The Pre-election Economic and Fiscal Update (PREFU) 2014 includes the Treasury's overall economic forecasts and forecast financial statements of the government. The Update includes the implications of government financial decisions and other information relevant to the fiscal and economic position.

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

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Treasury Forecast Update Process

The Public Finance Act 1989 requires a Pre-election Economic and Fiscal Update (Pre-election Update) to be published between 20 and 30 working days prior to an election.

With the announcement of an election date of 20 September 2014, the Treasury has prepared a set of forecasts taking into account the most recent economic and fiscal developments since its May 2014 Budget Economic and Fiscal Update (Budget Update). As in 2005, the last time there was a September General Election, the process has been slightly truncated given the proximity to the preparation of the Budget Update forecasts.

A complete set of macroeconomic forecasts has been produced taking into account the economic developments since the Budget Update. In line with established practice, Inland Revenue (IRD) has prepared an independent set of tax forecasts based, in the short term, on more detailed analysis of taxpayer information, and, in the longer term, on the same underlying macroeconomic trends that underpin the Treasury's tax forecasts.

The fiscal forecasts have been prepared using the same accounting policies used for the audited Financial Statements of the Government of New Zealand. They 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 Standards.

The preparation of the Pre-election Update fiscal forecasts has involved:

  • reassessing tax revenue (in conjunction with IRD) and benefit expense forecasts in light of the revisions to the macroeconomic forecasts
  • updating the operating results and expense forecasts using the 2013/14 pre-audited financial information of departments and other significant reporting entities
  • considering the impact of additional financial information that has occurred since the finalisation of the Budget Update fiscal forecasts of 29 April 2014
  • incorporating the fiscal impact of significant Cabinet decisions made since the Budget Update, up to and including 4 August 2014. The forecasts, for example, incorporate the decision to reduce ACC motor vehicle levies in the 2015/16 fiscal year, and
  • the forecasts also taking into account the Budget 2014 decision to raise the operating allowance for Budget 2015 to $1.5 billion (compared with $1.0 billion previously) and to increase the operating allowance by 2% in each Budget after that.

Where government policies, including those under active consideration, are known at the date of finalisation and would have a material effect on the fiscal forecasts, but which are not certain enough (in terms of their likely timing or measurement) to incorporate into the fiscal forecasts, they are disclosed in the Specific Fiscal Risks chapter.

Projections are also included in the document and represent potential future paths of variables. They are usually based on historical averages of the levels or growth rates of the relevant variables, and depend on both the forecast base from which they arise and the assumptions used to generate them. They differ from forecasts, which have a higher level of precision.

Finalisation Dates for the Update

Economic data     16 July 2014

Economic forecasts     18 July 2014

Tax revenue forecasts     25 July 2014

Fiscal forecasts     5 August 2014

Specific fiscal risks     5 August 2014

Projections     6 August 2014

Text finalised     13 August 2014

Since the macroeconomic forecasts were finalised on 18 July, there have been a number of data releases. They do not change the Treasury’s overall view of the economy. The Risks and Scenarios chapter describes some of the key risks to the Treasury's central economic forecasts, and sets out two alternative scenarios for how the economy and fiscal position might develop.

Other Information

On the Treasury's website is a series of other information that provides users of the Pre-election Update with further detail. This other information should be read in conjunction with the published document.

Additional Pre-election Update information includes:

  • detailed economic forecast information – tables providing breakdowns of the economic forecasts
  • Treasury and IRD 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, and
  • accounting policies – outline of the specific Crown accounting policies. The published forecast financial statements only provide a summary.

This other information can be accessed at: www.treasury.govt.nz/budget/forecasts/prefu2014

NZ Budget App

Smartphone and tablet users can also access the Pre-election Update through the NZ Budget App. The App is available on the Apple Store for iOS devices and the Google Play store for Android devices.

Statement of Responsibility

On the basis of the economic and fiscal information available to it, the Treasury has used its best professional judgement in supplying the Minister of Finance with this Economic and Fiscal Update. The Update incorporates the fiscal and economic implications both of Government decisions and other circumstances as at 5 August 2014 that were communicated to me by the Minister of Finance in accordance with the requirements of the Public Finance Act 1989 and of other economic and fiscal information available to the Treasury as at 5 August 2014. This Update does not incorporate any decisions, circumstances, or statements that the Minister of Finance has determined, in accordance with section 26V of the Public Finance Act 1989, should not be incorporated in this Update.

Gabriel Makhlouf
Secretary to the Treasury

13 August 2014

To enable the Treasury to prepare this Economic and Fiscal Update I have ensured the Secretary to the Treasury has been advised, in accordance with the requirements of the Public Finance Act 1989, of all Government decisions and other circumstances as at 5 August 2014 of which I was aware and that had material economic or fiscal implications.

