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Economic and fiscal update

Half Year Economic and Fiscal Update 2015

The Half Year Economic and Fiscal Update (HYEFU) 2015 provides the Treasury's latest economic forecasts and the forecast financial statements of the Government, including the implications of Government financial decisions.

HYEFU 2015 was published conjointly with the Budget Policy Statement (BPS) 2016.

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 27 November 2015 that were communicated to me by the Minister of Finance in accordance with the requirements of the Public Finance Act 1989 and of other economic and fiscal information available to the Treasury as at 27 November 2015. This Update does not incorporate any decisions, circumstances or statements that the Minister of Finance has determined, in accordance with section 26V of the Public Finance Act 1989, should not be incorporated in this Update.

Gabriel Makhlouf
Secretary to the Treasury

8 December 2015

To enable the Treasury to prepare this Economic and Fiscal Update I have ensured the Secretary to the Treasury has been advised, in accordance with the requirements of the Public Finance Act 1989, of all government decisions and other circumstances as at 27 November 2015 of which I was aware and that had material economic or fiscal implications.

I accept responsibility for the integrity of the disclosures contained in the Update and responsibility for the consistency and completeness of the Update information with the requirements of Part 2 (Fiscal responsibility) of the Public Finance Act 1989.

Hon Bill English
Minister of Finance

8 December 2015

Executive Summary

Overview

  • New Zealand's economic growth slowed in the first half of 2015 relative to the Budget Update, reflecting weaker international economic conditions, falls in dairy prices and a softening of domestic demand. The forecasts in this Half Year Update show relatively muted growth persisting and the unemployment rate rising until early 2016. However, the economy is expected to recover over the medium term.
  • Following growth of 3.2% over the year to March 2015, annual average growth in real gross domestic product (GDP) is forecast to slow to 2.1% in the year to March 2016 owing to weak global and domestic demand and lower terms of trade. Stimulatory monetary conditions and a recovery in the terms of trade are expected to see annual average growth increase to 3.6% in March 2018 before moderating to 2.2% in March 2020. Relative to the Budget Update, real growth forecasts are weaker in the near term but stronger in the medium term (Figure 1). Nominal GDP (which incorporates price changes as well as output growth) is forecast to continue growing slowly over the next year and, despite a strong recovery in later years, does not return to the forecast levels in the Budget Update.
Figure 1 - Real GDP growth
Figure 1 - Real GDP growth.
Source: Statistics New Zealand, the Treasury
  • The operating balance before gains and losses (OBEGAL) returned to surplus in the 2014/15 fiscal year. The current year's results to 31 October continue to be above the forecast in the Budget Update. Looking ahead, the fiscal position is expected to be broadly balanced in 2015/16 and 2016/17, followed by rising surpluses over the remaining forecast horizon. This fiscal outlook is slightly weaker than in the Budget Update primarily as a result of lower tax revenues, which reflect the weaker economic outlook. The Government's fiscal stance is expected to be expansionary in 2015/16 before turning slightly contractionary over the remainder of the forecast horizon.
  • Significant judgements influencing the economic forecasts and, in turn, fiscal forecasts relate to trading partner growth, the future paths of dairy and oil prices, the impact of El Niño, the extent and duration of the current migration boom, and the amount of spare capacity in the economy and its relationship with Consumers Price Index (CPI) inflation.

Economic Outlook

  • Global economic growth is expected to recover gradually in 2016, following a downturn in 2015, as policies support demand and recoveries become entrenched. However, the outlook for New Zealand's trading partner growth is weaker throughout the forecast horizon compared with the Budget Update. At present, risks to the global economy are skewed to the downside, particularly in relation to the risk of a sharp slowing of growth in China and its impact on other economies, and the risk of the impact of monetary policy tightening in the US on emerging market economies.
  • The weaker global growth outlook is expected to keep New Zealand's key commodity export prices low in the near term. Dairy export prices are expected to recover from the first quarter of 2016, though more gradually than assumed in the Budget Update. Oil prices are forecast to recover steadily, as expected in the Budget Update, although from lower levels. As a result, the terms of trade are forecast to show a subdued recovery from mid-2016 relative to the Budget Update forecasts.
  • Net migration inflows reached a record high of 62,500 over the year to October 2015. Annual net inflows are now expected to remain strong through to the March 2016 quarter before returning to the long-run average of 12,000 in the year ended March 2018.
  • Domestic demand growth is expected to remain weak until the middle of 2016. Forecasts show private consumption growth (on an annual average basis) slowing until the middle of 2016, partly reflecting the drop in farm incomes and a weakening of the exchange rate. Strong El Niño conditions are also expected to contribute to lower agricultural production in early 2016. Residential investment growth is assumed to slow with reduced impetus from the Canterbury rebuild. However, growth in the near term is expected to be supported by housing market activity in Auckland and surrounding regions, and strong growth in travel services exports.
  • Demand growth picks up after mid-2016 as exports respond to the recovery in the terms of trade and a weaker exchange rate, and as the agricultural sector recovers from El Niño. Monetary policy settings are expected to stimulate the domestic economy in the near term. The unemployment rate is forecast to increase from 6.0% in September 2015 to 6.5% in March 2016 before declining to reach 4.5% by September 2019.
  • Annual consumer price inflation is forecast to remain below 1.0% until the end of 2015 before rising to 1.9% in mid-2016 and remaining around 2% thereafter. Tradables inflation is expected to pick up sharply from early 2016 as the low New Zealand dollar flows through into higher prices, while non-tradables inflation rises from September 2017 as spare capacity in the economy reduces. Overall inflation forecasts are similar to the Budget Update forecasts as higher tradables inflation offsets lower non-tradables inflation in the near term (Figure 2).
Figure 2 - CPI inflation
Figure 2 - CPI inflation   .
Source: Statistics New Zealand, the Treasury
  • Monetary conditions are assumed to become more accommodative as the policy interest rate is reduced further[1] and as the exchange rate continues to depreciate in 2016 as monetary policy tightens in the US. Short-term interest rates are forecast to increase gradually from early 2017 as inflation returns to 2%. The exchange rate is also expected to increase from around the same time with the increase in interest rates and improvement in the terms of trade.
  • Although real GDP growth turned out to be lower than expected, annual average nominal GDP growth of 2.8% in the year to June 2015 was higher than forecast in the Budget Update. Annual average nominal GDP growth is forecast to slow to 1.8% in the year to June 2016 and recover thereafter to average 4.3% over the five years to June 2020. Compared with the Budget Update, nominal GDP growth is weaker in 2016 and 2017 owing to the income and price effects associated with a weaker terms of trade and lower real GDP growth, but is stronger in the subsequent forecast years.Nominal GDP is forecast to be a cumulative $17 billion lower compared with the Budget Update over five years to June 2019.

Notes

  • [1]Following finalisation of the economic forecasts on 20 November, the Reserve Bank reduced the Official Cash Rare (OCR) by 25 basis points on 10 December, in line with this economic forecast assumption.

Fiscal Outlook

  • Core Crown tax revenue is forecast to increase gradually as a share of GDP from 27.9% in the 2015/16 fiscal year to 28.4% in 2019/20. Actual tax revenue for 2014/15 was higher than forecast in the Budget Update partly owing to higher nominal GDP. However, tax revenue forecasts over the next four years are lower than in the Budget Update reflecting lower forecasts for nominal GDP growth and interest rates.
  • Core Crown expenses are expected to increase from $72.4 billion in 2014/15 to $86.2 billion in 2019/20 reflecting increases in social assistance spending, operating allowances and finance costs. Social assistance spending is expected to be slightly higher than previously forecast for 2016/17 and 2017/18 owing to a softer labour market outlook. Forecasts of future operating allowances are unchanged at $1.0 billion for Budget 2016, $2.5 billion for Budget 2017 and $1.5 billion for Budget 2018, while $1.5 billion is allocated for Budget 2019. As a share of GDP, core Crown expenses are forecast to reduce gradually from 30.6% of GDP in 2015/16 to 29.1% in 2019/20 (Figure 3).
Figure 3 - Core Crown revenue and expenses
Figure 3 - Core Crown revenue and expenses   .
Source:  The Treasury
  • Following a surplus of $0.4 billion in 2014/15, OBEGAL is forecast to show a deficit of $0.4 billion in 2015/16. Surpluses are expected to return thereafter and rise throughout the remaining forecast period (Figure 4). The changes to OBEGAL forecasts compared with the Budget Update are almost entirely owing to lower tax revenues. The cyclically adjusted balance, which adjusts OBEGAL for the cyclical position of the economy, is expected to remain in surplus throughout the forecast horizon.
Figure 4 - OBEGAL, core Crown residual cash and net core Crown debt
Figure 4 - OBEGAL, core Crown residual cash and net core Crown debt.
Source:  The Treasury
  • The Government is forecast to generate operating cash flows from core Crown operations of $14.3 billion over the five years to June 2020, which are not sufficient to cover the net capital spending forecast of $24.7 billion. However, core Crown residual cash is forecast to return to surplus in the 2018/19 fiscal year as forecast in the Budget Update. Net capital spending is expected to be $0.7 billion more than previously forecast over the four years to June 2019, largely because of an increase in the Budget 2016 capital allowance of $1.0 billion. Capital allowances of $0.9 billion are forecast in Budget 2017 before growing at a rate of 2.0% per year for subsequent budgets.
  • Net core Crown debt is expected to peak at 27.7% of GDP in 2016/17, before gradually declining to stand at 24.0% of GDP by 2019/20 (Table 1). Forecast net debt is higher than in the Budget Update across the forecast horizon.
  • Net worth attributable to the Crown is expected to increase over the forecast period, reaching $107.2 billion by the year ending June 2020, which is similar to the level before the global financial crisis. The rate of increase is expected to be muted over the next two years before rising thereafter in line with increases in forecast operating surpluses.
  • Forecasts show the Crown's total assets increasing by $35.3 billion and liabilities increasing by $14.3 billion over the five years ending June 2020. The largest increase occurs in social assets (including schools, hospitals and other properties, and student loans) followed by financial assets and commercial assets. The increase in liabilities is driven by borrowings to fund cash shortfalls, and the increase in commercial liabilities.

Risk and Scenarios

  • The central forecast discussed above involves several key judgements on the risks and uncertainties facing the New Zealand economy. The Risks and Scenarios chapter presents two alternative scenarios to show how the economy might evolve if some of these judgements are altered (Figure 5).
Figure 5 - OBEGAL scenarios
Figure 5 - OBEGAL scenarios    .
Source:  The Treasury
  • In Scenario One, three key judgements are changed relative to the central forecast - productivity growth is softer, demand is less responsive to monetary policy and the historical relationship between inflation and spare capacity takes longer to re-assert itself. This leads nominal GDP to be a cumulative $26 billion lower than the central forecast. The fiscal position shows larger operating deficits owing to lower nominal GDP impacting tax revenues, and the net core Crown debt to GDP ratio is higher throughout the forecast period compared with the central forecast.
  • Scenario Two assumes that global dairy prices recover faster, international demand is more sensitive to the low New Zealand dollar and there are an additional 11,000 net migrants over the next year. This leads to an earlier recovery in the terms of trade, and stronger growth in services exports, private consumption and investment. Inflation is also slightly higher and interest rates rise three quarters earlier. Nominal GDP is higher than in the central forecast by a cumulative $15 billion. Overall, higher nominal GDP and interest rates lead to increased tax revenues, and an OBEGAL surplus in 2015/16 and higher surpluses thereafter relative to the central forecast.
Table 1 - Summary of the Treasury's main economic and fiscal forecasts
  2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Economic (March years, %)            
Real GDP growth1 3.2 2.1 2.4 3.6 3.0 2.2
Unemployment rate2 5.8 6.5 6.1 5.3 4.7 4.5
CPI inflation3 0.3 1.4 2.1 1.9 2.1 2.2
Current account balance4 -3.5 -4.8 -6.0 -4.5 -3.9 -4.3
Fiscal (June years, % of GDP)            
Total Crown OBEGAL5 0.2 -0.2 0.1 0.4 1.2 1.7
Net core Crown debt6 25.2 26.9 27.7 27.1 25.6 24.0
Net worth attributable to the Crown 35.9 35.5 35.2 34.3 34.9 36.2

Notes:

  1. Real production GDP, annual average percentage change.
  2. Percent of labour force, March quarter, seasonally adjusted.
  3. CPI, annual percentage change, March quarter.
  4. Annual balances as % 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 - 20 November[2]

Economic forecasts - 20 November

Tax revenue forecasts - 24 November

Fiscal forecasts - 27 November

Specific fiscal risks - 27 November

Text finalised - 10 December

Notes

  • [2]The National Accounts: Income and Expenditure data released on 20 November have not been incorporated into the economic forecast. They are provisional and do not significantly change the outlook presented in these forecasts.

Economic Outlook

Overview

  • Economic growth slowed in the first half of 2015 and was lower than anticipated in the Budget Update. Economic growth is expected to remain muted in the near term in response to weak global and domestic demand and lower terms of trade. El Niño weather conditions, coupled with existing price signals, are likely to depress agricultural production and exports in early 2016. The degree of spare capacity in the economy is expected to increase further as growth slows, resulting in higher unemployment and lower non-tradables inflationary pressures. Real GDP growth is forecast to ease to 2.1% in the year to March 2016.
  • Growth is expected to pick up in the second half of 2016 and remain above trend for most of the latter part of the forecast. Exports are expected to recover in response to the recovery in the terms of trade, the weaker dollar and as the agricultural sector recovers from El Niño, with further support from strong travel service exports. Stimulatory monetary policy conditions are expected to support domestic consumption and investment. Increases in the Government's operating and capital allowances increase public consumption and non-market investment respectively. Unemployment falls as spare capacity in the economy declines.
  • Nominal GDP growth is expected to slow in the near term in response to slower real GDP growth and the lower terms of trade. Strong nominal GDP growth in later years, as real GDP growth picks up and the terms of trade increase, does not return nominal GDP to previously forecast levels. For the fiscal years 2014/15 to 2018/19, nominal GDP is forecast to be a cumulative $17 billion lower compared to the Budget Update.
  • Key factors influencing the economic outlook include judgements around trading partner growth, the future path of commodity prices, the impact of El Niño, the extent and duration of the current migration cycle and the relationship between inflation and spare capacity. The risks to these judgements are discussed further in the Risks and Scenarios chapter.
Table 1.1 - Economic forecasts1
(Annual average % change,
March years)
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Private consumption 3.1 2.7 2.3 2.3 2.5 2.1
Public consumption 2.8 2.7 1.0 1.9 1.9 0.9
Total consumption 3.0 2.7 2.0 2.3 2.3 1.8
Residential investment 12.3 5.9 6.7 4.9 2.8 1.4
Market investment 4.6 3.5 3.4 4.2 6.3 3.3
Non-market investment 2.1 10.7 8.0 3.0 -9.5 -0.8
Total investment 6.5 3.6 4.6 4.4 4.4 2.6
Stock change2 0.1 -0.3 -0.1 0.2 0.2 0.3
Gross national expenditure 3.8 2.8 2.6 2.9 3.0 2.4
Exports 4.2 2.9 0.1 4.3 4.2 2.8
Imports 7.5 4.1 0.7 2.2 4.2 3.2
GDP (expenditure measure) 3.0 2.1 2.4 3.6 3.0 2.2
GDP (production measure) 3.2 2.1 2.4 3.6 3.0 2.2
Real GDP per capita 1.6 0.2 0.7 2.5 2.1 1.3
Nominal GDP (expenditure measure) 3.6 2.7 3.0 6.0 5.6 4.1
GDP deflator 0.6 0.5 0.5 2.3 2.5 1.9
Potential GDP 2.5 2.5 2.6 2.5 2.5 2.4
Output gap (% deviation, March year average)3 -0.4 -0.8 -1.0 0.0 0.5 0.3
Employment 3.4 1.4 1.3 1.9 2.4 1.6
Unemployment rate4 5.8 6.5 6.1 5.3 4.7 4.5
Participation rate5 69.5 68.7 68.5 68.6 69.0 69.0
Nominal wages6 2.1 2.6 1.8 2.2 2.8 3.3
CPI inflation7 0.3 1.4 2.1 1.9 2.1 2.2
Terms of trade8 -0.8 -3.7 -2.2 2.5 2.6 -0.3
House prices9 8.9 16.0 5.4 2.3 2.0 2.0
Current account balance            
  $billions -8.3 -11.8 -15.0 -12.1 -10.9 -12.5
  % of GDP -3.5 -4.8 -6.0 -4.5 -3.9 -4.3
Household saving ratio (% of HHDI)10 2.8 2.2 1.7 1.8 1.8 1.8
TWI11 77.9 68.5 66.4 68.0 69.3 69.2
90-day bank bill rate11 3.6 2.6 2.6 3.4 4.2 4.5
10-year bond rate11 3.3 3.3 3.5 4.2 4.6 4.8

Notes:

  1. Forecasts finalised 20 November 2015.
  2. Contribution to GDP growth.
  3. Estimated as the percentage difference between actual real GDP and potential real GDP.
  4. Percent of the labour force, March quarter, seasonally adjusted.
  5. Percent of the working-age population, March quarter, seasonally adjusted.
  6. Quarterly Employment Survey, average ordinary-time hourly earnings, annual percentage change.
  7. Annual percentage change.
  8. System of National Accounts (SNA) and merchandise basis, annual average percentage change.
  9. Quotable Value New Zealand (QVNZ) House Price Index, annual percentage change.
  10. Treasury estimate for 2015.
  11. Average for the March quarter.

Longer time series for these variables are provided on page 144.

Sources: Statistics New Zealand, Reserve Bank of New Zealand, CoreLogic, the Treasury

Key economic forecast judgements and assumptions

Key judgements for this update
  • Trading partner growth is assumed to increase in 2016 and 2017 as slower growth in China is offset by stronger growth in Australia, the US and most other trading partners.
  • El Niño is assumed to have a small negative impact on the economy in 2016. See the box on page 20 for further details.
  • Dairy prices are expected to recover at a modest rate, returning towards the long-term levels forecast by the OECD-FAO of US$3,500/mt towards the end of 2017.
  • West Texas Intermediate (WTI) oil prices are assumed to rise from US$46 per barrel in the September 2015 quarter to US$69 in the March 2020 quarter.
  • Net permanent and long-term migration inflows are assumed to rise from 62,500 in the year ended October 2015 to a peak of 62,700 in the year ended December 2015 and to return to the long-run assumption of 12,000 per year in the year ended March 2018.
  • Growth in potential output is assumed to increase from 2.5% in the year ended June 2015 to a peak of 2.6% in the year ended June 2017 and to ease to 2.4% by the end of the forecast period. Economy-wide labour productivity growth is estimated to average 1.2% per year between the years ending March 2016 and March 2020.
  • The historical relationship between spare capacity (the output gap) and non-tradables inflation is assumed to hold. The output gap is estimated to be around -0.8% of GDP currently and to become increasingly negative over the next year or so, contributing to lower inflation. The output gap is expected to turn positive towards the end of 2017.
  • Ninety-day interest rates are assumed to rise to the neutral rate of 4.5% by the June 2020 quarter.
Other forecast assumptions
  • Average paid hours worked per week per person are estimated to decline from around 32.9 in the year to June 2015 to around 32.4 by the end of the forecast period.
  • Labour force participation averages 68.7% across the forecast period.
  • The non-accelerating inflation rate of unemployment (NAIRU) is estimated to be around 4.5% by the end of the forecast period.
  • Investment associated with the rebuild following the Canterbury earthquakes is assumed to be around $40 billion in 2011 prices (rounded to the nearest $5 billion), spread across residential property ($16 billion), commercial and other property ($10 billion) and infrastructure and social assets ($11 billion).
Policy impacts
  • The tobacco excise tax increase in the March quarter 2016 adds 0.2 percentage points to annual consumer price inflation.
  • The reduction in Accident Compensation Corporation (ACC) vehicle levies in September 2016 quarter is estimated to reduce consumer price inflation by 0.2 points.

Recent Developments and Near-term Outlook

Economic growth has slowed...

The pace of economic expansion slowed during the first half of 2015 owing to weaker international and domestic demand and falling dairy prices. This led to more spare capacity in the economy, reflected in low non-tradables inflation and higher unemployment. Weaker demand is expected to lead to slower annual growth over the remainder of 2015 and into 2016. Real production GDP growth is expected to slow from 3.2%in the year to March 2015 to 2.1% in the year to March 2016 (Figure 1.1). Although real GDP growth was lower than forecast in the Budget Update in the year to June 2015, nominal GDP growth was higher. As a result, nominal GDP was $0.8 billion higher than forecast, contributing to higher tax revenues in the 2015 fiscal year.

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

…with several developments impacting the economy and its outlook

A number of key developments since the Budget Update have influenced the revisions to the near-term growth outlook. These include a more subdued and uncertain global outlook, falling commodity prices (dairy in particular) contributing to a lower terms of trade, an earlier than expected peak in the Canterbury residential rebuild and the onset of El Niño. These are partially offset by a number of positive developments, including stronger net migration and tourist arrivals, higher housing market turnover and more stimulatory monetary conditions.

Judgements around trading partner growth, the future path of commodity prices, the impact of El Niño, the extent and duration of the current migration cycle and the relationship between inflation and spare capacity are key factors influencing the economic outlook. These judgements and the risks around them are discussed further in the Risks and Scenarios chapter and in the migration and El Niño boxes on pages 15 and 20.

Global economic growth has slowed…

Global economic growth has slowed over 2015 as demand weakened in China, impacting on other developing economies and slowing the recovery in many developed economies. The exception to these developments is the continuing recovery in the US economy.

Slower global growth is chiefly a result of the weaker economic outlook for emerging economies. Growth has slowed in China as the economy transitions from the investment-led model of recent years to greater dependence on consumption as a driver of growth, and as authorities balance structural reform and short-term stimulus of the economy. Sharp declines in the share market and adjustments to the exchange rate mechanism caused additional concerns about future growth mid-year. Slower growth in China has had flow-on effects to other economies in Asia, many of which are key trading partners for New Zealand, as well as commodity exporters such as Canada, Brazil and Russia.

The slowdown in China has also affected the Australian economy through a further fall in its terms of trade. However, with lower interest rates and a lower value of the Australian dollar, the Australian economy is shifting from mining investment towards other areas of investment (including housing), private consumption and export volume growth (both goods and services) as the main drivers of demand.

Economic indicators in both the US and UK have remained largely upbeat throughout 2015, although there has been some loss of momentum recently in the UK. Growth has been more subdued in Japan and the euro zone, with both economies easing monetary policy further through quantitative easing. Concerns over Greece's sovereign debt have decreased since mid-year.

Slower global growth has been reflected in weak commodity prices. Oil prices have remained low throughout the year, having fallen by 50% in the latter part of 2014. Since July, WTI oil prices have remained below US$50/barrel. The Commodity Research Bureau Futures Index has fallen 45% from a year ago and is just above a 14-year low.

…as has domestic demand

Domestic demand was weak through the first half of 2015. Real GDP (production measure) rose 0.2% and 0.4% in the March and June quarters respectively. Household consumption growth was particularly soft, largely owing to weak services consumption growth. In addition to low consumption growth, there was reduced impetus from the Canterbury rebuild and lower mining-related investment (in response to lower oil prices).

There are some positive factors underpinning growth despite recent weakness. Although there has been slower growth in the Canterbury residential rebuild, construction activity has remained solid. Services industries have also continued to grow at a steady rate, supported in part by a 25.6% increase in travel services export values in the year to June 2015 (mostly tourism- and education-related). Activity in the housing market has increased, driven by a higher number of sales in Auckland and, more recently, surrounding regions.

Aggregate demand has been supported by high levels of net inward migration, which reached a record 62,500 in the year to October 2015. The drivers of migration and the impacts on the economy are discussed in more detail in the box on page 15.

Dairy prices remain at low levels...

Dairy prices rallied briefly at the start of 2015 on concerns that drought might curb New Zealand milk production. However, once it became apparent that drought had not significantly reduced New Zealand production and that global demand remained relatively subdued, dairy prices fell sharply on the GlobalDairyTrade (GDT) auction platform. Between March and August prices fell by 50%, with key product whole milk powder selling for as low as US$1,600/mt in August.

Prices have recovered somewhat since then, albeit from a very low base, and by mid-November the GDT average price was around US$2,500/mt (Figure 1.2). This has led to a significant drop in dairy farmgate prices and incomes across both the 2014/15 and 2015/16 seasons, with many farmers projected to have negative cash flows in the latter season. The large drop in dairy farm incomes has spill-over effects to the wider economy as well.

Figure 1.2 - Dairy prices
Figure 1.2 - Dairy prices   .
Source:  GlobalDairyTrade, Statistics New Zealand, the Treasury

...but have been partly offset by strength in other export prices and lower import prices

While dairy export prices have fallen sharply, New Zealand's other exports such as meat, horticultural and seafood products, and manufactured goods have held up better and have benefited from depreciation of the New Zealand dollar (discussed further below). At the same time, world prices for New Zealand's imports have also remained relatively low. In part this reflects low global inflation. New Zealand has also benefited from low oil prices. Taken together, these factors saw New Zealand's terms of trade rise over the first half of 2015 despite the weakness in dairy prices, which will be reflected in the terms of trade in the second half of the year.

Slower economic growth has led to lower inflationary pressures and higher unemployment...

Inflation has remained low, at 0.4% in the year to September 2015 (Figure 1.3). Non-tradables inflation eased to 1.5%, reflecting a greater degree of spare capacity in the economy as well as policy changes (chiefly the ACC vehicle levy reduction). Subdued non-tradables inflation has been offset by slightly higher tradables inflation in recent quarters, resulting from a weaker New Zealand dollar. That said, annual tradables inflation remains negative at -1.2%, indicative of weak global inflationary pressures as well as the lagged impact of the previously high dollar.

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

Labour market movements also reflect the greater degree of spare capacity in the economy. Employment growth has eased, resulting in unemployment rising from 5.8% in March 2015 to 6.0% in September 2015. Nominal wage growth remains subdued but is well above the rate of inflation, indicating that growth in real wages has been positive.

...and loosening of monetary policy

In response to the weakening activity and inflation outlook, the Reserve Bank reduced the Official Cash Rate (OCR) by 75 basis points between June and September, to 2.75%, and retained an easing bias in October. Easier monetary conditions together with the decline in export prices have been associated with a depreciation of the New Zealand dollar. The trade-weighted exchange rate has fallen by about 10% since April.

Migration - causes and effects

The current net migration inflow to New Zealand is the largest on record, reaching 62,500 in the year to October 2015 (Figure 1.4), with key drivers being the Australian unemployment rate, relative growth between New Zealand and other countries, and New Zealand policy changes.

Figure 1.4 - Migration flows
Figure 1.4 - Migration flows   .
Source:  Statistics New Zealand

Australia is the main destination for New Zealand citizen departures, but the outflow generally eases in response to higher Australian unemployment. With the Australian unemployment rate rising from just over 5.0% in 2012 to 6.4% in January 2015, annual departures to Australia fell from 54,000 in December 2012 to 25,000 in October 2015.

Stronger GDP growth in New Zealand relative to source countries and policy changes (increased work rights for students from the start of 2014) are the key drivers of increased arrivals this cycle, with work and student visa arrivals reaching record highs in the October 2015 year. Working holiday visas have accounted for 60% of the growth in work visas approved since June 2012, with over half of this inflow coming from France and the UK, with which New Zealand has uncapped working visa scheme agreements.

Net migration can impact both demand and supply in the economy. Domestic demand is impacted by the higher level of private consumption and by increased demand for housing, which drives up existing house prices and increases household wealth. There are also second-round effects, with households able to draw on their increased housing equity and spend more on goods and services or reinvest in housing. The demand for housing and the impact on house prices seems to be strongest for arrivals[3] and those in older age groups,[4] who are typically wealthier. More net migrants of working age also increase the size of the labour force and therefore the capacity of the economy, which allows it to produce more with less price pressure than otherwise. The composition of net migration this cycle was initially dominated by fewer departures, but increasingly by returning New Zealanders, migrant workers and students (chiefly aged 20 to 34). The composition compared to previous cycles has meant a lesser impact on demand, while the increase in labour supply has been greater.

There appears to have been a smaller impact on house prices than in previous cycles, which is likely a result of fewer departures initially dominating and net inflows strongly concentrated in those aged 20 to 34. The lower concentration of wealthier age groups and more students may reduce the ‘spend per migrant'. This, along with a reduced impact on house price growth, may dampen the impact on private consumption and residential investment growth compared to previous cycles.

The current composition of net migration is also likely providing a greater contribution to the labour force than in previous cycles, with net migration accounting for 68% of the increase in the working-age population over the September 2015 year (compared to 48% at the peak of the previous boom in the June 2003 year).

Net migration can turn quickly as the drivers of the underlying flows reverse. The weaker outlook for the New Zealand economy, combined with somewhat lower unemployment in Australia, is expected to reduce the attractiveness of New Zealand as a destination and may encourage an increase in departures to Australia in the forecast period.

Notes

  • [3] McDonald, Chris (2013), ‘Migration and the housing market', Reserve Bank of New Zealand Analytical Notes Series AN2013/10, Wellington.
  • [4] The Treasury (2015), ‘Special Topic: Composition of migrant inflows and their impact on the economy', Monthly Economic Indicators February 2015.

Global economic growth is expected to remain subdued in the near term...

Global economic growth is expected to recover in the near term from its downturn in 2015 as policies support demand and recoveries become more entrenched. Despite the pick-up, global growth is likely to remain relatively subdued. Economic activity in China is expected to be supported by reductions in interest rates and bank reserve requirement ratios, but the trend in growth will remain down as a result of structural factors, including a rebalancing towards consumption-led growth. The pace of economic activity in Australia is expected to quicken as the economy rebalances and responds to easier monetary conditions and resource exports increase as projects are commissioned.

The stabilisation of growth in China is expected to have a positive impact on the Asian economies closely linked to it, and Japan and the euro area are expected to respond to current monetary stimulus. The recovery in the US economy is forecast to strengthen as growth becomes more self-sustaining and employment and earnings increase further. As a result, global economic growth is expected to pick up in 2016 from its dip in 2015, but at a slower pace than previously forecast. New Zealand's trading partners' growth has been revised down from 3.8% to 3.5% for 2015 and from 3.9% to 3.6% in 2016 (Table 1.2).

Table 1.2 - Trading partner growth (annual % change)
 Calendar years 2015
weights
2014
Estimate
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
China 25% 7.4 6.9 6.6 6.5 6.4 6.3 6.2
Australia 24% 2.7 2.2 2.5 3.0 3.0 3.0 3.0
Other Asia* 22% 4.1 3.5 3.8 4.2 4.3 4.3 4.2
United States 11% 2.4 2.4 2.6 2.6 2.5 2.5 2.4
Euro area 7% 0.9 1.5 1.5 1.5 1.5 1.5 1.5
Japan 7% -0.1 0.6 0.9 0.6 0.9 1.0 1.0
United Kingdom 4% 2.6 2.4 2.2 2.0 2.0 2.0 2.0
Canada 1% 2.5 1.0 1.7 2.0 2.1 2.2 2.2
Trading Partner Growth (TPG) 100% 3.7 3.5 3.6 3.8 3.9 3.9 3.8
TPG - Consensus (November 2015)   3.7 3.5 3.7 3.8 3.8 3.8 3.8
TPG - IMF WEO (October 2015)   3.7 3.6 3.7 3.8 3.8 3.9 3.9
TPG - The Treasury (2015 Budget Update)   3.7 3.8 3.9 4.0 4.0 4.0  

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

Sources: International Monetary Fund (IMF), Consensus Forecasts, the Treasury

Despite the pick-up, trading partner growth will remain relatively low, resulting in weak inflationary pressures. As a result, monetary policy conditions across most regions are expected to remain stimulatory. The main exception to this trend towards easing monetary conditions in the near term is the US. As domestic economic conditions continue to improve there, the Federal Reserve is expected to begin raising interest rates in mid-December or in early 2016 from current historic lows. The normalisation of monetary policy in the US could have adverse effects on emerging economies around the world. This risk and others associated with the global economy are discussed further in the Risks and Scenarios chapter.

...contributing to lower terms of trade...

The slower pace of global economic growth compared to the Budget Update is expected to reduce demand and therefore international prices for some of New Zealand's key commodity exports, including meat and forestry products. Together with the falls in dairy prices that are still flowing through to exports, this is expected to reduce New Zealand's terms of trade in coming quarters (Figure 1.5). Lower international import prices, reflecting low global inflationary pressures and demand, provide a partial offset. Dairy prices are expected to remain around their current levels of US$2,500/mt into early 2016 before picking up gradually from the March quarter onwards as the global dairy market becomes more balanced between supply and demand. The terms of trade are expected to begin improving from the middle of 2016, reflecting the recovery in dairy and other export prices as global demand picks up.

Figure 1.5 - Goods terms of trade (SNA)
Figure 1.5 - Goods terms of trade (SNA).
Source: Statistics New Zealand, the Treasury

...and slower domestic growth as consumers and businesses respond to lower incomes

Recent domestic economic indicators are consistent with stronger economic growth in the second half of 2015 than in the first half, resulting in annual average growth of about 2.2%. Both consumer and business confidence have rebounded from their August lows and business outlook and trading activity measures have improved. Meanwhile, retail trade and electronic cards transaction data suggest private consumption growth will rebound from the low rates seen in late 2014 and early 2015. Annual net inward migration is assumed to peak at 62,700 in the December 2015 quarter, adding further support to consumption. Building consents point to a continuation of solid construction activity.

However, strong El Niño conditions are expected to persist through the 2015/16 summer and into autumn. El Niño frequently leads to drought in parts of New Zealand. Together with the price signals already being made to farmers, dry conditions are expected to lead to lower agricultural production in the first half of 2016 and a 3.1% decline in goods exports in the year to September 2016. El Niño is also likely to reduce hydroelectric production. While these effects contribute to annual average GDP growth slowing to around 2.1% in early 2016, they reverse in subsequent quarters as climate conditions return to normal and growth is expected to recover. There is considerable uncertainty about this judgement given uncertainty over the impact of El Niño and the degree of resilience in the economy. The box on page 20 discusses the potential impacts of El Niño in more detail.

