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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 11 October 2011 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.

 

Gabriel Makhlouf
Secretary to the Treasury

18 October 2011

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 11 October 2011 of which I was aware and that had material economic or fiscal implications.

 

Hon Bill English
Minister of Finance

18 October 2011

Executive Summary

Real economic growth of 2.3% is forecast for the year ending March 2012 and an average growth rate of 2.9% per year is forecast for the years ended March 2012 to March 2016. The unemployment rate is forecast to fall from 6.5% in June 2011 to 4.7% in March 2016. A return to surplus in the operating balance (before gains and losses) is forecast for the year ending June 2015 and the ratio of net debt-to-GDP is forecast to peak in the same year.

These forecasts represent the outcome of judgements around likely developments in, and interactions between, five major forces that are influencing the economy:

  • The world economy is slowing and concerns about sovereign debt and the stability of the banking system have unsettled financial markets. In a number of advanced countries the outlook for an upturn in growth is constrained by their need to reduce public debt to sustainable levels. We assume that European governments manage the region's debt issues and stabilise financial markets.
  • Income growth in China and east Asia has increased demand and world prices for New Zealand's exports. Developments in these economies will be a major determinant of New Zealand's export performance.
  • The pace and magnitude of the rebuild in Canterbury.
  • The progressive withdrawal of domestic monetary and fiscal stimulus.
  • The magnitude of an anticipated move away from household dis-saving.

At present, export prices are high, business confidence remains firm and the Rugby World Cup has provided some temporary support for consumption and for services exports. Partly offsetting these positive impulses, growth in the world's largest developed economies is slowing and financial market volatility has increased. We have revised down our estimates of trading partner growth and there is a significant risk that medium-term growth slows further than is built into our forecasts. The implications of even slower trading partner growth are captured in the Risks and Scenarios chapter.

The reconstruction work in Canterbury will gather momentum over 2012 and into 2013, generating higher employment and business investment, helping to insulate the economy from the impacts of slowing trading partner growth. The Treasury's estimates of damage from the Canterbury earthquakes have been revised up from $15 billion in the Budget Economic and Fiscal Update (Budget Update) to $20 billion in this Pre-election Economic and Fiscal Update (Pre-election Update) and our forecast of the scale and duration of the rebuild is also higher.

As the rebuild and broader economic recovery gather pace, spare capacity is drawn into production and monetary policy stimulus will be progressively withdrawn. Fiscal policy stimulus is also forecast to be withdrawn and operating deficits replaced by surpluses in the year ending June 2015. As capacity becomes stretched, the pace of annual average growth slows to 2.4% by the end of the five-year forecast period (Table 1).

A return to positive household saving, defined as aggregate household incomes being higher than consumption, is estimated in the year ended March 2011, for the first time in more than a decade. The rate of household saving is expected to continue to strengthen as households in aggregate move to strengthen their net asset positions. This results in more moderate consumption growth in the current upturn than was experienced in the previous cyclical upturn. In spite of this, the Treasury anticipates that the current account deficit will widen, driven by investment related to the Canterbury rebuild and partly funded by earthquake insurance payments.

The fiscal forecasts are largely in line with the Budget Update and continue to show a return to surplus in the year ending June 2015. Core Crown revenue increases as a percentage of GDP over the forecast period while core Crown expenses decline as a percentage of GDP. While the operating deficit continues for the next three years, this trend in revenue and expenses results in a surplus in the fourth year (Table 1).

When capital spending is deducted from operating cash flows, residual cash deficits persist throughout the forecast period. As a result, net debt rises throughout the forecast period and peaks at 29% of GDP in the year ending June 2015 before falling as a percentage of GDP. The decline in net debt as a percentage of GDP continues in the medium-term projections.

Table 1 - Summary of the Treasury's main economic and fiscal forecasts
  2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast

Economic (March years, %)

           
Economic growth1 1.6 2.3 3.4 3.3 2.9 2.4
Unemployment rate2 6.5 5.8 5.2 4.9 4.7 4.7

Fiscal (June years, % of GDP)

           
Operating balance3 -9.2 -5.1 -2.0 -0.4 0.6 1.2
Net debt4 20.0 25.4 28.5 28.9 29.0 28.2

Notes:

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

Sources: Statistics New Zealand, The Treasury

The risks to our main forecasts are skewed to the downside. In an illustrative downside scenario, in which we assume a sharper slowdown in trading partner growth and lower terms of trade, we estimate that New Zealand's nominal GDP could be a cumulative $35 billion lower over the five-year forecast period to the year ending June 2016. We estimate that there is at least a one-in-five chance that the New Zealand economy performs worse than in this scenario.

The Crown's net worth is expected to decline in each of the next two fiscal years, before experiencing moderate growth over the remainder of the forecast period. Due to the upwards revision of the fiscal costs arising from the Canterbury earthquakes, this fall is now sharper than previously forecast in the Budget Update. Net worth is expected to be slightly below the current level in the year ending June 2016, at $77.2 billion, despite strong gross asset growth across the balance sheet over the forecast period.

The medium-term fiscal projections, covering the decade beyond the end of the forecasts, are similar to those included in the 2011 Fiscal Strategy Report. After first attaining a surplus in the year ending June 2015, the operating balance before gains and losses continues to strengthen over the projection period. Core Crown net debt steadily declines over the projection period, largely as a function of increasing surpluses being used to retire debt.

Finalisation Dates for the Forecasts
Economic forecasts 26 September
Economic data 26 September
Tax revenue forecasts 30 September
Fiscal forecasts 11 October
Specific fiscal risks 18 October
Text finalised 18 October

Note on 18 October the Government announced a decision to proceed with KiwiSaver auto-enrolment subject to a return to surplus. As this decision was taken after the forecasts were finalised the impacts of this policy change are not reflected in these economic forecasts. The change is included as a specific fiscal risk in chapter 4.

Economic Outlook

Introduction

This Pre-election Update, like its 2008 predecessor, has been prepared during a period of heightened uncertainty in the world economy. The repercussions of the financial crisis that erupted in 2008 are a key source of today's uncertainty. In many countries debt levels remain high and economic growth is weak. Many governments face unprecedented challenges in seeking to reverse fiscal deficits, and to stabilise, and eventually reduce, their debt levels. The global process of debt reduction has a long way to run and concerns about the sustainability of government debt, the strength of banking systems and economic growth are likely to continue to create periodic bouts of turbulence in financial markets for some time to come.

In contrast to the weak and fragile recovery in the major developed economies, growth in China and east Asia has been solid. Income growth in the region has led to its increased importance as an export destination and has helped lift New Zealand’s terms of trade to their highest level in 37 years. Despite an easing in the short term, the terms of trade are expected to remain elevated over the forecast period, providing a significant boost to nominal GDP. But history shows that commodity prices are volatile and, particularly in the current environment, the risks of a more significant fall than forecast here are substantial.

In New Zealand, as elsewhere, fiscal support for the economy will be withdrawn and a return to surplus is expected in the year ending June 2015. Monetary conditions are also expected to tighten as output expands and spare capacity is used up. However, the speed of the tightening process is conditional on the strength of world economic growth - slower world growth could delay the start of the tightening cycle.

For households in New Zealand, the rise in unemployment, combined with falls in asset prices and losses in wealth, has contributed to a change in saving behaviour: household saving is positive for the first time in more than a decade and the household debt-to-income ratio is declining. The change in behaviour is expected to be enduring and to result in lower consumption growth relative to that experienced over the past decade.

The rebuild following the Canterbury earthquakes provides an internal driver of growth that offsets the negative impact coming from abroad. Much of the rebuild cost is met from insurance claims, which means that progress is largely independent of the state of the world economy. Recent information has led us to revise our estimates of the damage to $20 billion from our initial estimate of $15 billion. As a consequence the rebuild will be larger and take longer than assumed in the Budget Update.

The Treasury's view of the most likely path for the economy over the forecast horizon is based on judgements around the impact of each of these forces and their interaction. However, in the current environment of heighted uncertainty, the range of plausible outcomes is wide. The Risks and Scenarios chapter presents a view based on a weaker outlook for the world economy.

Economic Outlook

Trading partner growth is slowing

In recent months the outlook for the world economy has deteriorated. In Europe, concerns about public debt, the stability of the financial system and the slowdown in growth have generated considerable volatility in global financial markets. Growth in the United States has also weakened and forecasts of growth in both regions have been reappraised as business confidence has faded and financial market volatility has increased. Euro area growth is forecast to slow to 0.9% in calendar year 2012, and forecast growth in the United States of 1.8% in 2012 is up only marginally from 2011 (see box on page 9).

Figure 1.1 - Trading partner growth
Figure 1.1 - Trading partner growth.
Sources: IMF, Consensus Forecasts, The Treasury

Our forecasts assume that European governments implement measures to manage the region's debt issues and stabilise financial markets, and that additional fiscal stimulus is adopted in the United States in 2012, while recognising the need for consolidation over the medium term. Weaker demand in these economies is expected to flow through to slower export growth in other countries. How substantive these flow-on impacts will eventually be is difficult to gauge and there is a significant risk that trading partner growth will slow further than assumed in these forecasts. Trading partner growth of 3.0% in the year to December 2011 is forecast, down from 4.6% last year, which was boosted by cyclical factors, such as inventory rebuilding and policy stimulus. Despite the deterioration in the world outlook, trading partner growth is expected to rise to 3.8% in 2012. The increase in 2012 is largely a reflection of the recovery from temporary disruptions to output in Australia and Japan early in 2011 - growth in China slows in 2012 and growth in Other Asia is steady (see Table 1.1). The gradual recovery in the United States, United Kingdom and euro area and continued solid growth elsewhere lift trading partner growth to around 4% by 2015 (Figure 1.1).

New Zealand's trade links with Other Asia and China, in particular, have strengthened in recent years and they now take around a third of New Zealand exports. Recent data point to an easing in activity across the region and, while further moderation is expected, the rate of expansion will likely remain solid. Economies in this region have scope to use fiscal and monetary policies to stimulate demand, although there are risks to inflation and asset prices to be navigated. The reasonable rates of growth expected in this region will provide opportunities for New Zealand exporters and support for commodity prices.

Outlook for the World Economy

The outlook for the world economy is one of the main assumptions in our forecasts and also one of the major uncertainties. The greatest uncertainty is associated with the euro area sovereign debt crisis, which we expect to be resolved only gradually, with risks around key developments. The outcome of meetings of European leaders scheduled to occur between the finalisation of this text and its publication, and in the period closely following publication, could change the outlook for the euro area and the global economy. Future developments and responses will carry similar risks.

Our forecasts for economic growth in our main trading partners have been revised down from the BudgetUpdate as outturns have been lower and the outlook has deteriorated (Table 1.1). While temporary factors, including natural disasters, account for some of the weaker growth to date, there is increasing acceptance that the recovery from the global financial crisis will be more protracted as household income growth is low and governments reduce debt.

Table 1.1 - Trading partner growth (calendar years)
PREFU forecasts 2008 2009 2010 2011 2012 2013 2014 2015
percent change actual actual actual estimate forecast forecast forecast forecast
Australia 2.6 1.4 2.7 1.7 3.5 3.2 3.2 3.2
China 9.6 9.2 10.3 9.3 8.8 8.7 8.7 8.5
United States -0.3 -3.5 3.0 1.5 1.8 2.0 2.2 2.4
Euro area 0.4 -4.3 1.8 1.5 0.9 1.5 1.5 1.5
Japan -1.2 -6.3 4.0 -0.7 2.3 1.5 1.4 1.4
United Kingdom -0.1 -4.9 1.4 1.0 1.6 2.0 2.1 2.2
Canada 0.7 -2.8 3.2 2.3 2.2 2.5 2.5 2.5
Other Asia* 3.2 0.3 8.3 5.0 5.0 5.2 5.1 5.1
Trading Partners 2.0 -0.5 4.6 3.0 3.8 3.8 3.9 4.0
Consensus (October) 2.0 -0.5 4.6 3.0 3.7 3.9 4.0 4.0
IMF WEO (September) 2.0 -0.5 4.6 3.1 3.8 4.1 4.2 4.3
Pre-Election Update Downside 2.0 -0.5 4.6 2.8 1.7 3.5 3.7 3.8
Budget Update 2011 (May) 1.9 -0.5 4.6 3.7 4.4 4.1 4.1 4.1

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

Sources: IMF, Consensus Economics, The Treasury

Our forecasts for trading partner growth are similar to October ConsensusForecasts (released after we finalised) and the IMF September World Economic Outlook (WEO), released just before we finalised. Our forecasts assume an orderly resolution of the euro area debt crisis, although it is acknowledged that this may take a few years to be fully resolved. Euro area growth is expected to slow to 0.9% in 2012 and to rise to 1.5% thereafter. A scenario where the euro area debt crisis is not contained is explored in the Risks and Scenarios chapter. The scenario is based on the IMF’s recent WEO downside scenario, but the impact of the crisis is twice as large with trading partner output 3% below the main forecasts at the end of the period in our scenario.

The downside scenario does not envisage as sharp a downturn in the world economy as in the Global Financial Crisis (GFC) when our trading partners' output contracted. In essence, we think policy makers have learned from the GFC and are better placed to respond should financial markets become disorderly. A rapid recovery followed the GFC as authorities responded with monetary and fiscal stimulus and stocks were rebuilt. In the downside scenario presented here, growth dips to 1.7% in 2012 and remains subdued through the forecast period because authorities’ ability to stimulate their economies is more limited now and households and governments still need to strengthen their financial positions.

In Australia, the terms of trade are very high, providing a substantial boost to income. Investment in the resources sector is growing strongly, contrasting with more subdued growth in the manufacturing and retail sectors of the economy. Commodity prices have fallen in recent weeks, although generally they remain high. Growth in Australia is likely to slow as the weaker outlook for developed economies flows through to Asian economies, which account for around half of Australia's exports. However, while demand growth may moderate, Australia's commodity export prices are likely to remain well supported, underpinning continued growth.

Figure 1.2 - Merchandise terms of trade (SNA)
Figure 1.2 - Merchandise terms of trade (SNA).
Sources: Statistics New Zealand, The Treasury

Prices for New Zealand's major export commodities increased more strongly than expected in the BudgetUpdate. While they have fallen from their record highs, they have not slumped the way they did in 2008, although that is a distinct possibility, which we explore more fully in the Risks and Scenarios chapter. Our forecast of a 4% decline in the terms of trade over the coming year reflects both the weaker demand outlook and an easing of supply constraints. In the medium term, increasing emerging market incomes, combined with rising world production costs, suggest that recent gains in the terms of trade will endure (Figure 1.2).

High commodity export prices have been reflected in increased profits in the agriculture sector, which have flowed through to lower agricultural sector debt. Household sector credit growth has also slowed, rising 2.0% in the past year, and with household disposable incomes growing 6.4% in the year, the household debt-to-income ratio has begun to decline (Figure 1.3). Income growth is expected to continue to exceed credit growth over the next few years, leading to further declines in this measure of household leverage.

Figure 1.3 - Household saving and leverage
Figure 1.3 - Household saving and leverage.
Sources: Statistics New Zealand, The Treasury

Growth in household consumption spending has also fallen below the rate of income growth. In the year ended March 2011, the difference between income and consumption - saving - is expected to be positive for the first time in more than a decade. The change in saving behaviour is forecast to be persistent, and saving is forecast to continue rising over the forecast period. Factors behind this trend include: a desire by households to rebuild wealth lost through finance company failures and declines in financial and property values, a rise in job insecurity associated with the 2008/09 recession and changes in government policy for example, tax and KiwiSaver policies.

New Zealand's economic recovery continues

Economic activity over the first half of the year was disrupted by the Canterbury earthquake of 22 February and subsequent aftershocks. However, the economic disruption was not as severe as we had anticipated and real GDP is, at the end of the June quarter, higher than we forecast in the Budget Update (Figure 1.4). The increased strength in the economy is expected to persist over the second half of the year. Export prices are high, business confidence remains firm and the Rugby World Cup has provided some temporary support for consumption and for services exports. We expect growth of 2.3% in the year ending March 2012, up from 1.8% in the Budget Update.

Figure 1.4 - Real production GDP
Figure 1.4 - Real production GDP.
Sources: Statistics New Zealand, The Treasury

In the year ending March 2013, growth rises to 3.4%, led by the construction work in Canterbury and the investment required to support it. Compared with the Budget Update growth is slower, reflecting the weaker world outlook and a more gradual pick-up in construction activity. The level of spare capacity in the economy is substantially absorbed by the middle of 2013 and growth moderates thereafter as economic growth returns to its sustainable or potential growth rate. Table 1.2 summarises our economic forecasts.

Measured in current prices, expenditure in the economy is in line with the Budget Update forecasts. Nominal GDP is expected to grow to $209 billion in the year ending March 2012, $2.5 billion above our Budget Update forecast. However, growth in the year ending March 2013 is now lower than in the Budget Update and GDP in current prices is $0.9 billion lower in the year ending March 2013 than it was in the Budget Update. In the year ending March 2015, we forecast GDP in current prices to be $0.3 billion higher than in the Budget Update. The cumulative impact of these revisions across the four years ending March 2015 is to raise nominal GDP by $1.7 billion.

The Canterbury rebuild will provide a significant boost to output and employment over the next few years, providing a powerful offset to the effects of the weaker world economy and, because much of the rebuild cost is met from insurance claims, there is a high degree of certainty that this activity will occur, although the precise timing of the rebuilding work is much less clear.

The earthquake rebuild is likely to take longer to begin than initially expected. This is primarily the result of continuing seismic activity in Canterbury and the implications of this activity for the reassessment of land damage and resulting building standards. So far, earthquake-related building consents remain at a low level. Nationally, the market for new houses is showing signs of a recovery from its trough. Over the past year, an estimated 12,000 to 13,000 houses were built, which is well below the 20-year average of around 22,000 houses built per year.

As well as taking longer to begin, the rebuild is expected to be larger and take longer to complete and we have revised our estimate of the extent and cost of damage up to $20 billion from $15 billion. The box on page 13 provides an update on the impacts of the Canterbury earthquake. These revisions, combined with the cyclical rise in residential building activity, and the repair of leaky buildings, result in this sector contributing around 1.5 percentage points to GDP growth in each of the next two years to December 2013 as activity rises to its peak. A high level of activity is maintained through to the end of the forecasts.

Table 1.2 - Economic forecasts1
(Annual average % change,
March years)
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Private consumption 2.0 2.1 2.2 2.9 2.9 2.2
Public consumption 3.8 1.8 -1.5 -0.2 0.5 0.7
Total consumption 2.5 2.0 1.3 2.2 2.4 1.9
Residential investment 2.3 -8.4 37.6 34.9 14.2 5.5
Market investment 5.0 1.1 -8.8 3.2 5.7 3.4
Non-market investment 7.8 8.9 9.8 10.3 4.1 -0.3
Total investment 5.9 5.0 16.2 14.4 6.4 1.2
Stock change2 1.4 -0.5 0.2 0.1 0.2 0.2
Gross national expenditure 4.5 2.1 4.8 5.4 3.7 1.9
Exports 1.9 2.8 2.3 1.9 1.7 1.8
Imports 10.5 3.6 6.1 8.0 4.3 0.7
GDP (expenditure measure) 1.9 2.0 3.2 3.3 2.8 2.4
GDP (production measure) 1.6 2.3 3.4 3.3 2.9 2.4
Real GDP per capita 0.5 1.5 2.6 2.4 1.9 1.5
Nominal GDP (expenditure measure) 5.7 5.5 4.7 5.8 5.1 4.5
GDP deflator 3.7 3.5 1.5 2.4 2.2 2.1
Output gap (% deviation, March year)3 -0.7 -0.8 -0.2 -0.1 -0.1 -0.2
Employment 1.2 1.8 1.5 1.5 1.4 1.3
Unemployment4 6.5 5.8 5.2 4.9 4.7 4.7
Nominal wages5 2.6 4.0 3.3 4.2 4.1 4.0
CPI inflation6 4.5 2.8 2.2 2.4 2.5 2.7
Merchandise terms of trade7 9.9 3.2 -1.4 1.0 1.1 0.3
Current account balance            
   $billion -7.196 -5.0 -7.9 -12.6 -15.6 -17.6
   % of GDP -3.6 -2.4 -3.6 -5.4 -6.4 -6.9
Net international investment position            
   % of GDP -68.7 -68.6 -69.1 -70.8 -73.8 -77.6
TWI8 67.2 70.0 70.1 69.6 67.2 63.3
90-day bank bill rate8 3.0 2.9 3.7 4.3 5.0 5.3
10-year bond rate8 5.6 4.4 4.6 5.0 5.2 5.4

Notes:

  1. Forecasts finalised 26 September
  2. Contribution to GDP growth
  3. Estimated as the percentage difference between actual real GDP and potential real GDP
  4. Household Labour Force Survey, percent of the labour force, March quarter, seasonally adjusted
  5. Quarterly Employment Survey, average ordinary-time hourly earnings, annual percentage change
  6. Annual percentage change
  7. System of National Accounts (SNA) basis, annual average percentage change
  8. Average for the March quarter

A longer time series for these variables is provided on page 118.

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

Economic and Fiscal Impacts of the Canterbury Earthquakes

This box summarises the economic and fiscal impacts of the Canterbury earthquakes that have been incorporated in the Pre-election Update, particularly the changes since the Budget Update.

Disruption to economic activity has been less than anticipated ...

Activity has been more resilient to the earthquakes than we expected. Real GDP rose 0.9% in the March quarter against our Budget Update expectation of a 0.3% fall. The impact was also less than for the natural disasters in Australia and Japan, where real GDP fell around 1% in the March quarter. But these disasters were different in nature from the Canterbury earthquakes and, crucially, affected exports. Goods exports were affected little by the Canterbury earthquakes as the primary and manufacturing sectors were relatively unscathed. Tourism and international education were affected significantly, but the full impact was not picked up in GDP until the June quarter. The smaller amount of disruption also meant less of a bounce back in subsequent quarters.

... but damage estimates are higher, partly owing to continuing aftershocks ...

Our estimate of the damage caused by the earthquakes in Canterbury has increased to $20 billion from $15 billion in the Budget Update. The bulk of the upward revision occurred for residential dwellings and reflects higher estimates of damage in the February event and the inclusion of damage from aftershocks since the Budget Update, particularly those on 13 June. As in the Budget Update, this remains a working assumption with much uncertainty.

Table 1.3 - Estimates of the damage caused by earthquakes (NZ$ billion)
  Residential Commercial Infrastructure Total
Budget Update 9.0 3.0 3.0 15.0
Pre-election Update 13.0 4.0 3.0 20.0

Source: The Treasury

The damage estimates represent damage on property, contents and infrastructure valued at current prices. They do not include business disruption or additional costs from inflation, insurance administration or rebuilding to higher standards than existed before the earthquakes. These costs are important and their inclusion could lift the total cost to $30 billion or more. For example, incorporating inflation raises these estimates by over 20% within the forecast period, with a peak in residential construction cost inflation of around 7% per annum in 2013. The Balance of Payments estimate of $12.5 billion in reinsurance claims includes the impact of the wider insurance costs. These estimates may be revised higher over time as more information comes to hand. Adding the Balance of Payments estimate to the $7.5 billion from EQC's liability already gives an insurance cost of around $20 billion. Compared to the Budget Update, the treatment of reinsurance has been changed by Statistics NZ from the current to the capital account.

... and the amount of rebuilding will be higher, although somewhat delayed

We now assume investment related to the earthquakes will not start in earnest until the second half of 2012. This represents a delay of six to nine months compared with the Budget Update. The delay is the result of a further significant earthquake on 13 June and continuing seismic activity, which in turn has implications for the reassessment of land damage and building code requirements.

Higher damage estimates flow through to more investment in the forecast period, but this investment is less than it could have been owing to this delay, the nature of the extra damage (some of it is to land), and the capacity of the building industry.

Wider impacts on the economy

Investment related to the earthquakes contributes around 2 percentage points of the rise in gross national investment from around 20% of GDP in the March 2011 year to over 26% of GDP in the March 2016 year. Although gross national saving is also expected to rise, it is not expected to keep pace with investment. The excess of investment over saving is reflected in the annual current account deficit widening to 6.9% of GDP in the March 2016 year.

Figure 1.5 - Canterbury rebuild profile
Figure 1.5 - Canterbury rebuild profile.
Source: The Treasury

Excluding earthquake-related investment, the current account deficit would rise to about 5% of GDP. Beyond 2016, when the rebuilding in Canterbury winds down, and assuming the exchange rate depreciates as in our forecasts, the current account deficit would be expected to return to more sustainable levels of around 4% of GDP.

Fiscal impacts

The Canterbury earthquakes will continue to have a significant impact on the Government's fiscal position over the next few years. At the time of the Budget Update the estimated total cost (including Earthquake Commission (EQC) insurance costs) was $8.8 billion spread over the next six years. A large portion of this expenditure ($3.2 billion) was unallocated, pending future decisions or additional costs of current obligations or decisions.

Figure 1.6 - Current account balance
Figure 1.6 - Current account balance.
Sources: Statistics New Zealand, The Treasury

The costs of insurance have increased and are reflected in higher payments to foreign reinsurers and a larger current account deficit. There may also be a long-term impact on the level of economic activity as a result of the earthquake (eg, lower services exports and the diversion of resources into the construction sector).

The estimated total net cost to the Crown is now estimated to be $13.5 billion (Table 1.4). The majority of the increase since the Budget Update is in relation to insurance costs incurred by the EQC.

Table 1.4 - Forecast earthquake expenses (impact on the operating balance before gains and losses)
Year ending 30 June
$million
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Total
Forecast
Budget
Update
Local infrastucture 160 883 128 128 128 128 1,555 1,162
State-owned assets 46 16 15 - - - 77 85
Welfare support and emergency services 363 116 27 27 21 - 554 521
AMI insurance contingency 335 - - - - - 335 500
Red Zone properties 653 194 - - - - 847 -
Other costs 36 1,336 115 58 62 7 1,614 -
Yet to be allocated - 270 120 45 45 45 525 3,239
Canterbury Earthquake Recovery Fund 1,593 2,815 405 258 256 180 5,507 5,507
EQC 7,471 225 156 125 - - 7,977 3,050
ACC 7 - - - - - 7 181
Other SOEs and CEs 16 - - - - - 16 40
Total Crown 9,087 3,040 561 383 256 180 13,507 8,778

Source: The Treasury

Costs in relation to the Canterbury Earthquake Recovery Fund are still expected to reach $5.5 billion. Although significant expenditure uncertainties remain, a number of expenditures have now been identified and estimated (eg, the purchase of Red Zone properties), reducing the amount set aside as “yet to be allocated”. As a result, no additional funding is required in the Pre-election Update (Table 1.5).

Table 1.5 - Funding sources
Year ending 30 June
$million
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Total
Forecast
Budget
Update
Absorbed by reprioritising within baselines 156 381 - - - - 537 537
Budget 2010 contingency 64 135 - - - - 199 199
Budget 2011 1,373 2,299 405 258 256 180 4,771 4,771
Canterbury Earthquake Recovery Fund 1,593 2,815 405 258 256 180 5,507 5,507
EQC 7,471 225 156 125 - - 7,977 3,050
ACC 7 - - - - - 7 181
Other SOEs and CEs 16 - - - - - 16 40
Total Crown 9,087 3,040 561 383 256 180 13,507 8,778

Source: The Treasury

The timing of expenditure has also changed since the Budget Update. Earthquake spending for the year ended June 2011 was $1.2 billion less than forecast. It is now expected that these expenses will occur over the forecast period.

The forecasts for the Canterbury Earthquake Recovery Fund include a number of pending decisions and possible eventualities that may result in additional costs to the Crown and the Fund being exceeded. Examples of these risks are outlined in the Fiscal Risks chapter (page 57). To the extent that costs exceed those included in these forecasts, there will be an adverse impact on the fiscal position.

Employment will continue to expand …

Employment grew 1.7% in the year ended June 2011 and is expected to continue expanding at a similar pace over the year ahead. The recovery in the economy, combined with reconstruction in Canterbury, helps the unemployment rate to fall from a little under 6% at the start of 2012 to under 5% by the end of 2013. As the degree of spare capacity in the labour market reduces and firm profitability returns to more normal levels, wage growth is also expected to recover, rising from the current rate of around 3% per year to around 4% per year from 2014.

… and business confidence remains positive

Measures of business confidence have eased recently, although confidence remains high, suggesting that firms think the impact on New Zealand's growth from the weaker world economy may be mild (Figure 1.7). The recovery in business confidence from the lows of the 2008/09 recession has been reflected in higher business investment and business credit growth. Provided that downside risks to the world economy do not transpire and undermine confidence, business investment is expected to increase 8.9% in the year ending March 2012.

Figure 1.7 - Business confidence
Figure 1.7 - Business confidence.
Sources: NZIER, ANZ/National Bank

Strong exporter incomes and the expected increase in both residential and non-residential construction help to sustain business investment growth of around 10% per year until 2014, when construction activity peaks. As the impulse from the earthquake fades, investment growth slows.

Inflation expected to ease

Annual Consumers Price Index (CPI) inflation likely peaked at 5.3% in the June 2011 quarter (Figure 1.8). Although CPI inflation is expected to ease in the September 2011 quarter, high food price inflation, rising insurance and house-building costs contribute to a still-elevated annual inflation rate of 5.0% in the quarter. In the December 2011 quarter the one-off impact from the GST increase falls out of the annual CPI calculation and inflation is forecast to fall to 3.1%. Over 2012 inflation eases further reflecting the impacts of the stabilisation and subsequent easing of international prices for food and the more general effects of the rise in the exchange rate over the middle of 2011. The weakening in tradables inflation provides some offset to rising domestic sources of inflation associated with a general tightening in capacity across the economy and inflationary pressures from the construction sector in particular. Towards the end of the forecast horizon, the falling exchange rate contributes to rising inflation.

Figure 1.8 - Consumers Price Index
Figure 1.8 - Consumers Price Index.
Sources: Statistics New Zealand, The Treasury

Spare capacity will be absorbed …

Most indicators of resource utilisation show that spare capacity in the economy has fallen from its recessionary highs but that resource utilisation remains below its normal or average level. For example, survey measures of capacity utilisation and difficulty finding skilled labour produced by the New Zealand Institute of Economic Research (NZIER) have risen but remain below historical averages (Figure 1.9). Similarly, the level of unemployment has fallen but is still relatively high. Other measures of spare capacity in the economy, such as the output gap used in these forecasts, also show the economy's resources are less than fully employed.

Figure 1.9 - Capacity measures
Figure 1.9 - Capacity measures.
Source: New Zealand Institute of Economic Research

Slack in the economy is drawn in over the next two years or so as growth picks up. Labour demand will increase, but initially increased output will be reflected more in the intensity of capital and labour use, rather than in hours worked or employment. Labour productivity (measured using hours worked) is forecast to grow 2.2% in the year to March 2013 but to slow thereafter, as firms take on more staff and output growth slows, in part a reflection of growth in the relatively labour-intensive construction sector. Over the forecast period labour productivity grows at an average rate of 1.5% per year.

Estimates of how fast the economy can grow without running into resource constraints depend on judgements around growth in the capital stock and whether the economy can supply labour to the parts of the economy that need it. Over the forecast period we judge the sustainable or potential growth rate of the economy to be around 2.5% per year or around 1.5% per year on a per capita basis.

… leading to tighter monetary conditions …

These judgements around spare capacity and potential growth inform our assessment of inflationary pressure in the economy and the pace at which monetary stimulus is withdrawn, but other factors are also important. For example, the period of easier monetary conditions following February's earthquake has been extended as global financial and economic risks have increased. The pace at which interest rates rise over the forecast period is conditional on the outlook for inflation - a larger slowdown in the world economy would likely see a longer period of low interest rates (the Risks and Scenarios chapter provides further detail). Also important is our assumption that price rises induced by the Canterbury rebuild do not cause a material shift in medium-term inflation expectations. There are some initial signs of rising inflation in the construction industry, which we forecast to increase to around 7% over the next two years or so, and there is a risk that competition for labour and materials between construction-related industries and other parts of the economy generates greater inflationary pressures than assumed here.

… and tighter fiscal policy

Fiscal policy has also been supporting activity in the recovery from the 2008/09 recession and in the aftermath of the Canterbury earthquakes. The government's fiscal plans, announced in the 2011 Budget, see this support progressively unwound. Over the next few years, government revenue growth outstrips expense growth and the operating balance deficit narrows and is replaced by surpluses in the year ending June 2015. The withdrawal of fiscal stimulus helps to moderate the inflationary pressures arising from greater resource utilisation and allows for a more gradual pace of monetary tightening.

In the national accounts, the reduction in fiscal stimulus is reflected in a falling share of government consumption in GDP and, as a result of changes to government transfers, slower private consumption growth. The level of government consumption spending has been boosted by a number of one-off expenditure items in recent quarters, including the Canterbury earthquake, imports of spare parts for the Airforce and costs associated with the reorganisation of local government structures in Auckland. These one-offs, combined with data revisions, result in weaker public consumption growth going forward than forecast in the Budget Update.

New Zealand dollar to remain high

The New Zealand dollar has come off its recent peaks as growing uncertainty in the world economy has led markets to reassess New Zealand's growth prospects, but it remains high relative to most of New Zealand's post-float experience. Credit rating agencies have also reconsidered the sustainability of New Zealand's international debt position and the subsequent downgrade of New Zealand's foreign currency credit rating contributed to a further weakening in the currency. However, the economic outlook for New Zealand is more positive than in many advanced economies, which is expected to provide support for the New Zealand dollar over 2012 and 2013.

Long-run interest rates lower

The credit rating downgrades, which occurred after these forecasts were finalised, also increased long-term interest rates, which impact directly on government debt servicing expenses. We estimate the downgrade increased long-term yields by around 15 basis points. This relatively muted impact likely reflects the backdrop of downgrades in a number of countries in recent months. Despite the downgrades, long-term interest rates in New Zealand and around the world have fallen since the Budget Update, reflecting the weaker world economy. Long-term bond yields remain close to their average rate over the past three months or so, suggesting that our forecast for 10-year bond rates of 4.4% in the December quarter, rising to 5.4% by March 2016 remains broadly appropriate.

Current account deficit to widen

The high exchange rate, combined with weaker export demand, is expected to result in export receipts falling in the year ending March 2013 compared to the March 2012 year. At the same time, the domestic recovery, driven by the rebuild in Canterbury, is forecast to increase import payments. As a consequence, the surplus on the goods balance in the Balance of Payments is forecast to become a small deficit in the year ending March 2014, contributing to a current account deficit of 5.4% of GDP in that year. The deficit on the goods balance begins to reverse after March 2015, as the falling exchange rate boosts export receipts (Figure 1.10). However, the current account deficit continues to widen, reaching 6.9% of GDP in March 2016, driven by increasing debt servicing costs as international interest rates rise and profit outflows increase (Figure 1.11).

