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Central Estimates

Cyclically-adjusted balance

The CAB is essentially an estimate of what the operating balance would be without the effect of automatic stabilisers. When the economy is operating above its potential level (a positive output gap), automatic stabilisers raise the operating balance that is, tax receipts are higher and unemployment expenses are lower than they would be relative to an economy operating at potential. When the economy is operating below its potential level, the opposite is true. Adjusting the headline OBEGAL for the economic cycle therefore shows the underlying, structural fiscal position.

Significant “one-off” impacts on expenses from the Canterbury and Kaikoura earthquakes are removed from the central estimates of the CAB to give a better indication of underlying fiscal performance.

Figure 1 shows the operating balance (before gains and losses) and the CAB. The OBEGAL is in surplus across the forecast period, with surpluses growing moderately from 2016/17 onwards. The CAB is in surplus across the entire forecast period, suggesting forecast OBEGAL surpluses are structural - that is, they are not due to cyclical economic conditions. In 2016/17 and 2017/18 the economy is estimated to be operating below its potential level (a negative output gap). From 2018/19 the economy is forecast to be operating above its potential (a positive output gap). As a result the CAB is higher than the headline OBEGAL in 2016/17 and 2017/18 and subsequently lower than the headline OBEGAL from 2018/19 onwards. Cyclically-adjusted surpluses are forecast to be stable at around 1.3% of GDP from 2016/17 to 2018/19, and then rise to 2.2% of GDP by 2020/21.

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 pressures 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 pressures. Purchases and sales of investments are also excluded as they represent a transfer of resources.

The fiscal impulse is shown for both the core Crown and combined core Crown and Crown entity segments (ie, total Crown excluding State-owned enterprises). 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 on aggregate demand pressures. A measure of the fiscal impulse that excludes earthquake-related (Canterbury and Kaikōura) financial transactions is also shown, which adjusts for EQC and Southern Response payments and receipts. These excluded items are expected to finance private demand (eg, residential construction). The core Crown plus Crown entity (excluding EQC and Southern Response) indicator is used by the Treasury as the headline estimate of the fiscal impulse.

It is worth noting that summary indicators such as the fiscal impulse do not take account of the composition of fiscal policy changes or how a change in fiscal policy will be transmitted through the economy. Research by the Treasury using time series statistical analysis indicates that spending and taxes have different effects on New Zealand GDP.[2] Therefore the fiscal impulse indicator is only an imprecise guide to the impact of fiscal policy on the economy.

The headline estimate of the fiscal impulse (Figure 2) shows that in 2016/17 fiscal policy is expected to have a neutral impact on aggregate demand, this turns mildly expansionary in 2017/18 and 2018/19. For the remainder of the forecast period, fiscal policy is forecast to have a mildly contractionary impact on aggregate demand.

Across the forecast period the ongoing decline in operating expenditure as a percentage of GDP has a negative contribution to the headline fiscal impulse in each fiscal year. In 2016/17 this negative contribution is offset by higher capital expenditure and movements in operating receipts as a percentage of GDP.

The expansionary fiscal impulse in 2017/18 largely reflects the Family Incomes package, and lower company tax and other receipts as a percentage of GDP. The fiscal impulse is positive in 2018/19 also driven by the Family Incomes package. The negative fiscal impulses across 2019/20 and 2020/21 are largely driven by declining operating expenditure as per cent of GDP.

Compared with the Half Year Update, the direction of the headline fiscal impulse in each year is unchanged, except in 2018/19 where the impulse has changed from a large negative impulse (-1.0% of GDP) to a moderately positive impulse (0.5% of GDP). There have also been some changes in magnitude. The 2016/17 impulse was forecast to be expansionary at around 1% of GDP at the Half Year Update, this has changed to a neutral impulse of 0.0% of GDP at the Budget Update. These differences largely reflect changes in the expected timing of expenditure, Budget policy initiatives and changes in forecast nominal GDP.

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


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