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 2008 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.

John Whitehead
Secretary to the Treasury

14 May 2008

 

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 2008 of which I was aware and that had material economic or fiscal implications.

Hon Dr Michael Cullen
Minister of Finance

14 May 2008

Summary

After annual average growth of 3.1% in the year to March 2008, the economy is forecast to record two years of sub-trend growth of 1.5% in the year to March 2009 and 2.3% in the year to March 2010. These Budget Update forecasts show a more cyclical path for the economy than in the Half Year Update.

The operating balance before gains and losses (OBEGAL) is forecast to fall from 2.9% of GDP in the year to June 2008 to 0.7% in the year to June 2009, consistent with keeping gross sovereign-issued debt excluding Reserve Bank Settlement Cash around 20% of GDP. The fall in OBEGAL reflects past and Budget 2008 decisions, including the incorporation of a cut in personal taxes from 1 October 2008.

In addition to the usual risks to any economic and fiscal forecast, there are now greater risks on the downside, particularly those arising from a lack of stability in global financial markets.

Economic Outlook

The New Zealand economy is expected to grow by 2.5% per annum on average during the forecast period, somewhat below the 3.1% per annum experienced over the past decade. Real GDP growth is expected to fall from 3.1% in the year to March 2008 to 1.5% the next year because of factors such as recent drought conditions, high interest rates, falling house prices and higher petrol and food prices. From the year to March 2011, real GDP growth is forecast to rebound to around 3% per annum.

Table 1 – Major economic parameters
March years
(annual average % change)
2007/08
Estimate
2008/09
Forecast
2009/10
Forecast
2010/11
Forecast
2011/12
Forecast
Real GDP 3.1 1.5 2.3 3.2 3.0
Employment 1.4 1.4 0.2 0.3 1.0
Wages 4.1 4.2 4.7 4.4 4.0
Consumer prices 3.4 3.2 2.8 2.8 2.8

Note: Employment is on a full-time equivalent basis; consumer price inflation is measured as an annual % change.

Source: The Treasury

Domestic demand slowed from mid-2007, and is forecast to remain subdued, as a result of factors such as higher interest rates, falling house prices, lower net migration inflows and higher prices for petrol and food. Interest rates have been elevated because of ongoing inflation pressures and global credit constraints. Personal income tax cuts, growing labour incomes and high farm incomes (albeit lower owing to drought) partially offset these forces.

The recent drought in much of the country will negatively affect agricultural production and commodity exports in the coming year. Weaker growth in the world economy is also expected to dampen export growth. However, strong export prices are expected to provide a large boost to export receipts. Higher world prices for dairy products boosted the terms of trade to a 33-year high in late 2007 and are forecast to fall but stay relatively high.

Consumer price inflation is expected to remain elevated despite a period of sub-trend growth in the economy. Ongoing inflation reflects high food and energy prices and a decline in the exchange rate from early 2009.

Nominal GDP growth is forecast to slow over the next two years, largely as a result of lower growth in real GDP. Nevertheless, strong terms of trade, driven by high world dairy prices, and an outlook for relatively high inflation continue to support nominal GDP.

There are a number of risks to the forecasts. These include the usual upside and downside risks to any economic and fiscal forecast such as different profiles for the terms of trade, the exchange rate and domestic demand. There is also a set of more extreme risks, albeit with a smaller probability, that could arise if recent financial market turmoil is more prolonged and/or deeper than we have assumed in the main forecast.

Fiscal Outlook

The fiscal position has strengthened over recent times, and operating and cash surpluses have risen to a level in excess of that required to meet the Government's long-term fiscal objectives.

Looking forward, core Crown revenue (excluding the New Zealand Superannuation (NZS) Fund), while continuing to grow in nominal terms, is forecast to fall from 34.3% of GDP in the June 2008 year to 32.6% in the June 2012 year. This fall primarily results from last year’s decision to cut the corporate tax rate and the incorporation of the cut in personal taxes announced in Budget 2008.

Core Crown expenses are forecast to increase by around 1.2% of GDP between the June 2008 year and the June 2012 year. The increase in expenses largely arises from recent initiatives and KiwiSaver costs.

As a result, OBEGAL falls and cash surpluses become deficits. These deficits are met with a reduction in financial assets while gross sovereign-issued debt (GSID) excluding Reserve Bank Settlement Cash falls from 17.6% to 16.8% of GDP by the end of the forecast period.

Table 2 – Summary of fiscal aggregates
June years 2007/08
Forecast
2008/09
Forecast
2009/10
Forecast
2010/11
Forecast
2011/12
Forecast
OBEGAL ($b)a 5.2 1.4 1.0 0.5 0.2
% of GDP 2.9 0.7 0.5 0.3 0.1
Residual cash 0.9 (3.5) (3.3) (3.4) (3.5)
% of GDP 0.5 (1.9) (1.7) (1.7) (1.6)
GSID (% of GDP)b 17.6 17.5 16.8 17.8 16.8
Net core Crown debt (% of GDP)c (6.2) (6.1) (6.1) (6.1) (6.1)

Note: a) excludes NZS Fund; b) gross sovereign-issued debt excluding Reserve Bank Settlement Cash; c) includes NZS Fund financial assets.

Source: The Treasury

Economic and Fiscal Forecasts – Finalisation Dates and Key Assumptions

Finalisation dates
Text finalised 14 May
Economic data 15 April
Economic forecasts (refer Chapter 1) 1 May
Tax revenue forecasts 2 May
Fiscal forecasts (refer Chapter 2), including: 9 May
  • Government decisions and circumstances
9 May
  • Actual asset revaluations
29 Feb
  • Foreign exchange rates
29 Feb
Specific fiscal risks (refer Chapter 4) 7 May
Contingent liabilities and commitments (refer Chapter 4) 31 Mar
Key assumptions

Global economic activity – Economic growth for our top 20 trading partners (eg, Australia, the United States, China) is expected to fall from an estimated 4.0% in 2007 to 3.0% in 2008 and 3.2% in 2009, compared with 3.8% in 2008 and 3.7% in 2009 in the Half Year Update. Trading partner growth forecasts are based on March 2008 Consensus Forecasts with additional judgements. We assume trading partner growth will be 0.3 percentage points lower than March 2008 Consensus Forecasts in 2008 and 2009 because Consensus Forecasts tend to adjust slowly during a slowdown of growth. There are considerable risks associated with this outlook, which are discussed in the Economic and Tax Outlook and Risks and Scenarios chapters.

Global inflation and interest rates – As a result of previous robust economic growth and rising prices for food and energy, inflation among our major trading partners is expected to be higher than at the time of the Half Year Update. However, the outlook is for lower interest rates in the United States, Japan and the Euro area because of the weaker economic outlook. The outlook is for higher rates in Australia than in the Half Year Update owing to recent high inflation outturns.

Oil prices – We have assumed the price of West Texas Intermediate (WTI) crude oil will rise from US$98 per barrel in the March 2008 quarter to US$111 per barrel in the June 2008 quarter and then fall to just above US$100 per barrel in the first quarter of 2012. These projections, which are based on the futures prices from the New York Mercantile Exchange recorded on 15 April 2008, are around 35% higher than in the Half Year Update over the forecast period. There are upside risks to this forecast, at least in the short term, as oil prices rose over US$125 in May 2008, after these forecasts were finalised.

Terms of trade – Forecasts for the goods terms of trade (measured on a System of National Accounts basis) are similar to the Half Year Update. The terms of trade are expected to have peaked in the first quarter of 2008 and decline 8% by the end of the forecast period.

Monetary conditions – It is assumed that the New Zealand dollar exchange rate will decline from 71.9 on the Trade Weighted Index (TWI) in the first quarter of 2008 to 56.3 at the end of the forecast period. Ninety-day interest rates were 8.8% in the March 2008 quarter and are assumed to remain around this level until the first quarter of 2009, when they will start to decline, reaching 7.1% at the end of the period.

Net migration – The net inflow of permanent and long-term migrants is expected to decline to around 4,000 in the year to September 2008, before recovering to around 6,000 in the year to March 2009, 8,000 in the year to March 2010 and 10,000 per annum in subsequent years (its average over the past decade).

Emissions Trading Scheme(ETS) – The economic forecasts now include a provision for the ETS, which is being introduced by the Government to encourage efforts to reduce greenhouse gas emissions and to help meet New Zealand’s obligations under the Kyoto Protocol. At an aggregate level, the scheme is considered unlikely to lead to any significant reduction in output, but there will be different effects on different sectors of the economy and it will result in higher prices for carbon-sourced energy.

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

Fiscal forecasts – 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. The financial statements presented in the Budget Update 2008 have been prepared in accordance with New Zealand equivalents to International Financial Reporting Standards. A summary of the key economic assumptions that are particularly relevant to the fiscal forecasts is provided below (Table 3). These figures are on a June-year-end basis to align with the Crown’s balance date of 30 June. The figures in Table 1 above and in the Economic and Tax Outlook chapter are for the year to 31 March.

Table 3 – Key economic data for fiscal forecasts
June years 2007/08
HYEFU
2007/08
BEFU

2008/09
BEFU

2009/10
BEFU

2010/11
BEFU

2011/12
BEFU

Real GDP (ann avg % chg) 2.7 2.8 1.6 2.7 3.2 2.9
Nominal GDP ($m) 178,199 180,137 185,478 192,125 201,802 211,800
CPI (ann avg % change) 2.7 2.9 3.2 2.7 2.9 2.7
Govt 10-year bonds (ann avg %) 6.4 6.4 6.3 6.3 6.2 6.1
90-day bill rate (ann avg %) 8.6 8.8 8.6 8.0 7.9 7.3
Unemployment rate (ann avg %) 3.8 3.5 3.7 4.4 4.5 4.4
Full-time equivalent employment (ann avg % change) 1.3 1.5 1.2 0.1 0.5 1.1
Current account (% of GDP) -6.9 -6.8 -7.2 -7.3 -6.9 -6.3

Source: The Treasury

1 - Economic and Tax Outlook

Introduction

This chapter outlines our view of the most likely path for the New Zealand economy and the expected impact on tax revenue over the next four years. The first part of the chapter discusses the recent course of the economy and focuses on what has happened since the Half Year Update. The second part of the chapter examines the external and domestic factors that are expected to influence the economy over the forecast period.

There is an unusual amount of uncertainty associated with the current economic and tax outlook. In addition to the usual upside and downside risks to any forecast, there are risks that have a low probability of happening but may have a significant negative impact on the economy should they eventuate. The key risks are introduced in this chapter and are discussed in more detail in the Risks and Scenarios chapter.

Recent Economic and Tax Developments

The economy picked up in 2007 ...

Figure 1.1 – Real GDP
Figure 1.1 – Real GDP.
Source: Statistics New Zealand

The New Zealand economy experienced an upturn in 2007. Quarterly real GDP growth averaged almost 1% in the five quarters to December 2007, up from ¼% in the previous five quarters, and annual average growth rose to 3.1% in 2007, the fastest pace since mid-2005 (Figure 1.1). The economy has now expanded in each of the nine years since the recession of 1997/98 and, with annual growth averaging 3.5% over this period, has outperformed the OECD average of 2.6%. The drivers of this strong performance have been well canvassed in the past (see pages 19-20 of the Half Year Update 2007).

The economy evolved broadly as expected in the second half of 2007 relative to the Half Year Update forecasts (finalised in early November 2007). Excluding data revisions, real expenditure GDP in the December 2007 quarter was 0.1% higher than expected as a result of higher business investment and exports, while both private consumption and residential investment slowed as expected.

… but appears to have slowed in early 2008 …

Economic growth had been expected to slow in the Half Year Update, but several factors have had a greater negative influence on the economy in early 2008. There are signs the slowdown in housing activity has been faster and larger than expected, drought conditions have affected agricultural production, the world economic environment has weakened, credit availability has tightened and oil prices have risen further. As a result, real GDP is expected to fall slightly in the March 2008 quarter and modest quarterly growth of 0.3% to 0.4% is forecast during the remainder of 2008.

… as the slowdown in the housing market has been faster and larger than expected …

Figure 1.2 – House prices
Figure 1.2 – House prices.
Source: Quotable Value New Zealand, The Treasury

The slowing of property activity has been faster and larger than forecast (Figure 1.2). House prices were forecast to rise 6% in the year to June 2008 in the Half Year Update, but are now forecast to fall 2% over this period and decline further the following year. These house price falls represent a correction after house prices nearly doubled since 2002. Weaker property activity was precipitated by higher mortgage interest rates, lower net migration inflows and declining affordability, and has already contributed to a slowing of consumer spending. Risks to house prices are mainly on the downside and are examined in the Risks and Scenarios chapter.

… drought conditions lowered agricultural production, especially dairy …

Another negative event since the Half Year Update is the emergence of drought conditions. The current climate setting, reflecting the influence of a strong La Niña weather pattern that appeared at the end of 2007, brought dry conditions to much of New Zealand through until April 2008.

Agricultural production in 2007/08 is expected to be around 1% lower than the year before because of the drought. The largest impact is likely to be on dairy production as dry conditions have been most severe in dairy regions such as Waikato, which accounts for around a third of the country’s dairy cattle. Drought has led dairy farmers to dry off poor-performing cows, use high-cost supplementary feeding and move to once-a-day milking, although greater use of irrigation has helped insulate dairy farmers from dry conditions in areas such as Canterbury. For sheep and beef farmers, the drought is expected to have increased culling and exports in early 2008, but exports will then fall away and remain subdued as farmers look to rebuild their stock.

Although rainfall in April has eased the drought situation significantly, the full impact of recent dry conditions on the economy is uncertain. The extent to which the drought will also impact on next year’s agricultural production, and on other aspects of the economy such as electricity generation, will be dependent on future rainfall and winter weather conditions.

… and the outlook for the world economy weakened amidst financial market turmoil

Other significant developments since the Half Year Update relate to world events. Data from the United States have been weak, with concern the United States economy may be in recession. Economic data have also been weak in other major economies, including Europe and the United Kingdom. In response to developments in the United States, the Federal Reserve has reduced its official interest rate by 225 basis points since January and the United States Congress passed a US$168 billion fiscal stimulus package.

Financial market turmoil in the second half of 2007, combined with continuing weakness in the United States housing market, has led to further difficulties in the financial sector of the United States. Some financial institutions have been exposed to losses from sub-prime mortgages (ie, loans made to people with poor credit histories) and the risk of credit downgrades increased the need for banks to raise and hold higher amounts of capital. Large losses have also been announced by European financial institutions.

Equity markets have reacted nervously to economic and financial market developments with stock markets down significantly from levels that prevailed late last year. The risk of flow-on effects from these developments in major developed economies to other parts of the world was highlighted by large falls in Asian and Australasian equity markets.

Figure 1.3 – Interest rates
Figure 1.3 – Interest rates.
Source: Reserve Bank of New Zealand

There are several channels by which recent developments in the world economy can affect New Zealand. The most immediate is through financial markets. Commercial interest rates have risen because of the risks associated with investments in sub-prime mortgages in the United States, raising the cost of credit globally. The borrowing costs of New Zealand banks have risen as a result, which, together with some restoration of margins by banks, has seen 2-year fixed term home loans in New Zealand rise by over half a percentage point since September 2007 to above 9.5% (Figure 1.3). There will be a larger increase in mortgage interest rates faced by those people rolling off existing lower mortgage rates (eg, the 2-year mortgage interest rate in March 2006 was around 7.8%). Higher interest rates are contributing to a slowing in consumer spending, housing activity and business investment. Other transmission channels by which developments in the world economy can affect New Zealand are less direct and immediate and are examined in the next section covering the economic outlook.

Some key factors have been, and will continue to be, positives for the economy

There are some positive factors that supported the economy in the second half of 2007 and in early 2008. The most important of these, the terms of trade, rose to a 33-year high in late 2007 mainly as a result of higher dairy prices. A number of factors lifted dairy prices in 2007 (eg, income growth in developing nations, drought in Australia, biofuel production competing for land use and rising grain prices) and they have held up well despite the weaker global economy. The boost to national income from high dairy prices is, in aggregate, expected to more than offset the negative impact on the economy from drought and the reduction in the spending power of households from higher food prices. The rising terms of trade have also contributed to a fall in the current account deficit from 8.6% of GDP in the year to December 2006 to 7.9% in the year to December 2007, as forecast in the Half Year Update, with a further fall to 6.7% expected in the year to September 2008.

The labour market has been another positive factor. With the unemployment rate falling to a 21-year low of 3.4% in late 2007, labour market conditions were slightly tighter than expected in the Half Year Update. Ongoing high wage growth and relatively low unemployment mean the labour market will likely remain a positive influence throughout most of 2008, although data released since the forecasts were finalised suggest there are downside risks to labour market conditions (see Risks and Scenarios chapter for more discussion).

Higher fuel and food prices drive inflation as easing demand is yet to fully impact …

Inflation remained elevated in early 2008. Consumer price inflationof 3.4% in the year to March 2008 was above the Half Year Update forecast of 3.1%. Some of the major sources of inflation pressure have not been affected by lower demand, especially fuel and food prices. In the year to March 2008, petrol prices rose 20.5% as world oil prices rose above US$100 a barrel on a West Texas Intermediate basis (and have since risen above US$125). In addition, food prices rose 5.1% in the year to March 2008 on the back of higher prices for soft commodities, with price rises of at least 20% for many dairy products. So far, the effects of easing demand on inflation have not been fully felt.

Monetary conditions are tighter than expected, partly because of global credit conditions. In the March 2008 quarter, 90-day bank bill rates averaged 8.8% (the Half Year Update forecast was 8.5%) and the Trade Weighted Index (TWI) averaged 71.9 (the Half Year Update forecast was 70.0).

… and growth in nominal GDP led to further growth in tax revenues

Figure 1.4 – Nominal GDP and tax receipts
Figure 1.4 – Nominal GDP and tax receipts.
Source: Statistics New Zealand, The Treasury

Nominal GDP has continued to expand at a fast pace. Excluding data revisions, nominal GDP in the December 2007 quarter was around 1% above forecast as a result of higher terms of trade and, to a lesser extent, higher economic growth and inflation. Annual average growth in nominal GDP rose to 7.7% at December 2007 and is expected to have risen to 7.9% at March 2008, similar to growth in tax receipts (Figure 1.4). Growth in tax receipts remained high at March 2008 and was similar to that expected in the Half Year Update.

Source deductions, largely PAYE on wages and salaries, maintained higher-than-expected growth into early 2008, consistent with growth in jobs and wages. Company tax receipts over the nine months to March 2008 were similar to the Half Year Update forecast. Despite a slowing of consumer spending in early 2008, GST receipts were also similar to forecast, partly owing to higher inflation.

Economic and Tax Outlook

The forecasts are for a more cyclical path for the economy

Figure 1.5 – Real GDP
Figure 1.5 – Real GDP.
Source: Statistics New Zealand, The Treasury

The Budget Update forecasts show a more cyclical path for the economy than the Half Year Update. Economic growth in the second half of 2007 was slightly higher than expected in the Half Year Update, but a deeper slowdown in the years to March 2009 and 2010 is now forecast (Figure 1.5). After real GDP growth of 3.1% in the year to March 2008, the economy is forecast to record two years of sub-trend growth of 1.5% and 2.3% in the years to March 2009 and 2010 respectively. Growth is forecast to rebound to 3.2% in 2011 and then return to trend of around 3% in 2012.

Compared to the Half Year Update, several factors play more important roles in shaping the outlook for the economy. These factors relate to the world economy and financial markets, drought conditions and the housing market. Importantly, the key positive factors in the Half Year Update, strength in the terms of trade and personal tax cuts, are still predicted to support the economy.

External Factors

The world economic outlook has weakened considerably since the Half Year Update …

The outlook for economic growth among New Zealand’s trading partners has been revised down significantly in recent months. In the Consensus Forecasts for March 2008 (the latest when these forecasts were finalised), the growth outlook for our top 20 trading partners was revised to 3.3% in calendar year 2008 and 3.5% in 2009 from 3.8% and 3.7% respectively in October 2007. The downward revisions were mainly in the major economies, with forecasts for the United States, Japan and the Euro area revised down considerably for 2008 and 2009. The outlook was revised down only slightly for non-Japan Asia and Australia.

Consensus Forecasts are used as the basis of our trading partner growth forecasts, but they are typically slow to adjust to changing economic conditions so are likely to understate the extent of the current downturn. As a result, we assume trading partner growth will be 3.0% in calendar year 2008 and 3.2% in 2009, 0.3 percentage points below the March 2008 Consensus Forecasts. We expect that developments in the world economy will affect the New Zealand economy through four main channels:

  • Credit constraints: The increased cost and reduced availability of credit will have a negative impact on private consumption, residential investment and business investment directly. This effect is already being felt as higher funding costs are being reflected in higher mortgage rates. The consequent cooling in the property market is expected to have a knock-on effect on private consumption and residential investment. We assume the credit constraint will gradually unwind in the year ahead but, in the Risks and Scenarios chapter, we acknowledge the risk it could worsen and continue for longer than expected in an alternative scenario for the economy.
Table 1.1 – Economic forecast1
Annual average % change, year to 31 March 2007
Actual
2008
Estimate
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
Private consumption 2.7 3.6 1.9 1.9 1.6 1.4
Public consumption2 4.3 4.6 3.7 3.1 3.3 3.3
Total consumption 3.1 3.8 2.3 2.2 2.0 1.8
Residential investment -2.7 4.5 -9.7 -3.1 2.4 3.0
Central government investment -4.9 1.9 22.7 4.2 2.0 2.0
Other investment -1.2 6.8 2.8 -0.9 2.1 3.5
Total investment -2.3 5.2 1.1 -0.9 2.2 3.4
Stock change3 -0.9 0.7 0.1 0.0 0.0 0.0
Gross national expenditure 1.0 5.0 2.0 1.4 2.0 2.2
Exports 3.1 3.1 -0.9 4.0 4.4 4.1
Imports -1.7 9.6 0.9 1.3 1.0 2.0
GDP (production measure) 1.5 3.1 1.5 2.3 3.2 3.0
 - annual % change 2.3 2.4 1.6 2.9 3.2 2.8
Real GDP per capita 0.3 2.1 0.6 1.4 2.2 2.0
Nominal GDP (expenditure basis) 5.0 7.9 3.6 3.2 4.9 5.0
GDP deflator 2.5 4.8 2.3 0.8 1.7 2.0
Employment4 2.0 1.4 1.4 0.2 0.3 1.0
Unemployment5 3.7 3.5 3.7 4.4 4.5 4.3
Wages6 4.8 4.1 4.2 4.7 4.4 4.0
CPI inflation7 2.5 3.4 3.2 2.8 2.8 2.8
Export prices8 9.1 2.5 7.4 3.1 6.1 4.7
Import prices8 7.2 -4.8 4.2 5.0 7.5 5.6
Current account balance            
  - $billion -13.5 -13.1 -13.3 -13.7 -14.1 -13.8
  - % of GDP -8.2 -7.4 -7.2 -7.2 -7.1 -6.6
TWI9 68.8 71.9 68.6 63.1 59.1 56.7
90-day bank bill rate9 7.8 8.8 8.5 7.9 7.9 7.2
10-year bond rate9 5.9 6.3 6.3 6.3 6.2 6.1

Notes:

  1. Forecast finalised 1 May 2008 incorporating data up until 15 April 2008.
  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 ordinary-time hourly earnings.
  7. Annual percentage change.
  8. Overseas Trade Index basis, annual average percentage change.
  9. Average for the March quarter.

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

  • Wealth effects: Falls in share and other asset prices will make consumers more cautious in their spending plans. This effect will also negatively affect businesses’ ability to raise capital and their investment plans.
  • Confidence: A lower level of confidence among firms and consumers, partly due to a slowdown in the global economy, is expected to increase precautionary saving and thus reduce consumption growth. It is difficult to separate out the impact that global developments are having in this area from local ones (eg, the weaker housing market), but they will compound the effect of local developments.
  • Export demand: Weaker world growth will affect demand for New Zealand export products and their prices, particularly for commodities. Although this effect has yet to have any material impact, it is expected to take longer to show up than the first three channels.

… but the extent of this weakness and its impact on New Zealand remain uncertain

The outlook for trading partner growth remains uncertain. The overall effect of a downturn in the United States on the New Zealand economy depends on how it spreads to the rest of the world. The downturn in the United States could affect New Zealand via Asia and demand from that region for New Zealand exports, particularly soft commodities. So far, there is little sign of a severe slowing in emerging Asian economies and, while some commodity prices are down a little, they remain high. Although still dependent on exports to the United States, there is also now significant intra-regional trade in Asia and investment is a major source of growth in China, along with exports. A further channel would be the effect of a downturn in Asia on Australia via demand for hard commodities and the effect that might have on New Zealand exports to Australia of manufactured products and tourism services. The Risks and Scenarios chapter has more discussion of these risks and how they might affect the New Zealand economy.

Higher terms of trade as world dairy prices hold much of their recent gain …

Figure 1.6 – SNA goods terms of trade
Figure 2: A strong labour market.
Source: Statistics New Zealand, The Treasury

Despite developments in the world economy, the terms of trade follow a similar profile to the Half Year Update, with dairy continuing to dominate (Figure 1.6). As expected, the terms of trade rose sharply in late 2007 to their highest level since 1974 as dairy prices rose sharply. The outlook for the terms of trade became much more positive in 2007 as spot dairy prices rose by 120% in the year to August 2007. In April 2008, the ANZ dairy price index was down 10% from its peak in November 2007, but was still more than double its level of 20 months earlier.

World dairy prices for New Zealand products are expected to peak in the June 2008 quarter before declining from late 2008. The levelling off and decline in prices reflects increasing production from the United States (high dairy prices have more than covered the higher feed costs caused by increasing biofuel production), Europe (as production quotas have increased), Australia (recovery from drought), and “newer” producers (eg, Argentina, Uruguay, Brazil, Ukraine for export markets and China for the domestic market). High prices for consumer products will also reduce demand, leading in turn to lower prices. However, continuing strong demand for protein products from developing countries is expected to help maintain dairy prices, and thus the terms of trade, at high levels throughout the forecast period.

Prices for some other New Zealand exports are also expected to rise. World meat prices are expected to recover over the forecast period largely because of income growth in developing countries leading to demand for protein and supply reductions in Europe and Australasia. Prices for non-commodity exports are forecast to continue their upward trend in the forecast period as New Zealand manufacturers move out of low-end manufacturing into high-end or niche products, although this rise will be dampened by other countries such as China also broadening their manufacturing base towards the higher end.

… will be partially offset by higher oil prices throughout the period …

Figure 1.7 – WTI oil prices
Figure 1.7 – WTI oil prices.
Source: Datastream, The Treasury

West Texas Intermediate (WTI) oil prices are expected to be around 35% higher than in the Half Year Update across the forecast period (Figure 1.7). Based on futures prices, we expect oil prices to still be relatively high at US$100 per barrel at the end of the period. Income growth in China, the Middle East and other developing countries continues to underpin demand for oil, despite the recent slowdown in parts of the developed world. In addition, oil supply remains tight and geo-political events pose risks to prices. There are still upside risks to this forecast, at least in the short term, as oil prices rose over US$125 in May 2008, after these forecasts were finalised.

Higher oil prices will offset some of the increase in dairy prices on the terms of trade and, as discussed below, will lower the spending power of households. However, high oil prices are also a factor supporting world demand for dairy products owing to strong demand from oil-exporting countries, and have also been a positive for New Zealand exports of oil.

… and will bring a temporary reduction in the current account deficit

The higher terms of trade, particularly high dairy prices, are expected to bring a fall in the current account deficit to 6.7% in the year to September 2008. However, this fall will be temporary as the current account deficit will rise back to 7.4% of GDP once the terms of trade begin to fall. Although an export recovery leads to a fall back towards 6% of GDP by the end of the forecast period, this remains a large deficit and the main risk is of a smaller narrowing of the deficit. In particular, financial market turmoil has raised the funding costs of debt acquired overseas and, if it persists, higher funding costs could result in a wider investment income deficit.

Exports recover as drought eases and the world economy picks up …

Figure 1.8 – Export volumes
Figure 1.8 – Export volumes.
Source: Statistics New Zealand, The Treasury

The high exchange rate, the impact of drought conditions and weak trading partner growth are all expected to weigh on export volumes in the coming year (Figure 1.8). Export volumes in the year to March 2009 are expected to be down nearly 1% from the year before compared with a forecast rise of almost 3% in the Half Year Update. As dairy areas were particularly affected by drought, this fall will be driven by a fall in the volume of dairy exports. Services export growth is picked to remain relatively low with the high exchange rate making New Zealand a more expensive destination for overseas visitors.

Exports are expected to be a key driver of the rebound in economic growth over the year to March 2010. The turnaround in exports occurs as agricultural production recovers from the recent drought, with a strong rebound in dairy exports as dairy production was particularly affected by drought and will also benefit from further dairy conversions. Another positive for export growth will be higher economic growth among our trading partners of 3.6% per annum from the calendar year 2010. Export volumes are expected to rise by 4.0% over the year to March 2010 and this robust pace of growth will continue in the final two years of the forecast period, also helped by a decline in the exchange rate.

… and the exchange rate of the New Zealand dollar declines …

Figure 1.9 – TWI exchange rate
Figure 1.9 – TWI exchange rate.
Source: Reserve Bank of New Zealand, The Treasury

The TWI is expected to remain around 70 over the course of 2008 and depreciate from 2009 onwards (Figure 1.9). The exchange rate is expected to fall by around 20% over the forecast period as a result of a projected fall in soft commodity prices, a slowing in the New Zealand economy and a reduction in interest rate differentials versus the United States and Japan (as interest rates rise in those economies as they recover from weak growth and interest rates fall in New Zealand).

… as interest rates ease from 2009

Despite a slowing in the economy, short-term (90-day) interest rates are expected to remain around their current level of 8.8% until early 2009 because of ongoing inflation pressures in the economy and funding difficulties arising from turmoil in global financial markets. After a period of lower economic growth, resource constraints are expected to have eased sufficiently for the Reserve Bank to begin easing monetary policy in early 2009. Interest rates are also expected to be lower as we assume that financial market turmoil and credit constraints will gradually unwind over the year ahead.

Domestic Factors

Domestic outlook is dominated by a number of negative factors …

As well as external events, the future path of the economy will be determined by some developments in the domestic economy. Domestic demand was expected to slow in the Half Year Update as a result of restrictive monetary conditions combined with high debt levels for households, slowing housing activity and a fall in net migration inflows. These factors are now expected to have a greater influence on domestic demand as monetary conditions are tighter than expected owing to global credit constraints, housing activity has slowed by more than expected and net migration inflows have tracked slightly below forecast. Additional factors have emerged since the Half Year Update, particularly higher fuel and food costs, general financial uncertainty and lower farm incomes than previously forecast owing to drought.

These factors will be offset to some degree by supportive factors such as personal income tax cuts and continuing momentum in the labour market, both of which will support private consumption. The net effect on the domestic economy is that growth in domestic demand (ie, real Gross National Expenditure) will fall from 5.0% in the year to March 2008 to around 2.0% the following year and 1.4% in the year to March 2010, picking up slightly to over 2% in the final year of the forecasts.

… as households are affected by high interest rates and declining house prices …

Figure 1.10 – Consumption and house prices
Figure 1.10 – Consumption and house prices.
Source: Statistics New Zealand, Quotable Value New Zealand, The Treasury

Real private consumption growth is fairly subdued over the forecast period (Figure 1.10). Growth in consumer spending slows sharply from 4.3% in the calendar year 2007 to 1.9% in the years to March 2009 and 2010. The main factors dampening this growth are higher mortgage servicing costs, higher fuel and food prices, a lower exchange rate making imports more expensive, and falling house values lowering wealth. Whereas no decline was forecast in the Half Year Update, house prices are now expected to fall 7% over the year to March 2009 and this fall already appears to be underway. A gradual recovery in house prices is expected from late 2009.

… but personal tax cuts provide some upside support to consumer spending …

The forecasts contain the personal tax cut in Budget 2008. Households will benefit from higher disposable incomes of $1.5 billion in 2008/09, $2.3 billion in 2009/10, $3.1 billion in 2010/11 and $3.8 billion in 2011/12 (June years). See Personal Income Tax Cuts box below for more details. This is larger than the assumption used in the Half Year Update, where the increase in disposable incomes was around $1.5 billion per annum from April 2009, rising to $1.7 billion in the year to June 2012. The boost to incomes helps support consumer spending growth of just under 2% in the years to March 2009 and 2010 during a time in which consumers face pressure from factors such as high interest rates and falling house prices.

