Previous forecasts are available from the Archive of Economic and Fiscal Updates.

How the Pre-election Update is organised

The 2008 Pre-election Update sets out the Treasury’s latest economic and fiscal forecasts for the current year and the next four years. The document is organised as follows:

  • A Statement of Responsibility from the Secretary to the Treasury and the Minister of Finance is included on page 1.
  • A Ministerial Statement from the Minister of Finance is provided on page 3.
  • The Executive Summary (page 5) provides a short summary of the economic and fiscal forecasts.
  • The Economic and Tax Outlook chapter (page 11) sets out the Treasury's economic and tax forecasts, including forecasts of major economic aggregates (eg, output, inflation, employment and the current account), and a statement of significant assumptions.
  • The Fiscal Outlook chapter (page 21) sets out the Treasury's fiscal forecasts, including forecasts of revenue and expenses, operating results, the cash position, debt and the NZS Fund. It also contains projections of key fiscal indicators for the ten years following the forecast period. In previous Pre-election Updates these ten-year projections, which by their nature are less precise than the forecasts, have been published separately on the Treasury website. They are now incorporated into the document to make this information easier to access and to provide a fuller picture.
  • The Risks and Scenarios chapter (page 49) describes some of the key risks to Treasury's central economic forecasts, and sets out two alternative scenarios for how the economy might develop.
  • The Specific Fiscal Risks chapter (page 57) sets out material risks and contingent liabilities that could have an impact on the fiscal forecasts if decisions being considered by ministers are taken, or if particular circumstances eventuate. This chapter also discloses commitments that have been made against future budget allowances.
  • The Generally Accepted Accounting Practice (GAAP) Series Tables chapter (page 83) provides a set of forecast financial statements, and a statement of accounting policies and assumptions.
  • The Core Crown Expense Tables chapter (page 113) provides information on core Crown expenses broken down into functional classifications; a glossary of terms; and a time series of fiscal and economic indicators.

Finalisation Dates

The dates on which particular elements of this Pre-election Update were finalised are set out below.

Economic and fiscal forecasts - finalisation dates
Text finalised 26 September
Economic data 28 August
Economic forecasts (refer Chapter 1) 28 August
Tax revenue forecasts 4 September
Fiscal forecasts (refer Chapter 2), including: 17 September
  • Government decisions and circumstances
17 September
  • Actual asset revaluations
30 June
  • Foreign exchange rates
30 June
Specific fiscal risks (refer Chapter 4) 23 September
Contingent liabilities and commitments (refer Chapter 4) 30 June

Between the finalisation of the economic forecasts on 28 August and the finalisation of the text of the Pre-election Update on 26 September, a number of developments have taken place, including:

  • The international financial crisis has continued to develop, with the US government taking control of Fannie Mae and Freddie Mac; US investment bank Lehman Brothers filing for bankruptcy protection; retail brokerage Merrill Lynch being bought by Bank of America; the US Federal Reserve announcing a rescue package for insurance company AIG; and the US Treasury developing a comprehensive plan to purchase “troubled assets” in order to stem further financial collapse.
  • On 11 September the Reserve Bank of New Zealand cut the official cash rate by 50 basis points to 7.5%.
  • The price of oil (West Texas Intermediate) fell to a low of US$91/barrel on 16 September, but increased again to US$111 on 25 September, just below its close of US$116 on 28 August.
  • The NZ dollar fell to 61.9 on the Trade Weighted Index on 16 September but strengthened again to 64.2 on 26 September.

These international financial crisis developments, while not leading us to change our overall view of the economy, have increased the risks of a sharper downward correction.

Statement of Responsibility

On the basis of the economic and fiscal information available to it, the Treasury has used its best professional judgement in supplying the Minister of Finance with this Economic and Fiscal Update. The Update incorporates the fiscal and economic implications both of Government decisions and circumstances as at 17 September 2008 that were communicated to me, and of other economic and fiscal information available to the Treasury in accordance with the provisions of the Public Finance Act 1989.

John Whitehead
Secretary to the Treasury

24 September 2008

 

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

To enable the Treasury to prepare this Update, I have ensured that the Secretary to the Treasury has been advised of all Government decisions and other circumstances as at 17 September 2008 of which I was aware and that had material economic or fiscal implications.

Hon Dr Michael Cullen
Minister of Finance

24 September 2008

Ministerial Statement

In the time between the publication of Budget 2008 and the preparation of this Pre-election Economic and Fiscal Update there have been a series of significant events in world financial markets. The fallout on New Zealand's housing market and on business and household incomes arising from higher international credit costs has compounded the effects of a weakening domestic economy. This has resulted in a Pre-EFU noticeably weaker than at Budget time.

Nine years of prudent fiscal management and sustained economic growth means that New Zealand is well placed to deal with these challenging times. Despite calls to spend the surpluses in recent years this government has adhered to our fiscal objectives and has reduced Gross Sovereign Issued Debt (GSID) so that we can meet the economic challenges ahead, while still delivering tax cuts and support for families.

While the international position has worsened over recent months New Zealand has been in what is forecast to be a short and relatively shallow recession. Treasury is forecasting a return to positive growth in the last quarter of 2008. These forecasts, however, do highlight the importance of fiscal restraint during favourable economic times to enable us to have room to respond in less favourable times.

New Zealand is well placed to manage the external shock that our economy has endured. So while today's report card highlights how critically important it was to utilise more favourable international and domestic economic times to save for a rainy day, it also tells us that the rainy day has arrived and that the Crown's fiscal position has taken a big hit. Changes in the operating balance from the Budget forecasts are predominantly driven by the weaker economic outlook (reductions in revenue and associated finance costs).

The New Zealand economy has come a long way since 1999:

  • the 1999 Pre-EFU forecast an unemployment rate of 7.0% in the March 2000 quarter compared with this Pre-EFU forecast of 4.4% unemployment in the March 2009 quarter
  • real gross domestic product (GDP) growth averaged 2.9% from 1990 to 1999 compared with 3.5% from 1999 to 2007
  • in 1999 net core Crown debt sat at 21.8% of GDP but this moved into a positive net financial asset position (including NZ Super Fund assets) since 2006, and
  • in 1999, GSID was above 35% of GDP but it has been brought down to below the government's medium-term target.

And we have achieved all this while enhancing social equality and while delivering significant gains for New Zealanders including:

  • the longest period of economic expansion since WWII
  • strong investment in New Zealand's infrastructure after the 1990s decade of neglect
  • lower primary health care costs
  • restoring and lifting entitlements in superannuation
  • tax relief for businesses, savers and families with children, and
  • personal tax cuts for all workers.

This Government is proud of what it has achieved during the past three terms. The New Zealand economy of 2008 is much stronger and more sustainable than that of 1999 and it is also fairer.

Executive Summary

The economic and fiscal outlook has deteriorated since the Budget Update

In the five months since the Budget Update was finalised, we have witnessed a number of significant domestic and international developments: in particular, the deepening of the international financial crisis, the slowing housing market, and growing pressure on households and businesses. These developments are key factors in our updated view of the economy and the government's finances set out in this Pre-election Update.

We are now expecting weaker economic growth over the next few years, resulting in slower growth in tax revenue and higher government expenditure. Combined with increases in the costs of some existing policies, these factors lead to sustained operating balance deficits and higher debt-to-GDP ratios.

The economic outlook is weaker …

Imbalances have built up during nearly a decade of sustained growth, including inflation pressures, an overvalued housing market, high household debt and a large current account deficit, with implications for interest rates and the exchange rate. With the economy slowing, these imbalances are starting to unwind - as are imbalances in the global economy - but there is a long way to go.

As expected in the Budget Update, the drought has had a significant negative influence on the economy, and was a chief factor in the recession in the first half of 2008 – reducing dairy production, hydro electricity generation and manufacturing output.

Figure 1 - Real GDP growth
Figure 1 - Real GDP growth.
Source:  Statistics New Zealand, The Treasury

Figure 1 shows a much weaker economic outlook than in the Budget Update, driven by a number of developments:

  • The domestic slow-down has been sharper than expected, with declines in consumption and residential investment.
  • Households and businesses have come under increasing cost pressures – electricity, interest rates, fuel and food – which are dampening private consumption and firm profitability. It will take time for these pressures to dissipate, though some relief in terms of oil prices and interest rates has emerged since the finalisation of our economic forecasts.
  • The housing market has weakened more quickly than expected. It will remain depressed over the next year as a result of high effective interest rates, low net migration flows and falling consumer confidence, which will affect private consumption and residential investment.
  • The international financial crisis has deepened and is having an adverse impact on global economic growth. New Zealand is expected to feel the effects of the financial crisis principally through the tighter availability and increased costs of credit, but also through a fall in business and consumer confidence, falling asset values and lower demand and prices for our exports.

While there are some positive factors for growth in the short term - eg, recovery from the drought and personal tax cuts boosting consumption - the factors above point to the recovery being gradual.

A more sustained pick-up in growth is forecast from mid-2009. We expect impetus to come particularly from the export sector, as primary export volumes increase and a lower exchange rate stimulates demand for manufactured products and services.

Table 1 - Major economic parameters
March years
(annual average % change)
2008/09
Forecast
2009/10
Forecast
2010/11
Forecast
2011/12
Forecast
2012/13
Forecast
Real GDP 0.1 1.8 3.3 3.4 3.1
Employment 0.3 (0.3) 0.4 1.3 1.8
Unemployment 4.4 5.1 5.1 4.8 4.6
Wages 5.5 4.3 4.0 3.8 3.5
Consumer prices 4.5 2.3 2.4 2.4 2.4

Note: Employment is on a full-time equivalent basis; unemployment is a percentage of the labour force, March quarter, seasonally adjusted; consumer price inflation is measured as an annual percentage change.

Source: The Treasury

… meaning lower tax revenue and higher government spending

The weaker economic growth that we are forecasting is reflected in reductions in our tax revenue forecasts. Compared with the Budget Update, we expect tax revenue to be on average around $900 million lower for each of the next three years.

  • The weak outlook for the household sector will have a direct impact through GST, which is forecast to grow by around 4% per annum over the next five years, compared with 7.5% over the six years to 2007.
  • With firms' margins under pressure and profitability low, underlying corporate income tax is forecast to decline by 3% in the 2009 June year, and growth is expected to be negligible in 2010 as accumulated tax losses offset profits.
  • A relatively robust forecast for wages over the next few years helps to keep underlying growth in PAYE up at around 5% per annum.

The largest single change in government spending in the Pre-election Update is an increase in the expected costs of benefits. Compared with the Budget Update, benefit expenses are around $500 million per annum higher, reflecting both an increase in numbers of beneficiaries as a result of the slowing economy, and the impact of higher inflation on the costs of indexing benefits.

The cost of some existing policies is higher …

The cost of some existing policies has increased since the Budget Update, particularly:

  • education spending is around $200 million per annum higher, driven by higher-than-expected take-up of the 20 hours free early childhood education initiative, and
  • KiwiSaver costs are higher, reaching an extra $280 million per annum by 2012, driven by higher-than-expected take-up rates.

… and debt servicing costs have increased

As a result of the various factors set out above, the government's debt outlook deteriorates. This leads to higher debt servicing costs, which are forecast to be around $500 million per annum higher.

These developments lead to a sustained period of operating balance deficits …

Figure 2 - OBEGAL excluding NZS Fund retained revenue
Figure 2 - OBEGAL excluding NZS Fund retained revenue.
Source:  The Treasury

As a result of the combination of weakening tax revenue and higher expenditure outlined above, we are forecasting the operating balance before gains and losses (OBEGAL) excluding New Zealand Superannuation (NZS) Fund retained revenue to move into a deficit of $31 million in the current year, which worsens to $3.2 billion by 2012/13. Projections beyond this do not return to surplus until 2017/18.

This contrasts with the position in the Budget Update, where we were expecting a track of modest surpluses through time.

Figures 2 to 4 show the Pre-election Update forecasts (solid lines) and projections (dotted lines) of key fiscal indicators.[1]

Figure 3 - GSID excluding Reserve Bank Settlement Cash
Figure 3 - GSID excluding Reserve Bank Settlement Cash.
Source:  The Treasury

… and larger cash deficits, leading to higher levels of debt

The deterioration in the operating outlook results in a worsening of the government's residual cash outlook. We are forecasting a cash deficit of $5.9 billion in 2008/09, growing to $7.3 billion in 2012/13.

Figure 4 - Net core Crown debt, net core Crown debt including NZS Fund assets
Figure 4 - Net core Crown debt, net core Crown debt including NZS Fund assets.
Source:  The Treasury

These larger cash deficits flow through into higher gross sovereign-issued debt (GSID) excluding Reserve Bank Settlement Cash. By 2012/13 we forecast GSID excluding Settlement Cash to rise to 24.3% of GDP.

Beyond 2012/13, we project GSID excluding Settlement Cash to rise to 30.1% of GDP in 2018/19 before falling to 27.7% of GDP in 2022/23.

The outlook for net debt has also weakened. We now forecast net core Crown debt excluding NZS Fund assets to rise to 13.2% of GDP by the end of the forecast period, and we project it to peak at 20.3% of GDP in 2018/19.

Figure 5 - Sensitivity of GSID projections to assumptions: changing the real GDP growth rate in the projection period
Figure 5 - Sensitivity of GSID projections to assumptions: changing the real GDP growth rate in the projection period.
Source:  The Treasury

The increase in net core Crown debt in the forecast period is more pronounced than the increase in GSID excluding Settlement Cash. This is because some of the cash deficits in the forecast period are financed by a reduction in financial assets which have built up in recent years. These financial assets are captured in net core Crown debt, but not in GSID excluding Settlement Cash.

Projections of debt are particularly sensitive to assumptions: small changes can compound and have large impacts in the future. For example, as illustrated in Figure 5, if real GDP growth from 2013/14 onwards was 3% rather than the assumed 2.5% because productivity was higher, by 2022/23 this would reduce GSID excluding Settlement Cash as a percentage of GDP by ten percentage points. This is because in the projections the higher productivity would lead to higher wages, GDP and tax revenue, but most government spending is assumed to continue to grow at 2% per annum.

Table 2 - Summary of fiscal aggregates
June years 2008/09
Forecast
2009/10
Forecast
2010/11
Forecast
2011/12
Forecast
2012/13
Forecast
Operating balance ($bn) 1.9 0.4 (0.1) (0.4) (0.4)
% of GDP 1.0 0.2 (0.0) (0.2) (0.2)
OBEGAL excl. NZS Fund ($bn) (0.0) (1.7) (2.4) (3.0) (3.2)
% of GDP (0.0) (0.9) (1.2) (1.4) (1.5)
Residual cash ($bn) (5.9) (5.3) (6.6) (6.8) (7.3)
% of GDP (3.2) (2.8) (3.3) (3.2) (3.3)
GSID excl. Settlement Cash (% of GDP) 17.4 18.0 21.9 23.1 24.3
Net core Crown debt (% of GDP) 2.8 5.3 8.0 10.6 13.2
Net core Crown debt incl. NZS Fund (% of GDP) (5.7) (4.5) (2.9) (1.5) (0.2)

Source: The Treasury

Further risks remain

These forecasts are subject to a number of risks, which are discussed in the Risks and Scenarios and Specific Fiscal Risks chapters. It is worth highlighting a couple of risks:

  • The international financial crisis has been moving rapidly, and considerable uncertainty remains. Developments subsequent to the finalisation of our economic forecasts on 28 August, while not leading us to change our overall view of the economy, have increased the risks of a sharper downward correction.
  • The funding allowances for future Budgets, particularly for Budget 2009, are expected to come under considerable pressure. (Details of charges against future Budgets are set out on page 28.) The fiscal forecasts assume that spending and revenue pressures can be managed within these funding allowances. If they cannot, the fiscal position would deteriorate further.

 

Notes

  • [1]Fiscal forecasts cover the years 2008/09 to 2012/13; they include decisions taken in recent Budgets (eg, the three tranches of personal tax cuts in 2008, 2010 and 2011), and allowances for new spending in future Budgets. Projections cover the subsequent 10 years (2013/14 to 2022/23); they extrapolate from the final year of the forecasts, based on assumptions about how particular elements will evolve. More detail on forecasts, projections and the assumptions used is included in the Fiscal Outlook chapter.

1 Economic and Tax Outlook

Introduction

This chapter presents the most likely path for the New Zealand economy and tax revenue and forms the basis for the Fiscal Outlook chapter. The forecasts were prepared during a period of heightened uncertainty in the global economy and they depend on a number of judgements about the associated risks. The Risks and Scenarios chapter discusses those risks in more detail and develops two scenarios based on different judgements about them.

Economic Growth and Tax Revenue Lower than Previously Forecast

Figure 1.1 - Real gross domestic product
Figure 1.1 - Real gross domestic product.
Source:  Statistics New Zealand, The Treasur

The New Zealand economy, like a number of others, is currently facing imbalances in the areas of inflation, household debt, house prices and the current account. As a result of drought, higher consumer prices and previous monetary tightening, output declined in the first two quarters of 2008 and is expected to have declined marginally in the September quarter. Growth is forecast to be positive in the final quarter of 2008 thanks to the recovery from the drought and tax cuts, but will remain subdued throughout most of 2009 as negative influences continue to affect the economy. As the world economy recovers, the domestic economy picks up and inflation and monetary conditions ease, growth will return above trend later in the forecast period, driven initially by increased exports (Figure 1.1). With economic activity forecast to be lower than in the Budget Update, core Crown tax revenue is expected to be $3,148 million lower in aggregate over the next four years.

Table 1.1 - Comparison of core Crown tax revenue forecasts
June years, $million 2007/08
Est./actual
2008/09
Forecast
2009/10
Forecast
2010/11
Forecast
2011/12
Forecast
2012/13
Forecast
Budget Update 2008 56,673 56,523 58,228 60,319 62,712 N/A
Pre-election Update 56,747 56,058 57,415 59,268 61,893 65,084
Difference 74 (465) (813) (1,051) (819) N/A

Source: The Treasury


Assumptions for the Forecasts

Trading partner growth - Consensus forecasts for economic growth in New Zealand's top 20 trading partners in 2008 and 2009 have been revised down steadily over the course of 2008. In anticipation of further revisions, we have reduced the August Consensus forecasts from 3.1% and 3.0% in 2008 and 2009 (respectively) to 2.9% and 2.8%. Growth is estimated to recover subsequently to around 3.5%. Recent developments in financial markets since these forecasts were finalised on 28 August have increased the risks of further downward revisions in the forecasts. The Risks and Scenarios chapter presents a case based on lower world growth.

Global inflation and interest rates - Inflation has increased in all our major trading partners as a result of rising food and fuel prices but is expected to decline as these prices stabilise or fall. Despite higher inflation, policy interest rates have been lowered in all major economies except Japan and the Euro area in response to the financial crisis and weaker economic growth. Commercial interest rates, however, are higher as inter-bank rates have increased. Interest rates are expected to return to neutral levels by 2010.

Figure 1.2 - West Texas Intermediate oil price
Figure 1.2 - West Texas Intermediate oil price.
Source:  Datastream, The Treasury

Oil prices - We have assumed that the price of West Texas Intermediate (WTI) oil will decline from an average of US$124/barrel in the June quarter of 2008 to US$115/barrel at the end of the forecast period. These forecasts were based on the average futures prices in August 2008 and average 13% higher throughout the forecast period than in the Budget Update (Figure 1.2). Since the end of August, the price of WTI has fluctuated widely, showing the increased uncertainty associated with these forecasts.

Terms of trade - The merchandise terms of trade (as measured in the System of National Accounts) are estimated to have peaked in the March quarter of 2008 and to decline 7.0% in the following five years as commodity prices fall from their peaks. The terms of trade are approximately 1.5% lower throughout the forecast period than in the Budget Update mainly because of lower dairy prices and higher oil prices.

Monetary conditions - We have assumed that the New Zealand dollar (NZ dollar) exchange rate will decline 22.7% from 69.2 on the Trade Weighted Index (TWI) in the June quarter of 2008 to 53.5 at the end of the period. Ninety-day interest rates are assumed to fall from 8.8% in the June quarter of 2008 to 6.3% at the end of the period. These forecasts were finalised before the Reserve Bank reduced the Official Cash Rate by 50 basis points on 11 September 2008. That may hasten the fall in interest rates in the near term.

External migration - The net inflow of permanent and long-term migrants is assumed to increase from a low of 4,700 in the year to June 2008 to its 10-year average of 10,000 per annum by March 2010 as outflows, particularly to Australia, ease and inflows, including returning New Zealanders, increase as economic growth slows elsewhere.

Policy and tax - The forecasts assume no change in government policy and incorporate the tax cuts effective from 1 October 2008 and 1 April 2010 and 2011, as did the Budget Update.

Table 1.2 - Economic forecast[1]
Annual average % change,
year to 31 March
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Private consumption 3.3 0.0 0.6 0.9 1.5 1.5
Public consumption[2] 4.2 4.1 3.9 3.8 3.1 2.7
Total consumption 3.5 0.9 1.3 1.6 1.9 1.8
Residential investment 3.7 -17.4 -9.4 8.0 10.1 8.9
Central government investment -0.5 12.2 4.2 2.0 2.0 2.0
Other investment 6.2 4.4 -2.9 2.0 4.7 5.4
Total investment 4.2 -1.2 -4.4 3.1 5.7 6.1
Stock change[3] 0.9 0.3 -0.4 -0.2 -0.1 0.0
Gross national expenditure 4.5 0.6 -0.4 1.7 2.6 2.8
Exports 2.3 -2.4 4.7 4.9 4.7 4.1
Imports 9.7 0.4 -2.5 0.3 2.4 3.2
GDP (production measure) 3.0 0.1 1.8 3.3 3.4 3.1
- annual % change 1.9 0.2 2.5 3.4 3.4 3.0
Real GDP per capita 1.9 -0.8 0.8 2.3 2.5 2.2
Nominal GDP (expenditure basis) 7.4 3.1 3.0 4.6 5.1 5.0
GDP deflator 4.9 3.4 1.2 1.3 1.7 1.8
Employment[4] 0.8 0.3 -0.3 0.4 1.3 1.8
Unemployment[5] 3.7 4.4 5.1 5.1 4.8 4.6
Wages[6] 4.2 5.5 4.3 4.0 3.8 3.5
CPI inflation[7] 3.4 4.5 2.3 2.4 2.4 2.4
Export prices[8] 2.8 17.4 3.4 4.2 3.7 3.3
Import prices[8] -4.5 13.5 6.5 5.4 4.7 3.8
Current account balance            
- $million -13787 -14597 -12234 -11477 -11020 -10994
- % of GDP -7.8 -8.0 -6.5 -5.8 -5.3 -5.0
TWI[9] 71.9 62.7 59.7 57.1 55.0 53.5
90-day bank bill rate[9] 8.8 7.5 7.0 6.7 6.5 6.3
10-year bond rate[9] 6.3 6.3 6.3 6.2 6.1 6.0

Sources: Statistics New Zealand, Reserve Bank of New Zealand, The Treasury

Notes:

  • [1] Forecast finalised 28 August 2008 incorporating data up until that date.
  • [2]The forecast profile for public consumption is influenced by government defence spending.
  • [3]Contribution to GDP growth.
  • [4]Household Labour Force Survey, full-time equivalent employment.
  • [5]Household Labour Force Survey, percentage of the labour force, March quarter, seasonally adjusted.
  • [6]Quarterly Employment Survey, average ordinary time hourly earnings.
  • [7]Annual percentage change.
  • [8]Overseas Trade Index basis, annual average percentage change.
  • [9]Average for the March quarter.

Weaker Growth as Global Economy Adjusts to Imbalances

The global economy is adjusting to significant imbalances

Figure 1.3 - World commodity prices
Figure 1.3 - World commodity prices.
Source:  Commodity Research Bureau, Goldman Sachs

High consumption growth in developed economies in recent years and increased production in developing economies led to developing economies building up large trade surpluses which provided funding for the rapid growth in the developed economies. The greater integration of low-cost developing economies into the world trade system helped suppress inflation and allowed interest rates to become established at low levels, encouraging investment in housing and inflating house prices. The search for higher yields led investors to under-estimate the risks of some investments. At the same time, growth in the developing economies was resource-hungry, pushing up commodity prices (Figure 1.3).

The sub-prime mortgage crisis, which developed in the United States (US) in mid-2007, was the trigger for the unwinding of these imbalances and the world economy, especially the US economy, is now undergoing the necessary adjustment. House prices have fallen in many countries and market interest rates have increased. High commodity prices, particularly for food and fuel, are impacting on household budgets in both developed and developing economies. Production costs are increasing in the developing economies, making them a source of inflation rather than deflation in the world economy. Trade imbalances are being corrected as the pattern of growth in developed economies shifts away from consumption towards exports. This process of adjustment is expected to be protracted and to involve both developing and developed economies.

Performance of the Australian economy is key for New Zealand

So far, these developments have had little direct impact on the New Zealand economy. In this regard, the performance of the Australian economy is particularly important for New Zealand as it is our largest single merchandise trade export market, our main tourist market, the top destination for emigration and our main investment partner. In addition, our major retail banks are Australian-owned. The Australian economy has performed strongly until recently, but it is currently undergoing a significant re-appraisal as the domestic economy slows despite the high terms of trade resulting from the continuing strong demand from China and other emerging economies for mineral resources. Any slowdown in the Australian economy arising from the global financial crisis is likely to have a direct impact on the New Zealand economy.

Since our forecasts were finalised at the end of August, there have been further developments in the global financial crisis, particularly in the US. These developments increase the downside risks to these forecasts. The Risks and Scenarios chapter discusses these risks in more detail and develops a scenario based on lower world economic growth.

International developments will be transmitted primarily via the cost of credit, …

We expect that developments in the international economy will be transmitted to New Zealand by four main channels, the most important of which is the cost and availability of credit. Because New Zealand has a low domestic saving rate, local banks were dependent on borrowing from other countries to fund the growth in consumption and investment in housing in recent years. This borrowing is mostly short term, transmitting the tighter availability and increased cost of credit rapidly to the local financial sector and from there to businesses and households.

… a fall in confidence and lower wealth …

Figure 1.4 - Business and consumer confidence
Figure 1.4 - Business and consumer confidence.
Source:  NZIER, Westpac McDermott Miller

Confidence is the second channel by which international developments are likely to affect the New Zealand economy. Concerns about the strength of the global economy have been a factor in lower business and consumer confidence as firms expect a reduction in demand and consumers reduce their expenditure because higher prices have eroded disposable incomes. Business and consumer confidence both fell to low levels in mid-2008 (Figure 1.4). Consumer confidence recovered in September and business confidence was higher in monthly surveys, but both remained low.

Loss of wealth is a less direct transmission channel for international developments. Asset values have fallen across a range of classes, from shares to housing, internationally as well as locally, with resultant effects on firms' ability to raise finance to fund investment and on households' wealth and access to collateral for borrowing. This is likely to constrain both firms' expansion plans (especially those with overseas ownership) and households' current consumption and investment in housing. It is also likely to lead to a consolidation of household balance sheets through an increase in precautionary saving and reduction in debt.

… and a lower terms of trade …

Lower world growth arising from the current international financial turmoil is also expected to result in weaker demand for New Zealand's export products and services, including tourism. The most direct effect of this is on the prices of commodities which have already declined as weaker world demand has become evident. International dairy prices peaked in late 2007 and their rate of decline increased in August 2008. Partially offsetting this, meat export prices increased in early 2008. Lower export prices (and higher import prices) have reduced the terms of trade by an average of 1.6% from our previous forecasts, leading to lower incomes for commodity exporters.

… leading to a lower exchange rate

Figure 1.5 - NZ dollar Trade Weighted Index
Figure 1.5 - NZ dollar Trade Weighted Index.
Source:  Reserve Bank of New Zealand, The Treasury

The NZ dollar has started to depreciate, consistent with the lower commodity prices, weak growth in the economy, the beginning of the interest rate easing cycle and the prospect of further cuts leading to a narrowing of the interest rate differential with other developed economies. The exchange rate is forecast to fall quickly in the near term, averaging 62.7 on the TWI in the March quarter 2009. In the longer term, we expect the NZ dollar to continue to decline because the current account deficit remains large and net external debt continues to grow (Figure 1.5). A lower exchange rate will offset some of the fall in world export prices, but will also raise the price of imported goods and services, restricting demand for them.

Export growth will chiefly reflect increased production …

Dairy production is expected to increase in late 2008 as a result of the recovery from the drought, as well as underlying growth in the industry. The drought and dairy conversions will have a negative effect on sheep meat production in the 2008/09 season, with some forecasts of lamb production down by a quarter from the previous season. Some increase in meat export volumes is expected from 2010 as higher dairy production leads to more dairy beef. Log exports are expected to increase as prices become more favourable with higher international prices and a fall in the NZ dollar, and a large quantity of forest plantings reach maturity.

Increases in some other non-traditional export products are also expected to boost export volume growth. New Zealand's oil exports have become significant, with oil the third largest export category after dairy and meat in the year to June 2008 and equivalent to 40% of the value of oil imports in the year to June 2008. The Maari oil field and the Pike River coal mine are scheduled to begin production later in 2008 and methanol exports are scheduled to recommence later in 2008. The fall in the NZ dollar is expected to boost services exports (chiefly tourism) and manufactured exports from mid-2009.

… and the current account deficit will narrow

In the near term the current account deficit is expected to increase as a proportion of Gross Domestic Product (GDP) as a result of high import prices and lower export volumes owing to the drought. A lower exchange rate and slower growth in domestic demand help to bring about some rebalancing in the economy and the deficit on goods and services gradually diminishes as export values grow more strongly than imports. Services exports and imports respond strongly to the fall in the exchange rate and are chiefly responsible for the reduction in the deficit. The investment income deficit is the main constraint on the overall deficit because of the need to service the substantial net international debt. Despite a positive balance on goods and services, the overall deficit is still forecast to be 5.0% of GDP at the end of the forecast period.

Domestic Imbalances Lead to Protracted Downturn

Domestic demand is expected to start to recover in the final quarter of 2008 with a modest pick-up in consumption as a result of the first instalment of the tax cuts on 1 October. In the following year, a number of the negative influences will continue to affect the economy, making the downturn protracted and the recovery only gradual. Eventually these negative influences will diminish and growth in domestic demand will begin to recover.

Tax cuts will boost household disposable incomes …

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

The October tax cuts will boost the disposable income of the average tax-payer by $16 per week. In aggregate, we assume that a large proportion of this fiscal stimulus will be spent, given the pressures currently faced by households. Most of the impact will be felt in the December quarter, but with a small amount anticipated in the September quarter. Although prices for food and fuel are expected to ease slightly as a result of weaker world growth, their rapid rise represents a shock to household budgets which will be relieved only slowly, constraining growth in consumption for some time. As a result, growth in private consumption will be lower than previously forecast (Figure 1.6).

… but firms are still under pressure …

Higher global commodity prices, especially for oil, are also adversely affecting firms' costs. Price pressures for a range of inputs are expected to dissipate only slowly and may be offset by the expected fall in the exchange rate which will also make imported capital items more expensive. These factors will mean that firms' margins remain under pressure and that profitability is low, constraining market investment. There are some supportive factors for business investment in the near term with the reduction in the company tax rate on 1 April 2008 increasing after-tax profitability and lowering the threshold for projects; in addition, ongoing dairy conversions and capacity constraints in some parts of the economy will also support investment expenditure. After a period of weak quarterly growth throughout 2009, market investment is forecast to pick up from 2010.

… leading to lower corporate tax revenue

With margins under pressure and profitability low, underlying corporate income tax is forecast to decline by 3% in the 2009 June year. Factoring in the company tax rate cut brings the total drop in corporate tax revenue to around 9% (close to 15% on receipts). In a period of low profitability, there are likely to be a significant number of firms making losses. Tax losses can be offset against profits when a firm returns to profitability and so have a small, but noticeable, lagged effect on corporate taxes. Thus growth in corporate tax is expected to be negligible in 2010, as tax losses offset profits, but is then forecast to exceed 5% per annum from 2011 onwards once those losses work their way out of the tax system.

Higher wage growth than in BEFU …

As a result of cost pressures and slower growth in demand, firms are expected to reduce their hiring in the second half of 2008, especially in the construction and retail industries. They are forecast to reduce staff levels marginally in mid-2009 and then to hold them unchanged until mid-2010. In the final years of the forecast, firms are expected to increase employment modestly by around 1.5% per annum as demand recovers. Wage growth is expected to remain relatively high in the near term, peaking at 5.8% annual growth in September 2008 as a result of a continuing shortage of skilled labour and increases in the cost of living. The net effect of softer employment and higher wage growth is slightly faster growth in labour incomes which will help offset some of the negative factors bearing on households and help support consumption growth.

… will lead to higher PAYE tax income …

Despite the weak employment outlook, the wage growth forecasts would normally be sufficient to keep growth in PAYE at around 5.0% per annum owing to the effects of fiscal drag. However, three rounds of personal income tax rate/threshold cuts more than offset fiscal drag during the forecast period, bringing average growth in PAYE down to around 3% per annum over the next five years.

… but higher unemployment will constrain consumption growth …

Figure 1.7 - Unemployment and participation
Figure 1.7 - Unemployment and participation.
Source:  Statistics New Zealand, The Treasury

With employment growth low over the next two to three years, the unemployment rate is forecast to increase from 3.9% in the June quarter 2008 to 5.1% in the March quarter 2010 and to remain at that level for the following five quarters. After that, it will decline to 4.5% at the end of the forecast period as growth in employment picks up with faster growth in output in the economy (Figure 1.7). The weaker outlook for the labour market, including a lower participation rate, will act as a constraint on private consumption growth in the forecast period and help bring about a reduction in the rate of accumulation of household debt necessary for rebalancing the economy.

… leading to lower GST revenue

The weak outlook for the household sector is the key economic factor underpinning the tax forecasts. The most direct effect of this on tax is via GST, which is forecast to grow by around 4% per annum over the next five years. This growth rate is much lower than the average of around 7.5% in the six years to 2007 when household consumption and residential investment increased rapidly. However, it also has flow-on effects for other taxes. For example, less household spending contributes to lower business profits, which ultimately feeds into the relatively weak forecasts for corporate taxes and “other persons” tax (income tax on the profits of unincorporated businesses and trusts).

The housing market is expected to remain depressed …

High interest rates, low net migration inflows and a lack of investor confidence will lead to continuing falls in residential investment. In addition, fallout from finance companies which have either failed or frozen investment funds, in some cases because of difficulties in the property development sector, will also inhibit investment in residential property. Confidence is also an important driver of residential investment and with economic growth expected to remain low, developers and households are less likely to start new residential projects.

The lower residential investment will be accompanied by fall in demand for existing houses. We expect house prices to continue to fall in nominal terms, recording a 10% annual fall in March 2009 and a total fall of 11.3% from their peak in the December quarter of 2007. Prices are expected to remain essentially flat from mid-2009 until late 2010 when they will start to increase again.

… but government expenditure will help sustain growth

On the basis of Budget 2008, public consumption expenditure is expected to continue to increase by around 4% per annum throughout the first part of the forecast period, before easing off to around 3% in the final two years. Growth in non-market investment remains strong in the near term but reverts to around 2% per annum in later years.

Inflation forecast to ease from its peak in late 2008 …

Figure 1.8 - Consumers price index
Figure 1.8 - Consumers price index.
Source:  Statistics New Zealand, The Treasury

High fresh produce prices in August make it likely that consumer price inflation will exceed our forecast of 4.9% in the year to September 2008. Non-tradables inflation is expected to ease as a result of the recent fall in output and weak growth over the next year. Lower demand in the economy will reduce capacity constraints and inflation pressures in key sectors such as construction and services. Tradables inflation is also expected to ease as commodity prices decline (Figure 1.8). The introduction of the Emissions Trading Scheme for stationary energy (primarily electricity) from 1 January 2010 and liquid fuels from 1 January 2011 will boost inflation by approximately 0.4 and 0.5 percentage points respectively, including indirect impacts which are spread over the subsequent period. (These figures are based on a price of €12.50/tonne for carbon credits.) As economic activity strengthens again towards the end of the period, headline inflation is still relatively high at 2.4% at the end of the forecast period.

