The Budget Economic and Fiscal Update (BEFU) 2014 includes the Treasury's overall economic forecasts and forecast financial statements of the government. The Update includes the implications of government financial decisions and other information relevant to the fiscal and economic position.

There is Additional Information available here that is not included in the printed Update.

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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 other circumstances as at 29 April 2014 that were communicated to me by the Minister of Finance in accordance with the requirements of the Public Finance Act 1989 and of other economic and fiscal information available to the Treasury as at 29 April 2014. This Update does not incorporate any decisions, circumstances, or statements that the Minister of Finance has determined, in accordance with the Public Finance Act 1989, should not be incorporated in this Update.

Gabriel Makhlouf
Secretary to the Treasury

6 May 2014

To enable the Treasury to prepare this Economic and Fiscal Update I have ensured the Secretary to the Treasury has been advised, in accordance with the requirements of the Public Finance Act 1989, of all Government decisions and other circumstances as at 29 April 2014 of which I was aware and that had material economic or fiscal implications.

I accept responsibility for the integrity of the disclosures contained in the Update and responsibility for the consistency and completeness of the Update information with the requirements of Fiscal Responsibility in the Public Finance Act 1989.

Hon Bill English
Minister of Finance

6 May 2014

Executive Summary

  • The economy is entering its fourth year of expansion with real gross domestic product (GDP) estimated to be currently growing at around a 4% annualised pace. Employment is increasing and both annual Consumers Price Index (CPI) inflation and the current account deficit are low at present. Growth has become more broad-based, although it is still dominated by domestic demand.
  • Following estimated real GDP growth of 3.0% in the year to March 2014, 4.0% growth is forecast this March year, 3.0% in the year to March 2016, then easing to around 2% in the last two years of the forecast period. Over the five years to March 2018, real GDP growth averages 2.8%, a little above the Treasury's estimate of potential output growth over this period. The latter is forecast to increase from a low of around 1.5% during the recession to around 2.6% on average over the forecast period, as a result of lower unemployment, strong growth in the working-age population and a rebound in trend productivity growth on the back of higher investment.
Figure 1 - Real GDP and potential output growth
Figure 1 - Real GDP and potential output growth.
Source: Statistics New Zealand, the Treasury
Figure 2 - Contributions to real GDP growth
Figure 2 - Contributions to real GDP growth.
Source:  Statistics New Zealand, the Treasury
  • The Canterbury rebuild, near record-high terms of trade, strong net migration and stimulatory monetary policy settings are all contributing to robust household and firm spending, while fiscal policy and the elevated exchange rate are providing some offset. Real private spending growth is forecast to accelerate to nearly 7% during the year ahead, supported by higher income growth and asset prices, application of insurance payouts and high consumer and business confidence. Credit growth is increasing but remains moderate.
  • Looking forward, the strength of some of the positive influences on GDP growth are expected to moderate, including monetary policy moving to a more neutral stance in response to emerging inflationary pressures. The latter reflects the expectation that the economy will be operating at or above capacity over much of the forecast period. Further increases in the Official Cash Rate (OCR) are expected, leading to a gradual but steady increase in short-term interest rates through 2014 and 2015, the precise pace depending on how inflation pressures evolve.
  • The global backdrop to these forecasts is steady, but uneven, economic growth, notwithstanding stronger growth in advanced economies. Trading partner growth is likely to be similar to that recorded in the mid-2000s with moderate inflation. Risks overall remain skewed to the downside.
  • Global financial conditions continue to be very accommodating. While the US Federal Reserve has begun to reduce its asset purchases, so-called “tapering”, it is likely to be some time yet before central banks in the major advanced economies begin to increase their policy interest rates.
  • The unemployment rate is forecast to decline to below 5%, annual CPI inflation to move back to around the middle of the 1% to 3% target band and the current account deficit to increase to over 6% of GDP by the end of the 2017/18 forecast period. Growth in imports, partly associated with strong investment growth, means net exports make a negative contribution to GDP growth over the first three years of the forecast period.
  • Fiscal policy restraint and the high exchange rate imply interest rates are lower than would otherwise be the case. The recent application of Loan-to-Value Ratios (LVRs) is also reducing the amount of work monetary policy needs to do over the short term. In the absence of these downward forces, the impetus to demand from the Canterbury rebuild and the high terms of the trade would have likely forced interest rates to rise earlier and by more.
  • The operating balance before gains and losses (OBEGAL) is forecast to move from a deficit of $2.4 billion this fiscal year to a surplus of $0.4 billion in the year ending June 2015, and to $3.5 billion in the year ending June 2018. Net core Crown debt is forecast to peak at $65.5 billion in June 2017 from $59.4 billion in June 2014.
Figure 3 - OBEGAL, core Crown residual cash and net core Crown debt
Figure 3 - OBEGAL, core Crown residual cash
and net core Crown debt.
Source:  The Treasury
  • Budget 2014 incorporates net new operating initiatives of $1 billion per annum on average over the next four years. The indicative operating allowance for Budget 2015 and beyond is $1.5 billion per annum, growing at 2% per Budget. Increasing tax receipts mean core Crown operating cash flows are forecast to return to surplus in the year ending June 2015. When combined with net capital spending, core Crown residual cash returns to surplus in the year ending June 2018 (one year later than forecast in the Half Year Update of December 2013). This includes $4.7 billion of gross proceeds from completion of the Government Share Offer programme.
  • Following a decline over recent years, the Crown's share of net worth is expected to increase modestly over the forecast period, as the Government begins to record surpluses and the growth in assets outpaces liabilities. Within the balance sheet, financial assets are forecast to increase (particularly the Crown's investment portfolios) to over 50% of total Crown assets and around 50% of GDP. Liabilities begin to fall in nominal terms by the end of the forecast period as earthquake obligations are settled and the Crown begins to pay back debt.
  • There is a mix of upside and downside risks, including the size and pace of the Canterbury rebuild, the size and duration of the current upswing in net migration, the path of the terms of trade, the path and pass-through of the exchange rate and the saving behaviour of households, particularly in light of current house price increases.
  • The Budget Update contains two alternative scenarios to illustrate how the economy could evolve if some of the judgements underpinning the main forecasts turn out differently. One scenario maps out a stronger net migration driven cycle, while the other shows the impact of a larger fall in the terms of trade.
  • In addition to the fiscal impact of changes to economic activity, the Government is exposed to other fiscal risks that could impact both the operating balance and the balance sheet. For example, the Crown's financial position is susceptible to market movements in variables such as interest rates, exchange rates and equity prices. The final fiscal cost of the Canterbury earthquakes is also still uncertain. There are also a number of contingent liabilities and fiscal risks outlined in the Specific Fiscal Risks chapter.
Table 1 - Summary of the Treasury's main economic and fiscal forecasts
  2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Economic (March years, %)            
Economic growth1 2.3 3.0 4.0 3.0 2.1 2.1
Unemployment rate2 6.2 5.9 5.4 5.1 4.8 4.4
CPI inflation3 0.9 1.5 1.8 2.5 2.3 2.0
Current account balance4 -3.9 -3.1 -4.4 -5.9 -6.2 -6.3
Fiscal (June years, % of GDP)            
Total Crown OBEGAL5 -2.1 -1.1 0.2 0.5 0.9 1.3
Net debt6 26.2 25.8 26.4 25.9 24.9 23.8

Notes:

  1. Real production GDP, annual average percentage change
  2. Percent of labour force, March quarter, seasonally adjusted
  3. CPI, annual percentage change, outturn for March 2014
  4. % of GDP
  5. Total Crown operating balance before gains and losses (OBEGAL)
  6. Net core Crown debt excluding the New Zealand Superannuation Fund and advances

Sources: Statistics New Zealand, the Treasury

Finalisation Dates for the Update

Economic data - 16 April 2014

Economic forecasts - 17 April 2014

Tax revenue forecasts - 22 April 2014

Fiscal forecasts - 29 April 2014

Specific fiscal risks - 29 April 2014

Text finalised - 7 May 2014

Economic Outlook

Overview

  • The pace of expansion in economic activity quickened and broadened over the second half of 2013. This trend is likely to have continued in 2014. Over the second half of 2013, agricultural production recovered from the drought earlier in the year and exports rose strongly; business confidence increased and investment in capital goods accelerated; and economy-wide employment rose sharply, supporting growth in household incomes.
  • Household and business incomes have been further boosted by high prices for New Zealand's export commodities, which have underpinned record high levels in the terms of trade. The rise in incomes has been reflected in faster growth in private consumption expenditure and in market investment. Low interest rates, the Canterbury rebuild and strengthening net migration inflows are also adding to domestic demand.
  • Growth in demand has reduced spare capacity in the economy and consumer price inflation has increased, particularly for non-tradable goods and services. Prices in the tradable sector have continued to fall, reflecting weak import prices and the ongoing appreciation of the exchange rate, and have helped keep overall inflation moderate. At the same time, the high exchange rate is reducing the price competitiveness of firms in the tradable sector, and restraints on high loan-to-value mortgage lending are reducing the impact of low interest rates on parts of the economy.
  • Growth in New Zealand's major trading partners is gaining momentum, supported by expansionary monetary policy. However, inflation is low in many countries, public and private debt is high and financial stability risks, while reduced, remain a threat to the recovery. Internationally, monetary policy accommodation is expected to remain in place for some time.
  • Domestically, the pace of expansion in the economy is expected to quicken to 4.0% over the next year and employment is forecast to increase by 3.0%. The relatively positive growth outlook and the accompanying inflationary pressures have led the Reserve Bank to begin returning interest rates to more neutral settings. Short-term interest rates are forecast to rise to 4.3% in the March 2015 quarter and to 4.8% a year later, and consumer price inflation is expected to peak at around 2.5% in mid-2016 and to ease to 2.0% in early 2018.
  • Expectations of widening interest rate differentials are providing support for the current high level of the New Zealand dollar. The trade-weighted exchange rate is assumed to remain elevated throughout the forecast period, which slows growth in the tradables sector and contributes to a widening of the current account deficit.
  • Beyond 2015, tighter monetary conditions, combined with a decline in the terms of trade and slowing net migration inflows, contribute to a period of more moderate growth that enables inflation to stabilise and the exchange rate to depreciate. Nonetheless, the exchange rate remains high at the end of the forecast period and continues to constrain export growth, while import demand continues to be supported by the Canterbury rebuild. This is reflected in a current account deficit of 6.3% of GDP in 2018.

Higher terms of trade and increased net migration inflows provide a temporary boost... 

The terms of trade (the price of exports relative to imports) have risen to 40-year highs, leading to an increase in national income and purchasing power. These gains are reflected in increased consumer spending and business investment. Higher net migration inflows are also adding to demand. As a consequence, the near-term growth outlook is slightly stronger than forecast in the Half Year Update (Figure 1.1). However, recent gains in the terms of trade and net migration are expected to be temporary.

Figure 1.1 - Real GDP growth
Figure 1.1 - Real GDP growth.
Source:  Statistics New Zealand, the Treasury

Rising dairy export prices have been a major contributor to the higher terms of trade but, more recently, dairy prices have moved lower and further falls are anticipated as global supply increases. Demand from Asia, and China in particular, is expected to remain strong and to provide support for historically high prices over the medium term. Prices for many other export commodities are also at high levels but, like the market for dairy products, increases in supply are expected to result in lower prices over the next 12 to 18 months.

Overall, the terms of trade are projected to decline by about 9% over the next year but to remain at a high level over the medium term. This is a small decline relative to many of those experienced over the past 40 years and the historical experience suggests that the terms of trade will, in all likelihood, be much more volatile than projected. Nonetheless, over the medium term the terms of trade are expected to settle at a level that is well above their long-run trend (see Box on the outlook for the terms of trade on page 13). The Risks and Scenarios chapter explores the likely effects of a large and sustained fall in the terms of trade.

Table 1.1 - Economic forecasts1
(Annual average % change,
March years)
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Private consumption 2.6 3.6 4.1 3.6 2.4 1.6
Public consumption -0.6 1.4 0.0 1.2 1.9 1.6
Total consumption 1.9 3.1 3.3 3.1 2.3 1.6
Residential investment 19.4 14.5 22.6 10.8 1.6 0.1
Market investment 4.9 11.3 9.6 4.3 3.8 2.8
Non-market investment -9.9 1.6 2.7 2.4 2.4 2.4
Total investment 7.3 11.8 13.6 5.7 3.5 2.4
Stock change2 -0.4 0.2 0.2 -0.1 -0.2 -0.1
Gross national expenditure 2.3 5.2 6.3 3.7 2.5 1.7
Exports 2.6 -0.7 1.4 2.1 2.7 2.6
Imports 1.2 8.2 6.6 4.4 3.7 1.6
GDP (expenditure measure) 2.6 2.5 3.9 3.0 2.1 2.1
GDP (production measure) 2.3 3.0 4.0 3.0 2.1 2.1
Real GDP per capita 1.6 2.0 2.2 1.7 1.1 1.2
Nominal GDP (expenditure measure) 2.2 6.7 5.7 4.3 4.5 3.7
GDP deflator -0.5 4.1 1.7 1.3 2.3 1.6
Output gap (% deviation, March year avg)3 -1.2 -0.4 0.8 1.2 0.6 0.2
Employment 0.3 2.4 3.0 1.8 1.3 1.2
Unemployment rate4 6.2 5.9 5.4 5.1 4.8 4.4
Participation rate5 67.9 69.0 69.3 69.2 69.1 69.0
Nominal wages6 2.1 3.0 2.7 3.1 3.5 3.5
CPI inflation7 0.9 1.5 1.8 2.5 2.3 2.0
Terms of trade8 -5.9 13.2 1.6 -4.9 0.9 0.2
House prices9 7.6 8.0 7.3 4.3 2.5 2.4
Current account balance            
    $billion -8.3 -7.0 -10.4 -14.6 -16.0 -17.1
    % of GDP -3.9 -3.1 -4.4 -5.9 -6.2 -6.3
Net international investment position            
   % of GDP -71.4 -65.9 -66.7 -69.8 -73.0 -76.6
TWI10 75.9 78.7 78.6 78.4 76.9 73.2
90-day bank bill rate10 2.7 3.0 4.3 4.8 4.9 5.3
10-year bond rate10 3.7 4.6 4.8 5.0 5.1 5.2

Notes:

  1. Forecasts finalised 17 April 2014.
  2. Contribution to GDP growth.
  3. Estimated as the percentage difference between actual real GDP and potential real GDP.
  4. Percent of the labour force, March quarter, seasonally adjusted.
  5. Percent of the working-age population, March quarter, seasonally adjusted.
  6. Quarterly Employment Survey, average ordinary-time hourly earnings, annual percentage change.
  7. Annual percentage change.
  8. System of National Accounts (SNA) and merchandise basis, annual average percentage change.
  9. QVNZ House Price Index, annual percentage change.
  10. Average for the March quarter. CPI, TWI and interest rates are actuals for 2014.

Longer time series for these variables are provided on page 132.

Net permanent and long-term migration inflows have continued to rise in recent months, increasing the population and adding to demand in the housing market and to private consumption demand more broadly (Figure 1.2). Net inflows reached nearly 32,000 in the 12 months to March 2014, almost double the inflow at the time of the Half Year Update, and have contributed to a doubling in annual population growth over the past 18 months.

Figure 1.2 - Private consumption and net migration
Figure 1.2 - Private consumption and net
migration.
Source:  Statistics New Zealand, the Treasury

Much of the rise in net migration inflows is accounted for by fewer departures, mostly to Australia, reflecting the relatively positive outlook for employment growth in New Zealand. Arrivals from Australia have also strengthened, driven by returning New Zealanders. Annual net migration is expected to increase further, to around 38,000 later this year, before declining gradually to its long-run average inflow of 12,000 per year. However, like the terms of trade, movements in net migration are hard to predict and can change rapidly. The implications of a greater increase in net inflows are discussed in the Risks and Scenarios chapter.

...while the Canterbury rebuild has a longer-lasting impact

The Canterbury rebuild is expected to provide significant impetus to demand over the forecast horizon and beyond, chiefly through additional residential and business investment, but also through related consumption spending on consumer durables. Reconstruction investment is estimated to total around $40 billion, with around half of this expenditure expected to have taken place by the end of the forecast period in mid-2018. Construction activity is also expected to increase elsewhere, particularly in the Auckland area where there is a shortage of housing.

Construction activity rose strongly over the first half of 2013 and continued at a high level over the remainder of the year. The number and value of residential building consents has continued to trend upward in recent months, indicating a strong pipeline of activity ahead (Figure 1.3). Employment in the industry has continued to expand and the labour market has tightened, particularly in Canterbury, where unemployment has fallen to low levels. Construction costs in the Consumers Price Index (CPI) have increased and are likely to increase further as capacity pressures become more acute, underpinning non-tradables inflation in coming years. While these costs are assumed to have limited implications for other industries, the risk of stronger cost pressures remains high.

Figure 1.3 - Real residential investment
Figure 1.3 - Real residential investment.
Source:  Statistics New Zealand, the Treasury

House prices rose 9% in the year ending December, although the rate of increase has eased in recent months, likely reflecting loan-to-value restrictions on mortgage lending imposed by the Reserve Bank on 1 October 2013, as well as higher mortgage interest rates. Further interest rate rises are projected and house price inflation is expected to ease further (Figure 1.4). In these forecasts, short-term interest rates rise to 4.8% by the March quarter 2016, up from 3.0% in the March quarter 2014, a little faster than projected in the Half Year Update, reflecting stronger growth.

Figure 1.4 - House prices and interest rates
Figure 1.4 - House prices and interest rates.
Source:  Quotable Value, Reserve Bank, the Treasury

Projected interest rate increases flow through to higher household debt servicing expenses (Figure 1.5), which constrains the rate of growth of consumption demand and the demand for housing assets. Although interest rates are projected to rise, the timing and extent of future increases are uncertain; for example, interest rates may not rise as quickly as forecast if the terms of trade fall more sharply than expected (as in the Risks and Scenarios chapter).

Figure 1.5 - Household saving and debt servicing
Figure 1.5 - Household saving and debt servicing.
Source:  Statistics New Zealand, the Treasury

Household debt has declined from its earlier peak as a share of household income, but remains elevated. These forecasts assume that some of the income gains from the rise in the terms of trade are saved (Figure 1.5), but the response of consumers to increased income is uncertain. There is a risk that, rather than increase their saving, households may instead prefer to increase their debt levels to fund the purchase of houses or the consumption of other goods and services and, as a consequence, house price inflation and domestic demand pressures do not ease as anticipated. The implications of stronger private consumption are modelled in the Risks and Scenarios chapter.

Private consumption expenditure is supported by a stronger labour market... 

Growth in private consumption is supported by rising labour income and the terms of trade. Employment growth accelerated over the second half of 2013, reflecting increased demand in the economy and greater confidence in the economic outlook, and the unemployment rate fell to 6.0% (Figure 1.6). With demand continuing to strengthen and confidence remaining high, further gains in employment are anticipated. The unemployment rate is expected to decline to around 5.0% in 2016, underpinned by a labour force participation rate that is assumed to return to its pre-recession peak in coming quarters and to remain at an historically high level. The higher labour force participation rate, coupled with rising net migration inflows, partly offsets the impact of stronger labour demand and results in only a gradual increase in wage growth.

Figure 1.6 - Labour market
Figure 1.6 - Labour market.
Source:  Statistics New Zealand, the Treasury

Similarly, although rising net migration adds to demand pressures in the short-run, in the medium term it increases the productive capacity of the economy. This increase is reflected in potential GDP growth, which expands at an average rate of 2.6% per year over the forecast period, slightly higher than in the Half Year Update.

Over the year ahead, employment is expected to grow 3.0% and to be the primary factor contributing to increased output. From the year ending March 2015 onward, growth in the capital stock, which partly reflects the Canterbury rebuild, makes the largest factor contribution to increases in output. These trends are reflected in above-average labour productivity growth over the March years ending 2013 to 2016 when output growth is strongest, but slower productivity growth thereafter as output growth slows. As a consequence, the forecast pickup in GDP per capita growth to over 2.0% per year in 2014 is expected to subside by 2016, and to average around 1.7% over the forecast period, a little above its post-2000 average.

...and higher real incomes

Increases in the terms of trade, which measure the prices of goods and services New Zealand exports relative to those it imports, mean that the purchasing power of New Zealand residents has improved. The terms of trade effects are not captured directly by the measures of real GDP, which measures production, but are included in real gross national income (GNI). The recent rise in the terms of trade has caused a significant divergence between the movements of real GDP and real GNI; that is, real incomes are increasing faster than real output or GDP (Figure 1.7). Although real income growth slows as the terms of trade ease, the ongoing high level of the terms of trade means that real incomes also remain high. Some of these income flows will be required to meet increased depreciation as the capital stock expands, but a large proportion of the gains from the terms of trade are likely to be available to support domestic consumption.

Figure 1.7 - Real income and real output
Figure 1.7 - Real income and real output.
Source: Statistics New Zealand, the Treasury

Outlook for New Zealand's Terms of Trade

Until the late 1980s, New Zealand's terms of trade appeared to be on a downward trend. This was considered a serious issue for the economy and was often explained in terms of a long-term decline in commodity prices relative to manufacturing prices.[1]The trend decline in the terms of trade appears to have stopped in the late 1980s, followed by a period of stability in the 1990s and an upward trend from around 2000.

One of the main factors responsible for this change is the entry of China into the world economy, increasing the demand for commodities and contributing to falling prices for manufactured goods. This combination has resulted in a rise in New Zealand's terms of trade over the past 10-15 years (Figure 1.8).

The terms of trade are an important influence on New Zealand's nominal GDP which in turn is a key driver of tax revenue. Higher export prices flow through directly to the tradables sector and indirectly to the rest of the economy.

An elevated outlook for the terms of trade has been one of the key features of recent Treasury forecasts. The headline merchandise terms of trade reached a fresh 40-year high in the December 2013 quarter and were only 3.5% short of their 1973 high.[2] The terms of trade are expected to fall over the second half of 2014 as high dairy prices drive increases in global production. This is expected to reduce global prices and to lower returns to New Zealand producers.

Nonetheless, rising demand from China and other emerging economies is expected to support demand for our commodity exports, and to underpin the terms of trade, into the medium term as total world production is unable to keep pace. In the 2014 Budget Update, the merchandise terms of trade are assumed to remain around 25% higher than their 50-year average.

The Treasury's forecasts are supported by international research, particularly with regard to dairy prices, which the OECD-FAO expects to remain high in real terms for the next decade (Figure 1.9). The Risks and Scenarios chapter contains a scenario based on a greater fall in the terms of trade that is maintained at a lower level over the medium term.

Figure 1.8 - Merchandise terms of trade
Figure 1.8 - Merchandise terms of trade.
Source:  Statistics New Zealand, the Treasury
Figure 1.9 - Forecasts of dairy prices
Figure 1.9 - Forecasts of dairy prices.
Source:  OECD-FAO, the Treasury

Notes

  • [1]For further discussion see Borkin, P, Past, Present and Future Developments in New Zealand's Terms of Trade, New Zealand Treasury Working Paper 06/09.
  • [2]Note that there are methodological differences between the headline measure of the terms of trade and the SNA-based series that the Treasury forecasts.

Market investment has accelerated...

The current environment of low interest rates, positive business sentiment and an elevated exchange rate (which makes imported capital goods cheaper) has supported a marked acceleration in investment in plant, machinery and equipment, which comprises about half of market investment. These supportive factors are expected to continue to drive investment growth over the next year or so (Figure 1.10). Thereafter, the influence of tighter monetary policy and the gradual decline of the exchange rate lead to slower investment growth. Furthermore, increases in demand from the Canterbury rebuild are expected to fade over 2015 as construction activity reaches its peak and continues at a high level for a number of years beyond the end of the forecast period in 2018.

Figure 1.10 - Investment demand
Figure 1.10 - Investment demand.
Source:  Statistics New Zealand, the Treasury

...but fiscal policy remains tight   

The Government's fiscal objectives of achieving an operating balance surplus in the year ending June 2015 and then reducing debt are consistent with moderate growth in real government consumption over the forecast period (Figure 1.11). The increased operating allowances announced in the Budget are assumed to result in higher government consumption expenditure. The composition of spending will be revisited when government policy decisions are confirmed in future Budgets, that is, the operating allowances may be used for either higher spending or revenue reductions (see the 2014 Fiscal Strategy Report).

Figure 1.11 - Public consumption
Figure 1.11 - Public consumption.
Source:  Statistics New Zealand, the Treasury

Despite the increased allowances, government consumption is forecast to continue to decline as a proportion of GDP and the fiscal impulse or stimulus to the economy maintains its contractionary trend. That is, the net impact of the Government's spending, taxation and borrowing programmes is to reduce the share of the economy's productive resources it utilises, which enables other sectors of the economy to expand more vigorously.

Trading partner growth is supporting export demand... 

Economic growth in our major trading partners has been slightly higher than anticipated in the Half Year Update for most of the advanced economies, and the UK and US in particular; Japan and some of the emerging Asian economies underperformed relative to the forecasts.

The trend in world growth forecasts since late last year is for improvement in most advanced economies as their recoveries take hold, but some downgrades for emerging economies as capacity constraints, structural issues and tighter financial conditions, driven by greater investor concerns about vulnerabilities, affect their outlook. Inflation in the major advanced economies has remained subdued and the period of low interest rates is likely to be sustained for some time (Figure 1.12).

Figure 1.12 - Short-term interest rates in advanced economies
Figure 1.12 - Short-term interest rates in
advanced economies.
Source:  Haver, the Treasury

In the US, adverse winter weather has likely contributed to a period of slower growth, but a return to the moderate growth evident at the end of 2013 is expected. The labour market has continued to strengthen, albeit at a somewhat slower pace in recent months, and the unemployment rate has fallen to 6.3%. Ongoing monetary stimulus and slowing fiscal consolidation are expected to support growth of around 3% per year over the forecast period. A prolonged period of low interest rates and supportive monetary policy is also expected for the euro area and Japan.

Growth in the Australian economy continues to reflect the rebalancing of activity from mining investment to exports and to other sectors. This transition has been accompanied by slower growth in 2013, but there are signs that demand is picking up, supported by low interest rates and strong demand in the housing market. However, the labour market remains subdued and the unemployment rate has been little changed over the past year, averaging around 5.8%. Growth is expected to remain below average for the next two years or so.

Figure 1.13 - Trading partner growth and inflation in the US and euro area
Figure 1.13 - Trading partner growth and
inflation in the US and euro area.
Source:  Haver, the Treasury

In China, growth also appears to have eased early in 2014, but is expected to recover, partly reflecting additional fiscal support. Over the medium term, growth is expected to moderate to around 7.0% as more restrained rates of credit growth and the impacts of reforms to promote a transition to a more balanced and sustainable growth path take effect. Although growth is expected to be more moderate, demand for New Zealand's export commodities is likely to remain strong as ongoing increases in per capita incomes and changing dietary tastes drive continued increases in protein consumption.

Overall, trading partner growth is expected to increase at a similar pace to that experienced through the mid-2000s (Figure 1.13). Rising demand, particularly in China, will support export growth and underpin strong export prices. Despite the improved outlook, significant downside risks remain. Public debt remains high in many advanced economies and credible medium-term plans to reduce the stock of debt are yet to emerge. Similarly, private and banking-sector debt remains high and credit conditions generally remain weak. In the euro area, the additional challenges of structural reform remain and risks to activity from very low inflation have emerged. The potential for a financial crisis in emerging markets and/or China also poses threats to the outlook. Risks to the global outlook are explored in more detail in the Risks and Scenarios chapter.

 ...but the high exchange rate is dampening the impact...

Expectations of future interest rate increases, combined with high commodity prices and New Zealand's relatively favourable growth outlook, lifted the trade-weighted index (TWI) to a record high in the March quarter (Figure 1.14).

Figure 1.14 - Services and manufactured goods exports and the exchange rate
Figure 1.14 - Services and manufactured goods
exports and the exchange rate.
Source:  Statistics New Zealand, the Treasury

In the services export sector, which is dominated by tourism, the elevated exchange rate is making New Zealand a more expensive destination for tourists and foreign students who tend to have fixed foreign currency budgets. As a result, the New Zealand dollar value of export receipts for travel services and services exports more broadly has been static over the past year despite a 6% increase in visitor arrivals. The price competitiveness of manufactured goods exports is also reduced when the exchange rate appreciates, and export receipts in this sector have fallen over the past year. Trading conditions are expected to remain challenging in both sectors, although trading partner growth and the assumed depreciation of the exchange rate, particularly after 2016, provide some relief.

...and contributing to a widening current account deficit 

In the final quarter of 2013 the strength of commodity export prices, combined with the recovery in dairy production from the earlier drought, increased the trade surplus and narrowed the current account deficit. Further increases in the trade surplus are expected in the near term reflecting ongoing high prices over the March quarter (Figure 1.15). More recently, dairy export prices have fallen and further falls are anticipated, leading to a decline in goods export receipts over the next two years or so. In addition, goods imports are expected to increase as investment and consumption demand continue to grow. As a consequence, the goods surplus is eroded over the year ahead and a widening deficit develops. This widening trend is halted late in the forecast period when the falling exchange rate supports export revenues.

Figure 1.15 - Current account
Figure 1.15 - Current account.
Source:  Statistics New Zealand, the Treasury

The long-term downward trend in the services surplus is forecast to continue, reflecting the depressing effect of the high exchange rate on export volume growth and its positive impact on services imports, which include holidays abroad by New Zealand residents.

Figure 1.16 - Savings and investment
Figure 1.16 - Savings and investment.
Source:  Statistics New Zealand, the Treasury

Interest rates in the major developed economies are expected to remain on hold over the next year at least, but long-term rates are expected to rise gradually and to drive increases in interest outflows. Dividend outflows are also expected to increase, reflecting improved profitability, and overall the income deficit widens to around $12 billion from around $10 billion in the year ending March 2014. As a share of GDP, the income deficit is broadly stable at around 4.5% of GDP.

Over the forecast period investment demand rises more rapidly than saving, partly as a result of the Canterbury rebuild, which is reflected in a wider current account deficit (Figure 1.16). However, a large share of the Canterbury rebuild is assumed to be financed by overseas insurance inflows, which means that a proportion of the current account deficit is not generating additional international liabilities. Statistics New Zealand estimates a total of $19 billion of reinsurance claims from all the Canterbury earthquakes, with $13 billion of these claims having been settled.

In summary, the annual current account deficit is forecast to widen to 6.3% of GDP by the end of the forecast period in June 2018 and net international liabilities rise to 77% of GDP from 67% currently. In these forecasts, further depreciation of the exchange rate is required to stabilise the net international liability position.

Domestic sources of inflation are rising... 

The strong pace of expansion evident in the economy is reducing spare capacity and contributing to price increases, particularly in non-traded sectors of the economy, including housing and household utilities. Falling tradable prices have provided an offset to rising non-tradable prices with the New Zealand dollar's appreciation, although the pace of falls has eased recently (Figure 1.17). Price pressures are expected to intensify, consistent with business survey measures of pricing intentions and with the expected stabilisation of the New Zealand dollar, which reduces opportunities for further tradable price falls.

Overall, headline CPI inflation is forecast to rise to around 2.5% in 2016 and decline gradually thereafter. Increases in tobacco excise taxes are expected to add 0.2 percentage points to annual inflation in each of the March 2015 and 2016 quarters.

Figure 1.17 - Consumer price inflation
Figure 1.17 - Consumer price inflation.
Source:  Statistics New Zealand, the Treasury

...leading to a withdrawal of monetary stimulus

As mentioned earlier, the Reserve Bank has begun to remove the stimulus to demand imparted by low interest rates. Further increases over the next two years are projected to lift short-term interest rates to around 4.8% from 3.3% currently. The higher interest rates have a direct impact on household disposable incomes through higher interest payments and an indirect impact on business investment demand, both of which result in slower growth. Although 90-day interest rates are expected to be neutral at around 4.8%, further increases may be required to offset the upward price pressure generated by the projected fall in the exchange rate and to keep inflation expectations anchored close to 2%.

Nominal GDP growth accelerates in the near term

The economy-wide price effects of movements in the terms of trade are captured in broad price measures including the GDP deflator, which is increasing sharply (Figure 1.18). With real GDP growth also rising briskly, nominal GDP growth is expected to accelerate to over 8% in the year ending June 2014. As the terms of trade fall later this year, nominal GDP growth slows to 4.5% in the year ending June 2015 and averages a little over 4% for the remainder of the forecast period.

Figure 1.18 - GDP deflator and nominal GDP
Figure 1.18 - GDP deflator and nominal GDP.
Source:  Statistics New Zealand, the Treasury

In the income measure of nominal GDP, which underpins the Treasury's tax revenue forecasts, compensation of employees grows at an average rate of 4.7% per year and remains broadly stable as a share of GDP. The net operating surplus, which drives forecasts of corporate tax, cycles around a more moderate growth rate of 3.8% per year, largely reflecting movements in commodity producer incomes.

Economic Forecast Assumptions

  • Net permanent and long-term migration inflows rose to 31,900 in the year ended March 2014, although only data up to the February month (29,000) were available when the Budget Update was finalised. Net migrant inflows are forecast to rise to 38,100 in the September 2014 year before returning to the long-run assumption of 12,000 per year in 2017.
  • The non-accelerating inflation rate of unemployment (NAIRU) is assumed to be around 4.5% by 2018.
  • Average hours worked per week are assumed to decline from their current level of 33.0 to 32.8.
  • Economy-wide labour productivity growth is assumed to average 1.3% per year between the years ending March 2014 and March 2018.
  • Investment associated with the rebuild following the Canterbury earthquakes is assumed to be around $40 billion in 2011 prices (rounded to the nearest $5 billion), spread across residential property ($18 billion), commercial property ($9 billion) and infrastructure and social assets ($11 billion). Around $18 billion of the total is forecast to be undertaken within the forecast period to June 2018.
  • WTI oil prices are assumed to fall from around US$99 per barrel in the March 2014 quarter to around US$81 in the March 2018 quarter, in line with oil futures prices.
  • 90-day interest rates are assumed to increase from 3.0% in the March 2014 quarter to 5.3% in the March 2018 quarter and 10-year interest rates to rise from 4.6% in the March 2014 quarter to 5.2% in the March 2018 quarter.
  • The TWI is assumed to remain around 79.0 from the June 2014 quarter until late 2016, and then to decline to 72.2 in the June 2018 quarter.
  • Tobacco excise tax increases add 0.2 percentage points to annual inflation in each of the March 2015 and 2016 quarters.
  • Reduced ACC levy rates will reduce contributions by households and employers by about $400 million in the 2014/15 levy year and around $480 million in the following levy year, with the latter to be finalised following ACC's public consultation.

Fiscal Outlook

Overview

Table 2.1 - Fiscal indicators
Year ended
30 June
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast

$billions

           
Total Crown OBEGAL1  (4.4)  (2.4) 0.4 1.3 2.4 3.5
Core Crown residual cash  (5.7)  (3.9)  (4.3)  (1.8) (0.1) 0.7
Net core Crown debt2 55.8 59.4 63.6 65.3 65.5 64.9
Net worth attributable to the Crown 68.1 70.0 73.1 77.3 82.7 89.5

% of GDP

           
Total Crown OBEGAL1  (2.1)  (1.1) 0.2 0.5 0.9 1.3
Core Crown residual cash  (2.7)  (1.7)  (1.8)  (0.7) (0.0) 0.3
Net core Crown debt2 26.2 25.8 26.4 25.9 24.9 23.8
Net worth attributable to the Crown 32.0 30.4 30.3 30.6 31.5 32.8

Notes:

  1. Operating balance before gains and losses.
  2. Net core Crown debt excluding the New Zealand Superannuation Fund (NZS Fund) and advances.

