Fiscal Scenarios
The fiscal position is strongly influenced by the economy (Table 3.4). 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 higher tax revenue, which increases the operating balance and lowers the Government’s net debt.
- Interest rates – higher interest rates lead to increased debt-financing costs but also to higher interest-based revenue.
- The level of unemployment – higher levels of unemployment translate into an increase in spending because the number of unemployment beneficiaries rises. This decreases the operating balance and raises net 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 net debt.
| Year ending 30 June | 2007 Actual |
2008 Estimate |
2009 Forecast |
2010 Forecast |
2011 Forecast |
2012 Forecast |
|---|---|---|---|---|---|---|
| OBEGAL ($billion)1 | ||||||
| Half Year Update forecast | 5.3 | 6.6 | 4.3 | 4.1 | 4.0 | 3.9 |
| Lower terms of trade | 5.3 | 6.4 | 3.1 | 3.0 | 2.3 | 2.0 |
| Higher terms of trade | 5.3 | 6.6 | 5.2 | 5.0 | 4.6 | 4.6 |
| Gross sovereign-issued debt ($billion)2 |
||||||
| Half Year Update forecast | 30.9 | 33.3 | 33.0 | 31.8 | 34.6 | 33.2 |
| Lower terms of trade | 30.9 | 33.5 | 34.5 | 34.3 | 38.8 | 39.3 |
| Higher terms of trade | 30.9 | 33.3 | 32.2 | 30.0 | 32.1 | 30.0 |
| OBEGAL (% GDP)1 | ||||||
| Half Year Update forecast | 3.2 | 3.7 | 2.3 | 2.1 | 2.0 | 1.8 |
| Lower terms of trade | 3.2 | 3.6 | 1.7 | 1.6 | 1.2 | 0.9 |
| Higher terms of trade | 3.2 | 3.7 | 2.7 | 2.5 | 2.3 | 2.1 |
| Gross sovereign-issued debt (% GDP)2 |
||||||
| Half Year Update forecast | 18.5 | 18.7 | 17.7 | 16.3 | 17.0 | 15.6 |
| Lower terms of trade | 18.5 | 18.8 | 18.8 | 17.9 | 19.6 | 18.9 |
| Higher terms of trade | 18.5 | 18.6 | 17.0 | 15.2 | 15.7 | 14.0 |
| Core Crown net debt (% GDP) | ||||||
| Half Year Update forecast | 2.7 | 1.1 | 0.9 | 0.9 | 0.9 | 1.0 |
| Lower terms of trade | 2.7 | 1.2 | 1.7 | 2.2 | 3.0 | 3.9 |
| Higher terms of trade | 2.7 | 1.1 | 0.5 | 0.0 | -0.3 | -0.5 |
Notes:
1 Operating balance before gains and losses.
2 Excluding Reserve Bank Settlement Cash.
Source: The Treasury
Lower terms of trade and weaker residential investment
- Figure 3.7 - OBEGAL
- Source: The Treasury
The first scenario is driven by a combination of international and domestic factors. Easing world demand for dairy products and/or a strong global supply response to high dairy prices leads to a fall in the terms of trade and the exchange rate. In addition, residential investment slows sharply. As a result, nominal GDP growth is slower, particularly over 2008/09, and a fall in the exchange rate increases tradables inflation. Real economic growth in 2010 increases through a rebound in private consumption and higher export volumesowing to the lower exchange rate. Overall, nominal GDP is a cumulative $15 billion lower by 2012 relative to the main forecast.
The weaker nominal GDP track reduces revenue by around $5 billion across the forecast period. In addition, expenses are higher because of higher unemployment and the higher CPI increasing inflation-indexed benefit costs. As a result, the OBEGAL as a percentage of GDP is 0.9% lower in the last year of the forecast period compared to the main forecast (Figure 3.7). Gross Sovereign-issued debt (GSID) is around 3.3% of GDP higher.
Higher terms of trade and stronger domestic demand
Scenario two sees higher commodity prices driven by, for example, demand from China and constraints on the global supply response from drought in Australia and conversion of grain to biofuel in the United States. The effect on the terms of trade is offset somewhat by higher oil prices. Strength in the domestic economy is characterised by consumer spending and business investment that flows through to higher real GDP. The CPI is also higher than in the main forecast as a result of higher non-tradables inflation and oil prices. Eventually, high interest rates dampen demand pressures in the domestic economy, leading to a fall in the exchange rate and a rise in export volume growth.
- Figure 3.8 - GSID
- Source: The Treasury
Overall, nominal GDP is a cumulative $10 billion higher across the forecast period, and revenues are a cumulative $3.3 billion higher compared to the main forecast. Expenses are the same across the period as a reduction in finance costs and unemployment benefits is offset by higher inflation-indexed welfare payments. The OBEGAL as a percentage of GDP is around 0.3% higher compared to the main case in the final year of the forecast. GSID is around 1.6% of GDP lower (Figure 3.8).