Figure 1.10 - Exports and imports
Figure 1.10 - Exports and imports.
Sources: Statistics New Zealand, The Treasury
Figure 1.11 - Current account and net IIP
Figure 1.11 - Current account and net IIP.
Sources: Statistics New Zealand, The Treasury

The widening of the current account deficit is reflected in the rising net liability position, which increases from 68.7% of GDP in March 2011 to 77.6% of GDP in March 2016 (Figure 1.11). However, in contrast to the period of high current account deficits in the mid-2000s, household and national saving is forecast to rise. The wider deficit and larger net debtor position therefore reflect higher investment spending, driven by the rebuild in Canterbury and by businesses, rather than consumption spending by households. The deficit is expected to stabilise as the Canterbury rebuild winds down.

Goods export volume growth slowed to 2.5% in the year ended June 2011 from the recovery-driven 6.5% in the previous year. At the same time services exports, including tourism, have been declining, with a significant drop in visitor numbers in the wake of the Canterbury earthquakes. Total export volume growth is expected to rise from 1.5% in the year ended June 2011 to 2.8% in the year ending March 2012, reflecting stronger commodity goods volumes and a rise in tourism from the Rugby World Cup. Further out, export volume growth, particularly for non-commodity goods and tourism, is restrained by the weaker world outlook.

Goods import volumes grew 11.6% in the year ended June 2011 driven by the recovery in business investment. However, import growth has trended lower over the first six months of the year and is expected to continue to weaken over the next few quarters before rising as the earthquake rebuild gets underway. Services imports have also been growing strongly, up 6.3% in the year ended June 2011, reflecting in part the high number of overseas trips taken by residents. Overall, real import volume growth is expected to ease to 3.6% in the year ending March 2012 but to rise to 8.0% in the year ending March 2014 as the Canterbury rebuild draws in imports.

The strength in import volume growth relative to exports means that net exports do not make a positive contribution to GDP growth until the final year of the forecasts.

Economic Forecast Assumptions

Earthquake - Details of the economic and fiscal impacts are discussed in the box on page 13 in chapter 1.

Trading partner growth - The economies of New Zealand's top-16 trading partners are expected to grow 3.0% in 2011, 3.8% in both 2012 and 2013, 3.9% in 2014 and 4.0% per annum thereafter. These are a cumulative 2% lower than in the Budget forecasts and similar to growth rates in the Consensus Forecasts report forOctober 2011.

Global inflation and interest rates - Annual inflation in the G3 countries (United States, Japan, euro area) falls from 2.0% in the June 2011 quarter to 1.5% in the December 2012 quarter and remains close to this rate over the forecast period. Short-term interest rates in the G3 begin to rise from their current rate of 0.6% in late 2013, reaching 2.4% in the June quarter 2016. G3 long-term interest rates begin to rise from their current rate of 1.9% in late 2012 to 3.1% in the June 2016 quarter.

Oil prices - The average price of West Texas Intermediate (WTI) oil rises from around US$87/barrel in the December 2011 quarter to US$93 in the June 2016 quarter. This projection is based on a monthly average of futures prices from the New York Mercantile Exchange recorded on 19 September 2011.

Terms of trade - The merchandise terms of trade, as measured in the System of National Accounts (SNA), are estimated to fall 4% over the year to September 2012 as commodity export prices fall from recent highs. The terms of trade remain higher than in the Budget Update owing to a higher starting point and offsetting weakness in merchandise import prices.

Monetary conditions - The New Zealand dollar Trade Weighted Index (TWI) exchange rate falls from 72.0 in the September 2011 quarter to 70.0 in the December quarter, holding there throughout 2012 and 2013. From 69.6 in March 2014, the TWI falls to 62.3 in the June 2016 quarter. Ninety-day interest rates are forecast to rise from 2.8% in the September 2011 quarter to 5.3% by the end of the forecast period.

External migration - The net inflow of permanent and long-term migrants of 2,300 in the year ending August 2011 becomes a net outflow of 1,000 in the year ending March 2012 as a result of the recent rise in departures to Australia (where labour market conditions have been stronger) and the impact of the Canterbury earthquakes. Additional activity related to the earthquake rebuild supports a rebound in net migration to 15,000 in the year ending March 2014 before settling at our long-run assumption of 10,000 in the year ending March 2016.

Fiscal Outlook

Introduction

Table 2.1 - Fiscal forecasts
Year ending 30 June
$billion
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Core Crown revenue 57.6 61.2 65.7 70.4 74.8 79.2
Core Crown expenses (70.5) (74.5) (71.6) (72.9) (75.6) (78.0)
Net surpluses/(deficits) of SOEs and CEs (5.5) 2.5 1.4 1.5 2.2 2.0
Total Crown OBEGAL (18.4) (10.8) (4.4) (0.9) 1.5 3.1
Net retained surpluses of SOEs, CEs and NZS Fund 5.1 (3.0) (1.5) (1.6) (2.3) (2.0)
Non-cash items and working capital movements 4.0 4.5 0.3 1.3 0.6 1.2
Net core Crown cash flow from operations (9.3) (9.3) (5.7) (1.3) (0.2) 2.3
Net purchase of physical assets (1.5) (2.1) (1.6) (1.4) (1.4) (1.6)
Advances and capital injections (2.5) (1.9) (2.2) (2.2) (2.5) (2.2)
Forecast for future new capital spending - (0.2) (0.5) (0.7) (0.8) (0.9)
Balance sheet funding of new capital spending - - 0.1 0.6 0.8 0.8
Core Crown residual cash deficit (13.3) (13.6) (9.9) (5.0) (4.1) (1.6)
Opening net debt 26.7 40.1 53.8 63.2 67.8 71.3
Core Crown residual cash deficit 13.3 13.6 9.9 5.0 4.1 1.6
Other valuation changes in financial assets and financial liabilities 0.1 0.1 (0.5) (0.4) (0.5) (0.4)
Closing net debt 40.1 53.8 63.2 67.8 71.3 72.5
As a percentage of GDP 20.0% 25.4% 28.5% 28.9% 29.0% 28.2%

A glossary and longer time series for these variables is provided on pages 113 and 117 respectively.

Source: The Treasury

While core Crown expenses[1] are expected to exceed core Crown revenue for the majority of the forecast period, the gap between them reduces, due in part to the expenditure constraints announced at the last Budget Update. As a result, core Crown revenue begins to exceed expenses by the year ending 30 June 2016.

When forecast surpluses from State-owned enterprises (SOEs) and Crown entities are added, total Crown operating deficits are forecast to persist for the first three years of the forecasts with the total Crown operating balance before gains and losses (OBEGAL) moving into surplus in the year ending June 2015.

Core Crown operating cash flows represent the cash impact of the operating deficit (or surplus). These cash flows exclude the surpluses retained by SOEs, Crown entities and the New Zealand Superannuation (NZS) Fund and non-cash items such as depreciation. Core Crown operating cash flows remain in deficit but decline for most of the period, reaching an operating cash surplus in the year ending June 2016 (a year later than the operating surplus).

When the forecast capital investments are included (eg, purchasing assets, making advances to students), cash deficits decline over the forecast from $13.6 billion in the year ending June 2012 to $1.6 billion by the year ending June 2016.

These cash deficits are funded by an increase in net debt which is forecast to rise from 20.0% of GDP at June 2011 and stand at 28.2% at June 2016 (after peaking at 29.0% in 2015).

Notes

  • [1]Core Crown expenses represent the operating expenses of government entities listed on page 77 but exclude expenses of State-owned enterprises and Crown entities. Losses are also excluded.

Short-term Outlook

Core Crown revenue increases while expenses decline as a percentage of GDP over the forecast period

Core Crown revenue is forecast to increase over the forecast period, reaching 30.8% by the end of the forecast period compared to 28.7% in the 2011 financial year just past.

Figure 2.1 - Core Crown revenue and expenses
Figure 2.1 - Core Crown revenue and expenses.
Source: The Treasury

Tax revenue makes up roughly 90% of total core Crown revenue. Other sources of income include interest income, revenue from the Emissions Trading Scheme and levies such as Child Support revenue.

The expected increase in core Crown revenue as a percentage of GDP is therefore predominantly in relation to core Crown tax revenue which is forecast to increase from 26.2% of GDP in the year ending June 2012 to 27.8% by the end of the forecast period.

Tax revenue is expected to grow at an average of 6.5% per year between the years ending June 2012 and June 2016. This increase is underpinned by growth in the nominal economy of around 5.0% per year. The main drivers of tax revenue growth are:

  • higher levels of employment and rising wages result in tax from source deductions growing at around 7% per year
  • the higher GST rate is applied to the full year to June 2012, boosting GST by 10% in that year. Growth in GST remains above 7% in the years ending June 2013 and 2014, as growth in the economy exceeds its long-run average, and
  • after several years of declining revenue, corporate tax revenue bounces back in the year ending June 2012. Growth in the year ending June 2013 slows, reflecting the impact of the first full year of a lower corporate tax rate and the impact of large tax losses built up through the 2008/09 recession being unwound. Revenue growth slows, however, over the June 2015 and 2016 years as the pace of economic growth slows.

Compared to the Budget Update, the Treasury's macroeconomic forecasts for the Pre-election Update have softer growth in nominal GDP in the year ending June 2013 with growth returning, albeit from a lower base, in subsequent years (Figure 2.2).

Figure 2.2 - GDP in current prices (expenditure measure)
Figure 2.2 - GDP in current prices (expenditure measure).
Sources: Statistics New Zealand, The Treasury

The weaker nominal economic growth rate in 2013 reflects slower growth in employee compensation and in consumption and flows through to lower estimates of growth in PAYE and GST tax revenue. Although growth in these tax drivers increases in subsequent years, the growth rates are not significantly higher than in the Budget Update and the lower tax revenue in the year ending June 2013 is not recovered within the forecast period.

The profit measures of operating surplus (for corporate) and entrepreneurial income (for other businesses) have also been revised down for the year ending June 2013, with peaks in activity now occurring a year later in the year ending June 2014. However, both measures have been strengthened in the current year ending June 2012.

Overall, compared to the Budget Update, core Crown tax forecasts have increased for the year ending June 2012 by $0.3 billion, but forecasts have been revised downwards in all subsequent years (Table 2.2).

Table 2.2 - Core Crown tax revenue
Year ending 30 June
$billion
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Pre-election Update 55.5 59.2 63.6 67.6 71.5
Budget Update 55.2 59.9 64.4 68.5  
Increase/(decrease) 0.3 (0.7) (0.8) (0.9)  

Source: The Treasury

In line with established practice, Inland Revenue has also prepared a tax revenue forecast, which, like the Treasury's tax forecast, is based on the Treasury's macroeconomic forecasts. The two sets of forecasts differ from each other because of the different modelling approaches used by the agencies, and the various judgements and assumptions made by the forecasting teams in producing their forecasts. The Inland Revenue forecasts are in the Treasury and Inland Revenue Tax Forecasts section of the Additional Information chapter of Pre-election Update 2011 published online only at http://www.treasury.govt.nz/budget/forecasts/prefu2011.

Core Crown expenses are forecast to decline as a percentage of GDP compared to the previous Budget Update, even including costs associated with the Canterbury earthquakes.

Earthquake costs to the Crown were $1.2 billion below forecast in the June 2011 financial year. However, these costs are now expected to be recognised in the current forecast period. Total earthquake costs (excluding EQC insurance costs) are estimated to remain largely within the forecast amounts included in the Budget Update (refer page 15).

Excluding these one-off earthquake costs, core Crown expenses are forecast to decline as a percentage of GDP across the forecast period from 34.2% in the year ending June 2011 to 30.3% by June 2016. This decrease reflects the reduction in new spending over this period that was announced in the Budget Update.

By June 2016, core Crown revenue is expected to exceed core Crown expenses by $1.2 billion.

Core Crown expenses[2] increase in nominal terms

While core Crown expenses are forecast to decline as a percentage of GDP, they are expected to increase in nominal terms (Table 2.3).

Table 2.3 - Growth in core Crown expenses since 2010 (pre-earthquake)
Year ending 30 June
$billion
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Movements in expenditure          
New spending          
Budget 2010 decisions 1.1 1.1 1.1 1.1 1.1
Budget 2011 decisions 0.4 (0.2) (0.3) (0.3) (0.3)
Budget 2012 allowance - 0.8 0.8 0.8 0.8
Budget 2013 allowance - - 0.8 0.8 0.8
Budget 2014 allowance - - - 1.2 1.2
Budget 2015 allowance - - - - 1.2
Existing policies          
Increases in New Zealand Superannuation costs 1.3 1.9 2.5 3.3 4.2
Increase in other social assistance 0.3 0.4 0.3 0.3 0.4
Emissions Trading Scheme 1.1 0.3 0.3 0.6 0.9
Debt impairments 0.5 0.5 0.7 0.7 0.7
Finance costs 1.4 1.5 1.6 2.0 2.0
Short-term expenses          
Canterbury earthquakes 2.8 0.4 0.3 0.3 0.2
Other movements 1.6 0.9 0.8 0.8 0.8
Increase in core Crown expenses 10.5 7.6 8.9 11.6 14.0
Baseline expenses (June 2010) 64.0 64.0 64.0 64.0 64.0
Core Crown expenses 74.5 71.6 72.9 75.6 78.0

Source: The Treasury

When costs associated with the Canterbury earthquakes are excluded, the main components of the increase in expenses are social assistance expenses (predominantly NZS), future allowances for new operating spending, costs associated with the Emissions Trading Scheme, and finance costs relating to the increase in gross debt.

At each Budget the Government announces expenditure initiatives. In the last Budget Update saving initiatives were of a greater value than the estimated cost of new initiatives. As a result, net savings were forecast over the forecast period. The forecasts in this Pre-election Update include an allowance for future spending initiatives based on the Government's net new operating allowances for new spending over the forecast period.

New Zealand Units issued under the Emissions Trading Scheme are expected to increase as new sectors enter the scheme. These expenses are partially offset by revenue associated with the surrender of New Zealand Units by emitters. Note 20 of the Forecast Financial Statements provide further details of the scheme.

Figure 2.3 - Beneficiary numbers
Figure 2.3 - Beneficiary numbers.
Source: The Treasury

Social assistance expenses are forecast to increase by $3.7 billion over the five years of the forecast period compared to the year ending June 2011. The majority of this increase is in relation to NZS which is expected to increase by $3.6 billion over that period.

This expected increase in social assistance expenses is due to growth in both the number of recipients (Figure 2.3) and the effect of wage and CPI indexation.

Figure 2.4 - Finance costs
Figure 2.4 - Finance costs.
Source: The Treasury

Finance costs are estimated to increase over the next few years (Figure 2.4) resulting from an increase in gross debt (discussed later in the chapter). Finance costs are forecast to increase from $3.7 billion in the June 2012 financial year to $4.3 billion in the year ending June 2016.

While debt financing costs increase over time, they are forecast to be much lower than expected at the last Budget Update. For example, the Budget Update forecast finance costs of $5.3 billion in the year ending June 2015. Our estimate for that year has fallen to $4.3 billion in the current forecasts, primarily driven by a reduction in the forecast interest rates.

The credit rating downgrades, which occurred after the interest rate forecasts were completed, are not expected to have a material impact on debt financing costs (long-term yields are expected to increase by around 15 basis points).

Cash raised from debt issuance that is not immediately required to meet cash demands is invested in financial assets. Therefore, while finance costs increase over the forecast period, this is partially offset by an increase in interest revenue from the invested assets (Table 2.4).

Table 2.4 - Core Crown net interest income
Year ending 30 June
$billion
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Core Crown interest revenue 1.1 1.3 1.3 1.6 1.7
Core Crown finance costs (3.7) (3.8) (3.9) (4.3) (4.3)
Core Crown net finance costs (2.6) (2.5) (2.6) (2.7) (2.6)

Source: The Treasury

The Crown is still forecast to return to surplus by June 2015

When core Crown forecasts are combined with the forecasts for SOEs and Crown entities, the total Crown is expected to return to surplus in the year ending June 2015 as also forecast in the Budget Update (Figure 2.5).

Figure 2.5 - Total Crown operating balance before gains and losses
Figure 2.5 - Total Crown operating balance before gains and losses.
Source: The Treasury

The operating deficit[3] is expected to fall from 9.2% of GDP in the June 2011 year to 5.1% of GDP in the June 2012 year. Excluding the cost of the earthquakes to the Crown, the deficit is estimated to be 3.7% of GDP in the year ending June 2012 compared with 4.6% in the previous financial year.

The June 2015 surplus has increased slightly from $1.3 billion in the Budget Update to $1.5 billion in these forecasts. Forecast reductions in tax revenue, the recently announced reduction in ACC levies, and the forecast impact of the introduction of the agriculture sector in 2015 to the Emissions Trading Scheme are expected to be offset by a faster-than-expected decline in unemployment benefits, an increase in the EQC levy and a reduction in forecast interest rates.

When forecast net gains are included, the total Crown operating balance (including gains and losses) is forecast to reach a surplus of $1.6 billion (0.7% of GDP) in the year ending June 2014. These net gains arise predominantly from forecasts of investment returns by the Crown's financial institutions (eg, the NZS Fund).

Operating balance forecasts for the year ending June 2012 include actuarial losses of $2.3 billion on the ACC claims liability and the Government Superannuation Fund pension liability, reflecting a decrease in the discount rates since 30 June 2011 that is used to calculate these long-term liabilities.

Cash deficits persist, resulting in increasing net debt

While the Crown returns to surplus[4] in the year ending June 2015, residual cash deficits, although reducing, remain across the forecast period.

Figure 2.6 - Net Core Crown debt
Figure 2.6 - Net Core Crown debt.
Source: The Treasury

Operating cash does reach surplus by June 2016, but when capital spending is included, residual cash remains in deficit by $1.6 billion (or 0.6% of GDP) in that year.

Capital spending includes providing funding to the Earthquake Commission to cover the estimated cash shortfall of $490 million in the year ending June 2015.

The resulting residual cash deficits represent the amount the Crown has to fund, either by raising debt or reducing financial assets and they result in an increase in net debt.

The reducing cash deficits result in net debt rising in nominal terms but decreasing as a percentage of GDP from a peak of 29.0% at June 2015 to 28.2% by June 2016. This decline continues into the medium-term projections (page 38).

The profile for net debt is forecast to remain similar to the picture outlined in the Budget Update. As a result, the borrowing programme run by the New Zealand Debt Management Office (NZDMO) remains largely unchanged (Table 2.5).

The forecasts include the redemption of non-market domestic bonds held in the Earthquake Commission's Natural Disaster Fund (NDF). In addition, repayments of market domestic bonds are expected in the first two years of the forecasts and in the year ending June 2015.

Table 2.5 - Net increase in domestic bonds
Year ending 30 June
$billion
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
5 year
Total
Cash proceeds from issue of domestic bonds (market) 15.4 12.8 10.0 7.8 4.8 50.8
Repayment of domestic bonds (market) (7.6) (11.0) - (10.0) - (28.6)
Net increase in domestic bonds (market) 7.8 1.8 10.0 (2.2) 4.8 22.2
Cash proceeds from issue of domestic bonds (non-market) 0.4 0.1 - - - 0.5
Repayment of domestic bonds (non-market) (1.7) (0.6) (0.9) (0.1) - (3.3)
Net increase in domestic bonds (non-market) (1.3) (0.5) (0.9) (0.1) - (2.8)
Net cash proceeds from bond issuance 6.5 1.3 9.1 (2.3) 4.8 19.4

Source: The Treasury

Notes

  • [2]Core Crown expenses represent the operating expenses of government entities listed on page 77 but exclude expenses of State-owned enterprises and Crown entities. Also excluded are gains and losses.
  • [3]Operating balance before gains and losses.
  • [4]Operating balance before gains and losses.

Crown's Balance Sheet Outlook

Net worth is forecast to remain below current levels over the forecast period

Continuing the trend from the past year, the Crown's net worth is expected to fall to a low of $65.9 billion in 2013, before recovering slightly over the remainder of the forecast period. By 2016, net worth is forecast to be $77.2 billion, $3.7 billion below 2011 levels (Figure 2.7 and Table 2.6).

Figure 2.7 - Portfolio net values 2010, 2011 and 2016
Figure 2.7 - Portfolio net values 2010, 2011 and 2016.
Source: The Treasury

The forecast continuation of fiscal deficits in each of the next three years is the main factor behind this decline in net worth. Core Crown borrowings are forecast to grow from $76.8 billion to $94.9 billion over the period. This is expected to drive a fall in the value of the financial portfolio, the only portfolio to experience a decline in net value, from -$47.2 billion to -$64.9 billion.[5] The fall is sharper than previously forecast in the Budget Update owing to the run down of the NDF as a result of the upwards revision of EQC costs arising from the Canterbury earthquakes.The use of NZDMO assets built up to meet Government bond maturities in the 2012 and 2013 fiscal years further contributes to the decline in the value of the financial portfolio.

Meanwhile, the social and commercial portfolios are both forecast to experience small net growth over the next five years.

The social portfolio is forecast to grow consistently, from $97.3 billion to $108.5 billion, representing portfolio growth of 11.5%. This is largely unchanged from the previous forecasts. This net growth is driven by a $9.7 billion increase in assets from continued investment in physical assets in priority social areas, particularly health, education and state highways. Expected net growth in the student loan book also contributes.

The commercial portfolio is also forecast to experience consistent growth, driven by the reinvestment of positive operating returns offsetting growth in liabilities. Of the $11.2 billion increase in commercial liabilities, $7.7 billion is attributable to forecast growth in Kiwibank deposits. The Crown's net commercial interests are expected to increase from $30.8 billion to $33.7 billion by 2016, or by 9.4%. This growth takes no account of a possible reduction in the Crown's commercial ownership from the proposed extension of the Mixed Ownership Model.[6]

Commercial assets and liabilities across the forecasts are slightly higher than those in the Budget Update, reflecting the inclusion of AMI Insurance in the Crown's accounts and small upwards revisions across the portfolio.

Table 2.6 - Forecast portfolio assets and liabilities, 2011 to 2016
$billion 2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Change between
2011 and 2016

Assets by Portfolio

             
Social 113.6 115.1 116.9 119.2 121.0 123.3 9.7
Commercial 58.1 60.7 63.1 66.3 69.4 72.1 14.1
Financial 73.5 69.8 62.0 67.5 66.0 72.0 -1.5
Total Assets 245.2 245.6 242.0 253.0 256.4 267.4 22.2

Liabilities by Portfolio

             
Social 16.4 17.7 15.9 15.6 14.9 14.8 -1.5
Commercial 27.2 29.6 31.8 34.1 36.5 38.4 11.2
Financial 120.7 130.0 128.4 135.8 133.5 136.9 16.2
Total Liabilities 164.3 177.3 176.0 185.5 184.9 190.2 25.9
Total Net Worth 80.9 68.3 65.9 67.5 71.5 77.2 -3.7

Note that numbers may not add exactly due to rounding

Source: The Treasury

However, there will still be significant asset growth across the balance sheet

While overall net worth is expected to remain below current levels by 2016, the Crown's assets are forecast to grow by gross $76.1 billion over the period to $267.4 billion after asset reductions (Table 2.7).

Table 2.7 shows that:

  • Of the $76.1 billion of gross asset growth, roughly half will occur in physical assets, known as “property, plant and equipment” (PPE). Including the companies currently being considered as candidates for the Mixed Ownership Model, SOEs are the largest source of this PPE investment, contributing 40.0%. Crown entities are forecast to be the next largest investors in PPE, driven largely by investments in the road network by the New Zealand Transport Agency (NZTA). Departments are expected to undertake 22.0% of gross PPE investment over the period.
  • Within non-PPE-related assets, growth in the asset portfolios held by the Crown Financial Institutions (CFIs) is the largest driver.[7] This arises from the projected value growth of existing assets and the reinvestment of returns, and contributes over a quarter of all gross asset growth. Growth in student loan advances is expected to remain largely steady across the forecasts, representing $8.2 billion by 2016.
  • $3.0 billion of new capital spending is expected over the forecast period. This reflects the assumption of a capital allowance of $900 million per Budget spread over five years. This expenditure has been included as a non-PPE addition as the exact nature of the investment is yet to be determined.
  • Gross asset growth will be offset by asset reductions and other changes of $53.9 billion. This is due mainly to depreciation, an unwinding of financial assets held by the NZDMO and the RBNZ, and a reduction in the EQC's assets as claims from the Canterbury earthquakes continue to be paid out. Repayments and revaluations of existing loans are expected to offset previously mentioned additions to the student loan book by $6.0 billion, resulting in a net increase in the student loan book of $2.2 billion.
  • The net increase in Crown assets over the next five years is forecast to be $22.2 billion.
Table 2.7 - Summary of forecast asset movements, 2011 to 2016
$billion 2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
5-Year
Total

Forecast Growth in Assets

             
PPE additions:              
   

Departments

1.5 2.3 1.7 1.3 1.2 1.5 8.0
   

Crown entities

2.5 3.0 2.7 2.6 2.6 2.8 13.8
   

SOEs

2.7 3.4 2.9 3.0 2.7 2.6 14.5
   

Total PPE additions

6.6 8.7 7.3 6.8 6.6 6.9 36.3
Non-PPE additions:              
   

Student loans additions

1.6 1.6 1.6 1.7 1.7 1.7 8.2
   

CFI asset investment growth

7.7 3.2 3.7 4.4 4.6 5.1 21.0
   

Kiwibank mortgages

1.1 1.5 1.5 1.6 1.6 1.6 7.7
   

Forecast new capital spending

0.0 0.2 0.5 0.7 0.8 0.9 3.0
   

Total non-PPE additions

10.4 6.4 7.3 8.3 8.6 9.2 39.8
Gross additions to assets 17.0 15.1 14.6 15.1 15.2 16.1 76.1

Forecast Reductions in Assets

             
PPE reductions:              
   

Depreciation on PPE

(3.7) (4.0) (4.2) (4.3) (4.3) (4.4) (21.2)
   

Balance sheet funding for new capital

0.0 0.1 (0.1) (0.6) (0.8) (0.8) (2.3)
Non-PPE reductions:              
   

RBNZ and NZDMO activity

5.6 (7.8) (9.9) 3.4 (5.5) 1.7 (18.0)
   

Student loans other changes

(0.9) (1.1) (1.1) (1.2) (1.2) (1.3) (6.0)
   

Reduction in EQC assets

3.3 (2.8) (2.7) (2.8) (1.0) 0.1 (9.1)
Other changes in assets 0.6 0.9 (0.3) 1.3 1.1 (0.3) 2.7
Net change in assets 21.9 0.4 (3.6) 11.0 3.4 11.1 22.2
Closing total Crown assets 245.2 245.6 242.0 253.0 256.4 267.4  

Note that numbers may not add exactly due to rounding

Source: The Treasury

Notes

  • [5]The ‘social portfolio’ consists of the assets and liabilities held primarily to provide public services or to protect assets for future generations; the ‘financial portfolio’ reflects assets and liabilities held by the Crown to finance or pre-fund government expenditure; while the Crown’s ‘commercial portfolio’ consists of the portfolio of companies held with purely commercial objectives. For more details, see the Investment Statement of the Government of New Zealand 2010 www.treasury.govt.nz/budget/2010/is.
  • [6]The Government has announced its intention to offer partial ownership of certain State-owned enterprises to private investors if it is re-elected. This is often referred to as the “Mixed Ownership Model”. As there is insufficient information to forecast individual transactions, there are no estimates of sale proceeds, selling costs, foregone dividends or ownership changes in these forecasts.
  • [7]The ‘Crown Financial Institutions' consist of the NZS Fund, Accident Compensation Corporation (ACC), EQC, National Provident Fund and the Government Superannuation Fund.

This will be funded from a range of sources

The Crown funds its asset growth from various sources, both from activity carried out within the core Crown and from dedicated sources outside it. Core Crown activity effectively reflects revenue raised from a mixture of taxation, additional borrowing, SOE dividends, and other sovereign revenue. Of the $76.1 billion of gross asset growth forecast for the next five years, $20.3 billion is expected to be funded directly from this activity (Table 2.8). The remaining $55.9 billion is forecast to be funded from sources outside the core Crown, including the reinvestment of CFI asset returns, road-user levies collected by the NZTA, and the retained operating surpluses of SOEs.

Table 2.8 - Summary of forecast funding sources, 2012 to 2016
$billion 2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
5-Year
Total
Funding sourced from core Crown activity:            
    Used to purchase PPE 3.2 2.7 2.1 2.1 2.4 12.5
    Used for budget capital allowances 1.0 0.3 0.2 0.1 0.1 1.7
    Funding for new capital spending from existing resources1 0.2 0.5 0.7 0.8 0.9 3.0
    Used for issuing student loans 0.7 0.7 0.6 0.6 0.5 3.1
    Total funding from core Crown activity 5.2 4.1 3.6 3.5 3.8 20.3
Other funding sources:            
    Student loan repayments 0.9 0.9 1.0 1.1 1.2 5.1
    Proceeds from asset disposals 0.3 0.2 0.3 0.3 0.3 1.4
    Hypothecated revenue for roading 1.2 1.2 1.3 1.5 1.7 6.9
    Financial and operating returns from CFIs 3.8 2.6 2.7 2.7 3.1 14.9
    Valuation gains/(losses) on CFI investments -0.6 1.1 1.7 1.8 2.0 6.1
    Borrowing by SOEs 1.2 1.2 0.9 0.6 0.3 4.0
    Operating surpluses generated by SOEs 1.8 1.7 2.0 1.9 2.2 9.8
    Kiwibank deposits 1.5 1.5 1.6 1.6 1.6 7.7
    Total funding from other sources 9.9 10.5 11.5 11.6 12.3 55.9
Total funding 15.1 14.6 15.1 15.2 16.1 76.1

Note that numbers may not add exactly due to rounding

  1. Funded from existing assets and increased returns on commercial assets

Source: The Treasury

Separating the sources of funding into those for PPE growth and those for all other non-PPE-related growth presents a clearer picture of which areas of the balance sheet are expected to rely largely on core Crown funding and which are predominantly self-funded.

Figures 2.8 and 2.9 present the funding sources for forecast PPE investment, as carried out by departments, Crown entities, and SOEs:

  • Of the $21.7 billion of PPE investment forecast for departments and Crown entities over the next five years, 63.7% is expected to come from the core Crown (Figure 2.8). Of this, $12.5 billion will fund new PPE spending, while $1.4 billion will be used to fund PPE expenditure committed to in previous years’ Budgets. Hypothecated revenue, principally road-user levies collected by the NZTA, contributes $6.9 billion over the five years, or 31.8%. The remaining 4.5% is from the disposal of assets within departments and Crown entities.
Figure 2.8 - Forecast PPE funding sources, 2012 to 2016: Departments and Crown entities
Figure 2.8 - Forecast PPE funding sources, 2012 to 2016: Departments and Crown entities.
Source: The Treasury
  • SOE PPE investment is expected to be largely funded independently of the core Crown (Figure 2.9). Capital allocations from the Crown provide only 2.1% of funding for PPE investment, used to fund commitments made in previous Budgets. The main recipient for this funding is KiwiRail's ‘Turnaround Plan'. The remainder of SOE PPE expenditure is forecast to be funded from SOE operating surpluses (67.2%), SOE borrowing (27.8%), and asset disposals within SOEs (2.9%).
Figure 2.9 - Forecast PPE funding sources, 2012 to 2016: SOEs
Figure 2.9 - Forecast PPE funding sources, 2012 to 2016: SOEs.
Source: The Treasury

Figure 2.10 presents the forecast funding sources for non-PPE growth. Despite the deterioration in the financial portfolio mentioned earlier, the gains and returns earned from CFI financial assets are expected to be relatively strong beyond 2012, as financial market conditions recover. These financial returns are forecast to fund all asset growth in the CFIs over the next five years, excluding the EQC. It is now expected that Crown operating surpluses will be sufficient to resume contributions to the NZS Fund in the year ending June 2018, a year later than forecast in the Budget Update. As this lies beyond the forecast period, no injections of core Crown funding into the NZS Fund occur in the forecasts.

As discussed elsewhere, it is expected that $3.0 billion of funding will be required for new capital spending in future Budgets. The current Government policy is to fund new capital spending initiatives for the next five budgets from its existing balance sheet rather than borrowing to fund these investments. The Government will source funding from alternative sources such as increased returns from existing investments, reprioritisation of planned capital spending, as well as the partial divestment of assets such as SOEs. New spending is not forecast to increase total assets but, rather, to replace existing assets. In total, $4.5 billion of capital spending is expected to be funded ($900 million per Budget for the next five Budgets), once out-years are included.

Of the remaining growth in non-PPE-related assets, growth in the student loan book is expected to be funded from $5.1 billion of student loan repayments, and the remaining $3.1 billion from core Crown revenue. Meanwhile, growth in Kiwibank loans is assumed to be entirely funded through an associated growth in Kiwibank deposits.

Figure 2.10 - Forecast Non-PPE funding sources, 2012 to 2016
Figure 2.10 - Forecast Non-PPE funding sources, 2012 to 2016.
Source: The Treasury

Fiscal Forecast Assumptions

The fiscal forecasts are based on assumptions and judgements developed from the best information available on 11 October 2011, when the forecasts were finalised. Actual events are likely to differ from some of these assumptions and judgements. Furthermore, uncertainty around the forecast assumptions and judgements increases over the forecast period. The Canterbury earthquakes add further uncertainty to the economic and fiscal forecasts.

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

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

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

Table 2.9 - Summary of key economic forecasts used in fiscal forecasts
June years 2011/12 2012/13 2013/14 2014/15 2015/16
  Budget forecasts PREFU forecasts PREFU forecasts PREFU forecasts PREFU forecasts PREFU forecasts
Real GDP (P) (ann avg % chg) 2.5 2.8 3.4 3.2 2.8 2.3
Nominal GDP (E) ($m) 209,178 211,773 221,864 234,325 246,189 256,939
CPI (annual avg % change) 3.4 3.2 2.2 2.4 2.5 2.7
Govt 10-year bonds (ann avg %) 5.7 4.5 4.5 5.0 5.2 5.4
5-year bonds (ann avg %) 5.0 3.6 3.9 4.7 5.0 5.3
90-day bill rate (ann avg %) 2.9 2.9 3.6 4.2 4.9 5.3
Unemployment rate (ann avg %) 5.9 6.0 5.3 5.0 4.8 4.7
Employment (ann avg % change) 1.3 1.7 1.4 1.5 1.4 1.2
Current account (% of GDP) -4.5 -2.2 -4.0 -5.8 -6.5 -6.9

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

 
Government decisions Incorporate government decisions up to 11 October 2011.
Tax revenue

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

The surge in other persons tax refunds and company tax refunds over the last few years was largely a result of the recession. The forecasts assume that refunds will return to pre-recession trends as the economic recovery gets underway.