Source: The Treasury

  • Core Crown tax revenue is expected to increase across the forecast period and by 2017/18 is expected to be $18.9 billion higher than 2012/13, reflecting the growth in the nominal economy, as discussed in the EconomicOutlookchapter.
  • The 2013/14 tax forecast has been revised downwards owing to weakness in the current year's results to date. However, this weakness is expected to dissipate by 2014/15 owing to higher growth in the drivers of tax revenue that year.
  • The Budget 2014 operating allowance averaged $1.0 billion per annum, with the Government's decision to set future allowances at $1.5 billion per annum from Budget 2015 (growing at 2% per annum per Budget). When an increase in social assistance spending is added, core Crown expenses are expected to rise by $11.1 billion by the end of the forecast period. This increase is slower than growth in the nominal economy so by the end of the forecast period core Crown expenses fall to below 30% of GDP.
  • These forecasts show that the Government is expected to achieve its fiscal objective of a return to surplus in 2014/15 with an OBEGAL surplus of $0.4 billion. Beyond 2014/15 these surpluses are expected to increase by between $0.9 and $1.1 billion each year and by 2017/18, the OBEGAL surplus is expected to reach $3.5 billion.
  • In nominal terms, net core Crown debt increases before falling in 2017/18 as residual cash returns to surplus. As a share of GDP, net core Crown debt declines after 2015, falling to 23.8% by the end of 2017/18.
  • The Government Share Offer programme has concluded, with gross proceeds of $4.7 billion available for the Future Investment Fund.
  • The Crown's balance sheet continues to strengthen, enabling buffers to be built to sustain government services in the event of future shocks.
  • In preparing these fiscal forecasts, key assumptions have been made on the performance of the economy and new operating allowances. As with all assumptions, there is inherent uncertainty and a change in any one assumption could negatively or positively impact the Crown's forecast surpluses and net core Crown debt position. The Risks and Scenarios and the Specific Fiscal Risks chapters outline the key risks to the Crown achieving these forecasts.
Table 2.2 - Reconciliation between OBEGAL and net core Crown debt
Year ending 30 June
$billions
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Core Crown revenue 64.1 67.8 72.5 76.9 80.8 84.7
Core Crown expenses (70.3) (71.6) (73.1) (76.0) (78.7) (81.5)
Net surpluses/(deficits) of SOEs and CEs 1.8 1.4 1.0 0.4 0.3 0.3
Total Crown OBEGAL (4.4) (2.4) 0.4 1.3 2.4 3.5
Net retained surpluses of SOEs, CEs and NZS Fund (1.2) (1.2) (0.9) (0.3) (0.2) (0.2)
Non-cash items and working capital movements 1.1 1.4 1.6 1.9 2.4 1.7
Net core Crown cash flow from operations (4.5) (2.2) 1.1  2.9  4.6  5.0 
Net purchase of physical assets (1.2) (2.0) (2.2) (2.0) (2.1) (1.8)
Advances and capital injections (1.7) (2.0) (3.5) (2.1) (1.9) (1.6)
Forecast for future new capital spending - (0.3) (0.6) (0.7) (0.9)
Proceeds from government share offers 1.7 2.3  0.6  -   -   -  
Core Crown residual cash balance (5.7) (3.9) (4.3) (1.8) (0.1) 0.7
Opening net core Crown debt 50.7 55.8 59.4 63.6 65.3 65.5
Core Crown residual cash deficit/(surplus) 5.7 3.9 4.3 1.8 0.1 (0.7)
Valuation changes in financial instruments (0.6) (0.3) (0.1) (0.1) 0.1 0.1
Closing net core Crown debt 55.8 59.4 63.6 65.3 65.5 64.9
As a percentage of GDP 26.2% 25.8% 26.4% 25.9% 24.9% 23.8%

Source: The Treasury

Core Crown Tax Revenue

Tax revenue grows by 5.8% per annum on average over the forecast period...

Core Crown tax revenue is forecast to rise in each year of the forecast period, although at a lower rate than previously expected. While tax in the current year is weaker than previously forecast, growth of 5.8% per annum across the forecast period is still expected.

By 2017/18 core Crown tax revenue is expected to reach $77.6 billion, $18.9 billion higher than in 2012/13. Forecast tax revenue increases relative to nominal GDP, reaching 28.5% by the end of the forecast period compared to 27.5% in 2012/13 (Figure 2.1).

Figure 2.1 - Core Crown tax revenue
Figure 2.1 - Core Crown tax revenue.
Source:  The Treasury

Most of the growth in tax revenue forecasts can be attributed to growth in the nominal economy, with nominal GDP forecast to grow at 5.1% per annum on average over the forecast period. Tax revenue growth increases in 2014/15 before slowing over the remainder of the forecast period as the growth in nominal GDP slows (Figure 2.2).

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

All tax types are expected to increase across the forecast period, with individuals' source deductions (PAYE) and goods and services tax (GST) showing the most significant growth, as shown in Table 2.3.

Table 2.3 - Growth in core Crown tax revenue over the forecast period by tax type
Year ending 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Total
Movement in core Crown tax owing to:            
Source deductions 1.5 1.4 1.4 1.5 1.7 7.5
Other persons tax 0.1 0.4 0.1 0.2 0.1 0.9
Corporate tax 0.4 0.5 0.5 0.3 0.3 2.0
Residential Withholding Tax (RWT) - 0.4 0.6 0.4 0.4 1.8
Goods and Services Tax (GST) 1.1 1.5 1.1 0.8 0.9 5.4
Other taxes 0.1 0.3 0.5 0.3 0.1 1.3
Total movement in core Crown tax 3.2 4.5 4.2 3.5 3.5 18.9
Plus: previous year's tax base 58.7 61.9 66.4 70.6 74.1 58.7
Core Crown tax revenue 61.9 66.4 70.6 74.1 77.6 77.6
As a % of GDP 26.8% 27.6% 28.0% 28.2% 28.5%  

Source: The Treasury

Growth in employees' compensation (contributing $6.2 billion to the growth in source deductions and the progressive nature of the personal tax scale (fiscal drag) see source deductions increase by $7.5 billion over the forecast period.

Growth in corporate profits are the main drivers behind corporate tax increasing by $2.0 billion over the forecast period, while growth in private consumption contributes to a $5.4 billion increase in GST.

Increased residential investment continues to contribute to the forecast growth in tax revenue, boosting GST by $1.4 billion by 2017/18 as residential investment is forecast to grow at an average rate of 13.8% per annum. This growth is partly offset by GST refunds to insurers, as a large part of the Canterbury residential rebuild is funded by insurance claims.

The 90-day bank bill interest rate is expected to rise from 2.6% on average in 2012/13 to 5.2% by 2017/18. This rise, together with growth in the interest-bearing deposit base, results in growth in tax on interest earned on residents' savings (RWT) of about $1.8 billion across the forecast period.

Table 2.4 - Composition of growth in core Crown tax revenue over the forecast period
Year ending 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Total
Movement in core Crown tax owing to:            
Employees' compensation 1.4 1.2 1.1 1.2 1.3 6.2
Entrepreneurial income 0.5 0.2 0.1 0.2 0.1 1.1
Corporate profits 0.9 0.5 0.4 0.4 0.2 2.4
Private consumption 0.8 1.1 1.1 0.9 0.7 4.6
Residential investment 0.3 0.6 0.3 0.1 0.1 1.4
Interest rates (0.1) 0.2 0.4 0.1 0.1 0.7
Fiscal drag 0.2 0.2 0.3 0.3 0.4 1.4
Policy changes - 0.1 0.1 0.1 - 0.3
Timing and other factors (0.8) 0.4 0.4 0.2 0.6 0.8
Total movement in core Crown tax 3.2 4.5 4.2 3.5 3.5 18.9
Plus: previous year's tax base 58.7 61.9 66.4 70.6 74.1 58.7
Core Crown tax revenue 61.9 66.4 70.6 74.1 77.6 77.6

Source: The Treasury

Budget 2014 includes policy changes totalling $0.3 billion across the forecast period. The largest positive changes come from an Inland Revenue initiative targeting unfiled tax returns and a reduction in the duty-free tobacco concession ($0.2 billion each), with other minor changes slightly reducing tax. These policy changes are discussed in further detail in the Additional Information document (on the Treasury website).

Although growth in tax revenue is forecast, risks to the forecast tax outturn remain, particularly if the assumptions on the economic outlook do not materialise as expected. The Risks and Scenarios chapter provides further discussion of the risks around tax revenue.

...but is weaker than at the Half Year Update

Overall, tax revenue is $1.1 billion less than the Half Year Update across the forecast period, with $0.6 billion relating to the 2013/14 year.

The downward revision in tax revenue in the current year is partly owing to assumptions made at the Half Year Update not eventuating - in particular, in individuals' tax, GST and excise duties (eg, higher earthquake-related insurance refunds than previously assumed and strength in excise that was previously assumed to be permanent but is timing-related). The reduction in the current year forecasts of $0.6 billion consists of $0.2 billion for individuals' tax, $0.3 billion for GST and $0.1 billion for other taxes (Figure 2.3).

Figure 2.3 - Movement in core Crown tax revenue since the Half Year Update
Figure 2.3 - Movement in core Crown tax
revenue since the Half Year Update.
Source:  The Treasury

While the current year's tax take is lower than previously forecast, this weakness is not expected to flow through to 2014/15, as stronger economic growth in that year is expected to boost tax revenues and offset the current year's weakness. Tax policy changes (as discussed above) since the Half Year Update also contribute to the increase in tax in 2014/15. However, the forecast for nominal GDP growth from 2015/16 onwards is lower than in the Half Year Update, reducing the core Crown tax revenue forecast in those years.

Tax Revenue Relative to GDP: Change Since the Half Year Update

Core Crown tax revenue as a percentage of GDP is lower than in the Half Year Update for all years of the forecast period. The average reduction across all forecast years is 0.3% of GDP. The largest movement is -0.6% and this occurs in the current year.

Table 2.5 - Drivers of change in core Crown tax revenue relative to GDP
Year ending 30 June
% of GDP
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
GDP revisions (0.06) (0.06) (0.06) (0.06) (0.06)
Composition of GDP (0.19) (0.12) (0.27) (0.24) (0.29)
Other factors (0.35) 0.02 0.14 (0.02) 0.03
Total change (0.60) (0.16) (0.19) (0.32) (0.32)
Plus 2013 Half Year Update forecast 27.43 27.73 28.18 28.50 28.81
2014 Budget Update forecast 26.83 27.57 27.99 28.18 28.49

Source: The Treasury

Since the Half Year Update, values of nominal GDP for the recent past have been revised up by Statistics New Zealand (reducing the tax-to-GDP ratio for the year ended 30 June 2013). Since the 2013 year is the base year from which subsequent years' tax revenue is forecast, this has reduced the tax-to-GDP in all forecast years (by around 0.06%). Revisions to nominal GDP occur regularly as Statistics New Zealand updates for new information or incoporate new statistical standards and classifications.

Also, not all components of GDP grow at the same rate as total nominal GDP. Since the various tax bases are taxed at different rates (eg, salaries and wages are taxed at personal tax rates and domestic consumption is taxed at a flat rate of 15%), changes in the composition of GDP will affect the overall tax-to-GDP ratio. This effect is shown in the “Composition of GDP” line in Table 2.5.

There are many other factors that can cause tax revenue to grow at a different rate to GDP, thereby affecting the tax-to-GDP ratio. These might be timing effects that shift tax revenue from one year to another, or changes in tax on income that is not included in GDP (eg, investment income).

The 2013/14 “Other factors” include changes to the timing of earthquake-related GST refunds, growth in source deductions that is not as strong as underlying economic drivers, and changes to assumptions on tobacco excise.

Core Crown Expenses

Core Crown expenses grow across the forecast period...

Core Crown expenses are expected to increase in nominal terms by $11.1 billion over the forecast period (Figure 2.4). However, as growth in core Crown expenses is forecast to be at a slower rate than growth in the nominal economy, they fall from 33.0% of GDP in 2012/13 to 29.9% of GDP by the end of the forecast period. In 2015/16, core Crown expenses are expected to stand at 30.1% of GDP, consistent with the Government's target of reducing expenses to around 30% of GDP by 2015/16.

Figure 2.4 - Core Crown expenses
Figure 2.4 - Core Crown expenses.
Source:  The Treasury

Nominal growth in core Crown expenses is largely attributable to new budget spending, along with increased social assistance spending as shown in Figure 2.5.

Figure 2.5 - Increase in core Crown expenses
Figure 2.5 - Increase in core Crown expenses.
Source:  The Treasury

Offsetting these increases, core Crown expenses for the Canterbury rebuild decrease over the forecast period as the most significant operating expenses have already been recognised and the Crown moves into more of an investment phase (refer to box on page 34 for details of the profile and phasing of earthquake expenses).

The Budget 2014 package includes an average net spend of $1.0 billion each year (Table 2.6). As a portion of the package relates to revenue initiatives, the gross increase in expenditure averages $1.2 billion.

Figure 2.6 - Budget 2014 and future Budget allowances
Figure 2.6 - Budget 2014 and future Budget
allowances.
Source:  The Treasury

Future operating allowances are $1.5 billion per annum from Budget 2015 (increasing by 2% each Budget thereafter). Without further information on how these will be allocated, these allowances are assumed to flow through as expenses. When combined, new spending reaches $6.0 billion by 2017/18 (Figure 2.6). However, these operating allowances can be used for a combination of both revenue and expense initiatives when allocated.

The following table summarises the impact of the Budget 2014 package on core Crown revenue and expenses.

Table 2.6 - Summary of changes in revenue and expenses arising from Budget 2014
Year ending 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
4-year
Average
Core Crown revenue - 0.1 0.2 0.2 0.2 0.2
Core Crown expenses (0.1) 1.0 1.2  1.3    1.4    1.2
OBEGAL impact (0.1) 0.9 1.0 1.1 1.2 1.0
Composition of core Crown expense increase:            
Health - 0.4 0.5 0.4 0.5 0.4
Education - 0.1 0.2 0.2 0.3 0.2
Defence - 0.1 0.1 0.2 0.2 0.1
Social development - 0.1 0.1 0.1 0.1 0.1
Families package - 0.1 0.1 0.1 0.1 0.1
Business Growth Agenda initiatives - 0.1 0.2 0.1 0.1 0.1
Other (including savings) (0.1) 0.1 - 0.2 0.1 0.2
Increase in core Crown expenses (0.1) 1.0 1.2 1.3 1.4 1.2

Source: The Treasury

Refer to the Minister's Executive Summary document for further details of the Budget 2014 package.

Outside new budget spending, social assistance spending is expected toincrease by $3.6 billion across the forecast period. New Zealand Superannuation payments (which makes up around half of social assistance costs), grow by $3.4 billion as payments are linked to wage growth and recipient numbers increase (Figure 2.7). Other benefit types also increase marginally over the forecast period.

Figure 2.7 - Social assistance spending
Figure 2.7 - Social assistance spending.
Source:  The Treasury

Finance costs increase by $0.8 billion over the forecast period as gross debt continues to increase alongside rising interest rates.

...and have increased since the previous forecasts

While current year's expenses are slightly lower than forecast at the Half Year Update, by the end of the forecast period expenses are around $2.4 billion higher than previously expected (Figure 2.8). This increase is largely owing to the Government's decision to increase operating allowances for future Budgets to $1.5 billion, up from $1.0 billion at the Half Year Update.

Figure 2.8 - Changes in core Crown expenses since the Half Year Update
Figure 2.8 - Changes in core Crown expenses
since the Half Year Update.
Source:  The Treasury

Slightly stronger real growth coupled with the ongoing impact of welfare reform see unemployment-related benefit recipient numbers reduce over the forecast period and associated social assistance expenses fall compared to the Half Year Update. Refer Table 2.7 in the Operating Balance section for changes to benefit expenses since the Half Year Update.

Operating Balance

The Crown is forecast to return to surplus in 2014/15…

The operating balance before gains and losses (OBEGAL) is expected to return to surplus in 2014/15 with a surplus of $0.4 billion forecast. Beyond 2014/15 surpluses are expected to increase by between $0.9 billion and $1.1 billion per annum.

Figure 2.9 shows the composition of OBEGAL from the different segments of the Government.

Figure 2.9 - Components of OBEGAL by segment
Figure 2.9 - Components of OBEGAL by segment.
Source:  The Treasury

The core Crown segment moves from a forecast OBEGAL deficit of $3.8 billion in 2013/14 to a forecast $3.2 billion surplus by 2017/18, largely reflecting growth in tax revenue.

The State-owned Enterprise (SOE) and Crown entity (CE) segments together contribute $2.1 billion to the OBEGAL surplus in 2013/14, halving to $1.0 billion by the end of the forecast period largely reflecting reductions in ACC levy rates announced in Budget 2013. The SOE segment's contribution stays relatively static across the forecast.

Surpluses are achieved in 2014/15 and continue to increase over the forecast period to a level that translates to being sufficient to fund the Government's capital spending as well as a reduction of debt. Maintaining a level of fiscal restraint while the economy grows will allow surpluses to be built up. These surpluses are important to enable a buffer to be built in the case of future shocks such as a global financial crisis or another large natural disaster.

...although post-2014/15 OBEGAL is lower compared to previous forecasts

OBEGAL is lower in all years with the exception of 2014/15. While lower than what had previously been forecast, nevertheless by the end of the forecast period an OBEGAL surplus of $3.5 billion is expected (Table 2.7).

Table 2.7 - Changes in OBEGAL since the Half Year Update
Year ending 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
OBEGAL - 2013 Half Year Update (2.3) 0.1 1.7 3.1 5.6
Changes in forecasts:          
                Tax revenue (0.6) 0.1 (0.1) (0.2) (0.3)
                Budget 2014 package 0.1 0.1 - (0.1) (0.2)
                Increase in future budget allowances - - (0.5) (1.0) (1.5)
                Social assistance expenses - (0.1) 0.1 0.2 0.1
                ACC forecasts 0.1 - 0.1 0.2 0.3
                EQC forecasts 0.1 0.2 0.1 - -
                Net finance costs (0.2) - - (0.1) (0.2)
                Other changes 0.4 - (0.1) 0.3 (0.3)
Total changes since the Half Year Update (0.1) 0.3 (0.4) (0.7) (2.1)
OBEGAL - 2014 Budget Update (2.4) 0.4 1.3 2.4 3.5

Source: The Treasury

Major changes include:

  • Tax revenue is slightly weaker than the Half Year Update (refer page 25).
  • The Budget 2014 package has a positive impact in the first two years as spending is rephased to later years. The Government has made a number of decisions in Budget 2014 to manage the fiscal impact of spending on the 2014/15 year.
  • An increase in new operating allowances from Budget 2015 ($1.5 billion increasing by 2% annually per Budget thereafter) reduces OBEGAL in the later years.
  • Social assistance expenses, while higher than previously forecast in 2014/15, are expected to be less than previously forecast largely as a result of the declining number of benefit recipients.
  • The positive ACC result largely reflects updated assumptions on the 2015/16 proposed reductions in the Work Account levy (now less than expected). In addition, a reduction in insurance claim expenses is expected, reflecting lower rates of growth in the cost of claims.
  • Earthquake Commission (EQC) results are more positive owing to lower forecast insurance expenses after an updated valuation of EQC's insurance liabilities at 31 December 2013.
  • Finance costs have increased compared to the Half Year Update largely as a result of rising interest costs and higher nominal net core Crown debt than previously forecast.

Operating Balance Indicators

In addition to OBEGAL and the operating balance (both of which are total Crown indicators), other operating indicators are useful in measuring different aspects of performance.

Cyclically Adjusted Balance (CAB)

The underlying nature of OBEGAL can be seen using CAB. This measure adjusts for the state of the economic cycle and significant one-off expenses. Figure 2.10 shows CAB tracking close to OBEGAL in recent years, indicating that the operating deficits between 2009 and 2013 have been largely structural. The projected size of the economy reduced during the recession, implying a smaller tax base while, in contrast, expenses continued to grow.

Government Financial Statistics (GFS)[3]

The net operating balance uses the framework developed by the International Monetary Fund called Government Financial Statistics and is specifically designed for government reporting. It is therefore a useful measure to compare with other countries. The net operating balance represents revenue and expenses of the core Crown (excluding the Reserve Bank) and CEs, and therefore excludes SOEs. It also excludes a wider range of valuation movements than OBEGAL, such as impairments and write-offs.

Table 2.8 - Operating balance indicators
Year ending 30 June
% of GDP
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
OBEGAL (2.1) (1.1) 0.2 0.5 0.9 1.3
Operating balance 3.2 1.3 1.3 1.6 2.0 2.5
Cyclically-adjusted balance (CAB) (1.5) (1.0) (0.2) 0.2 0.8 1.2
Net operating balance (GFS) (0.5) 0.2 1.3 1.5 1.8 2.1

Source: The Treasury

Figure 2.10 - Operating balance indicators
Figure 2.10 - Operating balance indicators.
Source:  The Treasury, IMF (GFS 2005-2006 years, GFS data unavailable for 2004)

Notes

  • [3]For more details of both CAB and GFS, see the Additional Information document on the Treasury website www.treasury.govt.nz

... and strength in equity markets lifts the operating balance

When gains and losses are included, the total Crown operating balance is forecast to be in surplus across the forecast period. While growth in the operating balance is initially subdued, from 2014/15 the operating balance grows steadily (Figure 2.11). The current year's surplus is largely a result of gains expected to be made by Crown financial institutions (CFIs), largely ACC and NZS Fund, and reflects strong global equity returns (eg, by 31 March 2014 NZS Fund had made year-to-date gains of $2.6 billion). While the 2013/14 year reflects the current strong market growth, future years assume a lower long-term rate of return, resulting in subdued growth in these years. These gains play a part in increasing the Government's financial assets and the Crown's net worth (discussed on page 37).

Figure 2.11 - Components of operating balance
Figure 2.11 - Components of operating balance.
Source:  The Treasury

In addition, updated long-term liability valuations for ACC (at 31 December 2013 updated for movements in discount rates to 31 March 2014) and the Government Superannuation Fund (GSF) (at 28 February 2014) have led to significant actuarial gains in the 2013/14 year (around $1.8 billion) which also contribute to the Crown's operating balance.

Given the size of the balance sheet, market movements can have a significant impact on the operating balance, as can be seen by comparing the current year's forecast with that of the 2012/13 year (Figure 2.11). The 2012/13 year included net gains of around $11.3 billion, largely as a result of gains on the investment portfolios of ACC and NZS Fund ($6.2 billion) and changes in discount rates leading to actuarial gains ($3.6 billion). While the current year's forecast includes strong returns for ACC and NZS Fund, the market is not as strong as the 2012/13 year, leading to a reduction in investment gains contributing to the operating balance. In addition, actuarial gains are forecast at just under half of the 2012/13 level, owing to smaller movements in discount rates in the year.

Cost to the Crown of the Canterbury Rebuild

Latest estimates for the total cost to the Crown are $15.4 billion to the end of the forecast period (compared to $14.9 billion in the Half Year Update). While core Crown costs have increased as new projects progress, Crown entity costs have reduced.

Core Crown costs have increased since the Half Year Update primarily owing to additional capital spending as the rebuild gets underway. These increases largely relate to the Greater Christchurch Education Renewal Programme as estimates of programmes in the outyears become clearer ($0.4 billion), the new Christchurch Housing Accord ($0.1 billion) and updated estimates for the new Canterbury hospitals. In addition, Budget 2014 allocated additional funding for the Christchurch central city anchor projects.

The increase in the core Crown costs was partially offset by a reduction in EQC costs arising from an updated actuarial valuation of its liability.

Table 2.9 outlines the latest estimates of the net impact of the earthquakes included in these forecasts, the operating/capital split and the expected cash profile of earthquake costs.

Table 2.9 - Net earthquake expenses (operating and capital)
Year ending 30 June
$millions
2011-13
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Total
Budget
Update
Total
Half Year
Update
Local infrastructure 1,364 101 150 113 50 50 1,828 1,828
Crown assets1 40 214 586 420 456 280 1,996 1,475
Land zoning 912 (22) 92 52 1,034 1,034
Christchurch central city rebuild2 115 456 294 135 48 (18) 1,030 909
Welfare support 269 19 9 4 3 2 306 292
Southern Response support package 458 67 (72) (23) (13) (2) 415 360
Other costs 508 128 154 120 55 32 997 975
Core Crown Canterbury earthquake
recovery costs
3,666 963 1,121 861 651 344 7,606 6,873
EQC (net of reinsurance proceeds) 8,026 (412) (198) (125) 7,291 7,528
Other SOE and CEs (217) 25 247 283 127 41 506 507
Total Crown 11,475 576 1,170 1,019 778 385 15,403 14,908
Operating and capital expenses                
Operating expenditure (OBEGAL) 11,253 (64) 251 358 212 122 12,132 12,092
Capital expenditure 222 640 919 661 566 263 3,271 2,816
Total Crown 11,475 576 1,170 1,019 778 385 15,403 14,908
Total cash payments3 6,595 1,331 4,207 1,575 917 381 15,006 14,693

Notes:

  1. Crown assets includes capital expenditure on Canterbury hospitals, schools, Tertiary Education Institutions, housing and the Justice and Emergency Services Precinct.
  2. Central city rebuild costs include land acquisition and are net of expected recoveries.
  3. Some expenses are non-cash (eg, asset write-offs and impairments) and therefore do not have a cash element to them.

Source: The Treasury

These are the latest estimates of the cost to the Crown of the Canterbury rebuild as included in these forecasts. The Specific Fiscal Risks chapter discusses the fiscal risks associated with the Canterbury earthquake forecast net expenses.

While the expenses are largely recognised up front and indicate the Crown's obligation, the cash profile reflects the expected timing of payments to settle these obligations. As with the expenses, risks also remain regarding the timing of cash payments.

Net Core Crown Debt

Net core Crown debt peaks as a share of GDP in 2014/15...

Cash deficits are funded by an increase in net core Crown debt4 (through additional borrowing or a reduction in financial assets), while cash surpluses reduce net core Crown debt.

While operating cash flows return to surplus in 2014/15, net capital spending is forecast to exceed operating cash flows until 2017/18, resulting in core Crown residual cash[4] remaining in deficit until then.

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

Over the forecast period, the Government is expected to generate cash flows from core Crown operations of $11.4 billion and will receive the remaining proceeds ($2.9 billion) from the Government share offer. The core Crown is forecast to spend $23.7 billion on capital items, which include purchasing physical assets (eg, school buildings), advances (eg, student loans) and future new capital spending. Overall, there is therefore a residual cash shortfall of $9.4 billion. As a result of the residual cash shortfall, net core Crown debt is expected to increase in nominal terms and to peak on an annual basis in 2016/17 at $65.5 billion, and then reduce once residual cash surpluses are achieved.

Net core Crown debt as a share of GDP peaks in 2014/15 at 26.4% (Figure 2.12). By 2017/18 net core Crown debt is expected to be 23.8% of GDP, consistent with the Government's medium-term target of net core Crown debt at a level no higher than 20% of GDP by 2020.

...but is higher than the Half Year Update...

Core Crown residual cash returns to surplus one year later and at a lower level than forecast in the Half Year Update (Figure 2.13), largely owing to higher operating allowances and lower tax receipts than previously forecast. As a result, net core Crown debt in nominal terms is forecast to be higher than at the Half Year Update. However, as a shareof GDP, it is similar to that previously forecast.

Figure 2.13 - Core Crown residual cash
Figure 2.13 - Core Crown residual cash.
Source:  The Treasury

...with government bond issuances funding residual cash deficits

The bond programme to 2017/18 is $3.0 billion higher than forecast in the Half Year Update, largely owing to a greater cash shortfall over the forecast period ($9.4 billion compared to the previous forecast of $4.4 billion). In order to fund this shortfall, along with bond maturities, the bond programme is expected to raise funds of $36.3 billion over the forecast period, while $25.3 billion of existing debt will be repaid, providing net cash proceeds of $11.0 billion (Table 2.10). Any excess cash proceeds raised from the bond programme will be invested in financial assets and used to meet future debt maturities.

Table 2.10 - Net increase in government bonds
Year ending 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
5-year
Total
Face value of government bonds issued (market) 8.0 8.0 7.0 7.0 7.0 37.0
Cash proceeds from government bond issue            
Cash proceeds from issue of market bonds 7.8 8.0 6.9 6.8 6.8 36.3
Repayment of market bonds (2.0) (8.8) (1.8) (11.3) (23.9)
Net proceeds from market bonds 5.8 (0.8) 5.1 6.8 (4.5) 12.4
Repayment of non-market bonds - (1.4) (1.4)
Net repayment of non-market bonds - (1.4) (1.4)
Net cash proceeds from bond issuance 5.8 (2.2) 5.1 6.8 (4.5) 11.0

Source: The Treasury

Notes

  • [4]Net core Crown debt and residual cash indicators are measured on a core Crown basis. Residual cash includes both operating and capital activity. This differs from OBEGAL, which is measured at a total Crown level and includes operating activity only.

Total Crown Balance Sheet

Operating balance surpluses result in a stronger balance sheet...

Following on from the 2012/13 increase (the first increase in five years), net worth attributable to the Crown is forecast to grow steadily in nominal terms across the forecast period largely owing to forecast operating balance surpluses. Beyond 2014, net worth attributable to the Crown is expected to grow by $19.4 billion to stand at $89.5 billion by 2017/18. As a share of GDP this is 32.8%, still below the peak of 56.6% of GDP in 2007/08 as shown in Figure 2.14.

Figure 2.14 - Net worth attributable to the Crown
Figure 2.14 - Net worth attributable to the
Crown.
Source:  The Treasury

...with assets increasing by $38 billion over the forecast period...

Total assets are forecast to grow by $37.6 billion over the forecast period, made up of additional investments in assets (both physical and financial) of $76.2 billion, partially offset by reductions (largely depreciation) of $38.6 billion.

The largest asset growth over the forecast period is in the financial assets portfolio (Figure 2.15). This growth reflects investments in Crown Financial Institutions (CFIs), with much of this growth recognised as gains in the Crown's operating balance.

Figure 2.15 - Total Crown assets
Figure 2.15 - Total Crown assets.
Source:  The Treasury

The commercial asset portfolio is expected to increase by $9.6 billion over the forecast period, with growth in Kiwibank mortgages comprising $8.0 billion of this increase, with the remainder from SOEs increasing their investment in physical assets.

Social assets (eg, schools, hospitals and social housing) are expected to increase by $13.3 billion by the end of the forecast period, primarily as a result of new capital spending. The Future Investment Fund contributes to the funding of these asset purchases, as detailed on page 41.

...and liabilities beginning to fall by the end of the forecast period

The Crown's liabilities are expected to increase by $12.5 billion (Figure 2.16) over the forecast period, largely driven by increased borrowing ($14.6 billion over the forecast period) (Figure 2.17) before beginning to fall in 2017/18. Borrowings are mostly held by the Treasury's Debt Management Office and the Reserve Bank, and are forecast to peak at $118.5 billion in 2016/17 before decreasing slightly to stand at $114.7 billion by 2017/18.

Figure 2.16 - Total Crown liabilities
Figure 2.16 - Total Crown liabilities.
Source:  The Treasury
Figure 2.17 - Total Crown borrowings
Figure 2.17 - Total Crown borrowings.
Source:  The Treasury

Borrowings in the financial portfolio increase by $4.9 billion over the forecast period to meet the Crown's cash deficits (refer to page 36 for discussion of the bond programme). The remainder of borrowing is in the commercial portfolio, of which two-thirds relates to Kiwibank deposits, which continue to grow in line with Kiwibank's mortgages.

Partially offsetting the growth in borrowings are reductions in liabilities as a result of settling the Crown's obligations related to the Canterbury earthquakes (around $9.4 billion at 30 June 2013). These are all expected to be settled by 2017/18.

The Crown's balance sheet remains sensitive to market movements...

Many of the assets and liabilities on the Crown's balance sheet are measured at “fair value” in order to disclose current estimates of what the Crown owns and owes. While the measurement at fair value is seen as the most appropriate value of these items, it can be volatile, resulting in fluctuations in the value of the assets and liabilities reflecting changes in the market and underlying assumptions.

Financial assets are the largest asset group on the Crown's balance sheet and have increased significantly in recent years. CFIs (eg, NZS Fund and ACC) hold investments to make financial returns, and those asset values are dependent on market prices, interest rates and exchange rates, which can all be volatile. For example, a 10% change in the New Zealand dollar exchange rate or share prices can impact the Crown's operating balance by $1 billion to $2 billion.

In addition, the Crown has a number of significant long-term liabilities (eg, ACC claims and GSF retirement liability) which are actuarially valued based on estimated future cash flows 50 years into the future. As part of the actuarial valuation, inflation rates are used to help estimate future cash flows, while discount rates are used to obtain the value of those future cash flows in today's dollars (their present value). Even small changes in these assumptions can have significant impacts on the valuation because the cash flows are so large and over such long periods.

...and judgements and estimates will also impact on the balance sheet...

Outside of market factors, valuations are subject to a number of judgements and estimates. In general, as time goes on, better information becomes available and initial estimates are updated to reflect current information. Some examples of this include: ACC rehabilitation costs, earthquake-related insurance liabilities, and student wage growth.

...while other risks still remain

In addition to those items on the balance sheet there are a number of liabilities (and assets) that may arise in the future but are not yet included in our forecasts, either because they are contingent on an uncertain future event occurring (eg, outcome of litigation) or the liability cannot be measured reliably. If these liabilities crystallise, there will be associated costs with a negative impact (or positive in the case of contingent assets) on the operating balance or net debt. Refer to page 76 for a list of the contingent liabilities that the Crown was exposed to at 31 March 2014. The Risks and Scenarios chapter also includes further discussion on risks to the Crown's balance sheet.

The Treasury recently released its 2014 Investment Statement, which further discusses the Crown's balance sheet. In particular, it provides information on the shape and health of the Crown's portfolio of assets and liabilities, as well as a discussion on balance sheet management, including financial risk management.

Government Share Offer Programme

The Government's Share Offer programme has now concluded. Minority shareholdings in Mighty River Power, Meridian Energy and Genesis Energy have been sold, and the Crown has reduced its shareholding in Air New Zealand. Since the Half Year Update, the Genesis Energy share offer has been completed and the proceeds from the Crown reducing its shareholding in Air New Zealand have been finalised. Refer to Table 2.11 for the final proceeds of the programme.

Table 2.11 - Proceeds of programme (core Crown)
Year ended 30 June
$billions
May 2011 Gross
proceeds
Net
proceeds1
% sold
Low
estimate
High
estimate
Mighty River Power 1.350 1.870 1.686 1.642 48.24
Meridian Energy 2.290 3.180 1.884 1.826 48.98
Air New Zealand 0.160 0.290 0.365 0.364 20.052
Genesis Energy 0.580 0.810 0.733 0.696 47.60
Solid Energy (did not proceed) 0.620 0.850 - - -
  5.000 7.000 4.668 4.528  

Note:

  1. Net of direct costs and present value discounting of the Meridian Energy deferred settlement.
  2. This represents the additional reduction in the Crown's shareholding as part of this programme.

Source: The Treasury

Total gross proceeds for the programme are $4.7 billion, compared to a range of $5.0 billion to $7.0 billion as estimated in May 2011. The May 2011 estimates included estimates for Solid Energy; however, a decision was made not to proceed with a Solid Energy share offer. For the transactions that did proceed:

  • actual proceeds for the Mighty River Power share offer were slightly above the mid-point of the estimated range from May 2011
  • actual proceeds for Meridian Energy were below the estimated range from May 2011, with proceeds affected by the falls in the share prices of comparable New Zealand electricity companies, and the revised contract between Meridian Energy and New Zealand Aluminium Smelters
  • actual proceeds for the Air New Zealand transaction were above the May 2011 estimated range, as a result of the significant increase in Air New Zealand's share price, and
  • actual proceeds for Genesis Energy were within the upper half of the May 2011 estimated range.

Although the Share Offer programme has now been completed, owing to the use of instalment receipts for the Meridian Energy share offer some proceeds (approximately $0.6 billion) are expected to be received next year.

Future Investment Fund

Proceeds from the Government Share Offer programme have been set aside to fund future capital spending through the Future Investment Fund (FIF) - a fund established in Budget 2012. So far, $3.0 billion of this fund has been allocated. A large portion of the fund is expected to be spent on investments in health and education ($1 billion each), as well as the Canterbury rebuild and irrigation initiatives.

Table 2.12 - Analysis of Future Investment Fund
$billions Total fund
Cash proceeds 4.668
Allocated in Budget 2012 (0.533)
Allocated in Budget 2013 (1.420)
Allocated in Budget 2014 (1.039)
To be allocated 1.676

Source: The Treasury

Budget 2014 allocates $1.0 billion of new spending from the fund, including $0.2 billion for KiwiRail, $0.2 billion for school property expansion, $0.2 billion for health initiatives, as well as smaller amounts for irrigation infrastructure. Refer to the Minister's Executive Summary document for further details of the Budget 2014 package.

With the proceeds from the Government Share Offer programme totalling $4.7 billion, the amount remaining to be allocated in future Budgets is $1.7 billion.

Table 2.13 - Estimated fiscal impact of the Government Share Offer programme
  Note Actual to date and forecast
Completed transactions    
Gross cash proceeds   $4.7 billion
Net cash proceeds   $4.5 billion
Loss on disposal recorded in taxpayers' funds   $384 million
Forecasts    
Cash impact    
Forecast foregone dividends 1 $336 million p.a.
Estimated finance cost savings 1 $191 million p.a.
Reduction in net debt   $3.7 billion by 2017/18
Accrual impact    
Forecast foregone profits 1 $290 million p.a.
Estimated finance cost savings 1 $191 million p.a.
Net decrease in OBEGAL 1 $99 million p.a.

Note:

  1. Based on an average of the fiscal forecasts subsequent to the programme being completed.

Source: The Treasury

The average profits and dividends estimated to be foregone have been updated since the Half Year Update, largely as a result of the Government selling slightly less than the 49% originally forecast, in addition to including updated forecasts from the companies.

The figures in Table 2.13 are based on the current profit and dividend forecasts supplied by the companies, and forecast interest rates on government debt.

The forecasts of company profits and dividends inherently contain more risk and uncertainty than forecasts of the Government's cost of borrowing. As a result, you would expect the return on commercial assets to reflect that additional risk and be generally higher than the Government's cost of borrowing. Whether forecast profits are actually delivered will depend on actual company performance.

The Forecast Financial Statements (Chapter 5) disclose forecasts for minority interests' share of profits and dividends for all minority interests of the Government. While these amounts include the forecasts as a result of the government share offer, they also include the pre-existing minority shareholding in Air New Zealand, along with minority interests in the Crown Fibre Holdings Group and Solid Energy (resulting from their recent restructure). As a result, the amounts in the Forecast Financial Statements are larger than those in Table 2.13 above.

