Indicators of Fiscal Impulse for New Zealand

Philip, Renee; Janssen, John Wo king Pape Indica o s o Fiscal Impulse o New Zealand New Zealand T easu y Wo king Pape , No. 02/30 P o ided in Coope a ion wi h: The T easu y, New Zealand Go e nmen Sugges ed Ci a ion: Philip, Renee; Janssen, John (2002) : Indica o s o Fiscal Impulse o New Zealand, New Zealand T easu y Wo king Pape , No. 02/30, New Zealand Go e nmen , The T easu y, Welling on This Ve sion is a ailable a : h ps://hdl.handle.ne /10419/205505 S anda d-Nu zungsbedingungen: Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen Zwecken und zum P i a geb auch gespeiche und kopie we den. Sie dü en die Dokumen e nich ü ö en liche ode komme zielle Zwecke e iel äl igen, ö en lich auss ellen, ö en lich zugänglich machen, e eiben ode ande wei ig nu zen. So e n die Ve asse die Dokumen e un e Open-Con en -Lizenzen (insbesonde e CC-Lizenzen) zu Ve ügung ges ell haben soll en, gel en abweichend on diesen Nu zungsbedingungen die in de do genann en Lizenz gewäh en Nu zungs ech e. Te ms o use: Documen s in EconS o may be sa ed and copied o you pe sonal and schola ly pu poses. You a e no o copy documen s o public o comme cial pu poses, o exhibi he documen s publicly, o make hem publicly a ailable on he in e ne , o o dis ibu e o o he wise use he documen s in public. I he documen s ha e been made a ailable unde an Open Con en Licence (especially C ea i e Commons Licences), you may exe cise u he usage igh s as speci ied in he indica ed licence. h ps://c ea i ecommons.o g/licenses/by/4.0/ Indica o s o Fiscal Impulse o New Zealand Renee Philip and John Janssen N EW Z EALAND T REASURY W ORKING P APER 02/30 DECEMBER 2002 NZ TREASURY WORKING PAPER 02/30 Indica o s o Fiscal Impulse o New Zealand MONTH / YEAR Decembe 2002 AUTHORS Renee Philip Rese e Bank o New Zealand, PO Box 2498, Welling on, New Zealand Email Telephone Fax [email p o ec ed] + 64-4-471 3661 + 64-4-473 1209 John Janssen New Zealand T easu y, PO Box 3724, Welling on, New Zealand Email Telephone Fax [email p o ec ed] +64-4-471 5931 +64-4-499 0992 ACKNOWLEDGEMENTS Renee Philip is cu en ly on secondmen om he New Zealand T easu y o he Rese e Bank o New Zealand. The au ho s would like o hank S e e Lei h, Hea he Ki kham, Glenn Phillips, And ew C isp, and B endon Riches o commen s and assis ance wi h he calcula ions. Thanks also o pa icipan s a he T easu y’s Mac oeconomic Reading G oup o hei indi ec inpu ia discussions on ecen iscal policy li e a u e. This pape has bene i ed om commen s ecei ed a p esen a ions made a he T easu y and he Rese e Bank in June 2002. An ea lie e sion o his pape was p esen ed a he Bank o I aly Wo kshop on Fiscal Impac held in Pe ugia, Ma ch 2002. NZ TREASURY New Zealand T easu y PO Box 3724 Welling on 6008 NEW ZEALAND Email Telephone Websi e [email p o ec ed] 64-4-472 2733 www. easu y.go .nz DISCLAIMER The iews exp essed in his Wo king Pape a e hose o he au ho s and do no necessa ily e lec he iews o he New Zealand T easu y. The pape is p esen ed no as policy, bu wi h a iew o in o m and s imula e wide deba e. WP 02/30 | INDICATORS OF FISCAL IMPULSE FOR NEW ZEALAND i Abs ac This pape de ines iscal impulse as a measu e o whe he go e nmen iscal policy decisions a e adding o, o sub ac ing om, agg ega e demand p essu es in he economy. When assessing he e ec s o iscal policy on he economy i can be use ul o ha e an app oxima e es ima e o iscal impulse. Es ima es o iscal impulse ange om simple indica o s based on iscal agg ega es, o mo e complica ed app oaches equi ing g ea e use o judgemen and economic heo y. This pape de elops easonably simple indica o s based on adjus ed iscal agg ega es. I also se s ou some sensi i i y analysis. The indica o s e lec in ui i e assessmen s abou changes in New Zealand iscal policy o e he las decade and looking o wa d in o he o ecas pe iod. Al hough es ima es a e ela i ely insensi i e o al e na i e assump ions, his is likely o be he esul o he ela i e s abili y o he ime pe iod unde conside a ion. Simple indica o s o iscal impulse ha e limi a ions. A bes hey can only p o ide an indica ion o he i s ound impac o changes in disc e iona y iscal policy. A mo e comple e assessmen o he e ec s o iscal policy on he economy equi es a ull-scale mac oeconomic model, pe haps complemen ed wi h ime se ies analysis. JEL CLASSIFICATION E62 - Fiscal Policy H60 – Na ional Budge , De ici and Deb : Gene al KEYWORDS Fiscal impulse; cyclical-adjus men ; agg ega e demand; New Zealand. WP 02/30 | INDICATORS OF FISCAL IMPULSE FOR NEW ZEALAND ii Table o Con en s Abs ac ...............................................................................................................................i Table o Con en s ..............................................................................................................ii Lis o Tables.....................................................................................................................iii Lis o Figu es...................................................................................................................iii 1 In oduc ion ..............................................................................................................1 2 De ini ions, Limi a ions and O he App oaches....................................................3 2.1 De ini ions .......................................................................................................................3 2.2 Limi a ions.......................................................................................................................4 2.3 O he app oaches ...........................................................................................................6 3 Issues in Es ima ing Indica o s o Fiscal Impulse ................................................8 3.1 Measu es o he iscal balance .......................................................................................8 3.2 Measu es o capi al ansac ions ....................................................................................9 3.3 App oaches o iden i ying disc e iona y iscal policy ......................................................9 4 Es ima es o Fiscal Impulse o New Zealand .....................................................12 