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

Hon Bill English
Minister of Finance

13 August 2014

Executive Summary

  • The New Zealand economy is expanding at a robust pace, although growth momentum has eased from earlier in the year. Looking forward, real production gross domestic product (GDP) is forecast to grow by 2.8% on average over the four years to March 2018, essentially unchanged from the Budget Update. The near-term outlook remains for growth faster than potential driven by residential investment, positive migration inflows and still-high terms of trade.
  • Real GDP growth for the year ending March 2014 was faster than expected in the Budget Update - 3.3% compared with 3.0% forecast - while growth for the year ending March 2015 is forecast to be lower at 3.8% (compared with 4.0% in the Budget Update). Growth is expected to slow later in the forecast period as the factors currently supporting growth decline and monetary conditions tighten (Figure 1).
Figure 1 - Real GDP growth
Figure 1 - Real GDP growth
Source:  Statistics New Zealand, the Treasury
  • Rising construction activity is expected to be a key driver of growth, with earthquake rebuilding supplemented by a rebound in residential construction in Auckland in response to pent-up demand. Business investment is also forecast to pick up as productive capacity is more heavily utilised.
  • Net migration inflows continue to rise, adding to both demand and the productive capacity of the economy. The net inflow is expected to reach 42,500 this year and overall to add an additional 3,500 to the population compared with the Budget Update, with risks skewed to the upside.
  • Household income growth is underpinning consumption and residential investment activity. Over the forecast period household disposable incomes are forecast to increase 4.0% on average per year, after an estimated 7.1% increase in the year to March 2014. Employment and wage growth is expected to be the main driver of this growth, with labour income growing by 4.6% on average over the next four years.
  • Recent falls in commodity prices (mainly dairy and forestry) have occurred earlier than envisaged in the Budget Update. As a result, the forecast decline in the goods terms of trade is occurring sooner than previously expected and consequently will provide less support to growth. The terms of trade are forecast to stabilise during 2015, recovering some of the decline currently being seen. Over the forecast period the terms of trade are expected to remain above the average experienced over the past decade (Figure 2). A more substantial and sustained short-term decline in export prices is an area of downside risk for the forecasts.
Figure 2 - Goods terms of trade (SNA basis)
Figure 2 - Goods terms of trade (SNA basis)   .
Source:  Statistics New Zealand, the Treasury
  • The global backdrop to these forecasts is steady, but uneven, economic growth. Trading partner growth is likely to be similar to that recorded in the mid-2000s with moderate inflation. Risks overall remain skewed to the downside, with heightened geopolitical tensions adding to economic uncertainties.
  • The exchange rate has remained elevated for some time, but is assumed to depreciate as the global outlook improves, foreign interest rates rise and the terms of trade fall from their recent peaks.
  • The current account deficit is forecast to increase from around 2.6% of GDP in mid-2014 to 4.8% in the year to March 2015 owing to lower export volumes in the near-term and a decline in the terms of trade. The deficit is forecast to stabilise at 6.4% of GDP from late 2016.
  • Fiscal policy is expected to exert a dampening influence on economic activity over the forecast horizon as slow growth in spending, combined with rising tax revenue, see the fiscal balance improve. The average fiscal impulse over the forecast period is unchanged from the Budget Update at -0.4% of GDP, but the timing and magnitude have changed with the impact of weaker tax receipts and changes in the expected timing of some forecast expenditure.
  • Despite higher than forecast growth, annual Consumers Price Index (CPI) inflation in June 2014 was 1.6%, below the Budget Update forecast of 1.8%. With real GDP growth exceeding our estimate of potential growth, upward pressure on resources is forecast to continue to increase and lead to higher inflation. We forecast annual CPI inflation to peak at 2.5% in late 2016 before declining to around 2% by the end of the forecast period.
  • Reflecting increased inflation pressures, we expect further increases in the Reserve Bank's Official Cash Rate (OCR) over the forecast period. Ninety-day interest rates are forecast to rise to 5.3% by late 2017.
  • Nominal GDP increased 7.0% in the year to March 2014, 0.3 percentage points higher than expected in the Budget Update. In contrast, forecast growth for the year to March 2015 is 0.5 percentage points lower at 5.2% taking the level of nominal GDP below that forecast in the Budget Update. This mainly reflects the earlier decline in the terms of trade. The lower level of nominal GDP is expected to continue over the remainder of the forecast period. See the box Real and Nominal GDP on page 7 for an explanation of the different measures.
  • The operating balance before gains and losses (OBEGAL) is forecast to move from an estimated $2.6 billion deficit in the year ending June 2014 to a surplus of $0.3 billion this fiscal year, and increasing thereafter to $3.0 billion in the year ending June 2018 (Figure 3). The OBEGAL surplus is $0.5 billion lower in the year ending 2018 than forecast in the Budget Update.
  • Core Crown tax revenue for the year to June 2014 has been revised downward from that expected in the Budget Update. While still expected to increase across the forecast period, core Crown tax revenue is forecast to be below the Budget Update forecasts each year as a result of lower forecast nominal GDP. Forecast core Crown expenses remain largely unchanged from the Budget Update, declining to 30.0% of GDP by the end of the forecast period.
  • Net core Crown debt is forecast to peak at 26.8% of GDP in the year ending June 2015 - slightly higher than 26.4% in the Budget Update. Thereafter, net debt is expected to reduce more slowly than in the Budget Update,reflecting a lower forecast path forcore Crown residual cash (which is now expected to return to surplus in the year ending June 2019). In dollar terms, net debt is forecast to peak at $67.9 billion in June 2018, $2.4 billion higher and a year later than forecast in the Budget Update.
  • In addition to the risks noted above, there are other upside and downside risks to the judgements underpinning the forecasts. These include the size and pace of the Canterbury rebuild, the path and pass-through of the exchange rate and the saving behaviour of households. The potential impacts of some of these judgements evolving differently from the main forecast are highlighted in the Risks and Scenarios chapter. One scenario assumes that growth in the United States (US) is stronger, along with stronger domestic price pressures. Another scenario explores the impact of weaker short-term domestic demand combined with a larger decline in the terms of trade.
  • As well as the fiscal impact of changes in economic activity, the Government is exposed to other fiscal risks that could impact both the operating balance and the balance sheet. For example, the Crown's financial position is susceptible to market movements in variables such as interest rates, exchange rates and equity prices. The final fiscal cost of the Christchurch earthquakes is also still uncertain. There are also a number of contingent liabilities and fiscal risks outlined in the Specific Fiscal Risks chapter.
Table 1 - Summary of the Treasury's main economic and fiscal forecasts - Economic (March years, %)
  2013
Actual
2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Economic growth1
Pre-election Update 2.2 3.3 3.8 3.0 2.2 2.1
Budget Update 2.3 3.0 4.0 3.0 2.1 2.1
Unemployment rate2
Pre-election Update 6.2 6.0 5.6 5.2 4.8 4.5
Budget Update 6.2 5.9 5.4 5.1 4.8 4.4
CPI inflation3
Pre-election Update 0.9 1.5 1.7 2.4 2.3 2.1
Budget Update 0.9 1.5 1.8 2.5 2.3 2.0
Current account balance4
Pre-election Update -3.9 -2.8 -4.8 -6.2 -6.4 -6.4
Budget Update -3.9 -3.1 -4.4 -5.9 -6.2 -6.3
Table 1 - Summary of the Treasury's main economic and fiscal forecasts - Fiscal (June years, % of GDP)
  2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Total Crown OBEGAL5
Pre-election Update -2.1 -1.1 0.1 0.3 0.7 1.1
Budget Update -2.1 -1.1 0.2 0.5 0.9 1.3
Net debt6
Pre-election Update 26.2 25.9 26.8 26.7 25.8 25.0
Budget Update 26.2 25.8 26.4 25.9 24.9 23.8

Notes:

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

Sources: Statistics New Zealand, the Treasury

Real and Nominal GDP

Gross domestic product (GDP) is a measure of the added value of goods and services produced in an economy in a quarter or a year. Changes in the level of GDP between time periods are a measure of economic growth. Quarterly GDP figures for New Zealand are produced on both a production and an expenditure basis. Production GDP measures the contribution of an industry as the value of output in that industry less the value of intermediate inputs sourced from local industries or abroad. Expenditure GDP measures the value of final demand in the economy as a whole (ie, consumption, investment, exports and any increase in stocks) minus imports. Income GDP is measured only on an annual basis in New Zealand.

The two quarterly measures of GDP correspond closely over time as they are different ways of measuring the same thing (Figure 4). However, they may diverge in the short term because of differences in data and estimation techniques. In New Zealand, production GDP is the preferred measure of growth in GDP. The Treasury forecasts expenditure GDP, but assumes that growth in production and expenditure GDP will be similar in the medium term.

Figure 4 - Production and expenditure GDP growth
Figure 4 - Production and expenditure GDP growth   .
Source:  Statistics New Zealand, the Treasury
Figure 5 - Real and nominal GDP growth
Figure 5 - Real and nominal GDP growth   .
Source:  Statistics New Zealand, the Treasury

In addition to the distinction between production and expenditure GDP, GDP can be measured in real and nominal terms. Real GDP is a measure of the value added in the economy adjusted for price changes and is sometimes referred to as a volume or constant price measure of GDP. The level of value added is expressed in the prices of a base period, currently the 1995/96 March year. Nominal GDP is a measure of the value added in the economy including price changes and is expressed in current dollars. Quarterly real GDP is calculated on both a production and an expenditure basis, but quarterly nominal GDP is calculated only on an expenditure basis.