Fiscal Forecast Assumptions

The fiscal forecasts are based on assumptions and judgements developed from the best information available on 29 April 2014, when the forecasts were finalised. Actual events are likely to differ from these assumptions and judgements. Furthermore, uncertainty around the forecast assumptions and judgements increases over the forecast period. The impact of the Canterbury earthquakes add further uncertainty to the economic and fiscal forecasts.

The fiscal forecasts are prepared on the basis of underlying economic forecasts. Such forecasts are critical for determining revenue and expense estimates. For example:

  • A nominal GDP forecast is needed in order to forecast tax revenue.
  • A forecast of CPI inflation is needed because social assistance benefits are generally indexed to inflation.
  • Forecasts of interest rates are needed to forecast finance costs, interest income and discount rates.

A summary of the key economic forecasts that are particularly relevant to the fiscal forecasts is provided in Table 2.14 below (on a June-year-end basis to align with the Government's balance date).

Table 2.14 - Summary of key economic forecasts used in fiscal forecasts
Year ended 30 June 2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Real GDP1 (ann avg % chg) 2.2 3.4 3.9 2.6 2.1 2.2
Nominal GDP2 ($m) 213,188 230,717 241,090 252,307 262,989 272,612
CPI (ann avg % chg) 0.8 1.6 1.7 2.3 2.4 2.1
Govt 10-year bonds (ann avg, %) 3.6 4.6 4.8 5.0 5.1 5.2
5-year bonds (ann avg, %) 2.9 4.1 4.5 4.9 5.1 5.2
90-day bill rate (ann avg, %) 2.6 2.9 4.1 4.8 5.0 5.2
Unemployment rate (ann avg, %) 6.7 6.0 5.5 5.2 4.8 4.5
Employment (ann avg % chg) 0.4 3.1 2.7 1.6 1.3 1.2

Notes:

  1. Production measure.
  2. Expenditure measure.

Source: The Treasury

In addition, a number of other key assumptions are critical in the preparation of the fiscal forecasts.

Government decisions

The forecasts incorporate Government decisions and other circumstances known to the Government and advised to the Treasury up to 29 April 2014.

Tax revenue

Tax policy changes enacted and announced by the Government will take place as planned and will affect tax revenue and receipts as calculated and agreed between Inland Revenue and the Treasury.

Earthquake costs

Expenditure (accrual measure) is forecast based on estimates of when key decisions will be taken.  The timing of cash payments is based on estimates of when actual spending will take place.  Refer to page 34 for further discussion.

Operating allowance

Operating allowances are net $1.5 billion from Budget 2015, growing at a rate of 2.0% per annum for subsequent Budgets.  For further details, see note 8 of the Forecast Financial Statements.

Provision for new capital spending

Capital allowances are $0.9 billion in Budget 2015 and Budget 2016, then growing at a rate of 2% per annum for subsequent Budgets.  For further details, see note 8 of the Forecast Financial Statements.

Finance cost on new bond issuances

Based on the 5-year rate from the main economic forecasts and adjusted for differing maturities.

Top-down adjustment

A top-down adjustment is made to compensate for departments that tend to forecast upper spending limits (appropriations) rather than best estimates.

Top-down adjustment to operating and capital expenses are as follows:

Top-down adjustment
Year ending 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Operating 0.7 0.9 0.5 0.4 0.4
Capital 0.4 0.4 0.1 0.1 0.1

The adjustment will be higher at the front end of the forecast period as departments' appropriations (and therefore expenses) tend to be higher in these years, reflecting the flexibility departments have around transferring underspends to later years.

Property, plant and equipment

For the purposes of the forecast financial statements, no revaluations of property, plant and equipment are projected beyond the current year.  Valuations as recorded for the 2013 annual financial statements and any additional valuations that have occurred up to 31 March 2014 are included in these forecasts. 

Student loans

The carrying value of student loans is based on a valuation model adapted to reflect current student loans policy.  As such, the carrying value over the forecast period is sensitive to changes in a number of underlying assumptions, including future income levels, repayment behaviour and macroeconomic factors such as inflation and discount rates used to determine the effective interest rate for new borrowers.  Any change in these assumptions would affect the present fiscal forecasts.

Investment rate of returns

The forecasts incorporate the actual results to 31 March 2014.  Beyond this time, gains on financial instruments are based on long-term benchmark rates of return for each portfolio.

GSF and ACC liabilities

The GSF and ACC liabilities included in these forecasts have been valued as at 28 February 2014 and 31 December 2013 respectively.  The ACC liability has also been adjusted for the 31 March 2014 discount rate.  Both liabilities are valued by projecting future cash payments, and discounting them to the present.  These valuations rely on historical data to predict future trends and use economic assumptions such as inflation and discount rates.  Any changes in actual payments or economic assumptions would affect the present fiscal forecast.  For example, if the discount rate decreases, the value of the liabilities would increase.

GSF's assets are offset against the gross liability and have been updated to reflect market values.  The value of assets over the forecast period reflects long-run rate of return assumptions appropriate to the forecast portfolio mix.

ACC levies

The forecasts include the Government's intention to further reduce ACC levies in the 2015/16 levy year.  A final decision on levy rates will be made after ACC's public consultation.

NZS Fund contributions

No contribution is assumed in the forecast period in line with the Government's stated intentions to commence contributions once net core Crown debt has reached 20% of GDP as set out in the Fiscal Strategy Report (FSR).

NZS Fund contributions
Year ending 30 June
$billions
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Required contribution1 2.3 2.3 2.3 2.2
Actual contribution - - - -
  1. Calculations of annual contributions if they were to resume in 2013/14

The underlying assumptions in calculating the required contribution in each year are the previous year's NZS Fund balance and projected series, over the ensuing 40 years of nominal GDP, net (after-tax) New Zealand superannuation expenses, and the government 5-year bond rate. The latter is used in calculating the Fund's expected long-run after-tax annual return.  Over the forecast years, all Fund variables, apart from the capital contributions, are provided by the NZS Fund itself. 

Refer to the Treasury's website for the NZS Fund model. 

Risks and Scenarios

Overview

  • This chapter outlines the general economic and fiscal risks associated with the main forecast. Domestic risks to the economic outlook are fairly evenly balanced, while global risks remain skewed to the downside.
  • Domestically, the risks with potentially the largest impact on the New Zealand economy relate to the pace of the Canterbury rebuild and its interaction with the wider economy, the sensitivity of households to higher debt servicing costs, along with net migration’s impact on domestic demand.
  • Stimulatory monetary policy settings appear to be succeeding in increasing demand in advanced economies, although inflation has been benign, particularly in the euro area. The risks posed to the recovery in emerging markets have increased since the Half Year Update with markets reassessing economic and financial fundamentals in some economies.
  • Two scenarios are presented which represent two ways in which the New Zealand economy could deviate from the main forecast. Scenario one is based on a larger decline in the terms of trade than in the main forecast. Scenario two is based on a more robust domestic demand cycle driven by a stronger migration cycle. If these scenarios or any other significant deviations from the main forecast did eventuate, this would impact on the Government's fiscal performance and position.
  • In addition to risks associated with the economy, the Crown is also subject to expenditure and balance sheet risks. In particular, volatility in market prices such as interest rates can have a significant impact on the Crown's fiscal position.
  • The first part of this chapter outlines the key risks to the economic outlook. The second part of the chapter presents two alternative scenarios for the economy. The remainder of the chapter focuses on general fiscal risks that can impact the Crown’s fiscal position.

Economic Risks

Domestic demand has grown faster than anticipated in the Half Year Update, with the economic expansion becoming more broad-based and embedded. Key areas of uncertainty remain, including the speed of the Canterbury rebuild and its wider economic implications, the reaction of households to higher debt servicing costs, and the scale of the current migration cycle and its impact on domestic demand.

Despite improvements in the prospects for some advanced economies, the balance of global risks remains skewed to the downside, with emerging economies having underperformed relative to expectations. Global economic developments may lead to adjustments in the demand for our main commodity exports and therefore affect the terms of trade (the prices of goods and services New Zealand exports relative to those that it imports) which were at a 40-year high in the December 2013 quarter. If a number of adverse global developments were to occur simultaneously, New Zealand could experience a rapid and sizeable negative adjustment in commodity prices and national income.

Other key assumptions made in the forecasts around the level and flow-through of the exchange rate, the amount of spare capacity in the economy and monetary policy developments all represent areas where deviations from forecast can exacerbate or dampen the current economic cycle.

The pace and scale of the Canterbury rebuild remain uncertain…

There is still some uncertainty around the timing and magnitude of the Canterbury rebuild. Key determinants continue to be the pace of the settlement of remaining insurance claims and the capacity of the construction sector.

While the resolution of insurance claims has continued to progress, there are risks that the greater complexity of remaining claims could slow the rate of settlement. The availability of skilled labour will also impact on the pace of reconstruction if specific skill shortages act as bottlenecks in the construction industry. If the rebuild were to progress more slowly, residential and non-residential investment and employment growth could all be weaker than reflected in the main forecast.

The Canterbury region will account for a greater share of GDP than in previous construction booms and regional resource pressures will act to crowd out activity in other parts of the economy. Inward migration and imports of capital and materials may help to alleviate local capacity issues and will mitigate some of the upward pressure on prices in both Canterbury and the wider economy.

...as does the sensitivity of households to increasing interest rates...

Figure 3.1 - Composition of residential mortgage lending
Figure 3.1 - Composition of residential mortgage lending.
Source: Reserve Bank

After a sustained period of historically low rates, the Reserve Bank has increased the OCR from 2.5% to 3.0% with the aim of returning it to neutral levels in the medium term and then increasing it even further by 2016. It is difficult to anticipate the sensitivity of households to higher debt servicing costs. This is in view of already elevated debt levels and high exposure to interest rate increases, with a large number of households on floating or fixed mortgages of less than one year (Figure 3.1). Households could exercise more or less spending restraint than is anticipated in the main forecast. If consumption growth were to outpace income growth, then the shortfall may have to be funded by increasing levels of debt. On the other hand, if households exercise more restraint, debt levels would be lower but consumption growth would be weaker.

…and net migration's effect on domestic demand remains uncertain

Stronger employment growth in New Zealand relative to Australia and a more positive outlook have reduced the number of New Zealand resident departures, while the Canterbury rebuild has contributed to more permanent and long-term arrivals. The annual net inflow of migrants is now forecast to peak at around 38,000 in the second half of 2014 compared to a forecast of around 26,000 in the Half Year Update. The impact on the wider economy of stronger rates of net migration will depend on the skill sets of the migrants and their geographic distribution. If the migration cycle is larger than forecast it would put additional pressure on the housing market and add further impetus to domestic demand. However, higher migrant inflows to Canterbury would mitigate some of the capacity risks associated with the rebuild.

If, for any reason, key factors such as those outlined above played out differently than assumed in the main forecast and impacted on the inflation outlook, then the Reserve Bank's setting of monetary policy would be responsive to those different conditions. Interest rates could rise by more or less and the pace of tightening could be faster or slower depending on the direction of change.

Global downside risks persist…

In addition to the migration channel, global developments can also impact the New Zealand economy through both trade and financial channels. For example, strong Chinese demand for our key commodity exports has contributed to the terms of trade reaching a 40-year high, improving incomes and supporting the exchange rate at high levels. Risks posed to the outlook for key trading partners, and global financial settings in general, are all factors that can lead to rapid changes in the economic outlook for New Zealand. Overall, the balance of global risks remains skewed to the downside. Geopolitical risks have also increased, with Russia's annexation of Crimea creating ongoing diplomatic tensions with the West and greater uncertainty in financial markets.

…as weak emerging-market fundamentals exposed…

In January, the US Federal Reserve began the tapering of its asset purchase programme. Expected rises in US bond yields contributed to capital outflows from emerging market economies and sizeable depreciations in exchange rates. Generally, borrowing costs for countries that have become accustomed to favourable global lending conditions in recent years have increased. Both the monetary policy responses (that are likely to magnify the higher costs of capital) and the higher capital cost itself, will act to constrain growth in emerging economies. The most fragile countries, with the largest imbalances and high inflation, account for only a small share of New Zealand's export demand. Contagion to other emerging market economies could impact New Zealand more significantly.

Importantly, Asian economies have larger foreign exchange reserves than they did prior to the Asian financial crisis in the late 1990s, as well as floating exchange rates, which make them more resilient to these market pressures.

…and risks to New Zealand's key trading partners remain

Our largest trading partner, China, would largely be immune to the risks outlined above because of its capital account restrictions. However, domestic risks to the growth outlook for China remain. The property investment and construction boom that stimulated Chinese growth following the global financial crisis was fuelled by rapid credit growth. Concerns around the high level of local government debt, the quality of lending in the shadow banking sector and exposure of financial institutions to housing market vulnerabilities persist. Chinese growth could slow more quickly than in the main forecasts if financial market disruption resulted in significantly tighter credit conditions.

Structurally, China is looking to rebalance its economy away from investment-led growth towards private consumption. Rebalancing could lead to slower growth in the short term, particularly if this transition is disorderly. As consumption's share of output increases and the purchasing power of Chinese consumers improves, demand for New Zealand's soft commodities, such as dairy, will strengthen and help maintain prices at high levels.

Australian data continue to show signs that demand is picking up as the economy transitions from growth in mining investment to growth in the non-mining sectors and exports. However, the labour market remains subdued and the unemployment rate has remained steady at around 5.8% for the past year. Australia remains exposed to a slowdown in China and emerging market economies, which would reduce demand for its hard commodities, such as iron ore. This channel could be a source of indirect effects on the New Zealand economy.

Upside risks to US growth are also apparent with the recent weakness in US data largely a result of the harsh winter. A large amount of investment activity has been deferred since the global financial crisis and the stock of capital has aged. A more rapid movement to capital investment could be a source of upside surprises to growth. Likewise, households have deferred purchases of durable goods over this time. That said, a stronger US economy would further exacerbate the risks to emerging economies if expectations of a faster withdrawal of monetary stimulus were to develop.

Euro area recovery exposed to deflationary risks

Inflation in the euro area has been on a declining trend since late 2011 as peripheral economies rebalance and attempt to achieve renewed competitiveness. Large negative output gaps also mean that pricing pressures remain subdued. In the absence of adequate policy responses, Europe could enter a period of sustained low inflation, increasing the risk of deflation. If long-term inflation expectations fall, demand and output would follow, stifling the euro area recovery.

Other risks around key judgements

Economic relationships are complex and judgements need to be made about key economic variables such as the exchange rate. For example, a higher exchange rate relative to forecast would decrease tradables inflation, as imported goods would become less expensive, and encourage the consumption of imported products. On the other hand, exporters and import-competing businesses would become less competitive, hindering manufacturing and service exports and production of import substitutes.

Recently, pasture conditions have been drier than usual in the North Island, with feed yields down from last year. Although there has been ample rain in most of the country in April, if dry conditions return, agricultural production could again act as a drag on gross domestic product as it did in the first half of 2013. Feed prices and availability amongst New Zealand's international competitors will also influence global supply and have a strong bearing on global commodity prices and the path of the terms of trade.

Alternative Scenarios

The following scenarios show how the economy might evolve if some of the key judgements in the main forecast are altered (Table 3.1). The scenarios represent two of a number of ways that the economy could deviate from the main forecast. Scenario one represents the economic impacts of a larger decline in the terms of trade. Scenario two represents the economic impacts of a larger migration cycle and stronger domestic demand.

Table 3.1 - Summary of key economic variables for main forecast and scenarios
March years 2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast

Real GDP (annual average % change)

           
Main forecast 2.3 3.0 4.0 3.0 2.1 2.1
Scenario one 2.3 3.0 3.4 3.3 1.7 1.9
Scenario two 2.3 3.1 4.6 3.0 1.9 2.0

Unemployment rate1

           
Main forecast 6.2 5.9 5.4 5.1 4.8 4.4
Scenario one 6.2 5.9 5.7 5.2 4.9 4.6
Scenario two 6.2 5.9 5.2 4.9 4.7 4.4

Nominal GDP (annual average % change)

           
Main forecast 2.2 6.7 5.7 4.3 4.5 3.7
Scenario one 2.2 6.6 2.6 4.1 4.6 3.6
Scenario two 2.2 6.8 6.9 4.5 4.1 3.5

Current account balance (% of GDP)

           
Main forecast -3.9 -3.1 -4.4 -5.9 -6.2 -6.3
Scenario one -3.9 -3.1 -6.1 -7.5 -6.6 -6.0
Scenario two -3.9 -3.1 -4.6 -6.4 -6.8 -6.8

90-day bank bill rate2

           
Main forecast 2.7 3.0 4.3 4.8 4.9 5.3
Scenario one 2.7 3.0 3.3 4.1 4.2 4.7
Scenario two 2.7 3.0 5.0 5.7 5.4 5.4

Total Crown OBEGAL (% of GDP)3

           
Main forecast -2.1 -1.1 0.2 0.5 0.9 1.3
Scenario one -2.1 -1.1 -0.7 -0.6 -0.2 0.1
Scenario two -2.1 -1.0 0.5 1.1 1.6 1.9

Core Crown net debt (% of GDP)3

           
Main forecast 26.2 25.8 26.4 25.9 24.9 23.8
Scenario one 26.2 25.9 28.2 28.6 28.7 28.7
Scenario two 26.2 25.7 25.6 24.5 23.0 21.4

Notes:

  1. March quarter, seasonally adjusted
  2. March quarter average
  3. June years

Sources: Reserve Bank, Statistics New Zealand, the Treasury

Scenario One - Terms of Trade Shock

A larger fall in New Zealand's terms of trade…

Scenario one is based on a large fall in the prices received for New Zealand's merchandise exports. This scenario represents both a faster and deeper decline in the terms of trade, and a lower level over the rest of the forecast period. The fall represents a return of the terms of trade to levels prevailing near the start of the current commodity price boom in 2004. A fall in the terms of trade of this magnitude could be triggered by demand or supply factors, or a combination of the two; for example, a financial crisis in China that spills over to emerging markets more generally, could impact on the demand for our main commodity exports. Alternatively, a larger increase in global production, in combination with softer global demand, could see a more pronounced decline in the terms of trade than in the main forecast.

In this scenario it is assumed that the merchandise terms of trade decline rapidly over 2014 from their 40-year peak, and are down by around 22% in the year to March 2015 compared to around 9% in the main forecast. The terms of trade then recover slightly, but are still down around 10% relative to the main forecast at the end of the forecast period (Figure 3.2). (See the box on the terms of trade on page 13 of the Economic Outlook chapter for more details.)

...results in a sharp depreciation in the exchange rate and a spike in inflation...

The exchange rate helps to buffer the shock to the export sector and depreciates sharply, with the trade-weighted exchange rate index (TWI) at 64.0 by mid-2015 compared to 78.6 in the main forecast. Tradables inflation rapidly increases and headline inflation peaks above the Reserve Bank's policy band at 3.1% in the December quarter of 2015 (Figure 3.3). However, given the flexibility in the Policy Targets Agreement around exceptional movements in the prices of commodities traded in world markets, the Reserve Bank largely looks through the spike in inflation, keeping rates on hold in the near term. The policy response helps to limit the negative impacts on private consumption and investment growth. If the Reserve Bank were to respond to the spike in inflation this could exacerbate the negative impacts on real GDP growth but limit the inflationary impacts.

Figure 3.2 - Merchandise terms of trade
Figure 3.2 - Merchandise terms of trade.
Sources: Statistics New Zealand, the Treasury
Figure 3.3 - Consumers Price Index
Figure 3.3 - Consumers Price Index.
Sources: Statistics New Zealand, the Treasury

...with real private consumption and investment growth lower…

The decrease in the purchasing power of New Zealand households and firms, as real gross domestic income growth slows, results in lower real private consumption and investment growth. Annual real private consumption growth averages 2.2% over the forecast period compared to 3.1% in the main forecast. Real investment growth, including residential and market investment, averages 5.8% per annum compared to 7.4% in the main forecast. Net exports contribute positively to growth rather than act as a drag, as import volumes fall away sharply. Although annual real GDP growth over the forecast period is only slightly less at 2.6% (compared to 2.8% in the main forecast), the composition and timing of that growth are different.

…and a sharp widening in the current account…

The annual current account deficit widens to 7.9% of GDP in the second half of 2015 as the trade balance deteriorates, while households and firms adjust to the real income shock, and nominal GDP growth slows. The large depreciation in the exchange rate makes New Zealand's goods and services more competitive globally. This sees a strong increase in nominal services exports and the services balance over the second half of the forecast period, notwithstanding the deterioration in the near term (the so-called “J-curve” effect). The annual current account deficit narrows to 6.0% of GDP by March 2018, a slightly lower deficit than in the main forecast.

…as well as lower tax revenue and operating balance

Weaker domestic activity combined with the lower terms of trade more than offsets the higher inflation and reduces nominal GDP by a cumulative $34 billion over the forecast period.

Core Crown tax revenue is a cumulative $9.7 billion lower over the forecast period in this scenario, owing to the weaker nominal GDP. The weaker labour market and lower labour incomes reduce source deductions revenue by $1.4 billion over the forecast period. The economy's weaker nominal activity means that business profitability is reduced, resulting in corporate taxes being a cumulative $4.0 billion lower. Resident withholding tax is $1.2 billion lower over the forecast period with interest rates increasing by less than in the main forecast. Weaker nominal consumption and residential investment reduces GST revenue by a cumulative $1.6 billion over the forecast period.

Figure 3.4 - Operating balance (before gains and losses)
Figure 3.4 - Operating balance (before gains and losses).
Source: The Treasury

Core Crown expenses are higher than in the main forecast, driven by an increase in debt servicing costs and increases in welfare payments. The increase in welfare payments results from a higher number of recipients of unemployment-related benefits than in the main forecast, reflecting the softer labour market. In this scenario, the return to surplus in OBEGAL is delayed until June 2018 (Figure 3.4). As a consequence, net core Crown debt peaks at 28.7% of GDP in the June 2017 year, compared to 26.4% in the June 2015 year in the main forecast (Figure 3.9). By the end of the forecast period net core Crown debt is 28.7% of GDP in this scenario compared to 23.8% of GDP in the main forecast.

Scenario Two - Stronger Cyclical Growth

A stronger cyclical pick-up in migration…

Scenario two is based on a more robust domestic demand cycle than in the main forecast, driven by a stronger migration cycle. The scenario is similar to scenario one in the Half Year Update in that it presents the risks around our key migration assumption. Annual net permanent and long-term migration in this scenario peaks at 41,500 in the December quarter of 2014 compared to 38,000 in the September quarter of 2014 in the main forecast (Figure 3.5). The migration profile of scenario two represents an addition of 21,500 people to the population over the forecast period compared to the main forecast. It is also assumed that currently high levels of consumer and business confidence translate into even stronger near-term private consumption and investment growth.

…leads to more robust domestic demand in the near term…

The larger migration cycle and less restrained households result in stronger annual real private consumption growth in the near term, peaking at 5.3% in the June quarter of 2015 compared to 4.2% in the main forecast (Figure 3.6). The population boost from net migration also increases demand for the existing stock of housing and provides additional support for residential investment. Stronger household demand, the current low interest rate environment and the elevated exchange rate spill over into business confidence with increased market investment and hiring intentions. Employment growth in this scenario is markedly stronger over 2015 and 2016, with the unemployment rate varying around 0.2% to 0.3% points lower over most of the forecast period compared to the main forecast.

Figure 3.5 - Annual net external migration
Figure 3.5 - Annual net external migration.
Sources: Statistics New Zealand, the Treasury
Figure 3.6 - Private consumption growth
Figure 3.6 - Private consumption growth.
Sources: Statistics New Zealand, the Treasury

…and sees increased price pressures and a faster monetary tightening cycle…

With the economy already growing faster than potential, the further boost to domestic demand sees any spare capacity in the economy used up more quickly than in the main forecast, and an even more positive output gap develop in the near term (despite net migration increasing productive capacity in the medium term). The stronger domestic outlook and expectations of higher interest rates result in a higher near-term exchange rate profile which puts downward pressure on tradables inflation. However, stronger non-tradables inflation dominates, resulting in a higher inflation track.

Given higher inflation, increased inflationary pressures and increased inflation expectations, monetary policy is tightened sooner and more aggressively to maintain price stability. The 90-day bank bill rate is around 100 basis points higher by mid-2015 than in the main forecast (Figure 3.7). The faster withdrawal of monetary stimulus acts to constrain consumption and investment growth, with lower real GDP growth over the final years of the forecast period compared to the main forecast.

…but domestic and external imbalances widen

With some of the higher consumption and investment growth met from increased imports, the goods and services balances are weaker than in the main forecast. The stronger domestic economy also sees a widening in the income balance deficit as stronger profitability leads to larger dividend outflows. Consequently, the annual current account deficit is wider over the forecast period, reaching 6.8% of GDP in the March quarter of 2018 compared to 6.3% in the main forecast (Figure 3.8).

Figure 3.7 - 90-day bank bill rate
Figure 3.7 - 90-day bank bill rate.
Sources: Statistics New Zealand, the Treasury
Figure 3.8 - Current account balance
Figure 3.8 - Current account balance.
Sources: Statistics New Zealand, the Treasury

Household saving rates are also lower in this scenario, with nominal consumption growth outpacing the growth in incomes. This additional consumption is funded through increasing levels of household debt and this constrains consumption growth further as debt servicing costs increase.

Nominal GDP growth and tax revenue higher…

Figure 3.9 - Net core Crown debt
Figure 3.9 - Net core Crown debt.
Source: The Treasury

Stronger domestic activity, combined with greater price pressures, increases nominal GDP by a cumulative $12 billion over the forecast period. Core Crown tax revenue is a cumulative $5.3 billion higher over the forecast period. Higher nominal consumption and residential investment boost GST revenue by $1.1 billion over the forecast period. The stronger labour market and increased competition for workers push up wages and salaries, boosting source deductions revenue by a cumulative $1.1 billion. The stronger economic activity allows firms to increase their margins, boosting profitability and increasing corporate tax by $1.3 billion. Higher short-term interest rates, needed to control rising inflation, boost tax on interest by $1.1 billion.

Core Crown expenses are slightly lower than in the main forecast owing to a fall in debt servicing costs and, to a lesser extent, a reduction in welfare payments. In this scenario, OBEGAL records a larger surplus of 0.5% of GDP ($1.3 billion) in the June 2015 year (Figure 3.4). Net core Crown debt declines to 21.4% of GDP in the June 2018 year compared to 23.8% of GDP in the main forecast (Figure 3.9).

…with fiscal policy remaining restrained

Although OBEGAL records a larger surplus in 2015 in this scenario, discretionary fiscal policy is unchanged relative to the main forecast and is restrained compared to the mid-2000s cycle. If the extra income received by the Government was used to increase spending it would add to the cycle by increasing domestic demand, contributing to price pressures which could then necessitate tighter monetary policy. This would support the exchange rate remaining higher for longer and would result in greater imbalances, such as an even wider current account deficit.

General Fiscal Risks

The remainder of this chapter focuses on the links between the risks to the performance of the economy and the Crown's fiscal position. For more on fiscal risks, see the Specific Fiscal Risks chapter on page 63.

Fiscal Sensitivities

Table 3.2 provides some rules of thumb on the sensitivities of the fiscal position to small changes in specific variables. For example, if nominal GDP growth is one percentage point faster than we have forecast in each year up to June 2018, tax revenue would be around $3.2 billion (1.2% of GDP) higher than forecast in the June 2018 year as a result. The sensitivities are broadly symmetric and if nominal GDP growth is one percentage point slower each year than we expect, tax revenue would be around $3.1 billion lower than forecast in the June 2018 year. The figures are indicative and can be influenced by the composition of growth as different types of activity have different effective tax rates.

A different interest rate path from that forecast would also impact on the fiscal position. A one percentage point lower interest rate would result in interest income on funds managed by the Treasury's Debt Management Office (DMO) being $162 million lower in the June 2018 year. This would be more than offset by interest expenses being $358 million lower in the June 2018 year.

Table 3.2 - Fiscal sensitivity analysis
Year ending 30 June
($millions unless stated)
2014
Estimate
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
1% higher nominal GDP growth per annum on          
Tax revenue  -  675 1,440 2,280 3,205
   (% of GDP)1  - 0.3 0.6 0.9 1.2
Tax revenue impact of a 1% increase in growth of          
Wages and salaries  - 285 605 965 1,390
   (% of GDP)1  - 0.1 0.2 0.4 0.5
Taxable business profits  - 130 300 480 675
(% of GDP)1  - 0.1 0.1 0.2 0.2
Impact of 1% point lower interest rates on          
Interest income2  (37)  (90)  (86)  (151)  (162)
   (% of GDP) (0.0) (0.0) (0.0) (0.1) (0.1)
Interest expenses2 3  (57)  (211)  (299)  (358)
(% of GDP) 0.0 (0.0) (0.1) (0.1) (0.1)
Overall operating balance (40) (33) 125 148 196
(% of GDP) (0.0) (0.0) 0.0 0.1 0.1

Notes:

  1. Percent of main forecast nominal GDP
  2. Funds managed by the Treasury's DMO only

Source: The Treasury

Revenue Risks

One of the major sources of risk to the fiscal position arises from the inherent uncertainty about future tax revenue. The amount of tax revenue that the Government receives in a given year is closely linked to the performance of the economy. Figure 3.10 plots the main tax revenue forecast, along with confidence intervals around these forecasts based on the Treasury's historical tax forecast errors and the assumption of an even balance of risks around the main forecast.[5] The outermost shaded area captures the range +/- $6.5 billion in the June 2018 year, within which actual tax outturns fall 80% of the time.[6]

The tax revenue forecasts from the two scenarios are also shown in Figure 3.10. The 2008/09 global financial crisis showed that exogenous shocks can have severe impacts on government revenue. Should any of the uncertainties outlined in the Economic Riskssection eventuate, government revenue would be different from forecast, with scenarios one and two being examples of possible outcomes.

Figure 3.10 - Core Crown tax revenue uncertainty
Figure 3.10 - Core Crown tax revenue uncertainty.
Source: The Treasury

Based on average historical forecast errors and an even balance of risks, Figure 3.10 suggests that tax revenue over the forecast period would be stronger than scenario two approximately 35% of the time and weaker than scenario one approximately 25% of the time.

There is also uncertainty around government revenue arising from the performance of SOEs and the path of interest rates as outlined in the Fiscal Sensitivities section.

Notes

  • [5]A full summary of the methodology and critical assumptions is included in New Zealand Treasury Working Paper 10/08. Standard deviation assumptions used for 0-, 1-, 2-, 3- and 4-year ahead forecasts are 0.9%, 3.2%, 5.3%, 6.6% and 6.9% of the actual result, respectively.
  • [6]Previous Treasury analysis showed that a shock that has a significant and persistent impact on economic growth can result in tax revenues significantly beyond the outermost shaded area. See Fookes, C (2011), “Modelling shocks to New Zealand's fiscal position”, New Zealand Treasury Working Paper 11/02.

Expenditure Risks

One-off and unexpected expenditure shocks can have a large impact on the Crown's operating balance in the year that they occur. Persistent over-forecasting of expenditure can also have substantial ongoing effects on the fiscal position, along with the uncertainty inherent in forecasting the cost of new policy initiatives.

There is also considerable uncertainty regarding the effect of the performance of the economy on Crown expenditures. This uncertainty largely relates to the operation of the so-called automatic stabilisers. For example, if the economy performs better (worse) than expected in a given year, official expenditures on social programmes may be lower (higher) than planned.

Meanwhile, the destructive seismic events of recent years have underlined the inherent exposure of the Crown's fiscal position to exogenous shocks. The Government's fiscal position would be impacted if another catastrophic earthquake were to occur or if the costs associated with prior events exceed the updated estimates.

The ageing population also presents risks to the medium-term fiscal position, particularly to the extent that demographic forecasts may prove to be too low or high. An ageing population requires increased government expenditure, especially for health and superannuation spending.

Balance Sheet Risks

In addition to risks around revenue and expenditure, which appear in the balance sheet through their impact on the operating balance, the Crown's financial position is also exposed to asset and liability risks. Some of these risks are on balance sheet owing to the Crown having explicit obligations either in respect of its own assets or to the wider economy. Some are off balance sheet owing to their discretionary nature, but are implicit to the Crown from strong expectations that the Crown would respond to an event. The focus here is on balance sheet risks that can be documented, based on the Crown's contractual position.

While the Crown's exposure to risk is sometimes unavoidable, the Crown's general approach is to identify, avoid or mitigate these risks where practicable. When a risk cannot be avoided or reduced, the Government's response has been to increase the Crown's resilience by reducing debt ahead of the time when it could be needed. This helps to absorb the impact of the risk through its balance sheet so that the wider economy need not adjust immediately at a greater economic cost. For more information on balance sheet risks, see the Fiscal Outlook chapter on pages 37-39.

The largest source of balance sheet risk is volatility in asset and liability values owing to movements in market variables such as interest rates, exchange rates and equity prices. This may result in an operating balance impact. Of the Crown's aggregate financial risk, roughly a third is estimated to be attributed to this “market risk”.[7] Three areas of the balance sheet are particularly susceptible:

  • Financial assets held by the CFIs are sensitive to financial-market volatility. CFIs diversify their portfolios across a range of financial assets to manage exposures to specific market risks. The Treasury estimates a 10% movement in world share markets would lead to around a $1.7 billion operating balance impact.
  • Insurance and retirement liabilities and provisions are prone to market volatility through their actuarial valuations, which are sensitive to assumptions about variables such as interest and inflation rates, and risk margins.
  • Physical assets such as land, buildings, state highways and military equipment are susceptible to valuation movements through changes in property market conditions, interest rates and changes in the costs of construction. This will affect the recorded value of physical Crown assets.

Business risks, relating to the broader commercial environment, may also affect the Crown's balance sheet. A number of entities owned by the Crown, including commercial and social entities, have their financial performance and valuations impacted by these external factors.

For additional detail, refer to the 2014 Investment Statement which provides information on the shape and health of the Crown's portfolio of assets and liabilities at the end of the past full financial year.[8] It outlines how the balance sheet has changed in recent years and includes forecasts of its anticipated composition and size through to 30 June 2018.

Funding Risks

The New Zealand Crown remains in the top-20 rated sovereigns globally, with the top Aaa foreign-currency rating from Moody's and AA foreign-currency ratings from Standard & Poor's and Fitch. Ratings outlooks are stable across all three agencies.

The cyclical downside risks identified by the rating agencies are broadly in line with the risks identified earlier in the chapter. In the case of an increase in global risk aversion and in the absence of a marked improvement in the external position, New Zealand may be more likely to face a degree of funding pressure in the future. All else being equal, a deterioration in the ratings outlook could serve to raise debt-servicing costs for the Crown. On the other hand, additional downward pressure on borrowing rates is possible if diversification flows, particularly away from Europe, continue in the future.

The Crown is also susceptible to “liquidity risk” with respect to its ability to raise cash to meet its obligations. This risk is relatively small, however, given ongoing management of the core Crown's liquidity position by the Treasury's DMO, as well as the Government's commitment to maintaining prudent debt levels.

Notes

Specific Fiscal Risks

The Statement of Specific Fiscal Risks is required by the Public Finance Act 1989 to set out, to the fullest extent possible, all government decisions and other circumstances known to the Government at the date of the finalisation of the fiscal forecasts that may have a material effect on the fiscal and economic outlook, but are not certain enough in timing or amount to include in the fiscal forecasts. Although the process for disclosure of specific fiscal risks involves a number of parties, including government departments, the Treasury and the Minister of Finance, there remains a possibility that not every risk is identified. Disclosure of known risks is also subject to specific requirements and materiality thresholds, which are described after the Statement of Specific Fiscal Risks.

Overview

Specific fiscal risks can be positive or negative and can affect revenue or spending. The links between external events and spending are indirect because new policies that change spending and revenue usually require a decision by the Government and approval from Parliament. The approach taken in this chapter is to disclose those potential policy decisions and key areas of uncertainty that may have a material effect on the fiscal outlook.

The Government generally sets aside allowances of new funding for future Budgets to manage uncertainty and cost pressures. These allowances are included in the fiscal forecasts. Current fiscal management policy is for future policy decisions affecting expenses or capital expenditure to be met through reprioritisation or from within existing provisions included in the fiscal forecasts. Future policy decisions are risks to the fiscal forecasts only to the extent that they cannot be managed from within:

  • for operating expenditure, existing baselines or Budget allowances, or
  • for capital expenditure, the Crown balance sheet, including the Future Investment Fund (FIF)/capital allowance.

Notwithstanding this, known material policy risks are identified as specific fiscal risks, even though the Government has more control in managing such risks through reprioritisation, the existing Crown balance sheet and the Budget allowances. This is done to ensure a prudent approach to the disclosure of risks, improve transparency and not pre-judge future decisions by governments.

The specific fiscal risks are categorised into:

  • Potential policy decisions affecting revenue: For example, changes to tax policy or ACC levies could reduce or increase government income.
  • Potential policy decisions affecting expenses (expected to be funded from reprioritisation or Budget allowances): Costs of policy proposals could increase or decrease expenses depending on decisions taken, and they are risks to the fiscal forecasts only to the extent that they cannot be managed within existing baselines or Budget allowances.
  • Potential capital decisions (expected to be funded from the Crown balance sheet, including the FIF/capital allowance): Capital investment decisions are risks to the fiscal forecasts only to the extent that they cannot be managed within the Crown balance sheet, including the FIF/capital allowance.
  • Matters dependent on external factors: The Crown's liability for costs is sometimes dependent on external factors such as the outcome of negotiations or international obligations.

