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This paper examines fiscal projections based on three consecutive budget forecasts (2009-2011) and provides cautionary insights as to how these projections only a year or two apart can lead to dramatic differences in projected debt levels in the future. Projections of net debt from a Budget 2011 forecast base are much lower, by 2050, than those for Budget 2009. This is largely due to the Budget 2011 forecast base having lower expenditure and higher revenue than the forecast base of the Budget 2009 projections. The paper also underscores how short-term policy changes, if sustained, can make a big difference over the long term and how, over time, the more fundamental structural factors such as demographics can prove to be more durable in influencing fiscal sustainability. Finally, it argues that, even though the level of debt-to-GDP shifts by mid-century, the messages we take from these projections remain the same: spending and possibly tax policies need to change, if we are to avoid passing debt that generates little social return onto our descendants, and early changes alleviate the need for more drastic revisions in the future.
The authors would like to thank our external referees, Peter S Heller and Ross Guest, and our internal referees, Nick Carroll and Rienk Asscher, for their helpful suggestions. Thanks also to our Treasury colleagues, John Janssen, Tim Hampton and Oscar Parkyn, for their comments on drafts of this paper in late 2011. An early version benefited from comments at the 2011 NZAE Conference. Completion of this paper was delayed by work on the 2013 Long-term Fiscal Project.
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 these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.
Table of Contents
- Executive Summary
- 1 Introduction
- 2 How our projection approach has evolved
- 3 Population ageing
- 4 Long-term fiscal modelling framework
- 4.2 How we project spending
- 4.3 How we project tax revenue
- 5 Long-term fiscal projections from three consecutive budgets
- 5.1 Constructing Cost Pressures and Constant Debt projections
- 5.2 What's the same between Budgets 2009 and 2011?
- 5.3 What drives differences in projected debt tracks?
- 5.4 Reasons for policy change now
- 6 Living within our means - what does it take and what does it mean?
- 7 Conclusions