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Economic and fiscal update

Half Year Economic and Fiscal Update 2017

An introduction to the Half Year Economic and Fiscal Update

The Treasury is New Zealand's economics and finance ministry. We advise on the direction of New Zealand's economic policy with the aim of achieving a strong and sustainable economy, and raising New Zealand living standards. This includes reporting on the expenditure of government (fiscal) revenue, and assisting to ensure spending is fit for purpose and can improve outcomes for New Zealanders.

Sharing what we do

As the government's lead economic and financial adviser we forecast the economic outlook for New Zealand and the Government's fiscal outlook. This Half Year Economic and Fiscal Update (Half Year Update) is part of a suite of documents we release as required by the Public Finance Act 1989.

This Update primarily outlines what the Treasury observes in our current economic and fiscal climate, what we might see in the future, and what risks we may face over the next four years (our forecast period).  This gives an indication of what the economy is most-likely to do to inform decision-making.

Making it New Zealander-centric

Our advice is not just based on facts and figures. Improving outcomes means we need to understand which outcomes to improve, and what is important to New Zealanders. We use the Treasury's Living Standards Framework to recognise the different aspects of New Zealanders' living standards and well-being. Our framework is based on four areas:

  • financial and physical capital eg, housing, machinery, buildings, money
  • human capital eg, health, skills
  • social capital eg, institutions, trust
  • and natural capital eg, water, biodiversity.

We took this approach further and last year presented a living standards perspective that stretches over the next 40 years. He Tirohanga Mokopuna: 2016 Statement on the Long-term Fiscal Position, shares our take on long-term fiscal issues facing New Zealand. We know that sustainable government finances are a requirement to improving long-term living standards, and vice versa.

Understanding our path

The Treasury is in a unique position to focus on improving the way our economy can raise New Zealand living standards. Along with delivering first-rate economic and financial advice, we are committed to providing it in a way so New Zealanders understand how we work to achieve our goals. If you would like to know more about who we are and what we do, or want a simpler overview of the Half Year Update please go to our website at www.treasury.govt.nz

Statement of Responsibility

I make this statement in accordance with section 26W of the Public Finance Act 1989.

On the basis of the economic and fiscal information available to it, the Treasury has used its best professional judgement in preparing, and supplying the Minister of Finance with this Economic and Fiscal Update. The Update incorporates the fiscal and economic implications of both government decisions and other circumstances as at 27 November 2017 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 2017. 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

7 December 2017

 

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 2017 of which I was aware and that had material economic or fiscal implications.

In accordance with section 26W of the Public Finance Act 1989, I accept responsibility for the integrity of the disclosures contained in the Update, responsibility for the consistency and completeness of the Update information with the requirements of Part 2 (Fiscal responsibility) of the Public Finance Act 1989 and responsibility for the omission from the Update under section 26V of the Public Finance Act 1989 of any decisions, circumstances or statements not incorporated in it.

 

Hon Grant Robertson
Minister of Finance

7 December 2017

Executive Summary

Summary of the Treasury's Economic and Fiscal Forecasts

 
June years 2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast

Economic

           
Real production GDP (annual average % change) 2.7 2.9 3.6 3.0 2.6 2.1
Real GDP per capita (annual average % change) 0.6 0.9 1.7 1.4 1.4 1.1
Unemployment rate (June quarter) 4.8 4.6 4.4 4.2 4.0 4.1
CPI inflation (annual % change, June quarter) 1.7 2.0 1.9 2.1 2.2 2.2
Current account balance (% of GDP) (2.9) (2.1) (2.3) (2.7) (3.3) (3.9)

Fiscal (% of GDP)

           
Core Crown tax revenue 27.7 27.3 27.5 27.7 28.0 28.3
Core Crown expenses 28.0 28.5 28.6 28.2 28.0 27.6
Total Crown operating balance before gains and losses 1.5 0.9 0.9 1.6 2.0 2.5
Core Crown residual cash 0.9 (0.9) (1.5) (0.8) 0.1 0.7
Net core Crown debt 21.8 21.7 22.2 21.9 20.8 19.3
Net worth attributable to the Crown 40.5 40.7 40.6 41.4 42.7 44.7

Sources: Statistics New Zealand, the Treasury

The context in which this Half Year Economic and Fiscal Update 2017 (Half Year Update) has been prepared means that it differs from the Treasury's more typical economic and fiscal updates. With a change of Government, there is a programme of new policies that have fiscal and economic implications. Following this Executive Summary is an outline of how the Government's policy commitments have been incorporated into the Half Year Update.

Nominal GDP over the four years to June 2021 is expected to be $1.5 billion higher than in the Pre-election Economic and Fiscal Update 2017 (Pre-election Update). GDP growth is forecast to expand at an average rate of 2.9% per year, supported by population growth, low interest rates, increased government spending, a positive international outlook and high terms of trade.

Growth in activity is expected to absorb spare capacity in the economy, support a gradual decline in the unemployment rate and contribute to stronger inflationary pressures than in the Pre-election Update. Solid international demand for New Zealand's exports is forecast to contribute to the current account deficit narrowing to 2.1% of GDP in mid-2018, before widening as export growth slows and import growth rises.

Changes to the economic outlook since the Pre-election Update primarily reflect recent economic data and the new Government's policies.Growth in the year ending June 2018 is a bit lower than previously forecast, mainly reflecting expectations of slower growth over the second half of 2017. Over 2018/19 the new Government’s policies increase government spending but reduce private expenditure, which leaves expected GDP growth unchanged. In 2019/20 and beyond faster growth in household incomes and the Government’s KiwiBuild programme contribute to higher GDP growth.

The fiscal outlook is anticipated to keep improving across the forecast period, though at a slower pace than in the Pre-election Update. By 2021/22 the operating balance before gains and losses (OBEGAL) is forecast to reach a surplus of $8.8 billion (2.5% of GDP), while Core Crown expenses rise in nominal terms but fall as a percentage of GDP to 27.6%.

The fiscal forecast includes core Crown capital spending totalling $41.7 billion to 2021/22. Capital spending is expected to lead to a residual cash deficit over the first three years of the forecast, before returning to a residual cash surplus. The residual cash position has an impact on net core Crown debt, which is expected to increase in nominal terms before tracking down later in the forecast. As a percentage of GDP, net core Crown debt reduces to around 19.3% in 2021/22. The Crown's balance sheet continues to grow. In 2021/22 net worth attributable to the Crown is anticipated to reach $154.6 billion (44.7% of GDP). Including the impact of Government policy changes and the changes in the economic outlook, core Crown tax revenue is $6.6 billion higher than in the Pre-election Update.

The economic and fiscal outlook is subject to a range of assumptions, risks and uncertainties. For the economic forecasts, uncertainties include how households respond to rising interest rates, given high household debt levels; the extent to which capacity constraints in the construction market prove binding; weakness in labour productivity and domestic demand persisting; and ongoing debate on the merits of trade liberalisation in some parts of the world. Any changes to the economic outlook would be expected to flow through to changes in the fiscal position. In addition, risks to the fiscal forecasts include changes in the value of the Crown's assets or liabilities and the potential impact of the Crown's fiscal obligations that arise from policy choices. More detail and discussion of assumptions, risks and uncertainties are included in each chapter.

Finalisation Dates for the Update

Economic forecasts - Thursday 23 November

Tax revenue forecasts - Thursday 23 November

Fiscal forecasts - Monday 27 November

Specific fiscal risks - Monday 27 November

Text finalised - Friday 8 December

National accounts data

The economic numbers and forecasts in the Economic Outlook chapter pre-date the release of annual national accounts data for the March 2017 year by Statistics New Zealand on 24 November 2017. These annual national accounts incorporated new data and methodological changes which resulted in nominal GDP for the March 2017 year being revised higher by $4.7 billion (1.8%) relative to the latest quarterly GDP release. The revised data will be fully incorporated into the Economic Outlook chapter of the 2018 Budget Update following it being included in the quarterly GDP data, due for release on 21 December. The annual GDP revisions do not affect the outlook for tax revenue as the impact of higher nominal GDP is offset by a lower tax-to-GDP ratio.

To reflect best practice, the revised nominal GDP data have been used in the calculation of the fiscal ratios to GDP throughout the Fiscal Outlook chapter. This approach has been applied previously when revisions have been large, for example in the 2014 Half Year Update. The higher denominator has the effect of reducing the fiscal ratios, with an impact on net core Crown debt of 0.4 percentage points of GDP in the year ended June 2017.

Impact of new Government policies

The Government has announced a number of aspects of its policy programme.[1] This box outlines how these policy commitments have been incorporated into the Half Year Update.

Policy commitments have been included in the forecasts if they are reasonably probable[2] to occur and can be quantified for a particular year with reasonable certainty. Commitments that have not met the criteria for inclusion are discussed in more detail in the Specific Fiscal Risks chapter. There is an expectation that costs not explicitly included in the fiscal forecasts can be met within the Budget operating and capital allowances included in the fiscal forecasts. Discussion on the size and timing of Budget allowances is included on page 31.

Some policies (eg, the increase in the minimum wage) have more significant impacts on the wider economy than on particular Government expense items.

Fiscal impact of the 100-Day Plan

The forecasts separate the fiscal implications of policies the Government will implement in the first 100 days (referred to as the 100-Day Plan) from other spending commitments yet to be announced in future Budgets, which are expected to be funded by the operating and capital allowances. A summary of the estimated fiscal costs of the 100-Day Plan is outlined in Table 1. Overall, the 100-Day Plan is estimated to cost $5.0 billion (net of revenue changes).

Table 1 - Estimated Fiscal Impact of the 100-Day Plan
Year ending 30 June
$million
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Total
Forecast
Families package (80) 1,157 1,309 1,525 1,616 5,527
Tertiary education package 342 469 535 597 628 2,571
Other operating commitments 28 134 78 37 37 314
Reversing Budget 2017 tax cuts (486) (1,904) (1,904) (1,993) (2,077) (8,364)
Net operating (savings)/expense (197) (143) 18 166 204 48
KiwiBuild 100 900 1000 0 0 2,000
NZS Fund contributions 500 1,000 1,500 16 330 3,346
Tertiary education package (155) (123) (86) (44) (26) (434)
Other capital commitments 3 3 0 0 0 6
Net capital spending 448 1,780 2,414 (28) 304 4,918
Net estimated fiscal cost 251 1,636 2,432 138 508 4,965

Source: The Treasury

Costings of significant commitments (ie, Tertiary education package and the Families package) have been made. In the case of KiwiBuild, we have included the commitment to spend $2 billion on the KiwiBuild programme. Further information on the treatment of KiwiBuild in the economic forecasts is covered below.

Economic impact of new Government policies

The economic forecasts incorporate assumptions relating to a number of policies, which are outlined below. These assumptions are subject to some uncertainty and will continue to be reviewed as further policy details and economic details emerge.

KiwiBuild

The KiwiBuild programme aims to deliver 100,000 affordable homes over 10 years for first home buyers through a combination of existing Crown programmes, purchasing private developments off plan and construction of additional dwellings.

The Treasury forecasts the real and nominal value of residential investment as an input into the tax and fiscal forecasts. We do not forecast the number of new dwellings, reflecting how we use the economic forecasts for tax revenue forecasting. From a tax forecast perspective, there is little difference between, say, a $1 million investment that generates two dwellings or three, whereas such differences clearly matter from a housing policy perspective.

Residential investment growth is expected to remain relatively weak in the near term. This reflects that while residential investment activity is at a high level, the construction sector faces constraints across a number of dimensions, as well as subdued demand growth (see page 14). All else unchanged these capacity constraints also act to restrain the rate of growth in supply of new dwellings over the longer term.

The Government will invest an initial $2 billion as part of the KiwiBuild programme. We assume that the phasing of capital injections and existing capacity constraints in the sector mean there is a lag before additional residential investment activity is realised (Table 2). This capital is assumed to be recycled as dwellings are sold and the proceeds are reinvested. The level of nominal residential investment is assumed to be about 10% higher in the June 2022 year than it would otherwise have been and is cumulatively around $5 billion higher across the forecast period. There is likely to be a degree of substitution from private sector to public sector-led investment in KiwiBuild housing, particularly in earlier years while policies alleviating capacity constraints scale-up. The extent of this substitution is difficult to quantify at this time.

Table 2 - Capital injections for KiwiBuild and assumed additional residential investment
Year ending 30 June
$billions
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Total
Forecast
KiwiBuild capital injection 0.1 0.9 1.0 - - 2.0
Additional nominal residential investment 0.0 0.0 0.7 2.1 2.6 5.4

Source: The Treasury

In the Half Year Update, we assume there will be a range of additional policies designed to alleviate capacity constraints, allowing residential investment to accelerate over the latter part of the forecast period. Policies designed to alleviate these constraints could include: construction work visas to increase labour supply; infrastructure funding; pre-fabricated/modular housing to increase productivity; encouraging competition, potentially through foreign construction firms; and buying off-plan to alleviate finance access issues.

There is a high degree of uncertainty about the impact of policies designed to alleviate capacity constraints, given the limited detail on what form they will take or when they will come into effect. These policies could be more effective than assumed and mean that aggregate residential investment expands faster to meet the demand created by KiwiBuild. Conversely, constraints may have a more prolonged impact and it could take longer until policies take effect. The extent of demand for KiwiBuild housing is a further source of uncertainty to our assumptions on the recycling of proceeds from sale.

The Families Package and increased student allowances

The economic impact of the Families Package and $50 per week increase in student allowances (part of the Tertiary education package) has been incorporated into these forecasts in the same way as the previous Government's Family Incomes package. That is, the Families Package and increased student allowances collectively boost household incomes via increased government transfers, which subsequently flow through into increased private consumption, imports, and household savings. Specifically for these forecasts, the approximately $2.5 billion per annum gross increase in household incomes from the Family Income package has been replaced with a $1.4 billion per annum gross increase in incomes from the combined impact of the Families Package and increased student allowances.[3] Most of the increase in household incomes begins from the 2018/19 fiscal year when the Families Package comes into effect. Allowing for a gradual adjustment in spending behaviour by households, tighter monetary policy and some “leakages” (through higher imports and higher savings) around 60% of the income boost flows through into higher nominal GDP. There is uncertainty around this pass through into GDP, as household behaviour could differ from that assumed.

The changes in welfare settings in the Families Package reduce incentives to work for those who are on low incomes or would face low-work incomes and also qualify for benefits. The Treasury's behavioural microsimulation model estimates these changes to reduce total hours worked by about 0.4%. Allowing time for households to adjust to the new settings, a 0.2% reduction in total hours worked has been incorporated within the forecast period.

Raising the minimum wage and other labour market policies

The Government has announced an increase in the minimum wage from $15.75 to $16.50 per hour from 1 April 2018 and intends to raise the minimum wage to $20.00 per hour by 1 April 2021. These forecasts assume that the increase to $20.00 occurs via steady increases in the minimum wage in the intervening years (2019 and 2020). Currently, about 9% of employees and 7% of total employee hours worked have mean hourly earnings at or below the minimum wage (on the starting-out rate, for example). A further 19% of hours worked have hourly earnings within 25% of the minimum wage.

To analyse the impact of the increase to $20.00 in 2021, earnings, employment and hours worked by those employees at the lower end of the income distribution were assumed to grow in line with the aggregate forecasts for these variables to estimate how many people would potentially be affected. By 2021 an estimated 19% of employee hours worked would be below the $20.00 per hour minimum wage or equivalent starting-out rate. To lift hourly earnings of these hours worked to the minimum wage, and allowing for some spill-over wage pressures to those earners a little above the minimum wage, would require aggregate mean hourly earnings to be about 1.6% higher than would otherwise have been the case in 2021 (this estimate assumes a ‘counterfactual' minimum wage of around $17.60 in April 2021). Assuming an elasticity of labour demand with respect to wages of -0.3, the higher cost of labour is estimated to reduce total hours worked by 0.4%. Using wages as a proxy for productivity, reducing the lowest productivity hours to that extent increases average labour productivity by about 0.2%. These estimates are conditional on a range of assumptions, with particular sensitivity to the elasticity of labour demand assumption, and are a further source of uncertainty for the forecasts. Abolishing the starting-out rate would have additional effects to those outlined above.

A range of other policies are likely to impact the labour market and wider economy, including Fair Pay agreements and further pay-equity settlements. These are expected to increase labour costs and may therefore reduce labour demand further. In addition, improving pay and/or conditions is likely to increase labour supply (through higher participation rates, for example). It is difficult to quantify the extent to which these will impact the economy at this time, given uncertainty over how many industries and/or professions may be eligible and therefore these are treated as risks to the economic forecasts until further policy detail is available. There is also a specific fiscal risk related to pay equity claims within State-employed and State-funded sectors.

Immigration policy

Annual net migration is assumed to fall steadily from its current level of 71,000 to Statistics New Zealand's long-run median assumption of 15,000 in 2022. Under this assumption net migration falls by around 27,000 by the end of 2019. The composition of immigration may change, with fewer students and more work visas, including the proposed KiwiBuild visa. This composition effect may have implications for labour productivity growth if the skill profile of migrants alters materially, although this has not been factored into these forecasts. The Treasury will review the long-term net migration assumption for the Budget 2018 forecasts.

Other Government spending

Other Government spending priorities are captured within the 100-Day Plan spending profile and future Budget operating and capital allowances. Operating allowances and unallocated contingencies have been incorporated into the public consumption forecast, which is higher than the Pre-election Update throughout the forecast period. This also includes fees-free tertiary education. Capital allowances (excluding KiwiBuild and New Zealand Superannuation Fund (NZS Fund) contributions) fall within the investment forecast. NZS Fund contributions do not affect the economic forecasts.

Fees-free tertiary education and cheaper doctors' visits lower CPI inflation by 0.2 percentage points over 2018. Tobacco excise tax increases in the March quarter for each of the next three years and contributes 0.2 percentage points to annual CPI inflation.

Summary of economic impacts

On balance, the economic impacts outlined above point to slightly stronger demand-side effects than supply-side effects and are forecast to support a longer period of above-trend economic growth and, consequently, slightly higher inflationary pressures and a stronger monetary policy response. The stronger monetary policy response, with short-term interest rates about 25 basis points higher than the Pre-election Update by 2021, partly offsets some of the fiscal policy-related demand impacts.

The overall impact of these new Government policies on labour supply and demand is uncertain but is judged as having a small negative impact on overall hours worked of 0.6%, which is partly offset on an output basis by slightly stronger (0.2%) labour productivity, leaving the level of potential output 0.4% lower. This judgement balances uncertainty around the impact with the view that the economy is likely to be operating at quite a strong cyclical position when the policies take effect and therefore some of the labour demand impacts associated with firms facing higher labour costs may be somewhat mitigated.

Notes

Economic Outlook

Overview

  • The New Zealand economy is expected to expand at an average rate of 2.9% per year over the next five years, slightly above the growth rate the economy can sustain before it leads to higher inflation. Factors supporting growth include low interest rates, population growth, government spending, a positive international outlook and high terms of trade. In the labour market, the unemployment rate is expected to decline to around 4.0% and, with more people in work, wage growth is expected to pick up and to contribute to rising inflation pressure. To ensure inflation remains around 2.0%, interest rates are projected to increase steadily from late 2018.
  • Over the year ahead, export volume growth is expected to strengthen and export commodity prices, which have risen over the past year, are expected to remain high and to contribute to a narrowing of the current account deficit to around 2.0% of GDP. Thereafter, the current account deficit is projected to widen as export growth slows and as domestic demand growth feeds through into faster import growth.
  • Changes in the outlook since the Pre-election Update primarily reflect both recent economic data and the new Government's policies. Growth in the year ending June 2018 is a bit lower than previously forecast, mainly reflecting expectations of slower growth over the second half of 2017, albeit with improving labour market conditions and higher inflation. Over 2018/19, the new Government's policies increase government spending but reduce private expenditure, which leaves expected GDP growth largely unchanged. In 2019/20 and beyond, increased household income growth, partly reflecting larger Government-mandated minimum wage increases, and the Government's KiwiBuild programme contribute to higher GDP growth. The faster pace of GDP growth and increased wage growth leads to greater inflationary pressures and slightly higher interest rates.
  • Compared to the Pre-election Update, the total cumulative increase in nominal GDP is higher by $1.5 billion over the four years to June 2021 (the final forecast year in the Pre-election Update). Including the impact of Government policy changes and the changes in the economic outlook, core Crown tax revenue is cumulatively $6.6 billion higher than in the Pre-election Update.
  • The assumptions and judgements underpinning these forecasts are subject to a range of risks and uncertainties. These are discussed in further detail in the Risks and Scenarios Chapter on page 51.
Table 1.1 – Economic forecasts
(Annual average % change, June years) 2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Private consumption 4.7 3.0 3.5 3.1 2.6 2.2
Public consumption 3.4 2.8 1.9 1.0 1.0 0.7
Total consumption 4.4 2.9 3.1 2.6 2.2 1.9
Residential investment 6.3 -1.5 3.0 6.2 8.0 4.5
Business investment1 3.8 6.7 5.5 6.0 5.1 4.2
Total investment 4.6 4.1 4.9 6.0 5.8 4.3
Stock change2 0.1 -0.7 0.2 0.2 0.3 0.3
Gross national expenditure 4.4 2.9 4.1 3.8 3.4 2.7
Exports 0.0 3.4 2.7 2.8 2.1 1.5
Imports 6.0 2.7 3.3 5.0 4.3 3.3
GDP (expenditure measure) 2.7 3.0 3.6 3.0 2.6 2.1
GDP (production measure) 2.7 2.9 3.6 3.0 2.6 2.1
Real GDP per capita 0.6 0.9 1.7 1.4 1.4 1.1
Nominal GDP (expenditure measure) 5.8 5.0 5.3 5.0 4.8 4.2
GDP deflator 3.1 1.9 1.6 2.0 2.1 2.1
Potential GDP 2.8 2.8 2.8 2.8 2.7 2.5
Output gap (% of potential, June quarter)3 -0.5 0.0 0.7 0.8 0.7 0.2
Working-age population 2.6 2.3 2.1 1.7 1.4 1.1
Employment 5.2 3.3 1.9 1.5 1.3 0.9
Unemployment rate4 4.8 4.6 4.4 4.2 4.0 4.1
Nominal wages5 1.6 2.8 3.3 3.2 3.4 3.5
CPI inflation6 1.7 2.0 1.9 2.1 2.2 2.2
Terms of trade (goods)7 5.1 4.2 -0.9 0.4 0.3 0.1
House prices8 5.2 2.1 2.3 2.1 2.0 2.0
Current account balance            
$billions -7.8 -5.9 -6.7 -8.4 -10.8 -13.3
% of GDP -2.9 -2.1 -2.3 -2.7 -3.3 -3.9
Net International Investment Position (% of GDP) -57.5 -56.9 -56.3 -56.4 -57.1 -58.7
Household saving ratio (% of HHDI)9 -1.1 -0.1 0.8 0.6 0.7 0.6
TWI10 76.5 73.8 73.8 73.8 73.8 73.8
90-day bank bill rate10 2.0 2.0 2.4 3.6 4.1 4.2
10-year bond rate10 2.9 3.0 3.4 3.9 4.2 4.3

Economic forecasts are presented on a June year basis, where practicable, for consistency with the fiscal forecasts. Longer time series for these variables are provided on page 144.

Notes:

  1. Business investment is the total of all investment types excluding residential investment.
  2. Contribution to GDP growth.
  3. Percentage difference between reported real GDP and potential real GDP.
  4. Percent of the labour force, June quarter, seasonally adjusted.
  5. Quarterly Employment Survey, average ordinary-time hourly earnings, annual percentage change.
  6. Annual percentage change.
  7. System of National Accounts (SNA)
  8. Quotable Value House Price Index, annual percentage change.
  9. Percent of household disposable income (HHDI), March years.
  10. Trade-weighted index, average for the June quarter.

Key economic forecast judgements and assumptions

  • These forecasts cover the period September quarter 2017 to June quarter 2022.
  • International prices for dairy exports fall slightly in the near term but lift gradually thereafter.
  • West Texas Intermediate (WTI) oil prices rise from US$54.4 per barrel in the December 2017 quarter to US$60.0 in the June 2022 quarter.
  • The New Zealand trade-weighted exchange rate remains at 73.8 over the forecast period.
  • Net permanent and long-term immigration declines from 71,050 persons in the year ended September 2017 to 15,000 persons in the year ended June 2022, consistent with Statistics New Zealand’s long-run migration assumption. The Treasury will review its long-run net migration assumption for the 2018 Budget Update.
  • Working-age population (15 years of age and over) growth averages 1.8% per year over the forecast period, including the contribution of net migration.
  • The labour force participation rate declines from 71.1% in the September quarter 2017 to 69.8% in June 2022.
  • Economy-wide multifactor productivity growth averages 0.6% per year over the forecast period.
  • Economy-wide labour productivity growth averages 1.1% per year over the forecast period.
  • Potential output growth averages 2.7% per year over the forecast period.
  • The neutral nominal 90-day interest rate is 4.5% in June 2022.
  • The non-accelerating inflation rate of unemployment (NAIRU) is around 4.3% in June 2022.
  • For assumptions and judgements relating to the impact of new Government policies on the economic outlook see page 6.

Recent Developments

Growth over the second half of 2017 similar to the first half…

This section discusses recent developments and their impact on the starting point of the economic outlook.

Compared to the Pre-election Update, underlying momentum is a little weaker across the second half of 2017. Economic growth appears to have slowed in the 2017 September quarter with wet weather hampering agricultural production, continued weakness in the housing market, and slower growth in private consumption. Quarterly GDP growth is expected to pick up from 0.6% in the September quarter to 0.8% in the December quarter as agricultural production rebounds and growth in residential construction, consumer spending and business investment picks up (Figure 1.1). Overall, growth over the second half of 2017 is expected to be similar to outturns recorded over the first half of the year.

Figure 1.1 – Economic growth (production GDP)
Figure 1.1 – Economic growth (production GDP).
Sources: Statistics New Zealand, the Treasury

…as housing market remains subdued…

Reflecting high capacity constraints and what is expected to be a temporary dip in demand, forecasts for residential investment activity begin from a weaker starting point than expected in the Pre-election Update.

The residential construction sector faces a high degree of capacity constraints: construction firms are reporting that their ability to expand is constrained by difficulty finding skilled labour; measures of capacity utilisation in the sector are near record highs; and pressure on materials is pushing construction costs higher. In addition to these physical constraints the sector has faced tightening financial market conditions. Banks have become more restrictive when lending to developers, in part owing to heightened risks associated with periods of rapid expansion, and growth in lending to investors has slowed following the implementation of higher loan-to-value ratio restrictions.

In addition, demand appears to have softened, with house prices and sales contracting in recent months. However, the fundamental drivers of demand have persisted, including strong population growth and low interest rates.

Reflecting these developments, the easing in residential investment activity over the first half of 2017 (from record-high levels in late 2016) is expected to persist into the September quarter, but to begin to recover from the December 2017 quarter, in line with the recent rise in dwelling consents (Figure 1.2) and reflecting solid demand fundamentals.

Figure 1.2 – Quarterly dwelling consents and residential investment
Figure 1.2 – Quarterly dwelling consents and residential investment.
Sources: Statistics New Zealand, the Treasury

…and uncertainty increases….

Business investment contracted 0.4% in the June 2017 quarter and was weaker than forecast in the Pre-election Update.[4] The lengthy pipeline of infrastructure and non-residential construction projects, including those associated with government projects, is expected to support a partial rebound in business investment over the remainder of 2017 and beyond (Figure 1.3). That said, business confidence has declined in recent months, possibly reflecting uncertainty during the election and government formation period. If this uncertainty persists, business investment could be weaker than forecast.

Figure 1.3 – Real business investment
Figure 1.3 – Real business investment.
Sources: Statistics New Zealand, the Treasury

A key judgement underpinning these forecasts is that the recent dip in business confidence is short-lived and that domestic activity begins to pick-up at the end of 2017. Scenario One in the Risks and Scenarios Chapter discusses the impact on the outlook should the assumed rebound in confidence not materialise (see page 56).

…but the fundamental drivers of growth remain intact…

Recent indicators suggest growth in household spending eased in the September quarter, possibly reflecting election-related uncertainty and the softening housing market. The latter was evidenced by weak spending on durable goods, such as household furnishings. As uncertainty recedes, an increase in private consumption growth is expected in the December quarter.

Net migration inflows have remained high, adding 71,000 people to the population in the year ending September 2017 and contributing to demand for goods and services. Employment growth has more than accommodated the larger population, with the unemployment rate falling 0.2% points to 4.6% in the September quarter. Wage growth was bolstered by the pay equity settlement in the September quarter, but underlying wage pressures appear subdued relative to history. Looking through some of the volatility in recent labour market statistics suggests conditions are tracking broadly as expected in the Pre-election Update (that is, an ongoing but modest strengthening in labour market conditions).

Despite annual CPI inflation coming in a little stronger in the 2017 September quarter than expected in the Pre-election Update,underlying inflationary pressures remain subdued, with indicators of core inflation, such as the Reserve Bank's Sectoral Factor Model and inflation excluding food and energy, broadly unchanged. Since September, the rise in oil prices and depreciation of the New Zealand dollar have been greater than anticipated. These developments will support stronger tradables inflation in the near term but are unlikely to have a sustained impact on inflation over the medium term. Accordingly, the near term outlook for short-term interest rates is unchanged from the Pre-election Update, with the 90-day rate remaining around its current level before rising steadily from late 2018 as the Reserve Bank begins to remove monetary stimulus.

…including a stronger international backdrop

Recent developments in the international economy have been positive on balance. Growth has strengthened in a number of advanced economies, including the US, euro area and Japan, and labour market conditions have continued to tighten. Growth in Australia picked up in the June quarter, while solid employment growth and buoyant business confidence suggest momentum will persist. If so, this will continue to support the pick-up in net trans-Tasman migrant outflows that has occurred in recent months and a decline in net migration inflows more broadly. In China, economic expansion has been buoyed by policy stimulus, particularly for property construction and infrastructure and consumption growth has remained robust while Chinese authorities continue to address debt risks through tighter financial market regulation. Despite many of New Zealand's key trading partners demonstrating broad-based improvement in activity, alongside tightening labour market conditions, wage growth has remained weak and inflationary pressures subdued. While policy makers expect inflationary pressures to pick-up over the medium term, uncertainties remain around the degree to which low inflation and wage growth may have become embedded.

Solid foreign demand is supporting export prices and the terms of trade, which rose further in the September quarter. While a small fall in dairy prices and rising oil-related import prices are expected to drive a small decline in the terms of trade in the December quarter, the terms of trade are expected to remain near historically-high levels over the forecast horizon. The unusually wet spring in 2017 and subsequent dry spell demonstrate the risks to agricultural production from weather conditions.

Services exports were boosted by the World Masters Games and Lions rugby tour in the June and September 2017 quarters. While a pull-back is anticipated in the December quarter, services exports are expected to remain robust, reflecting ongoing strength in New Zealand tourism. Solid income growth abroad, reflecting a strengthening global economy and the recent depreciation of the New Zealand dollar (if sustained) will provide a supportive backdrop for tourism and exports in general.

Figure 1.4 – Trade-weighted index
Figure 1.4 – Trade-weighted index.
Sources: Reserve Bank, the Treasury

The trade-weighted index (TWI) is around 6.0% lower than assumed in the Pre-election Update. If sustained, this will support New Zealand exporter incomes for goods sold in foreign currency-denominated prices. The tourism sector and services exports will also benefit as the lower dollar makes New Zealand more attractive to international visitors, while supporting a substitution towards domestic tourism by New Zealanders. Overall, a sustained depreciation will support a rebalancing in the economy towards the tradables sector but risks remain. These forecasts assume the recent depreciation in the TWI is sustained over the forecast horizon.

