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Half Year Economic & Fiscal Update 2009

Medium-term Projections

Projections take forecasts forward a further 10 years to 2024...

This section takes the main forecasts covering the period through to June 2014 in the previous section and projects them forward to June 2024. Projections differ from forecasts in both the manner they are produced and the sense of accuracy they portray. The projections grow forward economic and fiscal variables from the forecast base, using both demographic projections and assumptions, with the latter usually based on long-term averages. Some variables require a transitional period in the early projected years to reach stable, long-term values. These assumptions are discussed on page 46.

Projections are very sensitive to changes in the assumptions and changes in the forecast base. For this reason, and owing to inherent uncertainty in such medium-term projections, it is best to focus on the general trajectory over time, particularly the near term. Alternative medium-term scenarios are presented in the next section.

The main projections assume an easing of growth in real GDP from 2.8% in the June 2014 year to around 2% in the June 2024 year. Labour productivity growth is assumed to average around 1.5% per annum over the later years of the projection period, while annual labour force growth is projected to fall from 2% in June 2014 to 0.4% by June 2024 because of an ageing population. With real GDP growth projected to ease to around 2% and inflation of 2% per annum, projected growth in nominal GDP falls to 4% per annum from 2018.

...and show that surpluses are not projected to return until 2016/17...

The total Crown operating balance (before gains and losses) is projected to be zero in the June 2016 year and return to surplus in the June 2017 year for the first time since 2008. The projected operating balance returns to surplus two years earlier than was projected at Budget 2009, driven by changes in the forecast period that flow into projections of higher revenue that more than offset higher expenses. The core Crown operating balance returns to surplus in the June 2018 year and is of sufficient size for a full contribution to the NZS Fund in the June 2020 year, a year earlier than projected at Budget 2009.

...while net debt is projected to peak at around 30% of GDP...

Net debt is projected to continue lifting until the June 2016 year, when it peaks at just above 30% of nominal GDP (Figure 1.12). After this, it is projected to fall to just below 20% of GDP by June 2024. The peak of net debt is both lower and slightly earlier than was projected at Budget. By the June 2023 year, the last year shared by both projections, net debt is around 10 percentage points of GDP lower than the Budget projection.

Figure 1.12 - Net debt
Figure 1.12 - Net debt   .
Source:  The Treasury

The projections of net debt assume an operating allowance of $1.1 billion per annum from the June 2011 year, growing by 2% per annum in future years to account for inflation. This is significantly lower than operating allowances in recent years and will be challenging to maintain over the medium term. The net debt projections also assume full fiscal drag on tax on wages and salaries for the entire projection period. This assumption, combined with rising incomes, results in a substantial increase in tax revenue and would mean the average wage earner would have some of their income taxed at the top marginal tax rate by 2024.

Ongoing operating deficits are reflected in declining total net worth, until surpluses return in 2016/17 (Figure 1.13). To complement net worth, the Treasury is introducing a new fiscal indicator to provide a more complete picture of the Crown's position. Net worth excluding social assets provides the Government with an idea of how its assets that earn a financial return match the Government's liabilities. The measure consists of the financial assets of core Crown and CEs, all assets of SOEs and total liabilities, but excludes the physical assets of KiwiRail. Net worth excluding social assets follows a similar pattern to overall net worth.

Figure 1.13 - Net worth indicators
Figure 1.13 - Net worth indicators   .
Source:  The Treasury

...and then fall towards 20% of GDP, in line with the Government's long-term fiscal objectives

The decline in net debt to around 20% of GDP towards the end of the projection period is in line with the Government's long-term fiscal objective. Meeting this objective would mean the Crown is better placed to absorb economic shocks. It would also put New Zealand in a better position when the long-term fiscal pressures from an ageing population and other factors begin to escalate. The Treasury recently published its Long-term Fiscal Statement, which showed significant fiscal challenges posed by an ageing population and the unsustainable nature of growth in government spending in recent years. The Statement also showed ongoing cost pressures and an ageing population would likely require reductions in some areas of services, even with annual operating allowances of $1.1 billion (growing at 2% per annum) and growth in public sector productivity.

Given the uncertainty around the Half Year Update projections, and the forecasts these projections build on, the next section examines alternative scenarios that fall within the range of possible outcomes. Economic and fiscal indicators could turn out to be stronger than outlined in the main projections above. It is also possible to conceive a situation in which the fiscal position worsens by nearly as much as projected in Budget 2009.

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