… allowing interest rates to decline

As growth in consumption remains low and the outlook for inflation declines, the Reserve Bank is expected to continue to ease monetary policy. Ninety-day interest rates are expected to average 7.5% in the March quarter 2009 and to fall to 7.1% in the September quarter of 2009. The Reserve Bank's 50 basis point reduction in the Official Cash Rate on 11 September may bring forward some of the easing in 90-day interest rates. Easing tradables inflation later in the forecast period should allow the Reserve Bank to continue to ease policy so that 90-day rates fall to 6.3% by the end of the forecast period.

Lower level of nominal GDP …

The level of real GDP is forecast to be approximately $12.5 billion lower in aggregate over the next four March years than in our previous forecasts, chiefly because of lower consumption and residential investment, partly offset by lower imports. Since the general price level in the economy is higher than previously forecast, mainly because higher commodity prices result in higher consumer price inflation, the level of nominal GDP is forecast to be $8.1 billion lower in aggregate over the next four March years than in our previous forecasts.

… leads to lower tax revenue

The lower level of nominal GDP is forecast to lead to lower core Crown tax revenue over the forecast period as a whole relative to the Budget Update. The major revisions are for corporate taxes (down by $1,391 million), GST (down by $1,314 million) and other persons tax (down by $609 million). There are also downward revisions in resident withholding tax and other taxes. These reductions are offset by an increase in source deductions (primarily PAYE) of $494 million, leaving total core Crown tax revenue $3,148 million lower in aggregate over the next four years.

Table 1.3 - Core Crown tax revenue forecasts by major tax type
June years, $million 2007/08
Est./actual
2008/09
Forecast
2009/10
Forecast
2010/11
Forecast
2011/12
Forecast
2012/13
Forecast
Source deductions 23,356 23,082 23,712 24,419 25,526 27,211
Corporate tax 10,443 9,402 9,403 10,097 10,600 11,112
GST 11,115 11,687 12,024 12,476 13,187 13,762
Other taxes 11,833 11,887 12,276 12,276 12,580 12,999
Total 56,747 56,058 57,415 59,268 61,893 65,084

Source: The Treasury

2 Fiscal Outlook

Introduction

The Pre-election Update fiscal forecasts show a weakening in the fiscal outlook since the Budget Update. There are two key factors influencing this change. Firstly, the economic slowdown discussed in the previous chapter has resulted in slower tax growth and increased costs for social welfare benefits. Secondly, some past policies (such as KiwiSaver subsidies and 20 hours free early childhood education) have proven more expensive as a result of higher take-up rates. The combination of these two factors is forecast to result in a sustained period of deficits in both the operating balance before gains and losses (OBEGAL) and residual cash leading to higher debt and its associated financing costs.

The extended period of growth during the past decade has led to a fiscal position as at 30 June 2008 with gross sovereign-issued debt (excluding Settlement Cash) at 17.4% of GDP, net core Crown debt in a net financial asset position of $19 million and $14.2 billion in net assets held by the New Zealand Superannuation Fund (NZS Fund). Therefore the weakening in the fiscal outlook starts from a strong fiscal position.

This chapter outlines key trends for each of the following five areas:

  • revenue and expenses
  • operating results
  • cash position
  • debt, and
  • the NZS Fund.

The chapter has two sections:

  • Short-term outlook - This covers the fiscal results for the forecast period from 2008/09 to 2012/13.
  • Medium-term and long-term outlook - This covers the fiscal projections out to 2022/23. The medium term projections differ from the forecasts. The forecasts are based on comprehensive modelling, whereas the projections extrapolate the conditions existing in the final year of the forecast period.

Following these two sections is a summary of the key risks associated with the fiscal forecasts. In particular, the Fiscal Outlook chapter should be read in conjunction with the Specific Fiscal Risks chapter (Chapter 4).

Short-Term Outlook

Table 2.1 - Fiscal indicators[2]
Year ended 30 June
$million
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast

Revenue and expenses

           
Core Crown revenue (excl NZS Fund) 61,671 61,102 62,820 65,354 68,340 72,091
Core Crown expenses 56,997 62,359 65,849 68,891 72,252 76,157

Operating results

           
Total Crown OBEGAL 5,637 (64) (1,746) (2,481) (3,092) (3,374)
Total Crown OBEGAL (excl NZS Fund retained revenue) 5,586 (31) (1,665) (2,376) (2,962) (3,224)
Total Crown operating balance 2,385 1,909 374 (71) (396) (382)

Cash position

           
Core Crown residual cash 2,057 (5,909) (5,300) (6,603) (6,815) (7,307)

Debt

           
GSID (excl Settlement Cash) 31,390 32,087 34,400 43,821 48,626 53,666
Net core Crown debt (incl NZS Fund financial assets) (12,953) (10,430) (8,502) (5,799) (3,146) (380)
Net core Crown debt (19) 5,207 10,091 16,071 22,352 29,042

NZS Fund

           
NZS Fund net worth 14,212 17,440 20,638 24,175 28,024 32,158

Nominal GDP

180,077 184,390 190,713 199,881 210,205 220,574

% of GDP  

           

Revenue and expenses

           
Core Crown revenue (excl NZS Fund) 34.2 33.1 32.9 32.7 32.5 32.7
Core Crown expenses 31.7 33.8 34.5 34.5 34.4 34.5

Operating results

           
Total Crown OBEGAL 3.1 (0.0) (0.9) (1.2) (1.5) (1.5)
Total Crown OBEGAL (excl NZS Fund retained revenue) 3.1 (0.0) (0.9) (1.2) (1.4) (1.5)
Total Crown operating balance 1.3 1.0 0.2 (0.0) (0.2) (0.2)

Cash position

           
Core Crown residual cash 1.1 (3.2) (2.8) (3.3) (3.2) (3.3)

Debt

           
GSID (excl Settlement Cash) 17.4 17.4 18.0 21.9 23.1 24.3
Net core Crown debt (incl NZS Fund financial assets) (7.2) (5.7) (4.5) (2.9) (1.5) (0.2)
Net core Crown debt (0.0) 2.8 5.3 8.0 10.6 13.2

NZS Fund

           
NZS Fund net worth 7.9 9.5 10.8 12.1 13.3 14.6

Source: The Treasury

Core Crown vs Total Crown

The Fiscal Outlook chapter refers to both core Crown and total Crown results.

Core Crown includes Ministries, Departments, Offices of Parliament, the NZS Fund and the Reserve Bank of New Zealand.

Total Crown includes the core Crown, State-Owned Enterprises (SOEs) and Crown Entities (CEs).

Notes

  • [2]An historical trend series of the above indicators is available on page 122. The glossary on pages 118 to 121 includes a definition of these indicators.

Revenue and Expenses

Core Crown Revenue

Core Crown revenue consists mainly of tax revenue. Also included are interest and dividend revenues, and sales of goods and services.

Core Crown revenue excluding the NZS Fund best represents the revenue available to meet the Government's spending needs.

Core Crown revenue excluding the NZS Fund treats the NZS Fund as a third party (ie, its revenue is not included but the tax it pays is).

Core Crown revenue growth falls …

Figure 2.1 - Core Crown revenue excluding the NZS Fund
Figure 2.1 - Core Crown revenue excluding the NZS Fund.
Source:  The Treasury

Core Crown revenue excluding the NZS Fund is forecast to fall from 34.2% of GDP in 2007/08 to 32.7% of GDP by 2012/13, while in a nominal sense over the same period it is forecast to increase by around $10 billion. The trend in core Crown revenue is primarily driven by what happens in tax revenue.

… as the economy slows ...

As mentioned in Chapter 1, the forecasts for nominal GDP have been reduced by just over $8 billion since the Budget Update (on a June year basis), with GDP in 2011/12 (the final forecast year in the Budget Update) being about $2 billion lower than in the Budget Update.

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

A reduction in the forecasts for domestic consumption as past imbalances start to unwind over all forecast years is a key feature of the macroeconomic forecasts. This reduces the GST forecasts. It also has flow-on effects for business income taxes as reduced spending leads to lower profits, which have also been squeezed by an increase in the forecast wage growth track. The increased wage forecast provides some offset to the forecast reductions in tax revenue via an increase in the source deductions (PAYE) forecast.

Table 2.2 - Changes in core Crown tax revenue forecasts by major tax type
Year ended 30 June
$million
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast

Core Crown tax revenue

       
Budget Update 56,523 58,228 60,319 62,712
GST (193) (265) (516) (340)
Corporate taxes (183) (432) (305) (471)
Other persons tax (309) (94) (113) (93)
Source deductions 199 63 41 191
Other 21 (85) (158) (106)
Change in core Crown tax revenue (465) (813) (1,051) (819)
Pre-election update 56,058 57,415 59,268 61,893

… and personal tax cuts began to come into affect from 1 October 2008

The introduction of personal tax cuts announced in Budget 2008 means there has been a structural reduction in tax revenue of $1.6 billion in 2008/09 rising to $4.3 billion by 2012/13. The tax cut was included in the fiscal forecasts at the time of Budget 2008.

The tax cuts were the primary driver for the fall in tax revenue as a percentage of GDP over the forecast period.


Inland Revenue Tax Forecasts

In line with established practice, the Inland Revenue Department has also prepared a set of tax forecasts, which, like the Treasury's tax forecast, is based on the Treasury's macroeconomic forecast. Inland Revenue's forecasts are shown here for comparative purposes. The Treasury's forecasts are the Crown's official forecasts.

Table 2.3 - The Treasury and Inland Revenue core Crown tax revenue forecasts
Year ended 30 June
$billion
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast

Source deductions

         
Treasury 23.1 23.7 24.4 25.5 27.2
Inland Revenue 23.1 23.7 24.3 25.5 27.3
Difference 0.1 (0.1)

Net other persons tax

         
Treasury 3.5 3.8 3.8 3.9 4.0
Inland Revenue 3.4 3.6 3.7 3.8 3.9
Difference 0.1 0.2 0.1 0.1 0.1

Corporate tax

         
Treasury 9.5 9.6 10.4 10.9 11.4
Inland Revenue 9.3 10.3 10.9 11.4 11.8
Difference 0.2 (0.7) (0.5) (0.5) (0.4)

Goods and services tax

         
Treasury 11.7 12.0 12.5 13.2 13.8
Inland Revenue 11.6 12.0 12.4 13.1 13.8
Difference 0.1 - 0.1 0.1 -

Other taxes

         
Treasury 8.3 8.3 8.2 8.4 8.7
Inland Revenue 8.4 8.2 8.1 8.3 8.5
Difference (0.1) 0.1 0.1 0.1 0.2

Total tax revenue

         
Treasury 56.1 57.4 59.3 61.9 65.1
Inland Revenue 55.8 57.8 59.4 62.1 65.3
Difference 0.3 (0.4) (0.1) (0.2) (0.2)

Total tax revenue (% of GDP)

         
Treasury 30.4 30.1 29.7 29.4 29.5
Inland Revenue 30.3 30.3 29.7 29.5 29.6
Difference 0.1 (0.2) (0.1) (0.1)

Sources: The Treasury, Inland Revenue

The differences between the two sets of forecasts are much smaller than has been the case in recent forecasting rounds. The only significant difference is in corporate taxes where the two agencies have differing opinions on the degree of tax losses accumulating in the short term and on the effect these will have on income tax during the upswing in the business cycle.


Core Crown Expenses

Core Crown expenses represent the day-to-day operating spending of the Government (ie, this measure does not include purchases of physical assets or capital spending).

Core Crown expenses rise then stabilise in line with growth in the economy

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

Core Crown expenses are forecast to increase as a percentage of GDP in 2008/09 and then remain relatively stable at around 34.5% over the rest of the forecast period. In nominal terms, core Crown expenses grow over the forecast period from $57 billion in 2007/08 to $76.2 billion by 2012/13.

Some increases in expenses were forecast at the time of the Budget Update because of the normal processes of cost of living adjustments to social welfare benefits, and the inclusion in expenses of allowances to cover new spending in future Budgets. In addition, some of the policy decisions announced in recent Budgets were to be gradually implemented (eg, KiwiSaver), with a consequent rising profile of expenses.

The expected profile for core Crown expenses is higher in this Pre-election Update than in the Budget Update due to:

  • higher social welfare benefits mostly associated with the economic slowdown and higher expected inflation rate
  • increased costs of existing policies (such as KiwiSaver and early childhood education) arising from take-up rates being higher than previously forecast, and
  • as a consequence of lower tax and higher expenses, a higher debt track is forecast, so higher debt servicing costs are also expected.

Slowing growth leads initially to higher social welfare benefit costs …

The growth of benefit expenses initially exceeds economic growth, but slows after 2009/10 so that by 2012/13 social welfare expenditure, as a percentage of GDP, is slightly lower than its 2008/09 level.

Faster growth in benefit costs in the early years of the forecast period is largely due to higher-than-normal inflation indexation and a lift in recipient numbers, especially in relation to the unemployment benefit. The latter is a consequence of a forecast weaker labour market in these years.

… and there are additional costs from existing policies …

The fiscal costs for the following policies have been revised upwards since the Budget Update.

KiwiSaver

Take-up rates for the KiwiSaver scheme over its first year of operations far exceeded original assumptions. The Pre-election Update revisions are based on an assumption that growth in applications will continue and membership will reach 56% of the total labour force by 2012/13 (46% at Budget Update).

Early childhood education

Forecast costs have been revised upwards for the policy of 20 hours per week free early childhood education announced in Budget 2006. This increase is due to an increase in the volume of funded child hours claimed by service providers and an increase in the number of service providers offering the free 20 hour per week programme.

Treaty of Waitangi settlements

The pace of settlement of Historical Treaty of Waitangi claims is expected to pick up over the forecast period, resulting in an increase in expenses.

… as a result, debt servicing costs also rise

With slower growth in tax revenue and higher government spending, annual core Crown finance costs are forecast to rise from $2.5 billion in 2007/08 to $3.9 billion by 2012/13.

Recent spending decisions have been charged against the Budget 2009 allowance …

As in previous Economic and Fiscal Updates, the forecasts include allowances for new operating initiatives for future Budgets. Budget allowances represent a level of funding that will be allocated to spending and revenue initiatives over the Budgets covered in the fiscal forecasts.

The Budget 2009 allowance was set at $1.75 billion in the 2008 Fiscal Strategy Report (FSR), and this grows by 2% for each Budget as shown in Figure 2.4.

Figure 2.4 - Net amounts of forecast new operating initiatives
Figure 2.4 - Net amounts of forecast new operating initiatives.
Source:  The Treasury

The fiscal forecasts assume that spending and revenue pressures can be managed within these funding allowances.

The Government has made a number of spending decisions since the Budget. Table 2.4 shows decisions already charged and signalled as pre-commitments against Budget 2009. In addition the Specific Fiscal Risks chapter outlines a number of decisions under active consideration which need to be managed within the remaining allowance.

As a result, the Budget 2009 allowance is expected to come under pressure, and, if exceeded, the fiscal position would weaken from that shown in the fiscal forecasts.

Table 2.4 - Charges and pre-commitments[3] against Budget 2009
  2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Budget 2009 operating allowance 1,750 1,750 1,750 1,750
- Teachers and principals collective agreements (169) (192) (192) (192)
 - KiwiRail operating funding (148)
Budget 2009 operating allowance in forecasts 1,433 1,558 1,558 1,558
Less pre-commitments and indicative funding        
 - Health pre-commitment and indicative funding package (750) (750) (750) (750)
 - Economic Transformation: Innovation (93) (100) (100) (100)
 - Defence funding package (86) (86) (86) (86)
 - MFAT funding package (8) (8) (8) (8)
Budget 2009 operating allowance after pre-commitments and indicative funding 496 614 614 614

Source: The Treasury

Notes

  • [3]Pre-commitments are not reported in the fiscal forecasts as a final cabinet decision has yet to be made.

Operating Results

Total Crown OBEGAL (excluding the NZS Fund retained revenue)

OBEGAL is the operating balance before gains and losses for the total Crown. By excluding gains and losses, the OBEGAL gives a more direct indication of the underlying stewardship of the Government than the operating balance. The OBEGAL (excluding the NZS Fund retained revenue) is a measure of the operating balance that recognises that the NZS Fund has been set up to meet future spending pressures and as a result the returns it earns are not available to the Crown to meet current spending requirements.

OBEGAL deficits expected …

Figure 2.5 - Total Crown OBEGAL (excluding the NZS Fund retained revenue)
Figure 2.5 - Total Crown OBEGAL (excluding the NZS Fund retained revenue).
Source:  The Treasury

The OBEGAL (excluding the NZS Fund retained revenue) shifts into a deficit position in the current year of $31 million which worsens to $3.2 billion by the end of the forecast period.

As discussed earlier, slower growth in tax revenue and increases in government spending are the key factors driving the downward trend in the OBEGAL (excluding the NZS Fund retained revenue).

Table 2.5 provides a detailed reconciliation of the changes since the Budget Update, while Table 2.6 shows the changes since the Budget Update by the key drivers.

Table 2.5 - Total Crown OBEGAL (excluding the NZS Fund retained revenue) comparison to the Budget Update
Year ended 30 June
$million
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
OBEGAL (excluding the NZS Fund retained revenue)        
Budget Update 1,354 1,048 543 207
Core Crown changes        
Tax revenue (465) (813) (1,051) (819)
Benefit expenses (358) (629) (678) (543)
Education expense changes (239) (111) (208) (254)
KiwiSaver expense changes (71) (105) (197) (280)
Treaty settlements 25 (440) (130) (130)
Net finance costs (435) (284) (390) (675)
Expense transfers[1] (914) (10) (7)
Top-down adjustment[2] 1,095 40 (35) (110)
Emissions Trading Scheme expense rephasing 422 (599) (107) (120)
Technical baseline changes (54) (3) (19) (33)
Rail funding decision (148) 148
Other movements (13) 125 35 18
Core Crown OBEGAL change (1,155) (2,681) (2,787) (2,946)
Net SOE/CE change (including impact of eliminations) (230) (32) (132) (223)
Total OBEGAL (excluding the NZS Fund retained revenue) change (1,385) (2,713) (2,919) (3,169)
Pre-election Update (31) (1,665) (2,376) (2,962)
Table 2.6 - Total Crown OBEGAL (excluding the NZS Fund retained revenue) comparison to the Budget Update by key drivers
Year ended 30 June
$million
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
OBEGAL (excluding the NZS Fund retained revenue)        
Budget Update 1,354 1,048 543 207
Economic-driven changes        
    Tax revenue (465) (813) (1,051) (819)
    Benefit expenses (358) (629) (678) (543)
Total economic-driven changes (823) (1,442) (1,729) (1,362)
Changes due to policy costs        
    Education expense changes (239) (111) (208) (254)
    KiwiSaver expense changes (71) (105) (197) (280)
    Treaty settlements 25 (440) (130) (130)
Total changes due to policy costs (285) (656) (535) (664)
Debt servicing change        
    Net finance costs (435) (284) (390) (675)
Total debt servicing change (435) (284) (390) (675)
Other changes 158 (331) (265) (468)
Total OBEGAL (excluding the NZS Fund retained revenue) change (1,385) (2,713) (2,919) (3,169)
Pre-election Update (31) (1,665) (2,376) (2,962)

Notes:

  • [1]Expense transfers represent underspends from 2007/08 financial year which have been transferred into the forecast period.
  • [2]The top-downadjustment compensates for the fact that departments tend to use appropriations as the basis for their forecasts. Appropriations will overstate expenditure as they are upper limits.

Total Crown Operating Balance

The operating balance shows whether the government sector has generated enough revenues to cover its expenses in any given year.

… while the operating balance is close to breakeven point

Figure 2.6 - Total Crown operating balance
Figure 2.6 - Total Crown operating balance.
Source:  The Treasury

The operating balance is forecast to remain positive until 2009/10 before moving into modest deficits thereafter.

The main difference between the OBEGAL trend and operating balance is valuation gains on assets and liabilities are forecast of $1.6 billion in 2008/09 growing to $2.6 billion in 2012/13.

The expected growth in gains primarily relates to the asset portfolio of the NZS Fund which is forecast to increase by around $3 to $4 billion per annum. The forecast gains on financial instruments are based on long-term benchmark rates of return, in conjunction with the exchange rate and interest rate curves prevailing at the forecast reference date. Gains and losses on assets and liabilities are volatile in the short term. Since completing the fiscal forecasts, equity market conditions have deteriorated so there is a risk that valuation gains in the current year may be lower than forecast.

The total Crown operating balance is not available to be drawn upon to fund core Crown operations, as current policy is for SOEs and CEs to retain a portion of their surpluses for the purpose of achieving their long-term objectives and for the NZS Fund to retain all of its after tax surpluses. Over the forecast period, SOE and CE surpluses total $9.4 billion. Approximately $2.4 billion of these surpluses will be returned as dividends. This becomes cash available to the core Crown.

Cash Position

Core Crown Residual Cash

Core Crown residual cash represents core Crown operating cash flows less capital investment and contributions to the NZS Fund.

Table 2.7 - Reconciliation of core Crown residual cash
  Year ended 30 June
$million 2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Core Crown revenue 61,819 61,207 62,888 65,422 68,408 72,161
Core Crown expenses (56,997) (62,359) (65,849) (68,891) (72,252) (76,157)
Core Crown gains/(losses) and other items (930) 1,380 1,619 1,869 2,123 2,398
Net surpluses/(deficits) of SOEs and CEs (1,507) 1,681 1,716 1,529 1,325 1,216
Operating balance 2,385 1,909 374 (71) (396) (382)
Net total Crown (gains)/losses and other items 3,252 (1,973) (2,120) (2,410) (2,696) (2,992)
Operating balance before gains and losses (OBEGAL) 5,637 (64) (1,746) (2,481) (3,092) (3,374)
NZS Fund net revenue after tax (51) 33 81 105 130 150
OBEGAL excluding (NZS Fund retained revenue) 5,586 (31) (1,665) (2,376) (2,962) (3,224)
Net retained surpluses of SOEs and CEs (815) (1,088) (1,215) (988) (752) (622)
Non-cash items and working capital movements 2,521 1,905 2,659 2,071 2,007 1,785
Net core Crown cash flow from operations 7,292 786 (221) (1,293) (1,707) (2,061)
Contribution to NZS Fund (2,104) (2,242) (1,977) (2,096) (2,167) (2,194)
Net core Crown cash flow from operations            
after contributions to NZS Fund 5,188 (1,456) (2,198) (3,389) (3,874) (4,255)
Purchase of physical assets (1,433) (1,516) (1,729) (1,397) (1,251) (1,306)
Advances and capital injections (1,698) (2,753) (875) (1,009) (790) (666)
Forecast for future new capital spending (184) (498) (808) (900) (1,080)
Core Crown residual cash 2,057 (5,909) (5,300) (6,603) (6,815) (7,307)

Source: The Treasury

A sustained period of large cash deficits is forecast

Figure 2.7 - Core Crown residual cash
Figure 2.7 - Core Crown residual cash.
Source:  The Treasury

Core Crown residual cash is in deficit over the entire forecast period ranging from $5.9 billion in 2008/09 to $7.3 billion in 2012/13.

The decline in the OBEGAL is broadly mirrored in net core Crown cash flow from operations.

Table 2.8 - Application of core Crown residual cash from 2008/09 to 2012/13 inclusive ($billion)
Table 2.8 - Application of core Crown residual cash from 2008/09 to 2012/13 inclusive ($billion).
Source:  The Treasury

After taking into account contributions to the NZS Fund of $10.7 billion, purchases of physical assets (including new capital spending) of $10.6 billion and advances and capital injections of $6.1 billion, there is a residual financing requirement of $31.9 billion. The cash shortfall will be mainly met by additional borrowings of around $22 billion with the rest met by reducing financial assets that have accumulated from recent strong cash outturns (refer Table 2.13).

As in previous Economic and Fiscal Updates, the forecasts include allowances for new capital initiatives for future Budgets. As part of Budget 2009, the Government has allocated $900 million of new capital over the next four years. Amounts for the 2010, 2011 and 2012 Budgets have also been set at $900 million phased over four years. In total the fiscal forecasts incorporate $3.1 billion over the next five years to be spent on new capital commitments between 2008/09 to 2012/13.

Table 2.9 - Forecast future new capital allowances
Year ended 30 June
$million
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Total
Budget 2009 20 480 250 150 900
Budget 2010 (three years of phasing) 20 480 250 150 900
Budget 2011 (two years of phasing) 20 480 250 750
Budget 2012 (one year of phasing) 20 480 500
Budget 2013 -   20 20
Future capital allowances 20 500 750 900 900 3,070

Source: The Treasury

Figure 2.8 - Total purchase of physical assets by sector ($billion and % of total spend)
Figure 2.8 - Total purchase of physical assets by sector ($billion and % of total spend).
Source:  The Treasury

Core Crown forecasts for the purchase of physical assets ($10.6 billion) and advances and capital injections ($6.1 billion) comprise purchases met from existing baselines plus the $3.1 billion new capital allocation mentioned above.

Advances and capital injections are often used by CEs and SOEs to purchase physical assets (such as roading and rail assets). Therefore, to give an indication of the Government's capital investment it is important to consider total Crown physical asset purchases. Figure 2.8 shows the total purchases of physical assets by sector.

Taking into consideration capital and operating cash flows, the cash position is weaker than what was forecast at the Budget Update.

Table 2.10 - Residual cash comparison to the Budget Update
Year ended 30 June
$million
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast

Residual cash

       
Budget Update (3,478) (3,302) (3,447) (3,457)
Tax receipts (748) (1,022) (1,268) (954)
Benefit expenses (358) (629) (678) (543)
KiwiSaver uptake change (71) (105) (197) (280)
Education forecast change (239) (111) (209) (254)
Treaty settlements 25 (440) (130) (130)
Net finance costs (382) (171) (358) (641)
Top-down adjustment 1,090 (100) (175) (250)
Expense transfers (1,604) (10) (7) 11
National Provident Fund call on guarantee (17) (99) (99) (99)
NZS Fund contributions 158 167 116
Capital allocation (140) 140
Rail funding decision (45) 45
Other movements 58 346 (202) (334)
Total residual cash impact (2,431) (1,998) (3,156) (3,358)
Pre-election Update (5,909) (5,300) (6,603) (6,815)

Source: The Treasury

Debt

Gross Sovereign Issued Debt (GSID) (Excluding Settlement Cash)

GSID (excluding Settlement Cash)GSID (excluding Settlement Cash) represents the debt issued by the sovereign (ie, core Crown) and includes government stock held by the NZS Fund, ACC and EQC but excludes money deposited with the Reserve Bank by banks (Settlement Cash). Settlement Cash is excluded as it is financed from commercial banks and not from government funding.

(GSID) (Excluding Settlement Cash) is forecast to climb ...

Figure 2.9 - GSID (excluding Settlement Cash)
Figure 2.9 – GSID (excluding Settlement Cash).
Source:  The Treasury

The increase in GSID (excluding Settlement Cash) is primarily due to the need to raise finances to meet the residual cash deficits over the forecast period.

GSID (excluding Settlement Cash) is forecast to increase in both nominal terms (by around $22.3 billion) and as a percentage of GDP (by around 6.9%) over the forecast period. By the end of the forecast period in 2012/13 GSID (excluding Settlement Cash) is expected to be $53.7 billion or 24.3% of GDP.

The issuance of domestic bonds (market) for 2008/09 has been set at $4 billion and rises to $9.2 billion in 2012/13. After meeting debt maturities, the accumulated net bond issuance over the forecast period is $23 billion and this will translate into an increase in GSID (excluding Settlement Cash).

Table 2.11 - Net increase in domestic bonds
Year ended 30 June
$million
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Total
Issue of domestic bonds (market) 4,048 6,070 9,114 9,189 9,216 37,637
Repayment of domestic bonds (market) (2,900) (4,097) (4,483) (4,518) (15,998)
Net increase in domestic bonds (market) 1,148 1,973 9,114 4,706 4,698 21,639
Issue of domestic bonds (non-market) 738 843 258 826 832 3,497
Repayment of domestic bonds (non-market) (451) (599) (585) (533) (2,168)
Net increase in domestic bonds (non-market)[4] 287 244 258 241 299 1,329
Net bond issuance 1,435 2,217 9,372 4,947 4,997 22,968

Source: The Treasury

Notes

  • [4]Non-market domestic bonds are bonds held by EQC.

Net Core Crown Debt

Net core Crown debt equates to core Crown borrowings less core Crown financial assets (excluding the financial assets of the NZS Fund).

By deducting financial assets (excluding the NZS Fund), net debt can provide additional information about the sustainability of the Government's accounts. However, it is important to view net debt alongside GSID (excluding Settlement Cash) as some financial assets (eg, student loans) are not easily converted to cash.

…so too is net core Crown debt …

Figure 2.10 - Net core Crown debt
Figure 2.10 - Net core Crown debt.
Source:  The Treasury

As at 30 June 2008, net core Crown debt was in a small net asset position of $19 million. Over the forecast period, net core Crown debt is forecast to rise to $29 billion or 13.2% of GDP. The increase in net core Crown debt is due to the run-down of NZDMO financial assets and increases in borrowings expected during the forecast period. Table 2.12 provides a breakdown of core Crown net debt by portfolio. Net debt is forecast to increase faster than GSID (excluding Settlement Cash) as net debt takes into consideration the run-down of financial assets which is not captured by the GSID (excluding Settlement Cash) indicator, so it is important to look at the two indicators together.

Table 2.12 - Net core Crown debt (excl NZS Fund[5]) by portfolio as at 30 June 2008 and 30 June 2013
Year ended 30 June 2008 ($million)
  NZDMO Reserve Bank Student loans Other Total (excl. NZS Fund)
Core Crown borrowings 28,861 8,689 195 37,745
Core Crown financial assets 17,001 13,735 6,741 287 37,764
Core Crown net debt 11,860 (5,046) (6,741) (92) (19)
  2013 ($million)
Core Crown borrowings 51,314 8,513 194 60,021
Core Crown financial assets 5,793 16,115 8,851 220 30,979
Core Crown net debt 45,521 (7,602) (8,851) (26) 29,042

… in order to meet the cash shortfall

Table 2.13 shows New Zealand Debt Management Office (NZDMO) borrowings are forecast to increase by $22.5 billion and its financial assets are forecast to reduce by $11.2 billion over the forecast period.

Table 2.13 - NZDMO net debt movement between 30 June 2008 and 30 June 2013
$million Opening
balance
2008
Movements Closing balance
2013
Borrowing      
Government stock 23,203 23,846 47,049
Treasury bills 1,487 (200) 1,287
Other borrowings 4,171 (1,193) 2,978
Total 28,861 22,453 51,314
Financial assets      
Advances 4,293 702 4,995
Other 12,708 (11,910) 798
Total 17,001 (11,208) 5,793
NZDMO net debt 11,860   45,521

Notes

  • [5]The financial assets of the NZS Fund are excluded from the calculation of net core Crown debt as they are set aside to partially pre-fund the future cost of New Zealand Superannuation.

NZS Fund

The NZS Fund is an important component of the Government's fiscal strategy. The NZS Fund's assets provide the means for the Government to partially pre-fund future fiscal pressures, particularly those pressures arising from an ageing population.
Figure 2.11 - NZS Fund net worth
Figure 2.11 - NZS Fund net worth.
Source:  The Treasury

The NZS Fund is forecasting an operating surplus of $1 billion in 2008/09 growing to $1.9 billion in 2012/13.

A combination of holding gains and new investments funded by the Government's annual contribution of around $2 billion per annum is expected to increase the NZS Fund's net worth from $14.2 billion in 2007/08 to $32.2 billion in 2012/13.

Table 2.14 - NZS Fund net worth
Year ended 30 June
$million
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Opening net worth 12,973 14,212 17,440 20,638 24,175 28,024
Revenue 385 431 487 562 642 725
Other expenses (34) (156) (168) (196) (221) (245)
Tax expenses (237) (326) (419) (494) (574) (655)
Gains/(losses) (995) 1,037 1,321 1,569 1,836 2,114
Gross contributions from the Crown 2,104 2,242 1,977 2,096 2,167 2,194
Other movements in reserves 16 (1) 1
Closing net worth 14,212 17,440 20,638 24,175 28,024 32,158

Source: The Treasury

The Government's contributions to the NZS Fund are calculated over a 40-year rolling horizon to ensure that superannuation entitlements over the next 40 years can be met if the contribution rate were to be held to be constant at that level. The Government is forecast to make the required minimum annual contribution for 2008/09 as calculated by the formula set out in the New Zealand Superannuation and Retirement Income Act 2001.

The underlying assumptions in calculating the contributions for 2008/09 are the nominal GDP series to 2048, the New Zealand Superannuation expense series to 2048 and the expected long-term, net after-tax annual return of the NZS Fund (6.6%) (also 6.6% in the Budget Update). The forecast rate of return is based on the Treasury's assumptions for the rate of return on financial portfolios of Crown financial institutions. The Treasury website contains further information on the NZS Fund, as well as a copy of the NZS Fund model (http://www.treasury.govt.nz/government/assets/nzsf/contributionratemodel).

Medium-Term and Long-Term Outlook

Medium-Term

The preceding parts of the Fiscal Outlook chapter have focused on the fiscal forecasts covering the period 2008/09 to 2012/13. This section provides medium-term fiscal projections, covering the subsequent 10 years (2013/14 to 2022/23). In previous Pre-election Updates these projections have been published separately on the Treasury website. For this and subsequent Pre-election Updates, the projections are incorporated into the document, to make this information easier to access and to provide a fuller picture of the medium-term implications of developments in the fiscal forecasts.

The forecasts are based on comprehensive modelling of the macroeconomy, which flows through into forecasts of tax revenue and the overall fiscal position. The projections, on the other hand, extrapolate the conditions existing in the final year of the forecast period, using assumptions about how elements of revenue and expenditure will change over time.

Updated medium-term projections

Building on the deterioration since the Budget Update in the fiscal outlook in the forecast period discussed earlier in this chapter, the medium-term projections show that this deterioration continues throughout the 10-year projection period.[6]

Figure 2.12 - OBEGAL (excluding NZS Fund retained revenue)
Figure 2.12 - OBEGAL (excluding NZS Fund retained revenue).
Source:  The Treasury
Figure 2.13 - GSID (excluding Settlement Cash)
Figure 2.13 - GSID (excluding Settlement Cash).
Source:  The Treasury
Figure 2.14 - Operating balance, OBEGAL (excluding NZS Fund retained revenue), NZS Fund contributions
Figure 2.14 - Operating balance, OBEGAL (excluding NZS Fund retained revenue), NZS Fund contributions.
Source:  The Treasury

OBEGAL (excluding NZS Fund retained revenue) is forecast to be 1.5% of GDP in deficit in 2012/13. In the projection period, we assume that revenue growth exceeds expenditure growth, largely because personal income tax revenue grows faster than the allowance for new operating spending. This sees OBEGAL (excluding NZS Fund retained revenue) move into surplus in 2017/18, and end the projection period with a surplus of 1.2% of GDP in 2022/23.

Figure 2.15 shows GSID (excluding Settlement Cash) and net core Crown debt continuing to grow as a share of GDP at the start of the projection period, because of the scale of borrowing required to cover OBEGAL deficits and the Government's capital programme. As OBEGAL moves back into surplus towards the end of the projection period, GSID and net debt begin to fall as a share of GDP.

Figure 2.15 - GSID (excluding Settlement Cash), net core Crown debt, net core Crown debt including NZS Fund assets
Figure 2.15 - GSID (excluding Settlement Cash), net core Crown debt, net core Crown debt including NZS Fund assets.
Source:  The Treasury

Figure 2.16 shows that core Crown expenses are projected to stabilise and then fall slightly as a percentage of GDP. This is because the allowance for new operating spending grows at the rate of inflation, which is assumed to be lower than the rate of GDP growth.