Utilisation of corporate tax losses to offset future taxable profits will retard the growth of corporate tax up to and including the June 2013 year.

Earthquake-related GST refunds will provide a boost to GST refunds throughout the forecast period. GST receipts from earthquake-related spending will provide a temporary boost to gross GST, mostly from 2012 onwards. The total net effect of these two elements will be offset, ignoring any additional spending over and above the insurance claims that may occur.

The current unusually large margin between 90-day interest rates and 6-month term deposit rates will be maintained throughout the forecast period, which has a positive influence on resident withholding tax on interest income.

Earthquake costs Expenditure (accrual measure) is forecast based on estimates on when key decisions will be taken. The timing of cash payments is based on estimates of when actual spending will take place. Refer page 15 for further discussion.
Operating allowance

Net $800 million in Budget 2012 and 2013.

Net $1.19 billion from Budget 2014 growing at a rate of 2% per annum for subsequent Budgets.

Capital allowance

$900 million in Budget 2012 onwards as follows:

 

Year ending 30 June
$billion

 

2011/12
Forecast
2012/13
Forecast
2013/14
Forecast
2014/15
Forecast
2015/16
Forecast
Outside the
forecast
period
Total
Budget 2012 0.1 0.4 0.2 0.1 0.1 - 0.9
Budget 2013 - 0.1 0.4 0.2 0.1 0.1 0.9
Budget 2014 - - 0.1 0.4 0.2 0.2 0.9
Budget 2015       0.1 0.4 0.4 0.9
Budget 2016         0.1 0.8 0.9

Funding for new capital spending will be sourced from the existing balance sheet rather than borrowing.

Investment rate of returns Incorporate the actual results to 31 August 2011. Beyond this time, gains on financial instruments are based on long-term benchmark rates of return for each portfolio.

Finance cost on new bond issuances
Based on 5-year rate from the main economic forecasts and adjusted for differing maturity.
Top-down adjustment

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

Top-down adjustment to operating and capital as follows:

 
Year ending 30 June
$billion
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Operating 1.1 0.3 0.1 0.1 0.1
Capital 0.4 - - - -
Borrowing requirements The forecast cash deficits will be met by reducing financial assets and issuing debt.
Property, plant and equipment For the purposes of the forecast financial statements, no revaluations of property, plant and equipment are projected beyond the current year. Valuations as recorded for the 2011 annual financial statements and any additional valuations that have occurred up to 31 August 2011 are included in these forecasts.
Student loans The carrying value of student loans is based on a valuation model adapted to reflect current student loans policy. As such, the carrying value over the forecast period is sensitive to changes in a number of underlying assumptions, including future income levels, repayment behaviour and macroeconomic factors such as inflation and discount rates used to determine the effective interest rate for new borrowers. Any change in these assumptions would affect the present fiscal forecast.
Government Superannuation Fund and ACC liabilities

The Government Superannuation Fund and ACC liabilities included in these forecasts have been valued as at 30 June 2011 adjusted for the 31 August 2011 discount rate. Both liabilities are valued by projecting future cash payments, and discounting them to present value. These valuations rely on historical data to predict future trends and use economic assumptions such as inflation and discount rates. Any change in actual payments or economic assumptions would affect the present fiscal forecast. For example, if the discount rate decreases, the value of the liabilities would increase.

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

Emissions Trading Scheme (ETS)

The forecasts have been prepared in accordance with current government ETS policies. Details of current climate change policies are listed at: www.mfe.govt.nz/issues/climate/policies-initiatives.

The carbon price assumption for the ETS is based on estimates of the current certified emission reduction (CER) carbon price from Point Carbon, and is €10.40 with an exchange rate of 0.5907 (a carbon price of NZ$17.61) over the forecast period.

The economic models used to project agriculture and energy activity assume an international carbon price of NZ$25 per tonne to 2012 and NZ$50 to 2020.

The forecast assumes a 63% uptake of post-1989 foresters into the ETS over Commitment Period One (CP1).

Revenues and the associated expenses arising from the agriculture sector entering the ETS are included from the June 2015 financial year.

It is assumed the ETS has no fiscal impact on debt or cash flows, as the net cash impact from the ETS and international obligations is highly uncertain.

Kyoto position

The Kyoto position included in the fiscal forecasts reflects the Government's obligation for CP1, from 2008 to 2012. It does not include any future potential reduction of the position through the transfer of units offshore through the forestry sector, or any future changes to the position through transactions under the ETS.

The carbon price assumption for the Kyoto position is based on estimates of the current assigned amount unit (AAU) carbon price from Point Carbon, and is €7.63 with an exchange rate of 0.5907 (a carbon price of NZ$12.92) over the forecast period.

NZS Fund contributions No contribution is assumed in the forecast period.

Medium-term Projections

The preceding parts of this chapter have focused on the fiscal forecasts to the year ending June 2016. This section concentrates on the medium-term fiscal projections, covering the subsequent decade up to and including the year ending June 2026.

At each Economic and Fiscal Update, the Treasury produces post-forecast projections of key economic and fiscal variables, such as nominal GDP and net debt. The projections arise from the forecasts, but there are fundamental differences between them. Forecasts are based on comprehensive modelling of economic and fiscal conditions, including the relationships between the two and the impacts of existing or proposed policies. Projections, in contrast, are potential paths of economic and fiscal variables beyond their end-of-forecast values, largely based on historical averages while reflecting existing policy settings. In particular, projections move towards, and then maintain, an assumption of an economy that is growing on trend and free from cycles. Projections also contain no policy responses, beyond those already in existence or to which there is a future commitment, to mitigate unfavourable outcomes or to strengthen positive trends.

Updated medium-term projections

In order to produce post-forecast fiscal variables it is necessary to project forward the economic variables which inform them. For example, tax revenue grows in line with nominal GDP, once a stable economy is attained. The two economic variables that play the biggest roles in fiscal projections are nominal GDP and the rate of inflation, as measured by changes in the CPI.

CPI inflation gradually returns to 2% per year from its end-of-forecast value. This reflects the mid-point of the Reserve Bank's Policy Targets Agreement, which is to keep the CPI-measured annual inflation rate inside a 1% to 3% band.

The CPI inflation projection is added to the projection of real GDP growth to produce the nominal GDP growth projection. This means that there is an implicit assumption that other drivers of nominal GDP, such as the terms of trade, remain at the levels attained at the end of the forecasts.

Over the projections, nominal GDP trends down from 5% annual growth in the year ending June 2017 to around 4% per year from the year ending June 2020 onwards. There are a number of factors contributing to this slowing: CPI inflation trending down to 2% per year; economic activity and the labour market returning to more normal levels as the earthquake rebuild winds down; and the aging population slowing growth in the labour force.

The medium-term fiscal projections for the Pre-election Update are similar to those produced for the 2011 Fiscal Strategy Report. The full recovery of the economy from the impacts of the Global Financial Crisis, as well as those of the Canterbury earthquakes, is still expected to be attained around the end of this decade. The total Crown operating balance before gains/(losses) returns to surplus at the same time, the year ending June 2015, and strengthens beyond that at a relatively similar rate. Core Crown net debt peaks in the forecasts and declines along a path similar to that depicted in the 2011 Fiscal Strategy Report projection.

The improvements in the fiscal position over the forecast period, which sees a surplus first achieved in the year ending June 2015, continue into projected years (Figure 2.11). Two factors are primarily responsible for the surplus improving over the projection period.

Figure 2.11 - Total Crown operating balance before gains/(losses) or OBEGAL
Figure 2.11 - Total Crown operating balance before gains/(losses) or OBEGAL.
Source: The Treasury

Firstly, the growth of all core Crown expenses, except for welfare transfers and debt-financing costs, is restricted to the size of the projected allowances for new operating spending. The annual increment to the operating allowance used in the first projected year, the year ending June 2017, is $1.239 billion. In later projected years this amount is increased by 2% per year. As this level of controlled expenditure growth is lower than both historical averages and nominal GDP growth, it plays a major role in maintaining expenses below revenue levels in the projections.

The second factor is strengthening tax revenues, produced by an economy returning to trend and incorporating fiscal drag for the first five projected years. Even after tax recovers to an assumed stable ratio to nominal GDP, based on history, it then grows in line with GDP. As already indicated, this is faster than the driver of most expenses.

While the operating balance before gains/(losses) is the main indicator of fiscal flows, net core Crown debt (excluding the financial assets of the NZS Fund and advances) is the key indicator of the public sector's fiscal stocks. Figure 2.12 depicts net debt to nominal GDP, showing that it peaks at 29% in the year ending June 2015 before steadily declining over the projection period. The attainment of surpluses from the year ending June 2015 onwards enables some of the debt stock to be retired, which in turn helps surpluses to increase by reducing debt-financing costs.

Figure 2.12 - Net core Crown debt (excluding NZ Superannuation Fund and advances)
Figure 2.12 - Net core Crown debt (excluding NZ Superannuation Fund and advances).
Source: The Treasury

Figure 2.13 shows that core Crown expenses, which spike in the fiscal year just completed mainly owing to one-off costs associated with the earthquakes, are forecast to decline. By the last year of the Pre-election Update forecasts they have returned to levels of GDP more like those seen before the Global Financial Crisis. Much of this reduction, which extends into the decade of projections, is owing to reduced operating allowances, relative to their pre-crisis levels, and restricting their growth to 2% per year. Falling debt-financing costs also play a part, as seen by the reduction in the gap between the expenditure measures with and without these costs. By the year ending June 2026 the two lines are only half a percentage point of GDP apart.

Figure 2.13 - Expenses
Figure 2.13 - Expenses.
Source: The Treasury

While overall expenses are declining, this is not true of all individual spending classes. In particular, gross (of tax) expenditure on NZS increases from 4.4% of nominal GDP in the year ending June 2011 to 6.1% by the end of the projection period, the year ending June 2026. The chief driver of this expense is recipient numbers, with the “65 and over” population expected to grow nearly four times more quickly than the total population over this period.

As the economy recovers, so do tax revenues and other income sources, such as returns on financial assets. This is shown in Figure 2.14. As well as the boosts to tax from more people in employment, companies returning to profit and higher spending, fiscal drag also plays a role. This refers to the case where tax grows faster than the income that generates it, particularly when a taxpayer's income moves into a higher tax bracket. Fiscal drag is only modelled for the first five years of projections, in order to keep the tax-to-GDP ratio around average historical levels. This can be seen where the total Crown revenue line levels out from the year ending June 2021 onwards.

Figure 2.14 - Revenue
Figure 2.14 - Revenue.
Source: The Treasury

Long-term Projections

At least every four years the Treasury is required, by legislation, to produce a Statement of the Long-term Fiscal Position. The last Statement was published in October 2009 and can be sourced from the Treasury website at http://www.treasury.govt.nz/government/longterm/fiscalposition.

While a full update of the entire Statement will not be published before late 2012, the fiscal projections have been updated for a Pre-election Update base. Three alternative sets of policy assumptions have been modelled in Figures 2.15 and 2.16. These are:

  • Constrained spending scenario - This assumes core Crown expenses, excluding welfare transfers (which include NZS) and debt-financing costs, derive their growth from projected operating allowances out to the year ending June 2026. In other words, this projection mimics the medium-term projections out to this point. From the year ending June 2027 onwards, the spending classes that derive their growth from the operating allowances, such as health, education and justice, are allowed to revert to historic growth patterns. This means that underlying drivers of their growth, such as labour costs and non-demographic demand factors, return to values that more closely resemble the averages of the past 20 years. Demographic demand reflects the size of their recipient groups over the projected years. In some areas, such as education, this may not be as strong as in the past. In other areas, especially health, the impacts of an aging population drive the growth of projected spending even faster than in recent history.
  • Historic trends scenario - In this scenario, historic growth drivers for expense classes that derive their growth from the operating allowances in the forecasts are assumed from the beginning of the projections, the year ending June 2017. This is sometimes referred to as a “bottom-up” approach to modelling expenditure growth, in contrast to the “top-down” approach of imposing operating allowance caps. Historic trends represents the standard approach followed by most governments in producing long-term fiscal projections.
  • Constant debt scenario - Both the Constrained spending and Historic trends scenarios use debt as the residual of their modelling. By this it is meant that revenue, expenses, assets and non-debt liabilities are all modelled, and borrowings are the outcome of combining these under the normal accounting rules. Those two scenarios differ only in the way in which expense growth is projected. By contrast, the Constant debt scenario constrains debt to a targeted level of nominal GDP, and expenses are the residual in the modelling. Net core Crown debt is gradually reduced from its end-of-forecast position to 20% of nominal GDP, and then the expense classes that are subject to the operating allowances are constrained to keep net debt at this ratio.

The Historic trends scenario follows a similar path to that depicted in the Fiscal Strategy Report published with the 2011 Budget Update. As was the case in that projection, the net debt track gradually declines to around 20% of nominal GDP before starting to lift again from around the year ending June 2030. This rising net debt track is a fundamental “warning signal” in long-term fiscal projections. Unless ongoing deficits are addressed by changes to fiscal policy settings, the relationship between deficits, borrowings and debt-financing costs will cause the debt track to rise quite rapidly. In other words, the extra borrowings needed to fund an operating deficit increase the stock of debt. This, in turn, increases the level of debt-financing costs generated, which add to the operating deficit. In the absence of any response to this situation, the debt stock and the financing costs it generates continue to supplement each other and the net debt track accelerates upward.

Figure 2.15 - Core Crown net debt under three long-term scenarios
Figure 2.15 - Core Crown net debt under three long-term scenarios.
Source: The Treasury

The Constrained spending scenario does more than flatten debt, with net debt quickly going negative. This equates to a situation where publicly-held financial assets are in excess of gross debt levels. It is important to note that this scenario is based on the assumption that the Government maintains the tight fiscal strategy outlined in the 2011 Fiscal Strategy Report.

Figure 2.16 shows the three tracks of core Crown expenses, excluding debt-financing costs, which correspond to the three net debt scenarios in Figure 2.15.

Figure 2.16 - Core Crown expenses excluding debt-financing costs under three long-term scenarios
Figure 2.16 - Core Crown expenses excluding debt-financing costs under three long-term scenarios.
Source: The Treasury

The Constant debt expense path is in line with recent history. However, the composition of future public spending would need to be different under this scenario. NZS nearly doubles as a share of nominal GDP over the projections, rising to just under 8% of nominal GDP by the year ending June 2055. This would mean that at least some other spending areas would have to be reduced from their current ratios to GDP, if a total ratio of just over 30% were to be maintained.

Historic trends expenses rise to ratios nearing those of the current earthquake-induced position. However, the rising debt track that corresponds to this implies that this expenditure track would, all other things being equal, produce an unsustainable fiscal position.

The expense track aligned to Constrained spending sees expenses fall to levels not seen in recent history. Achieving this track will require ongoing fiscal constraint, especially when it is taken into account that NZS will be close to twice the ratio of GDP that it was when such overall ratios of expenditure to GDP were last achieved.

Annex: Assumptions for Medium-term Projections

The assumptions for the medium-term economic and fiscal projections are outlined in this section. The full assumptions can be found in the 2011 Fiscal Strategy Report, at http://www.treasury.govt.nz/budget/2011/fsr.

Table 2.10 - Summary of economic and demographic assumptions*
June Year[8] 2012 2013 2014 2015 2016 2017 2018 2019 2020 ….. 2026
  Forecasts Projections
Labour force 1.0 0.7 1.2 1.2 1.2 1.0 0.8 0.8 0.5   0.4
Unemployment rate** 6.0 5.3 4.9 4.7 4.7 4.6 4.5 4.5 4.5   4.5
Employment 1.6 1.4 1.5 1.4 1.2 1.1 0.9 0.8 0.5   0.4
Labour productivity growth*** 1.4 2.1 1.7 1.4 1.1 1.2 1.4 1.5 1.5   1.5
Real GDP 2.8 3.4 3.2 2.8 2.3 2.4 2.3 2.3 2.0   2.0
Average hours worked per week**** 33.2 33.2 33.2 33.2 33.2 33.2 33.2 33.2 33.2   33.2
Consumers Price Index
(annual % change)
2.2 2.5 2.3 2.6 2.8 2.6 2.4 2.2 2.0   2.0
Government 5-year bonds (average % rate) 3.6 3.9 4.7 5.0 5.3 5.4 5.5 5.5 5.5   5.5
Nominal average hourly wage 3.6 3.5 4.1 4.2 4.1 3.8 3.8 3.7 3.5   3.5

* Annual average % change unless otherwise stated.

** Level of unemployment (average for year ending June).

*** Hours worked measure.

**** Total hours worked ÷ total number employed.

Sources: The Treasury, Statistics New Zealand

Two economic variables have had their medium-term, stable assumptions changed since the 2011 Fiscal Strategy Report. These are the Government 5-year bond rate and the average hours worked per week.

The medium-term, stable assumption for the Government 5-year bond rate has been lowered from the 6% annual value used at the Fiscal Strategy Report to 5.5%. Forward interest rates, five and ten years ahead, are now more than 50 basis points lower than they were prior to the Global Financial Crisis. The Pre-election Update forecasts reflect this, with lower 5-year bond rates than the Budget Update forecasts in every year. The change in the bond rate comes through a lower nominal risk-free rate, owing to lower real growth and inflation rate expectations in safe-haven economies. Since the crisis,and more recently with continued global financial turmoil, forecasters have been revising down long-run forecasts for growth and inflation in advanced economies.

In the long-term projections the Government 5-year bond rate is gradually returned to 6%, reaching this rate by the year ending June 2031 and then remaining at this rate in later years. This reflects the assumption that many of the conditions impacting on the Government bond yield curves may not persist beyond the next decade.

The average hours worked per week has had its medium-term, stable assumption lowered from the 33.6 hours per week used at the 2011 Fiscal Strategy Report to 33.2 hours per week. The value in the final year of the Pre-election Update forecasts, the year ending June 2016, is 33.2 hours per week, meaning that the new assumption is in place from the first projected year. The change reflects a declining average in recent years, as well as the assumption that an aging population is likely to lead to a lower future value. The next decade, and beyond, will see a greater percentage of the workforce reach the age of eligibility (currently 65) for NZS. Many of these workers will not retire completely, but are likely to switch from full-time to part-time employment or at least reduce their hours of work.

Transition of economic variables from the end of forecast

The stable values assumed for a number of key economic variables, in medium-term projections, reflect their expected levels or growth in a New Zealand economy that is growing on trend and is free from cycles. While such conditions rarely occur, and are temporary when they do, they are appropriate to apply in projections. This is because they occur far enough into the future that it would be difficult, and subject to significant error margins, to predict the onset and duration of any economic perturbations.

Up until mid-2008 the five-year forecast period was generally sufficient for the effects of current cycles and shocks to have worked their way through the economy. This meant that key economic variables could be assumed to be at trend growth rates or levels by the final year of the forecasts. The impact of the Global Financial Crisis meant that it was no longer valid to assume the economy would fully recover within the five-year horizon of the forecasts. Consequently, for a number of variables, transitions back to trend values over the early years of projections became necessary, and this is still the case at the Pre-election Update.

Six economic variables are adjusted from their end-of-forecast values. All except the Government 5-year bond rate contribute to the projection of nominal GDP, which is both a driver of a number of important fiscal variables, such as tax revenue, and the underlying deflator of key fiscal indicators.[9] The other five variables are:

  • aggregate labour force growth
  • CPI inflation
  • unemployment rate
  • average hours worked, and
  • labour force productivity growth.

For all but aggregate labour force growth, the transition involves selecting a medium-term stable assumption and a rate at which it is approached from the end-of-forecast value. The stable assumption is based on historical data, making allowance for any factors that could alter future values, such as the Policy Targets Agreement with CPI inflation. The rate of adjustment is determined by estimating a plausible path of recovery.

The aggregate labour force growth is not brought to a constant, stable rate. The transition used in this case is to make adjustments in the early projected years to reflect a period of economic rebuilding. When these adjustments dissipate, all growth in later years is aligned to Statistics New Zealand's labour force projections. Historical values of the aggregate labour force participation rate are used to gauge the appropriate adjustments.

Table 2.11 - Summary of fiscal assumptions
Tax revenue Linked to growth in nominal GDP. Source deductions (mainly PAYE tax on salary and wages) is projected using employment growth and nominal average hourly wage growth. The latter is multiplied by a fiscal drag elasticity of 1.35 for the first five years of projections. The two other major tax categories, corporate tax and other taxes (dominated by GST), are gradually returned from their end-of-forecast values to long-term constant ratios to GDP. Source deductions is also returned to a long-term GDP ratio after fiscal drag modelling ceases. The use of long-term stable tax-to-GDP ratios is to ensure that tax revenue projections are neither higher nor lower than would be expected when the economy is performing at its potential. All tax categories change at a rate of 0.2% of GDP per year, with final ratios-to-GDP of 11.2% for source deductions, 4.5% for corporate tax and 13.0% for other taxes. The long-term ratios are based on historical data, taking into account tax rate and policy changes that could affect them. Once the long-term ratios are reached the tax types remain at them in later projected years.
New Zealand Superannuation (NZS) Demographically adjusted and linked to net wage growth, via the “66% wage floor”. The latter refers to the net (after-tax) weekly NZS rate for a couple being constrained to lie between 66% and 72.5% of net average weekly earnings. As tax on average weekly earnings, being a part of overall PAYE, increases due to fiscal drag, the net average weekly earnings do not grow as quickly as the gross earnings.
Other benefits Demographically adjusted and linked to inflation.
Health, education, justice and other core Crown expense classes All growth assumed to come from a share of projected allowances for new operating spending.
Debt-financing costs A function of debt levels and interest rates.
Operating allowance $1.239 billion in the first projected year, the year ending June 2017. This is based on a $1.19 billion allowance for new operating spending, set for the year ending June 2015, grown at 2% per year from that year.
Capital allowance $0.918 billion in the first projected year, the year ending June 2017. Budgets 2012 through to 2016 inclusive assume a $900 million allowance for new capital spending. From Budget 2017 onwards, which coincides with the first projected year, the allowance is assumed to grow at 2% per year.
Surplus DMO financial assets $0 billion.
NZS Fund Contributions to the Fund are suspended until they restart in the year ending June 2018. When contributions begin again they are calculated by a methodology consistent with the NZS and Retirement Income Act 2001.[10]
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 in the projected years, including and beyond the year ending June 2017. This is because a 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 emissions liabilities) is assumed to be recycled back to the public through fiscally equivalent, unspecified tax reductions or spending increases.
Future emissions liabilities The Kyoto liability included in fiscal forecasts reflects the government's obligation for Commitment Period One, which is for the period 2008-2012. Projections 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

Notes

  • [8]Note that the economic forecasts in the Pre-election Update are based on a March year.
  • [9]Most graphs of fiscal indicators, such as core Crown net debt, show the variable as a percentage of nominal GDP. This makes points at various times easier to compare.
  • [10]The 2011 Fiscal Strategy Report provides details on contributions over the forecast and projection periodsand more information is available at http://www.treasury.govt.nz/government/assets/nzsf/contributionratemodel

Risks and Scenarios

Introduction

The forecasts presented in the Economic and Fiscal Outlook chapters were produced in some of the most volatile economic and market conditions since the height of the Global Financial Crisis. The Chicago Board Options Exchange Volatility Index - a measure of volatility in the S&P500 index and generally considered to be a proxy for international financial market conditions – rose significantly during the September 2011 quarter and remains elevated.

Figure 3.1 - Chicago Board Options Exchange Volatility Index (VIX)
Figure 3.1 - Chicago Board Options Exchange Volatility Index (VIX).
Source: Chicago Board Options Exchange (A higher number means more market volatility is expected over the next 30-day period.)

Against this backdrop, the first part of this chapter outlines key risks to the economic outlook, before presenting a plausible downside alternative scenario for the New Zealand economy. It then focuses on the established channels between the risks facing the real economy and the Crown’s fiscal position.

Economic Risks

Global outlook is highly uncertain ...

Internationally, the biggest uncertainty is over how fast, or even if, policymakers and governments can stabilise financial markets. Our main forecasts assume that the global economy “manages through” in the near term, based on a reasonably orderly resolution of the ongoing sovereign debt problems in the euro area combined with the adoption of additional fiscal stimulus measures in the United States. However, the risks to this view are skewed to the downside. A failure on the part of governments to contain the crisis in the euro area could, in particular, cause a severe disruption to global funding markets.

In contrast to late 2008, there is limited room for policymakers in developed economies to cut official interest rates if such a situation were to occur again. Furthermore, differences of opinion over appropriate policy responses have come to the fore, particularly over fiscal settings in the United States. With private deleveraging set to continue in much of the world, we expect a prolonged period of sub-potential growth in the global economy.

... posing risks to New Zealand's economy

The risks to New Zealand from the global economy are threefold. If international activity turns out to be weaker than we have built into our main forecasts, this would reduce demand for our exports. Given the need for sizeable medium-term fiscal consolidation in much of the developed world - not least the United States - there is a great deal of uncertainty over the pace of global growth ahead. And while Asian economies appear to be relatively better placed, policymakers there - particularly in China - face their own challenges from persistently strong inflation and high-valued housing markets.

Our main forecasts assume that the terms of trade decline modestly in the near term but remain high relative to historical standards over the five-year forecast period. Should the terms of trade, in contrast, fall much further and reach their 30-year average, a sharp drop in incomes for agricultural producers would flow through into weaker domestic demand, less income for investment and debt repayment, and a significantly wider current account deficit. Lower commodity prices could also impact on New Zealand goods and services providers that export to Australia, which would also experience a cut in its national income from international commodity sales.

On the financial side, a drop in confidence and pick-up in global risk-aversion would be expected to reduce the availability, and raise the cost, of credit for New Zealand. In light of the recent downgrades to New Zealand's sovereign credit rating by international ratings agencies Fitch and Standard & Poor's, there is a risk that markets would demand a higher risk premium for New Zealand's debt in the future. That said, there is room for the Reserve Bank to provide liquidity as needed, and, if the outlook for inflation permits, to facilitate easier monetary conditions to help domestic borrowers adjust.

The economy faces existing challenges as well ...

The domestic economy faces other risks as well. Private consumption growth is expected to be held back by weak house price growth and households' aggregate desire to reduce their debt-to-income ratios to more comfortable levels. Given the wider potential for much tighter conditions in global funding markets, the risk is that the degree of household consolidation could be more intense than expected, with households seeking to move to an even lower level of debt than we have forecast. While this might bring forward the rebalancing that the economy needs in the long run, such a scenario would involve weaker domestic activity in the near term. At present, the risk of a large-scale increase in borrowing by households, reflecting an increased willingness by banks to lend, seems small. However, if this were to occur, it would drive a stronger economy in the near term, but would not prevent the inevitable household rebalancing further out.

... including ongoing uncertainty over the timing of the Canterbury rebuild ...

As outlined earlier this year, the timing and extent of the Canterbury earthquake rebuild is difficult to forecast. If significant extra seismic activity causes further damage, the risk that the cost of rebuilding exceeds the current $20 billion estimate factored into our main forecasts would clearly rise, as would the risk that the rebuild would be slower and overall economic activity lower in the short term. Conversely, if seismic activity and insurance-related issues that are currently delaying the process were to be rectified sooner than assumed, the rebuild could gather pace more quickly. Accordingly, residential and non-residential construction, imported goods and employment would all be stronger than in the main forecasts. As a result, we would expect wages in and around the rebuild area to come under upward pressure, as well as prices for some goods - particularly housing goods and services. On top of this, a more rapid rebuild could boost wider confidence in the economy, providing a lift to consumer spending and business investment.

... and risks from non-economic events

There are also non-economic risks that may impact on the economy, particularly climatic conditions here and abroad. Poor weather and droughts have adversely affected domestic agricultural production in the past and remain a residual risk. Equally, weather-driven supply shocks in New Zealand's competitor countries also pose risks to the price of New Zealand's exports. There are other inherent risks from a range of environmental events as well, including the potential for biosecurity issues to hit the agricultural sector and the impact of one-off events such as the recent Rena shipping incident in the Bay of Plenty.

There are upside risks, but these are small at present

The discussion up to now has centred on the negative risks facing the economy, but there are also some positive risks - albeit small at present. Possible factors this time around include the terms of trade holding up higher than forecast and/or a quicker and more decisive resolution to the problems in the euro area (as opposed to the “manage through” assumed in the main forecasts). In addition, a weaker exchange rate profile than we forecast would be expected to provide a competitive boost to New Zealand-based exporters.

Downside Scenario

With the balance of probabilities around our main forecasts skewed heavily to the downside, this section presents a downside scenario based on the risks discussed earlier in this chapter. To be clear, the following is just one possible outturn based on a set of risks. It should be considered an illustrative outcome rather than a ‘worst case' scenario. The main drivers of this downside scenario are:

  • European leaders do not manage to contain the ongoing sovereign debt challenges in the euro area, leading to a significant spike in global risk-aversion and an associated increase in market funding costs.
  • With little scope for fiscal and monetary policy in the developed world to step in as it did in 2008, a protracted global recession ensues. The United States and euro area economies contract by 1.5% and 2.0% respectively in the 2012 calendar year, and stage relatively weak recoveries thereafter. Monetary policy around the globe stays supportive for longer.
  • An increase in funding costs triggers housing market corrections in a number of Asian economies, exacerbating their economic downturns. Annual Chinese GDP growth slows to 6% in 2012 (versus an average of over 10% per year in the past decade).

In this scenario, aggregate output in New Zealand's trading partners is approximately 3% lower than the main forecasts in the year ending March 2016. The cumulative loss of trading partner growth over five years is 13.5% of one year's annual GDP. In a deliberate effort to capture the downside risks to the global economy at present, this magnitude is around twice as severe as the IMF's downside scenario from its September 2011 World Economic Outlook.

Figure 3.2 - Trading partner growth
Figure 3.2 - Trading partner growth.
Source: The Treasury
Figure 3.3 - Merchandise terms of trade (SNA)
Figure 3.3 - Merchandise terms of trade (SNA).
Source: The Treasury
Figure 3.4 - Inflation
Figure 3.4 - Inflation.
Source: The Treasury
Figure 3.5 - Nominal GDP
Figure 3.5 - Nominal GDP.
Source: The Treasury

The impact on New Zealand of this downside scenario primarily comes through lower demand for our goods and services exports (including inbound tourism), and also lower prices for our key commodity exports - particularly dairy, meat and forestry products. The terms of trade fall sharply, down 7.0% in the year ending March 2013, largely reflecting lower prices for export commodities, and remain below levels incorporated into the main forecasts throughout the forecast period. That said, given their high starting point, the terms of trade remain around 9% higher than their long-run average during the five-year forecast period.

Lower export receipts flow through to a more rapid deterioration in the current account balance in this downside scenario. The current account deficit widens to 4.6% of GDP in the year ending March 2013 (compared with 3.6% in the main forecasts) and to 7.9% by the year ending March 2016 (compared with 6.9%). The exchange rate drops sharply and undershoots in the near term, although in a world of weak monetary settings it does not fall as far as in previous recessions. In this scenario, the trade-weighted exchange rate falls to 63.4 by the middle of the 2012 calendar year - more than 9% lower than in the main forecasts but still higher than the average since 2000 - before regaining some lost ground in 2013. In the near term at least, slower global growth outweighs any competitive boost from a weaker currency.

Lower terms of trade would also hit consumer and business confidence. The levels of both consumer spending and market investment remain below their main tracks throughout the forecast period. The latter is held back by a lack of availability, and the higher cost of credit, reflecting the disruption to global funding markets - another key headwind in this downside scenario.

As in the main forecasts, the Canterbury rebuild is a sizeable mitigating factor in this downside scenario. Residential investment is hit in the near term but recovers as reconstruction funded largely by insurance flows gathers pace over the coming years. While unemployment rises to 6.8% in the mid-2012 calendar year in the scenario - 1.2 percentage points higher than the main forecasts - rebuilding activity helps to bring the rate back down towards the end of the forecast period.

However, the overall impact of weaker economic activity in the short run results in the inflation rate being lower throughout the forecast period, coming in at 1.8% in the March 2013 and 2014 years. Accordingly, short-term interest rates are lower than in the main forecasts. The combination of weaker domestic demand and lower terms of trade means that nominal GDP is a cumulative $35 billion lower through to the year ending June 2016 in the downside scenario. A comparison of the downside scenario with the main forecasts for the key economic variables is given in Table 3.1.

Government's fiscal position deteriorates as a result

Tax revenue in this scenario is lower than in the main forecasts because of weaker growth in the economy. However, the relationship between the performance of the economy and tax revenue is very imprecise. In addition to the negative impact forecast by our model, we have lowered tax revenue by a further cumulative $4 billion over the forecast period in the downside scenario. This adjustment is intended to emphasise the downside risks facing the economy at present and the extra uncertainty that this means for tax revenues (note that GDP is lower in the scenario but so is the ratio of tax to GDP).

Overall, core Crown tax revenue in the scenario is a cumulative $14.5 billion lowerthrough to the year ending June 2016. In contrast to the main forecasts, the total Crown operating balance before gains and losses remains in deficit throughout the forecast period, registering a deficit of 0.5% of GDP in the year ending June 2016 compared with a 1.2% of GDP surplus in the main forecasts. Accordingly, core Crown net debt in the downside scenario rises to 35% of GDP in the year ending June 2016 (from 20% of GDP in 2011) – some 7% of GDP higher than in the main forecasts.

Other downside risks not captured in the scenario

As noted earlier, the downside scenario sets out one plausible scenario of a downside event and should be considered more of an illustrative outcome than a ‘worst case'. Overall, historic forecasting performance suggests that there is at least a one-in-five chance of an outcome worse than that captured in the downside scenario. Indeed, there are a number of risks for the economy over and above those captured in the scenario. Specifically, if a variety of factors conspired to result in the exchange rate not depreciating as we expect in the downside scenario, New Zealand would have less of a cushion from the weaker global economy. Meanwhile, to the extent that a stronger exchange rate leads to wider current account deficits than in the downside scenario, New Zealand's external liabilities and potential vulnerabilities would be still higher. Conversely, should the exchange rate depreciate more than we expect in the downside scenario, this would help to cushion the export sector further.

Table 3.1 - Summary of key economic variables for main forecasts and scenario
March years 2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast

Real GDP (annual average % change)

           
Main forecast 1.6 2.3 3.4 3.3 2.9 2.4
Downside scenario   1.7 2.5 3.6 3.2 2.6

CPI inflation (annual % change)

           
Main forecast 4.5 2.8 2.2 2.4 2.5 2.7
Downside scenario   2.5 1.8 1.8 2.4 2.6

Unemployment rate1

           
Main forecast 6.5 5.8 5.2 4.9 4.7 4.7
Downside scenario   6.5 6.3 5.8 5.1 4.7

Nominal GDP (expenditure measure, $billion)

           
Main forecast 198 209 219 231 243 254
Downside scenario   207 212 223 235 246

Current Account Balance (% of GDP)

           
Main forecast -3.6 -2.4 -3.6 -5.4 -6.4 -6.9
Downside scenario   -2.9 -4.6 -6.2 -7.4 -7.9
  1. March quarter, seasonally adjusted

Source: The Treasury

General Fiscal Risks

The discussion up to this point has focused on the main near-term economic risks. The rest of this chapter focuses on the links between the inherent risks to the performance of the economy and the Crown's fiscal position.

