The Budget Economic and Fiscal Update (BEFU) 2007 gives a detailed statement of the Government's financial position including updated economic and fiscal forecasts, analysis of the fiscal position and a summary of specific fiscal risks.

BEFU 2007 was published conjointly with the Fiscal Strategy Report, the Budget Speech and the Executive Summary in the same hard copy publication.

Additional Information

There is also Additional Information that contains detailed economic forecast tables and additional financial information.

Statement of Responsibility

On the basis of the economic and fiscal information available to it, the Treasury has used its best professional judgement in supplying the Minister of Finance with this Economic and Fiscal Update.  The Update incorporates the fiscal and economic implications both of Government decisions and circumstances as at 9 May 2007 that were communicated to me, and of other economic and fiscal information available to the Treasury in accordance with the provisions of the Public Finance Act 1989.

Signature - John Whitehead.

John Whitehead
Secretary to the Treasury

9 May 2007

This Economic and Fiscal Update has been prepared in accordance with the Public Finance Act 1989.  I accept overall responsibility for the integrity of the disclosures contained in this Update, and the consistency and completeness of the Update information in accordance with the requirements of the Public Finance Act 1989.
To enable the Treasury to prepare this Update, I have ensured that the Secretary to the Treasury has been advised of all Government decisions and other circumstances as at 9 May 2007 of which I was aware and that had material economic or fiscal implications.

Signature - Hon Dr Michael Cullen.

Hon Dr Michael Cullen
Minister of Finance

9 May 2007

1 Economic and Tax Outlook

Summary

Real Gross Domestic Product (GDP) growth has re-accelerated after a short period of below-trend growth

  • The economy expanded by 0.8% in the last quarter of 2006, a pace estimated to have been matched in the first quarter of this year.
Figure 1.1 - Growth in real production GDP
Figure 1.1 - Growth in real production GDP
Sources: Statistics New Zealand, The Treasury
  • Quarterly real GDP growth is expected to be maintained at or just below potential (around ¾%) before easing in late 2007. The pace and duration of the current rebound is the main uncertainty of these forecasts.
  • The central forecasts see annual average real GDP growth of 2.6% over the year to March 2008, up from 1.7% in the March 2007 year. Key risks and two alternative scenarios are explored in the Risks and Scenarios chapter.

The upswing is being driven by a rebound in domestic demand

  • Household consumption and investment spending have rebounded. The recent momentum is expected to be sustained for the next few quarters on the back of ongoing strong labour income growth. Additional support has come from somewhat lower oil prices, the recent pick-up in house price growth and immigration flows, the final stage of Working for Families and the high exchange rate keeping prices for imported goods and services low.
  • Business investment has rebounded sharply, while government consumption and non-market investment are forecast to contribute around a total of 0.2 percentage points to quarterly growth.

The brief period of slower growth was not enough to lower inflation pressures which remain elevated and the exchange rate is near post-float highs 

  • Despite an expected temporary easing in annual Consumers Price Index (CPI) inflation to 1.7% in September 2007, associated with volatile petrol prices and the high exchange rate, the domestic, non-tradables bias of growth means strong medium-term inflation pressures are forecast to persist. CPI inflation is expected to return to near the top of the 1% to 3% target range by March 2008.
Figure 1.2 - Output Gap and annual nontradables inflation
Figure 1.2 - Output Gap and annual nontradables inflation
Sources: Statistics New Zealand

 

  • Recent increases in the prices of some major export commodities have boosted the terms of trade, which is forecast to contribute to a fall in the current account deficit over 2007. Nevertheless the current account deficit is expected to remain above its long-run average.
  • In response to more persistent inflation pressures, short-term interest rates are expected to be higher for longer than forecast in the Half Year Update.

The upswing in growth is not expected to be sustained, allowing inflation to ease eventually

  • Effective mortgage interest rates are expected to increase to an even greater extent, reflecting the rise in swap rates and the recent increase in bank margins on fixed rate loans. This contributes to an eventual decline in household spending growth.
  • Real GDP growth is expected to slow to 1.6% in the March 2009 year. The unemployment rate is forecast to rise to around 4½% in mid-2009 from 3.7% at the end of 2006.
  • The slower period of growth during the March 2009 year is forecast to lead to an easing of non-tradables inflation. CPI inflation is forecast to decline to 2.4% in March 2009, despite solid tradables inflation owing to a forecast depreciation of the exchange rate.

Eventually growth returns to trend and the pattern of growth becomes more balanced as interest rates and the exchange rate fall

  • Export volume growth is expected to increase in the later forecast years as growth in services and manufactured exports accelerates following the forecast exchange rate depreciation from 2008. A lower exchange rate also acts to reduce import growth. The current account deficit is forecast to fall to around 6% of GDP.
  • Despite lower interest rates, weak household spending growth is forecast to continue for a sustained period as people respond to higher debt servicing costs, falling house prices and net wealth, and slower income growth. Somewhat higher unemployment will also make households less sure about job security.
  • Real GDP growth of around 3% is forecast for the March 2010 and 2011 years – around potential.

The more cyclical outlook for growth and inflation will be mirrored in tax revenue growth

  • A higher level of inflation, a lift in the terms of trade and near term strength in domestic demand all contribute to a higher level of nominal GDP than forecast in the Half Year Update until the middle of 2009.
  • Forecasts of tax revenue growth have been revised up for the 2007 and 2008 fiscal years, mainly on the back of higher growth in source deductions (PAYE), GST and Resident Withholding Tax (RWT).
  • In the 2009 June year, the Business Tax Reform (BTR) announced in the Budget sees corporate tax revenue decline and overall tax grow at a pace below nominal GDP growth.
  • Notwithstanding the tax policy changes which reduce the tax take, the ratio of tax revenue is forecast to end the forecast period little changed from what it was in the year to June 2006, and higher than forecast in the Half Year Update. This reflects the removal of the judgement concerning corporate tax losses built into recent forecasts, and labour receiving a greater share of nominal GDP.

The discussion of the forecasts that follows is separated into four parts:

  • the slowdown during the 2005 and 2006 calendar years
  • the current re-acceleration in growth
  • a forecast slowdown in the March 2009 year, and
  • a return to trend growth in the years to March 2010 and 2011.

Table 1.1 – Economic outlook: central forecast [1]

Economic outlook: central forecast
(Annual average % change, year to 31 March) 2006 Actual 2007 Estimate 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Private consumption 4.3 1.7 3.2 1.6 1.6 1.6
Public consumption[2] 4.7 4.4 4.1 3.9 4.0 3.5
Total consumption 4.4 2.3 3.4 2.1 2.1 2.1
Residential investment -4.7 -2.3 3.4 -1.9 -0.5 0.9
Central government investment 6.4 -3.4 4.1 -0.5 -1.7 -0.3
Other investment 7.5 -4.6 5.8 0.2 1.4 4.2
Total investment 4.1 -4.0 4.9 -0.3 0.8 3.3
Stock change[3] -0.5 -0.4 0.8 -0.1 -0.2 -0.1
Gross national expenditure 3.9 0.6 4.4 1.4 1.6 2.3
Exports -0.3 3.1 0.4 3.5 4.1 4.1
Imports 4.1 -1.2 4.8 2.2 0.4 1.6
GDP (production measure) 2.0 1.7 2.6 1.6 2.8 3.1
 - annual % change 1.8 2.3 2.1 1.9 3.0 3.3
Real GDP per capita 1.1 0.6 1.5 0.7 1.9 2.3
Nominal GDP (expenditure basis) 4.6 4.4 5.6 3.5 4.2 4.8
GDP deflator 2.1 2.3 2.6 1.9 1.4 1.7
Employment[4] 2.7 1.8 0.8 1.0 0.5 1.3
Unemployment[5] 3.9 3.8 3.9 4.5 4.4 4.3
Wages[5] 4.7 4.8 4.1 4.0 4.0 3.6
CPI inflation[7] 3.3 2.6 2.7 2.4 2.4 2.2
Export prices[8] 1.0 8.8 -2.6 4.2 9.1 5.5
Import prices[8] 1.8 7.3 -6.0 4.1 9.8 5.7
Current account balance            
  - $ million -14922.0 -13933.2 -12676.9 -12593.1 -12844.5 -12100.9
  - % of GDP -9.6 -8.6 -7.4 -7.1 -6.9 -6.2
TWI[9] 68.3 68.8 69.0 62.3 56.9 54.5
90-day bank bill rate[9] 7.6 7.8 8.0 6.7 6.3 6.2
10-year bond rate[9] 5.7 5.8 6.1 6.1 6.1 6.0

Sources: Statistics New Zealand, Reserve Bank of New Zealand, The Treasury

NOTES:

  • 1 Forecasts finalised on 16 April 2007.
  • 2 The forecast profile for public consumption is influenced by government defence spending.
  • 3 Contribution to GDP growth.
  • 4 Household Labour Force Survey, full-time equivalent employment.
  • 5 Household Labour Force Survey, percentage of the labour force, March quarter, seasonally adjusted.
  • 6 Quarterly Employment Survey, average hourly ordinary time earnings.
  • 7 Annual percentage change.
  • 8 Overseas Trade Index basis, annual average percentage change, March quarter.
  • 9 Average for the March quarter.

Assumptions Underlying the Central Forecast

Global economic activity – global economic growth, inflation and interest rate forecasts are taken from the March 2007 Consensus Forecasts and Asia Pacific Consensus Forecasts. The general outlook remains positive and for steady growth of around 3.6% for our top 14 trading partners over the period. The outlook for the United States economy in 2007 has weakened recently, with growth expected to be only 2.4% in 2007, but stronger growth is now expected in Japan and the Euro Zone in the near term. Growth in Australia is expected to be 3.0% in 2007; and 2.6% in the UK.

Oil prices – prices for West Texas Intermediate (WTI) in the December quarter of 2006 matched the assumption in the Half Year Update, but lower prices in early January contributed to March quarter prices averaging US$58/barrel – around US$4 below the Half Year Update assumption. Futures pricing at the time these forecasts were finalised suggested that prices will increase to US$68/barrel in June 2008 and not fall below this point until the start of 2010. Prices end the forecast period at around US$67/barrel, about US$2/barrel higher than in the Half Year Update.

Net migration – net migrant inflows of around 13,000 are expected in the year to March 2007. Net migration levels are then assumed to fall by around 1,000 a year over the next three years so that net migration totals 12,000 in the year to March 2008, 11,000 in the year to March 2009 and 10,000 in the years to March 2010 and 2011.

Monetary conditions – the NZ dollar exchange rate as measured by the Trade Weighted Index (TWI) is assumed to average 70.0 over the June quarter of 2007 and 69.0 during the next three quarters through to March 2008, before easing to 62.3 in March 2009, 56.9 in March 2010 and 54.5 in March 2011.

Climate – agricultural growing conditions and the level of hydro electricity storage lakes are assumed to be normal over the forecast period.

Growth Eased in 2005 and 2006

New Zealand’s rate of economic growth slowed in 2005 and 2006 …

Figure 1.3 - Real GDP and final domestic demand
Source: Statistics New Zealand

During 2005 and most of 2006 New Zealand’s annual average rate of growth slowed, with real expenditure GDP growth falling from 4.0% at the end of 2004 to 1.5% in September 2006. This followed a period of strong growth between 2002 and 2004, in which real expenditure GDP growth peaked at 5.1% in June 2003. The slowing in domestic demand growth was particularly marked – the contribution to GDP growth from final domestic demand has declined sharply from over seven percentage points during 2004 to just over one percentage point in the year to December 2006.

… as a range of negative forces came together

Reversals in some of the same factors which contributed to the period of strong growth from 2002 to 2004 were behind the slowdown in the 2005 and 2006 calendar years. Declining migration, slowing house price growth and tighter monetary conditions in the latter period led to slower household and business spending, overcoming the effects of the generally high terms of trade, strong labour market and an increase in government consumption and investment spending, which all acted to support growth.

Net migration gains have eased from their peak, contributing to slower growth

Figure 1.4 - Net migration and residental investment
Source: Statistics New Zealand

Annual net migration inflows eased from their peak of 42,500 in mid-2003 to a trough of 6,000 in late 2005 as a result of lower student arrivals, a strengthening NZ dollar and slowing economic growth. An easing in net migration meant less additional demand for housing, with both slower growth in prices for existing houses and a decline in new housing construction. The latter directly reduced domestic demand growth, while slower house price growth acted to slow the rise in households’ wealth and hence their willingness to consume at the same pace as previously.

Annual average growth in private consumption slowed from 6.0% in 2004 to 2.0% in 2006, while growth in residential investment declined – from a peak of nearly 25% in mid-2003 to falls during most of the past two years.

Higher interest rates have slowed growth in domestic demand, but with a lag …

Figure 1.5 - Short-term interest rates and the effective mortgage rate
Source: Reserve Bank of New Zealand

Ninety-day interest rates increased from around 5% in mid-2003 to around 7.5% at the end of 2005. However, the full effect of higher short-term rates was not reflected in effective mortgage rates which increased by less than one percentage point over the same period as a result of access to lower-cost funding from offshore and competition amongst lenders that encouraged borrowers to shift to lower longer-term fixed rates. Despite this, debt servicing costs increased steadily, acting as a drag on household disposable income.

Higher interest rates also increased firms’ financing costs and reduced the attractiveness of additional capital investment. Combined with slower growth in sales, this contributed to growth in business investment declining from a peak of over 15% in mid 2004 to an absolute decline at the end of 2006. Overall, annual average growth in gross national expenditure slowed from 4.0% in 2005 to 0.4% in 2006.

… and the high exchange rate has slowed growth in exports

Increasing terms of trade and large positive interest rate differentials saw the NZ dollar appreciate from below 50 on the TWI in late 2000 to an average of 70.4 in 2005. This has contributed to slower growth in export volumes, particularly for services. Annual export growth declined from an average of 4.4% in the period from 2002 to 2004 to negative in late 2005 to early 2006.

Figure 1.6 - Services exports and TWI
Source: Statistics New Zealand, Reserve Bank of New Zealand

The terms of trade have generally boosted activity …

New Zealand’s terms of trade have trended up since 2002 as strong growth in the world economy was accompanied by increased demand for New Zealand’s export products and various disruptions affected competing agricultural producers. The continuing strength in the terms of trade supported export returns, providing a partial offset to the appreciation of the NZ dollar. The higher exchange rate also increased households’ real incomes as it lifted their purchasing power relative to the rest of the world. This provided some support to private consumption growth. However, increases in oil prices since early 2004 detracted from household disposable income and growth in private consumption during the 2005 and 2006 calendar years.

… and the labour market and government spending have also provided support

The labour market remained buoyant, even with the slowdown in growth. Employment growth was robust, participation reached a record high in mid-2006 and the unemployment rate was below 4% from the second half of 2004. Labour income growth was strong, supporting private consumption and residential investment.

Government transfers, and public consumption (averaging 4.6% growth since the start of 2004) and investment spending also supported growth in domestic demand, both directly and via household spending. However, with receipts growing at an even faster pace, the government in aggregate was withdrawing resources from the economy.

Growth in tax receipts has slowed in line with the easing in activity

Figure 1.7 - Tax component growth
The Treasury

With the slowing in economic growth, growth in tax receipts has eased in the past two years. The largest contributor to this easing was corporate tax, the growth of which declined from a peak of 26% in 2005 to around zero in the year to March 2007, reflecting the trend in corporate profits through that period. The growth rates of the two largest tax types, source deductions and GST, have slowed only marginally since 2005, supported by the recent strength in labour incomes and private consumption mentioned above. Overall, growth in total tax receipts was just under 5% in the year to March 2007, after being up around 10% in 2005.

Resource pressures remain intense and macroeconomic imbalances remain

Despite the period of slower growth, the economy still appeared to be operating at or above capacity. Indicators of firm capacity utilisation remain at a high level, the unemployment rate is near its recent low and firms continue to record difficulty in finding labour at prevailing wages. Annual non-tradables inflation remained above 4% for the three years since December 2003.

The domestic demand-dominated nature of growth led to a widening of the current account deficit from 3.2% of GDP at the start of 2002 to a peak of 9.7% in June 2006. While the deficit reduced slightly in the second half of 2006 as growth in domestic demand – and imports – began to ease and profitability of local firms levelled off, at 9.0% of GDP the deficit remained high at the end of 2006.

Growth Rebounded in Late 2006 and Early 2007

A rebound in some drivers of growth …

Many of the forces which led to the slower growth in the economy in 2005 and 2006, particularly in domestic demand, rebounded towards the end of 2006. Net migration inflows increased, house price growth re-accelerated, petrol prices fell and world prices for some key export commodities increased further. In addition, the labour market and government expenditure have provided continuing support and in aggregate these are outweighing the impact of tighter monetary conditions.

… has seen economic growth re-accelerate and led to a reappraisal of the near term outlook

Real production GDP increased 0.8% in the December 2006 quarter – stronger than the 0.4% increase forecast in the Half Year Update. The expenditure measure of GDP, at 1.2%, increased to an even greater extent, with 3.3% gross national expenditure (GNE) growth. Partial activity indicators point to the pace of growth being maintained in the first quarter of 2007. GNE growth of 4.4% is now forecast for the year to March 2008, compared with 1.7% forecast in the Half Year Update.

Net migration increased in late 2006 …

Figure 1.8 -Consumption and house prices
Sources: Quotable Value New Zealand, Statistics New Zealand, The Treasury

The increase in net migration inflows from their trough of 6,000 in late 2005 to 15,000 in late 2006 contributed to the resurgence in house price growth and private consumption recorded in late 2006 and early 2007. Private consumption expenditure grew 1.1% in the final quarter of 2006, more than in the first three quarters of the year as a whole. Consumption growth is expected to remain solid over the next couple of quarters, lifting annual average growth from 1.7% in March 2007 to 3.2% in March 2008. House price growth has picked up recently and further solid increases are expected until mid-2007, supporting private consumption and encouraging residential investment growth.

… the terms of trade continue to reach new cyclical highs …

The terms of trade increased sharply in the December quarter of 2006, and are expected to increase further during 2007. International dairy spot prices increased 45% in the six months to March 2007, as a result of the drought in Australia and increases in stockfeed prices in the United States, and are likely to remain high through 2007. World oil prices fell 15% in the December quarter of 2006 from their average of around US$70/barrel in mid-2006, and eased a further 3% in March 2007. These developments will support private consumption growth in the near term as lower petrol prices translate into increased household disposable incomes.

… and the labour market remains buoyant

Labour income growth remained buoyant in the second half of 2006, despite a slight fall in employment. Solid labour income growth is expected over much of 2007 as wage growth remains around recent levels and employment levels remain high. These are forecast to support private consumption growth and residential investment in the near term. The increase in Working for Families payments that took effect on 1 April 2007 will work in the same direction by increasing household incomes.

Domestic demand expected to remain solid in 2007, despite higher interest rates …

Ninety-day interest rates increased to around 8.0% in April 2007 as the Reserve Bank increased the official cash rate to 7.75% on 26 April. In addition, local banks have raised their retail mortgage rates for two-year and five-year fixed-rate loans to increase their margins. Interest rates are now expected to be higher for longer than in the Half Year Update, because of the stronger domestic demand and increased inflation pressures that are expected to arise as a result. The increase in interest rates, and the impact of past rate rises progressively being reflected in effective mortgage rates, are expected eventually to dampen consumption and investment demand. However, over the near term other factors (discussed above) are forecast to dominate, resulting in some continued momentum in domestic demand growth in 2007. How long this lasts is a key judgement which is explored in the Risks and Scenarios chapter.

Figure 1.9 - 90-day interest rates
Sources: Reserve Bank of New Zealand, The Treasury

… but the high NZ dollar will limit export growth and increase import growth

Figure 1.10 - TWI exchange rate
Sources: Reserve Bank of New Zealand, The Treasury

The NZ dollar reached a new post-float high of just under US$0.75 in April 2007. At its current level above 70.0 on the TWI, the NZ dollar is well above its estimated equilibrium value and adversely affecting returns to many exporters. Together with robust domestic demand growth, the high dollar is expected to see import growth remain strong. The dollar is assumed to average around 69.0 on the TWI through to March 2008, higher than in the Half Year Update. Export volume growth is expected to decline to 0.4% on an annual average basis in March 2008, while import volume growth is expected to peak at 5.6% in the 2007 calendar year.

Businesses are positive about their own prospects …

Business investment growth increased in the second half of 2006. This likely reflected the renewed strength in domestic spending, the high exchange rate reducing the cost of imported investment goods, as well as difficulties in finding labour and increasing labour costs. Businesses remained positive about the outlook for their own activity in early 2007 and investment and employment intentions were positive. Business investment is estimated to have remained strong in the first quarter of 2007 and the annual average rate of growth is expected to reach 5.8% in March 2008.

… and growth in domestic demand is forecast to remain strong over most of 2007

Production GDP is estimated to have increased by 0.9% in the March 2007 quarter, taking annual average growth to 1.7%, off its low of 1.4% recorded in September 2006. Quarterly growth rates are expected to ease over the next two quarters, but annual average growth will reach 2.9% in September 2007. Growth in GNE is estimated to be stronger at 1.4% in the March quarter and forecast to be 1.0% in each of the next two quarters, taking annual average growth to 4.7% in 2007 as a whole.

Non-tradables inflation will remain high for some time

The resurgence in domestic demand in the last quarter of 2006 and the first quarter of 2007 led to higher inflation in non-tradable goods and services in the March 2007 quarter, with a quarterly increase of 1.2% and an annual increase of 4.1%. Consumer price inflation is expected to fall below 2.0% in June and September 2007 but to increase again to 2.6% in December 2007, with past changes in petrol prices responsible for the volatility. With the recent resurgence in domestic demand, inflation is expected to be higher throughout the forecast period than forecast in the Half Year Update.

Growth Forecast to Slow and Imbalances Expected to Subside During 2008 and 2009

The impetus to growth from a number of current drivers is expected to weaken

The aggregate effects of the above forces that are currently boosting growth are expected to wane as 2007 progresses. From late 2007 and through most of 2008, we expect the influence of the high exchange rate and higher interest rates to become the more dominant driver of the economy.

The central forecast assumes that the TWI will average around 69.0 through to March 2008, with most of the factors currently supporting the NZ dollar expected to remain in place. This level is below 71.7, the rate prevailing at the time the forecasts were finalised.

Export revenue growth is likely to continue to be restricted by the high level of the exchange rate and a forecast decline in the terms of trade …

Figure 1.11 - SNA total terms of trade
Sources: Statistics New Zealand, The Treasury

Export revenues are forecast to be flat through most of 2008. This reflects the impact of the level of the exchange rate, as well as a forecast decline in the terms of trade during the 2008 calendar year. We expect that the factors currently pushing the world prices of some exports, particularly dairy, to record high levels will not be sustained throughout the forecast period. Supply conditions in other parts of the world are expected to return closer to normal levels, while demand is expected to ease somewhat, given the current high prices.

The assumed depreciation of the exchange rate during 2008 is consistent with the forecast decline in the terms of trade and a narrowing of interest rate differentials.

… while volumes, particularly of services exports, are forecast to remain under pressure during 2008 …

Our estimates suggest that exchange rate sensitive components of export volumes, particularly services, forestry and manufacturing, are affected by the exchange rate with a lag of around three to four quarters. The high level of the exchange rate has limited export volume growth in recent times, and with the depreciation in the exchange rate in the central forecast not expected to occur until the middle of 2008, a sizeable increase in export volumes is not expected until the latter part of 2008 and then more strongly in 2009.

Figure 1.12 - Export volumes
Sources: Statistics New Zealand, The Treasury

How long the exchange rate remains at elevated levels is a key judgement in the central forecast

New Zealand’s historical experience shows that the exchange rate can move through large cycles. If the level of the exchange rate reached during April 2007 is maintained for only a short period of time, followed by a depreciation, the effect on export volumes will not be as large as in the central forecast. The Risks and Scenarios chapter highlights a scenario where the exchange rate depreciates quickly.

Increases in effective interest rates during 2007 are expected to lead to an easing in domestic demand …

Most home loans in New Zealand are for fixed durations, albeit of a relatively short nature. As a result it takes time for increases in the Official Cash Rate (OCR) to flow into the actual interest costs faced by households, and therefore some time to affect their behaviour. Although people have moved onto longer-term loans, they will eventually feel the effect of past rate rises.

Figure 1.13 – Final domestic demand – percentage point contribution to growth
Sources: Statistics New Zealand, The Treasury

In such an environment we expect households to be more cautious about increasing their expenditure through the accumulation of debt than in the recent past and this is forecast to reduce private consumption growth. The level of household debt is forecast to increase, but the rate of increase is forecast to be slower than in the recent past. Households are also likely to be more reluctant to undertake substantial new investments in housing. Residential investment is forecast to fall by around 5% in the year to March 2009.

Further discussion of some of the factors affecting household decisions is provided in the box titled “Drivers of Private Consumption”.

… and an end to house price increases

Higher interest rates, as well as declining GDP growth rates, are forecast to lead to an easing in demand for houses. A small fall in house prices is forecast between March 2008 and March 2009. The end of large house price increases will see households’ net wealth position retrace some of the increases made over recent years, removing one of the key drivers of the recent strength in private spending.

Fiscal policy is expected to make a smaller contribution to domestic demand

Additions to government spending are forecast to be smaller during the 2009 March year than in the preceding years, with the additional impetus from Working for Families easing and slower growth in public consumption and non-market investment. The impact of government assistance through the Working for Families package is touched on in the “Drivers of Private Consumption” box.

While the contribution to domestic demand from government spending is expected to be smaller during the 2009 March year onwards, compared with the two to three preceding years, the combined influence of public consumption and non-market investment is forecast to provide a relatively steady contribution of just under ¾ percentage points to annual average growth.

Low export growth and slowing domestic demand add up to a period of weak GDP growth …

A period of below-trend GDP growth is forecast during the 2008 calendar year, with quarterly growth rates of ¼ - ½% expected throughout the year. As a result, annual average GDP growth is forecast to fall to 1.6% in the 2009 March year.

… and a softer labour market outlook

Figure 1.14 – Compensation of employees
Sources: Statistics New Zealand, The Treasury

The outlook for profit growth in the March 2009 year is weak. Slowing economic activity is forecast to be followed by an easing in employment growth, a lift in unemployment and easing in wage inflation. Slowing domestic demand is likely to adversely affect the profitability of firms and – as margins and profits come under pressure – it is likely that weak employment growth will see the unemployment rate rise. The unemployment rate is forecast to increase to 4.6% during the middle of the 2009 calendar year. A weaker labour market is also expected to lower the rate of income growth, with the annual average growth rate of compensation of employees expected to decline to 4.8% in March 2009, after generally being in the 6.5% to 7.5% range throughout the period June 2001 to December 2006. This leads to a fall in the rate of growth of tax revenue from source deductions.

The reaction of households to the gradual removal of a number of the drivers of the recent re-acceleration in activity is an important judgement

To date, household spending has proved resilient in the face of higher interest rates. This in part reflects the partially offsetting effects coming from steady labour income growth, low unemployment and the effect on import prices of exchange rate appreciation. While the central forecast incorporates a sustained period of weak growth, there is still a risk that domestic demand maintains momentum for a longer period of time. The Risks and Scenarios chapter describes the possible result of this outcome.

The forecast easing in domestic demand and the eventual depreciation of the exchange rate are forecast to lead to a slow unwinding of imbalances …

A positive output gap (where GDP exceeds the economy’s capacity to produce goods and services without generating high rates of inflation) has opened up in recent years. This generated pressure on available resources in the economy and led to the prolonged period of high non-tradables inflation recorded since 2004. Looking forward, sub-trend quarterly growth is expected to eventually generate a negative output gap, removing non-tradables inflation pressure from the economy.

… with CPI inflation forecast to ease, allowing room for cuts in interest rates

Figure 1.15 – Inflation
Sources: Statistics New Zealand, The Treasury

The easing of pressure on resources as the economy slows is expected to lead to slowing rates of non-tradables inflation. However, the assumed depreciation of the exchange rate during 2008 adds to tradables inflation and means that total CPI inflation is forecast to remain at 2.4% in 2009 and 2010.

The easing of non-tradables inflation is closely linked to productivity growth. The central forecasts incorporate productivity growth lifting to an average of around 1.5% over the forecast period, following lower productivity growth over recent times. A period of weaker productivity growth during the forecast period would be associated with lower potential GDP, and consequently a combination of lower actual GDP growth and/or higher inflation.

With inflationary pressures dissipating during 2008 and GDP growth rates easing, interest rates are forecast to begin to fall during 2008, after remaining at high levels throughout 2007.

Drivers of Private Consumption

A key area of judgement in our forecasts is the domestic demand outlook – particularly with respect to private consumption. Private consumption growth is forecast to rebound during 2007 after a period of weak growth during 2005 and 2006, before moderating again in the March 2009 year and remaining low thereafter. Some of the factors driving this are discussed in this box.

Increasing interest payments, rising debt levels and high petrol prices all contributed to slower consumption growth during 2005 and 2006. Table 1.2 provides some aggregate estimates of the net additions or subtractions to aggregate household cash flows/balance sheets from these different sources over recent years, as well as forecasts for the 2008 and 2009 years.

Factors contributing to the current rebound in private consumption spending include:

  • ongoing labour income growth (increasing $4 billion in the year to June 2007)
  • the increase in Working for Families payments (around $900 million in the year to June 2007)
  • the drop in petrol prices ($400 million in the year to June 2007), and
  • house price growth is estimated to have added $38 billion to household wealth over the year to June 2007).

On the downside, increased debt is estimated to subtract around $11 billion from household net worth in the year to June 2007, while interest payments increase by around $1.1 billion.

Table 1.2 – Aggregate incremental impacts on households of selected drivers
June years                 ($ billion) Past          2006 Current 2007 Forecast 2008 Forecast 2009
Nominal private consumption 5.2 4.6 4.8 3.8
Changes in income and expenses[1]        
Petrol prices -0.9 0.4 -0.3 0.0
Interest payments -1.3 -1.1 -1.2 -0.3
Labour income 4.7 4.0 3.6 3.6
Tax on labour income -1.5 -1.4 -1.3 -1.4
Total transfers 0.9 1.3 0.8 0.5
of which…        
Working for Families 0.5 0.9 0.3 0.0
Balance sheet        
Debt impact on net worth -11.2 -9.5 -10.6 -10.2
Housing assets[2] 51 38 30 10

[1] A negative refers to an increase in an expense or decrease in income.

[2]The effect of changes in house prices (this figure does not include  the effect on assets of additional residential investment).

Sources: The Treasury, Spicers, Statistics New Zealand

Interest payments are expected to increase by a total of $3.9 billion across the period from 2006 to 2009 as a result of high interest rates and an increased level of debt. The fall in the NZ dollar is expected to lead to higher petrol prices and higher prices for other imports. The cumulative impact of these factors, as well as a smaller boost to incomes from the labour market and Working for Families, is expected to moderate private consumption growth by June 2009.

Changes in household wealth are also expected to affect the household decisions. Rising debt levels are forecast to curb consumption growth by causing households to become more precautionary and less willing to take on an increasing amount of debt. A slowdown in the growth in value of housing assets from $30 billion in the 2008 June year to $10 billion by June 2009 is also forecast to reinforce the slowdown.

Nominal GDP growth rates also fall but the level of nominal GDP remains higher than the Half Year Update until late 2009 …

Figure 1.16 – Change in nominal GDP
Sources: Statistics New Zealand, The Treasury

Slow growth in real GDP, falls in the terms of trade and a fall in inflation all contribute to nominal GDP growth falling from 5.6% in March 2008 to 3.5% in March 2009. Nevertheless, a higher rate of inflation than in the Half Year Update throughout the forecast period together with a sustained higher terms of trade throughout 2008, combine to take nominal GDP to a substantially higher level than forecast in the Half Year Update in the March 2008 and 2009 years.

… boosting tax revenue

Tax revenue is forecast to be higher than in the Half Year Update throughout the forecast period. This reflects the higher level of nominal GDP in 2008 and 2009, as well as a reassessment of the effective tax rate on source deductions and company tax. The ratio of source deductions to labour income is forecast to stay at approximately the same rate as in recent years – a slightly higher rate than forecast in the Half Year Update.

However, company tax changes see a fall in company tax revenue in 2008 …

In the year to June 2008, total tax revenue is forecast to grow by 4.3%, slightly below nominal GDP growth of 5.0%. For 2008, source deductions grow at just over 6%, somewhat higher than compensation of employees growth at just under 5%. Fiscal drag is forecast to add to tax revenue relative to GDP over the forecast period, given that the personal income tax threshold indexation announced in Budget 2005 is not proceeding. Solid consumption growth contributes to GST growth of 6.4%.

Figure 1.17 – Corporate tax growth
Sources: Statistics New Zealand, The Treasury

Running against this trend, corporate tax revenue is forecast to decline by 1.5% in the year to June 2008, despite forecast profit growth of 4.7%. In 2008, several tax measures are scheduled to take effect, including a cut in the company tax rate from 33% to 30% as part of the Business Tax Reform, the portfolio investment entity (PIE) regime and the fair dividend rate (FDR) method for calculating returns on overseas equity investments – all of which are expected to reduce the company tax take.

Without the policy changes, including the Business Tax Reform, the forecast growth in corporate tax for 2008 would have been higher than the Half Year Update forecast. This is because the prominent tax loss build-up that has been a feature of the corporate tax forecasts for the past two years has been moderated, as there is now convincing evidence that the build-up in tax losses through the 2007 tax year was not as large as previously expected. The size of the tax losses is now a downside risk to the corporate tax forecasts, especially since total profits are forecast to decline in 2009.

… tax growth slows further in 2009, reflecting the weaker economy and the full effect of company tax changes

Figure 1.18 – Total tax and nominal GDP growth
Sources: Statistics New Zealand, The Treasury

In the year to June 2009, tax revenue is forecast to grow at just under 2%. With continued growth in compensation of employees of around 5%, source deductions revenue is forecast to increase by around 6%. However, 2009 is the first year in which the changes to company tax take full effect. This is expected to reduce company tax by over $800 million in that year, resulting in corporate tax declining by 6.5% despite relatively flat profits.

Real GDP Growth Forecast to Return to Trend by 2010 and 2011

A reorientation of growth towards exports intensifies over the March 2010 year following depreciation of the exchange rate …

Export growth is expected to accelerate during the March 2010 year as services exports in particular show strong growth on the back of the lagged effect of the depreciation of the exchange rate. Import growth is expected to slow further in 2010 owing to continued weak domestic demand growth and the impact of the exchange rate on import prices, before exhibiting a modest increase to 1.6% in the year to March 2011 as market investment growth increases. This means that exports make a strong contribution to growth and also contribute, together with the decline in import volume growth, to the annual current account deficit being forecast to decline to a little over 6% of GDP by the end of the forecast period.

Figure 1.19 – Current account

Sources: Statistics New Zealand, The Treasury

The lower exchange rate also boosts the competitiveness of New Zealand exports, with export volume growth increasing 3.5% in the year to March 2009. The exchange rate impact on services exports is expected to show up progressively over the March 2010 year when services export volumes grow 5.4% taking total export growth to 4.1%.

Market investment is forecast to gradually pick up in 2010 owing the improved performance of exports, lower interest rates and some increases flowing from the Business Tax Reform.

… contributing to a smaller current account deficit

A high level of the terms of trade during 2008 is forecast to lift the goods balance in the current account, while the eventual reorientation of growth towards exports also drives a closing of the current account deficit. The investment income balance is expected to remain in deficit. However, the investment income deficit is forecast to become smaller as the weak outlook for growth in 2009 hits firms’ profits, while the return on New Zealand investments abroad is expected to rise slightly.

Economy-wide labour productivity is forecast to increase relative to the past couple of years, contributing to trend growth of around 3%

Table 1.3 – Productivity growth
March Years GDP Growth Labour Productivity Growth Labour Input Growth
Average 1997-2006 3.0 1.2 1.8
2005 3.9 0.5 3.4
2006 2.0 -0.1 2.2
2007 1.7 0.8 0.8
2008 2.6 1.8 0.8
2009 1.6 0.9 0.8
2010 2.8 2.2 0.6
2011 3.1 1.7 1.4
Average 2007-2011 2.4 1.5 0.9

Sources: Statistics New Zealand, The Treasury

Economy-wide labour productivity growth, as measured by economy-wide GDP per hour worked, has been low recently, falling 0.1% in the year to March 2006 before increasing to 0.7% in the year to December 2006. The GDP forecasts discussed in this chapter incorporate labour productivity growth that is generally higher than the rates that have prevailed over the past three years. We believe that the recent weak productivity growth has included a large cyclical component.

The following factors suggest that productivity growth is likely to lift over the forecast period:

  • Despite slowing growth, labour market conditions have remained tight with firms still facing difficulties in finding labour. In such an environment firms are reluctant to reduce employment unless it is absolutely necessary. This is likely to have contributed to the lower labour productivity experienced recently, but potentially enables increases in production in the future without the need for a commensurate increase in labour input.
  • Productivity growth may also be higher over the forecast period as returns from recent growth in business investment are realised.
  • In recent years a number of new workers have been drawn into employment. It is likely that these new workers have been less productive than experienced workers. However, as these workers spend time in employment, developing on-the-job skills and experience, it is likely that their productivity will increase.
  • The reorientation of growth towards the export sector, where firms tends to have a higher level of productivity, should boost average productivity.

Annual growth in tax revenue is expected to be around 5%

Tax revenue is forecast to grow by around 5% in each of the 2010 and 2011 June years. The two largest tax types, source deductions and GST, are responsible for the vast bulk of this growth, growing by around 6% and 4% respectively. With changes such as the Business Tax Reform bedded down by 2010, growth in corporate tax is forecast to resume, growing by 4.5% to 5% in each of 2010 and 2011.

Impact of KiwiSaver Enhancements and the Business Tax Reform

The 2007 Budget Update incorporates a number of policy changes. The KiwiSaver enhancements and Business Tax Reform have both been incorporated into the economic forecasts.

The reduction in the corporate tax rate to 30% will increase the return on investment. In the forecasts this has the effect of making a larger number of investment projects profitable, and adds to the growth rate of market investment. The forecasts incorporate around $300 million of additional real investment as a result. The lift in investment is not expected to be immediate and is spread from 2009 until the end of the forecast period. Around 50% of investment is sourced from imports, so the lift in investment sees import volumes increase by around $150 million.