A range of generic risks to the fiscal forecasts are not recognised as specific fiscal risks:

  • The most significant economic risks have been identified in Chapter 3.
  • Business risks and volatility in the returns from the Crown's investments relating to the broader economic and commercial environment.
  • General cost pressures, such as those associated with demographic changes (eg, an ageing population).
  • Potential risks from changes in demand for government services or transfer payments owing to underlying structural factors (such as changes in demand for Jobseeker Support).
  • The costs of future individual natural disasters, and other major events, as they usually occur infrequently and their occurrence, nature and timing cannot be predicted. Once a disaster does occur, a number of choices arise about how to respond and when potential liabilities are recognised (eg, through setting aside an allocation of funding). Specific risks are disclosed at this point based on the range of possible responses.

The final part of the chapter contains a current list of contingent liabilities and contingent assets. Contingent liabilities are costs that the Crown will have to face if a particular event occurs or are present liabilities that are unable to be measured. Typically, contingent liabilities consist of guarantees and indemnities, legal disputes and claims on uncalled capital. The largest quantified contingent liabilities are to international financial organisations and mostly relate to uncalled capital and promissory notes. Contingent assets are possible assets that have arisen from past events but the value of the asset, or whether it will eventuate, will not be confirmed until a particular event occurs.

Statement of Specific Fiscal Risks

Summary Table

The matters listed below are disclosed as specific fiscal risks because they meet the rules for disclosure outlined after this Statement. Full descriptions of the risks listed below are set out in the next section. Where quantification is possible, this is included in the description of the risk.

Specific fiscal risks as at 29 April 2014 Status [9]

Potential policy decisions affecting revenue

 
ACC - Funding Policy Review Unchanged
Revenue - Income-sharing Tax Credits Unchanged
Services Funded by Third Parties Unchanged

Potential policy decisions affecting expenses (expected to be funded from reprioritisation or Budget allowances)

 
ACC - Work-related Gradual Process Disease and Infection Unchanged
Budget Operating Initiatives Changed
Canterbury Earthquake Recovery - Christchurch Central Recovery Plan Unchanged
Christchurch City Council/Crown Cost Sharing Unchanged
Communications - Ultra-Fast Broadband Initiative Unchanged
Defence Force - Operating and Capital Costs New
Finance - Concessionary Loans New
Government Response to Wai 262 Unchanged
Housing - Reform of Social Housing Unchanged
Revenue - KiwiSaver Auto-enrolment Changed
Revenue - Transformation and Technology Renewal Unchanged
Social Development - Vulnerable Children White Paper Changed
Social Development - Welfare Reform Costs Changed
Social Development - Welfare Reform Forecast Benefit Savings Unchanged
State Sector Employment Agreements Unchanged

Potential capital decisions (expected to be funded from the Crown balance sheet, including the FIF/capital allowance)

 
Departmental Capital Intentions Changed
Earthquake Strengthening for Crown-owned Buildings Unchanged
Finance - Crown Overseas Properties Unchanged
Primary Industries - Investment in Water Infrastructure Unchanged
Transport - Auckland Transport Projects Changed
Transport - Support for KiwiRail Changed

Matters dependent on external factors

 
ACC - Levies Unchanged
ACC - Non-earners' Account Unchanged
Canterbury Earthquake Recovery - Residential Red Zone Unchanged
Caregiver Employment Conditions New
Communications - Potential Impairment in Value of Broadband Investment Unchanged
Defence Force - Potential Rationalisation, Revaluation and Disposal of NZDF Assets Unchanged
Energy - Crown Revenue from Petroleum Royalties Unchanged
Finance - EQC Unchanged
Finance - Goodwill on Acquisition Unchanged
Finance - Solid Energy New
Finance - Southern Response Earthquake Services Support Unchanged
Housing - Divestment of Housing Unchanged
Revenue - Cash Held in Tax Pools Unchanged
Revenue - Student Loans New
Treaty Negotiations - Treaty Settlement Forecasts Unchanged
Treaty Negotiations - Relativity Clause Unchanged

Potential Policy Decisions Affecting Revenue

ACC - Funding Policy Review (Unchanged)

The Government is undertaking a review of ACC's funding policy. Adopting a lower funding target band midpoint would result in a reduction in levies and reduce Crown revenue and Crown assets, with a flow-on impact to the operating balance.

Revenue - Income-sharing Tax Credits (Unchanged)

The Government has introduced legislation to establish an income-sharing tax credit. If passed as introduced, the legislation will allow couples with children under the age of 18 to pool their earnings for income tax purposes if they meet certain criteria. If implemented, the changes could reduce tax revenue by $500 million a year once the scheme is fully operational. The Finance and Expenditure Committee has recommended that the significant fiscal cost of the package be addressed before the Bill proceeds further.

Services Funded by Third Parties (Unchanged)

A wide range of government services are funded through third party fees and charges. Demand for these services can vary with a direct impact on revenue received. There is a risk the Government may need to provide additional funding if revenue collected is lower than the total costs of providing the services. There is also a risk that changes will be required to the way government services are delivered, which could result in costs to the Crown.

Notes

  • [9]Unchanged - risks that have not substantively changed since the previous Economic and Fiscal Update.Changed - risks that have changed substantively from the previous Economic and Fiscal Update.New - risks that have not been disclosed in the previous Economic and Fiscal Update.

Potential Policy Decisions Affecting Expenses (Expected to be Funded from Reprioritisation or Budget Allowances)

ACC - Work-related Gradual Process Disease and Infection (Unchanged)

Under current legislation, the Government incurs an obligation for Work-related Gradual Process Disease and Infection claims when the claim is made, and an expense is recognised at this point. The liability for commercial accident and sickness insurance contracts would usually be recognised when exposure to conditions that will give rise to a claim occurs. An amendment to legislation would be required to recognise claims at the same time as for commercial contracts. This is under active consideration, but would require an appropriate legislative vehicle. An initial adjustment to the liability, and an expense of about $650 million would need to be reported if such an amendment were to be made.

Budget Operating Initiatives (Changed)

Future Budgets may well include new operating initiatives other than those identified in other specific fiscal risks. Such new operating initiatives are risks to the fiscal forecasts only to the extent they cannot be managed through reprioritisation or from within the existing provision in the fiscal forecasts for forecast new operating spending. The Government's stated intention is that all new operating initiatives will be managed through these mechanisms.

Canterbury Earthquake Recovery - Christchurch Central Recovery Plan (Unchanged)

The Crown is partially funding the construction of Anchor Projects as part of the Christchurch Central Recovery Plan as set out in the cost-sharing agreement with the Christchurch City Council. The extent of funding will vary from project to project, dependent on final project costs. Business cases are progressing through the decision-making process. Project costing for construction of the Anchor Projects will become increasingly clear during the business case process and the subsequent procurement phase. The Crown's contribution may differ from that included in the fiscal forecasts.

Christchurch City Council/Crown Cost Sharing (Unchanged)

The Crown is partially funding the recovery of local infrastructure in Canterbury as set out in the cost-sharing agreement with the Christchurch City Council. The agreement includes a review clause. The review is to be completed by 1 December 2014. Therefore, the fiscal forecasts make no allowance for additional costs arising from the review.

Communications - Ultra-Fast Broadband Initiative (Unchanged)

The Government has expressed support for Crown Fibre Holdings to enter into discussions with Chorus Limited to help manage potential issues for Chorus in delivering the Ultra-Fast Broadband Initiative. Depending on their nature, the outcomes of those discussions could give rise to a fiscal risk. The Government's expectation is that any options arising from the discussions will remain within the current funding envelope.

Defence Force - Operating and Capital Costs (New)

Operating and capital investment decisions may be made to achieve Defence White Paper (2010) policy over the forecast period. In 2013, the Government reconsidered New Zealand Defence Force (NZDF) funding, output requirements and capability intentions, through the Defence Mid-Point Rebalancing Review. The Government is yet to make final decisions on future funding for NZDF. However, funding increases may be approved for NZDF within the forecast period.

Finance - Concessionary Loans (New)

The Crown has provided loans to local government and iwi-based organisations on a concessionary, usually interest free, basis to achieve public policy purposes. To reflect the concession, these loans have been written down and are measured at $290 million in the financial statements. There is, however, a risk that the write-down provisions may be insufficient to cover the credit risk involved in these non-commercial loans.

Government Response to Wai 262 (Unchanged)

The Waitangi Tribunal's report on the Wai 262 claim focuses on the protection of Māori culture and identity, with a particular focus on mātauranga Māori and associated taonga. The Tribunal's recommendations are directed towards a number of government agencies individually, as groups and across sectors. The Government has yet to respond to the Tribunal's report and recommendations.

Housing - Reform of Social Housing (Unchanged)

The Government has decided to change the policy settings for social housing. This includes growing third party providers of social housing, increasing the effectiveness of financial assistance, and Housing New Zealand Corporation focusing on providing social housing to those with the greatest housing need. Increasing the scale or speed of change may require reprioritisation or additional funding.

Revenue - KiwiSaver Auto-enrolment (Changed)

The Government has announced its intention to consult on the design of a one-off KiwiSaver auto-enrolment exercise to increase the number of KiwiSaver members. The Government will proceed with a one-off KiwiSaver enrolment exercise only when it is confident that such a step poses no significant risks to returning to, and maintaining, an operating surplus and debt repayment is on track. An auto-enrolment exercise is likely to entail a one-off cost for kick-start payments to new members and ongoing additional costs for the Member Tax Credit. Depending on the timing, design features and take-up rate, these costs could be in the order of $100 million to $290 million over the first four years after auto-enrolment takes place, and are expected to be funded out of the operating allowance.

Revenue - Transformation and Technology Renewal (Unchanged)

The Government is exploring options that will change the way Inland Revenue manages its processes and data. Any changes could impact tax revenue collections and may have material costs to implement. Inland Revenue has commenced the development of a detailed business cases for Stage 1: Enabling secure digital services. The business cases will inform the Government's decision-making for the first stage of transformation and may require significant reprioritisation or new funding.

Social Development - Vulnerable Children White Paper (Changed)

The Government has begun to implement proposals to better identify and provide assistance to vulnerable children. While funding for 2014/15 has been included in the fiscal forecasts, future costs of the proposal are still being developed. To the extent that these cannot be funded from reprioritisation, additional funding from the Budget operating allowance may be required.

Social Development - Welfare Reform Costs (Changed)

The Welfare Reform package of changes to the benefit system was introduced from July 2013, following amendments to the Social Security Act 1964. The current phase is to review programmes with a view to reducing future benefit dependency and long-term liability. Additional funding was appropriated at Budget 2014. The extent of any further costs associated with the ongoing implementation of the Investment Approach is uncertain.

Social Development - Welfare Reform Forecast Benefit Savings (Unchanged)

A conservative estimate of the likely benefits from Welfare Reform has been included in the fiscal forecasts. The actual impact may differ owing to behavioural factors and the complexity in implementing the reforms, with a corresponding impact on benefit expenditure.

State Sector Employment Agreements (Unchanged)

A number of large collective agreements are due to be negotiated in the short-to-medium term. As well as direct fiscal implications from any changes to remuneration, the renegotiation of these agreements can have flow-on effects to remuneration in other sectors. The Government has signalled an expectation of restraint given its current fiscal stance and that agreements will be managed within the current fiscal forecasts.

Potential Capital Decisions (Expected to be Funded from the Crown Balance Sheet, Including the FIF/Capital Allowance)

Departmental Capital Intentions (Changed)

Future Budgets may well include new capital initiatives other than those identified in other specific fiscal risks. Such initiatives are likely to be primarily from the 16 capital-intensive agencies or sectors that are required to identify their capital spending intentions over the next 10 years based on current policy settings and certain demographic and inflation assumptions. The Government expects that these intentions will be managed back through a range of measures such as prioritisation, changes to asset utilisation, alternative methods of service delivery and changes to policy settings. New capital initiatives and departmental capital intentions are risks to the fiscal forecasts only to the extent they cannot be managed through existing balance sheets, including the FIF, and the provision in the fiscal forecasts for forecast new capital spending.

Earthquake Strengthening for Crown-owned Buildings (Unchanged)

There is a possibility that the Crown will incur costs for earthquake strengthening some of its buildings that do not meet modern building standards. The Government is currently undertaking a stocktake of Crown-owned earthquake-prone buildings. The likelihood, timing and fiscal impact of any earthquake strengthening are uncertain.

Finance - Crown Overseas Properties (Unchanged)

The Government holds New Zealand House in London on a long-term lease from the Crown Estate (UK). Depending on the outcome of ongoing discussions with the Crown Estate an upgrade to the building may be required. A rough-order cost estimate for this upgrade is $100 million over the forecast period.

Primary Industries - Investment in Water Infrastructure (Unchanged)

In addition to $80 million provided in Budget 2013 and $40 million provided in Budget 2014, the Government will consider providing up to $280 million in future Budgets to Crown Irrigation Investments Limited as schemes reach the “investment-ready” stage.

Transport - Auckland Transport Projects (Changed)

The Government has signalled its intention to accelerate transport projects in the Auckland Council’s Auckland Plan, including Auckland Manukau Eastern Transport Initiatives, the East-West Link and support for the City Rail Link and a second Waitemata Harbour Crossing. Decisions on further Crown financial assistance for Auckland Manukau Eastern Transport Initiatives and the East-West Link will be made as part of future Budgets.

Transport - Support for KiwiRail (Changed)

The Government has supported KiwiRail Holdings Limited (KiwiRail) with around $1 billion invested in its plan to become a commercially viable network in Budgets 2010 to 2014. Further funding is being sought by KiwiRail in support of this objective. A major review of the business has commenced and will be assessed to inform Budget 2015 and any further investment.

Matters Dependent on External Factors

ACC - Levies (Unchanged)

Revenue from the levies set for the Work, Earners' and Motor Vehicle accounts may be more or less than is required to cover the cost of claims, if factors such as claims experience, ACC performance and economic assumptions (particularly discount rates) turn out differently from what has been forecast. Any such variance will have a corresponding impact on the operating balance.

ACC - Non-earners' Account (Unchanged)

The amount of funding provided by the Crown (and included in the fiscal forecasts) for the Non-earners' Account may be more or less than is required to cover the cost of claims, if factors such as claims experience, ACC performance and economic assumptions (particularly discount rates) turn out differently from what has been forecast. Any such variance will have a corresponding fiscal impact.

Canterbury Earthquake Recovery - Residential Red Zone (Unchanged)

Some recoveries from the EQC and private insurers remain outstanding and there is a risk that final recoveries may be greater or less than forecast. In addition, potential costs associated with the future use of residential red zone are uncertain. The future value may change depending on any future alternate uses of the land.

Caregiver Employment Conditions (New)

Several cases and funding claims in the disability support and aged care sectors may involve significant costs to the Crown relating to interpretation of the Minimum Wage Act 1983, the Equal Pay Act 1972 and the Government's policy of paying certain family members through its Funded Care Policy. Changes to the existing policy could require additional funding. Successful litigation may have implications for agencies that target assistance based on family circumstances and/or employ workers under similar contracts.

Communications - Potential Impairment in Value of Broadband Investment (Unchanged)

The Government has set aside $1.345 billion to progressively capitalise Crown Fibre Holdings so that it can invest with private partners in a new network delivering “ultra-fast” broadband services. Given the contracts entered into, the extent of the recovery of this investment is particularly dependent on the number of connections made to the network. The fiscal forecasts include a provision for impairing this investment, but the final amount of the impairment may vary from this provision.

Defence Force - Potential Rationalisation, Revaluation and Disposal of NZDF Assets (Unchanged)

The Government is considering the potential to dispose of a number of NZDF assets, including the Seasprite helicopters and Unimog trucks. Depending on market conditions, the timing of disposal and sale price received could have an impact on the Government's overall financial position. NZDF is also completing analysis of inventory that is surplus to requirements and is over and above the existing provision for obsolescence. The existing provision is also being reviewed to ensure that all items comprising the provision are still relevant.

Energy - Crown Revenue from Petroleum Royalties (Unchanged)

Crown revenue from petroleum royalties is very dependent upon extraction rates, the US dollar value per barrel and the US dollar/NZ dollar exchange rate. Movements up or down in either of these variables could result in a significant decrease or increase in Crown revenue. The overall impact for the Crown could be positive or negative.

Finance - EQC (Unchanged)

The net financial position of EQC, and the size of any requirement for additional Crown funding, remain uncertain, although EQC expects the National Disaster Fund to be fully depleted during the 2014/15 financial year, after which the Crown funding will begin. The uncertainty is around EQC's outstanding claims liability - the actuarial estimate of EQC's outstanding claims liability is highly uncertain and sensitive to assumptions; for example, construction demand surge, land damage estimates, legal challenges, reinsurance recoveries and the profile of claims settlement. The magnitude of the net outstanding cost claims is large, so small percentage changes in the liability can have a material impact on the fiscal forecasts.

Finance - Goodwill on Acquisition (Unchanged)

As at 30 June 2013, the Government had goodwill on acquisition of a number of sub-entities totalling $655 million. Under New Zealand accounting standards (NZIAS 36), such goodwill items are required to be assessed annually for impairment. If there is any indication that the goodwill may be impaired, the recoverable amount of the cash generating units to which the goodwill is allocated is required to be estimated. If the recoverable amount is less than the carrying amount of those units, the units and the goodwill allocated to them are regarded as impaired and the Government is required to recognise impairment losses in the operating statement. Such assessments will be conducted at the end of the financial year, and the fiscal forecasts currently make no allowance for such impairment losses.

Finance - Solid Energy (New)

Since Solid Energy's financial restructure in October 2013 the company's export prices have deteriorated significantly driven mainly by a decrease in US dollar coal price. The company continues to develop and implement a business strategy to adapt to these challenging market conditions and continue operating. Any changes to the restructure arrangements or further deterioration in market conditions or the company’s financial position may adversely impact the Crown.

Finance - Southern Response Earthquake Services Support (Unchanged)

The ultimate cost to the Crown of settling earthquake claims remains subject to significant uncertainty. Out-year forecasts assume that the actual cost to settle claims will align with the actuary's central estimate of the claims provision. There is a risk that the actual cost could vary from this estimate.

Housing - Divestment of Housing (Unchanged)

The forecasts reflect related divestments and redevelopments of some housing property. Property sales are subject to market conditions and therefore there is an inherent level of uncertainty about the return to the Crown associated with forecast divestments and to the proposed funding of the related developments.

Revenue - Cash Held in Tax Pools (Unchanged)

Funds held in tax pools are recognised as a Crown asset. There is a risk that funds held in these pools, over and above a taxpayer's provisional tax liability, may be withdrawn by that taxpayer, resulting in a reduction in the Crown's available cash reserves.

Revenue - Student Loans (New)

The valuation of student loans in the fiscal forecasts use data compiled by Statistics New Zealand from the Ministry of Social Development, Ministry of Education and Inland Revenue. The structure of the datasets has changed to those previously used. While this change is expected to improve the accuracy of the forecasts in the future, the change may lead to revisions of assumptions in the short term which could affect the valuation of outstanding student loans.

Treaty Negotiations - Treaty Settlement Forecasts (Unchanged)

The fiscal forecasts include provision for the cost of future Treaty settlements. Given settlements are finalised through negotiations; there is a risk that the timing and amount of the settlements could differ from the profile included in the fiscal forecasts.

Treaty Negotiations - Relativity Clause (Unchanged)

The Deeds of Settlement negotiated with Waikato-Tainui and Ngāi Tahu include a relativity mechanism. Now that the total redress amount for all historical Treaty settlements exceeds $1 billion in 1994 present-value terms, the mechanism provides that the Crown is liable to make payments to maintain the real value of Ngāi Tahu and Waikato-Tainui's settlements as a proportion of all Treaty settlements. The agreed relativity proportions are 17% for Waikato-Tainui and approximately 16% for Ngāi Tahu. There is a risk that the timing and amount of the expense for the relativity payments may differ from that included in the fiscal forecasts. There is also uncertainty on how various disputes concerning the interpretation of the mechanism will be resolved.

Risks Removed Since the 2013 Half Year Update

The following risks have been removed since the 2013 Half Year Update:

Expired risks Reason
Defence Force - Mid-point Rebalancing Review Merged with Defence Force - Operating and Capital Costs risk 
Environment - Post-2012 International Climate Change Obligations No longer material
Health - Litigation in the Disability Support and Aged Care Areas Merged with Caregiver Employment Conditions risk
Justice - Christchurch Justice and Emergency Services Precinct No longer material
Finance - Government Commitments to International Financial Institutions No longer material
Finance - Sale of Part of the Crown's Shareholding in Certain Companies Included in forecasts

Criteria and Rules for Inclusion in the Fiscal Forecasts or Disclosure as Specific Fiscal Risks

The Public Finance Act 1989 requires that the Statement of Specific Fiscal Risks sets out all government decisions, contingent liabilities or contractual obligations known to the Government and subject to specific requirements that may have a material effect on the economic or fiscal outlook.[10]

The criteria and rules set out below are used to determine if government decisions or other circumstances should be incorporated into the fiscal forecasts, disclosed as specific fiscal risks or, in some circumstances, excluded from disclosure.

Criteria for Including Matters in the Fiscal Forecasts

Matters are incorporated into the fiscal forecasts provided they meet the following criteria:

  • The matter can be quantified for particular years with reasonable certainty.
  • A decision has been taken, or a decision has not yet been taken but it is reasonably probable[11] the matter will be approved, or it is reasonably probable the situation will occur.

Additionally, any other matters may be incorporated into the forecasts if the Secretary to the Treasury considers, using best professional judgement, that the matters may have a material effect on the fiscal and economic outlook and are certain enough to include in the fiscal forecasts.

Rules for the Disclosure of Specific Fiscal Risks 

Matters are disclosed as specific fiscal risks if:

  • the likely impact is more than $100 million over five years, and either
  • a decision has not yet been taken but it is reasonably possible[12] (but not probable) that the matter will be approved or the situation will occur, or
  • it is reasonably probable that the matter will be approved or the situation will occur, but the matter cannot be quantified or assigned to particular years with reasonable certainty.

Additionally, any other matters may be disclosed as specific fiscal risks if the Secretary to the Treasury considers, using best professional judgement, that the matters may have a material effect (more than $100 million over five years) on the fiscal and economic outlook but are not certain enough to include in the fiscal forecasts.

Exclusions from Disclosure

Matters are excluded from disclosure as specific fiscal risks if they fail to meet the materiality criterion (ie, are less than $100 million over five years), or if they are unlikely[13] to be approved or occur within the forecasting period.

Additionally, the Minister of Finance may determine that a matter be included in the fiscal forecasts or a specific fiscal risk not be disclosed, if such disclosure would be 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.

If possible, the Minister of Finance should avoid withholding the matter, either by making a decision on it before the forecasts are finalised, or by disclosing it without quantifying the risk.

Notes

  • [10]The Statement of Specific Fiscal Risks is a requirement set out in sections 26Q and 26U of the Public Finance Act 1989.
  • [11]For these purposes “reasonably probable” is taken to mean that the matter is more likely than not to be approved within the forecast period (by considering, for example, whether there is a better than 50% chance of the matter occurring or being approved).
  • [12]For these purposes “reasonably possible” is taken to mean that the matter might be approved within the forecast period (by considering, for example, whether there is a 20% to 50% chance of the matter occurring or being approved).
  • [13]For these purposes “unlikely” is taken to mean that the matter will probably not be approved within the forecast period (by considering, for example, whether there is a less than 20% chance of the matter occurring or being approved).

Contingent Liabilities and Contingent Assets

Contingent liabilities are possible costs that have arisen from past events, but the amount of the liability, or whether it will eventuate, will not be confirmed until a particular event occurs or present liabilities that are unable to be measured with sufficient reliability to be recorded in the financial statements (unquantifiable liabilities).

Typically, contingent liabilities consist of guarantees and indemnities, uncalled capital and legal disputes and claims. 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, or the amount becomes sufficiently reliable to record as a liability, it would reduce the operating balance and net worth and increase debt. In the case of contingencies for uncalled capital, the negative impact would be restricted to core Crown net debt because the cost would be offset by the acquisition of capital.

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

Contingent assets are possible assets that have arisen from past events but the amount of the asset, or whether it will eventuate, will not be confirmed until a particular event occurs.

Only contingent liabilities and contingent assets involving amounts of over $100 million are separately disclosed. Quantifiable contingencies less than $100 million are aggregated in the “other quantifiable” total.

Some contingencies of the Crown are not able to be quantified. We have disclosed all unquantifiable contingent liabilities and unquantifiable contingent assets that are not expected to be remote.[14]

Contingent liabilities have been stated as at 31 March 2014, being the latest set of reported contingent liabilities.

Notes

  • [14]Remote is defined as being an item with less than a 10% chance of occurring.

Quantifiable Contingent Liabilities and Contingent Assets

  Status [15] ($millions)

Contingent liabilities

   

Guarantees and indemnities

   
Other guarantees and indemnities Unchanged 158
    158

Uncalled capital

   
Asian Development Bank Unchanged 2,763
International Monetary Fund - promissory notes Unchanged 1,033
International Bank for Reconstruction and Development Unchanged 948
International Monetary Fund - arrangements to borrow Unchanged 972
Other uncalled capital Unchanged 22
    5,738

Legal proceedings and disputes

   
Tax disputes Unchanged 591
Other legal proceedings and disputes Unchanged 65
    656

Other quantifiable contingent liabilities

   
Unclaimed monies Unchanged 112
Transpower New Zealand Limited Unchanged 150
Other quantifiable contingent liabilities Unchanged 228
    490
Total quantifiable contingent liabilities   7,042

Contingent assets

   
Tax disputes Unchanged 118
Other quantifiable contingent assets Unchanged 46
Total quantifiable contingent assets   168

Notes

  • [15]Status of contingent liabilities or assets when compared to the Half Year Economic and Fiscal Update published on 17 December 2013.

Unquantifiable Contingent Liabilities and Contingent Assets

Contingent liabilities Status

Indemnities:

 
Air New Zealand Unchanged
Contact Energy Limited Unchanged
Earthquake Commission (EQC) Unchanged
Genesis Energy Limited Unchanged
Housing New Zealand Corporation Unchanged
Justices of the Peace, Community Magistrates and Disputes Tribunal Referees Unchanged
Maui Contracts Unchanged
Maui Partners Unchanged
New Zealand Aluminium Smelter and Comalco Unchanged
New Zealand Local Authorities Unchanged
New Zealand Railways Corporation Unchanged
Persons exercising investigating powers Unchanged
Synfuels-Waitara Outfall Indemnity Unchanged
Westpac New Zealand Limited Unchanged

Legal claims and proceedings:

 
Accident Compensation Corporation (ACC) litigations Unchanged
Air New Zealand litigation Unchanged
Television New Zealand Unchanged
Treaty of Waitangi claims Unchanged
Ministry of Education litigation Unchanged

Other unquantifiable contingent liabilities:

 
Criminal Proceeds (Recovery) Act 2009 Unchanged
Environmental liabilities Unchanged
Treaty of Waitangi claims - settlement relativity payments Unchanged

The following unquantifiable contingent liability was removed: Meridian Energy Limited Initial Public Offering.

Description of Contingent Liabilities

Quantifiable contingent liabilities over $100 million

Uncalled capital

As part of the Crown's commitment to a multilateral approach to ensure global financial and economic stability, New Zealand, as a member country of these organisations, contributes capital by subscribing to shares in certain institutions.

The capital (when called) is typically used to raise additional funding for loans to member countries or, in the case of the quota contributions, to directly finance lending to members. For New Zealand and other donor countries, capital contributions comprise both “paid in” capital and “callable capital or promissory notes”.

The Crown's uncalled capital subscriptions over $100 million are as follows:

Uncalled capital 31 March 2014
$millions
30 June 2013
$millions
Asian Development Bank 2,763 2,992
International Monetary Fund - promissory notes 1,033 1,163
International Bank for Reconstruction and Development 948 1,056
International Monetary Fund - arrangements to borrow 972 1,052

Legal proceedings and disputes

Tax in dispute

When a taxpayer disagrees with an amended assessment issued following the dispute process, the taxpayer may challenge that decision by filing proceedings with the Taxation Review Authority or the High Court. The contingent liability represents the maximum liability Inland Revenue has in respect of these cases.

$591 million at 31 March 2014 ($641 million at 30 June 2013)

Other quantifiable contingent liabilities

Unclaimed monies

Under the Unclaimed Money Act 1971, entities (eg, financial institutions, insurance companies) hand over money not claimed after six years to Inland Revenue. The funds are repaid to the entitled owner on proof of identification.

$112 million at 31 March 2014 ($101 million at 30 June 2013)

Transpower New Zealand Limited

Transpower has a contingent liability relating to excess capital expenditure on the North Island Grid Upgrade Project (NIGU). The NIGU spend exceeds the amount initially approved in 2006. If the excess expenditure is not approved by the Commerce Commission it cannot be recovered from customers. NIGU is operational and a submission for the excess expenditure has been made.

$150 million at 31 March 2014 ($156 million at 30 June 2013)

Unquantifiable contingent liabilities

This part of the Statement provides details of those contingent liabilities of the Crown that are not quantified, excluding those that are considered remote, reported by the following categories:

  1. Indemnities.
  2. Legal disputes.
  3. Other contingent liabilities.

a Indemnities

Indemnities are legally binding promises where the Crown undertakes to accept the risk of loss or damage that another party may suffer or to hold the other party harmless against loss caused by a specific stated event.

A number of these indemnities are provided to organisations within the Crown's control. If these indemnities were to crystallise, the Crown would compensate the individual entity for the loss and there would likely be an adverse impact on core Crown expenses and core Crown net debt.

Party indemnified Instrument of indemnification Actions indemnified
Air New Zealand Deed of indemnity issued 24 September 2001. Claims arising from acts of war and terrorism that cannot be met from insurance, up to a limit of US$1 billion in respect of any one claim.
Contact Energy Limited The Crown and Contact Energy signed a number of documents to settle in full Contact's outstanding land rights and geothermal asset rights at Wairakei.  The documents contained two reciprocal indemnities between the Crown and Contact to address the risk of certain losses to the respective parties' assets arising from the negligence or fault of the other party. 
Earthquake Commission (EQC) Section 16 of the Earthquake Commission Act 1993. As set out in the Earthquake Commission Act 1993, the Crown shall fund any deficiency in EQC's assets to cover its financial liabilities on such terms and conditions that the Minister of Finance determines.  See risk page 71.
Genesis Energy Limited Deed between Genesis Power Limited and the Crown. The agreement sees the Crown compensate Genesis in the event that Genesis has less gas than it requires for the long-term supply of gas to cover Huntly Power station's minimum needs.
  Genesis acquisition of Tekapo A & B power stations. Indemnity against any damage to bed of lakes and rivers subject to operating easements. 
Housing New Zealand Corporation (HNZC) The Crown has provided a warranty in respect of title to the assets transferred to Housing New Zealand Limited (HNZL).

The Crown indemnified HNZL against:

  • any breach of the warranty provided, and
  • any third party claims that are a result of acts or omissions prior to 1 November 1992.

The Crown also indemnified the directors and officers of HNZL against any liability consequent upon the assets not complying with statutory requirements, provided it is taking steps to rectify any non-compliance.

Justices of the Peace, Community Magistrates and Disputes Tribunal Referee

Section 197 of the Summary Proceedings Act 1957.

Section 58 of the Disputes Tribunal Act 1988.

Damages or costs awarded against them as a result of them exceeding their jurisdiction, provided a High Court Judge certifies that they have exceeded their jurisdiction in good faith and ought to be indemnified.
Maui Contracts Contracts in respect of which the Crown purchases gas from Maui Mining companies and sells gas downstream to Contact Energy Limited, Vector Gas Limited and Methanex Waitara Valley Limited. The contracts provide for invoices to be re-opened in certain circumstances within two years of their issue date as a result of revisions to indices.  These revisions may result in the Crown refunding monies or receiving monies from those parties.
Maui Partners Confidentiality agreements with the Maui Partners in relation to the provision of gas reserves information. Any losses arising from a breach of the deed.
New Zealand Aluminium Smelter and Comalco The Minister of Finance signed indemnities in November 2003 and February 2004 in respect of aluminium dross currently stored at another site in Invercargill. The indemnity relates to costs incurred in removing the dross and disposing of it at another site if required to do so by an appropriate authority. 
New Zealand Local Authorities

Section 9 of the Civil Defence Emergency Management Act 2002.

Civil Defence Emergency Management Plan.

The Guide to the National Civil Defence Emergency Management Plan (“the Guide”) states that, with the approval of the Minister, the Government will reimburse local authorities, in whole or in part, for certain types of response and recovery costs incurred as a result of a local or national emergency.  The Guide is approved and issued by the Director of Civil Defence Emergency Management.
New Zealand Railways Corporation The Minister of Finance signed the indemnity on 1 September 2004. The directors of New Zealand Railways Corporation are indemnified against all liabilities in connection with the Corporation taking ownership and/or responsibility for the national rail network and any associated assets and liabilities.
  Section 10 of the Finance Act 1990. The Act guarantees all loan and swap obligations of the New Zealand Railways Corporation. 
Persons exercising investigating powers Section 63 of the Corporations (Investigation and Management) Act 1989. Indemnifies the Financial Markets Authority (formerly Securities Commission), the Registrar of Companies, every statutory manager of a corporation, every member of an advisory committee appointed under the Act and persons appointed pursuant to sections 17 to 19 of the Act (to exercise powers of inspection and investigation).  The indemnity applies to the exercise, or omission to exercise, of any powers under the Act, unless the exercise of the power or the omission is shown to be in bad faith.
Synfuels-Waitara Outfall Indemnity 1990 sale of the Synfuels plant and operations to New Zealand Liquid Fuels Investment Limited (NZLFI). The Crown transferred to NZLFI the benefit and obligation of a Deed of Indemnity between the Crown and Borthwick-CWS Limited (and subsequent owners) in respect of the Waitara effluent transfer line which was laid across the Waitara meat processing plant site.  The Crown has the benefit of a counter indemnity from NZLFI which has since been transferred to Methanex Motunui Limited.
Westpac New Zealand Limited The Domestic Transaction Banking Services Master Agreement with Westpac Banking Corporation (Westpac's rights and obligations under this agreement were vested in Westpac New Zealand Limited under the Westpac New Zealand Act 2006), dated 30 November 2004.

The Crown has indemnified Westpac:

  • in relation to letters of credit issued on behalf of the Crown, and
  • for costs and expenses incurred by reason of third party claims against Westpac relating to indirect instructions, direct debits, third party cheques, departmental credit card merchant agreements, use of online banking products and IRD processing arrangements.
  Supplier Payments Service - New Zealand Government Master Agreement dated 23 June 2010. The Crown has indemnified Westpac New Zealand Limited against certain costs, damages and losses to third parties resulting from unauthorised, forged or fraudulent payment instructions (excluding costs, damages and losses arising from Westpac's wilful default, negligence or breach of the agreement or other applicable legal obligation).

Legal claims and proceedings

Numerous legal actions have been brought against the Crown. However, in the majority of these actions it is considered a remote possibility that the Crown would lose the case, or if the Crown were to lose it would be unlikely to have greater impact than a $20 million impact. Based on these factors, not all legal actions are individually disclosed. The claims that are disclosed individually, while they cannot be quantified, have the potential to exceed $20 million in costs.

Accident Compensation Corporation (ACC) litigations 

There are a number of actions involving ACC in existence, arising from the statutory review and appeal process, and in the main coming from challenges to operational decisions made by ACC. Given the nature of these proceedings and uncertainty as to their outcomes, attempting to quantify the financial effect would be unrealistic, so no estimate has been made.

Air New Zealand litigation

Air New Zealand is currently named in class actions. Two (one in Australia and the other in the United States) make allegations against more than 30 airlines, of anti competitive conduct in relation to pricing in the air cargo business. A class action in the United States alleges that Air New Zealand together with many other airlines conspired in respect of fares and surcharges on trans-Pacific routes. The United States class action is being defended. Claims against Air New Zealand in the Australian class action are to be discontinued under terms of a proposed settlement of the proceedings. Air New Zealand is not contributing to that settlement. The allegations made in relation to the air cargo business are also the subject of proceedings by the Australian Competition and Consumer Commission. A defended hearing in the Federal Court concluded in May 2013 and a decision is awaited. In the event that the Court determines that Air New Zealand had breached Australian laws, the Company would have potential liability for pecuniary penalties.

Television New Zealand Limited (TVNZ)

In the normal course of business various legal claims have been made against TVNZ. Given the stage of proceedings and uncertainty as to the outcomes of the claims, no estimate of the financial effect can be made and no provision for any potential liability has been made in the financial statements.

Treaty of Waitangi claims

Under the Treaty of Waitangi Act 1975, any Māori may lodge certain claims relating to land or actions counter to the principles of the Treaty with the Waitangi Tribunal. Where the Tribunal finds a claim is well founded, it may recommend to the Crown that action be taken to compensate those affected. The Tribunal can make recommendations that are binding on the Crown with respect to land which has been transferred by the Crown to an SOE or tertiary institution, or is subject to the Crown Forest Assets Act 1989.

