3  Issues in Estimating Indicators of Fiscal Impulse

Notwithstanding the limitations discussed in Section 2, we consider it useful to estimate indicators of fiscal impulse. Estimating these indicators involves a number of judgements, such as the appropriate measure of the fiscal balance, the nature of capital adjustments and the approach taken to isolating discretionary fiscal policy. The following sub-sections outline these judgements in more detail.

3.1  Measures of the fiscal balance

The most commonly reported measure of fiscal balance in New Zealand is the operating balance from the Statement of Financial Performance. The operating balance is the difference between the government’s current operating revenues and current operating expenses and so is a measure of saving. This measure differs from more traditional cash based measures where government spending typically includes current items and capital items. The operating balance is an accrual measure based on generally accepted accounting practice (GAAP) and so reflects accounting standards. It includes non-cash items such as depreciation and revaluation effects. In contrast, the OBERAC (Operating Balance Excluding Revaluations and Accounting policy Changes), excludes the following revaluation effects (unless the revaluation is the result of a policy decision):

• Net present valued liabilities such as the outstanding claims liability of the Accident Compensation Corporation (ACC) and Government Superannuation Fund (GSF) pension liability.
• Market valued financial assets and liabilities, such as tradeable marketable securities and deposits.
• Gains or losses on asset sales.

The OBERAC also excludes accounting policy changes (for example, changes around the recognition of assets and liabilities).[10] Revaluation and accounting policy changes are less likely to have a direct impact on aggregate demand than other income and spending items, although they may have indirect or second round effects. Two options are available for the purposes of calculating fiscal impulse. The first is to start with the OBERAC and exclude other non-cash items such as depreciation and the retained surpluses of State-owned enterprises and Crown entities. The second option is to start directly with a cash measure of the fiscal balance, that is, net cash flows from operations (NCFFO) from the Statement of Cash Flows. NCFFO is the difference between cash operating receipts and cash operating expenditures. The Statement of Cash Flows does not explicitly include depreciation. Although the path of depreciation over time is generally smooth, actual purchases of physical assets can occur in a more lumpy fashion and will include spending that increases the asset base.

Internationally, fiscal indicators are calculated from a range of sources, including budgetary accounts, the System of National Accounts (SNA) and Government Finance Statistics (GFS). Both SNA93 and revised GFS (GFS2001, see IMF, 2001b) are accrual frameworks based on statistical standards. The revised GFS framework is harmonised with SNA93 although the coverage of a particular category of transaction may differ slightly. Its primary aim is to provide a comprehensive conceptual and accounting framework for analysing and evaluating fiscal policy, especially the performance of the general government sector with a focus on taxes, spending, borrowing and lending (IMF, 2001b, pp.1-3). The balance in GFS and SNA that comes closest to our definition is “net lending/borrowing”. In GFS, net lending is the net operating balance less net acquisition of non-financial assets. The GFS net operating balance is “net” in the sense that it includes depreciation as an expense. In SNA, net lending is the difference between saving and investment.

Statistics New Zealand (SNZ) prepares government sector fiscal information on an SNA93 basis as part of the Institutional Sector Accounts (ISA). The government sectors (central and local) in the ISA are annual March year experimental series published with a lag (they are currently available from 1987 to 1998).[11] Saving of the general government in the ISA is an unofficial component of the official national saving statistic produced by SNZ. Publication by SNZ of GFS accounts in line with the revised manual is a medium-term project. To calculate fiscal impulse on an SNA (or GFS) basis for the most recent years and over the forecast period would require the detailed conversion of GAAP information.[12] We restrict calculations to GAAP-based indicators.

3.2  Measures of capital transactions

Ideally, the fiscal impulse indicator would include capital transactions that have an impact on aggregate demand. It is useful to examine how other countries adjust for capital. The United Kingdom Treasury uses cyclically-adjusted public sector net borrowing as an indicator of the short-term impact of fiscal policy on the economy, so as to include investment decisions (HM Treasury, 1999). Public sector net borrowing is defined as net investment less the surplus on current budget. The capital transactions included in public sector net borrowing are capital formation (acquisition of fixed assets, stocks and valuables net of any sales), plus net acquisition of land, and net payments of investment grants. The Australian Treasury (1997, 1999) uses net lending, which is the net operating balance less net capital investment.[13]

The impact on aggregate demand will depend on the nature of the capital transaction. For example, sales of existing assets represent a transfer of resources and are unlikely to have a significant effect on demand. In addition, for a small open economy like New Zealand, many large government capital items are imported, for example defence assets, and therefore will not impact on domestic demand.