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Half Year Economic and Fiscal Update 2015

Fiscal Forecast Assumptions

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 2.11 below (on a June-year-end basis to align with the Government's balance date).

Table 2.11 - Summary of key economic forecasts used in fiscal forecasts
Year ending 30 June 2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Real GDP1 (ann avg % chg) 3.0 2.1 2.6 3.7 2.7 2.1
Nominal GDP2 ($m) 240,591 244,923 254,972 271,233 284,874 296,300
CPI (ann avg % chg) 0.6 1.1 2.0 1.9 2.1 2.2
Govt 10-year bonds (ann avg, %) 3.8 3.3 3.5 4.2 4.6 4.8
5-year bonds (ann avg, %) 3.6 3.0 3.4 4.0 4.5 4.7
90-day bill rate (ann avg, %) 3.6 2.8 2.6 3.2 4.1 4.5
Unemployment rate (ann avg, %) 5.8 6.3 6.2 5.4 4.7 4.5
Employment (ann avg % chg) 3.2 0.8 1.5 2.1 2.3 1.3

Notes:

  1. Production measure.
  2. Expenditure measure.

Source: The Treasury

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

Government decisions

The forecasts incorporate government decisions and other circumstances known to the Government and advised to the Treasury up to 27 November 2015.

Tax revenue

Tax policy changes enacted and announced by the Government will take place as planned and will affect tax revenue and receipts.

Earthquake costs

Expenditure (accrual measure) is forecast based on estimates of 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 36 for further discussion.

Operating allowance

Operating allowances are a net $1.0 billion for Budget 2016, increasing to $2.5 billion in Budget 2017 and reducing to $1.5 billion in Budget 2018.  For further details, see note 9 of the Forecast Financial Statements.

Provision for new capital spending

Capital allowances are $1.7 billion in Budget 2016 and $0.9 billion in Budget 2017 then growing at a rate of 2.0% per year for subsequent Budgets.  For further details, see note 9 of the Forecast Financial Statements.

Social housing

The Government has announced social housing reforms as a key priority for this term.  Cabinet has agreed the general direction of the Social Housing Reform programme.  This includes transferring HNZC stock to non-government providers to create a competitive market for social housing.  The level of uncertainty, particularly around the structure of the transactions, makes it difficult to quantify the fiscal impacts, and therefore they are not included in the forecasts, with the exception of funding to the Tāmaki Redevelopment Company (TDC) and the transfer of social housing assets from HNZC to TDC which is included in these forecasts.

Finance cost on new bond issuances

Based on the five-year rate from the main economic forecasts and adjusted for differing maturities.

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 adjustments to operating and capital expenses are as follows:

Top-down adjustments to operating and capital expenses
Year ending 30 June
$billions
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Operating 1.0 0.6 0.5 0.5 0.5
Capital 0.6 0.1 (0.1) 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.

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 2015 annual financial statements and any additional valuations that have occurred up to 30 September 2015 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 forecasts.

Investment rate of returns

The forecasts incorporate the actual results to 30 September 2015.  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 2015 and 30 June 2015 respectively.  The ACC liability has also been adjusted for the 30 September 2015 discount rate.  Both liabilities are valued by projecting future cash payments, and discounting them to the present.  These valuations rely on historical data to predict future trends and use assumptions such as inflation and discount rates.  Any changes 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.

NZS Fund contributions

No contribution is assumed in the forecast period in line with the Government's stated intentions to commence contributions once net core Crown debt has fallen to 20.0% of GDP as set out in the Fiscal Strategy Report (FSR).

NZS Fund contributions
Year ending 30 June
$billions
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Annual contribution1 1.8 1.9 2.2 2.3 2.3
Actual contribution - - - - -

Note:  1  Calculations of annual contributions if they were to resume in 2015/16.

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) NZS expenses and the government five-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.

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