4.1 Fiscal balance, capi al and cyclical adjus men ............................................................12 4.2 Base indica o ...............................................................................................................14 4.3 App oach o iden i ying disc e iona y policy .................................................................18 4.4 Capi al adjus men s ......................................................................................................19 5 Concluding Rema ks .............................................................................................22 Re e ences .......................................................................................................................23 Appendix ..........................................................................................................................26 1. The s uc u al iscal balance.........................................................................................26 2. Helle , Haas and Mansu (1986) measu e o iscal impulse ........................................27 3. Blancha d iscal impulse...............................................................................................28 4. The New Zealand T easu y’s EFI.................................................................................29 WP 02/30 | INDICATORS OF FISCAL IMPULSE FOR NEW ZEALAND iii Lis o Tables Table 1 – De ini ion o go e nmen o base indica o o iscal impulse............................................12 Table 2 – Capi al ansac ions...........................................................................................................13 Table 3 – Base indica o o iscal impulse.........................................................................................14 Lis o Figu es Figu e 1 - OBERAC and es ima ed s uc u al OBERAC...................................................................10 Figu e 2 – P ima y s uc u al balance and iscal balance .................................................................15 Figu e 3 – P ima y s uc u al eceip s and p ima y s uc u al ou lays...............................................16 Figu e 4 – Base indica o o iscal impulse and change in p ima y s uc u al balance.....................17 Figu e 5 – Compa isons o disc e iona y measu es .........................................................................19 Figu e 6 – Fiscal impulse unde al e na i e capi al adjus men s ......................................................20 Figu e 7 – Componen s o he capi al adjus men ............................................................................21 WP 02/30 | INDICATORS OF FISCAL IMPULSE FOR NEW ZEALAND 1 Indica o s o Fiscal Impulse o New Zealand 1 In oduc ion Assessmen s o he in luence o iscal policy on he economy o en use e minology such as a “ igh e iscal s ance” o “con ac iona y iscal policy”.1 The ac ual iscal balance may no be a good measu e o changes in iscal policy. This is la gely because de elopmen s in he ac ual balance e lec bo h changes in iscal policy as well as how changes in he economy in luence ax e enue and go e nmen spending. The aim o his pape is o de elop a measu e o whe he changes in iscal policy a e adding o, o sub ac ing om, agg ega e demand p essu es in he economy. Consis en wi h he e minology gene ally used in his li e a u e, we de ine such a measu e as an indica o o iscal impulse. Indica o s o iscal impulse can be a use ul componen in a iscal analysis oolki ha also con ains measu es o he s uc u al iscal posi ion, analysis o ax and spending ends, and longe - e m iscal p ojec ions. Indica o s o iscal impulse can enhance he ex pos in e p e a ion o changes in iscal policy as well as helping o iden i y ela i ely la ge ex an e o ecas changes in iscal policy. Howe e , we do no see impulse indica o s as some so o s op o go igge o iscal policy ini ia i es. Policy ini ia i es should also be assessed wi h e e ence o unde lying mic o-economic and public inance analysis. Ideally, iscal impulse indica o s would be augmen ed wi h assessmen s de i ed om mac oeconomic and pe haps ime se ies models. Fu he , while assessmen s o iscal impulse may play an in o ma ion ole, hei calcula ion does no imply a shi in iscal policy away om i s cu en medium- e m ocus o a mo e ac i e coun e -cyclical ole. Indeed, he analysis in his pape cons i u es a signi ican heal h wa ning o he unquali ied use o iscal impulse indica o s. The limi ed a ailabili y o iscal in o ma ion on a consis en basis es ic s his o ical es ima es o iscal indica o s o New Zealand.2 The analysis in his pape co e s he pe iod om he ea ly 1990s o he end o he 2002 Budge o ecas ho izon (yea ending June 2006). Key ea u es o iscal policy o e his pe iod a e, i s , he shi om pe sis en ope a ing de ici s o consecu i e ope a ing su pluses since 1994 and a signi ican educ ion in he a io o public deb o g oss domes ic p oduc (GDP).3 Second, o ecas s o he iscal posi ion in he mid 1990s indica ed scope o a iscal adjus men , and he hen 1 Typical examples include he Economis ’s assessmen o iscal policy in he Uni ed Kingdom (“The iscal a i hme ic: Luck and judgmen ” The Economis , Ma ch 25, 2000, p.66) and he In e na ional Mone a y Fund (IMF) assessmen o I ish iscal policy (IMF, 2001a). 2 The C own Financial S a emen s (CFS) a e based on gene ally accep ed accoun ing p ac ice (GAAP). They a e p esen ed on a June yea basis, s a ing wi h he yea ended June 1994. GAAP in o ma ion equi ed o iscal impulse analysis is a ailable om 1992. 