4.5 Projections of government revenue, expenditure, and budget balance measures

Figure 5 shows projections of government revenue and expenses (with and without debt financing costs) as a percentage of GDP. Government revenue as a percentage of GDP falls from 2007/08 to 2010/11 before rising again and then stabilising at around 31% of GDP. Government expenses as a percentage of GDP generally increased over the 2007/08-2010/11 period and fall in the period to 2016/17 (due, in large part, to restrictions on new operating allowances, which are assumed to hold until 2014/15) before increasing from 2017/18 as a result of "bottom up" expenditure pressures. The wedge between government expenses with and without finance costs shows the proportion of government expenditure that is attributable to interest on government borrowing. As gross debt begins increasing from the late 2010s interest costs become a larger share of government expenditure. Revenue exceeds expenditure from 2017/18 before permanently dropping below expenditure from 2023/24. The gap between government revenue and expenditure which opens up, illustrates that closing this gap by raising revenue will require continually increasing revenue (such as tax) as a proportion of GDP. Similarly, closing this gap by reducing expenditure would involve governments continually managing spending pressures over time.

Figure 5: Government revenue and expenses as a percentage of GDP, 2006/07-2059/60

Notes: (1) revenue is the core Crown revenue excluding valuation gains; (2) expenses are core Crown expenses excluding losses; (3) expenses excluding finance costs are core Crown expenses excluding valuation losses and finance costs; (4) the projections are based on Budget 2013 forecasts

Figure 6 shows projections of the government's annual primary balance as a percentage of GDP. Under the cost pressure scenario the primary balance will return to surplus in 2015/16 and then fall into deficit from the mid-2020s. In order to stabilise net debt at 20% of GDP the government would need to run small primary surpluses for most of the projection period.[20] The reason the government can run small primary deficits from 2056/57 and still stabilise debt is because of the income projected to be earned from financial assets. The government could limit the size of its primary deficits in order to stabilise debt by constraining government expenditure or raising revenue, or making a combination of expenditure and tax changes.

Figure 6: Primary balance as a percentage of GDP, 2006/07-2059/60

Notes: (1) the primary balance is the core Crown operating balance excluding valuation gains and losses, investment income and finance costs; (2) the projections are based on Budget 2013 forecasts; (3) the projections assumptions are summarised in section 2.3 of the paper; (4) for the purpose of the projections, the sustainable debt scenario assumes core Crown net debt to GDP, excluding the New Zealand Superannuation Fund and advances, is reduced to 20% and maintained at that level over the projection period.

Figure 7 shows projections of the government's annual operating balance as a percentage of GDP. Under the cost pressure scenario the operating balance will return to surplus in 2014/15 and fall back into deficit from the late 2020s. The Treasury's projections show that in order to stabilise net debt at 20% of GDP, the government would need to sustain an operating surplus of 1 to 1.5% of GDP from the mid-2020s. Stabilising net debt at 20% of GDP requires the government to manage the "wedge" that arises between the cost pressure and sustainable debt scenarios, for example, by changing its tax or expenditure settings. A significant portion of the gap represents the difference in debt financing costs between the two scenarios, and so if governments begin adjustments earlier, they avoid some of those costs eventuating.

The difference between the primary balance and operating balance under the 20% net debt scenario reflects that over the projection period, interest and unrealised valuation gains on financial assets exceed debt servicing costs and unrealised valuation losses on financial assets.[21] This illustrates the financing consequences of simply allowing debt to grow to fund the consequences of population ageing and other future pressures on government spending. This in turn shows that delays in fiscal adjustment imply the possibility that much larger adjustments will be required in the future.

Figure 7: Operating balance as a percentage of GDP, 2006/07-2059/60

Notes: (1) The operating balance is the Core Crown revenue less expenses plus gains and losses from associates and joint ventures[22]; (2) the projections are based on Budget 2013 forecasts; (3) for the purpose of the projections, the sustainable debt scenario assumes core Crown net debt to GDP, excluding the New Zealand Superannuation Fund and advances, is reduced to 20% and maintained at that level over the projection period.