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Half Year Economic and Fiscal Update 2012

Projection Assumptions

The projection period begins in 2017/18 and is based on the long-run technical and policy assumptions outlined below.

Table 2.13 - Summary of key economic and demographic assumptions in projections1
Year ending 30 June 2013 2014 2015 2016 2017 2018 2019 2020 2021 ... 2027
Forecast Projections
Labour force 0.6 1.3 1.4 1.1 1.0 1.1 1.1 1.0 1.0 ... 0.7
Unemployment rate2 7.0 6.3 5.9 5.6 5.2 5.1 5.0 4.9 4.8 ... 4.5
Employment 0.2 2.0 1.8 1.4 1.5 1.2 1.2 1.1 1.1 ... 0.7
Labour productivity3 2.1 1.0 1.0 1.1 0.9 1.2 1.3 1.5 1.5 ... 1.5
Real GDP 2.3 3.0 2.5 2.4 2.4 2.4 2.5 2.6 2.5 ... 2.3
Consumers Price Index4 1.5 2.1 2.2 2.2 2.2 2.0 2.0 2.0 2.0 ... 2.0
Government 5-year bonds5 3.0 3.5 4.3 4.9 5.1 5.2 5.3 5.4 5.5 ... 5.5
Average hourly wage 2.5 2.4 2.7 2.6 2.6 3.2 3.3 3.5 3.5 ... 3.5


  1. Figures are annual average percentage change unless otherwise stated
  2. Household Labour Force Survey (HLFS) basis, annual average
  3. Hours worked measure
  4. Annual percentage change
  5. Annual average

Source: The Treasury

Transition of economic variables from the end of forecast

With the lingering impacts of the global financial crisis, Canterbury earthquakes and uncertainty around growth prospects for many of our major trading partners, many economic variables have not recovered to long-term, on-trend, stable values by the end of the five year forecast horizon. As a consequence, the first few years of projections involve a degree of transition for many of these variables to return them to this state.

Over the long term the unemployment rate is expected to be 4.5% of the labour force. By the last year of the forecasts, 2016/17, it is higher than this, at 5.2%. Over the early projected years it is lowered to 4.5%, reaching it by 2023/24.

Labour productivity annual growth ends the forecasts at 0.9% and is brought up to its long-run assumption of 1.5% per annum by 2019/20.

The Government 5-year bond rate has an end-of-forecast level of 5.1%. It is increased to 5.5% by 2020/21, where it stabilises for the rest of the projected decade.

By the final forecast year the Consumers Price Index (CPI) measure of inflation is close to the stable assumption of 2% per annum, and reaches this in the first projected year.

The total labour force is projected from the end of the forecasts using the growth of the aggregate labour force projections produced by Statistics New Zealand. Since the previous projections were published, for the Budget Update, Statistics New Zealand has produced updated labour force projections. These projections are stronger than those used for the Budget Update, especially in the early years, owing to both increased demographic growth and higher labour force participation rates. As a consequence, while the end-of-forecast labour force levels are not markedly different between the two forecasts, the growth rate over the projections is higher than the Budget Update.

Age groups over 50 in particular are expected to have higher rates of participation in the labour force than was the case in the Budget Update projections. As these workers tend to work fewer hours on average, the assumed long run value for the average number of hours worked per worker in a week has been reduced from 33.2 to 33.0. This level is reached in 2020/21. As the labour force is a driver of both real and nominal GDP in the projections, these variables also grow more quickly in the latest projections than they did for the BudgetUpdate.

In addition, there are a number of other key assumptions that are critical in the preparation of the projections:

Tax revenue Linked to growth in nominal GDP. Source deductions (mainly PAYE tax on salary and wages) is grown using employment growth and nominal average hourly wage growth for the first five years of the projection period.  The latter is multiplied by a fiscal drag elasticity of 1.35.  Beyond the first five years of the projection period source deductions grow in line with GDP. The three other major tax categories (corporate tax, hypothecated transport taxes and other taxes, dominated by GST), are gradually returned to long-term constant ratios to GDP.  The long-term ratios are based on historical data, taking into account tax rate and policy changes.  Once the long-term ratios are reached' the tax types remain at these ratios in later projected years.
New Zealand Superannuation (NZS) Demographically adjusted and linked to net (of tax) wage growth, as is prescribed by legislation relating the annual indexation of weekly NZS rates to net average weekly earnings.  As tax on average weekly earnings, being a part of overall PAYE, increases owing to fiscal drag, the net average weekly earnings do not grow as quickly as the gross earnings in years where fiscal drag is assumed on PAYE growth.
Other benefits Demographically adjusted and linked to inflation.
Finance costs A function of debt levels and interest rates.
Core Crown expenditure (excluding benefits and finance costs) Held constant at the end-of-forecast values, because growth is assumed to come from a share of the projected Operating Allowance annual increment.  The exception is Transport spending, which grows in line with the hypothecated tax revenue dedicated to funding it.
Operating allowance $1.26 billion in 2017/18.  Operating Allowances for subsequent projected years grow at 2% per annum from this value.
Capital allowance $0.936 billion in 2017/18.  This is based on a track of $0.918 billion in Budget 2017 as the starting point, grown at 2% per annum.
NZS Fund Contributions to the Fund suspended until 2017/18.  Contributions begin again in 2018/19, and are consistent with the New Zealand Superannuation and Retirement Income Act 2001.
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