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Projecting government finances

To assess the potential size and timing of changes to future public finances, the Treasury develops "what if?" projection scenarios. These projections represent scenarios which illustrate different possibilities – they are not predictions. We use different approaches for projecting the future paths of different areas of government spending. As with previous Statements, projected long-term fiscal pressures are primarily due to increased costs for New Zealand Superannuation (NZS) and healthcare expenses. Annex Two sets out the key assumptions underpinning the projections and where those assumptions have changed from the 2013 Statement.[134]

In projecting how NZS costs will grow, the main considerations are the current legislative settings, the future demographic structure, and future average wages (as NZS payments are pegged as a proportion of the average wage). NZS will become more costly as more people move into older age groups, and the ratio of people paying income tax declines.

In projecting the possible future path of healthcare, we use the future demographic structure, together with information on how spending has grown in the past. Spending on public healthcare is projected to rise because of increasing demand for healthcare services and the rising prices we will need to pay for those services. From 2025, around one-quarter of the annual growth in healthcare spending is the result of demographic change.

We assume that tax revenue is equal to around 29 percent of GDP over most of the projection period. This is broadly consistent with the average tax take in recent history. Holding tax revenue constant as a share of GDP over the longer term assumes that governments adjust tax settings to compensate for the effects of rising prices and wages, which move people into higher tax brackets (so-called 'fiscal drag'). Without these compensating adjustments, tax-to-GDP would increase over time.

In addition to the operating side of government finances, Table 6.1 includes elements that influence the wider Crown balance sheet – assets and liabilities. For example, capital expenditure includes spending on schools, hospitals, and defence. Capital expenditure projections are linked to GDP, and any amounts borrowed for this spending will change debt. Over the longer term, borrowing to fund long-lived assets (such as infrastructure) spreads costs across the different generations that are expected to benefit from those investments.

The New Zealand Superannuation Fund (NZSF) was created in 2001 to help smooth the increasing cost of NZS. Currently, the Government is not contributing to the Fund given its priority to reduce net debt. Table 6.1 assumes that contributions will resume from 2020/21 and withdrawals will commence in 2032/33. Current projections indicate that capital withdrawals fund around 4 percent of NZS expenses in 2060.

A consequence of holding tax-to-GDP constant as expenses increase, is that from the mid-2020s projected revenues do not cover projected expenses. Governments would need to borrow to make up the difference. Table 6.1 reflects the cost of this borrowing in the line "Debt-financing costs", which shows these costs increasing over time. "Net debt" also increases as a consequence. Growing debt financing costs create further borrowing and more debt servicing. To separate out these effects, we present "primary expenses" and the "primary balance" – both of which exclude debt-financing costs.

Projecting the long-term economic and fiscal impact of changes to the environment (e.g. resulting from climate change or natural disasters) is challenging. While the projections in this Statement assume these impacts will be in line with those faced in the past, they remain an opportunity for further analysis.


  • [134] These changes mean the 2016 results for this scenario cannot be directly compared with those from the 2013 Statement. For more detail on the projection methodology, changes since the last Statement, and sensitivity analysis, see the background paper by Matthew Bell and Melissa Piscetek (2016) Demographic, economic and fiscal assumptions and modelling methods in the 2016 long-term fiscal model.
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