3 See Wells (1996) and Janssen (2001) o discussion o iscal policy in New Zealand. WP 02/30 | INDICATORS OF FISCAL IMPULSE FOR NEW ZEALAND 2 Go e nmen announced ax educ ions and addi ional spending. Thi d, looking o wa d, he cu en Go e nmen is aiming o un ope a ing su pluses. One o he equi emen s o he Fiscal Responsibili y Ac 1994 is o he Go e nmen o se long- e m iscal objec i es. The Go e nmen o mula es i s budge o ensu e ha agg ega e le els o axa ion and spending, including o ecas new ope a ing and capi al spending, a e consis en wi h p og ess owa ds i s long- e m iscal objec i es. Adjus men owa ds he objec i es may esul in changes o he iscal balance o e ime. These changes a e no necessa ily a delibe a e a emp o in luence agg ega e demand. Ra he hey a e he consequence o a numbe o indi idual budge decisions and p og ession owa ds he long- e m iscal objec i es. None heless, Go e nmen s may also be conce ned abou mac oeconomic s abili y and he e o e he po en ial sho - e m impac o iscal policy on agg ega e demand. Fo example, s ongly p o-cyclical iscal policy could place addi ional p essu e on mone a y policy and lead o undesi able swings in in e es a es and he exchange a e. Because la ge changes in iscal policy may ha e an impac on agg ega e demand in he economy, hey will need o be aken in o accoun by he Rese e Bank o New Zealand (RBNZ), which ope a es o achie e an in la ion a ge .4 The emainde o his pape is se ou as ollows. Sec ion 2 se s ou de ini ions o iscal impulse and discusses some o he limi a ions o simple agg ega e indica o s. Sec ion 3 ou lines issues ha a ise in es ima ing indica o s o iscal impulse. Sec ion 4 p o ides es ima es and sensi i i y analysis o New Zealand. Finally, Sec ion 5 p o ides concluding ema ks. 4 In New Zealand, co-o dina ion be ween mone a y and iscal au ho i ies does no ake he o m o he au ho i ies ac ing o pu sue join policy objec i es. Ra he , he amewo ks ely on anspa ency, a medium- e m ocus and consul a ion. See he Rese e Bank o New Zealand submission o he Independen Re iew o he Ope a ion o Mone a y Policy, suppo ing documen on “Fiscal and mone a y coo dina ion” (www. bnz.go .nz/monpol/ e iew) and S ensson (2001). Analysis o mac oeconomic policy co-o dina ion in he Uni ed Kingdom by Bhundia and O’Donnell (2002) p o ides u he con ex o he New Zealand si ua ion. WP 02/30 | INDICATORS OF FISCAL IMPULSE FOR NEW ZEALAND 3 2 De ini ions, Limi a ions and O he App oaches 2.1 De ini ions Wells (1995, p.76) no es ha 'single-numbe ' measu es such as he iscal balance a e o en used in policy discussions ega ding iscal policy. He sugges s ha in an IS-LM model, a de ini ion o iscal s imulus o con ac ion is gi en by he deg ee o which changes in iscal ins umen s shi he IS cu e. As a esul , i is no he le el bu he change in he iscal balance ha p o ides an indica o o iscal s imulus o con ac ion. Wells (1995) sees wo d awbacks in using he change in he iscal balance as an indica o o iscal policy e ec s. Fi s , bo h changes in p i a e-sec o demand and iscal ins umen s ( ax a es and spending plans) can in luence changes in he ac ual iscal balance. The mos common app oach o his d awback is o es ima e a cyclically adjus ed o s uc u al iscal balance. The s uc u al iscal balance is an indica o o wha he iscal balance would be i he economy we e ope a ing a po en ial ou pu . Second, because o inhe en di e ences in each o he iscal ins umen s, hey should be weigh ed o e lec hei ini ial impac on agg ega e demand. This leads o he use o wha is some imes e med he weigh ed budge balance. In his pape we ocus on changes in disc e iona y policy ha a e likely o ha e an e ec on agg ega e demand. A ocus on changes in disc e iona y policy implies he use o a s uc u al iscal balance ha excludes cyclical in luences. Fo example, conside he case o unemploymen expendi u e. Changes in unemploymen expendi u e occu h ough changes in unemploymen numbe s and/o changes in unemploymen bene i a es. The e ec o cyclical changes in unemploymen numbe s is conside ed non-disc e iona y and would be excluded om he measu e o iscal impulse. The e ec o changes in unemploymen bene i a es is disc e iona y. Isola ing disc e iona y policy changes is no s aigh o wa d. Fo example, an exogenous and non-cyclical inc ease in he numbe o hospi al pa ien s can equi e inc eased spending on heal hca e. Al hough such exogenous ac o s a e la gely non-disc e iona y ( o gi en heal h policy), a go e nmen will need o ake hem in o accoun when making budge decisions. A go e nmen has he disc e ion o e whe he o accommoda e non- disc e iona y changes, o o o se hem wi h disc e iona y changes elsewhe e in he budge . Isola ing he non-cyclical o s uc u al componen ecognises he ole o so-called au oma ic iscal s abilise s.5 Fo example, conside he case whe e o ecas s indica e a signi ican de e io a ion in he o e all iscal balance. I his is due in la ge pa o a o ecas cyclical down u n, hen al hough he change appea s expansiona y, i is e lec ing he ole o au oma ic s abilise s. The onse o he down u n may esul in a iscal de ici unde policies ha would o he wise ha e gene a ed a balance o su plus. 5 Au oma ic s abilise s a e hose aspec s o ax and spending sys ems ha end o smoo h ou pu o e he economic cycle. Fo example, du ing an upswing, incomes end o ise, esul ing in highe ax eceip s, while alling unemploymen lowe s unemploymen expendi u e. The s eng h o hese s abilise s will depend on he speci ic ea u es o he ax and spending sys ems. O en hese ea u es a e he esul o a ious policy decisions a he han any conscious decision o op imise he s abilising ea u es o axes and spending. See Aue bach and Feenbu g (2000) o a de ailed analysis o he s abilising aspec s o axes. WP 02/30 | INDICATORS OF FISCAL IMPULSE FOR NEW ZEALAND 10 common app oach is a wo-s ep me hodology ha u ilises an es ima e o he ou pu gap oge he wi h a se o elas ici ies o ax and spending o ou pu . The New Zealand T easu y egula ly publishes a s uc u al OBERAC es ima ed using his wo-s ep me hod (see he Appendix). The OBERAC and es ima ed s uc u al OBERAC a e shown in Figu e 1. Tam and Ki kham (2001) ind ha he calcula ion o he s uc u al balance o New Zealand using he wo-s ep me hod is sensi i e o he ou pu gap calcula ion. Figu e 1 - OBERAC and es ima ed s uc u al OBERAC No e: As a Budge 2002 Sou ce: The T easu y The e a e wo disad an ages in using T easu y’s me hod as an inpu in o he es ima ion o iscal impulse. Fi s , he cu en me hodology does no make any adjus men o cyclical a ia ions in in e es a es and in la ion. Howe e , his p oblem has become less impo an as in la ion a es ha e declined and become mo e s able. Mo eo e , since we a e in e es ed in disc e iona y policy, hen ne in e es paymen s would be excluded in o de o ocus on he p ima y s uc u al balance. Second, he cu en me hodology is sensi i e o es ima es o po en ial ou pu , which a e unce ain, especially owa d he end o he sample pe iod and in o he o ecas ho izon. These a e he pe iods whe e disc e