Figure 2.16 - Expenses
Figure 2.16 - Expenses.
Source:  The Treasury

Figure 2.17 shows that from the start of the projection period until 2020 the tax-to-GDP ratio is assumed to rise as fiscal drag pushes people into higher tax brackets. From 2020 the tax-to-GDP ratio then flattens as fiscal drag is assumed to be mitigated by changes to personal tax rates and/or thresholds. This is assumed so that the tax-to-GDP ratio remains at average historical levels.

Figure 2.17 - Revenue
Figure 2.17 - Revenue.
Source:  The Treasury

The projections are sensitive to the assumptions used …

The projections are dependent on the assumptions chosen about how elements of revenue and expenditure will change over time. Differences in these assumptions would result in different medium-term fiscal projections.

The Treasury has decided to use the same assumptions in the Pre-election Update projections as those used in the 2008 FSR. These are outlined in the annex below. This reflects the Treasury's best judgement as to the most appropriate interpretation of current policy for the purposes of medium-term budgeting decisions. This is because medium-term assumptions around operating and capital allowances reflect the budgeting approach currently used and also applied in the forecast period.

Figure 2.18 - Changing the real GDP growth assumption in the projection period
(impact on GSID excluding Settlement Cash)
Figure 5 - Sensitivity of GSID projections to assumptions: changing the real GDP growth rate in the projection period.
Source:  The Treasury

To illustrate the sensitivity of the projections to assumptions, Figure 2.18 shows the impact on GSID (excluding Settlement Cash) of real GDP growth in the projection period being 0.5% higher or lower in each year than the 2.5% rate assumed in the central projection. In this scenario an increase in real GDP growth is assumed to be driven by an increase in productivity, which flows through into higher wages and nominal GDP and higher tax revenue. Because in the projections most expenditure is not linked to wage growth and instead grows at 2% per annum, the overall impact would be to reduce GSID (excluding Settlement Cash) as a percentage of GDP by ten percentage points by the end of the projection period.

… and to the starting point

Figure 2.19 - Changing the starting point: GSID (excluding Settlement Cash) with a higher or lower starting point in 2012/13
Figure 2.19 - Changing the starting point: GSID (excluding Settlement Cash) with a higher or lower starting point in 2012/13.
Source:  The Treasury

The projections are also dependent on the fiscal forecasts for the period 2008/09 to 2012/13, as these are the starting point from which the projections grow. If fiscal results turn out to be higher or lower than in the forecasts, this would result in a different debt ratio in 2012/13, and debt would then develop from that higher or lower starting point.

To illustrate this, Figure 2.19 shows how GSID (excluding Settlement Cash) as a share of GDP would evolve in the projection period if the starting debt ratio in 2012/13 were to be four percentage points higher or lower.

Long-Term

Beyond the 10-year projection period presented here, the proportion of New Zealand's population aged over 65 will start to rise significantly relative to the working age population. In the Treasury's 2006 Statement of the Long-term Fiscal Position we outlined how this will put pressure on the costs of health care and New Zealand Superannuation in particular, under the assumption of continuation of existing policies and cost trends over the next 40 years. The long-term fiscal situation is still subject to the same challenges outlined in the 2006 Statement, particularly the pressures of an ageing population. We have not updated the 2006 report, but our preliminary assessment is that the long-term fiscal position has deteriorated, in that debt rises more quickly than was set out previously. A full statement is likely to be published in 2009.

Notes

  • [6]The projections show that the deterioration in the fiscal outlook, which is driven by the weaker economy, is expected to be long-lasting. The projections are dependent on the starting point and there is considerable uncertainty around the short-term economic outlook. The extent to which the weaker economic outlook affects the short-term fiscal outlook can also be approached by considering estimates of the cyclically-adjusted balance. As has been the case in recent Updates, information on this is included in the Additional Information for the 2008 Pre-election Update, which is available at www.treasury.govt.nz/budget/forecasts/prefu2008

Annex: Assumptions for Medium-term Fiscal Projections

The assumptions for the medium-term fiscal projections are outlined below. The full assumptions can be found in the 2008 FSR, at http://www.treasury.govt.nz/budget/2008/fsr/

Table A1 - Summary of economic and demographic assumptions*
June year [7] 2009 2010 2011 2012 2013 2014 2015 2016 2017 ….. 2023
  Forecasts Projections
Labour force 0.9 0.6 0.7 1.1 1.4 0.9 1.0 0.9 0.8   0.6
Unemployment rate** 4.3 5.0 5.1 4.9 4.6 4.6 4.6 4.6 4.6   4.6
Employment 0.2 -0.2 0.5 1.3 1.7 0.9 1.0 0.9 0.8   0.6
Labour productivity growth*** 0.2 2.5 2.7 1.9 1.2 1.5 1.5 1.5 1.5   1.5
Real GDP 0.2 2.3 3.4 3.4 3.1 2.5 2.5 2.4 2.4   2.1
Consumer price index
(annual % change)
3.4 2.3 2.4 2.5 2.4 2.2 2.0 2.0 2.0   2.0
Government 10-year bonds (quarterly % rate) 6.3 6.3 6.2 6.1 6.0 6.0 6.0 6.0 6.0   6.0
Nominal average hourly wage 5.4 4.1 4.0 3.7 3.5 3.8 3.6 3.5 3.5   3.5

* Annual average % change unless otherwise stated.

** Level of unemployment.

*** Full-time equivalent employed measure.

Sources: The Treasury, Statistics New Zealand

Table A2 - Summary of fiscal assumptions
Tax revenue Linked to growth in nominal GDP, with a constant tax-to-GDP ratio assumed for all components except for PAYE.  PAYE is grown by multiplying nominal GDP growth by an elasticity of 1.4.
New Zealand Superannuation Currently indexed to inflation but is constrained for a married couple to the equivalent of 65% to 72.5% of average weekly earnings. By 2013/14, the 65% wage floor is reached and growth in the expense is driven by demographic changes and nominal wage growth. Assumes the average tax rate on New Zealand Superannuation increases due to fiscal drag which arises due to PAYE growing faster than nominal GDP.
Other benefits Demographically adjusted and linked to inflation.
Health and education Demographically adjusted.
Finance costs A function of debt levels and interest rates.
Other Not demographically adjusted.
Operating allowance $1.694 billion in 2013/14. This is equivalent to $1.894 billion with a $200 million adjustment which is the approximate expense that is already included in projected baselines as a result of demographic growth. $1.894 billion is based on the $1.750 billion new spending allowance set for Budget 2009, with subsequent operating allowances increasing at the rate of inflation over the forecast and projection periods.
Capital allowance $900 million in 2013/14, increasing at inflation.
Surplus NZDMO financial assets $0 billion.
NZS Fund Contributions to the Fund are assumed to be consistent with the New Zealand Superannuation Fund Act 2001[8].
Future emissions liabilities The Kyoto liability included in fiscal forecasts reflects the Government's obligation for Commitment Period 1, which is for the period 2008 to 2012. Base case projections beyond 2013/14 do not incorporate a quantitative estimate of any net emissions liability that may eventuate from New Zealand's obligations under future international climate change agreements.

Source: The Treasury

Assumptions about the Emissions Trading Scheme (ETS)

The fiscal impact of the ETS depends on several highly uncertain factors, most notably future carbon prices and New Zealand's emissions targets from future international climate change agreements. The ETS has no impact on debt beyond 2012/13 in fiscal projections asa policy of full recycling of revenue is assumed. Net revenue (the value of credits received after free allocation of credits to participating industries and after meeting future emission liabilities) is assumed to be recycled back to the public through fiscally equivalent, unspecified tax reductions or spending increases.

An indication of possible net revenue from the ETS is presented in the table below based on assuming:

  • a carbon price of $25 or $50 per tonne CO2-equivalent, and
  • three potential emissions targets New Zealand might face under future international agreements, where the target is set relative to emissions in 1990.
Table A3 - possible ETS net revenue
Projections, $millions, calendar years 2014 2015 2016 2017 2018 2019 2020
Crown net revenue if carbon price = $25/tonne of CO2-equivalent
 Scenario 1: target 100% of 1990 emissions 484 522 546 526 499 667 482
 Scenario 2: target 90% of 1990 emissions 331 370 393 373 346 514 329
 Scenario 3: target 80% of 1990 emissions 176 214 238 218 191 359 174
Crown net revenue if carbon price = $50/tonne of CO2-equivalent
 Scenario 1: target 100% of 1990 emissions 1,011 1,068 1,045 1,033 937 1,166 975
 Scenario 2: target 90% of 1990 emissions 706 763 740 727 632 861 670
 Scenario 3: target 80% of 1990 emissions 395 452 429 417 321 550 359

These estimates assume 50% of post-1989 foresters receive credits and the associated liabilities when forests are harvested. Revenue to the Government from unallocated credits exceeds the cost of liabilities from harvesting activities each year until 2020. Beyond 2020, this reverses in line with projected increases in harvesting.

Estimates also incorporate the fiscal impact of higher revenue to renewable electricity generators who do not face a corresponding increase in fuel costs. It is assumed the Government receives 30% of the revenue gain to private companies through tax. For SOE electricity producers, the Crown receives 50% of the revenue increase through both tax and dividends.

Notes

  • [7]Note that the economic forecasts in the Pre-election Update are based on a March year.
  • [8]The Pre-election Update provides details on contributions over the next four years. Further details can be found in “Financing New Zealand Superannuation”, a Treasury Working Paper 01/20, available at www.treasury.govt.nz/workingpapers/2001/01-20.asp

Risks to Fiscal Forecasts

The fiscal forecasts were finalised on 17 September 2008 in accordance with forecast accounting policies. There are certain risks associated with the forecast results. To assist in evaluating such risks, the following chapters should be read in conjunction with the fiscal forecasts:

  • Risks and Scenarios (Chapter 3) - The fiscal forecasts are based on the economic forecasts presented in Chapter 1 and any variation from the economic forecast will affect the fiscal forecasts, in particular tax revenue and benefit expenses. The Risks and Scenarios chapter discusses the effect on the forecasts under different circumstances.
  • Specific Fiscal Risks (Chapter 4) - The fiscal forecasts incorporate government decisions up to 17 September 2008. The Specific Fiscal Risks chapter covers specific policy decisions that are under active consideration by the Government at the time of the finalisation of the forecasts.

In addition to the specific fiscal risks and the link to the economic forecasts, there are a number of forecasting issues explained below that may arise in future.

Tax forecasting risks

The tax forecasts prepared for this Pre-election Update are based on current tax policy and on the macroeconomic central forecast. Given the many tax policy changes that have been enacted recently (cut in company income tax rate, movements in personal income tax thresholds, introduction of PIE and FDR regimes for taxation of investments, etc), there is considerable uncertainty around exactly how these changes will pan out and their effect on the tax take. Sensitivities of tax revenue to changes in economic conditions are also presented in the Risks and Scenarios chapter on page 56.

KiwiSaver risks

Baselines reported by Inland Revenue incorporate an assumed take-up rate profile for the KiwiSaver regime. The actual take-up rate could be higher or lower than assumed, or faster or slower than assumed, representing an unquantified risk to the operating balance.

ETS risks

Baselines reported by the Ministry for the Environment on the ETS are based on a number of assumptions and projections, all of which can change through time. Notably they incorporate an assumed take-up rate profile for forestry participation in the scheme. The actual take-up rate could be higher or lower than assumed. These potential changes represent an unquantified risk to the operating balance.

Revaluation of property, plant and equipment

Crown accounting policy is to revalue certain classes of property, plant and equipment on a regular basis. In certain circumstances the valuation will be affected by foreign exchange rates, so any change in the NZ dollar (from 30 June 2008) may affect the current physical asset values included in the fiscal forecasts.

Discount rates

The Government Superannuation Fund and ACC liabilities included in these forecasts have been valued as at 30 June 2008. The liabilities are to be next valued for the 2009 Budget Update. Any change in discount rates will affect the present fiscal forecast. For example, if the discount rate rises, the value of the liabilities will decrease.

Other market rates

Forecasts use the exchange rates, interest rate curves and electricity pricing curves prevailing at the forecast reference date. Any subsequent change to these rates will affect the fiscal outcome.

Tertiary education institutes' accounting treatment

The forecast information presented in the 2008 Pre-election Update combined Tertiary Education Institutes (TEIs) on an equity accounting basis. This treatment has been under consideration by accounting standard setters. The Financial Reporting Standards Board (FRSB) has recently advised that the question of whether to consolidate autonomous and independent entities will be considered by delivering its deliberations of the International Accounting Standards Board (IASB) project on consolidation.

The combination method adopted in these forecasts is to equity account for the TEIs' net surpluses and net investment (ie, TEI revenues, expenses, assets and liabilities are not included on a line-by-line basis). This is consistent with the treatment adopted in the 2008 Financial Statements of the Government.

3 Risks and Scenarios

Introduction

As presented in the Economic and Tax Outlook chapter, the main forecast relies on a number of judgements about how both the New Zealand and the world economies evolve. There is substantial uncertainty about those judgements, especially regarding how the world economy and the US financial crisis will evolve over the next few years. In the Budget Update, we noted that there were significant downside risks to the main forecast, reflecting the turmoil in international financial markets. We also developed an alternative scenario in which the finance costs faced by New Zealand would be higher than the main forecast because of a more prolonged and deeper global financial crisis.

Since the Budget Update, global developments have been more in line with the alternative scenario than the Budget forecast and global financial and economic conditions have worsened significantly. On the domestic front, finance companies have continued to face reduced debenture funding and more finance companies went into receivership or moratorium in the past three months. The speed and magnitude of the slowing in domestic demand has been more abrupt and greater than forecast in the Budget Update.

Reflecting these recent international and domestic developments, we have made significant downward revisions to our growth forecasts in this Update. However, the financial turmoil has intensified since the finalisation of our economic forecasts. As a result, we have seen the downside risks to our growth forecasts increase markedly, particularly in the years to March 2010 and 2011.

The first part of this chapter identifies major risks to the main forecast and describes how the various forces would affect the economy if these risks were to eventuate. The second part of this chapter presents two alternative scenarios for the economy. The third part of this chapter considers the implications of the alternative scenarios for the fiscal position, while the fourth part examines how sensitive the fiscal position is to changes in specific variables.

Economic Risks

Risks to the global outlook remain skewed to downside

Most of the downside risks to the global economy identified in the Budget Update which have started to materialise, are still compelling in this Update. As mentioned above, the turmoil in international financial markets has worsened significantly since the Budget Update, with increased risk aversion and investor uncertainty in financial markets.

The key downside risks concerning the global growth outlook are:

  • The credit crisis that originated in the US in 2007 could be deeper and longer than incorporated in the main forecast. The International Monetary Fund (IMF) projected that losses on mortgages and mortgage-related securities could amount to US$500 billion and total credit-losses could potentially cost up to US$1 trillion if loans and securities related to commercial real estate, consumer credit and corporations are included. The uncertainty about the losses depends on how deep and protracted the US housing recession will be and how far house prices will decline. Furthermore, the turmoil could be more prolonged owing to the uncertainty created by lack of transparency of securitised products and derivatives.
  • A further tightening of lending conditions and reduced credit availability is likely to raise the prospect of a self-reinforcing process of debt reduction. As it becomes harder to raise capital, firms and households in the US and other developed countries with large current account deficits are being forced to reduce debt and save aggressively, which in turn leads to an economic slowdown. An economic slowdown will exacerbate this process as borrowers with unsustainable amounts of debt will fail.
  • A significant slowing in growth in developing economies. So far, China and emerging markets have escaped the credit crisis relatively unscathed. With exports accounting for half of China's GDP and most of these directed to Europe and North America, there is greater uncertainty about the extent of the impact of negative financial shocks in the US and Europe on the Chinese economy. A severe US recession could cause China's growth to decline to 8% or below.

As the credit crisis has become more severe and persistent, the global growth outlook may prove weaker than anticipated in the main forecast. A worse-than-foreseen slowdown in world growth could affect the New Zealand economy further through lower export prices, higher costs of funding and, possibly more importantly, increased risk aversion and investor uncertainty. This would also provide downside risks to the rebound in export growth built into the main forecast even if the exchange rate was lower than the main forecast. A lower exchange rate could arise from rising global risk aversion which could cause large exits in carry trade positions.

Households have finally entered a period of consolidation

In the past eight years, New Zealand has experienced a dramatic fall in its household savings rate: the household savings rate has declined from 0% to -14% of household disposable income over the period from 2000 to 2008 and the ratio of household debt to annual disposable income increased from 112% to 196% over the corresponding period (Figure 3.1). The increasing trend of dis-saving is not unique to New Zealand. Many developed economies such as the US and Australia have experienced a similar phenomenon. To some extent, the fall in the saving rate over this period is partly owing to a long period of stability with interest rates falling to low levels. This may have led households into thinking that they were permanently operating in a low-cost and low-risk environment. As a result, households were encouraged to take on more debt and invest in housing which in turn caused house prices to rise. Higher house prices encouraged households to invest more in housing and increased house prices further, creating a positive feedback loop.

Figure 3.1 - Household savings and debt as % of disposable income
Figure 3.1 - Household savings and debt as % of disposable income.
Source:  Statistics New Zealand, RBNZ and The Treasury

The decline in households' saving contributed directly to rising current account imbalances: the current account balance has deteriorated from a deficit of 6.4% of GDP in 2000 to a deficit of 7.8% of GDP in 2008 with the current account deficit peaking at 9.2% in the March quarter of 2006. Such a high level of external indebtedness makes New Zealand dependent on overseas investors' willingness to lend at affordable rates. It appears that the current financial turmoil has triggered the long-awaited adjustment of external imbalances and households have finally begun to consolidate their balance sheets since the beginning of this year by cutting spending.

In the main forecast, consumption and residential investment growth forecasts are much weaker relative to the Budget Update, reflecting the judgement that households decide to lower their debt-to-income ratio relative to the Budget Update. However, the pace and depth of consolidation will depend on what happens to house prices, credit availability, the level of net migration and the employment outlook.

Figure 3.2 - House prices
Figure 3.2 - House prices .
Source:  QVNZ,  S&P/Case Shiller and Halifax

In particular, there is considerable uncertainty about the extent of the house price fall in the forecast. In the main forecast, we assume an 11% fall in nominal house prices from their peak. Some developed countries which started their housing cycles earlier than New Zealand have seen their house prices fall sharply. In the US, average house prices nationwide rose by 90% between 2000 and 2006 and have since fallen by 20%. Although there are differences in housing market conditions between the US and New Zealand, a larger decline in New Zealand house prices is possible (Figure 3.2).

A further point we can touch on here concerns the link between changes in house prices and consumption. There is greater uncertainty on the extent of the impact of wealth on consumption. Therefore, if households attempt to consolidate their balance sheets more aggressively and the estimated wealth effect is larger than assumed, we could see private consumption growth weaker than forecast.

The economy could be stronger in the near term

On the upside, while the international growth outlook has deteriorated, the domestic economy may be showing signs of having turned the corner: the business outlook improved according to the National Bank Business Outlook and the Westpac McDermott Miller measure of consumer confidence rebounded strongly to 104.8 for the September quarter from the 18-year low recorded in the June quarter. The renewed optimism is mainly attributed to falling petrol prices and expected further interest rate cuts. During the time of writing, WTI oil prices fell below $US100 per barrel at one stage from their recent peak of US$146 per barrel. Historically, the New Zealand economy, especially consumer spending, was very sensitive to changes in petrol prices. If petrol prices are lower than forecast, this will result in an upside risk to the consumption growth forecast in the near term.

In addition, higher consumer sentiment, lower petrol prices and expected further interest rate cuts together could spur households to spend more of their tax cut than is the case in the main forecast. As a result, this could see GDP growth slightly stronger in the near term than forecast.

From a medium-term perspective, the economy may be more resilient to weather the global economic storms now than in the late 1990s because of a stronger fiscal starting position and a better monetary framework. The main forecast incorporates a weak response of export services to the falling exchange rate to reflect a more protracted recovery in the world economy. It is possible that demand for our goods and services from Asia could be stronger if the Asian economies undergo only a mild slowdown and the exchange rate depreciates more sharply than incorporated in these forecasts. Finally, the fall in residential investment may not be quite as large as predicted in the main forecast because we do not have a large inventory of unsold houses as in the US.

Risks for inflation remain tilted to the upside

The balance of risks for inflation continues to be tilted to the upside even with a weaker GDP growth outlook and the recent drop in oil prices. Annual inflation is now expected to peak at around 5% in the September 2008 quarter. The Consumer Price Index (CPI) spike, driven by petrol and food price increases, could cause households and firms to revise up their inflation expectations in the medium term which in turn could lead to more sustained inflationary pressures. With implementation of the ETS, there are risks that the emissions price is higher than assumed in the forecast and the second round effects of the ETS could be greater than incorporated in the forecast. In addition, the ETS could have a larger effect on business investment than assumed in the forecast.

Besides inflation, the key drivers of the nominal economy are world export and import prices. In view of the weaker global growth outlook, the balance of risks to international prices for export and import goods is somewhat to the downside in the medium term, with the impact on the terms of trade dependent on whether it is export or import prices that are most affected.

Last, but not least, any extreme weather patterns such as drought and flooding could have a profound but temporary impact on the New Zealand economy.

Economic Scenarios

Given the number of risks and unusual uncertainty, two scenarios which simulate the impact of alternative judgements on the economy are presented.

Figure 3.3 - Trading partner growth
Figure 3.3  - Trading partner growth.
Source:  Consensus Economics, The Treasury

A deeper recession

The first scenario (downside) is based on a weaker outlook for world growth where credit risks and conditions in the US and Europe become more severe relative to the main forecast. Amid financial fears, firms are reluctant to invest and households reduce consumption further. As a result, there is a deeper and more prolonged slowdown in the US and Europe which significantly dampens economic growth in China and other Asian economies. Under this scenario, trading partner growth decelerates sharply to 2.2% in the 2009 calendar year and rebounds to only 3.0% in the 2010 calendar year (Figure 3.3). Against this backdrop, New Zealand house prices fall by 25% from peak to trough which negatively impacts on consumer confidence.

Figure 3.4 - Real GDP
Figure 3.4 - Real GDP.
Source:  Statistics New Zealand, The Treasury

Model simulations indicate that the combined effect of these judgements would reduce real GDP growth by 0.3 percentage points and 0.6 percentage points in the March 2009 and 2010 years respectively (Figure 3.4). Relative to the main forecast, we see households spend less and save more, in response to the larger house price slump and tighter credit conditions. With slower growth, businesses not only decrease investment expenditure but also cut back on employment, with the unemployment rate rising to around 6.1% in 2010 and staying at that level until the March 2011 quarter.

As global risk aversion heightens and the world economy slows, commodity prices fall more than in the main forecast. In such an environment, the NZ dollar also depreciates sharply to 57 in March 2009 on a TWI basis. Although the exchange rate declines faster than in the main forecast, CPI inflation is around 0.9 percentage points weaker than in the main forecast in March 2010 because of subdued domestic demand (Figure 3.5). With lower inflationary pressure throughout the forecast period, a more accommodating monetary policy stance is required with 90-day interest rates reaching 5% in the March 2010 quarter, almost 200 basis points lower than in the main forecast (Figure 3.6).

Lower interest rates encourage a recovery in both business and residential investment in the March 2011 and 2012 years but consumers do not regain their confidence until the March 2012 year. As a result, economic growth picks up speed from June 2010 onwards. Overall, weaker real activity combined with subdued inflationary pressures results in nominal GDP growth being lower than in the main forecast for the entire forecast period with a cumulative impact of around $12.1 billion.

Stronger short-term outlook

The second scenario (upside) presents a growth path for the economy where three key judgements are slightly different from the main forecast - (1) stronger near-term growth outlook owing to a larger impact on private consumption of the tax cuts; (2) a slightly stronger housing market and (3) higher inflationary expectations.

Figure 3.5 - Inflation
Figure 3.5 - Inflation.
Source:  Statistics New Zealand, The Treasury

With respect to real GDP, the overall profile in this scenario is very similar to that in the main track, apart from the first year of the forecast period (Figure 3.4). In this scenario, real GDP growth in the March 2009 year is 0.5 percentage points higher than forecast in the main track. As the impact of the personal tax cuts on consumer spending is larger than assumed in the main forecast, this altered judgement increases consumption growth by 0.2 to 0.3 percentage points for the first three years of the forecast period.

Figure 3.6 - 90-day interest rates
Figure 3.6 - 90-day interest rates.
Source:  Statistics New Zealand, The Treasury

Model simulations show that inflation holds up higher than in the main forecast as inflation expectations remain high (Figure 3.5). In addition, stronger near-term domestic demand also puts further pressure on non-tradable inflation. In this scenario, the Reserve Bank continues to lower the Official Cash Rate (OCR) with 90-day interest rates reaching 7.5% in June 2009 and holds the OCR at this level for a year. As inflationary pressures abate, the Reserve Bank begins the easing cycle again in June 2010 with 90-day interest rates reaching 6.5% by the end of the forecast period.

Higher output and inflationary pressures, relative to the main forecast, lead to higher nominal GDP. As the price level is permanently higher than in the main forecast, the divergence in the level of nominal GDP between this scenario and the main forecast increases over the forecast period with the greatest difference of $2.2 billion in the year to March 2013. Relative to the main forecast, the total nominal GDP gains amount to $7.4 billion across the forecast period.

Fiscal Scenarios

The fiscal position is strongly influenced by the economy. The major economic determinants, and how they impact on the fiscal position, are listed below.

  • Nominal GDP - higher GDP levels are reflected in higher tax revenue, which increases the operating balance and lowers the Government's net debt.
  • Interest rates - higher interest rates lead to increased debt-financing costs, although this would be partially offset by higher interest-based revenue on assets.
  • The level of unemployment - higher levels of unemployment translate to an increase in spending because the number of unemployment beneficiaries rises. This decreases the operating balance and raises net debt levels.
  • CPI inflation - as most benefits are indexed to CPI movements, higher inflation results in increased benefit costs. This reduces the operating balance and increases debt.

Of the two alternative scenarios, the differences from the main forecast are much greater in the downside scenario, reflecting the asymmetric risk profile of the main forecast. In the downside scenario, the fiscal position deteriorates markedly over the forecast horizon:

  • The deficit of the OBEGAL (excluding the NZS Fund retained revenue) is greater than the main forecast throughout the period with the largest difference of 0.5 percentage points of GDP occurring in 2009/10. The deficit ranges from 0.2% of GDP in 2008/09 to 1.8% of GDP in 2012/13 (Figure 3.7).
Figure 3.7 - OBEGAL (excluding NZS Fund retained revenue)
Figure 3.7 - OBEGAL (excluding NZS Fund retained revenue).
Source:  The Treasury
  • GSID is 26.2% of GDP at the end of the forecast period compared with 24.3% of GDP in the main forecast (Figure 3.8).
Figure 3.8 - Gross sovereign-issued debt (excluding Settlement Cash)
Figure 3.8 - Gross sovereign-issued debt (excluding Settlement Cash).
Source:  The Treasury

Under the upside scenario, the overall impact of higher nominal GDP is a small improvement in the fiscal position relative to the main forecast:

  • The OBEGAL is higher by around 0.2 percentage points of GDP throughout the forecast periodrelative to the main forecast.
  • GSID is 23.3% of GDP at the end of the forecast period.

Fiscal Sensitivities

Table 3.1 provides some “rules of thumb” on the sensitivities of the fiscal position to changes in specific variables. It is important to note that this analysis does not take into account the fact that some tax types such as corporate tax and other persons tax have a larger variability than nominal GDP over business cycles. This difference in variability exists because firms can build up losses in the downswing of the business cycle and utilise these losses in the upswing.

Table 3.1 - Fiscal sensitivity analysis
Year ending 30 June
($million)
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
1% lower nominal GDP growth per annum          
Revenue (549) (1,106) (1,691) (2,332) (3,040)
Addition to financing costs 18 69 158 280 436
Impact on the operating balance (567) (1,175) (1,849) (2,612) (3,475)
Revenue impact of a 1% decrease in the growth rates of:          
Wages and salaries (250) (515) (795) (1,100) (1,455)
Taxable business profits (135) (275) (435) (600) (775)
One percentage point lower interest rates          
Interest income (84) (26) (50) (65) (39)
Expenses (88) (148) (218) (305) (393)
Impact on the operating balance 5 122 168 240 354

The forecasts of capital contributions to the NZS Fund are sensitive to the rate of return assumed on the Fund's assets.

Table 3.2 - NZS Fund contributions sensitivity analysis
Variable Marginal
change
Effect on
net return
after tax
Effect on capital contribution
($million)
(%age points) (%age points) 2009/10 2010/11 2011/12 2012/13
Expected gross rate of return -1 -0.76 231 243 256 269

4 Specific Fiscal Risks

Introduction

This chapter describes the specific fiscal risks to the Crown, including contingent liabilities. The Public Finance Act 1989 (PFA) requires disclosure of all government decisions and other circumstances that may put pressure on the forecast spending amounts, and/or have a material effect on the fiscal and economic outlook.

Criteria for Disclosure of Specific Fiscal Risks

To ensure a practicable and consistent disclosure approach, fiscal risks are disclosed based on the following criteria, consistent with the principles of the PFA:

  • Reasonable certainty criterion - risks where government decisions or legislative commitments have uncertain fiscal consequences or timing, such that they cannot be included in the fiscal forecasts.
  • Materiality criterion - risks have an impact on the fiscal forecasts (operating balance, net worth or gross debt) of $10 million or more in any one forecast year.
  • Active consideration criterion - risks are being actively considered by the Minister of Finance and responsible Ministers (eg, are the subject of written reports) or are decisions that have been deferred until a later date.

Exclusions from Disclosure

The PFA requires that all specific fiscal risks be disclosed, except where it is determined by the Minister of Finance that disclosing a risk 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
  • result in a material loss of value to the Crown.

Specific fiscal risks do not include:

  • normal forecasting risks, such as uncertainty around welfare benefits, SOE/CE surpluses, the impact of regular revaluations of physical assets, finance costs or fluctuations in external markets,
  • possible changes to the interpretation of accounting policies, such as the changes to revenue recognition rules and recognition of liabilities, or
  • discussion documents containing proposals that the Minister of Finance and responsible Ministers will not actively consider until the consultation process has been completed.

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

The risks described in this chapter relate to the activities of the current Government only. Political party policies do not constitute specific fiscal risks.

Contingent liabilities are also included according to materiality. Contingent liabilities below $10 million are included in the “other quantifiable contingent liabilities” total. Comparatives have been adjusted where appropriate to align with the disclosure of new “material” contingent liabilities. The total amount of prior years' contingent liabilities remains unchanged.

Information Relating to all Disclosed Risks

  • The risks disclosed may not eventuate into government policy and the final cost or saving may differ from the amount disclosed if the policy is developed.
  • All risks, should they eventuate, would impact on the Government's forecast operating and/or capital spending amounts. In the 2008 Budget Update the Minister of Finance declared that the size of the operating allowances for spending and revenue initiatives in future Budgets had been set at $1.75 billion per annum from Budget 2009 onwards. An allowance of $900 million for capital spending over the period 2008/09 to 2012/13 was also set in the 2008 Budget Update. These amounts have been incorporated into the forecasts to accommodate policy initiatives on which decisions have yet to be made. Most of the risks outlined in this chapter, if they eventuate, would be covered by these amounts and therefore have no impact on the overall level of the forecasts. The risks have been disclosed to indicate the pressure the risks place upon the forecast spending amounts.
  • If the total of all risks considered exceeds the forecast new operating spending amounts in the forecasts, this would impact on the operating balance.
  • The impact of capital spending initiatives is described as increasing the Government's gross debt position. This is correct but because the Government also holds some financial assets the actual impact could equivalently be described as reducing the Government's assets.
  • There are a number of other pressures on the fiscal position that have not been included as risks. These pressures comprise proposals largely generated within individual departments and not yet considered by the Minister of Finance and responsible Ministers. Such items are expected to be managed within forecast spending amounts noted above.

Charges Against Future Budgets

As part of its Budget strategy, the Government has put in place some longer-term funding paths for particular sectors. This aids long-term planning and demonstrates the Government's commitment to specific policies.

Charges against future Budgets do not meet the definition of a “risk”‘ under the PFA, as these items are incorporated in the fiscal forecasts. This section is provided to increase transparency about the provisions for future Budgets.

Defence Funding Package

The Defence Funding Package is designed to provide the New Zealand Defence Force (NZDF) with the funding required to address issues identified by the Defence Capability and Resourcing Review, including capability, and maintaining equipment and reserves. Budget 2008 included $69.1 million per annum as the fourth tranche of the 10-year plan. The following table shows the additional tranches to be charged against future Budgets.

Defence Funding Package
Budget to be charged
($million)
2009/10 2010/11 2011/12 2012/13 2013/14 2014/15
Budget 2009 85.700 85.700 85.700 85.700 85.700 85.700
Budget 2010 - 108.100 108.100 108.100 108.100 108.100
Budget 2011 - - 66.900 66.900 66.900 66.900
Budget 2012 - - - 14.200 14.200 14.200
Budget 2013 - - - - 58.600 54.200
Budget 2014 - - - - - 0.00

Economic Transformation: Innovation - Pre-commitment

Budget 2008 included significant funding for Economic Transformation: Innovation. In addition to this, the Government has agreed that the following funding for this purpose will be pre-committed against future Budgets.

Economic Transformation: Innovation - Pre-commitment
Budget to be charged
($million)
2009/10 2010/11 2011/12 2012/13 and outyears
Budget 2009 93.000 100.000 100.000 100.000
Budget 2010 - 75.000 75.000 75.000
Budget 2011 - - 25.000 25.000

Foreign Affairs and Trade - Funding Package Pre-commitment

The Foreign Affairs and Trade Package is designed to provide the Ministry of Foreign Affairs and Trade (MFAT) with certainty to progress growth plans while also providing the Government and MFAT the flexibility to respond to emerging issues that may arise as a result of an increasingly complex international environment. The pre-commitment is $133 million operating and $39 million in capital funding to be allocated in Budget 2009 to Budget 2012.

Operating
Budget to be charged
($million)
2009/10 2010/11 2011/12 2012/13
Budget 2009 8.298 8.035 8.035 8.035
Budget 2010 - 13.557 13.369 13.369
Budget 2011 - - 18.267 17.68
Budget 2012 - - - 24.493
 
Capital
Budget to be charged
($million)
2009/10 2010/11 2011/12 2012/13
Budget 2009 7.031 - - -
Budget 2010 - 5.007 - -
Budget 2011 - - 15.655 -
Budget 2012 - - - 11.307

Health - Pre-commitment

The Government has agreed that the indicative Health allocation of $750 million for Budget 2009 may be pre-committed by $2.233 million in 2010/11 rising to $13.736 million per annum in 2012/13 and outyears.

Health - Pre-commitment
Budget to be charged
($million)
2009/10 2010/11 2011/12 2012/13 and outyears
Budget 2009 - 2.233 16.000 13.736

Teachers' and Principals' Collective Agreements

The Government previously set aside funding for the Teachers' and Principals' Collective Agreements in Budgets 2007 and 2008. These Collective Agreements have now been settled, and the remaining costs are $169.128 million in 2009/10 rising to $192.414 million in 2010/11 and outyears. These costs will be charged against Budget 2009.

Teachers' and Principals' Collective Agreements
Budget to be Charged
($million)
2009/10 2010/11 2011/12 2012/13 and outyears
Budget 2009 169.128 192.414  192.414  192.414 

Time-limited Funding

Time-limited funding does not meet the definition of a “risk” under the PFA, but is further information that is prepared to increase transparency about initiatives with funding profiles that cease or decrease during the forecast period.

The following table outlines those areas where initiatives have time-limited funding that decreases or ceases at some point in the forecast period and may potentially be extended, using a $5 million materiality threshold. Time-limited funding often relates to pilot programmes, and in some cases Multi-year Appropriations (MYAs) if they are likely to require further funding in the future.

