The Budget Economic and Fiscal Update (BEFU) 2015 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 1 May 2015 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 1 May 2015. This Update does not incorporate any decisions, circumstances or statements that the Minister of Finance has determined, in accordance with section 26V of the Public Finance Act 1989, should not be incorporated in this Update.

Gabriel Makhlouf
Secretary to the Treasury

11 May 2015

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 1 May 2015 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 Part 2 (Fiscal responsibility) of the Public Finance Act 1989.

Hon Bill English
Minister of Finance

11 May 2015

Executive Summary

  • New Zealand's economic expansion has continued to strengthen. Real gross domestic product (GDP) grew 3.3% in the year ended December 2014, the fastest pace of growth since 2007 and one of the strongest growth performances in the Organisation for Economic Cooperation and Development (OECD).
  • Looking forward, real GDP growth is forecast to average 2.8% per year over the four years to 2019, consistent with the forecasts in the Half Year Update. Low interest rates, robust investment activity, strong population growth and historically high terms of trade remain the key factors supporting the growth outlook. Sluggish global growth, drought and restraint in government spending provide partial offsets. The high New Zealand dollar acts as a constraint on export growth, although households and businesses benefit from increased purchasing power.
  • Nominal GDP growth is forecast to soften during 2015, reaching a low of 2.0% in the year to September, before strengthening later this year to average 4.3% per year over the four years to 2019 (Figure 1). Compared to the Half Year Update, nominal GDP growth is weaker in 2016 and 2017 owing to a softer outlook for inflation, but is stronger in 2018 and 2019.
Figure 1 - Real and nominal GDP growth
Figure 1 - Real and nominal GDP growth.
Sources: Statistics New Zealand, the Treasury
  • The fiscal position continues to strengthen, although at a more modest rate than forecast in the Half Year Update. A slightly larger deficit is forecast for the current 2014/15 fiscal year, while surpluses from 2015/16 are smaller than previously anticipated. On average, the Government's fiscal stance is mildly contractionary over the forecast horizon.
  • Several economic judgements underpin this Budget Update. The most significant relate to the prospects for trading partner growth, the future path of oil and dairy prices, the extent and duration of the current net migration boom and the amount of spare capacity in the economy and its relationship with inflation.
  • The global economic recovery is forecast to continue at a gradual pace. The recovery remains on track in the US, and growth is picking up from a slow pace in the euro area and Japan. However, Australian growth is expected to remain below trend for longer, while China's growth is forecast to slow as housing demand weakens further.
  • After remaining low for most of this year, oil prices are assumed to rise gradually and by the end of the forecast period are back at levels similar to those forecast in the Half Year Update. Dairy prices are forecast to recover from current low levels in the second half of 2015, in line with the Half Year Update. Recent oil and dairy price movements are broadly consistent with this outlook.
  • Net migration inflows reached a record high in March this year, and have exceeded the forecasts in the Half Year Update. Annual net inflows are now expected to peak at around 57,000, before returning to the long-run average net inflow of 12,000 by 2017.
  • Solid growth in economic activity has reduced the amount of spare capacity in the economy, with several indicators suggesting it is now mostly exhausted. Even so, annual consumer price inflation has weakened, slipping to 0.1% in the March 2015 quarter. A mix of factors have contributed to the recent low inflation outturns, including falling oil prices, the high New Zealand dollar and heightened retail competition. Overall, inflation is now expected to be much weaker in 2015 and 2016 relative to the Half Year Update, before rising to 2.0% in late 2016 as capacity pressures develop (Figure 2).
Figure 2 - CPI inflation
Figure 2 - CPI inflation.
Sources: Statistics New Zealand, the Treasury
  • Low inflation and further increases in labour supply are expected to lead to subdued nominal wage growth over the coming year. However, lower inflation means that, in real terms, purchasing power increases more rapidly in the near term compared to the Half Year Update. Over time, wage growth is forecast to strengthen as employment growth continues and the unemployment rate falls.
  • A weaker outlook for inflation means interest rates are expected to remain lower for longer than anticipated in the Half Year Update, with recent developments raising the prospect of interest rate reductions in the coming year. However, New Zealand's relatively strong growth and high interest rates are assumed to keep upward pressure on the exchange rate, with the trade-weighted index (TWI) higher than in the Half Year Update across the forecast horizon.
  • Core Crown tax revenue is expected to rise in each of the next four years, reaching $80.5 billion or just above 28% of GDP in 2018/19. With the exception of 2014/15, growth in tax revenue is expected to be slower than in the Half Year Update owing largely to downward revisions to the outlook for nominal GDP growth, wage growth and interest rates.
Figure 3 - Core Crown revenue and expenses
Figure 3 - Core Crown revenue and expenses.
Source: The Treasury
  • Core Crown expenses are forecast to continue to decline as a share of GDP, falling from 30.5% in 2013/14 to 29.2% in 2018/19. Future operating allowances remain unchanged from the Half Year Update at $1.0 billion for Budget 2016, rising to $2.5 billion in Budget 2017 and reducing to $1.5 billion in Budget 2018.
  • In addition to the Budget 2015 package, the Government has also signalled further reductions in Accident Compensation Corporation (ACC) levy rates of around $1.5 billion across the forecast period. On average, the reductions are expected to lower the operating balance before gains and losses (OBEGAL) by $0.6 billion per year from 2016/17.
  • OBEGAL is forecast to move from a deficit of $0.7 billion this fiscal year, to a surplus of $0.2 billion in 2015/16 and $3.6 billion in 2018/19 (Figure 4).
Figure 4 - OBEGAL, core Crown residual cash and net core Crown debt
Figure 4 - OBEGAL, core Crown residual cash and net core Crown debt.
Source: The Treasury
  • Net capital spending is forecast to exceed operating cash flows until 2018/19, while core Crown residual cash returns to surplus in the 2018/19 year. Over the entire forecast period, a residual cash shortfall of $6.9 billion is expected and is funded through additional borrowing and reductions in financial assets. Net core Crown debt is expected to peak at 26.3% of GDP in 2015/16, before reducing to 22.9% of GDP in 2018/19.
  • The government bond programme is expected to raise funds of $36.5 billion over the forecast period, while $34.8 billion of existing debt will be repaid, providing net cash proceeds of $1.7 billion.
  • Following a decline over recent years, the Crown's 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. Net worth is forecast to be $93.6 billion in 2018/19 or 32.8% of GDP.
  • Within the balance sheet, financial assets are forecast to increase (particularly the Crown's investment portfolios) to around 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 reduce debt.
  • The main economic and fiscal risks associated with the central forecast relate largely to the key judgements in this Budget Update. The Risks and Scenarios chapter provides two scenarios to illustrate how sensitive the central forecasts are to some of these judgements (Figure 5).
Figure 5 - OBEGAL scenarios
Figure 5 - OBEGAL scenarios.
Source: The Treasury
  • Scenario one is based on a larger fall in New Zealand's export commodity prices, and consequently a lower terms of trade, and weaker global inflation. In this scenario, the OBEGAL does not return to surplus until the June 2018 year, two years later than the central forecast. Scenario two considers the domestic demand impact from a larger household spending response to the low inflation environment and higher net migration. In this scenario, the OBEGAL returns to surplus in the 2015/16 year, the same as in the central forecast, but the surplus is larger.
  • 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. A number of contingent liabilities and fiscal risks are outlined in the Specific Fiscal Risks chapter.
Table 1 - Summary of the Treasury's main economic and fiscal forecasts
  2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast

Economic (March years, %)

           
Real GDP growth1 2.5 3.3 3.1 2.8 2.8 2.4
Unemployment rate2 6.1 5.6 5.1 4.7 4.5 4.5
CPI inflation3 1.5 0.2 1.4 2.1 2.0 2.1
Current account balance4 -2.6 -4.1 -5.6 -4.9 -5.1 -5.3

Fiscal (June years, % of GDP)

           
Total Crown OBEGAL5 -1.3 -0.3 0.1 0.6 0.7 1.3
Net core Crown debt6 25.6 25.7 26.3 25.5 24.4 22.9

Notes:

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

Sources: Statistics New Zealand, the Treasury

Finalisation dates for the Budget Update

 
  Date
Economic data 10 April 2015
Economic forecasts 10 April 2015
Tax revenue forecasts 17 April 2015
Fiscal forecasts 1 May 2015
Specific fiscal risks 1 May 2015
Text finalised 12 May 2015

Note: Data releases since the finalisation of the economic forecasts show that in the March 2015 quarter annual Consumers Price Index (CPI) inflation was 0.1% and that the unemployment rate was steady at a revised 5.8%. These and other recent developments have not significantly changed the outlook presented in this Budget Update. The changes to ACC levies announced on 11 May 2015 were decided in time to be included in the fiscal outlook but not the economic outlook. The economic impact of the ACC levy reduction is not expected to significantly alter the economic outlook.

Economic Outlook

Overview

  • Economic growth was 3.3% in the year ended December 2014. Growth of over 3.0% is expected in the year ahead, supported by net migration inflows, labour income growth, stimulatory interest rates and construction activity. Drought is likely to have had a small negative impact on GDP growth in the first half of 2015.
  • Real GDP growth is expected to moderate as migration inflows ease, construction growth slows and interest rates rise in response to increasing capacity pressures. Government expenditure growth is forecast to remain subdued, exerting a mild constraining influence on demand in most years of the forecast. The high exchange rate remains a headwind for export growth but households benefit from increased purchasing power.
  • Global oil prices have fallen considerably since the Half Year Update, reflecting ongoing increases in supply and an easing in demand. Lower oil import prices are feeding through to the economy via lower inflation and increased purchasing power, providing a partial offset to the reduced income associated with lower dairy prices. This is reflected in a smaller fall in the terms of trade than was forecast in the Half Year Update.
  • Lower fuel prices, particularly in the March quarter, and an appreciating exchange rate have contributed to lower tradables inflation. Non-tradables inflation has eased as the economy has operated with a degree of spare capacity and non-tradables inflation is expected to remain low in the near term. Looking forward, continued above-trend growth is expected to generate greater upward pressure on non-tradables prices. In addition, tradables inflation is forecast to increase as international oil prices rise and the exchange rate stabilises, causing headline inflation to rise to around 2.0% in late 2016.
  • The weaker domestic price outlook is reflected in a lower level of nominal GDP over the forecast period compared to the Half Year Update. Nominal GDP growth is forecast to be slower in the years ending June 2016 and 2017, but faster in the later years of the forecast period. Over the five-year forecast period, nominal GDP is forecast to be a cumulative $5.0 billion lower compared to the Half Year Update.
Table 1.1 - Economic forecasts1
(Annual average % change,
March years)
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Private consumption 2.9 3.7 3.9 2.8 2.7 2.8
Public consumption 2.7 3.2 0.9 0.4 2.3 1.9
Total consumption 2.8 3.5 3.2 2.3 2.6 2.6
Residential investment 16.7 13.9 11.9 5.3 6.0 0.2
Market investment 8.3 6.7 5.4 5.1 2.9 2.4
Non-market investment 12.5 -6.4 2.6 2.4 2.4 2.4
Total investment 10.4 7.5 8.1 5.0 3.6 1.8
Stock change2 0.2 0.2 -0.3 0.3 0.2 0.1
Gross national expenditure 4.6 4.6 4.2 3.2 3.1 2.5
Exports 0.2 2.2 0.5 3.5 3.2 3.3
Imports 8.0 7.0 3.5 4.5 4.0 3.3
GDP (expenditure measure) 2.4 3.2 3.3 2.8 2.8 2.4
GDP (production measure) 2.5 3.3 3.1 2.8 2.8 2.4
Real GDP per capita 1.6 1.7 1.3 1.7 1.8 1.5
Nominal GDP (expenditure measure) 6.8 3.9 3.3 5.3 4.8 4.1
GDP deflator 4.2 0.7 0.0 2.4 2.0 1.7
Potential GDP 2.1 2.4 2.5 2.8 2.8 2.6
Output gap (% deviation, March year average)3 -0.9 0.0 0.5 0.6 0.6 0.4
Employment 2.4 3.3 2.3 1.6 1.4 1.2
Unemployment rate4 6.1 5.6 5.1 4.7 4.5 4.5
Participation rate5 69.0 69.2 68.8 68.8 68.8 68.8
Nominal wages6 2.5 2.7 2.5 2.9 3.1 3.3
CPI inflation7 1.5 0.2 1.4 2.1 2.0 2.1
Terms of trade8 13.7 0.2 -2.9 2.9 0.1 -0.4
House prices9 8.0 6.8 5.2 3.0 2.4 2.0
Current account balance            
  $billions -6.0 -9.8 -13.7 -12.8 -13.8 -15.1
  % of GDP -2.6 -4.1 -5.6 -4.9 -5.1 -5.3
Net international investment position            
  % of GDP -65.5 -65.6 -69.1 -70.5 -72.4 -74.8
TWI10 80.0 77.9 77.9 77.9 77.9 77.1
90-day bank bill rate10 3.0 3.6 3.6 3.7 4.3 4.8
10-year bond rate10 4.6 3.3 3.5 4.2 4.8 5.1

Notes:

  1. Forecasts finalised 10 April 2015.
  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. Quotable Value New Zealand (QVNZ) House Price Index, annual percentage change.
  10. Average for the March quarter. 2015 actual.

Longer time series for these variables are provided on page 138.

Key economic forecast assumptions and judgements

  • Net permanent and long-term migration inflows are assumed to rise from 55,800 in the year ended March 2015 to 56,600 in the year ended June 2015 and to return to the long-run assumption of 12,000 per year in the year ended June 2017.
  • West Texas Intermediate (WTI) oil prices are assumed to rise from US$49 per barrel in the March 2015 quarter to US$78 in the March 2019 quarter.
  • Dairy prices are expected to recover at a modest rate, returning towards the long-term levels forecast by the OECD-FAO of US$3,900/mt towards the end of 2016.
  • Trading partner growth is assumed to increase in 2015 and 2016 as growth picks up in the US, euro area and Japan, offset by slightly slower growth in Australia and China.
  • Growth in potential output is assumed to increase from 2.3% in the year ended December 2014 to a peak of 2.9% in the year ended September 2017 and to ease to 2.6% by the end of the forecast period.
  • The output gap (spare capacity) is currently around zero and is estimated to become increasingly positive over the next year or so, contributing to higher inflation.
  • Economy-wide labour productivity growth is estimated to average 1.2% per year between the years ending March 2015 and March 2019.
  • Average hours worked per week per person are estimated to decline from around 33.4 in the year to December 2014 to around 32.9 by the end of the forecast period.
  • The labour force participation rate is estimated to be 68.8% for most of the forecast period.
  • The non-accelerating inflation rate of unemployment (NAIRU) is estimated to be around 4.5% by the end of the forecast period.
  • Ninety-day interest rates are estimated to remain stable around 3.6% until the end of 2016 before rising to 4.9% in the June 2019 quarter. Ten-year interest rates are estimated to rise from 3.3% in the March 2015 quarter to 5.2% in the June 2019 quarter.
  • The trade weighted exchange rate index (TWI-17) is assumed to hold at around 77.9 until late 2018, when it begins to decline, reaching 76.4 in the June 2019 quarter.
  • 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).
  • The tobacco excise tax increase in the March quarter 2016 adds 0.2 percentage points to annual inflation.
  • The reduction in ACC vehicle levies in September 2015 quarter is estimated to reduce consumer price inflation by 0.25 percentage points.

Recent Developments and Near-term Outlook

The economic expansion has gathered pace...

The pace of economic expansion strengthened over the second half of 2014 owing to strong domestic demand and a surge in tourism expenditure. Rapid migration-led population growth, increases in labour income, low interest rates and increased construction activity are expected to continue to support domestic demand, and underpin the outlook for growth over 2015.

Although real production GDP grew as expected over the second half of 2014, revisions to previous quarters by Statistics New Zealand meant that growth in the year ended December was lower than expected at 3.3% - but still the fastest pace since late 2007 (Figure 1.1).

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

…with several developments impacting the economy and its outlook

Several key developments have shaped the economic outlook and have reinforced the key themes of strong real activity and relatively weak price inflation presented in the Half Year Update. These developments include the sharp falls in international oil prices since late last year, higher than forecast net migrant inflows and the impacts of the summer drought.

Judgements around the future path of commodity prices, trading partner growth, the extent and duration of the current migration cycle and the amount of spare capacity and its relationship with inflation remain the key factors influencing the economic outlook.

International oil prices fell sharply…

Oil prices have fallen sharply since the Half Year Update was finalised in November. WTI prices have fallen from around US$80 per barrel in November 2014 to around $US50 per barrel in March 2015 (Figure 1.2). Brent and Dubai crude oil prices have followed a similar pattern. The price falls are primarily a result of increased supply from US shale oil production and the Organisation of Petroleum Exporting Countries' decision to maintain production levels despite falling prices. At the same time, international demand has eased, partly reflecting a slowdown in growth in China.

Figure 1.2 - WTI oil price
Figure 1.2 - WTI oil price.
Sources: Haver Analytics, the Treasury

Changes in oil prices directly affect consumer prices through lower fuel prices and indirectly through lower input costs for domestic firms. In addition, New Zealand's major trading partners are net oil importers so the positive impacts on domestic demand in those economies, all else equal, support demand for New Zealand's exports.

…contributing to weaker than forecast inflation…

Falling fuel prices provided the largest negative contribution to the 0.3% fall in quarterly inflation in the March 2015 quarter. Annual consumer price inflation eased to 0.1% from 0.8% in the December quarter (Figure 1.3) - considerably lower than the 1.3% forecast in the Half Year Update. Even excluding the impacts of lower fuel prices, inflation is low and inflation expectations are subdued. Although some slack remains in the labour market, capacity utilisation is generally quite high, indicating that, in aggregate, spare capacity has largely been absorbed. Capacity pressures take some time to influence inflation and inflation is expected to remain low this year.

Figure 1.3 - Consumer price inflation
Figure 1.3 - Consumer price inflation.
Source: Statistics New Zealand

…and providing a partial offset to lower export prices

The near-term outlook for the terms of trade has improved as lower import prices have provided a partial offset to lower export prices. Lower export prices result in a direct fall in national income and lower inflation. However, lower import prices, which result in a higher terms of trade, increase real national disposable income. The overall impact on nominal GDP depends on the extent to which households and businesses respond to the additional real income and how lower import prices affect domestic prices.

See the box “Commodity prices” (page 12) for details on how recent commodity price movements and the judgements around their future paths have impacted the outlook for the terms of trade and nominal GDP.

Commodity prices

Nearly three-quarters of New Zealand's goods exports are primary products in raw commodity or further processed form and around 15% of goods imports are crude and refined oil and petroleum products. As a result, New Zealand's trade balance and terms of trade are heavily influenced by developments in world commodity prices. This box focuses on recent developments in key commodities and the outlook for dairy and crude oil prices, two key judgements for the macroeconomic forecasts.

Recent commodity price movements

From US$107/barrel in June 2014, WTI crude oil prices fell to around US$80/barrel in November when the Half Year Update was finalised and to US$45/barrel in early 2015, a five-year low.[1] Since then they have traded in a US$45/barrel to US$60/barrel range. The initial catalyst for the fall was a growing surplus of crude oil production (and therefore increasing inventories), driven by shale oil extraction in the US and, to a lesser extent, oil sands production in Canada. At the same time, OPEC maintained production levels. This overall increase in supply was coupled with subdued demand from Europe and Japan and slowing growth in China (Figure 1.4). As a net importer of approximately 25 million barrels of crude oil per annum,[2] as well as other mineral fuels, the fall in crude oil prices has been beneficial to New Zealand's trade balance and terms of trade.

Figure 1.4 - Petroleum and other liquids production and consumption
Figure 1.4 - Petroleum and other liquids production and consumption.
Source: US Energy Information Administration

The global dairy market is little changed from the Half Year Update. Dairy production remains high in the key exporters including New Zealand, the European Union (EU) and the US. Meanwhile, demand from the two largest dairy importers, China and Russia, remains subdued owing to increased domestic production and high inventories in China and the ban on EU and US imports by Russia. GlobalDairyTrade (GDT) prices for New Zealand's key dairy export, whole milk powder, reached a low of US$2,229/mt in December 2014 and have only recovered modestly since then to around US$2,385/mt. The GDT index, reflecting a basket of dairy commodities, fell to a six-year low at the first GDT auction in May 2015.

Forestry prices have followed a similar pattern to dairy prices, falling throughout most of 2014 from record highs early in the year as demand from China has slowed. Prices for other export commodities have fared better. Meat prices, driven by beef, reached record levels in November 2014, largely owing to high US demand. Although meat prices have subsequently eased, they remain at high levels. Prices for horticultural products, including apples and kiwifruit, and for wine and seafood have held up well.

Commodity price outlook

The supply overhang in the market is expected to keep crude oil prices at low levels throughout 2015. This overhang is expected to be eroded as production is cut back. Prices are currently still at levels that allow most production to be maintained in the short term. However, current prices are below long-term average costs for many producers, particularly those operating under more technologically challenging conditions, which has led to a sharp reduction in exploration and investment and will lead to slower production growth in the future. The macroeconomic forecasts assume that oil prices will gradually return to around US$80/barrel, which approximately reflects long-term costs of production.

Dairy export prices are forecast to recover from the second half of 2015 onward at a relatively modest pace (Figure 1.5). Demand for dairy products is expected to pick up as imports into China return to more normal levels. There could be a larger increase in global dairy demand if Russia returns to global markets. However, global inventories of dairy products are high, particularly in the EU, and there is considerable uncertainty over the supply response of EU producers following the removal of milk production quotas. Dairy prices are assumed to recover towards the long-term levels forecast by the OECD-FAO of around US$3,900/mt towards the end of 2016 as supply and demand become more balanced.[3]

Figure 1.5 - Dairy prices
Figure 1.5 - Dairy prices.
Sources: GlobalDairyTrade, Statistics New Zealand, the Treasury
Impact on the New Zealand economy

The combined impacts of movements in export and import commodity prices are captured in the terms of trade, which have an important influence on New Zealand's income growth. Lower export prices reduce producer incomes and therefore influence their consumption, investment and saving decisions. Lower import prices have the opposite effect but it is less direct. That is, lower import prices enable producers and consumers to buy more of the lower priced goods or other goods for an unchanged income. At a national level, the fall in dairy prices is mainly reflected in lower export receipts (reduced income), while the fall in oil prices is mainly reflected in lower consumer and intermediate input prices (increased purchasing power), and both are reflected in lower nominal GDP.

The outlook for dairy and other export commodities is similar to the Half Year Update but oil prices are considerably weaker. Although still expected to decline in the short term, the terms of trade are expected to trough at a higher level and remain higher than the Half Year Update throughout the forecast, chiefly as a result of lower import prices (Figure 1.12).

Notes

  • [1]WTI is used as a proxy for the world oil price. Brent and Dubai crude oil prices followed a similar pattern.
  • [2]Ministry of Business, Innovation & Employment. In 2014 36.5 million barrels of crude oil were imported and 13.4 million exported.
  • [3]OECD-FAO Agricultural Outlook 2014, weighted to reflect New Zealand's export mix.

Net migration continues to surge…

The net inflow of permanent and long- term (PLT) migrants in the March 2015 year rose to 55,800 - surpassing the peak inflow of 52,400 forecast in the Half Year Update. These inflows have supported both domestic demand and productive capacity through increased labour supply. Initially fewer departures were the key driver, although increased arrivals are now the larger factor accounting for around two-thirds of the increase in the past year. The net inflow is now expected to peak at 56,600 in the year to June 2015 (Figure 1.6).

Figure 1.6 - Net PLT migration
Figure 1.6 - Net PLT migration.
Sources: Statistics New Zealand, the Treasury

…contributing to renewed activity in the housing market

The resurgence in housing market activity from late last year has continued in early 2015. Housing demand is being supported by lower fixed-term mortgage rates as long-term interest rates fall and by continued migration inflows. The housing supply response in the Auckland market remains gradual. Consequently, national house price inflation is expected to increase throughout 2015, supported by rapid house price inflation in Auckland. The resultant wealth effect is expected to provide additional support to household expenditure growth.

Solid labour demand…

The number of people employed increased by 80,000 (3.5%) in the December 2014 year led by growth in full-time staff.[4] Almost a third of national employment growth was in the construction industry, underscoring the strong growth impetus from the sector. Employment growth was stronger than forecast in the Half Year Update in the December quarterand employment indicators suggest employment growth will be stronger than previously forecast in the near term.

Labour supply has also grown rapidly through high net inflows of migrants and increased participation in the labour force, tempering the declines in the unemployment rate. The unemployment rate declined through 2014 but increased to 5.7% in the December quarter as the participation rate rose to 69.4% from 68.8% in the September quarter (Figure 1.7). The unemployment rate is expected to resume its downward trend as employment growth remains robust and labour supply growth begins to ease as net migration inflows slow.

Figure 1.7 - Unemployment and participation rates
Figure 1.7 - Unemployment and participation rates.
Source: Statistics New Zealand

…and income growth support household expenditure

Further increases in labour supply and low inflation are expected to keep annual growth in weekly earnings subdued throughout most of 2015 at around 2.1%. Despite that, total labour income growth is initially higher than in the Half Year Update reflecting solid employment growth over the year ahead (Figure 1.8). Real household income growth, which has been boosted by low inflation, is expected to provide greater support to private consumption growth than previously forecast in the near term.

Figure 1.8 - Compensation of employees
Figure 1.8 - Compensation of employees.
Sources: Statistics New Zealand, the Treasury

Investment is supported by construction activity and low interest rates…

Business sentiment and activity surveys point to solid investment growth over the year ahead as construction activity increases, the high NZ dollar makes capital goods imports cheaper and relatively low interest rates make investment more profitable. In addition, rapid population growth is adding to demand and supporting investment. Real business investment rose steadily over the latter half of 2014 - rising 7.5% in the year ended December - and is expected to continue growing at a slower but still robust rate of 5.0% to 6.0% over the next four to six quarters.

Residential investment is at historically high levels, following a 16.7% rise in the December 2014 year. Despite a recent slowing in building consent issuance, strong housing demand in Auckland and ongoing high levels of reconstruction activity in Canterbury continue to underpin the outlook for solid residential investment growth.

…but agricultural production is impacted by drought

Drought in parts of the South Island and dry conditions elsewhere are likely to have slowed GDP growth in the first half of 2015. This has been reflected in Fonterra revising down its milk production growth estimates for the 2014/15 season from a 3.3% increase earlier in the season to an increase of only 1.5%.

Growth momentum is expected to continue in the year ahead…

Solid labour income growth, increasing house prices and low debt-servicing costs, combined with low inflation which boosts real incomes, are supporting the outlook for household consumption expenditure. Low interest rates, a high NZ dollar and improved business sentiment also support a solid outlook for business investment. Residential investment is forecast to continue rising in the year ahead, driven by strong demand for housing in Auckland and a high level of rebuilding in Canterbury. Net exports will be a drag on activity reflecting the impacts of drought, solid import growth as a result of strong domestic demand and an expected pull-back in tourism expenditure following the Cricket World Cup in the March quarter. Overall, annual average growth in real GDP is forecast to remain similar to recent quarters at close to 3.3% for most of 2015.

…with further widening in the annual current account deficit

The annual current account deficit widened to 3.3% of GDP in December 2014 from 2.6% in the previous quarter, as lower commodity export prices flowed through to a smaller goods surplus. A surge in tourism expenditure driven by higher tourist arrivals in the December 2014 quarter drove an increase in the annual services surplus.

The current account deficit is expected to widen further over coming quarters as lower commodity export prices continue to reduce export values. However, lower import prices, higher tourism receipts and lower income outflows are expected to temper the widening in the current account deficit compared to the Half Year Update.The current account deficit is forecast to widen to 5.6% of GDP in March 2016 compared to 6.3% previously.

Subdued domestic inflation and further declines in the terms of trade result in slower nominal GDP growth

A sharp fall in the terms of trade, mainly reflecting falls in dairy export prices, and low domestic inflation contributed to nominal GDP growth of just 0.4% in the December 2014 quarter, reducing annual average growth to 5.7% from 7.6% in the previous quarter. Low domestic inflation and further pass-through of falls in export prices are expected to result in nominal GDP growth slowing to 2.4% in the June 2015 year.

Notes

  • [4]Latest data released after finalisation of the economic forecasts show employment growth of 0.7% in the March quarter, a further rise in the participation rate to 69.6% and the unemployment rate remaining at a revised 5.8%.

Medium-term Outlook

Growth moderates gradually in the medium term…

Growth in output from 2016 onwards is a little stronger than in the Half Year Update. Annual average growth for the year to March 2016 is expected to be 3.1%, and is then forecast to ease gradually to 2.4% at the end of the forecast period. Consumption and investment growth moderate as population and labour income growth ease, construction activity slows and interest rates rise. Relative to the Half Year Update, growth is forecast to be slightly slower in the first part of the forecast period reflecting the downward revisions to historical growth by Statistics New Zealand. Growth is higher later in the forecast period chiefly reflecting faster private consumption growth, largely as a consequence of lower import prices and interest rates.

Higher population growth compared to the Half Year Update contributes to a small upward revision to the economy's potential growth rate over the forecast period.[5] The annual average rate is estimated to increase from around 2.5% currently to 2.8% in mid-2017 as productivity growth rises from low levels with labour productivity growth rising towards trend. Potential growth averages around 2.6% over the forecast period (Figure 1.9).

Figure 1.9 - Actual and potential GDP growth
Figure 1.9 - Actual and potential GDP growth.
Sources: Statistics New Zealand, the Treasury

…as population growth eases…

The annual net inflow of migrants is expected to ease from a peak of 56,600 in June 2015 as departures increase and arrivals decline from record high levels in line with an improving Australian economy. Net inflows return to the long-run assumption of 12,000 a year by mid-2017. The change in the profile of migration results in an additional 11,400 people over the forecast period compared to the Half Year Update.

Risks remain around the duration and size of migration flows. Scenario two in the Risks and Scenarios chapter assesses the potential impact of stronger domestic demand, in part driven by a larger than expected migration cycle.

…and employment and income growth slows

Annual employment growth is forecast to moderate from its 3.5% pace in the December 2015 quarter (Figure 1.10). The unemployment rate declines gradually to 4.5% in late 2017 as the contribution to the labour force from migration eases and labour force participation stabilises at slightly lower levels.

Figure 1.10 - Employment, labour force and unemployment rate
Figure 1.10 - Employment, labour force and unemployment rate.
Sources: Statistics New Zealand, the Treasury

As the labour market tightens and inflation begins to rise, average hourly wage growth picks up gradually to 3.3% in the March quarter of 2019 from 2.5% in March 2016. Beyond June 2016, total labour income growth is slightly softer than previously forecast, mainly reflecting slower wage growth.

Household expenditure growth eases…

Private consumption is forecast to grow by 3.9% in the March 2016 year (contributing 2.3 percentage points to GDP growth [Figure 1.11]), before easing to 2.8% as support from population and labour income growth moderates and interest rates increase. Growth is stronger in later years compared to the Half Year Update given lower consumption import prices and lower interest rates.

Figure 1.11 - Contributions to real GDP growth
Figure 1.11 - Contributions to real GDP growth.
Sources: Statistics New Zealand, the Treasury

…while residential investment peaks…

Residential investment is expected to rise further, albeit at a slower rate than over recent years with activity peaking in early 2018. Investment is driven by strong population growth and housing demand in the Auckland market. A high level of activity in Canterbury is expected to be sustained for some time providing a solid base, although recent data have shown a decline in residential consents in the Canterbury region, posing some downside risk.

…and business investment slows as interest rates rise

Firms are forecast to expand their investment as output grows, supported by low interest rates and a high NZ dollar. Annual average growth in business investment is expected to remain over 5.0% until the March 2017 year, before easing to 2.4% in the March 2019 year as interest rates begin to rise and Canterbury rebuild-related growth slows.

Government expenditure growth remains subdued

Fiscal policy is forecast to exert a mild constraining influence on demand over most of the forecast period with operating allowances unchanged from the Half Year Update. Government consumption growth is expected to ease over the next few years before picking up in the 2017 fiscal year reflecting a larger operating allowance. Operating allowances are added to government expenditure as a technical assumption in the forecasts, but in practice are available for a combination of expenditure and revenue initiatives.