Personal Income Tax Cuts

Personal income taxes will be reduced over the forecast period. Personal income tax rates and thresholds will be adjusted over the forecast period as per Table 1.2.

Table 1.2 –Personal income tax rates and thresholds

Personal income tax rates and thresholds
For 1 April 2008 From 1 October 2008 From 1 April 2010 From 1 April 2011
Income over… is taxed at… Income over… is taxed at… Income over… is taxed at… Income over… is taxed at…
$0 15% $0 12.5% $0 12.5% $0 12.5%
$9,500 21% $14,000 21% $17,500 21% $20,000 21%
$38,000 33% $40,000 33% $40,000 33% $42,500 33%
$60,000 39% $70,000 39% $75,000 39% $80,000 39%

The Budget Update incorporates the actual policy change, whereas the HalfYear Update incorporated a revenue reduction contingency assumption of $1.5 billion per annum from April 2009, rising to $1.7 billion in the year to June 2012. The personal income tax cuts will deliver an increase in disposable income to New Zealand households of $1.5 billion in 2008/09, $2.3 billion in 2009/10, $3.1 billion in 2010/11 and $3.8 billion in 2011/12 (June years).

In terms of fiscal cost, the increase in disposable income for households represents the headline reduction in Crown revenue, adjusted for the consequential changes in Crown expenditure on benefits and superannuation. These changes are explained on page 92 of the Fiscal Outlook chapter.

The impact of personal income tax cuts on the economic forecasts is mainly through higher private consumption as a result of higher disposable income. The cut in personal taxes raises growth in real GDP by about 0.3% over the year to March 2009. Although the personal income tax cuts do not come into effect until the December 2008 quarter, they impact on consumer spending from the previous quarter as we assume workers anticipate an increase in discretionary income and spend more accordingly. Consumer spending is boosted further when tax cuts are realised from the December 2008 quarter onwards. We assume the tax cuts will only impact on the labour market via increased employment (ie, higher consumer spending boosts the demand for labour) as we have not assumed any change in the supply of labour from the tax cuts.

The exact nature of the response to personal tax cuts is uncertain. The effect could be smaller if the weaker economic environment encourages households to save more of the tax cuts than we expect. However, the effect could be greater as the percentage increases in take-home pay are highest for people at the lower end of the income scale, who tend to spend more of a given increase in income.

… while non-market investment and public consumption are expected to increase …

Government consumption and investment are expected to support overall economic growth in the years to March 2009 and March 2010. Non-market investment (ie, central government and Crown entities) is forecast to grow strongly over this period as the Government expands infrastructure. The Government's current expenditure is also forecast to increase throughout the forecast period, averaging growth of around 3.5% per annum in real terms.

… and the labour market is expected to weaken but remain relatively tight

Figure 1.11 – Unemployment rate
Figure 1.11 – Unemployment rate.
Source: Statistics New Zealand, The Treasury

The labour market is fairly robust throughout the forecast period but the weak patch in economic growth does affect employment growth with a lag. While employment growth is not expected to be as strong as in recent years, firms are expected to be reluctant to shed staff for fear of not being able to hire people when growth begins to pick up, given recent difficulty attracting labour. Lower employment growth means the unemployment rate rises to 4.5% in the March 2011 quarter, higher than in the Half Year Update (Figure 1.11). This rise comes from a lower starting point than assumed in the Half Year Update, and is expected to be muted by slower labour force growth (as a result of lower net migration inflows).

Figure 1.12 – Average hourly earnings
Figure 1.12 – Average hourly earnings.
Source: Statistics New Zealand, The Treasury

With earlier lower unemployment and continuing difficulties for firms in recruiting staff, as well as higher inflation, nominal wage growth is expected to be slightly higher than in the Half Year Update over the forecast period (albeit lower in the short term). Annual growth in average ordinary-time hourly earnings is forecast to rise to 4.7% at March 2010 before falling back towards 4% per annum (Figure 1.12). Ongoing wage growth is expected to keep growth in labour income near or above 5% per annum over the forecast period.

Real wage growth (ie, adjusted for inflation) averages around 1.5% per annum in the forecast period, supported by growth in labour productivity (output per work hour). On an economy-wide basis, labour productivity growth rose to a 7-year high of 2.6% in the calendar year 2007, partly reflecting the upturn in the economy and previous business investment. Although it eases in the short term as firms hoard labour amidst a slowing economy, labour productivity growth is expected to average 1.8% per annum over the forecast period.[1]

Notes

  • [1]For more discussion on productivity, see the recent Treasury Productivity Papers: http://www.treasury.govt.nz/publications/research-policy/tprp

High interest rates and weaker economic outlook dampen business investment

Business investment slows sharply, with a weakening of growth in the year to March 2009 and a fall the next year. This coincides with predicted falls in business operating surpluses, prior to a recovery in both business investment and operating surplus growth over the final two forecast years. Capacity constraints and labour shortages continue to support market investment in the short term as firms seek to expand output and supplement or complement labour input. The increase in the terms of trade, plus the associated higher exchange rate, are also expected to support market investment in the near term. However, as the economy slows and the exchange rate declines, growth in market investment is also expected to ease.

Net migration inflows are expected to stay low, with flow-on to residential investment

The net inflow of permanent and long-term (PLT) migrants tracked down steadily from a recent peak of 14,800 in the November 2006 year to 4,600 in the February 2008 year, the lowest since 2001 (Figure 1.13). Arrivals of overseas citizens to New Zealand increased over the past year as New Zealand remained an attractive destination for migrants with an upturn in the economy and ongoing tight labour market. However, a larger-than-expected increase in New Zealanders departing to Australia, where wages are higher and the labour market is similarly tight, more than offset the rise in arrivals and led to the larger fall in net migration inflows.

Net PLT migration inflows are expected to remain subdued, rising slightly to around 6,000 in the year to March 2009. A gradual rise back towards the average for the past decade of around 10,000 per annum is expected as arrivals increase slightly and departures fall. Immigration approvals, for both permanent residency and work permits, have been running at a high level recently, pointing to steady PLT arrivals. Economic weakness in the United Kingdom could result in more New Zealanders returning home. Departures to Australia are expected to fall from their recent high level as growth eases there.

Figure 1.13 – Residential investment and net PLT migration
Figure 1.13 – Residential investment and net PLT migration.
Source: Statistics New Zealand, The Treasury

Along with lower net migration inflows, residential investment is expected to be constrained by continuing high interest rates over the year ahead. Growth in residential investment is expected to recover by the end of the forecast period, with lower official interest rates from early 2009 flowing through to retail mortgage interest rates with a lag and net PLT migration inflows gradually recovering to 10,000 per annum (Figure 1.13).

Inflation is expected to be higher for longer …

Figure 1.14 – Consumer price inflation
Figure 1.14 – Consumer price inflation.
Source: Statistics New Zealand, The Treasury

Consumer price inflation is expected to be elevated for much of the forecast period above or near the top of the Reserve Bank’s medium-term target range. After peaking at 3.7% in the year to September 2008, inflation is expected to ease to 3.2% in the year to March 2009 and 2.8% in each of the next three March years (Figure 1.14). The inflation profile is higher than in the Half Year Update and, from the start of the 2010 calendar year, is influenced by the incorporation of the Emissions Trading Scheme (ETS), which impacts on the price of energy and vehicle fuels. We estimate an impact on consumer price inflation of about 0.4 percentage points in 2010 as the ETS impacts on the price of stationary energy (eg, coal, gas and geothermal) from 1 January 2010 and about 0.4 percentage points in 2011 as the ETS affects fuel prices from 1 January 2011. These estimates are based on a carbon price for tradable units of NZD$25/tonne and indirect effects from the rise in the price of electricity and fuels of half the initial impact.

Inflation pressures from higher fuel and food prices dominate in the short term and mean inflation does not fall away at a time when demand growth is easing. An assumed fall in oil prices is expected to lower tradables inflation from 2.8% in calendar year 2007 to 2.3% and 1.6% in the following two years respectively. As oil prices stabilise and a lower New Zealand dollar raises import prices, tradables inflation is forecast to rebound to 2.3% in the calendar year 2010. Despite easing domestic demand in the year ahead, non-tradables inflation remains elevated over much of the forecast period, peaking at 4.0% in the year to December 2008.

… but growth in nominal GDP is expected to be weaker than in the Half Year Update …

Figure 1.15 – Nominal GDP
Figure 1.15 – Nominal GDP.
Source: Statistics New Zealand, The Treasury

Despite higher inflation, weaker growth in real GDP leads to slower growth in nominal GDP than previously forecast (Figure 1.15). Nominal GDP is weaker from 2009 onwards and around a cumulative $9 billion lower than in the Half Year Update (excluding data revisions). This compares with an upward revision of around $22 billion for the 2008 to 2011 period from the Budget Update 2007 forecasts to the Half Year Update.

Growth in nominal GDP is forecast to slow from 7.9% in the year to March 2008 to 3.6% in the year to March 2009 and 3.2% in the year to March 2010 as a result of weaker real GDP growth and the fall in the terms of trade. As real GDP growth recovers and the terms of trade stabilise in subsequent years, annual average growth in nominal GDP picks up again to 4.9% in March 2011 and 5.0% in March 2012.

… and tax revenue growth will also be lower as a result

Slower growth in nominal GDP results in lower core Crown tax revenue of about $1 billion in total across the forecast period compared to the Half Year Update, excluding the effects of the personal tax package and other tax policy initiatives. The reductions in tax forecasts are weighted more towards the early part of the forecast horizon rather than the later part, with the reduction in the total core Crown tax forecast being about $0.1 billion in the year to June 2012. The largest changes to the forecasts by tax type are as follows:

  • Indirect taxes, mainly customs duty, excise duties and road user charges are negatively affected by high fuel prices, which will reduce volumes of fuel sold. Forecasts have been reduced by increasingly large amounts, with the forecast for the year to June 2012 being down by about $300 million on the Half Year Update.
  • Other persons tax forecasts have been reduced by $200 to $350 million per year owing to lower entrepreneurial income (including farm incomes) and a lower assumed effective tax rate.
  • Forecasts of GST are lower than in the Half Year Update by as much as $300 million in some years owing mainly to lower forecast paths for nominal consumption and residential investment.
  • Source deductions (mostly PAYE) forecasts are higher than in the Half Year Update, supported by an increase in employment forecasts over the next couple of years and increased wage growth forecasts from 2010 onwards.
  • Corporate tax forecasts are broadly similar to those in the Half Year Update.

In addition to all of the above, the personal tax package takes progressively larger amounts off tax revenue, amounting to $3.8 billion by the year to June 2012. Other policy changes such as tariff reductions also have a negative effect on tax revenue, culminating in a reduction of over $0.2 billion in the year to June 2012. The tax forecasts incorporate some second-round effects of the personal tax package. For example, personal tax cuts will result in higher disposable income, which is expected to lead to additional domestic spending and higher employment and wage growth. This will generate extra GST and PAYE and also provide a small boost to other taxes such as company tax.

Fiscal Policy and the Macroeconomy

The financial statements of the government, described in the Fiscal Outlook chapter of the Budget Update, summarise the financial position of the government. The information in the accounts is used in the economic forecasts presented in this chapter, which in turn feed into the fiscal forecasts. The information can also be utilised to develop summary indicators of fiscal sustainability and the effect of fiscal policy on the macroeconomy. Adjustments are made to the GAAP-based figures in the accounts dependent on the purpose of the measure being looked at. This box discusses the measures used to assess the impact of fiscal policy on the economy.

Economic forecasts

Forecasts of government spending enter the economic forecasts in the Budget Update directly. Adjustments to the spending figures in the GAAP-based financial statements are made to convert them to the System of National Accounts (SNA) framework used in Table 1.1 on page 76. Government operating spending is split into government consumption and transfers. The former adds to domestic demand directly. The latter forms part of household income and enters domestic demand indirectly via private consumption and residential investment. Capital spending that results in additions to fixed assets shows up in central government investment spending. Direct taxes also enter the economic forecasts indirectly. Taxes are a withdrawal from income, partially offsetting household and corporate income and affecting household and firm spending decisions.

The fiscal impulse is an indicator of whether discretionary fiscal policy is adding to demand in the economy

One useful indicator that combines both spending and tax information to provide a summary guide to the impact of fiscal policy on demand in the economy is the fiscal impulse (see page 52 of the Fiscal Strategy Report). It is constructed from cash-flow information contained in the financial statements. A cash-based measure of the operating balance is constructed and then adjusted to remove the effect of the business cycle on taxes and transfers. From this, capital expenditure is deducted. The change in the resulting fiscal balance is the fiscal impulse. Because the impact of the business cycle is removed it represents a measure of changes in discretionary fiscal policy.

The fiscal impulse is interpreted as expansionary fiscal policy when the fiscal balance decreases (the government is adding to aggregate demand growth through the above channels) or contractionary when the fiscal balance increases (the government is reducing its contribution to aggregate demand). The fiscal impulse, however, does not provide any information on how a change in fiscal policy will be transmitted through the economy. In particular, it ignores any supply-side impacts of policy and does not contain any information about second-round effects, such as changes in the spending decision of households and businesses resulting from changes in interest rates, inflation and the exchange rate.

The fiscal impulse is not a measure of the impact of fiscal policy on inflation. Even if the fiscal impulse is unchanged between forecast rounds it does not mean that the inflation impact will be the same in each forecast. In particular, a changed cyclical position may mean a different inflationary impact from the same fiscal policy change; if there is more pressure on resources then the same changes in discretionary fiscal policy may have a greater inflation impact. In addition, a different make-up of spending and taxation could mean that the same fiscal impulse could have a different impact on inflation.

The Cyclically Adjusted Balance is an indicator of the underlying fiscal position

The Cyclically Adjusted Balance (CAB) removes the cyclical components from the accrual measures of government spending, taxes and transfers contained in the operating balance in the Government's accounts. The CAB is a measure of the underlying fiscal position and shows what the Government's operating balance would be if GDP was at an assumed level of potential GDP. This measure provides a useful indicator of the sustainability of fiscal policy as in the medium term GDP should fluctuate around its potential level. For example, a positive value of the CAB indicates that current operating surpluses are not the result of temporary factors impacting on the economy.

Additional methods, including macro-models, are also used to inform understanding of the effects of discretionary fiscal policy on the economy

Another approach used in the Treasury is to estimate the impact of fiscal policy changes using time series statistical methods applied to fiscal data. The advantage of this approach is that it can take account of the different impacts of the composition of fiscal measures and estimates how a change in fiscal policy is transmitted through the economy by allowing feedback between economic activity and the fiscal position.

2 - Fiscal Outlook

Introduction

The fiscal position has strengthened over recent times. Operating and cash surpluses over the past few years have led to a build up of financial assets and to a lowering of debt (as a percentage of GDP).

Looking forward, growth in nominal GDP is forecast to slow resulting in a corresponding slowing in tax revenue growth. Additionally, Budget 2008 introduces personal tax cuts which results in core Crown revenue falling as a percentage of GDP. This is the main contributor to a reduction in OBEGAL and cash surpluses becoming deficits. These cash deficits are met by reducing financial assets accumulated in recent years and borrowing consistent with the debt objective of around 20% of GDP.

This chapter outlines the key trends for each of the indicators along with a comparison to the forecasts provided in the Half Year Update and should be read in conjunction with the financial statements (chapter 5) and the executive summary on pages 1 to 22. The chapter covers the fiscal results for the forecast period (2007/08 to 2011/12). The long-term fiscal outlook can be found on pages 42 to 64.

Each section in the chapter follows the five components of the fiscal strategy (outlined on page 45):

  • Revenue and expenses
  • Surpluses
  • Cash position
  • Debt, and
  • The New Zealand Superannuation Fund (NZS Fund).

 

Table 2.1 – Fiscal indicators[2]
Year ended 30 June 2007 2008 2009 2010 2011 2012
$ million Actual Forecast Forecast Forecast Forecast Forecast
Revenue and expenses            
Core Crown revenue excl NZS Fund 58,482 61,814 61,787 63,552 66,284 69,004
Core Crown expenses 54,003 57,364 61,883 63,890 67,016 69,943
Surpluses            
Total Crown OBEGAL 5,860 5,227 1,318 1,004 493 154
Total Crown OBEGAL excl NZS Fund retained revenue 6,250 5,219 1,354 1,048 543 207
Total Crown operating balance 8,023 2,559 3,105 3,009 2,779 2,734
Cash position            
Core Crown residual cash 2,877 908 (3,478) (3,302) (3,447) (3,457)
Debt            
GSID (excl Settlement Cash) 30,647 31,763 32,498 32,251 35,974 35,499
Net core Crown debt (incl NZS Fund financial assets) (7,467) (11,254) (11,337) (11,787) (12,348) (12,970)
Net core Crown debt 4,109 1,846 4,578 7,272 10,145 13,193
NZS Fund            
NZS Fund net worth 12,973 14,461 17,721 21,152 24,947 29,011
Nominal GDP 168,106 180,137 185,478 192,125 201,802 211,800
% of GDP            
Revenue and expenses            
Core Crown revenue excl NZS Fund 34.8 34.3 33.3 33.1 32.8 32.6
Core Crown expenses 32.1 31.8 33.4 33.3 33.2 33.0
Surpluses            
Total Crown OBEGAL 3.5 2.9 0.7 0.5 0.2 0.1
Total Crown OBEGAL excl NZS Fund retained revenue 3.7 2.9 0.7 0.5 0.3 0.1
Total Crown operating balance 4.8 1.4 1.7 1.6 1.4 1.3
Cash position            
Core Crown residual cash 1.7 0.5 (1.9) (1.7) (1.7) (1.6)
Debt            
GSID (excl Settlement Cash) 18.2 17.6 17.5 16.8 17.8 16.8
Net core Crown debt (incl NZS Fund financial assets) (4.4) (6.2) (6.1) (6.1) (6.1) (6.1)
Net core Crown debt 2.4 1.0 2.5 3.8 5.0 6.2
NZS Fund            
NZS Fund net worth 7.7 8.0 9.6 11.0 12.4 13.7

Source: The Treasury

Core Crown vs Total Crown

The Fiscal Outlook chapter refers to both core Crown and total Crown results.

Core Crown includes Ministers, Departments, Offices of Parliament, the NZS Fund and the Reserve Bank of New Zealand.

Total Crown includes the Core Crown, State-Owned Enterprises and Crown Entities.

Notes

  • [2]An historical trend series of the above indicators is available on page 188. The glossary on pages 184 to 187 includes a definition of these indicators.

Revenue and Expenses

Core Crown Revenue

Core Crown revenue consists mainly of tax revenue. Also included are interest and dividend revenues, and sales of goods and services.

Figure 2.1 – Core Crown revenue excluding the NZS Fund
Figure 2.1 - Core Crown revenue excluding the NZS Fund.
Source: The Treasury

The key indicator used to measure core Crown revenue is core Crown revenue excluding the NZS Fund. This best represents the revenue available to meet the Government's spending needs.

Core Crown revenue excluding the NZS Fund treats the NZS Fund as a third party (ie, its revenue is not included but the tax it pays is).

Core Crown revenue falls as a percentage of GDP …

While core Crown revenue excluding the NZS Fund grows over the period from $58.5 billion in 2006/07 to $69 billion by 2011/12, it falls as a percentage of GDP as initiatives such as the personal tax cuts and business tax reform (announced in Budget 2007) take effect.

… as personal tax cuts are introduced …

Figure 2.2 – Core Crown tax revenue
Figure 2.2	- Core Crown tax revenue.
Source: The Treasury

Core Crown tax revenue increases over the period from $53.5 billion in 2006/07 to $62.7 billion by 2011/12, but falls as a percentage of GDP.

The fall in percentage of GDP is due, in the main, to the introduction of personal tax cuts. The resulting core Crown tax revenue reduction is detailed in Table 2.2 and ranges from $1.6 billion in 2008/09 to $4.2 billion in 2011/12.

  • These tax cuts have now been incorporated into the tax forecasts, whereas in the Half Year Update it was separately identified as a revenue reduction contingency that appeared below the tax revenue line in the forecast financial statements. Further detail of personal tax cuts can be found on page 81.
Table 2.2 - Reconciliation of reduction in core Crown tax revenue
Year ended 30 June 2008 2009 2010 2011 2012  
$ million Forecast Forecast Forecast Forecast Forecast Total
Reduction in core Crown tax revenue 1,633 2,440 3,351 4,152 11,576
Change to benefits and superannuation (118) (166) (290) (393) (967)
Increase in taxpayers' disposable income 1,515 2,274 3,061 3,759 10,609

Source: The Treasury

The tax package will result in a reduction in core crown tax revenue of nearly $11.6 billion over the forecast period. Part of this revenue reduction represents reduced tax on benefits and superannuation payments.Under the personal tax reductions, after-tax benefit payments do not change while after-tax New Zealand Superannuation (NZS) payments increase. Given this, gross benefit appropriations are reduced to the extent that tax paid on them is lower following the personal tax changes. With NZS, the increased after-tax payments are accompanied by decreased tax paid stemming from the tax changes, meaning gross NZS appropriations change. The change in disposable income (being $10.6 billion over the forecast period) represents the reduction in tax paid by those working and the increase in the after-tax income of superannuitants.

In addition to the personal tax cuts, there have been two changes to tax forecasts in comparison to the Half Year Update:

  • Forecasting changes mainly related to changes in the macroeconomic forecasts. However, some other factors have also led to forecasting changes, eg, changes in the estimated effective tax rate on “other persons” taxpayers’ income and changes in the assumed future rate of growth of fuel consumption in response to historically-high fuel prices. Further detail on the tax forecasting changes can be found on page 85.
  • Other tax policy changes have also reduced forecasts of tax revenue compared to the Half Year Update. Details of these policies can be found on page 95.

… and other core Crown revenue increases over the forecast period

Other core Crown revenue increases slightly over the forecast period from $5 billion in 2006/07 to $6.3 billion in 2011/12. The main highlights are:

  • The Emissions Trading Scheme (ETS) revenue is forecast to increase to $0.9 billion by 2011/12. Forecasts of carbon units to be surrendered by emitters under the ETS have been reduced reflecting the decision to defer introducing liquid fossil fuels to the scheme until 2011. Compared to the Half Year Update, revenue forecasts associated with the surrender of units have reduced by $0.3 billion over the forecast period.
  • Forecasts for the Kyoto liability incorporate revised expectations of net emissions over the commitment period 2008 to 2012. Forecasts assume the net position will be 21.7 m tonnes compared with 45.5 m tonnes reported in the Half Year Update. The $0.4 billion reduction in the liability in 2007/08 due to fewer expected emissions is recognised as revenue. Changes to the liability from carbon prices and exchange rates are reported in Table 2.8 on page 100 as a change in gains and losses.
  • Investment income increases slightly over the forecast period but reduces in comparison to the Half Year Update in line with a reduction in financial assets in addition to netting out interest on the Crown settlement account (with a corresponding reduction in interest expense).
Table 2.3 - Core Crown revenue excluding the NZS Fund comparison to the Half Year Update
Year ended 30 June 2008 2009 2010 2011 2012
$ million Forecast Forecast Forecast Forecast Forecast
Core Crown revenue excluding NZS Fund          
Half Year Update 62,130 63,147 65,412 68,965 72,168
Personal tax cuts (1,633) (2,440) (3,351) (4,152)
Tax forecasting changes (491) 170 (336) (277) (96)
Other tax policy changes (2) (86) (114) (184) (247)
Revenue reduction contingency 375 1,500 1,600 1,700
Decrease in core Crown tax revenue (493) (1,174) (1,390) (2,212) (2,795)
Kyoto valuation due to emissions 368
Emissions trading scheme 47 (191) (148) 30
Investment income (254) (366) (445) (509) (615)
Other core Crown revenue 63 133 166 188 216
Increase/(decrease) in other core Crown revenue 177 (186) (470) (469) (369)
Budget update 61,814 61,787 63,552 66,284 69,004

Source: The Treasury

Inland Revenue Tax Forecasts

In line with established practice, Inland Revenue has also prepared a set of tax forecasts, which, like the Treasury’s tax forecast, is based on the Treasury’s macroeconomic forecast. Inland Revenue’s forecasts are shown here for comparative purposes. The Treasury’s forecasts remain the Crown’s official forecasts.

The main differences between the Treasury’s and Inland Revenue’s forecasts (Table 2. 4) are in:

  • source deductions (mostly PAYE), where Inland Revenue is more optimistic than the Treasury in the current year and the gap widens in later years in line with forecast growth in underlying incomes, and
  • GST, in which the departments have taken different views on the extent to which the housing downturn will affect the tax take, causing the Treasury’s forecast to be generally lower than Inland Revenue’s forecast.

These differences are not large compared to differences between the two sets of forecasts in the past.

Table 2.4 - The Treasury and Inland Revenue core Crown tax revenue forecasts
Year ended 30 June 2008 2009 2010 2011 2012
$ billion Forecast Forecast Forecast Forecast Forecast
Source deductions          
Treasury 22.7 22.9 23.6 24.4 25.3
Inland Revenue 22.9 23.1 24.0 24.8 25.7
Difference (0.2) (0.2) (0.4) (0.4) (0.4)
Net other persons tax          
Treasury 3.7 3.8 3.9 3.9 4.0
Inland Revenue 3.8 3.8 3.9 4.0 4.0
Difference (0.1) (0.1)
Corporate tax          
Treasury 10.4 9.7 10.1 10.7 11.3
Inland Revenue 10.2 9.4 10.1 10.7 11.1
Difference 0.2 0.3 0.2
Goods and services tax          
Treasury 11.8 11.9 12.3 13.0 13.5
Inland Revenue 11.7 12.1 12.6 13.3 13.9
Difference 0.1 (0.2) (0.3) (0.3) (0.4)
Other tax          
Treasury 8.1 8.2 8.3 8.3 8.6
Inland Revenue 8.1 8.4 8.5 8.4 8.5
Difference (0.2) (0.2) (0.1) 0.1
Total tax revenue          
Treasury 56.7 56.5 58.2 60.3 62.7
Inland Revenue 56.7 56.8 59.1 61.2 63.2
Difference (0.3) (0.9) (0.9) (0.5)
Total tax revenue (% of GDP)          
Treasury 31.5 30.5 30.3 29.9 29.6
Inland Revenue 31.5 30.6 30.8 30.3 29.8
Difference (0.1) (0.5) (0.4) (0.2)

Sources: The Treasury, Inland Revenue

Tax Policy Changes

Table 2.5 - Effect of policy changes on tax forecasts since the Half Year Update
Year ended 30 June 2008 2009 2010 2011 2012
$ million Forecast Forecast Forecast Forecast Forecast
Personal tax cuts1 (1,633) (2,440) (3,351) (4,152)
Petrol tax - no indexation2 (30) (56) (81) (107)
Tariff rate reductions3 (10) (50) (90)
Gas exploration4 (2) (17) (24) (31) (38)
Life insurance - taxing risk income5 8 22 35
Life insurance - extending PIE treatment6 (21) (23) (26)
SMEs - thresholds7 (16) (5) (15) (15)
Other8 (23) (6) (6) (6)
  (2) (1,719) (2,554) (3,535) (4,399)

Source: The Treasury

Summary of Policy Changes

1. Personal income tax rates and thresholds will be adjusted (refer table 2.2).

2. Annual indexation of the National Land Transport Fund (NLTF) portion of the petroleum fuel excise rate has been suspended so as to better align the contributions to the NLTF from the various transport-related taxes.

3. As a result of the Free Trade Agreement signed with China, tariff rates on some goods imports will be gradually reduced.

4. A number of tax measures intended to remove disincentives that may affect investment in oil and gas exploration and development in New Zealand.

5. The taxation of risk income of life insurers will be comprehensively reformed.

6. The Portfolio Investment Entity rules will be extended to include certain life insurance products.

7. A number of tax thresholds will be raised in order to lower compliance costs for businesses, especially small and medium enterprises.

8. A range of policy measures, each of which is below the materiality threshold of $10 million.

Core Crown Expenses

Core Crown expenses represent the day-to-day operating spending of the Government (ie, it does not include purchases of physical assets or capital spending).

Core Crown expenses increase initially as a percentage of GDP but level off …

The forecast growth in expenses largely arises from expense initiatives introduced in recent Budgets. These policy decisions tend to have rising profiles to allow sufficient time for full implementation.

Figure 2.3 – Core Crown expenses
Figure 2.3	- Core Crown expenses.
Source: The Treasury

Core Crown expenses grow over the forecast period from $54 billion in 2006/07 to $69.9 billion by 2011/12 (an increase of $15.9 billion).

These expenses rise as a percentage of GDP in 2008/09 as the full impact of past Budget decisions such as KiwiSaver ($1 billion in 2008/09) and the Emissions Trading Scheme ($0.7 billion in 2008/09) take effect. Subsequent forecast years remain at around 33% of GDP.

… as Budget 2008 operating initiatives are introduced …

Page 5 presents an overview of the new operating expenditure committed in Budget 2008. The Budget 2008 package includes a revenue reduction relating to business tax reform and the personal tax cuts. These have been deducted in Table 2.6 to show the impact on core Crown expenses.

Table 2.6 - Net amounts of new operating expenditure
Year ended 30 June 2008 2009 2010 2011 2012
$ million Forecast Forecast Forecast Forecast Forecast
Budget 2008 operating initiatives 4,752 5,417 6,236 6,972
Less increase in taxpayers' disposable income (1,515) (2,274) (3,061) (3,759)
Less business tax reform revenue decrease (916) (915) (870) (870)
New operating expenditure 2,321 2,228 2,305 2,343

Source: The Treasury

Budget 2008 operating initiatives increase expenditure by $2 billion by 2011/12 including:

  • Health spending of $0.75 billion
  • Education receive almost $0.6 billion
  • Non Government Organisations receive $0.2 billion to improve partnership with community-based social services, and
  • Strengthening New Zealand’s international connections receive $0.1 billion.

… along with forecast new initiatives …

The fiscal forecasts include indicative amounts for new operating initiatives for future Budgets. The allowance for these initiatives has been set at $1.75 billion for each of the forecast years (adjusted for inflation), resulting in an increase of $5.4 billion by the end of the forecast horizon. These allocations have reduced from the $2.0 billion annual increase included in the Half Year Update.

Figure 2.4 – Net amounts of forecast new operating initiatives
Figure 2.4 – Net amounts of forecast new operating initiatives.
Source: The Treasury

… and benefit costs increasing …

Benefit expenses are forecast to grow in line with the forecast growth in the economy. In nominal terms they are expected to increase $4.4 billion over the forecast period.

Around $2 billion of this reflects cost of living adjustments for New Zealand Superannuation (NZS) payments, welfare benefits and Working For Families (WFF) Tax Credits.

Most benefits are adjusted each April by the CPI movement over the previous calendar year and NZS rates are increased by the greater of average wage or CPI growth at the same time. Cumulative inflation increases to Family Tax Credit rates and WFF abatement thresholds are also encapsulated in the forecasts.

Partly offsetting this nominal growth in forecasted benefit expenses are the impacts of personal tax reductions, which lower the tax paid on both benefits and NZ Superannuation and hence result in reduced gross payments.

… as well as KiwiSaver …

In addition, expenses associated with the KiwiSaver scheme (including the $1,000 kickstart subsidy, fees subsidy, member tax credit and employer tax credit) increase to $1.5 billion by the end of the forecast period (Figure 2.5).

Figure 2.5 – KiwiSaver expenses
Figure 2.5			 – KiwiSaver expenses.
Source: The Treasury

…partially offset by the top down adjustment

An adjustment is made to core Crown expenses as department forecasts are often based on maximum spending limits (or appropriations) rather than mid-point estimates. This reduces forecast expenditure and is referred to as a “top down adjustment”. The top down adjustment ranges is $0.2 billion in 2007/08 and $0.5 billion in the remaining years reflecting the increased uncertainty of forecasts in the later forecast years. This is slightly higher than the Half Year Update.