Time-limited Funding

Vote
Description of initiative Impact of continuing funding
($million)
Biosecurity Southern Saltmarsh Mosquito Eradication Programme 7.000 in 2008/09, 9.000 in 2009/10 and 11.000 in 2010/11 and outyears
Child, Youth and Family Services Demand-driven pressures on care
and protection Services
6.800 in 2008/09 and outyears
Energy Funding to generate reserve electricity at Whirinaki 10.000 ongoing from 2012/13
Health Meningococcal Vaccine – Ongoing Delivery 7.000 ongoing from 2009/10
Health Healthy Housing Programme 15.000 ongoing from 2010/11
Transport Canterbury Transport Project 14.000 in 2012/13 and outyears

The following table shows the operating impact if funding were to be appropriated to maintain funding levels for these initiatives (ie, extend the initiatives beyond their current scheduled completion dates). These amounts would need to be managed within the forecast spending.

Operating Impact
Impact ($million) 2008/09 2009/10 2010/11 2011/12 2012/13 and
outyears
Funding to extend operating initiatives (impact on operating balance) 13.800 22.800 39.800 39.800 63.800

Specific Fiscal Risks

Quantified Risks

The risks outlined in these tables would, if they eventuated, impact on the Government's forecast new operating and/or capital spending amounts.

The Minister of Finance has yet to fully consider the quantum of these risks.

Quantified Risks
Quantified risks as at
23 September 2008
Operating balance Gross
debt
Value of risk
($million)
Funding in Budget 2008
($million)
New Risks        
Energy - ETS household assistance package Decrease - 1 billion over the period 2008/09 to 2023/24
and 180 million between 2009/10 and 2010/11
-
Justice - Supreme Court Construction
Cost Pressures
Decrease Increase 8 to 12 capital and 2 to 4 operating between
2008/09 and 2012/13
-
New Zealand Defence Force -
Operationally Deployed Forces
Decrease - 10 to 15 operating per annum from 2009/10 54 operating
Transport - Canterbury Transport Project - Increase 211 capital 34 capital between 2008/09 and 2012/13
Transport - Penlink Roading Project - Increase 100 to 200 capital in 2009 -
Transport - Waterview Connection - Increase 1.5 billion capital between 2015 and 2050 -
Transport - Waterview Connection,
risk of not tolling project
Decrease Increase 500 capital between 2015 and 2050 -
Changed risks        
Education - Early Childhood
Education Ratio Changes
Decrease - 35 per annum operating from 2011/12 -
Education - School Property Decrease Increase

Operating: 14 in 2009/10 rising to
89 in 2012/13

Capital: 153 in each of 2009/10 and
2010/11 and 123 per annum from 2011/12

Operating: 6 in 2008/09, 5 in
2009/10 and outyears

Capital: 71 in 2008/09, 3 in
2009/10 and 1 in 2010/11

Education - Schools Plus Decrease Increase 134 to 340 from 2011 40 in 2008/09
Education (Tertiary) - Tertiary
Education Capital Investment Fund
- Increase 123 capital between 2008/09 and 2011/12 12 in 2008/09
Education (Tertiary) - Wananga
Capital Injections
- Increase 59 capital in 2008/09 -
Health - Indicative Funding for
Budgets 2009 and 2010
Decrease - 750 in 2009/10, 1,498 in 2010/11,
1,484 in 2011/12 and 1,486 in 2009/10
750 per annum from 2008/09
New Zealand Defence Force - Sale
of Skyhawks and Aermacchi Trainers
Increase Decrease 90 capital in 2008/09 -
Police - Increases to Police Staff Decrease Increase 45 capital in 2009/10 41 per annum operating
and 10 capital in 2008/09
Unchanged Risks        
Customs - Border Management
System (CusMod) Replacement
Decrease Increase 15 per annum operating and 105 capital 1 operating one-off to further
develop the business case
Economic Development - Venture
Investment Fund
- Increase 40 capital in 2009/10 and 2010/11 -
Education (Tertiary) - Vocational Training Decrease - 2.5 in 2008/09, 7.5 in 2009/10, 15 in
2010/11 and 20 in 2011/12 and outyears
-
Environment - Purchase of Kyoto
Compliant Emission Units
- Increase 500 capital -
Justice - Financial Action Taskforce Recommendations Decrease - 15 per annum -
Justice - Greater Auckland Region
Service Delivery Strategy
Decrease Increase 265, operating / capital split yet to be determined -
Maori Affairs - Maori Business Aotearoa New Zealand Increase Increase 40 capital in 2008/09 and 4 per annum
operating saving
-
New Zealand Defence Force -
Capital Injections
- Increase 210 over the forecast period 130 capital
Social Development - Youth
Court Sentencing Orders
Decrease Increase 12 operating and 4 capital -

Unquantified Risks

The risks outlined in these tables would, if they eventuated, impact on the Government's forecast new operating and/or capital spending amounts.

Unquantified Risks
Unquantified risks as at
23 September 2008
Operating
balance
Gross
debt
Funding received in Budget 2008
($million)
New Risks      
Agriculture and Forestry – New Zealand Fast Forward Fund Decrease Increase -
Economic Development – Trilateral Projects Decrease Increase -
Education – Caretakers, Cleaners and Groundstaff Negotiations Decrease - -
Education – Integrated Schools Property Decrease - -
Housing – Affordable Home Ownership Decrease Increase -
Housing – Housing Innovation Fund - Increase -
Internal Affairs - Property Strategy Decrease Increase -
Revenue – Paid Parental Leave Review Decrease - -
Revenue – Renegotiation of Double Tax Agreements Decrease - -
Social Development – Five-year Action Plan for Out of School Services Decrease - -
Changed risks      
Health – District Health Board Deficits Decrease Increase -
Housing – Hobsonville Urban Development - Increase 33 capital and 5 operating between 2008/09
and 2011/12
Housing – Sustainable Urban Development Approach Decrease Increase -
Local Government – Response to Rates Inquiry Decrease Increase 51 operating between 2008/09 and 2012/13
Unchanged risks      
Corrections – Capital Projects Decrease Increase 110 capital and a total of 14 operating for Mt Eden
Economic Development – Implementation of the New Zealand Tourism Strategy Decrease Increase -
Economic Development – Radio Spectrum Rights Increase - -
Education/Social Development – Inter-agency Plan for Conduct Disorder/Severe Antisocial
Behaviour
Decrease - -
Finance – Crown Overseas Properties - Increase -
Fisheries – Civilian Maritime Aerial Surveillance Decrease Increase -
Housing – Tamaki - Increase -
Immigration – New Immigration Service Delivery Strategy Decrease Increase -
Justice Sector and Other Agencies – Effective Interventions Decrease - 0.5 capital and 6 operating between 2008/09
and 2011/12
New Zealand Agency for International Development – Adjustment of Official Development
Assistance Fund
Unknown - Operating: 10 in 2008/09, 15 in 2009/10, 12 in 2010/11
and outyears
Revenue – Investment in the Tax System and Related Business Decrease Increase -
Revenue – Rebuild of the Student Loan System Decrease Increase 4 operating in 2008/09
Revenue – Reducing Compliance Costs for Small- and Medium-sized Enterprises Unclear - -
Social Development – Children, Young Persons and their Families Act Decrease Increase -
Social Development – Energy Subsidy for SuperGold Card Holders Decrease - -
Social Development – Working New Zealand: Work-focused Support Decrease - -

Risks Removed Since the 2008 Budget Update

The following risks have been removed since the 2008 Budget Update:

Risks Removed Since the 2008 Budget Update
Expired risks Reason Funding received
($million)
Corrections - Collective Employment Contract Negotiations Funding has been provided 3 in 2008/09, and 11 per annum from 2009/10
Economic Development - Review of Financial products and Providers Funding provided in Budget 2008 and through the Reserve Bank's Funding Agreement

Operating: 3 in 2008/09, 6 in 2009/10, 2 in 2010/11 and 1 in 2011/12 and outyears

Capital: 2 in 2008/09

Finance - State-Owned Enterprise Long-term Hold Reviews Reviews no longer active -
Finance - Restructuring the Rail Industry Final decisions have been taken and funding provided 220 capital between 2008/09 and 2011/12
Finance - Upgrade of National Rail Network Superseded by Finance – Redevelopment of Rail -
Housing - Wellington City Council Social Housing Assistance Funding has been provided 220 capital between 2008/09 and 2017/18
Housing - Local Government and NGO Housing Projects Superseded by Housing – Affordable Home Ownership and Housing – Housing Innovation Fund -
Housing - Urban Development Agencies Superseded by Housing - Sustainable Urban Development Approach -
Justice - Strengthening the National Courts Infrastructure Funding has been provided 10 capital in 2008/09 and 16 capital in 2009/10. 2 operating in 2008/09
Police - International Deployment Capability Not funded in Budget 2007 and no longer under active consideration -
Police - Wage Negotiations Funding has been provided 33 operating in 2008/09, and 38 in 2009/10 and outyears
Revenue - Management of Inland Revenue's Lease Portfolio in Auckland Final decisions on lease options have been taken -
Revenue - Working for Families Review of Rates The Government has taken final decisions on the review -
Social Development - New Zealand Superannuation and Veteran's Pension CPI growth is forecast to be well above the level required to trigger the risk -
Transport - Regional Transport Projects Superseded by several region-specific risks -

Statement of Fiscal Risks

Agriculture and Forestry - New Zealand Fast Forward Fund (new, unquantified risk)

In March 2008, the Government announced its commitment of $700 million to the New Zealand Fast Forward initiative, promoting innovation projects in the pastoral and food sectors. The Government is now considering options to reimburse the fund for income tax and GST implications. This could decrease the operating balance or increase gross debt, depending on the method of reimbursement chosen by the Government.

Corrections – Capital Projects (unchanged, unquantified risk)

The Government is currently considering a range of options to address continued forecast growth in the prison population, including the asset management of current Corrections facilities, and increased prison capacity. This risk is unquantified as the quantum of the risk will vary greatly depending on the options chosen. If approved, any capital injections would increase gross debt while operating funding would decrease the operating balance.

Customs – Border Management System (CusMod) Replacement (unchanged, quantified risk)

Customs' border management systems (CusMod) are over 10 years old. Customs received funding in Budgets 2007 and 2008 to develop a business case for replacement systems for consideration in Budget 2009. In accordance with the two-stage approval process for major IT projects, funding for CusMod replacement is dependent on approval of the two business cases. The indicative cost of the project is $105 million capital over five years and up to $15 million operating per annum. If approved, this would decrease the operating balance and increase gross debt.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: New Zealand Customs Service

Economic Development – Implementation of the New Zealand Tourism Strategy (unchanged, unquantified risk)

The New Zealand Tourism Strategy 2015 is a joint document between the Government and industry. It includes a range of actions to progress key sector goals. Funding for these actions will come from a range of stakeholders, including Government. Ministers are yet to decide the appropriate funding mix to support high-priority actions within the Strategy, however additional capital funding would increase gross debt and additional operating funding would decrease the operating balance.

Economic Development – Radio Spectrum Rights (unchanged, unquantified risk)

The Government sets the processes for the renewal or auction of property rights to radio spectrum in consultation with industry. Any revenue from sale of rights would increase the operating balance by the full amount of the sales. Offers for rights of renewal to existing owners of spectrum rights are set approximately five years in advance of rights expiring with settlement being required prior to granting the new right. The rights in different frequency bands expire at different dates, with the initial expiry dates occurring in 2010. If any offers are rejected then they will be allocated by way of auction on the open market. (For this reason the expected revenue from sale of renewal rights is not reflected in current forecasts of revenue.)

This risk is unquantified as disclosure could compromise the Crown in negotiations.

Economic Development - Trilateral Projects (new, unquantified risk)

The Government is currently considering policy initiatives to support business sectors. The proposals are currently in the early stages of consideration and the Government is considering a range of funding options. Depending on the funding involved, this could decrease the operating balance and/or increase gross debt. The risk is unquantified as disclosure may compromise the Crown in commercial negotiations.

Economic Development – Venture Investment Fund (unchanged, quantified risk)

In Budget 2006, the Government agreed to additional investment commitments in the Venture Investment Fund of $60 million over the period of 2006/07 to 2008/09. The Government is also considering further commitments of $40 million over two years (2009/10 and 2010/11). This depends on the results of the evaluation of the Venture Investment Fund scheduled for completion by 31 March 2009. If approved, this would increase gross debt.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Economic Development

Education - Caretakers, Cleaners and Groundstaff Negotiations (new, unquantified risk)

The Government has agreed to amend the bargaining parameters for the School Caretakers and Cleaners Collective Agreement and the Secondary and Area School Groundstaff Collective Agreement. Any additional funding would decrease the operating balance. The risk is unquantified as disclosure could compromise the Crown in negotiations.

Education – Early Childhood Education Ratio Changes (changed, quantified risk)

The Government has committed to increasing teacher-to-child ratios as part of the Early Childhood Education Strategic Plan. In October 2006, the Government agreed to two stages of staffing ratio improvements to be implemented in July 2009 and 2010. The Government has also communicated that further increases in staffing ratios are being considered. Additional funding estimated as up to $35 million per annum from 2011/12 will be considered as part of Budget 2009. Any increased funding will reduce the operating balance.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Education

Education – Integrated Schools Property (new, unquantified risk)

The Ministry of Education is undertaking a review of integrated schools policy which is to be completed by the end of 2008. This includes consideration of the standard of integrated school property and options to bring substandard integrated school property up to the same standard as that of mainstream state schools. Any decisions on funding for integrated schools will not be considered until this review is completed. Any increased funding would reduce the operating balance.

Education – School Property (changed, quantified risk)

Capital injections for school property will be required in future years to accommodate roll growth and to establish new schools in response to regional population changes. Likely capital injections are estimated at up to $153 million in each of 2009/10 and 2010/11, and $123 million per annum from 2011/12. Capital injections result in consequential operating costs rising from approximately $13.5 million in 2009/10 (including $8.5 million in capital charge) to $89 million in 2012/13 (including $66 million in capital charge). The Ministry of Education is taking steps to reduce the level of capital funding carried forward from year to year. The carry-forward, which represents capital budgets allocated to schools but not yet expended, is currently $1.4 billion. If approved, any capital funding would increase debt, and any operating funding would decrease the operating balance.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Education

Education – Schools Plus (changed, quantified risk)

The Government is considering a range of policies to increase student participation and achievement in education, skills and structured learning. The Government has agreed to fund an initial $40 million in operating for the initial phase of the Schools Plus programme. The Government has also agreed that a compulsory education and training age of 17 will be introduced in 2011, and that age will increase to 18 in 2014. The Ministry of Education has estimated that the cost of all students participating until age 18 in some form of education and training would be between $134 million and $240 million. The Government is also considering other initiatives which could cost up to $100 million. If approved, any capital funding would increase debt, and any operating funding would decrease the operating balance.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Education

Education/Social Development – Inter-agency Plan for Conduct Disorder/Severe Antisocial Behaviour (unchanged, unquantified risk)

The Government has approved and published a six-year Inter-agency Plan for Conduct Disorder/Severe Antisocial Behaviour (2007-2012). The Inter-agency Plan commits Government to deliver a range of initiatives including new services for 3 to 7 year-olds and shared infrastructure across sectors. While amounts would depend on the policy and scaling options chosen, any additional operating funding would decrease the operating balance.

Education (Tertiary) – Tertiary Education Capital Investment Fund (changed, quantified risk)

The Government has established a contestable Tertiary Education Capital Investment Fund (The Capital Fund). This will fund the Crown's contribution to capital investments for public Tertiary Education Institutions that are approved by Cabinet on the recommendation of a panel administered by the Tertiary Education Commission. The value of this Fund has been set at $112 million over three years (this includes some funds transferred from unallocated 2007/08 contingencies). To date, $11.632 million has been appropriated against this Fund in 2008/09.

The Government has also approved in principle a one-off capital contribution of $11.15 million for the construction of a new building for the New Zealand School of Music. The funding has been set aside in a contingency pending the development of a business case.

The Government may also consider making loans or capital injections from the Capital Fund to Tertiary Education Institutions where ongoing educational provision or financial viability are at risk.

The provision of any capital injections will increase gross debt but the total quantum will be within the sum allocated to the Capital Fund.

The Minister of Finance is yet to fully consider the quantum of this risk.

Source: Ministry of Education and Tertiary Education Commission

Education (Tertiary) – Vocational Training (unchanged, quantified risk)

The Government is considering a number of policies regarding the expansion of vocational training. One of these is to have 250,000 people participating in industry training.

As at Budget 2008, funding supports participation of approximately 220,000 trainees by 2011. To achieve participation of 250,000 trainees in 2011, the Industry Training Fund would need to increase by approximately $7.5 million in 2009/10, $15 million in 2010/11 and $20 million in 2011/12 and outyears.

If approved, this proposal would decrease the operating balance.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Tertiary Education Commission

Education (Tertiary) - Wānanga Capital Injections (changed, quantified risk)

The Government is currently negotiating with Te Wānanga o Raukawa over settlement of its Waitangi Tribunal claim. The Waitangi Tribunal recommended that Te Wānanga o Raukawa be compensated for capital expenditure it has incurred on facilities to date, and be provided with funding to bring its facilities up to a standard comparable with other tertiary institutions and to meet additional capital requirements. Negotiations are also taking place with Te Whare Wānanga o Awanuiārangi in relation to an outstanding item from the original settlement. Cabinet has agreed to fund $50.649 million in the settlement with Te Wānanga o Raukawa but this is yet to be ratified by Te Wānanga. The outstanding settlement for Te Whare Wānanga o Awanuiārangi of $8.5 million was agreed as part of its settlement with the Crown in 2003. The Crown is currently discussing with Te Whare Wānanga o Awanuiārangi the conditions required to conclude the settlement. The settlements will increase gross debt.

Source: Ministry of Education and Tertiary Education Commission

Energy - ETS household assistance package (new, quantified risk)

The Climate Change Response (Emissions Trading) Amendment Act 2008 includes provisions for a household energy efficiency fund (section 180). The Act requires $1 billion to be paid into the Fund, from money appropriated by Parliament, sometime between the Act's commencement and 1 July 2024. How the Fund will be appropriated across the 15-year period is yet to be decided, and will first require the Minister of Energy to determine the criteria for the Fund. Consequently, the Fund cannot yet be included in the forecasts. In addition, direct financial support for households of up to $180 million over 2009/10 and 2010/11 has also been agreed to be included in the 2009 Budget. This proposal would decrease the operating balance.

The Minister of Finance is yet to fully consider the quantum of this risk.

Source: The Treasury

Environment - Purchase of Kyoto Compliant Emission Units (unchanged, quantified risk)

The Government faces a potential net-exposure to the international market for Kyoto-compliant emission units. This net-exposure would come about if the emission units that are built up by Government over the first commitment period as a result of the operation of the ETS are less than the size of the Government's Kyoto liability.

Currently the forecasts indicate that the Government may have to purchase Kyoto-compliant emission units to meet its Kyoto obligations. At the 30 June 2008 carbon price of $25.89 per tonne this could cost around $500 million. However, there is significant uncertainty around both the Kyoto liability and the units that may be built up as a result of the ETS (largely given the inherent uncertainty around forecasts of New Zealand net-emissions and the assumed take-up rate of forestry into the ETS). Any purchasing would increase gross debt.

The Minister of Finance is yet to fully consider the quantum of this risk.

Source: The Treasury

Finance – Crown Overseas Properties (unchanged, unquantified risk)

The Government is considering options relating to the continued use of certain Crown overseas properties.

The risk is unquantified as disclosure could compromise any negotiations the Crown may enter, but any additional operating funding would decrease the operating balance, and/or any additional capital funding would increase gross debt.

Finance – Redevelopment of Rail (new, quantified risk)

The Government has signalled an intention to continue investment in rail transport by agreeing to establish a five-year multi-year appropriation Rail Transport Upgrade and Growth Projects and a non-departmental output expense New Zealand Railways Corporation Operating Support. The Government, as a first step, has approved funding for these two new appropriations in 2008/09. Funding for 2009/10 to 2012/13 will be considered as part of Budget 2009 but is expected to total $920 million and $383 million respectively.

If approved, this funding would increase gross debt and reduce the operating balance.

Source: The Treasury

Finance - Taitokerau Forests Limited (new, unquantified risk)

The Government is considering various options regarding the restructuring of loans to Taitokerau Forests Limited, while protecting the Crown's interest as secured creditor. These options could involve a partial write-off of the Crown loan, additional funding until harvest of the forests and/or other payments to compensate shareholders for lost opportunities. Negotiations with the company are ongoing, and the outcome is not yet known. The risk is unquantified as disclosure could compromise the Crown in negotiations.

Fisheries - Civilian Maritime Aerial Surveillance (unchanged, unquantified risk)

The Government is considering options to provide increased short- to medium-range maritime aerial surveillance for civilian agencies. Options include delivery of a range of different surveillance capabilities by either military or commercial providers. The amount of funding required would depend on the option chosen, if any. Any capital injections required would increase gross debt, while operating funding would decrease the operating balance.

The risk is unquantified as the amount or timing of any funding is unclear.

Health – District Health Board Deficits (changed, unquantified risk)

Draft District Annual Plans from 15 of the 21 District Health Boards (DHBs) indicate projected operating deficits in 2008/09. The Government does not view DHB deficits as acceptable and cost containment strategies are in place.

Any decision to fund such deficits would decrease the operating balance and/or increase gross debt. Specific potential pressures for DHBs include wage bargaining and financing costs of capital projects.

This risk has changed since the 2008 Budget Update to take into account the new projections of DHB deficits.

Health – Indicative Funding for Budgets 2009 and 2010 (changed, quantified risk)

The Government is considering indicative operating allocations of $750 million for Budgets 2009 and 2010. These amounts indicate the likely level of increased funding to be provided to Vote Health in future Budgets and to assist the Minister of Health to plan spending priorities over the period. The final allocations will depend on economic and fiscal conditions at the time of each Budget. Finalising the amounts and details of how these allocations will be spent will be subject to normal budget processes.

The Government has also agreed that the indicative allocation for Budget 2009 above may be pre-committed up to $13.736 million per annum in 2012/13 and outyears. This was shown in the Charges against Future Budgets section of this chapter. The operating balance would be decreased by the totals as follows:

Health - Indicative Funding for Budgets 2009 and 2010
Budget to be charged
($million)
2009/10 2010/11 2011/12 2012/13 and outyears
Budget 2009 750 748 734 736
Budget 2010 - 750 750 750

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Health

Housing – Affordable Home Ownership (new, unquantified risk)

The Government is considering options to provide financial assistance to households to assist them to purchase an affordable new home. The provision of additional capital funding would increase gross debt and operational funding would decrease the operating balance.

Housing – Hobsonville Urban Development (changed, unquantified risk)

The Government has agreed to the creation of an integrated urban community at Hobsonville. While funding was provided in Budget 2008 for Precinct One, as well as any other costs that need to occur concurrently with Precinct One, capital funding will need to be provided for the remaining four precincts in future Budgets. This will increase gross debt. This risk is unquantified as disclosure could compromise the Crown in negotiations.

Housing - Housing Innovation Fund (new, unquantified risk)

The Government has agreed to consider a capital funding appropriation for the Housing Innovation Fund for 2009/10 to support community-based solutions for social housing. This is provided the Housing New Zealand Corporation is able to provide the corresponding operating funding. The provision of additional capital funding would increase gross debt.

Housing - Sustainable Urban Development Approach (changed, unquantified risk)

The Government has issued a public discussion document about how a Sustainable Urban Development Approach could be established in New Zealand, including supply of affordable housing. Submissions are due by 28 November 2008. The amount and timing of costs would depend on the option chosen. Additional funding would increase gross debt and/or decrease the operating balance.

Housing - Tamaki (unchanged, unquantified risk)

The Government is considering the redevelopment of the Tamaki area. Any capital funding would increase gross debt while operating funding would decrease the operating balance. This risk is unquantified as disclosure could compromise the Crown in negotiations.

Immigration – New Immigration Service Delivery Strategy (unchanged, unquantified risk)

The Government is in the process of developing a stage-two business case for a new Immigration Service Delivery Strategy, which would aim to allow better management of the risk surrounding immigration decision-making and improve delivery of immigration services. Cabinet is likely to consider the stage-two business case in early 2009. A portion of the additional funding is expected to be funded by third-party revenue and the rest would reduce the operating balance and increase gross debt. This risk is unquantified as disclosure could compromise the Crown in negotiations.

Internal Affairs – Property Strategy (new, unquantified risk)

The Government is considering options around a long-term property strategy for the Department of Internal Affairs, subject to completion of a detailed business case.

This risk is unquantified as disclosure could compromise the Crown in negotiations, but any new funding would decrease the operating balance and/or increase gross debt.

Justice – Financial Action Taskforce Recommendations (unchanged, quantified risk)

In order to implement the recommendations of the Financial Action Taskforce, the Government is considering a new Anti-money Laundering and Counter-terrorist Financing regime. Increased supervision and enforcement is expected to result in increased costs to the following agencies: the Reserve Bank, the Securities Commission, the Department of Internal Affairs, the Financial Intelligence Unit of the New Zealand Police and the Ministry of Justice. Costs are still being finalised but could be up to $15 million per annum and would reduce the operating balance.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Justice

Justice – Greater Auckland Region Service Delivery Strategy (unchanged, quantified risk)

The Government is developing a strategy to address courts' needs in the greater Auckland region. A wide range of stakeholders are currently being consulted over a variety of service delivery options. The total cost could be up to $265 million. The impact on the operating balance or gross debt would depend on the options chosen.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Justice

Justice Sector and Other Agencies - Effective Interventions (unchanged, unquantified risk)

As part of a comprehensive approach to reducing crime and the pressures on the prison population, the Government is considering measures to address the precursors of crime, and measures to reduce re-offending. The measures focus on early interventions for vulnerable children, youth offending, restorative justice, preventing crime in local communities, reintegrating offenders and drug and alcohol treatment for offenders.

Funding of $37 million per annum was approved in 2006. The Government is currently considering a range of further options. The amount of any additional funding will depend on the specific options chosen.

Justice - Supreme Court Construction Cost Pressures (new, quantified risk)

The Government is part-way through the construction of permanent premises for the Supreme Court, including the restoration of the old High Court Building on the same site. Current funding appears likely to be insufficient to complete the project owing to increased costs for building materials, pressures from the Wellington construction market, higher than anticipated costs for restoring the old High Court Building and increased costs for design development. It is expected that between $8.3 million and $12.1 million of additional capital funding will be required and additional operating funding of $1.5 million to $4.1 million over the four years from 2008/09 to 2012/13. This would decrease the operating balance and increase gross debt.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Justice

Local Government - Response to Rates Inquiry (changed, unquantified risk)

The Independent Inquiry into Local Government Rates reported in August 2007. The Government has established a series of work streams to assist development of its response to issues outlined in the report. Some initiatives have already been undertaken as part of the Government's response, including $51.2 million in new funding from 2008/09 to 2012/13 for enhancements to the rates rebate scheme (included in forecasts). However, the total potential impact of additional actions on the operating balance and/or gross debt is unknown at this stage, as this would depend on the nature and scope of such additional measures subsequently pursued.

Māori Affairs - Māori Business Aotearoa New Zealand (unchanged, quantified risk)

The Government has agreed to establish an independent statutory corporation for the purposes of furthering Māori economic development, to be known as Māori Business Aotearoa New Zealand (MBANZ), subject to enactment of the Māori Trustee and Māori Development Bill.

New Crown funding required is estimated to be $40 million capital in 2008/09, with an associated ongoing operating saving of approximately $4 million per annum related to the transfer of functions from Te Puni Kōkiri to MBANZ. If approved, this would increase the operating balance and increase gross debt.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Te Puni Kōkiri

New Zealand Agency for International Development - Adjustment of Official Development Assistance Fund (unchanged, unquantified risk)

Budget 2008 included funding to take Government Official Development Assistance to an equivalent percentage of Gross National Income (GNI) - 0.30% in 2008/09, 0.33% in 2009/10 and 0.35% in 2010/11. However, because GNI forecasts will change in subsequent years, there is a risk that funding levels may need to be adjusted to maintain these percentages of GNI. Any such changes will be considered in future Budgets. The net impact of this risk is unclear and thus may increase or decrease the operating balance.

New Zealand Defence Force - Capital Injections (unchanged, quantified risk)

Implementing the Government's decisions on the future structure of the NZDF will involve a series of capital acquisitions across all three armed services and for Headquarters NZDF to achieve the required capability upgrades. The Government has agreed to a capital injection of up to $1.244 billion over the 10-year period from 2002 to 2012.

Of the $1.244 billion, $1.034 billion has been appropriated with up to $210 million likely to be required within the forecast period. The actual expenditure profile will depend on the specification and timing of the individual projects, the contracted prices and the prevailing exchange rate at the time of purchase.

Any further capital injections would increase gross debt.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: New Zealand Defence Force

New Zealand Defence Force - Operationally Deployed Forces (new, quantified risk)

There are currently over 400 NZDF personnel deployed overseas on Peace Keeping and United Nations missions. Continuing to maintain deployments in Afghanistan, East Timor, the Solomon Islands and several other locations exceeds the deployment levels anticipated when the Defence Funding Package was approved in 2005. If current deployment levels are maintained, the appropriation for operationally deployed forces may need to be increased by approximately $10 to 15 million from 2009/10.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: New Zealand Defence Force

New Zealand Defence Force - Sale of Skyhawks and Aermacchi Trainers (changed, quantified risk)

As a result of the Government's decisions on the future structure of the NZDF, NZDF has signed an agreement with Tactical Air Services Inc for the sale of the Skyhawks and Aermacchi trainers for US$110 million. A formal contract has yet to be signed, but the net proceeds from the sale would decrease gross debt and increase the operating balance by $NZ90 million.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: New Zealand Defence Force

Police - Increases to Police Staff (changed, quantified risk)

The Government has funded an additional 1,250 Police staff over Budgets 2006 to 2008. Additional funding for property associated with these staff will be considered in future Budgets, and may be in the order of $45 million capital. If approved, additional capital injections would increase gross debt and additional operating funding would decrease the operating balance.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: New Zealand Police

Revenue – Investment in the Tax System and Related Business (unchanged, unquantified risk)

Inland Revenue is investigating options around investment in the tax system and related business processes, including replacing the FIRST tax system. Part of this work includes investigating options for transforming employer information and payments. The potential impact and timing of this are unknown at this stage, as it would depend on the nature and scope of any options that are pursued. Any additional capital funding would increase gross debt and additional operating funding would decrease the operating balance.

Revenue – Paid Parental Leave Review (new, unquantified risk)

The Government is considering options for changes to the Paid Parental Leave scheme, including changes to the eligibility criteria and the duration of payments. Possible adjustments to the Parental Tax Credit are also under consideration by the Government as a component of the Paid Parental Leave Review. The final proposals could be submitted as a budget bid as part of the Budget 2009 process. Any additional funding would decrease the operating balance.

Revenue – Rebuild of the Student Loan System (unchanged, unquantified risk)

The Government is considering options for redesigning the Student Loans IT system. The redesign aims to enable greater efficiency and enhanced student services while delivering increased integrity of the system, greater information to inform policy decisions and increased flexibility for future policy changes. This risk is unquantified as disclosure could compromise the Crown in negotiations. If approved, any funding would decrease the operating balance and/or increase gross debt.

Revenue – Reducing Compliance Costs for Small- and Medium-Sized Enterprises (unchanged, unquantified risk)

The Government is considering measures to simplify the tax rules for small- and medium-sized enterprises, pursuant to a Government discussion document released in December 2007. Consultation on a number of the measures proposed in this discussion document is underway. Some changes have been adopted as part of Budget 2008 while other changes may be adopted subsequently. The potential overall impact on the operating balance is unknown at this stage, as it would depend on the nature and scope of any measures that are subsequently pursued.

Revenue – Renegotiation of Double Tax Agreements (unchanged, unquantified risk)

A Government discussion document released in December 2006 considered the case for negotiating lower rates of Non-Resident Withholding Tax (NRWT) in New Zealand's Double Tax Agreements (DTAs). The Australia and US DTAs with New Zealand are being renegotiated this year. Although any effect on the operating balance will depend on the outcome of bilateral treaty negotiations, to the extent that lower rates are agreed, this will likely have the effect of decreasing the operating balance.

Social Development – Children, Young Persons and their Families Act (unchanged, unquantified risk)

The Government is considering a number of changes to the Children, Young Persons and Their Families Act 1989. Most of the costs relating to these changes arise from the proposal to increase the age of a young person from 17 to 18. The fiscal impacts would depend on what proposals are finally approved and the details of the legislation. Any additional operating funding would decrease the operating balance and any additional capital would increase gross debt.

Social Development – Energy Subsidy for SuperGold Card Holders (unchanged, unquantified risk)

The SuperGold Card is a discounts and concessions card issued free to senior citizens and veterans. When the card was introduced in 2006, it was with the intention of having a range of services gradually included. A major enhancement being considered by Government will offer SuperGold Card holders a winter heating subsidy to mitigate the increasing cost of energy prices when energy producers are brought into the ETS. The total cost of the subsidy would depend on policy and implementation decisions yet to be made.

Social Development – Five-year Action Plan for Out of School Services (new, unquantified risk)

The Government has approved, in principle, a Five-year Action Plan for Out of School Services. The Action Plan proposes a range of initiatives that represent a number of policy options available to Government. While the amounts are unclear and would depend on the policy options chosen, any additional operating funding would decrease the operating balance.

Social Development – Working New Zealand: Work-focused Support (unchanged, unquantified risk)

Working New Zealand: Work-focused Support is a package of policy and operational changes aimed at simplifying the benefit system and enhancing the opportunities for beneficiaries to participate in the labour market. The first stage has already been implemented and focused on getting services and support in place to help people move into work and stay employed. The Government is considering further options and costs to simplify the benefit system and further support people to stay in work. The next stage will be submitted for consideration in future Budgets. The remaining proposals are still being developed, but any additional funding would decrease the operating balance.

Social Development – Youth Court Sentencing Orders (unchanged, quantified risk)

The Government is considering the inclusion of new Youth Court orders in the Children, Young Persons and Their Families Act 1989. The estimated cost is approximately $12 million in operating funding and $4 million in capital funding. This would have the effect of decreasing the operating balance and increasing debt.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Social Development

Transport - Canterbury Transport Project (new, quantified risk)

In Budget 2008 the Government provided $33.5 million for the first four years of the ten-year Canterbury Transport Regional Implementation Plan. The Government has indicated that its total contribution to the project will be $244 million. The possible cost to the Government of the remainder of the project is estimated at $210.5 million. If approved, this proposal would increase gross debt.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Transport

Transport - Penlink Roading Project (new, quantified risk)

The Government is considering the provision of $100-$200 million in 2009 to the Rodney District Council to build the Penlink roading connection. This proposal would increase gross debt, which would be serviced with regional fuel tax revenue.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Transport

Transport – Waterview Connection (new, quantified risk)

The Government is considering progressing the Waterview Connection roading project through a public-private partnership. The cost to the Government of this project is estimated at $1.5 billion between 2015 and 2050. If approved, this proposal would increase gross debt.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: New Zealand Transport Agency

Transport – Waterview Connection, risk of not tolling project (new, quantified risk)

The Government has indicated that it may toll the Waterview Connection to recover $500 million of the construction costs of the project. However, there is also a possibility that the Government may decide not to toll the road, thus the Government could be required to provide an additional $500 million for the project. This money would be required between 2015 and 2050. If approved, this proposal would decrease the operating balance and increase gross debt.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: New Zealand Transport Agency

Contingent liabilities

Contingent liabilities are costs that the Crown will have to face if a particular event occurs. Typically, contingent liabilities consist of guarantees and indemnities, legal disputes and claims and uncalled capital. The contingent liabilities facing the Crown are a mixture of operating and balance sheet risks, and they can vary greatly in magnitude and likelihood of realisation. In general, if a contingent liability were realised it would reduce the operating balance and net worth, and increase GSID. However, in the case of contingencies for uncalled capital, the negative impact would be restricted to GSID.