Growth in nominal GDP to support tax revenues

The nominal economy, measured as the combination of real activity and prices, increased 5.8% in the year to June 2017 to $268 billion.[5] Consistent with the solid uplift in nominal GDP, core Crown tax revenues grew 7.6% to $75 billion in the year ending June 2017, driven by growth in corporate tax (owing to strong company profits), GST (reflecting solid consumption and residential investment) and wage and salary income tax (reflecting improving labour market conditions). The positive economic outlook is forecast to continue to support increasing tax revenues (see Fiscal Outlook Chapter).

Notes

  • [4]Business investment represents total investment excluding residential investment and therefore includes infrastructure.
  • [5]Based on quarterly nominal GDP data available prior to the release of Annual National Accounts data on 24 November 2017.

Economic Outlook

This section discusses the economic outlook for the period ending June 2022. The outlook is conditioned on a number of judgements and assumptions, which are outlined on page 13. Additional assumptions and judgements have been made regarding the impact of the new Government's policies on the economic outlook (see page 6). Should these assumptions and judgements prove incorrect, the economic and fiscal outlook would deviate from that presented here. The Risks and Scenarios Chapter on page 51 discusses some of the key risks facing the economy and uses scenarios to assess the implications if some key assumptions and judgements are altered.

Growth expected to average 2.9%…

The New Zealand economy is expected to expand at an average rate of 2.9% per year over the next five years (Figure 1.5). Factors supporting growth include low interest rates, population growth, government spending, a positive international outlook and high terms of trade.

Figure 1.5 – Economic growth (production GDP)
Figure 1.5 – Economic growth (production GDP).
Sources: Statistics New Zealand, the Treasury

Compared to the Pre-election Update, the new Government's policies have altered the drivers of growth and contribute to stronger growth over the latter part of the forecast horizon. Government spending makes a stronger contribution to GDP growth over 2018/19, which offsets downward revisions to private consumption growth, reflecting the net impact of the Families Package replacing the Family Incomes Package. Growth in private consumption is a little stronger over the latter part of the forecast horizon owing to stronger household income growth, as both wages and employment are expected to be higher. From a weaker starting point, residential investment activity increases more than previously forecast, reflecting the impact of KiwiBuild. Stronger GDP growth over the latter part of the forecast horizon puts additional pressure on resources, leading to higher inflationary pressures and interest rates. Further information is provided on page 7.

…supported by a range of forces…

Low interest rates and net migration inflows are expected to support domestic activity for some time. Growth in government spending, residential investment and business investment drive a pick up in GDP growth to a peak of 3.6% in the year ending June 2019. Thereafter, growth eases to 2.1% by June 2022 as interest rates rise, population growth eases and growth in government spending slows. Growth in GDP per capita peaks in the year ending June 2019 at 1.7% and eases to 1.1% in June 2022.

Growth in the working-age population will continue to be driven by high, albeit declining, net migration inflows (Figure 1.6). Relative to history, solid growth in the working-age population, together with a strengthening labour market, is expected to support household income growth and consumption.

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

Annual net migration inflows are assumed to ease over the forecast horizon, gradually declining from a peak of over 72,000 in June 2017 to 15,000 by 2022. In part, the gradual decline in net migration represents an assumption that the recent pick up in net trans-Tasman outflows (associated with a strengthening Australian labour market) will continue. The long-run net migration assumption is unchanged from the Pre-election Update but will be reviewed prior to the 2018 Budget Update.

…including government spending

Following a period of strong growth and a decline in the household saving rate, a slower pace of private consumption growth is expected over the next year or so (Figure 1.7). Thereafter, the Government's Families Package and other commitments in the 100-Day Plan provide additional impetus to household income growth and private consumption. Nonetheless, slower population growth and increasing interest rates will drive an easing trend in consumption growth over the latter part of the forecast period. The household saving rate is assumed to increase and to remain positive, although with interest rates projected to rise and to reduce disposable income, the saving behaviour of households is a source of uncertainty.

Figure 1.7 – Real private consumption growth
Figure 1.7 – Real private consumption growth.
Sources: Statistics New Zealand, the Treasury

Reflecting constraints in the housing market, residential investment activity is expected to increase only gradually over 2018. Growth in real residential investment is expected to gather pace over 2019 and activity is expected to rise to a higher level than forecast in the Pre-election Update, primarily reflecting the impact of KiwiBuild and associated policies to lift capacity in the construction sector (see page 7 for details).

Past forecasts have tended to overestimate the degree to which residential construction activity is able to respond to high demand (Figure 1.8). The Pre-election Update included a downgrade to expected residential investment activity, reflecting a change in view towards more binding capacity constraints in the sector. In the 2017 Half YearUpdate, the outlook is revised higher over the latter part of the forecast horizon. This reflects an assumption that capacity pressures will be partially alleviated by policies associated with KiwiBuild. Should capacity pressures prove to be stronger than assumed, the outlook for residential investment would be weaker than presented here.

Figure 1.8 – Residential investment
Figure 1.8 – Residential investment.
Sources: Statistics New Zealand, the Treasury

Consistent with the Government's operating allowance profile and a more stimulatory fiscal impulse (see summary fiscal indicators on page 38), public consumption makes a stronger contribution to the acceleration in GDP growth in 2018/19 than forecast in the Pre-election Update.

Increased government capital spending is also expected to contribute to stronger activity. This, alongside a strong tourism sector, low interest rates, generally solid domestic demand and sustained improvement in export prices, supports a solid uplift in business investment. However, a sustained drop in business confidence would likely result in weaker business investment than forecast (this is included as part of Scenario One on page 56).

The labour market strengthens…

The pace of expansion in economic activity is expected to support ongoing strengthening in the labour market and a gradual decline in the unemployment rate to around 4.0% (Figure 1.9). Tightening labour market conditions and building inflationary pressures support a pick up in wage growth, which receives additional impetus from the Government's policy to increase the minimum hourly wage to $20 by 2021.

Figure 1.9 – Unemployment rate and wages
Figure 1.9 – Unemployment rate and wages.
Sources: Statistics New Zealand, the Treasury

One of the assumptions underpinning the outlook is that labour productivity growth recovers to average 1.1% over the forecast period. Weaker growth in labour productivity would lower the rate at which economic activity is able to expand (for a given working-age population and labour force) without driving up inflationary pressures and interest rates. That is, it would lower potential growth. If labour productivity were to evolve at a more subdued pace than assumed, real economic activity would likely be slower and/or inflationary pressures stronger. The impact of slower productivity growth is investigated as part of Scenario One in the Risks and Scenarios Chapter on page 56.

…and inflationary pressures rise

Sustained growth in economic activity is expected to put pressure on resources, such as materials and labour, leading to higher input costs, which flow through to rising consumer prices. Annual CPI inflation is forecast to pick up to a little above 2.0% from mid-2019 (Figure 1.10). A stronger growth profile in the latter part of the forecasts than in the Pre-election Update contributes to stronger inflationary pressures. Interest rates are assumed to rise from late 2018, which is similar timing as in the Pre-election Update. However, to dampen stronger inflationary pressures, the 90-day interest rate is 25 basis points higher than in the Pre-election Update over 2020/21.

Figure 1.10 – Inflation and the 90-day interest rate
Figure 1.10 – Inflation and the 90-day interest rate.
Sources: Statistics New Zealand, Reserve Bank, the Treasury

Stronger international outlook…

The outlook for New Zealand's trading partners is a little more positive than at the Pre-election Update (Figure 1.11). The IMF, OECD and private sector forecasters have lifted their expectations for global growth in 2017 and 2018.

Figure 1.11 – Trading partner growth
Figure 1.11 – Trading partner growth.
Sources: Haver Analytics, the Treasury

In the US, euro area, Japan and Australia, above-trend economic growth is expected to lift household incomes and reduce the rate of unemployment. Inflation pressures are expected to build and to allow the gradual withdrawal of monetary stimulus. In China, economic activity is expected to slow modestly over the forecast horizon as authorities continue to pursue sustainable growth through a consumption- and services-led economy.

…supports exports and the terms of trade…

Solid demand from New Zealand's trading partners is expected to support export prices and maintain the terms of trade around historically-high levels (Figure 1.12). The ongoing transition towards consumption-led growth in China is expected to underpin demand for New Zealand dairy, meat and food and beverages. Oil prices can have significant impacts on New Zealand's goods imports bill, directly though the price of fuel imports and shipping costs and indirectly through higher input costs for the production of imported goods. Oil prices are assumed to pick up very gradually over the forecast horizon, and remain low relative to recent pre-shale oil history.

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

High export prices are expected to support a pick-up in goods export volumes. Growth in dairy export volumes is forecast to quicken in 2019 as milk production continues to recover over the remainder of the 2017/18 season and into the 2018/19 season. As always, unusually wet winter and spring conditions, or drought in the warmer months present risks to agricultural production. Strong activity in the domestic economy is expected to drive growth in goods import volumes and a widening of the goods deficit from early 2018. A strong tourism sector is expected to support growth in services exports and a gradual lift in the services surplus.

From a deficit of around 2.0% of GDP in mid-2018, the current account deficit is forecast to gradually widen to around 4.0% of GDP. Growth in imports is forecast to outstrip export growth leading to a wider goods deficit, while rising global interest rates contribute to a growing income deficit (Figure 1.13). From 57.0% of GDP at the end of 2017, New Zealand's net international liability position improves slightly in the next two years, before increasing modestly to just under 59.0% of GDP by June 2022.

Figure 1.13 – Current account balance
Figure 1.13 – Current account balance.
Sources: Statistics New Zealand, the Treasury

…and nominal GDP

Continued growth in economic activity, rising inflation and a terms of trade near historically-high levels are expected to support an expansion in the nominal economy (Figure 1.14). Solid employment and wage growth is forecast to drive growth in compensation of employees and consumption, supporting PAYE and GST revenues respectively. Strong domestic demand coupled with a positive international outlook will support business profits and corporate tax.

Figure 1.14 – Nominal GDP[6]
Figure 1.14 – Nominal GDP.
Sources: Statistics New Zealand, the Treasury

In the four years to June 2021 (which was the final forecast year of the Pre-election Update), nominal GDP is cumulatively $1.5 billion higher than forecast in the Pre-election Update. Including the impact of Government policy changes and the changes in the economic outlook, core Crown tax revenue is cumulatively $6.6 billion higher than in the Pre-election Update. After accounting for changes in government policy, such as the removal of personal income tax threshold adjustments, this supports a small macroeconomic-driven lift in tax revenues of around $0.7 billion.

Notes

  • [6]Based on quarterly nominal GDP data available prior to the release of Annual National Accounts data on 24 November 2017.

Fiscal Outlook

Overview

  • Overall, the fiscal outlook is expected to improve across the forecast period.
  • The operating balance before gains and losses (OBEGAL) is expected to continue growing across the forecast, reaching a surplus of $8.8 billion (2.5% of GDP) in 2021/22.
  • The fiscal forecasts include the operating and capital allowances outlined in the 2018 Budget Policy Statement (BPS), and the estimated costs of the Government's 100-Day Plan (refer to page 6).
  • Core Crown expenses as a percentage of GDP are expected to initially increase in the first two years of the forecast, reaching 28.6% before declining to 27.6% of GDP in 2021/22. In nominal terms, core Crown expenses continue to increase, reflecting the growing costs of New Zealand Superannuation and new spending in future budgets, as well as some expenditure transferred from 2016/17.
  • In addition to operating expenditure, core Crown capital spending totalling $41.7 billion is included in the forecast to 2021/22. Of this, $2.0 billion has been committed to the KiwiBuild programme and $7.7 billion to recommencing contributions to the NZS Fund.
  • Capital spending is expected to exceed operating cash flows over the first three years of the forecasts. As a result residual cash deficits are forecast for these years, before returning to a residual cash surplus.
  • Funding these residual cash deficits over the next three years, net core Crown debt is forecast to increase in nominal terms before tracking down later in the forecast. As a percentage of GDP, net core Crown debt reduces to around 19.3% by 2021/22.
  • The Crown's balance sheet continues to grow with net worth attributable to the Crown reaching $154.6 billion (44.7% of GDP) in 2021/22.
  • While the fiscal outlook is expected to improve, it is at a slower pace than the Pre-election Update. Comparisons against the Pre-election Update can be found on page 45.
  • The Forecast Financial Statements and Core Crown Expense Tables can be found on pages 97 to 136, and provide more detailed information on the fiscal forecasts.
  • These forecasts are sensitive to a number of judgements and assumptions and should be read in conjunction with the Risk and Scenarios and Specific Fiscal Risks chapters.
Table 2.1 – Fiscal indicators
Year ending 30 June 2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast

$billions

           
Core Crown tax revenue 75.6 78.2 82.8 87.8 93.0 97.8
Core Crown expenses 76.3 81.7 86.3 89.2 92.7 95.3
Total Crown OBEGAL1 4.1 2.5 2.8 5.0 6.5 8.8
Core Crown residual cash 2.6 (2.6) (4.7) (2.6) 0.3 2.3
Net core Crown debt2 59.5 62.1 66.8 69.4 69.0 66.8
Net worth attributable to the Crown 110.5 116.6 122.5 131.1 141.5 154.6

% of GDP

           
Core Crown tax revenue 27.7 27.3 27.5 27.7 28.0 28.3
Core Crown expenses 28.0 28.5 28.6 28.2 28.0 27.6
Total Crown OBEGAL1 1.5 0.9 0.9 1.6 2.0 2.5
Core Crown residual cash 0.9 (0.9) (1.5) (0.8) 0.1 0.7
Net core Crown debt2 21.8 21.7 22.2 21.9 20.8 19.3
Net worth attributable to the Crown 40.5 40.7 40.6 41.4 42.7 44.7

Notes:

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

Source: The Treasury

The Fiscal Outlook chapter discusses the following areas:

Key assumptions, core Crown tax revenue, core Crown expenses, the operating balance, core Crown capital spending, residual cash and net core Crown debt, the total Crown balance sheet and a comparison to the Pre-election Update.

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, while uncertainty around the forecast assumptions and judgements increases over the forecast period. The criteria for inclusion in these forecasts, along with the key risks, can be found in the Risks and Scenarios and Specific Fiscal Risks chapters.

The forecasts incorporate government decisions and other circumstances known to the Government and advised to the Treasury (up to 27 November 2017).

In addition to the key assumptions underpinning the economic forecasts (refer page 13), 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.
  • There is an expectation that the cost of commitments not explicitly included in the fiscal forecasts (or variations to the estimates included in the fiscal forecasts) can be met within the Budget operating and capital allowances included in the fiscal forecasts. How other Government commitments have been forecast is outlined in the box on pages 6 to 9. Any further updates to the 100-Day Plan costings will be charged against the Budget 2018 allowances.
  • Departments will continue to spend less than the upper limits of approved spending (referred to as appropriations). A top-down adjustment is made to compensate for this. 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.
  • Major capital programmes (eg, KiwiBuild, City Rail Link, Housing Infrastructure Fund, KaikŌura rebuild and Crown Infrastructure Partners) will proceed as planned.
  • Forecast returns on the large investment portfolios managed by the Accident Compensation Corporation (ACC) and the NZS Fund are based on their expectations of long-term benchmark rates of return for their respective portfolios.
  • Significant valuations (eg, student loan portfolio, ACC claims liability and the Government Superannuation Fund (GSF) retirement liability) are based on underlying assumptions (eg, discount rates, salary increases and inflation) made at the time the valuations were prepared.
  • No revaluations of property, plant and equipment are projected beyond the current year. Only valuations that have already been completed are included in these forecasts.
  • KiwiRail freight assets continue to be valued on a commercial basis (refer Specific Fiscal Risks chapter for risks to the valuation methodology).
  • The KiwiBuild programme has been included in the fiscal forecasts as a commitment to spend $2.0 billion. For further details refer to page 7.
  • Contributions to the NZS Fund are forecast to resume in the current financial year. Table 2.2 sets out the estimated contribution to the NZS Fund if contributions were to start in the current financial year, based on the legislated contribution formula. Over the forecast years all Fund variables, apart from the capital contributions, are based on those provided by the NZS Fund itself. For more information refer to the Treasury website for the NZS Fund model.
Table 2.2 – NZS Fund contributions
Year ending 30 June
$billions
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Estimated contribution1 2.3 2.5 2.5 2.6 2.6
Forecast contribution 0.5 1.0 1.5 2.2 2.5

Note

  1. Calculations of annual contributions if they were to resume in 2017/18, using the NZS Fund model.

Further information on the underlying economic assumptions used in these fiscal forecasts can be found on page 49.

Core Crown Tax Revenue

Core Crown tax revenue is expected to increase over the forecast period…

Core Crown tax revenue (Figure 2.1) is forecast to rise in each year of the forecast period in nominal terms, while remaining relatively stable as a percentage of GDP. By 2021/22, core Crown tax revenue is expected to reach $97.8 billion, $22.2 billion higher than in 2016/17.

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

Table 2.3 shows that, of the major tax types, source deductions account for just over 40% of the increase ($8.9 billion), mainly reflecting expected growth in forecasts of wage rates and employment. In addition, owing to the progressive tax scale, pay as you earn (PAYE) tax growth is boosted by rising average tax rates as wages increase (also known as fiscal drag).

Goods and Services Tax (GST) is forecast to increase by $5.4 billion over the forecast period, mainly owing to expected growth in nominal domestic consumption, with forecast residential investment also expected to contribute.

Corporate tax is forecast to increase by $3.6 billion over the forecast period, mainly owing to an expected rise in companies' taxable profits.

Table 2.3 – Increase in core Crown tax revenue over the forecast period, by major tax type
Year ending 30 June
$billions
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Total
Change
Source deductions 1.4 1.8 1.8 1.9 2.0 8.9
GST 0.8 1.2 1.2 1.2 1.0 5.4
Corporate tax 0.1 0.9 1.0 0.9 0.7 3.6
Resident Withholding Tax (on interest) - 0.2 0.5 0.6 0.5 1.8
Other taxes 0.3 0.5 0.5 0.6 0.6 2.5
Total increase core Crown tax revenue 2.6 4.6 5.0 5.2 4.8 22.2
Plus previous year 75.6 78.2 82.8 87.8 93.0  
Core Crown tax revenue 78.2 82.8 87.8 93.0 97.8  

Source: The Treasury

…in line with a growing economy

The average nominal GDP growth over the forecast period is expected to be 4.9%, while the average growth in core Crown tax revenue is expected to be slightly higher at 5.3% over the same period. As a share of the economy, core Crown tax revenue is forecast to increase to 28.3% of GDP in 2021/22.

Figure 2.2 shows that tax revenue growth is expected to drop below GDP growth in the current year of the forecast, mainly owing to some unusually large one-off effects in the 2016/17 results, which increased corporate tax revenue significantly. These are not forecast to be repeated in 2017/18, resulting in the initial decrease in tax revenue growth. Tax revenue is then forecast to grow at a higher rate than GDP.

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

Owing to the relatively strong forecast growth in wages, fiscal drag is expected to make a significant contribution to PAYE growth, adding nearly 0.5% of GDP to forecast tax revenue by 2021/22.

Increasing forecast deposit rates over the forecast period means that the Resident Withholding Tax on interest is forecast to grow at a faster rate than nominal GDP.

Previously announced policy measures (eg, base erosion and profit shifting measures for multinational corporations operating in New Zealand and successive 10% increases to tobacco excise rates) are expected to add 0.3% to the tax-to-GDP percentage over the forecast period.

Slightly offsetting these factors, some components of GDP that contribute to growth in taxes (total employees' compensation and domestic consumption) are forecast to grow at a slower rate than nominal GDP, thereby reducing the tax-to-GDP ratio.

Comparison with Inland Revenue forecasts

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 Treasury's forecasts of core Crown tax revenue are, on average, 0.3% lower than Inland Revenue's forecasts. Most of the forecast differences arise from judgements around the relative strength of tax revenue in the current year, as the differences between the two forecasts are, in aggregate, similar across all years of the forecast period.

This comparison is included in the Additional Information on the Treasury website at: http://www.treasury.govt.nz/budget/forecasts/hyefu2017

Core Crown Expenses

Core Crown expenses are expected to remain relatively stable compared to the size of the economy, despite nominal growth…

Core Crown expenses are expected to grow at a slightly slower rate than the nominal economy. While slightly higher in the near term, core Crown expenses as a percentage of GDP decline from 28.0% in 2016/17 to 27.6% at the end of the forecast period (Figure 2.3).

Figure 2.3 – Core Crown expenses
Source: The Treasury

Nominally, core Crown expenses are expected to increase by $19.0 billion from $76.3 billion in 2016/17 to $95.3 billion in 2021/22, an increase of around $4 billion each year.

…primarily owing to operating allowances provided for future decision-making…

The operating allowances are set by the Government in the BPS and outline the expected level of future expenditure, although no formal decision regarding the allocation of spending has yet been taken.

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

These forecasts assume that any additional costs in relation to Government commitments and future cost pressures (whether they be from increased demand for government services, inflation or additional services) will be met from operating allowances.

Future operating allowances are currently set at $2.6 billion for Budget 2018, reducing to $1.875 billion for each subsequent Budget (Figure 2.4).[13] The fiscal forecasts include estimated costs of the 100-Day Plan (refer page 6 for further discussion). Any additional costs of the policy commitments made by the Government are assumed to be met from these budget allowances. For further details refer to ‘impact of new Government policies' box on page 6 to 9.

Figure 2.4 – Core Crown expenses with allowance break down
Source: The Treasury

The Specific Fiscal Risks chapter outlines the options the Government has to manage those commitments with these allowances (refer page 63).

…and an increase in the cost of New Zealand superannuation contributes to expenditure growth…

New Zealand superannuation (NZS) is forecast to increase as recipient numbers increase.

NZS payments account for $4.2 billion of the increase in core Crown expenses over the forecast period. This increase reflects the growth in the number of NZS recipients and the increase in payment rates and other factors. By the end of the forecast period, NZS is around 54% of the total social assistance spending and 18% of core Crown expenditure (compared to 52% and 17% respectively in 2016/17).

Recipient numbers are forecast to increase from almost 717,000 in 2016/17, to over 851,000 by the end of the forecast horizon (an increase of 18.7%). The remaining increase is largely owing to indexation of entitlements to wage growth (Figure 2.5).

Figure 2.5 – Growth of NZS recipients and expenses
Source: The Treasury

…while judgements are made regarding the level of spending.

The fiscal forecasts are a culmination of individual forecasts provided by departments and other government entities (a ‘bottom-up' forecast).

Parliament provides the authority for departments to incur expenses (referred to as appropriations). History suggests that the actual level of spending is usually below these upper limits and that there is a bias towards over-forecasting expenditure (Figure 2.6).

Figure 2.6 – Variance in core Crown expenses to original budget1
Note
  1. Original budget refers to the relevant Budget Update first full forecast year (ie, Original budget for 2017 is Budget 2016).
Source: The Treasury

Actual expenditure is often lower than these limits owing to a number of reasons; such as expenditure being delayed or programmes not implemented. The Treasury therefore estimates the extent to which expenditure is ‘over forecast' and reduces the expenditure forecast accordingly. This adjustment is referred to as a ‘top-down' adjustment.

To make this judgement the Treasury analyses large departments' forecasts, including the past history of spending against forecasts and appropriations. Without the top-down adjustment the variance to forecast would be much larger.

Table 2.4 shows forecast core Crown expenses in the Half Year Update before and after the top-down adjustment is applied.

Table 2.4 – Core Crown expenses (before and after top-down adjustment).
Year ending 30 June
$billions
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Core Crown expenditure (before top-down adjustment) 83.1 87.1 89.8 93.3 95.9
Top-down adjustment (1.4) (0.8) (0.6) (0.6) (0.6)
Core Crown expenditure 81.7 86.3 89.2 92.7 95.3

Source: The Treasury

The top-down 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 spending not incurred and moved to the following year.

Notes

  • [13]New operating spending will be allocated to department baselines when budget decisions are made. As a result, the different functional expense areas (eg, health spending), 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.

Core Crown expenses over time

Nominal core Crown expenses

Over the last 19 years, core Crown expenses have almost doubled in nominal terms from $33.0 billion in 1997/98 to $76.3 billion in 2016/17. As a share of the economy, core Crown expenses increased from 31.5% in 1998 to peak at 34.1% in 2010/11 following the Canterbury earthquakes, and then decreased to 28.0% of GDP in 2016/17 (Figure 2.7).

Figure 2.7 – Core Crown expenses (nominal)
Figure 2.7 – Core Crown expenses (nominal).
Source: The Treasury

Core Crown expenses are forecast to continue to increase in nominal terms to $95.3 billion by 2021/22 or 27.6% of GDP. In the longer term, the Treasury's He Tirohanga Mokopuna 2016 Statement on the Long-Term Fiscal Position sets out projections of core Crown expenses including the key areas of spending such as health, education and welfare at 15- year intervals out to 2060. These projections represent scenarios that illustrate different possibilities rather than being predictions. They show that projected long-term pressures are primarily owing to increased costs for NZS and health expenses. The ageing population is the main driver of NZS increases, while this coupled with growing demand for services pushes up public health spending.

Real core Crown expenses (using 2016/17 dollars)

In real terms (ie, stripping out the impact of inflation) core Crown expenses have increased by $27.9 billion or 57.6% since 1998. Expenditure on social security and welfare increased by 37.8% in real terms, while health expenses increased by over 100%. Education and other expense classes increased by 75.2% and 68.3% respectively, while finance costs have decreased by 10.0% over this time, owing in part to lower interest rates (Table 2.5).

Table 2.5 – Change in core Crown expenses in real terms (using 2016/17 dollars)
Year ending 30 June
$million
1998 2017 $
Change
%
Change
Social Security and Welfare 18,349 25,294 6,945 37.8
Health 7,871 16,223 8,352 106.1
Education 7,579 13,281 5,702 75.2
Other 10,702 18,007 7,305 68.3
Finance costs 3,925 3,534 (391) (10.0)
Total core Crown expenses 48,426 76,339 27,913 57.6

Source: The Treasury

Core Crown expenses by functional classification (nominal)

Of the total core Crown expenses, social security and welfare, health and education represent the largest types of spending. Figures 2.8, 2.9 and 2.10 below show the expenditure trends over the last 20 years for these key areas of government expenditure, including the significant components of each.

In 2013/14 changes to the benefit system and exisiting benefit categories took place. Three new categories of benefits replaced a number of other categories.

Education expenses comprise spending on early childhood education, primary and secondary schools and tertiary education, including the cost of student allowances and student loans. In 2005/06 there was a change in the student loan scheme resulting in an additional $1.4 billion of tertiary expenses in that year.

Figure 2.8 – Social Security and Welfare
Figure 2.8 – Social Security and Welfare.
Source: The Treasury
Figure 2.9 – Health
Figure 2.9 – Health.
Source: The Treasury
Figure 2.10 – Education
Figure 2.10 – Education.
Source: The Treasury

Long-term projections

As discussed earlier the Treasury’s He Tirohanga Mokopuna 2016 Statement on the Long-Term Fiscal Position sets out projections of core Crown expenses.

Table 2.6 compares actual and forecast results in this Half Year Economic and Fiscal Update to the projections in the 2016 Long-Term Fiscal Position. These projections are based on historical spending patterns and use the Budget 2016 forecasts as a base. They do not include a Government response even though previous governments have made such responses. The purpose of the projections below is to provide potential outcomes to enable governments to make well-informed choices.

Table 2.6 – Projections for ‘Historical Spending Patterns’ scenario (% of GDP)
Year ending 30 June
% of GDP
1998
Actual
2017
Actual
2022
Forecast
2045
Projection
2060
Projection
New Zealand Superannuation 4.9 4.8 5.0 7.2 7.9
Health 5.1 5.9 5.0 8.3 9.7
Education 4.9 4.9 4.4 5.5 5.7
Total core Crown expenses 31.5 28.0 27.6 39.1 47.1

Source: The Treasury (He Tirohanga Mokopuna 2016 Statement on the Long-Term Fiscal Position)

Operating Balance

OBEGAL is expected to decrease initially, followed by steady growth over the next four years…

The forecast decrease in OBEGAL in the current year largely reflects the higher than expected outturn for 2016/17 and the increase in spending from Budget 2017 decisions. This decline is followed by steady growth in the remaining years of the forecast, as revenue grows at a faster pace than expenditure, reaching a surplus of $8.8 billion in 2021/22 (Figure 2.11).

Figure 2.11 – Components of OBEGAL by segment
Figure 2.11 - Components of OBEGAL by segment.
Source: The Treasury

Crown entities (CEs) are expected to record relatively small deficits over the forecast period, while State-owned Enterprises' (SOEs') contribution to OBEGAL remains fairly stable, with operating surpluses forecast to average $0.7 billion throughout the forecast period. See page 99 to 102 for a list of CEs and SOEs.

…while investment returns contribute to the growth in the operating balance and net worth.

The total Crown operating balance, inclusive of gains and losses, is forecast to be in surplus across all years of the forecast period.

The 2016/17 gains made on the Crown's large investment portfolios, largely ACC and the NZS Fund, reflected strong performance in the global equity markets. The forecast then assumes investment income returns to a long-term rate of return, resulting in more subdued growth going forward. The operating balance follows the OBEGAL trend growing to $13.0 billion in 2021/22 (Figure 2.12).

Figure 2.12 – Components of operating balance
Figure 2.12 - Components of operating balance.
Source: The Treasury

While expected financial gains on investments are positive, partially offsetting these was an actuarial loss on the ACC outstanding claims liability of $0.5 billion in 2017/18 (compared to actuarial gains of $0.4 billion in 2016/17). However, as future actuarial gains or losses are not forecast, they do not impact the operating balance beyond 2017/18.

The level of operating balance plays a significant part in increasing the Government's financial assets and contributing to growth in the Crown's net worth.

Summary fiscal indicators

The Treasury calculates two summary fiscal indicators, the cyclically-adjusted balance (CAB) and the fiscal impulse, to help assess the Government's fiscal position. Further detail on these indicators can be found in the Additional Information on the Treasury website: www.treasury.govt.nz/budget/forecasts/hyefu2017.

Table 2.7 - Structural fiscal balance indicators
Year ending 30 June
% of GDP
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
OBEGAL 1.5 0.9 0.9 1.6 2.0 2.5
Cyclically-adjusted balance 1.7 1.1 0.6 1.1 1.6 2.3
Fiscal impulse[8] (0.9) 1.8 0.6 (0.7) (1.1) (0.5)

Source: The Treasury

Cyclically-adjusted balance

The CAB is an estimate of OBEGAL adjusted for the cyclical position of the economy. Cyclical factors (eg, higher tax revenue in an upturn or higher unemployment expenses in a downturn) are removed to assess the Government's underlying fiscal position. The CAB is in surplus across the entire forecast period, indicating the forecast surpluses are structural, ie, they are not owing to cyclical economic conditions. The profile of the CAB broadly reflects the profile of OBEGAL across the forecast period (Figure 2.13). Cyclically-adjusted surpluses are, on average, 0.4% of GDP lower across the forecast period compared with the Pre-election Update as a result of higher operating expenses and lower cyclically-adjusted revenue as a per-cent of GDP.

Figure 2.13 – Operating balance indicators
Figure 2.13 - Operating balance indicators.
Source: The Treasury

Fiscal impulse

Unlike the CAB, which is an operating measure, the fiscal impulse is based on both operating and capital cash flows. The fiscal impulse is an estimate of discretionary changes (ie, excluding cyclical factors) in the fiscal position that have an impact on aggregate demand pressures in the economy. The fiscal impulse indicates that fiscal policy is forecast to have a stimulatory impact on aggregate demand in 2017/18 and 2018/19. This reflects strong growth in capital and operating expenditure, infrastructure investment, the Families Package and other expenditure on public services. Fiscal policy is estimated to have a contractionary impact on aggregate demand for the remainder of the forecast period. This is driven by a combination of declining operating and capital expenditure as a per cent of GDP and rising tax receipts as a per cent of GDP.

Notes

  • [8]The fiscal impulse measure shown is the core Crown fiscal impulse plus CEs, excluding Earthquake Commission (EQC) and Southern Response payments. A positive number indicates stimulatory fiscal policy.