Table 3.2 provides some rules of thumb on the sensitivities of the fiscal position to changes in specific variables. For example, if for some reason nominal GDP growth is 1 percentage point slower than we have forecast each year up to the year ending June 2016, we would expect tax revenue to be around $3.5 billion (1.4% of GDP) lower than forecast as a result. The sensitivities are broadly symmetric, ie, if nominal GDP growth is 1 percentage point faster each year than we expect, we would expect tax revenue to be around $3.5 billion higher than forecast instead.

Fiscal sensitivities

Table 3.2 - Fiscal sensitivity analysis
Year ending 30 June
($ million unless stated)
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast

1% lower nominal GDP growth per annum on

         
Tax revenue (549) (1,171) (1,876) (2,650) (3,492)
    (% of GDP) (0.3) (0.5) (0.8) (1.1) (1.4)

Revenue impact of a 1% decrease in growth of

         
Wages and salaries (240) (510) (812) (1,153) (1,532)
    (% of GDP) (0.1) (0.2) (0.3) (0.5) (0.6)
Taxable business profits (96) (225) (370) (526) (687)
    (% of GDP) (0.0) (0.1) (0.2) (0.2) (0.3)

Impact of 1% pt lower interest rates on

         
Interest incomea (116) (117) (54) (87) (34)
    (% of GDP) (0.1) (0.1) (0.0) (0.0) (0.0)
Expensesa (84) (291) (378) (516) (573)
    (% of GDP) (0.0) (0.1) (0.2) (0.2) (0.2)
Overall operating balance (32) 173 325 429 540
    (% of GDP) (0.0) 0.1 0.1 0.2 0.2
  1. New Zealand Debt Management Office holdings only.

Source: The Treasury

Revenue risks

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

Figure 3.6 plots our main tax revenue forecast, along with confidence intervals around those forecasts based on Treasury's historical tax forecast errors.[11] The outermost shaded area captures the range (+/- $5 billion in the final year) within which actual tax forecasts would typically fall for 80% of the time.[12] The tax revenue forecast from the downside scenario is also plotted. Tax revenue in the downside scenario is clearly much lower than in the main forecast, but based on average historical forecast errors, there is still a one-in-five chance that tax revenue over the forecast period comes in even weaker than shown here in the downside scenario. Furthermore, with uncertainty currently greater than usual and risks skewed to the downside, the probability of tax revenue undershooting the downside scenario is currently considered to be higher than one in five.

Figure 3.6 - Core Crown tax revenue uncertainty
Figure 3.6 - Core Crown tax revenue uncertainty.
Source: The Treasury

Expenditure risks

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

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

Meanwhile, the destructive seismic events of recent years have underlined the inherent exposure of the Crown's fiscal position to exogenous shocks on the capital side. The Government's fiscal position would be impacted if another catastrophic earthquake were to occur or if the costs associated with the recent events exceed the updated estimates. The ageing population also presents risks to the medium-term fiscal position, particularly to the extent that demographic forecasts may prove to be too low or high.

Balance sheet risks

In addition to the primary risks facing the public finances, the Crown's balance sheet faces risks on a number of fronts too.[13] One of the main risks in this regard is to the net worth of the Crown's financial assets from movements in financial markets - particularly relating to interest and exchange rates and equity prices. Examples of these funds include the NZS Fund and the Accident Compensation Scheme (ACC). The Crown Ownership Monitoring Unit estimates that the Crown's overall financial portfolio has an asset beta of 0.45 relative to global equity markets. This means that if the MSCI World Equity Index were to fall (rise) by 10%, the value of the Crown's investments would be expected to fall (rise) by 4.5%.

The Crown also faces liquidity risk, and in extreme instances could potentially encounter difficulty in meeting financial obligations as they fall due. However, the bulk of research suggests that such a scenario is very unlikely and the Government has liquid buffers to help cope with such events.

Funding risks

As noted in the Economic Outlook chapter, while our main forecasts were finalised before the recent downgrades of New Zealand's credit rating by Standard & Poor's and Fitch, the market reaction since then means that our forecasts for interest rates in the near term are still appropriate. For now, New Zealand is on a stable outlook with all three major credit ratings agencies and the Crown holds the top Aaa foreign currency rating from Moody's and stable AA foreign currency ratings from Standard & Poor's and Fitch.

Nonetheless, in the absence of a marked improvement in the external position, New Zealand may be more likely to be singled out in the funding markets in the future. All things being equal, any further deterioration in the ratings outlook could serve to raise debt-servicing costs for the Crown as well as borrowing rates for households and businesses.

Notes

  • [11]A full summary of the methodology and critical assumptions is included in Treasury Working Paper 10/08. Standard deviation assumptions used for 0-, 1-, 2- and 3-year ahead forecasts are 2.4%, 4.7%, 6.3% and 6.8% of the actual respectively. These are interpolations of the Budget Update forecast estimates, adjusting for the timing of the Pre-election Update forecast.
  • [12]Recent Treasury analysis shows that a shock that has a significant and persistent impact on economic growth can result in tax revenues coming in significantly below the outermost shaded area. See Fookes, C (2011), “Modelling shocks to New Zealand's fiscal position,” Treasury Working Paper 11/02.
  • [13]For a more detailed discussion see the Crown's Investment Statement 2010 as well as the Supplement to the Investment Statement 2010.

Specific Fiscal Risks

The most significant economic risks have been identified in Chapter 3. The Statement of Specific Fiscal Risks is a requirement of the Public Finance Act 1989 and sets out all pending government decisions and other circumstances known to the Government at the finalisation of the fiscal forecasts that may have a material effect on the fiscal and economic outlook, but are not certain enough in timing or amount to include in the fiscal forecasts. It is not possible to identify every possible risk and disclosure is also subject to legal requirements and materiality thresholds, which are described after the Statement of Specific Fiscal Risks.

Overview of Specific Fiscal Risks

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

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

Some key examples of the risks disclosed in this chapter are outlined below:

  • government decisions relating to the recommendations of the Welfare Working Group and the redesign of business processes at Inland Revenue
  • specific policies that may have flow-on costs that are not accounted for within allocated funding, such as early childhood education funding, but are not likely enough to include in the forecasts
  • explicit guarantees that give assurance to the public and businesses about the Crown’s planned response to specific events are recognised as risks; the largest current guarantee relates to the Extended Deposit Guarantees Scheme with a total value of $1.3 billion, and
  • generic cross-government risks such as the renegotiation of collective employment agreements that could have material costs and flow-on effects to remuneration in other sectors.

General cost pressures, such as those associated with an ageing population, are not recognised as specific fiscal risks.

The new risks that have been added since the Budget Update include:

  • how the Government will respond to the Waitangi Tribunal report on the Wai 262 claim
  • a change in the legal interpretation of when work-related gradual process disease and infection claims should be recognised may have an impact on the fiscal position, and
  • the response to the Rena cargo ship grounding on Astrolabe reef.

The costs of individual natural disasters, and other major events, are not recognised as specific fiscal risks in advance as they usually occur infrequently and their timing cannot be predicted. Once a disaster does occur, a number of choices arise about how to respond and when potential liabilities are recognised. Specific risks are disclosed at this point based on the range of possible responses.

In Budget 2011 the Government established the Canterbury Earthquake Recovery Fund (CERF). The CERF is $5.5 billion and this is an estimate of the core Crown's costs of earthquake recovery. There are a large number of earthquake-related risks that, if they occur, may exhaust the capacity of the CERF. These risks include government commitments where the final cost is not yet known and policy options where decisions have not yet been taken. The risks have been aggregated and are not quantified because it is unclear which risks will be realised and what the scale of these risks would be.

In addition to the obligations and policy choices for the Government, the disasters in Canterbury and elsewhere have placed pressure on private sector insurers. As a result, the cost of insurance premiums is likely to increase over the next five years with potential flow-on effects to the Crown. The potential Earthquake Commission impact has now been recognised as a separate risk.

The final part of the chapter contains a current list of contingent liabilities, which are likely 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 on uncalled capital. The largest quantified contingent liabilities are to international financial organisations and mostly relate to uncalled capital and promissory notes.

Statement of Specific Fiscal Risks

Summary Table

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

 
Specific fiscal risks as at 18 October Status Value of risk

Pending policy decisions affecting revenue

   
ACC - Levies Changed Unquantified
Finance - Mixed Ownership Model Unchanged Unquantified
Revenue - Apportionment Rules for Mixed-Use Assets Changed Unquantified
Revenue - Income-Sharing Tax Credits Unchanged $500 million per annum
Revenue - Potential Tax Policy Changes Changed Unquantified
Revenue - Salary Trade-Offs Changed Unquantified
Services funded by Third Party Revenue Changed Unquantified

Pending policy decisions affecting expenses

   
Climate Change - Review of the Emissions Trading Scheme Changed Up to $585 million operating expenses
Education - Early Childhood Education Funding Changed Unquantified
Education - Upward Adjustment for School Operating Funding Unchanged Unquantified
Government Response to Wai 262 New Unquantified
Housing - Reform of Social Housing Changed Unquantified
Revenue - KiwiSaver Auto-Enrolment New $350 to $550 million operating expenses
Revenue - Transformation and Technology Renewal Changed Unquantified
Reviews of Public Services Unchanged Unquantified
Social Development - Welfare Working Group Recommendations Changed Unquantified
State Sector Employment Agreements Unchanged Unquantified

Pending capital decisions

   
Agriculture and Forestry - Investment in Water Infrastructure Changed Unquantified
Departmental Capital Intentions Unchanged Unquantified
Finance - Crown Overseas Properties Unchanged $150 million capital expenditure
Transport - Support for New Zealand Railways Corporation Changed Unquantified
Matters dependent on external factors    
ACC - Non-Earners' Account Changed Unquantified
ACC - Work-related Gradual Process Disease and Infection New Unquantified
ACC, Education, Health, Social Development - Caregiver Employment Conditions Changed Unquantified
Canterbury Earthquake - AMI Support Package Changed Unquantified
Canterbury Earthquake - EQC New Unquantified
Canterbury Earthquake - Exceeding the CERF Changed Unquantified
Climate Change - Finance for Developing Countries Unchanged Unquantified
Climate Change - International Climate Change Obligations Unchanged Unquantified
Climate Change - Kyoto Protocol Obligations Unchanged Unquantified
Communications - Potential Impairment in Value of Broadband Investment Changed Unquantified
Defence Force - Asset Valuations New Unquantified
Defence Force - Future Operationally Deployed Forces Activity Changed $10 to $30 million operating expenses per annum
Energy - Crown Revenue from Petroleum Royalties Unchanged Unquantified
Finance - Entities in Receivership under Crown Retail Deposit Guarantee Scheme Unchanged Unquantified
Finance - Extended Crown Retail Deposit Guarantee Scheme Changed Unquantified
Finance - Government Commitments to International Financial Institutions Changed Unquantified
Health - Payment of Family Caregivers Unchanged Unquantified
Revenue - Cash Held in Tax Pools Unchanged Unquantified
Transport - Response to the MV Rena Grounding New Unquantified
Treaty Negotiations - Treaty Settlement Forecast Unchanged Unquantified
Treaty Negotiations - Relativity Clause Unchanged Unquantified

Pending policy decisions affecting revenue

ACC - Levies (Changed, Unquantified)

Changes in tax settings, economic factors and ACC's financial performance affect ACC's expenses and levy income. If ACC's performance as a result of any of these factors is different from what is forecast, ACC may increase or decrease levies. An increase or decrease in levies has a flow-on impact on total Crown revenue with a corresponding impact on the operating balance before gains and losses.

Finance - Mixed Ownership Model (Unchanged, Unquantified)

The Government is considering applying the type of Mixed Ownership Model that is currently used for Air New Zealand to Genesis Energy, Meridian Energy, Mighty River Power and Solid Energy, and further reducing the Crown's shareholding in Air New Zealand. The final amount and timing of any cash proceeds, the flow-on effects for future dividend streams and any implementation costs are uncertain.

Revenue - Apportionment Rules for Mixed-Use Assets (Changed, Unquantified)

An issues paper has been released on the apportionment rules that apply to tax deductions for assets which are used to earn income and which are also partly used for private purposes. Any changes to those rules will have a positive impact on tax revenue.

Revenue - Income-Sharing Tax Credits (Unchanged, Quantified)

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

Revenue - Potential Tax Policy Changes (Changed, Unquantified)

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

  • the tax treatment of charitable giving
  • the imputation system
  • amortisation of capital-raising costs
  • the international tax review
  • the GST treatment of cross-border business activities
  • the tax treatment of hybrid instruments
  • the dividend review, and
  • the review of specified minerals rules.

The Government aggregates the revenue impacts of most tax policy changes, and measures on the work programme are expected to be revenue-neutral or positive in aggregate.

Revenue - Salary Trade-Offs (Changed, Unquantified)

The Government is reviewing the tax treatment of employee benefits traded off for salary, including the treatment of car parks. Any changes are expected to result in an increase in tax revenues.

Services funded by Third Party Revenue (Changed, Unquantified)

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

Pending policy decisions affecting expenses

Climate Change - Review of the Emissions Trading Scheme (Changed, Quantified)

A statutory review of the ETS was published on 15 September 2011, which included recommendations to change the ETS settings with an estimated fiscal cost of up to $585 million between 2013 and 2020, calculated at a $25 carbon price. These estimates are subject to change, based on emissions forecasts and the carbon price. There are other recommendations that have not yet been quantified fully by officials, as well as potential savings that could be used to achieve a fiscally neutral outcome.

Education - Early Childhood Education Funding (Changed, Unquantified)

Rising demand for Early Childhood Education (ECE) services and increased costs associated with inflation have the potential to raise the costs of Government subsidies to ECE services.

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

The Government has increased school operating grants in Budget 2011 to help meet increased costs associated with inflation. A risk remains that similar cost pressures will need to be addressed in future years.

Government Response to Wai 262 (New, Unquantified)

The Waitangi Tribunal released its report on the Wai 262 claim on 2 July 2011. The report focuses on the protection of Maori culture and identity, with a particular focus on matauranga Maori and associated taonga. The Tribunal’s recommendations are directed towards a number of Government agencies individually, as groups and across sectors. The Government is currently considering the Tribunal’s report and recommendations to fully understand their implications (including any fiscal implications).

Housing - Reform of Social Housing (Changed, Unquantified)

The Government has decided to change the policy settings for social housing. This includes increasing third party providers of social housing, increasing the effectiveness of financial assistance and focusing Housing New Zealand Corporation on providing social housing to those with the greatest housing need. Plans for implementation remain under development, but potentially represent a significant fiscal risk to the Crown. However, there may be offsetting financial benefits to the Crown if significant gains in efficiency are achieved.

Revenue - KiwiSaver Auto-Enrolment (New, Quantified)

In Budget 2011 the Government announced its intention to consult on the design of a one-off KiwiSaver auto-enrolment exercise to increase the number of KiwiSaver members. The Government has recently announced that it intends to proceed with auto-enrolment in 2014/15 subject to returning to surplus as planned.Depending on the timing, design features and take-up rate, an auto-enrolment exercise is likely to entail a one-off cost for kick-start payments to new members and ongoing additional costs for the Member Tax Credit. These costs could be in the order of $350 to $550 million over the first four years after the auto-enrolment took place.

Revenue - Transformation and Technology Renewal (Changed, Unquantified)

Inland Revenue is exploring options that will fundamentally change the way it manages its processes and data, in order to deliver smarter, modern services for less. Technology renewal is a key enabler to support Inland Revenue's future business model and focuses on sustaining current systems (ie, minimising known risks within existing technology), through to significant business process and technology changes. Any changes could impact tax revenue collections and/or have material administrative costs to implement.

Reviews of Public Services (Unchanged, Unquantified)

The Government has initiated a series of reviews to improve the effectiveness and efficiency of public services. Reviews may recommend, or result in, changes to service delivery and/or free up resources for reprioritisation within Votes or be used to meet pressures in other areas.

Social Development - Welfare Working Group Recommendations (Changed,Unquantified)

The Government is considering its response to the recommendations of the Welfare Working Group. Many of the recommendations would result in large upfront costs if adopted. The Government will make policy and funding decisions over the next year.

State Sector Employment Agreements (Unchanged, Unquantified)

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

Pending capital decisions

Agriculture and Forestry - Investment in Water Infrastructure (Changed, Unquantified)

In Budget 2011 the Government established a funding programme to support potential irrigation development projects to an investment-ready stage. The Government intends to consider investing up to $400 million of equity for the construction and operation of water harvesting, storage and off-farm distribution infrastructure as part of Budget 2013. The proposal will provide detailed advice on the key investment principles and the provision of a clear separation in the Crown's role in supporting scheme development and investment decisions.

Departmental Capital Intentions (Unchanged, Unquantified)

The Government requires 15 capital-intensive agencies to identify their capital spending intentions over the next 10 years based on current policy settings and certain demographic and inflation assumptions. The difference between capital intentions and currently available funding is material but the Government expects that these intentions will be managed back through a range of measures such as prioritisation, changes to asset utilisation, alternative methods of service delivery and changes to policy settings. Departmental capital intentions are risks to the extent that they cannot be managed through these mechanisms or funded through existing funding sources.

Finance - Crown Overseas Properties (Unchanged, Quantified)

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

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

The Government has agreed in principle to support a 10-year strategy for the New Zealand Railways Corporation (NZRC, trading as KiwiRail Group) to achieve a commercially viable rail network. A total of $750 million in capital over the years to 2012/13 is forecast as the Crown contribution towards the strategy, but its disbursement will be dependent on the approval of suitable business cases and demonstrable progress towards objectives. Budgets 2010 and 2011 provided $500 million in capital towards the strategy. KiwiRail will be submitting a case for the third tranche of the $750 million as part of Budget 2012.

KiwiRail has signalled that completing the strategy will require $243 million in 2013 and $90 million in 2014. These costs are consistent with the $1.1 billion expected over the life of the plan, but are not yet funded.

KiwiRail also has $442 million in debt to the Crown maturing in the forecast period, all of which may need to be refinanced. In Budget 2011 $250 million was refinanced and $180 million falls due in 2012/13.

Matters dependent on external factors

ACC - Non-Earners' Account (Changed, Unquantified)

Changes in tax settings, economic factors and ACC's financial performance affect the Crown's liability for claims by non-earners. This is most evident in changes in discount rates that affect the Outstanding Claims Liability. If ACC's performance is different from what is forecast as a result of any of these factors, the amount required to cover the costs of non-earners' claims for that year may be more or less than needed, resulting in unplanned savings or costs to the Crown.

ACC - Work-related Gradual Process Disease and Infection (New, Unquantified)

The Department of Labour, in conjunction with the ACC, is seeking Crown Law advice to clarify the legal interpretation of when Work-related Gradual Process Disease and Infection claims should be recognised: at the date that someone first presents to a health provider with an injury (ACC's current interpretation) or the date that a person is first exposed to the injury-causing event. If the interpretation is the latter, ACC would need to recognise the additional liability.

ACC, Education, Health, Social Development - Caregiver Employment Conditions (Changed, Unquantified)

On 12 September 2011 the Government approved a negotiated settlement for sleepover providers whose service contracts are funded from Vote Health. The Government will contribute to the employers' payment of backpay and increased wages but the increased service cost to Health has only been partially funded. There is also a risk that this decision will have implications for other Crown-funded services, resulting in flow-on costs in ACC, Education and Social Development.

Canterbury Earthquake - AMI Support Package (Changed, Unquantified)

The net cost to the Crown of the AMI Support Package is currently estimated to be $335 million. The two main risks around this estimate are the ultimate cost of claims related to the Canterbury earthquakes (around which there is still considerable uncertainty) and the level of proceeds from the sale of the remaining good AMI business. Although the risks could be positive or negative, the reported claims liability estimates are based on the 75th percentile of the Appointed Actuary's estimated distribution of claims and therefore include a significant contingency against further deterioration.

Canterbury Earthquake - EQC (New, Unquantified)

The Crown faces increased risk relating to the Earthquake Commission's (EQC) disaster cover because the Natural Disaster Fund (NDF) is expected to be depleted after settling current Canterbury earthquake claims. The Government is liable to meet any deficiency in the EQC's assets required to fund future claims under section 16 of the Earthquake Commission Act 1993.

The deficiency in the EQC's assets as a result of the Canterbury earthquakes is estimated at $490 million and the core Crown's net debt has increased to allow for this shortfall. The estimated amount is based on a number of forecast assumptions, including:

  • an actuarial estimate of the EQC's outstanding claims liability at 30 June 2011 (net of reinsurance recoveries)
  • expected future levy income, and
  • forecasts of ongoing operational costs, including reinsurance.

There is a high degree of uncertainty regarding the final cost of claims and reinsurance recoveries, which means the extent to which the EQC's assets are deficient is also highly uncertain. Measures to manage the risk associated with the deficiency in the short term, such as the purchase of additional reinsurance, may have a fiscal impact.

Future earthquakes or other natural disasters would increase the Crown's liability under section 16.

Given the significant impact of the Canterbury earthquakes on the Commission and its NDF the EQC may be reviewed, which could have a fiscal impact.

Canterbury Earthquake - Exceeding the CERF (Changed, Unquantified)

The Christchurch Earthquake Recovery Fund (CERF) was established in Budget 2011 to meet the Crown's costs of the Canterbury earthquakes. There are a number of pending decisions and possible eventualities that result in a risk that the CERF may be exceeded. These include:

  • Land decisions - many properties are still classified as orange or white. Further decisions on land zoning and associated Government policies have yet to be made. These may increase costs to the Crown. There is also a risk that the forecast net cost to the Crown of current Crown offers is understated, mainly due to uncertainty about the extent of recoveries from insurance.
  • Demolition and rockfall - the costs of demolition and mitigating rockfall risk are highly uncertain. The Crown may be required to provide a contribution towards costs not met by other parties.
  • Infrastructure - not all damage to infrastructure has been fully assessed. There is a risk that the damage is greater than currently expected, which would increase the costs to the Crown.
  • Contribution to Council costs - cost-sharing arrangements are yet to be finalised. There is a risk that the Crown share is greater than forecast, which would increase the costs to the Crown. This includes any potential Crown contribution towards the Central Business District Plan costs.
Climate Change - Finance for Developing Countries (Unchanged, Unquantified)

There is an international expectation that developed countries, including New Zealand, contribute finance to developing countries to support adaptation to, and mitigation of, the effects of climate change. Developed countries have committed to mobilising $US100 billion per year by 2020 to address the needs of developing countries. This would come from a wide variety of sources, both public and private.

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

The Government is currently taking part in international negotiations for a post-2012 international climate change agreement. Currently no rights or obligations are included in the fiscal forecasts for any post-2012 agreement because of the high levels of uncertainty. Any agreement could have significant financial implications, and will need to be recognised at the time.

Climate Change – Kyoto Protocol Obligations (Unchanged, Unquantified)

The fiscal impact of the Government's Kyoto Protocol obligations (2008 to 2012) is currently uncertain. An increase in New Zealand's net emissions or the future transfer of emission units offshore could reduce the net Kyoto position significantly. Increased allocation to emitters or increased participation by foresters under the ETS would negatively impact the Government's ETS position. The fiscal impact of any changes is dependent on the carbon price. The Government may also need to purchase emission units to meet its obligations, which would have a corresponding impact on net debt.

Communications - Potential Impairment in Value of Broadband Investment (Changed, Unquantified)

The Government has committed to capitalise Crown Fibre Holdings with $1.345 billion so that it can invest with private partners in a new network delivering “ultra fast” broadband services. Crown Fibre Holdings has entered into contracts with several partners. Given the nature of the investments made, it is possible that the full value of the investments will not be recovered. The fiscal forecasts include a provision for this impairment, but the final amount of the impairment may vary from this provision.

Defence Force - Asset Valuations (New, Unquantified)

The New Zealand Defence Force is undertaking a wide-ranging review and implementing actions to improve its business as a result of the recent Defence White Paper. The work is expected to test assumptions around asset valuations and operating norms, which may lead to changes to valuations and have an impact on the operating balance.

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

New Zealand Defence Force personnel are deployed overseas on peace-keeping and United Nations missions. Deployments come with the risk of unforeseen events happening that could incur large costs - for example, the loss of a major military asset in a hostile environment. In addition, maintaining existing deployment levels would result in increased annual operating funding being required. The magnitude of both of these is estimated to be between $10 million and $30 million annually (but could potentially exceed this), subject to any decisions to change existing deployments.

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

The Crown Revenue from Petroleum Royalties is very dependent upon the US dollar value per barrel of oil and the exchange rate. Movements up or down in either of these variables could result in a significant decrease or increase in the Crown revenue. The overall impact for the Crown could therefore be negative or positive. In addition, the Government is currently reviewing the regulatory, royalty and taxation arrangements for petroleum as part of the Petroleum Action Plan. Although the outcomes of this review are still uncertain, any changes to policies in this area could have a significant impact on future revenue from petroleum royalties.

Finance - Entities in Receivership under Crown Retail Deposit Guarantee Scheme (Unchanged, Unquantified)

Eight entities that were guaranteed under the original Deposit Guarantee Scheme and one that was guaranteed under the extended scheme are now in receivership. The Crown recognises its obligations under the schemes as liabilities and its rights of recovery from the receivers as assets. While the reported assets represent the receivers' best prudent estimates of likely recoveries from the receiverships, the eventual return to the Crown is uncertain and dependent upon the value that can be realised from these entities' assets.

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

There are three financial institutions participating in the extended Retail Deposit Guarantee Scheme, which ends on 31 December 2011. These entities have deposits totalling $1.3 billion covered by the guarantee and are listed on the Treasury website. This is the maximum exposure and does not include any offset resulting from the recovery of the remaining assets of financial institutions in the event the guarantee is called upon. The entities participating in the extended scheme are currently assessed as unlikely to default and therefore no provision is considered necessary in relation to the amount guaranteed by the Crown under the extended guarantee. While this represents a best estimate of the expected outcome, a range of outcomes is possible if entities default, including eventual loss to the Crown.

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

The forecast level of government commitments to international financial institutions is subject to change, depending on the Government's response to any changed financial plans on the part of these institutions. The risk of government commitments to the International Monetary Fund being called has increased due to the Global Financial Crisis and recent world events, including in the Euro area.

Health - Payment of Family Caregivers (Unchanged, Unquantified)

The Human Rights Tribunal and High Court have ruled that the Ministry of Health's policy of not employing family members to provide care to disabled relatives is in breach of section 19 of the New Zealand Bill of Rights. Leave has been granted to appeal to the Court of Appeal.

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

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

Transport - Response to the MV Rena Grounding (New, Unquantified)

On Wednesday 5 October the cargo ship MV Rena was grounded on the Astrolabe Reef. The grounding resulted in New Zealand's largest marine oil spill. The Rena has a number of containers with hazardous substances in them. Some containers have fallen into the sea and more may also fall. Maritime New Zealand (MNZ) must maintain a reserve to fund an initial response to an oil pollution event and at 30 June 2011 this stood at $3.5 million. The fiscal forecasts also include an additional $12.1 million that the Government has approved for MNZ to fund the clean-up. Under the Maritime Transport Act 1994, some costs of a clean-up can be sought from the polluter. The total cost of the clean-up, salvage response and the contribution of the polluter are not yet known, and therefore additional funding may be required.

Treaty Negotiations - Treaty Settlement Forecast (Unchanged, Unquantified)

The fiscal forecasts include provision for the cost of future Treaty settlements. There is a risk that the timing and amount of the settlements could be different from what is forecast. It is not possible to reliably estimate the value of this difference.

Treaty Negotiations - Relativity Clause (Unchanged, Unquantified)

The Deeds of Settlement negotiated with Waikato-Tainui and Ngai Tahu include a relativity mechanism. The mechanism provides that, where the total redress amount for all historical Treaty settlements exceeds $1 billion in 1994 present-value terms, the Crown is liable to make payments to maintain the real value of Ngai Tahu’s and Waikato-Tainui’s settlements as a proportion of all Treaty settlements. The agreed relativity proportions are 17% for Waikato-Tainui and approximately 16% for Ngai Tahu. There is a risk that the timing and the amount of the expense for the relativity payments may differ from that included in the fiscal forecasts.

Risks Removed Since the 2011 BEFU

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

Risks Removed Since the 2011 BEFU
Expired risks Reason
Defence Force - Sale of Skyhawks and Aermacchi Trainers Decision taken to dispose of Skyhawks and Aermacchi Trainers element does not meet materiality threshold
Housing - Weathertight Homes No longer material
Justice - Legal Aid Some decisions taken, no longer material
Revenue - Child Support No longer material
Revenue - Student Loans Redesign Decision taken
Social Development - ServiceLink Project scaled back, no longer material
State Services - KiwiSaver Contribution Decision taken, risk now managed within departments

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

The Public Finance Act requires that the Statement of Specific Fiscal Risks sets out all government decisions, contingent liabilities or contractual obligations known to the Government and subject to specific requirements that may have a material effect on the economic or fiscal outlook.[14]

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

Notes

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

Criteria for Including Matters in the Fiscal Forecasts

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

  • The matter can be quantified for particular years with reasonable certainty.
  • A decision has been taken, or a decision has not yet been taken but it is reasonably probable[15] the matter will be approved, or it is reasonably probable the situation will occur.

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

Notes

  • [15]For these purposes “reasonably probable” is taken to mean that the matter is more likely than not to be approved within the forecast period (by considering, for example, whether there is a better than 50% chance of the matter occurring or being approved).

Rules for the Disclosure of Specific Fiscal Risks

Matters are disclosed as specific fiscal risks if:

  • the likely cost is more than $100 million over five years, and either
  • a decision has not yet been taken but it is reasonably possible[16] (but not probable) that the matter will be approved or the situation will occur, or
  • it is reasonably probable that the matter will be approved or the situation will occur, but the matter cannot be quantified or assigned to particular years with reasonable certainty.

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

Notes

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

Exclusions from Disclosure

Matters are excluded from disclosure as specific fiscal risks if they fail to meet the materiality criterion (ie, are less than $100 million over five years), or if they are unlikely[17] to be approved or occur within the forecasting period.

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

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

If possible, the Minister of Finance should avoid withholding the matter either by making a decision on it before the forecasts are finalised, or by disclosing it as an unquantified risk.

Notes

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

Contingent Liabilities

Contingent liabilities are:

  • costs that the Crown will have to face if a particular event occurs, or
  • present liabilities that are unable to be measured with sufficient reliability to be recorded in the financial statements (unquantifiable liabilities).

Typically, contingent liabilities consist of guarantees and indemnities, 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, or the amount becomes sufficiently reliable to record as a liability, it would reduce the operating balance and net worth and increase gross sovereign-issued debt. However, in the case of contingencies for uncalled capital, the negative impact would be restricted to gross sovereign-issued debt.

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

Only contingent liabilities involving amounts of over $10 million are separately disclosed. Contingent liabilities less than $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 2011, being the latest set of published contingent liabilities.

Details of each of the following contingent liabilities can be accessed from the Treasury website at http://www.treasury.govt.nz/budget/forecasts/prefu2011.

Quantifiable Contingent Liabilities

Quantifiable Contingent Liabilities
Guarantees and indemnities Status [18] ($ million)
Air New Zealand - letters of credit and performance bonds Unchanged 34
Cook Islands – Asian Development Bank loans Unchanged 12
Indemnification of receivers and managers - Terralink Limited Unchanged 10
Ministry of Transport - funding guarantee Unchanged 10
Other guarantees and indemnities Unchanged 12
    78

Uncalled capital

   
Asian Development Bank Unchanged 2,995
Bank for International Settlements Unchanged 23
European Bank for Reconstruction and Development Unchanged 12
International Bank for Reconstruction and Development Unchanged 991
Other uncalled capital Unchanged 12
    4,033

Legal proceedings and disputes

   
Health - legal claims Unchanged 18
Tax disputes Unchanged 281
Other legal proceedings and disputes Unchanged 32
    331

Other quantifiable contingent liabilities

   
Air New Zealand partnership Unchanged 77
Crown Health Financing Agency Unchanged 24
Inland Revenue Department - unclaimed monies Unchanged 55
International finance organisations Unchanged 1,254
Kyoto Protocol units Unchanged 997
New Zealand Export Credit Office – export guarantees Unchanged 132
NZTA - Auckland City Council Unchanged 10
Reserve Bank - demonetised currency Unchanged 23
Other quantifiable contingent liabilities Unchanged 127
    2,699
Total quantifiable contingent liabilities   7,141

Notes

  • [18]Relative to reporting in the Financial Statements of the New Zealand Government for the year ending 30 June 2011.

Unquantifiable Contingent Liabilities

Unquantifiable Contingent Liabilities
  Status

Guarantees and indemnities

 
Air New Zealand Unchanged
Airways Corporation of New Zealand Unchanged
AsureQuality Limited Unchanged

At Work Insurance Limited

Unchanged

Bona Vacantia property Unchanged
Building Industry Authority Unchanged
Civil Defence Emergency Management - New Zealand Local Authorities Unchanged
Contact Energy Limited Unchanged
Deposit Guarantee Schemes Unchanged
Electricity Corporation of New Zealand Limited Unchanged
Genesis Energy - financial guarantees Unchanged
Genesis Energy - letters of credit and performance bonds Unchanged
Housing New Zealand Corporation Unchanged
Indemnities against acts of war and terrorism Unchanged
Justices of the Peace, Community Magistrates and Disputes Tribunal Referees Unchanged
Landcorp Farming Limited Unchanged
Maui Partners Unchanged
Meridian Energy - letters of credit and performance bonds Unchanged
National Provident Fund Unchanged
New Zealand Railways Corporation Unchanged
Persons exercising investigating powers Unchanged
Public Trust Unchanged
Reserve Bank of New Zealand Unchanged
Synfuels-Waitara Outfall Indemnity Unchanged
Tainui Corporation Unchanged
Canterbury Earthquakes:  
   Earthquake Commission Unchanged
   Land Zones Unchanged
   Civil Defence Emergency Management - Canterbury Local Authorities Unchanged
   Properties acquired under the Canterbury Red Zone Support Package Unchanged

Other unquantifiable contingent liabilities

 
Abuse claims Unchanged
Accident Compensation Corporation litigations Unchanged
Air New Zealand litigation Unchanged
Environmental liabilities Unchanged
Family caregivers Unchanged
Kordia Group Limited Unchanged
Maui Contracts Unchanged
Rugby World Cup 2011 Unchanged
Television New Zealand Unchanged
Treaty of Waitangi claims Unchanged
Treaty of Waitangi claims - settlement relativity payments Unchanged
Westpac New Zealand Limited Unchanged
 
Contingent assets Status
Legal proceedings and tax disputes Unchanged
Suspensory loans to integrated schools Unchanged

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 11 October 2011.