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

Only contingent liabilities involving amounts of over $10 million are separately disclosed. Contingent liabilities below $10 million are included in the “other quantifiable contingent liabilities” total. Comparatives have been adjusted where appropriate to align with the disclosure of new “material” contingent liabilities. The total amount of prior years' contingent liabilities remains unchanged.

Contingent liabilities have been stated as at 30 June 2008, being the latest set of published contingent liabilities.

Details of each of the following contingent liabilities can be accessed from the Treasury's website at http://www.treasury.govt.nz/government/financialstatements/yearend/jun08

Quantifiable Contingent Liabilities

Quantifiable Contingent Liabilities
Guarantees and indemnities Status[9] ($ million)
Cook Islands – Asian Development Bank loans Unchanged 14
Indemnification of receivers and managers - Terralink Limited Unchanged 10
Ministry of Justice - Treaty settlement, tax liabilities Unchanged 200
Ministry of Transport - funding guarantee Unchanged 10
Guarantees and indemnities of SOEs and Crown entities Unchanged 40
Other guarantees and indemnities Unchanged 12
    286
Uncalled capital    
Asian Development Bank Unchanged 1,081
European Bank for Reconstruction and Development Unchanged 14
International Bank for Reconstruction and Development Unchanged 1,077
Other Unchanged 33
    2,205
Legal proceedings and disputes    
Health - legal claims Unchanged 39
Tax disputes Unchanged 249
Other legal claims against SOEs and Crown entities Unchanged -
Other legal claims Unchanged 95
    383

Other quantifiable contingent liabilities
   
International finance organisations Unchanged 1,727
New Zealand Export Credit Office – export guarantees Unchanged 37
Reserve Bank - demonetised currency Unchanged 23
Social Development - claim for judicial review Unchanged -
Transpower New Zealand Limited Unchanged -
Other quantifiable contingent liabilities of SOEs and Crown entities Unchanged 142
Other quantifiable contingent liabilities Unchanged 66
    1,995
Total quantifiable contingent liabilities   4,869

Notes

  • [9]Relative to reporting in the Financial Statements of the New Zealand Government for the year ending 30 June 2008.

Unquantifiable Contingent Liabilities

Unquantifiable Contingent Liabilities
Guarantees and indemnities Status
AgriQuality Limited (formerly Asure New Zealand Limited) Unchanged
At Work Insurance Limited Unchanged
Auckland Rail lease Unchanged
Bona Vacantia property Unchanged
Building Industry Authority Unchanged
Earthquake Commission (EQC) Unchanged
Electricity Corporation of New Zealand Limited (ECNZ) Unchanged
Ministry of Fisheries - indemnity provided for delivery of registry services Unchanged
Genesis Power Ltd (Genesis Energy) Unchanged
Geothermal carbon tax indemnity Unchanged
Housing New Zealand Corporation (HNZC) Unchanged
Indemnities against acts of war and terrorism Unchanged
Justices of the Peace, Community Magistrates and Disputes Tribunal Referees Unchanged
Maui Partners Unchanged
National Provident Fund Unchanged
New Zealand Railways Corporation Unchanged
Persons exercising investigating powers Unchanged
Ports of Auckland Unchanged
Public Trust Unchanged
Synfuels-Waitara Outfall Indemnity Unchanged
Tainui Corporation Unchanged
Toll NZ Ltd - purchase of rail network assets Unchanged
Other unquantifiable contingent liabilities  
Abuse claims Unchanged
Accident Compensation Corporation (ACC) litigations Unchanged
Environmental liabilities Unchanged
Rugby World Cup 2011 – joint venture arrangements Unchanged
Treaty of Waitangi claims Unchanged
Treaty of Waitangi claims - settlement relativity payments Unchanged
Other contingencies  
Foreshore and seabed Unchanged

5 Generally Accepted Accounting Practice (GAAP) Series Tables

Forecast Financial Statements

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

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

The forecasts have been prepared in accordance with the Statement of Responsibility and reflect the judgements and information known at the time they were prepared. They reflect all Government decisions and circumstances communicated to 17 September 2008.

The finalisation dates are outlined at the beginning of this document. A summary of the key economic assumptions that are particularly relevant to the fiscal forecast is provided below. These figures are on a June year basis to align with the government's balance date of 30 June.

Key Economic Assumptions
  June years
BEFU
2008/09
PREFU
2009/10
PREFU
2010/11
PREFU
2011/12
PREFU
2012/13
PREFU
Real GDP (P) (ann avg % chg) 1.6 0.2 2.3 3.4 3.4 3.1
Nominal GDP (E) ($m) 185,478 184,390 190,713 199,881 210,205 220,574
CPI (annual avg % change) 3.2 4.3 2.3 2.4 2.5 2.4
Govt 10-year bonds (qty avg %) 6.3 6.3 6.3 6.2 6.1 6.0
90-day bill rate (qty avg %) 8.3 7.3 7.0 6.7 6.4 6.3
Unemployment rate ((HLFS) basis ann avg %) 3.7 4.3 5.0 5.1 4.9 4.6
Full-time equivalent employment (ann avg % change) 1.2 0.0 -0.2 0.7 1.5 1.9
Current account (% of GDP) -7.2 -7.4 -6.2 -5.6 -5.2 -5.0

Statement of Accounting Policies and Forecast Assumptions

Significant Accounting Policies

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

These Forecast Financial Statements comply with generally accepted accounting policies (GAAP) as required by the Public Finance Act 1989 and have been prepared in accordance with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS), as appropriate for public benefit entities.

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).

Changes in Accounting Policies

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

Forecast Policies

These Forecast Financial Statements have been prepared on the basis of Treasury's best professional judgment. Key assumptions used are set out on page 83.

For the purposes of the Forecast Financial Statements, no revaluations of property, plant and equipment are projected beyond the current year.

Detailed Accounting Policies and Forecast Assumptions

The specific accounting and forecasting policies are reproduced in full on Treasury's website at http://www.treasury.govt.nz/publications/guidance/instructions/2008

Government Reporting Entity as at 17 September 2008

These forecast financial statements are for the Government reporting entity as specified in section 26Q(4) of the Public Finance Act 1989. This comprises Ministers of the Crown and the following entities:

Departments

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

Offices of Parliament

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

Others

Government Superannuation Fund
New Zealand Superannuation Fund
Reserve Bank of New Zealand

State-owned enterprises

Airways Corporation of New Zealand Limited
Animal Control Products Limited
AsureQuality Limited
Electricity Corporation of New Zealand Limited
Genesis Power Limited
Kordia Group Limited
Landcorp Farming Limited
Learning Media Limited
Meridian Energy Limited
Meteorological Service of New Zealand Limited
Mighty River Power Limited
New Zealand Post Limited
New Zealand Railways Corporation
Quotable Value Limited
Solid Energy New Zealand Limited
Terralink Limited (in liquidation)
Timberlands West Coast Limited
Transpower New Zealand Limited

Air New Zealand Limited (included for disclosure purposes as if it were a SOE)

KiwiRail Holdings Limited (included for disclosure purposes as if it were a SOE) *

* KiwiRail Holdings Limited was acquired by the Crown on 1 July 2008 and in turn is to be acquired by the New Zealand Railways Corporation from 1 October 2008 as its operating unit.

Crown entities

Accident Compensation Corporation
Accounting Standards Review Board
Alcohol Advisory Council of New Zealand
Arts Council of New Zealand Toi Aotearoa
Broadcasting Commission
Broadcasting Standards Authority
Career Services
Charities Commission
Children's Commissioner
Civil Aviation Authority of New Zealand
Commerce Commission
Crown Health Financing Agency
Crown research institutes (9)
District health boards (21)
Drug Free Sport New Zealand
Earthquake Commission
Electoral Commission
Electricity Commission
Energy Efficiency and Conservation Authority
Environmental Risk Management Authority
Families Commission
Foundation for Research, Science and Technology
Government Superannuation Fund Authority
Guardians of New Zealand Superannuation
Health and Disability Commissioner
Health Research Council of New Zealand
Health Sponsorship Council
Housing New Zealand Corporation
Human Rights Commission
Independent Police Conduct Authority
Law Commission
Legal Services Agency
Maritime New Zealand
Mental Health Commission
Museum of New Zealand Te Papa Tongarewa Board
New Zealand Antarctic Institute
New Zealand Artificial Limb Board
New Zealand Blood Service
New Zealand Fast Forward Fund Limited
New Zealand Film Commission
New Zealand Fire Service Commission
New Zealand Historic Places Trust (Pouhere Taonga)
New Zealand Lotteries Commission
New Zealand Qualifications Authority
New Zealand Symphony Orchestra
New Zealand Teachers Council
New Zealand Tourism Board
New Zealand Trade and Enterprise
New Zealand Transport Agency
New Zealand Venture Investment Fund Limited
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 (2,460)
Securities Commission
Social Workers Registration Board
Sport and Recreation New Zealand
Standards Council
Takeovers Panel
Te Reo Whakapuaki Irirangi (Te Māngai Pāho)
Te Taura Whiri i te Reo Māori (Māori Language Commission)
Television New Zealand Limited
Tertiary Education Commission
Tertiary education institutions (31)
Testing Laboratory Registration Council
Transport Accident Investigation Commission

Crown entity subsidiaries are consolidated by their parents and not listed separately in this table

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

Agriculture and Marketing Research and Development Trust
Asia New Zealand Foundation
Fish and game councils (12)
Leadership Development Centre Trust
National Pacific Radio Trust
New Zealand Fast Forward Limited
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 Development Trust
Research and Education Advanced Network New Zealand Limited
Reserves boards (24)
Road Safety Trust

Forecast Statement of Financial Performance

for the years ending 30 June
Forecast Statement of Financial Performance
  Note 2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m

Revenue

               
Taxation revenue 1 56,372 55,911 55,538 56,800 58,674 61,269 64,374
Other sovereign revenue 1 3,879 4,037 3,993 4,501 5,052 5,366 6,015
Total Revenue Levied through the Crown's Sovereign Power   60,251 59,948 59,531 61,301 63,726 66,635 70,389
Sales of goods and services   15,399 14,222 16,084 16,625 17,832 18,201 19,051
Interest revenue and dividends 2 3,214 3,358 3,828 3,867 4,256 4,456 4,471
Other revenue   2,615 2,591 2,247 2,851 2,842 2,909 2,977
Total Revenue Earned through the Crown's Operations   21,228 20,171 22,159 23,343 24,930 25,566 26,499
Total Revenue (excluding gains)   81,479 80,119 81,690 84,644 88,656 92,201 96,888

Expenses

               
Social assistance and official development assistance 3 18,374 19,681 20,151 21,256 22,174 23,159 24,124
Personnel expenses 4 16,478 17,061 17,800 18,110 18,478 18,582 18,657
Depreciation and amortisation 5 3,670 3,950 3,973 4,266 4,512 4,657 4,737
Other operating expenses 5 30,656 32,053 33,721 33,827 34,247 34,562 35,694
Interest expenses 6 3,101 2,503 3,311 3,457 4,009 4,434 4,916
Insurance expenses 7 3,563 3,799 4,076 4,209 4,494 4,811 5,135
Forecast new operating spending 8 249 172 1,615 3,498 5,288 7,149
Top-down expense adjustment 8 (495) (1,450) (350) (275) (200) (150)
Total Expenses (excluding losses)   75,842 78,801 81,754 86,390 91,137 95,293 100,262
Operating Balance before gains/(losses)   5,637 1,318 (64) (1,746) (2,481) (3,092) (3,374)
Net gains/(losses) on financial instruments 9 (617) 1,424 1,462 1,535 1,783 2,046 2,335
Net gains/(losses) on non-financial instruments 10 (2,925) 170 178 220 240 253 260
Total Gains/(losses)   (3,542) 1,594 1,640 1,755 2,023 2,299 2,595
Net surplus/(deficit) from associates and joint ventures   334 193 334 366 388 398 398
Operating Balance from continuing activities   2,429 3,105 1,910 375 (70) (395) (381)
Gain/(loss) from discontinued operations   22 (1) (1) (1) (1) (1)
Operating Balance (including minority interest)   2,451 3,105 1,909 374 (71) (396) (382)
Attributable to minority interest   (67)
Operating Balance 11 2,384 3,105 1,909 374 (71) (396) (382)

The accompanying Notes and Accounting policies are an integral part of these Statements.

Functional Expense Analysis

for the years ending 30 June
Total Crown
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m

Total Crown expenses By functional classification

             
Social security and welfare 21,509 22,843 23,382 24,505 25,473 26,707 27,886
GSF pension expenses 690 652 654 555 545 548 549
Health 10,809 12,024 11,884 11,874 11,864 11,861 11,917
Education 10,397 11,017 11,643 11,947 12,167 12,453 12,658
Core government services 3,274 3,412 3,576 3,570 3,809 3,896 4,029
Law and order 3,082 3,341 3,370 3,382 3,383 3,392 3,415
Defence 1,525 1,697 1,716 1,690 1,675 1,664 1,662
Transport and communications 7,424 8,027 9,487 8,879 9,271 9,240 9,492
Economic and industrial services 9,043 7,918 8,641 8,918 9,766 9,937 10,228
Primary services 1,459 1,364 1,450 1,441 1,474 1,498 1,503
Heritage, culture and recreation 2,337 3,130 2,808 3,353 3,117 3,177 3,652
Housing and community development 938 1,036 1,053 1,087 1,147 1,184 1,142
Other 254 83 57 467 214 214 214
Finance costs 3,101 2,503 3,311 3,457 4,009 4,434 4,916
Forecast for future new spending 249 172 1,615 3,498 5,288 7,149
Top-down expense adjustment (495) (1,450) (350) (275) (200) (150)
Total Crown Expenses excluding losses 75,842 78,801 81,754 86,390 91,137 95,293 100,262

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

Core Crown
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m

Core Crown expenses
By functional classification

             
Social security and welfare 17,877 18,898 19,156 20,112 20,780 21,680 22,529
GSF pension expenses 690 652 654 555 545 548 549
Health 11,297 12,586 12,377 12,424 12,401 12,390 12,391
Education 9,551 10,524 10,739 11,117 11,302 11,419 11,488
Core government services 3,371 3,448 3,649 3,625 3,845 3,919 4,050
Law and order 2,894 3,101 3,139 3,130 3,130 3,128 3,143
Defence 1,562 1,741 1,756 1,731 1,718 1,709 1,708
Transport and communications 2,244 2,823 3,566 2,649 2,615 2,515 2,548
Economic and industrial services 2,889 3,244 3,549 3,408 3,621 3,750 3,847
Primary services 541 520 545 507 499 498 484
Heritage, culture and recreation 1,107 1,769 1,446 1,925 1,608 1,606 2,030
Housing and community development 260 334 347 308 329 333 319
Other 254 83 57 467 214 214 214
Finance costs 2,460 2,406 2,657 2,626 3,061 3,455 3,858
Forecast for future new spending 249 172 1,615 3,498 5,288 7,149
Top-down expense adjustment (495) (1,450) (350) (275) (200) (150)
Total Core Crown Expenses excluding losses 56,997 61,883 62,359 65,849 68,891 72,252 76,157

The accompanying Notes and Accounting policies are an integral part of these Statements.

Forecast Statement of Cash Flows

for the years ending 30 June
Forecast Statement of Cash Flows
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m

Cash Flows From Operations

             
Cash was provided from              
Taxation receipts 55,168 54,681 54,159 56,139 57,898 60,468 63,412
Other sovereign receipts 3,460 3,675 3,737 3,836 3,963 4,102 4,216
Sales of goods and services 14,635 14,596 16,599 16,628 17,736 18,051 18,872
Interest and dividends 3,111 2,807 3,292 3,255 3,614 3,784 3,772
Other operating receipts 2,211 2,527 2,727 2,737 2,666 2,793 2,844
Total cash provided from operations 78,585 78,286 80,514 82,595 85,877 89,198 93,116
Cash was disbursed to              
Social assistance and official development assistance 18,026 19,123 19,675 20,992 21,823 22,738 23,702
Personnel and operating payments 45,972 49,961 54,076 52,701 54,034 54,509 55,628
Interest payments 2,820 2,284 2,970 3,102 3,605 4,068 4,563
Forecast for future new spending 249 172 1,615 3,498 5,288 7,149
Top-down expense adjustment (355) (1,450) (350) (275) (200) (150)
Total cash disbursed to operations 66,818 71,262 75,443 78,060 82,685 86,403 90,892
Net Cash Flows From Operations 11,767 7,024 5,071 4,535 3,192 2,795 2,224
Cash Flows From Investing Activities              
Cash was provided from/(disbursed to)              
Net purchase of physical assets (4,922) (6,583) (6,909) (6,118) (6,087) (5,501) (6,091)
Net purchase of shares and other securities (6,080) (576) 499 556 (5,735) (1,062) (597)
Net purchase of intangible assets (320) (324) (444) (351) (362) (312) (517)
Net issue/(repayment) of advances (2,646) (590) 359 (782) (805) (530) (1,043)
Net acquisition of investments in associates (363) (230) (1,024) (51) (35) (2) (2)
Capital contingency provision (261) (184) (498) (808) (900) (1,080)
Top-down capital adjustment 350 485
Net Cash Flows From Investing Activities (14,331) (8,214) (7,218) (7,244) (13,832) (8,307) (9,330)
Net Cash Flows From  Operating and Investing Activities (2,564) (1,190) (2,147) (2,709) (10,640) (5,512) (7,106)

Cash Flows From Financing Activities

             
Cash was provided from/(disbursed to)              
Issues of circulating currency 86 181 172 181 190 200 209
Net repayment/(issues) of Government stock1 1,674 1,235 1,748 2,619 9,804 5,431 5,443
Net repayment of foreign-currency borrowing 1,099 (299) (336) (17) 38 (431) (202)
Net repayment/(issues) of other New Zealand dollar borrowing (697) 1,255 637 550 790 1,213 2,168
Net Cash Flows From Financing Activities 2,162 2,372 2,221 3,333 10,822 6,413 7,618
Net Movement in Cash (402) 1,182 74 624 182 901 512
Opening Cash Balance 4,162 5,217 3,804 3,868 4,492 4,674 5,575
Foreign-exchange (losses)/gains on opening cash 44 13 (10) 3
Closing Cash Balance 3,804 6,412 3,868 4,492 4,674 5,575 6,090

1 Net issues of Government stock include movements within government stock holdings of entities such as NZS Fund, ACC and EQC. The Bonds reconciliation at the end of these accounts outlines the proceeds and repayments of domestic bonds.

The accompanying Notes and Accounting policies are an integral part of these Statements.

Reconciliation Between the Net Cash Flows from Operations and the Operating Balance
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m

Net Cash Flows from Operations

11,767 7,024 5,071 4,535 3,192 2,795 2,224
Items included in the operating balance
but not in net cash flows from operations
             

Gains/(losses)

             
Gains/(losses) on financial instruments (617) 1,424 1,462 1,535 1,783 2,046 2,335
Gains/(losses) on non-financial instruments (2,925) 170 178 220 240 253 260
Total Gains/(losses) (3,542) 1,594 1,640 1,755 2,023 2,299 2,595

Movements in Working Capital

             
Increase/(decrease) in receivables 2,100 422 321 410 52 (34) 227
Increase/(decrease) in inventories 138 63 46 68 98 19 33
Increase/(decrease) in prepayments 77 13 9 (12) (6) 3
Decrease/(increase) in deferred revenue (326) (18) 87 11 6 3 4
Decrease/(increase) in payables (2,613) (515) 359 (699) 558 678 829
  (624) (35) 822 (222) 708 666 1,096

Other Non-cash Items in Operating Balance

             
Depreciation and amortisation (3,670) (3,950) (3,973) (4,266) (4,512) (4,657) (4,737)
Write-down on initial recognition of loans (559) (667) (611) (651) (701) (735) (766)
Impairment on financial assets (excl receivables) 213 1 3 3 3 3 3
Net interest revenue (179) 333 196 258 238 306 345
Decrease/(increase) in defined benefit retirement plan liabilities 2 (75) (75) 39 66 80 80
Decrease/(increase) in insurance liabilities (1,358) (1,313) (1,498) (1,443) (1,477) (1,551) (1,620)
Other 334 193 334 366 389 398 398
Total Other Non-cash Items (5,217) (5,478) (5,624) (5,694) (5,994) (6,156) (6,297)

Operating Balance

2,384 3,105 1,909 374 (71) (396) (382)

The accompanying Notes and Accounting policies are an integral part of these Statements.

Forecast Statement of Recognised Income and Expense

for the years ending 30 June
Forecast Statement of Recognised Income and Expense
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$ m
2013
Forecast
$m
Revaluation of physical assets 6,214 292 3 2 2 3
Effective portion of changes in value of fair-value hedges 9 58 19 1
Net change in fair value of cash flow hedges transferred to the operating statement 22 1 (1)
Net change in fair value of cash flow hedges transferred to the hedged item (60) 34
Foreign currency translation differences for foreign operations 17 (1)
Valuation gain/(losses) on investments available for sale taken to reserves 11 6 1
Other movements 2 1 1 5 3
Total income/(expense) recognised directly in Net Worth 6,213 66 346 6 2 7 5
Operating Balance (including minority interest) 2,451 3,105 1,909 374 (71) (396) (382)
Total recognised income and expense 8,664 3,171 2,255 380 (69) (389) (377)

Attributable to:

             
 - minority interest 83
 - the Crown 8,581 3,171 2,255 380 (69) (389) (377)
Total recognised income and expense 8,664 3,171 2,255 380 (69) (389) (377)

This statement reports changes in net worth due to the operating balance, items of income or expense that are recognised directly in net worth, the effect of certain accounting changes and corrections of errors.

The accompanying Notes and Accounting policies are an integral part of these Statements.

Forecast Statement of Financial Position

as at 30 June
Forecast Statement of Financial Position
  Note 2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$ m
2013
Forecast
$m

Assets

               
Cash and cash equivalents 12 3,804 6,412 3,868 4,492 4,674 5,575 6,090
Receivables 12 14,158 12,749 14,479 14,889 14,941 14,908 15,135
Marketable securities and derivatives in gain 12 41,189 33,351 35,828 34,997 40,189 40,789 41,307
Share investments 12 12,964 13,700 14,293 15,254 16,816 18,452 20,096
Advances 12 12,948 18,648 18,978 20,554 21,553 21,700 22,358
Inventory   964 997 1,010 1,079 1,177 1,195 1,228
Prepayments and other assets   1,663 1,307 1,441 1,453 1,501 1,535 1,554
Property, plant & equipment 14 103,329 101,276 107,895 110,398 112,779 114,501 116,943
Equity accounted investments1   8,065 8,683 8,820 9,231 9,635 9,976 10,292
Intangible assets and goodwill   1,751 1,929 2,308 2,409 2,569 2,587 2,922
Forecast for new capital spending   951 184 785 1,562 2,462 3,542
Top-down capital adjustment   (350) (485) (485) (485) (485) (485)
Total Assets   200,835 199,653 208,619 215,056 226,911 233,195 240,982

Liabilities

               
Issued currency   3,530 3,885 3,702 3,883 4,073 4,273 4,482
Payables 16 10,895 8,497 11,936 11,809 10,823 10,711 10,577
Deferred revenue   1,292 1,064 1,205 1,194 1,188 1,185 1,181
Borrowings   46,110 48,656 48,618 52,672 64,196 69,684 76,365
Insurance liabilities 17 20,484 22,065 21,982 23,425 24,902 26,453 28,073
Retirement plan liabilities 18 8,257 8,221 8,332 8,293 8,227 8,147 8,067
Provisions 19 4,753 4,711 5,075 5,631 5,422 5,051 4,923
Total Liabilities   95,321 97,099 100,850 106,907 118,831 125,504 133,668
Total Assets less Total Liabilities   105,514 102,554 107,769 108,149 108,080 107,691 107,314

Net Worth

               
Taxpayer funds 20 46,700 49,886 48,675 49,050 48,979 48,588 48,209
Revaluation reserve 20 58,566 52,486 58,793 58,796 58,798 58,800 58,803
Other reserves 20 (134) (114) (81) (79) (79) (79) (80)
Total Net Worth attributable to the Crown   105,132 102,258 107,387 107,767 107,698 107,309 106,932
Net worth attributable to minority interest  
382
296 382 382 382 382 382
Total Net Worth   105,514 102,554 107,769 108,149 108,080 107,691 107,314

1 Tertiary education institutions constitute most equity accounted investments.

The accompanying Notes and Accounting policies are an integral part of these Statements.

Forecast Statement of Borrowings

for the years ending 30 June
Forecast Statement of Borrowings
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$ m
2013
Forecast
$m

Borrowings

             
Government stock 18,516 19,073 19,244 21,103 30,282 35,046 39,764
Treasury bills 1,484 1,289 1,116 1,103 1,088 1,074 1,058
Government retail stock 423 381 416 416 416 416 416
Settlement Cash with Reserve Bank 7,750 7,465 7,750 7,750 7,750 7,750 7,750
Derivatives in loss1 1,591 493 746 749 776 731 693
Finance lease liabilities 955 993 1,124 967 1,069 1,457 2,026
Other borrowings 15,391 18,962 18,222 20,584 22,815 23,210 24,658
Total Borrowings2 46,110 48,656 48,618 52,672 64,196 69,684 76,365
Total Sovereign-Guaranteed Debt3 33,192 32,534 33,378 35,564 44,813 49,723 55,059
Total Non-Sovereign-Guaranteed Debt 12,918 16,122 15,240 17,108 19,383 19,961 21,306
Total Borrowings2 46,110 48,656 48,618 52,672 64,196 69,684 76,365

Gross and Net Debt analysis:

             
Core Crown borrowings 37,336 37,640 37,793 39,998 49,295 53,949 58,814
Add back NZS Fund holdings of sovereign-issued
debt and NZS Fund borrowings
409 768 649 757 881 1,032 1,207
Gross sovereign-issued debt4 37,745 38,408 38,442 40,755 50,176 54,981 60,021
Less core Crown financial assets6 50,698 49,745 48,872 49,257 55,975 58,127 60,401
Net Core Crown debt (incl. NZS Fund)7 (12,953) (11,337) (10,430) (8,502) (5,799) (3,146) (380)
Add back NZS Fund financial assets 12,934 15,915 15,637 18,593 21,870 25,498 29,422
Net Core Crown Debt (excl. NZS Fund)8 (19) 4,578 5,207 10,091 16,071 22,352 29,042

Gross sovereign-issued debt excluding
Reserve Bank Settlement Cash:

             
Gross sovereign-issued debt4 37,745 38,408 38,442 40,755 50,176 54,981 60,021
Less Reserve Bank settlement cash (incl. Kiwibank) (7,955) (7,510) (7,955) (7,955) (7,955) (7,955) (7,955)
Add back changes to DMO borrowing due to
settlement cash5
1,600 1,600 1,600 1,600 1,600 1,600 1,600
Gross sovereign-issued debt excluding
Reserve Bank settlement cash
31,390 32,498 32,087 34,400 43,821 48,626 53,666

Notes on Borrowings

  1. Derivatives are included in either borrowings or marketable securities, deposits and equity investments depending on their value at balance date. This treatment leads to fluctuations in individual items within the Statement of Borrowings, primarily due to exchange rate movements.
  2. Total Borrowings (Gross Debt) is the total borrowings (both sovereign-guaranteed and non-sovereign-guaranteed) of the total Crown. This equates to the amount in the total Crown balance sheet and represents the complete picture of whole-of-Crown debt obligations to external parties.
  3. Total Borrowings (Gross Debt) 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.
  4. Gross sovereign-issued debt is debt issued by the sovereign (i.e., core Crown) and includes Government stock held by the NZS Fund, ACC or EQC for example. In other words, the total sovereign-issued debt does not eliminate any internal cross-holdings held by these entities.
  5. The Reserve Bank has used $1.6b of settlement cash to purchase reserves that were to have been funded by DMO borrowing. Therefore the impact of Settlement Cash on GSID is adjusted by this amount.
  6. Core Crown financial assets exclude receivables.
  7. Net core Crown debt is the Government Sovereign-issued debt less financial assets. This can provide information about the sustainability of the Government's accounts, and is used by some international agencies when determining the credit-worthiness of a country. However, as some financial assets are not easily converted into cash, and some are restricted, it is important to view net debt alongside gross sovereign- issued debt.
  8. Adding back the NZ Superannuation 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.

The accompanying Notes and Accounting policies are an integral part of these Statements.

Statement of Actual Commitments

as at 30 June
Statement of Actual Commitments
  Actual
30 June
2008
$m
30 June
2007
$m

Capital Commitments

   
Specialist military equipment 873 823
Land and buildings 1,121 605
Other property, plant and equipment 4,303 2,617
Other capital commitments 304 184
Tertiary Education Institutions 209 90
Total capital commitments 6,810 4,319

Operating Commitments

   
Non-cancellable accommodation leases 2,460 2,296
Other non-cancellable leases 2,390 2,355
Non-cancellable contracts for the supply of goods and services 2,157 1,626
Other operating commitments 7,995 7,278
Tertiary Education Institutions 315 303
Total operating commitments 15,317 13,858
Total commitments 22,127 18,177

Total Commitments by Segment

   
Core Crown 19,627 19,944
Crown entities 15,830 9,835
State-owned Enterprises 4,724 3,508
Inter-segment eliminations (18,054) (15,110)
Total commitments  22,127 18,177

Statement of Actual Contingent Liabilities and Assets

as at 30 June
Statement of Actual Contingent Liabilities and Assets
  Actual
30 June
2008
$m
30 June
2007
$m

Quantifiable Contingent Liabilities

   
Guarantees and indemnities 286 171
Uncalled capital 2,205 2,076
Legal proceedings and disputes 383 1,170
Other contingent liabilities 1,995 1,829
Total quantifiable contingent liabilities 4,869 5,246

Total Quantifiable Contingent Liabilities by Segment

   
Core Crown 4,685 5,071
Crown entities 86 45
State-owned Enterprises 98 150
Inter-segment eliminations (20)
Total quantifiable contingent liabilities 4,869 5,246

Quantifiable Contingent Assets

   
Suspensory loans to integrated schools 77 85
Legal proceedings and disputes 307
Other contingent assets 5 1
Total quantifiable contingent assets 389 86

A detailed Statement of Contingent Liabilities and Assets (quantified and unquantified) is outlined on pages 80 to 82 of the Specific Fiscal Risk chapter.

The Statement of Specific Risks (quantified and unquantified) is outlined on pages 57 to 82 of the Specific Fiscal Risk chapter.

Notes to the Forecast Financial Statements

NOTE 1: Revenue Collected Through the Crown's Sovereign Power
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$ m
2013
Forecast
$m

Taxation Revenue (accrual)

             

Individuals

             
Source deductions 23,345 22,874 23,073 23,703 24,410 25,517 27,201
Other persons 5,071 4,986 4,972 5,251 5,255 5,392 5,549
Refunds (1,470) (1,199) (1,494) (1,460) (1,451) (1,490) (1,552)
Fringe benefit tax 522 523 514 529 556 580 607
Total Individuals 27,468 27,184 27,065 28,023 28,770 29,999 31,805

Corporate Tax

             
Gross companies tax 8,787 7,817 7,651 7,703 8,428 8,824 9,196
Refunds (242) (300) (310) (300) (300) (300) (300)
Non-resident withholding tax 1,506 1,402 1,549 1,396 1,389 1,469 1,525
Foreign-source dividend w/holding payments 71 109 42 42 42 42 42
Total Corporate Tax 10,122 9,028 8,932 8,841 9,559 10,035 10,463

Other Income Tax

             
Resident w/holding tax on interest income 2,699 2,740 2,822 2,666 2,494 2,571 2,719
Resident w/holding tax on dividend income 69 91 60 221 267 271 275
Estate and gift duties 3 3 3 3 3 3 3
Total Other Income Tax 2,771 2,834 2,885 2,890 2,764 2,845 2,997
Total Income Tax 40,361 39,046 38,882 39,754 41,093 42,879 45,265

Goods and Services Tax

             
Gross goods and services tax 20,631 20,458 21,460 22,228 23,457 24,983 26,342
Refunds (9,516) (8,578) (9,773) (10,204) (10,981) (11,796) (12,580)
Total Goods and Services Tax 11,115 11,880 11,687 12,024 12,476 13,187 13,762

Other Indirect Taxation

             
Petroleum fuels excise 819 813 880 891 910 935 961
Tobacco excise 159 151 151 155 157 159 162
Customs duty 1,857 1,859 1,889 1,874 1,860 1,847 1,873
Road user charges 851 940 877 895 942 996 1,051
Alcohol excise 573 605 602 635 656 678 702
Gaming duties 260 254 252 255 262 269 277
Motor vehicle fees 226 229 185 184 185 186 188
Energy resources levies 46 43 43 43 43 43 43
Approved issuer levy and cheque duty 105 91 90 90 90 90 90
Total Other Indirect Taxation 4,896 4,985 4,969 5,022 5,105 5,203 5,347
Total Indirect Taxation 16,011 16,865 16,656 17,046 17,581 18,390 19,109
Total Taxation Revenue 56,372 55,911 55,538 56,800 58,674 61,269 64,374

Other Sovereign Revenue (accrual)

             
ACC levies 2,718 2,780 2,742 2,885 2,974 3,062 3,151
Fire Service levies 279 303 303 314 325 336 348
EQC levies 86 87 87 89 90 92 94
Other miscellaneous items 796 867 861 1,213 1,663 1,876 2,422
Total Other Sovereign Revenue 3,879 4,037 3,993 4,501 5,052 5,366 6,015
Total Sovereign Revenue 60,251 59,948 59,531 61,301 63,726 66,635 70,389
NOTE 1 (continued): Receipts Collected Through the Crown's Sovereign Power
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m

Income Tax Receipts (cash)

             

Individuals

             
Source deductions 22,830 22,737 23,041 23,662 24,358 25,453 27,132
Other persons 5,469 5,570 5,447 5,870 5,898 6,080 6,232
Refunds (2,171) (2,065) (2,369) (2,274) (2,300) (2,396) (2,400)
Fringe benefit tax 489 513 507 526 546 573 599
Total Individuals 26,617 26,755 26,626 27,784 28,502 29,710 31,563

Corporate Tax

             
Gross companies tax 9,075 7,948 7,954 8,390 8,994 9,526 9,730
Refunds (1,026) (1,000) (1,150) (1,100) (1,107) (1,170) (1,221)
Non-resident withholding tax 1,638 1,373 1,344 1,352 1,397 1,459 1,518
Foreign-source dividend w/holding payments 72 109 42 42 42 42 42
Total Corporate Tax 9,759 8,430 8,190 8,684 9,326 9,857 10,069

Other Income Tax

             
Resident w/holding tax on interest income 2,616 2,740 2,823 2,667 2,495 2,572 2,720
Resident w/holding tax on dividend income 40 90 90 220 266 270 274
Estate and gift duties 2 3 3 3 3 3 3
Total Other Income Tax 2,658 2,833 2,916 2,890 2,764 2,845 2,997
Total Income Tax 39,034 38,018 37,732 39,358 40,592 42,412 44,629

Goods and Services Tax

             
Gross goods and services tax 20,085 19,944 20,727 21,455 22,674 24,141 25,508
Refunds (8,859) (8,267) (9,260) (9,691) (10,468) (11,283) (12,067)
Total Goods and Services Tax 11,226 11,677 11,467 11,764 12,206 12,858 13,441

Other Indirect Taxation

             
Petroleum fuels excise 809 813 880 891 910 935 961
Tobacco excise 160 151 151 155 157 159 162
Customs duty 1,946 1,859 1,889 1,874 1,860 1,847 1,873
Road user charges 851 940 877 895 942 996 1,051
Alcohol excise 554 605 602 635 656 678 702
Gaming duties 238 254 248 255 262 269 277
Motor vehicle fees 223 229 185 184 185 186 188
Energy resources levies 42 43 48 43 43 43 43
Approved issuer levy and cheque duty 85 92 80 85 85 85 85
Total Other Indirect Taxation 4,908 4,986 4,960 5,017 5,100 5,198 5,342
Total Indirect Taxation 16,134 16,663 16,427 16,781 17,306 18,056 18,783
Total Tax Receipts Collected 55,168 54,681 54,159 56,139 57,898 60,468 63,412

Other Sovereign Receipts (cash)

             
ACC levies 2,561 2,688 2,752 2,821 2,916 3,031 3,119
Fire Service levies 281 303 303 314 325 336 348
EQC levies 86 87 87 88 90 92 94
Other miscellaneous items 532 597 595 613 632 643 655
Total Other Sovereign Receipts 3,460 3,675 3,737 3,836 3,963 4,102 4,216
Total Sovereign Receipts 58,628 58,356 57,896 59,975 61,861 64,570 67,628
NOTE 2: Interest Revenue and Dividends
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$ m
2013
Forecast
$m

By type

             
Interest revenue 2,803 2,967 3,378 3,372 3,696 3,834 3,791
Dividends 411 391 450 495 560 622 680
Total Interest Revenue and Dividends 3,214 3,358 3,828 3,867 4,256 4,456 4,471

By source

             
Core Crown 2,344 2,835 2,647 2,650 2,864 2,989 3,027
Crown entities 1,233 1,083 1,162 1,252 1,328 1,403 1,464
State-owned enterprises 704 239 673 890 994 1,002 1,020
Inter-segment eliminations (1,067) (799) (654) (925) (930) (938) (1,040)
Total Interest Revenue and Dividends 3,214 3,358 3,828 3,867 4,256 4,456 4,471
NOTE 3: Social Assistance and Official Development Assistance
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
New Zealand superannuation 7,348 7,741 7,785 8,339 8,720 9,262 9,886
Domestic purposes benefit 1,478 1,455 1,501 1,545 1,568 1,616 1,656
Unemployment benefit 458 403 487 576 583 540 523
Invalids benefit 1,216 1,264 1,273 1,332 1,378 1,427 1,466
Family tax credit 1,897 2,132 2,153 2,155 2,159 2,250 2,266
Accommodation supplement 891 911 951 991 1,012 1,027 1,050
Sickness benefit 582 548 570 577 578 584 588
Student allowances 386 398 411 433 444 454 462
Disability allowances 278 387 389 415 437 460 481
KiwiSaver subsidies 1,102 1,370 1,440 1,546 1,699 1,787 1,853
Other social assistance benefits 2,376 2,638 2,707 2,875 3,029 3,185 3,326
Total Social Assistance 18,012 19,247 19,667 20,784 21,607 22,592 23,557
Official development assistance 362 434 484 472 567 567 567
Total Social Assistance and
Official Development Assistance
18,374 19,681 20,151 21,256 22,174 23,159 24,124

ACC payments are now classified as insurance expenses under NZ IFRS (refer note 7).

