The Half Year Economic and Fiscal Update (HYEFU) 2010 includes the Treasury's overall economic and fiscal forecasts and disclosure of fiscal risks. The Public Finance Act 1989 (PFA) requires an economic and fiscal update to incorporate, to the fullest extent possible, all government decisions and other circumstances that may have a material effect on the economic and fiscal outlook.

HYEFU 2010 was published on 14 December 2010 conjointly with the Budget Policy Statement (BPS) 2011 and the 2010 Investment Statement.

Statement of Responsibility

On the basis of the economic and fiscal information available to it, the Treasury has used its best professional judgement in supplying the Minister of Finance with this Economic and Fiscal Update. The Update incorporates the fiscal and economic implications both of Government decisions and circumstances as at 22 November 2010 that were communicated to me, and of other economic and fiscal information available to the Treasury in accordance with the provisions of the Public Finance Act 1989.

John Whitehead
Secretary to the Treasury

6 December 2010

This Economic and Fiscal Update has been prepared in accordance with the Public Finance Act 1989. I accept overall responsibility for the integrity of the disclosures contained in this Update, and the consistency and completeness of the Update information in accordance with the requirements of the Public Finance Act 1989.

To enable the Treasury to prepare this Update, I have ensured that the Secretary to the Treasury has been advised of all Government decisions and other circumstances as at 22 November 2010 of which I was aware and that had material economic or fiscal implications.

Hon Bill English
Minister of Finance

6 December 2010

Economic and Fiscal Update

Overview

Economic outlook

Growth has been weaker than forecast at Budget and activity is anticipated to have lifted only gradually over the second half of 2010. The economic recovery is expected to continue to be gradual, with growth weighed down by subdued domestic demand. Temporary factors and events are expected to lift growth to 3.4% in the March 2012 year, but the current expansion is forecast to be weaker than recent recoveries, with growth expected to be slightly under 3% beyond 2012.

The outlook is characterised by muted growth in private consumption as households are expected to remain cautious in their spending and investment decisions. Business investment is forecast to increase from current levels, boosted by the earthquake recovery and a degree of catch-up by firms. Even so, the forecast recovery is weaker than what would typically have been expected following the sharp contraction that occurred during the recent recession. Government spending is also expected to be restrained, reflecting difficult fiscal circumstances.

Goods exports have been stronger than forecast at Budget 2010, reflecting increased demand for commodities such as dairy and meat. Strong demand has also been reflected in elevated prices for these goods. While this helps to partially offset the weaker outlook for domestic demand than at Budget 2010, the export response is expected to be gradual, constrained by the high exchange rate and the pace at which commodity production can increase. As a result, economic growth is forecast to continue, but at a slower rate than anticipated earlier this year.

The current account deficit is expected to widen as import demand increases and rising firm profitability sees greater income accruing to overseas owners of New Zealand firms. However, the current account deficit is not expected to widen to the same degree as in Budget 2010, contributing to a lower level of external indebtedness than at Budget 2010.

Slightly weaker real activity and lower prices for consumer goods and services than anticipated earlier in the year contribute to nominal Gross Domestic Product (GDP) being lower over the coming five years than was expected at Budget 2010.

Short-term uncertainties include the impact of the Canterbury earthquake, adverse weather conditions as well as the recently implemented tax reforms. In such an environment, households and businesses may exercise considerably more caution than is anticipated in the main forecasts.

The global economy remains a major source of uncertainty and risk. The recovery from the global financial crisis (GFC) remains fragile, with the current turmoil in Europe being one source of downside risk. On the other hand, New Zealand's exposure to fast-growing developing markets and the Australian economy means that the risks associated with developments in our trading partners are not all negative. These risks in relation to the international outlook are explored as alternative scenarios.

Fiscal outlook

The fiscal position has weakened significantly since 2008, with tax revenues falling as the economy contracted and income tax cuts taking effect. Core Crown expenditure has increased primarily owing to past policy decisions; for example, KiwiSaver and Working for Families, and the indexation of benefits. Operating deficits continue to widen in the current year reflecting one-off expenditure such as that associated with the Canterbury earthquake and the Weathertight homes scheme, as well as weaker tax growth stemming from the slower economic recovery. An operating deficit (before gains and losses) of 5.5% of GDP is expected in the current fiscal year.

The deficit then narrows as the economy recovers and slower growth in expenditure is expected. The operating balance (before gains and losses) is forecast to break even in the June 2015 year, with the first surplus of note projected for the June 2016 year.

A sustained period of cash deficits is expected, with net debt forecast to double from 14.1% of GDP in June 2010 to 28.5% of GDP by June 2015. Net debt is then projected to return to the Government's long-run target of 20% of GDP in June 2022, in line with Budget 2010 projections.

Table 1.1 - Summary of the Treasury's economic and fiscal forecasts
  2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast

Economic (March years, %)

           
Economic growth1 -0.4 2.2 3.4 2.9 2.7 2.7
Consumer price inflation2 2.0 4.5 2.9 2.6 2.2 2.0
Unemployment rate3 6.0 6.1 5.2 4.9 4.6 4.5

Fiscal (June years, % of GDP)

           
Operating balance4 -3.3 -5.5 -2.8 -1.9 -0.6 0.0
Net debt5 14.1 20.8 24.2 26.5 27.8 28.5
Net worth6 50.2 42.4 38.3 35.3 34.0 33.6

Notes:

1 Real production GDP, annual average percentage change

2 Consumers Price Index (CPI), annual percentage change

3 Percent of labour force, March quarter, seasonally adjusted

4 Total Crown operating balance before gains and losses

5 Net core Crown debt excluding the New Zealand Superannuation Fund and advances

6 Total Crown net worth

Sources: Statistics New Zealand, the Treasury

Main forecasts

The economic expansion is expected to be more gradual compared to previous upturns…

Figure 1.1 - Real production GDP per capita
Figure 1.1 - Real production GDP per capita.
Sources: Statistics New Zealand, the Treasury

The New Zealand economy contracted over 2008 and early 2009, with output falling 3.5% from peak to trough. While the economy has been recovering since June 2009, GDP remains 1.5% below the pre-recession level. The fall in output per person was even larger at 4.9% and per capita output is not expected to return to its pre-recessionary peak until June 2012, significantly later than in the two previous recessions (Figure 1.1).

…characterised by modest household spending…

Figure 1.2 - Private consumption
Figure 1.2 - Private consumption.
Sources:  Statistics New Zealand, the Treasury

Household spending is expected to move in line with incomes, with real growth averaging just 2.4% per year and both real and nominal measures declining as a share of the economy (Figure 1.2). The outlook is forecast to be subdued when contrasted with spending last decade, some of which was financed through increased borrowing. High demand for imported goods and services, coupled with increased debt-servicing costs on a large stock of debt, saw the current account deficit lift to reach nearly 9% of GDP at the end of 2008, a manifestation of imbalances in the economy.

…with less reliance on borrowing…

Household credit growth has eased considerably since the onset of the 2008/09 recession and is expected to remain weak as borrowers continue to be averse to taking on more debt. While nominal house prices have fallen 5% since their peak at the end of 2007, they remain elevated relative to disposable income. House prices are expected to increase only gradually over the next five years, while falling in real terms through to 2013 as inflation exceeds nominal house price growth. With housing accounting for the majority of household wealth, borrowers will remain reticent about funding consumption out of wealth.

…and a stronger relationship with incomes

As householdwealth is expected to provide little support, developments in the labour market become the key driver of private consumption over the medium term. With changes in the job market lagging economic developments, the continued economic recovery is anticipated to translate into modest employment growth, with one-off factors, including the Rugby World Cup, driving stronger growth over the 2011 calendar year. Wage growth appears to have troughed and is expected to lift, supporting consumer spending, although rising inflation and interest rates will provide significant offsets.

Imports of goods and services are expected to rise in coming years, in line with the recovery in domestic demand, and are boosted significantly in the March 2012 year from the purchase of goods and materials owing to the rebuild following the Canterbury earthquake. A forecast depreciation of the New Zealand dollar is expected to limit import demand, particularly from the March 2012 year, as imported goods become more expensive.

Residential investment lifts owing to earthquake recovery and population growth

Residential investment is forecast to lift strongly in the March 2011 and 2012 years, with some of the increase accounted for by the rebuild following the Canterbury earthquake (see the box on the impacts of the earthquake on pages 22 and 23). Despite a theme of household consolidation and increasing interest rates, population growth and catch-up from recent low rates of investment support housing investment over the medium term.

Goods and Services Tax (GST) is collected on many of the components of consumption, and residential investment. A more subdued household sector than expected earlier in the year contributes to slower GST revenue growth relative to Budget 2010. However, the 1 October lift in the GST rate from 12.5% to 15.0% contributes to the amount of GST collected increasing sharply from its 2010 level.

Businesses have been deleveraging…

Business borrowing from banks has contracted sharply in recent times, with Reserve Bank of New Zealand (RBNZ) data showing a decline of $5 billion (6.6%) in the level of business credit in October 2010 compared with a year earlier. The decline in business borrowing is likely driven by a combination of some businesses strengthening their balance sheets by paying off debt, others postponing or cancelling investment in plant and machinery in response to uncertainty around the strength of the economic recovery, and a degree of conservatism among lenders. Some of the fall in business credit can also be put down to large corporates obtaining alternative funding by accessing capital markets.

…and are expected to remain cautious as the recovery progresses

Market investment experienced large falls during the recent recession, falling 22% between June 2008 and March 2010. Market investment is expected to pick up in the near term, driven by post-earthquake activity, a high exchange rate keeping prices low, improved profitability and necessary replacement investment following deferral over the past two years. Despite the boost to construction following earthquake-related repairs, market investment growth remains weaker than typically expected following such a large fall.

Table 1.2 - Economic forecasts1

 
(Annual average % change, March years) 2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Private consumption 0.6 2.0 2.2 2.5 2.5 2.5
Public consumption 1.1 2.2 0.8 0.7 0.8 1.0
Total consumption 0.7 2.0 1.9 2.1 2.1 2.2
Residential investment -11.5 12.2 29.2 7.9 3.6 0.7
Non-market investment 8.3 -11.2 -3.6 3.8 4.6 4.1
Market investment -11.4 6.3 12.3 5.1 3.1 3.4
Total investment -9.7 7.0 16.0 6.1 3.6 3.2
Stock change2 -1.9 0.6 0.7 0.5 0.1 0.0
Gross national expenditure -3.3 3.2 5.9 3.6 2.6 2.4
Exports 3.2 1.8 4.5 3.0 2.8 2.9
Imports -9.5 6.0 10.5 5.0 2.4 2.0
GDP (expenditure measure) 0.5 2.2 3.9 2.9 2.7 2.7
GDP (production measure) -0.4 2.2 3.4 2.9 2.7 2.7
Real GDP per capita -1.6 1.1 2.4 2.0 1.8 1.8
Nominal GDP (expenditure basis) 1.7 6.4 5.7 5.5 5.2 4.7
GDP deflator 1.3 4.1 1.7 2.5 2.4 1.9
Output gap (% deviation, March qtr)3 -1.2 -0.4 -0.2 -0.5 -0.5 -0.3
Employment -1.3 1.3 1.7 1.8 1.7 1.5
Unemployment4 6.0 6.1 5.2 4.9 4.6 4.5
Nominal wages5 2.2 2.9 3.6 4.2 4.1 3.8
CPI inflation6 2.0 4.5 2.9 2.6 2.2 2.0
Merchandise terms of trade7 -6.3 7.0 -2.7 1.8 1.9 1.3
Current account balance            
  - $billion -4.5 -3.9 -10.1 -15.1 -15.3 -14.2
  - % of GDP -2.4 -2.0 -4.8 -6.8 -6.6 -5.8
Net international investment position            
  - $billion -161.0 -166.4 -177.4 -192.5 -207.2 -221.3
  - % of GDP -85.9 -83.5 -84.2 -86.6 -88.6 -90.4
TWI8 65.3 68.7 63.1 59.1 55.6 53.0
90-day bank bill rate8 2.7 3.3 4.5 5.0 5.0 5.0
10-year bond rate8 5.9 5.2 5.3 5.4 5.4 5.5

Notes:

1 Forecasts finalised 5 November 2010

2 Contribution to GDP growth

3 Estimated as the percentage point difference between real GDP and potential GDP

4 Household Labour Force Survey, percent of the labour force, March quarter, seasonally adjusted

5 Quarterly Employment Survey, average ordinary-time hourly earnings, annual percentage change

6 Annual percentage change

7 SNA basis, annual average percentage change

8 Average for the March quarter

A longer time series for these variables is provided on page 124.

Sources: Statistics New Zealand, RBNZ, the Treasury

Economic and fiscal impacts of the Canterbury earthquake

Damage from the Canterbury earthquake and the subsequent recovery in activity affect the economic and fiscal outlook. These effects are summarised below.

Damage assumptions

Exact damage levels remain unknown but influence the amount of repair and replacement activity that will occur as well as influencing costs to the Government. The economic forecasts assume $5 billion worth of damage across residential properties and contents, commercial buildings and assets, and infrastructure.[1]

Economic impacts

The earthquake is expected to have reduced economic activity by around 0.4% in the September quarter relative to what it would have been in the absence of the earthquake. Not all indicators of GDP will pick up this impact and therefore the forecasts incorporate a 0.2% adverse effect.

The amount of recovery activity is related to the damage estimates. These have been adjusted to allow a combination of non-replacement and that some of the recovery activity will crowd out investment that would have occurred in the absence of the earthquake.

Relative to a situation in which the earthquake had not occurred, the main economic impacts are that real GDP growth is 0.4 percentage points higher as a result of earthquake recovery activity over the March 2012 year. This additional growth will be concentrated in residential and other investment, partly offset by higher imports. Growth is then slightly lower in the next three years. This is because, while earthquake recovery activity continues to occur, it is not as large as in the March 2012 year. Overall, the level of activity remains higher than it would have been in the absence of the earthquake through to 2015. Employment is boosted by the higher activity, resulting in the unemployment rate in the March quarter of 2012 being around 0.3 percentage points lower than it would have been in the absence of earthquake-related recovery activity. The current account deficit will be reduced in the March 2011 year as a result of reinsurance inflows, while higher imports, to support rebuilding, will widen the deficit relative to what it would have been in the absence of the earthquake over the next few years.

Fiscal impacts

The tax forecasts included in the Half Year Economic and Fiscal Update (HYEFU)are based on an economic outlook that includes the effect of the earthquake on economic activity and therefore incomes and expenditure. The Government will face earthquake-related costs in the following areas:

Residential property

The Earthquake Commission (EQC) has reinsurance for its costs above $1.5 billion, up to $4 billion. The damage assumption for residential propertyis less than $4 billion, so EQC's net costs are forecast to be $1.5 billion. This has increased the 2010/11 forecast total Crown operating deficit by $1.5 billion, but has not affected core Crown net debt because EQC's assets and liabilities are not part of the core Crown. Although there is no impact on net debt, the New Zealand Debt Management Office (NZDMO) has incorporated the expected funding implications arising from EQC's redemption of government securities into the Government's debt programme.

EQC's reinsurance covers any damage caused by aftershocks up to 30 days after the original event. While aftershocks have continued after this period, the additional damage is not expected to have been significant and no provision for this has been included in the fiscal forecasts.

Local authorities

Under current Civil Defence Emergency Management policy, local authorities are eligible for government funding of 60% of the costs of repairing essential infrastructure. These include water, stormwater and sewerage facilities and river management systems where there is major community disruption or continuing risk to life. However, no provision for these costs has been included in the fiscal forecasts because a reliable estimate of the amount will not be available until a review of underground systems (currently underway) is completed.

The Government's contribution to repairing local roads is determined under a different arrangement through the National Land Transport Programme (NLTP). The current estimate of total damage is $110 million, with the Government's share estimated at $66 million, spread over three years. It is expected that the Government will absorb these costs through the NLTP by reprioritising projects, meaning the costs are already included in these forecasts. However, any future emergency events could affect this - see the Fiscal Risks chapter.

Government-owned assets

The cost of repairing state highways is not expected to be significant and will be absorbed by reprioritising projects. Costs associated with repairing other government infrastructure, including schools, housing and health facility assets, are largely covered by insurance and no additional provision for these costs has been factored into these forecasts.

Additional assistance

The Government has provided other assistance for the community and the cost of these initiatives is estimated to be less than $100 million.[2] This assistance has been funded within the existing operating allowance, thereby decreasing the amount of new funding available for other projects.

Fiscal uncertainty

The overall cost faced by the Government remains uncertain as there are still some costs that the Government has not yet committed to, or that cannot yet be reliably measured. When such costs are committed to, or when they can be reliably measured, they will be recorded in the Crown's financial statements and forecasts. Recording these costs is likely to have an adverse impact on the Crown's operating balance and net debt position. However, given that the amount of residential property damage appears unlikely to exceed $4 billion, the most significant cost, EQC's $1.5 billion net cost, is captured in these forecasts, as are the costs directly related to Government-owned assets and the additional assistance provided by the Government.

Growing profits to boost business tax but past losses will dampen tax growth

Recent tax outturns and talks with firms around New Zealand point to weaker business profits than assumed at Budget 2010. Provisional tax payments have also been lower than expected earlier in the year, as economic conditions have been softer than anticipated by corporates and other businesses.

Tax losses accumulated during the recent recession may now be playing a part in restraining business income tax growth. Based on currently-available data, gross losses incurred by all companies reached more than $18 billion in the 2009 tax year, an increase of more than 30% on the previous year. This pushed the stock of tax losses up to about twice its level after the recession of the late 1990s. These losses will be progressively offset against profits in future tax years, thereby reducing business income tax revenue. The forecasts include an assumption that loss usage will be at an elevated level for the next few years, reducing business income tax revenue by around $350 million each year, compared to what would have been the case in the absence of the recent loss build-up. The level of loss utilisation is anticipated to fall back to a more normal level in the June 2015 year.

These factors result in forecasts for total business tax to increase from $10.3 billion in the June 2011 year to $13.4 billion in the June 2015 year, although over the four years to June 2014 business income tax is forecast to be a cumulative $2.6 billion lower than forecast at Budget 2010.

Government spending to account for a smaller share of the economy

As was the case at Budget 2010, government consumption is expected to continue to play less of a role in the economy, based on lower levels of new spending than occurred over the middle of this decade. The operating allowance for new spending adds $1.12 billion to government expenses in the June 2012 year, and is forecast to grow at 2% per annum thereafter. This represents significantly slower growth than occurred over the 2004 to 2008 period when new operating spending (excluding revenue initiatives) ranged between $2 billion and $3.5 billion per annum.

Developments in Asia are increasingly important for export growth

Figure 1.3 - World growth rate comparisons
Figure 1.3 - World growth rate comparisons.
Sources: International Monetary Fund (IMF), the Treasury

New Zealand is expected to continue to benefit from strong growth in emerging Asia, especially China, which expanded rapidly over the first three quarters of 2010. Although growth is expected to ease in the near term, the region is set to continue to outperform advanced economies. The economies of New Zealand's top 16 trading partners are assumed to grow by 4.5% in 2010, before easing back to just under 4% on average through to 2015 (Figure 1.3).

Strength in Asia has also had significant benefits for our largest single trading partner, with Australia being the strongest performing advanced economy over the past two years. While the outlook for other advanced economies is less optimistic, the weight of New Zealand's trading partners (based on export shares) is expected to continue to shift towards Asia, providing fundamental support for goods and services exports over the medium term (see the box on page 34 on New Zealand's economic and fiscal outlook in an international context).

Notes

Higher demand is putting upward pressure on prices for our key commodities…

The value of exported goods increased over the first half of 2010, aided by the ongoing recovery in China and Australia. Higher demand has led to a broad-based lift in prices for New Zealand's main commodities, with the ANZ commodity price index at a record high in world price terms in November. High commodity prices are positive overall for New Zealand and help drive the merchandise terms of trade. It is anticipated that the terms of trade will remain elevated over the medium term, as demand for soft commodity goods grows, in line with developments in emerging Asia, particularly China, which include strong income growth and urbanisation.

…but the elevated exchange rate is limiting exports in other industries

Figure 1.4 - TWI and bilateral exchange rates
Figure 1.4 - TWI and bilateral exchange rates.
Sources: RBNZ, the Treasury

Note: The long-run average applies from the March 1999 to September 2010 quarters for the Euro and the 20 years to September 2010 for all other rates. Budget 2010 forecasts finalised 16 April 2010.

Past recoveries have been characterised by a low exchange rate providing support for the export sector. Although the Trade Weighted Index (TWI) fell sharply through late 2008 and early 2009, it bounced back strongly as the outlook for the global economy improved over 2009 and is currently around the same level as it was prior to the recession and high by historical standards (Figure 1.4). Although strong commodity prices are providing a buffer and the Rugby World Cup is expected to boost services exports next year, the level of the exchange rate is limiting the contribution of exports to the economic recovery. The exchange rate is forecast to remain elevated in the near term, reflecting current market forces, before falling owing to fundamentals, such as New Zealand's high level of international indebtedness and a recovering global economy.

Annual current account deficit to widen, but not to previous levels

Several factors led to the annual current account deficit falling sharply earlier this year: exports suffered less of a fall than imports during the recession; low interest rates led to a fall in net interest payments offshore; and net profits accruing to overseas-owned firms declined. The latter partly arose from the structured finance cases brought against the major banks by the Commissioner of Inland Revenue.

Earthquake-related reinsurance inflows are expected to help drive the current account deficit below 2% of GDP in 2011, before the deficit peaks at 6.8% of GDP in 2013 as interest payments and profits accruing to overseas-owned firms lift in line with rising interest rates and the economic recovery respectively. The annual current account deficit falls to 5.8% of GDP by March 2015, as the falling exchange rate dampens import growth, while export growth remains steady. Compared with Budget 2010, the current account deficit is smaller throughout the forecasts, and it peaks earlier and lower, reflecting a higher degree of household consolidation.

Figure 1.5 - Net international investment position
Figure 1.5 - Net international investment position.
Sources:  Statistics New Zealand, the Treasury

In these forecasts, net international liabilities fall as a proportion of GDP in the near term. However, current account deficits are still expected to grow more quickly than the nominal economy beyond 2011, lifting net international liabilities to just over 90% of GDP by 2015. This is still significantly lower than what was expected at Budget 2010 (Figure 1.5). Data revisions play a role in this, along with smaller current account deficits, discussed above.

Economic activity is forecast to remain below potential over the next five years…

Potential output is the highest level of output that can be sustained without generating excess inflation over the medium term and is a function of the capital stock, labour inputs and productivity. The expected recovery in business investment, continued population growth, together with labour productivity, which is forecast to grow at average levels of around 1.5% over the medium term, contribute to potential output growing on average by 2.5% per annum. Growth in potential output is estimated to have eased back from what was expected prior to the 2008/09 recession, largely accounted for by a marked fall in capital investment over the past two years, and partly owing to a reassessment of the level of potential output before the recession. Over the next five years, actual output growth is expected to exceed growth in potential output. Consequently, the gap between the two measures narrows gradually and is approximately closed by 2015.

…keeping a lid on underlying inflation pressures

Given the negative output gap, underlying non-tradables inflation (excluding the effects of government policy) remains well contained as policy changes are assumed not to have lifted inflation expectations materially. Nevertheless, with spare capacity in the economy gradually diminishing, interest rates rise gradually from mid-2011 to achieve an inflation track that returns to the middle of the 1% to 3% policy target band during 2014. Lower-than-average non-tradables inflation helps offset a slightly higher track for tradables inflation resulting from the falling exchange rate.

Figure 1.6 - CPI and CPI ex cigarettes, tobacco, GST
Figure 1.6 - CPI and CPI ex cigarettes, tobacco, GST.
Sources:  Statistics New Zealand, the Treasury

Increases in GST, other government charges and excises should see the headline rate of annual inflation spike to 5% in June 2011 (Figure 1.6). The significant lifts in cigarette and tobacco excise rates have reduced, and will continue to reduce, the amount of product purchased. As a result, the impact on the typical consumer of higher prices is likely to be lower than that implied by increases in the CPI, which uses fixed weights.

Weaker growth in nominal GDP results in lower tax revenue than at Budget

Nominal GDP is expected to grow from $189 billion in the June 2010 year to nearly $248 billion in June 2015. However, weaker domestic prices and lower real activity relative to that forecast in Budget 2010 result in nominal GDP being a cumulative $5.2 billion lower than in Budget 2010 over the four years to June 2014. Tax revenue is expected to be a cumulative $3.2 billon lower, with weaker nominal GDP accounting for around two-thirds of the change since Budget 2010. The remainder of the difference is explained by changes in the assumed magnitude of the tax loss cycle over the next four years and re-estimation of the average effective tax rate of the various major tax types relative to their notional underlying economic drivers, such as employees' compensation, private consumption and residential investment.

Table 1.3 - Change in core Crown tax revenue forecasts
Year ended 30 June
$billion
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast

Core Crown tax revenue

         
Budget 2010 forecasts 53.9 58.0 61.5 65.4 -
       Forecast changes -1.4 -0.8 -0.5 -0.5 -
Half Year Update 2010 forecasts 52.5 57.2 61.0 64.9 68.5

Changes in components

         
          Source deductions 0.2 -0.1 0.0 0.0 -
          Other persons tax -0.7 -0.2 -0.3 -0.2 -
          Corporate tax -0.4 -0.3 -0.2 -0.2 -
          GST -0.4 -0.1 0.0 -0.1 -
          Other taxes -0.1 0.0 0.0 0.0 -

Source: The Treasury

In line with established practice, Inland Revenue has also prepared a set of tax forecasts, which is also based on the Treasury's macroeconomic forecasts. The two sets of forecasts differ because of the different modelling approaches used by the two agencies and the various assumptions and judgements made by the forecasting teams in producing their forecasts.

In total, the Treasury's forecast is lower than Inland Revenue's in June 2011, mainly owing to differing views on the likely level of GST refunds and the implications of the current level of provisional tax. From June 2012 onwards, the Treasury's forecasts are higher than Inland Revenue's as the Treasury has a larger pro-cyclical response to the economic recovery built into its tax forecasts than does Inland Revenue. The aggregate differences between the two sets of forecasts are not large and reach just over 1% of total tax by June 2015.[3]

Notes

  • [3]For a detailed comparison of the Treasury and Inland Revenue forecasts of tax revenue, see Additional Information on the Treasury website.

Fiscal outlook

Table 1.4 - Summary of key fiscal indicators
Year ended 30 June 2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast

$billion

           
Core Crown revenue 56.2 58.4 63.4 67.8 72.3 76.6
Core Crown expenses 64.0 70.6 71.4 74.2 75.9 78.6
Core Crown residual cash -9.0 -15.6 -9.7 -8.1 -6.1 -4.9
Net debt1 26.7 42.1 51.7 59.6 65.8 70.5
Gross debt2 53.6 67.4 72.6 75.1 84.5 84.3
Total Crown operating balance before gains and losses -6.3 -11.1 -6.0 -4.4 -1.5 0.0
Total Crown operating balance -4.5 -9.1 -4.1 -2.3 0.9 2.7
Total Crown net worth 95.0 85.8 81.7 79.5 80.4 83.1

% of GDP

           
Core Crown revenue 29.7 28.9 29.7 30.1 30.5 30.9
Core Crown expenses 33.8 34.9 33.4 33.0 32.1 31.7
Core Crown residual cash -4.8 -7.7 -4.5 -3.6 -2.6 -2.0
Net debt1 14.1 20.8 24.2 26.5 27.8 28.5
Gross debt2 28.3 33.3 34.0 33.3 35.7 34.0
Total Crown operating balance before gains and losses -3.3 -5.5 -2.8 -1.9 -0.6 0.0
Total Crown operating balance -2.4 -4.5 -1.9 -1.0 0.4 1.1
Net worth 50.2 42.4 38.3 35.3 34.0 33.6

Notes:

1 Net core Crown debt excluding the New Zealand Superannuation Fund and advances

2 Gross sovereign-issued debt excluding Reserve Bank bills and settlement cash

A glossary and longer time series for these and other indicators are provided on page123

Source: The Treasury

Core Crown revenue grows slowly as taxes respond to the subdued recovery…

Figure 1.7 - Core Crown expenses and revenue
Figure 1.7 - Core Crown expenses and revenue.
Source:  The Treasury

Core Crown revenue is forecast to increase from $56.2 billion in the June 2010 year (29.7% of GDP) to $76.6 billion in the June 2015 year (30.9% of GDP). Higher tax revenue is expected to be the main source of growth, owing to:

  • growth in nominal GDP
  • fiscal drag, which is the result of an individual's average tax rate increasing as their income rises
  • an assumed run-down of tax losses accumulated during the recession, and
  • forecast deposit interest rate rises and growth in the amount of money on deposit over the next four years lead to an expected increase in interest withholding tax.

As discussed earlier, tax revenue is expected to be a cumulative $3.2 billon lower than expected at Budget 2010. This lower tax revenue is a key driver behind more-negative operating and cash deficits compared to Budget 2010.

…and core Crown expenses increase but fall as a share of the economy

Core Crown expenses are forecast to rise from $64.0 billion in the June 2010 year (33.8% of GDP) to $78.6 billion in the June 2015 year (31.7% of GDP), which is a similar trend to the Budget 2010 forecast. Key factors behind the rising profile are increases in benefit expenses, finance costs and forecast new spending through the operating allowance.

  • Benefit expenses are forecast to increase from $22.4 billion in the June 2011 year to $25.7 billion in the June 2015 year. This increase is mainly owing to the indexation of social assistance benefits, which increases expenses by around $2.1 billion, and growth in New Zealand Superannuation (NZS) recipient numbers of around 20,000 per annum, adding an extra $1.4 billion over the next four years.
  • Finance costs are forecast to increase from $2.3 billion in the June 2010 year to $4.9 billion in the June 2015 year owing to the flow-on impact to debt servicing costs from recent and forecast increases in debt.
  • The operating allowance for new spending adds $1.12 billion to expenses in the June 2012 year (ie, the original $1.1 billion increased by 2%). The operating allowance grows at 2% per annum thereafter, adding a further $4.8 billion by the June 2015 year.

Although expenses rise in absolute terms, as a share of the economy they decline from 2011, in part owing to a pick-up in nominal GDP, but also as a result of:

  • the decision to manage within smaller operating allowances for new spending
  • Emissions Trading Scheme (ETS), related expenses are expected to decline, and
  • no further expenditure being expected in relation to the Weathertight homes scheme as it is a one-off expenditure item in 2011.

As a result, expenses grow more slowly than the economy and the gap between expenses and revenue as a percentage of GDP narrows considerably.

The operating balance deficit peaks in the June 2011 year…

Table 1.5 - Change in operating balance from 2010 to 2011
$billion  
Operating balance before gains and losses June 2010 (6.3)
Tax revenue 1.7
Earthquake costs (1.5)
Weathertight homes scheme (0.7)
Impact of Budget 2010 (including tax package) (1.4)
ETS (0.9)
Finance costs (0.6)
NZS payments (0.5)
Other changes (0.9)
Total change (4.8)
Operating balance before gains and losses June 2011 (11.1)

Source: The Treasury

The operating balance (before gains and losses) deficit is forecast to peak at $11.1 billion in the June 2011 year (Table 1.5). Although tax revenue is forecast to increase compared to the June 2010 year, the growth in tax revenue in 2011 is somewhat subdued owing to the slow nature of the economic recovery. The key factors driving the deterioration in the operating balance since June 2010 are:

  • one-off expenditure including costs in relation to the Canterbury earthquake and the Weathertight homes scheme
  • the impact of previous policy decisions such as the Budget 2010 tax package and introduction of the ETS
  • increasing debt levels leading to higher debt financing costs, and
  • demographic changes driving an increase in eligibility for NZS benefit payments.

…but breaks even in the June 2015 year

Figure 1.8 - Total Crown operating balance before gains and losses
Figure 1.8 - Total Crown operating balance before gains and losses.
Source:  The Treasury

After peaking in the June 2011 year, the operating deficit narrows and is expected to return to a break-even point by June 2015 (Figure 1.8). The first surplus of note is projected to be recorded by June 2016 (see Medium-term projections on page 36).

The total Crown operating balance (including gains and losses) is also in deficit in the June 2011 year and returns to surplus by the June 2014 year. The deficit is forecast to be smaller than the operating balance before gains and losses because Crown financial institutions such as the NZS Fund are expected to make gains, on average, over the next five years.

Figure 1.9 - Cyclically-adjusted operating balance
Figure 1.9 - Cyclically-adjusted operating balance.
Source: The Treasury

The underlying nature of these operating deficits can be measured by the cyclically-adjusted, or structural, operating balance, which gauges how much of the operating balance before gains and losses reflects temporary cyclical factors rather than long-lasting factors. The operating deficit is largely structural, evidenced by a cyclically-adjusted deficit of 5.2% of GDP in the June 2011 year. Beyond 2011, a gradual improvement in the structural position is expected, such that a cyclically-adjusted surplus of 0.2% of GDP is forecast in the June 2015 year.[4]

Figure 1.10 - Net core Crown debt
Figure 1.10 - Net core Crown debt.
Source:  The Treasury

Cash deficits are met by increased borrowing

Residual cash deficits are forecast to continue over the next five years. The trend is similar to that for operating deficits, peaking in the June 2011 year at $15.6 billion before reducing to $4.9 billion in the June 2015 year. Overall, cash deficits total $44.4 billion over the next five years.

Cash deficits represent the amount the Government has to fund, either by raising debt or reducing financial assets. Cash deficits are expected to raise net core Crown debt from $26.7 billion (14.1% of GDP) in the June 2010 year to $70.5 billion (28.5% of GDP) by the June 2015 year. Net debt is forecast to peak in the June 2015 year (Figure 1.10).

Table 1.6 - reconciliation from operating balance to residual cash and net debt
Year ending 30 June
$billion
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Core Crown revenue 56.2 58.4 63.4 67.8 72.3 76.6
Core Crown expenses (64.0) (70.6) (71.4) (74.2) (75.9) (78.6)
Net surpluses/(deficits) of SOEs and CEs and core Crown gains and losses 3.3 3.1 3.9 4.1 4.5 4.7
Total Crown operating balance (4.5) (9.1) (4.1) (2.3) 0.9 2.7
Net retained surpluses of SOEs, CEs and NZSF (3.7) (3.1) (3.9) (4.1) (4.5) (4.7)
Non-cash items and working capital movements 3.2 2.3 2.5 2.2 1.8 1.1
Net core Crown cash flow from operations (5.0) (9.9) (5.5) (4.2) (1.8) (0.9)
Contribution to NZSF (0.2)
Net core Crown cash flow from operations after contributions to NZSF (5.2) (9.9) (5.5) (4.2) (1.8) (0.9)
Purchase of physical assets (1.8) (2.3) (1.8) (1.3) (1.6) (1.2)
Advances and capital injections (2.0) (3.4) (1.8) (1.9) (1.8) (1.7)
Forecast for future new capital spending (0.6) (0.7) (1.0) (1.2)
Core Crown residual cash deficit (9.0) (15.6) (9.7) (8.1) (6.1) (4.9)
Opening net debt 17.1 26.7 42.1 51.7 59.6 65.8
Core Crown residual cash deficit 9.0 15.6 9.7 8.1 6.1 4.9
Other valuation changes in financial assets and financial liabilities 0.6 (0.2) (0.1) (0.2) 0.1 (0.2)
Closing net debt 26.7 42.1 51.7 59.6 65.8 70.5

Source: The Treasury

The expected cash shortfall is forecast to be met by additional borrowing and the utilisation of financial assets held by NZDMO. The majority of the borrowing requirement will be met through bond issuance in the New Zealand domestic market (Table 1.7). Issuance totals $59.7 billion over the next five years. After meeting debt maturities, net bond issuance totals $31.8 billion. On a comparable period basis (ie, June 2011 to June 2014), forecast net bond issuance to the market has increased by $8.5 billion relative to the Budget 2010 forecast. This reflects an increase in the forecast cash deficit and an assumption that the June 2014 borrowing programme now includes some pre-funding of the June 2015 bond maturity. It also reflects the forecast for EQC's redemption of a portion of its government securities, which affects the market issuance of bonds; however, there is no effect on the overall debt position of the Crown.