Trading partner growth is uneven…

Trading partner growth is expected to increase in 2015 and 2016 as growth remains on track in the US and picks up from a slow pace in the euro area and Japan (Table 1.2). Australian growth is expected to remain below trend for longer as the rebalancing from mining investment to other sectors of the economy progresses slowly. In addition, China's growth is slowing as investment growth eases. A greater weighting to higher growth economies means trading partner growth is slightly stronger than previously forecast in the longer term.

Table 1.2 - Trading partner growth forecasts (annual % change)
  2015
weights
2014
Estimate
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
China 25% 7.4 7.0 6.9 6.8 6.6 6.5
Australia 24% 2.7 2.5 2.8 3.0 3.0 3.0
Other Asia* 22% 4.1 4.3 4.4 4.5 4.5 4.5
United States 11% 2.4 3.0 2.8 2.7 2.6 2.5
Euro area 7% 0.9 1.2 1.4 1.4 1.4 1.4
Japan 7% -0.1 0.9 1.4 0.6 0.7 1.0
United Kingdom 4% 2.6 2.6 2.3 2.0 2.0 2.0
Canada 1% 2.5 2.4 2.2 2.3 2.2 2.2
Trading Partner Growth (TPG) 100% 3.7 3.8 3.9 4.0 4.0 4.0
TPG - Consensus (April 2015)   3.7 3.9 4.1 4.0 3.9 3.9
TPG - IMF WEO (April 2015)   3.7 3.9 3.9 3.8 3.8 3.9
TPG - The Treasury (2014 Half Year Update)   3.7 3.9 3.9 3.9 3.9 3.9

* South Korea, Taiwan, Hong Kong, Singapore, Malaysia, Indonesia, Thailand, Philippines, India

Sources: IMF, Consensus Forecasts, Haver Analytics, the Treasury

Notes

  • [5]Potential growth is the rate at which the economy can expand while maintaining stable inflation. It depends on how many people are available to work and how many hours they are willing to work (labour); the number of buildings, machines and computers (capital); and the efficiency with which they are used (total factor productivity).

…with more accommodative monetary policy...

Low inflation - and in some cases falling prices - have been a global phenomenon recently with many central banks adopting more accommodative monetary policy stances since the Half Year Update. The European Central Bank introduced quantitative easing and the Bank of Japan expanded its quantitative easing programme while the Japanese government postponed a second sales tax hike. China has eased monetary policy in view of risks to its lower growth target of 7% this year, and Australia reduced its cash rate again in May, to 2.0%. Long-term interest rates have fallen given the increased demand for sovereign debt from the large quantitative easing programmes and postponement of policy rate increases. However, interest rates are expected to increase later in the forecast period as world growth strengthens and central banks reduce monetary stimulus.

…and recovery in the terms of trade…

The terms of trade are assumed to increase as commodity supply and demand come back into balance (Figure 1.12). Oil prices are assumed to rise steadily to around $US80 per barrel. As oil prices increase, they partially offset the benefits of rising dairy prices. Compared to the Half Year Update, weaker consumption and intermediate goods import prices as a result of the weaker global inflation environment provide less of a drag on the terms of trade over the latter years of the forecast period. These developments result in higher terms of trade than forecast in the Half Year Update.

Figure 1.12 - Goods terms of trade
Figure 1.12 - Goods terms of trade.
Sources: Statistics New Zealand, the Treasury

…leading to a higher NZ dollar…

The strong relative performance of the New Zealand economy, high terms of trade and positive international interest rate differentials exert upward pressure on the NZ dollar. The NZ dollar reached post-float highs against the euro and Australian dollar in April 2015 which have more than offset declines against the US dollar since July 2014 as expectations of interest rate increases build in that economy. The trade-weighted exchange rate index is higher than forecast in the Half Year Update and is expected to remain steady at an elevated level as these different forces continue to balance each other. A higher NZ dollar places downward pressure on tradables inflation and constrains export growth; however, households benefit through increased purchasing power.

…and the current account deficit stabilising

The annual current account deficit is forecast to stabilise around 5.0% to 5.5% of GDP from the March 2016 quarter until the end of the forecast period (Figure 1.13). Overall, the deficit is narrower by around half a percentage point compared to the Half Year Update, reflecting lower oil import prices and slower growth in intermediate and consumption import goods prices. Increased visitor arrivals result in a wider services surplus. Lower international interest rates moderate income outflows, leading to a narrower annual income deficit. As a consequence, net international liabilities are lower at 74.8% of GDP in the March 2019 quarter compared to 79.8% of GDP in the Half Year Update.

Figure 1.13 - Current account components
Figure 1.13 - Current account components.
Sources: Statistics New Zealand, the Treasury

Inflation rises as cyclical factors pass…

Annual inflation is expected to remain low throughout 2015 and rise gradually to 2.1% by the end of 2016 (Figure 1.14), remaining close to the mid-point of the Reserve Bank's target band thereafter. Tradables inflation is expected to rise to 0.2% in early 2016, from an estimated -2.4% in the March 2015 year, remaining around that level over the rest of the forecast period.

Figure 1.14 - Consumer price inflation
Figure 1.14 - Consumer price inflation.
Sources: Statistics New Zealand, the Treasury

Until recently the output gap has been negative but is now estimated to be around zero. Past spare capacity is reflected in current low non-tradables inflation and with inflation expectations and nominal wage growth also subdued, non-tradables inflation is expected to ease further to 2.0% over coming quarters. Non-tradables inflation is expected to rise to over 3.0% at the end of 2016 as capacity pressures develop. Consumer price inflation is considerably lower than forecast in the Half Year Update. Scenario one of the Risks and Scenarios chapter looks at the impacts of lower terms of trade than in the central forecast and a prolonged period of low global inflation. See the box “Why has inflation been surprisingly low?” (page 22) for details on the main factors that are contributing to low inflation and a discussion of the inflation outlook.

…supported by a period of low interest rates

Short-term interest rates are forecast to remain around current levels of 3.6% until late 2016 owing to the low inflation outlook. Short-term rates then begin to rise, reaching 4.8% in the March quarter of 2019. Long-term rates, which have fallen globally as a result of more accommodative monetary policy, are expected to increase gradually in line with international rates reaching 5.1% by March 2019.

Overall, low domestic inflation flows through to slower nominal GDP growth

While the outlook for real activity remains positive, the weak domestic inflation outlook results in slower nominal GDP growth in the 2016 and 2017 fiscal years than in the Half Year Update, but growth is faster in 2018 and 2019 (Figure 1.15). Cumulatively across the forecast period, nominal GDP is lower by around $5 billion.

Figure 1.15 - Nominal GDP growth
Figure 1.15 - Nominal GDP growth.
Sources: Statistics New Zealand, the Treasury

The downward revision to nominal GDP growth forecasts reduces forecast tax revenue from the Half Year Update. In addition, lower short-term interest rates as a result of downwardly-revised inflation contribute to a fall in tax revenue through lower interest resident withholding tax (see Fiscal Outlook chapter).

Why has inflation been surprisingly low?

Recent CPI inflation outturns have been low and have undershot the Treasury's and the Reserve Bank's forecasts. The most recent outturn showed prices rose only 0.1% in the year to March 2015, a significant deceleration from March 2014 (1.5%). Although fuel prices fell significantly over the December and March quarters, annual inflation excluding fuel was still a subdued 1.0% in March. Tradables inflation excluding vehicle fuels has been negative for some time and relatively stable, falling only slightly from -0.7% a year ago to -0.9% in March. On the other hand, non-tradables inflation has fallen from 3.0% to 2.3% over the same period.

There are a number of factors other than the fall in fuel prices that have contributed to low inflation, including:

  • Retail competition - in recent years around 15% of retail items have been discounted each quarter, compared to around 9% in 2009, despite strengthening private consumption growth. The ability of consumers to purchase overseas goods online also contributes to more intense competition.
  • Quality adjustments - quality-adjusted prices for electronic goods and communication services are continuing to decline as a result of improved technology and features.
  • Supply chain management - the Treasury's business talks suggested that firms have been negotiating lower prices with their suppliers, allowing them to minimise price increases.
  • Low global inflation - New Zealand's trading partners are experiencing low inflation, chiefly as a result of weak demand, which is contributing to lower import cost increases. This is also affecting prices for many non-tradable items as they include traded goods inputs.
  • The high NZ dollar - this has been dampening tradables inflation with imported items such as durable goods and clothing and footwear declining in price over the past several years.

Another factor behind low inflation has been the presence of spare capacity in the economy. The output gap, a summary measure of the difference between actual output and its sustainable level, has been negative since 2009. That is, the economy has been capable of producing more, while leaving some resources less than fully employed. As a consequence, there has been less pressure on prices to rise.

However, the Treasury's model estimates show the output gap has recently closed. Other indicators suggesting spare capacity has been largely exhausted include the Quarterly Survey of Business Opinion (QSBO) measure of capacity utilisation which is at its highest level in six years. The QSBO also showed supply factors are becoming more of a constraint on the expansion of output than demand. The Treasury expects the output gap to become increasingly positive over the next year which, all else equal, will lead to higher non-tradables inflation (Figure 1.16).

The labour market has also experienced a reduction in spare capacity, with the unemployment rate declining from 6.0% to 5.8% over 2014, despite record rates of labour force participation and high net migration inflows. However, wage growth has been subdued at 2.1% in March 2015 year (partly reflecting the low inflation) and the unemployment rate remains above the level that would lead to an increase in inflation, indicating that there is still some spare capacity in the market.

Even with the reduction in spare capacity in the economy, inflation expectations and surveys of pricing intentions have been falling. In the Reserve Bank's Survey of Expectations, the 2-year ahead inflation expectation declined from 2.3% in the March 2014 quarter to 1.8% in the March 2015 quarter. Similarly, the March QSBO showed a decline in firms' selling price expectations and cost price expectations to historically low levels. A net 6% of firms expect to raise prices while a net 19% of firms expect costs to increase in the June quarter. However, inflation expectations and pricing intentions tend to reflect recent outturns and the extent to which they influence future behaviour is uncertain (Figure 1.17).

Figure 1.16 - Non-tradables inflation and the output gap
Figure 1.16 - Non-tradables inflation and the output gap.
Sources: Statistics New Zealand, the Treasury
Figure 1.17 - Headline CPI and inflation expectations
Figure 1.17 - Headline CPI and inflation expectations.
Sources: Statistics New Zealand, Reserve Bank of New Zealand

The factors discussed above which have contributed to the recent low inflation outturns are a mix of temporary and permanent factors. Downward pressure on inflation will continue if retail competition, quality enhancements in communications technology and supply chain management intensify. The other factors, including the recent oil price fall and the appreciation in the exchange rate, are likely to be temporary.

In these forecasts, inflation returns to the Reserve Bank's target mid-point as excess demand pressure builds. However, should low inflation persist there would be a case for interest rate cuts, as shown in the Reserve Bank's March Monetary Policy Statement. This would help to offset some of the weaker growth in nominal GDP and tax revenue which would eventuate from lower-than-forecast inflation.

Fiscal Outlook

Overview

  • The fiscal outlook for the Crown is expected to continue to strengthen.
  • The strengthening outlook reflects both expenditure restraint and a growing economy which is driving growth in tax revenue. While forecasts of expenditure are largely unchanged overall, tax revenue forecasts have generally been revised down since the Half Year Update primarily owing to weaker inflation and lower interest rates.
  • Core Crown expenditure as a percentage of GDP is expected to be 30.5% in 2014/15, falling across the forecast period to be 29.2% in 2018/19.
  • The Budget 2015 operating package of about $1.0 billion a year on average over the next four years is in line with that signalled in the Budget Policy Statement. Future operating allowances remain at $1.0 billion for Budget 2016, $2.5 billion in Budget 2017 and $1.5 billion in Budget 2018.
  • In addition to the Budget 2015 package, the Government has also signalled further reductions in ACC levy rates, resulting in a structural reduction in OBEGAL of around $0.6 billion from 2016/17.
  • The total Crown OBEGAL deficit has reduced from $18.4 billion in 2010/11 to a forecast of $684 million in 2014/15, with growing OBEGAL surpluses forecast thereafter, reaching $3.6 billion in 2018/19.
  • Capital spending by the core Crown is estimated to be $24.0 billion over the forecast period. This is an increase of $1.0 billion since the Half Year Update, mainly owing to new spending decisions. Capital allowances of $0.7 billion are forecast in Budget 2016 before rising to $0.9 billion in Budget 2017 and then growing at a rate of 2.0% per year for subsequent budgets.
  • Net core Crown debt is now expected to peak at 26.3% of nominal GDP in 2015/16, before dropping to 22.9% of nominal GDP by 2018/19. Overall, forecast net core Crown debt is similar to the Half Year Update.
  • The Crown's net worth is expected to increase over the forecast period, reaching around $93.6 billion by 2018/19, following surpluses from 2015/16 as the growth in assets outpaces liabilities.
  • Within the balance sheet, total assets are forecast to be $296.3 billion by 2018/19, with financial assets (particularly the Crown's investment portfolios) forecast to increase by $12.9 billion to $87.9 billion. 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 down debt. Total liabilities are expected to stand at $197.3 billion at the end of 2018/19, with borrowings making up $115.6 billion of that.
  • These forecasts are sensitive to a number of assumptions and should be read in conjunction with the Risks and Scenarios and Specific Fiscal Risks chapters.
Table 2.1 - Fiscal indicators
Year ended 30 June 2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast

$billions

           
Total Crown OBEGAL1  (2.9)  (0.7) 0.2 1.5 2.0 3.6
Core Crown residual cash  (4.1)  (2.7)  (4.2)  (1.6) (0.2) 1.7
Net core Crown debt2 59.9 61.7 65.6 67.1 67.2 65.5
Net worth attributable to the Crown 75.6 74.8 77.8 82.1 87.0 93.6

% of GDP

           
Total Crown OBEGAL1  (1.3)  (0.3) 0.1 0.6 0.7 1.3
Core Crown residual cash  (1.8)  (1.1)  (1.7) (0.6) (0.1) 0.6
Net core Crown debt2 25.6 25.7 26.3 25.5 24.4 22.9
Net worth attributable to the Crown 32.3 31.2 31.1 31.2 31.6 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

Table 2.2 - Reconciliation between OBEGAL and net core Crown debt
Year ending 30 June
$billions
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Core Crown revenue 67.3 71.9 74.9 78.9 83.5 87.4
Core Crown expenses (71.5) (73.1) (74.9) (77.1) (80.8) (83.4)
Net surpluses/(deficits) of SOEs and CEs 1.3 0.5 0.2 (0.3) (0.7) (0.4)
Total Crown OBEGAL (2.9) (0.7) 0.2 1.5 2.0 3.6
Net retained surpluses of SOEs, CEs and NZS Fund (0.8) (0.6) (0.1) 0.4 0.7 0.4
Non-cash items and working capital movements 0.7 2.3 2.0 1.8 1.2 1.8
Net core Crown cash flow from operations (3.0)  1.0 2.1  3.7  3.9  5.8 
Net purchase of physical assets (1.9) (2.1) (2.6) (2.5) (1.6) (1.5)
Advances and capital injections (1.5) (2.2) (3.4) (2.4) (1.8) (1.7)
Forecast for future new capital spending - (0.3) (0.4) (0.7) (0.9)
Proceeds from government share offers 2.3 0.6  -   -   -  
Net core Crown capital cash flows (1.1) (3.7) (6.3) (5.3) (4.1) (4.1)
Core Crown residual cash (deficit)/surplus (4.1) (2.7) (4.2) (1.6) (0.2) 1.7
Opening net core Crown debt 55.8 59.9 61.7 65.7 67.2 67.4
Core Crown residual cash deficit/(surplus) 4.1 2.7 4.2 1.6 0.2 (1.7)
Valuation changes in financial instruments - (0.9) (0.2) (0.1) - -
Closing net core Crown debt 59.9 61.7 65.7 67.2 67.4 65.7
As a percentage of GDP 25.6% 25.7% 26.3% 25.5% 24.4% 22.9%

Source: The Treasury

Key judgements and assumptions

The fiscal forecasts are based on assumptions and judgements developed from the best information available at the time they were prepared. Actual events are likely to differ from these assumptions and judgements. Uncertainty around the forecast assumptions and judgements increases over the forecast period.

In addition to the key assumptions underpinning the economic forecasts, the following key judgements and assumptions supporting the fiscal forecasts were made:

  • Tax policy changes enacted and announced by the Government will take place as planned and will affect tax revenue and receipts.
  • Any additional future new spending or revenue reductions will be limited to the operating and capital allowances set by the Government.
  • Reductions to ACC levies will be implemented (refer page 37).
  • Departments will continue to spend less than the upper limits of approved spending (referred to as appropriations).
  • The form and timing of any significant divestment of social housing assets is uncertain and therefore not included in the forecasts, with the exception of funding to the Tāmaki Redevelopment Company, which is included.
  • Forecast returns of the large investment portfolios managed by ACC and the NZS Fund are based on long-term benchmark rates of return for each portfolio.
  • The valuations of the student loan portfolio, ACC claims liability and the Government Superannuation Fund (GSF) retirement liability are based on underlying assumptions made at the time the valuations were prepared.

Further information on the fiscal forecast assumptions can be found on pages 49 to 51.

Core Crown Tax Revenue

Tax revenue grows over the forecast period...

Core Crown tax revenue (Table 2.3) is forecast to rise in each year of the forecast period. By 2018/19, core Crown tax revenue is expected to reach $80.5 billion, $19.0 billion higher than in 2013/14. Forecast tax revenue increases as a percentage of nominal GDP, from 26.3% in 2013/14 to 28.2% at the end of the forecast period (Figure 2.1).

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

The main driver for the increase in tax revenue is forecast growth in nominal GDP (Figure 2.2). Factors that influence tax revenue are the composition of GDP growth, fiscal drag (being the additional personal income tax generated as an individual's average tax rate increases as their income increases), the interest rate forecast (affecting Resident Withholding Tax (RWT)), Consumers Price Index (CPI) indexation of excise rates and assumptions regarding such things as the timing of tax revenue recognition and the accumulation, and subsequent utilisation, of tax losses.

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

...with 2014/15 particularly strong...

Year-to-date core Crown tax outturns to March 2015 are around 8.0% up on last year, mainly owing to growth in:

  • source deductions, caused in roughly equal parts by growth in employment and wages, and with a contribution from fiscal drag too
  • corporate tax, in which unusually large terminal tax from the 2014 tax year is boosting the growth rate, and
  • goods and services tax (GST), where strong growth in residential investment, partly owing to the Canterbury rebuild, is complementing growth in nominal private consumption.

The year-on-year growth in core Crown tax revenue in 2014/15 is expected to reduce to around 7.5% by June, as some of the strength in year-to-date results is expected to soften, mainly owing to seasonal variation in PAYE and the timing of corporate tax. However, some upside risk to the 2014/15 tax revenue outturn remains, particularly as the June quarter is typically the largest quarter for tax revenue each year. Individually, small variations in tax returns that are due in the June quarter (eg, annual income tax returns from most large corporate and Portfolio Investment Entities (PIE) annual tax returns), can accumulate to large variances from forecast, presenting risks to the 2014/15 tax revenue outturn, both positive and negative.

The expected 7.5% growth in tax revenue in 2014/15 is higher than the 2.4% forecast for growth in nominal GDP. The main reasons for this difference are:

  • the components of nominal GDP that drive the underlying taxable bases for tax revenue are growing faster than total nominal GDP, for example, total employees' compensation is forecast to grow by 5.2%, nominal private consumption is forecast to grow by 4.5% and nominal residential investment is forecast to grow by 18.2%
  • tax revenue in the 2014/15 fiscal year has been boosted by higher-than-usual terminal tax, mainly from the 2014 tax year, and
  • excise rate increases and fiscal drag have also added to tax revenue growth.

...while nominal GDP growth drives tax revenue growth in future years

Through 2015/16 and 2016/17, total tax revenue is forecast to grow in line with nominal GDP, although there is considerable variation across the tax types:

  • source deductions and GST are forecast to grow faster than nominal GDP owing to fiscal drag and to continued strong residential investment growth, but
  • corporate tax and other persons tax are forecast to grow more slowly than nominal GDP (in fact, other persons tax is forecast to decline in 2015/16) owing to relatively weak growth in the underlying income drivers (operating surplus and entrepreneurial income) and an assumption that terminal tax will return to a more “normal” level in 2015/16.

Through 2017/18 and 2018/19, tax revenue growth is forecast to outstrip nominal GDP growth owing to (in approximate decreasing order of significance):

  • fiscal drag adding to the growth rate of source deductions
  • increasing deposit interest rates providing a boost to interest RWT
  • CPI indexation of excise rates, and
  • an assumed tailing-off of earthquake-related GST refunds.

Table 2.3 shows a complete breakdown of the drivers of growth in forecast tax revenue.

Table 2.3 - Composition of growth in core Crown tax revenue over the forecast period
Year ending 30 June
$billions
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Total

Movement in core Crown tax owing to:

           
Employees' compensation 1.3 1.0 1.1 1.2 1.3 5.9
Private consumption 0.9 0.8 0.9 0.9 0.9 4.4
Corporate profits 0.1 0.3 0.6 0.6 0.4 2.0
Fiscal drag 0.2 0.2 0.3 0.3 0.3 1.3
Residential investment 0.3 0.4 0.2 0.3 - 1.2
Indirect tax CPI inflation indexation 0.1 0.1 0.1 0.1 0.1 0.5
Entrepreneurial income (0.1) - 0.5 0.2 0.1 0.7
Interest rates 0.1 - - 0.1 0.3 0.5
Interest bearing deposit base 0.1 0.1 0.1 0.1 0.1 0.5
Budget 2015 policy initiatives - 0.1 0.1 0.1 - 0.3
Other factors 1.6 (0.2) (0.3) 0.4 0.2 1.7
Total movement in core Crown tax revenue 4.6 2.8 3.6 4.3 3.7 19.0
Plus: previous year's tax base 61.5 66.1 68.9 72.5 76.8 61.5
Core Crown tax revenue 66.1 68.9 72.5 76.8 80.5 80.5
Percentage of GDP 27.6% 27.6% 27.6% 27.9% 28.2%  

Note: “Other factors” in 2014/15 includes additional 2013/14 terminal tax recognised in 2014/15.

Source: The Treasury

Tax policy changes made by the Government have been included in these forecasts, with the largest effect being the provision of additional audit funding to Inland Revenue (IRD), which is expected to raise an additional $65 million of tax revenue in 2015/16 rising to $257 million in 2018/19.

Table 2.4 - Significant tax policy changes
Year ending 30 June
$millions
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Total
5 years

Tax policy changes:

           
Inland Revenue audit funding - 2015 Budget bid - 65 144 144 144 497
Inland Revenue audit funding - extension of 2012 Budget bid - - - 113 113 226
Child hardship package (PAYE effect) - 7 26 26 26 85
Total - 72 170 283 283 808

Inland Revenue has also prepared a set of tax forecasts based on the Treasury's macroeconomic forecasts. Inland Revenue’s forecasts are close to Treasury’s forecasts, with all the differences in the forecasts of total core Crown tax in any one year being less than $250 million (0.1% of GDP). This comparison is included in the Additional Information on the Treasury website http://www.treasury.govt.nz/budget/forecasts/befu2015

Impact of low inflation on the fiscal outlook

As outlined in the Economic Outlook chapter, recent price inflation outturns have been lower than previously forecast (refer pages 22 and 23). Price inflation is an important component of a number of economic indicators (eg, nominal GDP, wages) that are used to prepare the Government’s fiscal forecasts.

A lower inflation track impacts on both the revenue and expenses of the Government. However, revenue is more sensitive to price inflation changes than expenses are, which means the impact on OBEGAL is not symmetrical. In addition, the impact on the fiscal outlook from low inflation will be influenced by the factors contributing to slow price growth. For example price movements such as dairy prices, can have significant impacts on the fiscal outlook but will not have much impact on price inflation since they represent only a small fraction of domestic consumers' spending. Other price changes, such as sharp movements in the price of oil, can have a large impact on price inflation but only modest impacts on the fiscal outlook as consumers can switch their spending to other goods.

It is difficult to quantify the effect low inflation has on the fiscal outlook, given the intricacy of its relationship with economic and fiscal aggregates. This box looks at summarising the fiscal impact we would expect from lower forecast price inflation, which is expected to be associated with weaker growth in nominal income and spending. Broadly speaking, at present the negative impact of lower inflation on revenue is larger than the positive impact on expenses, contributing to OBEGAL being lower than previously forecast.

Core Crown tax revenue is forecast to be $66.1 billion for the year ended 30 June 2015. Most types of tax revenue are in some way sensitive to inflation either directly or indirectly. In an environment of low inflation, we would expect the following impacts on the critical economic indicators that underpin our tax revenue forecasts:

  • Nominal consumption growth would be weaker, which in turn will result in a reduction in GST revenue.
  • Nominal business profits may be marginally lower in a low-inflation environment, resulting in slower growth of business income taxes such as company tax and other persons' tax.
  • Interest rates will generally be low when inflation is low, thereby resulting in lower returns for depositors, which in turn reduces the level of taxable interest income and, hence, RWT on interest.
  • Excise rates are CPI-indexed, so lower inflation would result in slower growth in excise duties.
  • Wage growth would be lower and, as a result, the amount of source deductions collected by the Government would reduce. In addition, reduced wage growth also results in a slower rate of fiscal drag, reducing source deductions further. There will be a lag before low inflation effects source deductions, owing to timing of wage rounds.

There are other revenue sources (eg, petroleum royalties resulting from lower oil prices and interest revenue owing to lower interest rates) also impacted by inflation, albeit to a lesser extent.

There are some positive impacts on the fiscal outlook from low inflation and consequential low interest rates through reductions in core Crown expenses. However, unlike core Crown tax revenue, only a portion of core Crown expenses, namely benefit expenses and finance costs, are particularly sensitive to price inflation. In some cases, expenses are impacted later than revenue. For the year ended 30 June 2015, benefit expenses and finance costs are expected to total $27.8 billion, which is just over a third of total core Crown expenses. Department baselines and new operating allowances are fixed in nominal terms, so are not sensitive to price inflation, but lower inflation should increase the Government’s purchasing power. Specific impacts are as follows:

  • New Zealand Superannuation (NZS) payments (forecast to be $11.6 billion in 2015) are indexed to at least 66% of the net average wage, so are not directly impacted by inflation. However, to the extent that lower inflation is reflected in lower wage growth, NZS payments would be expected to be lower. Given the indirect impact there will be a lag before inflation starts to influence net average wages.
  • Most other benefits are indexed directly to CPI inflation (excluding the impact of tobacco product price increases), so low inflation would reduce benefit costs. However, although family tax credits are indexed to inflation, payments are fixed until the cumulative impact of inflation reaches 5%, so the increase in expenses is later.
  • The yields on inflation-indexed bonds (approximately 20% of government stock) are linked directly to inflation, so lower inflation reduces finance costs.
  • Lower interest rates result in a reduction in both finance costs and interest revenue. The majority of interest-bearing financial assets are short-term in nature, so are quick to respond to interest rate changes. In contrast, borrowings are generally longer term, so there is a lag before the impact of interest rates flows through to finance costs, as the existing stock of bonds are replaced by new bonds with lower yields.

Core Crown Expenses

Core Crown expenses as a percentage of nominal GDP reduces...

Growth in core Crown expenses is forecast to be at a slower rate than growth in the nominal economy, falling from 30.5% of GDP in 2013/14 to 29.2% of GDP at the end of the forecast period (Figure 2.3).

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

...although nominal spending increases

Nominal growth in core Crown expenses of $11.9 billion over the forecast period from $71.5 billion in 2013/14 to $83.4 billion in 2018/19 is largely attributable to new spending in the Budget 2015 operating package, new operating allowances in future budgets and increased social assistance spending (as shown in Figure 2.4).

Figure 2.4 - Increase in core Crown expenses
Figure 2.4 - Increase in core Crown expenses.
Source: The Treasury

New operating allowances have been set at $1.0 billion for Budget 2016, rising to $2.5 billion in Budget 2017 before reducing to $1.5 billion in Budget 2018.

The combined new spending totals $6.4 billion by 2018/19 (Figure 2.5). For forecasting purposes, the allowances beyond Budget 2015 are assumed to be all expenditure. However, these allowances can be used for a combination of revenue and expense initiatives when allocated.

Figure 2.5 - Budget 2015 and future Budget allowances impact on expenses
Figure 2.5 - Budget 2015 and future Budget allowances impact on expenses.
Source: The Treasury

New operating spending will be allocated to department baselines as budget decisions are made. As a result, most functional expense areas (eg, health, education) in the Treasury tables remain flat beyond 2015/16 across the forecast period because specific decisions on where to allocate new spending have yet to be decided. Therefore comparisons are difficult at a functional level.

The following table summarises the impact of the Budget 2015 package on core Crown expenses.

Table 2.5 - Summary of changes in revenue and expenses arising from Budget 2015 operating package
Year ending 30 June
$millions
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Core Crown revenue  -  85  211  357  357
Core Crown expenses  42 1,038 1,251 1,355 1,388
OBEGAL impact  42  953 1,040  998 1,031

Composition of core Crown expense increase:

         
Child hardship package  -  78  271  264  263
Health  -  406  435  417  402
Education  -  111  120  108  104
Other Social Sector 7  159  109  110  117
Business Growth Agenda  29  131 74 94 96
Canterbury Earthquake Recovery Authority  68  97 6 3 2
Defence 3 28 79 92 92
KiwiSaver kick-start (17)  (175) (126) (106) (107)
Other  -  117 100 82 92
Reprioritisation (48) (92) (121) (94) (79)
Contingencies  -  178  304  385  406
Increase in core Crown expenses  42 1,038 1,251 1,355 1,388

Source: The Treasury

Apart from new budget spending, social assistance spending is expected to increase by $3.9 billion across the forecast period. New Zealand superannuation payments grow by $3.5 billion with costs linked to wage growth and increasing recipient numbers (Figure 2.6). As a percentage of total social assistance spending, New Zealand superannuation is expected to rise from about 39% in 2008/09 to around 53% a decade later.

Figure 2.6 - Social assistance spending
Figure 2.6 - Social assistance spending.
Source: The Treasury

Apart from superannuation, other welfare expenditure grows by $0.4 billion over the five-year forecast horizon, including income-related rents subsidy, family tax credits and sole parent support. Overall working-age beneficiary numbers are expected to decline in every year, led by drops in Jobseeker Support and Sole Parent Support. In later years these reductions are largely offset by inflation-based rate indexation. The largest single year growth occurs between 2015/16 and 2016/17, with the introduction of the Child hardship package, particularly impacting Sole Parent Support.

Cost to the Crown of the Canterbury rebuild

Table 2.6 outlines the latest estimates of the net impact on the Crown of the earthquakes included in these forecasts. These estimates reflect the known costs under current policy settings. They do not include future decisions the Government may take regarding the rebuild.

The forecasts assume that any additional costs to the Crown will be met within budget allowances.

The total cost to the Crown is currently estimated to be $16.5 billion, $0.5 billion higher than the Half Year Update. $393 million of the increase since the Half Year Update relates to operating expenses while capital costs (mostly Crown assets) are $183 million higher. The largest increase in operating costs relate to Southern Response.

An updated valuation of Southern Response's insurance claim costs estimated an increase in claim numbers (particularly in relation to the number of properties that exceed the Earthquake Commission (EQC) cap) and out of scope claim size, along with increased repair costs. As a result, Southern Response's earthquake related expenses are expected to reach just over $290 million in the current year, increasing the total cost to $800 million.

The increase of $134 million in Crown assets mostly reflects additional capital spending on schools in the Canterbury region.

