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

10   Other Spending Areas

This chapter contains projections for all other areas of operating expenditure, together with a discussion of capital spending. The general approach taken for other spending areas is to leave them constant as a share of GDP at their 2010 levels.

Core government services

Core government services expenditure includes the costs of running departments, such as Inland Revenue, State Services Commission, Ministry of Foreign Affairs, the Treasury and Statistics New Zealand, and other spending such as Overseas Development Assistance. This area of spending has no clear relation to demographics.

Figure 10.1: Core government services projected to grow with GDP.

Source: The Treasury

Spending on core government services is modelled so that it depends on the number of public servants times the average nominal wage. The number of public servants is assumed to be a fixed proportion of total employment. Because total employment tracks the labour force, the ratio of spending to GDP is fixed.

Et = Et-1 x (1+i) x (1+w) x (1+nt),

where

Et = spending,

i = the inflation rate,

w = real wage growth, which is fixed at 1.5% per annum, and

nt = growth in employment.

Transport and communication

Until 2002, operational spending on transportation and communications had been trending down as a share of GDP for the past half century. More recently, it has boosted its share of GDP. In the projection period, the assumption is that it grows essentially by nominal GDP (as the real growth rate is the same as labour productivity growth) and hence the ratio to GDP is constant.

Et = Et-1 x (1+I) x (1+i) x (1+g),

where

Et = spending,

l = growth in the labour force,

i = the inflation rate, and

g = real expense growth, which is fixed at 1.5% per annum.

Figure 10.2: Transport and communications grows with nominal GDP.

Source: The Treasury

Defence

The share of GDP spent on defence fell to around 1% in the 1990s after hovering around 1.7% over the previous three decades. This share is projected out by a nominal rate of 3.5% a year (which settles down to the growth of nominal GDP, making the ratio to GDP eventually constant, as growth of the labour force slows).

Et = Et-1 x (1+i) x (1+g),

where

Et = spending,

i = the inflation rate, and

g = real expense growth, which is fixed at 1.5% per annum.

These projections include the Defence Sustainability Initiative (operational spending) for the years 2006 to 2015 as announced in the 2005 Budget.

Figure 10.3: Defence spending eventually grows with GDP.

Source: The Treasury

Law and order

A reverse pattern occurs in this spending area. Spending on law and order rose as a share of GDP until the 1990s, held at around 1.3% until 2005 and, based on the 2006 Budget, is forecast to climb to 1.6% of GDP by 2009. In the projection period, it is modelled to grow with total population growth, inflation and a real growth factor. This produces a small rise in its share of GDP (as population growth is faster than labour force growth because of the ageing population).

Et = Et-1 x (1+p) x (1+i) x (1+g),

where

Et = spending,

p = population growth,

i = the inflation rate, and

g = real expense growth, which is fixed at 1.5% per annum.

Figure 10.4: Law and order is projected to rise with population growth.

Source: The Treasury

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