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Half Year Economic and Fiscal Update 2015

General Fiscal Risks

The remainder of this chapter focuses on the links between the economic risks and the Crown's fiscal position. For more on fiscal risks, see the Specific Fiscal Risks chapter.

Revenue Risks

One of the major sources of risk to the fiscal position arises from the inherent uncertainty about future tax revenue. The amount of tax revenue that the Crown receives in a given year is closely linked to the performance of the economy.

Figure 3.9 plots the central tax revenue forecast, along with confidence intervals around these forecasts based on the Treasury's historical tax forecast variances and the assumption of an even balance of risks around the central forecast.[20] The outermost shaded area captures the range ±$7.2 billion in the June 2020 year, within which actual tax outturns are expected to fall 80% of the time.[21]

Figure 3.9 - Core Crown tax revenue uncertainty
Figure 3.9 - Core Crown tax revenue uncertainty   .
Source:  The Treasury

The tax revenue forecasts from the two scenarios are also shown in Figure 3.9. The 2008/09 global financial crisis showed that exogenous shocks can have severe impacts on government revenue. Should any of the uncertainties outlined in the Economic Riskssection eventuate, Crown revenue would be different from forecast, with Scenarios One and Two being examples of possible outcomes.

Based on average historical forecast variances, Figure 3.9 suggests that an annual tax revenue outturn associated with Scenario One lies between the 25th and 50th percentiles in most years. An annual tax revenue outturn associated with Scenario Two lies between the 50th and 75th percentiles in each year. On this basis, actual tax outcomes would be expected to fall within the range of the two alternative scenarios approximately half of the time, with greater or lesser outcomes also expected approximately half of the time.

Fiscal Sensitivities

Table 3.2 provides some rules of thumb on the sensitivities of the fiscal position to small changes in specific variables. For example, if nominal GDP growth is one percentage point higher than forecast in each year up to June 2020, tax revenue would be around $4.4 billion higher than forecast in the June 2020 year as a result. The sensitivities are broadly symmetric and if nominal GDP growth is one percentage point lower each year than expected, tax revenue would be around $4.2 billion lower than forecast in the June 2020 year. The figures are indicative and can be influenced by the composition of growth as different types of activity have different effective tax rates.

A different interest rate path from that forecast would also impact on the fiscal position. A one percentage point lower interest rate would result in interest income on funds managed by the Treasury's NZDMO being $110 million lower in the June 2020 year. This would be more than offset by interest expenses $450 million lower in the June 2020 year.

Table 3.2 - Fiscal sensitivity analysis
Year ending 30 June
1% higher nominal GDP growth per year on  
Tax revenue 710 1,470 2,320 3,300 4,360
Tax revenue impact of a 1% increase in growth of  
Wages and salaries 305 635 995 1,405 1,860
Taxable business profits 145 320 525 755 990
Impact of 1% lower interest rates on  
Interest income1 (59) (114) (113) (114) (106)
Interest expenses1 (30) (159) (265) (357) (451)
Overall operating balance1           (29)            45          152          243          344

Note: 1 Funds managed by the Treasury's NZDMO only.

Source: The Treasury

Expenditure Risks

One-off and unexpected expenditure shocks can have a large impact on the Crown's operating balance in the year that they occur. Over-forecasting of expenditure leads to policy being tighter than otherwise, and uncertainty is inherent in forecasting the cost of new policy initiatives.

There is also considerable uncertainty regarding the effect of the performance of the economy on Crown expenditures. This uncertainty relates largely to the operation of the so-called automatic stabilisers. For example, if the economy performs better (worse) than expected in a given year, official expenditures on social programmes may be lower (higher) than planned.

In recent years, earthquakes have underlined the inherent exposure of the Crown's fiscal position to unexpected events. The Crown's fiscal position would be affected if another catastrophic earthquake were to occur or if the costs associated with prior events exceed the updated estimates.

The ageing population also presents risks to the medium-term fiscal position, particularly to the extent that demographic forecasts may prove to be too low or too high. An ageing population implies increased public expenditure, especially for health and superannuation spending.


  • [20] A summary of the methodology and key assumptions is found in Parkyn, O (2010), Estimating New Zealand's Structural Budget Balance, New Zealand Treasury Working Paper 10/08, available at
  • [21] Treasury analysis showed that a shock that has a significant and persistent impact on economic growth can result in tax revenues significantly beyond the outermost shaded area. See Fookes, C (2011), Modelling Shocks to New Zealand's Fiscal Position, New Zealand Treasury Working Paper 11/02, available at
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