Challenges and Choices: Modelling New Zealand's Long-term Fiscal Position (WP 10/01)

Abstract

This working paper provides further detail on the modelling behind Challenges and Choices – New Zealand’s Long-Term Fiscal Statement, published on 29 October 2009. Building on the first Statement of 2006, we construct two main fiscal scenarios over a 40-year horizon. The historic trends scenario allows historic and current spending and revenue settings to interact with changing demography. The sustainable debt scenario applies a fiscal constraint on non-benefit spending so that Crown net debt follows the Government’s medium-term fiscal targets. The modelling innovations introduced this time do not alter the basic structure and principles of the Long-term Fiscal Model, but instead provide insights into government spending: public sector productivity growth and the growth of the basket of services each person receives. These innovations enable us to illustrate the effects of tradeoffs between broad spending categories in a constrained fiscal environment. In the 2009 Statement, these policy changes are combined into three possible scenarios for obtaining a sustainable fiscal position. The paper also illustrates the sensitivity of the fiscal position to small changes in the demographic, macroeconomic and fiscal modelling assumptions.

Acknowledgements

The authors would like to thank external reviewers Özer Karagedikli (Reserve Bank of New Zealand) and Kim Dunstan (Statistics New Zealand) for their helpful comments on an early draft. Our colleagues in the Treasury, Tim Hampton, John Janssen, Peter Mawson, Ruth Isaac, Tracy Mears, and Minoo Meimand also provided useful suggestions towards improving the paper. Any errors remaining in this paper are the responsibility of the authors and not the reviewers.

Disclaimer

The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the authors. They do not necessarily reflect the views of the New Zealand Treasury or the New Zealand Government. The New Zealand Treasury and the New Zealand Government take no responsibility for any errors or omissions in, or for the correctness of, the information contained in this working paper. The paper is presented not as policy, but with a view to inform and stimulate wider debate.