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Budget 2013 Home Page Budget Economic and Fiscal Update 2013

Fiscal Forecast Assumptions

The fiscal forecasts are based on assumptions and judgements developed from the best information available on 29 April 2013, when the forecasts were finalised. Actual events are likely to differ from these assumptions and judgements. Furthermore, uncertainty around the forecast assumptions and judgements increases over the forecast period. The Canterbury earthquakes add further uncertainty to the economic and fiscal forecasts.

The fiscal forecasts are prepared on the basis of underlying economic forecasts. Such forecasts are critical for determining revenue and expense estimates. For example:

  • A nominal GDP forecast is needed in order to forecast tax revenue.
  • A forecast of CPI inflation is needed because social assistance benefits are generally indexed to inflation.
  • Forecasts of interest rates are needed to forecast finance costs, interest income and discount rates.

A summary of the key economic forecasts that are particularly relevant to the fiscal forecasts is provided in Table 2.10 below (on a June-year-end basis to align with the Government's balance date).

Table 2.10 - Summary of key economic forecasts used in fiscal forecasts
Year ended 30 June
$billions
2012
Actual
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
Real GDP1 (ann avg % chg) 2.4 2.5 2.5 2.9 2.5 2.2
Nominal GDP2 ($m) 208,467 213,844 227,892 237,954 248,004 257,219
CPI (ann avg % chg) 2.2 0.9 1.7 1.9 2.0 2.2
Govt 10-year bonds (ann avg, %) 4.1 3.6 4.1 4.5 4.9 5.1
5-year bonds (ann avg, %) 3.5 2.9 3.3 4.1 4.8 5.0
90-day bill rate (ann avg, %) 2.7 2.7 2.8 3.4 4.2 4.7
Unemployment rate (ann avg, %) 6.6 7.0 6.2 5.9 5.6 5.3
Employment (ann avg % chg) 1.0 (0.8) 2.5 2.2 1.3 1.2

Notes:

  1. Production measure
  2. Expenditure measure

Source: The Treasury

In addition, there are a number of other key assumptions that are critical in the preparation of the fiscal forecasts.

Government decisions Incorporate government decisions and other circumstances known to the Government up to 29 April 2013.
Tax revenue Tax policy changes enacted and announced by the Government will take place as planned and will affect tax revenue and receipts as calculated and agreed between IRD and the Treasury.
Earthquake costs Expenditure (accrual measure) is forecast based on estimates on when key decisions will be taken.  The timing of cash payments is based on estimates of when actual spending will take place.  Refer to page 33 for further discussion.
Operating allowance Net $1.0 billion from Budget 2014 growing at a rate of 2.0% per annum for subsequent Budgets.
Provision for new capital spending Net $3.7 billion over the next four Budgets with $1.0 billion in Budget 2014, $0.9 billion in Budget 2015, Budget 2016 and Budget 2017.  For further details, see note 8 of the Forecast Financial Statements.
Government share offers

Sale programme spread evenly across the four years from 2012/13 to 2015/16. 

Net sale proceeds of $6 billion (based on a mid-point estimate of between $5 billion and $7 billion).

Net assets of the entities as at 30 June 2012 ($5.3 billion) were used to determine the gain on sale.

Forgone profits and dividends are based on an average of the fiscal forecasts provided by the companies for the Budget Update.

Finance cost on new bond issuances Based on 5-year rate from the main economic forecasts and adjusted for differing maturity.
Top-down adjustment

A top-down adjustment is made to compensate for departments that tend to forecast upper spending limits (appropriations) rather than best estimates.

Top-down adjustment to operating and capital as follows:

Year ending 30 June
$billions
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
Operating 0.3 0.6 0.3 0.3 0.3
Capital 0.3 0.1
Borrowing requirements Forecast cash deficits will be met by reducing financial assets and issuing debt.
Property, plant and equipment For the purposes of the forecast financial statements, no revaluations of property, plant and equipment are projected beyond the current year.  Valuations as recorded for the 2012 annual financial statements and any additional valuations that have occurred up to 31 March 2013 are included in these forecasts. 
Student loans The carrying value of student loans is based on a valuation model adapted to reflect current student loans policy.  As such, the carrying value over the forecast period is sensitive to changes in a number of underlying assumptions, including future income levels, repayment behaviour and macroeconomic factors such as inflation and discount rates used to determine the effective interest rate for new borrowers.  Any change in these assumptions would affect the present fiscal forecast.
Investment rate of returns Incorporate the actual results to 31 March 2013.  Beyond this time, gains on financial instruments are based on long-term benchmark rates of return for each portfolio.
GSF and ACC liabilities

The GSF and ACC liabilities included in these forecasts have been valued as at 28 February 2013 and 31 December 2012 respectively.  The ACC liability has also been adjusted for the 31 March 2013 discount rate.  Both liabilities are valued by projecting future cash payments, and discounting them to present value.  These valuations rely on historical data to predict future trends and use economic assumptions such as inflation and discount rates.  Any change in actual payments or economic assumptions would affect the present fiscal forecast.  For example, if the discount rate decreases, the value of the liabilities would increase.

GSF's assets are offset against the gross liability and have been updated to reflect market values.  The value of assets over the forecast period reflects long-run rate of return assumptions appropriate to the forecast portfolio mix.

NZS Fund contributions

No contribution is assumed in the forecast period.

Year ending 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
Required contribution 2.4 2.2 2.1 2.1
Actual contribution - - - -

The underlying assumptions in calculating the required contribution in each year are the previous year's NZS Fund balance and projected series, over the ensuing forty years of nominal GDP, net (after-tax) New Zealand superannuation expenses and the Government 5-year bond rate. The latter is used in calculating the Fund's expected long-run after-tax annual return.  Over the forecast years all Fund variables, apart from the capital contributions, are provided by the NZS Fund itself. 

Refer to the Treasury's website for the NZS Fund model. 

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