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Budget 2011 Home Page Budget Economic and Fiscal Update 2011

3 Risks and Scenarios

Overview

The forecasts presented in the Economic and Fiscal Outlook chapter incorporate judgements about how both the New Zealand and the world economies evolve. These judgements have a number of risks surrounding them. We have balanced these risks in arriving at our view of how the economy is most likely to evolve.

The first part of this chapter discusses these global and domestic risks in more detail. Global risks have the potential to alter world growth, particularly for our main trading partners, which would flow through to the New Zealand economy. Key global risks are:

  • inflation in emerging Asia being significantly higher than forecast
  • sovereign debt issues in Europe driving a deterioration in the financial system
  • private sector ability to compensate as fiscal and monetary stimuli ease, and
  • more robust recoveries in advanced economies and emerging Asia.

Domestic risks focus on the timing of the rebuild following the Canterbury earthquakes and the extent of consolidation by the private sector. The risks that the timing and size of the earthquake rebuild differ from the main forecasts are high, given we have no recent experience of the redevelopment required. Developments in Canterbury are fluid, with changing estimates of damage and required skills. The risks related to the private sector focus on the agriculture and household sectors. These risks are based on participants' comfort with debt levels over the forecast period, with any change from the main forecasts leading to either a more rapid or a more drawn-out profile for spending and investment.

Although we consider the main forecast presented in the Economic and Fiscal Outlook chapter to be the most likely outcome, two scenarios that illustrate different paths for the economy are presented in this chapter. These scenarios do not fully illustrate the range of possibilities, but they represent key risks. The upside scenario illustrates the impact of higher confidence levels and stronger domestic demand in the short term. GDP is higher in both real and nominal terms, driven by increases in private consumption and residential investment. The downside scenario models a sharp fall in export commodity prices, which flows through to spending and investment being lower than in the main forecasts and a weaker profile for real and nominal GDP. Changes in tax revenue are the key driver of the operating balance (before gains and losses) in both scenarios, with the operating balance returning to surplus one year earlier (2013/14) in the upside scenario and beyond the forecast period in the downside scenario.

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