Release of Paper: “Estimating New Zealand’s Structural Budget Balance”

The Treasury has today released a research paper which reviews the method for estimating the structural budget balance of the New Zealand government.

The working paper looks at the effect of the business cycle (i.e. booms and recessions) on the fiscal position, as well as other potentially non-structural factors such as the terms of trade, asset prices and unbalanced growth. A key result is that the commodity-price boom, which began in the late 2000s, is adding about 1% of GDP to tax revenues.

The paper also uses fan charts to present new estimates of the uncertainty surrounding the structural fiscal position.

The work contributes to improving the Treasury’s ability to advise the government on fiscal settings. The indicators developed in the paper can assist policy-makers to understand how much active fiscal adjustment is required to restore the budget to balance. In a boom, the indicators help make judgements about how much tax revenue is cyclical, which is critical to policy formation if fiscal policy is to avoid costly mistakes. Moreover, the change in the structural budget balance is indicative of whether discretionary fiscal policy is adding stimulus or withdrawing demand in the economy.

The Working Paper is available at http://www.treasury.govt.nz/publications/research-policy/wp/2010/10-08

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