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Summary

The Public Finance Act (PFA) was amended in 2004 to require the Treasury to publish at least every four years a Statement on the long-term fiscal position looking out at least 40 years. The first Statement must be presented to Parliament by 30 June 2006.

This Policy Perspectives Paper sets out the key judgements that are needed to prepare the Statement, along with some illustrations of how the results could be displayed (for instance, confidence intervals around the median to convey uncertainty). The paper does not contain aggregate results, but discusses proposed methods and seeks to elicit comments and discussion.

The horizon to be covered by the Statement means that it has a different character from the existing PFA publications, such as the Economic and Fiscal Updates and the Fiscal Strategy Report, as it will extend across the terms of many more governments, with potentially many different policy regimes.

This paper uses the policy settings at the end of the official forecast in 2010 (“current policy”) as the base for forward projections of spending and revenue. The durability of “current policy” over a very long horizon is open to question. For instance, there may be a tension between top-down approaches determined by fiscal objectives and bottom-up extrapolations of existing trends in particular areas. Another example might be tensions over the long term between price and wage linkages for different social welfare benefits.

We have adopted a three-stage approach to projecting the long-term fiscal position.

First, we use Statistics New Zealand’s National Population Projections to derive a series of projections of the future structure of the population

We then use these projections of the population to generate projections of Gross Domestic Product (GDP).

Finally, we add projections of government spending and revenue.

The long-term nature of the Statement also means that its final results will be sensitive to small changes in some assumptions, while others will have a minor effect. We demonstrate the effects of changes in the some of the key demographic and economic assumptions.

We welcome feedback on the proposed model. Comments should be directed to either of the authors, before the end of March. Contact details are on page ii.

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