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Half Year Economic and Fiscal Update 2010

Medium-term projections

Projections cover the period 2016 to 2025...

This section takes the main forecasts covering the period through to June 2015 in the previous section and projects them forward to June 2025. 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 outlined on pages 45-49.

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.

Labour productivity growth is projected to continue to increase before stabilising at 1.5% per annum from June 2017. Annual labour force growth declines to 0.5% in June 2020, contributing to a slowing of real GDP growth over this time. Beyond 2020, annual real GDP growth stabilises at 2% through to the end of the projection period in June 2025. With inflation expected to be in the middle of the RBNZ's 1%-3% target band, changes in nominal GDP growth are driven by real activity, with nominal GDP growth falling to around 4% from 2018 onwards.

…and show a similar track for the operating balance (before gains and losses) as expected at Budget 2010

Figure 1.14 - Total Crown operating balance (before gains and losses)
Figure 1.14 - Total Crown operating balance (before gains and losses).
Source:  The Treasury

Beyond 2015, the projected profile of the total Crown operating balance (before gains and losses) is very similar to that projected at Budget 2010, but lifts at a slightly faster pace (Figure 1.14). This is because the gap in tax revenue seen over the forecast period closes over the projected period as the economy returns to full potential. Furthermore, projected expenditure is coming off a lower base compared with Budget 2010, which helps offset lower tax revenue, especially in the initial projection years. After breaking even in the June 2015 year, the total Crown operating balance (before gains and losses) is projected to be 0.5% of GDP in the year to June 2016 and lift gradually thereafter to reach just under 5% by 2025.

The core Crown operating balance is expected to return to surplus in 2017 and is of sufficient size for a full contribution to the NZSF in 2019, the same year as projected at Budget 2010.

Net debt declines as a proportion of GDP…

Figure 1.15 - Net debt
Figure 1.15 - Net debt.
Source:  The Treasury

Net debt starts from a slightly higher forecast base than at Budget 2010. However, the improved operating balance track closes the gap by around the year ended June 2021 and then sees net debt drop below the Budget 2010 track. As was the case at Budget, net debt is projected to fall below 20% of GDP by 2022 (Figure 1.15).

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.

…and net worth lifts in line with the improving fiscal position

Figure 1.16 - Total Crown net worth
Figure 1.16 - Total Crown net worth.
Source:  The Treasury

Increasing operating balances over the projected years, with their consequent impact of reducing debt levels, are reflected in total net worth increasing over time. By 2025, net worth is projected to reach 57% of GDP, similar to the level it attained in 2008 before the GFC (Figure 1.16).

Given the uncertainty around the HYEFU projections, and the forecasts these projections build on, the next section examines alternative scenarios that fall within the range of possible outcomes.

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