![New Zealand's Long-Term Fiscal Position [June 2006]](/mastheads/government/longterm/longterm06.gif){kind=small}
Employment and unemployment
The Budget economic forecast assumes that, by 2010, the trend unemployment rate is 4.5% of the labour force and this is assumed to remain constant throughout the projection period. Along with this, hours worked per employee are also assumed not to change after 2010.
Productivity
Empirical estimates suggest that productivity rises with age before declining after middle age.[32] This could mean that ageing could produce a (small) decline in average productivity, with the effects of a greater proportion of older workers being largely offset by relatively fewer younger ones. The present modelling, however, assumes that average labour productivity (real output per hour worked) grows by 1.5% annually for everyone over the projection period. This reflects the median growth in the output per hour worked between 1980 and 2003.
Labour productivity growth (which is assumed to equal the real wage growth in the Long-Term Fiscal Model) of 1.5% a year means that by mid-century, real incomes will have doubled.
Chapter 11 examines the effects on the fiscal position of changing this productivity assumption.
Inflation and bond rates
The final major assumptions in the modelling are that annual inflation over the projection period is 2%, the middle of the present Reserve Bank target range, and that the real government 10-year bond rate is 4%.
Resulting GDP projections
In growth terms, nominal GDP in any one year (Yt ) grows as follows from 2010 onwards:
Yt = Yt-1 x (1+g) x (1+p) x (1+i),
where
Yt-1 = GDP in the previous year,
g = growth of labour force,
p = labour productivity growth, and
i = the inflation rate.
In other words, growth of nominal GDP is roughly the sum of the labour force growth, labour productivity growth and the inflation rate. This formula implicitly assumes that the employment rate and average weekly hours worked are constant after 2010.
Source: Statistics New Zealand and Treasury projections
Table 4.2: Summary of key economic assumptions from 2010
| Variable | Value |
|---|---|
| Labour productivity growth | 1.5% |
| Inflation | 2.0% |
| 10-year real government bond rate | 4.0% |
| Unemployment rate | 4.5% |
| Average hours per week | 38.4 hours |
Combined with these assumptions, the demographic projections translate into slower labour force growth and real economic growth lowering from about a 3.2% annual average over the past decade to a 1.6% average through the 2040s. Real per capita growth is closer to labour productivity growth, but it falls below this when population growth is larger than labour force growth from 2020 onwards.