The main effects of the KiwiSaver enhancements are likely to be on household saving. However, there may be some impact on private consumption as some individuals may be able to switch from their current saving vehicle to saving through KiwiSaver and reduce their saving by the size of the tax credit, but still accumulate the same level of funds. The exact size of this impact is uncertain. Our estimate is that enhancements to KiwiSaver will lift nominal private consumption by around 10% of the cost of the enhancements (in turn, household saving increases by 90% of the cost), but the effect could be between -10% and 25%.

There may also be some effects on firms. The cost of the compulsory matching of employee contributions could affect firm profitability, particularly as the contributions increase beyond the level of the tax credit provided to employers. As a result, it is likely that employers will seek to recoup this additional cost through lowering future wage growth or through increasing prices. These possible effects have not been incorporated in the forecasts, in part because they will be heavily influenced by the state of the economy at the time, but also because the main effects are likely to occur towards the end of the forecast period.

The estimate that the programme will lead to a 10% increase in consumption is the key determinant of the effects of the enhancements to KiwiSaver on the rest of the economy. With the spillover from the KiwiSaver enhancements into private consumption spending expected to be small, the programme as a whole has only a limited effect on real economic activity. Nominal consumption is expected to rise by around $30 million in the March 2008 year, with the impact rising to around $120 million by March 2011 (the end of the forecast period). This sees domestic demand lift, rising by approximately $300 million in total across the forecast period and this is forecast to lead to slightly higher inflation and interest rates.

The programme is expected to lead to an increase in annual pension fund contributions of $1.3 billion by the end of the forecast period. The table below summarises the effect of KiwiSaver on a number of economic variables:

(June years) 2008 2009 2010 2011
Fiscal cost of enhancements ($ millions)[5] $303 $693 $1,006 $1,214
Household saving effect ($ millions) +$273 +$624 +$905 +$1,093
Real GDP +$20 +$42 +$53 +$68
Inflation 0 +0.02 +0.03 +0.02
Interest rates (percentage points) 0 +0.05 +0.05 +0.01

Notes

  • [5]Note that this includes the full cost of the fee subsidy for all KiwiSaver members ($40) as the size of the subsidy has only recently been determined.

Fiscal Forecasts – Finalisation Dates and Key Assumptions

Finalisation Dates
Economic outlook (refer Chapter 1) 16 April
Tax revenue forecasts 20 April
Fiscal forecasts 9 May
Government decisions and circumstances 9 May
Actual asset revaluations 28 February
Foreign exchange rates 28 February
Specific fiscal risks (refer Chapter 4) 9 May
Contingent liabilities and commitments (refer Chapter 4) 31 March

Key Assumptions

The fiscal forecasts have been prepared in accordance with the Public Finance Act 1989. They are based on the Crown’s accounting policies and assumptions (refer page 158 of the GAAP Series Tables). As with all assumptions, there is a degree of uncertainty surrounding them. This uncertainty increases as the forecast horizon extends. A summary of the key economic assumptions that are particularly relevant to the fiscal forecasts is provided below (on a June-year-end basis to align with the Crown’s balance date of 30 June):

June years 2006/07 2007/08 2008/09 2009/10 2010/11
  HYEFU BEFU BEFU BEFU BEFU BEFU
Real GDP (P) (ann avg % chg) 2.0 2.1 2.3 1.8 3.0 3.2
Nominal GDP (E) ($m) 162,667 164,868 173,187 179,132 186,985 196,177
CPI (annual avg % change) 2.7 2.7 2.4 2.4 2.3 2.1
Govt 10-year bonds (ann avg %) 5.9 5.8 6.1 6.1 6.1 6.0
90-day bill rate (ann avg %) 7.5 7.7 7.9 6.8 6.4 6.2
Unemployment rate ((HLFS) basis ann avg %) 4.0 3.8 3.9 4.4 4.5 4.3
Full-time equivalent employment (ann avg % change) 0.9 0.8 1.6 0.9 0.8 1.4
Current account (% of GDP) -9.3 -8.3 -7.2 -6.9 -6.8 -6.1

Source: The Treasury

New Zealand Superannuation (NZS) Fund

The contribution to the NZS Fund for the year ending 30 June 2007 is $2.049 billion. The contribution to the NZS Fund is calculated over a 40-year rolling horizon to ensure that superannuation entitlements over the next 40 years can be met if the contribution rate were to be held constant at that level. The Government is making the required minimum annual contribution for 2006/07 and 2007/08 as calculated by the formula set out in the NZS Act.

$billion (June year end) 2005 2006 2007 2008 2009 2010 2011
Required contribution 2.107 2.337 2.049 2.103 2.194 2.312 2.458
Actual/Budgeted contribution 2.107 2.337 2.049 2.103 2.194 2.312 2.458

Source: The Treasury

The underlying assumptions in calculating the contributions for 2007 are the nominal gross domestic product (GDP) series to 2047, the NZS expense series to 2047 and the expected long-term, net after-tax annual return of the NZS Fund (6.1%) (6.1% Half Year Update). The forecast rate of return is based on the Treasury’s assumptions for the rate of return on financial portfolios of Crown financial institutions. The Treasury website contains further information on the NZS Fund, as well as a copy of the NZS Fund model.

2 Fiscal Outlook

Summary of the Budget Update

Economic growth has accelerated again after a period of weak growth in 2005 and 2006. Growth over 2007/08 is expected to be stronger than forecast at the time of the 2006 Half Year Economic and Fiscal Update (Half Year Update).

This rebound in growth has largely been the result of resurgence in domestic demand, with both private consumption and housing and business investment showing renewed strength.

This growth, together with higher terms of trade and persistent domestic price pressures has resulted in higher GDP, flowing directly into higher tax forecasts of around $3.3 billion over the forecast horizon.

Offsetting some of the forecast growth in tax are tax policy initiatives of around $1.4 billion which form part of Budgets 2007 and 2008. In addition, new expense initiatives are above what was signalled in the 2007Budget Policy Statement (BPS) by around $1.2 billion by 2010/11. The main driver of this increase in expenses is the enhancements to the KiwiSaver initiative previously announced in Budget 2005. These factors result in a fiscal outlook for the Budget Update that shows:

  • Slower core Crown revenue growth relative to recent years, with revenue remaining stable at around 34% of GDP over the forecast period, and expenditure rising to around 33% of GDP by 2010/11.
  • After peaking last year at 7.3% of GDP the operating balance returns to just under 4% of GDP in 2006/07 and declines over the rest of the forecast period. The operating balance before gains and losses (OBEGAL) and excluding NZS Fund revenue follows a similar trend.
  • After taking account of the Government’s capital programme, including contributions to the NZS Fund, the core Crown is forecast to record cash deficits from 2007/08.
  • Gross sovereign-issued debt rising in nominal terms, but falling slowly to 21.8% of GDP by the end of the forecast period.
  • Net core Crown debt rising over the forecast period, but at 3.5% of GDP in 2010/11 it is lower than the levels forecast at the Half Year Update.
  • The NZS Fund is forecast to be $27 billion (13.8% of GDP) by the 2010/11.
Table 2.1 Summary fiscal indicators[6]
  Year ended 30 June
  OLD GAAP NEW GAAP
  2006 2007 2007 2008 2009 2010 2011
($million) Actual Forecast Forecast Forecast Forecast Forecast Forecast
Core Crown revenue excluding NZS Fund revenue     57,123 59,304 61,077 63,733 66,906
Core Crown revenue 59,170 59,502 57,006 59,402 61,172 63,825 66,993
Core Crown expenses 49,900 53,775 52,783 56,096 58,819 61,677 64,898
OBEGAL7 excluding NZS Fund revenue     5,654 4,860 3,862 3,438 3,260
OBERAC 8,648 7,380          
Operating balance 11,473 6,568 6,327 6,431 5,569 5,310 5,366
Residual cash 2,985 1,720 1,720 (976) (1,687) (1,649) (1,426)
Gross sovereign-issued debt 35,461 37,217 37,935 40,400 40,231 39,894 42,737
Net core Crown debt (incl NZS Fund) (5,138) (7,962) (7,534) (10,784) (13,145) (16,008) (19,287)
% of GDP              
Core Crown revenue excluding NZS Fund revenue     34.6 34.2 34.1 34.1 34.1
Core Crown revenue 37.8 36.1 34.6 34.3 34.1 34.1 34.1
Core Crown expenses 31.9 32.6 32.0 32.4 32.8 33.0 33.1
OBEGAL excluding NZS Fund revenue     3.4 2.8 2.2 1.8 1.7
OBERAC 5.5 4.5          
Operating balance 7.3 4.0 3.8 3.7 3.1 2.8 2.7
Residual cash 1.9 1.0 1.0 (0.6) (0.9) (0.9) (0.7)
Gross sovereign-issued debt 22.6 22.6 23.0 23.3 22.5 21.3 21.8
Net core Crown debt (incl NZS Fund) (3.3) (4.8) (4.6) (6.2) (7.3) (8.6) (9.8)

Source: The Treasury

Old GAAP and New GAAP

The forecasts in Budget 2007 have been prepared under a new set of accounting standards – New Zealand equivalents to International Financial Reporting Standards (NZ IFRS). These new standards will be part of Generally Accepted Accounting Practice (GAAP) for financial statements relating to periods commencing after 1 January 2007.

To help navigate the transition from current reporting standards (Old GAAP) to NZ IFRS (New GAAP) this chapter uses:

  • Old GAAP numbers only for actual results to June 2006
  • New GAAP numbers only for forecasts beyond 2007, and
  • Both Old GAAP and New GAAP numbers for forecasts to June 2007.

Information on the impact of NZ IFRS adoption on the financial statements is provided on page 90, and on fiscal indicators on page 91.[3]

Table 2.2 - Reconciliation of residual cash
    Year ended 30 June 
  $million 2007
Forecast
2008
Forecast
2009
Forecast
2010
Forecast
2011
Forecast
  Core Crown revenue 57,006 59,402 61,172 63,825 66,993
Less Core Crown expenses 52,783 56,096 58,819 61,677 64,898
Plus Core Crown gains and losses and other items 1,578 1,157 1,314 1,482 1,686
Plus Net surpluses/(deficits) of SOEs and CEs 526 1,968 1,902 1,680 1,585
Equals Operating balance 6,327 6,431 5,569 5,310 5,366
Less Net gains and losses and other items 790 1,473 1,612 1,780 2,019
Equals Operating balance before gains and losses (OBEGAL) 5,537 4,958 3,957 3,530 3,348
Less NZS Fund revenue after-tax[8] -117 98 95 92 87
Equals OBEGAL less NZS Fund revenue 5,654 4,860 3,862 3,438 3,260
Less Net retained surpluses of SOEs and CEs 1,314 1,652 1,604 1,382 1,252
  Non-cash items and working capital movements 3,592 (1,830) (1,065) (1,495) (1,764)
Equals Net core Crown cashflow from operations 7,932 5,038 3,323 3,551 3,772
Less Contribution to NZS Fund 2,049 2,103 2,194 2,312 2,458
Equals Net core Crown cashflow from operations after contributions to NZS Fund 5,883 2,935 1,129 1,239 1,314
Less Purchase of physical assets 2,141 1,803 1,201 1,179 1,034
  Advances and capital injections 2,022 1,924 1,047 903 802
  Capital allowance for future Budgets 184 567 806 903
Equals Residual cash 1,720 (976) (1,687) (1,649) (1,426)

Source: The Treasury

The New Zealand Superannuation Fund

The NZS Fund is an important component of the Government’s fiscal strategy. The NZS Fund’s assets provide the means for the Government to partially pre-fund future New Zealand superannuation expenses and may only be used for New Zealand superannuation.

The NZS Fund’s assets are to be built up through a combination of investment returns earned on the Fund’s portfolio and Government contributions. The Government’s contributions to the NZS Fund are calculated over a 40-year rolling horizon to ensure that superannuation entitlements over the next 40 years can be met.

The Fund’s net assets are forecast to grow over the forecast period to $27 billion, an increase of $17.1 billion. Over $8 billion of this increase is expected to come from the NZS Fund’s investment performance, with the remaining increase from Government contributions.

  Year ended 30 June          
  OLD GAAP NEW GAAP
  2006 Actual 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
($million)              
Opening net worth 6,555 9,861 9,855 12,910 15,977 19,321 22,984
Gross contribution from the Crown 2,337 2,049 2,049 2,103 2,194 2,312 2,458
NZS Fund revenue 1,190 1,505 382 447 519 599 685
NZS Fund gains and losses     1,123 866 1,055 1,259 1,486
Tax (221) (497) (499) (349) (424) (507) (598)
Closing net worth 9,861 12,918 12,910 15,977 19,321 22,984 27,015

Updated Fiscal Indicators

The fiscal indicators have been updated as a consequence of:

  • the increasing size of the NZS Fund and its importance to the Government’s fiscal strategy. A new indicator, “NZS Fund returns” has been added, and
  • the change in accounting standards to New GAAP (page 90 discusses these changes further).
Previous Fiscal Indicator Updated Fiscal Indicator
  NZS Fund returns
Core Crown revenue Core Crown revenue ex NZS Fund revenue
OBERAC Operating balance before gains and losses
OBERAC excluding NZS Fund returns Operating balance before gains and losses ex NZS Fund revenue
Core Crown expenses
Residual cash
Gross sovereign-issued debt
Net core Crown debt
Net core Crown debt (inc NZS Fund)
Core Crown expenses
Residual cash
Gross sovereign-issued debt
Net core Crown debt
Net core Crown debt (inc NZS Fund)

The noticeable change from adopting New GAAP is OBERAC (operating balance excluding revaluations and accounting changes) being superseded by the “Operating balance before gains and losses”. Unlike the OBERAC the OBEGAL is visible on the Statement of Financial Performance.

A less obvious change is in the composition of the indicators. The core Crown revenue (now excluding NZS Fund revenue) and core Crown expenses indicators will no longer include gains or losses, as gains and losses (refer page 91) will be reported in a separate section of the Statement of Financial Performance.

Notes

  • [6]Detailed tables of the key indicators for the Budget Update and Half Year Update are located on pages 105-106. With the adoption of New GAAP there is a series break in the graphs and tables presented in the fiscal chapter. For some indicators there is not a comparable trend series.
  • [7]Operating balance before gains and losses (OBEGAL) less NZS Fund revenue represents the residual of operating revenue and expenses minus the portion of operating revenue earned by the NZS Fund. The indicator does not take into account any gains and losses which are now reported in a separate section of the Statement of Financial Performance (refer page 161).
  • [8]NZS Fund returns are the sum of its revenue (ie, interest and dividends), gains and losses (which comprise the bulk of its returns) and tax expenses. As OBEGAL does not include gains and losses, the remaining returns to deduct from OBEGAL are NZS Fund revenue less taxes.

Key Trends

Revenue grows in line with the economy …

Figure 2.1 – Core Crown revenue excluding NZS Fund revenue and expenses
Source: The Treasury

Tax revenue as a percentage of GDP remains relatively flat over the forecast period. However there are a number of offsetting factors influencing this trend. In particular:

  • the Business Tax Reform will resulted in a structural reduction in the tax revenue to GDP ratio. The most significant tax type affected is company income tax as a result of lowering the company tax rate from 33% to 30%, and
  • the impact of fiscal drag, whereby income growth over time moves people into higher tax brackets. This is more prominent with the removal of personal income tax threshold indexation.

The 2005/06 core Crown revenue includes the one-off non-cash adjustment of $1.8 billion booked at 30 June 2006 (1.1% of GDP), reflecting the change in accounting treatment for the recognition of provisional tax.

… while Budget initiatives increase expenses …

The Government has made significant policy decisions in recent Budgets. Core Crown expenses are expected to increase by around $1 billion between 2006/07 and 2007/08 as a result of past Budget initiatives such as Working for Families and KiwiSaver. In addition, the 2007 Budget includes new initiatives of $2.5 billion in 2007/08 rising to $3.1 billion by 2010/11. The enhancements to the KiwiSaver initiative is a key feature of Budget 2007 and is the main driver of the rising profile. In the short term this results in a rising trend in core Crown expenses to GDP. By 2008/09 this trend flattens out, as the allocations for future Budgets are broadly consistent with the forecast growth in the economy.

… resulting in declining operating balances …

Figure 2.2 – Operating balance
Source: The Treasury

The operating balance as a percentage of GDP is expected to decline from 7.3% in 2005/06 to 3.8% in 2006/07. The main reasons for the decrease are:

  • the 2005/06 outturn included a number of one-off positive revaluations (eg, investment gains) and accounting changes (eg, provisional tax revenue recognition), and
  • the forecast for 2006/07 includes some one-off expenses such as the write down of tax and fines receivables and an increase in the ACC insurance liability.
Figure 2.3 – Operating balance before gains and losses (OBEGAL) and excluding NZS Fund revenue
Source: The Treasury

Beyond 2006/07 the operating balance continues to decrease, but at a much lesser rate.

The operating balance before gains and losses (OBEGAL) and excluding NZS Fund revenue provides a better picture of the underlying movement in the fiscal position. The balance also declines over the forecast period, falling from 3.4% to 1.7% of GDP

Some components of the operating surpluses expected over the forecast period have been partitioned by the Government and are not available to fund new policy initiatives. This includes:

  • entities retaining their surpluses for the purpose of achieving their long-term objectives (ACC, EQC and NZS Fund), and
  • entities retaining their surpluses to accumulate assets (State-Owned Enterprises (SOEs) and some Crown entities).
Figure 2.4 – Accumulated operating balance breakdown for the period 2006/07 to 2010/11
Source: The Treasury

This leaves around 48% of the accumulated operating balance available to finance the Government’s investing activities, such as contributions to the NZS Fund and its general capital programme.

… and a move from cash surplus to deficit …

This will be invested primarily in NZS Fund contributions of $11.1 billion, purchases of physical assets of $9.6 billion (eg, schools and defence equipment), advances of $4.4 billion (mainly student loans and refinancing existing private sector debt of the health and housing sectors), injections into Crown entities for hospitals and housing of $1.8 billion, and the purchase of foreign exchange reserves of $0.7 billion.

Figure 2.5 – Core Crown cash position on a year-by-year basis
Source: The Treasury

There is a residual financing requirement over the forecast period of around $4 billion.

Table 2.3 – Impact of Crown operating surpluses on the balance sheet from 2006/07 to 2010/11 inclusive
Source: The Treasury

Application of the Operating Balance

The following graph explains how the operating balance translates into cash available and then how it has been applied for the 2007/08 financial year.

Application of the Operating Balance

… which is met by borrowings …

The Government’s intended bond programme has been set at around $2.5 billion per annum, amounting to $12.5 billion of new borrowings over the forecast period. $8.6 billion of the new borrowing replaces maturing debt. The balance of new debt issued of $3.9 billion is used to meet the cash shortfall.

Figure 2.6 – Gross sovereign-issued debt
Source: The Treasury

In addition to the cash shortfall, gross debt is affected by:

  • the Reserve Bank increasing settlement cash levels in 2006/07, this has had a net impact on borrowings of $3.2 billion (as noted in the Half Year Update), and
  • the impact of the transition to New GAAP, this has increased gross debt by $0.7 billion.

Gross debt increases by around $7.3 billion from 2005/06 to 2010/11. As a percentage of GDP, gross debt is expected to fall from 22.6% in 2005/06 to 21.8% by 2010/11. Excluding the impact of the increase in settlement cash levels, over the same period GSID falls to 18.8% by 2010/11.

… while financial assets increase …

Figure 2.7 – Net debt (% of GDP and $million) and % of GDP including assets of NZS Fund
Source: The Treasury

With borrowings meeting the cash shortfall, financial assets grow by the full extent of the build-up in assets resulting from:

  • contributions made to the NZS Fund and the returns earned by the Fund, and
  • advance activity, such as student loans.

… resulting in an increasing net financial assets (including NZS Fund) track

Including the NZS Fund the Crown is in a net financial asset position. Net financial assets are expected to continue to increase over the forecast period. Excluding the NZS Fund assets, net core Crown debt decreases in nominal terms by around $0.9 billion over the forecast period. This trend is contrary to what happens to gross debt reflecting the fact that some of the borrowings required to meet the cash shortfall are used to invest in financial assets (eg, student loans), so do not impact on net debt.

New Zealand International Financial Reporting Standards (NZ IFRS)

The fiscal forecasts in Budget 2007 are prepared on an NZ IFRS basis.

From 1 July 2007 the financial statements of the Government must be prepared in accordance with NZ IFRS. Hence, forecasts in Budget 2007 are prepared on an NZ IFRS basis to provide comparability with reporting actual results.

While there are relatively minor changes to the bottom line ….

Although the current New Zealand reporting standards (Old GAAP) are relatively well aligned with NZ IFRS (New GAAP), there have been some impacts on the bottom line as a result of adopting New GAAP. Using the forecast year-end position for 2006/07, changing to new GAAP results in the following impacts on fiscal indicators:

  Old GAAP Change New GAAP
Net worth $88.5b
Up Arrow: 1.2b.
$89.7b
Operating balance $6.6b
Up Arrow: 0.3b.
$6.3b
Residual cash $1.7b No change $1.7b

These fiscal indicators have changed by less than 1% of GDP (refer to page 105 for fiscal indicator changes).

… but there are changes to some values …

The two main contributors to the change in net worth of $1.2 billion are:

1. The net liability of the Government Superannuation Fund (GSF) is reduced by $3.2 billion. Under New GAAP the pension liability is reported on the basis that the Government meets its obligation on a pay-as-needed basis. Under Old GAAP the liability is reported based on the amount to be invested today to fully fund future pensions. The difference between the two is the treatment of investment taxes.

Note that, from a presentational point of view the assets of the GSF are now netted off against the liability.

The pension obligations to GSF members are underwritten by the Government and there are no implications for GSF members’ payments as a result of this reporting change.

2. The ACC liability has increased by $1.9 billion owing to adding an additional risk premium and liability adequacy test under New GAAP. The actuarially calculated liability under Old GAAP represents a mid-point estimate – that is, equal chance of actual payouts being greater than or less than the estimate. To that extent, it represents the most likely outcome. Introducing an additional risk premium and liability adequacy test under new GAAP does not change the relative risk of ACC’s activities; rather, it simply changes how this risk is reported. There are no implications for ACC levies as a result of this change in reporting.

… and to the presentation of financial information …

Under New GAAP there is:

  • more detail (eg, derivatives are shown separately on the face of the Statement of Financial Position)
  • reclassifications (eg, GSF assets are netted against the GSF liability), and
  • format changes, notably to the face of the Statement of Financial Performance.

The key change to the Statement of Financial Performance is reporting gains/losses in a separate section from revenue and expenses. This section will typically, but not exclusively, capture changes from market movements or actuarial assumptions such as gains on share portfolios and actuarial changes in the GSF liability. Separately reporting gains and losses will:

  • help users identify their effect on reported results and forecasts
  • reduce the “noise” from changes in fair value of items (eg, share investments can provide income (gains) in one month and expenses (losses) the next), and
  • better align accounting practice with other reporting frameworks, such as Government Financial Statistics.

A more detailed list of changes is provided in Chapter 7 NZ IFRS Transition on page 191.

… resulting in continued high-quality reporting

The Accounting Standards Review Board, by deciding that all reporting entities in New Zealand must comply with New GAAP after 1 January 2007, believed that by adopting global financial reporting standards it will improve:

  • the comparability of financial reporting for New Zealand’s corporate sector, thereby enhancing domestic capital market transparency and accountability, and
  • the quality of financial reporting (New GAAP is more comprehensive, more widely accepted and robustly tested).

The New Zealand Government has been required to comply with generally accepted accounting practice (GAAP) since the Public Finance of 1989, and therefore must now adopt New GAAP. Common financial reporting across all sectors in New Zealand provides consistency and transparency to users of financial reports.

As the Government progresses towards full implementation of New GAAP and the audit of June 2008 Financial Statements, the potential areas of impact from adoption of New GAAP will include any change in accounting standards during that time. However, based on the current work programme of the international standard setters, such changes are expected to be minimal on the reported results at June 2008.

Further details on the adoption and expected impact of New GAAP on the Financial Statements of Government, including New GAAP accounting policies for the Government reporting entity, are available at www.treasury.govt.nz/budget2007/.

Revenue and Expenses

Table 2.4 - Revenue and expenses' comparison with Half Year Update
  Year ended 30 June
  OLD GAAP NEW GAAP
(% of GDP) 2006
Actual
2007
Forecast
2007
Forecast
2008
Forecast
2009
Forecast
2010
Forecast
2011
Forecast
Total revenue              
Budget Update 48.8 46.2 44.5 44.4 44.4 44.5 44.3
Half Year Update     46.1 44.9 44.0 43.9 43.7
Total expenses              
Budget Update 41.5 42.3 41.2 41.5 42.2 42.6 42.5
Half Year Update     42.3 41.4 41.1 40.8 40.7
Core Crown revenue              
Budget Update 37.7 36.1 34.6 34.3 34.1 34.1 34.1
Half Year Update     36.3 35.1 34.2 34.3 34.3
Core Crown expenses              
Budget Update 31.8 32.6 32.0 32.4 32.8 33.0 33.1
Half Year Update     33.2 32.6 32.3 32.1 32.0
SOE revenue              
Budget Update 8.1 8.1 7.4 7.5 7.6 7.5 7.2
Half Year Update     7.3 7.2 7.2 7.1 6.9
SOE expenses              
Budget Update 6.9 6.9 6.8 6.9 6.9 6.9 6.7
Half Year Update     6.8 6.6 6.6 6.5 6.4
Crown entities' revenue              
Budget Update 16.1 16.1 15.9 15.9 15.6 15.2 14.6
Half Year Update     16.0 15.7 15.2 14.5 14.0
Crown entities' expenses              
Budget Update 15.2 15.2 15.4 15.5 15.3 14.9 14.4
Half Year Update     15.4 15.1 14.6 14.1 13.5

Source: The Treasury

Total revenue to GDP is forecast to remain relatively stable between 44.3% and 44.5% through the forecast period. There is a level shift downwards in revenue owing to the transition to New GAAP, as a result of transactions that were previously included in revenue being reclassified to gains and losses (refer page 91). Total expenses to GDP are forecast to increase from 41.2% to 42.5% by the end of the forecast period.

The trend in total revenue and expenses over the forecast horizon will largely be driven by activity in the core Crown segment of reported Government activity. The following section discusses the core Crown activity in more detail.

Core Crown – Revenue

Table 2.5 - Core Crown revenue
  Year ended 30 June
  OLD GAAP NEW GAAP
Core Crown Revenue 2006
Actual
2007
Forecast
2007
Forecast
2008
Forecast
2009
Forecast
2010
Forecast
2011
Forecast
($ billion)              
Tax revenue 52.4 52.1 52.2 54.7 56.3 58.9 62.0
Investment revenue 4.5 5.1 2.7 2.6 2.8 2.8 2.9
Other core Crown revenue 2.3 2.3 2.1 2.1 2.1 2.1 2.1
Total core Crown revenue 59.2 59.5 57.0 59.4 61.2 63.8 67.0
(% of GDP)              
Tax revenue 33.4 31.6 31.7 31.6 31.4 31.5 31.6
Investment revenue 2.9 3.1 1.6 1.5 1.6 1.5 1.5
Other core Crown revenue 1.5 1.4 1.3 1.2 1.2 1.1 1.1
Total core Crown revenue 37.8 36.1 34.6 34.3 34.1 34.1 34.1

Source: The Treasury

Table 2.6 - Tax revenue indicators compared with the Half Year Update
  Year ended 30 June
  OLD GAAP NEW GAAP
Tax revenue 2006
Actual
2007
Forecast
2007
Forecast
2008
Forecast
2009
Forecast
2010
Forecast
2011
Forecast
(% of GDP)              
Tax revenue - Budget Update 33.4 31.6 31.7 31.6 31.4 31.5 31.6
Tax revenue - Half Year Update     32.1 31.6 31.3 31.3 31.3

Source: The Treasury

Tax revenue is the major source of core Crown revenue.

A discussion of trends in total tax and the major tax types is included in the Economic and Tax Outlook chapter. The main points are:

  • an increase in the level of the nominal GDP forecast has led to an increase in the forecast of total tax revenue of about $1 billion in 2008
  • a shift in the balance of income in the macroeconomic forecast from profits to labour has increased the overall tax-to-GDP rate relative to the Half Year Update, thereby increasing the tax revenue forecasts from 2009 onwards, and
  • the Business Tax Reform and other policy changes since the Half Year Update collectively reduce total tax revenue by as much as $500 million each year from 2009 onwards.

Inland Revenue Department’s (IRD) tax forecasts

In line with established practice, the IRD has prepared an independent set of tax forecasts, based in the short term on analysis of taxpayer information, and in the longer term on the same broad macroeconomic trends that underpin the Treasury’s tax forecasts.

The Treasury’s forecasts are the Crown’s official forecasts. Unless otherwise stated, all forecasts in this document are Treasury forecasts. IRD tax forecasts are provided here for comparative purposes.

Table 2.7 - The Treasury and IRD tax revenue forecasts
$million 2006/07
Forecast
2007/08
Forecast
2008/09
Forecast
2009/10
Forecast
2010/1
1Forecast
Source deductions          
Treasury 21,012 22,334 23,695 25,094 26,619
Inland Revenue 20,943 22,265 23,545 24,970 26,494
Difference 69 69 150 124 125
Corporate taxes          
Treasury 9,120 9,166 8,411 8,860 9,321
Inland Revenue 9,243 9,254 8,385 8,558 8,902
Difference (123) (88) 26 302 419
Goods and services tax          
Treasury 10,722 11,495 11,993 12,333 12,896
Inland Revenue 10,771 11,315 11,819 12,161 12,734
Difference (49) 180 174 172 162
RWT (interest)          
Treasury 2,156 2,340 2,441 2,362 2,376
Inland Revenue 2,200 2,491 2,566 2,523 2,627
Difference (44) (151) (125) (161) (251)
Other taxes          
Treasury 8,647 8,838 9,151 9,621 10,140
Inland Revenue 8,568 8,728 8,992 9,421 9,968
Difference 79 110 159 200 172
Total tax          
Treasury 51,658 54,173 55,691 58,269 61,351
Inland Revenue 51,725 54,053 55,307 57,633 60,725
Difference (67) 120 384 636 626
Total tax (% of GDP)          
Treasury 31.3% 31.3% 31.1% 31.2% 31.3%
Inland Revenue 31.4% 31.2% 30.9% 30.8% 31.0%
Difference -0.1% 0.1% 0.2% 0.4% 0.3%

Sources: IRD, The Treasury

The differences between the Treasury and IRD tax forecasts are much smaller than has been the case in the last few updates.

The main points of difference in this Budget Update are:

  • Based on analysis of recent outturns, the Treasury has forecast source deductions about 0.5% higher than IRD in 2006/07, and this difference persists through all forecast years.
  • The two departments use different approaches for forecasting taxable corporate profits, which causes a gap to open up between the Treasury and IRD corporate tax forecasts in 2009/10 and 2010/11. However, the gap between the two corporate tax forecasts has narrowed substantially since the Half Year Update, as the Treasury’s corporate tax forecast no longer contains a prominent tax loss cycle. Further detail on the Treasury’s corporate tax forecast is provided in the Economic and Tax Outlook chapter.
  • The Treasury’s GST forecast is higher than Inland Revenue’s GST forecast from 2008/09 onwards as the two departments have different interpretations of the effects of the principal drivers of GST namely private consumption, public consumption and residential investment.
  • The RWT on interest forecasts diverge due to the different growth drivers that each department uses. Both departments use forecasts of interest rates and a trend growth estimate for the deposit base, but the Treasury also includes cyclical components from selected wealth and income indicators.

Detailed comparisons of the Treasury and Inland Revenue tax forecasts can be found at www.treasury.govt.nz/forecasts/befu/2007/.

Gains and Losses

The adoption of New GAAP will result in more fair value changes (gains and losses) being reported in the Statement of Financial Performance. In some cases (eg, with gains on the sale of property), these gains must be reported separately from other revenue.

Given the impact of this change, gains and losses will be reported in a separate section of the Statement of Financial Performance. This will enable users to better identify and assess:

  1. the cause of variances between actual results and forecasts, as variances from gains/losses (which are typically not forecasted) will be readily evident, and will not obscure comparisons between forecast and actual revenues and expenses
  2. the impact and volatility of gains and losses on results, and
  3. the relationship between gains and losses (eg, gains and losses in derivatives often have a close relationship with gains or losses in other financial instruments).

It should also reduce the “noise” that could arise from changes in fair value of items such as share investments being income (gains) one month and an expense (losses) the next.

The most significant gains and losses arise from financial assets and financial liabilities that are measured at fair value, and where changes in fair value must be reported in the Statement of Financial Performance. The financial assets held by the NZS Fund fall into this category. Such gains or losses will exclude interest revenue, dividend revenue and interest expense – these items will continue to be reported with revenues and expenses as appropriate. Actuarial gains and losses on items such as the GSF liability and changes in other provisions arising from market movements (eg, exchange rates) will also be separately identified in this new section.

Core Crown – Expenses

Table 2.8 - Expense indicators
  Year ended 30 June
  OLD GAAP NEW GAAP
Expenses 2006
Actual
2007
Forecast
2007
Forecast
2008
Forecast
2009
Forecast
2010
Forecast
2011
Forecast
($billion)              
Core Crown 49.9 53.8 52.8 56.1 58.8 61.7 64.9
Core Crown (excluding GSF valuation) 49.6 53.2          
Total Crown 65.1 69.7 67.9 71.9 75.6 79.6 83.5
(% of GDP)              
Core Crown 31.8 32.6 32.0 32.4 32.8 33.0 33.1
Core Crown (excluding GSF valuation) 31.6 32.3          
Total Crown 41.5 42.3 41.2 41.5 42.2 42.6 42.5

Source: The Treasury

Core Crown expenses are forecast to increase by around 1% of GDP between 2006/07 and 2010/11.

Figure 2.8 – Core expenses ($ and % of GDP)
Source: The Treasury

The growth in expenses has largely arisen from expense initiatives announced in recent Budgets. A number of the policy decisions made in previous Budgets have rising spending profiles to allow sufficient time for full implementation. Around $1 billion of the increase in spending between 2006/07 and 2007/08 relates to previous Budget announcements like Working for Families and KiwiSaver.

Budget 2007 also influences expense growth. It includes an additional $2.2 billion of spending rising to $3.3 billion[9] of spending. The main expense elements of Budget 2007 include:

  • an enhancement to the KiwiSaver initiative that was introduced in Budget 2005, initially costing $0.3 billion in 2007/08 rising to $1.1 billion by the end of the forecast period. This equates to 0.6% of GDP in 2010/11, and
  • an additional $0.8 billion per annum on health-related spending.

The Executive Summary provides a detailed breakdown on the new initiatives for operating (expenses and revenue) and capital.

In nominal terms, expenses are forecast to increase by $12.1 billion between 2006/07 and 2010/11. The major drivers of this increase are:

  • the Budget 2007 package and recent Budget packages ($4.3 billion)
  • forecast new operating initiatives for future Budgets ($6.1 billion), and
  • indexation of benefits, primarily New Zealand Superannuation ($1.5 billion).

Forecast new operating and capital initiatives

The fiscal forecasts include indicative amounts for new operating and capital initiatives.

The allowance for Budget 2008 is forecast to be $3.1 billion. Around $1.1 billion of this has already been earmarked for Business Tax Reform. The remaining $2 billion is assumed for forecasting purposes to be used for increased expenditure.

New initiatives for the 2009 and 2010 Budgets remain at around $2 billion and $2.1 billion. It is also assumed for forecasting purposes all of the forecast new operating initiatives in these Budgets are allocated to increased expenditure, although in practice some portion could be used to finance revenue reductions.

Figure 2.9 – Net amounts for new operating initiatives (GST exclusive)
Source: The Treasury

Capital initiatives

As part of the 2007 Budget, the Government has allocated $1.6 billion of new capital over the next four years. Amounts for the 2008, 2009 and 2010 Budgets have been set at $0.9 billion phased in over four years, some of which falls outside the forecast horizon. On a year-by-year basis, capital spending is forecast to be on average $2.0 billion per annum over the next five years.

Table 2.9 – Capital spending
  Year ended 30 June
  2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast Total
($million)            
New capital spending up to Budget 2008 164 67 56 23 310
Budget 2008 20 480 250 150 900
Budget 2009 20 480 250 750
Budget 2010 20 480 500
  184 567 806 903 2,460
Purchase of physical assets 2,141 1,803 1,201 1,179 1,034 7,359
  2,141 1,987 1,768 1,985 1,937 9,819

Top-down Adjustment to Spending

The core Crown operating and capital spending for 2006/07 in the forecast incorporates a downward adjustment of $700 million to take into account the timing delays in departmental spending. The adjustment is made on both a cash and accrual basis, and is split between operating ($500 million) and capital ($200 million).

The level of the adjustment has been based on analysis of previous expenditure delays and a review of the actual outturn to 31 March 2007.

No adjustment is made to subsequent years for possible under spending.

Net Worth

Table 2.10 –Net worth comparison with Half Year Update
  Year ended 30 June
Net worth OLD GAAP NEW GAAP
($billion) 2006 Actual 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Total Crown net worth 71.4 88.5 89.7 96.1 101.6 107.0 112.4
Core Crown net worth 40.1 45.9 49.1 53.6 57.2 60.9 64.7
SOE net worth 13.1 24.0 22.1 23.0 23.7 24.4 25.1
Crown entities' net worth 41.8 42.6 39.7 41.4 42.8 43.8 44.9

Source: The Treasury

In line with the Government’s fiscal strategy, net worth is forecast to increase from $89.7 billion in 2006/07 to $112.4 billion by 2010/11. This strategy is evident across the whole of the Crown. The following section focuses on the net worth of the core Crown segment of reported Government activity.

Notes

  • [9]The Budget 2007 package is $2.5 billion rising to $3.1 billion. The package includes a mixture of revenue and expense initiatives. Note that for accounting purposes, some policy initiatives implemented through the tax system such as Working for Families, KiwiSaver and the R & D tax credit are counted as expenses.