The key assumptions that underpin the preparation of the Forecast Financial Statements are outlined on pages 33 to 36.

Statement of Accounting Policies

Significant Accounting Policies

These forecast financial statements have been prepared in accordance with the accounting policies that are expected to be used in the comparable audited actual financial statements of the Government.

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

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

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

Changes in Accounting Policies

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

Forecast Policies

These forecast financial statements have been prepared on the basis of the Treasury's best professional judgement.

Actual financial results for the periods covered are likely to vary from the information presented. Factors that may lead to a material difference between information in these forecast financial statements and the actual reported results in future years are set out in the chapter on Fiscal Risks on pages 57 to 74.

Key forecast assumptions used are set out on pages 33 to 36.

Government Reporting Entity as at 11 October 2011

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

Core Crown

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

State-owned enterprises

  • AMI Insurance Limited*
  • Air New Zealand Limited*
  • 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)
  • Transpower New Zealand Limited

Subsidiaries of SOEs are consolidated by their parents and not listed separately in this table

* included for disclosure purposes as if they were an SOE

Crown entities

  • Accident Compensation Corporation
  • 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 Commisson
  • Crown Health Financing Agency
  • Crown Research Institutes (8)
  • District Health Boards (20)
  • Drug Free Sport New Zealand
  • Earthquake Commission
  • Electricity Authority
  • Electoral Commission
  • Energy Efficiency and Conservation Authority
  • Environmental Protection Authority
  • External Reporting Board
  • Families Commission
  • Financial Markets Authority
  • Government Superannuation Fund Authority
  • Guardians of New Zealand Superannuation
  • Health and Disability Commissioner
  • Health Quality and Safety Commission
  • Health Research Council of New Zealand
  • Health Sponsorship Council
  • Housing New Zealand Corporation
  • Human Rights Commission
  • Independent Police Conduct Authority
  • Law Commission
  • Maritime Safety Authority of New Zealand
  • Mental Health Commission
  • Museum of New Zealand Te Papa Tongarewa Board
  • New Zealand Antarctic Institute
  • New Zealand Artificial Limb Board
  • New Zealand Blood Service
  • New Zealand Film Commission
  • New Zealand Fire Service Commission
  • New Zealand Historic Places Trust (Pouhere Taonga)
  • New Zealand Lotteries Commission
  • New Zealand Productivity Commission
  • New Zealand Qualifications Authority
  • New Zealand Symphony Orchestra
  • New Zealand Teachers Council
  • New Zealand Tourism Board
  • New Zealand Trade and Enterprise
  • New Zealand Transport Agency
  • New Zealand Venture Investment Fund Limited
  • New Zealand Walking Access Commission
  • Office of Film and Literature Classification
  • Pharmaceutical Management Agency
  • Privacy Commissioner
  • Public Trust
  • Radio New Zealand Limited
  • Real Estate Agents Authority
  • Retirement Commissioner
  • School Boards of Trustees (2,481)
  • Social Workers Registration Board
  • Sport and Recreation New Zealand
  • Standards Council
  • Takeovers Panel
  • Te Reo Whakapuaki Irirangi (Te Mangai Paho)
  • Te Taura Whiri i te Reo Maori (Maori Language Commission)
  • Television New Zealand Limited
  • Tertiary Education Commission
  • Tertiary education institutions (29)
  • 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 of the Public Finance Act 1989

  • Agriculture and Marketing Research and Development Trust
  • Asia New Zealand Foundation
  • Crown Fibre Holdings Limited
  • Dispute Resolution Services Limited
  • Fish and Game Councils (12)
  • Health Benefits Limited
  • Leadership Development Centre Trust
  • Learning State Limited
  • National Pacific Radio Trust
  • New Zealand Fish and Game Council
  • New Zealand Game Bird Habitat Trust Board
  • New Zealand Government Property Corporation
  • New Zealand Lottery Grants Board
  • Ngai Tahu Ancillary Claims Trust
  • Pacific Co-operation Foundation
  • Pacific Island Business Development Trust
  • Research and Education Advanced Network New Zealand Limited
  • Reserves Boards (23)
  • Road Safety Trust
  • Sentencing Council
  • Te Ariki Trust
  • The Maori Trustee

Forecast Statement of Financial Performance for the years ending 30 June

Forecast Statement of Financial Performance
for the years ending 30 June
  Note 2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m

Revenue

               
Taxation revenue 1 51,128 54,690 54,957 58,571 62,885 66,869 70,642
Other sovereign revenue 1 5,281 5,808 5,563 5,731 6,118 6,366 6,951
Total revenue levied through the Crown's sovereign power   56,409 60,498 60,520 64,302 69,003 73,235 77,593
Sales of goods and services   15,084 16,078 16,825 17,314 18,426 19,164 19,941
Interest revenue and dividends 2 2,570 3,051 2,814 3,308 3,688 4,259 4,537
Other revenue   7,500 3,106 3,478 3,563 3,698 3,778 3,816
Total revenue earned through the Crown's operations   25,154 22,235 23,117 24,185 25,812 27,201 28,294
Total revenue (excluding gains)   81,563 82,733 83,637 88,487 94,815 100,436 105,887

Expenses

               
Transfer payments and subsidies 3 22,172 22,926 22,580 23,175 23,686 24,540 25,591
Personnel expenses 4 19,088 19,149 19,536 19,773 19,967 20,219 20,490
Depreciation and amortisation 5 4,682 4,631 4,562 4,797 4,931 4,988 5,067
Other operating expenses 5 35,829 37,792 40,685 35,782 36,180 36,720 37,505
Interest expenses 6 3,596 4,685 3,959 4,464 4,901 5,389 5,458
Insurance expenses 7 14,592 3,138 3,751 4,140 4,405 4,298 4,841
Forecast new operating spending 8 - 463 473 1,094 1,788 2,932 3,959
Top-down expense adjustment 8 - (310) (1,100) (300) (100) (100) (100)
Total expenses (excluding losses)   99,959 92,474 94,446 92,925 95,758 98,986 102,811
Operating balance before gains/(losses)   (18,396) (9,741) (10,809) (4,438) (943) 1,450 3,076
Net gains/(losses) on financial instruments 9 4,619 1,973 (4) 1,588 2,055 2,062 2,132
Net gains/(losses) on non-financial instruments 10 79 172 (2,064) 191 170 176 185
Total gains/(losses)   4,698 2,145 (2,068) 1,779 2,225 2,238 2,317
Net surplus from associates and joint ventures   237 303 276 284 294 286 308
Operating balance (including minority interest)   (13,461) (7,293) (12,601) (2,375) 1,576 3,974 5,701
Attributable to minority interest   101 - - - - - -
Operating balance 11 (13,360) (7,293) (12,601) (2,375) 1,576 3,974 5,701

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

Forecast Statement of Financial Performance (continued) - Functional Expense Analysis
for the years ending 30 June
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m

Total Crown expenses

             

By functional classification

             
Social security and welfare 25,324 26,353 26,047 27,182 28,054 28,961 30,335
GSF pension expenses 311 311 210 307 387 442 474
Health 13,068 13,787 13,809 13,676 13,594 13,597 13,597
Education 12,406 13,005 13,052 12,987 12,957 13,116 13,336
Core government services 5,515 5,440 7,018 4,300 4,395 4,366 4,287
Law and order 3,567 3,745 3,823 3,750 3,724 3,737 3,748
Defence 1,778 1,872 1,856 1,876 1,827 1,825 1,823
Transport and communications 8,402 8,584 8,943 8,939 9,192 9,448 9,733
Economic and industrial services 18,818 7,758 8,884 8,413 8,766 8,626 9,120
Primary services 1,603 1,700 1,710 1,652 1,654 1,656 1,639
Heritage, culture and recreation 3,437 3,327 3,898 3,015 3,039 3,329 3,704
Housing and community development 1,655 1,119 1,158 1,082 1,094 1,177 1,213
Other 479 635 706 488 486 485 485
Finance costs 3,596 4,685 3,959 4,464 4,901 5,389 5,458
Forecast new operating spending - 463 473 1,094 1,788 2,932 3,959
Top-down expense adjustment - (310) (1,100) (300) (100) (100) (100)
Total Crown expenses excluding losses 99,959 92,474 94,446 92,925 95,758 98,986 102,811

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

Analysis of core Crown expenses by functional classification
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m

Core Crown expenses

             

By functional classification

             
Social security and welfare 22,005 22,935 22,560 23,252 23,829 24,471 25,536
GSF pension expenses 305 302 201 298 377 433 464
Health 13,753 14,353 14,350 14,330 14,239 14,233 14,224
Education 11,650 12,257 12,269 12,205 12,099 12,227 12,420
Core government services 5,563 5,564 7,138 4,390 4,474 4,450 4,368
Law and order 3,382 3,555 3,635 3,539 3,511 3,509 3,510
Defence 1,809 1,911 1,903 1,917 1,867 1,866 1,864
Transport and communications 2,281 2,378 2,468 2,128 2,079 2,136 2,025
Economic and industrial services 2,609 2,235 2,529 1,922 1,855 1,876 1,906
Primary services 706 755 783 705 688 686 663
Heritage, culture and recreation 1,966 1,947 2,490 1,542 1,494 1,738 2,084
Housing and community development 876 333 400 313 313 328 281
Other 479 635 706 488 486 485 485
Finance costs 3,066 3,714 3,655 3,789 3,921 4,313 4,345
Forecast new operating spending - 463 473 1,094 1,788 2,932 3,959
Top-down expense adjustment - (310) (1,100) (300) (100) (100) (100)
Total core Crown expenses excluding losses 70,450 73,027 74,460 71,612 72,920 75,583 78,034

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

Forecast Statement of Comprehensive Income for the years ending 30 June

Forecast Statement of Comprehensive Income for the years ending 30 June
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
Revaluation of physical assets (443) - - - (1) - -
Effective portion of changes in the fair value of cash flow hedges (252) 3 7 (1) 1 4 -
Net change in fair value of cash flow hedges transferred to operating balance 17 - 1 1 - - 1
Net change in fair value of cash flow hedges transferred to the hedged item 95 (7) (21) (2) - - -
Foreign currency translation differences for foreign operations (37) (6) 6 24 - - -
Valuation gain/(losses) on investments available for sale taken to reserves (1) 6 3 8 10 13 14
Other movements 1 50 - 2 1 (3) (1)
Other comprehensive income for the year (620) 46 (4) 32 11 14 14
Operating balance (including minority interest) (13,461) (7,293) (12,601) (2,375) 1,576 3,974 5,701
Total comprehensive income (14,081) (7,247) (12,605) (2,343) 1,587 3,988 5,715

Attributable to:

             
- minority interest (74) - - - - - -
- the Crown (14,007) (7,247) (12,605) (2,343) 1,587 3,988 5,715
Total comprehensive income (14,081) (7,247) (12,605) (2,343) 1,587 3,988 5,715

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

Forecast Statement of Cash Flows for the years ending 30 June

Forecast Statement of Cash Flows for the years ending 30 June
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m

Cash flows from operations

             

Cash was provided from

             
Taxation receipts 50,418 53,959 54,070 57,810 62,231 66,168 69,872
Other sovereign receipts 4,693 4,878 4,884 4,722 4,784 4,867 5,221
Sales of goods and services 14,899 16,046 16,424 17,159 18,363 18,941 19,664
Interest and dividend receipts 2,682 2,594 2,602 3,001 3,291 3,785 3,992
Other operating receipts 2,990 4,536 5,164 5,728 4,333 4,164 3,771
Total cash provided from operations 75,682 82,013 83,144 88,420 93,002 97,925 102,520

Cash was disbursed to

             
Transfer payments and subsidies 22,172 23,435 23,089 23,265 23,782 24,634 25,685
Personnel and operating payments 55,152 59,108 62,029 60,788 59,999 59,746 57,952
Interest payments 3,107 4,583 4,100 4,903 5,085 5,748 5,748
Forecast new operating spending - 463 623 944 1,788 2,932 3,959
Top-down expense adjustment - (310) (1,100) (300) (100) (100) (100)
Total cash disbursed to operations 80,431 87,279 88,741 89,600 90,554 92,960 93,244
Net cash flows from operations (4,749) (5,266) (5,597) (1,180) 2,448 4,965 9,276

Cash flows from investing activities

             

Cash was provided from/(disbursed to)

             
Net purchase of physical assets (5,996) (7,852) (7,841) (6,656) (6,305) (5,939) (6,343)
Net purchase of shares and other securities (8,405) 5,831 (2) 3,862 (9,249) (2,205) (9,223)
Net purchase of intangible assets (600) (532) (582) (446) (407) (345) (345)
Net repayment/(issues) of advances (1,003) (2,039) (1,673) (2,229) (2,075) (2,061) (1,739)
Net acquisition of investments in associates 173 (137) (30) (10) (1) (1) (1)
Forecast new capital spending - (242) (192) (452) (651) (800) (900)
Balance sheet funding of new capital spending - 100 (50) 125 560 790 835
Top-down capital adjustment - 170 350 - - - -
Net cash flows from investing activities (15,831) (4,701) (10,020) (5,806) (18,128) (10,561) (17,716)
Net cash flows from operating and investing activities (20,580) (9,967) (15,617) (6,986) (15,680) (5,596) (8,440)

Cash flows from financing activities

             

Cash was provided from/(disbursed to)

             
Issues of circulating currency 234 219 89 218 229 240 252
Net issue/(repayment) of Government stock1 21,088 4,774 10,312 4,603 13,125 1,293 8,384
Net issue/(repayment) of foreign-currency borrowings 1,809 (6,639) (7,720) (549) (702) (1,199) (1,143)
Net issue/(repayment) of other New Zealand dollar borrowings 81 11,390 12,454 2,843 3,829 5,316 1,413
Net cash flows from financing activities 23,212 9,744 15,135 7,115 16,481 5,650 8,906
Net movement in cash 2,632 (223) (482) 129 801 54 466
Opening cash balance 7,774 9,103 9,801 9,185 9,261 10,009 10,010
Foreign-exchange gains/(losses) on opening cash (605) 6 (134) (53) (53) (53) (53)
Closing cash balance 9,801 8,886 9,185 9,261 10,009 10,010 10,423

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

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

Forecast Statement of Cash Flows (continued) for the years ending 30 June
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m

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

             
Net cash flows from operations (4,749) (5,266) (5,597) (1,180) 2,448 4,965 9,276
Items included in the operating balance
but not in net cash flows from operations
             

Gains/(losses)

             
Net gains/(losses) on financial instruments 4,619 1,973 (4) 1,588 2,055 2,062 2,132
Net gains/(losses) on non-financial instruments 79 172 (2,064) 191 170 176 185
Total gains/(losses) 4,698 2,145 (2,068) 1,779 2,225 2,238 2,317

Other non-cash items in operating balance

             
Depreciation and amortisation (4,682) (4,631) (4,562) (4,797) (4,931) (4,988) (5,067)
Write-down on initial recognition of financial assets (807) (806) (798) (779) (794) (794) (803)
Impairment on financial assets (excl. receivables) 105 85 79 149 142 135 124
Decrease/(increase) in defined benefit retirement plan liabilities 358 377 475 392 320 273 251
Decrease/(increase) in insurance liabilities (13,179) 1,269 2,460 2,086 1,697 303 (1,770)
Other 238 307 281 284 293 290 308
Total other non-cash Items (17,967) (3,399) (2,065) (2,665) (3,273) (4,781) (6,957)

Movements in working capital

             
Increase/(decrease) in receivables 6,605 (1,081) (1,532) (2,877) (683) (157) 127
Increase/(decrease) in accrued interest (599) 356 353 745 580 833 835
Increase/(decrease) in inventories 149 70 11 99 29 33 (10)
Increase/(decrease) in prepayments 39 (3) 4 (12) 39 (1) 2
Decrease/(increase) in deferred revenue (46) 62 164 30 20 (2) (6)
Decrease/(increase) in payables/provisions (1,490) (177) (1,871) 1,706 191 846 117
Total movements in working capital 4,658 (773) (2,871) (309) 176 1,552 1,065
Operating balance (13,360) (7,293) (12,601) (2,375) 1,576 3,974 5,701

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

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

Forecast Statement of Changes in Net Worth for the years ending 30 June
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
Opening net worth 94,988 85,519 80,887 68,282 65,939 67,526 71,514
Operating balance (including minority interest) (13,461) (7,293) (12,601) (2,375) 1,576 3,974 5,701
Net revaluations (443) - - - (1) - -
Transfers to/(from) reserves (278) 53 7 1 2 1 (1)
(Gains)/losses transferred to the Statement of Financial Performance 17 - 1 1 - - 1
Other movements 84 (7) (12) 30 10 13 14
Total comprehensive income (14,081) (7,247) (12,605) (2,343) 1,587 3,988 5,715
Transactions with minority interest in Air New Zealand (20) - - - - - -
Closing net worth 80,887 78,272 68,282 65,939 67,526 71,514 77,229

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

Forecast Statement of Financial Position as at 30 June

Forecast Statement of Financial Position as at 30 June
  Note 2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m

Assets

               
Cash and cash equivalents 12 9,801 8,886 9,185 9,261 10,009 10,010 10,423
Receivables 12 21,690 16,709 18,798 15,922 15,239 15,081 15,395
Marketable securities, deposits and derivatives in gain 12 49,056 43,034 42,497 33,836 38,441 35,430 38,735
Share investments 12 14,248 16,095 18,443 20,695 22,300 24,504 26,958
Advances 12 20,567 22,433 22,181 24,228 26,345 28,484 30,501
Inventory   1,308 1,380 1,320 1,419 1,448 1,481 1,471
Other assets   1,996 1,662 1,946 1,959 1,958 1,965 1,986
Property, plant and equipment 14 114,854 121,186 119,067 121,919 124,174 126,129 128,397
Equity accounted investments1   9,301 9,613 9,689 9,867 10,036 10,263 10,494
Intangible assets and goodwill 15 2,394 2,714 2,597 2,662 2,717 2,705 2,680
Forecast for new capital spending (net) 8 - 142 242 569 660 670 735
Top-down capital adjustment   - (270) (350) (350) (350) (350) (350)
Total assets   245,215 243,584 245,615 241,987 252,977 256,372 267,425

Liabilities

               
Issued currency   4,254 4,598 4,361 4,579 4,808 5,048 5,300
Payables 17 11,099 9,603 12,303 11,968 12,630 12,955 13,631
Deferred revenue   1,674 1,371 1,510 1,481 1,460 1,463 1,469
Borrowings   90,245 101,383 101,237 103,850 115,136 115,530 118,893
Insurance liabilities 18 39,314 30,533 38,272 36,185 34,488 34,185 35,955
Retirement plan liabilities 19 10,156 8,895 10,581 10,189 9,869 9,596 9,344
Provisions 20 7,586 8,929 9,069 7,796 7,060 6,081 5,604
Total liabilities   164,328 165,312 177,333 176,048 185,451 184,858 190,196
Total assets less total liabilities   80,887 78,272 68,282 65,939 67,526 71,514 77,229

Net worth

               
Taxpayer funds 21 18,188 14,463 5,631 3,322 4,934 8,933 14,661
Property, plant and equipment revaluation reserve 21 62,690 63,614 62,646 62,582 62,546 62,518 62,490
Other reserves 21 (299) (207) (303) (273) (262) (245) (230)
Total net worth attributable to the Crown   80,579 77,870 67,974 65,631 67,218 71,206 76,921
Net worth attributable to minority interest   308 402 308 308 308 308 308
Total net worth   80,887 78,272 68,282 65,939 67,526 71,514 77,229

Note 1: Tertiary education institutions constitute most equity accounted investments.

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

Forecast Statement of Borrowings as at 30 June

Forecast Statement of Borrowings as at 30 June
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m

Borrowings

             
Government stock 46,018 52,145 52,630 53,262 62,322 59,073 61,454
Treasury bills 7,028 7,707 8,997 8,613 8,543 8,474 8,415
Government retail stock 261 270 258 258 258 258 258
Settlement deposits with Reserve Bank 6,276 6,736 5,429 5,429 5,429 5,429 5,429
Derivatives in loss 2,767 1,559 2,638 2,377 2,126 2,055 2,017
Finance lease liabilities 1,176 1,492 1,556 1,463 1,512 1,704 1,721
Other borrowings 26,719 31,474 29,729 32,448 34,946 38,537 39,599
Total borrowings 90,245 101,383 101,237 103,850 115,136 115,530 118,893
Total sovereign-guaranteed debt 67,765 74,900 76,415 76,327 85,143 83,248 84,788
Total non-sovereign-guaranteed debt 22,480 26,483 24,822 27,523 29,993 32,282 34,105
Total borrowings 90,245 101,383 101,237 103,850 115,136 115,530 118,893

Net debt:

             
Core Crown borrowings1 76,885 83,195 84,636 84,762 93,271 92,086 94,878
Add back NZS Fund holdings of sovereign-issued debt and NZS Fund borrowings 405 (231) (872) (777) (883) (972) (1,105)
Gross sovereign-issued debt2 77,290 82,964 83,764 83,985 92,388 91,114 93,773
Less core Crown financial assets3 65,400 59,728 61,028 53,855 59,987 57,946 61,708
Net core Crown debt (incl. NZS Fund)4 11,890 23,236 22,736 30,130 32,401 33,168 32,065
Add back NZS Fund holdings of core Crown financial assets and NZS
Fund financial assets5
16,159 19,068 18,171 19,371 21,097 22,871 24,759
Net core Crown debt (excl. NZS Fund)4 28,049 42,304 40,907 49,501 53,498 56,039 56,824
Core Crown advances 12,079 12,568 12,916 13,650 14,277 15,285 15,710
Net core Crown debt (excl. NZS Fund and advances)6 40,128 54,872 53,823 63,151 67,775 71,324 72,534

Gross debt:

             
Gross sovereign-issued debt2 77,290 82,964 83,764 83,985 92,388 91,114 93,773
Less Reserve Bank settlement cash and bank bills (6,470) (6,800) (5,585) (5,585) (5,585) (5,585) (5,585)
Add back changes to DMO borrowing owing to settlement cash7 1,600 1,600 1,600 1,600 1,600 1,600 1,600
Gross sovereign-issued debt excluding Reserve Bank settlement
cash and bank bills4
72,420 77,764 79,779 80,000 88,403 87,129 89,788

Notes on borrowings

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

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

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

Statement of Actual Commitments as at 30 June 2011

Statement of Actual Commitments as at 30 June 2011
  As at
30 June
2011
$m
As at
30 June
2010
$m

Capital commitments

   
Specialist military equipment 369 422
Land and buildings 701 849
Other property, plant and equipment 7,032 6,370
Other capital commitments 408 224
Tertiary Education Institutions 413 302
Total capital commitments 8,923 8,167

Operating commitments

   
Non-cancellable accommodation leases 2,909 2,862
Other non-cancellable leases 3,171 3,230
Non-cancellable contracts for the supply of goods and services 5,520 6,254
Other operating commitments 7,415 7,634
Tertiary Education Institutions 366 304
Total operating commitments 19,381 20,284
Total commitments 28,304 28,451

Total commitments by segment

   
Core Crown 22,129 20,983
Crown entities 12,925 13,811
State-owned enterprises 10,410 11,238
Inter-segment eliminations (17,160) (17,581)
Total commitments 28,304 28,451

Statement of Actual Contingent Liabilities and Assets as at 30 June 2011

Statement of Actual Contingent Liabilities and Assets as at 30 June 2011
  As at
30 June
2011
$m
As at
30 June
2010
$m

Quantifiable contingent liabilities

   
Guarantees and indemnities 78 106
Uncalled capital 4,033 2,310
Legal proceedings and disputes 331 414
Other contingent liabilities 2,699 3,535
Total quantifiable contingent liabilities 7,141 6,365

Total quantifiable contingent liabilities by segment

   
Core Crown 6,884 6,050
Crown entities 173 171
State-owned enterprises 84 144
Inter-segment eliminations - -
Total quantifiable contingent liabilities 7,141 6,365

Quantifiable contingent assets by segment

   
Core Crown 702 570
Crown entities 2 2
Total quantifiable contingent assets 704 572

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

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

Notes to the Forecast Financial Statements

NOTE 1: Revenue collected through the Crown's sovereign power

NOTE 1: Revenue collected through the Crown's sovereign power
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m

Taxation revenue (accrual)

             

Individuals

             
Source deductions 20,857 21,165 21,304 22,739 24,334 26,052 27,825
Other persons 3,791 4,342 4,290 4,426 4,633 4,804 5,028
Refunds (1,679) (1,656) (1,616) (1,531) (1,499) (1,444) (1,458)
Fringe benefit tax 462 430 440 458 482 512 542
Total individuals 23,431 24,281 24,418 26,092 27,950 29,924 31,937

Corporate tax

             
Gross companies tax 6,687 7,978 8,025 8,278 8,826 9,238 9,462
Refunds (197) (400) (260) (284) (299) (326) (338)
Non-resident withholding tax 467 508 427 478 536 589 630
Foreign-source dividend w/holding payments - 1 - - - - -
Total corporate tax 6,957 8,087 8,192 8,472 9,063 9,501 9,754

Other direct income tax

             
Resident w/holding tax on interest income 1,704 1,665 1,646 1,874 2,251 2,645 3,069
Resident w/holding tax on dividend income 195 209 207 287 470 487 498
Estate and gift duties 2 - - - - - -
Total other direct income tax 1,901 1,874 1,853 2,161 2,721 3,132 3,567
Total direct income tax 32,289 34,242 34,463 36,725 39,734 42,557 45,258

Goods and services tax

             
Gross goods and services tax 23,484 26,007 25,626 27,437 30,466 31,628 32,594
Refunds (9,776) (10,965) (10,557) (11,202) (13,080) (13,232) (13,312)
Total goods and services tax 13,708 15,042 15,069 16,235 17,386 18,396 19,282

Other indirect taxation

             
Road user charges 1,016 1,049 1,073 1,142 1,223 1,297 1,367
Petroleum fuels excise - domestic production 872 886 921 938 979 1,016 1,055
Alcohol excise - domestic production 623 665 712 746 777 812 849
Tobacco excise - domestic production 220 251 210 219 212 206 207
Petroleum fuels excise - imports1 575 668 640 651 679 706 733
Alcohol excise - imports1 229 250 245 257 268 280 292
Tobacco excise - imports1 924 1,005 956 996 965 940 944
Other customs duty 188 130 178 172 167 156 144
Gaming duties 214 223 224 227 229 233 238
Motor vehicle fees 172 168 168 166 169 173 176
Energy resources levies 36 38 38 36 36 36 36
Approved issuer levy and cheque duty 62 73 60 61 61 61 61
Total other indirect taxation 5,131 5,406 5,425 5,611 5,765 5,916 6,102
Total indirect taxation 18,839 20,448 20,494 21,846 23,151 24,312 25,384
Total taxation revenue 51,128 54,690 54,957 58,571 62,885 66,869 70,642

Other sovereign revenue (accrual)

             
ACC levies 3,586 3,882 3,686 3,433 3,564 3,702 3,836
Fire Service levies 312 309 309 309 315 321 333
EQC levies 88 89 103 240 272 275 277
Other miscellaneous items 1,295 1,528 1,465 1,749 1,967 2,068 2,505
Total other sovereign revenue 5,281 5,808 5,563 5,731 6,118 6,366 6,951
Total sovereign revenue 56,409 60,498 60,520 64,302 69,003 73,235 77,593

Note 1: Customs excise-equivalent duty.

NOTE 1 (continued): Receipts collected through the Crown's sovereign power
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m

Taxation receipts (cash)

             

Individuals

             
Source deductions 20,699 21,066 21,212 22,643 24,234 25,948 27,721
Other persons 4,386 4,765 4,897 5,002 5,164 5,309 5,484
Refunds (2,463) (2,394) (2,342) (2,350) (2,270) (2,206) (2,180)
Fringe benefit tax 457 424 439 457 481 511 541
Total individuals 23,079 23,861 24,206 25,752 27,609 29,562 31,566

Corporate tax

             
Gross companies tax 7,588 8,369 8,603 8,864 9,524 9,866 10,063
Refunds (772) (799) (918) (913) (922) (927) (933)
Non-resident withholding tax 462 508 427 478 536 589 630
Foreign-source dividend w/holding payments (1) 1 - - - - -
Total corporate tax 7,277 8,079 8,112 8,429 9,138 9,528 9,760

Other direct income tax

             
Resident w/holding tax on interest income 1,701 1,664 1,645 1,873 2,250 2,644 3,068
Resident w/holding tax on dividend income 196 208 206 286 469 486 497
Estate and gift duties 2 - - - - - -
Total other direct income tax 1,899 1,872 1,851 2,159 2,719 3,130 3,565
Total direct income tax 32,255 33,812 34,169 36,340 39,466 42,220 44,891

Goods and services tax

             
Gross goods and services tax 22,162 25,135 24,370 26,502 29,526 30,712 31,640
Refunds (9,177) (10,394) (9,896) (10,643) (12,526) (12,680) (12,761)
Total goods and services tax 12,985 14,741 14,474 15,859 17,000 18,032 18,879

Other indirect taxation

             
Petroleum fuels excise - domestic production 869 886 921 938 979 1,016 1,055
Tobacco excise - domestic production 181 251 210 219 212 206 207
Customs duty 2,005 2,053 2,019 2,076 2,079 2,082 2,113
Road user charges 1,015 1,049 1,073 1,142 1,223 1,297 1,367
Alcohol excise - domestic production 625 665 712 746 777 812 849
Gaming duties 216 223 225 227 229 233 238
Motor vehicle fees 171 168 168 166 169 173 176
Energy resources levies 36 38 38 36 36 36 36
Approved issuer levy and cheque duty 60 73 61 61 61 61 61
Total other indirect taxation 5,178 5,406 5,427 5,611 5,765 5,916 6,102
Total indirect taxation 18,163 20,147 19,901 21,470 22,765 23,948 24,981
Total taxation receipts 50,418 53,959 54,070 57,810 62,231 66,168 69,872

Other sovereign receipts (cash)

             
ACC levies 3,612 3,804 3,712 3,422 3,446 3,504 3,831
Fire Service levies 312 309 309 309 315 321 333
EQC levies 88 88 135 270 273 275 278
Other miscellaneous items 681 677 728 721 750 767 779
Total other sovereign receipts 4,693 4,878 4,884 4,722 4,784 4,867 5,221
Total sovereign receipts 55,111 58,837 58,954 62,532 67,015 71,035 75,093

NOTE 2: Interest revenue and dividends

NOTE 2: Interest revenue and dividends
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m

By type

             
Interest revenue 2,142 2,569 2,272 2,695 3,003 3,503 3,713
Dividends 428 482 542 613 685 756 824
Total interest revenue and dividends 2,570 3,051 2,814 3,308 3,688 4,259 4,537

By source

             
Core Crown 2,169 2,134 2,039 2,667 2,674 2,942 3,057
Crown entities 1,234 768 1,325 1,244 1,446 1,642 1,857
State-owned enterprises 801 1,021 828 1,006 1,212 1,328 1,447
Inter-segment eliminations (1,634) (872) (1,378) (1,609) (1,644) (1,653) (1,824)
Total interest revenue and dividends 2,570 3,051 2,814 3,308 3,688 4,259 4,537

NOTE 3: Transfer payments and subsidies

NOTE 3: Transfer payments and subsidies
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
New Zealand Superannuation 8,830 9,575 9,597 10,235 10,824 11,590 12,449
Domestic Purposes Benefit 1,757 1,895 1,840 1,909 1,958 2,014 2,073
Unemployment Benefit 943 1,029 860 825 752 694 665
Invalid's Benefit 1,306 1,347 1,327 1,340 1,351 1,372 1,401
Family tax credit 2,139 2,178 2,131 2,125 2,075 2,038 2,054
Accommodation supplement 1,197 1,264 1,199 1,218 1,232 1,247 1,276
Sickness Benefit 743 782 770 797 819 847 879
Student allowances 620 627 634 580 532 511 507
Disability allowances 409 411 403 394 398 403 411
Other social assistance benefits 2,691 2,637 2,590 2,605 2,608 2,627 2,647
Total social assistance grants 20,635 21,745 21,351 22,028 22,549 23,343 24,362

Subsidies

             
KiwiSaver subsidies 1,042 656 685 634 603 638 670

Other transfer payments

             
Official development assistance 495 525 544 513 534 559 559
Total transfer payments and subsidies 22,172 22,926 22,580 23,175 23,686 24,540 25,591

NOTE 4: Personnel expenses

NOTE 4: Personnel expenses
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
Core Crown 5,996 6,021 6,011 5,956 5,979 6,040 6,084
Crown entities 10,410 10,440 10,724 10,924 11,005 11,120 11,241
State-owned enterprises 2,695 2,697 2,811 2,903 2,993 3,069 3,175
Inter-segment eliminations (13) (9) (10) (10) (10) (10) (10)
Total personnel expenses 19,088 19,149 19,536 19,773 19,967 20,219 20,490

NOTE 5: Depreciation, amortisation and other operating expenses

NOTE 5: Depreciation, amortisation and other operating expenses
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
Core Crown 39,157 40,197 42,824 37,854 37,603 37,813 38,111
Crown entities 17,905 18,390 18,433 18,141 18,423 18,580 18,383
State-owned enterprises 9,567 10,560 10,993 11,284 12,027 12,428 12,981
Inter-segment eliminations (26,118) (26,724) (27,003) (26,700) (26,942) (27,113) (26,903)
Total depreciation, amortisation and other operating expenses 40,511 42,423 45,247 40,579 41,111 41,708 42,572

NOTE 6: Interest expenses

NOTE 6: Interest expenses
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m

By type

             
Interest on financial liabilities 3,545 4,592 3,914 4,405 4,832 5,314 5,385
Interest unwind on provisions 51 93 45 59 69 75 73
Total interest expenses 3,596 4,685 3,959 4,464 4,901 5,389 5,458

By source

             
Core Crown 3,066 3,714 3,655 3,789 3,921 4,313 4,345
Crown entities 248 272 266 280 307 309 305
State-owned enterprises 1,027 1,392 1,129 1,361 1,641 1,745 1,883
Inter-segment eliminations (745) (693) (1,091) (966) (968) (978) (1,075)
Total interest expenses 3,596 4,685 3,959 4,464 4,901 5,389 5,458

NOTE 7: Insurance expenses

NOTE 7: Insurance expenses
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m

By entity

             
ACC 2,979 3,042 2,307 3,567 3,854 4,114 4,408
EQC 11,776 78 427 373 300 (105) 130
Other (163) 18 1,017 200 251 289 303
Total insurance expenses 14,592 3,138 3,751 4,140 4,405 4,298 4,841

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

NOTE 8: Forecast new spending and top-down expense adjustment
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m

Forecast new operating spending

             
Unallocated new spending from Budget 2011 - 463 473 294 188 141 (46)
Forecast new spending for Budget 2012 -   - 800 800 800 800
Forecast new spending for Budget 2013 - - - - 800 800 800
Forecast new spending for Budget 2014 - - - - - 1,191 1,191
Forecast new spending for Budget 2015 -   - - - - 1,214
Total forecast new operating spending - 463 473 1,094 1,788 2,932 3,959
Operating top-down adjustment - (310) (1,100) (300) (100) (100) (100)

Unallocated new spending from Budget 2011 represents expenses included in Budget 2011 that have yet to be allocated.

