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He Tirohanga Mokopuna: 2016 Statement on New Zealand's Long-term Fiscal Position

Annex Two – Projection assumptions

The Treasury has made four key alterations to the Long-Term Fiscal Model (LTFM) since the 2013 Statement:[141]

  • The spending base for the projections is now the end of the 2016 Budgetforecast period and so the first projection year is 2020/21. In the 2013 Statement the spending base was part way through the 2013 Budget forecast period. This means that spending is now treated in the same way as other economic, demographic, revenue, asset, and liability variables.
  • For a large number of areas (comprising around seven percent of GDP), spending is projected by returning it to historical ratios of GDP.
  • Growth in Health and Education spending is determined by: sector-specific, demographically-linked cost weights (to capture the effects of demographic change); sector-specific price-inflation; and labour productivity. We have simplified the last two drivers, to place more emphasis on historical trends.
  • Welfare payments, excluding NZS, are also returned to an historical ratio of GDP. In the 2013 Statement, most benefits were projected to grow with price inflation only.
Table 1 – Key projections and assumptions: 2013 LTFM and 2016 LTFM (June years)
Assumptions 2013 LTFM 2016 LTFM
Demographic    
Base case population projection 50th percentile 2011-base, 2012-2061 50th percentile 2014-base, 2014-2068[142]
Fertility Falls to 1.9 babies per woman from 2032 Falls to 1.9 babies per woman from 2036
Life expectancy at birth Rises to 87.9 (M), 90.4 (F) in 2060 Rises to 88.0 (M), 90.7 (F) in 2060
Net migration Reaches and holds 12,000 from 2015 Reaches and holds 12,000 from 2017
Labour force Reaches 3.2 million in 2060 Reaches 3.25 million in 2060
Economic    
Participation rate 50th percentile labour force (2012); participation rate in 2060: 65% 50th percentile labour force (2015); participation rate in 2060: 63.1%
CPI measured inflation rate (annual growth per year) 2% from 2018 2% from 2021
Labour productivity growth per year 1.5% from 2020 1.5% from 2023
Long-term government bond rate per year

5.5% in 2020s, rising

to 6% from 2030s

5.3% from 2025
Unemployment rate 4.5% from 2022 4.5% from 2021
Average weekly hours worked 33.20 from 2018 33.08 from 2022
Average hourly wage growth 3.53% from 2020 3.53% from 2023
Fiscal    
Revenue as a ratio of GDP Core Crown taxation revenue building to 29% by 2020 and holding there ("Resume Historic Cost Growth") Core Crown taxation revenue building to 28.6% by 2027 and holding there ("Historical Spending Patterns")
Expenditure Growth controlled by operating allowances for three years (to 2015) Bottom-up projections begin in 2016 Growth controlled by operating allowances for five years (to 2020) Bottom-up projections begin in 2021
Operating allowance controlled expenditure (excluding health and education expenditure) Growth controlled by operating allowances for three years (to 30 June 2015) Bottom-up projections begin in 2015/16 Ratio of nominal GDP: Operating allowance controlled expenditure (excluding health and education) are transitioned to a stable percentage of GDP from 2021 (i.e. expenditure is indexed to nominal GDP growth). Expenses reach a combined stable percentage of 6.8% once they all attain their long-term stable rates. A transition rate of 0.05 percentage points from the end of the forecast period is applied.
Health expenditure (non-demographic growth in spending in projection period) Spending growth rate of 4.5% per year Healthy ageing effects modelled Spending growth rate of 4.6% per year Healthy ageing effects modelled
Education expenditure (non-demographic growth in spending in projection period) Spending growth rate of 3.9% per year Spending growth rate of 4.1% per year
Other spending (non-demographic growth in spending in projection period) Spending growth rate of 3.7% per year Spending growth rate of 3.53% per year[143]
NZ Superannuation (NZS) Per recipient spending indexed by nominal wage growth Per recipient spending indexed by nominal wage growth
Non-NZS welfare Main benefits adjusted by CPI, some supplementary benefits adjusted by CPI and others by nominal wage growth Ratio of nominal GDP: Main benefits, supplementary benefits and others reach a stable percentage of GDP. Total non-NZS welfare spending reaches a stable percentage of GDP of 4.7% (i.e. payments are indexed to nominal GDP growth).
Debt finance costs Average of opening and closing stock for the year multiplied by an effective interest rate Average of opening and closing stock for the year multiplied by an effective interest rate. This is transitioned to the 10-year government bond rate early in the projections.
NZ Super Fund contributions Capital contributions resume in 2021; drawdown from the fund begins in 2032 Capital contributions resume in 2021; drawdown from the fund begins in 2033
Property, plant and equipment Nominal GDP growth Nominal GDP growth

