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Half Year Economic and Fiscal Update 2012

Medium-term Projections

Medium-term fiscal projections cover the decade subsequent to the forecasts up to and including the year ending June 2027. While the forecasts are based on comprehensive modelling of economic and fiscal conditions, projections differ in that they are potential paths for the future, largely based on historical values and reflecting only existing policy settings.

OBEGAL and net debt improve over the 10-year projection period, although to a lesser degree than in the Budget Update. Much of the change from the Budget Update arises from the fact that the latest projections start from a weaker forecast base. The increased levels of net debt over the forecast base translate to a higher net debt track over the projections. However, stronger labour force projections drive tax revenue growth at a faster rate than in the Budget Update and see the gap in the OBEGAL track nearly close by the end of the decade of projections.


Figure 2.12 - OBEGAL projections
Figure 2.12 - OBEGAL projections.
Source:  The Treasury

Following on from the end of the forecast period, fiscal constraint continues into the projection period. As the level of growth of expenditure is lower than both historical averages and nominal GDP growth, this plays a large part in the continued improvement in OBEGAL.

In addition, in the first five years of the projections, tax revenue grows relatively strongly as the unemployment rate continues to fall and labour productivity growth is assumed to return to 1.5% per annum.

As a result, the OBEGAL steadily increases, with contributions to the NZS Fund projected to resume in 2018/19 (at $2.1 billion) when the core Crown OBEGAL is at a sufficient level to fund contributions.

Net debt

Figure 2.13 - Net debt projections
Figure 2.13 - Net debt projections.
Source:  The Treasury

Overall, net debt is forecast to peak at 29.5% of GDP in 2014/15 and 2015/16 before steadily declining over the projection period, as shown in Figure 2.13. The improving track is largely owing to continued fiscal consolidation and the forecast return to surplus. The repayment of debt in turn helps surpluses to increase as debt financing costs fall.

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