Fiscal strategy model

Fiscal Strategy Model - PREFU 2020

The Fiscal Strategy Model (FSM) projects the financial performance and the financial position of the government over a medium-term horizon and is normally published with the latest Economic and Fiscal Update.

Fiscal Strategy Model Projections#

The principal purpose of the FSM is to produce the post-forecast fiscal projections.

The Pre-election Economic and Fiscal Update (PREFU) 2020 version of the FSM is published here on the Treasury's website.

The projections:

  • begin from the end of the five-year forecasts in Economic and Fiscal Updates (EFUs) and normally cover a period of ten years beyond that
  • are strongly influenced by the EFU economic and fiscal forecasts that provide their base
  • rely on long-term assumptions such as future population growth and economic growth
  • incorporate the Treasury’s forecasts and projections of net migration, which reaches 35,000 by the final forecast year, increases to 36,000 in the first projected year, and then declines by 2,000 per year to reach 18,000 by the end of projection period in 2033/34
  • include some degree of recovery to these long-term assumptions in the early years of the projections, if the long-term rates or levels have not been reached at the end of the forecast period
  • include several economic variables that were impacted by the COVID-19 pandemic, such as the unemployment rate and average weekly hours worked, which are projected to transition back to long-run stable assumptions over the early years of the projection period. Once this transition has happened, the economy is assumed to grow at trend growth rates with no economic cycles in the projections
  • apply an annual increment of $2.1 billion to the end-of-forecast operating allowance in the first projected year and increase this increment by 2% each year in later projected years
  • apply an annual increment of $3.0 billion to the end-of-forecast capital allowance in the first projected year and increase this increment by 2% each year in later projected years
  • assume the capital allowances are spent in the year they are allocated, in contrast to the forecast period where capital allowances are spread over a number of years
  • illustrate the path of net core Crown debt and total Crown operating balance before gains and losses (OBEGAL) over the long term, assuming the same operating and capital allowances as at Budget 2020
  • are required to be published annually, as part of the report on the Fiscal Strategy, under the Public Finance Act (1989).

Also downloadable above is a note Projection Assumptions Pre-election Economic and Fiscal Update (PREFU) 2020. This provides further information about the post-forecast projections, including detailing some of the key assumptions and providing data tables for both economic and fiscal variable projections.

Notes for this Version of the Fiscal Strategy Model#

Scenarios for different levels of operating expenses and revenue, and different NZS Fund tracks, can be tested using the Fiscal Forecast Adjuster and NZS Fund Adjuster worksheets of the FSM. The output of these scenarios can be modelled in the Scenario worksheet.

Other Treasury Models#

The Long-Term Fiscal Model#

Treasury produces another model that projects fiscal and economic variables beyond the forecasts. It is called the Long-Term Fiscal Model (LTFM).

The LTFM differs from the FSM in that:

  • modelling for the LTFM extends at least as far as the year ending June 2060
  • the LTFM’s projections are not intended to represent the Government's fiscal strategy
  • in regard to the last point. the LTFM projects individual operating and capital expenditure classes with their own particular cost drivers, such as changes in the recipient population and expense growth factors based on historical averages, rather than restricting their growth to a share of projected operating or capital allowances, and
  • the LTFM has more modelling capability so that it can, for example, produce scenarios where debt is constrained and some other fiscal variable, such as expenditure or tax revenue, becomes the balancing output.

New Zealand Superannuation (NZS) Fund Contribution Rate Model#

The projected required contributions track from the Treasury's New Zealand Superannuation (NZS) Fund Contribution Rate Model is an input into the LTFM and the FSM.