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Economic and fiscal update

Half Year Economic and Fiscal Update 2013

The Half Year Economic and Fiscal Update (HYEFU) 2013 provides the Treasury's latest economic forecasts and the forecast financial statements of the Government, including the implications of Government financial decisions.

HYEFU 2013 was published conjointly with the Budget Policy Statement (BPS) 2014.

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

This document is available for viewing or download in Adobe PDF and HTML formats, with the exception of the Additional Information. Using PDF Files

Statement of Responsibility

On the basis of the economic and fiscal information available to it, the Treasury has used its best professional judgement in supplying the Minister of Finance with this Economic and Fiscal Update. The Update incorporates the fiscal and economic implications both of Government decisions and other circumstances as at 3 December 2013 that were communicated to me by the Minister of Finance in accordance with the requirements of the Public Finance Act 1989 and of other economic and fiscal information available to the Treasury as at 3 December 2013. This Update does not incorporate any decisions, circumstances, or statements that the Minister of Finance has determined, in accordance with the Public Finance Act 1989, should not be incorporated in this Update.

Gabriel Makhlouf
Secretary to the Treasury

9 December 2013

To enable the Treasury to prepare this Economic and Fiscal Update I have ensured the Secretary to the Treasury has been advised, in accordance with the requirements of the Public Finance Act 1989, of all Government decisions and other circumstances as at 3 December 2013 of which I was aware and that had material economic or fiscal implications.

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

Hon Bill English
Minister of Finance

9 December 2013

Executive Summary

  • The economic expansion is becoming increasingly embedded, with growth becoming more broad-based although still dominated by domestic demand.
  • Growth in the second half of 2013 appears to have been stronger than expected at Budget time with real gross domestic product (GDP) estimated to be growing at around a 3% annualised pace. Real GDP growth is expected to be 3.6% in the 2015 March year, but eases to around 2% in the last two years of the forecast period. Over the five years to March 2018, real GDP growth averages 2.6%, a little above the Treasury's estimate of potential growth over this period.

*Private final demand comprises private consumption, residential and market investment spending

Figure 1 - Real GDP and private final demand*
Figure 1 - Real GDP and private final demand*   .
Source:  Statistics New Zealand, the Treasury
  • A stronger economy sees the underlying fiscal position improve faster than in the Budget Update, although developments outside the core Crown see the overall total Crown operating balance before gains and losses (OBEGAL) being little changed this year and next. OBEGAL is forecast to move from a deficit of $4.4 billion last year to a small surplus of $0.1 billion in the year ending June 2015, and to $5.6 billion in the year ending June 2018.
  • Government net core Crown debt peaks a year earlier and at a lower level than previously forecast at $64.5 billion in the year ending June 2016.
  • The main influences on the outlook for the economy are broadly similar to those in the Budget Update.
  • The Canterbury rebuild remains a key driver of demand, along with a high terms of trade and strengthening labour market conditions supporting income growth and associated household and firm spending. Credit growth is increasing but overall remains moderate.
  • Higher-than-expected net migration and household wealth inflows are also contributing to near term demand, as are stimulatory monetary policy settings, although all are forecast to diminish in importance over the forecast period. Private spending growth is forecast to accelerate to over 5% in the year ahead.
  • The Half Year Update sees a continuation of low government spending growth. This, together with some recovery in effective tax rates sees fiscal policy exerting a restraining influence on demand and interest rates, notwithstanding planned reductions in Accident Compensation Corporation (ACC) levies in the June 2015 and 2016 years.
  • The global backdrop for these forecasts is for steady, but uneven, economic growth with the possibility of further economic and financial market turbulence. It is likely to be some time yet before the major advanced economies begin to “normalise” monetary and fiscal conditions, contributing to an elevated New Zealand dollar in the meantime.
  • The exchange rate is assumed to remain high for much of the forecast period, acting as a drag on export and import-competing sectors but spreading the income gains from the high terms of trade to the broader economy. Growth in imports, partly associated with strong investment growth, means net exports make a negative contribution to GDP growth over the first three years of the forecast period.
  • In sum, the economy is expected to be operating at, or above capacity over most of the forecast period, leading to some increase in price pressures and the current account deficit. The unemployment rate is forecast to decline to below 5%, annual Consumers Price Index (CPI) inflation to move back to around the middle of the 1% to 3% target band and the current account deficit to increase to around 6.5% of GDP.
  • Higher inflation will lead to an eventual withdrawal of macroeconomic stimulus. Short-term interest rates are expected to begin increasing next year and to rise gradually thereafter.
Figure 2 - OBEGAL, core Crown residual cash and core Crown net debt
Figure 2 - OBEGAL, core Crown residual cash and core Crown net debt   .
Source:  The Treasury
  • Fiscal policy restraint and the high exchange rate imply interest rates are lower than otherwise would be the case. The recent application of macro prudential tools also assists monetary policy over the short term. In the absence of these downward forces, the size of the Canterbury rebuild would likely force interest rates to rise earlier and by more.
  • The estimated size of the Christchurch rebuild is unchanged from the Budget Update at $40 billion, although the precise timing of activity remains a key uncertainty. The Government's fiscal costs are currently assessed to be $14.9 billion.
  • Core Crown operating cash flows also return to surplus in the year ending June 2015, but when combined with net capital spending, core Crown residual cash does not return to surplus until the year ending June 2017 (both a year earlier than in the Budget Update).
  • There is a mix of upside and downside risks, including the size and pace of the Canterbury rebuild, the extent of the turnaround in net migration currently underway, the path of the terms of trade, the path and pass-through of the exchange rate and the saving behaviour of households, particularly in light of current house price increases.
  • Global risks, although more even than in recent years, remain skewed to the downside, which if crystallised, would act to accentuate the domestic orientation of forecast growth.
  • We see a risk of a more cyclical path for the economy, with stronger domestic demand driven growth in the short to medium term, necessitating a stronger macro policy response and eventual slowing in growth.
  • The Half Year Update contains two alternative scenarios to illustrate some of the risks to the main forecasts. One scenario maps out a more pronounced domestic demand driven cycle while the other shows the impact of weaker Asian trading partner growth.
  • In addition to the fiscal impact of changes to economic activity, the Government is exposed to other fiscal risks. For example, the Crown's financial position is susceptible to market risk with regards to movements in market variables such as interest rates, exchange rates and equity prices. There are also a number of contingent liabilities and fiscal risks outlined in the Specific Fiscal Risk chapter.
Table 1 - Summary of the Treasury's main economic and fiscal forecasts
  2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Economic (March years, %)            
Economic growth1 2.7 2.7 3.6 2.7 2.0 2.2
Unemployment rate2 6.2 5.8 5.6 5.4 5.2 4.7
CPI inflation3 0.9 1.4 2.4 2.4 2.3 2.2
Current account balance4 -4.5 -4.2 -5.5 -6.3 -6.5 -6.4
Fiscal (June years, % of GDP)            
Total Crown OBEGAL5 -2.1 -1.0 0.0 0.7 1.2 2.1
Net debt6 26.2 26.3 26.5 25.8 24.4 22.3

Notes:

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

Sources: Statistics New Zealand, the Treasury

Finalisation Dates for the Update

Economic data - 11 November

Economic forecasts - 11 November

Tax revenue forecasts - 18 November

Fiscal forecasts - 3 December

Specific fiscal risks - 3 December

Text finalised - 11 December

Economic Outlook

Overview

The near-term outlook for the New Zealand economy is robust, with an increasingly embedded and broad-based pick-up in activity anticipated following a drought-affected first half of 2013. Real GDP growth is expected to exceed its potential rate over the coming years, peaking at 3.6% in the March 2015 year, before easing to a more moderate rate of around 2.0% towards the end of the forecast period.

Growth outlook reflects net influence of supportive and constraining factors

The growth outlook continues to reflect the net impact of a number of large supporting and constraining forces. The Canterbury rebuild remains a key factor on the supportive side, along with a high terms of trade, stimulatory monetary policy settings and rising incomes on the back of a strengthening labour market.

The supportive influences on the domestic economy are set against a backdrop of familiar constraining factors. These include the forecast reduction in the fiscal deficit, which will continue to lean against demand, an elevated exchange rate that will remain a near-term headwind for growth in the export sector, and a steady, but uneven, outlook for global economic growth.

The main influences on the outlook for the economy are broadly similar to those in the Budget Update. However, higher-than-expected net migration inflows over the year to date contribute to stronger near-term demand growth, and add to the supply potential of the economy further out.

Figure 1.1 - Real GDP growth
Figure 1.1 - Real GDP growth   .
Source: 

Domestic demand pressures building in the near term...

The Canterbury rebuild is expected to provide significant impetus to demand over the forecast horizon and beyond, chiefly through additional residential and business investment, but also through related consumption spending on consumer durables.

The merchandise terms of trade are forecast to remain elevated and close to historic highs across most of the forecast period, supported by rising demand for New Zealand's commodity exports. This is a key driver of income growth and nominal GDP growth.

An additional inflow of approximately 26,000 net migrants compared to the Budget Update will boost the productive capacity of the economy over time, but will add to demand pressures in the near term - particularly in the housing market in Auckland.

Households are assumed to be broadly comfortable with the amount of debt reduction undertaken over recent years (as a share of income). That said, households are expected to remain cautious in their spending decisions, with increases in consumption coming from rises in income, rather than from running down assets or increasing debt.

...against a backdrop of familiar offsetting factors

Ongoing steps to reduce the fiscal deficit will remain a constraining factor on demand over the coming years, but will free up resources enabling additional activity elsewhere, such as the Canterbury rebuild. The reduction in the deficit will also allow interest rates and the exchange rate to remain lower than they would otherwise be.

The elevated New Zealand dollar will constrain activity in exchange rate-sensitive parts of the economy over the coming years, including the non-commodity and service export sectors, but will also support investment and consumption by making imported goods cheaper. The assumed decline in the exchange rate is expected to begin to stimulate activity in the external sector towards the end of the forecast period.

The near-term outlook for trading partner growth is slightly weaker than forecast in the Budget Update, primarily owing to slower growth in the Australian economy as mining investment moderates. Although the medium-term outlook for this growth is relatively benign, there are risks arising from the diverging trends in the global economy.

Interest rates expected to begin to rise next year

With the economy set for a period of above-potential growth, increasing price pressures are expected to see the Reserve Bank begin to increase the Official Cash Rate (OCR) in the first half of 2014. The forecast track for short-term interest rates in the Half Year Update is broadly similar to that in the Budget Update, but is around 30 basis points lower than it would have been in the first half of the forecast period if loan-to-value (LVR) lending restrictions had not been implemented.

Having been the subject of a range of revisions since the Budget Update, the annual current account deficit is expected to narrow further in the near term, before widening to 6.4% of GDP in the March 2018 quarter.

Table 1.1 - Economic forecasts1
(Annual average % change,
March years)
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Private consumption 2.3 3.7 2.8 2.8 1.9 1.6
Public consumption 0.4 0.1 0.4 0.7 0.6 0.7
Total consumption 1.9 2.9 2.3 2.4 1.6 1.4
Residential investment 19.1 16.7 25.5 16.4 3.7 0.6
Market investment 6.2 11.7 8.1 3.1 0.7 1.0
Non-market investment -12.2 15.2 -3.7 2.4 2.4 2.4
Total investment 7.1 14.6 12.1 6.2 1.7 1.1
Stock change2 -0.4 0.2 -0.2 -0.1 0.0 0.1
Gross national expenditure 2.3 5.7 4.4 3.3 1.6 1.3
Exports 3.0 -2.2 2.4 1.9 2.9 3.0
Imports 0.7 7.3 5.1 4.3 2.1 0.8
GDP (expenditure measure) 2.9 2.4 3.4 2.5 2.0 2.2
GDP (production measure) 2.7 2.7 3.6 2.7 2.0 2.2
Real GDP per capita 2.0 1.6 2.2 1.6 1.0 1.2
Nominal GDP (expenditure measure) 2.4 6.5 4.9 5.2 4.0 3.7
GDP deflator -0.5 3.9 1.5 2.6 2.0 1.5
Output gap (% deviation, March quarter)3 -0.9 -0.2 0.9 0.5 0.0 0.0
Employment 0.3 2.0 2.6 1.4 1.0 1.3
Unemployment rate4 6.2 5.8 5.6 5.4 5.2 4.7
Participation rate5 67.9 68.5 68.9 68.7 68.5 68.5
Nominal wages6 2.1 2.7 3.1 3.2 3.4 3.4
CPI inflation7 0.9 1.4 2.4 2.4 2.3 2.2
Terms of trade8 -6.1 10.6 -0.9 1.6 0.3 0.0
Current account balance            
  $billion -9.5 -9.5 -13.0 -15.7 -16.7 -17.2
  % of GDP -4.5 -4.2 -5.5 -6.3 -6.5 -6.4
Net international investment position
% of GDP
-71.8 -70.6 -72.8 -75.5 -79.0 -82.6
TWI9 75.9 77.0 75.3 73.9 70.0 65.3
90-day bank bill rate9 2.7 2.7 3.6 4.4 4.9 5.2
10-year bond rate9 3.7 4.8 4.9 5.1 5.2 5.2

Notes:

  1. Forecasts finalised 11 November 2013.
  2. Contribution to GDP growth.
  3. Estimated as the percentage difference between actual real GDP and potential real GDP.
  4. Percent of the labour force, March quarter, seasonally adjusted.
  5. Percent of the working-age population, March quarter, seasonally adjusted.
  6. Quarterly Employment Survey, average ordinary-time hourly earnings, annual percentage change.
  7. Annual percentage change.
  8. System of National Accounts (SNA) and merchandise basis, annual average percentage change.
  9. Average for the March quarter.

Longer time series for these variables are provided on page 129.

Economic Outlook

Economy set for period of above-potential growth in the near term...

The near-term outlook for the New Zealand economy is robust, with an increasingly embedded and broad-based pick-up in activity anticipated following a drought-affected first half of 2013. The Canterbury rebuild is showing signs of gaining momentum, the labour market is strengthening and monetary conditions remain stimulatory. Strong external demand for New Zealand's commodity exports, particularly dairy, has underpinned a rebound in the terms of trade to near-record highs and domestic demand has received further support from a marked turnaround in net migration inflows since the start of the year.

Overall, real GDP growth is forecast to accelerate above its potential rate in the coming years, peaking at 3.6% in the March 2015 year. This will result in an increase in price pressures and will necessitate withdrawal of monetary policy stimulus in the first half of 2014. There is likely to be some variation in growth and activity at a regional level.

...followed by a moderation in the later years

Real GDP growth is expected to moderate to a more sustainable pace later in the forecast period, in line with the Treasury's estimate that potential growth will average around 2.4% over the forecast period. This reflects the Treasury's assessment of growth in the labour force and productivity in the longer run.[1]

The assumed depreciation in the New Zealand dollar is forecast to begin to stimulate activity in the exchange rate-sensitive parts of the economy, such as the services and non-commodity export sectors, towards the end of the forecast period.

Outlook reflects net impact of large influencing factors

The growth outlook for the New Zealand economy reflects the net influence of a number of large supportive and constraining forces.

Many of the supportive factors that are expected to influence domestic activity over the forecast period do so in a similar manner, and to a similar extent, as forecast at the Budget Update. These include the impetus from the Canterbury rebuild, stimulatory monetary policy settings and a strengthening labour market.

Overall, however, the net impact of the supportive influences on demand in the near term is slightly stronger than forecast at the Budget Update, including a larger-than-expected turnaround in net migration flows reflecting the recent weaker performance of the Australian economy. We judge the balance of risks to the central forecast to be balanced, but explore alternative economic scenarios in the Risks and Scenarios chapter.

Canterbury rebuild remains a key influence across the forecast period...

The Canterbury rebuild is expected to provide significant impetus to demand over the forecast horizon and beyond, chiefly through additional residential and business investment, supported by higher private consumption, particularly of consumer durables.

Estimating the level of investment activity associated with the Canterbury rebuild is inherently difficult and subject to much uncertainty. The Treasury's estimate of the total level of investment that relates to the Canterbury rebuild is similar to that in the Budget Update at around $40 billion. Approximately half of this total investment is forecast to have taken place by the end of the forecast period in mid-2018.

...underpinning strong growth in residential investment...

After a soft patch in the middle of the year, a surge in building consents in the Canterbury region in the September quarter suggests that residential rebuild activity is about to increase significantly. Annual real residential investment growth is forecast to accelerate to a peak of around 26% in the March 2015 year. This peak in growth occurs slightly later and at a lower level than forecast in the Budget Update, but the broad picture is similar in level terms. Over two-thirds of the residential rebuild is expected to be completed by the end of the forecast period in 2018.

While the Canterbury rebuild is expected to provide a large proportion of the impetus for the surge in residential investment over the forecast period, activity in other parts of the country is also expected to rise significantly, particularly in the Auckland region. The drivers of the underlying growth include a catch-up for past population growth, expected future population increases (including through migration), rising household income, and low, albeit rising, interest rates. Figure 1.2 shows the share of real residential investment with and without the Canterbury rebuild. Including rebuild-related activity, residential investment is forecast to peak at around 6% of real GDP - in line with the share reached in the early-2000s.

Figure 1.2 - Real residential investment[2]
Figure 1.2 - Real residential investment.
Source: Statistics New Zealand, the Treasury

Rapidly rising house prices, particularly in the Auckland region, are expected to encourage an increase in new home building, although this will take time. The implementation of LVR lending restrictions by the Reserve Bank makes it less certain how the supply and demand dynamics in the housing market will play out. Higher-than-expected net migration inflows mean that annual house price inflation is forecast to be stronger in the near term than in the Budget Update. However, the impact from migration is offset to some extent by the LVR lending restrictions, which are expected to impose a modest dampening effect on house price inflation in the near term. Annual house price inflation is forecast to peak at around 10% in the December 2013 quarter, before moderating to 2.4% towards the end of the forecast period.

The forecast track for short-term interest rates in the Half Year Update is broadly similar to that in the Budget Update, but is around 30 basis points lower in the first half of the forecast period than it would have been if LVR restrictions had not been implemented (consistent with the Reserve Bank's estimates).

Notes

  • [1]See the note, Potential Output in the 2012 Half Year Update, published as part of the 2012 Half Year Economic and Fiscal Update ,for background information (available on the Treasury website).
  • [2]Note that the “Excluding Canterbury rebuild” line is only illustrative and should not be interpreted as an alternative forecast of what would have occurred in the absence of the Canterbury earthquakes.

...as well as market investment

The current environment of low interest rates, strong business confidence and an elevated exchange rate (which makes imported capital goods cheaper) is also expected to drive a sharp increase in market investment in the near term. The Canterbury rebuild is expected to contribute to an increase in market investment as well. Later in the forecast period, higher interest rates and a lower exchange rate are expected to see market investment growth moderate.

Robust outlook for private consumption...

The large increase in residential investment over the forecast period is also expected to provide significant impetus to private consumption in the form of related and additional spending on consumer durables. Private consumption growth is expected to accelerate to 3.7% in the March 2014 year – its fastest pace since the end of 2007 – as consumer confidence remains elevated and real incomes are boosted by the current subdued inflation environment.

The pace of private consumption growth is expected to slow later in the forecast period as real income and house price growth slow, and interest rates rise (Figure 1.3).

Figure 1.3- Private consumption and house prices
Figure 1.3- Private consumption and house prices   .
Source:  Statistics New Zealand, QV, the Treasury

Migration and Regional Activity

One of the main differences between the Half Year Update and the Budget Update forecasts is the more pronounced turnaround in net permanent and long-term migration flows. After registering a net outflow of migrants throughout 2012, the annual net flow of migrants moved into positive territory in January 2013, and has since climbed to a three-year high of 17,500 in the year ended October 2013.

Net migration flows often exhibit large cycles as arrivals and departures move in different directions at the same time. In a reflection of the recent divergence in performance between the New Zealand and Australian economies, fewer migrant departures, mostly to Australia, account for around two-thirds of the turnaround in net migration flows since the start of 2013. Moreover, just over half of the increase in arrivals since the start of the year was accounted for by arrivals from Australia, two-thirds of whom were returning New Zealanders. All told, the Half Year Update incorporates an additional net inflow of around 26,000 migrants over the forecast period compared with the Budget Update, mainly in the next two years (Figure 1.4).

Figure 1.4 - Net migration
Figure 1.4  - Net migration   .
Source:  Statistics New Zealand, the Treasury
Additional migrants will add to the economy's supply potential over time...

Additional people in New Zealand will flow through to an increase in the labour force, and add to the underlying productive capacity of the economy. An additional inflow of migrants may also help to relieve regional pressures and bottlenecks in the labour market - particularly arising out of the ongoing Canterbury rebuild.

...but will add to demand pressures in the near term

However, it will take time for the full supply impetus to be felt and, in the meantime, higher net migration inflows will exacerbate near-term demand pressures. With the economy already operating close to capacity, any additional demand impetus will complicate the task for the Reserve Bank of setting monetary policy in the near term.

Moreover, the concentrated nature of the demand associated with higher net migration will also contribute to sustained upward pressure on house prices, particularly in the Auckland region. While aggregate annual house price growth in the Half Year Update is forecast to peak at a slower pace than in the previous housing cycle in the early-to-mid-2000s, the aggregate picture masks significant variation at a regional level.

Overall, to the extent that stronger near-term demand pressures elicit a more aggressive tightening of monetary policy, the wider risk is of a more pronounced economic cycle than in the central forecast. The Risks and Scenarios chapter contains an alternative scenario in which the net migration inflow is greater than in the Half Year Update's main forecast.

...supported by the historically-high terms of trade...

The positive outlook for the terms of trade is another strongly supportive factor in the Half Year Update forecasts. This will continue to underpin incomes and nominal GDP over the forecast period. The near-term rebound in the merchandise terms of trade reflects sustained high dairy prices as well as support from forestry and meat during the middle of the year. In keeping with commodity price indicators, the merchandise terms of trade are expected to be around 15% higher in the December 2013 quarter than in the same period a year ago (Figure 1.5). Dairy prices are expected to fall back as global supply increases. The timing is uncertain and global supply remains constrained, but the Half Year Update forecasts assume a drop in dairy prices, and a corresponding modest correction in the terms of trade, during the first half of 2014.

Figure 1.5 - Merchandise terms of trade (SNA) and ANZ commodity price index
Figure 1.5 - Merchandise terms of trade (SNA) and ANZ commodity price index   .
Source:  Statistics New Zealand, ANZ, the Treasury

Overall, though, the terms of trade are expected to remain near record highs over the medium term, at a similar level seen in the Budget Update, supported by structural factors including rising demand for New Zealand's commodity exports, particularly from China.

...and a strengthening labour market

Having shown signs of improvement over the past year, the labour market is expected to strengthen further over the forecast period, with the unemployment rate falling gradually and employment continuing to increase. The Canterbury rebuild will be a large contributor to the strengthening in the near term, along with rising activity in the Auckland region. (See the Migration and Regional Activity box.) Nominal wage growth is expected to be solid throughout the forecast period, with annual growth remaining broadly in the range of 2.5% to 3.5%. This is consistent with moderate real wage growth of around 1% per year on average over the forecast period.

The labour force participation rate is expected to increase over the coming years as stronger employment conditions encourage more workers to enter the labour force. Ongoing welfare reform is expected to strengthen job-search incentives and have an additional positive influence on labour force participation. The participation rate is expected to moderate slightly towards the end of the forecast period reflecting the effect of an ageing population.

Figure 1.6 - Unemployment rate and participation rate
Figure 1.6 - Unemployment rate and participation rate   .
Source:  Statistics New Zealand, the Treasury

However, consumers expected to remain cautious...

As outlined in the Budget Update, developments in household net worth, partly driven by house price movements and reduced uncertainty about future growth, underpin our assumption that households are broadly comfortable with the amount of debt reduction undertaken over recent years (as a share of income). That said, households are expected to remain cautious in their spending decisions in the coming years, with increases in consumption coming from rises in income, rather than from running down assets or increasing debt further.

All told, household saving as a percentage of household disposable income is expected to remain broadly flat over the forecast period, as it has been for the past few years.[3] This represents a shift in behaviour from the mid-2000s and its continuation will be an important factor influencing demand in the economy.

...and there is a backdrop of familiar constraining factors, including fiscal restraint...

The supportive influences on the domestic economy are set against a familiar backdrop of factors that will constrain growth, including continued steps to reduce the fiscal deficit, an elevated exchange rate and a steady, but uneven, outlook for global economic growth.

Ongoing steps to reduce the fiscal deficit will remain a constraining factor on demand over the coming years. The combined impact of fiscal decisions in the 2013 and previous Budgets will see real government consumption rise only modestly over the forecast period, averaging growth of just 0.5% per year compared to around 4% over much of the 2000s (Figure 1.7). As a proportion of real GDP, government consumption declines over the period towards the past decade's low of 16.0%. A lower share of government spending in the economy will free up resources enabling additional activity elsewhere, such as the Canterbury rebuild. In doing so it also allows interest rates and the exchange rate to remain lower than they would otherwise be.

Figure 1.7 - Real government consumption
Figure 1.7 - Real government consumption   .
Source:  Statistics New Zealand, the Treasury

...an elevated exchange rate...

An elevated exchange rate will also continue to present a near-term headwind to growth in parts of the external sector, particularly for non-commodity exporters and import-competing firms. Having weakened during the middle of the year on the back of market expectations of a “tapering” of quantitative easing in the US, the trade-weighted index (TWI) climbed back close to its record highs in the September quarter. The New Zealand dollar has gained particularly strongly against its Australian counterpart, with the cross rate currently near a five-year high.

An elevated exchange rate makes New Zealand a more expensive destination for tourists and foreign students, and is expected to constrain growth of services and non-commodity goods exports in the near term. Given that many of New Zealand's commodity exports are priced in US dollars, an elevated exchange rate also dampens New Zealand dollar export receipts from commodity exports, but spreads income gains to the broader economy.

Over the longer term, goods and services export volumes are expected to grow more strongly, driven in large part by an assumed depreciation in the New Zealand dollar. Both goods and services volumes are also expected to rise as global demand picks up, generating additional demand for New Zealand's goods and services. A weaker New Zealand dollar will boost New Zealand dollar receipts for commodity exports too, but will also increase import prices. As mentioned before, demand for dairy and other commodity exports is likely to continue to benefit from links with fast-growing Asian markets over the long term.

Notes

  • [3]Note that the historical time-series of the net household saving rate was revised higher in the annual National Accounts for the year ended March 2013, which were released after the finalisation of the Half Year Update forecasts. See Revisions in the 2013 Annual National Accounts box for further details.

...and steady, but uneven, global growth

The near-term outlook for trading partner growth is slightly weaker than forecast in the Budget Update, primarily owing to slower growth in the Australian economy as mining investment moderates, and a weaker outlook for emerging economies including China. The outlook over the rest of the forecast period is broadly similar to that in the Budget Update, with growth of around 3.8% per year.

Table 1.2 - Trading partner growth (calendar years)
  2013
weights
2012
Actual
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Australia 27% 3.7 2.5 2.6 3.0 3.0 3.0 3.0
China 17% 7.8 7.6 7.4 7.3 7.1 7.0 7.0
United States 11% 2.8 1.7 2.6 2.5 2.5 2.5 2.5
Japan 9% 2.0 1.9 1.5 1.1 1.0 1.0 1.0
Euro area 8% -0.6 -0.5 0.8 1.2 1.3 1.4 1.5
United Kingdom 4% 0.1 1.3 1.9 1.8 2.0 2.0 2.0
Canada 2% 1.7 1.6 2.2 2.4 2.5 2.5 2.5
Other Asia* 23% 3.8 3.8 4.4 4.8 4.9 4.9 4.9
Trading Partner Growth (TPG) 100% 3.6 3.2 3.6 3.8 3.8 3.8 3.9
TPG - Consensus (November 2013) 3.6 3.3 3.7 3.9 4.0 3.9 3.9
TPG - IMF WEO (October 2013) 3.6 3.2 3.7 3.8 3.9 4.0 4.0
TPG - The Treasury (2013 Budget Update) 3.5 3.4 3.8 3.8 3.8 3.9 -

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

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

The factors behind the weaker near-term trading partner growth - particularly the gradual rebalancing of Australian GDP growth away from investment towards consumption, residential investment and exports - are unlikely to result in significant direct negative implications for New Zealand exporters. Ongoing income growth and increased demand for protein in Asian economies, particularly China, are also expected to underpin strong demand for New Zealand's commodity exports over the medium term.

However, the global economy continues to face significant challenges, and diverging trends pose risks to the relatively benign medium-term outlook for trading partner growth. The major developed economies are showing signs of more sustainable growth - particularly the US, Japan and the UK - while growth in emerging market economies (including some of New Zealand's trading partners in Asia) is slowing as a result of both structural and cyclical factors. As the developed economies begin to withdraw monetary stimulus, emerging market economies that have benefited from the loose global monetary conditions may come under pressure as capital inflows are reversed. Meanwhile, a combination of rapid credit growth and inflated property values poses risks to financial stability in China. The risks to the global outlook are explored in more detail in the Risks and Scenarios chapter.

Forecast widening in current account deficit reflects composition of growth

The current account has been subject to a range of historical revisions since the Budget Update, most recently in the annual set of National Accounts for the year ended March 2013, which were released after the Half Year Update forecasts were finalised. Estimates of the current account deficit from 2000 onwards are now on average 1.1% of GDP narrower than previously recorded. (See Revisions in the 2013 Annual National Accounts box for further details.)

Figure 1.8 - Current account balance
Figure 1.8 - Current account balance   .
Source:  Statistics New Zealand, the Treasury

The annual current account deficit is expected to narrow further in the near term on the back of a narrower income deficit and a wider goods surplus than in the Budget Update. The wider goods surplus is mainly attributable to the dairy sector, in which prices have remained higher than expected, and also production has recovered more quickly than expected from last summer's drought.

