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Budget 2017 Home Page Budget Economic and Fiscal Update 2017

Risks and Scenarios

Overview

  • In this chapter we discuss the risks and uncertainties surrounding the economic and fiscal forecasts. Fan charts are presented to help illustrate the range of potential outcomes and two alternative scenarios are presented to show how the economic and fiscal outlook might evolve under different assumptions and judgements. Specific Fiscal Risks are discussed in Chapter 4.
  • In a number of countries, political debate around policies to restrict trade has intensified, adding to uncertainty around the economic outlook. High levels of debt remain a threat to the sustainability of growth in China and growth in Japan and the euro area remains dependent on very stimulatory monetary conditions. In Australia, there are risks around the sustainability of growth in segments of the housing market. A significant weakening in the housing market could have broader implications including slower growth in consumption and employment. Ongoing softness in the Australian labour market may help sustain higher net migration inflows to New Zealand than assumed in the main forecasts.
  • An important assumption in these forecasts is that net migration inflows have passed their peak and will ease gradually. In Scenario One we consider the possibility that net migration does not decline and that capacity pressures in the construction sector are more intense than in the main forecast. As a consequence, domestic demand growth is stronger and inflation is higher, which leads to faster nominal GDP growth. This flows through to higher tax revenue and a stronger fiscal position.
  • In Scenario Two we consider the implications of a desire by households to reduce debt from current high levels. In this scenario, growth in private consumption and residential investment is more moderate, the unemployment rate is higher and inflation is relatively subdued. Nominal GDP and tax revenue are lower, leading to a weaker fiscal position.
  • The Crown's balance sheet is exposed to a number of risks beyond those associated with the operating balance. The Crown's financial position is exposed to risk through changes in the value of the Crown's assets or liabilities, and also through the potential impact of the Crown's fiscal obligations that arise from policy choices.
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