4  Estimates of Fiscal Impulse for New Zealand

This section provides estimates of fiscal impulse for New Zealand from 1992 until the end of the 2002 Budget forecast horizon (year ended June 2006). The section also examines sensitivities of a “base indicator” to some of the key judgements outlined above.

4.1  Fiscal balance, capital and cyclical adjustment

From the discussion in Section 3.1, the calculations are based on GAAP information. In using GAAP we still need to establish the appropriate definition of government. For example, should the measure include State-owned enterprises and Crown entities? State-owned enterprises are excluded because of the independence they have regarding operating and capital decisions. We have excluded third party revenues to Crown entities as well as their capital spending. On the operating side, because Crown entities are largely involved in delivering core Crown services (e.g., health and education), much of their income and spending is captured in the core. Table 1 provides the transactions included in the calculations, using a stylised representation of the segment notes to the GAAP financial statements. Note that total Crown consolidates the core Crown with State-owned enterprises and Crown entities on a line-by-line basis.[14] The table identifies those transactions relevant to the base indicator and those that are not applicable.

Notes: NA indicates that the transaction is not applicable to the base indicator of fiscal impulse. Income for the Core is largely tax. Crown entities are funded from the core and third-party revenues. Income for State-owned enterprises comes from the sales of goods and services. The table ignores inter-segment eliminations.

Section 3.1 noted two options for the fiscal balance. Although the OBERAC is the more familiar concept, we start directly with a cash measure, net cash flows from operations (NCFFO). Over the period 1992 to 2001 the correlation coefficient between the annual primary NCFFO and the annual primary OBERAC (before depreciation) is 0.986. Because we are interested in a primary concept, the fiscal balance is calculated before investment income (i.e., interest income and dividend income) and finance costs. In terms of capital transactions, there are five items in the Statement of Cash Flows that are potentially relevant for the capital adjustment. Items that have the greatest impact are likely to be those that increase the demand on real resources, as opposed to transactions that simply transfer resource use from one sector to another. Table 2 lists the five items of physical and financial capital, along with a judgement about whether these are likely to impact on aggregate demand.[15]

Note: “Net” in this table means net of sales as opposed to net of depreciation. Purchases of physical assets in the cash flow statement are not directly comparable with SNA public investment contained in Treasury’s SNA economic forecasts.

Core Crown physical assets are largely in land, buildings, military equipment and state highways. Core Crown physical assets are around twice the value of Crown entity physical assets, where the latter are largely in housing, health and education. Advances and net purchases of investments (excluding asset sales/purchases) can be included in the capital adjustment as a proxy for discretionary new capital spending outside the core Crown. However, on the withdrawal side this ignores third-party revenue levied by entities outside the core. On the injections side it may not capture all capital spending. Refining the fiscal impulse indicator to better capture the role of Crown entities is an area for further investigation. This will likely utilise the more detailed information available under full line-by-line consolidation and will shift the measure to more closely reflect the first two columns in Table 1 above. Based on Table 2, the capital adjustment in our base indicator includes: net purchase of physical assets (excluding defence), the forecast of future new capital spending (excluding expected defence capital) and increases in student loans. We examine the effect of alternative capital adjustments in the sensitivity analysis of Section 4.4.

In GAAP, asset sales and purchases flow through the Statement of Cash Flows and not the Statement of Financial Performance. We follow Heller et al. (1986) in excluding the sale or purchase of state-owned entities from the calculations. In a traditional cash based measure of the fiscal balance, the sale of an asset is included as an item “above the line”. The sale results in a cash surplus or reduced deficit because it lowers the governments borrowing requirement. In a national accounts framework the sale is not treated as a revenue item because it is not directly related to economic activity. Rather, the government has changed the composition of its assets (see Heller et al., 1986, p.28).

Finally, Treasury’s two-step cyclical adjustment method is used to remove the effect of the economic cycle because it is already a method used by the Treasury, and it is reasonably simple to update. The adjustment is applied only to the operating components of the NCFFO. The capital component is not cyclically adjusted.