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Media StatementTreasury Releases June Working Papers

27 June 2003

The Treasury today released thirteen new working papers in the June instalment of its Working Papers series.

This quarter's set of papers includes:

A full list of the abstracts from the thirteen papers follows.

The papers can all be found at  []

The Treasury Working Papers series contains work in progress on a variety of economic and financial issues. The series aims to help to increase understanding of Treasury and its work, and to make this work available to a larger audience. The working papers build internal capability, as well as generating more informed debate on key issues. The series has been running since 1998.

The views expressed in the Working Papers are those of the authors and do not necessarily reflect the views of the New Zealand Treasury. The papers are presented not as policy, but with a view to inform and stimulate wider debate.


03/03 Geography, Trade and Growth: Problems and Possibilities for the New Zealand Economy
Philip McCann (University of Reading)


This paper discusses the latest thinking in the relationships between the economics of trade, geography and industrial clusters. The aim of the paper is to explain the relevance of these various arguments for the economy of New Zealand and to suggest a possible public policy role for overcoming the growth problems associated with geographic periphery. As we will see, much of the current thinking on the relationships between geography, trade and clusters implies that New Zealand's long-term growth prospects are rather weak. However, it will be argued here that a detailed consideration of these relationships, plus some evidence from the UK, also provides some guidance as to possible strategies which New Zealand can employ to promote growth. In particular, the development of public policies which are specifically aimed at reducing the spatial market-area constraints of the New Zealand small-firm sector may be worthwhile.

03/04 Demographic Change and New Zealand's Economic Growth
John Bryant (Treasury)


New Zealand has, by OECD standards, high birth rates. This has provided New Zealand with a relatively young population and continuing labour force growth. Both these features are, on many accounts, good for economic growth. Yet most discussions of New Zealand's economic performance and its prospects for moving up the OECD income distribution have paid little attention to demography.

This paper defines "demography" narrowly as population size, growth, and age-structure, and examines the likely effects on New Zealand's growth rate in GDP per capita, relative to the rest of the OECD. The first part of the paper gives a broad overview of trends in population size and age structure in New Zealand and elsewhere in the OECD. The second part describes selected demographic trends in more detail and discusses their economic significance. The overall conclusion is future demographic trends are likely to provide New Zealand with a small advantage, relative to the rest of the OECD.

03/05 The Built-in Flexibility of Income and Consumption Taxes in New Zealand
John Creedy (Treasury) and Norman Gemmell (University of Nottingham)


This paper provides estimates of individual and aggregate revenue elasticities of income and consumption taxes in New Zealand, based on the 2001 tax structure and expenditure patterns. Using analytical expressions for revenue elasticities at the individual and aggregate levels, together with a simulated income distribution, values for New Zealand were obtained. Results using equi-proportional income changes suggest that the aggregate income and consumption tax revenue elasticities are both fairly constant as mean income increases, at around 1.3 and 0.95 respectively. This latter estimate assumes that increases in disposable income are accompanied by approximately proportional increases in total expenditure. If there is a tendency for the savings proportion to increase as disposable income increases, a somewhat lower total consumption tax revenue elasticity, of around 0.9, is obtained for 2001 income levels. However, non-equiproportional income changes are more realistic. Allowing for regression towards the geometric mean income reduces these elasticities, giving an elasticity for income and consumption taxes combined that is only slightly above unity. Examination of the tax-share weighted expenditure elasticities for various goods also revealed that, despite the adoption of a broad based GST at a uniform rate in New Zealand, the persistence of various excises has an important effect on the overall consumption tax revenue elasticity, especially for individuals at relatively low income levels.