Core Crown

Table 2.11 –Components of core Crown net worth
  Year ended 30 June
  OLD GAAP NEW GAAP
($ billion) 2006 Actual 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Total assets 102.3 109.7 105.5 112.2 115.4 118.2 124.3
Total liabilities 62.2 63.8 56.4 58.6 58.2 57.3 59.6
Net worth 40.1 45.9 49.1 53.6 57.2 60.9 64.7

Source: The Treasury

Over the forecast period, core Crown assets are expected to increase from $105.5 billion from 2006/07 to $124.3 billion, largely reflecting the application of the operating balance and additional borrowing to build up assets.

As Figure 2.10 illustrates, the majority of growth occurs within financial assets, which increase by around $14.9 billion, while investments in Crown entities (primarily to fund hospitals and housing capital projects), and physical assets also increase slightly.

Figure 2.10 – Core Crown asset growth
Figure 2.10 – Core Crown asset growth
Source: The Treasury

Within the financial asset portfolio of the core Crown:

  • the NZS Fund is expected to increase by around $12.2 billion from 2006/07 to 2010/11. These funds are being set aside to assist in meeting future fiscal pressures associated with an ageing population
  • advances are forecast to increase by around $2.4 billion, primarily due to student loans, and
  • the financial asset portfolios of the Reserve Bank and New Zealand Debt Management Office stay relatively flat over the forecast period.

By 2010/11 the make-up of the financial asset portfolio is expected to have changed significantly, primarily driven by the increase in the holdings of the NZS Fund.

Figure 2.11 – Core Crown financial assets by portfolio
Figure 2.11 – Core Crown financial assets by portfolio
Source: The Treasury

The level of core Crown liabilities is expected to increase by around $3.2 billion from 2006/07 to 2010/11. The major component of core Crown liabilities is gross sovereign-issued debt, which, as previously mentioned, is forecast to increase nominally but decrease as a percentage of GDP over the forecast period.

State-Owned Enterprises and Crown Entities – Net Surpluses

State-owned enterprises (SOEs) and Crown entities (CEs) are forecast to run total operating surpluses of $10 billion over the forecast period. Around $2.4 billion of the operating surpluses will be returned as dividends, and will be available to fund spending elsewhere in the Crown.

Figure 2.12 – SOE and Crown entities operating balance
Figure 2.12 – SOE and Crown entities operating balance
Source: The Treasury

In 2006/07 SOE/Crown entities net surpluses are forecast to be $0.5 billion, which is lower than what is expected for the rest of the forecast period. The lower 2006/07 result is primarily due to an increase in the ACC unfunded liability of around $2 billion. This increase was mainly a result of changes in economic assumptions and higher rehabilitation costs (eg, more claims).

From 2007/08 onwards, SOE/Crown entities net surpluses are on average $1.8 billion.

SOE/Crown entities net surpluses after payment of dividends total $7.6 billion. This residual is maintained within the entities that have generated the net surpluses. In broad terms, the majority of the accumulated net surpluses are forecast to build up assets.

Financial assets across SOE/CEs are forecast to increase by around $7.1 billion. The majority of the increase is within the Crown Financial Institutions (including ACC and EQC), which are accumulating financial assets for the purpose of meeting future obligations.

Comparison with Half Year Update

Operating balance

Figure 2.13 – Operating balance comparison
Figure 2.13 – Operating balance comparison
Source: The Treasury

Compared to the Half Year Update the operating balance is expected to be similar in 2006/07. However, there are a number of counteracting factors:

  • an increase in tax revenue primarily in corporate tax due to some one-off tax receipts
  • delays in spending (of which some has been transferred into 2007/08), and
  • non-cash write-offs of tax and fines receivables have resulted in a $1.2 billion increase in expenses.

Beyond the current year the operating balance is initially higher than the Half Year Update, however this trend reverses from 2009/10 (refer Table 2.12). Key drivers of this trend are:

  • increases to forecast nominal GDP have led to an increase in forecast tax revenue of about $1 billion in 2007/08 and 2008/09. The upward revision to tax forecasts in the last two years is much smaller
  • an increase in SOE/Crown entities surpluses of around $0.2 billion per annum (spread across a numbers of entities)
  • an increase in investment income primarily owing to a higher overall financial asset position
  • a reduction in benefit expenses forecast of approximately $0.1 billion per annum. Most of the reduction occurs in unemployment benefits as a result of expected improvements in labour market conditions, and
  • expenses are forecast to be higher than the Half Year Update, reflecting a higher Budget 2007 package than previously signalled in the 2007 Budget Policy Statement.
Table 2.12 - Operating balance reconciliation (explains changes to the operating balance since Half Year Update)
  NEW GAAP
($ million) 2007
Forecast
2008
Forecast
2009
Forecast
2010
Forecast
2011
Forecast
Operating balance 2006 Half Year Update 6,260 6,071 5,197 5,826 5,979
Changes (revenue)          
Tax revenue (forecasting) 461 967 766 570 580
Tax revenue (policy) (22) (516) (489) (330)
New revenue allocation 1,000 1,000 1,000
Investment income 263 125 123 113 105
Total revenue changes 724 1,070 1,373 1,194 1,355
Other changes          
Welfare Benefit forecast changes 39 141 207 175 127
Other forecasting changes 36 (143) (85) (127) (130)
Expense transfers 367 (211) (56) (70) (119)
Top down expense adjustment 500
Increase in Budget 2007 and 2008 allowance 153 (667) (1,065) (1,547) (1,834)
Long term receivables write-off (1,199)
ACC insurance expenses (1,019) (254) (281) (353) (379)
Other SOE/CE movements 585 490 404 397 400
Transition to IFRS (243)
Other movements 124 (66) (125) (185) (33)
Total other changes (657) (710) (1,001) (1,710) (1,968)
Total changes 67 360 372 (516) (613)
Operating balance 2007 Budget Update 6,327 6,431 5,569 5,310 5,366

Source: The Treasury

Effect of Policy Changes on Tax Forecasts since the Half Year Update

$ million 2006/07
Forecast
2007/08
Forecast
2008/09
Forecast
2009/10
Forecast
2010/11
Forecast
Material policy changes          
Reduction in company tax rate (60) (790) (735) (680)
Reduction in tax rate for savings vehicles (5) (50) (60) (65)
International tax review - CFC changes (13) (50) (50)
Inclusion of life insurance in the PIE rules (25) (25) (25) (25)
Charitable donations threshold (15) (25) (25)
SSCWT exemption extension (17) (18) (19) (20)
Indexation of personal income tax thresholds 85 395 425 535
Total (22) (516) (489) (330)

Sources: The Treasury, Inland Revenue

Reduction in company tax rate

With effect from the 2009 income year, the company income tax rate will decrease from 33% to 30%.

Reduction in tax rate for savings vehicles

In line with the reduction in the company income tax rate, the tax rate for widely-held savings vehicles, eg, superannuation funds and unit trusts, will also decrease from 33% to 30% and the maximum Portfolio Investment Entity (PIE) tax rate will be set at 30%.

International tax review – CFC changes

From 1 April 2009, active income of controlled foreign companies will be exempt from New Zealand income tax.

Inclusion of life insurance in the PIE rules

With effect from 1 October 2007, all life insurance savings products will be able to use the fair dividend rate method under the PIE regime. Unit-linked life products are to be allowed to obtain certain benefits of the PIE regime.

Charitable donations threshold

With effect from the 2009 income year, there will be no limit to the level of rebate that may be claimed in respect of charitable donations made by individuals and companies.

SSCWT exemption extension

The specified superannuation contribution withholding tax exemption for KiwiSaver has been extended to other superannuation schemes that have similar lock-in rules to KiwiSaver.

Indexation of personal income tax thresholds

The triennial indexation of personal income tax thresholds announced in the 2005 Budget will now not be proceeding.

Residual cash

Over the forecast period residual cash is similar to the Half Year Update. In the short term the cash position is stronger owing to the increase in tax revenue. The cash position weakens and similar to the Half Year Update moves into a cash deficit as the full impact of the forecast increases in the Budget 2007 operating and capital allowance kick in.

Debt indicators

Figure 2.14 – Gross sovereign-issued debt comparison
Figure 2.14 – Gross sovereign-issued debt comparison
Source: The Treasury

With the cash position ending up in a similar position to the Half Year Update there has been minimal change in the forecasts for the debt indicators.

By 2010/11, gross sovereign-issued debt is around 1% higher than at the Half Year Update. Net core Crown debt is 0.3% lower than forecast at the time of the Half Year Update.

Table 2.13 - 2007 Budget Update fiscal indicators
  Year ended 30 June
  OLD GAAP NEW GAAP
Fiscal indicators ($ million) 2006
Actual
2007
Forecast
2007
Forecast
2008
Forecast
2009
Forecast
2010
Forecast
2011
Forecast
Revenue              
Total revenue 76,581 76,203 73,390 76,872 79,576 83,178 86,819
Core Crown revenue 59,170 59,501 57,006 59,402 61,172 63,825 66,993
Tax revenue 51,973 51,539 51,658 54,173 55,691 58,269 61,351
Expenses              
Total expenses 65,084 69,687 67,853 71,914 75,619 79,648 83,472
Core Crown expenses 49,900 53,775 52,783 56,096 58,819 61,677 64,898
Operating balance - Core Crown 9,270 5,717 5,801 4,463 3,667 3,630 3,781
Operating balance - Crown entities 1,593 469 225 1,241 1,169 974 960
Operating balance - SOEs 1,799 1,065 1,034 1,068 1,141 1,155 1,065
Dividend elimination (1,189) (683) (733) (341) (408) (449) (440)
Total operating balance 11,473 6,568 6,327 6,431 5,569 5,310 5,366
OBEGAL     5,537 4,958 3,957 3,530 3,347
OBEGAL excluding NZS Fund revenue     5,654 4,860 3,862 3,438 3,260
Cash available/(shortfall to be funded) 2,985 1,720 1,720 (976) (1,687) (1,649) (1,426)
Debt indicators              
Gross sovereign-issued debt 35,461 37,217 37,935 40,400 40,231 39,894 42,737
Total gross Crown debt 39,427 42,367 43,556 46,364 47,050 46,522 49,691
Net core Crown debt 7,745 4,611 5,039 4,655 5,529 6,217 6,860
Net core Crown debt with NZS Fund assets (5,138) (7,962) (7,534) (10,784) (13,145) (16,008) (19,287)
Net worth 71,400 88,456 89,696 96,061 101,645 107,024 112,421
Domestic bond programme 2,375 2,511 2,511 2,520 2,500 2,483 2,515
Nominal GDP 156,562 164,868 164,868 173,187 179,132 186,985 196,177
Fiscal indicators as a % of GDP              
Revenue              
Total Crown revenue 48.9 46.2 44.5 44.4 44.4 44.5 44.3
Core Crown revenue 37.8 36.1 34.6 34.3 34.1 34.1 34.1
Tax revenue 33.2 31.3 31.3 31.3 31.1 31.2 31.3
Expenses              
Total Crown expenses 41.6 42.3 41.2 41.5 42.2 42.6 42.5
Core Crown expenses 31.9 32.6 32.0 32.4 32.8 33.0 33.1
Operating balance 7.3 4.0 3.8 3.7 3.1 2.8 2.7
OBEGAL     3.4 2.9 2.2 1.9 1.7
OBEGAL excluding NZS Fund revenue     3.4 2.8 2.2 1.8 1.7
Debt indicators              
Gross sovereign-issued debt 22.6 22.6 23.0 23.3 22.5 21.3 21.8
Total gross Crown debt 25.2 25.7 26.4 26.8 26.3 24.9 25.3
Net core Crown debt 4.9 2.8 3.1 2.7 3.1 3.3 3.5
Net core Crown debt with NZS Fund assets (3.3) (4.8) (4.6) (6.2) (7.3) (8.6) (9.8)
Net worth 45.6 53.7 54.4 55.5 56.7 57.2 57.3
New Zealand Superannuation Fund              
Fund asset returns (after tax) 969 1,006 1,006 965 1,150 1,351 1,573
Fund contributions 2,337 2,049 2,049 2,103 2,194 2,312 2,458
Fund assets (year end) 9,861 12,918 12,910 15,977 19,321 22,984 27,015
% of GDP 6.3 7.8 7.8 9.2 10.8 12.3 13.8

Source: The Treasury

Table 2.14 - 2006 Half Year Update fiscal indicators
  Year ended 30 June
  2006
Actual
2007
Forecast
2008
Forecast
2009
Forecast
2010
Forecast
2011
Forecast
Fiscal indicators ($ million)            
Revenue            
Total revenue 76,581 74,977 76,688 79,051 82,818 86,489
Core Crown revenue 59,170 59,020 59,917 61,577 64,746 67,895
Tax revenue 51,973 51,708 53,344 55,596 58,512 61,225
Expenses            
Total Crown expenses 65,084 68,790 70,688 73,926 77,064 80,583
Core Crown expenses 49,900 53,963 55,577 58,159 60,554 63,479
Operating balance - Core Crown 9,270 5,057 4,340 3,418 4,192 4,416
Operating balance - Crown entities 1,593 1,013 1,079 1,124 963 950
Operating balance - SOEs 1,799 776 993 1,055 1,091 1,062
Dividend elimination (1,189) (586) (341) (400) (420) (449)
Operating balance 11,473 6,260 6,071 5,197 5,826 5,979
OBERAC 8,648 6,656 6,071 5,197 5,826 5,979
OBERAC (excluding net NZS Fund asset returns) 8,068 5,981 5,231 4,170 4,588 4,511
Cash available/(shortfall to be funded) 2,985 107 (691) (1,821) (978) (294)
Debt indicators            
Gross sovereign-issued debt 35,461 37,867 40,153 39,192 38,615 41,082
Total gross Crown debt 39,427 43,750 46,869 47,290 46,901 49,531
Net core Crown debt 7,745 6,382 5,923 7,187 7,697 7,525
Net core Crown debt with NZS Fund assets (2,116) (6,271) (9,703) (11,792) (14,979) (19,195)
Net worth 71,403 77,718 83,789 88,986 94,812 100,791
Domestic bond programme 2,375 2,456 2,517 2,476 2,472 2,465
Nominal GDP 156,562 162,667 170,633 179,817 188,764 198,068
Fiscal indicators as a % of GDP            
Revenue            
Total Crown revenue 48.9 46.1 44.9 44.0 43.9 43.7
Core Crown revenue 37.8 36.3 35.1 34.2 34.3 34.3
Tax revenue 33.2 31.8 31.3 30.9 31.0 30.9
Expenses            
Total Crown expenses 41.6 42.3 41.4 41.1 40.8 40.7
Core Crown expenses 31.9 33.2 32.6 32.3 32.1 32.0
Operating balance 7.3 3.8 3.6 2.9 3.1 3.0
OBERAC 5.5 4.1 3.6 2.9 3.1 3.0
OBERAC (excluding net NZS Fund asset returns) 5.2 3.7 3.1 2.3 2.4 2.3
Debt indicators            
Gross sovereign-issued debt 22.6 23.3 23.5 21.8 20.5 20.7
Total gross Crown debt 25.2 26.9 27.5 26.3 24.8 25.0
Net core Crown debt 4.9 3.9 3.5 4.0 4.1 3.8
Net core Crown debt with NZS Fund assets (1.4) (3.9) (5.7) (6.6) (7.9) (9.7)
Net worth 45.6 47.8 49.1 49.5 50.2 50.9
New Zealand Superannuation Fund            
Fund asset returns (after tax) 969 743 840 1,027 1,238 1,468
Fund contributions 2,337 2,049 2,133 2,326 2,459 2,576
Fund assets (year end) 9,861 12,653 15,626 18,979 22,676 26,720
% of GDP 6.3 7.8 9.2 10.6 12.0 13.5

Source: The Treasury

Risks to fiscal forecasts

The fiscal forecasts were finalised on 9 May 2007 in accordance with the forecast accounting policies. There are certain risks associated with the forecast results. To assist in evaluating such risks, the following chapters should be read in conjunction with the fiscal forecasts:

  • Risks and Scenarios (Chapter 3) – The fiscal forecasts are based on the economic forecasts presented in Chapter 1 and any variation from the economic forecast will affect the fiscal forecasts in particular, tax revenue and benefit expenses. The Risks and Scenarios chapter discusses the effect on the forecasts under different circumstances.
  • Specific Fiscal Risks (Chapter 4) – The fiscal forecasts incorporate Government decisions up to 9 May 2006. The Specific Fiscal Risks chapter covers specific policy decisions that are under active consideration by the Government at the time of the finalisation of the forecasts.

In addition to the specific fiscal risks and the link to the economic forecasts, there are a number of forecasting issues explained below that may arise in future.

Tax forecasting risks

The tax forecasts prepared for this Budget Update are based on current tax policy and on the macroeconomic central forecast. Sensitivities of tax revenue to changes in economic conditions are also presented in the Risks and Scenarios chapter on page 115.

KiwiSaver risks

IRD baselines incorporate an assumed take-up profile for the KiwiSaver regime. Actual take-up could be higher or lower than assumed, or faster or slower than assumed, representing an unquantified risk to the operating balance. This would decrease or increase the operating balance.

SOEs’ and Crown entities’ forecasts

The forecasts for large SOEs and CEs were provided in March 2007 based on their best assessments at that time.

Revaluation of property, plant and equipment

Crown accounting policy is to revalue certain classes of property, plant and equipment on a regular basis. In certain circumstances the valuation will be affected by foreign exchange rates, so any appreciation in the NZ dollar (from 30 June 2007) will adversely affect the current physical asset values included in the fiscal forecasts.

Discount rates

The GSF and ACC liabilities included in these forecasts have been valued as at 28 February and 31 March respectively. The liabilities will next be valued as at 30 June 2007. Any change in discount rates will affect the present fiscal forecast. For example, if the discount rate rises, the value of the liabilities will decrease.

Tertiary education institutes’ accounting treatment

The forecast information presented in the 2007 Budget Update combined Tertiary Education Institutes (TEIs) on an equity accounting basis. This treatment has been under consideration by accounting standard setters. The Financial Reporting Standards Board has recently advised that the question of whether to consolidate autonomous and independent entities will be considered by delivering its deliberations of the International Accounting Standards Board (IASB) project on consolidation. The IASB plans to publish a discussion paper in 2007.

The combination method adopted in these forecasts is to equity account for the TEIs’ net surpluses and net investment (ie, TEI revenues, expenses, assets and liabilities are not included on a line-by-line basis). This is consistent with the treatment adopted in the 2006 Financial Statements of the Government.

The key indicators are unchanged as a result of the combination approach for TEIs (refer page 60 of the 30 June 2006 Financial Statements of the Government).

Indicators of the Government’s Fiscal Performance

This section aims to help readers better understand the Government’s fiscal position.

Each indicator in this fact sheet gives valid insights into the government’s historical, current and forecast fiscal position, but no one indicator gives a complete picture. Individual indicators do, however, come into greater or lesser focus as circumstances change.

When, for example, the New Zealand Government’s net worth was low and net and gross debt levels were high, much of the focus of government and public commentary at that time was on eliminating annual operating deficits and on the need to attain, and later to lock in, annual operating surpluses.

However, as net worth has risen, and gross and net debt levels have fallen, the Government in more recent years has increasingly focused on how to maintain debt levels around current levels and, accordingly, has given more focus to the Government’s annual cash balance.

Most of the indicators in this section may be useful regardless of the particular fiscal strategy being followed. In a few cases (such as the formulation of OBEGAL excluding NZS Fund revenue), the indicator is used to throw light on the impact of a particular strategy (in this case the build-up of financial assets in the NZS Fund).

Accounting Equations

Flow indicators (a worked example of how these flows interact is provided in the Fiscal Outlook chapter, see Table 2.2)

  1. Core Crown revenues – core crown expenses + net surplus of SOEs (ie, after dividends) and Crown entities + net gains and losses = Operating balance.
  2. Operating balance – net gains and losses = Operating balance before gains and losses (OBEGAL).
  3. OBEGAL – retained items (eg, net surplus of SOEs/CEs and revenues of the NZS Fund) – non-cash items (eg, depreciation) = Net core Crown cashflow from operations.
  4. Net core Crown cashflow from operations – net investing activities (eg, contributions to NZS Fund, purchases of assets, loans to others) = Residual cash.

Stock indicators

  1. Gross sovereign-issued debt (GSID) = debt issued by the core Crown.
  2. Core Crown net debt = gross sovereign-issued debt – core Crown’s financial assets.
  3. Net worth (NW) = Crown’s total assets – Crown’s total liabilities. (Operating balance (OB) in any year largely drives the change in Net worth.)

Ratio of Core Crown Revenue (excluding NZS Fund revenue) to GDP

Ratio of core Crown revenue (excluding NZS Fund revenue) to GDP = the amount of revenue the core Crown receives as a percentage of GDP. Core Crown revenue mostly consists of tax revenue collected by the Government, but also includes investment income, sales of goods and services, and other receipts. Tax revenue is an accrual measure of taxation (ie, it is a measure of tax due, regardless of whether or not it has actually been paid).

The revenue collected is used to meet the Government’s spending needs. It is important to look at this alongside expenses, operating balance and gross debt indicators for insights into the sustainability of current policy settings.

Ratio of Core Crown Revenue (excluding NZS Fund revenue) to GDP

Core Crown revenue (excluding NZS Fund revenue) to GDP is expected to be broadly stable at around 34% over the forecast period, while core Crown tax to GDP is expected to be remain relatively flat over the forecast period.

Ratio of Core Crown Expenses to GDP

Ratio of core Crown expenses to GDP = the day-to-day spending (on salaries, welfare benefit payments, running hospitals and schools, finance costs and maintaining national defence etc) that do not build physical assets for the Government. This is an accrual measure of expenses and includes items such as depreciation on physical assets.

This shows the day-to-day spending of the core Crown – ie, it excludes spending by SOEs and Crown entities – and highlights the size of Government in the economy and potential scope for crowding out the private sector.

The forecasts of operating expenses assume that the entire forecast operating allowance is allocated to spending.

By reducing gross debt, the Government has also reduced finance costs. However, in the years ahead, finance costs are likely to be fairly flat with gross debt forecast to be broadly stable.

Ratio of Core Crown Expenses to GDP

In the short-term core Crown expenses to GDP rise slightly before the trend stabilises as allocations for future Budgets are broadly consistent with forecast growth in the economy.

Operating Balance

Operating balance = revenues less expenses, plus net gains and losses.

The operating balance shows whether the government sector has generated enough revenues to cover its expenses in any given year.

This measure can be volatile from year to year owing to events outside of the Government’s direct control (such as changes in interest rates and revaluations etc); therefore, it is generally not used as a measure of the Government’s short-term fiscal stewardship.

Operating Balance

The Government has been running operating surpluses since the early 1990s. The operating balance was just over 7% of GDP in 2006 and is expected to remain above 2% of GDP over the forecast period.

OBEGAL

OBEGAL = the operating balance before net gains and losses.

OBEGAL excluding NZS Fund revenue = OBEGAL less interest and dividend revenue earned by the NZS Fund.

By excluding net gains and losses the OBEGAL gives a more direct indication of the underlying stewardship of the Government.

The current Government wishes to retain the NZS Fund investment returns in the Fund. Therefore, to ensure the Government is meeting its fiscal objectives, the Government has stated that it will be focusing on the OBEGAL excluding NZS Fund revenue.

OBEGAL

Residual Cash and Domestic Bond Programme

Residual cash = the level of money the Government has available to repay debt or, alternatively, needs to borrow in any given year. Residual cash is alternatively termed “Cash available/(shortfall to be funded)”.

Domestic bond programme = the amount of new government stock expected to be issued over the financial year.

The cash available measure includes capital investment and NZS Fund contributions; therefore, it is the flow contributing to changes in debt. This balance cannot be looked at independently from gross sovereign-issued debt.

The domestic bond programme raises term debt for the Government, the proceeds of which contribute to funding operating and investing activity, and the repayment of maturing debt. The programme tends to be different from the cash available figure in any given year as financing activity, such as the repayment of debt, needs to be considered.

Residual Cash and Domestic Bond Programme

The Government is currently moving from a period of having cash available to repay debt, to a need, in subsequent years, to generate cash through borrowing and reductions in marketable securities.

Crown Gross Debt

Total Crown gross debt = the total borrowings (both sovereign-guaranteed and non-sovereign guaranteed) of the total Crown.

Gross sovereign-issued debt = debt issued by the sovereign (ie, core Crown) and includes Government stock held by the NZS Fund, GSF, ACC or EQC for example.

Total gross debt and GSID are often expressed as a percentage of GDP to put the level of debt into perspective, in terms of a country’s ability to generate growth to repay the debt and/or income to service this debt.

Total gross debt represents the complete picture of whole-of-government obligations to external parties. However, debt issued by SOEs and Crown entities is not explicitly guaranteed by the Crown. The debt that is issued by the sovereign and guaranteed by the sovereign is in GSID. The Government’s long-term debt objective is formulated in terms of GSID.

A high ratio of debt to GDP can have an adverse impact on credit ratings and perceived sustainability of current policy settings. So as a general rule, a relatively low ratio is considered to be prudent. A low ratio of debt to GDP can also provide the Government with more flexibility in their accounts to respond to adverse shocks through increasing debt.

Crown Gross Debt

GSID has been steadily declining since the early 1990s and is expected to remain broadly stable around 20% of GDP in the forecast period.

Core Crown Financial Assets

Core Crown financial assets= the financial assets of the core Crown. These are either cash or shares (equity) or a right to receive a financial instrument, which can be converted to cash. The assets of the NZS Fund are becoming the dominant feature of the Crown’s financial assets. The NZS Fund is the Government’s means of building up assets to partially pre-fund future New Zealand Superannuation expenses. The Government’s contributions to the NZS Fund are calculated over a 40-year rolling horizon to ensure superannuation entitlements over the next 40 years can be met.

Established under the New Zealand Superannuation and Retirement Income Act 2001, the NZS Fund was created to partially provide for the future cost of New Zealand Superannuation, which is expected to almost double in cost due to population ageing.

The Government plans to allocate around $2 billion a year to the NZS Fund over the next 20 years. The NZS Fund’s mandate is to invest money in a way that maximises its returns, without undue risks.

As the cost of providing New Zealand Superannuation increases, future governments will draw on the NZS Fund to help smooth the impact of the cost of New Zealand Superannuation on their finances.

Core Crown Financial Assets

For the year ended June 2006, NZS Fund assets totalled $9.86 billion or around 6% of GDP. The NZS Fund is expected to grow to around $27 billion or 14% of GDP by the end of the forecast period.

Core Crown Net Debt

Core Crown net debt = borrowings (financial liabilities) less cash and bank balances, marketable securities and deposits, and advances (financial assets). Net debt excludes the assets of the NZS Fund and GSF.

By including financial assets, net debt can provide additional information about the sustainability of the Government’s accounts. Many international agencies believe the quantity of off setting financial assets is important when determining the credit-worthiness of a country. That is, if a country has a high ratio of financial assets to GDP, they are better able to justify a high ratio of debt to GDP.

However, as some financial assets are not very liquefiable (or easily converted into cash), it is important to view net debt alongside GSID.

Core Crown Net Debt

After declining steadily since the early 1990s, net debt is projected to consolidate in the years ahead at around 3% of GDP, rising slightly towards the end of the forecast period. If the assets of the NZS Fund are included, the Government’s net debt position is in a net financial asset position.

Net Worth

Net worth = assets less liabilities (also referred to as the Crown balance). The change in net worth in any given forecast year is largely driven by the operating balance.

Total Crown net worth is one indicator of the degree to which current government activities are sustainable. This indicator should be considered alongside the Crown’s debt position, as relatively high debt to GDP ratios may still be considered sustainable if the Crown has relatively high ratios of saleable or commercial assets to GDP.

Building up net worth is also consistent with preparing for population ageing.

Net Worth

Net worth is projected to continue to rise, moving from around 45% in 2006 to around 57% at the end of the forecast period.

3 Risks and Scenarios

Summary

  • The central forecast presented in the Economic and Tax Outlook chapter is for the current recovery in domestic demand to be sustained through most of 2007. Tight monetary conditions are expected to slow its quarterly growth from late 2007 and the high exchange rate will constrain export growth, leading to low growth overall in the March 2009 year, before it recovers in the final two years of the forecasts. However, the course taken by the economy depends on a number of different factors.
Figure 3.1 – Real GDP
Figure 3.1 – Real GDP
Source: Statistics New Zealand, The Treasury
  • A key judgement is the strength of domestic demand in the near term, particularly private consumption. There is also uncertainty about the path of the exchange rate and the strength of the world economy. The investment and employment responses of firms to increasing costs and weak profit growth are also key judgements, as are the underlying assumptions concerning population growth, labour market participation and productivity growth.
  • Although we believe the central forecast presented in the Economic and Tax Outlook chapter is the most likely outcome, two scenarios that illustrate different paths for the economy are presented in this chapter. These scenarios are only two of a number of possible outcomes and therefore do not fully illustrate the range of possibilities, but they represent key risks.
  • The first scenario illustrates the impact of higher terms of trade and stronger domestic demand in the short term. Gross domestic product (GDP) is higher in both real and nominal terms, but inflation pressures abate more slowly and the current account deficit reduces less. The second scenario assumes that the exchange rate falls sooner and that domestic demand is weaker than in the central forecast, leading to lower growth in GDP and an increase in tradables inflation. Subsequently, inflation is weaker, interest rates are lowered and the current account adjusts sooner than in the central forecast.

Introduction

The central forecast presented in the Economic and Tax Outlook chapter incorporates a number of key judgements about how various forces affecting the economy will evolve. These judgements reflect the balancing of both positive and negative risks facing the economy to arrive at our best assessment of how it is likely to develop. Some of these judgements are related to the cyclical drivers of activity and some relate to the structural characteristics of the economy. If events turn out differently from our assessment, the path taken by the economy is also likely to deviate from the central forecast.

The first part of this chapter, Economic Risks, outlines some of the risks associated with the economic outlook. There are both positive and negative risks – some domestically and some internationally oriented. The second part of this chapter, Economic Scenarios, presents in more detail two scenarios that could occur if events were to unfold differently. The third part of this chapter, Fiscal Scenarios, considers the implications of the two economic scenarios on the fiscal position.

Economic Risks

There is uncertainty about the strength of domestic demand in the near term …

Figure 3.2 – Real gross national expenditure
Figure 3.2 – Real gross national expenditure
Source: Statistics New Zealand, The Treasury

Domestic demand was the major driver of growth in the New Zealand economy from 2002 to 2004, but its contribution to GDP growth has decreased in the past two years. However, growth in domestic demand – particularly private consumption – picked up in the final quarter of 2006, but the outlook depends on the reasons for the resurgence. Petrol prices fell nearly 15% in the final quarter of 2006 as oil prices fell and the NZ dollar strengthened, increasing disposable income and giving private consumption growth a boost. Although the level of consumption might be maintained, further falls in fuel prices would be required to lift growth in consumption again.

Another uncertainty is the impact of past interest rate increases on domestic demand. From late 2003 until recently, the effective mortgage interest rate has not increased by as much as the Official Cash Rate and 90-day rates. However, longer term rates have increased recently, affecting new borrowers, and the effective mortgage rate will continue to increase as borrowers re-finance at higher rates. It is uncertain when the effect of these changes will be felt and what impact they will have on domestic demand.

… and the sustainability of the recent increase in the terms of trade

The impact of the recent increase in the terms of trade (largely as a result of increases in dairy prices) is a further uncertainty. International dairy prices have increased by nearly 50% since late 2006, but it is not certain how sustainable these increases are and what effect they will have on the exchange rate, real incomes and consumption.

The future rate of growth in house prices is another uncertainty for domestic demand. In the past six years house prices have approximately doubled, boosting household wealth and supporting private consumption growth and encouraging further residential investment. There has also been an increase in household liabilities, leaving the household sector exposed to a slowdown in house price growth as well as increases in debt servicing costs.

There are both positive and negative risks associated with the strength of domestic demand, but the greater risk is that it will continue to be stronger or continue for longer than in the central forecast. A scenario is developed below which illustrates this risk, combined with a stronger terms of trade, and shows the consequent developments in the economy and the implications for tax revenue.

The exchange rate is an important influence on the economy …

In the central forecast we have assumed that the exchange rate will remain around its current level until early 2008 when it will begin to fall in response to lower interest rates and slower economic growth. However, the exchange rate is always a major uncertainty in economic forecasts and recent volatility has shown that sentiment can change quickly.

There are a number of factors which help to explain the recent strength in the NZ dollar and which are likely to continue to influence it in the forecast period. The large positive interest rate differential between New Zealand and some other countries (particularly Japan, but also the United States) has encouraged offshore investment in New Zealand. Recent increases in commodity prices have also sustained the NZ dollar. The rebound in domestic demand in the final quarter of 2006 and first quarter of 2007 is an additional factor supporting the NZ dollar currently.

… but its future path is uncertain

Figure 3.3 – TWI exchange rate
Figure 3.3 – TWI exchange rate
Source: Reserve Bank of New Zealand, The Treasury

The NZ dollar could appreciate further, especially against the US dollar if growth slows in the United States, or could remain strong for longer than assumed in our central case if export commodity prices remain strong or domestic demand remains robust. Such an outcome would further postpone the export recovery and narrowing of the current account deficit, and likely bring stronger domestic demand and higher non-tradables inflation.

It is also possible that the NZ dollar could fall sooner than assumed in our central forecast, most likely because of international developments. A scenario which explores the implications of a sharp fall in the currency sooner than in the central forecasts, in conjunction with weaker domestic demand, is developed below. Its effect on other parts of the economy and tax revenue is also explored.

The pace of growth in the world economy is a potential risk …

The world economy is currently in the mature phase of an expansion which began in 2002 with the recovery from the bursting of the “tech bubble” in the United States. Our central forecast assumes that trading partner growth will average 3.6% per annum over the forecast period, similar to its average for the past three years. However, there are risks to this outlook, mostly on the downside.

Interest rates are being tightened in most developed economies as inflation pressures emerge. Consequently there is a risk that growth might be weaker than assumed in our central forecast if, for example, inflation pressures become greater and further monetary tightening is required in the major developed economies. In addition, the housing market in the United States has slowed over the past year and problems have emerged in the sub-prime mortgage sector.

If these financial difficulties spill over to other sectors, perhaps combined with further monetary tightening, growth could slow dramatically. Although the performance of the Asian economies, particularly China, may not be as dependent upon the US economy as previously, there are doubts about the sustainability of the growth in the Asian region as inflation pressures develop there too.

… as are other international developments

Changes in international commodity markets can have a major impact on the New Zealand economy. The recent emphasis on bio-fuels in the United States has placed upward pressure on stockfeed prices with flow-on effects on dairy prices. To the extent that these price increases are sustained, they point to higher terms of trade for New Zealand and a higher equilibrium exchange rate with consequent benefits for real incomes.

International events can also affect the prospects for the New Zealand economy. Recent fluctuations in oil prices have shown the continued influence of political events, as well as the usual supply and demand factors. Changes in oil prices are directly reflected in local fuel prices and affect household disposable income and private consumption, as well as inflation. Increased costs also affect firm profitability and investment and hiring decisions.

Employment and investment decisions by firms are a key factor …

The response of firms to higher costs (including labour costs) and steady or lower profits will also be a key factor in the forecast period. In the central forecast we have assumed that employment growth will ease. However, continuing tight labour market conditions and a pick-up in domestic demand may lead firms to seek to expand employment further.

If employment levels or labour incomes were higher than in the central scenario, private consumption and residential investment would also be stronger. If firms are unable to find the labour they are seeking, they may increase their investment in plant and equipment even more than already assumed in order to increase productivity and output.

Similarly, the response of firms to the Business Tax Reform in this budget is an uncertainty. The impact of the changes on business costs is a key dimension likely to affect employment and investment decisions.

… and so are the responses of households to labour market conditions

The response of households to labour market conditions is also important. The fall in participation from its peak in the second half of 2006 may be related to weaker employment growth at that time, but may also reflect the effect of income support policies which impose high effective marginal tax rates. Lower labour force participation, for a constant employment level, would bring lower unemployment and a tighter labour market and may lead to faster wage growth than assumed in the central forecasts. While this might support total labour income – and private consumption – in the short term, it would adversely affect firm profitability. Lower participation also implies a lower potential growth rate for the economy as a whole and greater inflation pressure for a given rate of growth above that trend.

Underlying assumptions concerning productivity are an uncertainty …

The central forecast assumes that labour productivity growth will recover in the forecast period. Productivity growth has been weak recently as output growth has fallen without a commensurate change in labour input, typical of the mature phase of the economic cycle. In addition, unemployment has been below 4% since September 2004 and so the productivity of the latest workers hired may be lower than the existing workforce, detracting from aggregate productivity. Some firms may also be holding onto existing labour despite a fall in output, adversely affecting measured productivity.

However, we consider that labour productivity growth is likely to strengthen in the forecast period as a result of a reversal of these cyclical factors, as well as the beneficial effects of recent business investment. If these assumptions are not correct and productivity growth turns out to be lower than assumed, the potential growth rate of the economy will be lower and inflation pressures will be higher for a given level of output.

… as are assumptions concerning population growth

Another key assumption in our central forecast is the rate of population growth, with the net gain from external migration the main uncertainty. In the central forecasts we have assumed that net migration will decline gradually to its long-run average of 10,000 per annum by March 2010. There is a risk that migration will be lower in the short term as increasing departures of New Zealanders lowered the net gain to only 6,400 on an annualised basis for the March 2007 quarter. Lower net migration gains would affect both the potential growth rate (through its effect on labour supply) and short-term demand via consumption and residential investment.

There are also risks associated with some other types of events

There are also a number of non-economic risks which might impact on the development of the economy. Climatic events can affect agricultural production levels, both in New Zealand and in competing supplier countries with adverse or beneficial effects on returns to New Zealand producers. Similarly, agricultural diseases can have adverse or beneficial consequences for New Zealand producers, depending on how they affect them. Market perceptions arising from concerns about long-term climate change and environmental concerns may also affect the demand for New Zealand products.

Economic Scenarios

The following scenarios show how the growth path of the economy might evolve if some of the key judgements underlying the central forecast are altered. The scenarios are two of a large number of possible examples, and do not represent upper or lower bounds for the central forecast, with more extreme paths possible. They represent what are assessed to be two key risks to the central forecast and serve to illustrate the impact which relatively small changes in the assumptions underlying the forecasts have on some key variables, especially the fiscal aggregates.