iona y policy changes and iscal impulse may be o mos in e es . Blancha d (1993) poin s ou ha he CAB was no designed as an indica o o changes in disc e iona y iscal policy, and i elies needlessly on he unce ain calcula ion o po en ial ou pu . -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 % GDP OBERAC S uc u al Balance Fo ecas s WP 02/30 | INDICATORS OF FISCAL IMPULSE FOR NEW ZEALAND 11 Ins ead, Blancha d sugges s he use o an indexed app oach. His sugges ed indica o o disc e iona y iscal policy has become known as he Blancha d Fiscal Impulse (BFI) (see o example, Alesina and Pe o i, 1995, 1997; and a ious pape s in Bank o I aly, 1999). The BFI is de ined as he alue o he p ima y su plus which would ha e p e ailed, we e unemploymen a he same alue as in he p e ious yea , minus he alue o he p ima y su plus in he p e ious yea , bo h as a a io o GDP in each yea (see Blancha d, 1993). Blancha d emo es ne in e es paymen s as a simple way o adjus ing he balance o changes in in la ion and eal in e es a es. Fluc ua ions in ne in e es paymen s a e also conside ed non-disc e iona y. The BFI is essen ially a cyclical adjus men ha elimina es om he iscal balance changes in axes and ans e s due o changes in he unemploymen a e (Alesina and Pe o i, 1997). Al hough he BFI app oach a oids he need o es ima e po en ial ou pu , Kea ney, McCoy, Du y, McMahon and Smy h (2000) no e ha i assumes a s able ela ionship be ween changes in unemploymen and economic ac i i y, which may no be app op ia e (especially du ing pe iods o s uc u al change). Ano he app oach is o use a s uc u al VAR, which akes in o accoun any eedback be ween iscal policy and he economic cycle (see Bou he illain and Quine , 1999; Kea ney e al., 2000). The s uc u al balance es ima ed ia he wo-s ep me hod a emp s o emo e he e ec o he economic cycle on he iscal balance, bu igno es he ac ha he iscal balance also may a ec he economic cycle. Bou he illain and Quine (1999) and Kea ney e al. (2000) es ima e a wo- a iable s uc u al VAR model ha decomposes luc ua ions in he de ici - o-GDP a io in o hose a ising om shocks o ou pu (assumed o ha e pe manen e ec s) and changes in he de ici i sel (assumed o ha e ansi o y e ec s). Howe e , Kea ney e al. sugges ha he s uc u al VAR me hod can be un eliable in he p esence o s uc u al change. O he disad an ages o his me hod a e ha he iden i ying p ocedu e is subjec i e so ha he es ima es a e sensi i e o small changes in he es ic ions. In addi ion, he s uc u al VAR me hod is no simple o upda e when new in o ma ion becomes a ailable, making i di icul o moni o an indica o based on a s uc u al VAR app oach on a egula basis. WP 02/30 | INDICATORS OF FISCAL IMPULSE FOR NEW ZEALAND 12 4 Es ima es o Fiscal Impulse o New Zealand This sec ion p o ides es ima es o iscal impulse o New Zealand om 1992 un il he end o he 2002 Budge o ecas ho izon (yea ended June 2006). The sec ion also examines sensi i i ies o a “base indica o ” o some o he key judgemen s ou lined abo e. 4.1 Fiscal balance, capi al and cyclical adjus men F om he discussion in Sec ion 3.1, he calcula ions a e based on GAAP in o ma ion. In using GAAP we s ill need o es ablish he app op ia e de ini ion o go e nmen . Fo example, should he measu e include S a e-owned en e p ises and C own en i ies? S a e-owned en e p ises a e excluded because o he independence hey ha e ega ding ope a ing and capi al decisions. We ha e excluded hi d pa y e enues o C own en i ies as well as hei capi al spending. On he ope a ing side, because C own en i ies a e la gely in ol ed in deli e ing co e C own se ices (e.g., heal h and educa ion), much o hei income and spending is cap u ed in he co e. Table 1 p o ides he ansac ions included in he calcula ions, using a s ylised ep esen a ion o he segmen no es o he GAAP inancial s a emen s. No e ha o al C own consolida es he co e C own wi h S a e-owned en e p ises and C own en i ies on a line-by-line basis.14 The able iden i ies hose ansac ions ele an o he base indica o and hose ha a e no applicable. Table 1 – De ini ion o go e nmen o base indica o o iscal impulse Co e C own C own en i ies S a e-owned en e p ises Income Yes NA NA In es men income NA NA NA Cu en spending Yes NA NA Finance cos s NA NA NA Capi al spending Yes NA NA No es: NA indica es ha he ansac ion is no applicable o he base indica o o iscal impulse. Income o he Co e is la gely ax. C own en i ies a e unded om he co e and hi d-pa y e enues. Income o S a e-owned en e p ises comes om he sales o goods and se ices. The able igno es in e -segmen elimina ions. Sec ion 3.1 no ed wo op ions o he iscal balance. Al hough he OBERAC is he mo e amilia concep , we s a di ec ly wi h a cash measu e, ne cash lows om ope a ions (NCFFO). O e he pe iod 1992 o 2001 he co ela ion coe icien be ween he annual p ima y NCFFO and he annual p ima y OBERAC (be o e dep ecia ion) is 0.986. Because we a e in e es ed in a p ima y concep , he iscal balance is calcula ed be o e in es men income (i.e., in e es income and di idend income) and inance cos s. In e ms o capi al ansac ions, he e a e i e i ems in he S a emen o Cash Flows ha a e po en ially ele an o he capi al adjus men . I ems ha ha e he g ea es impac a e likely o be hose ha inc ease he demand on eal esou ces, as opposed o ansac ions ha simply ans e esou ce use om one sec o o ano he . Table 2 lis s he i e i ems 14 De ails on ull line-by-line consolida ion can be ound in he 2002 Budge Economic and Fiscal Upda e (pp. 97-105). WP 02/30 | INDICATORS OF FISCAL IMPULSE FOR NEW ZEALAND 13 o physical and inancial capi al, along wi h a judgemen abou whe he hese a e likely o impac on agg ega e demand.15 Table 2 – Capi al ansac ions Capi al ansac ion Likely impac on agg ega e demand Reason Ne pu chases o physical asse s.