On occasion, Māori claimants pursue the resolution of particular claims against the Crown through higher courts. There are currently two such actions against the Crown being heard at the Court of Appeal and the Supreme Court. Failure to successfully defend such actions may result in a liability for historical Treaty grievances in excess of that currently anticipated.

Ministry of Education litigation

Post Primary Teachers Association and several teachers have lodged a claim in the High Court alleging breach of statutory duty, and compensation, in respect of the Novopay system failures. The Ministry is defending this claim.

Other unquantifiable contingent liabilities

Criminal Proceeds (Recovery) Act 2009

The Ministry of Justice is responsible for administering the Criminal Proceeds (Recovery) Act 2009. The Act requires the Crown to give an undertaking as to damages or costs in relation to asset restraining orders. In the event that the Crown is found liable, payment may be required. The timing and amount of any possible payments required are not able to be estimated.

Environmental liabilities

Under common law and various statutes, the Crown may have responsibility to remedy adverse effects on the environment arising from Crown activities. Departments managing significant Crown properties have implemented systems to identify, monitor and assess potential contaminated sites.

Any contaminated sites for which costs can be reliably measured have been included in the Statement of Financial Position as provisions.

Treaty of Waitangi claims - Settlement Relativity Payments - see page 72.

Description of Contingent Assets

Quantifiable contingent assets over $100 million

Tax disputes - non-assessed

A contingent asset is recognised when Inland Revenue has advised, or was about to advise, a taxpayer of a proposed adjustment to their tax assessment. The taxpayer has the right to dispute this adjustment and a disputes resolution process can be entered into. The contingent asset is based on the likely outcome of the disputes process based on experience and similar prior cases.

$118 million at 31 March 2014 ($169 million at 30 June 2013)

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 Risks and Scenarios and Specific Fiscal Risks chapters discuss the risks to the fiscal forecast in more detail.

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 29 April 2014.

The finalisation dates and key assumptions that underpin the preparation of the Forecast Financial Statements are outlined in the Fiscal Outlook Chapter (pages 21 to 45).

Statement of Accounting Policies

Significant Accounting Policies

The 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. They comply with generally accepted accounting practice (GAAP) as required by the Public Finance Act 1989 and have been prepared in accordance with Financial Reporting Standard 42: Prospective Financial Statements.

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).

The specific accounting policies are included within the 2014 Budget Economic and Fiscal Update Additional Information document which can be found on the Treasury's website at www.treasury.govt.nz/budget/forecasts/befu2014

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

The Forecast Financial Statements have been prepared on the basis of the Treasury's best professional judgement. Actual financial results for the periods covered are likely to vary from the information presented in these forecasts. Factors that may lead to a material difference between information in these Forecast Financial Statements and the actual reported results in future years are set out in the Specific Fiscal Riskschapter on pages 63 to 83.

Key forecast assumptions are set out on pages 43 to 45.

Government Reporting Entity as at 29 April 2014

These Forecast Financial Statements are for the government reporting entity as specified in Part 3 of the Public Finance Act 1989. This comprises Ministers of the Crown and the following entities (classified in the three institutional components used for segmental reporting):

Core Crown segment

Departments
  • Canterbury Earthquake Recovery AuthorityCrown Law Office
  • Department of Conservation
  • Department of Corrections
  • Department of Internal Affairs
  • Department of the Prime Minister and Cabinet
  • Education Review Office
  • Government Communications Security Bureau
  • Inland Revenue Department
  • Land Information New Zealand
  • Ministry for Culture and Heritage
  • Ministry for Primary Industries
  • Ministry for the Environment
  • Ministry of Business, Innovation and Employment
  • Ministry of Defence
  • Ministry of Education
  • Ministry of Foreign Affairs and Trade
  • Ministry of Health
  • Ministry of Justice
  • Ministry of Māori Development
  • Ministry of Pacific Island Affairs
  • Ministry of Social Development
  • Ministry of Transport
  • Ministry of Women's Affairs
  • New Zealand Customs Service
  • New Zealand Defence Force
  • New Zealand Police
  • New Zealand Security Intelligence Service
  • Office of the Clerk of the House of Representatives
  • Parliamentary Counsel Office
  • Parliamentary Service
  • Serious Fraud Office
  • State Services Commission
  • Statistics New Zealand
  • The Treasury
Offices of Parliament
  • Controller and Auditor-General
  • The Ombudsmen
  • Parliamentary Commissioner for the Environment
Others
  • New Zealand Superannuation Fund
  • Reserve Bank of New Zealand

State-owned enterprises segment

  • Airways Corporation of New Zealand Limited
  • Animal Control Products Limited
  • AsureQuality Limited
  • Electricity Corporation of New Zealand Limited
  • Kiwirail Holdings Limited
  • Kordia Group Limited
  • Landcorp Farming Limited
  • Learning Media Limited (in liquidation)
  • Meteorological Service of New Zealand Limited
  • New Zealand Post Limited
  • New Zealand Railways Corporation
  • Quotable Value Limited
  • Solid Energy New Zealand Limited
  • Transpower New Zealand Limited
Mixed ownership model companies (Public Finance Act schedule 5 companies) 
  • Genesis Energy Limited
  • Meridian Energy Limited
  • Mighty River Power Limited
Others
  • Air New Zealand Limited

Crown entities segment

  • Accident Compensation Corporation
  • Arts Council of New Zealand Toi Aotearoa
  • Broadcasting Commission
  • Broadcasting Standards Authority
  • Callaghan Innovation
  • Careers New Zealand
  • Children’s Commissioner
  • Civil Aviation Authority of New Zealand
  • Commerce Commission
  • Crown Irrigation Investments Limited
  • Crown Research Institutes (7)
  • District Health Boards (20)
  • Drug Free Sport New Zealand
  • Earthquake Commission
  • Education New Zealand
  • Electoral Commission
  • Electricity Authority
  • Energy Efficiency and Conservation Authority
  • Environmental Protection Authority
  • External Reporting Board
  • Families Commission
  • Financial Markets Authority
  • Government Superannuation Fund Authority
  • Guardians of New Zealand Superannuation
  • Health and Disability Commissioner
  • Health Promotion Agency
  • Health Quality and Safety Commission
  • Health Research Council of New Zealand
  • Housing New Zealand Corporation
  • Human Rights Commission
  • Independent Police Conduct Authority
  • Law Commission
  • Maritime New Zealand
  • Museum of New Zealand Te Papa Tongarewa Board
  • New Zealand Antarctic Institute
  • New Zealand Artificial Limb Service
  • 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 Productivity Commission
  • New Zealand Qualifications Authority
  • New Zealand Symphony Orchestra
  • New Zealand Teachers Council
  • New Zealand Tourism Board
  • New Zealand Trade and Enterprise
  • New Zealand Transport Agency
  • New Zealand Venture Investment Fund Limited
  • New Zealand Walking Access Commission
  • Office of Film and Literature Classification
  • Pharmaceutical Management Agency
  • Privacy Commissioner
  • Public Trust
  • Radio New Zealand Limited
  • Real Estate Agents Authority
  • Retirement Commissioner
  • School Boards of Trustees (2,453)
  • Social Workers Registration Board
  • Sport and Recreation New Zealand
  • Standards Council
  • Takeovers Panel
  • Te Reo Whakapuaki Irirangi (Māori Broadcasting Funding Agency)
  • Te Taura Whiri i te Reo Māori (Māori Language Commission)
  • Television New Zealand Limited
  • Tertiary Education Commission
  • Tertiary education institutions (29)
  • Testing Laboratory Registration Council
  • Transport Accident Investigation Commission
  • WorkSafe New Zealand
Organisations listed in schedule 4 of the Public Finance Act 1989
  • Agricultural and Marketing Research and Development Trust
  • Asia New Zealand Foundation
  • Fish and Game Councils (12)
  • Game Animal Council
  • Leadership Development Centre Trust
  • Māori Trustee
  • National Pacific Radio 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 Island Business Development Trust
  • Reserves Boards (21)
  • Sentencing Council
  • Te Ariki Trust
Non-listed companies in which the Crown is majority or sole shareholder (Public Finance Act schedule 4A companies)
  • Crown Asset Management Limited
  • Crown Fibre Holdings Limited
  • Fairway Resolution Limited
  • Health Benefits Limited
  • The Network for Learning Limited
  • Research and Education Advanced Network New Zealand Limited
  • Southern Response Earthquake Services Limited
  • Tāmaki Redevelopment Company Limited

Subsidiaries of SOEs, Crown entities and other government entities are consolidated by their parents and not listed separately in this table.

Forecast Financial Statements

Forecast Statement of Financial Performance for the years ending 30 June

  Note 2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

Revenue

               
Taxation revenue 1 58,134 61,773 61,380 65,824 69,912 73,348 76,848
Other sovereign revenue 1 5,172 5,296 5,383 5,138 4,826 4,790 4,909
Total revenue levied through the Crown's sovereign power   63,306 67,069 66,763 70,962 74,738 78,138 81,757
Sales of goods and services   16,713 17,080 16,432 17,091 17,593 18,107 18,764
Interest revenue and dividends 2 2,939 3,588 3,160 3,672 3,982 4,636 5,132
Other revenue   3,697 3,867 3,622 3,842 4,055 4,110 4,085
Total revenue earned through the Crown's operations   23,349 24,535 23,214 24,605 25,630 26,853 27,981
Total revenue (excluding gains)   86,655 91,604 89,977 95,567 100,368 104,991 109,738

Expenses

               
Transfer payments and subsidies 3 22,708 23,485 23,394 23,876 24,479 25,334 26,326
Personnel expenses 4 19,935 20,172 20,488 20,881 21,227 21,424 21,705
Depreciation and amortisation 5 4,812 4,640 4,644 4,882 5,048 5,151 5,213
Other operating expenses 5 36,163 37,608 36,527 37,520 37,497 37,327 37,567
Interest expenses 6 4,358 4,516 4,461 4,763 5,054 5,543 5,708
Insurance expenses 7 3,031 3,215 3,283 3,517 4,048 4,418 4,723
Forecast new operating spending 8 461 77 291 1,864 3,375 4,921
Top-down expense adjustment 8 (600) (660) (875) (485) (360) (360)
Total expenses (excluding losses)   91,007 93,497 92,214 94,855 98,732 102,212 105,803
Minority interest share of operating balance before gains/losses1   (62) (140) (210) (340) (374) (410) (450)
Operating balance before gains/(losses)   (4,414) (2,033) (2,447) 372 1,262 2,369 3,485
Net gains/(losses) on financial instruments 9 7,270 1,748 3,604 2,583 2,728 2,837 3,013
Net gains/(losses) on non-financial instruments 10 3,674 443 1,557 (107) (109) (73) (74)
Total gains/(losses)   10,944 2,191 5,161 2,476 2,619 2,764 2,939
Net surplus from associates and joint ventures   395 200 259 254 255 255 256
Operating balance 11 6,925 358 2,973 3,102 4,136 5,388 6,680
  1. Minority interests include those who recently purchased shares in the Government Share Offer Programme as well as the pre-existing minority interests in Air New Zealand Limited, and the minority interests held in the Crown Fibre Holdings Group and Solid Energy.

The accompanying notes and accounting policies are an integral part of these Statements.

Forecast Analysis of Expenses by Functional Classification for the years ending 30 June

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

Total Crown expenses

             

By functional classification

             
Social security and welfare 26,268 27,510 27,373 28,125 28,967 30,062 31,279
GSF pension expenses 286 283 300 409 436 464 493
Health 13,856 14,433 14,382 14,741 14,668 14,616 14,598
Education 13,366 13,180 13,180 13,571 13,774 13,833 13,909
Core government services 3,960 4,201 4,351 4,462 4,549 4,414 4,331
Law and order 3,670 3,804 3,811 3,750 3,788 3,764 3,767
Defence 1,766 1,893 1,818 1,936 1,975 1,950 1,947
Transport and communications 9,052 9,036 9,212 9,427 9,558 9,692 9,965
Economic and industrial services 8,375 8,098 7,538 7,924 8,066 8,348 8,797
Primary services 1,579 1,892 1,759 1,788 1,757 1,733 1,582
Heritage, culture and recreation 2,351 2,532 2,360 2,348 2,431 2,470 2,523
Housing and community development 989 1,057 1,109 1,141 1,180 1,187 1,220
Environmental protection 528 473 536 511 513 492 495
Other 603 728 607 543 637 629 628
Finance costs 4,358 4,516 4,461 4,763 5,054 5,543 5,708
Forecast new operating spending 461 77 291 1,864 3,375 4,921
Top-down expense adjustment (600) (660) (875) (485) (360) (360)
Total Crown expenses excluding losses 91,007 93,497 92,214 94,855 98,732 102,212 105,803

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

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

Core Crown expenses

             

By functional classification

             
Social security and welfare 22,741 23,595 23,329 23,954 24,377 25,186 26,137
GSF pension expenses 278 274 282 395 423 450 479
Health 14,498 14,950 14,889 15,065 15,132 15,191 15,274
Education 12,504 12,389 12,411 12,827 12,974 13,035 13,109
Core government services 4,294 4,637 4,792 4,816 4,910 4,761 4,664
Law and order 3,456 3,561 3,575 3,486 3,523 3,496 3,497
Defence 1,804 1,933 1,867 1,984 2,023 1,998 1,996
Transport and communications 2,255 2,162 2,241 2,217 2,176 2,240 2,308
Economic and industrial services 1,978 2,152 2,100 2,215 2,241 2,246 2,299
Primary services 659 818 716 700 638 605 603
Heritage, culture and recreation 804 854 838 770 778 753 744
Housing and community development 283 335 377 326 280 224 220
Environmental protection 530 496 534 510 511 491 494
Other 603 728 607 543 637 629 628
Finance costs 3,619 3,622 3,641 3,883 3,978 4,354 4,440
Forecast new operating spending 461 77 291 1,864 3,375 4,921
Top-down expense adjustment (600) (660) (875) (485) (360) (360)
Total core Crown expenses excluding losses 70,306 72,367 71,616 73,107 75,980 78,674 81,453

The accompanying notes and accounting policies are an integral part of these Statements.

Forecast Statement of Comprehensive Income for the years ending 30 June

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Operating balance (including minority interest) 7,019 498 3,216 3,467 4,530 5,816 7,148

Other comprehensive income

             
Revaluation of physical assets 1,367 (351)
Net change in hedging instruments entered into for cash flow hedges 280 (21) (102) (3) 5 8 2
Foreign currency translation differences for foreign operations 39 (7) 4
Valuation gains/(losses) on investments available for sale taken to reserves 36 8 (13) 10 10 12 13
Other movements 7 (38) 3 (30) 23 31 40
Total other comprehensive income 1,690 (12) (470) (19) 38 51 55
Total comprehensive income 8,709 486 2,746 3,448 4,568 5,867 7,203

Attributable to:

             
 - minority interest 153 140 243 365 394 428 468
 - the Crown 8,556 346 2,503 3,083 4,174 5,439 6,735
Total comprehensive income 8,709 486 2,746 3,448 4,568 5,867 7,203

Forecast Statement of Changes in Net Worth for the years ending 30 June

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Opening net worth 59,780 63,270 70,011 75,467 78,633 82,838 88,314
Operating balance 7,019 498 3,216 3,467 4,530 5,816 7,148
Net revaluations 1,367 (351)
Transfers to/(from) reserves 260 (59) (119) 10 26 39 43
(Gains)/losses transferred to the Statement of Financial Performance (10) (3) 3 2 (1)
Other movements 73 47 3 (32) 10 12 13
Comprehensive income attributable to the Crown 8,709 486 2,746 3,448 4,568 5,867 7,203
Gain/(loss) on Government share offers 167 175 (542)
Increase in minority interest from Government share offers 1,371 1,325 3,300
Transactions with minority interest (16) (74) (48) (282) (363) (391) (396)
Closing net worth 70,011 65,182 75,467 78,633 82,838 88,314 95,121

The accompanying notes and accounting policies are an integral part of these Statements.

Forecast Statement of Cash Flows for the years ending 30 June

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

Cash flows from operations

             

Cash was provided from

             
Taxation receipts 56,413 60,695 60,442 64,913 68,831 72,357 75,787
Other sovereign receipts 4,806 4,747 4,969 4,645 4,454 4,560 4,667
Sales of goods and services 16,651 17,175 16,460 17,113 17,626 18,151 18,867
Interest and dividend receipts 2,694 3,175 2,888 3,310 3,560 4,083 4,489
Other operating receipts 5,933 5,443 6,168 4,972 3,894 3,938 3,862
Total cash provided from operations 86,497 91,235 90,927 94,953 98,365 103,089 107,672

Cash was disbursed to

             
Transfer payments and subsidies 22,780 23,877 23,800 24,020 24,496 25,319 26,297
Personnel and operating payments 58,450 62,622 60,717 63,953 59,698 59,688 60,903
Interest payments 4,369 4,629 4,412 4,728 4,778 5,226 5,378
Forecast new operating spending 461 77 291 1,864 3,375 4,921
Top-down expense adjustment (600) (660) (875) (485) (360) (360)
Total cash disbursed to operations 85,599 90,989 88,346 92,117 90,351 93,248 97,139
Net cash flows from operations 898 246 2,581 2,836 8,014 9,841 10,533

Cash flows from investing activities

             

Cash was provided from/(disbursed to)

             
Net purchase of physical assets (5,169) (7,234) (6,787) (7,832) (6,807) (6,157) (5,648)
Net purchase of shares and other securities 6,342 (5,221) (5,336) 4,339 (4,855) (8,284) 2,005
Net purchase of intangible assets (581) (516) (568) (576) (505) (424) (403)
Net repayment/(issues) of advances (1,405) (2,029) (2,166) (1,971) (1,672) (1,512) (1,428)
Net acquisition of investments in associates 280 65 34 (46) 58 45 46
Government share offer programme1 1,547 1,500 2,216 598 -  
Forecast new capital spending (503) (13) (326) (565) (747) (901)
Top-down capital adjustment 50 395 370 75 50 50
Net cash flows from investing activities 1,014 (13,888) (12,225) (5,444) (14,271) (17,029) (6,279)
Net cash flows from operating and investing activities 1,912 (13,642) (9,644) (2,608) (6,257) (7,188) 4,254

Cash flows from financing activities

             

Cash was provided from/(disbursed to)

             
Issues of circulating currency 234 141 382 152 157 161 166
Net issue/(repayment) of government stock2 5,476 10,245 5,723 (759) 5,099 6,824 (4,487)
Net issue/(repayment) of foreign-currency borrowings (2,926) (519) (52) (838) (641) (37) (576)
Net issue/(repayment) of other New Zealand dollar borrowings (634) 2,647 251 3,808 2,140 1,117 1,674
Dividends paid to minority interests3 (20) (120) (246) (365) (401) (416) (435)
Net cash flows from financing activities 2,130 12,394 6,058 1,998 6,354 7,649 (3,658)
Net movement in cash 4,042 (1,248) (3,586) (610) 97 461 596
Opening cash balance 10,686 16,492 14,924 11,108 10,498 10,595 11,056
Foreign-exchange gains/(losses) on opening cash 196 (230)
Closing cash balance 14,924 15,244 11,108 10,498 10,595 11,056 11,652
  1. Excludes purchases by ACC and NZSF.
  2. Further information on the proceeds and repayments of government stock ("domestic bonds") is available in note 22.
  3. Minority interests include those who recently purchased shares in the Government Share Offer Programme as well as the pre-existing minority interests in Air New Zealand Limited, and the minority interests held in the Crown Fibre Holdings Group and Solid Energy.

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
  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

Reconciliation between the net cash flows from operations and the operating balance

             
Net cash flows from operations 898 246 2,581 2,836 8,014 9,841 10,533

Items included in the operating balance but not in net cash flows from operations

             

Gains/(losses)

             
Net gains/(losses) on financial instruments 7,270 1,748 3,604 2,583 2,728 2,837 3,013
Net gains/(losses) on non-financial  instruments 3,674 443 1,557 (107) (109) (73) (74)
Total gains/(losses) 10,944 2,191 5,161 2,476 2,619 2,764 2,939

Other non-cash items in operating balance

             
Depreciation and amortisation (4,812) (4,640) (4,644) (4,882) (5,048) (5,151) (5,213)
Write-down on initial recognition of financial assets (684) (723) (843) (838) (866) (885) (895)
Impairment on financial assets (excl. receivables) (497) 23 (18) (128) (131) (134) (137)
Decrease/(increase) in defined benefit retirement plan liabilities 385 461 458 353 338 322 304
Decrease/(increase) in insurance liabilities 1,106 2,517 1,730 3,629 (801) (1,392) (1,638)
Other 331 201 47 (86) (119) (152) (193)
Total other non-cash Items (4,171) (2,161) (3,270) (1,952) (6,627) (7,392) (7,772)

Movements in working capital

             
Increase/(decrease) in receivables (1,302) (1,119) (1,346) (803) 120 453 648
Increase/(decrease) in accrued interest 257 526 222 326 147 235 313
Increase/(decrease) in inventories (94) 73 18 (4) 25 8 (51)
Increase/(decrease) in prepayments 32 (29) (24) (27) 2 6 (2)
Decrease/(increase) in deferred revenue (2) 26 (87) (20) (19) (14) (64)
Decrease/(increase) in payables/provisions 363 605 (282) 270 (145) (513) 136
Total movements in working capital (746) 82 (1,499) (258) 130 175 980
Operating balance 6,925 358 2,973 3,102 4,136 5,388 6,680

The accompanying notes and accounting policies are an integral part of these Statements.

Forecast Statement of Financial Position as at 30 June

  Note 2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

Assets

               
Cash and cash equivalents 12 14,924 15,244 11,108 10,498 10,595 11,056 11,652
Receivables 12 19,883 18,070 17,873 16,610 16,757 17,244 17,933
Marketable securities, deposits and derivatives in gain 12 44,000 44,713 47,870 42,731 47,323 55,603 53,641
Share investments 12 17,359 18,176 19,672 21,234 22,743 24,412 26,209
Advances 12 22,613 25,312 24,611 26,626 28,655 30,343 31,949
Inventory   1,140 1,321 1,158 1,155 1,180 1,188 1,137
Other assets   2,295 2,061 2,267 2,144 2,167 2,182 2,192
Property, plant and equipment 14 109,833 112,627 112,264 115,873 118,485 120,399 121,969
Equity accounted investments1   9,593 9,642 10,021 10,326 10,530 10,713 10,895
Intangible assets and goodwill 15 2,776 2,837 2,841 2,934 2,970 2,900 2,870
Forecast for new capital spending 8 505 13 339 904 1,651 2,551
Top-down capital adjustment 8 (330) (395) (765) (840) (890) (940)
Total assets   244,416 250,178 249,303 249,705 261,469 276,801 282,058

Liabilities

               
Issued currency   4,691 4,897 5,072 5,224 5,381 5,543 5,709
Payables 17 11,160 12,360 11,952 11,874 12,676 13,629 14,288
Deferred revenue   1,714 1,553 1,802 1,821 1,840 1,854 1,918
Borrowings   100,087 112,201 103,058 104,390 110,727 118,421 114,698
Insurance liabilities 18 37,712 35,902 34,900 31,272 32,072 33,464 35,102
Retirement plan liabilities 19 11,903 11,766 10,732 10,380 10,042 9,719 9,416
Provisions 20 7,138 6,317 6,320 6,111 5,893 5,857 5,806
Total liabilities   174,405 184,996 173,836 171,072 178,631 188,487 186,937
Total assets less total liabilities   70,011 65,182 75,467 78,633 82,838 88,314 95,121

Net worth

               
Taxpayers' funds   10,862 6,230 13,344 16,601 21,010 26,603 33,489
Property, plant and equipment revaluation reserve   57,068 55,831 56,648 56,509 56,259 56,085 55,919
Other reserves   141 (64) 40 5 20 40 55
Total net worth attributable to the Crown   68,071 61,997 70,032 73,115 77,289 82,728 89,463
Net worth attributable to minority interest   1,940 3,185 5,435 5,518 5,549 5,586 5,658
Total net worth 21 70,011 65,182 75,467 78,633 82,838 88,314 95,121
  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 as at 30 June

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

Borrowings

             
Government bonds 57,377 68,469 60,499 58,855 63,426 69,678 64,664
Treasury bills 4,084 3,541 3,087 3,688 3,561 3,560 3,555
Government retail stock 199 204 190 190 190 190 190
Settlement deposits with Reserve Bank 7,575 7,183 6,849 6,849 6,849 6,849 6,849
Derivatives in loss 3,188 1,854 2,099 1,890 1,775 1,744 1,564
Finance lease liabilities 1,454 1,475 1,574 1,994 2,132 2,137 2,175
Other borrowings 26,210 29,475 28,760 30,924 32,794 34,263 35,701
Total borrowings 100,087 112,201 103,058 104,390 110,727 118,421 114,698
Total sovereign-guaranteed debt 75,684 84,580 76,653 75,602 79,940 86,132 80,971
Total non-sovereign-guaranteed debt 24,403 27,621 26,405 28,788 30,787 32,289 33,727
Total borrowings 100,087 112,201 103,058 104,390 110,727 118,421 114,698

Net debt:

             
Core Crown borrowings1 84,873 94,504 88,442 86,246 91,216 98,132 93,740
Add back NZS Fund holdings of sovereign-issued debt and NZS Fund borrowings (587) (1,027) (640) (767) (898) (939) (941)
Gross sovereign-issued debt2 84,286 93,477 87,802 85,479 90,318 97,193 92,799
Less core Crown financial assets3 62,984 65,786 66,764 63,248 68,868 77,954 76,562
Net core Crown debt 21,302 27,691 21,038 22,231 21,450 19,239 16,237
Core Crown advances 13,126 14,375 13,786 15,056 15,512 15,759 15,898
Net core Crown debt (incl. NZS Fund)4 34,428 42,066 34,824 37,287 36,962 34,998 32,135
Add back NZS Fund holdings of core Crown financial assets and NZS Fund financial assets5 21,407 22,699 24,597 26,280 28,359 30,486 32,732
Net core Crown debt (excl. NZS Fund and advances)6 55,835 64,765 59,421 63,567 65,321 65,484 64,867

Gross debt:

             
Gross sovereign-issued debt2 84,286 93,477 87,802 85,479 90,318 97,193 92,799
Less Reserve Bank settlement cash and bank bills (7,902) (7,391) (7,245) (7,245) (7,245) (7,245) (7,245)
Add back changes to DMO borrowing owing to settlement cash7 1,600 1,600 1,600 1,600 1,600 1,600 1,600
Gross sovereign-issued debt excluding Reserve Bank settlement cash and bank bills4 77,984 87,686 82,157 79,834 84,673 91,548 87,154

Notes on borrowings

Total borrowings 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.

  1. Core Crown borrowings in this instance include unsettled purchases of securities (classified as accounts payable in the Statement of Financial Position).
  2. Gross sovereign-issued debt (GSID) represents debt issued by the sovereign (the core Crown) and includes any government stock held by the other Crown reporting entities.
  3. Core Crown financial assets exclude receivables.
  4. Net core Crown debt represents GSID 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 creditworthiness of a country.
  5. Adding back the NZS 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.
  6. Net core Crown debt (excluding NZS Fund and advances) excludes financial assets which are held for public policy rather than treasury management purposes.
  7. The Reserve Bank has used $1.6 billion of settlement cash to purchase reserves that were to have been funded by the NZDMO borrowing. Therefore, the impact of settlement cash on GSID is adjusted by this amount.

The accompanying notes and accounting policies are an integral part of these Statements.

Statement of Actual Commitments as at 31 March 2014

  As at
31 Mar
2014
$m
As at
30 June
2013
$m

Capital commitments

   
Specialist military equipment 422 549
Land and buildings 961 717
Other property, plant and equipment 5,126 5,478
Other capital commitments 898 790
Tertiary education institutions 169 169
Total capital commitments 7,576 7,703

Operating commitments

   
Non-cancellable accommodation leases 2,626 2,792
Other non-cancellable leases 2,550 2,735
Tertiary education institutions 466 466
Total operating commitments 5,642 5,993
Total commitments 13,218 13,696

Total commitments by segment

   
Core Crown 3,722 4,226
Crown entities 5,344 5,296
State-owned enterprises 5,006 5,078
Inter-segment eliminations (854) (904)
Total commitments 13,218 13,696

Statement of Actual Contingent Liabilities and Assets as at 31 March 2014

  As at
31 Mar
2014
$m
As at
30 June
2013
$m

Quantifiable contingent liabilities

   
Guarantees and indemnities 158 225
Uncalled capital 5,738 6,286
Legal proceedings and disputes 656 707
Other contingent liabilities 490 432
Total quantifiable contingent liabilities 7,042 7,650

Total quantifiable contingent liabilities by segment

   
Core Crown 6,685 7,350
Crown entities 43 35
State-owned enterprises 314 265
Inter-segment eliminations
Total quantifiable contingent liabilities 7,042 7,650

Quantifiable contingent assets by segment

   
Core Crown 164 245
Crown entities 4 4
State-owned enterprises 21
Total quantifiable contingent assets 168 270

More information on contingent liabilities (quantified and unquantified) is outlined in the Specific Fiscal Risks chapter.

The accompanying notes and accounting policies are an integral part of these Statements.

Notes to the Forecast Financial Statements

NOTE 1: Sovereign Revenue (Accrual)

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

Taxation revenue (accrual)

             

Individuals

             
Source deductions 22,330 23,709 23,811 25,224 26,627 28,175 29,849
Other persons 5,210 5,083 5,161 5,428 5,681 5,955 6,106
Refunds (1,644) (1,488) (1,531) (1,395) (1,520) (1,609) (1,635)
Fringe benefit tax 480 477 487 512 533 556 581
Total individuals 26,376 27,781 27,928 29,769 31,321 33,077 34,901

Corporate tax

             
Gross companies tax 8,747 9,240 9,195 9,555 9,956 10,220 10,450
Refunds (151) (197) (195) (207) (233) (240) (248)
Non-resident withholding tax 420 447 421 481 528 551 569
Foreign-source dividend w/holding payments 2 2 2 2 2 2
Total corporate tax 9,018 9,490 9,423 9,831 10,253 10,533 10,773

Other direct income tax

             
Resident w/holding tax on interest income 1,631 1,671 1,642 2,007 2,638 3,022 3,381
Resident w/holding tax on dividend income 516 607 472 495 516 534 545
Total other direct income tax 2,147 2,278 2,114 2,502 3,154 3,556 3,926
Total direct income tax 37,541 39,549 39,465 42,102 44,728 47,166 49,600

Goods and services tax

             
Gross goods and services tax 25,125 27,220 27,364 29,392 30,722 32,241 34,410
Refunds (9,920) (10,695) (11,079) (11,630) (11,832) (12,568) (13,807)
Total goods and services tax 15,205 16,525 16,285 17,762 18,890 19,673 20,603

Other indirect taxation

             
Road user charges 1,066 1,164 1,162 1,268 1,366 1,425 1,473
Petroleum fuels excise – domestic production 855 931 848 936 1,088 1,214 1,246
Alcohol excise – domestic production 663 678 655 681 707 738 770
Tobacco excise – domestic production 281 277 274 286 297 309 308
Petroleum fuels excise – imports1 674 659 746 766 725 654 671
Alcohol excise – imports1 250 267 246 255 265 276 288
Tobacco excise – imports1 954 1,043 1,029 1,108 1,186 1,235 1,232
Other customs duty 178 172 169 155 147 139 132
Gaming duties 214 223 211 209 210 210 211
Motor vehicle fees 174 187 186 195 202 208 213
Approved issuer levy and cheque duty 45 62 68 65 65 65 65
Energy resources levies 34 36 36 36 36 36 36
Total other indirect taxation 5,388 5,699 5,630 5,960 6,294 6,509 6,645
Total indirect taxation 20,593 22,224 21,915 23,722 25,184 26,182 27,248
Total taxation revenue 58,134 61,773 61,380 65,824 69,912 73,348 76,848

Other sovereign revenue (accrual)

             
ACC levies 3,437 3,465 3,546 3,172 2,966 2,897 2,972
Fire Service levies 331 338 338 348 350 353 358
EQC levies 242 269 275 282 285 288 291
Child support 590 729 604 665 523 550 584
Court fines 168 173 173 173 173 173 173
Other miscellaneous items 404 322 447 498 529 529 531
Total other sovereign revenue 5,172 5,296 5,383 5,138 4,826 4,790 4,909
Total sovereign revenue 63,306 67,069 66,763 70,962 74,738 78,138 81,757

1. Customs excise-equivalent duty.

NOTE 1 (continued):  Sovereign Receipts (Cash)

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

Taxation receipts (cash)

             

Individuals

             
Source deductions 22,188 23,584 23,665 25,074 26,471 28,019 29,685
Other persons 5,194 5,549 5,655 5,964 6,184 6,429 6,632
Refunds (2,251) (2,222) (2,149) (2,211) (2,321) (2,372) (2,472)
Fringe benefit tax 465 476 485 510 531 554 579
Total individuals 25,596 27,387 27,656 29,337 30,865 32,630 34,424

Corporate tax

             
Gross companies tax 8,665 9,495 9,390 9,963 10,269 10,647 10,857
Refunds (597) (766) (652) (703) (755) (785) (811)
Non-resident withholding tax 451 446 399 480 527 550 568
Foreign-source dividend w/holding payments 1 2 2 2 2 2
Total corporate tax 8,520 9,175 9,139 9,742 10,043 10,414 10,616

Other direct income tax

             
Resident w/holding tax on interest income 1,635 1,670 1,641 2,005 2,636 3,020 3,379
Resident w/holding tax on dividend income 516 607 471 495 516 534 545
Total other direct income tax 2,151 2,277 2,112 2,500 3,152 3,554 3,924
Total direct income tax 36,267 38,839 38,907 41,579 44,060 46,598 48,964

Goods and services tax

             
Gross goods and services tax 24,539 26,352 26,537 28,504 29,809 31,318 33,485
Refunds (9,783) (10,195) (10,629) (11,130) (11,332) (12,068) (13,307)
Total goods and services tax 14,756 16,157 15,908 17,374 18,477 19,250 20,178

Other indirect taxation

             
Road user charges 1,064 1,164 1,162 1,268 1,366 1,425 1,473
Petroleum fuels excise – domestic production 865 931 848 936 1,088 1,214 1,246
Alcohol excise – domestic production 666 678 655 681 707 738 770
Tobacco excise – domestic production 287 277 274 286 297 309 308
Customs duty 2,035 2,141 2,190 2,284 2,323 2,304 2,323
Gaming duties 216 223 208 209 210 210 211
Motor vehicle fees 179 187 186 195 202 208 213
Approved issuer levy and cheque duty 44 62 68 65 65 65 65
Energy resources levies 34 36 36 36 36 36 36
Total other indirect taxation 5,390 5,699 5,627 5,960 6,294 6,509 6,645
Total indirect taxation 20,146 21,856 21,535 23,334 24,771 25,759 26,823
Total taxation receipts 56,413 60,695 60,442 64,913 68,831 72,357 75,787

Other sovereign receipts (cash)

             
ACC levies 3,524 3,438 3,550 3,174 2,959 3,049 3,133
Fire Service levies 331 338 338 348 350 353 358
EQC levies 274 267 278 282 285 287 290
Child support 230 237 227 252 267 278 293
Court fines 159 148 148 137 137 137 137
Other miscellaneous items 288 319 428 452 456 456 456
Total other sovereign receipts 4,806 4,747 4,969 4,645 4,454 4,560 4,667
Total sovereign receipts 61,219 65,442 65,411 69,558 73,285 76,917 80,454

NOTE 2: Interest revenue and dividends

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

By type

             
Interest revenue 2,382 3,006 2,555 3,101 3,367 3,984 4,443
Dividends 557 582 605 571 615 652 689
Total interest revenue and dividends 2,939 3,588 3,160 3,672 3,982 4,636 5,132

By source

             
Core Crown 2,104 2,639 2,304 2,492 2,717 3,226 3,581
Crown entities 1,270 1,242 1,156 1,277 1,308 1,364 1,455
State-owned enterprises 856 878 885 1,006 1,167 1,317 1,477
Inter-segment eliminations (1,291) (1,171) (1,185) (1,103) (1,210) (1,271) (1,381)
Total interest revenue and dividends 2,939 3,588 3,160 3,672 3,982 4,636 5,132

NOTE 3: Transfer payments and subsidies

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
New Zealand Superannuation 10,235 10,894 10,903 11,590 12,242 12,885 13,643
Jobseeker Support and Emergency Benefit 1,773 1,693 1,648 1,556 1,538 1,569
Supported Living Payment 1,392 1,422 1,518 1,538 1,560 1,591
Sole Parent Support 1,288 1,225 1,243 1,249 1,263 1,285
Domestic Purposes Benefit 1,738 67 63
Invalid's Benefit 1,330 53 52
Sickness Benefit 782 32 29
Unemployment Benefit 812 29 29
Family tax credit 2,018 2,038 1,976 1,934 1,912 1,982 1,951
Other working for families tax credits 575 539 556 527 527 522 515
Accommodation Assistance 1,177 1,191 1,149 1,141 1,129 1,129 1,145
Income related rents 611 662 670 718 775 825 879
Disability assistance 384 380 379 373 374 375 378
Student allowances 596 574 542 531 534 540 546
Other social assistance benefits 1,290 1,316 1,354 1,293 1,294 1,295 1,348
Total social assistance grants 21,548 22,228 22,042 22,516 23,130 23,914 24,850

Subsidies

             
KiwiSaver subsidies 723 748 822 827 807 847 890

Other transfer payments

             
Official development assistance 437 509 530 533 542 573 586
Total transfer payments and subsidies 22,708 23,485 23,394 23,876 24,479 25,334 26,326

From 15 July 2013 the benefit categories Domestic Purposes Benefit, Invalid's Benefit, Unemployment and Emergency Benefit and Sickness Benefit, as well as Widow's Benefit, were replaced by new benefit categories.  These categories are Jobseeker Support and Emergency Benefit, Supported Living Payment and Sole Parent Support.