Table 2.6 - Net earthquake expenses (operating and capital)
Year ended 30 June
$millions
2011-14
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Outside
forecast
period
Total
Budget Update
Total
Half Year Update
Local infrastructure 1,473 110 173 50 - - - 1,806 1,806
Crown assets1 115 362 796 563 204 118 - 2,158 2,024
Land zoning 1,009 45 22 50 - 1,126 1,139
Christchurch central city rebuild2 588 202 361 268 (4) 1 (175) 1,241 1,126
Welfare support 288 9 4 3 2 - - 306 306
Southern Response support package 582 290 (30) (30) (15) 3 - 800 555
Other costs 628 219 123 76 69 82 - 1,197 1,094
Core Crown Canterbury earthquake recovery costs 4,683 1,237 1,449 980 256 204 (175) 8,634 8,050
EQC (net of reinsurance proceeds) 7,757 (201) (164) (124) (1)  7,267 7,405
Other SOE and CEs (86) (26) 298 288 110 41 - 625 495
Total Crown 12,354 1,010 1,583 1,144 365 245 (175) 16,526 15,950

Operating and capital expenses

                 
Operating expenditure (OBEGAL) 11,552 327 385 188 133 135 - 12,720 12,327
Capital expenditure 802 683 1,198 956 232 110 (175) 3,806 3,623
Total Crown 12,354 1,010 1,583 1,144 365 245 (175) 16,526 15,950
Total cash payments3 8,002 2,740 3,007 1,690 535 245 (175) 16,044 15,477

Notes:

  1. Crown assets includes capital expenditure on Canterbury hospitals, schools, Tertiary Education Institutions (TEIs), housing and the Justice and Emergency Services Precinct.
  2. Central city rebuild costs include land acquisition and are net of expected recoveries and contributions from third parties.
  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

Key risks include the timing of expenditure and escalating costs as well as the independent review of infrastructure costs shared by the Christchurch City Council and the Crown (refer to the Specific Fiscal Risks chapter).

Operating Balance

Operating performance of the Crown continues to strengthen…

The OBEGAL deficit has reduced from $18.4 billion in 2010/11, to $2.9 billion in 2013/14 and is expected to be $0.7 billion in 2014/15. A surplus of $0.2 billion is now forecast in 2015/16 rising to $3.6 billion by 2018/19.

It can be difficult to do international comparisons, as jurisdictions use different financial frameworks. However, looking at the fiscal balance[6] the IMF produces, to enable cross-country comparisons, the New Zealand operating performance exceeds a number of other countries (Figure 2.7).

Figure 2.7 - International comparisons of fiscal balance
Figure 2.7 - International comparisons of fiscal balance.
Source: IMF

Figure 2.8 shows the composition of OBEGAL from the different segments of the Government. The core Crown segment is forecast to have an OBEGAL deficit of $1.2 billion in 2014/15, breakeven in 2015/16, then continues to rise over the forecast period, largely reflecting growth in tax revenue outpacing growth in nominal spending.

Figure 2.8 - Components of OBEGAL by segment
Figure 2.8 - Components of OBEGAL by segment.
Source: The Treasury

State-owned Enterprises (SOEs) are expected to continue to record operating surpluses throughout the forecast period.

The impact of Crown entities' (CEs') performance on OBEGAL results varies across the forecast period, largely reflecting changes in ACC results. In addition, Southern Response insurance expenses are expected to be $0.3 billion higher in 2014/15, adversely impacting that year.

As part of Budget 2015, the Government has signalled further reductions in the ACC levy rates of around $1.5 billion across the forecast period (largely in the last three years of the forecast). When combined with the consequential impact on investment revenue and insurance expenses, the fiscal impact on OBEGAL is expected to be on average $0.6 billion per year from 2016/17 (Table 2.7). An increase in expenses reflects the increased risk of meeting future claims with reduced revenue.

Table 2.7 - Impact of proposed ACC levy reduction
Year ending 30 June
$millions
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Total
Decrease in levy revenue - (32) (372) (533) (547) (1,484)
Foregone investment revenue - - (4) (28) (51) (83)
Increase in insurance expenses - 12  147 71  7 237
Impact on OBEGAL - (44) (523) (632) (605) (1,804)

Source:  The Treasury

...while investment returns lift the operating balance

The total Crown operating balance, inclusive of gains and losses, is forecast to be a deficit in 2014/15 of $0.6 billion before returning to growing surpluses in each year of the forecast period (Figure 2.9).

Figure 2.9 - Components of operating balance
Figure 2.9 - Components of operating balance.
Source: The Treasury

Investment returns in 2013/14 were higher than average, reflecting the strong performance of global equity markets. In 2014/15, the forecast gains on investments is $6.0 billion, primarily ACC and NZS Fund. The forecast assumes investment income returns to a long-term rate of return, resulting in subdued growth going forward. These gains play a part in increasing the Government's financial assets and the Crown's net worth (discussed on page 43).

While financial gains on investments are positive, the 2014/15 year is adversely impacted by losses of $6.6 billion, in relation to updated long-term liability valuations for ACC and the GSF, mainly owing to changes in economic factors (such as interest rates and inflation) impacting the valuations and reducing the operating balance surplus.

The operating balance is sensitive to balance sheet movements. Refer to the total Crown balance sheet section later in this chapter.

Notes

  • [6]Fiscal balance (sometimes referred to as net lending/borrowing) is defined as the net operating balance less the net acquisition of non financial assets such as property, plant and equipment. The inclusion of capital purchases and removal of impairments/write-offs are the major points of difference to OBEGAL.

Structural fiscal balance indicators and the fiscal impulse

The Treasury calculates a range of fiscal indicators to help assess the relationship between fiscal policy and the economy. These indicators include measures of the structural budget balance and a fiscal impulse indicator. Further detail on these indicators can be found in the Additional Information section of the Budget Update, which is available on the Treasury website www.treasury.govt.nz/budget/forecasts/befu2015

Table 2.8 - Structural fiscal balance indicators
Year ended 30 June
% of GDP
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
OBEGAL (1.3) (0.3) 0.1 0.6 0.7 1.3
Cyclically-adjusted balance (0.8) (0.2) - 0.4 0.5 1.2
Cyclically adjusted balance with terms-of-trade adjustment (3.2) (1.9) (1.7) (1.5) (1.4) (0.7)
Fiscal impulse [7] (0.3) (0.4) 0.6 (0.9) (0.3) (0.7)

Source: The Treasury

Structural budget balance

Indicators of the structural fiscal balance help to inform assessments of the sustainability of fiscal settings and identify shifts in discretionary fiscal policy. The Treasury's headline structural fiscal balance indicator (the cyclically-adjusted balance (CAB)) is an estimate of the OBEGAL adjusted for fluctuations of actual GDP around potential GDP. It provides an estimate of what the budget balance would be without the effect of the automatic stabilisers, which are the tax revenue and unemployment-related expenses that fluctuate with the business cycle. The economy is currently estimated to be operating close to its potential level, so there are only small differences between the OBEGAL and the CAB. Both the OBEGAL and the CAB increase by 1.0% of GDP between 2014/15 and 2018/19. Therefore the increase in the forecast OBEGAL is indicative of structural improvements in the fiscal position. This is largely owing to gradual reductions in the level of government expenses as a percentage of GDP over time.

A range of structural fiscal balance indicators can be calculated that are an extension of cyclically-adjusted balances, adjusting for a broader range of factors such as the effects of asset or commodity prices. An indicator of the structural budget balance relevant for New Zealand is one that incorporates a terms-of-trade adjustment. Such a measure gives an approximate indication of the OBEGAL if the terms of trade returned to its long-run average and the economy was operating at its potential level.

Although the terms of trade has recently fallen from a 40-year high, it remains above long-term historical averages. The medium and long-term outlook for New Zealand's terms of trade is underpinned by fast rising consumption in emerging market economies that is supporting demand for New Zealand's food exports. The Treasury's central forecast is for the terms of trade to remain elevated. Nevertheless, international and historical experience shows that terms-of-trade booms can reverseabruptly and so this is a risk to the outlook. The CAB with a terms-of-trade adjustment, using the 20-year average, suggests a weaker structural fiscal position than the CAB. Indeed, on this measure, a structural deficit persists across the forecast horizon. The trend is positive with a forecast improvement in this structural fiscal balance by 1.2% of GDP between 2014/15 and 2018/19.

Fiscal impulse

The fiscal impulse is a measure of discretionary changes in the fiscal position, which can be expected to have an impact on aggregate demand in the economy. The change in the structural budget balance is a rough indicator of the fiscal impulse. The indicators above show an improving structural fiscal balance, implying a contractionary fiscal impulse. However, these indicators are based on adjustments to the Crown’s operating balance. These are only very approximate measures of the contribution of fiscal policy to aggregate demand since the operating balance excludes some spending that contributes to aggregate demand (eg, purchases of physical assets) while including some items that do not feed directly into aggregate demand, such as KiwiSaver subsidies and goods with high import content (eg, much defence equipment). For these reasons, the Treasury calculates a fiscal impulse indicator that is a more precise guide to the contribution of discretionary fiscal policy on aggregate demand. The fiscal impulse indicator is calculated as the change in the cyclically-adjusted cash balance and excludes net interest payments, and makes a number of other specific adjustments.

The fiscal impulse indicator shows that fiscal policy is expected to have a contractionary impact on demand in almost every year of the forecast horizon. Discretionary fiscal policy is expected to withdraw 0.3% of GDP from aggregate demand on average in each year over the five years to June 2019. However, the estimated fiscal impulse is positive in 2015/16. The positive fiscal impulse in 2015/16 is owing to:

  • a fall in the tax receipts-to-GDP ratio in that year, partly as a result of the effect of lower inflation on tax receipts rather than any discretionary policy easing, and
  • modest stimulus from higher capital spending, partly owing to Crown capital spending on the Canterbury rebuild that is expected to peak in 2015/16.

These factors offset the negative contribution to the fiscal impulse in 2015/16 from operating expenditure that continues to fall as a share of GDP.

The fiscal impulse is negative for the three years to 2018/19, which reflects ongoing operating spending restraint, some reduction in capital spending from its 2015/16 peak, and a small rise in the tax receipts-to-GDP ratio.

There is much uncertainty about the precise magnitude and timing of the fiscal impulse and revisions between forecast rounds can be material. Perhaps the main conclusion that can be drawn is that continued fiscal consolidation can be expected over the next four years according to a range of indicators, although the pace of fiscal tightening is relatively moderate at less than 1% of GDP per year and may in fact be positive in the coming fiscal year.

Fiscal tightening can be expected to provide some offset to other positive drivers of aggregate demand over the forecast period relating to private consumption, business and residential investment, and net exports. Fiscal consolidation is keeping interest and exchange rates lower than otherwise, which helps to facilitate this shift in the drivers of demand.

Notes

  • [7]The fiscal impulse measure shown is the core Crown fiscal impulse plus Crown entities excluding EQC and Southern Response payments.

Residual Cash

Operating cash flows improve...

Similar to the trend in OBEGAL, operating cash flows are expected to strengthen across the forecast period. Net operating cash flows are forecast to be about $1.0 billion in surplus for 2014/15, increasing across the remaining forecast period. The strength largely represents the growth in tax receipts outpacing operating payments.

Over the forecast period, the Government is expected to generate cash flows from core Crown operations of $16.5 billion.

...but capital spending exceeds operating cash flows in the short term

Net capital spending is forecast to exceed operating cash flows until 2018/19, while core Crown residual cash[8] returns to surplus in the 2018/19 year (Figure 2.10).

Figure 2.10 - Core Crown residual cash
Figure 2.10 - Core Crown residual cash.
Source: The Treasury

The Government is forecast to spend $24.0 billion (net of the Government Share Offer programme) on capital items, which include purchasing physical assets (eg, school buildings), advances (eg, student loans), providing capital to CEs and future new capital spending. The 2014/15 cash flows include capital receipts of $0.6 billion from the deferred settlement for Meridian Energy shares.

Table 2.9 - Capital expenditure activity 2014/15 to 2018/19
Year ending 30 June
$billions
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Cumulative
Forecast
Purchase of physical assets (2.7) (3.0) (2.6) (1.9) (1.7) (11.9)
Sale of physical assets 0.2 0.1 0.1 0.1 0.1 0.6
Net purchase of physical assets (2.5) (2.9) (2.5) (1.8) (1.6) (11.3)
Advances made (2.8) (2.8) (2.1) (2.3) (2.3) (12.3)
Repayment of advances 2.1 1.6 1.6 2.2 2.1 9.6
Net advances (0.7) (1.2) (0.5) (0.1) (0.2) (2.7)
Purchase of investments (1.8) (2.1) (2.0) (1.6) (1.5) (9.0)
Sale of investments 0.3 - - - - 0.3
Net investments (1.5) (2.1) (2.0) (1.6) (1.5) (8.7)
Government Share Offer proceeds 0.6 - - - - 0.6
Top-down capital adjustment 0.4 0.3 0.1 0.1 0.1 1.0
Future new capital spending - (0.3) (0.4) (0.7) (0.9) (2.3)
Net capital spending (3.7) (6.2) (5.3) (4.1) (4.1) (23.4)

Source: The Treasury

Net purchases of physical assets represents forecast spending by core Crown agencies to maintain their existing asset base and includes spending on defence equipment and school property and also includes capital spending related to the Canterbury earthquakes (refer to the box on Canterbury earthquake costs on page 35).

Figure 2.11 - Forecast capital activity for 2014/15 to 2018/19 by significant spending
Figure 2.11 - Forecast capital activity for 2014/15 to 2018/19 by significant spending.
Source: The Treasury

Net investments largely represent capital injections to CEs, to expand their asset base, and are estimated to be $1.5 billion to $2.0 billion a year. The largest capital injections across the forecast period are to the New Zealand Transport Agency for state highways.

The unallocated new capital spending for Budget 2016 (totalling $0.5 billion) is forecast to be funded by the proceeds from the Government Share Offer programme (the Future Investment Fund) (Table 2.10). In addition, $190 million of KiwiRail funding is pre-committed against Budget 2016.

Table 2.10 - Future Investment Fund
$billions Total fund
Cash proceeds 4.669  
Allocated in Budget 2012 (0.533)
Allocated in Budget 2013 (1.421)
Allocated in Budget 2014 (1.050)
Allocated in Budget 2015 (0.939)
Future new capital spending 0.726 
Pre-committed Budget 2016 (0.190)
To be allocated 0.536 

Source: The Treasury

Capital allowances of $0.9 billion are forecast in Budget 2017 before growing at a rate of 2.0% per year for subsequent budgets.

New capital spending is expected to be allocated in future Budgets. The new capital spending for each Budget is spread over four fiscal years reflecting the assumed profile of the spend. This profile is illustrated in Figure 2.12.

Figure 2.12 - New capital spending (capital allowances)
Figure 2.12 - New capital spending (capital allowances).
Source: The Treasury

...leading to a forecast cash shortfall of $6.9 billion

Over the entire forecast period a cash shortfall of $6.9 billion is expected. The cash shortfall is funded through additional borrowing and reductions in financial assets.

Notes

  • [8]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.

Net Core Crown Debt

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

Net core Crown debt as a share of nominal GDP is forecast to peak at 26.3% in 2015/16 (Figure 2.13) before reducing to 22.9% by 2018/19, consistent with the Government's long-term fiscal objectives of net core Crown debt at a level no higher than 20.0% of GDP by 2020.

Figure 2.13 - Net core Crown debt
Figure 2.13 - Net core Crown debt.
Source: The Treasury

As residual cash returns to surplus, nominal net core Crown debt begins to reduce in 2018/19, to stand at $65.5 billion.

...while gross debt begins to decline after 2016/17...

Gross debt is expected to peak at $93.6 billion in 2016/17 after which forecast maturities are expected to exceed new debt being issued, so gross debt begins to decline. Gross debt is forecast to be $83.7 billion in 2018/19 which is equivalent to 29.3% of nominal GDP.

Figure 2.14 - Gross debt
Figure 2.14 - Gross debt.
Source: The Treasury

The bond programme is expected to raise funds of $36.5 billion over the forecast period, while $34.8 billion of existing debt will be repaid, providing net cash proceeds of $1.7 billion (Table 2.11). Any excess cash proceeds raised from the bond programme will be invested in financial assets and used to meet future debt maturities.

The total bond programme is broadly in line with total repayment of market bonds over the forecast period. The issuance profile is relatively flat in order to reduce year-to-year volatility of bond programmes and ensure consistency of supply over this time.

Table 2.11 - Net increase in government bonds
Year ending 30 June
$billions
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
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 8.2 8.5 6.9 6.5 6.4 36.5
Repayment of market bonds (8.7) (1.8) - (11.3) (11.5) (33.3)
Net proceeds from market bonds (0.5) 6.7 6.9 (4.8) (5.1) 3.2  
Repayment of non-market bonds (1.2) (0.3) (1.5)
Net repayment of non-market bonds (1.2) (0.3) (1.5)
Net cash proceeds from bond issuance (1.7 ) 6.4 6.9 (4.8) (5.1) 1.7

Source: The Treasury

Total Crown Balance Sheet

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

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 2015, net worth attributable to the Crown is expected to grow by $18.1 billion to stand at $93.6 billion by 2018/19, increasing as a share of nominal GDP to reach 32.8% by 2018/19 (Figure 2.15).

Figure 2.15 - Net worth attributable to the Crown
Figure 2.15 - Net worth attributable to the Crown.
Source: The Treasury

...with assets increasing by $40.2 billion over the forecast period...

Total assets are forecast to grow by $40.2 billion over the forecast period to $296.3 billion in 2018/19, made up of additional investments in assets (both physical and financial) of $65.5 billion, partially offset by reductions (largely depreciation) of $25.3 billion.

The largest asset growth over the forecast period is in the social assets portfolio which is expected to increase by $17.8 billion to be $149.4 billion in 2018/19 (Figure 2.16) over the forecast period. This growth reflects increases in student loans and property, plant and equipment, (including Canterbury rebuild assets, school property, hospitals and increases in the social housing portfolio value). See page 50 for social housing assumptions.

Figure 2.16 - Total Crown assets
Figure 2.16 - Total Crown assets.
Source: The Treasury

The financial asset portfolio is expected to increase by $12.9 billion to be $87.9 billion in 2018/19, reflecting the Treasury's New Zealand Debt Management Office (NZDMO) and Reserve Bank activities, and investment growth in the investment portfolios such as those managed by NZS Fund and ACC.

The commercial asset portfolio is expected to increase by $9.5 billion over the forecast period to be $59.0 billion in 2018/19, with growth coming from SOEs' investment in physical assets and growth in Kiwibank mortgages.

...while liabilities are expected to fall by the end of the forecast period

The Crown's liabilities begin to fall in 2017/18, from a peak of $199.7 billion in 2016/17 (Figure 2.17). The increases in the first three years of the forecast are largely increased borrowing.

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

Borrowings are mostly conducted by NZDMO, which manages the Crown's bond programme, the Reserve Bank and Kiwibank, and are forecast to peak at $121.7 billion in 2016/17 before decreasing slightly to stand at $115.6 billion by 2018/19.

Insurance liabilities are mostly held by ACC, EQC and Southern Response and are expected to increase over the forecast period from $38.5 billion in 2014/15 to reach $42.1 billion in 2018/19. The increases primarily relate to the ACC claims liability, as EQC and Southern Response insurance liabilities are expected to fall as earthquake insurance settlements continue to progress.

Retirement plan liabilities, primarily the GSF, are $12.6 billion in 2014/15 and fall to $10.9 billion by 2018/19.

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.

Refer to the Risks and Scenarios chapter page 65 for more details.

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

Apart from 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 liabilities; and future wage growth of students, which directly impacts the value of the student loan book.

...while other risks 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 82 for a list of the contingent liabilities at 31 March 2015.

Comparison to the Half Year Update

The Half Year Update was published on 16 December 2014. There have been a number of developments since then that have significantly impacted the fiscal outlook.

Table 2.12 - Key fiscal indicators compared to the Half Year Update
Year ending 30 June
$billions
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast

Core Crown tax revenue

         
Budget Update 66.1 68.9 72.5 76.8 80.5
Half Year Update 65.6 69.2 73.1 76.8 80.0
Change 0.5 (0.3) (0.6) - 0.5

Core Crown expenses

         
Budget Update 73.1 74.9 77.1 80.8 83.4
Half Year Update 73.0 75.1 76.9 80.7 83.2
Change 0.1 (0.2) 0.2 0.1 0.2

OBEGAL

         
Budget Update (0.7) 0.2 1.5 2.0 3.6
Half Year Update (0.6) 0.6 2.6 3.1 4.1
Change (0.1) (0.4) (1.1) (1.1) (0.5)

Residual cash

         
Budget Update (2.7) (4.2) (1.6) (0.2) 1.7
Half Year Update (4.0) (3.5) (0.1) 0.6 1.8
Change 1.3 (0.7) (1.5) (0.8) (0.1)

Net debt

         
Budget Update 61.7 65.6 67.1 67.2 65.5
Half Year Update 63.5 67.0 67.0 66.4 64.5
Change (1.8) (1.4) 0.1 0.8 1.0

Source: The Treasury

Economic factors have adversely impacted OBEGAL...

The reduced outlook for economy-wide prices and domestic interest rates has adversely impacted OBEGAL, with tax revenue now expected to be lower across most of the forecast period.

Figure 2.18 - Movement in core Crown tax revenue since the Half Year Update
Figure 2.18 - Movement in core Crown tax revenue since the <em>Half Year Update</em>.
Source: The Treasury

Tax revenue in the year to 30 June 2015 has been revised up on the back of strong year-to-date results and a higher nominal GDP outlook overall for the 2014/15 year when compared with the Half Year Update. From then until 2017/18, tax revenue forecasts have been revised down largely owing to reductions in the forecast for nominal GDP growth and interest rates, which reflect the weaker inflation outlook. The tax revenue forecast for 2018/19 is higher than in the Half Year Update, mainly owing to increases to the forecasts of nominal private consumption and residential investment.

Table 2.13 - Reconciliation of the change in core Crown tax revenue
Year ending 30 June
$billions
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast

Movement in core Crown tax owing to:

         
Source deductions 0.1 - - (0.1) (0.1)
Other persons tax 0.3 - 0.1 0.2 0.3
Corporate tax 0.1 (0.4) (0.4) (0.2) (0.1)
RWT - - (0.2) (0.3) (0.2)
GST (0.2) - (0.1) 0.3 0.6
Other taxes 0.2 0.1 - 0.1 -
Total movement in core Crown tax revenue 0.5 (0.3) (0.6) - 0.5
Plus: Half Year Update's tax base 65.6 69.2 73.1 76.8 80.0
Core Crown tax revenue at Budget Update 66.1 68.9 72.5 76.8 80.5
As a % of GDP 26.3% 27.6% 27.6% 27.6% 27.9%

Core Crown tax movements consist of:

         
Tax policy changes - 0.1 0.2 0.3 0.3
Forecast changes 0.5 (0.4) (0.8) (0.3) 0.2

Source: The Treasury

The changes in tax forecasts owing to macroeconomic changes are not a fixed proportion of the nominal GDP forecast changes. This is owing to the components within the GDP forecasts changing by varying amounts, thereby affecting the forecasts of the various tax types differently. Specifically:

  • Recent strength in employment and wages has seen source deductions above forecast for the current fiscal year to date. This is expected to persist through to the end of 2014/15, and the momentum in employment is expected to flow through to 2015/16, resulting in an increase in the source deductions forecast in that year. Thereafter, the lower wage growth track dominates, reducing the source deductions forecast below the Half Year Update level.
  • A generally stronger forecast for entrepreneurial income than in the Half Year Update has caused an increase in the other persons' tax forecast, especially in 2017/18 and 2018/19. This is also responsible for some of the reduction in the corporate tax forecast, with unincorporated businesses now forecast to earn a higher proportion of total profits than in the Half Year Update.
  • The GST forecast is initially lower than in the Half Year Update owing to weaker forecasts of nominal consumption and residential investment, and some earthquake-related refunds occurring earlier in the forecast period than previously assumed. However, by the end of the forecast period, the GST forecast is about 2% higher than the Half Year Update as a result of higher forecasts of private consumption and residential investment in 2017/18 and 2018/19.
  • Finally, with interest rates lower than in the Half Year Update, the forecast for interest RWT has been reduced in most years of the forecast period.

Overall, OBEGAL is expected to be lower in each year of the forecast compared to the Half Year Update (Table 2.14).

Table 2.14 - Changes in OBEGAL since the Half Year Update
Year ending 30 June
$billions
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
OBEGAL - 2014 Half Year Update (0.6) 0.6 2.6 3.1 4.1
Changes in forecasts:          

Economic factors

         
       Tax revenue (forecast changes) 0.5 (0.4) (0.7) (0.3) 0.2
       Benefit expenses (forecast changes) 0.1 (0.1) - 0.1 -
       Petroleum royalties (0.1) (0.1) (0.1) - -

Other factors

         
       Student loan impairment (0.2) - - - -
       Tax debt impairment 0.3 - - - -
       Net finance costs (0.2) 0.2 0.1 - -
       ACC forecast changes - (0.1) (0.5) (0.9) (0.6)
       Southern Response (0.3) - - - -
       Other changes - 0.1 0.1 - (0.1)
Total changes since the Budget Update (0.1) (0.4) (1.1) (1.1) (0.5)
OBEGAL - 2015 Budget Update (0.7) 0.2 1.5 2.0 3.6

Source:  The Treasury

Petroleum royalties have reduced as global oil prices have fallen considerably since the Half Year Update reflecting ongoing increases in supply even as demand has eased.

...while other factors also contribute to reducing OBEGAL…

Factors outside the macroeconomic environment can impact the operating result of the Government.

Since the Half Year Update,Southern Response insurance costs in 2014/15 are expected to increase by $0.3 billion, reflecting an increase in the estimated number and cost of claims (particularly those claims over the EQC cap).

In addition, the Government's signalled reductions in the ACC levy rates (discussed on page 37) also reduce OBEGAL, particularly in the last three years of the forecast.

The student loan impairment forecasts increase in the current year due to assumptions around forecast income levels of students.

The forecast impairment of IRD's debt portfolio in the current year is expected to be lower than previously forecast as growth in the debt book has slowed considerably.

...leading to an increase in net core Crown debt by the end of the forecast period

Similar to the changes to OBEGAL, residual cash deficits increase by $1.8 billion across the forecast period, resulting in net core Crown debt being higher by 2018/19 when compared to the Half Year Update.

Tax receipts and petroleum royalties are reduced, partially offset by lower benefit payments.

On the capital side, some spending is now expected to occur sooner than previously forecast. This coupled with additional capital spending (including Southern Response), sees the overall capital spend across the forecast period increase.

The increased cash deficits are the primary reason for net core Crown debt being $1.0 billion higher by 2018/19.

Fiscal Forecast Assumptions

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 2.15 below (on a June-year-end basis to align with the Government's balance date).

Table 2.15 - Summary of key economic forecasts used in fiscal forecasts
Year ended 30 June 2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Real GDP1 (ann avg % chg) 2.9 3.3 3.0 2.8 2.8 2.1
Nominal GDP2 ($m) 234,184 239,771 249,890 262,825 275,207 285,765
CPI (ann avg % chg) 1.5 0.5 1.0 2.1 2.1 2.1
Govt 10-year bonds (ann avg, %) 4.5 3.7 3.5 4.1 4.8 5.1
5-year bonds (ann avg, %) 4.1 3.6 3.5 4.0 4.6 5.0
90-day bill rate (ann avg, %) 2.9 3.7 3.6 3.7 4.2 4.8
Unemployment rate (ann avg, %) 6.0 5.6 5.2 4.8 4.5 4.5
Employment (ann avg % chg) 3.2 3.2 1.9 1.5 1.3 1.1

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 1 May 2015.
Tax revenue Tax policy changes enacted and announced by the Government will take place as planned and will affect tax revenue and receipts.
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 35 for further discussion.
Operating allowance Operating allowances are a net $1.0 billion for Budget 2016, increasing to $2.5 billion in Budget 2017 and reducing to $1.5 billion in Budget 2018. For further details, see note 9 of the Forecast Financial Statements.
Provision for new capital spending Capital allowances are $0.7 billion in Budget 2016 and $0.9 billion in Budget 2017 then growing at a rate of 2.0% per year for subsequent Budgets.  For further details, see note 9 of the Forecast Financial Statements.
Social housing The Government has announced social housing reforms as a key priority for this term. Cabinet has agreed the general direction of the Social Housing Reform programme. This includes transferring Housing New Zealand Corporation stock to non-government providers to create a competitive market for social housing. The level of uncertainty, particularly around the structure of the transactions, makes it difficult to quantify the fiscal impacts, and therefore are not included in the forecasts, with the exception of funding to the Tāmaki Redevelopment Company, which is included in these forecasts.
Finance cost on new bond issuances Based on the five-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 adjustments to operating and capital expenses are as follows:

 
Year ending 30 June
$billions
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Operating 0.6 1.0 0.5 0.4 0.4
Capital 0.4 0.3 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 2014 annual financial statements and any additional valuations that have occurred up to 31 March 2015 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 2015.  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 31 January 2015 and 31 December 2014 respectively.  The ACC liability has also been adjusted for the 31 March 2015 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 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.

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 fallen to 20.0% of GDP as set out in the Fiscal Strategy Report (FSR).

 
Year ending 30 June
$billions
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Annual contribution1 2.2 2.4 2.5 2.4
Actual contribution - - - -

Note

  1. Calculations of annual contributions if they were to resume in 2015/16

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 five-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 main economic and fiscal risks associated with the central forecast. The first part of the chapter outlines the key risks to the economic outlook. The second part of the chapter presents two alternative scenarios for the economy, and the remainder focuses on general fiscal risks. The global risks to the New Zealand economy, primarily around the prices of commodity exports, are tilted to the downside. However, domestic risks, relating chiefly to the size and duration of net inward migration, are skewed to the upside.
  • Internationally, the risks with potentially the largest impact on the New Zealand economy relate to the demand for commodities and global inflation. These include a sharp fall in demand from China, a slower rebalancing into non-mining activity in the Australian economy, the impact of any unwinding of easy US monetary policy on emerging markets and persistent weak inflation in many advanced economies.
  • Domestically, the risks with potentially the largest impact on the New Zealand economy relate to the duration and impact of elevated net migration, the uncertain impact on household spending as a result of the low inflation environment, a nationwide adjustment in house prices, the outlook for the Canterbury rebuild and uncertainty around labour productivity growth later in the forecast.
  • Two scenarios are presented that show possible ways in which the New Zealand economy could deviate from the central forecast. Scenario one is based on lower terms of trade and weaker inflation than in the central forecast, which reduce nominal GDP and tax revenue. An OBEGAL surplus is not achieved until the 2018 fiscal year. Scenario two is based on a larger boost to domestic demand from the low inflation environment, associated with a longer period of elevated net migration. This lifts nominal GDP, tax revenue and the OBEGAL over the forecast period.
  • In addition to the risks associated with the economy, the Crown is also subject to expenditure and balance sheet risks. In particular, volatility in financial asset prices and interest rates can have a significant impact on the Crown's fiscal position.

Economic Risks

The balance of risks to global growth continues to be skewed to the downside. Growth in China slowed in 2014 as housing demand weakened, and growth in Australia remained below trend. The US recovery remains on track despite moderating in early 2015, and US monetary policy settings are expected to tighten, which may have the unintended effect of increased volatility in emerging markets. Growth in euro area activity has picked up from a low level, but deflationary risks persist. Downside risks remain around the demand for New Zealand's key commodity exports, and global inflation may remain weak for longer. The realisation of any of these downside risks to the world economy would weigh on growth in the New Zealand economy.

The outlook for domestic demand continues to be solid, with household spending and high net migration presenting upside risks. High household confidence may facilitate a larger boost to consumption from the low inflation environment than in the central forecast. Stronger demand and GDP growth in New Zealand relative to other countries, compared to our central forecast, could sustain a longer period of elevated net inward migration, which would further boost domestic demand in the economy.

Risks to China's growth outlook continue to be tilted to the downside...

Risks to the growth outlook for China continue to be skewed to the downside, with GDP growth in 2014 (7.4%) just below the government's target (7.5%). Annual growth in the March 2015 quarter fell to the government's 2015 target of 7.0%. Housing demand has continued to weaken, resulting in house price falls across the major cities. The housing market slowdown reinforced concerns over the high level of informal banking credit and local government debt. China's growth could slow more sharply than in the central forecast if financial adjustment results in significantly tighter credit conditions.

The People's Bank of China has continued to ease monetary policy, but the extent of stimulus has been relatively limited so far. While policymakers want to prevent a sharp slowdown in the economy and stabilise the housing market, excessive stimulus would lead to the build-up of future risks. Structurally, China is rebalancing its economy away from investment- and export-led growth towards private consumption. Rebalancing is expected to lead to slower overall growth in the short term, but should deliver more sustainable growth in the long term. A successful rebalancing into more consumption-based growth would be positive for New Zealand by increasing Chinese demand for our primary products.

...which could hinder the recovery in the Australian economy...

