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Budget 2016 Home Page Budget Economic and Fiscal Update 2016

Additional Fiscal Indicators

The Treasury calculates two summary fiscal indicators: the cyclically-adjusted balance (CAB) and the fiscal impulse indicator. This part of the additional information chapter discusses these estimates.

The first section discusses the Treasury's central estimates of the CAB and fiscal impulse. The next section discusses the changes to the elasticities behind the cyclical adjustment. Finally, the last section contains the sensitivity analysis and terms of trade adjustment. Detailed tables of data can be found at the end of the Additional Fiscal Indicators section.

Further information on the methodology, interpretation and limitations behind the indicators can be found in Treasury Working Papers 02/30 and 10/08.[24]

Central estimates

Cyclically-adjusted balance (CAB)

The CAB is an estimate of the OBEGAL adjusted for fluctuations of actual GDP around potential GDP. When the economy is operating above its potential level, automatic stabilisers raise the budget balance; that is, tax receipts are higher, and unemployment expenses are lower, than they otherwise would be. When the economy is operating below its potential level, the opposite is true. CAB provides an estimate of what the budget balance would be without the effect of these automatic stabilisers. The economy is estimated to be operating just below its potential level in the current year, and this gap is forecast to close over time with only small differences between the OBEGAL and the CAB later in the forecast.

The CAB is subject to uncertainty because it uses estimated variables and is sensitive to new information, particularly regarding the output gap. Significant “one-off” impacts on expenses from the Canterbury earthquake are removed from estimates of the CAB. This is to give a better indication of underlying fiscal performance.

Figure 1 shows the operating balance (before gains and losses) and the cyclically-adjusted balance. The OBEGAL is in surplus across the forecast period with two small surpluses in 2015/16 and 2016/17 before rising rapidly in 2017/18. The economy is forecast to be operating just below its potential level across the forecast period (ie. a negative output gap). As a result, the CAB is slightly higher than the OBEGAL and therefore also in surplus across the forecast period. This implies that the surpluses in the OBEGAL are structural surpluses and not a result of temporary economic conditions. These cyclically-adjusted surpluses increase over the forecast period with a surplus of 0.4% of GDP in 2015/16, growing to 2.3% of GDP in 2019/20.

Figure 1 - Cyclically-adjusted balance
Figure 1 - Cyclically-adjusted balance.
Source: The Treasury

Fiscal impulse

The fiscal impulse is an estimate of discretionary changes in the fiscal position that have an impact on aggregate demand in the economy. It is calculated as the change in a cash-based version of the fiscal balance (a cyclically-adjusted primary balance supplemented by capital expenditure). Capital expenditure on defence, KiwiSaver subsidies and Deposit Guarantee Scheme payments are excluded from the measure since these are expected to have a limited direct impact on aggregate demand. Purchases and sales of investments are also excluded from the measure.

The fiscal impulse is shown for both the core Crown and combined core Crown and Crown entity segments. 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). A measure of the fiscal impulse that excludes Canterbury-related financial transactions is also shown, which adjusts for EQC and Southern Response payments and receipts. EQC and Southern Response payments and receipts account for much of the difference between the core Crown fiscal impulse and the indicator for the core Crown plus Crown entities. The core Crown plus Crown entity (excluding EQC and Southern Response) is used by the Treasury as the headline estimate of the fiscal impulse.

The fiscal impulse does not take account of the composition of fiscal policy changes or of how a change in fiscal policy will be transmitted through the economy. Treasury research using time series statistical analysis indicates that spending and taxes have different effects on New Zealand GDP.[25] Therefore the fiscal impulse indicator only provides an imprecise guide to the impact of fiscal policy on the economy.

Estimates of the fiscal impulse shown in figure 2 show that fiscal policy is expected to have a broadly neutral impact on aggregate demand on average over the five years to June 2020. The positive fiscal impulses in 2015/16 and 2016/17 are caused by increases in the ratio of operating expenses to GDP in those years as well as stimulus from higher capital spending, partly reflecting the timing of some cash expenses, and the increased operating allowance in Budget 2016. The negative fiscal impulses from 2017/18 to 2019/20 reflect ongoing reductions in operating spending (relative to GDP), and from 2017/18, a decline in capital spending. The most contractionary impulse across the forecast period occurs in 2018/19, reflecting accelerating revenue growth, along with operating and capital expenditure falling as a percentage of GDP.

Compared with the Half Year Update, the sign of the headline fiscal impulse in each year is unchanged, with the exception of 2016/17 which has changed from a small negative impulse at the Half Year Update to a small positive impulse in the Budget Update. This shift reflects the increase in the operating allowances for Budget 2016. The impulse in 2015/16 is less stimulatory than was forecast at the Half Year Update. The main driver of this change has been the significant increase in the expected tax receipts relative to forecast. This increase is more than would be implied by the change in the output gap and is therefore impacting the impulse by more than the cyclical adjustment accounts for. Overall the changes since the Half Year Update have made the average impulse slightly more contractionary.

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


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