Core Crown Capital Spending

The Government is forecast to spend $41.7 billion on net capital spending over the next five years. Net capital spending is expected to increase significantly in 2017/18 and persist at that level across the forecast. The estimated increase in the forecast capital spend increases the risk that spending may be pushed into future periods as capacity constraints are tested.

Table 2.8 – Net capital expenditure activity 2017/18 to 2021/22
Year ending 30 June
$billions
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
5-year
Total
Education 0.7 1.0 0.9 0.7 0.7 0.7 4.0
Defence 0.4 0.7 0.8 0.5 0.3 0.5 2.8
KiwiBuild - 0.1 0.9 1.0 - - 2.0
Corrections 0.1 0.2 0.2 0.1 0.1 0.1 0.7
Inland Revenue 0.1 0.2 0.1 0.1 0.1 0.1 0.6
Other 0.8 1.5 0.7 0.5 0.6 0.6 3.9
Net purchase of physical assets 2.1 3.7 3.6 2.9 1.8 2.0 14.0
Housing Infrastructure Fund - 0.1 0.2 0.1 0.2 0.1 0.7
Student loans 0.1 - (0.1) (0.1) (0.1) (0.1) (0.4)
Other (0.2) 0.1 - - (0.1) (0.1) (0.1)
Net advances (0.1) 0.2 0.1 - - (0.1) 0.2
New Zealand Transport Agency (NZTA) 1.0 1.4 1.3 1.4 1.1 1.5 6.7
City Rail Link - 0.3 0.2 0.3 0.4 0.3 1.5
Crown Infrastructure Partners - - 0.1 0.2 0.3 - 0.6
Southern Response 0.2 0.3 0.2 0.1 - - 0.6
District Health Boards - 0.3 0.1 0.1 - - 0.5
KiwiRail 0.2 0.2 0.2 - - - 0.4
Other 0.3 0.5 0.6 0.3 - - 1.4
Net investments 1.7 3.0 2.7 2.4 1.8 1.8 11.7
Future new capital spending - 0.3 2.0 2.5 2.7 2.7 10.2
Top-down capital adjustment - (1.1) (0.5) (0.3) (0.1) (0.1) (2.1)
Contribution to NZS Fund - 0.5 1.0 1.5 2.2 2.5 7.7
Net capital spending 3.7 6.6 8.9 9.0 8.4 8.8 41.7

Source: The Treasury

Table 2.8 outlines core Crown capital spending that has a net core Crown debt impact. It excludes capital spending undertaken directly by CEs and SOEs funded from their own resources. The Government has committed to spending $2.0 billion on the KiwiBuild programme (refer to page 7 for further information). This has been forecast to occur in the first three years of the forecast. Other significant areas of capital spending include Crown Infrastructure Partners, schools and the roading network (through NZTA).

Some capital commitments relating to the City Rail Link and Housing Infrastructure Fund are expected to fall outside of the forecast horizon.

Capital allowances represent new capital spending expected to be allocated over the forecast period. The capital allowance for each Budget is spread over five fiscal years, reflecting the expected profile of 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

As with operating allowances, capital allowances are set by the Government and outline the expected level of future expenditure, although no formal decision regarding the allocation of spending has yet been taken. Future capital allowances are currently set in the 2018 Budget Policy Statement at $3.4 billion for both Budget 2018 and Budget 2019, reducing to $3.1 billion in Budget 2020, and $2.7 billion in Budget 2021 onwards.

In addition to the above capital spending, a number of capital projects have been undertaken through Public Private Partnerships (PPPs) (eg, Transmission Gully). Unlike capital spending, where cash payments are made as the asset is being constructed, cash flows in relation to PPPs do not typically commence until the completion of the project. Instead, borrowings are accumulated across the period reflecting the progress towards completion. Payments are then spread over a number of subsequent years as the assets become operational.

Residual Cash and Net Core Crown Debt

[15]

Operating cash flows are expected to improve across the forecast period…

Net operating cash flows are expected to rise over the forecast period. However, these are forecast to be exceeded in the first three years of the forecast by the expected capital spending as discussed earlier on page 39. This results in a residual cash deficit forecast for the first three years. However, as capital spending steadies, and forecast tax receipts continue to grow at a faster pace than operating expenditure, a residual cash surplus occurs in the final two years of the forecast, peaking at $2.3 billion in 2021/22 (Figure 2.15).

Figure 2.15 – Core Crown residual cash
Figure 2.15 - Core Crown residual cash.
Source: The Treasury

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

…while net core Crown debt falls as a percentage of GDP

Net core Crown debt as a percentage of GDP is expected to decline across the forecast period from 21.8% in 2016/17 to 19.3% at the end of the forecast period (Figure 2.16).

Figure 2.16 – Net core Crown debt
Figure 2.16 - Net core Crown debt.
Source: The Treasury

However, as a result of the expected residual cash results, net core Crown debt is expected to increase in the short term and peak in nominal terms at $69.4 billion in 2019/20 before reducing to $66.8 billion in 2021/22.

This forecast nominal increase in net core Crown debt in the short-term is expected to be funded by reducing financial assets of the Crown, rather than increasing nominal gross debt.

This forecast nominal increase in net core Crown debt occurs as cash flows from operating activities are not expected to be sufficient to meet capital spending.

The bond programme remains stable…

While nominal net core Crown debt increases in the short term, the bond programme is forecast to remain stable over the forecast period. The issuance profile reduces the year-to-year volatility of bond programmes and ensures consistency of supply over this time.

The bond programme is expected to raise funds of $35.2 billion over the forecast period, while $35.5 billion of existing debt will be repaid, providing net repayments of $0.3 billion (Table 2.9).[16]

Table 2.9 – Net issuance of government bonds
Year ending 30 June
$billions
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
5-year
Total
Face value of government bonds issued (market) 7.0 7.0 7.0 7.0 7.0 35.0

Cash proceeds from government bond issue

           
Cash proceeds from issue of market bonds 7.0 7.0 7.0 7.1 7.1 35.2
Repayment of market bonds (9.2) (7.9) (7.3) (11.1) - (35.5)
Net proceeds from market bonds (2.2) (0.9) (0.3) (4.0) 7.1 (0.3)
Net cash proceeds from bond issuance (2.2) (0.9) (0.3) (4.0) 7.1 (0.3)

Source: The Treasury

…although gross debt declines as a percentage of GDP

In line with the Crown bond programme, gross debt as a percentage of GDP is expected to decline across the first four years of the forecast period. By 2020/21 gross debt is expected to decrease to 23.9% of GDP, from 31.9% at the end of 2016/17. In the final year of the forecast, gross debt climbs again to 25.1% of GDP, as steady bond issuance continues during a year with no forecast bond maturity.

In nominal terms gross debt declines to $79.4 billion in 2020/21 before peaking in 2021/22 at $86.7 billion, $0.4 billion lower than current levels (Figure 2.17), largely as a result of the net repayment discussed above.

Figure 2.17 – Gross debt
Figure 2.17 - Gross debt.
Source: The Treasury

As previously signalled in the Budget Update 2017, the Government intends to maintain the amount of bonds issued at not less than 20% of GDP over time. The BPS contains further information on this objective.

Notes

  • [15]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.
  • [16]More information on the bond programme can be found at https://www.nzdmo.govt.nz/analyst-centre/media-statements

Analysis of Government debt

How does the Crown borrow?

The Treasury actively manages the Crown's material funding and liquidity risks, ensuring the Crown has enough net cash to meet its obligations. The Crown issues debt securities that raise the funds necessary to cover any cash flow shortfall between Crown expenditure and debt repayments and Crown revenue.

The Crown issues New Zealand Government Bonds (NZGBs) and treasury bills in the wholesale market. These are issued via regular competitive tenders or in the case of new bonds, via syndication.[17] At 27 November 2017, there were $76.6 billion of bonds on issue that were available to be bought and sold in the secondary market. The Crown also had around $4 billion of treasury bills on issue. Currently, there are nine NZGBs, with maturities that span from December 2017 to September 2040. In addition to NZGBs and treasury bills issued in the wholesale market, the Crown makes bonds available to retail investors. These retail bonds are known as Kiwibonds.

Who buys NZGBs?

NZGBs are currently only issued in New Zealand dollars, and are bought by a wide range of domestic and offshore investors. Domestically, NZGBs are typically purchased by banks, fund managers and KiwiSaver providers. Non-resident purchasers are diverse by type and geographic location. They may be central banks, fund managers, hedge funds or pension funds that include NZGBs in a global or region-specific portfolio of assets. Offshore investors may be located anywhere in the world and are currently largely located in Asia, Europe, the Americas, Middle East or Australia. Figure 2.18 shows the resident and non-resident holdings of NZGBs.

Figure 2.18 – Holdings of NZGBs: Resident and Non-resident
Figure 2.18 - Holdings of NZGBs: Resident and Non-resident.
Source: The Treasury

How does the NZGB market look over history?

Over time, the amount of NZGBs issued each year and the total outstanding has varied (Figure 2.19). In the period prior to the Global Financial Crisis (GFC), bond issuance had fallen to around $2.0 billion per year and total NZGBs on issue were below $20.0 billion. Following the GFC (before 2007-2008) and the Canterbury earthquakes (2010) funding requirements increased. Annual bond issuance programmes grew to almost ten-fold at the peak annual funding requirement. More recently, issuance programmes have been steadier, averaging $8.0 billion per year.

Figure 2.19 – New Zealand Government Bonds Over Time
Figure 2.19 – New Zealand Government Bonds Over Time.
Source: The Treasury

Notes

  • [17]Syndications involve appointing a group of intermediaries (typically banks) to a panel to issue a new bond. The purpose is to achieve a relatively large volume of issuance, to a diverse range of investors, at cost-effective pricing.

Total Crown Balance Sheet

Growing 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 expected operating balance surpluses, to stand at $154.6 billion by 2021/22. As a percentage of GDP, it remains stable in the first half of the forecast before increasing to 44.7% by 2021/22 (Figure 2.20) as growing operating surpluses outpace GDP growth.

Figure 2.20 – Net worth attributable to the Crown
Figure 2.20 – Net worth attributable to the Crown.
Source: The Treasury

…with assets increasing by $48.5 billion over the forecast period…

Total assets are forecast to grow by $48.5 billion over the forecast period to $364.8 billion in 2021/22, made up of additional investments in assets, both physical and financial (Figure 2.21).

Figure 2.21 – Total Crown assets
Figure 2.21 – Total Crown assets.
Source: The Treasury

The largest asset growth over the forecast period is in the social assets portfolio (around 53% of the total Crown balance sheet). Social assets (eg, schools, hospitals and social housing) are expected to increase by $23.4 billion over the forecast period to be $189.8 billion in 2021/22. This increase largely reflects the capital spending discussed earlier.

...while liabilities are expected to grow at a slower rate…

The Crown's liabilities across the forecast period reach $204.5 billion by 2021/22, an increase of $10.7 billion. Primarily driving this is the increase in the Crown's insurance liabilities (mostly held by ACC, EQC and Southern Response). Insurance liabilities are expected to increase across the forecast by $6.3 billion, largely owing to ACC claims liability (reflecting a growth in both volume and cost of claims).

…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 to show current estimates of what the Crown owns and owes. While the measurement at fair value is intended to reflect the 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.

The Risks and Scenarios chapter includes a section on balance sheet risks and should be read in conjunction with the fiscal forecasts.

Comparison to the Pre-election Update 2017

The Pre-election Update was published on 23 August 2017. Since then, there have been a number of developments that have impacted the fiscal outlook, in particular the 2017 General Election resulting in the formation of a new Government and the finalisation of the fiscal 2016/17 results. Overall, the forecasts for the next four years continue to improve, however, at a slower pace than was forecast in the Pre-election Update forecasts. Table 2.10 below summarises the changes in the key fiscal indicators.

Table 2.10 - Key fiscal indicators compared to the Pre-election Update
Year ending 30 June
$billions
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast

Core Crown tax revenue

         
Half Year Update   78.2 82.8 87.8 93.0
Pre-election Update 75.6 78.3 81.3 85.8 89.8
Actual 75.6 - - - -
Change - (0.1) 1.5 2.0 3.2

Core Crown expenses

         
Half Year Update   81.7 86.3 89.2 92.7
Pre-election Update 76.8 81.0 83.7 86.1 89.5
Actual 76.3 - - - -
Change (0.5) 0.7 2.6 3.1 3.2

OBEGAL[18]

         
Half Year Update   2.5 2.8 5.0 6.5
Pre-election Update 3.7 2.9 3.5 5.7 6.4
Actual 4.1 - - - -
Change 0.4 (0.4) (0.7) (0.7) 0.1

Core Crown residual cash

         
Half Year Update   (2.6) (4.7) (2.6) 0.3
Pre-election Update 1.5 (1.4) (1.4) 1.7 1.1
Actual 2.6 - - - -
Change 1.1 (1.2) (3.3) (4.3) (0.8)

Net core Crown debt

         
Half Year Update   62.1 66.8 69.4 69.0
Pre-election Update 60.6 62.2 63.7 62.0 60.8
Actual 59.5 - - - -
Change (1.1) (0.1) 3.1 7.4 8.2

Net worth attributable to the Crown

         
Half Year Update   116.6 122.5 131.1 141.5
Pre-election Update 108.9 114.5 121.2 130.4 140.6
Actual 110.5 - - - -
Change 1.6 2.1 1.3 0.7 0.9

Source: The Treasury

Core Crown tax revenue is expected to be higher than the Pre-election Update...

Core Crown tax revenue is forecast to be $6.6 billion higher than in the Pre-election Update over the four-year period up to 2020/21 (Table 2.11). Of this change $6.3 billion of this change has come from repealing the Budget 2017 tax cuts and reinstating the Independent Earners' Tax Credit (IETC). Apart from this policy change, most of the change in tax revenue forecasts has come from:

  • source deduction revenue forecasts increased by $0.9 billion in total (excluding policy changes) across the forecast period, mainly owing to a higher track for forecast wage rates, plus the associated increase in forecast fiscal drag, and
  • GST forecasts have been increased by a total of $0.6 billion, mainly owing to increased forecasts of net tourist spending in New Zealand and residential investment, particularly towards the latter part of the forecast period.

This is somewhat offset by corporate tax being nearly $1.0 billion lower than in the Pre-election Update, mainly owing to a lower outlook for company profits across the forecast period.

Within the nominal GDP forecast that underlies the tax forecast, relative to the Pre-election Update, there has been a switch out of profits (net operating surplus) and into labour incomes (compensation of employees) caused at least in part by proposed increases in the minimum wage over the next three years (see Impact of new Government policies on pages 6 to 9). Overall, the tax gained on the components of GDP for which forecasts increased, was greater than the tax lost on the components of GDP for which forecasts were decreased.

Table 2.11 - Reconciliation of the change in core Crown tax revenue
Year ending 30 June
$billions
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
Total
Change

Movement in core Crown tax owing to:

         
Source deductions 0.5 1.8 2.0 2.4 6.7
GST (0.1) (0.1) 0.2 0.6 0.6
Other persons tax 0.1 0.2 0.1 0.2 0.6
RWT (on interest) (0.1) - - 0.2 0.1
Corporate tax (0.4) (0.3) (0.2) (0.1) (1.0)
Other taxes (0.1) (0.1) (0.1) (0.1) (0.4)
Total movement in core Crown tax revenue (0.1) 1.5 2.0 3.2 6.6
Plus: Pre-election Update tax base 78.3 81.3 85.8 89.8  
Core Crown tax revenue 78.2 82.8 87.8 93.0  
As a % of GDP 27.3% 27.5% 27.7% 28.0%  

Core Crown tax movements consist of:

         
Policy initiatives 0.5 1.9 1.9 2.0 6.3
Forecast changes (0.6) (0.4) 0.1 1.2 0.3

Source: The Treasury

…while OBEGAL growth slows with recent developments before climbing…

The major movements in OBEGAL since the Pre-election Update are outlined in Table 2.12 below. Cumulatively, OBEGAL is $1.7 billion lower than the Pre-election Update across the forecast period.

Table 2.12 - Changes in OBEGAL since the Pre-election Update
Year ending 30 June
$billions
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
OBEGAL - Pre-election Update 2.9 3.5 5.7 6.4
Changes in forecasts:        
    100-Day Plan net operating costs 0.2 0.1 - (0.2)
    Change in operating allowances - (0.9) (1.1) (1.1)
    Tax forecast changes (0.6) (0.4) 0.1 1.2
    Benefit forecast changes - (0.1) (0.2) (0.2)
    Expenditure transferred from 2016/17 (0.4) - (0.1) -
    ACC results 0.1 0.3 0.2 0.1
    Other changes 0.3 0.3 0.4 0.3
Total changes since the Pre-election Update (0.4) (0.7) (0.7) 0.1
OBEGAL - 2017 Half Year Update 2.5 2.8 5.0 6.5

Source: The Treasury

The Government's 100-Day Plan has been included in these forecasts. More detail around the 100-Day Plan can be found on pages 6 to 9.

In addition, operating allowances have been set at $2.6 billion for Budget 2018 and $1.875 billion for Budgets 2019-2021, which is higher than those forecast in the Pre-election Update.

Tax revenue and benefit expenses have been updated to reflect changes to the latest economic forecasts (refer to tax revenue on page 46). Benefit expenses have been impacted as a result of the indexation of payments to wage growth and inflation, and increases in recipient numbers.

There has also been some expenditure that was not spent in the previous financial year that is now expected to occur in the current forecast period.

Accident Compensation Corporation's (ACC's) OBEGAL result is expected to improve, primarily owing to decreases in insurance expenditure, as growth in claim volumes is expected to be lower than the Pre-election Update.

...and net core Crown debt is higher across the forecast period compared to the Pre-election Update.

Core Crown residual cash is $9.6 billion lower than the Pre-election Update increasing net core Crown debt, which is expected to be around $8.2 billion higher than the Pre-election Update across the forecast period (Table 2.13).

Table 2.13 - Changes in net core Crown debt since the Pre-election Update
Year ending 30 June
$billions
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
Net core Crown debt - Pre-election Update 62.2 63.7 62.0 60.8
Changes in forecasts (cumulative):        
    100-Day Plan net operating and capital expenditure 0.3 1.9 4.3 4.5
    Change in operating allowances - 0.9 2.0 3.1
    Change in capital allowances - 0.5 0.9 1.3
    Tax forecast changes 0.9 1.5 1.6 0.5
    Benefit forecast changes - 0.1 0.3 0.5
    Opening balance improvement (1.1) (1.1) (1.1) (1.1)
    Other changes (0.2) (0.7) (0.6) (0.6)
Total changes since the Pre-election Update (0.1) 3.1 7.4 8.2
Net core Crown debt - Half Year Update 62.1 66.8 69.4 69.0

Source: The Treasury

In addition to the operating impacts of the 100-Day Plan, restarting contributions to the NZS Fund earlier (an additional $3.0 billion) and the commitment to the KiwiBuild programme (of $2.0 billion) have increased net core Crown debt. More details on the 100-Day Plan can be found on pages 6 to 9.

Allowances for new capital spending have also increased to $3.4 billion for Budgets 2018 and 2019, $3.1 billion for Budget 2020 and $2.7 billion for Budget 2021. This adds an additional $1.3 billion over the forecast period from allowances set in the Pre-election Update.

Net core Crown debt also had a stronger starting position for the 2017/18 financial year, with net debt being $1.1 billion lower at 30 June 2017 than previously forecast at the Pre-election Update.

Notes

  • [18]The OBEGAL balance excludes minority interests - the portion attributable to the investors in mixed ownership companies (Air New Zealand, Genesis, Mercury and Meridian).

Key Economic Assumptions Used in the Fiscal Forecasts

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

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

A summary of the key economic forecasts that are particularly relevant to the fiscal forecasts is provided in Table 2.14 below.

Table 2.14 - Summary of key economic forecasts used in fiscal forecasts
Year ending 30 June 2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Real GDP1 (annual average, % change) 2.7 2.9 3.6 3.0 2.6 2.1
Nominal GDP2 ($millions) 272,766 286,391 301,430 316,488 331,627 345,650
CPI (annual average, % change) 1.4 1.8 1.9 2.1 2.2 2.3
Govt 10-year bonds (annual average, %) 2.9 2.9 3.2 3.7 4.1 4.3
5-year bonds (annual average, %) 2.3 2.6 3.0 3.6 4.1 4.3
90-day bill rate (annual average, %) 2.1 2.0 2.2 3.2 4.0 4.2
Unemployment rate (annual average, %) 5.0 4.6 4.5 4.3 4.0 4.1
Employment (annual average' % change) 5.2 3.3 1.9 1.5 1.3 0.9

Notes:

  1. Production measure.
  2. Expenditure measure. Nominal GDP has been adjusted to incorporate changes to the national accounts data released 24 November 2017. For further information refer to page 5.

Source: The Treasury

Risks and Scenarios

Overview

  • In this chapter we discuss the risks and uncertainties surrounding the forecasts and how they may cause economic and fiscal outcomes to differ from those presented in the previous chapters. Risks can be positive or negative and can have an impact on the Government's fiscal position, including tax revenue, expenditure and debt. While this chapter focuses on risks and uncertainty to the economic and fiscal outlook, it does not cover specific fiscal risks such as cost pressures, contingent liabilities, or potential changes to government policy, which are discussed in Chapter 4.
  • The outlook for the domestic economy may differ from what we have forecast in a number of ways. Weaker economic confidence could mean that consumption or business investment is softer than expected. The impact of falling unemployment and government policy changes could result in higher than expected growth in wages. Growth in real residential investment may be weaker than forecast if capacity constraints are more binding than we have assumed.
  • Changes in the international economy also have potential to impact the economic outlook. Stronger than forecast growth in our trading partners could increase demand for exports and result in higher terms of trade. Higher wage growth or lower unemployment in New Zealand has the potential to keep net migration higher for longer than we have assumed. Geopolitical tensions and ongoing debate in some countries on the merits of trade liberalisation also remain as risks to the global economy.
  • Two alternative scenarios are presented to show how the economic and fiscal outlook might evolve under a different set of assumptions and judgements. Scenario One shows the impact of the economy failing to pick up as quickly as we have forecast. Scenario Two shows how a stronger global economy might flow through to stronger growth and higher inflation in New Zealand.
  • The Crown's balance sheet is exposed to a number of risks beyond those associated with the operating balance. The Crown's financial position is exposed to risk through changes in the value of the Crown's assets or liabilities and through the potential impact of the Crown's fiscal obligations that arise from policy choices.

Risks to the Economic and Fiscal Outlook

The main forecasts are based on a set of assumptions (such as the evolution of the exchange rate, the terms of trade and population growth) and judgements about how developments in one part of the economy impact the rest of the economy.[13] Should these assumptions and judgements prove incorrect, the economic and fiscal outlook would deviate from that presented in Chapters 1 and 2. This chapter discusses some of the key risks facing the economy and uses scenarios to assess the implications if assumptions and judgements are altered. Supplementing this, the Statement of specific fiscal risks (Chapter 4) provides details of the risk of potential government decisions, contingent liabilities and contractual obligations that may also have a material impact on the economic or fiscal outlook.

There are a number of key risks to the economic outlook that could have a significant impact on the Government's fiscal position should they materialise. In particular, recent weakness in a number of economic indicators, including retail sales, business confidence, and labour productivity are expected to unwind driving the forecast lift in growth through to 2019. If these assumptions prove incorrect, growth is likely to remain around current levels, leading to a weaker fiscal position than forecast. On balance, domestic risks are skewed towards weaker growth, although wage pressures provide some offset to this. In contrast, the global economy has continued to improve more quickly than anticipated. If this trend continues, domestic growth could be boosted by stronger exports or higher terms of trade. For the most part, uncertainty surrounding the impacts of new policy are dealt with in ‘Impact of new Government policies' on page 6.

The level and composition of net migration could impact the economic outlook

Recent net migration outturns have been broadly in line with our forecasts at the Pre-election Update. Our main forecasts continue to assume a downward trend over the forecast period. Migration inflows may not ease as expected if the relative attractiveness of living, working and studying in New Zealand is stronger than expected. In particular, changes in the Australian labour market are seen as a key driver of net migration cycles. The composition of migration also has implications for the economy. For example, a larger inflow of construction workers may help to alleviate capacity constraints in the sector. See ‘Impact of new Government policies' on page 6 for details of current policy assumptions.

There is considerable uncertainty surrounding our long-term assumption for migration. Our current assumption is drawn from Statistics New Zealand's long-term population projections. A higher long-term assumption would imply a different long-term level of output and tax revenue, given more people would be working and consuming in New Zealand. We will continue to monitor data outturns and review our long-term assumption ahead of Budget 2018.

Wage growth is uncertain, domestically and globally

The link between the unemployment rate and wage growth appears to have weakened in a number of advanced economies (for example Australia, Figure 3.1). It is unclear whether this relationship will reassert itself in the future.

Figure 3.1 – Unemployment and wage growth in Australia
Figure 3.1 – Unemployment and wage growth in Australia.
Sources: Haver Analytics, the Treasury

Domestically, policy changes contribute to faster wage growth in the forecasts (see ‘Impact of new Government policies’ on page 6 for details). The impacts, and take-up, of some policies, such as further pay equity settlements, could result in stronger wage growth than in the main forecasts. However, these impacts remain too uncertain to include in the forecasts at this stage; we will continue to monitor how these policies are flowing through to the wider economy and update our assumptions as necessary.

Our main forecasts incorporate a pick-up in labour productivity growth, which has remained weak for a number of years. If labour productivity were to evolve at a more subdued pace, real economic activity per person would likely be slower, inflationary pressures stronger and wage growth weaker.

Exporters face uncertainty from the global economy...

Given the small and open nature of the New Zealand economy, changes in the global economy are of particular relevance for exporters. The global outlook has continued to improve in recent months but a number of risks remain. Stronger demand from Chinese consumers, a faster recovery in Europe and Japan, or stronger than expected fiscal stimulus in the United States, would all boost global growth, presenting an upside risk to New Zealand's export volumes and prices. Stronger growth in the near term may cause a faster withdrawal of monetary stimulus by central banks globally, creating a more cyclical profile for global growth. This is explored in more detail in Scenario Two. On the other hand, high levels of debt remain a risk for a number of economies. In particular, high debt levels in China and Australia could present a risk to consumption as interest rates begin to rise or if financial market regulations begin to tighten.

There are also a number of non-economic factors that could impact conditions for exporters. Geopolitical tensions continue to persist. Debate around the merits of trade liberalisation remains a risk, although the pursuit of new free trade deals has the potential to broaden export markets. Natural shocks, including earthquakes, drought or other severe weather conditions, could produce a shock to commodity prices, the domestic economy and the Government's fiscal position. In the medium term weather-related risks may increase in prevalence as the impacts of climate change become more pronounced.

...and the exchange rate

The exchange rate has fallen by around 6% since the Pre-election Update. Our forecasts assume the exchange rate remains around this level. However, there is a wide band of uncertainty around this. For example, faster than anticipated monetary tightening or a shift in market sentiment could lead to an increase of the exchange rate. A higher exchange rate would lower tradable inflation, and reduce exporters' incomes resulting in lower nominal gross domestic product (GDP) and less tax revenue.

Persistently weak confidence may soften domestic demand

In recent months consumer and business confidence has softened. Our main forecasts assume this weakness is likely owing to election uncertainty and that these measures will rebound in the near-term without materially impacting investment or consumption decisions. If confidence does not pick up, it is likely that business investment and private consumption will remain subdued for some time. This is explored in more detail in Scenario One.

Capacity constraints could limit growth in the construction sector

House prices have risen sharply in recent years as strong population growth has outpaced residential investment. Credit constraints, the availability of skilled labour, local planning regulations and land shortages have all constrained residential investment growth, limiting the supply of new houses. Our forecasts currently have a pick-up in residential construction in 2018/19 and stronger growth for the remainder of the forecast period owing, in part, to the KiwiBuild policy. This assumption will depend on how binding these constraints turn out to be. In particular, shortages of skilled labour or tighter credit constraints would likely restrict residential investment growth. For details of the Treasury assumptions on the impact of KiwiBuild on the construction sector, refer to ‘Impact of new Government policies' on page 6.

Notes

  • [13]See Key economic forecast judgements and assumptions on page 13 for those underpinning the main forecasts.

Alternative Scenarios

The following scenarios show how the economy might evolve if some of the assumptions in the main forecast are altered. They illustrate two of the many ways that the economy may deviate from the main forecasts. Scenario One illustrates the impact of recent weakness in a number of economic variables persisting through the forecast period. Specifically, labour productivity fails to pick-up as forecast and business and consumer confidence remain soft, dampening investment and private consumption growth. Weaker demand leads to lower inflationary pressure and softer nominal GDP growth, resulting in less tax revenue and higher net debt. Scenario Two illustrates the economic and fiscal impacts of higher terms of trade and stronger trading-partner growth. In this scenario, trading-partner growth picks up faster than anticipated, driving stronger export prices, which hold the terms of trade higher throughout the forecast horizon. Higher nominal GDP and tax revenues generate a stronger fiscal position.

Table 3.1 - Summary of economic and fiscal variables for main forecasts and scenarios
June years 2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast

Real GDP (aapc1)

         
Main forecast 2.9 3.6 3.0 2.6 2.1
Scenario One: Softer but stable growth 2.5 2.5 2.9 2.7 1.9
Scenario Two: Stronger global growth 2.9 4.0 3.4 2.5 1.8

Nominal GDP (aapc)

         
Main forecast 5.0 5.3 5.0 4.8 4.2
Scenario One: Softer but stable growth 4.6 3.9 4.7 4.8 3.9
Scenario Two: Stronger global growth 5.1 6.0 5.9 4.7 3.8

Operating balance before gains and losses 

         
Main forecast (% of GDP)2 0.9 0.9 1.6 2.0 2.5
($billions) 2.5 2.8 5.0 6.5 8.8
Scenario One: Softer but stable growth (% of GDP) 0.7 0.4 0.8 1.2 1.7
($billions) 2.1 1.2 2.6 3.8 5.6
Scenario Two: Stronger global growth (% of GDP) 0.9 1.1 2.0 2.5 3.0
($billions) 2.5 3.3 6.5 8.5 10.6

Net core Crown debt (% of GDP)

         
Main forecast 21.7 22.2 21.9 20.8 19.3
Scenario One: Softer but stable growth 21.9 23.3 23.8 23.4 22.8
Scenario Two: Stronger global growth 21.7 21.8 20.9 19.3 17.4

Notes:

  1. Annual average % change.
  2. For consistency with the fiscal chapter, GDP as used here is the scaled nominal GDP.

Source: The Treasury

Scenario One - Softer but Stable Growth  

The first scenario looks at the impacts of recent weakness in some economic variables continuing into the forecast period. In particular, labour productivity, business investment and household consumption fail to pick-up as quickly as we have assumed in the main forecasts. This causes growth to remain around current levels, creating a softer but stable profile for growth. GDP growth generally remains above 2.0% in this scenario implying no severe shocks to the economy (Figure 3.2). The scenario highlights that even small changes in the domestic economy can flow through to a materially weaker fiscal position.

Figure 3.2 – Real GDP growth
Figure 3.2 – Real GDP growth.
Sources: Statistics New Zealand, the Treasury

In recent years, growth in labour productivity has remained low. This scenario sees this trend continue for longer than assumed in the main forecasts, resulting in a lower level of potential output. In the medium term this means that household incomes will be reduced, limiting any pick-up in domestic demand.

This scenario assumes recent falls in consumer and business confidence persist for some time. Businesses are therefore less willing to invest in new technology and commit to expansions beyond current operations. This constrains the forecast pick-up in business investment, which is 5.7% lower by the end of the forecast period. Similarly, consumers remain uncertain of the economic outlook so hold off on discretionary consumption. In the medium term, weaker productivity growth and lower household income mean that households are forced to restrict consumption even further. Together, this means private consumption is 1.9% lower than otherwise, by June 2022.