Table 2.7 - Core Crown expenses comparison to the Half Year Update
Year ended 30 June 2008 2009 2010 2011 2012
$ million Forecast Forecast Forecast Forecast Forecast
Core Crown expenses          
Half Year Update 57,137 60,537 63,106 66,632 70,034
Increase in baseline expenses 266 158 143 114 78
Expenditure above allocations 186 332 200 164 328
Reduction in operating allowances (178) (359) (552)
Expense transfers (494) 339 131 117 (91)
Kiwisaver 195 390 285 211 67
Benefits 42 170 386 98 192
Finance costs1 (277) (317) (305) (219) (159)
Asset impairment (eg, student loans, tax receivables) 303 169 187 207 226
Emissions Trading Scheme 152 (121) 46 46
Top down adjustment (100) (100) (150) (200)
Other core Crown expenses 6 53 156 155 (26)
Total core Crown expense impact 227 1,346 784 384 (91)
Budget update 57,364 61,883 63,890 67,016 69,943

Source: The Treasury

1. Finance costs reduced in comparison to the Half Year Update due in the main to netting out interest on the Crown settlement account (with a corresponding reduction in interest income).

 

Surpluses

Total Crown OBEGAL

OBEGAL is the operating balance before gains and losses for the total Crown. By excluding gains and losses the OBEGAL gives a more direct indication of the underlying stewardship of the Government than the operating balance.

Figure 2.6 – Total Crown OBEGAL
Figure 2.6	- Total Crown OBEGAL.
Source: The Treasury

OBEGAL reduces reflecting Budget decisions …

The OBEGAL reduces over the forecast period from $5.9 billion in 2006/07 to $0.2 billion in 2011/12.

This fall reflects Budget decisions, including the reduction in core Crown tax revenue discussed earlier. State-Owned Enterprises (SOEs) and Crown Entities (CEs) OBEGAL forecasts have declined in line with tighter market conditions associated with macroeconomic forecasts of slower growth.

The OBEGAL (excluding the NZS Fund retained revenue) is a measure of the operating balance that recognises that the NZS Fund has been set up to meet future spending pressures and as a result the returns it earns are not available to the Crown to meet current spending requirements. OBEGAL (excluding the NZS Fund retained revenue) reduces over the forecast period from $6.3 billion in 2006/07 to $0.2 billion in 2011/12.

Total Crown Operating Balance

Figure 2.7 – Total Crown gains and losses
Figure 2.7			 – Total Crown gains and losses.
Source: The Treasury

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

… which coupled with a financial market downturn …

Losses of $2.7 billion are forecast in 2007/08. This is a reflection of the recent decline in overseas equity markets and increases in the ACC claims liability and GSF liability. Looking forward, net gains are forecast to range from $1.6 billion in 2008/09 to $2.4 billion in 2011/12. These later forecasts are based on long term benchmark rates of return, in conjunction with the exchange rates and interest rate curves prevailing at the forecast reference date.

… leads to a reduction in the operating balance …

Figure 2.8 – Total Crown operating balance
Figure 2.8	- Total Crown operating balance.
Source: The Treasury

The operating balance is forecast to remain positive over the forecast period from $2.6 billion in 2007/08 to $2.7 billion in 2011/12.

The total Crown operating balance is not available to be drawn upon to fund core Crown operations, as current policy is for the NZS Fund, SOEs and CEs to retain a portion of their surpluses for the purpose of achieving their long-term objectives. Over the forecast period SOE and CE surpluses total $7.6 billion. Approximately $2.3 billion of these surpluses will be returned as dividends. This becomes cash available to the core Crown.

Table 2.8 - Total Crown OBEGAL and operating balance comparison to the Half Year Update
Year ended 30 June 2008 2009 2010 2011 2012
$ million Forecast Forecast Forecast Forecast Forecast
OBEGAL          
Half Year Update 6,574 4,327 4,062 3,984 3,850
Core Crown revenue impact (316) (1,360) (1,860) (2,681) (3,164)
Core Crown expense impact (227) (1,346) (784) (384) 91
CE/SOE results (648) (64) (111) (64) (230)
Other items (156) (239) (303) (362) (393)
Total OBEGAL impact (1,347) (3,009) (3,058) (3,491) (3,696)
Budget Update 5,227 1,318 1,004 493 154
Operating balance          
Half Year Update 7,388 6,053 5,924 6,094 6,228
Decrease in OBEGAL (1,347) (3,009) (3,058) (3,491) (3,696)
GSF valuation (643)
Kyoto valuation due to changes in carbon price (145)
Core Crown gains and losses (1,099) 195 289 353 404
CE/SOE gains and losses (1,704) (152) (165) (357) (336)
Other gains 109 18 19 180 134
Total operating balance impact (4,829) (2,948) (2,915) (3,315) (3,494)
Budget Update 2,559 3,105 3,009 2,779 2,734

Source: The Treasury

 

Cash Position

Core Crown Residual Cash

Core Crown residual cash represents core Crown operating cash flows less capital investment and contributions to the NZS Fund.

Table 2.9 - Reconciliation of residual core Crown cash
    Year ended 30 June
    2007 2008 2009 2010 2011 2012
  $ million Actual Forecast Forecast Forecast Forecast Forecast
  Core Crown revenue 58,211 61,936 61,891 63,664 66,416 69,159
Less Core Crown expenses (54,003) (57,364) (61,883) (63,890) (67,016) (69,943)
Plus Core Crown gains/(losses) and other items 2,395 (841) 1,422 1,670 1,925 2,172
Plus Net surpluses/(deficits) of SOEs and CEs 1,420 (1,172) 1,675 1,565 1,454 1,346
Equals Operating balance 8,023 2,559 3,105 3,009 2,779 2,734
Less Net total Crown (gains)/losses and other items (2,163) 2,668 (1,787) (2,005) (2,286) (2,580)
Equals Operating balance before gains and losses (OBEGAL) 5,860 5,227 1,318 1,004 493 154
Less NZS Fund net revenue after tax 390 (8) 36 44 50 53
Equals OBEGAL excluding NZS Fund retained revenue 6,250 5,219 1,354 1,048 543 207
Less Net retained surpluses of SOEs and CEs (1,652) (655) (1,310) (1,230) (1,093) (938)
  Non-cash items and working capital movements 3,988 2,454 2,507 2,171 2,455 2,275
Equals Net core Crown cash flow from operations 8,586 7,018 2,551 1,989 1,905 1,544
Less Contribution to NZS Fund (2,048) (2,103) (2,242) (2,151) (2,270) (2,290)
Equals Net core Crown cash flow from operations after contributions to NZS Fund 6,538 4,915 309 (162) (365) (746)
Less Purchase of physical assets (1,755) (1,544) (1,541) (1,683) (1,327) (1,146)
  Advances and capital injections (1,906) (1,773) (1,985) (855) (978) (638)
  Forecast for future new capital spending (690) (261) (602) (777) (927)
Equals Core Crown residual cash 2,877 908 (3,478) (3,302) (3,447) (3,457)

Source: The Treasury

Figure 2.9 – Core Crown residual cash 
Figure 2.9 - Core Crown residual cash.
Source: The Treasury

Cash surpluses become deficits …

Core Crown residual cash is in deficit for most of the forecast period. The cash deficits are around $3.5 billion for each forecast year from 2008/09.

Net core Crown cash flow from operations decreases in line with movements in core Crown revenue and core Crown expenses.

Table 2.10 – Application of core Crown residual cash from 2007/08 to 2011/12 inclusive ($ billion)
Table 2.10	- Application of core Crown residual cash from 2007/08 to 2011/12 inclusive ($ billion).
Source: The Treasury

After taking into account contributions to the NZS Fund of $11.1 billion, purchases of physical assets (including new capital spending) of $10.5 billion and advances and capital injections of $6.2 billion, there is a residual financing requirement of $12.8 billion. This will be met by a decrease in net financial assets of $6.4 billion and monies raised from the Government's domestic bond programme, after meeting repayments on maturing debt of $6.4 billion.

… while capital investment continues

New capital commitments are $0.813 billion in 2007/08 and $1.911 billion for 2008/09 to 2011/12, totalling $2.7 billion. In addition $2.2 billion is committed in future Budgets at $0.9 billion per year phased over four years (Table 2.11). The total new capital investment is $4.9 billion ($2.7 billion plus $2.2 billion).

Table 2.11 - Forecast future new capital allowances
Year ended 30 June 2008 2009 2010 2011 2012  
$ million Forecast Forecast Forecast Forecast Forecast Total
Budget 2009 20 480 250 150 900
Budget 2010 (three years of phasing) 20 480 250 750
Budget 2011 (two years of phasing) 20 480 500
Budget 2012 (first year of phasing)   20 20
Future capital allowances 20 500 750 900 2,170

Source: The Treasury

Figure 2.10 – Core Crown and Crown Entity purchase of physical assets by sector ($billion and % of total spend)
Figure 2.10			 – Core Crown and Crown Entity purchase of physical assets by sector ($billion and % of total spend).
Source: The Treasury

Core Crown forecasts for the purchase of physical assets ($10.5 billion) and advances and capital injections ($6.2 billion) comprise purchases met from existing baselines plus the $4.9 billion new capital allocation above.

To give an indication of how core Crown capital investment is distributed by sector, it is necessary to consider the purchase of physical assets by both the core Crown and Crown entities (Figure 2.10).

These purchases will include new capital spending in addition to the replacement of exisiting physical assets. The recently announced purchase of Toll Holdings Limited ($0.690 billion) and the NZ Fast Forward initiative ($0.7 billion) are included as new spending.

Table 2.12 - Residual cash comparison to the Half Year Update
Year ended 30 June 2008 2009 2010 2011 2012
$ million Forecast Forecast Forecast Forecast Forecast
Residual cash          
Half Year Update 759 (763) (779) (851) (937)
Tax receipts 180 (1,790) (1,506) (2,229) (2,917)
Changes to baselines 3 (3) 41 96 112
Expense transfers (operating and capital) 761 (546) (175) (158) 91
Payments (above)/below allocations (952) (505) (368) (231) (161)
Reduction in operating allowances 178 359 552
Benefits (42) (170) (386) (98) (192)
KiwiSaver 54 (45) (188) (210) (57)
Net finance costs (57) (54) (168) (347) (560)
Top down adjustment 345 50 100
Other items 202 53 49 172 512
Total residual cash impact 149 (2,715) (2,523) (2,596) (2,520)
Budget Update 908 (3,478) (3,302) (3,447) (3,457)

Source: The Treasury

Debt

Gross Sovereign Issued Debt (GSID) Excluding Settlement Cash

Figure 2.11 – GSID (excluding Settlement Cash)
Figure 2.11			– GSID (excluding Settlement Cash).
Source: The Treasury

GSID (excluding Settlement Cash) represents the debt issued by the sovereign (ie, core Crown) and includes Government stock held by the NZS Fund, ACC and EQC but excludes money deposited with the Reserve Bank by banks (Settlement Cash).

Gross debt falls as a percentage of GDP …

Although GSID (excluding Settlement Cash) increases over the forecast period from $30.6 billion in 2006/07 to $35.5 billion by 2011/12 it falls as a percentage of GDP from 18.2% to 16.8% over the same period.

The $4.9 billion nominal increase in GSID (excluding Settlement Cash) is primarily due to the net bond issuance of $6.4 billion (Table 2.13); partially offset by a $1.5 billion decrease in other core Crown financial liabilities such as Treasury bills.

Table 2.13 – Net increase in domestic bonds[3]
Year ended 30 June 2008 2009 2010 2011 2012  
$ million Forecast Forecast Forecast Forecast Forecast Total
Issue of domestic bonds (market) 2,415 3,314 3,393 3,394 3,365 15,881
Repayment of domestic bonds (market) (2,700) (3,947) (3,976) (10,623)
Net increase in domestic bonds (market) 2,415 614 (554) 3,394 (611) 5,258
Issue of domestic bonds (non-market) 189 662 851 245 1,286 3,233
Repayment of domestic bonds (non-market) (451) (599) (1,046) (2,096)
Net increase in domestic bonds (non-market)3 189 211 252 245 240 1,137
Net bond issuance 2,604 825 (302) 3,639 (371) 6,395

Source: The Treasury

Table 2.14 - GSID (excluding Settlement Cash) comparison to the Half Year Update
Year ended 30 June 2008 2009 2010 2011 2012
$ million Forecast Forecast Forecast Forecast Forecast
GSID (excluding Settlement Cash)          
Half Year Update 33,303 33,034 31,779 34,566 33,172
Domestic bonds (market) (38) 817 1,753 2,640 3,508
Domestic bonds (non-market) (30) (37) (16) (17) (28)
Reduction in treasury bills (1,387) (1,289) (1,289) (1,289) (1,289)
Movements in other financial liabilities (85) (27) 24 74 136
  (1,540) (536) 472 1,408 2,327
Budget Update 31,763 32,498 32,251 35,974 35,499

Source: The Treasury

Net Core Crown Debt

Figure 2.12 – Net core Crown debt
Figure 2.12 – Net core Crown debt.
Source: The Treasury

Net core Crown debt equates to core Crown borrowings less core Crown financial assets (excluding the financial assets of the NZS Fund).

By deducting financial assets (excluding the NZS Fund), net debt can provide additional information about the sustainability of the Government's accounts. However, it is important to view net debt alongside GSID (excluding Settlement Cash) as some financial assets are not very easily converted to cash.

Figure 2.13 – DMO/RB financial assets (excluding Settlement Cash impact)
Figure 2.13 – DMO/RB financial assets (excluding Settlement Cash impact).
Source: The Treasury

Net debt increases …

Net debt rises from $1.9 billion in 2007/08 to $13.2 billion by 2011/12 (from 1.0% to 6.2% as a percentage of GDP).

… as financial assets fall …

Net debt increases as a result of cash deficits of almost $13 billion over the forecast period. Funding of these deficits is met through a combination of domestic bond issuance and a reduction in the financial assets which have been built up by the New Zealand Debt Management Office (NZDMO) over the past few years.

Financial assets of the NZS Fund are excluded from the calculation of net debt as they are set aside to partially pre-fund the future cost of New Zealand Superannuation.

Table 2.15 - Net core Crown debt comparison to the Half Year Update
Year ended 30 June 2008 2009 2010 2011 2012
$ million Forecast Forecast Forecast Forecast Forecast
Net core Crown debt          
Half Year Update 1,983 1,756 1,705 1,792 2,105
Core Crown residual cash impact (149) 2,566 5,089 7,685 10,205
Valuation of financial instruments 181 438 386 558 659
Other items (169) (182) 92 110 224
Total net debt impact (137) 2,822 5,567 8,353 11,088
Budget Update 1,846 4,578 7,272 10,145 13,193

Source: The Treasury

Notes

  • [3]Non-market domestic bonds are bonds held by the Earthquake Commission.

NZS Fund

Figure 2.14 – NZS Fund net worth
Figure 2.14 - NZS Fund net worth.
Source: The Treasury

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 fiscal pressures, particularly those pressures arising from an ageing population.

The NZS Fund makes a deficit in the current financial year …

The NZS Fund is forecasting an operating deficit of $0.6 billion in 2007/08. This is a result of the recent downturn in overseas equity markets (particularly in the United States).

… but the Fund's net worth grows by $16 billion over the forecast period

Despite the 2007/08 deficit the Fund's net assets are forecast to grow to $29 billion by 2011/12, an increase of $16 billion. More than $4.9 billion of this increase is expected to come from the NZS Fund's investment performance; with the remaining $11.1 billion increase from Government contributions.

Table 2.16 - NZS Fund net worth
Year ended 30 June 2007 2008 2009 2010 2011 2012
$ million Actual Forecast Forecast Forecast Forecast Forecast
Opening net worth 9,855 12,973 14,461 17,721 21,152 24,947
Revenue 436 381 427 516 612 715
Other expenses 52 (51) (154) (177) (204) (231)
Tax expenses (707) (259) (323) (404) (480) (560)
Gains/(losses) 1,313 (686) 1,068 1,345 1,597 1,850
Gross contributions from the Crown 2,049 2,103 2,242 2,151 2,270 2,290
Other movements in reserves (25)
Closing net worth 12,973 14,461 17,721 21,152 24,947 29,011

Source: The Treasury

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 if the contribution rate were to be held to be constant at that level. The Government is forecast to make the required minimum annual contribution for 2007/08 and 2008/09 as calculated by the formula set out in the New Zealand Superannuation and Retirement Income Act 2001.

The underlying assumptions in calculating the contributions for 2008 are the nominal GDP series to 2048, the NZS expense series to 2048 and the expected long-term, net after-tax annual return of the NZS Fund (6.6%) (6.6% in the 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 (http://www.treasury.govt.nz/government/assets/nzsf/contributionratemodel).

Table 2.17 – NZS Fund net worth comparison to Half Year Update
Year ended 30 June 2008 2009 2010 2011 2012
$ million Forecast Forecast Forecast Forecast Forecast
NZS Fund net worth          
Half Year Update 15,993 19,488 23,140 27,016 31,102
Change in contributions (134) (170) (45) 9
Change in Fund performance (1,532) (1,633) (1,818) (2,024) (2,100)
Total net worth impact (1,532) (1,767) (1,988) (2,069) (2,091)
Budget Update 14,461 17,721 21,152 24,947 29,011

Source: The Treasury

Risks to Fiscal Forecasts

The fiscal forecasts were finalised on 9 May 2008 in accordance with 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 7 May 2008. 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 111.

KiwiSaver risks

Baselines reported by IRD 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.

Emission Trading Scheme risks

Baselines reported by the Ministry for the Environment on the Emission Trading Scheme are based on a number of assumptions and projections, all of which can change through time. Notably they incorporate an assumed take-up profile for forestry participation in the scheme. Actual take-up could be higher or lower than assumed. These potential changes represent an unquantified risk to the operating balance.

SOEs' and Crown entities' forecasts

The forecasts for large SOEs and CEs were based on results to 29 February 2008 and 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 2008) 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 29 February 2008 and 31 March 2008 respectively. The liabilities will next be valued as at 30 June 2008. 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.

Other market rates

Forecasts use the exchange rates, interest rate curves and electricity pricing curves prevailing at the forecast reference date. Any subsequent change to these rates will affect the fiscal outcome.

Tertiary education institutes’ accounting treatment

The forecast information presented in the 2008 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 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 2007 Financial Statements of the Government.

3 - Risks and Scenarios

Introduction

The forecasts presented in the Economic and Tax Outlook chapter incorporate a number of judgements about how both the New Zealand and the world economies evolve. Some judgements relate to the cyclical drivers of activity, others to the structural characteristics of the New Zealand and the world economies. These judgements have a number of risks surrounding them. In balancing these risks we have arrived at our view of how the economy is going to evolve, as presented in the Economic and Tax Outlook chapter.

The risks to our forecasts can be characterised as two types. The first are the risks we traditionally identify that could lead to more or less nominal GDP – examples of such risks include different profiles for the terms of trade, domestic demand and the exchange rate (see the 2007 Half Year Update, for example). Associated with this forecast, there is a second set of more extreme risks, albeit with a smaller probability, that would arise if recent financial market developments were more prolonged and severe than we have assumed in the main forecast.

The first part of this chapter, Economic Risks, focuses on describing both sets of risks around our forecasts and describing the possible impact on the economy if these risks were to occur. Given the significance of more prolonged and severe weakness in financial markets on the New Zealand economy and the Government's fiscal position, we consider such a scenario in the second part of the chapter. In such an environment, with high levels of risk aversion prevalent and confidence low, a significant gap would exist between the interest rates faced by borrowers and official policy rates both in New Zealand and abroad, slowing domestic demand and trading partner growth relative to our main forecast.

The third part of this chapter, Fiscal Scenarios, considers the implications of the alternative scenario for the fiscal position, while the fourth part, Fiscal Sensitivities, examines how sensitive the fiscal position is to changes in specific variables.

Economic Risks

A longer and deeper financial crisis poses downside risk to our forecasts …

As stated in the Economic and Tax Outlook chapter, the turmoil in international financial markets has worsened since the Half Year Update, with financial markets characterised by increased risk aversion and investor uncertainty. In our main forecasts, we have assumed a reasonably orderly resolution of the financial crisis in the year ahead. Figure 3.1 shows the Chicago Board Options Exchange Volatility Index. It represents one measure of the market’s expectation of volatility over the next 30-day period (a higher number means more volatility is expected). Since mid-March the index has been falling – consistent with the assumption in our main forecasts – but, as Figure 3.1 indicates, in the past year uncertainty has come in cycles with stresses intensifying and easing in waves. With risk appetite being so volatile in the current environment, further write-downs of debt and bank funding problems internationally could see the markets become even more risk averse. If the period of financial market uncertainty and risk aversion is more protracted and severe than expected, New Zealand could be affected in two main ways – a higher cost of credit to firms and households and a lower exchange rate.

Figure 3.1 – Chicago Board Options Exchange Volatility Index
Figure 3.1 – Chicago Board Options Exchange Volatility Index.
Source: Chicago Board Options Exchange

Banks operating in New Zealand have passed on some of the increased costs of funding their loans to New Zealand households and firms in the form of higher interest rates. Banks have also become more reluctant to lend to some firms in some sectors. In our main forecasts this contributes to the slowing in domestic demand which began late 2007, continuing throughout 2008. A further rise in interest rates (or in the more extreme case if credit availability becomes severely restricted) would mean the easing in domestic demand is sharper and longer than we have forecast.

Rising global risk aversion could exacerbate any depreciation of the currency. If, as assumed in our forecasts, the official cash rate moves towards a more neutral position, heightened risk aversion could cause large exits in carry trade positions.[4] A lower exchange rate would boost exports but would also likely slow consumption and business investment relative to our main forecasts as imports become more expensive.

Notes

  • [4]The carry trade is an investment strategy in which an investor sells a certain currency with a relatively low interest rate, eg, the Yen, and uses the funds to purchase a different currency yielding a higher interest rate, eg, the NZD. These transactions are leveraged, so a small movement in exchange rates can result in large losses.

… as does weaker global growth …

In the Economic and Tax Outlook chapter we noted that a key risk to our forecast would be weaker than assumed growth in Asia. Rapid growth in emerging Asia (notably China and India) has accounted for much of the incremental demand for commodities over the past five years and has therefore been a key driver of the large run-up in commodity prices in that time period. Lower income growth in Asia – driven by lower export receipts as the result of a more severe than expected downturn in the United States and Europe – could see international prices for New Zealand’s exports (particularly commodity exports) fall more rapidly than expected. Lower export prices would lower incomes for agricultural producers and therefore slow domestic demand. Lower export prices would also likely result in a lower exchange rate which would provide some offset to lower agricultural incomes but also lower private consumption and business investment through making imports more expensive. Slower growth in Asia could also slow growth in so-called “hard” commodity prices (eg, metals and coal). Lower hard commodity prices could indirectly affect New Zealand through slowing income growth in Australia thus lowering manufacturing revenue (Australia is the largest export market for New Zealand’s manufactured items) and services revenue (fewer Australians visiting).

As outlined in the Economic and Tax Outlook chapter, our trading partner growth forecasts are based on March Consensus Forecasts – albeit adjusted downwards to take into account of the way Consensus Forecasts tend to lag recent developments. Given the heightened level of uncertainty at the moment, there is a range of views on what growth tracks our trading partners (particularly the United States and Europe) could take. The International Monetary Fund (IMF), for example, has a more pessimistic view of the world growth outlook and expects a more severe downturn than Consensus Forecasts and ourselves, particularly in the United States.

Figure 3.2 – Impact of a lower commodity price track on nominal GDP

Figure 3.2 – Impact of a lower commodity price track on nominal GDP.
Source: The Treasury

The exact impact of lower export prices depends on the type of export affected and the nature of the deviation from the forecast track. Figure 3.2 shows the impact on nominal GDP if international commodity prices for New Zealand’s exports were 10% lower than forecast for the first two and a half years of the forecast period. This would lead to about $8 billion less GDP over the forecast period, which translates into about $2.6 billion less tax revenue.

… and higher import prices

At the time of writing, West Texas Intermediate (WTI) oil prices were sitting above US$125 a barrel on reports of low stock levels and supply disruptions. Such a starting point poses upside risks to our oil price track. If the level of oil prices were to be higher over the forecast period this could result in higher petrol prices dampening consumption relative to our main forecast and placing further pressure on firms (particularly in the transport industry). The impact of higher oil prices would be partially offset by increased incomes to New Zealand oil producers and to oil-exporting countries. Higher incomes for oil-exporting countries would support prices for some of our exports, particularly commodities.

The prices of other commodities we import, particularly metals, have also experienced strong growth of late. Further large increases in these prices would put further upward pressure on firms' input costs, lowering profits therefore presenting a downside risk to our business investment and labour market forecasts. Any increases in costs that are passed on to the domestic consumer would place downside risk to our private consumption profile but upside risk to our inflation track.

But domestically sourced risks are important too …

The Economic and Tax Outlook chapter outlined a number of forces that have been operating to slow the domestic economy. These forces include higher financing costs for firms and households (owing to both restrictive monetary policy and financial market issues), a slowing housing market, rising food and fuel prices and slowing net inward migration. If any of these factors were to prove more severe than assumed in our forecasts then this would lead to weaker domestic demand and a weaker housing market than we currently have in our forecasts.

Our main forecast is for house prices to contract 7% in the March 2009 year. A more marked fall in house prices could be caused by lower than forecast net inward migration and/or higher debt servicing costs (owing to further turmoil in financial markets). The risk of a more marked fall in house prices is also implied by housing affordability measures. Measures of housing affordability show that housing affordability is very low relative to historical standards.[5] Home ownership affordability is highly cyclical, moving in line with changes in house prices, interest rates and income and while in our forecasts interest rates, house prices and incomes do move in a direction that would help increase affordability, they would not move enough to return affordability to its average – a more marked fall in house prices would be required to achieve this.

A more rapid drop in house prices than forecast could lower the consumption profile by making people less wealthy and also by lowering the value of collateral to borrow against. A weaker housing market would also decrease demand for consumer durables to furnish new houses. A larger fall in house prices would also be indicative of a greater slowing in the housing market (eg, house sales), resulting in a sharper fall in residential investment than forecast.

… including the labour market

In our main forecasts, the labour market is fairly robust throughout the forecast period and provides support to domestic demand. However, there is a risk that the labour market may be weaker than presented in the main forecast. While such data are volatile, March quarter labour market data – released after the finalisation of the forecasts – showed the largest fall in employment since the March 1989 quarter. In particular, weaker labour market places downside risk to our consumption profile. As well as less consumption due to lower income in aggregate, households facing a sluggish employment market are also more likely to engage in precautionary saving – including saving more of the tax reductions than assumed in our main forecast.

A further risk surrounds climatic conditions. Variability in climatic conditions, and the effect of these fluctuations on agricultural production, has been a significant influence on New Zealand’s economic growth in past years – most notably in 1998 when the drought precipitated a recession. The Economic and Tax Outlook chapter noted that during the summer months of 2007/08, the dry weather reduced agricultural production relative to a “normal” season. Should the next summer be dry there is the potential for a further significant impact on agricultural production in the 2008/09 season as stock condition has already been affected by this season’s drought. This would reduce rural incomes and confidence and potentially flow on to other parts of the economy. Other climatic events that may have significant effects in the economy are flooding and severe snow.

If any of the above risks were to occur, the result would be lower nominal GDP and therefore less tax revenue. Table 3.1, in the Fiscal Sensitivities section of this chapter, provides some rules of thumb for calculating the impact of lower GDP growth on tax revenue.

Notes

  • [5]See: Final Report of the House Prices Unit: House Price Increases and Housing in New Zealand – March 2008 – available at http://www.dpmc.govt.nz/dpmc/publications/hpr-report; and Regional Economic Outlook: Asia and Pacific, International Monetary Fund, 2007 – available at:http://www.imf.org/external/pubs/ft/reo/2007/apd/eng/areo0407.pdf

There are also upside risks to our forecasts …

Some or all of the factors below could interact to produce stronger nominal GDP than in our forecasts.

One key driver of a stronger economy would be a higher terms of trade. Relative to forecast, higher export commodity prices would result in increased exports and stronger domestic demand through boosting agricultural incomes and keeping the exchange rate higher and consequently making imports cheaper. We expect commodity export prices to remain high in the near term before easing back. However, higher than forecast commodity prices could arise for several reasons:

  • even stronger protein demand from emerging Asia than assumed in our forecasts
  • the world supply response is more muted (particularly in the case of dairy) than we have assumed, owing to higher feed costs as the cost of grain increases (relating to the alternative use of grain as an input into biofuel production) and/or adverse climatic conditions
  • higher oil prices increase oil-exporters’ demand for soft commodities as well as increasing input costs for producers (especially of crops), and
  • increased speculative activity in commodity markets.

... particularly if financial markets recover faster ...

It is possible there may be a quicker than expected resolution to the problems in financial markets than we have assumed – with recent market volatility and weakness proving to be (at least in part) an overreaction to the market correcting for a “mis-pricing” of risk that has been associated with certain asset types over recent years. A quicker than expected resolution to the financial market problems would lower the risk premium being charged on lending to firms and consumers, resulting in stronger than forecast domestic demand growth than in our main forecast.

Such a return of confidence to financial markets could mean the exchange rate is higher than assumed in the main track as investors are attracted by the interest rate differential that exists between New Zealand and other countries (notably the United States and Japan). This interest rate differential has been reinforced by the significant loosening in United States monetary policy (325 basis points since mid-2007), although this differential may decrease if normality were to return to markets faster than expected. A higher exchange rate would provide further upside risk to our domestic demand forecasts but downside risk for our export forecasts.

… and if the housing cycle is shallower than assumed …

There is a risk that the housing cycle is less deep and protracted than we have assumed. Contributing factors would include a faster resolution of the financial market problems (meaning the cost of borrowing faced by households declines), or (relative to our main forecast) the labour market is stronger (making debt servicing easier) and/or net inward migration is higher (increasing the demand for houses).

Figure 3.3 – Impact on nominal GDP of a shallower housing cycle
Figure 3.3 – Impact on nominal GDP of a shallower housing cycle.
Source: Statistics New Zealand, The Treasury

Higher house prices than forecast could result in higher private consumption and residential investment. Figure 3.3 shows that nominal GDP could be around $3.4 billion higher across the forecast period if real private consumption and real residential investment growth in the March 2009 year were to be half a percentage point and two percentage points higher respectively than in our main forecasts as the result of a shallower house price cycle.

There is also the risk of higher inflation …

Relative to our main forecast, a stronger domestic economy (placing more pressure on the economy’s productive capacity) or more rapid food and fuel price growth represent upside risks to our inflation forecasts. Prices of staples (particularly food and fuel) have increased rapidly lately. While implicitly in our forecasts we have some further increases built in, further increases over and above this would also result in higher inflation and therefore higher inflation expectations, meaning inflation takes longer to unwind than in our main forecast. Higher food and fuel prices would also provide downside risk to our real private consumption forecasts.

The Emissions Trading Scheme (ETS) offers a further risk to our inflation forecasts. Currently we have assumed an emissions unit price of $25 a tonne with 50% of the price impacts on directly affected prices (electricity and petrol) passed on to other prices. This results in approximately 0.4 percentage points additional CPI inflation in the June 2010 and 2011 years. If the emissions price were to be higher than this, or alternatively if the pass-through to other prices is greater than assumed, this would result in higher CPI inflation.

Higher inflation, coupled with a higher terms of trade and a stronger real economy, would result in higher nominal GDP and therefore higher tax revenue.

Economic Scenario

In this section, a scenario is presented to represent a situation where the downturn in financial market developments is more severe and protracted than in our main forecast and this impacts on the growth path of economies worldwide. In the scenario, the severity of the financial downturn leads to a lack of confidence and a high level of risk aversion in financial markets, meaning a significant gap exists between the interest rates faced by borrowers and official policy rates in both New Zealand and abroad. Monetary measures in key global economies, especially the United States, are therefore not successful in their attempts at boosting real economies. While this is a relatively extreme scenario, with a low but not negligible probability, such a development would have significant impacts on the global economy and New Zealand and would have major implications for the New Zealand Government's fiscal position.