Demand growth is expected to remain modest through 2016 as consumers and businesses adjust to lower farm incomes and the weaker New Zealand dollar. For consumers, much of this adjustment occurs through lower consumption expenditure, with annual average private consumption expected to slow to 2.4% in 2016 (Figure 1.6). The household saving rate is also assumed to decline in 2016 as households adjust to lower incomes.[5] Public consumption growth remains at a relatively high level in the near term. See the Fiscal impulse box on page 40 for further details.

Figure 1.6 - Private consumption
Figure 1.6 - Private consumption   .
Source: Statistics New Zealand, the Treasury

Market investment growth is forecast to ease as the lower terms of trade put downward pressure on business profitability and as the price of investment goods increases with the lower exchange rate. Slower domestic demand growth will reduce capacity pressures, leading to lower demand for investment by businesses.

Residential investment growth is also assumed to slow as the growth impetus from the Canterbury residential rebuild eases. However, growth rates are expected to remain high compared to the previous decade as the market responds to strong demand for houses in Auckland and surrounding regions.

House price growth is expected to ease in the near term but remain at relatively high levels over 2016. Recent indicators suggest that the pace of activity has slowed slightly, partly in response to new lending and tax measures. Nonetheless, the fundamental drivers of high population growth and relatively constrained housing supply remain in place. Strong demand in Auckland and, to a lesser extent, surrounding regions, is assumed to be the main driver behind house price growth remaining at high levels. House price growth is expected to remain fairly muted in some other parts of the country, including Christchurch.

The degree of spare capacity in the economy is expected to increase...

In the short term, weak demand increases the degree of spare capacity in the economy.[6] The unemployment rate is forecast to rise to 6.5% in early 2016, largely as a result of slower employment growth, while the labour force continues to expand rapidly with high net migration inflows (Figure 1.7). Annual average weekly earnings growth falls below 2.0% as demand pressure in the labour market eases.

Figure 1.7 - Unemployment
Figure 1.7 - Unemployment   .
Source: Statistics New Zealand, the Treasury

With weaker inflationary pressures, non-tradables inflation is expected to be lower than forecast in the Budget Update, although an offset from higher tradables inflation (as a result of the lower exchange rate) means the overall inflation path is broadly similar. Headline annual inflation is expected to rise to around 2.0% by the end of 2016. This assumes that the historical relationship between inflation, the output gap (spare capacity) and monetary policy reasserts itself. The uncertainty around this judgement is examined further in Scenario One of the Risks and Scenarios chapter.

...and monetary policy is expected to remain accommodative

Monetary conditions are assumed to become more accommodative over the period ahead as the policy interest rate is reduced further and the exchange rate continues to depreciate. One further 25 basis points reduction of the OCR is assumed to occur by March 2016, in line with market expectations.[7] Short-term interest rates are expected to remain low throughout 2016 before beginning to move higher in early 2017 (Figure 1.8). The exchange rate is assumed to fall slightly over 2016, as monetary policy tightens in the US (reducing the relative attractiveness of New Zealand's interest rates).

Figure 1.8 - 90-day interest rates
Figure 1.8 - 90-day interest rates   .
Source: Statistics New Zealand, the Treasury

Nominal GDP growth is expected to slow...

Figure 1.9 - Nominal GDP growth
Figure 1.9 - Nominal GDP growth   .
Source: Statistics New Zealand, the Treasury

Annual average growth in nominal GDP is forecast to ease below 2% in the middle of 2016 before picking up again (Figure 1.9). The slowdown in nominal growth reflects slower real GDP growth as well as reduced inflationary pressures and the lower incomes associated with the fall in the terms of trade. As a result, nominal GDP is expected to be $5.0 billion lower than in the Budget Update for the year to June 2016.

...while the current account deficit widens further

The decline in the goods terms of trade and lower agricultural export volumes (owing in part to El Niño) are the main drivers behind the widening of the annual current account deficit to 6.0% of GDP in 2016 (Figure 1.10). A large services surplus, as a result of high travel services exports, provides a partial offset to the deterioration in the goods balance, while the income deficit is expected to remain stable.

Figure 1.10 - Current account components
Figure 1.10 - Current account components   .
Source: Statistics New Zealand, the Treasury

Notes

  • [5] The National Accounts: Income and Expenditure data released on 20 November, including the household saving rate for the year to March 2015, have not been incorporated into the economic forecast as they are provisional. They do not point to a significantly different outlook to that presented in these forecasts.
  • [6] The output gap, or the difference between the economy's potential and actual output, is expected to widen to about -1.3% of GDP in June 2016 before narrowing again. The output gap is a common measure of spare capacity in the economy.
  • [7] Following finalisation of the economic forecasts on 20 November, the Reserve Bank reduced the OCR by 25 basis points on 10 December, in line with this economic forecast assumption.

El Niño

El Niño is one phase of a global climatic cycle known as the El Niño-Southern Oscillation. El Niño events typically result in above average rainfall in south eastern South America, eastern equatorial Africa and the southern US, and below average rainfall in parts of Australia and India. For New Zealand, El Niño typically leads to wetter conditions in the west of the country and drier than normal, frequently drought conditions in the east.[8] The current El Niño event could be as severe as the 1997/98 event, the strongest since 1950 (Figure 1.11).

Figure 1.11 - Southern Oscillation Index
Figure   .
Source:  NIWA

El Niño's impact on the economy is primarily via the agricultural sector and related primary manufacturing, and hydroelectric production. For agriculture, drier conditions in the east of the country reduce pasture quality and quantity. Milk production typically falls as a result, although this can be mitigated somewhat by providing supplementary feed and use of irrigation. Given the current low farmgate milk price, dairy farmers are less likely to buy supplementary feed than otherwise. Milk production typically rebounds in the following season (assuming a return to “normal” conditions), unless there has been a reduction in the size of the dairy herd.  El Niño impacts on meat production by reducing the rate at which livestock gain weight, resulting in lower carcass weights. If pasture conditions are particularly poor, some breeding stock may also be sent to slaughter, temporarily boosting production but reducing livestock numbers. The effects can persist for more than one season given the time to rebuild herds and flocks.

The impact on prices and therefore farm revenues is more uncertain. If there is sufficient price reaction (as a result of reduced overall supply) to offset declines in milk and meat production, the overall impact on farm revenues may be partially offset or even neutral.  In the Treasury's judgement, prices are unlikely to fully offset production declines given current global supply and demand dynamics for both dairy and meat.

Hydroelectric production also tends to fall during El Niño events. Hydroelectric generation has a higher value-add than thermal and gas electricity generation owing to its low-cost inputs; switching the electricity generation mix towards thermal sources consequently reduces GDP.

The impact from an El Niño varies considerably from event to event, given both the large variation in the strength of El Niño events and the severity of their impact on New Zealand weather conditions. The degree of resilience in the economy and agricultural sector in particular also influences the impact. Furthermore, El Niño affects regions differently, so there is scope for greater production in wetter western regions to offset drier eastern regions.

IMF research estimates that a ‘standard' El Niño shock reduces New Zealand's annual real GDP growth by 0.4 percentage points, with most of the impact in the first quarter following the shock.[9] The IMF's methodology suggests the current, relatively strong El Niño will reduce GDP growth by 0.6 percentage points. The Treasury estimated that the 2013 drought reduced annual real GDP growth by 0.7 percentage points.[10] Although the 2013 drought was not caused by El Niño, it nonetheless provides an indication of the potential size of a drought impact.

The IMF estimates an overall positive impact on world real commodity prices from an El Niño. This reflects overall reduced agricultural production pushing up non-fuel commodity prices, as well as higher oil prices owing to increased demand for electricity from non-hydro sources. Higher commodity prices are likely to flow through to higher inflation in some regions, notably Asia, which may reduce household purchasing power and therefore demand. For dairy products, the price signals are less clear-cut. Although milk production is likely to fall in New Zealand and Australia as a result of El Niño, it may rise in the US (particularly if the four-year drought in California is broken) while the EU is largely unaffected by El Niño.  The global supply and demand imbalance may not be materially altered as a result.

Notes

  • [8] National Institute of Water and Atmospheric Research (NIWA).
  • [9] Cashin, P., Mohaddes, K., and Raissi, M. (2015). Fair weather or foul? The macroeconomic effects of El Niño. IMF Working Paper WP/15/89.
  • [10] The Treasury (2013). Budget Economic and Fiscal Update 2013, pp. 17-18.

Medium-term Outlook

Growth increases in the medium term…

Economic growth is expected to pick up in the second half of 2016. Annual average growth is expected to lift to 2.4% in the year to March 2017, peak at 3.6% in the year to March 2018 and then ease over the remainder of the forecast period. Exports are expected to increase in response to the lift in the terms of trade and weaker dollar, and as the agricultural sector recovers from El Niño. Monetary policy settings stimulate the domestic economy. The shortfall in the supply of housing together with low interest rates and high population growth underpin residential investment growth. Market investment also picks up in response to the increasing terms of trade and low interest rates. Increase in the Government's operating and capital allowances increases public consumption and non-market investment respectively. Unemployment falls as spare capacity in the economy declines.

The economy's potential growth rate has been revised downwards compared to the Budget Update, largely owing to slower growth in investment.[11] Higher population growth, owing to higher net migration, provides a partial offset to lower investment. The annual average potential growth rate is estimated to increase from around 2.5% currently to 2.6% in 2017 as productivity growth rises from low levels (Figure 1.12). Potential growth averages around 2.5% over the forecast period as a whole. The implications of lower productivity growth than assumed are discussed further in Scenario One in the Risks and Scenarios chapter. The contribution of productivity to growth is explored further in the Composition of growth box on page 25.

Figure 1.12 - Actual and potential GDP
Figure 1.12 - Actual and potential GDP.
Source: Statistics New Zealand, the Treasury

…as the terms of trade recover…

The terms of trade begin to recover from the middle of 2016, largely as a result of increasing export prices. Dairy prices are expected to pick up from around this time as surplus Chinese inventories clear and as global milk production growth slows sufficiently to rebalance supply and demand in the market. Dairy prices steadily increase towards their assumed long-run level of around US$3,500 by the end of 2017. Prices for New Zealand's other key commodity exports are also expected to pick up from the middle of 2016 in response to strengthening global demand. The implications of a faster recovery in export prices than assumed are explored in Scenario Two of the Risks and Scenarios chapter.

Slowly rising import prices, in line with low global inflationary pressures, provide a modest drag to the terms of trade. Oil prices are assumed to trend slowly but steadily higher, to reach around US$70/barrel by the end of the forecast period.

These assumptions on balance result in lower terms of trade than in the Budget Update. At the end of the forecast period that difference narrows to around 1.5%. The lower end-point reflects the view that lower production costs and structural changes in the dairy market outweigh the effects of lower prices for oil (and other commodities) on the terms of trade. The Structural fiscal balance indicators box on page 39 estimates the fiscal position adjusted for the terms of trade.

…and accommodative monetary policy stimulates domestic activity

After remaining at low levels in 2016 and into early 2017, short-term interest rates are assumed to rise gradually to the long-run assumption of 4.5%, keeping inflation near 2%. The long-run interest rate assumption has been lowered by 0.25 basis points compared to the Budget Update, with recent research by the Reserve Bank[12] and the Treasury pointing to a lower neutral interest rate than previously estimated. The trade-weighted exchange rate index appreciates from early 2017 onwards in line with the gradual rise in interest rates and improvement in the terms of trade (Figure 1.13).

Figure 1.13 - Trade-weighted exchange rate
Figure 1.13 - Trade-weighted exchange rate   .
Source: Statistics New Zealand, the Treasury

Exports are expected to grow strongly from 2017 (Figure 1.14). Agricultural output is expected to begin recovering in the 2016/17 season, assuming a return to normal climatic conditions and no lasting impact from El Niño, leading to strong growth in agricultural exports in the year to March 2018. The recovery in the terms of trade as well as depreciation of the New Zealand dollar contributes to sustained growth in these exports over the medium term. The depreciation of the dollar is also expected to boost the competitiveness of non-commodity and services exports, leading to strong volume growth in these areas. Growth in services export volumes is expected to be further supported by continued growth in travel services exports (chiefly tourism-related). Taken together, these factors see exports making a substantial contribution to real GDP growth in the latter years of the forecast.

Figure 1.14 - Total exports
Figure 1.14 - Total exports   .
Source: Statistics New Zealand, the Treasury

The shortfall in the supply of housing, together with low interest rates and relatively high population growth, underpins residential investment growth throughout the forecast. Although construction activity associated with the Canterbury residential rebuild is thought to have peaked, it is expected to remain at a relatively high level through the forecast period.[13] Construction resources will progressively move from Canterbury to other regions, notably Auckland, in order to reduce the existing shortfall of housing.

Growth in market investment picks up from 2017 in response to low interest rates, strengthening trading partner growth and the resultant recovery in the terms of trade. Non-market investment is increased by a one-off $1.0 billion increase in the Government's capital allowance. The majority of this increase is assumed to occur in the year to June 2017. However, approximately half of the total increase in the capital allowance is expected to be used for imported capital goods, which has an offsetting effect on GDP. See the Fiscal Outlook chapter for further details on the change in the capital allowance. The commercial and the social and infrastructure elements of the Canterbury rebuild will also support market and non-market investment respectively.

Private consumption growth eases to around 2.3% in early 2017 and then remains stable around this level for the remainder of the forecast. This reflects lower labour and farm incomes and the relatively higher price of consumption owing to the lower exchange rate. Low interest rates provide a partial offset to these factors by reducing household debt servicing costs. Households are assumed to lower their saving rates somewhat to buffer reduced incomes and smooth their consumption. If households are more sensitive to slower income growth then private consumption growth could be slower.

Public consumption growth lifts in 2018 as a result of the increase in the government operating allowance from $1.0 billion to $2.5 billion in fiscal year 2018 (Figure 1.15). Growth eases thereafter. For the purpose of the economic forecast, the increase in the operating allowance is assumed to increase expenditure. See the Fiscal impulse box on page 40 for further details on how discretionary changes in the fiscal position impact on the economy.

Figure 1.15 - Public consumption
Figure 1.15 - Public consumption    .
Source: Statistics New Zealand, the Treasury

Unemployment declines as spare capacity is reduced...

As economic growth picks up in 2017, the degree of spare capacity in the economy declines. The output gap, a measure of this spare capacity, closes rapidly through 2017 before turning positive. This is reflected in the steady decline in the unemployment rate from 6.5% in 2016 to 4.5% in 2020. The main driver of the fall in unemployment is the increase in employment growth, with the participation rate assumed to remain at relatively high levels. Slower working-age population growth, as net migration returns to its long-run average of 12,000 per year, will also contribute to a lower unemployment rate.

...while inflation remains stable

The shift in the output gap from negative to positive is also reflected in non-tradables inflation, which steadily picks up from below 2.0% at the end of 2016 to 3.4% by the end of the forecast. The increase assumes that the historical relationship between the output gap and non-tradables inflation reasserts itself. In contrast, tradables inflation falls steadily from 2.4% at the end of 2016 to below 1.0% from 2018 onwards, in line with the gradual appreciation of the exchange rate. Taken together, increasing non-tradables inflation and decreasing tradables inflation are broadly offsetting, leaving headline CPI inflation relatively stable at around 2.0% across most of the forecast.

However, strong nominal GDP growth in later years does not return nominal GDP to previously forecast levels

Nominal GDP growth is forecast to pick up strongly, with annual average growth accelerating from 1.8% in the middle of 2016 to 6.4% in 2018. Growth then eases to 4.0% by the end of the forecast. High nominal GDP growth in 2018 and 2019 reflects high real GDP growth, the recovery in the terms of trade and the increase in inflation. The contribution from the terms of trade is evident in the annual current account deficit, which narrows from 6.0% of GDP in 2016 to 4.0 - 4.5% in later years.

However, the strong growth in nominal GDP is from a lower base in the year to June 2016 than in the Budget Update. As a result, nominal GDP is cumulatively lower by around $17 billion over the five fiscal years to 2018/19 (Figure 1.16). The downward revision to nominal GDP reduces forecast tax revenue from the Budget Update. In addition, lower short-term interest rates contribute to a fall in tax revenue from Resident Withholding Tax (RWT). The Fiscal Outlook chapter discusses changes in tax revenues in more detail.

Figure 1.16 - Nominal GDP
Figure 1.16 - Nominal GDP   .
Source: Statistics New Zealand, the Treasury

Notes

  • [11] Potential growth is the rate at which the economy can expand while maintaining stable inflation. It depends on how many people are available to work and how many hours they are willing to work (labour); the number of buildings, machines and computers (capital); and the efficiency with which they are used (multi-factor productivity).
  • [12] Richardson, A. and Williams, R. (2015). Estimating New Zealand's neutral interest rate. Reserve Bank of New Zealand Analytical Note AN2015/05.
  • [13] Approximately $1 billion of land repair activity has been reclassified from residential rebuild to commercial and other. This does not significantly alter the residential investment growth profile, with the level of residential rebuild remaining at relatively high levels.

Composition of growth

In 2008 the New Zealand economy experienced a pronounced contraction in economic activity. Subsequently, growth in real GDP has been subdued relative to its long-run trend. To better understand the nature of New Zealand's recent growth performance, and the drivers of growth over the forecast period, this box uses a simple growth accounting framework.

This framework decomposes GDP growth into ‘supply side' components:  population growth, labour utilisation (total hours worked), capital deepening (investment in capital) and multi-factor productivity (MFP or technical change, essentially anything that increases output for given inputs including more efficient processes, better management, new technology etc). 

Labour utilisation is further decomposed into average hours per worker, the employment rate and growth in the working-age population to population ratio.  This framework may miss important interactions between the inputs to GDP; nevertheless, it may help to identify the nature of changes in the economy and the risks to our forecasts.

Table 1.3 - Subdued GDP growth reflects slowdown in multi-factor productivity
Average annual growth rate %
(years ended March)*
Pre-recession
(1992-2008)
Post-recession
(2009-2015)
Long-term avg
(1992-2015)
Forecast period
(2016-2020)
Real GDP 3.3 1.4 2.7 2.7
Population 1.2 1.0 1.1 1.2
GDP per capita 2.1 0.4 1.7 1.4
   Labour productivity 1.3 0.6 1.1 1.2
      Capital deepening 0.3 0.5 0.3 0.6
      Multi-factor productivity 1.0 0.1 >0.8 0.6
   Labour utilisation 0.8 -0.2 0.5 0.2
      Average hours -0.1 -0.2 -0.1 -0.3
      Employment rate 0.7 -0.2 0.5 0.2
      Working-age population 0.2 0.1 0.2 0.2

*Note totals may not add, due to rounding 

Sources: Statistics New Zealand, the Treasury

Table 1.3 compares pre- and post-recession GDP growth with the long-term average and with growth over the forecast period.[14] In the years leading up to the 2008 recession, labour productivity (output per hour worked) was the dominant driver of per capita GDP growth, led by MFP growth. Increased labour utilisation was also a significant contributor, mostly owing to increased employment.  The ratio of the working-age population to the total population also increased over this period, while average hours per employee declined.     

In the post-recession period, growth in labour productivity has been more moderate, primarily reflecting slower MFP.  On the other hand, the amount of capital used by each worker has grown more quickly than in the past.  Labour utilisation fell markedly in the 2008/09 recession and, while it has been increasing since 2011, labour utilisation remains below its pre-recession level. The factors behind the slower rate of labour productivity growth are not well understood.  Suggested causes include rapid growth in export commodity prices and sectoral shifts in output, and the impact of the 2008 recession.  However, the evidence supporting each of these suggested causes is not compelling.

New Zealand is not alone in experiencing slower productivity growth over recent years; similar phenomena are evident in a number of advanced economies.[15]  Equally, evidence on the causes of the slowdown remains elusive.  To some extent the widespread nature of the slowdown may reflect a common cause; for example, relatively weak aggregate demand may be impairing supply-side performance.

Uncertainty around the causes of slower growth flows through to uncertainty around the outlook for productivity growth.  These forecasts assume that labour productivity returns to its long-run average rate, consistent with a view that slower productivity growth has partly been a cyclical development.  MFP is the main driver of the rise in labour productivity growth, although capital deepening is expected to remain relatively strong as growth in the capital stock outstrips labour supply growth, which expands at a modest pace.  In light of the uncertainty surrounding the outlook for productivity growth, the implicationsof slower productivity growth are explored further in the Risks and Scenarios chapter.

Notes

  • [14]The productivity estimates and the measure of capital used in Table 1.3 are for the total economy. Official productivity statistics for the narrower ‘measured sector' can be found at www.stats.govt.nz/browse_for_stats/economic_indicators/productivity.aspx
  • [15]See The future of productivity report, OECD (2015), www.oecd.org/economy/the-future-of-productivity.htm

Fiscal Outlook

Overview

  • The Crown's fiscal position has improved over the past few years with an OBEGAL surplus being recorded in the 2014/15 fiscal year for the first time since 2007/08 (up from a deficit of $18.4 billion in 2010/11) and compared to a forecast deficit at the Budget Update.
  • The current year's results to 31 October continue to be ahead of previous forecast levels. However, we are expecting some of the recent economic events to result in a slowdown in revenue growth in the second half of the fiscal year.
  • OBEGAL is now expected to be broadly in balance over the next few years with a small deficit forecast for 2015/16 and modest surpluses from 2016/17. OBEGAL then begins to significantly improve, growing to reach $4.9 billion over the forecast horizon.
  • The steadily improving fiscal outlook reflects a growing nominal economy which is forecast to drive growth in tax revenue at a rate higher than the expected growth in expenses.
  • Core Crown expenditure as a percentage of GDP is expected to be 30.6% in 2015/16, falling across the forecast period to be 29.1% in 2019/20.
  • Future operating allowances remain at $1.0 billion for Budget 2016, $2.5 billion in Budget 2017 and $1.5 billion in Budgets 2018 and 2019.
  • Capital spending by the core Crown is estimated to be $24.7 billion over the forecast period. Capital allowances for new initiatives in Budget 2016 have been increased by $1.0 billion (supplementing the Future Investment Fund allocation of $0.7 billion) before falling to $0.9 billion in Budget 2017 and then growing at a rate of 2.0% per year for subsequent budgets.
  • Net core Crown debt is expected to peak at 27.7% of GDP in 2016/17, before dropping to 24.0% of GDP by 2019/20 reflecting increasing cash flows.
  • Net worth attributable to the Crown is expected to increase over the forecast period, reaching $107.2 billion by 2019/20 similar to the level before the global financial crisis. This growth is the result of forecast surpluses from 2016/17 onwards as growth in assets exceeds liability growth.
  • Within the balance sheet, total assets are forecast to grow by $35.3 billion to stand at $314.0 billion by 2019/20. Of this, social assets have the largest growth increasing $16.7 billion to stand at $155.9 billion by 2019/20. Liabilities fall in nominal terms initially as earthquake obligations are settled and then increase again slightly as borrowings are increased. Total liabilities are expected to stand at $200.7 billion at the end of 2019/20, with borrowings making up $125.6 billion of that balance.
  • Overall tax revenue forecasts have been revised down since the Budget Update primarily owing to the weaker nominal GDP outlook and lower interest rates. However, improved ACC forecasts (lower insurance expenses, coupled with higher levy revenue from 2017/18) offset the lower revenue somewhat. Core Crown expenses remain relatively close to the previous forecasts. As a result, OBEGAL is expected to be lower across the forecast horizon. The revised tax forecasts also impact on residual cash with higher cash deficits leading to net core Crown debt being higher than previously expected. Refer to page 50 for more detailed discussion on the comparison to the Budget Update.
  • These forecasts are sensitive to a number of assumptions and should be read in conjunction with the Risks and Scenarios and Specific Fiscal Risks chapters.
Table 2.1 - Fiscal indicators
Year ending 30 June 2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast

$billions

           
Total Crown OBEGAL1 0.4 (0.4) 0.4 1.0 3.5 4.9
Core Crown residual cash (1.8) (5.4) (4.7) (2.8) 0.5 1.9
Net core Crown debt2 60.6 65.9 70.7 73.4 72.8 71.1
Net worth attributable to the Crown 86.5 86.9 89.6 93.1 99.3 107.2

% of GDP

           
Total Crown OBEGAL1 0.2 (0.2) 0.1 0.4 1.2 1.7
Core Crown residual cash (0.8) (2.2) (1.8) (1.0) 0.2 0.7
Net core Crown debt2 25.2 26.9 27.7 27.1 25.6 24.0
Net worth attributable to the Crown 35.9 35.5 35.2 34.3 34.9 36.2

Notes:

  1. Operating balance before gains and losses.
  2. Net core Crown debt excluding the NZS Fund and advances.

Source: The Treasury

Table 2.2 - Reconciliation between OBEGAL and net core Crown debt
Year ending 30 June
$billions
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Core Crown revenue 72.2 74.3 77.0 81.4 86.5 90.8
Core Crown expenses (72.4) (74.9) (76.8) (80.7) (83.3) (86.2)
Net surpluses/(deficits) of SOEs and CEs 0.6 0.2 0.2 0.3 0.3 0.3
Total Crown OBEGAL 0.4 (0.4) 0.4 1.0 3.5 4.9
Net retained surpluses of SOEs, CEs and NZS Fund (1.1) (0.6) (0.2) (0.3) (0.4) (0.3)
Non-cash items and working capital movements 2.3 1.1 1.2 1.1 1.7 1.6
Net core Crown cash flow from operations 1.6  0.1 1.4  1.8  4.8  6.2 
Net purchase of physical assets (2.0) (2.5) (2.7) (1.9) (1.7) (1.7)
Advances and capital injections (2.0) (2.5) (2.6) (2.0) (1.9) (1.7)
Forecast for future new capital spending (0.5) (0.8) (0.7) (0.7) (0.9)
Proceeds from government share offers 0.6 - -   -   -  
Net core Crown capital cash flows (3.4) (5.5) (6.1) (4.6) (4.3) (4.3)
Core Crown residual cash (deficit)/surplus (1.8) (5.4) (4.7) (2.8) 0.5 1.9
Opening net core Crown debt 59.9 60.6 65.9 70.7 73.4 72.8
Core Crown residual cash deficit/(surplus) 1.8 5.4 4.7 2.8 (0.5) (1.9)
Valuation changes in financial instruments (1.1) (0.1) 0.1 (0.1) (0.1) 0.2
Closing net core Crown debt 60.6 65.9 70.7 73.4 72.8 71.1
As a percentage of GDP 25.2% 26.9% 27.7% 27.1% 25.6% 24.0%

Source: The Treasury

Key judgements and assumptions

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

In addition to the key assumptions underpinning the economic forecasts (refer page 54), the following key judgements and assumptions supporting the fiscal forecasts were made:

  • Tax policy changes enacted and announced by the Government will take place as planned and will affect tax revenue and receipts.
  • Any future new spending or revenue reductions will be limited to the operating and capital allowances set by the Government.
  • ACC levies will be implemented in line with ACC’s funding policy and consultation papers.
  • Departments will continue to spend less than the upper limits of approved spending (referred to as appropriations).
  • The form and timing of any significant divestment of social housing assets remains uncertain and therefore not included in the forecasts, with the exception of the transfer of housing stock from Housing New Zealand Corporation (HNZC) to Tāmaki Redevelopment Company, which is included.
  • Forecast returns of the large investment portfolios managed by ACC and the NZS Fund are based on their expectations of long-term benchmark rates of return for their respective portfolios.
  • The valuations of the student loan portfolio, ACC claims liability and the Government Superannuation Fund (GSF) retirement liability are based on their underlying assumptions (eg, discount rates, salary increases and inflation) made at the time the valuations were prepared.

Further information on the fiscal forecast assumptions can be found on pages 54 to 56.

Core Crown Tax Revenue

Tax revenue grows over the forecast period...

Core Crown tax revenue (Figure 2.1) is forecast to rise in each year of the forecast period. By 2019/20, core Crown tax revenue is expected to reach $84.0 billion, $17.4 billion higher than in 2014/15. Forecast core Crown tax revenue increases as a percentage of nominal GDP, from 27.7% in 2014/15 to 28.4% at the end of the forecast period (Figure 2.1).

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

The main driver for the increase in tax revenue is forecast growth in nominal GDP (Figure 2.2). This graph also illustrates the timing lag between GDP growth and its impact on revenue.

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

In addition, other factors such as the composition of GDP growth, fiscal drag (being the additional personal income tax generated as an individual's average tax rate increases as their income increases), movements in interest rates and the interest-bearing deposit base and CPI indexation of excise rates also influence tax revenue.

...with this year's tax outturns currently ahead of expectations...

Core Crown tax revenue for the four months to 31 October shows some tax types above the Budget Update forecast levels. However, some negative forecast variances have begun to appear: lower-than-forecast RWT indicates that reductions in interest rates are starting to impact on tax revenue and lower-than-forecast GST indicating weakness in nominal domestic consumption. The lower interest rates and weaker domestic demand contribute to the overall slower growth rate for 2015/16.

...growth in 2015/16 is expected to slow...

Nominal GDP growth is expected to slow to 1.8% in 2015/16 from 2.8% in the 2014/15 (Figure 2.2) fiscal year. This has affected the growth forecasts of all tax types to varying degrees with growth in every tax type forecast to be lower in 2015/16 than it was in 2014/15 and with some tax types expected to contract. Total growth in core Crown tax revenue for 2015/16 is forecast to be 2.7% compared to the actual growth of 8.4% in 2014/15.

In addition, timing of income tax plays a large part in the growth rates. In 2014/15, a surge in terminal tax and strong growth in provisional tax resulted in positive growth in both individuals' and corporate income tax, contributing to the above-forecast tax revenue results in that year. Although this strength has continued into the first part of 2015/16, income tax timing effects are forecast to be negative for growth in 2015/16 as the positive spill-over into 2014/15 is not expected to repeat in the current year.

...and nominal GDP growth picks up in later years driving tax revenue growth

Nominal GDP and its components are the principal drivers of tax revenue growth through the forecast period, as shown in Table 2.3. The other factors contributing the most to the forecast growth in tax revenue are:

  • fiscal drag (ie, the effect of higher marginal tax rates applying to higher incomes), adding approximately $1.3 billion to PAYE and the growth of source deductions across the forecast period
  • CPI indexation of excise rates adds $0.6 billion to customs and excise duties by 2019/20
  • growth in the interest-bearing deposit base (ie, the sum of cash-like investments on which interest is earned that, in turn, is subject to RWT) is forecast to add $0.6 billion to RWT by 2019/20
  • although they have a negative effect on tax growth in the early part of the forecast period, interest rates are forecast to rise from 2017 onwards, overall increasing the interest RWT forecast by $0.5 billion, and
  • various policy initiatives are expected to add to tax revenue towards the end of the forecast period. See Additional Information on the Treasury website at www.treasury.govt.nz/budget/forecasts/hyefu2015 for details of these policy initiatives.

Inland Revenue has also prepared a set of tax forecasts which, like the Treasury's tax forecasts, were based on the Treasury's macroeconomic forecasts. The two sets of forecasts differ from each other because of the different modelling approaches and assumptions and judgements made by the two agencies. This comparison is included in the Additional Information on the Treasury website.

Table 2.3 - Composition of growth in core Crown tax revenue over the forecast period
Year ending 30 June
$billions
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Total
increase
Change in core Crown tax compared with previous year owing to:            
Macroeconomic factors:            
Employees' compensation 0.8 0.7 1.1 1.4 1.4 5.4
Private consumption 0.7 0.8 0.8 0.8 0.8 3.9
Corporate profits (0.1) 0.3 1.2 0.8 0.4 2.6
Residential investment 0.3 0.3 0.2 0.2 0.1 1.1
Entrepreneurial income (0.1) 0.2 0.3 0.2 0.1 0.7
Other factors:            
Fiscal drag 0.2 0.2 0.2 0.3 0.4 1.3
Indirect tax CPI inflation indexation 0.2 0.1 0.1 0.1 0.1 0.6
Interest-bearing deposit base 0.1 0.1 0.1 0.1 0.2 0.6
Interest rates (0.2) (0.3) 0.1 0.5 0.4 0.5
Half Year Update policy initiatives - - - 0.2 0.1 0.3
Other factors (0.1) 0.2 - 0.2 0.1 0.4 
Total movement in core Crown tax revenue 1.8 2.6 4.1 4.8 4.1 17.4
Plus: previous year's tax base 66.6 68.4 71.0 75.1 79.9 66.6
Core Crown tax revenue 68.4 71.0 75.1 79.9 84.0 84.0
Percentage of GDP 27.9% 27.8% 27.7% 28.1% 28.4%  

Source: The Treasury

Tax Expenditure Statement

The Treasury prepares a Tax Expenditure Statement annually in conjunction with the Budget Update. The purpose of this statement is to provide additional transparency around policy-motivated ‘expenditures' made through the tax system. Tax expenditures impact on the Crown's operating balance by either reducing tax revenue (eg, through an exemption or a preferential tax rate) or by increasing expenditure (eg, Working for Families tax credits). Refer to the Treasury website for a copy of the 2015 Tax Expenditure Statement.

http://www.treasury.govt.nz/budget/2015/taxexpenditure

Core Crown Expenses

Nominal core Crown expenditure increases...

Core Crown expenses are expected to grow $13.8 billion over the forecast period from $72.4 billion in 2014/15 to $86.2 billion in 2019/20 (refer Figures 2.3 and 2.4). This nominal growth is largely attributable to $6.5 billion of operating allowances set aside for future Budgets in addition to the $1.4 billion[16] allocated at Budget 2015. In addition, social assistance spending is forecast to increase by $4.6 billion, an annual increase of $1.0 billion on average per year. Finance costs are forecast to rise by $0.7 billion over the next five years owing to increased borrowing requirements (refer discussion on gross debt on page 42).