In the first scenario, entitled “Higher terms of trade and stronger domestic demand”, a stronger terms of trade (in the form of higher export prices) in the near term, accompanied by stronger consumption and residential and market investment, raises real GDP growth in the near term but also increases inflationary pressures and postpones the current account adjustment.

The second scenario is entitled “A sharper fall in the TWI and weaker domestic demand”. The NZ dollar falls sooner than in the central forecast and domestic demand is weaker, leading to lower growth in GDP initially and an increase in tradables inflation. Subsequently, inflation is weaker, interest rates are lowered and the current account deficit adjusts sooner than in the central forecast.

Table 3.1 – Alternative scenarios: summary
  2006 Actual 2007 Estimate 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Production GDP (annual average % change, year ending 31 March)            
Central forecast 2.0 1.7 2.6 1.6 2.8 3.1
Higher terms of trade and stronger domestic demand 2.0 1.7 2.9 2.3 2.6 2.8
Sharper fall in TWI and weaker domestic demand 2.0 1.7 2.2 1.3 2.7 3.4
Nominal expenditure GDP (annual average % change, year ending 31 March)            
Central forecast 4.6 4.4 5.6 3.5 4.2 4.8
Higher terms of trade and stronger domestic demand 4.6 4.4 6.4 4.6 4.2 5.0
Sharper fall in TWI and weaker domestic demand 4.6 4.4 4.8 3.4 3.9 4.5
OBEGAL ($billion, year ending 30 June)[1]            
Central forecast 8.6 5.5 5.0 4.0 3.5 3.3
Higher terms of trade and stronger domestic demand 8.6 5.6 5.6 5.0 4.4 4.1
Sharper fall in TWI and weaker domestic demand 8.6 5.5 4.4 3.4 3.0 2.7

Sources: Statistics New Zealand, The Treasury

NOTE:

  • [1] Operating balance before gains and losses. See Chapter 2 above for an explanation. The figures for 2006 are the OBERAC.

Higher terms of trade and stronger domestic demand

In the central forecast, the terms of trade (on an overseas trade index basis) are forecast to increase 3.6% in annual average terms in the March 2008 year. Most of this increase is an upward revision from the Half Year Update forecasts; in this scenario, the terms of trade are assumed to increase by a further 2% in the March 2008 year. The reason for this could be a more sustained increase in international dairy prices or a greater flow-through from the recent increases to the price received by New Zealand producers. As a result of the increased export prices, the exchange rate is assumed to be 3% higher in the March 2008 quarter. It is also assumed that there is greater confidence as a result of the higher terms of trade and more momentum in the economy than in the central scenario.

Table 3.2 – Higher terms of trade and stronger domestic demand scenario
(Annual average % change, year ending 31 March) 2006 Actual 2007 Estimate 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Private consumption 4.3 1.7 3.6 2.8 1.2 1.0
Residential investment -4.7 -2.3 5.8 -1.3 -5.1 -0.0
Market investment 7.5 -4.6 6.6 5.5 1.3 0.8
Gross national expenditure 3.9 0.6 5.0 3.1 1.2 1.3
Exports of goods and services -0.3 3.1 0.4 3.4 3.8 4.2
Imports of goods and services 4.1 -1.2 5.5 5.2 -0.3 -0.2
GDP (production measure) 2.0 1.7 2.9 2.3 2.6 2.8
Employment growth 2.6 1.6 1.1 1.7 1.2 1.3
Unemployment rate[1] 3.9 3.8 3.9 4.1 4.0 4.0
90-day bank bill rate[2] 7.6 7.8 8.5 8.3 7.2 6.9
TWI[2] 68.3 68.8 72.0 62.8 55.6 52.8
CPI[3] 3.3 2.6 2.7 3.1 3.3 2.7
Current account balance (% GDP) -9.6 -8.6 -7.2 -8.1 -8.7 -7.3
Nominal GDP (expenditure measure) 4.6 4.4 6.4 4.6 4.2 5.0

Sources: Statistics New Zealand, Reserve Bank of New Zealand, The Treasury

NOTES:

  • [1] Percentage of labour force, March quarter, seasonally adjusted.
  • [2] Average for March quarter.
  • [3] Annual percentage change, March quarter.

In this scenario, private consumption growth is assumed to be stronger in the March 2008 and 2009 years than in the central forecast, as households respond to their higher real incomes and increased confidence; higher real incomes also lead to stronger residential investment in the first two years of the scenario. With stronger demand from households, firms increase their investment relative to the central forecast in the same period.

As a result of the stronger domestic demand, employment growth is approximately half a percentage point higher in the March 2009 and 2010 years and the unemployment rate approximately half a percentage point lower. Wage growth is higher than in the central forecasts and the greater strength in the labour market reinforces the stronger domestic demand.

Export volume growth in this scenario is assumed to be slightly lower than in the central forecast because of the effect of the higher exchange rate inhibiting growth in non-commodity and services export volumes. Import volume growth responds rapidly to the increased private consumption and business investment to be slightly higher in the March 2008 year and 3.0% higher in the March 2009 year. GDP growth is higher in the first two years of the forecast period.

The stronger domestic demand leads to higher inflation and more persistent inflation pressures. Consumer price inflation is 0.7% higher in March 2009 and 1.0% higher in the following year. Increased inflation pressure results in tighter monetary policy and 90-day interest rates are half a percentage point higher in the March 2008 quarter and do not fall as rapidly in the following year, remaining at 8.3% in March 2009, 1.6% points higher than in the central scenario. Even with this monetary tightening, inflation remains half a percentage point higher in the final year of the forecasts.

The monetary tightening, however, brings about a slowing in domestic demand. Private consumption, residential investment and market investment all grow more slowly in this scenario in the final two years of the forecast than in the central forecast. Import growth is also lower in this period, but so is real GDP growth. Nominal GDP growth receives a boost of approximately 1% in each of the first two years of the projection period as the higher real GDP is boosted by higher inflation, but is practically unchanged from the central forecast in the last two years as lower real GDP growth offsets the higher inflation.

The stronger domestic demand, especially increased demand for imports, leads to a slower adjustment in the current account deficit. Net investment income outflows also increase as firm profitability increases with the stronger domestic demand. The deficit increases in the March 2009 and 2010 years, reaching 8.7% of nominal GDP in March 2010, 1.8% points higher than in the central forecast. It declines slightly in the following year as GDP growth falls below the central forecasts, but remains at least one percentage point higher at 7.3% of GDP. A continuation of current account deficits at such a level is unsustainable, suggesting that further adjustment will be necessary in the future.

Figure 3.4 – Current account
Figure 3.4 – Current account
Source: Statistics New Zealand, The Treasury

Because of the stronger growth in nominal GDP in the early part of the forecast period, the level of nominal GDP is higher throughout the whole forecast period. The cumulative increase over the period to March 2010 is $11.6 billion, with an increase in the final year of $3.7 billion. This higher level of nominal GDP leads to higher tax revenues throughout the period.

A sharper fall in the TWI and weaker domestic demand

The second scenario illustrates a situation in which the NZ dollar falls sooner than assumed in the central forecast (possibly as a result of a change in investor sentiment towards New Zealand as a result of other international developments) and – in conjunction with an assumption of greater impact from recent increases in interest rates – there is weaker domestic demand.

Table 3.3 – Sharper fall in TWI and weaker domestic demand
(Annual average % change, year ending 31 March) 2006 Actual 2007 Estimate 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Private consumption 4.3 1.7 2.6 0.5 1.3 2.0
Residential investment -4.7 -2.3 0.9 -7.6 0.8 9.0
Market investment 7.5 -4.6 4.7 -4.7 5.0 7.4
Gross national expenditure 3.9 0.6 3.7 -0.4 2.2 3.4
Exports of goods and services -0.3 3.1 0.4 3.7 4.4 4.2
Imports of goods and services 4.1 -1.2 4.0 -2.2 2.8 4.3
GDP (production measure) 2.0 1.7 2.2 1.3 2.7 3.4
Employment growth 2.6 1.6 0.9 1.2 0.2 0.8
Unemployment rate[1] 3.9 3.8 4.0 4.6 4.9 4.8
90-day bank bill rate[2] 7.6 7.8 8.0 6.2 5.2 5.5
TWI[2] 68.3 68.8 60.3 59.6 58.3 57.3
CPI[3] 3.3 2.6 3.0 2.2 1.2 1.5
Current account balance (% GDP) -9.6 -8.6 -7.8 -5.9 -4.3 -4.6
Nominal GDP (expenditure measure) 4.6 4.4 4.8 3.4 3.9 4.5

Sources: Statistics New Zealand, Reserve Bank of New Zealand, The Treasury

NOTES:

  • [1] Percentage of labour force, March quarter, seasonally adjusted.
  • [2] Average for March quarter.
  • [3] Annual percentage change, March quarter.

In this scenario, the Trade Weighted Index (TWI) falls to 60.3 in March 2008, nearly 13% lower than in the central forecast, and below 60.0 in the following March, approximately 4% lower than in the central case. Thereafter, the decline in the exchange rate levels off and it is slightly above the central track at the end of the forecast period. The earlier fall in the NZ dollar, combined with weaker domestic demand, helps achieve a faster rebalancing of the economy and so the exchange rate does not fall as much at the end of the period.

Private consumption growth is half a percent lower than the central forecasts in the year to March 2008 and 1.2% lower in the following year as recent interest rate increases have more effect. Residential investment growth is lower initially in this scenario, falling by 7.6% in the March 2009 year. Market investment is also lower than in the central forecast, declining by nearly 5% in the March 2009 year as a result of the weaker domestic demand.

The weaker domestic demand is accompanied by slower growth in imports in the first two years of the scenario. Import volume growth in the March 2008 year is slightly lower at 4.0% and declines 2.2% in the following year. In the final two years of the forecast, import growth is higher than in the central forecasts as domestic demand strengthens again.

The response of export volumes to the lower exchange rate is muted, partly because the lower exchange rate is more likely to affect primary product prices than volumes and partly because the extended period of the high exchange rate has limited the ability of the manufacturing export sector to increase output in response to increased competitiveness. Growth in real GDP is lower in the first three years than in the central forecasts.

Employment growth is lower throughout the forecast period, as firms utilise a lower level of labour input in response to weaker demand. The unemployment rate is higher as a result, rising to 4.0% in March 2008 and averaging just below 5.0% in the final two years of the projections. Wage growth is weaker throughout the period, compounding the weaker private consumption and residential investment growth.

Initially, consumer price inflation is higher than in the central forecasts because of the pass-through from the sharp fall in the exchange rate, but thereafter it falls below the rate in the central case as domestic demand eases and non-tradables inflation declines. Inflation increases to 3.0% in March 2008, but falls away quickly to 2.2% in the following year and 1.2% the year after that. Once lower inflation becomes established, monetary policy is loosened and 90-day rates fall nearly two percentage points to 6.2% in March 2009 and 5.2% the following March, well below the 6.3% in the central forecast.

Figure 3.5 – CPI inflation
Figure 3.5 - CPI inflation
Source: Statistics New Zealand, The Treasury

The lower interest rates stimulate domestic demand in the final two years of the scenario. Residential investment begins to recover in the 2010 March year from its decline in the previous year and records solid growth of 9.0% in the final year. Private consumption growth takes slightly longer to respond, but is also above the central forecast in the final year. Market investment responds to both the lower interest rates and the stronger consumption and residential investment, and real gross national expenditure growth is higher than in the central case in the final two years of the forecast period. Import volume growth also recovers.

The current account deficit increases initially in this scenario as the price effects of the fall in the exchange rate are felt before import volumes respond, but then it narrows more quickly, reaching 4.6% of nominal GDP at the end of the period (compared with 6.2% in the central forecasts).

Because of the lower rate of growth in real GDP initially and the lower consumer price inflation after the initial period, both the rate of growth and the level of nominal GDP are lower throughout the forecast period by a cumulative total of approximately $7.2 billion. This brings a corresponding reduction in tax revenues.

Fiscal Scenarios

The fiscal position is strongly influenced by the economy. The major economic determinants, and how they impact on the fiscal position, are listed below. While each effect is expressed in terms of an increase in the determinant, the opposite impact applies for a decrease.

  • Nominal GDP – higher GDP levels are reflected in higher tax revenue, which increases the operating balance and lowers the Government’s net debt.
  • Interest rates – higher interest rates lead to increased debt-financing costs but also to higher interest-based revenue.
  • The level of unemployment – higher levels of unemployment translate to an increase in spending, because the number of unemployment beneficiaries rises. This decreases the operating balance and raises net debt levels.
  • CPI inflation – as most benefits are indexed to CPI movements, higher inflation results in increased benefit costs. This reduces the operating balance and increases net debt.
Table 3.4 – Alternative scenarios: impact on OBEGAL and debt
Year ending 30 June 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
OBEGAL ($billion)[1]            
Central forecast 8.6 5.5 5.0 4.0 3.5 3.3
Higher terms of trade 8.6 5.6 5.6 5.0 4.4 4.1
Sharper fall in TWI 8.6 5.5 4.4 3.4 3.0 2.7
Gross sovereign-issued debt
($billion)[2]
           
Central forecast 33.5 32.0 34.5 34.3 34.0 36.8
Higher terms of trade 33.5 32.0 33.8 32.7 31.5 33.5
Sharper fall in TWI 33.5 32.0 35.0 35.4 35.5 39.0
OBEGAL (% GDP)[1]            
Central forecast 7.3 3.4 2.9 2.2 1.9 1.7
Higher terms of trade 7.3 3.4 3.2 2.7 2.3 2.1
Sharper fall in TWI 7.3 3.4 2.6 1.9 1.6 1.4
Gross sovereign-issued debt
(% GDP)[2]
           
Central forecast 21.4 19.4 19.9 19.2 18.2 18.8
Higher terms of trade 21.4 19.4 19.3 17.9 16.5 16.8
Sharper fall in TWI 21.4 19.4 20.4 19.9 19.2 20.2
Core Crown net debt (% GDP)            
Central forecast 5.0 3.1 2.7 3.1 3.3 3.5
Higher terms of trade 5.0 3.0 2.3 2.1 1.9 1.8
Sharper fall in TWI 5.0 3.0 3.0 3.7 4.2 4.7

Sources: Statistics New Zealand, The Treasury

NOTES:

  • [1] Operating balance before gains and losses. The figures for 2006 are the OBERAC.
  • [2] This chapter assumes that changes in the OBEGAL translate into changes in gross sovereign-issued debt. As discussed in the Fiscal Strategy Report, for the purpose of assessing progress towards the fiscal objectives in the forecast period the measure of gross sovereign-issued debt excludes the $5.9 billion increase in the level of Reserve Bank settlement cash. For 2006, $2.0 billion is excluded from gross sovereign-issued debt for consistency.

Higher terms of trade and stronger domestic demand

The first scenario sees higher terms of trade and continuing high levels of domestic consumption and investment. This leads to lower unemployment, higher wage growth and higher inflation. Initially, the higher terms of trade and stronger domestic demand lead to higher nominal GDP. However, by 2010 both nominal and real GDP growth are lower than in the central forecast, as private consumption and residential investment respond to higher interest rates. The higher level of nominal GDP leads to a cumulative increase in tax revenue of $3.9 billion by 2011 relative to the central forecast.

Figure 3.6 – OBEGAL (OBERAC for 2006)
Figure 3.6 – OBEGAL (OBERAC for 2006)
Source: The Treasury

A reduction in the number of unemployment beneficiaries is offset by higher inflation-indexed benefit costs. The combination of lower debt and higher interest rates results in an overall reduction in net finance costs. Overall, expenses are higher over the period, but by less than the increase in tax revenue. As a result, the OBEGAL as a percentage of GDP is 0.4% higher compared with the central forecast at the end of the period and gross sovereign-issued debt is $3.3 billion lower by 2011.

Sharper fall in the TWI and weaker domestic demand

The second scenario is characterised by a 13% fall in the TWI in the year to March 2008 compared with the central forecast, as well as weaker private consumption in 2008 and 2009. Lower inflation over the forecast period leads to lower interest rates and reduced debt financing costs. Weaker demand results in an increase in the unemployment rate relative to the central forecast and slightly lower nominal GDP reduces tax revenue by a cumulative $2.5 billion by 2011 compared to the central forecast.

Figure 3.7 – Gross sovereign-issued debt
Figure 3.7 – Gross sovereign-issued debt
Source: The Treasury

Expenses are lower overall as the increase in the number of unemployed is offset by the lower cost of inflation-indexed benefits. The OBEGAL is lower over the forecast period and is 0.3% of GDP lower in the final year of the forecast. As a result, gross sovereign-issued debt is 1.4% of GDP higher at the end of the forecast period.

Fiscal Sensitivities

The scenarios above indicate the sensitivity of fiscal aggregates to changes in economic conditions. Table 3.5 provides some “rules of thumb” on the sensitivities of the fiscal position to changes in specific variables.

Table 3.5 – Fiscal sensitivity analysis
($million) Year ending 30 June 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
1% lower nominal GDP growth per annum          
 Revenue (497) (1,033) (1,589) (2,208) (2,883)
 Addition to financing costs 15 62 141 255 407
Impact on the operating balance (512) (1,094) (1,730) (2,463) (3,290)
Revenue impact of a 1% decrease in the growth rates of:          
 Wages and salaries (230) (490) (775) (1,090) (1,435)
 Taxable business profits (135) (280) (410) (560) (735)
One percentage point lower interest rates          
 Interest income (117) (168) (187) (137) (77)
 Expenses (70) (160) (174) (179) (209)
Impact on the operating balance (47) (8) (13) 42 132

The forecasts of capital contributions to the New Zealand Superannuation (NZS) Fund are sensitive to the rate of return assumed on the Fund’s assets:

Table 3.6 – NZS Fund contributions sensitivity analysis
Variable Marginal Change (%age points) Effect on Net Return After Tax (%age points) Effect on Capital Contribution
($million)
2007/08 2008/09 2009/10 2010/11
Expected gross rate of return -1% -0.71% 203 216 231 249

4 Specific Fiscal Risks

Introduction

This chapter describes the specific fiscal risks to the Crown, including contingent liabilities. The Public Finance Act 1989 (PFA) requires disclosure of all Government decisions and other circumstances that may put pressure on the forecast spending amounts, and/or have a material effect on the fiscal and economic outlook.

Criteria for Disclosure of Specific Fiscal Risks

To ensure a practicable and consistent disclosure approach, fiscal risks are disclosed based on the following criteria, consistent with the principles of the PFA:

  • Reasonable certainty criterion – risks have not been included in the fiscal forecasts because they reflect Government decisions or legislative commitments with uncertain fiscal consequences or timing.
  • Materiality criterion – risks have an impact on the fiscal forecasts (operating balance, net worth or gross debt) of $10 million or more in any one forecast year.
  • Active consideration criterion – risks are being actively considered by the Minister of Finance and responsible Ministers (eg, are the subject of written reports) or are decisions that have been deferred until a later date.

Exclusions from Disclosure

The PFA requires that all specific fiscal risks be disclosed, except where it is determined by the Minister of Finance that disclosing a risk is likely to:

  • prejudice the substantial economic interests of New Zealand
  • prejudice the security or defence of New Zealand or international relations of the Government
  • compromise the Crown in a material way in negotiation, litigation or commercial activity, or
  • result in a material loss of value to the Crown.

Specific fiscal risks do not include:

  • normal forecasting risks, such as uncertainty around welfare benefits, State-Owned Enterprise/Crown entity surpluses, the impact of regular revaluations of physical assets, finance costs or fluctuations in external markets
  • possible changes to the interpretation of accounting policies, such as the changes to revenue recognition rules and recognition of liabilities, or
  • discussion documents containing proposals that the Minister of Finance and responsible Ministers will not actively consider until the consultation process has been completed.

In addition, the Minister of Finance has to determine that there is no reasonable or prudent way the Government can avoid this prejudice, compromise or material loss by making a decision on the fiscal risk before the finalisation of the forecasts, or by disclosing the fiscal risk without reference to its fiscal implications.

Contingent liabilities are also included according to materiality. Contingent liabilities below $10 million are included in the “other quantifiable contingent liabilities” total. Comparatives have been adjusted where appropriate to align with the disclosure of new “material” contingent liabilities. The total amount of prior years’ contingent liabilities remains unchanged.

Information Relating to All Disclosed Risks

  • The risks disclosed may not eventuate into Government policy and the final cost or saving may differ from the amount disclosed if the policy is developed.
  • All risks, should they eventuate, would impact on the Government’s forecast operating and/or capital spending amounts. There are new spending amounts already incorporated into the forecasts to accommodate policy initiatives on which decisions have yet to be made. Most risks outlined in this chapter, if they eventuate, would be covered by these amounts and therefore have no impact on the overall level of the forecasts. The risks have been disclosed to indicate the pressure the risks place upon the forecast spending amounts.
  • If the total of all risks considered exceeds the forecast new operating spending amounts in the forecasts, this would impact on the operating balance.
  • There are a number of other pressures on the fiscal position that have not been included as risks. These pressures comprise proposals largely generated within individual departments and not yet considered by the Minister of Finance and responsible Ministers. Such items are expected to be managed within forecast spending amounts noted above.

Charges against Future Budgets

As part of its Budget strategy, the Government has put in place some longer-term funding paths for particular sectors. This aids long-term planning and demonstrates the Government’s commitment to specific policies.

Charges against future Budgets do not meet the definition of a ‘risk’ under the PFA, as these items are incorporated in the fiscal forecasts. This section is provided to increase transparency about the provisions for future Budgets.

Business Tax Reform

In Budget 2007 the Government announced the Business Tax Review, a package of reforms to business taxation. This included:

  • reducing the company tax rate from 33% to 30%
  • reducing the maximum tax rate that applies to widely-held savings vehicles and the top portfolio investment entity cap in line with the reduced company tax rate, and
  • introducing a tax credit for research and development.

The package exceeds the $1 billion per annum allowance set aside in Budget 2008 for the Business Tax Review by $129.5 million in outyears. This extra cost is being met by increasing the Budget 2008 allowance.

Charge against Budget 2008
($million)
2008/09 2009/10 2010/11 2011/12 and Outyears
Operating 1,056.3 1,135.4 1,129.5 1,129.5
Capital 3.2 - - -

Defence Funding Package

The Defence Funding Package (DFP) is designed to provide the New Zealand Defence Force (NZDF) with the funding required to address issues identified by the Defence Capability and Resourcing Review, including capability, and maintaining equipment and reserves. Budget 2007 included $58 million per annum as the second tranche of the 10-year plan. The following table shows the additional tranches to be charged against future Budgets.

Budget to be Charged
($million)
2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15
Budget 2008 69.1 69.1 69.1 69.1 69.1 69.1 69.1
Budget 2009   85.7 85.7 85.7 85.7 85.7 85.7
Budget 2010     108.1 108.1 108.1 108.1 108.1
Budget 2011       66.9 66.9 66.9 66.9
Budget 2012         14.2 14.2 14.2
Budget 2013           58.6 54.2
Budget 2014             0

Health – Pre-commitment

The Government has agreed that the indicative Health allocation of $750 million for Budget 2008 may be pre-committed by $53 million per annum in 2011/12 and outyears. This is to allow for Budget 2007 initiatives that may be further developed in 2007/08 and have a rising profile.

Budget to be Charged
($million)
2008/09 2009/10 2010/11 2011/12 and Outyears
Budget 2008 34 48 53 53

Transport Capital Decisions

The Government has made several long-term capital commitments relating to Transport. This table notes the implications for the capital allowances beyond the forecast period.

Transport Project
($million)
2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Auckland 25 - - - - -
Wellington 20 20 20 20 - -
Western Corridor 125 200 195 10 5 -
Bay of Plenty 25 15 10 10 - -
Waikato 22 22 22 22 22 22

Time-limited Funding

Time-limited funding does not meet the definition of a ‘risk’ under the PFA, but is further information that is prepared to increase transparency about initiatives with funding profiles that cease or decrease during the forecast period.

The following table outlines those areas where initiatives have time-limited funding that decreases or ceases at some point and may potentially be extended, using a $5 million materiality threshold. Time-limited funding often relates to pilot programmes, and in some cases Multi-Year Appropriations (MYAs) if they are likely to require further funding in the future.

Vote Description of Initiative Operating Impact ($million)
Community and Voluntary Sector Digital Strategy – Community Partnerships Fund 17 from 2005/06 to 2008/09 (MYA)
Communications Digital Strategy – High-speed Connectivity for Growth 20 from 2005/06 to 2008/09 (MYA)
Internal Affairs Significant Community-based Projects Fund 40 from 2005/06 to 2008/09 (MYA)
Sport & Recreation Children’s and Young People’s Lifestyles 8 in 2006/07, 10 in 2007/08, 6 in each of 2008/09 and 2009/10

The following table shows the impact on the operating balance if funding were to be appropriated to maintain funding levels for these initiatives (ie, extend the initiatives beyond their current scheduled completion dates). These amounts would need to be managed within the forecast operating spending.

Operating Impact ($million) 2007/08 2008/09 2009/10 2010/11 2011/12 and Outyears
Funding to Extend Initiatives 10 10 21 27 27

Quantified Risks

The risks outlined in these tables would, if they eventuated, impact on the Government’s forecast new operating and/or capital spending amounts.

The Minister of Finance has yet to fully consider the quantum of these risks.

Quantified Risks as at
2 May 2007
Operating Balance Gross Debt Value of Risk
($ million)
Funding in Budget 2007
($million)
New Risks        
Foreign Affairs and Trade – Additional Baseline Funding Decrease Increase 440 from 2007/08 to 2010/11  
Health – National Systems Development Programme Tranche 2 Decrease Increase 80 operating from 2007/08 to 2010/11 and 50 capital  
Justice Sector and Other Agencies – Effective Interventions Decrease - 150 per annum  
Justice Sector Agencies – Potential Flow-on Impact of Extra Police Decrease Increase 119 operating from 2007/08 to 2010/11 and 19 capital  
Police – International Deployment Capability Decrease - 30 per annum -
Revenue – Taxation of Redundancy Payments Decrease - 19 per annum -
Education – School Staffing Review Decrease Increase 15 per annum operating and 7 capital -
Changed Risks        
Corrections – Capital Projects Decrease Increase 1,200 capital through to 2014 and operating implications of 123 through 2010/11, 89 operating ongoing  
Culture and Heritage – Broadcasting Initiatives Decrease - 24 per annum 3 per annum
Education – School Property Decrease Increase 260 capital in each of the next 4 years and operating of 14 per annum 203 capital and 11 operating ongoing
Education (Tertiary) – Vocational Training Decrease - 2.5 in 2008/09, 7.5 in 2009/10, 15 in 2010/11, and 20 in 2011/12 and outyears 71 from 2007/08 to 2010/11
Finance – National Rail Network – Obligations of Rail Agreement - Increase 60 to 70 per annum capital from 2007/08 56 capital in 2007/08 to 2010/11
Finance – National Rail Network – Reconfiguration of Land - Increase 31 capital beyond 2007/08, unclear thereafter 48 capital in 2007/08
Health – Indicative Funding for Budgets 2008, 2009, and 2010 Decrease - 716 in 2008/09, 1,502 from 2009/10, and 2,347 per annum from 2008/09 -
New Zealand Defence Force – Defence – Capital Injections - Increase 213 capital from 2008/09 to 2010/11 44 capital
Police – Increases to Police Staff Decrease Increase Operating of 63 in 2007/08, 105 in 2008/09, 116 in 2009/10 and 117 per annum from 2010/11 and capital of 122 from 2007/08 to 2010/11 32 per annum operating and 49 capital from 2006/07 to 2010/11
Research, Science and Technology – Multi-year Funding Profile Decrease - 30 in 2008/09 and 60 per annum from 2009/10 55.5 over three years from  2007/08
Unchanged Risks        
Economic Development – Venture Investment Fund - Increase 40 capital in 2009/10 and 2010/11 -
Education – Early Childhood Education Ratio Changes Decrease - 90 per annum -
Education (Tertiary) – Centres of Research Excellence Decrease Increase 20 capital in 2007/08 and 10 per annum operating -
New Zealand Defence Force – Sale of Skyhawks and Aermacchi Trainers - Decrease US$110 capital -

Unquantified Risks

The risks outlined in these tables would, if they eventuated, impact on the Government’s forecast new operating and/or capital spending amounts.

Unquantified Risks as at
2 May 2007
Operating Balance Gross Debt Funding Received in Budget 2007  ($million)
New Risks      
Corrections – Collective Employment Contract Negotiations Decrease - -
Economic Development – Shanghai Expo 2010: New Zealand Participation - Increase -
Health – Strengthening Child and Adolescent Oral Health Services Decrease - -
Housing – Shared Equity Home Ownership - Increase -
Housing – Wellington City Council Social Housing Assistance Decrease - -
Police – Wage Negotiations Decrease - -
Revenue – Reducing Compliance Costs for Small and Medium-sized Enterprises Unclear - -
Revenue – International Tax Review Decrease - -
Revenue – Management of Inland Revenue Lease Portfolio in Auckland and Wellington Decrease - -
Revenue – Renegotiation of Double Tax Agreements Decrease - -
Revenue – Tax Treatment for Relocation Expenses Unclear - -
Social Development – New Zealand Superannuation and Veteran’s Pension Unclear - 274 from 2006/07 to 2010/11
Transport – Cost Guarantee for the State Highway Programme - Increase -
Transport – Regional Transport Projects - Increase -
Transport – Investment in Transport Infrastructure Decrease Increase -
Changed Risks      
Economic Development – Increasing Stadium Capacity for the Rugby World Cup - Increase -
Economic Development – Radio Spectrum Rights Increase - -
Education (Tertiary) – Vocational Training Decrease - 71 from 2007/08 to 2010/11
Education – Year One Class Sizes Decrease Increase -
Environment – Climate Change Policies Unclear Increase 14 from 2007/08 to 2010/11
Health – District Health Board Deficits Decrease Increase -
Housing – State Housing Project at Hobsonville - Increase -
Immigration – New Immigration Service Delivery Strategy Decrease Increase -
National Library – National Library Building Extension - Increase -
Revenue – Life Insurance Unclear - 25 per annum (reduced revenue)
Revenue – Tax Incentives for Giving to Charities and Other Non-Profit Organisations Unclear - 15 in 2008/09, 25 per annum from 2009/10 (reduced revenue)
Social Development – New Zealand Superannuation and Veteran’s Pension – Rate Adjustment Decrease    
Transport – Extending the State Highway Construction and Revenue Guarantee - Increase -
Unchanged Risks      
Conservation – Lease of Taupo Property Rights from Tuwharetoa Decrease - -
Education – Schools ICT Network Infrastructure Upgrade Decrease Increase -
Education (Tertiary) – Wananga Capital Injections - Increase -
Education (Tertiary) – Tertiary Education Institutions – Capital Injections - Increase -
Education (Tertiary) – Tertiary Student Support Changes Decrease Increase Operating expenditure of 29 from 2007/08 through to 2010/11; capital savings of 16 through 2007/08 to 2010/11
Finance – Crown Overseas Properties - Increase -
Finance – Development of Rail Land Decrease Increase -
Finance – National Rail Access Agreement Amendments Unclear Unclear -
Finance – SOE Long-term Hold Reviews - Decrease -
Fisheries – Civilian Maritime Aerial Surveillance Decrease Increase -
Fisheries – Māori Interest in Marine Farming Decrease - -
Justice – Strengthening the National Court Infrastructure Decrease Increase -
Revenue – Rebuild of the Student Loan IT System Decrease Increase -
Revenue – Working for Families Tax Credits Indexation and Review of Rates Decrease - -
Social Development / Housing – Accommodation Supplement Review Decrease Increase -
Social Development – Working New Zealand: Work-focused Support Decrease - -
Social Development – New Zealand Superannuation – International Portability Issues Unclear - -

Risks Removed Since the 2006 Half Year Update

The following risks have been removed since the 2006 Half Year Economic and Fiscal Update:

Expired Risks Reason Funding Received
($million)
Economic Development – Radio Spectrum Rights This is now a risk in Vote Communications and is incorporated in that Vote below. -
Education (Tertiary) – Tertiary Education Expenditure Review Review process now complete -
Education (Tertiary) – Partnerships for Excellence Ministers decided to reprioritise the contingency set aside for another Partnerships round -
Justice – New Supreme Court – Cost Escalation This initiative has now been funded 45 capital; 4 per annum operating
Revenue – Extending the Specified Superannuation Contribution This initiative has now been funded 17 in 2007/08, 18 in 2008/09, 19 in 2009/10, and 20 in 2010/11 and outyears
Revenue –  International Financial Reporting Standards There are no material fiscal impacts -
Revenue – Business Tax Review This is being funded through Budgets 2007 and 2008 -
Revenue – Taxation of Partnerships Review There are no material fiscal impacts -
State Services Commission – State Sector Retirement Savings Scheme Superseded by decisions taken regarding KiwiSaver -
Social Development – Child, Youth, and Family Services – Reviewing Levels of Funding and Service Delivery Any risk will be managed within baselines -

Statement of Fiscal Risks

Conservation - Lease of Taupo Property Rights from Tuwharetoa (unchanged, unquantified risk)

On 18 May 2005, the Government agreed to enter into negotiations with Tuwharetoa Māori Trust Board following legal clarification of property rights relating to Lake Taupo. The Crown is considering leasing certain property rights from the Tuwharetoa Māori Trust Board in order to resolve current disputes. Negotiations are ongoing and the outcome is not yet known. This would decrease the operating balance.

This risk is unquantified as disclosure could compromise the Crown in negotiations.

Corrections - Capital Projects (changed, quantified risk)

The Government is considering the asset management of current Corrections facilities, and requirements for increased capacity to meet the continued forecast prisoner growth in the foreseeable future, including the replacement of Mt Eden Prison. Estimated costs of upgrade and expansion are $1.2 billion capital through to 2014, with operating implications of $123 million over the forecast period, and ongoing operating implications of $89 million from 2013/14. These estimates are based on the 2006 Justice Sector Prisoner Forecast which includes the impact of 1,000 Police and Effective Intervention decisions to date, and in response to the 2006 Capital Asset Management Review. Capital injections would increase gross debt while operating funding would decrease the operating balance.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Department of Corrections

Corrections - Collective Employment Contract Negotiations (new, unquantified risk)

The Government will be entering into negotiations with the Public Service Association and the Corrections Association of New Zealand to settle six new collective employment agreements. Any additional funding would decrease the operating balance. This risk is unquantified as disclosure may compromise the Crown in negotiations.

Culture and Heritage - Broadcasting initiatives (changed, quantified risk)

On 3 February 2005, the Government released a Public Broadcasting Programme of Action. The Programme contains a set of priorities to guide public broadcasting policy over the six-year period to 2009/10, and a series of proposals to give effect to these priorities. The Programme as a whole (if fully implemented) would have total ongoing operating costs rising to around $44 million in 2009/10. Broadcasting initiatives totalling $11 million, $6 million and $3 million per annum have been included in Budgets 2005, 2006 and 2007, respectively. The Government may consider individual proposals relating to the Programme for the remaining $24 million per annum over the next three Budgets. If funded, these would decrease the operating balance.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry for Culture and Heritage

Economic Development - Venture Investment Fund (unchanged, quantified risk)

In Budget 2006, the Government agreed to additional investment commitments in the Venture Investment Fund of $60 million from 2006/07 to 2008/09. The Government is also considering further commitments of $40 million over two years (2009/10 and 2010/11) in Budget 2009. This depends on the results of the evaluation of the Venture Investment Fund scheduled for completion by 31 March 2009. This would increase gross debt.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Economic Development

Economic Development - Increasing Stadium Capacity for the Rugby World Cup (changed, unquantified risk)

Eden Park in Auckland requires redevelopment in order to increase stadium capacity ahead of the Rugby World Cup in 2011. The latest proposal is estimated to cost $170 to $190 million. The Government is considering meeting a portion of the redevelopment costs, which would increase gross debt.

Economic Development - Radio Spectrum Rights (unchanged, unquantified risk)

The Government sets the processes for the renewal or auction of property rights to radio spectrum in consultation with industry. Any revenue from sale of rights would increase the operating balance by the full amount of the new sales. Offers for rights of renewal to existing owners of spectrum rights are set approximately five years in advance of rights expiring from 2010 onwards. Owners of spectrum rights will have a choice about whether to renew them after 2010, so expected revenue from sale of renewal rights is not reflected in current forecasts of revenue.

Economic Development - Shanghai Expo 2010: New Zealand Participation (new, unquantified risk)

The Government has announced New Zealand's participation in the Shanghai Expo 2010 and officials are in the process of developing a detailed proposal for the design and construction of a pavilion to be used at the agreed site for New Zealand at the Expo. The Government is considering meeting part of the overall cost of New Zealand's participation. However, the amount that the Government contributes will depend on the level of industry contribution obtained and the development of a more definitive budget for New Zealand's participation at the Expo. Any contribution from the Government would increase gross debt.

Education - Early Childhood Education Ratio Changes (unchanged, quantified risk)

The Government has committed to improving adult to child ratios as part of the Early Childhood Education Strategic Plan, and consulted on options for new ratios in 2004 and 2005. In October 2006, Cabinet agreed to initial changes to ratios to implement part of one option consulted on, to take place from July 2009 and 2010. The Government has also communicated that further changes are being considered, through a Ministry of Education newsletter. The current funding is thought to be insufficient for further changes so additional funding of approximately $90 million per annum will be considered as part of the budget process. Any increased funding would reduce the operating balance.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Education

Education (Tertiary) - Centres of Research Excellence (unchanged, quantified risk)

The Government is considering providing additional capital funding of up to $20 million and operating funding of $10 million per annum to establish up to two new Centres of Research Excellence and provide further funding to existing centres. This would decrease the operating balance and increase gross debt.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Tertiary Education Commission

Education (Tertiary) - Vocational Training (changed, quantified risk)

The Government is considering a number of policies regarding the expansion of vocational training. One of these is to have 250,000 people participating in industry training. The total number of people participating in industry training in 2005 was around 160,000. The cost of funding the additional 90,000 places required to meet the target would decrease the operating balance.

In Budget 2007, the Government provided around $4.5 million a year from 1 January 2008 for a tertiary education organisation component for ITO funding. The Government is also allocating an additional $53 million over four years for industry training volume growth to enhance the skills of the workforce as part of the Business Tax Review. This additional funding would support industry training participation of approximately 220,000 trainees in 2011. To achieve a participation of 250,000 trainees in 2011, the Industry Training Fund baseline would need to increase by approximately $2.5 million in 2008/09, $7.5 million in 2009/10, $15 million in 2010/11 and $20 million in 2011/12 and outyears.