Forecast for future new spending indicates the expected spending increases from future Budgets.

NOTE 8: Forecast new spending and top-down expense adjustment (continued)
  2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
Post-2016
Forecast
$m
Total
Forecast
$m

Forecast new capital spending (annual)

             
Unallocated new spending from Budget 2011 92 2 1 - - - 95
Forecast new spending for Budget 2012 100 350 200 150 100 - 900
Forecast new spending for Budget 2013 - 100 350 200 150 100 900
Forecast new spending for Budget 2014 - - 100 350 200 250 900
Forecast new spending for Budget 2015 - - - 100 350 450 900
Forecast new spending for Budget 2016         100 800 900
Balance sheet funding of new capital spending 50 (125) (560) (790) (835) (1,600) (3,860)
Total forecast new capital spending 242 327 91 10 65 - 735
Forecast new capital spending (cumulative) 242 569 660 670 735    
Capital top-down adjustment (cumulative) (350) (350) (350) (350) (350)    

Unallocated new spending from Budget 2011 represents capital spending from Budget 2011 that has yet to be allocated.

Forecast for future new spending indicates the expected capital spending increases from future Budgets.

These forecasts assume that, instead of borrowing to fund this new capital spending, the Government will source funding from alternative sources such as increased returns from existing investments, reprioritisation of planned capital spending, as well as the partial divestment of assets such as State-owned enterprises. The portion of funding yet to be allocated is referred to "Balance sheet funding of new capital spending".

NOTE 9: Gains and losses on financial instruments

NOTE 9: Gains and losses on financial instruments
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m

By source

             
Core Crown 4,116 1,546 36 1,477 1,960 1,992 2,040
Crown entities 1,058 688 32 280 225 212 241
State-owned enterprises (281) (68) (86) 19 65 59 59
Inter-segment eliminations (274) (193) 14 (188) (195) (201) (208)
Net gains/(losses) on financial instruments 4,619 1,973 (4) 1,588 2,055 2,062 2,132

NOTE 10: Gains and losses on non-financial instruments

NOTE 10: Gains and losses on non-financial instruments
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m

By type

             
Actuarial gains/(losses) on GSF liability (574) - (900) - - - -
Actuarial gains/(losses) on ACC outstanding claims 996 - (1,418) - - - -
Other (343) 172 254 191 170 176 185
Net gains/(losses) on non-financial instruments 79 172 (2,064) 191 170 176 185

By source

             
Core Crown (588) (8) (834) (3) (6) (9) (10)
Crown entities 931 (1) (1,429) (14) (41) (36) (32)
State-owned enterprises (264) 180 199 207 217 221 226
Inter-segment eliminations - 1 - 1 - - 1
Net gains/(losses) on non-financial instruments 79 172 (2,064) 191 170 176 185

NOTE 11: Source of operating balance

NOTE 11: Source of operating balance
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
Core Crown (9,267) (10,350) (14,010) (4,318) (457) 1,261 3,237
Crown entities (3,143) 2,533 538 1,633 1,558 1,997 1,720
State-owned enterprises 327 981 1,097 1,184 1,407 1,612 1,738
Inter-segment eliminations (1,277) (457) (226) (874) (932) (896) (994)
Total operating balance (13,360) (7,293) (12,601) (2,375) 1,576 3,974 5,701

NOTE 12: Financial assets

NOTE 12: Financial assets
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
Cash and cash equivalents 9,801 8,886 9,185 9,261 10,009 10,010 10,423
Tax receivables 7,104 6,788 7,348 7,121 7,085 7,136 7,309
Trade and other receivables 14,586 9,921 11,450 8,801 8,154 7,945 8,086
Student loans (refer note 13) 7,460 7,822 7,932 8,407 8,869 9,286 9,647
Kiwibank mortgages 11,495 13,493 12,950 14,474 16,036 17,611 19,186
Long-term deposits 2,259 2,047 2,402 2,234 2,250 2,777 2,977
IMF financial assets 2,168 2,528 2,346 2,515 2,515 2,516 2,350
Other advances 1,612 1,118 1,299 1,347 1,440 1,587 1,668
Share investments 14,248 16,095 18,443 20,695 22,300 24,504 26,958
Derivatives in gain 5,415 2,394 4,188 3,176 2,521 2,124 1,649
Other marketable securities 39,214 36,065 33,561 25,911 31,155 28,013 31,759
Total financial assets 115,362 107,157 111,104 103,942 112,334 113,509 122,012

Financial assets by entity

             
NZDMO 29,928 20,413 23,314 13,482 16,904 11,762 13,253
Reserve Bank of New Zealand 17,909 17,628 16,752 16,728 16,746 16,365 16,557
NZS Fund 18,687 19,543 18,872 20,036 21,674 23,263 24,997
Other core Crown 19,116 17,694 19,110 19,266 19,804 20,638 21,223
Intra-segment eliminations (9,165) (6,769) (7,538) (6,574) (5,933) (4,781) (4,746)
Total core Crown segment 76,475 68,509 70,510 62,938 69,195 67,247 71,284
ACC portfolio 21,569 23,742 24,548 27,108 29,891 32,891 36,234
EQC portfolio 9,305 6,168 6,495 3,831 1,038 62 171
Other Crown entities 8,831 6,343 8,284 8,081 8,255 7,922 8,052
Intra-segment eliminations (3,314) (1,532) (3,426) (3,432) (3,439) (2,945) (2,953)
Total Crown entities segment 36,391 34,721 35,901 35,588 35,745 37,930 41,504
Total state-owned enterprises segment 20,241 19,624 20,789 21,847 23,472 25,658 27,736
Inter-segment eliminations (17,745) (15,697) (16,096) (16,431) (16,078) (17,326) (18,512)
Total financial assets 115,362 107,157 111,104 103,942 112,334 113,509 122,012

NOTE 13: Student loans

NOTE 13: Student loans
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
Nominal value (including accrued interest) 12,070 12,909 12,981 13,861 14,721 15,522 16,265
Opening book value 6,790 7,325 7,460 7,932 8,407 8,869 9,286
Amount borrowed in current year 1,564 1,590 1,588 1,617 1,650 1,653 1,673
Less initial write-down to fair value (713) (707) (698) (679) (693) (693) (702)
Repayments made during the year (802) (834) (852) (940) (1,010) (1,089) (1,184)
Interest unwind 484 534 532 576 612 645 673
(Impairment)/reversal of impairment 125 (110) (110) (110) (110) (110) (110)
Other movements 12 24 12 11 13 11 11
Closing book value 7,460 7,822 7,932 8,407 8,869 9,286 9,647

NOTE 14: Property, plant and equipment

NOTE 14: Property, plant and equipment
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m

By class of asset

             

Net carrying value

             
Land (valuation) 16,372 16,892 16,774 16,981 17,099 17,438 17,673
Buildings (valuation) 24,539 25,232 25,514 25,841 25,829 25,389 25,433
Electricity distribution network (cost) 2,690 3,553 3,267 3,845 4,299 4,518 4,590
Electricity generation assets (valuation) 14,439 14,915 15,208 15,603 16,043 16,634 17,260
Aircraft (excluding military) (valuation) 1,805 2,587 2,048 2,268 2,593 2,771 2,944
State highways (valuation) 25,126 26,504 25,842 26,679 27,648 28,686 29,890
Rail network (valuation) 12,749 12,755 12,986 13,100 13,191 13,227 13,163
Specialist military equipment (valuation) 3,331 3,377 3,271 3,167 2,986 2,789 2,582
Specified cultural and heritage assets (valuation) 8,133 8,559 8,169 8,199 8,223 8,248 8,277
Other plant and equipment (cost) 5,670 6,812 5,988 6,236 6,263 6,429 6,585
Total property, plant and equipment 114,854 121,186 119,067 121,919 124,174 126,129 128,397

By source

             
Core Crown 29,549 30,595 30,121 30,198 30,082 29,986 30,191
Crown entities 48,480 50,949 50,148 51,488 52,485 53,521 54,728
State-owned enterprises 36,825 39,642 38,798 40,233 41,607 42,622 43,478
Inter-segment eliminations - - - - - - -
Total property, plant and equipment 114,854 121,186 119,067 121,919 124,174 126,129 128,397

Schedule of movements

             

Cost or valuation

             
Opening balance 123,941 131,282 126,601 135,184 142,025 148,361 154,402
Additions (refer below for further breakdown) 6,644 8,628 8,673 7,316 6,812 6,566 6,903
Disposals (1,283) (287) (371) (292) (374) (463) (405)
Net revaluations (2,471) - 50 - - - -
Other (230) (240) 231 (183) (102) (62) (88)
Total cost or valuation 126,601 139,383 135,184 142,025 148,361 154,402 160,812

Accumulated depreciation and impairment

             
Opening balance 10,611 14,349 11,747 16,117 20,106 24,187 28,273
Eliminated on disposal (832) (73) (109) (73) (63) (88) (66)
Eliminated on revaluation (1,884) - - - - - -
Depreciation expense 3,727 4,032 3,952 4,169 4,288 4,338 4,405
Other 125 (111) 527 (107) (144) (164) (197)
Total accumulated depreciation and impairment 11,747 18,197 16,117 20,106 24,187 28,273 32,415
Total property, plant and equipment 114,854 121,186 119,067 121,919 124,174 126,129 128,397

Additions - by functional classification

             
Transport 2,807 2,685 2,401 2,338 2,535 2,418 2,462
Economic 1,200 2,573 2,115 1,856 1,808 1,747 1,766
Education 648 865 886 801 724 728 727
Health 617 605 992 508 394 344 344
Defence 258 726 690 509 199 144 103
Other 1,114 1,174 1,589 1,304 1,152 1,185 1,501
Total additions to property, plant and equipment1 6,644 8,628 8,673 7,316 6,812 6,566 6,903

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

NOTE 15: Intangible assets and goodwill

NOTE 15: Intangible assets and goodwill
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m

By type

             
Net Kyoto position1 291 444 282 282 282 282 282
Goodwill 485 484 442 431 452 452 452
Other intangible assets 1,618 1,786 1,873 1,949 1,983 1,971 1,946
Total intangible assets and goodwill 2,394 2,714 2,597 2,662 2,717 2,705 2,680

By source

             
Core Crown 1,157 1,498 1,335 1,391 1,429 1,428 1,414
Crown entities 430 500 516 531 518 493 471
State-owned enterprises 807 716 746 740 770 784 795
Inter-segment eliminations - - - - - - -
Total intangible assets and goodwill 2,394 2,714 2,597 2,662 2,717 2,705 2,680

Note 1: The New Zealand Government has committed under the Kyoto Protocol to ensuring that New Zealand's average net emissions of greenhouse gases from 2008 to 2012 (the first commitment period of the Kyoto Protocol, or CP1) are reduced to 1990 levels, or to take responsibility for the difference. New Zealand can meet its commitment through emissions reductions and use of the Kyoto Protocol flexibility mechanisms such as Joint Implementation, the Clean Development Mechanism, and offsetting increased emissions against carbon removed by forests.

To assist New Zealand in meeting its Kyoto Protocol commitments, an Emissions Trading Scheme (ETS) was established (refer note 20). These two initiatives should be looked at together when understanding New Zealand's international climate change obligations. The asset reported in these financial statements could be significantly reduced if international units are transferred offshore through foresters participating in the ETS. This, combined with other ETS variables, has a significant impact on the Government's net fiscal position from the Kyoto Protocol, which will crystallise when the first Kyoto commitment period is settled up post-2012.

These financial statements report on the New Zealand Government's international climate change obligations for the first commitment period, but not for future commitment periods which are currently being negotiated.

The latest Net Position estimate for 2011 can be found on the Ministry for the Environment's website: www.mfe.govt.nz/issues/climate/greenhouse-gas-emissions/net-position

NOTE 16: NZS Fund

NOTE 16: NZS Fund
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
Revenue 518 551 590 641 670 709 743
Less current tax expense 872 367 (20) 403 441 482 527
Less other expenses 169 172 171 184 202 216 235
Add gains/(losses) 3,518 1,215 (425) 1,066 1,584 1,698 1,842
Operating balance 2,995 1,227 14 1,120 1,611 1,709 1,823
Opening net worth 15,656 18,668 18,652 18,672 19,801 21,422 23,143
Gross contribution from the Crown - - - - - - -
Operating balance 2,995 1,227 14 1,120 1,611 1,709 1,823
Other movements in reserves 1 6 6 9 10 12 14
Closing net worth 18,652 19,901 18,672 19,801 21,422 23,143 24,980

Comprising:

             
Financial assets 18,687 19,543 18,872 20,036 21,674 23,263 24,997
Financial liabilities (1,161) (674) (1,436) (1,461) (1,462) (1,432) (1,436)
Net other assets 1,126 1,032 1,236 1,226 1,210 1,312 1,419
Closing net worth 18,652 19,901 18,672 19,801 21,422 23,143 24,980

NOTE 17: Payables

NOTE 17: Payables
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m

By type

             
Accounts payable 7,337 6,161 8,541 8,206 8,468 8,343 8,519
Taxes repayable 3,762 3,442 3,762 3,762 4,162 4,612 5,112
Total payables 11,099 9,603 12,303 11,968 12,630 12,955 13,631

By source

             
Core Crown 6,997 6,371 7,085 6,818 7,291 7,457 7,923
Crown entities 5,587 4,663 6,314 6,286 6,300 6,346 6,531
State-owned enterprises 4,779 4,917 5,406 5,537 5,853 6,013 6,201
Inter-segment eliminations (6,264) (6,348) (6,502) (6,673) (6,814) (6,861) (7,024)
Total payables 11,099 9,603 12,303 11,968 12,630 12,955 13,631

NOTE 18: Insurance liabilities

NOTE 18: Insurance liabilities
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m

By entity

             
ACC liability 26,939 27,687 29,025 30,388 31,896 33,574 35,415
EQC property damage claims 10,570 2,785 7,616 4,884 2,054 144 145
AMI liability 2,082 - 1,560 835 452 371 289
Other insurance liabilities (277) 61 71 78 86 96 106
Total insurance liabilities 39,314 30,533 38,272 36,185 34,488 34,185 35,955

ACC liability

Calculation information

PricewaterhouseCoopers Actuarial Pty Ltd have prepared an independent actuarial estimate of the ACC outstanding claims liability as at 30 June 2011. This estimate includes the expected future payments relating to accidents that occurred prior to balance date (whether or not the associated claims have been reported to, or accepted by, ACC) and also the expected future administrative expenses of managing these claims.

The key economic variables that impact on changes to the valuation are the long-term Labour Cost Index (LCI), average weekly earnings and the discount rate. Discount rates were derived from the yield curve for New Zealand Government bonds. For these forecast statements, the claims liability has been updated for the latest discount rates as at 31 August 2011. The equivalent single effective discount rate, taking into account ACC's projected future cash flow patterns, is a short-term discount rate of 5.15% and a long-term discount rate of 6%.

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.

 
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m

Gross ACC liability

             
Opening gross liability 26,997 26,761 26,939 29,025 30,388 31,896 33,574
Net change (58) 926 2,086 1,363 1,508 1,678 1,841
Closing gross liability 26,939 27,687 29,025 30,388 31,896 33,574 35,415

Less net assets available to ACC

             
Opening net asset value 16,745 20,236 20,233 22,380 24,957 27,735 30,762
Net change 3,488 2,926 2,147 2,577 2,778 3,027 3,233
Closing net asset value 20,233 23,162 22,380 24,957 27,735 30,762 33,995

Net ACC reserves (net liability)

             
Opening reserves position (10,252) (6,525) (6,706) (6,645) (5,431) (4,161) (2,812)
Net change 3,546 2,000 61 1,214 1,270 1,349 1,392
Closing reserves position (net liability) (6,706) (4,525) (6,645) (5,431) (4,161) (2,812) (1,420)

NOTE 19: Retirement plan liabilities

NOTE 19: Retirement plan liabilities
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
Government Superannuation Fund 10,152 8,891 10,574 10,182 9,862 9,589 9,337
Other funds 4 4 7 7 7 7 7
Total retirement plan liabilities 10,156 8,895 10,581 10,189 9,869 9,596 9,344

The net liability of the Government Superannuation Fund (GSF) was calculated by the Government Actuary as at 30 June 2011.

The liability arises from closed schemes for past and present public sector employees as set out in the Government Superannuation Fund Act 1956. A Projected Unit Credit method is used to calculate the liability as at 30 June 2011, based on membership data as at that date. The funding method requires the benefits payable from GSF in respect of past service to be calculated and then discounted back to the valuation date.

For these forecast financial statements, the net GSF liability was updated for the latest discount rates derived from the market yield curve for New Zealand Government bonds as at 31 August 2011.

Other principal long-term financial assumptions were an inflation rate, as measured by the Consumer Price Index, of 2.6% for 2012 decreasing to 2.5% in 2013 (unchanged from 30 June 2011) and an annual salary growth rate, before any promotional effects, of 3% (unchanged from 30 June 2011).

The 2011/12 projected increase in the net GSF liability is $422 million, reflecting an increase in the GSF liability of $282 million and a decrease in the GSF assets of $140 million.

The increase in the GSF liability of $282 million includes an actuarial loss between 1 July 2011 and 31 August 2011, of $700 million owing to movements in the discount rates. The remaining $418m reduction is due to expected benefits paid to members (reduces the liability) and current service cost and interest unwind (increases the liability).

The decrease in the value of the net assets of GSF of $140 million includes a loss of $200 million reflecting the updated market value of assets at 31 August 2011. The balance of $60 million is the total of the expected investment returns and contributions received, offset by the benefits paid to members.

The changes in the projected net GSF liability from 2011/12 onwards reflect the net of the expected current service cost, interest cost, investment returns and contributions.

 
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m

GSF net defined benefit retirement liability

             

GSF liability

             
Opening GSF liability 12,881 12,497 13,311 13,593 13,259 12,997 12,777
Net projected change 430 (321) 282 (334) (262) (220) (201)
Closing GSF liability 13,311 12,176 13,593 13,259 12,997 12,777 12,576

Less net assets available to GSF

             
Opening net asset value 2,945 3,229 3,159 3,019 3,077 3,135 3,188
Investment valuation changes 336 180 (15) 189 196 196 199
Contribution and other income less pension payments (122) (124) (125) (131) (138) (143) (148)
Closing net asset value 3,159 3,285 3,019 3,077 3,135 3,188 3,239

Net GSF liability

             
Opening unfunded liability 9,936 9,268 10,152 10,574 10,182 9,862 9,589
Net projected change 216 (377) 422 (392) (320) (273) (252)
Closing unfunded liability 10,152 8,891 10,574 10,182 9,862 9,589 9,337

NOTE 20: Provisions

NOTE 20: Provisions
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
Provision for ETS credits 612 1,241 1,492 1,387 1,113 813 473
Provision for National Provident Fund guarantee 983 925 918 850 794 743 692
Provision for employee entitlements 3,050 2,919 2,990 3,073 3,019 3,018 3,109
Provision for Canterbury Red Zone support package 1,039 - 610 - - - -
Provision for weathertight services financial assistance package 567 687 556 392 209 52 6
Other provisions 1,335 3,157 2,503 2,094 1,925 1,455 1,324
Total provisions 7,586 8,929 9,069 7,796 7,060 6,081 5,604

By source

             
Core Crown 5,351 6,433 6,833 5,571 4,551 3,661 2,917
Crown entities 1,770 1,705 1,734 1,755 1,771 1,775 1,783
State-owned enterprises 1,028 882 945 927 955 1,014 1,042
Inter-segment eliminations (563) (91) (443) (457) (217) (369) (138)
Total provisions 7,586 8,929 9,069 7,796 7,060 6,081 5,604

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. The allocation of NZ Units creates a provision (and an expense if allocated for free). The provision is reduced, and revenue recognised, as NZ Units are surrendered to the Crown by emitters. Emitters can also use international Kyoto Units to settle their emission obligation, which might occur where obligations exceed the number of allocated NZ Units. In the ETS transition period to the end of 2012, emitters can also use the NZ$25 price option to settle their emission obligation.

Until the end of 2012, the Government's net position regarding its climate change obligations will be determined by the net Kyoto position and the provision for ETS credits. After 2012, the net position will depend on any future international climate change commitments.

The carbon price used to calculate the ETS provision is assumed to remain constant over the forecast period and is based on the estimated current carbon price of €10.40 with an exchange rate of 0.5907 (a carbon price of NZ$17.61).

The carbon price for the ETS provision has been determined by the Ministry for the Environment based on international market transactions that have occurred in the certified emission reduction (CER) markets. Currently, the CER market has been determined to be the most relevant market to use for determining the carbon price for NZ Units and the calculation of the provision for ETS credits. As the market for NZ Units develops the basis for determining this carbon price will be reviewed.

The ETS impact on the fiscal forecast is as follows:

NOTE 20: Provisions (continued)
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
Revenue 322 379 298 485 669 956 1,328
Expenses 860 692 1,178 380 395 656 988
OBEGAL (538) (313) (880) 105 274 300 340

NOTE 21: Net worth attributable to the Crown

NOTE 21: Net worth attributable to the Crown
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
Taxpayer funds 18,188 14,463 5,631 3,322 4,934 8,933 14,661
Property, plant and equipment revaluation reserve 62,690 63,614 62,646 62,582 62,546 62,518 62,490
Investment revaluation reserve 58 69 61 69 79 92 106
Cash flow hedge reserve (310) (223) (323) (325) (324) (320) (319)
Foreign currency translation reserve (47) (53) (41) (17) (17) (17) (17)
Total net worth attributable to the Crown 80,579 77,870 67,974 65,631 67,218 71,206 76,921

Taxpayer Funds

             
Opening taxpayer funds 31,087 21,720 18,188 5,631 3,322 4,934 8,933
Operating balance excluding minority interest (13,360) (7,293) (12,601) (2,375) 1,576 3,974 5,701
Transfers from/(to) other reserves 461 36 44 66 36 25 27
Closing taxpayer funds 18,188 14,463 5,631 3,322 4,934 8,933 14,661

Property, plant and equipment revaluation reserve

             
Opening revaluation reserve 63,593 63,600 62,690 62,646 62,582 62,546 62,518
Net revaluations (443) - - - (1) - -
Transfers from/(to) other reserves (460) 14 (44) (64) (35) (28) (28)
Closing property, plant and equipment revaluation reserve 62,690 63,614 62,646 62,582 62,546 62,518 62,490

Investment revaluation reserve

             
Opening investment revaluation reserve 59 63 58 61 69 79 92
Valuation gain/(losses) on investments available for sale taken to reserves (1) 6 3 8 10 13 14
Closing investment revaluation reserve 58 69 61 69 79 92 106

Cash flow hedge reserve

             
Opening cash flow hedge reserve (143) (219) (310) (323) (325) (324) (320)
Transfer into reserve (279) 3 7 (1) 1 4 -
Transfer to the Statement of Financial Performance 17 - 1 1 - - 1
Transfer to initial carrying value of hedged item 95 (7) (21) (2) - - -
Closing cash flow hedge reserve (310) (223) (323) (325) (324) (320) (319)

Foreign currency translation reserve

             
Opening foreign currency translation reserve (10) (47) (47) (41) (17) (17) (17)
Movement arising from translation of foreign operations (37) (6) 6 24 - - -
Closing foreign currency translation reserve (47) (53) (41) (17) (17) (17) (17)

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

NOTE 22: Reconciliation of core Crown operating cash flows to residual core Crown cash
  2011
Actual
$m
2012
Previous
Budget
$m
2012
Forecast
$m
2013
Forecast
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m

Core Crown cash flows from operations

             
Total tax receipts 51,454 55,084 54,801 58,629 63,325 67,297 71,112
Total other sovereign receipts 646 645 693 686 715 731 743
Interest, profits and dividends 1,817 1,469 1,462 1,938 1,840 1,996 2,005
Sale of goods and services and other receipts 2,094 2,496 2,895 2,238 2,087 2,051 2,035
Transfer payments and subsidies (22,226) (23,448) (23,103) (23,308) (23,825) (24,677) (25,728)
Personnel and operating costs (40,433) (42,107) (43,101) (41,293) (39,785) (40,291) (39,569)
Finance costs (2,637) (3,493) (3,450) (3,995) (3,934) (4,512) (4,446)
Forecast for future new operating spending - (463) (623) (944) (1,788) (2,932) (3,959)
Top-down expense adjustment - 310 1,100 300 100 100 100
Net cash flows from core Crown operations (9,285) (9,507) (9,326) (5,749) (1,265) (237) 2,293
Net purchase of physical assets (1,524) (1,863) (2,133) (1,616) (1,379) (1,350) (1,617)
Net increase in advances (1,242) (879) (1,125) (952) (813) (1,162) (553)
Net purchase of investments (1,292) (1,261) (1,160) (1,222) (1,428) (1,297) (1,638)
Contribution to NZS Fund - - - - - - -
Forecast for future new capital spending - (242) (192) (452) (651) (800) (900)
Balance sheet funding of new capital spending - 100 (50) 125 560 790 835
Top-down capital adjustment - 170 350 - - - -
Residual cash (13,343) (13,482) (13,636) (9,866) (4,976) (4,056) (1,580)

Financed by:

             
Other net sale/(purchase) of marketable securities and deposits (4,791) 6,733 6,517 8,701 (4,405) 4,456 (1,880)
Total operating and investing activities (18,134) (6,749) (7,119) (1,165) (9,381) 400 (3,460)

Used in:

             
Net (repayment)/issue of other New Zealand dollar borrowing (1,835) 8,295 9,521 194 733 2,971 (616)
Net (repayment)/issue of foreign currency borrowing 1,661 (6,871) (7,773) (547) (700) (1,197) (1,141)
Issues of circulating currency 234 219 89 218 229 240 252
Decrease/(increase) in cash (861) (1) (1,250) (2) - (145) 146
  (801) 1,642 587 (137) 262 1,869 (1,359)
Net cash inflow/(outflow) to be offset by domestic bonds (18,935) (5,107) (6,532) (1,302) (9,119) 2,269 (4,819)

Gross cash proceeds from domestic bonds

             
Domestic bonds (market) 19,468 13,635 15,422 12,773 10,030 7,833 4,819
Domestic bonds (non-market) 270 187 448 122 36 - -
Total gross cash proceeds from domestic bonds 19,738 13,822 15,870 12,895 10,066 7,833 4,819
Repayment of domestic bonds (market) - (7,602) (7,602) (10,957) - (9,955) -
Repayment of domestic bonds (non-market) (803) (1,113) (1,736) (636) (947) (147) -
Net cash proceeds from domestic bonds 18,935 5,107 6,532 1,302 9,119 (2,269) 4,819

Forecast Statement of Segments

Statement of Financial Performance for the year ended 30 June 2011
  Core Crown
2011
Actual
$m
Crown entities
2011
Actual
$m
State-owned
enterprises
2011
Actual
$m
Inter-segment
eliminations
2011
Actual
$m
Total Crown
2011
Actual
$m

Revenue

         
Taxation revenue 51,557 - - (429) 51,128
Other sovereign revenue 1,275 5,080 - (1,074) 5,281
Sales of goods and services 1,443 14,680 12,510 (13,549) 15,084
Interest revenue and dividends 2,169 1,234 801 (1,634) 2,570
Other revenue 1,106 17,042 935 (11,583) 7,500
Total revenue (excluding gains) 57,550 38,036 14,246 (28,269) 81,563

Expenses

         
Social assistance and official development assistance 22,227 - - (55) 22,172
Personnel expenses 5,996 10,410 2,695 (13) 19,088
Other operating expenses 39,161 32,670 9,727 (26,455) 55,103
Interest expenses 3,066 248 1,027 (745) 3,596
Forecast for future new spending and top-down adjustment - - - - -
Total expenses (excluding losses) 70,450 43,328 13,449 (27,268) 99,959
Operating balance before gains/(losses) (12,900) (5,292) 797 (1,001) (18,396)
Total gains/(losses) 3,530 1,989 (545) (276) 4,698
Net surplus/(deficit) from associates and joint ventures 103 160 (26) - 237
Attributable to minority interest in Air NZ - - 101 - 101
Operating balance (9,267) (3,143) 327 (1,277) (13,360)

Expenses by functional classification

         
Social security and welfare 22,005 3,945 - (626) 25,324
Health 13,753 11,467 - (12,152) 13,068
Education 11,650 9,176 23 (8,443) 12,406
Transport and communications 2,281 2,117 6,203 (2,199) 8,402
Other 17,695 16,375 6,196 (3,103) 37,163
Finance costs 3,066 248 1,027 (745) 3,596
Forecast for future new spending and top-down adjustment - - - - -
Total Crown expenses (excluding losses) 70,450 43,328 13,449 (27,268) 99,959
Statement of Financial Position as at 30 June 2011
  Core Crown
2011
Actual
$m
Crown entities
2011
Actual
$m
State-owned
enterprises
2011
Actual
$m
Inter-segment
eliminations
2011
Actual
$m
Total Crown
2011
Actual
$m

Assets

         
Cash and cash equivalents 6,087 2,773 1,425 (484) 9,801
Receivables 11,376 8,999 3,576 (2,261) 21,690
Other financial assets 59,012 24,619 15,240 (15,000) 83,871
Property, plant and equipment 29,549 48,480 36,825 - 114,854
Equity accounted investments 30,093 7,979 197 (28,968) 9,301
Intangible assets and goodwill 1,157 430 807 - 2,394
Inventory and other assets 1,691 378 1,290 (55) 3,304
Forecast for new capital spending and top-down adjustment - - - - -
Total assets 138,965 93,658 59,360 (46,768) 245,215

Liabilities

         
Borrowings 76,827 5,123 23,099 (14,804) 90,245
Other liabilities 27,207 45,105 9,021 (7,250) 74,083
Total liabilities 104,034 50,228 32,120 (22,054) 164,328
Total assets less total liabilities 34,931 43,430 27,240 (24,714) 80,887

Net worth

         
Taxpayer funds 19,531 17,098 9,574 (28,015) 18,188
Reserves 15,400 26,332 17,323 3,336 62,391
Net worth attributable to minority interest in Air NZ - - 343 (35) 308
Total net worth 34,931 43,430 27,240 (24,714) 80,887
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 55,451 - - (494) 54,957
Other sovereign revenue 1,445 5,391 - (1,273) 5,563
Sales of goods and services 1,457 14,803 14,178 (13,613) 16,825
Interest revenue and dividends 2,039 1,325 828 (1,378) 2,814
Other revenue 773 13,229 1,074 (11,598) 3,478
Total revenue (excluding gains) 61,165 34,748 16,080 (28,356) 83,637

Expenses

         
Social assistance and official development assistance 22,593 - - (13) 22,580
Personnel expenses 6,011 10,724 2,811 (10) 19,536
Other operating expenses 42,828 21,991 11,185 (27,006) 48,998
Interest expenses 3,655 266 1,129 (1,091) 3,959
Forecast for future new spending and top-down adjustment (627) - - - (627)
Total expenses (excluding losses) 74,460 32,981 15,125 (28,120) 94,446
Operating balance before gains/(losses) (13,295) 1,767 955 (236) (10,809)
Total gains/(losses) (798) (1,397) 113 14 (2,068)
Net surplus/(deficit) from associates and joint ventures 83 168 29 (4) 276
Attributable to minority interest in Air NZ - - - - -
Operating balance (14,010) 538 1,097 (226) (12,601)

Expenses by functional classification

         
Social security and welfare 22,560 4,101 - (614) 26,047
Health 14,350 12,009 - (12,550) 13,809
Education 12,269 9,421 23 (8,661) 13,052
Transport and communications 2,468 2,148 6,670 (2,343) 8,943
Other 19,785 5,036 7,303 (2,861) 29,263
Finance costs 3,655 266 1,129 (1,091) 3,959
Forecast for future new spending and top-down adjustment (627) - - - (627)
Total Crown expenses (excluding losses) 74,460 32,981 15,125 (28,120) 94,446
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 6,193 2,291 850 (149) 9,185
Receivables 9,485 7,749 3,487 (1,923) 18,798
Other financial assets 54,832 25,861 16,452 (14,024) 83,121
Property, plant and equipment 30,121 50,148 38,798 - 119,067
Equity accounted investments 31,283 8,167 437 (30,198) 9,689
Intangible assets and goodwill 1,336 516 746 (1) 2,597
Inventory and other assets 1,643 344 1,317 (38) 3,266
Forecast for new capital spending and top-down adjustment (108) - - - (108)
Total assets 134,785 95,076 62,087 (46,333) 245,615

Liabilities

         
Borrowings 84,635 5,282 25,105 (13,785) 101,237
Other liabilities 29,247 44,934 8,937 (7,022) 76,096
Total liabilities 113,882 50,216 34,042 (20,807) 177,333
Total assets less total liabilities 20,903 44,860 28,045 (25,526) 68,282

Net worth

         
Taxpayer funds 5,524 18,530 10,394 (28,817) 5,631
Reserves 15,379 26,330 17,308 3,326 62,343
Net worth attributable to minority interest in Air NZ - - 343 (35) 308
Total net worth 20,903 44,860 28,045 (25,526) 68,282
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 59,195 - - (624) 58,571
Other sovereign revenue 1,728 5,302 - (1,299) 5,731
Sales of goods and services 1,434 14,790 14,627 (13,537) 17,314
Interest revenue and dividends 2,667 1,244 1,006 (1,609) 3,308
Other revenue 712 13,149 1,037 (11,335) 3,563
Total revenue (excluding gains) 65,736 34,485 16,670 (28,404) 88,487

Expenses

         
Social assistance and official development assistance 23,217 - - (42) 23,175
Personnel expenses 5,956 10,924 2,903 (10) 19,773
Other operating expenses 37,856 22,082 11,481 (26,700) 44,719
Interest expenses 3,789 280 1,361 (966) 4,464
Forecast for future new spending and top-down adjustment 794 - - - 794
Total expenses (excluding losses) 71,612 33,286 15,745 (27,718) 92,925
Operating balance before gains/(losses) (5,876) 1,199 925 (686) (4,438)
Total gains/(losses) 1,474 266 226 (187) 1,779
Net surplus/(deficit) from associates and joint ventures 84 168 33 (1) 284
Attributable to minority interest in Air NZ - - - - -
Operating balance (4,318) 1,633 1,184 (874) (2,375)