Figure 2.3 - Core Crown expenses
Figure 2.3 - Core Crown expenses.
Source:  The Treasury
Figure 2.4 - Increase in core Crown expenses relative to 2014/15 actuals
Figure 2.4 - Increase in core Crown expenses relative to 2014/15 actuals   .
Source:  The Treasury

...reflecting new budget spending...

Future operating allowances are currently set at $1.0 billion for Budget 2016, rising to $2.5 billion in Budget 2017 before reducing to $1.5 billion in Budget 2018 and Budget 2019 (Figure 2.5). These forecasts are based on the current allowance assumptions noted above. Some re-phasing of these allowances between Budgets is possible, however, to meet particular spending priorities.

Figure 2.5 - Budget 2016 and future Budget allowances
Figure 2.5 - Budget 2016 and future Budget allowances   .
Source:  The Treasury

For forecasting purposes, the allowances are assumed to be all expenditure. However, these allowances can be used for a combination of revenue and expense initiatives when allocated.

New operating spending will be allocated to department baselines when budget decisions are made. As a result, the different functional expense areas, with the exception of social security and welfare and finance costs, remain flat across the forecast period (refer page 131). Therefore comparisons across the forecast period will not necessarily reflect the expected spend at a functional level.

...and increasing social assistance...

Apart from new budget spending, social assistance spending is expected toincrease by $4.6 billion across the forecast period. New Zealand superannuation (NZS) payments account for $3.5 billion of this increase. NZS recipient numbers are forecast to increase from 665,000 in 2014/15 to 797,000 by the end of the forecast horizon. This increase in recipient numbers accounts for just over 60% of the increase in NZS costs, with the remaining increase largely owing to indexation of entitlements to wage growth (Figure 2.6). By the end of the forecast period New Zealand superannuation is around 53% of the total social assistance spending.

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

Apart from superannuation, other welfare expenditure grows by $1.1 billion over the five-year forecast period, including income-related rents subsidy ($0.3 billion), family tax credits ($0.2 billion) and sole parent support ($0.1 billion).

The expected weakening in the economic outlook and labour market is expected to flow through to higher numbers receiving the Jobseeker Support component of the Jobseeker Support and Emergency Benefit, with expenditure peaking in 2016/17. Jobseeker Support recipient numbers, which generally lag economic and labour market movements by several months, are expected to increase from around 118,000 in June 2015 to 121,000 in June 2017. They are then forecast to decline to around 106,000 by June 2020.

...although as a percentage of nominal GDP core Crown expenses reduce

Growth in core Crown expenses is forecast to be at a slower rate than growth in the nominal economy, falling from 30.1% of GDP in 2014/15 to stand at 29.1% of GDP at the end of the forecast period (Figure 2.3).

Notes

  • [16]The net Budget 2015 package was $1.0 billion when revenue initiatives are taken into account.

Cost to the Crown of the Canterbury rebuild

Table 2.4 outlines the latest estimates of the net impact on the Crown of the earthquakes included in these forecasts. These estimates reflect the known costs under current policy settings. They do not include future decisions the Government may take regarding the rebuild.

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

The total cost to the Crown is currently estimated to be $17.0 billion, $0.5 billion higher than the Budget Update. Operating expenses have reduced by $92 million while capital costs are $606 million higher than the Budget Update. The lower operating costs are largely owing to updated valuations of the Earthquake Commission's (EQC's) insurance claim costs as at 30 June 2015. Additional capital costs relate to the Christchurch central city rebuild projects as well as the inclusion of the total estimated capital spending on schools in the Canterbury region. This programme is currently expected to extend out to 2023, three years beyond the forecast period, and involves the repair and rebuild of around 115 schools.

Table 2.4 - Net earthquake expenses (operating and capital)
Year ending 30 June
$millions
2011-15
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Outside
forecast
period
Total
Half Year
Update
Total
Budget
Update
Local infrastructure 1,582 107 107 57 - - - 1,853 1,806
Crown assets1 471 666 603 269 128 116 150 2,403 2,158
Land zoning 999 101 57 - - 1,157 1,126
Christchurch central city rebuild2 767 199 441 178 56 6 (175) 1,472 1,241
Welfare support 297 4 3 2 - - - 306 306
Southern Response support package 907 (14) (29) (14) (4) 1 - 847 800
Other costs 726 134 92 93 97 101 - 1,243 1,197
Core Crown Canterbury earthquake recovery costs 5,749 1,197 1,274 585 277 224 (25) 9,281 8,634
EQC (net of reinsurance proceeds) 7,313 (146) (192) (29) 6,949 7,267
Other SOE and CEs (119) 226 336 226 91 50 - 810 625
Total Crown 12,943 1,277 1,418 782 371 274 (25) 17,040 16,526
Operating and capital expenses                  
Operating expenditure (OBEGAL) 11,497 360 228 213 184 146 - 12,628 12,720
Capital expenditure 1,446 917 1,190 569 187 128 (25) 4,412 3,806
Total Crown 12,943 1,277 1,418 782 371 274 (25) 17,040 16,526
Total cash payments3 9,801 2,530 2,096 1,258 540 277 (25) 16,477 16,044

Notes:

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

Source: The Treasury

Key risks in relation to the Canterbury rebuild are set out in the Specific Fiscal Risks chapter.

Operating Balance

Operating performance of the Crown strengthens…

OBEGAL is expected to be broadly balanced over the next few years. OBEGAL reached a surplus of $0.4 billion in 2014/15, however a small deficit of $0.4 billion is expected in the current year. This deficit is then forecast to return to a surplus in 2016/17 rising to $4.9 billion by 2019/20.

The forecast deterioration in OBEGAL in the current year is largely owing to the growth in core Crown expenses outpacing growth in core Crown revenue. As mentioned earlier in this chapter, forecast growth in tax revenue is considerably lower than actual growth in 2014/15, while core Crown expenses are expected to increase in the current year compared to last year.

As OBEGAL is the residual of a large revenue and expense base small variations to forecast can therefore have a significant impact on OBEGAL. The higher-than-forecast result in the 2014/15 year and the decrease in the current year's OBEGAL forecast reflects the level of uncertainty around these forecasts. Refer to the Risks and Scenarios chapter for further discussion of some of the risks that could impact on the 2015/16 outturn.

Figure 2.7 shows the composition of OBEGAL from the different segments of the Government. The core Crown segment is forecast to have an OBEGAL deficit of $0.6 billion in 2015/16, before returning to a surplus of $0.2 billion in 2016/17, with OBEGAL surpluses continuing to rise over the remainder of the forecast period, largely reflecting growth in tax revenue outpacing growth in nominal spending.

Figure 2.7 - Components of OBEGAL by segment
Figure 2.7 - Components of OBEGAL by segment   .
Source:  The Treasury

State-owned Enterprises (SOEs) contribution to OBEGAL is fairly stable with operating surpluses forecast throughout the forecast period.

Contrasting this Crown entities' (CEs') contribution to OBEGAL reduces across the forecast period from $0.7 billion in 2014/15 to a break-even position from 2017/18 onwards and is spread across a number of entities, with ACC's results generally having the largest impact. For example, changes to ACC levies result in ACC's contribution to the OBEGAL reducing.

...with investment returns contributing to the operating balance

The total Crown operating balance, inclusive of gains and losses, is forecast to be in surplus across all years of the forecast period with a surplus in 2015/16 of $0.3 billion growing to $7.8 billion in 2019/20 Figure 2.8 shows the continuing growth in the operating balance and its components.

Figure 2.8 - Components of operating balance
Figure 2.8 - Components of operating balance   .
Source:  The Treasury

ACC and NZS Fund hold the largest investment portfolios and market movements in these portfolios can have a significant impact on the operating balance.

In 2015/16 gains on investments are forecast to be substantially lower than in previous years, primarily owing to NZS Fund recording net losses on their investments in the first four months of the current financial year. The forecasts assume investment income returns to a long-term rate of return, resulting in continued growth going forward. The level of investment gains plays a significant part in increasing the Government's financial assets and contributing to growth in the Crown's net worth (discussed on page 45).

In addition to gains on investments, gains and losses on long-term liability valuations for ACC and GSF may also impact on the Crown's operating balance. However, in the 2015/16 year they contribute only a small amount with $0.1 billion of actuarial losses.

Gains and losses are sensitive to balance sheet movements. Refer to the total Crown balance sheet section later in this chapter for further discussion of these sensitivities.

Structural fiscal balance indicators

The Treasury calculates a range of fiscal indicators to help assess the relationship between fiscal policy and the economy. These indicators include measures of the structural budget balance and a fiscal impulse indicator. Further detail on both these indicators can be found in the Additional Information section of the Half Year Update, which is available on the Treasury website (www.treasury.govt.nz/budget/forecasts/hyefu2015).

Table 2.5 - Structural fiscal balance indicators
Year ending 30 June
% of GDP
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
OBEGAL 0.2 (0.2) 0.1 0.4 1.2 1.7
Cyclically-adjusted balance 0.4 0.4 0.6 0.3 1.1 1.6
Cyclically-adjusted balance with terms-of-trade adjustment (1.9) (1.1) (0.8) (1.6) (1.1) (0.6)
Fiscal impulse[17] (1.1) 1.4 (0.3) (0.1) (1.2) (0.3)

Source: The Treasury

Cyclically-adjusted balance

Indicators of the structural fiscal balance help to inform assessments of the sustainability of fiscal settings and identify shifts in discretionary fiscal policy. The Treasury's headline structural fiscal balance indicator, the cyclically-adjusted balance (CAB), is an estimate of the OBEGAL adjusted for fluctuations of actual GDP around potential GDP. When the economy is operating above its potential level, automatic stabilisers raise the budget balance; that is, tax receipts are higher, and unemployment expenses are lower, than they otherwise would be. When the economy is operating below its potential level, the opposite is true.

CAB provides an estimate of what the budget balance would be without the effect of these automatic stabilisers. CAB is subject to uncertainty because it uses estimated variables and is sensitive to new information, particularly regarding the output gap. The economy is forecast to be operating below its potential level until 2017/18, so CAB is estimated to be higher than OBEGAL until then. The difference between forecast and potential GDP is largest in the 2015/16 fiscal year, leading to a surplus in CAB while OBEGAL is in deficit. This suggests that the OBEGAL deficit forecast for 2015/16 is not a structural deficit.

Looking across the whole forecast period, OBEGAL increases by nearly 2% of GDP between 2015/16 and 2019/20. However, owing to a rising output gap, CAB only increases by about 1% of GDP over the same period; therefore, approximately half of the increase in the forecast OBEGAL is indicative of structural improvement in the fiscal position. This structural improvement largely reflects reductions in the level of government expenses as a percentage of GDP over time.

There is a range of other structural fiscal balance indicators that can be calculated to adjust for other factors such as the effects of asset or commodity prices on the fiscal position. Because of the importance of New Zealand's terms of trade in influencing the economic cycle, a terms of trade adjusted measure is of particular relevance to New Zealand. This measure estimates what OBEGAL would be if the terms of trade returned to its long-run average and the economy was operating at its potential level.

Although the terms of trade has recently fallen from a 40-year high, it remains above its long-term historical averages, and is forecast to remain so. The terms of trade for the June 2015 quarter is approximately 22% higher than the 30-year average and it remains 19% higher at the end of the forecast period. CAB with a terms of trade adjustment, using the 30-year average, shows structural deficits persisting across the forecast horizon.

Fiscal impulse

The fiscal impulse is an estimate of discretionary changes in the fiscal position that have an impact on aggregate demand in the economy. The year-to-year change in the structural budget balance is a rough indicator of the fiscal impulse. The fiscal impulse indicator calculated by the Treasury takes the change in a cash measure of the cyclically-adjusted fiscal balance and makes a number of adjustments. These include:

  • incorporating capital spending that contributes to aggregate demand (eg, purchases of physical assets), and
  • excluding some items that do not directly affect aggregate demand, such as KiwiSaver subsidies, net interest payments and goods with high import content (eg, defence equipment).

The fiscal impulse indicator shows that discretionary fiscal policy is expected to have a contractionary impact on demand in all but the first year of the forecast horizon and to be broadly neutral on average. The positive fiscal impulse in 2015/16 is caused by:

  • an increase in operating expenses (as a share of GDP) partly owing to some payments from 2014/15 shifting into the 2015/16 fiscal year, and
  • an increase in capital spending relative to 2014/15, partly reflecting some re-phasing of expenditure originally planned for previous years.

The negative fiscal impulse from 2016/17 to 2019/20 reflects ongoing reductions in operating spending (relative to GDP), and from 2017/18, a decline in capital spending. The most contractionary impulse across the forecast period occurs in 2018/19, reflecting accelerating revenue growth along with operating and capital expenditure falling as a percentage of GDP.

Figure 2.9 - Operating balance indicators
Figure 2.9 - Operating balance indicators   .
Source:  The Treasury

Notes

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

Residual Cash and Net Core Crown Debt

Operating cash flows steadily improve...

Net operating cash flows are forecast to be in surplus across the forecast period with a small surplus in the 2015/16 year increasing to an operating cash surpluses of $6.2 billion by 2019/20. Over the forecast period, the Government is expected to generate cash flows from core Crown operations of $14.3 billion.

The growth in operating cashflows largely mirrors the trend shown in OBEGAL and strengthens each year of the forecast period. The strength in operating cashflows largely represents growth in tax receipts exceeding growth in operating payments.

...outpacing capital spending near the end of the forecast period

Net capital spending is forecast to exceed operating cash flows until 2018/19, when core Crown residual cash[18] returns to surplus (Figure 2.10). The increase between 2014/15 actual net capital spending and 2015/16 forecast is partly owing to 2014/15 including $0.6 billion of proceeds from the Government Share Offer programme (2014/15 being the last year to include proceeds). In addition, expenditure previously expected to be spent in 2014/15 has been delayed until 2015/16 (eg, Canterbury Earthquake Recovery Authority's (CERA's) rebuild projects, defence and schools capital expenditure). These two factors result in an increased residual cash deficit in 2015/16 when compared to 2014/15.

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

Over the entire forecast period a cash shortfall of $10.4 billion is expected. This cash shortfall is funded largely through additional bond issuances (Table 2.6).

Net core Crown debt peaks as a share of GDP in 2016/17...

Net core Crown debt as a share of nominal GDP is forecast to peak at 27.7% in 2016/17 (Figure 2.11) before reducing to 24.0% by 2019/20 and continuing to decline thereafter.

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

Net core Crown debt on a nominal basis increases for the first three years as a result of cashflows from operating activities not being sufficient to meet capital spending (as discussed above) before starting to decline once residual cash returns to surplus in 2018/19, to stand at $71.1 billion at the end of the forecast period.

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

Gross debt is expected to peak at $95.7 billion in 2016/17. Forecast maturities are then expected to exceed new debt being issued, and gross debt begins to decline. Gross debt is forecast to be $91.3 billion in 2019/20 which is equivalent to 30.8% of nominal GDP (Figure 2.12).

Figure 2.12 - Gross debt
Figure 2.12 - Gross debt   .
Source:  The Treasury

The bond programme is expected to raise funds of $43.6 billion over the forecast period, while $33.0 billion of existing debt will be repaid, providing net cash proceeds of $10.6 billion (Table 2.6). Any excess cash proceeds raised from the bond programme are expected to be invested in financial assets and used to meet future debt maturities.

The issuance profile is relatively flat in order to reduce year-to-year volatility of bond programmes and ensure consistency of supply over this time.

Table 2.6 - Net increase in government bonds
Year ending 30 June
$billions
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
5-year
Total
Face value of government bonds issued (market) 8.0 9.0 9.0 9.0 9.0 44.0
Cash proceeds from government bond issue            
Cash proceeds from issue of market bonds 8.4 9.3 8.7 8.6 8.6 43.6
Repayment of market bonds (1.8) - (11.3) (11.5) (7.4) (32.0)
Net proceeds from market bonds 6.6 9.3 (2.6) (2.9) 1.2 11.6
Repayment of non-market bonds (0.6) (0.4) - - - (1.0)
Net repayment of non-market bonds (0.6) (0.4) - - - (1.0)
Net cash proceeds from bond issuance 6.0 8.9 (2.6) (2.9) 1.2 10.6

Source: The Treasury

Notes

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

Capital Expenditure

The Government is forecast to spend a net total of $24.7 billion on capital items over the forecast period, which includes purchasing physical assets (eg, school buildings), advances (eg, student loans), providing capital to Crown entities (eg, New Zealand Transport Agency (NZTA)) and future new capital spending (Table 2.7). Figure 2.13 includes a breakdown of the most significant forecast capital expenditure.

Table 2.7 - Net capital expenditure activity 2015/16 to 2019/20
Year ending 30 June
$billions
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Cumulative
Forecast
Purchase of physical assets (3.2) (2.8) (1.9) (1.8) (1.8) (11.5)
Sale of physical assets 0.2 0.1 0.1 - - 0.4
Net purchase of physical assets (3.0) (2.7) (1.8) (1.8) (1.8) (11.1)
Advances made (2.2) (2.1) (2.5) (2.4) (2.2) (11.4)
Repayment of advances 1.6 1.5 2.0 2.0 2.0 9.1
Net advances (0.6) (0.6) (0.5) (0.4) (0.2) (2.3)
Investments (2.1) (2.0) (1.6) (1.5) (1.5) (8.7)
Return of investments 0.1 - 0.1 - - 0.2
Net investments (2.0) (2.0) (1.5) (1.5) (1.5) (8.5)
Top-down capital adjustment 0.6 0.1 (0.1) 0.1 0.1 0.8
Future new capital spending (0.5) (0.8) (0.7) (0.7) (0.9) (3.6)
Net capital spending (5.5) (6.0) (4.6) (4.3) (4.3) (24.7)

Source: The Treasury

Figure 2.13 - Forecast capital activity for 2015/16 to 2019/20 by significant spending
Figure 2.13 - Forecast capital activity for 2015/16 to 2019/20 by significant spending   .
Source:  The Treasury

Net purchases of physical assets represents forecast spending by core Crown agencies to maintain their existing asset base and includes spending on defence equipment and school property and also includes capital spending related to the Canterbury earthquakes (refer to the box on Canterbury earthquake costs on page 36).

Net investments largely represent capital injections to Crown entities, to expand their asset base, and are estimated to be between $1.5 billion and $2.0 billion a year. The largest capital injections across the forecast period are to NZTA for state highways (between $1.1 and $1.3 billion each year of the forecast).

Net advances largely relate to the issuance and repayment of student loans. Student loan issuances peak at $1.8 billion in 2020 with repayments of $1.6 billion forecast in the same year.

The capital allowance for Budget 2016 has been set at $1.7 billion which includes the $700 million previously set aside in the Future Investment Fund. Around $1.0 billion of the Budget 2016 allowance has already been allocated with $0.7 billion remaining to be allocated. Capital allowances of $0.9 billion are forecast in Budget 2017 before growing at a rate of 2.0% per year for subsequent budgets.

New capital spending is expected to be allocated in future Budgets. The new capital spending for each Budget is spread over four fiscal years reflecting the assumed profile of future spending. This profile is illustrated in Figure 2.14.

Figure 2.14 - New capital spending (capital allowances)
Figure 2.14 - New capital spending (capital allowances)   .
Source:  The Treasury

Figure 2.15 sets out a history of capital expenditure over the past 10 years and includes the forecast capital activity to 2019/20. The graph excludes contributions to the NZS Fund (2006-2010 years) and also excludes proceeds from the Government Share Offer programme in 2012-2014 (a total of $4.7 billion) which were used to fund capital expenditure.

Figure 2.15 - Net capital spending history
Figure 2.15 - Net capital spending history   .
Source:  The Treasury

Capital spending is expected to increase in 2016 (largely owing to delayed expenditure from 2014/15) and increase again in 2017 largely owing to a significant portion of the Budget 2016 spending expected to occur in that year (discussed above).

Total Crown Balance Sheet

Increasing operating balance surpluses result in a stronger balance sheet...

Net worth attributable to the Crown is forecast to grow in nominal terms across the forecast period largely owing to forecast operating balance surpluses. Beyond 2016, net worth attributable to the Crown is expected to grow by $20.7 billion to stand at $107.2 billion by 2019/20, increasing as a share of nominal GDP to reach 36.2% by 2019/20 (Figure 2.16).

Figure 2.16 - Net worth attributable to the Crown
Figure 2.16 - Net worth attributable to the Crown   .
Source:  The Treasury

...with assets increasing by $35.3 billion over the forecast period...

Total assets are forecast to grow by $35.3 billion over the forecast period to $314.0 billion in 2019/20, made up of additional investments in assets (both physical and financial) of $70.1 billion, partially offset by reductions (largely depreciation) of $34.8 billion.

The largest asset growth over the forecast period is in the social assets portfolio (eg, schools, hospitals and social housing) which is expected to increase by $16.7 billion to be $155.9 billion in 2019/20 (Figure 2.17) over the forecast period. This growth reflects increases in future new capital spending, property, plant and equipment and student loans.

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

The financial asset portfolio is expected to increase by $10.8 billion to be $97.8 billion in 2019/20, reflecting investment growth in the large investment portfolios (NZS Fund and ACC), partly offset by a reduction in the Treasury’s New Zealand Debt Management Office (NZDMO) financial assets to help fund the expected cash shortfall.

The commercial asset portfolio is expected to increase by $7.8 billion over the forecast period to be $60.3 billion in 2019/20, with growth coming from SOEs' investment in physical assets and growth in Kiwibank mortgages.

What is net worth attributable to the Crown and why does it matter?

The Treasury calculates a range of fiscal indicators to help assess the relationship between fiscal policy and the economy. These include net debt and net worth measures. Historically, net debt has been used as the primary indicator of fiscal sustainability[19] as it is reasonably well understood, relatively stable (compared to other measures) and internationally comparable. However, as net debt excludes a range of Crown assets and liabilities it is a relatively narrow measure of fiscal sustainability. Net worth provides a much fuller picture about the fiscal sustainability of the Government.

Net worth measures the difference between the Crown's total assets and its liabilities. However, not all of this net worth is attributable to the Crown. Minority interest shareholdings in Government entities (eg, Air New Zealand, Mighty River, Meridian Energy and Genesis Energy) are entitled to part of the net worth of the companies they have invested in. The Crown owns the rest. Net worth attributable to the Crown is a measure of the Crown's share of the balance sheet.

A positive level of net worth indicates that the Crown broadly has sufficient assets to meet its liabilities. However, net worth is a measure at a point in time. It does not include an assessment of potential risks or future activities. Therefore it is most useful in conjunction with other information such as assessments of contingent liabilities and fiscal risks.

Prudent net worth should provide the Crown with a sufficient buffer, given the Crown's current fiscal position and expected future fiscal outcomes, such that fiscal sustainability is not jeopardised by fiscal shocks (such as natural disasters or significant deterioration in the global economy).

Figure 2.18 illustrates how net worth has changed over the past 20 years and how it is expected to change over the next five years. While net worth declined sharply between 2009 and 2011 reflecting the global financial crisis and Canterbury earthquakes, recovery has been underway since 2012, and further increases are forecast in nominal terms by the end of the forecast period (although it takes much longer as a percentage of nominal GDP).

Figure 2.18 - Net worth attributable to the Crown
Figure 2.18 - Net worth attributable to the Crown   .
Source:  The Treasury

Over time the change in net worth is largely attributable to two things:

  • whether the Crown is making deficits or surpluses, and
  • revaluations of long-term assets such as land and buildings (where the asset's current value is higher than its original cost).

Figure 2.19 shows how the composition of net worth has changed over time. Ten years ago net worth was fairly evenly split between cumulative operating surpluses and asset revaluations. However, since that time the Crown has reported operating deficits, decreasing net worth, while revaluations of the Crown's property, plant and equipment have increased net worth.

Figure 2.19 - Composition of net worth attributable to the Crown
Figure 2.19 - Composition of net worth attributable to the Crown   .
Source:  The Treasury

The size of the balance sheet does not determine net worth. For example, borrowing to fund capital expenditure, while increasing the size of the balance sheet, does not impact net worth (assets and liabilities have increased by the same amount). Similarly, the composition of the balance sheet does not impact net worth (eg, selling property for cash does not change total assets). However, both the size and composition of the balance sheet can influence the risk profile of the Crown and therefore the ‘buffer' required against future events.

Figure 2.20 shows the correlation between the net worth and net debt fiscal indicators.

Figure 2.20 - Net worth attributable to the Crown and core Crown net debt
Figure 2.20 - Net worth attributable to the Crown and core Crown net debt   .
Source:  The Treasury

Net worth differs from core Crown net debt as net worth:

  • is a total Crown measure (whereas net debt excludes SOEs, Crown entities and the NZS Fund), and
  • includes all assets and liabilities (whereas net debt only includes liquid assets and borrowings).

Net worth should therefore be monitored in conjunction with net debt when assessing fiscal sustainability. Rising net worth means the Government is well placed to meet the costs that could be posed by a possible future shock.

Notes

  • [19]Fiscal sustainability is a term that is commonly used in relation to the affordability of government taxation and spending programmes over the long term.

...while liabilities are expected to remain fairly constant from 2016/17

The Crown's liabilities increase in 2016/17 and then begin to fall in 2017/18, before increasing again slightly to reach a peak of $200.7 billion in 2019/20 (Figure 2.21).

Figure 2.21 - Total Crown liabilities
Figure 2.21 - Total Crown liabilities   .
Source: The Treasury

Of the $14.3 billion total increase, $6.1 billion is driven by the financial sector and is largely owing to borrowings which start to decline before increasing again slightly in the last year of the forecast.

Borrowings are mostly undertaken by NZDMO (which manages the Crown's bond programme), the Reserve Bank and Kiwibank, and are forecast to peak at $126.9 billion in 2016/17 before decreasing slightly to stand at $125.6 billion by 2019/20.

The commercial liability portfolio is expected to increase by $7.3 billion over the forecast period to stand at $39.4 billion in 2019/20, with growth coming mainly from Kiwibank (consistent with growth in their loan book).

Insurance liabilities are mostly held by ACC, EQC and Southern Response. Insurance liabilities are expected to decrease in the current year owing to further progress in settling EQC and Southern Response claims liabilities. Insurance liabilities then increase again in 2016/17 to reach $38.6 billion in 2019/20 primarily relating to the ACC claims liability.

Retirement plan liabilities, primarily GSF, are forecast to be $10.7 billion in 2015/16 falling to $8.7 billion by 2019/20.

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

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

Refer to the Risks and Scenarios chapter page 57 for more details.

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

Apart from market factors, valuations are subject to a number of judgements and estimates. In general, as time goes on, better information becomes available and initial estimates are updated to reflect current information. Some examples of this include: ACC rehabilitation costs; earthquake-related liabilities; and future wage growth of students, which directly impacts the value of the student loan book.

...while other risks remain

In addition to those items on the balance sheet there are a number of liabilities (and assets) that may arise in the future but are not yet included in our forecasts, either because they are contingent on an uncertain future event occurring (eg, outcome of litigation) or the liability cannot be measured reliably. If these liabilities crystallise, there will be associated costs with a negative impact (or positive in the case of contingent assets) on the operating balance or net debt. Refer to page 86 for a list of the contingent liabilities at 31 October 2015.

The Treasury prepares its forecast balance sheets in accordance with generally accepted accounting practice (GAAP). However, sometimes it can be useful to look at potential assets and liabilities that are excluded from the standard GAAP balance sheet. When these are measured and added to the standard GAAP balance sheet, these are referred to as the comprehensive balance sheet. The comprehensive balance sheet concept is discussed in further detail in the Treasury's Investment Statement published in 2014. Refer www.treasury.govt.nz/government/investmentstatements/2014/07.htm

Comparison to the Budget Update

The Budget Update was published on 21 May 2015. Since then, there have been a number of developments that have significantly impacted the fiscal outlook. Table 2.8 below summarises the changes in the key fiscal indicators since then.

Table 2.8 - Key fiscal indicators compared to the Budget Update
Year ending 30 June
$billions
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Core Crown tax revenue          
Half Year Update - 68.4 71.0 75.1 79.9
Budget Update 66.1 68.9 72.5 76.8 80.5
Actual 66.6 - - - -
Change 0.5 (0.5) (1.5) (1.7) (0.6)
Core Crown expenses          
Half Year Update - 74.9 76.8 80.7 83.3
Budget Update 73.1 74.9 77.1 80.8 83.4
Actual 72.4 - - - -
Change 0.7 - 0.3 0.1 0.1
OBEGAL          
Half Year Update - (0.4) 0.4 1.0 3.5
Budget Update (0.7) 0.2 1.5 2.0 3.6
Actual 0.4 - - - -
Change 1.1 (0.6) (1.1) (1.0) (0.1)
Residual cash          
Half Year Update - (5.4) (4.7) (2.8) 0.5
Budget Update (2.7) (4.2) (1.6) (0.2) 1.7
Actual (1.8) - - - -
Change 0.9 (1.2) (3.1) (2.6) (1.2)
Net core Crown debt          
Half Year Update - 65.9 70.7 73.4 72.8
Budget Update 61.7 65.6 67.1 67.2 65.5
Actual 60.6 - - - -
Change 1.1 (0.3) (3.6) (6.2) (7.3)
Net worth attributable to the Crown          
Half Year Update - 86.9 89.6 93.1 99.3
Budget Update 74.8 77.8 82.1 87.0 93.6
Actual 86.5 - - - -
Change 11.7 9.1 7.5 6.1 5.7

Source: The Treasury

 A weaker economic outlook has adversely impacted the fiscal outlook...

Slowing economic growth since the Budget Update has adversely impacted the fiscal outlook, with tax revenue now expected to be lower in each year of the forecast period.

Core Crown tax revenue forecasts have been revised down by a combined $4.3 billion across the forecast period, mainly owing to the cumulative $17 billion reduction in the forecasts (from 2014/15 to 2018/19) for nominal GDP. Forecasts for most of the major tax types have been reduced with the exception of corporate tax which is higher than at the Budget Update (Figure 2.22). Table 2.9 below summarises the movements by tax type since the Budget Update.

Figure 2.22 - Movement in core Crown tax revenue since the Budget Update
Figure 2.22 - Movement in core Crown tax revenue since the Budget Update   .
Source:  The Treasury

Table 2.9 - Reconciliation of the change in core Crown tax revenue

 
Year ending 30 June
$billions
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Movement in core Crown tax owing to:        
Source deductions - (0.4) (0.6) (0.5)
Other persons' tax - (0.4) (0.3) (0.1)
Corporate tax - (0.2) 0.2 0.7
RWT (0.2) (0.4) (0.5) (0.3)
GST (0.3) (0.3) (0.6) (0.3)
Other taxes - 0.2 0.1 (0.1)
Total movement in core Crown tax revenue (0.5) (1.5) (1.7) (0.6)
Plus: Budget Update's tax base 68.9 72.5 76.8 80.5
Core Crown tax revenue at Half Year Update 68.4 71.0 75.1 79.9
As a % of GDP 27.9% 27.8% 27.7% 28.1%
Core Crown tax movements consist of:        
Policy initiatives - - - 0.2
Forecast changes (0.5) (1.5) (1.7) (0.8)

Source: The Treasury

As a result of the weaker nominal GDP outlook and lower interest rate track, forecasts for most of the major tax types have been reduced:

  • A lower forecast for compensation of employees (aggregate wages and salaries) has contributed to the source deductions forecasts being reduced by $1.5 billion across the forecast period.
  • The forecasts for entrepreneurial income, mainly on the farming side, are lower than in the Budget Update which has caused a $0.8 billion reduction in the other persons' tax forecast.
  • Interest rate forecasts are lower than in the Budget Update, which was the main contributor to the $1.4 billion reduction in interest RWT forecasts across the forecast period.
  • The Goods and Services Tax (GST) forecast is $1.5 billion lower in total than in the Budget Update owing to weaker forecasts of nominal consumption.

In contrast to the above tax types, corporate tax forecasts are, in total, higher than in the Budget Update for a number of reasons:

  • Portfolio Investment Entity (PIE) tax was around 25% higher than forecast in 2014/15 and this is expected to persist into the future, although there will continue to be considerable volatility around the trend in this tax.
  • Although initially lower, the outlook for profits through the latter part of the forecast period is higher than in the Budget Update, providing a boost to corporate tax in 2018/19 and 2019/20.
  • Based on the most recent published financial statements of companies operating in the financial sector, forecasts of income tax from that sector have been revised up.

...with the fiscal outlook now more subdued than previously forecast

Overall, OBEGAL is expected to be lower in each year of the forecast compared to the Budget Update (Table 2.10).

Table 2.10 - Changes in OBEGAL since the Budget Update

 
Year ending 30 June
$billions
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
OBEGAL - 2015 Budget Update 0.2 1.5 2.0 3.6
Changes in forecasts:        
Economic factors        
       Tax revenue (0.5) (1.5) (1.7) (0.6)
       Social assistance - (0.2) (0.2) -
Other factors        
       GSF pension expenses 0.1 0.1 0.1 0.1
       ACC forecasts 0.2 0.5 1.0 0.7
       Net finance costs 0.1 (0.1) (0.1) (0.2)
       Other changes (0.5) 0.1 (0.1) (0.1)
Total changes since the Budget Update (0.6) (1.1) (1.0) (0.1)
OBEGAL - 2015 Half Year Update (0.4) 0.4 1.0 3.5

Source: The Treasury

An increase in expected social assistance spending in 2016/17 and 2017/18 is a result of a softer labour market outlook, causing an increase in recipient numbers compared to the Budget Update (particularly in Jobseeker Support and Sole Parent Support benefits). Jobseeker Support benefits increase by a total of around $430 million (6.9%) across the forecast period. Annual increases of between $61 million (3.8%) and $147 million (9.6%) compared to the Budget Update are expected with the largest increase in the 2017/18 year. However, this trend is expected to start unwinding by 2018/19 with the increase since the Budget Update forecast to be $77 million (5.1%).