The current June 2011 government bond programme has been increased by $1 billion to $13.5 billion ($14 billion net cash proceeds). Having already completed over half of the original $12.5 billion programme following strong demand for New Zealand government bonds, the increase provides flexibility for continued regular nominal bond issuance should market conditions remain favourable and given the potential issuance of an inflation-indexed bond.

Table 1.7 - Net increase in domestic bonds
Year ended 30 June
$billion 
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
5-year
Total
Cash proceeds from issue of domestic bonds (market) 14.0 13.9 12.8 9.3 9.8 59.7
Repayment of domestic bonds (market) (8.0) (10.0) (9.9) (27.9)
Net increase in domestic bonds (market) 14.0 5.9 2.8 9.3 (0.2) 31.8
Cash proceeds from issue of domestic bonds (non-market) 0.2 1.0 0.2 0.8 2.2
Repayment of domestic bonds (non-market) (0.8) (0.8) (0.6) (2.2)
Net increase in domestic bonds (non-market) (0.6) 0.2 0.2 0.2
Net cash proceeds from bond issuance 14.0 5.3 3.0 9.5 31.8

Source: The Treasury

Notes

  • [4]For more details, see the Additional Information on the Treasury website www.treasury.govt.nz/budget/forecasts/hyefu2010

Net worth declines because of continued operating deficits, then rises by June 2015

Net worth is forecast to fall from $95 billion (50.2% of GDP) in June 2010 to $79.5 billion (35.3% of GDP) in June 2013 and then rise to $83.1 billion (33.6% of GDP) by June 2015. Although net worth declines, the Government is still expected to increase total assets from $223.4 billion in June 2010 to $256.3 billion by June 2015.

Table 1.8 - Asset movements
Year ended 30 June
$billion
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
5-year
Total
Opening total assets 217.2 223.4 232.3 238.6 241.0 252.7  
Increases in assets:              
Addition of property, plant and equipment1 6.6 8.2 7.6 7.0 6.8 6.5 36.1
 - ACC reinvestment of returns 2.7 3.5 2.6 2.9 3.2 3.4 15.6
 - Student loans issued 1.5 1.5 1.6 1.6 1.6 1.6 7.9
 - NZSF reinvestment of returns 2.0 1.4 1.2 1.3 1.5 1.6 7.0
 - Forecast for new capital spending 0.3 0.7 0.7 1.0 1.2 3.9
Reduction in assets:              
 - Depreciation on property, plant and equipment (3.6) (3.8) (4.0) (4.1) (4.2) (4.4) (20.5)
 - (Reduction)/increases in NZDMO/RBNZ financial assets (2.8) (0.2) (5.7) (6.4) 3.3 (5.4) (14.3)
Other changes in assets (0.1) (2.1) 2.2 (0.7) (1.3) (0.9) (2.8)
Net change in assets 6.2 8.9 6.3 2.4 11.7 3.6 32.9
Closing total assets 223.4 232.3 238.6 241.0 252.7 256.3  

1 Further breakdown is provided in note 14 of the forecast financial statements.

Source: The Treasury

Although total assets are expected to increase by around $32.9 billion, the overall level of capital investment is expected to be double this figure. The key areas of investment include:

  • the purchase of around $36.1 billion of physical assets over the next five years, primarily in the areas of transport, energy, education, health and defence
  • Accident Compensation Corporation (ACC) and NZS Fund reinvesting returns in financial assets of $15.6 billion and $7 billion respectively
  • an expected issuance of student loans of $7.9 billion, and
  • funding for future capital investments over the next five years of $3.9 billion.

This investment in assets will be offset by $20.5 billion of expected depreciation and an anticipated reduction in financial assets held by the RBNZ and NZDMO.

New Zealand's economic and fiscal outlook in an international context

New Zealand fared better than many developed economies following the global financial crisis (GFC), but its recovery is expected to be subdued, as in most developed economies. The GFC also had an impact on the Government's fiscal position, but less than for some countries, reflecting its stronger initial position.

Economic impact of the crisis

The New Zealand economy entered recession before the impact of the GFC as a result of a drought in the summer of 2007/08 and a tightening of monetary policy in response to increasing inflation. The economy recorded five successive quarters of economic contraction from March 2008 to March 2009, with a decline in production GDP of 3.5%. So far, New Zealand has recorded five quarters of expansion, totalling 2.1% growth, but it is not expected to regain its previous level of output until the first quarter of 2011 (Figure 1.11).

The downturn in New Zealand was relatively mild compared with other Organisation for Economic Co-operation and Development (OECD) economies, with the peak-to-trough decline ranked the seventh smallest out of 33 countries. The main reasons for this lesser impact were the soundness of the financial sector in New Zealand and the economy’s dependence on soft commodity exports and close trade links with Australia and China, both of which performed strongly through the GFC. The monetary policy response in New Zealand also lessened the impact of the GFC on the economy.

Table 1.9 - Economic growth outlook
(Calendar year, %  change) 2009
Actual
2010
Estimate
2011
Forecast
2012
Forecast
New Zealand -1.7 2.0 3.2 3.0
Australia 1.2 3.4 3.5 3.5
China 9.1 10.0 9.0 9.5
United States -2.6 2.7 2.4 2.7
Euro Zone -4.1 1.5 1.5 1.7
United
Kingdom
-4.9 1.8 1.8 1.9
Japan -5.2 2.6 1.2 1.4
Other Asia* 0.1 7.8 5.1 5.5
Trading partner growth -0.5 4.5 3.7 4.0

*  South Korea, Taiwan, Hong Kong, Singapore, Indonesia, Malaysia,Philippines, Indonesia and India, weighted by NZ export shares.

Sources: Statistics New Zealand, IMF, the Treasury

Figure 1.11 - Downturn and recovery
Figure 1.11 - Downturn and recovery.
Sources: Statistics New Zealand, IMF, the Treasury

New Zealand's recovery from the downturn is expected to be gradual, chiefly because of the consolidation by households, businesses and government. This is in line with the major developed economies, apart from Australia where a robust recovery is expected given its close integration with emerging Asia, particularly China. Australia experienced only one quarter of negative growth following the GFC, supported by a strong financial sector, ample monetary and fiscal stimulus and a resumption of demand for minerals from China, which is leading to a surge in investment in the mining sector and higher terms of trade that are supporting growth in private consumption (Table 1.9).

We expect growth to slow slightly from high levels in China as steps are taken to control inflation and cool the property market. Strong growth has been led by infrastructure investment and exports. After their sharp dip immediately following the GFC as global demand for manufactured goods fell and stocks were run down, the economies of emerging Asia (ex China) recovered rapidly but are not expected to sustain that rate of growth. Nevertheless, their growth rate will remain much higher than the developed economies.

Generally, the developed economies are expected to experience long, slow recoveries because of a range of factors, some of which are more important for some than for others. We expect the rate of recovery in the United States (US) to be constrained by household consolidation, a weak labour market and further adjustment in the housing market. The financial sector is still weak and the Government must reduce its ongoing deficits some time.

The outlook for the recovery in the Euro area and the United Kingdom (UK) is muted as the region copes with financial sector weakness, sovereign debt and the possible negative short-term effects of fiscal consolidation in the UK and some parts of the Euro area. The housing market in the UK and parts of Europe is weak and will take time to recover.

The recovery in Japan is also expected to be sluggish. Japan's economy was already in a weak position prior to the GFC and it was affected directly by the sharp contraction in emerging Asia as manufacturing was cut back and stocks were reduced. Following reasonably rapid growth in 2010, the recovery is expected to falter as domestic demand is hampered by deflation and lower external demand by the appreciation of the yen.

Comparing fiscal performance

Similar to its economic performance, New Zealand's fiscal performance through the GFC wasbetter than some but worse than the best performers. Prior to the crisis, New Zealand was one of a handful of countries running a surplus on its financial balance.[5]Reflecting the combined impact of prior policy decisions and the recession on revenues, the financial position moved into substantial deficit in the 2009 June year. This pattern was mirrored in most other developed economies (Figure 1.12).

Figure 1.12 - General government financial balance
Figure 1.12 - General government financial balance.
Sources: OECD Economic Outlook 88, the Treasury
Figure 1.13 - General government net debt
Figure 1.13 - General government net debt.
Sources: IMF Fall Fiscal Monitor 2010, the Treasury

Note: New Zealand data are for the System of National Accounts (SNA) general government sector (central plus local government, excluding State Owned Enterprises (SOEs) and Local Authority Trading Enterprises (LATEs)) derived from a Generally Accepted Accounting Principles - (GAAP) based proxy indicator applied to historical Statistics New Zealand (SNZ) data and refer to years ended 31 March (30 June for net debt). The figures shown in the graphs are from the Half-Year Update forecasts. Data for other economies are general government financial balance and refer to calendar years.

New Zealand's fiscal deficit is expected to peak this year, before declining gradually over the next few years and moving into surplus in 2016 June year. Australia is expected to return to surplus a few years earlier. Some other countries, which have been more-severely affected by recession, are forecast to face a much longer period of large deficits.

These developments are reflected in net debt movements. Although continuing to rise through to the middle of the decade, New Zealand’s level of net debt is expected to remain low by the standards of many OECD economies. Net debt in the major advanced economies is expected to reach an average 90% of GDP in 2015, significantly higher than the New Zealand peak (Figure 1.13). Relative to other smaller advanced economies, New Zealand’s forecast level of net debt is either comparable or slightly lower.

Notes

  • [5]To enable comparison across countries, New Zealand’s GAAP/IFRS-based fiscal accounts need to be converted to an SNA basis. Statistics New Zealand produces historical SNA estimates for the central government and general government financial balance. Over the forecast period, high-level adjustments have been made to GAAP forecasts to convert them to a SNA basis. The SNA-based figures for New Zealand used for this comparison should therefore be regarded as indicative.

Medium-term projections

Projections cover the period 2016 to 2025...

This section takes the main forecasts covering the period through to June 2015 in the previous section and projects them forward to June 2025. Projections differ from forecasts in both the manner they are produced and the sense of accuracy they portray. The projections grow forward economic and fiscal variables from the forecast base, using both demographic projections and assumptions, with the latter usually based on long-term averages. Some variables require a transitional period in the early projected years to reach stable, long-term values. These assumptions are outlined on pages 45-49.

Projections are very sensitive to changes in the assumptions and changes in the forecast base. For this reason, and owing to inherent uncertainty in such medium-term projections, it is best to focus on the general trajectory over time, particularly the near term. Alternative medium-term scenarios are presented in the next section.

Labour productivity growth is projected to continue to increase before stabilising at 1.5% per annum from June 2017. Annual labour force growth declines to 0.5% in June 2020, contributing to a slowing of real GDP growth over this time. Beyond 2020, annual real GDP growth stabilises at 2% through to the end of the projection period in June 2025. With inflation expected to be in the middle of the RBNZ's 1%-3% target band, changes in nominal GDP growth are driven by real activity, with nominal GDP growth falling to around 4% from 2018 onwards.

…and show a similar track for the operating balance (before gains and losses) as expected at Budget 2010

Figure 1.14 - Total Crown operating balance (before gains and losses)
Figure 1.14 - Total Crown operating balance (before gains and losses).
Source:  The Treasury

Beyond 2015, the projected profile of the total Crown operating balance (before gains and losses) is very similar to that projected at Budget 2010, but lifts at a slightly faster pace (Figure 1.14). This is because the gap in tax revenue seen over the forecast period closes over the projected period as the economy returns to full potential. Furthermore, projected expenditure is coming off a lower base compared with Budget 2010, which helps offset lower tax revenue, especially in the initial projection years. After breaking even in the June 2015 year, the total Crown operating balance (before gains and losses) is projected to be 0.5% of GDP in the year to June 2016 and lift gradually thereafter to reach just under 5% by 2025.

The core Crown operating balance is expected to return to surplus in 2017 and is of sufficient size for a full contribution to the NZSF in 2019, the same year as projected at Budget 2010.

Net debt declines as a proportion of GDP…

Figure 1.15 - Net debt
Figure 1.15 - Net debt.
Source:  The Treasury

Net debt starts from a slightly higher forecast base than at Budget 2010. However, the improved operating balance track closes the gap by around the year ended June 2021 and then sees net debt drop below the Budget 2010 track. As was the case at Budget, net debt is projected to fall below 20% of GDP by 2022 (Figure 1.15).

The decline in net debt to around 20% of GDP towards the end of the projection period is in line with the Government's long-term fiscal objective. Meeting this objective would mean the Crown is better placed to absorb economic shocks. It would also put New Zealand in a better position when the long-term fiscal pressures from an ageing population and other factors begin to escalate.

…and net worth lifts in line with the improving fiscal position

Figure 1.16 - Total Crown net worth
Figure 1.16 - Total Crown net worth.
Source:  The Treasury

Increasing operating balances over the projected years, with their consequent impact of reducing debt levels, are reflected in total net worth increasing over time. By 2025, net worth is projected to reach 57% of GDP, similar to the level it attained in 2008 before the GFC (Figure 1.16).

Given the uncertainty around the HYEFU projections, and the forecasts these projections build on, the next section examines alternative scenarios that fall within the range of possible outcomes.

Risks and scenarios

There are always uncertainties and risks associated with forecasts. These can be sourced from both the international economy and domestic developments.

Global developments present both upside and downside risks…

Although most economies are now growing again after the GFC, there is considerable uncertainty about the pace and durability of the recovery in many developed economies.

One source of downside risk relates to sovereign and banking system funding problems in some European economies and associated risks of contagion. An intensification and broadening of these problems to other countries would likely have significant negative impacts on activity levels, official interest rates and capital flows, particularly in Europe, with spill-overs to the rest of the world.

Another uncertainty relates to the response of the private sector to the ending of fiscal stimulus and in some economies the switch to fiscal consolidation. Consolidation will act to dampen domestic demand in the shorter term. As a result, the pace of growth will depend on the degree of offset coming from any crowding-in of private sector investment or higher net exports.

Other risks include the pace of recovery in the US, where there is continuing weakness in the labour and housing markets, and the extent of global imbalances which could lead to an increase in trade and capital barriers. These would impair world growth and, depending on the nature of the barriers, could adversely affect New Zealand export volumes.

Risks in China and emerging Asia are tilted to higher growth as these economies continue their economic development. Although China is currently taking steps to constrain credit growth, with some consequent short-term risks to growth, ongoing infrastructure investment and the scope for private spending to expand could see higher average growth over the next five years and further boost demand for minerals and soft commodities. It is also possible that the US and European economies could grow more quickly than expected if the current headwinds to growth dissipate faster than currently expected.

Economic strength in developing countries has helped support global commodity prices and boosted New Zealand's terms of trade, which are expected to remain elevated over the next five years. Past experience, however, indicates that negative shocks to commodity prices cannot be ruled out. Disappointing growth from emerging markets would be one factor that could result in lower demand and commodity prices than in the main forecasts.

...while the impact of atypical events and the behaviour of households present domestic risks

In the domestic economy, there is uncertainty about the degree to which rebuilding from the Canterbury earthquake will boost growth, and over what period. Since the forecasts were finalised, there have been a number of adverse developments. These are the discovery of a kiwifruit disease, the disaster at Pike River coal mine and the dry conditions developing in parts of the country as a result of the La Niña weather pattern. Risks of this kind will always exist in an economy with a large natural resource base, with drought effects having potentially significant adverse impacts on output and exports. Record temperatures during November mean that the risk that drought conditions will adversely impact on economic activity is particularly high.

New Zealand households have taken initial moves towards strengthening their financial position and are much more cautious about taking on debt, but it is not clear how sustained their restraint will be. Greater restraint will lead to lower growth in the short term, but possibly more sustainable growth in the long term; less restraint would bring higher growth in the near term, but risk a sharper deleveraging and rebalancing later. Developments in the housing market will influence household behaviour, with any additional housing market weakness likely to dampen household spending levels.

Two scenarios have been developed from these risks to illustrate the uncertainty associated with the current economic outlook. The scenarios are constructed by applying relevant shocks and alternative judgements to the New Zealand Treasury Model (NZTM). They should be treated as providing a high-level representation of how the economy could differ from the main forecasts. The focus is on key economic variables, rather than the larger suite produced as part of the main forecasts.

As a result, significantly different outcomes are possible

While the main forecast represents our view of the most likely path the economy will take, the scenarios illustrate that a large range of different outcomes is possible. The upside scenario assumes a stronger outlook for China and emerging Asia flows through to the economy in the form of higher prices for commodity exports. The downside scenario represents a more severe event with larger economic and fiscal implications, but with a lower probability. In this scenario, global growth falters and New Zealand's terms of trade are adversely affected. The scenarios are extended into the projection period in the same way as the main forecasts were in the preceding section, illustrating the considerable range in fiscal outcomes that could occur.

Table 1.10 - Summary of key economic variables for main forecasts and scenarios
(Annual average % change,
Year ended 31 March)
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Real GDP (production measure)            
Main forecast -0.4 2.2 3.4 2.9 2.7 2.7
Upside scenario   2.2 3.9 3.1 2.9 2.8
Downside scenario   1.3 1.2 3.9 3.0 2.3
Merchandise terms of trade1            
Main forecast -6.3 7.0 -2.7 1.8 1.9 1.3
Upside scenario   7.9 1.6 2.5 1.8 1.2
Downside scenario   6.9 -7.3 -1.0 0.3 -0.4
Unemployment rate2            
Main forecast 6.0 6.1 5.2 4.9 4.6 4.5
Upside scenario   6.1 5.0 4.7 4.5 4.4
Downside scenario   6.5 6.2 5.8 5.6 5.5
Nominal GDP ($billion)            
Main forecast   187   199 211 222   234   245
Upside scenario     200   215   227   239   251
Downside scenario     197   201   213   223   231

Notes:

1 SNA basis

2 March quarter, annual % change, seasonally adjusted

Upside scenario

Stronger demand for commodities lifts the terms of trade above the main track…

Figure 1.17 - SNA merchandise terms of trade
Figure 1.17 - SNA merchandise terms of trade.
Sources:  Statistics New Zealand, the Treasury

New Zealand is a key supplier of soft commodities to the global economy, particularly dairy products and meat. Limited global resources and long lags in production mean that changing demand manifests itself in price swings in the short term, having a significant impact on the terms of trade and the overall economy.

The main forecasts assume that the terms of trade ease off in the short run but remain elevated over the medium term. In the upside scenario, it is assumed that stronger demand from key trading partners (particularly China and Australia) results in higher commodity prices and a continuation of the upward trend seen in the terms of trade over the past decade (Figure 1.17).

…and benefits flow through the rest of the economy

A higher terms of trade places upward pressure on the exchange rate, which, coupled with stronger earnings, leads to increased domestic demand. Private consumption growth averages 3.1%, compared with 2.4% in the main forecasts, and residential investment also lifts, driving GST revenue higher. In line with recent trends, some of the income surprise is saved, lifting the household saving rate above that in the main forecasts over the medium term. Stronger export values relative to imports drive a lower overall profile for the current account deficit.

Figure 1.18 - Annual nominal GDP
Figure 1.18 - Annual nominal GDP.
Sources:  Statistics New Zealand, the Treasury

More robust demand creates some inflation pressure, but higher potential output owing to stronger investment, combined with a more elevated exchange rate, means the overall impact on consumer prices is relatively small, allowing official interest rates to remain broadly similar to those expected in the main forecasts.

…driving higher tax revenues and a more positive fiscal position

The stronger economic outlook in this scenario lifts nominal GDP $4.2 billion (2%) higher in the March 2012 year and a cumulative $23 billion higher than the main forecasts over the 2011 to 2015 June years. Such a scenario would boost demand for labour and wages, flowing through to higher PAYE tax revenue which, together with higher corporate tax and GST, results in overall tax revenue being a cumulative $6.6 billion higher than in the main forecasts.

Figure 1.19 - Total Crown operating balance (before gains and losses)
Figure 1.19 - Total Crown operating balance (before gains and losses).
Source:  The Treasury

With expenses broadly similar to the main forecasts, higher tax revenues mean the overall fiscal outlook is stronger than envisaged in the main forecasts. The operating balance (before gains and losses) breaks even in the June 2014 year, one year earlier than in the main projections. Net debt is projected to fall below 20% of nominal GDP in the June 2020 year, two years earlier than in the main projections.

Core Crown operating surpluses (before gains and losses) are projected to be of sufficient size to trigger the resumption of contributions to the NZSF by the June 2018 year - one year earlier than in the main projections.

Downside scenario

Global growth falters and financial conditions tighten, leading to lower export demand…

The downside scenario centres on sovereign debt issues in Europe intensifying and causing financial market disruption globally. As a result, global growth prospects falter. The channels through which such an event impacts on the New Zealand economy are primarily export demand, access to credit, confidence and wealth.

In this scenario, export demand is negatively affected, with lower commodity prices reflected in a much lower terms of trade, despite weakness in prices for some of the goods New Zealand imports (Figure 1.17 above). Although we would expect to see a significant decline in the exchange rate that would help offset lower export prices, the extent of the fall in demand means that overall export values are likely to be lower than in the main forecasts.

With financial markets experiencing renewed dislocation and risk aversion rising, capital- importing countries such as New Zealand could expect to face higher global funding costs. While official interest rates are likely to be lowered in such an event to limit the impact on retail interest rates, banks' access to funding could be more limited. The net result would be a more restricted supply of credit, at a higher price, to businesses and households. With confidence levels hit by the global situation, demand for credit also falls, resulting in weaker business and residential investment growth.

…and weaker private consumption

Figure 1.20 - Real private consumption
Figure 1.20 - Real private consumption.
Sources:  Statistics New Zealand, the Treasury

House prices could be expected to fall further, reflecting a lack of confidence and credit, driving household wealth lower. Lower wealth, together with a weaker labour market, results in a significantly lower profile for real private consumption (Figure 1.20)

…driving real growth lower than in the main forecasts…

With business investment, residential investment and private consumption all weaker than in the main forecasts, the overall profile for real GDP is markedly lower than in the main forecasts.

The lower terms of trade, coupled with softer domestic prices, reflecting the weaker domestic economy, results in nominal GDP in the five years to June 2015 being around a cumulative $50 billion lower than in the main forecasts, with tax revenues expected to be nearly a cumulative $18 billion lower over the same period.

…and weakening the fiscal outlook

Figure 1.21 - Core Crown net debt
Figure 1.21 - Core Crown net debt.
Source:  The Treasury

The total Crown operating balance (before gains and losses) would still be in deficit by about 2½% of GDP in the June 2015 year, while core Crown net debt would have risen to nearly 40%. Across the 10 years of post-forecast projections there is little recovery in the nominal GDP track, relative to that arising from the main forecast. As a consequence, the tax revenue gap of the next five years is maintained, which, in turn, flows through to much-lower operating balances. With surpluses taking longer to achieve, and being smaller when they do occur, the net debt track does not begin to reduce, as a percentage of GDP, until the end of this decade. The long-term target of net debt at 20% of GDP is not attained, with the ratio falling to about 35% by the mid-2020s.

It is important to note that the fiscal scenarios do not include a fiscal policy response which would be necessary if events were to evolve in a similar manner to that outlined in the downside scenario.

Fiscal sensitivities

The scenarios presented above reflect only two of a large number of possible alternative paths the economy may take. Table 1.11 provides some “rules of thumb” on the sensitivities of the fiscal position to changes in several specific economic variables. These enable an assessment of how the fiscal position could be affected should events turn out differently.

Table 1.11 - Fiscal sensitivity analysis
Year ended 30 June
($million)
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
1% lower nominal GDP growth per annum on          
Tax revenue   (520)   (1,135)   (1,810)   (2,560)   (3,370)
Revenue impact of a 1% decrease in growth of          
Wages and salaries   (230)   (470)   (750)   (1,075)   (1,450)
Taxable business profits   (100)   (235)   (385)   (540)   (710)
One percentage point lower interest rates          
Interest income1   (90)   (104)   (105)   (56)   (75)
Expenses1   (106)   (302)   (436)   (522)   (615)
Impact of interest rates on the operating balance   16 198 331 466 540

Note:

1 NZDMO holdings only

Source: The Treasury

Finalisation dates and assumptions for the forecasts and projections

Economic and fiscal forecasts - finalisation dates
Economic forecasts 5 November
Tax revenue forecasts 12 November
Fiscal forecasts 22 November
Text finalised 7 December

Economic forecast assumptions

Tax policy - The tax reform package announced earlier in the year has a significant impact on the economy. As in Budget 2010, the economic forecasts incorporate a level of real GDP that is 0.4% higher than in the absence of the tax package by June 2014, growing to 0.9% higher in the 2016 June projection year.[6]

Several relatively minor tax policy changes, agreed to by Cabinet since the Budget 2010, have been included in the HYEFU.

Table 1.12 - Tax policy changes included in the HYEFU tax revenue forecasts[7]
Year ended 30 June
($million)
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast

Material tax policy changes

         
Thin capitalisation for low-asset companies (30) (15) (15) (15) (15)
GST transitional measures (12) (15) (4) (3) (1)
Extending active income exemption to non-porfolio FIFs (10) (10) (10) (10)
Other (9) 22 (10) (6) (10)
Total (51) (18) (39) (34) (36)

Trading partner growth - New Zealand's trading partners grew more strongly in the first half of 2010 than previously expected, especially emerging Asia and Australia. Growth is expected to ease in the second half of 2010 and in 2011 as monetary policy is tightened in the faster growing regions and renewed weakness is apparent in the developed economies as sovereign debt concerns, fiscal consolidation, deflation and weak labour and housing markets constrain growth in the Euro area, UK, Japan and the US, respectively. Trading partner growth is projected to ease from 4.5% in 2010 to 3.7% in 2011, before recovering again to 4% in 2012.

Figure 1.22 - WTI oil prices
Figure 1.22 - WTI oil prices.
Sources:  Datastream, the Treasury

Oil prices - Based on the average futures prices for WTI oil over the month to 27 October 2010, the price of oil is assumed to rise to US$89/barrel by March 2015. The oil price assumption contained in the HYEFU is lower than assumed in Budget 2010 (Figure 1.22).

Terms of trade - The merchandise terms of trade (as measured in the SNA) are assumed to decline 3.4% through to June 2011, before rising 6.5% over the next four years. This measure of the merchandise terms of trade is influenced by both price level changes and changes in the composition of export and import volumes. For example, a shift of production towards higher priced exports will see the terms of trade rise.

Monetary conditions - The TWI is expected to be 68.5 in the December 2010 quarter and is assumed to be marginally higher (68.7) in March 2011. The TWI is then assumed to fall to 53 by March 2015. Ninety-day interest rates are expected to remain broadly steady before lifting to 3.7% in the June 2011 quarter and then steadily rise to 5% by late 2012.

External migration - The net inflow of permanent and long-term migrants is assumed to fall from 13,600 in the year to September 2010 to 8,900 in the year to March 2011 before lifting to 10,000 per annum by early 2012.

Other policy - The ETS had an immediate impact on the price of liquid fossil fuels from 1 July 2010 but the impact on prices was offset by declines in the New Zealand dollar price of fuel over this time. While stationary energy was included in the scheme on the same date, the impact on consumer prices has been more gradual than assumed at Budget, reflecting delayed pass-through from retailers, with the full impact now expected to occur by the middle of 2011.

Notes

Fiscal forecast assumptions

The fiscal forecasts are based on assumptions and judgements developed from the best information available on 22 November 2010, when the forecasts were finalised. Actual events are likely to differ from some of these assumptions and judgements. Furthermore, uncertainty around the forecast assumptions and judgements increases over the forecast period.

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
  • an unemployment forecast is needed to underpin the projected number of unemployment benefit recipients, and
  • 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 1.13 below on a June year basis, to align with the Government's balance date.

Table 1.13 - Summary of key economic variables used in fiscal forecasts (June year basis)
Year ended 30 June Budget
Forecasts
2011
HYEFU
Forecasts
2012
HYEFU
Forecasts

2013
HYEFU
Forecasts
2014
HYEFU
Forecasts
2015
HYEFU
Forecasts
Real GDP (P) (ann avg % chg) 3.3 2.5 3.4 2.8 2.8 2.7
Nominal GDP (E) ($b) 204 202 213 225 237 248
CPI (annual avg % change) 4.8 3.7 3.3 2.7 2.3 2.0
Govt 10-year bonds (ann avg %) 5.9 5.3 5.3 5.3 5.4 5.5
5-year bonds (ann avg %) 5.5 4.6 5.0 5.3 5.3 5.4
90-day bill rate (ann avg %) 3.9 3.3 4.5 5.0 5.0 5.0
Unemployment rate (HLFS basis, ann avg %) 6.4 6.2 5.4 4.9 4.6 4.5
Total employment (ann avg % change) 0.9 1.8 1.6 1.8 1.6 1.5
Current account (% of GDP) -5.0 -1.5 -6.0 -6.8 -6.3 -5.6

Source: The Treasury

Projection assumptions

The projection period begins in the June 2016 year. The post-forecast fiscal projections are based on the long-run technical and policy assumptions outlined below. The projection model can be found on the Treasury website.

Table 1.14 - Summary of economic and demographic assumptions1
Year ended 30 June 2011 2012 2013 2014 2015 2016 2017 2018 2019 2025
  Forecasts Projections
Labour force 1.4 0.8 1.3 1.3 1.3 1.0 1.0 0.6 0.6 ... 0.5
Unemployment rate2 6.2 5.4 4.9 4.6 4.5 4.5 4.5 4.5 4.5 ... 4.5
Employment 1.8 1.6 1.8 1.6 1.5 1.0 1.0 0.6 0.6 ... 0.5
Labour productivity3 -0.1 1.8 1.0 1.1 1.2 1.4 1.5 1.5 1.5 ... 1.5
Real GDP 2.5 3.4 2.8 2.8 2.7 2.7 2.6 2.1 2.1 ... 2.0
Consumer price index
(annual % change)
5.0 2.9 2.6 2.1 2.0 2.0 2.0 2.0 2.0 ... 2.0
Government 5-year bonds (ann avg %) 4.6 5.0 5.3 5.3 5.4 5.6 5.8 6.0 6.0 ... 6.0
Average hourly wage 2.0 3.6 4.1 4.2 3.9 3.4 3.5 3.5 3.5 ... 3.5

Notes:

1 Annual average % change unless otherwise stated

2 HLFS basis, annual average

3 Hours worked measure

Source: The Treasury

Given the difficulty in projecting cycles and shocks beyond the forecast horizon, the projections use trend or long-run averages for the growth rates or levels of key economic variables. In the HYEFU, some of these variables are not predicted to return to their trend levels within the five-year forecast period because of the persistent effects of the recession. However, the variables are assumed to return to these trend rates or levels in the first few years of the projections. These variables are: age-and-gender group labour force participation rates; average hours worked; government 5-year bond rate; and labour productivity growth. For the labour force participation rate, it is assumed that the labour force will fully recover from any cyclical impact by 2016/17, which in turn sees the labour force participation rate returning to the level seen in 2008/09. In subsequent years, the labour force participation rates are growing in line with projections produced by Statistics New Zealand. For the other variables, a rate of transition to the long-run trend rate or level is determined. These variables all contribute to the projection of nominal GDP, which is both a driver of a number of important fiscal variables, such as tax revenue, and the denominator in key fiscal ratios.

Table 1.15 - Summary of fiscal assumptions for forecasts and projections
  Forecast period (to 2015) Projection period (2016-2025)
Government decisions
  • Incorporate government decisions up to 22 November 2010.
  • Only incorporates policy settings contained in the forecast base.
Operating allowance
  • Net $1.12 billion in 2011/12 (ie, the original $1.1 billion increased by 2%), growing by the rate of 2% per annum for subsequent Budgets.
  • Also based on annual increments of a 2011/12 base of $1.12 billion, grown at 2% per annum. 
Capital allowance
  • $1.39 billion from Budget 2011 to 2014, allocated as follows over the forecast period (June year basis):
 
$billion 2011 2012 2013 2014 2015
Contingency 0.13 0.01 - - -
Budget 11 0.16 0.56 - 0.16 0.09
Budget 12 - 0.16 0.54 0.10 0.26
Budget 13 - - 0.16 0.56 0.10
Budget 14 - - - 0.16 0.56
Budget 15 - - - - 0.16
Total 0.29 0.73 0.70 0.98 1.17
  • Page 58 outlines indicative decisions against Budget 2011.
  • Based on a track of $900 million in 2013/14 as the starting point, increasing at 2% p.a. Value in 2015/16 is $936 million.
Emissions Trading Scheme (ETS)
  • The forecasts have been prepared in accordance with current government ETS policies.  Details of current climate change policies are listed at: www.mfe.govt.nz/issues/climate/policies-initiatives
  • The carbon price assumption is based on estimates of the current carbon price from Price Carbon and is assumed to remain constant at €10.75 with an exchange rate of 0.5409 (a carbon price of NZ$19.87) over the forecast period. 
  • The forecast assumes a 67% uptake of post-1989 foresters into the ETS over Commitment Period One (CP1).
  • It is assumed the ETS has no fiscal impact on debt or cash flows, as the net cash impact from the ETS and international obligations is highly uncertain. 
  • The ETS has been modelled as having no net fiscal impact in the projection period (expenses equal revenues), as the net impact of the ETS and future international obligations is highly uncertain.  Any net revenue (the value of credits received after free allocation of credits to participating industries and after meeting future emission liabilities) is assumed to be recycled back to the public through fiscally equivalent, unspecified tax reductions or spending increases.
Kyoto position
  • The Kyoto position included in the fiscal forecasts reflects the Government's obligation for CP1, which is for the period 2008 to 2012. 
  • Projections beyond 2015 do not incorporate a quantitative estimate of any net emissions liability that may eventuate from New Zealand's obligation under future international climate change agreements.
NZSF contributions
  • Assume no contributions over the forecast period.
  • Contributions calculated via separate NZSF model.
  • Assumed to recommence at $2.8 billion in 2019 when the projected core Crown operating surplus (before gains and losses) is more than enough to cover the capital contribution.
Investment rate of returns
  • Incorporate the actual results to 30 September 2010.  Beyond 30 September, gains on financial instruments are based on long-term benchmark rates of return for each portfolio.
 
Finance cost on new bond issuances
  • Based on five-year rate from the main economic forecasts and adjusted for differing maturity.
 
Borrowing requirements
  • The forecast cash deficits will be met by reducing financial assets and issuing debt.
 
