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Challenges and Choices: Modelling New Zealand’s Long-term Fiscal Position

1  Challenges and Choices: Modelling New Zealand's Long-term Fiscal Position

1  Introduction

The Treasury is required to publish, at least every four years, a Statement on the government's fiscal position looking out at least 40 years. The first Statement was published on 22 June 2006, the second on 29 October 2009. This paper is an accompanying document to the 2009 Statement, and seeks to outline the modelling approaches used and the assumptions chosen. This paper also describes the changes - in approach, assumptions and results - between the 2006 and 2009 Statements.

The 2009 Challenges and Choices - New Zealand's Long-Term Fiscal Statement, (referred to as the 2009 Statement) was designed to be a more accessible document than the 2006 Statement. While the key assumptions were outlined in an appendix in the 2009 Statement, there was a deliberate choice to avoid including equations and detailed discussions of the judgements around the assumptions. This paper provides these details for those interested in the more technical aspects of long-term fiscal modelling.

1.1  Outline of this paper

Section 2 of this paper summarises our broad approach to modelling the long-term fiscal position, how we deal with uncertainty, and the limitations of the model. It also highlights the changes in approach from the 2006 Statement, and explains how these affect the projections. Section 3 outlines the demographic assumptions, and provides sensitivity analysis around some key assumptions. Section 4 discusses the assumptions made to project economic growth. Section 5 covers the modelling of government revenue.

Section 6 outlines the general framework for modelling areas of government spending on public service, while Section 7 focuses on the modelling of health care services in more detail. Sections 8 and 9 discuss the modelling of government transfers - New Zealand Superannuation (NZS) and working-age benefits.

Section 10 discusses indicators of fiscal sustainability. Section 11 concludes this paper by highlighting some conclusions and some areas for further work for future Statements.

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