A sharp slowdown in China's growth would weaken external demand for other Asian economies. Lower Chinese demand would also impact on Australia's export sector, particularly mining and agriculture. Iron ore prices have already fallen 50% since mid-2014. Growth in Australia is expected to be below trend in the near term, and risks to the Australian economy (apart from the flow-on effect from China) centre on a slower-than-expected rebalancing of growth from mining investment to investment in the non-mining sectors. Continued muted growth in labour productivity and firm profitability could dampen employment and wage growth, leading to weaker household demand than expected. Lower export earnings and a sharp depreciation in the Australian dollar would also reduce real incomes and spending. As one of New Zealand's largest trading partners, a more prolonged period of soft growth in Australia would clearly impact on the New Zealand economy.

...and US monetary tightening may expose emerging market vulnerabilities...

The US economy has continued to recover from the global financial crisis, driven by growth in consumption and investment. Despite a moderation in the recovery in early 2015, the US Federal Reserve is expected to raise its funds rate in the second half of the year. Thereafter, monetary tightening could be faster than in the central forecast if US domestic demand turns out to be stronger than expected. This could lead to the unintended consequence of a disorderly global financial market adjustment, especially in emerging markets.

In an environment of very low interest rates, global asset prices have risen to levels that may not reflect economic fundamentals. As monetary tightening begins in the US, higher US bond yields and a more entrenched recovery would raise the attractiveness of US assets. This could lead to large capital outflows from emerging markets including Asia, as well as tighter credit conditions and volatility in their exchange rates. Growth would fall in some of New Zealand's key trading partners, in turn reducing the demand for our exports.

...contributing to risks of prolonged weakness in global commodity demand

Risks to the outlook for global commodity prices are, on balance, skewed to the downside. Crude oil prices were down 50% in April 2015 from June 2014, and a key judgement underpinning the central forecast is a slow recovery in oil prices (see the box on “Commodity prices” in the Economic Outlook chapter). Oil prices would remain low for longer than in the central forecast if any international risks weaken demand, and/or competition intensifies between oil producers in the Middle East and North America. On the other hand, geopolitical uncertainty in the Middle East and Ukraine could lead to greater volatility in oil prices.

The prices of other hard commodities, such as iron ore and copper, and soft commodities including dairy, may fall further or remain at their current low levels for longer than expected. Lower commodity prices than in the central forecast would reduce key export prices and export revenues for New Zealand. Lower commodity prices would also dampen global inflation and increase deflationary risks in some of the major economies, particularly the euro area and Japan.

Euro area deflationary risks persist despite a pick-up in growth

The growth outlook for the euro area economy has improved from 2014, but significant risks remain around the high levels of sovereign debt and the robustness of the banking sector in the peripheral economies. In particular, the risk of a Greek default is assessed by the market to have increased as the Greek government and its EU partners experienced difficulty in agreeing on the terms of a further bailout programme.

Meanwhile, deflationary risks remain high as lower petrol prices drove headline inflation below zero, which may reinforce low inflation expectations. A flare-up of debt concerns or a fall into deflation could stifle the euro area recovery. It remains uncertain how effective the European Central Bank's quantitative easing programme will be at boosting inflation and growth.

Weak global demand would reduce key commodity export prices...

The effect of lower commodity prices on New Zealand's terms of trade would depend on the relative size of price declines between commodity exports (especially dairy) and imports (primarily crude oil). Given a larger weight for commodities in exports than in imports, and the possibility of weaker demand from Asian markets, the risks to the terms of trade are tilted to the downside. Lower terms of trade than in the central forecasts, owing to weakness in export prices, particularly dairy, would reduce export receipts and weigh on incomes and spending in the agricultural sector. Agricultural production beyond 2015 may also be negatively affected to an extent. Lower spending by the agricultural sector could lead to second-round impacts on other sectors, suppressing consumer confidence and demand in the wider economy.

...and global inflation may remain low for longer and suppress domestic prices further...

The inflation outlook is weak over the year ahead in spite of solid growth in domestic demand. If prices for crude oil and other commodities remain at a low level for longer, this would flow through to lower domestic petrol prices and inflation. A more prolonged period of low inflation in the major economies than expected, including the euro area and Japan, would suppress global price pressures, which could put further downward pressure on the prices of tradable goods and services in New Zealand.

A separate risk for inflation originates from the estimation of the economy's productive capacity (the maximum level of activity that can be achieved while maintaining stable inflation). If potential output is higher than estimated, the output gap (the difference between real GDP and potential output) would be smaller. As a result, inflationary pressures would be weaker than anticipated. Under these circumstances, the Reserve Bank may hold stimulatory monetary policy settings in place for longer than currently expected. If potential output is lower than estimated and fast growth continues, inflation could pick up earlier, prompting the Reserve Bank to increase rates sooner.

Scenario one explores the above risks further, through simulating the economic impacts of lower terms of trade for longer than in the main forecast as a result of weaker world demand. Weak global demand is also reflected in a prolonged period of low inflation in this scenario.

...but higher net migration than forecast would boost domestic demand...

Net migration gains remain elevated and judgements around the extent of the cycle play a key role in the forecasts. The annual net inflow of migrants is forecast to peak at around 57,000 in June 2015, up from a forecast peak of around 52,000 in March in the Half Year Update. A stronger domestic labour market than forecast or weaker conditions in the countries to and from which significant migration occurs could result in a higher peak level of net migration than in the central forecast, which may also last for longer. Higher net migration would be likely to continue to include fewer departures to Australia.

The impact of higher migration inflows on the wider economy will depend on the balance between increased arrivals and reduced departures. The contribution of new arrivals to net migration gains has increased over the past year, which points to a larger initial boost to demand than to supply in the economy. This development contrasts with 2014, when reduced departures drove net migration gains. New migrants are likely to require time to adjust to the New Zealand labour market. At the same time, higher migrant arrivals than in the central forecast would put additional pressure on the housing market and boost private consumption.

...and low inflation environment may provide larger boost to consumption

Low inflation also poses some upside risk to the central forecast of domestic demand through lifting the purchasing power of households. The extent of the demand boost would depend on the magnitude of the impact on real incomes, the response from the Reserve Bank and household decisions on saving and spending. Should firms' wage-setting behaviour remain relatively unchanged despite low inflation, real wage growth would be higher, contributing to a larger boost to household consumption. The Reserve Bank may hold the Official Cash Rate (OCR) at an historically low level for longer than in the central forecast, or even reduce the OCR. Lower interest rates and higher consumer confidence would also lead to a larger boost to household spending and business investment, which would flow through to faster growth in real and nominal GDP than in the central forecast.

Potential housing market adjustment and risks around the Canterbury rebuild

Housing demand is expected to be supported by net migration and low mortgage rates in the year ahead. However, housing demand might be weaker or stronger than in the main forecast, particularly given the risks around migration inflows. Declining nationwide house prices would reduce growth in residential investment and erode some households' wealth. Faster nationwide house price growth than in the central forecast would boost residential investment, as well as household wealth and consumer confidence.

The Canterbury rebuild may provide a smaller contribution to growth than in the central forecast. The size of the residential rebuild may be smaller than expected, as uncertainty persists over the number of households leaving Christchurch after settling their insurance claims. At the same time, housing supply may be gradually catching up with demand. The commercial rebuild may also be slower over the next couple of years than expected, as the commencement of large commercial buildings is taking longer than anticipated despite the basic infrastructure rebuild being well underway.

Uncertainty on labour productivity presents risks for the medium-term outlook

The assumptions on labour productivity growth have significant implications for the medium-term real GDP forecasts. Slower labour productivity growth over the medium term than in the central forecast would result in lower real income growth in the later years of the forecast period. This would result in lower domestic demand than projected, and slower growth in both real and nominal GDP. Conversely, faster labour productivity growth would lead to higher GDP growth.

Alternative Scenarios

The following scenarios show how the economy might evolve if some of the key judgements in the central forecast are altered (Table 3.1). They represent two of the many ways that the economy could deviate from the central forecast. Scenario one represents the economic impacts if the terms of trade fall to a lower level than in the central forecast and recover only gradually over the forecast period. Scenario two shows the economic impact if household demand rises by more than in the central forecast in response to low inflation and if net inward migration is stronger.

Table 3.1 - Economic and fiscal variables for central forecast and scenarios
March years 2014
Actual
2015
Estimate
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast

Real GDP (annual average % change)

           
Main forecast 2.5 3.3 3.1 2.8 2.8 2.4
Scenario one 2.5 3.3 2.4 2.8 3.0 2.5
Scenario two 2.5 3.3 3.6 3.1 2.6 2.2

Nominal GDP (annual average % change)

           
Main forecast 6.8 3.9 3.3 5.3 4.8 4.1
Scenario one 6.8 3.8 0.7 4.5 5.9 5.1
Scenario two 6.8 3.9 4.0 6.0 5.0 4.2

Consumers price index (annual % change)

           
Main forecast 1.5 0.2 1.4 2.1 2.0 2.1
Scenario one 1.5 0.1 1.4 1.9 2.1 2.0
Scenario two 1.5 0.2 1.7 2.5 2.5 2.3

Unemployment rate1

           
Main forecast 6.1 5.6 5.1 4.7 4.5 4.5
Scenario one 6.1 5.6 5.4 5.2 4.8 4.6
Scenario two 6.1 5.6 4.9 4.4 4.3 4.4

Operating balance before gains and losses  (% of GDP)2

           
Main forecast -1.3 -0.3 0.1 0.6 0.7 1.3
Scenario one -1.3 -0.3 -0.6 -0.3 0.0 0.7
Scenario two -1.3 -0.3 0.3 1.0 1.3 1.8

Net core crown debt (% of GDP)2

           
Main forecast 25.6 25.7 26.3 25.5 24.4 22.9
Scenario one 25.6 25.8 27.9 27.9 27.2 25.9
Scenario two 25.6 25.7 25.7 24.4 22.7 20.7

Notes:

  1. March quarter, seasonally adjusted
  2. June years

Sources: Reserve Bank, Statistics New Zealand, the Treasury

Scenario One - Lower Trough in the Terms of Trade

Greater weakness in commodity prices and low global inflation...

In the first scenario, world prices for New Zealand's commodity exports fall to a lower level than in the central forecast. The potential key drivers of such a price fall include the impacts of a sharp slowdown in Chinese demand on other Asian economies and Australia. Alternatively, US monetary tightening may lead to falling asset prices, currency volatility and tighter credit conditions in emerging markets, which would also result in lower Asian demand. Finally, global supply of soft commodities may be larger than projected.

As a result of weaker commodity prices, global inflation remains low for a longer period. At the same time, low nominal interest rates hinder an effective response by central banks to lift demand. Even weaker global inflation flows through to lower import prices for New Zealand, partly offsetting the fall in export prices, but the goods terms of trade are lower than in the central forecast until June 2019 (Figure 3.1), when they recover to the same level.

Figure 3.1 - Goods terms of trade (SNA)
Figure 3.1 - Goods terms of trade (SNA).
Sources: Statistics New Zealand, the Treasury

...result in depreciation of the NZ dollar and slightly lower inflation...

Lower terms of trade than in the central forecast lead to a sharp depreciation in the exchange rate over the coming year, contrasting with a steady NZ dollar TWI projection in the central forecast (Figure 3.2). Following this fall, the TWI remains at a lower level throughout the forecast period.

Figure 3.2 - Trade-weighted NZ dollar index
Figure 3.2 - Trade-weighted NZ dollar index.
Sources: Reserve Bank, the Treasury

Inflation is slightly lower over the next year than in the central forecast (Figure 3.6). Non-tradable inflation recovers at a slower pace over 2016 and 2017 as a result of weaker domestic demand. Tradable inflation is higher over 2016 as a result of the fall in the exchange rate, but the lift is partly offset by low global prices for tradable goods and particularly for commodities, including crude oil. Headline inflation returns to 2.0% at the end of 2016, similar to the central forecast.

...as well as reduced export values, domestic demand and nominal GDP growth...

The fall in commodity prices initially results in a contraction in export receipts, leading to lower farm incomes and, more gradually, reduced agricultural output than in the central forecast. The depreciation of the NZ dollar acts to offset some of the fall in export values, but nominal goods exports are lower over the next three years. Weak spending by the agricultural sector spreads to other sectors, leading to slower growth in private consumption (Figure 3.3), investment and imports than in the central forecast. While import volumes are lower, import values are higher owing to a weaker exchange rate. Higher import values and lower export prices lead to the annual current account deficit rising to 7.7% of GDP by the end of 2016, larger than in the central forecast. Nominal GDP is a cumulative $26 billion lower than in the central forecasts over the period to June 2019.

Figure 3.3 - Real private consumption
Figure 3.3 - Real private consumption.
Sources: Statistics New Zealand, the Treasury

…together leading to lower tax revenue and operating balance

Core Crown tax revenue is a cumulative $7.1 billion lower over the forecast period in this scenario. Lower nominal consumption and residential investment reduce GST revenue by a cumulative $1.1 billion over the forecast period. The economy’s lower value of output means that business profits are reduced, resulting in corporate taxes being a cumulative $2.3 billion lower. The weaker labour market and lower labour incomes reduce source deductions revenue by $1.9 billion over the forecast period.

Core Crown expenses are moderately higher than in the central forecast. Weaker demand for labour results in an increase in the number of recipients of unemployment-related benefits. Fiscal policy is assumed to remain unchanged from the central forecast. In this scenario, the OBEGAL does not return to surplus until the June 2018 year (Figure 3.4), two years later than in the central forecast. As a consequence, net core Crown debt peaks at 27.9% of nominal GDP in the June 2016 year, rather than peaking at 26.3% in that year, as in the central forecast (Figure 3.7).

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

Scenario Two - Stronger Household Demand and Migration

Low inflation lifts consumer spending with a larger surge in net inward migration...

In the second scenario, household demand picks up by more than in the central forecast in response to the low inflation environment. Consumer confidence rises to a higher level than in the central forecast, as low retail prices, including petrol, increase the disposable income of households. As a result, consumers spend a larger proportion of the income boost. Stronger trading conditions for businesses than in the central forecast lead to increased demand for labour.

At the same time, net inward migration rises to a higher level than in the central forecast, reinforced by more upbeat domestic demand and a stronger labour market. The annual net migration inflow rises to 60,000 in June 2015, and remains around that level until March 2016 (Figure 3.5), contrasting with an earlier decline in the central forecast from a peak of 57,000 in June 2015. This represents a cumulative 15,000 more people than in the central forecast over the next two years. Higher net inward migration driven mostly by new arrivals further boosts domestic demand by more than the supply side of the economy over the next couple of years.

Figure 3.5 - Annual net migration
Figure 3.5 - Annual net migration.
Sources: Statistics New Zealand, the Treasury

...supporting a lift in private consumption and business investment...

Higher net inward migration and increased spending by New Zealand households underpin faster growth in real private consumption than in the central forecast (Figure 3.3). In response to buoyant trading conditions, businesses increase capital investment and hiring of labour to expand capacity. Spare capacity in the labour market is reduced faster than in the central forecast despite higher migration. Stronger growth in labour demand than supply leads to the unemployment rate falling to 4.5% by the end of 2016, a year earlier than in the central forecast. The NZ dollar appreciates, with the TWI rising to 80.0 by June 2016, higher than the steady track in the central forecast of 77.9.

...and leading to a surge in housing demand...

Higher population growth than in the central forecast boosts housing demand, and annual house price growth is faster, at 8.0% at the end of 2015, and remains higher over the next two years. Initially, the increase in housing demand relative to the central forecast is concentrated in Auckland and Canterbury, but gradually broadens to other areas. Faster house price growth supports higher real and nominal residential investment growth than in the central forecast.

...while pressure in the non-tradable sectors eventually leads to higher inflation...

Stronger domestic demand results in higher inflation over the medium term than in the central forecast. Non-tradable inflation is significantly higher at 4.3% in the March quarter of 2017, although tradable inflation is slightly lower as a result of a higher exchange rate. Annual inflation rises to 2.0% by the middle of 2016, half a year earlier than in the central forecast, and moves towards the upper limit of the Reserve Bank's target band thereafter (Figure 3.6). The Reserve Bank tightens monetary policy in the December quarter of 2016, earlier than in the central forecast, but the move only begins to restrain demand and inflation later in the forecast period. The caution on the part of the Reserve Bank reflects the uncertainty in the economic outlook and accommodative policy settings in the rest of the world.

Figure 3.6 - Consumers price index
Figure 3.6 - Consumers price index.
Sources: Statistics New Zealand, the Treasury

Real GDP growth over the next two years is faster than in the central forecast, at 3.6% in the March year 2016, although increased import growth produces some offset. Higher inflation and faster house price growth lead to stronger nominal GDP growth. Nominal GDP is a cumulative $16 billion higher than in the central forecast by the end of June 2019, with most of this occurring over the first three years of the scenario.

...and higher nominal GDP boosts tax revenue and the operating balance

Core Crown tax revenue is a cumulative $5.0 billion higher than in the central forecast over the period to June 2019. Increased nominal consumption and residential investment boost GST revenue by a cumulative $1.2 billion over the forecast period. Greater business profitability results in corporate taxes being a cumulative $1.1 billion higher. The stronger labour market and higher wage growth lift source deductions revenue by $1.9 billion over the forecast period. An earlier increase in short-term interest rates flows through to a cumulative $0.2 billion rise in RWT.

Core Crown expenses are lower than in the central forecast owing to a lower number of recipients of unemployment-related benefits. The OBEGAL returns to surplus in the June 2016 year, the same as in the central forecast, but the surplus is larger at 0.3% of GDP (Figure 3.4). The OBEGAL surplus remains larger than in the central forecast over the later years. Net core Crown debt peaks at a lower level of 25.7% of GDP in the June 2016 year, and it subsequently declines faster to 20.7% of GDP in the June 2019 year (Figure 3.7).

Figure 3.7 - Net core Crown debt
Figure 3.7 - Net core Crown debt.
Source: The Treasury

General Fiscal Risks

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

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 Crown receives in a given year is closely linked to the performance of the economy.

Figure 3.8 plots the central tax revenue forecast, along with confidence intervals around these forecasts based on the Treasury's historical tax forecast variances and the assumption of an even balance of risks around the central forecast.[9] The outermost shaded area captures the range ±$6.7 billion in the June 2019 year, within which actual tax outturns are expected to fall 80% of the time.[10]

Figure 3.8 - Core Crown tax revenue uncertainty
Figure 3.8 - Core Crown tax revenue uncertainty.
Source: The Treasury

The tax revenue forecasts from the two scenarios are also shown in Figure 3.8. 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, Crown revenue would be different from forecast, with Scenarios one and two being examples of possible outcomes.

Based on average historical forecast variances, Figure 3.8 suggests that an annual tax revenue outturn associated with Scenario one lies between the 25th and 50th percentiles in most years. An annual tax revenue outturn associated with Scenario two lies between the 50th and 75th percentiles in each year.

Notes

  • [9]A summary of the methodology and key assumptions is found in Parkyn, O (2010), “Estimating New Zealand's Structural Budget Balance”, New Zealand Treasury Working Paper 10/08, available at http://www.treasury.govt.nz/publications/research-policy/wp/2010/10-08/. Standard deviations used for the 0-, 1-, 2-, 3- and 4-year forecasts are 0.9%, 3.2%, 5.3%, 6.6% and 6.9% of the actual results.
  • [10]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, available at http://www.treasury.govt.nz/publications/research-policy/wp/2011/11-02

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 higher than forecast in each year up to June 2019, tax revenue would be around $4.1 billion higher than forecast in the June 2019 year as a result. The sensitivities are broadly symmetric and if nominal GDP growth is one percentage point lower each year than expected, tax revenue would be around $4.0 billion lower than forecast in the June 2019 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 NZDMO being $130 million lower in the June 2019 year. This would be more than offset by interest expenses being $340 million lower in the June 2019 year. In the June 2015 year, a one percentage point lower interest rate would result in interest expenses being $8 million higher, owing to increased realised losses on the repurchase of EQC buildings.

Table 3.2 - Fiscal sensitivity analysis
Year ending 30 June
($millions)
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast

1% higher nominal GDP growth per year on

         
Tax revenue 675 1,400 2,210 3,130 4,125

Tax revenue impact of a 1% increase in growth of

         
Wages and salaries 280 595 945 1,350 1,800
Taxable business profits 130 290 475 680 895

Impact of 1% lower interest rates on

         
Interest income1 (32) (68) (135) (138) (130)
Interest expenses1 8 (109) (214) (275) (340)
Overall operating balance1 (40) 41 78 138 210

Note:

  1. Funds managed by NZDMO only.

Source: TheTreasury

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. Over-forecasting of expenditure leads to policy being tighter than otherwise, and there is inherent uncertainty 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 relates largely 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.

In recent years, earthquakes have underlined the inherent exposure of the Crown's fiscal position to unexpected events. The Crown's fiscal position would be affected 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 implies increased public 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 impact on the balance sheet owing to the Crown having explicit obligations either in respect of its own assets or to the wider economy. Some do not directly impact the balance sheet but nonetheless affect fiscal stability (eg, items that are of a discretionary nature, but are implicit obligations of the Crown owing to strong expectations that the Crown would respond to an event).

While the Crown's exposure to risks 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 financial resources could be needed. This helps to absorb the impact of the risk through the balance sheet so that the wider economy need not adjust immediately at a greater economic cost.

A large 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, it is estimated that roughly a third is attributed to this “market risk”.[11] Three areas of the balance sheet are particularly susceptible:

  • Financial assets held by the Crown Financial Institutions (CFIs) are sensitive to financial-market volatility. CFIs tend to diversify their portfolios across a range of financial assets to manage exposures to specific market risks.
  • 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.
  • 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.

Other large sources of balance sheet risk are contingent and implicit liabilities relating to natural disasters and potential financial system stress.

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.

The New Zealand Crown remains in the top-25 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 for Standard & Poor's and Moody's, and the rating outlook from Fitch is positive.

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 face increased funding pressure in the future. All else being equal, deterioration in the ratings outlook could 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 NZDMO.

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 2013/14 financial year.[12] 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.

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 significant 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 or the balance sheet. 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.

Established practice is that the Government 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 allowances 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 the allowance in the fiscal forecasts for forecast new operating expenditure, or
  • for capital, the existing Crown balance sheet, including the Future Investment Fund (FIF), or the allowance in the fiscal forecasts for forecast new capital spending.

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 within existing baselines, 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 the Budget operating allowance): 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 existing Crown balance sheet, including the FIF, or the Budget capital allowance): Capital investment decisions are risks to the fiscal forecasts only to the extent that they cannot be managed within the existing Crown balance sheet, including the FIF, or the Budget 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:

  • Risks from changes to economic assumptions; 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 1 May 2015
Vote name (if appropriate)[13] - specific fiscal risk title Status[14]

Potential policy decisions affecting revenue

 
Labour Market - ACC Funding Policy Review Unchanged
Revenue - Income Sharing Tax Credits Unchanged
Revenue - Potential Tax Policy Changes New
Services Funded by Third Parties Unchanged

Potential policy decisions affecting expenses (expected to be funded from reprioritisation or the Budget operating allowance)

 
Budget Operating Initiatives Unchanged
Building and Housing/Social Development - Social Housing Reform Changed
Business, Science and Innovation - Ultra-Fast Broadband Initiative Unchanged
Canterbury Earthquake Recovery - Christchurch Central Recovery Plan - Anchor Projects Unchanged
Christchurch City/Crown Cost Sharing - Horizontal Infrastructure Unchanged
Concessionary Loans Unchanged
Defence Force - Operating and Capital Costs Unchanged
Government Response to Wai 262 Unchanged
Health - Health Benefits Limited Unchanged
Internal Affairs - All-of-Government Common Capabilities Sustainable Funding Unchanged
Labour Market - ACC: Work-related Gradual Process Disease and Infection Changed
Revenue - Transformation and Technology Renewal Unchanged
Social Development - Child, Youth and Family Modernisation Changed
Social Development - Welfare Reform Costs Unchanged
Social Development - Welfare Reform Forecast Benefit Savings Unchanged
State Sector Employment Agreements Unchanged

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

 
Agency Capital Intentions Unchanged
Arts, Culture & Heritage - Review of Military History Museum Arrangements Unchanged
Earthquake Strengthening for Crown-owned Buildings Unchanged
Finance - Asian Infrastructure Investment Bank New
Finance - Crown Overseas Properties Unchanged
Lands - Upgrading Landonline New
Parliamentary Service - Parliamentary Accommodation Unchanged
Primary Industries and Food Safety - Investment in Water Infrastructure Unchanged
Transport - Auckland Transport Projects Changed
Transport - Regional State Highways Unchanged
Transport - Support for KiwiRail Changed

Matters dependent on external factors

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

Notes

  • [13]Note that some vote names have changed since the Half Year Update.
  • [14]Unchanged- risks where the nature and/or scale of the risk has not changed substantively since the Half Year Update.

Potential Policy Decisions Affecting Revenue

Labour Market - ACC Funding Policy Review (Unchanged)

The Government has reviewed ACC's funding policy and intends that there be further levy reductions across all accounts but final decisions have not yet been taken on the nature and timing of those reductions. Such reductions would reduce Crown revenue and Crown assets, with a flow-on impact to the operating balance and net worth.

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. The best estimate at the time the Bill was introduced in 2010 was that the changes will reduce tax revenues by $500 million per 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.

Revenue - Potential Tax Policy Changes (New)

Some of the items on the tax policy work programme could each have a significant positive impact on operating revenue: review of GST on goods and services purchased online, ensuring that withholding tax is paid on interest income derived from related New Zealand entities and accruing to non-residents, and work on Base Erosion and Profit Shifting including interest allocation rules and the taxation of foreign hybrid instruments and entities.

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.

Potential Policy Decisions Affecting Expenses (Expected to be Funded from Reprioritisation or the Budget Operating Allowance)

Budget Operating Initiatives (Unchanged)

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.

Building and Housing/Social Development - Social Housing Reform (Changed)

The Government is progressing the Social Housing Reform Programme (SHRP). The objectives of this programme are to improve the services and assistance provided to those in housing need, building the social housing market and fully recognising the costs of the social housing system. The next stage of the programme will see work begin on Housing New Zealand Corporation (HNZC) stock transfers involving community housing organisations as well as development transactions aimed at leveraging the redevelopment potential of HNZC land and increasing the supply of social/affordable housing. Depending on the size, scope and complexity of these transactions additional funding may be required and expenses associated with these transactions will need to be accounted for.

Business, Science and Innovation - Ultra-Fast Broadband Initiative (Unchanged)

The Government's expectation is that the current funding envelope for the roll out of Ultra-Fast Broadband (UFB) phase 1 will not be breached and that the objective of rolling out UFB to 75% of New Zealanders by the end of 2019 will be met. Until the Commerce Commission issues a final decision on the pricing of the copper network, the largest partner in the roll out, Chorus, will face some degree of funding uncertainty which could give rise to a fiscal risk in achieving these targets.

Canterbury Earthquake Recovery - Christchurch Central Recovery Plan - Anchor Projects (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 scope, ownership decisions, implementation and project costs, and will to some extent eventually be recovered. Business cases are progressing through the decision-making process and construction costs 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/Crown Cost Sharing - Horizontal Infrastructure (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 yet to be completed, so the Crown cannot yet consider it. Any additional costs or savings to the Crown that may arise from decisions following the review will have a corresponding fiscal impact.

Concessionary Loans (Unchanged)

The Crown has provided loans to local government and iwi-based organisations on a concessionary basis to achieve public policy purposes. Because of their concessionary nature, these loans are written down on draw down to reflect existing market conditions. There is a risk that future market conditions may require a different adjustment. The current carrying value of these loans on the Crown's balance sheet is $605 million.

Defence Force - Operating and Capital Costs (Unchanged)

In 2013, the Government reconsidered New Zealand Defence Force (NZDF) funding, output requirements and capability intentions, through the Defence Mid-Point Rebalancing Review. The review has resulted in increased funding for NZDF in Budget 2014 and Budget 2015. Further operating and capital decisions may be required to achieve Defence White Paper (2010) policy and enable NZDF to manage additional cost pressures over the forecast period.

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.

Health - Health Benefits Limited (Unchanged)

Health Benefits Ltd (HBL) was established in July 2010 to deliver back-office cost savings, helping district health boards (DHBs) to live within their means in the face of increasing costs and tightening budget constraints. In November 2014 the Minister of Health announced that the implementation of HBL's business cases should be transferred to a DHB-owned vehicle by July 2015 following a due diligence process. HBL has a significant and complex change management programme currently underway with DHBs. This requires that four major national business case initiatives are progressed simultaneously by HBL and DHBs, which will be a significant challenge, particularly during this transition period. Until the business cases have been completed and implemented, there is a risk that the anticipated savings may not be achieved.

Internal Affairs - All-of-Government Common Capabilities Sustainable Funding (Unchanged)

A central component of the Department of Internal Affairs' responsibilities as functional lead for All-of-Government ICT and the ICT Strategy and Action Plan is the development and delivery of All-of-Government common capabilities. The Government has agreed that departments and some Crown Entities should migrate to common ICT capabilities, including RealMe. Many of these common capabilities have been developed and are being used and some are still in development. To the extent that these costs cannot be met within agencies' baselines, they may require new funding.

Labour Market - ACC: Work-related Gradual Process Disease and Infection (Changed)

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. An initial adjustment to the liability and an expense of about $1.0 billion to $1.5 billion would need to be reported if such an amendment were to be enacted.

Revenue - Transformation and Technology Renewal (Unchanged)

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

Social Development - Child, Youth and Family Modernisation (Changed)

An external panel is overseeing the development of a new operating model for Child, Youth and Family that sets outs the structure, systems and resources needed to help improve the outcomes for children and young people by strengthening and enhancing the way it operates. While funding for 2015/16 has been included in the fiscal forecasts, the future costs of the proposal are still being developed. To the extent that these cannot be funded from reprioritisation, additional funding from the operating allowance may be required.

Social Development - Welfare Reform Costs (Unchanged)

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 in order to achieve Better Public Services Result One 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 Existing Crown Balance Sheet, Including the FIF, or the Budget Capital Allowance)

Agency Capital Intentions (Unchanged)

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 agency 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.

Arts, Culture and Heritage - Review of Military History Museum Arrangements (Unchanged)

In June 2014, the Government agreed to review the current arrangements around the recording, collecting and exhibiting of New Zealand's military history with a focus on the national level. At this stage it is unclear what the outcome of this business case will be, but this could result in further provision of military history exhibitions. This could require substantial Crown investment.

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 stock take of Crown-owned earthquake-prone buildings. The likelihood, timing and fiscal impact of any earthquake strengthening are uncertain.

Finance - Asian Infrastructure Investment Bank (New)

New Zealand has attended negotiations among prospective members to establish a proposed Asian Infrastructure Investment Bank. This is likely to take the form of a multilateral bank focused on supporting the development of infrastructure in the Asian region, leveraging both public and private funding. The size of any New Zealand contribution depends on membership and rules on the capital shares. The level of capital subscription is currently estimated at between $100 and $150 million, payable across 2016/17 to 2020/21.

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. Should a decision be taken to refurbish the property, a rough-order cost estimate for this upgrade is $100 million over the forecast period.

Lands - Upgrading Landonline (New)

Land Information New Zealand (LINZ) is currently exploring options around the upgrade of Landonline to replace its outdated technology platform and to meet the changing business and technology needs of users. LINZ completed an indicative business case, which received Cabinet approval to go to the detailed business case stage in November 2013. LINZ has now completed a detailed business case which it will submit to Cabinet for approval in 2015. There is insufficient accumulated depreciation to cover the replacement and enhancement cost.

Parliamentary Service - Parliamentary Accommodation (Unchanged)

With the expiry of the lease on Bowen House in December 2018, the Parliamentary Service is identifying and assessing options for future office accommodation which may require capital expenditure with estimates ranging from $40 million to $130 million.

Primary Industries and Food Safety - Investment in Water Infrastructure (Unchanged)

In addition to $120 million already appropriated, the Government will consider providing further capital of up to $280 million in future Budgets to Crown Irrigation Investment Limited as schemes reach the “investment-ready” stage. The Government has made a public statement that it will invest up to $400 million in equity of irrigation schemes.

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. The NZ Transport Agency has advised that it can fund the Auckland Manukau Eastern Transport Initiatives without further Crown funding. Decisions on further Crown financial assistance for the East-West Link and other projects will be made as part of future Budgets.