Top-down adjustment
  • Top-down adjustment to operating and capital as follows:
 
$ billion 2011 2012 2013 2014 2015
Operating 0.85 0.15 - - -
Capital 0.35 0.15 - - -
  • This is a downward adjustment to expenditure forecasts to reflect the extent to which departments use appropriations (upper-spending limits) for their expenditure forecasts.
 
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 2010 annual financial statements and any additional valuations that have occurred up to 30 September 2010 are included in these forecasts.
 
Student loans
  • The value of student loans is based on a valuation model adapted to reflect current student loans policy.  As such, the 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 fiscal forecast.
 
Government Superannuation Fund (GSF) and ACC liabilities
  • GSF and ACC liabilities included in these forecasts have been valued as at 31 October 2010 and 30 June 2010 respectively, with the ACC valuation being adjusted for the 30 September 2010 discount rate.  Both liabilities are valued by projecting future cash payments and discounting them to present value.  These valuations rely on historical data to predict future trends and use of economic assumptions such as inflation and discount rates.  Any change 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.  Pages 101 and 102 outline the key economic assumptions used for both valuations.  GSF's assets are offset against the gross liability and have been updated to reflect market values at 31 October 2010.  The value of assets over the forecast period reflects long-run rate of return assumptions appropriate to the forecast portfolio mix.
 
Fiscal drag  
  • Projecting source deductions involves employed labour force growth plus nominal average wage growth, supplemented by a fiscal drag elasticity of 1.35.

Fiscal Risks

The Government's fiscal strategy aims to return the budget to surplus, bring down debt to restore a buffer against unforeseen circumstances, and support growth in a way that minimises economic vulnerability. The ability of the Government to achieve this fiscal strategy depends on future government decisions and, to a significant extent, the level of risk inherent in the global and domestic economies. This chapter describes risks to the economic and fiscal outlook from the perspective of a taxpayer.

The Public Finance Act 1989 (PFA) requires that each Economic and Fiscal Update incorporate, to the extent that it is possible to do so, all future government decisions and other circumstances that may have a material effect on the economic and fiscal outlook. Providing this information serves two purposes. First, providing information on uncertainty ensures that any risks that are able to be identified are transparently disclosed. The only exceptions to this requirement are where disclosure might cause serious harm to New Zealand's security, economy or Government. The second purpose is to aid interpretation of the statements by providing a sense of the uncertainty surrounding the economic and fiscal outlook.

The HYEFU 2010 risk chapter has been expanded to cover how events in the wider economy can impact on the fiscal position. This expands the focus of the risk chapter beyond the traditional contingent risks and the policy under active consideration, which are now included in the second part of this chapter. In providing this information no attempt has been made to specify individual economic events. Instead the focus of the additional material is on the size of potential change (variance) relative to what is included in our forecasts. Specific economic risks, to the extent that they impact on the economic outlook and are able to be identified, are discussed in the Economic and Fiscal Update chapter.

Fiscal strategy must respond to changes in the economy

Fiscal strategy specifies the Government's future spending intentions given expectations about how much tax it is likely to collect. Changes in the economy affect the Government through changes in tax and, to a lesser extent, through changes in either spending or the value of assets and liabilities held on the balance sheet. Thus, the key risk to the Government's ability to deliver on its fiscal strategy is that the economy will not evolve in line with the Treasury's economic forecasts over an extended period.

Revenue uncertainty

Taxation revenue is the primary channel through which changes in the economy affect the Crown's fiscal position. For taxation revenue, it is uncertainty about the level of nominal GDP that is most important. Two uncertainties that could significantly alter our forecasts for taxation revenue include: a change in trend growth; or uncertainty about the permanence of declines in tax following a large shock. Significant changes in prices, most notably through the terms of trade, have been especially important in the New Zealand context.

Figure 2.1 - Revenue uncertainty (holding policy constant)[8]
 
Figure 2.1 - Revenue uncertainty (holding policy constant).
Source:  The Treasury

Note: The blue bands represent sequential deciles such that the difference between the 10th and 90th pecentiles represents an 80% confidence interval.

The experience of New Zealand over the past three decades provides three clear examples:

  • The 1997 Asian crisis: The shock was assumed to be more permanent than it was and, as a result, the economy recovered faster than forecast.
  • Growth through the 2000s: Forecasts persistently underestimated the strength and sustained persistence of above par economic growth mainly as a result of a terms of trade shock.
  • The global financial crisis: Tax revenue suffered a structural decline after forecasts overestimated trend growth in government revenues (refer Figure 2.1).

The Economic and Fiscal Update provides the Treasury's current view of how the economy is expected to evolve. The upside and downside scenarios (refer page 38) provide two possible alternative scenarios for how the economy could differ from our central forecasts, although more extreme outcomes are possible. Historic variance in taxation revenues for the next fiscal year (refer Figure 2.1), once the impacts of policy change are taken into account, would normally fall within a two standard deviation range of plus or minus $4.9 billion (8.8%) on the current revenue base of $56 billion. Outcomes beyond this range could be expected to occur one year out of every 20.

Historic estimates of uncertainty may understate the potential volatility of forecasts over the next five years. Global imbalances that have not unwound to any significant extent, a large negative net international investment position and high levels of domestic debt all create uncertainty. Structural changes in the economy that affect the rate at which revenue grows relative to spending would place pressure on the Government's fiscal strategy.

Expenditure uncertainty

Most unexpected costs are likely to be captured through reprioritisation or from within the $1.12 billion annual budget operating allowance. However, large unexpected events, such as the Canterbury earthquake (refer page 22), can still place significant pressure on the Government's other spending priorities. A summary of the risks that are able to be specifically identified at the time of writing have been included in the second part of this chapter.

On 22 November 2010 Standard and Poor's placed the New Zealand sovereign rating on a negative watch. The decision referenced declining fiscal flexibility as a result of government budget deficits and widening external imbalances with respect to growing private sector debt. A credit downgrade would likely increase the Government's expenses through rising debt servicing costs.

Valuation uncertainty

Valuations of the assets and liabilities held on the Government's balance sheet respond to changes in interest rates, exchange rates and market prices. Significant changes in the balance sheet could eventually flow through placing pressure on the Crown's fiscal position. Risks to the government balance sheet lie beyond the scope of this chapter. However, the Government's capital spending intentions and information on portfolio risk are laid out in the Budget Policy Statement, National Infrastructure Plan and Investment Statement.

Uncertainty about the buffer provided by net worth

Figure 2.2 - Variation in past forecasts for net worth
Figure 2.2 - Variation in past forecasts for net worth.
Source:  The Treasury

The impact of tax, spending and valuation changes all create significant uncertainty about the future level of the Government's net worth. Higher net worth, or lower net debt, provide the Government with the fiscal headroom to spend or avoid increasing taxes in a recession. In this way, balance sheet measures, or lower debt, can be viewed as rough indicators of the risk that policy may need to change in a future crisis or a recession.

The global financial crisis has highlighted that the value of net worth can change rapidly when the economy is hit by an unusually large shock. This chapter makes no assessment of risk to the New Zealand economy. However, the effect of the economy and the impact of unexpected events on uncertainty about the future value of net worth can be illustrated by plotting forecasts for net worth against actual outcomes (refer Figure 2.2). Net worth is forecast to decline from 50.2% of GDP in June 2010 to 33.6% of GDP by June 2015, before recovering thereafter. A summary of the assumptions and judgements underlying our expectations for net worth, net debt and the economy as a whole has been included on page 45.

Notes

  • [8]A full summary of the methodology and critical assumptions is included in Treasury Working Paper 10/08. Standard deviation assumptions used for 0-, 1-, 2- and 3-year ahead forecasts are 2.0%, 4.3%, 6.1% and 6.8% of the actual respectively. These are interpolations of the BEFU forecast estimates, adjusting for the timing of the HYEFU forecast.

Statement of Specific Fiscal Risks

Context of the specific fiscal risks

The Statement of Specific Fiscal Risks sets out all government decisions, contingent liabilities or contractual obligations known to the government and subject to specific materiality requirements that may have a material effect on the economic or fiscal outlook[9].

The risks outlined in this chapter, should they eventuate, would only have an effect on the operating balance and/or net debt to the extent that they were not funded from within budget allowances, by reprioritising existing expenditure or through third-party revenue.

Policy options for many risks require further development, and the quantum of the risk is often uncertain. Consequently, the final cost or saving may differ from the amounts disclosed in this chapter.

Categories of risk

Previously, risks were grouped according to whether or not they were quantified. To improve the presentation of the information, they are now categorised to help explain the impact the risk would have if it were to occur. The categories of risk are explained and listed below.

  • Pending policy decisions affecting revenue: Changes to tax policy or ACC levies could reduce or increase Government income from taxes or levies.
  • Pending policy decisions affecting expenses: Costs of policy proposals could increase or decrease depending on decisions taken and they are risks to the extent that they cannot be managed within baselines or budget allowances.
  • Pending capital decisions: Capital investment decisions are risks to the extent that they cannot be managed within balance sheets or budget allowances.
  • Matters dependent on external factors: The liability of the Government for costs is sometimes dependent on external factors such as the outcome of negotiations or international obligations.

Summary table

The matters listed below are disclosed as specific fiscal risks because they meet the rules for disclosure outlined in the next section. Full descriptions of the risks listed below are set out following the rules for disclosure.

Summary table
Specific fiscal risks as at 22 November 2010 Status Value of risk

Pending policy decisions affecting revenue

   
ACC - Levies and Non-earners' Account Changed Unquantified
Revenue - Income-sharing Tax Credits New $500m per annum by 2014/15
Revenue - Potential Tax Policy Changes Changed Unquantified
Risk to Third Party Revenue Unchanged Unquantified

Pending policy decisions affecting expenses

   
Corrections - Community Probation Services Capacity Changed $25m per annum operating expenditure and $20m capital expenditure
Education - Early Childhood Education Funding Changed Unquantified
Education - Operating Funding for New Schools New Unquantified
Education - Inflation Adjustment for School Operating Funding Unchanged Unquantified
Education - Repairing Leaky Schools Unchanged Unquantified
Finance - Electricity Reforms Changed Unquantified
State Sector Employment Agreements Unchanged Unquantified
Housing - Housing Shareholders' Advisory Group New Unquantified
Justice - Review of the Legal Aid System Unchanged Unquantified
Revenue - Child Support Unchanged Unquantified
Revenue - Redesigning Business Processes at Inland Revenue Unchanged Unquantified

Pending capital decisions

   
Corrections - Prison Capacity Changed $600m capital expenditure and $90m per annum operating expenditure
Communications - Broadband Investment Initiative Changed $1,010m
Education - Broadband Investment: Schools Changed $205m
Education - School Property Changed $1,950m
Finance - Crown Overseas Properties Unchanged $150m
Housing - Weathertight Homes Changed Unquantified
Justice - Auckland Region Property Strategy Changed $150m over three years
Police - Digital Radio Network Full Implementation Changed $170m capital expenditure and $5m rising to $30m per annum operating expenditure 
Transport - Support for New Zealand Railways Corporation (KiwiRail) Changed $950m

Matters dependent on external factors

   
Canterbury Earthquake - Land New Unquantified
Canterbury Earthquake - Local Authorities New Unquantified
Climate Change - ETS and International Climate Change Obligations Unchanged Unquantified
Climate Change - Finance for Developing Countries Changed Unquantified
Defence Force - Future Operationally Deployed Forces Activity Unchanged $30m per annum
Defence Force - Sale of Skyhawks and Aermacchi Trainers Changed Unquantified
Energy - Crown Revenue from Petroleum Royalties New Unquantified
Finance - Original Crown Retail Deposit Guarantee Scheme Changed Unquantified
Finance - Extended Crown Retail Deposit Guarantee Scheme New Unquantified
Finance - Government Commitments to International Financial Institutions Unchanged Unquantified
Health - Caregiver Employment Conditions Changed $100m per annum
Health - Payment of Family Caregivers Unchanged Unquantified
Revenue - Cash Held in Tax Pools Unchanged Unquantified
Reviews of the Delivery of Public Services Unchanged Unquantified
State Services - KiwiSaver Contribution Unchanged Unquantified
Treaty Negotiations - Treaty of Waitangi Claims - Settlement Relativity Payments New Unquantified

Notes

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

Criteria and rules for disclosure in the fiscal forecasts or as specific fiscal risks

The criteria and rules set out below are used to determine if government decisions or other circumstances should be incorporated into the fiscal forecasts, disclosed as specific fiscal risks or, in some circumstances, excluded from disclosure. Since the last Economic and Fiscal Update, the materiality criterion for disclosure has been raised from $10 million in any one year to $100 million over five years (2010/11 to 2014/15) in order to provide greater focus on the more material risks. There are 12 risks that are not published because of the revision, with a combined average value per annum of approximately $88 million.

Criteria for including matters in the fiscal forecasts

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

  • The quantum is more than $100 million over five years.
  • 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[10] 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 his 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 cost is more than $100 million over five years, and either
  • a decision has not yet been taken, but it is reasonably possible[11] (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 his best professional judgement, that the matters may have a material effect (more than $100 million over five years) on the fiscal and economic outlook, but are not certain enough to include in the fiscal forecasts.

Exclusions from disclosure

Matters are excluded from disclosure as specific fiscal risks if they fail to meet the materiality criterion (ie, are less than $100 million over five years), or if they are unlikely[12] to be approved or occur within the forecasting period.

Additionally, the Minister of Finance may determine that an item 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.

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

Charges against the fiscal forecasts

Communications - Broadband Investment Initiative

Based on the criteria outlined above, it is probable that additional funding to Crown Fibre Holdings Limited for a new broadband network will be approved by the Government during the forecast period. Consequently, this matter has been incorporated into the fiscal forecasts as a potential charge against the capital allowances for future Budgets.

Communications - Broadband Investment Initiative
  2010/11 2011/12 2012/13 2013/14 2014/15
Broadband Investment Initiative 0 0 $300m $200m $200m

Notes

  • [10]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).
  • [11]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).
  • [12]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).

Statement of Specific Fiscal Risks

Pending policy decisions affecting revenue

ACC - Levies and Non-earners' Account (Changed, Unquantified)

Changes in tax settings, economic factors and ACC's financial performance affect the ACC's levy income and the Crown's liability for claims.

Revenue - Income-sharing Tax Credits (New, Quantified)

The Government has introduced legislation to establish an income-sharing tax credit, which is being considered by select committee. If passed, the legislation will allow couples with children under the age of 18 to pool their earnings for income tax purposes if they meet certain criteria. If implemented, the changes will reduce tax revenues by $500 million per annum once the scheme is fully operational.

Revenue - Potential Tax Policy Changes (Changed, Unquantified)

The tax policy work programme announced by the Government includes a number of items which are under consideration, including:

  • the tax treatment of profit distribution plans
  • the tax treatment of charitable giving
  • the imputation system
  • the tax treatment of employee benefits
  • amortisation of capital raising costs
  • the international tax review
  • the GST treatment of cross-border business activities, and
  • the tax treatment of hybrid instruments.

Measures on the work programme are expected to be revenue neutral or positive in aggregate. Measures enacted since Budget 2009, and included in revenue forecasts, have increased tax revenue by around $60 million per annum. The remaining items could be revenue negative up to the same extent. Because it is unclear exactly what additional policy changes, if any, will be made at this stage, these further changes have not been included in revenue forecasts.

Risk to Third Party Revenue (Unchanged, Unquantified)

A wide range of government activities are funded through third party fees and charges. With a decrease in economic activity, there is a risk that decreases in third party revenue streams will require changes to service delivery with transitional costs to the Crown. For example, decreases in Customs revenue or in levies on building activity may mean that some activities are temporarily unable to be fully cost-recovered and the Government will need to reduce the level of an activity or temporarily subsidise that activity.

Pending policy decisions affecting expenses

Corrections - Community Probation Services Capacity (Changed, Quantified)

Over the next 10 years sentences and orders served in the community are forecast to increase. If the growth materialises as forecast, it is estimated that additional funding will be required for Probation Officers and investment in Community Probation infrastructure. Based on current forecasts, expenses are estimated at $20 million capital expenditure in total and operating expenditure of $25 million per annum by 2014/15.

Education - Early Childhood Education Funding (Changed, Unquantified)

Demand for Early Childhood Education (ECE) services is continuing to increase more than forecast, raising the costs of subsidies to ECE services. If this continues, the Government will face additional cost pressures.

Education - Inflation Adjustment for School Operating Funding (Unchanged, Unquantified)

The Government has historically increased school operating grants in each Budget. Any funding for school operations grants would depend on the circumstances and the ability of the proposal to be managed within existing baselines and any allocation provided during the Budget process.

Education - Operating Funding for New Schools (New, Unquantified)

Applications for the establishment of new schools or for the approval of integration agreements present an unquantified risk. Proposals for the establishment of Kura Kaupapa Māori, Trades Academies or other secondary-tertiary establishments will drive the demand for funding in this area.

Education - Repairing Leaky Schools (Unchanged, Unquantified)

A $930 million impairment has been made to the school property portfolio reflecting “leaky building” (defective building) issues. There is a risk that existing funding will not be sufficient to repair the damage to schools which has been accounted for by the impairment.

Finance - Electricity Reforms (Changed, Unquantified)

In December 2009, the Government announced a series of measures related to improving the operation of the electricity market, including reconfiguring State Owned Enterprises' assets (virtual asset swaps and the sale of Meridian's Tekapo A and B power stations to Genesis and the sale of the Crown-owned Whirinaki power station to Meridian). The timing and some of the details of the SOE asset reconfiguration have yet to be decided. Given this, the impact of the reforms on the individual SOEs and the Crown cannot currently be estimated.

Housing - Housing Shareholders' Advisory Group (New, Unquantified)

The Government is considering a report by the Housing Shareholders' Advisory Group (HSAG) that includes recommendations for how to improve the effectiveness and efficiency of social housing provision, and make housing more affordable. The Government will consider and initial response before the end of the year. Until then, the magnitude of the fiscal risk will remain uncertain.

Justice - Review of the Legal Aid System (Unchanged, Quantified)

The Government is developing options for delivering legal aid services in a sustainable and affordable way. Decisions are due to be taken on proposals in late 2010. Final costs will depend on decisions taken.

Revenue - Child Support (Unchanged, Unquantified)

A government discussion document has been released which considers changes to the child support regime. The discussion document considers the costs of raising children, potential changes to the child support formula and options to improve compliance with the child support regime. Any changes would have administrative costs for Inland Revenue and could have further costs to government from reduced offsets to benefits.

Revenue - Redesigning Business Processes at Inland Revenue (Unchanged, Unquantified)

The Government is investigating options to redesign business processes at Inland Revenue, which could include both policy and administrative options to simplify customer interactions in the Pay As You Earn and Personal Tax Summary systems. Any changes could impact tax revenue collections or have material administrative costs to implement.

State Sector Employment Agreements (Unchanged, Unquantified)

A number of large collective agreements are due to be renegotiated 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 for restraint given the current economic environment and conditions in the private sector.

Pending capital decisions

Communications - Broadband Investment Initiative (Changed, Quantified)

The Government has committed to spend $1.548 billion on a new broadband network delivering ultra-fast broadband services. Of this amount, $290 million has been appropriated through Budget 2009 and $248 million through Budget 2010. Capital expenses of $300 million in 2012/13 and $200 million in each of 2013/14 and 2014/15 are included in the forecasts as potential charges against the capital allowance. However, the timing and final amount of capital contributions to Crown Fibre Holdings Limited may differ significantly from those forecast.

Corrections - Prison Capacity (Changed, Quantified)

In the next 10 years the prisoner population is forecast to increase. Based on current estimates, 600 additional prisoner places (beyond current commitments) will be needed by 2020. Some Corrections assets may also come to the end of their useful life and need to be decommissioned. This translates to $600 million additional capital expenditure in the next 10 years, with an operating expenditure impact of $90 million per annum by 2024.

Education - Broadband Investment: Schools (Changed, Quantified)

The Government has signalled an investment in Vote Communications to support the introduction of ultra-fast broadband into schools. The estimated cost of completing the upgrade of hardware in schools (School Network Upgrade Programme) has increased to $205 million and there is currently no funding set aside to manage the additional expense.

Education - School Property (Changed, Quantified)

The Ministry of Education faces financial risks in relation to school property: $165 million may be required in 2011 for new schools to meet roll growth and population movements.

Finance - Crown Overseas Properties (Unchanged, Quantified)

The Government holds New Zealand House in London on a long-term lease from the Crown Estate (UK). Depending on the Government's future intentions for this building, an upgrade may be required. Preliminary cost estimates for this upgrade total $150 million over the period 2012/13 to 2014/15.

Housing - Weathertight Homes (Changed, Unquantified)

The Government has agreed to offer a package to assist homeowners to repair homes affected by the weathertightness issues that occurred in the late 1990s and early 2000s. The package includes a 25% government contribution towards agreed repair costs, a 25% contribution from participating territorial authorities and credit support for the remaining repair costs for those who meet the eligibility and lending criteria. There is a risk that the costs of the package will exceed the $1.055 billion provided for in the forecasts, as uncertainty remains regarding the extent of damage to eligible homes and the level of uptake.

Justice - Auckland Region Property Strategy (Changed, Quantified)

The forecast level of demand for court services indicates there may be a need for additional courthouse capacity in the greater Auckland region. If additional funding is provided, the overall estimated cost will be up to $150 million with $20 million in 2011/12, $25 million in 2012/13 and $105 million in 2013/14.

Police - Digital Radio Network Full Implementation (Changed, Quantified)

The Government has previously funded the implementation of a Digital Radio Network in the Wellington, Auckland and Canterbury areas for New Zealand Police, to be completed by December 2010. Police are developing the business case for completion of a whole of government National Digital Radio Network with an Indicative Business Case planned for completion by 30 April 2011. Current estimates suggest capital costs of around $170 million over the period 2011/12 to 2017/18; and around $5 million of operating expenditure in 2012/13, rising to around $30 million per annum when fully implemented.

Transport - Support for New Zealand Railways Corporation (KiwiRail) (Changed, Quantified)

The Government has agreed in principle to support a 10-year strategy for the New Zealand Railways Corporation (NZRC, trading as KiwiRail Group) to achieve a commercially viable rail network. A total of $750 million in capital over three years is the expected Crown contribution towards the strategy, but its disbursement is dependent on the approval of suitable business cases and demonstrable progress towards objectives. Budget 2010 provided $250 million in capital as the first tranche of Crown funding for this strategy. NZRC will submit a case for the second tranche of the $750 million for Budget 2011.

The overall commitment KiwiRail seeks towards the 10-year plan is $1.2 billion over the forecast period 2010/11 to 2014/15.

KiwiRail has $408 million in debt to the Crown maturing in the forecast period, all of which may need to be refinanced or restructured. Of this, $250 million is maturing in 2011/12.

Matters dependent on external factors

Canterbury Earthquake - Land (New, Unquantified)

The total extent of damage in the region is still being determined. The Government is considering a range of options that might be made to assist the Canterbury region in its rebuilding. Options may include further remediation of private and Crown-owned land.

Canterbury Earthquake - Local Authorities (New, Unquantified)

Current government policy is to reimburse 60% of the combined eligible costs of restoring critical local government infrastructure (eg, water and sewerage), in the case of damage caused in an emergency event. The amount of the Government's contribution to restoring local government infrastructure in the Canterbury region has not yet been determined.

Climate Change - ETS and International Climate Change Obligations (Unchanged, Unquantified)

There is uncertainty in the level of fiscal impact associated with the Kyoto obligation over the 2008-2012 first commitment period. The net impact of variables including carbon prices, levels of net-emissions, the uptake of post-1989 foresters and allocation levels to emitters is highly uncertain and could change the Government's costs significantly. The Government may need to purchase emission units to meet its obligations under the Climate Change Response Act 2002 and the Kyoto protocol, with a corresponding impact on net debt. A review of the Emissions Trading Scheme (ETS) is also scheduled for 2011. Any change to ETS settings could have significant fiscal implications. After the first commitment period, no rights or obligations are forecast in the Government's accounts for any post-2012 international climate change agreement. International negotiations are currently underway but the potential nature, timing and size of any New Zealand commitment is highly uncertain. The fiscal impact of any commitment will need to be recognised at the time an agreement is made.

Climate Change - Finance for Developing Countries (Changed, Unquantified)

Following the Copenhagen climate change negotiations in 2009, New Zealand associated with the Copenhagen Accord. In the accord, developed countries committed to jointly mobilising US$100 billion per year by 2020 to address the needs of developing countries, in the context of meaningful mitigation actions and transparency on implementation. This would come from a wide variety of sources, public and private, bilateral and multilateral, including alternative sources of finance. New Zealand's contribution as a portion of this finance is currently uncertain.

Defence Force - Future Operationally Deployed Forces Activity (Unchanged, Quantified)

There are currently over 400 New Zealand Defence Force personnel deployed overseas on peace-keeping and United Nations missions. Maintaining existing deployment levels would result in an increased annual operating balance impact of some $30 million from 2011/12 subject to any decisions to change existing deployments. The forthcoming White Paper on Defence, expected to be complete by 30 November 2010, will consider future funding requirements for a range of operational commitments in the context of Government's wider policy priorities and fiscal position.

Defence Force - Sale of Skyhawks and Aermacchi Trainers (Changed, Unquantified)

The sale of the former Air Combat Force aircraft now depends on the successful conclusion of commercial negotiations. Should the sale proceed, the net sale proceeds are uncertain.

Energy - Crown Revenue from Petroleum Royalties (New, Unquantified)

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

Finance - Original Crown Retail Deposit Guarantee Scheme (Changed, Unquantified)

The Government operates an opt-in Retail Deposit Guarantee Scheme over financial institution deposits. The objective of the scheme is to ensure ongoing retail depositor confidence in New Zealand's financial system, given the international financial market turbulence. As at 31 October, eight entities guaranteed under the original Retail Deposit Guarantee Scheme had been placed into receivership. The Crown recognises its obligations under the scheme as liabilities and its rights of recovery from the receivers as assets. While the reported assets represent a best estimate of likely recoveries from the receiverships the eventual loss to the Crown is dependent upon the value that can be realised from these entities' assets. Except as provided on the Treasury website, further information on the Retail Deposit Guarantee Scheme cannot be provided due to commercial sensitivity.

Finance - Extended Crown Retail Deposit Guarantee Scheme (New, Unquantified)

The extended scheme came into place on 12 October 2010 immediately upon expiry of the original scheme. A total of seven financial institutions have been approved under the extended Retail Deposit Guarantee Scheme. These entities are listed on the Treasury website and have deposits totalling $2.3 billion under guarantee. This is the maximum exposure and does not include any offset resulting from the recovery of the remaining assets of financial institutions in the event the guarantee is called upon. The Crown continually updates the likelihood of further default actions triggering the guarantee and assesses the expected loss given default. As at 31 October the Crown assessed the risk of default by the seven entities participating in the extended scheme to be unlikely and therefore no provision was considered necessary in relation to the amount guaranteed by the Crown under the extended guarantee. Although one of the entities in the extended scheme has subsequently gone into default, the Crown assesses the risk of default of the remaining six entities participating in the extended scheme to be unlikely. While the provision represents a best estimate of the likely loss, a range of outcomes is possible under the scheme in terms of which entities may default and the eventual loss to the Crown following an event of default. This reflects the significant uncertainty as to the value that can be realised from an entity's assets following an event of default.

Finance - Government Commitments to International Financial Institutions (Unchanged,Unquantified)

The forecast level of government commitments to international financial institutions is subject to change, depending on the Government's response to any changed financial plans on the part of these institutions.

Health - Caregiver Employment Conditions (Changed, Quantified)

The Employment Court has made a judgment in favour of two third party employed caregivers regarding their sleepover employment conditions. Although the third party employer is appealing the decision, an unsuccessful result would require consideration of the repercussions for the Crown. This decision would also have an impact on other service providers in health and other sectors.

Health - Payment of Family Caregivers (Unchanged, Quantified)

The Human Rights Tribunal has declared that the Ministry of Health's policy of not employing family members to provide care to disabled relatives is in breach of s19 of the New Zealand Bill of Rights. An appeal has been lodged in the High Court.

Revenue - Cash Held in Tax Pools (Unchanged, Unquantified)

Funds held in tax pools are recognised as an asset to the Crown. There is a risk that funds held in these pools, over and above a customer's provisional tax liability, may be withdrawn, resulting in an unquantified cash loss to the Crown.

Reviews of the Delivery of Public Services (Unchanged, Unquantified)

The Government has announced its intention to deliver better public services for less. Recommendations arising from reviews may identify areas of expenditure that are not efficient, effective or aligned to government policy, or could be delivered differently. Reviews may recommend, or result in, changes to service delivery and/or free up resources for reprioritisation within the Vote (or within the organisation) or be returned to the centre to meet pressures in other areas. Reviews of government activities that result in improved cost-effectivenessare likely to have a positive impact on the fiscal position.

State Services - KiwiSaver Contribution (Unchanged, Unquantified)

The forecasts in relation to KiwiSaver policies are dependent on a number of assumptions and projections, such as uptake and contribution rates, all of which may change through time. In the current economic environment, factors such as reduced automatic enrolment, financial market disruption and low consumer confidence increase forecast uncertainty.

Treaty Negotiations - Treaty of Waitangi Claims - Settlement Relativity Payments (New,Unquantified)

The Deeds of Settlement negotiated with Waikato-Tainui and Ngāi Tahu include a relativity mechanism. The mechanism provides that, where the total redress amount for all historical Treaty settlements exceeds $1 billion in 1994 present-value terms, 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 the amount of the expense for the relativity payments may differ from that included in the fiscal forecasts.

Risks removed since the 2010 Budget Economic and Fiscal Update

The following risks have been removed since the 2010 Budget Economic and Fiscal Update:

 
Expired risks Reason
Broadcasting - Digital Switchover Decision taken
Defence Force - Defence Review White Paper has been released
Economic Development - Venture Investment Fund Underwrite Decision taken
Education - Medical Training Places No longer material
Education - Youth Guarantee No longer material
Finance - New Zealand Post equity injection to fund expansion Decision taken
Health - Additional Wellchild Visits No longer material
Health - District Health Board Deficits No longer material
Health - H1N1 Pandemic No longer likely
Housing - State Housing Tenancy Management Superseded by Housing Shareholders' Advisory Group risk
Immigration - Immigration New Zealand Change Programme No longer material
Immigration - Re-development of Mangere Refugee Centre No longer material
Ministerial Services - Rugby World Cup Visits Programme Decision taken
Revenue - Review Tax Treatment of Fitout of Commercial and Industrial Buildings Funded from Baselines
Revenue - Reviews stemming from Budget 2010 Tax Changes Funded from Baselines
Revenue - Tax Issues Relating to Auckland Governance Reform Funded from Baselines
Transport - Changes to Penalties for Driving Offences Decision taken
Transport - Tauranga Eastern Corridor Decision taken

Contingent liabilities and assets

Contingent liabilities are costs that the Crown will have to face if a particular event occurs. Typically, contingent liabilities consist of guarantees and indemnities, legal disputes and claims and uncalled capital. The contingent liabilities facing the Crown are a mixture of operating and balance sheet risks, and they can vary greatly in magnitude and likelihood of realisation.

In general, if a contingent liability were realised it would reduce the operating balance and increase net debt. However, in the case of contingencies for uncalled capital, the negative impact would be restricted to net debt.

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

Only contingent liabilities involving amounts of over $100 million are separately disclosed. Contingent liabilities below $100 million are included in the “other quantifiable contingent liabilities” total.

Contingent liabilities have been stated as at 31 October 2010, being the latest set of contingent liabilities reported.

Quantifiable contingent liabilities

Quantifiable contingent liabilities
Guarantees and indemnities Status [13] ($million)
Other guarantees and indemnities Changed 103

Uncalled capital

   
Asian Development Bank Changed 1,035
International Bank for Reconstruction and Development Changed 1,071

Other uncalled capital

Changed

45

Legal proceedings and disputes

   
Tax in dispute Changed 301
Other legal proceedings and disputes Changed 112

Other quantifiable contingent liabilities

   
International finance organisations Changed 1,501
Kyoto Protocol Units Changed 1,665
New Zealand Export Credit Office Changed 105
Other quantifiable contingent liabilities Changed 305
Total quantifiable contingent liabilities   6,243

Unquantifiable contingent liabilities

Unquantifiable contingent liabilities
Guarantees and indemnities Status
Airways New Zealand Unchanged
AsureQuality Limited Unchanged
At Work Insurance Limited Unchanged
Bona Vacantia property Unchanged
Contact Energy Limited Unchanged
Earthquake Commission (EQC) Unchanged
Electricity Corporation of New Zealand Limited (ECNZ) Unchanged
Genesis Power Limited - financial guarantees Unchanged
Genesis Power Limited - letters of credit and performance bonds Unchanged
Housing New Zealand Corporation (HNZC) Unchanged
Indemnities against acts of war and terrorism Unchanged

Indemnification of the Stadel Museum's touring exhibition

New

Justices of the Peace, Community Magistrates and
Disputes Tribunal Referees
Unchanged
Landcorp Farming Limited Unchanged
Maui Partners Unchanged
Meridian Energy - letters of credit and performance bonds Changed

National Provident Fund (NPF)

Unchanged

New Zealand Railways Corporation Unchanged
Persons exercising investigating powers Unchanged
Public Trust Unchanged
Reserve Bank of New Zealand Unchanged
Synfuels-Waitara Outfall Indemnity Unchanged
Tainui Corporation Unchanged

Other unquantifiable contingent liabilities

 
Abuse claims Unchanged
Accident Compensation Corporation (ACC) litigations Changed
Air New Zealand litigation Changed

Canterbury earthquake

New

Maui contracts Unchanged

Kordia Group Limited

Unchanged

Rugby New Zealand World Cup 2011 Limited Unchanged

Television New Zealand

Unchanged

Treaty of Waitangi claims Unchanged
Westpac New Zealand Limited Unchanged

The following contingent liabilities are no longer disclosed separately owing to the materiality criterion to disclose items separately being raised from $10 million to $100 million.

Guarantees and indemnities:

  • Air New Zealand
  • Cook Islands - Asian Development Bank loans
  • Indemnification of receivers and managers - Terralink Limited
  • Ministry of Transport - funding guarantee

Uncalled capital:

  • Bank for International Settlements
  • European Bank for Reconstruction and Development

Legal proceedings and disputes:

  • Accident Compensation Corporation
  • Health - legal claims
  • Kapiti West Link Road

Other quantifiable contingent liabilities:

  • Air New Zealand partnership
  • Crown Health Financing Agency
  • Inland Revenue - unclaimed monies
  • Reserve Bank - demonetised currency
  • State highway extension

Notes

  • [13]Relative to reporting in the Financial Statements of the Government of New Zealand for the year ended 30 June 2010.

Statement of contingent liabilities

Quantified contingent liabilities

Guarantees and indemnities

Guarantees and indemnities are disclosed in accordance with NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets. In addition, guarantees given under Section 65ZD of the PFA are disclosed in accordance with Section 26Q(3)(b)(i)(B) of the same Act.

Legal proceedings and disputes

The amounts under quantifiable contingent liabilities for legal proceedings and disputes are shown exclusive of any interest and costs that may be claimed if these cases were decided against the Crown.

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

Tax in dispute 

Tax in dispute represents the outstanding debt of those tax assessments raised, against which an objection has been lodged and legal action is proceeding. 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.

