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Challenges and Choices: New Zealand's Long-Term Fiscal Statement

Different demographic and labour market outcomes

Migration

The baseline projection assumes long-term annual net immigration of 10,000. The annual average from 1990 to 2008 was 11,400, though there have been occasional peaks between 30,000 and 40,000. Initially, migrants add to the workforce and so to GDP and government net revenue (ie, in excess of the extra demands on education and health). However, eventually the younger migrants age and add to the demands for government services. Overall, our model shows increasing the level of migration permanently has a positive but not major impact on the fiscal outlook.

Fertility rates

The long-term fertility rate is assumed to be 1.9 children per woman for the baseline projection. Perhaps surprisingly, a higher rate would likely lead to a slight deterioration in the fiscal position by 2050. This is because there is higher expenditure on health and education in the early years of children's lives, and then a period where as workers they create higher tax revenues. However, this cycle of increased government spending followed by increased government revenue from the higher birth rates would not be complete by 2050. Further out, the overall impact on the fiscal position is likely to be positive.

Labour force participation

New Zealand's labour force participation is already high, but further increases could be attained - particularly for those during the middle years of their working lives. Higher aggregate labour force participation relative to the gradual downward trend that we are projecting would generate higher GDP and tax revenue, helping the fiscal outlook.

Average hours worked

Average hours worked per worker in New Zealand have been trending down in recent years, so that we are now just above the average of the OECD. Our baseline projection assumes that average hours worked stabilise around the current level. If we were to assume that average hours continued to decline - something that seems more likely in a world where older people constitute a larger share of the workforce - then the fiscal outlook would likely deteriorate further. The lower hours would result in lower GDP and tax revenue, offset slightly by lower NZS entitlements (because they are indexed to average weekly wages).

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