Figure 3.4 – Real GDP
Figure 3.4 – Real GDP.
Source: Statistics New Zealand, The Treasury
Figure 3.5 – Real GNE
Figure 3.5 – Real GNE.
Source: Statistics New Zealand, The Treasury
Figure 3.6 – Nominal GDP
Figure 3.6 – Nominal GDP.
Source: Statistics New Zealand, The Treasury
Figure 3.7 – Inflation
Figure 3.7 – Inflation.
Source: Statistics New Zealand, The Treasury

Such a scenario could have the following consequences (expressed relative to the main forecast):

  • As a result of investor uncertainty and risk aversion remaining higher in financial markets until the March 2011 year, banks operating in New Zealand face significantly higher funding costs. These increased funding costs are passed on to firms and households as higher borrowing costs. Financial markets begin to normalise again in the March 2012 year.
  • Key trading partners experience slower growth for longer, including slower growth in emerging Asia, which has so far been largely unaffected by developed country weakness. Trading partner growth is about 1 to 2 percentage points lower in each year until the March 2011 year than currently assumed in our forecasts, before recovering to similar levels as in our main forecasts in the March 2012 year. Lower trading partner growth reduces demand for exports, particularly commodities and tourist services.
  • The heightened uncertainty means New Zealand households become more cautious in their spending behaviour and firms are reluctant to invest.

Domestic demand is weak in this scenario …

Relative to the main forecast, higher interest rates – owing to a longer period of more pronounced risk aversion in financial markets – make mortgage debt servicing difficult for a larger number of households and property investors. For the majority of households, higher debt servicing costs reduce disposable incomes, lowering consumption. However for some households (and more than in the main forecast) the strain of servicing this debt would mean they are forced to sell their home or investment property. More houses on the market would lower house prices and lower the demand for the construction of new housing. Residential investment is therefore weaker for longer in this scenario, falling cumulatively by 23% in the forecast period until the March 2011 year.

Figure 3.8 – Real private consumption growth
Figure 3.8 – Real private consumption growth.
Source: Statistics New Zealand, The Treasury

Real private consumption undergoes a period of weak growth (around 1%) throughout the forecast period owing to higher mortgage servicing costs reducing discretionary incomes, falling house values lowering perceptions of wealth and collateral, households engaging in more precautionary saving (particularly of the tax cut) as the result of global uncertainty and a lower exchange rate making imports more expensive.

In this scenario, firms face less demand for their products as a result of weak domestic and international markets. Lower demand, coupled with higher borrowing costs, a lower exchange rate (increasing the cost of importing plant and machinery) and heightened uncertainty mean business investment is cumulatively 14 percentage points lower across the forecast period than in our main forecast.

Slower domestic demand means that firms lower their demand for labour, resulting in a contraction in employment, slower wage growth and a higher unemployment rate than the main forecast. The weaker labour market reinforces the slowdown in the domestic economy.

Domestic demand recovers in the March 2012 year as financial markets recover lowering the risk premium on interest rates. A lower risk premium, combined with looser monetary policy, results in lower market interest rates, which boost private consumption and investment.

… as is the export response, leading to slower real activity …

Weaker domestic demand and a lower exchange rate slow import growth until the March 2010 year resulting in a narrowing of the current account deficit to 4.5%. The narrowing of the current account deficit is somewhat muted by increased debt servicing costs as higher world interest rates result in a larger investment income deficit.

From 2010 the lower exchange rate helps to drive the rebound in exports of goods and services but a softer world economy than in our main forecasts means the response of exports to the lower exchange rate is somewhat muted (see Figure 3.9). The response of exports of services (including tourism receipts) to the lower exchange rate is particularly weak as the slower global economy reduces discretionary incomes available for travel.

Figure 3.9 – Real exports
Figure 3.9 – Real exports
Source: Statistics New Zealand, The Treasury

The weak domestic economy means real GDP growth is sub 1% in the March 2009 and 2010 years. Real GDP growth does rebound to 2.8% in the 2012 March year – although still below trend – owing to lower market interest rates boosting domestic demand and stronger exports as the world economy recovers and the exchange rate is lower.

… lowering inflation …

CPI inflation averages 2% across the forecast period in this scenario as opposed to around 2.9% in the main forecast. Lower inflation is mainly driven by a weaker domestic economy lowering non-tradables inflation. While the sharp depreciation of the exchange rate does lead to an increase in tradables inflation, it is limited somewhat by a weaker economy, meaning firms facing increased import prices are not able to fully pass through cost increases. The lower inflation pressures see official interest rates cut significantly more than in the main forecast but this does not fully translate into lower market interest rates owing to the heightened risk aversion in the financial markets. The exchange rate depreciates more sharply than in the main forecasts as slower economic growth and relatively lower domestic interest rates make the New Zealand dollar less attractive.

… leading to less nominal GDP

Lower consumer price inflation, coupled with a weaker real economy, results in slower nominal GDP growth throughout the period and therefore the level of nominal GDP is a cumulative $34.4 billion lower, resulting in lower tax revenues across the whole period. See the Fiscal Scenarios section for more details.

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.

Figure 3.10 – Gross sovereign-issued debt
Figure 3.10 – Gross sovereign-issued debt.
Source: The Treasury
  • 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, although this would be partially offset by higher interest-based revenue on assets.
  • 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 debt.

The scenario results in lower tax revenue and more Government debt …

The scenario is characterised by weaker domestic demand and lower inflation throughout the forecast period compared with the main forecast. The weaker domestic demand and lower inflation – plus a muted export response to the lower exchange rate – lead to lower nominal GDP reducing tax revenue. Relative to the main forecast, there is cumulatively $10.4 billion less tax by June 2012.

Figure 3.11 – OBEGAL (excluding NZS Fund retained revenue)
Figure 3.11 – OBEGAL (excluding NZS Fund retained revenue).
Source: The Treasury

Expenses are lower overall relative to the main forecast, as the increase in debt financing costs owing to the larger stock of debt (see below) and the increase in the number of unemployed are offset by the lower cost of inflation-indexed benefits owing to lower inflation.

Despite the lower expenses, lower tax revenue means the OBEGAL (excluding NZS Fund retained revenue) is lower over the forecast period and is, when expressed as a percentage of GDP, 1.5 percentage points lower in the final year of the forecast than in our main forecast (see Figure 3.11). As a result, gross sovereign-issued debt is 21.9% of GDP at the end of the forecast period compared to 16.8% of GDP in the main forecast.

Fiscal Sensitivities

Table 3.1 provides some “rules of thumb” on the sensitivities of the fiscal position to changes in specific variables.

Table 3.1 - Fiscal sensitivity analysis
  Year ending 30 June
($ million)
2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast 2012 Forecast
1% lower nominal GDP growth per annum          
 Revenue (550) (1,100) (1,725) (2,365) (3,055)
 Addition to financing costs 17 68 152 271 425
Impact on the operating balance (567) (1167) (1878) (2636) (3480)
Revenue impact of a 1% decrease in the growth rates of:          
 Wages and salaries (245) (490) (765) (1,045) 1,355)
 Taxable business profits (125) (265) (420) (590) (770)
One percentage point lower interest rates          
 Interest income (41) (89) (57) (70) (49)
 Expenses (21) 88) (130) (167) (201)
Impact on the operating balance (20) (0) 72 97 152

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 3.2 - NZS Fund contributions sensitivity analysis
Variable Marginal change Effect on net return after tax Effect on Capital Contribution
($ million)
  (%age points) (%age points) 2008/09 2009/10 2010/11 2011/12
Expected gross rate of return -1 -0.76 220 230 243 256

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.
  • The impact of capital spending initiatives is described as increasing the Government's gross debt position. This is correct but because the Government also holds some financial assets the actual impact could equivalently be described as reducing the Government's assets.
  • 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.

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 2008 included $69.1 million per annum as the fourth tranche of the 10-year plan. The following table shows the additional tranches to be charged against future Budgets.

Defence Funding Package of additional tranches to be charged against future Budgets
Budget to be Charged
($ million)
2009/10 2010/11 2011/12 2012/13 2013/14 2014/15
Budget 2009 85.700 85.700 85.700 85.700 85.700 85.700
Budget 2010 - 108.100 108.100 108.100 108.100 108.100
Budget 2011 - - 66.900 66.900 66.900 66.900
Budget 2012 - - - 14.200 14.200 14.200
Budget 2013 - - - - 58.600 54.200
Budget 2014 - - - - - 0.00

Economic Transformation: Innovation - Pre-commitment

Budget 2008 included significant funding for Economic Transformation: Innovation. In addition to this, the Government has agreed that the following funding for this purpose will be pre-committed against future budgets:

Economic Transformation: Innovation. Budget to be Charged (millions of dollars)
Budget to be Charged
($ million)
2009/10 2010/11 2011/12 2012/13 and Outyears
Budget 2009 93.000 100.000 100.000 100.000
Budget 2010 - 75.000 75.000 75.000
Budget 2011 - - 25.000 25.000

Foreign Affairs and Trade - Funding Package Pre-commitment

The Foreign Affairs and Trade Package is designed to provide the Ministry of Foreign Affairs and Trade (MFAT) with certainty to progress growth plans while also providing the Government and MFAT the flexibility to respond to emerging issues that may arise as a result of an increasingly complex international environment. The pre-commitment is $133 million operating and $39 million in capital funding to be allocated in Budget 2009 to Budget 2012.

Operating:

Foreign Affairs and Trade - Funding Package Pre-commitment: Operating
Budget to be Charged
($ million)
2009/10 2010/11 2011/12 2012/13
Budget 2009 8.298 8.035 8.035 8.035
Budget 2010 - 13.557 13.369 13.369
Budget 2011 - - 18.267 17.68
Budget 2012 - - - 24.493

Capital:

Foreign Affairs and Trade - Funding Package Pre-commitment: Capital
Budget to be Charged
($ million)
2009/10 2010/11 2011/12 2012/13
Budget 2009 7.031 - - -
Budget 2010 - 5.007 -  
Budget 2011 - - 15.655 -
Budget 2012 - - - 11.307

Health - Pre-commitment

The Government has agreed that the indicative Health allocation of $800 million for Budget 2009 may be pre-committed by $2.233 million in 2010/11 rising to $13.736 million per annum in 2012/13 and outyears.

Health - Pre-commitment
Budget to be Charged
($ million)
2009/10 2010/11 2011/12 2012/13 and Outyears
Budget 2009 - 2.233 16.000 13.736

Teachers’ and Principals’ Collective Agreements

The Government previously set aside funding for the Teachers’ and Principals’ Collective Agreements in Budgets 2007 and 2008. These Collective Agreements have now been settled, and the remaining costs are $169.128 million in 2009/10 rising to $192.414 million in 2010/11 and outyears. These costs will be charged against Budget 2009.

Teachers' and Principals' - Collective Agreements
Budget to be Charged
($ million)
2009/10 2010/11 2011/12 2012/13 and Outyears
Budget 2009 169.128 192.414 192.414 192.414

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 in the forecast period 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.

Time-limited Funding

Vote
Description of Initiative Impact of Continuing Funding
($ million)
Biosecurity Southern Saltmarsh Mosquito Eradication Programme 7.000 in 2008/09, 9.000 in 2009/10 and 11.000 in 2010/11 and outyears
Child, Youth and Family Services Demand driven pressures on care and protection Services 6.800 in 2008/09 and outyears
Finance Funding for ONTRACK's revenue shortfall as a consequence of the
extension of Toll's interim track access charge pending the outcome
of the expert determination process
28.000 in 2009/10 and outyears
Finance Funding to ONTRACK to cover the cost of Wellington Railway Station,
land released by Toll NZ Ltd and specific expenditure
26.350 capital in 2008/09, 42.750 capital in 2009/10 and outyears
Finance Loan facility to ONTRACK to build a range of infrastructure projects 46.995 capital in 2008/09, 110.000 capital in 2009/10 and outyears
Finance National rail network improvements 25.000 capital in 2009/10 and outyears
Health Meningococcal Vaccine - Ongoing Delivery 7.000 ongoing from 2009/10
Health Healthy Housing Programme 15.000 ongoing from 2010/11
Housing Shared Equity Home Ownership Pilot 17.500 capital ongoing from 2010/11
Revenue Property Audit Strategy 23.567 in 2010/11 and outyears
Transport Canterbury Transport Project 9.000 in 2011/12, 14.000 in 2012/13 and outyears

The following table shows the debt and operating impact 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 spending.

Debt and operating impact
Impact ($ million) 2007/08 2008/09 2009/10 2010/11 2011/12and
Outyears
Funding to Extend Operating Initiatives (Impact on Operating Balance) - 13.800 50.800 91.367 100.367
Funding to Extend Capital Initiatives (Impact on Debt) - 73.345 177.750 195.250 195.250

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
Quantified Risks as at
14 May 2008
Operating Balance Gross Debt Value of Risk
($ million)
Funding in Budget 2008 ($ million)
New Risks        
Finance - Restructuring the Rail Industry Decrease Increase 80-120 million capital in 2008/09 690 million capital in 2007/08
Changed Risks        
Customs - Border Management System (CusMod) Replacement Decrease Increase 22 per annum operating and 100 capital 1 operating one-off to further develop the business case
Education - School Property Decrease Increase Up to 84 capital in each of the next four years

Operating: 6 in 2008/09, 5 in 2009/10 and outyears

Capital: 71 in 2008/09, 3 in 2009/10 and 1 in 2010/11

Finance - Upgrade of National Rail Network - Increase 375-425 capital over four years 65 capital in 2008/09
Health - Indicative Funding for Budgets 2009 and 2010 Decrease - 800 in 2009/10, 1648 in 2010/11, 1634 in 2011/12 and 1636 in 2009/10 750 per annum from 2008/09
Māori Affairs - Māori Business Aotearoa New Zealand Increase Increase 40 capital in 2008/09 and ongoing operating savings of 4 -
Police - Increases to Police Staff - Increase 45 capital over the forecast period 41 per annum operating and 10 capital in 2008/09
Police - International Deployment Capability Decrease - 20 per annum operating -
Unchanged Risks        
Economic Development - Venture Investment Fund - Increase 40 capital in 2009/10 and 2010/11 -
Education - Early Childhood Education Ratio Changes Decrease - 51 per annum operating from 2011/12 -
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 -
Housing - Wellington City Council Social Housing Assistance Decrease - 220 operating spread over a 10-15 year period Funding set aside in a contingency but has not been appropriated
New Zealand Defence Force - Sale of Skyhawks and Aermacchi Trainers - Decrease US$110 capital -
New Zealand Defence Force - Defence - Capital Injections - Increase 210 capital from 2008/09 to 2010/11 -
Social Development - Youth Court Sentencing Orders Decrease Increase 12 per annum operating and 4 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
Unquantified Risks as at
14 May 2008
Operating Balance Gross Debt Funding Received in Budget 2008 ($ million)
New Risks      
Economic Development - Implementation of the New Zealand Tourism Strategy Decrease Increase -
Economic Development - Review of Financial Products and Providers Decrease Increase -
Education - Schools Plus Decrease Increase -
Education/Social Development - Inter-agency Plan for Conduct Disorder/Severe Antisocial Behaviour Decrease - -
Housing - Local Government and NGO Housing Projects Decrease Increase -
Housing - Urban Development Agencies Decrease Increase -
Housing - Hobsonville Urban Development - Increase 33 capital and 5 operating between 2008/09 and 20011/12
Revenue - Investment in the Tax System and Related Business Decrease Increase -
Social Development - Five-Year Action Plan for Out of School Services Decrease - -
Social Development - New Zealand Superannuation and Veteran's Pension Decrease - -
Social Development - Energy Subsidy for SuperGold Card Holders Decrease - -
Changed Risks      
Corrections - Capital Projects Decrease Increase 110 capital and a total of 13.5 operating for Mt Eden
Corrections - Collective Employment Contract Negotiations Decrease - 16.5 operating in outyears
Environment - Purchase of Kyoto Compliant Emission Units - Increase -
Health - District Health Board Deficits Decrease Increase -
Housing - Tamaki - Increase -
Justice - Strengthening the National Court Infrastructure Decrease Increase 11 capital and 2 operating between 2008/09 and 2011/12
Justice - Greater Auckland Region Service Delivery Strategy Decrease Increase 6 operating between 2008/09 and 2011/12
Justice Sector and Other Agencies - Effective Interventions Decrease - .5 capital and 6 operating between 2008/09 and 2011/12
Local Government - Response to Rates Inquiry Decrease Increase

41 operating over four years

 

Revenue - Reducing Compliance Costs for Small- and Medium-Sized Enterprises Unclear - -
Transport - Regional transport projects - Increase 33.5 operating between 2008/09 and 2011/12
Unchanged Risks      
Economic Development - Radio Spectrum Rights Increase - -
Education (Tertiary) - Tertiary Education Institutions - Capital Injection - Increase -
Education (Tertiary) - Wānanga Capital Injections - Increase -
Finance - SOE Long-term Hold Reviews - Decrease -
Finance - Crown Overseas Properties - Increase -
Fisheries - Civilian Maritime Aerial Surveillance Decrease Increase -
Immigration - New Immigration Service Delivery Strategy Decrease Increase 5 operating in 2007/08
Justice - Financial Action Taskforce Recommendations Decrease - -
New Zealand Agency for International Development - Adjustment of Official Development Assistance Fund Unknown -

Operating:

10 in 2008/09, 15 in 2009/10, 12 in 2010/11 and outyears

Police - Wage Negotiations Decrease - -
Revenue - Management of Inland Revenue’s Lease Portfolio in Auckland Decrease - -
Revenue - Rebuild of the Student Loan IT System Decrease Increase 4 operating in 2008/09
Revenue - Renegotiation of Double Tax Agreements Decrease - -
Revenue - Working for Families Review of Rates Decrease - -
Social Development - Working New Zealand: Work-focused Support Decrease - -
Social Development - Children, Young Persons and their Families Act Decrease Increase -

Risks Removed Since the 2007 HYEFU Update

The following risks have been removed since the 2007 Half-Year Economic and Fiscal Update:

Risks Removed Since the 2007 Half-Year Economic and Fiscal Update
Expired Risks Reason Funding Received
($ million)
Agriculture and Forestry - Industry Partnership for Food and Pastoral Innovation Funded in Budget 2008 700 capital in 2008/09
Culture and Heritage - Broadcasting Initiatives Funding provided in Budget 2008 means the remainder of the risk is below the materiality threshold 3 operating per annum ongoing
Economic Development - Shanghai Expo 2010: New Zealand Participation Funded in Budget 2008 27 operating over three years
Education - Schools ICT Network Infrastructure Upgrade Funded in Budget 2008 9 operating in 2008/09, 19 operating in 2009/10 and outyears
Education - Performance Based Research Fund Funded in Budget 2008 Operating: 4 in 3007/08, 7 in 2008/09, 9 in 2009/10, 13 in 2010/11 and outyears
Education - Upskilling the Workforce Strategy Funded in Budget 2008 Operating: 29 in 2008/09, 38 in 2009/10, 48 in 2010/11, 50 in 2011/12 and outyears
Education - Year One Class Sizes Funded in Budget 2008 Operating: 22 in 2008/09, 53 in 2009/10, 54 in 2010/11 and outyears Capital: 2 in 2008/09, 17 in 2010/11 and 7 in 2011/12
Education - Tertiary Student Support Changes Funded in Budget 2008 Operating: 18 in 2008/09, 34 in 2009/10, 38 in 2010/11, 40 in 2011/12 and outyears Capital: 24 over the forecast period
Finance - National Rail Access Agreement Amendments Funded in Budget 2008 690 capital in 2007/08
Fisheries - Māori Interest in Marine Farming Funded in Budget 2008 - liability now in financial statements 72 operating in 2007/08
Foreign Affairs and Trade - Additional Baseline Funding Funded in Budget 2008 242 operating and 59 capital over four years. Additional funding has also been set aside in the pre-commitment
Health - National Systems Development Project Tranche 2 Project may be met from within current baselines 10 operating in 2008/09 and outyears
Health - Strengthening Child and Adolescent Oral Health Services Funded in Budget 2008 Operating: 14 in 2008/09, 15 in 2009/10, 20 in 2010/11 and 30 in 2011/12 and outyears
Housing - Rural Housing Not Funded in Budget 2008 -
Housing - Shared Equity Home Ownership Funded in Budget 2008 18 capital in 2008/09 and 2009/10
Justice Sector Agencies - Potential Flow-on Impact of Extra Police The risk has been partially funded, and other measures are being taken to mitigate the risk 2 per annum operating ongoing
National Library - National Library Building Redevelopment Funded in Budget 2008 Operating: 10 in 2007/08, 6 in 2008/09, 5 in 2009/10, 8 in 2010/11 and 7 in 2011/12 and outyears Capital: 3 in 2007/08, 12 in 2008/09, 32 in 2009/10, 19 in 2010/11 and 3 in 2011/12
Prime Minister and Cabinet - Government House Wellington Funded in Budget 2008 47 capital and 1 operating over the forecast period
Research, Science and Technology - Multi-year Funding Profile Superseded by Economic Transformation: Innovation funding and pre-commitment Operating: 44 in 2008/09, 40 in 2009/10, 56 in 2010/11 and 65 in 2011/12 and outyears
Revenue - Life Insurance The Government has taken final decisions on this risk -
Revenue - Changes to the Petroleum Mining Tax Rules The Government has taken final decisions on changes to the rules -
Revenue - International Tax Review The Government has taken final decisions on the review -
Social Development/Housing - Accommodation Supplement Review Review process now complete -
Transport - Cost Guarantee for State Highway Construction Funded by transferring existing funding from 2007/08 to 2008/09 -

Statement of Fiscal Risks

Corrections - Capital Projects (changed, unquantified risk)

The Government is currently considering a range of options to address continued forecast growth in the prison population, including the asset management of current Corrections facilities, and increased prison capacity. This risk is unquantified as the quantum of the risk will vary greatly depending on the options chosen. If approved, any capital injections would increase gross debt while operating funding would decrease the operating balance.

Corrections - Collective Employment Contract Negotiations (changed, 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. Current agreements expire in the first half of 2008.

This risk is unquantified as disclosure may compromise the Crown in negotiations, however any additional funding would decrease the operating balance.

Customs - Border Management System (CusMod) Replacement (changed, quantified risk)

Customs' border management systems (CusMod) are over 10 years old. Customs received funding in Budgets 2007 and 2008 to develop a business case for replacement systems for consideration in Budget 2009. In accordance with the two-stage approval process for major IT projects, funding for CusMod replacement is dependent on approval of the two business cases. The indicative cost of the project is $105 million capital over five years and up to $15 million operating per annum. If approved, 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: New Zealand Customs Service

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 over the period of 2006/07 to 2008/09. The Government is also considering further commitments of $40 million over two years (2009/10 and 2010/11). This depends on the results of the evaluation of the Venture Investment Fund scheduled for completion by 31 March 2009. If approved, 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 - Implementation of the New Zealand Tourism Strategy (new, unquantified risk)

The New Zealand Tourism Strategy 2015 is a joint document between the Government and industry. It includes a range of actions to progress key sector goals. Funding for these actions will come from a range of stakeholders, including Government. Ministers are yet to decide the appropriate funding mix to support high-priority actions within the Strategy, however additional capital funding would increase gross debt and additional operating funding would decrease the operating balance.

Economic Development - Review of Financial Products and Providers (new, unquantified risk)

As part of the Review of Financial Products and Providers the Government is strengthening the regulatory regimes for the non-bank financial sector. These regimes are intended to come into force from 2010. This will have resource implications for the Reserve Bank, the Securities Commission and the Ministry of Economic Development. Final costs are unknown at this time, however additional capital funding would increase gross debt and additional operating funding would decrease the operating balance.

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 sales less the cost of sales as charged to the Spectrum Sales Appropriation. Offers for rights of renewal to existing owners of spectrum rights are set approximately five years in advance of rights expiring from 2010 onwards with settlement being required prior to granting the new right. If any offers are rejected then they will be allocated by way of auction on the open market. (For this reason the expected revenue from sale of renewal rights is not reflected in current forecasts of revenue.)

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

Education - Schools Plus (new, unquantified risk)

The Government is considering a range of policies to increase student participation and achievement in education, skills and structured learning. This could result in increased costs for compulsory and tertiary education. The impact of any further funding would reduce the operating balance and/or increase gross debt, but the quantum is unclear as it would depend on the options chosen.

Education/Social Development - Inter-agency Plan for Conduct Disorder/Severe Antisocial Behaviour (new, unquantified risk)

The Government has approved and published a six-year Inter-agency Plan for Conduct Disorder/Severe Antisocial Behaviour (2007-2012). The Inter-agency Plan commits the Government to deliver a range of initiatives including new services for 3-7-year-olds and shared infrastructure across sectors. While amounts would depend on the policy and scaling options chosen, any additional operating funding would decrease the operating balance.

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

The Government has committed to increasing 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, the Government agreed to initial changes to ratios to implement part of one option consulted on, to be gradually introduced from July 2009. The Government has also communicated that further changes are being considered. The current funding is thought to be insufficient for further changes, so additional funding of approximately up to $51 million per annum from 2011/12 will be considered as part of Budget 2009. 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) - Vocational Training (unchanged, 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.

As at Budget 2008, funding supports participation of approximately 220,000 trainees by 2011. To achieve participation of 250,000 trainees in 2011, the Industry Training Fund would need to increase by approximately $7.5 million in 2009/10, $15 million in 2010/11 and $20 million in 2011/12 and outyears.

If approved, this proposal would decrease the operating balance.

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

Source: Tertiary Education Commission

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. They could cost up to $84 million in each of the next four years. In addition to capital injections, consequential operating costs are likely to increase by approximately $13 million per annum (including $7 million in capital charge). New expenditure rules have been put in place to time limit new capital budget approvals, but this will take some time to take effect. It is expected that the liability for schools’ unspent property entitlements and delayed projects will continue to increase until 2010/11 before levelling off and then declining. If approved, any capital funding would increase debt, and any operating funding 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 Injection (unchanged, unquantified risk)

The Government is considering 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 any capital injections would increase gross debt, but the total quantum is unclear as it would depend on progress made by institutions in managing their pressures, and on decisions taken by Government.

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

The Government is currently negotiating with Te Wānanga o Raukawa over settlement of its Waitangi Tribunal claim. The Waitangi Tribunal has recommended that the Wānanga 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 to meet additional capital requirements. Negotiations are also taking place with Te Whare Wānanga o Awanuiārangi in relation to an outstanding item from the original settlement.

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

Environment - Purchase of Kyoto-compliant Emission Units (changed, unquantified risk)

The government faces a potential net-exposure to the international market for Kyoto-compliant emission units. This net-exposure would come about if the emission units that are built up by government over the first commitment period as a result of the operation of the Emission Trading Scheme (ETS), are less than the size of the governments Kyoto liability.

Currently the forecasts indicate that the government may have to purchase Kyoto-compliant emission units to meet its Kyoto obligations. However, there is significant uncertainty around both the Kyoto liability and the units that may be built up as a result of the ETS (largely given the inherent uncertainty around forecasts of NZ net emissions and the assumed take-up rate of forestry into the ETS).

The risk is unquantified given the large degree of uncertainty. Any purchasing would increase gross debt.

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

To implement its long-term hold ownership policy, the Government has conducted reviews of State-Owned Enterprises (SOEs). These reviews have examined appropriate capital structures to support the strategies of SOEs. One possible outcome of these 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.

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 - Upgrade of National Rail Network (changed, quantified risk)

The Government has committed significant expenditure to upgrade and renew the national rail network, and has signalled an intention to continue investment in rail infrastructure. In particular, the government it is considering a package of renewals and upgrades to the rail network of approximately $375 million to $425 million between 2008/09 and 2012/13 (this is in addition to the $25 million for national network upgrades that was funded in Budget 2007). If approved, this funding would increase gross debt.

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

Source: Ministry of Education

Finance - Restructuring the Rail Industry (new, quantified risk) 

Ministers are considering options around ensuring the viability of the rail industry, including medium-term capital investment. These options include the refinancing of between $80 million and $120 million of debt held by the new rail operator company with a loan from the Crown in 2008/09, and the purchase of rolling stock for the new rail operator company - the timing and scale of which is uncertain at this stage. If approved, any funding of this nature would increase gross debt and/or reduce the operating balance.

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

Source: Ministry of Education

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.

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

The Government is considering indicative operating allocations of $800 million and $850 million for Budgets 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 2009 above may be pre-committed up to $13.736 million per annum in 2012/13 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:

Charges Against Future Budgets
Budget to be Charged
($ million)
2009/10 2010/11 2011/12 2012/13 and Outyears
Budget 2009 800 798 784 786
Budget 2010 - 850 850 850

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

Source: Ministry of Education

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

Draft District Annual Plans from Hawkes Bay, Auckland, Counties Manukau, Whanganui, West Coast, Southland, Otago, Tarawhiti and Capital and Coast District Health Boards (DHBs) indicate projected operating deficits in 2008/09. The Government does not view DHB deficits as acceptable and cost containment strategies are in place.

Any decision to fund such deficits would 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 2007 Half Year Economic and Fiscal Update to take into account the new projections of DHB deficits.

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

The Government has agreed to provide the Wellington City Council with a conditional grant of $220 million over an investment period of 10 to 15 years (representing approximately $150 million in net present value terms) to upgrade its social housing portfolio. The funding has been set aside in contingency, pending conclusion of negotiations with the Council about the details of the assistance. The conditional grant will decrease the operating balance.

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

Source: Ministry of Education

Housing - Local Government and NGO Housing Projects (new, unquantified risk)

The Government is considering how best to encourage the growth of not-for-profit providers of affordable rental and owner-occupier housing. The amount and timing of costs would depend on the option chosen, however additional capital funding would increase gross debt and additional operating funding would decrease the operating balance.

Housing - Urban Development Agencies (new, unquantified risk)

The Government is considering how Urban Development Agencies could be established in New Zealand for housing developments that would provide for sustainable communities, including the supply of affordable housing. The amount and timing of costs would depend on the option chosen, however additional capital funding would increase gross debt and additional operating funding would decrease the operating balance.

Housing - Tamaki (changed, unquantified risk)

The Government is considering the redevelopment of the Tamaki area. Any capital funding would increase gross debt while operating funding would decrease the operating balance. This risk is unquantified as disclosure could compromise the Crown in negotiations.

Housing - Hobsonville Urban Development (new, unquantified risk)

The Government has agreed to the creation of an integrated urban community at Hobsonville. While funding is being provided in Budget 2008 for Precinct One, as well as any other costs that need to occur concurrently with Precinct One, capital funding will need to be provided for the remaining four precincts in future Budgets. This will increase gross debt. This risk is unquantified as disclosure could compromise the Crown in negotiations.

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

The Government is in the process of developing a stage-two business case for a new immigration service delivery strategy, which would aim to allow better management of the risk surrounding immigration decision-making and improve delivery of immigration services. Cabinet is likely to consider the stage-two business case later in 2008. 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 - Financial Action Taskforce Recommendations (unchanged, unquantified risk)

In order to implement the recommendations of the Financial Action Taskforce, the Government is considering a new Anti-money Laundering and Counter-terrorist Financing regime. Increased supervision and enforcement is expected to result in increased costs to the following agencies: the Reserve Bank, the Securities Commission, the Department of Internal Affairs, the Financial Intelligence Unit of the New Zealand Police and the Ministry of Justice. The risk is unquantified as costs are still being finalised but would reduce the operating balance.

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

The Government is considering options to ensure that court facilities in Gisborne, Christchurch, Nelson and Auckland are able to adequately deliver court and associated justice services to the regions. 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 - Greater Auckland Region Service Delivery Strategy (changed, unquantified risk)

The Government is developing a strategy to address courts needs in the greater Auckland region. A wide range of stakeholders are currently being consulted over a variety of service delivery options.

The risk is unquantifed as disclosure may compromise the Crown in negotiations to purchase land or enter into future construction contracts. Any impact on the operating balance or gross debt will depend on the options chosen.

Justice Sector and Other Agencies - Effective Interventions (changed, unquantified 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 will depend on the specific options chosen. This would decrease the operating balance.

This risk was quantified in HYEFU 2007, however this only reflected Phase 1 initiatives. Work has since commenced on Phase 2 initiatives, but these have not yet been developed and as such the risk is now unquantified.

Local Government - Response to Rates Inquiry (changed, unquantified risk)

The Independent Inquiry into Local Government Rates reported in August 2007. The Government has established a series of work streams to assist development of its response to issues outlined in the report. Some initiatives have already been undertaken as part of the Government's response, including $38.1 million in new funding over four years for enhancements to the rates rebate scheme. However, the total potential impact of this risk on the operating balance and/or gross debt is unknown at this stage, as this would depend on the nature and scope of any additional measures subsequently pursued.

Māori Affairs - Māori Business Aotearoa New Zealand (changed, quantified risk)

The Government has agreed to establish an independent statutory corporation for the purposes of furthering Māori economic development, to be known as Māori Business Aotearoa New Zealand (MBANZ), subject to enactment of the Māori Trustee and Māori Development Bill.

