Fiscal Forecast Assumptions
The fiscal forecasts are based on assumptions and judgements developed from the best information available on 11 October 2011, when the forecasts were finalised. Actual events are likely to differ from some of these assumptions and judgements. Furthermore, uncertainty around the forecast assumptions and judgements increases over the forecast period. The Canterbury earthquakes add further uncertainty to the economic and fiscal forecasts.
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 the table below (on a June-year-end basis to align with the Government's balance date).
| June years | 2011/12 | 2012/13 | 2013/14 | 2014/15 | 2015/16 | |
|---|---|---|---|---|---|---|
| Budget forecasts | PREFU forecasts | PREFU forecasts | PREFU forecasts | PREFU forecasts | PREFU forecasts | |
| Real GDP (P) (ann avg % chg) | 2.5 | 2.8 | 3.4 | 3.2 | 2.8 | 2.3 |
| Nominal GDP (E) ($m) | 209,178 | 211,773 | 221,864 | 234,325 | 246,189 | 256,939 |
| CPI (annual avg % change) | 3.4 | 3.2 | 2.2 | 2.4 | 2.5 | 2.7 |
| Govt 10-year bonds (ann avg %) | 5.7 | 4.5 | 4.5 | 5.0 | 5.2 | 5.4 |
| 5-year bonds (ann avg %) | 5.0 | 3.6 | 3.9 | 4.7 | 5.0 | 5.3 |
| 90-day bill rate (ann avg %) | 2.9 | 2.9 | 3.6 | 4.2 | 4.9 | 5.3 |
| Unemployment rate (ann avg %) | 5.9 | 6.0 | 5.3 | 5.0 | 4.8 | 4.7 |
| Employment (ann avg % change) | 1.3 | 1.7 | 1.4 | 1.5 | 1.4 | 1.2 |
| Current account (% of GDP) | -4.5 | -2.2 | -4.0 | -5.8 | -6.5 | -6.9 |
In addition, there are a number of other key assumptions that are critical in the preparation of the fiscal forecasts.
| Government decisions | Incorporate government decisions up to 11 October 2011. | ||||||||||||||||||||||||||||||||||||||||||||||||
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| Tax revenue |
Tax policy changes announced and enacted by the Government will take place as planned and will affect tax revenue and receipts as calculated and agreed by Inland Revenue and the Treasury. The surge in other persons tax refunds and company tax refunds over the last few years was largely a result of the recession. The forecasts assume that refunds will return to pre-recession trends as the economic recovery gets underway. Utilisation of corporate tax losses to offset future taxable profits will retard the growth of corporate tax up to and including the June 2013 year. Earthquake-related GST refunds will provide a boost to GST refunds throughout the forecast period. GST receipts from earthquake-related spending will provide a temporary boost to gross GST, mostly from 2012 onwards. The total net effect of these two elements will be offset, ignoring any additional spending over and above the insurance claims that may occur. The current unusually large margin between 90-day interest rates and 6-month term deposit rates will be maintained throughout the forecast period, which has a positive influence on resident withholding tax on interest income. |
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| Earthquake costs | Expenditure (accrual measure) is forecast based on estimates on when key decisions will be taken. The timing of cash payments is based on estimates of when actual spending will take place. Refer page 15 for further discussion. | ||||||||||||||||||||||||||||||||||||||||||||||||
| Operating allowance |
Net $800 million in Budget 2012 and 2013. Net $1.19 billion from Budget 2014 growing at a rate of 2% per annum for subsequent Budgets. |
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| Capital allowance |
$900 million in Budget 2012 onwards as follows:
Funding for new capital spending will be sourced from the existing balance sheet rather than borrowing. |
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| Investment rate of returns | Incorporate the actual results to 31 August 2011. Beyond this time, gains on financial instruments are based on long-term benchmark rates of return for each portfolio. | ||||||||||||||||||||||||||||||||||||||||||||||||
Finance cost on new bond issuances |
Based on 5-year rate from the main economic forecasts and adjusted for differing maturity. | ||||||||||||||||||||||||||||||||||||||||||||||||
| Top-down adjustment |
A top down adjustment is made to compensate for departments who tend to forecast upper spending limits (appropriations) rather than best estimates. Top-down adjustment to operating and capital as follows:
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| Borrowing requirements | The forecast cash deficits will be met by reducing financial assets and issuing debt. | ||||||||||||||||||||||||||||||||||||||||||||||||
| 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 2011 annual financial statements and any additional valuations that have occurred up to 31 August 2011 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 forecast. | ||||||||||||||||||||||||||||||||||||||||||||||||
| Government Superannuation Fund and ACC liabilities |
The Government Superannuation Fund and ACC liabilities included in these forecasts have been valued as at 30 June 2011 adjusted for the 31 August 2011 discount rate. Both liabilities are valued by projecting future cash payments, and discounting them to present value. These valuations rely on historical data to predict future trends and use economic assumptions such as inflation and discount rates. Any change 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. The Government Superannuation Fund'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. |
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| Emissions Trading Scheme (ETS) |
The forecasts have been prepared in accordance with current government ETS policies. Details of current climate change policies are listed at: www.mfe.govt.nz/issues/climate/policies-initiatives. The carbon price assumption for the ETS is based on estimates of the current certified emission reduction (CER) carbon price from Point Carbon, and is €10.40 with an exchange rate of 0.5907 (a carbon price of NZ$17.61) over the forecast period. The economic models used to project agriculture and energy activity assume an international carbon price of NZ$25 per tonne to 2012 and NZ$50 to 2020. The forecast assumes a 63% uptake of post-1989 foresters into the ETS over Commitment Period One (CP1). Revenues and the associated expenses arising from the agriculture sector entering the ETS are included from the June 2015 financial year. It is assumed the ETS has no fiscal impact on debt or cash flows, as the net cash impact from the ETS and international obligations is highly uncertain. |
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| Kyoto position |
The Kyoto position included in the fiscal forecasts reflects the Government's obligation for CP1, from 2008 to 2012. It does not include any future potential reduction of the position through the transfer of units offshore through the forestry sector, or any future changes to the position through transactions under the ETS. The carbon price assumption for the Kyoto position is based on estimates of the current assigned amount unit (AAU) carbon price from Point Carbon, and is €7.63 with an exchange rate of 0.5907 (a carbon price of NZ$12.92) over the forecast period. |
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| NZS Fund contributions | No contribution is assumed in the forecast period. |