Price indices or deflators account for the difference between nominal and real GDP and are calculated for each of the components of expenditure GDP, eg, consumption, investment, exports and imports. The aggregate GDP price deflator reflects movements in all those components and is a wider measure of price changes in the economy than the CPI. The ratio of the exports price deflator to the imports price deflator is referred to as the terms of trade and is part of the overall GDP price deflator and therefore affects nominal GDP. The terms of trade measure the volume of imports that can be purchased for a given volume of exports. The Treasury forecasts both real and nominal expenditure GDP (Figure 5). Nominal GDP is the measure of value added that is used to forecast tax revenue as taxes are paid on current dollar values.

Economic Outlook

Overview

  • The outlook for the New Zealand economy has not changed significantly in the relatively short time since the Budget Update. Growth in real GDP in the year to March 2014 was slightly faster than expected in the Budget Update, but the outlook for the year ahead is slightly weaker. Thereafter, the outlook for growth in real GDP is largely unchanged.
  • Growth in nominal GDP was also marginally higher in the past year than expected in the Budget Update, largely because of higher terms of trade, but is now forecast to be weaker over most of the forecast period as the terms of trade are expected to fall sooner and domestic prices have increased by less than previously expected. For an explanation of real and nominal GDP, see the box Real and Nominal GDP on page 7.
  • Economic growth amongst our main trading partners in the first quarter of 2014 was close to forecast at the aggregate level and the outlook remains similar to previously. Risks remain in the outlook for the world economy, especially geopolitical risks, and they are discussed further in the Risks and Scenarios chapter.
  • Dairy export prices are forecast to fall earlier than in the Budget Update, but to stabilise at around the same level later in 2014. If sustained, the latest auction prices would point to the risk of a larger fall in dairy prices and the terms of trade. A scenario based partly on lower terms of trade is discussed in the Risks and Scenarios chapter.
  • The main factors supporting growth in the New Zealand economy over the forecast period are the same as in the Budget Update, in particular the surge in residential construction in Christchurch and Auckland, faster population growth as a result of higher net migration inflows, and historically high terms of trade despite a near-term adjustment.
  • The factors that are expected to moderate growth in the economy include rising interest rates, the continuing high value of the New Zealand dollar and fiscal restraint.
  • The capacity of the New Zealand economy to grow is marginally increased by faster population growth, but pressure on resources is expected to increase as the pace of expansion exceeds the economy's potential rate of growth, and this pressure will manifest itself in higher inflation.

Recent Developments and Near-term Outlook

Outlook for economic growth similar to Budget Update...

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

Real production GDP grew 3.3% in the year to March 2014 from the previous year, slightly faster than the 3.0% forecast in the Budget Update (Figure 1.1). Growth in the March quarter was marginally higher than forecast at 1.0%, but most of the difference in annual average growth was accounted for by upward revisions to earlier quarters' previously published growth rates. The outlook for annual average growth in real GDP in the year ahead is 3.8% (slightly lower than the 4.0% in the Budget Update), easing to 3.0% in March 2016 and 2.1% in March 2018.

...but private consumption was lower than expected in the March quarter...

Although outturns at an aggregate level for the March quarter were only slightly higher than forecast, there were some significant differences within the components of economic activity. The level of real private consumption was unchanged from the previous quarter, which was well below the Budget Update forecast of 0.8% growth, with the demand for services down by 0.4% in the quarter. The reasons for the weakness are not yet clear but a strong recovery is expected in the June quarter, based on indicators released to date.

Growth in private consumption in current dollar terms was weaker than forecast by a slightly larger margin as consumption prices rose only 0.1% in the March quarter, compared to the Budget Update forecast of a 0.3% increase. Consumer price inflation was lower than expected in the June quarter for non-tradable goods and services, indicating a continuation of weak price pressures in the economy. The annual inflation rate in June 2014 was 1.6%, less than the Budget Update forecast of 1.8%, with non-tradables inflation of 2.7% compared with a forecast of 3.4%.

...offset by higher net exports in both real and nominal terms

Strong growth in exports offset the weak growth in private consumption in the March quarter in both real and nominal terms. Goods export volumes increased 3.9% in the March quarter against an expectation of a slight fall from the December quarter; services exports also increased more than expected, offsetting the weak private consumption outturn.

At the same time, goods import volumes increased by less than forecast, partially offset by higher than expected services imports. As a result, net exports made a larger contribution to GDP than expected. The terms of trade (the ratio of export prices to import prices) were close to forecast so net exports were also higher than forecast in nominal terms.

However, the near-term outlook is for slightly weaker growth...

Although real private consumption is expected to rebound strongly in June from its flat result in the March quarter, it is not expected to recover fully in nominal terms. Consumer price inflation of 0.3% in the June quarter was weaker than forecast in the Budget Update, pointing to weak price growth in the GDP measure of consumption. The level of nominal consumption is expected to remain lower than previously forecast in coming quarters despite ongoing growth in the consumption of goods and services in real terms.

Recent developments in the external sector of the economy reinforce the outlook for slightly weaker than earlier forecast GDP growth in the year ahead. The value of merchandise exports fell in the June quarter with both volumes and prices lower, and import volumes appear to have increased, supporting the forecast negative contribution from net goods exports to real GDP; similarly, although visitor arrivals were up slightly in the June quarter from March, resident departures increased by more, pointing to weak net services exports.

...as weaker terms of trade compound the impact of lower domestic prices

Dairy prices have declined sooner than expected in the Budget Update and these forecasts bring forward the fall in prices. The decline may be partly seasonal as supply increases in New Zealand and demand dips in China, but increasing global supply and high stock levels in China may also be contributing to the weaker prices. The forecast assumes that prices stabilise at around the same level as in the Budget Update by the end of 2014 as the seasonal factors reverse.

Dairy auction prices have fallen further since finalisation of the forecasts in mid-July, dropping 8.4% in US dollars in early August. Dairy auction prices tend to be volatile and the recent falls may overstate the weakness in demand. However, if the latest prices were sustained, they would pose a downside risk to the main forecast. The impact of a larger fall in the terms of trade is explored in the Risks and Scenarios chapter.

Forestry prices have also declined as demand from China has fallen with slower growth in housing construction. These export price declines have been only partly offset by higher meat prices as sheep meat prices were lifted by additional demand from China and meat supply remains constrained in the US. At the same time, oil prices have increased as geopolitical risks have intensified in the Middle East and Ukraine.

Figure 1.2 - Goods terms of trade (SNA)
Figure 1.2 - Goods terms of trade (SNA)   .
Source:  Statistics New Zealand, the Treasury

The terms of trade are expected to decline sooner than forecast in the Budget Update, although to a similar level (Figure 1.2). There is normally a lag of one to two quarters from auction prices to export prices and the terms of trade, and on this basis the declines in market prices since the March quarter are expected to result in a larger fall in the goods terms of trade in the year to December 2014 of 9%, compared with a fall of 5% over the same period in the Budget Update.