Weaker domestic demand flows through to lower non-tradable inflation, causing headline inflation to begin falling in 2018 and remain below 2.0% until 2021. Consequently, the Reserve Bank takes a more cautious view of monetary policy settings and raises interest rates more gradually than in our main forecasts. By the end of the forecast period interest rates are 50 basis points lower than they otherwise would have been.

Overall, the slower pick-up in domestic demand and labour productivity mean that real GDP is weaker, with growth now peaking at 2.9% in 2020. Weaker activity, combined with softer inflation, lowers nominal GDP by a cumulative $26.6 billion over the forecast period to June 2022 (Figure 3.3). Lower wage growth, softer consumption and lower business profits, flow through to weaker tax revenue. Core Crown tax revenue is $8.9 billion lower than in the main forecast by June 2022, with source deductions and Goods and Services Tax (GST) $2.6 billion and $1.8 billion lower respectively.

Figure 3.3 – Nominal GDP and tax revenue
Figure 3.3 – Nominal GDP and tax revenue.
Sources: Statistics New Zealand, the Treasury

In this scenario we assume that the Government's operating and capital allowances are unchanged from those in the main forecast (see Chapter 2 for details). Under these assumptions, operating balance before gains and loses (OBEGAL) surpluses are smaller in each year, reaching $5.6 billion (1.7% of GDP) in 2022 (Table 3.1, see page 55). This is $3.2 billion below that in the main forecast. The Government's debt position is also weakened, with the level of net core Crown debt $10.4 billion higher by June 2022, at 22.8% of GDP (Figure 3.5).

Scenario Two - Stronger and More Cyclical World Growth

This scenario illustrates the impact of higher terms of trade and trading-partner growth on the economic and fiscal outlook. In this scenario growth of our trading-partners is assumed to pick up faster in the near term. This creates a more cyclical profile for global growth, which feeds into more of a cycle in exports, export prices and domestic growth.

Global growth is assumed to pick-up faster in 2018, peaking in late 2019. Growth is assumed to be broad based and causes central banks to withdraw stimulus faster than otherwise. This reduces the pace of future economic growth, producing a more cyclical profile for global growth.

Stronger global growth increases demand for New Zealand exports, bidding up the price. The price of imports also increases, though not as quickly. This means the terms of trade is 2.0% higher than the main forecasts at its peak in 2019 (Figure 3.4).

Figure 3.4 – Terms of trade
Figure 3.4 – Terms of trade.
Sources: Statistics New Zealand, the Treasury

Domestic businesses respond to the increased demand by bringing forward investment. Higher global growth therefore flows through to increased inflationary pressure and higher interest rates, which end up around 70 basis points higher by the end of the forecast period.

Overall, nominal GDP is $16.5 billion higher over the forecast period. The pass-through to tax revenue is not as significant as we would normally expect, because the higher GDP is concentrated in business profits and residents withholding tax (RWT) rather than private consumption or wages. Core Crown tax revenue is $5.5 billion higher (Table 3.1), with higher company tax ($1.9 billion) and RWT ($1.7 billion).

As in Scenario One, we assume that the Government's operating and capital allowances are unchanged from those in the main forecast. Under these assumptions, OBEGAL surpluses are larger, increasing to $10.6 billion (3.0% of GDP) in 2022 and net debt is lower across the forecast period (Figure 3.5).

Figure 3.5 – Net debt as a percentage of GDP
Figure 3.5 – Net debt as a percentage of GDP.
Source: The Treasury

General Uncertainties in the Economic and Fiscal Outlooks

While the chapter thus far has focused on key assumptions and judgements that may eventuate differently and alter our main forecasts, there are almost limitless ways the economy could evolve. It can therefore be useful to assess the general uncertainties in our forecasts and the sensitivity of these forecasts to changes in the economy.

The wide range of economic outcomes can be illustrated using fan charts that show the uncertainty in our forecasts. Figure 3.6 shows a fan chart of nominal GDP.[14] The width of the fan increases further into the forecast period, meaning the further away from the present the more uncertainty there is around the main forecast. The area within the outermost (blue) edges of the fan shows where nominal GDP is expected to be 90% of the time. At the end of the forecast period, this is within +/-7% ($23.5 billion per annum) of the main forecast. The boundaries of the green fan show where nominal GDP is expected to be 70% of the time. At the end of the forecast period, this is within +/-4.4% ($14.8 billion per annum) of the main forecast. In the two scenarios considered in this chapter, nominal GDP forecasts remain within the green fan (70th percentile).

Figure 3.6 – Nominal GDP fan chart
Figure 3.6 – Nominal GDP fan chart
Sources: Statistics New Zealand, the Treasury

The amount of tax revenue the Government receives in a given year is closely linked to the performance of the economy. For example, lower private consumption will mean less revenue from GST, while higher unemployment will mean less revenue from taxes on wages and salaries.

Figure 3.7 shows the uncertainty surrounding the main tax revenue forecast.[15] At the end of the forecast period, the outermost (blue) area captures a range of approximately +/-$11.3 billion, within which actual tax outturns are expected to fall 90% of the time.[16]

Figure 3.7 – Tax revenue fan chart
Figure 3.7 - Tax revenue fan chart
Source: The Treasury

The fiscal position is also impacted by changes in government expenses, which may also be impacted by economic developments. For example, the demand for working-age benefits is closely linked to labour market conditions. Changes in net migration flows may also impact on the demand for central government services, particularly health, education and publicly funded infrastructure. Over the longer term, current policies imply population growth and population ageing will place increasing pressure on public expenditure, particularly in the areas of health and superannuation.[17]

Notes

Fiscal Sensitivities

While significant economic shocks will naturally flow through to changes in the fiscal position, even small changes to the economic outlook can have a fiscal impact. Table 3.2 sets out 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 2022, tax revenue would be around $5.1 billion higher than forecast in the June 2022 year as a result. The sensitivities are broadly symmetric and if nominal GDP growth is one percentage point lower than expected each year, tax revenue would be around $4.9 billion lower than forecast in the June 2022 year. The figures are indicative and can be influenced by the composition of growth as different types of activity can have different effective tax rates.

A different interest rate path from the forecast would also impact the fiscal position owing to the effect on the portfolios of various government reporting entities, such as the NZS Fund, ACC and the Treasury. For example, at 30 June 2017, a 1.0% increase in New Zealand interest rates would have reduced the total Crown operating balance by $946 million while a 1.0% decrease would have increased the total Crown operating balance by $1,122 million. The majority of the Government's borrowings and a large number of financial assets are managed by the Treasury. To illustrate the interest rate sensitivities on the Treasury's portfolio, Table 3.2 provides the estimated impact of lower interest rates on those assets and liabilities.

3.2 - Fiscal sensitivity analysis
Years ended 30 June
($millions)
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast

Impact on tax revenue of a 1 percentage point increase in growth of

         
Nominal GDP 790 1,680 2,690 3,815 5,055
Wages and salaries 340 725 1,155 1,635 2,175
Taxable business profits 170 390 630 895 1,185

Impact of 1% lower interest rates on

         
Interest income1 -60 -52 -30 -20 -9
Interest expenses1 -41 -135 -210 -284 -354
Net impact on operating balance -19 83 180 264 345

Note:

  1. Funds managed by the Treasury.

Source: The Treasury

The forecast financial position is based on a number of judgements and assumptions about the future. To inform these judgements and assumptions we rely on market information. Some additional assumptions include those around foreign exchange rates, share prices, the carbon price and property prices. Where the actual outcome differs from our assumptions, the Crown's actual financial position and operating balance is likely to differ from the forecasts. For example, a strengthening of share prices may result in higher returns from the Government's direct share investments.

Balance Sheet Risks

To achieve the Government's fiscal strategy it is important to have a strong balance sheet. In particular the balance sheet can provide resilience to shocks and provide choices for how the Government responds to these shocks. The Crown's balance sheet is exposed to a number of risks beyond those associated with the operating balance. Understanding and managing those risks supports the delivery of public services, strengthens resilience to shocks, minimises costs, and improves the achievement of economic and social outcomes. The Crown's financial position is exposed to risk through changes in the value of its assets or liabilities, and also through the potential impact of the Crown's explicit and implicit obligations (including a strong expectation that the Crown would respond to an shock) as a result of policy settings.

Main sources of balance sheet risk

A large source of balance sheet risk can be attributed to changes 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. 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 types of market risks
  • insurance and retirement liabilities and provisions are prone to volatility through their actuarial valuations, and
  • 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 sources of balance sheet risk

[18]

  • Business risk: A number of commercial entities owned by the Crown have their financial performance and valuations impacted by the commercial environment they operate in.
  • Funding risk: The New Zealand Government remains amongst the highest-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 from all three agencies.
  • In the case of an increase in global risk aversion, New Zealand could 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.
  • Liquidity risk: The Crown incurs liquidity risk with respect to its ability to raise cash to meet its obligations. This risk is managed by each government reporting entity to meet their specific liquidity risk requirements and by the Treasury to manage the Crown's liquidity requirements.
  • Contingent liabilities: The Crown faces contingent liabilities, for example relating to natural disasters and financial system stress. The Specific Fiscal Risks chapter discusses contingent assets and liabilities in greater detail.

Notes

Specific Fiscal Risks

Overview

The statement of specific fiscal risks is required by the Public Finance Act 1989. In addition to the discussion of risks to the economic and fiscal forecasts presented in Chapter 3, it sets out (to the fullest extent possible) all government decisions and other circumstances known to the Government that may have a material effect on the fiscal outlook, but are not certain enough in timing or amount to include in the fiscal forecasts. This chapter covers:

  • the nature of fiscal risks to the economic and fiscal outlook
  • how risks set out in the chapter are managed
  • criteria for inclusion and exclusion of fiscal risks in this chapter
  • statement of specific fiscal risks, and
  • contingent liabilities and assets.

The risks disclosed in this chapter reflect those that are known at the date of the finalisation of 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.

Nature of Risks to the Economic and Fiscal Outlook

Risks can be positive or negative and can affect revenue and spending or assets and liabilities. The table below reflects a wide range of potential risks that may exist to the economic and fiscal forecasts. However, not all of these are covered in this chapter as they are discussed in the Risks and Scenarios chapter.

 
Nature of Risk Description
1   Policy changes Potential decisions likely to be taken by the Government related to both new policy and existing policy settings (for example, changes to eligibility criteria for a benefit). This category includes variances to costs of policies in fiscal forecasts. It does not include the economic impact of new Government policies as these are covered in the Risks and Scenarios chapter and in the ‘Economic impact of new Government policies' box in the Economic Outlook chapter.
2   Cost pressures associated with existing policies Changes in demand or pricing that impact the cost of delivering services under existing policy settings (for example, an increase in the number of students enrolling in schools).
3   Contingent liabilities and assets Potential costs or income to the Crown dependent on the occurrence of particular events. 
4   Deviation from key assumptions and judgements

Any deviations from the key assumptions and judgements used in preparing economic and fiscal forecasts, which have flow-on impacts for the fiscal forecasts.

This is covered in the ‘Risks and Scenarios' chapter.

5   Other uncertain events

Significant events relating to changes in the external environment (natural disasters, international events).

This is covered in the ‘Risks and Scenarios' chapter.

Risks 1-3 above are in the scope of this chapter whereas risks 4 and 5 are covered in the Risks and Scenarios chapter. Further detail on the criteria for disclosing a specific fiscal risk is set out in the sections below.

How Risks Outlined in this Chapter are Managed

A key principle guiding the disclosure of risks is transparency. This means that risks are disclosed in this chapter regardless of whether they can be managed through existing funding sources (for example, through reprioritisation of funding already available to departments) or the Budget operating and capital allowances (future new spending built into the fiscal forecasts). This is done to ensure a prudent approach to the disclosure of risks, to improve transparency and not to pre-judge future decisions by governments about what may or may not be funded from allowances.

The Government has a number of options to manage the risks disclosed in this chapter.

1. Re-prioritisation

Core Crown expenses for the year ended 30 June 2017 were $76.339 billion, while capital spending for the same period totalled $3.734 billion. In the first instance, agencies are expected to fund pressures and new activities by reprioritising within the funding already allocated to them. This could include repurposing low-value expenditure or generating efficiency savings.

2. Budget Allowances

The following allowances for new expenditure have been included in the Treasury's fiscal forecasts (Chapter 2) and reflected in the Government's Budget Policy Statement.

 
$billions Budget 2018 Budget 2019 Budget 2020 Budget 2021
Operating allowances (per year) Half Year Update 2.600 1.875 1.875 1.875
Capital allowances (total) Half Year Update 3.400 3.400 3.100 2.700

These allowances are included in the fiscal forecasts to cap future new spending by the Government and better link the forecasts to the Government's fiscal strategy. This means that new spending decisions in future Budgets should not impact the Government's fiscal targets.

The allowances are the main mechanism for the Government to allocate new expenditure at each Budget. They do this through providing a self-imposed cap on expenditure that helps to ensure any new spending is targeted to areas of high value. They have been set at a level that allows the Government to achieve its broader fiscal objectives and under the expectation that any new policy initiatives and cost pressures can be managed within these parameters.

3. Policy choices

For a number of risks the Government has choices around future funding, including how much is funded and the timing of funding. Therefore, risks disclosed in this chapter may not eventuate or may not eventuate to the full extent.

Criteria for Inclusion in the Fiscal Forecasts or as a Specific Fiscal Risk

Specific criteria are used to determine what is included in the fiscal forecasts compared to what is disclosed as a specific fiscal risk.

 
Fiscal Forecasts Specific Fiscal Risks

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

  • the matter can be quantified for particular years with reasonable certainty, and
  • a decision has been taken, or a decision has not yet been taken but it is reasonably probable[19]the matter will be approved, or it is reasonably probable the situation will occur.

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[20](but not probable) that the matter will be approved or the situation will occur, and
  • 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.

Specific fiscal risks are submitted by individual departments based on the criteria above. If there are significant uncertainties around the timing and quantum of the risk (which is typically the case) agencies are asked to make a judgement on how the materiality criterion is applied. These judgements are tested by the Treasury in the preparation of this chapter to ensure consistency.

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

A number of policy commitments made by the Government have been included in this chapter as ‘new' risks. This reflects that decisions have yet to be taken by Cabinet for these commitments to be included in fiscal forecasts based on the criteria above. There is an expectation that these commitments can be managed against the Budget operating and capital allowances included in the fiscal forecasts. Further information on these allowances and the Government's fiscal strategy can be found in the Budget Policy Statement.

Commitments associated with the Government's 100-Day Plan (such as the Families Package and fees-free tertiary education for the first year) have been incorporated into the fiscal forecasts. These commitments are a specific fiscal risk only to the extent that there could be variances to what is included in the fiscal forecasts.

General Risks Not Included in this Chapter

A range of general risks to the fiscal forecasts exist but are not separately disclosed 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, and valuation of, the Crown's investments relating to the broader economic and commercial environment.
  • The costs of future individual natural disasters, biosecurity incursions 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. Specific risks are disclosed at this point based on the range of possible responses.

Exclusions to Disclosure

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 is 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, and
  • 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.

Contingency Liabilities and Assets

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 current known 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.

Notes

  • [19]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).
  • [20]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).

Summary Table

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

The table below is categorised based on the nature of the risk: policy changes, cost pressures, and cross-portfolio risks. Within these categories, the risks have been ordered by portfolio and includes the title of the risk, its status and whether it has an impact on revenue, operating expenses or capital expenditure. The status of the risk describes whether the risk reflects a new matter or is changed or unchanged since the Pre-election Update.

Statement of specific fiscal risks as at 27 November 2017
Policy Changes by Portfolio Status [21] Type of risk

Accident Compensation Corporation (ACC)

   
Impacts of Changes to Accident Compensation Policy Settings New Expenses
Work-related Gradual Process Disease and Infection Unchanged Expenses

Broadcasting, Communications and Digital Media

   
Increased Funding for New Zealand Programming and Journalism New Expenses

Conservation

   
Funding for Department of Conservation New Expenses and Capital

Climate Change

   
Green Investment Fund New Capital

Customs

   
Joint Border Management System Further Development New Expenses and Capital

Defence

   
Disposal of New Zealand Defence Force (NZDF) Assets Unchanged Expenses
Defence Force - Operating and Capital Costs Changed Expenses and Capital

Economic Development

   
36th America's Cup New Expenses

Education

   
Extension of the Fees-free Tertiary Education Policy New Expenses and Capital
School and Early Childhood Education (ECE) Funding Review Unchanged Expenses
Possible School of Rural Medicine Changed Expenses and Capital

Foreign Affairs

   
Hosting the Asia Pacific Economic Cooperation (APEC) 2021 Forum New Expenses
Official Development Assistance New Expenses

Greater Christchurch Regeneration

   
Christchurch Capital Acceleration Facility New Capital

Housing and Urban Development

   
Crown Infrastructure Partners Unchanged Capital
KiwiBuild New Expenses and Capital
Healthy Homes Legislation New Expenses
Public Housing New Expenses
Housing Infrastructure Fund Unchanged Expenses and Capital

Immigration

   
Increasing the Refugee Quota New Expenses

Internal Affairs

   
North Island Property Review Unchanged Expenses

Justice

   
Justice Commitments New Expenses

Land Information

   
Upgrading Landonline New Expenses and Capital

Police

   
Increase in the Number of Police Numbers New Expenses

Regional Economic Development

   
Provincial Growth Fund New Expenses and Capital

Revenue

   
Potential Tax Policy Changes Changed Revenue
Transformation and Technology Renewal Changed Revenue

Social Development

   
Changes to the Welfare System New Expenses

Transport

   
Auckland and Wellington Rail Priorities New Capital
National Land Transport Fund New Capital
Auckland Transport Alignment Project Changed Capital
Auckland City Rail Link Unchanged Capital

Treaty Negotiations

   
Government Response to Wai 262 Unchanged Expenses
 
Cost Pressures by Portfolio Status [22] Type of risk

ACC

   
ACC Levies Unchanged Expenses
Non-earners' Account Unchanged Expenses

Children

   
Investing in Children Transformation Changed Expenses
Clothing Allowances New Expenses

Corrections

   
Additional Capacity to Address Prison Population Changed Expenses and Capital

Economic Development

   
New Zealand Screen Production Grant Unchanged Expenses

Education

   
Learning Support New Expenses

Finance

   
EQC Unchanged Expenses
Goodwill on Acquisition Unchanged Expenses

Greater Christchurch Regeneration

   
Residential Red Zone Unchanged Expenses
Southern Response Earthquake Services Support Unchanged Expenses and Capital

Health

   
Primary Care Services New Expenses

Housing and Urban Development

   
Divestment and Development of Housing Unchanged Expenses
Tāmaki Regeneration Project Unchanged Expenses
Transitional Housing New Expenses and Capital

Internal Affairs

   
Fire Services Levy Unchanged Revenue

Revenue

   
Student Loans - Valuation Unchanged Expenses
Cash Held in Tax Pools Unchanged Revenue

Transport

   
Southern Transport Corridor Reinstatement Unchanged Expenses and Capital
Support for KiwiRail Unchanged Capital
Rail Network Valuation Approach Unchanged Expenses

Treaty Negotiations

   
Relativity Clause Unchanged Expenses
Treaty Settlement Forecasts Unchanged Expenses
 
Cross-portfolio Specific Fiscal Risks Status Type of risk
Addressing the Gender Pay Gap in the State Sector New Expenses
Changes to Institutional Form of Government Agencies New Expenses
Other Capital Cost Pressures Changed Capital
Changes in an Accounting Standard for Financial Instruments Unchanged Expenses
Increasing the Minimum Wage New Expenses
Other Operating Cost Pressures Changed Expenses
Pay Equity Claims Following the Care and Support Worker Settlement Changed Expenses
Services Funded by Third Parties Unchanged Expenses
State Sector Employment Agreements Changed Expenses
Unexpected Maintenance for Crown-owned buildings Unchanged Capital
Variance in Costs of 100-Day Plan Commitments New Expenses and Capital

Notes

  • [21]Unchanged - risks where the nature and/or scale of the risk has not changed substantively since the previous Pre-election Update.
  • [22]Unchanged - risks where the nature and/or scale of the risk has not changed substantively since the previous Pre-election Update.

Policy Change Risks by Portfolio

ACC

Impacts of Changes to Accident Compensation Policy Settings (New)

The Government has signalled it will review a number of accident compensation scheme policy settings. Previous work indicates that a number of review areas entail options that could have material cost implications. Each such area could generate options with fiscal impacts in excess of $10 million to cash claims per year or to the Outstanding Claims Liability. The combined effect of the policies identified could potentially exceed $100 million per year. However, all of the policy issues identified entail optionality and would require either legislative or regulatory change to generate fiscal impacts and are therefore highly uncertain.

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.

Broadcasting, Communications and Digital Media

Increased Funding for New Zealand Programming and Journalism (New)

The Government has committed to transform Radio New Zealand into a multi-platform provider dedicated to quality New Zealand programming and journalism, including a free-to-air non-commercial television service and the establishment of a new Public Media Funding Commission to recommend directly to Parliament funding for public broadcasting on a three yearly rolling cycle. The total costs associated with this are still being finalised. The Government has indicated $38 million in 2018/19 to kick start this new public broadcasting system, to be apportioned between Radio New Zealand and New Zealand On Air. Funding beyond 2018/19 will be subject to recommendations by the Public Media Funding Commission, once established.

Conservation

Funding for Department of Conservation (New)

The Government has committed to significantly increase the Department of Conservation's funding. The exact quantum of such an increase is yet to be determined. Any significant increases in funding may have an impact on the operating balance and net core Crown debt.

Climate Change

Green Investment Fund (New)

The Government has committed to create a Government-backed Green Investment Fund of $100 million, with the aim of stimulating up to $1 billion of new investment in low carbon industries by 2020.

Customs

Joint Border Management System Further Development (New)

The Government had supported the replacement of Customs' border management systems (CusMod) with funding approved in Budget 2010 for Tranche 1 of the Joint Border Management Systems (JBMS). Tranche 1 provides enhanced border management capability but is still reliant on the ageing CusMod and Ministry for Primary Industries' Quantum systems. A series of initiatives to enhance or replace specific elements of the current CusMod and Quantum systems is planned to realise the full benefits to the Crown and industry of the JBMS programme and to mitigate the risks associated with reliance on the CusMod and Quantum systems. Funding for these projects may be required.

Defence

Disposal of New Zealand Defence Force (NZDF) Assets (Unchanged)

The Government is considering the potential to dispose of a number of New Zealand Defence Force (NZDF) assets. Depending on market conditions, the timing of disposal and sale price received could have either a positive or a negative impact on the Government's overall financial position. NZDF regularly completes an analysis of inventory that is surplus to requirements and is over the existing provision for obsolescence. The existing provision is regularly reviewed to ensure that all items comprising the provision are still relevant.

Defence Force - Operating and Capital Costs (Changed)

In 2016, the previous Government reconsidered NZDF capability and funding requirements through the Defence White Paper 2016. It is expected that changes to NZDF operating and capital funding will be made over the forecast period to achieve the Defence White Paper settings. However, the precise quantum and timing of these changes will be dependent on a range of business cases that will be considered by Cabinet in the future. In particular, decisions on significant asset purchases may be sought earlier than planned. The Government has indicated it will re-examine the Defence procurement programme within the context of the existing indicative funding for the Defence White Paper. This may also result in changes to the quantum and timing of these costs.

Economic Development

36th America's Cup (New)

Following its successful challenge for the 35th America's Cup, Emirates Team New Zealand has indicated that the 36th America's Cup may take place in Auckland, New Zealand. While the Government has signalled that any government investment would need to demonstrate benefits to New Zealand, there is a possibility that the Government will need to invest directly or indirectly in leverage programmes, infrastructure or other facilities to ensure New Zealand delivers a successful 36th America's Cup.

Education

Extension of the Fees-free Tertiary Education Policy (New)

The Government has committed to expand fees-free tertiary education to two years from 2021 and three years from 2024. The Government has indicated that the timeline for the third year may be brought forward depending on economic conditions. The behavioural assumptions, and therefore the impact on future costs are unquantifiable at this early stage but there is an expected general increase in demand for tertiary education beyond the forecast period.

School and Early Childhood Education (ECE) Funding Review (Unchanged)

The previous Government made decisions on the Review of Education Funding Systems across the schooling and Early Childhood Education (ECE) sectors, agreeing that for State and State integrated schools and ECE services and ngā kŌhanga reo the decile system would be replaced by a predictive risk index to allocate funding, to help overcome educational disadvantage. Decisions are yet to be taken on whether to proceed with these decisions, and if so the system-wide level of funding required to mitigate disadvantage and any other components of the funding model that may also have expenditure implications.

Possible School of Rural Medicine (Changed)

In August 2017, the previous Government agreed in principle to the establishment of a School of Rural Medicine, in part as a response to two proposals, one from the University of Waikato and Waikato District Health Board (DHB), and a joint proposal from the universities of Auckland and Otago. The previous Government also noted that funding would be required for the establishment of the school, and its operating costs, and this would be sought through Budget 2018. The previous Government requested the Tertiary Education Commission (TEC) to develop a competitive tender process and report back in late 2017. Tertiary Education Commission's advice is currently before ministers, seeking decisions on next steps. The proposal represents a fiscal risk, as no funding has been set aside if the Government decides to progress it.

Foreign Affairs

Hosting the Asia Pacific Economic Cooperation (APEC) 2021 Forum (New)

The New Zealand Government has committed to hosting the Asia Pacific Economic Cooperation (APEC) Forum in 2021. This will involve hosting meetings and events throughout the year, culminating in Leaders' Week in Auckland in November. The cost of hosting APEC, including meeting associated security responsibilities, represents a fiscal risk, as no funding has been specifically set aside; funding will be determined by Cabinet on the basis of a number of business cases. Funding will depend on the assessment of threat and risk levels in the lead up to APEC 2021.

Official Development Assistance (New)

Over the last 20 years, governments have regularly increased the amount of funding for Official Development Assistance (ODA). The current Government has signalled its intent to increase ODA. Historically, funding decisions have been made in the Budget preceding the end of the funding triennium. The current triennium finishes on 30 June 2018. While the intent has been signalled, any increase is subject to a funding decision by the Government. If the Government chooses to increase funding to maintain the current ODA/GNI (gross national income) ratio of 0.27%, this is provisionally estimated to cost $569 million over the next four years, and could be higher if the Government decides to increase the ratio.

Greater Christchurch Regeneration

Christchurch Capital Acceleration Facility (New)

The Government has committed to establish a $300 million capital acceleration facility to develop the red zone, contribute towards a new stadium and deal with gaps in the horizontal infrastructure programme, in partnership with the Christchurch City Council as part of the Global Settlement. Depending on how the facility is funded, there may be an impact on the Crown's fiscal position.

Housing and Urban Development

Crown Infrastructure Partners (Unchanged)

In July 2017, the previous Government agreed to task Crown Fibre Holdings (now known as Crown Infrastructure Partners) with negotiating and, where viable, funding Crown investment to enable housing infrastructure development in a manner that accelerates growth. There is a high level of uncertainty in the areas noted below, which may affect the final fiscal impacts:

  • the amount invested by the Crown
  • the timing and amount of investments
  • whether or not an economic return will be earned on all investments, and
  • the amount and timing of repayments to the Crown.

KiwiBuild (New)

The forecasts include the Government's commitment to KiwiBuild. Funding is needed to support capital purchases of housing and land, holding costs, subsidies, rates, insurance and a potential rent-to-own programme being established. This includes the monitoring function and machinery of government for KiwiBuild. This programme is also likely to increase the take-up of the Homestart grant. There is a risk that costs may be different to what has been included in the forecasts and there is an additional impact on fiscal indicators.

Healthy Homes Legislation (New)

As part of its 100-Day Plan, the Government has passed the Healthy Homes Guarantee Bill, requiring all rentals to be warm and dry. When this legislation comes into force it will require improvements in insulation, ventilation and heating in 30,000 Housing New Zealand properties, which is estimated to cost a minimum of $90 million over the forecast period. In addition, the Bill will enable all private property owners to access grants of up to $2,000 per dwelling to pay for up to 50% of the cost of insulation upgrades and double glazing that meet or exceed the current building code, or of the cost to install a clean, fixed form of heating. Further work would be required to determine the scope of the policy, however, there are inherent risks to the current financial forecast and costings around this commitment.

Public Housing (New)

The Government has made a number of commitments to reduce homelessness and improve access to public housing. Policy settings are yet to be developed for increasing and improving support services and increased supply for those in housing need. This is likely to have a significant fiscal impact.

Housing Infrastructure Fund (Unchanged)

In June 2016, Cabinet agreed to establish a $1 billion Housing Infrastructure Fund to which high-growth councils could apply to help finance roading and water infrastructure needed to unlock residential development. The previous Government has approved in principle funding of $889 million for five councils. The successful councils are now preparing detailed business cases. Negotiations on the detailed funding arrangements are continuing and final agreements are expected in late 2017. Actual expenditure may vary from what has been included in the fiscal forecasts owing to:

  • changes in the agreed spending levels for each project
  • the timing and size of drawdowns and of repayments of capital (both annual and final) varying from what is included in the financial forecasts
  • the value of interest foregone
  • the resultant reduction in the fair value of loans made, and
  • a different split between capital expenditure and operating expenses.

Immigration

Increasing the Refugee Quota (New)

Increasing the refugee quota to 1,500 over three years will require increased refugee settlement services and have flow-on costs to health, education and welfare. Additional work needs to be completed to properly assess the cost of this change.

Internal Affairs

North Island Property Review (Unchanged)

There are several issues with the current property portfolio regarding their capacity and condition, which are not covered as part of Wellington accommodation project tranche 2. There is insufficient storage capacity in the Wellington region for the Archives New Zealand holdings. Current storage capability will be reached in the next two to three years. Some of the existing storage capacity is also not fit for purpose.

A review has been undertaken to identify investment options to resolve these issues. A business case has been prepared to assess the options for the Department of Internal Affairs to continue to meet its statutory and business requirements. Crown funding for reinvestment was sought as part of Budget 2017. Some funding was approved as part of Budget 2017 to progress the option analysis and design; however, the risk still remains from 2019/20.

Justice

Justice Commitments (New)

The Government has committed to increasing access to justice and reducing and preventing family violence. This includes a commitment to increase Community Law Centre funding, establish a Criminal Cases Review Commission and increase funding to family violence networks. The potential cost and timing of these initiatives is still to be finalised and will be subject to final Cabinet decisions.

Land Information

Upgrading Landonline (New)

Land Information New Zealand (LINZ) is currently in discussions with vendors about upgrading Landonline to replace the outdated technology platform and to meet the changing business and technology needs of users and government. In April 2016, LINZ received permission from Cabinet to proceed with procurement on an ‘as a service' model, limiting the amount of capital investment required. Recent work done in conjunction with the vendor indicates that an ‘as a service’ model is currently not viable and LINZ will have to purchase the product, with the understanding that it will sell the product back to the vendor in a few years. Funding options are currently being explored.

Police

Increase in the Number of Police Numbers (New)

The Labour and New Zealand First coalition agreement notes that the Government will strive toward adding 1,800 new Police officers over three years. To the extent that this is not able to be funded within baselines, new funding will be required. Although an increase in resource for crime enforcement is likely to have flow-on costs (to the Ministry of Justice and Department of Corrections), the impact will depend on the extent to which this is able to be balanced by a focus on community prevention, greater use of alternative resolutions, and a reduction in remand prisoners.

Regional Economic Development

Provincial Growth Fund (New)

The Government is developing a Provincial Growth Fund (PGF) of $1 billion per annum. The Fund will support the Government's overall goal of productive, sustainable and inclusive growth. It is envisioned, at this stage, that the PGF will comprise three tiers of investment:

  1. Small scale investments (building on the Regional Growth initiative)
  2. Mid-large scale sector-based investments (such as the 1 Billion Trees Programme), and
  3. Large infrastructure investments.