New Crown funding required is estimated to be $40 million capital in 2008/09, with an associated ongoing operating saving of approximately $4 million per annum. If approved, this would increase the operating balance and increase gross debt.

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

Source: Te Puni Kokiri

New Zealand Agency for International Development - Adjustment of Official Development Assistance Fund (unchanged, unquantified risk)

Budget 2008 includes funding to take Government Official Development Assistance to an equivalent percentage of Gross National Income (GNI) - 0.30% in 2008/09, 0.33% in 2009/10 and 0.35% in 2010/11. However, because GNI forecasts will change in subsequent years, there is a risk that further funding may be required to maintain these percentages of GNI. Any such changes will be considered in future Budgets. The net impact of this risk is unclear and thus may increase or reduce the operating balance.

New Zealand Defence Force - Capital Injection (unchanged, quantified risk)

Implementing the Government's decisions on the future structure of the New Zealand Defence Force (NZDF) will involve a series of capital acquisitions across all three armed services and for Headquarters NZDF 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, $1.034 billion has been appropriated with the remaining $210 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 - Increases to Police Staff (changed, quantified risk)

The Government will consider increases in Police staff in future Budgets with a view to achieving Police Officer ratios comparable with those of Australia by 2010. The amount of funding that could be required is unclear at this point.

The Government has funded an additional 1,000 sworn Police and 250 non-sworn Police staff over Budgets 2006-08. Additional funding for property associated with these staff will be considered in future Budgets, and may be in the order of $45 million capital. If approved, 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

Police - International Deployment Capability (changed, 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 $20 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 - Wage Negotiations (unchanged, 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.

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

The Government is considering measures to simplify the tax rules for small- and medium-sized enterprises, pursuant to a Government discussion document released in December 2007. Consultation on a number of the measures proposed in this discussion document is underway. Some changes have been adopted as part of Budget 2008 while other changes may be adopted subsequently. The potential overall 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 - Management of Inland Revenue’s Lease Portfolio in Auckland (unchanged, unquantified risk)

Inland Revenue is currently exploring options to consolidate its lease portfolio in Auckland. A report back that will consider options and risks is due in June 2008. This risk is unquantified as disclosure could compromise the Crown in negotiations, but any additional operating funding would decrease the operating balance.

Revenue - Investment in the Tax System and Related Business (new, unquantified risk)

Inland Revenue is investigating options around investment in the tax system and related business processes, including replacing the FIRST tax system. Part of this work includes investigating options for transforming employer information and payments. The potential impact and timing of this are unknown at this stage, as it would depend on the nature and scope of any options that are subsequently pursued. Any additional capital funding would increase gross debt and additional operating funding would decrease the operating balance.

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 aims to 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. If approved, any funding would decrease the operating balance and/or increase gross debt.

Revenue - Renegotiation of Double Tax Agreements (unchanged, 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 - Working for Families Review of Rates (unchanged, unquantified risk)

Working for Families legislation 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 review is to assess whether the current rates still meet the policy objectives behind Working for Families. This policy cannot be quantified until the review is completed.

Social Development - Children, Young Persons and Their Families Act (unchanged, unquantified risk)

The Government is considering a number of changes to the Children, Young Persons and Their Families Act 1989. Most of the costs relating to these changes arise from the proposal to increase the age of a young person from 17 to 18. The fiscal impacts would depend on what proposals are finally approved and the details of the legislation. Any additional operating funding would decrease the operating balance and any additional capital would increase gross debt.

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 has already been implemented and focused 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 and further support people to stay in work. The next stage 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 - Five-year Action Plan for Out of School Services (new, unquantified risk)

The Government has approved, in principle, a Five-year Action Plan for Out of School Services. The Action Plan proposes a range of initiatives that represent a number of policy options available to Government. While the amounts are unclear and would depend on the policy options chosen, any additional operating funding would decrease the operating balance.

Social Development - Youth Court Sentencing Orders (unchanged, quantified risk)

The Government is considering the inclusion of new Youth Court orders in the Children, Young Persons and Their Families Act 1989. These new Youth Court orders are extended supervision with residents and extended supervision with activity. The estimated cost is approximately $12 million in operating funding and $4 million in capital funding. This would have the effect of decreasing the operating balance and increasing debt.

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

Source: Ministry of Social Development

Social Development - New Zealand Superannuation and Veteran's Pension (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 2008 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. Each year the Government will review the level to be set for the following tax year. Under the 2008 Budget Economic and Fiscal Update (BEFU) 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 2009 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 - Energy Subsidy for SuperGold Card Holders (new, unquantified risk)

The SuperGold Card is a discounts and concessions card issued free to senior citizens and veterans. When the card was introduced in 2006, it was with the intention of having a range of services gradually included. A major enhancement being considered by Government would offer SuperGold Card holders a winter heating subsidy, to mitigate the increasing cost of energy prices. The total cost of the subsidy would depend on policy and implementation decisions yet to be made.

Transport - Regional Transport Projects (changed, unquantified risk)

The Government is considering funding options for a number of regional transport projects. There is potential for some of these projects to be debt funded and repaid via a regional fuel tax in those regions. This would increase gross debt. In Budget 2008 the Crown provided $33.5 million of such funding over the forecast period for the Canterbury Transport Project.

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 gross sovereign issued debt. However, in the case of contingencies for uncalled capital, the negative impact would be restricted to gross sovereign issued debt.

Where contingent liabilities have arisen as a consequence of legal action being taken against the Crown, the amount shown is the estimation of the possible amount of any award against the Crown. It does not represent either an admission that the claim is valid or an estimation of the 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 2008, being the latest set of published contingent liabilities.

Details of each of the following contingent liabilities can be accessed from the Treasury website at http://www.treasury.govt.nz/budget/forecasts/befu2008.

Quantifiable Contingent Liabilities

Quantifiable Contingent Liabilities
Guarantees and indemnities Status [6] ($ million)
Cook Islands – Asian Development Bank loans Unchanged 14
Indemnification of receivers and managers – Terralink Limited Unchanged 10
Ministry of Justice – Treaty settlement, tax liabilities Unchanged 105
Ministry of Transport – funding guarantee Unchanged 10
Guarantees and indemnities of SOEs and Crown entities Unchanged 18
Other guarantees and indemnities Changed 10
    167
Uncalled capital    
Asian Development Bank Changed 1,005
Bank for International Settlements Unchanged 25
European Bank for Reconstruction and Development Changed 14
International Bank for Reconstruction and Development Changed 1,036
    2,080
Legal proceedings and disputes    
Health – legal claims Changed 39
Tax in dispute Changed 220
Other legal claims against SOEs and Crown entities Changed 3
Other legal claims Changed 87
    349
Other quantifiable contingent liabilities    
International finance organisations Changed 1,647
New Zealand Export Credit Office – export guarantees Changed 33
Reserve Bank – demonetised currency Unchanged 23
Social Development – claim for judicial review Changed 88
Transpower New Zealand Limited Changed 37
Other quantifiable contingent liabilities of SOEs and Crown entities Changed 85
Other quantifiable contingent liabilities Changed 71
    1,984
Total quantifiable contingent liabilities   4,580

Unquantifiable Contingent Liabilities

Unquantifiable Contingent Liabilities
Guarantees and indemnities Status
AgriQuality Limited (formerly Asure New Zealand Limited) Unchanged
At Work Insurance Limited Unchanged
Auckland Rail lease Unchanged
Bona Vacantia property Unchanged
Building Industry Authority Unchanged
District Court Judges, Justices of the Peace, Coroners and
Disputes Tribunal
Unchanged
Earthquake Commission (EQC) Unchanged
Electricity Corporation of New Zealand Limited (ECNZ) Changed
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
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
Other unquantifiable contingent liabilities  
Abuse claims Unchanged
Accident Compensation Corporation (ACC) litigations Unchanged
Environmental liabilities Unchanged
Rugby World Cup 2011 – joint venture arrangements Unchanged
Treaty of Waitangi claims Unchanged
Treaty of Waitangi claims – settlement relativity payments Unchanged
Other contingencies  
Foreshore and seabed Unchanged

Notes

  • [6]Relative to reporting in the Half Year Economic and Fiscal Update 2007.

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 2008.

The finalisation dates and key assumptions that underpin the preparation of the GAAP tables are outlined in the Summary on page 69 to 70.

Statement of Accounting Policies and Forecast Assumptions

Significant Accounting Policies

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

These Forecast Financial Statements comply with generally accepted accounting policies (GAAP) as required by the Public Finance Act 1989 and have been prepared in accordance with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS), as appropriate for public benefit entities.

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

Changes in Accounting Policies

All policies have been applied on a consistent basis during the forecast period. There have been no changes in accounting policies during the period.

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 69 to 70.

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

Detailed Accounting Policies and Forecast Assumptions

The specific accounting and forecasting policies are reproduced in full on Treasury’s website at http://www.treasury.govt.nz/budget/2008.

Government Reporting Entity as at 9 May 2008

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:

Core Crown Segment

Departments

Agriculture and Forestry
Archives New Zealand
Building and Housing
Conservation
Corrections
Crown Law Office
Culture and Heritage
Defence
Economic Development
Education
Education Review Office
Environment
Fisheries
Food Safety Authority
Foreign Affairs and Trade
Government Communications Security Bureau
Health
Inland Revenue
Internal Affairs
Justice
Labour
Land Information New Zealand
Māori Development
National Library of New Zealand
New Zealand Customs Service
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

Airways Corporation of New Zealand Limited
Animal Control Products Limited
AsureQuality 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)
Drug Free Sport New Zealand
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
Independent Police Conduct Authority
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 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
Privacy Commissioner
Public Trust
Radio New Zealand Limited
Retirement Commissioner
School boards of trustees (2,462)
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 (31)
Testing Laboratory Registration Council
Transit New Zealand
Transport Accident Investigation Commission

Crown entity subsidiaries are consolidated by their parents and are 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
Sentencing Council

Purchase of Rail and Ferry Network from Toll Holding Limited

On 5 May 2008 the Government reached an agreement with Toll Holding Limited for the purchase of Toll New Zealand’s rail and ferry business with the date of acquisition set for 30 June 2008.

With the closeness of the purchase announcement to the finalisation date of the Budget Update Toll New Zealand’s rail and ferry business are not incorporated on a line by line basis in the fiscal forecasts. Instead the 2007/08 forecast for new capital spending has increased by the value of the purchase price.

Looking ahead, the rail and ferry operating revenues and expenses and the assets acquired and liabilities assumed will be incorporated into future forecasts and Government Financial Statements from the date of effective ownership.

There are a number of valuation issues that need to be considered before the assets and liabilities are combined into the whole-of-Government financial statements on acquisition.

There is a risk that if any differential in the purchase price and the value of Toll New Zealand’s rail and ferry assets and liabilities cannot be recovered through rail operations, a write-down in the Government Financial Statements will be required.

Forecast Statement of Financial Performance

for the years ending 30 June
Forecast Statement of Financial Performance for the years ending 30 June
    2007 2008 2008 2009 2010 2011 2012
  Note Actual Previous
Budget
Forecast Forecast Forecast Forecast Forecast
    $m $m $m $m $m $m $m
Revenue                
Taxation revenue 1 53,064 54,173 56,186 55,911 57,645 59,743 62,134
Other sovereign revenue 1 3,496 3,693 3,851 4,037 4,342 4,876 5,162
Total Revenue Levied through the Crown's Sovereign Power   56,560 57,866 60,037 59,948 61,987 64,619 67,296
Sales of goods and services   12,613 13,253 13,682 14,222 14,864 15,784 16,287
Interest revenue and dividends 2 2,995 3,366 3,203 3,358 3,252 3,410 3,461
Other revenue   2,421 2,387 2,891 2,591 2,738 2,881 3,008
Total Revenue Earned through the Crown's Operations   18,029 19,006 19,776 20,171 20,854 22,075 22,756
Total Revenue (excluding gains)   74,589 76,872 79,813 80,119 82,841 86,694 90,052
Expenses                
Social assistance and official development assistance 3 16,346 17,892 18,520 19,681 20,528 21,273 22,327
Personnel expenses 4 15,284 15,657 16,422 17,061 17,268 17,572 17,616
Depreciation and amortisation 5 3,397 3,296 3,618 3,950 4,153 4,448 4,580
Other operating expenses 5 27,579 28,997 29,217 32,053 31,934 32,781 33,087
Interest expenses 6 2,885 2,748 2,954 2,503 2,490 2,769 2,886
Insurance expenses 7 3,238 3,010 4,095 3,799 4,140 4,432 4,735
Forecast new operating spending 8 314 249 1,774 3,376 5,117
Top-down expense adjustment 8 (240) (495) (450) (450) (450)
Total Expenses (excluding losses)   68,729 71,914 74,586 78,801 81,837 86,201 89,898
Operating Balance before gains/(losses)   5,860 4,958 5,227 1,318 1,004 493 154
Net gains/(losses) on financial instruments 9 1,566 1,377 (824) 1,424 1,625 1,890 2,171
Net gains/(losses) on non-financial instruments 10 486 (2,007) 170 176 183 190
Total Gains/(losses)   2,052 1,377 (2,831) 1,594 1,801 2,073 2,361
Net surplus/(deficit) from associates and joint ventures   191 96 166 193 204 213 219
Operating Balance from continuing activities   8,103 6,431 2,562 3,105 3,009 2,779 2,734
Gain/(loss) from discontinued operations   (92) (3)
Operating Balance (including minority interest)   8,011 6,431 2,559 3,105 3,009 2,779 2,734
Attributable to minority interest   12
Operating Balance 11 8,023 6,431 2,559 3,105 3,009 2,779 2,734

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

Forecast Statement of Financial Performance – Functional Expense Analysis

for the years ending 30 June
Forecast Statement of Financial Performance (continued) - Functional Expense Analysis for the years ending 30 June
  2007 2008 2008 2009 2010 2011 2012
  Actual Previous
Budget
Forecast Forecast Forecast Forecast Forecast
Total Crown $m $m $m $m $m $m $m
Total Crown expenses              
By functional classification              
Social security and welfare 19,829 21,271 22,274 22,843 23,888 24,814 26,179
GSF pension expenses 645 629 714 652 625 610 582
Health 10,661 11,699 10,765 12,024 11,949 11,923 11,911
Education 9,853 10,321 10,803 11,017 11,335 11,551 11,687
Core government services 4,628 2,132 3,163 3,412 3,463 3,639 3,675
Law and order 2,822 3,076 3,192 3,341 3,334 3,342 3,357
Defence 1,478 1,597 1,524 1,697 1,755 1,845 1,917
Transport and communications 6,990 7,671 7,185 8,027 8,156 8,540 8,540
Economic and industrial services 4,723 5,879 7,433 7,918 8,306 8,789 8,976
Primary services 1,233 1,319 1,404 1,364 1,349 1,351 1,358
Heritage, culture and recreation 2,043 2,218 2,366 3,130 2,765 2,997 3,043
Housing and community development 865 961 965 1,036 1,015 1,022 1,037
Other 74 79 84 83 83 83 83
Finance costs 2,885 2,748 2,954 2,503 2,490 2,769 2,886
Forecast for future new spending 314 249 1,774 3,376 5,117
Top-down expense adjustment (240) (495) (450) (450) (450)
Total Crown Expenses excluding losses 68,729 71,914 74,586 78,801 81,837 86,201 89,898

Below is an analysis of core Crown expenses by functional classification. Core Crown expenses include expenses incurred by the Crown, Departments, Reserve Bank and the NZS Fund, but not Crown entities and SOEs.

Analysis of core Crown expenses by functional classification
  2007 2008 2008 2009 2010 2011 2012
  Actual Previous
Budget
Forecast Forecast Forecast Forecast Forecast
Core Crown $m $m $m $m $m $m $m
Core Crown expenses              
By functional classification              
Social security and welfare 16,768 17,698 18,071 18,898 19,566 20,175 21,212
GSF pension expenses 645 629 714 652 625 610 582
Health 10,355 11,613 11,343 12,586 12,538 12,522 12,526
Education 9,269 9,719 10,046 10,524 10,892 11,096 11,217
Core government services 4,816 2,479 3,222 3,448 3,508 3,678 3,728
Law and order 2,699 2,836 2,943 3,101 3,078 3,085 3,086
Defence 1,517 1,641 1,566 1,741 1,800 1,891 1,964
Transport and communications 2,405 2,792 2,290 2,823 2,731 2,635 2,488
Economic and industrial services 1,595 2,276 2,828 3,244 3,281 3,414 3,461
Primary services 438 494 565 520 499 494 499
Heritage, culture and recreation 844 977 1,123 1,769 1,322 1,502 1,485
Housing and community development 255 304 282 334 302 299 297
Other 68 80 84 83 83 83 83
Finance costs 2,329 2,244 2,527 2,406 2,341 2,606 2,648
Forecast for future new spending 314 249 1,774 3,376 5,117
Top-down expense adjustment (240) (495) (450) (450) (450)
Total Core Crown Expenses excluding losses 54,003 56,096 57,364 61,883 63,890 67,016 69,943

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
  2007 2008 2008 2009 2010 2011 2012
Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
$m $m $m $m $m $m $m
Cash Flows From Operations              
Cash was provided from              
Taxation receipts 52,157 54,266 55,662 54,681 57,087 59,198 61,473
Other sovereign receipts 3,415 3,472 3,496 3,675 3,812 3,932 4,028
Sales of goods and services 12,806 13,394 14,001 14,596 15,180 16,019 16,529
Interest and dividends 2,491 2,760 2,718 2,807 2,658 2,781 2,798
Other operating receipts 2,222 2,302 2,532 2,527 2,617 2,727 2,870
Total cash provided from operations 73,091 76,194 78,409 78,286 81,354 84,657 87,698
Cash was disbursed to              
Social assistance and official development assistance 16,344 19,529 18,242 19,123 20,241 21,052 22,036
Personnel and operating payments 41,845 44,025 46,643 49,961 50,597 51,821 52,029
Interest payments 2,441 2,530 2,705 2,284 2,335 2,472 2,613
Forecast for future new spending 314 249 1,774 3,376 5,117
Top-down expense adjustment (240) (355) (310) (310) (310)
Total cash disbursed to operations 60,630 66,398 67,350 71,262 74,637 78,411 81,485
Net Cash Flows From Operations 12,461 9,796 11,059 7,024 6,717 6,246 6,213
Cash Flows From Investing Activities              
Cash was provided from/(disbursed to)              
Net purchase of physical assets (5,214) (6,661) (5,826) (6,583) (6,156) (6,337) (5,440)
Net purchase of shares and other securities (8,132) (4,491) (4,963) (576) 15 (3,758) 202
Net purchase of intangible assets (232) (144) (299) (324) (255) (236) (204)
Net issue/(repayment) of advances (1,153) (1,628) (1,153) (590) (658) (200) (837)
Net acquisition of investments in associates (295) (95) (994) (230) (6) (23) (1)
Capital contingency provision (184) (690) (261) (602) (777) (927)
Top-down capital adjustment 350
Net Cash Flows From Investing Activities (15,026) (13,203) (13,925) (8,214) (7,662) (11,331) (7,207)
Net Cash Flows From  Operating and Investing Activities (2,565) (3,407) (2,866) (1,190) (945) (5,085) (994)
Cash Flows From Financing Activities              
Cash was provided from/(disbursed to)              
Issues of circulating currency 81 178 260 181 190 200 210
Net repayment/(issues) of Government stock1 (3,758) 2,223 2,357 1,235 218 4,211 242
Net repayment of foreign-currency borrowing 1,780 (1,130) (419) (299) (95) (10) (274)
Net repayment/(issues) of other New Zealand dollar borrowing 4,992 2,225 1,735 1,255 932 1,273 1,158
Net Cash Flows From Financing Activities 3,095 3,496 3,933 2,372 1,245 5,674 1,336
Net Movement in Cash 530 89 1,067 1,182 300 589 342
Opening Cash Balance 3,676 3,107 4,163 5,217 6,412 6,725 7,327
Foreign-exchange (losses)/gains on opening cash (43) (13) 13 13 13 13
Closing Cash Balance 4,163 3,196 5,217 6,412 6,725 7,327 7,682

1 Net issues of Government stock include movements within government stock holdings of entities such as NZS Fund, ACC and EQC. The Bonds reconciliation at the end of these accounts outlines the proceeds and repayments of domestic bonds.

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
  2007 2008 2008 2009 2010 2011 2012
Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
$m $m $m $m $m $m $m

Reconciliation Between the Net Cash Flows
from Operations and the Operating Balance

             
Net Cash Flows from Operations 12,461 9,796 11,059 7,024 6,717 6,246 6,213
Items included in the operating balance
but not in net cash flows from operations
             
Gains/(losses)              
Gains/(losses) on financial instruments 1,566 1,377 (824) 1,424 1,625 1,890 2,171
Gains/(losses) on non-financial instruments 486 (2,007) 170 176 183 190
Total Gains/(losses) 2,052 1,377 (2,831) 1,594 1,801 2,073 2,361
Movements in Working Capital              
Increase/(decrease) in receivables (1,591) 218 267 422 (153) (93) (65)
Increase/(decrease) in inventories 83 41 107 63 72 112 83
Increase/(decrease) in prepayments (89) (2) (49) 13 20
Decrease/(increase) in deferred revenue (73) (80) (18) 1 4
Decrease/(increase) in payables 2 (569) 82 (515) 176 504 329
  (1,668) (312) 327 (35) 116 523 351
Other Non-cash Items in Operating Balance              
Depreciation and amortisation (3,397) (3,296) (3,618) (3,950) (4,153) (4,448) (4,580)
Write-down on initial recognition of loans (629) (518) (628) (667) (705) (739) (773)
Impairment on financial assets (excl receivables) 37 (38) 201 1 1 1 1
Net interest revenue 61 389 237 333 439 331 390
Decrease/(increase) in defined benefit retirement plan liabilities 13 (51) (78) (75) (33) (4) 37
Decrease/(increase) in insurance liabilities (1,098) (1,013) (2,276) (1,313) (1,378) (1,417) (1,485)
Other 191 97 166 193 204 213 219
Total Other Non-cash Items (4,822) (4,430) (5,996) (5,478) (5,625) (6,063) (6,191)
Operating Balance 8,023 6,431 2,559 3,105 3,009 2,779 2,734
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
  2007 2008 2008 2009 2010 2011 2012
  Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
Revaluation of physical assets 5,262 43
Effective portion of changes in value of fair-value hedges (331) 39 (2) 58 19 13 17
Net change in fair value of cash flow hedges transferred to the operating statement (60) 74 (15) (1) 1 (2)
Net change in fair value of cash flow hedges transferred to the hedged item (13) (36)
Foreign currency translation differences for foreign operations (66) 2 1 2
Valuation gain/(losses) on investments available for sale taken to reserves 10 6 6
Other movements 11 (1) 2 (3) 1
Total income/(expense) recognised directly in Net Worth 4,813 113 (3) 66 15 16 17
Operating Balance (including minority interest) 8,011 6,431 2,559 3,105 3,009 2,779 2,734
Total recognised income and expense 12,824 6,544 2,556 3,171 3,024 2,795 2,751
Attributable to:              
 - minority interest (12)
 - the Crown 12,836 6,544 2,556 3,171 3,024 2,795 2,751
Total recognised income and expense 12,824 6,544 2,556 3,171 3,024 2,795 2,751

Forecast Statement of Financial Position

as at 30 June
Forecast Statement of Financial Position as at 30 June
    2007 2008 2008 2009 2010 2011 2012
  Note Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
    $m $m $m $m $m $m $m
Assets                
Cash and cash equivalents 12 4,163 3,196 5,217 6,412 6,725 7,327 7,682
Receivables 12 12,058 12,547 12,326 12,749 12,595 12,503 12,438
Marketable securities and derivatives in gain 12 32,125 32,885 34,473 33,351 32,636 34,995 33,690
Share investments 12 13,581 17,273 12,790 13,700 15,608 17,603 19,517
Advances 12 11,793 15,087 15,799 18,648 21,043 20,981 21,623
Inventory   826 982 933 997 1,069 1,181 1,264
Prepayments and other assets   1,527 1,205 1,171 1,307 1,385 1,434 1,470
Property, plant & equipment 14 95,598 95,950 98,355 101,276 103,885 106,481 107,902
Equity accounted investments1   7,001 6,647 7,519 8,683 8,294 8,516 8,693
Intangible assets and goodwill   1,677 1,555 1,772 1,929 1,952 1,958 1,917
Forecast for new capital spending   234 690 951 1,553 2,330 3,257
Top-down capital adjustment   (250) (350) (350) (350) (350)
Total Assets   180,349 187,311 191,045 199,653 206,395 214,959 219,103
Liabilities                
Issued currency   3,444 3,730 3,704 3,885 4,075 4,275 4,484
Payables 16 8,075 9,036 8,423 8,497 8,524 8,492 8,619
Deferred revenue   966 845 1,046 1,064 1,063 1,063 1,059
Borrowings   41,898 46,364 45,546 48,656 50,616 54,959 54,910
Insurance liabilities 17 17,418 19,011 20,752 22,065 23,444 24,861 26,346
Retirement plan liabilities 18 7,161 8,414 8,146 8,221 8,254 8,258 8,222
Provisions 19 4,560 3,850 4,045 4,711 4,841 4,678 4,339
Total Liabilities   83,522 91,250 91,662 97,099 100,817 106,586 107,979
Total Assets less Total Liabilities   96,827 96,061 99,383 102,554 105,578 108,373 111,124
Net Worth                
Taxpayer funds 20 44,222 48,239 46,767 49,886 52,892 55,672 58,406
Revaluation reserve 20 52,442 47,402 52,498 52,486 52,486 52,486 52,486
Other reserves 20 (133) 127 (178) (114) (96) (81) (64)
Total Net Worth attributable to the Crown   96,531 95,768 99,087 102,258 105,282 108,077 110,828
Net worth attributable to minority interest   296 293 296 296 296 296 296
Total Net Worth   96,827 96,061 99,383 102,554 105,578 108,373 111,124

1 Tertiary education institutions constitute most equity accounted investments.

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

Forecast Statement of Borrowings

for the years ending 30 June
Forecast Statement of Borrowings for the years ending 30 June
  2007 2008 2008 2009 2010 2011 2012
  Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
Borrowings              
Government stock 15,778 17,732 18,683 19,073 18,271 21,423 20,529
Treasury bills 2,098 2,786 1,389 1,289 1,289 1,289 1,289
Government retail stock 364 358 386 381 381 381 381
Settlement Cash with Reserve Bank 7,507 7,523 7,465 7,465 7,465 7,465 7,465
Derivatives in loss1 1,126 300 780 493 472 451 410
Finance lease liabilities 954 958 1,251 993 853 1,183 1,331
Other borrowings 14,071 16,707 15,592 18,962 21,885 22,767 23,505
Total Borrowings2 41,898 46,364 45,546 48,656 50,616 54,959 54,910
Total Sovereign-Guaranteed Debt3 31,163 33,167 32,912 32,534 31,473 34,666 33,552
Total Non-Sovereign-Guaranteed Debt 10,735 13,197 12,634 16,122 19,143 20,293 21,358
Total Borrowings2 41,898 46,364 45,546 48,656 50,616 54,959 54,910
Gross and Net Debt analysis:              
Core Crown borrowings 35,892 38,876 37,035 37,640 37,173 40,631 39,815
Add back NZS Fund holdings of sovereign-issued
debt and NZS Fund borrowings
913 1,524 638 768 988 1,253 1,594
Gross sovereign-issued debt4 36,805 40,400 37,673 38,408 38,161 41,884 41,409
Less core Crown financial assets6 44,272 51,184 48,927 49,745 49,948 54,232 54,379
Net Core Crown debt (incl. NZS Fund)7 (7,467) (10,784) (11,254) (11,337) (11,787) (12,348) (12,970)
Add back NZS Fund financial assets 11,576 15,439 13,100 15,915 19,059 22,493 26,163
Net Core Crown Debt (excl. NZS Fund)8 4,109 4,655 1,846 4,578 7,272 10,145 13,193
Gross sovereign-issued debt excluding
Reserve Bank Settlement Cash:
             
Gross sovereign-issued debt4 36,805 40,400 37,673 38,408 38,161 41,884 41,409
Less Reserve Bank settlement cash
(incl. Kiwibank)
(7,758) (7,523) (7,510) (7,510) (7,510) (7,510) (7,510)
Add back changes to DMO borrowing
due to settlement cash5
1,600 1,600 1,600 1,600 1,600 1,600 1,600
Gross sovereign-issued debt excluding
Reserve Bank settlement cash
30,647 34,477 31,763 32,498 32,251 35,974 35,499

Notes on Borrowings

1. Derivatives are included in either borrowings or marketable securities, deposits and equity investments depending on their value at balance date. This treatment leads to fluctuations in individual items within the Statement of Borrowings, primarily due to exchange rate movements.

2. Total Borrowings (Gross Debt) is the total borrowings (both sovereign-guaranteed and non-sovereign-guaranteed) of the total Crown. This equates to the amount in the total Crown balance sheet and represents the complete picture of whole-of-Crown debt obligations to external parties.

3. Total Borrowings (Gross Debt) can be split into sovereign-guaranteed and non-sovereign-guaranteed debt. This split reflects the fact that borrowings by SOEs and Crown entities are not explicitly guaranteed by the Crown. No debt of SOEs and Crown entities is currently guaranteed by the Crown.

4. 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 total sovereign-issued debt does not eliminate any internal cross-holdings held by these entities.

5. The Reserve Bank has used $1.6b of settlement cash to purchase reserves that were to have been funded by DMO borrowing. Therefore the impact of Settlement Cash on GSID is adjusted by this amount.

6. Core Crown financial assets exclude receivables.

7. Net core Crown debt is the Government Sovereign-issued debt less financial assets. This can provide information about the sustainability of the Government's accounts, and is used by some international agencies when determining the credit-worthiness of a country. However, as some financial assets are not easily converted into cash, and some are restricted, it is important to view net debt alongside gross sovereign-issued debt.

8. Adding back the NZ Superannuation Fund Assets provides the financial liabilities less financial assets of the Core Crown, excluding those assets set aside to meet part of the future cost of New Zealand superannuation.

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
 

As at
31 March
2008

As at
30 June
2007

  $m $m
Capital Commitments    
Specialist military equipment 832 823
Land and buildings 704 605
Other property, plant and equipment 2,608 2,617
Other capital commitments 167 184
Tertiary Education Institutions 90 90
Total capital commitments 4,401 4,319
Operating Commitments    
Non-cancellable accommodation leases 2,262 2,296
Other non-cancellable leases 2,327 2,355
Non-cancellable contracts for the supply of goods and services 1,813 1,626
Other operating commitments 7,445 7,278
Tertiary Education Institutions 303 303
Total operating commitments 14,150 13,858
Total commitments 18,551 18,177
Total Commitments by Segment    
Core Crown 12,932 19,944
Crown entities 9,907 9,835
State Owned Enterprises 3,509 3,508
Inter-segment eliminations (7,797) (15,110)
Total commitments  18,551 18,177

Statement of Actual Contingent Liabilities and Assets

as at 31 March
Statement of Actual Contingent Liabilities and Assets as at 31 March
 

As at
31 March
2008

As at
30 June
2007

  $m $m
Quantifiable Contingent Liabilities    
Guarantees and indemnities 168 171
Uncalled capital 2,080 2,076
Legal proceedings and disputes 349 1,170
Other contingent liabilities 1,984 1,829
Total quantifiable contingent liabilities 4,581 5,246
Total Quantifiable Contingent Liabilities by Segment    
Core Crown 4,474 5,071
Crown entities 52 45
State Owned Enterprises 91 150
Inter-segment eliminations (36) (20)
Total quantifiable contingent liabilities 4,581 5,246
Quantifiable Contingent Assets    
Core Crown 85 86
Crown entities 5
Total quantifiable contingent assets 90 86

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 146 to 148 of the Specific Fiscal Risk chapter.

The Statement of Specific Risks (quantified and unquantified) is outlined on pages 123 to 145 of the Specific Fiscal Risk chapter.

