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Pre-election Economic and Fiscal Update 2017

10-Year Medium-term Projections

The previous sections of this chapter have concentrated on the five-year forecast horizon, up to and including 2020/21. The focus now switches to the decade beyond the last forecast year, extending to 2030/31, referred to as the medium-term projections. Projections differ from forecasts in a number of ways.

Forecasts are based on comprehensive modelling of, and expert opinion on, economic and fiscal conditions. They take into account the relationships and interactions between variables, and make allowance for the impacts of existing policies. Forecasts represent the best attempt to predict future outcomes based on the information available.

Projections represent potential future paths of variables. They are usually based on historical averages of the levels or growth rates, and depend greatly on both the forecast base from which they arise and the assumptions used to generate them. Projections should not be viewed as accurate predictions, but rather as indicators of potential outcomes under a given set of assumptions. The projections assume an economy that is free of cycles and growing on trend, and contain no unplanned future policy responses that might be enacted.

Projected nominal GDP growth slows...

The two most important economic variables that influence the fiscal projections are nominal GDP and the CPI inflation measure. A table in the annex to this section shows the paths of the other main economic projections.

Annual growth of nominal GDP gradually slows over the projection period, from a peak of 4.4% in the year ending June 2025 to 4.1% by the year ending June 2031. This is owing to the labour force contribution, where an ageing population slowly reduces overall participation rates.

While projected nominal GDP growth rates are almost identical to those produced for the 2017 FSR, they arise from an end-of-forecast GDP base which is $1.7 billion (0.5%) lower. This difference is maintained over the projection decade.

…revenue rises faster than expenses…

Revenue and expenses are projected to increase in nominal terms but revenue rises faster than expenses, which is fairly flat as a share of GDP across the medium-term horizon.

Most revenue types grow in line with nominal GDP once they have reached an assumed steady-state level of GDP. Some tax types take several years into the projections to reach their stable percentages of GDP. This strengthens the revenue projections because some tax types grow faster than nominal GDP for some of the projected years. Growth in expenses is mainly driven by growth in transfer payments (including NZS) each year, along with allowances for new expenditure.

Figure 2.22 illustrates the paths of core Crown revenue and expenses, as percentages of nominal GDP, in recent history and the Pre-election Update forecasts and projections.

Figure 2.22 - Core Crown revenue and expenses
Figure 2.22 - Core Crown revenue and expenses.
Source: The Treasury

...and OBEGAL surpluses are projected to continue...

The OBEGAL is projected to increase across the projection period.

Surpluses increase, not just in dollar terms, but also as a percentage of nominal GDP.

The projected OBEGAL in the Pre-election Update is slightly weaker in each year compared to the projections in the 2017 FSR (Figure 2.23). The majority of the difference is owing to higher transfer payment costs and other operating expenses in the Pre-election Update.

Figure 2.23 - Total Crown operating balance before gains/(losses) or OBEGAL
Figure 2.23 - Total Crown operating balance before gains/(losses) or OBEGAL.
Source: The Treasury

...resulting in net core Crown debt falling below 15% of GDP in 2022/23…

In the 2017 FSR, the Government announced a new long-term objective to reduce net debt to within a range of 10% and 15% and to be within that range by 2025. In the Pre-election Update, net core Crown debt is expected to be within this range approximately two years earlier than target (14.9% of GDP by 2023) and will steadily decline as a percentage of GDP for the remaining projection years. This is illustrated in Figure 2.24.

Figure 2.24 - Net core Crown debt (excluding NZS Fund and advances) assuming no policy intervention
Figure 2.24 - Net core Crown debt (excluding NZS Fund and advances) assuming no policy intervention.
Source: The Treasury

…assuming that operating and capital allowances are the same as the allowances in the 2017 FSR.

The projections assume the same operating and capital allowances as at the FSR 2017. From 2021/22, operating allowances are assumed to be $2 billion, growing at 4% per budget and capital allowances are assumed to be $4 billion growing at 20% per budget. These were set at the 2017 FSR so as to meet the Government's net debt objective. They reflect the headroom the Government has to invest in capital and public services or to alter tax and transfer settings. The updated forecast base, and the fact that allowances have remained unchanged from the 2017 FSR, result in a net core Crown debt to GDP that is lower in the Pre-election Update compared to the 2017 FSR (Figure 2.24).

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