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

3   Approach Taken Here

The section of the Public Finance Act that requires the Treasury to prepare this Statement simply states that “the Treasury must prepare a statement on the long-term fiscal position,”[4] which must relate to a period of at least 40 consecutive years.

This chapter outlines how the Treasury has gone about preparing the projections of the future fiscal position that go to make up this Statement.

The purpose of this Statement

The purpose of this Statement is to increase the quality and depth of public information and understanding about the drivers of the long-term fiscal position, the role of growth, and the consequences of spending and revenue decisions. This purpose has guided the methodology used in the Statement.

Building on the past and overseas practice

While the legislative requirement for the Treasury to produce a long-term fiscal statement is new, publishing this Statement will not by any means be the first time that the issue has been placed in the public arena.

Many reports by the Treasury and by other agencies over the past 15 years have thrown light on aspects of New Zealand’s long-term fiscal position. Some have focused on the impact of population ageing, while others have looked at a wider range of drivers of the fiscal position. Annex 2 contains a list of these previous studies.

Increasingly, other countries are also preparing regular statements of their long-term fiscal positions. Three recent examples are Australia, the United Kingdom and the United States.

The Australian Commonwealth Government produced its Intergenerational Report in 2002. This study contains projections of individual spending programmes and taxes, looking out 40 years.[5] In 2005, the Australian Productivity Commission published a research study examining the productivity, labour-supply and fiscal implications of likely demographic trends over the next 40 years for all levels of government.[6] This study extended some of the economic analysis underlying the Intergenerational Report and looked at the implications of ageing for Australian state and territorial governments (the Intergenerational Report focused exclusively on the federal level). The next intergenerational report is required to be produced over the coming year.

HM Treasury in the United Kingdom produces an annual Long-term Public Finance Report, which contains a mix of projections of individual programmes and investigates the impact of the United Kingdom Government’s overall fiscal strategy on spending.[7] The United Kingdom Government’s Pensions Commission, which issued its final report in April 2006, also undertook extensive modelling of the long-term impacts of demography on age-pension policy. Details can be found on its website.[8]

The United States’ Congressional Budget Office prepares a Long-Term Budget Outlook.[9] This outlook models the effect of different scenarios of spending and revenue on the federal government’s fiscal balance and, thus, levels of debt.

The European Commission and the OECD periodically make projections of their members’ fiscal positions. The EC published a set of projections of age-related expenditure for all of its 25 member states in February 2006.[10] The OECD examined the fiscal implications of age-related spending in member countries in 2001[11] and published a set of projections of long-term health spending in 2006.[12]

Notes

  • [4]Section 26N(1)(a) of the Public Finance Act 1989.
  • [5]This is available on the Commonwealth Treasury’s website at: http://www.treasury.gov.au/contentitem.asp?NavId=012&ContentID=378.
  • [6]Economic Implications of an Ageing Australia, A Research Report, available at http://www.pc.gov.au/study/ageing/finalreport/index.html.
  • [7]The December 2005 edition can be found at: http://www.hm-treasury.gov.uk/media/F59/32/pbr05_longterm_513.pdf.
  • [8]http://www.pensionscommission.org.uk/.
  • [9]2005 Long-Term Budget Outlook is available at http://www.cbo.gov/ftpdocs/69xx/doc6982/12-15-LongTermOutlook.pdf.
  • [10]This is available on the European Commission website: http://europa.eu.int/comm/economy_finance/epc/epc_sustainability_ageing_en.htm.
  • [11]Fiscal Implications of Ageing: Projections of Age-related Spending, OECD Economics Department Working Paper No. 305, 2001.
  • [12]Projecting OECD health and long-term care expenditures: what are the main drivers? Economics Department Working Papers No. 477, 2006.
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