Long-run projections are inherently uncertain. Due to the ongoing global challenges of COVID-19 there remains a higher than usual degree of uncertainty around the trajectory of the recovery. The response to COVID-19 has also highlighted the need for ongoing adaptability and responsiveness in the Government's investment approach.
As the global economy emerges from the public health crisis, and countries are able to more fully focus on the economic recovery, New Zealand will face choices as to how it manages the economic costs of COVID-19 and the ongoing need to invest in public services. The current low interest rates on public borrowing also change the trade-offs previously associated with government debt. So long as the interest rates the Crown pays on its debt remain below the growth rate of the economy, it is easier for an economy to sustain higher levels of debt. Continued low interest rates give New Zealand a greater degree of choice in terms of how public finances and spending on public services are managed.
The scenarios below illustrate some of these options. In addition to the Government's central projections, two additional scenarios are presented below:
- A higher allowance, unchanged tax revenue scenario: operating allowances are increased to $2.3 billion from 2025/26 and grow at 2.0 percent per annum, with no change to revenue as a share of GDP.
- A higher allowance, increased revenue scenario: operating allowances are increased to $2.3 billion from 2025/26 and grow at 2.0 percent per annum. This is accompanied by a small increase in the tax-to-GDP ratio of 0.5 percentage points in 2026/27, which lifts the long-run core Crown tax-to-GDP ratio from 27.6 percent of GDP to 28.1 percent of GDP. This generates around $3 billion per annum of additional revenue by the end of the projection period. The Government has already announced its intention to make changes to tax policy (interest deductibility) that have not been factored into the forecasts and projections. For reasons discussed earlier, the additional revenue from these measures has not been fully estimated.
Under scenario 1, higher spending on public services results in a small, constant OBEGAL deficit over the projection period of about 0.4 percent of GDP. However, as the rate of interest on public debt is below the growth rate of the economy for most the projection period, debt still falls as a share of GDP. Under scenario 1, net core Crown debt as a share of GDP falls from a peak of 47.9 percent of GDP to 31.0 percent of GDP by the end of the projection period.
Under scenario 2, OBEGAL returns to surplus in 2026/27 and remains there across the projection period. Net core Crown debt as a share of GDP falls from a peak of 47.9 percent of GDP to 26.5 percent of GDP by the end of the projection period.
These scenarios also highlight the limitations of long-term projections beyond the four-year forecast period. Small changes to the assumptions can result in large shifts across the 10-year projection period. In times of considerable uncertainty, projections are best suited to signal the general direction of the Government's fiscal strategy, rather than pointing to specific fiscal outcomes within the projection period.
Figure 20 - OBEGAL
Source: The Treasury
Figure 21 - Net core Crown debt
Source: The Treasury