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Budget 2015 Home Page Budget Economic and Fiscal Update 2015

General Fiscal Risks

The remainder of this chapter focuses on the links between the economic risks and the Crown's fiscal position. For more on fiscal risks, see the Specific Fiscal Risks chapter.

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 Crown receives in a given year is closely linked to the performance of the economy.

Figure 3.8 plots the central tax revenue forecast, along with confidence intervals around these forecasts based on the Treasury's historical tax forecast variances and the assumption of an even balance of risks around the central forecast.[9] The outermost shaded area captures the range ±$6.7 billion in the June 2019 year, within which actual tax outturns are expected to fall 80% of the time.[10]

Figure 3.8 - Core Crown tax revenue uncertainty
Figure 3.8 - Core Crown tax revenue uncertainty.
Source: The Treasury

The tax revenue forecasts from the two scenarios are also shown in Figure 3.8. 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, Crown revenue would be different from forecast, with Scenarios one and two being examples of possible outcomes.

Based on average historical forecast variances, Figure 3.8 suggests that an annual tax revenue outturn associated with Scenario one lies between the 25th and 50th percentiles in most years. An annual tax revenue outturn associated with Scenario two lies between the 50th and 75th percentiles in each year.

Notes

  • [9]A summary of the methodology and key assumptions is found in Parkyn, O (2010), “Estimating New Zealand's Structural Budget Balance”, New Zealand Treasury Working Paper 10/08, available at http://www.treasury.govt.nz/publications/research-policy/wp/2010/10-08/. Standard deviations used for the 0-, 1-, 2-, 3- and 4-year forecasts are 0.9%, 3.2%, 5.3%, 6.6% and 6.9% of the actual results.
  • [10]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, available at http://www.treasury.govt.nz/publications/research-policy/wp/2011/11-02
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