The annual current account deficit is forecast to widen from 2014 onwards to 6.4% of GDP in the March 2018 quarter. This is expected to be driven by a widening in the income balance as business profits and international interest rates pick up.

The goods balance is expected to register a small deficit in 2015, primarily owing to increased goods imports associated with the expected pick-up in investment. The balance is expected to recover in the final years of the forecast period as investment growth slows and the assumed weakening in the exchange rate makes New Zealand's non-commodity exports more attractive overseas.

The services deficit is forecast to widen towards the end of the forecast period as the assumed fall in the exchange rate feeds through into increased services import prices (an example of the so-called “J-curve” effect). However, over time, a weaker exchange rate will make New Zealand a more attractive destination for tourists and also make service imports less attractive. As a result, the services deficit would be expected to narrow outside the forecast period, contributing to a narrower current account deficit.

Revisions in the 2013 Annual National Accounts

The annual National Accounts for the year ended March 2013 were released after the Half Year Update forecasts were prepared and finalised. The National Accounts provide information on national income, consumption, investment and saving by the different sectors of the economy. Overall, the level of nominal (expenditure) GDP in the March 2013 year was around $600 million higher than previously indicated by the quarterly GDP releases. This mainly reflected upward revisions to investment, with revised estimates for Canterbury making a significant contribution on the residential side.

As previously signalled by Statistics New Zealand, the release incorporated a range of historical revisions to the current account as well, stemming mainly from updated estimates of spending by foreign visitors in New Zealand. Exports of services are now 1.2% of GDP higher on average from 2000 onwards than previously estimated. This increase was partly offset by higher goods imports, which were revised up by 0.3% of GDP on average from 2004 onwards on account of a new estimate for goods imports valued under $1,000 - a known area of undercoverage. Accordingly, the current account deficit is now on average 1.1% of GDP narrower than was reported in the 2012 National Accounts (Figure 1.9). The largest positive impacts were in 2002 and 2004, when the current account deficit is now 1.5 percentage points of GDP narrower than was previously estimated. The peak current account deficit reached in 2006 was revised narrower too, to 7.9% of GDP compared to 8.7% of GDP previously. When incorporated into the quarterly data, these changes are likely to lead to a narrower current account deficit than that presented in the Half Year Update.

Higher estimates of spending by foreign visitors in New Zealand reduced the amount of activity that was previously attributed to private consumption. This flowed through to a level shift in the household saving rate, which is now between 0.5 and 2.5 percentage points of disposable income higher across history than was previously estimated, and increased national saving too. As shown in Figure 1.10, the narrower current account almost entirely reflects higher national saving across history.

The widening current account deficit in the Half Year Update forecasts reflects investment increasing by more than saving over the forecast period, partly as a result of the Canterbury rebuild. However, with a large proportion of the Canterbury rebuild to be paid for by overseas insurance inflows, the investment-saving gap does not flow through fully into new borrowing. Statistics New Zealand currently estimates a total of $18.7 billion of reinsurance claims from all of the Canterbury earthquakes. At the end of the June 2013 quarter, a total of $10.5 billion of these claims had been settled with overseas reinsurers, with these inflows recorded in the financial account of the balance of payments.

Figure 1.9 - Revised current account balance
Figure 1.9 - Revised current account balance   .
Source:  Statistics New Zealand, the Treasury
Figure 1.10 - Saving and investment
Figure 1.10 - Saving and investment   .
Source:  Statistics New Zealand, the Treasury

Inflation expected to pick up as spare capacity is used up...

With the economy set for a period of above-potential growth in the near term, non-tradables inflation is forecast to accelerate to a peak of around 4% in mid-2016, before easing back as real GDP growth moderates towards the end of the forecast period. Tradables inflation is expected to move back into positive territory over the coming years and to come under increased upward pressure from the assumed decline in the exchange rate. Overall, headline CPI inflation is forecast to peak at 2.6% in late-2015 and to decline gradually thereafter, albeit remaining slightly above the 2.0% mid-point of the target range. Increases in tobacco excises are expected to add 0.2 percentage points to annual inflation in each of the March 2014, 2015 and 2016 quarters.

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

...leading to a withdrawal of monetary stimulus next year

Increasing price pressures are expected to see the Reserve Bank begin to increase the OCR in early 2014. As mentioned earlier, the forecast track for short-term interest rates in the Half Year Update is broadly similar to that in the Budget Update, but is around 30 basis points lower than it would have been if LVR restrictions had not been implemented.

Nominal GDP growth expected to remain strong

Nominal GDP is particularly important for generating forecasts of tax revenue. The main components of nominal income GDP, namely compensation of employees and business operating surplus, are inputs for generating forecasts of PAYE and corporate tax revenues respectively.

Underlying growth in the volume of output, alongside strong gains in the terms of trade and a pick-up in pricing pressures, are expected to support nominal GDP growth in the near term. Nominal GDP is forecast to grow by 6.5% and 4.9% in the March 2014 and 2015 years respectively. Growth in nominal GDP is expected to ease somewhat later in the forecast period, as real GDP growth moderates, the terms of trade level off and pricing pressures are restrained by higher interest rates.

Figure 1.12 - Nominal GDP and terms of trade
Figure 1.12 - Nominal GDP and terms of trade  .
Source:  Statistics New Zealand, the Treasury

Economic Forecast Assumptions

  • Net permanent and long-term migration inflows rose to 17,500 in the year ended October 2013, although only data up to the September month (+15,200) were available when the Half Year Update forecasts were finalised. Net migrant inflows are forecast to rise to 26,300 in the June 2014 year before returning to the long-run assumption of 12,000 per year by the second half of 2016.
  • The non-accelerating inflation rate of unemployment (NAIRU) is assumed to be around 4.5% by 2018.
  • Average hours worked per week are assumed to be around 33 (near their current level).
  • Economy-wide labour productivity growth is assumed to average around 1.1% per year between the years ending March 2014 and March 2018.
  • Investment associated with the rebuild from the Canterbury earthquakes is assumed to be around $40 billion in 2011 prices (rounded to the nearest $5 billion), spread across residential property ($18 billion), commercial ($9 billion), and infrastructure and social assets ($11 billion). Around $18 billion of the total is forecast to be undertaken within the forecast period to June 2018.
  • WTI oil prices are assumed to fall from around US$106 per barrel in the September 2013 quarter to around US$82 in the March 2018 quarter, in line with the latest oil futures prices.
  • Ninety-day interest rates are assumed to increase from the first half of 2014 to 5.2% in the March 2018 quarter. Ten-year interest rates are also assumed to rise gradually from their current levels, reaching 5.2% by the March 2018 quarter.
  • The TWI is assumed to remain around 75 until mid-2015 before falling to around 64 in the June 2018 quarter.
  • Tobacco excise increases add 0.2 percentage points to annual inflation in each of the March quarters 2014, 2015 and 2016.
  • The reductions to ACC levy rates will reduce contributions by households and employers by $387 million in the 2014/15 levy year rising to around $1 billion in the following levy year.

Fiscal Outlook

Overview

  • The Crown's fiscal position is broadly unchanged from the Budget Update in the first two years of the forecast but has strengthened in the medium term.
  • With stronger economic growth expected, core Crown tax revenue is forecast to grow more rapidly, while expenses remain relatively stable.
  • The operating deficit narrows in the current year and a surplus of $86 million is forecast in 2014/15. By 2017/18, the surplus is expected to reach $5.6 billion. These surpluses help fund the Government's capital spending and enable the repayment of debt.
  • Net core Crown debt starts to fall in nominal terms as residual cash returns to surplus in 2016/17, a year earlier than previously expected.
  • The improved cash position, coupled with a lower starting base in 2012/13, means net core Crown debt falls as a share of GDP to stand at 22.3% by 2017/18.
  • The Government Share Offer programme is expected to conclude in the current year with proceeds between $4.6 billion and $5.0 billion now expected to be available for the Future Investment Fund.
  • The Crown's balance sheet continues to strengthen as operating surpluses are expected to steadily increase.
Table 2.1 - Fiscal indicators
Year ended 30 June
$billions
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Total Crown OBEGAL1  (4.4)  (2.3) 0.1 1.7 3.1 5.6
Core Crown residual cash  (5.7)  (4.1)  (3.5)  (1.2) 1.2 3.1
Net core Crown debt2 55.8 60.0 63.3 64.5 63.4 60.4
Net worth attributable to the Crown 68.1 69.2 72.2 77.0 83.4 92.4
% of GDP            
Total Crown OBEGAL1  (2.1)  (1.0) 0.0 0.7 1.2 2.1
Core Crown residual cash  (2.7)  (1.8)  (1.5)  (0.5) 0.5 1.2
Net core Crown debt2 26.2 26.3 26.5 25.8 24.4 22.3
Net worth attributable to the Crown 32.0 30.4 30.2 30.8 32.0 34.2

Notes:

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

Source: The Treasury

Overall, growth in the economy, and continued management of spending levels, is expected to result in the Crown returning to surplus, starting to reduce debt and rebuild the Crown's net worth.

In preparing these fiscal forecasts, key assumptions have been made in relation to the performance of the economy, and managing new spending within Budget allowances. As with all assumptions, there is inherent uncertainty and a change in any one of these could negatively or positively impact the Crown's forecast surpluses and net debt position. The Risks and Scenarios chapter and the Specific Fiscal Risks chapter outline the key risks to the Crown achieving these forecasts.

Core Crown tax revenue increases in each year of the forecasts and by 2017/18 is expected to be $19.2 billion higher compared to 2012/13, reflecting the forecast growth in nominal GDP, as discussed in the EconomicOutlookchapter.

While core Crown operating expenses are expected to increase by $8.7 billion over the next five years, they fall to just under 30% of GDP by the end of the forecast period.

These forecasts shows the Government is expected to achieve its fiscal objective of a return to surplus in 2014/15. While a surplus of $86 million is forecast in 2014/15, beyond 2014/15 surpluses are expected to increase by between $1.5 and $2.5 billion each year.

With net debt finishing in a stronger position at 30 June 2013 and a strengthening in the residual cash balance since the Budget Update, the net debt track is lower on average by 2.4% of GDP each year. Net debt falls to 22.3% by 2017/18 in line with the Government's medium-term target of net debt brought back to a level no higher than 20% of GDP by 2020. In nominal terms, net debt starts decreasing from 2016/17 as cash surpluses are forecast to return for the first time since 2007/08.

Table 2.2 - Reconciliation between OBEGAL and net debt
Year ending 30 June
$billions
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Core Crown revenue 64.1 68.5 72.3 76.7 80.9 84.9
Core Crown expenses (70.3) (72.2) (73.2) (75.5) (77.8) (79.0)
Net surpluses/(deficits) of SOEs and CEs 1.8 1.4 1.0 0.5 - (0.3)
Total Crown OBEGAL (4.4) (2.3) 0.1 1.7 3.1 5.6
Net retained surpluses of SOEs, CEs and NZS Fund (1.2) (1.4) (1.0) (0.4) - 0.2
Non-cash items and working capital movements 1.1 1.4 1.5 2.0 2.3 1.0
Net core Crown cash flow from operations (4.5)  (2.3) 0.6  3.3  5.4  6.8 
Net purchase of physical assets (1.2) (2.2) (1.8) (1.3) (1.4) (1.2)
Advances and capital injections (1.7) (1.9) (2.3) (2.4) (1.8) (1.6)
Forecast for future new capital spending (0.2) (0.6) (0.8) (1.0) (0.9)
Proceeds from Government share offers 1.7 2.5  0.6  -   -   -  
Core Crown residual cash balance (5.7) (4.1) (3.5) (1.2) 1.2 3.1
Opening net debt 50.7 55.8 60.0 63.3 64.5 63.4
Core Crown residual cash deficit/(surplus) 5.7 4.1 3.5 1.2 (1.2) (3.1)
Valuation changes in financial instruments (0.6) 0.1 (0.2) - 0.1 0.1
Closing net debt 55.8 60.0 63.3 64.5 63.4 60.4
As a percentage of GDP 26.2% 26.3% 26.5% 25.8% 24.4% 22.3%

Source: The Treasury

Core Crown Tax Revenue

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

Core Crown tax revenue is forecast to rise in each year of the forecast period, with the 2017/18 forecast being $77.9 billion, which is $19.2 billion higher than in 2012/13. These annual increases also see forecast tax revenue increasing relative to nominal GDP, reaching 28.8% by the end of the forecast period (Figure 2.1).

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

Most of the 5.8% average annual growth in tax revenue forecasts comes from growth in the economy with nominal GDP forecast to grow at 4.9% on average over the forecast period. Tax revenue growth slows a little towards the end of the forecast period as nominal GDP growth slows (refer Figure 2.2). The remainder of the forecast tax growth largely relates to increased residential investment, largely owing to the Canterbury rebuild, and the progressive nature of PAYE tax.

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

All tax types are expected to increase across the forecast period, with particular strength in tax from employees (PAYE) and goods and services tax (GST), as shown in Table 2.3.

Employment earnings growth (forecast at just below the GDP growth rate) combined with the progressive nature of the personal tax scale add $7.3 billion to source deductions over the forecast period with the average PAYE growth rate of 5.8% per annum.

The level of residential investment is forecast to grow at an average rate of 16% per annum over the forecast period, largely as a result of rebuilding in Canterbury. This increase in investment is expected to boost GST by $1.7 billion by 2017/18.

These forecasts also see an expected rise in 90-day bank bill interest rates from 2.6% on average in 2012/13 to 5.2% by 2017/18, with flow-on increases to tax on interest earned on residents' savings (RWT).

Table 2.3 - Reconciliation of movement in core Crown tax revenue over the forecast period
Year ending 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Total
Movement in core Crown tax owing to:            
Employees' compensation 1.2 1.1 1.1 1.2 1.3 5.9
Entrepreneurial income 0.4 0.2 0.3 0.2 0.2 1.3
Corporate profits 0.8 0.7 0.6 0.2 0.2 2.5
Private consumption 0.9 0.9 0.9 0.8 0.7 4.2
Residential investment 0.4 0.6 0.4 0.2 0.1 1.7
Interest rates (0.1) 0.1 0.3 0.2 0.2 0.7
Fiscal drag1 0.2 0.3 0.3 0.3 0.3 1.4
Timing and other factors - (0.1) 0.4 0.5 0.7 1.5
Total movement in core Crown tax revenue 3.8 3.8 4.3 3.6 3.7 19.2
Plus: previous year's tax base 58.7 62.5 66.3 70.6 74.2 58.7
Core Crown tax revenue 62.5 66.3 70.6 74.2 77.9 77.9
  27.4% 27.7% 28.2% 28.5% 28.8%  

Note: 1 Fiscal drag is the additional tax revenue generated from source deductions as an individual’s average tax rate increases as their income increases.

Source: The Treasury

...and is higher than the Budget Update

Compared to the Budget Update, tax revenue forecasts have been revised up by $0.1 billion in 2013/14 rising to $1.4 billion by 2016/17.

The bulk of the upwards revision occurs beyond 2014/15 (refer Figure 2.3), with the largest increases from individuals' taxation and GST. A stronger labour market, with higher wages and salaries, is expected to increase PAYE relative to the Budget Update, with the change further boosted by fiscal drag. Net other persons’ tax also increases as a result of higher forecast profits for unincorporated businesses. Increased employee compensation and profitability lead to higher consumption, boosting GST growth.

Although corporate tax is expected to increase over the forecast period in nominal terms as business profitability improves, annual growth is broadly similar to that forecast at the Budget Update.

Figure 2.3 - Movement in core Crown tax revenue since the Budget Update
Figure 2.3 - Movement in core Crown tax revenue since the <em>Budget Update .
Source:  The Treasury

Core Crown Expenses

Growth in core Crown expenses is subdued over the forecast period...

Core Crown expenses are forecast to increase in nominal terms by $8.7 billion in total over the forecast period (Figure 2.4). The growth in core Crown expenses is expected to be at a slower rate than economic growth, so as a result they fall from 33.1% in 2012/13 to 29.2% of GDP by 2017/18, in line with the Government's target of reducing expenses to around 30% of GDP.

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

Nominal growth in core Crown expenses is largely attributable to new spending for future Budgets, social assistance spending and finance costs as shown in Figure 2.5.

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

The forecast includes new spending to be allocated in future budgets of around $1.0 billion for the next four budgets. Including the impact of spending decisions from Budget 2013, budget allocations are forecast to increase core Crown expenses by $5.1 billion by the end of the forecast period.

Social assistance spending is expected to increase by $3.7 billion across the forecast period. New Zealand Superannuation payments (the most significant across different social assistance payments) grow by $3.3 billion over the forecast period as payments are indexed to inflation and recipient numbers increase on average by 25,000 over the next five years (Figure 2.6). The rest of the increase in social assistance spending is owing to indexation, with recipient numbers staying relatively stable for other benefit types.

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

Finance costs increase by $0.7 billion over the forecast period as gross debt continues to increase and interest rates are forecast to rise.

Partially offsetting this higher expenditure, the Crown's earthquake costs reduce over the forecast period as the most significant expenses have already been recognised in previous years (refer to box on page 30 for details of the profile of earthquake expenses).

...but expenses are marginally higher than the Budget Update by the end of the forecast period

Initially expenses are slightly lower than forecast at the Budget Update, but by the end of the forecast period expenses are around $0.6 billion higher than previously expected (refer Figure 2.7).

Figure 2.7 - Changes in core Crown expenses since Budget 2013
Figure 2.7 - Changes in core Crown expenses since Budget 2013   .
Source:  The Treasury

The strength in economic conditions and impacts from welfare reform have reduced unemployment-related benefit recipient numbers and therefore social assistance expenses compared to the Budget Update. However, by the end of the forecast period this trend reverses owing to the impact of a higher inflation track and increases in income-related rents. Refer Table 2.4 in the Operating Balance section below for changes to benefit expenses since the Budget Update.

Costs associated with the Government Superannuation Fund (GSF) are also forecast to increase above the level forecast in Budget Update. Larger impacts are expected in the last few years of the forecast owing to increases in discount rates causing the interest unwind of the GSF liability to also increase.

In addition to these expenses, some increases (eg, Emissions Trading Scheme expenses) also have a corresponding increase in core Crown revenue and therefore are OBEGAL neutral to the Crown.

Operating Balance

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

Increases in core Crown tax revenue and slowing expenditure growth reflect an improved outlook across the forecast period with the Crown's OBEGAL forecast to return to a surplus of $86 million in 2014/15. This stronger outlook is largely driven by economic factors impacting on tax revenue combined with the continuing programme of fiscal constraint. There are risks to achieving a surplus in 2014/15 and later years should these factors not play out as forecast. Refer to the Risks and Scenarios and Specific Fiscal Risks chapters for further discussion of risks that may impact the Crown's operating balance.

OBEGAL is a total Crown measure, of which the core Crown shows the greatest growth over the forecast period. In 2013/14 the core Crown has an OBEGAL deficit of $3.7 billion which turns around to contribute a $5.9 billion surplus to OBEGAL by 2017/18.

Both the State-owned Enterprise (SOE) and Crown entity (CE) sectors' contribution to OBEGAL in the future have been significantly changed. Together they contribute $2.0 billion to the OBEGAL surplus in 2013/14 falling to $0.4 billion by the end of the forecasts.

Figure 2.8 shows the composition of OBEGAL from the different sectors of the Government. The CE sector's contribution is expected to fall significantly owing to a reduction in ACC levy rates while the SOE sector's contribution falls owing to the Government's Share Offer programme. Refer to separate section on pages 36 to 41 for further discussion of this programme.

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

While reductions in ACC levies were included in the Budget Update, reductions are higher in these forecasts. Reductions in ACC levies of $300 million in 2014/15 increasing to $1 billion a year from 2015/16 were announced at the time of the Budget Update. Since that time specific levy rate reductions for the relevant levy years have now been factored into the forecasts and Cabinet has increased the 2014/15 reduction to $387 million. As a result, the reduction in income has increased in 2014/15 and the timing of the OBEGAL impact for the expected second round of reductions has been revised.

Refer Table 2.4 for a summary of the key changes to the forecasts from the Budget Update that impact on OBEGAL.

 

Table 2.4 - Changes in OBEGAL since Budget 2013
Year ending 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
OBEGAL - 2013 Budget Update (2.0) 0.1 0.8 2.6
Changes in forecasts:        
                Tax revenue 0.1 0.2 0.9 1.4
                Benefit expense 0.1 0.2 0.1 (0.1)
                GSF expenses - (0.1) (0.1) (0.1)
                NZS Fund and ACC interest income (0.1) (0.2) (0.2) (0.2)
                SOE results (0.1) (0.3) (0.2) (0.1)
                ACC levy and insurance expense (0.1) - 0.4 (0.3)
                Other changes (0.2) 0.2 - (0.1)
Total changes since Budget Update (0.3) - 0.9 0.5
OBEGAL - Half Year Update (2.3) 0.1 1.7 3.1

Source: The Treasury

ACC and NZS Fund's interest income has also decreased since Budget Update largely owing to a reduction in the expected level of interest earning assets held by ACC and NZS Fund since Budget 2013.

SOE profits have also declined across the forecast period since Budget Update largely owing to foregone profits from the Government's share programme (refer to Government Share Offer Programme section on pages 36 to 41).

The underlying nature of OBEGAL can be seen using the cyclically adjusted balance (CAB). This measure adjusts for the state of the economic cycle and significant one-off expenses. Figure 2.9 shows CAB tracking close to OBEGAL in recent years, indicating that the operating deficits between 2009 and 2013 have been largely structural. The projected size of the economy reduced following the recession, implying a smaller tax base while, in contrast, expenses continued to grow. In this forecast, tax revenue is forecast to grow more rapidly than expenses (which remain relatively stable), seeing CAB move to surplus in 2015/16[4] a year later than OBEGAL.

Figure 2.9 - OBEGAL and CAB
Figure 2.9 - OBEGAL and CAB   .
Source:  The Treasury

...with OBEGAL surpluses beyond 2014/15 enabling debt to be repaid

Surpluses are achieved in 2014/15 and continue to increase over the forecast period to a level that translates to being sufficient to fund the Government's capital spending and allows for the reduction of debt.

Current strength in equity markets lifts the operating balance…

When gains and losses are included, the total Crown operating balance is forecast to be in surplus across the forecast period with steady growth each year of the forecasts (Figure 2.10). The current year's surplus is a result of gains expected to be made by Crown financial institutions (CFIs), largely ACC and NZS Fund, and reflects strong global equity returns (for example, by 30 September 2013 NZS Fund had made year-to-date gains of $1.0 billion). While the current year reflects strong market growth, the forecast gains in future years assume a long-term rate of return, resulting in more subdued growth in these years. These gains play a part in increasing the Government's financial assets, and the Crown's net worth (discussed on page 33).

Figure 2.10 - Components of operating balance
Figure 2.10 - Components of operating balance   .
Source:  The Treasury

...and valuations of long-term liabilities contribute to an improved result in 2013/14

In addition, updated long-term liability valuations for ACC (at 30 June 2013 and updated for movements in discount rates to 30 September) and GSF (at 30 September) have also led to significant actuarial gains in the 2013/14 year which also contribute to the Crown's operating balance.

Given the size of the balance sheet, market movements can have a significant impact on the operating balance. Refer to page 35 for further discussion of the impact of these valuations on the Crown's operating balance.

Cost to the Crown of Canterbury Earthquakes

The Government continues to make significant contributions to the rebuild of Canterbury which is one of its four key priorities. Latest estimates for the total cost to the Crown are at $14.9 billion to the end of the forecast period (slightly lower than the $15.2 billion in the Budget Update). While some costs have reduced, others have increased.

An updated estimate of costs to the Crown show that core Crown costs have reduced since the Budget Update primarily owing to a cost sharing agreement entered into with the Christchurch City Council (CCC) and an updated red zone valuation. However, increases in estimates of Crown entity capital investment in Canterbury (primarily investment in state housing stock) partially offset these reductions.

In June 2013 the Crown negotiated a cost sharing agreement with CCC to contribute up to $1.8 billion for the repair costs of local infrastructure (mainly water and roads). This agreement has increased certainty around the Crown's estimate of local infrastructure costs, reducing them from the $2.4 billion estimate at Budget Update to $1.8 billion.

Table 2.5 outlines the latest estimates of the net impact of the earthquake included in these forecasts, the operating/capital split and the expected cash profile of earthquake costs.

Table 2.5 - Net earthquake expenses (operating and capital)
Year ending 30 June
$millions
2011-13
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Total
HYEFU
Total
BEFU
Local infrastructure 1,364 111 110 110 83 50 1,828 2,395
Crown assets1 40 258 461 353 272 92 1,475 1,579
Land zoning 912 122 1,034 1,218
Christchurch central city rebuild2 115 763 135 81 63 (249) 909 901
Welfare support 269 19 4 292 305
Southern Response support package 458 16 (59) (27) (29) 360 301
Other costs 508 272 71 61 32 32 975 868
Core Crown Canterbury
earthquake recovery costs
3,666 1,563 722 577 422 (75) 6,874 7,567
EQC (net of reinsurance proceeds) 8,026 (337) (47) (114) 7,528 7,532
Other SOE and CEs (217) 160 161 242 123 38 507 66
Total Crown 11,475 1,385 836 705 545 (37) 14,908 15,165
Operating and Capital expenses                
Operating expenditure (OBEGAL) 11,253 413 182 45 135 65 12,093 12,852
Capital expenditure 222 972 654 660 410 (102) 2,816 2,313
Total Crown 11,475 1,385 836 705 545 (37) 14,908 15,165
Total cash payments3 6,595 3,012 2,800 1,594 733 (40) 14,693 15,165

Notes:

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

Source: The Treasury

The Specific Fiscal Risks chapter includes discussion on the risks associated with the Canterbury earthquakes (eg, many of the business cases and project costings for Anchor projects in the central city are yet to be finalised).

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

Notes

  • [4]For more details, see the Additional Information on the Treasury website www.treasury.govt.nz/budget/forecasts/hyefu2013.

Net Debt

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

When compared to the Budget Update, net debt levels have reduced to be on average 2.4 percentage points of GDP lower than previously forecast. This reduction in net debt is owing to a stronger starting position at 30 June 2013 and an improved cash flow over the forecast period.

Similar to the operating surplus, core Crown operating cash flows[5] also return to surplus in 2014/15. However, once capital cash flows are included, residual cash remains in deficit two further years, reaching surplus of $1.2 billion in 2016/17, one year earlier than forecast in the Budget Update. By 2017/18, core Crown residual cash is expected to increase to a cash surplus of $3.1 billion.

Deficits are funded by an increase in net debt (through additional borrowing or a reduction in financial assets) while surpluses reduce net debt. In nominal terms, net debt is expected to peak on an annual basis in 2015/16 at $64.5 billion, but once residual cash surpluses are forecast, debt is expected to reduce.

Net debt as a share of GDP peaks in 2014/15 at 26.5% (a year earlier than in nominal terms). By 2017/18 net debt is expected to be 22.3% of GDP (Figure 2.11) in line with the Government's medium-term target of net debt brought back to a level no higher than 20% of GDP by 2020.

Figure 2.11 - Net debt
Figure 2.11 - Net debt   .
Source:  The Treasury

...with residual cash deficits mostly funded by issuing government bonds

Residual cash surpluses are reached earlier than previously forecast, largely owing to stronger tax receipts and a decline in cash payments. The lower proceeds from the Government Share Offer programme partially offset this increase.

Over the forecast period there is a cash shortfall of $4.4 billion. In order to fund this shortfall along with bond maturities, the bond programme is expected to raise funds of $33.6 billion over the forecast period. Over the forecast period, $26.1 billion of existing debt will be repaid, providing net cash proceeds of $7.5 billion (Table 2.6). The excess cash proceeds raised from the bond programme will be invested in financial assets and used to meet future debt maturities.

As the Crown's fiscal position is stronger at the start of the forecast period than was previously forecast, the bond programme to 2016/17 is $4.0 billion lower than forecast in Budget 2013. The higher-than-forecast starting cash position has allowed for a $2.0 billion reduction in the current year’s bond programme as well as the beginning of a buy-back programme to help manage cash flows around the record-large bond maturity in April 2015. A buy-back programme of the April 2015 bond is scheduled to commence in the second half of the 2013/14 fiscal year. Up to $3.0 billion is forecast to be repurchased by 30 June 2014, subject to market conditions.

Table 2.6 - Net increase in government bonds
Year ending 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
5-year
Total
Face value of government bonds issued (market) 8.0 7.0 7.0 6.0 6.0 34.0
Cash proceeds from government bond issue            
Cash proceeds from issue of market bonds 8.0 7.1 6.7 5.9 5.9 33.6
Repayment of market bonds (3.1) (7.8) (1.8) (11.9) (24.6)
Net proceeds from market bonds 4.9 (0.7) 4.9 5.9 (6.0) 9.0
Repayment of non-market bonds (0.8) (0.7) (1.5)
Net repayment of non-market bonds (0.8) (0.7) (1.5)
Net cash proceeds from bond issuance 4.1 (1.4) 4.9 5.9 (6.0) 7.5

Source: The Treasury

Notes

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

Total Crown Balance Sheet

Operating balance surpluses result in increasing net worth...

Net worth attributable to the Crown increased in 2012/13 for the first time since the global financial crisis and the Canterbury earthquakes. At its height, net worth attributable to the Crown peaked at $105.1 billion in 2007/08.

Net worth attributable to the Crown is forecast to continue strengthening in nominal terms, largely owing to forecast operating balance surpluses (of which just under half is attributable to gains on the Crown's investment portfolio), and grow to $69.2 billion by the end of the current year. Net worth is expected to grow another $23.2 billion to stand at $92.4 billion by 2017/18, as shown in Figure 2.12. As a share of GDP this is 34.2%, still well below the peak of 56.6% of GDP in 2007/08.

