Long-term Fiscal Model

Page updated 29 Oct 2009

The Long-term Fiscal Model is a Treasury model used for the 40-year projections of the government fiscal position in the first statement on the long-term fiscal position.

The models used in the Fiscal Strategy Report and in the Statements on the Long-term Fiscal Position have many things in common, but a crucial difference is that the Fiscal Strategy Model (FSM) keeps the operating and capital allowances (money set aside for future new budget spending) separate from spending based on past decisions. This reflects current budget practice, and is used in the Economic and Fiscal Update forecasts (covering the first 3-5 years). The Long-term Fiscal Model (LTFM), on the other hand, allocates forecast new spending to the major spending categories which are then grown out by demographic and other costs drivers. This better reflects likely growth over the very long-term. Another difference is that health spending in the LTFM takes greater account of changing health status over the long-term. These differences mean that it is difficult to compare the two models.

The LTFM is used in two ways in the statement. One makes projections that combine demographic scenarios and historical trends in government spending and revenue and adds up the results (called the historical trends scenario). Debt is then the unconstrained residual. The other assumes a debt position constrained as a share of GDP and then suggests ways in which spending or revenue might change to meet this debt position. This is labelled the sustainable debt scenario.

The LTFM is also used to show how sensitive the results are to changes in assumptions, for example, around demographics, and the productivity of the overall economy and the public service. Different choices have different effects on the growth of a typical basket of publicly-funded services for the average New Zealander.

The first sheet of the LTFM contains notes on assumptions and the uses of the model.

By the end of November 2009 the Treasury intends to publish a Working Paper on the assumptions and modelling framework behind the second statement, Challenges and Choices: New Zealand's Long-term Fiscal Statement (released 29 October 2009). Some information is also available in the statement itself.

The modelling approach and assumptions used in the first statement, New Zealand's Long-term Fiscal Position (2006) are outlined in the Policy Perspectives Paper Modelling New Zealand’s Long-term Fiscal Position and throughout the statement itself.

Download the Model