Transport - Regional State Highways (Unchanged)

A regional state highway acceleration package of $212 million was announced by the Government in June 2014. $115 million of this is subject to the outcome of further investigations. Further funding decisions will be considered as part of Budget 2016.

Transport - Support for KiwiRail (Changed)

The Government in Budgets 2010 to 2015 supported KiwiRail Holdings Limited (KiwiRail) with around $1.5 billion invested in the New Zealand freight rail system. Further funding will be sought by KiwiRail in future Budgets.

Matters Dependent on External Factors

Building and Housing - Divestment and Development of Housing (Changed)

The forecasts reflect divestments and redevelopments of some housing property as part of HNZC's business as usual asset management strategy and other developments in which the Crown has an interest. 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 about the proposed funding of developments, including of Crown-owned land.

Business, Science and Innovation - Crown Revenue from Petroleum Royalties (Unchanged)

The Crown Revenue from Petroleum Royalties is 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 the Crown revenue. The overall impact for the Crown could be negative or positive. International oil prices have fallen by up to 50% over the last 6 months of the current financial year and it is expected that this will lead to a decline in Royalties payable to the Crown of up to $70 million in 2014/15.

Business, Science and Innovation - Impairment in Value of Broadband Investment (Unchanged)

The Government has set aside approximately $1.6 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 somewhat 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.

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 or potential revenues or recoveries 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. The fiscal impact of this is not yet certain.

Caregiver Employment Conditions (Unchanged)

Several cases and funding claims in the disability support and aged care sectors 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 may involve significant costs to the Crown. 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 contracts in circumstances within the ambit of the Courts' decisions.

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. 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 an 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.

Finance - EQC (Unchanged)

EQC is forecasting a cash deficiency in the National Disaster Fund (NDF) arising in the 2015/16 financial year. Under section 16 of the Earthquake Commission Act 1993 the Crown shall provide funding to meet a deficiency in the NDF. Such funding will impact on net debt but not the operating balance or OBEGAL. The financial position of EQC and the amount of any Crown funding carry a high level of uncertainty owing to the nature of EQC's claims liability. An actuarial estimate of the net claims liability and its rate of settlement is included in the forecasts; however, the estimates are sensitive to underlying assumptions such as damage estimates, legal challenges, reinsurance recoveries and the forecast profile of settlements. The Crown's financial position may be adversely impacted if these assumptions are modified over time. Because the net claims liability is large, small percentage changes in the liability can have a material impact on costs and forecasts.

Finance - Goodwill on Acquisition (Unchanged)

As at 30 June 2014, the Government had goodwill on acquisition of a number of sub-entities totalling $628 million. Under New Zealand accounting standards (PBE IPSAS 26), 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 (Unchanged)

International coal prices have deteriorated significantly since Solid Energy's financial restructure in 2013. In September 2014 the Government provided an indemnity for the company's costs of environmental remediation obligations that allowed it to continue operating. The company continues to implement a business strategy to adapt to market conditions; however, there are large challenges ahead. In particular, the international coal price remains depressed and the company has a large tranche of debt maturing in 2016. Any changes to the support arrangements in place, or any 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. 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 which is sensitive to its underlying assumptions such as damage estimates, legal challenges, reinsurance recoveries and the forecast profile of claims settlement. The Crown's financial position may be adversely impacted as these assumptions are modified over time. Because the net claims liability is large, small percentage changes in the liability can have a material impact on costs and forecasts.

Labour Market - 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.

Labour Market - 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.

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 (Unchanged)

The value of student loans is sensitive to assumptions such as the borrower's future income, and general economic factors such as interest rates, unemployment levels, salary inflation and the CPI. As new lending occurs, an initial write-down to fair value will be made, and an expense will be incurred, reflecting the cost the Crown incurs in making an interest free loan and the risk that borrowers may not repay their loans. However, the assumptions made at the time of lending are volatile and are subject to change.

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 be different 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 $1.0 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's 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 2014 Half Year Update

The following risks have been removed since the 2014 Half Year Update:

 
Expired risk Reason
Communications – Ultra-Fast Broadband Expanded Scope Risk materialised.
Revenue – KiwiSaver One-off Enrolment The cost is no longer estimated to exceed $100 million over five years, owing to the reduction in the number of potential further enrolees.
Social Development – Vulnerable Children Risk materialised.
Social Development – Support for Children in Hardship Risk materialised.

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 and other circumstances known to the Government and subject to specific requirements that may have a material effect on the economic or fiscal outlook.[15]

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 certain situations, excluded from disclosure.

Notes

  • [15]The Statement of Specific Fiscal Risks is a requirement set out in sections 26Q and 26U of the Public Finance Act 1989.

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[16] 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[17] (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.

Notes

  • [16]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).
  • [17]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).

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[18] to be approved or occur within the forecasting period.

Additionally, the Minister of Finance may determine, under section 26V of the Public Finance Act 1989, that a matter not 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

  • [18]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.[19]

The contingencies have been stated as at 31 March 2015, being the latest set of reported contingencies.

Notes

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

Quantifiable Contingent Liabilities and Contingent Assets

Guarantees and indemnities Status[20] 31 March
2015
($millions)

Contingent liabilities

   
New Zealand Export Credit Office guarantees Unchanged[21] 118
Other guarantees and indemnities Unchanged 105
    223

Uncalled capital

   
Asian Development Bank Unchanged 2,852
International Monetary Fund - promissory notes Unchanged 1,107
International Bank for Reconstruction and Development Unchanged 1,094
International Monetary Fund - arrangements to borrow Unchanged 1,018
Other uncalled capital Unchanged 18
    6,089

Legal proceedings and disputes

   
Tax disputes Unchanged 406
Other legal proceedings and disputes Unchanged 53
    459

Other quantifiable contingent liabilities

   
Unclaimed monies Unchanged 120
Other quantifiable contingent liabilities Unchanged 256
    376
Total quantifiable contingent liabilities   7,147
Contingent assets (all under $100 million)   156

Notes

  • [20]Status of contingent liabilities or assets when compared to the Half Year Update published on 16 December 2014.
  • [21]Included as part of other guarantees and indemnities at the Half Year Update, as below the materiality threshold.

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) litigation Unchanged
Air New Zealand litigation Unchanged
Kiwibank Unchanged
Treaty of Waitangi claims 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 liabilities were removed:  Ministry of Education litigation, Television New Zealand litigation.

Description of Contingent Liabilities

Quantifiable contingent liabilities over $100 million
Guarantees and Indemnities

Guarantees are legally binding promises made by the Crown to assume responsibility for a debt, or performance of an obligation of another party, should that party default. Guarantees generally relate to the payment of money but may require the performance of services. Guarantees given under Section 65ZD of the Public Finance Act 1989 are disclosed in accordance with Section 26Q(3)(b)(i)(B) of the same Act.

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

New Zealand Export Credit Office guarantees

The New Zealand Export Credit Office (NZECO) provides a range of guarantee products to assist New Zealand exporters manage risk and capitalise on trade opportunities around the globe.  The obligations to third parties are guaranteed by the Crown and are intended to extend the capacity of facilities in the private sector.  

$118 million at 31 March 2015 ($93 million at 30 June 2014)

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 2015
$millions
30 June 2014
$millions
Asian Development Bank 2,852 2,728
International Monetary Fund - promissory notes 1,107 1,013
International Bank for Reconstruction and Development 1,094 968
International Monetary Fund - arrangements to borrow 1,018 937

In addition to the uncalled capital above, the Crown Support Deed agreed with Southern Response Earthquake Services Ltd includes two capital subscriptions:

  • a $500 million preference share facility under the Crown's agreement dated 5 April 2012 of which $100 million has already been called and paid, with the other $400 million called but unpaid as at 31 March 2015. The balance is forecast to be paid progressively over the period 2016 to 2017, and
  • $500 million of uncalled ordinary shares under an amended Crown Support Deed dated 30 January 2013 by which Southern Response may issue a call notice following the payment or redemption of all preference shares. As at 31 March 2015, no call has been made on this facility, however it is now considered probable that approximately $300 million of this subscription will be called and paid, and therefore has been included in the forecast. The extent to which the subscription is called and paid depends on the ultimate cost of settling earthquake claims, which is subject to significant uncertainty. See further description of the risk on page 77.
Legal proceedings and disputes

Tax disputes

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

$406 million at 31 March 2015 ($591 million at 30 June 2014)

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 IRD. The funds are repaid to the entitled owner on proof of identification.

$120 million at 31 March 2015 ($112 million at 30 June 2014)

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:

a) Indemnities

b) Legal disputes, and

c) Other contingent liabilities.

a)  Indemnities

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.  The impact of any funding under this arrangement is limited to core Crown new debt.  See further description of the risk on page 77.
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 Referees

Section 11CE of the District Courts Act 1947

Section 4F of the Justices of the Peace 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. The indemnity relates to costs incurred in removing the dross and disposing of it at another site in Invercargill if required to do so by an appropriate authority. 
New Zealand Local Authorities

Section 9 of the Civil Defence Emergency Management Act 2002

Sections 88-89 of the National Civil Defence Emergency Management Plan Order 2005

Section 26 of the Guide to the National 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 under section 9 of the Act.

In addition, Government may provide disaster recovery relief funding to councils to assist individuals and communities with immediate needs; and also will consider applications for “special policy” for recovery measures that will mitigate future risk and where the circumstances are exceptional.

New Zealand Railways Corporation The Minister of Finance signed the indemnity on 1 September 2004 The directors of New Zealand Railways Corporation 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 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 and Deputy Registrar of Companies, members of advising committees within the Act, every statutory manager of a corporation and persons appointed pursuant to sections 17 to 19 (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).

b)  Legal claims and proceedings

There are numerous legal actions that 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 have a greater impact than $20 million. 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) litigation   

There are several legal actions against ACC in existence, arising in the main from challenges to operational decisions made by ACC. Given the stage of proceedings and uncertainty as to outcomes of the cases, no estimate of the financial effect can be made.

Air New Zealand litigation

Air New Zealand is defending two class actions in the United States. One makes allegations of anti-competitive conduct against many airlines in relation to pricing in the air cargo business. Following settlements, four airlines including Air New Zealand continue to defend the claim. A similar, previously reported class action filed in Australia was discontinued against Air New Zealand in June 2014 resulting in legal costs of over $3 million being recovered.

A second class action in the US, alleges that Air New Zealand together with other airlines acted anti-competitively in respect of fares and surcharges on trans-Pacific routes.

Allegations of anti-competitive conduct in the air cargo business in Hong Kong and Singapore were the subject of proceedings by the Australian Competition and Consumer Commission (ACCC). Following a defended hearing, the Federal Court released its decision in October 2014, finding in favour of Air New Zealand. The ACCC has appealed the decision. The appeal will be defended and cross appeals have been filed on selected aspects of the decision.

Kiwibank

In June 2013, a group called Fair Play on Fees announced plans for a representative action against banks in New Zealand in relation to certain default fees charged to New Zealand customers. In November 2013, the group issued proceedings against Kiwibank. The potential outcome of the proceedings cannot be determined with any certainty at this stage.

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 that 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. Failure to successfully defend such actions may result in a liability for historical Treaty grievances in excess of that currently anticipated.

c)  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.

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.

In accordance with PBE IPSAS 19: Provisions, Contingent Liabilities and Contingent Assets 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 78.

Description of Contingent Assets

Quantifiable contingent assets over $100 million

No individual quantifiable contingent assets are greater than $100 million as at 31 March 2015. The majority of quantifiable contingent assets relate to likely cash collectible from tax disputes.

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 1 May 2015.

The finalisation dates and key assumptions that underpin the preparation of the Forecast Financial Statements are outlined in the Fiscal Outlook chapter (pages 49 to 51).

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 Public Benefit EntityFinancial 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 2015 Budget Economic and Fiscal Update Additional Information document which can be found on the Treasury's website at www.treasury.govt.nz/budget/forecasts/befu2015

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.

The “Actual” Financial Statements for the year ended 30 June 2014 shown in these forecasts apply accounting policies established in accordance with New Zealand equivalents to International Financial Reporting Standards as appropriate for public benefit entities (NZ IFRS (PBE)).

As a consequence of the change in GAAP resulting from the External Reporting Board's Approved Accounting Standards Framework, the Forecast Financial Statements for the years ended 30 June 2015 to 30 June 2019 apply accounting policies established in accordance with Public Sector PBE Accounting Standards (PBE Standards) – Tier 1. These standards are based on International Public Sector Accounting Standards (IPSAS). The impact of changing from NZ IFRS (PBE) to PBE Standards is not significant. This is owing to a strong degree of convergence between the two suites of standards.

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 67 to 90.

Key forecast assumptions are set out on pages 49 to 51.

Reporting and Forecast Period

The reporting periods for these Forecast Financial Statements are the years ended 30 June 2015 to 30 June 2019. The “2014 Actual” figures reported in the statements are the audited results reported in the Financial Statements of the Government for the year ended 30 June 2014. The “2015 Previous Budget” figures are the original forecasts to 30 June 2015 as presented in the 2014 Budget.

Government Reporting Entity as at 1 May 2015

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

Departments
  • Crown Law Office
  • Department of Conservation
  • Department of Corrections
  • Department of Internal Affairs
  • Department of the Prime Minister and Cabinet (includes Canterbury Earthquake Recovery Authority as a departmental agency)
  • 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
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
  • Education Payroll Limited
  • Fairway Resolution Limited
  • Health Benefits Limited
  • Research and Education Advanced Network New Zealand Limited
  • Southern Response Earthquake Services Limited
  • Tāmaki Redevelopment Company Limited
  • The Network for Learning Limited
Legal entities created by Treaty of Waitangi settlements Acts (Public Finance Act schedule 6)
  • Te Urewera

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 2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

Revenue

               
Taxation revenue 1 60,879 65,824 65,462 68,098 71,718 75,995 79,633
Other sovereign revenue 1 5,450 5,138 5,191 5,038 4,621 4,444 4,284
Total Revenue Levied through the Crown's Sovereign Power   66,329 70,962 70,653 73,136 76,339 80,439 83,917
Sales of goods and services   16,472 17,091 16,625 17,253 17,756 18,325 18,682
Interest revenue and dividends 2 3,175 3,672 3,565 4,036 4,692 5,140 5,480
Other revenue   3,420 3,842 3,594 3,580 3,692 3,809 3,879
Total revenue earned through the Crown's operations   23,067 24,605 23,784 24,869 26,140 27,274 28,041
Total revenue (excluding gains)   89,396 95,567 94,437 98,005 102,479 107,713 111,958

Expenses

               
Transfer payments and subsidies 3 23,360 23,876 23,846 24,482 25,353 26,228 27,232
Personnel expenses 4 20,484 20,881 21,182 21,594 21,699 21,868 22,025
Depreciation and amortisation 5 4,872 4,882 4,855 4,904 5,034 5,196 5,250
Other operating expenses 6 35,553 37,520 36,757 38,093 37,499 37,664 37,669
Finance costs 7 4,400 4,763 4,689 4,687 5,271 5,503 5,536
Insurance expenses 8 3,501 3,517 4,023 4,348 4,764 5,217 4,991
Forecast new operating spending 9 291 7 305 1,403 3,965 5,526
Top-down expense adjustment 9 (875) (555) (1,025) (520) (445) (430)
Total expenses (excluding losses)   92,170 94,855 94,804 97,388 100,503 105,196 107,799
Minority interest share of operating balance before gains/(losses)   (159) (340) (317) (441) (500) (522) (535)
Operating balance before gains/(losses) (excluding minority interests)   (2,933) 372 (684) 176 1,476 1,995 3,624
Net gains/(losses) on financial instruments 10 4,820 2,583 6,021 2,560 2,518 2,602 2,689
Net gains/(losses) on non-financial instruments 11 540 (82) (6,551) (45) (47) (48) (49)
Less minority interest share of net gains/losses   21 (25) (66) (32) (13) (11) (1)
Total gains/(losses)   5,381 2,476 (596) 2,483 2,458 2,543 2,639
Net surplus/(deficit) from associates and    joint ventures   360 254 646 331 333 333 334
Operating balance (excluding minority interests) 12 2,808 3,102 (634) 2,990 4,267 4,871 6,597

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

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

Total Crown expenses

             

By functional classification

             
Social security and welfare 27,266 28,125 28,224 29,595 30,457 31,585 32,245
GSF pension expenses 295 409 375 371 334 322 311
Health 14,344 14,741 14,748 15,103 15,041 14,983 14,937
Education 13,064 13,571 13,772 13,894 13,990 14,031 14,033
Core government services 4,104 4,462 3,940 4,385 4,155 4,231 4,261
Law and order 3,730 3,750 3,863 3,881 3,850 3,853 3,863
Defence 1,776 1,936 1,878 2,036 2,064 2,051 2,051
Transport and communications 9,137 9,427 9,583 9,437 9,684 10,017 10,211
Economic and industrial services 7,767 7,924 8,169 7,866 7,984 8,256 8,328
Heritage, culture and recreation 2,372 2,348 2,174 2,304 2,328 2,350 2,376
Primary services 1,703 1,788 1,848 1,896 1,787 1,792 1,827
Housing and community development 1,095 1,141 1,211 1,547 1,517 1,545 1,567
Environmental protection 538 511 593 569 563 562 566
Other 579 543 285 537 595 595 591
Finance costs 4,400 4,763 4,689 4,687 5,271 5,503 5,536
Forecast new operating spending 291 7 305 1,403 3,965 5,526
Top-down expense adjustment (875) (555) (1,025) (520) (445) (430)
Total Crown expenses excluding losses 92,170 94,855 94,804 97,388 100,503 105,196 107,799

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.

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

Core Crown expenses

             

By functional classification1

             
Social security and welfare 23,281 23,954 23,842 24,639 25,161 25,928 26,855
GSF pension expenses 282 395 359 355 318 305 294
Health 14,898 15,065 15,075 15,581 15,621 15,673 15,743
Education 12,300 12,827 13,021 13,134 13,211 13,255 13,249
Core government services 4,502 4,816 4,401 4,811 4,598 4,630 4,660
Law and order 3,501 3,486 3,606 3,622 3,576 3,572 3,572
Defence 1,811 1,984 1,927 2,087 2,118 2,108 2,108
Transport and communications 2,237 2,217 2,328 2,214 2,259 2,320 2,361
Economic and industrial services 2,058 2,215 2,268 2,262 2,178 2,242 2,188
Heritage, culture and recreation 842 770 779 808 784 769 754
Primary services 676 700 735 742 660 647 670
Housing and community development 347 326 357 582 497 477 472
Environmental protection 533 510 678 605 571 573 577
Other 579 543 285 537 595 595 591
Finance costs 3,620 3,883 3,977 3,676 4,080 4,217 4,254
Forecast new operating spending 291 7 305 1,403 3,965 5,526
Top-down expense adjustment (875) (555) (1,025) (520) (445) (430)
Total core Crown expenses excluding losses 71,467 73,107 73,090 74,935 77,110 80,831 83,444
  1. The classifications of the functions of the Government reflect current approved baselines. Forecast new operating spending is shown as a separate line item in the above analysis and will be allocated to functions of the Government once decisions are made in future Budgets.

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

Forecast Statement of Comprehensive Income for the years ending 30 June

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
Operating Balance (including minority interest) 2,946 3,467 (251) 3,463 4,780 5,404 7,133

Other comprehensive income

             
Revaluation of physical assets 5,395 (51)
Net change in hedging instruments entered into for cash flow hedges (34) (3) (142) 10 2 (3)
Foreign currency translation differences for foreign operations (51) 4 7
Valuation gains/(losses) on investments available for    sale taken to reserves (36) 10 24 10 11 11 12
Other movements 1 (30) (46) 6 11 17 20
Total other comprehensive income 5,275 (19) (208) 26 22 30 29
Total comprehensive income 8,221 3,448 (459) 3,489 4,802 5,434 7,162

Attributable to:

             
 - minority interest 147 365 306 480 514 534 534
 - the Crown 8,074 3,083 (765) 3,009 4,288 4,900 6,628
Total comprehensive income 8,221 3,448 (459) 3,489 4,802 5,434 7,162

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

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

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
Opening net worth 70,011 75,467 80,779 79,984 83,035 87,360 92,329
Operating balance (including minority interest) 2,946 3,467 (251) 3,463 4,780 5,404 7,133
Net revaluations 5,395 (51)
Transfers to/(from) reserves (2) 10 (113) 30 20 25 24
(Gains)/losses transferred to the Statement of Financial Performance (43) 3 7 6 8 13 13
Other movements (75) (32) (51) (10) (6) (8) (8)
Comprehensive income 8,221 3,448 (459) 3,489 4,802 5,434 7,162
Gain/(loss) on Government share offers (577)
Increase in minority interest from Government share offers1 3,308 23
Transactions with minority interest (184) (282) (359) (438) (477) (465) (489)
Closing net worth 80,779 78,633 79,984 83,035 87,360 92,329 99,002
  1. 2015 movement relates to the vesting of the loyalty bonus schemes on Government share offers.

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

Forecast Statement of Cash Flows for the years ending 30 June

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

Cash Flows from Operations

             

Cash was provided from

             
Taxation receipts 59,853 64,913 64,650 67,001 70,605 74,865 78,456
Other sovereign receipts 4,974 4,645 4,642 4,357 4,140 4,117 4,233
Sales of goods and services 16,608 17,113 17,135 17,352 17,807 18,358 18,656
Interest and dividend receipts 2,945 3,310 3,465 3,608 4,185 4,567 4,945
Other operating receipts 5,737 4,972 4,319 4,621 3,667 3,771 3,718
Total cash provided from operations 90,117 94,953 94,211 96,939 100,404 105,678 110,008

Cash was disbursed to

             
Transfer payments and subsidies 23,447 24,020 23,944 24,498 25,333 26,194 27,188
Personnel and operating payments 59,891 63,953 62,090 63,069 60,884 61,782 61,251
Interest payments 4,312 4,728 4,784 4,704 5,173 5,327 5,351
Forecast new operating spending 291 7 305 1,403 3,965 5,526
Top-down expense adjustment (875) (555) (1,025) (520) (445) (430)
Total cash disbursed to operations 87,650 92,117 90,270 91,551 92,273 96,823 98,886
Net cash flows from operations 2,467 2,836 3,941 5,388 8,131 8,855 11,122

Cash Flows from Investing Activities

             

Cash was provided from/(disbursed to)

             
Net (purchase)/sale of physical assets (5,503) (7,832) (7,022) (8,128) (7,115) (6,264) (5,872)
Net (purchase)/sale of shares and other securities (5,725) 4,339 952 (788) (5,692) 4,095 2,391
Net (purchase)/sale of intangible assets (658) (576) (601) (744) (655) (436) (426)
Net (issue)/repayment of advances (1,529) (1,971) (1,786) (1,645) (1,698) (1,679) (1,743)
Net acquisition of investments in associates 73 (46) 134 (75) 31 29 42
Forecast new capital spending (326) (316) (412) (677) (880)
Top-down capital adjustment 370 375 280 75 100 100
Net cash flows from investing activities (13,342) (6,042) (7,948) (11,416) (15,466) (4,832) (6,388)
Net cash flows from operating and investing activities (10,875) (3,206) (4,007) (6,028) (7,335) 4,023 4,734

Cash Flows from Financing Activities

             

Cash was provided from/(disbursed to)

             
Issues of circulating currency 274 152 511 164 169 174 180
Government share offer programme1 2,186 598 595
Net issue/(repayment) of government bonds2 5,520 (759) (482) 6,685 6,909 (4,809) (5,081)
Net issue/(repayment) of foreign-currency borrowings 1,442 (838) (2,101) (1,494) (464) (1,073) 21
Net issue/(repayment) of other New Zealand dollar borrowings (832) 3,808 6,688 965 1,819 3,003 1,507
Dividends paid to minority interests (166) (365) (471) (464) (514) (524) (547)
Net cash flows from financing activities 8,424 2,596 4,740 5,856 7,919 (3,229) (3,920)
Net movement in cash (2,451) (610) 733 (172) 584 794 814
Opening cash balance 14,924 11,108 11,888 13,209 13,037 13,621 14,415
Foreign-exchange gains/(losses) on opening cash (585) 588
Closing cash balance 11,888 10,498 13,209 13,037 13,621 14,415 15,229
  1. Excludes purchases by ACC and NZS Fund.
  2. Further information on the proceeds and repayments of government bonds is available in note 23.

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

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

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

             
Net Cash Flows from Operations 2,467 2,836 3,941 5,388 8,131 8,855 11,122
Items included in the operating balance but not in net cash flows from operations              

Gains/(losses)

             
Net gains/(losses) on financial instruments 4,820 2,583 6,021 2,560 2,518 2,602 2,689
Net gains/(losses) on non-financial instruments 540 (82) (6,551) (45) (47) (48) (49)
Minority interest share of net gains/(losses) 21 (25) (66) (32) (13) (11) (1)
Total gains/(losses) 5,381 2,476 (596) 2,483 2,458 2,543 2,639

Other Non-cash Items in Operating Balance

             
Depreciation and amortisation (4,872) (4,882) (4,855) (4,904) (5,034) (5,196) (5,250)
Write-down on initial recognition of financial assets (789) (838) (738) (773) (777) (790) (805)
Impairment on financial assets (excluding receivables) (47) (128) (290) (125) (126) (129) (129)
Decrease/(increase) in defined benefit retirement plan liabilities 442 353 374 370 418 440 460
Decrease/(increase) in insurance liabilities 1,409 3,629 1,538 705 (1,089) (1,478) (1,713)
Other 202 (86) 330 (109) (167) (189) (203)
Total other non-cash Items (3,655) (1,952) (3,641) (4,836) (6,775) (7,342) (7,640)

Movements in Working Capital

             
Increase/(decrease) in receivables (1,553) (803) 390 (278) 501 323 577
Increase/(decrease) in accrued interest 143 326 194 445 409 397 350
Increase/(decrease) in inventories (41) (4) (33) 22 (14) (62) (48)
Increase/(decrease) in prepayments 39 (27) (61) (10) 1 (1) 1
Decrease/(increase) in deferred revenue (248) (20) (40) (9) (10) (28) (10)
Decrease/(increase) in payables/provisions 275 270 (788) (215) (434) 186 (394)
Total movements in working capital (1,385) (258) (338) (45) 453 815 476
Operating balance (excluding minority interests) 2,808 3,102 (634) 2,990 4,267 4,871 6,597

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

Forecast Statement of Financial Position as at 30 June

  Note 2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

Assets

               
Cash and cash equivalents 13 11,888 10,498 13,209 13,037 13,621 14,415 15,229
Receivables 13 17,480 16,610 17,471 17,468 18,009 18,377 19,003
Marketable securities, deposits and derivatives in gain 13 48,457 42,731 46,469 46,799 52,760 49,167 47,226
Share investments 13 20,596 21,234 24,526 25,921 27,353 28,880 30,508
Advances 13 24,756 26,626 26,973 28,669 30,482 32,135 33,939
Inventory   1,099 1,155 1,067 1,089 1,075 1,014 965
Other assets   2,510 2,144 2,153 2,165 2,194 2,189 2,266
Property, plant and equipment 15 116,306 115,873 119,432 123,577 126,675 128,793 130,414
Equity accounted investments1   10,071 10,326 10,742 11,126 11,430 11,741 12,054
Intangible assets and goodwill 16 2,920 2,934 2,999 3,264 3,433 3,373 3,323
Forecast for new capital spending 9 339 316 729 1,406 2,286
Top-down capital adjustment 9 (765) (375) (655) (730) (830) (930)
Total assets   256,083 249,705 264,666 272,776 287,031 290,660 296,283

Liabilities

               
Issued currency   4,964 5,224 5,476 5,640 5,809 5,984 6,163
Payables 18 11,294 11,874 11,500 12,232 13,114 13,333 14,260
Deferred revenue   1,962 1,821 2,002 2,012 2,022 2,050 2,060
Borrowings   103,419 104,390 107,898 113,377 121,663 118,961 115,620
Insurance liabilities 19 35,825 31,272 38,519 37,814 38,903 40,381 42,094
Retirement plan liabilities 20 10,885 10,380 12,560 12,190 11,772 11,332 10,872
Provisions 21 6,955 6,111 6,727 6,476 6,388 6,290 6,212
Total liabilities   175,304 171,072 184,682 189,741 199,671 198,331 197,281
Total assets less total liabilities   80,779 78,633 79,984 83,035 87,360 92,329 99,002

Net Worth

               
Taxpayers' funds   13,300 16,601 12,720 15,978 20,439 25,508 32,312
Property, plant and equipment revaluation reserve   62,225 56,509 62,142 61,873 61,689 61,507 61,322
Other reserves   43 5 (59) (39) (28) (15) (6)
Total net worth attributable to the Crown   75,568 73,115 74,803 77,812 82,100 87,000 93,628
Net worth attributable to minority interest   5,211 5,518 5,181 5,223 5,260 5,329 5,374
Total net worth 22 80,779 78,633 79,984 83,035 87,360 92,329 99,002
  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

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

Borrowings

             
Government bonds 60,337 58,855 58,381 64,149 70,456 65,364 60,024
Treasury bills 3,147 3,688 5,917 3,939 3,937 3,928 3,921
Government retail stock 183 190 179 179 179 179 179
Settlement deposits with Reserve Bank 7,758 6,849 7,311 7,311 7,311 7,311 7,311
Derivatives in loss 2,245 1,890 2,582 2,281 1,969 1,849 1,729
Finance lease liabilities 1,501 1,994 2,088 2,706 2,669 3,103 3,142
Other borrowings 28,248 30,924 31,440 32,812 35,142 37,227 39,314
Total borrowings 103,419 104,390 107,898 113,377 121,663 118,961 115,620
Sovereign-guaranteed debt 77,461 75,602 79,702 82,878 88,811 83,562 78,037
Non sovereign-guaranteed debt 25,958 28,788 28,196 30,499 32,852 35,399 37,583
Total borrowings 103,419 104,390 107,898 113,377 121,663 118,961 115,620

Net Debt:

             
Core Crown borrowings1 89,090 86,246 91,162 94,467 100,896 96,081 90,992
Add back NZS Fund holdings of sovereign-issued debt and NZS Fund borrowings (622) (767) (1,168) (1,280) (1,305) (1,307) (1,306)
Gross sovereign-issued debt2 88,468 85,479 89,994 93,187 99,591 94,774 89,686
Less core Crown financial assets3 68,047 63,248 71,777 73,929 81,207 78,514 77,572
Net core Crown debt 20,421 22,231 18,217 19,258 18,384 16,260 12,114
Add back core Crown advances 13,753 15,056 14,352 15,425 15,758 15,823 15,881
Net core Crown debt (incl. NZS Fund)4 34,174 37,287 32,569 34,683 34,142 32,083 27,995
Add back NZS Fund holdings of core Crown financial assets and NZS Fund financial assets5 25,757 26,280 29,104 30,914 32,962 35,136 37,472
Net core Crown debt (excl. NZS Fund and advances)6 59,931 63,567 61,673 65,597 67,104 67,219 65,467

Gross Debt:

             
Gross sovereign-issued debt2 88,468 85,479 89,994 93,187 99,591 94,774 89,686
Less Reserve Bank settlement cash and Reserve Bank bills (8,112) (7,245) (7,684) (7,625) (7,550) (7,550) (7,550)
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 Reserve Bank bills4 81,956 79,834 83,910 87,162 93,641 88,824 83,736
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 2015

  As at 31 Mar
2015
$m
As at 30 June
2014
$m

Capital Commitments

   
Specialist military equipment 479 732
Land and buildings 1,182 878
Other property, plant and equipment 5,513 5,307
Other capital commitments 842 919
Tertiary education institutions 201 201
Total capital commitments 8,217 8,037

Operating Commitments

   
Non-cancellable accommodation leases 2,838 3,059
Other non-cancellable leases 2,388 2,340
Tertiary education institutions 494 494
Total operating commitments 5,720 5,893
Total commitments 13,937 13,930

Total Commitments by Segment

   
Core Crown 4,366 4,916
Crown entities 5,368 5,465
State-owned Enterprises 5,025 4,847
Inter-segment eliminations (822) (1,298)
Total commitments 13,937 13,930

Statement of Actual Contingent Liabilities and Assets as at 31 March 2015

  As at 31 Mar
2015
$m
As at 30 June
2014
$m

Quantifiable Contingent Liabilities

   
Guarantees and indemnities 223 222
Uncalled capital 6,089 5,662
Legal proceedings and disputes 459 604
Other contingent liabilities 376 357
Total quantifiable contingent liabilities 7,147 6,845