The scope of such a Fund has yet to be determined, including which regions and what types of projects are eligible.

Revenue

Potential Tax Policy Changes (Changed)

The Government has yet to finalise its tax policy work programme. It has stated an intent to make some changes to current tax settings, including: the reinstatement of research and development tax credits, ring-fencing of losses from residential investment property and a fuel tax in Auckland. In addition, the outcomes of the Tax Working Group are yet to be determined. The fiscal impacts of these potential changes are unquantified at this stage.

Transformation and Technology Renewal (Changed)

The Business Transformation programme agreed by Cabinet in 2015 is reflected in forecasts. There are risks that the expected implementation costs, revenue gains and operating cost savings may differ from forecasts. In addition, changes in Government policies could materially affect the programme's costs and benefits.

Social Development

Changes to the Welfare System (New)

The Government has announced a commitment to ensure access to entitlements, remove selected sanctions in the welfare system, review tax and transfer settings and consider long-term changes that need to occur to provide for sustainable incomes. The behaviour change associated with such changes, including the removal of section 70A of the Social Security Act 1964 (which reduces the amount of benefit payments owed to sole parents who do not disclose the identity of the other parents of their children) is unknown. Such changes could have an impact on the operating balance.

Transport

Auckland and Wellington Rail Priorities (New)

The Government has identified as transport priorities a number of metro rail projects in Auckland and Wellington. Although the Government has indicated that rail investment will ultimately be funded through the National Land Transport Fund, achieving this will require further exploration that may not be completed in time for some or all of the following projects:

  • the Third Main Line in Auckland
  • electrification of the Papakura to Pukekohe line
  • establishment of a commuter train service between Auckland, Hamilton and Tauranga
  • the Wairarapa line upgrade, and
  • double-tracking the Trentham to Upper Hutt line.

National Land Transport Fund (New)

The Government has committed to reprioritise National Land Transport Fund (NLTF) spending to increase investment in public transport, rail and active modes, like walking or cycling. The Government has also indicated support for specific projects that might receive funding through the NLTF if prioritised and approved by the New Zealand Transport Agency (NZTA) Board to be included in the National Land Transport Programme (NLTP). The NLTP will be released by August 2018. Crown funding may need to be provided for projects if they do not receive NLTF funding and the scope, timing and costs of some of these projects are still being finalised.

Auckland Transport Alignment Plan (Changed)

The Government and Auckland Council released the final report for the Auckland Transport Alignment Plan (ATAP) in August 2016. The funding gap identified through the mid-2017 revised ATAP was $5.9 billion for the first ten years. Early assessments of the funding gap, when taking into account the Auckland transport priorities of the new Government, is now between $5 billion and $6.5 billion. The Government and Auckland Council are currently considering how to refresh ATAP in order to align the priorities of the new Government with the existing priorities of Auckland Council. This work will also include consideration of options to address the funding gap.

Auckland City Rail Link (Unchanged)

The Government has committed to fund 50% of the costs associated with the City Rail Link project, which is estimated to cost $3.4 billion. Based on this estimate, the Government's contribution to this project will be around $1.7 billion, of which the first $436 million has been appropriated. There is a risk that the timing and amount of the Government contribution towards the project could be different from what is included in the forecasts.

Treaty Negotiations

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.

Cost Pressures by Portfolio

ACC

ACC Levies (Unchanged)

Indicative future levy rates for the Work, Earners' and Motor Vehicle accounts have been included in the forecasts. However, final levy decisions are made by the Government and may differ from the forecast levy path. 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 and unemployment rates) turn out differently from what has been forecast, ACC's levy revenue, claims costs and liability may also differ from forecast. Any variance will have a corresponding impact on the operating balance.

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.

Children

Investing in Children Transformation (Changed)

The Ministry for Vulnerable Children, Oranga Tamariki (Oranga Tamariki) was established on 1 April 2017, with a new operating model to be implemented over the next few years and an expanded focus and target group, and new obligations from associated legislation. Changes to the Oranga Tamariki Act 1989 coming into effect no later than 1 July 2019 will extend the scope of the Youth Justice system to include most 17-year-olds, which is expected to increase the operating cost of the Service and require additional residential bed capacity. This Act will also extend the scope of the Ministry to provide more support for young people aged 18-25. To the extent that the costs associated with the new Ministry cannot be funded from a tagged contingency or from reprioritisation, additional funding is likely to be required.

Clothing Allowances (New)

The Social Security (Clothing Allowances for Orphans and Unsupported Children) Amendment Act 2015, which was introduced as a Member's Bill, comes into force on 1 July 2018. The fiscal implications of this Act have yet to be fully assessed and incorporated in the fiscal forecasts, in part because they are dependent on the settings of the Clothing Allowance within Oranga Tamariki, which is included in the scope of future reviews on financial assistance for carers stemming from the Expert Advisory Panel review.

Corrections

Additional Capacity to Address Prison Population (Changed)

The fiscal forecasts include provision for the investment agreed by the previous Government to create additional prison capacity to accommodate prison population growth over the next 10 years. The Department of Corrections is likely to seek additional funding relating to the direct costs of accommodating increases in the number of prisoners. There is also a risk that growth in the prison population is different from what is included in the forecasts and additional funding is required. The Government is committed to reducing the prison population over time and is currently considering options to do this.

Economic Development

New Zealand Screen Production Grant (Unchanged)

The New Zealand Screen Production Grant is a demand-driven, uncapped programme. New Zealand is attracting a much larger number of international productions. Based on the current rising trend, there is a risk that demand for the Screen Production Grant will exceed what is included in the fiscal forecasts.

Education

Learning Support (New)

There are a number of cost pressures building in the supply of learning support services. These include the Ongoing Resourcing Scheme; English for Speakers of Other Languages (ESOL); Early Intervention and Sensory Learning. To the extent that these pressures cannot be managed within agency baselines, additional funding is likely to be required.

Finance

EQC (Unchanged)

EQC's independent actuary undertakes half-yearly valuations of the total earthquake liability to the Crown. This includes settled and yet-to-settle claims and reinsurance recoveries. Based on these valuations, a profile of the claims yet to settle is included in the fiscal forecasts. There still remains some risk that EQC's remaining settlement expenditure relating to the Canterbury and KaikŌura earthquakes will be different (higher or lower) than forecast.

Goodwill on Acquisition (Unchanged)

As at30 June 2017, the Crown had goodwill on acquisition of a number of sub-entities totalling $744 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. The fiscal forecasts currently make no allowance for such impairment losses.

Greater Christchurch Regeneration

Residential Red Zone (Unchanged)

Some recoveries from the EQC and private insurers remain outstanding and there is a risk that final recoveries may be greater or less than forecast. In addition, potential costs or potential revenues or recoveries associated with the future use of residential red zone are uncertain. The future value may change depending on any future alternative uses of the land. The fiscal impact of this, and whether there is any overlap with the Christchurch Capital Acceleration Facility risk, is not yet certain.

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, the forecast profile of claims settlement and other related policy changes. 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.

Health

Primary Care Services (New)

The Government has committed to increase funding for Primary Care services to reduce general practitioner (GP) fees, provide additional funding for GP practices, fund extra places to train GPs, and provide annual free health checks for seniors as part of the SuperGold card. The implementation details and funding arrangements for these commitments are yet to be finalised.

Housing and Urban Development

Divestment and Development of Housing (Unchanged)

The forecasts include business-as-usual divestments and redevelopments of housing property as part of Housing New Zealand Corporation's (HNZC's) asset management strategy. Proceeds from property divestments will be used to help fund investment in redeveloping and growing HNZC's stock. Market conditions impact on the proceeds of sale and the cost of acquisitions and development. Given these uncertainties, there is a risk that there will be variations from the fiscal forecasts. The Government's intention is to stop the major State housing sell-off programme.

Tāmaki Regeneration Project (Unchanged)

There are 7,500 new houses planned to be built in Tāmaki in place of about 2,500 existing houses. Development involves writing off existing public housing assets. If land sale proceeds are less than the value of the write offs in the year that they occur, there will be a negative impact on the operating balance.

Transitional Housing (New)

The average cost of providing transitional housing support services is significantly higher than funding appropriated in Budget 2017, as the original costs were estimates only. Better understanding of the type and nature of support services required, combined with increased intensity in levels of support services and higher levels of complex cases than originally anticipated, are contributing to the increase in the average costs of support services. Additional capital is required to meet the existing supply target of 2,155 places, which might require adjusting upwards.

Internal Affairs

Fire Services Levy (Unchanged)

The Fire Services were unified into Fire and Emergency New Zealand on 1 July 2017. The increase in levies required to meet the increase in expenditure on Fire Services, and to contribute to repaying a loan from the Crown, has been approved for the year 2017/18 only. Any future levy changes beyond 2017/18 are still uncertain and not yet included in the fiscal forecasts.

Revenue

Student Loans - Valuation (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 consumer price index (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.

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 a taxpayer's provisional tax liability, may be withdrawn by that taxpayer, resulting in a reduction in the Crown's available cash reserves.

Transport

Southern Transport Corridor Reinstatement (Unchanged)

There is a risk that the costs of reinstating the earthquake-damaged South Island Transport Corridor (Picton-Christchurch) will cost more than the $552 million of capital expenditure and $163 million of operating expenditure currently included in the fiscal forecasts. In addition, a portion of the costs of the reinstatement currently classified as capital expenditure in the fiscal forecasts may be reclassified as operating expenditure, adversely impacting the operating balance (currently estimated by NZTA to be $90 million in 2017/18). The classification between capital and operating expenditure has no impact on net core Crown debt. KiwiRail has identified a reinstatement shortfall or cashflow required in uninsured costs across 2017/18 and 2018/19. The final uninsured costs for reinstating the Main North Line will be understood when the insurance claim is completed - expected within 2018/19.

Support for KiwiRail (Unchanged)

The Government in Budgets 2010 to 2017 supported KiwiRail Holdings Limited (KiwiRail) with an investment of around $2 billion in the New Zealand freight rail system. Further Crown investment into KiwiRail is likely to be required from 2019/20. A review of KiwiRail's structure and funding arrangements will be undertaken in 2017/18, to inform future funding decisions.

Rail Network Valuation Approach (Unchanged)

KiwiRail operates both freight and passenger transport services. The valuation approach for the assets used for these different activities is outlined in Budget 2017 Additional Information - accounting policies. The freight business of KiwiRail is predominantly commercially focused and therefore for financial reporting purposes assets relating to the freight business are fair valued on a net realisable value basis.

For the freight infrastructure to continue to be valued on this basis, KiwiRail needs to meet certain criteria set out in the Accounting Standards Framework. Consistent with prior years, there is a likelihood of continued Crown support and a risk that KiwiRail no longer meets the criteria for valuing freight infrastructure on a net realisable value basis and may need to change to a depreciated replacement cost basis. The impact of this change would increase the value of assets by up to $4.3 billion.

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.

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.

Cross-portfolio Specific Fiscal Risks

Addressing the Gender Pay Gap in the State Sector (New)

The Government has made a commitment to addressing the gender pay gap in the core public service. Fulfilling this commitment may involve costs to the Crown.

Changes to Institutional Form of Government Agencies (New)

The Government has announced a number of policy commitments that involve changes to the machinery of government such as the establishment of an independent Climate Commission and changing Housing New Zealand Corporation into a public service entity. These commitments are likely to involve a number of changes to the composition and structure of existing government departments. Where the additional resourcing (and other costs of these changes) cannot be met through baseline expenditure, further Crown funding may be required.

Other Capital Cost Pressures (Changed)

As in previous years, agencies are likely to face capital expenditure pressures in the future related to replacing ageing infrastructure nearing its end of life (for example, school property and redevelopment of Scott Base), information and communications technology (ICT) capability that is no longer fit-for-purpose and other capital requirements driven by demand pressures. These pressures are risks to the fiscal forecasts only to the extent they cannot be managed through agencies' existing balance sheets, new capital spending set aside in forecasts or other funding mechanisms (eg,Crown Infrastructure Partners). The Government’s stated intention is that all pressures are managed through these mechanisms.

Changes in the Accounting Standard for Financial Instruments (Unchanged)

The External Reporting Board has recently issued changes to accounting standards Public Benefit Entities International Financial Reporting Standard (PBE IFRS 9) Financial Instruments and it is likely that the Crown will adopt the amended accounting standard in the 2018/19 financial year. The resulting changes include new valuation methodology for some financial assets, a new impairment model for financial assets, and revised hedge accounting requirements. The impact of these new requirements has not yet been assessed, except for some initial impact analysis on the student loan asset (an estimated one-off increase of around $600 million).

Increasing the Minimum Wage (New)

Government policy decisions to increase the minimum wage to $20 per hour by April 2021 will mean increased costs to State sector employers. Funding may be sought where costs cannot be absorbed within baselines without resulting in unacceptable impacts on service delivery.

Other Operating Cost Pressures (Changed)

As in previous years, agencies are likely to face operating expenditure pressures in the future owing to changes in demand and price of services they provide. The majority of spending by agencies is not automatically adjusted for increases driven by demand or price pressures. These pressures are risks to the fiscal forecasts only to the extent they cannot be managed through reprioritisation or new spending set aside in the forecasts. The Government's stated intention is that all pressures are managed through these mechanisms.

Pay Equity Claims following the Care and Support Worker Settlement (Changed)

There are several funding claims, mainly from workers in the social sectors (including health, education and welfare) relating to the interpretation, and application, of the Equal Pay Act 1972. A pay equity claim for Care and Support workers in the aged care, disability support and home and community services sector has already been resolved, including an extension of the same pay rates and conditions to equivalent workforces funded by the Ministry of Social Development and Oranga Tamariki.

There are a number of outstanding claims and the possibility of further claims being raised. Current claims include:

  • social workers employed by Oranga Tamariki
  • education support workers employed by the Ministry of Education
  • school support workers employed by school boards of trustees, and
  • mental health support workers employed by non-government organisations (funded by the Government).

The resolution of such claims within State-employed and State-funded sectors may involve significant costs to the Crown.

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.

State Sector Employment Agreements (Changed)

A number of large collective agreements are due to be renegotiated over the forecast period. These include (but are not limited to) nurses and senior doctors, as well as primary and secondary school teachers. As well as direct fiscal implications for the employers of workforces covered by any changes to remuneration, the renegotiation of these agreements can have flow-on effects to remuneration in other sectors. The Government has committed to paying core public sector staff a Living Wage.

Unexpected Maintenance for Crown-owned Buildings (Unchanged)

There is a possibility that the Crown will incur costs when unexpected maintenance is required for the buildings it owns. For example, earthquake strengthening some of the buildings that do not meet modern building standards, and maintenance for buildings with weathertight issues. The likelihood, timing and fiscal impact of any repairs are uncertain.

Variance in Costs of 100-Day Plan Commitments (New)

The forecasts include funding for the Government's 100-Day Plan commitments, including First Year Fees-free Tertiary Education and the Families' Package. Where costs are different to what has been reflected in the forecasts, the resulting fiscal impacts will need to be managed.

Risks Removed Since the Pre-election Update

The following risks have been removed or their title has changed since the Pre-election Update.

 
Portfolio Title Reason for Expiry
Building and Urban Development Social Housing Reform This risk related to the previous Government's reform programme. It now has been replaced by the ‘Public Housing' risk.
Education Possible University of Waikato Medical School The title of risk has changed to ‘Possible School of Rural Medicine'.
Finance Crown Overseas Properties A Cabinet decision has been taken - this risk has materialised.
Greater Christchurch Regeneration Christchurch Central Recovery Plan - Anchor Projects This risk is no longer material and is now covered by the ‘Christchurch Capital Acceleration Facility' risk.
Māori Development Proposed Māori Land Service The Government will not progress the Te Ture Whenua Māori Bill.
Parliamentary Service Parliamentary Office Accommodation Expired as a result of the Labour-New Zealand First coalition agreement.
Primary Industries and Food Safety Investment in Water Infrastructure The Government is committed to winding down its funding for irrigation while meeting its current commitments.
Revenue Tax and Transfer Settings This risk related to priorities set out in the previous Government's fiscal strategy.

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 fiscal forecasts.

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

In general, if a contingent liability were realised, or the amount becomes sufficiently reliable to record as a liability, it would reduce the operating balance and net worth and increase net core Crown debt. In the case of some contingencies (eg, uncalled capital) the negative impact would be restricted to net core Crown 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.[23]

The contingencies have been stated as at 31 October 2017, being the latest set of published contingencies.

Notes

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

Quantifiable Contingent Liabilities and Contingent Assets

Contingent liabilities

 
  Status[24] 31 October 2017
($millions)

Uncalled capital

   
Asian Development Bank Unchanged 3,173
International Monetary Fund - promissory notes Unchanged 2,284
International Bank for Reconstruction and Development Unchanged 1,615
International Monetary Fund - arrangements to borrow Unchanged 599
Asian Infrastructure Investment Bank Unchanged 538
Other uncalled capital Unchanged 20
    8,229

Guarantees and indemnities

   
New Zealand Export Credit Office guarantees Unchanged 124
Other guarantees and indemnities Unchanged 96
    220

Legal proceedings and disputes

   
Legal tax proceedings Unchanged 136
Other legal proceedings and disputes Unchanged 189
    325

Other quantifiable contingent liabilities

   
Unclaimed monies Unchanged 150
Christchurch Engine Centre Partnership Agreement Unchanged 121
Other quantifiable contingent liabilities Unchanged 63
    334
Total quantifiable contingent liabilities   9,108

Contingent assets

 
  Status24 31 October 2017
($millions)

Legal proceedings and disputes

   
Other contingent assets Unchanged 103
Total quantifiable contingent assets   103

Notes

  • [24]Status of contingent liabilities or assets when compared to the Financial Statements of the Government published on 5 October 2017.

Unquantifiable Contingent Liabilities and Contingent Assets

Contingent liabilities

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

Legal claims and proceedings

 
Accident Compensation Corporation (ACC) litigation Unchanged
Ministry for Primary Industries - Biosecurity Act 1993 compensation Unchanged
Treaty of Waitangi claims Unchanged

Other unquantifiable contingent liabilities

 
Criminal Proceeds (Recovery) Act 2009 Unchanged
Environmental liabilities Unchanged
Treaty of Waitangi claims - settlement relativity payments Unchanged
Holidays Act 2003 and other relevant legislation Unchanged

The following contingent liability was removed:

Ministry for Culture and Heritage – The Body Laid Bare Exhibition as this indemnity has now expired.

Description of Contingent Liabilities

Quantifiable contingent liabilities over $100 million

Uncalled capital

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

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

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

 
Uncalled capital 31 October 2017
$millions
30 June 2017
$millions
Asian Development Bank 3,173 2,941
International Monetary Fund - promissory notes 2,284 2,123
International Bank for Reconstruction and Development 1,615 1,512
International Monetary Fund - arrangements to borrow 599 540
Asian Infrastructure Investment Bank 538 504

In addition to the uncalled capital detailed above, the Crown has agreed to provide an uncalled capital facility of $230 million to Southern Response Earthquake Service Limited (SRES) to support the Christchurch earthquake recovery process. Of this amount, $113 million has been called, leaving $117 million as a contingent liability. This capital support will increase net core Crown debt when called.

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 obligations.

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(s).

New Zealand Export Credit Office guarantees

The New Zealand Export Credit Office provides a range of guarantee products to assist New Zealand exporters to 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.

$124 million at 31 October 2017 ($136 million at 30 June 2017)

Legal proceedings and disputes

Legal tax proceedings

When a taxpayer disagrees with a tax 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.

$136 million at 31 October 2017 ($145 million at 30 June 2017)

Other quantifiable contingent liabilities

Unclaimed monies

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

$150 million at 31 October 2017 ($147 million at 30 June 2017)

Christchurch Engine Centre Partnership Agreement

The Air New Zealand Group has a partnership agreement with Pratt and Whitney in relation to the Christchurch Engine Centre (CEC), holding a 49% interest. By the nature of the agreement, joint and several liabilities exist between the two parties; the contingent liability represents Air New Zealand's share of CEC's liabilities.

$121 million at 31 October 2017 ($121 million at 30 June 2017)

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 indemnities, legal claims and proceedings and other contingent liabilities.

The indemnities and claims that are disclosed individually, while they cannot be quantified, have the potential to exceed $20 million in costs and are not considered to be remote.

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 net core Crown debt.

 
Party indemnified Instrument of indemnification Actions indemnified
Air New Zealand Deed of indemnity issued 24 September 2001. Claims arising from acts of war and terrorism that cannot be met from insurance, up to a limit of US$1 billion in respect of any one claim.
Contact Energy Limited The Crown and Contact Energy signed a number of documents to settle in full Contact Energy's outstanding land rights and geothermal asset rights at Wairakei The documents contained two reciprocal indemnities between the Crown and Contact Energy to address the risk of certain losses to the respective parties' assets arising from the negligence or fault of the other party.
Earthquake Commission (EQC) Section 16 of the Earthquake Commission Act 1993 As set out in the Earthquake Commission Act 1993, the Crown shall fund any deficiency in EQC's assets to cover its financial liabilities on such terms and conditions that the Minister of Finance determines.
Genesis Energy Deed between Genesis 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 the beds 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 they are taking steps to rectify any non-compliance.

Justices of the Peace, Community Magistrates and Disputes Tribunal Referee

Section 50 of the District Court Act 2016 and 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 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 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 39 of the Civil Defence Emergency Management Act 2002 Civil Defence Emergency Management Plan The Guide to the National Civil Defence Emergency Management Plan (‘the Guide') states that, with the approval of the Minister, the Government will reimburse local authorities, in whole or in part, for certain types of response and recovery costs incurred as a result of a local or national emergency. The Guide is approved and issued by the Director of Civil Defence Emergency Management.
New Zealand Railways Corporation The Minister of Finance signed the indemnity on 1 September 2004 The directors of New Zealand Railways Corporation against all liabilities in connection with the Corporation taking ownership and/or responsibility for the national rail network and any associated assets and liabilities.
Section 10 of the Finance Act 1989 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 that 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

The Crown Transactional Banking Services Agreement with Westpac New Zealand Limited dated 24 September 2015. The Crown has indemnified Westpac New Zealand Limited:

  • for all amounts paid by Westpac New Zealand under letters of credit issued on behalf of the Crown, and
  • against certain cost, damages and losses to third parties resulting from:
    • unauthorised, forged or fraudulent payment instructions
    • unauthorised or incorrect direct debit instructions, or
    • cheques mistakenly drawn in favour of a third party rather than drawn in favour of the Crown.

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 cases. Based on these factors, not all legal actions are individually disclosed.

Accident Compensation Corporation (ACC) 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 that 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. ACC's Board believes the resolution of outstanding appeals will not have any material effect on the financial statements of ACC and therefore are not material for the Crown.

Ministry for Primary Industries - Biosecurity Act 1993 compensation

Under section 162A of the Biosecurity Act 1993 compensation may be payable as a result of the exercise of powers to manage or eradicate organisms. Compensation is payable where there are verifiable losses as a result of the damage or destruction of a person's property or restrictions on the movement of a person's goods. The Ministry has been notified compensation will be sought for incursions including fruit fly, pea weevil, bonamia ostreae, mycoplasma bovis and myrtle rust. Owing to the complexity and uncertainty of the amount of these claims the amounts are unquantified.

Kiwfruit vine PSA-V

Approximately 210 growers, represented by the first plaintiff, Strathboss Kiwifruit Limited, filed a claim against the Ministry for Primary Industries alleging it was legally liable for damages it has suffered from a biosecurity incursion of the kiwifruit vine disease, Psa-V, in New Zealand. The total losses have not been quantified. As Strathboss Kiwifruit Limited is required to prove the Ministry owes a duty of care to the growers before losses will be assessed, the Ministry is unable to quantify the first plaintiff's claim.

Treaty of Waitangi claims

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

On occasion, Māori claimants pursue the resolution of particular claims against the Crown through higher courts. Failure to successfully defend such actions may result in a liability for historical Treaty grievances in excess of that currently anticipated.

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. Entities 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 as provisions in the statement of financial position.

Treaty of Waitangi claims - Settlement Relativity Payments - see page 84

Holidays Act 2003 and other relevant legislation

A number of entities have commenced a review of payroll calculations over the past six years to ensure compliance with the Holidays Act 2003 and other relevant legislation. Where possible, provision has been made in these financial statements for obligations arising from that review. To the extent that an obligation cannot reasonably be quantified at 31 October 2017, a contingent liability exists.

Description of Contingent Assets

Quantifiable contingent assets over $100 million

There are no quantifiable contingent assets over $100 million at 31 October 2017.

Unquantifiable contingent assets

There are no unquantifiable contingent assets over $100 million at 31 October 2017.

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 2017.

The finalisation dates and key assumptions that underpin the preparation of the Forecast Financial Statements are outlined in the Fiscal Outlook chapter (pages 25 to 49).

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 Entity Financial Reporting Standard 42: Prospective Financial Statements.

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

The specific accounting policies are included within the 2017 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/hyefu2017

Forecast Policies

The Forecast Financial Statements have been prepared on the basis of the Treasury's best professional judgement. Actual financial results for the periods covered are likely to vary from the information presented in these forecasts. Factors that may lead to a material difference between information in these Forecast Financial Statements and the actual reported results in future years are set out in the Specific Fiscal Riskschapter on pages 63 to 96.

Key forecast assumptions are set out on pages 27 to 28.

Reporting and Forecast Period

The reporting periods for these Forecast Financial Statements are the years ended 30 June 2018 to 30 June 2022. The “2017 Actual” figures reported in the statements are the audited results reported in the Financial Statements of the Government for the year ended 30 June 2017. The “2018 Previous Budget” figures are the original forecasts to 30 June 2018 as presented in the 2017 Budget.

Government Reporting Entity as at 27 November 2017

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
  • Education Review Office
  • Government Communications Security Bureau
  • Inland Revenue Department
  • Land Information New Zealand
  • Ministry for Culture and Heritage
  • Ministry for Pacific Peoples
  • Ministry for Primary Industries
  • Ministry for the Environment
  • Ministry for Vulnerable Children, Oranga Tamariki
  • Ministry for Women
  • 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 Social Development
  • Ministry of Transport
  • 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
  • Office of the Ombudsman
  • Parliamentary Commissioner for the Environment

Others

  • New Zealand Superannuation Fund
  • Reserve Bank of New Zealand

State-owned Enterprises Segment

State-owned Enterprises

  • 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
  • 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) 

  • Genesis Energy Limited
  • Mercury NZ Limited
  • Meridian Energy Limited

Other

  • Air New Zealand Limited
  • Kiwi Group Holdings Limited (Including Kiwibank)

Crown Entities Segment

Crown entities

  • Accident Compensation Corporation
  • Accreditation Council
  • Arts Council of New Zealand Toi Aotearoa
  • Broadcasting Commission
  • Broadcasting Standards Authority
  • Callaghan Innovation
  • Children's Commissioner
  • Civil Aviation Authority of New Zealand
  • Commerce Commission
  • Crown Irrigation Investments Limited
  • Crown Research Institutes (7)
  • District Health Boards (20)
  • Drug Free Sport New Zealand
  • Earthquake Commission
  • Education New Zealand
  • Electoral Commission
  • Electricity Authority
  • Energy Efficiency and Conservation Authority
  • Environmental Protection Authority
  • External Reporting Board
  • Families Commission
  • Financial Markets Authority
  • Fire and Emergency New Zealand
  • 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 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 (2,408)
  • Social Workers Registration Board
  • Sport and Recreation New Zealand
  • 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
  • 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)
  • Te Ariki Trust

Non-listed companies in which the Crown is majority or sole shareholder (Public Finance Act Schedule 4A)

  • Crown Asset Management Limited
  • Crown Infrastructure Partners Limited (previously Crown Fibre Holdings)
  • Education Payroll Limited
  • Health Benefits Limited (ceased operating)
  • Ōtākaro Limited
  • Predator Free 2050 Limited
  • Research and Education Advanced Network New Zealand Limited
  • Southern Response Earthquake Services Limited
  • Tāmaki Redevelopment Company Limited
  • The Network for Learning Limited

Legal entities created by Treaty of Waitangi settlement Acts (Public Finance Act Schedule 6)

  • Te Urewera

Others

  • Education Council of Aotearoa New Zealand
  • Regenerate Christchurch

Other entities

Crown entities

  • Tertiary Education Institutions (27)*

Non-listed companies in which the Crown is majority or sole shareholder (Public Finance Act Schedule 4A)

  • City Rail Link Limited*

*These entities are not fully consolidated into the forecast financial statements of the government with only the Crown's interest in them being included.

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 2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m

Revenue

               
Taxation revenue 1 74,973 76,872 77,468 82,055 87,022 92,129 96,980
Other sovereign revenue 1 5,081 5,057 5,151 5,503 5,953 6,199 6,482
Total Revenue Levied through the Crown's Sovereign Power   80,054 81,929 82,619 87,558 92,975 98,328 103,462
Sales of goods and services   16,871 16,994 17,825 18,416 19,171 19,617 20,093
Interest revenue 2 2,727 2,807 2,767 2,751 2,810 2,891 2,923
Other revenue   4,575 4,617 4,973 5,164 5,321 5,421 5,587
Total revenue earned through the Crown's operations   24,173 24,418 25,565 26,331 27,302 27,929 28,603
Total revenue (excluding gains)   104,227 106,347 108,184 113,889 120,277 126,257 132,065

Expenses

               
Transfer payments and subsidies 3 25,264 26,462 26,396 28,901 29,988 31,173 32,498
Personnel expenses   22,599 23,003 23,604 23,628 23,782 24,128 24,188
Depreciation   4,361 4,563 4,568 4,714 4,844 4,862 4,874
Other operating expenses 4 38,008 41,000 43,109 42,525 42,718 43,330 43,483
Finance costs 2 4,162 4,224 4,143 4,058 4,077 4,111 3,915
Insurance expenses 5 5,418 4,546 4,591 4,837 5,491 5,899 6,299
Forecast new operating spending 6 293 179 2,721 4,496 6,339 8,084
Top-down expense adjustment 6 (1,000) (1,365) (750) (575) (575) (575)
Total expenses (excluding losses)   99,812 103,091 105,225 110,634 114,821 119,267 122,766
Minority interest share of operating balance before gains/(losses)   (346) (398) (418) (427) (477) (486) (506)
Operating balance before gains/(losses) (excluding minority interests)   4,069 2,858 2,541 2,828 4,979 6,504 8,793
Net gains/(losses) on financial instruments 2 6,330 2,538 3,938 2,877 3,220 3,540 3,983
Net gains/(losses) on non-financial instruments   1,321 (88) (734) (98) (27) (44) (30)
Less minority interest share of net gains/losses   27 (26) (43) (17) (4) (4) (6)
Total gains/(losses) (excluding minority interests)   7,678 2,424 3,161 2,762 3,189 3,492 3,947
Net surplus/(deficit) from associates and joint ventures   570 214 214 249 283 301 309
Operating balance (excluding minority interests)   12,317 5,496 5,916 5,839 8,451 10,297 13,049

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

Forecast Analysis of Expenses by Functional Classificationfor the years ending 30 June

 
  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m

Total Crown expenses

             

By functional classification

             
Social security and welfare 30,599 31,577 31,646 34,217 35,771 37,296 38,977
Health 15,645 16,389 16,614 16,592 16,639 16,566 16,667
Education 14,112 14,741 15,206 15,479 15,648 15,932 15,995
Core government services 3,762 4,572 5,392 4,494 4,440 4,189 4,149
Law and order 4,161 4,435 4,510 4,536 4,584 4,607 4,657
Transport and communications 9,360 9,637 9,715 10,010 10,232 11,139 11,060
Economic and industrial services 8,452 7,949 8,405 8,701 9,123 9,139 9,240
Defence 2,145 2,286 2,309 2,354 2,364 2,374 2,380
Heritage, culture and recreation 2,433 2,391 2,387 2,432 2,454 2,489 2,561
Primary services 1,886 1,986 2,086 2,026 2,028 2,015 2,004
Housing and community development 1,820 1,954 2,133 2,129 1,985 2,037 2,021
Environmental protection 863 1,012 1,290 989 1,021 1,043 1,042
GSF pension expenses 231 239 163 162 192 224 247
Other 181 406 412 484 342 342 342
Finance costs 4,162 4,224 4,143 4,058 4,077 4,111 3,915
Forecast new operating spending 293 179 2,721 4,496 6,339 8,084
Top-down expense adjustment (1,000) (1,365) (750) (575) (575) (575)
Total Crown expenses excluding losses 99,812 103,091 105,225 110,634 114,821 119,267 122,766

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.