* Yes o mos excep de ence pu chases. De ence asse s a e la gely impo ed. Ne inc eases in ad ances ( his is la gely loans o s uden s and hospi als). Yes o s uden loans. Yes o loans o hospi als (excluding e inancing o exis ing loans). No o o he ad ances. S uden loans la gely spen on consump ion. Loans o hospi als a e la gely o capi al expendi u e. Ne pu chases o in es men s ( his includes capi al injec ions o S a e- owned en e p ises and C own en i ies, pu chase and sale o exis ing en i ies). Yes o capi al expendi u es. No o pu chase / sale o exis ing en i ies. Mos capi al injec ions a e likely o be o capi al expendi u e. Pu chases and sales o exis ing en i ies ep esen a ans e o esou ces. Fo ecas o u u e new capi al spending. This is an amoun o capi al spending included in o ecas s (pa o his will inc ease he exis ing physical asse base). Yes o mos . No o de ence. Some o he o ecas amoun will be spen on pu chases o physical asse s. Some will also be spen on de ence, which is la gely impo ed. Con ibu ions o New Zealand Supe annua ion Fund (in ol es in es ing in inancial asse s o u u e NZS expenses). Unlikely. Likely o ha e li le di ec e ec . Will be in es ed in inancial asse s, and i is likely ha a la ge po ion will be in es ed o sho e. No e: “Ne ” in his able means ne o sales as opposed o ne o dep ecia ion. Pu chases o physical asse s in he cash low s a emen a e no di ec ly compa able wi h SNA public in es men con ained in T easu y’s SNA economic o ecas s. Co e C own physical asse s a e la gely in land, buildings, mili a y equipmen and s a e highways. Co e C own physical asse s a e a ound wice he alue o C own en i y physical asse s, whe e he la e a e la gely in housing, heal h and educa ion. Ad ances and ne pu chases o in es men s (excluding asse sales/pu chases) can be included in he capi al adjus men as a p oxy o disc e iona y new capi al spending ou side he co e C own. Howe e , on he wi hd awal side his igno es hi d-pa y e enue le ied by en i ies ou side he co e. On he injec ions side i may no cap u e all capi al spending. Re ining he iscal impulse indica o o be e cap u e he ole o C own en i ies is an a ea o u he in es iga ion. This will likely u ilise he mo e de ailed in o ma ion a ailable unde ull line- by-line consolida ion and will shi he measu e o mo e closely e lec he i s wo columns in Table 1 abo e. Based on Table 2, he capi al adjus men in ou base indica o includes: ne pu chase o physical asse s (excluding de ence), he o ecas o u u e new capi al spending (excluding expec ed de ence capi al) and inc eases in s uden loans. We examine he e ec o al e na i e capi al adjus men s in he sensi i i y analysis o Sec ion 4.4. In GAAP, asse sales and pu chases low h ough he S a emen o Cash Flows and no he S a emen o Financial Pe o mance. We ollow Helle e al. (1986) in excluding he sale o pu chase o s a e-owned en i ies om he calcula ions. In a adi ional cash based measu e o he iscal balance, he sale o an asse is included as an i em “abo e he line”. 15 This is somewha a bi a y because we ha e no made simila judgemen s on he ope a ing side. Howe e , because iscal impulse is measu ed as a change, he lumpy na u e o capi al means he adjus men s will be mo e impo an on he capi al side. WP 02/30 | INDICATORS OF FISCAL IMPULSE FOR NEW ZEALAND 14 The sale esul s in a cash su plus o educed de ici because i lowe s he go e nmen s bo owing equi emen . In a na ional accoun s amewo k he sale is no ea ed as a e enue i em because i is no di ec ly ela ed o economic ac i i y. Ra he , he go e nmen has changed he composi ion o i s asse s (see Helle e al., 1986, p.28). Finally, T easu y’s wo-s ep cyclical adjus men me hod is used o emo e he e ec o he economic cycle because i is al eady a me hod used by he T easu y, and i is easonably simple o upda e. The adjus men is applied only o he ope a ing componen s o he NCFFO. The capi al componen is no cyclically adjus ed. 4.2 Base indica o Using in o ma ion om he Budge Economic and Fiscal Upda e 2002, Table 3 se s ou he calcula ion o a base indica o o iscal impulse. The iscal balance epo ed in Table 3 deduc s capi al spending (line ‘b’) om p ima y s uc u al ne cash lows om ope a ions (line ‘a’). P ima y s uc u al ne cash lows om ope a ions a e e med he p ima y s uc u al balance. The iscal balance and he p ima y s uc u al balance (bo h ela i e o nominal GDP) a e plo ed in Figu e 2. The p ima y s uc u al balance is la ge because i co e s only ope a ing expendi u e and no he capi al adjus men . Al hough he p ima y s uc u al balance is posi i e h ough he en i e pe iod, ac ual ne cash lows om ope a ions we e nega i e in 1992 and 1993. Fo example, he e was a ne cash low de ici o $2,021 million in 1992. The di e ence wi h espec o he p ima y s uc u al balance is due o es ima ed cyclical ac o s o $866 million ( he es ima ed ou pu gap was nega i e) and $2,980 million o ne in e es paymen s. Table 3 – Base indica o o iscal impulse Yea ended June 2001 2002 2003 2004 2005 2006 $ million A c ual Es . Ac ual Fo ecas Fo ecas Fo ecas Fo ecas To al cash om ope a ions 38,471 40,964 42,436 44,488 46,467 48,301 To al cash o ope a ions 36,549 38,160 39,725 41,391 42,930 44,686 Ne cash lows om ope a ions (NCFFO) 1,922 2,804 2,711 3,097 3,537 3,615 S uc u al NCFFO 1,976 2,861 2,653 2,974 3,537 3,615 Ne in e es paymen s 1,557 1,065 1,252 1,258 1,247 1,151 P ima y s uc u al NCFFO (a) 3,533 3,926 3,905 4,232 4,784 4,766 Capi al adjus men Ne pu chases o physical asse s (excluding de ence) 842 950 1,224 1,022 942 969 Ne inc ease in ad ances o s uden s 668 708 773 799 810 821 Fo ecas o u u e new capi al spending (excluding expec ed de ence) 0 0 190 360 310 260 To al capi al adjus men (b) 1,510 1,658 2,187 2,181 2,062 2,050 Fiscal balance ( = a - b) 2,023 2,268 1,718 2,051 2,722 2,716 Fiscal balance (% GDP) 1.8 1.9 1.4 1.6 2.0 1.9 Fiscal impulse (change in balance, % GDP) 0.9 0.1 -0.5 0.2 0.4 -0.1 Memo andum i ems P ima y s uc u al NCFFO (a) (% GDP) 3.1 3.3 3.1 3.2 3.5 3.3 Change in p ima y s uc u al NCFFO (% GDP) 1.1 0.2 -0.1 0.1 0.3 -0.2 Dep ecia ion 925 943 1,013 1,059 1,084 1,106 Nominal GDP 114,145 120,309 124,964 131,293 137,201 143,026 WP 02/30 | INDICATORS OF FISCAL IMPULSE FOR NEW ZEALAND 15 Figu e 2 – P ima y s uc u al balance and iscal balance Sou ce: The T easu y In b oad e ms, changes in he balances plo ed in Figu e 2 sugges a igh ening o iscal policy in he ea ly 1990s, ollowed by a loosening un il he la e-1990s. This e lec s he 1996 and 1998 ax cu s (which occu ed in he 1997 and 1999 iscal yea s) and inc eases in p ima y expendi u e. Be ween 1996 and 2000, bo h he p ima y s uc u al balance and he iscal balance declined by 3.8 pe cen age poin s o GDP. Es ima ed p ima y s uc u al eceip s dec eased om 35.1% o GDP in 1996 o 32.6% in 2000. Es ima ed p ima y s uc u al (ope a ing) expendi u es we e 29.4% in 1996 and 30.6% in 2000.16 In ecogni ion o he po en ially di e en e ec s o axes and spending, Figu e 3 shows he pa hs o p ima y s uc u al eceip s and p ima y s uc u al ou lays, whe e ou lays a e ope a ing plus he capi al adjus men . 