Notes to the Forecast Financial Statements

NOTE 1: Revenue Collected Through the Crown's Sovereign Power
  2007 2008 2008 2009 2010 2011 2012
  Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
NOTE 1:  Revenue Collected Through
the Crown's Sovereign Power
             
Taxation Revenue (accrual)              
Individuals              
Source deductions 20,980 22,334 22,735 22,874 23,639 24,368 25,325
Other persons 4,440 4,553 4,986 4,986 5,162 5,205 5,317
Refunds (1,080) (1,102) (1,290) (1,199) (1,277) (1,288) (1,322)
Fringe benefit tax 468 474 521 523 541 571 595
Total Individuals 24,808 26,259 26,952 27,184 28,065 28,856 29,915
Corporate Tax              
Gross companies tax 8,849 8,222 8,403 7,817 8,135 8,773 9,372
Refunds (296) (255) (310) (300) (300) (300) (300)
Non-resident withholding tax 1,189 1,005 1,653 1,402 1,364 1,303 1,375
Foreign-source dividend w/holding payments 149 102 122 109 109 109 109
Total Corporate Tax 9,891 9,074 9,868 9,028 9,308 9,885 10,556
Other Income Tax              
Resident w/holding tax on interest income 2,227 2,340 2,596 2,740 2,719 2,646 2,719
Resident w/holding tax on dividend income 89 92 63 91 221 269 271
Estate and gift duties 2 2 3 3 3 3 3
Total Other Income Tax 2,318 2,434 2,662 2,834 2,943 2,918 2,993
Total Income Tax 37,017 37,767 39,482 39,046 40,316 41,659 43,464
Goods and Services Tax              
Gross goods and services tax 19,540 19,726 20,655 20,458 21,432 23,034 24,398
Refunds (8,325) (8,231) (8,841) (8,578) (9,143) (10,042) (10,871)
Total Goods and Services Tax 11,215 11,495 11,814 11,880 12,289 12,992 13,527
Other Indirect Taxation              
Petroleum fuels excise 819 903 818 813 831 841 849
Tobacco excise 238 148 144 151 154 157 160
Customs duty 1,836 1,865 1,880 1,859 1,862 1,861 1,854
Road user charges 786 877 867 940 925 933 944
Alcohol excise 553 586 573 605 636 660 687
Gaming duties 230 215 245 254 262 269 276
Motor vehicle fees 222 219 227 229 230 232 234
Energy resources levies 54 34 47 43 43 43 43
Approved issuer levy and cheque duty 94 64 89 91 97 96 96
Total Other Indirect Taxation 4,832 4,911 4,890 4,985 5,040 5,092 5,143
Total Indirect Taxation 16,047 16,406 16,704 16,865 17,329 18,084 18,670
Total Taxation Revenue 53,064 54,173 56,186 55,911 57,645 59,743 62,134
Other Sovereign Revenue (accrual)              
ACC levies 2,468 2,654 2,770 2,780 2,907 2,993 3,077
Fire Service levies 268 261 285 303 309 315 322
EQC levies 84 86 86 87 89 90 92
Other miscellaneous items 676 692 710 867 1,037 1,478 1,671
Total Other Sovereign Revenue 3,496 3,693 3,851 4,037 4,342 4,876 5,162
Total Sovereign Revenue 56,560 57,866 60,037 59,948 61,987 64,619 67,296
NOTE 1 (continued): Receipts Collected Through the Crown's Sovereign Power
  2007 2008 2008 2009 2010 2011 2012
  Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
Income Tax Receipts (cash)              
Individuals              
Source deductions 21,009 22,334 22,676 22,737 23,570 24,296 25,251
Other persons 5,121 5,430 5,669 5,570 5,813 5,895 5,928
Refunds (1,850) (2,017) (2,238) (2,065) (2,093) (2,117) (2,122)
Fringe benefit tax 482 470 486 513 535 560 586
Total Individuals 24,762 26,217 26,593 26,755 27,825 28,634 29,643
Corporate Tax              
Gross companies tax 9,120 9,184 9,327 7,948 8,631 9,291 9,911
Refunds (1,153) (1,041) (1,000) (1,000) (880) (949) (1,012)
Non-resident withholding tax 1,135 981 1,615 1,373 1,335 1,340 1,396
Foreign-source dividend w/holding payments 141 102 122 109 109 109 109
Total Corporate Tax 9,243 9,226 10,064 8,430 9,195 9,791 10,404
Other Income Tax              
Resident w/holding tax on interest income 2,192 2,340 2,567 2,740 2,719 2,646 2,719
Resident w/holding tax on dividend income 90 92 63 90 220 267 269
Estate and gift duties 3 2 3 3 3 3 3
Total Other Income Tax 2,285 2,434 2,633 2,833 2,942 2,916 2,991
Total Income Tax 36,290 37,877 39,290 38,018 39,962 41,341 43,038
Goods and Services Tax              
Gross goods and services tax 18,701 19,354 20,038 19,944 20,917 22,496 23,852
Refunds (7,625) (7,877) (8,561) (8,267) (8,832) (9,731) (10,560)
Total Goods and Services Tax 11,076 11,477 11,477 11,677 12,085 12,765 13,292
Other Indirect Taxation              
Petroleum fuels excise 835 903 818 813 831 841 849
Tobacco excise 265 148 144 151 154 157 160
Customs duty 1,778 1,865 1,880 1,859 1,862 1,861 1,854
Road user charges 791 877 867 940 925 933 944
Alcohol excise 549 586 573 605 636 660 687
Gaming duties 236 215 245 254 262 269 276
Motor vehicle fees 208 219 227 229 230 232 234
Energy resources levies 55 35 52 43 43 43 43
Approved issuer levy and cheque duty 74 64 89 92 97 96 96
Total Other Indirect Taxation 4,791 4,912 4,895 4,986 5,040 5,092 5,143
Total Indirect Taxation 15,867 16,389 16,372 16,663 17,125 17,857 18,435
Total Tax Receipts Collected 52,157 54,266 55,662 54,681 57,087 59,198 61,473
Other Sovereign Receipts (cash)              
ACC levies 2,599 2,561 2,565 2,688 2,808 2,908 2,985
Fire Service levies 268 263 285 303 309 316 322
EQC levies 84 86 86 87 88 90 92
Other miscellaneous items 464 562 560 597 607 618 629
Total Other Sovereign Receipts 3,415 3,472 3,496 3,675 3,812 3,932 4,028
Total Sovereign Receipts 55,572 57,738 59,158 58,356 60,899 63,130 65,501
NOTE 2: Interest Revenue and Dividends
  2007 2008 2008 2009 2010 2011 2012
  Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
By type              
Interest revenue 2,555 2,865 2,864 2,967 2,802 2,896 2,886
Dividends 440 501 339 391 450 514 575
Total Interest Revenue and Dividends 2,995 3,366 3,203 3,358 3,252 3,410 3,461
By source              
Core Crown 2,580 2,587 2,562 2,835 2,702 2,879 2,981
Crown entities 756 880 1,085 1,083 1,136 1,183 1,242
State-owned enterprises 484 481 509 239 263 225 243
Inter-segment eliminations (825) (582) (953) (799) (849) (877) (1,005)
Total Interest Revenue and Dividends 2,995 3,366 3,203 3,358 3,252 3,410 3,461
NOTE 3: Social Assistance and Official Development Assistance
  2007 2008 2008 2009 2010 2011 2012
  Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
New Zealand superannuation 6,810 7,292 7,347 7,741 8,196 8,622 9,219
Domestic purposes benefit 1,468 1,456 1,475 1,455 1,463 1,469 1,535
Unemployment benefit 613 497 455 403 431 419 421
Invalids benefit 1,132 1,201 1,214 1,264 1,298 1,327 1,397
Family support 1,699 1,964 2,081 2,132 2,132 2,137 2,236
Accommodation supplement 877 909 888 911 935 953 977
Sickness benefit 573 608 580 548 538 530 541
Student allowances 382 402 384 398 418 429 446
Disability allowances 270 279 278 387 410 433 456
KiwiSaver subsidies 491 1,030 1,370 1,441 1,502 1,507
Other social assistance benefits 2,192 2,392 2,390 2,638 2,767 2,884 3,024
Total Social Assistance 16,016 17,491 18,122 19,247 20,029 20,705 21,759
Official development assistance 330 401 398 434 499 568 568
Total Social Assistance and Official Development
Assistance
16,346 17,892 18,520 19,681 20,528 21,273 22,327

ACC payments are now classified as insurance expenses under NZ IFRS (refer note 7).

NOTE 4: Personnel Expenses
  2007 2008 2008 2009 2010 2011 2012
  Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
Core Crown 5,092 5,434 5,621 5,846 5,800 5,857 5,870
Crown entities 8,183 8,213 8,624 8,976 9,162 9,321 9,313
State-owned enterprises 2,018 2,011 2,186 2,248 2,316 2,404 2,443
Inter-segment eliminations (9) (1) (9) (9) (10) (10) (10)
Total Personnel Expenses 15,284 15,657 16,422 17,061 17,268 17,572 17,616
NOTE 5: Operating Expenses
  2007 2008 2008 2009 2010 2011 2012
  Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
Core Crown 30,120 30,102 30,791 34,027 33,741 34,194 34,269
Crown entities 13,485 15,291 14,789 15,773 15,898 16,053 16,150
State-owned enterprises 8,294 9,180 9,434 10,017 10,549 11,098 11,357
Inter-segment eliminations (20,922) (22,280) (22,179) (23,814) (24,101) (24,116) (24,109)
Total Operating Expenses 30,977 32,293 32,835 36,003 36,087 37,229 37,667
NOTE 6: Interest Expenses
  2007 2008 2008 2009 2010 2011 2012
  Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
By type              
Interest on financial liabilities 2,867 2,335 2,930 2,482 2,469 2,748 2,866
Interest unwind on provisions 18 413 24 21 21 21 20
Total Interest Expenses 2,885 2,748 2,954 2,503 2,490 2,769 2,886
By source              
Core Crown 2,330 2,245 2,527 2,406 2,341 2,606 2,648
Crown entities 265 306 275 294 301 297 310
State-owned Enterprises 685 704 734 442 511 553 630
Inter-segment eliminations (395) (507) (582) (639) (663) (687) (702)
Total Interest Expenses 2,885 2,748 2,954 2,503 2,490 2,769 2,886
NOTE 7: Insurance Expenses
  2007 2008 2008 2009 2010 2011 2012
  Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
By type              
ACC 3,143 2,965 4,001 3,749 4,088 4,380 4,682
Earthquake Commission 77 37 82 39 40 40 41
Other insurance expenses 18 8 12 11 12 12 12
Total Insurance Expenses 3,238 3,010 4,095 3,799 4,140 4,432 4,735
NOTE 8: Forecast New Operating Spending
  2007 2008 2008 2009 2010 2011 2012
  Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
New operating spending up to Budget 2009 314 249 210 209 219
Forecast for future new spending 1,564 3,167 4,898
Total Forecast New Operating Spending 314 249 1,774 3,376 5,117
Top-down expense adjustment (240) (495) (450) (450) (450)

New operating spending up to Budget 2009 represents expenses included in Budget 2008 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 remaining budget round. As some of this spending has already been allocated to the Defence funding package, this line represents the unallocated portion. Total potential spending increases included in the forecasts are $1.75 billion for the next four Budgets.

NOTE 9: Gains and Losses on Financial Instruments
  2007 2008 2008 2009 2010 2011 2012
  Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
By source              
Core Crown 1,179 1,155 200 1,377 1,612 1,864 2,105
Crown entities 365 485 (691) 354 335 367 398
State-owned enterprises 63 18 (138) (50) (60) (76) (69)
Inter-segment eliminations (41) (281) (195) (257) (262) (265) (263)
Net Gains/(Losses) on Financial Instruments 1,566 1,377 (824) 1,424 1,625 1,890 2,171
NOTE 10:  Gains and Losses on Non-Financial Instruments
  2007 2008 2008 2009 2010 2011 2012
  Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
Actuarial gains/(losses) on GSF liability 1,133 (906)
Actuarial gains/(losses) on ACC outstanding claims (481) (1,059)
Other (166) (42) 170 176 183 190
Net Gains/(Losses) on Non-Financial Instruments 486 (2,007) 170 176 183 190
By source              
Core Crown 1,163 (1,057) 8 9 9 10
Crown entities (495) (1,078)
State-owned enterprises (181) 128 162 167 174 180
Inter-segment eliminations (1)
Net Gains/(Losses) on Non-Financial Instruments 486 (2,007) 170 176 183 190
NOTE 11: Source of Operating Balance
  2007 2008 2008 2009 2010 2011 2012
  Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
Core Crown 6,510 4,464 3,729 1,436 1,445 1,329 1,391
Crown entities 1,023 1,242 (1,285) 1,147 925 914 861
State-owned enterprises 807 1,068 747 1,067 1,137 1,028 1,020
Inter-segment eliminations (317) (343) (632) (545) (498) (492) (538)
Total Operating Balance 8,023 6,431 2,559 3,105 3,009 2,779 2,734
NOTE 12:  Financial Assets
  2007 2008 2008 2009 2010 2011 2012
  Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
Cash and cash equivalents 4,163 3,196 5,217 6,412 6,725 7,327 7,682
Tax receivables 6,368 7,078 6,005 6,139 5,823 5,567 5,384
Trade and other receivables 5,690 5,469 6,321 6,610 6,772 6,936 7,054
Student loans (refer note 13) 6,011 6,252 6,278 6,718 7,161 7,604 8,044
Kiwibank mortgages 3,637 5,127 5,751 8,137 10,067 10,067 10,067
Long-term deposits 2,110 2,037 1,741 1,785 1,812 1,339 1,561
Reserve position at the IMF 183 212 151 141 131 120 109
Other advances 2,145 1,459 1,878 1,867 1,872 1,851 1,842
Share investments 13,581 17,273 12,790 13,700 15,608 17,603 19,517
Derivatives in gain 2,352 464 1,167 565 496 465 436
Other marketable securities 27,480 32,421 33,306 32,786 32,140 34,530 33,254
Total Financial Assets 73,720 80,988 80,605 84,860 88,607 93,409 94,950
Financial assets by portfolio              
Reserve Bank and DMO managed funds 22,577 26,013 23,559 21,026 17,661 17,836 13,859
NZ Superannuation Fund 12,576 15,439 13,816 16,821 20,149 23,867 27,896
Other core Crown 14,403 14,311 16,021 16,382 16,465 16,690 16,999
Intra-segment eliminations (952) (1,536) (587) (775) (1,000) (1,270) (1,614)
Total Core Crown 48,604 54,227 52,809 53,454 53,275 57,123 57,140
ACC portfolio 10,588 11,695 11,864 12,916 13,953 14,959 15,897
EQC portfolio 1,920 2,174 1,814 1,963 2,124 2,298 2,485
Other Crown entities 4,078 3,670 3,894 3,895 3,999 4,117 4,255
Total  Crown Entities 16,586 17,539 17,572 18,774 20,076 21,374 22,637
Total  State-Owned Enterprises 8,530 9,222 10,224 12,632 15,256 14,912 15,173
Total Financial Assets by portfolio 73,720 80,988 80,605 84,860 88,607 93,409 94,950
NOTE 13:  Student Loans
  2007 2008 2008 2009 2010 2011 2012
  Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
Nominal value (including accrued interest) 9,413 9,983 10,012 10,642 11,284 11,928 12,573
Opening book value 5,569 5,761 6,011 6,278 6,718 7,161 7,604
Amount borrowed in the year 1,176 1,278 1,210 1,305 1,399 1,483 1,568
Initial fair value write down on new borrowings (488) (526) (487) (525) (563) (597) (631)
Repayments made during the year (555) (621) (611) (675) (758) (838) (924)
Interest unwind 360 391 414 445 475 506 536
Impairment (151) (31) (260) (110) (110) (110) (110)
Other movements 100 1 (1) 1
Closing book value 6,011 6,252 6,278 6,718 7,161 7,604 8,044
NOTE 14: Property, Plant and Equipment
  2007 2008 2008 2009 2010 2011 2012
  Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
By Class of asset              
Net Carrying Value              
Land (valuation) 21,140 18,963 21,418 21,586 21,751 21,891 21,952
Buildings (valuation) 20,777 21,349 21,368 21,775 22,227 22,327 22,312
Electricity distribution network (cost) 1,972 2,219 2,060 2,343 2,790 3,387 3,824
Electricity generation assets (valuation) 10,402 10,057 11,059 11,882 12,541 13,151 14,043
Aircraft (excl military) (valuation) 2,104 2,064 1,955 1,756 1,808 2,695 2,848
State highways (valuation) 19,400 19,415 20,220 20,937 21,470 22,040 22,667
Rail network (valuation) 10,568 10,804 10,581 10,917 11,248 11,348 11,221
Specialist military equipment (valuation) 3,079 3,628 3,157 3,160 3,148 2,891 2,464
Other plant and equipment (cost) 3,805 5,882 4,146 4,513 4,478 4,305 4,104
Specified cultural and heritage assets (valuation) 2,351 1,569 2,391 2,407 2,424 2,446 2,467
Total Property, Plant and Equipment 95,598 95,950 98,355 101,276 103,885 106,481 107,902
By source              
Core Crown 26,213 26,492 26,458 26,827 27,079 26,860 26,416
Crown entities 41,296 40,327 42,683 43,868 44,723 45,479 46,165
State-owned enterprises 28,087 29,131 29,214 30,580 32,083 34,143 35,320
Inter-segment eliminations 2    -      -  1    -  (1) 1
Total Property, Plant and Equipment 95,598 95,950 98,355 101,276 103,885 106,481 107,902
NOTE 15: NZ Superannuation Fund
  2007 2008 2008 2009 2010 2011 2012
  Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
Revenue 436 447 381 427 516 612 715
Other expenses (52) 109 51 154 177 204 231
Tax expenses 707 349 259 323 404 480 560
Gains/(losses) 1,313 866 (686) 1,068 1,345 1,597 1,850
Operating Balance 1,094 855 (615) 1,018 1,280 1,525 1,774
Opening net worth 9,855 12,973 12,973 14,461 17,721 21,152 24,947
Gross contribution from the Crown 2,049 2,103 2,103 2,242 2,151 2,270 2,290
Income after tax 1,094 855 (615) 1,018 1,280 1,525 1,774
Other movements in reserves (25)
Closing Net Worth 12,973 15,931 14,461 17,721 21,152 24,947 29,011
comprising:              
Financial assets 12,576 15,439 13,816 16,821 20,149 23,867 27,896
Net other assets 397 492 645 900 1,003 1,080 1,115
Closing Net Worth 12,973 15,931 14,461 17,721 21,152 24,947 29,011
Reconciliation Core Crown to Core Crown
excluding NZSF net revenue
             
Core Crown revenue 58,211 59,402 61,936 61,891 63,664 66,416 69,159
Less NZSF revenue 436 447 381 427 516 612 715
Add back NZSF tax 707 349 259 323 404 480 560
Core Crown revenue excluding NZS Fund 58,482 59,304 61,814 61,787 63,552 66,284 69,004
OBEGAL 5,860 4,958 5,227 1,318 1,004 493 154
Less NZSF revenue 436 447 381 427 516 612 715
Less NZSF expenses 119 110 114 140 156 182 208
Add back NZSF tax 707 349 259 323 404 480 560
OBEGAL excluding NZS Fund 6,250 4,970 5,219 1,354 1,048 543 207
NOTE 16: Payables
  2007 2008 2008 2009 2010 2011 2012
  Actual Previous
Budget
Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
Accounts payable 4,896 5,556 5,244 5,318 5,345 5,313 5,440
Taxes repayable 3,179 3,480 3,179 3,179 3,179 3,179 3,179
Total Payables 8,075 9,036 8,423 8,497 8,524 8,492 8,619
By source              
Core Crown 5,334 5,181 5,256 5,235 5,010 5,050 5,187
Crown entities 4,169 4,164 3,917 3,910 3,919 3,866 3,839
State-owned enterprises 3,719 3,446 4,124 4,079 4,237 4,152 4,224
Inter-segment eliminations (5,147) (3,755) (4,874) (4,727) (4,642) (4,576) (4,631)
Total Payables 8,075 9,036 8,423 8,497 8,524 8,492 8,619
NOTE 17: Insurance Liabilities
  2007 2008 2008 2009 2010 2011 2012
  Actual Previous
Budget
Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
ACC liability 17,328 18,949 20,663 21,976 23,354 24,771 26,255
EQC liability 68 42 79 79 79 79 79
Other insurance liabilities 22 20 10 10 11 11 12
Total Insurance Liabilities 17,418 19,011 20,752 22,065 23,444 24,861 26,346

ACC liability

Calculation information

PricewaterhouseCoopers Actuarial Pty Ltd have prepared an independent actuarial estimate of the ACC outstanding claims liability as at 31 December 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 estimate has been updated as at 31 March 2008 to reflect material changes to those expected

future payments identified since 31 December 2007.

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 6.23% (6.61% at 30 June 2007). 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.

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.

NOTE 17: Insurance Liabilities (continued)
  2007 2008 2008 2009 2010 2011 2012
  Actual Previous
Budget
Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
Gross ACC liability              
Opening gross liability 15,761 17,924 17,328 20,663 21,976 23,354 24,771
Net change 1,567 1,025 3,335 1,313 1,378 1,417 1,484
Closing gross liability 17,328 18,949 20,663 21,976 23,354 24,771 26,255
Less net assets available to ACC              
Opening net asset value 10,298 11,724 11,757 12,735 13,826 14,740 15,520
Net change 1,459 1,024 978 1,091 914 780 646
Closing net asset value 11,757 12,748 12,735 13,826 14,740 15,520 16,166
Net ACC reserves (net liability)              
Opening reserves position (5,463) (6,200) (5,571) (7,928) (8,150) (8,614) (9,251)
Net change (108) (1) (2,357) (222) (464) (637) (838)
Closing reserves position (net liability) (5,571) (6,201) (7,928) (8,150) (8,614) (9,251) (10,089)
NOTE 18: Retirement Plan Liabilities
  2007 2008 2008 2009 2010 2011 2012
  Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
Government Superannuation Fund 7,160 8,402 8,141 8,216 8,249 8,253 8,216
Other funds 1 12 5 5 5 5 6
Total Retirement Plan Liabilities 7,161 8,414 8,146 8,221 8,254 8,258 8,222

The net liability of the Government Superannuation Fund (GSF), as at 29 February 2008 (the valuation date), has been calculated by the Government Actuary for inclusion within the 2008 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 29 February 2008 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 2008 Budget Update was calculated using discount rates derived from the market yield curve as at 29 February 2008. This resulted in long-term before-tax discount rates ranging from 7.31% in 2008 to 5.73% 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 2007/08 projected movement in the net liability is $981 million, reflecting an increase in the GSF liability of $659 million and a decrease in the GSF assets of $322 million.

The increase in the projected GSF liability of $659 million includes an actuarial loss of $563 million at 29 February 2008, of which $75 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 decrease in the projected GSF assets of $322 million includes an actuarial loss of $363 million at 31 October 2007 reflecting the recent equity market downturn resulting from the US economic slowdown. The remaining increase in GSF assets is 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.

NOTE 18: Retirement Plan Liabilities (continued)
  2007 2008 2008 2009 2010 2011 2012
  Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
GSF net defined benefit retirement liability              
GSF liability              
Opening GSF liability 12,098 12,365 11,167 11,826 11,947 12,016 12,049
Net projected change (931) 158 659 121 69 33 (16)
Closing GSF liability 11,167 12,523 11,826 11,947 12,016 12,049 12,033
Less net assets available to GSF              
Opening net asset value 3,799 4,014 4,007 3,685 3,731 3,767 3,796
Investment valuation changes 354 225 (143) 222 225 228 230
Contribution and other income less membership payments (146) (118) (179) (176) (189) (199) (209)
Closing net asset value 4,007 4,121 3,685 3,731 3,767 3,796 3,817
Net GSF liability              
Opening unfunded liability 8,299 8,351 7,160 8,141 8,216 8,249 8,253
Net projected change (1,139) 51 981 75 33 4 (37)
Closing unfunded liability 7,160 8,402 8,141 8,216 8,249 8,253 8,216
NOTE 19: Provisions
  2007 2008 2008 2009 2010 2011 2012
  Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
Provision for Kyoto 704 557 482 482 482 482 482
Provision for ETS credits 618 685 492 121
Provision for National Provident Fund guarantee 771 805 780 780 780 780 780
Provision for employee entitlements 1,828 1,621 1,738 1,747 1,768 1,782 1,793
Other provisions 1,257 867 1,045 1,084 1,126 1,142 1,163
Total Provisions 4,560 3,850 4,045 4,711 4,841 4,678 4,339
By source              
Core Crown 2,537 2,267 2,353 2,862 2,978 2,833 2,519
Crown entities 1,195 1,042 1,214 1,220 1,236 1,243 1,247
State-owned enterprises 852 757 610 652 660 644 635
Inter-segment eliminations (24) (216) (132) (23) (33) (42) (62)
Total Provisions 4,560 3,850 4,045 4,711 4,841 4,678 4,339
Analysis of Provision for Kyoto              
Opening balance 656 557 704 482 482 482 482
Change in price of carbon (20) 145
Change in net projected emission units 68 (367)
Closing balance 704 557 482 482 482 482 482

Analysis of Provision for ETS credits

The Emissions Trading Scheme (ETS) was established to encourage reduction in greenhouse gas emissions. The ETS creates a limited number of tradable units (the NZ Unit) which the Government can allocate freely or sell to entities. The allocation of NZ Units creates a provision (and an expense if allocated for free). The provision is reduced, and revenue recognised, as NZ Units are surrended to the Crown by emitters. Emitters can also use international Kyoto units to settle their emission obligation, which will occur where emissions exceed the number of allocated NZ units.

 

NOTE 19: Provisions (continued)
  2007 2008 2008 2009 2010 2011 2012
  Actual

Previous
Budget

Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
The ETS impact on the fiscal forecast is as follows:              
Revenue 131 289 716 894
Expenses 749 356 523 523
OBEGAL (618) (67) 193 371
Provision for ETS credits 618 685 492 121
NOTE 20: Net Worth attributable to the Crown
  2007 2008 2008 2009 2010 2011 2012
  Actual Previous
Budget
Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
Taxpayers funds 44,222 48,239 46,767 49,886 52,892 55,672 58,406
Property, plant and equipment revaluation reserve 52,442 47,402 52,498 52,486 52,486 52,486 52,486
Investment revaluation reserve 23 13 29 35 35 35 35
Cash flow hedge reserve (122) 97 (175) (117) (99) (85) (70)
Foreign currency translation reserve (34) 17 (32) (32) (32) (31) (29)
Total net worth attributable to the Crown 96,531 95,768 99,087 102,258 105,282 108,077 110,828
Taxpayers Funds              
Opening taxpayers funds 36,214 42,219 44,222 46,767 49,886 52,892 55,672
Operating balance excluding minority interest 8,023 6,431 2,559 3,105 3,009 2,779 2,734
Transfers from/(to) other reserves (15) (411) (14) 14 (3) 1
Closing Taxpayers Funds 44,222 48,239 46,767 49,886 52,892 55,672 58,406
Property, Plant and Equipment Revaluation Reserve              
Opening revaluation reserve 47,153 47,459 52,442 52,498 52,486 52,486 52,486
Net revaluations 5,262 2 43
Transfers from/(to) other reserves 27 (59) 13 (12)
Closing Property, Plant and Equipment Revaluation
Reserve
52,442 47,402 52,498 52,486 52,486 52,486 52,486
Investment Revaluation Reserve              
Opening investment revaluation reserve 13 13 23 29 35 35 35
Valuation gain/(losses) on investments available for sale
taken to reserves
10 6 6
Closing Investment Revaluation Reserve 23 13 29 35 35 35 35
Cash Flow Hedge Reserve              
Opening cash flow hedge reserve 281 62 (122) (175) (117) (99) (85)
Transfer into reserve (331) (39) (2) 58 19 13 17
Transfer to the statement of financial performance (59) 74 (15) (1) 1 (2)
Transfer to initial carrying value of hedged item (13) (36)
Closing Cash Flow Hedge Reserve (122) 97 (175) (117) (99) (85) (70)
Foreign Currency Translation Reserve              
Opening foreign currency translation reserve 31 17 (34) (32) (32) (32) (31)
Movement arising from translation of foreign operations (65) 2 1 2
Closing Foreign Currency Translation Reserve (34) 17 (32) (32) (32) (31) (29)
NOTE 21: Reconciliation of core Crown operating cash flows to residual core Crown cash
  2007 2008 2008 2009 2010 2011 2012
  Actual Previous
Budget
Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m $m $m
Core Crown Cash Flows from Operations              
Total tax receipts 53,278 55,121 56,392 55,599 58,066 60,276 62,615
Total other sovereign receipts 395 477 494 530 539 551 561
Interest, profits and dividends 1,896 1,857 1,980 2,232 1,990 2,055 2,031
Sale of goods & services and other receipts 1,433 1,472 1,654 1,658 1,656 1,691 1,742
Subsidies and transfer payments (17,234) (18,789) (19,931) (21,068) (22,259) (23,084) (24,095)
Personnel and operating costs (28,962) (32,610) (31,478) (34,224) (34,257) (34,094) (33,982)
Finance costs (2,220) (2,176) (2,333) (2,282) (2,282) (2,424) (2,521)
Forecast for future new operating spending (314) (249) (1,774) (3,376) (5,117)
Top-down expense adjustment 240 355 310 310 310
Net Cash Flows from core Crown Operations 8,586 5,038 7,018 2,551 1,989 1,905 1,544
Net purchase of physical assets (1,755) (1,803) (1,544) (1,891) (1,683) (1,327) (1,146)
Net increase in advances (1,125) (1,088) (1,254) (821) (626) (760) (541)
Net purchase of investments (281) (636) (519) (1,164) (229) (218) (97)
Contribution to NZ Superannuation Fund (2,048) (2,103) (2,103) (2,242) (2,151) (2,270) (2,290)
Purchase of Reserve Bank reserves (500) (200)
Forecast for future new capital spending (184) (690) (261) (602) (777) (927)
Top-down capital adjustment 350
Residual Cash 2,877 (976) 908 (3,478) (3,302) (3,447) (3,457)
Financed by:              
Other net sale/(purchase) of marketable securities
and deposits
(5,040) (1,649) (2,863) 2,643 3,401 (279) 3,807
Total Operating and Investing Activities (2,163) (2,625) (1,955) (835) 99 (3,726) 350
Used in:              
Net repayment/(issue) of other New Zealand-dollar
borrowing
1,120 709 167 399 121 (49) 238
Net repayment/(issue) of foreign currency borrowing 1,775 (993) (504) (541) (163) (49) (479)
Issues of circulating currency 81 178 260 181 190 200 210
Decrease/(increase) in cash (479) 3 (572) (29) 55 (15) 52
  2,497 (103) (649) 10 203 87 21
Net Cash Inflow/(Outflow) to be Offset by
Domestic Bonds
334 (2,728) (2,604) (825) 302 (3,639) 371
Gross Cash Proceeds from Domestic Bonds              
Domestic bonds (market) 2,294 2,520 2,415 3,314 3,393 3,394 3,365
Domestic bonds (non-market) 570 208 189 662 851 245 1,286
Total Gross Cash Proceeds from Domestic Bonds 2,864 2,728 2,604 3,976 4,244 3,639 4,651
Repayment of domestic bonds (market) (2,777) (2,700) (3,947) (3,976)
Repayment of domestic bonds (non-market) (421) (451) (599) (1,046)
Net (Repayments of)/Cash Proceeds from
Domestic Bonds
(334) 2,728 2,604 825 (302) 3,639 (371)
Statement of Financial Performance for the year ended 30 June 2007
  Core Crown Crown Entities State-owned
Enterprises
Inter-segment
eliminations
Total Crown
  2007 2007 2007 2007 2007
  Actual Actual Actual Actual Actual
  $m $m $m $m $m
Revenue          
Taxation revenue 53,477 (413) 53,064
Other sovereign revenue 636 3,640 (780) 3,496
Sales of goods and services 1,095 11,322 10,701 (10,505) 12,613
Interest revenue and dividends 2,580 756 484 (825) 2,995
Other revenue 423 10,482 703 (9,187) 2,421
Total Revenue (excluding gains) 58,211 26,200 11,888 (21,710) 74,589
Expenses          
Social assistance and official development
assistance
16,453 (107) 16,346
Personnel expenses 5,092 8,183 2,018 (9) 15,284
Other operating expenses 30,128 16,709 8,301 (20,924) 34,214
Interest expenses 2,330 265 685 (395) 2,885
Forecast for future new spending
Total Expenses (excluding losses) 54,003 25,157 11,004 (21,435) 68,729
Operating Balance before gains/(losses) 4,208 1,043 884 (275) 5,860
Total Gains/(losses) 2,342 (130) (118) (42) 2,052
Net surplus/(deficit) from associates and
joint ventures
53 108 30 191
Gain/(loss) from discontinued operations (92) (92)
Attributable to minority interest in Air NZ 12 12
Operating Balance 6,511 1,021 808 (317) 8,023
Expenses by functional classification          
Social security and welfare 16,768 3,665 (604) 19,829
Health 10,355 8,972 (8,666) 10,661
Education 9,269 6,900 24 (6,340) 9,853
Transport and communications 2,405 1,598 5,338 (2,351) 6,990
Other 12,876 3,757 4,957 (3,079) 18,511
Finance costs 2,330 265 685 (395) 2,885
Forecast for future new spending
Total Crown Expenses excluding losses 54,003 25,157 11,004 (21,435) 68,729
Statement of Financial Position as at 30 June 2007
  Core Crown Crown Entities State-owned
Enterprises
Inter-segment
eliminations
Total Crown
  2007 2007 2007 2007 2007
  Actual Actual Actual Actual Actual
  $m $m $m $m $m
Assets          
Cash and cash equivalents 1,118 2,812 492 (259) 4,163
Receivables 7,590 3,687 1,729 (948) 12,058
Other financial assets 43,377 16,044 6,721 (8,643) 57,499
Property, plant & equipment 26,213 41,296 28,087 2 95,598
Equity accounted investments 25,049 6,331 88 (24,467) 7,001
Intangible assets and goodwill 804 377 495 1 1,677
Other assets 1,062 244 829 218 2,353
Forecast for new capital spending
Total Assets 105,213 70,791 38,441 (34,096) 180,349
Liabilities          
Borrowings 35,885 4,430 10,293 (8,710) 41,898
Other liabilities 18,538 23,032 5,346 (5,292) 41,624
Total Liabilities 54,423 27,462 15,639 (14,002) 83,522
Total Assets less Total Liabilities 50,790 43,329 22,802 (20,094) 96,827
Net Worth          
Taxpayer funds 39,110 20,978 7,139 (23,005) 44,222
Reserves 11,680 22,351 15,261 3,017 52,309
Net worth attributable to minority
interest in Air NZ
402 (106) 296
Total Net Worth 50,790 43,329 22,802 (20,094) 96,827
Statement of Financial Performance for the year ended 30 June 2008
  Core Crown Crown Entities