Total Quantifiable Contingent Liabilities by Segment

   
Core Crown 6,881 6,568
Crown entities 47 44
State-owned Enterprises 219 233
Inter-segment eliminations
Total quantifiable contingent liabilities 7,147 6,845

Quantifiable Contingent Assets by Segment

   
Core Crown 141 129
Crown entities 3 4
State-owned Enterprises 12
Total quantifiable contingent assets 156 133

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)
  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

Taxation Revenue (accrual)

             

Individuals

             
Source deductions 23,738 25,224 25,114 26,364 27,710 29,173 30,766
Other persons 5,216 5,428 5,661 5,584 6,018 6,399 6,578
Refunds (1,573) (1,395) (1,517) (1,696) (1,680) (1,710) (1,783)
Fringe benefit tax 489 512 519 540 561 585 609
Total individuals 27,870 29,769 29,777 30,792 32,609 34,447 36,170

Corporate Tax

             
Gross companies tax 9,020 9,555 9,838 9,785 10,369 10,988 11,423
Refunds (192) (207) (152) (148) (152) (160) (167)
Non-resident withholding tax 428 481 486 506 527 567 605
Foreign-source dividend w/holding payments 8 2 (2) 2 2 2 2
Total corporate tax 9,264 9,831 10,170 10,145 10,746 11,397 11,863

Other Direct Income Tax

             
Resident w/holding tax on interest income 1,644 2,007 1,777 2,094 2,243 2,567 3,045
Resident w/holding tax on dividend income 446 495 523 537 566 594 615
Total other direct income tax 2,090 2,502 2,300 2,631 2,809 3,161 3,660
Total direct income tax 39,224 42,102 42,247 43,568 46,164 49,005 51,693

Goods and Services Tax

             
Gross goods and services tax 27,208 29,392 28,519 30,242 31,754 33,384 34,663
Refunds (11,191) (11,630) (11,312) (11,949) (12,609) (12,957) (13,429)
Total goods and services tax 16,017 17,762 17,207 18,293 19,145 20,427 21,234

Other Indirect Taxation

             
Road user charges 1,205 1,268 1,265 1,339 1,396 1,475 1,543
Petroleum fuels excise – domestic production 865 936 972 1,074 1,191 1,219 1,243
Alcohol excise – domestic production 650 681 665 689 713 742 772
Tobacco excise – domestic production 273 286 307 309 310 309 309
Petroleum fuels excise – imports1 747 766 716 717 642 657 670
Alcohol excise – imports1 242 255 259 255 264 275 286
Tobacco excise – imports1 999 1,108 1,154 1,197 1,241 1,236 1,237
Other customs duty 172 155 169 160 152 144 136
Gaming duties 211 209 217 213 215 218 220
Motor vehicle fees 187 195 199 200 203 205 208
Approved issuer levy and cheque duty 52 65 48 47 47 47 47
Energy resources levies 35 36 37 37 35 36 35
Total other indirect taxation 5,638 5,960 6,008 6,237 6,409 6,563 6,706
Total indirect taxation 21,655 23,722 23,215 24,530 25,554 26,990 27,940
Total taxation revenue 60,879 65,824 65,462 68,098 71,718 75,995 79,633

Other Sovereign Revenue (accrual)

             
ACC levies 3,600 3,172 3,303 2,941 2,671 2,514 2,387
Fire Service levies 339 348 355 357 360 365 370
EQC levies 274 282 280 281 283 286 289
Child support 545 665 501 642 484 449 398
Court fines 179 173 179 178 179 180 181
Other miscellaneous items 513 498 573 639 644 650 659
Total other sovereign revenue 5,450 5,138 5,191 5,038 4,621 4,444 4,284
Total sovereign revenue 66,329 70,962 70,653 73,136 76,339 80,439 83,917
  1. Customs excise-equivalent duty.
NOTE 1 (continued): Sovereign Receipts (Cash)
  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

Taxation Receipts (cash)

             

Individuals

             
Source deductions 23,621 25,074 24,982 26,229 27,569 29,027 30,612
Other persons 5,466 5,964 5,949 5,823 6,198 6,707 6,915
Refunds (2,276) (2,211) (2,111) (2,273) (2,252) (2,362) (2,474)
Fringe benefit tax 482 510 517 538 559 583 607
Total individuals 27,293 29,337 29,337 30,317 32,074 33,955 35,660

Corporate Tax

             
Gross companies tax 9,374 9,963 10,050 9,956 10,599 11,202 11,628
Refunds (563) (703) (544) (561) (579) (609) (637)
Non-resident withholding tax 405 480 517 505 526 566 604
Foreign-source dividend w/holding payments 2 (4) 2 2 2 2
Total corporate tax 9,216 9,742 10,019 9,902 10,548 11,161 11,597

Other Direct Income Tax

             
Resident w/holding tax on interest income 1,629 2,005 1,776 2,093 2,242 2,566 3,043
Resident w/holding tax on dividend income 449 495 523 537 566 594 615
Total other direct income tax 2,078 2,500 2,299 2,630 2,808 3,160 3,658
Total direct income tax 38,587 41,579 41,655 42,849 45,430 48,276 50,915

Goods and Services Tax

             
Gross goods and services tax 26,596 28,504 27,799 29,364 30,875 32,483 33,764
Refunds (10,948) (11,130) (10,812) (11,449) (12,109) (12,457) (12,929)
Total goods and services tax 15,648 17,374 16,987 17,915 18,766 20,026 20,835

Other Indirect Taxation

             
Road user charges 1,187 1,268 1,265 1,339 1,396 1,475 1,543
Petroleum fuels excise – domestic production 861 936 972 1,074 1,191 1,219 1,243
Alcohol excise – domestic production 651 681 665 689 713 742 772
Tobacco excise – domestic production 268 286 307 309 310 309 309
Customs duty 2,179 2,284 2,298 2,329 2,299 2,312 2,329
Gaming duties 208 209 217 213 215 218 220
Motor vehicle fees 178 195 199 200 203 205 208
Approved issuer levy and cheque duty 51 65 48 47 47 47 47
Energy resources levies 35 36 37 37 35 36 35
Total other indirect taxation 5,618 5,960 6,008 6,237 6,409 6,563 6,706
Total indirect taxation 21,266 23,334 22,995 24,152 25,175 26,589 27,541
Total taxation receipts 59,853 64,913 64,650 67,001 70,605 74,865 78,456

Other Sovereign Receipts (cash)

             
ACC levies 3,579 3,174 3,154 2,858 2,631 2,595 2,693
Fire Service levies 340 348 355 357 360 365 370
EQC levies 273 282 287 280 283 286 289
Child support 219 252 207 216 219 223 229
Court fines 149 137 152 153 153 153 154
Other miscellaneous items 414 452 487 493 494 495 498
Total other sovereign receipts 4,974 4,645 4,642 4,357 4,140 4,117 4,233
Total sovereign receipts 64,827 69,558 69,292 71,358 74,745 78,982 82,689

NOTE 2: Interest Revenue and Dividends

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

By type

             
Interest revenue 2,516 3,101 2,913 3,356 3,971 4,376 4,670
Dividends 659 571 652 680 721 764 810
Total interest revenue and dividends 3,175 3,672 3,565 4,036 4,692 5,140 5,480

By source

             
Core Crown 2,295 2,492 2,419 2,561 3,031 3,333 3,551
Crown entities 1,249 1,277 1,459 1,481 1,522 1,569 1,624
State-owned Enterprises 879 1,006 1,070 1,300 1,523 1,652 1,746
Inter-segment eliminations (1,248) (1,103) (1,383) (1,306) (1,384) (1,414) (1,441)
Total interest revenue and dividends 3,175 3,672 3,565 4,036 4,692 5,140 5,480

NOTE 3: Transfer Payments and Subsidies

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
New Zealand superannuation 10,913 11,590 11,589 12,256 12,861 13,571 14,383
Jobseeker support and emergency benefit 1,691 1,648 1,686 1,616 1,574 1,531 1,519
Supported living payment 1,422 1,518 1,512 1,519 1,530 1,536 1,564
Sole parent support 1,222 1,243 1,186 1,187 1,242 1,218 1,224
Family tax credit 1,965 1,934 1,857 1,837 1,835 1,916 1,983
Other working for families tax credits 567 527 550 577 655 648 639
Accommodation assistance 1,146 1,141 1,128 1,137 1,151 1,169 1,174
Income related rents 660 718 718 774 818 872 927
Disability assistance 379 373 377 379 378 379 380
Student allowances 539 531 520 529 548 560 558
Other social assistance benefits 1,519 1,293 1,310 1,409 1,423 1,436 1,450
Total social assistance grants 22,023 22,516 22,433 23,220 24,015 24,836 25,801

Subsidies

             
KiwiSaver 804 827 882 720 765 806 845

Other transfer payments

             
Official development assistance 533 533 531 542 573 586 586
Total transfer payments and subsidies 23,360 23,876 23,846 24,482 25,353 26,228 27,232

NOTE 4: Personnel Expenses

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

By source

             
Core Crown 6,232 6,361 6,540 6,739 6,628 6,642 6,612
Crown entities 11,315 11,607 11,749 11,964 12,108 12,201 12,328
State-owned Enterprises 2,956 2,923 2,909 2,908 2,980 3,042 3,103
Inter-segment eliminations (19) (10) (16) (17) (17) (17) (18)
Total personnel expenses 20,484 20,881 21,182 21,594 21,699 21,868 22,025

NOTE 5: Depreciation and Amortisation

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

By source

             
Core Crown 1,476 1,533 1,457 1,536 1,574 1,588 1,606
Crown entities 1,661 1,710 1,687 1,743 1,797 1,858 1,885
State-owned Enterprises 1,735 1,639 1,711 1,625 1,663 1,750 1,759
Inter-segment eliminations
Total depreciation and amortisation 4,872 4,882 4,855 4,904 5,034 5,196 5,250

NOTE 6: Other Operating Expenses

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

By source

             
Core Crown 36,779 38,038 37,816 39,219 38,592 38,635 38,644
Crown entities 17,297 17,759 17,947 18,471 18,400 18,300 18,205
State-owned Enterprises 9,042 9,556 9,270 9,396 9,682 10,082 10,328
Inter-segment eliminations (27,565) (27,833) (28,276) (28,993) (29,175) (29,353) (29,508)
Total other operating expenses 35,553 37,520 36,757 38,093 37,499 37,664 37,669

NOTE 7: Finance Costs

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

By type

             
Interest on financial liabilities 4,360 4,721 4,633 4,630 5,216 5,449 5,480
Interest unwind on provisions 40 42 56 57 55 54 56
Total finance costs 4,400 4,763 4,689 4,687 5,271 5,503 5,536

By source

             
Core Crown 3,620 3,883 3,977 3,676 4,080 4,217 4,254
Crown entities 219 237 221 216 230 243 251
State-owned Enterprises 1,161 1,295 1,333 1,520 1,700 1,805 1,818
Inter-segment eliminations (600) (652) (842) (725) (739) (762) (787)
Total finance costs 4,400 4,763 4,689 4,687 5,271 5,503 5,536

NOTE 8: Insurance Expenses

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

By entity

             
ACC 3,484 3,561 3,783 4,329 4,641 5,001 4,756
EQC (111) 34 (59) 57 153 224 225
Southern Response 87 (89) 286 (49) (42) (21) (3)
Other (incl. inter-segment eliminations) 41 11 13 11 12 13 13
Total insurance expenses 3,501 3,517 4,023 4,348 4,764 5,217 4,991

NOTE 9: Forecast New Spending and Top-down Expense Adjustment

  2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

Forecast New Operating Spending

         
Unallocated contingencies 7 305 403 465 526
Forecast new spending for Budget 2016 1,000 1,000 1,000
Forecast new spending for Budget 2017 2,500 2,500
Forecast new spending for Budget 2018 1,500
Total forecast new operating spending 7 305 1,403 3,965 5,526
Operating top-down adjustment (555) (1,025) (520) (445) (430)

Unallocated contingencies represent expenses included in Budget 2015 and previous Budgets that have yet to be allocated. Forecast new spending indicates the expected spending increases from future Budgets.

  2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
Post-2019
Forecast
$m
Total
Forecast
$m

Forecast New Capital Spending (annual)

             
Unallocated contingencies 241 254 77 30 602
Forecast new spending for Budget 2016 75 59 200 200 534
Forecast new spending for Budget 2017 100 300 250 250 900
Forecast new spending for Budget 2018 100 300 518 918
Forecast new spending for Budget 2019 100 836 936
Total forecast new capital spending 316 413 677 880 1,604 3,890
Forecast new capital spending (cumulative) 316 729 1,406 2,286    
Capital top-down adjustment (cumulative) (375) (655) (730) (830) (930)    

Unallocated contingencies represent capital spending from Budget 2015 and previous Budgets that has yet to be allocated. Forecast new spending indicates the expected capital spending increases from future Budgets.

NOTE 10: Net Gains and Losses on Financial Instruments

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

By source

             
Core Crown 4,045 2,378 4,415 2,344 2,370 2,466 2,604
Crown entities 702 373 2,765 316 318 331 335
State-owned Enterprises 161 52 59 123 59 42 (2)
Inter-segment eliminations (88) (220) (1,218) (223) (229) (237) (248)
Net gains/(losses) on financial instruments 4,820 2,583 6,021 2,560 2,518 2,602 2,689

NOTE 11: Net Gains and Losses on Non-Financial Instruments

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

By type

             
Actuarial gains/(losses) on GSF liability 577 (2,049)
Actuarial gains/(losses) on ACC outstanding claims 479 (4,232)
Other (516) (82) (270) (45) (47) (48) (49)
Net gains/(losses) on non-financial instruments 540 (82) (6,551) (45) (47) (48) (49)

By source

             
Core Crown 220 (13) (2,360) (1) (1) (1) (1)
Crown entities 477 (69) (4,243) (45) (47) (48) (49)
State-owned Enterprises (156) (20) 53 1 1 1 1
Inter-segment eliminations (1) 20 (1)
Net gains/(losses) on non-financial instruments 540 (82) (6,551) (45) (47) (48) (49)

NOTE 12: Operating Balance (excluding Minority Interests)

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

By source

             
Core Crown 203 1,871 916 2,406 4,279 5,223 6,596
Crown entities 2,874 1,357 (392) 585 48 (289) 52
State-owned Enterprises 428 593 490 800 830 809 845
Inter-segment eliminations (697) (719) (1,648) (801) (890) (872) (896)
Total operating balance 2,808 3,102 (634) 2,990 4,267 4,871 6,597

NOTE 13: Financial Assets and Sovereign Receivables

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
Cash and cash equivalents 11,888 10,498 13,209 13,037 13,621 14,415 15,229
Tax receivables 8,112 8,664 8,884 9,290 9,818 10,504 11,113
Trade and other receivables 9,368 7,946 8,587 8,178 8,191 7,873 7,890
Student loans (refer note 14) 8,716 9,024 8,878 9,171 9,415 9,615 9,750
Kiwibank mortgages 14,630 16,361 16,037 17,446 19,026 20,528 22,176
Long-term deposits 3,844 1,986 3,046 2,848 2,869 3,072 3,347
IMF financial assets 2,142 2,557 2,504 2,525 2,545 2,565 2,585
Other advances 1,410 1,241 2,058 2,052 2,041 1,992 2,013
Share investments 20,596 21,234 24,526 25,921 27,353 28,880 30,508
Derivatives in gain 4,164 2,797 3,303 2,950 3,039 3,155 3,358
Other marketable securities 38,307 35,391 37,616 38,476 44,307 40,375 37,936
Total financial assets and sovereign receivables 123,177 117,699 128,648 131,894 142,225 142,974 145,905

Financial Assets by Entity

             
NZDMO 18,359 13,555 17,552 17,907 23,558 18,371 14,803
Reserve Bank of New Zealand 18,849 18,657 20,521 20,683 21,055 20,682 20,837
NZS Fund 26,990 27,419 30,062 32,038 34,100 36,316 38,702
Other core Crown 24,358 21,202 22,988 22,909 23,172 23,826 24,290
Intra-segment eliminations (8,473) (6,318) (7,585) (7,648) (8,173) (7,515) (7,309)
Total core Crown segment 80,083 74,515 83,538 85,889 93,712 91,680 91,323
ACC portfolio 30,897 32,539 34,787 36,131 37,289 38,183 39,416
EQC portfolio 3,605 102 1,557 71 121 118 119
Other Crown entities 9,806 7,852 8,984 7,923 7,802 8,005 8,253
Intra-segment eliminations (2,464) (1,777) (2,765) (2,222) (2,177) (2,136) (2,066)
Total Crown entities segment 41,844 38,716 42,563 41,903 43,035 44,170 45,722
Total state-owned enterprises segment 21,151 23,459 23,156 25,140 26,931 28,915 31,005
Inter-segment eliminations (19,901) (18,991) (20,609) (21,038) (21,453) (21,791) (22,145)
Total financial assets and sovereign receivables 123,177 117,699 128,648 131,894 142,225 142,974 145,905

NOTE 14: Student Loans

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
Nominal value (including accrued interest) 14,235 14,790 14,802 15,375 15,875 16,341 16,768
Opening book value 8,288 8,752 8,716 8,878 9,171 9,415 9,615
Amount borrowed in current year 1,512 1,586 1,529 1,583 1,615 1,655 1,702
Less initial write-down to fair value (630) (668) (606) (646) (652) (668) (687)
Repayments made during the year (1,032) (1,158) (1,114) (1,161) (1,251) (1,334) (1,436)
Interest unwind 579 601 596 605 622 636 646
Impairment (12) (100) (253) (100) (100) (100) (100)
Other movements 11 11 10 12 10 11 10
Closing book value 8,716 9,024 8,878 9,171 9,415 9,615 9,750

NOTE 15: Property, Plant and Equipment

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

Net Carrying Value1

             

By class of asset

             
Land 37,138 35,030 37,312 37,240 37,111 37,140 37,159
Buildings 27,396 27,365 28,498 30,198 31,147 31,313 31,768
State highways 19,709 19,797 20,828 22,419 23,908 25,434 26,910
Electricity generation assets 13,941 13,529 13,643 13,413 13,192 12,933 12,703
Electricity distribution network (cost) 3,992 4,261 4,124 4,242 4,440 4,528 4,621
Specialist military equipment 2,891 3,080 3,091 3,109 3,173 3,090 3,126
Specified cultural and heritage assets 2,975 2,679 2,993 3,018 3,045 3,072 3,098
Aircraft (excluding military) 2,287 3,269 2,891 3,593 4,072 4,670 4,883
Rail network 936 1,372 1,040 1,367 1,699 1,782 1,856
Other plant and equipment (cost) 5,041 5,491 5,012 4,978 4,888 4,831 4,290
Total property, plant and equipment 116,306 115,873 119,432 123,577 126,675 128,793 130,414

By source

             
Core Crown 30,963 31,334 31,956 33,292 34,210 34,397 34,561
Crown entities 56,802 54,618 58,773 60,902 62,548 64,202 65,787
State-owned Enterprises 28,541 29,921 28,703 29,383 29,917 30,194 30,066
Inter-segment eliminations    -     -     -     -     -     -     - 
Total property, plant and equipment 116,306 115,873 119,432 123,577 126,675 128,793 130,414

Land breakdown by usage

             
Housing 11,361 9,410 11,371 11,089 10,882 10,670 10,451
State highway corridor land 8,853 8,303 8,853 8,881 8,923 9,073 9,223
Conservation land 5,432 5,385 5,357 5,368 5,378 5,389 5,399
Rail network 3,256 3,234 3,231 3,214 3,194 3,183 3,163
Schools 3,167 2,875 3,186 3,228 3,223 3,218 3,218
Commercial (SOEs) excluding Rail 1,312 1,489 1,327 1,364 1,378 1,420 1,462
Other 3,757 4,334 3,987 4,096 4,133 4,187 4,243
Total land 37,138 35,030 37,312 37,240 37,111 37,140 37,159
  1. Using a revaluation methodology unless otherwise stated.
  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

Schedule of Movements

             

Cost or Valuation

             
Opening balance 122,796 129,107 130,342 137,593 145,930 153,326 159,887
Additions (refer below) 6,672 8,678 8,039 9,247 8,180 7,301 6,910
Disposals (1,432) (865) (731) (912) (780) (763) (789)
Net revaluations 3,038    -  (3)    -     -     -  1
Other1 (732) (37) (54) 2 (4) 23 6
Total cost or valuation 130,342 136,883 137,593 145,930 153,326 159,887 166,015

Accumulated Depreciation and Impairment

             
Opening balance 12,963 16,843 14,036 18,161 22,353 26,651 31,094
Eliminated on disposal (813) (52) (92) (55) (60) (60) (60)
Eliminated on revaluation (2,133)    -  (19)    -     -     -     - 
Impairment losses charged to operating balance 346    -     -     -     -     -     - 
Depreciation expense 3,805 4,224 4,199 4,253 4,364 4,501 4,563
Other1 (132) (5) 37 (6) (6) 2 4
Total accumulated depreciation and impairment 14,036 21,010 18,161 22,353 26,651 31,094 35,601
Total property, plant and equipment 116,306 115,873 119,432 123,577 126,675 128,793 130,414

Additions - by functional classification

             
Transport and communications 2,363 3,235 3,081 3,834 3,355 3,347 2,917
Economic and industrial services 1,108 717 593 610 710 626 650
Education 529 895 899 1,162 1,024 853 814
Health 443 803 772 701 722 417 410
Defence 386 619 334 441 511 362 486
Other 1,843 2,409 2,360 2,499 1,858 1,696 1,633
Total additions to property, plant and equipment2 6,672 8,678 8,039 9,247 8,180 7,301 6,910
  1. Other mainly includes transfers to/from other asset categories.
  2. 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 16: Intangible Assets and Goodwill

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

By type

             
Goodwill 628 650 589 589 589 589 589
Other intangible assets 2,292 2,284 2,410 2,675 2,844 2,784 2,734
Total intangible assets and goodwill 2,920 2,934 2,999 3,264 3,433 3,373 3,323

By source

             
Core Crown 1,184 1,182 1,247 1,436 1,566 1,569 1,571
Crown entities 542 587 573 657 696 640 577
State-owned Enterprises 1,194 1,165 1,179 1,171 1,171 1,164 1,175
Inter-segment eliminations    -     -     -     -     -     -     - 
Total intangible assets and goodwill 2,920 2,934 2,999 3,264 3,433 3,373 3,323

NOTE 17: NZ Superannuation Fund

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
Revenue 767 685 678 714 782 854 930
Less current tax expense 1,074 585 508 616 660 708 760
Less other expenses 164 157 138 168 195 220 242
Add gains/(losses) 3,735 1,914 3,328 2,025 2,161 2,306 2,460
Operating balance 3,264 1,857 3,360 1,955 2,088 2,232 2,388
Opening net worth 22,549 25,157 25,809 29,190 31,165 33,279 35,545
Operating balance 3,264 1,857 3,360 1,955 2,088 2,232 2,388
Other movements in reserves (4) 19 21 20 26 34 42
Closing net worth 25,809 27,033 29,190 31,165 33,279 35,545 37,975

Comprising:

             
Financial assets 26,990 27,419 30,062 32,038 34,100 36,316 38,702
Financial liabilities (2,323) (1,557) (2,005) (2,095) (2,147) (2,204) (2,265)
Net other assets 1,142 1,171 1,133 1,222 1,326 1,433 1,538
Closing net worth 25,809 27,033 29,190 31,165 33,279 35,545 37,975

NOTE 18: Payables

 
  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

By type

             
Accounts payable 7,626 7,439 7,081 7,445 7,759 7,234 7,486
Taxes repayable 3,668 4,435 4,419 4,787 5,355 6,099 6,774
Total payables 11,294 11,874 11,500 12,232 13,114 13,333 14,260

By source

             
Core Crown 7,800 7,856 7,869 8,621 9,493 9,750 10,750
Crown entities 5,382 5,270 5,027 4,865 4,810 4,672 4,524
State-owned Enterprises 4,832 5,146 5,040 5,057 5,099 5,166 5,228
Inter-segment eliminations (6,720) (6,398) (6,436) (6,311) (6,288) (6,255) (6,242)
Total payables 11,294 11,874 11,500 12,232 13,114 13,333 14,260

NOTE 19: Insurance Liabilities

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
By entity              
ACC 29,948 30,383 35,307 36,842 38,458 40,126 41,863
EQC 4,747 364 2,288 262 170 163 158
Southern Response 1,434 466 1,193 645 208 23
Other (incl. inter-segment eliminations) (304) 59 (269) 65 67 69 73
Total insurance liabilities 35,825 31,272 38,519 37,814 38,903 40,381 42,094

ACC liability

Calculation information

PwC NZ has prepared an independent actuarial estimate of the ACC outstanding claims liability as at 31 December 2014. 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 2015. The equivalent single effective discount rate, taking into account ACC's projected future cash flow patterns, is 3.82% and allows for a long-term discount rate of 5.5% from 2065.

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 below (less cross-holdings of NZ Government stock) are included as assets in the Statement of Financial Position.

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

Gross ACC Liability

             
Opening gross liability 29,446 29,209 29,948 35,307 36,842 38,458 40,126
Net change 502 1,174 5,359 1,535 1,616 1,668 1,737
Closing gross liability 29,948 30,383 35,307 36,842 38,458 40,126 41,863

Less Net Assets Available to ACC

             
Opening net asset value 27,193 29,309 29,840 34,297 35,917 37,140 38,005
Net change 2,647 2,042 4,457 1,620 1,223 865 1,202
Closing net asset value 29,840 31,351 34,297 35,917 37,140 38,005 39,207

Net ACC Reserves (Net Liability)

             
Opening reserves position (2,253) 100 (108) (1,010) (925) (1,318) (2,121)
Net change 2,145 868 (902) 85 (393) (803) (535)
Closing reserves position (net liability)/net asset (108) 968 (1,010) (925) (1,318) (2,121) (2,656)

EQC liability

Calculation information

Melville Jessup Weaver prepared an independent actuarial estimate of the EQC outstanding claims liability at 31 December 2014 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 2014 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.

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

EQC Liability

             
Opening gross liability 6,869 4,308 4,747 2,288 262 170 163
Net change (2,122) (3,944) (2,459) (2,026) (92) (7) (5)
Closing gross liability 4,747 364 2,288 262 170 163 158

Less Reinsurance Receivable

             
Opening reinsurance receivable 2,623 1,161 1,225 664 17 5 2
Net change (1,398) (1,111) (561) (647) (12) (3) (2)
Closing reinsurance receivable 1,225 50 664 17 5 2

Net EQC Liability

             
Opening net position (4,246) (3,147) (3,522) (1,624) (245) (165) (161)
Net change 724 2,833 1,898 1,379 80 4 3
Closing net position (net liability) (3,522) (314) (1,624) (245) (165) (161) (158)

NOTE 20: Retirement Plan Liabilities

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
Government Superannuation Fund 10,886 10,385 12,562 12,192 11,774 11,334 10,874
Other funds (1) (5) (2) (2) (2) (2) (2)
Total retirement plan liabilities 10,885 10,380 12,560 12,190 11,772 11,332 10,872

The net liability of the Government Superannuation Fund (GSF) was calculated by GSF's actuary as at 31 January 2015. 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 31 January 2015, based on membership data as at 30 June 2014 with adjustments for cash flows to 31 January 2015. 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 31 January 2015.

Other principal long-term financial assumptions were an inflation rate, as measured by the Consumers Price Index (CPI), of 1.3% for the year to 30 June 2015, increasing to 1.9% for the 11 years to 30 June 2026, then increasing by 0.05% each year reaching to 2.5% in the year ending 30 June 2039 and remaining at 2.5% pa for all years after that. In addition an annual salary growth rate, before any promotional effects, of 3% (unchanged from 30 June 2014).

The 2014/15 projected increase in the net GSF liability is $1,676 million, reflecting an increase in the GSF liability of $1,981 million and an increase in the GSF net assets of $305 million.

The increase in the GSF liability of $1,981 million includes an actuarial loss between 1 July 2014 and 31 January 2015, of $2,266 million, owing to movements in the discount rates offset by the impact of movements in CPI rates. The remaining $285 million reduction is owing to lower than expected benefits 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 $305 million includes a gain of $217 million reflecting the updated market value of assets at 31 January 2015. The balance of $88 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 2014/15 onwards reflect the net of the expected current service cost, interest cost, investment returns and contributions.

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

GSF Liability

             
Opening GSF liability 15,290 14,360 14,560 16,541 16,238 15,886 15,510
Net projected change (730) (299) 1,981 (303) (352) (376) (397)
Closing GSF liability 14,560 14,061 16,541 16,238 15,886 15,510 15,113

Less Net Assets Available to GSF

             
Opening net asset value 3,382 3,622 3,674 3,979 4,046 4,112 4,176
Investment valuation changes 395 195 433 234 238 241 245
Contribution and other income less pension payments (103) (141) (128) (167) (172) (177) (182)
Closing net asset value 3,674 3,676 3,979 4,046 4,112 4,176 4,239

Net GSF Liability

             
Opening unfunded liability 11,908 10,738 10,886 12,562 12,192 11,774 11,334
Net projected change (1,022) (353) 1,676 (370) (418) (440) (460)
Closing unfunded liability 10,886 10,385 12,562 12,192 11,774 11,334 10,874

NOTE 21: Provisions

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
Provision for employee entitlements 3,444 3,174 3,264 3,251 3,289 3,304 3,286
Provision for ETS credits 521 362 863 821 777 732 683
Provision for National Provident Fund guarantee 910 942 872 833 794 756 718
Provision for infrastructure costs 394 201 204
Provision for weathertight services financial assistance package 112 123 64 33 19 13 7
Other provisions 1,574 1,309 1,460 1,538 1,509 1,485 1,518
Total provisions 6,955 6,111 6,727 6,476 6,388 6,290 6,212

By source

             
Core Crown 4,208 3,562 4,413 4,040 3,680 3,579 3,473
Crown entities 2,076 2,017 1,994 2,001 2,017 2,028 2,042
State-owned Enterprises 1,177 1,016 964 956 958 945 955
Inter-segment eliminations (506) (484) (644) (521) (267) (262) (258)
Total provisions 6,955 6,111 6,727 6,476 6,388 6,290 6,212

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 March 2015.