03/06 Productivity in New Zealand 1988 to 2002
Melleny Black, Melody Guy and Nathan McLellan (Treasury)


This paper reports new aggregate and industry productivity series for the New Zealand economy for the period 1988 to 2002. These productivity series are intended for ongoing monitoring of New Zealand's productivity performance and for use in further analyses investigating the evolution, sources and determinants of New Zealand's productivity growth. Productivity series are constructed using index number techniques and industry data sourced from Statistics New Zealand. Throughout, comparisons are made with the productivity estimates reported in Diewert and Lawrence's (1999), Measuring New Zealand's Productivity. Industry data are also used to construct productivity series that are comparable with the market sector productivity series published by the Australian Bureau of Statistics. The comparison between Australia and New Zealand shows that market sector multifactor productivity has been similar in both countries over the full sample period. Since 1994 average labour productivity growth has been higher in Australia, which reflects the relatively lower rate of physical capital accumulation in New Zealand after 1993. On the other hand, New Zealand's capital productivity growth has been higher than Australia's capital productivity growth since 1994, reflecting the relatively higher growth in hours worked in New Zealand.

03/07 Can Population Projections be used for Sensitivity Tests on Policy Models?
John Bryant (Treasury)


Many policy models require assumptions about future population trends. Sensitivity tests for these assumptions are normally carried out by comparing population projection variants. This paper outlines some of the conditions that variant-based sensitivity tests must meet if they are to be informative. It then describes four common situations where these conditions are not met, so that conventional sensitivity tests are not informative. The solution, the paper argues, is stochastic population projections.

03/08 Labour Supply Incentives in Alternative Tax and Transfer Schemes: A Diagrammatic Introduction
John Creedy (Treasury)


The aim of this paper is to illustrate some of the complexities involved in modelling the incentive effects of taxes and transfers, using only basic diagrammatic methods. It describes a range of diagrams which are helpful in thinking about the design of tax and transfer systems and their potential effects on labour supply behaviour. Emphasis is given to the role of highly nonlinear budget constraints and the resulting wide range of labour supply responses.

03/09 The Impact of Monetary Policy on New Zealand Business Cycles and Inflation Variability
Robert Buckle, Nathan McLellan (Treasury) and Kunhong Kim (Victoria University)


This paper uses the open economy structural VAR model developed in Buckle, Kim, Kirkham, McLellan and Sharma (2002) to evaluate the impact of monetary policy on New Zealand business cycles and inflation variability and the output/inflation variance trade-off. The model includes a forward-looking Taylor Rule to identify monetary policy and the impact of monetary policy is evaluated by deriving a monetary policy index using a procedure suggested by Dungey and Pagan (2000). Monetary policy has generally been counter-cyclical, thereby reducing business cycles and inflation variability. Exceptions are in 1994 and 1995 when monetary policy accentuated the business cycle upswing and in 1998 when monetary policy accentuated the recession, although its impact in 1998 was small relative to the impact of adverse climatic conditions. During the initial years of inflation targeting monetary policy tended to simultaneously reduce inflation and output variability. From 1996 to 2001 monetary policy was less effective in reducing inflation and output variability. This latter period included a brief experiment with a Monetary Conditions Index, the Asian crisis and a large adverse domestic climate shock.

03/10 Population Ageing in New Zealand: Implications for Living Standards and the Optimal Rate of Saving
Grant Scobie, John Bryant (Treasury) and Ross Guest (Griffith University, Australia)


Over the next 50 years, New Zealand's population will age substantially. There has been wide debate about whether New Zealand should prepare for population ageing by increasing national savings. The debate had not, however, involved explicit consideration of possible time paths for savings, consumption, debt, and other relevant macroeconomic variables; nor have explicit principles been offered for determining which of these time paths are to be preferred. This paper addresses the question of choosing time paths through the use of a Ramsey-Solow model of optimal saving, adapted for investigating problems of population ageing. The results suggest that population ageing alone would not justify increases in national savings rates beyond those envisaged by current policy. The cost of ageing in terms of reduced real consumption is not large enough to justify large additional savings beyond those currently predicted, and the concomitant reduction in current consumption. The findings concerning national savings and living standards are robust to a variety of specifications of demographic conditions, interest rates, and productivity growth.