Figure 2.12 - Net worth attributable to the Crown
Figure 2.12 - Net worth attributable to the Crown.
Source: The Treasury

...with assets increasing $35.5 billion over the forecast period...

Assets are forecast to increase by $35.5 billion, with the growth over the forecast period made up of investments in additional assets of $78.4 billion partially offset by reductions (largely depreciation) of $42.9 billion.

The largest asset growth over the forecast period is in the financial assets portfolio (Figure 2.13). This reflects investment growth in CFIs such as NZS Fund and ACC, with much of this growth recognised as gains in the Crown's operating balance with some growth in the asset base from reinvestment.

Figure 2.13 - Total Crown assets
Figure 2.13 - Total Crown assets   .
Source:  The Treasury

Commercial assets increase $9.5 billion over the forecast period, largely owing to continued growth in the Kiwibank mortgage assets (that grow as their deposits from customers grow) and as SOEs increase their investment in physical assets.

The social asset portfolio (eg, schools, hospitals and social housing) increases by $10.9 billion by the end of the forecast period as a result of new capital spending (funded by the Future Investment Fund, as detailed in the Government Share Offer Programme section on pages 36 to 41), and as existing assets are replaced.

...while liabilities increase at a slower rate

The Crown's liabilities are expected to increase by $7.2 billion over the forecast period, largely driven by increased borrowing. Borrowings are forecast to increase $12.2 billion to $112.3 billion by 2017/18.

As shown in Figure 2.14, borrowing is mostly held in the financial liability portfolio (by the Treasury's Debt Management Office, and the Reserve Bank). Borrowings in this portfolio increase $2.5 billion over the forecast period to meet the Crown's cash deficits (refer to pages 31 to 32 for discussion of the bond programme). The remainder of borrowing is in the commercial portfolio, and is largely made up of Kiwibank deposits, which grow in line with the bank's mortgage assets.

Figure 2.14 - Total Crown borrowings
Figure 2.14 - Total Crown borrowings   .
Source:  The Treasury
Figure 2.15 - Total Crown liabilities
Figure 2.15 - Total Crown liabilities   .
Source:  The Treasury

Partially offsetting the growth in borrowings are reductions in liabilities as a result of settling obligations related to the Canterbury earthquakes. The Crown's earthquake-related insurance liabilities held in the financial portfolio (EQC and Southern Response) are forecast to decrease $8.4 billion over the five-year forecast period as all claims are expected to be settled by 2017/18.

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

Many of the assets and liabilities on the Crown's balance sheet are measured at “fair value” in order to disclose current estimates of what the Crown owns and owes. Fair value can be derived in a number of ways, traditionally based on market prices, but where these are not available, values can be best estimates based on certain assumptions. While the measurement at fair value is seen as the most appropriate value of these items, it can be volatile, resulting in fluctuations in the value of the assets and liabilities with changes in the underlying assumptions. Table 2.7 shows an example of some of the key sensitivities to the valuation of the Crown's major assets and liabilities and the impact these can have on the operating balance.

Table 2.7 - Financial instruments sensitivities
Financial assets
Impact on operating balance1
%change $millions
Interest rates +1 (532)
  -1 592
Share prices +10 1,681
  -10 (1,681)
NZD exchange rate +10 (1,029)
  -10 1,160

1 Using 30 June 2013 sensitivities

Source: The Treasury

Financial assets are the largest asset group on the Crown's balance sheet and have increased significantly in recent years. CFIs (eg, NZS Fund and ACC) hold investments to make financial returns, and those asset values are dependent on market prices, interest rates and exchange rates, which can all be volatile.

The Crown has a number of significant long-term liabilities which are actuarially valued based on estimated future cash flows, over 50 years into the future. As part of the actuarial valuation, inflation rates are used to help estimate future cash flows while discount rates are used to obtain the value of those future cash flows in today's dollars (their present value). Changes in these assumptions can have significant impacts on the valuation because the cash flows are so large and over such long periods. Table 2.8 shows the impact that a 1% change in inflation and discount rates would have on the operating balance.

Table 2.8 - Long-term liability sensitivities
Impact on operating balance1
$millions
Discount rate Inflation rate
+1 % -1 % +1 % -1 %
ACC outstanding claims 3,628 (4,823) (4,966) 3,788
GSF retirement liability 1,587 (1,927) (1,508) 1,831
EQC outstanding claims 33 (33) (19) 43
  1. Using 30 June 2013 sensitivities.

Source: The Treasury

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

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

...while other risks still remain

In addition to those items on the balance sheet there are a number of liabilities (and assets) that may arise in the future but are not yet included; either because they are dependent on an uncertain future event occurring (eg, outcome of litigation) or the liability cannot be measured reliably. If these contingent liabilities crystallise, there will be associated costs with a negative impact on the operating balance. Refer to page 75 for a list of the contingent liabilities that the Crown was exposed to at 31 October 2013. Refer also to the Risks and Scenarios chapter for further discussion on balance sheet risks.

Government Share Offer Programme

At the time of the Budget Update, no transactions in the Government Share Offer programme had been completed. Since that time minority shareholdings in Mighty River Power, Meridian Energy and Air New Zealand have been sold and the Government has indicated that the sale of up to 49% of the shares in Genesis Energy will follow in the first half of calendar 2014. At the time the assumptions for this Half Year Update were finalised, the proceeds from the Crown reducing its shareholding in Air New Zealand were not known.

Table 2.9 - Progress to date (core Crown)
  Gross proceeds
$millions
Net proceeds1
$millions
% sold Gain/(loss)
on disposal
$millions
Mighty River Power 1,685 1,638 48.20 167
Meridian Energy 1,883 1,829 48.98 (422)

Note:

  1. Net of direct costs and present value discounting.

Source: The Treasury

As a result of the progress to date (Table 2.9), two key assumptions underpinning the forecast fiscal impact of the programme have been updated in this current Half Year Update:

  • Total proceeds are now expected to be within an estimated range of $4.6 billion to $5.0 billion, which is based on actual proceeds from the Mighty River Power and Meridian transactions and estimated proceeds from the Genesis Energy and Air New Zealand transactions. The Half Year Update forecasts assume the mid-point of this range of $4.8 billion. The previous $6 billion assumption was a mid-point estimate of a range of potential outcomes across the entire Government Share Offer programme. These outcomes have now narrowed considerably since the Budget Update. This section includes discussion on the changes in the estimate in proceeds over time.
  • Given the Government's announcement regarding the timing of the Genesis Energy share offer, all proceeds from the programme are now expected to be received by 2014/15. The Budget Update did not forecast the timing of individual share offers, none of which had been completed by that point, and so assumed proceeds were spread evenly across the four years 2012/13 to 2015/16.

The fiscal impacts of these changes in assumptions are that, while net debt will decrease sooner than previously forecast, that reduction will be smaller as proceeds have been re-estimated. In addition, while the proceeds are received earlier (and so the estimated finance cost savings occur earlier), dividends and profits are also foregone earlier than previously forecast as the Government's share of the companies is reduced.

Table 2.10 - Estimated profile of gross cash proceeds
Year ending 30 June
$millions
2013
Actual
2014
Forecast
2015
Forecast
Cash/Debt impact      
Forecast cash proceeds 1,690 2,490 620

Source: The Treasury

This estimated profile is based on the mid-point of the estimated range of $4.6 billion to $5.0 billion, which was set before the proceeds from the Crown reducing its shareholding in Air New Zealand were known.

Table 2.11 - Estimated fiscal impact of the Government Share Offer programme
$billions Note Actual to date
and forecast
Cash/Debt impact    
Forecast cash proceeds   $4.8 billion
Forecast foregone dividends 1 $321 million p.a.
Estimated finance cost savings 1 $219 million p.a.
Reduction in net debt   $4.2 billion by 2017/18
Accrual impact    
Forecast foregone profits 1 $327 million p.a.
Estimated finance cost savings 1 $219 million p.a.
Net decrease in OBEGAL 1 $108 million p.a.
Loss on disposal recorded in taxpayers' funds 2 $383 million

Notes:

  1. Based on an average of the fiscal forecasts subsequent to the programme being completed.
  2. Based on the mid-point estimated cash proceeds, the published gain from the Mighty River Power sale and loss from the Meridian Energy sale, and the published net asset position of Air New Zealand and Genesis Energy at 30 June 2013.

Source: The Treasury

The final fiscal impact of the Government Share Offer programme remains uncertain and dependent on a number of factors, including market conditions.

The figures in Table 2.11 are based on the current profit and dividend forecasts supplied by the companies, and forecast interest rates on government debt. This means the figures are a static estimate, at the current time, of the fiscal impact of the Government Share Offer programme.

The figures do not account for uncertainty and risks, and in particular the commercial risks around the estimated profits and dividends from the companies, and risks around future interest rates on government debt. The risks in relation to Mighty River Power and Meridian Energy were explained in the offer documents for these companies. Because of uncertainty and risk, a commercial entity would usually forecast profits that are greater than the Government's cost of borrowing. Whether forecast profits are actually delivered will depend on actual company performance.

Previous Economic and Fiscal Updates have disclosed annual estimated fiscal impacts of the Government Share Offer programme, as well as a five-year total. It is no longer possible to give annual figures, as the progress in the programme to date means that providing the latest annual estimates could allow forecast profits and dividends for individual companies in the programme to be calculated. Individual company forecasts are commercially sensitive, and may be “inside information” in relation to the Securities Markets Act 1988. Forecast profits and dividends are supplied to the Treasury by the companies under a confidentiality deed, under which the Treasury has agreed to preserve the confidentiality of this information, and to comply with the provisions of the Securities Markets Act 1988.

Given this, only totals or averages have been disclosed, consistent with section 26V of the Public Finance Act 1989. Future disclosures of the impacts of the Government Share Offer programme will follow the same approach.

Future Investment Fund

In Budget 2012 the Future Investment Fund (FIF) was established to allocate the estimated proceeds from the Government Share Offer programme, rather than issuing debt. So far, $2.1 billion of this fund has been allocated. A large portion of this allocation is expected to be spent on the Canterbury rebuild as well as investments in schools, hospitals, technology and irrigation.

Table 2.12 - Analysis of Future Investment Fund
$billions Total Fund
Forecast cash proceeds 4.8
Allocated in Budget 2012 (0.5)
Allocated in Budget 2013 (1.4)
Commitments against future budgets (0.2)
To be allocated 2.7

Source: The Treasury

With the proceeds from the Government Share Offer programme now expected to be between $4.6 billion and $5.0 billion, the amount remaining to be allocated over the life of the FIF has declined since the Budget Update. However, based on current forecasts, the Government does not need to alter the current FIF spending profile as the current profile still ensures the FIF funds all new capital expenditure through to Budget 2016.

Changes to Estimate of Proceeds

Original Estimate

In the Supplement to the 2010 Investment Statement of the Government of New Zealand in May 2011[6] the Treasury estimated that the Government Share Offer programme was likely to result in gross sales in the order of $5 billion to $7 billion (Table 2.13). In part, that assessment was based on independent

Table 2.13 - May 2011 estimated gross sales
$billions Low
estimate
High
estimate
Estimated
commercial
value
Mighty River Power 1.35 1.87 3.70
Meridian Energy 2.29 3.18 6.30
Air New Zealand 0.16 0.29 1.20
Genesis Energy 0.58 0.81 1.60
Solid Energy 0.62 0.86 1.70
Total 5.00 7.00  

Source: The Treasury

The estimated commercial values are for 100% of the companies. The figures for Mighty River Power, Meridian Energy, Genesis Energy and Solid Energy were based on the most recent independent commercial valuations of these companies by Macquarie Research, First NZ Capital and Forsyth Barr. The figure for Air New Zealand was based on its share price at the time. These valuation reports are available at: www.comu.govt.nz/publications/information-releases/valuation-reports/2010/

Solid Energy is no longer in a position to be part of the Government Share Offer programme in the near future. Excluding Solid Energy from the May 2011 estimate of proceeds gives a revised range of $4.38 billion to $6.14 billion. The Treasury's estimate of proceeds, $4.6 billion to $5.0 billion, is within this range.

Other factors that have affected the estimated proceeds from the programme include:

  • falls in the share prices of comparable New Zealand electricity companies, reflecting a range of influences, and
  • the revised contract between Meridian Energy and New Zealand Aluminium Smelters Limited (NZAS) which, according to Meridian Energy, reduced the value of its net assets by $476 million.

2013 Budget Update

The exclusion of Solid Energy from the programme was the only new information available at the time the fiscal forecasts for the Budget Update were finalised. The $6 billion figure used in previous fiscal forecasts was still within the revised range excluding Solid Energy, although it was towards the top of that revised range.

At that point the share offer for Mighty River Power had not been completed, and so none of the commercial valuations implicit in the $5 billion to $7 billion range had been tested by the market. At the top end of the price range in the offer document, proceeds from Mighty River Power would have been around $1.9 billion, which was above the top end of the estimated range that was part of the $5 billion to $7 billion range.

The Treasury therefore concluded that the Budget Update should retain the $6 billion mid-point estimate of proceeds.

Actual proceeds

Table 2.14 - Actual proceeds to date
$billions May 2011 Actual gross
proceeds
Low
estimate
High
estimate
Mighty River Power 1.35 1.87 1.69
Meridian Energy 2.29 3.18 1.88
Air New Zealand 0.16 0.29 0.36
Total 3.80 5.34 3.93

Source: The Treasury

Total gross proceeds for the three transactions completed to date, at $3.93 billion, are towards the bottom of the May 2011 estimate. For the individual transactions:

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

Accounting for minority interests

The treatment of the programme in the fiscal forecasts reflects that the Government retains the majority ownership and control of the companies. There is therefore no “sale of assets” reported in the consolidated financial statements. The revenue and expenses, assets and liabilities of these companies will continue to be fully consolidated by the Crown.

The key change to the financial statements is the disclosure of the non-controlling interest (often referred to as the “minority interest”) of the profits and equity in those companies.

The loss on disposal is calculated as the difference in the book value of the net assets sold and the cash proceeds. This loss is shown as a transfer within the equity section of the balance sheet as it is considered a transaction between owners. There is therefore no loss shown in the statement of financial performance.

Foregone profits represent the portion of profits that would have been recognised by the Government prior to the sale but are now attributable to the minority interests. Forecast foregone profits reduce the Government's OBEGAL. The actual change in the OBEGAL will depend on the actual profits the company generates, which may be different from what is currently forecast.

These profits are different from foregone dividends (although dividends are often a subset of profits), which represent dividend payments by the companies that will now be paid to minority interests. As dividends are a cash receipt, forecast foregone dividends increase the Government's net debt. Again, the actual change in net debt will depend on actual dividends paid by the companies.

Proceeds from the programme decrease net debt. This impact on the Government’s debt has flow-on impacts to finance costs. Overall, the programme is expected to decrease net debt by $4.2 billion by the end of the forecast period. This decrease serves to reduce finance costs for the Government.

Fiscal Forecast Assumptions

The fiscal forecasts are based on assumptions and judgements developed from the best information available on 3 December 2013, when the forecasts were finalised. Actual events are likely to differ from these assumptions and judgements. Furthermore, uncertainty around the forecast assumptions and judgements increases over the forecast period. The Canterbury earthquakes add further uncertainty to the economic and fiscal forecasts.

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

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

A summary of the key economic forecasts that are particularly relevant to the fiscal forecasts is provided in Table 2.15 below (on a June-year-end basis to align with the Government's balance date).

Table 2.15 - Summary of key economic forecasts used in fiscal forecasts
Year ended 30 June
$Billions
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Real GDP1 (ann avg % chg) 2.6 3.0 3.4 2.4 1.9 2.2
Nominal GDP2 ($m) 212,721 227,793 239,172 250,494 260,334 270,295
CPI (ann avg % chg) 0.8 1.4 2.0 2.5 2.3 2.3
Govt 10-year bonds (ann avg, %) 3.6 4.7 4.9 5.1 5.2 5.2
5-year bonds (ann avg, %) 2.9 4.3 4.6 4.9 5.1 5.2
90-day bill rate (ann avg, %) 2.6 2.7 3.4 4.3 4.8 5.2
Unemployment rate (ann avg, %) 6.6 5.9 5.6 5.4 5.2 4.8
Employment (ann avg % chg) 0.4 2.6 2.2 1.3 1.0 1.4

Notes:

  1. Production measure.
  2. Expenditure measure.

Source: The Treasury

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

Government decisions

Incorporate government decisions and other circumstances known to the Government up to 3 December 2013.

Tax revenue

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

Earthquake costs

Expenditure (accrual measure) is forecast based on estimates on when key decisions will be taken.  The timing of cash payments is based on estimates of when actual spending will take place.  Refer to page 30 for further discussion.

Operating allowance

Net $1.0 billion from Budget 2014 growing at a rate of 2.0% per annum for subsequent Budgets.

Provision for new capital spending

$1.0 billion in Budget 2014 and $0.9 billion in Budgets 2015 and 2016, then growing at a rate of 2% per annum for subsequent Budgets.  For further details, see note 8 of the Forecast Financial Statements.

Government share offers

Sale programme is forecast to conclude in 2013/14.

Net sale proceeds of $4.8 billion (based on a mid-point estimate of between $4.6 billion and $5.0 billion).

Finance cost on new bond issuances

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

Top-down adjustment

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

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

Top-down adjustment to operating and capital
Year ending 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Operating 1.4 0.5 0.3 0.3 0.3
Capital 0.5 0.1 0.2 0.1 0.1

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

Borrowing requirements

Forecast cash deficits will be met by reducing financial assets and issuing debt.

Property, plant and equipment

For the purposes of the forecast financial statements, no revaluations of property, plant and equipment are projected beyond the current year.  Valuations as recorded for the 2013 annual financial statements and any additional valuations that have occurred up to 30 September 2013 are included in these forecasts. 

Student loans

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

Investment rate of returns

Incorporate the actual results to 30 September 2013.  Beyond this time, gains on financial instruments are based on long-term benchmark rates of return for each portfolio.

GSF and ACC liabilities

The GSF and ACC liabilities included in these forecasts have been valued as at 30 September 2013 and 30 June 2013 respectively.  The ACC liability has also been adjusted for the 30 September 2013 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 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.

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

ACC levies

The forecast includes a $387 million reduction in ACC levies for the 2014/15 levy year rising to $1.0 billion in the following levy year.

NZS Fund contributions

No contribution is assumed in the forecast period.

Fund contribution
Year ending 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Required contribution 2.1 2.2 2.2 2.1 2.0
Actual contribution - - - - -

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

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

Risks and Scenarios

Overview

  • This chapter outlines the general economic and fiscal risks associated with the major assumptions underpinning the main forecast. Risks associated with the main forecast of the Half Year Update are evenly balanced, with upside risks to the domestic outlook having increased relative to recent Economic and Fiscal Updates, while risks associated with a negative global shock remain.
  • Domestically, risks with potentially the largest impact on the New Zealand economy relate to the speed of the Canterbury rebuild and its interaction with the wider economy, the extent to which demand is boosted by population growth via higher net migration inflows and the degree of caution displayed by consumers.
  • Major advanced economies continue to undergo significant adjustments to reduce government debt, while the effects of monetary easing remain uncertain. Emerging economies are at risk from a rise in global interest rates once the US begins tapering its quantitative easing programme, which could have negative implications for New Zealand's economy through both financial channels and the terms of trade.
  • Two scenarios are presented that represent just two possible ways the New Zealand economy could deviate from the main forecast. Scenario one is based on a stronger domestically driven, cyclical pick-up in GDP growth, in part driven by higher external net migration. This scenario results in nominal GDP being $20.7 billion higher over the forecast period. In scenario two, a slowing of growth in emerging Asia negatively impacts New Zealand's terms of trade and lowers nominal GDP by $12.5 billion over the forecast period. If these economic risks or any significant deviations from the main forecast were to eventuate they would impact on the Government’s fiscal performance and position.
  • In addition to risks associated with the economy, the Crown is also subject to expenditure and balance sheet risks. In particular, volatility in market prices such as interest rates can have a significant impact on the Crown's fiscal position.

Introduction

The first part of this chapter outlines the key risks to the economic outlook. These risks mainly relate to the key judgements associated with the main forecast. In the second part of the chapter, two scenarios are presented that represent just two possible ways the New Zealand economy could deviate from the main forecast. The chapter then focuses on the established channels between the risks facing the economy and the Crown’s fiscal position.

Economic Risks

Risks to the forecasts are relatively balanced

As in the BudgetUpdate, risks around the main forecasts are fairly evenly balanced, with upside risks to the domestic outlook having increased relative to recent Economic and Fiscal Updates, while risks associated with a negative global shock remain.

There are a large number of ways in which events could turn out different from forecast. The risks with potentially the largest impact on the New Zealand economy relate to the speed of the Canterbury rebuild and its interaction with the wider economy, the extent to which demand is boosted by population growth via higher net migration inflows and consumer behaviour. Global economic developments, including shocks as the world economy undergoes an extended period of transition, could lead to more rapid adjustments for the prices of some of our main commodity exports and therefore affect the path of the terms of trade.

All of these factors are likely to have a significant role in influencing the size and dynamics of the current economic cycle. Other key judgements made in the forecasts include the level and flow-through of the exchange rate, the current amount of spare capacity in the economy and monetary policy developments.

The earthquake rebuild remains a significant area of uncertainty...

There is considerable uncertainty associated with the timing and magnitude of the Canterbury earthquake rebuild. Key determinants of the speed of the rebuild include insurance settlements and the capacity and capability of the construction sector. If the rebuild were to progress more slowly than expected, residential and non-residential construction and employment could all be weaker than in the main forecast. The overall size of the rebuild will also be influenced by the extent to which private firms ultimately decide to reinvest insurance proceeds within the Canterbury region.

Another risk to the forecasts is how much the Canterbury rebuild crowds out activity in other parts of the economy. Even with inward migration and the importation of capital goods, New Zealand has limited construction capacity and consequently it is likely that some rebuild activity will crowd out other activity elsewhere. Implicitly this means that activity outside Canterbury at the peak of the building cycle is likely to be a lower share of GDP relative to previous construction upturns. If the pace and level of the Canterbury rebuild is more sluggish, there will be less displacement of activity in the rest of the country and less competition for construction resources, resulting in less upward pressure on prices.

...as does the strength of the current net migration cycle...

Despite large upward revisions to the net migration assumption since the Budget Update, there is the possibility that weaker activity in Australia and other developed economies sees even stronger net inflows into New Zealand. The impact on the economy will be influenced by the skills of migrants and the areas where they settle (or remain in the case of New Zealanders who choose not to leave for abroad). For example, appropriately skilled migrant inflows into Canterbury could mitigate some of the risks related to the Canterbury rebuild, albeit adding to accommodation pressures in the near term. However, a large proportion of the population gains from higher net migration will likely place additional pressure on the housing market in other parts of the country, such as Auckland, contributing to stronger domestic demand, which then flows through to the wider economy through multiplier effects.

…while households could be less cautious, resulting in greater cyclical volatility

If households exercise less spending restraint than is anticipated in the main forecasts, consumption may rise faster than disposable income, with the shortfall being funded by rising debt, resulting in a negative saving rate over the forecast period. While this would be positive for GDP growth in the near term, owing to a boost to private consumption, it may require a sharper adjustment in the medium term as households become more indebted and need to repair their balance sheets. Elevated debt levels also expose household balance sheets to sharp corrections in house prices.

The Alternative Scenarios section explores the risk of a more protracted and larger net migration cycle and more willingness on the part of households to spend, all resulting in a more cyclical pick-up across the economy.

Global downside risks persist…

Global risks continue in the background and remain skewed to the downside as major advanced economies continue to undergo significant adjustments to reduce government debt, and in addition the effects of monetary easing and its subsequent withdrawal remain uncertain. Some emerging Asian economies, which are significant for New Zealand's trading partner growth, could also experience weaker growth once global monetary stimulus is withdrawn, particularly in the US.

...with elevated debt levels requiring ongoing adjustment

European countries remain highly indebted, but the probability that the crisis will worsen significantly has subsided over the past year owing to actions taken by the European Central Bank and some pick-up in euro area growth. Nevertheless, there remains considerable ongoing risk of further flare-ups, which would further dampen growth in the region and trigger financial market turmoil if an event was significant enough. Peripheral countries in the euro area continue to struggle with austerity measures which, compounded by poor competitiveness, create the potential for political instability.

The US must also undergo significant adjustment to reduce high government debt. Following on from events in October when the debt ceiling was raised temporarily to prevent a default on interest payments for US Treasury debt, there is a risk that brinkmanship continues to create heightened uncertainty concerning a permanent increase in the debt ceiling. This could lead to significant volatility in global financial markets which rely heavily on US Treasury bills and bonds as collateral.

More sustained growth and therefore reduced need for monetary stimulus...

Well anchored inflation expectations and existing spare capacity mean Japan, the US and the UK are still undertaking significant quantitative easing programmes to stimulate their economies through the purchase of financial assets. However, the US economy has recently shown signs of more sustainable growth and markets are expecting a tapering of quantitative easing in early 2014, although the US remains vulnerable if the removal of stimulus proves to be premature. Japan has implemented additional fiscal stimulus and structural reforms to kick-start growth. However, whether this will translate into sustainable growth over the medium term remains uncertain, particularly following a prolonged period of economic malaise.

…could expose fragilities elsewhere...

A rise in global bond rates once the US tapers its quantitative easing programme could leave some emerging economies significantly exposed given their currently high levels of debt. This could be exacerbated by losses in the banking sector in those emerging economies if the rapid growth in credit in recent years was facilitated by easy lending standards. An increase in US bond rates, combined with a weaker economic outlook in emerging market economies, could also lead to an outflow of foreign capital, putting downward pressure on exchange rates and raising inflation.

Of New Zealand's emerging Asia trading partners, Indonesia and India are the most vulnerable, as neither is currently running a current account surplus. The risk of a severe event similar to the Asian financial crisis in 1997 appears less likely now given that most Asian economies have floating exchange rates, hold larger foreign exchange reserves and have less foreign currency-denominated external debt.

…while risks for New Zealand's key trading partners remain…

Of more significance to New Zealand are the risks to the growth outlook for China, which is our second largest trading partner after Australia. The property investment and construction boom in China following the global financial crisis led to a build-up of poor-quality debt, especially in the local government sector. The risk of a sharp correction in house prices remains, and could expose a high level of bad debts in the banking sector and may cause credit conditions to tighten even further.

China is aiming to rebalance its economy away from export- and investment-led growth towards consumption. Rebalancing could lead to lower growth in the short term, particularly if the transition is disorderly, while faster progress to this goal would benefit New Zealand as it is a major supplier of food products to Chinese households. Weaker growth in China would also negatively impact on activity in emerging Asia, particularly amongst commodity producers, given their reliance on Chinese demand and tightly-linked supply chains.

One of the main risks associated with New Zealand's largest trading partner, Australia, is the transition of growth from investment to domestic demand and exports. It will take some time for the exports associated with this investment to come online, requiring increased residential and non-mining business investment to replace high levels of mining investment and maintain Australia's recent strength in economic growth. Australia is also exposed to a slowdown in China and emerging market economies which would reduce the demand for hard commodities.

…which, if they eventuate, would adversely impact on the New Zealand economy

Weaker growth in our trading partners could result in weaker demand for New Zealand's exports and commodity prices may fall. This would affect domestic incomes, confidence and asset prices as households behave more cautiously owing to higher risk aversion. The result of these developments would be lower private consumption, while more caution on the part of firms would decrease business investment growth and new hiring. The higher level of uncertainty faced by financial market participants could flow through to reduced availability, and a higher cost, of credit for New Zealand. However, in contrast to other developed countries, there is still scope for the Reserve Bank to provide liquidity as needed and lower the base interest rate (or slow increases) to mitigate the impact of higher funding costs on the interest rates faced by households and businesses.

Other risks surround key judgements...

Economic relationships are complex and developments are subject to inherent uncertainty, particularly the evolution of the exchange rate. There is a risk that the exchange rate remains supported for longer owing to the stronger domestic outlook, prolonged monetary stimulus in advanced economies and ongoing gains in global commodity prices for key New Zealand exports. A higher exchange rate would decrease tradables inflation, as imported goods would become less expensive, and encourage consumption of imported products. On the other hand, exporters and import-competing businesses would become less competitive, hindering manufacturing and services exports and production of import substitutes for the domestic market.

Another area of uncertainty is the current amount of spare capacity in the economy (the output gap) and its relationship with inflation. If the output gap is currently more negative, because potential GDP is higher than we have assumed in the main forecast, then there is greater scope for an increase in real GDP with less domestically generated inflation. Alternatively, if the strength of inflationary pressures were to surprise, perhaps owing to a stronger spill-over of rebuild costs from Canterbury into the wider economy, the response of monetary policy may be greater than anticipated. While implemented for macro-prudential reasons, the effectiveness of the recent loan-to-value restrictions in moderating house price growth is another area of uncertainty.

…including the perennial risks associated with the weather

Pasture conditions have improved since last summer and the impact of the drought on real GDP was broadly in line with estimates outlined in the Budget Update. In the near term, the agricultural sector is expected to bounce back strongly from the drought, although this is dependent on the assumption that pasture conditions remain favourable in coming quarters. Feed prices and availability amongst New Zealand's international competitors will also influence global supply and have a strong bearing on commodity prices and therefore the path of New Zealand's merchandise terms of trade.

