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
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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.