$301 million at 31 October 2010 ($295 million at 30 June 2010)

Other quantifiable contingent liabilities

International finance organisations 

The Crown has lodged promissory notes with the IMF. Payment of the notes depends upon the operation of the rules of the organisation.

$1,501 million at 31 October 2010 ($1,529 million at 30 June 2010)

Kyoto protocol

The Ministry of Agriculture and Forestry has a liability on behalf of the Crown relating to the 84 million forestry credits. During the first commitment period, the Ministry estimates that 89.1 million tonnes of credits will be generated by carbon removals via forests (2010: 89.1 million tonnes). Of this amount, 5.1 million tonnes has been allocated to foresters through the ETS as at 31 October 2010. To the extent that these forests are harvested (in subsequent commitment periods) and a future international agreement is negotiated, there will be an associated liability generated that will need to be repaid. As the forestry credits have been incorporated when calculating the current position for the first commitment period, the associated obligation of the Crown in respect of future commitment periods has been reported as a separate contingent liability. Using the carbon price as at 31 October 2010 of $NZ19.83, this contingent liability can be measured at $NZ1,665 million ($1,590 million at 30 June 2010)

New Zealand Export Credit Office (NZECO) - export guarantees

NZECO provides a range of guarantee products to assist New Zealand exporters. These NZECO guarantees are recorded by the Crown as contingent liabilities.

$105 million at 31 October 2010 ($133 million at 30 June 2010)

Unquantifiable contingent liabilities

Accounting standard NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires that contingent liabilities be disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Disclosure of remote contingent liabilities is only required if knowledge of the transaction or event is necessary to achieve the objectives of general purpose financial reporting. This section provides details of those contingent liabilities of the Crown that cannot be quantified (remote contingent liabilities are excluded).

Guarantees and indemnities

Airways Corporation of New Zealand

The Crown has indemnified Airways Corporation of New Zealand Limited as contained in Airways' contract with New Zealand Defence Force for the provision of air traffic control services. The indemnity relates to any claim brought against Airways by third parties arising from military flight operations undertaken by the Royal New Zealand Air Force.

AsureQuality Limited

The Crown has indemnified the directors of AsureQuality Limited in the event that they incur any personal liability for redundancies arising from any agreement by international trading partners that allows post-mortem meat inspection by parties other than the Ministry of Agriculture and Forestry, or its sub-contractor.

At Work Insurance Limited

The Crown has indemnified the liquidators of At Work Insurance Limited (Deloitte Touche Tohmatsu) against various employment-related claims.

Bona Vacantia property

P&O NZ Limited sought a declaratory judgement that property disclaimed by a liquidator is bona vacantia. A settlement has been reached, which includes a Crown indemnity in favour of New Zealand Aluminium Smelters and Comalco in relation to aluminium dross disposed of in their landfill, for costs that may be incurred in removing the dross and disposing of it at another site if they are required to do so by an appropriate authority. The Minister of Finance signed the indemnity on 24 November 2003. In February 2004, a similar indemnity was signed in respect of aluminium dross currently stored at another site in Invercargill.

Contact Energy Limited (Contact)

The Crown and Contact signed a number of documents to settle in full Contact's outstanding land rights and geothermal asset rights at Wairakei. Those 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) 

The Crown is liable to meet any deficiency in EQC's assets in meeting the Commission's financial liabilities (section 16 of the Earthquake Commission Act 1993). In the event of a major natural disaster the Crown may be called upon to meet any financial shortfall incurred by the Commission.

On 4 September 2010 the Canterbury region experienced a serious earthquake - refer to pages 22 and 23 for further discussion.

Electricity Corporation of New Zealand Limited (ECNZ) 

The ECNZ Sale and Purchase Agreement provides for compensation to ECNZ for any tax, levy or royalty imposed on ECNZ for the use of water or geothermal energy for plants in existence or under construction at the date of the Sale and Purchase Agreement. The Agreement also provides for compensation for any net costs to ECNZ arising from resumption of assets pursuant to the Treaty of Waitangi (State Enterprises) Act 1988.

The Deed of Assumption and Release between ECNZ, Contact Energy Limited and the Crown provides that the Crown is no longer liable to ECNZ in respect of those assets transferred to it from ECNZ. As a result of the split of ECNZ in 1999, Ministers have transferred the benefits of the Deed to ECNZ's successors - Meridian Energy Limited, Mighty River Power Limited and Genesis Power Limited.

Under the Transpower New Zealand Limited (Transpower) Sale and Purchase and Debt Assumption Agreements, the Crown has indemnified ECNZ for any losses resulting from changes in tax rules applicable to transactions listed in the Agreements. Additionally, the Crown has indemnified the directors and officers of ECNZ for any liability they may incur in their personal capacities as a result of the Transpower separation process.

Following the split of ECNZ in 1999 into three new companies, the Crown has indemnified ECNZ in relation to all ECNZ's pre-split liabilities, including:

  • existing debt and swap obligations
  • hedge contracts and obligations, and
  • any liabilities that arise out of the split itself.
Genesis Energy (Genesis) - financial guarantees

Genesis has issued financial guarantees to the alliance contractor and other agents of the Kupe joint venture for the full and faithful performance of its subsidiaries in their capacities as joint venture partners, to the extent of their several liabilities under the development agreement.

Genesis issued a financial guarantee to Energy Clearing House Limited for the full and faithful performance of its subsidiary Energy Online Limited, to the extent of its liabilities for its retail electricity purchases.

These guarantees may give rise to liabilities in the company if the subsidiaries do not meet their obligations under the terms of the respective arrangements.

Genesis Energy (Genesis) - letters of credit and performance bonds

Genesis, as a participant in the electricity market, issued letters of credit to the Energy Clearing House Limited under the markets' security requirements. These letters of credit are issued as part of normal trading conditions and are to ensure there is no significant credit risk exposure to any one market participant.

Genesis has also issued letters of credit and performance bonds to certain suppliers and services providers under normal trading conditions. The liabilities covered by these arrangements are already provided for in the Statement of Financial Position, and therefore not expected to create any adverse effects on the financial results presented. These are not material to the financial statements.

Housing New Zealand Corporation (HNZC) 

HNZC is liable to the owners (ANZ National Bank Limited, Ichthus Limited and Westpac Banking Corporation) of mortgages sold by HNZC during 1992 to 1999 for credit losses they may incur from specified limited aspects of their ownership of those mortgages with the Crown standing behind this obligation.

The Crown has provided a warranty in respect of title to the assets transferred to Housing New Zealand Limited (HNZL) (HNZL was incorporated into the HNZC group as a subsidiary in 2001 as part of a legislated consolidation of government housing functions) and has indemnified HNZL against any breach of this warranty. In addition, the Crown has indemnified HNZL against any third-party claims that are a result of acts or omissions prior to 1 November 1992. It has 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.

Indemnities against acts of war and terrorism

The Crown has indemnified Air New Zealand against 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.

Indemnification of the Stadel Museum's touring exhibition

The Crown has a contingent liability for damages and losses under the scheme for indemnifying the Stadel Museum's touring exhibition. The amount is not disclosed in order to keep the value of the exhibition confidential to the Crown and the lending museum. This protects Te Papa's ability to hold similar exhibitions in the future.

Justices of the Peace, Community Magistrates and Disputes Tribunal Referees

Section 197 of the Summary Proceedings Act 1957, requires the Crown to indemnify Justices of the Peace and Community Magistrates against 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. Section 58 of the Disputes Tribunal Act 1988 confers a similar indemnity on Disputes Tribunal Referees.

Landcorp Farming Limited (Landcorp) 

The Protected Land Agreement provides that the Crown will pay Landcorp any accumulated capital costs and accumulated losses or Landcorp will pay the Crown any accumulated profit, attributed to a Protected Land property that is required to be transferred to the Crown or that the Crown releases for sale. The Crown will also be liable to pay Landcorp, at the time of sale or transfer of any property deemed to be Protected Land, the amount of any outstanding equity payments on the initial value of the property.

Maui Partners 

The Crown has entered into confidentiality agreements with the Maui Partners in relation to the provision of gas reserves information. The deed contains an indemnity against any losses arising from a breach of the deed.

Meridian Energy (Meridian) - letters of credit and performance bonds

In addition to its borrowings, Meridian has entered into a number of letters of credit and performance guarantee arrangements that provide credit support of $69.1 million to support the collateral requirements of Meridian's trading business. Of the $69.1 million, $2.4 million expires in the 2011 financial year, $20 million expires in the 2012 financial year and $0.125 million expires in the 2016 financial year with the balance having no expiry date.

National Provident Fund (NPF)

NPF has been indemnified for certain potential tax liabilities. Under the NPF Restructuring Act 1990, the Crown guarantees:

  • the benefits payable by all NPF schemes (section 60)
  • investments and interest thereon deposited with the NPF Board prior to 1 April 1991 (section 61), and
  • payment to certain NPF defined contribution schemes where application of the 4% minimum earnings rate causes any deficiency or increased deficiencies in reserves to arise (section 72).

A provision has been made in these financial statements in respect of the actuarially assessed deficit in the DBP Annuitants' Scheme (refer to note 20).

New Zealand Railways Corporation 

The Crown has indemnified the directors of New Zealand Railways Corporation against any liability arising from the surrender of the licence and lease of the Auckland rail corridor.

The Crown has further indemnified 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 on 1 September 2004.

Section 10 of the Finance Act 1990 guarantees all loan and swap obligations of the New Zealand Railways Corporation.

Persons exercising investigating powers 

The Crown, under section 63 of the Corporations (Investigation and Management) Act 1989, indemnifies the Securities Commission, the Registrar and Deputy Registrar of Companies, members of an advisory committee, every statutory manager of a corporation and persons appointed pursuant to sections 17 and 19 of the Act in respect of any liability arising as a result of exercising the investigating powers conferred under the Act. The indemnity does not apply where the investigating powers have been exercised in bad faith.

Public Trust

Section 52 of the Public Trust Act 2001 provides for the Crown to meet any deficiency in the Public Trust's Common Fund in meeting lawful claims on the Fund. This is a permanent (legislated) liability. On 7 November 2008 the Minister of Finance guaranteed interest payable on estates whose money constitutes the Common Fund.

Reserve Bank of New Zealand

Section 21(2) of the Reserve Bank of New Zealand Act 1989 requires the Crown to pay the Reserve Bank the amount of any exchange losses incurred by the Bank as a result of dealing in foreign exchange under sections 17 and 18 of the Act. This is a permanent (legislated) liability.

Synfuels-Waitara Outfall Indemnity

As part of the 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.

Tainui Corporation

Several leases of Tainui land at Huntly and Meremere have been transferred from ECNZ to Genesis Power. The Crown has provided guarantees to Tainui Corporation relating to Genesis Power's obligations under the lease agreements.

Other unquantifiable contingent liabilities

Abuse claims

There is ongoing legal action against the Crown in relation to historical abuse claims. At this stage the number of claimants and outcomes of these cases are uncertain.

Accident Compensation Corporation (ACC) litigations

There are several legal actions against ACC in existence, arising in the main from challenges to operational decisions made by ACC. ACC will be vigorously defending these claims.

Air New Zealand litigation

Air New Zealand has been named in five class actions. One, in Australia, claims travel agents' commission on fuel surcharges and two (one in Australia and the other in the United States) make allegations against more than 30 airlines, of anti competitive conduct in relation to pricing in the air cargo business. The other two class actions (in the United States and in Canada) allege that Air New Zealand together with many other airlines conspired in respect of fares and surcharges on trans-Pacific routes. All class actions are being defended.

The allegations made in relation to the air cargo business are also the subject of investigations or proceedings by regulators in New Zealand, Australia and the United States. A formal Statement of Objections was issued by the European Commission in 2007 to 25 airlines including Air New Zealand. Air New Zealand responded to this Statement of Objections and on 9 November 2010 the European Commission advised that it had closed its file in relation to Air New Zealand, being satisfied that there was insufficient evidence of any breach of the law. On 15 December 2008 the New Zealand Commerce Commission filed proceedings against 13 airlines including Air New Zealand alleging breaches of the Commerce Act 1986. On 17 May 2010 the Australian Competition and Consumer Commission filed proceedings alleging breaches of the (Australian) Trade Practices Act 1974.

Air New Zealand is defending these proceedings. In the event that a court determined, or it was agreed with a regulator, that Air New Zealand had breached relevant laws, Air New Zealand would have potential liability for pecuniary penalties and to third-party damages under the laws of the relevant jurisdictions.

Canterbury earthquake

Apart from the costs arising from the earthquake that have been quantified and included in these forecasts, there are also some unquantifiable components and associated risks that cannot yet be quantified. Refer to the commentary provided on pages 22 and 23 for more details on the expected fiscal impacts of the earthquake and how these have been reflected in these forecasts.

Caregiver employment conditions

In October 2010, the Court of Appeal heard an appeal against an Employment Court decision relating to minimum wage requirements for employees of disability support services providers currently paid sleepover allowances. If the employer's appeal is unsuccessful, consideration will need to be given to the repercussions for the Crown.

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 NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets any contaminated sites for which the Crown has accepted liability and for which costs can be reliably measured have been included in the Schedule of Non-Departmental Liabilities.

Kordia Group Limited

As part of its contractual obligations with clients, Kordia Limited has an undertaking to provide services at a certain level and should this not be achieved, Kordia Limited may be liable for contract penalties. It is not possible to quantify what these may be until an event has occurred. The company does not expect any liabilities to occur as a result of these contractual obligations.

The company makes advances to its subsidiary companies. The company's loan facility comprises a syndicated revolving cash advance facility between three banks, committed to a maximum amount of $120 million ($136 million at 30 June 2010). The facility is supported by a negative pledge by the company and its guaranteeing subsidiaries over their assets and undertakings. Under the negative pledge, each guaranteeing subsidiary may be liable for indebtedness incurred by the company and other guaranteeing subsidiaries. The company considers the negative pledge to be an insurance contract. Such contracts and cross guarantees are treated as a contingent liability and only recognised as a liability if a payment is probable.

Maui Contracts

Contracts in respect of which the Crown purchases gas from Maui Mining companies and sells gas downstream to Contract Energy Limited, Vector Gas Limited and Methanex Waitara Valley Limited 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.

Rugby World Cup 2011 Limited

The Crown has agreed in joint venture arrangements with the New Zealand Rugby Union (NZRU) to an uncapped underwrite of the costs of hosting the 2011 Rugby World Cup, on a loss-sharing basis (Crown 67%, NZRU 33%). A provision for the forecast losses has been made in the Government's financial statements.

The Crown has agreed to reimburse New Zealand income tax that might be incurred by the joint venture entity (Rugby New Zealand 2011 Limited) or the NZRU in relation to the joint venture entity, and has also agreed to reimburse the NZRU for New Zealand withholding tax that might be incurred on certain payments made in relation to the tournament.

Television New Zealand

The company is subject to a number of legal claims. Given the stage of proceedings and uncertainty as to outcomes of the cases, no estimate of the financial effect can be made and no provision for any potential liability has been made in the financial statements.

Treaty of Waitangi claims

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

On occasion Māori claimants pursue the resolution of particular claims against the Crown through higher courts. There are currently two such actions against the Crown - one awaiting a decision on an application at the Supreme Court and one to be heard at the High Court. Failure to successfully defend such actions may result in liability for historical Treaty grievances in excess of that currently anticipated.

Westpac New Zealand Limited (Westpac)

Under 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 Inland Revenue processing arrangements.

Under the Supplier Payments Service - New Zealand Government Master Agreement dated 23 June 2010, the Crown indemnified Westpac 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).

Contingent assets

Legal proceedings and tax disputes

Legal proceedings and tax disputes are contingent assets in relation to Inland Revenue pending assessments or Inland Revenue initiated assessments. They are net of any losses brought forward. Contingent assets arise where Inland Revenue has advised or is about to advise a taxpayer of a proposed adjustment to their tax assessment. There has been no amended assessment issued at this point or revenue recognised so these are recorded legal proceedings and disputes – non-assessed. The taxpayer has the right to dispute this adjustment and a disputes resolution process is entered into. Inland Revenue quantifies a contingent asset based on the likely outcome of the disputes process based on experience and similar prior cases.

$568 million at 31 October 2010 ($504 million at 30 June 2010)

Foreshore and seabed

The Foreshore and Seabed Act 2004 (FSA):

  • vests the full legal and beneficial ownership of the public foreshore and seabed in the Crown
  • provides for the recognition and protection of ongoing customary rights with respect to the public foreshore and seabed
  • enables applications to the High Court to investigate if previously held common law rights have been adversely impacted, and if so, providing for those affected either to participate in the administration of a foreshore and seabed reserve or else enter into formal discussions on redress, and
  • provides for general rights of public access and recreation in, on, over and across the public foreshore and seabed and general rights of navigation within the foreshore and seabed.

The public foreshore and seabed means the marine area that is bounded on the landward side by the line of mean high water spring; and on the seaward side by the outer limits of the territorial sea, but does not include land subject to a specified freehold interest (refer section 5 of the FSA).

The FSA codifies the nature of the Crown's ownership interest in the public foreshore and seabed on behalf of the public of New Zealand. Although full legal and beneficial ownership of the public foreshore and seabed has been vested in the Crown, there are significant limitations to the Crown's rights under the FSA. As well as recognising and protecting customary rights, the FSA significantly restricts the Crown's ability to alienate or dispose of any part of the public foreshore and seabed and significantly restricts the Crown's ability to exclude others from entering or engaging in recreational activities or navigating in, on or within the public foreshore and seabed. Because of the complex nature of the Crown's ownership interest in the public foreshore and seabed and because it is not possible to obtain a reliable valuation of the Crown's interest, the public foreshore and seabed has not been recognised as an asset in the forecast financial statements. The Government intends to repeal the FSA by the end of 2010.

Forecast Financial Statements

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

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

The forecasts have been prepared in accordance with the Statement of Responsibility and reflect the judgements and information known at the time they were prepared. They reflect all Government decisions and circumstances communicated to 22 November 2010.

The finalisation dates and key assumptions that underpin the preparation of the Forecast Financial Statements are outlined on pages 43 to 49.

Statement of Accounting Policies

Significant accounting policies

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

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

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

The specific accounting policies are reproduced in full on Treasury's website at http://www.treasury.govt.nz/publications/guidance/reporting/accounting.

Changes in accounting policies

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

Forecast policies

These Forecast Financial Statements have been prepared on the basis of Treasury's best professional judgment.

Actual financial results for the periods covered are likely to vary from the information presented. 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 chapter on Fiscal Risks on pages 51 to 80.

Key forecast assumptions used are set out on pages 43 to 49.

Government Reporting Entity as at 22 November 2010

These forecast financial statements are for the Government reporting entity as specified in Part III of the Public Finance Act 1989. This comprises Ministers of the Crown and the following entities:

Departments

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

* The Ministry of Science and Innovation was listed as a Department in legislation on 1 November 2010 in the State Sector Act and will replace the Ministry of Research, Science and Technology and the Foundation for Research, Science and Technology (a Crown entity) in the 2011 financial year.

State-owned enterprises

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

*  Includes KiwiRail Holdings

Others

  • New Zealand Superannuation Fund
  • Reserve Bank of New Zealand

Offices of Parliament

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

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

  • Agriculture and Marketing Research and Development Trust
  • Asia New Zealand Foundation
  • Crown Fibre Holdings Limited
  • Fish and game councils (12)
  • Health Benefits Limited
  • Leadership Development Centre Trust
  • Learning State Limited
  • 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
  • Research and Education Advanced Network New Zealand Limited
  • Reserves boards (23)
  • Road Safety Trust
  • Sentencing Council
  • The Māori Trustee

Crown entities

  • Accident Compensation Corporation
  • Accounting Standards Review Board
  • Alcohol Advisory Council of New Zealand
  • Arts Council of New Zealand Toi Aotearoa
  • Broadcasting Commission
  • Broadcasting Standards Authority
  • Career Services
  • Charities Commission
  • Children's Commissioner
  • Civil Aviation Authority of New Zealand
  • Commerce Commission
  • Crown Health Financing Agency
  • Crown research institutes (8)
  • District health boards (20)
  • Drug Free Sport New Zealand
  • Earthquake Commission
  • Electricity Authority
  • Electoral Commission
  • Energy Efficiency and Conservation Authority
  • Environmental Risk Management Authority
  • Families Commission
  • Foundation for Research, Science and Technology
  • Government Superannuation Fund Authority
  • Guardians of New Zealand Superannuation
  • Health and Disability Commissioner
  • Health Quality and Safety Commission*
  • Health Research Council of New Zealand
  • Health Sponsorship Council
  • Housing New Zealand Corporation
  • Human Rights Commission
  • Independent Police Conduct Authority
  • Law Commission
  • Legal Services Agency
  • Maritime New Zealand
  • Mental Health Commission
  • Museum of New Zealand Te Papa Tongarewa Board
  • New Zealand Antarctic Institute
  • New Zealand Artificial Limb Board
  • New Zealand Blood Service
  • New Zealand Film Commission
  • New Zealand Fire Service Commission
  • New Zealand Historic Places Trust (Pouhere Taonga)
  • New Zealand Lotteries Commission
  • New Zealand Qualifications Authority
  • New Zealand Symphony Orchestra
  • New Zealand Teachers Council
  • New Zealand Tourism Board
  • New Zealand Trade and Enterprise
  • New Zealand Transport Agency
  • New Zealand Venture Investment Fund Limited
  • New Zealand Walking Access Commission
  • Office of Film and Literature Classification
  • Pharmaceutical Management Agency
  • Privacy Commissioner
  • Public Trust
  • Radio New Zealand Limited
  • Real Estate Agents Authority
  • Retirement Commissioner
  • School boards of trustees (2,479)
  • Securities Commission
  • Social Workers Registration Board
  • Sport and Recreation New Zealand
  • Standards Council
  • Takeovers Panel
  • Te Reo Whakapuaki Irirangi (Te Māngai Pāho)
  • Te Taura Whiri i te Reo Māori (Māori Language Commission)
  • Television New Zealand Limited
  • Tertiary Education Commission
  • Tertiary education institutions (31)
  • Testing Laboratory Registration Council
  • Transport Accident Investigation Commission
  • Crown entity subsidiaries are consolidated by their parents and not listed separately in this table

*The Health Quality and Safety Commission was listed as a Crown Agent in legislation on 9 November 2010, and begins operation on 1 December 2010.

Forecast Statement of Financial Performance for the years ending 30 June

Forecast Statement of Financial Performance for the years ending 30 June
  Note 2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m

Revenue

               
Taxation revenue 1 50,347 53,457 52,072 56,685 60,349 64,211 67,807
Other sovereign revenue 1 4,682 5,759 5,700 6,012 6,444 6,925 7,627
Total revenue levied through the Crown's sovereign power   55,029 59,216 57,772 62,697 66,793 71,136 75,434
Sales of goods and services   14,331 15,399 15,591 16,148 17,198 17,872 18,396
Interest revenue and dividends 2 2,315 4,063 2,888 3,303 3,582 3,705 3,915
Other revenue   3,050 3,103 3,608 2,984 3,125 3,209 3,300
Total revenue earned through the Crown's operations   19,696 22,565 22,087 22,435 23,905 24,786 25,611
Total revenue (excluding gains)   74,725 81,781 79,859 85,132 90,698 95,922 101,045

Expenses

               
Transfer payments and subsidies 3 21,213 22,628 22,411 23,189 23,934 24,701 25,668
Personnel expenses 4 18,477 19,109 18,939 19,157 19,478 19,436 19,673
Depreciation and amortisation 5 4,229 4,428 4,344 4,605 4,757 4,838 4,942
Other operating expenses 5 31,338 35,927 37,133 34,772 35,497 35,283 35,575
Interest expenses 6 2,777 4,612 3,388 4,322 4,823 5,162 5,610
Insurance expenses 7 3,006 3,725 5,362 3,759 4,051 4,369 4,719
Forecast new operating spending 8 394 230 1,442 2,529 3,634 4,819
Top-down expense adjustment 8 (410) (850) (150)
Total expenses (excluding losses)   81,040 90,413 90,957 91,096 95,069 97,423 101,006
Operating balance before gains/(losses)   (6,315) (8,632) (11,098) (5,964) (4,371) (1,501) 39
Net gains/(losses) on financial instruments 9 2,522 1,250 2,227 1,365 1,609 1,906 2,176
Net gains/(losses) on non-financial instruments 10 (960) 181 (557) 165 175 180 183
Total gains/(losses)   1,562 1,431 1,670 1,530 1,784 2,086 2,359
Net surplus from associates and joint ventures   227 134 312 314 328 322 320
Operating balance (including minority interest)   (4,526) (7,067) (9,116) (4,120) (2,259) 907 2,718
Attributable to minority interest   17
Operating balance 11 (4,509) (7,067) (9,116) (4,120) (2,259) 907 2,718

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

Forecast Statement of Financial Performance - Functional Expense Analysis for the years ending 30 June

Forecast Statement of Financial Performance - Functional Expense Analysisfor the years ending 30 June
  2001
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m

Total Crown Expenses

             

By functional classification

             
Social security and welfare 24,206 26,127 25,708 26,840 28,004 29,274 30,570
GSF pension expenses 333 363 312 372 424 460 490
Health 12,673 13,379 13,308 13,186 13,151 13,127 13,115
Education 12,440 12,861 12,793 12,755 12,865 12,731 12,904
Core government services 2,830 3,922 3,919 3,954 3,929 3,974 4,007
Law and order 3,354 3,746 3,689 3,637 3,615 3,619 3,625
Defence 1,771 1,862 1,922 1,825 1,820 1,820 1,820
Transport and communications 7,991 8,184 8,464 8,374 8,609 8,870 9,105
Economic and industrial services 7,541 8,114 10,424 8,316 8,540 8,540 8,681
Primary services 1,373 1,742 1,690 1,682 1,674 1,661 1,668
Heritage, culture and recreation 2,584 3,344 3,525 2,827 3,435 2,881 2,891
Housing and community development 1,087 1,102 1,823 1,136 1,174 1,195 1,226
Other 80 1,071 612 578 477 475 475
Finance costs 2,777 4,612 3,388 4,322 4,823 5,162 5,610
Forecast new operating spending 394 230 1,442 2,529 3,634 4,819
Top-down expense adjustment (410) (850) (150)
Total Crown expenses excluding losses 81,040 90,413 90,957 91,096 95,069 97,423 101,006

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 State-owned enterprises.

 
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m

Core Crown Expenses

             

By functional classification

             
Social security and welfare 21,185 22,120 22,052 22,792 23,659 24,780 25,739
GSF pension expenses 328 357 304 362 414 450 480
Health 13,128 14,043 13,956 13,971 13,966 13,780 13,755
Education 11,724 11,992 12,048 12,019 12,061 11,875 12,018
Core government services 2,974 3,979 4,069 4,043 4,019 4,061 4,094
Law and order 3,191 3,537 3,481 3,429 3,404 3,401 3,400
Defence 1,814 1,912 1,972 1,872 1,867 1,867 1,867
Transport and communications 2,345 2,417 2,563 2,134 2,064 2,081 2,081
Economic and industrial services 2,839 2,828 2,989 2,652 2,520 2,484 2,512
Primary services 507 757 792 759 740 718 716
Heritage, culture and recreation 1,281 2,037 2,187 1,453 1,961 1,380 1,357
Housing and community development 306 370 1,073 365 373 377 394
Other 80 1,088 612 578 477 475 475
Finance costs 2,311 3,230 3,082 3,683 4,179 4,542 4,919
Forecast new operating spending 394 230 1,442 2,529 3,634 4,819
Top-down expense adjustment (410) (850) (150)
Total core Crown expenses excluding losses 64,013 70,651 70,560 71,404 74,233 75,905 78,626

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

Forecast Statement of Comprehensive Income for the years ending 30 June

Forecast Statement of Comprehensive Income for the years ending 30 June
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
Revaluation of physical assets 196 (41)
Effective portion of changes in the fair value of cash flow hedges (112) 5 5 13 2
Net change in fair value of cash flow hedges transferred to operating balance (62) (1) -  
Net change in fair value of cash flow hedges transferred to the hedged item (3) (14) (6)
Foreign currency translation differences for foreign operations (11) (25)
Valuation gain/(losses) on investments available for sale taken to reserves 3 1 9 6 10 13 15
Other movements (1) (1) 3 2 4 3 7
Other comprehensive income for the year 10 4 (63) 15 16 16 22
Operating balance (including minority interest) (4,526) (7,067) (9,116) (4,120) (2,259) 907 2,718
Total Comprehensive Income (4,516) (7,063) (9,179) (4,105) (2,243) 923 2,740
Attributable to:              
 - minority interest (34)
 - the Crown (4,482) (7,063) (9,179) (4,105) (2,243) 923 2,740
Total Comprehensive Income (4,516) (7,063) (9,179) (4,105) (2,243) 923 2,740

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

Forecast Statement of Cash Flows for the years ending 30 June

Forecast Statement of Cash Flows for the years ending 30 June
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m

Cash Flows From Operations

             

Cash was provided from

             
Taxation receipts 50,104 52,681 51,665 55,905 59,624 63,345 66,870
Other sovereign receipts 4,268 4,792 4,797 5,022 5,128 5,215 5,224
Sales of goods and services 14,411 15,173 15,232 15,501 16,584 17,107 17,740
Interest and dividend receipts 2,378 3,592 2,650 3,243 3,249 3,377 3,719
Other operating receipts 2,974 2,960 3,452 3,756 3,383 3,382 3,375
Total cash provided from operations 74,135 79,198 77,796 83,427 87,968 92,426 96,928

Cash was disbursed to

             
Transfer payments and subsidies 21,335 22,642 22,436 23,136 24,114 24,705 25,729
Personnel and operating payments 50,767 54,693 57,679 54,125 54,259 54,806 55,237
Interest payments 2,420 3,979 3,190 4,180 5,024 5,186 5,924
Forecast new operating spending 394 230 1,442 2,529 3,634 4,819
Top-down expense adjustment (410) (850) (150)
Total cash disbursed to operations 74,522 81,298 82,685 82,733 85,926 88,331 91,709
Net cash flows from operations (387) (2,100) (4,889) 694 2,042 4,095 5,219

Cash Flows From Investing Activities

             

Cash was provided from/(disbursed to)

             
Net purchase of physical assets (5,866) (7,842) (7,718) (7,056) (6,566) (6,312) (5,721)
Net purchase of shares and other securities 2,093 (1,088) 281 1,554 2,988 (5,915) 2,466
Net purchase of intangible assets (377) (513) (537) (454) (352) (310) (285)
Net repayment/(issues) of advances (310) (1,426) (1,503) (868) (442) (407) (370)
Net acquisition of investments in associates (198) (468) (122) (297) (303) (207) (180)
Forecast new capital spending (282) (292) (732) (707) (981) (1,170)
Top-down capital adjustment 300 350 150
Net cash flows from investing activities (4,658) (11,319) (9,541) (7,703) (5,382) (14,132) (5,260)
Net cash flows from operating and investing activities (5,045) (13,419) (14,430) (7,009) (3,340) (10,037) (41)

Cash Flows From Financing Activities

             

Cash was provided from/(disbursed to)

             
Issues of circulating currency 15 104 117 207 217 228 239
Net issue/(repayment) of Government stock1 7,158 11,718 13,753 5,582 2,450 8,926 (598)
Net issue/(repayment) of foreign-currency borrowings 3,296 (5,320) (4,789) (3,793) (783) (920) (1,454)
Net issue/(repayment) of other New Zealand dollar borrowings (3,765) 6,898 7,384 4,950 1,429 2,144 2,117
Net cash flows from financing activities 6,704 13,400 16,465 6,946 3,313 10,378 304
Net movement in cash 1,659 (19) 2,035 (63) (27) 341 263
Opening cash balance 6,268 6,143 7,774 9,687 9,624 9,597 9,938
Foreign-exchange gains/(losses) on opening cash (153) 2 (122)
Closing cash balance 7,774 6,126 9,687 9,624 9,597 9,938 10,201

1 Net issues of Government stock is after elimination of holdings by entities such as NZS Fund, ACC and EQC. Further information on the proceeds and repayments of Government stock ("domestic bonds") is available in note 22.