NOTE 4: Personnel expenses

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

By source

             
Core Crown 6,037 6,066 6,253 6,361 6,450 6,478 6,524
Crown entities 10,966 11,198 11,302 11,607 11,821 11,964 12,114
State-owned enterprises 2,949 2,919 2,940 2,923 2,967 2,993 3,078
Inter-segment eliminations (17) (11) (7) (10) (11) (11) (11)
Total personnel expenses 19,935 20,172 20,488 20,881 21,227 21,424 21,705

NOTE 5: Depreciation, amortisation and other operating expenses

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

Other operating expenses by source

             
Core Crown 36,565 37,811 37,474 38,038 38,128 37,901 37,995
Crown entities 17,065 17,458 17,580 17,759 17,927 17,836 17,720
State-owned enterprises 9,689 9,743 9,154 9,556 9,789 10,123 10,539
Inter-segment eliminations (27,156) (27,404) (27,681) (27,833) (28,347) (28,533) (28,687)
Total other operating expenses 36,163 37,608 36,527 37,520 37,497 37,327 37,567

Depreciation and amortisation by source

             
Core Crown 1,378 1,522 1,435 1,533 1,567 1,592 1,604
Crown entities 1,583 1,642 1,656 1,710 1,792 1,821 1,822
State-owned enterprises 1,851 1,476 1,553 1,639 1,689 1,738 1,787
Inter-segment eliminations
Total depreciation and amortisation 4,812 4,640 4,644 4,882 5,048 5,151 5,213

NOTE 6: Interest expenses

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

By type

             
Interest on financial liabilities 4,312 4,465 4,416 4,721 5,020 5,501 5,669
Interest unwind on provisions 46 51 45 42 34 42 39
Total interest expenses 4,358 4,516 4,461 4,763 5,054 5,543 5,708

By source

             
Core Crown 3,620 3,622 3,641 3,883 3,978 4,354 4,440
Crown entities 235 239 224 237 236 245 250
State-owned enterprises 1,248 1,279 1,173 1,295 1,433 1,568 1,696
Inter-segment eliminations (745) (624) (577) (652) (593) (624) (678)
Total interest expenses 4,358 4,516 4,461 4,763 5,054 5,543 5,708

NOTE 7: Insurance expenses

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

By entity

             
ACC 3,133 3,315 3,461 3,561 3,936 4,213 4,496
EQC (103) (19) (252) 34 142 218 224
Southern Response (22) (95) 61 (89) (42) (24) (8)
Other (incl. inter-segment eliminations) 23 14 13 11 12 11 11
Total insurance expenses 3,031 3,215 3,283 3,517 4,048 4,418 4,723

NOTE 8: Forecast new spending and top-down expense adjustment

  2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

Forecast new operating spending

         
Unallocated contingencies 77 291 364 345 330
Forecast new spending for Budget 2015 1,500 1,500 1,500
Forecast new spending for Budget 2016 1,530 1,530
Forecast new spending for Budget 2017 -   1,561
Total forecast new operating spending 77 291 1,864 3,375 4,921
Operating top-down adjustment (660) (875) (485) (360) (360)

Unallocated contingencies represent expenses included in Budget 2014 and previous Budgets that has yet to be allocated. Forecast new spending indicates the expected spending increases from future Budgets.

NOTE 8: Forecast new spending and top-down expense adjustment
  2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Post-2018
Forecast
$m
Total
Forecast
$m

Forecast new capital spending (annual)

             
Unallocated contingencies 13 226 165 97 501
Forecast new spending for Budget 2015 100 300 250 250 900
Forecast new spending for Budget 2016 100 300 250 250 900
Forecast new spending for Budget 2017 100 300 518 918
Forecast new spending for Budget 2018 100 836 936
Total forecast new capital spending 13 326 565 747 900 1,604 4,155
Forecast new capital spending (cumulative) 13 339 904 1,651 2,551    
Capital top-down adjustment (cumulative) (395) (765) (840) (890) (940)    

Unallocated contingencies represent capital spending from Budget 2014 and previous Budgets that has yet to be allocated. Forecast new spending indicates the expected capital spending increases from future Budgets, which will be mostly funded from the Future Investment Fund.

NOTE 9: Gains and losses on financial instruments

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

By source

             
Core Crown 5,081 1,663 3,301 2,378 2,473 2,521 2,613
Crown entities 1,192 252 342 373 435 512 600
State-owned enterprises 354 11 88 52 49 39 44
Inter-segment eliminations 643 (178) (127) (220) (229) (235) (244)
Net gains/(losses) on financial instruments 7,270 1,748 3,604 2,583 2,728 2,837 3,013

NOTE 10: Gains and losses on non-financial instruments

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

By type

             
Actuarial gains/(losses) on GSF liability 1,251 713
Actuarial gains/(losses) on ACC outstanding claims 2,369 498 1,082
Other 86 (55) (205) (82) (89) (55) (56)
Minority interest share of net gains/losses (32) (33) (25) (20) (18) (18)
Net gains/(losses) on non-financial instruments 3,674 443 1,557 (107) (109) (73) (74)

By source

             
Core Crown 1,298 (2) 557 (13) (36) (1) (1)
Crown entities 2,309 446 1,034 (69) (53) (54) (55)
State-owned enterprises 68 (1) (6) (45) (40) (28) (28)
Inter-segment eliminations (1) (28) 20 20 10 10
Net gains/(losses) on non-financial instruments 3,674 443 1,557 (107) (109) (73) (74)

NOTE 11: Operating balance

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

By source

             
Core Crown 371 (2,249) 109 1,871 3,395 4,753 5,901
Crown entities 5,877 2,646 2,993 1,357 848 711 860
State-owned enterprises 614 732 654 593 764 823 880
Inter-segment eliminations 63 (771) (783) (719) (871) (899) (961)
Total operating balance 6,925 358 2,973 3,102 4,136 5,388 6,680

NOTE 12: Financial assets

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Cash and cash equivalents 14,924 15,244 11,108 10,498 10,595 11,056 11,652
Tax receivables 8,184 7,831 8,555 8,664 9,206 9,711 10,498
Trade and other receivables 11,699 10,239 9,318 7,946 7,551 7,533 7,435
Student loans (refer note 13) 8,288 8,989 8,752 9,024 9,287 9,513 9,695
Kiwibank mortgages 13,202 14,544 14,784 16,361 18,152 19,652 21,152
Long-term deposits 3,588 2,089 2,407 1,986 1,886 1,913 2,090
IMF financial assets 2,291 2,404 2,507 2,557 2,574 2,598 2,623
Other advances 1,123 1,779 1,075 1,241 1,216 1,178 1,102
Share investments 17,359 18,176 19,672 21,234 22,743 24,412 26,209
Derivatives in gain 3,775 3,906 3,194 2,797 2,507 2,346 2,224
Other marketable securities 34,346 36,314 39,762 35,391 40,356 48,746 46,704
Total financial assets 118,779 121,515 121,134 117,699 126,073 138,658 141,384

Financial assets by entity

             
NZDMO 17,799 20,153 19,405 13,555 16,823 23,539 19,583
Reserve Bank of New Zealand 19,342 18,228 18,481 18,657 19,127 19,714 19,296
NZS Fund 23,419 23,891 25,698 27,419 29,393 31,515 33,801
Other core Crown 22,339 20,464 22,419 21,202 21,450 21,753 22,391
Intra-segment eliminations (7,788) (6,691) (7,733) (6,318) (6,097) (6,202) (5,332)
Total core Crown segment 75,111 76,045 78,270 74,515 80,696 90,319 89,739
ACC portfolio 28,243 32,161 30,632 32,539 34,303 36,263 38,380
EQC portfolio 5,401 2,597 3,237 102 58 57 59
Other Crown entities 9,075 9,735 8,722 7,852 7,075 7,071 7,213
Intra-segment eliminations (1,422) (3,625) (1,764) (1,777) (1,820) (1,862) (1,904)
Total Crown entities segment 41,297 40,868 40,827 38,716 39,616 41,529 43,748
Total state-owned enterprises segment 20,058 22,141 21,541 23,459 25,460 27,205 29,121
Inter-segment eliminations (17,687) (17,539) (19,504) (18,991) (19,699) (20,395) (21,224)
Total financial assets 118,779 121,515 121,134 117,699 126,073 138,658 141,384

NOTE 13: Student loans

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Nominal value (including accrued interest) 13,562 14,144 14,209 14,790 15,377 15,952 16,484
Opening book value 8,291 8,528 8,288 8,752 9,024 9,287 9,513
Amount borrowed in current year 1,481 1,632 1,545 1,586 1,645 1,701 1,732
Less initial write-down to fair value (536) (537) (644) (668) (693) (716) (729)
Repayments made during the year (1,054) (1,135) (1,050) (1,158) (1,219) (1,304) (1,379)
Interest unwind 590 600 572 601 618 634 647
(Impairment)/reversal of impairment (484) (110) 30 (100) (100) (100) (100)
Other movements 11 11 11 12 11 11
Closing book value 8,288 8,989 8,752 9,024 9,287 9,513 9,695

NOTE 14: Property, plant and equipment

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

By class of asset

             

Net carrying value

             
Land (valuation) 34,453 34,759 34,934 35,030 34,887 34,990 34,996
Buildings (valuation) 25,784 25,312 25,969 27,365 28,393 29,008 29,542
State highways (valuation) 17,930 18,918 18,875 19,797 20,809 21,839 22,907
Electricity generation assets (valuation) 13,555 14,104 13,660 13,529 13,345 13,172 12,990
Electricity distribution network (cost) 3,865 4,273 4,167 4,261 4,365 4,487 4,544
Specialist military equipment (valuation) 3,094 3,330 2,854 3,080 3,268 3,373 3,338
Specified cultural and heritage assets (valuation) 2,617 2,502 2,677 2,679 2,704 2,726 2,736
Aircraft (excluding military) (valuation) 2,296 2,498 2,639 3,269 3,774 3,983 4,107
Rail network (valuation) 1,035 1,012 1,134 1,372 1,401 1,447 1,480
Other plant and equipment (cost) 5,204 5,919 5,355 5,491 5,539 5,374 5,329
Total property, plant and equipment 109,833 112,627 112,264 115,873 118,485 120,399 121,969

By source

             
Core Crown 29,507 30,565 29,971 31,334 31,986 32,595 32,886
Crown entities 51,823 52,207 53,043 54,618 56,327 57,628 59,039
State-owned enterprises 28,503 29,855 29,250 29,921 30,172 30,176 30,044
Inter-segment eliminations    -     -     -     -     -     -     - 
Total property, plant and equipment 109,833 112,627 112,264 115,873 118,485 120,399 121,969

Land breakdown by usage

             
Housing 9,580 8,750 9,582 9,410 9,149 8,943 8,730
State highway corridor land 8,003 8,653 8,153 8,303 8,453 8,603 8,753
Conservation land 5,364 5,460 5,373 5,385 5,407 5,417 5,417
Rail network 3,256 3,418 3,252 3,232 3,212 3,202 3,192
Schools 2,887 2,724 2,880 2,875 2,870 2,865 2,860
Commercial (SOEs) excluding Rail 1,374 1,520 1,491 1,491 1,509 1,624 1,669
Other 3,989 4,234 4,203 4,334 4,287 4,336 4,375
Total land 34,453 34,759 34,934 35,030 34,887 34,990 34,996
  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

Schedule of movements

             

Cost or valuation

             
Opening balance 121,717 126,589 122,796 129,107 136,883 143,769 150,056
Additions (refer below for further breakdown) 5,779 7,830 7,318 8,678 7,957 7,133 6,791
Disposals (1,471) (598) (639) (865) (1,061) (858) (763)
Net revaluations (2,047)    -  (363)    -     -     -     - 
Other1 (1,182) (56) (5) (37) (10) 12 (24)
Total cost or valuation 122,796 133,765 129,107 136,883 143,769 150,056 156,060

Accumulated depreciation and impairment

             
Opening balance 13,133 17,255 12,963 16,843 21,010 25,284 29,657
Eliminated on disposal (659) (42) (98) (52) (52) (52) (50)
Eliminated on revaluation (3,587)    -  (69)    -     -     -     - 
Impairment losses charged to operating balance 473    -     -     -     -     -     - 
Depreciation expense 3,697 4,011 4,025 4,224 4,329 4,429 4,521
Other1 (94) (86) 22 (5) (3) (4) (37)
Total accumulated depreciation and impairment 12,963 21,138 16,843 21,010 25,284 29,657 34,091
Total property, plant and equipment 109,833 112,627 112,264 115,873 118,485 120,399 121,969
  1. Other mainly includes transfers to/from other asset categories.
  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

Additions - by functional classification

             
Transport 2,041 2,579 2,625 3,235 2,945 2,659 2,581
Economic 1,521 1,338 1,147 717 682 739 734
Education 472 862 757 895 959 880 720
Health 578 636 572 803 700 576 800
Defence 201 548 413 619 613 561 439
Other 966 1,867 1,804 2,409 2,058 1,718 1,517
Total additions to property, plant and equipment2 5,779 7,830 7,318 8,678 7,957 7,133 6,791
  1. These additions do not include any purchases which may result from the allocation of the forecast for new capital spending (separately disclosed in the Statement of Financial Position).

NOTE 15: Intangible assets and goodwill

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

By type

             
Net Kyoto position 53 3 31 37 37 37 37
Goodwill 655 744 650 650 650 650 650
Other intangible assets 2,068 2,090 2,160 2,247 2,283 2,213 2,183
Total intangible assets and goodwill 2,776 2,837 2,841 2,934 2,970 2,900 2,870

By source

             
Core Crown 1,041 1,175 1,136 1,182 1,196 1,197 1,205
Crown entities 573 534 498 587 603 537 499
State-owned enterprises 1,162 1,128 1,207 1,165 1,171 1,166 1,166
Inter-segment eliminations    -     -     -     -     -     -     - 
Total intangible assets and goodwill 2,776 2,837 2,841 2,934 2,970 2,900 2,870

Net Kyoto position

The New Zealand Government has committed under the Kyoto Protocol to ensuring that New Zealand's average net emissions of greenhouse gases from 2008 to 2012 (the first commitment period of the Kyoto Protocol, or CP1) are reduced to gross 1990 emission levels, or to take responsibility for the difference. New Zealand can meet its commitment through emissions reductions and use of the Kyoto Protocol flexibility mechanisms such as Joint Implementation, the Clean Development Mechanism, and offsetting increased emissions against carbon removed by forests.

To assist New Zealand in meeting its Kyoto Protocol commitments, an Emissions Trading Scheme (ETS) was established (refer note 20). These two initiatives should be looked at together when understanding New Zealand's international climate change obligations.

The latest Net Position estimate can be found on the Ministry for the Environment's website: www.mfe.govt.nz/issues/climate/greenhouse-gas-emissions/net-position

NOTE 16: NZS Fund

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Revenue 595 777 707 685 757 832 913
Less current tax expense 983 478 832 585 631 681 735
Less other expenses 165 148 141 157 184 209 235
Add gains/(losses) 4,374 1,358 2,872 1,914 2,054 2,205 2,367
Operating balance 3,821 1,509 2,606 1,857 1,996 2,147 2,310
Opening net worth 18,703 21,752 22,549 25,157 27,033 29,056 31,238
Operating balance 3,821 1,509 2,606 1,857 1,996 2,147 2,310
Other movements in reserves 25 22 2 19 27 35 44
Closing net worth 22,549 23,283 25,157 27,033 29,056 31,238 33,592

Comprising:

             
Financial assets 23,419 23,891 25,698 27,419 29,393 31,515 33,801
Financial liabilities (2,055) (1,714) (1,636) (1,557) (1,599) (1,646) (1,699)
Net other assets 1,185 1,106 1,095 1,171 1,262 1,369 1,490
Closing net worth 22,549 23,283 25,157 27,033 29,056 31,238 33,592

NOTE 17: Payables

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

By type

             
Accounts payable 7,616 8,403 7,756 7,439 7,627 7,893 7,633
Taxes repayable 3,544 3,957 4,196 4,435 5,049 5,736 6,655
Total payables 11,160 12,360 11,952 11,874 12,676 13,629 14,288

By source

             
Core Crown 7,873 6,860 7,682 7,856 8,791 9,696 10,176
Crown entities 4,996 5,929 5,584 5,270 4,981 4,884 4,941
State-owned enterprises 4,877 5,663 5,003 5,146 5,301 5,426 5,534
Inter-segment eliminations (6,586) (6,092) (6,317) (6,398) (6,397) (6,377) (6,363)
Total payables 11,160 12,360 11,952 11,874 12,676 13,629 14,288

NOTE 18: Insurance liabilities

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

By entity

             
ACC 29,446 31,423 29,209 30,383 31,663 33,202 34,859
EQC 6,869 3,743 4,308 364 184 178 178
Southern Response 1,744 698 1,327 466 165 21
Other (incl. inter-segment eliminations) (347) 38 56 59 60 63 65
Total insurance liabilities 37,712 35,902 34,900 31,272 32,072 33,464 35,102

ACC liability

Levy reductions

The forecast includes a reduction in levy rates for the 2015/16 levy year. The amounts factored in for the 2015/16 levy year are based on a best estimate of the likely outcome, which may differ from ACC's consultation document and the final outcome.

Calculation information

PwC NZ has prepared an independent actuarial estimate of the ACC outstanding claims liability as at 31 December 2013. 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 assumptions underpinning this valuation form the basis of the five-year forecast of the outstanding claims liability.

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. Discount rates were derived from the yield curve for New Zealand Government bonds. For these forecast statements, the claims liability has been updated for the latest discount rates as at 31 March 2014. The equivalent single effective discount rate, taking into account ACC's projected future cash flow patterns, is 5.15% and allows for a long-term discount rate of 5.5% from 2035.

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

ACC has available to it a portfolio of assets that offset the claims liability. The assets (less cross-holdings of NZ Government stock) are included as assets in the Statement of Financial Position.

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

Gross ACC liability

             
Opening gross liability 30,648 30,767 29,446 29,209 30,383 31,663 33,202
Net change (1,202) 656 (237) 1,174 1,280 1,539 1,657
Closing gross liability 29,446 31,423 29,209 30,383 31,663 33,202 34,859

Less net assets available to ACC

             
Opening net asset value 23,466 27,486 27,193 29,309 31,351 33,137 35,054
Net change 3,727 2,503 2,116 2,042 1,786 1,917 2,102
Closing net asset value 27,193 29,989 29,309 31,351 33,137 35,054 37,156

Net ACC reserves (net liability)

             
Opening reserves position (7,182) (3,281) (2,253) 100 968 1,474 1,852
Net change 4,929 1,847 2,353 868 506 378 445
Closing reserves position (net liability)/net asset (2,253) (1,434) 100 968 1,474 1,852 2,297

EQC liability

Calculation information

Melville Jessup Weaver prepared an independent actuarial estimate of the EQC outstanding claims liability at 31 December 2013 by estimating the projected ultimate claims costs then deducting the payments made in relation to those claims on or before that date. Each component of the claims liability was split into separate groups depending upon the Canterbury earthquake event grouping or other “business as usual” claims. These event groups were further split into sub-claim valuation groups being land claims, building claims or contents claims. The assumptions underpinning the 31 December 2013 valuation form the basis of the five-year forecast of the outstanding claims liability.

Critical assumptions used in projecting the ultimate costs include apportionment of costs across earthquake events, the profile of claims settlement, claims inflation rate per annum, risk margins and claims handling costs.

There is a high level of uncertainty associated with the valuation of the outstanding claims liability, reinsurance recoveries and unexpired risk liability. Some of the key uncertainties are: cost apportionment across events; the potential for construction cost to exceed expectations; land damage estimates; reinsurance recoveries and profile of claims settlement.

The actual claims outcome may differ from the one currently forecast.

Presentation approach

EQC reinsurance recoveries are included in receivables in the Statement of Financial Position.

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

EQC liability

             
Opening gross liability 8,877 7,114 6,869 4,308 364 184 178
Net change (2,008) (3,371) (2,561) (3,944) (180) (6)
Closing gross liability 6,869 3,743 4,308 364 184 178 178

Less reinsurance receivable

             
Opening reinsurance receivable 4,066 2,616 2,623 1,161 50 3
Net change (1,443) (1,238) (1,462) (1,111) (47) (3)
Closing reinsurance receivable 2,623 1,378 1,161 50 3

Net EQC liability

             
Opening net position (4,811) (4,498) (4,246) (3,147) (314) (181) (178)
Net change 565 2,133 1,099 2,833 133 3
Closing net position (net liability) (4,246) (2,365) (3,147) (314) (181) (178) (178)

NOTE 19: Retirement plan liabilities

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Government Superannuation Fund 11,908 11,767 10,738 10,385 10,047 9,725 9,421
Other funds (5) (1) (6) (5) (5) (6) (5)
Total retirement plan liabilities 11,903 11,766 10,732 10,380 10,042 9,719 9,416

The net liability of the Government Superannuation Fund (GSF) was calculated by GSF's actuary as at 28 February 2014. The liability arises from closed schemes for past and present public sector employees as set out in the Government Superannuation Fund Act 1956. A Projected Unit Credit method was used to calculate the liability as at 28 February 2014, based on membership data as at 30 June 2013 with adjustments for cash flows to 28 February 2014. The funding method requires the benefits payable from GSF in respect of past service to be calculated and then discounted back to the valuation date.

For these Forecast Financial Statements, the net GSF liability was updated for the latest discount rates derived from the market yield curve for New Zealand Government bonds as at 28 February 2014.

Other principal long-term financial assumptions were an inflation rate, as measured by the Consumers Price Index, of 1.9% for the year to 28 February 2015, 2.3% for the two years to 28 February 2017, 2.4% for the two years to 28 February 2019 and increasing to 2.5% for all years after that. In addition an annual salary growth rate, before any promotional effects, of 3% (unchanged from 30 June 2013).

The 2013/14 projected decrease in the net GSF liability is $1,170 million, reflecting a decrease in the GSF liability of $930 million and an increase in the GSF net assets of $240 million.

The decrease in the GSF liability of $930 million includes an actuarial gain between 1 July 2013 and 28 February 2014, of $550 million, owing to movements in the discount rates. The remaining $380 million reduction is owing to lower than expected benefits paid to members (reduces the liability), offset by current service cost and interest unwind (increases the liability).

The increase in the value of the net assets of GSF of $240 million includes a gain of $163 million reflecting the updated market value of assets at 28 February 2014. The balance of $77 million is the total of the expected investment returns and contributions received, offset by the benefits paid to members.

The changes in the projected net GSF liability from 2013/14 onwards reflect the net of the expected current service cost, interest cost, investment returns and contributions.

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

GSF liability

             
Opening GSF liability 16,557 15,504 15,290 14,360 14,061 13,774 13,499
Net projected change (1,267) (395) (930) (299) (287) (275) (260)
Closing GSF liability 15,290 15,109 14,360 14,061 13,774 13,499 13,239

Less net assets available to GSF

             
Opening net asset value 3,018 3,276 3,382 3,622 3,676 3,727 3,774
Investment valuation changes 493 177 346 195 198 201 203
Contribution and other income less pension payments (129) (111) (106) (141) (147) (154) (159)
Closing net asset value 3,382 3,342 3,622 3,676 3,727 3,774 3,818

Net GSF liability

             
Opening unfunded liability 13,539 12,228 11,908 10,738 10,385 10,047 9,725
Net projected change (1,631) (461) (1,170) (353) (338) (322) (304)
Closing unfunded liability 11,908 11,767 10,738 10,385 10,047 9,725 9,421

NOTE 20: Provisions

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Provision for employee entitlements 3,374 3,233 3,181 3,174 3,181 3,197 3,204
Provision for ETS credits 179 351 362 342 324 304
Provision for National Provident Fund guarantee 977 987 987 942 901 864 827
Provision for Canterbury Red Zone support package 222
Provision for infrastructure costs 769 837 391 201
Provision for weathertight services financial assistance package 123 62 123 123 123 123 123
Other provisions 1,494 1,198 1,287 1,309 1,346 1,349 1,348
Total provisions 7,138 6,317 6,320 6,111 5,893 5,857 5,806

By source

             
Core Crown 4,492 3,905 3,776 3,562 3,160 3,018 2,978
Crown entities 1,979 1,907 1,988 2,017 2,032 2,037 2,011
State-owned enterprises 1,151 963 1,013 1,016 1,029 1,019 1,047
Inter-segment eliminations (484) (458) (457) (484) (328) (217) (230)
Total provisions 7,138 6,317 6,320 6,111 5,893 5,857 5,806

Provision for ETS credits

The Emissions Trading Scheme (ETS) was established to assist New Zealand in meeting its international climate change obligations and to reduce New Zealand's net emissions of greenhouse gases to below business-as-usual levels. The ETS creates a limited number of tradable New Zealand Units (NZUs) which the Government can allocate. Emitters can also surrender Kyoto compliant units to meet their obligations.

The allocation of NZUs creates a provision if allocated for free; the provision is reduced, and revenue recognised, as NZUs and Kyoto compliant units are surrendered to the Crown by emitters. The Kyoto compliant units collected through the ETS are recognised as revenue and as part of the net Kyoto Protocol position.

The prices for NZUs and Kyoto compliant units used to calculate the ETS provision are assumed to remain constant over the forecast period and are based on market prices during February 2014.

The ETS impact on the fiscal forecast is as follows:

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Revenue 40 5 19 46 73 72 74
Expenses (55) (4) (51) (51) (53) (54) (55)
Kyoto compliant units surrender expense (24)    -  (12) (6)    -     -     - 
Gains/(losses) 235    -  (128)    -     -     -     - 
Operating balance 196 1 (172) (11) 20 18 19

NOTE 21: Net worth

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Taxpayers' funds 10,862 6,230 13,344 16,601 21,010 26,603 33,489
Property, plant and equipment revaluation reserve 57,068 55,831 56,648 56,509 56,259 56,085 55,919
Investment revaluation reserve 107 84 94 104 114 126 139
Cash flow hedge reserve 58 (142) (44) (47) (42) (34) (32)
Foreign currency translation reserve (49) (6) (56) (52) (52) (52) (52)
Share based payment reserve 25 46
Net worth attributable to minority interests 1,940 3,185 5,435 5,518 5,549 5,586 5,658
Total net worth 70,011 65,182 75,467 78,633 82,838 88,314 95,121

Taxpayers' funds

             
Opening taxpayers' funds 3,520 5,601 10,862 13,344 16,601 21,010 26,603
Operating balance excluding minority interest 6,925 358 2,973 3,102 4,136 5,388 6,680
Government share offers in SOEs 167 175 (542)
Transfers from/(to) other reserves 250 96 51 155 273 205 206
Closing taxpayers' funds 10,862 6,230 13,344 16,601 21,010 26,603 33,489

Property, plant and equipment revaluation reserve

             
Opening revaluation reserve 56,001 55,965 57,068 56,648 56,509 56,259 56,085
Net revaluations 1,335 (351)
Transfers from/(to) other reserves (268) (134) (69) (139) (250) (174) (166)
Closing property, plant and equipment revaluation reserve 57,068 55,831 56,648 56,509 56,259 56,085 55,919

NOTE 22: Core Crown residual cash

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

Core Crown cash flows from operations

             
Tax receipts 57,808 62,056 61,892 66,030 70,099 73,731 77,261
Other sovereign receipts 651 644 732 771 789 801 815
Interest, profits and dividends 1,553 1,660 1,546 1,737 1,838 2,204 2,441
Sale of goods and services and other receipts 2,385 2,641 2,917 2,307 2,309 2,231 2,117
Transfer payments and subsidies (22,780) (23,877) (23,800) (24,021) (24,496) (25,319) (26,297)
Personnel and operating costs (40,412) (42,800) (42,417) (42,419) (42,449) (41,967) (42,703)
Finance costs (3,729) (3,680) (3,664) (3,884) (3,758) (4,069) (4,114)
Forecast for future new operating spending (461) (77) (291) (1,864) (3,375) (4,921)
Top-down expense adjustment 600 660 875 485 360 360
Net core Crown operating cash flows (4,524) (3,217) (2,211) 1,105 2,953 4,597 4,959

Core Crown capital cash flows

             
Net purchase of physical assets (1,231) (2,560) (2,370) (2,600) (2,129) (2,132) (1,836)
Net increase in advances (342) (990) (877) (1,423) (608) (407) (287)
Net purchase of investments (1,308) (1,166) (1,153) (2,060) (1,492) (1,411) (1,275)
Government share offer programme 1,663 1,500 2,315 628
Forecast for future new capital spending (503) (13) (326) (565) (747) (901)
Top-down capital adjustment 50 395 370 75 50 50
Net core Crown capital cash flows (1,218) (3,669) (1,703) (5,411) (4,719) (4,647) (4,249)
Residual cash (deficit)/surplus (5,742) (6,886) (3,914) (4,306) (1,766) (50) 710

The residual cash (deficit)/surplus is funded or invested as follows:

             

Debt programme cash flows

             
Market:              
    Issue of government bonds 15,458 10,245 7,769 8,046 6,915 6,824 6,825
    Repayment of government bonds (9,982) (2,046) (8,805) (1,816) (11,312)
    Net issue/(repayment) of short-term borrowing1 (5,404) 90 (795) 720
Total market debt cash flows 72 10,335 4,928 (39) 5,099 6,824 (4,487)
Non-market:              
    Issue of government bonds
    Repayment of government bonds (499) (757) (1,427)
    Net issue/(repayment) of short-term borrowing 100 (219) (500) (80)
Total non-market debt cash flows (399) (976) (1,927) (80)
Total debt programme cash flows (327) 9,359 4,928 (1,966) 5,019 6,824 (4,487)

Other borrowing cash flows

             
Net (repayment)/issue of other New Zealand dollar borrowing 4,494 724 (440) 1,136 761 58 710
Net (repayment)/issue of foreign currency borrowing (3,047) (512) (118) (842) (639) (35) (574)
Total other borrowing cash flows 1,447 212 (558) 294 122 23 136
Investing cash flows              
Net sale/(purchase) of marketable securities and deposits 5,699 (2,826) (2,644) 5,830 (3,527) (6,952) 3,480
Issues of circulating currency 234 141 382 152 157 161 166
Decrease/(increase) in cash (1,311) 1,806 (4) (5) (6) (5)
Total investing cash flows 4,622 (2,685) (456) 5,978 (3,375) (6,797) 3,641
Residual cash deficit/(surplus) funding or investing 5,742 6,886 3,914 4,306 1,766 50 (710)
  1. Short-term borrowing consists of Treasury Bills and may include Euro-Commercial Paper.

Forecast Statement of Segments

Statement of Financial Performance for the year ended 30 June 2013
  Core Crown
2013
Actual
$m
Crown entities
2013
Actual
$m
State-Owned
Enterprises
2013
Actual
$m
Inter-segment
eliminations
2013
Actual
$m
Total Crown
2013
Actual
$m

Revenue

         
Taxation revenue 58,651 (517) 58,134
Other sovereign revenue 1,133 5,295 (1,256) 5,172
Revenue from core Crown funding 24,096 268 (24,364)
Sales of goods and services 1,461 1,856 14,002 (606) 16,713
Interest revenue and dividends 2,104 1,270 856 (1,291) 2,939
Other revenue 800 2,547 810 (460) 3,697
Total revenue (excluding gains) 64,149 35,064 15,936 (28,494) 86,655

Expenses

         
Social assistance and official development assistance 22,709 (1) 22,708
Personnel expenses 6,037 10,966 2,949 (17) 19,935
Other operating expenses 37,943 18,648 11,540 (27,156) 40,975
Interest expenses 3,620 235 1,248 (745) 4,358
Insurance expenses 1 3,011 15 4 3,031
Forecast for future new spending and top-down adjustment
Total expenses (excluding losses) 70,310 32,860 15,752 (27,915) 91,007
Minority interest share of operating balance before gains/losses 10 (75) 3 (62)
Operating balance before gains/(losses) (6,161) 2,214 109 (576) (4,414)
Total gains/(losses) 6,379 3,501 422 642 10,944
Net surplus/(deficit) from associates and joint ventures 153 162 83 (3) 395
Operating balance 371 5,877 614 63 6,925

Expenses by functional classification

         
Social security and welfare 22,741 4,151 (624) 26,268
Health 14,498 12,236 (12,878) 13,856
Education 12,504 9,594 19 (8,751) 13,366
Transport and communications 2,255 2,250 6,891 (2,344) 9,052
Other 14,692 4,394 7,594 (2,573) 24,107
Finance costs 3,620 235 1,248 (745) 4,358
Forecast for future new spending and top-down adjustment
Total Crown expenses (excluding losses) 70,310 32,860 15,752 (27,915) 91,007
Statement of Financial Position as at 30 June 2013
  Core Crown
2013
Actual
$m
Crown entities
2013
Actual
$m
State-Owned
Enterprises
2013
Actual
$m
Inter-segment
eliminations
2013
Actual
$m
Total Crown
2013
Actual
$m

Assets

         
Cash and cash equivalents 11,047 2,933 1,594 (650) 14,924
Receivables 11,924 8,369 2,037 (2,447) 19,883
Other financial assets 52,140 29,995 16,427 (14,590) 83,972
Property, plant and equipment 29,507 51,823 28,503 109,833
Equity accounted investments 32,611 8,151 187 (31,356) 9,593
Intangible assets and goodwill 1,041 573 1,162 2,776
Inventory and other assets 1,605 560 1,301 (31) 3,435
Forecast for new capital spending and top-down adjustment
Total assets 139,875 102,404 51,211 (49,074) 244,416

Liabilities

         
Borrowings 84,870 5,251 24,839 (14,873) 100,087
Other liabilities 29,392 45,261 7,226 (7,561) 74,318
Total liabilities 114,262 50,512 32,065 (22,434) 174,405
Total assets less total liabilities 25,613 51,892 19,146 (26,640) 70,011

Net worth

         
Taxpayers' funds 8,274 24,213 8,382 (30,007) 10,862
Reserves 15,840 27,638 10,192 3,539 57,209
Net worth attributable to minority interest 1,499 41 572 (172) 1,940
Total net worth 25,613 51,892 19,146 (26,640) 70,011
Statement of Financial Performance for the year ended 30 June 2014
  Core Crown
2014
Forecast
$m
Crown entities
2014
Forecast
$m
State-Owned
Enterprises
2014
Forecast
$m
Inter-segment
eliminations
2014
Forecast
$m
Total Crown
2014
Forecast
$m

Revenue

         
Taxation revenue 61,896 (516) 61,380
Other sovereign revenue 1,153 5,319 (1,089) 5,383
Revenue from core Crown funding 24,812 207 (25,019)
Sales of goods and services 1,513 1,904 13,596 (581) 16,432
Interest revenue and dividends 2,304 1,156 885 (1,185) 3,160
Other revenue 909 2,284 964 (535) 3,622
Total revenue (excluding gains) 67,775 35,475 15,652 (28,925) 89,977

Expenses

         
Social assistance and official development assistance 23,394 23,394
Personnel expenses 6,253 11,302 2,940 (7) 20,488
Other operating expenses 38,909 19,236 10,707 (27,681) 41,171
Interest expenses 3,641 224 1,173 (577) 4,461
Insurance expenses 2 3,274 8 (1) 3,283
Forecast for future new spending and top-down adjustment (583) (583)
Total expenses (excluding losses) 71,616 34,036 14,828 (28,266) 92,214
Minority interest share of operating balance before gains/losses 16 (226) (210)
Operating balance before gains/(losses) (3,841) 1,455 598 (659) (2,447)
Total gains/(losses) 3,858 1,376 82 (155) 5,161
Net surplus/(deficit) from associates and joint ventures 92 162 (26) 31 259
Operating balance 109 2,993 654 (783) 2,973

Expenses by functional classification

         
Social security and welfare 23,329 4,583 (539) 27,373
Health 14,889 12,636 (13,143) 14,382
Education 12,411 9,668 9 (8,908) 13,180
Transport and communications 2,241 2,431 6,925 (2,385) 9,212
Other 15,688 4,494 6,721 (2,714) 24,189
Finance costs 3,641 224 1,173 (577) 4,461
Forecast for future new spending and top-down adjustment (583) (583)
Total Crown expenses (excluding losses) 71,616 34,036 14,828 (28,266) 92,214
Statement of Financial Position as at 30 June 2014
  Core Crown
2014
Forecast
$m
Crown entities
2014
Forecast
$m
State-Owned
Enterprises
2014
Forecast
$m
Inter-segment
eliminations
2014
Forecast
$m
Total Crown
2014
Forecast
$m

