Indicators of Fiscal Impulse for New Zealand (WP 02/30)

Abstract

This paper defines fiscal impulse as a measure of whether government fiscal policy decisions are adding to, or subtracting from, aggregate demand pressures in the economy. When assessing the effects of fiscal policy on the economy it can be useful to have an approximate estimate of fiscal impulse. Estimates of fiscal impulse range from simple indicators based on fiscal aggregates, to more complicated approaches requiring greater use of judgement and economic theory. This paper develops reasonably simple indicators based on adjusted fiscal aggregates. It also sets out some sensitivity analysis. The indicators reflect intuitive assessments about changes in New Zealand fiscal policy over the last decade and looking forward into the forecast period. Although estimates are relatively insensitive to alternative assumptions, this is likely to be the result of the relative stability of the time period under consideration. Simple indicators of fiscal impulse have limitations. At best they can only provide an indication of the first round impact of changes in discretionary fiscal policy. A more complete assessment of the effects of fiscal policy on the economy requires a full-scale macroeconomic model, perhaps complemented with time series analysis.

Acknowledgements

Renee Philip is currently on secondment from the New Zealand Treasury to the Reserve Bank of New Zealand.

The authors would like to thank Steve Leith, Heather Kirkham, Glenn Phillips, Andrew Crisp, and Brendon Riches for comments and assistance with the calculations. Thanks also to participants at the Treasury’s Macroeconomic Reading Group for their indirect input via discussions on recent fiscal policy literature. This paper has benefited from comments received at presentations made at the Treasury and the Reserve Bank in June 2002.

An earlier version of this paper was presented at the Bank of Italy Workshop on Fiscal Impact held in Perugia, March 2002.

Disclaimer

The views expressed in this Working Paper are those of the authors 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.