Alternative Scenarios

The following scenarios show how the economy might evolve if some of the key judgements in the main forecast are altered (Table 3.1). The scenarios are only illustrative in that they are two of a large number of possible examples, and do not represent upper or lower bounds for the forecasts, with more extreme paths possible. They represent what are assessed to be key risks to the Half Year Update forecast and illustrate the impact of relatively small changes in the assumptions on key economic and fiscal variables. Although not the most likely outcome, there is a realistic prospect that these scenarios could occur.

Table 3.1 - Summary of key economic and fiscal variables for main forecast and scenarios
March years 2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Real GDP (annual average % change)            
Main forecast 2.7 2.7 3.6 2.7 2.0 2.2
Stronger cyclical growth 2.7 3.2 4.4 2.8 1.6 1.8
Slower emerging Asia growth 2.7 2.7 3.4 2.5 1.8 2.0
Unemployment rate1            
Main forecast 6.2 5.8 5.6 5.4 5.2 4.7
Stronger cyclical growth 6.2 5.7 5.3 5.1 4.9 4.6
Slower emerging Asia growth 6.2 5.8 5.8 5.7 5.4 5.0
Nominal GDP (annual average % change)            
Main forecast 2.4 6.5 4.9 5.2 4.0 3.7
Stronger cyclical growth 2.4 6.9 6.1 5.7 3.9 3.6
Slower emerging Asia growth 2.4 6.5 4.1 5.0 3.8 3.4
Current account balance (% of GDP)            
Main forecast -4.5 -4.2 -5.5 -6.3 -6.5 -6.4
Stronger cyclical growth -4.5 -4.2 -5.8 -7.2 -7.5 -7.2
Slower emerging Asia growth -4.5 -4.2 -6.4 -7.2 -7.1 -7.1
90-day bank bill rate2            
Main forecast 2.7 2.7 3.6 4.4 4.9 5.2
Stronger cyclical growth 2.7 2.9 4.7 5.8 6.0 6.1
Slower emerging Asia growth 2.7 2.7 3.3 3.7 4.5 5.0
Total Crown OBEGAL (% of GDP)3            
Main forecast -2.1 -1.0 0.0 0.7 1.2 2.1
Stronger cyclical growth -2.1 -0.8 0.6 1.6 2.2 3.0
Slower emerging Asia growth -2.1 -1.0 -0.2 0.3 0.7 1.5
Core Crown net debt (% of GDP)3            
Main forecast 26.2 26.3 26.5 25.8 24.4 22.3
Stronger cyclical growth 26.2 25.9 25.2 23.5 21.2 18.4
Slower emerging Asia growth 26.2 26.4 26.9 26.6 25.7 24.3

Notes:

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

Sources: Statistics New Zealand, the Treasury, Reserve Bank

Scenario One - Stronger Cyclical Growth

A more cyclical pick-up in domestic growth…

Scenario one is based on a stronger domestically driven, cyclical pick-up in GDP growth, in part driven by higher external net migration which raises domestic demand and spills over to wider confidence amongst firms. In this scenario it is assumed that the peak and duration of the net migration cycle is greater than in the main forecast and reaches 33,000 in the year to September 2014, only 10,000 below the peak in the early 2000s. This results in an addition of 16,000 people to the population over the forecast period (Figure 3.1) and follows from a relatively more attractive New Zealand economy and outlook compared to other developed countries, particularly Australia. Within this, the arrival of international migrants to assist in the Canterbury rebuild is greater, particularly from the UK and Ireland, as well as Asia.

An increase in the number of international arrivals adds to demand for housing, particularly in the Auckland and Canterbury regions where job opportunities are more abundant and the pressure on the existing housing stock is already high. Stronger competition for existing homes leads to higher house price inflation relative to the main forecast. As a result, annual house price inflation peaks at about 15% in 2014, compared with around 10% in 2013 in the main forecast.

Figure 3.1 - Annual net external migration
Figure 3.1 - Annual net external migration   .
Source:  Statistics New Zealand, the Treasury
Figure 3.2 - Private consumption growth
Figure 3.2  - Private consumption growth   .
Source:  Statistics New Zealand, the Treasury

...with private consumption and investment growing more strongly...

Faster house price growth leads households to resume mortgage equity withdrawal to finance consumption, and the relationship seen between house prices and consumption over the 2000s reasserts itself. Annual real private consumption growth averages 4.5% in this scenario over 2014 and 2015 compared to 3.0% in the main forecast, although growth is slower beyond 2016 (Figure 3.2). Additional demand for the existing housing stock also provides further support for residential investment which is already forecast to reach a similar peak (as a percent of GDP) as in the previous housing boom. The lift in domestic demand spills over to business confidence, resulting in increased market investment and hiring. Employment growth is therefore higher, which contributes to a lower unemployment rate over the forecast period.

In the near term, the demand-driven pick-up in actual GDP sees the output gap close earlier, resulting in faster growth in domestically generated inflation. Although the influx of overseas migrants contributes to an increase in potential GDP over the forecast by lifting the working-age population, the output gap is more positive owing to the stronger pick-up in actual GDP. The output gap peaks at 1.9% of potential GDP over the medium term as opposed to 0.9% in the main forecast, but is still much narrower than the cycle in the mid-2000s.

Higher inflation and inflation expectations in the near term see the Reserve Bank react by tightening monetary policy sooner and more aggressively over the cycle to maintain price stability. The 90-day bank bill rate reaches 6.0% by March 2017, around 100 basis points higher than the main forecast, which could see floating mortgage rates rise to around 8%. Higher interest rates act to temper private consumption and investment growth and, as a result, real GDP growth beyond 2016 is weaker relative to the main forecast.

...but domestic and external imbalances become greater

As the higher consumption is partly financed by borrowing against the increased value of housing, rather than higher incomes, the household saving rate is significantly lower than in the main forecast. The household saving rate reaches a low of -3.6% of household disposable income in the March 2017 year compared to the main forecast where it is 0.1% in 2017. This negative saving rate, along with higher interest rates at the end of the forecast period, drives lower consumption growth relative to the main forecast in 2017 and 2018. It is likely that further adjustment to household balance sheets will be required sometime beyond the forecast period, which would continue to constrain future consumption growth.

The annual current account deficit is wider and reaches 7.2% of GDP in March 2018, versus 6.4% in the main forecast. This is because some of the increased consumption and investment is met from imported goods and services. The higher interest rate track also means the exchange rate remains elevated for longer, which encourages more imports and constrains services exports, further contributing to a wider current account deficit.

GDP and tax revenue increases...

Stronger private consumption and residential investment, along with greater price pressure, result in nominal GDP being a cumulative $20.7 billion higher over the forecast period. The increased activity drives a stronger labour market in the early years of the forecast period, with the unemployment rate falling to 5.1% in March 2016, 0.3 percentage points lower than in the main forecasts.

Core Crown tax revenue is a cumulative $8.6 billion higher over the forecast period as a result of the higher nominal GDP. Higher nominal consumption and residential investment boost GST revenue by $2.1 billion over the forecast period. The stronger labour market and increased competition for workers push up wages and salaries, boosting source deductions revenue by a cumulative $1.8 billion. The stronger economic activity allows firms to increase their margins, boosting profitability and increasing corporate tax by $1.9 billion out to June 2018. Higher short-term interest rates, needed to control rising inflation, boost tax on interest by $1.8 billion.

Figure 3.3 - Operating balance (before gains and losses)
Figure 3.3 - Operating balance (before gains and losses)   .
Source:  the Treasury

Core Crown expenses are slightly lower than in the main forecast owing to a fall in debt servicing costs and, to a lesser extent, a reduction in welfare payments. The decrease in welfare payments is driven by a lower number of recipients receiving unemployment-related benefits, reflecting the stronger labour market. In this scenario, OBEGAL records a larger surplus of 0.6% of GDP in the June 2015 year, the same year surplus is achieved in the main forecast (Figure 3.3). Net core Crown debt as a percentage of GDP peaks at 25.9% in the June 2014 year, compared to 26.5% in the June 2015 year in the main forecast and falls away more quickly, dropping below 20% by June 2018 (Figure 3.6).

...but fiscal policy assumed to be restrained

While OBEGAL records a larger surplus in 2015 in this scenario, discretionary fiscal policy is unchanged relative to the main forecast and is restrained compared to the mid-2000s cycle. The subdued growth in government spending in the main forecast maximises the prospect of a subsequent “soft-landing” for the economy as well as minimising external vulnerabilities. If the extra income received by the Government was used to increase spending it would add to the cycle by increasing domestic demand, contributing to price pressures, which could then necessitate tighter monetary policy. This may support the exchange rate remaining higher for longer, which could result in greater imbalances such as an even larger current account deficit.

Scenario Two - Slower Growth in Emerging Asia

Increases in global interest rates trigger slower growth in emerging Asia…

Scenario two is based on a slowing of growth in emerging Asia, which would negatively impact New Zealand's terms of trade as demand for soft commodities falls. It is assumed that earlier and faster-than-expected tapering of asset purchases in the US leads to a tightening of credit conditions in emerging Asia, excluding China. Tighter credit conditions in the region constrain business investment, while household disposable income falls as servicing costs on outstanding household debt rise, limiting household spending growth.

…while domestic imbalances partially unravel in China...

Slower growth in China is triggered by relatively disorderly corrections in domestic financial and real estate markets. Specifically, these events could arise from a reduction in infrastructure investment as local government debt mounts to unsustainable levels, a sharp correction in the overheated housing market which results in a tightening of credit conditions and/or large-scale defaults in the informal banking sector. It should be noted that this scenario characterises a disorderly rebalancing event as opposed to a significant financial market failure that would have more severe implications, but is considered to be unlikely. Weaker Chinese demand for commodities produced in the rest of emerging Asia compounds the impact of the initial slowdown in the region. In addition,growth in our largest trading partner, Australia, slows as demand for hardcommodities from emerging Asia falls in the face of weaker growth.

…resulting in weaker growth in our trading partners...

Overall, the shock lowers trading partner growth between 2014 and 2016 relative to the main forecasts (Figure 3.4). The weaker-than-assumed activity in emerging Asia (including China) flows through to New Zealand in the form of lower pricesfor key commodity exports, particularly dairy, meat and forestry products, resulting in a larger drop in the merchandise terms of trade in the near term (Figure 3.5). As in the main forecast, the assumed global supply response to previously strong demand still occurs in this scenario, adding to the downward pressure on prices for key commodity exports. The terms of trade in this scenario remain at a lower level over the medium term, albeit one that is still high by historical standards, which reduces incomes and results in more cautious household spending over the forecast period. In this scenario, private consumption growth averages around 2.4% annually, compared with 2.6% in the main forecast. Risk aversion is heightened for firms, leading to lower business investment as they are less willing to commit to expenditure in a more uncertain environment.

In the main forecast we assume that the labour market continues to improve as increasing employment contributes to a gradual decline in unemployment. In scenario two, a weaker pick-up in domestic activity and more caution on the part of businesses result in subdued employment and the unemployment rate recovers to a lesser extent. The assumption of a weaker labour market sees the unemployment rate fall to 5.0% by March 2018, compared to 4.7% in the main forecast. This results in more spare capacity in the economy and less domestically generated inflation.

Figure 3.4 - Trading partner growth
Figure 3.4 - Trading partner growth   .
Source:  Haver Analytics, the Treasury
Figure 3.5 - Merchandise terms of trade (SNA)
Figure 3.5 - Merchandise terms of trade (SNA)   .
Source:  Statistics New Zealand, the Treasury

…causing weaker nominal GDP…

Weaker domestic activity, combined with lower terms of trade and CPI inflation, reduces nominal GDP by $12.5 billion over the forecast period compared to the main forecast. The lower terms of trade in this scenario weaken the goods trade balance over the forecast period which, along with the lower nominal GDP, increases the current account deficit as a percentage of GDP relative to the main forecast. The current account balance reaches a deficit of 7.1% of GDP by March 2018, compared to 6.4% in the main forecast.

…as well as lower tax revenue and operating balance

Core Crown tax revenue is a cumulative $3.9 billion lower over the forecast period in this scenario, largely owing to nominal GDP being $12.5 billion lower over the forecast period. The weaker labour market and less inflationary pressure lower worker incomes, which reduces source deductions revenue by $1.3 billion over the forecast period. The economy's weaker nominal activity means that business profitability is reduced, resulting in corporate taxes being a cumulative $1.0 billion lower. Resident withholding tax is $0.7 billion lower over the forecast period with interest rates increasing less than in the central forecast as inflation is closer to the mid-point of the target band. Weaker nominal consumption and residential investment reduces GST revenue by a cumulative $0.4 billion over the forecast period.

Core Crown expenses are slightly higher than in the main forecast, driven by an increase in debt servicing costs. Welfare payments are broadly similar to the main forecast as the higher number of recipients receiving unemployment-related benefits is largely offset by lower indexation adjustments to payment rates of many benefits and superannuation. This reflects both lower inflation and wage growth. In this scenario, the return to surplus of OBEGAL is delayed by one year until the June 2016 year (Figure 3.3). As a consequence, net core Crown debt as a proportion of GDP is higher at the end of the forecast period (June 2018), falling to 24.3% compared to 22.3% in the main forecast (Figure 3.6).

Figure 3.6 - Net core Crown debt
Figure 3.6 - Net core Crown debt   .
Source:  The Treasury

General Fiscal Risks

The remainder of this chapter focuses on the links between the risks to the performance of the economy and the Crown's fiscal position. For more on fiscal risks, see the Specific Fiscal Risks chapter on page 61.

Fiscal Sensitivities

Table 3.2 provides some rules of thumb on the sensitivities of the fiscal position to small changes in specific variables. For example, if, for some reason, nominal GDP growth is one percentage point faster than we have forecast each year up to June 2018, tax revenue would be expected to be around $4.0 billion (1.5% of GDP) higher than forecast in the June 2018 year as a result. The sensitivities are broadly symmetric and if nominal GDP growth is one percentage point slower each year than we expect, tax revenue would be around $3.9 billion lower than forecast in the June 2018 year. However, these figures can be influenced by the composition of growth as different types of activity have different effective tax rates.

A different interest rate path than that forecast would also impact on the fiscal position. A one percentage point lower interest rate would result in interest income on funds managed by the Treasury's New Zealand Debt Management Office (NZDMO) being $178 million lower in the June 2018 year. This would be more than offset by interest expenses being $384 million lower in the June 2018 year.

Table 3.2 - Fiscal sensitivity analysis
Year ending 30 June
($millions unless stated)
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
1% higher nominal GDP growth per annum on          
Tax revenue 620 1,335 2,150 3,035 4,015
   (% of GDP) 0.3 0.6 0.9 1.2 1.5
Tax revenue impact of a 1% increase in growth of          
Wages and salaries 270  570 910 1,285 1,725
   (% of GDP) 0.1 0.2 0.4 0.5 0.6
Taxable business profits 125  290 475 670 875
   (% of GDP) 0.1 0.1 0.2 0.3 0.3
Impact of 1% point lower interest rates on          
Interest income1          (70)          (89)          (85)        (161)        (178)
   (% of GDP)         (0.0)         (0.0)         (0.0)         (0.1)         (0.1)
Interest expenses1            (4)         (134)        (244)        (341)        (384)
   (% of GDP)  (0.0)   (0.1)   (0.1)  (0.1)   (0.1)
Overall operating balance          (66) 45 159 180 206
   (% of GDP)         (0.0) 0.0 0.1 0.1 0.1

Note: 1 Funds managed by the Treasury's NZDMO only.

Source: The Treasury

Revenue Risks

One of the major sources of risk to the fiscal position arises from the inherent uncertainty about future tax revenue. The amount of tax revenue that the Government receives in a given year is closely linked to the performance of the economy. Figure 3.7 plots the main tax revenue forecast, along with confidence intervals around those forecasts based on the Treasury's historical tax forecast errors and the assumption of an even balance of risks around the central forecast.[7] The outermost shaded area captures the range +/- $7.8 billion in the June 2018 year within which actual tax outturns fall 80% of the time.[8]

The tax revenue forecasts from the two scenarios are also shown in Figure 3.7. The 2008/09 global financial crisis showed that exogenous shocks can have severe impacts on government revenue. Further adverse weather conditions or a global downturn would have a negative impact on the Government's fiscal position. Should any of the uncertainties outlined in the Economic Riskssection eventuate differently from the main forecast, government revenue would likely be different from forecast, with scenarios one and two being examples of possible outcomes.

Figure 3.7 - Core Crown tax revenue uncertainty
Figure 3.7 - Core Crown tax revenue uncertainty.
Source:  The Treasury

Based on average historical forecast errors and an even balance of risks, Figure 3.7 suggests that tax revenue over the forecast period would be stronger than scenario one approximately 30% of the time and weaker than scenario two approximately 40% of the time.

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

Notes

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

Expenditure Risks

One-off and unexpected expenditure shocks can have a large impact on the Crown's operating balance in the year that they occur. Persistent errors in forecasting the cost of various programmes (ie, policies that cost more than the Government allows for) can also have substantial ongoing effects on the fiscal position.

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

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

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

Balance Sheet Risks

In addition to risks around revenue and expenditure, the Crown's financial position is exposed to risks to its balance sheet. While some are unavoidable, the Crown's general approach is to identify, avoid or mitigate these risks where practicable. For more information on balance sheet risks, see the Fiscal Outlook chapter on pages 34 to 35.

The largest source of balance sheet risk is volatility in asset and liability values owing to movements in market variables such as interest rates, exchange rates and equity prices. This may result in an operating balance impact. Of the Crown's aggregate financial risk, roughly a third is estimated to be attributed to this “market risk”.[9] Three areas of the balance sheet are particularly susceptible:

  • Financial assets held by the CFIs are sensitive to financial-market volatility. CFIs diversify their portfolios across a range of financial assets to manage exposures to specific market risks. The Crown Ownership Monitoring Unit (COMU) estimates a 10% fall (rise) in world share markets would lead to a 4% to 5% fall (rise) in the value of the Crown's financial portfolio.
  • Insurance and retirement liabilities and provisions are prone to market volatility through their actuarial valuations, which are sensitive to assumptions about variables such as interest and inflation rates, and risk margins.
  • Physical assets such as land, buildings, state highways and military equipment are susceptible to valuation movements through changes in property market conditions, interest rates and changes in the costs of construction. This will affect the recorded value of physical Crown assets.

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

Notes

  • [9]Irwin, T and Parkyn, O (2009), “Improving the management of the Crown's exposure to risk”, New Zealand Treasury Working Paper 09/06.

Funding Risks

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

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

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

Specific Fiscal Risks

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

Overview

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

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

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

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

The specific fiscal risks are categorised into:

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

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

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

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

Statement of Specific Fiscal Risks

Summary Table

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

 
Specific fiscal risks as at 3 December 2013 Status[10]

Potential policy decisions affecting revenue

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

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

 
ACC - Work-related Gradual Process Disease and Infection Unchanged
Budget Operating Initiatives New
Canterbury Earthquake Recovery - Christchurch City Council/Crown Cost Sharing Changed
Canterbury Earthquake Recovery - Christchurch Central Recovery Plan Changed
Canterbury Earthquake Recovery - Residential Red Zone Changed
Communications - Ultra-Fast Broadband Initiative New
Defence Force - Mid-point Rebalancing Review Changed
Environment - Post-2012 International Climate Change Obligations Changed
Government Response to Wai 262 Unchanged
Housing - Reform of Social Housing Unchanged
Revenue - KiwiSaver Auto-enrolment Unchanged
Revenue - Transformation and Technology Renewal Changed
Social Development - Vulnerable Children White Paper Unchanged
Social Development - Welfare Reform Costs Unchanged
Social Development - Welfare Reform Forecast Benefit Savings Unchanged
State Sector Employment Agreements Unchanged

Potential capital decisions (expected to be funded from the existing Crown balance sheet, including the Future Investment Fund)

 
Departmental Capital Intentions Unchanged
Earthquake Strengthening for Crown-owned Buildings Unchanged
Finance - Crown Overseas Properties Changed
Justice - Christchurch Justice and Emergency Services Precinct Changed
Primary Industries - Investment in Water Infrastructure Unchanged
Transport - Auckland Transport Projects New
Transport - Support for KiwiRail Changed

Matters dependent on external factors

 
ACC - Non-earners' Account Unchanged
Canterbury Earthquake Recovery - Residential Red Zone Changed
Communications - Potential Impairment in Value of Broadband Investment Unchanged
Defence Force - Potential Rationalisation, Revaluation and Disposal of NZDF Assets Unchanged
Energy - Crown Revenue from Petroleum Royalties Unchanged
Environment - Post 2012 International Climate Change Negotiations Changed
Finance - EQC Changed
Finance - Goodwill on Acquisition Unchanged
Finance - Government Commitments to International Financial Institutions Unchanged
Finance - Sale of Part of the Crown's Shareholding in Certain Companies Changed
Finance - Southern Response Earthquake Services Support Unchanged
Health - Litigation in the Disability Support and Aged Care Areas Changed
Housing - Divestment of Housing Unchanged
Revenue - Cash Held in Tax Pools Unchanged
Treaty Negotiations - Treaty Settlement Forecasts Unchanged
Treaty Negotiations - Relativity Clause Unchanged

Notes

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

Potential Policy Decisions Affecting Revenue

ACC - Levies (Unchanged)

Levy rates for the Work, Earners' and Motor Vehicle accounts are set by Cabinet following a public consultation process. Claims experience, ACC performance and economic assumptions (particularly discount rates) can impact insurance expenditure, both in the current year and the estimated future liability. If any of these factors differ from what is forecast the revenue collected may be more or less than required to cover the costs of claims, resulting in unplanned savings or costs which could have a corresponding impact on the operating balance.

ACC - Funding Policy Review (Unchanged)

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

Revenue - Income-sharing Tax Credits (Unchanged)

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

Services Funded by Third Parties (Unchanged)

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

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

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

Under current legislation, the Government incurs an obligation for Work-related Gradual Process Disease and Infection claims when the claim is made, and an expense is recognised at this point. The liability for commercial accident and sickness insurance contracts would usually be recognised when exposure to conditions that will give rise to a claim occurs. An amendment to legislation would be required to recognise claims at the same time as for commercial contracts. There are currently no plans to make such a change. An initial adjustment to the liability, and an expense of about $650 million would need to be reported if such an amendment were to be made.

Budget Operating Initiatives (New)

The Government is yet to make decisions on any potential package of new operating initiatives for the upcoming Budget. New operating initiatives represent a risk to the forecasts only to the extent they cannot be managed through reprioritisation or from within the existing Budget allowance for new operating spending in the forecasts. The Government's stated intention is that all new operating initiatives will be managed through these mechanisms.

Canterbury Earthquake Recovery - Christchurch City Council/Crown Cost Sharing (Changed)

The Crown is partially funding the recovery of local infrastructure in Canterbury as set out in the cost sharing agreement with the Christchurch City Council. The agreement includes a review clause. The review is to be completed by 1 December 2014. As a result, the Crown's contribution could differ from that included in the fiscal forecasts.

Canterbury Earthquake Recovery - Christchurch Central Recovery Plan (Changed)

The Crown is partially funding the construction of Anchor Projects as part of the Christchurch Central Recovery Plan as set out in the cost sharing agreement with the Christchurch City Council. The extent of funding will vary from project to project, depending on final project costs. Business cases for the development of Anchor Projects are in their early stages. Project costing for construction of the Anchor Projects will become increasingly clear during the business case process and the subsequent procurement phase. An estimate of the cost has been included in the fiscal forecasts but the Crown's eventual contribution may differ.

Communications - Ultra-Fast Broadband Initiative (New)

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

Defence Force - Mid-point Rebalancing Review (Changed)

The New Zealand Defence Force (NZDF) savings and reform programme will be on-going and integrated into normal business practice from 2014/15. The Government is yet to make final decisions on future funding for NZDF. However, funding increases may be approved for NZDF within the forecast period.

Government Response to Wai 262 (Unchanged)

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

Housing - Reform of Social Housing (Unchanged)

The Government has decided to change the policy settings for social housing. This includes growing third party providers of social housing, increasing the effectiveness of financial assistance, and Housing New Zealand Corporation focusing on providing social housing to those with the greatest housing need. Some decisions have been announced and included in the fiscal forecasts but other plans for implementation remain under development, and may require reprioritisation or additional funding.

Revenue - KiwiSaver Auto-enrolment (Unchanged)

The Government has announced its intention to consult on the design of a one-off KiwiSaver auto-enrolment exercise to increase the number of KiwiSaver members. The Government will proceed with a one-off KiwiSaver enrolment exercise only when it is confident that such a step poses no significant risks to returning to, and maintaining, an operating surplus. An auto-enrolment exercise is likely to entail a one-off cost for kick-start payments to new members and ongoing additional costs for the Member Tax Credit. Depending on the timing, design features and take-up rate, these costs could be in the order of $350 million to $550 million over the first four years after auto-enrolment takes place, and are expected to be funded out of the operating allowance.

Revenue - Transformation and Technology Renewal (Changed)

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

Social Development - Vulnerable Children White Paper (Unchanged)

The Government has begun to implement proposals to better identify and provide assistance to vulnerable children. Future costs of the proposals are currently being developed with a focus in the first instance on costs for the 2014/15 year. There are likely to be multi-year impacts on Votes Education, Health, Justice and Social Development. To the extent that these cannot be funded from reprioritisation, additional funding from the allowance may be required.

Social Development - Welfare Reform Costs (Unchanged)

The Government has agreed to a package of changes to the benefit system. The extent of any additional costs of implementing welfare reform, such as implementing the Investment Approach, remain uncertain.

Social Development - Welfare Reform Forecast Benefit Savings (Unchanged)

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

State Sector Employment Agreements (Unchanged)

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

Potential Capital Decisions (Expected to be Funded from the Existing Crown Balance Sheet, Including the Future Investment Fund)

Departmental Capital Intentions (Unchanged)

The Government requires 16 capital-intensive agencies or sectors to identify their capital spending intentions over the next 10 years based on current policy settings and certain demographic and inflation assumptions. The Government expects that these intentions will be managed back through a range of measures such as prioritisation, changes to asset utilisation, alternative methods of service delivery and changes to policy settings. Departmental capital intentions are risks to the fiscal forecasts only to the extent that they cannot be managed through existing balance sheets, including the Future Investment Fund.

Earthquake Strengthening for Crown-owned Buildings (Unchanged)

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

Finance - Crown Overseas Properties (Changed)

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. A rough-order cost estimate for this upgrade is $100 million over the period from 2014/15 to 2016/17.

Justice - Christchurch Justice and Emergency Services Precinct (Unchanged)

The Government has included the development of a Justice and Emergency Services Precinct in the fiscal forecasts, and there is a risk that the spending profile differs from this.

Primary Industries - Investment in Water Infrastructure (Unchanged)

In addition to $80 million provided in 2013/14, the Government will consider providing up to $320 million in future Budgets to Crown Irrigation Investments Limited as schemes reach the “investment-ready” stage.

Transport - Auckland Transport Projects (New)

The Government has signalled its intention to accelerate transport projects in the Auckland Council's Auckland Plan, including a number of state highway projects, Auckland Manukau Eastern Transport Initiatives, the East-West Link and support for the City Rail Link and a second Waitemata Harbour Crossing. The Government is yet to consider the most appropriate timing, phasing of and funding for these initiatives.

Transport - Support for KiwiRail (Changed)

KiwiRail has signalled its intention to seek additional Crown funding over the next four years as it continues to:

  • work towards its objective of becoming a commercially viable network
  • undertake earthquake strengthening work on some of its buildings, and
  • repair damage to operational facilities in Christchurch following the earthquakes.

KiwiRail has also signalled that it may require additional funding following the breakdown of the Aratere ferry. The Government has not considered how it would respond to such a request.

Matters Dependent on External Factors

ACC - Non-earners' Account (Unchanged)

Funding for the Non-earners' Account is agreed as part of the annual Budget process. Claims' experience, ACC's financial performance and economic assumptions (particularly discount rates) can impact insurance expenditure, both in the current year and the estimated future liability. If any of these factors differ from what is forecast the amount required to cover the costs of non-earners' claims for that year may be more or less than the agreed level of funding, resulting in unplanned savings or costs to the Crown.

Canterbury Earthquake Recovery - Residential Red Zone (Changed)

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

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

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

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

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

Energy - Crown Revenue from Petroleum Royalties (Unchanged)

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

Environment - Post-2012 International Climate Change Obligations (Changed)

The Government has adopted an unconditional target to reduce emissions by 5% by 2020 relative to its 1990 levels. Its conditional commitments are subject to international negotiations and agreements. Currently no rights or obligations are included in the fiscal forecasts for either conditional or unconditional post-2012 obligations. These could have significant fiscal implications that will need to be recognised when the commitments are considered to be binding and the Government has no discretion to avoid the liabilities.

Finance - EQC (Changed)

The net financial position of EQC, and the size of any requirement for additional Crown funding, remains uncertain. The key driver of this uncertainty is EQC's outstanding claims liability - the actuarial estimate of EQC's outstanding claims liability is highly uncertain and sensitive to assumptions; for example, construction demand surge, land damage estimates, legal challenges, reinsurance recoveries and the profile of claims settlement. The magnitude of the net outstanding cost claims is large, so small percentage changes in the liability can have a material impact on the fiscal forecasts.

Finance - Goodwill on Acquisition (Unchanged)

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

Finance - Government Commitments to International Financial Institutions (Unchanged)

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. The risk government commitments to the International Monetary Fund being called has increased in recent years.

Finance - Sale of Part of the Crown's Shareholding in Certain Companies (Changed)

The Government has sold part of the Crown's shareholding in Air New Zealand, Mighty River Power and Meridian Energy. It is proposing to sell part of the Crown's shareholding in Genesis Energy. The fiscal forecasts include an estimate of the cash proceeds from the sale of part of the Crown's shareholding in these companies, the dividends and profits from these companies that will be paid or are attributable to minority shareholders rather than to the Crown, and the estimated finance cost savings. There is still some uncertainty over the final amount and timing of any cash proceeds, foregone profits, flow-on effects for the Crown and any implementation costs are uncertain, and these may differ from what has been assumed in the fiscal forecasts.