Education - Schools ICT Network Infrastructure Upgrade (unchanged, unquantified risk)

Budget 2006 provided $4 million in capital and $0.6 million in associated operating funding for a partial roll-out of the Schools ICT Network Infrastructure Upgrade, as part of the School Property Business Case 2006/07. The roll-out is intended to assist schools to meet the costs of upgrading their computer networks to meet the new IT infrastructure standards. The Government will consider further roll-out in future budgets. This would decrease the operating balance and increase gross debt.

This risk is unquantified as disclosure could compromise the Crown in negotiations.

Education (Tertiary) - Wananga Capital Injections (unchanged, unquantified risk)

The Government is currently negotiating with Te Wananga o Raukawa over settlement of its Waitangi Tribunal claim. The Waitangi Tribunal has recommended that the Wananga be compensated for capital expenditure it has incurred on facilities to date, and be provided with funding to bring its facilities up to a standard comparable with other tertiary institutions, and meet additional capital requirements. Negotiations are also taking place with Te Whare Wananga o Awanuiarangi in relation to an outstanding item from an original settlement.

This risk is unquantified as disclosure could compromise the Crown in negotiations with the Wananga, but any capital injections would increase gross debt.

Education - School Staffing Review (new, quantified risk)

The Government is considering this initiative, based on the recommendations of the School Staffing Review Group. Most of the recommendations have been implemented in previous budgets. The cost of implementing the remaining component would cost up to $15 million per annum in operating funding and around $7 million in capital funding. The Government will consider implementation of the remaining component in future budgets.

This proposal would increase gross debt and decrease the operating balance.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Education

Education - Year One Class Sizes (changed, unquantified risk)

The Government will consider providing more teachers to further reduce Year 1 class sizes in future budgets. Any future increase in teachers for this purpose would decrease the operating balance and increase gross debt, but the precise costs have yet to be quantified as the phasing has yet to be determined.

Education - School Property (changed, quantified risk)

Additional capital injections for school accommodation will be required in future years to meet roll growth and to establish new schools, and could cost up to $260 million in each of the next four years with a corresponding increase in debt. In addition to capital injections, consequential operating costs building up by approximately $14 million per annum are likely to be incurred, which would decrease the operating balance.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Education

Education (Tertiary) - Tertiary Education Institutions – Capital Injections (unchanged, unquantified risk)

The Government may consider making loans or capital injections to tertiary education institutions where ongoing educational provision or financial viability are at risk.

The Government may also consider making capital injections to tertiary education institutions when a strategic investment to support the development of their infrastructure is warranted.

The provision of capital injections would increase gross debt, but the precise impact is unclear as it would depend on progress made by institutions in managing their pressures, and decisions taken by Government.

Capital injections were appropriated for a number of Tertiary Education Institutes in 2006/07 to address immediate viability or long-term sustainability issues, including $14.5 million to merge the remaining two Colleges of Education with their universities, $7 million in additional loans to WITT to manage its cash flow pressures until the end of 2007, and $10 million to UCOL (of which $7.2 million may be converted to equity). Some existing Crown loans were also restructured to be converted to equity, including $12.8 million for WelTec and $20 million for Te Wananga o Aotearoa to address a Treaty of Waitangi settlement.

Education (Tertiary) - Tertiary Student Support Changes (unchanged, unquantified risk)

The Government is considering increasing eligibility for student allowances over the parliamentary term. The impact of these changes is likely to reduce the operating balance and increase gross debt, but the quantum is unclear as it would depend upon the options chosen.

Budget 2006 provided operating funding of $10.6 million and capital savings of $85.4 million over four years to increase the number of bonded merit scholarships to 1,000, increase the student allowances parental income thresholds, add PhDs and professional doctorates to the list of recognised long programmes and align student support with funded qualifications.

Budget 2007 provided around $29 million in operating funding and around $16 million in capital savings over the forecast period to inflation adjust the student allowance personal income threshold, increase the student allowance parental income threshold, expand the Step Up scholarship programme, and strengthen the Ngariumu VC and 28th Māori Battalion Memorial Scholarships.

Further proposals to increase eligibility for student allowances are likely to be considered in future budgets.

Environment - Climate Change Policies (changed, unquantified risk)

Work on climate change policies is currently underway. The impact on the operating balance and debt is unclear, as it will depend on the outcomes of the various work streams underway.

The forecasts make provision for New Zealand’s liability under the Kyoto Protocol, currently estimated at 41.2 million tonnes of carbon dioxide equivalent. The Government has not, at this point, taken a decision on whether to finance part of this liability through purchase of Kyoto-compliant emission units on the international market. However, should a purchasing policy be pursued, the commensurate funding required would increase gross debt while having a neutral effect on net worth.

Finance - Crown Overseas Properties (unchanged, unquantified risk)

The Government is considering options relating to the continued use of certain Crown overseas properties.

The risk is unquantified as disclosure could compromise any negotiations the Crown may enter, but any additional operating funding would decrease the operating balance, and/or any additional capital funding would increase gross debt.

Finance - Development of Rail Land (unchanged, unquantified risk)

The Government is considering options for the development of rail land.

The risk is currently unquantified as disclosure could damage the Government's financial interests, but any additional operating funding would decrease the operating balance, and/or any additional capital funding would increase gross debt.

Finance - National Rail Access Agreement Amendments (unchanged, unquantified risk)

The Government is considering options for amending the National Rail Access Agreement between Toll and ONTRACK. Any impact on the operating balance or gross debt would depend on the option chosen.

This risk is unquantified as disclosure could compromise the Crown in negotiations.

Finance - National Rail Network - Obligations of Rail Agreement (changed, quantified risk)

The Government has committed $306 million between 2004/05 and 2007/08 to upgrade and renew the national rail network (including $56 million agreed in Budget 2007). Additional funding for as yet un-scoped projects may be required in 2007/08. Beyond this, expenditure of around $60 to $70 million per annum may also be required from 2008/09 for renewals, with additional funding on top of this for upgrades, but the exact amount will depend on decisions yet to be made. Under the National Rail Access Agreement, additional funding of this nature would generally be recovered through track access fees. Any additional funding would increase gross debt.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: The Treasury

Finance - National Rail Network – Reconfiguration of Land (changed, quantified risk)

The Agreement for Sale and Purchase of Rail Network and Associated Assets between the Crown and Toll provides for Toll to reconfigure its operations to enable the release of land it occupies to the Crown (ONTRACK) for other uses. ONTRACK requires funding from the Crown for the reconfiguration costs and the settlement of the land value with Toll. Funding of approximately $48 million to ONTRACK for land release in 2007/08 was agreed in Budget 2007. Further funding of around $31 million may be required in 2008/09, with unquantified amounts in years beyond that. The exact amounts of funding will depend on decisions yet to be made, but any additional funding would increase gross debt.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: The Treasury

Finance - State-Owned Enterprise Long-term Hold Reviews (unchanged, unquantified risk)

To implement its long-term hold ownership policy, the Government is conducting reviews of each State-Owned Enterprise (SOE). These reviews are examining the strategic direction for each SOE and therefore the appropriate capital structure to support the individual SOE’s strategy. One possible outcome of current reviews is that some capital could be returned to the Crown. This may be in the form of a special dividend, which would decrease gross debt.

Fisheries - Māori Interest in Marine Farming (unchanged, unquantified risk)

The Māori Commercial Aquaculture Claims Settlement Act 2004 addresses Māori claims in commercial marine farming space from 21 September 1992 to 31 December 2004 (pre-commencement space) by providing Iwi with 20% equivalent space. This obligation is to be met through three possible options: the provision of additional new space; Crown purchase of existing farms from 2008; or provision of the financial equivalent of space from 2013.

Under the Act, any Māori claim relating to new aquaculture space after 31 December 2004 will be met by the provision of 20% of the new space.

To the extent that financial compensation or Crown purchase of existing farms is necessary to address Māori interests in pre-commencement space (as opposed to using new space), this would decrease the operating balance. This risk is unquantified as the amount or timing of any funding is unclear. In addition, disclosure could compromise the Crown in negotiations with either commercial marine farm owners or Iwi.

Fisheries - Civilian Maritime Aerial Surveillance (unchanged, unquantified risk)

The Government is considering options to provide increased maritime aerial surveillance for civilian agencies in the short to medium range. Options include delivery of a range of different surveillance capabilities by either military or commercial providers. The amount of funding required would depend on the option chosen, if any. Any capital injections required would increase gross debt, while operating funding would decrease the operating balance.

The risk is unquantified as the amount or timing of any funding is unclear.

Foreign Affairs and Trade - Additional Baseline Funding (new, quantified risk)

The Government is considering funding an additional $440 million of operating funding and associated capital funding related to the ‘Response to Foreign and Trade Policy Changes’ bid, including the opening of new posts. The additional operating funding would decrease the operating balance and associated capital funding would increase gross debt.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Foreign Affairs and Trade

Health - National Systems Development Programme Tranche 2 (new, quantified risk)

The Ministry of Health is developing and implementing the National Systems Development Programme (NSDP). NSDP is a four-year information technology project for the central health payment systems and national data collections. The project has been divided into two tranches with a decision on whether to proceed with Tranche 2 expected in July 2008. It is anticipated that implementation of Tranche 2 will require additional capital funding of around $50 million and operating funding of $80 million over four years from 2008/09 to 2011/12. This would decrease the operating balance and increase gross debt.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Health

Health - Indicative Funding for Budgets 2008, 2009 and 2010 (changed, quantified risk)

The Government is considering indicative operating allocations of $750 million, $800 million and $850 million for Budgets 2008, 2009 and 2010 respectively. These amounts indicate the likely level of increased funding to be provided to Vote Health in future budgets and to assist the Minister of Health to plan spending priorities over the period. The final allocations will depend on economic and fiscal conditions at the time of each budget. Finalising the amounts and details of how these allocations will be spent will be subject to normal budget processes.

The Government has also agreed that the indicative allocation for Budget 2008 above may be pre-committed up to $53 million per annum in 2010/11 and outyears. This was shown in the Charges against Future Budgets section of this chapter. The operating balance would be decreased by the totals as follows:

Budget to be Charged
($million)
2008/09 2009/10 2010/11 2011/12 and Outyears
Budget 2008 716 702 697 697
Budget 2009 - 800 800 800
Budget 2010 - - 850 850

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Health

Health - Strengthening Child and Adolescent Oral Health Services (new, unquantified risk)

The Government has agreed to provide capital funding to District Health Boards for new infrastructure for strengthening child and adolescent oral health services. This capital investment is likely to result in additional operating expenditure, which may be sought from funding to be agreed in Budget 2008.

Health - District Health Board Deficits (changed, unquantified risk)

Draft District Annual Plans from Whanganui, West Coast, Southland and Waitemata District Health Boards (DHBs) indicate projected operating deficits in 2007/08. The Government does not view DHB deficits as acceptable and cost containment strategies are in place.

Any deficits would potentially decrease the operating balance and/or increase gross debt. Specific potential pressures for DHBs include wage bargaining and financing costs of capital projects.

This risk has changed since the 2006 Half Year Economic and Fiscal Update to take into account the new projections of DHB deficits.

Housing - Hobsonville: Additional Land Purchase (changed, unquantified risk)

The Minister of Finance and Minister of Housing have approved the business case for the development of land at Hobsonville. For the development to be completed a further section of land needs to be acquired from the Waitakere City Council and the New Zealand Defence Force. This initiative is for a loan on commercial terms from the New Zealand Debt Management Office which will have market interest and be repaid as the lots of land are sold off. This would increase gross debt.

Housing - Shared Equity Home Ownership (new, unquantified risk)

The Government has announced it will look into possibilities for assisting home ownership in areas that appear unaffordable. It has been investigating the possibility of a shared equity scheme and has announced it is likely to make a decision in 2008. It is currently proposed that the Government would take a 10% to 30% stake in a property and would receive an equivalent portion of the sale proceeds when the owners move. This initiative is for a pilot study of 500 loans over two years to assess the impact of a shared equity scheme on potential home buyers and the housing market as a whole. This would increase gross debt.

Housing - Wellington City Council Social Housing Assistance (new, quantified risk)

The Government is currently in negotiations with the Wellington City Council to provide financial assistance for improving the quality of its social housing portfolio. High-level parameters were agreed by Cabinet, including a funding limit of $220 million over a 10 to 15-year development period, and the details of the assistance are now being worked through by Council and government officials. This would decrease the operating balance.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Department of Building and Housing

Immigration - New Immigration Service Delivery Strategy (changed, unquantified risk)

The Government is in the process of developing options for a new immigration service delivery strategy that would allow better management of the risk surrounding immigration decision-making and delivering immigration services. Options are still being developed, and are likely to be considered later in 2007. A portion of the additional funding is expected to be funded by third party revenue and the rest would reduce the operating balance and increase gross debt.

Justice - Strengthening the National Court Infrastructure (unchanged, unquantified risk)

The Government is considering options to ensure that Christchurch’s court facilities are able to adequately deliver court and associated justice services to the region. This risk is unquantified as disclosure could compromise any commercial property negotiations the Crown may enter into. Any additional operating funding would decrease the operating balance and any additional capital would increase gross debt.

Justice Sector and Other Agencies - Effective Interventions (new, quantified risk)

As part of a comprehensive approach to reducing crime and the pressures on the prison population, the Government is considering measures to address the precursors of crime, and measures to reduce re-offending. The measures focus on early interventions for vulnerable children, youth offending, restorative justice, preventing crime in local communities, reintegrating offenders, and drug and alcohol treatment for offenders.

Funding of $37 million per annum was approved in 2006. Further operating funding to implement the approach could be up to $150 million per annum, depending on the specific options chosen. This would decrease the operating balance.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Justice

Justice Sector Agencies - Potential Flow-on Impact of Extra Police (new, quantified risk)

The addition of 1,000 Police will result in additional activity in other justice sector agencies (eg, the Ministry of Justice and the Department of Corrections). Excluding the costs associated with additional prison beds, the Government estimates additional operating costs of $119 million over the forecast period with an ongoing cost of $34 million per annum, and capital cost of $19 million over the forecast period. This would decrease the operating balance and increase gross debt.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Justice

National Library - National Library Building Extension (changed, unquantified risk)

The Government is considering funding an extension to the National Library building, subject to a fully developed and costed proposal.

This risk remains unquantified as disclosure could compromise the Crown in negotiations, but any additional funding would increase gross debt.

New Zealand Defence Force - Capital Injections (changed, quantified risk)

Implementing the Government’s decisions on the future structure of the NZDF will involve a series of capital acquisitions across all three armed services and for HQNZDF to achieve the required capability upgrades. The Government has agreed to a capital injection of up to $1.244 billion over the 10-year period from 2002 to 2012.

Of the $1.244 billion, $1.031 billion has been agreed with the remaining $213 million likely to be required within the forecast period. The actual expenditure profile will depend on the specification and timing of the individual projects, the contracted prices, and the prevailing exchange rate at the time of purchase.

Any further capital injections would increase gross debt.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: New Zealand Defence Force

New Zealand Defence Force - Sale of Skyhawks and Aermacchi Trainers (unchanged, quantified risk)

As a result of the Government’s decisions on the future structure of the NZDF, NZDF has signed an agreement with Tactical Air Services Inc for the sale of the Skyhawks and Aermacchi trainers for US$110 million. A formal contract has yet to be signed, but proceeds from the sale would decrease gross debt and increase the operating balance.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: New Zealand Defence Force

Police - Wage Negotiations (new, unquantified risk)

The Police collective employment agreements expire on 30 June 2008. The Government will be entering into negotiations with police service organisations to settle new collective employment agreements prior to the expiration date of the current agreements. Any additional funding would decrease the operating balance. This risk is unquantified as disclosure may compromise the Crown in negotiations.

Police - International Deployment Capability (new, quantified risk)

The Government is considering options to ensure that the New Zealand Police has sufficient capability to manage requests for assistance overseas. The funding required depends on the quantity of personnel and the funding structure associated with the option chosen, but could be in the order of $30 million operating per annum. Any additional operating funding would decrease the operating balance.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: New Zealand Police

Police - Increases to Police Staff (changed, quantified risk)

The Government has committed to funding an additional 1,000 sworn Police and 250 non-sworn Police staff over Budgets 2006 to 2008. The Government will consider further increases in future Budgets with a view to achieving police officer ratios comparable with those of Australia by 2010. Budget 2007 included $49 million per annum operating in outyears; and $10 million capital over the forecast period to provide for the second tranche of additional police (including 90 non-sworn staff and some associated infrastructure costs). The Government intends to roll out the third tranche in Budget 2008. The indicative operating costs are $45 million in 2009/10 and out years. Indicative additional capital costs associated with the second and third tranches are $97 million. Additional capital injections would increase gross debt and additional operating funding would decrease the operating balance.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: New Zealand Police

Research, Science and Technology - Multi-year Funding Profile (changed, quantified risk)

As part of Budget 2006, the Government signalled its broad intention to move towards a medium-term focus for investment in research, science and technology by indicating increases in the order of $30 million per annum in Budgets 2008 and 2009, subject to the context of each Budget and the Government’s overall fiscal strategy. In Budget 2007, there is $55.5 million of new investment in research, science and technology over the three years from 2007/08 to 2009/10. These increases would decrease the operating balance.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Research, Science and Technology

Revenue - Rebuild of the Student Loan IT System (unchanged, unquantified risk)

The Government is considering options for redesigning the student loans IT system. The redesign will enable greater efficiency and enhanced student services while delivering increased integrity of the system, produce greater information to inform policy decisions and increased flexibility for future policy changes. This risk is unquantified as disclosure could compromise the Crown in negotiations. This would decrease the operating balance and/or increase gross debt.

Revenue - Working for Families Tax Credits Indexation and Review of Rates (unchanged, unquantified risk)

The Working for Families package included a commitment to index Working for Families Tax Credit rates and abatement thresholds, once inflation beyond 1 April 2007 cumulatively exceeds 5%. Legislation also requires a review of the amounts of the In-Work Tax Credit and Parental Tax Credits to be undertaken no later than June 2008. This policy cannot be costed with sufficient accuracy until the reviews are completed, but the indexation changes would reduce the operating balance.

Revenue - Reducing Compliance Costs for Small- and Medium-sized Enterprises (new, unquantified risk)

The Government is considering measures to simplify the tax rules for small- and medium-sized enterprises, with a view to issuing a discussion document later in 2007. The potential impact on the operating balance is unknown at this stage, as it would depend on the nature and scope of any measures that are subsequently pursued.

Revenue - Taxation of Redundancy Payments (new, quantified risk)

The Government will be considering changes to the taxation of redundancy payments. The reduction in the operating balance would depend on what proposals are finally approved, the details of the legislation, and the date of application. However, the estimated fiscal costs of the options considered thus far range from $10 to $19 million per annum. This would decrease the operating balance.

The Minister of Finance is yet to fully consider the quantum of this risk.

Source: Inland Revenue Department

Revenue - International Tax Review (new, unquantified risk)

In Budget 2007 the Government announced the major features of the international tax reform package, which would introduce a tax exemption for the active income of Controlled Foreign Companies. These announcements followed the release of a Government discussion document in December 2006. The cost of the reform package is uncertain as many detailed design decisions have yet to be made but it would reduce the operating balance.

Revenue - Management of Inland Revenue Lease Portfolio in Auckland and Wellington (new, unquantified risk)

Inland Revenue is currently exploring options to consolidate its lease portfolio in both Wellington and Auckland. As a large tenant in each market, consolidation provides an opportunity to realise organisational efficiencies. Inland Revenue has identified a number of options following a formal request for proposals however the Government has not yet considered these. This risk is unquantified as disclosure could compromise the Crown in negotiations. This would decrease the operating balance.

Revenue - Renegotiation of Double Tax Agreements (new, unquantified risk)

A Government discussion document released in December 2006 considered the case for negotiating lower rates of Non-Resident Withholding Tax (NRWT) in New Zealand's Double Tax Agreements (DTAs). Subsequently, it has been announced that the renegotiation of the New Zealand and Australia DTA is expected to commence shortly. Although any effect on the operating balance will depend on the outcome of bilateral treaty negotiations, to the extent that lower rates are agreed, this will likely have the effect of decreasing the operating balance.

Revenue - Tax Treatment for Relocation Expenses (new, unquantified risk)

The Government is currently reviewing the tax treatment of employees' relocation expenses. The potential impact on the operating balance is unclear.

Revenue - Life Insurance (changed, unquantified risk)

The Government is considering changes to the tax rules in respect of life insurance, including ensuring consistency of the taxation of life insurers' savings products with similar products of other savings vehicles. The Government has agreed and funded the first phase of the proposals, which relate to partially extending the Portfolio Investment Entity (PIE) tax rules to the unit-linked savings products of life insurers, and correcting an anomaly in the fair dividend rate rules as they apply to life insurers. The estimated reduction in the operating balance in respect of this first phase is $25 million per annum. The second phase of reform of the life insurance tax rules, relating to risk insurance and further integration of life products into the PIE rules, is still under development. Accordingly, the impact on the operating balance of this second phase cannot yet be quantified.

Revenue - Tax Incentives for Giving to Charities and Other Not-for-profit Organisations (changed, unquantified risk)

Under the Confidence and Supply Agreement with United Future the Government is considering further issues related to encouraging giving, including pre-tax giving, a gift aid scheme, and deductibility of non-monetary donations. Budget 2007 includes increases to tax relief received by individuals, companies, and Māori authorities for charitable donations made. The Government is also considering the tax treatment of reimbursements and honoraria paid to volunteers. The impact on the operating balance is unclear and would depend upon the proposals that are finally developed and approved.

Social Development - New Zealand Superannuation and Veteran's Pension – Rate Adjustment (changed, unquantified risk)

The Government has ensured that the net married couple rate of New Zealand Superannuation (NZS) applying for the tax year from 1 April 2007 is equivalent to 66% of the net average ordinary time weekly wage (known as the 66% wage floor). This also applies to the Veteran's Pension, which is set at the same rates as NZS. The Government will review each year the level to be set for the following tax year. Under the 2007 Budget Update forecasts CPI-indexation of NZS rates is predicted to be enough to maintain the 66% wage floor next year. However, because the rates of NZS applied on 1 April 2008 will depend on the actual CPI and wage statistics that occur, there is a risk that maintaining the 66% wage floor at that time will exceed the cost of CPI-indexing. This would decrease the operating balance.

Social Development - New Zealand Superannuation – International Portability (unchanged, unquantified risk)

The Government is considering the results of a review of arrangements for the payment of New Zealand Superannuation (NZS) to New Zealanders residing overseas and the treatment of overseas pensions paid to recipients of New Zealand pensions and welfare benefits. The impact on the operating balance is unclear, as proposals are still being developed. Any additional funding would decrease the operating balance.

Social Development - Working New Zealand: Work-focused Support (unchanged, unquantified risk)

Working New Zealand: Work-focused Support is a package of policy and operational changes aimed at simplifying the benefit system and enhancing the opportunities for beneficiaries to participate in the labour market. The first stage, already underway, focuses on getting services and support in place to help people move into work and stay employed.The Government is considering further options and costs to simplify the benefit system. The next stages will be submitted for consideration in future Budgets. The remaining proposals are still being developed, but any additional funding would decrease the operating balance.

Social Development / Housing - Accommodation Supplement Review (unchanged, unquantified risk)

The Government is reviewing the Accommodation Supplement to assess how well it is performing as an income support and housing assistance policy. If the review identifies a need to adjust the Accommodation Supplement, the Government will consider policy options in future Budgets. While the amounts are unclear and would depend on the policy options chosen, any additional operating funding would decrease the operating balance.

Transport - Extending the State Highway Construction and Revenue Guarantee (unchanged, unquantified risk)

The Government has agreed to extend the revenue guarantee for the National Land Transport Programme and the State Highway Plan guarantee from five years to six. The Crown is still considering how and when to add a sixth year to the current five-year State Highway Plan guarantee and National Land Transport Programme revenue guarantee.

Transport - Cost guarantee for the State Highway Programme (new, unquantified risk)

In Budget 2006 the Government agreed to provide a cost guarantee for a five-year State Highway Construction Programme. In Budget 2007 funding is being provided to cover estimated cost escalation in the State Highway Construction Programme between 2006/07 and 2007/08. Decisions on funding for 2008/09 and beyond have been deferred until Budget 2008, pending an update of the State Highway Construction Programme (including extension to a six-year guarantee period) which is scheduled to be undertaken in 2007/08.

Transport - Regional Transport Projects (new, unquantified risk)

The Government is considering providing funding for a number of regional transport projects in Auckland and Wellington. It is envisaged that these projects will be debt funded and repaid via a regional fuel tax in those regions. This would increase gross debt.

Transport - Investment in Transport Infrastructure (new, unquantified risk)

The Government has commissioned a review looking at the ‘Next Steps in the Transport Sector’. One of the objectives of this review is to look at ways to better link demand and expenditure. Officials have been asked to consider a range of options, including changes to Fuel Excise Duty as a possible option to achieve this. This would decrease the operating balance and increase gross debt.

Contingent Liabilities

Contingent liabilities are costs that the Crown will have to face if a particular event occurs. Typically, contingent liabilities consist of guarantees and indemnities, legal disputes and claims, and uncalled capital. The contingent liabilities facing the Crown are a mixture of operating and balance sheet risks, and they can vary greatly in magnitude and likelihood of realisation. In general, if a contingent liability were realised it would reduce the operating balance and net worth, and increase Crown debt. However, in the case of contingencies for uncalled capital, the negative impact would be restricted to Crown debt.

Where contingent liabilities have arisen as a consequence of legal action being taken against the Crown, the amount shown is the amount claimed and thus the maximum potential cost. It does not represent either an admission that the claim is valid or an estimation of the possible amount of any award against the Crown.

Only contingent liabilities involving amounts of over $10 million are separately disclosed. Contingent liabilities below $10 million are included in the “other quantifiable contingent liabilities” total. Comparatives have been adjusted where appropriate to align with the disclosure of new “material” contingent liabilities. The total amount of prior years’ contingent liabilities remains unchanged.

Contingent liabilities have been stated as at 31 March 2007, being the latest set of published contingent liabilities.

Details of each of the following contingent liabilities can be accessed from the Treasury website at www.treasury.govt.nz/forecasts/befu/2007/.

Quantifiable Contingent Liabilities

Quantifiable Contingent Liabilities
Guarantees and indemnities Status [10] ($ million)
Cook Islands – Asian Development Bank loans Changed 13
Indemnification of receivers and managers – Terralink Limited Unchanged 10
Indemnification of touring exhibitions Unchanged 349
Ministry of Justice – Treaty settlement, tax liabilities Unchanged 105
Ministry of Transport – funding guarantee Unchanged 10
Post Office Bank – guaranteed deposits Unchanged 10

Guarantees and indemnities of SOEs and Crown entities
Unchanged 19
Other guarantees and indemnities Changed 5
    521
Uncalled capital    
Asian Development Bank Changed 1,039
European Bank for Reconstruction and Development Unchanged 13
International Bank for Reconstruction and Development Changed 1,151
    2,203
Legal proceedings and disputes    
Health – legal claims Unchanged 90
Tax in dispute Changed 715
Other legal claims against SOEs and Crown entities Unchanged 25
Other legal claims Unchanged 101
    931

Other quantifiable contingent liabilities
   
International finance organisations Changed 1,749
Reserve Bank – demonetised currency Unchanged 22
Social Development – claim for judicial review Changed 93
Transpower New Zealand Limited Unchanged 98
Other quantifiable contingent liabilities of SOEs and Crown entities Unchanged 37
Other quantifiable contingent liabilities Changed 20
    2,019
Total quantifiable contingent liabilities   5,674

Unquantifiable Contingent Liabilities

Unquantifiable Contingent Liabilities
Guarantees and indemnities Status
Asure New Zealand Limited Unchanged
At Work Insurance Limited Unchanged
Auckland Rail lease Unchanged
Bona Vacantia property Unchanged
Building Industry Authority Unchanged
Contact Energy Limited Unchanged
Crown Research Institutes (CRIs) Unchanged
District Court Judges, Justices of the Peace, Coroners and
Disputes Tribunal
Changed
District Health Boards – director indemnity – (DHBs) Unchanged
Earthquake Commission (EQC) Unchanged
Electricity Corporation of New Zealand Limited (ECNZ) Unchanged
Ministry of Fisheries – indemnity provided for delivery of registry services Unchanged
Genesis Power Ltd (Genesis Energy) Unchanged
Geothermal carbon tax indemnity Unchanged
Housing New Zealand Corporation (HNZC) Unchanged
Indemnities against acts of war and terrorism Unchanged
Maui Partners Unchanged
National Provident Fund Unchanged
New Zealand Railways Corporation Unchanged
Persons exercising investigating powers Unchanged
Ports of Auckland Unchanged
Public Trust Unchanged
Purchasers of Crown operations Unchanged
State Insurance and Rural Bank – tax liabilities Unchanged
Synfuels-Waitara Outfall Indemnity Unchanged
Tainui Corporation Unchanged
Toll NZ Ltd – purchase of rail network assets Unchanged
Works Civil Construction Unchanged
Works Consultancy Services Unchanged
Other unquantifiable contingent liabilities  
Abuse claims Unchanged
Accident Compensation Corporation (ACC) litigations Unchanged
Environmental liabilities Unchanged
Rugby World Cup 2011 Unchanged
Sale of Crown assets Unchanged
Treaty of Waitangi claims Unchanged
Treaty of Waitangi claims – settlement relativity payments Unchanged
Other contingencies  
Foreshore and seabed Unchanged

Notes

  • [10]Relative to reporting in the 31 December 2006 Financial Statements of the Government of New Zealand.

5 Generally Accepted Accounting Practice (GAAP) Series Tables

Forecast Financial Statements

These forecasts have been prepared in accordance with the Public Finance Act 1989.

They are based on the accounting policies and assumptions that follow. As with all such assumptions, there is a degree of uncertainty surrounding them. This uncertainty increases as the forecast horizon extends.

The forecasts have been prepared in accordance with the Statement of Responsibility and reflect the judgements and information known at the time they were prepared. They reflect all Government decisions and circumstances communicated to 9 May 2007.

Finalisation dates and key assumptions that underpin the preparation of the GAAP tables are outlined at the start of the Fiscal Outlook chapter on page 80.

Statement of Accounting Policies and Forecast Assumptions

Significant Accounting Policies

These Forecast Financial Statements have been prepared in accordance with the accounting policies expected to be used in the comparable audited actual Financial Statements of the Government.

These Forecast Financial Statements comply with generally accepted accounting practice (GAAP) as required by the Public Finance Act 1989.

Forecasts for the year ending 30 June 2008 and beyond have been prepared in accordance with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS), as appropriate for public benefit entities. These are the standards to be adopted by the Crown from 1 July 2007. These forecasts are identified as “New GAAP” in the financial statements that follow. Historical information prepared under current accounting standards has not been restated and is identified as “Old GAAP”.

Forecasts for the year ending 30 June 2007 have been prepared under both “New GAAP” and “Old GAAP” and are provided in these following statements to help communicate the transition to NZ IFRS.

All forecasts use the accrual basis of accounting. Forecasts have been prepared for the consolidated financial statements of the government reporting entity, including all entities controlled by the Government (as defined by applicable financial reporting standards).

Changes in accounting policies

From 1 July 2007 the financial statements of the Government will adopt NZ IFRS as appropriate for public benefit entities. As a consequence, there have been a number of changes accounting policies to reflect the requirements of these new standards.

Chapter 7 NZ IFRS Transition on page 191 reconciles forecasts for the year ending 30 June 2007 prepared under “Old GAAP” and “New GAAP”.

Forecast Policies

These Forecast Financial Statements have been prepared on the basis of Treasury’s best professional judgment. Key assumptions used are set out on page 80.

For the purposes of the Forecast Financial Statements, no revaluations of property, plant and equipment are projected beyond the current year.

Detailed accounting and forecasting policies

Detailed accounting and forecasting policies are reproduced in full on Treasury’s website at www.treasury.govt.nz/budget2007/.

Government Reporting Entity as at 9 May 2007

These forecast financial statements are for the Government reporting entity as specified in section 26Q(4) of the Public Finance Act 1989. This comprises Ministers of the Crown and the following entities:

Departments

  • Agriculture and Forestry
  • Archives New Zealand
  • Building and Housing
  • Conservation
  • Corrections
  • Crown Law
  • Culture and Heritage
  • Customs
  • Defence
  • Economic Development
  • Education
  • Education Review Office
  • Environment
  • Fisheries
  • Foreign Affairs and Trade
  • Government Communications Security Bureau
  • Health
  • Inland Revenue
  • Internal Affairs
  • Justice
  • Labour
  • Land Information New Zealand
  • Māori Development
  • National Library
  • New Zealand Defence Force
  • Office of the Clerk
  • Pacific Island Affairs
  • Parliamentary Counsel Office
  • Parliamentary Service
  • Police
  • Prime Minister and Cabinet
  • Research, Science and Technology
  • Security Intelligence Service
  • Serious Fraud Office
  • Social Development
  • State Services Commission
  • Statistics
  • Transport
  • Treasury
  • Women’s Affairs

State-owned enterprises

  • AgriQuality Limited
  • Airways Corporation of New Zealand Limited
  • Animal Control Products Limited
  • Asure New Zealand Limited
  • Electricity Corporation of New Zealand Limited
  • Genesis Power Limited
  • Kordia Group Limited
  • Landcorp Farming Limited
  • Learning Media Limited
  • Meridian Energy Limited
  • Meteorological Service of New Zealand Limited
  • Mighty River Power Limited
  • New Zealand Post Limited
  • New Zealand Railways Corporation
  • Quotable Value Limited
  • Solid Energy New Zealand Limited
  • Terralink Limited (in liquidation)
  • Timberlands West Coast Limited
  • Transpower New Zealand Limited
     
  • Air New Zealand Limited (included for disclosure purposes as if it were a SOE)

Others

  • Government Superannuation Fund
  • New Zealand Superannuation Fund
  • Reserve Bank of New Zealand

Offices of Parliament

  • Office of the Controller and Auditor-General
  • Office of the Ombudsmen
  • Parliamentary Commissioner for the Environment

Crown entities

  • Accident Compensation Corporation
  • Accounting Standards Review Board
  • Alcohol Advisory Council of New Zealand
  • Arts Council of New Zealand Toi Aotearoa
  • Broadcasting Commission
  • Broadcasting Standards Authority
  • Career Services
  • Charities Commission
  • Children’s Commissioner
  • Civil Aviation Authority of New Zealand
  • Commerce Commission
  • Crown Health Financing Agency
  • Crown research institutes (9)
  • District health boards (21)
  • Earthquake Commission
  • Electoral Commission
  • Electricity Commission
  • Energy Efficiency and Conservation Authority Environmental Risk Management Authority
  • Families Commission
  • Foundation for Research, Science and Technology
  • Government Superannuation Fund Authority
  • Guardians of New Zealand Superannuation
  • Health and Disability Commissioner
  • Health Research Council of New Zealand
  • Health Sponsorship Council
  • Housing New Zealand Corporation
  • Human Rights Commission
  • Land Transport New Zealand
  • Law Commission
  • Legal Services Agency
  • Maritime New Zealand
  • Mental Health Commission
  • Museum of New Zealand Te Papa Tongarewa Board
  • New Zealand Antarctic Institute
  • New Zealand Artificial Limb Board
  • New Zealand Blood Service
  • New Zealand Film Commission
  • New Zealand Fire Service Commission
  • New Zealand Historic Places Trust (Pouhere Taonga)
  • New Zealand Lotteries Commission
  • New Zealand Qualifications Authority
  • New Zealand Sports Drug Agency
  • New Zealand Symphony Orchestra
  • New Zealand Teachers Council
  • New Zealand Tourism Board
  • New Zealand Trade and Enterprise
  • New Zealand Venture Investment Fund Limited
  • Office of Film and Literature Classification
  • Pharmaceutical Management Agency
  • Police Complaints Authority
  • Privacy Commissioner
  • Public Trust
  • Radio New Zealand Limited
  • Retirement Commissioner
  • School boards of trustees (2,465)
  • Securities Commission
  • Social Workers Registration Board
  • Sport and Recreation New Zealand
  • Standards Council
  • Takeovers Panel
  • Te Reo Whakapuaki Irirangi (Te Māngai Pāho)
  • Te Taura Whiri i te Reo Māori (Māori Language Commission)
  • Television New Zealand Limited
  • Tertiary Education Commission
  • Tertiary education institutions (TEIs) (31)
  • Testing Laboratory Registration Council
  • Transit New Zealand
  • Transport Accident Investigation Commission

Crown entity subsidiaries are consolidated by their parents and not listed separately in this table

Organisations named or described in Schedule 4 to the Public Finance Act 1989

  • Agriculture and Marketing Research and Development Trust
  • Asia New Zealand Foundation
  • Fish and game councils (12)
  • Leadership Development Centre Trust
  • New Zealand Fish and Game Council
  • New Zealand Game Bird Habitat Trust Board
  • New Zealand Government Property Corporation
  • New Zealand Lottery Grants Board
  • Ngāi Tahu Ancillary Claims Trust
  • Pacific Co-operation Foundation
  • Pacific Islands Business Development Trust
  • Research and Education Advanced Network New Zealand Limited
  • Reserves boards (24)
  • Road Safety Trust

Forecast Statement of Financial Performance for the years ending 30 June

Forecast Statement of Financial Performance for the years ending 30 June
  Note Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million)   2006
Actual
2007
Previous
Budget
2007
Forecast
2007
Forecast
2008
Forecast
2009
Forecast
2010
Forecast
2011
Forecast
($ million)   2006 2007 2007 2007 2008 2009 2010 2011
Revenue                  
Taxation revenue [1a] 51,973 50,669 51,539 51,658 54,173 55,691 58,269 61,351
Other sovereign revenue [1a] 3,411 3,179 3,508 3,691 3,693 3,757 3,846 3,931
Total Revenue Levied through the Crown's Sovereign Power   55,384 53,848 55,047 55,349 57,866 59,448 62,115 65,282
Sales of goods and services [2] 13,337 12,715 13,111 12,563 13,253 13,870 14,431 14,790
Interest revenue and dividends [3] 5,828 3,687 5,807 3,072 3,366 3,585 3,636 3,756
Other revenue [4] 2,032 2,361 2,238 2,406 2,387 2,673 2,996 2,991
Total Revenue Earned through the Crown’s Operations   21,197 18,763 21,156 18,041 19,006 20,128 21,063 21,537
Total Revenue (excluding gains)   76,581 72,611 76,203 73,390 76,872 79,576 83,178 86,819
Expenses                  
Social assistance and official development assistance [5] 16,688 18,257 18,275 18,300 19,908 20,975 22,095 23,190
Personnel expenses [6] 15,395 15,118 15,673 15,084 15,657 15,787 15,950 16,006
Depreciation and amortisation [7] 2,708 2,918 3,099 3,023 3,296 3,417 3,579 3,696
Other operating expenses [8] 26,731 26,835 28,254 28,132 28,997 29,471 30,030 30,408
Interest expenses [9] 2,241 2,854 3,063 2,780 2,748 2,705 2,643 2,766
Insurance expenses   1,321 674 1,743 954 994 1,027 1,115 1,160
New operating spending up to Budget 2008 [10] ..  ..  80 80 314 329 398 460
Forecast for future new spending [10] ..  320 ..  ..  ..  1,908 3,838 5,786
Top-down expense adjustment [10] ..  ..  (500) (500) ..  ..  ..  .. 
Total Expenses (excluding losses)   65,084 66,976 69,687 67,853 71,914 75,619 79,648 83,472
Operating Balance before gains/(losses)   11,497 5,635 6,516 5,537 4,958 3,957 3,530 3,347
Net gains/(losses) on financial instruments   ..  ..  ..  1,644 1,377 1,516 1,684 1,922
Net gains/(losses) on non-financial instruments [11] ..  ..  ..  (947) ..  ..  ..  .. 
Total Gains/(Losses)   ..  ..  ..  697 1,377 1,516 1,684 1,922
Net surplus/(deficit) from associates and joint ventures   54 133 52 96 96 96 96 97
Operating Balance from continuing activities   11,551 5,768 6,568 6,330 6,431 5,569 5,310 5,366
Gain/(loss) from discontinued operations   ..  ..  ..  (3) ..  ..  ..  .. 
Operating Balance (including minority interest)   11,551 5,768 6,568 6,327 6,431 5,569 5,310 5,366
Attributable to minority interest in Air NZ   (78) ..  ..  ..  ..  ..  ..  .. 
Operating Balance   11,473 5,768 6,568 6,327 6,431 5,569 5,310 5,366

The revenues and expenses are GST exclusive.