16 New Zealand’s iscal consolida ion was concen a ed in he ea ly o mid-1990s, whe eas OECD coun ies gene ally consolida ed in he la e hal o he decade. Analysis by he OECD (1999, Figu e I.9, p.21) indica es ha o e he pe iod 1995 o 1999, only wo ou o wen y OECD coun ies expe ienced a all in hei es ima ed s uc u al iscal balance, New Zealand and Japan. (In o de o acili a e he c oss-coun y compa ison, he OECD use di e en iscal in o ma ion o ha used he e. Bu he gene al poin o an easing s ill holds.) 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Fo ecas sP ima y s uc u al balance Fiscal balance % GDP WP 02/30 | INDICATORS OF FISCAL IMPULSE FOR NEW ZEALAND 16 Figu e 3 – P ima y s uc u al eceip s and p ima y s uc u al ou lays Sou ce: The T easu y Fo a coun y unning s uc u al iscal de ici s, an inc ease in he absolu e alue o he s uc u al de ici is ypically de ined as expansiona y. In a si ua ion o s uc u al su pluses, an inc ease in he absolu e alue o he s uc u al iscal su plus should be in e p e ed as a igh ening o policy ela i e o he p e ious yea . No e ha 1992 is los because iscal impulse is calcula ed as a change. Figu e 4 indica es ha he inclusion o he capi al adjus men has some in luence on he in e p e a ion o iscal impulses ela i e o changes in he p ima y s uc u al balance. Fo example, iscal impulses in he ea ly o mid-1990s di e somewha in e ms o magni ude, al hough ac oss his o y and he o ecas pe iod impulses om bo h he measu es a e in he same di ec ion. 15.0 20.0 25.0 30.0 35.0 40.0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Fo ecas s P ima y s uc u al eceip s P ima y s uc u al ou lays % GDP WP 02/30 | INDICATORS OF FISCAL IMPULSE FOR NEW ZEALAND 17 Figu e 4 – Base indica o o iscal impulse and change in p ima y s uc u al balance Sou ce: The T easu y Helle e al. (1986) cau ion ha iscal impulse a bes “…p o ides a measu e o he magni ude o he ini ial s imulus o agg ega e demand a ising om he ne e ec s o iscal policy in a gi en pe iod” (p.4). Whe he a pa icula iscal impulse ac ually has an expansiona y o con ac iona y e ec depends on some o he issues and limi a ions aised in Sec ion 2 (i.e., le els o go e nmen deb , expec a ions su ounding he pe manence o he change, mone a y policy condi ions and he mix o ax and spending changes behind he iscal impulse). Fo hese easons i is inapp op ia e o compa e iscal impulses o app oxima ely equal magni ude (e.g., he base indica o in 1993 and 2005) as ha ing equal e ec s on agg ega e demand. Some o he ele an judgmen s o conside when assessing whe he a con ac iona y iscal impulse will ac ually ha e a con ac iona y impac on he economy include he composi ion o he change in iscal policy (e.g., be ween changes in axes, ans e paymen s, public sec o employmen and wages, and in es men ). Expec a ions and assump ions abou he deg ee o o esigh o consume s may also be ele an . Fo example, New Zealand’s longe - e m bias owa ds s uc u al igh ening (a leas in he ini ial s ages o pa ially p e- unding u u e New Zealand Supe annua ion expenses) could mean ha an inc easing s uc u al iscal su plus is less con ac iona y on he economy han in he absence o such a p e-signalled bias. Alesina and Pe o i (1995) use a classi ica ion sys em o iden i y signi ican iscal expansions and con ac ions.17 Measu emen o iscal impulse is unce ain, and i is use ul o iden i y how la ge he change in iscal policy should be be o e i is conside ed “expansiona y” o “con ac iona y”. 17 The classi ica ion sys em uses he Blancha d Fiscal Impulse (BFI) measu e as he ele an iscal indica o . -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Fo ecas s Tigh e Loose Base indica o Change in p ima y s uc u al balance % GDP WP 02/30 | INDICATORS OF FISCAL IMPULSE FOR NEW ZEALAND 18 Re-w i ing he Alesina and Pe o i de ini ion o he budge balance ins ead o he budge de ici , iscal impulses a e: …when he iscal indica o is: Ve y loose less han minus 1.5 % o GDP Loose be ween minus 0.5 and minus 1.5 % o GDP Neu al be ween minus 0.5 and 0.5 % o GDP Tigh be ween 0.5 and 1.5 % o GDP Ve y igh mo e han 1.5 % o GDP Using his sys em, his o ical iscal impulses om he base indica o in Figu e 4 we e easonably “ igh ” in he yea s om 1993 o 1996, and 2001 and “loose” in 1997, 1999 and 2000. Only one o he his o ical impulses, in 1997, exceeds he e y igh /loose bounda ies. Al hough he iscal balance gene ally ollows he p ima y s uc u al balance in Figu e 2, he e a e occasions whe e he na u e o he capi al adjus men c ea es a di e gence. This di e gence eeds h ough in o he iscal impulses in Figu e 4. The yea ending June 2001, which is he las ac ual obse a ion, shows a igh ening compa ed o 2000. The change in he capi al adjus men be ween hese wo yea s is modes and he igh ening e lec s an inc ease in he p ima y s uc u al balance ( e e Figu e 2). Looking o wa d, p ima y s uc u al balances a e o ecas o a e age jus o e 3% o GDP. These balances a e lowe a e he capi al adjus men is made (al hough no e ha he capi al adjus men in he o ecas pe iod is on a e age la ge han in he his o ical pe iod). The base indica o iscal impulses a e on a e age close o neu al o e he o ecas ho izon as he impulses a e in he minus 0.5 o +0.5 ange. Es ima es o iscal impulse o e he o ecas ho izon should be ea ed mo e cau iously han he his o ical es ima es o wo easons. Fi s , es ima es o po en ial ou pu a e mo e unce ain owa d he end o he his o ical sample pe iod and in o he o ecas ho izon. Second, he indica o is based on ex an e spending in en ions. Delays in he implemen a ion o spending plans, especially on he capi al side will mean a change in he iming o he ac ual demand impac . 