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

Annex 1: Key Assumptions

This annex contains a list of the major assumptions used in the Statement.

Demographic assumptions

The base-case projection uses Statistics New Zealand’s mid-range Series 5 demographic projection (Statistics New Zealand, 2004). It assumes a total fertility rate of 1.85 children per woman from 2016 onwards. Female life expectancy at birth rises at a slowing rate to 87 years, male to 83.5 years in 2050. Net migration settles at 10,000 people from 2009 onwards (Chapter 4).

Economic assumptions

Economic projections follow the medium-term Budget 2006 forecasts to 2010. After that, the following economic trend settings are assumed (Chapter 4).

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

Fiscal assumptions

The assumptions used in the base-case are listed in Chapters 5 to 10. The key assumptions are:

  • tax-to-GDP is broadly held constant from 2010 onwards
  • health status: the “healthy ageing” hypothesis is assumed to hold in the projection period so that longevity gains are translated into further years of good health. Similarly, the incidence of disability is assumed to fall by 0.5% a year
  • 1% growth in nominal income results in 1% growth in health spending
  • some cost-containment measures apply to health spending from 2010 onwards
  • the cost per student grows with the average wage from 2010 onwards
  • New Zealand Superannuation modelling assumes the current parameters: “65 at 65” – the pension grows with the average wage and is payable at age 65
  • welfare benefits are assumed to grow at the same rate as the CPI
  • all other spending areas largely grow at the rate of nominal GDP.
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