4 Empirical results

Table 1shows the Maximum Likelihood estimates of coefficients of Equation 6 for the benchmark model with the corresponding p-values in parenthesis below each coefficient. The coefficients for the contemporaneous effect of government spending and revenues on income have the expected signs. While higher government spending has a positive contemporaneous effect on income on impact (0.052), the immediate effect of increasing government revenues on income is negative (-0.046). The effect is slightly higher in the case of government spending but is not statistically significant. The interpretations of these coefficients in terms of dollar multipliers are provided in Section 4.2.3. Government spending has a positive effect on interest rates and the effect is highly significant. A one percent government spending shock increases the interest rates by approximately 7 basis points on impact. The effect of tax increases on interest rates, on the other hand, is negative and insignificant.

Table 1: Estimates of A and B in the benchmark model (Equation 6)

Table 2 shows the estimates of the lagged effects of debt in the five equations. The cumulative effect of the lagged levels of debt on government spending is negative which means that higher levels of previous debt results in reduced government expenditures. The corresponding impact on net taxes on the other hand is positive and more pronounced. Furthermore, higher levels of previous debt reduce output and leads to higher inflation and interest rates. The majority of the direct effects of lags, on the other hand, are not statistically significant.

*significant at 5 percent level

4.1  Interpreting the fiscal shocks

The estimated shocks to net taxes and government spending are shown in Figures 6 and 7 respectively. It would be useful to assess the shocks in relation to other methods of identifying fiscal shocks. One such approach is the narrative approach as employed in Romer and Romer (2010). Estimating shocks using the narrative approach would be a useful area of future work. Nevertheless, from visual inspection we can observe that there is some congruence between the shocks and some well-known policy changes.

For the net taxes shocks, we can observe that there are large negative shocks in 1988:2, 1996:3 and 2008:4 (see Figure 6). This timing is consistent with significant reductions in tax rates that occurred on 1 April 1988, 1 July 1996 and 1 October 2008. Positive tax shocks are harder to relate to policy changes, perhaps as structural revenue increases tend to occur over time through fiscal drag rather than through announced tax rate increases.

Figure 6: Quarterly net tax shocks

Source: Authors' calculations

The two-year moving average of the spending shocks indicates that spending shocks were generally negative in the late 1980s and mid 1990s reflecting fiscal consolidation and expenditure restraint over 1996 to 2003 (see Figure 7). There are positive shocks to government spending occurring in the early-to-mid 1980s (perhaps reflecting ‘Think Big’ investment projects) and 2004 to 2008 (reflecting structural increases in spending over this period that are discussed in Mears et al. (2010)).

Figure 7: Quarterly government spending shocks

Source: Authors' calculations

The fiscal shocks can also be compared against the cyclically-adjusted receipts and expenditure measures using the method of Philip and Janssen (2002). We combine the New Zealand Treasury's official estimates that are backdated to 1997 with the unofficial estimates presented in Claus et al. (2006) that are backdated to 1983 (Figure 8 and Figure 9). The measures of government spending shocksare positively correlated over the period from 1997 to 2010 (correlation coef.=0.3) but not over 1983 to 1996 (-0.2). The 1997 to 2010 period is one in which we may have more confidence that the Crown accounting information was prepared on a consistent basis. The correlation between the measures of tax shocks is more pronounced particularly during the period 1997-2010 (correlation coef.=0.7). The SVAR fiscal measures during this period may give a better indication of the stance of tax and spending settings, as they are less contaminated by issues such as changes in the accounting framework and restructuring of government entities.[3]

Figure 8: Comparing measures of net tax shocks

Source: The Treasury, authors' calculations.

Figure 9: Comparing measures of government spending shocks

Source: The Treasury, authors' calculations