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Budget 2013 Home Page Budget Economic and Fiscal Update 2013

General Fiscal Risks

The discussion up to this point has focused on the main near-term economic risks. The rest of this chapter focuses on the links between the risks to the performance of the economy and the Crown's fiscal position. For more on fiscal risks, see the Specific Fiscal Risks chapter on page 59.

Fiscal Sensitivities

Table 3.2 provides some rules of thumb on the sensitivities of the fiscal position to small changes in specific variables. For example, if for some reason nominal GDP growth is one percentage point faster than we have forecast each year up to June 2017, tax revenue would be expected to be around $3.0 billion (1.2% of GDP) higher than forecast in the June 2017 year as a result. The sensitivities are broadly symmetric and if nominal GDP growth is one percentage point slower each year than we expect, tax revenue would be around $2.9 billion lower than forecast in the June 2017 year. However, these figures can be influenced by the composition of growth as different types of activity have different effective tax rates; for example, the upside and downside scenario both have around a $19 billion impact on nominal GDP but their tax revenue impacts differ by $1.2 billion.

A different interest rate path than that forecast would also impact on the fiscal position. A one percentage point lower interest rate would result in interest income being $116 million lower in the June 2017 year. This would be more than offset by interest expenses being $434 million lower in the June 2017 year.

Table 3.2 - Fiscal sensitivity analysis
Year ending 30 June
($millions unless stated)

1% higher nominal GDP growth per annum on

Tax revenue - 620 1,335 2,125 2,985
   (% of GDP) - 0.3 0.6 0.9 1.2

Tax revenue impact of a 1% increase in growth of

Wages and salaries - 270 565 900 1,270
   (% of GDP) - 0.1 0.2 0.4 0.5
Taxable business profits - 120 285 465 655
   (% of GDP) - 0.1 0.1 0.2 0.3

Impact of 1% point lower interest rates on

Interest income1 (42) (94 ) (119) (82) (116)
   (% of GDP)  (0.0)  (0.0)  (0.1)  (0.0)  (0.0)
Interest expenses1 (29) (155) (248) (367) (434)
   (% of GDP)  (0.0)  (0.1)  (0.1)  (0.1)  (0.2)
Overall operating balance (13) 61 129 285 318
   (% of GDP)  (0.0) 0.0 0.1 0.1 0.1


  1. Funds managed by the NZDMO only

Source: The Treasury

Revenue Risks

One of the major sources of risk to the fiscal position arises from the inherent uncertainty about future tax revenue. The amount of tax revenue that the Government accrues in a given year is closely linked to the performance of the economy. Figure 3.7 plots the main tax revenue forecast, along with confidence intervals around those forecasts based on the Treasury's historical tax forecast errors and the assumption of an even balance of risks around the central forecast.[9] The outermost shaded area captures the range (+/- $7.3 billion in the June 2017 year) within which actual tax outturns fall 80% of the time.[10]

The tax revenue forecasts from the upside and downside scenarios are also plotted. The recent global financial crisis showed that exogenous shocks can have severe impacts on government revenue. The recent drought is another example of a shock which is expected to decrease government revenue. Further adverse weather conditions or a global downturn would have a negative impact on the Government's fiscal position. Should any of the uncertainties outlined in the Economic Riskssection eventuate differently from the central forecast, government revenue would likely be different from forecast, with the upside and downside scenarios being examples of possible outcomes.

Figure 3.7 - Core Crown tax revenue uncertainty
Figure 3.7 - Core Crown tax revenue uncertainty.
Source: The Treasury

Based on average historical forecast errors and an even balance of risks, Figure 3.7 suggests that tax revenue over the forecast period would be weaker than shown in the downside scenario around one-third of the time. For the upside scenario, tax revenue over the forecast period would be stronger than shown about one-third of the time. Tax revenue would be between the two scenarios approximately one-third of the time.

There is also uncertainty around government revenue arising from the performance of SOEs and the path of interest rates as outlined in the Fiscal Sensitivities section.


  • [9]A full summary of the methodology and critical assumptions is included in New Zealand Treasury Working Paper 10/08. Standard deviation assumptions used for 0-, 1-, 2- and 3-year ahead forecasts are 0.9%, 3.2%, 5.3% and 6.6% of the actual result, respectively.
  • [10]Previous Treasury analysis showed that a shock that has a significant and persistent impact on economic growth can result in tax revenues significantly beyond the outermost shaded area. See Fookes, C (2011), “Modelling shocks to New Zealand’s fiscal position”, New Zealand Treasury Working Paper 11/02.
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