The accompanying Notes and Accounting policies are an integral part of these Statements.

Forecast Statement of Financial Performance (continued) for the years ending 30 June
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006
Actual
2007
Previous
Budget
2007
Forecast
2007
Forecast
2008
Forecast
2009
Forecast
2010
Forecast
2011
Forecast
($million) 2006 2007 2007 2007 2008 2009 2010 2011
Total Crown expenses by functional classification                
Social security and welfare 18,969 19,706 21,468 20,142 21,271 22,025 22,888 23,768
GSF pension expenses 1,671 1,051 1,471 645 629 587 549 525
Health  9,262 10,305 10,037 10,658 11,699 11,987 12,290 12,287
Education 10,430 9,892 9,636 10,204 10,321 10,460 10,561 10,671
Core government services 2,046 2,031 2,810 2,982 2,132 2,158 2,236 2,501
Law and order 2,420 2,604 2,872 2,800 3,076 3,055 3,088 3,084
Defence 1,339 1,405 1,456 1,489 1,597 1,641 1,729 1,838
Transport and communications 5,986 6,853 7,240 7,150 7,671 7,759 7,841 7,782
Economic and industrial services 6,334 5,896 5,684 4,994 5,879 6,468 7,022 7,375
Primary services 1,219 1,198 1,365 1,316 1,319 1,314 1,314 1,316
Heritage, culture and recreation 2,361 1,900 1,995 2,091 2,218 2,174 2,207 2,240
Housing and community development 758 851 913 908 961 972 977 958
Other 48 110 98 113 79 77 66 73
Finance costs 2,652 2,854 3,023 2,781 2,748 2,705 2,644 2,808
Net foreign-exchange (gains)/losses (411) ..  39 ..  ..  ..  ..  .. 
New operating spending up to Budget 2008 ..  ..  80 80 314 329 398 460
Forecast for future new spending ..  320 ..  ..  ..  1,908 3,838 5,786
Top-down expense adjustment ..  ..  (500) (500) ..  ..  ..  .. 
Total Crown Expenses 65,084 66,976 69,687 67,853 71,914 75,619 79,648 83,472
Total Crown other gains and losses by functional classification                
Social security and welfare ..  ..  ..  (724) 282 271 262 279
GSF pension expenses ..  ..  ..  (30) ..  ..  ..  .. 
Education ..  ..  ..  (5) 5 5 5 5
Core government services ..  ..  ..  1,176 754 917 1,088 1,286
Transport and communications ..  ..  ..  55 64 61 75 58
Economic and industrial services ..  ..  ..  (86) 151 169 184 203
Primary services ..  ..  ..  63 (26) (27) (26) (26)
Heritage, culture and recreation ..  ..  ..  92 ..  ..  ..  .. 
Housing and community development ..  ..  ..  (16) 20 18 14 14
Finance costs ..  ..  ..  172 127 102 82 103
Total Crown Other Gains and Losses ..  ..  ..  697 1,377 1,516 1,684 1,922
Core Crown expenses by functional classification                
Social security and welfare 15,598 16,956 17,325 16,891 17,698 18,172 18,788 19,437
GSF pension expenses 1,671 1,051 1,471 645 629 587 549 525
Health  9,547 10,732 10,492 10,486 11,613 11,634 11,665 11,662
Education 9,914 9,068 9,125 9,622 9,719 9,835 9,912 9,998
Core government services 2,169 2,301 3,083 3,237 2,479 2,506 2,556 2,672
Law and order 2,235 2,393 2,658 2,581 2,836 2,818 2,836 2,829
Defence 1,383 1,457 1,508 1,533 1,641 1,686 1,773 1,883
Transport and communications 1,818 2,524 2,549 2,505 2,792 2,796 2,566 2,476
Economic and industrial services 1,592 1,721 1,605 1,681 2,276 2,651 3,001 3,239
Primary services 467 441 584 477 494 484 477 472
Heritage, culture and recreation 1,194 812 778 884 977 867 870 868
Housing and community development 202 278 277 279 304 286 270 268
Other 49 110 97 112 80 80 80 80
Finance costs 2,356 2,090 2,553 2,270 2,244 2,180 2,098 2,243
Net foreign-exchange (gains)/losses (295) ..  90 ..  ..  ..  ..  .. 
New operating spending up to Budget 2008 ..  ..  80 80 314 329 398 460
Forecast for future new spending ..  320 ..  ..  ..  1,908 3,838 5,786
Top-down expense adjustment ..  ..  (500) (500) ..  ..  ..  .. 
Total Core Crown Expenses 49,900 52,254 53,775 52,783 56,096 58,819 61,677 64,898
Total Core Crown other gains and losses by functional classification                
Social security and welfare ..  ..  ..  ..  ..  ..  ..  .. 
GSF pension expenses ..  ..  ..  (30) ..  ..  ..  .. 
Core government services ..  ..  ..  1,176 756 920 1,092 1,288
Heritage, culture and recreation ..  ..  ..  96 ..  ..  ..  .. 
Finance costs ..  ..  ..  336 399 392 388 396
Total Core Crown Other Gains and Losses ..  ..  ..  1,578 1,155 1,312 1,480 1,684

The accompanying Notes and Accounting policies are an integral part of these Statements.

Forecast Statement of Cash Flows for the years ending 30 June

Forecast Statement of Cash Flows for the years ending 30 June
    Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) Note 2006
Actual
2007
Previous
Budget
2007
Forecast
2007
Forecast
2008
Forecast
2009
Forecast
2010
Forecast
2011
Forecast
($million) Note 2006 2007 2007 2007 2008 2009 2010 2011
Cash flows from operations                  
Cash was provided from                  
Total tax receipts [1b] 49,706 50,738 51,823 52,009 54,266 55,048 58,099 61,252
Other sovereign receipts [1b] 3,246 3,047 3,387 3,455 3,472 3,607 3,728 3,825
Sales of goods and services   13,457 13,089 13,357 12,795 13,394 13,935 14,501 14,832
Interest   1,622 1,422 2,148 2,071 2,256 2,395 2,305 2,293
Dividends   117 90 133 426 504 586 676 772
Other operating receipts   1,919 2,393 2,091 2,352 2,302 2,609 2,880 2,908
Total cash provided from operations   70,067 70,779 72,939 73,108 76,194 78,180 82,189 85,882
Cash was disbursed to                  
Social assistance and official development assistance   16,944 18,665 18,592 18,277 19,529 20,130 20,960 21,870
Personnel and operating payments   38,964 41,670 41,189 41,015 44,025 45,030 46,107 46,543
Interest expenses   2,047 2,441 2,428 2,487 2,530 2,610 2,622 2,667
Forecast for future new spending [10] .. 320 80 80 314 2,306 4,391 6,508
Top-down cash adjustment [10] .. .. (500) (500) .. .. .. ..
Total cash disbursed to operations   57,955 63,096 61,789 61,359 66,398 70,076 74,080 77,588
Net cash flows from operations   12,112 7,683 11,150 11,749 9,796 8,104 8,109 8,294
Cash flows from investing activities                  
Net sale/(purchase) of share investments and other securities   (5,859) 527 (9,656) (8,607) (4,491) (1,155) (983) (4,289)
Net sale/(purchase) of physical assets   (4,044) (6,713) (6,536) (6,607) (6,661) (5,363) (5,675) (6,024)
Net sale/(purchase) of intangible assets   .. .. .. (139) (144) (101) (84) (75)
Net repayment/(issue) of advances   (1,637) (1,808) (2,409) (2,010) (1,628) (1,449) (59) 18
Net disposal/(acquisition) of investment in associates   .. .. .. (384) (95) (68) (7) (2)
Forecast for future new capital spending [10] .. (256) .. .. (184) (567) (806) (903)
Top-down capital adjustment [10] .. .. 200 200 .. .. .. ..
Net cash flows from investing activities   (11,540) (8,250) (18,401) (17,547) (13,203) (8,703) (7,614) (11,275)
Net Cash Flows from Operating and Investing Activities   572 (567) (7,251) (5,798) (3,407) (599) 495 (2,981)
Cash flows from financing activities                  
Issues of circulating currency   165 .. 273 273 178 186 196 206
Net issue/(repayment) of Government stock [1]   151 (656) (128) (366) 2,223 (714) (956) 2,159
Net issue/(repayment) of other New Zealand dollar borrowing   1,856 394 6,692 5,509 2,225 1,865 474 215
Net issue/(repayment) of foreign currency borrowing   (2,300) 412 (272) (204) (1,130) (499) (325) 354
Net cash flows from financing activities   (128) 150 6,565 5,212 3,496 838 (611) 2,934
Net (decrease)/increase in cash and cash equivalents   444 (417) (686) (586) 89 239 (116) (47)
Opening cash and cash equivalents   3,710 3,319 4,168 3,676 3,107 3,196 3,435 3,319
Foreign exchange gains/(losses) on opening cash   14 .. (4) 17 .. .. .. ..
Closing cash and cash equivalents   4,168 2,902 3,478 3,107 3,196 3,435 3,319 3,272
  • [1] Net issues of Government stock include movements within government stock holdings of entities such as NZS Fund, GSF, ACC and EQC. The Bonds Reconciliation (Note 20) at the end of these forecasts outlines NZDMO issues of Government stock.

The accompanying Notes and Accounting policies are an integral part of these Statements.

Forecast Statement of Cash Flows (continued) for the years ending 30 June
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006
Actual
2007
Previous
Budget
2007
Forecast
2007
Forecast
2008
Forecast
2009
Forecast
2010
Forecast
2011
Forecast
($million) 2006 2007 2007 2007 2008 2009 2010 2011
Reconciliation Between the Forecast Net Cash Flows from Operations and the Operating Balance                
Net Cash Flows from Operations 12,112 7,683 11,150 11,749 9,796 8,104 8,109 8,294
Items included in the operating balance but not in net cash flows from operations                
Unrealised gains/(losses)                
Unrealised gains/(losses) on other financial instruments 1,759 544 631 521 511 461 425 437
Unrealised gains/(losses) NZ Superannuation Fund 968 675 1,008 1,123 866 1,055 1,259 1,486
Unrealised (increase)/decrease on other non-financial instruments .. .. .. (947) .. .. .. ..
Total unrealised gains/(losses) 2,727 1,219 1,639 697 1,377 1,516 1,684 1,923
Movements in Working Capital                
Increase/(decrease) in receivables 3,591 329 (2,082) (1,322) 218 714 131 22
Increase/(decrease) in inventories (39) 161 193 198 41 64 25 10
Increase/(decrease) in prepayments .. .. .. (10) (2) .. .. (1)
Decrease/(increase) in deferred revenue .. .. .. (11) .. (5) (5) (2)
Decrease/(increase) in payables (1,598) 74 1,409 880 (569) (429) (146) (201)
Total Movements in Working Capital 1,954 564 (480) (265) (312) 344 5 (172)
Other Non-cash Items in Operating Balance                
Depreciation and amortisation (2,708) (2,918) (3,099) (3,023) (3,296) (3,417) (3,579) (3,696)
(Loss)/gain on sale of assets 811 .. .. .. .. .. .. ..
Write-down on initial recognition of loans (1,671) (167) (817) (588) (518) (525) (547) (568)
Impairment on financial assets (excl receivables) .. .. .. (418) (38) (40) (42) (45)
Net interest revenue .. .. .. 282 389 509 634 592
Decrease/(increase) in defined benefit retirement plan liabilities (279) 17 .. (44) (51) 12 71 106
Decrease/(increase) in insurance liabilities (1,321) (674) (1,743) (2,159) (1,013) (1,030) (1,121) (1,166)
Other (152) 44 (82) 96 97 96 96 98
Total Other Non-cash Items in Operating Balance (5,320) (3,698) (5,741) (5,854) (4,430) (4,395) (4,488) (4,679)
Operating Balance 11,473 5,768 6,568 6,327 6,431 5,569 5,310 5,366

The accompanying Notes and Accounting policies are an integral part of these Statements.

Forecast Statement of Recognised Income and Expense for the years ending 30 June

Forecast Statement of Recognised Income and Expense for the years ending 30 June
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Revaluation of physical assets 9,869 ..  10,489 93 ..  ..  ..  .. 
Effective portion of changes in fair value of cash flow hedges ..  ..  ..  91 39 21 10 (3)
Net change in fair value of cash flow hedges transferred to operating statement ..  ..  ..  (128) 74 (4) (5) (3)
Foreign currency translation differences for foreign operations ..  ..  ..  14 ..  ..  ..  .. 
Total income/(expense) recognised directly in Net Worth 9,869 ..  10,489 70 113 17 5 (6)
Operating balance 11,473 5,768 6,568 6,327 6,431 5,569 5,310 5,366
Total recognised income and expense for the year 21,342 5,768 17,057 6,397 6,544 5,586 5,315 5,360
Attributable to:                
- minority interest in Air NZ 78 ..  ..  ..  ..  ..  ..  .. 
- the Crown 21,264 5,768 17,057 6,397 6,543 5,587 5,315 5,359
Total recognised income and expense for the year 21,342 5,768 17,057 6,397 6,543 5,587 5,315 5,359

The accompanying Notes and Accounting policies are an integral part of these Statements.

Forecast Statement of Financial Position as at 30 June

    Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) Note 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Assets                  
Cash and cash equivalents [12] 4,168 2,902 3,478 3,107 3,196 3,435 3,319 3,272
Receivables [13] 14,053 10,345 11,972 12,329 12,547 13,262 13,390 13,413
Marketable securities and derivatives in gain [12] 27,668 25,250 35,300 30,730 32,885 32,203 31,468 34,008
Share investments [12] 15,834 17,994 16,783 14,121 17,273 20,179 23,330 26,722
Advances [14] 9,099 10,296 10,416 13,839 15,087 16,798 17,362 17,920
Inventory   907 1,182 1,101 941 982 1,046 1,071 1,080
Prepayments and other assets   1,463 874 1,241 1,182 1,205 1,209 1,218 1,224
Property, plant and equipment [15] 78,974 73,409 92,842 92,670 95,950 97,667 99,675 101,846
Equity accounted investments (including TEIs)   5,475 5,301 5,586 6,482 6,647 6,812 6,914 7,003
Intangible assets and Goodwill   630 398 594 1,569 1,555 1,529 1,456 1,392
Forecast for new capital spending   ..  256 ..  ..  184 751 1,557 2,460
Top-down capital adjustment   ..  ..  (200) (200) (200) (200) (200) (200)
Total Assets   158,271 148,207 179,113 176,770 187,311 194,691 200,560 210,140
Liabilities                  
Issued currency   3,362 3,408 3,551 3,552 3,730 3,914 4,110 4,316
Payables [16] 12,469 10,122 11,121 8,912 9,036 9,002 8,737 8,491
Deferred revenue   ..  ..  ..  845 845 850 855 857
Settlement deposits with the Reserve Bank   1,964 2,071 7,523 7,523 7,523 7,523 7,523 7,523
Other borrowings   37,463 36,317 34,844 36,033 38,841 39,527 38,999 42,168
Insurance liabilities [18] 12,715 13,255 14,457 17,998 19,011 20,042 21,162 22,328
Defined benefit retirement plan liabilities [19] 15,231 15,344 15,554 8,363 8,414 8,402 8,331 8,224
Provisions [17] 3,664 3,437 3,607 3,848 3,850 3,786 3,819 3,812
Total Liabilities   86,868 83,954 90,657 87,074 91,250 93,046 93,536 97,719
Total Assets less Total Liabilities   71,403 64,253 88,456 89,696 96,061 101,645 107,024 112,421
Net Worth                  
Taxpayer funds   33,477 36,049 40,018 41,852 48,239 53,844 59,236 64,630
Revaluation reserve   37,633 27,989 48,145 47,459 47,402 47,406 47,409 47,412
Cashflow hedge reserve   ..  ..  ..  62 97 72 56 56
Available for sale financial asset reserve   ..  ..  ..  13 13 13 13 13
Foreign exchange translation reserve   ..  ..  ..  17 17 17 17 17
Total Net Worth attributable to the Crown   71,110 64,038 88,163 89,403 95,768 101,352 106,731 112,128
Net Worth attributable to minority interest in Air NZ   293 215 293 293 293 293 293 293
Total Net Worth   71,403 64,253 88,456 89,696 96,061 101,645 107,024 112,421

The accompanying Notes and Accounting policies are an integral part of these Statements.

Components of the Fiscal Indicators

Indicators for measuring progress against the Government's fiscal objectives encompass activities at the Total Crown level and Core Crown level. This note details the components of each indicator. The Government's Fiscal Strategy Report details the Government's fiscal strategy and the connections between this strategy and the fiscal objectives and indicators.

New Zealand Superannuation Fund
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast

New Zealand Superannuation Fund

               
The New Zealand Superannuation Fund (NZSF) is part of the Core Crown segment. It is also an important component of the Government's fiscal strategy in its own right, which is reflected in the design of the fiscal indicators. The following NZSF information is not adjusted for transactions with other parts of the core Crown (i.e. is uneliminated data), such as cross-holdings with the New Zealand Debt Management Office

Results before elimination

               
Opening net worth 6,555 10,015 9,861 9,855 12,910 15,977 19,321 22,984
Gross contribution from the Crown 2,337 2,049 2,049 2,049 2,103 2,194 2,312 2,458
Revenue (including interest and dividends) 1,190 951 1,505 382 447 519 599 685
Other gains and losses ..  ..  ..  1,123 866 1,055 1,259 1,486
Tax (221) (276) (497) (499) (349) (424) (507) (598)
Closing net worth 9,861 12,739 12,918 12,910 15,977 19,321 22,984 27,015
NZ Superannuation Fund returns 1,190 951 1,505 1,505 1,313 1,574 1,858 2,171

(New Zealand Superannuation Fund returns represent the sum of its revenue, expenses and other gains/losses)

  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Core Crown Revenue excluding New Zealand Superannuation Fund revenue

Core Crown Revenue excluding New Zealand Superannuation Fund revenue

               
Core Crown revenue encompasses interest and dividends earned by the New Zealand Superannuation Fund (after eliminating any interest and dividend earned from cross holdings).  After-tax revenue is retained by the NZSF and is therefore excluded from the core Crown revenue indicator.
Core Crown revenue       57,006 59,402 61,172 63,825 66,993
NZSF after-tax revenue       (117) 98 95 92 87
Core Crown revenue excluding NZSF revenue       57,123 59,304 61,077 63,733 66,906
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Operating Balance before Gains and Losses excluding NZS Fund revenue

Operating Balance before Gains and Losses excluding NZS Fund revenue

               
Operating Balance before gains and losses       5,537 4,958 3,957 3,530 3,347
NZSF after-tax revenue       (117) 98 95 92 87
Operating Balance before gains and losses excluding NZS Fund revenue       5,654 4,860 3,862 3,438 3,260

Definitions of debt:

Total Crown gross debt is the total borrowings (both sovereign-guaranteed and non-sovereign guaranteed and including derivatives in loss) of the total Crown.   This is the amount in the total Crown Statement of Financial Position for Reserve Bank settlement deposits plus other borrowings. It represents the complete picture of whole-of-Crown debt obligations to external parties, excluding payables.Gross sovereign-issued debt is debt issued by the sovereign (i.e., Core Crown) and includes Government stock held by the NZS Fund, ACC or EQC for example.  In other words, the gross sovereign-issued debt  indicator does not eliminate any internal cross-holdings.  The Government's debt objective uses this measure of debt.    Net Core Crown debt deducts financial assets of the Core Crown (comprising cash equivalents, marketable securities, derivatives in gain, advances and some share investments) from gross sovereign-issued debt.   Share investments in supranational organisations, such as the International Bank for Reconstruction and Development & Bank for International Settlements, are excluded from the net Core Crown debt measure.

  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Total Crown gross debt 39,427 38,388 42,367 43,556 46,364 47,050 46,522 49,691
Core Crown borrowings 34,477 33,356 35,876 36,771 38,876 38,371 37,665 40,098
Add back NZS Fund holdings of sovereign issued debt and NZS Fund borrowings[2] 984 1,657 1,341 1,164 1,524 1,860 2,229 2,639
Gross sovereign-issued debt 35,461 35,013 37,217 37,935 40,400 40,231 39,894 42,737
Gross sovereign-issued debt 35,461 35,013 37,217 37,935 40,400 40,231 39,894 42,737
Less Core Crown financial assets (excluding receivables and equity in supranational organisations) (40,599) (41,028) (45,179) (45,469) (51,184) (53,375) (55,903) (62,024)
Net Core Crown Debt (including NZS Fund) (5,138) (6,015) (7,962) (7,534) (10,784) (13,144) (16,009) (19,287)
Add back NZS Fund financial assets 12,883 15,224 12,573 12,573 15,439 18,673 22,226 26,147
Net Core Crown Debt 7,745 9,209 4,611 5,039 4,655 5,529 6,217 6,860

[2] GSF holdings of sovereign issued debt are also added back under Old GAAP

The accompanying Notes and Accounting policies are an integral part of these Statements.

Forecast Statement of Borrowings for the years ending 30 June

Borrowings comprise financial liabilities excluding issued currency and payables. Borrowings are split into sovereign-guaranteed and non-sovereign-guaranteed borrowings. This split reflects the fact that debt held by State-owned enterprises (SOEs) and Crown entities is not explicitly guaranteed by the Crown. Any such debt that may be guaranteed would be included in the sovereign-guaranteed total, however, no debt of SOEs and Crown entities is currently guaranteed by the Crown. The Forecast Statement of Segments identifies borrowings by institutional segment.

  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Borrowings:                
Government stock 17,002 15,982 16,337 15,515 17,732 16,884 15,793 17,943
Treasury bills 4,860 5,259 2,577 2,576 2,786 2,602 2,614 2,626
Government retail stock 532 482 472 363 358 358 358 358
Settlement deposits with the Reserve Bank 1,964 2,071 7,523 7,523 7,523 7,523 7,523 7,523
Derivatives in loss       604 300 186 174 154
Finance lease liabilities       966 958 949 941 937
Other borrowings 15,069 14,594 15,458 16,009 16,707 18,548 19,119 20,150
Total borrowings 39,427 38,388 42,367 43,556 46,364 47,050 46,522 49,691
Borrowings - sovereign guaranteed 29,879 28,560 30,819 31,285 33,167 32,309 31,247 33,309
Borrowings - non- sovereign guaranteed 9,548 9,828 11,548 12,271 13,197 14,741 15,275 16,382

The accompanying Notes and Accounting policies are an integral part of these Statements.

Statement of Actual Commitments as at 31 March

Statement of Actual Commitments as at 31 March
($ million) As at 31 March 2007 As at 30 June 2006
Capital Commitments    
Specialist military equipment 1,084 535
Land and buildings 788 945
Other property, plant and equipment 2,506 2,530
Other capital commitments 454 818
TEIs 124
Total Capital Commitments 4,832 4,952
Operating Commitments    
Non-cancellable accommodation leases 1,850 1,940
Other non-cancellable leases 2,493 2,466
Non-cancellable contracts for the supply of goods and services 1,841 1,908
Other operating commitments 6,543 6,462
TEIs 303
Total Operating Commitments 12,727 13,079
Total Commitments 17,559 18,031
Total Commitments by Institutional Segment    
Core Crown 5,055 4,824
Crown entities 9,033 9,627
State-owned enterprises 3,471 3,580
Total Commitments  17,559 18,031

The accompanying Notes and Accounting policies are an integral part of these Statements.

Statement of Actual Contingent Liabilities as at 31 March

Statement of Actual Contingent Liabilities as at 31 March
($ million) As at 31 March 2007 As at 30 June 2006
Quantifiable Contingent Liabilities    
Guarantees and Indemnities 521 405
Uncalled Capital 2,203 2,592
Legal Proceedings and Disputes 931 1,032
Other Contingent Liabilities 2,019 2,073
Total Quantifiable Contingent Liabilities 5,674 6,102
Total Quantifiable Contingent Liabilities by Institutional Segment    
Core Crown 5,495 5,921
Crown entities 61 63
State-owned enterprises 118 118
Total Quantifiable Contingent Liabilities 5,674 6,102
Quantifiable Contingent Assets    
Core Crown - Education and Transport 103 106
Total Quantifiable Contingent Assets 103 106

The accompanying Notes and Accounting policies are an integral part of these Statements.

A detailed Statement of Contingent Liabilities and Assets (quantified and unquantified) is outlined on pages 154 to 156 of the Specific Fiscal Risk chapter.

The Statement of Specific Risks (quantified and unquantified) is outlined on pages 138 to 153 of the Specific Fiscal Risk chapter.

Forecast Statement of Segments

Statement of Financial Performance (institutional form) for the year ended 30 June 2006
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) Old GAAP 2006 Actual Old GAAP 2006 Actual Old GAAP 2006 Actual Old GAAP 2006 Actual Old GAAP 2006 Actual
Revenue          
Taxation revenue 52,444 ..  ..  (471) 51,973
Other sovereign revenue 663 2,811 ..  (63) 3,411
Sales of goods and services 884 1,865 11,206 (618) 13,337
Investment revenue 4,496 1,962 1,008 (1,638) 5,828
Other revenue 683 18,677 537 (17,865) 2,032
Total Revenue (excluding gains) 59,170 25,315 12,751 (20,655) 76,581
Expenses          
Social assistance and official development assistance 15,081 1,708 ..  (101) 16,688
Personnel expenses 5,935 7,591 1,876 (7) 15,395
Other operating expenses 26,823 14,288 8,558 (18,909) 30,760
Interest expenses 2,061 189 440 (449) 2,241
Total Expenses (excluding losses) 49,900 23,776 10,874 (19,466) 65,084
Operating Balance before gains/(losses) 9,270 1,539 1,877 (1,189) 11,497
Total gains/(losses) ..  ..  ..  ..  .. 
Net surplus/(deficit) from associates and joint ventures ..  54 ..  ..  54
Gain/(loss) from discontinued operations ..  ..  ..  ..  .. 
Attributable to minority interest in Air NZ ..  ..  (78) ..  (78)
Operating Balance 9,270 1,593 1,799 (1,189) 11,473
Expenses by functional classification          
Social security and welfare 15,598 3,740 ..  (369) 18,969
Health 9,547 8,227 ..  (8,512) 9,262
Education 9,914 6,539 22 (6,045) 10,430
Transport and communications 1,818 1,482 4,456 (1,770) 5,986
Other 10,962 3,599 5,956 (2,321) 18,196
Interest expenses 2,061 189 440 (449) 2,241
Forecast for future new spending ..  ..  ..  ..  .. 
Total Expenses 49,900 23,776 10,874 (19,466) 65,084
Other gains and losses by functional classification          
Social security and welfare ..  ..  ..  ..  .. 
Education ..  ..  ..  ..  .. 
Core government services ..  ..  ..  ..  .. 
Other ..  ..  ..  ..  .. 
Interest expenses ..  ..  ..  ..  .. 
Total Other Gains and Losses ..  ..  ..  ..  .. 
Statement of Financial Position (institutional form) as at 30 June 2006
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) Old GAAP 2006 Actual Old GAAP 2006 Actual Old GAAP 2006 Actual Old GAAP 2006 Actual Old GAAP 2006 Actual
Assets          
Cash and cash equivalents 677 1,975 1,515 1 4,168
Receivables 10,584 2,132 1,576 (238) 14,054
Other financial assets 40,244 15,578 3,852 (7,075) 52,599
Property, plant and equipment 24,818 37,965 16,191 (1) 78,973
Equity accounted investments ..  ..  ..  ..  .. 
Investment in SOEs, CEs and TEIs 24,169 5,475 ..  (24,169) 5,475
Intangible assets and goodwill 260 134 236 ..  630
Other assets 1,532 190 650 ..  2,372
Forecast for new capital spending ..  ..  ..  ..  .. 
Total Assets 102,284 63,449 24,020 (31,482) 158,271
Liabilities          
Borrowings 34,477 4,124 7,899 (7,073) 39,427
Other liabilities 27,730 17,503 3,006 (798) 47,441
Total Liabilities 62,207 21,627 10,905 (7,871) 86,868
Net Worth 40,077 41,822 13,115 (23,611) 71,403
Taxpayer funds 28,929 21,086 7,072 (23,611) 33,476
Reserves 11,148 20,736 5,750 ..  37,634
Net Worth attributable to minority interest in Air NZ ..  ..  293 ..  293
Net Worth 40,077 41,822 13,115 (23,611) 71,403

 

The accompanying Notes and Accounting policies are an integral part of these Statements.

Statement of Financial Performance (institutional form) for the year ended 30 June 2007
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) Old GAAP 2007 Forecast Old GAAP 2007 Forecast Old GAAP 2007 Forecast Old GAAP 2007 Forecast Old GAAP 2007 Forecast
Revenue          
Taxation revenue 52,114 ..  ..  (575) 51,539
Other sovereign revenue 604 2,946 ..  (42) 3,508
Sales of goods and services 955 1,845 10,921 (610) 13,111
Investment revenue 5,104 1,372 513 (1,182) 5,807
Other revenue 725 20,587 770 (19,844) 2,238
Total Revenue (excluding gains) 59,502 26,750 12,204 (22,253) 76,203
Expenses          
Social assistance and official development assistance 16,423 1,959 ..  (107) 18,275
Personnel expenses 5,818 7,897 1,964 (6) 15,673
Other operating expenses 28,891 16,136 8,638 (20,989) 32,676
Interest expenses 2,643 351 537 (468) 3,063
Total Expenses (excluding losses) 53,775 26,343 11,139 (21,570) 69,687
Operating Balance before gains/(losses) 5,727 407 1,065 (683) 6,516
Total gains/(losses) ..  ..  ..  ..  .. 
Net surplus/(deficit) from associates and joint ventures (10) 62 ..  ..  52
Gain/(loss) from discontinued operations ..  ..  ..  ..  .. 
Operating Balance 5,717 469 1,065 (683) 6,568
Expenses by functional classification          
Social security and welfare 17,325 4,525 ..  (382) 21,468
Health 10,492 8,812 ..  (9,267) 10,037
Education 9,125 6,889 23 (6,400) 9,637
Transport and communications 2,549 1,786 5,315 (2,410) 7,240
Other 11,561 3,980 5,264 (2,643) 18,162
Interest expenses 2,643 351 537 (468) 3,063
Forecast for future new spending 80 ..  ..  ..  80
Total Expenses 53,775 26,343 11,139 (21,570) 69,687
Other gains and losses by functional classification          
Social security and welfare ..  ..  ..  ..  .. 
Education ..  ..  ..  ..  .. 
Core government services ..  ..  ..  ..  .. 
Other ..  ..  ..  ..  .. 
Interest expenses ..  ..  ..  ..  .. 
Total Other Gains and Losses ..  ..  ..  ..  .. 
Statement of Financial Position (institutional form) as at 30 June 2007
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) Old GAAP 2007 Forecast Old GAAP 2007 Forecast Old GAAP 2007 Forecast Old GAAP 2007 Forecast Old GAAP 2007 Forecast
Assets          
Cash and cash equivalents 359 2,027 1,504 (412) 3,478
Receivables 9,106 1,983 1,573 (690) 11,972
Other financial assets 48,122 16,820 5,524 (7,967) 62,499
Property, plant and equipment 25,882 38,950 28,010 ..  92,842
Equity accounted investments ..  ..  ..  ..  .. 
Investment in SOEs, CEs and TEIs 24,776 5,586 ..  (24,776) 5,586
Intangible assets and goodwill 220 134 240 ..  594
Other assets 1,239 211 692 ..  2,142
Forecast for new capital spending ..  ..  ..  ..  .. 
Total Assets 109,704 65,711 37,543 (33,845) 179,113
Liabilities          
Borrowings 35,876 4,394 10,482 (8,385) 42,367
Other liabilities 27,954 18,675 3,032 (1,371) 48,290
Total Liabilities 63,830 23,069 13,514 (9,756) 90,657
Net Worth 45,874 42,642 24,029 (24,089) 88,456
Taxpayer funds 34,678 21,883 7,546 (24,089) 40,018
Reserves 11,196 20,759 16,190 ..  48,145
Net Worth attributable to minority interest in Air NZ ..  ..  293 ..  293
Net Worth 45,874 42,642 24,029 (24,089) 88,456

The accompanying Notes and Accounting policies are an integral part of these Statements.

Statement of Financial Performance (institutional form) for the year ended 30 June 2007
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) New GAAP 2007 Forecast New GAAP 2007 Forecast New GAAP 2007 Forecast New GAAP 2007 Forecast New GAAP 2007 Forecast
Revenue          
Taxation revenue 52,230 ..  ..  (572) 51,658
Other sovereign revenue 620 3,631 ..  (560) 3,691
Sales of goods and services 1,067 11,280 10,850 (10,634) 12,563
Investment revenue 2,686 826 458 (898) 3,072
Other revenue 403 10,556 840 (9,393) 2,406
Total Revenue (excluding gains) 57,006 26,293 12,148 (22,057) 73,390
Expenses          
Social assistance and official development assistance 16,626 1,781 ..  (107) 18,300
Personnel expenses 5,202 7,914 1,968 ..  15,084
Other operating expenses 28,686 15,465 8,533 (20,995) 31,689
Interest expenses 2,269 272 672 (433) 2,780
Total Expenses (excluding losses) 52,783 25,432 11,173 (21,535) 67,853
Operating Balance before gains/(losses) 4,223 861 975 (522) 5,537
Total gains/(losses) 1,578 (698) 28 (211) 697
Net surplus/(deficit) from associates and joint ventures 3 62 31 ..  96
Gain/(loss) from discontinued operations (3) ..  ..  ..  (3)
Operating Balance 5,801 225 1,034 (733) 6,327
Expenses by functional classification          
Social security and welfare 16,891 3,649 ..  (398) 20,142
Health 10,486 8,830 ..  (8,658) 10,658
Education 9,622 6,872 23 (6,313) 10,204
Transport and communications 2,505 1,760 5,279 (2,394) 7,150
Other 10,930 4,049 5,199 (3,339) 16,839
Interest expenses 2,269 272 672 (433) 2,780
Forecast for future new spending 80 ..  ..  ..  80
Total Expenses 52,783 25,432 11,173 (21,535) 67,853
Other gains and losses by functional classification          
Social security and welfare ..  (696) ..  (28) (724)
Education ..  ..  ..  ..  .. 
Core government services 1,176 ..  ..  ..  1,176
Other 66 (2) 28 (19) 73
Interest expenses 336 ..  ..  (164) 172
Total Other Gains and Losses 1,578 (698) 28 (211) 697
Statement of Financial Position (institutional form) as at 30 June 2007
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) New GAAP 2007 Forecast New GAAP 2007 Forecast New GAAP 2007 Forecast New GAAP 2007 Forecast New GAAP 2007 Forecast
Assets          
Cash and cash equivalents 277 2,065 1,185 (420) 3,107
Receivables 8,194 3,435 1,465 (765) 12,329
Other financial assets 44,229 16,857 5,886 (8,282) 58,690
Property, plant and equipment 26,092 38,911 27,667 ..  92,670
Equity accounted investments 949 20 130 (519) 580
Investment in SOEs, CEs and TEIs 24,079 5,905 ..  (24,082) 5,902
Intangible assets and goodwill 745 385 439 ..  1,569
Other assets 905 254 773 (9) 1,923
Forecast for new capital spending ..  ..  ..  ..  .. 
Total Assets 105,470 67,832 37,545 (34,077) 176,770
Liabilities          
Borrowings 36,771 4,621 10,845 (8,681) 43,556
Other liabilities 19,596 23,527 4,596 (4,201) 43,518
Total Liabilities 56,367 28,148 15,441 (12,882) 87,074
Net Worth 49,103 39,684 22,104 (21,195) 89,696
Taxpayer funds 38,053 20,115 7,424 (23,740) 41,852
Reserves 11,050 19,569 14,387 2,545 47,551
Net Worth attributable to minority interest in Air NZ ..  ..  293 ..  293
Net Worth 49,103 39,684 22,104 (21,195) 89,696

The accompanying Notes and Accounting policies are an integral part of these Statements.

