The Treasury

Global Navigation

Personal tools


Pre-election Economic & Fiscal Update 2011

General Fiscal Risks

The discussion up to this point has focused on the main near-term economic risks. The rest of this chapter focuses on the links between the inherent risks to the performance of the economy and the Crown's fiscal position.

Table 3.2 provides some rules of thumb on the sensitivities of the fiscal position to changes in specific variables. For example, if for some reason nominal GDP growth is 1 percentage point slower than we have forecast each year up to the year ending June 2016, we would expect tax revenue to be around $3.5 billion (1.4% of GDP) lower than forecast as a result. The sensitivities are broadly symmetric, ie, if nominal GDP growth is 1 percentage point faster each year than we expect, we would expect tax revenue to be around $3.5 billion higher than forecast instead.

Fiscal sensitivities

Table 3.2 - Fiscal sensitivity analysis
Year ending 30 June
($ million unless stated)

1% lower nominal GDP growth per annum on

Tax revenue (549) (1,171) (1,876) (2,650) (3,492)
    (% of GDP) (0.3) (0.5) (0.8) (1.1) (1.4)

Revenue impact of a 1% decrease in growth of

Wages and salaries (240) (510) (812) (1,153) (1,532)
    (% of GDP) (0.1) (0.2) (0.3) (0.5) (0.6)
Taxable business profits (96) (225) (370) (526) (687)
    (% of GDP) (0.0) (0.1) (0.2) (0.2) (0.3)

Impact of 1% pt lower interest rates on

Interest incomea (116) (117) (54) (87) (34)
    (% of GDP) (0.1) (0.1) (0.0) (0.0) (0.0)
Expensesa (84) (291) (378) (516) (573)
    (% of GDP) (0.0) (0.1) (0.2) (0.2) (0.2)
Overall operating balance (32) 173 325 429 540
    (% of GDP) (0.0) 0.1 0.1 0.2 0.2
  1. New Zealand Debt Management Office holdings only.

Source: The Treasury

Revenue risks

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

Figure 3.6 plots our main tax revenue forecast, along with confidence intervals around those forecasts based on Treasury's historical tax forecast errors.[11] The outermost shaded area captures the range (+/- $5 billion in the final year) within which actual tax forecasts would typically fall for 80% of the time.[12] The tax revenue forecast from the downside scenario is also plotted. Tax revenue in the downside scenario is clearly much lower than in the main forecast, but based on average historical forecast errors, there is still a one-in-five chance that tax revenue over the forecast period comes in even weaker than shown here in the downside scenario. Furthermore, with uncertainty currently greater than usual and risks skewed to the downside, the probability of tax revenue undershooting the downside scenario is currently considered to be higher than one in five.

Figure 3.6 - Core Crown tax revenue uncertainty
Figure 3.6 - Core Crown tax revenue uncertainty.
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. Persistent errors in forecasting the cost of various programmes (ie, policies that end up costing more than the Government allows for) can also have substantial ongoing effects on the fiscal position.

There is also considerable uncertainty with regard to the performance of the economy on Crown expenditures too. This uncertainty largely relates 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, and tax revenues higher (lower).

Meanwhile, the destructive seismic events of recent years have underlined the inherent exposure of the Crown's fiscal position to exogenous shocks on the capital side. The Government's fiscal position would be impacted if another catastrophic earthquake were to occur or if the costs associated with the recent 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 high.

Balance sheet risks

In addition to the primary risks facing the public finances, the Crown's balance sheet faces risks on a number of fronts too.[13] One of the main risks in this regard is to the net worth of the Crown's financial assets from movements in financial markets - particularly relating to interest and exchange rates and equity prices. Examples of these funds include the NZS Fund and the Accident Compensation Scheme (ACC). The Crown Ownership Monitoring Unit estimates that the Crown's overall financial portfolio has an asset beta of 0.45 relative to global equity markets. This means that if the MSCI World Equity Index were to fall (rise) by 10%, the value of the Crown's investments would be expected to fall (rise) by 4.5%.

The Crown also faces liquidity risk, and in extreme instances could potentially encounter difficulty in meeting financial obligations as they fall due. However, the bulk of research suggests that such a scenario is very unlikely and the Government has liquid buffers to help cope with such events.

Funding risks

As noted in the Economic Outlook chapter, while our main forecasts were finalised before the recent downgrades of New Zealand's credit rating by Standard & Poor's and Fitch, the market reaction since then means that our forecasts for interest rates in the near term are still appropriate. For now, New Zealand is on a stable outlook with all three major credit ratings agencies and the Crown holds the top Aaa foreign currency rating from Moody's and stable AA foreign currency ratings from Standard & Poor's and Fitch.

Nonetheless, in the absence of a marked improvement in the external position, New Zealand may be more likely to be singled out in the funding markets in the future. All things being equal, any further deterioration in the ratings outlook could serve to raise debt-servicing costs for the Crown as well as borrowing rates for households and businesses.


  • [11]A full summary of the methodology and critical assumptions is included in Treasury Working Paper 10/08. Standard deviation assumptions used for 0-, 1-, 2- and 3-year ahead forecasts are 2.4%, 4.7%, 6.3% and 6.8% of the actual respectively. These are interpolations of the Budget Update forecast estimates, adjusting for the timing of the Pre-election Update forecast.
  • [12]Recent Treasury analysis shows that a shock that has a significant and persistent impact on economic growth can result in tax revenues coming in significantly below the outermost shaded area. See Fookes, C (2011), “Modelling shocks to New Zealand's fiscal position,” Treasury Working Paper 11/02.
  • [13]For a more detailed discussion see the Crown's Investment Statement 2010 as well as the Supplement to the Investment Statement 2010.
Page top