The main assumptions behind the six social outcome scenarios are as follows:

Scenario A: Benchmark (Low ambition)

  • Three and four-year-old participation of Early Childhood Education rises to 98 percent between 2021 and 2035
  • Halve the number of school leavers with no qualifications by 2026
  • NCEA2 levels rise to 95 percent by 2026
  • Five percent higher tertiary attendance by 2028
  • Reduced demand for main welfare benefits by 25 percent by 2026
  • Reduced justice costs for six years from 2021. 10 percent saving by 2026
  • Labour force increases by 40,000 at average wage by 2040

Scenario A: Benchmark (High ambition)

  • Start with Scenario A: Low ambition
  • Public health productivity growth of 0.3 percent per year above Historical Spending Patterns scenario
  • Only two percent of students leave secondary school with no qualifications by 2026
  • 15 percent increase in Effective Full-Time students in tertiary education by 2037
  • Population projections replaced with higher life expectancy projections
  • Further cost reductions in justice sector so costs fall to around 14 percent below the Historical Spending Patterns scenario in 2027
  • Only 50 percent of people coming off main benefits take up supplementary benefits (lagged by a year) by 2031
  • Labour force increases by 100,000 by 2040 and 130,000 by 2060 at average wage

Scenario B: Expert case studies

  • Nine initiatives are implemented as recommended by experts in the field
  • For each initiative, net fiscal impacts are layered over the Historical Spending Patterns scenario
  • Labour force increases by an additional 34,000 workers by 2060

Scenario C: Broader investment in human capital

  • Start with Scenario A: Low ambition
  • Population projection replaced with higher life expectancy projection
  • Public health productivity growth of 0.15 percent per year above Historical Spending Patterns scenario
  • Health cost convergence reduces costs by five percent by 2035
  • Higher NCEA achievement (97 percent)
  • Effective Full-Time tertiary places grow by 10 percent through the decade ending in 2032
  • Reduced demand for supplementary benefits by a further 50 percent by 2031
  • Labour force increases by 100,000 at average wage by 2060

Scenario D: Equitable Māori outcomes

  • Start with Scenario A: Low ambition
  • Interventions reduce the risks to Māori of long-term unemployment and incarceration to the risk faced by the rest of the population
  • Estimated cost of main benefits reduced to 65 percent of the Historical Spending Patterns scenario over a 35-year period
  • Supplementary benefits reduce at a quarter of this rate, lagged a year
  • Estimated cost to the justice sector reduced to 52 percent of the Historical Spending Patterns scenario over a 35-year period

Scenario E: Reduce risk of poor outcomes for the most vulnerable

  • Start with Scenario A: Low ambition
  • Interventions halve the probability of long-term unemployment and incarceration for the most vulnerable and more gradually reduce risk for others
  • Assume welfare and corrections/courts costs reduce to 88 percent and 79 percent of the Scenario A levels respectively by 2055

Scenario F: Regional

  • Start with Scenario A: Low ambition
  • Interventions lower the probability of long-term unemployment and incarceration for those living in the regions with the most risk to the average of the three regions with the least risk. For the most risky region this lowers the risk for most of the population to half of the pre-intervention levels with lower reductions for regions with lower initial risk profiles
  • Assume main benefit and corrections/courts costs reduce to 87 percent and 82 percent of the Scenario A levels respectively by 2055

Notes

  • [141]  In addition to the changes listed here, the historical series of (nominal) GDP has been revised. Historical averages for spending and tax are calculated over the period 1996/97 to 2014/15.
  • [142]Statistics New Zealand's most recent population projections (2016 base), which were released on 19 October 2016, have not been used in this version of the LTFM.
  • [143]Reflects the non-demographic growth in nominal GDP, which is effectively the nominal wage growth rate.
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