A Guide to the Statement on the Long-term Fiscal Position

What is the Long-term Fiscal Statement?

The Statement is about the long-term outlook for the government’s fiscal position and the factors that drive that fiscal outlook.

When was it decided to produce a Long-term Fiscal Statement?

In 2004, the Public Finance Act was amended to require the Treasury to produce a statement on the government’s finances over a period of at least 40 years, and to update the outlook at least every four years.

This is the first Statement to be produced since the law change.

Why do we have a Long-term Fiscal Statement?

Successive New Zealand governments have increasingly looked to the long term in setting their policy objectives. Part 2 of the Public Finance Act (which deals with fiscal responsibility) requires governments to look to the future when making decisions today. It does this by requiring them to set objectives for at least a 10-year horizon and to report their actions against these.

The Statement, mandated by a new section of Part 2 of the Act, is a natural extension of this reporting framework, although it differs in that it looks out over a very long period, and across many parliaments and governments.

So what is the purpose of this Statement?

We see the purpose of this Statement as being to increase the quality and depth of public information and understanding about the long-term consequences of spending and revenue decisions. This will assist governments in making fiscally-sound decisions in the decades ahead.

The material presented here should be useful as the basis for discussions about the fiscal and other consequences of different policy settings.

Who is responsible for the content of the Statement and who is it aimed at?

The Statement is the responsibility of the Secretary to the Treasury and a long-term fiscal statement must be presented to Parliament at least every four years.

How can people get a copy of the long-term fiscal statement?

An electronic copy of the Statement can be downloaded from the Treasury website:

Does it contain a set of forecasts about where our government’s finances will stand in 40 years’ time?

It is impossible to predict with any accuracy what governments will be doing in the next 40 years. Modern governments do a myriad of things, in areas as diverse as foreign aid, taxes, health and road-building.

Therefore, rather than attempt to make such predictions, we have used the available information to make projections of the fiscal consequences of particular scenarios. These scenarios set out the implications of possible policies and patterns of development of the economy. To pick up the uncertainty around these, we have used a series of “what if” questions; eg, what if economic growth is higher than we assume, what if fertility increases, and what if governments choose to spend more on education?

What does the Statement say?

The Statement indicates that the combination of the projected structural change in the population and present policy settings is likely to lead to growing challenges to the fiscal position, and these pressures will accelerate from the 2030s.

At the same time, the Statement assumes that governments will continue to follow the principles of responsible fiscal management contained in the Public Finance Act, meaning that they will act to ensure that the fiscal position remains sound. The Statement presents a range of scenarios about what government could do to maintain a sound fiscal position.

How does this Statement differ from previous work by the Treasury on the long-term fiscal position?

Previous studies of the long-term fiscal position in New Zealand tend to present the long-term implications of continuing with existing policies.

The bottom-up approach involves modelling the effect on major fiscal aggregates of individual spending programmes and the current tax system projected forward on the basis of demographic and other assumptions, without any overall constraints.

The top-down approach starts with a set of constraints for major fiscal aggregates (such as debt-to-GDP ratios) and determines what spending or revenue track would be required to continue to meet these constraints, given likely changes to the population and the economy.

Is this the first time that the Treasury has released projections about how the long-term future may pan out based on historic patterns of behaviour?

No, it is not. For example, in 1993, the Treasury’s post-election briefing paper contained estimates of the long-term fiscal position going out to 2049.

For many years, the Treasury has at least twice a year published four-year ahead economic and fiscal forecasts. Fiscal projections spanning out ten years or more are included in the Government’s annual Fiscal Strategy Report.

The Statement on the long-term fiscal position builds on the Treasury’s ten-year-ahead projection model and extends the horizon out to 40 years.

Is this type of very long-term fiscal modelling unique to New Zealand?

Similar types of reports are produced in Australia, the United Kingdom, the United States and by international organizations such as the Organization for Economic Co-operation and Development and the European Commission.

The methodologies adopted in the New Zealand Statement draw on the strengths of the various overseas’ models.

The Australian Intergenerational Report, which provides a basis for considering the Commonwealth of Australia’s fiscal outlook over the long-term, and identifying emerging issues associated with an ageing population, can be found at:

http://www.budget.gov.au/2002-03/bp5/html/index.html

The United Kingdom’s Long-Term Public Finance Report, which aims to provide a comprehensive analysis of long term socio-economic and demographic developments and their likely impact on public finances, can be found at:

http://www.hmtreasury.gov.uk/media/F59/32/pbr05_longterm_513.pdf

The Long-Term Budget Outlook, published by the United States Congressional Budget Office, can be found at:

http://www.cbo.gov/ftpdocs/69xx/doc6982/12-15-LongTermOutlook.pdf

Executive Summary PDF

ENDS

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