Despite lower commodity export prices, the value of the New Zealand (NZ) dollar averaged 80.2 on the Trade Weighted Index (TWI) in the June quarter, 1.5% higher than the Budget Update assumption. It is assumed to decline only slowly from that level over the next couple of years and to remain higher than previously forecast, keeping tradables inflation lower than otherwise but constraining services and manufactured exports to some degree.

Rapid increase in household income points to strong growth in real consumption...

Other data released since the Budget Update was finalised also point to continuing robust growth in the economy in real terms. Firms' demand for labour grew strongly in the year to June, with total weekly paid hours up 3.6% and the number of people employed up 3.7% (Figure 1.3). The increase in labour input was spread across most industries.

Figure 1.3 - Employment and labour force growth
Figure 1.3 - Employment and labour force growth   .
Source:  Statistics New Zealand

The supply of labour also increased rapidly over the past year, partly as a result of gains from external migration. The net inflow of migrants in the year to June 2014 was 38,300, an increase of 30,400 from the year before. The increase was largely a result of a fall in the number of departures of New Zealand citizens to Australia (16,500), but increased arrivals of non-New Zealand citizens (9,300) and of returning New Zealand citizens (3,300) also contributed. Net external migration added around 0.9 percentage points to total population growth in the past year.

In addition, the proportion of the working-age population participating in the labour market increased from 68.1% a year ago to 68.9% in the June quarter, resulting in a total increase in the labour force of 2.8% (Figure 1.3). With the faster growth in the number of people employed, the unemployment rate fell from 6.4% a year ago to 5.6% in June 2014. Average hourly wages increased 2.5% from a year before and, given the large increase in total weekly paid hours, total weekly gross earnings rose 6.3% from a year before. With low inflation recently, this result underpins the outlook for ongoing real consumption growth in the near term.

Figure 1.4 - Migration and house prices
Figure 1.4 - Migration and house prices   .
Source:  Statistics New Zealand, REINZ

...but housing demand has eased

Despite rapid population growth as a result of elevated net inward migration, the demand for existing housing has eased since late 2013. House sales declined 14% from a year ago in the June quarter 2014 and the annual rate of increase in house prices slowed from just less than 10% in late 2013 to 6.2% in June (Figure 1.4). Loan-to-value ratio (LVR) restrictions introduced by the Reserve Bank in October 2013, and rising interest rates since earlier this year, may have cooled housing demand.

Table 1.1 - Economic forecasts1
(Annual average % change, March years) 2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Private consumption 3.4 4.1 3.6 2.6 1.7
Public consumption 1.9 0.1 0.9 1.8 1.6
Total consumption 3.0 3.3 3.1 2.4 1.6
Residential investment 16.9 20.7 9.8 1.3 -0.3
Market investment 8.8 11.1 4.8 3.6 2.6
Non-market investment -2.7 4.0 6.1 2.4 2.4
Total investment 10.6 14.7 6.4 3.2 2.2
Stock change2 0.3 0.2 -0.3 0.1 0.0
Gross national expenditure 4.7 6.1 3.6 2.7 1.7
Exports 0.3 -0.4 2.8 2.7 2.8
Imports 7.9 7.0 4.5 4.0 1.7
GDP (expenditure measure) 2.5 3.8 3.0 2.2 2.1
GDP (production measure) 3.3 3.8 3.0 2.2 2.1
Real GDP per capita 2.2 2.2 1.7 1.2 1.2
Nominal GDP (expenditure measure) 7.0 5.2 4.2 4.4 3.7
GDP deflator 4.3 1.4 1.1 2.2 1.6
Output gap (% deviation, March quarter)3 0.3 1.2 1.1 0.4 0.1
Employment 2.5 3.0 1.7 1.4 1.2
Unemployment rate4 6.0 5.6 5.2 4.8 4.5
Participation rate5 69.3 69.3 69.2 69.1 69.0
Nominal wages6 2.5 3.0 3.0 3.4 3.4
CPI inflation7 1.5 1.7 2.4 2.3 2.1
Terms of trade8 13.5 -0.7 -3.3 1.1 -0.1
House prices9 7.2 4.4 4.1 2.5 2.4
Current account balance          
  $billions -6.3 -11.5 -15.3 -16.5 -17.3
  % of GDP -2.8 -4.8 -6.2 -6.4 -6.4
Net international investment position          
  % of GDP -65.3 -66.9 -70.4 -73.8 -77.6
TWI10 78.7 80.0 79.1 77.8 74.3
90-day bank bill rate10 3.0 4.3 4.9 5.0 5.3
10-year bond rate10 4.6 4.7 4.9 5.1 5.2

Notes:

  1. Forecasts finalised 18 July 2014.
  2. Contribution to GDP growth.
  3. Estimated as the percentage difference between actual real GDP and potential real GDP.
  4. Percent of the labour force, March quarter, seasonally adjusted.
  5. Percent of the working-age population, March quarter, seasonally adjusted.
  6. Quarterly Employment Survey, average ordinary-time hourly earnings, annual percentage change.
  7. Annual percentage change.
  8. System of National Accounts (SNA) and merchandise basis, annual average percentage change.
  9. Quotable Value New Zealand (QVNZ) House Price Index, annual percentage change.
  10. Average for the March quarter.

Longer time series for these variables are provided on page 130.

Positive outlook for residential investment...

Figure 1.5 - Dwelling consents and residential investment
Figure 1.5 - Dwelling consents and residential investment   .
Source:  Statistics New Zealand

Despite the slightly weaker demand for existing houses, residential investment is expected to continue to increase rapidly in the year ahead as the rebuilding of Christchurch gathers further pace and house-building in Auckland increases in response to the shortage of supply. Residential building consents, particularly for Canterbury and Auckland, point to ongoing growth in residential construction (Figure 1.5). Dwelling consents in Canterbury were 44% higher in the year to June 2014 than in the previous year.

...and business and consumer confidence remain elevated

The outlook for business investment is also positive. Business confidence and activity indicators have eased from elevated levels recently; investment intentions remain above historical averages, supply factors are increasing as the major constraint on the expansion of output, and capacity utilisation rates are high. In the next year or so, investment will be supported by the high value of the NZ dollar and relatively low interest rates, making imported capital goods cheaper and investment more profitable.

Figure 1.6 - Consumer confidence and private consumption
Figure 1.6 - Consumer confidence and private consumption   .
Source:  Statistics New Zealand, Westpac-McDermott Miller

Consumer confidence remains elevated, despite some easing in the June quarter, pointing to ongoing private consumption growth (Figure 1.6). Higher interest rates and a slowdown in the housing market may have made consumers more cautious, but the outlook for private consumption in real terms remains positive, thanks to rapid population growth from net migration inflows and increasing incomes from expanding employment. However, with relatively low inflation outturns expected to continue in the near term - even as inflation pressures build - the outlook for nominal consumption growth is weaker than in the Budget Update, as highlighted earlier.

