4.8 Sensitivity analysis
This section looks at the implications for long-term fiscal projections of delays in the implementation of fiscal adjustment. Figure 9 illustrates the implications of the short-term fiscal strategy on the long-term fiscal projections. It compares two scenarios. One scenario is the central scenario, which assumes that government expenditure is constrained by operating allowances until 2014/15 (ie, cost pressures begin from 2015/16). The other scenario assumes that government expenditure is constrained by operating allowances until 2016/17 (ie, cost pressures begin from 2017/18). The projections in Figure 9 illustrate that additional expenditure constraint in the short-term can have significant long-term effects on the government's fiscal position.
- Figure 9: Operating balance as a percentage of GDP, under different short-term fiscal strategy scenarios, 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; (2) the projections are based on Budget 2013 forecasts; (3) the central scenario assumes cost pressures begin in 2015/16; the other scenario assumes the cost pressures begin in 2017/18 (ie, there are two years additional fiscal consolidation in the short-term).
The above discussion illustrates that assumptions about the government's short-term fiscal policy are crucial to long-term projections. In other words, as part of the long-term fiscal strategy, governments need to be concerned with their short and medium-term fiscal strategies, as well as ensure government finances are sustainable given cost pressures arising from population ageing and age-related public expenditure programmes.
Governments are faced with a range of choices about how and when to adjust their fiscal programme. We review those issues and the type of trade-offs governments will need to consider in section 5. Before turning to a discussion of the types of trade-offs, it is instructive to turn to review other estimates of the fiscal adjustment New Zealand may need to make to achieve fiscal sustainability.