State-owned
Enterprises

Inter-segment
eliminations

Total Crown
  2008 2008 2008 2008 2008
  Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m
Revenue          
Taxation revenue 56,673 (487) 56,186
Other sovereign revenue 673 4,061 (883) 3,851
Sales of goods and services 1,161 12,080 11,711 (11,270) 13,682
Interest revenue and dividends 2,562 1,085 509 (953) 3,203
Other revenue 867 10,911 874 (9,761) 2,891
Total Revenue (excluding gains) 61,936 28,137 13,094 (23,354) 79,813
Expenses          
Social assistance and official development
assistance
18,666 (146) 18,520
Personnel expenses 5,621 8,624 2,186 (9) 16,422
Other operating expenses 30,790 18,874 9,443 (22,177) 36,930
Interest expenses 2,527 275 734 (582) 2,954
Forecast for future new spending and top down
adjustment
(240) (240)
Total Expenses (excluding losses) 57,364 27,773 12,363 (22,914) 74,586
Operating Balance before gains/(losses) 4,572 364 731 (440) 5,227
Total Gains/(losses) (860) (1,768) (10) (193) (2,831)
Net surplus/(deficit) from associates and
joint ventures
19 120 26 1 166
Gain/(loss) from discontinued operations (3) (3)
Attributable to minority interest in Air NZ
Operating Balance 3,728 (1,284) 747 (632) 2,559
Expenses by functional classification          
Social security and welfare 18,071 4,870 (667) 22,274
Health 11,343 9,512 (10,090) 10,765
Education 10,046 7,563 24 (6,830) 10,803
Transport and communications 2,290 1,492 5,827 (2,424) 7,185
Other 13,327 4,061 5,778 (2,321) 20,845
Finance costs 2,527 275 734 (582) 2,954
Forecast for future new spending and top
down adjustment
(240) (240)
Total Crown Expenses excluding losses 57,364 27,773 12,363 (22,914) 74,586
Statement of Financial Position as at 30 June 2008
  Core Crown Crown Entities

State-owned
Enterprises

Inter-segment
eliminations

Total Crown
  2008 2008 2008 2008 2008
  Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m
Assets          
Cash and cash equivalents 1,846 3,203 415 (247) 5,217
Receivables 7,108 4,260 1,742 (784) 12,326
Other financial assets 47,336 16,018 8,243 (8,535) 63,062
Property, plant & equipment 26,458 42,683 29,215 (1) 98,355
Equity accounted investments 25,709 6,606 193 (24,989) 7,519
Intangible assets and goodwill 915 312 546 (1) 1,772
Other assets 1,040 252 860 (48) 2,104
Forecast for new capital spending 690 690
Total Assets 111,102 73,334 41,214 (34,605) 191,045
Liabilities          
Borrowings 37,034 4,650 12,608 (8,746) 45,546
Other liabilities 19,513 26,130 5,732 (5,259) 46,116
Total Liabilities 56,547 30,780 18,340 (14,005) 91,662
Total Assets less Total Liabilities 54,555 42,554 22,874 (20,600) 99,383
Net Worth          
Taxpayer funds 42,825 20,191 7,366 (23,615) 46,767
Reserves 11,730 22,363 15,212 3,015 52,320
Net worth attributable to minority interest in Air NZ 296 296
Total Net Worth 54,555 42,554 22,874 (20,600) 99,383
Statement of Financial Performance for the year ended 30 June 2009
  Core Crown Crown Entities

State-owned
Enterprises

Inter-segment
eliminations

Total Crown
  2009 2009 2009 2009 2009
  Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m
Revenue          
Taxation revenue 56,523 (612) 55,911
Other sovereign revenue 828 4,149 (940) 4,037
Sales of goods and services 1,238 12,004 12,358 (11,378) 14,222
Interest revenue and dividends 2,835 1,083 239 (799) 3,358
Other revenue 467 12,268 1,042 (11,186) 2,591
Total Revenue (excluding gains) 61,891 29,504 13,639 (24,915) 80,119
Expenses          
Social assistance and official development assistance 19,846 (165) 19,681
Personnel expenses 5,846 8,976 2,248 (9) 17,061
Other operating expenses 34,031 19,563 10,025 (23,817) 39,802
Interest expenses 2,406 294 442 (639) 2,503
Forecast for future new spending and top down adjustment (246) (246)
Total Expenses (excluding losses) 61,883 28,833 12,715 (24,630) 78,801
Operating Balance before gains/(losses) 8 671 924 (285) 1,318
Total Gains/(losses) 1,381 354 112 (253) 1,594
Net surplus/(deficit) from associates and joint ventures 41 122 31 (1) 193
Gain/(loss) from discontinued operations
Attributable to minority interest in Air NZ
Operating Balance 1,430 1,147 1,067 (539) 3,105
Expenses by functional classification          
Social security and welfare 18,898 4,663 (718) 22,843
Health 12,586 9,959 (10,521) 12,024
Education 10,524 7,720 24 (7,251) 11,017
Transport and communications 2,823 1,912 6,234 (2,942) 8,027
Other 14,892 4,285 6,015 (2,559) 22,633
Finance costs 2,406 294 442 (639) 2,503
Forecast for future new spending and top down adjustment (246) (246)
Total Crown Expenses excluding losses 61,883 28,833 12,715 (24,630) 78,801
Statement of Financial Position as at 30 June 2009
  Core Crown Crown Entities

State-owned
Enterprises

Inter-segment
eliminations

Total Crown
  2009 2009 2009 2009 2009
  Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m
Assets          
Cash and cash equivalents 3,047 3,224 389 (248) 6,412
Receivables 7,201 4,437 1,909 (798) 12,749
Other financial assets 46,952 17,300 10,512 (9,065) 65,699
Property, plant & equipment 26,827 43,868 30,582 (1) 101,276
Equity accounted investments 27,019 6,832 246 (25,414) 8,683
Intangible assets and goodwill 1,053 337 538 1 1,929
Other assets 1,183 272 893 (44) 2,304
Forecast for new capital spending 601 601
Total Assets 113,883 76,270 45,069 (35,569) 199,653
Liabilities          
Borrowings 37,639 4,621 15,719 (9,323) 48,656
Other liabilities 20,252 27,439 5,751 (4,999) 48,443
Total Liabilities 57,891 32,060 21,470 (14,322) 97,099
Total Assets less Total Liabilities 55,992 44,210 23,599 (21,247) 102,554
Net Worth          
Taxpayer funds 44,274 21,836 8,054 (24,278) 49,886
Reserves 11,718 22,374 15,249 3,031 52,372
Net worth attributable to minority interest
in Air NZ
296 296
Total Net Worth 55,992 44,210 23,599 (21,247) 102,554
Statement of Financial Performance for the year ended 30 June 2010
  Core Crown Crown Entities

State-owned
Enterprises

Inter-segment
eliminations

Total Crown
  2010 2010 2010 2010 2010
  Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m
Revenue          
Taxation revenue 58,228 (583) 57,645
Other sovereign revenue 998 4,301 (957) 4,342
Sales of goods and services 1,265 12,052 12,992 (11,445) 14,864
Interest revenue and dividends 2,702 1,136 263 (849) 3,252
Other revenue 471 12,468 1,131 (11,332) 2,738
Total Revenue (excluding gains) 63,664 29,957 14,386 (25,166) 82,841
Expenses          
Social assistance and official development assistance 20,684 (156) 20,528
Personnel expenses 5,800 9,162 2,316 (10) 17,268
Other operating expenses 33,741 20,029 10,558 (24,101) 40,227
Interest expenses 2,341 301 511 (663) 2,490
Forecast for future new spending and top down adjustment 1,324 1,324
Total Expenses (excluding losses) 63,890 29,492 13,385 (24,930) 81,837
Operating Balance before gains/(losses) (226) 465 1,001 (236) 1,004
Total Gains/(losses) 1,620 335 107 (261) 1,801
Net surplus/(deficit) from associates and joint ventures 50 125 29 204
Gain/(loss) from discontinued operations
Attributable to minority interest in Air NZ -  
Operating Balance 1,444 925 1,137 (497) 3,009
Expenses by functional classification          
Social security and welfare 19,566 5,057 (735) 23,888
Health 12,538 9,980 (10,569) 11,949
Education 10,892 7,958 24 (7,539) 11,335
Transport and communications 2,731 1,890 6,406 (2,871) 8,156
Other 14,498 4,306 6,444 (2,553) 22,695
Finance costs 2,341 301 511 (663) 2,490
Forecast for future new spending and top down adjustment 1,324 1,324
Total Crown Expenses excluding losses 63,890 29,492 13,385 (24,930) 81,837
Statement of Financial Position as at 30 June 2010
  Core Crown Crown Entities State-owned
Enterprises
Inter-segment
eliminations
Total Crown
  2010 2010 2010 2010 2010
  Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m
Assets          
Cash and cash equivalents 3,361 3,264 344 (244) 6,725
Receivables 6,871 4,636 1,902 (814) 12,595
Other financial assets 46,841 18,697 12,488 (8,739) 69,287
Property, plant & equipment 27,079 44,723 32,082 1 103,885
Equity accounted investments 27,276 6,984 315 (26,281) 8,294
Intangible assets and goodwill 1,089 328 535 1,952
Other assets 1,253 256 970 (25) 2,454
Forecast for new capital spending 1,203 1,203
Total Assets 114,973 78,888 48,636 (36,102) 206,395
Liabilities          
Borrowings 37,173 4,719 18,406 (9,682) 50,616
Other liabilities 20,364 28,822 5,917 (4,902) 50,201
Total Liabilities 57,537 33,541 24,323 (14,584) 100,817
Total Assets less Total Liabilities 57,436 45,347 24,313 (21,518) 105,578
Net Worth          
Taxpayer funds 45,718 22,955 8,768 (24,549) 52,892
Reserves 11,718 22,392 15,249 3,031 52,390
Net worth attributable to minority interest in Air NZ 296 296
Total Net Worth 57,436 45,347 24,313 (21,518) 105,578
Statement of Financial Performance for the year ended 30 June 2011
  Core Crown Crown Entities

State-owned
Enterprises

Inter-segment
eliminations

Total Crown
  2011 2011 2011 2011 2011
  Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m
Revenue          
Taxation revenue 60,319 (576) 59,743
Other sovereign revenue 1,439 4,437 (1,000) 4,876
Sales of goods and services 1,308 12,113 13,842 (11,479) 15,784
Interest revenue and dividends 2,879 1,183 225 (877) 3,410
Other revenue 471 12,779 897 (11,266) 2,881
Total Revenue (excluding gains) 66,416 30,512 14,964 (25,198) 86,694
Expenses          
Social assistance and official development
assistance
21,432 (159) 21,273
Personnel expenses 5,857 9,321 2,404 (10) 17,572
Other operating expenses 34,195 20,475 11,108 (24,117) 41,661
Interest expenses 2,606 297 553 (687) 2,769
Forecast for future new spending and top down
adjustment
2,926 2,926
Total Expenses (excluding losses) 67,016 30,093 14,065 (24,973) 86,201
Operating Balance before gains/(losses) (600) 419 899 (225) 493
Total Gains/(losses) 1,870 367 98 (262) 2,073
Net surplus/(deficit) from associates and joint
ventures
55 128 30 213
Gain/(loss) from discontinued operations
Attributable to minority interest in Air NZ
Operating Balance 1,325 914 1,027 (487) 2,779
Expenses by functional classification          
Social security and welfare 20,175 5,403 (764) 24,814
Health 12,522 10,002 (10,601) 11,923
Education 11,096 8,021 24 (7,590) 11,551
Transport and communications 2,635 1,992 6,686 (2,773) 8,540
Other 15,056 4,378 6,802 (2,558) 23,678
Finance costs 2,606 297 553 (687) 2,769
Forecast for future new spending and top down
adjustment
2,926 2,926
Total Crown Expenses excluding losses 67,016 30,093 14,065 (24,973) 86,201
Statement of Financial Position as at 30 June 2011
  Core Crown Crown Entities

State-owned
Enterprises

Inter-segment
eliminations

Total Crown
  2011 2011 2011 2011 2011
  Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m
Assets          
Cash and cash equivalents 3,746 3,332 498 (249) 7,327
Receivables 6,579 4,786 1,931 (793) 12,503
Other financial assets 50,739 20,115 11,965 (9,240) 73,579
Property, plant & equipment 26,860 45,479 34,143 (1) 106,481
Equity accounted investments 27,527 7,125 320 (26,456) 8,516
Intangible assets and goodwill 1,114 313 531 1,958
Other assets 1,314 257 1,068 (24) 2,615
Forecast for new capital spending 1,980 1,980
Total Assets 119,859 81,407 50,456 (36,763) 214,959
Liabilities          
Borrowings 40,631 4,880 19,718 (10,270) 54,959
Other liabilities 20,462 30,191 5,819 (4,845) 51,627
Total Liabilities 61,093 35,071 25,537 (15,115) 106,586
Total Assets less Total Liabilities 58,766 46,336 24,919 (21,648) 108,373
Net Worth          
Taxpayer funds 47,048 23,936 9,370 (24,682) 55,672
Reserves 11,718 22,400 15,253 3,034 52,405
Net worth attributable to minority
interest in Air NZ
296 296
Total Net Worth 58,766 46,336 24,919 (21,648) 108,373
Statement of Financial Performance for the year ended 30 June 2012
  Core Crown Crown Entities

State-owned
Enterprises

Inter-segment
eliminations

Total Crown
  2012 2012 2012 2012 2012
  Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m
Revenue          
Taxation revenue 62,712 (578) 62,134
Other sovereign revenue 1,632 4,568 (1,038) 5,162
Sales of goods and services 1,360 12,193 14,254 (11,520) 16,287
Interest revenue and dividends 2,981 1,242 243 (1,005) 3,461
Other revenue 474 12,829 823 (11,118) 3,008
Forecast revenue reduction contingency
Total Revenue (excluding gains) 69,159 30,832 15,320 (25,259) 90,052
Expenses          
Social assistance and official development assistance 22,487 (160) 22,327
Personnel expenses 5,870 9,313 2,443 (10) 17,616
Other operating expenses 34,271 20,875 11,366 (24,110) 42,402
Interest expenses 2,648 310 630 (702) 2,886
Forecast for future new spending and top down adjustment 4,667 4,667
Total Expenses (excluding losses) 69,943 30,498 14,439 (24,982) 89,898
Operating Balance before gains/(losses) (784) 334 881 (277) 154
Total Gains/(losses) 2,112 398 110 (259) 2,361
Net surplus/(deficit) from associates and joint ventures 60 129 30 219
Gain/(loss) from discontinued operations
Attributable to minority interest in Air NZ
Operating Balance 1,388 861 1,021 (536) 2,734
Expenses by functional classification          
Social security and welfare 21,212 5,762 (795) 26,179
Health 12,526 10,044 (10,659) 11,911
Education 11,217 8,035 24 (7,589) 11,687
Transport and communications 2,488 1,899 6,778 (2,625) 8,540
Other 15,185 4,448 7,007 (2,612) 24,028
Finance costs 2,648 310 630 (702) 2,886
Forecast for future new spending and top down adjustment 4,667 4,667
Total Crown Expenses excluding losses 69,943 30,498 14,439 (24,982) 89,898
Statement of Financial Position as at 30 June 2012
  Core Crown Crown Entities

State-owned
Enterprises

Inter-segment
eliminations

Total Crown
  2012 2012 2012 2012 2012
  Forecast Forecast Forecast Forecast Forecast
  $m $m $m $m $m
Assets          
Cash and cash equivalents 3,972 3,389 570 (249) 7,682
Receivables 6,388 4,917 1,931 (798) 12,438
Other financial assets 50,661 21,529 12,150 (9,510) 74,830
Property, plant & equipment 26,416 46,165 35,320 1 107,902
Equity accounted investments 27,643 7,254 319 (26,523) 8,693
Intangible assets and goodwill 1,091 300 527 (1) 1,917
Other assets 1,348 258 1,153 (25) 2,734
Forecast for new capital spending 2,907 2,907
Total Assets 120,426 83,812 51,970 (37,105) 219,103
Liabilities          
Borrowings 39,815 4,982 20,673 (10,560) 54,910
Other liabilities 20,455 31,653 5,880 (4,919) 53,069
Total Liabilities 60,270 36,635 26,553 (15,479) 107,979
Total Assets less Total Liabilities 60,156 47,177 25,417 (21,626) 111,124
Net Worth          
Taxpayer funds 48,438 24,768 9,859 (24,659) 58,406
Reserves 11,718 22,409 15,262 3,033 52,422
Net worth attributable to minority interest
in Air NZ
296 296
Total Net Worth 60,156 47,177 25,417 (21,626) 111,124

6 - Core Crown Expense Tables

[13]

  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
($ million) Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast
Social security and welfare 13,907 14,252 14,682 15,598 16,768 18,071 18,898 19,566 20,175 21,212
GSF 541 591 718 761 645 714 652 625 610 582
Health 7,501 8,111 8,813 9,547 10,355 11,343 12,586 12,538 12,522 12,526
Education 7,016 7,585 7,930 9,914 9,269 10,046 10,524 10,892 11,096 11,217
Core government services 2,130 2,091 2,567 2,507 4,816 3,222 3,448 3,508 3,678 3,728
Law and order 1,734 1,843 1,977 2,235 2,699 2,943 3,101 3,078 3,085 3,086
Defence 1,199 1,311 1,275 1,383 1,517 1,566 1,741 1,800 1,891 1,964
Transport and communications 1,408 1,461 1,635 1,818 2,405 2,290 2,823 2,731 2,635 2,488
Economic and industrial services 1,054 1,192 1,444 1,592 1,595 2,828 3,244 3,281 3,414 3,461
Primary services 355 368 394 467 438 565 520 499 494 499
Heritage, culture and recreation 515 634 991 891 844 1,123 1,769 1,322 1,502 1,485
Housing and community development 102 139 163 202 255 282 334 302 299 297
Other 75 52 32 49 68 84 83 83 83 83
Finance costs 2,360 2,252 2,274 2,356 2,329 2,527 2,406 2,341 2,606 2,648
Net foreign exchange (gains)/losses  ..   ..   ..  ..   ..   ..   ..   ..   ..   ..  
Forecast for future new spending  ..   ..   ..   ..   ..   ..  249 1,774 3,376 5,117
Top- down expense adjustment  ..   ..   ..   ..   ..  ( 240) ( 495) ( 450) ( 450) ( 450)
Core Crown expenses 39,897 41,882 44,895 49,320 54,003 57,364 61,883 63,890 67,016 69,943

Source: The Treasury

Table 6.1 - Social security and welfare expenses
  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
($ million) Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast
Welfare benefits 12,884 13,181 13,326 14,246 15,435 16,448 16,972 17,608 18,163 19,144
Social rehabilitation & compensation 146 118 152 145 163 199 223 215 221 225
Departmental expenses 666 705 781 858 845 866 1,101 1,091 1,083 1,073
Other non-departmental expenses 211 248 423 349 325 558 602 652 708 770
Social security and welfare expenses 13,907 14,252 14,682 15,598 16,768 18,071 18,898 19,566 20,175 21,212

Source: The Treasury

Table 6.2 - New Zealand superannuation and welfare benefit expenses
  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
($ million) Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast
New Zealand Superannuation 5,642 5,889 6,083 6,414 6,810 7,347 7,741 8,196 8,622 9,219
Domestic Purposes Benefit 1,520 1,569 1,547 1,493 1,468 1,475 1,455 1,463 1,469 1,535
Unemployment Benefit 1,274 1,084 831 712 613 455 403 431 419 421
Invalids Benefit 914 976 1,026 1,073 1,132 1,214 1,264 1,298 1,327 1,397
Family Support 862 833 846 1,285 1,699 2,081 2,132 2,132 2,137 2,236
Accommodation Supplement 706 702 750 843 877 888 911 935 953 977
Sickness Benefit 421 470 510 541 573 580 548 538 530 541
Disability Allowance 241 257 267 261 270 278 387 410 433 456
Transitional Retirement Benefit 47 11 ..  ..  ..  ..  ..  ..  ..  .. 
Income Related Rents 296 340 370 395 434 463 496 527 556 587
In Work Tax Credit ..  ..  ..  70 461 557 587 578 583 605
Child Tax Credit 143 155 141 154 44 10 6 4 3 3
Special Benefit 82 140 175 162 106 71 ..  ..  ..  .. 
Benefits paid in Australia 121 103 91 80 71 58 51 45 38 33
Paid Parental Leave 56 63 76 96 122 137 146 158 167 177
Other benefits 559 589 613 667 755 834 845 893 926 957
Welfare benefit expenses 12,884 13,181 13,326 14,246 15,435 16,448 16,972 17,608 18,163 19,144

Source: The Treasury

Table 6.3 - Beneficiary numbers
  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
(Thousands) Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast
New Zealand Superannuation 454 461 469 482 495 509 521 535 549 569
Domestic Purposes Benefit 110 110 109 106 100 97 97 96 95 95
Unemployment Benefit 126 104 78 64 52 37 33 35 33 32
Accommodation Supplement 261 249 243 249 251 244 244 248 250 253
Invalids Benefit 67 70 74 76 78 82 86 88 89 90
Sickness Benefit 38 42 45 47 48 48 45 44 43 42

Source: The Treasury

Table 6.4 - GSF pension expenses
  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
($ million) Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast
Pension expenses 541 591 718 761 645 714 652 625 610 582
GSF pension expenses 541 591 718 761 645 714 652 625 610 582

Source: The Treasury

Table 6.5 - Health expenses
  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
($ million) Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast
Departmental outputs 148 161 157 174 180 204 224 216 212 210
Health service purchasing 6,783 7,452 8,113 8,805 9,614 10,531 11,704 11,633 11,588 11,557
Other non-departmental outputs 59 71 160 135 99 99 104 98 92 91
Health payments to ACC 482 409 356 372 425 467 511 548 586 624
Other expenses 29 18 27 61 37 42 43 43 44 44
Health expenses 7,501 8,111 8,813 9,547 10,355 11,343 12,586 12,538 12,522 12,526

Source: The Treasury

Table 6.6 - Health service purchasing
  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
($ million) Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast
Payments to District Health Boards 5,328 6,441 7,262 7,814 8,547 9,339 10,276 10,217 10,184 10,194
National Disability Support Services 1,260 793 620 699 755 834 880 875 875 875
Public Health Service Purchasing 195 218 231 292 312 358 548 541 529 488
Health service purchasing 6,783 7,452 8,113 8,805 9,614 10,531 11,704 11,633 11,588 11,557

Source: The Treasury

Table 6.7 - Education expenses
  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
($ million) Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast
Early childhood education 373 393 444 555 617 841 917 997 1,065 1,100
Primary and secondary schools 3,449 3,692 3,934 4,153 4,325 4,583 4,876 5,033 5,038 5,052
Tertiary funding 2,470 2,535 2,496 4,047 3,322 3,623 3,737 3,890 4,023 4,097
Departmental expenses 621 679 737 821 875 854 881 865 860 860
Other education expenses 103 286 319 338 130 145 113 107 110 108
Education expenses 7,016 7,585 7,930 9,914 9,269 10,046 10,524 10,892 11,096 11,217

Source: The Treasury

Table 6.8 - Primary and secondary education expenses
  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
($ million) Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast
Primary 1,749 1,884 1,964 2,062 2,141 2,275 2,423 2,563 2,578 2,591
Secondary 1,269 1,385 1,524 1,618 1,682 1,773 1,893 1,906 1,899 1,900
School transport 103 106 109 118 125 132 139 142 146 150
Special needs support 227 221 231 245 263 280 294 305 304 303
Professional Development 86 84 95 101 104 111 114 104 98 95
Schooling Improvement 15 12 11 9 10 12 13 13 13 13
Primary and secondary education expenses 3,449 3,692 3,934 4,153 4,325 4,583 4,876 5,033 5,038 5,052

Sources: Ministry of Education, The Treasury

Notes

  • [13]Historical data contained in the expense tables have been restated on a NZ IFRS basis for material changes.
Table 6.9 - Tertiary education expenses
  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
($ million) Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast
Tuition 1,729 1,770 1,647 1,865 1,962 2,183 2,206 2,295 2,370 2,385
Other tertiary funding 62 66 68 110 339 369 558 564 577 585
Tertiary student allowances 388 380 359 354 382 384 398 418 429 446
Initial fair value change in student loans ..  ..  ..  1,415 ..  ..  ..  ..  ..  .. 
Student loans 291 319 422 303 639 687 575 613 647 681
Tertiary education expenses 2,470 2,535 2,496 4,047 3,322 3,623 3,737 3,890 4,023 4,097

Sources: Ministry of Education, The Treasury

Table 6.10 - Core Government service expenses
  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
($ million) Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast
Official development assistance 230 237 297 330 330 413 434 499 568 568
Indemnity and guarantee expenses 197 9 ..  ..  ..  ..  ..  ..  ..  .. 
Departmental expenses 1,025 1,096 1,570 1,403 1,402 1,509 1,607 1,583 1,618 1,614
Non-Departmental Expenses         237 197 244 389 433 462
Tax receivable write-down 350 350 350 338 2,479 713 722 614 633 653
Science expenses 250 283 170 157 163 169 186 192 193 195
Other expenses 78 116 180 279 205 221 255 231 233 236
Core Government service expenses 2,130 2,091 2,567 2,507 4,816 3,222 3,448 3,508 3,678 3,728

Source: The Treasury

Table 6.11 - Law and order expenses
  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
($ million) Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast
Police 800 844 896 976 1,086 1,209 1,264 1,256 1,259 1,260
Ministry of Justice 15 178 257 299 454 368 390 374 369 370
Department of Corrections 403 439 483 572 662 787 830 841 845 844
Department for Courts 211 53 ..  ..  ..  ..  ..  ..  ..  .. 
Other departments 77 81 72 76 60 105 119 124 129 129
Department expenses 1,506 1,595 1,708 1,923 2,262 2,469 2,603 2,595 2,602 2,603

Source: The Treasury

Table 6.12 - Defence expenses
  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
($ million) Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast
NZDF Core expenses 1,095 1,182 1,203 1,306 1,459 1,520 1,685 1,741 1,819 1,903
NZDF write-offs 23 72 ..  ..  ..  ..  ..  ..  ..  .. 
NZDF East Timor deployment 20 ..  ..  ..  ..  ..  ..  ..  ..  .. 
Other expenses 61 57 72 77 58 46 56 59 72 61
Defence expenses 1,199 1,311 1,275 1,383 1,517 1,566 1,741 1,800 1,891 1,964

Source: The Treasury

Table 6.13 - Transport and communication expenses
  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
($ million) Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast
Land Transport NZ1 1,131 1,222 1,346 1,482 1,874 1,860 2,175 2,006 2,150 2,138
Departmental outputs 80 83 97 101 113 133 130 128 127 127
Other non-departmental expenses 61 84 79 109 221 120 134 143 140 119
Goodwill amortisation 47 47 47 47 47 ..  ..  ..  ..  .. 
Rail write-offs 81 19 ..  ..  ..  ..  ..  ..  ..  .. 
Rail costs ..  3 63 77 142 163 359 435 199 85
Other expenses 8 3 3 2 8 14 25 19 19 19
Transport and communication expenses 1,408 1,461 1,635 1,818 2,405 2,290 2,823 2,731 2,635 2,488

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
  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
($ million) Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast
Departmental outputs 424 478 508 549 546 600 399 382 377 374
Employment initiatives 217 222 224 202 207 207 196 182 182 182
Non-departmental outputs 277 444 549 751 873 826 909 849 845 840
Reserve Electricity Generation ..  ..  ..  26 16 39 26 26 26 25
Flood relief ..  15 52 8 ..  ..  ..  ..  ..  .. 
KiwiSaver ..  ..  ..  ..  ..  1,031 1,370 1,441 1,502 1,507
Research & Development tax credits ..  ..  ..  ..  ..  37 208 250 290 332
Other expenses 136 33 111 56 (47) 88 136 151 192 201
Economic and industrial service expenses 1,054 1,192 1,444 1,592 1,595 2,828 3,244 3,281 3,414 3,461

Source: The Treasury

Table 6.15 - Employment initiatives
  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
($ million) Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast
Training incentive allowance 37 42 36 32 29 29 26 26 26 26
Community employment projects 21 16 6 ..  ..  ..  ..  ..  ..  .. 
Subsidised work 95 100 102 84 88 85 75 61 60 59
Employment support for disabled 61 61 74 82 86 89 91 91 92 93
Other employment assistance schemes 3 3 6 4 4 4 4 4 4 4
Employment initiatives 217 222 224 202 207 207 196 182 182 182

Source: The Treasury

Table 6.16 - Primary service expenses
  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
($ million) Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast
Departmental expenses 265 269 272 350 342 375 390 377 377 379
Non-departmental outputs 80 81 114 97 80 107 111 107 102 105
Other expenses 10 18 8 20 16 83 19 15 15 15
Primary service expenses 355 368 394 467 438 565 520 499 494 499

Source: The Treasury

Table 6.17 - Heritage, culture and recreation expenses
  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
($ million) Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast
Community grants 6 3 6 7 7 7 8 9 9 10
Kyoto protocol ..  ..  310 42 ..  ..  .. .. .. ..
Emmission Trading Scheme ..  ..  ..  ..  ..  ..  762 369 536 536
Departmental outputs 253 269 292 322 357 413 456 440 451 451
Non-departmental outputs 212 258 317 351 411 456 486 454 453 429
Other expenses 44 104 66 169 69 247 57 50 53 59
Heritage, culture and recreation expenses 515 634 991 891 844 1,123 1,769 1,322 1,502 1,485

Source: The Treasury

Table 6.18 - Housing and community development expenses
  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
($ million) Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast
Housing subsidies 25 27 31 23 25 28 33 32 32 31
Departmental outputs 57 77 100 117 134 152 167 145 139 135
Other non-departmental expenses 20 35 32 62 96 102 134 125 128 131
Housing and community development expenses 102 139 163 202 255 282 334 302 299 297

Source: The Treasury

Glossary of Terms

ACC insurance liability

The ACC insurance liability is the gross liability of the future cost of past ACC claims. The net ACC liability is the gross liability less the asset reserves held to meet these claims.

