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Budget 2012 Home Page Budget Economic and Fiscal Update 2012

Additional Fiscal Indicators

There are different approaches to assessing the relationship between the economy and the fiscal position, and the relationship between fiscal policy and the economy. One approach to assessing these relationships uses summary fiscal indicators. A discussion of the Treasury’s perspective on these indicators, their use and limitations, and the relationship between them, can be found in the 2010 Budget Update Additional Information.[1]

The Treasury estimates two summary fiscal indicators: the cyclically-adjusted balance (CAB) and the fiscal impulse indicator.

  • The cyclically-adjusted balance adjusts the operating balance before gains and losses (OBEGAL) and is subject to uncertainty because it uses estimated variables and is sensitive to new information, particularly regarding the output gap.
  • The fiscal impulse indicator uses the change in a cash-based version of the cyclically-adjusted balance (and includes capital expenditure).

Further information on the methodology behind the indicators can be found in Treasury Working Papers 02/30 and 10/08.[2]

Main indicators

This section discusses the Treasury's central estimates of the cyclically-adjusted balance and fiscal impulse. Detailed tables of data can be found at the end of the Additional Fiscal Indicators section.

The significant “one-off” impact on expenses of the Canterbury earthquake is removed from estimates of the cyclically-adjusted balance. This is to give a better indication of the underlying fiscal position. Earthquake expenditure is not removed when calculating the fiscal impulse indicator, since it is expected to add to demand pressure along with other government expenditure.

Cyclically-adjusted balance

The operating balance (before gains and losses) and the cyclically-adjusted balance are shown in Figure 1. The headline OBEGAL deficit is forecast to be 4.1% of GDP in 2011/12 (Pre-election Update: 5.1% of GDP). The cyclically-adjusted balance, excluding earthquake expenses, is estimated to be a deficit of 3.0% of GDP in 2011/12 (Pre-election Update: 3.4% of GDP). The difference between the headline and cyclically-adjusted balance comprises the impact of the automatic stabilisers of 0.4% of GDP and the earthquake-adjustment of 0.7% of GDP. As consolidation measures take hold, the cyclically-adjusted deficit is projected to be eliminated over the forecast horizon. The cyclically-adjusted balance, excluding earthquake expenses, is forecast to be a surplus of $895 million (0.9% of GDP) in 2014/15.

Figure 1 - Cyclically-adjusted balance
Figure 1 - Cyclically-adjusted balance.
Source: The Treasury

Fiscal impulse

The fiscal impulse indicator is shown in Figure 2. As has been noted in previous Economic and Fiscal Updates, capital expenditure on defence, KiwiSaver subsidies and Deposit Guarantee Scheme payments are excluded from the measure of fiscal impulse since these are expected to have a limited direct impact on aggregate demand. Purchases and sales of investments are excluded from the measure of fiscal balance used in the calculation of the fiscal impulse indicator. Therefore the forecast sale proceeds from the policy to extend the partial share sales do not have any impact on the fiscal impulse indicator.

The fiscal impulse is shown for both the core Crown and combined core Crown and Crown entity segments. A measure of the fiscal impulse excluding EQC payments is also shown (EQC is a Crown entity). The core Crown indicator mostly reflects changes in receipts and expenditure which are impacted by Budget decisions, whereas the core Crown plus Crown entity indicator provides a better indication of the total impact of central government activities (excluding State-owned enterprises). EQC payments account for much of the difference between the core Crown fiscal impulse and the indicator for the core Crown plus Crown entities.

The fiscal impulse indicator estimates that discretionary fiscal policy is broadly neutral in 2011/12, with a tightening of about 1% of GDP in 2012/13, 2% of GDP in 2013/14 and 1% in each of 2014/15 and 2015/16. The broadly neutral stance in 2011/12 reflects underlying fiscal tightening offset by temporary earthquake-related spending.

Compared to the Pre-election Update, the core Crown fiscal impulse in 2011/12 is tighter (Budget Update: -0.3% of GDP; Pre-election Update: 0.6% of GDP). In 2012/13, there is less tightening forecast relative to the Pre-election Update (Budget Update: -0.8% of GDP; Pre-election Update: -1.8% of GDP). This change reflects less expenditure expected for 2011/12 and some changes in the expected timing of expenditure from 2011/12 to 2012/13.

Figure 2 - Fiscal impulse estimates
Figure 2 - Fiscal impulse estimates.
Source: The Treasury

Notes

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