4.3 App oach o iden i ying disc e iona y policy This sec ion compa es he wo-s ep me hod o cyclical adjus men wi h he Helle e al. me hod and he Blancha d Fiscal Impulse (see he Appendix). No e ha he same capi al componen is included in each me hod. Figu e 5 shows ha in all yea s he Helle e al. measu e o iscal impulse is he same sign as he base indica o and o a b oadly simila magni ude. This s ems la gely om he ac ha de elopmen s in po en ial ou pu a e cen al o bo h indica o s. The Helle e . al. me hod does no adjus o he elas ici y o axes wi h espec o ou pu (see Appendix). Howe e , his does no c ea e a di e gence because he assumed elas ici y is close o uni y. WP 02/30 | INDICATORS OF FISCAL IMPULSE FOR NEW ZEALAND 19 Figu e 5 – Compa isons o disc e iona y measu es Sou ce: The T easu y The simila i y be ween hese wo me hods endo ses he indings o Chalk (2002) no ed in Sec ion 2.2 abo e. In con as , he BFI di e s in di ec ion om he base indica o in a numbe o yea s. Like he o he wo measu es, he BFI picks up he easing o 1997. Ye in 2001 he BFI sugges s a close o neu al iscal impulse, whe eas he o he indica o s sugges a igh ening. Unlike he wo o he me hods, he BFI elies on de elopmen s in unemploymen . Changes in unemploymen need no ack closely wi h de elopmen s in he ou pu gap (e.g., he e may be a lag). All h ee indica o s ell a simila s o y o e he o ecas pe iod. Howe e , i is likely ha he simila i y e lec s he ela i ely small economic cycle and s able unemploymen a es o e he o ecas pe iod compa ed o his o y, so ha he e is less di e ence be ween he di e en me hods o adjus ing o he cycle. 4.4 Capi al adjus men s The capi al adjus men equi es judgemen s abou which capi al i ems o include. Because he end in he wo balances in Figu e 2 is b oadly simila o e ime he iscal impulses ell a easonably simila s o y. The yea s whe e he e a e di e ences be ween he indica o s e lec changes in capi al spending. Fo example, in 2003 he inc ease in o ecas capi al spending means ha he base indica o shows iscal policy is loosening, while he p ima y s uc u al balance shows ha iscal policy is close o neu al. Figu e 6 looks a he sensi i i y o iscal impulses o di e en capi al adjus men s. The base indica o o iscal impulse is compa ed wi h wo al e na i e capi al de ini ions. The i s al e na i e is a ”na ow” capi al de ini ion ha includes ne pu chases o physical asse s and o ecas u u e new capi al spending. In con as o he base indica o his de ini ion includes all ac ual and expec ed de ence capi al pu chases. This na ow de ini ion is simila o he measu es used by he Uni ed Kingdom and Aus alian T easu ies. I is a guably a be e p oxy o di ec esou ce claims and b ings he iscal balance close o a GFS/SNA ne lending concep . The second al e na i e is a “b oad” -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Fo ecas s Tigh e Loose Base indica o Helle e .al. iscal impulse BFI % GDP WP 02/30 | INDICATORS OF FISCAL IMPULSE FOR NEW ZEALAND 26 Appendix 1. The s uc u al iscal balance The s uc u al iscal balance p o ides an es ima e o wha he iscal balance would be i he economy we e a po en ial ou pu . The T easu y’s app oach o es ima ing he s uc u al iscal balance is ou lined in mo e de ail in Tam and Ki kham (2001). The app oach u ilises he es ima ed ou pu gap and he sensi i i y o ax eceip s and unemploymen expendi u es o ou pu .19 The ou pu gap is measu ed as: ** /)( YYYgap −= (1.1) whe e Y is ac ual eal GDP in yea and Y * is po en ial eal GDP in yea . A posi i e (nega i e) alue o gap indica es ha ac ual eal GDP is abo e (below) po en ial eal GDP. Fo he calcula ion o he s uc u al balance, he T easu y es ima es he ou pu gap using he Hod ick-P esco (HP) il e .20 The s uc u al balance is calcula ed using cyclically adjus ed eceip s, cyclically adjus ed unemploymen expendi u e, and o he ope a ing expendi u es. The esponsi eness o eceip s o ou pu depends on wo e ec s, he esponsi eness o he ax ype o a change in i s base (eT,B) and he esponsi eness o he ax base o a change in ou pu (eB,Y). Cyclically-adjus ed eceip s a e calcula ed as: ))(1( ,,, * , YTi i i gapeRR −×+= (1.2) whe e: Ri, * = cyclically adjus ed nominal eceip s i em i in yea Ri, = ac ual nominal eceip i em i in yea gap = ou pu gap in yea ei,T,Y = ei,T,B × ei,B,Y o each eceip s i em i. The elas ici ies o he di e en eceip i ems, wi h espec o ou pu , a e as ollows: Receip i em Elas ici y Indi idual income ax 1.12 Company ax 1.10 Wi hholding ax/O he di ec ax 1.10 GST 1.10 Excise du ies 1.00 O he indi ec ax 1.00 In e es , p o i s and di idends 0.00 O he eceip s 1.00 Sou ce: The T easu y 19 When he app oach is applied o cash measu es, as is he case o he indica o s in his pape , eceip s and expendi u e a e he app op ia e e ms. 20 Tam and Ki kham (2001) use a s uc u al ime se ies model (STAMP) o es ima e po en ial ou pu . They examine he sensi i i y o he es ima ed s uc u al balance o al e na i e me hods o calcula ing po en ial ou pu . WP 02/30 | INDICATORS OF FISCAL IMPULSE FOR NEW ZEALAND 27 The cyclically adjus ed unemploymen a e is de i ed using he ou pu gap and an Okun coe icien β , which is assumed o be 0.5.21 )( gapUU −−= ∗ β (1.3) whe e U is he ac ual unemploymen a e in yea and U * is benchma k unemploymen a e in yea . Cyclically adjus ed unemploymen expendi u e is assumed o mo e p opo ionally o he a io o unemploymen o benchma k unemploymen . 52)( * *×××= U U iesbene icia bene i a e ageUE (1.4) whe e: UE * = cyclically adjus ed nominal unemploymen expendi u e in yea a e age.bene i = a e age weekly bene i in yea bene icia ies = numbe o unemploymen bene icia ies in yea . 2. Helle , Haas and Mansu (1986) measu e o iscal impulse S a wi h he ollowing de ini ion o he iscal balance (whe e no a ion has been changed o ma ch ha used elsewhe e in his pape and he measu es a e on a p ima y basis): )( GRFB −= (2.1) whe e FB is he p ima y iscal balance in yea , R deno es p ima y go e nmen nominal eceip s in yea and G is p ima y go e nmen nominal expendi u e in yea . The iscal balance is decomposed as ollows: FSYY YgY FB −−−−= )]([)( * 0 * 0 * 0 (2.2) whe e: 0 = R0 / Y0 base yea p ima y nominal eceip s- o-nominal GDP g 0 = G0 / Y0 base yea p ima y nominal expendi u e- o-nominal GDP Y = ac ual GDP in nominal p ices in yea Y * = po en ial GDP in nominal p ices in yea R = as de ined abo e G = as de ined abo e FS = measu e o he iscal s ance in yea . The base yea (deno ed by he subsc ip 0) is a yea in which ac ual and po en ial eal GDP a e app oxima ely equal (i.e., ze o ou pu gap). In ou calcula ions, 1994 has he smalles es ima ed ou pu gap. The i s igh -hand-side e