The Treasury

Global Navigation

Personal tools

Government
Publication

Half Year Economic and Fiscal Update 2013

Fiscal Forecast Assumptions

The fiscal forecasts are based on assumptions and judgements developed from the best information available on 3 December 2013, when the forecasts were finalised. Actual events are likely to differ from these assumptions and judgements. Furthermore, uncertainty around the forecast assumptions and judgements increases over the forecast period. The Canterbury earthquakes add further uncertainty to the economic and fiscal forecasts.

The fiscal forecasts are prepared on the basis of underlying economic forecasts. Such forecasts are critical for determining revenue and expense estimates. For example:

  • A nominal GDP forecast is needed in order to forecast tax revenue.
  • A forecast of CPI inflation is needed because social assistance benefits are generally indexed to inflation.
  • Forecasts of interest rates are needed to forecast finance costs, interest income and discount rates.

A summary of the key economic forecasts that are particularly relevant to the fiscal forecasts is provided in Table 2.15 below (on a June-year-end basis to align with the Government's balance date).

Table 2.15 - Summary of key economic forecasts used in fiscal forecasts
Year ended 30 June
$Billions
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Real GDP1 (ann avg % chg) 2.6 3.0 3.4 2.4 1.9 2.2
Nominal GDP2 ($m) 212,721 227,793 239,172 250,494 260,334 270,295
CPI (ann avg % chg) 0.8 1.4 2.0 2.5 2.3 2.3
Govt 10-year bonds (ann avg, %) 3.6 4.7 4.9 5.1 5.2 5.2
5-year bonds (ann avg, %) 2.9 4.3 4.6 4.9 5.1 5.2
90-day bill rate (ann avg, %) 2.6 2.7 3.4 4.3 4.8 5.2
Unemployment rate (ann avg, %) 6.6 5.9 5.6 5.4 5.2 4.8
Employment (ann avg % chg) 0.4 2.6 2.2 1.3 1.0 1.4

Notes:

  1. Production measure.
  2. Expenditure measure.

Source: The Treasury

In addition, there are a number of other key assumptions that are critical in the preparation of the fiscal forecasts.

Government decisions

Incorporate government decisions and other circumstances known to the Government up to 3 December 2013.

Tax revenue

Tax policy changes enacted and announced by the Government will take place as planned and will affect tax revenue and receipts as calculated and agreed between Inland Revenue and the Treasury.

Earthquake costs

Expenditure (accrual measure) is forecast based on estimates on when key decisions will be taken.  The timing of cash payments is based on estimates of when actual spending will take place.  Refer to page 30 for further discussion.

Operating allowance

Net $1.0 billion from Budget 2014 growing at a rate of 2.0% per annum for subsequent Budgets.

Provision for new capital spending

$1.0 billion in Budget 2014 and $0.9 billion in Budgets 2015 and 2016, then growing at a rate of 2% per annum for subsequent Budgets.  For further details, see note 8 of the Forecast Financial Statements.

Government share offers

Sale programme is forecast to conclude in 2013/14.

Net sale proceeds of $4.8 billion (based on a mid-point estimate of between $4.6 billion and $5.0 billion).

Finance cost on new bond issuances

Based on the 5-year rate from the main economic forecasts and adjusted for differing maturity.

Top-down adjustment

A top-down adjustment is made to compensate for departments that tend to forecast upper spending limits (appropriations) rather than best estimates.

Top-down adjustment to operating and capital are as follows:

Top-down adjustment to operating and capital
Year ending 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Operating 1.4 0.5 0.3 0.3 0.3
Capital 0.5 0.1 0.2 0.1 0.1

The adjustment will be higher at the front end of the forecast period as departments' appropriations (and therefore expenses) tend to be higher in these years, reflecting the flexibility departments have around transferring underspends to later years.

Borrowing requirements

Forecast cash deficits will be met by reducing financial assets and issuing debt.

Property, plant and equipment

For the purposes of the forecast financial statements, no revaluations of property, plant and equipment are projected beyond the current year.  Valuations as recorded for the 2013 annual financial statements and any additional valuations that have occurred up to 30 September 2013 are included in these forecasts. 

Student loans

The carrying value of student loans is based on a valuation model adapted to reflect current student loans policy.  As such, the carrying value over the forecast period is sensitive to changes in a number of underlying assumptions, including future income levels, repayment behaviour and macroeconomic factors such as inflation and discount rates used to determine the effective interest rate for new borrowers.  Any change in these assumptions would affect the present fiscal forecast.

Investment rate of returns

Incorporate the actual results to 30 September 2013.  Beyond this time, gains on financial instruments are based on long-term benchmark rates of return for each portfolio.

GSF and ACC liabilities

The GSF and ACC liabilities included in these forecasts have been valued as at 30 September 2013 and 30 June 2013 respectively.  The ACC liability has also been adjusted for the 30 September 2013 discount rate.  Both liabilities are valued by projecting future cash payments, and discounting them to present value.  These valuations rely on historical data to predict future trends and use economic assumptions such as inflation and discount rates.  Any change in actual payments or economic assumptions would affect the present fiscal forecast.  For example, if the discount rate decreases, the value of the liabilities would increase.

GSF's assets are offset against the gross liability and have been updated to reflect market values.  The value of assets over the forecast period reflects long-run rate of return assumptions appropriate to the forecast portfolio mix.

ACC levies

The forecast includes a $387 million reduction in ACC levies for the 2014/15 levy year rising to $1.0 billion in the following levy year.

NZS Fund contributions

No contribution is assumed in the forecast period.

Fund contribution
Year ending 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Required contribution 2.1 2.2 2.2 2.1 2.0
Actual contribution - - - - -

The underlying assumptions in calculating the required contribution in each year are the previous year's NZS Fund balance and projected series, over the ensuing 40 years of nominal GDP, net (after-tax) New Zealand superannuation expenses and the Government 5-year bond rate. The latter is used in calculating the Fund's expected long-run after-tax annual return.  Over the forecast years all Fund variables, apart from the capital contributions, are provided by the NZS Fund itself. 

Refer to the Treasury's website for the NZS Fund model. 

Page top