NOTE 4: Personnel Expenses
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
Core Crown 5,584 5,846 5,865 5,842 5,877 5,920 5,999
Crown entities 8,741 8,976 9,505 9,782 9,991 10,002 9,921
State-owned enterprises 2,164 2,248 2,438 2,494 2,619 2,669 2,746
Inter-segment eliminations (11) (9) (8) (8) (9) (9) (9)
Total Personnel Expenses 16,478 17,061 17,800 18,110 18,478 18,582 18,657
NOTE 5: Operating Expenses
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
Core Crown 30,432 34,027 34,796 34,703 34,392 34,467 35,015
Crown entities 15,754 15,773 16,028 15,643 15,841 16,186 16,595
State-owned enterprises 10,945 10,017 11,426 11,603 12,531 12,562 12,967
Inter-segment eliminations (22,805) (23,814) (24,556) (23,856) (24,005) (23,996) (24,146)
Total Operating Expenses 34,326 36,003 37,694 38,093 38,759 39,219 40,431
NOTE 6: Interest Expenses
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m

By type

             
Interest on financial liabilities 3,015 2,482 3,219 3,350 3,881 4,285 4,750
Interest unwind on provisions 86 21 92 107 128 149 166
Total Interest Expenses 3,101 2,503 3,311 3,457 4,009 4,434 4,916

By source

             
Core Crown 2,460 2,406 2,650 2,610 3,036 3,419 3,819
Crown entities 248 294 254 284 298 317 335
State-owned Enterprises 870 442 1,022 1,186 1,330 1,384 1,473
Inter-segment eliminations (477) (639) (615) (623) (655) (686) (711)
Total Interest Expenses 3,101 2,503 3,311 3,457 4,009 4,434 4,916
NOTE 7: Insurance Expenses
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m

By type

             
ACC 3,423 3,749 4,020 4,153 4,436 4,751 5,074
Earthquake Commission 130 39 39 40 40 41 42
Other insurance expenses 10 11 17 16 18 19 19
Total Insurance Expenses 3,563 3,799 4,076 4,209 4,494 4,811 5,135
NOTE 8: Forecast New Operating Spending
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
New operating spending up to Budget 2009 249 172 182 155 125 129
Forecast for future new spending 1,433 3,343 5,163 7,020
Total Forecast New Operating Spending 249 172 1,615 3,498 5,288 7,149
Top-down expense adjustment (495) (1,450) (350) (275) (200) (150)

New operating spending up to Budget 2009 represents the unallocated allowance from Budget 2008.

Forecast new operating spending indicates in broad terms the potential spending increases that could be introduced in each future remaining budget round. Total potential spending increases included in the forecasts are $1.75 billion for the next four Budgets (growing 2% each budget). As some of this spending has already been allocated, this line represents the unallocated portion.

NOTE 9: Gains and Losses on Financial Instruments
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
By source              
Core Crown 353 1,377 1,287 1,503 1,734 1,976 2,247
Crown entities (743) 354 412 338 366 395 416
State-owned enterprises (37) (50) 17 (66) (70) (71) (71)
Inter-segment eliminations (190) (257) (254) (240) (247) (254) (257)
Net Gains/(Losses) on
Financial Instruments
(617) 1,424 1,462 1,535 1,783 2,046 2,335
NOTE 10: Gains and Losses on Non-Financial Instruments
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
Actuarial gains/(losses) on
GSF liability
(1,098)
Actuarial gains/(losses) on
ACC outstanding claims
(1,709)
Other (118) 170 178 220 240 253 260
Net Gains/(Losses) on
Non-Financial Instruments
(2,925) 170 178 220 240 253 260
By source              
Core Crown (1,369) 8 33 42 49 53 56
Crown entities (1,725) (13)
State-owned enterprises 170 162 158 178 191 200 205
Inter-segment eliminations (1) (1)
Net Gains/(Losses) on
Non-Financial Instruments
(2,925) 170 178 220 240 253 260
NOTE 11: Source of Operating Balance
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
Core Crown 3,891 1,436 239 (1,321) (1,570) (1,681) (1,555)
Crown entities (1,526) 1,147 970 852 841 668 407
State-owned enterprises 723 1,067 938 1,381 1,118 1,046 1,222
Inter-segment eliminations (704) (545) (238) (538) (460) (429) (456)
Total Operating Balance 2,384 3,105 1,909 374 (71) (396) (382)
NOTE 12: Financial Assets
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
Cash and cash equivalents 3,804 6,412 3,868 4,492 4,674 5,575 6,090
Tax receivables 7,398 6,139 7,637 7,397 7,176 6,892 6,816
Trade and other receivables 6,760 6,610 6,842 7,492 7,765 8,016 8,319
Student loans (refer note 13) 6,741 6,718 7,173 7,599 8,022 8,441 8,852
Kiwibank mortgages 5,581 8,137 8,500 9,500 10,000 10,000 10,000
Long-term deposits 2,787 1,785 1,670 1,756 1,839 1,567 1,784
Reserve position at the IMF 188 141 174 163 153 141 130
Other advances 626 1,867 1,461 1,536 1,539 1,551 1,592
Share investments 12,964 13,700 14,293 15,254 16,816 18,452 20,096
Derivatives in gain 1,563 565 858 726 637 554 460
Other marketable securities 36,651 32,786 34,970 34,271 39,552 40,235 40,847
Total Financial Assets 85,063 84,860 87,446 90,186 98,173 101,424 104,986

Financial assets by portfolio

             
Reserve Bank and DMO managed funds 23,228 21,026 15,127 12,167 14,958 13,022 10,893
NZ Superannuation Fund 13,791 16,821 16,563 19,608 23,020 26,811 30,936
Other core Crown 19,080 16,382 23,194 23,813 24,125 24,386 24,848
Intra-segment eliminations (563) (775) (660) (758) (880) (1,029) (1,218)
Total Core Crown 55,536 53,454 54,224 54,830 61,223 63,190 65,459
ACC portfolio 11,977 12,916 12,599 13,464 14,302 14,954 15,376
EQC portfolio 1,872 1,963 2,019 2,178 2,349 2,536 2,738
Other Crown entities 4,304 3,895 4,645 4,957 5,244 5,472 5,723
Total  Crown Entities 18,153 18,774 19,263 20,599 21,895 22,962 23,837
Total  State-Owned Enterprises 11,374 12,632 13,959 14,757 15,055 15,272 15,690
Total Financial Assets by portfolio 85,063 84,860 87,446 90,186 98,173 101,424 104,986
NOTE 13: Student Loans
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
Nominal value (including accrued interest) 9,573 10,642 10,176 10,774 11,376 11,980 12,578
Opening book value 6,011 6,278 6,741 7,173 7,599 8,022 8,441
Amount borrowed in the year 1,201 1,305 1,298 1,384 1,470 1,558 1,638
Initial fair value write down on new borrowings (487) (525) (503) (536) (570) (604) (634)
Repayments made during the year (629) (675) (703) (795) (879) (965) (1,050)
Interest unwind 407 445 452 483 510 539 568
Impairment 231 (110) (110) (110) (110) (110) (110)
Other movements 7 (2) 2 1 (1)
Closing book value 6,741 6,718 7,173 7,599 8,022 8,441 8,852
NOTE 14: Property, Plant and Equipment
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m

By Class of asset

             

Net Carrying Value

             
Land (valuation) 17,609 16,918 18,122 18,303 18,435 18,550 18,625
Buildings (valuation) 22,257 21,775 22,977 23,380 23,438 23,393 23,253
Electricity distribution network (cost) 1,887 2,343 2,255 2,575 2,987 3,375 3,776
Electricity generation assets (valuation) 11,202 11,882 11,890 12,243 12,634 12,965 13,996
Aircraft (excl military) (valuation) 2,071 1,756 2,051 2,148 2,677 3,201 3,730
State highways (valuation) 20,947 20,937 21,628 22,230 22,860 23,518 24,153
Rail network (valuation) 11,621 10,917 11,979 12,471 12,592 12,496 12,459
Specialist military equipment (valuation) 3,345 3,160 3,421 3,397 3,264 3,015 2,900
Other plant and equipment (cost) 4,412 4,513 5,578 5,641 5,860 5,937 5,964
Specified cultural and heritage assets (valuation) 7,978 7,075 7,994 8,010 8,032 8,051 8,087
Total Property, Plant and Equipment 103,329 101,276 107,895 110,398 112,779 114,501 116,943

By source

             
Core Crown 28,637 26,827 29,236 29,542 29,497 29,256 29,085
Crown entities 43,659 43,868 45,312 46,311 47,197 48,041 48,790
State-owned enterprises 31,033 30,580 33,347 34,546 36,084 37,203 39,069
Inter-segment eliminations    -  1    -  (1) 1 1 (1)
Total Property, Plant and Equipment 103,329 101,276 107,895 110,398 112,779 114,501 116,943
NOTE 15: NZ Superannuation Fund
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
Revenue 385 427 431 487 562 642 725
Other expenses 34 154 156 168 196 221 245
Tax expenses 237 323 326 419 494 574 655
Gains/(losses) (995) 1,068 1,037 1,321 1,569 1,836 2,114
Operating Balance (881) 1,018 986 1,221 1,441 1,683 1,939
Opening net worth 12,973 14,461 14,212 17,440 20,638 24,175 28,024
Gross contribution from the Crown 2,104 2,242 2,242 1,977 2,096 2,167 2,194
Income after tax (881) 1,018 986 1,221 1,441 1,683 1,939
Other movements in reserves 16 (1) 1
Closing Net Worth 14,212 17,721 17,440 20,638 24,175 28,024 32,158

comprising:

             
Financial assets 13,791 16,821 16,563 19,608 23,020 26,811 30,936
Net other assets 421 900 877 1,030 1,155 1,213 1,222
Closing Net Worth 14,212 17,721 17,440 20,638 24,175 28,024 32,158
Reconciliation Core Crown to Core Crown
excluding NZSF net revenue
             
Core Crown revenue 61,819 61,891 61,207 62,888 65,422 68,408 72,161
Less NZSF revenue 385 427 431 487 562 642 725
Add back NZSF tax 237 323 326 419 494 574 655
Core Crown revenue excluding NZS Fund 61,671 61,787 61,102 62,820 65,354 68,340 72,091
OBEGAL 5,637 1,318 (64) (1,746) (2,481) (3,092) (3,374)
Less NZSF revenue 385 427 431 487 562 642 725
Less NZSF expenses 97 140 138 149 173 198 220
Add back NZSF tax 237 323 326 419 494 574 655
OBEGAL excluding NZS Fund 5,586 1,354 (31) (1,665) (2,376) (2,962) (3,224)
NOTE 16: Payables
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
Accounts payable 6,444 5,318 7,485 7,358 6,372 6,260 6,126
Taxes repayable 4,451 3,179 4,451 4,451 4,451 4,451 4,451
Total Payables 10,895 8,497 11,936 11,809 10,823 10,711 10,577

By source

             
Core Crown 7,425 5,235 7,615 7,758 7,855 8,072 8,289
Crown entities 4,042 3,910 3,444 3,424 3,365 3,339 3,275
State-owned enterprises 4,877 4,079 5,907 5,812 5,054 5,131 5,192
Inter-segment eliminations (5,449) (4,727) (5,030) (5,185) (5,451) (5,831) (6,179)
Total Payables 10,895 8,497 11,936 11,809 10,823 10,711 10,577
NOTE 17: Insurance Liabilities
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
ACC liability 20,374 21,976 21,876 23,321 24,799 26,351 27,972
EQC liability 97 79 97 97 97 97 97
Other insurance liabilities 13 10 9 7 6 5 4
Total Insurance Liabilities 20,484 22,065 21,982 23,425 24,902 26,453 28,073

ACC liability

Calculation information

PricewaterhouseCoopers Actuarial Pty Ltd have prepared an independent actuarial estimate of the ACC outstanding claims liability asat 30 June 2008. This estimate includes the expected future payments relating to accidents that occurred prior to balance date (whether or not the associated claims have been reported to, or accepted by, ACC) and also the expected future administrative expenses of managing these claims.

The key economic variables that impact on changes to the valuation are the long-term Labour Cost Index (LCI), average weeklyearnings and the discount rate (6.63% at 30 June 2008). Other key variables in each valuation are the forecast increases in claim costs over and above the economic variables above, and the assumed rate at which long-term claimants will leave the scheme over the period. This assessment is largely based on scheme history.

Presentation approach

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

ACC liability
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m

Gross ACC liability

             
Opening gross liability 17,328 20,663 20,374 21,876 23,321 24,799 26,351
Net change 3,046 1,313 1,502 1,445 1,478 1,552 1,621
Closing gross liability 20,374 21,976 21,876 23,321 24,799 26,351 27,972

Less net assets available to ACC

             
Opening net asset value 11,757 12,735 12,397 13,484 14,445 15,281 15,988
Net change 640 1,091 1,087 961 836 707 512
Closing net asset value 12,397 13,826 13,484 14,445 15,281 15,988 16,500

Net ACC reserves (net liability)

             
Opening reserves position (5,571) (7,928) (7,977) (8,392) (8,876) (9,518) (10,363)
Net change (2,406) (222) (415) (484) (642) (845) (1,109)
Closing reserves position (net liability) (7,977) (8,150) (8,392) (8,876) (9,518) (10,363) (11,472)
NOTE 18: Retirement Plan Liabilities
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
Government Superannuation Fund 8,257 8,216 8,332 8,293 8,226 8,146 8,066
Other funds 5 1 1 1
Total Retirement Plan Liabilities 8,257 8,221 8,332 8,293 8,227 8,147 8,067

The GSF obligation has been calculated by the Government Actuary as at 30 June 2008. A Projected Unit Credit Method, based on balance-date membership data, is used for the valuation. This method requires the benefits payable from the GSF in respect of past service to be estimated and then discounted back to the valuation date.

The projected GSF net liability was calculated using discount rates derived from the market yield curve as at 30 June 2008. This resulted in long-term before-tax discount rates ranging from 6.06% to 6.95%. The principal long-term financial assumptions used in the calculation were an inflation rate of 2.25% and an annual salary increases rate, before any promotional effects, of 3.0%.

The 2008/09 projected movement in the net liability is $74 million, reflecting an increase in the GSF liability of $86 million and an increase in the GSF assets of $12 million.

The changes in the projected GSF net liability from 2008/09 onwards reflects the net of the expected current service cost, interest cost, investment returns and contributions.

GSF net defined benefit retirement liability
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
GSF liability              
Opening GSF liability 11,167 11,826 11,831 11,917 11,880 11,804 11,702
Net projected change 664 121 86 (37) (76) (102) (108)
Closing GSF liability 11,831 11,947 11,917 11,880 11,804 11,702 11,594
Less net assets available to GSF              
Opening net asset value 4,007 3,685 3,574 3,586 3,588 3,578 3,556
Investment valuation changes (261) 222 191 193 192 191 190
Contribution and other income less membership payments (172) (176) (179) (191) (202) (213) (218)
Closing net asset value 3,574 3,731 3,586 3,588 3,578 3,556 3,528
Net GSF liability              
Opening unfunded liability 7,160 8,141 8,257 8,332 8,293 8,226 8,146
Net projected change 1,097 75 74 (39) (66) (80) (80)
Closing unfunded liability 8,257 8,216 8,332 8,293 8,226 8,146 8,066
NOTE 19: Provisions
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
Provision for Kyoto 562 482 562 562 562 562 562
Provision for ETS credits 618 239 781 564 162 (345)
Provision for National Provident Fund guarantee 907 780 978 953 926 900 873
Provision for employee entitlements 2,220 1,747 2,206 2,229 2,268 2,292 2,310
Other provisions 1,064 1,084 1,090 1,106 1,102 1,135 1,523
Total Provisions 4,753 4,711 5,075 5,631 5,422 5,051 4,923

By source

             
Core Crown 2,763 2,862 2,874 3,422 3,223 2,853 2,694
Crown entities 1,500 1,220 1,485 1,496 1,515 1,520 1,523
State-owned enterprises 684 652 752 763 742 751 786
Inter-segment eliminations (194) (23) (36) (50) (58) (73) (80)
Total Provisions 4,753 4,711 5,075 5,631 5,422 5,051 4,923
Analysis of Provision for Kyoto              
Opening balance 704 482 562 562 562 562 562
Change in the price of carbon and foreign exchange rate 226
Change in net projected emission units (368)
Closing balance 562 482 562 562 562 562 562

Analysis of Provision for ETS credits

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

The ETS impact on the fiscal forecast is as follows:

ETS impact
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
Revenue 131 88 414 846 1,044 1,577
Expenses 749 327 956 629 642 1,070
OBEGAL (618) (239) (542) 217 402 507
Provision for ETS credits 618 239 781 564 162 (345)
NOTE 20: Net Worth attributable to the Crown
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m
Taxpayers funds 46,700 49,886 48,675 49,050 48,979 48,588 48,209
Property, plant and equipment revaluation reserve 58,566 52,486 58,793 58,796 58,798 58,800 58,803
Investment revaluation reserve 34 35 35 35 35 35 35
Cash flow hedge reserve (151) (117) (98) (96) (96) (96) (97)
Foreign currency translation reserve (17) (32) (18) (18) (18) (18) (18)
Total net worth attributable to the Crown 105,132 102,258 107,387 107,767 107,698 107,309 106,932

Taxpayers Funds

             
Opening taxpayers funds 44,222 46,767 46,700 48,675 49,050 48,979 48,588
Operating balance excluding minority interest 2,384 3,105 1,909 374 (71) (396) (382)
Transfers from/(to) other reserves 94 14 66 1 5 3
Closing Taxpayers Funds 46,700 49,886 48,675 49,050 48,979 48,588 48,209

Property, Plant and Equipment Revaluation Reserve

             
Opening revaluation reserve 52,442 52,498 58,566 58,793 58,796 58,798 58,800
Net revaluations 6,214 292 3 2 2 3
Transfers from/(to) other reserves (90) (12) (65)
Closing Property, Plant and Equipment Revaluation Reserve 58,566 52,486 58,793 58,796 58,798 58,800 58,803

Investment Revaluation Reserve

             
Opening investment revaluation reserve 23 29 34 35 35 35 35
Valuation gain/(losses) on investments available for sale taken to reserves 11 6 1
Closing Investment Revaluation Reserve 34 35 35 35 35 35 35

Cash Flow Hedge Reserve

             
Opening cash flow hedge reserve (122) (175) (151) (98) (96) (96) (96)
Transfer into reserve 9 58 19 1
Transfer to the statement of financial performance 22 1 (1)
Transfer to initial carrying value of hedged item (60) 34
Closing Cash Flow Hedge Reserve (151) (117) (98) (96) (96) (96) (97)

Foreign Currency Translation Reserve

             
Opening foreign currency translation reserve (34) (32) (17) (18) (18) (18) (18)
Movement arising from translation of foreign operations 17 (1) -  
Closing Foreign Currency Translation Reserve (17) (32) (18) (18) (18) (18) (18)
NOTE 21: Reconciliation of core Crown operating cash flows to residual core Crown cash
  2008
Actual
$m
2009
Previous
Budget
$m
2009
Forecast
$m
2010
Forecast
$m
2011
Forecast
$m
2012
Forecast
$m
2013
Forecast
$m

Core Crown Cash Flows from Operations

             
Total tax receipts 55,975 55,599 54,851 57,044 59,008 61,661 64,850
Total other sovereign receipts 486 530 536 555 573 585 597
Interest, profits and dividends 2,128 2,232 2,009 1,931 2,060 2,107 2,045
Sale of goods & services and other receipts 1,411 1,658 1,641 1,551 1,538 1,570 1,549
Subsidies and transfer payments (19,562) (21,068) (22,045) (23,559) (24,249) (25,247) (26,260)
Personnel and operating costs (30,792) (34,224) (35,043) (34,084) (34,213) (34,057) (34,163)
Finance costs (2,354) (2,282) (2,441) (2,394) (2,787) (3,238) (3,680)
Forecast for future new operating spending 106 (172) (1,615) (3,498) (5,288) (7,149)
Top-down expense adjustment 1,450 350 275 200 150
Net Cash Flows from core Crown Operations 7,292 2,551 786 (221) (1,293) (1,707) (2,061)
Net purchase of physical assets (1,433) (1,891) (2,001) (1,729) (1,397) (1,251) (1,306)
Net increase in advances (1,254) (821) (903) (559) (788) (622) (633)
Net purchase of investments (444) (1,164) (1,850) (316) (221) (168) (33)
Contribution to NZ Superannuation Fund (2,104) (2,242) (2,242) (1,977) (2,096) (2,167) (2,194)
Purchase of Reserve Bank reserves
Forecast for future new capital spending 89 (184) (498) (808) (900) (1,080)
Top-down capital adjustment 485
Residual Cash 2,057 (3,478) (5,909) (5,300) (6,603) (6,815) (7,307)

Financed by:

             
Other net sale/(purchase) of marketable securities
and deposits
(3,595) 2,643 4,493 2,929 (2,820) 1,956 2,177
Total Operating and Investing Activities (1,538) (835) (1,416) (2,371) (9,423) (4,859) (5,130)

Used in:

             
Net (repayment)/issue of other New Zealand-dollar borrowing (1,585) 399 440 147 (82) 241 431
Net (repayment)/issue of foreign currency borrowing 901 (541) (602) (173) (54) (522) (507)
Issues of circulating currency 86 181 172 181 190 200 209
Decrease/(increase) in cash 249 (29) (29) (1) (3) (7)
  (349) 10 (19) 154 51 (88) 133
Net Cash Inflow/(Outflow) to be Offset by
Domestic Bonds
(1,887) (825) (1,435) (2,217) (9,372) (4,947) (4,997)
Gross Cash Proceeds from Domestic Bonds              
Domestic bonds (market) 1,757 3,314 4,048 6,070 9,114 9,189 9,216
Domestic bonds (non-market) 130 662 738 843 258 826 832
Total Gross Cash Proceeds from Domestic Bonds 1,887 3,976 4,786 6,913 9,372 10,015 10,048
Repayment of domestic bonds (market) (2,700) (2,900) (4,097) (4,483) (4,518)
Repayment of domestic bonds (non-market) (451) (451) (599) (585) (533)
Net (Repayments of)/Cash Proceeds from
Domestic Bonds
1,887 825 1,435 2,217 9,372 4,947 4,997

Forecast Statement of Segments

Statement of Financial Performance for the year ended 30 June 2008
  Core Crown
2008
Actual
$m
Crown Entities
2008
Actual
$m
State-owned
Enterprises
2008
Actual
$m
Inter-segment
eliminations
2008
Actual
$m
Total Crown
2008
Actual
$m

Revenue

         
Taxation revenue 56,747 (375) 56,372
Other sovereign revenue 733 4,039 (893) 3,879
Sales of goods and services 1,097 12,502 13,201 (11,401) 15,399
Interest revenue and dividends 2,344 1,233 704 (1,067) 3,214
Other revenue 898 11,239 692 (10,214) 2,615
Total Revenue (excluding gains) 61,819 29,013 14,597 (23,950) 81,479

Expenses

         
Social assistance and
official development assistance
18,519 (145) 18,374
Personnel expenses 5,584 8,741 2,164 (11) 16,478
Other operating expenses 30,434 19,307 10,955 (22,807) 37,889
Interest expenses 2,460 248 870 (477) 3,101
Forecast for future new spending
Total Expenses (excluding losses) 56,997 28,296 13,989 (23,440) 75,842

Operating Balance before gains/(losses)

4,822 717 608 (510) 5,637
Total Gains/(losses) (1,014) (2,468) 134 (194) (3,542)
Net surplus/(deficit) from
associates and joint ventures
85 225 24 334
Gain/(loss) from discontinued operations (2) 24 22
Attributable to minority interest in Air NZ (67) (67)
Operating Balance 3,891 (1,526) 723 (704) 2,384

Expenses by functional classification

         
Social security and welfare 17,877 4,307 (675) 21,509
Health 11,297 9,791 (10,279) 10,809
Education 9,551 8,069 25 (7,248) 10,397
Transport and communications 2,244 1,737 5,832 (2,389) 7,424
Other 13,568 4,144 7,262 (2,372) 22,602
Finance costs 2,460 248 870 (477) 3,101
Forecast for future new spending
Total Crown Expenses excluding losses 56,997 28,296 13,989 (23,440) 75,842
Statement of Financial Position as at 30 June 2008
  Core Crown
2008
Actual
$m
Crown Entities
2008
Actual
$m
State-owned
Enterprises
2008
Actual
$m
Inter-segment
eliminations
2008
Actual
$m
Total Crown
2008
Actual
$m

Assets

         
Cash and cash equivalents 872 2,640 531 (239) 3,804
Receivables 9,031 4,444 2,247 (1,564) 14,158
Other financial assets 49,726 16,807 8,949 (8,381) 67,101
Property, plant & equipment 28,637 43,659 31,033 103,329
Equity accounted investments 25,696 7,073 224 (24,928) 8,065
Intangible assets and goodwill 845 386 520 1,751
Other assets 1,375 329 938 (15) 2,627
Forecast for new capital spending
Total Assets 116,182 75,338 44,442 (35,127) 200,835

Liabilities

         
Borrowings 37,167 4,705 12,817 (8,579) 46,110
Other liabilities 22,032 26,256 6,648 (5,725) 49,211
Total Liabilities 59,199 30,961 19,465 (14,304) 95,321
Total Assets less Total Liabilities 56,983 44,377 24,977 (20,823) 105,514

Net Worth

         
Taxpayer funds 42,676 20,004 7,721 (23,701) 46,700
Reserves 14,307 24,373 16,777 2,975 58,432
Net worth attributable to minority interest in Air NZ
479
(97)
382
Total Net Worth 56,983 44,377 24,977 (20,823) 105,514
Statement of Financial Performance for the year ended 30 June 2009
  Core Crown
2009
Forecast
$m
Crown Entities
2009
Forecast
$m
State-owned
Enterprises
2009
Forecast
$m
Inter-segment
eliminations
2009
Forecast
$m
Total Crown
2009
Forecast
$m

Revenue

         
Taxation revenue 56,058 (520) 55,538
Other sovereign revenue 798 4,104 (909) 3,993
Sales of goods and services 1,215 12,821 13,842 (11,794) 16,084
Interest revenue and dividends 2,647 1,162 673 (654) 3,828
Other revenue 489 12,089 1,119 (11,450) 2,247
Total Revenue (excluding gains) 61,207 30,176 15,634 (25,327) 81,690

Expenses

         
Social assistance and official development assistance 20,318 (167) 20,151
Personnel expenses 5,865 9,505 2,438 (8) 17,800
Other operating expenses 34,804 20,087 11,442 (24,563) 41,770
Interest expenses 2,650 254 1,022 (615) 3,311
Forecast for future new spending and top down adjustment (1,278) (1,278)
Total Expenses (excluding losses) 62,359 29,846 14,902 (25,353) 81,754

Operating Balance before gains/(losses)

(1,152) 330 732 26 (64)
Total Gains/(losses) 1,317 399 175 (251) 1,640
Net surplus/(deficit) from associates and joint ventures 63 240 31 334
Gain/(loss) from discontinued operations (1) (1)
Attributable to minority interest in Air NZ
Operating Balance 228 969 937 (225) 1,909

Expenses by functional classification

         
Social security and welfare 19,156 4,942 (716) 23,382
Health 12,377 10,020 (10,513) 11,884
Education 10,739 7,930 23 (7,049) 11,643
Transport and communications 3,566 2,082 7,298 (3,459) 9,487
Other 15,149 4,618 6,559 (3,001) 23,325
Finance costs 2,650 254 1,022 (615) 3,311
Forecast for future new spending and top down adjustment (1,278) (1,278)
Total Crown Expenses excluding losses 62,359 29,846 14,902 (25,353) 81,754
Statement of Financial Position as at 30 June 2009
  Core Crown
2009
Forecast
$m
Crown Entities
2009
Forecast
$m
State-owned
Enterprises
2009
Forecast
$m
Inter-segment
eliminations
2009
Forecast
$m
Total Crown2009
Forecast
$m

Assets

         
Cash and cash equivalents 1,347 2,339 411 (229) 3,868
Receivables 9,376 4,166 2,163 (1,226) 14,479
Other financial assets 47,790 18,685 11,655 (9,031) 69,099
Property, plant & equipment 29,236 45,312 33,348 (1) 107,895
Equity accounted investments 27,807 7,449 219 (26,655) 8,820
Intangible assets and goodwill 963 414 678 253 2,308
Other assets 1,248 289 921 (7) 2,451
Forecast for new capital spending (301) (301)
Total Assets 117,466 78,654 49,395 (36,896) 208,619

Liabilities

         
Borrowings 37,793 4,855 15,680 (9,710) 48,618
Other liabilities 22,406 27,117 7,657 (4,948) 52,232
Total Liabilities 60,199 31,972 23,337 (14,658) 100,850
Total Assets less Total Liabilities 57,267 46,682 26,058 (22,238) 107,769

Net Worth

         
Taxpayer funds 42,960 22,019 8,815 (31,995) 41,799
Reserves 14,307 24,663 16,764 9,854 65,588
Net worth attributable to minority interest in Air NZ
479
(97)
382
Total Net Worth 57,267 46,682 26,058 (22,238) 107,769
Statement of Financial Performance for the year ended 30 June 2010
  Core Crown
2010
Forecast
$m
Crown Entities
2010
Forecast
$m
State-owned
Enterprises
2010
Forecast
$m
Inter-segment
eliminations
2010
Forecast
$m
Total Crown
2010
Forecast
$m

Revenue

         
Taxation revenue 57,415 (615) 56,800
Other sovereign revenue 1,152 4,300 (951) 4,501
Sales of goods and services 1,203 12,804 14,427 (11,809) 16,625
Interest revenue and dividends 2,650 1,252 890 (925) 3,867
Other revenue 468 11,813 1,210 (10,640) 2,851
Total Revenue (excluding gains) 62,888 30,169 16,527 (24,940) 84,644

Expenses

         
Social assistance and
official development assistance
21,412 (156) 21,256
Personnel expenses 5,842 9,782 2,494 (8) 18,110
Other operating expenses 34,720 19,836 11,619 (23,873) 42,302
Interest expenses 2,610 284 1,186 (623) 3,457
Forecast for future new spending
and top down adjustment
1,265 1,265
Total Expenses (excluding losses) 65,849 29,902 15,299 (24,660) 86,390

Operating Balance before gains/(losses)

(2,961) 267 1,228 (280) (1,746)
Total Gains/(losses) 1,542 338 112 (237) 1,755
Net surplus/(deficit) from
associates and joint ventures
77 248 40 1 366
Gain/(loss) from discontinued operations (1) (1)
Attributable to minority interest in Air NZ
Operating Balance (1,342) 853 1,379 (516) 374

Expenses by functional classification

         
Social security and welfare 20,112 5,134 (741) 24,505
Health 12,424 10,030 (10,580) 11,874
Education 11,117 8,050 23 (7,243) 11,947
Transport and communications 2,649 1,890 7,102 (2,762) 8,879
Other 15,672 4,514 6,988 (2,711) 24,463
Finance costs 2,610 284 1,186 (623) 3,457
Forecast for future new spending
and top down adjustment
1,265 1,265
Total Crown Expenses excluding losses 65,849 29,902 15,299 (24,660) 86,390
Statement of Financial Position as at 30 June 2010
  Core Crown
2010
Forecast
$m
Crown Entities
2010
Forecast
$m
State-owned
Enterprises
2010
Forecast
$m
Inter-segment
eliminations
2010
Forecast
$m
Total Crown
2010
Forecast
$m

Assets

         
Cash and cash equivalents 2,071 2,360 288 (227) 4,492
Receivables 9,295 4,323 2,208 (937) 14,889
Other financial assets 47,452 20,171 12,534 (9,352) 70,805
Property, plant & equipment 29,542 46,311 34,548 (3) 110,398
Equity accounted investments 28,201 7,703 254 (26,927) 9,231
Intangible assets and goodwill 1,008 409 736 256 2,409
Other assets 1,310 291 935 (4) 2,532
Forecast for new capital spending 300 300
Total Assets 119,179 81,568 51,503 (37,194) 215,056

Liabilities

         
Borrowings 39,998 5,185 17,030 (9,541) 52,672
Other liabilities 23,235 28,542 7,572 (5,114) 54,235
Total Liabilities 63,233 33,727 24,602 (14,655) 106,907
Total Assets less Total Liabilities 55,946 47,841 26,901 (22,539) 108,149

Net Worth

         
Taxpayer funds 41,639 23,178 9,655 (32,298) 42,174
Reserves 14,307 24,663 16,767 9,856 65,593
Net worth attributable to
minority interest in Air NZ
479 (97) 382
Total Net Worth 55,946 47,841 26,901 (22,539) 108,149
Statement of Financial Performance for the year ended 30 June 2011
  Core Crown
2011
Forecast
$m
Crown Entities
2011
Forecast
$m
State-owned
Enterprises
2011
Forecast
$m
Inter-segment
eliminations
2011
Forecast
$m
Total Crown
2011
Forecast
$m