The ETS impact on the fiscal forecast is as follows:

 
  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
Revenue 13 46 83 144 148 154 159
Expenses (46) (51) (114) (102) (104) (109) (110)
Kyoto compliant units surrender expense (24) (6)    -     -     -     -     - 
Gains/(losses) (285)    -  (311)    -     -     -     - 
Operating balance (342) (11) (342) 42 44 45 49

NOTE 22: Changes in Net Worth

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
Taxpayers' funds 13,300 16,601 12,720 15,978 20,439 25,508 32,312
Property, plant and equipment revaluation reserve 62,225 56,509 62,142 61,873 61,689 61,507 61,322
Investment revaluation reserve 58 104 82 92 103 114 126
Cash flow hedge reserve 33 (47) (56) (46) (46) (44) (47)
Foreign currency translation reserve (92) (52) (85) (85) (85) (85) (85)
Share based payment reserve 44
Net worth attributable to minority interests 5,211 5,518 5,181 5,223 5,260 5,329 5,374
Total net worth 80,779 78,633 79,984 83,035 87,360 92,329 99,002

Taxpayers' funds

             
Opening taxpayers' funds 10,862 13,344 13,300 12,720 15,978 20,439 25,508
Operating balance excluding minority interest 2,808 3,102 (634) 2,990 4,267 4,871 6,597
Government share offers in SOEs (577)
Transfers from/(to) other reserves 229 155 65 279 201 205 215
Other movements (22) (11) (11) (7) (7) (8)
Closing taxpayers' funds 13,300 16,601 12,720 15,978 20,439 25,508 32,312

Property, Plant and Equipment Revaluation Reserve

             
Opening revaluation reserve 57,068 56,648 62,225 62,142 61,873 61,689 61,507
Net revaluations 5,386 (39)
Transfers from/(to) other reserves (229) (139) (44) (269) (184) (182) (185)
Closing property, plant and equipment revaluation reserve 62,225 56,509 62,142 61,873 61,689 61,507 61,322

NOTE 23: Core Crown Residual Cash

  2014
Actual
$m
2015
Previous
Budget
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m

Core Crown Cash Flows from Operations

             
Tax receipts 61,321 66,030 66,032 68,282 72,028 76,360 80,025
Other sovereign receipts 747 771 821 835 839 846 858
Interest, profits and dividends 1,627 1,737 1,921 1,718 2,023 2,217 2,350
Sale of goods and services and other receipts 2,397 2,307 2,442 2,438 1,996 2,002 1,992
Transfer payments and subsidies (23,447) (24,021) (23,944) (24,498) (25,333) (26,194) (27,188)
Personnel and operating costs (41,989) (42,419) (42,757) (43,745) (42,974) (43,749) (43,045)
Interest payments (3,642) (3,884) (4,043) (3,691) (3,980) (4,048) (4,091)
Forecast for future new operating spending (291) (7) (305) (1,403) (3,965) (5,526)
Top-down expense adjustment 875 555 1,025 520 445 430
Net core Crown operating cash flows (2,986) 1,105 1,020 2,059 3,716 3,914 5,805

Core Crown Capital Cash Flows

             
Net purchase of physical assets (1,867) (2,600) (2,486) (2,928) (2,528) (1,715) (1,633)
Net increase in advances (716) (1,423) (759) (1,216) (466) (191) (192)
Net purchase of investments (865) (2,060) (1,452) (2,045) (1,997) (1,589) (1,494)
Government share offer programme 2,325 628 628
Forecast for future new capital spending (326) (316) (412) (677) (880)
Top-down capital adjustment 370 375 280 75 100 100
Net core Crown capital cash flows (1,123) (5,411) (3,694) (6,225) (5,328) (4,072) (4,099)
Residual cash (deficit)/surplus (4,109) (4,306) (2,674) (4,166) (1,612) (158) 1,706

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

             

Debt Programme Cash Flows

             
Market:              
    Issue of government bonds 7,716 8,046 8,201 8,462 6,909 6,503 6,374
    Repayment of government bonds (2,196) (8,805) (8,684) (1,777) (11,312) (11,455)
    Net issue/(repayment) of short-term borrowing1 (935) 720 3,380 (2,400)
Total market debt cash flows 4,585 (39) 2,897 4,285 6,909 (4,809) (5,081)
Non-market:              
    Repayment of government bonds (1,427) (1,152) (303)
    Net issue/(repayment) of short-term borrowing (500) (480) (100)
Total non-market debt cash flows (1,927) (1,632) (403)
Total debt programme cash flows 4,585 (1,966) 1,265 3,882 6,909 (4,809) (5,081)

Other Borrowing Cash Flows

             
Net (repayment)/issue of other New Zealand dollar borrowing (674) 1,136 1,682 509 (79) 1,160 (21)
Net (repayment)/issue of foreign currency borrowing 1,083 (842) (1,769) (722) (106) (1,072) 22
Total other borrowing cash flows 409 294 (87) (213) (185) 88 1

Investing Cash Flows

             
Net sale/(purchase) of marketable securities and deposits (1,510) 5,830 2,120 337 (5,275) 4,711 3,199
Issues of circulating currency 274 152 511 164 169 174 180
Decrease/(increase) in cash 351 (4) (1,135) (4) (6) (6) (5)
Total investing cash flows (885) 5,978 1,496 497 (5,112) 4,879 3,374
Residual cash deficit/(surplus) funding/(investing) 4,109 4,306 2,674 4,166 1,612 158 (1,706)
  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 2014
  Core Crown
2014
Actual
$m
Crown entities
2014
Actual
$m
State-owned Enterprises
2014
Actual
$m
Inter-segment eliminations
2014
Actual
$m
Total Crown
2014
Actual
$m

Revenue

         
Taxation revenue 61,474 (595) 60,879
Other sovereign revenue 1,201 5,409 (1,160) 5,450
Revenue from core Crown funding 24,782 187 (24,969)
Sales of goods and services 1,488 1,868 13,650 (534) 16,472
Interest revenue and dividends 2,295 1,249 879 (1,248) 3,175
Other revenue 839 2,090 772 (281) 3,420
Total revenue (excluding gains) 67,297 35,398 15,488 (28,787) 89,396

Expenses

         
Social assistance and official development assistance 23,360 23,360
Personnel expenses 6,232 11,315 2,956 (19) 20,484
Other operating expenses 38,255 18,958 10,777 (27,565) 40,425
Interest expenses 3,620 219 1,161 (600) 4,400
Insurance expenses 3,464 14 23 3,501
Forecast for future new spending and top-down adjustment
Total expenses (excluding losses) 71,467 33,956 14,908 (28,161) 92,170
Minority interest share of operating balance before gains/(losses) 18 (173) (4) (159)
Operating balance before gains/(losses) (4,170) 1,460 407 (630) (2,933)
Total gains/(losses) 4,265 1,179 5 (68) 5,381
Net surplus/(deficit) from associates and joint ventures 108 235 16 1 360
Operating balance 203 2,874 428 (697) 2,808

Expenses by functional classification

         
Social security and welfare 23,281 4,526 (541) 27,266
Health 14,898 12,640 (13,194) 14,344
Education 12,300 9,622 4 (8,862) 13,064
Transport and communications 2,237 2,289 6,909 (2,298) 9,137
Other 15,131 4,660 6,834 (2,666) 23,959
Finance costs 3,620 219 1,161 (600) 4,400
Forecast for future new spending and top-down adjustment
Total Crown expenses (excluding losses) 71,467 33,956 14,908 (28,161) 92,170
Statement of Financial Position as at 30 June 2014
  Core Crown
2014
Actual
$m
Crown entities
2014
Actual
$m
State-owned
Enterprises
2014
Actual
$m
Inter-segment
eliminations
2014
Actual
$m
Total Crown
2014
Actual
$m

Assets

         
Cash and cash equivalents 8,227 2,780 1,574 (693) 11,888
Receivables 11,819 6,379 1,762 (2,480) 17,480
Other financial assets 60,037 32,685 17,815 (16,728) 93,809
Property, plant and equipment 30,963 56,802 28,541 116,306
Equity accounted investments 32,543 8,627 192 (31,291) 10,071
Intangible assets and goodwill 1,184 542 1,194 2,920
Inventory and other assets 1,633 607 1,404 (35) 3,609
Forecast for new capital spending and top-down adjustment
Total assets 146,406 108,422 52,482 (51,227) 256,083

Liabilities

         
Borrowings 89,090 5,155 26,185 (17,011) 103,419
Other liabilities 28,442 43,836 7,245 (7,638) 71,885
Total liabilities 117,532 48,991 33,430 (24,649) 175,304
Total assets less total liabilities 28,874 59,431 19,052 (26,578) 80,779

Net worth

         
Taxpayers' funds 11,971 27,744 3,358 (29,773) 13,300
Reserves 16,903 31,627 10,111 3,627 62,268
Net worth attributable to minority interest 60 5,583 (432) 5,211
Total net worth 28,874 59,431 19,052 (26,578) 80,779
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 66,077 (615) 65,462
Other sovereign revenue 1,236 5,071 (1,116) 5,191
Revenue from core Crown funding 25,378 142 (25,520)
Sales of goods and services 1,429 1,787 13,928 (519) 16,625
Interest revenue and dividends 2,419 1,459 1,070 (1,383) 3,565
Other revenue 723 2,413 894 (436) 3,594
Total revenue (excluding gains) 71,884 36,108 16,034 (29,589) 94,437

Expenses

         
Social assistance and official development assistance 23,846 23,846
Personnel expenses 6,540 11,749 2,909 (16) 21,182
Other operating expenses 39,273 19,634 10,981 (28,276) 41,612
Interest expenses 3,977 221 1,333 (842) 4,689
Insurance expenses 2 4,013 8 4,023
Forecast for future new spending and top-down adjustment (548) (548)
Total expenses (excluding losses) 73,090 35,617 15,231 (29,134) 94,804
Minority interest share of operating balance before gains/(losses) 19 (362) 26 (317)
Operating balance before gains/(losses) (1,206) 510 441 (429) (684)
Total gains/(losses) 2,055 (1,478) 46 (1,219) (596)
Net surplus/(deficit) from associates and joint ventures 67 576 3 646
Operating balance 916 (392) 490 (1,648) (634)

Expenses by functional classification

         
Social security and welfare 23,842 4,910 (528) 28,224
Health 15,075 12,893 (13,220) 14,748
Education 13,021 9,912 1 (9,162) 13,772
Transport and communications 2,328 2,637 7,150 (2,532) 9,583
Other 15,395 5,044 6,747 (2,850) 24,336
Finance costs 3,977 221 1,333 (842) 4,689
Forecast for future new spending and top-down adjustment (548) (548)
Total Crown expenses (excluding losses) 73,090 35,617 15,231 (29,134) 94,804
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 9,462 2,684 1,663 (600) 13,209
Receivables 12,161 5,617 1,984 (2,291) 17,471
Other financial assets 61,915 34,262 19,509 (17,718) 97,968
Property, plant and equipment 31,956 58,773 28,703 119,432
Equity accounted investments 34,085 9,331 164 (32,838) 10,742
Intangible assets and goodwill 1,247 573 1,179 2,999
Inventory and other assets 1,454 577 1,215 (26) 3,220
Forecast for new capital spending and top-down adjustment (375) (375)
Total assets 151,905 111,817 54,417 (53,473) 264,666

Liabilities

         
Borrowings 91,161 5,484 28,278 (17,025) 107,898
Other liabilities 30,882 46,070 7,294 (7,462) 76,784
Total liabilities 122,043 51,554 35,572 (24,487) 184,682
Total assets less total liabilities 29,862 60,263 18,845 (28,986) 79,984

Net worth

         
Taxpayers' funds 12,931 28,585 3,401 (32,197) 12,720
Reserves 16,931 31,569 10,012 3,571 62,083
Net worth attributable to minority interest 109 5,432 (360) 5,181
Total net worth 29,862 60,263 18,845 (28,986) 79,984
Statement of Financial Performance for 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 68,868 (770) 68,098
Other sovereign revenue 1,438 4,832 (1,232) 5,038
Revenue from core Crown funding 25,829 111 (25,940)
Sales of goods and services 1,416 1,925 14,450 (538) 17,253
Interest revenue and dividends 2,561 1,481 1,300 (1,306) 4,036
Other revenue 638 2,706 800 (564) 3,580
Total revenue (excluding gains) 74,921 36,773 16,661 (30,350) 98,005

Expenses

         
Social assistance and official development assistance 24,482 24,482
Personnel expenses 6,739 11,964 2,908 (17) 21,594
Other operating expenses 40,755 20,214 11,021 (28,993) 42,997
Interest expenses 3,676 216 1,520 (725) 4,687
Insurance expenses 3 4,340 8 (3) 4,348
Forecast for future new spending and top-down adjustment (720) (720)
Total expenses (excluding losses) 74,935 36,734 15,457 (29,738) 97,388
Minority interest share of operating balance before gains/(losses) 27 (504) 36 (441)
Operating balance before gains/(losses) (14) 66 700 (576) 176
Total gains/(losses) 2,343 271 92 (223) 2,483
Net surplus/(deficit) from associates and joint ventures 77 248 8 (2) 331
Operating balance 2,406 585 800 (801) 2,990

Expenses by functional classification

         
Social security and welfare 24,639 5,494 (538) 29,595
Health 15,581 13,161 (13,639) 15,103
Education 13,134 10,145 1 (9,386) 13,894
Transport and communications 2,214 2,600 7,155 (2,532) 9,437
Other 16,411 5,118 6,781 (2,918) 25,392
Finance costs 3,676 216 1,520 (725) 4,687
Forecast for future new spending and top-down adjustment (720) (720)
Total Crown expenses (excluding losses) 74,935 36,734 15,457 (29,738) 97,388
Statement of Financial Position as 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 9,715 1,849 1,990 (517) 13,037
Receivables 12,361 4,811 2,035 (1,739) 17,468
Other financial assets 63,813 35,244 21,115 (18,783) 101,389
Property, plant and equipment 33,292 60,902 29,383 123,577
Equity accounted investments 35,983 9,700 171 (34,728) 11,126
Intangible assets and goodwill 1,436 657 1,171 3,264
Inventory and other assets 1,508 585 1,188 (27) 3,254
Forecast for new capital spending and top-down adjustment (339) (339)
Total assets 157,769 113,748 57,053 (55,794) 272,776

Liabilities

         
Borrowings 94,467 6,447 30,490 (18,027) 113,377
Other liabilities 31,017 44,885 7,348 (6,886) 76,364
Total liabilities 125,484 51,332 37,838 (24,913) 189,741
Total assets less total liabilities 32,285 62,416 19,215 (30,881) 83,035

Net worth

         
Taxpayers' funds 15,336 31,030 3,704 (34,092) 15,978
Reserves 16,949 31,293 10,019 3,573 61,834
Net worth attributable to minority interest 93 5,492 (362) 5,223
Total net worth 32,285 62,416 19,215 (30,881) 83,035
Statement of Financial Performance for 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 72,544 (826) 71,718
Other sovereign revenue 1,288 4,673 (1,340) 4,621
Revenue from core Crown funding 25,904 103 (26,007)
Sales of goods and services 1,478 1,993 14,843 (558) 17,756
Interest revenue and dividends 3,031 1,522 1,523 (1,384) 4,692
Other revenue 604 2,702 898 (512) 3,692
Total revenue (excluding gains) 78,945 36,794 17,367 (30,627) 102,479

Expenses

         
Social assistance and official development assistance 25,353 25,353
Personnel expenses 6,628 12,108 2,980 (17) 21,699
Other operating expenses 40,166 20,197 11,345 (29,175) 42,533
Interest expenses 4,080 230 1,700 (739) 5,271
Insurance expenses 4,755 8 1 4,764
Forecast for future new spending and top-down adjustment 883 883
Total expenses (excluding losses) 77,110 37,290 16,033 (29,930) 100,503
Minority interest share of operating balance before gains/(losses) 24 (561) 37 (500)
Operating balance before gains/(losses) 1,835 (472) 773 (660) 1,476
Total gains/(losses) 2,369 271 47 (229) 2,458
Net surplus/(deficit) from associates and joint ventures 75 249 10 (1) 333
Operating balance 4,279 48 830 (890) 4,267

Expenses by functional classification

         
Social security and welfare 25,161 5,856 (560) 30,457
Health 15,621 13,168 (13,748) 15,041
Education 13,211 10,204 1 (9,426) 13,990
Transport and communications 2,259 2,633 7,347 (2,555) 9,684
Other 15,895 5,199 6,985 (2,902) 25,177
Finance costs 4,080 230 1,700 (739) 5,271
Forecast for future new spending and top-down adjustment 883 883
Total Crown expenses (excluding losses) 77,110 37,290 16,033 (29,930) 100,503
Statement of Financial Position as 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 10,178 1,922 1,963 (442) 13,621
Receivables 12,906 4,572 2,055 (1,524) 18,009
Other financial assets 70,628 36,540 22,914 (19,487) 110,595
Property, plant and equipment 34,210 62,548 29,917 126,675
Equity accounted investments 37,730 9,962 204 (36,466) 11,430
Intangible assets and goodwill 1,566 696 1,171 3,433
Inventory and other assets 1,519 602 1,175 (27) 3,269
Forecast for new capital spending and top-down adjustment (1) (1)
Total assets 168,736 116,842 59,399 (57,946) 287,031

Liabilities

         
Borrowings 100,895 6,992 32,435 (18,659) 121,663
Other liabilities 31,249 45,938 7,430 (6,609) 78,008
Total liabilities 132,144 52,930 39,865 (25,268) 199,671
Total assets less total liabilities 36,592 63,912 19,534 (32,678) 87,360

Net worth

         
Taxpayers' funds 19,615 32,733 3,983 (35,892) 20,439
Reserves 16,977 31,090 10,017 3,577 61,661
Net worth attributable to minority interest 89 5,534 (363) 5,260
Total net worth 36,592 63,912 19,534 (32,678) 87,360
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 76,811 (816) 75,995
Other sovereign revenue 1,263 4,622 (1,441) 4,444
Revenue from core Crown funding 25,970 103 (26,073)
Sales of goods and services 1,527 2,070 15,307 (579) 18,325
Interest revenue and dividends 3,333 1,569 1,652 (1,414) 5,140
Other revenue 583 2,749 960 (483) 3,809
Total revenue (excluding gains) 83,517 36,980 18,022 (30,806) 107,713

Expenses

         
Social assistance and official development assistance 26,228 26,228
Personnel expenses 6,642 12,201 3,042 (17) 21,868
Other operating expenses 40,223 20,158 11,832 (29,353) 42,860
Interest expenses 4,217 243 1,805 (762) 5,503
Insurance expenses 1 5,209 8 (1) 5,217
Forecast for future new spending and top-down adjustment 3,520 3,520
Total expenses (excluding losses) 80,831 37,811 16,687 (30,133) 105,196
Minority interest share of operating balance before gains/(losses) 10 (569) 37 (522)
Operating balance before gains/(losses) 2,686 (821) 766 (636) 1,995
Total gains/(losses) 2,465 283 32 (237) 2,543
Net surplus/(deficit) from associates and joint ventures 72 249 11 1 333
Operating balance 5,223 (289) 809 (872) 4,871

Expenses by functional classification

         
Social security and welfare 25,928 6,261 (24) (580) 31,585
Health 15,673 13,134 (13,824) 14,983
Education 13,255 10,203 1 (9,428) 14,031
Transport and communications 2,320 2,601 7,704 (2,608) 10,017
Other 15,918 5,369 7,201 (2,931) 25,557
Finance costs 4,217 243 1,805 (762) 5,503
Forecast for future new spending and top-down adjustment 3,520 3,520
Total Crown expenses (excluding losses) 80,831 37,811 16,687 (30,133) 105,196
Statement of Financial Position as 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 10,672 1,898 2,288 (443) 14,415
Receivables 13,570 4,239 2,090 (1,522) 18,377
Other financial assets 67,439 38,034 24,537 (19,828) 110,182
Property, plant and equipment 34,397 64,202 30,194 128,793
Equity accounted investments 39,326 10,219 249 (38,053) 11,741
Intangible assets and goodwill 1,569 640 1,164 3,373
Inventory and other assets 1,494 617 1,118 (26) 3,203
Forecast for new capital spending and top-down adjustment 576 576
Total assets 169,043 119,849 61,640 (59,872) 290,660

Liabilities

         
Borrowings 96,080 7,412 34,471 (19,002) 118,961
Other liabilities 31,113 47,292 7,536 (6,571) 79,370
Total liabilities 127,193 54,704 42,007 (25,573) 198,331
Total assets less total liabilities 41,850 65,145 19,633 (34,299) 92,329

Net worth

         
Taxpayers' funds 24,838 34,142 4,037 (37,509) 25,508
Reserves 17,012 30,887 10,018 3,575 61,492
Net worth attributable to minority interest 116 5,578 (365) 5,329
Total net worth 41,850 65,145 19,633 (34,299) 92,329
Statement of Financial Performance for the year ended 30 June 2019
  Core Crown
2019
Forecast
$m
Crown entities
2019
Forecast
$m
State-owned
Enterprises
2019
Forecast
$m
Inter-segment
eliminations
2019
Forecast
$m
Total Crown
2019
Forecast
$m

Revenue

         
Taxation revenue 80,472 (839) 79,633
Other sovereign revenue 1,222 4,597 (1,535) 4,284
Revenue from core Crown funding 26,015 103 (26,118)
Sales of goods and services 1,556 2,127 15,593 (594) 18,682
Interest revenue and dividends 3,551 1,624 1,746 (1,441) 5,480
Other revenue 560 2,794 996 (471) 3,879
Total revenue (excluding gains) 87,361 37,157 18,438 (30,998) 111,958

Expenses

         
Social assistance and official development assistance 27,232 27,232
Personnel expenses 6,612 12,328 3,103 (18) 22,025
Other operating expenses 40,250 20,090 12,087 (29,508) 42,919
Interest expenses 4,254 251 1,818 (787) 5,536
Insurance expenses 4,982 8 1 4,991
Forecast for future new spending and top-down adjustment 5,096 5,096
Total expenses (excluding losses) 83,444 37,651 17,016 (30,312) 107,799
Minority interest share of operating balance before gains/(losses) 12 (585) 38 (535)
Operating balance before gains/(losses) 3,917 (482) 837 (648) 3,624
Total gains/(losses) 2,603 286 (2) (248) 2,639
Net surplus/(deficit) from associates and joint ventures 76 248 10 334
Operating balance 6,596 52 845 (896) 6,597

Expenses by functional classification

         
Social security and welfare 26,855 6,016 (25) (601) 32,245
Health 15,743 13,107 (13,913) 14,937
Education 13,249 10,192 1 (9,409) 14,033
Transport and communications 2,361 2,625 7,885 (2,660) 10,211
Other 15,886 5,460 7,337 (2,942) 25,741
Finance costs 4,254 251 1,818 (787) 5,536
Forecast for future new spending and top-down adjustment 5,096 -   5,096
Total Crown expenses (excluding losses) 83,444 37,651 17,016 (30,312) 107,799
Statement of Financial Position as at 30 June 2019
  Core Crown
2019
Forecast
$m
Crown entities
2019
Forecast
$m
State-owned
Enterprises
2019
Forecast
$m
Inter-segment
eliminations
2019
Forecast
$m
Total Crown
2019
Forecast
$m

Assets

         
Cash and cash equivalents 11,203 1,795 2,677 (446) 15,229
Receivables 14,154 4,248 2,128 (1,527) 19,003
Other financial assets 65,966 39,680 26,200 (20,173) 111,673
Property, plant and equipment 34,561 65,787 30,066 130,414
Equity accounted investments 40,824 10,469 304 (39,543) 12,054
Intangible assets and goodwill 1,571 577 1,175 3,323
Inventory and other assets 1,542 632 1,084 (27) 3,231
Forecast for new capital spending and top-down adjustment 1,356 1,356
Total assets 171,177 123,188 63,634 (61,716) 296,283

Liabilities

         
Borrowings 90,991 7,719 36,231 (19,321) 115,620
Other liabilities 31,698 48,874 7,643 (6,554) 81,661
Total liabilities 122,689 56,593 43,874 (25,875) 197,281
Total assets less total liabilities 48,488 66,595 19,760 (35,841) 99,002

Net worth

         
Taxpayers' funds 31,435 35,803 4,124 (39,050) 32,312
Reserves 17,053 30,674 10,014 3,575 61,316
Net worth attributable to minority interest 118 5,622 (366) 5,374
Total net worth 48,488 66,595 19,760 (35,841) 99,002

Core Crown Expense Tables

 
($millions) 2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Social security and welfare 21,185 22,005 22,028 22,741 23,281 23,842 24,639 25,161 25,928 26,855
GSF pension expenses 328 305 192 278 282 359 355 318 305 294
Health 13,128 13,753 14,160 14,498 14,898 15,075 15,581 15,621 15,673 15,743
Education 11,724 11,650 11,654 12,504 12,300 13,021 13,134 13,211 13,255 13,249
Core government services 2,974 5,563 5,428 4,294 4,502 4,401 4,811 4,598 4,630 4,660
Law and order 3,191 3,382 3,403 3,456 3,501 3,606 3,622 3,576 3,572 3,572
Defence 1,814 1,809 1,736 1,804 1,811 1,927 2,087 2,118 2,108 2,108
Transport and communications 2,345 2,281 2,232 2,255 2,237 2,328 2,214 2,259 2,320 2,361
Economic and industrial services 2,806 2,542 2,073 1,978 2,058 2,268 2,262 2,178 2,242 2,188
Heritage, culture and recreation 630 741 863 804 842 779 808 784 769 754
Primary services 507 706 648 659 676 735 742 660 647 670
Housing and community development 339 943 ( 46) 283 347 357 582 497 477 472
Environmental protection 651 1,225 769 530 533 678 605 571 573 577
Other 80 479 425 603 579 285 537 595 595 591
Finance costs 2,311 3,066 3,511 3,619 3,620 3,977 3,676 4,080 4,217 4,254
Forecast for future new spending1  ..   ..   ..   ..   ..  7 305 1,403 3,965 5,526
Top-down expense adjustment  ..   ..   ..   ..   ..  ( 555) ( 1,025) ( 520) ( 445) ( 430)
Core Crown expenses 64,013 70,450 69,076 70,306 71,467 73,090 74,935 77,110 80,831 83,444
  1. The classifications of the functions of the Government reflect current approved baselines. Forecast new operating spending is shown as a separate line item in the above analysis and will be allocated to functions of the Government once decisions are made in future Budgets.

Source: The Treasury

Table 6.1 - Social security and welfare expenses
($millions) 2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Welfare benefits (see below) 18,961 19,781 20,375 20,789 21,187 21,699 22,492 23,263 24,069 25,034
Social rehabilitation and compensation 331 119 81 107 173 142 151 157 163 176
Departmental expenses 1,130 1,127 1,122 1,168 1,204 1,340 1,370 1,270 1,258 1,257
Child support impairment 371 281 72 282 255 222 353 204 171 123
Other non-departmental expenses1 392 697 378 395 462 439 273 267 267 265
Social security and welfare expenses 21,185 22,005 22,028 22,741 23,281 23,842 24,639 25,161 25,928 26,855
  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) 2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
New Zealand Superannuation 8,290 8,830 9,584 10,235 10,913 11,589 12,256 12,861 13,571 14,383
Jobseeker Support and Emergency Benefit ..  ..  ..  ..  1,691 1,686 1,616 1,574 1,531 1,519
Supported living payment ..  ..  ..  ..  1,422 1,512 1,519 1,530 1,536 1,564
Sole parent support ..  ..  ..  ..  1,222 1,186 1,187 1,242 1,218 1,224
Domestic Purposes Benefit 1,693 1,757 1,811 1,738 63 ..  ..  ..  ..  .. 
Invalid's Benefit 1,303 1,306 1,325 1,330 52 ..  ..  ..  ..  .. 
Sickness Benefit 710 743 775 782 29 ..  ..  ..  ..  .. 
Unemployment Benefit 930 943 883 812 29 ..  ..  ..  ..  .. 
Family Tax Credit 2,159 2,130 2,071 2,018 1,965 1,857 1,837 1,835 1,916 1,983
Other working for families tax credits 629 616 599 575 567 550 577 655 648 639
Accommodation Assistance 1,154 1,197 1,195 1,177 1,146 1,128 1,137 1,151 1,169 1,174
Income-Related Rents 522 553 580 611 660 718 774 818 872 927
Disability Assistance 411 409 401 384 379 377 379 378 379 380
Benefits paid in Australia 45 40 37 22 19 15 40 ..  ..  .. 
Paid Parental Leave 154 154 158 165 165 184 233 254 265 274
Childcare Assistance 178 188 188 186 186 184 193 226 227 230
Veterans Support Entitlement2 137 135 128 123 119 116 111 102 98 94
Veteran's Pension 179 178 177 171 165 178 193 189 181 173
Other benefits 467 602 463 460 395 419 440 448 458 470
Benefit expenses 18,961 19,781 20,375 20,789 21,187 21,699 22,492 23,263 24,069 25,034

Source: The Treasury

 
Beneficiary numbers
(Thousands)
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
New Zealand Superannuation 540 561 585 612 640 665 691 717 743 768
Jobseeker Support and Emergency Benefit1 ..  ..  ..  ..  138 133 126 121 117 113
Supported living payment1 ..  ..  ..  ..  96 98 98 98 98 98
Sole parent support1 ..  ..  ..  ..  78 72 70 68 67 65
Domestic Purposes Benefit1 110 114 114 109 ..  ..  ..  ..  ..  .. 
Invalid's Benefit1 88 88 87 87 ..  ..  ..  ..  ..  .. 
Sickness Benefit1 58 60 60 60 ..  ..  ..  ..  ..  .. 
Unemployment Benefit1 78 80 73 67 ..  ..  ..  ..  ..  .. 
Accommodation Assistance 312 320 311 305 297 292 292 293 296 295

Source: Ministry of Social Development

  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. Owing to the changes, there is no historical data for the new benefit categories and no forecast data for the previous categories beyond July 2013.
  2. From 2015, War Disablement Pensions have been renamed Veterans Support Entitlements.
Table 6.3 - Health expenses
($millions) 2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Departmental outputs 211 199 186 171 183 188 187 186 185 185
Health services purchasing (see below) 12,077 12,530 13,018 13,348 13,648 13,939 14,351 14,304 14,271 14,254
Other non-departmental outputs 106 120 119 234 330 326 322 326 340 356
Health payments to ACC 691 849 744 715 694 589 694 774 848 919
Other expenses 43 55 93 30 43 33 27 31 29 29
Health expenses 13,128 13,753 14,160 14,498 14,898 15,075 15,581 15,621 15,673 15,743

Source: The Treasury

Table 6.4 - Health services purchasing
($millions) 2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Payments to District Health Boards 10,670 11,133 11,542 11,946 12,165 12,432 12,766 12,771 12,752 12,738
National disability support services 930 971 1,029 1,028 1,087 1,109 1,158 1,159 1,153 1,153
Public health services purchasing 477 426 447 374 396 398 427 374 366 363
Health services purchasing 12,077 12,530 13,018 13,348 13,648 13,939 14,351 14,304 14,271 14,254

Source: The Treasury

Table 6.5 - Education expenses
($millions) 2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Early childhood education 1,184 1,340 1,355 1,436 1,545 1,628 1,681 1,710 1,732 1,757
Primary and secondary schools (see below) 5,157 5,354 5,443 5,590 5,550 5,848 6,010 6,034 6,039 5,999
Tertiary funding (see below) 4,465 3,991 3,795 4,370 4,027 4,295 4,250 4,285 4,302 4,319
Departmental expenses 898 923 988 1,039 1,107 1,141 1,114 1,110 1,109 1,107
Other education expenses 20 42 73 69 71 109 79 72 73 67
Education expenses 11,724 11,650 11,654 12,504 12,300 13,021 13,134 13,211 13,255 13,249

Source: The Treasury

 
Number of places provided1 2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Early childhood education 152,877 159,997 166,434 174,782 183,843 191,229 195,570 197,954 200,674 203,769
  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) 2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Primary 2,622 2,731 2,771 2,845 2,812 2,974 3,078 3,100 3,104 3,091
Secondary 1,972 2,051 2,085 2,148 2,146 2,241 2,287 2,290 2,286 2,268
School transport 160 163 172 175 177 187 187 190 197 192
Special needs support 297 310 323 332 322 340 352 354 355 350
Professional development 95 90 85 84 87 100 100 94 91 92
Schooling improvement 11 9 7 6 6 6 6 6 6 6
Primary and secondary education expenses 5,157 5,354 5,443 5,590 5,550 5,848 6,010 6,034 6,039 5,999

Source: The Treasury

 
Number of places provided1 2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Primary 489,904 489,275 489,799 493,025 497,765 505,162 510,705 513,881 516,227 516,286
Secondary 275,343 274,518 271,078 267,627 266,734 269,874 267,814 267,892 266,563 267,115
  1. These are snapshots based as at 1 July for primary year levels (years 1 to 8) and 1 March for secondary year levels (years 9 to 13). These numbers exclude special school rolls, health camps, hospital schools and home schooling (prior published tables included special school rolls). These estimates include a new entrant adjustment to make provision for the number of new entrants likely to be enrolled between 1 March and 10 October. Actual numbers have been restated to include this adjustment so may differ from previous published Economic and Fiscal Update numbers.

