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New Zealand's Long-Term Fiscal Position [June 2006]

1   Introduction

This is the first Statement on the long-term fiscal position that the Treasury has produced under the Public Finance Act.

The Act was amended in 2004 to require the Treasury, at least once every four years, to prepare a statement on the long-term fiscal position, looking out over at least a 40-year horizon.

The Statement projects the fiscal consequences of particular scenarios of what governments might be doing over the next 40 or so years. We have captured the uncertainty around these projections by using a series of “what if” questions; for example, what if economic growth is higher than assumed, what if fertility increases, and what if governments choose to spend more on education?

The starting point for this analysis is Statistics New Zealand’s projections of the future size and structure of the New Zealand population and Treasury’s assumptions about the future size of the economy. This information is used to project forward major spending categories and taxes, based on assumptions derived from history, current policy settings and judgements.

The Statement is structured as follows.

Chapter 2 discusses the principles of responsible fiscal management contained in the Public Finance Act. The chapter explains what the principles are and how this Statement adds to the transparency of fiscal policy in New Zealand. Overseas practice is also reviewed.

Chapter 3 discusses the techniques used to prepare the projections in the Statement.

This Statement goes beyond the traditional “bottom-up” approach of using current policy as the sole basis of constructing projections of the long-term fiscal position.

The “bottom-up” approach, which involves projecting future expenditure and taxes on the basis that current policy in each area will continue, is a powerful tool for examining the impact of changes in the population on individual components of the fiscal position. It is the approach that has been used in many studies of the fiscal position in New Zealand. It is also an approach commonly used by other countries; for example, the European Commission has recently published a set of bottom-up long-term fiscal projections for all 25 members of the European Union in the areas of pensions, health and long-term care, education and unemployment benefits.

The Statement also contains projections on what could be termed a “top-down” basis. As the name implies, this projection method seeks to impose an overall set of fiscal constraints on the government and then looks at what various combinations of spending and taxes might meet these constraints.

The main demographic and economic assumptions are contained in Chapter 4.

The Statement uses Statistics New Zealand’s projections of the population. Also included is some detailed discussion of the various drivers of these projections, as these drivers have implications for government spending and hence for projections of spending and revenue.

The projections of future GDP are based on the three Ps of Population, Participation and Productivity. This Statement deliberately adopts a simple model of future GDP growth, because it is about the long-term fiscal position, not the long-term economic situation. It does, however, present examples of the implications of different growth outcomes on various categories of expenditure.

The next five chapters contain projections for revenue and the main spending categories of health, education, New Zealand Superannuation, and other welfare. A further chapter contains projections for all other spending.

Each of these chapters presents base-case projections, as well as a discussion of the drivers of expenditure, together with alternative scenarios to demonstrate the sensitivity of the results to the various assumptions made.

Chapter 11 contains overall results, from both the bottom-up and the constrained, top-down, perspectives.

Note on historical data

The historical data used in the Statement come from a variety of sources and so are not necessarily consistent. They are used to give readers an idea of how we have arrived at the present point.

Demographic data

Statistics New Zealand has changed the way it counts population at least twice in the past century, from the de facto-population concept to the resident-population concept. This produces breaks in the data.

Economic and fiscal data

The Treasury has spliced together various GDP series to produce a long historical series. Through the long time period considered here, the System of National Accounts has undergone several revisions. The fiscal data on revenue and spending, operating balance, debt and net worth are also spliced together from a variety of sources. Before 1994, they were based on cash figures and combined operating and capital spending. After 1994, they were GAAP-based and kept operating and capital spending separate.

These long-term historical series are available on the Statistics New Zealand website (http://www.stats.govt.nz/tables/ltds/default.htm) and come with detailed health warnings.

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