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Alternative projection assumptions

Fiscal projections require assumptions about demography and the economy. The projections are based on Statistics New Zealand's median population projections and the assumptions it contains about birth rates and life expectancy. Based on long-term historical trends, net migration (permanent and long-term) is assumed to be 12,000 per year over the projection period. The transition to this rate is assumed to occur before the end of 2020. The projections also incorporate assumptions about labour force participation, the rate of unemployment, average hours worked, inflation, and the interest rate paid on government debt.

A higher net migration assumption of 25,000 per year would see net debt projections reach around 180 percent of GDP in 2060. This is the net long-term effect of both higher GDP and hence taxes, but also higher government spending on education, healthcare, and NZS. In its most recent population projections, Statistics New Zealand (2016) has revised its median net migration assumption to 15,000 per year. Our analysis indicates this makes only a relatively small change to the long-term fiscal outlook and we have retained the net migration assumption of 12,000 per year.

The projections assume that (economy-wide) labour productivity growth increases to 1.5 percent per year in the early 2020s. Higher labour productivity growth would likely lead to more tax being collected. In turn, this provides governments with more options to spend (e.g. address expense demands), save (e.g. reduce debt) or invest (e.g. spend today to reduce expense pressures tomorrow). The Historical Spending Patterns scenario assumes that governments will choose to spend this money. For example, it assumes that higher labour productivity growth will lead to increased public sector wage growth, higher NZS costs (because NZS payments are pegged to the average wage), and higher healthcare spending (given the relationship with incomes). A higher labour productivity growth assumption of 2 percent per year would see net debt projections reach around 200 percent of GDP in 2060.

We also need to consider how a changing fiscal position might influence economic variables such as the interest rate paid on government debt. Reviewers of the 2013 Statement suggested the inclusion of feedback effects between the fiscal position and the economy, and providing more information on uncertainty and the timing of policy changes. As a result, the Treasury has looked at fiscal-macro feedbacks.[135]

For this Statement we have considered potential feedbacks between the fiscal position and the interest rate on government debt. The Historical Spending Patterns scenario, with the 10-year interest rate remaining at 5.3 percent from 2025 onwards, has net debt rising from 20 percent of nominal GDP in the early 2020s to 206 percent in 2060. The literature and evidence suggests that as the public debt-to-GDP ratio rises, overseas debt holders demand a higher return for holding what they see as increasingly risky debt. As a result, we model the 10-year interest rate as climbing slowly until the debt-to-GDP ratio reaches 100 percent and then accelerating for higher debt values. A rising debt-to-GDP ratio feeds into rising interest rates and then into higher debt-financing costs, and then adds to debt, with most of the change occurring in the last 10 years of the projection. This produces a cumulative rise to 16.9 percent in the 10-year interest rate and net debt of 288 percent of GDP in 2060.

Analysis undertaken since the 2013 Statement has also examined the nature of uncertainty in the fiscal projectionsand the timing of possible tax policy changes.[136] Overall, this work tends to support more of a "wait and see" approach in the face of projected fiscal pressures. This would be in combination with processes that allow for policy revisions in light of actual outcomes and new information, while at the same time keeping important policy variables within a reasonable range. Nonetheless, uncertainty, feedback effects, and the timing of policy changes are complex analytical and policy issues, requiring further consideration.

Figure 6.1 – Stabilising net debt in the long-term: Expenses-to-GDP (excluding debt financing)
Figure 6.1 – Stabilising net debt in the long-term: Expenses-to-GDP (excluding debt financing)   .


  • [135] John Creedy and Grant Scobie (2016) Debt projections and fiscal sustainability with feedback effects. New Zealand Economic Papers.
  • [136] Christopher Ball, John Creedy and Grant Scobie (2015) Long-run fiscal projections under uncertainty: The case of New Zealand. New Zealand Treasury Working Paper 15/10. Christopher Ball, John Creedy and Grant Scobie (2015) Optimal timing of tax policy in the face of projected debt increases. New Zealand Treasury Working Paper 16/02.
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