Long-term Fiscal Projections and their Relationship with the Intertemporal Budget Constraint: An Application to New Zealand (WP 02/04)

Abstract

The fiscal gap calculates the change in fiscal policy settings needed to achieve a particular debt target at some point in the future. This working paper calculates fiscal gaps for New Zealand under a range of scenarios, including alternative spending growth, debt targets and interest rates. A positive (negative) fiscal gap indicates that a permanent increase (decrease) in the primary surplus is required to achieve a selected debt target in a particular terminal year. The scenarios suggest that under a range of alternative assumptions the fiscal gap out to 2051 is positive. These results are in accord with previous long-term fiscal projections, which, unlike the fiscal gap, have not been explicit about the nature of long-term fiscal imbalances. The analysis provides a platform for the further examination of potential long-term fiscal imbalances under a wider range of assumptions (e.g., around demographics, labour force participation, health spending) as well as alternative modelling techniques that allow for uncertainty.

Acknowledgements

Thanks to Matthew Bell for running the fiscal gap calculations through the Treasury’s Long-term Fiscal Model. Thanks also to Heather Kirkham, Alan Vandermolen and Ivan Tuckwell for comments on model re-development. Acknowledgment also goes to Cameron Bagrie for his earlier work at the Treasury on tax gaps. This working paper has benefited from feedback provided at Treasury’s Macroeconomic Issues Group and comments from Bob Buckle, Renee Lister and Peter Heller. Special thanks are due to Alan Auerbach, Graeme Wells and Arthur Grimes for detailed comments on earlier drafts. Any remaining errors or omissions are the responsibility of the author.

Disclaimer

The views expressed in this Working Paper are those of the author and do not necessarily reflect the views of the New Zealand Treasury. The paper is presented not as policy, but with a view to inform and stimulate wider debate.