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Half Year Economic and Fiscal Update 2016

General Fiscal Risks

The remainder of this chapter focuses on the nexus between economic risks and the Crown's fiscal position. Specifically, we look at economic risks and how they translate to fiscal risks via their effects on Crown revenue, Crown expenditure and the Crown balance sheet. 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, which accounts for around 70% of the Crown's revenue. As demonstrated earlier in this chapter in Scenario One and Scenario Two, the amount of tax revenue that the Crown receives in a given year is closely linked to the performance of the economy. For example - as set out in Scenario One - an international shock that depresses export demand and prices translates to decreased investment and consumption, which leads to lower core Crown tax revenue (lower GST, corporate tax revenue and source deductions) owing to the combined effects of lower nominal consumption, lower interest rates and a weaker labour market. Alternatively, an acceleration in domestic demand raises core Crown tax revenue (higher GST revenue, higher corporate taxes and source deductions) because of an increase in nominal consumption, greater business profitability and a stronger labour market (Scenario Two).

Figure 3.10 plots the main annual 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 main forecast.[11] The outermost shaded area captures the range of approximately plus or minus $7.5 billion in the June 2021 year, within which actual tax outturns are expected to fall 80% of the time.[12]

Figure 3.10 - Core Crown tax revenue uncertainty
Figure 3.10 - Core Crown tax revenue uncertainty    .
Source: The Treasury

The tax revenue forecasts from Scenario One and Scenario Two are also shown in Figure 3.10. Should any of the uncertainties outlined in the Economic Riskssection eventuate, Crown revenue would be different from forecast, with Scenario One and Scenario Two being examples of possible outcomes.

Based on average historical forecast variances, Figure 3.10 suggests that an annual tax revenue outturn associated with Scenario One lies between the 25th and 50th percentiles. 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.

Exogenous shocks can have severe effects on government revenue. The detrimental impact of the 2008/09 global financial crisis on core Crown tax revenue is shown in Figure 3.10. Although nominal core Crown tax revenue has surpassed pre-global financial crisis levels, future exogenous shocks pose a potential risk to Crown tax revenues. For the possible tax revenue effects of the recent earthquakes, see Economic and fiscal impacts of the Kaikōura earthquakes on page 6.

There are also risks around other sources of revenue including sales of goods and services, investment income, and fees and levies. This additional revenue is also subject to changes in economic conditions, such as changes in interest rates which impact investment income and changes in oil prices which impact the amount of petroleum royalties the Crown receives.


  • [11] 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
  • [12] 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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