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Modelling New Zealand's Long-term Fiscal Position - PP 06/01

1.  Introduction

Mehemea kua otia e ahau te here atu i taku waka ki tōna tauranga, ā, kua tau taku hinengaro ki taku ahunga ki whea, he mea hanga i taku tūnga i runga ki ngā pakahiwi o te ao o nehe.[1]

The Public Finance Act requires the Treasury to publish at least every four years a Statement on the government’s fiscal position looking out at least 40 years.[2] The first such Statement must be tabled in Parliament by 30 June 2006.

The main focus of the paper is the judgements and assumptions, the risks and uncertainty that surround developing a set of long-term fiscal projections.

This Policy Perspectives Paper is the first step in meeting this new legislative requirement. It outlines the model we propose to use to prepare the fiscal projections to be included in the Statement.[3] The main areas of focus of the paper are the judgements and assumptions, the risks and uncertainty that surround developing a set of long-term fiscal projections. Exposing the modelling early is an important part of the process in producing the Statement. We are particularly interested in feedback on the degree of detail proposed and the assumptions we have made.

Using this model, the Statement will outline a set of fiscal projections going forward 40 or so years. The Statement will also discuss the origins of our present policy settings and the types of policy choices we could make in the next few years to increase the likelihood that the fiscal position remains strong over the decades ahead.

A brief summary of our model

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 project 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 the central government sector, in the form of projections of spending and revenue.

Outline of this paper

The next section of this paper summarises the work that we judge to be required to produce the Statement and also summarises our modelling strategy as well as our approach to dealing with uncertainty. The third section considers the assumptions made for the demographic projections, while the fourth does the same for GDP projections

The fifth section canvasses the necessary assumptions about projecting government spending and revenue and how these are modelled, and then uses several examples to illustrate the issues. This section also illustrates the effects of different choices for various parameters. The sixth and concluding section looks ahead to the Statement itself and how it will move beyond what has been developed in the present paper.

Feedback

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

Notes

  • [1]This saying is quoted in the Whanganui Iwi Exhibition at Te Papa, 2003-06. In English: “If I am comfortable with where I am in the present and confident with where I will be in the future, it is only because I am standing on the shoulders of the past.”
  • [2]The Treasury publication A Guide to the Public Finance Act provides more details. It is available on our website at: http://www.treasury.govt.nz/pfa/default.asp. The “fiscal position” refers to a mix of indicators of the state of the Crown accounts: debt, net worth, operating balance, expenses, revenue, often stated as a ratio of nominal GDP. The Government’s fiscal objectives are expressed in terms of goals for these indicators.
  • [3]The choice of the term “projections” over the alternative “forecasts” is deliberate. A projection provides information about what could happen if no changes were made to present behaviour or policy. A forecast considers the likely changes and their interactions in assessing possible futures.
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