Overall, the outlook for nominal GDP growth in the near term is weaker than in the Budget Update because of the sooner-than-expected fall in the terms of trade, the higher NZ dollar and lower domestic inflation. Nominal GDP increased 7.0% in the year to March 2014 from the previous year, 0.3 percentage points higher than expected in the Budget Update. However, it is forecast to grow by 5.2% in the year to March 2015, 0.5 percentage points less than in the Budget Update. The level of nominal GDP in the June 2015 year is forecast to be $900 million (0.4%) lower than in the Budget Update.

Recent Developments and Outlook for Main Trading Partners

In aggregate, New Zealand's main trading partners' economies grew much as expected in the first quarter of 2014, although there were some offsetting variances from forecast. The outlook for the forecast period has not changed significantly since the Budget Update.

China's annual growth picked up in the June quarter with some fiscal stimulus and monetary easing, but authorities face a trade-off between boosting growth in the short term and rebalancing the economy and reducing credit risk over the medium term. The Australian economy recorded above-trend growth in the first quarter as export volumes increased sooner than expected; however, domestic demand remains weak and growth is expected to be sub-trend for some time, albeit supported by continuing low interest rates.

The US economy contracted in the March quarter as a result of the harsh winter and a rundown in inventories, and is expected to record lower growth for the year as a whole. The euro area also recorded low growth in the first quarter and is expected to remain weak for some time as the area experiences a protracted recovery from its debt crisis.

The United Kingdom (UK) and Japanese economies both performed better than expected in the March quarter. The recovery in the UK is expected to continue for the rest of the year, supported by rapid employment growth. In Japan, private consumption was brought forward to avoid the 1 April sales tax increase and is expected to be lower in the rest of the year.

Forecasts for most other Asian economies were revised down on the weaker outlook for the major advanced economies (especially the US) and some specific factors such as the political unrest in Thailand. Downgrades for these economies account for most of the reduction in trading partner growth in 2014 (in addition to the weaker US result), but the outlook for subsequent years is unchanged at the aggregate level from the Budget Update.

Table 1.2 - Trading partner growth (calendar years)
  2014
weights
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Australia 25% 2.4 3.0 2.8 2.9 3.0 3.0
China 22% 7.7 7.4 7.3 7.1 7.0 7.0
United States 10% 1.9 2.0 2.8 2.9 3.0 3.0
Japan 8% 1.5 1.5 1.1 1.3 1.2 1.2
Euro area 7% -0.4 1.0 1.2 1.3 1.4 1.4
United Kingdom 4% 1.7 3.0 2.5 2.1 2.0 2.0
Canada 1% 2.0 2.2 2.4 2.5 2.5 2.5
Other Asia* 23% 4.0 4.1 4.6 4.8 4.8 4.8
Trading Partner Growth (TPG) 100% 3.5 3.8 4.0 4.0 4.1 4.1
TPG - Consensus (July 2014)   3.5 3.8 4.0 4.1 4.1 4.0
TPG - IMF WEO (April 2014)   3.4 3.9 4.0 4.0 4.0 4.0
TPG - The Treasury (2014 Budget Update)   3.5 3.9 4.0 4.0 4.1 4.1

Sources: IMF, Consensus Forecasts, the Treasury

Inflation is increasing in the US and UK. The Federal Reserve plans to conclude its asset purchases in October and is expected to raise its policy rate in the first half of 2015; the Bank of England may raise its policy rate earlier. Inflation is generally low elsewhere, especially in Europe where the European Central Bank loosened monetary conditions further in June.

The extended period of low interest rates has brought reduced volatility in financial markets, leading investors to seek higher yields, including in New Zealand. The tightening of monetary policy in the US may lead to deleveraging and a reversal of some of these capital flows. These risks are discussed further in the Risks and Scenarios chapter.

Medium-term Outlook

Fundamental drivers of outlook unchanged

The medium-term growth outlook is largely unchanged from the Budget Update. The drivers of growth are expected to be a surge in residential construction in Auckland and Christchurch, higher net migration and historically high terms of trade despite some near-term adjustment. These factors are expected to be reinforced by continuing strong labour income growth, leading to increasing private consumption.

The initial above-trend growth will place further pressure on labour and capital resources, leading to increased inflationary pressures and higher interest rates. Growth will also be moderated by a continuing high value of the NZ dollar and fiscal restraint. The current account deficit is forecast to increase from its current low level as import values grow faster than exports.

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

While growth in real GDP in the March 2015 year is forecast to be slightly lower than in the Budget Update, the outlook is very similar over the rest of the forecast period. In terms of nominal GDP, growth is expected to be slightly lower in the March 2015 year and similar thereafter (Figure 1.7). The level of nominal GDP is forecast to be approximately 0.5% lower than in the Budget Update over the forecast period as a whole.

Terms of trade to stabilise above historical average...

Although the goods terms of trade are expected to fall 10% in the year to March 2015, they are forecast to stabilise at around that level and to be 9% higher over the forecast period than their average over the past decade. They are expected to be chiefly supported by continuing robust demand from China for dairy and meat products. Demand for forestry products will pick up again with an increase in construction activity in China and residential construction in the US and Australia. Demand for New Zealand's other primary commodities, and for manufactured products, is expected to be sustained by the gradual recovery in the world economy.

...but NZ dollar to decline, making some exports more competitive

The value of the NZ dollar is assumed to remain close to its record level on the TWI in the near term, supported by relatively high commodity prices and positive interest rate differentials. It is expected to begin to decline as the economic recovery becomes more established in the US and the Federal Reserve starts to increase its policy rate, gradually reducing the interest rate differential. The impact of an earlier and more rapid decline in the NZ dollar as a result of a faster recovery in the US economy is discussed in the Risks and Scenarios chapter.

The fall in the NZ dollar is expected to boost tourism earnings and manufactured exports as NZ dollar-priced goods and services become more competitive. The TWI is assumed to decline from an average of 81.2 in the current quarter to 73.3 in the June quarter of 2018, a fall of 9.7% over four years.

Residential investment a major driver of growth in the economy...

The rebuilding of residential housing in Christchurch is forecast to be a major driver of growth in real GDP at the start of the forecast period and then to help sustain the level of activity. Annual growth in residential investment is forecast to peak in the December quarter 2014, but the level of activity is forecast to continue to increase throughout the rest of the forecast period.

The assumptions concerning the rebuilding of Christchurch are unchanged from the Budget Update. The total amount of rebuild-related investment is estimated to be $40 billion (in 2011 prices), with around half of this total assumed to take place by mid-2018. Most of this investment will be funded by insurance payments and government investment. Residential investment is expected to provide the greatest contribution over the forecast period, followed by investment in infrastructure and social assets, and commercial assets.