Revenue

         
Taxation revenue 59,268 (594) 58,674
Other sovereign revenue 1,602 4,443 (993) 5,052
Sales of goods and services 1,216 12,895 15,535 (11,814) 17,832
Interest revenue and dividends 2,864 1,328 994 (930) 4,256
Other revenue 472 12,162 918 (10,710) 2,842
Total Revenue (excluding gains) 65,422 30,828 17,447 (25,041) 88,656

Expenses

         
Social assistance and
official development assistance
22,335 (161) 22,174
Personnel expenses 5,877 9,991 2,619 (9) 18,478
Other operating expenses 34,420 20,317 12,547 (24,031) 43,253
Interest expenses 3,036 298 1,330 (655) 4,009
Forecast for future new spending
and top down adjustment
3,223 3,223
Total Expenses (excluding losses) 68,891 30,606 16,496 (24,856) 91,137

Operating Balance before gains/(losses)

(3,469) 222 951 (185) (2,481)
Total Gains/(losses) 1,781 366 121 (245) 2,023
Net surplus/(deficit) from
associates and joint ventures
88 253 47 388
Gain/(loss) from discontinued operations (1) (1)
Attributable to minority interest in Air NZ
Operating Balance (1,600) 841 1,118 (430) (71)

Expenses by functional classification

         
Social security and welfare 20,780 5,473 (780) 25,473
Health 12,401 10,054 (10,591) 11,864
Education 11,302 8,171 23 (7,329) 12,167
Transport and communications 2,615 1,941 7,469 (2,754) 9,271
Other 15,534 4,669 7,674 (2,747) 25,130
Finance costs 3,036 298 1,330 (655) 4,009
Forecast for future new spending
and top down adjustment
3,223 3,223
Total Crown Expenses excluding losses 68,891 30,606 16,496 (24,856) 91,137
Statement of Financial Position as at 30 June 2011
  Core Crown
2011
Forecast
$m
Crown Entities
2011
Forecast
$m
State-owned
Enterprises
2011
Forecast
$m
Inter-segment
eliminations
2011
Forecast
$m
Total Crown
2011
Forecast
$m

Assets

         
Cash and cash equivalents 2,400 2,473 29 (228) 4,674
Receivables 9,116 4,439 2,276 (890) 14,941
Other financial assets 53,838 21,623 13,024 (9,927) 78,558
Property, plant & equipment 29,497 47,197 36,083 2 112,779
Equity accounted investments 28,595 7,955 302 (27,217) 9,635
Intangible assets and goodwill 1,038 411 865 255 2,569
Other assets 1,371 287 1,023 (3) 2,678
Forecast for new capital spending 1,077 1,077
Total Assets 126,932 84,385 53,602 (38,008) 226,911

Liabilities

         
Borrowings 49,296 5,460 19,304 (9,864) 64,196
Other liabilities 23,260 29,966 6,796 (5,387) 54,635
Total Liabilities 72,556 35,426 26,100 (15,251) 118,831
Total Assets less Total Liabilities 54,376 48,959 27,502 (22,757) 108,080

Net Worth

         
Taxpayer funds 40,069 24,296 10,253 (32,515) 42,103
Reserves 14,307 24,663 16,770 9,855 65,595
Net worth attributable to
minority interest in Air NZ
479
(97)
382
Total Net Worth 54,376 48,959 27,502 (22,757) 108,080
Statement of Financial Performance for the year ended 30 June 2012
  Core Crown
2012
Forecast
$m
Crown Entities
2012
Forecast
$m
State-owned
Enterprises
2012
Forecast
$m
Inter-segment
eliminations
2012
Forecast
$m
Total Crown
2012
Forecast
$m

Revenue

         
Taxation revenue 61,893 (624) 61,269
Other sovereign revenue 1,815 4,584 (1,033) 5,366
Sales of goods and services 1,236 13,075 15,689 (11,799) 18,201
Interest revenue and dividends 2,989 1,403 1,002 (938) 4,456
Other revenue 475 12,256 810 (10,632) 2,909
Total Revenue (excluding gains) 68,408 31,318 17,501 (25,026) 92,201

Expenses

         
Social assistance and
official development assistance
23,320 (161) 23,159
Personnel expenses 5,920 10,002 2,669 (9) 18,582
Other operating expenses 34,505 20,979 12,580 (24,034) 44,030
Interest expenses 3,419 317 1,384 (686) 4,434
Forecast for future new spending
and top down adjustment
5,088 5,088
Total Expenses (excluding losses) 72,252 31,298 16,633 (24,890) 95,293

Operating Balance before gains/(losses)

(3,844) 20 868 (136) (3,092)
Total Gains/(losses) 2,026 395 129 (251) 2,299
Net surplus/(deficit) from associates
and joint ventures
97 253 48 398
Gain/(loss) from discontinued operations (1) (1)
Attributable to minority interest in Air NZ
Operating Balance (1,721) 668 1,044 (387) (396)

Expenses by functional classification

         
Social security and welfare 21,680 5,849 (822) 26,707
Health 12,390 10,067 (10,596) 11,861
Education 11,419 8,356 23 (7,345) 12,453
Transport and communications 2,515 1,930 7,475 (2,680) 9,240
Other 15,741 4,779 7,751 (2,761) 25,510
Finance costs 3,419 317 1,384 (686) 4,434
Forecast for future new spending
and top down adjustment
5,088 5,088
Total Crown Expenses excluding losses 72,252 31,298 16,633 (24,890) 95,293
Statement of Financial Position as at 30 June 2012
  Core Crown
2012
Forecast
$m
Crown Entities
2012
Forecast
$m
State-owned
Enterprises
2012
Forecast
$m
Inter-segment
eliminations
2012
Forecast
$m
Total Crown
2012
Forecast
$m

Assets

         
Cash and cash equivalents 2,741 2,521 541 (228) 5,575
Receivables 8,967 4,528 2,273 (860) 14,908
Other financial assets 55,652 22,891 12,719 (10,321) 80,941
Property, plant & equipment 29,256 48,041 37,203 1 114,501
Equity accounted investments 28,850 8,209 329 (27,412) 9,976
Intangible assets and goodwill 1,039 405 889 254 2,587
Other assets 1,402 287 1,045 (4) 2,730
Forecast for new capital spending 1,977 1,977
Total Assets 129,884 86,882 54,999 (38,570) 233,195

Liabilities

         
Borrowings 53,951 5,701 20,074 (10,042) 69,684
Other liabilities 23,238 31,487 6,882 (5,787) 55,820
Total Liabilities 77,189 37,188 26,956 (15,829) 125,504
Total Assets less Total Liabilities 52,695 49,694 28,043 (22,741) 107,691

Net Worth

         
Taxpayer funds 38,388 25,031 10,792 (32,499) 41,712
Reserves 14,307 24,663 16,772 9,855 65,597
Net worth attributable to
minority interest in Air NZ
479 (97) 382
Total Net Worth 52,695 49,694 28,043 (22,741) 107,691
Statement of Financial Performance for the year ended 30 June 2013
  Core Crown
2013
Forecast
$m
Crown Entities
2013
Forecast
$m
State-owned
Enterprises
2013
Forecast
$m
Inter-segment
eliminations
2013
Forecast
$m
Total Crown
2013
Forecast
$m

Revenue

         
Taxation revenue 65,084 (710) 64,374
Other sovereign revenue 2,360 4,686 (1,031) 6,015
Sales of goods and services 1,214 13,234 16,399 (11,796) 19,051
Interest revenue and dividends 3,027 1,464 1,020 (1,040) 4,471
Other revenue 476 12,321 827 (10,647) 2,977
Forecast revenue reduction contingency
Total Revenue (excluding gains) 72,161 31,705 18,246 (25,224) 96,888

Expenses

         
Social assistance and
official development assistance
24,284 (160) 24,124
Personnel expenses 5,999 9,921 2,746 (9) 18,657
Other operating expenses 35,056 21,711 12,984 (24,185) 45,566
Interest expenses 3,819 335 1,473 (711) 4,916
Forecast for future new spending
and top down adjustment
6,999 6,999
Total Expenses (excluding losses) 76,157 31,967 17,203 (25,065) 100,262

Operating Balance before gains/(losses)

(3,996) (262) 1,043 (159) (3,374)
Total Gains/(losses) 2,299 416 134 (254) 2,595
Net surplus/(deficit) from
associates and joint ventures
99 253 47 (1) 398
Gain/(loss) from discontinued operations (1) (1)
Attributable to minority interest in Air NZ
Operating Balance (1,598) 407 1,223 (414) (382)

Expenses by functional classification

         
Social security and welfare 22,529 6,218 (861) 27,886
Health 12,391 10,084 (10,558) 11,917
Education 11,488 8,489 23 (7,342) 12,658
Transport and communications 2,548 2,009 7,677 (2,742) 9,492
Other 16,383 4,832 8,030 (2,851) 26,394
Finance costs 3,819 335 1,473 (711) 4,916
Forecast for future new spending
and top down adjustment
6,999 6,999
Total Crown Expenses excluding losses 76,157 31,967 17,203 (25,065) 100,262
Statement of Financial Position as at 30 June 2013
  Core Crown
2013
Forecast
$m
Crown Entities
2013
Forecast
$m
State-owned
Enterprises
2013
Forecast
$m
Inter-segment
eliminations
2013
Forecast
$m
Total Crown
2013
Forecast
$m

Assets

         
Cash and cash equivalents 3,076 2,533 709 (228) 6,090
Receivables 8,870 4,627 2,322 (684) 15,135
Other financial assets 57,589 23,986 12,916 (10,730) 83,761
Property, plant & equipment 29,085 48,790 39,069 (1) 116,943
Equity accounted investments 28,914 8,462 363 (27,447) 10,292
Intangible assets and goodwill (5,281) 401 888 38 2,922
Other assets 1,417 287 1,082 (4) 2,782
Forecast for new capital spending 9,716 217 3,057
Total Assets 133,386 89,086 57,349 (38,839) 240,982

Liabilities

         
Borrowings 58,815 5,991 21,694 (10,135) 76,365
Other liabilities 23,431 33,037 6,977 (6,142) 57,303
Total Liabilities 82,246 39,028 28,671 (16,277) 133,668
Total Assets less Total Liabilities 51,140 50,058 28,678 (22,562) 107,314

Net Worth

         
Taxpayer funds 36,833 25,395 11,425 (32,320) 41,333
Reserves 14,307 24,663 16,774 9,855 65,599
Net worth attributable to
minority interest in Air NZ
479
(97)
382
Total Net Worth 51,140 50,058 28,678 (22,562) 107,314

6 Core Crown Expense Tables

[10]

Core Crown Expenses
($ million) 2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Social security and welfare 14,252 14,682 15,598 16,768 17,877 19,156 20,112 20,780 21,680 22,529
GSF 591 718 761 645 690 654 555 545 548 549
Health 8,111 8,813 9,547 10,355 11,297 12,377 12,424 12,401 12,390 12,391
Education 7,585 7,930 9,914 9,269 9,551 10,739 11,117 11,302 11,419 11,488
Core government services 2,091 2,567 2,507 4,816 3,371 3,649 3,625 3,845 3,919 4,050
Law and order 1,843 1,977 2,235 2,699 2,894 3,139 3,130 3,130 3,128 3,143
Defence 1,311 1,275 1,383 1,517 1,562 1,756 1,731 1,718 1,709 1,708
Transport and communications 1,461 1,635 1,818 2,405 2,244 3,566 2,649 2,615 2,515 2,548
Economic and industrial services 1,192 1,444 1,592 1,595 2,889 3,549 3,408 3,621 3,750 3,847
Primary services 368 394 467 438 541 545 507 499 498 484
Heritage, culture and recreation 634 991 891 844 1,107 1,446 1,925 1,608 1,606 2,030
Housing and community development 139 163 202 255 260 347 308 329 333 319
Other 52 32 49 68 254 57 467 214 214 214
Finance costs 2,252 2,274 2,356 2,329 2,460 2,657 2,626 3,061 3,455 3,858
Forecast for future new spending  ..   ..   ..   ..   ..  172 1,615 3,498 5,288 7,149
Top- down expense adjustment  ..   ..   ..   ..   ..  ( 1,450) ( 350) ( 275) ( 200) ( 150)
Core Crown expenses 41,882 44,895 49,320 54,003 56,997 62,359 65,849 68,891 72,252 76,157

Source:  The Treasury

Table 6.1 - Social security and welfare expenses
($ million) 2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Welfare benefits 13,181 13,326 14,246 15,435 16,288 17,175 18,089 18,686 19,511 20,350
Social rehabilitation & compensation 118 152 145 163 199 223 215 221 225 225
Departmental expenses 705 781 858 845 850 1,120 1,095 1,084 1,074 1,074
Other non-departmental expenses 248 423 349 325 540 638 713 789 870 880
Social security and welfare expenses 14,252 14,682 15,598 16,768 17,877 19,156 20,112 20,780 21,680 22,529

Source:  The Treasury

Notes

  • [10]Historical data contained in the expense tables have been restated on a NZ IFRS basis for material changes.
Table 6.2 - New Zealand superannuation and welfare benefit expenses
($ million) 2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
New Zealand Superannuation 5,889 6,083 6,414 6,810 7,348 7,785 8,339 8,720 9,262 9,886
Domestic Purposes Benefit 1,569 1,547 1,493 1,468 1,478 1,501 1,545 1,568 1,616 1,656
Unemployment Benefit 1,084 831 712 613 458 487 576 583 540 523
Invalids Benefit 976 1,026 1,073 1,132 1,216 1,273 1,332 1,378 1,427 1,466
Family Tax Credit 833 846 1,285 1,699 1,897 2,153 2,155 2,159 2,250 2,266
Accommodation Supplement 702 750 843 877 891 951 991 1,012 1,027 1,050
Sickness Benefit 470 510 541 573 582 570 577 578 584 588
Disability Allowance 257 267 261 270 278 389 415 437 460 481
Transitional Retirement Benefit 11 ..  ..  ..  ..  ..  ..  ..  ..  .. 
Income Related Rents 340 370 395 434 465 498 532 576 623 669
In Work Tax Credit ..  ..  70 461 563 577 587 594 604 623
Child Tax Credit 155 141 154 44 11 6 4 3 2 2
Special Benefit 140 175 162 106 71 ..  ..  ..  ..  .. 
Benefits paid in Australia 103 91 80 71 58 52 46 40 34 21
Paid Parental Leave 63 76 96 122 135 145 156 164 175 185
Other benefits 589 613 667 755 837 788 834 874 907 934
Welfare benefit expenses 13,181 13,326 14,246 15,435 16,288 17,175 18,089 18,686 19,511 20,350

Source:  The Treasury

Table 6.3 - Beneficiary numbers
(Thousands) 2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
New Zealand Superannuation 461 469 482 495 508 522 537 552 571 594
Domestic Purposes Benefit 110 109 106 100 97 99 99 99 100 100
Unemployment Benefit 104 78 64 52 37 39 45 45 40 38
Accommodation Supplement 249 243 249 251 245 255 263 266 266 268
Invalids Benefit 70 74 76 78 82 86 89 91 92 94
Sickness Benefit 42 45 47 48 48 46 46 45 44 43

Source:  The Treasury

 
Table 6.4 - GSF pension expenses
($ million) 2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Pension expenses 591 718 761 645 690 654 555 545 548 549
GSF pension expenses 591 718 761 645 690 654 555 545 548 549

Source:  The Treasury

Table 6.5 - Health expenses
($ million) 2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Departmental outputs 161 157 174 180 206 227 217 210 210 210
Health service purchasing 7,452 8,113 8,805 9,614 10,503 11,489 11,517 11,467 11,420 11,421
Other non-departmental outputs 71 160 135 99 97 105 98 93 91 91
Health payments to ACC 409 356 372 425 463 511 548 586 624 624
Other expenses 18 27 61 37 28 45 44 45 45 45
Health expenses 8,111 8,813 9,547 10,355 11,297 12,377 12,424 12,401 12,390 12,391

Source:  The Treasury

Table 6.6 - Health service purchasing
($ million) 2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Payments to District Health Boards 6,441 7,262 7,814 8,547 9,312 10,060 10,096 10,062 10,056 10,057
National Disability Support Services 793 620 699 755 834 880 875 875 875 875
Public Health Service Purchasing 218 231 292 312 357 549 546 530 489 489
Health service purchasing 7,452 8,113 8,805 9,614 10,503 11,489 11,517 11,467 11,420 11,421

Source:  The Treasury

Table 6.7 - Education expenses
($ million) 2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Early childhood education 393 444 555 617 860 1,014 1,115 1,210 1,268 1,286
Primary and secondary schools 3,692 3,934 4,153 4,325 4,552 4,889 5,053 5,042 5,057 5,074
Tertiary funding 2,535 2,496 4,047 3,322 3,266 3,757 3,913 4,031 4,088 4,126
Departmental expenses 679 737 821 875 828 890 880 871 861 860
Other education expenses 286 319 338 130 45 189 156 148 145 142
Education expenses 7,585 7,930 9,914 9,269 9,551 10,739 11,117 11,302 11,419 11,488

Source:  The Treasury

Table 6.8 - Primary and secondary education expenses
($ million) 2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Primary 1,884 1,964 2,062 2,141 2,262 2,448 2,561 2,565 2,585 2,600
Secondary 1,385 1,524 1,618 1,682 1,761 1,879 1,929 1,914 1,907 1,906
School transport 106 109 118 125 131 142 146 151 155 159
Special needs support 221 231 245 263 278 293 299 300 301 301
Professional Development 84 95 101 104 108 114 104 98 95 94
Schooling Improvement 12 11 9 10 12 13 14 14 14 14
Primary and secondary
education expenses
3,692 3,934 4,153 4,325 4,552 4,889 5,053 5,042 5,057 5,074

Places (year)

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Primary 464,000 457,000 457,951 477,385 475,611 477,562 479,333 480,697 486,751 491,162
Secondary 277,000 284,000 288,711 275,821 275,276 271,847 269,292 268,789 267,337 268,211

Source:  Ministry of Education, The Treasury

Table 6.9 - Tertiary education expenses
($ million) 2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Tuition 1,770 1,647 1,865 1,962 2,172 2,227 2,323 2,381 2,387 2,386
Other tertiary funding 66 68 110 339 358 557 562 576 583 583
Tertiary student allowances 380 359 354 382 386 411 433 444 454 462
Initial fair value change in student loans ..  ..  1,415 ..  ..  ..  ..  ..  ..  .. 
Student loans 319 422 303 639 350 562 595 630 664 695
Tertiary education expenses 2,535 2,496 4,047 3,322 3,266 3,757 3,913 4,031 4,088 4,126

Places (year)

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
EFT students 247,975 240,734 227,416 226,238 225,898 231,814 235,797 236,041 236,041 236,041

Source:  Ministry of Education, The Treasury

Table 6.10 - Core Government service expenses
($ million) 2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Official development assistance 237 297 330 330 362 484 472 567 567 567
Indemnity and guarantee expenses 9 ..  ..  ..  ..  ..  ..  ..  ..  .. 
Departmental expenses 1,096 1,570 1,403 1,402 1,557 1,683 1,638 1,694 1,698 1,780
Non-Departmental Expenses       237 277 317 472 521 567 615
Tax receivable write-down 350 350 338 2,479 701 722 614 633 653 653
Science expenses 283 170 157 163 168 187 192 193 196 196
Other expenses 116 180 279 205 306 256 237 237 238 239
Core Government service expenses 2,091 2,567 2,507 4,816 3,371 3,649 3,625 3,845 3,919 4,050

Source:  The Treasury

Table 6.11 - Law and order expenses
($ million) 2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Police 844 896 976 1,086 1,198 1,298 1,292 1,293 1,292 1,292
Ministry of Justice 178 257 299 454 367 392 379 372 373 370
Department of Corrections 439 483 572 662 787 834 848 849 848 866
Department for Courts 53 ..  ..  ..  ..  ..  ..  ..  ..  .. 
Other departments 81 72 76 60 91 110 116 118 118 118
Department expenses 1,595 1,708 1,923 2,262 2,443 2,634 2,635 2,632 2,631 2,646
Non-departmental outputs 178 218 262 354 326 356 340 340 339 339
Other expenses 70 51 50 83 125 149 155 158 158 158
Law and order expenses 1,843 1,977 2,235 2,699 2,894 3,139 3,130 3,130 3,128 3,143

Source:  The Treasury

Table 6.12 - Defence expenses
($ million) 2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
NZDF Core expenses 1,182 1,203 1,306 1,459 1,517 1,700 1,674 1,651 1,653 1,653
NZDF write-offs 72 ..  ..  ..  ..  ..  ..  ..  ..  .. 
NZDF East Timor deployment ..  ..  ..  ..  ..  ..  ..  ..  ..  .. 
Other expenses 57 72 77 58 45 56 57 67 56 55
Defence expenses 1,311 1,275 1,383 1,517 1,562 1,756 1,731 1,718 1,709 1,708

Source:  The Treasury

Table 6.13 - Transport and communication expenses
($ million) 2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
New Zealand Transport Agency[1] 1,222 1,346 1,482 1,874 1,966 2,744 1,960 2,144 2,176 2,242
Departmental outputs 83 97 101 113 137 82 69 67 67 67
Other non-departmental expenses 84 79 109 221 104 180 182 180 160 156
Goodwill amortisation 47 47 47 47 ..  ..  ..  ..  ..  .. 
Rail write-offs 19 ..  ..  ..  ..  ..  ..  ..  ..  .. 
Rail costs 3 63 77 142 24 534 414 199 86 58
Other expenses 3 3 2 8 13 26 24 25 26 25
Transport and communication expenses 1,461 1,635 1,818 2,405 2,244 3,566 2,649 2,615 2,515 2,548

Source:  The Treasury

Table 6.14 - Economic and industrial services expenses
($ million) 2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Departmental outputs 478 508 549 546 603 425 391 386 383 382
Employment initiatives 222 224 202 207 186 192 178 177 177 177
Non-departmental outputs 444 549 751 873 822 919 807 786 780 779
Reserve Electricity Generation ..  ..  26 16 81 162 27 27 26 17
Flood relief 15 52 8 ..  ..  ..  ..  ..  ..  .. 
KiwiSaver ..  ..  ..  ..  1,101 1,440 1,546 1,703 1,792 1,859
Broadband ..  ..  ..  ..  ..  57 62 62 62 62
Research & Development tax credits ..  ..  ..  ..  37 208 250 290 332 373
Other expenses 33 111 56 (47) 59 146 147 190 198 198
Economic and industrial service expenses 1,192 1,444 1,592 1,595 2,889 3,549 3,408 3,621 3,750 3,847

Source:  The Treasury

Notes

  • [1]Since 2008/09 funding has been provided to New Zealand Transport Agency. From 2004/05 to 2007/08 funding was received by Land Transport NZ. Prior to this, funding was received by Transfund.
Table 6.15 - Employment initiatives
($ million) 2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Training incentive allowance 42 36 32 29 27 25 25 25 26 26
Community employment projects 16 6 ..  ..  ..  ..  ..  ..  ..  .. 
Subsidised work 100 102 84 88 67 75 61 60 59 59
Employment support for disabled 61 74 82 86 88 88 88 88 88 88
Other employment assistance schemes 3 6 4 4 4 4 4 4 4 4
Employment initiatives 222 224 202 207 186 192 178 177 177 177

Source:  The Treasury

Table 6.16 - Primary service expenses
($ million) 2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Departmental expenses 269 272 350 342 354 398 377 374 376 376
Non-departmental outputs 81 114 97 80 109 129 115 110 108 94
Other expenses 18 8 20 16 78 18 15 15 14 14
Primary service expenses 368 394 467 438 541 545 507 499 498 484

Source:  The Treasury

Table 6.17 - Heritage, culture and recreation expenses
($ million) 2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Community grants 3 6 7 7 7 8 9 9 10 10
Kyoto protocol ..  310 42 ..  ..  ..  ..  ..  ..  .. 
Emmission Trading Scheme ..  ..  ..  ..  ..  327 969 642 655 1,083
Departmental outputs 269 292 322 357 392 469 437 443 447 449
Non-departmental outputs 258 317 351 411 469 493 454 454 429 428
Other expenses 104 66 169 69 239 149 56 60 65 60
Heritage, culture and recreation expenses 634 991 891 844 1,107 1,446 1,925 1,608 1,606 2,030

Source:  The Treasury

Table 6.18 - Housing and community development expenses
($ million) 2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Housing subsidies 27 31 23 25 28 33 32 32 31 31
Departmental outputs 77 100 117 134 141 176 145 139 135 130
Other non-departmental expenses 35 32 62 96 91 138 131 158 167 158
Housing and community development expenses 139 163 202 255 260 347 308 329 333 319

Source:  The Treasury

Glossary of Terms

ACC insurance liability

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

Baselines

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

Consumers Price Index (CPI)

A measure of change in the prices of goods and services bought by households.

Contingent liability

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

Contingent assets

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

Core Crown

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

Core Crown revenue

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

Core Crown expenses

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

Corporate tax

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

Current account (Balance of Payments)

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

Cyclically adjusted or structural fiscal balance

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

Demographic changes

Changes to the structure of the population. For example the age, gender or ethnic make-up of the population.

Domestic bond programme

The amount and timing of new government stock expected to be issued over the financial year.

Excise duties

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

Financial assets

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

Fiscal impulse

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

Fiscal intentions (short-term)

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

Fiscal objectives (long-term)

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

Forecast new capital spending

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

Forecast new operating spending

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

Gross Crown debt

The total borrowings (both sovereign guaranteed and non-sovereign guaranteed and including derivatives in loss) of the total Crown. This is the amount in the total Crown Statement of Financial Position for Reserve Bank settlement deposits plus other borrowings. It represents the complete picture of whole-of-Crown debt obligations to external parties, excluding payables.

Gross domestic product (GDP)

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

Gross domestic product (expenditure)

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

Gross national expenditure (GNE)

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

Gross sovereign-issued debt (GSID)

Debt issued by the sovereign (ie, Core Crown) and includes Government stock held by the NZS Fund, ACC or EQC for example. The gross sovereign-issued debt indicator does not eliminate any internal cross-holdings.

GSID (excluding settlement cash)

GSID less Reserve Bank settlement cash.

Labour force participation rate

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

Labour productivity

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

Line-by-line consolidation

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

Marketable securities

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

Monetary conditions

The combination of interest rates and the exchange rate.

Monetary policy

Action taken by the Reserve Bank to affect interest rates and the exchange rate in order to control inflation. Tightening monetary policy refers to actions taken by the Reserve Bank to raise interest rates (which can influence the exchange rate) in order to moderate aggregate demand pressures and so reduce inflationary pressures.

Net core Crown cashflow from operations

OBEGAL less retained items (eg, net surplus of SOEs, CEs and NZS Fund net revenue) less non-cash items (eg, depreciation).

Net core Crown debt

Debt after deducting financial assets of the Core Crown from gross sovereign-issued debt. Share investments in supranational organisations, such as the International Bank for Reconstruction and Development & Bank for International Settlements, are excluded from the net Core Crown debt measure as are the assets of the NZS Fund.

Net worth

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

NZ IFRS

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

Operating allowance

The amount included in the Fiscal Strategy Report projections for new initiatives, including spending and cost pressures. The allowance is a projection assumption. The projections in the Fiscal Strategy Report also include an allowance for capital spending.

Operating balance

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

Operating balance before gains and losses (OBEGAL)

The OBEGAL is the operating balance excluding gains and losses.

OBEGAL excluding NZS Fund net revenue

A measure of the operating balance that recognises that NZS Fund net revenues are not available to the Crown.

Projections

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

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 cashflow from operations excluding NZS Fund activity less core Crown capital commitments (eg, contributions to NZS Fund, purchase of assets, loans to others).

Settlement cash

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

Specific fiscal risks

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

System of National Accounts (SNA)

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

Tax revenue

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

Top-down adjustment

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

Trade weighted index (TWI)

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

Unit labour costs

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

Year ended

Graphs and tables use different expressions of the timeframe. For example, 2008/09 or 2009 will generally mean “year ended 30 June” unless otherwise stated.

Time Series of Fiscal and Economic Indicators

Fiscal Indicators

Fiscal Indicators
Years ended 30 June - $million 1997
Actual
1998
Actual
1999
Actual
2000
Actual
2001
Actual
2002
Actual
2003
Actual
2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast

Revenue and Expenses

                                 
Core Crown revenue excl NZS Fund 33,131 34,242 32,880 34,946 37,842 39,945 43,440 46,219 51,045 56,951 58,482 61,671 61,102 62,820 65,354 68,340 72,091
Core Crown expenses 31,368 32,982 33,939 34,829 36,559 37,513 39,897 41,882 44,895 49,320 54,003 56,997 62,359 65,849 68,891 72,252 76,157

Surpluses

                                 
Total Crown OBEGAL 1,801 2,345 128 594 1,422 2,471 4,366 5,573 7,075 7,091 5,860 5,637 (64) (1,746) (2,481) (3,092) (3,374)
Total Crown OBEGAL excl NZS Fund 1,801 2,345 128 594 1,422 2,456 4,297 5,526 7,140 7,252 6,250 5,586 (31) (1,665) (2,376) (2,962) (3,224)
Total Crown operating surplus 1,863 2,048 1,705 1,405 1,208 2,286 1,621 7,309 5,931 9,542 8,023 2,384 1,909 374 (71) (396) (382)

Cash Position

                                 
Core Crown residual cash 3,913 484 2,048 (386) 349 216 1,217 520 3,104 2,985 2,877 2,057 (5,909) (5,300) (6,603) (6,815) (7,307)

Debt

                                 
GSID (excluding settlement cash) 36,236 38,475 37,307 36,580 37,194 36,650 36,617 36,017 35,478 33,903 30,647 31,390 32,087 34,400 43,821 48,626 53,666
Net core Crown debt (incl NZS Fund) 25,562 24,635 22,275 21,900 20,293 19,051 16,093 11,613 4,538 (1,817) (7,467) (12,953) (10,430) (8,502) (5,799) (3,146) (380)
Net core Crown debt 25,562 24,635 22,275 21,900 20,293 19,666 17,977 15,569 11,093 8,044 4,109 (19) 5,207 10,091 16,071 22,352 29,042

NZS Fund

                                 
NZS Fund net worth ..  ..  ..  ..  ..  615 1,884 3,956 6,555 9,861 12,973 14,212 17,440 20,638 24,175 28,024 32,158

Years ended 30 June - % GDP

                                 

Revenue and Expenses

                                 
Core Crown revenue excl NZS Fund 33.5 33.7 31.4 31.5 32.0 31.8 32.8 32.5 33.9 36.3 34.8 34.2 33.1 32.9 32.7 32.5 32.7
Core Crown expenses 31.7 32.5 32.4 31.4 30.9 29.8 30.1 29.4 29.8 31.4 32.1 31.7 33.8 34.5 34.5 34.4 34.5

Surpluses

                                 
Total Crown OBEGAL 1.8 2.3 0.1 0.5 1.2 2.0 3.3 3.9 4.7 4.5 3.5 3.1 (0.0) (0.9) (1.2) (1.5) (1.5)
Total Crown OBEGAL excl NZS Fund 1.8 2.3 0.1 0.5 1.2 2.0 3.2 3.9 4.7 4.6 3.7 3.1 (0.0) (0.9) (1.2) (1.4) (1.5)
Total Crown operating surplus 1.9 2.0 1.6 1.3 1.0 1.8 1.2 5.1 3.9 6.1 4.8 1.3 1.0 0.2 (0.0) (0.2) (0.2)

Cash Position

                                 
Core Crown residual cash 4.0 0.5 2.0 (0.3) 0.3 0.2 0.9 0.4 2.1 1.9 1.7 1.1 (3.2) (2.8) (3.3) (3.2) (3.3)

Debt

                                 
GSID (excluding settlement cash) 36.6 37.9 35.6 32.9 31.4 29.1 27.7 25.3 23.5 21.6 18.2 17.4 17.4 18.0 21.9 23.1 24.3
Net core Crown debt (incl NZS Fund) 25.8 24.3 21.3 19.7 17.1 15.1 12.2 8.2 3.0 (1.2) (4.4) (7.2) (5.7) (4.5) (2.9) (1.5) (0.2)
Net core Crown debt 25.8 24.3 21.3 19.7 17.1 15.6 13.6 10.9 7.4 5.1 2.4 (0.0) 2.8 5.3 8.0 10.6 13.2

NZS Fund

                                 
NZS Fund net worth ..  ..  ..  ..  ..  0.5 1.4 2.8 4.3 6.3 7.7 7.9 9.5 10.8 12.1 13.3 14.6

Economic Indicators

Economic Indicators
March Years 1997
Actual
1998
Actual
1999
Actual
2000
Actual
2001
Actual
2002
Actual
2003
Actual
2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Private consumption 4.3 2.4 3.1 3.3 1.4 2.8 4.9 6.6 5.0 4.7 2.8 3.3 0.0 0.6 0.9 1.5 1.5
Public consumption 1.4 8.1 -0.5 5.7 -2.0 4.0 1.4 4.7 4.3 5.1 4.4 4.2 4.1 3.9 3.8 3.1 2.7

TOTAL CONSUMPTION

3.7 3.6 2.2 3.8 0.6 3.0 4.1 6.2 4.9 4.8 3.2 3.5 0.9 1.3 1.6 1.9 1.8
Residential investment 4.9 3.0 -13.0 19.5 -13.3 2.0 23.6 15.0 2.9 -5.2 -2.7 3.7 -17.4 -9.4 8.0 10.1 8.9
Non-market investment  18.3 14.0 -4.8 13.0 -13.8 21.9 13.7 15.6 14.2 -1.0 -4.9 -0.5 12.2 4.2 2.0 2.0 2.0
Market investment 4.3 -2.2 2.6 6.9 8.0 6.9 2.3 12.2 11.9 8.4 -0.7 6.2 4.4 -2.9 2.0 4.7 5.4

TOTAL INVESTMENT

5.1 0.2 -2.3 10.6 0.4 6.8 7.8 13.1 9.2 4.4 -1.9 4.2 -1.2 -4.4 3.1 5.7 6.1
Stock Change (contribution to growth) -0.4 -0.2 -0.3 1.2 -0.3 0.1 -0.1 0.2 0.3 -0.5 -0.9 0.9 0.3 -0.4 -0.2 -0.1 0.0

GROSS NATIONAL EXPENDITURE

3.6 2.7 0.9 6.3 0.3 3.9 4.7 7.7 6.1 4.1 1.2 4.5 0.6 -0.4 1.7 2.6 2.8
Exports 4.7 3.9 2.9 7.4 6.3 3.0 7.8 0.9 4.7 -0.1 3.1 2.3 -2.4 4.7 4.9 4.7 4.1
Imports 6.4 2.5 2.1 11.3 -0.7 4.0 7.2 12.7 12.5 4.1 -1.7 9.7 0.4 -2.5 0.3 2.4 3.2

EXPENDITURE ON GDP

3.1 3.1 1.2 5.2 2.4 3.5 5.0 4.0 3.8 2.9 2.6 2.4 -0.3 1.8 3.2 3.4 3.1

GDP (production measure)

3.5 1.7 0.5 5.3 2.4 3.8 5.0 3.8 3.8 2.7 1.6 3.0 0.1 1.8 3.3 3.4 3.1
 - annual % change 2.0 0.3 2.5 6.5 0.7 4.8 4.5 4.8 2.4 2.5 2.3 1.9 0.2 2.5 3.4 3.4 3.0
Real GDP per capita 1.9 0.5 -0.3 4.8 1.8 2.8 3.2 1.9 2.3 1.6 0.4 1.9 -0.8 0.8 2.3 2.5 2.2
Nominal GDP (expenditure basis) 4.9 3.7 1.7 6.0 5.7 7.5 5.1 6.8 7.2 4.9 5.2 7.4 3.1 3.0 4.6 5.1 5.0
GDP deflator 1.8 0.7 0.5 0.9 3.2 3.9 0.2 2.7 3.2 1.9 2.5 4.9 3.4 1.2 1.3 1.7 1.8
Employment  (full-time equivalent)  2.2 0.0 -0.8 2.0 2.2 2.6 2.5 2.9 3.6 2.7 2.0 0.8 0.3 -0.3 0.4 1.3 1.8
Unemployment (% March quarter s.a.) 6.5 7.1 7.1 6.3 5.3 5.2 4.8 4.1 3.8 3.9 3.7 3.7 4.4 5.1 5.1 4.8 4.6
Wages (average ordinary-time hourly) 3.8 3.3 2.9 2.2 2.4 3.5 2.9 3.4 3.3 4.7 4.8 4.2 5.5 4.3 4.0 3.8 3.5
CPI inflation (ann % change, March qtr) 1.8 1.3 -0.1 1.5 3.1 2.6 2.5 1.5 2.8 3.3 2.5 3.4 4.5 2.3 2.4 2.4 2.4
Export prices (merchandise, OTI) -4.2 -0.2 3.4 4.0 20.5 3.1 -13.3 -8.2 3.7 1.0 9.1 2.8 17.4 3.4 4.2 3.7 3.3
Import prices (merchandise, OTI) -3.4 0.8 3.7 4.3 15.3 -0.9 -8.2 -11.6 -2.0 1.8 7.2 -4.5 13.5 6.5 5.4 4.7 3.8
Current account balance - $billion  -5.8 -5.4 -4.4 -7.0 -5.1 -3.9 -4.5 -6.7 -10.3 -14.5 -13.5 -13.8 -14.6 -12.2 -11.5 -11.0 -11.0
Current account balance - % of GDP -6.0 -5.3 -4.2 -6.4 -4.4 -3.1 -3.4 -4.8 -6.9 -9.2 -8.2 -7.8 -8.0 -6.5 -5.8 -5.3 -5.0
TWI (March quarter) 68.4 61.2 57.6 54.1 50.5 51.6 60.6 66.9 69.6 68.3 68.8 71.9 62.7 59.7 57.1 55.0 53.5
90-day bank bill rate (March quarter) 7.5 8.9 4.5 6.0 6.4 5.0 5.8 5.5 6.9 7.6 7.8 8.8 7.5 7.0 6.7 6.5 6.3
10-year bond rate (March quarter) 7.5 6.8 5.7 7.3 6.0 6.7 6.0 5.9 6.0 5.7 5.9 6.3 6.3 6.3 6.2 6.1 6.0

2008 Pre-Election Update Additional Information

The following information forms part of the Pre-Election Economic and Fiscal Update 2008 (“Pre-Election Update”), released by the Treasury on 6 October 2008. This information provides further details on the Pre-Election Update and should be read in conjunction with the published document. The additional information includes:

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

Detailed Economic Forecast Information

The following tables provide additional detail on the economic forecasts presented in the Pre-Election Update.