Expenses by functional classification

         
Social security and welfare 23,252 4,590 - (660) 27,182
Health 14,330 11,896 - (12,550) 13,676
Education 12,205 9,488 23 (8,729) 12,987
Transport and communications 2,128 2,173 6,818 (2,180) 8,939
Other 15,114 4,859 7,543 (2,633) 24,883
Finance costs 3,789 280 1,361 (966) 4,464
Forecast for future new spending and top-down adjustment 794 - - - 794
Total Crown expenses (excluding losses) 71,612 33,286 15,745 (27,718) 92,925
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 6,093 2,432 886 (150) 9,261
Receivables 9,082 5,756 3,094 (2,010) 15,922
Other financial assets 47,763 27,400 17,867 (14,271) 78,759
Property, plant and equipment 30,198 51,487 40,233 1 121,919
Equity accounted investments 32,473 8,332 481 (31,419) 9,867
Intangible assets and goodwill 1,391 531 740 - 2,662
Inventory and other assets 1,652 345 1,420 (39) 3,378
Forecast for new capital spending and top-down adjustment 219 - - - 219
Total assets 128,871 96,283 64,721 (47,888) 241,987

Liabilities

         
Borrowings 84,761 5,228 27,993 (14,132) 103,850
Other liabilities 27,513 43,564 8,325 (7,204) 72,198
Total liabilities 112,274 48,792 36,318 (21,336) 176,048
Total assets less total liabilities 16,597 47,491 28,403 (26,552) 65,939

Net worth

         
Taxpayer funds 1,210 21,266 10,730 (29,884) 3,322
Reserves 15,387 26,225 17,330 3,367 62,309
Net worth attributable to minority interest in Air NZ - - 343 (35) 308
Total net worth 16,597 47,491 28,403 (26,552) 65,939
Statement of Financial Performance for the year ended 30 June 2014
  Core Crown
2014
Forecast
$m
Crown entities
2014
Forecast
$m
State-owned
enterprises
2014
Forecast
$m
Inter-segment
eliminations
2014
Forecast
$m
Total Crown
2014
Forecast
$m

Revenue

         
Taxation revenue 63,635 - - (750) 62,885
Other sovereign revenue 1,946 5,471 - (1,299) 6,118
Sales of goods and services 1,444 15,191 15,657 (13,866) 18,426
Interest revenue and dividends 2,674 1,446 1,212 (1,644) 3,688
Other revenue 729 12,987 1,119 (11,137) 3,698
Total revenue (excluding gains) 70,428 35,095 17,988 (28,696) 94,815

Expenses

         
Social assistance and official development assistance 23,727 - - (41) 23,686
Personnel expenses 5,979 11,005 2,993 (10) 19,967
Other operating expenses 37,605 22,578 12,276 (26,943) 45,516
Interest expenses 3,921 307 1,641 (968) 4,901
Forecast for future new spending and top-down adjustment 1,688 - - - 1,688
Total expenses (excluding losses) 72,920 33,890 16,910 (27,962) 95,758
Operating balance before gains/(losses) (2,492) 1,205 1,078 (734) (943)
Total gains/(losses) 1,954 184 282 (195) 2,225
Net surplus/(deficit) from associates and joint ventures 81 169 47 (3) 294
Attributable to minority interest in Air NZ - - - - -
Operating balance (457) 1,558 1,407 (932) 1,576

Expenses by functional classification

         
Social security and welfare 23,829 4,902 - (677) 28,054
Health 14,239 12,205 - (12,850) 13,594
Education 12,099 9,449 23 (8,614) 12,957
Transport and communications 2,079 2,214 7,099 (2,200) 9,192
Other 15,065 4,813 8,147 (2,653) 25,372
Finance costs 3,921 307 1,641 (968) 4,901
Forecast for future new spending and top-down adjustment 1,688 - - - 1,688
Total Crown expenses (excluding losses) 72,920 33,890 16,910 (27,962) 95,758
Statement of Financial Position as at 30 June 2014
  Core Crown
2014
Forecast
$m
Crown entities
2014
Forecast
$m
State-owned
enterprises
2014
Forecast
$m
Inter-segment
eliminations
2014
Forecast
$m
Total Crown
2014
Forecast
$m

Assets

         
Cash and cash equivalents 6,312 2,693 1,152 (148) 10,009
Receivables 9,208 5,210 2,738 (1,917) 15,239
Other financial assets 53,675 27,842 19,582 (14,013) 87,086
Property, plant and equipment 30,082 52,485 41,607 - 124,174
Equity accounted investments 33,612 8,502 518 (32,596) 10,036
Intangible assets and goodwill 1,429 518 770 - 2,717
Inventory and other assets 1,644 346 1,456 (40) 3,406
Forecast for new capital spending and top-down adjustment 310 - - - 310
Total assets 136,272 97,596 67,823 (48,714) 252,977

Liabilities

         
Borrowings 93,270 5,294 30,531 (13,959) 115,136
Other liabilities 26,849 42,282 8,291 (7,107) 70,315
Total liabilities 120,119 47,576 38,822 (21,066) 185,451
Total assets less total liabilities 16,153 50,020 29,001 (27,648) 67,526

Net worth

         
Taxpayer funds 757 23,905 11,328 (31,056) 4,934
Reserves 15,396 26,115 17,330 3,443 62,284
Net worth attributable to minority interest in Air NZ - - 343 (35) 308
Total net worth 16,153 50,020 29,001 (27,648) 67,526
Statement of Financial Performance for the year ended 30 June 2015
  Core Crown
2015
Forecast
$m
Crown entities
2015
Forecast
$m
State-owned
enterprises
2015
Forecast
$m
Inter-segment
eliminations
2015
Forecast
$m
Total Crown
2015
Forecast
$m

Revenue

         
Taxation revenue 67,644 - - (775) 66,869
Other sovereign revenue 2,047 5,618 - (1,299) 6,366
Sales of goods and services 1,431 15,246 16,367 (13,880) 19,164
Interest revenue and dividends 2,942 1,642 1,328 (1,653) 4,259
Other revenue 722 13,167 1,123 (11,234) 3,778
Total revenue (excluding gains) 74,786 35,673 18,818 (28,841) 100,436

Expenses

         
Social assistance and official development assistance 24,584 - - (44) 24,540
Personnel expenses 6,040 11,120 3,069 (10) 20,219
Other operating expenses 37,814 22,591 12,715 (27,114) 46,006
Interest expenses 4,313 309 1,745 (978) 5,389
Forecast for future new spending and top-down adjustment 2,832 - - - 2,832
Total expenses (excluding losses) 75,583 34,020 17,529 (28,146) 98,986
Operating balance before gains/(losses) (797) 1,653 1,289 (695) 1,450
Total gains/(losses) 1,983 176 280 (201) 2,238
Net surplus/(deficit) from associates and joint ventures 75 168 43 - 286
Attributable to minority interest in Air NZ - - - - -
Operating balance 1,261 1,997 1,612 (896) 3,974

Expenses by functional classification

         
Social security and welfare 24,471 5,184 - (694) 28,961
Health 14,233 12,208 - (12,844) 13,597
Education 12,227 9,604 23 (8,738) 13,116
Transport and communications 2,136 2,201 7,312 (2,201) 9,448
Other 15,371 4,514 8,449 (2,691) 25,643
Finance costs 4,313 309 1,745 (978) 5,389
Forecast for future new spending and top-down adjustment 2,832 - - - 2,832
Total Crown expenses (excluding losses) 75,583 34,020 17,529 (28,146) 98,986
Statement of Financial Position as at 30 June 2015
  Core Crown
2015
Forecast
$m
Crown entities
2015
Forecast
$m
State-owned
enterprises
2015
Forecast
$m
Inter-segment
eliminations
2015
Forecast
$m
Total Crown
2015
Forecast
$m

Assets

         
Cash and cash equivalents 6,739 2,374 1,046 (149) 10,010
Receivables 9,302 5,048 2,798 (2,067) 15,081
Other financial assets 51,206 30,508 21,814 (15,110) 88,418
Property, plant and equipment 29,986 53,521 42,622 - 126,129
Equity accounted investments 34,966 8,671 519 (33,893) 10,263
Intangible assets and goodwill 1,428 493 784 - 2,705
Inventory and other assets 1,657 345 1,484 (40) 3,446
Forecast for new capital spending and top-down adjustment 320 - - - 320
Total assets 135,604 100,960 71,067 (51,259) 256,372

Liabilities

         
Borrowings 92,085 5,728 32,793 (15,076) 115,530
Other liabilities 26,087 42,111 8,436 (7,306) 69,328
Total liabilities 118,172 47,839 41,229 (22,382) 184,858
Total assets less total liabilities 17,432 53,121 29,838 (28,877) 71,514

Net worth

         
Taxpayer funds 2,022 27,116 12,163 (32,368) 8,933
Reserves 15,410 26,005 17,332 3,526 62,273
Net worth attributable to minority interest in Air NZ - - 343 (35) 308
Total net worth 17,432 53,121 29,838 (28,877) 71,514
Statement of Financial Performance for the year ended 30 June 2016
  Core Crown
2016
Forecast
$m
Crown entities
2016
Forecast
$m
State-owned
enterprises
2016
Forecast
$m
Inter-segment
eliminations
2016
Forecast
$m
Total Crown
2016
Forecast
$m

Revenue

         
Taxation revenue 71,468 - - (826) 70,642
Other sovereign revenue 2,484 5,766 - (1,299) 6,951
Sales of goods and services 1,426 14,876 17,123 (13,484) 19,941
Interest revenue and dividends 3,057 1,857 1,447 (1,824) 4,537
Other revenue 724 13,313 1,163 (11,384) 3,816
Total revenue (excluding gains) 79,159 35,812 19,733 (28,817) 105,887

Expenses

         
Social assistance and official development assistance 25,633 - - (42) 25,591
Personnel expenses 6,084 11,241 3,175 (10) 20,490
Other operating expenses 38,113 22,923 13,282 (26,905) 47,413
Interest expenses 4,345 305 1,883 (1,075) 5,458
Forecast for future new spending and top-down adjustment 3,859 - - - 3,859
Total expenses (excluding losses) 78,034 34,469 18,340 (28,032) 102,811
Operating balance before gains/(losses) 1,125 1,343 1,393 (785) 3,076
Total gains/(losses) 2,030 209 285 (207) 2,317
Net surplus/(deficit) from associates and joint ventures 82 168 60 (2) 308
Attributable to minority interest in Air NZ - - - - -
Operating balance 3,237 1,720 1,738 (994) 5,701

Expenses by functional classification

         
Social security and welfare 25,536 5,509 - (710) 30,335
Health 14,224 11,803 - (12,430) 13,597
Education 12,420 9,780 23 (8,887) 13,336
Transport and communications 2,025 2,194 7,711 (2,197) 9,733
Other 15,625 4,878 8,723 (2,733) 26,493
Finance costs 4,345 305 1,883 (1,075) 5,458
Forecast for future new spending and top-down adjustment 3,859 - - - 3,859
Total Crown expenses (excluding losses) 78,034 34,469 18,340 (28,032) 102,811
Statement of Financial Position as at 30 June 2016
  Core Crown
2016
Forecast
$m
Crown entities
2016
Forecast
$m
State-owned
enterprises
2016
Forecast
$m
Inter-segment
eliminations
2016
Forecast
$m
Total Crown
2016
Forecast
$m

Assets

         
Cash and cash equivalents 6,920 2,506 1,149 (152) 10,423
Receivables 9,578 5,145 2,628 (1,956) 15,395
Other financial assets 54,786 33,853 23,959 (16,404) 96,194
Property, plant and equipment 30,191 54,729 43,478 (1) 128,397
Equity accounted investments 36,415 8,839 520 (35,280) 10,494
Intangible assets and goodwill 1,414 471 795 - 2,680
Inventory and other assets 1,678 346 1,473 (40) 3,457
Forecast for new capital spending and top-down adjustment 385 - - - 385
Total assets 141,367 105,889 74,002 (53,833) 267,425

Liabilities

         
Borrowings 94,877 5,691 34,712 (16,387) 118,893
Other liabilities 25,811 44,157 8,573 (7,238) 71,303
Total liabilities 120,688 49,848 43,285 (23,625) 190,196
Total assets less total liabilities 20,679 56,041 30,717 (30,208) 77,229

Net worth

         
Taxpayer funds 5,262 30,143 13,042 (33,786) 14,661
Reserves 15,417 25,898 17,332 3,613 62,260
Net worth attributable to minority interest in Air NZ - - 343 (35) 308
Total net worth 20,679 56,041 30,717 (30,208) 77,229

Core Crown Expense Tables

Core Crown Expense Tables
($million) 2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Social security and welfare 16,768 17,877 19,382 21,185 22,005 22,560 23,252 23,829 24,471 25,536
GSF pension expenses 645 690 655 328 305 201 298 377 433 464
Health 10,355 11,297 12,368 13,128 13,753 14,350 14,330 14,239 14,233 14,224
Education 9,269 9,551 11,455 11,724 11,650 12,269 12,205 12,099 12,227 12,420
Core government services 4,816 3,371 5,293 2,974 5,563 7,138 4,390 4,474 4,450 4,368
Law and order 2,699 2,894 3,089 3,191 3,382 3,635 3,539 3,511 3,509 3,510
Defence 1,517 1,562 1,757 1,814 1,809 1,903 1,917 1,867 1,866 1,864
Transport and communications 2,405 2,244 2,663 2,345 2,281 2,468 2,128 2,079 2,136 2,025
Economic and industrial services 1,595 2,889 2,960 2,839 2,609 2,529 1,922 1,855 1,876 1,906
Primary services 438 541 534 507 706 783 705 688 686 663
Heritage, culture and recreation 844 1,107 1,002 1,281 1,966 2,490 1,542 1,494 1,738 2,084
Housing and community development 255 260 297 306 876 400 313 313 328 281
Other 68 254 118 80 479 706 488 486 485 485
Finance costs 2,329 2,460 2,429 2,311 3,066 3,655 3,789 3,921 4,313 4,345
Forecast for future new spending .. .. .. .. .. 473 1,094 1,788 2,932 3,959
Top-down expense adjustment .. .. .. .. .. ( 1,100) ( 300) ( 100) ( 100) ( 100)
Core Crown expenses 54,003 56,997 64,002 64,013 70,450 74,460 71,612 72,920 75,583 78,034

Source: The Treasury

Table 6.1 - Social security and welfare expenses
($million) 2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Welfare benefits 15,435 16,288 17,366 18,961 19,781 20,456 21,198 21,764 22,588 23,610
Social rehabilitation and compensation 163 199 336 331 119 81 112 112 112 112
Departmental expenses 845 850 1,092 1,130 1,127 1,123 1,105 1,098 1,100 1,093
Child support impairment 183 193 205 371 281 421 505 525 339 390
Other non-departmental expenses1 142 347 383 392 697 479 332 330 332 331
Social security and welfare expenses 16,768 17,877 19,382 21,185 22,005 22,560 23,252 23,829 24,471 25,536

Note 1: Other non-departmental expenses in the 2011 forecast include costs associated with the Canterbury earthquakes.

Source: The Treasury

Table 6.2 - New Zealand Superannuation and welfare benefit expenses
($million) 2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
New Zealand Superannuation 6,810 7,348 7,744 8,290 8,830 9,597 10,235 10,824 11,590 12,449
Domestic Purposes Benefit 1,468 1,478 1,530 1,693 1,757 1,840 1,909 1,958 2,014 2,073
Unemployment Benefit 613 458 586 930 943 860 825 752 694 665
Invalid's Benefit 1,132 1,216 1,260 1,303 1,306 1,327 1,340 1,351 1,372 1,401
Family Tax Credit 1,699 1,897 2,062 2,168 2,139 2,131 2,125 2,075 2,038 2,054
Accommodation Supplement 877 891 989 1,154 1,197 1,199 1,218 1,232 1,247 1,276
Sickness Benefit 573 582 613 710 743 770 797 819 847 879
Disability Allowance 270 278 390 411 409 403 394 398 403 411
Income-Related Rents 434 465 512 522 553 587 623 663 705 705
In Work Tax Credit 461 563 584 595 585 564 558 528 503 499
Child Tax Credit 44 11 6 4 3 2 2 1 1 1
Special Benefit 106 71 .. .. .. .. .. .. .. ..
Benefits paid in Australia 71 58 50 45 40 37 22 19 16 13
Paid Parental Leave 122 135 143 154 154 162 171 180 191 211
Childcare Assistance 139 150 159 178 188 183 181 178 182 189
War Disablement Pensions 122 134 125 137 135 133 130 125 122 117
Veteran's Pension 143 161 176 179 178 177 174 170 168 166
Other benefits 351 392 437 488 621 484 494 491 495 501
Benefit expenses 15,435 16,288 17,366 18,961 19,781 20,456 21,198 21,764 22,588 23,610

Source: The Treasury

Table 6.3 - Beneficiary numbers
(Thousands) 2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
New Zealand Superannuation 495 508 522 540 561 584 608 630 652 673
Domestic Purposes Benefit 100 97 101 110 114 115 116 117 117 117
Unemployment Benefit 52 37 48 78 80 70 66 58 52 48
Accommodation Supplement 251 245 267 312 320 312 312 310 308 308
Invalid's Benefit 78 82 86 88 88 87 87 86 85 85
Sickness Benefit 48 48 50 58 60 60 61 62 62 63

Source: Ministry of Social Development

Table 6.4 - Health expenses
($million) 2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Departmental outputs 180 206 206 211 199 202 201 201 201 201
Health services purchasing 9,614 10,503 11,354 12,077 12,530 13,224 13,159 13,083 13,086 13,086
Other non-departmental outputs 99 97 98 106 120 121 117 111 111 111
Health payments to ACC 425 463 667 691 849 752 804 795 786 778
Other expenses 37 28 43 43 55 51 49 49 49 48
Health expenses 10,355 11,297 12,368 13,128 13,753 14,350 14,330 14,239 14,233 14,224

Source: The Treasury

Table 6.5 - Health services purchasing
($million) 2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Payments to District Health Boards 8,547 9,312 10,038 10,670 11,133 11,703 11,659 11,644 11,659 11,659
National disability support services 755 834 889 930 971 1,035 1,020 1,020 1,019 1,019
Public health services purchasing 312 357 427 477 426 486 480 419 408 408
Health services purchasing 9,614 10,503 11,354 12,077 12,530 13,224 13,159 13,083 13,086 13,086

Source: The Treasury

Table 6.6 - Education expenses
($million) 2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Early childhood education 617 860 1,030 1,184 1,340 1,353 1,414 1,469 1,521 1,575
Primary and secondary schools 4,325 4,552 4,936 5,157 5,354 5,521 5,608 5,499 5,602 5,735
Tertiary funding 3,322 3,266 4,564 4,465 3,991 4,273 4,191 4,145 4,127 4,133
Departmental expenses 875 828 888 898 923 1,047 981 977 969 969
Other education expenses 130 45 37 20 42 75 11 9 8 8
Education expenses 9,269 9,551 11,455 11,724 11,650 12,269 12,205 12,099 12,227 12,420
Table 6.6 - Education expenses (continued)
Places 2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Early childhood education1 123,196 133,863 142,014 155,108 159,995 166,807 172,895 179,823 185,638 192,135

Note 1: Full-time equivalent based on 1,000 funded child hours per year based as at 1 July.

Sources: Ministry of Education, The Treasury

Table 6.7 - Primary and secondary education expenses
($million) 2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Primary 2,141 2,262 2,484 2,622 2,731 2,815 2,870 2,821 2,892 2,974
Secondary 1,682 1,761 1,898 1,972 2,051 2,121 2,142 2,083 2,104 2,143
School transport 125 131 152 160 163 173 178 186 193 199
Special needs support 263 278 290 297 310 316 320 313 316 322
Professional development 104 108 101 95 90 87 88 87 87 87
Schooling improvement 10 12 11 11 9 9 10 9 10 10
Primary and secondary education expenses 4,325 4,552 4,936 5,157 5,354 5,521 5,608 5,499 5,602 5,735
Table 6.7 - Primary and secondary education expenses (continued)
Places 2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Primary1 479,230 475,820 474,630 473,431 474,149 480,477 485,321 491,068 499,160 505,442
Secondary1 277,619 277,582 280,062 281,095 281,999 279,588 278,831 277,599 276,550 275,310

Note 1: These are snapshots based as at 1 July for primary year levels (years 1 to 8) and 1 March for secondary year levels (years 9 to 13). These numbers include special school rolls but exclude health camps, hospital schools and home schooling.

Sources: Ministry of Education, The Treasury

Table 6.8 - Tertiary education expenses
($million) 2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Tuition 1,962 2,172 2,287 2,398 2,354 2,370 2,381 2,367 2,372 2,373
Other tertiary funding 339 452 522 489 429 461 441 443 441 441
Tertiary student allowances 382 386 444 570 620 634 580 532 511 507
Initial fair value change in student loans .. .. .. .. .. .. .. .. .. ..
Student loans 639 256 1,311 1,008 588 808 789 803 803 812
Tertiary education expenses 3,322 3,266 4,564 4,465 3,991 4,273 4,191 4,145 4,127 4,133
Table 6.8 - Tertiary education expenses (continued)
Places (year) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Estimated funded places1 225,652 225,836 234,230 239,978 238,721 244,339 242,533 242,633 242,687 242,723
Actual delivered places1 230,319 229,224 246,041 250,440            

Note 1: Tertiary places are the number of equivalent full time (EFT) students in: student achievement component; adult and community education; and youth guarantee programmes. Note that historical place numbers have been revised so will differ from previous published EFU numbers. Place numbers are based on calendar years rather than fiscal years.

Sources: Ministry of Education, The Treasury

Table 6.9 - Core government service expenses

Core government service expenses
($million) 2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Official development assistance 330 362 458 435 495 544 513 534 559 559
Indemnity and guarantee expenses .. .. 992 7 319 29 37 43 48 48
Departmental expenses 1,402 1,557 1,668 1,324 1,492 1,648 1,673 1,622 1,605 1,589
Non-departmental expenses 237 277 117 236 471 589 548 582 602 615
Tax receivable write-down and impairments 2,479 701 1,654 590 1,010 1,104 1,068 1,112 1,157 1,157
Science expenses 163 168 179 191 174 121 120 121 124 124
Other expenses1 205 306 225 191 1,602 3,103 431 460 355 276
Core government service expenses 4,816 3,371 5,293 2,974 5,563 7,138 4,390 4,474 4,450 4,368

Note 1: Other expenses in the forecast period include costs associated with the Canterbury earthquakes.

Source: The Treasury

Table 6.10 - Law and order expenses

Law and order expenses
($million) 2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Police 1,086 1,198 1,326 1,349 1,393 1,406 1,401 1,395 1,397 1,398
Ministry of Justice 454 367 379 372 397 470 462 455 457 457
Department of Corrections 662 787 829 903 956 1,033 1,014 1,014 1,014 1,014
NZ Customs Service1 12 12 12 13 120 138 147 148 148 148
Other departments 48 79 80 102 237 101 73 75 72 72
Department expenses 2,262 2,443 2,626 2,739 3,103 3,148 3,097 3,087 3,088 3,089
Non-departmental outputs 354 326 380 399 261 399 367 358 362 362
Other expenses 83 125 83 53 18 88 75 66 59 59
Law and order expenses 2,699 2,894 3,089 3,191 3,382 3,635 3,539 3,511 3,509 3,510

Note1: Previously the majority of NZ Customs Service expenses were classified as core government services.

Source: The Treasury

Table 6.11 - Defence expenses

Defence expenses
($million) 2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
NZDF core expenses 1,459 1,517 1,697 1,747 1,736 1,808 1,868 1,818 1,817 1,809
Other expenses 58 45 60 67 73 95 49 49 49 55
Defence expenses 1,517 1,562 1,757 1,814 1,809 1,903 1,917 1,867 1,866 1,864

Source: The Treasury

Table 6.12 - Transport and communication expenses

Transport and communication expenses
($million) 2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
New Zealand Transport Agency1 1,874 1,966 1,562 1,778 1,696 1,799 1,767 1,817 1,822 1,827
Departmental outputs 113 137 83 63 65 67 65 65 65 65
Other non-departmental expenses 221 104 170 58 105 233 188 137 131 104
Asset impairments 47 .. 320 .. .. .. .. .. .. ..
Rail funding 142 24 507 418 386 338 83 36 93 3
Other expenses 8 13 21 28 29 31 25 24 25 26
Transport and communication expenses 2,405 2,244 2,663 2,345 2,281 2,468 2,128 2,079 2,136 2,025

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

Source: The Treasury

Table 6.13 - Economic and industrial services expenses

Economic and industrial services expenses
($ million) 2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Departmental outputs 546 603 389 382 420 436 413 417 415 415
Employment initiatives 207 186 185 220 214 230 197 198 198 198
Non-departmental outputs 873 822 809 927 756 808 596 553 545 544
Reserve electricity generation 16 81 20 23 9 113 .. .. .. ..
KiwiSaver .. 1,102 1,281 1,024 1,042 685 634 603 638 670
Research and development tax credits .. 37 154 .. .. .. .. .. .. ..
Other expenses (47) 58 122 263 168 257 82 84 80 79
Economic and industrial services expenses 1,595 2,889 2,960 2,839 2,609 2,529 1,922 1,855 1,876 1,906

Source: The Treasury

Table 6.14 - Employment initiatives

Employment initiatives
($ million) 2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Training incentive allowance 29 27 30 19 11 16 14 15 15 15
Subsidised work 88 67 63 109 112 122 90 90 90 90
Employment support for the disabled 86 88 88 88 87 88 89 89 89 89
Other employment assistance schemes 4 4 4 4 4 4 4 4 4 4
Employment initiatives 207 186 185 220 214 230 197 198 198 198

Source: The Treasury

Table 6.15 - Primary service expenses

Primary service expenses
($ million) 2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Departmental expenses 342 354 360 352 354 394 372 370 372 375
Non-departmental outputs 80 109 89 136 160 223 197 182 176 149
Biological research1 .. .. .. .. 167 105 106 102 102 102
Other expenses 16 78 85 19 25 61 30 34 36 37
Primary service expenses 438 541 534 507 706 783 705 688 686 663

1 Biological research was previously classified as an economic and industrial services expense.

Source: The Treasury

Table 6.16 - Heritage, culture and recreation expenses

Heritage, culture and recreation expenses
($ million) 2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Community grants 7 7 8 8 8 7 7 7 7 7
Emissions Trading Scheme .. .. 17 80 860 1,178 380 395 656 988
Departmental outputs 357 392 426 415 433 556 511 504 490 490
Non-departmental outputs 411 469 467 637 481 516 503 489 491 494
Other expenses 69 239 84 141 184 233 141 99 94 105
Heritage, culture and recreation expenses 844 1,107 1,002 1,281 1,966 2,490 1,542 1,494 1,738 2,084

Source: The Treasury

Table 6.17 - Housing and community development expenses

Housing and community development expenses
($ million) 2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Housing subsidies 25 28 37 44 68 67 58 51 55 43
Departmental outputs 134 141 148 140 136 137 129 140 148 110
Other non-departmental expenses 96 91 112 122 672 196 126 122 125 128
Housing and community development expenses 255 260 297 306 876 400 313 313 328 281

Source: The Treasury

Glossary of Terms

ACC insurance liability

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

Baselines

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

Consumer Price Index (CPI)

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

Contingent assets

Potential assets dependent on an uncertain event occurring.

Contingent liability

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

Core Crown

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

Core Crown expenses

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

Core Crown revenue

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

Corporate tax

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

Current account (Balance of Payments)

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

Cyclically adjusted or structural fiscal balance

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

Demographic changes

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

Domestic bond programme

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

Excise duties

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

Financial assets

Any asset that is cash, an equity instrument of another entity (shares), a contractual right to receive cash or shares, 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 excludes net interest payments. To better capture the role of capital spending the indicator is derived from cash flow information.

Fiscal intentions (short-term)

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

Fiscal objectives (long-term)

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

Forecast new capital spending

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

Forecast new operating spending

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

Gains and Losses

Gains and losses typically arise from the revaluation of assets and liabilities, such as investments in financial assets and long-term liabilities for ACC and the Government Superannuation Fund. These valuation changes are reported directly as a movement in net worth (eg, asset revaluation reserves) or indirectly through the Statement of Financial Performance. The impact of gains and losses on the operating balance can be volatile, therefore the operating balance (before gains and losses) indicator can provide a more useful measure of underlying stewardship.

GDP deflator

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

Gross domestic product (GDP)

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

Gross domestic product (expenditure)

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

Gross national expenditure (GNE)

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

Gross sovereign-issued debt (GSID)

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

Labour force participation rate

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

Labour productivity

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

Line-by-line consolidation

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

Marketable securities

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

Monetary conditions

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

Monetary policy

The Reserve Bank implements its monetary policy decisions by adjusting its Official Cash Rate (OCR) in an effort to maintain stability in general level of prices within a defined annual CPI target range.

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

Net core Crown cash flow from operations

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

Net core Crown debt

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

Net international investment position (NIIP)

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

Net worth

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

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

The reporting and measurement framework under which these forecast financial statements are prepared. These standards are approved by the External Reporting Board in New Zealand, based on requirements of the international financial reporting standards issued by the International Accounting Standards Board, adjusted where appropriate for entities that are not profit-oriented.

Operating balance

The residual of revenues less expenses plus surpluses from SOEs and Crown entities. It includes gains and losses not reported directly as a movement against net worth.

Operating balance before gains and losses

The impact of gains and losses on the operating balance can be volatile so the operating balance before gains and losses can provide a more useful measure of underlying stewardship.

Output gap

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

Productivity

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

Projections

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

Residual cash

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

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

Settlement cash

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

Specific fiscal risks

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

System of National Accounts (SNA)

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

Tax revenue

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

Top-down adjustment

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

Total borrowings

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

Tradable/non-tradable

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

Trade-weighted index (TWI)

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

Unit labour costs

Wages and other costs associated with employment per unit of output.

Year ended

Graphs and tables use different expressions of the timeframe. For example, 2011/12 or 2012 will generally mean “year ended 30 June” unless otherwise stated.