The GSF liability has reduced since the Budget Update mainly owing to higher discount rates. The reduction in the liability results in lower forecast GSF pension expenses as the interest unwind is now less than previously expected.

Updated ACC forecasts have resulted in an increase in OBEGAL in each year of the forecast and are owing to a number of factors:

  • Similar to the GSF liability, higher discount rates have resulted in a reduction in the ACC claims liability and lower insurance expenses across all years than previously forecast.
  • In September, the Government made the decision to stop the residual levy from 1 April 2016. This decision had the effect of bringing forward costs from later forecast years into the 2014/15 year.
  • From 2017/18, ACC levy revenue is expected to be higher than previously forecast owing to assumptions around levy rate reductions being based on ACC's agreed funding policy.

Net finance costs are affected by both favourable and unfavourable factors:

  • Decreases in short-term interest rates have resulted in a reduction in interest income. However, the impact in 2015/16 is somewhat offset by the starting position at 2014/15 being stronger than expected.
  • The lower residual cash forecast has led to an increase in the Government's borrowing requirements resulting in increased debt servicing costs.
  • Lower medium-term interest rates have resulted in a reduction in finance costs and offset some of the unfavourable impacts mentioned above.

Other changes include re-phasing of operating expenses previously forecast to occur in 2014/15 but now expected to occur in 2015/16.

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

Residual cash deficits increase by $8.1 billion across the forecast period compared to the Budget Update. The majority of the weaker cash position is a result of reduced tax receipts ($5.6 billion), higher benefit payments ($0.4 billion) and higher net finance costs ($0.8 billion) over the forecast horizon.

On the capital side, net spending is now expected to be $0.7 billion more than previously forecast largely owing to the increase in the Budget 2016 capital allowance of $1.0 billion and also transfers of unspent capital expenditure from the 2014/15 year.

The increase in cash deficits was partially offset by a $1.1 billion lower actual net debt position in 2014/15 than previously forecast. As a result, net core Crown debt is forecast to be $7.3 billion higher by 2018/19 when compared to the Budget Update.

Fiscal Forecast Assumptions

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

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

A summary of the key economic forecasts that are particularly relevant to the fiscal forecasts is provided in Table 2.11 below (on a June-year-end basis to align with the Government's balance date).

Table 2.11 - Summary of key economic forecasts used in fiscal forecasts
Year ending 30 June 2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Real GDP1 (ann avg % chg) 3.0 2.1 2.6 3.7 2.7 2.1
Nominal GDP2 ($m) 240,591 244,923 254,972 271,233 284,874 296,300
CPI (ann avg % chg) 0.6 1.1 2.0 1.9 2.1 2.2
Govt 10-year bonds (ann avg, %) 3.8 3.3 3.5 4.2 4.6 4.8
5-year bonds (ann avg, %) 3.6 3.0 3.4 4.0 4.5 4.7
90-day bill rate (ann avg, %) 3.6 2.8 2.6 3.2 4.1 4.5
Unemployment rate (ann avg, %) 5.8 6.3 6.2 5.4 4.7 4.5
Employment (ann avg % chg) 3.2 0.8 1.5 2.1 2.3 1.3

Notes:

  1. Production measure.
  2. Expenditure measure.

Source: The Treasury

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

Government decisions

The forecasts incorporate government decisions and other circumstances known to the Government and advised to the Treasury up to 27 November 2015.

Tax revenue

Tax policy changes enacted and announced by the Government will take place as planned and will affect tax revenue and receipts.

Earthquake costs

Expenditure (accrual measure) is forecast based on estimates of when key decisions will be taken.  The timing of cash payments is based on estimates of when actual spending will take place.  Refer to page 36 for further discussion.

Operating allowance

Operating allowances are a net $1.0 billion for Budget 2016, increasing to $2.5 billion in Budget 2017 and reducing to $1.5 billion in Budget 2018.  For further details, see note 9 of the Forecast Financial Statements.

Provision for new capital spending

Capital allowances are $1.7 billion in Budget 2016 and $0.9 billion in Budget 2017 then growing at a rate of 2.0% per year for subsequent Budgets.  For further details, see note 9 of the Forecast Financial Statements.

Social housing

The Government has announced social housing reforms as a key priority for this term.  Cabinet has agreed the general direction of the Social Housing Reform programme.  This includes transferring HNZC stock to non-government providers to create a competitive market for social housing.  The level of uncertainty, particularly around the structure of the transactions, makes it difficult to quantify the fiscal impacts, and therefore they are not included in the forecasts, with the exception of funding to the Tāmaki Redevelopment Company (TDC) and the transfer of social housing assets from HNZC to TDC which is included in these forecasts.

Finance cost on new bond issuances

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

Top-down adjustment

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

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

Top-down adjustments to operating and capital expenses
Year ending 30 June
$billions
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Operating 1.0 0.6 0.5 0.5 0.5
Capital 0.6 0.1 (0.1) 0.1 0.1

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

Property, plant and equipment

For the purposes of the Forecast Financial Statements, no revaluations of property, plant and equipment are projected beyond the current year.  Valuations as recorded for the 2015 annual financial statements and any additional valuations that have occurred up to 30 September 2015 are included in these forecasts. 

Student loans

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

Investment rate of returns

The forecasts incorporate the actual results to 30 September 2015.  Beyond this time, gains on financial instruments are based on long-term benchmark rates of return for each portfolio.

GSF and ACC liabilities

The GSF and ACC liabilities included in these forecasts have been valued as at 30 September 2015 and 30 June 2015 respectively.  The ACC liability has also been adjusted for the 30 September 2015 discount rate.  Both liabilities are valued by projecting future cash payments, and discounting them to the present.  These valuations rely on historical data to predict future trends and use assumptions such as inflation and discount rates.  Any changes in actual payments or economic assumptions would affect the present fiscal forecast.  For example, if the discount rate decreases, the value of the liabilities would increase.

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

NZS Fund contributions

No contribution is assumed in the forecast period in line with the Government's stated intentions to commence contributions once net core Crown debt has fallen to 20.0% of GDP as set out in the Fiscal Strategy Report (FSR).

NZS Fund contributions
Year ending 30 June
$billions
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Annual contribution1 1.8 1.9 2.2 2.3 2.3
Actual contribution - - - - -

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

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

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

Risks and Scenarios

Overview

  • This chapter outlines the main economic and fiscal risks associated with the central forecast. The first part of the chapter outlines the key risks to the economic outlook. The second part of the chapter presents two alternative scenarios for the economy, and the remainder focuses on general fiscal risks. At present, risks to the global economy are skewed to the downside, while domestic risks are more balanced.
  • Internationally, the risks with potentially the largest impact on the New Zealand economy relate to the demand for commodities and global inflation. These include a sharp slowing of growth in China and its impact on other emerging market economies, the impact of the unwinding of easy US monetary policy on emerging economies and persistent weak inflation in many advanced economies. Recent volatility in dairy prices has increased the uncertainty about their future direction.
  • Domestically, the risks with potentially the largest impact on the New Zealand economy relate to the impact on agriculture from El Niño, whether inflation dynamics have changed, the demand response to monetary policy, uncertainty around productivity growth, the length and peak of the current migration cycle and house price growth.
  • Two scenarios are presented that show possible ways in which the New Zealand economy could deviate from the central forecast. Scenario One is based on slower potential growth, demand less responsive to monetary policy and a longer period before historical inflation relationships re-assert themselves. In this scenario, nominal GDP, tax revenue and OBEGAL would be lower. Scenario Two is based on higher dairy prices, increased tourism and a longer period of elevated net migration. This scenario lifts nominal GDP, tax revenue and OBEGAL over the forecast period.
  • In addition to the risks associated with the economy, the Crown is also subject to expenditure and balance sheet risks. In particular, volatility in financial asset prices and interest rates can have a significant impact on the Crown's fiscal position.

Economic Risks

Key judgements in the forecasts (see Key economic forecast assumptions and judgements box in the Economic Outlook chapter) are among the main risks to the economic forecasts.

Risks to global growth continue to be skewed to the downside. The US recovery remains on track with tightening of US monetary policy expected to begin soon, which may lead to the unintended effect of destabilising emerging market economies. Growth in China continues to slow, with risks of a sharp slowdown, while growth in Australia may remain below trend for longer. The realisation of any of these downside risks to the world economy would weigh on growth in the New Zealand economy. Risks remain around demand and prices for New Zealand's key commodity exports, with El Niño possibly leading to reduced supply through drought. Geopolitical tensions in the Middle East and terrorist attacks in Europe pose a risk to financial market and economic stability.

The outlook for domestic demand is balanced. High net migration, increased visitor arrivals and house prices present upside risks, while uncertainty around the effectiveness of monetary policy, inflation dynamics and productivity growth present downside risks.

Normalisation of monetary policy is expected in the US...

The US Federal Reserve is expected to begin tightening monetary policy in late 2015 or early 2016 owing to continued improvement in the economy and the labour market. However, uncertainty regarding the timing of the first move and the speed of tightening may lead to further financial market volatility, reducing confidence and subsequently demand. Once tightening has started, higher interest rates in the US may increase the attractiveness of US assets and lead to a re-pricing of risk, following a period of low risk premiums with investors seeking high-yielding assets. Increased demand for US assets and re-pricing of risk may prompt large capital outflows from emerging market economies, as well as tighter credit conditions and weaker exchange rates. If this were to eventuate, growth in emerging market economies would likely be softer, leading to weaker demand (and prices) for New Zealand exports.

...while there are risks of a sharper slowdown in China

In contrast to the US economy, risks to the growth outlook for China remain skewed to the downside. Annual GDP growth was on the lower side of the Government's target (around 7%) in September 2015 (6.9%) and economists are expecting a downward revision for 2016. In addition, financial market developments in mid-2015 - falls in the Chinese stock market and the depreciation of the Renminbi after liberalisation - have increased concerns that the Chinese economy is weaker than headline GDP indicates. A slowdown in China may be exaggerated by authorities not acting to support activity in order to avoid creating further imbalances, especially if the key risks of high levels of local government debt and a further slowdown in the housing market increase.

The direct effect on New Zealand of a slowdown in China may be offset to some extent by China's structural rebalancing towards consumption from investment as the main driver of growth. A successful rebalancing into more consumption-based growth would be positive for New Zealand by increasing Chinese demand for our primary products. However, a sharp slowdown in China’s growth would weaken demand for Australia and other trading partners in Asia, in turn lowering their income and demand for their exports, directly affecting New Zealand. Other risks to the Australian economy centre on the more gradual-than-expected transition in the growth drivers from mining to non-mining sectors, resulting in a longer period of below-trend growth. There is also some uncertainty about Australia's trend growth rate with slower population and productivity growth, a need for debt consolidation and lower trading partner growth.

Effect of El Niño is uncertain...

The nature and severity of any drought impacts from El Niño on agricultural supply and prices are uncertain, along with the eventual impact on economic growth (see El Niño box in the Economic Outlook chapter). If the drought was severe, it could lead to a sharp drop in dairy production and, initially, a further pick-up in meat production as more livestock may be sent to slaughter. In turn, dairy prices would likely rise and meat prices would initially decline, while the overall impact on nominal growth would be uncertain. On the other hand, a mild El Niño impact could lead to no material change in production or prices for New Zealand.

There is similar uncertainty about the effect of El Niño on other countries, with negative effects of reduced production for commodity exporters, while any rise in prices is positive for commodity exporters and negative for commodity importers. If the price of staple foods were to increase as a result of El Niño, this would reduce real incomes in emerging market economies and demand for other products, weakening global demand further.

...as is the evolution of dairy exports

As well as the concern around El Niño, the evolution of supply of and demand for dairy exports continues to generate uncertainty. Concerns of a temporary reduction in domestic supply from drought may have held prices up, although prices remain at low levels and are expected to recover only gradually. Growth in international production may also ease in response to lower prices, although these effects seem to be limited at this stage with the removal of the EU quotas, and US subsidies and EU intervention prices distorting price signals. On the other hand, Chinese dairy demand may pick up faster than expected, leading to dairy prices recovering earlier than in the central forecast.

Similarly, prices for other key international commodities are expected to remain subdued for an extended period of time, although the effects of this are uncertain. On balance, low oil prices are expected to be beneficial for growth in our trading partners. However, this positive effect may, at least temporarily, be largely offset by weaker export commodity prices in those countries as a result of generally weaker global demand.

Inflation remains low in advanced economies...

Falls in oil and other commodity prices, as well as weaker economic growth, have kept inflation low in most economies. Core inflation (excluding food and energy; ie, direct commodity price effects) remains below target in the major advanced economies, including the US. As interest rates are close to the zero lower bound, in the event of further weakness in advanced economiesthere is limited scope for increased monetary stimulus to provide a boost to inflation. If ongoing weakness in global inflation continues, tradables inflation in New Zealand is likely to remain low, despite the lower New Zealand dollar.

...possibly compounded in New Zealand by a change in inflation dynamics

As well as the potential for weak tradables inflation, the persistent weakness in domestic inflation and lower inflation expectations are generating uncertainty around inflation dynamics (see Why has inflation been surprisingly low? box in the Budget Update 2015 Economic Outlook chapter). In recent times, non-tradables inflation has been weaker than the long-term relationship with the output gap would suggest, and there is a risk that the historical relationship remains weaker for longer or does not re-assert itself. Similarly, the degree and timing of pass-through from the lower New Zealand dollar to tradables inflation may be more subdued than expected, particularly in the current low-inflation environment where businesses may be reluctant to pass on higher costs to consumers. If one or both of these risks were to play out, all else equal, headline inflation would be softer than forecast.

Uncertainty surrounds the sensitivity of demand to monetary policy settings...

Slowing domestic demand growth in New Zealand, despite interest rates considered to be well below estimates of neutral, has led to a questioning of the response of demand to monetary policy. Possible reasons for this may be a lower neutral interest rate than is currently assumed or that businesses and consumers require more incentive to spend because of heightened uncertainty in the current environment. If businesses and consumers are less sensitive to monetary policy than in the past, it would lead to a smaller boost to investment and consumption growth from low interest rates than in the central forecast.

...and labour productivity growth

The assumptions concerning labour productivity growth have significant implications for potential growth and the medium-term real GDP forecasts. Labour productivity growth is comprised of investment in capital and multi-factor productivity (MFP). In the central forecast, MFP growth recovers gradually to its historical average but there is a risk that it remains slower over the medium term. If this were to play out, real income growth would be lower, consistent with the experience of recent years, leading to lower domestic demand and slower growth in both real and nominal GDP (see Composition of growth box in the Economic Outlook chapter). Low productivity growth may reflect a combination of low inflation, interest rates and economic growth (sometimes referred to as ‘secular stagnation’).

Risk remains around the extent of the current migration cycle...

Net migration inflows remain elevated and judgements around the size of the current cycle are a risk to the forecast. Net annual gains are assumed to begin declining from a forecast peak of 62,700 in December 2016 as the weaker outlook for the New Zealand economy reduces its attractiveness for those on work visas and returning New Zealand citizens. It is difficult to gauge the strength and timing of these effects and risks appear biased towards higher migration, particularly with the inflow of students which may lead to structurally higher net migration gains. That said, with the New Zealand labour market and economic outlook materially weaker than a year ago, there is a risk that net migration inflows decline more sharply than in the central forecast, particularly if the Australian labour market materially improves.

Visitor arrivals have also been at all-time highs, leading to robust growth in travel services exports over the first half of 2015. There is a risk that the depreciation of the New Zealand dollar in the middle of 2015 has a larger effect and that higher-than-expected visitor arrivals and/or spending per visitor, particularly from China, lead to stronger export services volumes than incorporated in the central forecast. Similarly, arrivals on student visas are at high levels, with risks biased towards further gains, which would lead to increased education services export volumes.

...with high net migration expected to support housing demand

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

The Canterbury rebuild may provide a smaller contribution to growth than in the central forecast. The residential rebuild appears to have peaked, earlier than previously forecast, and uncertainty persists over the total size of the residential rebuild.

Alternative Scenarios

The following scenarios show how the economy might evolve if some of the key judgements in the central forecast are altered (Table 3.1). They illustrate two of the many ways that the economy may deviate from the central forecast. Scenario One represents the economic impacts if productivity growth is weaker, demand is less responsive to monetary policy and inflation is less responsive to spare capacity than in the central forecast. Scenario Two shows the economic impact if dairy prices recover faster than in the central forecast and if net inward migration and visitor arrivals are higher.

Table 3.1 - Economic and fiscal variables for central forecast and scenarios
March years 2015
Actual
2016
Estimate
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Real GDP
(annual average % change)
           
Main forecast 3.2 2.1 2.4 3.6 3.0 2.2
Scenario One 3.2 1.9 2.1 2.9 2.4 2.1
Scenario Two 3.2 2.3 2.8 3.7 3.0 2.1
Unemployment rate1            
Main forecast 5.8 6.5 6.1 5.3 4.7 4.5
Scenario One 5.8 6.9 6.3 5.5 5.0 4.8
Scenario Two 5.8 6.2 5.8 4.9 4.5 4.5
Nominal GDP
(annual average % change)
           
Main forecast 3.6 2.7 3.0 6.0 5.6 4.1
Scenario One 3.6 2.5 2.0 5.1 4.8 3.9
Scenario Two 3.6 3.4 3.7 6.0 5.1 4.1
Consumers price index (annual % change)            
Main forecast 0.3 1.4 2.1 1.9 2.1 2.2
Scenario One 0.3 1.2 1.7 1.8 1.8 2.0
Scenario Two 0.3 1.4 2.2 2.0 2.3 2.3
Operating balance before gains and losses
(% of GDP)2
           
Main forecast 0.2 -0.2 0.1 0.4 1.2 1.7
Scenario One 0.2 -0.2 -0.1 -0.3 0.2 0.6
Scenario Two 0.2 0.1 0.6 0.9 1.7 2.1
Net core crown debt
(% of GDP)2
           
Main forecast 25.2 26.9 27.7 27.1 25.6 24.0
Scenario One 25.2 27.1 28.4 28.7 28.3 27.8
Scenario Two 25.2 26.4 26.6 25.5 23.6 21.7

Notes:

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

Sources: Statistics New Zealand, the Treasury

Scenario One - Structurally Lower Nominal GDP

Slower potential growth...

In the first scenario, New Zealand's potential growth is slower than in the central forecast. Potential growth is the rate at which the economy can expand while maintaining stable inflation and depends on capital (eg, the number of buildings, machines and computers), labour (how many people are available to work and the hours they are willing to work) and MFP (the efficiency with which capital and labour are used). In the past few years MFP has made only small contributions to potential growth, but in the central scenario the contributions are expected to gradually increase. This scenario is based on what would happen if the contribution from MFP remains at its current low level, with potential growth averaging 2.1% over the next five years instead of around 2.5% (Figure 3.1).

Figure 3.1 - Potential growth
Figure 3.1 - Potential growth   .
Source:  The Treasury

...change in responsiveness of demand...

Domestic demand is assumed to be less responsive to monetary policy than in the central scenario. This means that, for a given interest rate, the impulse to spend for consumers and businesses is lower. Possible reasons for this may be a lower neutral interest rate than in the central scenario (associated with lower potential growth) or that businesses and consumers require more incentive to spend because of heightened uncertainty in the current environment. If the current level of interest rates is not stimulatory enough to boost growth, real investment (both business and residential) and private consumption growth would be weaker than in the central forecast (Figure 3.2 and Figure 3.6). Therefore, the scenario assumes the Reserve Bank reduces the OCR by an additional 0.5 percentage points in the second half of 2016 and interest rates remain lower by that amount for the remainder of the forecast period. This provides a boost to investment and private consumption growth, although it remains below the central track.

Figure 3.2 - Real residential investment
Figure 3.2 - Real residential investment   .
Source: Statistics New Zealand, the Treasury

...and inflation less responsive to spare capacity…

The historical relationship between non-tradables inflation and the output gap is assumed to not re-assert itself until mid-way through the forecast period. This means that non-tradables inflation is weaker for any given level of spare capacity in the interim. As the output gap estimate is similar to the central scenario (weaker supply is offset by weaker demand), non-tradables inflation slows to 0.8%, compared with 1.3% in the central forecast (Figure 3.3).

Figure 3.3 - Non-tradables inflation
Figure 3.3 - Non-tradables inflation   .
Source: Statistics New Zealand, the Treasury

The pass-through from the lower New Zealand dollar to tradables inflation is also subdued relative to the central forecast, although a lower New Zealand dollar than in the central forecast (owing to lower interest rates) leads to slightly higher tradables inflation in 2016. Weaker non-tradables inflation more than offsets stronger tradables inflation, resulting in softer headline inflation over the forecast period. When non-tradables inflation becomes more responsive to the closing output gap in mid-2017, inflation starts to pick up but it does not return to 2.0% until 2020.

…lead to softer real and nominal GDP

Over the forecast period, weaker real investment and private consumption, coupled with lower potential growth, lead to weaker real GDP growth throughout the forecast period. Softer demand also leads to weaker jobs growth which, along with weaker inflation, leads to lower wage growth. As consumers have less income, real private consumption growth only picks up slightly with the boost from lower interest rates. Real GDP growth peaks at 2.9%, compared to 3.7% in the central forecast. Weaker real growth, combined with lower inflation, leads to softer nominal GDP growth. Over the course of the forecast period, nominal GDP is a cumulative $25.5 billion lower than in the central forecast.

Core Crown tax revenue is a cumulative $8.8 billion lower over the forecast period in this scenario. Lower nominal consumption and residential investment reduce GST revenue by a cumulative $2.1 billion over the forecast period. A lower value of output in the economy means business profits are reduced, resulting in corporate taxes being a cumulative $2.5 billion lower. The weaker labour market and lower labour incomes reduce source deductions revenue by $3.2 billion over the forecast period.

Core Crown expenses are moderately higher than in the central forecast, largely owing to increased debt financing costs. Fiscal policy is assumed to remain unchanged from the central forecast. In this scenario, OBEGAL does not return to surplus again until the June 2019 year (Figure 3.4), two years later than in the central forecast. As a consequence, net core Crown debt peaks at 28.7% of nominal GDP in the June 2018 year, rather than peaking at 27.7% a year earlier, as in the central forecast (Figure 3.8).

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

Scenario Two - Stronger Dairy Prices and Export Services

Higher dairy prices...

In the second scenario, global dairy prices recover faster than in the central forecast, which may be owing to faster-than-expected recovery in Chinese dairy demand. Higher export prices for New Zealand, without an offset from higher import prices, leads to the terms of trade not declining as far and recovering earlier (Figure 3.5).

Figure 3.5 - SNA terms of trade
Figure 3.5 - SNA terms of trade   .
Source:  Statistics New Zealand, the Treasury

...and more arrivals to New Zealand...

At the same time, international demand is more responsive to the low New Zealand dollar than in the central scenario, leading to stronger services export growth. This is partly from higher tourist arrivals, particularly from China, supported by a continuing increase in flights to New Zealand, and boosted by increased spending per visitor. The low New Zealand dollar also makes New Zealand a more attractive international study destination, increasing the number of international students and boosting export education services growth.

As well as increased student arrivals, the scenario includes increased work visa and New Zealand citizen arrivals, which may be motivated by a weaker Australian labour market and attracted by the stronger growth in the New Zealand economy as a result of increased tourism activity and higher dairy prices. Annual net migration inflows remain around 63,000 until June 2016, providing a cumulative 11,000 more net migrants than in the central forecast.

...support a lift in private consumption and investment...

In rural regions most exposed to the dairy export sector, the earlier recovery in dairy prices increases income levels, leading to higher private consumption growth than in the central forecast (Figure 3.6). This momentum carries through to other parts of the country and stronger private consumption growth continues, compounded by more immigrants. Higher population growth also leads to stronger housing demand, higher house prices and subsequently increased residential investment. In response to buoyant trading conditions, businesses increase capital investment and employment. Stronger growth in labour demand leads to the unemployment rate declining below 6.0% in early 2017, slightly earlier than in the central forecast.

Figure 3.6 - Real private consumption growth
Figure 3.6 - Real private consumption growth   .
Source:  Statistics New Zealand, the Treasury

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

Stronger domestic demand results in higher inflation over 2016 than in the central forecast, owing to higher non-tradables inflation. Annual inflation rises to 2.0% by the middle of 2016, one quarter earlier than in the central forecast. Higher domestic demand and increased inflationary pressures in the economy lead the Reserve Bank to begin tightening monetary policy three quarters earlier than in the central forecast (Figure 3.7). Higher interest rates cause private consumption, house price and residential investment growth to slow from 2018, with growth slightly below the central forecast at the end of the projection.

Figure 3.7 - 90-day interest rates
Figure 3.7 - 90-day interest rates    .
Source:  Statistics New Zealand, the Treasury

Real GDP growth over the next two years is faster than in the central forecast, at 2.3% and 2.8% in the March 2016 and 2017 years respectively. The higher terms of trade and slightly stronger inflation boost nominal GDP growth further. Nominal GDP is a cumulative $15.1 billion higher than in the central forecast by the end of June 2020, with most of this occurring over the first three years of the scenario.

Higher nominal GDP lifts tax revenue and the operating balance

Core Crown tax revenue is a cumulative $5.5 billion higher than in the central forecast over the period to June 2020. Increased nominal consumption and residential investment boost GST revenue by a cumulative $0.8 billion over the forecast period. Greater business profitability results in corporate taxes being a cumulative $1.3 billion higher. The stronger labour market and higher wage growth lift source deductions revenue by $1.9 billion over the forecast period. An earlier increase in short-term interest rates flows through to a cumulative $0.6 billion rise in RWT.

Core Crown expenses are lower than in the central forecast owing to a lower number of recipients of unemployment-related benefits. OBEGAL remains in surplus over the entire forecast period, rather than a deficit in the 2016 year in the central forecast (Figure 3.4). The OBEGAL surplus remains larger than in the central forecast over the later years. Net core Crown debt peaks at a lower level of 26.6% of GDP in the June 2017 year, and it subsequently declines faster to 21.7% of GDP in the June 2020 year (Figure 3.8).

Figure 3.8 - Net core crown debt
Figure 3.8 - Net core crown debt   .
Source:  The Treasury

General Fiscal Risks

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

Revenue Risks

One of the major sources of risk to the fiscal position arises from the inherent uncertainty about future tax revenue. The amount of tax revenue that the Crown receives in a given year is closely linked to the performance of the economy.

Figure 3.9 plots the central tax revenue forecast, along with confidence intervals around these forecasts based on the Treasury's historical tax forecast variances and the assumption of an even balance of risks around the central forecast.[20] The outermost shaded area captures the range ±$7.2 billion in the June 2020 year, within which actual tax outturns are expected to fall 80% of the time.[21]

Figure 3.9 - Core Crown tax revenue uncertainty
Figure 3.9 - Core Crown tax revenue uncertainty   .
Source:  The Treasury

The tax revenue forecasts from the two scenarios are also shown in Figure 3.9. The 2008/09 global financial crisis showed that exogenous shocks can have severe impacts on government revenue. Should any of the uncertainties outlined in the Economic Riskssection eventuate, Crown revenue would be different from forecast, with Scenarios One and Two being examples of possible outcomes.

Based on average historical forecast variances, Figure 3.9 suggests that an annual tax revenue outturn associated with Scenario One lies between the 25th and 50th percentiles in most years. An annual tax revenue outturn associated with Scenario Two lies between the 50th and 75th percentiles in each year. On this basis, actual tax outcomes would be expected to fall within the range of the two alternative scenarios approximately half of the time, with greater or lesser outcomes also expected approximately half of the time.

Fiscal Sensitivities

Table 3.2 provides some rules of thumb on the sensitivities of the fiscal position to small changes in specific variables. For example, if nominal GDP growth is one percentage point higher than forecast in each year up to June 2020, tax revenue would be around $4.4 billion higher than forecast in the June 2020 year as a result. The sensitivities are broadly symmetric and if nominal GDP growth is one percentage point lower each year than expected, tax revenue would be around $4.2 billion lower than forecast in the June 2020 year. The figures are indicative and can be influenced by the composition of growth as different types of activity have different effective tax rates.

A different interest rate path from that forecast would also impact on the fiscal position. A one percentage point lower interest rate would result in interest income on funds managed by the Treasury's NZDMO being $110 million lower in the June 2020 year. This would be more than offset by interest expenses $450 million lower in the June 2020 year.

Table 3.2 - Fiscal sensitivity analysis
Year ending 30 June
($millions)
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
1% higher nominal GDP growth per year on          
Tax revenue 710 1,470 2,320 3,300 4,360
Tax revenue impact of a 1% increase in growth of          
Wages and salaries 305 635 995 1,405 1,860
Taxable business profits 145 320 525 755 990
Impact of 1% lower interest rates on          
Interest income1 (59) (114) (113) (114) (106)
Interest expenses1 (30) (159) (265) (357) (451)
Overall operating balance1           (29)            45          152          243          344

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

Source: The Treasury

Expenditure Risks

One-off and unexpected expenditure shocks can have a large impact on the Crown's operating balance in the year that they occur. Over-forecasting of expenditure leads to policy being tighter than otherwise, and uncertainty is inherent in forecasting the cost of new policy initiatives.

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

In recent years, earthquakes have underlined the inherent exposure of the Crown's fiscal position to unexpected events. The Crown's fiscal position would be affected if another catastrophic earthquake were to occur or if the costs associated with prior events exceed the updated estimates.

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

Notes

  • [20] A summary of the methodology and key assumptions is found in Parkyn, O (2010), Estimating New Zealand's Structural Budget Balance, New Zealand Treasury Working Paper 10/08, available at http://www.treasury.govt.nz/publications/research-policy/wp/2010/10-08/
  • [21] Treasury analysis showed that a shock that has a significant and persistent impact on economic growth can result in tax revenues significantly beyond the outermost shaded area. See Fookes, C (2011), Modelling Shocks to New Zealand's Fiscal Position, New Zealand Treasury Working Paper 11/02, available at http://www.treasury.govt.nz/publications/research-policy/wp/2011/11-02/

Balance Sheet Risks

In addition to risks around revenue and expenditure, which appear in the balance sheet through their impact on the operating balance, the Crown's financial position is also exposed to risk. These risks manifest themselves through change in the value of the Crown's assets or liabilities. The balance sheet is also affected owing to the Crown having both explicit and implicit obligations (a strong expectation that the Crown would respond to an event) as a result of policy settings.

A large source of balance sheet risk can be attributed to volatility in the value of the Crown's assets and liabilities owing to movements in market variables such as interest rates, exchange rates and equity prices. This can also result in changes to the Crown's operating balance. Of the Crown's aggregate financial risk, a significant proportion can be attributed to market risk. Three areas of the balance sheet are particularly susceptible to market risk:

  • Financial assets held by the Crown Financial Institutions (CFIs) are sensitive to financial-market volatility. CFIs tend to diversify their portfolios across a range of financial assets to manage exposures to specific market risks.
  • Insurance and retirement liabilities and provisions are prone to market volatility through their actuarial valuations, which are sensitive to assumptions about variables such as interest and inflation rates.
  • Physical assets such as land, buildings, state highways and military equipment are susceptible to valuation movements through changes in property market conditions, interest rates and changes in the costs of construction.

Other large sources of balance sheet risk are contingent and implicit liabilities relating to natural disasters and financial system stress. These are discussed in specific detail in the Specific Fiscal Risks chapter.

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.

While the Crown's exposure to risks is sometimes unavoidable, the Crown's general approach is to identify, measure and treat these risks where practicable. When a risk cannot be avoided or reduced, the Government's response has been to increase the Crown's resilience by reducing debt ahead of the time when financial resources could be needed, or increase sustainability through achieving higher levels of net worth. This helps to absorb the impact of the risk through the balance sheet so that the wider economy need not adjust immediately at a greater economic cost.

The New Zealand government remains amongst the top-rated sovereigns globally, with the top Aaa foreign-currency rating from Moody's and AA foreign-currency ratings from Standard & Poor's and Fitch. Ratings outlooks are stable for Standard & Poor's and Moody's, and the rating outlook from Fitch is positive.

In the case of an increase in global risk aversion and in the absence of a marked improvement in the external position, New Zealand may face increased funding pressure in the future. All else being equal, deterioration in the ratings outlook could raise debt-servicing costs and lessen the funding capability for the Crown. On the other hand, additional downward pressure on borrowing rates is possible if diversification flows, particularly away from Europe, continue in the future.

The Crown is also susceptible to ‘liquidity risk' with respect to its ability to raise cash to meet its obligations. This risk is relatively small and managed by each agency to meet their specific liquidity risk requirements and by NZDMO to manage the Crown's liquidity requirements.

For additional detail, refer to the 2014 Investment Statement which provides information on the shape and health of the Crown's portfolio of assets and liabilities at the end of the 2013/14 financial year.[22] It outlines how the balance sheet has changed in recent years and includes forecasts of its anticipated composition and size through to 30 June 2018.

Notes

  • [22]http://www.treasury.govt.nz/government/investmentstatements/2014

Specific Fiscal Risks

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

Overview

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

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

  • for operating expenditure, existing baselines or the allowance in the fiscal forecasts for forecast new operating expenditure, or
  • for capital, the existing Crown balance sheet or the allowance in the fiscal forecasts for forecast new capital spending.

