Annex 2 – Fiscal projections
This Annex contains multiple projection scenarios, based on different levels of operating and capital spending in future Budgets. It illustrates a range of possible medium-term outcomes. This is a different approach from past fiscal strategy reports, which focused on one baseline or central projection.
These 10-year projections start at the end of the forecast period (see Annex 1) and are produced using the Treasury's Fiscal Strategy Model.[9] Unless otherwise stated, the projections are based on trend or long-run historical averages for economic, fiscal and demographic variables. They assume that revenue as a percentage of GDP remains broadly stable, 10-year Government bond yields converge towards 4.3 per cent, and long-run labour productivity growth converges towards 0.9 per cent per annum. The projections also assume that increases to welfare payments are in line with current policy settings, including rising NZ Superannuation payments as the population ages.
Scenario 1: Continuation of the forecast period
Scenario 1 projects forward operating and average capital allowances from the forecast period. It assumes that:
- the operating allowance is $2.4 billion in Budget 2029 (the first Budget directly affecting the projection period), growing at 3 per cent per year in subsequent Budgets, and
- the capital allowance is $3.625 billion in Budget 2029, growing at 3 per cent per year in subsequent Budgets.[10]
Scenario 2: Higher capital investment
Scenario 2 includes higher capital expenditure than Scenario 1. It assumes that:
- the capital allowance is $7 billion in Budget 2029, growing at 3 per cent per year in subsequent Budgets, and
- the operating allowance is $3.525 billion in Budget 2029, growing at 3 per cent per year in subsequent Budgets.
The operating allowance is higher than in Scenario 1, as capital expenditure is usually accompanied by operating funding for depreciation, maintenance and other costs. Assuming $1 of operating for every $3 of capital, the operating allowance has been raised by a third of the $3.375 billion addition to the capital allowance.
Scenario 3: Higher operating expenses
Scenario 3 includes higher operating expenditure than Scenario 1. This scenario does not use operating allowances to manage expenditure pressures, but instead assumes that operating expenditure grows unconstrained at each Budget in line with price, wage and demographic pressures. No offsetting reprioritisation or efficiency savings are assumed. The capital allowance grows as in Scenario 1.
Scenario 4: Higher operating expenses and capital investment
Scenario 4 combines the higher operating expenditure from Scenario 3 with the higher capital expenditure from Scenario 2.
Figure A2.1 - Net core Crown debt
Source: The Treasury
Figure A2.2 - OBEGALx
Source: The Treasury
Figure A2.3 - Core Crown expenses
Source: The Treasury
The Government's long-term fiscal objectives include:
- reducing net core Crown debt to 40 per cent of GDP, maintaining it thereafter within a range of 20 to 40 per cent of GDP
- maintaining operating surpluses sufficient to ensure consistency with the debt objective, and
- reducing core Crown expenses towards 30 per cent of GDP.
Scenario 1 shows OBEGALx surpluses growing, core Crown expenses reducing to 28.3 per cent of GDP and net core Crown debt reducing to 25.7 per cent of GDP over the projection period (Table A2.1). This scenario is consistent with the Government's long-term fiscal objectives.
Scenario 2 shows small OBEGALx surpluses, little change in core Crown expenses as a percentage of GDP and net core Crown debt slowly decreasing to 42.2 per cent of GDP over the projection period (Table A2.2). As the surpluses are insufficient to bring debt within the range of 20 to 40 per cent of GDP, this scenario is inconsistent with the long-term debt and operating balance objectives.
Scenarios 3 and 4 show OBEGALx deficits, core Crown expenses and net core Crown debt growing as a percentage of GDP. As Tables A2.3 and A2.4 show, these scenarios are inconsistent with the long-term objectives. Net core Crown debt in Scenario 4 exceeds the Treasury's assessment of a sustainable long-term level of debt that retains headroom to borrow in response to future shocks (50 per cent of GDP).