Finance - Southern Response Earthquake Services Support (Unchanged)

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

Health - Litigation in the Disability Support and Aged Care Areas (Changed)

Several cases and funding claims in the disability support and aged care sectors may involve significant costs to the Crown relating to interpretation of the Minimum Wage Act 1983, the Equal Pay Act 1972 and the Government's policy of paying certain family members through its Funded Care Policy. Changes to the existing policy could require additional funding.

Housing - Divestment of Housing (Unchanged)

The Government may undertake divestment or redevelopment of some housing property. Property sales are subject to market conditions and therefore there is an inherent level of uncertainty about the return to the Crown associated with any divestment and/or development.

Revenue - Cash Held in Tax Pools (Unchanged)

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

Treaty Negotiations - Treaty Settlement Forecasts (Unchanged)

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

Treaty Negotiations - Relativity Clause (Unchanged)

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

Risks Removed Since the 2013 Budget Update

The following risks have been removed since the 2013 Budget Update:

 
Expired risks Reason
Health - Payment of Family Caregivers Merged with Litigation in the Disability Support and Aged Care Areas risk
Finance - New Zealand Aluminium Smelters Included in fiscal forecasts
Finance - Solid Energy No longer material

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

The Public Finance Act 1989 requires that the Statement of Specific Fiscal Risks sets out all government decisions, contingent liabilities or contractual obligations known to the Government and subject to specific requirements that may have a material effect on the economic or fiscal outlook.[11]

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.

Notes

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

Criteria for Including Matters in the Fiscal Forecasts

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

  • The matter can be quantified for particular years with reasonable certainty.
  • A decision has been taken, or a decision has not yet been taken but it is reasonably probable[12] 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 their 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.

Notes

  • [12]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).

Rules for the Disclosure of Specific Fiscal Risks 

Matters are disclosed as specific fiscal risks if:

  • the likely impact is more than $100 million over five years, and either
  • a decision has not yet been taken but it is reasonably possible[13] (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 their best professional judgement, that the matters may have a material effect (more than $100 million over five years) on the fiscal and economic outlook but are not certain enough to include in the fiscal forecasts.

Notes

  • [13]For these purposes 'reasonably possible' is taken to mean that the matter might be approved within the forecast period (by considering, for example, whether there is a 20% to 50% chance of the matter occurring or being approved).

Exclusions from Disclosure

Matters are excluded from disclosure as specific fiscal risks if they fail to meet the materiality criterion (ie, are less than $100 million over five years), or if they are unlikely[14] to be approved or occur within the forecasting period.

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

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

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

Notes

  • [14]For these purposes ‘unlikely' is taken to mean that the matter will probably not be approved within the forecast period (by considering, for example, whether there is a less than 20% chance of the matter occurring or being approved).

Contingent Liabilities and Contingent Assets

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

Typically, contingent liabilities consist of guarantees and indemnities, uncalled capital and legal disputes and claims. The contingent liabilities facing the Crown are a mixture of operating and balance sheet risks, and they can vary greatly in magnitude and likelihood of realisation.

In general, if a contingent liability were realised, or the amount becomes sufficiently reliable to record as a liability, it would reduce the operating balance and net worth and increase net debt. In the case of contingencies for uncalled capital, the negative impact would be restricted to net debt because the cost would be offset by the acquisition of capital.

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

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

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

Some contingencies of the Crown are not able to be quantified. We have disclosed all unquantifiable contingent liabilities and unquantifiable contingent assets that are not expected to be remote.[15]

Contingent liabilities have been stated as at 31 October 2013, being the latest set of reported contingent liabilities.

Notes

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

Quantifiable Contingent Liabilities and Contingent Assets

Guarantees and indemnities Status[16] ($ millions)

Contingent liabilities

   
Other guarantees and indemnities Unchanged 178
    178

Uncalled capital

   
Asian Development Bank Unchanged 2,881
International Monetary Fund - promissory notes Unchanged 1,092
International Bank for Reconstruction and Development Unchanged 995
International Monetary Fund - arrangements to borrow Unchanged 1,013
Other uncalled capital Unchanged 25
    6,006

Legal proceedings and disputes

   
Tax disputes Unchanged 607
Other legal proceedings and disputes Unchanged 65
    672

Other quantifiable contingent liabilities

   
Unclaimed monies administered by the Department of Inland Revenue Unchanged 104
Transpower New Zealand Limited Unchanged 156
Other quantifiable contingent liabilities Unchanged 184
    444
Total quantifiable contingent liabilities   7,300

Contingent assets

   
Tax disputes Unchanged 169
Other quantifiable contingent assets Unchanged 84
Total quantifiable contingent assets   253

Notes

  • [16]Status of contingent liabilities or assets when compared to the Financial Statements of the Government of New Zealand for the year ended 30 June 2013.

Unquantifiable Contingent Liabilities and Contingent Assets

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

Legal claims and proceedings

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

Other unquantifiable contingent liabilities

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

Description of Contingent Liabilities

Quantifiable contingent liabilities over $100 million

Uncalled capital

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

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

The Crown's uncalled capital subscriptions are as follows:

 
Uncalled capital 31 October 2013
$millions
30 June 201
$millions
Asian Development Bank 2,881 2,992
International Monetary Fund - promissory notes 1,092 1,163
International Bank for Reconstruction and Development 995 1,056
International Monetary Fund - arrangements to borrow 1,013 1,052

Other

25

23

Legal proceedings and disputes

Tax in dispute - assessed

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

$607 million at 31 October 2013 ($641 million at 30 June 2013)

Other quantifiable contingent liabilities

Unclaimed monies

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

$104 million at 31 October 2013 ($101 million at 30 June 2013)

Transpower New Zealand Limited

Transpower has a contingent liability relating to excess capital expenditure on the North Island Grid Upgrade Project (NIGU).The NIGU spend exceeds the amount initially approved in 2006. The methodology for approvals subsequently changed in 2012, which increases the potential size of the excess capital expenditure. If the excess expenditure is not approved by the Commerce Commission it cannot be recovered from customers. NIGU is operational and a submission for the excess expenditure has been made.

The excess is $156 million at 31 October 2013 ($156 million at 30 June 2013)

Unquantifiable contingent liabilities

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

a) Indemnities

b) Legal claims and proceedings, and

c) Other unquantifiable contingent liabilities.

a) Indemnities

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

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

 
Party indemnified Instrument of indemnification Actions indemnified
Air New Zealand Deed of indemnity issued 24 September 2001. Claims arising from acts of war and terrorism that cannot be met from insurance, up to a limit of US$1 billion in respect of any one claim.
Contact Energy Limited The Crown and Contact Energy signed a number of documents to settle in full Contact's outstanding land rights and geothermal asset rights at Wairakei.  The documents contained two reciprocal indemnities between the Crown and Contact to address the risk of certain losses to the respective parties' assets arising from the negligence or fault of the other party. 
Earthquake Commission (EQC) Section 16 of the Earthquake Commission Act 1993.

Any deficiency in EQC's assets to cover the Commission's financial liabilities.  In the event of a major natural disaster the Crown may be called upon to meet any financial shortfall incurred by the EQC.

EQC expects to have the necessary financing to meet its liabilities as they fall due over the next 12 months, hence a call on its Crown guarantee is not expected for the coming year. 

In the event that EQC cannot meet its obligations, however, the Crown would need to finance any shortfall and the Crown's net debt position would increase as a result.  This support arrangement is discussed earlier in this chapter as a specific fiscal risk.

Genesis Power Limited Deed between Genesis Power Limited and the Crown. The agreement sees the Crown compensate Genesis in the event that it has less gas than it requires for the long-term supply of gas to cover Huntly Power station's minimum needs. 
  Genesis acquisition of Tekapo A & B power stations. Indemnity against any damage to bed of lakes and rivers subject to operating easements. 
Housing New Zealand Limited (HNZL) The Crown has provided a warranty in respect of title to the assets transferred to HNZL.

The Crown indemnified HNZL against:

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

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

Justices of the Peace, Community Magistrates and Disputes Tribunal Referees

Section 197 of the Summary Proceedings Act 1957.

Section 58 of the Disputes Tribunal Act 1988.

Damages or costs awarded against them as a result of them exceeding their jurisdiction, provided a High Court Judge certifies that they have exceeded their jurisdiction in good faith and ought to be indemnified.
Maui Contracts Contracts in respect of which the Crown purchases gas from Maui Mining companies and sells gas downstream to Contact Energy Limited, Vector Gas Limited and Methanex Waitara Valley Limited. The contracts provide for invoices to be re-opened in certain circumstances within two years of their issue date as a result of revisions to indices.  These revisions may result in the Crown refunding monies or receiving monies from those parties.
Maui Partners Confidentiality agreements with the Maui Partners in relation to the provision of gas reserves information. Any losses arising from a breach of the deed. 
Meridian Energy Limited Initial Public Offering The Minister of Finance signed a number of indemnities in October 2013. The Crown has indemnified Meridian Energy Limited's directors and a number of external advisors against losses that they may suffer as a result of any claims brought against them in relation to the Meridian Energy Limited partial share sale.
New Zealand Aluminium Smelter and Comalco The Minister of Finance signed indemnities in November 2003 and February 2004 in respect of aluminium dross currently stored at another site in Invercargill.  The indemnity relates to costs incurred in removing the dross and disposing of it at another site if required to do so by an appropriate authority. 
New Zealand Local Authorities

Section 9 of the Civil Defence Emergency Management Act 2002. 

Civil Defence Emergency Management Plan.

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

The Crown has indemnified Westpac:

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

Legal claims and proceedings

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

Accident Compensation Corporation (ACC) litigations 

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

Air New Zealand litigation

Air New Zealand is currently named in class actions. Two (one in Australia and the other in the United States) make allegations against more than 30 airlines, of anti competitive conduct in relation to pricing in the air cargo business. A class action in the United States alleges that Air New Zealand together with many other airlines conspired in respect of fares and surcharges on trans-Pacific routes. All class actions are being defended. The allegations made in relation to the air cargo business are also the subject of proceedings by the Australian Competition and Consumer Commission. A defended hearing in the Federal Court concluded in May 2013 and a decision is awaited. In the event that the Court determines that Air New Zealand had breached Australian laws, the company would have potential liability for pecuniary penalties.

Television New Zealand (TVNZ)

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

Treaty of Waitangi claims

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

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

Ministry of Education litigation

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

Other unquantifiable contingent liabilities

Criminal Proceeds (Recovery) Act 2009

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

Environmental liabilities

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

Any contaminated sites for which costs can be reliably measured have been included in the statement of financial position as provisions.

Treaty of Waitangi claims - settlement relativity payments

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 Waikato-Tainui's and Ngāi Tahu's settlements as a proportion of all Treaty settlements. The agreed relativity proportions are 17% for Waikato-Tainui and approximately 16% for Ngāi Tahu.

The relativity mechanism has now been triggered and in future years additional costs may be incurred in accordance with the relativity mechanism as Treaty settlements are reached. However, the final amount payable to settle this matter cannot be quantified yet owing to uncertainty around when current and future negotiations will be settled and the value of these settlements when reached. There is also uncertainty on how various disputes concerning the interpretation of the mechanism will be resolved.

Description of Contingent Assets

Quantifiable contingent assets over $100 million

Tax disputes - non assessed

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

$169 million at 31 October 2013 ($169 million at 30 June 2013)

Forecast Financial Statements

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

They are based on the accounting policies and assumptions that follow. As with all such assumptions, there is a degree of uncertainty surrounding them. This uncertainty increases as the forecast horizon extends. The Risks and Scenarios and Specific Fiscal Risks chapters discuss the risks to the fiscal forecast in more detail.

The forecasts have been prepared in accordance with the Statement of Responsibility and reflect the judgements and information known at the time they were prepared. They reflect all government decisions and circumstances communicated to 3 December 2013.

The finalisation dates and key assumptions that underpin the preparation of the Forecast Financial Statements are outlined on pages 42 to 44.

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 included within the 2013 Half Year Economic and Fiscal Update Additional Information document which can be found on the Treasury's website at www.treasury.govt.nz/budget/forecasts/hyefu2013.

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 the Treasury's best professional judgement. Actual financial results for the periods covered are likely to vary from the information presented in these forecasts. Factors that may lead to a material difference between information in these Forecast Financial Statements and the actual reported results in future years are set out in the Specific Fiscal Risks chapter on pages 61 to 83.

Key forecast assumptions used are set out on pages 42 to 44.

Government Reporting Entity as at 3 December 2013

These Forecast Financial Statements are for the government reporting entity as specified in Part 3 of the Public Finance Act 1989. This comprises Ministers of the Crown and the following entities:

Core Crown

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

State-owned enterprises

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

Crown entities

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

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

Forecast Financial Statements

Forecast Statement of Financial Performance for the years ending 30 June

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

Revenue

               
Taxation revenue 1 58,134 61,773 61,969 65,703 69,938 73,493 77,126
Other sovereign revenue 1 5,172 5,296 5,276 5,070 4,665 4,633 4,779
Total revenue levied through the Crown's sovereign power   63,306 67,069 67,245 70,773 74,603 78,126 81,905
Sales of goods and services   16,713 17,080 16,592 17,516 18,149 18,693 19,270
Interest revenue and dividends 2 2,939 3,588 3,378 3,679 4,011 4,676 5,192
Other revenue   3,697 3,867 3,767 3,799 3,988 4,037 3,960
Total revenue earned through the Crown's operations   23,349 24,535 23,737 24,994 26,148 27,406 28,422
Total revenue (excluding gains)   86,655 91,604 90,982 95,767 100,751 105,532 110,327

Expenses

               
Transfer payments and subsidies 3 22,708 23,485 23,338 23,817 24,566 25,468 26,396
Personnel expenses 4 19,935 20,172 20,246 20,384 20,746 21,034 21,350
Depreciation and amortisation 5 4,812 4,640 4,666 4,841 4,925 5,016 5,098
Other operating expenses 5 36,163 37,748 38,350 37,681 37,941 38,175 37,649
Interest expenses 6 4,358 4,516 4,418 4,695 5,027 5,473 5,621
Insurance expenses 7 3,031 3,215 3,439 3,657 4,068 4,395 4,775
Forecast new operating spending 8 461 220 1,106 2,104 3,167 4,115
Top-down expense adjustment 8 (600) (1,375) (500) (300) (300) (300)
Total expenses (excluding losses)   91,007 93,637 93,302 95,681 99,077 102,428 104,704
Minority interest share of operating balance before gains/losses1   (62)
Operating balance before gains/(losses)   (4,414) (2,033) (2,320) 86 1,674 3,104 5,623
Net gains/(losses) on financial instruments 9 7,270 1,748 2,234 2,206 2,347 2,494 2,676
Net gains/(losses) on non-financial instruments 10 3,706 443 1,486 535 499 478 398
Total gains/(losses)   10,976 2,191 3,720 2,741 2,846 2,972 3,074
Net surplus from associates and joint ventures   395 200 239 253 254 254 253
Minority interest share of net gains/losses1   (32)
Operating balance 11 6,925 358 1,639 3,080 4,774 6,330 8,950
  1. Foregone profits from the Government Share Offer programme are not separately disclosed. Refer to pages 36 to 41 for further details.

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

Functional Expense Analysis for the years ending 30 June

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

Total Crown expenses

             

By functional classification

             
Social security and welfare 26,268 27,510 27,305 27,889 28,784 30,009 31,286
GSF pension expenses 286 283 291 377 460 514 536
Health 13,856 14,433 14,464 14,335 14,318 14,289 14,222
Education 13,366 13,180 13,369 13,456 13,524 13,622 13,710
Core government services 3,960 4,341 4,755 4,126 4,226 4,199 4,108
Law and order 3,670 3,804 3,820 3,672 3,741 3,723 3,729
Defence 1,766 1,893 1,852 1,839 1,889 1,794 1,794
Transport and communications 9,052 9,036 9,285 9,737 9,917 10,102 10,338
Economic and industrial services 8,375 8,098 8,096 8,554 8,843 9,110 9,412
Primary services 1,579 1,892 1,838 1,777 1,753 1,759 1,592
Heritage, culture and recreation 2,351 2,532 2,398 2,358 2,417 2,478 2,542
Housing and community development 989 1,057 1,157 1,197 1,213 1,217 1,243
Environmental protection 528 473 603 514 515 506 505
Other 603 728 806 549 646 766 251
Finance costs 4,358 4,516 4,418 4,695 5,027 5,473 5,621
Forecast new operating spending 461 220 1,106 2,104 3,167 4,115
Top-down expense adjustment (600) (1,375) (500) (300) (300) (300)
Total Crown expenses excluding losses 91,007 93,637 93,302 95,681 99,077 102,428 104,704

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

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

Core Crown expenses

             

By functional classification

             
Social security and welfare 22,741 23,595 23,246 23,729 24,244 25,123 26,034
GSF pension expenses 278 274 282 369 452 505 528
Health 14,498 14,950 14,997 14,924 14,953 14,930 14,860
Education 12,504 12,389 12,558 12,669 12,785 12,835 12,882
Core government services 4,294 4,637 5,067 4,470 4,581 4,558 4,453
Law and order 3,456 3,561 3,630 3,471 3,516 3,488 3,488
Defence 1,804 1,933 1,901 1,887 1,938 1,843 1,843
Transport and communications 2,255 2,162 2,285 2,247 2,173 2,247 2,250
Economic and industrial services 1,978 2,152 2,226 2,155 2,168 2,193 2,096
Primary services 659 818 816 726 696 674 648
Heritage, culture and recreation 804 854 882 816 803 801 801
Housing and community development 283 335 434 324 265 204 201
Environmental protection 530 496 602 512 513 504 504
Other 603 728 806 549 646 766 251
Finance costs 3,619 3,622 3,604 3,743 3,949 4,280 4,350
Forecast new operating spending 461 220 1,106 2,104 3,167 4,115
Top-down expense adjustment (600) (1,375) (500) (300) (300) (300)
Total core Crown expenses excluding losses 70,306 72,367 72,181 73,197 75,486 77,818 79,004

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

Forecast Statement of Comprehensive Income for the years ending 30 June

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Operating balance (including minority interest) 7,019 358 1,639 3,080 4,774 6,330 8,950

Other comprehensive income

             
Revaluation of physical assets 1,367 (74)
Net change in hedging instruments entered into for cash flow hedges 280 (21) 41 (16) 6 9 7
Foreign currency translation differences for foreign operations 39 (6) 1
Valuation gains/(losses) on investments available for sale taken to reserves 36 8 (2) 9 12 13 14
Other movements 7 (38) 46 3 6 9 5
Total other comprehensive income 1,690 (12) 5 (3) 24 31 26
Total comprehensive income 8,709 346 1,644 3,077 4,798 6,361 8,976
Attributable to:              
 - minority interest 153
 - the Crown 8,556 346 1,644 3,077 4,798 6,361 8,976
Total comprehensive income 8,709 346 1,644 3,077 4,798 6,361 8,976

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

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Opening net worth 59,780 63,270 70,011 74,895 78,009 82,847 89,236
Operating balance (excluding minority interest) 7,019 358 1,639 3,080 4,774 6,330 8,950
Net revaluations 1,367 (74)
Transfers to/(from) reserves 260 (59) 86 14 11 18 17
(Gains)/losses transferred to the Statement of Financial Performance (10) (1) (2) 1 (5)
Other movements 73 47 (6) (15) 12 13 14
Comprehensive income attributable to the Crown 8,709 346 1,644 3,077 4,798 6,361 8,976
Gain/(loss) on Government share offers 167 175 (550)
Increase in minority interest from Government share offers 1,371 1,325 3,676 25
Transactions with minority interest (16) 66 114 12 40 28 23
Closing net worth 70,011 65,182 74,895 78,009 82,847 89,236 98,235

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

Forecast Statement of Cash Flows for the years ending 30 June

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

Cash flows from operations

             

Cash was provided from

             
Taxation receipts 56,413 60,695 61,139 64,923 68,977 72,540 76,029
Other sovereign receipts 4,806 4,747 4,831 4,579 4,153 4,230 4,340
Sales of goods and services 16,651 17,175 16,476 17,505 18,127 18,660 19,243
Interest and dividend receipts 2,694 3,175 3,112 3,456 3,761 4,408 4,899
Other operating receipts 5,933 5,443 6,565 4,387 4,062 3,877 3,784
Total cash provided from operations 86,497 91,235 92,123 94,850 99,080 103,715 108,295

Cash was disbursed to

             
Transfer payments and subsidies 22,780 23,877 23,787 23,947 24,557 25,445 26,362
Personnel and operating payments 58,450 62,742 63,974 61,513 60,277 60,369 61,206
Interest payments 4,369 4,629 4,395 4,661 4,739 5,159 5,237
Forecast new operating spending 461 220 1,106 2,104 3,167 4,115
Top-down expense adjustment (600) (1,375) (500) (300) (300) (300)
Total cash disbursed to operations 85,599 91,109 91,001 90,727 91,377 93,840 96,620
Net cash flows from operations 898 126 1,122 4,123 7,703 9,875 11,675

Cash flows from investing activities

             

Cash was provided from/(disbursed to)

             
Net purchase of physical assets (5,169) (7,234) (7,423) (6,487) (6,077) (5,482) (5,123)
Net purchase of shares and other securities 6,342 (5,221) (5,284) 2,428 (5,798) (8,991) 841
Net purchase of intangible assets (581) (516) (563) (465) (408) (414) (404)
Net repayment/(issues) of advances (1,405) (2,029) (2,085) (1,877) (1,602) (1,460) (1,446)
Net acquisition of investments in associates 280 65 27 (19) 47 74 65
Government share offer programme 1,547 1,500 2,490 620
Forecast new capital spending (503) (206) (567) (816) (950) (900)
Top-down capital adjustment 50 450 175 175 125 125
Net cash flows from investing activities 1,014 (13,888) (12,594) (6,192) (14,479) (17,098) (6,842)
Net cash flows from operating and investing activities 1,912 (13,762) (11,472) (2,069) (6,776) (7,223) 4,833

Cash flows from financing activities

             

Cash was provided from/(disbursed to)

             
Issues of circulating currency 234 141 246 148 153 157 162
Net issue/(repayment) of government stock1 5,476 10,245 4,947 (753) 4,924 5,851 (6,035)
Net issue/(repayment) of foreign-currency borrowings (2,926) (519) 170 (751) (605) 3 (508)
Net issue/(repayment) of other New Zealand dollar borrowings (634) 2,647 1,698 2,739 2,005 1,093 1,727
Dividends paid to minority interests (20)
Net cash flows from financing activities 2,130 12,514 7,061 1,383 6,477 7,104 (4,654)
Net movement in cash 4,042 (1,248) (4,411) (686) (299) (119) 179
Opening cash balance 10,686 16,492 14,924 10,221 9,535 9,236 9,117
Foreign-exchange gains/(losses) on opening cash 196 (292)
Closing cash balance 14,924 15,244 10,221 9,535 9,236 9,117 9,296
  1. Further information on the proceeds and repayments of government stock ("domestic bonds") is available in note 22.

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

Forecast Statement of Cash Flows (continued) for the years ending 30 June
  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

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

             
Net cash flows from operations 898 126 1,122 4,123 7,703 9,875 11,675

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

             

Gains/(losses)

             
Net gains/(losses) on financial instruments 7,270 1,748 2,234 2,206 2,347 2,494 2,676
Net gains/(losses) on non-financial instruments 3,706 443 1,486 535 499 478 398
Total gains/(losses) 10,976 2,191 3,720 2,741 2,846 2,972 3,074

Other non-cash items in operating balance

             
Depreciation and amortisation (4,812) (4,640) (4,666) (4,841) (4,925) (5,016) (5,098)
Write-down on initial recognition of financial assets (684) (723) (785) (789) (807) (828) (830)
Impairment on financial assets (excl. receivables) (497) 23 (130) (138) (141) (145) (147)
Decrease/(increase) in defined benefit retirement plan liabilities 385 461 484 379 309 267 256
Decrease/(increase) in insurance liabilities 1,106 2,517 2,956 1,686 (258) (1,422) (1,850)
Other 299 321 387 564 572 580 582
Total other non-cash Items (4,203) (2,041) (1,754) (3,139) (5,250) (6,564) (7,087)

Movements in working capital

             
Increase/(decrease) in receivables (1,302) (1,119) (1,166) (987) 277 441 436
Increase/(decrease) in accrued interest 257 526 243 190 (39) (46) (91)
Increase/(decrease) in inventories (94) 73 8 40 108 (29) (4)
Increase/(decrease) in prepayments 32 (29) (2) (36) 3 3 1
Decrease/(increase) in deferred revenue (2) 26 19 (38) (7) (6) (49)
Decrease/(increase) in payables/provisions 363 605 (551) 186 (867) (316) 995
Total movements in working capital (746) 82 (1,449) (645) (525) 47 1,288
Operating balance 6,925 358 1,639 3,080 4,774 6,330 8,950

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

Assets

               
Cash and cash equivalents 12 14,924 15,244 10,221 9,535 9,236 9,117 9,296
Receivables 12 19,883 18,070 18,968 17,909 18,191 18,642 19,090
Marketable securities, deposits and derivatives in gain 12 44,000 44,713 44,522 40,429 45,246 53,732 52,549
Share investments 12 17,359 18,176 21,289 23,044 24,747 26,511 28,365
Advances 12 22,613 25,312 24,359 26,268 28,188 29,780 31,295
Inventory   1,140 1,321 1,148 1,189 1,296 1,267 1,263
Other assets   2,295 2,061 2,268 2,366 2,404 2,385 2,377
Property, plant and equipment 14 109,833 112,627 113,277 115,464 117,316 118,833 119,899
Equity accounted investments1   9,593 9,642 9,876 10,130 10,331 10,478 10,631
Intangible assets and goodwill 15 2,776 2,837 2,878 2,872 2,829 2,788 2,761
Forecast for new capital spending 8 505 206 773 1,589 2,539 3,439
Top-down capital adjustment 8 (330) (450) (625) (800) (925) (1,050)
Total assets   244,416 250,178 248,562 249,354 260,573 275,147 279,915

Liabilities

               
Issued currency   4,691 4,897 4,936 5,084 5,237 5,394 5,556
Payables 17 11,160 12,360 11,955 12,103 13,238 13,971 13,395
Deferred revenue   1,714 1,553 1,695 1,733 1,740 1,746 1,794
Borrowings   100,087 112,201 104,354 104,608 110,532 117,271 112,282
Insurance liabilities 18 37,712 35,902 33,430 31,140 30,848 31,738 33,136
Retirement plan liabilities 19 11,903 11,766 10,880 10,501 10,192 9,925 9,669
Provisions 20 7,138 6,317 6,417 6,176 5,939 5,866 5,848
Total liabilities   174,405 184,996 173,667 171,345 177,726 185,911 181,680
Total assets less total liabilities   70,011 65,182 74,895 78,009 82,847 89,236 98,235

Net worth

               
Taxpayers' funds   10,862 6,230 12,080 15,339 20,388 26,926 36,080
Property, plant and equipment revaluation reserve   57,068 55,831 56,911 56,760 56,491 56,292 56,093
Other reserves   141 (64) 174 143 161 183 204
Total net worth attributable to the Crown   68,071 61,997 69,165 72,242 77,040 83,401 92,377
Net worth attributable to minority interest   1,940 3,185 5,730 5,767 5,807 5,835 5,858
Total net worth 21 70,011 65,182 74,895 78,009 82,847 89,236 98,235
  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
  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

Borrowings

             
Government bonds 57,377 68,469 60,456 58,726 63,128 68,434 61,956
Treasury bills 4,084 3,541 3,470 3,494 3,361 3,351 3,345
Government retail stock 199 204 196 196 196 196 196
Settlement deposits with Reserve Bank 7,575 7,183 7,094 7,094 7,094 7,094 7,094
Derivatives in loss 3,188 1,854 2,187 1,914 1,673 1,610 1,571
Finance lease liabilities 1,454 1,475 1,535 1,680 1,639 1,643 1,726
Other borrowings 26,210 29,475 29,416 31,504 33,441 34,943 36,394
Total borrowings 100,087 112,201 104,354 104,608 110,532 117,271 112,282
Total sovereign-guaranteed debt 75,684 84,580 77,526 75,818 79,851 85,059 78,566
Total non-sovereign-guaranteed debt 24,403 27,621 26,828 28,790 30,681 32,212 33,716
Total borrowings 100,087 112,201 104,354 104,608 110,532 117,271 112,282

Net debt:

             
Core Crown borrowings1 84,873 94,504 87,571 85,691 90,329 96,209 90,397
Add back NZS Fund holdings of sovereign-issued debt and NZS Fund borrowings (587) (1,027) (449) (573) (713) (760) (761)
Gross sovereign-issued debt2 84,286 93,477 87,122 85,118 89,616 95,449 89,636
Less core Crown financial assets3 62,984 65,786 63,660 60,708 66,516 75,606 75,001
Net core Crown debt 21,302 27,691 23,462 24,410 23,100 19,843 14,635
Core Crown advances 13,126 14,375 13,785 14,574 15,264 15,302 15,294
Net core Crown debt (incl. NZS Fund)4 34,428 42,066 37,247 38,984 38,364 35,145 29,929
Add back NZS Fund holdings of core Crown financial assets and NZS Fund financial assets5 21,407 22,699 22,736 24,320 26,184 28,265 30,457
Net core Crown debt (excl. NZS Fund and advances)6 55,835 64,765 59,983 63,304 64,548 63,410 60,386

Gross debt:

             
Gross sovereign-issued debt2 84,286 93,477 87,122 85,118 89,616 95,449 89,636
Less Reserve Bank settlement cash and bank bills (7,902) (7,391) (7,094) (7,094) (7,094) (7,094) (7,094)
Add back changes to DMO borrowing owing to settlement cash7 1,600 1,600 1,600 1,600 1,600 1,600 1,600
Gross sovereign-issued debt excluding Reserve Bank settlement cash and bank bills4 77,984 87,686 81,628 79,624 84,122 89,955 84,142

Notes on borrowings

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

  1. Core Crown borrowings in this instance include unsettled purchases of securities (classified as accounts payable in the Statement of Financial Position).
  2. Gross sovereign-issued debt (GSID) represents debt issued by the sovereign (the core Crown) and includes any government stock held by the other Crown reporting entities.
  3. Core Crown financial assets exclude receivables.
  4. Net core Crown debt represents GSID less financial assets. This can provide information about the sustainability of the Government's accounts, and is used by some international agencies when determining the creditworthiness of a country.
  5. Adding back the NZS Fund assets provides the financial liabilities less financial assets of the core Crown, excluding those assets set aside to meet part of the future cost of New Zealand Superannuation.
  6. Net core Crown debt (excluding NZS Fund and advances) excludes financial assets which are held for public policy rather than treasury management purposes.
  7. The Reserve Bank has used $1.6 billion of settlement cash to purchase reserves that were to have been funded by the NZDMO borrowing. Therefore, the impact of settlement cash on GSID is adjusted by this amount.

