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

10  Indicators of fiscal sustainability

10.1  Debt, net debt and net worth

The path of the government's balance sheet over time can be analysed to assess fiscal sustainability, defined as the government meeting its inter-temporal budget constraint without policy adjustment.[24] A perpetually increasing debt track, as in the historic trends scenario, is inconsistent with fiscal sustainability. By contrast, a broadly stable debt outlook indicates that revenue and expenses are in balance over time (although not necessarily in any given year). The 2009 Statement uses net debt as the main fiscal indicator. This differs from the 2006 Statement which used gross debt.

As discussed in the 2009 Fiscal Strategy Report, net debt is a broader measure than gross debt because it nets off some financial assets, which can be used to offset debt. Movements in net debt are more consistent with the net flow indicator as measured by the core Crown residual cash balance. Net debt is also less affected by a range of operational decisions, such as those made by the Debt Management Office or the Reserve Bank of New Zealand.

The definition of net debt used does not net off advances (eg, student loans). These advances are substantially less liquid than other financial assets and they are made for public policy reasons rather than for purposes associated with government financing. The financial assets of the NZS Fund are also not netted off. Their inclusion would require the Government's net debt objective to reflect a changing profile through time, as the purpose of the NZSF is to partially prefund future expenses.

Net worth is an even broader measure of the fiscal position, incorporating all assets and liabilities of the Crown. A projection of total Crown net worth is included in the 2009 Statement.[25] Its path in the projections is dominated by the path of debt. In the historic trends scenario, net worth deteriorates significantly to -146% of GDP by 2050, while in the sustainable debt scenario it is stabilised at 50% of GDP. At 30 June 2009, net worth stood at 55% of GDP.

10.2  Primary balance

The projections for the primary balance are a useful way to indicate the size and time profile of fiscal imbalances. The primary balance is defined as the difference between primary revenue (core Crown tax revenue and non-investment income) and primary expenses (core Crown expenses excluding finance costs).

Figure 10.1 plots the primary balance for the base projection in the 2006 Statement and the historic trends scenario in 2009 Statement. The key features of the 2009 projection are (i) the move into deficit sooner than projected in 2006 and (ii) the primary deficits are projected to be larger in future years. The primary deficit is 5.8% of GDP by 2050 according to the 2009 historic trends scenario.

Figure 10.1 - Primary balance (% of GDP)
Figure 10.1 - Primary balance (% of GDP).
Source: The Treasury

10.3  The inter-temporal fiscal gap

The inter-temporal fiscal gap, or simply the fiscal gap, is another indicator of fiscal sustainability. It is defined as the permanent spending decrease or revenue increase that would be necessary at a point in time to ensure a specified debt-to-GDP constraint is met at the end of the projection horizon. The main benefits in using the fiscal gap are that it communicates the fiscal position in one summary number and indicates the magnitude of the required fiscal adjustment. Janssen (2002) has previously calculated a fiscal gap for New Zealand and it is regularly reported in some other jurisdictions (eg, Congressional Budget Office, 2009).

Results are shown in Table 10.1, where the fiscal gap for the historic trends scenario is used. The specific method used was to determine the change in core Crown revenue or expenses needed in order for net debt to equal 20% of GDP in 2050. No dynamic feedback from fiscal policy to economic growth was modelled. Calculations were done with an initial year of adjustment being 2014, 2024 and 2034.

Table 10.1 - Fiscal gap
  First year of adjustment
Fiscal gap (% of GDP)3.75.710.0

Source: The Treasury

The fiscal gap is 3.7% of GDP if fiscal adjustment starts in 2014, and rises if adjustment is delayed. This indicates why early changes are important: it is to ensure that large and sharp adjustments are not imposed on future generations. A 10.0% fiscal gap for 2034 would require a dramatic fiscal adjustment, equivalent to eliminating all expenditure on health care.

The fiscal gap for the sustainable debt scenario is zero. This is because it is a scenario constructed to meet the inter-temporal budget constraint.


  • [24]The inter-temporal budget constraint is based on the notion that all government spending must eventually be financed, either in the current period through taxes, or over time through interest on debt (Janssen, 2002).
  • [25]Alternative measures of sovereign net worth are discussed in Irwin and Parkyn (2009).
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