By BRIAN FALLOW
The latest batch of Treasury working papers contains some economic research which is quietly subversive of Michael Cullen's proposed superannuation fund, or, for that matter, other costly fiscal initiatives like tax cuts.
It relates to the idea that a budget surplus has both a structural and a cyclical component.
The
cyclical component reflects the working of automatic fiscal stabilisers: in good times tax revenues are boosted and unemployment payments fall, while the reverse applies in a downturn. This component of the fiscal balance is seen as a buffer which should be left alone, allowing the stabilisers to work automatically.
"Automatic stabilisers need to be allowed to run on both the up and the down sides of the cycle," say the working paper's authors, Julie Tam, of Stanford University and Heather Kirkham, of the Treasury.
"There is a temptation for governments to spend the upside gain and then have to finance the fiscal cost of a downturn through borrowing."
The cost of partial prefunding of future New Zealand Superannuation payments is supposed to come from the non-cyclical, structural component of the surplus.
Clearly, then, it is important to get a handle on how much of the surplus at any time is cyclical and how much structural.
But this seems to be an especially slippery thing to measure.
The cyclical components of the budget balance are larger here than in the average OECD country because New Zealand tends to have a more volatile economy cycle, and because tax and Government spending are more sensitive to that cycle.
And, compared with other OECD countries, the automatic stabilisers tend to be more negative during a recession, but the upside more limited.
Different ways of estimating the automatic stabilisers yield broadly similar trends, but the level varies significantly, so that, at any given time, a "structural surplus" depends on the estimation method.
The Treasury uses a two-step approach: first figure out the output gap (between the economy's actual output and its long-term trend), then the elasticities of taxes and Government spending (how much they rise and fall with changes in economic growth).
Tam and Kirkham have tested how sensitive estimates of the cyclical component of the fiscal balance are to different ways of estimating the output gap, to different estimates of the elasticity of tax and spending, and to different lags in tax collection.
They conclude that the size of the cyclical component is most sensitive to the estimated output gap. Plugging in different elasticities or tax collection lags, by contrast, makes little difference.
But at any given time, estimates of the output gap can vary widely. For example, for the June quarter last year, estimates ranged from minus 0.2 per cent of GDP to plus 3.3 per cent, depending on the method used.
They were also liable to be substantially revised, Tam and Kirkham found.
Widely differing estimates of the output gap at any point in time produce quite different estimates of the automatic stabilisers of the budget balance.
A surplus might be entirely cyclical or entirely structural or somewhere in between.
"Large projected operating surpluses could easily disappear if lower economic outcomes are mistakenly assumed to be cyclical," say the researchers.
By BRIAN FALLOW
The latest batch of Treasury working papers contains some economic research which is quietly subversive of Michael Cullen's proposed superannuation fund, or, for that matter, other costly fiscal initiatives like tax cuts.
It relates to the idea that a budget surplus has both a structural and a cyclical component.
The
AdvertisementAdvertise with NZME.