Source: Ministry of Education

Table 6.7 - Tertiary funding
($millions) 2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Tuition 2,398 2,354 2,306 2,322 2,383 2,423 2,474 2,481 2,472 2,472
Other tertiary funding 489 429 430 432 463 493 501 504 502 502
Student allowances 570 620 644 596 539 520 529 548 560 558
Student loans 1,008 588 415 1,020 642 859 746 752 768 787
Tertiary education expenses 4,465 3,991 3,795 4,370 4,027 4,295 4,250 4,285 4,302 4,319

Source: The Treasury

 
Number of places provided1 2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Actual delivered and estimated funded places 250,440 240,529 245,784 240,472 237,898 238,729 237,929 236,629 236,529 236,929
  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) 2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Official development assistance 435 495 510 437 533 531 542 573 586 586
Indemnity and guarantee expenses 7 319 59 27 29 38 36 36 36 36
Departmental expenses 1,324 1,492 1,518 1,576 1,635 1,743 1,831 1,689 1,730 1,693
Non-departmental expenses1 236 471 524 330 689 507 507 574 602 599
Tax receivable write-down and impairments 590 1,010 1,003 925 1,069 887 1,179 1,232 1,275 1,326
Science expenses 191 174 116 115 118 121 120 112 113 128
Other expenses1 191 1,602 1,698 884 429 574 596 382 288 292
Core government service expenses 2,974 5,563 5,428 4,294 4,502 4,401 4,811 4,598 4,630 4,660
  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) 2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Police 1,349 1,393 1,394 1,408 1,416 1,460 1,454 1,450 1,442 1,442
Ministry of Justice 372 397 440 466 471 461 473 450 444 444
Department of Corrections 903 956 988 972 1,001 1,029 1,038 1,022 1,021 1,021
NZ Customs Service1 13 120 126 140 150 163 160 163 164 165
Other departments 102 237 103 98 86 87 94 89 91 91
Department expenses 2,739 3,103 3,051 3,084 3,124 3,200 3,219 3,174 3,162 3,163
Non-departmental outputs 399 261 315 317 327 350 342 333 339 334
Other expenses 53 18 37 55 50 56 61 69 71 75
Law and order expenses 3,191 3,382 3,403 3,456 3,501 3,606 3,622 3,576 3,572 3,572
  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) 2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
NZDF core expenses 1,747 1,736 1,678 1,747 1,768 1,863 2,011 2,041 2,029 2,029
Other expenses 67 73 58 57 43 64 76 77 79 79
Defence expenses 1,814 1,809 1,736 1,804 1,811 1,927 2,087 2,118 2,108 2,108

Source: The Treasury

Table 6.11 - Transport and communication expenses
($millions) 2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
New Zealand Transport Agency 1,778 1,696 1,744 1,819 1,880 2,024 2,006 2,053 2,103 2,157
Departmental outputs 63 65 60 40 45 46 50 48 48 47
Other non-departmental expenses 58 105 62 213 227 110 101 116 128 131
Rail funding 418 386 305 153 56 93 3 3 3 3
Other expenses 28 29 61 30 29 55 54 39 38 23
Transport and communication expenses 2,345 2,281 2,232 2,255 2,237 2,328 2,214 2,259 2,320 2,361

Source: The Treasury

Table 6.12 - Economic and industrial services expenses
($millions) 2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Departmental outputs 382 420 346 350 372 400 383 367 366 367
Employment initiatives1 220 214 206 192 141 79 4 4 4 4
Non-departmental outputs 894 689 614 618 660 765 929 864 871 816
KiwiSaver (includes housing deposit subsidy) 1,024 1,045 698 740 828 919 798 851 908 951
Other expenses 286 174 209 78 57 105 148 92 93 50
Economic and industrial services expenses 2,806 2,542 2,073 1,978 2,058 2,268 2,262 2,178 2,242 2,188
  1. From 2016 some of the employment initiatives spending has ceased with spending reclassified to other non-departmental expenses in housing and community development (refer table below).

Source: The Treasury

Table 6.13 - Heritage, culture and recreation expenses
($millions) 2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Departmental outputs 115 133 172 270 286 280 272 271 263 261
Non-departmental outputs 405 455 444 442 471 465 465 464 464 464
Other expenses 110 153 247 92 85 34 71 49 42 29
Heritage, culture and recreation expenses 630 741 863 804 842 779 808 784 769 754

Source: The Treasury

Table 6.14 - Primary service expenses
($millions) 2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Departmental expenses 352 354 348 347 365 379 434 415 409 408
Non-departmental outputs 123 142 134 137 135 110 77 47 61 68
Biological research1 ..  167 102 105 92 95 92 89 84 95
Other expenses 32 43 64 70 84 151 139 109 93 99
Primary service expenses 507 706 648 659 676 735 742 660 647 670
  1. Prior to 2011, biological research was classified as an economic and industrial services expense.

Source: The Treasury

Table 6.15 - Housing and community development expenses
($millions) 2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Financial assistance package1 ..  567 (407) (60) ..  ..  ..  ..  ..  .. 
Housing subsidies 30 31 22 5 5 6 6 6 6 6
Departmental outputs 140 136 98 89 100 120 176 166 157 156
Other non-departmental expenses2 122 105 113 117 138 136 322 298 287 283
Warm up New Zealand 33 67 84 76 49 36 24 ..  ..  .. 
Other expenses 14 37 44 56 55 59 54 27 27 27
Housing and community development expenses 339 943 (46) 283 347 357 582 497 477 472
  1. Financial assistance package for 2012 and 2013 actual includes the impact of a revised estimate of the weathertight homes financial assistance package provision.
  2. From 2016, other non-departmental expenses includes new spending on community participation services with previous spending reallocated from employment initiatives (refer above table).

Source: The Treasury

Table 6.16 - Environmental protection expenses
($millions) 2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Emissions Trading Scheme 80 838 334 55 46 114 102 104 109 110
Departmental outputs 300 301 342 335 362 364 366 355 358 363
Non-departmental outputs 231 26 46 88 48 16 70 51 47 45
Other expenses 40 60 47 52 77 184 67 61 59 59
Environmental protection expenses 651 1,225 769 530 533 678 605 571 573 577

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).

Commercial portfolio

Consists of assets and liabilities held by companies with commercial objectives, predominantly State-owned Enterprises.

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 the Reserve Bank. For a list of all entities included in this segment, refer to the Government Reporting Entity (pages 94 to 96).

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 or purchase physical assets by the core Crown. This is an accrual measure of expenses and includes non-cash 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 composition.

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 personal income tax generated 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 in the economy. To isolate discretionary changes, the 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 concepts used to prepare and present financial statements. GAAP is an independent set of rules and frameworks that govern the recognition, measurement and disclosure 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 debt

GSID (refer below) excluding settlement cash and bank bills.

Gross domestic product (GDP)

A measure of the value-added 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 on either an expenditure or production basis and in either real or nominal terms. (See following definitions.)

Gross domestic product (expenditure)

The sum of total expenditure on final goods and services in the economy, including exports but minus imports. Expenditure GDP is calculated in both real and nominal terms.

Gross domestic product (nominal)

The value-added of goods and services produced in the economy expressed in current prices.

Gross domestic product (production)

The value-added of goods and services produced in New Zealand, after deducting the cost of goods and services used in the production process. Production GDP is calculated only in real terms.

Gross domestic product (real)

The value-added of goods and services produced in the economy expressed in the prices of a base period. The current base period is 2009/10.

Gross national expenditure (GNE)

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

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.

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

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

Labour productivity

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 Financial Statements of the Government. It means that the individual line items for revenues, expenses, assets and liabilities in the Financial Statements of the Government include all departments, Offices of Parliament, the Reserve Bank, SOEs, Crown entities and other entities controlled by the Government.

Loan-to-value ratio (LVR)

A measure of how much a bank lends against residential property, compared to the value of that property. The Reserve Bank currently requires banks to restrict new residential mortgage lending at LVRs of over 80% (deposit of less than 20%) to no more than 10% of the dollar value of their new residential mortgage lending.

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 interest refers to shareholders of Government reporting entities outside the Crown. Current examples include those who hold shares in the mixed ownership companies.

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 the Reserve Bank uses to regulate the supply of money in New Zealand. The Reserve Bank 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 core Crown 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)

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

Net worth

Total assets less total liabilities of all Government reporting entities. 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 excluding minority interest share. OBEGAL can provide a more 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. (See Potential output.)

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.

Potential output

The level of output an economy can sustain without an acceleration of inflation.

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 the Reserve Bank 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)

A set of macroeconomic accounts for government reporting, developed by the international community, to facilitate international comparisons of national economic statistics. This differs from the GAAP framework that is used for reporting by the Government in New Zealand.

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 Indices. 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 94 to 96.

Tradable/non-tradable output

The tradable sector is that part of the economy particularly exposed to foreign competition either through exports or import substitution. It includes agriculture, forestry and fishing, mining, and manufacturing industries. Non-tradable output includes the construction industry, rental, hiring and real estate services, public administration and safety, and health care and social assistance. Other industries may be classified as either tradable or non-tradable depending on whether their direct or indirect outputs are exposed to foreign competition.

Trade-weighted index (TWI)

A measure of movements in the NZ dollar against the currencies of our major trading partners. Since December 2014, the TWI has been based on 17 currencies, weighted according to each country's direct bilateral trade in goods and services with New Zealand. Together these countries account for more than 80% of New Zealand's foreign trade.

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 2014/15 or 2015 will mean the end of the financial year.

Time Series of Fiscal and Economic Indicators

Fiscal Indicators
June years 2005
 Actual
2006
 Actual
2007
 Actual
2008
 Actual
2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast

$millions

                             

Revenue and expenses

                             
Core Crown tax revenue 47,468 50,973 53,477 56,747 54,681 50,744 51,557 55,081 58,651 61,474 66,077 68,868 72,544 76,811 80,472
Core Crown revenue 51,045 55,735 58,211 61,819 59,482 56,216 57,550 60,565 64,149 67,297 71,884 74,921 78,945 83,517 87,361
Core Crown expenses 44,895 49,320 54,003 56,997 64,002 64,013 70,450 69,076 70,306 71,467 73,090 74,935 77,110 80,831 83,444

Surpluses

                             
Total Crown OBEGAL 7,075 7,091 5,860 5,637 (3,893) (6,315) (18,396) (9,240) (4,414) (2,933) (684) 176 1,476 1,995 3,624
Total Crown operating balance 5,931 9,542 8,023 2,384 (10,505) (4,509) (13,360) (14,897) 6,925 2,808 (634) 2,990 4,267 4,871 6,597

Cash position

                             
Core Crown residual cash 3,104 2,985 2,877 2,057 (8,639) (9,000) (13,343) (10,644) (5,742) (4,109) (2,674) (4,166) (1,612) (158) 1,706

Debt

                             
Gross debt1 35,478 33,903 30,647 31,390 43,356 53,591 72,420 79,635 77,984 81,956 83,910 87,162 93,641 88,824 83,736
Gross debt incl RB settlement cash and bank bills 35,478 35,867 36,805 37,745 50,973 58,891 77,290 84,168 84,286 88,468 89,994 93,187 99,591 94,774 89,686
Net core Crown debt (incl NZS Fund)2 13,324 6,302 1,620 (2,676) 5,633 12,549 23,969 33,475 34,428 34,174 32,569 34,683 34,142 32,083 27,995
Net core Crown debt2 19,879 16,163 13,380 10,258 17,119 26,738 40,128 50,671 55,835 59,931 61,673 65,597 67,104 67,219 65,467

Net worth

                             
Total Crown net worth 54,240 83,971 96,827 105,514 99,515 94,988 80,887 59,780 70,011 80,779 79,984 83,035 87,360 92,329 99,002
Total net worth attributable to the Crown 54,025 83,678 96,531 105,132 99,068 94,586 80,579 59,348 68,071 75,568 74,803 77,812 82,100 87,000 93,628
Nominal GDP (revised actuals) 157,097 164,969 174,967 188,108 187,493 195,401 203,757 212,334 216,590 234,184 239,771 249,890 262,825 275,207 285,765

% GDP

                             

Revenue and expenses

                             
Core Crown tax revenue 30.2 30.9 30.6 30.2 29.2 26.0 25.3 25.9 27.1 26.3 27.6 27.6 27.6 27.9 28.2
Core Crown revenue 32.5 33.8 33.3 32.9 31.7 28.8 28.2 28.5 29.6 28.7 30.0 30.0 30.0 30.3 30.6
Core Crown expenses 28.6 29.9 30.9 30.3 34.1 32.8 34.6 32.5 32.5 30.5 30.5 30.0 29.3 29.4 29.2

Surpluses

                             
Total Crown OBEGAL 4.5 4.3 3.3 3.0 (2.1) (3.2) (9.0) (4.4) (2.0) (1.3) (0.3) 0.1 0.6 0.7 1.3
Total Crown operating balance 3.8 5.8 4.6 1.3 (5.6) (2.3) (6.6) (7.0) 3.2 1.2 (0.3) 1.2 1.6 1.8 2.3

Cash position

                             
Core Crown residual cash 2.0 1.8 1.6 1.1 (4.6) (4.6) (6.5) (5.0) (2.7) (1.8) (1.1) (1.7) (0.6) (0.1) 0.6

Debt

                             
Gross debt1 22.6 20.6 17.5 16.7 23.1 27.4 35.5 37.5 36.0 35.0 35.0 34.9 35.6 32.3 29.3
Gross debt incl RB settlement cash and bank bills 22.6 21.7 21.0 20.1 27.2 30.1 37.9 39.6 38.9 37.8 37.5 37.3 37.9 34.4 31.4
Net core Crown debt (incl NZS Fund)2 8.5 3.8 0.9 (1.4) 3.0 6.4 11.8 15.8 15.9 14.6 13.6 13.9 13.0 11.7 9.8
Net core Crown debt2 12.7 9.8 7.6 5.5 9.1 13.7 19.7 23.9 25.8 25.6 25.7 26.3 25.5 24.4 22.9

Net worth

                             
Total Crown net worth 34.5 50.9 55.3 56.1 53.1 48.6 39.7 28.2 32.3 34.5 33.4 33.2 33.2 33.5 34.6
Total net worth attributable to the Crown 34.4 50.7 55.2 55.9 52.8 48.4 39.5 28.0 31.4 32.3 31.2 31.1 31.2 31.6 32.8
  1. Excludes Reserve Bank settlement cash and bank bills
  2. Excludes advances

Economic Indicators

March years
Annual average % change

2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Private consumption 5.4 4.9 2.3 3.7 -1.6 1.7 2.1 2.7 2.5 2.9 3.7 3.9 2.8 2.7 2.8
Public consumption 4.8 7.1 4.1 4.7 4.0 -0.5 2.0 1.5 -0.6 2.7 3.2 0.9 0.4 2.3 1.9
TOTAL CONSUMPTION 5.3 5.5 2.7 4.0 -0.2 1.1 2.0 2.4 1.7 2.8 3.5 3.2 2.3 2.6 2.6
Residential investment 2.3 -4.9 -1.1 1.8 -21.2 -9.0 1.6 -0.2 17.8 16.7 13.9 11.9 5.3 6.0 0.2
Non-market investment 10.8 9.5 -0.7 -6.7 24.0 -1.0 0.6 -9.0 -21.1 12.5 -6.4 2.6 2.4 2.4 2.4
Market investment 10.0 10.9 -2.6 12.4 -5.3 -10.6 4.1 9.8 7.0 8.3 6.7 5.4 5.1 2.9 2.4
TOTAL INVESTMENT 8.0 5.7 -1.9 7.7 -7.5 -9.2 3.3 5.5 7.1 10.4 7.5 8.1 5.0 3.6 1.8
Stock change (contribution to growth) 0.2 -0.3 -0.8 0.8 -0.3 -0.8 0.7 0.3 -0.3 0.2 0.2 -0.3 0.3 0.2 0.1
GROSS NATIONAL EXPENDITURE 6.2 5.1 0.6 5.7 -2.3 -2.0 3.0 3.5 2.4 4.6 4.6 4.2 3.2 3.1 2.5
Exports 3.1 -0.4 3.5 3.9 -2.8 4.1 2.8 2.3 3.1 0.2 2.2 0.5 3.5 3.2 3.3
Imports 13.2 4.8 -1.6 10.9 -3.6 -9.2 11.4 6.7 1.3 8.0 7.0 3.5 4.5 4.0 3.3
EXPENDITURE ON GDP 3.3 3.5 2.1 3.6 -2.1 2.3 0.7 2.2 2.9 2.4 3.2 3.3 2.8 2.8 2.4
GDP (production measure) 3.8 3.4 2.7 3.0 -1.6 -0.3 1.5 2.2 2.2 2.5 3.3 3.1 2.8 2.8 2.4
- annual % change 2.5 3.3 3.3 1.6 -2.9 1.7 1.2 2.7 1.9 3.1 3.3 2.9 2.8 2.8 2.0
Real GDP per capita 2.4 2.2 1.6 2.0 -2.4 -1.3 0.4 1.5 1.6 1.6 1.7 1.3 1.7 1.8 1.5
Nominal GDP (expenditure basis) 7.0 5.5 5.1 8.3 0.9 2.7 4.6 4.3 2.4 6.8 3.9 3.3 5.3 4.8 4.1
GDP deflator 3.6 1.9 3.0 4.5 3.0 0.4 3.8 2.0 -0.5 4.2 0.7 0.0 2.4 2.0 1.7
Output gap (% deviation, March year average) 1.3 1.6 1.8 2.7 -0.4 -1.9 -2.0 -1.7 -1.4 -0.9 0.0 0.5 0.6 0.6 0.4
Employment 3.6 2.8 2.1 1.5 0.2 -1.5 0.9 1.2 0.1 2.4 3.3 2.3 1.6 1.4 1.2
Unemployment (% March quarter s.a.) 3.9 4.0 3.9 3.8 5.2 6.2 6.6 6.9 6.3 6.1 5.6 5.1 4.7 4.5 4.5
Wages (average ordinary-time hourly, ann % change) 3.6 5.3 4.6 4.7 5.4 1.0 2.6 3.8 2.1 2.5 2.7 2.5 2.9 3.1 3.3
CPI inflation (ann % change) 2.8 3.3 2.5 3.4 3.0 2.0 4.5 1.6 0.9 1.5 0.2 1.4 2.1 2.0 2.1
Merchandise terms of trade (SNA basis) 4.8 -1.5 -0.9 8.3 0.7 -8.0 10.8 1.4 -6.0 13.7 0.2 -2.9 2.9 0.1 -0.4
House prices (ann % change) 13.5 12.2 11.7 2.8 -9.2 6.4 -1.5 3.6 7.6 8.0 6.8 5.2 3.0 2.4 2.0
Current account balance - $billions -7.9 -12.7 -11.6 -12.4 -13.3 -2.9 -5.7 -6.7 -7.9 -6.0 -9.8 -13.7 -12.8 -13.8 -15.1
Current account balance - % of GDP -5.1 -7.8 -6.8 -6.7 -7.1 -1.5 -2.8 -3.2 -3.7 -2.6 -4.1 -5.6 -4.9 -5.1 -5.3
TWI (March quarter) 75.1 72.4 72.6 75.6 58.0 68.2 68.9 73.5 75.9 80.0 77.9 77.9 77.9 77.9 77.1
90-day bank bill rate (March quarter) 6.9 7.6 7.8 8.8 3.7 2.7 3.0 2.7 2.7 3.0 3.6 3.6 3.7 4.3 4.8
10-year bond rate (March quarter) 6.0 5.7 5.9 6.4 4.6 5.9 5.6 4.0 3.7 4.6 3.3 3.5 4.2 4.8 5.1

Data for 2015 and subsequently are forecasts (except for financial market data where 2015 are actuals). Data for 2014 and prior years are those that were available when the forecasts were finalised.

Additional Information

The following information forms part of the Budget Economic and Fiscal Update 2015 (Budget Update) released by the Treasury on 21 May 2015. 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 tables with additional detail on the economic forecasts in the Budget Update.

The economic numbers and forecasts in this section were finalised on 10 April 2015.

Table 1 Real Gross Domestic Product

Table 2 Consumers Price Index and exchange rates

Table 3 Expenditure ongross domestic product and gross domestic product (income) in current prices

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 based chain volume series expressed in 2009/10 prices

Seasonally adjusted

Table 1 - Real Gross Domestic Product
  $ million Quarterly
% change
Annual
% change
Annual average
% change
2012Q1 50,466 0.8 2.7 2.2
2012Q2 50,625 0.3 2.3 2.6
2012Q3 50,785 0.3 1.8 2.4
2012Q4 51,416 1.2 2.6 2.4
2013Q1 51,444 0.1 1.9 2.2
2013Q2 51,672 0.4 2.1 2.1
2013Q3 52,242 1.1 2.9 2.4
2013Q4 52,511 0.5 2.1 2.3
2014Q1 53,029 1.0 3.1 2.5
2014Q2 53,402 0.7 3.3 2.9
2014Q3 53,908 0.9 3.2 2.9
2014Q4 54,349 0.8 3.5 3.3
2015Q1 54,784 0.8 3.3 3.3
2015Q2 55,167 0.7 3.3 3.3
2015Q3 55,545 0.7 3.0 3.3
2015Q4 56,000 0.8 3.0 3.2
2016Q1 56,362 0.6 2.9 3.1
2016Q2 56,776 0.7 2.9 3.0
2016Q3 57,174 0.7 2.9 2.9
2016Q4 57,535 0.6 2.7 2.9
2017Q1 57,917 0.7 2.8 2.8
2017Q2 58,304 0.7 2.7 2.8
2017Q3 58,721 0.7 2.7 2.7
2017Q4 59,159 0.7 2.8 2.7
2018Q1 59,544 0.6 2.8 2.8
2018Q2 59,919 0.6 2.8 2.8
2018Q3 60,196 0.5 2.5 2.7
2018Q4 60,489 0.5 2.2 2.6
2019Q1 60,754 0.4 2.0 2.4
2019Q2 60,996 0.4 1.8 2.1

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
2012Q1 1164 0.5 1.6 73.5 0.82
2012Q2 1168 0.3 1.0 72.4 0.79
2012Q3 1171 0.3 0.8 73.5 0.81
2012Q4 1169 -0.2 0.9 74.2 0.82
2013Q1 1174 0.4 0.9 75.9 0.83
2013Q2 1176 0.2 0.7 76.3 0.82
2013Q3 1187 0.9 1.4 76.0 0.80
2013Q4 1188 0.1 1.6 78.2 0.83
2014Q1 1192 0.3 1.5 80.0 0.84
2014Q2 1195 0.3 1.6 81.5 0.86
2014Q3 1199 0.3 1.0 80.1 0.84
2014Q4 1197 -0.2 0.8 77.5 0.78
2015Q1 1194 -0.3 0.2 77.9 0.75
2015Q2 1198 0.3 0.2 77.9 0.75
2015Q3 1203 0.4 0.3 77.9 0.75
2015Q4 1203 0.0 0.5 77.9 0.74
2016Q1 1211 0.6 1.4 77.9 0.74
2016Q2 1217 0.5 1.6 77.9 0.73
2016Q3 1226 0.8 1.9 77.9 0.73
2016Q4 1228 0.2 2.1 77.9 0.73
2017Q1 1236 0.7 2.1 77.9 0.73
2017Q2 1243 0.5 2.1 77.9 0.73
2017Q3 1252 0.7 2.1 77.9 0.73
2017Q4 1253 0.1 2.1 77.9 0.73
2018Q1 1261 0.6 2.0 77.9 0.72
2018Q2 1268 0.5 2.0 77.9 0.72
2018Q3 1278 0.8 2.1 77.9 0.72
2018Q4 1280 0.2 2.1 77.6 0.72
2019Q1 1288 0.6 2.1 77.1 0.72
2019Q2 1294 0.5 2.1 76.4 0.71

Source: RBNZ, Statistics New Zealand, the Treasury

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

Year ended March 2014
Actual
$million
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
%volume %price $million %volume %price $million %volume %price $million %volume %price $million %volume %price $million
Consumption:                                
- Private 130,395 3.7 0.6 136,050 3.9 0.8 142,448 2.8 1.6 148,800 2.7 1.5 155,173 2.8 1.5 161,881
- Public 43,441 3.2 1.0 45,261 0.9 1.4 46,302 0.4 2.1 47,470 2.3 2.5 49,773 1.9 2.5 51,965
Gross Fixed Capital Formation:                                
- Residential 13,400 13.9 5.1 16,027 11.9 5.0 18,841 5.3 4.0 20,636 6.0 3.4 22,612 0.2 3.4 23,415
- Market * 34,013 6.7 -1.0 35,918 5.4 -0.4 37,712 5.1 0.2 39,702 2.9 0.6 41,071 2.4 0.8 42,402
- Non-market ** 3,161 -6.4 14.0 3,334 2.6 -6.1 3,254 2.4 2.4 3,413 2.4 2.4 3,580 2.4 2.4 3,756
- Total all sectors 50,568 7.5 1.6 55,208 8.1 0.2 59,806 5.0 1.5 63,751 3.6 1.8 67,263 1.8 1.6 69,573
Change in Stocks 1,724     1,038     679     1,412     2,064     2,437
Gross National Expenditure 226,058 4.6 0.4 237,549 4.2 0.7 249,235 3.2 1.6 261,432 3.1 1.8 274,274 2.5 1.7 285,855
Exports 67,142 2.2 -2.9 66,554 0.5 -2.7 65,153 3.5 4.5 70,485 3.2 2.2 74,320 3.3 2.0 78,287
Imports 63,192 7.0 -3.2 65,479 3.5 0.0 67,783 4.5 2.1 72,264 4.0 1.7 76,465 3.3 2.2 80,731
Expenditure on GDP 229,906 3.2 0.7 238,800 3.3 0.0 246,629 2.8 2.4 259,656 2.8 2.0 272,129 2.4 1.7 283,412
Statistical Discrepancy -188     -183     -179     -172     -165     -159
Gross Domestic Product 229,718     238,617     246,450     259,484     271,964     283,253
Compensation of employees 100,127     105,936     110,500     114,937     119,790     124,908
Operating Surplus, net:                                
- Agriculture 8,156     6,563     5,408     7,743     8,498     8,730
- Other 60,069     61,589     62,681     65,679     68,982     71,415
- Total all sectors 68,225     68,151     68,089     73,422     77,480     80,144
Consumption of fixed capital 31,838     33,430     35,101     36,856     38,699     40,634
Indirect Taxes 30,398     31,969     33,630     35,139     36,864     38,436
Less subsidies 870     870     870     870     870     870
Gross Domestic Product 229,718     238,617     246,450     259,484     271,964     283,253

* 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
Year ended March
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Real GDP (production basis) 2.5 3.3 3.1 2.8 2.8 2.4
Working Age Population 1.2 2.0 1.9 1.3 1.1 1.0
Labour Force 1.8 2.7 1.9 1.1 1.0 1.1
Employment 2.4 3.3 2.3 1.6 1.4 1.2
Labour Productivity* 0.2 0.1 1.3 1.7 1.7 1.4
CPI (annual percentage change) 1.5 0.2 1.4 2.1 2.0 2.1
Average Ordinary Time Hourly Wages 2.5 2.6 2.5 2.8 3.0 3.2
Average Weekly Earnings 2.8 2.2 2.2 2.4 2.8 3.1
Real Wages 1.2 1.7 1.9 0.8 0.9 1.1
Compensation of Employees 4.3 5.8 4.3 4.0 4.2 4.3
Unit Labour Costs (Hours worked basis) 2.3 2.4 1.2 1.0 1.4 1.8
Real Unit Labour Costs 1.0 1.5 0.6 -0.9 -0.7 -0.2

* Hours worked basis

 
Number (000's)
As at March Quarter
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Total Population 4,496 4,575 4,639 4,684 4,726 4,768
Natural Increase 29 23 27 33 30 30
Net Migration 31 56 37 13 12 12
Annual Change 60 79 64 46 42 42
Working Age Population 3,520 3,596 3,656 3,699 3,738 3,777
Annual Change 53 75 61 43 39 39
Not in the labour force (s.a.) 1,092 1,107 1,137 1,153 1,165 1,178
Annual Change -29 15 29 17 12 13
Labour Force (s.a.) 2,428 2,488 2,520 2,546 2,573 2,599
Annual Change 82 60 31 26 27 26
Total Employment (s.a.) 2,281 2,349 2,392 2,426 2,457 2,483
Annual Change 82 68 42 35 31 25
Unemployment (s.a.) 147 139 128 120 116 117
Annual Change 0 -8 -11 -8 -4 1
Participation Rate (%, s.a.) 69.0 69.2 68.9 68.8 68.8 68.8
Unemployment Rate (%, s.a.) 6.1 5.6 5.1 4.7 4.5 4.5

Source: Statistics New Zealand, the Treasury

s.a. - seasonally adjusted

Table 5 - Exports - SNA basis

Breakdown of Exports
Year ended March Dairy Products Meat and Meat Products Non-Commodity*
%volume %price $million %volume %price $million %volume %price $million
2011 -0.8 29.6 11,661 -2.6 6.4 5,481 5.7 16.3 13,306
2012 9.1 0.4 12,773 -5.2 10.4 5,745 5.8 -0.2 14,057
2013 18.4 -16.5 12,600 10.0 -9.0 5,738 -1.9 -4.9 13,111
2014 -6.9 32.8 15,706 3.7 -0.9 5,911 0.0 0.8 13,218
2015 6.9 -15.8 14,048 -0.5 10.6 6,511 4.2 -7.5 12,728
2016 -2.4 -16.2 11,516 -2.2 -4.4 6,084 0.4 10.7 14,159
2017 6.0 13.6 13,865 0.9 -5.5 5,796 3.1 7.0 15,617
2018 3.5 2.5 14,709 1.2 0.3 5,885 3.6 2.8 16,628
2019 3.2 0.4 15,254 1.2 0.8 6,007 4.4 3.3 17,938

 

 
Year ended March Total Goods** Services Total Exports
%volume %price $million %volume %price $million %volume %price $million
2011 2.9 10.3 45,237 2.4 -0.2 16,260 2.8 7.3 61,498
2012 2.7 3.3 47,966 1.3 1.7 16,741 2.3 2.9 64,706
2013 5.5 -8.0 46,520 -3.8 0.9 16,251 3.1 -5.8 62,771
2014 -0.3 8.6 50,410 1.7 1.2 16,732 0.2 6.7 67,142
2015 0.1 -3.9 48,388 7.0 1.4 18,165 2.2 -2.9 66,554
2016 0.8 -4.7 46,518 0.9 1.7 18,637 0.5 -2.7 65,153
2017 3.7 5.2 50,742 3.1 2.7 19,747 3.5 4.5 70,485
2018 3.0 2.0 53,287 3.7 2.8 21,036 3.2 2.2 74,320
2019 3.1 1.8 55,976 3.6 2.4 22,315 3.3 2.0 78,287

* 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

Year ended March Capital Goods
(Value for Duty)
Mineral Fuel*
(VFD)
Intermediate Goods**
(VFD)
Consumption Goods
(VFD)
%volume %price $million %volume %price $million %volume %price $million %volume %price $million
2011 26.7 -5.2 7,436 -0.6 15.0 6,945 14.8 -0.9 16,651 7.5 -4.7 11,116
2012 14.9 -6.5 7,982 5.9 19.4 8,795 5.7 1.0 17,770 5.7 -2.1 11,502
2013 7.3 -6.3 8,039 -2.8 0.3 8,537 0.6 -1.6 17,581 4.1 -1.4 11,801
2014 20.2 -6.5 9,027 0.2 -5.3 8,139 8.1 -3.5 18,334 6.1 -3.0 12,143
2015 19.2 -4.8 10,246 -0.7 -15.4 6,838 6.5 0.2 19,579 6.8 -1.8 12,733
2016 -1.8 1.7 10,241 5.3 -28.4 5,157 3.7 3.4 20,985 3.5 3.2 13,598
2017 3.2 -1.2 10,438 3.0 11.6 5,928 4.7 2.0 22,403 6.9 1.7 14,786
2018 2.4 -1.3 10,555 2.8 9.3 6,664 4.4 1.6 23,773 6.4 1.1 15,917
2019 1.8 -0.8 10,664 1.8 9.1 7,400 3.5 2.1 25,113 5.7 1.7 17,100
 
Year ended March Total Goods (VFD) Services Total Imports
%volume %price $million %volume %price $million %volume %price $million
2011 12.3 -0.4 42,338 8.9 -1.3 14,538 11.4 -0.6 56,875
2012 6.9 1.8 46,078 5.9 -0.2 15,377 6.7 1.3 61,455
2013 2.0 -2.1 46,001 -0.9 -0.1 15,222 1.3 -1.6 61,223
2014 8.5 -4.5 47,693 6.4 -4.3 15,499 8.0 -4.4 63,192
2015 8.3 -4.3 49,436 3.3 0.2 16,044 7.0 -3.2 65,479
2016 3.0 -1.8 50,028 6.1 4.4 17,760 3.5 0.0 67,783
2017 4.7 2.3 53,602 3.6 1.5 18,675 4.5 2.1 72,264
2018 4.3 1.8 56,958 3.0 1.5 19,519 4.0 1.7 76,465
2019 3.5 2.3 60,325 2.5 2.0 20,404 3.3 2.2 80,731

* 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

$ millions
Year ended March
2014
Actual
2015
Forecast