...along with business investment

Businesses are also expected to continue to expand their investment as aggregate demand in the economy increases. As noted above, business confidence and investment intentions are at high levels, although they have eased from earlier in the year. Reduced spare capacity in the economy, continuing high terms of trade and a tighter labour market are expected to lead firms to invest more. Annual average growth in business investment is forecast to remain high until mid-2015, and then to decline to be similar to GDP growth by the end of the forecast period.

Higher net migration boosts population growth...

Figure 1.8 - Net external migration
Figure 1.8 - Net external migration   .
Source:  Statistics New Zealand, the Treasury

The net external migration inflow has been running ahead of the Budget Update forecast as departures declined. The forecast peak annual gain in September 2014 has been increased from 38,100 in the Budget Update to 42,500 in these forecasts (Figure 1.8); the turn-around in net migration inflows in 2015 is now assumed to be slightly sharper than previously as departures start to increase again with a pick-up in the Australian economy and arrivals begin to fall as the demand for labour eases. The small change in the profile of migration results in an additional 3,500 people in the total population compared with the Budget Update. Higher net migration inflows would pose an upside risk to the outlook.

...and increased demand for workers results in a fall in unemployment...

Figure 1.9 - Participation and unemployment
Figure 1.9 - Participation and unemployment   .
Source:  Statistics New Zealand, the Treasury

The demand for labour is expected to continue to grow with the expansion in the economy. Employment growth is forecast to remain strong over the remainder of 2014, but to ease as the pace of growth in output slows. Growth in the working-age population will be boosted by higher net migration and the proportion of the working-age population participating in the labour market is forecast to decline only slightly from its March quarter peak. As a result, the unemployment rate is forecast to fall to 4.5% in the first half of 2018 (Figure 1.9).

...but muted wage growth

Wage growth has been relatively subdued recently with an increase in average hourly earnings of 2.5% in the year to June 2014, as public sector wage growth of 1.3% offset private sector wage growth of 3.1%. Wage growth is expected to accelerate gradually as a result of increased growth in labour supply from net migration, initially low inflation and continuing public sector wage restraint. Growth in hourly wages is forecast to increase to 3.0% by March quarter 2015 and to 3.4% by the end of the forecast period, the same as in the Budget Update. Moderate employment growth, combined with rising wage growth, will increase total compensation of employees by more than 1% per quarter throughout most of the forecast period.

Household income growth will support private consumption...

Steady growth in household incomes is forecast to support ongoing growth in private consumption over the forecast period. Private consumption growth is slightly higher over the period than in the Budget Update in real terms, but from a marginally lower base in the March 2014 year; at the end of the forecast period the level of real private consumption is expected to be practically the same as in the Budget Update. However, the level of nominal private consumption is expected to be lower throughout the period chiefly because of the lower starting point as a result of recent weak inflation outturns.

...but the Government will continue to exercise spending restraint

It is assumed that the current fiscal strategy of limiting the growth in public consumption and non-market investment is maintained. Growth in public consumption is forecast to be low in the March 2015 year at 0.1%, but to increase slightly thereafter with the larger increment in the annual operating allowance announced in Budget 2014, but remains below the rate of growth in the economy as a whole. As is outlined in the Fiscal Outlook chapter, the operating allowance has been added to expenditure as a working assumption, but in practice would be available for a mixture of expenditure and revenue initiatives.

Nevertheless, inflationary pressures will increase...

The economy's growth rate is forecast initially to outstrip its ability to expand without placing additional pressure on prices. It is estimated that actual output was slightly higher than potential output in the March 2014 quarter and that it will exceed the economy's sustainable or non-inflationary level by 1.3% in the second half of 2015. The economy's potential growth rate is estimated to be marginally higher than in the Budget Update because of the faster population growth from net migration inflows. The annual average potential growth rate is estimated to increase from 2.2% in the March quarter 2014 to a peak of 2.8% before declining to around 2.5% in the long run.

Figure 1.10 - CPI inflation
Figure 1.10 - CPI inflation   .
Source:  Statistics New Zealand, the Treasury

As actual output is expected to exceed the economy's level of potential output, non-tradables inflation is forecast to rise to around 4% in the second half of 2016. Tradables inflation will increase gradually over the forecast period as the value of the NZ dollar falls, but continue to offset the higher non-tradables inflation. Annual inflation is forecast to peak in the third quarter of 2016 at 2.5%, but to decline towards the mid-point of the Reserve Bank's target band by the end of the forecast period (Figure 1.10).

...leading to interest rate increases

The Reserve Bank is expected to continue to raise the OCR as inflationary pressures strengthen. Ninety-day interest rates are assumed in these forecasts to rise from 3.4% in the June quarter 2014 to 4.8% by the fourth quarter of 2015 and to 5.3% by late 2017. Higher interest rates will moderate growth in private consumption and investment apart from the Christchurch rebuild, so that the economy grows more slowly and inflationary pressures are reduced. Longer-term interest rates are expected to increase in line with international rates as global monetary conditions are normalised.

Value of imports will increase faster than exports...

With rapid growth in private consumption and both residential and business investment in the March 2015 year, real gross national expenditure (GNE) is forecast to increase 6.1%, up from 4.7% growth in the March 2014 year. The robust expansion in domestic demand is expected to lead to continuing rapid growth in import volumes of 7.0% in the March 2015 year, down only slightly from 7.9% growth in the previous year. As growth in GNE slows over the forecast period, import volume growth will ease, but import values will increase more rapidly later in the forecast period as the value of the NZ dollar falls.

Export volumes are forecast to grow by around 2.5% to 3.0% per year from 2016 onwards as production expands in response to increased international demand. Export values are forecast to decline initially with lower export volumes and the expected fall in commodity prices, although an assumed fall in the value of the NZ dollar later in the period will bring an increase in total export values.

...and the current account deficit will widen but stabilise by the end of the forecasts

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

Lower export volumes in the near term, combined with a fall in the terms of trade, are expected to lead to an increase in the annual current account deficit from around 2.6% of GDP in mid-2014 to 4.8% of GDP in March 2015. The annual figures have been enhanced recently by the high terms of trade, but the annual goods balance is forecast to become negative as the terms of trade fall. The current account deficit is forecast to stabilise at 6.4% of GDP in the final couple of years of the forecast period.

