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Half Year Economic and Fiscal Update 2014

Additional Fiscal Indicators

There are different approaches to assessing the relationship between the economy and the fiscal performance, and the relationship between fiscal policy and the economy. One approach to assessing these relationships uses summary fiscal indicators. A discussion of the Treasury’s perspective on these indicators, their use and limitations, and the relationship between them, can be found in the 2010 Budget Update Additional Information.[1]

The Treasury calculates two summary fiscal indicators: the cyclically-adjusted balance (CAB) and the fiscal impulse indicator.

  • The cyclically-adjusted balance adjusts the operating balance before gains and losses (OBEGAL) for the cyclical position of the economy. The CAB is subject to uncertainty because it uses estimated variables and is sensitive to new information, particularly regarding the output gap.
  • The fiscal impulse indicator uses the change in a cash-based version of the fiscal balance (a cyclically-adjusted balance supplemented by capital expenditure).

Further information on the methodology behind the indicators can be found in Treasury Working Papers 02/30 and 10/08.[2]

Central estimate

This section discusses the Treasury's central estimates of the cyclically-adjusted balance and fiscal impulse. Detailed tables of data can be found at the end of the Additional Fiscal Indicators section.

The significant “one-off” impact on expenses of the Canterbury earthquake is removed from estimates of the cyclically-adjusted balance. This is to give a better indication of the underlying fiscal performance. Similarly for one measure of the fiscal impulse, some earthquake expenditures that are more of a financial nature are removed as the demand effects arising from such flows (eg, EQC payments to households) will show up in other parts of the economy.

Cyclically-adjusted balance

Figure 1 shows the operating balance (before gains and losses) and the cyclically-adjusted balance. They are broadly similar to those estimated in the Pre-election Update. The headline OBEGAL is forecast to be a surplus of 0.2% of GDP in the year ended June 2016 (Pre-election Update: 0.3% of GDP).The cyclically-adjusted balance, excluding earthquake expenses, is estimated to be a deficit of 0.2% of GDP for the year ended June 2015 (consistent with the Pre-election Update). The difference between the headline and cyclically-adjusted balance comprises the impact of the automatic stabilisers and the earthquake adjustment.

Cyclically-adjusted revenue and expenses are forecast to be broadly balanced in the years ended June 2015 and 2016. Over the forecast period, the cyclically-adjusted balance is lower than the headline OBEGAL owing to the forecast assumption that the economy will be operating above capacity (ie, a positive output gap). However, this is to a lesser extent than at the Pre-election Update as the forecast output gap has been revised lower (less positive) in the forecast. The cyclically-adjusted balance increases over the forecast period, reaching a surplus of 0.9% of GDP in the year ended June 2017, growing to 1.4% of GDP in 2019.

Figure 1 - Cyclically-adjusted balance
Figure 1 - Cyclically-adjusted balance.
Source: The Treasury

Fiscal impulse

The fiscal impulse indicator is shown in Figure 2. As has been noted in previous Economic and Fiscal Updates, capital expenditure on defence, KiwiSaver subsidies and Deposit Guarantee Scheme payments are excluded from the measure of fiscal impulse since these are expected to have a limited direct impact on aggregate demand. Purchases and sales of investments are also excluded from the measure. As a result, any sale proceeds from the Government's share offer programme do not impact on the fiscal impulse indicator.

The fiscal impulse is shown for both the core Crown and combined core Crown and Crown entity segments. The core Crown indicator mostly reflects changes in receipts and expenditure impacted by Budget decisions, whereas the core Crown plus Crown entity indicator provides a better indication of the total impact of central government activities (ie, excluding State-Owned Enterprises). A measure of the fiscal impulse that excludes Canterbury-related financial transactions is also shown, which adjusts for EQC and Southern Response payments and receipts. EQC and Southern Response payments and receipts account for much of the difference between the core Crown fiscal impulse and the indicator for the core Crown plus Crown entities.

It is worth noting that summary indicators such as fiscal impulse do not take account of the composition of fiscal policy changes or how a change in fiscal policy will be transmitted through the economy. Treasury research using time series statistical analysis indicates that spending and taxes have different effects on New Zealand GDP.[3] Therefore the fiscal impulse indicator is only a very imprecise guide to the impact of fiscal policy on the economy.

The fiscal impulse shows that fiscal policy is expected to have a contractionary impact on demand in almost every year of the forecast horizon. The estimates of the fiscal impulse are broadly unchanged from the Pre-election Update. Fiscal policy is expected to withdraw 0.4% of GDP from aggregate demand on average in each year over the five years to June 2019. The fiscal impulse for the year ended June 2015 is -0.1% of GDP (Pre-election Update: -0.2% of GDP).

It is also worth noting the difference in 2015 between the unadjusted and earthquake-adjusted fiscal impulses. The fiscal impulse is affected by large payments and receipts by EQC and Southern Response. The one-off positive impulse in the unadjusted measure is due to the timing of reinsurance inflows. As these reinsurance flows do not reflect the impact of discretionary fiscal policy on the domestic economy, the adjusted measure gives a better estimate of the impact of fiscal policy in these years.

Figure 2 - Estimates of the fiscal impulse
Figure 2 - Estimates of the fiscal impulse.
Source: The Treasury

Notes

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