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

Statement of Actual Commitments as at 31 October 2013

Statement of Actual Commitments as at 31 October 2013
  As at
31 Oct 2013
$m
As at
30 June 2013
$m

Capital commitments

   
Specialist military equipment 438 549
Land and buildings 716 717
Other property, plant and equipment 5,377 5,478
Other capital commitments 760 790
Tertiary education institutions 169 169
Total capital commitments 7,460 7,703

Operating commitments

   
Non-cancellable accommodation leases 2,694 2,792
Other non-cancellable leases 2,620 2,735
Tertiary education institutions 466 466
Total operating commitments 5,780 5,993
Total commitments 13,240 13,696

Total commitments by segment

   
Core Crown 3,881 4,226
Crown entities 5,283 5,296
State-owned enterprises 5,062 5,078
Inter-segment eliminations (986) (904)
Total commitments 13,240 13,696

Statement of Actual Contingent Liabilities and Assets as at 31 October 2013

Statement of Actual Contingent Liabilities and Assets as at 31 October 2013
  As at
31 Oct 2013
$m
As at
30 June 2013
$m

Quantifiable contingent liabilities

   
Guarantees and indemnities 178 225
Uncalled capital 6,006 6,286
Legal proceedings and disputes 672 707
Other contingent liabilities 444 432
Total quantifiable contingent liabilities 7,300 7,650

Total quantifiable contingent liabilities by segment

   
Core Crown 6,983 7,350
Crown entities 53 35
State-owned enterprises 264 265
Inter-segment eliminations
Total quantifiable contingent liabilities 7,300 7,650

Quantifiable contingent assets by segment

   
Core Crown 228 245
Crown entities 4 4
State-owned enterprises 21 21
Total quantifiable contingent assets 253 270

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

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

Notes to the Forecast Financial Statements

NOTE 1: Sovereign Revenue (Accrual)
  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

Taxation revenue (accrual)

             

Individuals

             
Source deductions 22,330 23,709 23,825 25,134 26,491 27,950 29,603
Other persons 5,210 5,083 5,263 5,525 5,798 6,061 6,307
Refunds (1,644) (1,488) (1,465) (1,491) (1,524) (1,527) (1,579)
Fringe benefit tax 480 477 480 502 522 544 568
Total individuals 26,376 27,781 28,103 29,670 31,287 33,028 34,899

Corporate tax

             
Gross companies tax 8,747 9,240 9,197 9,681 10,271 10,453 10,683
Refunds (151) (197) (193) (205) (219) (230) (234)
Non-resident withholding tax 420 447 394 459 521 559 585
Foreign-source dividend w/holding payments 2 2 2 2 2 2
Total corporate tax 9,018 9,490 9,400 9,937 10,575 10,784 11,036

Other direct income tax

             
Resident w/holding tax on interest income 1,631 1,671 1,673 1,905 2,419 2,879 3,271
Resident w/holding tax on dividend income 516 607 460 492 520 530 540
Total other direct income tax 2,147 2,278 2,133 2,397 2,939 3,409 3,811
Total direct income tax 37,541 39,549 39,636 42,004 44,801 47,221 49,746

Goods and services tax

             
Gross goods and services tax 25,125 27,220 27,298 29,041 30,800 32,847 35,346
Refunds (9,920) (10,695) (10,700) (11,357) (11,989) (13,121) (14,658)
Total goods and services tax 15,205 16,525 16,598 17,684 18,811 19,726 20,688

Other indirect taxation

             
Road user charges 1,066 1,164 1,155 1,250 1,346 1,412 1,470
Petroleum fuels excise – domestic production 855 931 938 995 1,055 1,084 1,112
Alcohol excise – domestic production 663 678 655 680 711 743 775
Tobacco excise – domestic production 281 277 294 298 305 318 318
Petroleum fuels excise – imports1 674 659 680 721 764 785 805
Alcohol excise – imports1 250 267 246 255 267 278 290
Tobacco excise – imports1 954 1,043 1,107 1,156 1,221 1,272 1,271
Other customs duty 178 172 168 160 151 144 137
Gaming duties 214 223 208 208 209 209 210
Motor vehicle fees 174 187 183 191 196 200 203
Approved issuer levy and cheque duty 45 62 65 65 65 65 65
Energy resources levies 34 36 36 36 36 36 36
Total other indirect taxation 5,388 5,699 5,735 6,015 6,326 6,546 6,692
Total indirect taxation 20,593 22,224 22,333 23,699 25,137 26,272 27,380
Total taxation revenue 58,134 61,773 61,969 65,703 69,938 73,493 77,126

Other sovereign revenue (accrual)

             
ACC levies 3,437 3,465 3,444 3,125 2,808 2,724 2,804
Fire Service levies 331 338 338 341 351 361 370
EQC levies 242 269 268 271 274 276 279
Child support 590 729 608 664 527 565 614
Court fines 168 173 173 173 173 173 173
Other miscellaneous items 404 322 445 496 532 534 539
Total other sovereign revenue 5,172 5,296 5,276 5,070 4,665 4,633 4,779
Total sovereign revenue 63,306 67,069 67,245 70,773 74,603 78,126 81,905
  1. Customs excise-equivalent duty.
NOTE 1 (continued): Sovereign Receipts (Cash)
  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

Taxation receipts (cash)

             

Individuals

             
Source deductions 22,188 23,584 23,715 25,003 26,354 27,812 29,463
Other persons 5,194 5,549 5,667 5,764 6,046 6,348 6,591
Refunds (2,251) (2,222) (2,084) (2,005) (2,067) (2,140) (2,226)
Fringe benefit tax 465 476 478 500 520 542 566
Total individuals 25,596 27,387 27,776 29,262 30,853 32,562 34,394

Corporate tax

             
Gross companies tax 8,665 9,495 9,516 10,119 10,613 10,887 11,074
Refunds (597) (766) (641) (681) (728) (768) (783)
Non-resident withholding tax 451 446 392 457 519 557 583
Foreign-source dividend w/holding payments 1 2 2 2 2 2
Total corporate tax 8,520 9,175 9,269 9,897 10,406 10,678 10,876

Other direct income tax

             
Resident w/holding tax on interest income 1,635 1,670 1,672 1,904 2,417 2,877 3,269
Resident w/holding tax on dividend income 516 607 460 492 520 530 540
Total other direct income tax 2,151 2,277 2,132 2,396 2,937 3,407 3,809
Total direct income tax 36,267 38,839 39,177 41,555 44,196 46,647 49,079

Goods and services tax

             
Gross goods and services tax 24,539 26,352 26,428 28,210 29,944 31,968 34,416
Refunds (9,783) (10,195) (10,200) (10,857) (11,489) (12,621) (14,158)
Total goods and services tax 14,756 16,157 16,228 17,353 18,455 19,347 20,258

Other indirect taxation

             
Road user charges 1,064 1,164 1,155 1,250 1,346 1,412 1,470
Petroleum fuels excise – domestic production 865 931 938 995 1,055 1,084 1,112
Alcohol excise – domestic production 666 678 655 680 711 743 775
Tobacco excise – domestic production 287 277 294 298 305 318 318
Customs duty 2,035 2,141 2,201 2,292 2,403 2,479 2,503
Gaming duties 216 223 206 208 209 209 210
Motor vehicle fees 179 187 183 191 196 200 203
Approved issuer levy and cheque duty 44 62 66 65 65 65 65
Energy resources levies 34 36 36 36 36 36 36
Total other indirect taxation 5,390 5,699 5,734 6,015 6,326 6,546 6,692
Total indirect taxation 20,146 21,856 21,962 23,368 24,781 25,893 26,950
Total taxation receipts 56,413 60,695 61,139 64,923 68,977 72,540 76,029

Other sovereign receipts (cash)

             
ACC levies 3,524 3,438 3,423 3,151 2,695 2,747 2,827
Fire Service levies 331 338 338 341 351 361 370
EQC levies 274 267 271 270 273 276 279
Child support 230 237 237 248 259 270 286
Court fines 159 148 148 137 137 137 137
Other miscellaneous items 288 319 414 432 438 439 441
Total other sovereign receipts 4,806 4,747 4,831 4,579 4,153 4,230 4,340
Total sovereign receipts 61,219 65,442 65,970 69,502 73,130 76,770 80,369

NOTE 2: Interest revenue and dividends

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

By type

             
Interest revenue 2,382 3,006 2,689 2,989 3,267 3,887 4,357
Dividends 557 582 689 690 744 789 835
Total interest revenue and dividends 2,939 3,588 3,378 3,679 4,011 4,676 5,192

By source

             
Core Crown 2,104 2,639 2,501 2,427 2,615 3,158 3,527
Crown entities 1,270 1,242 1,187 1,254 1,307 1,364 1,446
State-owned enterprises 856 878 873 1,018 1,172 1,305 1,465
Inter-segment eliminations (1,291) (1,171) (1,183) (1,020) (1,083) (1,151) (1,246)
Total interest revenue and dividends 2,939 3,588 3,378 3,679 4,011 4,676 5,192

NOTE 3: Transfer payments and subsidies

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
New Zealand Superannuation 10,235 10,894 10,890 11,506 12,155 12,816 13,578
Jobseeker Support and Emergency Benefit 1,773 1,697 1,703 1,685 1,696 1,732
Supported Living Payment 1,392 1,416 1,484 1,491 1,508 1,539
Sole Parent Support 1,288 1,233 1,272 1,296 1,328 1,361
Domestic Purposes Benefit 1,738 67 63
Invalid's Benefit 1,330 53 52
Sickness Benefit 782 32 29
Unemployment Benefit 812 29 29
Family tax credit 2,018 2,038 1,966 1,934 1,910 1,979 1,948
Other working for families tax credits 575 539 547 522 512 507 500
Accommodation Assistance 1,177 1,191 1,156 1,165 1,174 1,188 1,213
Income related rents 611 662 670 712 768 823 882
Disability assistance 384 380 379 377 378 379 382
Student allowances 596 574 548 536 538 544 549
Other social assistance benefits 1,290 1,316 1,295 1,327 1,338 1,341 1,313
Total social assistance grants 21,548 22,228 21,970 22,538 23,245 24,109 24,997

Subsidies

             
KiwiSaver subsidies 723 748 795 759 774 812 852

Other transfer payments

             
Official development assistance 437 509 573 520 547 547 547
Total transfer payments and subsidies 22,708 23,485 23,338 23,817 24,566 25,468 26,396

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

NOTE 4: Personnel expenses

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

By source

             
Core Crown 6,037 6,066 6,155 6,102 6,253 6,371 6,472
Crown entities 10,966 11,198 11,190 11,320 11,449 11,585 11,723
State-owned enterprises 2,949 2,919 2,908 2,969 3,051 3,086 3,163
Inter-segment eliminations (17) (11) (7) (7) (7) (8) (8)
Total personnel expenses 19,935 20,172 20,246 20,384 20,746 21,034 21,350

NOTE 5: Depreciation, amortisation and other operating expenses

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

By source

             
Core Crown 37,940 39,472 40,233 38,926 38,908 38,827 37,967
Crown entities 18,648 19,100 19,439 19,435 19,524 19,612 19,491
State-owned enterprises 11,540 11,219 11,086 11,937 12,411 12,826 13,288
Inter-segment eliminations (27,153) (27,403) (27,742) (27,776) (27,977) (28,074) (27,999)
Total depreciation, amortisation and other operating expenses 40,975 42,388 43,016 42,522 42,866 43,191 42,747

NOTE 6: Interest expenses

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

By type

             
Interest on financial liabilities 4,312 4,465 4,371 4,653 4,983 5,425 5,573
Interest unwind on provisions 46 51 47 42 44 48 48
Total interest expenses 4,358 4,516 4,418 4,695 5,027 5,473 5,621

By source

             
Core Crown 3,620 3,622 3,604 3,743 3,949 4,280 4,350
Crown entities 235 239 221 228 227 241 250
State-owned enterprises 1,248 1,279 1,198 1,300 1,415 1,550 1,676
Inter-segment eliminations (745) (624) (605) (576) (564) (598) (655)
Total interest expenses 4,358 4,516 4,418 4,695 5,027 5,473 5,621

NOTE 7: Insurance expenses

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

By entity

             
ACC 3,133 3,315 3,457 3,545 3,885 4,204 4,537
EQC (103) (19) (38) 172 213 219 224
Southern Response (22) (95) 6 (72) (43) (39)
Other (incl. inter-segment eliminations) 23 14 14 12 13 11 14
Total insurance expenses 3,031 3,215 3,439 3,657 4,068 4,395 4,775

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

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

Forecast new operating spending

           
Unallocated contingencies 461 220 146 125 142 58
Forecast new spending for Budget 2014 960 959 965 936
Forecast new spending for Budget 2015 1,020 1,020 1,020
Forecast new spending for Budget 2016 1,040 1,040
Forecast new spending for Budget 2017 1,061
Total forecast new operating spending 461 220 1,106 2,104 3,167 4,115
Operating top-down adjustment (600) (1,375) (500) (300) (300) (300)

Unallocated contingencies represent expenses included in Budget 2013 and previous Budgets that have yet to be allocated. Forecast new spending indicates the expected spending increases from future Budgets. The Budget 2014 allowance of $1 billion has been reduced to absorb Vote Education forecast changes which will be managed within Education's Budget 2014 allocation or through reprioritisation.

  2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Post-2018
Forecast
$m
Total
Forecast
$m

Forecast new capital spending (annual)

             
Unallocated contingencies 140 161 166 100 567
Forecast new spending for Budget 2014 66 306 250 200 822
Forecast new spending for Budget 2015 100 300 250 250 900
Forecast new spending for Budget 2016 100 300 250 250 900
Forecast new spending for Budget 2017 100 300 518 918
Forecast new spending for Budget 2018 100 836 936
Total forecast new capital spending 206 567 816 950 900 1,604 5,043
Forecast new capital spending (cumulative) 206 773 1,589 2,539 3,439    
Capital top-down adjustment (cumulative) (450) (625) (800) (925) (1,050)    

Unallocated contingencies represent capital spending from Budget 2013 and previous Budgets that have yet to be allocated. Forecast new spending indicates the expected capital spending increases from future Budgets, which will be mostly funded from the Future Investment Fund.

NOTE 9: Gains and losses on financial instruments

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

By source

             
Core Crown 5,081 1,663 1,982 2,076 2,178 2,277 2,390
Crown entities 1,192 252 111 315 367 420 480
State-owned enterprises 354 11 19 24 19 24 45
Inter-segment eliminations 643 (178) 122 (209) (217) (227) (239)
Net gains/(losses) on financial instruments 7,270 1,748 2,234 2,206 2,347 2,494 2,676

NOTE 10: Gains and losses on non-financial instruments

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

By type

             
Actuarial gains/(losses) on GSF liability 1,251 539
Actuarial gains/(losses) on ACC outstanding claims 2,369 498 1,326 604 551 531 452
Other 86 (55) (379) (69) (52) (53) (54)
Net gains/(losses) on non-financial instruments 3,706 443 1,486 535 499 478 398

By source

             
Core Crown 1,298 (2) 266 (1) (1) (1) (1)
Crown entities 2,309 446 1,221 534 498 477 397
State-owned enterprises 100 (1) (26) (9) (9) (9) (9)
Inter-segment eliminations (1) 25 11 11 11 11
Net gains/(losses) on non-financial instruments 3,706 443 1,486 535 499 478 398

NOTE 11: Operating balance

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

By source

             
Core Crown 371 (2,249) (1,356) 1,255 3,520 5,450 8,325
Crown entities 5,877 2,646 2,832 1,897 1,344 946 682
State-owned enterprises 614 732 614 614 697 766 816
Inter-segment eliminations 63 (771) (451) (686) (787) (832) (873)
Total operating balance 6,925 358 1,639 3,080 4,774 6,330 8,950

NOTE 12: Financial assets

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Cash and cash equivalents 14,924 15,244 10,221 9,535 9,236 9,117 9,296
Tax receivables 8,184 7,831 8,712 9,235 9,751 10,139 10,509
Trade and other receivables 11,699 10,239 10,256 8,674 8,440 8,503 8,581
Student loans (refer note 13) 8,288 8,989 8,484 8,623 8,746 8,848 8,912
Kiwibank mortgages 13,202 14,544 14,784 16,361 18,152 19,652 21,152
Long-term deposits 3,588 2,089 2,167 1,829 1,837 1,847 1,855
IMF financial assets 2,291 2,404 2,524 2,560 2,589 2,613 2,638
Other advances 1,123 1,779 1,091 1,284 1,290 1,280 1,231
Share investments 17,359 18,176 21,289 23,044 24,747 26,511 28,365
Derivatives in gain 3,775 3,906 2,845 2,269 1,863 1,611 1,412
Other marketable securities 34,346 36,314 36,986 33,771 38,957 47,661 46,644
Total financial assets 118,779 121,515 119,359 117,185 125,608 137,782 140,595

Financial assets by entity

             
NZDMO 17,799 20,153 18,319 12,887 16,246 23,261 19,999
Reserve Bank of New Zealand 19,342 18,228 18,509 18,724 19,018 19,615 19,324
NZS Fund 23,419 23,891 24,899 26,282 28,010 30,055 32,259
Other core Crown 22,339 20,464 21,307 21,534 21,952 22,391 22,735
Intra-segment eliminations (7,788) (6,691) (6,835) (6,384) (5,895) (6,539) (5,794)
Total core Crown segment 75,111 76,045 76,199 73,043 79,331 88,783 88,523
ACC portfolio 28,243 32,161 30,752 32,463 34,178 35,917 37,657
EQC portfolio 5,401 2,597 2,035 328 74 28 29
Other Crown entities 9,075 9,735 8,008 6,806 6,163 6,247 6,521
Intra-segment eliminations (1,422) (3,625) (1,929) (1,491) (1,141) (1,381) (1,573)
Total Crown entities segment 41,297 40,868 38,866 38,106 39,274 40,811 42,634
Total state-owned enterprises segment 20,058 22,141 21,558 23,465 25,571 27,254 29,191
Inter-segment eliminations (17,687) (17,539) (17,264) (17,429) (18,568) (19,066) (19,753)
Total financial assets 118,779 121,515 119,359 117,185 125,608 137,782 140,595

NOTE 13: Student loans

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Nominal value (including accrued interest) 13,562 14,144 14,049 14,486 14,929 15,384 15,802
Opening book value 8,291 8,528 8,288 8,484 8,623 8,746 8,848
Amount borrowed in current year 1,481 1,632 1,510 1,562 1,613 1,677 1,695
Less initial write-down to fair value (536) (537) (604) (622) (643) (667) (675)
Repayments made during the year (1,054) (1,135) (1,176) (1,276) (1,331) (1,398) (1,451)
Interest unwind 590 600 564 574 582 589 594
(Impairment)/reversal of impairment (484) (110) (110) (110) (110) (110) (110)
Other movements 11 12 11 12 11 11
Closing book value 8,288 8,989 8,484 8,623 8,746 8,848 8,912

NOTE 14: Property, plant and equipment

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

By class of asset

             

Net carrying value

             
Land (valuation) 34,453 34,759 35,085 35,108 35,110 35,127 34,816
Buildings (valuation) 25,784 25,312 26,322 27,029 27,556 27,832 27,890
State highways (valuation) 17,930 18,918 19,049 19,778 20,673 21,606 22,650
Electricity generation assets (valuation) 13,555 14,104 13,673 13,459 13,316 13,234 13,132
Electricity distribution network (cost) 3,865 4,273 4,166 4,260 4,364 4,485 4,543
Specialist military equipment (valuation) 3,094 3,330 3,186 3,412 3,445 3,529 3,625
Specified cultural and heritage assets (valuation) 2,617 2,502 2,563 2,562 2,588 2,616 2,686
Aircraft (excluding military) (valuation) 2,296 2,498 2,657 3,025 3,261 3,538 3,774
Rail network (valuation) 1,035 1,012 1,128 1,193 1,215 1,237 1,245
Other plant and equipment (cost) 5,204 5,919 5,448 5,638 5,788 5,629 5,538
Total property, plant and equipment 109,833 112,627 113,277 115,464 117,316 118,833 119,899

By source

             
Core Crown 29,507 30,565 30,562 30,991 31,190 31,188 30,960
Crown entities 51,823 52,207 53,485 55,016 56,617 57,985 59,250
State-owned enterprises 28,503 29,855 29,230 29,457 29,509 29,660 29,689
Inter-segment eliminations    -     -     -     -     -     -     - 
Total property, plant and equipment 109,833 112,627 113,277 115,464 117,316 118,833 119,899

Land breakdown by usage

             
Housing 9,580 8,750 9,539 9,367 9,106 8,900 8,687
State highway corridor land 8,003 8,653 8,153 8,303 8,453 8,603 8,753
Conservation land 5,364 5,460 5,389 5,401 5,423 5,433 5,433
Rail network 3,256 3,418 3,232 3,222 3,212 3,202 3,192
Schools 2,887 2,724 2,880 2,875 2,870 2,865 2,860
Commercial (SOEs) excluding Rail 1,374 1,520 1,414 1,463 1,480 1,595 1,640
Other 3,989 4,234 4,478 4,477 4,566 4,529 4,251
Total land 34,453 34,759 35,085 35,108 35,110 35,127 34,816
  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

Schedule of movements

             
Cost or valuation              
Opening balance 121,717 126,589 122,796 130,262 136,537 142,558 148,348
Additions (refer below for further breakdown) 5,779 7,830 7,925 7,011 6,921 6,554 6,369
Disposals (1,471) (598) (496) (670) (815) (704) (912)
Net revaluations (2,047)    -  12    -     -     -     - 
Other1 (1,182) (56) 25 (66) (85) (60) (44)
Total cost or valuation 122,796 133,765 130,262 136,537 142,558 148,348 153,761
Accumulated depreciation and impairment              
Opening balance 13,133 17,255 12,963 16,985 21,073 25,242 29,515
Eliminated on disposal (659) (42) (52) (71) (69) (67) (64)
Eliminated on revaluation (3,587)    -     -     -     -      -     - 
Impairment losses charged to operating balance 473    -     -     -     -     -     - 
Depreciation expense 3,697 4,011 4,030 4,168 4,260 4,353 4,436
Other1 (94) (86) 44 (9) (22) (13) (25)
Total accumulated depreciation and impairment 12,963 21,138 16,985 21,073 25,242 29,515 33,862
Total property, plant and equipment 109,833 112,627 113,277 115,464 117,316 118,833 119,899
  1. Other mainly includes transfers to/from other asset categories.
 
  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Additions - by functional classification              
Transport 2,041 2,579 2,609 2,485 2,462 2,516 2,570
Economic 1,521 1,338 1,301 718 802 865 820
Education 472 862 688 809 732 674 652
Health 578 636 746 564 543 540 448
Defence 201 548 506 616 424 495 521
Other 966 1,867 2,075 1,819 1,958 1,464 1,358
Total additions to property, plant and equipment2 5,779 7,830 7,925 7,011 6,921 6,554 6,369
  1. These additions do not include any purchases which may result from the allocation of the forecast for new capital spending (separately disclosed in the Statement of Financial Position).

NOTE 15: Intangible assets and goodwill

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

By type

             
Net Kyoto position 53 3 72 72 72 72 72
Goodwill 655 744 652 652 652 652 652
Other intangible assets 2,068 2,090 2,154 2,148 2,105 2,064 2,037
Total intangible assets and goodwill 2,776 2,837 2,878 2,872 2,829 2,788 2,761

By source

             
Core Crown 1,041 1,175 1,237 1,250 1,229 1,213 1,209
Crown entities 573 534 492 486 483 461 439
State-owned enterprises 1,162 1,128 1,149 1,136 1,117 1,114 1,113
Inter-segment eliminations    -     -     -     -     -     -     - 
Total intangible assets and goodwill 2,776 2,837 2,878 2,872 2,829 2,788 2,761

Net Kyoto position

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

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

The New Zealand Government has to settle its Kyoto obligation by the completion of the true-up period which is expected to occur in late 2015.

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

NOTE 16: NZS Fund

NOTE 16: NZS Fund
  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Revenue 595 777 782 742 783 836 893
Less current tax expense 983 478 554 547 589 637 688
Less other expenses 165 148 159 155 170 181 196
Add gains/(losses) 4,374 1,358 1,776 1,684 1,820 1,972 2,139
Operating balance 3,821 1,509 1,845 1,724 1,844 1,990 2,148
Opening net worth 18,703 21,752 22,549 24,413 26,162 28,046 30,079
Operating balance 3,821 1,509 1,845 1,724 1,844 1,990 2,148
Other movements in reserves 25 22 19 25 40 43 47
Closing net worth 22,549 23,283 24,413 26,162 28,046 30,079 32,274

Comprising:

             
Financial assets 23,419 23,891 24,899 26,282 28,010 30,055 32,259
Financial liabilities (2,055) (1,714) (1,632) (1,308) (1,325) (1,347) (1,372)
Net other assets 1,185 1,106 1,146 1,188 1,361 1,371 1,387
Closing net worth 22,549 23,283 24,413 26,162 28,046 30,079 32,274

NOTE 17: Payables

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

By type

             
Accounts payable 7,616 8,403 7,568 7,038 7,594 7,842 6,894
Taxes repayable 3,544 3,957 4,387 5,065 5,644 6,129 6,501
Total payables 11,160 12,360 11,955 12,103 13,238 13,971 13,395

By source

             
Core Crown 7,873 6,860 7,990 8,108 9,128 9,735 8,936
Crown entities 4,996 5,929 5,178 5,053 4,963 4,869 4,801
State-owned enterprises 4,877 5,663 5,219 5,736 6,230 6,738 7,303
Inter-segment eliminations (6,586) (6,092) (6,432) (6,794) (7,083) (7,371) (7,645)
Total payables 11,160 12,360 11,955 12,103 13,238 13,971 13,395

NOTE 18: Insurance liabilities

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

By entity

             
ACC 29,446 31,423 29,146 29,605 30,363 31,505 32,899
EQC 6,869 3,743 3,152 941 164 166 168
Southern Response 1,744 698 1,071 532 256
Other (incl. inter-segment eliminations) (347) 38 61 62 65 67 69
Total insurance liabilities 37,712 35,902 33,430 31,140 30,848 31,738 33,136

ACC liability

Levy reductions

The forecast includes a reduction in levy rates for the 2014/15 levy year agreed to by Cabinet on 2nd December 2013. In addition, the forecasts include further levy reductions for the 2015/16 levy year in line with what was signalled in Budget 2013. The amounts factored in for the 2015/16 levy year are based on a best estimate of the likely outcome which may differ from ACC's consultation document and the final outcome.

Calculation information

PwC NZ have prepared an independent actuarial estimate of the ACC outstanding claims liability as at 30 June 2013. This estimate includes the expected future payments relating to accidents that occurred prior to balance date (whether or not the associated claims have been reported to, or accepted by, ACC) and also the expected future administrative expenses of managing these claims. The assumptions underpinning this valuation form the basis of the five-year forecast of the outstanding claims liability.

The key economic variables that impact on changes to the valuation are the long-term Labour Cost Index (LCI), average weekly earnings and the discount rate. Discount rates were derived from the yield curve for New Zealand Government bonds. For these forecast statements, the claims liability has been updated for the latest discount rates as at 30 September 2013. The equivalent single effective discount rate, taking into account ACC's projected future cash flow patterns, is 5.19% and allows for a long-term discount rate of 5.50% from 2035.

Other key variables in each valuation are the forecast increases in claim costs over and above the economic variables above, and the assumed rate at which long-term claimants will leave the scheme over the period. This assessment is largely based on scheme history.

Presentation approach

The projected outstanding claims liability, including an adjustment to reflect projected future actuarial releases ($466 million in 2014 and a further $604 million in 2015), is included within total liabilities. ACC has available to it a portfolio of assets that offset the claims liability. The assets (less cross-holdings of NZ Government stock) are included in the asset portion of the Government's Statement of Financial Position.

