2 Fiscal Outlook
Fiscal Forecasts – Finalisation Dates and Key Assumptions
| Finalisation Dates | |
|---|---|
| Economic and tax outlook (refer Chapter 1) | 18 November |
| Tax revenue forecasts | 23 November |
| Fiscal forecasts | 7 December |
| Government decisions and circumstances | 7 December |
| Actual asset revaluations | 31 October |
| Foreign exchange rates | 30 September |
| Specific fiscal risks (refer Chapter 4) | 7 December |
| Contingent liabilities and commitments (refer Chapter 4) | 31 October |
Key assumptions
The fiscal forecasts have been prepared in accordance with the Public Finance Act 1989. They are based on the Crown’s accounting policies and assumptions (refer page 90 of the GAAP tables). As with all assumptions, there is a degree of uncertainty surrounding them. This uncertainty increases as the forecast horizon extends. A summary of the key economic assumptions that are particularly relevant to the fiscal forecasts is provided below (on a June-year-end basis to align with the Crown’s balance date of 30 June):
| 2005/06 | 2006/07 | 2007/08 | 2008/09 | 2009/10 | ||
|---|---|---|---|---|---|---|
| June years | Pre-EFU | HEFU | HEFU | HEFU | HEFU | HEFU |
| Real GDP (P) (ann avg % chg) | 2.2 | 2.9 | 1.7 | 2.5 | 3.7 | 3.1 |
| Nominal GDP (E) ($m)[1] | 156,481 | 158,947 | 163,062 | 169,897 | 178,805 | 187,853 |
| CPI (annual % change) | 2.9 | 3.4 | 3.1 | 2.4 | 2.2 | 2.0 |
| Govt 10-year bonds (qty avg %) | 6.1 | 6.0 | 6.2 | 6.1 | 6.0 | 6.0 |
| 90-day bill rate (qty avg %) | 7.0 | 7.5 | 6.8 | 6.3 | 6.0 | 5.8 |
| Unemployment rate ((HLFS) basis ann avg %) | 3.9 | 3.4 | 3.8 | 4.1 | 4.3 | 4.5 |
| Full-time equivalent employment (ann avg %) | 0.8 | 2.8 | 0.4 | 0.6 | 1.2 | 1.3 |
| Current account (% of GDP) | -7.6 | -9.1 | -8.3 | -7.2 | -6.6 | -5.9 |
Source: The Treasury
New Zealand Superannuation (NZS) Fund
The contribution to the NZS Fund for the year ending 30 June 2007 is $2.351 billion. The contribution to the NZS Fund is calculated over a 40-year rolling horizon to ensure that superannuation entitlements over the next 40 years can be met if the contribution rate were to be held constant at that level. The Government is making the required minimum annual contribution for 2005/06 as calculated by the formula set out in the NZS Act.
| $ billion (June year end) | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 |
|---|---|---|---|---|---|---|---|
| Required contribution | 1.879 | 2.107 | 2.337 | 2.351 | 2.443 | 2.677 | 2.819 |
| Actual/Budgeted contribution | 1.879 | 2.107 | 2.337 | 2.351 | 2.443 | 2.677 | 2.819 |
Source: The Treasury
The underlying assumptions in calculating the contributions for 2007 are the nominal GDP series to 2047, the NZS expense series to 2047 and the expected long-term, net after-tax annual return of the NZS Fund (6.1%) (6.1% Pre-election Update). The forecast rate of return is based on the Treasury’s assumptions for the rate of return on financial portfolios of Crown financial institutions. The Treasury website contains further information on the NZS Fund, as well as a copy of the NZS Fund model.
Summary
The forecast fiscal outlook for the Half Year Update reflects:
- the OBERAC as a percentage of GDP declining from 5.9% in 2004/05 to 3.7% in the current year. It drops to a low of 1.9% in 2008/09 before rebounding to 2.7% in 2009/10
- net worth increasing by around $24 billion over the forecast period, largely resulting from the accumulation of financial assets (primarily the NZS Fund)
- the cash equivalent of the OBERAC is not sufficient to fund all of the Government’s investing activity over the forecast period, leaving an expected cash shortfall to be met by reducing financial assets and additional borrowing
- gross sovereign-issued debt as a percentage of GDP slowly reducing over the forecast period, while in nominal terms gross debt rises near the end of the forecast period.
Compared to the Pre-election Update the OBERAC is lower due to:
- tax revenue being slightly higher in the early forecast years
- the increase in the operating allowance for Budget 2006 for the extension to the Working for Families package announced on 18 August which reduces the OBERAC by around $2.2 billion over the forecast period
- the impact of the fair value changes due to the interest free student loan policy reducing the OBERAC by around $1 billion in the current year (refer page 39)
- the economic assumptions used in compiling the fiscal forecasts is the Central Forecast outlined in the Economic and Tax Outlook chapter.
Notes
- [1]Historical March year nominal GDP was revised in National Accounts data released on November 17.