Forecast Statement of Cash Flows (continued) for the years ending 30 June
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m

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

             
Net Cash Flows from Operations (387) (2,100) (4,889) 694 2,042 4,095 5,219
Items included in the operating balance but not in net cash flows from operations              

Gains/(losses)

             
Net gains/(losses) on financial instruments 2,522 1,250 2,227 1,365 1,609 1,906 2,176
Net gains/(losses) on non-financial instruments (960) 181 (557) 165 175 180 183
Total gains/(losses) 1,562 1,431 1,670 1,530 1,784 2,086 2,359

Other Non-cash Items in Operating Balance

             
Depreciation and amortisation (4,229) (4,428) (4,344) (4,605) (4,757) (4,838) (4,942)
Write-down on initial recognition of financial assets (855) (896) (809) (819) (829) (839) (848)
Impairment on financial assets (excl receivables) 33 5 16 16 16 15 16
Decrease/(increase) in defined benefit retirement plan liabilities 284 337 356 259 168 153 153
Decrease/(increase) in insurance liabilities (974) (1,329) (1,642) (860) (1,537) (1,684) (1,872)
Other 244 135 317 314 328 322 320
Total other non-cash Items (5,497) (6,176) (6,106) (5,695) (6,611) (6,871) (7,173)

Movements in Working Capital

             
Increase/(decrease) in receivables (338) 225 1,086 (944) (464) (33) 357
Increase/(decrease) in accrued interest (420) (162) 41 (82) 534 352 511
Increase/(decrease) in inventories 78 51 86 48 45 31 52
Increase/(decrease) in prepayments 18 (7) (12) (2) 1 4
Decrease/(increase) in deferred revenue (202) 109 192 77 40 22 22
Decrease/(increase) in payables 677 (438) (1,184) 254 370 1,225 1,367
Total movements in working capital (187) (222) 209 (649) 526 1,597 2,313
Operating balance (4,509) (7,067) (9,116) (4,120) (2,259) 907 2,718

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

Forecast Statement of Changes in Net Worth for the years ending 30 June
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
Opening net worth 99,515 96,479 94,988 85,809 81,704 79,461 80,384
Operating balance (including minority interest) (4,526) (7,067) (9,116) (4,120) (2,259) 907 2,718
Net revaluations 196 (41)
Transfers to/(from) reserves (96) 4 8 15 6 3 7
(Gains)/losses transferred to the statement of financial performance (60) (1)
Other movements (30) 1 (30) 10 13 15
Total comprehensive income (4,516) (7,063) (9,179) (4,105) (2,243) 923 2,740
Transactions with minority interest in Air New Zealand (11)
Closing net worth 94,988 89,416 85,809 81,704 79,461 80,384 83,124

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

Forecast Statement of Financial Position as at 30 June

Forecast Statement of Financial Position as at 30 June
  Note 2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m

Assets

               
Cash and cash equivalents 12 7,774 6,126 9,687 9,624 9,597 9,938 10,201
Receivables 12 13,884 14,038 14,970 14,026 13,563 13,530 13,886
Marketable securities, deposits and derivatives in gain 12 43,687 46,220 42,375 38,641 34,382 38,970 35,504
Share investments 12 12,179 17,771 13,704 16,945 19,627 22,379 25,346
Advances 12 18,447 20,411 19,642 23,354 24,181 24,407 24,600
Inventory   1,160 1,228 1,245 1,293 1,338 1,369 1,421
Other assets   1,661 1,488 1,705 1,703 1,709 1,705 1,703
Property, plant & equipment 14 113,330 117,742 117,328 120,491 123,140 125,865 127,749
Equity accounted investments1   9,049 9,440 9,345 9,554 9,773 9,976 10,173
Intangible assets and goodwill 15 2,184 2,596 2,369 2,464 2,429 2,371 2,308
Forecast for new capital spending   282 292 1,024 1,731 2,712 3,882
Top-down capital adjustment   (425) (350) (500) (500) (500) (500)
Total assets   223,355 236,917 232,312 238,619 240,970 252,722 256,273

Liabilities

               
Issued currency   4,020 4,251 4,137 4,344 4,561 4,789 5,028
Payables 17 9,931 10,001 9,562 10,092 10,226 10,705 11,117
Deferred revenue   1,628 1,222 1,436 1,360 1,320 1,298 1,298
Borrowings   69,733 89,416 85,876 95,189 97,949 107,278 106,651
Insurance liabilities 18 27,131 28,635 29,604 30,464 32,001 33,685 35,557
Retirement plan liabilities 19 9,940 8,821 9,436 9,113 8,832 8,580 8,352
Provisions 20 5,984 5,155 6,452 6,353 6,620 6,003 5,146
Total liabilities   128,367 147,501 146,503 156,915 161,509 172,338 173,149
Total assets less total liabilities   94,988 89,416 85,809 81,704 79,461 80,384 83,124

Net Worth

               
Taxpayer funds 21 31,087 26,983 22,010 17,925 15,710 16,644 19,393
Property, plant and equipment revaluation reserve 21 63,593 62,086 63,516 63,483 63,443 63,419 63,395
Other reserves 21 (94) (100) (119) (106) (94) (81) (66)
Total net worth attributable to the Crown   94,586 88,969 85,407 81,302 79,059 79,982 82,722
Net worth attributable to minority interest   402 447 402 402 402 402 402
Total net worth   94,988 89,416 85,809 81,704 79,461 80,384 83,124

1 Tertiary education institutions constitute most equity accounted investments.

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

Forecast Statement of Borrowings as at 30 June

Forecast Statement of Borrowings as at 30 June
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m

Borrowings

             
Government stock 27,926 41,328 40,153 45,228 47,100 55,697 54,664
Treasury bills 7,625 9,509 7,428 7,595 7,585 7,585 7,584
Government retail stock 309 337 295 295 295 295 295
Settlement deposits with Reserve Bank 6,679 7,602 7,108 7,108 7,108 7,108 7,108
Derivatives in loss 2,376 1,369 1,555 1,382 1,380 1,300 1,258
Finance lease liabilities 920 1,037 1,052 1,324 1,226 1,589 1,616
Other borrowings 23,898 28,234 28,285 32,257 33,255 33,704 34,126
Total borrowings 69,733 89,416 85,876 95,189 97,949 107,278 106,651
Total sovereign-guaranteed debt 50,017 65,890 64,188 69,349 70,970 79,369 78,307
Total non-sovereign-guaranteed debt 19,716 23,526 21,688 25,840 26,979 27,909 28,344
Total borrowings 69,733 89,416 85,876 95,189 97,949 107,278 106,651

Net debt:

             
Core Crown borrowings1 58,583 73,196 73,001 78,200 80,728 90,146 90,035
Add back NZS Fund holdings of sovereign-issued debt and NZS
Fund borrowings
308 (31) 58 10 8 (15) (55)
Gross sovereign-issued debt2 58,891 73,165 73,059 78,210 80,736 90,131 89,980
Less core Crown financial assets3 57,209 61,317 58,816 56,174 52,746 58,085 55,183
Net core Crown debt (incl. NZS Fund)4 1,682 11,848 14,243 22,036 27,990 32,046 34,797
Add back NZS Fund holdings of core Crown financial assets and
NZS Fund financial assets5
14,189 16,575 15,785 17,132 18,576 20,108 21,772
Net core Crown debt (excl. NZS Fund)4 15,871 28,423 30,028 39,168 46,566 52,154 56,569
Core Crown Advances 10,867 11,542 12,050 12,496 13,058 13,604 13,900
Net core Crown debt (excl. NZS Fund and advances)6 26,738 39,965 42,078 51,664 59,624 65,758 70,469

Gross debt:

             
Gross sovereign-issued debt2 58,891 73,165 73,059 78,210 80,736 90,131 89,980
Less Reserve Bank settlement cash and bank bills (6,900) (7,796) (7,259) (7,259) (7,259) (7,259) (7,259)
Add back changes to DMO borrowing due to settlement cash7 1,600 1,600 1,600 1,600 1,600 1,600 1,600
Gross sovereign-issued debt excluding Reserve Bank
settlement cash and bank bills4
53,591 66,969 67,400 72,551 75,077 84,472 84,321

Notes on Borrowings

Total Borrowings can be split into sovereign-guaranteed and non-sovereign-guaranteed debt. This split reflects the fact that borrowings by State-owned enterprises and Crown entities are not explicitly guaranteed by the Crown. Sovereign-guaranteed debt excludes Kiwibank deposits guaranteed under the retail deposit guarantee scheme. No other debt of State-owned enterprises and Crown entities is currently guaranteed by the Crown.

1. Core Crown borrowings in this instance includes 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 New Zealand Superannuation Fund (NZS Fund), ACC and EQC.

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 credit worthiness 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 NZ Debt Management Office 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 October 2010

Statement of Actual Commitments as at 31 October 2010
  As at
31 Oct 2010
$m
As at
30 June 2010
$m

Capital Commitments

   
Specialist military equipment 417 422
Land and buildings 818 849
Other property, plant and equipment 6,473 6,370
Other capital commitments 242 224
Tertiary Education Institutions 302 302
Total capital commitments 8,252 8,167

Operating Commitments

   
Non-cancellable accommodation leases 2,925 2,862
Other non-cancellable leases 3,557 3,230
Non-cancellable contracts for the supply of goods and services 2,361 2,258
Other operating commitments 9,062 9,376
Tertiary Education Institutions 304 304
Total operating commitments 18,209 18,030
Total commitments 26,461 26,197

Total Commitments by Segment

   
Core Crown 16,423 20,983
Crown entities 13,219 13,811
State-owned enterprises 7,775 7,242
Inter-segment eliminations (10,956) (15,839)
Total commitments  26,461 26,197

Statement of Actual Contingent Liabilities and Assets as at 31 October 2010

Statement of Actual Contingent Liabilities and Assets as at 31 October 2010
  As at
31 Oct 2010
$m
As at
30 June 2010
$m

Quantifiable Contingent Liabilities

   
Guarantees and indemnities 103 106
Uncalled capital 2,151 2,310
Legal proceedings and disputes 413 414
Other contingent liabilities 3,576 3,535
Total quantifiable contingent liabilities 6,243 6,365

Total Quantifiable Contingent Liabilities by Segment

   
Core Crown 5,916 6,050
Crown entities 258 171
State-owned enterprises 69 144
Inter-segment eliminations
Total quantifiable contingent liabilities 6,243 6,365

Quantifiable Contingent Assets by Segment

   
Core Crown 634 570
Crown entities 3 2
Total quantifiable contingent assets 637 572

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

More information on contingent liabilities (quantified and unquantified) is outlined on pages 68 to 80 of the Fiscal Risks chapter.

Notes to the Forecast Financial Statements

NOTE 1:  Revenue Collected Through the Crown's Sovereign Power

NOTE 1:  Revenue Collected Through the Crown's Sovereign Power
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m

Taxation Revenue (accrual)

             

Individuals

             
Source deductions 21,774 20,174 20,376 20,936 22,575 24,398 26,219
Other persons 3,987 4,403 3,883 4,543 4,609 4,814 5,087
Refunds (1,831) (1,484) (1,629) (1,484) (1,483) (1,521) (1,613)
Fringe benefit tax 461 430 441 430 448 475 502
Total individuals 24,391 23,523 23,071 24,425 26,149 28,166 30,195

Corporate Tax

             
Gross companies tax 6,698 8,214 7,897 8,605 8,987 9,369 9,735
Refunds (379) (376) (371) (430) (451) (485) (504)
Non-resident withholding tax 884 628 495 579 635 660 681
Foreign-source dividend w/holding payments (3) 8 2 2 2 2 2
Total corporate tax 7,200 8,474 8,023 8,756 9,173 9,546 9,914

Other Direct Income Tax

             
Resident w/holding tax on interest income 1,804 1,465 1,589 1,990 2,370 2,666 2,961
Resident w/holding tax on dividend income 130 240 221 233 314 490 505
Estate and gift duties 2 1 1
Total other direct income tax 1,936 1,706 1,811 2,223 2,684 3,156 3,466
Total direct income tax 33,527 33,703 32,905 35,404 38,006 40,868 43,575

Goods and Services Tax

             
Gross goods and services tax 19,797 23,968 23,726 27,222 29,407 31,404 33,235
Refunds (7,880) (9,524) (9,703) (11,460) (12,765) (13,925) (15,028)
Total goods and services tax 11,917 14,444 14,023 15,762 16,642 17,479 18,207

Other Indirect Taxation

             
Road user charges 910 955 963 1,011 1,071 1,133 1,193
Petroleum fuels excise - domestic production 805 907 895 964 991 1,028 1,060
Alcohol excise - domestic production 600 657 625 665 698 731 762
Tobacco excise - domestic production 217 209 194 217 225 226 229
Petroleum fuels excise - imports1 622 600 597 643 661 685 707
Alcohol excise - imports1 225 242 234 250 262 274 286
Tobacco excise - imports1 851 1,020 908 1,060 1,101 1,105 1,119
Other customs duty 175 198 220 199 179 160 139
Gaming duties 219 228 218 221 221 224 226
Motor vehicle fees 171 175 176 180 185 191 197
Energy resources levies 39 38 38 38 36 36 36
Approved issuer levy and cheque duty 69 81 76 71 71 71 71
Total other indirect taxation 4,903 5,310 5,144 5,519 5,701 5,864 6,025
Total indirect taxation 16,820 19,754 19,167 21,281 22,343 23,343 24,232
Total taxation revenue 50,347 53,457 52,072 56,685 60,349 64,211 67,807

Other Sovereign Revenue (accrual)

             
ACC levies 3,261 3,823 3,855 4,039 4,159 4,297 4,441
Fire Service levies 301 309 306 312 318 326 334
EQC levies 86 87 87 87 87 87 87
Other miscellaneous items 1,034 1,540 1,452 1,574 1,880 2,215 2,765
Total other sovereign revenue 4,682 5,759 5,700 6,012 6,444 6,925 7,627
Total sovereign revenue 55,029 59,216 57,772 62,697 66,793 71,136 75,434

1. Customs excise-equivalent duty.

NOTE 1:  Receipts Collected Through the Crown's Sovereign Power

NOTE 1:  Receipts Collected Through the Crown's Sovereign Power
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m

Taxation Receipts (cash)

             

Individuals

             
Source deductions 21,744 20,314 20,483 20,835 22,472 24,297 26,118
Other persons 4,630 4,875 4,319 5,056 5,087 5,300 5,643
Refunds (2,793) (2,255) (2,298) (2,192) (2,169) (2,228) (2,373)
Fringe benefit tax 469 433 440 421 443 467 494
Total individuals 24,050 23,367 22,944 24,120 25,833 27,836 29,882

Corporate Tax

             
Gross companies tax 8,650 9,051 8,908 9,158 9,577 9,820 10,099
Refunds (1,644) (1,314) (1,141) (1,138) (1,122) (1,152) (1,168)
Non-resident withholding tax 889 627 494 578 634 659 680
Foreign-source dividend w/holding payments 6 8 2 2 2 2 2
Total corporate tax 7,901 8,372 8,263 8,600 9,091 9,329 9,613

Other Direct Income Tax

             
Resident w/holding tax on interest income 1,833 1,463 1,588 1,989 2,369 2,665 2,960
Resident w/holding tax on dividend income 114 240 221 233 314 490 505
Estate and gift duties 2 1 1
Total other direct income tax 1,949 1,704 1,810 2,222 2,683 3,155 3,465
Total direct income tax 33,900 33,443 33,017 34,942 37,607 40,320 42,960

Goods and Services Tax

             
Gross goods and services tax 18,797 23,052 22,562 26,338 28,517 30,522 32,350
Refunds (7,456) (9,124) (9,059) (10,894) (12,201) (13,361) (14,465)
Total goods and services tax 11,341 13,928 13,503 15,444 16,316 17,161 17,885

Other Indirect Taxation

             
Petroleum fuels excise 805 907 895 964 991 1,028 1,060
Tobacco excise 214 209 194 217 225 226 229
Customs duty 1,805 2,060 1,959 2,152 2,203 2,224 2,251
Road user charges 908 955 963 1,011 1,071 1,133 1,193
Alcohol excise 622 657 625 665 698 731 762
Gaming duties 218 228 219 221 221 224 226
Motor vehicle fees 195 175 176 180 185 191 197
Energy resources levies 37 38 38 38 36 36 36
Approved issuer levy and cheque duty 59 81 76 71 71 71 71
Total other indirect taxation 4,863 5,310 5,145 5,519 5,701 5,864 6,025
Total indirect taxation 16,204 19,238 18,648 20,963 22,017 23,025 23,910
Total Taxation Receipts 50,104 52,681 51,665 55,905 59,624 63,345 66,870

Other Sovereign Receipts (cash)

             
ACC levies 3,291 3,761 3,760 3,972 4,087 4,154 4,143
Fire Service levies 301 309 306 312 318 326 334
EQC levies 86 87 87 87 87 87 87
Other miscellaneous items 590 635 644 651 636 648 660
Total other sovereign receipts 4,268 4,792 4,797 5,022 5,128 5,215 5,224
Total sovereign receipts 54,372 57,473 56,462 60,927 64,752 68,560 72,094

NOTE 2:  Interest Revenue and Dividends

NOTE 2:  Interest Revenue and Dividends
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m

By type

             
Interest revenue 1,926 3,482 2,432 2,749 2,942 2,987 3,137
Dividends 389 581 456 554 640 718 778
Total interest revenue and dividends 2,315 4,063 2,888 3,303 3,582 3,705 3,915

By source

             
Core Crown 2,135 2,487 2,128 2,508 2,862 3,025 3,179
Crown entities 1,146 939 1,075 1,093 1,226 1,368 1,512
State-owned enterprises 626 1,550 859 918 961 964 971
Inter-segment eliminations (1,592) (913) (1,174) (1,216) (1,467) (1,652) (1,747)
Total interest revenue and dividends 2,315 4,063 2,888 3,303 3,582 3,705 3,915

NOTE 3: Transfer Payments and Subsidies

NOTE 3: Transfer Payments and Subsidies
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
New Zealand superannuation 8,290 8,822 8,817 9,481 10,112 10,820 11,606
Domestic purposes benefit 1,693 1,756 1,771 1,861 1,921 1,980 2,040
Unemployment benefit 930 969 980 990 921 867 817
Invalids benefit 1,303 1,319 1,314 1,362 1,396 1,430 1,463
Family tax credit 2,168 2,239 2,219 2,193 2,207 2,169 2,237
Accommodation supplement 1,154 1,221 1,214 1,254 1,273 1,296 1,321
Sickness benefit 710 760 726 738 762 788 813
Student allowances 570 656 624 622 574 524 501
Disability allowances 411 421 413 421 432 445 458
Other social assistance benefits 2,525 2,801 2,774 2,656 2,693 2,752 2,747
Total social assistance grants 19,754 20,964 20,852 21,578 22,291 23,071 24,003

Subsidies

             
KiwiSaver subsidies 1,024 1,179 1,066 1,102 1,084 1,071 1,106

Other transfer payments

             
Official development assistance 435 485 493 509 559 559 559
Total transfer payments and subsidies 21,213 22,628 22,411 23,189 23,934 24,701 25,668

NOTE 4: Personnel Expenses

NOTE 4:  Personnel Expenses
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
Core Crown 5,991 6,076 5,979 6,017 6,045 6,100 6,154
Crown entities 10,043 10,516 10,318 10,454 10,700 10,552 10,685
State-owned enterprises 2,455 2,526 2,651 2,695 2,742 2,793 2,843
Inter-segment eliminations (12) (9) (9) (9) (9) (9) (9)
Total personnel expenses 18,477 19,109 18,939 19,157 19,478 19,436 19,673

NOTE 5: Depreciation, Amortisation and Other Operating Expenses

NOTE 5: Depreciation, Amortisation and Other Operating Expenses
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
Core Crown 34,226 38,677 39,651 37,159 37,478 36,679 36,820
Crown entities 18,392 17,903 17,991 17,695 17,699 17,809 17,944
State-owned enterprises 9,494 10,237 10,356 10,849 11,418 11,686 11,985
Inter-segment eliminations (26,545) (26,462) (26,521) (26,326) (26,341) (26,053) (26,232)
Total depreciation, amortisation and other operating expenses 35,567 40,355 41,477 39,377 40,254 40,121 40,517

NOTE 6: Interest Expenses

NOTE 6: Interest Expenses
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m

By type

             
Interest on financial liabilities 2,724 4,537 3,303 4,249 4,750 5,085 5,531
Interest unwind on provisions 53 75 85 73 73 77 79
Total interest expenses 2,777 4,612 3,388 4,322 4,823 5,162 5,610

By source

             
Core Crown 2,311 3,230 3,082 3,683 4,179 4,542 4,919
Crown entities 245 181 263 289 302 305 307
State-owned enterprises 845 1,733 1,074 1,205 1,243 1,299 1,437
Inter-segment eliminations (624) (532) (1,031) (855) (901) (984) (1,053)
Total interest expenses 2,777 4,612 3,388 4,322 4,823 5,162 5,610

NOTE 7: Insurance Expenses

NOTE 7: Insurance Expenses
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m

By entity

             
ACC 2,922 3,668 3,298 3,696 3,984 4,298 4,649
Earthquake Commission 64 39 2,046 45 49 52 51
Other 20 18 18 18 18 19 19
Total insurance expenses 3,006 3,725 5,362 3,759 4,051 4,369 4,719

NOTE 8:  Forecast New Operating Spending and Top-Down Adjustment

NOTE 8:  Forecast New Operating Spending and Top-Down Adjustment
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
Forecast new spending up to Budget 2011 394 230 434 376 340 340
Forecast for future new spending 1,008 2,153 3,294 4,479
Total forecast new operating spending 394 230 1,442 2,529 3,634 4,819
Top-down expense adjustment (410) (850) (150)

Forecast new spending up to Budget 2011 represents expenses included in Budget 2010 that have yet to be allocated.

Forecast for future new spending indicates the expected spending increases from the operating allowances planned for future budgets.

NOTE 9: Gains and Losses on Financial Instruments

NOTE 9: Gains and Losses on Financial Instruments
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m

By source

             
Core Crown 2,094 1,231 1,902 1,455 1,535 1,683 1,827
Crown entities 787 209 615 120 284 445 583
State-owned enterprises (105) (11) (65) (6) 6 6 (2)
Inter-segment eliminations (254) (179) (225) (204) (216) (228) (232)
Net gains/(losses) on financial instruments 2,522 1,250 2,227 1,365 1,609 1,906 2,176

NOTE 10: Gains and Losses on Non-Financial Instruments

NOTE 10: Gains and Losses on Non-Financial Instruments
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m

By type

             
Actuarial gains/(losses) on GSF liability (1,231) - 144 - - - -
Actuarial gains/(losses) on ACC outstanding claims 410 - (831) - - - -
Other (139) 181 130 165 175 180 183
Net gains/(losses) on non-financial instruments (960) 181 (557) 165 175 180 183

By source

             
Core Crown (1,351) 21 122 (15) (15) (15) (16)
Crown entities 398 (17) (846) (1) (1) (1) (1)
State-owned enterprises (7) 177 168 180 191 197 200
Inter-segment eliminations - - (1) 1 - (1) -
Net gains/(losses) on non-financial instruments (960) 181 (557) 165 175 180 183

NOTE 11: Source of Operating Balance

NOTE 11: Source of Operating Balance
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
Core Crown (7,000) (9,082) (10,022) (6,441) (4,812) (1,873) (147)
Crown entities 2,373 1,423 234 1,998 2,108 2,201 2,266
State-owned enterprises 635 1,014 1,059 907 1,241 1,480 1,543
Inter-segment eliminations (517) (422) (387) (584) (796) (901) (944)
Total operating balance (4,509) (7,067) (9,116) (4,120) (2,259) 907 2,718

NOTE 12: Financial Assets

NOTE 12: Financial Assets
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
Cash and cash equivalents 7,774 6,126 9,687 9,624 9,597 9,938 10,201
Tax receivables 6,864 6,288 6,214 5,862 5,447 5,152 4,905
Trade and other receivables 7,020 7,750 8,756 8,164 8,116 8,378 8,981
Student loans (refer note 13) 6,790 7,300 7,239 7,641 7,964 8,218 8,399
Kiwibank mortgages 10,419 12,411 11,106 14,381 14,985 14,985 14,985
Long-term deposits 2,784 2,240 2,712 2,748 2,804 2,861 2,915
IMF financial assets 2,199 2,546 2,430 2,430 2,431 2,432 2,432
Other advances 1,238 700 1,297 1,332 1,232 1,204 1,216
Share investments 12,179 17,771 13,704 16,945 19,627 22,379 25,346
Derivatives in gain 2,972 1,771 2,839 2,189 1,816 1,416 1,247
Other marketable securities 35,732 39,663 34,394 31,274 27,331 32,261 28,910
Total financial assets 95,971 104,566 100,378 102,590 101,350 109,224 109,537

Financial assets by entity

             
NZDMO 23,097 24,360 24,216 18,709 12,515 15,768 10,851
Reserve Bank of New Zealand 19,260 18,928 17,965 17,797 17,624 17,644 17,176
NZ Superannuation Fund 15,552 16,452 16,610 17,815 19,159 20,643 22,269
Other core Crown 16,508 16,777 17,027 16,560 16,359 17,744 16,347
Intra-segment eliminations (8,437) (6,845) (8,190) (6,582) (5,422) (6,630) (4,508)
Total core Crown segment 65,980 69,672 67,628 64,299 60,235 65,169 62,135
ACC portfolio 16,975 18,897 20,513 23,134 26,058 29,224 32,581
EQC portfolio 6,003 6,424 5,299 5,083 5,443 5,834 6,260
Other Crown entities 6,874 6,352 6,406 6,709 7,015 7,299 7,555
Intra-segment eliminations (1,716) (1,482) (1,200) (1,514) (1,523) (1,532) (1,541)
Total Crown entities segment 28,136 30,191 31,018 33,412 36,993 40,825 44,855
Total State-owned enterprises segment 16,064 18,987 17,721 21,093 21,584 21,980 22,263
Inter-segment eliminations (14,209) (14,284) (15,989) (16,214) (17,462) (18,750) (19,716)
Total financial assets 95,971 104,566 100,378 102,590 101,350 109,224 109,537

NOTE 13: Student Loans

NOTE 13: Student Loans
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
Nominal value (including accrued interest) 11,145 12,050 11,987 12,762 13,447 14,054 14,573
Opening book value 6,553 6,874 6,790 7,239 7,641 7,964 8,218
Amount borrowed in current year 1,525 1,616 1,547 1,558 1,580 1,602 1,622
Less initial write down to fair value (728) (772) (706) (711) (720) (730) (739)
Repayments made during the year (754) (826) (791) (878) (997) (1,101) (1,213)
Interest unwind 463 506 496 530 558 582 610
(Impairment)/reversal of impairment (280) (110) (110) (110) (110) (110) (110)
Other movements 11 12 13 13 12 11 11
Closing book value 6,790 7,300 7,239 7,641 7,964 8,218 8,399

NOTE 14: Property, Plant and Equipment

NOTE 14: Property, Plant and Equipment
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m

By Class of asset

             

Net Carrying Value

             
Land (valuation) 16,688 16,570 16,895 16,934 16,966 17,097 17,238
Buildings (valuation) 24,019 25,831 24,921 25,437 25,568 25,767 25,595
Electricity distribution network (cost) 2,251 2,887 2,722 3,336 3,822 4,022 4,224
Electricity generation assets (valuation) 13,642 12,333 13,830 13,818 14,372 14,818 15,247
Aircraft (excluding military) (valuation) 1,731 2,347 1,842 2,365 2,648 3,071 3,204
State highways (valuation) 24,838 25,596 26,033 26,795 27,548 28,407 29,374
Rail network (valuation) 12,437 13,224 13,076 13,418 13,875 14,283 14,505
Specialist military equipment (valuation) 3,413 3,835 3,494 3,526 3,391 3,179 2,965
Specified cultural and heritage assets (valuation) 8,505 8,645 8,480 8,526 8,555 8,579 8,604
Other plant and equipment (cost) 5,806 6,474 6,035 6,336 6,395 6,642 6,793
Total property, plant and equipment 113,330 117,742 117,328 120,491 123,140 125,865 127,749

By source

             
Core Crown 29,986 31,877 30,691 30,923 30,729 30,767 30,442
Crown entities 48,109 49,453 49,908 51,260 52,311 53,247 54,246
State-owned enterprises 35,235 36,412 36,729 38,308 40,100 41,851 43,061
Inter-segment eliminations    -     -     -     -     -     -     - 
Total property, plant and equipment 113,330 117,742 117,328 120,491 123,140 125,865 127,749

Schedule of movements

             

Cost or valuation

             
Opening balance 119,547 125,897 123,941 132,002 139,012 145,602 152,354
Additions (refer below for further breakdown) 6,555 8,221 8,162 7,628 7,024 6,785 6,493
Disposals (977) (229) (292) (325) (311) (415) (372)
Net Revaluations (1,143)    -  (41)    -     -     -     - 
Other (41) (273) 232 (293) (123) 382 (48)
Total cost or valuation 123,941 133,616 132,002 139,012 145,602 152,354 158,427

Accumulated depreciation and impairment

             
Opening balance 9,412 12,263 10,611 14,674 18,521 22,461 26,489
Eliminated on disposal (587) (64) (75) (105) (102) (95) (84)
Eliminated on revaluation (1,349)    -     -     -     -     -     - 
Depreciation expense 3,582 3,834 3,756 4,008 4,146 4,225 4,360
Other (447) (159) 382 (56) (103) (102) (87)
Total accumulated depreciation and impairment 10,611 15,874 14,674 18,521 22,462 26,489 30,678
Total property, plant and equipment 113,330 117,742 117,328 120,491 123,140 125,865 127,749

Additions - by functional classification

             
Transport 2,383 2,494 2,764 2,727 2,497 2,724 2,390
Economic 1,425 1,793 1,466 1,521 1,844 1,809 1,864
Education 725 936 983 730 682 676 676
Health 430 932 804 756 552 401 447
Defence 526 936 775 728 394 154 154
Other 1,066 1,130 1,371 1,166 1,055 1,021 961
Total additions to property, plant and equipment1 6,555 8,221 8,162 7,628 7,024 6,785 6,493

1 These additions do not include any purchases which may result from the allocation of the forecast for new capital spending (separately disclosed in the Statement of Financial Position).

NOTE 15: Intangible Assets and Goodwill

NOTE 15: Intangible Assets and Goodwill
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m

By type

             
Net Kyoto position1 212 231 222 222 222 222 222
Goodwill 487 457 483 483 483 483 483
Other intangible assets 1,485 1,908 1,664 1,759 1,724 1,666 1,603
Total intangible assets and goodwill 2,184 2,596 2,369 2,464 2,429 2,371 2,308

By source

             
Core Crown 1,122 1,327 1,245 1,301 1,312 1,318 1,317
Crown entities 417 503 459 494 473 435 405
State-owned enterprises 645 766 665 669 644 618 586
Inter-segment eliminations    -     -     -     -     -     -     - 
Total intangible assets and goodwill 2,184 2,596 2,369 2,464 2,429 2,371 2,308

1. The New Zealand Government has committed under the Kyoto Protocol to ensuring that New Zealand's average net emissions of greenhouse gases over 2008-2012 (the first commitment period of the Kyoto Protocol or CP1) is reduced to 1990 levels or to take responsibility for the difference. New Zealand can meet its commitment through emissions reductions and use of the Kyoto Protocol flexibility mechanisms such as Joint Implementation, the Clean Development Mechanism, and offsetting increased emissions against carbon removed by forests. The position will crystallise when the first Kyoto commitment period is settled up post-2012. These financial statements report on the New Zealand Government's obligations for the first commitment period, but not for future commitment periods which are currently being negotiated.

A full copy of the Net Position Report 2010 can be found on the Ministry for the Environment's website: www.mfe.govt.nz

NOTE 16: NZ Superannuation Fund

NOTE 16: NZ Superannuation Fund
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
Revenue 433 520 462 501 537 562 592
Less current tax expense (27) 310 373 362 395 433 473
Less other expenses 502 135 145 168 185 203 211
Add gains/(losses) 1,750 978 1,452 1,256 1,373 1,517 1,659
Operating balance 1,708 1,053 1,396 1,227 1,330 1,443 1,567
Opening net worth 13,688 16,066 15,656 17,059 18,295 19,635 21,091
Gross contribution from the Crown 250
Operating balance 1,708 1,053 1,396 1,227 1,330 1,443 1,567
Other movements in reserves 10 5 7 9 10 13 16
Closing net worth 15,656 17,124 17,059 18,295 19,635 21,091 22,674

Comprising:

             
Financial assets 15,552 16,452 16,610 17,815 19,159 20,643 22,269
Net other assets 104 672 449 480 476 448 405
Closing net worth 15,656 17,124 17,059 18,295 19,635 21,091 22,674

NOTE 17: Payables

NOTE 17: Payables
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m

By type

             
Accounts payable 6,703 6,242 6,334 6,864 6,998 7,477 7,889
Taxes repayable 3,228 3,759 3,228 3,228 3,228 3,228 3,228
Total payables 9,931 10,001 9,562 10,092 10,226 10,705 11,117

By source

             
Core Crown 7,120 7,011 5,956 6,043 5,802 5,908 6,002
Crown entities 4,390 3,680 4,776 4,692 4,702 4,670 4,670
State-owned enterprises 4,652 4,876 5,160 5,615 6,040 6,374 6,630
Inter-segment eliminations (6,231) (5,566) (6,330) (6,258) (6,318) (6,247) (6,185)
Total payables 9,931 10,001 9,562 10,092 10,226 10,705 11,117

NOTE 18: Insurance Liabilities

NOTE 18: Insurance Liabilities
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m

By entity

             
ACC liability 26,997 28,483 28,956 30,307 31,837 33,517 35,387
EQC property damage claims1 88 86 597 97 98 99 99
Other insurance liabilities 46 66 51 60 66 69 71
Total insurance liabilities 27,131 28,635 29,604 30,464 32,001 33,685 35,557

ACC liability

Calculation information

PricewaterhouseCoopers Actuarial Pty Ltd have prepared an independent actuarial estimate of the ACC outstanding claims liability as at 30 June 2010. This estimate includes the expected future payments relating to accidents that occurred prior to balance date (whether or not the associated claims have been reported to, or accepted by, ACC) and also the expected future administrative expenses of managing these claims.

The key economic variables that impact on changes to the valuation are the long-term Labour Cost Index (LCI), average weekly earnings and the discount rate. 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 rate as at 30 September 2010. The equivalent single effective discount rate, taking into account ACC's projected future cash flow patterns, is a short-term discount rate of 5.42% and a long-term discount rate of 6.00%. Other key variables in each valuation are the forecast increases in claim costs over and above the economic variables above, and the assumed rate at which long-term claimants will leave the scheme over the period. This assessment is largely based on scheme history.

Presentation approach

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

 
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m

Gross ACC liability

             
Opening gross liability 26,446 27,169 26,997 28,956 30,307 31,837 33,517
Net change 551 1,314 1,959 1,351 1,530 1,680 1,870
Closing gross liability 26,997 28,483 28,956 30,307 31,837 33,517 35,387

Less net assets available to ACC

             
Opening net asset value 13,695 16,607 16,745 19,929 22,611 25,530 28,684
Net change 3,050 2,282 3,184 2,682 2,919 3,154 3,371
Closing net asset value 16,745 18,889 19,929 22,611 25,530 28,684 32,055

Net ACC reserves (net liability)

             
Opening reserves position (12,751) (10,562) (10,252) (9,027) (7,696) (6,307) (4,833)
Net change 2,499 968 1,225 1,331 1,389 1,474 1,501
Closing reserves position (net liability) (10,252) (9,594) (9,027) (7,696) (6,307) (4,833) (3,332)

1 The majority of the 2011 forecast balance relates to the Canterbury earthquake. Refer the text box on pages 22 and 23 for more information.

NOTE 19: Retirement Plan Liabilities

NOTE 19: Retirement Plan Liabilities
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
Government Superannuation Fund (GSF) 9,936 8,817 9,433 9,110 8,828 8,576 8,348
Other funds 4 4 3 3 4 4 4
Total retirement plan liabilities 9,940 8,821 9,436 9,113 8,832 8,580 8,352

The net liability of the Government Superannuation Fund (GSF) liabilities has been calculated by the Government Actuary as at 31 October 2010. 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 is used to calculate the liability as at 31 October 2010, based on membership data as at that date. 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.

The net GSF liability at this valuation was calculated using discount rates derived from the market yield curve as at the balance date and then blended to the long-term discount rate of 6.00% (long-term rate unchanged from 30 June 2010). Other principal long-term financial assumptions were an inflation rate, as measured by the Consumer Price Index, of 5.90% for 2011 decreasing to 2.40% in 2012 and 2013 and then increasing to 2.50% from 2014 (unchanged from 30 June 2010) and an annual salary growth rate, before any promotional effects, of 3.00% (unchanged from 30 June 2010).

The 2010/11 projected movement in the net GSF liability is $503 million, reflecting a decrease in the GSF liability of $281 million and an increase in the GSF assets of $222 million.

The decrease in the GSF liability of $281 million includes an actuarial loss, between 1 July 2010 and 31 October 2010, of $19 million due to experience adjustments. In addition to the actuarial loss, changes in the current service cost, interest cost and benefits paid to members, give an overall net projected change of $281 million.

The increase in the value of the net assets of GSF of $222 million includes an actuarial gain, from 1 July 2010 to 31 October 2010, of $163 million. The balance of $59 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 2010/11 onwards reflect the net of the expected current service cost, interest cost, investment returns and contributions.