 
  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m

Core Crown expenses

             

By functional classification1

             
Social security and welfare 25,294 26,247 26,191 28,729 29,792 30,913 32,181
Health 16,223 17,096 17,184 17,250 17,257 17,213 17,334
Education 13,281 13,985 14,397 14,641 14,807 15,092 15,151
Core government services 3,957 4,843 5,477 4,727 4,657 4,438 4,416
Law and order 3,882 4,119 4,146 4,170 4,208 4,244 4,265
Transport and communications 2,176 2,329 2,486 2,350 2,280 2,813 2,423
Economic and industrial services 2,544 3,001 2,941 2,817 2,804 2,789 2,730
Defence 2,146 2,294 2,318 2,363 2,373 2,383 2,389
Heritage, culture and recreation 850 885 879 880 840 811 824
Primary services 644 730 792 706 678 648 648
Housing and community development 539 530 662 622 548 515 511
Environmental protection 871 1,015 1,291 989 1,022 1,043 1,043
GSF pension expenses 217 220 150 149 179 211 234
Other 181 406 412 484 342 342 342
Finance costs 3,534 3,493 3,513 3,460 3,452 3,508 3,304
Forecast new operating spending 293 179 2,721 4,496 6,339 8,084
Top-down expense adjustment (1,000) (1,365) (750) (575) (575) (575)
Total core Crown expenses excluding losses 76,339 80,486 81,653 86,308 89,160 92,727 95,304
  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 Revenue and Expensefor the years ending 30 June

 
  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
Operating Balance (including minority interest) 12,636 5,920 6,377 6,283 8,932 10,787 13,561

Other comprehensive revenue and expense

             
Revaluation of physical assets 8,923 31
Transfers to/(from) reserves 47 28 (5) 122 97 93 145
(Gains)/losses transferred to the statement of financial performance 62 (1) (4) 4 6 4 7
Other movements 39 4 81 (19) (10) 9 (12)
Total other comprehensive revenue and expense 9,071 31 103 107 93 106 140
Total comprehensive revenue and expense 21,707 5,951 6,480 6,390 9,025 10,893 13,701

Attributable to:

             
 - minority interest 541 429 444 446 482 490 512
 - the Crown 21,166 5,522 6,036 5,944 8,543 10,403 13,189
Total comprehensive revenue and expense 21,707 5,951 6,480 6,390 9,025 10,893 13,701

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

Forecast Statement of Changes in Net Worthfor the years ending 30 June

 
  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
Opening net worth 95,521 105,923 116,472 122,448 128,327 136,804 147,113
Operating balance (including minority interest) 12,636 5,920 6,377 6,283 8,932 10,787 13,561
Net revaluations 8,923 31
Transfers to/(from) reserves 47 28 (5) 122 97 93 145
(Gains)/losses transferred to the Statement of Financial Performance 62 (1) (4) 4 6 4 7
Other movements 39 4 81 (19) (10) 9 (12)
Comprehensive income 21,707 5,951 6,480 6,390 9,025 10,893 13,701
Transactions with minority interest (756) (432) (504) (511) (548) (584) (560)
Closing net worth 116,472 111,442 122,448 128,327 136,804 147,113 160,254

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

Forecast Statement of Cash Flowsfor the years ending 30 June

 
  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m

Cash Flows from Operations

             

Cash was provided from

             
Taxation receipts 73,099 75,563 75,956 80,892 85,858 90,944 95,722
Other sovereign receipts 4,515 4,484 4,503 4,587 5,122 5,257 5,526
Sales of goods and services 16,948 17,473 18,011 18,572 19,285 19,756 20,229
Interest receipts 2,431 2,395 2,311 2,302 2,393 2,500 2,572
Other operating receipts 4,882 4,062 5,057 4,974 5,137 5,255 5,438
Total cash provided from operations 101,875 103,977 105,838 111,327 117,795 123,712 129,487

Cash was disbursed to

             
Transfer payments and subsidies 25,293 26,512 26,294 28,870 29,993 31,193 32,494
Personnel and operating payments 62,836 66,838 69,206 68,106 68,431 68,508 69,527
Interest payments 4,179 4,813 4,176 3,952 3,933 3,957 3,592
Forecast new operating spending 293 179 2,721 4,496 6,339 8,084
Top-down expense adjustment (1,000) (1,365) (750) (575) (575) (575)
Total cash disbursed to operations 92,308 97,456 98,490 102,899 106,278 109,422 113,122
Net cash flows from operations 9,567 6,521 7,348 8,428 11,517 14,290 16,365

Cash Flows from Investing Activities

             

Cash was provided from/(disbursed to)

             
Net (purchase)/sale of physical assets (6,209) (8,429) (8,664) (9,026) (7,531) (6,080) (6,165)
Net (purchase)/sale of shares and other securities 889 5,389 (906) 2,850 (230) (35) (13,212)
Net (purchase)/sale of intangible assets (748) (814) (977) (614) (536) (478) (461)
Net (issue)/repayment of advances (989) (1,196) (867) (740) (699) (824) (770)
Net acquisition of investments in associates (148) (15) (291) (237) (223) (155) (288)
Forecast new capital spending (446) (304) (1,965) (2,465) (2,745) (2,720)
Top-down capital adjustment 840 1,100 450 250 100 50
Net cash flows from investing activities (7,205) (4,671) (10,909) (9,282) (11,434) (10,217) (23,566)
Net cash flows from operating and investing activities 2,362 1,850 (3,561) (854) 83 4,073 (7,201)

Cash Flows from Financing Activities

             

Cash was provided from/(disbursed to)

             
Issues of circulating currency 265 170 105 183 188 194 199
Net issue/(repayment) of government bonds2 1,328 (4,729) (2,174) (893) (313) (3,950) 7,084
Net issue/(repayment) of foreign-currency borrowings 2,048 (940) (5,486) 334 10 2 2
Net issue/(repayment) of other New Zealand dollar borrowings (1,810) 2,627 8,017 1,453 1,028 846 712
Dividends paid to minority interests1 (656) (492) (531) (522) (559) (566) (569)
Net cash flows from financing activities 1,175 (3,364) (69) 555 354 (3,474) 7,428
Net movement in cash 3,537 (1,514) (3,630) (299) 437 599 227
Opening cash balance 15,617 17,495 18,732 15,512 15,214 15,654 16,255
Foreign-exchange gains/(losses) on opening cash (422) 3 410 1 3 2 1
Closing cash balance 18,732 15,984 15,512 15,214 15,654 16,255 16,483
  1. Excludes transactions with ACC and NZS Fund.
  2. Further information on the proceeds and repayments of government bonds is available in note 16.

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

Forecast Statement of Cash Flows (continued)
for the years ending 30 June
  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m

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

             
Net Cash Flows from Operations 9,567 6,521 7,348 8,428 11,517 14,290 16,365

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

             

Gains/(losses)

             
Net gains/(losses) on financial instruments 6,330 2,538 3,938 2,877 3,220 3,540 3,983
Net gains/(losses) on non-financial instruments 1,321 (88) (734) (98) (27) (44) (30)
Minority interest share of net gains/(losses) 27 (26) (43) (17) (4) (4) (6)
Total gains/(losses) 7,678 2,424 3,161 2,762 3,189 3,492 3,947

Other Non-cash Items in Operating Balance

             
Depreciation (4,073) (4,563) (4,568) (4,714) (4,844) (4,862) (4,874)
Amortisation (1,102) (743) (717) (750) (750) (752) (758)
Cost of concessionary lending (753) (801) (1,141) (864) (905) (941) (934)
Impairment on financial assets (excluding receivables) 50 (126) (114) (115) (115) (117) (118)
Decrease/(increase) in defined benefit retirement plan liabilities 472 548 589 563 538 510 488
Decrease/(increase) in insurance liabilities (1,047) 145 (124) (822) (1,598) (1,937) (1,987)
Other 258 (184) (203) (175) (197) (182) (198)
Total other non-cash Items (6,195) (5,724) (6,278) (6,877) (7,871) (8,281) (8,381)

Movements in Working Capital

             
Increase/(decrease) in receivables 1,170 496 1,511 943 668 752 746
Increase/(decrease) in accrued interest 312 1,028 459 293 248 210 7
Increase/(decrease) in inventories 57 (11) (109) (50) (13) (16) (6)
Increase/(decrease) in prepayments 151 (7) (60) 2 (11) (2) (1)
Decrease/(increase) in deferred revenue (46) (20) 106 (66) (16) (44) (27)
Decrease/(increase) in payables/provisions (377) 789 (222) 404 740 (104) 399
Total movements in working capital 1,267 2,275 1,685 1,526 1,616 796 1,118
Operating balance (excluding minority interests) 12,317 5,496 5,916 5,839 8,451 10,297 13,049

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

Forecast Statement of Financial Positionas at 30 June

 
  Note 2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m

Assets

               
Cash and cash equivalents 8 18,732 15,984 15,512 15,214 15,654 16,255 16,483
Receivables 8 18,529 17,452 18,900 19,876 20,588 21,988 22,220
Marketable securities, deposits and derivatives in gain 8 50,506 45,514 47,214 43,562 43,467 41,791 53,612
Share investments 8 30,700 30,140 34,512 36,492 38,749 42,838 47,138
Advances 8 28,583 29,805 29,411 30,428 31,280 32,015 32,735
Inventory   1,167 970 1,057 1,007 994 978 973
Other assets   3,079 2,352 2,619 2,661 2,661 2,679 2,698
Property, plant and equipment 10 144,550 142,577 149,323 154,300 157,627 158,638 160,278
Equity accounted investments1   14,210 14,618 14,678 15,161 15,617 16,171 16,694
Intangible assets and goodwill   3,553 3,713 3,887 3,916 3,896 3,812 3,716
Forecast for new capital spending 6 616 304 2,269 4,734 7,479 10,199
Top-down capital adjustment 6 (965) (1,100) (1,550) (1,800) (1,900) (1,950)
Total assets   313,609 302,776 316,317 323,336 333,467 342,744 364,796

Liabilities

               
Issued currency   5,980 5,932 6,085 6,267 6,455 6,649 6,849
Payables 12 14,794 12,479 12,306 12,387 12,323 13,136 12,852
Deferred revenue   2,224 2,086 2,118 2,184 2,200 2,244 2,270
Borrowings   111,806 111,500 110,904 111,832 112,722 109,605 117,503
Insurance liabilities 5 42,786 41,219 43,364 44,186 45,784 47,721 49,708
Retirement plan liabilities 13 11,006 9,917 10,388 9,825 9,287 8,777 8,289
Provisions 14 8,541 8,201 8,704 8,328 7,892 7,499 7,071
Total liabilities   197,137 191,334 193,869 195,009 196,663 195,631 204,542
Total assets less total liabilities   116,472 111,442 122,448 128,327 136,804 147,113 160,254

Net Worth

               
Taxpayers' funds   26,456 29,141 32,784 38,802 47,676 58,225 71,507
Property, plant and equipment revaluation reserve   84,164 76,526 83,864 83,781 83,443 83,291 83,192
Other reserves   (88) (101) (80) (71) (64) (58) (52)
Total net worth attributable to the Crown   110,532 105,566 116,568 122,512 131,055 141,458 154,647
Net worth attributable to minority interest   5,940 5,876 5,880 5,815 5,749 5,655 5,607
Total net worth 15 116,472 111,442 122,448 128,327 136,804 147,113 160,254
  1. Equity accounted investments include tertiary education institutions and City Rail Link.

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

Forecast Statement of Borrowings as at 30 June

 
  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m

Borrowings

             
Government bonds 64,349 59,591 61,054 59,975 59,368 55,099 62,065
Treasury bills 4,071 4,096 4,094 4,018 3,942 3,864 3,859
Government retail stock 190 205 185 185 185 185 185
Settlement deposits with Reserve Bank 6,471 7,183 7,517 7,517 7,517 7,517 7,517
Derivatives in loss 3,113 2,800 3,080 2,537 2,338 2,161 2,105
Finance lease liabilities 1,412 2,559 2,425 2,566 2,457 2,197 1,899
Other borrowings 32,200 35,066 32,549 35,034 36,915 38,582 39,873
Total borrowings 111,806 111,500 110,904 111,832 112,722 109,605 117,503
Sovereign-guaranteed debt 81,395 78,805 78,622 77,234 76,656 72,408 79,523
Non sovereign-guaranteed debt 30,411 32,695 32,282 34,598 36,066 37,197 37,980
Total borrowings 111,806 111,500 110,904 111,832 112,722 109,605 117,503

Net Debt:

             
Core Crown borrowings1 94,107 92,565 92,455 91,499 91,258 87,336 94,643
Add back NZS Fund holdings of sovereign-issued debt and NZS Fund borrowings (1,487) (1,908) (1,112) (1,126) (1,135) (1,136) (1,140)
Gross sovereign-issued debt2 92,620 90,657 91,343 90,373 90,123 86,200 93,503
Less core Crown financial assets3 81,015 74,344 78,808 76,186 77,395 78,796 93,800
Net core Crown debt (incl. NZS Fund)4 11,605 16,313 12,535 14,187 12,728 7,404 (297)
Add back NZS Fund holdings of core Crown financial assets and NZS Fund financial assets5 35,861 35,486 37,830 41,022 45,337 50,593 56,530
Net core Crown debt (excl. NZS Fund) 47,466 51,799 50,365 55,209 58,065 57,997 56,233
Add back core Crown advances 12,014 12,312 11,749 11,618 11,339 11,033 10,530
Net core Crown debt (excl. NZS Fund and advances)6 59,480 64,111 62,114 66,827 69,404 69,030 66,763

Gross Debt:

             
Gross sovereign-issued debt2 92,620 90,657 91,343 90,373 90,123 86,200 93,503
Less Reserve Bank settlement cash and Reserve Bank bills (7,079) (8,179) (8,419) (8,419) (8,419) (8,419) (8,419)
Add back changes to NZDMO 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 87,141 84,078 84,524 83,554 83,304 79,381 86,684

Notes on borrowings

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

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

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

Statement of Actual Commitments

  As at
31 Oct
2017
$m
As at
30 June
2017
$m

Capital Commitments

   
State highways 6,963 6,130
Specialist military equipment 451 366
Land and buildings 3,141 2,735
Other property, plant and equipment 2,127 2,108
Other capital commitments 237 227
Tertiary education institutions 673 673
Total capital commitments 13,592 12,239

Operating Commitments

   
Non-cancellable accommodation leases 3,287 3,398
Other non-cancellable leases 2,467 2,468
Tertiary education institutions 499 499
Total operating commitments 6,253 6,365
Total commitments 19,845 18,604

Total Commitments by Segment

   
Core Crown 7,270 5,945
Crown entities 8,881 9,032
State-owned Enterprises 4,494 4,492
Inter-segment eliminations (800) (865)
Total commitments 19,845 18,604

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

Statement of Actual Contingent Liabilities and Assets

Statement of Actual Contingent Liabilities and Assets
  As at
31 Oct
2017
$m
As at
30 June
2017
$m

Quantifiable Contingent Liabilities

   
Uncalled capital 8,229 7,638
Guarantees and indemnities 220 690
Legal proceedings and disputes 325 333
Other contingent liabilities 334 327
Total quantifiable contingent liabilities 9,108 8,988

Total Quantifiable Contingent Liabilities by Segment

   
Core Crown 8,934 8,769
Crown entities 20 16
State-owned Enterprises 154 203
Inter-segment eliminations
Total quantifiable contingent liabilities 9,108 8,988

Quantifiable Contingent Assets by Segment

   
Core Crown 57 58
Crown entities 6 4
State-owned Enterprises 40 40
Total quantifiable contingent assets 103 102

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)
  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m

Taxation Revenue (accrual)

             

Individuals

             
Source deductions 28,641 29,498 30,085 31,904 33,745 35,677 37,687
Other persons 6,382 6,497 6,581 6,869 7,085 7,403 7,787
Refunds (1,638) (1,686) (1,744) (1,746) (1,729) (1,721) (1,743)
Fringe benefit tax 525 554 554 571 598 625 653
Total individuals 33,910 34,863 35,476 37,598 39,699 41,984 44,384

Corporate Tax

             
Gross companies tax 12,228 12,110 12,301 13,159 14,020 14,734 15,462
Refunds (188) (206) (199) (211) (224) (236) (230)
Non-resident withholding tax 599 589 581 633 734 818 858
Foreign-source dividend w/holding payments (10)
Total corporate tax 12,629 12,493 12,683 13,581 14,530 15,316 16,090

Other Direct Income Tax

             
Resident w/holding tax on interest income 1,472 1,519 1,512 1,725 2,183 2,768 3,257
Resident w/holding tax on dividend income 743 685 740 785 832 873 907
Total other direct income tax 2,215 2,204 2,252 2,510 3,015 3,641 4,164
Total direct income tax 48,754 49,560 50,411 53,689 57,244 60,941 64,638

Goods and Services Tax

             
Gross goods and services tax 31,259 32,354 32,879 34,384 36,244 38,138 39,847
Refunds (11,751) (11,774) (12,586) (12,932) (13,545) (14,208) (14,874)
Total goods and services tax 19,508 20,580 20,293 21,452 22,699 23,930 24,973

Other Indirect Taxation

             
Road user charges 1,469 1,437 1,497 1,514 1,545 1,586 1,621
Petroleum fuels excise – domestic production 1,137 1,215 1,205 1,256 1,264 1,282 1,304
Alcohol excise – domestic production 684 712 693 733 757 781 806
Tobacco excise – domestic production 352 366 327 353 368 382 382
Petroleum fuels excise – imports1 771 685 745 710 714 724 737
Alcohol excise – imports1 301 291 326 314 325 335 345
Tobacco excise – imports1 1,325 1,349 1,308 1,374 1,432 1,487 1,488
Other customs duty 152 148 152 152 152 152 152
Gaming duties 229 231 225 229 231 234 236
Motor vehicle fees 223 235 221 206 209 212 214
Approved issuer levy and cheque duty 44 33 35 43 52 53 54
Energy resources levies 24 30 30 30 30 30 30
Total other indirect taxation 6,711 6,732 6,764 6,914 7,079 7,258 7,369
Total indirect taxation 26,219 27,312 27,057 28,366 29,778 31,188 32,342
Total taxation revenue 74,973 76,872 77,468 82,055 87,022 92,129 96,980

Other Sovereign Revenue (accrual)

             
ACC levies 2,882 2,689 2,718 2,905 3,291 3,476 3,711
Fire Service levies 392 518 547 500 511 512 516
EQC levies 283 329 315 388 394 398 402
Child support and working for families penalties 262 261 246 247 249 251 256
Court fines 105 96 96 96 96 96 96
Other miscellaneous items 1,157 1,164 1,229 1,367 1,412 1,466 1,501
Total other sovereign revenue 5,081 5,057 5,151 5,503 5,953 6,199 6,482
Total sovereign revenue 80,054 81,929 82,619 87,558 92,975 98,328 103,462
  1. Customs excise-equivalent duty.
NOTE 1 (continued): Sovereign Receipts (Cash)
  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m

Taxation Receipts (cash)

             

Individuals

             
Source deductions 28,443 29,485 29,921 31,736 33,566 35,487 37,486
Other persons 6,683 6,868 6,832 7,230 7,424 7,719 8,118
Refunds (2,540) (2,526) (2,564) (2,609) (2,596) (2,595) (2,610)
Fringe benefit tax 526 554 554 571 598 625 653
Total individuals 33,112 34,381 34,743 36,928 38,992 41,236 43,647

Corporate Tax

             
Gross companies tax 12,139 11,989 12,239 13,410 14,332 15,090 15,758
Refunds (586) (676) (607) (630) (671) (712) (732)
Non-resident withholding tax 583 589 580 633 734 818 858
Foreign-source dividend w/holding payments 3
Total corporate tax 12,139 11,902 12,212 13,413 14,395 15,196 15,884

Other Direct Income Tax

             
Resident w/holding tax on interest income 1,446 1,519 1,512 1,725 2,183 2,768 3,257
Resident w/holding tax on dividend income 729 685 740 785 832 873 907
Total other direct income tax 2,175 2,204 2,252 2,510 3,015 3,641 4,164
Total direct income tax 47,426 48,487 49,207 52,851 56,402 60,073 63,695
Goods and Services Tax              
Gross goods and services tax 30,611 31,974 32,390 33,899 35,767 37,667 39,373
Refunds (11,584) (11,614) (12,426) (12,772) (13,385) (14,048) (14,714)
Total goods and services tax 19,027 20,360 19,964 21,127 22,382 23,619 24,659

Other Indirect Taxation

             
Road user charges 1,469 1,437 1,497 1,514 1,545 1,586 1,621
Petroleum fuels excise – domestic production 1,135 1,215 1,205 1,256 1,264 1,282 1,304
Alcohol excise – domestic production 678 712 693 733 757 781 806
Tobacco excise – domestic production 330 366 327 353 368 382 382
Customs duty 2,525 2,457 2,552 2,550 2,618 2,692 2,721
Gaming duties 228 231 225 229 231 234 236
Motor vehicle fees 217 235 221 206 209 212 214
Approved issuer levy and cheque duty 40 33 35 43 52 53 54
Energy resources levies 24 30 30 30 30 30 30
Total other indirect taxation 6,646 6,716 6,785 6,914 7,074 7,252 7,368
Total indirect taxation 25,673 27,076 26,749 28,041 29,456 30,871 32,027
Total taxation receipts 73,099 75,563 75,956 80,892 85,858 90,944 95,722

Other Sovereign Receipts (cash)

             
ACC levies 2,820 2,679 2,729 2,754 3,277 3,405 3,662
Fire Service levies 388 486 509 459 500 498 498
EQC levies 285 355 296 387 394 398 402
Child support and working for families penalties 204 212 209 210 212 213 217
Court fines 125 119 119 119 118 118 118
Other miscellaneous items 693 633 641 658 621 625 629
Total other sovereign receipts 4,515 4,484 4,503 4,587 5,122 5,257 5,526
Total sovereign receipts 77,614 80,047 80,459 85,479 90,980 96,201 101,248

NOTE 2: Investment Revenue/(Expenditure)

  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
Interest revenue 2,727 2,807 2,767 2,751 2,810 2,891 2,923

Interest Expenses

             
Interest on financial liabilities 4,130 4,185 4,129 4,024 4,041 4,076 3,881
Interest unwind on provisions 32 39 14 34 36 35 34
Total interest expenses 4,162 4,224 4,143 4,058 4,077 4,111 3,915
Net interest revenue/(expense) (1,435) (1,417) (1,376) (1,307) (1,267) (1,220) (992)
Dividend revenue 871 917 1,004 1,125 1,220 1,297 1,411
Gains and losses on financial instruments 6,330 2,538 3,938 2,877 3,220 3,540 3,983
Total investment revenue/(expenditure) 5,766 2,038 3,566 2,695 3,173 3,617 4,402

NOTE 3: Transfer Payments and Subsidies

  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
New Zealand superannuation 13,043 13,671 13,670 14,436 15,354 16,222 17,223
Family tax credit 1,723 1,823 1,716 2,628 2,552 2,523 2,534
Jobseeker support and emergency benefit 1,697 1,663 1,680 1,663 1,595 1,564 1,580
Supported living payment 1,533 1,531 1,542 1,559 1,575 1,585 1,599
Accommodation assistance 1,127 1,218 1,208 1,493 1,487 1,484 1,499
Sole parent support 1,159 1,117 1,095 1,081 1,101 1,113 1,139
Income related rents 815 900 903 990 1,049 1,107 1,166
KiwiSaver subsidies 743 810 814 847 895 940 980
Other working for families tax credits 596 603 585 582 577 572 572
Official development assistance 520 644 647 583 586 586 586
Student allowances 465 505 513 592 583 606 626
Winter energy payment 443 448 455 465
Best start 80 231 373 451
Disability assistance 377 379 378 380 382 383 386
Other social assistance benefits 1,466 1,598 1,645 1,544 1,573 1,660 1,692
Total transfer payments and subsidies 25,264 26,462 26,396 28,901 29,988 31,173 32,498

NOTE 4: Other Operating Expenses

  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
Grants and subsidies 4,906 5,611 5,704 5,766 5,682 5,845 5,873
Rental and leasing costs 1,289 1,272 1,350 1,357 1,367 1,381 1,386
Amortisation and impairment of non-financial assets 1,102 743 717 750 750 752 758
Impairment of financial assets 607 1,047 1,020 1,014 1,015 1,017 1,018
Cost of concessionary lending 753 801 1,141 864 905 941 934
Lottery prize payments 652 541 601 630 659 688 719
Inventory expenses 278 371 423 441 338 339 332
Other operating expenses 28,709 30,614 32,153 31,703 32,002 32,367 32,463
Total other operating expenses 38,296 41,000 43,109 42,525 42,718 43,330 43,483

NOTE 5: Insurance

 
  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m

Insurance expense by entity

             
ACC 4,587 4,613 4,727 4,778 5,296 5,692 6,091
EQC 332 (28) (115) 77 199 200 200
Southern Response 325 (49) (63) (25) (12)
Other (incl. inter-segment eliminations) 174 10 42 7 8 7 8
Total insurance expenses 5,418 4,546 4,591 4,837 5,491 5,899 6,299

Insurance liability by entity

             
ACC 40,288 40,707 42,281 43,802 45,503 47,441 49,428
EQC 1,853 295 708 267 246 245 245
Southern Response 668 166 290 82
Other (incl. inter-segment eliminations) (23) 51 85 35 35 35 35
Total insurance liabilities 42,786 41,219 43,364 44,186 45,784 47,721 49,708

ACC liability

Calculation information

PwC NZ has prepared an independent actuarial estimate of the ACC outstanding claims liability as at 30 June 2017. 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 2017. The equivalent single effective discount rate, taking into account ACC's projected future cash flow patterns, is 3.89% and allows for a long-term discount rate of 4.75% from 2054.

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.

 
  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m

Gross ACC Liability

             
Opening gross liability 39,106 39,379 40,288 42,281 43,802 45,503 47,441
Net change 1,182 1,328 1,993 1,521 1,701 1,938 1,987
Closing gross liability 40,288 40,707 42,281 43,802 45,503 47,441 49,428

Less Net Assets Available to ACC

             
Opening net asset value 37,241 38,312 39,030 40,327 41,598 42,993 44,423
Net change 1,789 836 1,297 1,271 1,395 1,430 1,307
Closing net asset value 39,030 39,148 40,327 41,598 42,993 44,423 45,730

Net ACC Reserves (Net Liability)

             
Opening reserves position (1,865) (1,067) (1,258) (1,954) (2,204) (2,510) (3,018)
Net change 607 (492) (696) (250) (306) (508) (680)
Closing reserves position (net liability)/net asset (1,258) (1,559) (1,954) (2,204) (2,510) (3,018) (3,698)

EQC liability

Calculation information

Melville Jessup Weaver prepared an independent actuarial estimate of the EQC outstanding claims liability at 30 June 2017 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, KaikŌura earthquake 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 2017 valuation form the basis of the five-year forecast of the outstanding claims liability.

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: the potential outcome of complex land litigation and the financial impact of confirming final liabilities with insurance and reinsurers.

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.

 
  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m

EQC Liability

             
Opening gross liability 2,485 1,644 1,853 708 267 246 245
Net change (632) (1,349) (1,145) (441) (21) (1)
Closing gross liability 1,853 295 708 267 246 245 245

Less Reinsurance Receivable

             
Opening reinsurance receivable 515 185 193 63 1
Net change (322) (175) (130) (62) (1)
Closing reinsurance receivable 193 10 63 1

Net EQC Liability

             
Opening net position (1,970) (1,459) (1,660) (645) (266) (246) (245)
Net change 310 1,174 1,015 379 20 1
Closing net position (net liability) (1,660) (285) (645) (266) (246) (245) (245)

NOTE 6: Forecast New Spending and Top-down Expense Adjustment

  2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m

Forecast New Operating Spending

         
Unallocated contingencies 179 250 216 260 248
Forecast new spending for Budget 2018 2,471 2,405 2,329 2,211
Forecast new spending for Budget 2019 1,875 1,875 1,875
Forecast new spending for Budget 2020 1,875 1,875
Forecast new spending for Budget 2021 1,875
Total forecast new operating spending 179 2,721 4,496 6,339 8,084
Operating top-down adjustment (1,365) (750) (575) (575) (575)

Unallocated contingencies represent expenses included in Budget 2017 and previous Budgets that have yet to be allocated to departments. Forecast new spending indicates the expected spending increases from future Budgets.

The forecast for new operating spending for Budget 2018 is $2.6 billion. Some of this allowance has been pre-committed as at the forecast finalisation date of 27 November 2017, with only the unallocated portion of the allowance included in this note.

  2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
Post-2022
Forecast
$m
Total
Forecast
$m

Forecast New Capital Spending (annual)

             
Unallocated contingencies 204 765 465 245 20 1,699
Forecast new spending for Budget 2018 100 1,100 800 500 200 2,700
Forecast new spending for Budget 2019 100 1,100 800 500 200 2,700
Forecast new spending for Budget 2020 100 1,100 800 700 2,700
Forecast new spending for Budget 2021 100 1,100 1,500 2,700
Forecast new spending for Budget 2022 100 2,600 2,700
Total forecast new capital spending 304 1,965 2,465 2,745 2,720 5,000 15,199
Forecast new capital spending (cumulative) 304 2,269 4,734 7,479 10,199    
Capital top-down adjustment (cumulative) (1,100) (1,550) (1,800) (1,900) (1,950)    

Unallocated contingencies represent capital spending from Budget 2017 and previous Budgets that has yet to be allocated to departments. Forecast new spending indicates the expected capital spending increases from future Budgets.

The forecast for new capital spending for Budget 2018 is $3.4 billion. Some of the allowance has been pre-committed as at the forecast finalisation date of 27 November 2017, with only the unallocated portion of the allowance included in this note.

