6 Conclusion
This paper has looked at a range of methodological issues relating to the cyclically-adjusted balance. Suggestions for the future use of CAB and SBB indicators are briefly summarised here.
The broad indicator structure used by the New Zealand Treasury is sound and internationally accepted. The OECD's revenue elasticity estimates should continue to be used. It is suggested that a cyclical adjustment is no longer made to revenue from sales, levies and fines.
A very important choice is the output gap estimate. For the purposes of medium-term fiscal analysis, there is a case for using a much stiffer filter than might be used with a shorter-term macroeconomic stabilisation objective in mind. In general, sensitivity to different estimation techniques should be analysed.
There is an emerging literature looking at non-structural factors, besides the business cycle. The terms of trade is highly relevant for New Zealand. An adjustment can be calculated which provides complementary information to the regular cyclical adjustment.
Asset prices have important linkages to structural economic phenomena, but do not explain revenue surprises in a New Zealand context. This would need to be re-visited if a significant asset-based tax (eg, capital gains tax) is introduced in the future.
While lacking some robustness, a method which adjusts for output composition effects could play a useful role as a means of sensitivity analysis.
Uncertainty is an important consideration. Sensitivity analysis for the key parameters is one way to address this in this framework. Different output gap estimation techniques, in particular, provide a range of estimates with varying economic interpretations requiring judgement and tradeoffs about which type of error to minimise. Furthermore, analysis should be complemented by the computation of confidence intervals, which have the benefit of indicating the likelihood of different outcomes (albeit imperfectly).
These indicators should be seen as the starting pointing for analysis, not the end point. Policy makers, and their advisors, should not attempt to supplant judgement with a single model. Nevertheless, the indicators discussed in this paper should be a valuable part of any suite of information used for thinking about fiscal settings and whether revenues are structural or cyclical.