 
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m

GSF net defined benefit retirement liability

             

GSF liability

             
Opening GSF liability 11,792 12,204 12,881 12,600 12,331 12,099 11,894
Net projected change 1,089 (320) (281) (269) (232) (205) (183)
Closing GSF liability 12,881 11,884 12,600 12,331 12,099 11,894 11,711

Less net assets available to GSF

             
Opening net asset value 2,804 3,050 2,945 3,167 3,221 3,271 3,318
Investment valuation changes 285 151 340 178 180 183 186
Contribution and other income less pension payments (144) (134) (118) (124) (130) (136) (141)
Closing net asset value 2,945 3,067 3,167 3,221 3,271 3,318 3,363

Net GSF liability

             
Opening unfunded liability 8,988 9,154 9,936 9,433 9,110 8,828 8,576
Net projected change 948 (337) (503) (323) (282) (252) (228)
Closing unfunded liability 9,936 8,817 9,433 9,110 8,828 8,576 8,348

NOTE 20: Provisions

NOTE 20: Provisions
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
Provision for ETS credits 74 722 720 709 1,074 706 (59)
Provision for future retail deposit guarantee scheme payments 748
Provision for National Provident Fund guarantee 1,007 883 965 925 884 843 802
Provision for employee entitlements 2,836 2,516 2,790 2,822 2,896 2,780 2,792
Other provisions 1,319 1,034 1,977 1,897 1,766 1,674 1,611
Total provisions 5,984 5,155 6,452 6,353 6,620 6,003 5,146

By source

             
Core Crown 3,424 2,788 3,877 3,864 4,088 3,460 2,531
Crown entities 1,695 1,563 1,671 1,685 1,703 1,707 1,712
State-owned enterprises 925 862 919 845 860 927 1,006
Inter-segment eliminations (60) (58) (15) (41) (31) (91) (103)
Total provisions 5,984 5,155 6,452 6,353 6,620 6,003 5,146

Provision for ETS credits

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

The carbon price is assumed to remain constant over the forecast period and is based on the estimates of the current carbon price of €10.75 with an exchange rate of 0.5409 (a carbon price of NZ$19.87).

Details of current climate change policies are listed at: www.mfe.govt.nz/issues/climate/policies-initiatives

The ETS impact on the fiscal forecast is as follows:

 
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
Revenue 23 378 370 371 567 766 1,164
Expenses 80 1,007 1,016 360 932 398 399
OBEGAL (57) (629) (646) 11 (365) 368 765
Provision for ETS credits 74 722 720 709 1,074 706 (59)

NOTE 21: Net Worth attributable to the Crown

NOTE 21: Net Worth attributable to the Crown
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
Taxpayers funds 31,087 26,983 22,010 17,925 15,710 16,644 19,393
Property, plant and equipment revaluation reserve 63,593 62,086 63,516 63,483 63,443 63,419 63,395
Investment revaluation reserve 59 62 68 74 84 97 112
Cash flow hedge reserve (143) (186) (152) (145) (143) (143) (143)
Foreign currency translation reserve (10) 24 (35) (35) (35) (35) (35)
Total net worth attributable to the Crown 94,586 88,969 85,407 81,302 79,059 79,982 82,722

Taxpayers Funds

             
Opening taxpayers funds 36,382 34,027 31,087 22,010 17,925 15,710 16,644
Operating balance excluding minority interest (4,509) (7,067) (9,116) (4,120) (2,259) 907 2,718
Transfers from/(to) other reserves (786) 23 39 35 44 27 31
Closing taxpayers funds 31,087 26,983 22,010 17,925 15,710 16,644 19,393

Property, Plant and Equipment Revaluation Reserve

             
Opening revaluation reserve 62,612 62,110 63,593 63,516 63,483 63,443 63,419
Net revaluations 196 (41)
Transfers from/(to) other reserves 785 (24) (36) (33) (40) (24) (24)
Closing property, plant and equipment revaluation reserve 63,593 62,086 63,516 63,483 63,443 63,419 63,395

Investment Revaluation Reserve

             
Opening investment revaluation reserve 56 61 59 68 74 84 97
Valuation gain/(losses) on investments available for sale taken to reserves 3 1 9 6 10 13 15
Closing investment revaluation reserve 59 62 68 74 84 97 112

Cash Flow Hedge Reserve

             
Opening cash flow hedge reserve 18 (190) (143) (152) (145) (143) (143)
Transfer into reserve (96) 5 5 13 2
Transfer to the statement of financial performance (62) (1)
Transfer to initial carrying value of hedged item (3) (14) (6)
Closing cash flow hedge reserve (143) (186) (152) (145) (143) (143) (143)

Foreign Currency Translation Reserve

             
Opening foreign currency translation reserve 24 (10) (35) (35) (35) (35)
Movement arising from translation of foreign operations (10) (25)
Closing foreign currency translation reserve (10) 24 (35) (35) (35) (35) (35)

NOTE 22: Reconciliation of core Crown operating cash flows to residual core Crown cash

NOTE 22: Reconciliation of core Crown operating cash flows to residual core Crown cash
  2010
Actual
$m
2011
Previous
Budget
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m

Core Crown Cash Flows from Operations

             
Total tax receipts 50,631 53,348 52,231 56,780 60,620 64,535 68,181
Total other sovereign receipts 566 582 607 613 599 611 623
Interest, profits and dividends 1,897 1,572 1,449 1,711 2,008 2,027 2,226
Sale of goods & services and other receipts 2,658 2,214 2,561 2,334 2,286 2,277 2,197
Transfer payments and subsidies (21,605) (22,726) (22,491) (23,199) (24,180) (24,951) (25,974)
Personnel and operating costs (37,157) (40,498) (42,127) (38,961) (38,875) (38,495) (38,536)
Finance costs (1,981) (2,847) (2,747) (3,515) (4,091) (4,135) (4,759)
Forecast for future new operating spending (394) (230) (1,442) (2,529) (3,634) (4,819)
Top-down expense adjustment 410 850 150
Net cash flows from core Crown operations (4,991) (8,339) (9,897) (5,529) (4,162) (1,765) (861)
Net purchase of physical assets (1,778) (2,258) (2,322) (1,807) (1,348) (1,561) (1,190)
Net increase in advances (926) (905) (1,718) (647) (747) (745) (494)
Net purchase of investments (1,055) (1,843) (1,723) (1,128) (1,171) (1,060) (1,162)
Contribution to NZ Superannuation Fund (250)
Forecast for future new capital spending (282) (292) (732) (707) (981) (1,170)
Top-down capital adjustment 300 350 150
Residual cash (9,000) (13,327) (15,602) (9,693) (8,135) (6,112) (4,877)

Financed by:

             
Other net sale/(purchase) of marketable securities and deposits 2,002 (286) 860 4,101 5,064 (3,653) 4,599
Total operating and investing activities (6,998) (13,613) (14,742) (5,592) (3,071) (9,765) (278)

Used in:

             
Net (repayment)/issue of other New Zealand dollar borrowing (3,938) 5,815 6,678 3,876 665 964 1,471
Net (repayment)/issue of foreign currency borrowing 3,368 (5,320) (4,759) (3,788) (764) (886) (1,406)
Issues of circulating currency 15 104 117 207 217 228 239
Decrease/(increase) in cash (817) 14 (1,311) (1) (19) (34) (51)
  (1,372) 613 725 294 99 272 253
Net cash inflow/(outflow) to be offset by domestic bonds (8,370) (13,000) (14,017) (5,298) (2,972) (9,493) (25)

Gross Cash Proceeds from Domestic Bonds

             
Domestic bonds (market) 12,424 12,776 14,011 13,860 12,774 9,307 9,761
Domestic bonds (non-market) 799 224 6 196 1,028 186 795
Total gross cash proceeds from domestic bonds 13,223 13,000 14,017 14,056 13,802 9,493 10,556
Repayment of domestic bonds (market) (4,197) (7,982) (9,987) (9,934)
Repayment of domestic bonds (non-market) (656) (776) (843) (597)
Net cash proceeds from domestic bonds 8,370 13,000 14,017 5,298 2,972 9,493 25

Forecast Statement of Segments

Statement of Financial Performance for the year ended 30 June 2010

Statement of Financial Performance for the year ended 30 June 2010
  Core Crown
2010
Actual
$m
Crown Entities
2010
Actual
$m
State-owned
Enterprises
2010
Actual
$m
Inter-segment
eliminations
2010
Actual
$m
Total Crown
2010
Actual
$m

Revenue

         
Taxation revenue 50,744 (397) 50,347
Other sovereign revenue 1,015 4,840 (1,173) 4,682
Sales of goods and services 1,387 14,107 11,979 (13,142) 14,331
Interest revenue and dividends 2,135 1,146 626 (1,592) 2,315
Other revenue 935 12,553 974 (11,412) 3,050
Total Revenue (excluding gains) 56,216 32,646 13,579 (27,716) 74,725

Expenses

         
Social assistance and official development assistance 21,484 (271) 21,213
Personnel expenses 5,991 10,043 2,455 (12) 18,477
Other operating expenses 34,227 21,379 9,512 (26,545) 38,573
Interest expenses 2,311 245 845 (624) 2,777
Forecast for future new spending and top down adjustment
Total Expenses (excluding losses) 64,013 31,667 12,812 (27,452) 81,040
Operating Balance before gains/(losses) (7,797) 979 767 (264) (6,315)
Total gains/(losses) 742 1,185 (112) (253) 1,562
Net surplus/(deficit) from associates and joint ventures 55 209 (37) 227
Attributable to minority interest in Air NZ 17 17
Operating Balance (7,000) 2,373 635 (517) (4,509)

Expenses by functional classification

         
Social security and welfare 21,185 3,848 (827) 24,206
Health 13,128 11,070 (11,525) 12,673
Education 11,724 9,010 23 (8,317) 12,440
Transport and communications 2,345 2,108 5,977 (2,439) 7,991
Other 13,320 5,386 5,967 (3,720) 20,953
Finance costs 2,311 245 845 (624) 2,777
Forecast for future new spending and top down adjustment
Total Crown Expenses (excluding losses) 64,013 31,667 12,812 (27,452) 81,040

Statement of Financial Position as at 30 June 2010

Statement of Financial Position as at 30 June 2010
  Core Crown
2010
Actual
$m
Crown Entities
2010
Actual
$m
State-owned
Enterprises
2010
Actual
$m
Inter-segment
eliminations
2010
Actual
$m
Total Crown
2010
Actual
$m

Assets

         
Cash and cash equivalents 4,973 2,392 585 (176) 7,774
Receivables 8,776 4,713 1,740 (1,345) 13,884
Other financial assets 52,232 21,031 13,740 (12,690) 74,313
Property, plant & equipment 29,986 48,109 35,235 113,330
Equity accounted investments 28,663 7,760 223 (27,597) 9,049
Intangible assets and goodwill 1,122 417 645 2,184
Other assets 1,463 326 1,071 (39) 2,821
Forecast for new capital spending and top down adjustment
Total Assets 127,215 84,748 53,239 (41,847) 223,355

Liabilities

         
Borrowings 57,583 4,835 19,747 (12,432) 69,733
Other liabilities 24,963 33,421 6,612 (6,362) 58,634
Total Liabilities 82,546 38,256 26,359 (18,794) 128,367
Total Assets less Total Liabilities 44,669 46,492 26,880 (23,053) 94,988

Net Worth

         
Taxpayer funds 28,761 19,316 9,373 (26,363) 31,087
Reserves 15,908 27,176 17,064 3,351 63,499
Net worth attributable to minority interest in Air NZ 443 (41) 402
Total Net Worth 44,669 46,492 26,880 (23,053) 94,988

Statement of Financial Performance for the year ended 30 June 2011

Statement of Financial Performance for the year ended 30 June 2011
  Core Crown
2011
Forecast
$m
Crown Entities
2011
Forecast
$m
State-owned
Enterprises
2011
Forecast
$m
Inter-segment
eliminations
2011
Forecast
$m
Total Crown
2011
Forecast
$m

Revenue

         
Taxation revenue 52,527 (455) 52,072
Other sovereign revenue 1,419 5,424 (1,143) 5,700
Sales of goods and services 1,480 14,405 13,134 (13,428) 15,591
Interest revenue and dividends 2,128 1,075 859 (1,174) 2,888
Other revenue 892 13,269 1,023 (11,576) 3,608
Total Revenue (excluding gains) 58,446 34,173 15,016 (27,776) 79,859

Expenses

         
Social assistance and official development assistance 22,465 (54) 22,411
Personnel expenses 5,979 10,318 2,651 (9) 18,939
Other operating expenses 39,654 23,336 10,371 (26,522) 46,839
Interest expenses 3,082 263 1,074 (1,031) 3,388
Forecast for future new spending and top down adjustment (620) (620)
Total Expenses (excluding losses) 70,560 33,917 14,096 (27,616) 90,957
Operating Balance before gains/(losses) (12,114) 256 920 (160) (11,098)
Total gains/(losses) 2,024 (231) 102 (225) 1,670
Net surplus/(deficit) from associates and joint ventures 72 209 37 (6) 312
Attributable to minority interest in Air NZ
Operating Balance (10,018) 234 1,059 (391) (9,116)

Expenses by functional classification

         
Social security and welfare 22,052 4,290 (634) 25,708
Health 13,956 11,376 (12,024) 13,308
Education 12,048 9,152 24 (8,431) 12,793
Transport and communications 2,563 2,103 6,230 (2,432) 8,464
Other 17,479 6,733 6,768 (3,064) 27,916
Finance costs 3,082 263 1,074 (1,031) 3,388
Forecast for future new spending and top down adjustment (620) (620)
Total Crown Expenses (excluding losses) 70,560 33,917 14,096 (27,616) 90,957

Statement of Financial Position as at 30 June 2011

Statement of Financial Position as at 30 June 2011
  Core Crown
2011
Forecast
$m
Crown Entities
2011
Forecast
$m
State-owned
Enterprises
2011
Forecast
$m
Inter-segment
eliminations
2011
Forecast
$m
Total Crown
2011
Forecast
$m

Assets

         
Cash and cash equivalents 7,076 2,174 627 (190) 9,687
Receivables 8,848 5,411 2,137 (1,426) 14,970
Other financial assets 51,704 23,433 14,957 (14,373) 75,721
Property, plant & equipment 30,691 49,908 36,729 117,328
Equity accounted investments 30,332 7,992 260 (29,239) 9,345
Intangible assets and goodwill 1,244 459 665 1 2,369
Other assets 1,532 349 1,098 (29) 2,950
Forecast for new capital spending and top down adjustment (58) (58)
Total Assets 131,369 89,726 56,473 (45,256) 232,312

Liabilities

         
Borrowings 73,001 5,449 21,727 (14,301) 85,876
Other liabilities 23,765 36,235 7,029 (6,402) 60,627
Total Liabilities 96,766 41,684 28,756 (20,703) 146,503
Total Assets less Total Liabilities 34,603 48,042 27,717 (24,553) 85,809

Net Worth

         
Taxpayer funds 18,744 20,883 10,221 (27,838) 22,010
Reserves 15,859 27,159 17,053 3,326 63,397
Net worth attributable to minority interest in Air NZ 443 (41) 402
Total Net Worth 34,603 48,042 27,717 (24,553) 85,809

Statement of Financial Performance for the year ended 30 June 2012

Statement of Financial Performance for the year ended 30 June 2012
  Core Crown
2012
Forecast
$m
Crown Entities
2012
Forecast
$m
State-owned
Enterprises
2012
Forecast
$m
Inter-segment
eliminations
2012
Forecast
$m
Total Crown
2012
Forecast
$m

Revenue

         
Taxation revenue 57,215 (530) 56,685
Other sovereign revenue 1,542 5,653 (1,183) 6,012
Sales of goods and services 1,491 14,421 13,650 (13,414) 16,148
Interest revenue and dividends 2,508 1,093 918 (1,216) 3,303
Other revenue 682 12,686 907 (11,291) 2,984
Total Revenue (excluding gains) 63,438 33,853 15,475 (27,634) 85,132

Expenses

         
Social assistance and official development assistance 23,252 (63) 23,189
Personnel expenses 6,017 10,454 2,695 (9) 19,157
Other operating expenses 37,160 21,437 10,865 (26,326) 43,136
Interest expenses 3,683 289 1,205 (855) 4,322
Forecast for future new spending and top down adjustment 1,292 1,292
Total Expenses (excluding losses) 71,404 32,180 14,765 (27,253) 91,096
Operating Balance before gains/(losses) (7,966) 1,673 710 (381) (5,964)
Total gains/(losses) 1,441 119 174 (204) 1,530
Net surplus/(deficit) from associates and joint ventures 84 206 22 2 314
Attributable to minority interest in Air NZ
Operating Balance (6,441) 1,998 906 (583) (4,120)

Expenses by functional classification

         
Social security and welfare 22,792 4,708 (660) 26,840
Health 13,971 11,246 (12,031) 13,186
Education 12,019 9,174 24 (8,462) 12,755
Transport and communications 2,134 2,052 6,481 (2,293) 8,374
Other 15,513 4,711 7,055 (2,952) 24,327
Finance costs 3,683 289 1,205 (855) 4,322
Forecast for future new spending and top down adjustment 1,292 1,292
Total Crown Expenses (excluding losses) 71,404 32,180 14,765 (27,253) 91,096

Statement of Financial Position as at 30 June 2012

Statement of Financial Position as at 30 June 2012
  Core Crown
2012
Forecast
$m
Crown Entities
2012
Forecast
$m
State-owned
Enterprises
2012
Forecast
$m
Inter-segment
eliminations
2012
Forecast
$m
Total Crown
2012
Forecast
$m

Assets

         
Cash and cash equivalents 7,166 2,134 513 (189) 9,624
Receivables 8,163 5,078 2,231 (1,446) 14,026
Other financial assets 48,970 26,200 18,349 (14,579) 78,940
Property, plant & equipment 30,922 51,260 38,308 1 120,491
Equity accounted investments 31,442 8,198 278 (30,364) 9,554
Intangible assets and goodwill 1,301 494 669 2,464
Other assets 1,542 359 1,124 (29) 2,996
Forecast for new capital spending and top down adjustment 524 524
Total Assets 130,030 93,723 61,472 (46,606) 238,619

Liabilities

         
Borrowings 78,198 5,587 25,951 (14,547) 95,189
Other liabilities 23,658 37,015 7,401 (6,348) 61,726
Total Liabilities 101,856 42,602 33,352 (20,895) 156,915
Total Assets less Total Liabilities 28,174 51,121 28,120 (25,711) 81,704

Net Worth

         
Taxpayer funds 12,307 23,994 10,623 (28,999) 17,925
Reserves 15,867 27,127 17,054 3,329 63,377
Net worth attributable to minority interest in Air NZ 443 (41) 402
Total Net Worth 28,174 51,121 28,120 (25,711) 81,704

Statement of Financial Performance for the year ended 30 June 2013

Statement of Financial Performance for the year ended 30 June 2013
  Core Crown
2013
Forecast
$m
Crown Entities
2013
Forecast
$m
State-owned
Enterprises
2013
Forecast
$m
Inter-segment
eliminations
2013
Forecast
$m
Total Crown
2013
Forecast
$m

Revenue

         
Taxation revenue 60,989 (640) 60,349
Other sovereign revenue 1,848 5,837 (1,241) 6,444
Sales of goods and services 1,436 14,478 14,671 (13,387) 17,198
Interest revenue and dividends 2,862 1,226 961 (1,467) 3,582
Other revenue 679 12,814 791 (11,159) 3,125
Total Revenue (excluding gains) 67,814 34,355 16,423 (27,894) 90,698

Expenses

         
Social assistance and official development assistance 23,999 (65) 23,934
Personnel expenses 6,045 10,700 2,742 (9) 19,478
Other operating expenses 37,481 21,733 11,434 (26,343) 44,305
Interest expenses 4,179 302 1,243 (901) 4,823
Forecast for future new spending and top down adjustment 2,529 2,529
Total Expenses (excluding losses) 74,233 32,735 15,419 (27,318) 95,069
Operating Balance before gains/(losses) (6,419) 1,620 1,004 (576) (4,371)
Total gains/(losses) 1,520 283 197 (216) 1,784
Net surplus/(deficit) from associates and joint ventures 87 205 40 (4) 328
Attributable to minority interest in Air NZ
Operating Balance (4,812) 2,108 1,241 (796) (2,259)

Expenses by functional classification

         
Social security and welfare 23,659 5,028 (683) 28,004
Health 13,966 11,230 (12,045) 13,151
Education 12,061 9,313 24 (8,533) 12,865
Transport and communications 2,064 2,161 6,596 (2,212) 8,609
Other 15,775 4,701 7,556 (2,944) 25,088
Finance costs 4,179 302 1,243 (901) 4,823
Forecast for future new spending and top down adjustment 2,529 2,529
Total Crown Expenses (excluding losses) 74,233 32,735 15,419 (27,318) 95,069

Statement of Financial Position as at 30 June 2013

Statement of Financial Position as at 30 June 2013
  Core Crown
2013
Forecast
$m
Crown Entities
2013
Forecast
$m
State-owned
Enterprises
2013
Forecast
$m
Inter-segment
eliminations
2013
Forecast
$m
Total Crown
2013
Forecast
$m

Assets

         
Cash and cash equivalents 7,242 2,104 439 (188) 9,597
Receivables 7,528 5,245 2,316 (1,526) 13,563
Other financial assets 45,465 29,644 18,829 (15,748) 78,190
Property, plant & equipment 30,730 52,311 40,100 (1) 123,140
Equity accounted investments 32,593 8,404 312 (31,536) 9,773
Intangible assets and goodwill 1,312 473 644 2,429
Other assets 1,547 370 1,159 (29) 3,047
Forecast for new capital spending and top down adjustment 1,231 1,231
Total Assets 127,648 98,551 63,799 (49,028) 240,970

Liabilities

         
Borrowings 80,727 5,660 27,316 (15,754) 97,949
Other liabilities 23,547 38,579 7,831 (6,397) 63,560
Total Liabilities 104,274 44,239 35,147 (22,151) 161,509
Total Assets less Total Liabilities 23,374 54,312 28,652 (26,877) 79,461

Net Worth

         
Taxpayer funds 7,497 27,225 11,154 (30,166) 15,710
Reserves 15,877 27,087 17,055 3,330 63,349
Net worth attributable to minority interest in Air NZ 443 (41) 402
Total Net Worth 23,374 54,312 28,652 (26,877) 79,461

Statement of Financial Performance for the year ended 30 June 2014

Statement of Financial Performance for the year ended 30 June 2014
  Core Crown
2014
Forecast
$m
Crown Entities
2014
Forecast
$m
State-owned
Enterprises
2014
Forecast
$m
Inter-segment
eliminations
2014
Forecast
$m
Total Crown
2014
Forecast
$m

Revenue

         
Taxation revenue 64,931 (720) 64,211
Other sovereign revenue 2,182 6,004 (1,261) 6,925
Sales of goods and services 1,463 14,490 15,292 (13,373) 17,872
Interest revenue and dividends 3,025 1,368 964 (1,652) 3,705
Other revenue 679 12,707 780 (10,957) 3,209
Total Revenue (excluding gains) 72,280 34,569 17,036 (27,963) 95,922

Expenses

         
Social assistance and official development assistance 24,947 (246) 24,701
Personnel expenses 6,100 10,552 2,793 (9) 19,436
Other operating expenses 36,682 22,161 11,702 (26,055) 44,490
Interest expenses 4,542 305 1,299 (984) 5,162
Forecast for future new spending and top down adjustment 3,634 3,634
Total Expenses (excluding losses) 75,905 33,018 15,794 (27,294) 97,423
Operating Balance before gains/(losses) (3,625) 1,551 1,242 (669) (1,501)
Total gains/(losses) 1,668 444 202 (228) 2,086
Net surplus/(deficit) from associates and joint ventures 84 206 36 (4) 322
Attributable to minority interest in Air NZ
Operating Balance (1,873) 2,201 1,480 (901) 907

Expenses by functional classification

         
Social security and welfare 24,780 5,377 (883) 29,274
Health 13,780 11,190 (11,843) 13,127
Education 11,875 9,209 24 (8,377) 12,731
Transport and communications 2,081 2,230 6,805 (2,246) 8,870
Other 15,213 4,707 7,666 (2,961) 24,625
Finance costs 4,542 305 1,299 (984) 5,162
Forecast for future new spending and top down adjustment 3,634 3,634
Total Crown Expenses (excluding losses) 75,905 33,018 15,794 (27,294) 97,423

Statement of Financial Position as at 30 June 2014

Statement of Financial Position as at 30 June 2014
  Core Crown
2014
Forecast
$m
Crown Entities
2014
Forecast
$m
State-owned
Enterprises
2014
Forecast
$m
Inter-segment
eliminations
2014
Forecast
$m
Total Crown
2014
Forecast
$m

Assets

         
Cash and cash equivalents 7,293 2,159 675 (189) 9,938
Receivables 7,125 5,489 2,461 (1,545) 13,530
Other financial assets 50,751 33,177 18,844 (17,016) 85,756
Property, plant & equipment 30,767 53,247 41,851 125,865
Equity accounted investments 33,626 8,609 337 (32,596) 9,976
Intangible assets and goodwill 1,317 435 618 1 2,371
Other assets 1,542 370 1,190 (28) 3,074
Forecast for new capital spending and top down adjustment 2,212 2,212
Total Assets 134,633 103,486 65,976 (51,373) 252,722

Liabilities

         
Borrowings 90,145 5,768 28,416 (17,051) 107,278
Other liabilities 22,971 40,237 8,237 (6,385) 65,060
Total Liabilities 113,116 46,005 36,653 (23,436) 172,338
Total Assets less Total Liabilities 21,517 57,481 29,323 (27,937) 80,384

Net Worth

         
Taxpayer funds 5,627 30,418 11,825 (31,226) 16,644
Reserves 15,890 27,063 17,055 3,330 63,338
Net worth attributable to minority interest in Air NZ 443 (41) 402
Total Net Worth 21,517 57,481 29,323 (27,937) 80,384

Statement of Financial Performance for the year ended 30 June 2015

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 68,545 (738) 67,807
Other sovereign revenue 2,733 6,156 (1,262) 7,627
Sales of goods and services 1,450 14,511 15,800 (13,365) 18,396
Interest revenue and dividends 3,179 1,512 971 (1,747) 3,915
Other revenue 683 12,937 819 (11,139) 3,300
Total Revenue (excluding gains) 76,590 35,116 17,590 (28,251) 101,045

Expenses

         
Social assistance and official development assistance 25,914 (246) 25,668
Personnel expenses 6,154 10,685 2,843 (9) 19,673
Other operating expenses 36,820 22,646 12,002 (26,232) 45,236
Interest expenses 4,919 307 1,437 (1,053) 5,610
Forecast for future new spending and top down adjustment 4,819 4,819
Total Expenses (excluding losses) 78,626 33,638 16,282 (27,540) 101,006
Operating Balance before gains/(losses) (2,036) 1,478 1,308 (711) 39
Total gains/(losses) 1,811 582 198 (232) 2,359
Net surplus/(deficit) from associates and joint ventures 81 206 37 (4) 320
Attributable to minority interest in Air NZ
Operating Balance (144) 2,266 1,543 (947) 2,718

Expenses by functional classification

         
Social security and welfare 25,739 5,734 (903) 30,570
Health 13,755 11,196 (11,836) 13,115
Education 12,018 9,390 24 (8,528) 12,904
Transport and communications 2,081 2,232 7,037 (2,245) 9,105
Other 15,295 4,779 7,784 (2,975) 24,883
Finance costs 4,919 307 1,437 (1,053) 5,610
Forecast for future new spending and top down adjustment 4,819 4,819
Total Crown Expenses (excluding losses) 78,626 33,638 16,282 (27,540) 101,006

Statement of Financial Position as at 30 June 2015

Statement of Financial Position as at 30 June 2015
  Core Crown
2015
Forecast
$m
Crown Entities
2015
Forecast
$m
State-owned
Enterprises
2015
Forecast
$m
Inter-segment
eliminations
2015
Forecast
$m
Total Crown
2015
Forecast
$m

Assets

         
Cash and cash equivalents 7,310 2,207 875 (191) 10,201
Receivables 6,988 5,886 2,532 (1,520) 13,886
Other financial assets 47,837 36,762 18,855 (18,004) 85,450
Property, plant & equipment 30,442 54,246 43,061 127,749
Equity accounted investments 34,753 8,814 363 (33,757) 10,173
Intangible assets and goodwill 1,317 405 586 2,308
Other assets 1,536 371 1,246 (29) 3,124
Forecast for new capital spending and top down adjustment 3,382 3,382
Total Assets 133,565 108,691 67,518 (53,501) 256,273

Liabilities

         
Borrowings 90,035 5,785 28,891 (18,060) 106,651
Other liabilities 22,140 42,117 8,577 (6,336) 66,498
Total Liabilities 112,175 47,902 37,468 (24,396) 173,149
Total Assets less Total Liabilities 21,390 60,789 30,050 (29,105) 83,124

Net Worth

         
Taxpayer funds 5,485 33,750 12,552 (32,394) 19,393
Reserves 15,905 27,039 17,055 3,330 63,329
Net worth attributable to minority interest in Air NZ 443 (41) 402
Total Net Worth 21,390 60,789 30,050 (29,105) 83,124

Core Crown Expense Tables

[14]

Core Crown Expense
($ million) 2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Social security and welfare 15,598 16,768 17,877 19,382 21,185 22,052 22,792 23,659 24,780 25,739
GSF 761 645 690 655 328 304 362 414 450 480
Health 9,547 10,355 11,297 12,368 13,128 13,956 13,971 13,966 13,780 13,755
Education 9,914 9,269 9,551 11,455 11,724 12,048 12,019 12,061 11,875 12,018
Core government services 2,507 4,816 3,371 5,293 2,974 4,069 4,043 4,019 4,061 4,094
Law and order 2,235 2,699 2,894 3,089 3,191 3,481 3,429 3,404 3,401 3,400
Defence 1,383 1,517 1,562 1,757 1,814 1,972 1,872 1,867 1,867 1,867
Transport and communications 1,818 2,405 2,244 2,663 2,345 2,563 2,134 2,064 2,081 2,081
Economic and industrial services 1,592 1,595 2,889 2,960 2,839 2,989 2,652 2,520 2,484 2,512
Primary services 467 438 541 534 507 792 759 740 718 716
Heritage, culture and recreation 891 844 1,107 1,002 1,281 2,187 1,453 1,961 1,380 1,357
Housing and community development 202 255 260 297 306 1,073 365 373 377 394
Other 49 68 254 118 80 612 578 477 475 475
Finance costs 2,356 2,329 2,460 2,429 2,311 3,082 3,683 4,179 4,542 4,919
Forecast for future new spending  ..   ..   ..   ..    230 1,442 2,529 3,634 4,819
Top- down expense adjustment  ..   ..   ..   ..    ( 850) ( 150)  ..   ..   .. 
Core Crown expenses 49,320 54,003 56,997 64,002 64,013 70,560 71,404 74,233 75,905 78,626

Source: The Treasury

Table 4.1 - Social security and welfare expenses
($ million) 2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Welfare benefits 14,246 15,435 16,288 17,366 18,961 19,970 20,697 21,468 22,295 23,251
Social rehabilitation & compensation 145 163 199 336 331 120 133 141 314 314
Departmental expenses 858 845 850 1,092 1,130 1,153 1,090 1,074 1,073 1,073
Child support impairment 151 183 193 205 371 401 471 558 668 668
Other non-departmental expenses 198 142 347 383 392 408 401 418 430 433
Social security and welfare expenses 15,598 16,768 17,877 19,382 21,185 22,052 22,792 23,659 24,780 25,739

Source: The Treasury

Table 4.2 - New Zealand superannuation and welfare benefit expenses
($ million) 2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
New Zealand Superannuation 6,414 6,810 7,348 7,744 8,290 8,817 9,481 10,112 10,820 11,606
Domestic Purposes Benefit 1,493 1,468 1,478 1,530 1,693 1,771 1,861 1,921 1,980 2,040
Unemployment Benefit 712 613 458 586 930 980 990 921 867 817
Invalids Benefit 1,073 1,132 1,216 1,260 1,303 1,314 1,362 1,396 1,430 1,463
Family Tax Credit 1,285 1,699 1,897 2,062 2,168 2,219 2,193 2,207 2,169 2,237
Accommodation Supplement 843 877 891 989 1,154 1,214 1,254 1,273 1,296 1,321
Sickness Benefit 541 573 582 613 710 726 738 762 788 813
Disability Allowance 261 270 278 390 411 413 421 432 445 458
Income Related Rents 395 434 465 512 522 563 613 661 717 713
In Work Tax Credit 70 461 563 584 595 588 572 578 568 561
Child Tax Credit 154 44 11 6 4 3 2 2 1 1
Special Benefit 162 106 71 ..  ..  ..  ..  ..  ..  .. 
Benefits paid in Australia 80 71 58 50 45 40 37 22 19 16
Paid Parental Leave 96 122 135 143 154 159 169 177 188 198
Childcare Assistance 110 139 150 159 178 191 187 186 185 181
War Disablement Pensions 113 122 134 125 137 135 135 134 132 129
Veteran's Pension 128 143 161 176 179 178 180 179 179 180
Other benefits 316 351 392 437 488 659 502 505 511 517
Benefit expenses 14,246 15,435 16,288 17,366 18,961 19,970 20,697 21,468 22,295 23,251

Source: The Treasury

Table 4.3 - Beneficiary numbers
($ million) 2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
New Zealand Superannuation 482 495 508 522 540 561 582 606 627 649
Domestic Purposes Benefit 106 100 97 101 110 114 116 117 117 118
Unemployment Benefit 64 52 37 48 78 82 80 73 68 62
Accommodation Supplement 249 251 245 267 312 325 329 329 330 331
Invalids Benefit 76 78 82 86 88 88 89 89 90 90
Sickness Benefit 47 48 48 50 58 59 58 59 59 60

Source: Ministry of Social Development

Table 4.4 - GSF pension expenses
($ million) 2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Pension expenses 761 645 690 655 328 304 362 414 450 480
Core Crown GSF 761 645 690 655 328 304 362 414 450 480

Source: The Treasury

Table 4.5 - Health expenses
($ million) 2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Departmental outputs 174 180 206 206 211 204 205 205 204 204
Health service purchasing 8,805 9,614 10,503 11,354 12,077 12,760 12,709 12,688 12,646 12,652
Other non-departmental outputs 135 99 97 98 106 51 121 118 112 112
Health payments to ACC 372 425 463 667 691 882 878 907 754 742
Other expenses 61 37 28 43 43 59 58 48 64 45
Health expenses 9,547 10,355 11,297 12,368 13,128 13,956 13,971 13,966 13,780 13,755

Source: The Treasury

Table 4.6 - Health service purchasing
($ million) 2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Payments to District Health Boards 7,814 8,547 9,312 10,038 10,670 11,276 11,279 11,266 11,254 11,272
National Disability Support Services 699 755 834 889 930 973 966 961 961 961
Public Health Service Purchasing 292 312 357 427 477 511 464 461 431 419
Health service purchasing 8,805 9,614 10,503 11,354 12,077 12,760 12,709 12,688 12,646 12,652

Source: The Treasury

Notes

  • [14]Historical data contained in the expense tables have been restated on a NZ IFRS basis for material changes.
Table 4.7 - Education expenses
($ million) 2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Early childhood education 555 617 860 1,030 1,184 1,392 1,379 1,439 1,470 1,499
Primary and secondary schools 4,153 4,325 4,552 4,936 5,157 5,315 5,366 5,432 5,262 5,389
Tertiary funding 4,047 3,322 3,266 4,564 4,465 4,244 4,234 4,183 4,140 4,127
Departmental expenses 821 875 828 888 898 1,023 989 967 966 966
Other education expenses 338 130 45 37 20 74 51 40 37 37
Education expenses 9,914 9,269 9,551 11,455 11,724 12,048 12,019 12,061 11,875 12,018
Places 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Early childhood education1 115,903 123,196 133,863 142,014 152,469 162,638 168,963 173,518 176,403 179,368

1 Full-time equivalent based on 1,000 funded child hours per year. From 2004, these have been restated and are now snapshots based as at 1 July

Sources: Ministry of Education, the Treasury

Table 4.8 - Primary and secondary education expenses
($ million) 2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Primary 2,062 2,141 2,262 2,484 2,622 2,684 2,731 2,781 2,706 2,796
Secondary 1,618 1,682 1,761 1,898 1,972 2,061 2,064 2,073 1,977 2,002
School transport 118 125 131 152 160 162 169 174 182 189
Special needs support 245 263 278 290 297 306 308 310 303 309
Professional Development 101 104 108 101 95 92 87 87 87 86
Schooling Improvement 9 10 12 11 11 10 7 7 7 7
Primary and secondary education expenses 4,153 4,325 4,552 4,936 5,157 5,315 5,366 5,432 5,262 5,389
Places 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Primary1 481,007 479,230 475,820 474,630 475,141 477,173 482,842 488,361 494,289 502,562
Secondary1 275,869 277,619 277,582 280,062 283,024 285,225 283,723 279,759 274,899 270,089

1. From 1999, these have been restated and are now snapshots based as at 1 July for primary year-levels (years 1 to 8) and 1 March for secondary year-levels (years 9 to 15). These numbers include special school rolls but exclude health camps, hospital schools and home schooling.

