Fiscal projections and assumptions
The fiscal projections in Table 9 show the Government is expected to meet its long-term objective of stabilising debt by the mid-2020s. These projections are based on a set of modelling assumptions that are outlined on the Treasury website at: https://treasury.govt.nz/information-and-services/financial-management-and-advice/fiscal-strategy/fiscal-strategy-model. These assumptions are predominantly based on trend or long-run averages for growth rates and therefore are less closely associated by current policy settings. Where more appropriate, they are instead based on levels of key economic, fiscal and demographic variables.
The key assumptions in the central projections are:
- Non-welfare spending growth is largely determined by operating allowances, which are assumed to be $2.0 billion in Budget 2025, growing at 2.0 percent per year for subsequent Budgets.
- Capital allowances are assumed to be $4.0 billion in Budget 2025, growing at 2.0 percent per year for subsequent Budgets.
The Treasury sets out further assumptions, based on long-term historical data. Several economic variables, such as the unemployment rate, Consumers Price Index (CPI) growth, annual labour productivity growth, average weekly hours worked and nominal average hourly wage growth are projected to transition back to long-run stable assumptions over the early years of the projection period. Once this transition has happened, the economy is assumed by the Treasury to grow at trend growth rates, with no economic cycles in the projections.
Due to historical data revisions, the Treasury has made a number of changes to these long-run economic assumptions since the Fiscal Strategy Report 2020 (FSR):
- A decrease in the long-term core Crown tax-to-GDP ratio to 27.6 percent of GDP from 28.3 percent of GDP in the 2020 FSR. The revised ratio considers outturns of data between 2006/07 and 2019/20, as well as revisions to historical GDP data by Stats NZ. The Treasury has also updated the long-term values for each of the individual tax types.
- A decrease in the long-run annual labour productivity growth to 1.0 percent from 1.2 percent in the 2020 FSR. This is based on outturns and revisions in long-term historical GDP data.
- A decrease to the long-run assumption for the government 10-year bond rate to 4.8 percent from 5.0 percent in the 2020 FSR. This is based on an assumption that lower productivity growth also implies lower real interest rates. The Treasury is keeping the bond rate assumption under review, given the fall in interest rates both before and during the pandemic.
Changes in the economic and fiscal forecasts also affect the starting point and have a major impact on the projections.
Table 9 - Summary of fiscal projections
|Year ending 30 June||2021||2022||2023||2024||2025||2026||2027||2028||2029||2030||2031||…||2035|
|% of GDP||Forecasts||Projections|
|Core Crown revenue||29.3||28.5||29.3||29.2||29.3||29.3||29.3||29.4||29.4||29.4||29.4||…||29.5|
|Core Crown expenses||33.1||32.8||31.1||30.0||29.2||28.7||28.6||28.6||28.5||28.4||28.3||…||28.0|
|Core Crown residual cash||-7.6||-11.2||-6.9||-1.5||0.8||0.9||-0.8||-0.6||-0.4||-0.1||0.0||…||0.6|
|Total Crown revenue||36.2||35.4||36.1||36.0||35.8||36.0||36.0||36.1||36.1||36.1||36.2||…||36.3|
|Total Crown expenses||40.7||40.6||38.5||37.3||36.3||35.9||35.9||35.9||35.9||35.9||35.9||…||36.0|
|Total Crown OBEGAL1||-4.5||-5.3||-2.6||-1.4||-0.6||-0.1||0.1||0.1||0.1||0.2||0.2||…||0.2|
|Total Crown operating balance2||0.4||-4.5||-1.4||-0.2||0.7||1.3||1.4||1.5||1.6||1.7||1.7||…||1.8|
|Gross sovereign-issued debt||40.9||49.9||53.4||51.7||48.2||45.4||44.5||43.5||42.2||40.8||39.3||…||32.7|
|Net core Crown debt3||34.0||43.8||48.0||46.9||43.6||40.7||39.7||38.6||37.3||35.9||34.4||…||27.8|
|Total Crown net worth||35.1||29.2||26.1||24.5||24.0||24.3||24.7||25.2||25.8||26.4||27.1||…||30.2|
|Net worth attributable to the Crown||33.5||27.6||24.6||23.1||22.7||22.9||23.3||23.8||24.3||25.0||25.7||…||28.7|
- Operating balance (before gains and losses)
- Excludes minority interests
- Excludes the NZS Fund and advances
Source: The Treasury