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Pre-election Economic and Fiscal Update 2014

Assumptions for Medium-term Fiscal Projections

The assumptions for the medium-term economic and fiscal projections are outlined in this section. The full assumptions can be found in the 2014 FSR, at http://www.treasury.govt.nz/budget/2014/fsr

Table 2.12 - Summary of economic and demographic assumptions*
Forecasts Projections
June Year[7] 2014 2015 2016 2017 2018 2019 2020 2021 2022 ….. 2028
Labour force 2.6 2.1 1.2 0.9 0.8 1.1 1.0 1.0 0.9   0.7
Unemployment rate** 6.0 5.6 5.3 4.9 4.6 4.5 4.5 4.5 4.5 4.5
Employment 3.3 2.5 1.5 1.4 1.1 1.2 1.0 1.0 0.9   0.7
Labour productivity growth*** 0.5 1.3 1.6 1.0 1.1 1.4 1.5 1.5 1.5   1.5
Real GDP 3.6 3.6 2.8 2.1 2.1 2.3 2.4 2.5 2.4   2.2
Nominal GDP                 8.5 3.9 4.5 4.3 3.6 4.3 4.4 4.5 4.5   4.2
Average hours paid per week**** 32.8 32.6 32.5 32.4 32.4 32.3 32.2 32.2 32.2   32.2
Average hours worked per week***** 33.4 33.4 33.3 33.2 33.1 33.0 33.0 33.0 33.0   33.0
CPI (annual % change) 1.6 2.1 2.3 2.3 2.1 2.0 2.0 2.0 2.0   2.0
Government 5-year bonds
(average % rate)
4.1 4.4 4.8 5.0 5.2 5.3 5.5 5.5 5.5   5.5
Nominal average hourly wage 2.6 2.8 3.1 3.3 3.4 3.4 3.5 3.5 3.5   3.5

* Annual average % change unless otherwise stated.

** Level of unemployment (average for year ending June).

*** Hours worked measure.

**** Average over public and private sector.

***** Total hours worked ÷ total number employed.

Sources: The Treasury, Statistics New Zealand

No economic variables have had their medium-term, stable assumptions changed since the 2014 FSR. As average hours worked per week is assumed to grow at the rate of average hours paid per week, it has stabilised at a slightly higher level, but in the same projected year. This does not affect projected GDP as it depends on the unchanged growth rate, not the level, of average hours worked per week.

Economic projections display the potential paths that some key economic indicators take beyond their forecast bases, while simultaneously providing inputs to projecting many fiscal variables. For example, the modelling of many future benefit expenses uses inflation to annually index payment rates. Nominal GDP acts as the denominator in fiscal indicators to make them more comparable over periods of a decade or more.

The stable projection assumption for annual growth in CPI is 2%, which is the midpoint of the 1% to 3% target in the Reserve Bank's Policy Targets Agreement. With annual growth in CPI at 2.1% by the end of the forecasts, the stable assumption is attained in the first projected year and maintained in all later ones.

Nominal GDP is projected using a growth rate produced by combining those of real GDP and CPI. Projected real GDP growth is itself derived from the growth rates of several economic variables, particularly that of the labour force and annual labour productivity growth.

Table 2.13 - Summary of fiscal projections, as percentages of nominal GDP
Forecast Projections
Year ended 30 June 2014 2015 2016 2017 2018 2019 2020 2021 2022 ... 2028
Core Crown revenue 29.1 30.1 30.5 30.7 31.0 31.4 31.4 31.3 31.3 ... 31.2
Core Crown expenses 30.8 30.3 30.2 30.0 30.0 29.7 29.2 28.9 28.6 ... 27.0
Total Crown revenue 38.8 39.6 39.7 39.8 40.2 40.5 40.6 40.5 40.5 ... 40.3
Total Crown expenses 39.8 39.3 39.2 39.0 38.9 38.6 38.1 37.8 37.5 ... 36.0
Total Crown OBEGAL1 -1.1 0.1 0.3 0.7 1.1 1.8 2.3 2.5 2.7 ... 4.2
Total Crown operating balance 1.2 1.2 1.4 1.8 2.2 3.0 3.3 3.5 3.8 ... 5.5
Core Crown GSID2 38.3 36.1 36.4 37.5 34.6 32.6 29.8 27.4 24.9 ... 10.0
Core Crown net debt3 25.9 26.8 26.7 25.8 25.0 23.3 20.8 19.0 16.9 ... -0.7
Total Crown net worth 34.5 34.5 34.5 34.9 36.0 37.5 39.2 41.1 43.2 ... 59.5
Net worth attributable to the Crown4 32.2 32.2 32.3 32.8 33.9 35.2 36.9 38.6 40.6 ... 55.9

Notes:

  1. Operating balance before gains/(losses).
  2. Gross sovereign-issued debt.
  3. Excludes financial assets of the NZS Fund and core Crown advances.
  4. Excludes assets and liabilities belonging to minority interests.

Source: The Treasury

Summary of medium-term fiscal assumptions
Tax revenue Linked to growth in nominal GDP. Source deductions (mainly PAYE tax on salary and wages) are grown using employment growth and nominal average hourly wage growth, multiplied by a fiscal drag elasticity of 1.35, at the beginning of the projection period.  Beyond 2019/20 source deductions remain at a long-term stable value of 11.2% of GDP.  The four other major tax categories - Corporate tax, GST, hypothecated Transport taxes and Other taxes ­­- are gradually returned, from their end-of-forecast values, to long-term constant ratios to GDP.  This transitional adjustment is to ensure that tax revenue projections are based on ratios to GDP that are neither higher nor lower than would be expected when the economy is performing at its potential.  All tax categories change at a rate of 0.2% of GDP per year, with final ratios-to-GDP of 4.1% for Corporate tax, 7.6% for GST, 1.3% for hypothecated Transport taxes and 4.5% for Other taxes.  The long-term ratios are based on historical data, taking into account tax rate and policy changes that could affect these.  Once the long-term ratios are reached the tax types remain at them in later projected years.
New Zealand Superannuation (NZS) Demographically adjusted and linked to net wage growth, via the “wage floor”.  The latter refers to the net (after-tax) weekly NZS rate for a couple being constrained in legislation to lie between 65% and 72.5% of net average weekly earnings.  As tax on average weekly earnings increases owing to fiscal drag, the net average weekly earnings do not grow as quickly as the gross earnings in the years where fiscal drag is applied in modelling source deductions.
Other benefits Demographically adjusted and linked to inflation.
Health and education Held constant at the end-of-forecast values, because their growth is assumed to come from a share of the projected Operating Allowance annual increment.
Other expenditure Held constant at the end-of-forecast values, because their growth is assumed to come from a share of the projected Operating Allowance annual increment.
Finance costs A function of debt levels and interest rates.
Operating allowance $1.592 billion in 2018/19, based on 2% growth from a $1.5 billion value in Budget 2015.  Operating Allowances continue to grow at 2% per year from this value in later projected years.
Capital allowance $0.955 billion in 2018/19, based on 2% growth from a $0.9 billion value in Budget 2016.  Capital Allowances continue to grow at 2% per year from this value in later projected years.
NZS Fund Contributions to the Fund suspended until 2019/20.  Contributions begin again in 2020/21, at a level consistent with the New Zealand Superannuation and Retirement Income Act 2001.

Source: The Treasury

Notes

  • [7]Note that the economic forecasts in the Pre-election Update are based on a March year.
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