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Economic and Fiscal Forecasts December 2008

Ten-year Post-forecast Projections

The preceding parts of this Update have focused on forecasts out until 2013. This section provides 10-year post-forecast fiscal projections, covering the subsequent decade (the 2014 to 2023 June years).

Projections are subject to greater caveats and are less comprehensive than forecasts

Projections differ from forecasts in both the manner they are produced and the sense of accuracy they portray. The forecasts are based on comprehensive modelling of the macroeconomy, which flows through into forecasts of tax revenue and the overall fiscal position. By contrast, the projections extrapolate the conditions existing in the final year of the forecast period, using assumptions about how elements of revenue and expenditure will change over time.

Future actions to curb rising debt are not captured in the projections

There is another important caveat concerning the post-forecast projections produced for this Update, which is that they do not include any future policy responses designed to influence future debt levels. Policy settings and assumptions for projected years have been left largely as they were at the Budget Update, with the exceptions of the changes to the personal tax regime, the savings from the removal of research and development tax credits and changes to the KiwiSaver scheme. Future updates will reflect changes to policy settings as they are made.

In the absence of policy changes, continued deficits are projected…

Figure 15 - Core Crown expenses
Figure 15  - Core Crown expenses.
Source: The Treasury

Figure 15 illustrates that, with the exception of debt financing costs, projected expenses are relatively similar to their Pre-election Update track. There have been changes in the composition of overall expenses, such as higher benefit costs and lower KiwiSaver expenditure, but in total the changes have largely offset one another. It is via increased finance costs, arising from higher debt levels, that expenditure contributes most to the deterioration over the projection period of the OBEGAL track since the Pre-election Update.

Figure 16 - Core Crown revenue
Figure 16 - Core Crown revenue.
Source: The Treasury
Figure 17 - OBEGAL projections
Figure 17 - OBEGAL projections.
Source: The Treasury

Revenue tracks, on the other hand, have reduced markedly from their Pre-election Update positions. As Figure 16 depicts, it is reduced income, especially from tax, in both the forecasts and projections that is the main cause of the deterioration in the operating balance. Tax revenue forecasts are lower than they were in the Pre-election Update, largely due to the weaker economic outlook. It is from this reduced base that the tax projections grow.

Figure 17 shows the combined effects of the expenditure and revenue impacts discussed above on the OBEGAL track. This Update's projections indicate continued OBEGAL deficits of around 2% of GDP from 2019 on. This contrasts with the Pre-election Update, when it was projected to return to surplus by June 2018.

…and debt is projected to rise substantially…

Figure 18 - Gross debt projections
Figure 18 - Gross debt projections.
Source: The Treasury

The need to fund continued deficits contributes to gross debt being projected to rise substantially, with GSID (excluding Settlement Cash) increasing to an estimated 57% of GDP in 2023. Another factor contributing to the increase in projected debt levels relative to previous Updates is the need to fund larger capital programmes due to increased capital allowances. The weaker outlook for nominal GDP also increases the debt-to-GDP ratio for any given level of debt.

Figure 19 - Net core Crown debt
Figure 19 - Net core Crown debt.
Source: The Treasury

…with both gross and net debt not projected to diminish at any stage

Figure 19 shows that the pattern of continued increases in gross debt is also seen with net core Crown debt. Under these assumptions net debt reaches 47% by 2023.

Uncertainty about the economic outlook translates into uncertainty over the projection period

Figure 20 - OBEGAL scenarios
Figure 20 - OBEGAL scenarios.
Source: The Treasury

Projections are highly sensitive to the economic and fiscal conditions from which they are derived. With the current volatile macroeconomic situation, the uncertainty around the main forecast base is more pronounced for this Update than is normally the case. Fiscal projections launched off both the downside and upside scenarios have been produced and these illustrate that the different fiscal outcomes that are forecast in 2013 are magnified when estimates are extended out until 2023.

Figure 21 - Gross debt scenarios
Figure 21  - Gross debt scenarios.
Source: The Treasury

Projections based on the upside scenario still show ongoing OBEGAL deficits, but these do narrow to around 0.7% of GDP by 2023. Projections based on the downside scenario show the OBEGAL deficit remaining broadly around 4% of GDP over the projection period. The gap between the projected OBEGAL deficits under this scenario and the main forecast widens over the projection period. This is chiefly due to the ever-increasing impact of higher finance costs in the downside scenario.

Gross debt is projected to rise to 76% of GDP by 2023 under the downside scenario and 44% of GDP under the upside scenario. This contrasts to the 57% of GDP projected when the main forecasts are used as the projection starting point. The cumulative nature of debt growth gives rise to the widening difference, over the projection period, between the scenarios and the projection based on the main forecast.

Lower levels of debt are possible

The Budget Policy Statement notes that the projected rise in debt and declines in the Crown's net worth are outside the range that the Government considers prudent. The Government will therefore not allow these projections to eventuate and has a range of options open to it to ensure this. As noted in the Budget Policy Statement, these options include carefully scrutinising its own expenditure to ensure value for money outcomes, considering alternative forms of financing for long term projects, continuing to ensure that its tax bases are maintained and ensuring that the commercial assets it owns are managed as effectively as possible. Corrective actions in these areas can make a substantial improvement to the long term projected fiscal track. The 2009 Fiscal Strategy Report will set out further steps that the Government intends to take.

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