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

The specific fiscal risks are categorised into:

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

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

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

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

Statement of Specific Fiscal Risks

Summary Table

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

Specific fiscal risks as at 27 November 2015
Vote name (if appropriate) - specific fiscal risk title Status [23]
Potential policy decisions affecting revenue
Labour Market - ACC Levies Changed
Revenue - Business Tax Simplification New
Revenue - Income-sharing Tax Credits Unchanged
Revenue - Potential Tax Policy Changes Unchanged
Services Funded by Third Parties Unchanged
Potential policy decisions affecting expenses (expected to be
funded from reprioritisation or the Budget operating allowance)
Budget Operating Initiatives Unchanged
Building and Housing/Social Development - Social Housing Reform Changed
Business, Science and Innovation - Ultra-fast Broadband Initiative Phase One Unchanged
Canterbury Earthquake Recovery - Christchurch Central Recovery Plan - Anchor Projects Unchanged
Concessionary Loans Unchanged
Defence Force - Operating and Capital Costs Unchanged
Government Response to Wai 262 Unchanged
Labour Market - ACC: Work-related Gradual Process Disease and Infection Unchanged
Revenue - Transformation and Technology Renewal Changed
Social Development - Child, Youth and Family Modernisation Unchanged
Social Development - Welfare Reform Costs Unchanged
Social Development - Welfare Reform Forecast Benefit Savings Unchanged
Social Development - Youth Service Extension New
State Sector Employment Agreements Unchanged
Potential capital decisions (expected to be funded from the
existing Crown balance sheet or the Budget capital allowance)
Agency Capital Intentions Unchanged
Earthquake Strengthening for Crown-owned Buildings Unchanged
Finance - Crown Overseas Properties Unchanged
Lands - Upgrading Landonline Unchanged
Parliamentary Service - Parliamentary Accommodation Unchanged
Primary Industries and Food Safety - Investment in Water Infrastructure Unchanged
Transport - Auckland Transport Projects Unchanged
Transport - Regional State Highways Unchanged
Transport - Support for KiwiRail Unchanged
Matters dependent on external factors
Building and Housing - Divestment and Development of HNZC Housing Unchanged
Business, Science and Innovation - Crown Revenue from Petroleum Royalties Unchanged
Business, Science and Innovation - Impairment in Value of Broadband Investment Unchanged
Canterbury Earthquake Recovery - Residential Red Zone Unchanged
Defence Force - Potential Rationalisation, Revaluation and Disposal of NZDF Assets Unchanged
Finance - EQC Changed
Finance - Goodwill on Acquisition Unchanged
Finance - Southern Response Earthquake Services Support Unchanged
Labour Market - ACC Non-earners' Account Unchanged
Pay Equity and Caregiver Employment Conditions Changed
Revenue - Cash Held in Tax Pools Unchanged
Revenue - Student Loans Unchanged
Treaty Negotiations - Treaty Settlement Forecasts Unchanged
Treaty Negotiations - Relativity Clause Unchanged

Notes

  • [23]Unchanged- risks where the nature and/or scale of the risk has not changed substantively since the Budget Update.

Potential Policy Decisions Affecting Revenue

Labour Market - ACC Levies (Changed)

Indicative future levy rates for the Work, Earners' and Motor Vehicle accounts are based on ACC's funding policy. This policy has been agreed by Cabinet but remains subject to final confirmation. The indicative levy path based on the policy has been included in the forecasts. However, final levy decisions are made by the Government, and may differ from the forecast levy path if the Government chooses levy rates that do not reflect the funding policy or if it subsequently changes the funding policy. In addition, revenue from the levies set for these accounts may be more or less than is required to cover the cost of claims. If factors such as claims experience, ACC performance and economic assumptions (particularly discount rates) turn out differently from what has been forecast, any variance will have a corresponding impact on the operating balance.

Revenue - Business Tax Simplification (New)

The Government is considering options for simplifying tax for businesses, as set out in the Government Green Paper on Tax Administration. Some of the options being considered may have a material fiscal impact (positive or negative).

Revenue - Income-sharing Tax Credits (Unchanged)

The Government has introduced legislation to establish an income-sharing tax credit. If passed as introduced, the legislation will allow couples with children under the age of 18 to pool their earnings for income tax purposes if they meet certain criteria. The best estimate at the time the Bill was introduced in 2010 was that the changes will reduce tax revenues by $500 million per year once the scheme is fully operational. The Finance and Expenditure Committee has recommended that the significant fiscal cost of the package be addressed before the Bill proceeds further.

Revenue - Potential Tax Policy Changes (Unchanged)

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

Services Funded by Third Parties (Unchanged)

A wide range of government services are funded through third-party fees and charges. Demand for these services can vary with a direct effect 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 service. There is also a risk that changes will be required to the way government services are delivered, which could result in costs to the Crown.

Potential Policy Decisions Affecting Expenses (expected to be funded from reprioritisation or the Budget operating allowance)

Budget Operating Initiatives (Unchanged)

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

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

The Government is progressing the Social Housing Reform programme. This programme aims to improve the services and assistance provided to those in housing need, build the social housing market and fully recognise the costs of social housing. Specific fiscal risks associated with this reform programme are that:

  • the Tāmaki Redevelopment Company Limited's construction costs over the next 10 to 15 years will not be recovered from the proceeds of properties sold. Over this time, 7,500 new houses are planned to be built in place of approximately 2,500 existing houses
  • the Government has set a target to fund 65,000 social housing places by 2017/18. This will require new funding over and above the current Income Related Rent Subsidy appropriation cap
  • there may be costs to HNZC arising from the Social Housing Reform Programme, and
  • proceeds from the Tauranga/Invercargill transfers programme may differ from book value leading to losses on transfer.

The Government is also developing housing on underutilised Crown land in Auckland. There is a risk that delivering social and affordable housing as part of this programme requires additional operating and/or capital expenditure.

Business, Science and Innovation - Ultra-fast Broadband Initiative Phase One (Unchanged)

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

Canterbury Earthquake Recovery - Christchurch Central Recovery Plan - Anchor Projects (Unchanged)

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

Concessionary Loans (Unchanged)

The Crown has provided loans to local government and iwi-based organisations on a concessionary basis to achieve public policy purposes. Because of their concessionary nature, these loans are written down on draw down to reflect existing market conditions. There is a risk that future market conditions may require a different adjustment. The current carrying value of these loans on the Crown's balance sheet is $616 million.

Defence Force - Operating and Capital Costs (Unchanged)

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

Government Response to Wai 262 (Unchanged)

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

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

Revenue - Transformation and Technology Renewal (Changed)

The Business Transformation programme has been agreed by Cabinet and is reflected in forecasts. There are risks that the expected implementation costs, revenue gains and operating costs savings may differ from forecasts. In addition, the Government is considering possible policy changes affecting the way Inland Revenue manages its processes and data. Any changes could materially impact the programme's cost, and the additional revenue collected.

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

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

Social Development - Welfare Reform Costs (Unchanged)

The Welfare Reform package of changes to the benefit system was introduced from July 2013, following amendments to the Social Security Act 1964. The current phase is to review programmes with a view to reducing future benefit dependency and long-term liability. An additional $100 million over four years was appropriated in Budget 2014 and $24 million over four years in Budget 2015. It is likely that there will be further costs associated with the ongoing implementation of the Investment Approach in order to achieve Better Public Services Result One.

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 of benefit recipients and the complexity in implementing the reforms, with a corresponding impact on benefit expenditure.

Social Development - Youth Service Extension (New)

An amendment Bill providing the enabling framework for extension of the Youth Service is currently being considered by the Social Services Select Committee. The intent is that, subject to funding and IT changes being in place, the extension would be implemented from March 2016. It is intended that funding options will be identified following the Youth Funding Review. The expected operating cost of the Youth Service Extension is $25 million per annum.

State Sector Employment Agreements (Unchanged)

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

Potential Capital Decisions (expected to be funded from the existing Crown balance sheet or the Budget capital allowance)

Agency Capital Intentions (Unchanged)

Future Budgets may well include new capital investments other than those identified in other specific fiscal risks. Such investments are most likely to be developed by the 24 investment-intensive agencies that are required to identify their capital spending intentions over the next 10 years based on current policy settings and certain demographic and inflation assumptions. The Government expects that these intentions will be managed back through a range of measures such as prioritisation, improvements in asset performance, alternative methods of service delivery and changes to policy settings. New investments are risks to the fiscal forecasts only to the extent they cannot be managed through existing balance sheets, or the provision in the fiscal forecasts for forecast new capital spending.

Earthquake Strengthening for Crown-owned Buildings (Unchanged)

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

Finance - Crown Overseas Properties (Unchanged)

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

Lands - Upgrading Landonline (Unchanged)

Land Information New Zealand (LINZ) is currently exploring options around the upgrade of Landonline to replace its outdated technology platform and to meet the changing business and technology needs of users. LINZ has now completed a detailed business case which Cabinet endorsed in 2015. They will also submit a capital initiative through Budget 2016. There may be insufficient accumulated depreciation funding to cover the replacement and enhancement cost.

Parliamentary Service - Parliamentary Accommodation (Unchanged)

With the expiry of the lease on Bowen House in December 2018, the Parliamentary Service is reviewing how it provides accommodation for Parliament to ensure that accommodation meets the needs of future Parliaments at best economic value. Options for future accommodation may require capital expenditure with estimates ranging from $36 million to $97 million.

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

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

Transport - Auckland Transport Projects (Unchanged)

The Government has signalled its intention to accelerate transport projects in the Auckland Council's Auckland Plan, including Auckland Manukau Eastern Transport Initiatives, the East-West Link and support for the City Rail Link and a second Waitemata Harbour Crossing. NZTA has advised that it can fund the Auckland Manukau Eastern Transport Initiatives without further Crown funding. Decisions on further Crown financial assistance for the East-West Link and other projects will be made as part of future Budgets.

Transport - Regional State Highways (Unchanged)

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

Transport - Support for KiwiRail (Unchanged)

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

Matters Dependent on External Factors

Building and Housing - Divestment and Development of HNZC Housing (Unchanged)

The forecasts reflect divestments and redevelopments of some housing property as part of HNZC's asset management strategy. Property sales are subject to market conditions and therefore there is an inherent level of uncertainty about the return to the Crown associated with forecast divestments and about the proposed funding of developments.

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

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

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

The Government has set aside approximately $1.6 billion to progressively capitalise Crown Fibre Holdings so that it can invest with private partners in a new network delivering ultra-fast broadband services. Given the contracts entered into, the extent of the recovery of this investment is somewhat dependent on the number of connections made to the network. The fiscal forecasts include a provision for impairing this investment, but the final amount of the impairment may vary from this provision.

Canterbury Earthquake Recovery - Residential Red Zone (Unchanged)

Some recoveries from 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, revenues or recoveries associated with the future use of residential red zone are uncertain. The future value may change depending on any future alternate uses of the land. The fiscal impact of this is not yet certain.

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

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

Finance - EQC (Changed)

An actuarial estimate of the net claims liability and the rate of settlement has been included in the Crown's fiscal forecasts. This includes a cash forecast for EQC. At the last fiscal update, EQC had forecast a future cash shortfall of $375 million to be funded by the Crown under Section 16 of the Earthquake Commission Act 1993 - the Crown Guarantee. The most recent valuation of EQC's Canterbury Earthquake settlements has seen the central estimate of the total cost reduce from $11.543 billion to $11.249 billion. Consequently, EQC has reduced its forecast cash shortfall and is not currently expecting to call on the Crown Guarantee. There still remains some risk that EQC's remaining settlement expenditure relating to the Canterbury earthquakes will be significantly different (higher or lower) from forecast.

Finance - Goodwill on Acquisition (Unchanged)

As at 30 June 2015, the Government had goodwill on acquisition of a number of sub-entities totalling $592 million. Under New Zealand accounting standards (PBE IPSAS 26), such goodwill items are required to be assessed annually for impairment. If there is any indication that the goodwill may be impaired, the recoverable amount of the cash generating units to which the goodwill is allocated is required to be estimated. If the recoverable amount is less than the carrying amount of those units, the units and the goodwill allocated to them are regarded as impaired and the Government is required to recognise impairment losses in the operating statement. Such assessments will be conducted at the end of the financial year, and the fiscal forecasts currently make no allowance for such impairment losses.

Finance - Southern Response Earthquake Services Support (Unchanged)

The ultimate cost to the Crown of settling earthquake claims remains subject to significant uncertainty. Forecasts assume that the actual cost to settle claims will align with the actuary's central estimate of the claims provision. There is a risk that the actual cost could vary from this estimate which is sensitive to its underlying assumptions such as damage estimates, legal challenges, reinsurance recoveries and the forecast profile of claims settlement. The Crown's financial position may be adversely impacted as these assumptions are modified over time. Because the net claims liability is large, small percentage changes in the liability can have a material impact on costs and forecasts.

Labour Market - ACC Non-earners' Account (Unchanged)

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

Pay Equity and Caregiver Employment Conditions (Changed)

Several cases and funding claims in the disability support and aged care sectors relating to interpretation of the Minimum Wage Act 1983, the Equal Pay Act 1972 and the Government's policy of paying certain family members through its Funded Care Policy may involve significant costs to the Crown. The Government has announced it will be entering negotiations over pay rates for care and support workers which will cover around 50,000 workers. A Joint Working Group has been established to develop principles for dealing with claims of pay equity under the Equal Pay Act. The group will recommend to Ministers agreed principles on pay equity that could be applied in all sectors in the economy. The result of both of these could require additional funding.

Revenue - Cash Held in Tax Pools (Unchanged)

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

Revenue - Student Loans (Unchanged)

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

Treaty Negotiations - Treaty Settlement Forecasts (Unchanged)

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

Treaty Negotiations - Relativity Clause (Unchanged)

The Deeds of Settlement negotiated with Waikato-Tainui and Ngāi Tahu include a relativity mechanism. Now that the total redress amount for all historical Treaty settlements exceeds $1.0 billion in 1994 present-value terms, the mechanism provides that the Crown is liable to make payments to maintain the real value of Ngāi Tahu's and Waikato-Tainui's settlements as a proportion of all Treaty Settlements. The agreed relativity proportions are 17% for Waikato-Tainui and approximately 16% for Ngāi Tahu. There is a risk that the timing and amount of the expense for the relativity payments may differ from that included in the fiscal forecasts. There is also uncertainty on how various disputes concerning the interpretation of the mechanism will be resolved.

Risks Removed Since the 2015 Budget Update

The following risks have been removed since the 2015 Budget Update:

Risks Removed Since the 2015 Budget Update
Expired risk Reason
Arts, Culture & Heritage - Military History Museum Arrangements No longer meets likelihood threshold.
Christchurch City/Crown Cost Sharing - Horizontal Infrastructure The cost is no longer expected to exceed $100 million over five years.
Finance - Asian Infrastructure Investment Bank Risk materialised and reflected in forecasts and quantifiable contingent liabilities.
Finance - Solid Energy Risk materialised and reflected in forecasts.
Health - Health Benefits Limited Risk materialised.
Internal Affairs - All-of-Government Common Capabilities Sustainable Funding Funding approved through Budget 2015.
Labour Market - ACC Funding Policy Review This risk is now incorporated into the Labour Market - ACC levies risk.

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

The Public Finance Act 1989 requires that the Statement of Specific Fiscal Risks sets out all government decisions, contingent liabilities and other circumstances known to the Government and subject to specific requirements that may have a material effect on the economic or fiscal outlook.[24]

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

Notes

  • [24]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[25] the matter will be approved, or it is reasonably probable the situation will occur.

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

Rules for the disclosure of specific fiscal risks

Matters are disclosed as specific fiscal risks if:

  • the likely impact is more than $100 million over five years, and either
  • a decision has not yet been taken but it is reasonably possible[26] (but not probable) that the matter will be approved or the situation will occur, or
  • it is reasonably probable that the matter will be approved or the situation will occur, but the matter cannot be quantified or assigned to particular years with reasonable certainty.

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

Notes

  • [25] 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).
  • [26] 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[27] to be approved or occur within the forecasting period.

Additionally, the Minister of Finance may determine, under section 26V of the Public Finance Act 1989, that a matter not be included in the fiscal forecasts or a specific fiscal risk not be disclosed, if such disclosure would be likely to:

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

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

Notes

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

Contingent Liabilities and Contingent Assets

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

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

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

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

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

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

Some contingencies of the Crown are not able to be quantified. We have disclosed all unquantifiable contingent liabilities and unquantifiable contingent assets that are not expected to be remote.[28]

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

Notes

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

Quantifiable Contingent Liabilities and Contingent Assets

Quantifiable Contingent liabilities
Contingent liabilities Status [29] 31 October 2015
($millions)
Guarantees and indemnities    
New Zealand Export Credit Office guarantees Unchanged 208
Other guarantees and indemnities Unchanged 102
    310
Uncalled capital    
Asian Development Bank Unchanged 3,214
International Monetary Fund - promissory notes Unchanged 1,433
International Bank for Reconstruction and Development Unchanged 1,646
International Monetary Fund - arrangements to borrow Unchanged 1,167
Other uncalled capital Unchanged 19
    7,479
Legal proceedings and disputes    
Tax disputes Unchanged 156
Other legal proceedings and disputes Unchanged 119
    275
Other quantifiable contingent liabilities    
Asian Infrastructure Investment Bank New 694
Unclaimed monies Unchanged 121
Other quantifiable contingent liabilities Unchanged 203
    1,018
Total quantifiable contingent liabilities   9,082
Quantifiable Contingent Assets
Contingent assets Status [29] 31 October 2015
($millions)
Legal proceedings and disputes    
Tax disputes Unchanged 103
Other contingent assets Unchanged 76
Total quantifiable contingent assets   179

Notes

  • [29] Status of contingent liabilities or assets when compared to the Financial Statements of the Government of New Zealand for the year ended 30 June 2015.

Unquantifiable Contingent Liabilities and Contingent Assets

Unquantifiable Contingent Liabilities and Contingent Assets
Contingent liabilities Status
Indemnities:  
Air New Zealand Unchanged
Contact Energy Limited Unchanged
Earthquake Commission Unchanged
Genesis Energy Limited Unchanged
Housing New Zealand Corporation Unchanged
Justices of the Peace, Community Magistrates and Disputes Tribunal Referees Unchanged
Maui Contracts Unchanged
Maui Partners Unchanged
New Zealand Aluminium Smelter and Comalco Unchanged
New Zealand Local Authorities Unchanged
New Zealand Railways Corporation Unchanged
Persons exercising investigating powers Unchanged
Synfuels-Waitara Outfall Indemnity Unchanged
Westpac New Zealand Limited Unchanged
Legal claims and proceedings:  
Accident Compensation Corporation litigation Unchanged
Air New Zealand litigation Unchanged
Kiwibank Unchanged
Ministry for Primary Industries - Kiwifruit vine disease New
Treaty of Waitangi claims Unchanged
Other unquantifiable contingent liabilities:  
Criminal Proceeds (Recovery) Act 2009 Unchanged
Environmental liabilities Unchanged
Treaty of Waitangi claims - settlement relativity payments Unchanged

Description of Contingent Liabilities

Quantifiable contingent liabilities over $100 million

Guarantees and indemnities

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

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

New Zealand Export Credit Office guarantees

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

$208million at 31 October 2015 ($177 million at 30 June 2015)

Uncalled capital

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

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

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

The Crown's Uncalled Capital Subscriptions
Uncalled capital

31 October 2015

$millions

30 June 2015 

$millions

Asian Development Bank 3,214 3,193
International Monetary Fund - promissory notes 1,433 1,337
International Bank for Reconstruction and Development 1,646 1,625
International Monetary Fund - arrangements to borrow 1,167 1,164

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

  • a $500 million preference share facility under the Crown's agreement dated 5 April 2012 of which $140 million has already been called and paid, with the other $360 million called but unpaid as at 31 October 2015. The balance is forecast to be paid progressively through the 2016/17 financial year, and
  • $500 million of uncalled ordinary shares under an amended Crown Support Deed dated 30 January 2013 by which Southern Response may issue a call notice but only after Southern Response's investments, reinsurance and existing Crown support (the remaining $400 million convertible preference share facility discussed above) is exhausted.

As at 31 October 2015, no call has been made on the uncalled ordinary capital facility. However, it is now considered probable that approximately $347 million of this subscription will be called and paid for in the near future. There is also a possibility that the remaining $153 million will be called owing to significant complexities that exist in settling Christchurch earthquake claims. The extent to which the subscription is called and paid depends on the ultimate cost of settling earthquake claims, which continues to be subject to significant uncertainty.

If this Crown Support Deed 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. However, as Southern Response is part of the Crown there would be no impact on the overall Crown operating balance.

Legal proceedings and disputes

Tax disputes

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

$156million at 31 October 2015 ($148 million at 30 June 2015)

Other quantifiable contingent liabilities

AIIB

The Government has agreed to become a regional member of the Asian Infrastructure Investment Bank (AIIB). The AIIB is a multilateral development bank focused on supporting the development of infrastructure in the Asian region. The Government has completed the necessary parliamentary and legislative processes and expects New Zealand to formally ratify the Bank's Articles of Agreement in December 2015[30]. It is anticipated that the threshold for entry into force of the treaty establishing the AIIB will also be met in December 2015.

The Government has agreed to subscribe to 4,615 shares in the authorised capital stock of the AIIB with a value of US$461.50 million (NZ$693.6 million). On entry into force of the agreement and ratification by New Zealand paid-in capital of 20% (US$92.3 million (NZ$144.8 million based on forward contracted exchange rates)) will be paid in five equal instalments over five years. The payments of the called portion are included in the fiscal forecast. The remaining 80% (US$369.2 million (NZ$548.8 million)) will be called only as and when required by the AIIB to meet its liabilities.

$694 million at 31 October 2015 ($nil at 30 June 2015)

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.

$121 million at 31 October 2015 ($120 million at 30 June 2015)

Notes

  • [30] New Zealand formally deposited the instrument of ratification of the Bank’s Articles of Agreement on 7 December 2015.

Unquantifiable contingent liabilities

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

a) Indemnities

b) Legal disputes, and

c) Other contingent liabilities.

a)  Indemnities

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

Indemnities
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 Section 16 of the Earthquake Commission Act 1993 As set out in the Earthquake Commission Act 1993, the Crown shall fund any deficiency in EQC's assets to cover its financial liabilities on such terms and conditions that the Minister of Finance determines. 
Genesis Energy Limited Deed between Genesis Power Limited and the Crown The agreement sees the Crown compensate Genesis in the event that Genesis has less gas than it requires for the long-term supply of gas to cover Huntly power station's minimum needs.
Genesis acquisition of Tekapo A & B power stations Indemnity against any damage to bed of lakes and rivers subject to operating easements. 
Housing New Zealand 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 Referee

Section 11CE of the District Courts Act 1947

Section 4F of the Justices of the Peace Act 1957

Section 58 of the Disputes Tribunal Act 1988

Damages or costs awarded against them as a result of them exceeding their jurisdiction, provided a High Court Judge certifies that they have exceeded their jurisdiction in good faith and ought to be indemnified.
Maui Contracts Contracts in respect of which the Crown purchases gas from Maui Mining companies and sells gas downstream to Contact Energy Limited, Vector Gas Limited and Methanex Waitara Valley Limited The contracts provide for invoices to be re-opened in certain circumstances within two years of their issue date as a result of revisions to indices.  These revisions may result in the Crown refunding monies or receiving monies from those parties.
Maui Partners Confidentiality agreements with the Maui Partners in relation to the provision of gas reserves information Any losses arising from a breach of the deed.
New Zealand Aluminium Smelter and Comalco The Minister of Finance signed indemnities in November 2003 and February 2004 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 Rail Corporation The Minister of Finance signed the indemnity on 1 September 2004 The directors of NZ Railways Corporation against all liabilities in connection with the Corporation taking ownership and/or responsibility for the national rail network and any associated assets and liabilities.
Section 10 of the Finance Act 1990 Guarantees all loan and swap obligations of the New Zealand Railways Corporation.
Persons exercising investigating powers Section 63 of the Corporations (Investigation and Management) Act 1989 Indemnifies the Financial Markets Authority (formerly Securities Commission), the Registrar and Deputy Registrar of Companies, members of advising committees within the Act, every statutory manager of a corporation and persons appointed pursuant to sections 17 to 19 of the Act, in the exercise of investigating powers, unless the power has been exercised 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).

b)  Legal claims and proceedings

There are numerous legal actions that have been brought against the Crown. However, in the majority of these actions it is considered a remote possibility that the Crown would lose the case. 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 and not considered to be remote.

Accident Compensation Corporation litigation   

Litigation involving ACC arises almost exclusively from challenges to operational decisions made by ACC through the statutory review and appeal process. No accrual has been made for contingent liabilities which could arise as these disputes are issue based and ACC's active management of litigation means that it will be either settling or defending, depending on the merits of the issue in dispute.

Air New Zealand litigation

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

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

Allegations of anti-competitive conduct in the air cargo business in Hong Kong and Singapore were the subject of proceedings by the Australian Competition and Consumer Commission (ACCC). Following a defended hearing, the Federal Court released its decision in October 2014, finding in favour of Air New Zealand. The ACCC has appealed the decision and the appeal was heard in August 2015. A decision is awaited.

In the event that a Court determined that Air New Zealand had breached competition laws, the Group would have potential liability for damages or (in Australia) pecuniary penalties. No other significant contingent liability claims are outstanding at balance date.

Kiwibank

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

Ministry for Primary Industries - Kiwifruit vine disease

In November 2014, 42 kiwifruit growers and post-harvest owners filed a claim against the Ministry for Primary Industries alleging it is liable for damages they suffered from the kiwifruit vine disease Psa-V. The plaintiffs have not quantified their losses, but have publicly claimed it is in the vicinity of $250 million, citing total industry losses of $885 million. Plaintiffs of the proceedings must provide details of their claims by 4 December 2015. At that point it may be possible to provide a more accurate assessment of the contingent liability. The Ministry is defending the claim and currently it remains unquantifiable.

Treaty of Waitangi claims

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

c)  Other unquantifiable contingent liabilities

Criminal Proceeds (Recovery) Act 2009

The Ministry of Justice is responsible for administering the Criminal Proceeds (Recovery) Act 2009. The Act requires the Crown to give an undertaking as to damages or costs in relation to asset restraining orders. In the event that the Crown is found liable, payment may be required.

Environmental liabilities

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

In accordance with PBE IPSAS 19: Provisions, Contingent Liabilities and Contingent Assets any contaminated sites for which costs can be reliably measured have been included in the Statement of Financial Position as provisions.

Treaty of Waitangi claims - Settlement Relativity Payments - see page 82.

Description of Contingent Assets

Quantifiable contingent assets over $100 million

Legal proceedings and disputes

Tax disputes

A contingent asset is recognised when Inland Revenue has advised 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 cash collectable from the disputes process based on experience and similar prior cases, net of losses carried forward.

$103 million at 31 October 2015 ($103 million at 30 June 2015)

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 27 November 2015.

The finalisation dates and key assumptions that underpin the preparation of the Forecast Financial Statements are outlined in the Fiscal Outlook chapter (pages 54 to 56).

Statement of Accounting Policies

Significant Accounting Policies

The Forecast Financial Statements have been prepared in accordance with the accounting policies that are expected to be used in the comparable audited actual Financial Statements of the Government. They comply with generally accepted accounting practice (GAAP) as required by the Public Finance Act 1989 and have been prepared in accordance with Public Benefit EntityFinancial Reporting Standard 42: Prospective Financial Statements.

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

The specific accounting policies are included within the 2015 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/hyefu2015

Forecast Assumptions

Key forecast assumptions are set out on pages 54 to 56.

The Forecast Financial Statements have been prepared on the basis of the Treasury's best professional judgement. Actual financial results for the periods covered are likely to vary from the information presented in these forecasts. Factors that may lead to a material difference between information in these Forecast Financial Statements and the actual reported results in future years are set out in the Specific Fiscal Riskschapter on pages 71 to 84.

Reporting and Forecast Period

The reporting periods for these Forecast Financial Statements are the years ended 30 June 2016 to 30 June 2020. The ‘2015 Actual’ figures reported in the statements are the audited results reported in the Financial Statements of the Government for the year ended 30 June 2015. The ‘2016 Previous Budget’ figures are the forecasts to 30 June 2016 as presented in the 2015 Budget.

Government Reporting Entity as at 27 November 2015

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

Core Crown segment

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

State-owned enterprises segment

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

Crown entities segment

  • Accident Compensation Corporation
  • Accreditation Council
  • 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) (including NZ Health Partnerships)
  • 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
  • Heritage New Zealand Pouhere Taonga
  • Housing New Zealand Corporation
  • Human Rights Commission
  • Independent Police Conduct Authority
  • Law Commission
  • Maritime New Zealand
  • Museum of New Zealand Te Papa Tongarewa Board
  • New Zealand Antarctic Institute
  • New Zealand Artificial Limb Service
  • New Zealand Blood Service
  • New Zealand Film Commission
  • New Zealand Fire Service Commission
  • New Zealand Lotteries Commission
  • New Zealand Productivity Commission
  • New Zealand Qualifications Authority
  • New Zealand Symphony Orchestra
  • 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 (2,404)
  • 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)
  • Transport Accident Investigation Commission
  • WorkSafe New Zealand
Organisations listed in schedule 4 of the Public Finance Act 1989
  • Agricultural and Marketing Research and Development Trust
  • Asia New Zealand Foundation
  • Fish and Game Councils (12)
  • Game Animal Council
  • Leadership Development Centre Trust
  • Māori Trustee
  • National Pacific Radio Trust
  • New Zealand Fish and Game Council
  • New Zealand Game Bird Habitat Trust Board
  • New Zealand Government Property Corporation
  • New Zealand Lottery Grants Board
  • Ngāi Tahu Ancillary Claims Trust
  • Pacific Co-operation Foundation
  • Pacific Island Business Development Trust
  • Reserves Boards (20)
  • Sentencing Council
  • Te Ariki Trust
Non-listed companies in which the Crown is majority or sole shareholder (Public Finance Act schedule 4A companies)
  • Crown Asset Management Limited
  • Crown Fibre Holdings Limited
  • Education Payroll Limited
  • Fairway Resolution Limited
  • Health Benefits Limited (ceased operations)
  • Research and Education Advanced Network New Zealand Limited
  • Southern Response Earthquake Services Limited
  • Tāmaki Redevelopment Company Limited
  • The Network for Learning Limited
Legal entities created by Treaty of Waitangi settlements Acts (Public Finance Act schedule 6)
  • Te Urewera

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

Forecast Financial Statements

Forecast Statement of Financial Performance for the years ending 30 June

  Note 2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

Revenue

               
Taxation revenue 1 66,055 68,098 67,648 70,226 74,351 79,134 83,141
Other sovereign revenue 1 4,953 4,606 4,459 4,411 4,546 4,719 4,879
Total revenue levied through the Crown's sovereign power   71,008 72,704 72,107 74,637 78,897 83,853 88,020
Sales of goods and services   16,866 17,253 17,039 17,570 18,280 18,500 18,840
Interest revenue and dividends 2 3,524 4,064 4,067 4,263 4,611 4,994 5,301
Other revenue   3,615 3,580 3,592 3,699 3,752 3,798 3,842
Total revenue earned through the Crown's operations   24,005 24,897 24,698 25,532 26,643 27,292 27,983
Total revenue (excluding gains)   95,013 97,601 96,805 100,169 105,540 111,145 116,003

Expenses

               
Transfer payments and subsidies 3 23,723 24,482 24,485 25,566 26,440 27,203 28,353
Personnel expenses 4 21,124 21,594 21,849 21,784 21,930 22,066 22,305
Depreciation and amortisation 5 4,842 4,904 4,936 5,113 5,307 5,443 5,510
Other operating expenses 6 35,910 37,689 37,788 37,370 37,685 37,486 37,489
Finance costs 7 4,563 4,687 4,421 4,830 5,077 5,260 5,408
Insurance expenses 8 4,110 4,348 3,997 4,112 4,405 4,751 4,966
Forecast new operating spending 9 305 271 1,123 3,681 5,365 6,936
Top-down expense adjustment 9 (1,025) (1,025) (600) (475) (450) (500)
Total expenses (excluding losses)   94,272 96,984 96,722 99,298 104,050 107,124 110,467
Minority interest share of operating balance before gains/(losses)   (327) (441) (484) (515) (533) (536) (591)
Operating balance before gains/(losses) (excluding minority interests)   414 176 (401) 356 957 3,485 4,945
Net gains/(losses) on financial instruments 10 6,196 2,560 576 2,194 2,297 2,478 2,672
Net gains/(losses) on non-financial instruments 11 (1,649) (45) (101) (93) (120) (64) (102)
Less minority interest share of net gains/losses   (218) (32) (42) (11) (10) (2) (6)
Total gains/(losses)   4,329 2,483 433 2,090 2,167 2,412 2,564
Net surplus/(deficit) from associates and joint ventures   1,028 331 266 279 279 281 283
Operating balance (excluding minority interests) 12 5,771 2,990 298 2,725 3,403 6,178 7,792

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

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

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

Total Crown expenses

             

By functional classification

             
Social security and welfare 28,231 29,231 28,928 29,959 30,920 31,968 33,323
GSF pension expenses 373 371 283 224 226 237 248
Health 14,696 15,103 15,150 15,028 14,980 14,955 14,948
Education 13,537 13,894 13,993 14,103 14,122 14,109 14,226
Core government services 3,898 4,385 4,818 4,519 4,606 4,564 4,534
Law and order 3,730 3,841 3,853 3,763 3,759 3,763 3,774
Defence 1,917 2,036 2,051 2,118 2,082 2,089 2,089
Transport and communications 9,279 9,437 9,449 9,780 10,080 10,257 10,395
Economic and industrial services 8,235 7,866 7,505 7,646 8,067 8,010 8,094
Heritage, culture and recreation 2,198 2,304 2,319 2,336 2,363 2,386 2,392
Primary services 1,740 1,896 1,993 1,877 1,847 1,884 1,879
Housing and community development 1,114 1,547 1,535 1,581 1,600 1,614 1,639
Environmental protection 616 569 639 582 627 629 598
Other 145 537 539 429 488 484 484
Finance costs 4,563 4,687 4,421 4,830 5,077 5,260 5,408
Forecast new operating spending 305 271 1,123 3,681 5,365 6,936
Top-down expense adjustment (1,025) (1,025) (600) (475) (450) (500)
Total Crown expenses excluding losses 94,272 96,984 96,722 99,298 104,050 107,124 110,467

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.