Economic Forecast Assumptions

  • Net permanent and long-term migration inflows rose to 38,300 in the year ended June 2014, although only data up to May 2014 (36,400) were available when the Pre-election Update was finalised. Net migrant inflows are forecast to rise to 42,500 in the September 2014 year before returning to the long-run assumption of 12,000 per year in March 2017.
  • The annual average potential growth rate is estimated to increase from 2.2% in the March quarter 2014 to a peak of 2.8% before declining to around 2.5% in the long run.
  • The non-accelerating inflation rate of unemployment (NAIRU) is estimated to be around 4.5% by 2018.
  • Average hours worked per week are estimated to decline from their current level of 33.7 to 33.1.
  • Economy-wide labour productivity growth is estimated to average 1.1% per year between the years ending March 2014 and March 2018.
  • Investment associated with the rebuild following the Canterbury earthquakes is assumed to be around $40 billion in 2011 prices (rounded to the nearest $5 billion), spread across residential property ($18 billion), commercial property ($9 billion) and infrastructure and social assets ($11 billion). Around half of the total is forecast to be undertaken within the forecast period to June 2018.
  • West Texas Intermediate (WTI) oil prices are assumed to fall from US$103.30 per barrel in the June 2014 quarter to around US$89 in the March 2018 quarter, in line with oil futures prices.
  • Ninety-day interest rates are assumed to increase from 3.4% in the June 2014 quarter to 5.3% in the June 2018 quarter and 10-year interest rates to rise from 4.4% in the June 2014 quarter to 5.2% in the June 2018 quarter.
  • The TWI is assumed to fall slightly from an average of 81.2 in the current quarter to just below 80.0 in mid-2016, when it will begin to decline to 73.3 in the June 2018 quarter.
  • Tobacco excise tax increases add 0.2 percentage points to annual inflation in each of the March 2015 and 2016 quarters.
  • Reduced Accident Compensation Corporation (ACC) levy rates will reduce contributions by households and employers by about $400 million in the 2014/15 levy year and around $480 million in the 2015/16 levy year. The reduction in ACC vehicle levies is estimated to reduce CPI inflation by 0.25 percentage points in the September 2015 quarter.

Fiscal Outlook

Overview

Table 2.1 - Fiscal indicators
Year ended 30 June 2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
$billions            
Total Crown OBEGAL1  (4.4)  (2.6) 0.3 0.8 1.9 3.0
Core Crown residual cash  (5.7)  (4.2)  (4.6)  (2.9) (0.4) (0.3)
Net core Crown debt2 55.8 59.9 64.3 67.0 67.5 67.9
Net worth attributable to the Crown 68.1 74.4 77.4 81.0 85.9 92.0
% of GDP            
Total Crown OBEGAL1  (2.1)  (1.1) 0.1 0.3 0.7 1.1
Core Crown residual cash  (2.7)  (1.8)  (1.9)  (1.1) (0.2) (0.1)
Net core Crown debt2 26.2 25.9 26.8 26.7 25.8 25.0
Net worth attributable to the Crown 32.0 32.2 32.2 32.3 32.8 33.9

Notes:

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

Source: The Treasury

  • The Treasury forecasts an OBEGAL surplus of $297 million in the 2014/15 fiscal year. Beyond 2014/15, annual surpluses are expected to increase by between $500 million and $1.1 billion each year of the forecast and, by 2017/18, the OBEGAL surplus is expected to reach $3.0 billion.
  • Core Crown tax revenue continues to grow across the forecast period and is expected to reach $77.1 billion by 2017/18.
  • Beyond 2013/14, core Crown expenses are expected to rise by $10.2 billion by the end of the forecast period. This rise is largely owing to operating allowances[1] (which contribute $6.0 billion) and increases in social assistance spending of $3.7 billion. This forecast growth in core Crown expenses is slower than growth in the nominal economy so by the end of the forecast period core Crown expenses are expected to fall to 30.0% of GDP.
  • In nominal terms, net core Crown debt is forecast to increase, reaching $67.9 billion in 2017/18 while the residual cash position remains in deficit across the forecast period. As a share of GDP, net core Crown debt is expected to decline, falling to 25.0% by June 2018 (Table 2.2).
  • The Crown's balance sheet strengthens across the forecast period with net worth attributable to the Crown reaching $92.0 billion by 2017/18 (compared to $74.4 billion in 2013/14).
  • Compared to the Budget Update, core Crown tax revenue forecasts have been revised downwards owing to the changes in macroeconomic conditions. Weaker tax forecasts, both revenue and receipts, result in surpluses that are expected to be smaller than the Budget Update in each of the four years across the forecast period and a larger cash shortfall. As a result, debt repayments now commence a year later (the first year outside the forecast period) once residual cash surpluses are achieved.
  • In preparing these fiscal forecasts, key assumptions have been made on the performance of the economy as well as new operating allowances. As with all assumptions, there is inherent uncertainty and a change in any one assumption could negatively or positively impact forecasts for the Crown's fiscal indicators. The Risks and Scenarios and the Specific Fiscal Risks chapters outline the key risks to the Crown achieving these forecasts.

 

Table 2.2 - Reconciliation between OBEGAL and net core Crown debt
Year ended 30 June
$billions
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Core Crown revenue 64.1 67.3 72.2 76.5 80.3 84.2
Core Crown expenses (70.3) (71.3) (72.8) (75.9) (78.6) (81.5)
Net surpluses/(deficits) of SOEs and CEs 1.8 1.4 0.9 0.2 0.2 0.3
Total Crown OBEGAL (4.4) (2.6) 0.3 0.8 1.9 3.0
Net retained surpluses of SOEs, CEs and NZS Fund (1.2) (0.9) (0.8) (0.2) (0.1) (0.3)
Non-cash items and working capital movements 1.1 0.5 1.7 1.7 2.5 1.2
Net core Crown cash flow from operations (4.5) (3.0) 1.2  2.3  4.3  3.9 
Net purchase of physical assets (1.2) (1.9) (2.5) (2.4) (2.2) (1.8)
Advances and capital injections (1.7) (1.6) (3.8) (2.4) (1.8) (1.6)
Forecast for future new capital spending - (0.1) (0.4) (0.7) (0.8)
Proceeds from government share offers 1.7 2.3  0.6  -   -   -  
Core Crown residual cash balance (5.7) (4.2) (4.6) (2.9) (0.4) (0.3)
Opening net core Crown debt 50.7 55.8 59.9 64.3 67.0 67.5
Core Crown residual cash deficit/(surplus) 5.7 4.2 4.6 2.9 0.4 0.3
Valuation changes in financial instruments (0.6) (0.1) (0.2) (0.2) 0.1 0.1
Closing net core Crown debt 55.8 59.9 64.3 67.0 67.5 67.9
As a percentage of GDP 26.2% 25.9% 26.8% 26.7% 25.8% 25.0%

Source: The Treasury

  • This chapter also includes medium-term projections to 2027/28. These projections represent a potential future path based on historical averages. The weaker OBEGAL outlook compared to the Budget Update would mean there would be a delay by one year to the re-commencement of the Crown's NZS Fund contributions (to 2020/21).

 

Notes

  • [1]Operating allowances are assumed to flow through as expenses. However, allowances can be used for a combination of both revenue and expense initiatives when allocated.

 

Core Crown Tax Revenue

Core Crown tax revenue is weaker than at the Budget Update...

Figure 2.1 - Movement in core Crown tax revenue since the Budget Update
Figure 2.1 - Movement in core Crown tax revenue since the Budget Update   .
Source:  The Treasury

Overall, tax revenue is forecast to be $2.1 billion less than the Budget Update across the forecast period with tax revenue between $0.3 billion and $0.5 billion lower each year.

