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Budget 2013 Home Page Budget Economic and Fiscal Update 2013

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 calculates 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) for the cyclical position of the economy. The CAB 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 fiscal balance (a cyclically-adjusted balance supplemented by capital expenditure).

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

Central estimate

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. Similarly for one measure of the fiscal impulse, some earthquake expenditures that are more of a financial nature are removed as the demand effects arising from such flows (eg, EQC payments to households) will show up in other parts of the economy.

Cyclically-adjusted balance

The operating balance (before gains and losses) and the cyclically-adjusted balance are shown in Figure 1. They are broadly similar to those estimated in the Half Year Update, although are slightly more positive at the beginning and end of the forecast period reflecting stronger-than-expected tax revenue and smaller operating allowances. The headline OBEGAL deficit is forecast to be 2.9% of GDP in the year ended June 2013 (Half Year Update: 3.4% of GDP). The cyclically-adjusted balance, excluding earthquake expenses, is estimated to be a deficit of 1.8% of GDP in 2013 June year (Half Year Update: 2.1% of GDP). The difference between the headline and cyclically-adjusted balance comprises the impact of the automatic stabilisers of 0.5% of GDP and the earthquake-adjustment of 0.7% of GDP. As the gap between expenditure and revenue falls over the forecast horizon, the cyclically-adjusted balance is expected to move from deficit to surplus, reaching a surplus of around 1.0% of GDP in the year ended June 2017. The cyclical component of the operating balance - the difference between the headline and cyclically-adjusted measures - is also expected to reduce as the economy reaches and maintains full capacity.

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 also excluded from the measure of fiscal balance used in the calculation of the fiscal impulse indicator. As a result, the forecast sale proceeds from the Government's share offer programme 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 that excludes Canterbury-related financial transactions is also shown, which adjusts for EQC and Southern Response payments. The core Crown indicator mostly reflects changes in receipts and expenditure impacted by Budget decisions, whereas the core Crown plus Crown entity indicator provides a better indication of the total impact of central government activities (ie, excluding State-Owned Enterprises). EQC and Southern Response 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 shows that fiscal policy is expected to have a contractionary impact on demand in each year of the forecast horizon. The 2013 June year impulse is forecast to be more contractionary than estimated in the Half Year Update­ (Budget Update: -1.5% of GDP; Half Year Update: -0.2% of GDP). This reflects a combination of higher tax revenue and lower government spending in the Budget Update, neither of which is fully explained by the economy growing at a slightly faster pace over recent quarters. In the 2014 June year some of the lower government spending is assumed to be caught up. As the fiscal impulse is calculated as the change in the fiscal balance, this results in a somewhat smaller contraction in 2014 June year. Over the latter half of the forecast period, the impulse is similar to the Half Year Update, with fiscal policy expected to withdraw around 0.5% of GDP from aggregate demand in both the 2016 and 2017 June years.

One anomaly in these estimates is the difference between the unadjusted and Canterbury-adjusted fiscal impulses in the 2014 June year. This is due to reinsurance inflows that are expected to peak in 2013. These reduce the size of the unadjusted fiscal deficit and lead the following year's impulse to be more expansionary than in the adjusted measure. As these reinsurance inflows do not reflect a withdrawal of aggregate demand from the domestic economy, the adjusted measure gives a better estimate of the impact of fiscal policy in these years.

Figure 2 - Estimates of the fiscal impulse
Figure 2 - Estimates of the fiscal impulse.
Source: The Treasury


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