NOTE 7: Net Gains and Losses on Non-Financial Instruments

  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m

By type

             
Actuarial gains/(losses) on ACC outstanding claims 387 (454)
Actuarial gains/(losses) on GSF liability 964 29
Gains/(losses) on the Emissions Trading Scheme 73 (209)
Other (103) (88) (100) (98) (27) (44) (30)
Net gains/(losses) on non-financial instruments 1,321 (88) (734) (98) (27) (44) (30)

NOTE 8: Financial Assets (including receivables)

  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
Cash and cash equivalents 18,732 15,984 15,512 15,214 15,654 16,255 16,483
Tax receivables 10,313 10,098 11,045 11,470 11,900 12,348 12,838
Trade and other receivables 8,216 7,354 7,855 8,406 8,688 9,640 9,382
Student loans (refer note 9) 9,197 9,210 9,030 8,746 8,344 7,900 7,386
Kiwibank mortgages 17,795 18,902 18,902 20,002 21,102 22,202 23,302
Long-term deposits 4,730 3,257 4,241 4,258 4,246 4,182 4,125
IMF financial assets 1,837 1,806 1,880 1,880 1,880 1,880 1,880
Other advances 1,591 1,693 1,479 1,680 1,834 1,913 2,047
Share investments 30,700 30,140 34,512 36,492 38,749 42,838 47,138
Derivatives in gain 4,381 4,313 3,294 2,805 2,680 2,379 2,407
Other marketable securities 39,558 36,138 37,799 34,619 34,661 33,350 45,200
Total financial assets (including receivables) 147,050 138,895 145,549 145,572 149,738 154,887 172,188

Financial Assets by Entity

             
NZDMO 22,554 14,701 15,813 10,165 7,036 3,217 13,180
Reserve Bank of New Zealand 18,985 19,755 19,525 19,880 20,102 20,310 20,541
NZS Fund 37,345 36,557 38,847 42,060 46,412 52,312 57,731
Other core Crown 25,600 24,451 27,449 27,197 27,807 28,024 28,385
Intra-segment eliminations (9,643) (8,096) (8,861) (8,614) (8,913) (8,878) (9,800)
Total core Crown segment 94,841 87,368 92,773 90,688 92,444 94,985 110,037
ACC portfolio 39,514 40,072 41,116 42,228 43,616 45,054 46,366
EQC portfolio 1,089 257 169 278 414 556
Other Crown entities 10,597 9,366 9,996 9,421 9,362 9,314 9,091
Intra-segment eliminations (3,025) (2,561) (2,522) (2,079) (1,942) (1,828) (1,758)
Total Crown entities segment 48,175 46,877 48,847 49,739 51,314 52,954 54,255
Total state-owned enterprises segment 24,876 25,964 25,644 27,021 28,372 29,811 31,104
Inter-segment eliminations (20,842) (21,314) (21,715) (21,876) (22,392) (22,863) (23,208)
Total financial assets (including receivables) 147,050 138,895 145,549 145,572 149,738 154,887 172,188

NOTE 9: Student Loans

  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
Nominal value (including accrued interest) 15,735 15,963 15,798 16,005 16,186 16,390 16,507
Opening book value 8,982 9,178 9,197 9,030 8,746 8,344 7,900
Net new lending (excluding fees) 1,475 1,533 1,342 1,393 1,456 1,539 1,610
New lending - establishment fee 10 10 10 10 10 10 10
Less initial write-down to fair value (662) (676) (667) (731) (816) (836) (860)
Repayments made during the year (1,272) (1,336) (1,346) (1,447) (1,538) (1,633) (1,734)
Interest unwind 602 601 594 591 586 576 560
Impairment 62 (100) (100) (100) (100) (100) (100)
Other movements
Closing book value 9,197 9,210 9,030 8,746 8,344 7,900 7,386

NOTE 10: Property, Plant and Equipment

  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m

Net Carrying Value1

             

By class of asset

             
Land 49,640 45,330 49,974 50,458 50,831 50,504 50,750
Buildings 34,655 33,771 36,184 37,769 38,565 38,660 39,013
State highways 23,829 26,056 25,912 27,808 29,616 30,774 32,255
Electricity generation assets 15,866 15,232 15,625 15,387 15,132 14,898 14,724
Electricity distribution network (cost) 4,080 4,226 3,986 3,936 3,822 3,699 3,577
Aircraft (excluding military) 4,112 5,092 4,539 4,964 5,105 5,127 5,194
Specialist military equipment 3,119 3,357 3,296 3,685 3,731 3,515 3,343
Specified cultural and heritage assets 3,097 3,033 3,109 3,110 3,121 3,137 3,155
Rail network 939 1,136 1,128 1,293 1,423 1,598 1,780
Other plant and equipment (cost) 5,213 5,344 5,570 5,890 6,281 6,726 6,487
Total property, plant and equipment 144,550 142,577 149,323 154,300 157,627 158,638 160,278

Land breakdown by usage

             
Housing 17,845 15,751 17,960 18,077 18,165 18,243 18,311
State highway corridor land 10,892 9,782 10,868 10,842 10,792 10,742 10,692
Conservation land 5,718 5,700 5,724 5,734 5,745 5,755 5,766
Rail network 3,520 3,311 3,487 3,472 3,457 3,454 3,452
Schools 5,683 4,833 5,713 5,756 5,799 5,848 5,892
Commercial (SOEs) excluding Rail 1,237 1,259 1,208 1,273 1,280 1,312 1,379
Other 4,745 4,694 5,014 5,304 5,593 5,150 5,258
Total land 49,640 45,330 49,974 50,458 50,831 50,504 50,750
  1. Using a revaluation methodology unless otherwise stated.
 
  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m

Schedule of Movements

             

Cost or Valuation

             
Opening balance 149,806 156,678 160,631 168,998 178,573 186,637 192,337
Additions2 7,781 9,573 10,105 10,390 8,981 7,073 6,955
Disposals (1,533) (594) (1,628) (700) (879) (1,325) (589)
Net revaluations 5,260    -  14    -     -     -     - 
Other1 (683) (178) (124) (115) (38) (48) 1
Total cost or valuation 160,631 165,479 168,998 178,573 186,637 192,337 198,704

Accumulated Depreciation and Impairment

             
Opening balance 15,307 18,506 16,081 19,675 24,273 29,010 33,699
Eliminated on disposal (859) (128) (939) (112) (104) (152) (144)
Eliminated on revaluation (2,504) (46) (4)    -     -     -     - 
Impairment losses charged to operating balance 325    -     -     -     -     -     - 
Depreciation expense 4,073 4,563 4,568 4,714 4,844 4,862 4,874
Other1 (261) 7 (31) (4) (3) (21) (3)
Total accumulated depreciation and impairment 16,081 22,902 19,675 24,273 29,010 33,699 38,426
Total property, plant and equipment 144,550 142,577 149,323 154,300 157,627 158,638 160,278
  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 11: NZ Superannuation Fund

  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
Revenue 833 858 929 1,044 1,152 1,253 1,407
Less current tax expense 1,139 708 707 807 890 968 1,089
Less other expenses 227 184 225 187 199 214 227
Add gains/(losses) 5,512 2,280 3,088 2,515 2,764 2,996 3,356
Operating balance 4,979 2,246 3,085 2,565 2,827 3,067 3,447
Opening net worth 29,527 33,090 34,506 38,141 41,730 46,086 51,387
Gross contribution from the Crown 500 1,000 1,500 2,200 2,500
Operating balance 4,979 2,246 3,085 2,565 2,827 3,067 3,447
Other movements in reserves 29 50 24 29 34 39
Closing net worth 34,506 35,365 38,141 41,730 46,086 51,387 57,373

Comprising:

             
Financial assets 37,345 36,557 38,847 42,060 46,412 52,312 57,731
Financial liabilities (4,656) (2,970) (2,525) (2,256) (2,315) (2,980) (2,484)
Net other assets 1,817 1,778 1,819 1,926 1,989 2,055 2,126
Closing net worth 34,506 35,365 38,141 41,730 46,086 51,387 57,373

NOTE 12: Payables

  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
Accounts payable 10,517 7,905 7,996 8,066 7,976 8,767 8,464
Taxes repayable 4,277 4,574 4,310 4,321 4,347 4,369 4,388
Total payables 14,794 12,479 12,306 12,387 12,323 13,136 12,852

NOTE 13: Retirement Plan Liabilities

  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
Government Superannuation Fund 11,004 9,916 10,386 9,823 9,284 8,775 8,287
Other funds 2 1 2 2 3 2 2
Total retirement plan liabilities 11,006 9,917 10,388 9,825 9,287 8,777 8,289

The net liability of the Government Superannuation Fund (GSF) was calculated by GSF's actuary as at 30 September 2017. 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 2017, based on membership data as at 30 June 2017 with adjustments for cash flows to 30 September 2017. 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 2017.

Other principal long-term financial assumptions were an inflation rate, as measured by the Consumers Price Index (CPI), of 1.67% for the 20 years to 30 June 2037, then increasing gradually each year to 2.0% in the year ended 30 June 2048 and remaining at 2.0% p.a. for all years after that. In addition an annual salary growth rate, before any promotional effects, of 2.5% (2.5% at 30 June 2017).

The 2017/18 projected decrease in the net GSF liability is $618 million, reflecting a decrease in the GSF liability of $484 million and an increase in the GSF net assets of $134 million.

The decrease in the GSF liability of $484 million includes an actuarial loss between 1 July 2017 and 30 September 2017, of $68 million, owing to movements in the discount rates. The remaining $416 million reduction is owing to the current service cost and interest unwind (increases the liability) offset by benefits to members (reducing the liability) which were slightly lower than expected.

The increase in the value of the net assets of GSF of $134 million includes a gain of $97 million reflecting the updated market value of assets at 30 September 2017. The balance of $37 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 2017/18 onwards reflect the net of the expected current service cost, interest cost, investment returns and contributions.

 
  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m

GSF Liability

             
Opening GSF liability 16,406 14,562 15,272 14,788 14,232 13,698 13,189
Net projected change (1,134) (526) (484) (556) (534) (509) (490)
Closing GSF liability 15,272 14,036 14,788 14,232 13,698 13,189 12,699

Less Net Assets Available to GSF

             
Opening net asset value 3,965 4,098 4,268 4,402 4,409 4,414 4,414
Investment valuation changes 483 200 306 215 215 215 215
Contribution and other income less pension payments (180) (178) (172) (208) (210) (215) (217)
Closing net asset value 4,268 4,120 4,402 4,409 4,414 4,414 4,412

Net GSF Liability

             
Opening unfunded liability 12,441 10,464 11,004 10,386 9,823 9,284 8,775
Net projected change (1,437) (548) (618) (563) (539) (509) (488)
Closing unfunded liability 11,004 9,916 10,386 9,823 9,284 8,775 8,287

NOTE 14: Provisions

  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
Provision for employee entitlements 3,582 3,551 3,527 3,512 3,505 3,597 3,579
Provision for ETS credits 2,028 2,023 2,366 2,129 1,833 1,488 1,113
Provision for National Provident Fund guarantee 856 816 806 751 700 650 601
Other provisions 2,075 1,811 2,005 1,936 1,854 1,764 1,778
Total provisions 8,541 8,201 8,704 8,328 7,892 7,499 7,071

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 the last week of October 2017.

The ETS impact on the fiscal forecast is as follows:

  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
Revenue 444 529 578 706 787 838 868
Expenses (295) (470) (707) (469) (491) (493) (493)
Gains/(losses) 73    -  (209)    -     -     -     - 
Operating balance 222 59 (338) 237 296 345 375

NOTE 15: Changes in Net Worth

  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
Taxpayers' funds 26,456 29,141 32,784 38,802 47,676 58,225 71,507
Property, plant and equipment revaluation reserve 84,164 76,526 83,864 83,781 83,443 83,291 83,192
Investment revaluation reserve 85 97 94 98 103 109 114
Intangible asset reserve 2 8 2 2 2 2 2
Cash flow hedge reserve (106) (129) (125) (120) (118) (118) (117)
Foreign currency translation reserve (69) (77) (51) (51) (51) (51) (51)
Net worth attributable to minority interests 5,940 5,876 5,880 5,815 5,749 5,655 5,607
Total net worth 116,472 111,442 122,448 128,327 136,804 147,113 160,254

Taxpayers' funds

             
Opening taxpayers' funds 13,932 23,527 26,456 32,784 38,802 47,676 58,225
Operating balance excluding minority interest 12,317 5,496 5,916 5,839 8,451 10,297 13,049
Transfers from/(to) other reserves 207 119 331 199 434 244 244
Other movements (1) 81 (20) (11) 8 (11)
Closing taxpayers' funds 26,456 29,141 32,784 38,802 47,676 58,225 71,507

Property, Plant and Equipment Revaluation Reserve

             
Opening revaluation reserve 75,626 76,627 84,164 83,864 83,781 83,443 83,291
Net revaluations 8,745 31
Transfers from/(to) other reserves (207) (101) (331) (83) (338) (152) (99)
Closing property, plant and equipment revaluation reserve 84,164 76,526 83,864 83,781 83,443 83,291 83,192

NOTE 16: Core Crown Residual Cash

  2017
Actual
$m
2018
Previous
Budget
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m

Core Crown Cash Flows from Operations

             
Tax receipts 74,729 77,133 77,419 82,571 87,475 92,759 97,618
Other sovereign receipts 955 892 892 907 872 877 887
Interest, profits and dividends 1,770 1,382 1,447 1,376 1,424 1,479 1,502
Sale of goods and services and other receipts 2,258 2,555 2,411 2,228 2,241 2,216 2,232
Transfer payments and subsidies (25,293) (26,512) (26,294) (28,870) (29,993) (31,193) (32,494)
Personnel and operating costs (44,581) (48,424) (49,563) (48,641) (48,350) (48,268) (48,121)
Interest payments (3,530) (3,507) (3,498) (3,343) (3,274) (3,361) (3,012)
Forecast for future new operating spending (293) (179) (2,721) (4,496) (6,339) (8,084)
Top-down expense adjustment 1,000 1,365 750 575 575 575
Net core Crown operating cash flows 6,308 4,226 4,000 4,257 6,474 8,745 11,103

Core Crown Capital Cash Flows

             
Net purchase of physical assets (2,153) (3,196) (3,748) (3,591) (2,917) (1,677) (1,855)
Net increase in advances 111 (325) (205) (93) (31) (33) 118
Net purchase of investments (1,692) (2,888) (2,990) (2,715) (2,363) (1,845) (1,849)
Contribution to NZS Fund (500) (1,000) (1,500) (2,200) (2,500)
Forecast for future new capital spending (446) (304) (1,965) (2,465) (2,745) (2,720)
Top-down capital adjustment 840 1,100 450 250 100 50
Net core Crown capital cash flows (3,734) (6,015) (6,647) (8,914) (9,026) (8,400) (8,756)
Residual cash (deficit)/surplus 2,574 (1,789) (2,647) (4,657) (2,552) 345 2,347
The residual cash (deficit)/surplus is funded or invested as follows:              

Debt Programme Cash Flows

             
Market:              
    Issue of government bonds 7,847 6,874 6,992 6,993 6,977 7,109 7,084
    Repayment of government bonds (6,080) (11,602) (9,166) (7,886) (7,290) (11,059)
    Net issue/(repayment) of short-term borrowing1 160 200
Total market debt cash flows 1,927 (4,528) (2,174) (893) (313) (3,950) 7,084
Non-market:              
    Repayment of government bonds (830)
    Net issue/(repayment) of short-term borrowing (100)
Total non-market debt cash flows (830) (100)
Total debt programme cash flows 1,097 (4,528) (2,274) (893) (313) (3,950) 7,084

Other Borrowing Cash Flows

             
Net (repayment)/issue of other New Zealand dollar borrowing (2,352) 1,034 6,801 (342) (18) (25) (27)
Net (repayment)/issue of foreign currency borrowing 2,425 (971) (5,568) 329 6
Total other borrowing cash flows 73 63 1,233 (13) (12) (25) (27)

Investing Cash Flows

             
Net sale/(purchase) of marketable securities and deposits (195) 6,087 1,606 5,381 2,688 3,436 (9,603)
Issues of circulating currency 265 170 105 183 188 194 199
Decrease/(increase) in cash (3,814) (3) 1,977 (1) 1
Total investing cash flows (3,744) 6,254 3,688 5,563 2,877 3,630 (9,404)
Residual cash deficit/(surplus) funding/(investing) (2,574) 1,789 2,647 4,657 2,552 (345) (2,347)
  1. Short-term borrowing consists of Treasury Bills and may include Euro-Commercial Paper.

NOTE 17: Net earthquake expenses (operating and capital)

These net earthquake costs are the latest estimates of the net impact on the Crown of the Canterbury earthquakes. 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.

As time elapses the ability to directly attribute costs to the original events in 2010 and 2011 becomes more difficult. To ensure unrelated expenditure is not included, estimated costs associated with the Canterbury earthquakes are limited to the reassessment of insurance claims by EQC and Southern Response, and the construction of large capital projects (eg, anchor projects being managed by Ōtākaro Limited).

Amounts recognised in the statement of financial performance (operating expenses) as well as capital expenditure in respect of the Canterbury earthquakes are:

 
  To date
Actual
$m
2018
Forecast
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
Total
Half Year
Update
$m
Total
Pre-election
Update
$m
EQC insurance claims 7,026 (223) (108) (41) 6,654 7,119
Southern Response support package 1,420 (47) (16) (7) 1,350 1,441
Christchurch central city rebuild 1,030 251 238 247 42 31 1,839 1,939
Crown assets 1,223 484 268 189 130 104 2,398 2,423
Other earthquake costs 4,361 350 101 61 19 17 4,909 5,196
Total Crown net earthquake costs 15,060 815 484 448 191 152 17,150 18,118

Operating and capital expenses

               
Operating expenses 12,431 63 (90) 22 76 47 12,549 13,254
Capital expenditure 2,629 752 574 427 115 105 4,600 4,864
Total Crown net earthquake costs 15,060 815 484 448 191 152 17,150 18,118

The negative “costs” in relation to EQC and Southern Response insurance claims represents a re-estimation of their respective outstanding claims liability, resulting in a reduction in the overall costs of the Canterbury earthquakes.

Forecast Statement of Segments

Statement of Financial Performance for the year ended 30 June 2017
  Core Crown
2017
Actual
$m
Crown entities
2017
Actual
$m
State-owned
Enterprises
2017
Actual
$m
Inter-segment
eliminations
2017
Actual
$m
Total Crown
2017
Actual
$m

Revenue

         
Taxation revenue 75,644 (671) 74,973
Other sovereign revenue 1,458 4,919 (1,296) 5,081
Revenue from core Crown funding 27,252 106 (27,358)
Sales of goods and services 1,607 2,194 13,675 (605) 16,871
Interest revenue 1,119 998 918 (308) 2,727
Other revenue 1,954 2,980 772 (1,131) 4,575
Total revenue (excluding gains) 81,782 38,343 15,471 (31,369) 104,227

Expenses

         
Social assistance and official development assistance 25,264 25,264
Personnel expenses 6,890 12,878 2,869 (38) 22,599
Other operating expenses 40,643 21,180 10,706 (30,160) 42,369
Interest expenses 3,534 158 1,060 (590) 4,162
Insurance expenses 8 5,248 8 154 5,418
Forecast for future new spending and top-down adjustment
Total expenses (excluding losses) 76,339 39,464 14,643 (30,634) 99,812
Minority interest share of operating balance before gains/(losses) 10 (347) (9) (346)
Operating balance before gains/(losses) 5,443 (1,111) 481 (744) 4,069
Total gains/(losses) 6,314 1,291 93 (20) 7,678
Net surplus/(deficit) from associates and joint ventures 307 239 31 (7) 570
Operating balance 12,064 419 605 (771) 12,317

Expenses by functional classification

         
Social security and welfare 25,294 5,852 (547) 30,599
Health 16,223 13,955 (14,533) 15,645
Education 13,281 10,432 (9,601) 14,112
Transport and communications 2,176 2,625 6,962 (2,403) 9,360
Other 15,831 6,442 6,621 (2,960) 25,934
Finance costs 3,534 158 1,060 (590) 4,162
Forecast for future new spending and top-down adjustment
Total expenses (excluding losses) 76,339 39,464 14,643 (30,634) 99,812
Statement of Financial Position as at 30 June 2017
  Core Crown
2017
Actual
$m
Crown entities
2017
Actual
$m
State-owned
Enterprises
2017
Actual
$m
Inter-segment
eliminations
2017
Actual
$m
Total Crown
2017
Actual
$m

Assets

         
Cash and cash equivalents 15,757 2,447 991 (463) 18,732
Receivables 13,860 5,409 1,892 (2,632) 18,529
Other financial assets 65,224 40,319 21,993 (17,747) 109,789
Property, plant and equipment 39,221 72,599 32,730 144,550
Equity accounted investments 43,001 12,143 219 (41,153) 14,210
Intangible assets and goodwill 1,478 572 1,523 (20) 3,553
Inventory and other assets 1,835 1,298 1,207 (94) 4,246
Forecast for new capital spending and top-down adjustment
Total assets 180,376 134,787 60,555 (62,109) 313,609

Liabilities

         
Borrowings 93,730 4,082 30,222 (16,228) 111,806
Other liabilities 34,898 50,804 8,326 (8,697) 85,331
Total liabilities 128,628 54,886 38,548 (24,925) 197,137
Total assets less total liabilities 51,748 79,901 22,007 (37,184) 116,472

Net worth

         
Taxpayers' funds 28,084 35,740 4,302 (41,670) 26,456
Reserves 23,664 44,140 11,454 4,818 84,076
Net worth attributable to minority interest 21 6,251 (332) 5,940
Total net worth 51,748 79,901 22,007 (37,184) 116,472

Forecast Statement of Segments (2018)

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 78,172 (704) 77,468
Other sovereign revenue 1,509 5,064 (1,422) 5,151
Revenue from core Crown funding 28,912 133 (29,045)
Sales of goods and services 1,705 2,135 14,527 (542) 17,825
Interest revenue 1,184 1,036 956 (409) 2,767
Other revenue 2,100 3,124 895 (1,146) 4,973
Total revenue (excluding gains) 84,670 40,271 16,511 (33,268) 108,184

Expenses

         
Social assistance and official development assistance 26,396 26,396
Personnel expenses 7,251 13,496 2,886 (29) 23,604
Other operating expenses 45,644 22,536 11,498 (32,001) 47,677
Interest expenses 3,513 58 1,095 (523) 4,143
Insurance expenses 35 4,551 5 4,591
Forecast for future new spending and top-down adjustment (1,186) (1,186)
Total expenses (excluding losses) 81,653 40,641 15,484 (32,553) 105,225
Minority interest share of operating balance before gains/(losses) (1) (440) 23 (418)
Operating balance before gains/(losses) 3,017 (371) 587 (692) 2,541
Total gains/(losses) 3,217 (104) 92 (44) 3,161
Net surplus/(deficit) from associates and joint ventures 121 91 2 214
Operating balance 6,355 (384) 679 (734) 5,916

Expenses by functional classification

         
Social security and welfare 26,191 6,014 (559) 31,646
Health 17,184 14,566 (15,136) 16,614
Education 14,397 11,074 (10,265) 15,206
Transport and communications 2,486 2,809 7,215 (2,795) 9,715
Other 19,068 6,120 7,174 (3,275) 29,087
Finance costs 3,513 58 1,095 (523) 4,143
Forecast for future new spending and top-down adjustment (1,186) (1,186)
Total expenses (excluding losses) 81,653 40,641 15,484 (32,553) 105,225
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 12,661 2,183 1,076 (408) 15,512
Receivables 13,962 5,396 1,779 (2,237) 18,900
Other financial assets 66,150 41,268 22,789 (19,070) 111,137
Property, plant and equipment 40,978 75,541 32,804 149,323
Equity accounted investments 45,705 12,295 247 (43,569) 14,678
Intangible assets and goodwill 1,781 562 1,564 (20) 3,887
Inventory and other assets 1,674 943 1,086 (27) 3,676
Forecast for new capital spending and top-down adjustment (796) (796)
Total assets 182,115 138,188 61,345 (65,331) 316,317

Liabilities

         
Borrowings 92,455 4,998 31,072 (17,621) 110,904
Other liabilities 31,505 51,383 8,112 (8,035) 82,965
Total liabilities 123,960 56,381 39,184 (25,656) 193,869
Total assets less total liabilities 58,155 81,807 22,161 (39,675) 122,448

Net worth

         
Taxpayers' funds 34,439 37,933 4,568 (44,156) 32,784
Reserves 23,716 43,851 11,428 4,789 83,784
Net worth attributable to minority interest 23 6,165 (308) 5,880
Total net worth 58,155 81,807 22,161 (39,675) 122,448

Forecast Statement of Segments (2019)

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 82,817 (762) 82,055
Other sovereign revenue 1,646 5,365 (1,508) 5,503
Revenue from core Crown funding 28,815 136 (28,951)
Sales of goods and services 1,722 2,176 15,077 (559) 18,416
Interest revenue 1,141 1,022 1,012 (424) 2,751
Other revenue 2,131 3,331 931 (1,229) 5,164
Total revenue (excluding gains) 89,457 40,709 17,156 (33,433) 113,889

Expenses

         
Social assistance and official development assistance 28,901 28,901
Personnel expenses 7,082 13,604 2,977 (35) 23,628
Other operating expenses 44,893 22,367 12,007 (32,028) 47,239
Interest expenses 3,460 58 1,061 (521) 4,058
Insurance expenses 1 4,832 5 (1) 4,837
Forecast for future new spending and top-down adjustment 1,971 1,971
Total expenses (excluding losses) 86,308 40,861 16,050 (32,585) 110,634
Minority interest share of operating balance before gains/(losses) (2) (448) 23 (427)
Operating balance before gains/(losses) 3,149 (154) 658 (825) 2,828
Total gains/(losses) 2,683 136 58 (115) 2,762
Net surplus/(deficit) from associates and joint ventures 114 132 2 1 249
Operating balance 5,946 114 718 (939) 5,839

Expenses by functional classification

         
Social security and welfare 28,729 6,059 (571) 34,217
Health 17,250 14,577 (15,235) 16,592
Education 14,641 11,253 (10,415) 15,479
Transport and communications 2,350 2,677 7,571 (2,588) 10,010
Other 17,907 6,237 7,418 (3,255) 28,307
Finance costs 3,460 58 1,061 (521) 4,058
Forecast for future new spending and top-down adjustment 1,971 1,971
Total expenses (excluding losses) 86,308 40,861 16,050 (32,585) 110,634
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 12,581 1,898 1,141 (406) 15,214
Receivables 14,498 5,594 1,852 (2,068) 19,876
Other financial assets 63,609 42,247 24,028 (19,402) 110,482
Property, plant and equipment 42,924 78,380 32,996 154,300
Equity accounted investments 48,227 12,535 247 (45,848) 15,161
Intangible assets and goodwill 1,831 550 1,555 (20) 3,916
Inventory and other assets 1,711 909 1,074 (26) 3,668
Forecast for new capital spending and top-down adjustment 719 719
Total assets 186,100 142,113 62,893 (67,770) 323,336

Liabilities

         
Borrowings 91,499 5,786 32,494 (17,947) 111,832
Other liabilities 30,469 52,327 8,117 (7,736) 83,177
Total liabilities 121,968 58,113 40,611 (25,683) 195,009
Total assets less total liabilities 64,132 84,000 22,282 (42,087) 128,327

Net worth

         
Taxpayers' funds 40,385 40,265 4,725 (46,573) 38,802
Reserves 23,747 43,710 11,464 4,789 83,710
Net worth attributable to minority interest 25 6,093 (303) 5,815
Total net worth 64,132 84,000 22,282 (42,087) 128,327

Forecast Statement of Segments (2020)

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 87,811 (789) 87,022
Other sovereign revenue 1,693 5,764 (1,504) 5,953
Revenue from core Crown funding 28,852 124 (28,976)
Sales of goods and services 1,739 2,189 15,812 (569) 19,171
Interest revenue 1,116 1,047 1,079 (432) 2,810
Other revenue 2,267 3,240 993 (1,179) 5,321
Total revenue (excluding gains) 94,626 41,092 18,008 (33,449) 120,277

Expenses

         
Social assistance and official development assistance 29,988 29,988
Personnel expenses 7,040 13,646 3,130 (34) 23,782
Other operating expenses 44,756 22,284 12,533 (32,011) 47,562
Interest expenses 3,452 66 1,098 (539) 4,077
Insurance expenses 3 5,485 5 (2) 5,491
Forecast for future new spending and top-down adjustment 3,921 3,921
Total expenses (excluding losses) 89,160 41,481 16,766 (32,586) 114,821
Minority interest share of operating balance before gains/(losses) (2) (498) 23 (477)
Operating balance before gains/(losses) 5,466 (391) 744 (840) 4,979
Total gains/(losses) 2,999 281 39 (130) 3,189
Net surplus/(deficit) from associates and joint ventures 119 162 1 1 283
Operating balance 8,584 52 784 (969) 8,451

Expenses by functional classification

         
Social security and welfare 29,792 6,569 (590) 35,771
Health 17,257 14,601 (15,219) 16,639
Education 14,807 11,287 (10,446) 15,648
Transport and communications 2,280 2,592 7,915 (2,555) 10,232
Other 17,651 6,366 7,753 (3,237) 28,533
Finance costs 3,452 66 1,098 (539) 4,077
Forecast for future new spending and top-down adjustment 3,921 3,921
Total expenses (excluding losses) 89,160 41,481 16,766 (32,586) 114,821
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 12,842 1,990 1,226 (404) 15,654
Receivables 15,045 5,665 1,915 (2,037) 20,588
Other financial assets 64,557 43,659 25,231 (19,951) 113,496
Property, plant and equipment 44,065 80,746 32,816 157,627
Equity accounted investments 50,544 12,737 236 (47,900) 15,617
Intangible assets and goodwill 1,841 540 1,534 (19) 3,896
Inventory and other assets 1,698 910 1,073 (26) 3,655
Forecast for new capital spending and top-down adjustment 2,934 2,934
Total assets 193,526 146,247 64,031 (70,337) 333,467

Liabilities

         
Borrowings 91,258 6,106 33,841 (18,483) 112,722
Other liabilities 29,516 53,968 8,029 (7,572) 83,941
Total liabilities 120,774 60,074 41,870 (26,055) 196,663
Total assets less total liabilities 72,752 86,173 22,161 (44,282) 136,804

Net worth

         
Taxpayers' funds 48,969 42,806 4,677 (48,776) 47,676
Reserves 23,783 43,341 11,464 4,791 83,379
Net worth attributable to minority interest 26 6,020 (297) 5,749
Total net worth 72,752 86,173 22,161 (44,282) 136,804

Forecast Statement of Segments (2021)

Statement of Financial Performance for the year ended 30 June 2021
  Core Crown
2021
Forecast
$m
Crown entities
2021
Forecast
$m
State-owned
Enterprises
2021
Forecast
$m
Inter-segment
eliminations
2021
Forecast
$m
Total Crown
2021
Forecast
$m

Revenue

         
Taxation revenue 92,985 (856) 92,129
Other sovereign revenue 1,749 5,953 (1,503) 6,199
Revenue from core Crown funding 29,484 102 (29,586)
Sales of goods and services 1,728 2,221 16,253 (585) 19,617
Interest revenue 1,137 1,051 1,135 (432) 2,891
Other revenue 2,360 3,234 1,052 (1,225) 5,421
Total revenue (excluding gains) 99,959 41,943 18,542 (34,187) 126,257

Expenses

         
Social assistance and official development assistance 31,173 31,173
Personnel expenses 7,030 13,864 3,268 (34) 24,128
Other operating expenses 45,250 22,764 12,878 (32,700) 48,192
Interest expenses 3,508 72 1,079 (548) 4,111
Insurance expenses 2 5,894 5 (2) 5,899
Forecast for future new spending and top-down adjustment 5,764 5,764
Total expenses (excluding losses) 92,727 42,594 17,230 (33,284) 119,267
Minority interest share of operating balance before gains/(losses) (14) (510) 38 (486)
Operating balance before gains/(losses) 7,232 (665) 802 (865) 6,504
Total gains/(losses) 3,271 335 39 (153) 3,492
Net surplus/(deficit) from associates and joint ventures 118 182 2 (1) 301
Operating balance 10,621 (148) 843 (1,019) 10,297

Expenses by functional classification

         
Social security and welfare 30,913 6,991 (608) 37,296
Health 17,213 14,563 (15,210) 16,566
Education 15,092 11,480 (10,640) 15,932
Transport and communications 2,813 3,145 8,273 (3,092) 11,139
Other 17,424 6,343 7,878 (3,186) 28,459
Finance costs 3,508 72 1,079 (548) 4,111
Forecast for future new spending and top-down adjustment 5,764 5,764
Total expenses (excluding losses) 92,727 42,594 17,230 (33,284) 119,267
Statement of Financial Position as at 30 June 2021
  Core Crown
2021
Forecast
$m
Crown entities
2021
Forecast
$m
State-owned
Enterprises
2021
Forecast
$m
Inter-segment
eliminations
2021
Forecast
$m
Total Crown
2021
Forecast
$m

