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Budget 2005 Home Page Half-Year Economic & Fiscal Update 2005

Fiscal Scenarios

The fiscal position is strongly influenced by the economy. The major economic determinants, and how they impact on the fiscal position, are listed below. While each effect is expressed in terms of an increase in the determinant, the opposite impact applies for a decrease.

  • Nominal GDP – higher GDP levels are reflected in a higher tax take, which increases the operating balance and lowers the Government’s debt.
  • Interest rates – higher interest rates lead to increased debt financing costs. While interest-based revenue also increases, the negative effect of higher finance costs on the operating balance dominates, meaning debt increases.
  • The level of unemployment – higher levels of unemployment translate to an increase in spending, because the number of unemployment beneficiaries rises. This decreases the operating balance and raises debt levels.
  • CPI inflation – as most benefits are indexed to CPI movements, higher inflation results in increased benefit costs. This reduces the operating balance and increases debt.
Table 3.4 –Alternative scenarios: OBERAC and gross debt
Year ending 30 June 2005 2006 2007 2008 2009 2010
  Actual Forecast Forecast Forecast Forecast Forecast
OBERAC ($ billion)            
Central forecast 8.9 5.9 5.9 4.1 3.4 5.1
Generalised weakness 8.9 5.8 4.9 2.4 2.0 3.8
More rapid exchange rate led adjustment 8.9 6.0 6.1 4.5 3.5 5.2
Gross sovereign-issued debt
($ billion)
Central forecast 35.0 33.3 33.0 35.7 36.1 36.2
Generalised weakness 35.0 33.4 34.0 38.5 40.2 41.7
More rapid exchange rate led adjustment 35.0 33.2 32.7 35.1 35.3 35.2
OBERAC (% GDP)            
Central forecast 5.9 3.7 3.6 2.4 1.9 2.7
Generalised weakness 5.9 3.7 3.1 1.4 1.2 2.1
More rapid exchange rate led adjustment 5.9 3.8 3.7 2.6 2.0 2.8
Gross sovereign-issued debt
(% GDP)
Central forecast 23.2 20.9 20.2 21.0 20.2 19.3
Generalised weakness 23.2 21.1 21.3 23.2 23.0 22.7
More rapid exchange rate led adjustment 23.2 20.9 20.1 20.4 19.5 18.5

Sources: Statistics New Zealand, The Treasury

The generalised weakness scenario is characterised by lower nominal GDP, lower interest rates, a higher unemployment rate and lower inflation in comparison to the central forecast.

Lower nominal GDP and higher unemployment result in a decrease in taxes collected and an increase in benefit payments. Lower inflation results in a partial reduction in benefit payments and lower interest rates result in a reduction in debt servicing costs, but the overall impact of this scenario is a lower OBERAC and higher debt.

Figure 3.5 – OBERAC
Figure 3.5 - OBERAC.
Source: The Treasury

By 2007/08 the OBERAC is around half a percentage point of GDP lower than the central forecast and by the end of the period gross sovereign-issued debt (GSID) is around 3.5 percentage points of GDP higher than the central forecast.

The more rapid exchange rate led adjustment scenario is characterised by a more cyclical profile for unemployment and interest rates. Inflation is higher throughout the forecast period in comparison to the central forecast. Nominal GDP is higher than the central forecast for most of the forecast period.

Higher nominal GDP leads to higher tax revenue in the more rapid exchange rate led adjustment scenario, but higher interest rates and unemployment in the early part of the forecast also result in higher expenses. The overall impact of higher taxes and expenses is a small increase in the OBERAC by around 0.1 percentage points of GDP throughout most of the forecast period. The cumulative impact of having a higher OBERAC is a reduction in GSID by less than a percentage point of GDP by the end of the period compared to the central forecast.

Figure 3.6 – Gross sovereign-issued debt
Gross sovereign-issued debt.
Source: The Treasury

The net impact of generalised weakness scenario is much larger than the net impact of the more rapid exchange rate led adjustment scenario.

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