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Pre-election Economic and Fiscal Update 2017

Fiscal Sensitivities

Table 3.2 sets out some rules of thumb on the sensitivities of the fiscal position to small changes in specific variables. For example, if nominal GDP growth is one percentage point higher than forecast in each year up to June 2021, tax revenue would be around $3.7 billion higher than forecast in the June 2021 year as a result. The sensitivities are broadly symmetric and if nominal GDP growth is one percentage point lower than expected each year, tax revenue would be around $3.6 billion lower than forecast in the June 2021 year. The figures are indicative and can be influenced by the composition of growth as different types of activity have different effective tax rates.

A different interest rate path from the forecast would also impact the fiscal position owing to the effect on the portfolios of various government reporting entities, such as the NZS Fund, ACC and the Treasury's New Zealand Debt Management Office (NZDMO). For example, at 30 June 2016, a 1.0% increase in NZ interest rates would have reduced the total Crown operating balance by $896 million while a 1.0% decrease would have increased the total Crown operating balance by $926 million. The majority of the Government's borrowings and a large number of financial assets are managed by NZDMO. To illustrate the interest rate sensitivities on the NZDMO portfolio, Table 3.2 provides the estimated impact of lower interest rates on those assets and liabilities. A one percentage point lower interest rate would result in interest income on funds managed by the NZDMO being $100 million lower in the June 2021 year. This would be more than offset by interest expenses $298 million lower in the June 2021 year. As above, the sensitivities are broadly symmetric.

Table 3.2 - Fiscal sensitivity analysis
Years ended 30 June

Impact on tax revenue of a 1 percentage point increase in
growth of

Nominal GDP 790 1,650 2,630 3,695
Wages and salaries 335 685 1,090 1,535
Taxable business profits 170 390 630 895

Impact of 1% lower interest rates on

Interest income1 -78 -73 -87 -100
Interest expenses1 -79 -155 -229 -298
Net impact on operating balance 1 82 142 198

Note: 1 Funds managed by the Treasury's NZDMO only.

Source: The Treasury

The forecast financial position is based on a number of judgements and assumptions about the future. To inform these judgements and assumptions we rely on market information. Some additional assumptions include those around foreign exchange rates, share prices, the carbon price and property prices. Where the actual outcome differs from our assumptions, the Crown's actual financial position is likely to differ from the forecasts. For example, foreign currency-denominated financial assets and liabilities are converted into New Zealand dollars at the reporting date, the Government's listed share investments are reported on market prices and property owned by the Crown is valued using market information. Changes in these variables can also have flow-on effects on the Crown's operating balance. For example, a strengthening of share prices may result in higher returns from the Government's direct share investments.

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