How Uncertain Are Long-Run Fiscal Projections? Non-Parametric Stochastic Modelling for New Zealand

Christopher Ball, John Creedy and Grant Scobie

Australian Economic Review, 2016, vol. 49, issue 1, 59-76

Abstract: type="main" xml:lang="en">

This article introduces uncertainty into a fiscal projection model which incorporates population ageing along with a number of feedback effects. A new non-parametric method of producing stochastic projections is explored. This allows for the complex nature of the observed joint distributions of relevant variables and their time paths. Stochastic projections of a range of policy responses are produced, allowing for uncertainty regarding the world interest rate, productivity growth and the growth rates of two components of per capita government expenditure. The probability of exceeding a given debt ratio in each projection year, using a particular tax or expenditure policy, can then be evaluated. Examples of tax policies designed to achieve a target debt ratio are examined. Policy implications are briefly discussed.

Date: 2016
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