Time Series of Fiscal and Economic Indicators

Fiscal Indicators

 
June Years 2000
Actual
2001
Actual
2002
Actual
2003
Actual
2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast

$ millions

                                 

Revenue and Expenses

                                 
Core Crown revenue 34,946 37,842 39,945 43,440 46,219 51,045 55,735 58,211 61,819 59,482 56,216 57,550 61,165 65,736 70,428 74,786 79,159
Core Crown expenses 34,829 36,559 37,513 39,897 41,882 44,895 49,320 54,003 56,997 64,002 64,013 70,450 74,460 71,612 72,920 75,583 78,034

Surpluses

                                 
Total Crown OBEGAL 594 1,422 2,471 4,366 5,573 7,075 7,091 5,860 5,637 (3,893) (6,315) (18,396) (10,809) (4,438) (943) 1,450 3,076
Total Crown operating balance 1,405 1,208 2,286 1,621 7,309 5,931 9,542 8,023 2,384 (10,505) (4,509) (13,360) (12,601) (2,375) 1,576 3,974 5,701

Cash Position

                                 
Core Crown residual cash (386) 349 216 1,217 520 3,104 2,985 2,877 2,057 (8,639) (9,000) (13,343) (13,636) (9,866) (4,976) (4,056) (1,580)

Debt

                                 
Gross debt[1] 36,580 37,194 36,650 36,617 36,017 35,478 33,903 30,647 31,390 43,356 53,591 72,420 79,779 80,000 88,403 87,129 89,788
Gross debt incl RB settlement cash and bank bills 36,580 37,194 36,650 36,617 36,017 35,478 35,867 36,805 37,745 50,973 58,891 77,290 83,764 83,985 92,388 91,114 93,773
Net core Crown debt (incl NZS Fund)[2] 25,895 24,908 24,773 22,647 19,902 13,324 6,302 1,620 (2,676) 5,633 12,549 23,969 35,652 43,780 46,678 48,453 47,775
Net core Crown debt[2] 25,895 24,908 25,388 24,531 23,858 19,879 16,163 13,380 10,258 17,119 26,738 40,128 53,823 63,151 67,775 71,324 72,534

Net Worth

                                 
Total Crown net worth 12,605 15,450 22,825 28,012 39,595 54,240 83,971 96,827 105,514 99,515 94,988 80,887 68,282 65,939 67,526 71,514 77,229

Nominal GDP

112,588 119,991 127,511 134,659 145,200 154,376 161,890 172,060 183,325 185,449 189,359 200,291 211,773 221,864 234,325 246,189 256,939

% GDP

                                 

Revenue and Expenses

                                 
Core Crown revenue 31.0 31.5 31.3 32.3 31.8 33.1 34.4 33.8 33.7 32.1 29.7 28.7 28.9 29.6 30.1 30.4 30.8
Core Crown expenses 30.9 30.5 29.4 29.6 28.8 29.1 30.5 31.4 31.1 34.5 33.8 35.2 35.2 32.3 31.1 30.7 30.4

Surpluses

                                 
Total Crown OBEGAL 0.5 1.2 1.9 3.2 3.8 4.6 4.4 3.4 3.1 (2.1) (3.3) (9.2) (5.1) (2.0) (0.4) 0.6 1.2
Total Crown operating balance 1.2 1.0 1.8 1.2 5.0 3.8 5.9 4.7 1.3 (5.7) (2.4) (6.7) (6.0) (1.1) 0.7 1.6 2.2

Cash Position

                                 
Core Crown residual cash (0.3) 0.3 0.2 0.9 0.4 2.0 1.8 1.7 1.1 (4.7) (4.8) (6.7) (6.4) (4.4) (2.1) (1.6) (0.6)

Debt

                                 
Gross debt[1] 32.5 31.0 28.7 27.2 24.8 23.0 20.9 17.8 17.1 23.4 28.3 36.2 37.7 36.1 37.7 35.4 34.9
Gross debt incl RB settlement cash and bank bills 32.5 31.0 28.7 27.2 24.8 23.0 22.2 21.4 20.6 27.5 31.1 38.6 39.6 37.9 39.4 37.0 36.5
Net core Crown debt (incl NZS Fund)[2] 23.0 20.8 19.4 16.8 13.7 8.6 3.9 0.9 (1.5) 3.0 6.6 12.0 16.8 19.7 19.9 19.7 18.6
Net core Crown debt[2] 23.0 20.8 19.9 18.2 16.4 12.9 10.0 7.8 5.6 9.2 14.1 20.0 25.4 28.5 28.9 29.0 28.2

Net Worth

                                 
Total Crown net worth 11.2 12.9 17.9 20.8 27.3 35.1 51.9 56.3 57.6 53.7 50.2 40.4 32.2 29.7 28.8 29.0 30.1

Notes

  • [1]Excludes Reserve Bank settlement cash and bank bills
  • [2]Excludes advances

Economic Indicators

Economic Indicators
March Years
Annual average % change
2000
Actual
2001
Actual
2002
Actual
2003
Actual
2004
Actual
2005
Actual
2006
Actual
2007
Actual
2008
Actual
2009
Actual
2010
Actual
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Private consumption 3.3 1.4 2.7 4.8 6.2 4.5 4.4 2.5 3.3 -1.1 0.3 2.0 2.1 2.2 2.9 2.9 2.2
Public consumption 5.8 -2.1 4.2 1.4 4.9 4.6 4.9 4.1 5.0 4.2 0.2 3.8 1.8 -1.5 -0.2 0.5 0.7
TOTAL CONSUMPTION 3.8 0.6 3.0 4.0 5.9 4.6 4.5 2.8 3.7 0.1 0.3 2.5 2.0 1.3 2.2 2.4 1.9
Residential investment 19.5 -13.3 2.0 23.6 14.9 2.6 -5.1 -1.4 3.8 -23.2 -13.0 2.3 -8.4 37.6 34.9 14.2 5.5
Non-market investment 13.0 -13.8 21.9 10.7 15.7 11.0 5.9 -7.0 -7.9 15.6 -5.6 5.0 1.1 -8.8 3.2 5.7 3.4
Market investment 7.4 7.3 6.9 2.8 13.0 11.9 11.3 -1.5 9.4 -3.3 -10.1 7.8 8.9 9.8 10.3 4.1 -0.3
TOTAL INVESTMENT 10.9 -0.1 6.8 8.0 13.6 8.8 6.6 -2.2 6.3 -7.7 -9.5 5.9 5.0 16.2 14.4 6.4 1.2
Stock change (contribution to growth) 1.2 -0.3 0.1 -0.1 0.2 0.3 -0.5 -0.7 0.6 0.2 -2.2 1.4 -0.5 0.2 0.1 0.2 0.2
GROSS NATIONAL EXPENDITURE 6.4 0.2 3.8 4.7 7.6 5.8 4.5 1.0 4.8 -1.4 -3.7 4.5 2.1 4.8 5.4 3.7 1.9
Exports 7.4 6.3 3.0 7.8 1.1 4.8 -0.2 2.9 3.4 -3.0 4.8 1.9 2.8 2.3 1.9 1.7 1.8
Imports 11.3 -0.7 4.0 7.2 12.7 12.5 4.2 -1.6 10.4 -4.3 -9.4 10.5 3.6 6.1 8.0 4.3 0.7
EXPENDITURE ON GDP 5.2 2.4 3.5 5.0 4.0 3.6 3.3 2.2 2.8 -0.9 0.8 1.9 2.0 3.2 3.3 2.8 2.4
GDP (production measure) 5.4 2.5 3.6 4.9 4.4 3.8 3.2 0.9 3.0 -1.5 -0.7 1.6 2.3 3.4 3.3 2.9 2.4
- annual % change 6.5 0.8 4.6 4.6 5.3 2.6 2.4 1.7 2.3 -3.5 1.8 1.6 2.5 3.7 3.1 2.8 2.2
Real GDP per capita 4.8 1.9 2.7 3.0 2.4 2.4 2.1 -0.4 1.9 -2.4 -1.8 0.5 1.5 2.6 2.4 1.9 1.5
Nominal GDP (expenditure basis) 6.0 5.7 7.5 5.1 6.9 7.1 5.6 5.0 7.7 1.9 1.2 5.7 5.5 4.7 5.8 5.1 4.5
GDP deflator 0.8 3.2 3.9 0.2 2.8 3.3 2.3 2.8 4.7 2.9 0.4 3.7 3.5 1.5 2.4 2.2 2.1
Output gap (% deviation, March year average) 0.6 0.1 0.1 1.0 1.4 1.7 2.1 1.1 2.8 0.7 -0.7 -0.7 -0.8 -0.2 -0.1 -0.1 -0.2
Employment 1.9 2.0 2.9 2.8 3.0 3.6 2.8 2.2 1.3 0.9 -1.3 1.2 1.8 1.5 1.5 1.4 1.3
Unemployment (% March quarter s.a.) 6.5 5.5 5.3 5.0 4.3 3.9 4.0 3.9 3.9 5.1 6.1 6.5 5.8 5.2 4.9 4.7 4.7
Wages (average ordinary-time hourly, ann % change) 1.7 3.2 3.7 2.3 3.5 3.6 5.4 4.7 4.7 5.4 1.0 2.6 4.0 3.3 4.2 4.1 4.0
CPI inflation (ann % change) 1.5 3.1 2.6 2.5 1.5 2.8 3.3 2.5 3.4 3.0 2.0 4.5 2.8 2.2 2.4 2.5 2.7
Merchandise terms of trade (SNA basis) 0.2 3.4 4.0 -5.6 4.3 3.5 -2.0 -1.1 8.5 -0.1 -7.5 9.9 3.2 -1.4 1.0 1.1 0.3
Current account balance - $billion -7.1 -4.4 -3.4 -4.1 -6.2 -9.4 -14.0 -13.5 -14.6 -14.8 -3.6 -7.2 -5.0 -7.9 -12.6 -15.6 -17.6
Current account balance - % of GDP -6.4 -3.7 -2.7 -3.1 -4.4 -6.2 -8.7 -8.0 -8.0 -8.0 -1.9 -3.6 -2.4 -3.6 -5.4 -6.4 -6.9
TWI (March quarter) 54.1 50.5 51.6 60.6 66.9 69.6 68.3 68.8 71.9 53.7 65.3 67.2 70.0 70.1 69.6 67.2 63.3
90-day bank bill rate (March quarter) 6.0 6.4 5.0 5.8 5.5 6.9 7.6 7.8 8.8 3.7 2.7 3.0 2.9 3.7 4.3 5.0 5.3
10-year bond rate (March quarter) 7.3 6.0 6.7 6.0 5.9 6.0 5.7 5.9 6.3 4.6 5.9 5.6 4.4 4.6 5.0 5.2 5.4

Additional Information

The following information forms part of the Pre-election Economic and Fiscal Update 2011 (Pre-election Update), released by the Treasury on 25 October 2011. 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 - detailed tables providing breakdowns of the economic forecasts.
  • Treasury and Inland Revenue tax forecasts - detailed tax revenue and receipts tables comparing Treasury's forecasts with IRD's forecasts.
  • Additional fiscal indicators - estimates of the cyclically-adjusted balance and fiscal impulse.
  • Government Finance Statistics (GFS) for central government - fiscal tables presented under a GFS presentation framework to help with cross-country comparisons.
  • Accounting policies - outline of the specific Crown accounting policies. The published forecast financial statements only provide a summary.

Detailed Economic Forecast Information

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

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

Table 1 - Real Gross Domestic Product

Chain-volume series expressed in 1995/96 prices

Table 1 - Real Gross Domestic Product
  Actual Seasonally Adjusted
  $ million Annual %
change
Annual
Average %
change
$million Quarterly
% change
2009Q1 32,850 -3.5 -1.5 33,129 -1.1
2009Q2 32,544 -2.7 -2.4 33,186 0.2
2009Q3 32,850 -2.0 -2.7 33,260 0.2
2009Q4 34,913 0.2 -2.0 33,564 0.9
2010Q1 33,453 1.8 -0.7 33,736 0.5
2010Q2 33,162 1.9 0.5 33,820 0.2
2010Q3 33,367 1.6 1.4 33,791 -0.1
2010Q4 35,372 1.3 1.6 33,997 0.6
2011Q1 34,003 1.6 1.6 34,293 0.9
2011Q2 33,658 1.5 1.5 34,325 0.1
2011Q3 34,199 2.5 1.7 34,634 0.9
2011Q4 36,359 2.8 2.1 34,946 0.9
2012Q1 34,840 2.5 2.3 35,137 0.5
2012Q2 34,778 3.3 2.8 35,467 0.9
2012Q3 35,289 3.2 2.9 35,738 0.8
2012Q4 37,550 3.3 3.1 36,091 1.0
2013Q1 36,112 3.7 3.4 36,420 0.9
2013Q2 36,008 3.5 3.4 36,722 0.8
2013Q3 36,529 3.5 3.5 36,993 0.7
2013Q4 38,772 3.3 3.5 37,265 0.7
2014Q1 37,216 3.1 3.3 37,534 0.7
2014Q2 37,077 3.0 3.2 37,811 0.7
2014Q3 37,594 2.9 3.1 38,072 0.7
2014Q4 39,878 2.9 2.9 38,327 0.7
2015Q1 38,255 2.8 2.9 38,581 0.7
2015Q2 38,061 2.7 2.8 38,815 0.6
2015Q3 38,517 2.5 2.7 39,006 0.5
2015Q4 40,796 2.3 2.5 39,211 0.5
2016Q1 39,105 2.2 2.4 39,438 0.6
2016Q2 38,918 2.3 2.3 39,689 0.6

Source: Statistics New Zealand, The Treasury

Table 2 - Consumers Price Index and Exchange Rates

Table 2 - Consumers Price Index and Exchange Rates
  Consumers Price Index Exchange rates
  Index Quarterly %
change
Annual %
change
TWI USD
2009Q1 1075 0.3 3.0 53.7 0.53
2009Q2 1081 0.6 1.9 58.4 0.60
2009Q3 1095 1.3 1.7 62.6 0.67
2009Q4 1093 -0.2 2.0 65.5 0.73
2010Q1 1097 0.4 2.0 65.3 0.71
2010Q2 1099 0.2 1.7 66.7 0.70
2010Q3 1111 1.1 1.5 66.9 0.72
2010Q4 1137 2.3 4.0 67.8 0.76
2011Q1 1146 0.8 4.5 67.2 0.76
2011Q2 1157 1.0 5.3 69.1 0.79
2011Q3 1166 0.8 5.0 72.0 0.83
2011Q4 1172 0.5 3.1 70.0 0.79
2012Q1 1178 0.5 2.8 70.0 0.79
2012Q2 1183 0.4 2.2 70.0 0.79
2012Q3 1189 0.6 2.0 70.0 0.79
2012Q4 1195 0.5 2.0 70.0 0.79
2013Q1 1204 0.8 2.2 70.1 0.79
2013Q2 1212 0.7 2.5 70.1 0.79
2013Q3 1219 0.6 2.5 70.0 0.79
2013Q4 1226 0.6 2.6 69.9 0.78
2014Q1 1233 0.6 2.4 69.6 0.78
2014Q2 1240 0.6 2.3 69.1 0.77
2014Q3 1248 0.6 2.4 68.6 0.76
2014Q4 1256 0.6 2.5 67.9 0.75
2015Q1 1264 0.6 2.5 67.2 0.74
2015Q2 1273 0.7 2.6 66.3 0.72
2015Q3 1281 0.7 2.6 65.3 0.71
2015Q4 1290 0.7 2.7 64.3 0.69
2016Q1 1299 0.7 2.7 63.3 0.67
2016Q2 1308 0.7 2.8 62.3 0.66

Source: Statistics New Zealand, The Treasury

Table 3 - Gross Domestic Expenditure and Income

Table 3 - Gross Domestic Expenditure and Income
March Year 2011
Estimate
2012 Forecast 2013 Forecast 2014 Forecast 2015 Forecast 2016 Forecast
  $ mill %vol %pr   $ mill %vol %pr   $ mill %vol %pr   $ mill %vol %pr $ mill %vol %pr   $ mill
Consumption:                                
- Private 115,155 2.1 3.0 121,078 2.2 1.6 125,674 2.9 2.0 131,915 2.9 2.0 138,478 2.2 2.3 144,734
- Public 40,529 1.8 2.9 42,439 -1.5 2.1 42,708 -0.2 2.3 43,600 0.5 2.3 44,859 0.7 2.3 46,222
Gross Fixed Capital Formation:                                
- Residential 8,487 -8.4 3.8 8,074 37.6 5.5 11,740 34.9 6.4 16,828 14.2 4.9 20,138 5.5 5.0 22,297
- Market * 27,120 8.9 0.0 29,516 9.8 4.1 33,761 10.3 1.4 37,747 4.1 1.6 39,934 -0.3 2.3 40,713
- Non-market ** 3,208 1.1 2.9 3,330 -8.8 2.4 3,110 3.2 2.4 3,292 5.7 2.4 3,561 3.4 2.4 3,772
- Total all sectors 38,809 5.0 0.4 40,930 16.2 2.3 48,634 14.4 4.0 57,890 6.4 3.3 63,657 1.2 3.7 66,804
Change in Stocks 682     -352     316     2     205     720
Gross National Expenditure 195,174 2.1 2.5 204,095 4.8 1.6 217,332 5.4 1.9 233,407 3.7 2.1 247,199 1.9 2.6 258,480
Exports 58,157 2.8 2.9 61,443 2.3 -4.2 60,227 1.9 1.4 62,241 1.7 5.3 66,680 1.8 9.4 74,303
Imports 55,288 3.6 -1.4 56,515 6.1 -2.0 58,803 8.0 1.2 64,295 4.3 5.3 70,621 0.7 10.5 78,526
Expenditure on GDP 198,042 2.0 3.5 209,024 3.2 1.5 218,755 3.3 2.4 231,353 2.8 2.2 243,258 2.4 2.1 254,256
Statistical Discrepancy 447     447     447     447     447     447
Gross Domestic Product 198,489     209,471     219,202     231,800     243,705     254,703
Compensation of employees 87,458   5.3 92,091   4.6 96,298   5.5 101,606   5.6 107,338   5.4 113,153
Operating Surplus, net:                                 
- Agriculture 7,250   6.2 7,700   -6.4 7,211   1.3 7,307   5.1 7,679   8.7 8,349
- Other 48,401   3.2 49,963   5.7 52,807   6.3 56,120   3.6 58,121   1.4 58,953
- Total all sectors 55,651   3.6 57,663   4.1 60,018   5.7 63,427   3.7 65,800   2.3 67,302
Consumption of fixed capital 30,094   5.5 31,750   5.5 33,496   5.5 35,338   5.5 37,282   5.5 39,332
Indirect Taxes 25,939   10.3 28,621   5.0 30,044   6.8 32,083   5.8 33,940   4.8 35,570
Less subsidies 654   0.0 654   0.0 654   0.0 654   0.0 654   0.0 654
Gross Domestic Product 198,489   5.5 209,471   4.6 219,202   5.7 231,800   5.1 243,705   4.5 254,703

* Includes Local Government and Non-profit Organisations

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

Source: Statistics New Zealand, The Treasury

Table 4 - Labour Market Indicators

Table 4 - Labour Market Indicators
Annual Average Percentage Change
March Year
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Real GDP (production basis) 1.6 2.3 3.4 3.3 2.9 2.4
Working Age Population 1.4 1.0 0.9 1.1 1.1 1.0
Labour Force 1.5 1.3 0.6 1.1 1.2 1.2
Employment - Total 1.2 1.8 1.5 1.5 1.4 1.3
Labour Productivity * -0.4 0.7 2.2 1.9 1.5 1.1
CPI  (annual percentage change) 4.5 2.8 2.2 2.4 2.5 2.7
Average Ordinary Time Hourly Wages 1.6 3.4 3.5 4.0 4.2 4.1
Average Weekly Earnings 2.7 3.4 3.2 3.9 4.1 4.0
Real Wages -1.2 -0.6 1.3 1.5 1.7 1.4
Compensation of Employees 3.7 5.3 4.6 5.5 5.6 5.4
Unit Labour Costs (Hours worked basis) 2.1 2.7 1.3 2.1 2.7 2.9
Real Unit Labour Costs -0.7 -1.4 -0.8 -0.4 0.2 0.3

* Hours worked basis

Table 5 - Labour Market Indicators

Table 5 - Labour Market Indicators
Number (000's)
As at March Quarter
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Total Population 4,403 4,430 4,469 4,513 4,554 4,593
     Natural Increase 34 28 31 29 30 29
     Net  Migration 6 -1 8 15 11 10
     Annual Change 41 27 39 44 41 39
Working Age Population      3,458 3,483 3,518 3,556 3,594 3,630
     Annual Change          46 25 35 39 38 36
Not in the labour force (s.a.) 1,082 1,093 1,114 1,123 1,132 1,139
     Annual Change -7 11 20 10 8 7
Labour Force (s.a.) 2,367 2,382 2,398 2,427 2,457 2,486
     Annual Change          52 15 16 29 30 28
Total Employment (s.a.)           2,213 2,244 2,274 2,308 2,342 2,369
     Annual Change          40 31 30 34 33 27
Unemployment (s.a.)             154 138 124 119 116 117
     Annual Change          13 -16 -14 -5 -4 1
Participation Rate (% s.a)    68.6 68.4 68.2 68.3 68.4 68.5
Unemployment Rate (% s.a)     6.5 5.8 5.2 4.9 4.7 4.7

Source: Statistics New Zealand, The Treasury

Table 6 - Current Account

Table 6 - Current Account
$NZ Million
Year ended March
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Exports Goods 45,523 48,101 47,215 49,203 53,361 60,321
annual % Change 13.5 5.7 -1.8 4.2 8.5 13.0
Imports Goods 42,093 42,999 44,979 49,656 54,648 60,716
annual % Change 12.3 2.2 4.6 10.4 10.1 11.1
Balance on Goods 3,431 5,102 2,236 -453 -1,287 -394
% of Nominal GDP 1.7 2.4 1.0 -0.2 -0.5 -0.2
Exports Services 12,633 13,399 12,972 12,984 13,256 13,907
annual % change -1.4 6.1 -3.2 0.1 2.1 4.9
Imports Services 13,195 13,516 13,825 14,639 15,973 17,811
annual % change 6.0 2.4 2.3 5.9 9.1 11.5
Balance on Services -562 -116 -852 -1,655 -2,716 -3,904
% of Nominal GDP -0.3 -0.1 -0.4 -0.7 -1.1 -1.5
Balance on Goods & Services 2,869 4,985 1,383 -2,108 -4,003 -4,298
% of Nominal GDP 1.4 2.4 0.6 -0.9 -1.6 -1.7
Income and Transfers Balance          -10,063 -10,011 -9254 -10469 -11594 -13296
% of Nominal GDP -5.1 -4.8 -4.2 -4.5 -4.8 -5.2
Current Account Balance    -7,196 -5,026 -7,871 -12,576 -15,597 -17,594
% of Nominal GDP -3.6 -2.4 -3.6 -5.4 -6.4 -6.9

Source: Statistics New Zealand, The Treasury

Table 7 - Exports - SNA basis

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
2008 -0.9 25.7 9,434 -2.9 -5.1 4,656 0.7 6.3 12,456
2009 -15.1 27.9 10,101 1.5 23.2 5,796 1.6 16.8 14,804
2010 30.8 -31.9 9,078 -1.1 -7.5 5,332 -5.6 -6.7 13,052
2011 0.5 29.4 11,668 -2.4 6.3 5,550 6.2 2.4 14,173
2012 3.1 4.4 12,620 -3.3 14.5 6,098 6.8 -3.2 14,672
2013 1.1 -9.4 11,588 0.3 -7.1 5,699 2.2 1.5 15,211
2014 2.0 -0.4 11,792 3.2 -0.2 5,864 2.1 4.3 16,183
2015 2.0 4.5 12,579 2.8 4.0 6,274 2.4 8.5 17,980
2016 2.0 9.0 13,994 2.8 8.6 7,006 2.7 13.2 20,893
Table 7 - Exports - SNA basis (continued)
Breakdown of Exports
March
Years
Total Goods** Services Total Exports
  %v %p $ mn %v %p $ mn %v %p $ mn
2008 4.5 3.9 38,718 0.4 2.2 12,988 3.4 3.3 51,705
2009 -2.6 17.6 44,248 -4.1 6.9 13,309 -3.0 15.1 57,556
2010 6.8 -15.4 40,092 -1.9 -1.8 12,809 4.8 -12.5 52,900
2011 2.7 10.7 45,523 -1.0 -0.5 12,633 1.9 7.9 58,157
2012 3.3 2.2 48,101 2.5 3.5 13,399 2.8 2.9 61,443
2013 2.7 -4.4 47,215 0.6 -3.6 12,972 2.3 -4.2 60,227
2014 2.1 2.1 49,203 0.9 -0.9 12,984 1.9 1.4 62,241
2015 2.0 6.4 53,361 0.7 1.3 13,256 1.7 5.3 66,680
2016 2.0 10.8 60,321 1.0 3.8 13,907 1.8 9.4 74,303

* 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.

Table 8 - Imports - SNA basis

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
2008 10.2 -9.7 7,213 15.8 2.7 6,982 10.3 -6.4 16,225 6.9 -2.7 9,908
2009 3.5 13.2 8,292 -6.3 26.3 8,186 -6.3 21.9 18,452 -2.7 12.4 10,788
2010 -28.2 2.1 6,202 1.5 -27.4 6,059 -11.1 -9.9 14,818 -4.1 -1.0 10,256
2011 25.3 -4.3 7,436 -2.0 16.7 6,945 12.9 1.2 16,943 7.7 -4.5 10,564
2012 3.6 -8.9 7,026 6.3 12.5 8,321 0.9 -0.9 16,968 4.4 -3.7 10,610
2013 16.3 -10.9 7,280 0.2 0.1 8,338 5.0 0.3 17,866 6.3 0.7 11,375
2014 16.7 4.6 8,896 4.4 1.5 8,832 5.6 2.7 19,364 6.5 2.7 12,444
2015 5.1 0.7 9,425 3.8 5.3 9,650 4.4 6.5 21,537 5.0 6.5 13,916
2016 -2.3 3.8 9,534 1.6 9.9 10,779 1.8 11.2 24,390 2.7 11.2 15,894
Table 8 - Imports - SNA basis (continued)
Breakdown of Imports
March
Years
Total Goods (VFD) Services Total  
  %v %p $ mn %v %p $ mn %v %p $ mn
2008 10.3 -4.3 40,596 10.9 -5.8 12,725 10.4 -4.7 53,321
2009 -4.3 17.9 45,768 -4.2 16.6 14,091 -4.3 17.6 59,859
2010 -10.5 -8.5 37,471 -6.1 -6.4 12,453 -9.4 -8.0 49,925
2011 11.6 0.7 42,093 7.3 -1.5 13,195 10.5 0.1 55,288
2012 3.0 -0.9 42,999 4.3 -1.6 13,516 3.6 -1.4 56,515
2013 7.8 -3.0 44,979 0.4 1.7 13,825 6.1 -2.0 58,803
2014 9.2 1.1 49,656 3.9 2.0 14,639 8.0 1.2 64,295
2015 4.6 5.3 54,648 3.3 5.7 15,973 4.3 5.3 70,621
2016 0.6 10.5 60,716 1.1 10.3 17,811 0.7 10.5 78,526

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

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

Treasury and Inland Revenue Tax Forecasts

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

The Treasury's total tax forecasts are higher than Inland Revenue's in every June year from 2012 through to 2016 by, on average, $0.7 billion pa, a difference of approximately 1% of total tax revenue. The difference is spread across all of the major tax types, although Inland Revenue forecasts overall higher net other persons tax.

Table 9 - Summary of Treasury and Inland Revenue forecasts of total Crown tax revenue
Year ended 30 June
$billion
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast

Source deductions

         
Treasury 21.3 22.7 24.3 26.1 27.8
Inland Revenue 21.0 22.5 24.2 25.9 27.7
Difference 0.3 0.2 0.1 0.2 0.1

Corporate taxes

         
Treasury 8.4 8.8 9.5 10.0 10.3
Inland Revenue 8.2 8.5 9.1 9.5 9.6
Difference 0.2 0.3 0.4 0.5 0.7

Goods and services tax

         
Treasury 15.1 16.2 17.4 18.4 19.3
Inland Revenue 15.1 16.0 17.2 18.2 19.1
Difference - 0.2 0.2 0.2 0.2

Other taxes

         
Treasury 10.2 10.9 11.7 12.4 13.2
Inland Revenue 10.1 10.8 11.7 12.6 13.5
Difference 0.1 0.1 - (0.2) (0.3)

Total tax

         
Treasury 55.0 58.6 62.9 66.9 70.6
Inland Revenue 54.4 57.8 62.2 66.2 69.9
Difference 0.6 0.8 0.7 0.7 0.7

Total tax (% of GDP)

         
Treasury 26.0 26.4 26.8 27.2 27.5
Inland Revenue 25.7 26.1 26.5 26.9 27.2
Difference 0.3 0.3 0.3 0.3 0.3

The Treasury's and Inland Revenue's source deductions (mainly PAYE) are similar to each other, with the average difference across all five years being less than 1%.

In corporate tax, the Treasury's view of current corporate profitability is higher than Inland Revenue's view. This in turn causes the Treasury's corporate tax forecast to be higher than Inland Revenue's in 2012 and the gap persists through the forecast period as the Treasury's 2012 profit assumption raises the base level of profits through all forecast years. In addition, the Treasury's forecast includes a more cyclical recovery than Inland Revenue's in that it has tax loss usage abating from 2014 onwards. This increases the gap between the two forecasts as Inland Revenue has made no explicit assumption regarding the level of tax loss usage in the forecast period.

The difference in the GST forecasts is caused by the different treatment of residential investment in the respective forecasting models. The Treasury's GST forecasting model explicitly includes forecasts of residential investment as an input whereas Inland Revenue's forecasts of GST related to residential investment are judgement based. Residential investment grows strongly in the Treasury's macroeconomic forecast over the year ending June 2013 and the difference in approach is reflected in the Treasury's higher GST forecast from 2013 onwards.

Forecasts of other taxes, in total, are broadly similar to each other, with some offsetting differences across various minor taxes. For instance, Inland Revenue's forecast for other taxes is higher than the Treasury's in 2015 and 2016 owing to different judgements around the cyclical profile of refunds to individuals. Inland Revenue expects that refunds to individuals and business (other persons) will abate once the recent spate of ‘catch up' refunds for salary and wage earners runs its course and will settle out at a lower level. The Treasury considers that refunds to businesses and individuals (other persons) will remain at a higher level.

  • Table 10 ­- Treasury and Inland Revenue forecasts of tax revenue (accrual).
  • Table 11 - Treasury and Inland Revenue forecasts of tax receipts (cash).

Table 10 - Treasury and Inland Revenue forecasts of tax revenue (accrual)

Table 10 - Treasury and Inland Revenue forecasts of tax revenue (accrual)
  2010/11
Actual
2011/12
Forecast
2012/13
Forecast
2013/14
Forecast
2014/15
Forecast
2015/16
Forecast
$ million   Treasury IRD Difference Treasury IRD Difference Treasury IRD Difference Treasury IRD Difference Treasury IRD Difference

Direct tax

                               

Individuals

                               
Source deductions 21,243 21,676 21,366 310 23,117 22,900 217 24,716 24,561 155 26,439 26,302 137 28,217 28,056 161
Other persons tax 3,791 4,290 4,086 204 4,426 4,375 51 4,633 4,865 (232) 4,804 5,036 (232) 5,028 5,124 (96)
Refunds (1,679) (1,616) (1,620) 4 (1,531) (1,500) (31) (1,499) (1,360) (139) (1,444) (1,300) (144) (1,458) (1,240) (218)
Fringe benefit tax 462 440 453 (13) 458 464 (6) 482 480 2 512 497 15 542 506 36
Subtotal: Individuals 23,817 24,790 24,285 505 26,470 26,239 231 28,332 28,546 (214) 30,311 30,535 (224) 32,329 32,446 (117)
Company tax (net) 7,727 8,421 8,203 218 8,961 8,636 325 9,656 9,158 498 10,107 9,572 535 10,414 9,690 724

Withholding taxes on:

                               
Resident interest income 1,704 1,646 1,769 (123) 1,874 1,855 19 2,251 1,979 272 2,645 2,462 183 3,069 3,088 (19)
Non-resident income 467 427 477 (50) 478 533 (55) 536 598 (62) 589 658 (69) 630 700 (70)
Foreign-source dividends ..  ..  1 (1) ..  1 (1) ..  1 (1) ..  1 (1) ..  1 (1)
Resident dividend income 195 207 216 (9) 287 293 (6) 470 470 ..  487 479 8 498 483 15
Subtotal: Withholding tax 2,366 2,280 2,463 (183) 2,639 2,682 (43) 3,257 3,048 209 3,721 3,600 121 4,197 4,272 (75)
Total income tax 33,910 35,491 34,951 540 38,070 37,557 513 41,245 40,752 493 44,139 43,707 432 46,940 46,408 532
Other: Estate and gift duties 2 ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  .. 
Total direct tax 33,912 35,491 34,951 540 38,070 37,557 513 41,245 40,752 493 44,139 43,707 432 46,940 46,408 532

Indirect tax

                               
GST (net) 19,461 21,486 21,522 (36) 22,426 22,230 196 23,650 23,462 188 24,870 24,665 205 25,888 25,686 202

Excise duties on:

                               
Alcoholic drinks 623 712 696 16 746 732 14 777 769 8 812 808 4 849 851 (2)
Tobacco products 220 210 203 7 219 211 8 212 213 (1) 206 208 (2) 207 209 (2)
Petroleum fuels 872 921 939 (18) 938 948 (10) 979 987 (8) 1,016 1,016 0 1,055 1,046 9
Subtotal: excise duties 1,715 1,843 1,838 5 1,903 1,891 12 1,968 1,969 (1) 2,034 2,032 2 2,111 2,106 5

Other indirect tax

                               
Customs duty 1,916 2,019 1,995 24 2,076 2,032 44 2,079 2,055 24 2,082 2,065 17 2,113 2,083 30
Road user charges 1,016 1,073 1,065 8 1,142 1,125 17 1,223 1,195 28 1,297 1,265 32 1,367 1,330 37
Gaming duties 266 271 271 ..  277 275 2 282 279 3 287 283 4 292 287 5
Motor vehicle fees 172 168 175 (7) 166 180 (14) 169 185 (16) 173 190 (17) 176 195 (19)
Exhaustible resource levy 36 38 35 3 36 34 2 36 36 (0) 36 39 (3) 36 42 (6)
Approved issuer levy, cheque duty & other 91 90 104 (14) 91 93 (2) 91 91 ..  91 89 2 91 87 4
Subtotal: Other indirect tax 3,497 3,659 3,645 14 3,788 3,739 49 3,880 3,841 39 3,965 3,931 34 4,075 4,024 51
Total indirect tax 24,673 26,988 27,005 (17) 28,117 27,860 257 29,498 29,272 226 30,869 30,628 241 32,074 31,816 258
Total tax 58,585 62,479 61,956 523 66,187 65,417 770 70,743 70,024 719 75,008 74,335 673 79,014 78,224 790
Total tax (% of GDP) 29.2% 29.5% 29.3% 0.2% 29.8% 29.5% 0.3% 30.2% 29.9% 0.3% 30.5% 30.2% 0.3% 30.8% 30.4% 0.3%

less Core Crown tax eliminations

                               
Core Crown income tax 872 220 220   403 403   441 441   482 482   527 527  
GST on Crown expenses and departmental outputs 5,753 6,417 6,417   6,191 6,191   6,264 6,264   6,474 6,474   6,606 6,606  
Crown ESCT 373 362 362   369 369   373 373   377 377   382 382  
Crown AIL 29 30 30   30 30   30 30   30 30   30 30  
Core Crown taxation 51,558 55,451 54,927 523 59,195 58,425 770 63,635 62,916 719 67,644 66,971 673 71,468 70,678 790
Core Crown tax (% of GDP) 25.7% 26.2% 25.9% 0.2% 26.7% 26.3% 0.3% 27.2% 26.8% 0.3% 27.5% 27.2% 0.3% 27.8% 27.5% 0.3%

less Total Crown tax eliminations

                               
Income tax from SOEs and CEs 365 436 436   564 564   688 688   712 712   762 762  
Other Crown GST ..  ..  ..    ..  ..    ..  ..    ..  ..     ..  ..   
ESCT from SOEs and CEs 13 10 10   10 10   10 10   10 10   10 10  
Lottery duty 52 47 47   50 50   53 53   54 54   54 54  
Total Crown taxation 51,128 54,958 54,435 523 58,572 57,802 770 62,885 62,166 719 66,868 66,195 673 70,642 69,852 790
Total Crown tax (% of GDP) 25.5% 26.0% 25.7% 0.2% 26.4% 26.1% 0.3% 26.8% 26.5% 0.3% 27.2% 26.9% 0.3% 27.5% 27.2% 0.3%
Nominal GDP 200,291 211,773 211,773   221,864 221,864   234,325 234,325   246,189 246,189   256,939 256,939  

Table 11 - Treasury and Inland Revenue forecasts of tax receipts (cash)

 
  2010/11
Actual
2011/12
Forecast
2012/13
Forecast
2013/14
Forecast
2014/15
Forecast
2015/16
Forecast
$ million   Treasury IRD Difference Treasury IRD Difference Treasury IRD Difference Treasury IRD Difference Treasury IRD Difference

Direct tax

                               

Individuals

                               
Source deductions 21,081 21,576 21,281 295 23,013 22,811 202 24,608 24,468 140 26,327 26,205 122 28,105 27,959 146
Other persons tax 4,386 4,897 4,570 327 5,002 4,880 122 5,164 5,350 (186) 5,309 5,480 (171) 5,484 5,600 (116)
Refunds (2,463) (2,342) (2,410) 68 (2,350) (2,290) (60) (2,270) (2,150) (120) (2,206) (2,090) (116) (2,180) (1,980) (200)
Fringe benefit tax 457 439 447 (8) 457 457 ..  481 473 8 511 489 22 541 505 36
Subtotal: Individuals 23,461 24,570 23,888 682 26,122 25,858 264 27,983 28,141 (158) 29,941 30,084 (143) 31,950 32,084 (134)
Company tax (net) 7,717 8,522 8,255 267 8,785 8,455 330 9,635 9,000 635 10,038 9,365 673 10,305 9,555 750

Withholding taxes on:

                               
Resident interest income 1,701 1,645 1,768 (123) 1,873 1,854 19 2,250 1,978 272 2,644 2,461 183 3,068 3,087 (19)
Non-resident income 462 427 477 (50) 478 533 (55) 536 598 (62) 589 658 (69) 630 700 (70)
Foreign-source dividends (1) ..  1 (1) ..  1 (1) ..  1 (1) ..  1 (1) ..  1 (1)
Resident dividend income 196 206 215 (9) 286 292 (6) 469 469 ..  486 478 8 497 482 15
Subtotal: Withholding tax 2,358 2,278 2,461 (183) 2,637 2,680 (43) 3,255 3,046 209 3,719 3,598 121 4,195 4,270 (75)
Total income tax 33,536 35,370 34,604 766 37,544 36,993 551 40,873 40,187 686 43,698 43,047 651 46,450 45,909 541
Other: Estate and gift duties 2 ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  .. 
Total direct tax 33,538 35,370 34,604 766 37,544 36,993 551 40,873 40,187 686 43,698 43,047 651 46,450 45,909 541

Indirect tax

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