Statement of Financial Performance (institutional form) for the year ended 30 June 2008
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) New GAAP 2008 Forecast New GAAP 2008 Forecast New GAAP 2008 Forecast New GAAP 2008 Forecast New GAAP 2008 Forecast
Revenue          
Taxation revenue 54,707 ..  ..  (534) 54,173
Other sovereign revenue 613 3,678 ..  (598) 3,693
Sales of goods and services 1,057 11,928 11,510 (11,242) 13,253
Investment revenue 2,587 880 481 (582) 3,366
Other revenue 438 11,018 929 (9,998) 2,387
Total Revenue (excluding gains) 59,402 27,504 12,920 (22,954) 76,872
Expenses          
Social assistance and official development assistance 17,998 2,016 ..  (106) 19,908
Personnel expenses 5,434 8,213 2,011 (1) 15,657
Other operating expenses 30,419 16,277 9,185 (22,280) 33,601
Interest expenses 2,245 306 704 (507) 2,748
Total Expenses (excluding losses) 56,096 26,812 11,900 (22,894) 71,914
Operating Balance before gains/(losses) 3,306 692 1,020 (60) 4,958
Total gains/(losses) 1,155 485 18 (281) 1,377
Net surplus/(deficit) from associates and joint ventures 2 64 30 ..  96
Gain/(loss) from discontinued operations ..  ..  ..  ..  .. 
Operating Balance 4,463 1,241 1,068 (341) 6,431
Expenses by functional classification          
Social security and welfare 17,698 3,997 ..  (424) 21,271
Health 11,613 9,315 ..  (9,229) 11,699
Education 9,719 7,166 23 (6,587) 10,321
Transport and communications 2,792 1,877 5,589 (2,587) 7,671
Other 11,715 4,151 5,584 (3,560) 17,890
Interest expenses 2,245 306 704 (507) 2,748
Forecast for future new spending 314 ..  ..  ..  314
Total Expenses 56,096 26,812 11,900 (22,894) 71,914
Other gains and losses by functional classification          
Social security and welfare ..  320 ..  (38) 282
Education ..  ..  ..  5 5
Core government services 756 ..  ..  (2) 754
Other ..  165 18 26 209
Interest expenses 399 ..  ..  (272) 127
Total Other Gains and Losses 1,155 485 18 (281) 1,377
Statement of Financial Position (institutional form) as at 30 June 2008
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) New GAAP 2008 Forecast New GAAP 2008 Forecast New GAAP 2008 Forecast New GAAP 2008 Forecast New GAAP 2008 Forecast
Assets          
Cash and cash equivalents 274 2,052 1,291 (421) 3,196
Receivables 8,285 3,507 1,647 (892) 12,547
Other financial assets 49,668 18,188 6,573 (9,184) 65,245
Property, plant and equipment 26,492 40,327 29,131 ..  95,950
Equity accounted investments 1,026 25 148 (596) 603
Investment in SOEs, CEs and TEIs 24,571 5,989 ..  (24,516) 6,044
Intangible assets and goodwill 805 371 379 ..  1,555
Other assets 916 252 826 (7) 1,987
Forecast for new capital spending 184 ..  ..  ..  184
Total Assets 112,221 70,711 39,995 (35,616) 187,311
Liabilities          
Borrowings 38,876 4,773 12,155 (9,440) 46,364
Other liabilities 19,770 24,544 4,882 (4,310) 44,886
Total Liabilities 58,646 29,317 17,037 (13,750) 91,250
Net Worth 53,575 41,394 22,958 (21,866) 96,061
Taxpayer funds 42,525 21,827 8,258 (24,371) 48,239
Reserves 11,050 19,567 14,407 2,505 47,529
Net Worth attributable to minority interest in Air NZ ..  ..  293 ..  293
Net Worth 53,575 41,394 22,958 (21,866) 96,061

The accompanying Notes and Accounting policies are an integral part of these Statements.

Statement of Financial Performance (institutional form) for the year ended 30 June 2009
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) New GAAP 2009 Forecast New GAAP 2009 Forecast New GAAP 2009 Forecast New GAAP 2009 Forecast New GAAP 2009 Forecast
Revenue          
Taxation revenue 56,280 ..  ..  (589) 55,691
Other sovereign revenue 603 3,792 ..  (638) 3,757
Sales of goods and services 1,063 11,951 12,097 (11,241) 13,870
Investment revenue 2,787 924 522 (648) 3,585
Other revenue 439 11,330 917 (10,013) 2,673
Total Revenue (excluding gains) 61,172 27,997 13,536 (23,129) 79,576
Expenses          
Social assistance and official development assistance 18,852 2,235 ..  (112) 20,975
Personnel expenses 5,459 8,252 2,076 ..  15,787
Other operating expenses 32,327 16,585 9,604 (22,364) 36,152
Interest expenses 2,181 309 744 (529) 2,705
Total Expenses (excluding losses) 58,819 27,381 12,424 (23,005) 75,619
Operating Balance before gains/(losses) 2,353 616 1,112 (124) 3,957
Total gains/(losses) 1,312 488 ..  (284) 1,516
Net surplus/(deficit) from associates and joint ventures 2 65 29 ..  96
Gain/(loss) from discontinued operations ..  ..  ..  ..  .. 
Attributable to minority interest in Air NZ ..  ..  ..  ..  .. 
Operating Balance 3,667 1,169 1,141 (408) 5,569
Expenses by functional classification          
Social security and welfare 18,172 4,296 ..  (443) 22,025
Health 11,634 9,556 ..  (9,203) 11,987
Education 9,835 7,237 23 (6,635) 10,460
Transport and communications 2,796 1,839 5,774 (2,650) 7,759
Other 11,964 4,144 5,883 (3,545) 18,446
Interest expenses 2,181 309 744 (529) 2,705
Forecast for future new spending 2,237 ..  ..  ..  2,237
Total Expenses 58,819 27,381 12,424 (23,005) 75,619
Other gains and losses by functional classification          
Social security and welfare ..  307 ..  (36) 271
Education ..  ..  ..  5 5
Core government services 920 ..  ..  (3) 917
Other ..  181 ..  40 221
Interest expenses 392 ..  ..  (290) 102
Total Other Gains and Losses 1,312 488 ..  (284) 1,516
Statement of Financial Position (institutional form) as at 30 June 2009
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) New GAAP 2009 Forecast New GAAP 2009 Forecast New GAAP 2009 Forecast New GAAP 2009 Forecast New GAAP 2009 Forecast
Assets          
Cash and cash equivalents 318 1,998 1,539 (420) 3,435
Receivables 8,960 3,566 1,729 (993) 13,262
Other financial assets 51,486 19,429 7,833 (9,568) 69,180
Property, plant and equipment 26,263 41,372 30,032 ..  97,667
Equity accounted investments 1,096 31 171 (666) 632
Investment in SOEs, CEs and TEIs 24,763 6,063 ..  (24,646) 6,180
Intangible assets and goodwill 805 347 376 1 1,529
Other assets 961 250 849 (5) 2,055
Forecast for new capital spending 751 ..  ..  ..  751
Total Assets 115,403 73,056 42,529 (36,297) 194,691
Liabilities          
Borrowings 38,371 4,851 13,673 (9,845) 47,050
Other liabilities 19,787 25,454 5,170 (4,415) 45,996
Total Liabilities 58,158 30,305 18,843 (14,260) 93,046
Net Worth 57,245 42,751 23,686 (22,037) 101,645
Taxpayer funds 46,195 23,182 9,003 (24,536) 53,844
Reserves 11,050 19,569 14,390 2,499 47,508
Net Worth attributable to minority interest in Air NZ ..  ..  293 ..  293
Net Worth 57,245 42,751 23,686 (22,037) 101,645

The accompanying Notes and Accounting policies are an integral part of these Statements.

Statement of Financial Performance (institutional form) for the year ended 30 June 2010
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) New GAAP 2010 Forecast New GAAP 2010 Forecast New GAAP 2010 Forecast New GAAP 2010 Forecast New GAAP 2010 Forecast
Revenue          
Taxation revenue 58,877 ..  ..  (608) 58,269
Other sovereign revenue 609 3,909 ..  (672) 3,846
Sales of goods and services 1,068 12,017 12,612 (11,266) 14,431
Investment revenue 2,826 968 526 (684) 3,636
Other revenue 445 11,450 889 (9,788) 2,996
Total Revenue (excluding gains) 63,825 28,344 14,027 (23,018) 83,178
Expenses          
Social assistance and official development assistance 19,837 2,369 ..  (111) 22,095
Personnel expenses 5,431 8,401 2,118 ..  15,950
Other operating expenses 34,310 16,837 10,007 (22,194) 38,960
Interest expenses 2,099 322 774 (552) 2,643
Total Expenses (excluding losses) 61,677 27,929 12,899 (22,857) 79,648
Operating Balance before gains/(losses) 2,148 415 1,128 (161) 3,530
Total gains/(losses) 1,480 494 (2) (288) 1,684
Net surplus/(deficit) from associates and joint ventures 2 65 29 ..  96
Gain/(loss) from discontinued operations ..  ..  ..  ..  .. 
Attributable to minority interest in Air NZ ..  ..  ..  ..  .. 
Operating Balance 3,630 974 1,155 (449) 5,310
Expenses by functional classification          
Social security and welfare 18,788 4,555 ..  (455) 22,888
Health 11,665 9,824 ..  (9,199) 12,290
Education 9,912 7,284 23 (6,658) 10,561
Transport and communications 2,566 1,744 5,953 (2,422) 7,841
Other 12,411 4,200 6,149 (3,571) 19,189
Interest expenses 2,099 322 774 (552) 2,643
Forecast for future new spending 4,236 ..  ..  ..  4,236
Total Expenses 61,677 27,929 12,899 (22,857) 79,648
Other gains and losses by functional classification          
Social security and welfare ..  296 ..  (34) 262
Education ..  ..  ..  5 5
Core government services 1,092 ..  ..  (4) 1,088
Other ..  198 (2) 51 247
Interest expenses 388 ..  ..  (306) 82
Total Other Gains and Losses 1,480 494 (2) (288) 1,684
Statement of Financial Position (institutional form) as at 30 June 2010
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) New GAAP 2010 Forecast New GAAP 2010 Forecast New GAAP 2010 Forecast New GAAP 2010 Forecast New GAAP 2010 Forecast
Assets          
Cash and cash equivalents 347 1,948 1,443 (419) 3,319
Receivables 8,914 3,659 1,782 (965) 13,390
Other financial assets 53,621 20,684 7,814 (9,957) 72,162
Property, plant and equipment 26,071 42,225 31,380 (1) 99,675
Equity accounted investments 1,102 36 196 (672) 662
Investment in SOEs, CEs and TEIs 24,896 6,134 ..  (24,778) 6,252
Intangible assets and goodwill 768 321 367 ..  1,456
Other assets 970 250 872 (5) 2,087
Forecast for new capital spending 1,557 ..  ..  ..  1,557
Total Assets 118,246 75,257 43,854 (36,797) 200,560
Liabilities          
Borrowings 37,665 4,919 14,185 (10,247) 46,522
Other liabilities 19,652 26,493 5,252 (4,383) 47,014
Total Liabilities 57,317 31,412 19,437 (14,630) 93,536
Net Worth 60,929 43,845 24,417 (22,167) 107,024
Taxpayer funds 49,879 24,277 9,746 (24,666) 59,236
Reserves 11,050 19,568 14,378 2,499 47,495
Net Worth attributable to minority interest in Air NZ ..  ..  293 ..  293
Net Worth 60,929 43,845 24,417 (22,167) 107,024

The accompanying Notes and Accounting policies are an integral part of these Statements.

Statement of Financial Performance (institutional form) for the year ended 30 June 2011
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) New GAAP 2011 Forecast New GAAP 2011 Forecast New GAAP 2011 Forecast New GAAP 2011 Forecast New GAAP 2011 Forecast
Revenue          
Taxation revenue 61,960 ..  ..  (609) 61,351
Other sovereign revenue 614 4,023 ..  (706) 3,931
Sales of goods and services 1,082 12,042 12,936 (11,270) 14,790
Investment revenue 2,936 1,014 524 (718) 3,756
Other revenue 401 11,518 754 (9,682) 2,991
Total Revenue (excluding gains) 66,993 28,597 14,214 (22,985) 86,819
Expenses          
Social assistance and official development assistance 20,767 2,537 ..  (114) 23,190
Personnel expenses 5,456 8,400 2,151 (1) 16,006
Other operating expenses 36,431 16,975 10,245 (22,141) 41,510
Interest expenses 2,244 326 779 (583) 2,766
Total Expenses (excluding losses) 64,898 28,238 13,175 (22,839) 83,472
Operating Balance before gains/(losses) 2,095 359 1,039 (146) 3,347
Total gains/(losses) 1,684 535 (2) (295) 1,922
Net surplus/(deficit) from associates and joint ventures 2 66 28 1 97
Gain/(loss) from discontinued operations ..  ..  ..  ..  .. 
Attributable to minority interest in Air NZ ..  ..  ..  ..  .. 
Operating Balance 3,781 960 1,065 (440) 5,366
Expenses by functional classification          
Social security and welfare 19,437 4,802 ..  (471) 23,768
Health 11,662 9,811 ..  (9,186) 12,287
Education 9,998 7,294 23 (6,644) 10,671
Transport and communications 2,476 1,749 6,034 (2,477) 7,782
Other 12,835 4,256 6,339 (3,478) 19,952
Interest expenses 2,244 326 779 (583) 2,766
Forecast for future new spending 6,246 ..  ..  ..  6,246
Total Expenses 64,898 28,238 13,175 (22,839) 83,472
Other gains and losses by functional classification          
Social security and welfare ..  317 ..  (38) 279
Education ..  ..  ..  5 5
Core government services 1,288 ..  ..  (2) 1,286
Other ..  218 (2) 34 250
Interest expenses 396 ..  ..  (294) 102
Total Other Gains and Losses 1,684 535 (2) (295) 1,922
Statement of Financial Position (institutional form) as at 30 June 2011
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) New GAAP 2011 Forecast New GAAP 2011 Forecast New GAAP 2011 Forecast New GAAP 2011 Forecast New GAAP 2011 Forecast
Assets          
Cash and cash equivalents 377 1,915 1,400 (420) 3,272
Receivables 8,806 3,746 1,823 (962) 13,413
Other financial assets 59,316 21,940 7,797 (10,403) 78,650
Property, plant and equipment 25,604 43,071 33,171 ..   101,846
Equity accounted investments 1,102 36 218 (671) 685
Investment in SOEs, CEs and TEIs 24,970 6,200 ..  (24,852) 6,318
Intangible assets and goodwill 740 298 355 (1) 1,392
Other assets 969 250 888 (3) 2,104
Forecast for new capital spending 2,460 ..  ..  ..  2,460
Total Assets 124,344 77,456 45,652 (37,312) 210,140
Liabilities          
Borrowings 40,098 5,039 15,262 (10,712) 49,687
Other liabilities 19,531 27,562 5,324 (4,385) 48,032
Total Liabilities 59,629 32,601 20,586 (15,097) 97,719
Net Worth 64,715 44,855 25,066 (22,215) 112,421
Taxpayer funds 53,665 25,287 10,393 (24,715) 64,630
Reserves 11,050 19,568 14,380 2,500 47,498
Net Worth attributable to minority interest in Air NZ ..  ..  293 ..  293
Net Worth 64,715 44,855 25,066 (22,215) 112,421

The accompanying Notes and Accounting policies are an integral part of these Statements.

Notes to the Forecast Financial Statements

NOTE 1a: Revenue Collected Through the Crown's Sovereign Power
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast

Income Tax Revenue (accrual)

               

Direct Income Tax

               
Individuals
               
Source deductions 19,936 20,534 21,012 21,012 22,334 23,695 25,094 26,619
Other persons 4,940 4,393 4,474 4,474 4,553 4,774 5,169 5,529
Refunds (953) (962) (1,085) (1,085) (1,102) (1,130) (1,205) (1,260)
Fringe benefit tax 450 425 455 455 474 498 519 546
Total individuals 24,373 24,390 24,856 24,856 26,259 27,837 29,577 31,434
Corporate Tax
               
Gross companies tax 9,413 7,966 7,878 7,995 8,222 7,469 7,765 8,190
Refunds (270) (205) (252) (252) (255) (260) (260) (260)
Non-resident withholding tax 1,096 874 1,142 1,142 1,005 1,002 1,020 1,009
Foreign-source dividend withholding payments 160 220 146 146 102 86 86 86
Total corporate tax 10,399 8,855 8,914 9,031 9,074 8,297 8,611 9,025
Other Income Tax
               
Resident withholding tax on interest income 1,879 2,079 2,156 2,156 2,340 2,441 2,362 2,376
Resident withholding tax on dividend income 74 56 89 89 92 114 249 296
Estate and gift duties 3 2 4 4 2 2 2 2
Total other income tax 1,956 2,137 2,249 2,249 2,434 2,557 2,613 2,674
Total direct income tax 36,728 35,382 36,019 36,136 37,767 38,691 40,801 43,133

Indirect Tax

               
Goods and Services Tax
               
Gross goods and services tax 18,241 18,542 19,053 19,054 19,726 20,704 21,729 22,844
Refunds (7,664) (8,028) (8,332) (8,332) (8,231) (8,711) (9,396) (9,948)
Total goods and services tax 10,577 10,514 10,721 10,722 11,495 11,993 12,333 12,896
Other Indirect Taxation
               
Petroleum fuels excise 852 914 881 881 903 921 938 955
Tobacco excise[3] 834 145 244 244 148 150 152 154
Customs duty 1,083 1,773 1,760 1,760 1,865 1,849 1,873 1,921
Road user charges 731 793 785 785 877 933 988 1,043
Alcohol excise 516 537 559 559 586 614 641 670
Gaming duties 275 256 230 231 215 214 212 212
Motor vehicle fees 221 223 220 220 219 228 233 239
Energy resources levies 73 58 49 49 34 34 34 64
Approved issuer levy (AIL) and cheque duty 83 74 71 71 64 64 64 64
Total other indirect taxation 4,668 4,773 4,799 4,800 4,911 5,007 5,135 5,322
Total indirect taxation 15,245 15,287 15,520 15,522 16,406 17,000 17,468 18,218
Total taxation revenue 51,973 50,669 51,539 51,658 54,173 55,691 58,269 61,351

Other Sovereign Revenues (accrual)

               
ACC levies 2,326 2,189 2,454 2,647 2,654 2,726 2,807 2,883
Fire Service levies 254 253 259 259 261 263 265 267
EQC levies 82 83 84 84 86 87 89 91
Other levies 749 654 711 701 692 681 685 690
Total Other Sovereign Revenues 3,411 3,179 3,508 3,691 3,693 3,757 3,846 3,931
Total Sovereign Revenue 55,384 53,848 55,047 55,349 57,866 59,448 62,115 65,282
  • [3] From 2006/07 a larger portion of tobacco products will be supplied by imports. This will increase customs duty at the expense of tobacco excise duty.

NOTE 1b: Receipts Collected Through the Crown's Sovereign Power
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast

Income Tax Receipts (cash)

               

Direct Income Tax

               
Individuals
               
Source deductions 19,897 20,534 21,034 21,034 22,334 23,695 25,094 26,619
Other persons 4,883 5,189 5,296 5,296 5,430 5,568 6,105 6,510
Refunds (1,503) (1,780) (1,858) (1,858) (2,017) (2,065) (2,185) (2,287)
Fringe benefit tax 450 421 469 469 470 493 515 541
Total individuals 23,727 24,364 24,941 24,941 26,217 27,691 29,529 31,383
Corporate Tax
               
Gross companies tax 8,512 8,602 8,865 9,072 9,184 7,625 8,269 8,713
Refunds (833) (746) (1,091) (1,091) (1,041) (889) (851) (843)
Non-resident withholding tax 1,093 874 1,092 1,092 981 983 995 1,031
Foreign-source dividend withholding payments 157 220 148 148 102 86 86 86
Total corporate tax 8,929 8,950 9,014 9,221 9,226 7,805 8,499 8,987
Other Income Tax
               
Resident withholding tax on interest income 1,862 2,078 2,154 2,154 2,340 2,441 2,362 2,376
Resident withholding tax on dividend income 74 56 91 91 92 114 249 296
Estate and gift duties 2 2 4 4 2 2 2 2
Total other income tax 1,938 2,136 2,249 2,249 2,434 2,557 2,613 2,674
Total direct income tax 34,594 35,450 36,204 36,411 37,877 38,053 40,641 43,044

Indirect Tax

               
Goods and Services Tax
               
Gross goods and services tax 17,705 18,183 18,415 18,393 19,354 20,345 21,365 22,483
Refunds (7,216) (7,669) (7,604) (7,604) (7,877) (8,357) (9,042) (9,594)
Total goods and services tax 10,489 10,514 10,811 10,789 11,477 11,988 12,323 12,889
Other Indirect Taxation
               
Petroleum fuels excise 847 914 881 881 903 921 938 955
Tobacco excise[4] 842 145 244 244 148 150 152 154
Customs duty 1,074 1,773 1,760 1,760 1,865 1,849 1,873 1,921
Road user charges 721 793 785 785 877 933 988 1,043
Alcohol excise 514 537 559 559 586 614 641 670
Gaming duties 273 257 235 236 215 214 212 212
Motor vehicle fees 199 223 220 220 219 228 233 239
Energy resources levies 73 58 53 53 35 34 34 61
Approved issuer levy (AIL) and cheque duty 80 74 71 71 64 64 64 64
Total other indirect taxation 4,623 4,774 4,808 4,809 4,912 5,007 5,135 5,319
Total indirect taxation 15,112 15,288 15,619 15,598 16,389 16,995 17,458 18,208
Total taxation receipts 49,706 50,738 51,823 52,009 54,266 55,048 58,099 61,252

Other Sovereign Receipts (cash)

               
ACC levies 2,256 2,105 2,401 2,585 2,561 2,662 2,764 2,844
Fire Service levies 254 253 262 262 263 265 267 269
EQC levies 83 83 85 85 86 88 90 91
Other levies 653 606 639 523 562 592 607 621
Total Other Sovereign Receipts 3,246 3,047 3,387 3,455 3,472 3,607 3,728 3,825
Total Sovereign Receipts 52,952 53,785 55,210 55,464 57,738 58,655 61,827 65,077

[4] From 2006/07 a larger portion of tobacco products will be supplied by imports. This will increase customs duty at the expense of tobacco excise duty

NOTE 2: Sale of Goods and Services
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006
Actual
2007 Previous
Budget
2007
Forecast
2007
Forecast
2008
Forecast
2009
Forecast
2010
Forecast
2011
Forecast
Total revenue from sale and exchange of goods       7,151 7,550 7,899 8,290 8,538
Total revenue from sale and exchange of services       5,412 5,703 5,971 6,141 6,252
Total sale of goods and services 13,337 12,715 13,111 12,563 13,253 13,870 14,431 14,790
The Statement of Segments shows the sale of goods and services as a total for each institutional segment of the Crown (ie, total sales for Core Crown, Crown entities and SOEs). The total for Crown entities includes such items as lottery sales, housing rental, Crown Research Institute sales. The total sales of SOEs represents the majority of their income from electricity generation and distribution services, postal services, advertising, air travel sales.
NOTE 3: Interest Revenue and Dividends
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006
Actual
2007 Previous
Budget
2007
Forecast
2007
Forecast
2008
Forecast
2009
Forecast
2010
Forecast
2011
Forecast
Interest revenue from student loans 344 87 453 362 391 423 453 483
Interest revenue on other financial assets 5,367 3,529 5,207 2,286 2,474 2,579 2,510 2,504
Total interest revenue 5,711 3,616 5,660 2,648 2,865 3,002 2,963 2,987
Dividends 117 71 147 424 501 583 673 769
Total interest and dividend revenue 5,828 3,687 5,807 3,072 3,366 3,585 3,636 3,756

Interest revenue is calculated using the effective interest rate as stated in the note on accounting policies. One consequence of this requirement is that an interest rate is imputed on financial assets that do not earn interest (or have a below market interest rate), such as student loans.

NOTE 4: Other Revenue
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006
Actual
2007 Previous
Budget
2007
Forecast
2007
Forecast
2008
Forecast
2009
Forecast
2010
Forecast
2011
Forecast
Royalties 61 55 62 66 72 75 78 35
Other revenue 1,971 2,306 2,176 2,340 2,315 2,598 2,918 2,956
Total other revenue 2,032 2,361 2,238 2,406 2,387 2,673 2,996 2,991
NOTE 5: Social Assistance and Official Development Assistance
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
New Zealand superannuation 6,414 6,782 6,807 6,807 7,292 7,605 7,998 8,440
Domestic purposes benefit 1,493 1,504 1,467 1,467 1,456 1,454 1,467 1,491
ACC payments 1,708 1,845 1,959 1,781 2,016 2,235 2,369 2,537
Unemployment benefit 712 783 615 615 497 471 484 500
Invalids benefit 1,073 1,131 1,136 1,136 1,201 1,253 1,305 1,353
Family support 1,285 1,725 1,779 1,779 1,964 1,998 1,995 1,989
Accommodation supplement 843 883 882 882 909 928 955 986
Sickness benefit 541 575 573 573 608 642 679 714
Student allowances 354 364 385 385 402 407 410 411
Disability allowances 261 286 270 270 279 289 301 314
Other social assistance benefits 1,674 2,046 2,028 2,257 2,883 3,261 3,634 3,888
Total social assistance 16,358 17,924 17,901 17,952 19,507 20,543 21,597 22,623
Official development assistance 330 333 374 348 401 432 498 567
Total social assistance and official development assistance 16,688 18,257 18,275 18,300 19,908 20,975 22,095 23,190
NOTE 6: Personnel Expenses
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Wages and salaries       13,904 14,495 14,643 14,809 14,867
Defined benefit retirement plan expenses (excluding actuarial gains/losses)       654 637 596 558 534
Defined contribution retirement plan expenses       192 214 230 248 247
Other personnel expenses       334 311 318 335 358
Total personnel expenses 15,395 15,118 15,673 15,084 15,657 15,787 15,950 16,006
NOTE 7: Depreciation and Amortisation
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Depreciation expense (by class of asset):                
Buildings 880 900 920 929 989 1,017 1,039 1,044
Electricity distribution network 109 118 97 87 87 90 93 97
Electricity generation assets 198 216 241 248 276 324 380 388
Aircraft (excluding SME) 102 246 223 203 215 202 189 170
State highways 252 236 242 242 255 270 286 302
Rail network ..  ..  152 152 177 184 189 194
Specialist military equipment (SME) 187 216 239 239 286 310 335 445
Other plant and equipment 905 913 910 685 739 772 788 795
Other assets 75 73 75 108 115 121 123 122
Total depreciation costs 2,708 2,918 3,099 2,893 3,139 3,290 3,422 3,557
Amortisation and impairment on intangible assets                
Amortisation and impairment on intangible assets       130 157 127 157 139
Total depreciation, amortisation and impairment on intangible assets 2,708 2,918 3,099 3,023 3,296 3,417 3,579 3,696
NOTE 8: Other Operating Expenses
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Write-down on initial recognition of loans 328 381 496 588 518 525 547 568
Impairment on financial assets 1,925 696 2,132 1,439 133 101 103 104
Grants 1,578 1,162 1,771 1,936 2,085 2,222 2,259 2,269
Rental and leasing costs 820 787 843 812 823 841 853 869
Lottery prize payments 398 371 397 397 412 429 446 464
Inventory expensed during the period       211 231 230 229 239
Other operating expenses 21,682 23,438 22,615 22,749 24,795 25,123 25,593 25,895
Total other operating expenses 26,731 26,835 28,254 28,132 28,997 29,471 30,030 30,408
NOTE 9: Interest Expenses
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Interest on financial liabilities       2,382 2,335 2,232 2,169 2,299
Interest unwind on provisions       398 413 473 474 467
Total interest expenses 2,241 2,854 3,063 2,780 2,748 2,705 2,643 2,766
NOTE 10: Forecast New Operating Spending and Top-down Expense Adjustment
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
New operating spending up to Budget 2008 ..  ..  80 80 314 329 398 460
Forecast for future new spending ..  320 ..  ..  ..  1,908 3,838 5,786
Top-down expense adjustment ..  ..  (500) (500) ..  ..  ..  .. 
Total forecast new operating spending and top-down expense adjustment ..  320 (420) (420) 314 2,237 4,236 6,246

New operating spending up to Budget 2008 represents expenses included in Budget 2007 that have yet to be allocated.

Forecast new operating spending indicates in broad terms the potential spending increases that could be introduced in each future budget round. As some of this spending has already been allocated to the Defence funding package, this line represents the remaining unallocated portion. Total potential spending increases included in the forecasts are $2 billion for Budget 2008, $2 billion for Budget 2009 and $2.1 billion for Budget 2010. Also included in the forecasts is a provision for potential new capital spending.

The top-down expense adjustment takes into account timing delays in departmental spending for 2006/07. This adjustment is made on both a cash and accrual basis, and is split between operating ($500 million) and capital ($200 million).

NOTE 11: Net Gains and Losses on Non-financial Instruments
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Actuarial gains/(losses) on Government Superannuation Fund liability       (30) ..  ..  ..  ..  
Actuarial gains/(losses) on ACC liability       (1,136) ..  ..  ..  .. 
Net gains/(losses) on other non-financial instruments       219 ..  ..  ..  .. 
Total net gains and losses on non-financial instruments       (947) ..  ..  ..  ..
NOTE 12: Financial assets
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Cash and cash equivalents 4,168 2,902 3,478 3,107 3,196 3,435 3,319 3,272
Tax receivables 8,720 5,607 7,318 7,147 7,078 7,628 7,658 7,578
Trade and other receivables 5,333 4,738 4,654 5,182 5,469 5,634 5,732 5,835
Student loans 5,569 5,868 5,761 5,761 6,252 6,721 7,193 7,649
Kiwibank mortgages 2,609 3,425 3,817 3,823 5,127 6,274 6,274 6,274
Long-term deposits       1,925 2,037 2,130 2,221 2,311
Reserve position at the IMF 341 275 221 221 212 204 195 185
Other loans 580 728 617 2,109 1,459 1,469 1,479 1,501
Share investments 15,834 17,994 16,783 14,121 17,273 20,179 23,330 26,722
Derivatives in gain       832 464 293 241 189
Other marketable securities 27,668 25,250 35,300 29,898 32,421 31,910 31,227 33,819
Total financial assets 70,822 66,787 77,949 74,126 80,988 85,877 88,869 95,335
Share investments include those in supranational organisations, such as the International Bank for Reconstruction and Development and the Bank for International Settlements.
The value of these investments included above is: 323 286 289 299 302 303 303 303
Financial assets by portfolio                
The financial assets by portfolio analysis is net of any cross-holdings within a segment and across the segments.  In previous forecasts, this net of cross-holdings portfolio information was provided for marketable securities and deposits only.  As this portfolio information now encompasses cash and receivables, prior year comparisons are not available on a like-for-like basis.
Reserve Bank and NZ DMO       23,921 26,013 24,527 22,973 24,634
NZ Superannuation Fund       11,342 13,903 16,801 19,985 23,501
Other Core Crown       13,897 14,311 15,356 15,849 16,180
Total Core Crown       49,160 54,227 56,684 58,807 64,315
ACC portfolio       10,806 11,695 12,446 13,174 13,861
EQC portfolio       1,997 2,174 2,381 2,604 2,847
Other Crown entities       3,786 3,670 3,617 3,611 3,626
Total Crown entities       16,589 17,539 18,444 19,389 20,334
State-owned enterprises       8,377 9,222 10,749 10,673 10,686
Total financial assets by portfolio 70,822 66,787 77,949 74,126 80,988 85,877 88,869 95,335
Uneliminated financial asset portfolio information by entity                
NZ Superannuation Fund 9,726 13,038 12,639 12,573 15,439 18,673 22,226 26,147
ACC portfolio 9,097 9,459 10,079 10,039 10,903 11,671 12,434 13,152
EQC portfolio 5,243 5,656 5,454 5,644 6,031 6,460 6,919 7,412
NOTE 13: Receivables
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Tax receivables 8,720 5,607 7,318 7,147 7,078 7,628 7,658 7,578
Trade and other receivables 5,333 4,738 4,654 5,182 5,469 5,634 5,732 5,835
Total receivables 14,053 10,345 11,972 12,329 12,547 13,262 13,390 13,413
NOTE 14: Advances
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Student loans (see analysis below) 5,569 5,868 5,761 5,761 6,252 6,721 7,193 7,649
Kiwibank mortgages 2,609 3,425 3,817 3,823 5,127 6,274 6,274 6,274
Long-term deposits ..  ..  ..  1,925 2,037 2,130 2,221 2,311
Reserve position at the IMF 341 275 221 221 212 204 195 185
Other loans 580 728 617 2,109 1,459 1,469 1,479 1,501
Total advances 9,099 10,296 10,416 13,839 15,087 16,798 17,362 17,920
Analysis of Student Loans                
Nominal student loan value 8,370 8,784 9,242 9,242 9,983 10,705 11,430 12,140
Movement during the year                
Opening balance 6,465 5,472 5,569 5,569 5,761 6,252 6,721 7,193
Initial fair value write down (1,415) ..  ..  ..  ..  ..  ..  .. 
Amount borrowed in current year 1,046 1,157 1,206 1,206 1,278 1,334 1,389 1,444
Fair value write down on new borrowings (328) (381) (496) (496) (526) (549) (572) (594)
Repayments made during the year (550) (634) (559) (559) (621) (705) (763) (839)
Interest unwind 358 87 362 362 391 423 453 484
Impairment (13) (15) (411) (411) (31) (34) (36) (39)
Other movements 6 182 90 90 ..  ..  1 .. 
Closing balance 5,569 5,868 5,761 5,761 6,252 6,721 7,193 7,649

NOTE 15: Property, Plant and Equipment
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast

By Class of Asset

               

Gross Carrying Value

               
Land (valuation) 13,803 11,801 14,111 18,882 18,963 19,113 19,166 19,180
Buildings (valuation) 21,859 22,487 23,092 22,987 24,416 25,105 25,849 26,252
Electricity distribution network (valuation) 2,311 2,668 2,540 2,439 2,694 3,139 3,854 4,656
Electricity generation assets (valuation) 8,536 8,428 9,378 9,541 10,727 11,636 12,507 13,362
Aircraft (excluding SME) (valuation) 2,068 2,566 2,339 2,328 2,523 2,651 2,760 3,565
State highways (valuation) 17,948 16,757 19,339 22,477 23,516 24,544 25,519 26,661
Rail network (valuation) ..  ..  10,786 10,797 11,149 11,444 11,641 11,840
Specialist military equipment (valuation) 3,422 4,013 4,092 4,110 4,508 4,650 4,937 5,126
Other plant and equipment (cost) 9,692 10,211 10,589 8,301 8,986 9,497 10,110 10,432
Specified cultural and heritage assets (valuation)       1,542 1,569 1,501 1,498 1,499
Other assets 7,965 7,250 8,369 2,746 3,147 3,340 3,899 4,054
Total Gross Carrying Value 87,604 86,181 104,635 106,150 112,198 116,620 121,740 126,627

Accumulated Depreciation

               
Buildings 1,307 2,883 2,135 2,165 3,067 3,760 4,711 5,196
Electricity distribution network 299 421 388 388 475 565 658 755
Electricity generation assets 111 525 347 392 670 996 1,378 1,768
Aircraft (excluding SME) ..  444 223 223 459 681 890 1,080
State highways ..  689 719 3,846 4,101 4,371 4,698 5,152
Rail network ..  ..  155 167 345 530 721 916
Specialist military equipment 344 1,017 587 594 880 1,190 1,525 1,970
Other plant and equipment 6,008 6,420 6,626 4,771 5,228 5,736 6,261 6,625
Specified cultural and heritage assets       ..  ..  ..  ..  .. 
Other assets 561 373 613 934 1,023 1,124 1,223 1,319
Total Accumulated Depreciation 8,630 12,772 11,793 13,480 16,248 18,953 22,065 24,781

Net Carrying Value

               
Land (valuation) 13,803 11,801 14,111 18,882 18,963 19,113 19,166 19,180
Buildings (valuation) 20,552 19,604 20,957 20,822 21,349 21,345 21,138 21,056
Electricity distribution network (valuation) 2,012 2,247 2,152 2,051 2,219 2,574 3,196 3,901
Electricity generation assets (valuation) 8,425 7,903 9,031 9,149 10,057 10,640 11,129 11,594
Aircraft (excluding SME) (valuation) 2,068 2,122 2,116 2,105 2,064 1,970 1,870 2,485
State highways (valuation) 17,948 16,068 18,620 18,631 19,415 20,173 20,821 21,509
Rail network (valuation) ..  ..  10,631 10,630 10,804 10,914 10,920 10,924
Specialist military equipment (valuation) 3,078 2,996 3,505 3,516 3,628 3,460 3,412 3,156
Other plant and equipment (cost) 3,684 3,791 3,963 3,530 3,758 3,761 3,849 3,807

Specified cultural and heritage assets (valuation)

    ..  1,542 1,569 1,501 1,498 1,499
Other assets 7,404 6,877 7,756 1,812 2,124 2,216 2,676 2,735
Total Net Carrying Value 78,974 73,409 92,842 92,670 95,950 97,667 99,675 101,846

By Type

               
Freehold assets 77,391 72,385 91,267 91,531 94,809 96,482 98,455 100,547
Leasehold assets 1,583 1,024 1,575 1,139 1,141 1,185 1,220 1,299
Total Net Carrying Value 78,974 73,409 92,842 92,670 95,950 97,667 99,675 101,846
NOTE 16: Payables
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Taxes repayable 3,570 2,742 3,570 3,490 3,480 3,350 3,270 3,230
Accounts payable 8,899 7,380 7,551 5,422 5,556 5,652 5,467 5,261
Total payables 12,469 10,122 11,121 8,912 9,036 9,002 8,737 8,491
NOTE 17: Provisions
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Provision for Kyoto 656 582 557 557 557 557 557 557
Provision for NPF guarantee 998 944 998 805 805 805 805 805
Provision for employee entitlements 1,533 1,397 1,544 1,611 1,621 1,627 1,635 1,638
Other provisions 477 514 508 875 867 797 822 812
Total provisions 3,664 3,437 3,607 3,848 3,850 3,786 3,819 3,812

NOTE 18: Insurance liabilities
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
ACC liability 12,715 13,255 14,457 17,924 18,949 19,978 21,097 22,261
EQC liability       55 42 43 44 45
Other insurance liabilities       19 20 21 21 22
Insurance liabilities 12,715 13,255 14,457 17,998 19,011 20,042 21,162 22,328

ACC liability and asset information

Calculation Information

PricewaterhouseCoopers Actuarial Pty Ltd have prepared an independent actuarial estimate of the ACC outstanding claims liability as at 30 June 2007.  This estimate includes the expected future payments relating to accidents that occurred prior to balance date (whether or not the associated claims have been reported to, or accepted by, ACC) and also the expected future administrative expenses of managing these claims.