Assets

         
Cash and cash equivalents 7,746 2,798 1,229 (665) 11,108
Receivables 11,507 6,035 2,077 (1,746) 17,873
Other financial assets 59,017 31,994 18,235 (17,093) 92,153
Property, plant and equipment 29,971 53,043 29,250 112,264
Equity accounted investments 32,764 8,479 348 (31,570) 10,021
Intangible assets and goodwill 1,136 498 1,207 2,841
Inventory and other assets 1,697 602 1,164 (38) 3,425
Forecast for new capital spending and top-down adjustment (382) (382)
Total assets 143,456 103,449 53,510 (51,112) 249,303

Liabilities

         
Borrowings 88,438 5,107 26,916 (17,403) 103,058
Other liabilities 27,585 42,651 7,332 (6,790) 70,778
Total liabilities 116,023 47,758 34,248 (24,193) 173,836
Total assets less total liabilities 27,433 55,691 19,262 (26,919) 75,467

Net worth

         
Taxpayers' funds 11,835 28,081 3,540 (30,112) 13,344
Reserves 15,598 27,544 10,065 3,481 56,688
Net worth attributable to minority interest 66 5,657 (288) 5,435
Total net worth 27,433 55,691 19,262 (26,919) 75,467
Statement of Financial Performance for the year ended 30 June 2015
  Core Crown
2015
Forecast
$m
Crown entities
2015
Forecast
$m
State-Owned
Enterprises
2015
Forecast
$m
Inter-segment
eliminations
2015
Forecast
$m
Total Crown
2015
Forecast
$m

Revenue

         
Taxation revenue 66,442 (618) 65,824
Other sovereign revenue 1,265 4,924 (1,051) 5,138
Revenue from core Crown funding 25,016 123 (25,139)
Sales of goods and services 1,435 1,981 14,251 (576) 17,091
Interest revenue and dividends 2,492 1,277 1,006 (1,103) 3,672
Other revenue 903 2,491 977 (529) 3,842
Total revenue (excluding gains) 72,537 35,689 16,357 (29,016) 95,567

Expenses

         
Social assistance and official development assistance 23,876 23,876
Personnel expenses 6,361 11,607 2,923 (10) 20,881
Other operating expenses 39,571 19,469 11,195 (27,833) 42,402
Interest expenses 3,883 237 1,295 (652) 4,763
Insurance expenses (1) 3,508 8 2 3,517
Forecast for future new spending and top-down adjustment (584) (584)
Total expenses (excluding losses) 73,106 34,821 15,421 (28,493) 94,855
Minority interest share of operating balance before gains/losses 17 (357) (340)
Operating balance before gains/(losses) (569) 885 579 (523) 372
Total gains/(losses) 2,365 304 7 (200) 2,476
Net surplus/(deficit) from associates and joint ventures 75 168 7 4 254
Operating balance 1,871 1,357 593 (719) 3,102

Expenses by functional classification

         
Social security and welfare 23,954 4,699 (528) 28,125
Health 15,065 12,781 (13,105) 14,741
Education 12,827 9,903 9 (9,168) 13,571
Transport and communications 2,217 2,443 7,083 (2,316) 9,427
Other 15,744 4,758 7,034 (2,724) 24,812
Finance costs 3,883 237 1,295 (652) 4,763
Forecast for future new spending and top-down adjustment (584) (584)
Total Crown expenses (excluding losses) 73,106 34,821 15,421 (28,493) 94,855
Statement of Financial Position as at 30 June 2015
  Core Crown
2015
Forecast
$m
Crown entities
2015
Forecast
$m
State-Owned
Enterprises
2015
Forecast
$m
Inter-segment
eliminations
2015
Forecast
$m
Total Crown
2015
Forecast
$m

Assets

         
Cash and cash equivalents 7,801 2,094 1,248 (645) 10,498
Receivables 11,266 5,086 2,160 (1,902) 16,610
Other financial assets 55,448 31,536 20,051 (16,444) 90,591
Property, plant and equipment 31,334 54,618 29,921 115,873
Equity accounted investments 34,814 8,771 352 (33,611) 10,326
Intangible assets and goodwill 1,182 587 1,165 2,934
Inventory and other assets 1,454 631 1,249 (35) 3,299
Forecast for new capital spending and top-down adjustment (426) (426)
Total assets 142,873 103,323 56,146 (52,637) 249,705

Liabilities

         
Borrowings 86,243 5,779 29,180 (16,812) 104,390
Other liabilities 27,316 38,737 7,527 (6,898) 66,682
Total liabilities 113,559 44,516 36,707 (23,710) 171,072
Total assets less total liabilities 29,314 58,807 19,439 (28,927) 78,633

Net worth

         
Taxpayers' funds 13,743 31,329 3,651 (32,122) 16,601
Reserves 15,571 27,397 10,063 3,483 56,514
Net worth attributable to minority interest 81 5,725 (288) 5,518
Total net worth 29,314 58,807 19,439 (28,927) 78,633
Statement of Financial Performancefor the year ended 30 June 2016
  Core Crown
2016
Forecast
$m
Crown entities
2016
Forecast
$m
State-Owned
Enterprises
2016
Forecast
$m
Inter-segment
eliminations
2016
Forecast
$m
Total Crown
2016
Forecast
$m

Revenue

         
Taxation revenue 70,594 (682) 69,912
Other sovereign revenue 1,154 4,830 (1,158) 4,826
Revenue from core Crown funding 25,256 111 (25,367)
Sales of goods and services 1,411 2,052 14,714 (584) 17,593
Interest revenue and dividends 2,717 1,308 1,167 (1,210) 3,982
Other revenue 987 2,654 1,031 (617) 4,055
Total revenue (excluding gains) 76,863 36,100 17,023 (29,618) 100,368

Expenses

         
Social assistance and official development assistance 24,479 24,479
Personnel expenses 6,450 11,821 2,967 (11) 21,227
Other operating expenses 39,695 19,719 11,478 (28,347) 42,545
Interest expenses 3,978 236 1,433 (593) 5,054
Insurance expenses (2) 4,039 8 3 4,048
Forecast for future new spending and top-down adjustment 1,379 -   1,379
Total expenses (excluding losses) 75,979 35,815 15,886 (28,948) 98,732
Minority interest share of operating balance before gains/losses 14 (388) (374)
Operating balance before gains/(losses) 884 299 749 (670) 1,262
Total gains/(losses) 2,437 382 9 (209) 2,619
Net surplus/(deficit) from associates and joint ventures 74 167 6 8 255
Operating balance 3,395 848 764 (871) 4,136

Expenses by functional classification

         
Social security and welfare 24,377 5,130 (540) 28,967
Health 15,132 12,798 (13,262) 14,668
Education 12,974 10,072 9 (9,281) 13,774
Transport and communications 2,176 2,520 7,288 (2,426) 9,558
Other 15,963 5,059 7,156 (2,846) 25,332
Finance costs 3,978 236 1,433 (593) 5,054
Forecast for future new spending and top-down adjustment 1,379 1,379
Total Crown expenses (excluding losses) 75,979 35,815 15,886 (28,948) 98,732
Statement of Financial Positionas at 30 June 2016
  Core Crown
2016
Forecast
$m
Crown entities
2016
Forecast
$m
State-Owned
Enterprises
2016
Forecast
$m
Inter-segment
eliminations
2016
Forecast
$m
Total Crown
2016
Forecast
$m

Assets

         
Cash and cash equivalents 8,126 1,963 1,149 (643) 10,595
Receivables 11,830 4,426 2,275 (1,774) 16,757
Other financial assets 60,740 33,227 22,036 (17,282) 98,721
Property, plant and equipment 31,986 56,327 30,172 118,485
Equity accounted investments 36,120 8,964 354 (34,908) 10,530
Intangible assets and goodwill 1,196 603 1,171 2,970
Inventory and other assets 1,519 600 1,262 (34) 3,347
Forecast for new capital spending and top-down adjustment 64 64
Total assets 151,581 106,110 58,419 (54,641) 261,469

Liabilities

         
Borrowings 91,214 5,980 31,188 (17,655) 110,727
Other liabilities 27,640 39,264 7,742 (6,742) 67,904
Total liabilities 118,854 45,244 38,930 (24,397) 178,631
Total assets less total liabilities 32,727 60,866 19,489 (30,244) 82,838

Net worth

         
Taxpayers' funds 17,128 33,639 3,684 (33,441) 21,010
Reserves 15,599 27,127 10,068 3,485 56,279
Net worth attributable to minority interest 100 5,737 (288) 5,549
Total net worth 32,727 60,866 19,489 (30,244) 82,838
Statement of Financial Performancefor the year ended 30 June 2017
  Core Crown
2017
Forecast
$m
Crown entities
2017
Forecast
$m
State-Owned
Enterprises
2017
Forecast
$m
Inter-segment
eliminations
2017
Forecast
$m
Total Crown
2017
Forecast
$m

Revenue

         
Taxation revenue 74,082 (734) 73,348
Other sovereign revenue 1,181 4,872 (1,263) 4,790
Revenue from core Crown funding 25,342 110 (25,452)
Sales of goods and services 1,408 2,136 15,156 (593) 18,107
Interest revenue and dividends 3,226 1,364 1,317 (1,271) 4,636
Other revenue 932 2,640 1,069 (531) 4,110
Total revenue (excluding gains) 80,829 36,354 17,652 (29,844) 104,991

Expenses

         
Social assistance and official development assistance 25,334 25,334
Personnel expenses 6,478 11,964 2,993 (11) 21,424
Other operating expenses 39,493 19,657 11,861 (28,533) 42,478
Interest expenses 4,354 245 1,568 (624) 5,543
Insurance expenses 1 4,409 8 4,418
Forecast for future new spending and top-down adjustment 3,015 3,015
Total expenses (excluding losses) 78,675 36,275 16,430 (29,168) 102,212
Minority interest share of operating balance before gains/losses 6 (416) (410)
Operating balance before gains/(losses) 2,154 85 806 (676) 2,369
Total gains/(losses) 2,520 458 11 (225) 2,764
Net surplus/(deficit) from associates and joint ventures 79 168 6 2 255
Operating balance 4,753 711 823 (899) 5,388

Expenses by functional classification

         
Social security and welfare 25,186 5,426 (550) 30,062
Health 15,191 12,774 (13,349) 14,616
Education 13,035 10,082 9 (9,293) 13,833
Transport and communications 2,240 2,525 7,448 (2,521) 9,692
Other 15,654 5,223 7,405 (2,831) 25,451
Finance costs 4,354 245 1,568 (624) 5,543
Forecast for future new spending and top-down adjustment 3,015 3,015
Total Crown expenses (excluding losses) 78,675 36,275 16,430 (29,168) 102,212
Statement of Financial Positionas at 30 June 2017
  Core Crown
2017
Forecast
$m
Crown entities
2017
Forecast
$m
State-Owned
Enterprises
2017
Forecast
$m
Inter-segment
eliminations
2017
Forecast
$m
Total Crown
2017
Forecast
$m

Assets

         
Cash and cash equivalents 8,462 1,986 1,252 (644) 11,056
Receivables 12,362 4,221 2,339 (1,678) 17,244
Other financial assets 69,495 35,322 23,614 (18,073) 110,358
Property, plant and equipment 32,595 57,628 30,176 120,399
Equity accounted investments 37,430 9,134 359 (36,210) 10,713
Intangible assets and goodwill 1,197 537 1,166 2,900
Inventory and other assets 1,550 589 1,266 (35) 3,370
Forecast for new capital spending and top-down adjustment 761 761
Total assets 163,852 109,417 60,172 (56,640) 276,801

Liabilities

         
Borrowings 98,129 6,057 32,691 (18,456) 118,421
Other liabilities 28,216 40,563 7,898 (6,611) 70,066
Total liabilities 126,345 46,620 40,589 (25,067) 188,487
Total assets less total liabilities 37,507 62,797 19,583 (31,573) 88,314

Net worth

         
Taxpayers' funds 21,870 35,753 3,751 (34,771) 26,603
Reserves 15,637 26,930 10,072 3,486 56,125
Net worth attributable to minority interest 114 5,760 (288) 5,586
Total net worth 37,507 62,797 19,583 (31,573) 88,314
Statement of Financial Performance for the year ended 30 June 2018
  Core Crown
2018
Forecast
$m
Crown entities
2018
Forecast
$m
State-Owned
Enterprises
2018
Forecast
$m
Inter-segment
eliminations
2018
Forecast
$m
Total Crown
2018
Forecast
$m

Revenue

         
Taxation revenue 77,636 (788) 76,848
Other sovereign revenue 1,217 5,053 (1,361) 4,909
Revenue from core Crown funding 25,500 110 (25,610)
Sales of goods and services 1,435 2,222 15,705 (598) 18,764
Interest revenue and dividends 3,581 1,455 1,477 (1,381) 5,132
Other revenue 793 2,539 1,117 (364) 4,085
Total revenue (excluding gains) 84,662 36,769 18,409 (30,102) 109,738

Expenses

         
Social assistance and official development assistance 26,326 26,326
Personnel expenses 6,524 12,114 3,078 (11) 21,705
Other operating expenses 39,599 19,542 12,326 (28,687) 42,780
Interest expenses 4,440 250 1,696 (678) 5,708
Insurance expenses 3 4,714 9 (3) 4,723
Forecast for future new spending and top-down adjustment 4,561 4,561
Total expenses (excluding losses) 81,453 36,620 17,109 (29,379) 105,803
Minority interest share of operating balance before gains/losses (3) (447) (450)
Operating balance before gains/(losses) 3,209 146 853 (723) 3,485
Total gains/(losses) 2,612 545 16 (234) 2,939
Net surplus/(deficit) from associates and joint ventures 80 169 11 (4) 256
Operating balance 5,901 860 880 (961) 6,680

Expenses by functional classification

         
Social security and welfare 26,137 5,705 (563) 31,279
Health 15,274 12,825 (13,501) 14,598
Education 13,109 10,103 9 (9,312) 13,909
Transport and communications 2,308 2,551 7,723 (2,617) 9,965
Other 15,624 5,186 7,681 (2,708) 25,783
Finance costs 4,440 250 1,696 (678) 5,708
Forecast for future new spending and top-down adjustment 4,561 4,561
Total Crown expenses (excluding losses) 81,453 36,620 17,109 (29,379) 105,803
Statement of Financial Positionas at 30 June 2018
  Core Crown
2018
Forecast
$m
Crown entities
2018
Forecast
$m
State-Owned
Enterprises
2018
Forecast
$m
Inter-segment
eliminations
2018
Forecast
$m
Total Crown
2018
Forecast
$m

Assets

         
Cash and cash equivalents 8,812 1,960 1,526 (646) 11,652
Receivables 13,176 4,049 2,392 (1,684) 17,933
Other financial assets 67,751 37,739 25,203 (18,894) 111,799
Property, plant and equipment 32,886 59,039 30,044 121,969
Equity accounted investments 38,710 9,303 363 (37,481) 10,895
Intangible assets and goodwill 1,205 499 1,166 2,870
Inventory and other assets 1,546 590 1,229 (36) 3,329
Forecast for new capital spending and top-down adjustment 1,611 1,611
Total assets 165,697 113,179 61,923 (58,741) 282,058

Liabilities

         
Borrowings 93,738 6,096 34,132 (19,268) 114,698
Other liabilities 28,518 42,232 8,097 (6,608) 72,239
Total liabilities 122,256 48,328 42,229 (25,876) 186,937
Total assets less total liabilities 43,441 64,851 19,694 (32,865) 95,121

Net worth

         
Taxpayers' funds 27,759 37,967 3,825 (36,062) 33,489
Reserves 15,682 26,732 10,075 3,485 55,974
Net worth attributable to minority interest 152 5,794 (288) 5,658
Total net worth 43,441 64,851 19,694 (32,865) 95,121

Core Crown Expense Tables

Core Crown Expense Tables
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Social security and welfare 19,382 21,185 22,005 22,028 22,741 23,329 23,954 24,377 25,186 26,137
GSF pension expenses 655 328 305 192 278 282 395 423 450 479
Health 12,368 13,128 13,753 14,160 14,498 14,889 15,065 15,132 15,191 15,274
Education 11,455 11,724 11,650 11,654 12,504 12,411 12,827 12,974 13,035 13,109
Core government services 5,293 2,974 5,563 5,428 4,294 4,792 4,816 4,910 4,761 4,664
Law and order 3,089 3,191 3,382 3,403 3,456 3,575 3,486 3,523 3,496 3,497
Defence 1,757 1,814 1,809 1,736 1,804 1,867 1,984 2,023 1,998 1,996
Transport and communications 2,663 2,345 2,281 2,232 2,255 2,241 2,217 2,176 2,240 2,308
Economic and industrial services 2,960 2,806 2,542 2,073 1,978 2,100 2,215 2,241 2,246 2,299
Primary services 534 507 706 648 659 716 700 638 605 603
Heritage, culture and recreation 586 630 741 863 804 838 770 778 753 744
Housing and community development 297 339 943 ( 46) 283 377 326 280 224 220
Environmental protection 416 651 1,225 769 530 534 510 511 491 494
Other 118 80 479 425 603 607 543 637 629 628
Finance costs 2,429 2,311 3,066 3,511 3,619 3,641 3,883 3,978 4,354 4,440
Forecast for future new spending  ..   ..   ..   ..   ..  77 291 1,864 3,375 4,921
Top-down expense adjustment  ..   ..   ..   ..   ..  ( 660) ( 875) ( 485) ( 360) ( 360)
Core Crown expenses 64,002 64,013 70,450 69,076 70,306 71,616 73,107 75,980 78,674 81,453

Source: The Treasury

Table 6.1 - Social security and welfare expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Welfare benefits (see below) 17,366 18,961 19,781 20,375 20,789 21,194 21,736 22,387 23,199 24,052
Social rehabilitation and compensation 336 331 119 81 107 173 142 151 157 163
Departmental expenses 1,092 1,130 1,127 1,122 1,168 1,218 1,313 1,265 1,262 1,260
Child support impairment 205 371 281 72 282 296 321 148 147 243
Other non-departmental expenses1 383 392 697 378 395 448 442 426 421 419
Social security and welfare expenses 19,382 21,185 22,005 22,028 22,741 23,329 23,954 24,377 25,186 26,137
  1. Other non-departmental expenses and other expenses include costs associated with the Canterbury earthquakes.

Source: The Treasury

Table 6.2 - Welfare benefit expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
New Zealand Superannuation 7,744 8,290 8,830 9,584 10,235 10,903 11,590 12,242 12,885 13,643
Jobseeker Support and Emergency Benefit ..  ..  ..  ..  ..  1,693 1,648 1,556 1,538 1,569
Supported living payment ..  ..  ..  ..  ..  1,422 1,518 1,538 1,560 1,591
Sole parent support ..  ..  ..  ..  ..  1,225 1,243 1,249 1,263 1,285
Domestic Purposes Benefit 1,530 1,693 1,757 1,811 1,738 63 ..  ..  ..  .. 
Invalid's Benefit 1,260 1,303 1,306 1,325 1,330 52 ..  ..  ..  .. 
Sickness Benefit 613 710 743 775 782 29 ..  ..  ..  .. 
Unemployment Benefit 586 930 943 883 812 29 ..  ..  ..  .. 
Family Tax Credit 2,053 2,159 2,130 2,071 2,018 1,976 1,934 1,912 1,982 1,951
Other working for families tax credits 620 629 616 599 575 556 527 527 522 515
Accommodation Assistance 989 1,154 1,197 1,195 1,177 1,149 1,141 1,129 1,129 1,145
Income-Related Rents 512 522 553 580 611 670 718 775 825 879
Disability Assistance 390 411 409 401 384 379 373 374 375 378
Benefits paid in Australia 50 45 40 37 22 19 15 12 34 .. 
Paid Parental Leave 143 154 154 158 165 164 176 223 244 254
Childcare Assistance 159 178 188 188 186 185 183 184 186 188
War Disablement Pensions 125 137 135 128 123 122 119 120 115 110
Veteran's Pension 176 179 178 177 171 165 156 152 147 143
Other benefits 416 467 602 463 460 393 395 394 394 401
Benefit expenses 17,366 18,961 19,781 20,375 20,789 21,194 21,736 22,387 23,199 24,052

Source: The Treasury

Table 6.2 - Welfare benefit expenses (continued)
Beneficiary numbers
(Thousands)
2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
New Zealand Superannuation 522 540 561 585 612 640 665 690 713 736
Jobseeker Support and Emergency Benefit1 ..  ..  ..  ..  ..  137 126 117 113 113
Supported living payment1 ..  ..  ..  ..  ..  96 98 97 97 97
Sole parent support1 ..  ..  ..  ..  ..  78 75 74 74 73
Domestic Purposes Benefit1 101 110 114 114 109 ..  ..  ..  ..  .. 
Invalid's Benefit1 86 88 88 87 87 ..  ..  ..  ..  .. 
Sickness Benefit1 50 58 60 60 60 ..  ..  ..  ..  .. 
Unemployment Benefit1 48 78 80 73 67 ..  ..  ..   ..  .. 
Accommodation Supplement 267 312 320 311 305 297 291 285 284 286
  1. From July 2013, changes to the benefit system and existing benefit categories took place. Three new categories of benefit; Supported living payment, Sole parent support and Jobseeker support; have replaced the following existing categories: Domestic Purposes Benefit, Invalid's Benefit, Unemployment Benefit, Sickness Benefit and Widow's Benefit. Due to the changes, there is no historical data for the new benefit categories and no forecast data for the previous categories beyond July 2013.

Source: Ministry of Social Development

Table 6.3 - Health expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Departmental outputs 206 211 199 186 171 184 183 188 189 189
Health services purchasing (see below) 11,354 12,077 12,530 13,018 13,348 13,645 14,024 13,999 13,971 13,930
Other non-departmental outputs 98 106 120 119 234 332 217 201 214 266
Health payments to ACC 667 691 849 744 715 690 598 700 773 847
Other expenses 43 43 55 93 30 38 43 44 44 42
Health expenses 12,368 13,128 13,753 14,160 14,498 14,889 15,065 15,132 15,191 15,274

Source: The Treasury

Table 6.4 - Health services purchasing
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Payments to District Health Boards 10,038 10,670 11,133 11,542 11,946 12,161 12,476 12,490 12,491 12,464
National disability support services 889 930 971 1,029 1,028 1,089 1,118 1,112 1,109 1,101
Public health services purchasing 427 477 426 447 374 395 430 397 371 365
Health services purchasing 11,354 12,077 12,530 13,018 13,348 13,645 14,024 13,999 13,971 13,930

Source: The Treasury

Table 6.5 - Education expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Early childhood education 1,030 1,184 1,340 1,355 1,436 1,540 1,604 1,650 1,680 1,716
Primary and secondary schools (see below) 4,936 5,157 5,354 5,443 5,590 5,629 5,824 5,924 5,923 5,933
Tertiary funding (see below) 4,564 4,465 3,991 3,795 4,370 4,042 4,253 4,286 4,325 4,344
Departmental expenses 888 898 923 988 1,039 1,126 1,066 1,040 1,043 1,048
Other education expenses 37 20 42 73 69 74 80 74 64 68
Education expenses 11,455 11,724 11,650 11,654 12,504 12,411 12,827 12,974 13,035 13,109

Source: The Treasury

Table 6.5 - Education expenses (continued)
Number of places provided1 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Early childhood education 142,135 152,877 159,997 166,434 174,782 182,481 187,212 192,038 195,243 199,319
  1. Full-time equivalent based on 1,000 funded child hours per calendar year. Note that historical place numbers have been revised so may differ from previous published Economic and Fiscal Update numbers.

Source: Ministry of Education

Table 6.6 - Primary and secondary schools
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Primary 2,484 2,622 2,731 2,771 2,845 2,843 2,961 3,028 3,033 3,041
Secondary 1,898 1,972 2,051 2,085 2,148 2,171 2,236 2,262 2,254 2,252
School transport 152 160 163 172 175 177 183 189 195 202
Special needs support 290 297 310 323 332 336 335 338 339 339
Professional development 101 95 90 85 84 95 103 101 96 93
Schooling improvement 11 11 9 7 6 7 6 6 6 6
Primary and secondary education expenses 4,936 5,157 5,354 5,443 5,590 5,629 5,824 5,924 5,923 5,933

Source: The Treasury

Table 6.6 - Primary and secondary schools (continued)
Number of places provided1 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Primary 474,630 473,431 474,149 474,821 477,716 480,634 487,107 492,031 494,939 497,422
Secondary 280,062 281,095 281,999 279,554 278,136 277,895 275,815 273,295 272,900 271,133
  1. These are snapshots based as at 1 July for primary year levels (years 1 to 8, with no year one student adjustment included) and 1 March for secondary year levels (years 9 to 13). These numbers include special school rolls but exclude health camps, hospital schools and home schooling.

Source: Ministry of Education

Table 6.7 - Tertiary funding
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Tuition 2,287 2,398 2,354 2,306 2,322 2,404 2,469 2,467 2,471 2,471
Other tertiary funding 522 489 429 430 432 482 485 492 498 498
Student allowances 444 570 620 644 596 542 531 534 540 546
Student loans 1,311 1,008 588 415 1,020 614 768 793 816 829
Tertiary education expenses 4,564 4,465 3,991 3,795 4,370 4,042 4,253 4,286 4,325 4,344

Source: The Treasury

Table 6.7 - Tertiary funding (continued)
Number of places provided1 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Actual delivered and estimated funded places 246,041 250,440 240,529 245,784 240,472 242,517 239,714 240,171 238,778 238,426
  1. Tertiary places are the number of equivalent full time (EFT) students in: student achievement component; adult and community education; and youth guarantee programmes. Note that historical place numbers have been revised so may differ from previous published Economic and Fiscal Update numbers. Place numbers are based on calendar years rather than fiscal years.

Source: Ministry of Education

Table 6.8 - Core government service expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Official development assistance 458 435 495 510 437 530 533 542 573 586
Indemnity and guarantee expenses 992 7 319 59 27 27 25 28 32 32
Departmental expenses 1,668 1,324 1,492 1,518 1,576 1,711 1,728 1,663 1,617 1,605
Non-departmental expenses1 117 236 471 524 330 535 609 780 808 766
Tax receivable write-down and impairments 1,654 590 1,010 1,003 925 1,248 1,162 1,220 1,220 1,267
Science expenses 179 191 174 116 115 118 124 124 114 115
Other expenses1 225 191 1,602 1,698 884 623 635 553 397 293
Core government service expenses 5,293 2,974 5,563 5,428 4,294 4,792 4,816 4,910 4,761 4,664
  1. Non-departmental expenses and other expenses include costs associated with the Canterbury earthquakes.

Source: The Treasury

Table 6.9 - Law and order expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Police 1,326 1,349 1,393 1,394 1,408 1,433 1,399 1,396 1,386 1,386
Ministry of Justice 379 372 397 440 466 483 450 457 454 454
Department of Corrections 829 903 956 988 972 1,019 997 1,037 1,021 1,021
NZ Customs Service1 12 13 120 126 140 154 153 150 150 150
Other departments 80 102 237 103 98 97 95 96 95 96
Department expenses 2,626 2,739 3,103 3,051 3,084 3,186 3,094 3,136 3,106 3,107
Non-departmental outputs 380 399 261 315 317 317 314 309 306 306
Other expenses 83 53 18 37 55 72 78 78 84 84
Law and order expenses 3,089 3,191 3,382 3,403 3,456 3,575 3,486 3,523 3,496 3,497
  1. Prior to 2010/11 the majority of NZ Customs Service expenses were classified as core government services.

Source: The Treasury

Table 6.10 - Defence expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
NZDF core expenses 1,697 1,747 1,736 1,678 1,747 1,829 1,933 1,972 1,948 1,946
Other expenses 60 67 73 58 57 38 51 51 50 50
Defence expenses 1,757 1,814 1,809 1,736 1,804 1,867 1,984 2,023 1,998 1,996

Source: The Treasury

Table 6.11 - Transport and communication expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
New Zealand Transport Agency 1,562 1,778 1,696 1,744 1,819 1,880 1,914 2,011 2,076 2,145
Departmental outputs 83 63 65 60 40 48 45 45 45 45
Other non-departmental expenses 170 58 105 62 213 215 133 93 91 91
Asset impairments 320 ..  ..  ..  ..  ..  ..  ..  ..  .. 
Rail funding 507 418 386 305 153 67 93 3 3 3
Other expenses 21 28 29 61 30 31 32 24 25 24
Transport and communication expenses 2,663 2,345 2,281 2,232 2,255 2,241 2,217 2,176 2,240 2,308

Source: The Treasury

Table 6.12 - Economic and industrial services expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Departmental outputs 389 382 420 346 350 366 375 347 340 339
Employment initiatives1 185 220 214 206 192 151 77 77 77 78
Non-departmental outputs 809 894 689 614 618 668 797 843 851 843
Reserve electricity generation 20 23 9 5 ..  ..  ..  ..  ..  .. 
KiwiSaver (includes housing deposit subsidy) 1,281 1,024 1,045 698 740 848 857 842 882 936
Research and development tax credits 154 ..  ..  ..  ..  ..  ..  ..  ..  .. 
Other expenses 122 263 165 204 78 67 109 132 96 103
Economic and industrial services expenses 2,960 2,806 2,542 2,073 1,978 2,100 2,215 2,241 2,246 2,299
  1. From 2015 some of the employment initiatives spending has been classified as other non-departmental expenses in social security and welfare.

Source: The Treasury

Table 6.13 - Primary service expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Departmental expenses 364 352 354 348 347 353 375 376 368 365
Non-departmental outputs 82 123 142 134 137 128 104 30 43 62
Biological research1 ..  ..  167 102 105 92 94 92 89 84
Other expenses 88 32 43 64 70 143 127 140 105 92
Primary service expenses 534 507 706 648 659 716 700 638 605 603
  1. Prior to 2011, biological research was classified as an economic and industrial services expense.

Source: The Treasury

Table 6.14 - Heritage, culture and recreation expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Departmental outputs 120 115 133 172 270 295 275 260 255 254
Non-departmental outputs 422 405 455 444 442 465 462 449 448 448
Other expenses 44 110 153 247 92 78 33 69 50 42
Heritage, culture and recreation expenses 586 630 741 863 804 838 770 778 753 744

Source: The Treasury

Table 6.15 - Housing and community development expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Financial assistance package1 ..  ..  567 (407) (60) ..  ..  ..  ..  .. 
Housing subsidies 29 30 31 22 5 6 6 6 6 6
Departmental outputs 148 140 136 98 89 110 112 111 105 101
Other non-departmental expenses 112 122 105 113 117 156 125 96 92 92
Warm up New Zealand ..  33 67 84 76 49 33 28 ..  .. 
Other expenses 8 14 37 44 56 56 50 39 21 21
Housing and community development expenses 297 339 943 (46) 283 377 326 280 224 220

1. Financial assistance package for 2012 actual and 2013 forecast includes the impact of a revised estimate of the weathertight homes financial assistance package provision.

Source: The Treasury

Table 6.16 - Environmental protection expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Emissions Trading Scheme 17 80 838 334 55 51 51 53 54 55
Departmental outputs 306 300 301 342 335 357 356 348 344 347
Non-departmental outputs 47 231 26 46 88 46 41 51 35 34
Other expenses 46 40 60 47 52 80 62 59 58 58
Environmental protection expenses 416 651 1,225 769 530 534 510 511 491 494

Source: The Treasury

Glossary of Terms

Accruals basis of accounting

An accounting basis where revenue is recognised when earned and expenses when the obligations they relate to are incurred. This contrasts to cash accounting, where income is recognised when the cash is received and expenses when cash to settle an obligation is paid out.

Appropriations

Appropriations are legal authorities granted by Parliament to the Crown or an Office of Parliament to use public resources. Most appropriations are set out in Appropriation Acts.

Baselines

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

Commercial portfolio

Consists of assets and liabilities held by companies with commercial objectives.

Consumers Price Index (CPI)

Statistics New Zealand's official index to measure the rate of change in prices of goods and services purchased by households.

Contingent assets

Income that the Crown will realise if a particular uncertain event occurs, or a present asset is unable to be measured with sufficient reliability to be recorded in the financial statements (unquantified contingent assets). Contingent assets typically comprise loans with specific events that trigger repayment and IRD pending assessments (where there is a proposed adjustment to a tax assessment).

Contingent liabilities

Costs that the Crown will have to face if a particular uncertain event occurs, or present liabilities that are unable to be measured with sufficient reliability to be recorded in the financial statements (unquantified contingent liabilities). Contingent liabilities typically comprise guarantees and indemnities, legal disputes and claims, and uncalled capital.

Core Crown

A reporting segment consisting of the Crown, departments, Offices of Parliament, the NZS Fund and RBNZ. For a list of all entities included in this segment, refer to the Government Reporting Entity (pages 87 to 89).

Core Crown expenses

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

Core Crown revenue

Consists primarily of tax revenue collected by the Government but also includes investment income, sales of goods and services and other revenue of the core Crown.

Corporate tax

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

Current account (Balance of Payments)

The current account records the value of New Zealand's transactions with the rest of the world in goods, services, income and transfers. The current-account balance is the sum of all current-account credits less all current-account debits. When the sum of debits is greater than the sum of credits there is a current-account deficit. The current-account balance is commonly expressed as a percentage of nominal GDP.

Cyclically-adjusted balance (CAB) or structural balance

An estimate of the fiscal balance (operating balance before gains and losses) adjusted for fluctuations of actual GDP around trend GDP. CAB provides a picture of the underlying fiscal position and the effects of policy decisions.

Demographic changes

Changes to the structure of the population such as the age, gender or ethnic make up.

Domestic bond programme

The amount and timing of government bonds expected to be issued or redeemed.

Excise duties

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

Financial assets

Any asset that is cash, an equity instrument of another entity (shares), a contractual right to receive cash or shares (taxes receivable and ACC levies) or a right to exchange a financial asset or liability on favourable terms (derivatives in gain).

Financial liabilities

Any liability that is a contractual obligation to pay cash (government stock, accounts payable) or a right to exchange a financial asset or liability on unfavourable terms (derivatives in loss).

Financial portfolio

Consists of the assets and liabilities held by the Crown to finance or pre-fund government expenditure.

Fiscal drag

The additional tax revenue generated from source deductions as an individual's average tax rate increases as their income increases.

Fiscal impulse

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

Fiscal intentions (short-term)

Indications of the Government's intentions for operating expenses, operating revenues and the impact of its intentions on the operating balance, debt and net worth over (at least) the next three years. These intentions are required under the Public Finance Act 1989 (PFA).

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 PFA. The objectives must be consistent with the defined principles of responsible fiscal management as outlined in the PFA and must cover a period of (at least) 10 years.

Forecast new capital spending (Capital allowance)

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 (Operating allowance)

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

Gains and losses

Gains and losses typically arise from the revaluation of assets and liabilities, such as investments in financial assets and long-term liabilities for ACC and GSF. These valuation changes are reported directly as a movement in net worth (eg, asset revaluation reserves) or indirectly through the statement of financial performance.

GDP deflator

An index of changes in the general price level in the economy. It is calculated as the ratio of nominal GDP to real GDP.

Generally accepted accounting practice (GAAP)

GAAP refers to the rules and assumptions used to prepare and present financial statements. GAAP is an independent and objective set of rules that govern the recognition and measurement of financial elements, such as assets, liabilities, revenues and expenses.

Government Finance Statistics (GFS)

A statistical framework for government reporting developed by IMF to aid comparability of results between countries. This differs from the GAAP framework that is used for reporting by the Government in New Zealand.

Gross sovereign-issued debt [GSID]

Represents debt issued by the sovereign (the core Crown) and includes government stock held by the NZS Fund, ACC and EQC.

Gross debt

GSID excluding settlement cash and bank bills.

Gross domestic product (GDP)

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

Gross domestic product (expenditure)

The sum of total expenditure on final goods and services in the economy.

Gross national expenditure (GNE)

A measure of total expenditure on final goods and services by New Zealand residents.

Insurance liabilities

The gross obligation for the future cost of claims incurred prior to balance date represented in today's dollars (present value). The net liability is the gross liability less the asset reserves held to meet those claims.

Inter-segment eliminations

The amounts of transactions between different segments (core Crown, Crown entities and SOEs) that are eliminated to determine total Crown results.

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 unit of labour input (where labour inputs might be measured as hours worked or the number of people employed).

Line-by-line consolidation

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 financial statements of Government include all departments, Offices of Parliament, RBNZ, 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. Examples are bonds, commercial papers and debentures.

Minority interest

Minority interests include those who recently purchased shares in the Government Share Offer Programme as well as the pre-existing minority interests in Air New Zealand limited and the minority interests held in the Crown Fibre Holdings Group and Solid Energy

Monetary conditions

Aggregate monetary conditions measure the degree to which short-term interest rates and the exchange rate either support or restrict economic growth.

Monetary policy

The policies that RBNZ uses to regulate the supply of money in New Zealand. RBNZ implements its monetary policy decisions by adjusting its Official Cash Rate (OCR) in an effort to maintain stability in the rate of CPI inflation within a defined target range.

Tightening monetary policy means raising the OCR in order to moderate aggregate demand pressures and reduce inflationary pressures. Easing monetary policy has the reverse effect.