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

Core Crown expenses

             

By functional classification[1]

             
Social security and welfare 23,523 24,275 24,325 25,209 26,007 26,746 27,865
GSF pension expenses 358 355 265 206 208 219 230
Health 15,058 15,581 15,601 15,616 15,668 15,735 15,733
Education 12,879 13,134 13,222 13,316 13,332 13,315 13,431
Core government services 4,134 4,811 4,976 4,782 4,864 4,850 4,814
Law and order 3,515 3,582 3,635 3,530 3,518 3,510 3,513
Defence 1,961 2,087 2,079 2,146 2,110 2,117 2,117
Transport and communications 2,291 2,214 2,265 2,321 2,404 2,435 2,420
Economic and industrial services 2,228 2,262 2,196 2,248 2,246 2,186 2,265
Heritage, culture and recreation 778 808 828 797 791 777 789
Primary services 667 742 822 672 655 672 661
Housing and community development 320 582 619 506 484 477 475
Environmental protection 723 605 637 581 625 627 596
Other 145 537 539 429 488 484 484
Finance costs 3,783 3,676 3,656 3,946 4,051 4,220 4,331
Forecast new operating spending 305 271 1,123 3,681 5,365 6,936
Top-down expense adjustment (1,025) (1,025) (600) (475) (450) (500)
Total core Crown expenses excluding losses 72,363 74,531 74,911 76,828 80,657 83,285 86,160
  1. The classifications of the functions of the Government reflect current approved baselines. Forecast new operating spending is shown as a separate line item in the above analysis and will be allocated to functions of the Government once decisions are made in future Budgets.

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

Forecast Statement of Comprehensive Income for the years ending 30 June

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
Operating balance (including minority interest) 6,316 3,463 824 3,251 3,946 6,716 8,389

Other comprehensive revenue and expense

             
Revaluation of physical assets 5,519 19
Net change in hedging instruments entered into for cash flow hedges (100) 10 19 21 22 16 3
Foreign currency translation differences for foreign operations 51 53
Valuation gains/(losses) on investments available for sale taken to reserves 44 10 5 11 11 13 13
Other movements (13) 6 (5) 22 26 34 41
Total other comprehensive revenue and expense 5,501 26 91 54 59 63 57
Total comprehensive revenue and expense 11,817 3,489 915 3,305 4,005 6,779 8,446

Attributable to:

             
 - minority interest 848 480 507 533 550 543 598
 - the Crown 10,969 3,009 408 2,772 3,455 6,236 7,848
Total comprehensive revenue and expense 11,817 3,489 915 3,305 4,005 6,779 8,446

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

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
Opening net worth 80,697 79,984 92,236 92,738 95,565 99,089 105,402
Operating balance (including minority interest) 6,316 3,463 824 3,251 3,946 6,716 8,389
Net revaluations 5,519 19
Transfers to/(from) reserves 30 3 40 47 50 45
(Gains)/losses transferred to the Statement of Financial Performance (56) 6 18 12 11 12 13
Other movements 38 (10) 51 2 1 1 (1)
Comprehensive income 11,817 3,489 915 3,305 4,005 6,779 8,446
Transactions with minority interest (278) (438) (413) (478) (481) (466) (560)
Closing net worth 92,236 83,035 92,738 95,565 99,089 105,402 113,288

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

Forecast Statement of Cash Flows for the years ending 30 June

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

Cash Flows from Operations

             

Cash was provided from

             
Taxation receipts 64,945 67,001 66,505 68,902 73,120 77,890 81,856
Other sovereign receipts 4,731 4,357 4,453 4,170 4,343 4,522 4,680
Sales of goods and services 17,232 17,352 17,219 17,700 18,395 18,586 18,940
Interest and dividend receipts 3,364 3,608 3,517 3,672 4,027 4,385 4,362
Other operating receipts 3,823 4,621 4,001 3,783 3,624 3,553 3,595
Total cash provided from operations 94,095 96,939 95,695 98,227 103,509 108,936 113,433

Cash was disbursed to

             
Transfer payments and subsidies 23,896 24,498 24,489 25,538 26,421 27,186 28,650
Personnel and operating payments 60,009 63,069 62,893 61,632 61,890 61,047 61,649
Interest payments 4,598 4,704 4,385 4,667 4,923 5,094 4,624
Forecast new operating spending 305 271 1,123 3,681 5,365 6,936
Top-down expense adjustment (1,025) (1,025) (600) (475) (450) (500)
Total cash disbursed to operations 88,503 91,551 91,013 92,360 96,440 98,242 101,359
Net cash flows from operations 5,592 5,388 4,682 5,867 7,069 10,694 12,074

Cash Flows from Investing Activities

             

Cash was provided from/(disbursed to)

             
Net (purchase)/sale of physical assets (6,177) (8,128) (7,619) (7,461) (6,618) (6,519) (6,090)
Net (purchase)/sale of shares and other securities (4,912) (788) 2,842 (5,558) 4,713 1,662 (3,665)
Net (purchase)/sale of intangible assets (631) (744) (793) (680) (498) (485) (463)
Net (issue)/repayment of advances (1,686) (1,645) (1,987) (1,527) (1,608) (1,574) (1,571)
Net acquisition of investments in associates 153 (75) (13) 75 69 (6) 32
Forecast new capital spending (316) (451) (796) (666) (735) (913)
Top-down capital adjustment 280 555 75 (75) 50 50
Net cash flows from investing activities (13,253) (11,416) (7,466) (15,872) (4,683) (7,607) (12,620)
Net cash flows from operating and investing activities (7,661) (6,028) (2,784) (10,005) 2,386 3,087 (546)

Cash Flows from Financing Activities

             

Cash was provided from/(disbursed to)

             
Issues of circulating currency 372 164 214 163 170 174 180
Government share offer programme1 579
Net issue/(repayment) of government bonds2 1,548 6,685 6,613 9,318 (2,600) (2,870) 1,127
Net issue/(repayment) of foreign-currency borrowings (2,321) (1,494) (1,067) (481) (1,202) (1) 24
Net issue/(repayment) of other New Zealand dollar borrowings 7,077 965 (796) 1,459 2,330 1,253 978
Dividends paid to minority interests (478) (464) (494) (507) (515) (533) (551)
Net cash flows from financing activities 6,777 5,856 4,470 9,952 (1,817) (1,977) 1,758
Net movement in cash (884) (172) 1,686 (53) 569 1,110 1,212
Opening cash balance 11,888 13,209 11,982 14,158 14,105 14,674 15,784
Foreign-exchange gains/(losses) on opening cash 978 490
Closing cash balance 11,982 13,037 14,158 14,105 14,674 15,784 16,996
  1. Excludes purchases by ACC and NZS Fund.
  2. Further information on the proceeds and repayments of government bonds is available in note 23.

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

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

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

             
Net Cash Flows from Operations 5,592 5,388 4,682 5,867 7,069 10,694 12,074

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

             

Gains/(losses)

             
Net gains/(losses) on financial instruments 6,196 2,560 576 2,194 2,297 2,478 2,672
Net gains/(losses) on non-financial instruments (1,649) (45) (101) (93) (120) (64) (102)
Minority interest share of net gains/(losses) (218) (32) (42) (11) (10) (2) (6)
Total gains/(losses) 4,329 2,483 433 2,090 2,167 2,412 2,564

Other Non-cash Items in Operating Balance

             
Depreciation and amortisation (4,842) (4,904) (4,936) (5,113) (5,307) (5,443) (5,510)
Cost of concessionary lending (696) (773) (775) (781) (783) (783) (737)
Impairment on financial assets (excluding receivables) (305) (125) (120) (126) (129) (136) (138)
Decrease/(increase) in defined benefit retirement plan liabilities 373 370 463 506 508 502 493
Decrease/(increase) in insurance liabilities 746 705 925 (117) (817) (1,173) (1,319)
Other 699 (109) (214) (237) (259) (254) (307)
Total other non-cash Items (4,025) (4,836) (4,657) (5,868) (6,787) (7,287) (7,518)

Movements in Working Capital

             
Increase/(decrease) in receivables 141 (278) 28 77 498 662 644
Increase/(decrease) in accrued interest 196 445 513 428 431 442 155
Increase/(decrease) in inventories (105) 22 (27) (102) (8) (9) (8)
Increase/(decrease) in prepayments (12) (10) (50) 1 (10) 1 7
Decrease/(increase) in deferred revenue (149) (9) (57) (7) (12) (11) (15)
Decrease/(increase) in payables/provisions (196) (215) (567) 239 55 (726) (111)
Total movements in working capital (125) (45) (160) 636 954 359 672
Operating balance (excluding minority interests) 5,771 2,990 298 2,725 3,403 6,178 7,792

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

Forecast Statement of Financial Position as at 30 June

  Note 2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

Assets

               
Cash and cash equivalents 13 11,982 13,037 14,158 14,105 14,674 15,784 16,996
Receivables 13 17,602 17,468 17,828 17,830 18,371 19,081 19,777
Marketable securities, deposits and derivatives in gain 13 54,298 46,799 49,345 53,828 49,378 47,941 52,136
Share investments 13 25,408 25,921 26,344 27,643 29,064 30,620 32,272
Advances 13 26,497 28,669 28,087 29,396 30,790 32,158 33,543
Inventory   995 1,089 967 865 857 848 840
Other assets   2,389 2,165 2,085 2,120 2,155 2,214 2,273
Property, plant and equipment 15 124,558 123,577 128,472 131,915 134,088 135,796 136,549
Equity accounted investments1   11,918 11,126 12,157 12,410 12,653 12,953 13,195
Intangible assets and goodwill 16 3,056 3,264 3,392 3,565 3,550 3,535 3,491
Forecast for new capital spending 9 316 451 1,247 1,913 2,648 3,561
Top-down capital adjustment 9 (655) (555) (630) (555) (605) (655)
Total assets   278,703 272,776 282,731 294,294 296,938 302,973 313,978

Liabilities

               
Issued currency   5,336 5,640 5,560 5,723 5,893 6,067 6,247
Payables 18 11,953 12,232 12,380 11,760 12,109 12,958 12,771
Deferred revenue   2,112 2,012 2,169 2,176 2,188 2,199 2,214
Borrowings   112,580 113,377 116,976 126,871 125,242 123,333 125,643
Insurance liabilities 19 36,431 37,814 35,217 35,335 36,152 37,325 38,644
Retirement plan liabilities 20 10,834 12,190 10,741 10,235 9,727 9,225 8,732
Provisions 21 7,221 6,476 6,950 6,629 6,538 6,464 6,439
Total liabilities   186,467 189,741 189,993 198,729 197,849 197,571 200,690
Total assets less total liabilities   92,236 83,035 92,738 95,565 99,089 105,402 113,288

Net Worth

               
Taxpayers' funds   19,354 15,978 19,648 22,589 26,207 32,589 40,609
Property, plant and equipment revaluation reserve   67,107 61,873 67,128 66,934 66,745 66,575 66,388
Other reserves   (7) (39) 86 111 137 161 176
Total net worth attributable to the Crown   86,454 77,812 86,862 89,634 93,089 99,325 107,173
Net worth attributable to minority interest   5,782 5,223 5,876 5,931 6,000 6,077 6,115
Total net worth 22 92,236 83,035 92,738 95,565 99,089 105,402 113,288
  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

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

Borrowings

             
Government bonds 58,743 64,149 64,563 73,456 70,503 67,235 68,218
Treasury bills 6,734 3,939 3,925 3,827 3,812 3,797 3,790
Government retail stock 188 179 193 193 193 193 193
Settlement deposits with Reserve Bank 7,931 7,311 6,990 6,990 6,990 6,990 6,990
Derivatives in loss 6,261 2,281 5,931 5,218 4,915 4,629 4,543
Finance lease liabilities 1,788 2,706 2,755 2,767 2,937 2,930 2,672
Other borrowings 30,935 32,812 32,619 34,420 35,892 37,559 39,237
Total borrowings 112,580 113,377 116,976 126,871 125,242 123,333 125,643
Sovereign-guaranteed debt 84,008 82,878 86,458 95,024 91,836 88,291 89,182
Non sovereign-guaranteed debt 28,572 30,499 30,518 31,847 33,406 35,042 36,461
Total borrowings 112,580 113,377 116,976 126,871 125,242 123,333 125,643

Net Debt:

             
Core Crown borrowings1 95,649 94,467 98,090 106,690 103,942 100,922 102,363
Add back NZS Fund holdings of sovereign-issued debt and NZS Fund borrowings (2,493) (1,280) (3,177) (3,224) (3,226) (3,225) (3,227)
Gross sovereign-issued debt2 93,156 93,187 94,913 103,466 100,716 97,697 99,136
Less core Crown financial assets3 76,434 73,929 75,213 80,840 77,723 77,741 83,315
Net core Crown debt 16,722 19,258 19,700 22,626 22,993 19,956 15,821
Add back core Crown advances 14,140 15,425 14,613 14,992 15,285 15,509 15,554
Net core Crown debt (incl. NZS Fund)4 30,862 34,683 34,313 37,618 38,278 35,465 31,375
Add back NZS Fund holdings of core Crown financial assets and NZS Fund financial assets5 29,769 30,914 31,577 33,072 35,143 37,360 39,735
Net core Crown debt (excl. NZS Fund and advances)6 60,631 65,597 65,890 70,690 73,421 72,825 71,110

Gross Debt:

             
Gross sovereign-issued debt2 93,156 93,187 94,913 103,466 100,716 97,697 99,136
Less Reserve Bank settlement cash and Reserve Bank bills (8,631) (7,625) (9,390) (9,390) (9,390) (9,390) (9,390)
Add back changes to DMO borrowing owing to settlement cash7 1,600 1,600 1,600 1,600 1,600 1,600 1,600
Gross sovereign-issued debt excluding Reserve Bank settlement cash and Reserve Bank bills4 86,125 87,162 87,123 95,676 92,926 89,907 91,346

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.

Statement of Actual Commitments as at 31 October

  As at
31 Oct
2015
$m
As at
30 June
2015
$m

Capital Commitments

   
State highways 3,926 4,060
Land and buildings 1,919 1,122
Specialist military equipment 544 420
Other property, plant and equipment 3,028 2,958
Other capital commitments 673 694
Tertiary education institutions 480 480
Total capital commitments 10,570 9,734

Operating Commitments

   
Non-cancellable accommodation leases 2,918 3,088
Other non-cancellable leases 2,245 2,291
Tertiary education institutions 542 540
Total operating commitments 5,705 5,919
Total commitments 16,275 15,653

Total Commitments by Segment

   
Core Crown 5,091 4,453
Crown entities 7,102 7,231
State-owned Enterprises 4,929 4,887
Inter-segment eliminations (847) (918)
Total commitments 16,275 15,653

Statement of Actual Contingent Liabilities and Assets as at 31 October

  As at
31 Oct
2015
$m
As at
30 June
2015
$m

Quantifiable Contingent Liabilities

   
Guarantees and indemnities 310 310
Uncalled capital 7,479 7,337
Legal proceedings and disputes 275 247
Other contingent liabilities1 1,018 379
Total quantifiable contingent liabilities 9,082 8,273

Total Quantifiable Contingent Liabilities by Segment

   
Core Crown 8,862 8,025
Crown entities 59 30
State-owned Enterprises 161 218
Inter-segment eliminations
Total quantifiable contingent liabilities 9,082 8,273

Quantifiable Contingent Assets by Segment

   
Core Crown 148 160
Crown entities 3 3
State-owned Enterprises 28 75
Total quantifiable contingent assets 179 238
  1. The increase of $639 million since 30 June 2015, largely reflects the Government's contingent liability as a result of recently agreeing to be a founding member of the Asian Infrastructure Investment Bank.

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)

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

Taxation Revenue (accrual)

             

Individuals

             
Source deductions 25,309 26,364 26,333 27,350 28,616 30,265 31,989
Other persons 5,848 5,584 5,593 5,717 6,087 6,409 6,684
Refunds (1,595) (1,696) (1,753) (1,740) (1,740) (1,760) (1,848)
Fringe benefit tax 514 540 526 540 560 587 613
Total individuals 30,076 30,792 30,699 31,867 33,523 35,501 37,438

Corporate Tax

             
Gross companies tax 9,972 9,785 9,860 10,341 11,348 12,213 12,689
Refunds (143) (148) (243) (219) (228) (251) (266)
Non-resident withholding tax 470 506 573 496 559 626 662
Foreign-source dividend w/holding payments (3) 2 2 2 2 2 2
Total corporate tax 10,296 10,145 10,192 10,620 11,681 12,590 13,087

Other Direct Income Tax

             
Resident w/holding tax on interest income 1,830 2,094 1,925 1,837 2,088 2,700 3,203
Resident w/holding tax on dividend income 543 537 538 557 619 659 682
Total other direct income tax 2,373 2,631 2,463 2,394 2,707 3,359 3,885
Total direct income tax 42,745 43,568 43,354 44,881 47,911 51,450 54,410

Goods and Services Tax

             
Gross goods and services tax 28,123 30,242 29,792 30,948 32,411 33,942 35,221
Refunds (10,954) (11,949) (11,776) (12,064) (12,587) (13,033) (13,422)
Total goods and services tax 17,169 18,293 18,016 18,884 19,824 20,909 21,799

Other Indirect Taxation

             
Road user charges 1,283 1,339 1,342 1,403 1,476 1,548 1,621
Petroleum fuels excise – domestic production 1,018 1,074 1,172 1,184 1,215 1,246 1,272
Alcohol excise – domestic production 651 689 677 701 734 761 791
Tobacco excise – domestic production 310 309 307 324 322 322 322
Petroleum fuels excise – imports1 721 717 631 638 654 671 685
Alcohol excise – imports1 259 255 290 279 285 296 308
Tobacco excise – imports1 1,197 1,197 1,190 1,257 1,250 1,249 1,248
Other customs duty 214 160 173 173 174 172 172
Gaming duties 214 213 215 216 216 218 219
Motor vehicle fees 181 200 197 204 207 210 212
Approved issuer levy and cheque duty 57 47 47 47 47 47 47
Energy resources levies 36 37 37 35 36 35 35
Total other indirect taxation 6,141 6,237 6,278 6,461 6,616 6,775 6,932
Total indirect taxation 23,310 24,530 24,294 25,345 26,440 27,684 28,731
Total taxation revenue 66,055 68,098 67,648 70,226 74,351 79,134 83,141

Other Sovereign Revenue (accrual)

             
ACC levies 3,276 2,941 2,739 2,671 2,779 2,929 3,062
Fire Service levies 351 357 362 360 365 370 382
EQC levies 281 281 281 283 286 289 289
Child support and working for families penalties 283 278 278 281 293 306 321
Court fines 110 110 110 111 112 112 112
Other miscellaneous items 652 639 689 705 711 713 713
Total other sovereign revenue 4,953 4,606 4,459 4,411 4,546 4,719 4,879
Total sovereign revenue 71,008 72,704 72,107 74,637 78,897 83,853 88,020
  1. Customs excise-equivalent duty.

NOTE 1 (continued): Sovereign Receipts (Cash)

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

Taxation Receipts (cash)

             

Individuals

             
Source deductions 25,128 26,229 26,208 27,201 28,461 30,103 31,826
Other persons 6,044 5,823 5,789 5,933 6,468 6,872 7,114
Refunds (2,275) (2,273) (2,416) (2,346) (2,494) (2,687) (2,731)
Fringe benefit tax 498 538 524 538 558 585 611
Total individuals 29,395 30,317 30,105 31,326 32,993 34,873 36,820

Corporate Tax

             
Gross companies tax 10,484 9,956 10,393 10,428 11,544 12,558 13,020
Refunds (600) (561) (929) (661) (686) (761) (810)
Non-resident withholding tax 532 505 577 496 559 626 662
Foreign-source dividend w/holding payments (5) 2 2 2 2 2 2
Total corporate tax 10,411 9,902 10,043 10,265 11,419 12,425 12,874

Other Direct Income Tax

             
Resident w/holding tax on interest income 1,810 2,093 1,924 1,836 2,087 2,698 3,201
Resident w/holding tax on dividend income 542 537 538 557 619 659 682
Total other direct income tax 2,352 2,630 2,462 2,393 2,706 3,357 3,883
Total direct income tax 42,158 42,849 42,610 43,984 47,118 50,655 53,577

Goods and Services Tax

             
Gross goods and services tax 27,609 29,364 28,843 29,971 31,423 32,943 34,219
Refunds (10,900) (11,449) (11,226) (11,514) (12,037) (12,483) (12,872)
Total goods and services tax 16,709 17,915 17,617 18,457 19,386 20,460 21,347

Other Indirect Taxation

             
Road user charges 1,283 1,339 1,342 1,403 1,476 1,548 1,621
Petroleum fuels excise – domestic production 988 1,074 1,172 1,184 1,215 1,246 1,272
Alcohol excise – domestic production 652 689 677 701 734 761 791
Tobacco excise – domestic production 284 309 307 324 322 322 322
Customs duty 2,395 2,329 2,284 2,347 2,363 2,388 2,413
Gaming duties 214 213 215 216 216 218 219
Motor vehicle fees 173 200 197 204 207 210 212
Approved issuer levy and cheque duty 53 47 47 47 47 47 47
Energy resources levies 36 37 37 35 36 35 35
Total other indirect taxation 6,078 6,237 6,278 6,461 6,616 6,775 6,932
Total indirect taxation 22,787 24,152 23,895 24,918 26,002 27,235 28,279
Total taxation receipts 64,945 67,001 66,505 68,902 73,120 77,890 81,856

Other Sovereign Receipts (cash)

             
ACC levies 3,170 2,858 2,924 2,623 2,776 2,931 3,068
Fire Service levies 351 357 362 360 365 370 382
EQC levies 281 280 285 283 286 289 289
Child support and working for families penalties 208 216 213 219 229 242 254
Court fines 148 153 150 152 152 152 152
Other miscellaneous items 573 493 519 533 535 538 535
Total other sovereign receipts 4,731 4,357 4,453 4,170 4,343 4,522 4,680
Total sovereign receipts 69,676 71,358 70,958 73,072 77,463 82,412 86,536

NOTE 2: Interest Revenue and Dividends

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

By type

             
Interest revenue 2,802 3,384 3,225 3,402 3,704 4,032 4,276
Dividends 722 680 842 861 907 962 1,025
Total interest revenue and dividends 3,524 4,064 4,067 4,263 4,611 4,994 5,301

By source

             
Core Crown 2,452 2,589 2,839 2,915 3,107 3,395 3,587
Crown entities 1,429 1,481 1,552 1,503 1,493 1,547 1,604
State-owned Enterprises 1,043 1,300 1,054 1,121 1,272 1,348 1,447
Inter-segment eliminations (1,400) (1,306) (1,378) (1,276) (1,261) (1,296) (1,337)
Total interest revenue and dividends 3,524 4,064 4,067 4,263 4,611 4,994 5,301

NOTE 3: Transfer Payments and Subsidies

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
New Zealand superannuation 11,591 12,256 12,223 12,860 13,522 14,234 15,072
Jobseeker support and emergency benefit 1,684 1,616 1,676 1,718 1,678 1,597 1,591
Supported living payment 1,515 1,519 1,526 1,538 1,545 1,570 1,602
Sole parent support 1,186 1,187 1,157 1,254 1,253 1,242 1,250
Family tax credit 1,854 1,837 1,834 1,851 1,948 1,991 2,100
Other working for families tax credits 549 577 567 645 638 629 628
Accommodation assistance 1,129 1,137 1,154 1,199 1,222 1,206 1,209
Income related rents 703 774 778 818 872 927 1,025
Disability assistance 377 379 378 380 383 383 387
Student allowances 511 529 509 545 561 560 567
Other social assistance benefits 1,255 1,409 1,415 1,437 1,449 1,460 1,481
Total social assistance grants 22,354 23,220 23,217 24,245 25,071 25,799 26,912

Subsidies

             
KiwiSaver 856 720 709 749 783 818 855

Other transfer payments

             
Official development assistance 513 542 559 572 586 586 586
Total transfer payments and subsidies 23,723 24,482 24,485 25,566 26,440 27,203 28,353

NOTE 4: Personnel Expenses

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

By source

             
Core Crown 6,552 6,739 6,739 6,580 6,606 6,615 6,616
Crown entities 11,660 11,964 12,209 12,311 12,406 12,475 12,653
State-owned Enterprises 2,935 2,908 2,921 2,913 2,938 2,996 3,056
Inter-segment eliminations (23) (17) (20) (20) (20) (20) (20)
Total personnel expenses 21,124 21,594 21,849 21,784 21,930 22,066 22,305

NOTE 5: Depreciation and Amortisation

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

By source

             
Core Crown 1,441 1,536 1,550 1,578 1,617 1,694 1,724
Crown entities 1,751 1,743 1,777 1,881 1,946 2,004 2,058
State-owned Enterprises 1,650 1,625 1,609 1,654 1,744 1,745 1,728
Inter-segment eliminations
Total depreciation and amortisation 4,842 4,904 4,936 5,113 5,307 5,443 5,510

NOTE 6: Other Operating Expenses

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

By source

             
Core Crown 36,858 38,815 39,233 38,627 38,728 38,632 38,691
Crown entities 17,914 18,471 18,495 18,398 18,240 18,115 17,966
State-owned Enterprises 9,333 9,396 9,118 9,607 10,057 10,164 10,355
Inter-segment eliminations (28,195) (28,993) (29,058) (29,262) (29,340) (29,425) (29,523)
Total other operating expenses 35,910 37,689 37,788 37,370 37,685 37,486 37,489

NOTE 7: Finance Costs

 
  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

By type

             
Interest on financial liabilities 4,522 4,630 4,364 4,776 5,025 5,212 5,361
Interest unwind on provisions 41 57 57 54 52 48 47
Total finance costs 4,563 4,687 4,421 4,830 5,077 5,260 5,408

By source

             
Core Crown 3,783 3,676 3,656 3,946 4,051 4,220 4,331
Crown entities 221 216 220 222 232 240 246
State-owned Enterprises 1,280 1,520 1,271 1,288 1,412 1,444 1,501
Inter-segment eliminations (721) (725) (726) (626) (618) (644) (670)
Total finance costs 4,563 4,687 4,421 4,830 5,077 5,260 5,408

NOTE 8: Insurance Expenses

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

By entity

             
ACC 4,104 4,329 3,970 4,092 4,243 4,543 4,754
EQC (357) 57 50 53 172 201 200
Southern Response 335 (49) (35) (45) (21) (5)
Other (incl. inter-segment eliminations) 28 11 12 12 11 12 12
Total insurance expenses 4,110 4,348 3,997 4,112 4,405 4,751 4,966

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

  2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

Forecast New Operating Spending

         
Unallocated contingencies 271 376 444 514 512
Forecast new spending for Budget 2016 747 737 851 894
Forecast new spending for Budget 2017 2,500 2,500 2,500
Forecast new spending for Budget 2018 1,500 1,500
Forecast new spending for Budget 2019 1,530
Total forecast new operating spending 271 1,123 3,681 5,365 6,936
Operating top-down adjustment (1,025) (600) (475) (450) (500)

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

The forecast for new operating spending for Budget 2016 is $1 billion. Some of this allowance has been pre-committed as at the forecast finalisation date of 27 November 2015, with only the unallocated portion of the allowance included in this note.

  2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
Post-2020
Forecast
$m
Total
Forecast
$m

Forecast New Capital Spending (annual)

             
Unallocated contingencies 349 356 98 803
Forecast new spending for Budget 2016 102 340 168 85 13 708
Forecast new spending for Budget 2017 100 300 250 250 900
Forecast new spending for Budget 2018 100 300 250 268 918
Forecast new spending for Budget 2019 100 300 536 936
Forecast new spending for Budget 2020 100 855 955
Total forecast new capital spending 451 796 666 735 913 1,659 5,220
Forecast new capital spending (cumulative) 451 1,247 1,913 2,648 3,561    
Capital top-down adjustment (cumulative) (555) (630) (555) (605) (655)    

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

The forecast for new capital spending for Budget 2016 is $1.7 billion, which includes $0.7 billion that was left in the Future Investment Fund. Some of the allowance has been pre-committed as at the forecast finalisation date of 27 November, with only the unallocated portion of the allowance included in this note.

NOTE 10: Net Gains and Losses on Financial Instruments

 
  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

By source

             
Core Crown 4,389 2,344 650 2,020 2,150 2,314 2,479
Crown entities 2,752 316 (20) 288 322 367 411
State-owned Enterprises (63) 123 143 43 28 15 11
Inter-segment eliminations (882) (223) (197) (157) (203) (218) (229)
Net gains/(losses) on financial instruments 6,196 2,560 576 2,194 2,297 2,478 2,672

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

 
  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

By type

             
Actuarial gains/(losses) on GSF liability (322) (370)
Actuarial gains/(losses) on ACC outstanding claims (1,352) 288
Other 25 (45) (19) (93) (120) (64) (102)
Net gains/(losses) on non-financial instruments (1,649) (45) (101) (93) (120) (64) (102)

By source

             
Core Crown (719) (1) (359) 1 1 1 1
Crown entities (1,335) (45) 258 (93) (120) (64) (103)
State-owned Enterprises 405 1
Inter-segment eliminations (1) (1) (1)
Net gains/(losses) on non-financial instruments (1,649) (45) (101) (93) (120) (64) (102)

NOTE 12: Operating Balance (excluding Minority Interests)

 
  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

By source

             
Core Crown 3,879 2,406 (203) 2,295 2,980 5,630 7,232
Crown entities 2,786 585 559 446 390 495 508
State-owned Enterprises 689 800 783 804 856 912 969
Inter-segment eliminations (1,583) (801) (841) (820) (823) (859) (917)
Total operating balance 5,771 2,990 298 2,725 3,403 6,178 7,792

NOTE 13: Financial Assets (including receivables)

 
  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
Cash and cash equivalents 11,982 13,037 14,158 14,105 14,674 15,784 16,996
Tax receivables 8,957 9,290 8,732 8,930 9,471 10,030 10,498
Trade and other receivables 8,645 8,178 9,096 8,900 8,900 9,051 9,279
Student loans (refer note 14) 8,864 9,171 9,118 9,333 9,507 9,607 9,683
Kiwibank mortgages 15,598 17,446 16,640 17,753 18,959 20,208 21,507
Long-term deposits 5,214 2,848 5,169 4,925 4,951 4,921 4,867
IMF financial assets 2,299 2,525 2,868 2,882 2,902 2,923 2,943
Other advances 2,035 2,052 2,329 2,310 2,324 2,343 2,353
Share investments 25,408 25,921 26,344 27,643 29,064 30,620 32,272
Derivatives in gain 3,015 2,950 2,946 2,368 2,443 2,502 2,598
Other marketable securities 43,770 38,476 38,362 43,653 39,082 37,595 41,728
Total financial assets (including receivables) 135,787 131,894 135,762 142,802 142,277 145,584 154,724
Financial Assets by Entity              
NZDMO 19,481 17,907 17,608 22,110 16,688 14,334 17,179
Reserve Bank of New Zealand 22,905 20,683 22,023 22,273 21,706 21,781 21,973
NZS Fund 31,274 32,038 33,659 35,030 37,147 39,411 41,835
Other core Crown 22,907 22,909 22,528 22,268 22,888 23,543 24,193
Intra-segment eliminations (7,812) (7,648) (7,783) (8,240) (7,515) (7,477) (7,444)
Total core Crown segment 88,755 85,889 88,035 93,441 90,914 91,592 97,736
ACC portfolio 35,765 36,131 36,194 37,145 38,397 39,755 41,179
EQC portfolio 2,485 71 1,074 314 193 211 258
Other Crown entities 10,311 7,923 9,341 8,942 8,721 8,717 8,693
Intra-segment eliminations (3,305) (2,222) (2,733) (2,622) (2,513) (2,405) (2,295)
Total Crown entities segment 45,256 41,903 43,876 43,779 44,798 46,278 47,835
Total State-owned Enterprises segment 22,588 25,140 24,297 25,413 26,818 28,670 30,707
Inter-segment eliminations (20,812) (21,038) (20,446) (19,831) (20,253) (20,956) (21,554)
Total financial assets (including receivables) 135,787 131,894 135,762 142,802 142,277 145,584 154,724

NOTE 14: Student Loans

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
Nominal value (including accrued interest) 14,837 15,375 15,364 15,833 16,255 16,610 16,961
Opening book value 8,716 8,878 8,864 9,118 9,333 9,507 9,607
Amount borrowed in current year 1,518 1,583 1,595 1,629 1,641 1,649 1,691
Less initial write-down to fair value (602) (646) (677) (685) (690) (693) (711)
Repayments made during the year (1,114) (1,161) (1,171) (1,249) (1,310) (1,395) (1,449)
Interest unwind 604 605 596 609 622 629 635
Impairment (269) (100) (100) (100) (100) (100) (100)
Other movements 11 12 11 11 11 10 10
Closing book value 8,864 9,171 9,118 9,333 9,507 9,607 9,683

NOTE 15: Property, Plant and Equipment

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

Net Carrying Value1

             

By class of asset

             
Land 39,912 37,240 40,476 40,853 41,111 41,527 41,912
Buildings 28,914 30,198 30,115 31,349 31,689 31,706 31,508
State highways 21,034 22,419 22,271 23,291 24,291 25,353 26,308
Electricity generation assets 14,739 13,413 14,570 14,407 14,194 13,985 13,768
Electricity distribution network (cost) 4,107 4,242 4,195 4,354 4,445 4,522 4,579
Specialist military equipment 3,080 3,109 3,233 3,427 3,367 3,334 3,333
Specified cultural and heritage assets 3,004 3,018 3,041 3,050 3,060 3,071 3,083
Aircraft (excluding military) 3,272 3,593 3,896 4,421 5,077 5,322 5,253
Rail network 983 1,367 1,083 1,195 1,245 1,379 1,520
Other plant and equipment (cost) 5,513 4,978 5,592 5,568 5,609 5,597 5,285
Total property, plant and equipment 124,558 123,577 128,472 131,915 134,088 135,796 136,549

By source

             
Core Crown 32,289 33,292 33,795 35,167 35,537 35,704 35,848
Crown entities 61,417 60,902 63,587 65,304 66,893 68,456 69,468
State-owned Enterprises 30,852 29,383 31,090 31,444 31,658 31,636 31,233
Inter-segment eliminations    -     -     -     -     -     -     - 
Total property, plant and equipment 124,558 123,577 128,472 131,915 134,088 135,796 136,549

Land breakdown by usage

             
Housing 12,976 11,089 11,916 11,830 11,745 11,658 11,567
State highway corridor land 9,307 8,881 9,343 9,743 10,143 10,543 10,943
Conservation land 5,521 5,368 5,520 5,531 5,542 5,552 5,563
Rail network 3,360 3,214 3,340 3,323 3,315 3,305 3,299
Schools 3,425 3,228 3,451 3,446 3,441 3,441 3,441
Commercial (SOEs) excluding Rail 1,365 1,364 1,765 1,864 1,905 1,922 1,940
Other 3,958 4,096 5,141 5,116 5,020 5,106 5,159
Total land 39,912 37,240 40,476 40,853 41,111 41,527 41,912
  1. Using a revaluation methodology unless otherwise stated.
  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

Schedule of Movements

             

Cost or Valuation

             
Opening balance 129,449 137,593 138,681 146,726 153,995 160,470 166,872
Additions (refer below) 7,229 9,247 8,591 8,587 7,488 7,002 6,725
Disposals (1,211) (912) (596) (1,242) (974) (609) (1,239)
Net revaluations 3,064    -  80    -     -     -     - 
Other1 150 2 (30) (76) (39) 9 23
Total cost or valuation 138,681 145,930 146,726 153,995 160,470 166,872 172,381

Accumulated Depreciation and Impairment

             
Opening balance 13,143 18,161 14,123 18,254 22,080 26,382 31,076
Eliminated on disposal (655) (55) (157) (611) (314) (52) (60)
Eliminated on revaluation (2,159)    -     -     -     -     -     - 
Impairment losses charged to operating balance 78    -     -     -     -     -     - 
Depreciation expense 3,873 4,253 4,291 4,450 4,627 4,751 4,818
Other1 (157) (6) (3) (13) (11) (5) (2)
Total accumulated depreciation and impairment 14,123 22,353 18,254 22,080 26,382 31,076 35,832
Total property, plant and equipment 124,558 123,577 128,472 131,915 134,088 135,796 136,549

Additions - by functional classification

             
Transport and communications 3,364 3,834 3,356 3,394 3,481 3,248 2,818
Economic and industrial services 618 610 318 625 510 548 466
Education 893 1,162 1,090 1,158 898 818 796
Health 502 701 913 813 479 334 536
Defence 523 441 551 592 373 444 501
Other 1,329 2,499 2,363 2,005 1,747 1,610 1,608
Total additions to property, plant and equipment2 7,229 9,247 8,591 8,587 7,488 7,002 6,725
  1. Other mainly includes transfers to/from other asset categories.
  2. These additions do not include any purchases which may result from the allocation of the forecast for new capital spending (separately disclosed in the Statement of Financial Position).