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

Gross ACC liability

             
Opening gross liability 30,648 30,767 29,446 29,146 29,605 30,363 31,505
Net change (1,202) 656 (300) 459 758 1,142 1,394
Closing gross liability 29,446 31,423 29,146 29,605 30,363 31,505 32,899

Less net assets available to ACC

             
Opening net asset value 23,466 27,486 27,193 29,227 31,248 32,975 34,723
Net change 3,727 2,503 2,034 2,021 1,727 1,748 1,753
Closing net asset value 27,193 29,989 29,227 31,248 32,975 34,723 36,476

Net ACC reserves (net liability)

             
Opening reserves position (7,182) (3,281) (2,253) 81 1,643 2,612 3,218
Net change 4,929 1,847 2,334 1,562 969 606 359
Closing reserves position (net liability) (2,253) (1,434) 81 1,643 2,612 3,218 3,577

EQC liability

Calculation information

Melville Jessup Weaver prepared an independent actuarial estimate of the EQC outstanding claims liability at 30 June 2013 by estimating the projected ultimate claims costs then deducting the payments made in relation to those claims on or before that date. Each component of the claims liability was split into separate groups depending upon the Canterbury earthquake event grouping or other “business as usual” claims. These event groups were further split into sub-claim valuation groups being land claims, building claims or contents claims. The assumptions underpinning the 30 June 2013 valuation form the basis of the five-year forecast of the outstanding claims liability.

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

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

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

Presentation approach

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

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

EQC liability

             
Opening gross liability 8,877 7,114 6,869 3,152 941 164 166
Net change (2,008) (3,371) (3,717) (2,211) (777) 2 2
Closing gross liability 6,869 3,743 3,152 941 164 166 168

Less reinsurance receivable

             
Opening reinsurance receivable 4,066 2,616 2,623 913 292 47
Net change (1,443) (1,238) (1,710) (621) (245) (47)
Closing reinsurance receivable 2,623 1,378 913 292 47

Net EQC liability

             
Opening net position (4,811) (4,498) (4,246) (2,239) (649) (117) (166)
Net change 565 2,133 2,007 1,590 532 (49) (2)
Closing net position (net liability) (4,246) (2,365) (2,239) (649) (117) (166) (168)

NOTE 19: Retirement plan liabilities

 
  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Government Superannuation Fund 11,908 11,767 10,885 10,506 10,197 9,930 9,674
Other funds (5) (1) (5) (5) (5) (5) (5)
Total retirement plan liabilities 11,903 11,766 10,880 10,501 10,192 9,925 9,669

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

For these Forecast Financial Statements, the net GSF liability was updated for the latest discount rates derived from the market yield curve for New Zealand Government bonds as at 30 September 2013.

Other principal long-term financial assumptions were an inflation rate, as measured by the Consumers Price Index, of 1.9% for the year to 30 September 2014, 2.3% for the two years to 30 September 2016, 2.4% for the two years to 30 September 2018 and increasing to 2.5% for all years after that. In addition an annual salary growth rate, before any promotional effects, of 3% (unchanged from 30 June 2013).

The 2013/14 projected decrease in the net GSF liability is $1,023 million, reflecting a decrease in the GSF liability of $924 million and an increase in the GSF net assets of $99 million.

The decrease in the GSF liability of $924 million includes an actuarial gain between 1 July 2013 and 30 September 2013, of $512 million owing to movements in the discount rates and changes in demographic assumptions. The remaining $412 million reduction is owing to expected benefits paid to members (reduces the liability) offset by current service cost and interest unwind (increases the liability).

The increase in the value of the net assets of GSF of $99 million includes a gain of $27 million reflecting the updated market value of assets at 30 September 2013. The balance of $72 million is the total of the expected investment returns and contributions received, offset by the benefits paid to members.

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

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

GSF liability

             
Opening GSF liability 16,557 15,504 15,290 14,366 14,034 13,768 13,539
Net projected change (1,267) (395) (924) (332) (266) (229) (221)
Closing GSF liability 15,290 15,109 14,366 14,034 13,768 13,539 13,318

Less net assets available to GSF

             
Opening net asset value 3,018 3,276 3,382 3,481 3,528 3,571 3,609
Investment valuation changes 493 177 210 188 190 192 194
Contribution and other income less pension payments (129) (111) (111) (141) (147) (154) (159)
Closing net asset value 3,382 3,342 3,481 3,528 3,571 3,609 3,644

Net GSF liability

             
Opening unfunded liability 13,539 12,228 11,908 10,885 10,506 10,197 9,930
Net projected change (1,631) (461) (1,023) (379) (309) (267) (256)
Closing unfunded liability 11,908 11,767 10,885 10,506 10,197 9,930 9,674

NOTE 20: Provisions

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Provision for employee entitlements 3,374 3,233 3,177 3,177 3,182 3,199 3,212
Provision for ETS credits 179 488 510 492 474 454
Provision for National Provident Fund guarantee 977 987 987 942 901 864 827
Provision for Canterbury Red Zone support package 222
Provision for infrastructure costs 769 837 391 201
Provision for weathertight services financial assistance package 123 62 114 92 67 54 54
Other provisions 1,494 1,198 1,260 1,254 1,297 1,275 1,301
Total provisions 7,138 6,317 6,417 6,176 5,939 5,866 5,848

By source

             
Core Crown 4,492 3,905 3,963 3,730 3,399 3,181 3,140
Crown entities 1,979 1,907 1,979 2,012 2,023 2,029 2,006
State-owned enterprises 1,151 963 972 952 969 953 1,015
Inter-segment eliminations (484) (458) (497) (518) (452) (297) (313)
Total provisions 7,138 6,317 6,417 6,176 5,939 5,866 5,848

Provision for ETS credits

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

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

The prices for NZUs and Kyoto compliant units used to calculate the ETS provision are assumed to remain constant over the forecast period and are based on market prices during September 2013.

The ETS impact on the fiscal forecast is as follows:

 
  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Revenue 16 5 32 65 94 95 98
Expenses (55) (4) (83) (87) (76) (77) (78)
Gains/(losses) 235    -  (258)    -     -     -     - 
Operating balance 196 1 (309) (22) 18 18 20

NOTE 21: Net worth

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Taxpayers' funds 10,862 6,230 12,080 15,339 20,388 26,926 36,080
Property, plant and equipment revaluation reserve 57,068 55,831 56,911 56,760 56,491 56,292 56,093
Investment revaluation reserve 107 84 105 114 126 139 153
Cash flow hedge reserve 58 (142) 99 83 89 98 105
Foreign currency translation reserve (49) (6) (55) (54) (54) (54) (54)
Share based payment reserve 25 25
Net worth attributable to minority interests 1,940 3,185 5,730 5,767 5,807 5,835 5,858
Total net worth 70,011 65,182 74,895 78,009 82,847 89,236 98,235

Taxpayers' funds

             
Opening taxpayers' funds 3,520 5,601 10,862 12,080 15,339 20,388 26,926
Operating balance excluding minority interest 6,925 358 1,639 3,080 4,774 6,330 8,950
Government share offers in SOEs 167 175 (550)
Transfers from/(to) other reserves 250 96 129 179 275 208 204
Closing taxpayers' funds 10,862 6,230 12,080 15,339 20,388 26,926 36,080

Property, plant and equipment revaluation reserve

             
Opening revaluation reserve 56,001 55,965 57,068 56,911 56,760 56,491 56,292
Net revaluations 1,335 (74)
Transfers from/(to) other reserves (268) (134) (83) (151) (269) (199) (199)
Closing property, plant and equipment revaluation reserve 57,068 55,831 56,911 56,760 56,491 56,292 56,093

NOTE 22: Core Crown residual cash

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

Core Crown cash flows from operations

             
Tax receipts 57,808 62,056 62,314 66,028 70,179 73,831 77,412
Other sovereign receipts 651 644 728 746 763 775 793
Interest, profits and dividends 1,553 1,660 1,604 1,548 1,654 2,113 2,394
Sale of goods and services and other receipts 2,385 2,641 2,795 2,271 2,311 2,291 2,220
Transfer payments and subsidies (22,780) (23,877) (23,787) (23,948) (24,557) (25,445) (26,362)
Personnel and operating costs (40,412) (42,800) (43,446) (41,740) (41,510) (41,346) (41,811)
Finance costs (3,729) (3,680) (3,619) (3,736) (3,690) (3,997) (3,996)
Forecast for future new operating spending (461) (220) (1,106) (2,104) (3,167) (4,115)
Top-down expense adjustment 600 1,375 500 300 300 300
Net core Crown operating cash flows (4,524) (3,217) (2,256) 563 3,346 5,355 6,835

Core Crown capital cash flows

             
Net purchase of physical assets (1,231) (2,560) (2,691) (1,997) (1,522) (1,573) (1,367)
Net increase in advances (342) (990) (842) (941) (841) (209) (227)
Net purchase of investments (1,308) (1,166) (1,021) (1,325) (1,518) (1,530) (1,335)
Government share offer programme 1,663 1,500 2,490 620
Forecast for future new capital spending (503) (206) (567) (816) (950) (900)
Top-down capital adjustment 50 450 175 175 125 125
Net core Crown capital cash flows (1,218) (3,669) (1,820) (4,035) (4,522) (4,137) (3,704)
Residual cash (deficit)/surplus (5,742) (6,886) (4,076) (3,472) (1,176) 1,218 3,131

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

             

Debt programme cash flows

             

Market:

             
    Issue of government bonds 15,458 10,245 8,013 7,052 6,744 5,851 5,877
    Repayment of government bonds (9,982) (3,067) (7,805) (1,820) (11,912)
    Net issue/(repayment) of short-term borrowing1 (5,404) 90 (235) 160
Total market debt cash flows 72 10,335 4,711 (593) 4,924 5,851 (6,035)

Non-market:

             
    Issue of government bonds
    Repayment of government bonds (499) (757) (745) (679)
    Net issue/(repayment) of short-term borrowing 100 (219) (100) (360) (120)
Total non-market debt cash flows (399) (976) (845) (1,039) (120)
Total debt programme cash flows (327) 9,359 3,866 (1,632) 4,804 5,851 (6,035)

Other borrowing cash flows

             
Net (repayment)/issue of other New Zealand dollar borrowing 4,494 724 (138) 1,041 724 16 646
Net (repayment)/issue of foreign currency borrowing (3,047) (512) 113 (754) (603) 4 (506)
Total other borrowing cash flows 1,447 212 (25) 287 121 20 140

Investing cash flows

             
Other net sale/(purchase) of marketable securities and deposits 5,699 (2,826) (1,446) 4,669 (3,902) (7,245) 2,602
Issues of circulating currency 234 141 246 148 153 157 162
Decrease/(increase) in cash (1,311) 1,435 (1)
Total investing cash flows 4,622 (2,685) 235 4,817 (3,749) (7,089) 2,764
Residual cash deficit/(surplus) funding or investing 5,742 6,886 4,076 3,472 1,176 (1,218) (3,131)
  1. Short-term borrowing consists of Treasury Bills and may include Euro-Commercial Paper.

Forecast Statement of Segments

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

Revenue

         
Taxation revenue 58,651 (517) 58,134
Other sovereign revenue 1,133 5,295 (1,256) 5,172
Revenue from core Crown funding 24,096 268 (24,364)
Sales of goods and services 1,461 1,856 14,001 (605) 16,713
Interest revenue and dividends 2,104 1,270 856 (1,291) 2,939
Other revenue 800 2,547 811 (461) 3,697
Total revenue (excluding gains) 64,149 35,064 15,936 (28,494) 86,655

Expenses

         
Social assistance and official development assistance 22,709 (1) 22,708
Personnel expenses 6,037 10,966 2,949 (17) 19,935
Other operating expenses 37,940 18,648 11,540 (27,153) 40,975
Interest expenses 3,620 236 1,248 (746) 4,358
Insurance expenses 3,011 15 5 3,031
Forecast for future new spending and top-down adjustment
Total expenses (excluding losses) 70,306 32,861 15,752 (27,912) 91,007
Operating balance before gains/(losses) attributable to minority interests 10 (75) 3 (62)
Operating balance before gains/(losses) (6,157) 2,213 109 (579) (4,414)
Total gains/(losses) 6,379 3,501 454 642 10,976
Net surplus/(deficit) from associates and joint ventures 149 153 155 (62) 395
Attributable to minority interest 10 (104) 62 (32)
Operating balance 371 5,877 614 63 6,925

Expenses by functional classification

         
Social security and welfare 22,741 4,151 (624) 26,268
Health 14,498 12,236 (12,878) 13,856
Education 12,504 9,594 19 (8,751) 13,366
Transport and communications 2,255 2,250 6,891 (2,344) 9,052
Other 14,688 4,394 7,594 (2,569) 24,107
Finance costs 3,620 236 1,248 (746) 4,358
Forecast for future new spending and top-down adjustment
Total Crown expenses (excluding losses) 70,306 32,861 15,752 (27,912) 91,007
Statement of Financial Position as at 30 June 2013
  Core Crown
2013
Actual
$m
Crown entities
2013
Actual
$m
State-Owned
Enterprises
2013
Actual
$m
Inter-segment
eliminations
2013
Actual
$m
Total Crown
2013
Actual
$m

Assets

         
Cash and cash equivalents 11,047 2,933 1,594 (650) 14,924
Receivables 11,924 8,368 2,037 (2,446) 19,883
Other financial assets 52,140 29,996 16,427 (14,591) 83,972
Property, plant and equipment 29,507 51,823 28,503 109,833
Equity accounted investments 32,611 8,151 187 (31,356) 9,593
Intangible assets and goodwill 1,041 573 1,162 2,776
Inventory and other assets 1,605 560 1,301 (31) 3,435
Forecast for new capital spending and top-down adjustment
Total assets 139,875 102,404 51,211 (49,074) 244,416

Liabilities

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

Net worth

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

Revenue

         
Taxation revenue 62,491 (522) 61,969
Other sovereign revenue 1,156 5,222 (1,102) 5,276
Revenue from core Crown funding 24,632 181 (24,813)
Sales of goods and services 1,453 1,904 13,826 (591) 16,592
Interest revenue and dividends 2,501 1,187 873 (1,183) 3,378
Other revenue 892 2,667 948 (740) 3,767
Total revenue (excluding gains) 68,493 35,612 15,828 (28,951) 90,982

Expenses

         
Social assistance and official development assistance 23,338 23,338
Personnel expenses 6,155 11,190 2,908 (7) 20,246
Other operating expenses 40,233 19,439 11,086 (27,742) 43,016
Interest expenses 3,604 221 1,198 (605) 4,418
Insurance expenses 6 3,428 8 (3) 3,439
Forecast for future new spending and top-down adjustment (1,155) (1,155)
Total expenses (excluding losses) 72,181 34,278 15,200 (28,357) 93,302
Operating balance before gains/(losses) (3,688) 1,334 628 (594) (2,320)
Total gains/(losses) 2,248 1,332 (7) 147 3,720
Net surplus/(deficit) from associates and joint ventures 84 166 (7) (4) 239
Operating balance (1,356) 2,832 614 (451) 1,639

Expenses by functional classification

         
Social security and welfare 23,246 4,638 (579) 27,305
Health 14,997 12,594 (13,127) 14,464
Education 12,558 9,759 18 (8,966) 13,369
Transport and communications 2,285 2,379 7,024 (2,403) 9,285
Other 16,646 4,687 6,960 (2,677) 25,616
Finance costs 3,604 221 1,198 (605) 4,418
Forecast for future new spending and top-down adjustment (1,155) (1,155)
Total Crown expenses (excluding losses) 72,181 34,278 15,200 (28,357) 93,302
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 7,012 2,314 1,110 (215) 10,221
Receivables 12,538 5,947 2,233 (1,750) 18,968
Other financial assets 56,649 30,606 18,216 (15,301) 90,170
Property, plant and equipment 30,562 53,485 29,230 113,277
Equity accounted investments 33,584 8,371 205 (32,284) 9,876
Intangible assets and goodwill 1,237 492 1,149 2,878
Inventory and other assets 1,716 525 1,213 (38) 3,416
Forecast for new capital spending and top-down adjustment (244) (244)
Total assets 143,054 101,740 53,356 (49,588) 248,562

Liabilities

         
Borrowings 87,568 5,499 26,916 (15,629) 104,354
Other liabilities 28,098 40,757 7,398 (6,940) 69,313
Total liabilities 115,666 46,256 34,314 (22,569) 173,667
Total assets less total liabilities 27,388 55,484 19,042 (27,019) 74,895

Net worth

         
Taxpayers' funds 9,977 27,844 8,229 (33,970) 12,080
Reserves 15,912 27,560 10,166 3,447 57,085
Net worth attributable to minority interest 1,499 80 647 3,504 5,730
Total net worth 27,388 55,484 19,042 (27,019) 74,895
Statement of Financial Performance for the year ended 30 June 2015
  Core Crown
2015
Forecast
$m
Crown entities
2015
Forecast
$m
State-Owned
Enterprises
2015
Forecast
$m
Inter-segment
eliminations
2015
Forecast
$m
Total Crown
2015
Forecast
$m

Revenue

         
Taxation revenue 66,317 (614) 65,703
Other sovereign revenue 1,262 4,992 (1,184) 5,070
Revenue from core Crown funding 24,751 123 (24,874)
Sales of goods and services 1,425 1,977 14,693 (579) 17,516
Interest revenue and dividends 2,427 1,254 1,018 (1,020) 3,679
Other revenue 866 2,537 973 (577) 3,799
Total revenue (excluding gains) 72,297 35,511 16,807 (28,848) 95,767

Expenses

         
Social assistance and official development assistance 23,818 (1) 23,817
Personnel expenses 6,102 11,320 2,969 (7) 20,384
Other operating expenses 38,926 19,435 11,937 (27,776) 42,522
Interest expenses 3,743 228 1,300 (576) 4,695
Insurance expenses 2 3,646 8 1 3,657
Forecast for future new spending and top-down adjustment 606 606
Total expenses (excluding losses) 73,197 34,629 16,214 (28,359) 95,681
Operating balance before gains/(losses) (900) 882 593 (489) 86
Total gains/(losses) 2,075 849 15 (198) 2,741
Net surplus/(deficit) from associates and joint ventures 80 166 6 1 253
Operating balance 1,255 1,897 614 (686) 3,080

Expenses by functional classification

         
Social security and welfare 23,729 4,678 (518) 27,889
Health 14,924 12,507 (13,096) 14,335
Education 12,669 9,899 18 (9,130) 13,456
Transport and communications 2,247 2,438 7,379 (2,327) 9,737
Other 15,279 4,879 7,517 (2,712) 24,963
Finance costs 3,743 228 1,300 (576) 4,695
Forecast for future new spending and top-down adjustment 606 606
Total Crown expenses (excluding losses) 73,197 34,629 16,214 (28,359) 95,681
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 6,682 1,871 1,195 (213) 9,535
Receivables 12,335 5,039 2,306 (1,771) 17,909
Other financial assets 54,025 31,197 19,962 (15,443) 89,741
Property, plant and equipment 30,991 55,016 29,457 115,464
Equity accounted investments 34,874 8,563 204 (33,511) 10,130
Intangible assets and goodwill 1,250 486 1,136 2,872
Inventory and other assets 1,762 534 1,294 (35) 3,555
Forecast for new capital spending and top-down adjustment 148 148
Total assets 142,067 102,706 55,554 (50,973) 249,354

Liabilities

         
Borrowings 85,690 5,793 28,849 (15,724) 104,608
Other liabilities 27,723 38,375 7,963 (7,324) 66,737
Total liabilities 113,413 44,168 36,812 (23,048) 171,345
Total assets less total liabilities 28,654 58,538 18,742 (27,925) 78,009

Net worth

         
Taxpayers' funds 11,257 31,008 7,946 (34,872) 15,339
Reserves 15,898 27,413 10,149 3,443 56,903
Net worth attributable to minority interest 1,499 117 647 3,504 5,767
Total net worth 28,654 58,538 18,742 (27,925) 78,009
Statement of Financial Performance for the year ended 30 June 2016
  Core Crown
2016
Forecast
$m
Crown entities
2016
Forecast
$m
State-Owned
Enterprises
2016
Forecast
$m
Inter-segment
eliminations
2016
Forecast
$m
Total Crown
2016
Forecast
$m

Revenue

         
Taxation revenue 70,594 (656) 69,938
Other sovereign revenue 1,162 4,747 (1,244) 4,665
Revenue from core Crown funding 24,896 111 (25,007)
Sales of goods and services 1,418 2,048 15,272 (589) 18,149
Interest revenue and dividends 2,615 1,307 1,172 (1,083) 4,011
Other revenue 959 2,570 1,010 (551) 3,988
Total revenue (excluding gains) 76,748 35,568 17,565 (29,130) 100,751

Expenses

         
Social assistance and official development assistance 24,566 24,566
Personnel expenses 6,253 11,449 3,051 (7) 20,746
Other operating expenses 38,908 19,524 12,411 (27,977) 42,866
Interest expenses 3,949 227 1,415 (564) 5,027
Insurance expenses 6 4,057 8 (3) 4,068
Forecast for future new spending and top-down adjustment 1,804 1,804
Total expenses (excluding losses) 75,486 35,257 16,885 (28,551) 99,077
Operating balance before gains/(losses) 1,262 311 680 (579) 1,674
Total gains/(losses) 2,177 865 10 (206) 2,846
Net surplus/(deficit) from associates and joint ventures 81 168 7 (2) 254
Operating balance 3,520 1,344 697 (787) 4,774

Expenses by functional classification

         
Social security and welfare 24,244 5,055 (515) 28,784
Health 14,953 12,498 (13,133) 14,318
Education 12,785 9,951 18 (9,230) 13,524
Transport and communications 2,173 2,486 7,621 (2,363) 9,917
Other 15,578 5,040 7,831 (2,746) 25,703
Finance costs 3,949 227 1,415 (564) 5,027
Forecast for future new spending and top-down adjustment 1,804 -   1,804
Total Crown expenses (excluding losses) 75,486 35,257 16,885 (28,551) 99,077
Statement of Financial Position as at 30 June 2016
  Core Crown
2016
Forecast
$m
Crown entities
2016
Forecast
$m
State-Owned
Enterprises
2016
Forecast
$m
Inter-segment
eliminations
2016
Forecast
$m
Total Crown
2016
Forecast
$m

Assets

         
Cash and cash equivalents 6,447 1,743 1,259 (213) 9,236
Receivables 12,815 4,723 2,387 (1,734) 18,191
Other financial assets 60,067 32,809 21,925 (16,620) 98,181
Property, plant and equipment 31,190 56,617 29,509 117,316
Equity accounted investments 36,312 8,747 203 (34,931) 10,331
Intangible assets and goodwill 1,229 483 1,117 2,829
Inventory and other assets 1,890 508 1,336 (34) 3,700
Forecast for new capital spending and top-down adjustment 789 789
Total assets 150,739 105,630 57,736 (53,532) 260,573

Liabilities

         
Borrowings 90,329 6,363 30,743 (16,903) 110,532
Other liabilities 28,228 38,003 8,510 (7,547) 67,194
Total liabilities 118,557 44,366 39,253 (24,450) 177,726
Total assets less total liabilities 32,182 61,264 18,483 (29,082) 82,847

Net worth

         
Taxpayers' funds 14,777 33,961 7,681 (36,031) 20,388
Reserves 15,906 27,147 10,155 3,444 56,652
Net worth attributable to minority interest 1,499 156 647 3,505 5,807
Total net worth 32,182 61,264 18,483 (29,082) 82,847
Statement of Financial Performance for the year ended 30 June 2017
  Core Crown
2017
Forecast
$m
Crown entities
2017
Forecast
$m
State-Owned
Enterprises
2017
Forecast
$m
Inter-segment
eliminations
2017
Forecast
$m
Total Crown
2017
Forecast
$m

Revenue

         
Taxation revenue 74,200 (707) 73,493
Other sovereign revenue 1,201 4,683 (1,251) 4,633
Revenue from core Crown funding 24,978 110 (25,088)
Sales of goods and services 1,407 2,131 15,753 (598) 18,693
Interest revenue and dividends 3,158 1,364 1,305 (1,151) 4,676
Other revenue 947 2,544 1,045 (499) 4,037
Forecast revenue reduction contingency
Total revenue (excluding gains) 80,913 35,700 18,213 (29,294) 105,532

Expenses

         
Social assistance and official development assistance 25,468 25,468
Personnel expenses 6,371 11,585 3,086 (8) 21,034
Other operating expenses 38,827 19,612 12,826 (28,074) 43,191
Interest expenses 4,280 241 1,550 (598) 5,473
Insurance expenses 5 4,384 8 (2) 4,395
Forecast for future new spending and top-down adjustment 2,867 2,867
Total expenses (excluding losses) 77,818 35,822 17,470 (28,682) 102,428
Forgone profits from Government share offers
Operating balance before gains/(losses) 3,095 (122) 743 (612) 3,104
Total gains/(losses) 2,276 897 15 (216) 2,972
Net surplus/(deficit) from associates and joint ventures 79 171 8 (4) 254
Operating balance 5,450 946 766 (832) 6,330

Expenses by functional classification

         
Social security and welfare 25,123 5,405 (519) 30,009
Health 14,930 12,478 (13,119) 14,289
Education 12,835 10,015 18 (9,246) 13,622
Transport and communications 2,247 2,549 7,765 (2,459) 10,102
Other 15,536 5,134 8,137 (2,741) 26,066
Finance costs 4,280 241 1,550 (598) 5,473
Forecast for future new spending and top-down adjustment 2,867 2,867
Total Crown expenses (excluding losses) 77,818 35,822 17,470 (28,682) 102,428
Statement of Financial Position as at 30 June 2017
  Core Crown
2017
Forecast
$m
Crown entities
2017
Forecast
$m
State-Owned
Enterprises
2017
Forecast
$m
Inter-segment
eliminations
2017
Forecast
$m
Total Crown
2017
Forecast
$m

Assets

         
Cash and cash equivalents 6,329 1,729 1,271 (212) 9,117
Receivables 13,174 4,578 2,475 (1,585) 18,642
Other financial assets 69,280 34,504 23,507 (17,268) 110,023
Property, plant and equipment 31,188 57,985 29,660 118,833
Equity accounted investments 37,688 8,918 201 (36,329) 10,478
Intangible assets and goodwill 1,213 461 1,114 2,788
Inventory and other assets 1,850 496 1,342 (36) 3,652
Forecast for new capital spending and top-down adjustment 1,614 1,614
Total assets 162,336 108,671 59,570 (55,430) 275,147

Liabilities

         
Borrowings 96,209 6,337 32,272 (17,547) 117,271
Other liabilities 28,480 38,805 9,035 (7,680) 68,640
Total liabilities 124,689 45,142 41,307 (25,227) 185,911
Total assets less total liabilities 37,647 63,529 18,263 (30,203) 89,236

Net worth

         
Taxpayers' funds 20,227 36,397 7,456 (37,154) 26,926
Reserves 15,921 26,947 10,160 3,447 56,475
Net worth attributable to minority interest 1,499 185 647 3,504 5,835
Total net worth 37,647 63,529 18,263 (30,203) 89,236
Statement of Financial Performance for the year ended 30 June 2018
  Core Crown
2018
Forecast
$m
Crown entities
2018
Forecast
$m
State-Owned
Enterprises
2018
Forecast
$m
Inter-segment
eliminations
2018
Forecast
$m
Total Crown
2018
Forecast
$m

Revenue

         
Taxation revenue 77,869 (743) 77,126
Other sovereign revenue 1,256 4,782 (1,259) 4,779
Revenue from core Crown funding 24,995 110 (25,105)
Sales of goods and services 1,411 2,214 16,248 (603) 19,270
Interest revenue and dividends 3,527 1,446 1,465 (1,246) 5,192
Other revenue 802 2,425 1,085 (352) 3,960
Total revenue (excluding gains) 84,865 35,862 18,908 (29,308) 110,327

Expenses

         
Social assistance and official development assistance 26,395 1 26,396
Personnel expenses 6,472 11,723 3,163 (8) 21,350
Other operating expenses 37,967 19,491 13,288 (27,999) 42,747
Interest expenses 4,350 250 1,676 (655) 5,621
Insurance expenses 5 4,764 9 (3) 4,775
Forecast for future new spending and top-down adjustment 3,815 3,815
Total expenses (excluding losses) 79,004 36,228 18,136 (28,664) 104,704
Operating balance before gains/(losses) 5,861 (366) 772 (644) 5,623
Total gains/(losses) 2,389 877 36 (228) 3,074
Net surplus/(deficit) from associates and joint ventures 75 171 8 (1) 253
Operating balance 8,325 682 816 (873) 8,950

Expenses by functional classification

         
Social security and welfare 26,034 5,781 (529) 31,286
Health 14,860 12,475 (13,113) 14,222
Education 12,882 10,072 18 (9,262) 13,710
Transport and communications 2,250 2,529 8,040 (2,481) 10,338
Other 14,813 5,121 8,402 (2,624) 25,712
Finance costs 4,350 250 1,676 (655) 5,621
Forecast for future new spending and top-down adjustment 3,815 3,815
Total Crown expenses (excluding losses) 79,004 36,228 18,136 (28,664) 104,704
Statement of Financial Position as at 30 June 2018
  Core Crown
2018
Forecast
$m
Crown entities
2018
Forecast
$m
State-Owned
Enterprises
2018
Forecast
$m
Inter-segment
eliminations
2018
Forecast
$m
Total Crown
2018
Forecast
$m

Assets

         
Cash and cash equivalents 6,155 1,827 1,525 (211) 9,296
Receivables 13,521 4,586 2,563 (1,580) 19,090
Other financial assets 68,848 36,220 25,103 (17,962) 112,209
Property, plant and equipment 30,960 59,250 29,689 119,899
Equity accounted investments 39,012 9,090 203 (37,674) 10,631
Intangible assets and goodwill 1,209 439 1,113 2,761
Inventory and other assets 1,837 497 1,341 (35) 3,640
Forecast for new capital spending and top-down adjustment 2,389 2,389
Total assets 163,931 111,909 61,537 (57,462) 279,915

Liabilities

         
Borrowings 90,396 6,342 33,780 (18,236) 112,282
Other liabilities 27,547 40,112 9,710 (7,971) 69,398
Total liabilities 117,943 46,454 43,490 (26,207) 181,680
Total assets less total liabilities 45,988 65,455 18,047 (31,255) 98,235

Net worth

         
Taxpayers' funds 28,552 38,497 7,238 (38,207) 36,080
Reserves 15,937 26,750 10,162 3,448 56,297
Net worth attributable to minority interest 1,499 208 647 3,504 5,858
Total net worth 45,988 65,455 18,047 (31,255) 98,235

Core Crown Expense Tables

Core Crown Expense Tables
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Social security and welfare 19,382 21,185 22,005 22,028 22,741 23,246 23,729 24,244 25,123 26,034
GSF pension expenses 655 328 305 192 278 282 369 452 505 528
Health 12,368 13,128 13,753 14,160 14,498 14,997 14,924 14,953 14,930 14,860
Education 11,455 11,724 11,650 11,654 12,504 12,558 12,669 12,785 12,835 12,882
Core government services 5,293 2,974 5,563 5,428 4,294 5,067 4,470 4,581 4,558 4,453
Law and order 3,089 3,191 3,382 3,403 3,456 3,630 3,471 3,516 3,488 3,488
Defence 1,757 1,814 1,809 1,736 1,804 1,901 1,887 1,938 1,843 1,843
Transport and communications 2,663 2,345 2,281 2,232 2,255 2,285 2,247 2,173 2,247 2,250
Economic and industrial services 2,960 2,806 2,542 2,073 1,978 2,226 2,155 2,168 2,193 2,096
Primary services 534 507 706 648 659 816 726 696 674 648
Heritage, culture and recreation 586 630 741 863 804 882 816 803 801 801
Housing and community development 297 339 943 (46) 283 434 324 265 204 201
Environmental protection 416 651 1,225 769 530 602 512 513 504 504
Other 118 80 479 425 603 806 549 646 766 251
Finance costs 2,429 2,311 3,066 3,511 3,619 3,604 3,743 3,949 4,280 4,350
Forecast for future new spending  ..   ..   ..   ..   ..  220 1,106 2,104 3,167 4,115
Top-down expense adjustment  ..   ..    ..   ..   ..  (1,375) (500) (300) (300) (300)
Core Crown expenses 64,002 64,013 70,450 69,076 70,306 72,181 73,197 75,486 77,818 79,004

Source: The Treasury

Table 6.1 - Social security and welfare expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Welfare benefits (see below) 17,366 18,961 19,781 20,375 20,789 21,164 21,701 22,400 23,267 24,149
Social rehabilitation and compensation 336 331 119 81 107 173 159 153 156 167
Departmental expenses 1,092 1,130 1,127 1,122 1,168 1,150 1,106 1,093 1,090 1,090
Child support impairment 205 371 281 72 282 284 318 165 179 199
Other non-departmental expenses1 383 392 697 378 395 475 445 433 431 429
Social security and welfare expenses 19,382 21,185 22,005 22,028 22,741 23,246 23,729 24,244 25,123 26,034
  1. Other non-departmental expenses and other expenses include costs associated with the Canterbury earthquakes.