National saving

National disposable income less private and public consumption spending. Income excludes gains and losses on capital. Gross saving includes depreciation.

Net core Crown cash flow from operations

The cash impact of operating results. It is represented by the operating balance (before gains and losses) less retained items (eg, net surplus of SOEs, Crown entities and NZS Fund net revenue) less non-cash items (eg, depreciation).

Net core Crown debt

Net core Crown debt provides information about the sustainability of the Government's accounts, and is used by some international rating agencies when determining the creditworthiness of a country. It represents gross debt less core Crown financial assets (excluding advances and financial assets held by the NZS Fund). Advances and financial assets held by the NZS Fund are excluded as these assets are less liquid and/or they are made for public policy reasons rather than for the purposes associated with government financing.

Net international investment position (NIIP)

Measures the net value of New Zealand's international assets and liabilities at a point in time.

Net worth

Total assets less total liabilities. The change in net worth in any given forecast year is largely driven by the operating balance and property, plant and equipment revaluations.

Net worth attributable to the Crown

Represents the Crown's share of total assets and liabilities and excludes minority interests' share of those assets and liabilities.

Operating balance

Represents OBEGAL (refer below) plus gains and less losses. The operating balance includes gains and losses not reported directly as a movement against net worth. The impact of gains and losses on the operating balance can be subject to short-term market volatility and revaluations of long-term liabilities.

Operating balance before gains and losses (OBEGAL)

Represents total Crown revenue less total Crown expenses. OBEGAL can provide a useful measure of underlying stewardship than the operating balance as short-term market fluctuations are not included in the calculation.

Output gap

The difference between actual and potential GDP. Potential GDP is the level of output an economy can sustain without acceleration of inflation.

Outputs

Outputs are the goods and services commissioned by Ministers from public, non-governmental and private sector producers. Outputs may include the supply of policy advice, enforcement of regulations (such as speed limits in transport), provision of a range of services (in health, education, etc), negotiation and management of contracts and administration of benefits.

Productivity

The amount of output (eg, GDP) per unit of input.

Projections

Projections relate to the period beyond the five-year forecast period and 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 cash flow from operations excluding NZS Fund activity less core Crown capital payments (eg, purchase of assets, loans to others).

Settlement cash

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

Social portfolio

Consists of the assets and liabilities held primarily to provide public services or to protect assets for future generations.

Specific fiscal risks

All government decisions or other circumstances known to the Government which may have a material impact on the fiscal and economic outlook, but are not certain enough in timing or amount to include in the fiscal forecasts.

System of National Accounts (SNA)

SNA is a comprehensive, consistent and flexible set of macroeconomic accounts which meets 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 at a given point in time, regardless of whether or not it has actually been paid.

Terms of trade

The terms of trade measure the volume of imports that can be funded by a fixed volume of exports, and are calculated as the ratio of the total export price index to the total import price index. New Zealand's headline terms of trade series is derived from export and import price indices from Statistics New Zealand's quarterly Overseas Trade Index release. The Treasury forecasts the terms of trade on an SNA-basis, using implicit export and import price indices derived from quarterly national accounts data.

Top-down adjustment

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

Total borrowings

Represents the Government's total debt obligations to external parties and can be split into sovereign-guaranteed debt and non-sovereign-guaranteed debt. Non-sovereign-guaranteed debt represents the debt obligations of SOEs and Crown entities that are not guaranteed by the Crown.

Total Crown

Includes the core Crown (defined above) plus Crown entities and SOEs as defined by the Government Reporting Entity on pages 87 to 89.

Tradable/non-tradable output

There is no official definition of the tradable sector. In this document the tradable sector is defined as the part of the economy particularly exposed to foreign competition. It includes primary, manufacturing and tourism industries. Non-tradable output is estimated as a residual of total real GDP.

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.

Votes

When Parliament considers legislation relating to appropriations, the appropriations are grouped within “Votes”. Generally, a Vote groups similar or related appropriations together (eg, Vote Health includes all health- related appropriations administered by the Ministry of Health).

Year ended

Graphs and tables within this document use different expressions of the timeframe. While some tables may refer to the end of the tax year (31 March), others will refer to the end of the Government's financial year (30 June). For example, unless otherwise stated references to 2013/14 or 2014 will mean the end of the financial year.

Time Series of Fiscal and Economic Indicators

Fiscal Indicators

June years 2003
Actual
2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
$millions                                

Revenue and expenses

                               
Core Crown revenue 43,440 46,219 51,045 55,735 58,211 61,819 59,482 56,216 57,550 60,565 64,149 67,775 72,537 76,863 80,829 84,662
Core Crown expenses 39,897 41,882 44,895 49,320 54,003 56,997 64,002 64,013 70,450 69,076 70,306 71,616 73,107 75,980 78,674 81,453

Surpluses

                               
Total Crown OBEGAL 4,366 5,573 7,075 7,091 5,860 5,637 (3,893) (6,315) (18,396) (9,240) (4,414) (2,447) 372 1,262 2,369 3,485
Total Crown operating balance 1,621 7,309 5,931 9,542 8,023 2,384 (10,505) (4,509) (13,360) (14,897) 6,925 2,973 3,102 4,136 5,388 6,680

Cash position

                               
Core Crown residual cash 1,217 520 3,104 2,985 2,877 2,057 (8,639) (9,000) (13,343) (10,644) (5,742) (3,914) (4,306) (1,766) (50) 710

Debt

                               
Gross debt1 36,617 36,017 35,478 33,903 30,647 31,390 43,356 53,591 72,420 79,635 77,984 82,157 79,834 84,673 91,548 87,154
Gross debt incl RB settlement cash and bank bills 36,617 36,017 35,478 35,867 36,805 37,745 50,973 58,891 77,290 84,168 84,286 87,802 85,479 90,318 97,193 92,799
Net core Crown debt (incl NZS Fund)2 22,647 19,902 13,324 6,302 1,620 (2,676) 5,633 12,549 23,969 33,475 34,428 34,824 37,287 36,962 34,998 32,135
Net core Crown debt2 24,531 23,858 19,879 16,163 13,380 10,258 17,119 26,738 40,128 50,671 55,835 59,421 63,567 65,321 65,484 64,867

Net worth

                               
Total Crown net worth 28,012 39,595 54,240 83,971 96,827 105,514 99,515 94,988 80,887 59,780 70,011 75,467 78,633 82,838 88,314 95,121
Total net worth attributable to the Crown 27,918 39,456 54,025 83,678 96,531 105,132 99,068 94,586 80,579 59,348 68,071 70,032 73,115 77,289 82,728 89,463
Nominal GDP 135,761 146,397 155,363 163,081 173,230 185,715 185,845 192,525 200,880 209,684 213,188 230,717 241,090 252,307 262,989 272,612
% of GDP                                

Revenue and expenses

                               
Core Crown revenue 32.0 31.6 32.9 34.2 33.6 33.3 32.0 29.2 28.6 28.9 30.1 29.4 30.1 30.5 30.7 31.1
Core Crown expenses 29.4 28.6 28.9 30.2 31.2 30.7 34.4 33.2 35.1 32.9 33.0 31.0 30.3 30.1 29.9 29.9

Surpluses

                               
Total Crown OBEGAL 3.2 3.8 4.6 4.3 3.4 3.0 (2.1) (3.3) (9.2) (4.4) (2.1) (1.1) 0.2 0.5 0.9 1.3
Total Crown operating balance 1.2 5.0 3.8 5.9 4.6 1.3 (5.7) (2.3) (6.7) (7.1) 3.2 1.3 1.3 1.6 2.0 2.5

Cash position

                               
Core Crown residual cash 0.9 0.4 2.0 1.8 1.7 1.1 (4.6) (4.7) (6.6) (5.1) (2.7) (1.7) (1.8) (0.7) (0.0) 0.3

Debt

                               
Gross debt1 27.0 24.6 22.8 20.8 17.7 16.9 23.3 27.8 36.1 38.0 36.6 35.6 33.1 33.6 34.8 32.0
Gross debt incl RB settlement cash and bank bills 27.0 24.6 22.8 22.0 21.2 20.3 27.4 30.6 38.5 40.1 39.5 38.1 35.5 35.8 37.0 34.0
Net core Crown debt (incl NZS Fund)2 16.7 13.6 8.6 3.9 0.9 (1.4) 3.0 6.5 11.9 16.0 16.1 15.1 15.5 14.6 13.3 11.8
Net core Crown debt2 18.1 16.3 12.8 9.9 7.7 5.5 9.2 13.9 20.0 24.2 26.2 25.8 26.4 25.9 24.9 23.8

Net worth

                               
Total Crown net worth 20.6 27.0 34.9 51.5 55.9 56.8 53.5 49.3 40.3 28.5 32.8 32.7 32.6 32.8 33.6 34.9
Total net worth attributable to the Crown 20.6 27.0 34.8 51.3 55.7 56.6 53.3 49.1 40.1 28.3 31.9 30.4 30.3 30.6 31.5 32.8
  1. Excludes Reserve Bank settlement cash and bank bills
  2. Excludes advances

Economic Indicators

March years
Annual average % change
2003
Actual
2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Private consumption 5.3 6.1 5.5 5.0 2.3 3.7 -1.6 1.6 2.4 3.1 2.6 3.6 4.1 3.6 2.4 1.6
Public consumption 0.7 5.1 4.3 4.3 3.6 4.8 4.5 -0.1 2.0 0.2 -0.6 1.4 0.0 1.2 1.9 1.6
TOTAL CONSUMPTION 4.2 5.9 5.2 4.8 2.6 4.0 -0.3 1.2 2.3 2.4 1.9 3.1 3.3 3.1 2.3 1.6
Residential investment                23.6 14.7 2.3 -5.0 -2.1 1.8 -21.3 -8.6 0.3 -0.5 19.4 14.5 22.6 10.8 1.6 0.1
Non-market investment                 10.8 15.0 11.9 8.2 -1.9 -8.0 22.3 -0.3 -0.8 -24.6 -9.9 1.6 2.7 2.4 2.4 2.4
Market investment                     3.8 12.9 11.8 10.9 -2.2 11.2 -4.4 -11.8 5.7 11.2 4.9 11.3 9.6 4.3 3.8 2.8
TOTAL INVESTMENT 8.6 13.5 8.4 6.6 -2.7 7.4 -7.8 -9.5 1.8 4.4 7.3 11.8 13.6 5.7 3.5 2.4
Stock change (contribution to growth) -0.1 0.3 0.3 -0.5 -1.1 1.2 -0.5 -1.1 1.0 0.5 -0.4 0.2 0.2 -0.1 -0.2 -0.1
GROSS NATIONAL EXPENDITURE 4.9 7.7 6.2 4.8 0.3 5.7 -2.3 -2.1 3.0 3.5 2.3 5.2 6.3 3.7 2.5 1.7
Exports 7.4 2.0 3.9 -0.3 3.8 3.7 -2.7 4.0 2.9 2.7 2.6 -0.7 1.4 2.1 2.7 2.6
Imports 7.1 13.3 13.2 4.8 -1.6 10.8 -4.0 -8.9 11.4 6.6 1.2 8.2 6.6 4.4 3.7 1.6
EXPENDITURE ON GDP 5.0 4.2 3.5 3.3 1.8 3.5 -1.9 2.2 0.7 2.3 2.6 2.5 3.9 3.0 2.1 2.1
GDP (production measure) 4.8 4.4 3.7 3.5 2.8 2.9 -1.9 -0.1 1.8 2.4 2.3 3.0 4.0 3.0 2.1 2.1
 - annual % change 4.5 5.4 2.4 3.5 3.4 1.3 -3.0 2.1 1.2 3.2 2.1 3.4 4.0 2.4 2.0 2.2
Real GDP per capita 3.3 2.5 2.1 2.3 1.5 1.8 -2.9 -1.2 0.6 1.5 1.6 2.0 2.2 1.7 1.1 1.2
Nominal GDP (expenditure basis) 5.2 6.9 7.0 5.5 5.1 8.3 0.8 2.6 4.5 4.2 2.2 6.7 5.7 4.3 4.5 3.7
GDP deflator 0.2 2.6 3.4 2.1 3.2 4.6 2.8 0.4 3.9 1.8 -0.5 4.1 1.7 1.3 2.3 1.6
Output gap (% deviation, March year average) 0.4 1.0 1.3 1.7 1.9 2.8 -0.6 -2.1 -1.9 -1.5 -1.2 -0.4 0.8 1.2 0.6 0.2
Employment 2.8 3.0 3.6 2.8 2.2 1.7 0.5 -1.3 1.2 1.4 0.3 2.4 3.0 1.8 1.3 1.2
Unemployment (% March quarter s.a.)          5.0 4.3 3.9 4.0 3.9 3.8 5.2 6.2 6.7 6.8 6.2 5.9 5.4 5.1 4.8 4.4
Wages (average ordinary-time hourly, ann % change)         2.3 3.5 3.6 5.4 4.6 4.7 5.5 1.0 2.6 3.8 2.1 3.0 2.7 3.1 3.5 3.5
CPI inflation (ann % change)      2.5 1.5 2.8 3.3 2.5 3.4 3.0 2.0 4.5 1.6 0.9 1.5 1.8 2.5 2.3 2.0
Merchandise terms of trade (SNA basis)       -5.5 4.5 3.6 -1.7 -1.1 8.6 0.3 -7.5 10.6 1.4 -5.9 13.2 1.6 -4.9 0.9 0.2
House prices (ann % change) 14.7 23.4 13.5 12.2 11.7 2.8 -9.2 6.4 -1.5 3.6 7.6 8.0 7.3 4.3 2.5 2.4
Current account balance - $billion -2.6 -4.1 -8.0 -12.8 -11.6 -12.4 -13.2 -2.8 -5.6 -6.4 -8.3 -7.0 -10.4 -14.6 -16.0 -17.1
Current account balance - % of GDP           -1.9 -2.9 -5.2 -7.9 -6.9 -6.8 -7.1 -1.5 -2.8 -3.1 -3.9 -3.1 -4.4 -5.9 -6.2 -6.3
TWI (March quarter)                          60.6 66.9 69.6 68.3 68.8 71.9 53.7 65.3 67.2 72.5 75.9 78.7 78.6 78.4 76.9 73.2
90-day bank bill rate (March quarter)        5.8 5.5 6.9 7.6 7.8 8.8 3.7 2.7 3.0 2.7 2.7 3.0 4.3 4.8 4.9 5.3
10-year bond rate (March quarter) 6.0 5.9 6.0 5.7 5.9 6.4 4.6 5.9 5.6 4.0 3.7 4.6 4.8 5.0 5.1 5.2

Based on data available at 17 April 2014. CPI, TWI and interest rates are actuals for 2014.

Additional Information

The following information forms part of the Budget Economic and Fiscal Update 2014 (Budget Update), released by the Treasury on 15 May 2014. This information provides further details on the Budget Update and should be read in conjunction with the published document. The additional information includes:

Detailed Economic Forecast Information

This section includes a series of tables to provide additional detail on the economic forecasts presented in the Budget Update.

Table 1 Real Gross Domestic Product

Table 2 Consumers price index and exchange rates

Table 3 Gross domestic expenditure and income

Table 4 Labour market indicators

Table 5 Exports - SNA basis

Table 6 Imports - SNA basis

Table 7 Balance of payments - current account

Table 1 - Real Gross Domestic Product (production measure)

Chain-volume series expressed in 1995/96 prices
Seasonally Adjusted
  $ million Quarterly
% change
Annual
% change
Annual Average
% change
2011Q1 35,436 0.9 1.2 1.8
2011Q2 35,709 0.8 0.9 1.2
2011Q3 36,035 0.9 2.1 1.2
2011Q4 36,253 0.6 3.2 1.9
2012Q1 36,578 0.9 3.2 2.4
2012Q2 36,646 0.2 2.6 2.8
2012Q3 36,725 0.2 1.9 2.7
2012Q4 37,166 1.2 2.5 2.6
2013Q1 37,356 0.5 2.1 2.3
2013Q2 37,510 0.4 2.4 2.2
2013Q3 37,949 1.2 3.3 2.6
2013Q4 38,304 0.9 3.1 2.7
2014Q1 38,630 0.9 3.4 3.0
2014Q2 38,997 1.0 4.0 3.4
2014Q3 39,427 1.1 3.9 3.6
2014Q4 39,855 1.1 4.0 3.8
2015Q1 40,162 0.8 4.0 4.0
2015Q2 40,418 0.6 3.6 3.9
2015Q3 40,702 0.7 3.2 3.7
2015Q4 40,928 0.6 2.7 3.4
2016Q1 41,136 0.5 2.4 3.0
2016Q2 41,327 0.5 2.2 2.6
2016Q3 41,556 0.6 2.1 2.4
2016Q4 41,764 0.5 2.0 2.2
2017Q1 41,977 0.5 2.0 2.1
2017Q2 42,195 0.5 2.1 2.1
2017Q3 42,425 0.5 2.1 2.1
2017Q4 42,655 0.5 2.1 2.1
2018Q1 42,896 0.6 2.2 2.1
2018Q2 43,160 0.6 2.3 2.2

Source: Statistics New Zealand, the Treasury

Table 2 - Consumers price index and exchange rates

  Consumers Price Index Exchange rates
  Index Quarterly
% change
Annual
% change
TWI USD
2011Q1 1146 0.8 4.5 67.2 0.76
2011Q2 1157 1.0 5.3 69.1 0.80
2011Q3 1162 0.4 4.6 72.0 0.83
2011Q4 1158 -0.3 1.8 68.7 0.78
2012Q1 1164 0.5 1.6 72.5 0.82
2012Q2 1168 0.3 1.0 71.3 0.79
2012Q3 1171 0.3 0.8 72.7 0.81
2012Q4 1169 -0.2 0.9 73.6 0.82
2013Q1 1174 0.4 0.9 75.9 0.83
2013Q2 1176 0.2 0.7 76.5 0.82
2013Q3 1187 0.9 1.4 75.3 0.80
2013Q4 1188 0.1 1.6 77.3 0.83
2014Q1 1192 0.3 1.5 78.7 0.84
2014Q2 1197 0.4 1.8 79.0 0.85
2014Q3 1206 0.7 1.6 78.8 0.83
2014Q4 1208 0.1 1.6 78.7 0.83
2015Q1 1214 0.5 1.8 78.6 0.83
2015Q2 1220 0.5 1.9 78.6 0.83
2015Q3 1231 0.9 2.1 78.5 0.83
2015Q4 1234 0.2 2.2 78.5 0.84
2016Q1 1244 0.8 2.5 78.4 0.84
2016Q2 1251 0.6 2.6 78.3 0.83
2016Q3 1262 0.9 2.5 78.0 0.83
2016Q4 1264 0.2 2.4 77.5 0.83
2017Q1 1273 0.7 2.3 76.9 0.82
2017Q2 1279 0.5 2.2 76.1 0.81
2017Q3 1289 0.8 2.1 75.3 0.80
2017Q4 1290 0.1 2.1 74.3 0.80
2018Q1 1299 0.7 2.0 73.2 0.79
2018Q2 1305 0.4 2.0 72.2 0.78

Source: RBNZ, Statistics New Zealand, the Treasury

Table 3 - Expenditure on Gross Domestic Product and Gross Domestic Product (income) in current prices

 
March Year 2013
Estimate
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
  $million %volume %price $million %volume %price $million %volume %price $million %volume %price $million %volume %price $million
Consumption:                                
- Private 126,230 3.6 0.7 131,670 4.1 1.2 138,761 3.6 2.0 146,636 2.4 2.1 153,367 1.6 2.0 159,037
- Public 41,238 1.4 1.1 42,264 0.0 2.2 43,203 1.2 2.4 44,760 1.9 2.2 46,614 1.6 2.0 48,280
Gross Fixed Capital Formation:                                
- Residential 10,979 14.5 4.5 13,134 22.6 5.2 16,939 10.8 4.5 19,605 1.6 4.3 20,768 0.1 4.3 21,700
- Market * 28,276 11.3 -1.5 30,977 9.6 2.4 34,781 4.3 2.4 37,142 3.8 2.2 39,399 2.8 2.2 41,418
- Non-market ** 2,728 1.6 2.4 2,840 2.7 4.2 3,042 2.4 2.4 3,191 2.4 2.4 3,347 2.4 2.4 3,511
- Total all sectors 41,943 11.8 0.1 46,935 13.6 2.2 54,474 5.7 3.6 59,658 3.5 2.4 63,234 2.4 2.5 66,349
Change in Stocks 841     1,750     1,714     1,577     1,311     1,114
Gross National Expenditure 210,256 5.2 0.7 222,659 6.3 0.6 238,156 3.7 2.3 252,634 2.5 2.2 264,529 1.7 2.1 274,784
Exports 62,762 -0.7 6.2 66,235 1.4 -2.8 65,229 2.1 -3.5 64,328 2.7 2.3 67,608 2.6 6.0 73,516
Imports 61,101 8.2 -4.7 63,009 6.6 -4.4 64,258 4.4 0.3 67,294 3.7 2.2 71,342 1.6 7.3 77,733
Expenditure on GDP 211,867 2.5 4.1 226,100 3.9 1.7 238,961 3.0 1.3 249,321 2.1 2.3 260,466 2.1 1.6 270,199
Statistical Discrepancy -228     -241     -252     -261     -271     -280
Gross Domestic Product 211,639     225,859     238,709     249,060     260,194     269,919
Compensation of employees 95,756     100,849     106,419     111,154     116,088     121,381
Operating Surplus, net:                                 
- Agriculture 5,942     7,972     7,894     7,600     8,140     8,538
- Other 54,488     58,724     62,753     65,217     67,709     68,715
- Total all sectors 60,430     66,696     70,647     72,817     75,849     77,252
Consumption of fixed capital 29,150     30,608     32,138     33,745     35,432     37,204
Indirect Taxes 27,031     28,434     30,233     32,072     33,554     34,811
Less subsidies 728     728     728     728     728     728
Gross Domestic Product 211,639     225,859     238,709     249,060     260,194     269,919

* Includes Local Government and Non-profit Organisations

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

Source: Statistics New Zealand, the Treasury

Table 4 - Labour market indicators

Annual Average Percentage Change
March Year
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Real GDP (production basis) 2.3 3.0 4.0 3.0 2.1 2.1
Working Age Population 0.8 1.2 1.6 1.4 1.1 1.0
Labour Force 0.5 1.7 2.4 1.4 0.9 0.8
Employment 0.3 2.4 3.0 1.8 1.3 1.2
Labour Productivity* 1.6 1.4 1.3 1.5 1.1 1.1
CPI (annual percentage change) 0.9 1.5 1.8 2.5 2.3 2.0
Average Ordinary Time Hourly Wages 2.6 2.6 2.9 3.0 3.4 3.5
Average Weekly Earnings 2.9 2.6 2.3 2.6 3.1 3.3
Real Wages 1.7 1.3 1.2 0.8 0.9 1.4
Compensation of Employees 4.0 5.3 5.5 4.4 4.4 4.6
Unit Labour Costs (Hours worked basis) 1.0 1.3 1.6 1.4 2.3 2.4
Real Unit Labour Costs 0.1 -0.1 -0.1 -0.7 -0.2 0.2

* Hours worked basis

Number (000's)
As at March Quarter
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Total Population 4,464 4,521 4,584 4,633 4,676 4,718
     Natural Increase 31 26 27 32 31 30
     Net  Migration 2 31 35 17 12 12
     Annual Change 33 57 63 49 43 42
Working Age Population      3,511 3,560 3,617 3,661 3,699 3,735
     Annual Change           29 49 56 44 38 37
Not in the labour force (s.a.)     1,128 1,104 1,111 1,127 1,143 1,159
     Annual Change          36 -24 7 16 17 15
Labour Force (s.a.) 2,383 2,457 2,506 2,534 2,555 2,577
     Annual Change          -7 74 49 29 21 21
Total Employment (s.a.)           2,235 2,311 2,369 2,404 2,434 2,462
     Annual Change          8 76 59 35 30 28
Unemployment (s.a.)             148 146 136 131 122 115
     Annual Change          -15 -2 -9 -6 -9 -7
Participation Rate (%sa)    67.9 69.0 69.3 69.2 69.1 69.0
Unemployment Rate (%sa)     6.2 5.9 5.4 5.1 4.8 4.4

Source: Statistics New Zealand, The Treasury

Table 5 - Exports - SNA basis

Breakdown of Exports

  Dairy Products Meat and Meat Products Non-Commodity*
March Years %volume %price $million %volume %price $million %volume %price $million
2010 32.5 -32.0 9,045 -1.9 -7.5 5,285 -5.3 -7.4 13,270
2011 -0.7 29.6 11,667 -2.6 6.4 5,484 6.7 2.4 14,489
2012 9.0 0.4 12,777 -5.2 10.4 5,748 3.5 2.1 15,322
2013 18.4 -16.5 12,593 10.0 -8.9 5,746 -2.2 -4.9 14,263
2014 -6.1 32.8 15,869 -0.4 -1.6 5,646 -0.1 -2.0 13,972
2015 8.8 -7.8 15,817 -2.2 -4.8 5,256 2.7 2.3 14,675
2016 1.7 -16.8 13,376 2.8 -1.1 5,343 1.8 3.0 15,374
2017 3.2 1.4 14,010 2.3 1.8 5,570 1.9 4.4 16,362
2018 3.2 6.0 15,335 2.0 6.4 6,050 2.3 8.8 18,211
  Total Goods** Services Total Exports
March Years   %volume %price $million %volume %price $million %volume %price $million
2010 6.8 -15.4 40,053 -3.6 -0.8 15,760 4.0 -11.7 55,813
2011 3.3 10.2 45,565 1.6 -0.4 15,949 2.9 7.2 61,515
2012 2.7 3.2 48,294 2.8 1.6 16,670 2.7 2.8 64,964
2013 5.3 -8.0 46,775 -5.0 0.9 15,986 2.6 -5.8 62,762
2014 -0.5 7.4 50,086 -0.1 1.1 16,149 -0.7 6.2 66,235
2015 2.2 -3.7 49,279 -1.6 0.3 15,947 1.4 -2.8 65,229
2016 1.9 -4.8 47,816 3.0 0.5 16,509 2.1 -3.5 64,328
2017 2.4 2.9 50,387 3.9 0.4 17,217 2.7 2.3 67,608
2018 2.5 7.4 55,474 2.9 1.8 18,038 2.6 6.0 73,516

* Consists of 'Metal Products and Machinery Equipment', 'Chemicals, Rubber and Other Non-Metallic Goods' and 'Textile, Apparel and Leather'

** Note that Statistics NZ withholds data for some components of exports for confidentiality reasons. As a result we have not published the "Wood and Wood Products' and 'Other Goods' components of exports.

Source: Statistics New Zealand, The Treasury

Table 6 - Imports - SNA basis

  Capital Goods (Value for Duty) Mineral Fuel* (VFD) Intermediate Goods** (VFD) Consumption Goods (VFD)
March
Years
%volume %price $million %volume %price $million %volume %price $million %volume %price $million
2010 -26.3 0.3 6,204 1.6 -27.4 6,059 -10.7 -9.8 14,806 -5.1 -1.3 10,843
2011 26.7 -5.3 7,429 -1.7 16.4 6,945 13.4 0.5 16,922 7.5 -4.7 11,116
2012 14.8 -6.5 7,974 5.8 19.5 8,795 6.4 0.4 18,062 5.7 -2.1 11,502
2013 7.4 -6.3 8,035 -3.0 0.5 8,537 0.8 -2.3 17,785 4.1 -1.4 11,799
2014 19.2 -6.5 8,956 -0.7 -5.9 8,020 7.9 -2.8 18,666 6.1 -3.1 12,120
2015 8.1 -3.3 9,359 5.0 -11.0 7,484 4.8 -2.3 19,117 6.7 -2.0 12,679
2016 5.0 -1.4 9,686 7.6 -5.2 7,638 3.0 1.6 20,016 6.7 1.5 13,726
2017 4.2 0.0 10,093 4.8 -2.4 7,807 3.3 3.6 21,427 5.4 3.2 14,920
2018 1.2 4.3 10,651 2.1 3.5 8,249 1.9 8.6 23,709 2.9 7.7 16,542
  Total Goods (VFD) Services Total  
March
Years  
%volume %price $million %volume %price $million %volume %price $million
2010 -10.5 -8.5 38,048 -4.2 -6.0 13,246 -8.9 -7.9 51,294
2011 12.4 -0.4 42,616 8.5 -1.1 14,235 11.4 -0.6 56,852
2012 6.9 1.8 46,383 5.7 -0.2 15,032 6.6 1.3 61,415
2013 1.8 -2.2 46,198 -0.8 -0.1 14,903 1.2 -1.7 61,101
2014 8.9 -4.9 47,838 6.2 -4.2 15,171 8.2 -4.7 63,009
2015 7.5 -5.3 48,704 3.1 -0.5 15,554 6.6 -4.4 64,258
2016 4.9 0.1 51,130 2.5 1.4 16,163 4.4 0.3 67,294
2017 4.1 2.0 54,312 2.3 3.0 17,030 3.7 2.2 71,342
2018 1.7 7.2 59,215 1.0 7.6 18,518 1.6 7.3 77,733

* Consists of 'Fuels and Lubricants' and 'Petrol and Aviation Gas'

** Consists of 'Intermediate Goods' excluding 'Fuels and Lubricants' and 'Passenger Cars'

Source: Statistics New Zealand, The Treasury

Table 7 - Balance of payments - current account

Year ended March 2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Exports Goods 46,775 50,086 49,279 47,816 50,387 55,474
annual % change -3.1 7.1 -1.6 -3.0 5.4 10.1
Imports Goods 46,198 47,838 48,704 51,130 54,312 59,215
annual % change -0.4 3.6 1.8 5.0 6.2 9.0
Balance on Goods 577 2,248 575 -3,315 -3,925 -3,741
% of nominal GDP 0.3 1.0 0.2 -1.3 -1.5 -1.4
Exports Services 15,986 16,149 15,947 16,509 17,217 18,038
annual % change -4.1 1.0 -1.3 3.5 4.3 4.8
Imports Services 14,903 15,171 15,554 16,163 17,030 18,518
annual % change -0.9 1.8 2.5 3.9 5.4 8.7
Balance on services 1,083 978 393 346 187 -480
% of nominal GDP 0.5 0.4 0.2 0.1 0.1 -0.2
Balance on goods & services 1,660 3,226 968 -2,969 -3,738 -4,221
% of nominal GDP 0.8 1.4 0.4 -1.2 -1.4 -1.6
Income and transfers balance          -9,975 -10,336 -11,409 -11,623 -12,307 -12,829
% of nominal GDP -4.7 -4.6 -4.8 -4.7 -4.7 -4.7
Current account balance    -8,320 -7,017 -10,441 -14,592 -16,045 -17,050
% of nominal GDP -3.9 -3.1 -4.4 -5.9 -6.2 -6.3

Source: Statistics New Zealand, The Treasury

Treasury and 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 forecasts, were based on the Treasury's macroeconomic forecasts. The two sets of forecasts differ from each other because of the different modelling approaches used by the two agencies and the various assumptions and judgements made by the forecasting teams in producing their forecasts.

In this Budget Update, the two sets of tax forecasts are quite close to each other by historical standards, with the largest difference in any one year being $201 million (0.1% of GDP). Over the whole forecast period, the Treasury's forecasts are generally lower than Inland Revenue's. The main point of difference occurs in the forecasts of resident withholding tax on interest.

The following two tables detail the respective forecasts by the Treasury and the IRD for tax revenue and receipts across each of the various sources:

Table 8 Treasury and IRD forecasts of tax revenue (accrual)

Table 9 Treasury and IRD forecasts of tax receipts (cash)

Table 8 - Treasury and IRD forecasts of tax revenue (accrual)

2012/13
Actual
2013/14
Forecast
2014/15
Forecast
2015/16
Forecast
2016/17
Forecast
2017/18
Forecast
$ million   Treasury IRD Difference Treasury IRD Difference Treasury IRD Difference Treasury IRD Difference Treasury IRD Difference

Direct tax

                               

Individuals

                               
Source deductions 22,768 24,266 24,296 (30) 25,684 25,814 (130) 27,094 27,196 (102) 28,648 28,719 (71) 30,328 30,325 3
Other persons tax 5,210 5,161 5,122 39 5,428 5,473 (45) 5,681 5,654 27 5,955 5,852 103 6,106 5,967 139
Refunds (1,644) (1,531) (1,497) (34) (1,395) (1,495) 100 (1,520) (1,554) 34 (1,609) (1,591) (18) (1,635) (1,550) (85)
Fringe benefit tax 480 487 482 5 512 506 6 533 522 11 556 542 14 581 561 20
Subtotal: Individuals 26,814 28,383 28,403 (20) 30,229 30,298 (69) 31,788 31,818 (30) 33,550 33,522 28 35,380 35,303 77
Company tax (net) 10,026 10,286 10,456 (170) 10,482 10,454 28 10,964 10,909 55 11,321 11,233 88 11,648 11,419 229

Withholding taxes on:

                               
Resident interest income 1,631 1,642 1,636 6 2,007 2,102 (95) 2,638 2,865 (227) 3,022 3,217 (195) 3,381 3,658 (277)
Non-resident income 420 421 401 20 481 475 6 528 514 14 551 530 21 569 543 26
Foreign-source dividends 2 2 1 1 2 1 1 2 1 1 2 1 1 2 1 1
Resident dividend income 516 472 448 24 495 493 2 516 512 4 534 527 7 545 532 13
Subtotal: Withholding tax 2,569 2,537 2,486 51 2,985 3,071 (86) 3,684 3,892 (208) 4,109 4,275 (166) 4,497 4,734 (237)
Total direct tax 39,409 41,206 41,345 (139) 43,696 43,823 (127) 46,436 46,619 (183) 48,980 49,030 (50) 51,525 51,456 69

Indirect tax

                               
GST (net) 21,356 22,591 22,515 76 24,163 24,175 (12) 25,577 25,536 41 26,560 26,687 (127) 27,682 27,580 102

Excise duties on:

                               
Alcoholic drinks 663 655 650 5 681 700 (19) 707 730 (23) 738 770 (32) 770 800 (30)
Tobacco products 281 274 265 9 286 295 (9) 297 310 (13) 309 320 (11) 308 325 (17)
Petroleum fuels 855 848 850 (2) 936 950 (14) 1,088 1,010 78 1,214 1,030 184 1,246 1,050 196
Subtotal: excise duties 1,799 1,777 1,765 12 1,903 1,945 (42) 2,092 2,050 42 2,261 2,120 141 2,324 2,175 149

Other indirect tax

                               
Customs duty 2,056 2,190 2,160 30 2,284 2,225 59 2,323 2,325 (2) 2,304 2,455 (151) 2,323 2,525 (202)
Road user charges 1,066 1,162 1,190 (28) 1,268 1,295 (27) 1,366 1,395 (29) 1,425 1,450 (25) 1,473 1,505 (32)
Gaming duties 267 267 263 4 267 265 2 271 268 3 274 271 3 278 275 3
Motor vehicle fees 174 186 185 1 195 190 5 202 195 7 208 200 8 213 205 8
Exhaustible resource levy 34 36 34 2 36 32 4 36 31 5 36 30 6 36 29 7
Approved issuer levy, cheque duty & other 86 98 101 (3) 95 102 (7) 95 101 (6) 95 101 (6) 95 101 (6)
Subtotal: Other indirect tax 3,683 3,939 3,933 6 4,145 4,109 36 4,293 4,315 (22) 4,342 4,507 (165) 4,418 4,640 (222)
Total indirect tax 26,838 28,307 28,213 94 30,211 30,229 (18) 31,962 31,901 61 33,163 33,314 (151) 34,424 34,395 29
Total tax 66,247 69,513 69,558 (45) 73,907 74,052 (145) 78,398 78,520 (122) 82,143 82,344 (201) 85,949 85,851 98
Total tax (% of GDP) 31.1% 30.1% 30.1% 0.0% 30.7% 30.7% 0.0% 31.1% 31.1% 0.0% 31.2% 31.3% -0.1% 31.5% 31.5% 0.0%

less Core Crown tax eliminations

                               
Core Crown income tax 984 832 832   585 585   631 631   681 681   735 735  
GST on Crown expenses and departmental outputs 6,151 6,306 6,306   6,401 6,401   6,687 6,687   6,887 6,887   7,079 7,079  
Crown ESCT 421 448 448   449 449   456 456   463 463   468 468  
Crown AIL 41 30 30   30 30   30 30   30 30   30 30  
Core Crown taxation 58,651 61,896 61,942 (45) 66,442 66,587 (145) 70,594 70,716 (122) 74,082 74,283 (201) 77,636 77,539 98
Core Crown tax (% of GDP) 27.5% 26.8% 26.8% 0.0% 27.6% 27.6% 0.0% 28.0% 28.0% 0.0% 28.2% 28.3% -0.1% 28.5% 28.4% 0.0%

less Total Crown tax eliminations

                               
Income tax from SOEs and CEs 446 454 454   549 549   610 610   660 660   711 711  
Other Crown GST ..  ..  ..    ..  ..    ..  ..    ..  ..    ..  ..   
ESCT from SOEs and CEs 17 7 7   11 11   11 11   10 10   11 11  
Lottery duty 54