Treasury's 2013 long-term fiscal statement: Assumptions and projections

Abstract

Affording Our Future, the New Zealand Treasury's 2013 long-term fiscal statement, tests fiscal sustainability over the next 40 or so years through a series of projections. These projections endeavour to capture the effect of population ageing and other influences on the future government budget balances and public debt. This paper explains the modelling approaches, major assumptions, and sensitivities around the assumptions. It provides results for two scenarios: ‘Resume Historic Cost Growth’ and ‘Spending Path that Maintains 20% Net Debt’. The paper also discusses the costs of delay in addressing the fiscal pressures produced by an ageing population structure.

Keywords:

• demographic projections
• public expenditure
• taxation
• labour market
• labour economics

JEL Classifications:

• H2
• I00
• J11

Acknowledgements

The authors are grateful for comments from colleagues at the New Zealand Treasury who worked on Affording Our Future: Statement on New Zealand's Long-term Fiscal Position, and in particular for the assistance and comments of Prof. Bob Buckle and Prof. John Creedy from Victoria University of Wellington.

Notes

1. The relative certainty of population projections is shown by the narrow 90% probability bands of the 65-and-older population (Bascand & Dunstan, 2014). Creedy and Makale (2014) comment in their work on stochastic projections of social expenditure that population uncertainty makes a negligible contribution to the dispersion of the ratio of spending to GDP.

2. See Bascand and Dunstan (2014) for a discussion of Statistics New Zealand's stochastic population and labour force projections.

3. Unless otherwise defined (for example, real GDP), references to GDP in this paper should be taken to mean nominal GDP.

4. Derived from an assumption that 80% of this real input cost is due to wages, and real wage growth equals labour productivity growth over the long term, which is normally assumed to be 1.5%, so 0.8 × 1.5% = 1.2%.

5. In 2010, the 65-and-over age group made up 13% of the population, but were the recipients of over 28% of the public health budget.

6. Under New Zealand's mixed-member proportional representation voting system, this does not necessarily mean a change in the major governing party. It could arise simply from a change in coalition partners and the ensuing agreements.