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Budget 2014 Home Page Budget Economic and Fiscal Update 2014

General Fiscal Risks

The remainder 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 63.

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 nominal GDP growth is one percentage point faster than we have forecast in each year up to June 2018, tax revenue would be around $3.2 billion (1.2% of GDP) higher than forecast in the June 2018 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 $3.1 billion lower than forecast in the June 2018 year. The figures are indicative and can be influenced by the composition of growth as different types of activity have different effective tax rates.

A different interest rate path from that forecast would also impact on the fiscal position. A one percentage point lower interest rate would result in interest income on funds managed by the Treasury's Debt Management Office (DMO) being $162 million lower in the June 2018 year. This would be more than offset by interest expenses being $358 million lower in the June 2018 year.

Table 3.2 - Fiscal sensitivity analysis
Year ending 30 June
($millions unless stated)
1% higher nominal GDP growth per annum on
Tax revenue  -  675 1,440 2,280 3,205
   (% of GDP)1  - 0.3 0.6 0.9 1.2
Tax revenue impact of a 1% increase in growth of
Wages and salaries  - 285 605 965 1,390
   (% of GDP)1  - 0.1 0.2 0.4 0.5
Taxable business profits  - 130 300 480 675
(% of GDP)1  - 0.1 0.1 0.2 0.2
Impact of 1% point lower interest rates on
Interest income2  (37)  (90)  (86)  (151)  (162)
   (% of GDP) (0.0) (0.0) (0.0) (0.1) (0.1)
Interest expenses2 3  (57)  (211)  (299)  (358)
(% of GDP) 0.0 (0.0) (0.1) (0.1) (0.1)
Overall operating balance (40) (33) 125 148 196
(% of GDP) (0.0) (0.0) 0.0 0.1 0.1


  1. Percent of main forecast nominal GDP
  2. Funds managed by the Treasury's DMO 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 receives in a given year is closely linked to the performance of the economy. Figure 3.10 plots the main tax revenue forecast, along with confidence intervals around these forecasts based on the Treasury's historical tax forecast errors and the assumption of an even balance of risks around the main forecast.[5] The outermost shaded area captures the range +/- $6.5 billion in the June 2018 year, within which actual tax outturns fall 80% of the time.[6]

The tax revenue forecasts from the two scenarios are also shown in Figure 3.10. The 2008/09 global financial crisis showed that exogenous shocks can have severe impacts on government revenue. Should any of the uncertainties outlined in the Economic Riskssection eventuate, government revenue would be different from forecast, with scenarios one and two being examples of possible outcomes.

Figure 3.10 - Core Crown tax revenue uncertainty
Figure 3.10 - Core Crown tax revenue uncertainty.
Source: The Treasury

Based on average historical forecast errors and an even balance of risks, Figure 3.10 suggests that tax revenue over the forecast period would be stronger than scenario two approximately 35% of the time and weaker than scenario one approximately 25% 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.


  • [5]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-, 3- and 4-year ahead forecasts are 0.9%, 3.2%, 5.3%, 6.6% and 6.9% of the actual result, respectively.
  • [6]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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