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Additional Fiscal Indicators

There are different approaches to assessing the relationship between the economy and the fiscal position, and the relationship between fiscal policy and the economy. One approach to assessing these relationships uses summary fiscal indicators. A discussion of the Treasury’s perspective on these indicators, their use and limitations, and the relationship between them, can be found in the 2010 Budget Update Additional Information.[1]

The Treasury estimates two summary fiscal indicators: the cyclically-adjusted balance (CAB) and the fiscal impulse indicator. The fiscal impulse indicator uses the change in a cash-based version of the cyclically-adjusted balance (and includes capital expenditure). The cyclically-adjusted balance indicator is subject to uncertainty because it uses estimated variables and is sensitive to new information, particularly regarding the output gap. Further information on the methodology behind the indicators can be found in Treasury Working Papers 02/30 and 10/08.[2]

Main indicators

This section discusses the Treasury's central estimates of the cyclically-adjusted balance and fiscal impulse. Detailed tables of data can be found at the end of the Additional Fiscal Indicators section.

The significant “one-off” impact on expenses of the Canterbury earthquake is removed from estimates of the cyclically-adjusted balance. This is to give a better indication of the underlying fiscal position. Earthquake expenditure is not removed when calculating the fiscal impulse indicator, since it is expected to add to demand pressure along with other government expenditure.

Cyclically-adjusted balance

The operating balance (before gains and losses) and the cyclically-adjusted balance are shown in Figure 1. The headline OBEGAL deficit is forecast to be 5.1% of GDP in 2011/12 (Budget Update: 4.7% of GDP). The cyclically-adjusted balance, adjusting for the one-off earthquake expenses, is estimated to be a deficit of 3.4% of GDP (Budget Update: 3.6% of GDP). The difference between the headline and cyclically-adjusted balance comprises the impact of the automatic stabilisers of 0.3% of GDP and the earthquake-adjustment of 1.4% of GDP. As consolidation measures take hold, the cyclically-adjusted deficit is projected to unwind over the forecast horizon. A surplus is projected on both a cyclically-adjusted and headline basis for 2014/15.

Figure 1 - Cyclically-adjusted balance
Figure 1 - Cyclically-adjusted balance.
Source: The Treasury

Fiscal impulse

The fiscal impulse indicator is shown in Figure 2. As has been noted in previous Economic and Fiscal Updates, capital expenditure on defence, KiwiSaver subsidies and Deposit Guarantee Scheme payments are excluded from the measure of fiscal impulse since these are expected to have a limited direct impact on aggregate demand.

The fiscal impulse is shown for both the core Crown and combined core Crown and Crown entity segments. The core Crown indicator mostly reflects changes in receipts and expenditure which are impacted by Budget decisions, whereas the core Crown plus Crown entity indicator provides a better indication of the total impact of central government activities.

The fiscal impulse indicator suggests that core Crown discretionary fiscal policy will add net stimulus of 0.6% of GDP in 2011/12 (Budget Update: 0.0% of GDP) and then tightening of 1.8% of GDP in 2012/13 (Budget Update: 2.1% of GDP) and 2.1% of GDP in 2013/14 (Budget Update: 1.9% of GDP). The core Crown plus Crown entity indicator excluding EQC payments shows a broadly similar picture to the core Crown indicator.

The looser fiscal stance estimated for 2011/12 compares with the neutral stance forecast in the Budget Update. This is largely due to the expected timing of some expenditure relating to the Canterbury earthquakes shifting from 2010/11 to 2011/12. The fiscal impulse estimate for 2010/11 has reduced from 1.3% to 0.6% of GDP, while the 2011/12 estimate increased from 0.0% to 0.6% of GDP.

Figure 2 - Fiscal impulse estimates
Figure 2 - Fiscal impulse estimates.

Source: The Treasury


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