4.7 Fiscal gap measures
The previous sections endeavoured to show the time profile of operating balances, primary balances and government debt under certain assumptions. As we discussed in section 2, the outcome for fiscal aggregates can be summarised by the fiscal gap measure. The finite horizon fiscal gap is a single indicator that represents the extent of fiscal adjustment required at a point in time to meet a particular debt target in the future. The fiscal gap measure is described in expression (6) presented earlier in the paper. Table 2 shows fiscal gap calculations for New Zealand, generated for different terminal debt targets, if adjustment is made to the primary balance in 2017/18 in order to achieve the specified terminal public debt target. The measures are derived from projections generated from the Treasury Long-Term Fiscal Model. Based on the central assumptions in the LTFM, the permanent change in the primary balance in 2015/16 to reach a terminal debt target of 20% net government debt to GDP by 2059/60 is 2.2% of GDP.
The fiscal gap calculations show that within reasonable bounds, the terminal debt target does not make a big difference to the degree of fiscal adjustment that is required. This is because small changes made early can add up to significant reductions in debt servicing costs over long periods of time, and the bulk of the adjustment is to bring debt down from very high levels (eg, 200% of GDP), to something within a lower range (eg, 0% to 40% of GDP).
| Terminal debt target | Time period | |
|---|---|---|
| 2049/50 | 2059/60 | |
| 0% net government debt to GDP | 2.7% | 3.0% |
| 10% net government debt to GDP | 2.4% | 2.8% |
| 20% net government debt to GDP | 2.2% | 2.7% |
| 25% net government debt to GDP | 2.1% | 2.6% |
| 30% net government debt to GDP | 2.0% | 2.5% |
| 40% net government debt to GDP | 1.8% | 2.4% |
Note: (1) The fiscal gap calculations assume that the permanent change in the primary balance begins in 2017/18.