Assets

         
Cash and cash equivalents 13,001 2,252 1,407 (405) 16,255
Receivables 16,186 5,877 1,949 (2,024) 21,988
Other financial assets 65,798 44,825 26,455 (20,434) 116,644
Property, plant and equipment 44,114 81,921 32,603 158,638
Equity accounted investments 52,404 12,933 225 (49,391) 16,171
Intangible assets and goodwill 1,784 515 1,532 (19) 3,812
Inventory and other assets 1,691 902 1,091 (27) 3,657
Forecast for new capital spending and top-down adjustment 5,579 5,579
Total assets 200,557 149,225 65,262 (72,300) 342,744

Liabilities

         
Borrowings 87,338 6,138 35,083 (18,954) 109,605
Other liabilities 29,804 55,538 8,094 (7,410) 86,026
Total liabilities 117,142 61,676 43,177 (26,364) 195,631
Total assets less total liabilities 83,415 87,549 22,085 (45,936) 147,113

Net worth

         
Taxpayers' funds 59,590 44,394 4,674 (50,433) 58,225
Reserves 23,825 43,155 11,464 4,789 83,233
Net worth attributable to minority interest 5,947 (292) 5,655
Total net worth 83,415 87,549 22,085 (45,936) 147,113

Forecast Statement of Segments (2022)

Statement of Financial Performance for the year ended 30 June 2022
  Core Crown
2022
Forecast
$m
Crown entities
2022
Forecast
$m
State-owned
Enterprises
2022
Forecast
$m
Inter-segment
eliminations
2022
Forecast
$m
Total Crown
2022
Forecast
$m

Revenue

         
Taxation revenue 97,815 (835) 96,980
Other sovereign revenue 1,789 6,196 (1,503) 6,482
Revenue from core Crown funding 29,016 97 (29,113)
Sales of goods and services 1,744 2,240 16,714 (605) 20,093
Interest revenue 1,131 1,052 1,171 (431) 2,923
Other revenue 2,475 3,206 1,099 (1,193) 5,587
Total revenue (excluding gains) 104,954 41,710 19,081 (33,680) 132,065

Expenses

         
Social assistance and official development assistance 32,498 32,498
Personnel expenses 7,042 13,795 3,387 (36) 24,188
Other operating expenses 44,950 22,457 13,232 (32,282) 48,357
Interest expenses 3,304 78 1,087 (554) 3,915
Insurance expenses 1 6,293 5 6,299
Forecast for future new spending and top-down adjustment 7,509 7,509
Total expenses (excluding losses) 95,304 42,623 17,711 (32,872) 122,766
Minority interest share of operating balance before gains/(losses) (531) 25 (506)
Operating balance before gains/(losses) 9,650 (913) 839 (783) 8,793
Total gains/(losses) 3,678 385 29 (145) 3,947
Net surplus/(deficit) from associates and joint ventures 120 188 5 (4) 309
Operating balance 13,448 (340) 873 (932) 13,049

Expenses by functional classification

         
Social security and welfare 32,181 7,423 (627) 38,977
Health 17,334 14,544 (15,211) 16,667
Education 15,151 11,409 (10,565) 15,995
Transport and communications 2,423 2,824 8,540 (2,727) 11,060
Other 17,402 6,345 8,084 (3,188) 28,643
Finance costs 3,304 78 1,087 (554) 3,915
Forecast for future new spending and top-down adjustment 7,509 7,509
Total expenses (excluding losses) 95,304 42,623 17,711 (32,872) 122,766
Statement of Financial Position as at 30 June 2022
  Core Crown
2022
Forecast
$m
Crown entities
2022
Forecast
$m
State-owned
Enterprises
2022
Forecast
$m
Inter-segment
eliminations
2022
Forecast
$m
Total Crown
2022
Forecast
$m

Assets

         
Cash and cash equivalents 13,206 2,118 1,545 (386) 16,483
Receivables 16,232 6,036 1,986 (2,034) 22,220
Other financial assets 80,599 46,101 27,573 (20,788) 133,485
Property, plant and equipment 44,260 83,479 32,539 160,278
Equity accounted investments 54,248 13,121 215 (50,890) 16,694
Intangible assets and goodwill 1,725 495 1,515 (19) 3,716
Inventory and other assets 1,683 908 1,105 (25) 3,671
Forecast for new capital spending and top-down adjustment 8,249 8,249
Total assets 220,202 152,258 66,478 (74,142) 364,796

Liabilities

         
Borrowings 94,643 6,032 36,103 (19,275) 117,503
Other liabilities 28,652 57,477 8,282 (7,372) 87,039
Total liabilities 123,295 63,509 44,385 (26,647) 204,542
Total assets less total liabilities 96,907 88,749 22,093 (47,495) 160,254

Net worth

         
Taxpayers' funds 73,038 45,770 4,698 (51,999) 71,507
Reserves 23,869 42,979 11,501 4,791 83,140
Net worth attributable to minority interest 5,894 (287) 5,607
Total net worth 96,907 88,749 22,093 (47,495) 160,254

Core Crown Expense Tables

($millions) 2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Social security and welfare 22,459 23,026 23,523 24,081 25,294 26,191 28,729 29,792 30,913 32,181
Health 14,498 14,898 15,058 15,626 16,223 17,184 17,250 17,257 17,213 17,334
Education 12,504 12,300 12,879 13,158 13,281 14,397 14,641 14,807 15,092 15,151
Core government services 4,294 4,502 4,134 4,102 3,957 5,477 4,727 4,657 4,438 4,416
Law and order 3,394 3,463 3,515 3,648 3,882 4,146 4,170 4,208 4,244 4,265
Transport and communications 2,255 2,237 2,291 2,178 2,176 2,486 2,350 2,280 2,813 2,423
Economic and industrial services 1,978 2,058 2,228 2,107 2,544 2,941 2,817 2,804 2,789 2,730
Defence 1,804 1,811 1,961 2,026 2,146 2,318 2,363 2,373 2,383 2,389
Heritage, culture and recreation 804 842 778 787 850 879 880 840 811 824
Primary services 659 676 667 749 644 792 706 678 648 648
Housing and community development 283 347 320 558 539 662 622 548 515 511
Environmental protection 530 533 723 587 871 1,291 989 1,022 1,043 1,043
GSF pension expenses 278 282 358 271 217 150 149 179 211 234
Other 603 579 145 461 181 412 484 342 342 342
Finance costs 3,619 3,620 3,783 3,590 3,534 3,513 3,460 3,452 3,508 3,304
Forecast new operating spending  ..   ..   ..   ..   ..  179 2,721 4,496 6,339 8,084
Top-down expense adjustment  ..   ..   ..   ..   ..  ( 1,365) ( 750) ( 575) ( 575) ( 575)
Core Crown expenses 69,962 71,174 72,363 73,929 76,339 81,653 86,308 89,160 92,727 95,304
  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) 2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Welfare benefits (see below) 20,789 21,187 21,680 22,441 23,339 24,054 26,535 27,586 28,636 29,909
Social rehabilitation and compensation 107 173 142 151 220 241 249 260 279 279
Departmental expenses 1,168 1,204 1,319 1,339 1,417 1,646 1,588 1,556 1,553 1,552
Child support impairment ..  ..  ..  ..  ..  ..  ..  ..  ..  .. 
Other non-departmental expenses1 395 462 382 150 318 250 357 390 445 441
Social security and welfare expenses 22,459 23,026 23,523 24,081 25,294 26,191 28,729 29,792 30,913 32,181
  1. 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) 2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
New Zealand Superannuation 10,235 10,913 11,591 12,267 13,043 13,670 14,436 15,354 16,222 17,223
Jobseeker Support and Emergency Benefit1 ..  1,691 1,684 1,671 1,697 1,680 1,663 1,595 1,564 1,580
Supported living payment1 ..  1,422 1,515 1,523 1,533 1,542 1,559 1,575 1,585 1,599
Sole parent support1 ..  1,222 1,186 1,153 1,159 1,095 1,081 1,101 1,113 1,139
Domestic Purposes Benefit1 1,738 63 ..  ..  ..  ..  ..  ..  ..  .. 
Invalid's Benefit1 1,330 52 ..  ..  ..  ..  ..  ..  ..  .. 
Sickness Benefit1 782 29 ..  ..  ..  ..  ..  ..  ..  .. 
Unemployment Benefit1 812 29 ..  ..  ..  ..  ..  ..  ..  .. 
Family Tax Credit 2,018 1,965 1,854 1,793 1,723 1,716 2,628 2,552 2,523 2,534
Other working for families tax credits 575 567 549 559 596 585 582 577 572 572
Accommodation Assistance 1,177 1,146 1,129 1,164 1,127 1,208 1,493 1,487 1,484 1,499
Income-Related Rents 611 660 703 755 815 903 990 1,049 1,107 1,166
Disability Assistance 384 379 377 377 377 378 380 382 383 386
Benefits paid in Australia 22 19 15 40 ..  ..  ..  ..  ..  .. 
Winter energy ..  ..  ..  ..  ..  ..  443 448 455 465
Best start ..  ..  ..  ..  ..  ..  80 231 373 451
Paid Parental Leave 165 165 180 217 274 286 359 373 448 467
Childcare Assistance 186 186 183 182 199 199 202 209 213 218
Veterans Support Entitlement2 123 119 115 107 98 92 86 81 75 71
Veteran's Pension 171 165 178 186 175 163 152 144 135 125
Other benefits 460 395 421 447 523 537 401 428 384 414
Benefit expenses 20,789 21,187 21,680 22,441 23,339 24,054 26,535 27,586 28,636 29,909

Source: The Treasury

 
Beneficiary numbers
(Thousands)
2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
New Zealand Superannuation 612 640 665 691 717 742 768 795 823 851
Jobseeker Support and Emergency Benefit1 ..  138 133 130 131 129 125 117 113 111
Supported living payment1 ..  96 98 98 97 96 96 95 94 93
Sole parent support1 ..  78 72 67 64 59 57 57 57 57
Domestic Purposes Benefit1 109 ..  ..  ..  ..  ..  ..  ..  ..  .. 
Invalid's Benefit1 87 ..  ..  ..  ..  ..  ..  ..  ..  .. 
Sickness Benefit1 60 ..  ..  ..  ..  ..  ..  ..  ..  .. 
Unemployment Benefit1 67 ..  ..  ..  ..  ..  ..  ..  ..  .. 
Accommodation Supplement 305 297 292 292 290 289 295 290 287 287
  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.

Source: Ministry of Social Development

Table 6.3 - Health expenses
($millions) 2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Departmental outputs 171 183 190 188 192 201 193 192 192 193
Health services purchasing (see below) 13,348 13,648 13,937 14,361 14,855 15,442 15,396 15,398 15,393 15,393
Other non-departmental outputs 234 330 312 356 365 816 867 901 879 999
Health payments to ACC 715 694 587 694 697 698 766 739 720 720
Other expenses 30 43 32 27 114 27 28 27 29 29
Health expenses 14,498 14,898 15,058 15,626 16,223 17,184 17,250 17,257 17,213 17,334

Source: The Treasury

Table 6.4 - Health services purchasing
($millions) 2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Payments to District Health Boards 11,946 12,165 12,414 12,822 13,281 13,823 13,803 13,804 13,799 13,799
National disability support services 1,028 1,087 1,126 1,167 1,188 1,205 1,205 1,205 1,205 1,205
Public health services purchasing 374 396 397 372 386 414 388 389 389 389
Health services purchasing 13,348 13,648 13,937 14,361 14,855 15,442 15,396 15,398 15,393 15,393

Source: The Treasury

Table 6.5 - Education expenses
($millions) 2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Early childhood education 1,436 1,545 1,644 1,735 1,805 1,877 1,982 2,090 2,168 2,257
Primary and secondary schools (see below) 5,590 5,550 5,773 6,044 6,116 6,490 6,548 6,530 6,684 6,602
Tertiary funding (see below)1 4,370 4,027 4,272 4,235 4,051 4,616 4,725 4,812 4,876 4,930
Departmental expenses 1,039 1,107 1,129 1,112 1,190 1,311 1,280 1,250 1,247 1,247
Other education expenses 69 71 61 32 119 103 106 125 117 115
Education expenses 12,504 12,300 12,879 13,158 13,281 14,397 14,641 14,807 15,092 15,151
  1. From 2018, tertiary funding includes the tertiary education package.

Source: The Treasury

 
Number of places provided1 2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Early childhood education 174,853 185,336 195,817 205,714 211,752 223,358 235,366 246,342 256,565 265,249
  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: The Ministry of Education

Table 6.6 - Primary and secondary schools

($millions)

2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Primary 2,845 2,812 2,920 3,033 3,091 3,294 3,333 3,320 3,400 3,345
Secondary 2,148 2,146 2,229 2,329 2,336 2,470 2,496 2,497 2,568 2,552
School transport 175 177 186 185 186 195 190 190 190 190
Special needs support 332 322 336 396 410 425 423 417 424 417
Professional development 84 87 98 96 88 100 100 100 96 92
Schooling improvement 6 6 4 5 5 6 6 6 6 6
Primary and secondary education expenses 5,590 5,550 5,773 6,044 6,116 6,490 6,548 6,530 6,684 6,602

Source: The Treasury

 
Number of places provided1 2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Primary 493,025 497,765 507,132 517,782 525,673 535,497 540,854 541,366 539,210 536,837
Secondary 267,627 266,734 265,557 264,189 271,635 272,278 275,028 278,658 285,685 290,761
  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: The Ministry of Education

Table 6.7 - Tertiary funding
($millions) 2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Tuition1 2,322 2,383 2,406 2,463 2,466 2,759 2,727 2,739 2,761 2,771
Other tertiary funding 432 463 484 487 520 577 575 574 573 573
Student allowances1 596 539 511 486 465 513 592 583 606 626
Student loans1 1,020 642 871 799 600 767 831 916 936 960
Tertiary education expenses 4,370 4,027 4,272 4,235 4,051 4,616 4,725 4,812 4,876 4,930
  1. From 2018, tertiary funding includes the tertiary education package.

Source: The Treasury

 
Number of places provided1 2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Actual delivered places1 241,796 239,086 233,132 231,413            
Estimated funded places (excluding policy change)         234,874 234,993 230,521 230,692 230,850 230,975
Estimated funded (including policy change)2         234,874 234,993 231,322 233,482 236,671 236,671
  1. Tertiary places are the number of equivalent full time students (EFTS) 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.
  2. This line shows the estimated volume of EFTS to be funded following Cabinet decisions to make tertiary education and training fees-free from the start of 2018 and to increase weekly student allowance and student loan living cost payments by $50.

Source: Tertiary Education Commission

Table 6.8 - Core government services expenses
($millions) 2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Official development assistance 437 533 513 534 520 647 583 586 586 586
Indemnity and guarantee expenses 27 29 38 30 22 18 16 16 16 16
Departmental expenses5 1,576 1,635 1,740 1,845 1,835 2,346 2,072 1,984 1,844 1,833
Non-departmental expenses1,2,3,4 330 689 481 379 511 830 688 761 668 651
Tax receivable write-down and impairments 925 1,069 873 680 493 800 800 800 800 800
Science expenses 115 118 121 118 91 95 103 111 111 111
Other expenses1 884 429 368 516 485 741 465 399 413 419
Core government service expenses 4,294 4,502 4,134 4,102 3,957 5,477 4,727 4,657 4,438 4,416
  1. Non-departmental expenses and other expenses include costs associated with the Canterbury earthquakes.
  2. From 2017 onwards, biological research has been reclassified from Primary services to non-departmental expenses within core government services.
  3. From 2017 onwards, some investment and research expenditure has been reclassified from core government service to economic and industrial services.
  4. The 2018 forecast includes the concessionary element of the Housing Infrastructure Fund loans.
  5. Departmental expenses includes costs relating to the Inland Revenue Business Transformation project.

Source: The Treasury

Table 6.9 - Law and order expenses
($millions) 2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Police 1,408 1,416 1,456 1,498 1,539 1,636 1,658 1,674 1,699 1,699
Ministry of Justice 404 433 451 468 479 514 506 500 507 507
Department of Corrections 972 1,001 1,024 1,068 1,145 1,268 1,273 1,281 1,272 1,287
NZ Customs Service 140 150 161 153 171 180 175 178 180 183
Other departments 98 86 100 83 121 136 144 146 146 147
Departmental expenses 3,022 3,086 3,192 3,270 3,455 3,734 3,756 3,779 3,804 3,823
Non-departmental outputs 317 327 320 359 397 391 391 405 415 418
Other expenses 55 50 3 19 30 21 23 24 25 24
Law and order expenses 3,394 3,463 3,515 3,648 3,882 4,146 4,170 4,208 4,244 4,265

Source: The Treasury

Table 6.10 - Transport and communication expenses
($millions) 2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
New Zealand Transport Agency 1,819 1,880 1,992 1,982 1,888 2,159 2,114 2,050 2,589 2,239
Departmental outputs 40 45 43 45 52 58 58 57 57 57
Other non-departmental expenses 213 227 114 106 168 212 140 136 130 90
Rail funding 153 56 93 3 3 3 3 3 3 3
Other expenses 30 29 49 42 65 54 35 34 34 34
Transport and communication expenses 2,255 2,237 2,291 2,178 2,176 2,486 2,350 2,280 2,813 2,423

Source: The Treasury

Table 6.11 - Economic and industrial services expenses
($millions) 2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Departmental outputs 350 372 391 389 465 443 424 412 404 404
Employment initiatives1 192 141 75 3 3 4 4 4 4 4
Non-departmental outputs2 618 660 742 798 1,085 1,284 1,204 1,235 1,207 1,112
KiwiSaver (includes housing deposit subsidy) 740 828 888 763 743 814 847 895 940 980
Other expenses 78 57 132 154 248 396 338 258 234 230
Economic and industrial services expenses 1,978 2,058 2,228 2,107 2,544 2,941 2,817 2,804 2,789 2,730
  1. From 2016 some of the employment initiatives spending has been reclassified to other non-departmental expenses in housing and community development expenses.
  2. From 2017 onwards, spending on new investment and research fund initiatives is included in non-departmental outputs, this has been reclassified from core government services.

Source: The Treasury

Table 6.12 - Defence expenses
($millions) 2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
NZDF core expenses 1,747 1,768 1,879 1,986 2,084 2,204 2,255 2,258 2,275 2,275
Other expenses 57 43 82 40 62 114 108 115 108 114
Defence expenses 1,804 1,811 1,961 2,026 2,146 2,318 2,363 2,373 2,383 2,389

Source: The Treasury

Table 6.13 - Heritage, culture and recreation expenses
($millions) 2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Departmental outputs 270 286 280 274 282 312 309 300 285 284
Non-departmental outputs 442 471 468 477 512 503 503 500 500 512
Other expenses 92 85 30 36 56 64 68 40 26 28
Heritage, culture and recreation expenses 804 842 778 787 850 879 880 840 811 824

Source: The Treasury

Table 6.14 - Primary service expenses
($millions) 2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Departmental expenses 347 365 384 424 458 530 478 476 476 474
Non-departmental outputs 137 135 114 100 92 126 113 110 106 106
Biological research1 105 92 91 95 ..  ..  ..  ..  ..  .. 
Other expenses 70 84 78 130 94 136 115 92 66 68
Primary service expenses 659 676 667 749 644 792 706 678 648 648
  1. From 2017 onwards, biological research has been reclassified from Primary services to non-departmental expenses within core government services.

Source: The Treasury

Table 6.15 - Housing and community development expenses
($millions) 2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Financial assistance package1 (60) ..  ..  ..  ..  ..  ..  ..  ..  .. 
Housing subsidies 5 5 5 5 5 1 1 1 1 1
Community Services2 ..  ..  ..  189 189 191 182 179 180 180
Departmental outputs 89 100 113 171 187 169 146 141 138 135
Other non-departmental expenses 117 138 117 114 127 269 268 202 174 173
Warm up New Zealand 76 49 37 22 ..  ..  ..  ..  ..  .. 
Other expenses 56 55 48 57 31 32 25 25 22 22
Housing and community development expenses 283 347 320 558 539 662 622 548 515 511
  1. Financial assistance package for 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) 2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Emissions Trading Scheme 55 46 133 163 295 707 469 491 493 493
Departmental outputs 335 362 360 383 404 430 405 411 413 413
Non-departmental outputs 88 48 41 1 64 97 69 74 91 91
Other expenses 52 77 189 40 108 57 46 46 46 46
Environmental protection expenses 530 533 723 587 871 1,291 989 1,022 1,043 1,043

Source: The Treasury

Glossary of Terms

Accruals basis of accounting

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

Appropriations

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

Baselines

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

Commercial portfolio

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

Consumers Price Index (CPI)

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

Contingent assets

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

Contingent liabilities

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

Core Crown

A reporting segment consisting of the Crown, departments, Offices of Parliament, the NZS Fund and the Reserve Bank. For a list of all entities included in this segment, refer to the Government Reporting Entity (pages 99 to 102).

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 revised them in November 2015 and October 2016. From 1 January 2018, investor loans with a LVR of more than 65% can make up no more than 5% of a bank's total new lending within this category. Non-investor loans with an LVR of more than 80% can make up no more than 15% of a bank's total new 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.

Multi-factor productivity

Multi-factor productivity (MFP) relates a change in output to several types of inputs, typically capital and labour. MFP is often measured residually, as that change in output that cannot be accounted for by the change in combined inputs.

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.

Real unit labour costs

Real unit labour costs (ULC) show how much output an economy receives relative to real wages (wages adjusted for inflation), or labour cost per unit of output. ULCs can be calculated as the ratio of real labour compensation to real GDP. It is also the equivalent of the ratio between labour compensation per labour input (per hour or per employee) worked and labour productivity.

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 102.

Tradable/non-tradable output

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

Trade-weighted index (TWI)

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

Votes

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

Year ended

Graphs and tables within this document use different expressions of the timeframe. While some tables may refer to the end of the tax year (31 March), others will refer to the end of the Government's financial year (30 June). For example, unless otherwise stated references to 2016/17 or 2017 will mean the end of the financial year.

Time Series of Fiscal and Economic Indicators

Fiscal Indicators

June years 2008
 Actual
2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast

$millions

                             

Revenue and expenses

                             
Core Crown tax revenue 56,747 54,681 50,744 51,557 55,081 58,651 61,563 66,636 70,445 75,644 78,172 82,817 87,811 92,985 97,815
Core Crown revenue 61,575 59,191 55,757 57,199 60,428 63,805 67,093 72,213 76,121 81,782 84,670 89,457 94,626 99,959 104,954
Core Crown expenses 56,753 63,711 63,554 70,099 68,939 69,962 71,174 72,363 73,929 76,339 81,653 86,308 89,160 92,727 95,304

Surpluses

                             
Total Crown OBEGAL 5,637 (3,893) (6,315) (18,396) (9,240) (4,414) (2,802) 414 1,831 4,069 2,541 2,828 4,979 6,504 8,793
Total Crown operating balance 2,384 (10,505) (4,509) (13,360) (14,897) 6,925 2,939 5,771 (5,369) 12,317 5,916 5,839 8,451 10,297 13,049

Cash position

                             
Core Crown residual cash 2,057 (8,639) (9,000) (13,343) (10,644) (5,742) (4,109) (1,827) (1,322) 2,574 (2,647) (4,657) (2,552) 345 2,347

Debt

                             
Gross debt1 31,390 43,356 53,591 72,420 79,635 77,984 81,956 86,125 86,928 87,141 84,524 83,554 83,304 79,381 86,684
Gross debt incl RB settlement cash and bank bills 37,745 50,973 58,891 77,290 84,168 84,286 88,468 93,156 93,283 92,620 91,343 90,373 90,123 86,200 93,503
Net core Crown debt (incl NZS Fund)2 (2,676) 5,633 12,549 23,969 33,475 34,428 34,174 30,862 32,102 23,619 24,284 25,805 24,067 18,437 10,233
Net core Crown debt2 10,258 17,119 26,738 40,128 50,671 55,835 59,931 60,631 61,880 59,480 62,114 66,827 69,404 69,030 66,763

Net worth

                             
Total Crown net worth 105,514 99,515 94,988 80,887 59,780 70,011 80,697 98,236 95,521 116,472 122,448 128,327 136,804 147,113 160,254
Total net worth attributable to the Crown 105,132 99,068 94,586 80,579 59,348 68,071 75,486 86,454 89,366 110,532 116,568 122,512 131,055 141,458 154,647
Nominal expenditure GDP (revised actuals) 189,001 189,500 196,735 205,819 215,109 218,792 236,731 245,094 257,353 272,766 286,391 301,430 316,488 331,627 345,650

% GDP

                             

Revenue and expenses

                             
Core Crown tax revenue 30.0 28.9 25.8 25.0 25.6 26.8 26.0 27.2 27.4 27.7 27.3 27.5 27.7 28.0 28.3
Core Crown revenue 32.6 31.2 28.3 27.8 28.1 29.2 28.3 29.5 29.6 30.0 29.6 29.7 29.9 30.1 30.4
Core Crown expenses 30.0 33.6 32.3 34.1 32.0 32.0 30.1 29.5 28.7 28.0 28.5 28.6 28.2 28.0 27.6

Surpluses

                             
Total Crown OBEGAL 3.0 (2.1) (3.2) (8.9) (4.3) (2.0) (1.2) 0.2 0.7 1.5 0.9 0.9 1.6 2.0 2.5
Total Crown operating balance 1.3 (5.5) (2.3) (6.5) (6.9) 3.2 1.2 2.4 (2.1) 4.5 2.1 1.9 2.7 3.1 3.8

Cash position

                             
Core Crown residual cash 1.1 (4.6) (4.6) (6.5) (4.9) (2.6) (1.7) (0.7) (0.5) 0.9 (0.9) (1.5) (0.8) 0.1 0.7

Debt

                             
Gross debt1 16.6 22.9 27.2 35.2 37.0 35.6 34.6 35.1 33.8 31.9 29.5 27.7 26.3 23.9 25.1
Gross debt incl RB settlement cash and bank bills 20.0 26.9 29.9 37.6 39.1 38.5 37.4 38.0 36.2 34.0 31.9 30.0 28.5 26.0 27.1
Net core Crown debt (incl NZS Fund)2 (1.4) 3.0 6.4 11.6 15.6 15.7 14.4 12.6 12.5 8.7 8.5 8.6 7.6 5.6 3.0
Net core Crown debt2 5.4 9.0 13.6 19.5 23.6 25.5 25.3 24.7 24.0 21.8 21.7 22.2 21.9 20.8 19.3

Net worth

                             
Total Crown net worth 55.8 52.5 48.3 39.3 27.8 32.0 34.1 40.1 37.1 42.7 42.8 42.6 43.2 44.4 46.4
Total net worth attributable to the Crown 55.6 52.3 48.1 39.2 27.6 31.1 31.9 35.3 34.7 40.5 40.7 40.6 41.4 42.7 44.7
  1. Excludes Reserve Bank settlement cash and bank bills.
  2. Excludes advances.

Economic Indicators

June Years
Annual average % change
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
Private consumption 2.9 -1.0 2.3 2.0 3.5 2.4 3.3 3.1 3.2 4.7 3.0 3.5 3.1 2.6 2.2
Public consumption 4.3 3.3 -0.4 2.5 0.7 0.0 2.9 3.1 1.8 3.4 2.8 1.9 1.0 1.0 0.7
TOTAL CONSUMPTION 3.2 0.1 1.6 2.2 2.8 1.8 3.2 3.1 2.9 4.4 2.9 3.1 2.6 2.2 1.9
Residential investment                 -3.8 -22.0 -2.5 -3.1 10.2 18.0 13.6 5.6 6.3 6.3 -1.5 3.0 6.2 8.0 4.5
Business investment                  10.3 -8.6 -8.0 8.2 6.0 0.8 8.7 5.2 2.4 3.8 6.7 5.5 6.0 5.1 4.2
TOTAL INVESTMENT 6.5 -12.0 -6.8 5.6 6.8 4.7 10.0 5.3 3.5 4.6 4.1 4.9 6.0 5.8 4.3
Stock change (contribution to growth)  0.9 -1.4 0.9 -0.1 0.1 -0.3 0.4 -0.1 -0.4 0.1 -0.7 0.2 0.2 0.3 0.3
GROSS NATIONAL EXPENDITURE 4.8 -4.2 0.7 2.7 3.9 2.2 4.6 3.4 2.6 4.4 2.9 4.1 3.8 3.4 2.7
Exports 3.5 -2.9 4.8 2.2 2.1 3.0 0.1 5.8 5.0 0.0 3.4 2.7 2.8 2.1 1.5
Imports 11.6 -12.0 -1.0 11.4 4.4 2.6 9.0 6.6 1.0 6.0 2.7 3.3 5.0 4.3 3.3
EXPENDITURE ON GDP 2.4 -1.3 2.7 0.2 3.3 2.3 2.1 3.2 3.7 2.7 3.0 3.6 3.0 2.6 2.1
GDP (production measure) 2.2 -1.7 0.8 1.1 2.6 2.2 2.5 3.3 2.7 2.7 2.9 3.6 3.0 2.6 2.1
 - annual % change 0.5 -2.0 2.6 0.9 2.5 2.6 2.7 2.4 3.5 2.5 3.3 3.4 2.9 2.5 1.9
Real GDP per capita 1.3 -2.6 -0.3 0.2 2.0 1.6 1.3 1.6 0.7 0.6 0.9 1.7 1.4 1.4 1.1
Nominal GDP (expenditure basis) 7.7 0.3 3.8 4.6 4.5 1.7 8.0 2.9 4.2 5.8 5.0 5.3 5.0 4.8 4.2
GDP deflator 5.2 1.6 1.1 4.4 1.2 -0.6 5.7 -0.3 0.5 3.1 1.9 1.6 2.0 2.1 2.1
Output gap (% deviation, June year average) 2.1 -0.9 -1.4 -1.9 -1.4 -1.3 -1.3 -0.5 -0.4 -0.4 -0.3 0.6 0.8 0.8 0.4
Employment 1.3 -0.2 -1.3 1.5 0.9 0.2 3.2 3.2 2.3 5.2 3.3 1.9 1.5 1.3 0.9
Unemployment (% June quarter s.a.)           3.8 5.7 6.5 6.0 6.3 5.9 5.2 5.5 5.0 4.8 4.6 4.4 4.2 4.0 4.1
Wages (average ordinary-time hourly, ann % change)          5.4 4.7 1.1 3.0 2.9 2.1 2.5 2.7 2.1 1.6 2.8 3.3 3.2 3.4 3.5
CPI inflation (ann % change)       4.0 1.9 1.7 5.3 1.0 0.7 1.6 0.4 0.4 1.7 2.0 1.9 2.1 2.2 2.2
Merchandise terms of trade (SNA basis)        10.0 -4.3 -3.0 9.7 -1.7 -3.8 16.4 -4.7 -2.7 5.1 4.2 -0.9 0.4 0.3 0.1
House prices (ann % change) -4.4 -3.2 3.4 0.4 4.2 9.1 6.9 11.2 13.9 5.2 2.1 2.3 2.1 2.0 2.0
Current account balance - $billion            -13.4 -9.4 -3.5 -6.0 -7.7 -7.9 -6.0 -8.8 -6.8 -7.8 -5.9 -6.7 -8.4 -10.8 -13.3
Current account balance - % of GDP            -7.1 -4.9 -1.8 -2.9 -3.6 -3.6 -2.5 -3.6 -2.7 -2.9 -2.1 -2.3 -2.7 -3.3 -3.9
TWI (June quarter)                           73.0 62.3 68.6 70.8 72.4 76.3 81.5 76.2 73.6 76.5 73.8 73.8 73.8 73.8 73.8
90-day bank bill rate (June quarter)         8.8 2.9 2.9 2.7 2.6 2.6 3.4 3.5 2.4 2.0 2.0 2.4 3.6 4.1 4.2
10-year bond rate (June quarter)             6.4 5.6 5.7 5.3 3.7 3.5 4.4 3.6 2.7 2.9 3.0 3.4 3.9 4.2 4.3

Data for 2018 and subsequently are forecasts. Data for 2017 and prior years are those that were available when the forecasts were finalised.

Last updated: 
Wednesday, 28 March 2018