The key economic variables that impact on changes to the valuation are the long-term Labour Cost Index (LCI), average weekly earnings and the discount rate of 5.70% (5.83% at 30 June 2006). Other key variables in each valuation are the forecast increases in claim costs over and above the economic variables above, and the assumed rate at which long-term claimants will leave the scheme over the period. This assessment is largely based on scheme history.

Explanation of change

Of the increase in the ACC projected claims liability from 30 June 2006 to that forecast to 30 June 2007, $3.0 billion relates to adopting a new accounting standard (NZ IFRS-4). This standard required a risk margin and an unexpired risk liability to be added ($1.6 billion) and inclusion of $1.4 billion of future levies (with an equivalent amount recognised as an asset). 

The remaining $2.2 billion increase from 30 June 2006 arose from an increase of:  

a. $2.0 billion due to a reassessment of the outstanding claims liability including the risk margin. The key reasons for this movement are associated with the changes in economic and other variables        mentioned above, notably increases in claim costs and number of long term claimants arising from claims experience.   
b. $0.1 billion in the unexpired risk liability, and  
c. $0.1 billion in the unearned levy liability.

Presentation Approach

The projected outstanding claims liability is included within total liabilities. ACC has available to it a portfolio of assets that partially offset the claims liability. The assets (less cross holdings of NZ Government stock) are included in the asset portion of the Crown's overall Statement of Financial Position.

Gross ACC liability                
Opening gross liability 11,384 12,581 12,715 12,715 17,924 18,949 19,977 21,097
Adjustment on transition to NZ IFRS (as at 1 July 2006)       3,047 ..  ..  ..  .. 
Net projected change 1,321 674 1,742 2,162 1,025 1,029 1,120 1,164
Transfer from other insurer 10 ..  ..  ..  ..   ..  ..  .. 
Closing gross liability 12,715 13,255 14,457 17,924 18,949 19,978 21,097 22,261
Less net assets available to ACC                
Opening net asset value 7,217 8,813 8,880 8,880 11,724 12,748 13,607 14,440
Adjustment on transition to NZ IFRS  (as at 1 July 2006)       1,417 ..  ..  ..  .. 
Net projected change 1,663 802 1,289 1,427 1,024 859 833 787
Closing net asset values 8,880 9,615 10,169 11,724 12,748 13,607 14,440 15,227
Net ACC reserves (net liability)                
Opening reserves position (4,167) (3,768) (3,835) (3,835) (6,200) (6,201) (6,370) (6,657)
Adjustment on transition to NZ IFRS (as at 1 July 2006)       (1,630) ..  ..  ..  .. 
Net projected change 332 128 (453) (735) (1) (170) (287) (377)
Closing reserves position (net liability) (3,835) (3,640) (4,288) (6,200) (6,201) (6,371) (6,657) (7,034)

NOTE 19: Defined benefit retirement plan liabilities
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
GSF net defined benefit retirement liability 15,231 15,344 15,554 8,351 8,402 8,390 8,319 8,213
Other net defined benefit retirement liability       12 12 12 12 11
Total net defined benefit retirement plan liabilities 15,231 15,344 15,554 8,363 8,414 8,402 8,331 8,224

The net liability of the Government Superannuation Fund (GSF), as at 28 February 2007 (the valuation date), has been calculated by the Government Actuary for inclusion within the 2007 Budget Update.  The GSF net liability arises from closed schemes for past and present public sector employees (set out in the GSF Act 1956).  The Projected Unit Credit Method, based on 28 February 2007 membership data, was used for the valuation. This method requires the benefits payable from the GSF in respect of past service to be calculated and then discounted back to the valuation date.

The projected GSF net liability included in the 2007 Budget Update was calculated using discount rates derived from the market yield curve as at 28 February 2007. This resulted in a long-term before-tax discount rate ranging from 6.87% in 2008 to 5.42% in 2017 and beyond. The principal long-term financial assumptions used in the calculation were an inflation rate of 2.25% and an annual salary increases rate, before any promotional effects, of 3.0%.

The 2006/07 projected movement in the net liability (excluding the adjustment on transition to NZ IFRS at 1 July 2006) is $52 million, reflecting an increase in the GSF liability of $267 million offset by an increase in the GSF assets of $215 million. For details on the adjustment as a result of changing to NZ IFRS refer to page 195.

The increase in the projected GSF liability of $267 million includes an actuarial loss of $156 million at 28 February 2007, of which $137 million resulted from experience adjustments with the balance due to a change in discount rate assumptions on valuation date.  The remainder of the increase in the GSF liability is the net of the current service cost, interest cost and benefits paid to members.

The increase in the projected GSF assets includes an actuarial gain of $126 million at 28 February 2007 mainly due to investment returns being better than the expected investment return of 5.75% after tax. (annualised).  The balance of $89 million increase in GSF assets is due to the net of expected investments returns, contributions received by the GSF and benefits paid to members.

The changes in the projected GSF net liability from 2007/08 onwards reflects the net of the expected current service cost, interest cost, investment returns and contributions.

Change in the presentation of the GSF net liability in the Financial Statements of the Government

Under New GAAP (NZ IFRS) the net actuarial loss of $30 million in 2006/07 ($156 million actuarial loss in the GSF liability offset by $126 million actuarial gain in GSF assets) is reported in the gains and losses section of the statement of financial performance, while the pension expense of $645 million, (being the net of expected current service cost, interest unwind and expected investment returns), is reported in total personnel costs.  Under Old GAAP the investment returns of the GSF are reported as investment revenue and the benefit payments to members (pension expense) are reported in expenses in the statement of financial position.

For further details on the presentational differences between Old GAAP and New GAAP refer to page 191.

The projected GSF net liability is presented within total liabilities of the Crown under New GAAP. Under Old GAAP the projected GSF liability is included within total liabilities of the Crown while the GSF portfolio of assets is included in the asset portion of the Crown’s overall Statement of Financial Position.

GSF net defined benefit retirement liability                
GSF liability                
Opening GSF liability 14,952 15,361 15,231 15,231 12,365 12,523 12,612 12,638
Adjustment on transition to NZ IFRS (as at 1 July 2006)       (3,133) ..  ..  ..  .. 
Net projected change 279 (17) 323 267 158 89 26 (13)
Closing GSF liability 15,231 15,344 15,554 12,365 12,523 12,612 12,638 12,625
Less net assets available to GSF                
Opening net asset value 3,521 3,768 3,793 3,793 4,014 4,121 4,222 4,319
Adjustment on transition to NZ IFRS (as at 1 July 2006)       6 ..  ..  ..  .. 
Investment valuation changes 368 186 382 382 225 230 239 241
Contribution and other income less membership payments (96) (97) (167) (167) (118) (129) (142) (148)
Closing net asset value 3,793 3,857 4,008 4,014 4,121 4,222 4,319 4,412
Net GSF liability                
Opening unfunded liability 11,431 11,593 11,438 11,438 8,351 8,402 8,390 8,319
Adjustment on transition to NZ IFRS (as at 1 July 2006)       (3,139) ..  ..  ..  .. 
Net projected change 7 (106) 108 52 51 (12) (71) (106)
Net liability 11,438 11,487 11,546 8,351 8,402 8,390 8,319 8,213
Note 20: Reconciliation of Core Crown operating cash flows to residual Core Crown cash (includes contribution to NZSF, excludes all other NZSF flows)
  Old GAAP Old GAAP Old GAAP New GAAP New GAAP New GAAP New GAAP New GAAP
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Core Crown Cash Flows from Operations                
Total tax receipts 50,507 51,499 52,868 52,868 55,121 56,007 59,251 62,469
Total other sovereign receipts 539 503 463 463 477 510 526 539
Interest, profits and dividends 1,893 1,035 2,147 2,147 1,857 1,981 1,891 1,882
Sale of goods & services and other receipts 1,449 1,387 1,606 1,606 1,472 1,480 1,462 1,424
Subsidies and transfer payments (15,357) (16,820) (16,624) (16,624) (18,789) (19,280) (20,178) (20,962)
Personnel and operating expenses (28,167) (30,815) (30,748) (30,748) (32,610) (32,832) (32,810) (32,808)
Finance costs (2,005) (1,781) (2,200) (2,200) (2,176) (2,237) (2,200) (2,264)
Forecast new operating spending ..  (320) (80) (80) (314) (2,306) (4,391) (6,508)
Top-down expense adjustment ..  ..  500 500 ..  ..  ..  .. 
Net Cash Flows from Core Crown Operations 8,859 4,688 7,932 7,932 5,038 3,323 3,551 3,772
Net purchase of physical assets (1,826) (1,953) (2,141) (2,141) (1,803) (1,201) (1,179) (1,034)
Net increase in advances (822) (957) (1,266) (1,266) (1,088) (699) (674) (695)
Net purchase of investments (389) (441) (456) (456) (636) (349) (229) (108)
Contribution to NZS Fund (2,337) (2,049) (2,049) (2,049) (2,103) (2,194) (2,312) (2,458)
Purchase of Reserve Bank reserves (500) (500) (500) (500) (200) ..  ..  .. 
Forecast new capital spending ..  (256) ..  ..  (184) (567) (806) (903)
Top-down capital adjustment ..  ..  200 200 ..  ..   ..  .. 
Residual cash 2,985 (1,468) 1,720 1,720 (976) (1,687) (1,649) (1,426)
Financed by:                
Other net sale/(purchase) of marketable securities and deposits (2,039) 2,493 (5,728) (5,471) (1,649) 1,467 1,727 (1,543)
Total Operating and Investing Activities 946 1,025 (4,008) (3,751) (2,625) (220) 78 (2,969)
Used in:                
Net (repayment)/issue of other New Zealand-dollar borrowing 419 (1,132) 4,436 3,977 709 580 294 89
Decrease/(increase) in cash 105 (23) (76) 31 3 (45) (30) (30)
Issue of circulating currency 165 ..  273 273 178 186 196 206
Net issue/(repayment) of foreign-currency borrowing (1,801) 502 (497) (402) (993) (320) (152) (57)
  (1,112) (653) 4,136 3,879 (103) 401 308 208
Net Cash Inflow/(Outflow) to be Offset by Domestic Bonds (166) 372 128 128 (2,728) 181 386 (2,761)
Gross Cash Proceeds from Domestic Bonds                
Domestic bonds (market) 2,375 2,438 2,511 2,511 2,520 2,500 2,483 2,515
Domestic bonds (non-market) 740 406 559 559 208 647 767 246
Total Gross Cash Proceeds from Domestic Bonds 3,115 2,844 3,070 3,070 2,728 3,147 3,250 2,761
Repayment of domestic bonds (market) (2,574) (2,777) (2,777) (2,777) ..  (2,900) (3,102) .. 
Repayment of domestic bonds (non-market) (375) (439) (421) (421) ..  (428) (534) .. 
Net Cash (Repayments of)/Proceeds from Domestic Bonds 166 (372) (128) (128) 2,728 (181) (386) 2,761

6 Core Crown Expense Tables

($ million) 2002 Actual 2003 Actual 2004 Actual 2005 Actual 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Social security and welfare 13,485 13,907 14,252 14,682 15,598 16,891 17,698 18,172 18,788 19,437
GSF 1,409 2,625 660 2,442 1,671 645 629 587 549 525
Health 7,032 7,501 8,111 8,813 9,547 10,486 11,613 11,634 11,665 11,662
Education 6,473 7,016 7,585 7,930 9,914 9,622 9,719 9,835 9,912 9,998
Core government services 1,540 1,780 1,741 2,217 2,169 3,237 2,479 2,506 2,556 2,672
Law and order 1,733 1,734 1,843 1,977 2,235 2,581 2,836 2,818 2,836 2,829
Defence 1,162 1,199 1,311 1,275 1,383 1,533 1,641 1,686 1,773 1,883
Transport and communications 989 1,408 1,461 1,635 1,818 2,505 2,792 2,796 2,566 2,476
Economic and industrial services 1,013 1,054 1,192 1,444 1,592 1,681 2,276 2,651 3,001 3,239
Primary services 304 355 368 394 467 477 494 484 477 472
Heritage, culture and recreation 434 515 634 991 1,194 884 977 867 870 868
Housing and community 93 102 139 163 202 279 304 286 270 268
Other 110 75 52 32 49 112 80 80 80 80
Finance costs 2,118 2,360 2,252 2,274 2,356 2,270 2,244 2,180 2,098 2,243
Net foreign exchange (gains)/losses 75 118 7 ( 35) (295)  ..   ..   ..   ..   .. 
New operating spending up to Budget 2008  ..   ..   ..   ..   ..  80 314 329 398 460
Forecast new operating spending  ..   ..   ..   ..   ..   ..   ..  1,908 3,838 5,786
Top Down Expense adjustment  ..   ..   ..   ..   ..  ( 500)  ..   ..   ..   .. 
Core Crown expenses 37,970 41,749 41,608 46,234 49,900 53,283 56,096 58,819 61,677 64,898

Source: The Treasury

Table 6.1 – Social security and welfare expenses
($ million) 2002 Actual 2003 Actual 2004 Actual 2005 Actual 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Welfare benefits 12,614 12,884 13,181 13,326 14,246 15,524 16,291 16,774 17,372 18,028
Social rehabilitation & compensation 87 146 118 152 145 163 164 171 174 179
Departmental expenses 657 666 705 781 858 986 866 859 848 835
Other non-departmental expenses 127 211 248 423 349 218 377 368 394 395
Social security and welfare expenses 13,485 13,907 14,252 14,682 15,598 16,891 17,698 18,172 18,788 19,437

Source: The Treasury

Table 6.2 – New Zealand superannuation and welfare benefit expenses
($ million) 2002 Actual 2003 Actual 2004 Actual 2005 Actual 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
New Zealand Superannuation 5,450 5,642 5,889 6,083 6,414 6,807 7,292 7,605 7,998 8,440
Domestic Purposes Benefit 1,501 1,520 1,569 1,547 1,493 1,467 1,456 1,454 1,467 1,491
Unemployment Benefit 1,369 1,274 1,084 831 712 615 497 471 484 500
Accommodation Supplement 720 706 702 750 843 882 909 928 955 986
Invalids Benefit 832 914 976 1,026 1,073 1,136 1,201 1,253 1,305 1,353
Sickness Benefit 375 421 470 510 541 573 608 642 679 714
Disability Allowance 224 241 257 267 261 270 279 289 301 314
Transitional Retirement Benefit 97 47 11 ..  ..  ..  ..  ..  ..  .. 
Income Related Rents 274 296 340 370 395 434 465 495 527 559
Family Tax Credit 848 862 833 846 1,285 1,779 1,964 1,998 1,995 1,989
Child Tax Credit 157 143 155 141 154 44 8 4 1 .. 
Special Benefit 49 82 140 175 162 105 67 51 44 40
In Work Tax Credit ..  ..  ..  ..  70 461 560 571 572 574
Benefits paid in Australia 159 121 103 91 80 71 58 51 49 41
Paid Parental Leave ..  56 63 76 96 121 128 131 139 146
Other benefits 559 559 589 613 667 759 799 831 856 881
Welfare benefit expenses 12,614 12,884 13,181 13,326 14,246 15,524 16,291 16,774 17,372 18,028

Source: The Treasury

Table 6.3 – Beneficiary numbers
(Thousands) 2002 Actual 2003 Actual 2004 Actual 2005 Actual 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
New Zealand Superannuation 448 454 461 469 482 495 506 516 529 543
Domestic Purposes Benefit 110 110 110 109 106 100 96 94 92 92
Unemployment Benefit 140 126 104 78 64 53 41 38 38 38
Accommodation Supplement 270 261 249 243 249 252 251 255 260 266
Invalids Benefit 62 67 70 74 76 78 81 83 86 88
Sickness Benefit 35 38 42 45 47 48 50 52 54 55

Source: The Treasury

Table 6.4 – GSF pension expenses
($ million) 2002 Actual 2003 Actual 2004 Actual 2005 Actual 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Pension expenses 973 978 975 1,032 1,392 675 629 587 549 525
Revaluation of Unfunded Liability 436 1,647 (315) 1,410 279 (30) ..  ..  ..  .. 
GSF pension expenses 1,409 2,625 660 2,442 1,671 645 629 587 549 525

Source: The Treasury

Table 6.5 – Health expenses
($ million) 2002 Actual 2003 Actual 2004 Actual 2005 Actual 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Departmental outputs 136 148 161 157 174 174 193 182 181 179
Health service purchasing 6,307 6,783 7,452 8,113 8,805 9,736 10,820 10,816 10,813 10,789
Other non-departmental outputs 61 59 71 160 135 102 99 100 93 86
Health payments to ACC 484 482 409 356 372 430 465 501 543 573
Other expenses 44 29 18 27 61 44 36 35 35 35
Health expenses 7,032 7,501 8,111 8,813 9,547 10,486 11,613 11,634 11,665 11,662

Source: The Treasury

Table 6.6 – Health service purchasing
($ million) 2002 Actual 2003 Actual 2004 Actual 2005 Actual 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Payments to District Health Boards 4,936 5,328 6,441 7,262 7,814 8,655 9,564 9,562 9,550 9,538
National Disability Support Services 1,170 1,260 793 620 699 754 860 851 850 848
Public Health Service Purchasing 201 195 218 231 292 327 396 403 413 403
Health service purchasing 6,307 6,783 7,452 8,113 8,805 9,736 10,820 10,816 10,813 10,789

Source: The Treasury

Table 6.7 – Education expenses
($ million) 2002 Actual 2003 Actual 2004 Actual 2005 Actual 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Early childhood education 343 373 393 444 555 619 789 818 876 930
Primary and secondary schools 3,325 3,449 3,692 3,934 4,153 4,345 4,415 4,428 4,421 4,412
Tertiary funding 2,225 2,470 2,535 2,496 4,047 3,353 3,253 3,312 3,366 3,412
Departmental expenses 467 621 679 737 821 867 874 864 859 857
Other education expenses 113 103 286 319 338 438 388 413 390 387
Education expenses 6,473 7,016 7,585 7,930 9,914 9,622 9,719 9,835 9,912 9,998

Source: The Treasury

Table 6.8 – Primary and secondary education expenses
($ million) 2002 Actual 2003 Actual 2004 Actual 2005 Actual 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Primary 1,706 1,749 1,884 1,964 2,062 2,146 2,182 2,187 2,212 2,209
Secondary 1,182 1,269 1,385 1,524 1,618 1,693 1,704 1,725 1,694 1,687
School transport 98 103 106 109 118 126 128 130 132 133
Special needs support 251 227 221 231 245 261 268 268 268 267
Professional Development 76 86 84 95 101 108 120 104 101 102
Schooling Improvement 12 15 12 11 9 11 13 14 14 14
Primary and secondary education expenses 3,325 3,449 3,692 3,934 4,153 4,345 4,415 4,428 4,421 4,412
Table 6.8 – Primary and secondary education expenses
Places (year) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Primary 465,000 469,000 464,000 457,000 457,951 453,939 451,490 453,203 454,115 454,483
Secondary 257,000 265,000 277,000 284,000 288,711 290,180 289,169 286,712 284,627 284,006

Sources: Ministry of Education, The Treasury

Table 6.9 – Tertiary education expenses
($ million) 2002 Actual 2003 Actual 2004 Actual 2005 Actual 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Tuition 1,515 1,729 1,770 1,647 1,865 1,953 2,106 2,139 2,171 2,192
Other tertiary funding 36 62 66 68 110 153 183 181 178 180
Tertiary student allowances 401 388 380 359 354 385 402 407 410 411
Initial fair value change in student loans ..  ..  ..  ..  1,415   ..  ..  ..  .. 
Student loans 273 291 319 422 303 862 562 585 607 629
Tertiary education expenses 2,225 2,470 2,535 2,496 4,047 3,353 3,253 3,312 3,366 3,412
Table 6.9 – Tertiary education expenses
Places (year) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
EFT students 219,239 245,152 247,975 240,734 227,416 233,062 235,451 239,543 241,595 243,249

Sources: Ministry of Education, The Treasury

Table 6.10 – Core Government service expenses
($ million) 2002 Actual 2003 Actual 2004 Actual 2005 Actual 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Official development assistance 223 230 237 297 330 348 401 432 498 567
Indemnity and guarantee expenses ..  197 9 ..  ..  ..  ..  ..  ..  .. 
Departmental expenses 907 1,025 1,096 1,570 1,403 2,496 1,692 1,686 1,671 1,720
Science expenses 202 250 283 170 157 164 170 172 174 173
Other expenses 208 78 116 180 279 229 216 216 213 212
Core Government service expenses 1,540 1,780 1,741 2,217 2,169 3,237 2,479 2,506 2,556 2,672

Source: The Treasury

Table 6.11 – Law and order expenses
($ million) 2002 Actual 2003 Actual 2004 Actual 2005 Actual 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Police 755 800 844 896 976 1,075 1,172 1,181 1,179 1,178
Ministry of Justice 15 15 178 257 299 326 369 368 361 361
Department of Corrections 412 403 439 483 572 668 773 778 785 783
Department for Courts 189 211 53 ..  ..  ..  ..  ..  ..  .. 
Other departments 71 77 81 72 76 94 87 88 88 87
Department expenses 1,442 1,506 1,595 1,708 1,923 2,163 2,401 2,415 2,413 2,409
Non-departmental outputs 178 177 178 218 262 346 311 279 299 296
Other expenses 113 51 70 51 50 72 124 124 124 124
Law and order expenses 1,733 1,734 1,843 1,977 2,235 2,581 2,836 2,818 2,836 2,829

Source: The Treasury

Table 6.12 – Defence expenses
($ million) 2002 Actual 2003 Actual 2004 Actual 2005 Actual 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
NZDF Core expenses 1,076 1,095 1,182 1,203 1,306 1,451 1,590 1,635 1,722 1,832
NZDF write-offs ..  23 72 ..  ..  ..  ..  ..  ..  .. 
NZDF East Timor deployment 20 20 ..  ..  ..  ..  ..  ..  ..  .. 
MSD East Timor deployment 23 13 12 10 10 10 ..  ..  ..  .. 
Other departments 43 48 45 62 67 72 51 51 51 51
Defence expenses 1,162 1,199 1,311 1,275 1,383 1,533 1,641 1,686 1,773 1,883

Source: The Treasury

Table 6.13 – Transport and communication expenses
($ million) 2002 Actual 2003 Actual 2004 Actual 2005 Actual 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Land Transport NZ[1] 817 1,131 1,222 1,346 1,482 2,054 2,225 2,242 2,034 2,103
Departmental outputs 78 80 83 97 101 121 123 121 126 123
Other non-departmental expenses 49 61 84 79 109 107 123 116 124 114
Goodwill amortisation 23 47 47 47 47 ..  ..  ..  ..  .. 
Rail write-offs ..  81 19 ..  ..  ..  ..  ..  ..  .. 
Rail costs ..  ..  3 63 77 214 313 309 280 134
Other expenses 22 8 3 3 2 9 8 8 2 2
Transport and communication expenses 989 1,408 1,461 1,635 1,818 2,505 2,792 2,796 2,566 2,476
  • [1] Since 2004/05 funding has been provided to Land Transport NZ. Prior to this, funding was received by Transfund.

Source: The Treasury

Table 6.14 – Economic and industrial services expenses
($ million) 2002 Actual 2003 Actual 2004 Actual 2005 Actual 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Departmental outputs 414 424 478 508 549 556 577 570 564 558
Employment initiatives 209 217 222 224 202 224 223 221 217 217
Non-departmental outputs 282 277 444 549 751 810 832 920 968 1,020
Reserve Electricity Generation ..  ..  ..  ..  26 26 55 26 26 26
Flood relief ..  ..  15 52 8 ..  ..  ..  ..  .. 
Savings package ..  ..  ..  ..  ..  ..  491 808 1,106 1,302
Other expenses 108 136 33 111 56 65 98 106 120 116
Economic and industrial service expenses 1,013 1,054 1,192 1,444 1,592 1,681 2,276 2,651 3,001 3,239

Source: The Treasury

Table 6.15 – Employment initiatives
($ million) 2002 Actual 2003 Actual 2004 Actual 2005 Actual 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Training incentive allowance 36 37 42 36 32 37 44 44 44 44
Community employment projects 21 21 16 6 ..  ..  ..  ..  ..  .. 
Subsidised work 92 95 100 102 84 95 85 82 78 78
Employment support for disabled 60 61 61 74 82 88 90 91 91 91
Other employment assistance schemes ..  3 3 6 4 4 4 4 4 4
Employment initiatives 209 217 222 224 202 224 223 221 217 217

Source: The Treasury

Table 6.16 – Primary service expenses
($ million) 2002 Actual 2003 Actual 2004 Actual 2005 Actual 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Departmental expenses 220 265 269 272 350 357 358 357 352 353
Non-departmental outputs 75 80 81 114 97 102 115 109 108 102
Other expenses 9 10 18 8 20 18 21 18 17 17
Primary service expenses 304 355 368 394 467 477 494 484 477 472

Source: The Treasury

Table 6.17 – Heritage, culture and recreation expenses
($ million) 2002 Actual 2003 Actual 2004 Actual 2005 Actual 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Community grants 6 6 3 6 7 7 7 7 7 7
Kyoto protocol ..  ..  ..  310 345 ..  ..  ..  ..  .. 
Departmental outputs 212 253 269 292 322 395 401 398 403 410
Non-departmental outputs 130 212 258 317 351 400 392 391 391 381
Other expenses 86 44 104 66 169 82 177 71 69 70
Heritage, culture and recreation expenses 434 515 634 991 1,194 884 977 867 870 868
Kyoto Protocol exchange rate change in gains & losses           (96)        
Heritage expenses including gains and losses           788 977 867 870 868

Source: The Treasury

Table 6.18 – Housing and community development expenses
($ million) 2002 Actual 2003 Actual 2004 Actual 2005 Actual 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Housing subsidies 22 25 27 31 23 26 29 29 28 29
Departmental outputs 51 57 77 100 117 142 151 145 136 132
Other non-departmental expenses 20 20 35 32 62 111 124 112 106 107
Housing and community development expenses 93 102 139 163 202 279 304 286 270 268

Source: The Treasury

7 NZ IFRS Transition – Budget 2007

Introduction

The impact of the change to New Zealand equivalents to International Financial Reporting Standards (New GAAP) on Budget 2007 are outlined in the Fiscal Outlook chapter (pages 80-114). The aim of this section is to provide additional detail on those impacts.

Significant impacts are summarised into two main categories:

  • changes to the format of the main financial statements to enable easier comparatives with New GAAP format, and
  • measurement and reclassification adjustments owing to changes in accounting policy under New GAAP.

The following pages describe the impact of these key format and measurement changes in:

  • the Statement of Financial Performance
  • the Statement of Cash Flows, and
  • the Statement of Financial Position.

Each statement begins with the current “old” format used in previous forecasts. Changes to this format are then detailed separately resulting in the second “Old GAAP 2007 Forecast” column which agrees to the forecast financial statements presented in the GAAP Series Tables chapter (pages 157-184). Subsequent columns detail the measurement and reclassification adjustments owing to changes in accounting policy. These changes all sum together to give the New GAAP 2007 financial statements also presented in the GAAP Series Tables chapter. Detailed explanations for the adjustments are given in the notes at the end of the chapter.

Further details on the adoption and expected impact of moving to New GAAP on the Financial Statements of Government, including NZ IFRS accounting policies for the Government reporting entity are available at www.treasury.govt.nz/nzifrs/.

Forecast Statement of Financial Performance for the year ended 30 June 2007

Forecast Statement of Financial Performance for the year ended 30 June 2007
Old format   New format
($ million) Old GAAP 2007 Forecast Format
changes
note (i)
Old GAAP 2007 Forecast GSF
note (ii)
ACC
note (iii)
NZS
Fund
note (iv)
Financial
instruments
note (v)
Reclass-ifications
note (ix)
Other
note (x)
New GAAP 2007 Forecast ($ million)

Revenue

                   

Revenue

Taxation revenue 51,539   51,539 117       ..  2 51,658 Taxation revenue
Levies, fees, fines and penalties 3,508   3,508       16 186 (19) 3,691 Other sovereign revenue
Total Revenue Levied through the Crown's Sovereign Power 55,047 ..  55,047 117 ..  ..  16 186 (17) 55,349 Total Revenue Levied through the Crown's Sovereign Power
Sales of goods and services 13,111   13,111     18 (16) (536) (14) 12,563 Sales of goods and services
Investment income 5,807   5,807 (462)   (1,051) (896) (423) 97 3,072 Interest revenue and dividends
Other revenue 2,238   2,238 (86)   4   300 (50) 2,406 Other revenue
Total Revenue Earned through the Crown's Operations 21,156 ..  21,156 (548) ..  (1,029) (912) (659) 33 18,041 Total Revenue Earned through the Crown’s Operations
Total Crown Revenue 76,203 ..  76,203 (431) ..  (1,029) (896) (473) 16 73,390 Total Revenue (excluding gains)

Expenses

                   

Expenses

By input type

                     
Subsidies and transfer payments 18,430 (155) 18,275         24 1 18,300 Social assistance and official development assistance
Personnel expenses 15,352 321 15,673 (199)       (388) (2) 15,084 Personnel expenses
    3,099 3,099         (76) ..  3,023 Depreciation and amortisation
Operating expenses 31,198 (2,944) 28,254       (6) (79) (37) 28,132 Other operating expenses
Finance costs 3,023 40 3,063 5     (583) 95 200 2,780 Interest expenses
Movement in total ACC liability 1,743   1,743   283     (1,072) ..  954 Insurance expenses
Movement in total GSF liability 321 (321) ..            ..  ..   
New operating spending up to Budget 2008 80   80           ..  80 New operating spending up to Budget 2008
Top-down expense adjustment (500)   (500)           ..  (500) Top-down expense adjustment
Net foreign-exchange (gains)/losses 40 (40) ..            ..  ..   
Total Crown expenses 69,687 ..  69,687 (194) 283 ..  (589) (1,496) 162 67,853 Total Expenses (excluding losses)
Revenue less Expenses 6,516 ..  6,516 (237) (283) (1,029) (307) 1,023 (146) 5,537 Operating Balance before gains (losses)
      ..      1,029 294 314 7 1,644 Net gains/(losses) on financial instruments
      ..  291       (1,337) 99 (947) Net gains/(losses) on non-financial instruments
    ..  ..  291 ..  1,029 294 (1,023) 106 697 Total Other Gains (Losses)
Net surplus of TEIs 52   52           44 96 Net surplus/(deficit) from associates and joint ventures
  6,568 0 6,568 54 (283) ..  (13) ..  4 6,330 Operating Balance from continuing activities
      ..            (3) (3) Gain/(loss) from discontinued operations
Operating balance (including minority interest) 6,568 ..  6,568 54 (283) ..  (13) ..  1 6,327 Operating Balance (including minority interest)
Minority interest                 ..  ..  Attributable to minority interest in Air NZ
Operating Balance 6,568 ..  6,568 54 (283) ..  (13) ..  1 6,327 Operating Balance

Forecast Statement of Cash Flows for the year ended 30 June 2007

Forecast Statement of Cash Flows for the year ended 30 June 2007
Old format   New format
($ million) Old GAAP 2007 Forecast Format
changes
note (i)
Old GAAP 2007 Forecast GSF
note (ii)
NZS
Fund
note (iv)
Financial
instruments
note (iv)
Reclass-ifications
note (ix)
Other
note (x)
New GAAP 2007 Forecast ($ million)

Cash flows from operations

                 

Cash flows from operations

Cash was provided from

                 

Cash was provided from

Total tax receipts 51,823   51,823 94 112     (20) 52,009 Total tax receipts
Total other sovereign receipts 3,387   3,387       142 (74) 3,455 Other sovereign receipts
Sales of goods and services 13,357   13,357   19   (612) 31 12,795 Sales of goods and services
Interest 2,148   2,148 (69) 152 (106) (54) ..  2,071 Interest
Dividends 133   133   262     31 426 Dividends
Other operating receipts 2,091   2,091 (90)     419 (68) 2,352 Other operating receipts
Total cash provided from operations 72,939 ..  72,939 (65) 545 (106) (105) (100) 73,108 Total cash provided from operations

Cash was disbursed to

                 

Cash was disbursed to

Subsidies and transfer payments 18,592   18,592       (20) (295) 18,277 Social assistance and official development assistance
Personnel and operating payments 41,189   41,189 (282) 78 (191) (2) 223 41,015 Personnel and operating payments
Finance costs 2,428   2,428     79 (20) ..  2,487 Finance costs
Forecast new operating spending 80   80         ..  80 Forecast for future new spending
Top-down expense adjustment (500)   (500)         ..  (500) Top-down expense adjustment
Total cash disbursed to operations 61,789 ..  61,789 (282) 78 (112) (42) (72) 61,359 Total cash disbursed to operations
Net cash flows from operations 11,150 ..  11,150 217 467 6 (63) (28) 11,749 Net cash flows from operations

Cash flows from investing activities

                 

Cash flows from investing activities

Cash was provided from

                   
Sale of physical assets 246 (246) ..          ..  ..   
Total cash provided 246 (246) ..  ..  ..  ..  ..  ..  ..   

Cash was disbursed to

                   
Net purchase/(sale) of marketable securities, deposits and other equity investments (9,656)   (9,656) (181) (184) 1,322 92 ..  (8,607) Net sale/(purchase) of share investments and other securities
Purchase of physical assets (6,782) 246 (6,536)         (71) (6,607) Net sale/(purchase) of physical assets
      ..          (139) (139) Net sale/(purchase) of intangible assets
Net increase in advances (2,409)   (2,409)     249 150 ..  (2,010) Net repayment/(issue) of advances
      ..    (283)   (92) (9) (384) Net disposal/(acquisition) of investment in associates
Top-down capital adjustment 200   200         ..  200 Top-down capital adjustment
Net cash flows from investing activities (18,401) ..  (18,401) (181) (467) 1,571 150 (219) (17,547) Net cash flows from investing activities
Net Cash Flows from Operating and Investing Activities (7,251) ..  (7,251) 36 ..  1,577 87 (247) (5,798) Net Cash Flows from Operating and Investing Activities

Cash flows from financing activities

                 

Cash flows from financing activities

Cash was provided from

                   
Issues of circulating currency 272 1 273         ..  273 Issues of circulating currency
Net (repayment)/issue of Government stock (128)   (128)     (238)   ..  (366) Net issue/(repayment) of Government Stock
Net (issue)/repayment of other New Zealand-dollar borrowing 6,693 (1) 6,692     (825) (359) 1 5,509 Net issue/(repayment) of other New Zealand dollar borrowing
Net (issue)/repayment of foreign currency borrowing (272)   (272)     (204) 272 ..   (204) Net issue/(repayment) of foreign currency borrowing
Net cash flows from financing activities 6,565 ..  6,565 ..  ..  (1,267) (87) 1 5,212 Net cash flows from financing activities
Net movement in cash (686) ..  (686) 36 ..  310 ..  (246) (586) Net (decrease)/increase in cash and cash equivalents
Opening Cash Balance 4,168   4,168 (36)   (310)   (146) 3,676 Opening cash and cash equivalents
Foreign exchange gains/(losses) on opening cash (4)   (4)         21 17 Foreign exchange gains/(losses) on opening cash
Closing Cash Balance 3,478 ..  3,478 ..  ..  ..  ..  (371) 3,107 Closing cash and cash equivalents

Forecast Statement of Financial Position for the year ended 30 June 2007

Forecast Statement of Financial Position for the year ended 30 June 2007
Old format   New format
($ million) Old GAAP 2007 Forecast Format changes note (i) Old GAAP 2007 Forecast GSF note (ii) ACC note (iii) NPF note (vi)

Receivables note (vii)

LINZ proprevalnote (viii) FinInstnote (iv) Other note (x) New GAAP 2007 Forecast ($ million)

Assets

                     

Assets

Cash and bank balances 3,478   3,478             (371) 3,107 Cash and cash equivalents
Receivables 12,246 (274) 11,972 (349) 1,441 (268) (306)   (143) (18) 12,329 Receivables
Marketable securities, deposits and equity instruments 52,015 (16,715) 35,300 (1,700)         153 (3,023) 30,730 Marketable securities and derivatives
    16,783 16,783 (2,412)           (250) 14,121 Share investments
Advances 10,195 221 10,416             3,423 13,839 Advances
Inventories 1,101   1,101             (160) 941 Inventory
    1,241 1,241         (378)   319 1,182 Prepayments and other assets
Commercial forests 550 (550) ..              ..  ..   
Property, plant and equipment 93,259 (417) 92,842         694   (866) 92,670 Property, plant and equipment
TEI investment 5,586   5,586             896 6,482 Equity accounted investments (including TEIs)
Intangible assets (including goodwill) 594   594             975 1,569 Intangible assets and goodwill
Top-down capital adjustment (200)   (200)             ..  (200) Top-down capital adjustment
Other investments 289 (289) ..              ..  ..   
Total Assets 179,113 ..  179,113 (4,461) 1,441 (268) (306) 316 10 925 176,770 Total Assets

Liabilities

                     

Liabilities

Currency issued 3,551   3,551             1 3,552 Issued currency
Payables and provisions 14,728 (3,607) 11,121 (537) (139)       (394) (1,139) 8,912 Payables
      ..              845 845 Deferred revenue
      ..            377 (377) ..  Derivatives in loss
    7,523 7,523             ..  7,523 Settlement deposits with the Reserve Bank
    34,844 34,844 84         241 863 36,033