NOTE 16: Intangible Assets and Goodwill

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

By type

             
Goodwill 591 589 600 600 600 600 600
Other intangible assets 2,465 2,675 2,792 2,965 2,950 2,935 2,891
Total intangible assets and goodwill 3,056 3,264 3,392 3,565 3,550 3,535 3,491

By source

             
Core Crown 1,239 1,436 1,460 1,555 1,551 1,555 1,546
Crown entities 607 657 657 722 734 719 682
State-owned Enterprises 1,210 1,171 1,275 1,288 1,265 1,261 1,263
Inter-segment eliminations    -     -     -     -     -     -     - 
Total intangible assets and goodwill 3,056 3,264 3,392 3,565 3,550 3,535 3,491

NOTE 17:  NZ Superannuation Fund

 
  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
Revenue 760 714 798 837 912 990 1,075
Less current tax expense 46 616 227 629 672 720 772
Less other expenses 198 168 153 171 202 227 253
Add gains/(losses) 3,156 2,025 340 1,963 2,094 2,233 2,381
Operating balance 3,672 1,955 758 2,000 2,132 2,276 2,431
Opening net worth 25,809 29,190 29,522 30,345 32,364 34,522 36,831
Operating balance 3,672 1,955 758 2,000 2,132 2,276 2,431
Other movements in reserves 41 20 65 19 26 33 41
Closing net worth 29,522 31,165 30,345 32,364 34,522 36,831 39,303
Comprising:              
Financial assets 31,274 32,038 33,659 35,030 37,147 39,411 41,835
Financial liabilities (3,145) (2,095) (4,662) (4,132) (4,189) (4,250) (4,314)
Net other assets 1,393 1,222 1,348 1,466 1,564 1,670 1,782
Closing net worth 29,522 31,165 30,345 32,364 34,522 36,831 39,303

NOTE 18: Payables

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

By type

             
Accounts payable 7,599 7,445 8,334 7,623 7,385 7,597 6,907
Taxes repayable 4,354 4,787 4,046 4,137 4,724 5,361 5,864
Total payables 11,953 12,232 12,380 11,760 12,109 12,958 12,771

By source

             
Core Crown 8,131 8,621 8,594 7,812 8,154 9,011 9,425
Crown entities 5,670 4,865 5,466 5,530 5,437 5,342 4,805
State-owned Enterprises 4,953 5,057 4,992 5,041 5,146 5,249 5,293
Inter-segment eliminations (6,801) (6,311) (6,672) (6,623) (6,628) (6,644) (6,752)
Total payables 11,953 12,232 12,380 11,760 12,109 12,958 12,771

NOTE 19: Insurance Liabilities

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

By entity

             
ACC 32,518 36,842 33,500 34,654 35,826 37,068 38,384
EQC 2,965 262 1,353 382 196 175 175
Southern Response 1,216 645 624 223 51
Other (incl. inter-segment eliminations) (268) 65 (260) 76 79 82 85
Total insurance liabilities 36,431 37,814 35,217 35,335 36,152 37,325 38,644

ACC liability

Calculation information

PwC NZ has prepared an independent actuarial estimate of the ACC outstanding claims liability as at 30 June 2015. 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 2015. The equivalent single effective discount rate, taking into account ACC's projected future cash flow patterns, is 4.16% and allows for a long-term discount rate of 5.5% from 2052.

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

Presentation approach

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

 
  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

Gross ACC Liability

             
Opening gross liability 29,948 35,307 32,518 33,500 34,654 35,826 37,068
Net change 2,570 1,535 982 1,154 1,172 1,242 1,316
Closing gross liability 32,518 36,842 33,500 34,654 35,826 37,068 38,384

Less Net Assets Available to ACC

             
Opening net asset value 29,840 34,297 34,021 35,274 36,449 37,731 39,096
Net change 4,181 1,620 1,253 1,175 1,282 1,365 1,421
Closing net asset value 34,021 35,917 35,274 36,449 37,731 39,096 40,517

Net ACC Reserves (Net Liability)

             
Opening reserves position (108) (1,010) 1,503 1,774 1,795 1,905 2,028
Net change 1,611 85 271 21 110 123 105
Closing reserves position (net liability)/net asset 1,503 (925) 1,774 1,795 1,905 2,028 2,133

EQC liability

Calculation information

Melville Jessup Weaver prepared an independent actuarial estimate of the EQC outstanding claims liability at 30 June 2015 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 2015 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: a complex land claims environment as policy, engineering and legal difficulties are worked through and complexity of the remaining dwelling claims and the expectation that some claims will need to be reopened to rectify outstanding issues.

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.

 
  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

EQC Liability

             
Opening gross liability 4,747 2,288 2,965 1,353 382 196 175
Net change (1,782) (2,026) (1,612) (971) (186) (21)
Closing gross liability 2,965 262 1,353 382 196 175 175

Less Reinsurance Receivable

             
Opening reinsurance receivable 1,225 664 962 386 89 29 17
Net change (263) (647) (576) (297) (60) (12) (17)
Closing reinsurance receivable 962 17 386 89 29 17

Net EQC Liability

             
Opening net position (3,522) (1,624) (2,003) (967) (293) (167) (158)
Net change 1,519 1,379 1,036 674 126 9 (17)
Closing net position (net liability) (2,003) (245) (967) (293) (167) (158) (175)

NOTE 20: Retirement Plan Liabilities

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
Government Superannuation Fund 10,845 12,192 10,751 10,245 9,737 9,235 8,742
Other funds (11) (2) (10) (10) (10) (10) (10)
Total retirement plan liabilities 10,834 12,190 10,741 10,235 9,727 9,225 8,732

The net liability of the Government Superannuation Fund (GSF) was calculated by GSF's actuary as at 30 September 2015. The liability arises from closed schemes for past and present public sector employees as set out in the Government Superannuation Fund Act 1956. A Projected Unit Credit method was used to calculate the liability as at 30 September 2015, based on membership data as at 30 June 2015 with adjustments for cash flows to 30 September 2015. The funding method requires the benefits payable from GSF in respect of past service to be calculated and then discounted back to the valuation date.

For these Forecast Financial Statements, the net GSF liability was updated for the latest discount rates derived from the market yield curve for New Zealand Government bonds as at 30 September 2015.

Other principal long-term financial assumptions were an inflation rate, as measured by the Consumers Price Index (CPI), of 1.28% for the year to 30 June 2016, increasing to 1.28% for the 11 years to 30 June 2026, then increasing gradually each year reaching to 2.5% from 2052 and remaining at 2.5% pa for all years after that. In addition an annual salary growth rate, before any promotional effects, of 3% (unchanged from 30 June 2014).

The 2015/16 projected decrease in the net GSF liability is $94 million, reflecting a decrease in the GSF liability of $209 million and a decrease in the GSF net assets of $115 million.

The decrease in the GSF liability of $209 million includes an actuarial loss between 1 July 2015 and 30 September 2015, of $171 million, owing to movements in the discount rates offset by the impact of movements in CPI rates and changes in the demographic assumptions. The remaining $10 million reduction is owing to lower than expected benefits to members (reduces the liability), offset by current service cost and interest unwind (increases the liability).

The decrease in the value of the net assets of GSF of $115 million includes a loss of $171 million reflecting the updated market value of assets at 30 September 2015. The balance of $56 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 2015/16 onwards reflect the net of the expected current service cost, interest cost, investment returns and contributions.

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

GSF Liability

             
Opening GSF liability 14,560 16,541 14,932 14,723 14,242 13,757 13,275
Net projected change 372 (303) (209) (481) (485) (482) (476)
Closing GSF liability 14,932 16,238 14,723 14,242 13,757 13,275 12,799

Less Net Assets Available to GSF

             
Opening net asset value 3,674 3,979 4,087 3,972 3,997 4,020 4,040
Investment valuation changes 541 234 49 213 215 216 217
Contribution and other income less pension Payments (128) (167) (164) (188) (192) (196) (200)
Closing net asset value 4,087 4,046 3,972 3,997 4,020 4,040 4,057

Net GSF Liability

             
Opening unfunded liability 10,886 12,562 10,845 10,751 10,245 9,737 9,235
Net projected change (41) (370) (94) (506) (508) (502) (493)
Closing unfunded liability 10,845 12,192 10,751 10,245 9,737 9,235 8,742

NOTE 21: Provisions

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
Provision for employee entitlements 3,533 3,251 3,452 3,453 3,472 3,451 3,473
Provision for ETS credits 855 821 794 741 713 689 631
Provision for National Provident Fund guarantee 893 833 847 797 747 698 649
Provision for infrastructure costs 234 52
Provision for weathertight services financial assistance package 234 33 55 24 11 8 4
Other provisions 1,472 1,538 1,750 1,614 1,595 1,618 1,682
Total provisions 7,221 6,476 6,950 6,629 6,538 6,464 6,439

By source

             
Core Crown 4,855 4,040 4,492 3,917 3,679 3,563 3,387
Crown entities 2,113 2,001 2,118 2,085 2,087 2,092 2,098
State-owned Enterprises 1,267 956 1,083 956 943 970 991
Inter-segment eliminations (1,014) (521) (743) (329) (171) (161) (37)
Total provisions 7,221 6,476 6,950 6,629 6,538 6,464 6,439

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.

The allocation of NZUs creates a provision if allocated for free; the provision is reduced, and revenue recognised, as NZUs are surrendered to the Crown by emitters.

The prices for NZUs used to calculate the ETS provision are assumed to remain constant over the forecast period and are based on market prices during September 2015.

The ETS impact on the fiscal forecast is as follows:

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
Revenue 135 144 169 172 176 176 178
Expenses (133) (102) (114) (119) (148) (152) (120)
Kyoto compliant units surrender expense 3    -     -     -     -     -     - 
Gains/(losses) (339)    -  6    -     -     -     - 
Operating balance (334) 42 61 53 28 24 58

NOTE 22: Changes in Net Worth

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
Taxpayers' funds 19,354 15,978 19,648 22,589 26,207 32,589 40,609
Property, plant and equipment revaluation reserve 67,107 61,873 67,128 66,934 66,745 66,575 66,388
Investment revaluation reserve 101 92 106 117 128 141 154
Cash flow hedge reserve (67) (46) (32) (18) (3) 8 10
Foreign currency translation reserve (41) (85) 12 12 12 12 12
Net worth attributable to minority interests 5,782 5,223 5,876 5,931 6,000 6,077 6,115
Total net worth 92,236 83,035 92,738 95,565 99,089 105,402 113,288

Taxpayers' funds

             
Opening taxpayers' funds 13,218 12,720 19,354 19,648 22,589 26,207 32,589
Operating balance excluding minority interest 5,771 2,990 298 2,725 3,403 6,178 7,792
Transfers from/(to) other reserves 392 279 (2) 213 214 204 229
Other movements (27) (11) (2) 3 1 (1)
Closing taxpayers' funds 19,354 15,978 19,648 22,589 26,207 32,589 40,609

Property, Plant and Equipment Revaluation Reserve

             
Opening revaluation reserve 62,225 62,142 67,107 67,128 66,934 66,745 66,575
Net revaluations 5,274 19
Transfers from/(to) other reserves (392) (269) 2 (194) (189) (170) (187)
Closing property, plant and equipment revaluation reserve 67,107 61,873 67,128 66,934 66,745 66,575 66,388

NOTE 23: Core Crown Residual Cash

  2015
Actual
$m
2016
Previous
Budget
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m

Core Crown Cash Flows from Operations

             
Tax receipts 66,348 68,282 67,265 69,913 74,562 79,351 83,464
Other sovereign receipts 889 835 839 857 869 883 894
Interest, profits and dividends 1,806 1,718 1,729 1,678 1,795 2,021 2,142
Sale of goods and services and other receipts 2,433 2,438 2,002 2,292 1,992 1,966 1,956
Transfer payments and subsidies (23,895) (24,498) (24,489) (25,538) (26,421) (27,186) (28,650)
Personnel and operating costs (42,064) (43,745) (44,345) (43,463) (43,827) (43,164) (43,223)
Interest payments (3,922) (3,691) (3,640) (3,848) (3,945) (4,110) (3,905)
Forecast for future new operating spending (305) (271) (1,123) (3,681) (5,365) (6,936)
Top-down expense adjustment 1,025 1,025 600 475 450 500
Net core Crown operating cash flows 1,595 2,059 115 1,368 1,819 4,846 6,242

Core Crown Capital Cash Flows

             
Net purchase of physical assets (1,955) (2,928) (3,034) (2,757) (1,850) (1,743) (1,766)
Net increase in advances (570) (1,216) (609) (569) (461) (386) (217)
Net purchase of investments (1,525) (2,045) (1,974) (1,983) (1,546) (1,509) (1,466)
Government share offer programme 628
Forecast for future new capital spending (316) (451) (796) (666) (735) (913)
Top-down capital adjustment 280 555 75 (75) 50 50
Net core Crown capital cash flows (3,422) (6,225) (5,513) (6,030) (4,598) (4,323) (4,312)
Residual cash (deficit)/surplus (1,827) (4,166) (5,398) (4,662) (2,779) 523 1,930

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

             

Debt Programme Cash Flows

             
Market:              
    Issue of government bonds 8,058 8,462 8,392 9,318 8,712 8,585 8,567
    Repayment of government bonds (8,684) (1,777) (1,779) (11,312) (11,455) (7,440)
    Net issue/(repayment) of short-term borrowing1 4,179 (2,400) (3,171) (100)
Total market debt cash flows 3,553 4,285 3,442 9,218 (2,600) (2,870) 1,127
Non-market:              
    Repayment of government bonds (482) (303) (573) (388)
    Net issue/(repayment) of short-term borrowing (480) (100) (100)
Total non-market debt cash flows (962) (403) (673) (388)
Total debt programme cash flows 2,591 3,882 2,769 8,830 (2,600) (2,870) 1,127

Other Borrowing Cash Flows

             
Net (repayment)/issue of other New Zealand dollar borrowing 3,207 509 (280) 126 1,174 (29)
Net (repayment)/issue of foreign currency borrowing (2,757) (722) (256) (94) (1,209) (9) 19
Total other borrowing cash flows 450 (213) (536) 32 (35) (9) (10)

Investing Cash Flows

             
Net sale/(purchase) of marketable securities and deposits 795 337 3,008 (4,359) 5,248 2,188 (3,222)
Issues of circulating currency 372 164 214 163 170 174 180
Decrease/(increase) in cash (2,381) (4) (57) (4) (4) (6) (5)
Total investing cash flows (1,214) 497 3,165 (4,200) 5,414 2,356 (3,047)
Residual cash deficit/(surplus) funding/(investing) 1,827 4,166 5,398 4,662 2,779 (523) (1,930)
  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 2015
  Core Crown
2015
Actual
$m
Crown entities
2015
Actual
$m
State-owned
Enterprises
2015
Actual
$m
Inter-segment
eliminations
2015
Actual
$m
Total Crown
2015
Actual
$m

Revenue

         
Taxation revenue 66,636 (581) 66,055
Other sovereign revenue 993 5,062 (1,102) 4,953
Revenue from core Crown funding 25,535 139 (25,674)
Sales of goods and services 1,393 1,854 14,171 (552) 16,866
Interest revenue and dividends 2,452 1,429 1,043 (1,400) 3,524
Other revenue 739 2,414 822 (360) 3,615
Total revenue (excluding gains) 72,213 36,294 16,175 (29,669) 95,013

Expenses

         
Social assistance and official development assistance 23,723 23,723
Personnel expenses 6,552 11,660 2,935 (23) 21,124
Other operating expenses 38,299 19,665 10,983 (28,195) 40,752
Interest expenses 3,783 221 1,280 (721) 4,563
Insurance expenses 6 4,085 11 8 4,110
Forecast for future new spending and top-down adjustment
Total expenses (excluding losses) 72,363 35,631 15,209 (28,931) 94,272
Minority interest share of operating balance before gains/(losses) 21 (384) 36 (327)
Operating balance before gains/(losses) (150) 684 582 (702) 414
Total gains/(losses) 3,670 1,417 342 (1,100) 4,329
Net surplus/(deficit) from associates and joint ventures 359 685 (235) 219 1,028
Operating balance 3,879 2,786 689 (1,583) 5,771

Expenses by functional classification

         
Social security and welfare 23,523 5,246 (538) 28,231
Health 15,058 12,922 (13,284) 14,696
Education 12,879 9,853 (9,195) 13,537
Transport and communications 2,291 2,564 6,919 (2,495) 9,279
Other 14,829 4,825 7,010 (2,698) 23,966
Finance costs 3,783 221 1,280 (721) 4,563
Forecast for future new spending and top-down adjustment
Total expenses (excluding losses) 72,363 35,631 15,209 (28,931) 94,272
Statement of Financial Position as at 30 June 2015
  Core Crown
2015
Actual
$m
Crown entities
2015
Actual
$m
State-owned
Enterprises
2015
Actual
$m
Inter-segment
eliminations
2015
Actual
$m
Total Crown
2015
Actual
$m

Assets

         
Cash and cash equivalents 9,032 2,452 1,039 (541) 11,982
Receivables 12,171 6,361 1,783 (2,713) 17,602
Other financial assets 67,552 36,443 19,766 (17,558) 106,203
Property, plant and equipment 32,289 61,417 30,852 124,558
Equity accounted investments 34,883 9,790 565 (33,320) 11,918
Intangible assets and goodwill 1,239 607 1,210 3,056
Inventory and other assets 1,547 674 1,194 (31) 3,384
Forecast for new capital spending and top-down adjustment
Total assets 158,713 117,744 56,409 (54,163) 278,703

Liabilities

         
Borrowings 95,549 5,640 28,437 (17,046) 112,580
Other liabilities 29,762 44,766 7,572 (8,213) 73,887
Total liabilities 125,311 50,406 36,009 (25,259) 186,467
Total assets less total liabilities 33,402 67,338 20,400 (28,904) 92,236

Net worth

         
Taxpayers' funds 15,766 32,400 3,752 (32,564) 19,354
Reserves 17,636 34,839 10,565 4,060 67,100
Net worth attributable to minority interest 99 6,083 (400) 5,782
Total net worth 33,402 67,338 20,400 (28,904) 92,236
Statement of Financial Performance for the year ended 30 June 2016
  Core Crown
2016
Forecast
$m
Crown entities
2016
Forecast
$m
State-owned
Enterprises
2016
Forecast
$m
Inter-segment
eliminations
2016
Forecast
$m
Total Crown
2016
Forecast
$m

Revenue

         
Taxation revenue 68,414 (766) 67,648
Other sovereign revenue 1,050 4,622 (1,213) 4,459
Revenue from core Crown funding 26,319 118 (26,437)
Sales of goods and services 1,409 1,953 14,187 (510) 17,039
Interest revenue and dividends 2,839 1,552 1,054 (1,378) 4,067
Other revenue 626 2,361 781 (176) 3,592
Total revenue (excluding gains) 74,338 36,807 16,140 (30,480) 96,805

Expenses

         
Social assistance and official development assistance 24,485 24,485
Personnel expenses 6,739 12,209 2,921 (20) 21,849
Other operating expenses 40,783 20,272 10,727 (29,058) 42,724
Interest expenses 3,656 220 1,271 (726) 4,421
Insurance expenses 2 3,989 8 (2) 3,997
Forecast for future new spending and top-down adjustment (754) (754)
Total expenses (excluding losses) 74,911 36,690 14,927 (29,806) 96,722
Minority interest share of operating balance before gains/(losses) 19 (534) 31 (484)
Operating balance before gains/(losses) (573) 136 679 (643) (401)
Total gains/(losses) 291 238 101 (197) 433
Net surplus/(deficit) from associates and joint ventures 79 185 3 (1) 266
Operating balance (203) 559 783 (841) 298

Expenses by functional classification

         
Social security and welfare 24,325 5,126 (523) 28,928
Health 15,601 13,219 (13,670) 15,150
Education 13,222 10,185 (9,414) 13,993
Transport and communications 2,265 2,667 7,119 (2,602) 9,449
Other 16,596 5,273 6,537 (2,871) 25,535
Finance costs 3,656 220 1,271 (726) 4,421
Forecast for future new spending and top-down adjustment (754) (754)
Total expenses (excluding losses) 74,911 36,690 14,927 (29,806) 96,722
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 10,529 2,386 1,694 (451) 14,158
Receivables 12,822 5,468 1,918 (2,380) 17,828
Other financial assets 64,684 36,022 20,685 (17,615) 103,776
Property, plant and equipment 33,795 63,587 31,090 128,472
Equity accounted investments 36,601 10,084 560 (35,088) 12,157
Intangible assets and goodwill 1,460 657 1,275 3,392
Inventory and other assets 1,533 592 964 (37) 3,052
Forecast for new capital spending and top-down adjustment (104) (104)
Total assets 161,320 118,796 58,186 (55,571) 282,731

Liabilities

         
Borrowings 98,091 6,117 29,879 (17,111) 116,976
Other liabilities 29,947 43,351 7,523 (7,804) 73,017
Total liabilities 128,038 49,468 37,402 (24,915) 189,993
Total assets less total liabilities 33,282 69,328 20,784 (30,656) 92,738

Net worth

         
Taxpayers' funds 15,562 34,370 4,008 (34,292) 19,648
Reserves 17,720 34,796 10,676 4,022 67,214
Net worth attributable to minority interest 162 6,100 (386) 5,876
Total net worth 33,282 69,328 20,784 (30,656) 92,738
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 71,005 (779) 70,226
Other sovereign revenue 1,066 4,677 (1,332) 4,411
Revenue from core Crown funding 26,335 102 (26,437)
Sales of goods and services 1,437 1,998 14,655 (520) 17,570
Interest revenue and dividends 2,915 1,503 1,121 (1,276) 4,263
Other revenue 587 2,443 928 (259) 3,699
Total revenue (excluding gains) 77,010 36,956 16,806 (30,603) 100,169

Expenses

         
Social assistance and official development assistance 25,566 25,566
Personnel expenses 6,580 12,311 2,913 (20) 21,784
Other operating expenses 40,205 20,279 11,261 (29,262) 42,483
Interest expenses 3,946 222 1,288 (626) 4,830
Insurance expenses 8 4,103 8 (7) 4,112
Forecast for future new spending and top-down adjustment 523 523
Total expenses (excluding losses) 76,828 36,915 15,470 (29,915) 99,298
Minority interest share of operating balance before gains/(losses) 24 (571) 32 (515)
Operating balance before gains/(losses) 182 65 765 (656) 356
Total gains/(losses) 2,021 195 32 (158) 2,090
Net surplus/(deficit) from associates and joint ventures 92 186 7 (6) 279
Operating balance 2,295 446 804 (820) 2,725

Expenses by functional classification

         
Social security and welfare 25,209 5,310 (560) 29,959
Health 15,616 13,166 (13,754) 15,028
Education 13,316 10,206 (9,419) 14,103
Transport and communications 2,321 2,691 7,382 (2,614) 9,780
Other 15,897 5,320 6,800 (2,942) 25,075
Finance costs 3,946 222 1,288 (626) 4,830
Forecast for future new spending and top-down adjustment 523 523
Total expenses (excluding losses) 76,828 36,915 15,470 (29,915) 99,298
Statement of Financial Position as at 30 June 2017
  Core Crown
2017
Forecast
$m
Crown entities
2017
Forecast
$m
State-owned
Enterprises
2017
Forecast
$m
Inter-segment
eliminations
2017
Forecast
$m
Total Crown
2017
Forecast
$m

Assets

         
Cash and cash equivalents 10,637 2,220 1,651 (403) 14,105
Receivables 12,602 4,999 1,868 (1,639) 17,830
Other financial assets 70,202 36,560 21,894 (17,789) 110,867
Property, plant and equipment 35,167 65,304 31,444 131,915
Equity accounted investments 38,200 10,301 587 (36,678) 12,410
Intangible assets and goodwill 1,555 722 1,288 3,565
Inventory and other assets 1,533 608 882 (38) 2,985
Forecast for new capital spending and top-down adjustment 617 617
Total assets 170,513 120,714 59,614 (56,547) 294,294

Liabilities

         
Borrowings 106,693 6,409 31,062 (17,293) 126,871
Other liabilities 28,216 43,158 7,489 (7,005) 71,858
Total liabilities 134,909 49,567 38,551 (24,298) 198,729
Total assets less total liabilities 35,604 71,147 21,063 (32,249) 95,565

Net worth

         
Taxpayers' funds 17,857 36,377 4,244 (35,889) 22,589
Reserves 17,747 34,591 10,683 4,024 67,045
Net worth attributable to minority interest 179 6,136 (384) 5,931
Total net worth 35,604 71,147 21,063 (32,249) 95,565
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 75,128 (777) 74,351
Other sovereign revenue 1,076 4,890 (1,420) 4,546
Revenue from core Crown funding 26,292 101 (26,393)
Sales of goods and services 1,515 2,063 15,228 (526) 18,280
Interest revenue and dividends 3,107 1,493 1,272 (1,261) 4,611
Other revenue 566 2,475 964 (253) 3,752
Total revenue (excluding gains) 81,392 37,213 17,565 (30,630) 105,540

Expenses

         
Social assistance and official development assistance 26,440 26,440
Personnel expenses 6,606 12,406 2,938 (20) 21,930
Other operating expenses 40,345 20,186 11,801 (29,340) 42,992
Interest expenses 4,051 232 1,412 (618) 5,077
Insurance expenses 9 4,396 8 (8) 4,405
Forecast for future new spending and top-down adjustment 3,206 3,206
Total expenses (excluding losses) 80,657 37,220 16,159 (29,986) 104,050
Minority interest share of operating balance before gains/(losses) 9 (575) 33 (533)
Operating balance before gains/(losses) 735 2 831 (611) 957
Total gains/(losses) 2,151 202 18 (204) 2,167
Net surplus/(deficit) from associates and joint ventures 94 186 7 (8) 279
Operating balance 2,980 390 856 (823) 3,403

Expenses by functional classification

         
Social security and welfare 26,007 5,490 (577) 30,920
Health 15,668 13,151 (13,839) 14,980
Education 13,332 10,161 (9,371) 14,122
Transport and communications 2,404 2,704 7,659 (2,687) 10,080
Other 15,989 5,482 7,088 (2,894) 25,665
Finance costs 4,051 232 1,412 (618) 5,077
Forecast for future new spending and top-down adjustment 3,206 3,206
Total expenses (excluding losses) 80,657 37,220 16,159 (29,986) 104,050
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 11,273 2,090 1,714 (403) 14,674
Receivables 13,191 4,826 1,854 (1,500) 18,371
Other financial assets 66,450 37,882 23,250 (18,350) 109,232
Property, plant and equipment 35,537 66,893 31,658 134,088
Equity accounted investments 39,574 10,490 631 (38,042) 12,653
Intangible assets and goodwill 1,551 734 1,265 3,550
Inventory and other assets 1,579 615 855 (37) 3,012
Forecast for new capital spending and top-down adjustment 1,358 1,358
Total assets 170,513 123,530 61,227 (58,332) 296,938

Liabilities

         
Borrowings 103,944 6,745 32,407 (17,854) 125,242
Other liabilities 27,956 43,883 7,619 (6,851) 72,607
Total liabilities 131,900 50,628 40,026 (24,705) 197,849
Total assets less total liabilities 38,613 72,902 21,201 (33,627) 99,089

Net worth

         
Taxpayers' funds 20,837 38,309 4,333 (37,272) 26,207
Reserves 17,776 34,383 10,696 4,027 66,882
Net worth attributable to minority interest 210 6,172 (382) 6,000
Total net worth 38,613 72,902 21,201 (33,627) 99,089
Statement of Financial Performance for the year ended 30 June 2019
  Core Crown
2019
Forecast
$m
Crown entities
2019
Forecast
$m
State-owned
Enterprises
2019
Forecast
$m
Inter-segment
eliminations
2019
Forecast
$m
Total Crown
2019
Forecast
$m

Revenue

         
Taxation revenue 79,930 (796) 79,134
Other sovereign revenue 1,091 5,143 (1,515) 4,719
Revenue from core Crown funding 26,267 101 (26,368)
Sales of goods and services 1,551 2,109 15,377 (537) 18,500
Interest revenue and dividends 3,395 1,547 1,348 (1,296) 4,994
Other revenue 543 2,506 1,002 (253) 3,798
Total revenue (excluding gains) 86,510 37,572 17,828 (30,765) 111,145

Expenses

         
Social assistance and official development assistance 27,203 27,203
Personnel expenses 6,615 12,475 2,996 (20) 22,066
Other operating expenses 40,326 20,119 11,909 (29,425) 42,929
Interest expenses 4,220 240 1,444 (644) 5,260
Insurance expenses 6 4,742 8 (5) 4,751
Forecast for future new spending and top-down adjustment 4,915 4,915
Total expenses (excluding losses) 83,285 37,576 16,357 (30,094) 107,124
Minority interest share of operating balance before gains/(losses) 12 (581) 33 (536)
Operating balance before gains/(losses) 3,225 8 890 (638) 3,485
Total gains/(losses) 2,315 303 13 (219) 2,412
Net surplus/(deficit) from associates and joint ventures 90 184 9 (2) 281
Operating balance 5,630 495 912 (859) 6,178

Expenses by functional classification

         
Social security and welfare 26,746 5,816 (594) 31,968
Health 15,735 13,156 (13,936) 14,955
Education 13,315 10,099 (9,305) 14,109
Transport and communications 2,435 2,681 7,869 (2,728) 10,257
Other 15,919 5,584 7,044 (2,887) 25,660
Finance costs 4,220 240 1,444 (644) 5,260
Forecast for future new spending and top-down adjustment 4,915 4,915
Total expenses (excluding losses) 83,285 37,576 16,357 (30,094) 107,124
Statement of Financial Position as at 30 June 2019
  Core Crown
2019
Forecast
$m
Crown entities
2019
Forecast
$m
State-owned
Enterprises
2019
Forecast
$m
Inter-segment
eliminations
2019
Forecast
$m
Total Crown
2019
Forecast
$m

Assets

         
Cash and cash equivalents 11,945 2,109 2,131 (401) 15,784
Receivables 13,849 4,873 1,896 (1,537) 19,081
Other financial assets 65,798 39,296 24,643 (19,018) 110,719
Property, plant and equipment 35,704 68,456 31,636 135,796
Equity accounted investments 41,042 10,680 681 (39,450) 12,953
Intangible assets and goodwill 1,555 719 1,261 3,535
Inventory and other assets 1,612 625 861 (36) 3,062
Forecast for new capital spending and top-down adjustment 2,043 2,043
Total assets 173,548 126,758 63,109 (60,442) 302,973

Liabilities

         
Borrowings 100,923 7,008 33,921 (18,519) 123,333
Other liabilities 28,341 44,966 7,787 (6,856) 74,238
Total liabilities 129,264 51,974 41,708 (25,375) 197,571
Total assets less total liabilities 44,284 74,784 21,401 (35,067) 105,402