Table A2.1 - Fiscal indicators from Scenario 1
| Year ending 30 June | 2029 |
2031 |
2033 |
2035 |
2037 |
2039 |
|---|---|---|---|---|---|---|
| % of GDP | ||||||
| Core Crown revenue | 31.0 | 30.8 | 30.7 | 30.6 | 30.5 | 30.5 |
| Total Crown revenue | 38.7 | 38.6 | 38.6 | 38.6 | 38.6 | 38.5 |
| Core Crown expenses | 30.9 | 30.2 | 29.6 | 29.1 | 28.7 | 28.3 |
| Total Crown expenses | 39.2 | 38.4 | 37.7 | 37.1 | 36.5 | 35.9 |
| OBEGALx | 0.0 | 0.6 | 1.2 | 1.7 | 2.2 | 2.6 |
| Operating balance | 0.8 | 1.4 | 2.2 | 2.9 | 3.5 | 4.0 |
| Net core Crown debt | 45.5 | 42.8 | 39.4 | 35.4 | 30.8 | 25.7 |
| Total borrowings | 67.6 | 63.8 | 59.2 | 53.6 | 47.1 | 40.0 |
| Net worth | 32.8 | 32.8 | 34.4 | 37.4 | 41.6 | 46.6 |
Source: The Treasury
Table A2.2 - Fiscal indicators from Scenario 2
| Year ending 30 June | 2029 |
2031 |
2033 |
2035 |
2037 |
2039 |
|---|---|---|---|---|---|---|
| % of GDP | ||||||
| Core Crown revenue | 31.0 | 30.8 | 30.7 | 30.6 | 30.5 | 30.5 |
| Total Crown revenue | 38.7 | 38.6 | 38.6 | 38.6 | 38.6 | 38.5 |
| Core Crown expenses | 30.9 | 30.6 | 30.6 | 30.5 | 30.6 | 30.6 |
| Total Crown expenses | 39.2 | 38.9 | 38.7 | 38.5 | 38.4 | 38.3 |
| OBEGALx | 0.0 | 0.2 | 0.3 | 0.3 | 0.3 | 0.3 |
| Operating balance | 0.8 | 1.0 | 1.2 | 1.5 | 1.7 | 1.7 |
| Net core Crown debt | 45.5 | 44.7 | 43.9 | 43.2 | 42.6 | 42.2 |
| Total borrowings | 67.6 | 65.7 | 63.7 | 61.4 | 59.0 | 56.5 |
| Net worth | 32.8 | 32.1 | 32.2 | 32.8 | 33.9 | 35.1 |
Source: The Treasury
Table A2.3 - Fiscal indicators from Scenario 3
| Year ending 30 June | 2029 |
2031 |
2033 |
2035 |
2037 |
2039 |
|---|---|---|---|---|---|---|
| % of GDP | ||||||
| Core Crown revenue | 31.0 | 30.8 | 30.7 | 30.6 | 30.5 | 30.5 |
| Total Crown revenue | 38.7 | 38.6 | 38.6 | 38.6 | 38.6 | 38.5 |
| Core Crown expenses | 30.9 | 31.1 | 31.4 | 31.7 | 31.9 | 32.1 |
| Total Crown expenses | 39.2 | 39.4 | 39.5 | 39.6 | 39.7 | 39.8 |
| OBEGALx | 0.0 | -0.3 | -0.6 | -0.8 | -1.0 | -1.2 |
| Operating balance | 0.8 | 0.5 | 0.4 | 0.3 | 0.3 | 0.2 |
| Net core Crown debt | 45.5 | 44.3 | 43.8 | 44.1 | 44.8 | 46.1 |
| Total borrowings | 67.6 | 65.2 | 63.6 | 62.3 | 61.2 | 60.4 |
| Net worth | 32.8 | 31.3 | 30.0 | 28.7 | 27.5 | 26.2 |
Source: The Treasury
Table A2.4 - Fiscal indicators from Scenario 4
| Year ending 30 June | 2029 |
2031 |
2033 |
2035 |
2037 |
2039 |
|---|---|---|---|---|---|---|
| % of GDP | ||||||
| Core Crown revenue | 31.0 | 30.8 | 30.7 | 30.6 | 30.5 | 30.5 |
| Total Crown revenue | 38.7 | 38.6 | 38.6 | 38.6 | 38.6 | 38.5 |
| Core Crown expenses | 30.9 | 31.2 | 31.5 | 31.8 | 32.1 | 32.4 |
| Total Crown expenses | 39.2 | 39.4 | 39.6 | 39.8 | 39.9 | 40.1 |
| OBEGALx | 0.0 | -0.4 | -0.7 | -1.0 | -1.2 | -1.5 |
| Operating balance | 0.8 | 0.5 | 0.3 | 0.2 | 0.1 | -0.1 |
| Net core Crown debt | 45.5 | 45.5 | 46.3 | 47.8 | 49.8 | 52.4 |
| Total borrowings | 67.6 | 66.5 | 66.1 | 66.0 | 66.2 | 66.7 |
| Net worth | 32.8 | 31.3 | 29.8 | 28.2 | 26.7 | 25.0 |
Source: The Treasury
Notes
- [9] https://www.treasury.govt.nz/publications/fsm/fiscal-strategy-model-befu-2025
- [10] In previous fiscal strategy reports, Budget operating and capital allowances were assumed to grow at 2 per cent per annum, based on expected consumer price inflation. However, there is evidence to suggest that the costs of providing public services, and capital investment, increase faster than consumer price inflation.