Source: The Treasury

Table 6.2 - Welfare benefit expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
New Zealand Superannuation 7,744 8,290 8,830 9,584 10,235 10,890 11,506 12,155 12,816 13,578
Jobseeker Support and Emergency Benefit1 ..  ..  ..  ..  ..  1,697 1,703 1,685 1,696 1,732
Supported living payment1 ..  ..  ..  ..  ..  1,416 1,484 1,491 1,508 1,539
Sole parent support1 ..  ..  ..  ..  ..  1,233 1,272 1,296 1,328 1,361
Domestic Purposes Benefit1 1,530 1,693 1,757 1,811 1,738 63 ..  ..  ..  .. 
Invalid's Benefit1 1,260 1,303 1,306 1,325 1,330 52 ..  ..  ..  .. 
Sickness Benefit1 613 710 743 775 782 29 ..  ..  ..  .. 
Unemployment Benefit1 586 930 943 883 812 29 ..  ..  ..  .. 
Family Tax Credit 2,062 2,168 2,139 2,071 2,018 1,966 1,934 1,910 1,979 1,948
Other working for families tax credits 619 628 616 599 575 547 522 512 507 500
Accommodation Assistance 989 1,154 1,197 1,195 1,177 1,156 1,165 1,174 1,188 1,213
Income-Related Rents 512 522 553 580 611 670 712 768 823 882
Disability Assistance 390 411 409 401 384 379 377 378 379 382
Benefits paid in Australia 50 45 40 37 22 19 15 12 34 .. 
Paid Parental Leave 143 154 154 158 165 170 181 196 196 205
Childcare Assistance 159 178 188 188 186 183 179 180 180 181
War Disablement Pensions 125 137 135 128 0 120 121 121 116 111
Veteran's Pension 176 179 178 177 171 165 154 149 142 137
Other benefits 408 459 593 463 583 380 376 373 375 380
Benefit expenses 17,366 18,961 19,781 20,375 20,789 21,164 21,701 22,400 23,267 24,149

Source: The Treasury

Table 6.2 - Welfare benefit expenses (continued)
Beneficiary numbers
(Thousands)
2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
New Zealand Superannuation 522 540 561 585 612 640 667 692 716 739
Jobseeker Support and Emergency Benefit1 ..  ..  ..  ..  ..  138 132 127 125 125
Supported living payment1 ..  ..  ..  ..  ..  96 96 95 94 94
Sole parent support1 ..  ..  ..  ..  ..  79 77 77 77 77
Domestic Purposes Benefit1 101 110 114 114 109 ..  ..  ..  ..  .. 
Invalid's Benefit1 86 88 88 87 87 ..  ..  ..  ..  .. 
Sickness Benefit1 50 58 60 60 60 ..  ..  ..  ..  .. 
Unemployment Benefit1 48 78 80 73 67 ..  ..  ..  ..  .. 
Accommodation Supplement 267 312 320 311 305 297 296 294 296 299

Source: Ministry of Social Development

  1. From 15 July 2013 the benefit categories Domestic Purposes Benefit, Invalid's Benefit, Unemployment and Emergency Benefit and Sickness Benefit, as well as Widow's Benefit, were replaced by new benefit categories. These categories are Jobseeker Support and Emergency Benefit, Supported Living Payment and Sole Parent Support.
Table 6.3 - Health expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Departmental outputs 206 211 199 186 171 186 188 189 188 188
Health services purchasing (see below) 11,354 12,077 12,530 13,018 13,348 13,791 13,630 13,612 13,610 13,562
Other non-departmental outputs 98 106 120 119 234 296 348 360 345 337
Health payments to ACC 667 691 849 744 715 685 712 745 740 730
Other expenses 43 43 55 93 30 39 46 47 47 43
Health expenses 12,368 13,128 13,753 14,160 14,498 14,997 14,924 14,953 14,930 14,860

Source: The Treasury

Table 6.4 - Health services purchasing
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Payments to District Health Boards 10,038 10,670 11,133 11,542 11,946 12,219 12,165 12,155 12,162 12,119
National disability support services 889 930 971 1,029 1,028 1,122 1,089 1,089 1,089 1,089
Public health services purchasing 427 477 426 447 374 450 376 368 359 354
Health services purchasing 11,354 12,077 12,530 13,018 13,348 13,791 13,630 13,612 13,610 13,562

Source: The Treasury

Table 6.5 - Education expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Early childhood education 1,030 1,184 1,340 1,355 1,436 1,533 1,567 1,594 1,608 1,628
Primary and secondary schools (see below) 4,936 5,157 5,354 5,443 5,590 5,643 5,813 5,902 5,905 5,918
Tertiary funding (see below) 4,564 4,465 3,991 3,795 4,370 4,179 4,178 4,210 4,248 4,259
Departmental expenses 888 898 923 988 1,039 1,119 1,035 1,014 1,013 1,013
Other education expenses 37 20 42 73 69 84 76 65 61 64
Education expenses 11,455 11,724 11,650 11,654 12,504 12,558 12,669 12,785 12,835 12,882

Source: The Treasury

Table 6.5 - Education expenses (continued)
Places 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Early childhood education1 142,135 152,862 159,619 165,126 174,471 180,096 182,417 185,432 187,016 190,492
  1. Full-time equivalent based on 1,000 funded child hours per calendar year.

Source: Ministry of Education

Table 6.6 - Primary and secondary education expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Primary 2,484 2,622 2,731 2,771 2,845 2,845 2,946 3,013 3,017 3,025
Secondary 1,898 1,972 2,051 2,085 2,148 2,178 2,233 2,248 2,241 2,241
School transport 152 160 163 172 175 177 183 188 194 200
Special needs support 290 297 310 323 332 336 345 347 348 348
Professional development 101 95 90 85 84 99 99 99 98 97
Schooling improvement 11 11 9 7 6 8 7 7 7 7
Primary and secondary education expenses 4,936 5,157 5,354 5,443 5,590 5,643 5,813 5,902 5,905 5,918

Source: The Treasury

Table 6.6 - Primary and secondary education expenses (continued)
Number of places provided1 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Primary 474,630 473,431 474,149 474,821 477,659 481,303 487,798 492,741 495,659 498,153
Secondary 280,062 281,095 281,999 279,554 278,193 277,226 275,123 272,584 272,180 270,402
  1. These are snapshots based as at 1 July for primary year levels (years 1 to 8) and 1 March for secondary year levels (years 9 to 13). These numbers include special school rolls but exclude health camps, hospital schools and home schooling.

Source: Ministry of Education

Table 6.7 - Tertiary education expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Tuition 2,287 2,398 2,354 2,306 2,322 2,444 2,442 2,443 2,445 2,443
Other tertiary funding 522 489 429 430 432 473 468 476 482 482
Student allowances 444 570 620 644 596 548 536 538 544 549
Student loans 1,311 1,008 588 415 1,020 714 732 753 777 785
Tertiary education expenses 4,564 4,465 3,991 3,795 4,370 4,179 4,178 4,210 4,248 4,259

Source: The Treasury

Table 6.7 - Tertiary education expenses (continued)
Places 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Actual delivered and estimated funded places1 246,041 250,440 240,529 246,942 243,678 241,623 239,975 240,226 240,314 239,929
  1. Tertiary places are the number of equivalent full time (EFT) students in: student achievement component; adult and community education; and youth guarantee programmes. Note that historical place numbers have been revised so may differ from previous published EFU numbers. Place numbers are based on calendar years rather than fiscal years.

Source: Ministry of Education

Table 6.8 - Core government service expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Official development assistance 458 435 495 510 437 573 520 547 547 547
Indemnity and guarantee expenses 992 7 319 59 27 26 25 28 32 32
Departmental expenses 1,668 1,324 1,492 1,518 1,576 1,800 1,594 1,591 1,588 1,628
Non-departmental expenses1 117 236 471 524 330 556 702 796 807 667
Tax receivable write-down and impairments 1,654 590 1,010 1,003 925 1,197 1,153 1,200 1,200 1,247
Science expenses 179 191 174 116 115 120 123 123 123 123
Other expenses1 225 191 1,602 1,698 884 795 353 296 261 209
Core government service expenses 5,293 2,974 5,563 5,428 4,294 5,067 4,470 4,581 4,558 4,453
  1. Non-departmental expenses and other expenses include costs associated with the Canterbury earthquakes.

Source: The Treasury

Table 6.9 - Law and order expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Police 1,326 1,349 1,393 1,394 1,408 1,414 1,400 1,397 1,388 1,388
Ministry of Justice 379 372 397 440 466 509 448 457 454 454
Department of Corrections 829 903 956 988 972 1,035 996 1,036 1,020 1,020
NZ Customs Service1 12 13 120 126 140 151 151 152 152 152
Other departments 80 102 237 103 98 93 92 93 93 90
Department expenses 2,626 2,739 3,103 3,051 3,084 3,202 3,087 3,135 3,107 3,104
Non-departmental outputs 380 399 261 315 317 370 325 321 318 321
Other expenses 83 53 18 37 55 58 59 60 63 63
Law and order expenses 3,089 3,191 3,382 3,403 3,456 3,630 3,471 3,516 3,488 3,488
  1. Prior to 2010/11 the majority of NZ Customs Service expenses were classified as core government services.

Source: The Treasury

Table 6.10 - Defence expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
NZDF core expenses 1,697 1,747 1,736 1,678 1,747 1,854 1,836 1,881 1,786 1,786
Other expenses 60 67 73 58 57 47 51 57 57 57
Defence expenses 1,757 1,814 1,809 1,736 1,804 1,901 1,887 1,938 1,843 1,843

Source: The Treasury

Table 6.11 - Transport and communication expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
New Zealand Transport Agency 1,562 1,778 1,696 1,744 1,819 1,874 1,954 2,008 2,082 2,085
Departmental outputs 83 63 65 60 40 48 46 46 46 46
Other non-departmental expenses 170 58 105 62 213 262 121 90 90 90
Asset impairments 320 ..  ..  ..  ..  ..  ..  ..  ..  .. 
Rail funding 507 418 386 305 153 67 93 3 3 3
Other expenses 21 28 29 61 30 34 33 26 26 26
Transport and communication expenses 2,663 2,345 2,281 2,232 2,255 2,285 2,247 2,173 2,247 2,250

Source: The Treasury

Table 6.12 - Economic and industrial services expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Departmental outputs 389 382 420 346 350 393 370 357 350 350
Employment initiatives (see below) 185 220 214 206 192 226 196 196 196 196
Non-departmental outputs 809 894 689 614 618 693 729 737 730 591
Reserve electricity generation 20 23 9 5 ..  ..  ..  ..  ..  .. 
KiwiSaver (includes housing deposit subsidy) 1,281 1,024 1,045 698 740 820 791 809 850 891
Research and development tax credits 154 ..  ..  ..  ..  ..  ..  ..  ..  .. 
Other expenses 122 263 165 204 78 94 69 69 67 68
Economic and industrial services expenses 2,960 2,806 2,542 2,073 1,978 2,226 2,155 2,168 2,193 2,096

Source: The Treasury

Table 6.13 - Employment initiatives
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Training incentive allowance 30 19 11 8 7 15 15 15 15 15
Subsidised work 63 109 112 106 93 118 88 88 88 88
Employment support for the disabled 88 88 87 88 89 89 89 89 89 89
Other employment assistance schemes 4 4 4 4 3 4 4 4 4 4
Employment initiatives 185 220 214 206 192 226 196 196 196 196

Source: The Treasury

Table 6.14 - Primary service expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Departmental expenses 364 352 354 348 347 372 364 370 363 359
Non-departmental outputs 82 123 142 134 137 140 135 110 101 101
Biological research1 ..  ..  167 102 105 100 94 94 95 95
Other expenses 88 32 43 64 70 204 133 122 115 93
Primary service expenses 534 507 706 648 659 816 726 696 674 648
  1. Biological research was previously classified as an economic and industrial services expense.

Source: The Treasury

Table 6.15 - Heritage, culture and recreation expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Departmental outputs 120 115 133 172 270 299 265 263 263 263
Non-departmental outputs 422 405 455 444 442 464 461 450 449 449
Other expenses 44 110 153 247 92 119 90 90 89 89
Heritage, culture and recreation expenses 586 630 741 863 804 882 816 803 801 801

Source: The Treasury

Table 6.16 - Housing and community development expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Financial assistance package1 ..  ..  567 (407) (60) ..  ..  ..  ..  .. 
Housing subsidies 29 30 31 22 5 8 12 14 15 15
Departmental outputs 148 140 136 98 89 113 101 95 84 82
Other non-departmental expenses 112 122 105 113 117 214 129 90 85 86
Warm up New Zealand ..  33 67 84 76 49 33 28 ..  .. 
Other expenses 8 14 37 44 56 50 49 38 20 18
Housing and community development expenses 297 339 943 (46) 283 434 324 265 204 201
  1. Financial assistance package for 2012 actual and 2013 actual includes the impact of a revised estimate of the weathertight homes financial assistance package provision.

Source: The Treasury

Table 6.17 - Environmental protection expenses
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Emissions Trading Scheme 17 80 838 334 55 83 87 76 77 78
Departmental outputs 306 300 301 342 335 372 339 339 339 340
Non-departmental outputs 47 231 26 46 88 95 41 53 43 42
Other expenses 46 40 60 47 52 52 45 45 45 44
Environmental protection expenses 416 651 1,225 769 530 602 512 513 504 504

Source: The Treasury

Glossary of Terms

Accruals basis of accounting

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

Appropriations

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

Baselines

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

Commercial portfolio

Consists of the portfolio of companies held with purely commercial objectives.

Consumers Price Index (CPI)

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

Contingent assets

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

Contingent liabilities

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

Core Crown

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

Core Crown expenses

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

Core Crown revenue

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

Corporate tax

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

Current account (Balance of Payments)

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

Cyclically-adjusted balance (CAB) or structural balance

An estimate of the fiscal balance (eg, operating balance before gains and losses) adjusted for fluctuations of actual GDP around trend GDP. CAB provides a picture of the underlying fiscal position and the effects of policy decisions. 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 government bonds expected to be issued or redeemed.

Excise duties

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

Financial assets

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

Financial liabilities

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

Financial portfolio

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

Fiscal drag

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

Fiscal impulse

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

Fiscal intentions (short-term)

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

Fiscal objectives (long-term)

The Government's long-term goals for operating expenses, operating revenue, the operating balance, debt and net worth, as required by the PFA. The objectives must be consistent with the defined principles of responsible fiscal management as outlined in the PFA and must cover a period of (at least) 10 years.

Forecast new capital spending

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, changes to demographics and other forecasting changes expected to occur over the forecast period.

Gains and losses

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

GDP deflator

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

Generally accepted accounting practice (GAAP)

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

Government Finance Statistics (GFS)

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

Gross debt (or Gross sovereign-issued debt [GSID])

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

Gross domestic product (GDP)

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

Gross domestic product (expenditure)

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

Gross national expenditure (GNE)

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

Insurance liabilities

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

Inter-segment eliminations

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

Labour force participation rate

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

Labour productivity

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

Line-by-line consolidation

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

Marketable securities

Assets held with financial institutions. These assets are held for both cash flow and investment purposes. Examples are bonds, commercial papers and debentures.

Monetary conditions

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

Monetary policy

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

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

National saving

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

Net core Crown cash flow from operations

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

Net core Crown debt

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

Net international investment position (NIIP)

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

Net worth

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

Net worth attributable to the Crown

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

New Zealand equivalents to International Financial Reporting Standards (NZ IFRS)

The reporting and measurement framework under which these forecast financial statements are prepared. These standards are approved by the External Reporting Board in New Zealand, based on 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

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

Operating balance before gains and losses (OBEGAL)

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

Output gap

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

Outputs

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

Productivity

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

Projections

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

Residual cash

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

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

Settlement cash

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

Social portfolio

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

Specific fiscal risks

All government decisions or other circumstances known to the Government which may have a material impact on the fiscal and economic outlook, but are not included in the fiscal forecasts. 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 which meets the needs of government and private sector analysts, policy-makers and decision-takers.

Tax revenue

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

Terms of trade

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

Top-down adjustment

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

Total borrowings

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

Total Crown

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

Tradable/non-tradable output

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

Trade-weighted index (TWI)

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

Votes

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

Year ended

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

Time Series of Fiscal and Economic Indicators

Fiscal Indicators

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

$ millions

                               

Revenue and Expenses

                               
Core Crown revenue 43,440 46,219 51,045 55,735 58,211 61,819 59,482 56,216 57,550 60,565 64,149 68,493 72,297 76,748 80,913 84,865
Core Crown expenses 39,897 41,882 44,895 49,320 54,003 56,997 64,002 64,013 70,450 69,076 70,306 72,181 73,197 75,486 77,818 79,004

Surpluses

                               
Total Crown OBEGAL 4,366 5,573 7,075 7,091 5,860 5,637 (3,893) (6,315) (18,396) (9,240) (4,414) (2,320) 86 1,674 3,104 5,623
Total Crown operating balance 1,621 7,309 5,931 9,542 8,023 2,384 (10,505) (4,509) (13,360) (14,897) 6,925 1,639 3,080 4,774 6,330 8,950

Cash Position

                               
Core Crown residual cash 1,217 520 3,104 2,985 2,877 2,057 (8,639) (9,000) (13,343) (10,644) (5,742) (4,076) (3,472) (1,176) 1,218 3,131

Debt

                               
Gross debt1 36,617 36,017 35,478 33,903 30,647 31,390 43,356 53,591 72,420 79,635 77,984 81,628 79,624 84,122 89,955 84,142
Gross debt incl RB settlement cash and bank bills 36,617 36,017 35,478 35,867 36,805 37,745 50,973 58,891 77,290 84,168 84,286 87,122 85,118 89,616 95,449 89,636
Net core Crown debt (incl NZS Fund)2 22,647 19,902 13,324 6,302 1,620 (2,676) 5,633 12,549 23,969 33,475 34,428 37,247 38,984 38,364 35,145 29,929
Net core Crown debt2 24,531 23,858 19,879 16,163 13,380 10,258 17,119 26,738 40,128 50,671 55,835 59,983 63,304 64,548 63,410 60,386

Net Worth

                               
Total Crown net worth 28,012 39,595 54,240 83,971 96,827 105,514 99,515 94,988 80,887 59,780 70,011 74,895 78,009 82,847 89,236 98,235
Total net worth attributable to the Crown 27,918 39,456 54,025 83,678 96,531 105,132 99,068 94,586 80,579 59,348 68,071 69,165 72,242 77,040 83,401 92,377
Nominal GDP 135,710 146,348 155,361 163,224 173,214 185,672 185,479 191,778 200,246 208,404 212,721 227,793 239,172 250,494 260,334 270,295

% GDP

                               

Revenue and Expenses

                               
Core Crown revenue 32.0 31.6 32.9 34.1 33.6 33.3 32.1 29.3 28.7 29.1 30.2 30.1 30.2 30.6 31.1 31.4
Core Crown expenses 29.4 28.6 28.9 30.2 31.2 30.7 34.5 33.4 35.2 33.1 33.1 31.7 30.6 30.1 29.9 29.2

Surpluses

                               
Total Crown OBEGAL 3.2 3.8 4.6 4.3 3.4 3.0 (2.1) (3.3) (9.2) (4.4) (2.1) (1.0) 0.0 0.7 1.2 2.1
Total Crown operating balance 1.2 5.0 3.8 5.8 4.6 1.3 (5.7) (2.4) (6.7) (7.1) 3.3 0.7 1.3 1.9 2.4 3.3

Cash Position

                               
Core Crown residual cash 0.9 0.4 2.0 1.8 1.7 1.1 (4.7) (4.7) (6.7) (5.1) (2.7) (1.8) (1.5) (0.5) 0.5 1.2

Debt

                               
Gross debt1 27.0 24.6 22.8 20.8 17.7 16.9 23.4 27.9 36.2 38.2 36.7 35.8 33.3 33.6 34.6 31.1
Gross debt incl RB settlement cash and bank bills 27.0 24.6 22.8 22.0 21.2 20.3 27.5 30.7 38.6 40.4 39.6 38.2 35.6 35.8 36.7 33.2
Net core Crown debt (incl NZS Fund)2 16.7 13.6 8.6 3.9 0.9 (1.4) 3.0 6.5 12.0 16.1 16.2 16.4 16.3 15.3 13.5 11.1
Net core Crown debt2 18.1 16.3 12.8 9.9 7.7 5.5 9.2 13.9 20.0 24.3 26.2 26.3 26.5 25.8 24.4 22.3

Net Worth

                               
Total Crown net worth 20.6 27.1 34.9 51.4 55.9 56.8 53.7 49.5 40.4 28.7 32.9 32.9 32.6 33.1 34.3 36.3
Total net worth attributable to the Crown 20.6 27.0 34.8 51.3 55.7 56.6 53.4 49.3 40.2 28.5 32.0 30.4 30.2 30.8 32.0 34.2
  1. Excludes Reserve Bank settlement cash and bank bills
  2. Excludes advances

Economic Indicators

 
March Years
Annual average % change
2003
 Actual
2004
 Actual
2005
 Actual
2006
 Actual
2007
 Actual
2008
 Actual
2009
 Actual
2010
 Actual
2011
 Actual
2012
 Actual
2013
 Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Private consumption 4.9 6.5 4.7 4.7 2.8 3.5 -1.6 0.6 2.0 2.5 2.3 3.7 2.8 2.8 1.9 1.6
Public consumption 0.7 5.1 4.6 4.7 3.4 4.9 4.5 0.2 1.4 1.9 0.4 0.1 0.4 0.7 0.6 0.7
TOTAL CONSUMPTION 4.0 6.2 4.7 4.7 2.9 3.8 -0.3 0.5 1.9 2.3 1.9 2.9 2.3 2.4 1.6 1.4
Residential investment                23.6 14.7 2.3 -5.0 -2.1 1.8 -21.3 -9.1 1.8 -10.7 19.1 16.7 25.5 16.4 3.7 0.6
Non-market investment                 10.7 15.5 10.8 5.7 1.8 -8.0 22.6 0.0 -3.0 -14.8 -12.2 15.2 -3.7 2.4 2.4 2.4
Market investment  2.8 12.4 11.6 11.0 -2.9 10.6 -5.2 -15.2 5.4 8.8 6.2 11.7 8.1 3.1 0.7 1.0
TOTAL INVESTMENT 7.9 13.2 8.3 6.5 -2.8 7.1 -8.1 -11.6 3.0 2.3 7.1 14.6 12.1 6.2 1.7 1.1
Stock change (contribution to growth) -0.1 0.3 0.3 -0.5 -1.1 1.2 -0.5 -1.2 1.2 0.5 -0.4 0.2 -0.2 -0.1 0.0 0.1
GROSS NATIONAL EXPENDITURE 4.6 7.8 5.7 4.7 0.3 5.6 -2.1 -3.0 2.5 3.2 2.3 5.7 4.4 3.3 1.6 1.3
Exports 8.0 0.9 4.8 -0.1 3.3 3.5 -2.7 4.9 2.7 3.0 3.0 -2.2 2.4 1.9 2.9 3.0
Imports 6.9 12.8 12.2 4.4 -1.3 10.6 -4.0 -8.9 11.3 6.2 0.7 7.3 5.1 4.3 2.1 0.8
EXPENDITURE ON GDP 5.0 4.1 3.6 3.4 1.6 3.5 -1.8 1.5 0.2 2.3 2.9 2.4 3.4 2.5 2.0 2.2
GDP (production measure) 4.8 4.4 3.6 3.5 2.9 2.9 -1.8 -0.2 1.6 1.9 2.7 2.7 3.6 2.7 2.0 2.2
 - annual % change 4.4 5.4 2.3 3.5 3.5 1.2 -2.9 2.0 0.8 2.8 2.7 2.9 3.4 2.2 2.0 2.3
Real GDP per capita 3.3 2.5 2.0 2.2 1.7 1.8 -2.8 -1.3 0.4 1.0 2.0 1.6 2.2 1.6 1.0 1.2
Nominal GDP (expenditure basis) 5.2 6.9 7.0 5.5 5.0 8.3 0.9 2.3 4.6 3.8 2.4 6.5 4.9 5.2 4.0 3.7
GDP deflator 0.2 2.6 3.3 2.0 3.4 4.6 2.7 0.7 4.5 1.5 -0.5 3.9 1.5 2.6 2.0 1.5
Output gap (% deviation, March year average) 0.4 1.0 1.2 1.6 1.9 2.8 -0.5 -2.0 -1.9 -1.9 -1.2 -0.7 0.6 0.8 0.2 0.0
Employment 2.8 3.0 3.6 2.8 2.2 1.7 0.5 -1.3 1.2 1.4 0.3 2.0 2.6 1.4 1.0 1.3
Unemployment (% March quarter s.a.)          5.0 4.3 3.9 4.0 3.9 3.8 5.2 6.2 6.7 6.8 6.2 5.8 5.6 5.4 5.2 4.7
Wages (average ordinary-time hourly, ann % change)         2.3 3.5 3.6 5.3 4.6 4.7 5.4 1.0 2.6 3.8 2.1 2.7 3.1 3.2 3.4 3.4
CPI inflation (ann % change)      2.5 1.5 2.8 3.3 2.5 3.4 3.0 2.0 4.5 1.6 0.9 1.4 2.4 2.4 2.3 2.2
Merchandise terms of trade (SNA basis)       -5.6 4.4 3.4 -1.9 -1.2 8.4 0.0 -7.6 10.3 1.2 -6.1 10.6 -0.9 1.6 0.3 0.0
Current account balance - $billion           -4.0 -6.0 -9.3 -13.8 -13.2 -14.2 -15.0 -4.3 -7.3 -7.9 -9.5 -9.5 -13.0 -15.7 -16.7 -17.2
Current account balance - % of GDP           -3.0 -4.2 -6.0 -8.5 -7.8 -7.7 -8.1 -2.3 -3.7 -3.9 -4.5 -4.2 -5.5 -6.3 -6.5 -6.4
TWI (March quarter)                          60.6 66.9 69.6 68.3 68.8 71.9 53.7 65.3 67.2 72.5 75.9 77.0 75.3 73.9 70.0 65.3
90-day bank bill rate (March quarter)        5.8 5.5 6.9 7.6 7.8 8.8 3.7 2.7 3.0 2.7 2.7 2.7 3.6 4.4 4.9 5.2
10-year bond rate (March quarter)            6.0 5.9 6.0 5.7 5.9 6.4 4.6 5.9 5.6 4.0 3.7 4.8 4.9 5.1 5.2 5.2

Data for 2014 and subsequently are forecasts. Data for 2013 and prior years are those that were available on 11 November when the forecasts were finalised.

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