Net worth

         
Taxpayers' funds 26,468 40,354 4,492 (38,725) 32,589
Reserves 17,816 34,184 10,699 4,037 66,736
Net worth attributable to minority interest 246 6,210 (379) 6,077
Total net worth 44,284 74,784 21,401 (35,067) 105,402
Statement of Financial Performance for the year ended 30 June 2020
  Core Crown
2020
Forecast
$m
Crown entities
2020
Forecast
$m
State-owned
Enterprises
2020
Forecast
$m
Inter-segment
eliminations
2020
Forecast
$m
Total Crown
2020
Forecast
$m

Revenue

         
Taxation revenue 84,021 (880) 83,141
Other sovereign revenue 1,107 5,288 (1,516) 4,879
Revenue from core Crown funding 26,310 102 (26,412)
Sales of goods and services 1,560 2,185 15,632 (537) 18,840
Interest revenue and dividends 3,587 1,604 1,447 (1,337) 5,301
Other revenue 543 2,526 1,026 (253) 3,842
Total revenue (excluding gains) 90,818 37,913 18,207 (30,935) 116,003

Expenses

         
Social assistance and official development assistance 28,353 28,353
Personnel expenses 6,616 12,653 3,056 (20) 22,305
Other operating expenses 40,415 20,024 12,083 (29,523) 42,999
Interest expenses 4,331 246 1,501 (670) 5,408
Insurance expenses 9 4,958 8 (9) 4,966
Forecast for future new spending and top-down adjustment 6,436 6,436
Total expenses (excluding losses) 86,160 37,881 16,648 (30,222) 110,467
Minority interest share of operating balance before gains/(losses) (20) (606) 35 (591)
Operating balance before gains/(losses) 4,658 12 953 (678) 4,945
Total gains/(losses) 2,480 308 5 (229) 2,564
Net surplus/(deficit) from associates and joint ventures 94 188 11 (10) 283
Operating balance 7,232 508 969 (917) 7,792

Expenses by functional classification

         
Social security and welfare 27,865 6,052 (594) 33,323
Health 15,733 13,149 (13,934) 14,948
Education 13,431 10,134 (9,339) 14,226
Transport and communications 2,420 2,630 8,089 (2,744) 10,395
Other 15,944 5,670 7,058 (2,941) 25,731
Finance costs 4,331 246 1,501 (670) 5,408
Forecast for future new spending and top-down adjustment 6,436 6,436
Total expenses (excluding losses) 86,160 37,881 16,648 (30,222) 110,467
Statement of Financial Position as at 30 June 2020
  Core Crown
2020
Forecast
$m
Crown entities
2020
Forecast
$m
State-owned
Enterprises
2020
Forecast
$m
Inter-segment
eliminations
2020
Forecast
$m
Total Crown
2020
Forecast
$m

Assets

         
Cash and cash equivalents 12,659 2,105 2,634 (402) 16,996
Receivables 14,421 5,011 1,938 (1,593) 19,777
Other financial assets 70,656 40,719 26,135 (19,559) 117,951
Property, plant and equipment 35,848 69,468 31,233 136,549
Equity accounted investments 42,487 10,864 729 (40,885) 13,195
Intangible assets and goodwill 1,546 682 1,263 3,491
Inventory and other assets 1,645 636 869 (37) 3,113
Forecast for new capital spending and top-down adjustment 2,906 2,906
Total assets 182,168 129,485 64,801 (62,476) 313,978

Liabilities

         
Borrowings 102,364 7,091 35,242 (19,054) 125,643
Other liabilities 28,239 45,754 7,894 (6,840) 75,047
Total liabilities 130,603 52,845 43,136 (25,894) 200,690
Total assets less total liabilities 51,565 76,640 21,665 (36,582) 113,288

Net worth

         
Taxpayers' funds 33,700 42,457 4,692 (40,240) 40,609
Reserves 17,865 33,958 10,704 4,037 66,564
Net worth attributable to minority interest 225 6,269 (379) 6,115
Total net worth 51,565 76,640 21,665 (36,582) 113,288

Core Crown Expense Tables

Core Crown Expense Tables
($millions) 2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Social security and welfare 21,724 21,956 22,459 23,026 23,523 24,325 25,209 26,007 26,746 27,865
GSF pension expenses 305 192 278 282 358 265 206 208 219 230
Health 13,753 14,160 14,498 14,898 15,058 15,601 15,616 15,668 15,735 15,733
Education 11,650 11,654 12,504 12,300 12,879 13,222 13,316 13,332 13,315 13,431
Core government services 5,563 5,428 4,294 4,502 4,134 4,976 4,782 4,864 4,850 4,814
Law and order 3,312 3,338 3,394 3,463 3,515 3,635 3,530 3,518 3,510 3,513
Defence 1,809 1,736 1,804 1,811 1,961 2,079 2,146 2,110 2,117 2,117
Transport and communications 2,281 2,232 2,255 2,237 2,291 2,265 2,321 2,404 2,435 2,420
Economic and industrial services 2,542 2,073 1,978 2,058 2,228 2,196 2,248 2,246 2,186 2,265
Heritage, culture and recreation 741 863 804 842 778 828 797 791 777 789
Primary services 706 648 659 676 667 822 672 655 672 661
Housing and community development 943 ( 46) 283 347 320 619 506 484 477 475
Environmental protection 1,225 769 530 533 723 637 581 625 627 596
Other 479 425 603 579 145 539 429 488 484 484
Finance costs 3,066 3,511 3,619 3,620 3,783 3,656 3,946 4,051 4,220 4,331
Forecast for future new spending1  ..   ..   ..   ..   ..  271 1,123 3,681 5,365 6,936
Top-down expense adjustment  ..   ..   ..   ..   ..  ( 1,025) ( 600) ( 475) ( 450) ( 500)
Core Crown expenses 70,099 68,939 69,962 71,174 72,363 74,911 76,828 80,657 83,285 86,160
  1. The classifications of the functions of the Government reflect current approved baselines. Forecast new operating spending is shown as a separate line item in the above analysis and will be allocated to functions of the Government once decisions are made in future Budgets.

Source: The Treasury

Table 6.1 - Social security and welfare expenses
($millions) 2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Welfare benefits (see below) 19,781 20,375 20,789 21,187 21,680 22,503 23,501 24,306 25,035 26,138
Social rehabilitation and compensation 119 81 107 173 142 151 157 163 176 176
Departmental expenses 1,127 1,122 1,168 1,204 1,319 1,370 1,268 1,256 1,255 1,270
Child support impairment ..  ..  ..  ..  ..  5 5 5 5 5
Other non-departmental expenses1 697 378 395 462 382 296 278 277 275 276
Social security and welfare expenses 21,724 21,956 22,459 23,026 23,523 24,325 25,209 26,007 26,746 27,865
  1. Other non-departmental expenses and other expenses include costs associated with the Canterbury earthquakes. This is most representative in the 2011 year. From 2016 some non-departmental expenses spending has been reclassified to community services in housing and community development expenses.

Source: The Treasury

Table 6.2 - Welfare benefit expenses
($millions) 2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
New Zealand Superannuation 8,830 9,584 10,235 10,913 11,591 12,223 12,860 13,522 14,234 15,072
Jobseeker Support and Emergency Benefit1 ..  ..  ..  1,691 1,684 1,676 1,718 1,678 1,597 1,591
Supported living payment1 ..  ..  ..  1,422 1,515 1,526 1,538 1,545 1,570 1,602
Sole parent support1 ..  ..  ..  1,222 1,186 1,157 1,254 1,253 1,242 1,250
Domestic Purposes Benefit1 1,757 1,811 1,738 63 ..  ..  ..  ..  ..  .. 
Invalid's Benefit1 1,306 1,325 1,330 52 ..  ..  ..  ..  ..  .. 
Sickness Benefit1 743 775 782 29 ..  ..  ..  ..  ..  .. 
Unemployment Benefit 943 883 812 29 ..  ..  ..  ..  ..  .. 
Family Tax Credit 2,130 2,071 2,018 1,965 1,854 1,834 1,851 1,948 1,991 2,100
Other working for families tax credits 616 599 575 567 549 567 645 638 629 628
Accommodation Assistance 1,197 1,195 1,177 1,146 1,129 1,154 1,199 1,222 1,206 1,209
Income-Related Rents 553 580 611 660 703 778 818 872 927 1,025
Disability Assistance 409 401 384 379 377 378 380 383 383 387
Benefits paid in Australia 40 37 22 19 15 40 ..  ..  ..  .. 
Paid Parental Leave 154 158 165 165 180 233 268 275 282 290
Childcare Assistance 188 188 186 186 183 188 218 216 218 220
Veterans Support Entitlement2 135 128 123 119 115 107 98 94 90 87
Veteran's Pension 178 177 171 165 178 186 177 168 160 152
Other benefits 602 463 460 395 421 456 477 492 506 525
Benefit expenses 19,781 20,375 20,789 21,187 21,680 22,503 23,501 24,306 25,035 26,138

Source: The Treasury

Table 6.2 - Welfare benefit expenses (continued)
Beneficiary numbers
(Thousands)
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
New Zealand Superannuation 561 585 612 640 665 691 719 744 770 797
Jobseeker Support and Emergency Benefit1 ..  ..  ..  138 133 131 133 129 120 117
Supported living payment1 ..  ..  ..  96 98 98 98 98 98 98
Sole parent support1 ..  ..  ..  78 72 68 69 68 66 65
Domestic Purposes Benefit1 114 114 109 ..  ..  ..  ..  ..  ..  .. 
Invalid's Benefit1 88 87 87 ..  ..  ..  ..  ..  ..  .. 
Sickness Benefit1 60 60 60 ..  ..  ..  ..  ..  ..  .. 
Unemployment Benefit1 80 73 67 ..  ..  ..  ..  ..  ..  .. 
Accommodation Assistance 320 311 305 297 292 297 308 313 308 308

Source: Ministry of Social Development

  1. From July 2013, changes to the benefit system and existing benefit categories took place. Three new categories of benefit; Supported living payment, Sole parent support and Jobseeker support; have replaced the following existing categories: Domestic Purposes Benefit, Invalid's Benefit, Unemployment Benefit, Sickness Benefit and Widow's Benefit. Owing to the changes, there is no historical data for the new benefit categories and no forecast data for the previous categories beyond July 2013.
  2. From 2015, War Disablement Pensions have been renamed Veterans Support Entitlements.
Table 6.3 - Health expenses
($millions) 2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Departmental outputs 199 186 171 183 190 187 186 185 185 185
Health services purchasing (see below) 12,530 13,018 13,348 13,648 13,937 14,343 14,288 14,261 14,249 14,247
Other non-departmental outputs 120 119 234 330 312 347 343 354 367 367
Health payments to ACC 849 744 715 694 587 693 769 838 905 905
Other expenses 55 93 30 43 32 31 30 30 29 29
Health expenses 13,753 14,160 14,498 14,898 15,058 15,601 15,616 15,668 15,735 15,733

Source: The Treasury

Table 6.4 - Health services purchasing
($millions) 2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Payments to District Health Boards 11,133 11,542 11,946 12,165 12,414 12,772 12,768 12,749 12,737 12,735
National disability support services 971 1,029 1,028 1,087 1,126 1,158 1,155 1,153 1,153 1,153
Public health services purchasing 426 447 374 396 397 413 365 359 359 359
Health services purchasing 12,530 13,018 13,348 13,648 13,937 14,343 14,288 14,261 14,249 14,247

Source: The Treasury

Table 6.5 - Education expenses
($millions) 2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Early childhood education 1,340 1,355 1,436 1,545 1,644 1,708 1,763 1,798 1,850 1,909
Primary and secondary schools (see below) 5,354 5,443 5,590 5,550 5,773 6,046 6,064 6,042 5,983 6,015
Tertiary funding (see below) 3,991 3,795 4,370 4,027 4,272 4,271 4,317 4,320 4,322 4,349
Departmental expenses 923 988 1,039 1,107 1,129 1,111 1,094 1,098 1,095 1,094
Other education expenses 42 73 69 71 61 86 78 74 65 64
Education expenses 11,650 11,654 12,504 12,300 12,879 13,222 13,316 13,332 13,315 13,431

Source: The Treasury

Table 6.5 - Education expenses (continued)
Number of places provided1 2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Early childhood education 159,997 166,434 174,782 183,843 193,862 196,964 200,974 202,455 206,764 212,342
  1. Full-time equivalent based on 1,000 funded child hours per calendar year. Note that historical place numbers have been revised so may differ from previous published Economic and Fiscal Update numbers.

Source: Ministry of Education

Table 6.6 - Primary and secondary schools

($millions)

2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Primary 2,731 2,771 2,845 2,812 2,920 3,064 3,084 3,070 3,038 3,050
Secondary 2,051 2,085 2,148 2,146 2,229 2,296 2,295 2,283 2,264 2,282
School transport 163 172 175 177 186 187 190 197 192 192
Special needs support 310 323 332 322 336 394 396 396 391 393
Professional development 90 85 84 87 98 100 94 91 92 92
Schooling improvement 9 7 6 6 4 5 5 5 6 6
Primary and secondary education expenses 5,354 5,443 5,590 5,550 5,773 6,046 6,064 6,042 5,983 6,015

Source: The Treasury

Table 6.6 - Primary and secondary schools (continued)
Number of places provided1 2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Primary 489,275 489,799 493,025 497,765 507,132 513,267 516,456 518,065 517,510 515,769
Secondary 274,518 271,078 267,627 266,734 265,557 274,163 273,775 273,228 274,268 277,882
  1. These are snapshots based as at 1 July for primary year levels (years 1 to 8) and 1 March for secondary year levels (years 9 to 13). These numbers exclude special school rolls, health camps, hospital schools and home schooling (prior published tables included special school rolls).

These estimates include a new entrant adjustment to make provision for the number of new entrants likely to be enrolled between 1 March and 10 October. Actual numbers have been restated to include this adjustment so may differ from previous published Economic and Fiscal Update numbers.

Source: Ministry of Education

Table 6.7 - Tertiary funding
($millions) 2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Tuition 2,354 2,306 2,322 2,383 2,406 2,482 2,479 2,467 2,467 2,469
Other tertiary funding 429 430 432 463 484 503 508 502 502 502
Student allowances 620 644 596 539 511 509 545 561 560 567
Student loans 588 415 1,020 642 871 777 785 790 793 811
Tertiary education expenses 3,991 3,795 4,370 4,027 4,272 4,271 4,317 4,320 4,322 4,349

Source: The Treasury

Table 6.7 - Tertiary funding (continued)
Number of places provided1 2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Actual delivered and estimated funded places 240,529 245,784 240,472 237,898 234,500 237,200 235,829 235,629 236,029 236,029
  1. Tertiary places are the number of equivalent full time (EFT) students in: student achievement component; adult and community education; and youth guarantee programmes. Note that historical place numbers have been revised so may differ from previous published Economic and Fiscal Update numbers. Place numbers are based on calendar years rather than fiscal years.

Source: Ministry of Education

Table 6.8 - Core government service expenses
($millions) 2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Official development assistance 495 510 437 533 513 559 572 586 586 586
Indemnity and guarantee expenses 319 59 27 29 38 27 25 25 25 25
Departmental expenses 1,492 1,518 1,576 1,635 1,740 1,935 1,916 1,981 1,912 1,835
Non-departmental expenses1 471 524 330 689 481 396 456 553 551 593
Tax receivable write-down and impairments 1,010 1,003 925 1,069 873 1,179 1,232 1,275 1,326 1,323
Science expenses 174 116 115 118 121 120 112 113 128 128
Other expenses1 1,602 1,698 884 429 368 760 469 331 322 324
Core government service expenses 5,563 5,428 4,294 4,502 4,134 4,976 4,782 4,864 4,850 4,814
  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) 2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Police 1,393 1,394 1,408 1,416 1,456 1,473 1,448 1,440 1,439 1,440
Ministry of Justice 327 375 404 433 451 478 442 435 435 435
Department of Corrections 956 988 972 1,001 1,024 1,050 1,032 1,028 1,024 1,025
NZ Customs Service 120 126 140 150 161 159 163 164 164 165
Other departments 237 103 98 86 100 101 95 98 98 98
Department expenses 3,033 2,986 3,022 3,086 3,192 3,261 3,180 3,165 3,160 3,163
Non-departmental outputs 261 315 317 327 320 357 326 331 324 324
Other expenses 18 37 55 50 3 17 24 22 26 26
Law and order expenses 3,312 3,338 3,394 3,463 3,515 3,635 3,530 3,518 3,510 3,513

Source: The Treasury

Table 6.10 - Defence expenses
($millions) 2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
NZDF core expenses 1,736 1,678 1,747 1,768 1,879 2,009 2,073 2,033 2,041 2,041
Other expenses 73 58 57 43 82 70 73 77 76 76
Defence expenses 1,809 1,736 1,804 1,811 1,961 2,079 2,146 2,110 2,117 2,117

Source: The Treasury

Table 6.11 - Transport and communication expenses
($millions) 2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
New Zealand Transport Agency 1,696 1,744 1,819 1,880 1,992 2,039 2,082 2,132 2,186 2,186
Departmental outputs 65 60 40 45 43 50 49 48 47 46
Other non-departmental expenses 105 62 213 227 114 115 132 168 176 161
Rail funding 386 305 153 56 93 3 3 3 3 3
Other expenses 29 61 30 29 49 58 55 53 23 24
Transport and communication expenses 2,281 2,232 2,255 2,237 2,291 2,265 2,321 2,404 2,435 2,420

Source: The Treasury

Table 6.12 - Economic and industrial services expenses
($millions) 2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Departmental outputs 420 346 350 372 391 409 388 387 388 388
Employment initiatives1 214 206 192 141 75 4 4 4 4 4
Non-departmental outputs 689 614 618 660 742 902 926 873 820 819
KiwiSaver (includes housing deposit subsidy) 1,045 698 740 828 888 787 835 885 924 961
Other expenses 174 209 78 57 132 94 95 97 50 93
Economic and industrial services expenses 2,542 2,073 1,978 2,058 2,228 2,196 2,248 2,246 2,186 2,265
  1. From 2016 some of the employment initiatives spending has been reclassified to other non-departmental expenses in housing and community development expenses.

Source: The Treasury

Table 6.13 - Heritage, culture and recreation expenses
($millions) 2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Departmental outputs 133 172 270 286 280 274 271 273 273 273
Non-departmental outputs 455 444 442 471 468 480 476 476 476 489
Other expenses 153 247 92 85 30 74 50 42 28 27
Heritage, culture and recreation expenses 741 863 804 842 778 828 797 791 777 789

Source: The Treasury

Table 6.14 - Primary service expenses
($millions) 2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Departmental expenses 354 348 347 365 384 432 416 406 409 405
Non-departmental outputs 142 134 137 135 114 90 37 73 78 69
Biological research 167 102 105 92 91 98 89 84 95 95
Other expenses 43 64 70 84 78 202 130 92 90 92
Primary service expenses 706 648 659 676 667 822 672 655 672 661

Source: The Treasury

Table 6.15 - Housing and community development expenses
($millions) 2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Financial assistance package1 567 (407) (60) ..  ..  ..  ..  ..  ..  .. 
Housing subsidies 31 22 5 5 5 6 6 6 6 6
Community Services2 ..  ..  ..  ..  ..  194 192 187 187 187
Departmental outputs 136 98 89 100 113 188 174 167 164 163
Other non-departmental expenses 105 113 117 138 117 141 108 97 93 92
Warm up New Zealand 67 84 76 49 37 23 ..  ..  ..  .. 
Other expenses 37 44 56 55 48 67 26 27 27 27
Housing and community development expenses 943 (46) 283 347 320 619 506 484 477 475
  1. Financial assistance package for 2012 and 2013 actual includes the impact of a revised estimate of the weathertight homes financial assistance package provision.
  2. For 2016 onwards, community services have been reclassified from non-departmental expenses in Social Security and Welfare expenses and employment initiatives in economic expenses.

Source: The Treasury

Table 6.16 - Environmental protection expenses
($millions) 2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Emissions Trading Scheme 838 334 55 46 133 114 119 148 152 120
Departmental outputs 301 342 335 362 360 380 360 363 366 367
Non-departmental outputs 26 46 88 48 41 67 42 52 50 50
Other expenses 60 47 52 77 189 76 60 62 59 59
Environmental protection expenses 1,225 769 530 533 723 637 581 625 627 596

Source: The Treasury

Glossary of Terms

Accruals basis of accounting

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

Appropriations

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

Baselines

The level of funding approved for any given area of spending (eg, Vote Education).

Commercial portfolio

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

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 Inland Revenue pending assessments (where there is a proposed adjustment to a tax assessment).

Contingent liabilities

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

Core Crown

A reporting segment consisting of the Crown, departments, Offices of Parliament, the NZS Fund and the Reserve Bank. For a list of all entities included in this segment, refer to the Government Reporting Entity on pages 99 to 101.

Core Crown expenses

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

Core Crown revenue

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

Corporate tax

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

Current account (Balance of Payments)

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

Cyclically-adjusted balance (CAB) or structural balance

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

Demographic changes

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

Domestic bond programme

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

Excise duties

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

Financial assets

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

Financial liabilities

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

Financial portfolio

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

Fiscal drag

The additional personal income tax generated as an individual's average tax rate increases as their income increases.

Fiscal impulse

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

Fiscal intentions (short-term)

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

Fiscal objectives (long-term)

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

Forecast new capital spending (Capital allowance)

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

Forecast new operating spending (Operating allowance)

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

Gains and losses

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

GDP deflator

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

Generally accepted accounting practice (GAAP)

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

Government Finance Statistics (GFS)

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

Gross debt

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

Gross domestic product (GDP)

A measure of the value-added of all goods and services produced in New Zealand. Changes in GDP measure growth or contraction in economic activity or output. GDP can be measured on either an expenditure or production basis and in either real or nominal terms. (See following definitions.)

Gross domestic product (expenditure)

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

Gross domestic product (nominal)

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

Gross domestic product (production)

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

Gross domestic product (real)

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

Gross national expenditure (GNE)

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

Gross sovereign-issued debt (GSID)

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

Insurance liabilities

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

Inter-segment eliminations

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

Labour force participation rate

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

Labour productivity

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

Line-by-line consolidation

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

Loan-to-value ratio (LVR)

A measure of how much a bank lends against residential property, compared to the value of that property. The Reserve Bank introduced LVR restrictions in October 2013 and changed them in November 2015. Investor loans in the Auckland Council area with a LVR of more than 70% can make up no more than 5% of a bank's total new lending within this category. Non-investor loans in the Auckland Council area with an LVR of more than 80% can make up no more than 10% of a bank's total lending in that category (the same as the original restrictions). All loans outside the Auckland Council area with a LVR of more than 80% can make up no more than 15% of a bank's total lending in that category.

Marketable securities

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

Minority interest

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

Monetary conditions

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

Monetary policy

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

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

National saving

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

Net core Crown cash flow from operations

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

Net core Crown debt

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

Net international investment position (NIIP)

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

Net worth

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

Net worth attributable to the Crown

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

Operating balance

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

Operating balance before gains and losses (OBEGAL)

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

Output gap

The difference between actual and potential GDP. (See Potential output.)

Outputs

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

Potential output

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

Productivity

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

Projections

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

Residual cash

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

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

Settlement cash

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

Social portfolio

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

Specific fiscal risks

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

System of National Accounts (SNA)

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

Tax revenue

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

Terms of trade

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

Top-down adjustment

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

Total borrowings

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

Total Crown

Includes the core Crown (defined above) plus Crown entities and SOEs as defined by the Government Reporting Entity on pages 99 to 101.

Tradable/non-tradable output

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

Trade-weighted index (TWI)

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

Votes

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

Year ended

Graphs and tables within this document use different expressions of the timeframe. While some tables may refer to the end of the tax year (31 March), others will refer to the end of the Government's financial year (30 June). For example, unless otherwise stated references to 2014/15 or 2015 will mean the end of the financial year.

Time Series of Fiscal and Economic Indicators

Fiscal Indicators
June years 2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast

$millions

                             

Revenue and expenses

                             
Core Crown tax revenue 50,973 53,477 56,747 54,681 50,744 51,557 55,081 58,651 61,563 66,636 68,414 71,005 75,128 79,930 84,021
Core Crown revenue 55,499 57,971 61,575 59,191 55,757 57,199 60,428 63,805 67,093 72,213 74,338 77,010 81,392 86,510 90,818
Core Crown expenses 49,084 53,764 56,753 63,711 63,554 70,099 68,939 69,962 71,174 72,363 74,911 76,828 80,657 83,285 86,160

Surpluses

                             
Total Crown OBEGAL 7,091 5,860 5,637 (3,893) (6,315) (18,396) (9,240) (4,414) (2,802) 414 (401) 356 957 3,485 4,945
Total Crown operating balance 9,542 8,023 2,384 (10,505) (4,509) (13,360) (14,897) 6,925 2,939 5,771 298 2,725 3,403 6,178 7,792

Cash position

                             
Core Crown residual cash 2,985 2,793 2,057 (8,639) (9,000) (13,343) (10,644) (5,742) (4,109) (1,827) (5,398) (4,662) (2,779) 523 1,930

Debt

                             
Gross debt1 33,903 30,647 31,390 43,356 53,591 72,420 79,635 77,984 81,956 86,125 87,123 95,676 92,926 89,907 91,346
Gross debt incl RB settlement cash and bank bills 35,867 36,805 37,745 50,973 58,891 77,290 84,168 84,286 88,468 93,156 94,913 103,466 100,716 97,697 99,136
Net core Crown debt (incl NZS Fund)2 6,302 1,620 (2,676) 5,633 12,549 23,969 33,475 34,428 34,174 30,862 34,313 37,618 38,278 35,465 31,375
Net core Crown debt2 16,163 13,380 10,258 17,119 26,738 40,128 50,671 55,835 59,931 60,631 65,890 70,690 73,421 72,825 71,110

Net worth

                             
Total Crown net worth 83,971 96,827 105,514 99,515 94,988 80,887 59,780 70,011 80,697 92,236 92,738 95,565 99,089 105,402 113,288
Total net worth attributable to the Crown 83,678 96,531 105,132 99,068 94,586 80,579 59,348 68,071 75,486 86,454 86,862 89,634 93,089 99,325 107,173
Nominal GDP (revised actuals) 164,969 174,967 188,108 187,493 195,401 203,757 212,326 216,602 233,964 240,591 244,923 254,972 271,233 284,874 296,300

% GDP

                             

Revenue and expenses

                             
Core Crown tax revenue 30.9 30.6 30.2 29.2 26.0 25.3 25.9 27.1 26.3 27.7 27.9 27.8 27.7 28.1 28.4
Core Crown revenue 33.6 33.1 32.7 31.6 28.5 28.1 28.5 29.5 28.7 30.0 30.4 30.2 30.0 30.4 30.7
Core Crown expenses 29.8 30.7 30.2 34.0 32.5 34.4 32.5 32.3 30.4 30.1 30.6 30.1 29.7 29.2 29.1

Surpluses

                             
Total Crown OBEGAL 4.3 3.3 3.0 (2.1) (3.2) (9.0) (4.4) (2.0) (1.2) 0.2 (0.2) 0.1 0.4 1.2 1.7
Total Crown operating balance 5.8 4.6 1.3 (5.6) (2.3) (6.6) (7.0) 3.2 1.3 2.4 0.1 1.1 1.3 2.2 2.6

Cash position

                             
Core Crown residual cash 1.8 1.6 1.1 (4.6) (4.6) (6.5) (5.0) (2.7) (1.8) (0.8) (2.2) (1.8) (1.0) 0.2 0.7

Debt

                             
Gross debt1 20.6 17.5 16.7 23.1 27.4 35.5 37.5 36.0 35.0 35.8 35.6 37.5 34.3 31.6 30.8
Gross debt incl RB settlement cash and bank bills 21.7 21.0 20.1 27.2 30.1 37.9 39.6 38.9 37.8 38.7 38.8 40.6 37.1 34.3 33.5
Net core Crown debt (incl NZS Fund)2 3.8 0.9 (1.4) 3.0 6.4 11.8 15.8 15.9 14.6 12.8 14.0 14.8 14.1 12.4 10.6
Net core Crown debt2 9.8 7.6 5.5 9.1 13.7 19.7 23.9 25.8 25.6 25.2 26.9 27.7 27.1 25.6 24.0

Net worth

                             
Total Crown net worth 50.9 55.3 56.1 53.1 48.6 39.7 28.2 32.3 34.5 38.3 37.9 37.5 36.5 37.0 38.2
Total net worth attributable to the Crown 50.7 55.2 55.9 52.8 48.4 39.5 28.0 31.4 32.3 35.9 35.5 35.2 34.3 34.9 36.2
  1. Excludes Reserve Bank settlement cash and bank bills.
  2. Excludes advances.
Economic Indicators
March years
Annual average % change
2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Private consumption 4.9 2.3 3.7 -1.6 1.7 2.1 2.7 2.5 3.1 3.1 2.7 2.3 2.3 2.5 2.1
Public consumption 7.1 4.1 4.7 4.0 -0.5 2.0 1.5 -0.6 2.7 2.8 2.7 1.0 1.9 1.9 0.9
TOTAL CONSUMPTION 5.5 2.7 4.0 -0.2 1.1 2.0 2.4 1.7 3.0 3.0 2.7 2.0 2.3 2.3 1.8
Residential investment  -4.9 -1.1 1.8 -21.2 -9.0 1.6 -0.2 17.7 16.6 12.3 5.9 6.7 4.9 2.8 1.4
Non-market investment 9.5 -0.7 -6.7 24.1 -1.0 0.6 -9.0 -21.1 12.4 2.1 10.7 8.0 3.0 -9.5 -0.8
Market investment 10.9 -2.6 12.4 -5.3 -10.6 4.1 9.8 7.0 8.3 4.6 3.5 3.4 4.2 6.3 3.3
TOTAL INVESTMENT 5.7 -1.9 7.7 -7.5 -9.2 3.3 5.5 7.1 10.4 6.5 3.6 4.6 4.4 4.4 2.6
Stock change (contribution to growth) -0.3 -0.8 0.8 -0.3 -0.8 0.7 0.3 -0.3 0.2 0.1 -0.3 -0.1 0.2 0.2 0.3
GROSS NATIONAL EXPENDITURE 5.1 0.6 5.7 -2.3 -2.0 3.0 3.5 2.4 4.8 3.8 2.8 2.6 2.9 3.0 2.4
Exports -0.4 3.5 3.9 -2.8 4.1 2.8 2.2 3.1 -0.1 4.2 2.9 0.1 4.3 4.2 2.8
Imports 4.8 -1.6 10.9 -3.6 -9.2 11.4 6.7 1.3 8.1 7.5 4.1 0.7 2.2 4.2 3.2
EXPENDITURE ON GDP 3.5 2.1 3.6 -2.1 2.3 0.7 2.2 2.9 2.5 3.0 2.1 2.4 3.6 3.0 2.2
GDP (production measure) 3.4 2.7 3.0 -1.6 -0.3 1.5 2.2 2.2 2.5 3.2 2.1 2.4 3.6 3.0 2.2
 - annual % change 3.3 3.3 1.6 -2.9 1.7 1.2 2.7 1.9 3.1 2.7 2.2 2.7 3.9 2.5 2.1
Real GDP per capita 2.2 1.6 2.0 -2.4 -1.3 0.4 1.5 1.6 1.6 1.6 0.2 0.7 2.5 2.1 1.3
Nominal GDP (expenditure basis) 5.5 5.1 8.3 0.9 2.7 4.5 4.3 2.4 6.8 3.6 2.7 3.0 6.0 5.6 4.1
GDP deflator 1.9 3.0 4.5 3.0 0.4 3.8 2.0 -0.5 4.2 0.6 0.5 0.5 2.3 2.5 1.9
Output gap (% deviation, March year average) 1.4 1.6 2.6 -0.3 -1.7 -1.8 -1.5 -1.4 -1.1 -0.4 -0.8 -1.0 0.0 0.5 0.3
Employment 2.8 2.1 1.6 0.2 -1.5 1.0 1.2 0.1 2.4 3.4 1.4 1.3 1.9 2.4 1.6
Unemployment (% March quarter s.a.) 4.1 3.9 3.9 5.2 6.2 6.5 6.8 6.2 6.0 5.8 6.5 6.1 5.3 4.7 4.5
Wages (average ordinary-time hourly, ann % change) 5.3 4.6 4.7 5.4 1.0 2.6 3.8 2.1 2.5 2.1 2.6 1.8 2.2 2.8 3.3
CPI inflation (ann % change)  3.3 2.5 3.4 3.0 2.0 4.5 1.6 0.9 1.5 0.3 1.4 2.1 1.9 2.1 2.2
Merchandise terms of trade (SNA basis) -1.5 -0.9 8.3 0.7 -7.9 10.8 1.4 -6.0 13.8 -0.8 -3.7 -2.2 2.5 2.6 -0.3
House prices (ann % change) 12.2 11.7 2.8 -9.2 6.4 -1.5 3.6 7.6 8.0 8.9 16.0 5.4 2.3 2.0 2.0
Current account balance - $billions -12.7 -11.6 -12.4 -13.3 -2.9 -5.7 -6.7 -7.9 -5.9 -8.3 -11.8 -15.0 -12.1 -10.9 -12.5
Current account balance - % of GDP -7.8 -6.8 -6.7 -7.1 -1.5 -2.8 -3.2 -3.7 -2.5 -3.5 -4.8 -6.0 -4.5 -3.9 -4.3
TWI (March quarter)  72.4 72.6 75.6 58.0 68.2 68.9 73.5 75.9 80.0 77.9 68.5 66.4 68.0 69.3 69.2
90-day bank bill rate (March quarter)  7.6 7.8 8.8 3.7 2.7 3.0 2.7 2.7 3.0 3.6 2.6 2.6 3.4 4.2 4.5
10-year bond rate (March quarter) 5.7 5.9 6.4 4.6 5.9 5.6 4.0 3.7 4.6 3.3 3.3 3.5 4.2 4.6 4.8

Data for 2016 and subsequently are forecasts. Data for 2015 and prior years are those that were available when the forecasts were finalised.