Social expenditure in New Zealand: Stochastic projections

Abstract

This paper presents stochastic projections for 13 categories of social spending in New Zealand over the next 50 years. These projections are based on detailed demographic estimates covering fertility, migration and mortality disaggregated by single year of age and gender. Distributional parameters are incorporated for all of the major variables, and are used to build up probabilistic projections for social expenditure as a share of gross domestic product using simulation methods. Emphasis is placed on the considerable uncertainty involved in projecting future expenditure levels.

Keywords:

• population
• projections
• stochastic simulation
• social expenditure
• fiscal costs
• New Zealand

Notes

1. That paper produced the first demographic and expenditure projections for New Zealand and provides a discussion of alternative approaches and related literature.

2. See, for example, contributions collected in Creedy (1995) and Creedy and Guest (2007).

3. For example, see Auerbach and Hassett (2000), and on tax smoothing, see Davis and Fabling (2002).

4. The use of a priori values is examined in detail in Creedy and Alvarado (1998a). They obtained stochastic projections of social expenditure for Australia but did not, unlike Creedy and Scobie (2005) and the present paper, combine these with stochastic population projections.

5. This section borrows heavily from Creedy and Scobie (2005).

6. Some policy responses may arise from changing voting patterns associated with population ageing.

7. The assumption of lognormality was also made, for example, by Alho (1997) and Creedy and Alvarado (1998a).

8. This form is a simplified form of the more general Box–Jenkins type of time series specification used by Lee and Tuljapurkar (2000).

9. The use of past variability to reflect future uncertainty is of course just one possible approach. The same model could be used with a priori assumptions about the distributions, based on a combination of past information and a range of considerations concerning views of the future; see Creedy and Alvarado (1998a).

10. The full details are given in Creedy and Makale (2013).

11. These summary values were produced for 10-year intervals rather than each year of the projection period, to reduce computer run-times.

12. As in the previous analysis, the mean and median were found to be similar.

13. Comparisons with earlier results are not exact because the 14 social expenditure categories used by Creedy and Scobie (2005) are not precisely the same as the 13 categories used here, in view of data limitations.

14. The question of whether higher net immigration can to some extent substitute for higher fertility is examined in detail in the context of Australia by Creedy and Alvarado (1998b), who allow for ‘assimilation’ to take several generations. They found relatively small effects.