m in equa ion (2.2) is he “base yea su plus”. The second e m is he cyclical componen . Equa ion (2.2) can be e- w i en as: FSYgY FB −−= )( * 00 (2.3) Fiscal s ance can be exp essed as: )()( * 00 GYgRY FS −−−= (2.4) 21 See Tam and Ki kham (2001) o de ails. WP 02/30 | INDICATORS OF FISCAL IMPULSE FOR NEW ZEALAND 28 This is he o mula ion p esen ed in Chalk (2002, Table 1). No e ha unlike he s uc u al balance me hod, iscal s ance he e assumes ha nominal axes a e uni elas ic wi h espec o ou pu . Go e nmen expendi u es a e assumed o be uni elas ic wi h espec o po en ial ou pu in nominal p ices. So: • Go e nmen eceip s a e cyclically neu al i hey inc ease p opo iona ely wi h inc eases in nominal ac ual GDP. A mo e han p opo iona e inc ease is con ac iona y ega dless o he sou ce (i.e., om ei he disc e iona y policy o a p og essi e ax s uc u e). • Go e nmen expendi u es a e cyclically neu al i hey inc ease p opo iona ely wi h inc eases in nominal po en ial GDP. A mo e han p opo iona e inc ease is expansiona y ega dless o he sou ce (i.e., om ei he disc e iona y policy o in la ion). Al hough he measu e makes a cyclical adjus men , i includes changes gene a ed by elas ici ies o axes and spending wi h espec o ou pu ha di e om uni y.22 De ining he cyclically neu al e ms in his way alloca es he con ibu ion o au oma ic iscal s abilise s ha a ise om non-uni elas ici ies o he measu e o iscal impulse. The i s di e ence o equa ion (2.4) gi es a measu e o iscal impulse (FI): )()( 0 * 0 Y RYgGFSFI ∆−∆−∆−∆=∆= (2.5a) Y YgFB ∆+∆−∆−= 0 * 0 (2.5b) Helle e al. use ∆ (FS/Y) as a measu e o iscal impulse ela i e o ou pu . The a io o iscal s ance o GDP in a pa icula yea indica es how he iscal policy s ance has changed ela i e o he base yea (whe e by de ini ion, iscal s ance is neu al). Fiscal impulse in a gi en yea e lec s he change in s ance. I FS/Y is unchanged be ween wo pe iods (i.e., ∆ (FS/Y) = 0) hen no addi ional impulse has occu ed. A posi i e (nega i e) alue o iscal impulse indica es ha iscal policy is mo e expansiona y (con ac iona y) ela i e o he p e ious yea . To ensu e consis ency wi h he o he measu es in his pape , we e e se he sign o he impulse measu e so ha a posi i e (nega i e) indica es a igh ening (loosening) wi h espec o he p e ious yea . 3. Blancha d iscal impulse The Blancha d Fiscal Impulse (BFI) is an indic o o disc e iona y iscal policy, and is de ined as he alue o he p ima y su plus which would ha e p e ailed, we e unemploymen a he same alue as in he p e ious yea , minus he alue o he p ima y su plus in he p e ious yea , bo h as a a io o GDP in each yea . ()() 1111 )()( −−−− −−−= g UgU BFI (3.1) whe e deno es p ima y go e nmen eceip s (% GDP) in each yea , g is p ima y go e nmen expendi u e (% GDP) in each yea and U is he unemploymen a e. The BFI has been calcula ed using he equa ions, elas ici ies and Okun coe icien om he T easu y’s s uc u al adjus men app oach. The Okun ela ionship p o ides he link om ou pu o unemploymen . The Okun ela ionship in his case is speci ied as: 22 Tha is, he ou pu gap s ill has an in luence ha needs o be adjus ed o e en i he e is a uni elas ici y. Elas ici ies abo e uni y imply ha he cycle has a mo e han one- o -one e ec . WP 02/30 | INDICATORS OF FISCAL IMPULSE FOR NEW ZEALAND 29 )( 1 1 1 1 UU Y YY −= − − − − β (3.2) Now con e (1.2) in o changes in ou pu om he p e ious yea , a he han de ia ion in ou pu om po en ial:        − += − − − 1 1 ,,,1, 1)( YTi i i Y YY eRYR (3.3) Con e (3.3) in o changes in unemploymen om he p e ious yea by subs i u ing in he Okun ela ionship (3.2) abo e. Con e (1.4) in o he ela ionship be ween cu en and lagged unemploymen , a he han cu en and benchma k unemploymen . This gi es an equa ion o each eceip i em, and an equa ion o unemploymen expendi u e:      −+= −− )( 1 1)( 1,,,1, YTi i i UUeRUR β (3.4) 52)()( 1 1×××= − − U U iesbene icia bene i a e ageUUE (3.5) Ri , (U -1) is a measu e o a eceip i em in yea had he unemploymen a e o he p e ious pe iod p e ailed. Simila ly, UE (U -1) is unemploymen expendi u e in yea had he unemploymen a e o he p e ious pe iod p e ailed. R (U -1) is o al eceip s in yea a he p e ious yea s unemploymen a e, and is de i ed by agg ega ing he adjus ed eceip i ems (i.e., om equa ion 3.4). G (U -1) is de i ed by combining adjus ed unemploymen expendi u e ( om equa ion 3.5) wi h o he ope a ing expendi u e. The BFI can be calcula ed by subs i u ing R (U -1) and G (U -1) in o he equa ion o he BFI (3.1) abo e, and con e ing o % o GDP. 4. The New Zealand T easu y’s EFI The New Zealand T easu y de eloped an Economic and Fiscal Indica o (see T easu y’s B ie ing o he Incoming Go e nmen 1996, p.61), which showed whe he iscal policy is igh e o loose in one yea ela i e o ano he yea . The key di e ence be ween he EFI and o he indica o s o iscal impulse is ha he EFI a emp s o ake in o accoun he composi ion o go e nmen expendi u e and axes. The app oach aken was o conside how a change in iscal policy a ec s he componen s o agg ega e demand (consump ion, in es men , go e nmen spending, and ne expo s), including he eed h ough pa ame e s and elas ici ies. The indica o is he sum o he e ec o he change in iscal policy on each o hese componen s. The key bene i o he EFI is ha i akes in o accoun he composi ion o iscal policy, so ha i may p o ide addi ional in o ma ion in he case o a balanced budge change in iscal policy. I also accoun s o di e en eac ions by di e en households, by assuming ha some households a e liquidi y cons ained while o he s a e no . The key disad an ages o he EFI a e ha he calcula ion is subjec i e and elies on judgemen s a ound economic heo y and pa ame e s such as elas ici ies, i is no cyclically adjus ed and i is no in e na ionally compa able. In addi ion, changes in he ope a ing balance we e ound o p oxy easonably well any changes in he EFI unde a a ie y o scena ios. The mul iplie e ec s in he EFI and he inclusion o some capi al ansac ions do no appea o cause subs an ial di e ences o he s o y being old. E en WP 02/30 | INDICATORS OF FISCAL IMPULSE FOR NEW ZEALAND 30 he EFI could no p o ide a comple e assessmen o he impac o iscal policy on he economy because i is only a pa ial model. Fo example, i does no con ain a supply side, o a mone a y policy eac ion unc ion.