Table 1: Real Gross Domestic Product
Chain-volume series expressed in 1995/96 prices
  Actual Seasonally Adjusted
$ million Annual
% change
Annual
Average
% change
$million Quarterly
% change
2006Q1 32,058 2.5 2.7 32,334 1.0
2006Q2 31,668 1.0 2.2 32,318 0.0
2006Q3 32,129 1.0 1.7 32,473 0.5
2006Q4 33,932 1.9 1.6 32,661 0.6
2007Q1 32,804 2.3 1.6 33,085 1.3
2007Q2 32,697 3.2 2.1 33,348 0.8
2007Q3 33,167 3.2 2.7 33,528 0.5
2007Q4 35,107 3.5 3.1 33,800 0.8
2008Q1 33,421 1.9 3.0 33,703 -0.3
2008Q2 32,913 0.7 2.3 33,568 -0.4
2008Q3 33,174 0.0 1.5 33,535 -0.1
2008Q4 34,971 -0.4 0.5 33,669 0.4
2009Q1 33,477 0.2 0.1 33,760 0.3
2009Q2 33,218 0.9 0.2 33,880 0.4
2009Q3 33,722 1.7 0.6 34,089 0.6
2009Q4 35,659 2.0 1.2 34,331 0.7
2010Q1 34,320 2.5 1.8 34,610 0.8
2010Q2 34,231 3.0 2.3 34,912 0.9
2010Q3 34,826 3.3 2.7 35,205 0.8
2010Q4 36,870 3.4 3.1 35,497 0.8
2011Q1 35,502 3.4 3.3 35,802 0.9
2011Q2 35,411 3.4 3.4 36,116 0.9
2011Q3 36,032 3.5 3.4 36,425 0.9
2011Q4 38,140 3.4 3.5 36,720 0.8
2012Q1 36,701 3.4 3.4 37,011 0.8
2012Q2 36,572 3.3 3.4 37,300 0.8
2012Q3 37,178 3.2 3.3 37,582 0.8
2012Q4 39,327 3.1 3.2 37,863 0.7
2013Q1 37,814 3.0 3.1 38,133 0.7
2013Q2 37,657 3.0 3.1 38,407 0.7

Source:  Statistics New Zealand, The Treasury

Table 2: Consumer Price Index and Exchange Rates
        Consumers Price Index Exchange rates
Index Quarterly
% change
Annual %
change
TWI USD
2006Q1 985 0.6 3.3 68.3 0.67
2006Q2 1000 1.5 4.0 62.8 0.62
2006Q3 1007 0.7 3.5 63.6 0.63
2006Q4 1005 -0.2 2.6 67.1 0.67
2007Q1 1010 0.5 2.5 68.8 0.70
2007Q2 1020 1.0 2.0 72.0 0.74
2007Q3 1025 0.5 1.8 71.3 0.74
2007Q4 1037 1.2 3.2 71.0 0.76
2008Q1 1044 0.7 3.4 71.9 0.79
2008Q2 1061 1.6 4.0 69.2 0.78
2008Q3 1076 1.4 4.9 65.7 0.73
2008Q4 1083 0.7 4.4 63.6 0.70
2009Q1 1091 0.7 4.5 62.7 0.69
2009Q2 1097 0.6 3.4 62.0 0.68
2009Q3 1102 0.5 2.5 61.3 0.67
2009Q4 1107 0.5 2.3 60.4 0.65
2010Q1 1116 0.7 2.3 59.7 0.64
2010Q2 1122 0.6 2.3 59.0 0.63
2010Q3 1128 0.5 2.3 58.3 0.62
2010Q4 1133 0.5 2.4 57.7 0.61
2011Q1 1142 0.8 2.4 57.1 0.60
2011Q2 1149 0.6 2.4 56.5 0.59
2011Q3 1156 0.6 2.5 56.0 0.59
2011Q4 1163 0.6 2.6 55.5 0.58
2012Q1 1170 0.6 2.4 55.0 0.57
2012Q2 1177 0.6 2.5 54.5 0.56
2012Q3 1185 0.6 2.5 54.1 0.55
2012Q4 1191 0.6 2.5 53.8 0.55
2013Q1 1198 0.6 2.4 53.5 0.54
2013Q2 1206 0.6 2.4 53.3 0.54

Table 3: Gross Domestic Expenditure and Income
March Year 2008 Estimate 2009 Forecast 2010 Forecast 2011 Forecast 2012 Forecast 2013 Forecast
$ mill %vol %pr   $ mill     %vol      %pr   $ mill     %vol      %pr   $ mill     %vol      %pr   $ mill     %vol      %pr   $ mill

Consumption:

                               
- Private 103,730 0.0 3.5 107,366 0.6 2.5 110,635 0.9 1.8 113,681 1.5 1.9 117,580 1.5 1.9 121,574
- Public 33,125 4.1 2.9 35,486 3.9 2.5 37,799 3.8 2.2 40,079 3.1 2.0 42,167 2.7 2.0 44,163

Gross Fixed Capital Formation:

                               
- Residential 11,715 -17.4 2.5 9,916 -9.4 2.4 9,202 8.0 3.9 10,327 10.1 4.7 11,901 8.9 4.8 13,585
- Market [*] 26,412 4.4 -1.2 27,276 -2.9 -1.1 26,200 2.0 0.9 26,973 4.7 1.9 28,788 5.4 2.1 30,980
- Non-market [**] 2,742 12.2 2.2 3,140 4.2 2.0 3,337 2.0 1.9 3,467 2.0 1.5 3,590 2.0 1.4 3,714
- Total all sectors 40,872 -1.2 -0.1 40,332 -4.4 0.5 38,739 3.1 2.1 40,768 5.7 2.8 44,279 6.1 2.8 48,278
Change in Stocks 1,340     1,958     1,218     787     529     570
Gross National Expenditure 179,068 0.6 2.8 185,141 -0.4 2.2 188,391 1.7 1.9 195,315 2.6 2.0 204,555 2.8 2.0 214,586
Exports 51,422 -2.4 16.9 58,525 4.7 3.5 63,397 4.9 3.7 68,954 4.7 3.5 74,789 4.1 3.2 80,359
Imports 52,875 0.4 14.2 60,593 -2.5 6.9 63,148 0.3 5.6 66,898 2.4 4.9 71,830 3.2 4.0 77,076
Expenditure on GDP 177,613 -0.3 3.4 183,074 1.8 1.2 188,640 3.2 1.3 197,371 3.4 1.7 207,514 3.1 1.8 217,868
Statistical Discrepancy 919     920     921     922     924     926
Gross Domestic Product 178,532     183,993     189,561     198,293     208,438     218,794
Compensation of employees 78,615   6.6 83,839   3.9 87,095   4.4 90,904   5.0 95,471   5.2 100,472

Operating Surplus, net: 

                               
- Agriculture 4,850   12.6 5,461   -1.8 5,365   0.9 5,412   1.3 5,483   1.8 5,580
- Other 47,457   -4.3 45,425   0.2 45,507   4.9 47,717   5.4 50,287   4.4 52,484
- Total all sectors 52,306   -2.7 50,886   0.0 50,872   4.4 53,129   5.0 55,770   4.1 58,064
Consumption of fixed capital 25,180   4.0 26,188   6.0 27,759   6.0 29,424   6.0 31,190   6.0 33,061
Indirect Taxes 23,028   2.8 23,679   3.2 24,434   4.1 25,434   4.6 26,605   4.5 27,795
Less subsidies 598   0.0 598   0.0 598   0.0 598   0.0 598   0.0 598
Gross Domestic Product 178,532   3.1 183,993   3.0 189,561   4.6 198,293   5.1 208,438   5.0 218,794

Source:  Statistics New Zealand, The Treasury

Notes

  • [*]Includes Local Government and Non-profit Organisations.
  • [**]Central Government (includes Crown Entities but not SOEs)

Tables 4 & 5: Labour Market Indicators

Annual Average Percentage Change
March Year 2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Real GDP (production basis) 3.0 0.1 1.8 3.3 3.4 3.1
Working Age Population 1.2 1.2 1.2 1.2 1.1 1.1
Labour Force 1.1 1.1 0.5 0.6 1.0 1.3
Employment - Full Time Equivalents[*] 0.8 0.3 -0.3 0.4 1.3 1.8
Labour Productivity[*] 2.1 -0.2 2.1 2.9 2.1 1.3
Labour Productivity [**] 3.1 -0.9 2.1 2.9 2.2 1.5
CPI  (annual percentage change) 3.4 4.5 2.3 2.4 2.4 2.4
Average Ordinary Time Hourly Wages 4.2 5.5 4.3 4.0 3.8 3.5
Average Weekly Earnings 4.1 5.2 4.2 4.0 3.8 3.5
Real Wages 1.6 1.0 1.6 1.7 1.3 1.1
Compensation of Employees 5.8 6.6 3.9 4.4 5.0 5.2
Unit Labour Costs (Hours worked basis) 1.1 6.4 2.2 1.0 1.5 2.0
Real Unit Labour Costs -1.4 1.9 -0.4 -1.2 -0.9 -0.4

Source:  Statistics New Zealand, The Treasury

Number (000's)
As at March Quarter 2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Total Population 4,264 4,299 4,340 4,381 4,422 4,462
     Natural Increase 36 29 33 31 31 30
     Net  Migration 5 6 8 10 10 10
     Annual Change 41 35 41 41 41 40
Working Age Population      3,284 3,322 3,361 3,399 3,436 3,473
     Annual Change          36 38 39 39 37 36
Not in the labour force     1,053 1,051 1,076 1,099 1,110 1,115
     Annual Change           43 -2 25 23 12 4
Labour Force                2,231 2,271 2,285 2,301 2,326 2,358
     Annual Change          -7 40 15 16 25 32
Total Employment            2,139 2,159 2,155 2,170 2,200 2,238
     Annual Change          -5 20 -4 15 31 38
Unemployment                92 112 130 131 126 120
     Annual Change          -2 19 19 1 -6 -6
Participation Rate (%sa)    67.7 68.1 67.7 67.4 67.4 67.6
Unemployment Rate (%sa)     3.7 4.4 5.1 5.1 4.8 4.6

Notes

  • [*]Full time equivalent basis
  • [**]Hours worked basis

Table 6: Current Account
$NZ Million Percent of Nominal GDP
Year ended March 2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
2008
Actual
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast
Exports Goods 38,722 45,440 49,175 53,478 57,481 61,137            
annual % Change 8.7 17.4 8.2 8.7 7.5 6.4            
Imports Goods 40,469 47,328 49,253 52,263 56,202 60,374            
annual % Change 5.2 16.9 4.1 6.1 7.5 7.4            
Balance on Goods -1,748 -1,887 -78 1,215 1,278 763 -1.0 -1.0 0.0 0.6 0.6 0.4
Exports Services 12,701 13,219 14,383 15,668 17,531 19,464            
annual % change 1.1 4.1 8.8 8.9 11.9 11.0            
Imports Services 12,406 13,251 13,883 14,622 15,613 16,687            
annual % change 2.8 6.8 4.8 5.3 6.8 6.9            
Balance on services 293 -32 500 1,046 1,918 2,777 0.2 0.0 0.3 0.5 0.9 1.3
Balance on goods & services -1,455 -1,919 423 2,261 3,196 3,540 -0.8 -1.0 0.2 1.1 1.5 1.6
Int'l investment income
and transfers balance
-12,333 -12,678 -12,656 -13,738 -14,216 -14,533 -6.9 -6.9 -6.7 -7.0 -6.9 -6.7
Current account balance    -13,787 -14,597 -12,234 -11,477 -11,020 -10,994 -7.8 -8.0 -6.5 -5.8 -5.3 -5.0

Source:  Statistics New Zealand, The Treasury

Table 7: Exports - SNA basis

Breakdown of Exports

March Years

Dairy Products Meat and Meat Products Non-Commodity[*]
%v %p $ mn       %v       %p     $ mn             %v       %p     $ mn
2005 -9.4 9.1 5,783 3.5 6.8 4,873 8.4 -0.2 10,122
2006 -2.4 6.0 5,993 -2.2 -3.2 4,611 -0.5 2.5 10,331
2007 22.3 2.1 7,455 6.7 2.6 5,037 0.6 10.8 11,678
2008 -1.0 25.9 9,437 -2.9 -5.3 4,656 0.9 8.5 12,467
2009 -4.6 29.4 11,505 0.8 14.8 5,363 2.7 12.8 14,513
2010 9.4 -5.3 11,901 -3.2 7.3 5,586 5.9 7.4 16,516
2011 3.9 0.5 12,433 2.1 5.3 6,005 6.9 6.2 18,774
2012 3.2 1.3 12,997 0.9 4.4 6,329 4.9 5.0 20,695
2013 2.6 1.2 13,487 0.6 3.7 6,603 3.5 4.2 22,334
Breakdown of Exports
March Years Total Goods[**] Services Total Exports
      %v       %p     $ mn       %v       %p     $ mn       %v       %p     $ mn
2005 5.1 1.8 31,114 3.5 1.8 12,239 4.7 1.8 43,353
2006 0.7 0.9 31,580 -2.2 1.9 12,205 -0.1 1.1 43,786
2007 4.9 7.5 35,633 -1.6 4.5 12,565 3.1 6.8 48,199
2008 3.7 4.8 38,722 -1.4 2.4 12,701 2.3 4.0 51,422
2009 -1.6 19.4 45,440 -2.3 6.5 13,219 -2.4 16.9 58,525
2010 4.6 3.4 49,175 4.9 3.9 14,383 4.7 3.5 63,397
2011 4.4 4.2 53,478 6.3 2.4 15,668 4.9 3.7 68,954
2012 3.6 3.7 57,481 8.5 3.2 17,531 4.7 3.5 74,789
2013 3.0 3.3 61,137 7.6 3.2 19,464 4.1 3.2 80,359

Notes

  • [*]Consists of 'Metal Products and Machinery Equipment', 'Chemicals, Rubber and Other Non-Metallic Goods' and 'Textile, Apparel and Leather'.
  • [**]Note that Statistics NZ withholds data for some components of exports for confidentaility reasons. As a result we have not published the "Wood and Wood Products' and 'Other Goods' components of exports that we have published previously.

Table 8: Imports - SNA basis

Breakdown of Imports
March
Years  
Capital Goods (VFD) Mineral Fuel[*] (VFD) Intermediate Goods[**] (VFD) Consumption Goods (VFD)
      %v       %p     $ mn       %v       %p     $ mn       %v       %p     $ mn       %v       %p     $ mn
2005 16.8 -9.1 6,607 13.7 21.6 3,811 10.1 -1.9 14,481 10.5 -3.9 8,125
2006 16.3 -5.0 7,301 0.3 37.3 5,250 -1.4 0.7 14,365 8.1 -1.0 8,703
2007 -3.2 2.3 7,223 -8.0 21.2 5,872 -2.8 12.5 15,717 5.8 3.7 9,544
2008 10.9 -10.4 7,184 15.0 3.9 7,019 9.2 -6.3 16,091 7.0 -3.0 9,909
2009 5.6 2.7 7,803 -9.4 55.5 9,864 0.2 13.4 18,297 -0.3 13.5 11,223
2010 -7.0 -2.5 7,064 -3.1 3.5 9,902 -0.8 8.9 19,747 1.6 8.4 12,357
2011 0.8 3.3 7,355 -0.2 3.8 10,266 -0.2 7.0 21,098 2.1 6.1 13,391
2012 3.0 4.0 7,879 2.2 3.2 10,829 2.2 5.8 22,829 2.9 4.9 14,460
2013 4.4 3.3 8,490 3.0 2.7 11,459 3.0 4.7 24,620 3.2 4.1 15,535
Breakdown of Imports
March
Years
Total Goods (VFD) Services Total
      %v       %p     $ mn       %v       %p     $ mn       %v       %p     $ mn
2005 12.0 -1.7 33,343 13.7 -1.7 11,169 12.5 -1.8 44,512
2006 3.9 3.1 35,685 4.5 0.6 11,759 4.1 2.5 47,444
2007 -0.9 8.7 38,464 -4.3 7.0 12,064 -1.7 8.3 50,528
2008 9.8 -4.2 40,469 9.3 -5.9 12,406 9.7 -4.6 52,875
2009 1.9 14.8 47,328 -4.0 11.4 13,251 0.4 14.2 60,593
2010 -2.3 6.5 49,253 -3.4 8.4 13,883 -2.5 6.9 63,148
2011 0.6 5.4 52,263 -1.0 6.4 14,622 0.3 5.6 66,898
2012 2.7 4.7 56,202 1.1 5.6 15,613 2.4 4.9 71,830
2013 3.5 3.8 60,374 1.9 4.8 16,687 3.2 4.0 77,076

Notes

  • [*]Consists of 'Fuels and Lubricants' and 'Petrol and Aviation Gas'
  • [**]Consists of 'Intermediate Goods' excluding 'Fuels and Lubricants' and 'Passenger Cars'
  • [***]Consists of 'Consumption Goods' and 'Passenger Motor Cars'

Estimates of the Cyclically-Adjusted Balance and Fiscal Impulse

There are different ways of assessing the link between fiscal policy and the macroeconomy. For a broader discussion, refer to pages 86 and 87 of the 2008 Budget Economic and Fiscal Update (BEFU) http://www.treasury.govt.nz/budget/forecasts/befu2008. Below is an update of the cyclically-adjusted balance and the fiscal impulse based on Pre-Election Update (PREFU) economic and fiscal forecasts.

Cyclically-adjusted balance

The cyclically-adjusted balance (CAB) is an indicator that provides an estimate of what the fiscal balance would be if the economy was operating at trend output. The CAB can act as a guide in assessing the sustainability of fiscal policy. It does this by gauging the extent to which the fiscal balance reflects temporary cyclical factors rather than long-lasting permanent factors. A positive value of the CAB suggests that the fiscal surplus is not the result of temporary cyclical factors affecting the economy.

Cyclical adjustment primarily involves the use of the output gap (the difference between actual output and trend output). Trend output, and so the output gap, is not directly observable and has to be estimated. Cyclical adjustment also takes into account the responsiveness of different tax types, and unemployment, to the output gap.[1] No adjustments are made for prices being above or below trend levels. Because the approach removes an estimate of the cyclical component of taxes and unemployment spending from the actual fiscal balance, the CAB is a mix of discretionary fiscal policy, demand driven influences on spending, prices differing from trend, and forecast changes. For this reason it is helpful to assess changes in estimates of the CAB in the context of the major changes in taxes and spending. Finally, because it includes estimated variables, and is sensitive to new information, particularly regarding the evolution of trend output the output gap, the CAB is subject to uncertainty.[2]

There are different views on the usefulness of the CAB as an indicator because of the inherent uncertainty of the estimate. In the United Kingdom estimates of the cyclically-adjusted position are a requirement under the Code for Fiscal Stability. In contrast, no such requirement exists in the Australian Charter of Budget Honesty and estimates are not generally published. Although in New Zealand the Public Finance Act 1989 does not require estimates of the cyclically-adjusted position, the Treasury has published CAB estimates since the mid-1990s. The approach used by the Treasury to estimate the CAB is in-line with that used by the OECD and IMF.

In the figure below the CAB is estimated for a measure of the operating balance excluding gains and losses (OBEGAL), and excluding the retained revenue of the NZS Fund. This measure of the fiscal balance recognises that the NZS Fund has been set up to meet future spending pressures and as a result the returns it earns are not available to the Crown to meet current spending requirements. The figure shows that both the OBEGAL (excluding NZS Fund retained revenue) and the estimated CAB have increased since the late 1990s.[3] However, the estimated CAB has not increased by the same extent. This suggests part of the increase in the fiscal balance was cyclical (i.e., from 2004 through to 2008) and reflected the operation of the so-called automatic fiscal stabilisers. A medium-term reduction in the CAB was forecast at the time of the BEFU, in part as a result of discretionary fiscal policy changes (including tax reductions). As in the BEFU, the PREFU forecasts show that the fiscal balance declines somewhat faster than the estimated CAB in the near term, suggesting that the automatic fiscal stabilisers are operating in the opposite direction.

Figure 1: Balance and Cyclically-adjusted Balance
Figure 1: Balance and Cyclically-adjusted Balance.
Source:  The Treasury

As discussed above, estimates of the CAB are sensitive to new information about the evolution of trend output and the output gap, and how this affects the cyclically-adjusted components of revenues and expenses. For example, compared to the BEFU, the output gaps in 2006, 2007 and 2008 are now estimated to be more positive. As a result, a larger portion of tax revenue in these years is now assessed as being cyclical. Compared to BEFU, the output gap is now forecast to be more negative in 2009, 2010 and 2011.

To help illustrate the sources of change, listed below are the major movements in components of the OBEGAL since BEFU for the 2012 year (refer Table 2.5 in the PREFU):[4]

Major movements in components of the OBEGAL
Tax revenue ($819m)
Benefit expenses $543m
Education expense changes $254m
KiwiSaver expense changes $280m
Treaty settlements $130m
Net finance costs $675m

Like many economic forecasters, Treasury assumes that towards the end of the forecast period output growth converges on trend output growth. However, it is not always the case that the output gap is closed toward the end of the forecasts or that the level of trend output is unchanged between forecasts. In addition, changes in prices can mean that the level of nominal GDP, and hence taxes, can display level shifts between forecast rounds. If the change in nominal GDP and so tax revenue is permanent, and the output gap is small or closed, then the CAB will treat these as permanent tax revenue changes. In contrast, while some expenses are linked to prices (eg, indexation of benefits) there is less movement in response to forecast changes in nominal GDP.

In these PREFU forecasts, nominal GDP is lower in each year of the forecasts when compared to BEFU and the output gap shifts to small positive values in the last two forecast years. The tax revenue and benefit changes are the dominant source of change in the fiscal position since BEFU. If the tax revenue and benefit forecast changes are both treated as cyclical in 2012, forecast changes in other non-finance expenses have acted to shift the estimated CAB downward somewhat relative to BEFU.

Overall, the uncertainties toward the end of the forecasts imply that caution is needed in interpreting shifts in the CAB and the estimate is based on the information we have at this point in time.

Notes

  • [1]Trend output is estimated here using a Hodrick-Prescott (HP) filter. The responsiveness of tax bases to the output gap are OECD estimates while the responsiveness of taxes to the bases are Treasury estimates.
  • [2]Treasury's approach to estimating the cyclically-adjusted balance and fiscal impulse is set out in Treasury Working Papers 01/10 and 02/30.
  • [3]OECD estimates of New Zealand's cyclically-adjusted balance, while based on a different measure of the fiscal balance and output gap, show a similar increase over this period (OECD Economic Outlook 83, June 2008).
  • [4]Net finance costs are included in the cyclically-adjusted balance. However, they are not cyclically-adjusted and it is not uncommon to remove them so as to focus on the so-called primary balance. The change in net finance costs relative to BEFU reflects the underlying changes in primary taxes and spending and the impact on debt.

Fiscal balance and fiscal impulse

Fiscal impulse is an indicator that combines both spending and tax information to provide a guide to the impact of fiscal policy on demand in the economy. It is constructed from cash flow information in the financial statements (primarily from Note 21: Reconciliation of core Crown operating cash flows to residual core Crown cash). A cash-based measure of the operating balance is constructed and then adjusted to remove the estimated cyclical components of taxes and unemployment spending, and net interest payments. From this balance, capital expenditure is deducted. Capital spending is adjusted to remove that part of defence spending judged as less likely to affect aggregate demand. An adjustment is also made for the government's contribution to KiwiSaver accounts. Overall, these adjustments are made so that the indicator focuses on those changes in discretionary fiscal policy likely to affect demand in the economy. The change in the resulting fiscal balance is the fiscal impulse. Although cash based, the fiscal balance and the fiscal impulse do not correspond to fiscal indicators such as “residual cash” because of the various adjustments applied.

Figure 2: Fiscal Balance and Impulse
Figure 2: Fiscal Balance and Impulse.
Source:  The Treasury

Fiscal impulse is interpreted as expansionary fiscal policy when the fiscal balance decreases (the government is adding to aggregate demand) or contractionary when the fiscal balance increases (the government is reducing its contribution to aggregate demand).

Fiscal impulse, however, does not provide any information on how a change in fiscal policy will be transmitted through the economy. In particular, it ignores any supply-side impacts of policy and does not contain any information about second-round effects, such as how changes in the spending decisions of households and firms may change as a result of changes in interest rates, inflation and the exchange rate. As a result, fiscal impulse is not a measure of the impact of fiscal policy on inflation. Even if the fiscal impulse indicator is unchanged between forecasts it does not mean that the inflation impact will be the same in each forecast. In particular, there may be a different inflationary impact from the same fiscal policy change depending on where the economy is in the cycle; if there is more (less) pressure on resources then the same discretionary fiscal policy change may have greater (lesser) inflation impact. In addition, a different make-up of taxes and spending could mean that the same fiscal impulse has a different impact on inflation.

As noted in the case of the CAB above, ex post and ex ante estimates of fiscal impulse can and do change between forecast rounds because of revisions to the output gap and changes in spending (i.e., timing delays in departmental spending, both operating and capital; and the application of the top-down adjustment).

June year
% of GDP
Fiscal
Balance
Fiscal
Impulse
OBEGAL
ex NZSF
retained income
Cyclically
Adjusted
1997 2.5 -2.3 1.8 1.0
1998 2.3 -0.2 2.3 2.6
1999 1.5 -0.8 0.1 1.2
2000 0.9 -0.6 0.5 0.3
2001 2.2 1.3 1.2 1.8
2002 2.9 0.7 2.0 2.3
2003 3.1 0.2 3.2 3.1
2004 2.8 -0.3 3.9 3.4
2005 4.4 1.6 4.7 4.2
2006 4.1 -0.3 4.6 4.3
2007 4.0 -0.1 3.7 3.5
2008 3.7 -0.4 3.1 2.8
2009 0.9 -2.8 0.0 0.6
2010 0.1 -0.8 -0.9 -0.3
2011 -0.5 -0.7 -1.2 -1.0
2012 -0.7 -0.2 -1.4 -1.6
2013 -0.8 0.0 -1.5 -1.7

Source:  The Treasury

Tax Revenue Tables

Table 1 - Treasury and Inland Revenue forecasts of tax revenue
Tax revenue 2007/08
Actual
2008/09
Forecast
2009/10
Forecast
2010/11
Forecast
2011/12
Forecast
2012/13
Forecast
$ million   Treasury IRD Treasury IRD Treasury IRD Treasury IRD Treasury IRD

Direct tax

                     

Individuals

                     
Source deductions 23,769 23,429 23,457 24,059 24,022 24,766 24,691 25,873 25,875 27,558 27,598
Other persons tax 5,071 4,972 4,919 5,251 5,112 5,255 5,194 5,392 5,377 5,549 5,488
Refunds (1,470) (1,494) (1,550) (1,460) (1,490) (1,451) (1,510) (1,490) (1,540) (1,552) (1,540)
Fringe benefit tax 522 514 520 529 539 556 562 580 588 607 616
Subtotal: Individuals 27,892 27,421 27,346 28,379 28,183 29,126 28,937 30,355 30,300 32,162 32,162
Company tax (net) 9,103 8,137 8,060 8,384 8,980 9,160 9,582 9,663 10,132 10,200 10,574

Withholding taxes on:

                     
Resident interest income 2,699 2,822 2,833 2,666 2,565 2,494 2,320 2,571 2,320 2,719 2,370
Non-resident income 1,506 1,549 1,450 1,396 1,476 1,389 1,506 1,469 1,536 1,525 1,566
Foreign-source dividends 71 42 62 42 57 42 52 42 52 42 50
Resident dividend income 69 60 61 221 196 267 243 271 255 275 262
Subtotal: Withholding tax 4,345 4,473 4,406 4,325 4,294 4,192 4,121 4,353 4,163 4,561 4,248
Total income tax 41,340 40,031 39,812 41,088 41,457 42,478 42,640 44,371 44,595 46,923 46,984
Other: Estate and gift duties 3 3 2 3 3 3 3 3 3 3 3
Total direct tax 41,343 40,034 39,814 41,091 41,460 42,481 42,643 44,374 44,598 46,926 46,987

Indirect tax

                     

GST

                     
GST (Customs) 5,812 6,611 6,642 6,895 7,017 7,330 7,418 7,892 7,964 8,460 8,560
GST (IRD) 9,488 9,709 9,609 10,006 9,873 10,306 10,132 10,564 10,420 10,818 10,749
Subtotal: GST 15,300 16,320 16,251 16,901 16,890 17,636 17,550 18,456 18,384 19,278 19,309

Excise duties on:

                     
Alcoholic drinks 573 602 610 635 633 656 657 678 682 702 708
Tobacco products 159 151 155 155 156 157 159 159 162 162 164
Petroleum fuels 819 880 880 891 891 910 910 935 935 961 961
Subtotal: excise duties 1,551 1,633 1,645 1,681 1,680 1,723 1,726 1,772 1,779 1,825 1,833

Other indirect tax

                     
Customs duty 1,857 1,889 1,903 1,874 1,888 1,860 1,901 1,847 1,895 1,873 1,894
Road user charges 851 877 916 895 940 942 984 996 1,033 1,051 1,087
Gaming duties 302 294 290 299 297 309 301 319 306 330 311
Motor vehicle fees 226 185 187 184 191 185 199 186 207 188 215
Exhaustible resource levy 46 43 45 43 45 43 50 43 55 43 58
Approved issuer levy, cheque duty & other 123 104 114 106 111 105 103 106 100 104 99
Subtotal: Other indirect tax 3,405 3,392 3,455 3,401 3,472 3,444 3,538 3,497 3,596 3,589 3,664
Total indirect tax 20,256 21,345 21,351 21,983 22,042 22,803 22,814 23,725 23,759 24,692 24,806
Total tax 61,599 61,379 61,165 63,074 63,502 65,284 65,457 68,099 68,357 71,618 71,793
Total tax (% of GDP) 34.2% 33.3% 33.2% 33.1% 33.3% 32.7% 32.7% 32.4% 32.5% 32.5% 32.5%

less Core Crown tax eliminations

                     
Core Crown income tax 237 326 326 419 419 494 494 574 574 655 655
GST on Crown expenses
and departmental outputs
4,185 4,633 4,633 4,877 4,877 5,160 5,160 5,269 5,269 5,516 5,516
Crown ESCT 413 347 347 348 348 347 347 348 348 348 348
Crown AIL 17 15 15 15 15 15 15 15 15 15 15
Core Crown taxation 56,747 56,058 55,844 57,415 57,843 59,268 59,441 61,893 62,151 65,084 65,259
Core Crown tax (% of GDP) 31.5% 30.4% 30.3% 30.1% 30.3% 29.7% 29.7% 29.4% 29.6% 29.5% 29.6%

less Total Crown tax eliminations

                     
Income tax from SOEs and CEs 322 470 470 562 562 538 538 565 565 648 648
Other Crown GST ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  .. 
ESCT from SOEs and CEs 10 8 8 8 8 9 9 9 9 9 9
Lottery duty 42 42 42 44 44 47 47 50 50 52 52
Total Crown taxation 56,373 55,538 55,324 56,801 57,229 58,674 58,847 61,269 61,527 64,375 64,550
Total Crown tax (% of GDP) 31.3% 30.1% 30.0% 29.8% 30.0% 29.4% 29.4% 29.1% 29.3% 29.2% 29.3%
Nominal GDP 180,077 184,390 184,390 190,713 190,713 199,881 199,881 210,205 210,205 220,574 220,574

Source:  Inland Revenue, The Treasury

Table 2 - Treasury and Inland Revenue forecasts of tax receipts (cash)
Tax receipts 2007/08
Actual
2008/09
Forecast
2009/10
Forecast
2010/11
Forecast
2011/12
Forecast
2012/13
Forecast
$ million   Treasury IRD Treasury IRD Treasury IRD Treasury IRD Treasury IRD

Direct tax

                     

Individuals

                     
Source deductions 23,247 23,354 23,382 23,982 23,945 24,687 24,612 25,790 25,792 27,470 27,510
Other persons tax 5,469 5,447 5,440 5,870 5,680 5,898 5,750 6,080 5,920 6,232 6,090
Refunds (2,171) (2,369) (2,330) (2,274) (2,270) (2,300) (2,290) (2,396) (2,320) (2,400) (2,350)
Fringe benefit tax 489 507 515 526 533 546 555 573 580 599 608
Subtotal: Individuals 27,034 26,939 27,007 28,104 27,888 28,831 28,627 30,047 29,972 31,901 31,858
Company tax (net) 8,703 7,507 7,303 8,148 8,641 8,943 9,252 9,456 9,807 9,872 10,106

Withholding taxes on:

                     
Resident interest income 2,616 2,823 2,833 2,667 2,565 2,495 2,320 2,572 2,320 2,720 2,370
Non-resident income 1,638 1,344 1,450 1,352 1,476 1,397 1,506 1,459 1,536 1,518 1,566
Foreign-source dividends 72 42 62 42 57 42 52 42 52 42 50
Resident dividend income 40 90 61 220 196 266 243 270 255 274 262
Subtotal: Withholding tax 4,366 4,299 4,406 4,281 4,294 4,200 4,121 4,343 4,163 4,554 4,248