4.9 OECD comparisons
The OECD has also calculated fiscal sustainability measures for different OECD countries, including New Zealand, using its own long-term fiscal modelling. The calculations are useful to benchmark the results from the Treasury LTFM and to compare New Zealand's situation to that of other countries. The measures can also be used to illustrate the influence of the terminal debt target on the extent of fiscal adjustment required, as well as the potential effect of future economic shocks on the extent of required adjustment.
The OECD calculations suggest a larger fiscal consolidation is required for New Zealand than that suggested by the Treasury LTFM. This is because the OECD calculations are based on an earlier base year which picks up the effects of the economic recession and Canterbury Earthquake expenditure, but not the more recent improved short-term economic outlook and the Government's short-term fiscal consolidation plans. There may also be other factors that cause the calculations to differ, such as how the OECD models the effects of population ageing on government expenditure. The Treasury LTFM projections begin from a later base year and assume planned fiscal consolidation is implemented for this term of government (taken to be three years after the last General Election).
The OECD calculates the New Zealand fiscal gap that would need to be closed to reach a target of 25% net financial liabilities to GDP ratio by 2050 is 5.1% of GDP. This compares to fiscal gaps for other OECD countries ranging from 7.0% for the United States and 5.6% for the United Kingdom to zero for Denmark, Finland, Korea, Luxembourg, Sweden and Switzerland (Sutherland, et. al., 2012). This suggests that New Zealand is amongst the OECD countries facing the largest increase in the primary balance required to achieve a target of net financial liabilities to GDP of no greater than 25% by 2050.
The OECD also shows the implications of different terminal debt targets for the extent of fiscal adjustment needed. If a fiscal gap is positive (in that either government spending would need to be reduced or taxes increased to reach the debt target), then a lower terminal debt target increases the amount of fiscal adjustment required to reach the debt target, and vice versa. However, the increase may be smaller than one might initially think, because small early policy changes can result in significant savings in debt financing cost over long future time periods. The paper finds that the fiscal gap for New Zealand is 5.1% of GDP for a target of 25% net financial liabilities to GDP by 2050, and 5.7% of GDP for a target of 0% net financial liabilities to GDP by 2050. Once the debt target is reached, maintaining debt at that level is a matter of balancing revenue and expenditure. This is the case regardless of where the target is set, although debt servicing costs will be higher and/or revenues from financial assets lower for a higher net debt target.
The OECD run simulations to demonstrate the effect of shocks to government debt on the degree of fiscal adjustment required. They calculate the additional fiscal tightening (or in some cases loosening) for governments to have a 75% chance of reaching the terminal debt target (of 50% gross debt by 2050) when government debt is hit by shocks (both positive and negative) relative to the baseline case of no shocks. These simulations are based on shocks to debt and are based on each country's own historical distribution of shocks as well as the distribution for the OECD as a whole. The paper finds that under these scenarios the additional fiscal tightening needed to have a 75% chance of meeting the debt target is not substantial. For New Zealand, the required fiscal adjustment in response to both New Zealand-specific and cross-OECD shocks is 6.0% of GDP rather than 5.5% of GDP. The paper notes that because of the highly skewed distribution of shocks, setting a higher probability threshold for meeting the debt target (eg, a 90% chance rather than 75% chance of meeting the debt target) raises the fiscal adjustment requirement further (Sutherland, 2012).
