6 Conclusions
This paper has examined the dynamic effects of fiscal policy on New Zealand GDP using a structural VAR model. Following the modelling procedures developed and implemented by Blanchard and Perotti (2002) and Perotti (2004), the impact of government spending (purchases of goods and services), taxes and transfers on GDP was identified by assuming that discretionary fiscal policy is unable to respond to GDP shocks within one quarter. Institutional information on the tax and transfer system are therefore used to quantify the automatic effects of changes in GDP on government spending, taxes and transfers.
Results showed that an increase in government spending led to an increase in GDP in the short term, while an increase in net tax reduced GDP in the short-term. The size of the response in GDP to changes in government spending and net tax was dependent on the trend specification adopted. The estimated impact of increases in government spending or net tax on New Zealand GDP was smaller than the estimated effects of changes in government spending or net tax on GDP for the United States. In this respect, results for New Zealand are similar to those for Australia and most likely reflect the small, open nature of both economies. When the fiscal VAR model was estimated with the net tax variable separated into taxes and government transfers, impulse responses revealed that a tax revenue shock lowered GDP (although the decline was small), while a government transfer shock lead to an increase in GDP in the short-term, but a decline in GDP over the medium-term.
The structural VAR model was also used to analyse the historical contributions of fiscal policy to New Zealand business cycles. Two measures of fiscal impulse were examined: one based on a first difference VAR specification and the other based on detrending data using the Hodrick-Prescott filter. The fiscal impulse measure based on the first difference specification showed that fiscal policy dampened GDP growth in the early 1990s, while adding to growth in the mid-to-late 1990s. Since 2001 fiscal policy has tended to add to GDP growth. The fiscal impulse measure based on the Hodrick-Prescott trend specification showed that fiscal policy subtracted from positive deviations in GDP from trend in the early 1990s, but made a positive contribution during the period 1993 to 1998. Since 1998 fiscal policy tended to subtract from positive deviations in GDP from trend. Although there is a reasonable degree of congruence between the Philip and Janssen measure of fiscal impulse and the alternative structural VAR measures (especially for the first difference specification), there are periods where the measures differ significantly on the contribution of fiscal policy to GDP.
This paper provides a basis for further work on fiscal policy and the New Zealand economy. One area of work is to disaggregate government spending and tax data to analyse the differential effect of changes in different spending and tax categories on GDP. A further area of work is to explicitly incorporate the government budget constraint. Another extension of this work is to include fiscal variables in a larger structural VAR model of the New Zealand economy (for example, the structural VAR model developed by Buckle, Kim, Kirkham, McLellan and Sharma, 2002) to measure the effect of changes in fiscal policy on other economic variables, such as inflation, interest and exchange rates, and private sector output. This larger model could also be used to examine the impact of exogenous shocks on the fiscal balance and, using techniques developed by Buckle, Kim and Tam (2001), the ex-ante fiscal balance required to maintain some specified lower or upper bound for the fiscal balance.