03/11 Taxation, Reranking and Equivalence Scales
John Creedy (Treasury) and Justin van de Ven

This paper considers whether an equivalence scale implicit in transfer policy can be inferred from summary measures of reranking (whereby the rank order of pre-tax incomes is different from that of the post-tax distribution). It is conjectured that, if the government has a distributional objective and formulates tax policy with a view to equitable treatment of income units, then adopting the scale that is implicit in government transfer policy should identify only the reranking that has no equity foundation. This motivates the question: Is the incidence of reranking associated with a transfer system minimised by the equivalence scale that is implicit in the transfer system? The analysis presented in this paper suggests that the equivalence scale which minimises reranking, while not necessarily equal to the closest approximation to the one that is implicit in transfer policy, is nevertheless in its vicinity.

03/12 Productivity Measurement: Alternative Approaches and Estimates
Peter Mawson, Nathan McLellan (Treasury) and Kenneth Carlaw (University of Canterbury)


This paper provides a review of conceptual and methodological issues in measuring productivity. Attention is given to the concept of productivity and the relationship between productivity and technological change. Different approaches to measuring productivity are surveyed and the results from a number of NZ productivity studies are summarised. The availability of appropriate input and output data is essential for the accurate measurement of productivity and therefore this paper also discusses some important data issues that influence productivity measurement.

03/13 Wage and Employment Rates in New Zealand from 1991 to 2001
Guyonne Kalb and Rosanna Scutella (University of Melbourne)


This paper presents results for five separately estimated sets of employment and wage equations. The New Zealand working-age population is divided into sole parents, single men, single women, married men and married women. The results for the wage equations are as anticipated and similar to the results in other countries. A higher education level, living in a city and age (up to the early forties) increase the expected wage. Wages also differ significantly across industries and occupations. Employment follows the expected patterns as well, where women with children are less likely to be employed; education increases the employment probability; and living in remote areas decreases employment. In addition to the usual variables, unemployment affects the probability of employment negatively and a clear upward time trend is observed for sole parents, living with one's parents decreases the employment probability of singles but increases the probability for sole parents, and eligibility for the New Zealand Superannuation seems relevant in the employment decision.

03/14 Fiscal Policy, Growth and Convergence in Europe
Norman Gemmell and Richard Kneller (University of Nottingham)


How far are economic growth rates in the European Union (EU) affected by fiscal policy? Recent empirical evidence suggests that changes in the level and mix of taxation, public expenditure, or fiscal deficits may have relatively long-run effects on growth rates in OECD countries. After a brief review of the relevant theory and empirical estimates in section II, this paper provides some simulations of possible fiscal-growth scenarios relevant to recent EU experience, in Section III. Important driving forces behind recent European integration have been the convergence criteria for budget deficits within the Euro zone, and a wider drive towards tax harmonisation. Together with some evidence for convergence in the growth rates in per capita income across European countries, this suggests that there may be forces within Europe encouraging both the convergence of key fiscal variables and their resulting growth impacts. Section IV explores some preliminary data on this issue.

03/15 Modelling the Effect of Population Ageing on Government Social Expenditure
John Bryant (Treasury)


This paper reviews and extends a new framework, developed by Razin, Sadka, and Swagel, for capturing the effect of population ageing on public support for government social expenditures. Razin et al construct up an overlapping generations, median voter model, and investigate the empirical applicability of the model using panel data from 13 OECD countries. Their results suggest that population ageing will put downward pressure on per capita expenditures. These results rest, however, on an assumption that there is only one dependant age group: the old. This paper investigates the consequences of allowing for two such age groups: the young and the old. A replication of Razin et al's empirical analysis, using two dependent age groups rather than one, suggests that population ageing will instead put upward pressure on per capita expenditures. Although these results are tentative, they illustrate the usefulness of including both youth dependency and old-age dependency in Razin et al's framework.

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