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Pre-election Economic and Fiscal Update 2017

Key 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 2017 Pre-election Update, at http://www.treasury.govt.nz/government/fiscalstrategy/model

Table 2.14 - Summary of economic and demographic assumptions1
June Year 2 2017 2018 2019 2020 2021 2022 2023 2024 2025 ….. 2031
Forecasts Projections
Labour force 5.2 2.6 1.8 1.3 1.0 0.8 0.8 0.8 0.8 ... 0.6
Unemployment rate3 5.0 4.9 4.6 4.4 4.3 4.3 4.3 4.3 4.3 ... 4.3
Average weekly hours worked 33.7 33.7 33.7 33.7 33.6 33.6 33.6 33.7 33.6 ... 33.6
Average weekly hours paid 33.1 32.8 32.8 32.8 32.8 32.7 32.7 32.7 32.7 ... 32.7
Labour productivity growth4 (2.4) 0.4 1.7 1.3 1.3 1.5 1.5 1.5 1.5 ... 1.5
Real GDP5 2.8 3.2 3.7 2.8 2.3 2.2 2.3 2.3 2.3 ... 2.1
Nominal GDP6 6.2 5.1 4.9 4.7 4.1 4.3 4.4 4.4 4.4 ... 4.1
Consumers Price Index (CPI)
(annual percentage change)
1.7 1.3 1.9 2.1 2.1 2.0 2.0 2.0 2.0 ... 2.0
Government 10-year bonds
(average percentage rate)
2.9 2.9 3.3 3.8 4.2 4.4 4.6 4.8 5.0 ... 5.3
Nominal average hourly wage 1.5 2.3 2.9 2.7 2.7 3.5 3.5 3.5 3.5 ... 3.5

Notes:

  1. Annual average percentage change unless otherwise stated
  2. Note that the economic forecasts in the Pre-election Update are based on a June year.
  3. Total unemployed as a percentage of the labour force (annual average)
  4. Hours worked measure
  5. Production measure, 2009/10 base
  6. Expenditure measure

Sources: The Treasury, Statistics New Zealand

The assumptions for the economic variables remain unchanged from the 2017 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 one year earlier (in the first projected year). This affects projected GDP in 2022/23 and results in higher GDP growth rate in that year compared to the 2017 FSR.

Economic projections display the potential path that some key economic indicators take beyond their forecast bases, and provide 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 time.

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 2.09% 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 2.15 - Summary of fiscal projections, as percentages of nominal GDP
Year ended
30 June
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Forecasts Projections
Core Crown revenue 30.4 29.9 29.6 29.8 29.9 30.0 30.3 30.4 30.5 30.7 30.8 31.0 31.0 31.1 31.1
Core Crown expenses 28.6 28.7 28.2 27.7 27.7 27.3 27.4 27.4 27.4 27.4 27.5 27.6 27.6 27.6 27.7
Core Crown residual cash 0.6 -0.5 -0.5 0.6 0.3 1.3 1.0 1.0 1.0 1.0 1.0 0.9 0.7 0.4 0.1
Total Crown revenue 38.8 38.1 37.8 37.9 37.9 38.2 38.4 38.5 38.6 38.8 39.0 39.1 39.2 39.2 39.3
Total Crown expenses 37.3 37.0 36.5 35.9 35.8 35.6 35.6 35.6 35.6 35.7 35.8 35.9 35.9 35.9 35.9
Total Crown OBEGAL1 1.4 1.0 1.2 1.9 2.0 2.4 2.6 2.7 2.9 3.0 3.1 3.1 3.2 3.2 3.2
Total Crown operating balance2 4.3 2.0 2.2 3.0 3.1 3.4 3.7 3.9 4.0 4.2 4.3 4.4 4.5 4.5 4.6
Gross sovereign-issued debt 34.6 31.7 30.4 29.0 26.2 24.4 23.0 21.5 20.0 20.0 20.0 20.0 20.0 20.0 20.0
Net core Crown debt3 22.5 22.0 21.5 20.0 18.8 16.7 14.9 13.2 11.6 10.1 8.7 7.5 6.5 5.8 5.4
Total Crown net worth 42.7 42.6 42.8 43.8 45.2 46.8 48.5 50.3 52.2 54.3 56.4 58.5 60.6 62.7 64.8
Net worth attributable to the Crown4 40.5 40.5 40.9 42.0 43.5 45.0 46.8 48.7 50.6 52.7 54.9 57.0 59.2 61.3 63.4

Notes:

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

Source: The Treasury

Key judgements and assumptions

Tax revenue

Linked to growth in nominal GDP. All tax categories change at a rate of 0.05 percentage points of GDP per year from their end-of-forecast percentage of GDP, either upward or downward, until they reach a long-run stable percentage of GDP. These stable assumptions are based on historical data, taking into account tax rate and policy changes that could affect them.

  • Source deductions (mainly PAYE tax on salary and wages) track towards a stable percentage to nominal GDP of 11.0%.
  • The stable percentage for corporate tax (dominated by company tax) is 4.2%.
  • The assumption for GST is 7.4%.
  • Hypothecated transport taxes, used to fund most transport-related operating and capital expenditure, stabilise at 1.3% of GDP.
  • All remaining tax types are aggregated into the other taxes category, which uses a long-run stable assumption of 4.4% of GDP.

The elimination from core Crown tax to total Crown tax applies a long-run stable assumption of 0.3% of GDP.

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 as set in legislation to lie between 65% and 72.5% of net average weekly earnings.

NZS eligibility age increases to 67 and the residency requirement increases to 20 years.

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

$2 billion in 2021/22. Operating allowances continue to grow at 4% per budget from this value in later projected years.

Capital allowance

$4 billion in 2021/22. Capital allowances continue to grow at 20% per budget 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.  The assumed resumption year is determined by the Government's policy of restarting capital contributions once net core Crown debt is no higher than 20% of nominal GDP.

 

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