Baselines

The level of funding approved for any given spending area (eg, Education). All amounts within baselines are included in the forecasts.

Consumers Price Index (CPI)

A measure of change in the prices of goods and services bought by households.

Contingent liability

Contingent liabilities are costs, which the Crown will have to face if a particular uncertain and not probable event occurs. Typically, contingent liabilities consist of guarantees and indemnities, legal disputes and claims, and uncalled capital.

Contingent assets

Contingent assets are potential assets dependent on an uncertain event occurring.

Core Crown

The core Crown represents the revenues, expenses, assets and liabilities of the Crown, departments, Offices of Parliament, the Reserve Bank, and the NZS Fund.

Core Crown revenue

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.

Core Crown expenses

The day-to-day spending (eg, salaries, welfare benefit payments, finance costs and maintaining national defence etc) that does not build physical assets for the Government. This is an accrual measure of expenses and includes items such as depreciation on physical assets.

Corporate tax

The sum of net company tax, non-resident withholding tax (NRWT), foreign-source dividend withholding payments (FDWP).

Current account (Balance of Payments)

A measure of the flows of income between New Zealand and the rest of the world. A net inflow to New Zealand is a current account surplus, while a net outflow is a deficit. The current account balance is commonly expressed as a percentage of GDP.

Cyclically adjusted or structural fiscal balance

An estimate of the fiscal balance (eg, OBEGAL) adjusted for short-term fluctuations of actual GDP around trend GDP. The estimate provides a picture of the underlying trend fiscal position and an indication of the effects of policy decisions. Because it is based on a number of assumptions and is sensitive to new information, the estimate is subject to some uncertainty.

Demographic changes

Changes to the structure of the population. For example the age, gender or ethnic make-up of the population.

Domestic bond programme

The amount and timing of new government stock expected to be issued over the financial year.

Excise duties

Tax levied on the domestic production of alcohol, tobacco and light petroleum products (CNG, LPG and petrol).

Financial assets

Cash or shares (equity) or a right to receive cash or shares (equity), or a right to exchange a financial asset or liability on favourable terms.

Fiscal impulse

A summary measure of how changes in fiscal policy affect aggregate demand. To isolate discretionary changes, fiscal impulse is calculated on a cyclically-adjusted basis and excluding net interest payments. To better capture the role of capital spending the indicator is derived from cash flow information.

Fiscal intentions (short-term)

Under the Public Finance Act 1989, the Government must indicate explicitly its intentions for operating expenses, operating revenues, the operating balance, debt and net worth over (at least) the next three years.

Fiscal objectives (long-term)

The Government's long-term goals for operating expenses, operating revenue, the operating balance, debt and net worth, as required by the Public Finance Act 1989. The objectives must be consistent with the principles of responsible fiscal management outlined in the Act and cover a period of ten or more years.

Forecast new capital spending

An amount provided in the forecasts to represent the balance sheet impact of capital initiatives expected to be introduced over the forecast period.

Forecast new operating spending

An amount included in the forecasts to provide for the operating balance impact of policy initiatives and changes to demographics and other forecasting changes expected to occur over the forecast period.

Gross Crown debt

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 domestic product (GDP)

A measure of the value of all goods and services produced in New Zealand; changes in GDP measure growth in economic activity or output. GDP can be measured as the actual dollar value of goods and services measured at today’s prices (nominal GDP), or excluding the effects of price changes over time (real GDP).

Gross domestic product (expenditure)

This is the sum of total final expenditures on goods and services in the economy.

Gross national expenditure (GNE)

Measures total expenditure on goods and services by New Zealand residents.

Gross sovereign-issued debt (GSID)

Debt issued by the sovereign (ie, Core Crown) and includes Government stock held by the NZS Fund, ACC or EQC for example. The gross sovereign-issued debt indicator does not eliminate any internal cross-holdings.

GSID (excluding settlement cash)

GSID less Reserve Bank settlement cash.

Labour force participation rate

Measures the percentage of the working-age population in work or actively looking for and available for work.

Labour productivity

Measures output per input of labour (where labour inputs might be measured as hours worked or people).

Line-by-line consolidation

This is a term used to refer to the general approach to the presentation of the Crown financial statements. It means that the individual line items for revenues, expenses, assets and liabilities in the Crown financial statements include all departments, Offices of Parliament, the Reserve Bank, SOEs, Crown entities, and other entities controlled by the Government.

Marketable securities

Assets held with financial institutions. These assets are held for both cash flow and investment purposes, and include any funds the Government has invested in the International Monetary Fund.

Monetary conditions

The combination of interest rates and the exchange rate.

Monetary policy

Action taken by the Reserve Bank to affect interest rates and the exchange rate in order to control inflation. Tightening monetary policy refers to actions taken by the Reserve Bank to raise interest rates (which can influence the exchange rate) in order to moderate aggregate demand pressures and so reduce inflationary pressures.

Net core Crown cashflow from operations

OBEGAL less retained items (eg, net surplus of SOEs, CEs and NZS Fund net revenue) less non-cash items (eg, depreciation).

Net core Crown debt

Debt after deducting financial assets of the Core Crown 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 as are the assets of the NZS Fund.

Net worth

Total assets less total 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.

NZ IFRS

New Zealand equivalents to International Financial Reporting Standards. These standards are approved by the Accounting Standards Review Board in New Zealand and are based on the requirements of the international financial reporting standards issued by the International Accounting Standards Board adjusted where appropriate for entities that are not profit oriented.

Operating allowance

The amount included in the Fiscal Strategy Report projections for new initiatives, including spending and cost pressures. The allowance is a projection assumption. The projections in the Fiscal Strategy Report also include an allowance for capital spending.

Operating balance

The operating balance is the residual of revenues less expenses plus surpluses from state-owned enterprises and Crown entities. It includes gains and losses not reported directly as a movement against net worth.

Operating balance before gains and losses (OBEGAL)

The OBEGAL is the operating balance excluding gains and losses.

OBEGAL excluding NZS Fund net revenue

A measure of the operating balance that recognises that NZS Fund net revenues are not available to the Crown.

Projections

Projections of the key fiscal indicators beyond the five-year forecast period. The projections are based on long-run economic and fiscal assumptions. For example, the projections assume no economic cycle and constant long-run interest, inflation and unemployment rates.

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)”.

Residual cash is equal to net core crown cashflow from operations excluding NZS Fund activity less core Crown capital commitments (eg, contributions to NZS Fund, purchase of assets, loans to others).

Settlement cash

This is the amount of money deposited with the Reserve Bank by banks. It is a liquidity mechanism used to settle wholesale obligations between banks and provides the basis for settling most of the retail banking transactions that occur every working day between corporates and individuals.

Specific fiscal risks

These are a category of Government decisions or circumstances which may have a material impact on the fiscal position (excluding contingent liabilities). They are not included in the main forecasts because their fiscal impact cannot be reasonably quantified, the likelihood of realisation is uncertain and/or the timing is uncertain.

System of National Accounts (SNA)

SNA is a comprehensive, consistent and flexible set of macroeconomic accounts to meet the needs of government and private sector analysts, policy-makers, and decision-takers.

Tax revenue

The accrual, rather than the cash (“tax receipts”) measure of taxation. It is a measure of tax due, regardless of whether or not it has actually been paid.

Top-down adjustment

The adjustment to expenditure forecasts to reflect the extent to which departments use appropriations (upper spending limits) for their expenditure forecasts. As appropriations apply to the core Crown only, no adjustment is required to SOE or Crown Entity forecasts.

Trade weighted index (TWI)

A measure of movements in the New Zealand dollar against the currencies of our major trading partners. The currencies comprise the US dollar, the Australian dollar, the Japanese yen, the euro and the UK pound.

Unit labour costs

The wages and other costs associated with employment per unit of output.

Year ended

Graphs and tables use different expressions of the timeframe. For example, 2008/09 or 2009 will generally mean “year ended 30 June” unless otherwise stated.

Time Series of Fiscal and Economic Indicators

Fiscal Indicators
  1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Years ended 30 June - $million Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast
Revenue and Expenses                                
Core Crown revenue excl NZS Fund 33,131 34,242 32,880 34,946 37,842 39,945 43,440 46,219 51,045 56,951 58,482 61,814 61,787 63,552 66,284 69,004
Core Crown expenses 31,368 32,982 33,939 34,829 36,559 37,513 39,897 41,882 44,895 49,320 54,003 57,364 61,883 63,890 67,016 69,943
Surpluses                                
Total Crown OBEGAL 1,801 2,345 128 594 1,422 2,471 4,366 5,573 7,075 7,091 5,860 5,227 1,318 1,004 493 154
Total Crown OBEGAL excl NZS Fund 1,801 2,345 128 594 1,422 2,456 4,297 5,526 7,140 7,252 6,250 5,219 1,354 1,048 543 207
Total Crown operating surplus 1,863 2,048 1,705 1,405 1,208 2,286 1,621 7,309 5,931 9,542 8,023 2,559 3,105 3,009 2,779 2,734
Cash Position                                
Core Crown residual cash 3,913 484 2,048 (386) 349 216 1,217 520 3,104 2,985 2,877 908 (3,478) (3,302) (3,447) (3,457)
Debt                                
GSID (excluding settlement cash) 36,236 38,475 37,307 36,580 37,194 36,650 36,617 36,017 35,478 33,903 30,647 31,763 32,498 32,251 35,974 35,499
Net core Crown debt (incl NZS Fund) 25,562 24,635 22,275 21,900 20,293 19,051 16,093 11,613 4,538 (1,817) (7,467) (11,254) (11,337) (11,787) (12,348) (12,970)
Net core Crown debt 25,562 24,635 22,275 21,900 20,293 19,666 17,977 15,569 11,093 8,044 4,109 1,846 4,578 7,272 10,145 13,193
NZS Fund                                
NZS Fund net worth ..  ..  ..  ..  ..  615 1,884 3,956 6,555 9,861 12,973 14,461 17,721 21,152 24,947 29,011
Years ended 30 June - % GDP                                
Revenue and Expenses                                
Core Crown revenue excl NZS Fund 33.5 33.7 31.4 31.5 32.0 31.8 32.8 32.5 33.9 36.3 34.8 34.3 33.3 33.1 32.8 32.6
Core Crown expenses 31.7 32.5 32.4 31.4 30.9 29.8 30.1 29.4 29.8 31.4 32.1 31.8 33.4 33.3 33.2 33.0
Surpluses                                
Total Crown OBEGAL 1.8 2.3 0.1 0.5 1.2 2.0 3.3 3.9 4.7 4.5 3.5 2.9 0.7 0.5 0.2 0.1
Total Crown OBEGAL excl NZS Fund 1.8 2.3 0.1 0.5 1.2 2.0 3.2 3.9 4.7 4.6 3.7 2.9 0.7 0.5 0.3 0.1
Total Crown operating surplus 1.9 2.0 1.6 1.3 1.0 1.8 1.2 5.1 3.9 6.1 4.8 1.4 1.7 1.6 1.4 1.3
Cash Position                                
Core Crown residual cash 4.0 0.5 2.0 (0.3) 0.3 0.2 0.9 0.4 2.1 1.9 1.7 0.5 (1.9) (1.7) (1.7) (1.6)
Debt                                
GSID (excluding settlement cash) 36.6 37.9 35.6 32.9 31.4 29.1 27.7 25.3 23.5 21.6 18.2 17.6 17.5 16.8 17.8 16.8
Net core Crown debt (incl NZS Fund) 25.8 24.3 21.3 19.7 17.1 15.1 12.2 8.2 3.0 (1.2) (4.4) (6.2) (6.1) (6.1) (6.1) (6.1)
Net core Crown debt 25.8 24.3 21.3 19.7 17.1 15.6 13.6 10.9 7.4 5.1 2.4 1.0 2.5 3.8 5.0 6.2
NZS Fund                                
NZS Fund net worth ..  ..  ..  ..  ..  0.5 1.4 2.8 4.3 6.3 7.7 8.0 9.6 11.0 12.4 13.7
Economic Indicators
Years ended 31 March (annual average % change unless stated)

1997
Actual

1998
Actual

1999 Actual 2000
Actual
2001 Actual 2002 Actual 2003
Actual
2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008 Estimate 2009 Forecast 2010 Forecast 2011 Forecast 2012 Forecast
Private consumption 4.4 2.4 3.1 3.3 1.5 2.8 5.0 6.5 5.3 4.7 2.7 3.6 1.9 1.9 1.6 1.4
Public consumption 1.4 8.1 -0.5 5.7 -2.0 4.0 1.4 4.6 4.0 5.1 4.3 4.6 3.7 3.1 3.3 3.3
Total consumption 3.7 3.7 2.2 3.8 0.7 3.1 4.2 6.0 5.1 4.8 3.1 3.8 2.3 2.2 2.0 1.8
Residential investment 4.9 3.0 -13.0 19.5 -13.3 2.0 23.5 14.4 2.7 -4.5 -2.7 4.5 -9.7 -3.1 2.4 3.0
Non-market investment 18.3 14.0 -4.8 13.0 -13.8 21.9 13.7 11.9 15.7 0.9 -4.9 1.9 22.7 4.2 2.0 2.0
Market investment 4.3 -2.2 2.6 6.9 8.0 6.9 2.3 12.2 9.4 9.5 -1.2 6.8 2.8 -0.9 2.1 3.5
Total investment 5.1 0.2 -2.3 10.6 0.4 6.8 7.8 12.8 7.6 5.2 -2.3 5.2 1.1 -0.9 2.2 3.4
Stock change (contribution to growth) -0.4 -0.2 -0.3 1.1 -0.4 0.1 -0.1 0.2 0.3 -0.6 -0.9 0.7 0.1 0.0 0.0 0.0
Gross national expenditure 3.6 2.7 0.9 6.3 0.3 3.9 4.8 7.6 5.9 4.2 1.0 5.0 2.0 1.4 2.0 2.2
Exports 4.7 3.9 2.9 7.4 6.3 3.0 7.8 0.9 4.7 -0.1 3.1 3.1 -0.9 4.0 4.4 4.1
Imports 6.4 2.5 2.1 11.3 -0.7 4.0 7.2 12.7 12.5 4.1 -1.7 9.6 0.9 1.3 1.0 2.0
GDP (production measure) 3.5 1.7 0.5 5.3 2.4 3.8 5.1 3.8 3.8 2.7 1.5 3.1 1.5 2.3 3.2 3.0
 - annual % change 2.0 0.3 2.5 6.5 0.7 4.8 4.5 4.8 2.4 2.5 2.3 2.4 1.6 2.9 3.2 2.8
                                 
Real GDP per capita 2.0 0.5 -0.3 4.8 1.8 2.9 3.2 1.9 2.4 1.5 0.3 2.1 0.6 1.4 2.2 2.0
Nominal GDP (expenditure basis) 4.9 3.7 1.7 6.0 5.7 7.5 5.1 6.7 6.9 5.0 5.0 7.9 3.6 3.2 4.9 5.0
GDP deflator 1.7 0.6 0.5 0.9 3.1 3.9 0.1 2.7 3.2 2.0 2.5 4.8 2.3 0.8 1.7 2.0
                                 
Employment (full-time equivalent) 2.2 0.0 -0.8 2.0 2.2 2.6 2.5 2.9 3.6 2.7 2.0 1.4 1.4 0.2 0.3 1.0
Unemployment (% March quarter s.a.) 6.5 7.1 7.1 6.3 5.3 5.2 4.8 4.1 3.8 3.9 3.7 3.5 3.7 4.4 4.5 4.3
                                 
Wages (average ordinary-time hourly) 3.8 3.3 2.9 2.2 2.4 3.5 2.9 3.4 3.3 4.7 4.8 4.1 4.2 4.7 4.4 4.0
CPI inflation (annual % change) 1.8 1.3 -0.1 1.5 3.1 2.6 2.5 1.5 2.8 3.3 2.5 3.4 3.2 2.8 2.8 2.8
Export prices (merchandise, OTI) -4.2 -0.2 3.4 4.0 20.5 3.1 -13.3 -8.2 3.7 1.0 9.1 2.5 7.4 3.1 6.1 4.7
Import price (merchandise, OTI) -3.4 0.8 3.7 4.3 15.3 -0.9 -8.2 -11.6 -2.0 1.8 7.2 -4.8 4.2 5.0 7.5 5.6
                                 
Current account balance - $billion -5.8 -5.4 -4.4 -7.0 -5.1 -3.9 -4.5 -6.7 -10.3 -14.5 -13.5 -13.1 -13.3 -13.7 -14.1 -13.8
Current account balance - % of GDP -6.0 -5.3 -4.2 -6.4 -4.4 -3.1 -3.4 -4.8 -6.9 -9.3 -8.2 -7.4 -7.2 -7.2 -7.1 -6.6
                                 
TWI (March quarter) 68.4 61.2 57.6 54.1 50.5 51.6 60.6 66.9 69.6 68.3 68.8 71.9 68.6 63.1 59.1 56.7
90-day bank bill rate (March quarter) 7.5 8.9 4.5 6.0 6.4 5.0 5.8 5.5 6.9 7.6 7.8 8.8 8.5 7.9 7.9 7.2
10-year bond rate (March quarter) 7.5 6.8 5.7 7.3 6.0 6.7 6.0 5.9 6.0 5.7 5.9 6.3 6.3 6.3 6.2 6.1

Additional Information

The following information forms part of Budget Economic and Fiscal Update 2008

(2008 Budget), released by the Treasury on 22 May 2008. This information provides users of the 2008 Budget with further detail and should be read in conjunction with the published document. The information contains:

  • Detailed economic forecast information – these tables provide some more detailed breakdowns of the economic forecasts
  • Additional fiscal indicators – estimates of the cyclically-adjusted balance and fiscal impulse
  • Tax tables – detailed tax revenue and receipts tables comparing Treasury’s forecasts with IRD’s forecasts
  • Contingent liabilities and contingent assets – write-ups of the nature of each item in the tables outlined in the 2008 Budget Specific Fiscal Risks chapter
  • Crown accounting policies – outline of the specific Crown accounting policies and forecast assumptions. The published GAAP tables only provide a summary.

Detailed Economic Forecast Information

The following tables provide additional detail on the economic forecasts presented in the Budget Update.

Table 1:  Real Gross Domestic Product (Production)

Table 1: Real Gross Domestic Product (Production)
Chain-volume series expressed in 1995/96 prices
  Actual  Seasonally Adjusted
 

$ million

Annual
% change
Annual
Average
% change
$million Quarterly
% change
2005Q1 31,283 2.4 3.8 31,550 0.9
2005Q2 31,352 3.1 3.2 32,039 1.5
2005Q3 31,821 3.0 2.9 32,149 0.3
2005Q4 33,294 2.3 2.7 32,035 -0.4
2006Q1 32,052 2.5 2.7 32,315 0.9
2006Q2 31,644 0.9 2.2 32,304 0.0
2006Q3 32,112 0.9 1.6 32,442 0.4
2006Q4 33,908 1.8 1.5 32,658 0.7
2007Q1 32,799 2.3 1.5 33,060 1.2
2007Q2 32,687 3.3 2.1 33,350 0.9
2007Q3 33,167 3.3 2.7 33,512 0.5
2007Q4 35,138 3.6 3.1 33,854 1.0
2008Q1 33,570 2.4 3.1 33,837 -0.1
2008Q2 33,280 1.8 2.8 33,955 0.3
2008Q3 33,723 1.7 2.4 34,074 0.4
2008Q4 35,525 1.1 1.7 34,227 0.4
2009Q1 34,115 1.6 1.5 34,387 0.5
2009Q2 33,894 1.8 1.6 34,581 0.6
2009Q3 34,461 2.2 1.7 34,819 0.7
2009Q4 36,407 2.5 2.0 35,077 0.7
2010Q1 35,089 2.9 2.3 35,368 0.8
2010Q2 34,958 3.1 2.7 35,667 0.8
2010Q3 35,587 3.3 2.9 35,957 0.8
2010Q4 37,597 3.3 3.1 36,223 0.7
2011Q1 36,215 3.2 3.2 36,503 0.8
2011Q2 36,050 3.1 3.2 36,782 0.8
2011Q3 36,645 3.0 3.1 37,026 0.7
2011Q4 38,691 2.9 3.1 37,277 0.7
2012Q1 37,236 2.8 3.0 37,533 0.7
2012Q2 37,037 2.7 2.9 37,788 0.7

Source: Statistics New Zealand, The Treasury

Table 2: Consumers Price Index and Exchange Rates

Table 2: Consumers Price Index and Exchange Rates
  Consumers Price Index Exchange rates
  Index Quarterly
% change
Annual
% change
TWI USD
2005Q1 953 0.4 2.8 69.6 0.72
2005Q2 962 0.9 2.8 70.8 0.72
2005Q3 973 1.1 3.4 69.7 0.69
2005Q4 979 0.7 3.2 71.5 0.69
2006Q1 985 0.6 3.3 68.3 0.67
2006Q2 1000 1.5 4.0 62.8 0.62
2006Q3 1007 0.7 3.5 63.6 0.63
2006Q4 1005 -0.2 2.6 67.1 0.67
2007Q1 1010 0.5 2.5 68.8 0.70
2007Q2 1020 1.0 2.0 72.0 0.74
2007Q3 1025 0.5 1.8 71.3 0.74
2007Q4 1037 1.2 3.2 71.0 0.76
2008Q1 1044 0.7 3.4 71.9 0.79
2008Q2 1054 0.9 3.3 70.0 0.77
2008Q3 1063 0.8 3.7 70.0 0.77
2008Q4 1070 0.7 3.2 69.5 0.76
2009Q1 1077 0.7 3.2 68.6 0.75
2009Q2 1083 0.6 2.8 67.0 0.74
2009Q3 1090 0.6 2.6 65.8 0.72
2009Q4 1097 0.6 2.5 64.4 0.71
2010Q1 1107 0.9 2.8 63.1 0.69
2010Q2 1116 0.8 3.0 61.9 0.68
2010Q3 1123 0.7 3.1 60.9 0.67
2010Q4 1131 0.7 3.1 59.9 0.66
2011Q1 1138 0.7 2.8 59.1 0.65
2011Q2 1147 0.8 2.8 58.3 0.64
2011Q3 1155 0.7 2.8 57.6 0.63
2011Q4 1162 0.6 2.8 57.1 0.63
2012Q1 1170 0.6 2.8 56.7 0.62
2012Q2 1177 0.6 2.6 56.3 0.62

Source: Statistics New Zealand, The Treasury

Table 3: Nominal Gross Domestic Product (Expenditure and Income)

Table 3: Nominal Gross Domestic Product (Expenditure and Income)
March Year 2007
Actual
2008 Estimate 2009 Forecast 2010 Forecast 2011 Forecast 2012 Forecast
  $ mill %vol %pr   $ mill %vol %pr   $ mill %vol %pr $ mill %vol %pr $ mill %vol %pr $ mill
Consumption:                                
Private 98,616 3.6 1.8 103,967 1.9 2.4 108,462 1.9 2.1 112,878 1.6 2.5 117,557 1.4 2.3 121,901
Public 30,639 4.6 2.8 32,963 3.7 2.1 34,870 3.1 1.9 36,628 3.3 2.0 38,576 3.3 2.0 40,652
Gross Fixed Capital Formation:                                
Residential 10,813 4.5 4.5 11,813 -9.7 2.6 10,947 -3.1 2.7 10,895 2.4 3.8 11,579 3.0 4.3 12,440
Market * 24,509 6.8 -0.2 26,120 2.8 -2.6 26,152 -0.9 -0.4 25,815 2.1 2.0 26,892 3.5 2.5 28,546
Non-market ** 2,769 1.9 -1.0 2,798 22.7 0.5 3,447 4.2 2.0 3,664 2.0 1.9 3,807 2.0 1.5 3,942
Total all sectors 38,101 5.2 1.6 40,733 1.1 -1.5 40,554 -0.9 0.5 40,381 2.2 2.4 42,285 3.4 2.7 44,934
Change in Stocks -320     956     861     992     890     1,040
Gross National Expenditure 167,036 4.8 2.0 178,620 -3.3 7.8 184,747 1.2 2.2 190,879 2.2 2.1 199,308 2.2 2.4 208,527
Exports 48,199 3.1 3.7 51,677 -0.9 7.7 55,055 4.0 2.5 58,709 4.4 5.9 64,941 4.1 4.9 70,900
Imports 50,528 9.6 -5.1 52,520 0.9 4.8 55,539 1.3 5.8 59,502 1.0 8.0 64,910 2.0 5.9 70,115
Expenditure on GDP 164,707 3.0 4.8 177,776 1.3 2.3 184,263 2.3 0.8 190,086 3.2 1.7 199,340 2.9 2.0 209,312
Statistical Discrepancy 1,536     1,587     1,613     1,636     1,672     1,711
Gross Domestic Product 166,243     179,363     185,875     191,722     201,012     211,023
Compensation of employees 74,322   6.1 78,873   5.8 83,412   5.0 87,543   4.8 91,721   5.1 96,412
Operating Surplus, net:                                 
Agriculture 3,201   54.9 4,959   3.9 5,151   -13.4 4,461   -11.7 3,937   -6.3 3,687
Other 43,998   8.9 47,894   -0.2 47,810   -0.2 47,695   5.9 50,531   5.3 53,209
Total all sectors 47,199   12.0 52,853   0.2 52,960   -1.5 52,156   4.4 54,469   4.5 56,896
Consumption of fixed capital 23,755   6.0 25,180   4.0 26,188   6.0 27,759   6.0 29,424   6.0 31,190
Indirect Taxes 21,564   6.9 23,055   3.7 23,913   4.0 24,862   4.6 25,995   4.3 27,124
Less subsidies 598   0.0 598   0.0 598   0.0 598   0.0 598   0.0 598
Gross Domestic Product 166,243   7.9 179,363   3.6 185,875   3.1 191,722   4.8 201,012   5.0 211,023

* Includes Local Government and Non-profit Organisations

** Central Government (includes Crown Entities but not SOEs)

Source: Statistics New Zealand, The Treasury

Tables 4 & 5: Labour Market Indicators

Table 4: Labour Market Indicators
  Annual Average Percentage Change
March Year 2007 2008 2009 2010 2011 2012
  Actual Estimate Forecast Forecast Forecast Forecast
Real GDP (production basis) 1.5 3.1 1.5 2.3 3.2 3.0
Working Age Population 1.4 1.2 1.1 1.2 1.2 1.1
Labour Force 1.9 1.6 1.4 0.9 0.6 0.9
Employment - Full Time Equivalents* 2.0 1.4 1.4 0.2 0.3 1.0
Labour Productivity* -0.5 1.8 0.1 2.1 2.9 1.9
Labour Productivity ** 1.0 2.6 0.5 2.1 2.8 1.9
CPI  (annual percentage change) 2.5 3.4 3.2 2.8 2.8 2.8
Average Ordinary Time Hourly Wages 4.8 4.1 4.2 4.7 4.4 4.0
Average Weekly Earnings 5.2 3.7 4.0 4.7 4.4 4.0
Real Wages 1.5 1.5 0.8 1.9 1.3 1.2
Compensation of Employees 8.1 6.1 5.8 5.0 4.8 5.1
Unit Labour Costs (Hours worked basis) 3.8 1.4 3.7 2.6 1.5 2.1
Real Unit Labour Costs 0.5 -1.1 0.4 -0.1 -1.5 -0.7

* Full time equivalent basis

** Hours worked basis

Source: Statistics New Zealand, The Treasury

Table 5: Labour Market Indicators
  Number (000's)
As at March Quarter 2007 2008 2009 2010 2011 2012
  Actual Estimate Forecast Forecast Forecast Forecast
Total Population 4,223 4,261 4,300 4,342 4,383 4,424
Natural Increase 34 34 34 33 31 31
Net  Migration 12 4 6 8 10 10
Annual Change 47 38 40 41 41 41
Working Age Population 3,248 3,282 3,320 3,360 3,398 3,435
Annual Change 45 35 38 39 39 37
Not in the labour force 1,010 1,012 1,023 1,045 1,068 1,081
Annual Change 10 3 11 22 23 13
Labour Force 2,238 2,270 2,298 2,315 2,331 2,354
Annual Change 35 32 27 17 16 23
Total Employment 2,144 2,182 2,201 2,200 2,214 2,239
Annual Change 36 38 19 -1 14 26
Unemployment 94 88 97 115 117 115
Annual Change -2 -5 8 18 2 -2
Participation Rate (%sa) 68.6 68.9 68.9 68.5 68.2 68.1
Unemployment Rate (%sa) 3.7 3.5 3.7 4.4 4.5 4.3

Source: Statistics New Zealand, The Treasury

Table 6: Current Account

Table 6: Current Account
 

 $NZ Million

Percent of Nominal GDP

Year ended March 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012
  Actual Estimate Forecast Forecast Forecast Forecast   Actual Estimate Forecast Forecast Forecast Forecast
Exports Goods 35,633 38,794 42,333 45,208 49,904 54,055            
annual % Change 12.8 8.9 9.1 6.8 10.4 8.3            
Imports Goods 38,464 40,097 42,543 45,508 49,612 53,646            
annual % Change 7.8 4.2 6.1 7.0 9.0 8.1            
Balance on Goods -2,830 -1,302 -210 -299 292 409 -1.7 -0.7 -0.1 -0.2 0.1 0.2
Exports Services 12,565 12,794 12,759 13,543 15,092 16,925            
annual % change 2.9 1.8 -0.3 6.1 11.4 12.1            
Imports Services 12,064 12,424 12,988 13,987 15,289 16,460            
annual % change 2.6 3.0 4.5 7.7 9.3 7.7            
Balance on services 500 368 -229 -443 -197 465 0.3 0.2 -0.1 -0.2 -0.1 0.2
Balance on goods & services -2,330 -934 -439 -743 95 874 -1.4 -0.5 -0.2 -0.4 0.0 0.4
Int'l investment income and
transfers balance        
-11,192 -12,136 -12,833 -13,002 -14,224 -14,666 -6.8 -6.8 -7.0 -6.8 -7.1 -7.0
Current account balance    -13,522 -13,069 -13,272 -13,745 -14,129 -13,792 -8.2 -7.4 -7.2 -7.2 -7.1 -6.6

Source: Statistics New Zealand, The Treasury

Table 7: Exports - SNA basis

Breakdown of Exports
Table 7: Exports - SNA basis
Breakdown of Exports
  Dairy Products Meat and Meat Products Non-Commodity*        
March Years %v %p $ mn %v %p $ mn %v %p $ mn
2004 5.2 -7.8 5,835 7.9 -8.2 4,379 0.4 -5.6 9,340
2005 -9.4 9.1 5,783 3.5 6.7 4,873 8.4 -0.2 10,122
2006 -2.4 6.0 5,993 -2.2 -3.1 4,611 -0.5 2.5 10,331
2007 22.3 2.0 7,455 6.7 2.5 5,037 0.6 11.7 11,678
2008 1.5 24.1 9,557 -0.9 -5.1 4,756 2.3 6.2 12,424
2009 -1.3 28.2 11,891 -3.4 4.7 4,803 2.4 -1.3 12,601
2010 3.0 -6.0 11,516 3.0 6.2 5,249 5.1 7.7 14,252
2011 4.0 1.6 12,187 2.1 8.0 5,787 5.5 8.5 16,316
2012 3.2 2.5 12,892 0.9 5.7 6,174 4.4 5.8 18,039
Table 7: Exports - SNA basis (continued)
  Total Goods** Services Total Exports
March Years   %v %p $ mn %v %p $ mn %v %p $ mn
2004 2.1 -7.1 29,054 -2.2 -0.3 11,604 0.9 -5.4 40,657
2005 5.1 1.8 31,114 3.5 1.8 12,239 4.7 1.8 43,353
2006 0.7 0.9 31,580 -2.2 1.9 12,205 -0.1 1.1 43,786
2007 4.9 7.4 35,633 -1.6 4.6 12,565 3.1 6.8 48,199
2008 4.2 4.5 38,794 -0.3 2.1 12,794 3.1 3.7 51,677
2009 -0.6 9.8 42,333 0.0 0.0 12,759 -0.9 7.7 55,055
2010 3.7 3.1 45,208 4.9 0.9 13,543 4.0 2.5 58,709
2011 4.0 6.1 49,904 5.7 5.3 15,092 4.4 5.9 64