Sources: Ministry of Education, the Treasury

Table 4.9 - Tertiary education expenses
($ million) 2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Tuition 1,865 1,962 2,172 2,287 2,398 2,371 2,350 2,360 2,356 2,359
Other tertiary funding 110 339 358 522 489 433 441 419 420 418
Tertiary student allowances 354 382 386 444 570 624 622 574 524 501
Initial fair value change in student loans 1,415 ..  ..  ..  ..  ..  ..  ..  ..  .. 
Student loans 303 639 350 1,311 1,008 816 821 830 840 849
Tertiary education expenses 4,047 3,322 3,266 4,564 4,465 4,244 4,234 4,183 4,140 4,127
Places (year) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
EFT students1 226,891 230,319 229,340 246,239 240,215 239,628 238,119 236,884 236,964 236,984

1. Tertiary EFTS numbers from 2000 to 2009 include all delivered EFTS. EFTS in 2010 are enrolments up to August 2010. EFTS numbers from 2011 onwards have been estimated on the basis of funded EFTS. Note that historical EFTS numbers have been revised so will differ from previous published EFU numbers. EFTS numbers are based on calendar years rather than fiscal years.

Sources: Ministry of Education, the Treasury

Table 4.10 - Core Government service expenses
($ million) 2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Official development assistance 330 330 362 458 435 493 509 559 559 559
Indemnity and guarantee expenses ..  ..  ..  992 7 60 59 58 58 58
Departmental expenses 1,403 1,402 1,557 1,668 1,324 1,614 1,597 1,563 1,572 1,583
Non-Departmental Expenses ..  237 277 117 236 214 326 311 345 366
Tax receivable write-down and impairments 338 2,479 701 1,654 590 1,154 1,170 1,159 1,160 1,160
Science expenses 157 163 168 179 191 181 184 183 184 184
Other expenses 279 205 306 225 191 353 198 186 183 184
Core Government service expenses 2,507 4,816 3,371 5,293 2,974 4,069 4,043 4,019 4,061 4,094

Source: The Treasury

Table 4.11 - Law and order expenses
($ million) 2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Police 976 1,086 1,198 1,326 1,349 1,402 1,401 1,398 1,393 1,394
Ministry of Justice 299 454 367 379 372 418 401 401 401 401
Department of Corrections 572 662 787 829 903 1,009 997 1,012 1,013 1,013
Customs1 12 12 12 12 13 124 137 145 145 145
Other departments 64 48 79 80 102 100 82 83 84 84
Department expenses 1,923 2,262 2,443 2,626 2,739 3,053 3,018 3,039 3,036 3,037
Non-departmental outputs 262 354 326 380 399 352 318 313 313 311
Other expenses 50 83 125 83 53 76 93 52 52 52
Law and order expenses 2,235 2,699 2,894 3,089 3,191 3,481 3,429 3,404 3,401 3,400

1 Previously the majority of Customs spending was classified as Core Government Services.

Source: The Treasury

Table 4.12 - Defence expenses
($ million) 2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
NZDF Core expenses 1,306 1,459 1,517 1,697 1,747 1,892 1,814 1,808 1,808 1,808
Other expenses 77 58 45 60 67 80 58 59 59 59
Defence expenses 1,383 1,517 1,562 1,757 1,814 1,972 1,872 1,867 1,867 1,867

Source: The Treasury

Table 4.13 - Transport and communication expenses
($ million) 2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
New Zealand Transport Agency1 1,482 1,874 1,966 1,562 1,778 1,736 1,716 1,838 1,902 1,902
Departmental outputs 101 113 137 83 63 68 64 63 63 63
Other non-departmental expenses 109 221 104 170 58 165 93 89 88 88
Asset impairments 47 47 ..  320 ..  ..  ..  ..  ..  .. 
Rail funding 77 142 24 507 418 564 231 49 3 3
Other expenses 2 8 13 21 28 30 30 25 25 25
Transport and communication expenses 1,818 2,405 2,244 2,663 2,345 2,563 2,134 2,064 2,081 2,081

1 Since 2008/09 funding has been provided to New Zealand Transport Agency. From 2004/05 to 2007/08 funding was received by Land Transport NZ. Prior to this, funding was received by Transfund. Prior to 2008/09 all NZTA funding was recognised as operating expenditure. However from 2008/09 some funding is now classified as capital resulting in a reduction to operating expenditure.

Source: The Treasury

Table 4.14 - Economic and industrial services expenses
($ million) 2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Departmental outputs 549 546 603 389 382 447 411 407 411 409
Employment initiatives 202 207 186 185 220 265 197 196 197 197
Non-departmental outputs 751 873 822 809 927 871 729 654 615 614
Reserve Electricity Generation 26 16 81 20 23 112 11 ..  ..  .. 
Flood relief 8 ..  ..  ..  ..  ..  ..  ..  ..  .. 
KiwiSaver ..  ..  1,102 1,281 1,024 1,066 1,102 1,084 1,071 1,106
Research & Development tax credits ..  ..  37 154 ..  ..  ..  ..  ..  .. 
Other expenses 56 (47) 58 122 263 228 202 179 190 186
Economic and industrial services expenses 1,592 1,595 2,889 2,960 2,839 2,989 2,652 2,520 2,484 2,512

Source: The Treasury

Table 4.15 - Employment initiatives
($ million) 2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Training incentive allowance 32 29 27 30 19 20 16 15 15 15
Subsidised work 84 88 67 63 109 154 90 90 90 90
Employment support for disabled 82 86 88 88 88 87 87 87 88 88
Other employment assistance schemes 4 4 4 4 4 4 4 4 4 4
Employment initiatives 202 207 186 185 220 265 197 196 197 197

Source: The Treasury

Table 4.16 - Primary service expenses
($ million) 2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Departmental expenses 350 342 354 360 352 381 365 364 363 366
Non-departmental outputs 97 80 109 89 136 208 201 185 164 159
Biological research ..  ..  ..  ..  ..  171 173 173 173 173
Other expenses 20 16 78 85 19 32 20 18 18 18
Primary service expenses 467 438 541 534 507 792 759 740 718 716

Source: The Treasury

Table 4.17 - Heritage, culture and recreation expenses
($ million) 2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Community grants 7 7 7 8 8 8 7 7 7 7
Kyoto protocol 42 ..  ..  ..  ..  ..  ..  ..  ..  .. 
Emissions Trading Scheme ..  ..  ..  17 80 1,016 360 932 398 399
Departmental outputs 322 357 392 426 415 461 424 429 419 411
Non-departmental outputs 351 411 469 467 637 468 477 464 466 469
Other expenses 169 69 239 84 141 234 185 129 90 71
Heritage, culture and recreation expenses 891 844 1,107 1,002 1,281 2,187 1,453 1,961 1,380 1,357

Source: The Treasury

Table 4.18 - Housing and community development expenses
($ million) 2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Housing subsidies 23 25 28 37 44 71 65 57 50 54
Departmental outputs 117 134 141 148 140 173 160 158 157 157
Other non-departmental expenses 62 96 91 112 122 829 140 158 170 183
Housing and community development expenses 202 255 260 297 306 1,073 365 373 377 394

Source: The Treasury

Glossary of Terms

ACC insurance liability

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

Baselines

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

Consumers Price Index (CPI)

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

Contingent assets

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

Contingent liability

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

Core Crown

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

Core Crown revenue

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

Core Crown expenses

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

Corporate tax

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

Current account (Balance of Payments)

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

Cyclically adjusted or structural fiscal balance

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

Demographic changes

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

Domestic bond programme

The amount and timing of additional government debt expected to be issued in the next financial year.

Excise duties

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

Financial assets

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

Fiscal drag

In a tax system with multiple tax thresholds, as taxable incomes increase, tax revenues increase more than proportionately. This occurs because a higher proportion of an individual's income is taxed at the higher rate as their income increases. The additional increase in taxes is known as fiscal drag because it has the effect of removing aggregate demand from the economy.

Fiscal impulse

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

Fiscal intentions (short-term)

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

Fiscal objectives (long-term)

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

Forecast new capital spending

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

Forecast new operating spending

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

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. Gains and losses are reported directly as a movement in net worth (eg, asset revaluation reserves) or indirectly through the Statement of Financial Performance. The impact of gains and losses on the operating balance can be volatile, the operating balance (before gains and losses) indicator can provide a more useful measure of underlying stewardship.

Gross domestic product (GDP)

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

Gross domestic product (expenditure)

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

Gross national expenditure (GNE)

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

Gross sovereign-issued debt (GSID)

This includes all debt issued by the sovereign (the core Crown). It therefore includes Government stock held within the Crown (eg, by the NZS Fund, ACC and EQC).

Labour force participation rate

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

Labour productivity

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

Line-by-line consolidation

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

Marketable securities

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

Monetary conditions

Aggregate monetary conditions measure the degree to which short-term interest rates and the trade-weighted index are either supportive of, or restrictive to, economic growth.

Monetary policy

The Reserve Bank implements its monetary policy decisions by adjusting its' office cash rate (OCR) in an effort to maintain stability in the general level of prices within a defined annual CPI target range.

Tightening monetary policy means raising the level of the OCR in order to moderate aggregate demand pressures and to reduce inflationary pressures, while easing monetary policy has the reverse effect.

Net core Crown cash flow from operations

Operating balance (before gains and losses) less retained items (eg, net surplus of SOEs, CEs and NZS Fund net revenue) less non-cash items (eg, depreciation).

Net core Crown debt

Represents GSID 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 they are made for public policy reasons rather than for the purposes associated with government financing. 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

Net core Crown debt (incl NZS Fund)

Represents net core Crown debt plus the financial assets of the NZS Fund.

Net international investor position

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

Net worth

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

Net worth excluding social assets

Net worth excluding social assets provides the government with an idea of how its assets that earn a financial return match its liabilities. The measure consists of the financial assets of the core Crown and Crown Entities, all the assets of State-Owned Enterprises (excluding the physical assets of KiwiRail), and total liabilities.

NZ IFRS

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

Operating balance

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

Operating balance before gains and losses

The operating balance (before gains and losses) is the operating balance excluding gains and losses. The impact of gains and losses on the operating balance can be volatile so the operating balance (before gains and losses) indicator (because it excludes gains and losses) can provide a more useful measure of underlying stewardship.

Productivity

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

Projections

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

Public Private Partnership (PPP)

No single widely accepted definition for the term PPP exists. However, most descriptions characterise a PPP as an arrangement between a public sector entity to deliver a public sector asset (normally infrastructure or a public facility) and/or service. In this way, PPP arrangements offer an alternative to traditional public sector procurement methods used to accomplish a public duty or responsibility.

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 commitments (eg, contributions to NZS Fund, purchase of assets, loans to others).

Settlement cash

This is the amount of money deposited with the Reserve Bank by 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 corporate and individuals.

Specific fiscal risks

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

System of National Accounts (SNA)

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

Tax revenue

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

Tradable/non-tradable

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

Top-down adjustment

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

Total borrowings

Total borrowings represents the Government's debt obligations to external parties. Total borrowings 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 explicitly guaranteed by the Crown.

Trade weighted index (TWI)

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

Unit labour costs

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

Year ended

Graphs and tables use different expressions of the timeframe. For example, 2009/10 or 2010 will generally mean “year ended 30 June” unless otherwise stated.

Time Series of Fiscal and Economic Indicators

Fiscal Indicators
June Years 1999
 Actual
2000
 Actual
2001
 Actual
2002
 Actual
2003
 Actual
2004
 Actual
2005
 Actual
2006
 Actual
2007
 Actual
2008
 Actual
2009
Actual
2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast

$ millions

                                 

Revenue and Expenses

                                 
Core Crown revenue 32,880 34,946 37,842 39,945 43,440 46,219 51,045 55,735 58,211 61,819 59,482 56,216 58,446 63,438 67,814 72,280 76,590
Core Crown expenses 33,939 34,829 36,559 37,513 39,897 41,882 44,895 49,320 54,003 56,997 64,002 64,013 70,560 71,404 74,233 75,905 78,626
Surpluses                                  
Total Crown OBEGAL 128 594 1,422 2,471 4,366 5,573 7,075 7,091 5,860 5,637 (3,893) (6,315) (11,098) (5,964) (4,371) (1,501) 39
Total Crown operating balance 1,705 1,405 1,208 2,286 1,621 7,309 5,931 9,542 8,023 2,384 (10,505) (4,509) (9,116) (4,120) (2,259) 907 2,718

Cash Position

                                 
Core Crown residual cash 2,048 (386) 349 216 1,217 520 3,104 2,985 2,877 2,057 (8,639) (9,000) (15,602) (9,693) (8,135) (6,112) (4,877)

Debt

                                 
Gross debt1 37,307 36,580 37,194 36,650 36,617 36,017 35,478 33,903 30,647 31,390 43,356 53,591 67,400 72,551 75,077 84,472 84,321
Gross debt incl RB settlement cash and bank bills 37,307 36,580 37,194 36,650 36,617 36,017 35,478 35,867 36,805 37,745 50,973 58,891 73,059 78,210 80,736 90,131 89,980
Net core Crown debt (incl NZS Fund)2 25,923 25,895 24,908 24,773 22,647 19,902 13,324 6,302 1,620 (2,676) 5,633 12,549 26,293 34,532 41,048 45,650 48,697
Net core Crown debt2 25,923 25,895 24,908 25,388 24,531 23,858 19,879 16,163 13,380 10,258 17,119 26,738 42,078 51,664 59,624 65,758 70,469

Net Worth

                                 
Total Crown net worth 10,121 12,605 15,450 22,825 28,012 39,595 54,240 83,971 96,827 105,514 99,515 94,988 85,809 81,704 79,461 80,384 83,124

% GDP

                                 

Revenue and Expenses

                                 
Core Crown revenue 31.0 31.1 31.6 31.4 32.3 31.9 33.1 34.5 33.9 33.9 32.2 29.7 28.9 29.7 30.1 30.5 30.9
Core Crown expenses 32.0 31.0 30.6 29.5 29.7 28.9 29.1 30.5 31.5 31.2 34.7 33.8 34.9 33.4 33.0 32.1 31.7

Surpluses

                                 
Total Crown OBEGAL 0.1 0.5 1.2 1.9 3.3 3.8 4.6 4.4 3.4 3.1 (2.1) (3.3) (5.5) (2.8) (1.9) (0.6) 0.0
Total Crown operating balance 1.6 1.3 1.0 1.8 1.2 5.0 3.8 5.9 4.7 1.3 (5.7) (2.4) (4.5) (1.9) (1.0) 0.4 1.1

Cash Position

                                 
Core Crown residual cash 1.9 (0.3) 0.3 0.2 0.9 0.4 2.0 1.8 1.7 1.1 (4.7) (4.8) (7.7) (4.5) (3.6) (2.6) (2.0)

Debt

                                 
Gross debt1 35.2 32.6 31.1 28.8 27.3 24.9 23.0 21.0 17.9 17.2 23.5 28.3 33.3 34.0 33.3 35.7 34.0
Gross debt incl RB settlement cash and bank bills 35.2 32.6 31.1 28.8 27.3 24.9 23.0 22.2 21.4 20.7 27.6 31.1 36.1 36.6 35.8 38.1 36.3
Net core Crown debt (incl NZS Fund)2 24.5 23.1 20.8 19.5 16.9 13.7 8.6 3.9 0.9 (1.5) 3.1 6.6 13.0 16.2 18.2 19.3 19.7
Net core Crown debt2 24.5 23.1 20.8 20.0 18.3 16.5 12.9 10.0 7.8 5.6 9.3 14.1 20.8 24.2 26.5 27.8 28.5

Net Worth

                                 
Total Crown net worth 9.6 11.2 12.9 18.0 20.9 27.3 35.2 52.0 56.4 57.8 53.9 50.2 42.4 38.3 35.3 34.0 33.6

1 Excludes Reserve Bank settlement cash and bank bills

2 Excludes advances

Economic Indicators

March Years
Annual average % change
1999
Actual
2000
 Actual
2001
 Actual
2002
 Actual
2003
 Actual
2004
 Actual
2005
 Actual
2006
 Actual
2007
 Actual
2008
 Actual
2009
 Actual
2010
 Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Private consumption 3.0 3.2 1.4 2.7 4.8 6.4 4.6 4.5 2.3 3.2 -1.2 0.6 2.0 2.2 2.5 2.5 2.5
Public consumption -0.4 5.8 -2.1 4.1 1.3 4.9 4.2 4.9 4.5 4.9 4.3 1.1 2.2 0.8 0.7 0.8 1.0
TOTAL CONSUMPTION 2.2 3.8 0.6 3.0 4.0 6.0 4.5 4.6 2.8 3.6 0.1 0.7 2.0 1.9 2.1 2.1 2.2
Residential investment                 -13.0 19.5 -13.3 2.0 23.6 14.9 2.6 -5.1 -1.4 3.8 -22.8 -11.5 12.2 29.2 7.9 3.6 0.7
Non-market investment                 -4.8 13.0 -13.8 21.9 13.7 15.6 13.7 2.7 -5.4 -11.5 11.4 8.3 -11.2 -3.6 3.8 4.6 4.1
Market investment                     2.6 6.9 8.0 6.9 2.3 12.2 11.6 11.1 -1.2 8.5 -1.7 -11.4 6.3 12.3 5.1 3.1 3.4
TOTAL INVESTMENT -2.3 10.6 0.4 6.8 7.8 13.0 8.8 6.2 -2.0 5.6 -7.1 -9.7 7.0 16.0 6.1 3.6 3.2
Stock change (contribution to growth) -0.3 1.2 -0.3 0.1 -0.1 0.2 0.3 -0.5 -0.7 0.7 0.0 -1.9 0.6 0.7 0.5 0.1 0.0
GROSS NATIONAL EXPENDITURE 0.9 6.3 0.3 3.8 4.7 7.6 5.8 4.5 1.1 4.7 -1.5 -3.3 3.2 5.9 3.6 2.6 2.4
Exports 2.9 7.4 6.3 3.0 7.8 1.1 4.8 -0.2 2.9 3.2 -3.0 3.2 1.8 4.5 3.0 2.8 2.9
Imports 2.1 11.3 -0.7 4.0 7.2 12.7 12.5 4.2 -1.6 10.1 -4.3 -9.5 6.0 10.5 5.0 2.4 2.0
EXPENDITURE ON GDP 1.2 5.1 2.4 3.5 4.9 3.9 3.6 3.3 2.3 2.6 -1.0 0.5 2.2 3.9 2.9 2.7 2.7
GDP (production measure) 0.5 5.3 2.4 3.5 4.9 4.3 3.7 3.2 0.8 2.9 -1.5 -0.4 2.2 3.4 2.9 2.7 2.7
 - annual % change 2.6 6.3 0.7 4.5 4.6 5.2 2.4 2.4 1.7 2.1 -3.2 1.9 2.5 3.2 2.7 2.8 2.7
Real GDP per capita -0.3 4.7 1.8 2.6 3.0 2.4 2.2 2.0 -0.4 1.8 -2.4 -1.6 1.1 2.4 2.0 1.8 1.8
Nominal GDP (expenditure basis) 1.7 6.0 5.6 7.4 5.2 7.0 7.1 5.7 5.0 7.6 1.7 1.7 6.4 5.7 5.5 5.2 4.7
GDP deflator 0.5 0.8 3.2 3.8 0.3 2.9 3.4 2.3 2.6 4.8 2.7 1.3 4.1 1.7 2.5 2.4 1.9
Output gap (% deviation, March year average) -1.9 0.6 0.0 0.1 1.0 1.4 1.7 2.3 1.4 3.1 0.4 -1.5 -1.1 -0.1 -0.4 -0.5 -0.4
Employment -0.6 1.9 2.0 2.9 2.8 3.0 3.6 2.8 2.2 1.3 0.9 -1.3 1.3 1.7 1.8 1.7 1.5
Unemployment (% March quarter s.a.)          7.5 6.5 5.5 5.3 5.0 4.3 3.9 4.0 3.9 3.9 5.1 6.0 6.1 5.2 4.9 4.6 4.5
Wages (average ordinary-time hourly, ann % change)         3.1 1.7 3.1 3.6 2.2 3.4 3.5 5.2 4.6 4.5 5.3 2.2 2.9 3.6 4.2 4.1 3.8
CPI inflation (ann % change)      -0.1 1.5 3.1 2.6 2.5 1.5 2.8 3.3 2.5 3.4 3.0 2.0 4.5 2.9 2.6 2.2 2.0
Merchandise terms of trade (SNA basis)       0.9 0.2 3.4 4.0 -5.6 4.3 3.5 -2.0 -1.1 8.5 -0.6 -6.3 7.0 -2.7 1.8 1.9 1.3
Current account balance - $billion           -4.0 -6.9 -4.4 -3.4 -4.1 -6.1 -9.3 -13.9 -13.3 -14.4 -14.7 -4.5 -3.9 -10.1 -15.1 -15.3 -14.2
Current account balance - % of GDP           -3.8 -6.2 -3.7 -2.7 -3.1 -4.3 -6.2 -8.7 -7.9 -7.9 -8.0 -2.4 -2.0 -4.8 -6.8 -6.6 -5.8
TWI (March quarter)                          57.6 54.1 50.5 51.6 60.6 66.9 69.6 68.3 68.8 71.9 53.7 65.3 68.7 63.1 59.1 55.6 53.0
90-day bank bill rate (March quarter)        4.5 6.0 6.4 5.0 5.8 5.5 6.9 7.6 7.8 8.8 3.7 2.7 3.3 4.5 5.0 5.0 5.0
10-year bond rate (March quarter)            5.7 7.3 6.0 6.7 6.0 5.9 6.0 5.7 5.9 6.3 4.6 5.9 5.2 5.3 5.4 5.4 5.5

Additional Information

The following information forms part of the Half Year Economic and Fiscal Update 2010 (“Half Year Update”), released by the Treasury on 14 December 2010. This information provides further details on the Half Year Update and should be read in conjunction with the published document. The additional information includes:

  • Detailed economic forecast information - these tables provide detailed breakdowns of the economic forecasts.
  • Tax tables - detailed tax revenue and receipts tables comparing Treasury's forecasts with IRD's forecasts.
  • Additional fiscal indicators - estimates of the cyclically-adjusted balance and fiscal impulse.
  • Accounting policies - outline of the specific Crown accounting policies. The published forecast financial statements only provide a summary.

Detailed Economic Forecast Information

The following tables provide additional detail on the economic forecasts presented in the 2010 Half Year Update.

  • Table 1 - Real gross domestic product
  • Table 2 - Consumer price index and exchange rates
  • Table 3 - Gross domestic expenditure and income
  • Tables 4 & 5 - Labour market indicators
  • Table 6 - Current account
  • Table 7 - Exports - SNA basis
  • Table 8 - Imports - SNA basis

Table 1: Real Gross Domestic Product

Chain-volume series expressed in 1995/96 prices
  Actual Seasonally Adjusted
  $ million Annual %
change
Annual
Average %
change
$million Quarterly %
change
2008Q1 33,634 2.1 2.9 33,935 -0.3
2008Q2 33,081 0.7 2.4 33,738 -0.6
2008Q3 33,146 -0.7 1.5 33,520 -0.6
2008Q4 34,458 -2.6 -0.2 33,142 -1.1
2009Q1 32,559 -3.2 -1.5 32,851 -0.9
2009Q2 32,251 -2.5 -2.3 32,900 0.1
2009Q3 32,604 -1.6 -2.5 32,977 0.2
2009Q4 34,637 0.5 -1.7 33,300 1.0
2010Q1 33,175 1.9 -0.4 33,479 0.5
2010Q2 32,871 1.9 0.7 33,536 0.2
2010Q3 33,299 2.1 1.6 33,680 0.4
2010Q4 35,348 2.1 2.0 33,983 0.9
2011Q1 34,014 2.5 2.2 34,326 1.0
2011Q2 33,922 3.2 2.5 34,608 0.8
2011Q3 34,475 3.5 2.8 34,869 0.8
2011Q4 36,638 3.7 3.2 35,224 1.0
2012Q1 35,112 3.2 3.4 35,434 0.6
2012Q2 34,994 3.2 3.4 35,701 0.8
2012Q3 35,541 3.1 3.3 35,948 0.7
2012Q4 37,629 2.7 3.0 36,176 0.6
2013Q1 36,076 2.7 2.9 36,407 0.6
2013Q2 35,921 2.7 2.8 36,648 0.7
2013Q3 36,486 2.7 2.7 36,904 0.7
2013Q4 38,658 2.7 2.7 37,166 0.7
2014Q1 37,094 2.8 2.7 37,434 0.7
2014Q2 36,938 2.8 2.8 37,685 0.7
2014Q3 37,503 2.8 2.8 37,932 0.7
2014Q4 39,712 2.7 2.8 38,179 0.7
2015Q1 38,079 2.7 2.7 38,428 0.7
2015Q2 37,903 2.6 2.7 38,670 0.6

Source: Statistics New Zealand, The Treasury

Table 2: Consumer Price Index and Exchange Rates

Table 2: Consumer Price Index and Exchange Rates
  Consumers Price Index Exchange rates
  Index Quarterly %
change
        Annual %
change
TWI USD
2008Q1 1044 0.7 3.4 71.9 0.79
2008Q2 1061 1.6 4.0 69.2 0.78
2008Q3 1077 1.5 5.1 65.5 0.71
2008Q4 1072 -0.5 3.4 57.8 0.58
2009Q1 1075 0.3 3.0 53.7 0.53
2009Q2 1081 0.6 1.9 58.4 0.60
2009Q3 1095 1.3 1.7 62.6 0.67
2009Q4 1093 -0.2 2.0 65.5 0.73
2010Q1 1097 0.4 2.0 65.3 0.71
2010Q2 1099 0.2 1.7 66.7 0.70
2010Q3 1111 1.1 1.5 66.9 0.72
2010Q4 1135 2.2 3.9 68.5 0.77
2011Q1 1146 1.0 4.5 68.7 0.77
2011Q2 1154 0.7 5.0 66.8 0.74
2011Q3 1161 0.6 4.5 65.5 0.72
2011Q4 1168 0.7 2.9 64.0 0.69
2012Q1 1179 0.9 2.9 63.1 0.68
2012Q2 1187 0.6 2.9 62.2 0.66
2012Q3 1194 0.6 2.9 61.2 0.65
2012Q4 1201 0.6 2.8 60.1 0.63
2013Q1 1210 0.8 2.6 59.1 0.61
2013Q2 1218 0.7 2.6 58.0 0.60
2013Q3 1225 0.5 2.6 57.1 0.58
2013Q4 1231 0.5 2.5 56.3 0.57
2014Q1 1237 0.5 2.2 55.6 0.56
2014Q2 1243 0.5 2.1 54.8 0.55
2014Q3 1249 0.5 2.0 54.1 0.54
2014Q4 1256 0.5 2.0 53.5 0.53
2015Q1 1262 0.5 2.0 53.0 0.52
2015Q2 1268 0.5 2.0 52.5 0.52

Source: Statistics New Zealand, The Treasury

Table 3: Gross Domestic Expenditure and Income

Table 3: Gross Domestic Expenditure and Income
March Year 2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
  $ mill %vol %pr   $ mill     %vol      %pr   $ mill     %vol      %pr   $ mill     %vol      %pr   $ mill     %vol      %pr   $ mill
Consumption:                                
- Private 110,907 2.0 2.2 115,616 2.2 3.2 121,929 2.5 2.4 128,019 2.5 2.1 133,913 2.5 1.6 139,446
- Public 38,250 2.2 2.9 40,248 0.8 2.9 41,748 0.7 2.7 43,197 0.8 2.8 44,753 1.0 2.8 46,469
Gross Fixed Capital Formation:                                
- Residential 8,388 12.2 2.2 9,625 29.2 5.2 13,072 7.9 5.6 14,891 3.6 5.5 16,266 0.7 4.7 17,147
- Market * 25,219 6.3 -0.5 26,666 12.3 3.3 30,928 5.1 2.3 33,269 3.1 2.2 35,053 3.4 1.6 36,839
- Non-market ** 3,185 -11.2 6.1 3,008 -3.6 1.5 2,948 3.8 1.4 3,105 4.6 1.4 3,292 4.1 1.4 3,474
- Total all sectors 36,793 7.0 -0.2 39,299 16.0 3.0 46,947 6.1 2.9 51,264 3.6 2.8 54,612 3.2 1.9 57,460
Change in Stocks -1,379     -142     741     1,687     1,928     1,999
Gross National Expenditure 184,571 3.2 2.3 195,022 5.9 2.3 211,366 3.6 2.4 224,168 2.6 2.3 235,207 2.4 1.8 245,374
Exports 52,424 1.8 6.5 56,736 4.5 1.7 60,330 3.0 7.5 66,771 2.8 8.4 74,393 2.9 6.8 81,740
Imports 49,690 6.0 -0.5 52,507 10.5 5.2 61,048 5.0 7.1 68,639 2.4 7.8 75,727 2.0 6.5 82,217
Expenditure on GDP 187,305 2.2 4.1 199,249 3.9 1.7 210,647 2.9 2.5 222,299 2.7 2.4 233,873 2.7 1.9 244,896
Statistical Discrepancy 719     725     730     735     741     746
Gross Domestic Product 188,024     199,974     211,378     223,035     234,614     245,642
Compensation of employees 82,409   3.3 85,131   4.8 89,195   5.9 94,502   5.9 100,111   5.5 105,661
Operating Surplus, net:                                 
- Agriculture 5,368   24.1 6,662   -4.9 6,334   -0.2 6,322   11.9 7,072   10.8 7,838
- Other 48,920   7.9 52,765   5.1 55,439   5.5 58,489   3.3 60,391   2.3 61,799
- Total all sectors 54,288   9.5 59,427   3.9 61,773   4.9 64,812   4.1 67,464   3.2 69,638
Consumption of fixed capital 28,595   5.5 30,167   5.5 31,826   5.5 33,577   5.5 35,424   5.5 37,372
Indirect Taxes 23,632   10.6 26,147   12.8 29,482   5.3 31,043   4.7 32,515   4.2 33,871
Less subsidies 899   0.0 899   0.0 899   0.0 899   0.0 899   0.0 899
Gross Domestic Product 188,024   6.4 199,974   5.7 211,378   5.5 223,035   5.2 234,614   4.7 245,642

* Includes Local Government and Non-profit Organisations

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

Source: Statistics New Zealand, The Treasury

Tables 4 & 5: Labour Market Indicators

Annual Average Percentage Change
March Year 2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Real GDP (production basis) -0.4 2.2 3.4 2.9 2.7 2.7
Working Age Population 1.4 1.3 1.1 1.1 1.0 1.0
Labour Force 0.7 1.4 0.7 1.2 1.4 1.3
Employment - Total -1.3 1.3 1.7 1.8 1.7 1.5
Labour Productivity * 2.3 -0.4 1.8 1.1 1.0 1.2
CPI  (annual percentage change) 2.0 4.5 2.9 2.6 2.2 2.0
Average Ordinary Time Hourly Wages 3.9 1.9 3.3 4.1 4.2 3.9
Average Weekly Earnings 4.6 2.6 3.2 4.1 4.2 4.0
Real Wages 2.0 -0.9 -0.5 1.3 1.7 1.9
Compensation of Employees 2.2 3.3 4.8 5.9 5.9 5.5
Unit Labour Costs (Hours worked basis) 1.6 2.3 1.4 2.9 3.1 2.7
Real Unit Labour Costs -0.3 -0.5 -2.4 0.1 0.6 0.7

* Hours worked basis

Source: Statistics New Zealand, The Treasury

Number 000's)
As at March Quarter 2010
Actual
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Total Population 4,362 4,400 4,442 4,483 4,523 4,563
     Natural Increase 35 29 32 31 30 30
     Net  Migration 21 9 10 10 10 10
     Annual Change 56 38 42 41 40 40
Working Age Population      3,412 3,451 3,488 3,525 3,561 3,597
     Annual Change          51 39 38 37 36 36
Not in the labour force (s.a.)     1,088 1,092 1,112 1,118 1,121 1,127
     Annual Change          28 4 20 5 4 5
Labour Force (s.a.) 2,315 2,349 2,369 2,401 2,433 2,465
     Annual Change          20 34 20 32 32 31
Total Employment (s.a.)           2,175 2,206 2,245 2,284 2,321 2,354
     Annual Change          -2 31 39 39 37 33
Unemployment (s.a.)              140 143 124 117 112 110
     Annual Change          23 3 -19 -7 -5 -2
Participation Rate (%,s.a.) 68.0 68.1 67.9 68.1 68.3 68.5
Unemployment Rate (%,s.a.)     6.0 6.1 5.2 4.9 4.6 4.5

Table 6: Current Account

Table 6: Current Account
  $NZ Million Percent of Nominal GDP
Year ended March 2010
Actual
2011
Estimate
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2010
Actual
2011
Estimate
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
Exports Goods 40,092 44,351 46,349 51,836 58,342 64,310            
annual % Change -9.4 10.6 4.5 11.8 12.6 10.2            
Imports Goods 37,452 40,125 47,209 53,254 58,913 64,130            
annual % Change -18.2 7.1 17.7 12.8 10.6 8.9            
Balance on Goods 2,641 4,225 -860 -1,418 -571 180 1.4 2.1 -0.4 -0.6 -0.2 0.1
Exports Services 12,332 12,428 13,989 14,910 16,040 17,427            
annual % change -4.8 0.8 12.6 6.6 7.6 8.6            
Imports Services 12,239 12,382 13,839 15,385 16,814 18,087            
annual % change -11.5 1.2 11.8 11.2 9.3 7.6            
Balance on services 92 47 149 -475 -774 -660 0.0 0.0 0.1 -0.2 -0.3 -0.3
Balance on goods & services 2,733 4,273 -711 -1,894 -1,345 -480 1.5 2.1 -0.3 -0.9 -0.6 -0.2
International income and transfers balance -7,192 -8,163 -9,408 -13,171 -13,999 -13,725 -3.8 -4.1 -4.5 -5.9 -6.0 -5.6
Current account balance -4,458 -3,890 -10,119 -15,065 -15,344 -14,206 -2.4 -2.0 -4.8 -6.8 -6.6 -5.8

Source: Statistics New Zealand, The Treasury

Table 7: Exports - SNA basis

Breakdown of Exports
  Dairy Products Meat and Meat Products Non-Commodity*
March Years %v %p $ mn %v %p $ mn %v %p $ mn
2007 22.3 2.1 7,455 6.7 2.5 5,037 0.6 12.2 11,668
2008 -0.9 25.7 9,434 -2.9 -5.1 4,656 0.7 6.3 12,456
2009 -15.1 27.8 10,101 1.5 23.2 5,796 1.2 17.3 14,804
2010 30.7 -31.8 9,078 -1.1 -7.5 5,332 -5.1 -7.2 13,052
2011 -4.1 35.1 11,686 -4.1 -2.3 5,000 8.7 -3.0 13,761
2012 1.4 -6.5 11,138 -5.6 6.1 4,987 7.4 5.6 15,616
2013 3.2 4.2 11,992 0.7 8.9 5,472 4.9 11.6 18,290
2014 3.2 6.8 13,222 1.2 7.5 5,951 3.7 12.8 21,384
2015 3.2 5.4 14,379 2.7 5.4 6,439 2.9 9.6 24,135
 
  Total Goods** Services Total Exports
March Years %v %p $ mn %v %p $ mn %v %p $ mn
2007 4.9 7.5 35,633 -2.1 4.6 12,639 2.9 6.8 48,272
2008 4.5 3.9 38,718 -0.4 2.3 12,889 3.2 3.3 51,606
2009 -2.0 16.9 44,248 -6.0 6.9 12,949 -3.0 14.6 57,196
2010 5.2 -14.1 40,092 -3.1 -1.6 12,332 3.2 -11.4 52,424
2011 2.6 8.0 44,351 0.1 0.6 12,428 1.8 6.5 56,736
2012 2.7 1.8 46,349 11.7 0.7 13,989 4.5 1.7 60,330
2013 3.0 8.6 51,836 2.7 3.7 14,910 3.0 7.5 66,771
2014 2.6 9.7 58,342 3.2 4.3 16,040 2.8 8.4 74,393
2015 2.3 7.7 64,310 4.7 3.8 17,427 2.9 6.8 81,740

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

Table 8: Imports - SNA basis

 
  Capital Goods (VFD) Mineral Fuel* (VFD) Intermediate Goods** (VFD) Consumption Goods (VFD)
March Years %v %p $ mn %v %p $ mn %v %p $ mn %v %p $ mn
2007 -3.0 2.3 7,249 -8.0 21.4 5,865 -2.8 12.5 15,717 5.8 3.4 9,525
2008 10.2 -9.8 7,213 15.8 2.7 6,982 9.9 -6.5 16,144 6.9 -2.7 9,908
2009 3.3 13.4 8,292 -6.3 26.3 8,186 -5.7 21.7 18,454 -3.0 12.7 10,788
2010 -26.9 0.4 6,202 1.5 -27.4 6,059 -11.1 -9.9 14,799 -4.2 -0.9 10,256
2011 6.7 -12.2 5,813 -5.3 14.6 6,595 10.0 5.1 17,144 8.2 -6.2 10,426
2012 23.9 -3.8 6,931 9.5 10.6 7,991 9.9 7.9 20,339 7.7 5.3 11,838
2013 11.5 3.3 7,983 3.1 10.1 9,062 3.3 8.1 22,704 3.4 9.4 13,386
2014 4.3 4.7 8,719 1.4 8.1 9,939 1.4 8.5 24,971 3.1 9.9 15,164
2015 3.3 3.7 9,337 1.1 6.6 10,717 1.0 7.1 27,013 3.1 8.4 16,943
 
  Total Goods (VFD) Services Total
March Years %v %p $ mn %v %p $ mn %v %p $ mn
2007 -0.9 8.7 38,464 -3.7 7.0 12,186 -1.6 8.3 50,649
2008 10.0 -4.3 40,515 10.1 -5.8 12,631 10.1 -4.7 53,146
2009 -4.0 17.8 45,770 -5.4 16.7 13,827 -4.3 17.5 59,597
2010 -10.7 -8.3 37,452 -5.8 -6.6 12,239 -9.5 -7.9 49,690
2011 6.0 0.9 40,125 5.0 -3.9 12,382 6.0 -0.5 52,507
2012 12.4 4.6 47,209 4.0 7.5 13,839 10.5 5.2 61,048
2013 5.8 6.6 53,254 1.9 9.1 15,385 5.0 7.1 68,639
2014 2.8 7.6 58,913 0.7 8.5 16,814 2.4 7.8 75,727
2015 2.4 6.3 64,130 0.5 7.0 18,087 2.0 6.5 82,217

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

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

Tax Tables

In line with established practice, Inland Revenue has also prepared a set of tax forecasts, which, like the Treasury's tax forecasts, is based on the Treasury's macroeconomic forecasts. The two sets of forecasts differ from each other because of the different modelling approaches used by the two agencies and the various assumptions and judgements made by the forecasting teams in producing their forecasts.

In total, the Treasury's forecast is lower than Inland Revenue's in 2010/11 mainly owing to differing views on the likely level of GST refunds and the implications of the current level of provisional tax. From 2011/12 onwards, the Treasury's forecasts are higher than Inland Revenue's as the Treasury has a larger pro-cyclical response to the economic recovery built into its tax forecasts than does Inland Revenue.

The aggregate differences between the two sets of forecasts are not large compared with past experience and reach just over 1% of total tax by 2014/15.

Table 9: Treasury and Inland Revenue forecasts of tax revenue (accrual)

Table 9: Treasury and Inland Revenue forecasts of tax revenue (accrual)
2009/10
Actual
2010/11
Forecast
2011/12
Forecast
2012/13
Forecast
2013/14
Forecast
2014/15
Forecast
$ million   Treasury IRD Difference Treasury IRD Difference Treasury IRD Difference Treasury IRD Difference Treasury IRD Difference

Direct tax

                               

Individuals

                               
Source deductions 22,135 20,858 20,658 200 21,415 21,274 141 23,059 22,872 187 24,886 24,652 234 26,711 26,436 275
Other persons tax 3,987 3,883 3,950 (67) 4,543 4,396 147 4,609 4,472 137 4,814 4,680 134 5,087 4,864 223
Refunds (1,831) (1,629) (1,700) 71 (1,484) (1,560) 76 (1,483) (1,420) (63) (1,521) (1,400) (121) (1,613) (1,350) (263)
Fringe benefit tax 461 441 454 (13) 430 438 (8) 448 460 (12) 475 488 (13) 502 529 (27)
Subtotal: Individuals 24,752 23,553 23,362 191 24,904 24,548 356 26,633 26,384 249 28,654 28,420 234 30,687 30,479 208
Company tax (net) 6,631 8,300 8,628 (328) 9,014 8,955 59 9,514 9,216 298 9,977 9,497 480 10,381 9,754 627

Withholding taxes on:

                               
Resident interest income 1,804 1,589 1,611 (22) 1,990 1,774 216 2,370 2,049 321 2,666 2,268 398 2,961 2,443 518
Non-resident income 884 495 527 (32) 579 572 7 635 611 24 660 635 25 681 659 22
Foreign-source dividends (3) 2 4 (2) 2 4 (2) 2 4 (2) 2 4 (2) 2 4 (2)
Resident dividend income 130 221 215 6 233 214 19 314 286 28 490 455 35 505 457 48
Subtotal: Withholding tax 2,815 2,307 2,357 (50) 2,804 2,564 240 3,321 2,950 371 3,818 3,362 456 4,149 3,563 586
Total income tax 34,198 34,160 34,347 (187) 36,722 36,067 655 39,468 38,550 918 42,449 41,279 1,170 45,217 43,796 1,421
Other: Estate and gift duties 2 1 1 ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  .. 
Total direct tax 34,200 34,161 34,348 (187) 36,722 36,067 655 39,468 38,550 918 42,449 41,279 1,170 45,217 43,796 1,421

Indirect tax

                               
GST (net) 16,729 19,367 19,870 (503) 21,738 21,907 (169) 22,768 23,077 (309) 23,714 24,107 (393) 24,642 25,120 (478)

Excise duties on:

                               
Alcoholic drinks 600 625 637 (12) 665 655 10 698 672 26 731 687 44 762 701 61
Tobacco products 217 194 202 (8) 217 200 17 225 199 26 226 198 28 229 198 31
Petroleum fuels 805 895 879 16 964 966 (2) 991 1,004 (13) 1,028 1,043 (15) 1,060 1,071 (11)
Subtotal: Excise duties 1,622 1,714 1,718 (4) 1,846 1,821 25 1,914 1,875 39 1,985 1,928 57 2,051 1,970 81

Other indirect tax

                               
Customs duty 1,873 1,959 1,965 (6) 2,152 2,163 (11) 2,203 2,217 (14) 2,224 2,238 (14) 2,251 2,242 9
Road user charges 910 963 970 (7) 1,011 1,020 (9) 1,071 1,080 (9) 1,133 1,135 (2) 1,193 1,190 3
Gaming duties 265 263 261 2 266 263 3 270 266 4 274 270 4 277 274 3
Motor vehicle fees 171 176 175 1 180 180 ..  185 185 ..  191 190 1 197 195 2
Exhaustible resource levy 39 38 37 1 38 36 2 36 35 1 36 37 (1) 36 40 (4)
Approved issuer levy, cheque duty & other 90 91 80 11 86 72 14 86 72 14 86 72 14 86 72 14
Subtotal: Other indirect tax 3,348 3,490 3,488 2 3,733 3,734 (1) 3,851 3,855 (4) 3,944 3,942 2 4,040 4,013 27
Total indirect tax 21,699 24,571 25,076 (505) 27,317 27,462 (145) 28,533 28,807 (274) 29,643 29,977 (334) 30,733 31,103 (370)
Total tax 55,899 58,732 59,424 (692) 64,039 63,529 510 68,001 67,357 644 72,092 71,256 836 75,950 74,899 1,051
Total tax (% of GDP) 29.5% 29.0% 29.4% -0.3% 30.0% 29.8% 0.2% 30.2% 29.9% 0.3% 30.5% 30.1% 0.4% 30.7% 30.2% 0.4%

less Core Crown tax eliminations

                               
Core Crown income tax (27) 373 373   362 362   395 395   433 433   473 473  
GST on Crown expenses and departmental outputs 4,812 5,344 5,344   5,976 5,976   6,126 6,126   6,235 6,235   6,435 6,435  
Crown ESCT 349 473 473   470 470   475 475   479 479   483 483  
Crown AIL 21 15 15   15 15   15 15   15 15   15 15  
Core Crown taxation 50,744 52,527 53,219 (692) 57,216 56,706 510 60,990 60,346 644 64,930 64,094 836 68,544 67,493 1,051
Core Crown tax (% of GDP) 26.8% 26.0% 26.3% -0.3% 26.8% 26.6% 0.2% 27.1% 26.8% 0.3% 27.4% 27.1% 0.4% 27.7% 27.3% 0.4%

less Total Crown tax eliminations

                               
Income tax from SOEs and CEs 339 401 401   477 477   583 583   660 660   677 677  
Other Crown GST ..  ..  ..    ..  ..    ..  ..    ..  ..    ..  ..   
ESCT from SOEs and CEs 12 9 9   9 9   9 9   9 9   9 9  
Lottery duty 46 45 45   45 45   49 49   50 50   51 51  
Total Crown taxation 50,347 52,072 52,764 (692) 56,685 56,175 510 60,349 59,705 644 64,211 63,375 836 67,807 66,756 1,051
Total Crown tax (% of GDP) 26.6% 25.7% 26.1% -0.3% 26.6% 26.3% 0.2% 26.8% 26.5% 0.3% 27.1% 26.8% 0.4% 27.4% 27.0% 0.4%
Nominal GDP 189,295 202,398 202,398   213,495 213,495   225,232 225,232   236,656 236,656   247,667 247,667  

Table 10: Treasury and Inland Revenue forecasts of tax receipts (cash)

Table 10: Treasury and Inland Revenue forecasts of tax receipts (cash)
  2009/10
Actual
2010/11
Forecast
2011/12
Forecast
2012/13
Forecast
2013/14
Forecast
2014/15
Forecast
$ million   Treasury IRD Difference Treasury IRD Difference Treasury IRD Difference Treasury IRD Difference Treasury IRD Difference

Direct tax

                               

Individuals

                               
Source deductions 22,097 20,958 20,750 208 21,307 21,181 126 22,949 22,777 172 24,778 24,559 219 26,603 26,343 260
Other persons tax 4,630 4,319 4,600 (281) 5,056 5,010 46 5,087 5,050 37 5,300 5,230 70 5,643 5,400 243
Refunds (2,793) (2,298) (2,600) 302 (2,192) (2,430) 238 (2,169) (2,290) 121 (2,228) (2,250) 22 (2,373) (2,170) (203)
Fringe benefit tax 469 440 451 (11) 421 431 (10) 443 453 (10) 467 481 (14) 494 508 (14)
Subtotal: Individuals 24,403 23,419 23,201 218 24,592 24,192 400 26,310 25,990 320 28,317 28,020 297 30,367 30,081 286
Company tax (net) 7,471 8,283 8,462 (179) 8,846 8,794 52 9,398 9,005 393 9,803 9,267 536 10,185 9,505 680

Withholding taxes on:

                               
Resident interest income 1,833 1,588 1,611 (23) 1,989 1,774 215 2,369 2,049 320 2,665 2,268 397 2,960 2,443 517
Non-resident income 889 494 527 (33) 578 572 6 634 611 23 659 635 24 680 659 21
Foreign-source dividends 6 2 4 (2) 2 4 (2) 2 4 (2) 2 4 (2) 2 4 (2)
Resident dividend income 114 221 215 6 233 214 19 314 286 28 490 455 35 505 457 48
Subtotal: Withholding tax 2,842 2,305 2,357 (52) 2,802 2,564 238 3,319 2,950 369 3,816 3,362 454 4,147 3,563 584
Total income tax 34,716 34,007 34,020 (13) 36,240 35,550 690 39,027 37,945 1,082 41,936 40,649 1,287 44,699 43,149 1,550
Other: Estate and gift duties 2 1 1 ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  .. 
Total direct tax 34,718 34,008 34,021 (13) 36,240 35,550 690 39,027 37,945 1,082 41,936 40,649 1,287 44,699 43,149 1,550

Indirect tax

                               
GST (net) 16,150 18,862 19,355 (493) 21,419 21,603 (184) 22,440 22,763 (323) 23,392 23,800 (408) 24,320 24,810 (490)

Excise duties on:

                               
Alcoholic drinks 622 625 637 (12) 665 655 10 698 672 26 731 687 44 762 701 61
Tobacco products 214 194 202 (8) 217 200 17 225 199 26 226 198 28 229 198 31
Petroleum fuels 805 895 879 16 964 966 (2) 991 1,004 (13) 1,028 1,043 (15) 1,060 1,071 (11)
Subtotal: Excise duties 1,641 1,714 1,718 (4) 1,846 1,821 25 1,914 1,875 39 1,985 1,928 57 2,051 1,970 81

Other indirect tax

                               
Customs duty 1,805 1,959 1,965 (6) 2,152 2,163 (11) 2,203 2,217 (14) 2,224 2,238 (14) 2,251 2,242 9
Road user charges 908 963 970 (7) 1,011 1,020 (9) 1,071 1,080 (9) 1,133 1,135 (2) 1,193 1,190 3
Gaming duties 264 264 261 3 266 263 3 270 266 4 274 270 4 277 274 3
Motor vehicle fees 195 176 175 1 180 180 ..  185 185 ..  191 190 1 197 195 2
Exhaustible resource levy 37 38 37 1 38 36 2 36 35 1 36 37 (1) 36 40 (4)
Approved issuer levy, cheque duty & other 82 91 77 14 86 72 14 86 72 14 86 72 14 86 72 14
Subtotal: Other indirect tax 3,291 3,491 3,485 6 3,733 3,734 (1) 3,851 3,855 (4) 3,944 3,942 2 4,040 4,013 27
Total indirect tax 21,082 24,067 24,558 (491) 26,998 27,158 (160) 28,205 28,493 (288) 29,321 29,670 (349) 30,411 30,793 (382)
Total tax 55,800 58,075 58,579 (504) 63,238 62,708 530 67,232 66,438 794 71,257 70,319 938 75,110 73,942 1,168
Total tax (% of GDP) 29.5% 28.7% 28.9% -0.2% 29.6% 29.4% 0.2% 29.9% 29.5% 0.4% 30.1% 29.7% 0.4% 30.3% 29.9% 0.5%

less Core Crown tax eliminations

                               
Core Crown income tax 111 195 195   389 389   408 408   444 444   483 483  
GST on Crown expenses and departmental outputs 4,809 5,382 5,382   5,968 5,968   6,113 6,113   6,218 6,218   6,429 6,429  
Crown ESCT 341 471 471   467 467   472 472   476 476   480 480  
Crown AIL 23 15 15   15 15   15 15   15 15   15 15  
Core Crown taxation 50,516 52,012 52,516 (504) 56,399 55,869 530 60,224 59,430 794 64,104 63,166 938 67,703 66,535 1,168
Core Crown tax (% of GDP) 26.7% 25.7% 25.9% -0.2% 26.4% 26.2% 0.2% 26.7% 26.4% 0.4% 27.1% 26.7% 0.4% 27.3% 26.9% 0.5%

less Total Crown tax eliminations

                               
Income tax from SOEs and CEs 354 321 321   437 437   535 535   691 691   771 771  
Other Crown GST ..  (23) (23)   7 7   11 11   13 13   6 6  
ESCT from SOEs and CEs 12 4 4   5 5   5 5   5 5   5 5  
Lottery duty 46 45 45   45 45   49 49   50 50   51 51  
Total Crown taxation 50,104 51,665 52,169 (504) 55,905 55,375 530 59,624 58,830 794 63,345 62,407 938 66,870 65,702 1,168
Total Crown tax (% of GDP) 26.5% 25.5% 25.8% -0.2% 26.2% 25.9% 0.2% 26.5% 26.1% 0.4% 26.8% 26.4% 0.4% 27.0% 26.5% 0.5%

Table 11: Tax policy changes included in the Half Year Update tax revenue forecasts

Table 11: Tax policy changes included in the Half Year Update tax revenue forecasts
Year ended 30 June
($ million)
2011
Forecast
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast

Material tax policy changes

         
Thin capitalisation rules for low-asset companies (30) (15) (15) (15) (15)
GST transitional measures (12) (15) (4) (3) (1)
Extending active income exemption to non-portfolio FIFs (10) (10) (10) (10)
Other (9) 22 (10) (6) (10)
Total (51) (18) (39) (34) (36)

Thin capitalisation rules for low-asset companies

In certain circumstances, companies will be able to use a thin capitalisation test based on cash flow and interest rather than debt and assets.

GST transitional measures

Some transitional measures were introduced to assist GST taxpayers with the change in the GST rate from 12.5% to 15%.

Extending active income exemption to non-portfolio FIFs (Foreign Investment Funds)

The rules for applying the active income exemption to controlled foreign companies will also apply to shareholdings of 10% or more in foreign companies that are not controlled by New Zealand investors.

Additional Fiscal Indicators

There are different approaches to assessing the relationship between the economy and the fiscal position, and the relationship between fiscal policy and the economy. One approach to assessing these relationships uses summary fiscal indicators. A discussion of Treasury’s perspective on these indicators, their use and limitations, and the relationship between them, can be found in the Budget 2010 Economic and Fiscal Update Additional Information.[1]

The cyclically-adjusted balance (CAB) indicator is subject to uncertainty because it uses estimated variables and is sensitive to new information, particularly regarding the output gap. The Treasury has recently reviewed the CAB indicator.[2] This review has raised methodological issues and examined a range of techniques to estimate the underlying fiscal position. For this Economic and Fiscal Update, there have been no methodological changes made since Budget 2010. However, the Treasury is currently considering what information it presents in future Economic and Fiscal Updates in light of this review.

The Treasury's fiscal impulse indicator uses the change in a cash based version of the cyclically-adjusted balance for the core Crown.[3] The methodology is the same as at Budget 2010 with the exception that payouts under the Deposit Guarantee Scheme (DGS) have been excluded from the indicator reflecting a judgement that these payouts are unlikely to have a direct impact on aggregate demand. For completeness, the indicator is shown without the adjustment for the DGS payouts, in order to show what effect this assumption has on the indicator.

Treasury's summary fiscal indicators

Output is projected to be below potential until 2014, with the gap closing in 2015. The output gap is estimated to be -0.8% in the 2011 fiscal year, slightly more negative than the -0.6% estimated in the 2010 BEFU Forecasts. Despite underlying cyclical weakness, the output gap is estimated to be just -0.1% in 2012. This primarily reflects temporary factors: a rise in activity associated the 2011 Rugby World Cup and the response to the damage caused by the Canterbury earthquake.

The CAB indicates a structural deficit in 2011 of around 5.2% of GDP compared to 4.0% estimated at the time of the 2010BEFUForecasts. This mainly reflects fiscal developments, including judgements about tax revenue (independent of judgements about the cyclical weakness of the economy) and one-off expense items, such as those relating to the Canterbury earthquake. The structural balance is forecast to improve significantly in 2012 to -2.7% of GDP.

The estimate of fiscal impulse for the 2011 fiscal year has maintained an expansionary stance with a fiscal impulse of 1.5% of GDP. This is more expansionary than the 1.2% of GDP impulse estimated in the 2010 BEFU Forecasts, reflecting a larger structural deficit. From 2012, the withdrawal of this stimulus is projected to occur, reflecting a steady unwinding of structural deficits.

Figure 1 - Operating balance before gains and losses and cyclically-adjusted indicator
Figure 1 - Operating balance before gains and losses and cyclically-adjusted indicator.
Source: The Treasury
Note: Years stated are those ended 30 June.
Figure 2 - Fiscal impulse
Figure 2 - Fiscal impulse.
Source: The Treasury
Note: Years stated are those ended 30 June

Table 12 - Additional fiscal indicators

Operating balance before gains and losses (Year ended June, % GDP)
Historical Forecast
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
1.9 3.3 3.8 4.6 4.4 3.4 3.1 -2.1 -3.3 -5.5 -2.8 -1.9 -0.6 0.0
Cyclically-adjusted operating balance before gains and losses
(Year ended June, % GDP)
Historical Forecast
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
1.8 2.8 2.9 3.7 3.4 2.6 1.7 -1.9 -2.7 -5.2 -2.7 -1.7 -0.4 0.2

Memorandum items:

Output gap (Year ended June, % deviation)
Historical Forecast
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
0.3 1.0 1.9 1.9 2.0 1.7 3.0 -0.5 -1.4 -0.8 -0.1 -0.5 -0.5 -0.4
Fiscal impulse (Year ended June, % GDP)
Historical Forecast
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
-0.8 -0.3 0.3 -1.6 0.5 0.1 0.7 3.6 1.7 1.5 -1.5 -1.1 -0.9 -0.7

Source: The Treasury

Notes

Accounting Policies

The forecast financial statements contained in the published Half Year Economic and Fiscal Update 2010 are based on the following accounting policies.

Statement of Compliance

These forecast financial statements have been prepared in accordance with the Public Finance Act 1989 and with New Zealand Generally Accepted Accounting Practice (NZ GAAP). The accounting policies applied in the statements are the same as those applied in the audited, actual financial statements of the Government for the year ended 30 June 2010.

For the purposes of these forecast financial statements, the government reporting entity has been designated as a public benefit entity. The forecast financial statements comply with FRS-42: Prospective Financial Statements and NZ GAAP as it relates to prospective financial statements.

Reporting Entity

The Government reporting entity as defined in section 2(1) of the Public Finance Act 1989 means:

  • the Sovereign in right of New Zealand, and
  • the legislative, executive, and judicial branches of the Government of New Zealand.

Basis of Preparation

These forecast financial statements have been prepared on the basis of historic cost modified by the revaluation of certain assets and liabilities.

The forecast financial statements are prepared on an accrual basis, unless otherwise specified (for example, the Statement of Cash Flows).

The forecast financial statements are presented in New Zealand dollars rounded to the nearest million, unless otherwise specified.

Judgements and Estimations

The preparation of these forecast financial statements requires judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. For example, the present value of large cash flows that are predicted to occur a long time into the future, as with the settlement of ACC outstanding claim obligations and Government Superannuation retirement benefits, depends critically on judgements regarding future cash flows, including inflation assumptions and the risk free discount rate used to calculate present values.

The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. For example, the risk free rate is derived from government bond rates for the periods covered by these bonds, and is extrapolated to converge towards the long-term average of 6% beyond that time. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

More details on these judgements and estimations are available in the Financial Statements of the Government of New Zealand for the year ended 30 June 2010.

Early Adoption of Standards and Interpretations

The Government has elected to early-adopt all NZ IFRSs and Interpretations that had been approved by the New Zealand Accounting Standards Review Board as at 30 June 2010 but that are not yet effective, with the exception of NZ IFRS 9: Financial Instruments. This new standard (which is incomplete) was approved by the Accounting Standards Review Board in November 2009. The standard addresses the issues of classification and measurement of financial assets and becomes effective for annual reporting periods commencing on or after 1 January 2013.

The standards and interpretations that have been early-adopted by the Government predominantly relate to the presentation of financial information and do not have a material impact on these forecast financial statements.

Reporting and Forecast Period

The reporting period for these forecast financial statements is the year ended 30 June 2011 to 30 June 2015.

The “2010 Actual” figures reported in the statements are the audited results reported in the Financial Statements of Government for the year ended 30 June 2010. The “2011 Previous Budget” figures are the original forecasts to 30 June 2011, as presented in the 2010 Budget. The “2011 Forecast” figures incorporate actual financial results up to either 30 September 2010 or 31 October 2010.

Where necessary, the financial information for State-owned enterprises and Crown entities that have a balance date other than 30 June has been adjusted for any transactions or events that have occurred since their most recent balance date and that are significant for the Government's financial statements. Such entities are primarily in the education sector.

Basis of Combination

These forecast financial statements combine the following entities using the acquisition method of combination:

Core Entities

  • Ministers of the Crown
  • Government departments
  • Offices of Parliament
  • the Reserve Bank of New Zealand
  • New Zealand Superannuation Fund

Other entities

  • State-owned enterprises
  • Crown entities (excl. Tertiary Education Institutions)
  • Air New Zealand Limited
  • Organisations listed in Schedule 4 of the Public Finance Act 1989

Corresponding assets, liabilities, income and expenses, are added together line by line. Transactions and balances between these sub-entities are eliminated on combination. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies into line with those used by the Government reporting entity.

Tertiary education institutions are equity-accounted for the reasons explained in the notes to the Government's financial statements for the period ended 30 June 2010. This treatment recognises these entities' net assets, including asset revaluation movements, surpluses and deficits.

The basis of combination for joint ventures depends on the form of the joint venture.

  • Jointly controlled operations: The Government reporting entity recognises the assets it controls, the liabilities and expenses that it incurs, and its share of the jointly controlled operations’ income
  • Jointly controlled assets: The Government reporting entity recognises its share of the jointly controlled assets, its share of any liabilities and expenses incurred jointly, any other liabilities and expenses it has incurred in respect of the jointly controlled asset, and income from the sale or use of its share of the output of the jointly controlled assets; and
  • Jointly controlled entities: Jointly controlled entities are equity accounted, whereby the Government reporting entity initially recognises its share of interest in these entities' net assets at cost and subsequently adjusts the cost for changes in net assets. The Government reporting entity’s share of the jointly controlled entities’ surpluses and deficits are recognised in the statement of financial performance.

Accounting Policies

The accounting policies set out below have been applied consistently to all periods in the 2010 HYEFU Update.

Income

Taxation revenue levied through the Crown's sovereign power

The Government provides many services and benefits that do not give rise to revenue. Further, payment of tax does not of itself entitle a taxpayer to an equivalent value of services or benefits, since there is no relationship between paying tax and receiving Crown services and transfers. Such revenue is received through the exercise of the sovereign power of the Crown in Parliament.

Where possible, taxation revenue is recognised at the time the debt to the Crown arises.

 
Revenue type Revenue recognition point
Source deductions When an individual earns income that is subject to PAYE
Resident withholding tax (RWT) When an individual is paid interest or dividends subject to deduction at source
Fringe benefit tax (FBT) When benefits are provided that give rise to FBT
Provisional tax When taxable income is earned
Terminal tax Assessment filed date
Goods and services tax (GST) When the liability to the Crown is incurred
Customs and excise duty When goods become subject to duty
Road user charges and motor vehicle fees When payment of the fee or charge is made
Stamp, cheque and credit card duties When the liability to the Crown is incurred
Exhaustible resources levy When the resource is extracted
Other indirect taxes When the debt to the Crown arises
Levies (eg, ACC levies) When the obligation to pay the levy is incurred
Revenue earned through operations

Revenue from the supply of goods and services to third parties is measured at the fair value of consideration received. Revenue from the supply of goods is recognised when the significant risks and rewards of ownership have been transferred to the buyer. Revenue from the supply of services is recognised on a straight-line basis over the specified period for the services unless an alternative method better represents the stage of completion of the transaction.

Interest income

Interest income is accrued using the effective interest rate method.

The effective interest rate exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount. The method applies this rate to the principal outstanding to determine interest income each period.

Dividend income

Dividend income from investments is recognised when the Government's rights as a shareholder to receive payment have been established.

Rental income

Rental income is recognised in the statement of financial performance on a straight-line basis over the term of the lease. Lease incentives granted are recognised evenly over the term of the lease as a reduction in total rental income.

Donated or Subsidised Assets

Where an asset is acquired for nil or nominal consideration, the fair value of the asset received is recognised as income in the statement of financial performance.

Expenses

General

Expenses are recognised in the period to which they relate.

Welfare benefits and entitlements

Welfare benefits and entitlements, including New Zealand Superannuation, are recognised in the period when an application for a benefit has been received and the eligibility criteria has been met.

Grants and subsidies

Where grants and subsidies are discretionary until payment, the expense is recognised when the payment is made. Otherwise, the expense is recognised when the specified criteria have been fulfilled and notice has been given to the Crown.

Interest expense

Interest expense is accrued using the effective interest rate method.

The effective interest rate exactly discounts estimated future cash payments through the expected life of the financial liability to that liability's net carrying amount. The method applies this rate to the principal outstanding to determine interest expense each period.

Foreign currency

Transactions in foreign currencies are initially translated at the foreign exchange rate at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of financial performance, except when recognised in the statement of comprehensive income when hedge accounting is applied.

Non-monetary assets and liabilities measured at historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies and measured at fair value are translated into New Zealand dollars at the exchange rate applicable at the fair value date. The associated foreign exchange gains or losses follow the fair value gains or losses to either the statement of financial performance or the statement of comprehensive income.

Foreign exchange gains and losses arising from translating monetary items that form part of the net investment in a foreign operation are reported in a translation reserve in net worth and recognised in the statement of comprehensive income.

Sovereign receivables and taxes repayable

Receivables from taxes, levies and fines (and any penalties associated with these activities) as well as social benefit receivables do not arise out of a contract. These non-contract receivables are collectively referred to as sovereign receivables.

Sovereign receivables are initially assessed at nominal amount or face value; that is, the receivable reflects the amount of tax owed, levy, fine charged, or social benefit debt payable. These receivables are subsequently adjusted for penalties and interest as they are charged, and tested for impairment. Interest and penalties charged on tax receivables are presented as tax revenue in the statement of financial performance.

Taxes repayable represent refunds due to taxpayers and are recognised at their nominal value. They are subsequently adjusted for interest once account and refund reviews are complete.

Financial instruments

Financial assets

Financial assets are designated into the following categories: loans and receivables, financial instruments available-for-sale, financial assets held-for-trading, and financial instruments designated as fair value through profit and loss. This designation is made by reference to the purpose of the financial instruments, policies and practices for their management, their relationship with other instruments and the reporting costs and benefits associated with each designation.

The maximum loss due to default on any financial asset is the carrying value reported in the statement of financial position.

 
Major financial asset type Designation
Trade and other receivables All designated as loans and receivables
Student loans All designated as loans and receivables
Kiwibank mortgages Generally designated as loans and receivables
Other advances Generally designated as loans and receivables
IMF financial assets All designated as loans and receivables
Share investments Generally designated as fair value through profit and loss
Marketable securities Generally designated as fair value through profit and loss

Loans and receivables are recognised initially at fair value plus transaction costs and subsequently measured at amortised cost using the effective interest rate method (refer interest income policy). Loans and receivables issued with a duration of less than 12 months are recognised at their nominal value, unless the effect of discounting is material. Allowances for estimated irrecoverable amounts are recognised when there is objective evidence that the asset is impaired. Interest, impairment losses and foreign exchange gains and losses are recognised in the statement of financial performance.

Financial assets held for trading and financial assets designated at fair value through profit or loss are recorded at fair value with any realised and unrealised gains or losses recognised in the statement of financial performance.

A financial asset is designated at fair value through profit and loss if acquired principally for the purpose of trading in the short term. It may also be designated into this category if the accounting treatment results in more relevant information because it either significantly reduces an accounting mismatch with related liabilities or is part of a group of financial assets that is managed and evaluated on a fair value basis, such as with the NZ Superannuation Fund. Gains or losses from interest, foreign exchange and other fair value movements are separately reported in the statement of financial performance. Transaction costs are expensed as they are incurred.

Available-for-sale financial assets are initially recorded at fair value plus transaction costs. They are subsequently recorded at fair value with any resultant fair value gains or losses recognised in the statement of comprehensive income with some exceptions. Those exceptions are for impairment losses, any interest calculated using the effective interest method and, in the case of monetary items (such as debt securities), foreign exchange gains and losses resulting from translation differences due to changes in amortised cost of the asset. These latter items are recognised in the statement of financial performance.

For non-monetary available-for-sale financial assets (eg, some unlisted equity instruments) the fair value movements recognised in the statement of comprehensive income include any related foreign exchange component. At derecognition, the cumulative fair value gain or loss previously recognised in the statement of comprehensive income, is recognised in the statement of financial performance.

Cash and cash equivalents include cash on hand, cash in transit, bank accounts and deposits with an original maturity of no more than three months.

Fair values of quoted investments are based on current bid prices. Regular way purchases and sales of all financial assets are accounted for at trade date. If the market for a financial asset is not active, fair values for initial recognition and, where appropriate, subsequent measurement are established by using valuation techniques, as set out in the following notes. At each balance date an assessment is made whether there is objective evidence that a financial asset or group of financial assets is impaired.

Financial liabilities
 
Major financial liability type Designation
Accounts payable All designated at amortised cost
Government stock Generally designated at amortised cost
Treasury bills Generally designated at amortised cost
Government retail stock All designated at amortised cost
Settlement deposits with Reserve Bank All designated as fair value through profit and loss
Issued currency Not designated: Recognised at face value

Financial liabilities held for trading and financial liabilities designated at fair value through profit or loss are recorded at fair value with any realised and unrealised gains or losses recognised in the statement of financial performance. A financial liability is designated at fair value through profit and loss if acqu