Most of the lower tax revenue is owing to changes in macroeconomic conditions that have been reflected in the economic forecasts. In particular, reductions in forecasts of nominal private consumption resulting in decreases in the goods and services tax (GST) forecasts across each year of the forecast, and a lower deposit rate track resulting in reduced forecasts of residents' withholding tax (RWT) (included in Other taxes in Figure 2.1). Partially offsetting these influences, a higher forecast for corporate profits is expected to deliver higher-than-previously anticipated corporate tax revenue. As the reductions in overall tax forecasts mirror macroeconomic conditions, the tax-to-GDP profile is very similar to the Budget Update. Refer Table 2.3 for a summary of the key drivers of the changes in tax forecasts from the Budget Update.

The 2013/14 forecast, which is based on preliminary, unaudited results for the 2013/14 year, is $0.4 billion lower than the Budget Update. This change comprises $0.2 billion for GST, $0.1 billion for corporate tax and $0.1 billion for other taxes (Figure 2.1). Refer to the box on page 28 for further discussion of the 2013/14 forecast tax revenue result.

Table 2.3 - Change in core Crown tax revenue forecasts since the Budget Update
Year ended 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Core Crown tax revenue - 2014 Budget Update 61.9 66.4 70.6 74.1 77.6
As a percentage of GDP 26.8% 27.6% 28.0% 28.2% 28.5%
Changes in forecasts by principal factor          
Employees' compensation (0.1) (0.1)
Entrepeneurial income (0.1)
Corporate profits 0.1 0.1 0.1
Private consumption (0.2) (0.1) (0.1) (0.1) (0.2)
Residential investment (0.1)
Other macroeconomic factors (0.1) (0.1)
Interest rates (0.1) (0.1) (0.1) (0.1)
Other factors (0.3) (0.1) (0.1) (0.1) (0.1)
Total changes since the Budget Update (0.4) (0.3) (0.4) (0.5) (0.5)
Core Crown tax revenue - 2014 Pre-election Update 61.5 66.1 70.2 73.6 77.1
As a percentage of GDP 26.6% 27.5% 28.0% 28.1% 28.4%
Changes in forecasts by major tax type          
Source deductions (0.1) (0.1) (0.2)
Net other persons tax (0.1) (0.1) (0.1)
Corporate tax (0.1) 0.1 0.1 0.1 0.1
Resident withholding taxes (0.1) (0.1) (0.1) (0.1)
GST (0.2) (0.1) (0.1) (0.1) (0.2)
Customs and excise duties (0.1) (0.1)
Other taxes (0.1) (0.1) (0.2) (0.1) 0.1
Total changes since the Budget Update (0.4) (0.3) (0.4) (0.5) (0.5)

...but continues to grow by 5.6% per year on average over the forecast period

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

Core Crown tax revenue is forecast to rise in each year of the forecast period. While tax is weaker than previously forecast, growth of 5.6% per year across the forecast period is still expected and, by 2017/18, core Crown tax revenue is expected to reach $77.1 billion.

Figure 2.3 - Core Crown tax revenue growth
Figure 2.3 - Core Crown tax revenue growth   .
Source:  The Treasury

Forecast tax revenue increases relative to nominal GDP, reaching 28.4% by the end of the forecast period compared to 27.5% in 2012/13 (Figure 2.2) mainly owing to the progressive nature of the personal tax scale.

Most of the growth in nominal tax revenue forecasts can be attributed to growth in the nominal economy, with nominal GDP forecast to grow at 5.0% per year on average over the forecast period. Tax revenue growth increases in 2014/15 before slowing over the remainder of the forecast period as the growth in nominal GDP slows (Figure 2.3).

All tax types are expected to increase across the forecast period as shown in Table 2.4.

Table 2.4 - Movement in core Crown tax revenue over the forecast period by tax type
Year ended 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Total
Movement in core Crown tax owing to:            
Source deductions 1.4 1.4 1.4 1.5 1.6 7.3
Other persons tax 0.1 0.3 0.2 0.2 0.1 0.9
Corporate tax 0.3 0.8 0.4 0.4 0.3 2.2
Resident withholding tax (RWT) (0.1) 0.3 0.6 0.4 0.4 1.6
Goods and services tax (GST) 0.9 1.6 1.1 0.8 0.9 5.3
Other taxes 0.2 0.2 0.4 0.1 0.2 1.1
Total movement in core Crown tax 2.8 4.6 4.1 3.4 3.5 18.4
Plus: previous year's tax base 58.7 61.5 66.1 70.2 73.6 58.7
Core Crown tax revenue 61.5 66.1 70.2 73.6 77.1 77.1
As a % of GDP 26.6% 27.5% 28.0% 28.1% 28.4%  

Note: These numbers may not add due to rounding.

Source: The Treasury

Growth in employees' compensation and the progressive nature of the personal tax scale (fiscal drag) see source deductions increase by $7.3 billion over the forecast period while growth in corporate profits sees corporate tax increasing by $2.2 billion over the forecast period. Private consumption is expected to grow, contributing to a forecast $5.3 billion increase in GST.

Forecast increases in deposit interest rates and growth in the interest-bearing deposit base are expected to result in growth in tax on interest earned on residents' savings (RWT) of about $1.6 billion across the forecast period.

The Risks and Scenarios chapter provides further discussion of the risks around tax revenue.

IRD has also prepared a set of tax forecasts based on the Treasury's macroeconomic forecasts (Table 2.5).[2]

Table 2.5 - The Treasury and IRD core Crown tax revenue forecasts
Year ended 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Source deductions          
Treasury  23.8  25.2  26.6  28.1  29.7
Inland Revenue  23.8  25.3  26.7  28.2  29.7
Difference -  (0.1)  (0.1)  (0.1) -
Net other persons tax          
Treasury  3.6  3.9  4.1  4.3  4.4
Inland Revenue  3.6  3.8  4.0  4.2  4.3
Difference -  0.1  0.1  0.1  0.1
Corporate taxes          
Treasury  10.2  11.0  11.4  11.8  12.1
Inland Revenue  10.2  10.9  11.3  11.6  11.8
Difference -  0.1  0.1  0.2  0.3
Goods and services tax          
Treasury  16.1  17.7  18.8  19.5  20.4
Inland Revenue  16.1  17.8  18.8  19.7  20.4
Difference -  (0.1) -  (0.2) -
Other taxes          
Treasury  7.8  8.3  9.3  9.9  10.5
Inland Revenue  7.8  8.5  9.6  10.2  11.0
Difference -  (0.2)  (0.3)  (0.3)  (0.5)
Total tax          
Treasury  61.5  66.1  70.2  73.6  77.1
Inland Revenue  61.5  66.3  70.4  73.9  77.2
Difference -  (0.2)  (0.2)  (0.3)  (0.1)
Total tax (% of GDP)          
 Treasury  26.6  27.5  28.0  28.1  28.4
 Inland Revenue  26.6  27.6  28.1  28.2  28.5
 Difference -  (0.1)  (0.1)  (0.1)  (0.1)

Source: The Treasury, IRD

Notes

  • [2]For more details of the Treasury and IRD's forecasts, see the Additional Information document on the Treasury website www.treasury.govt.nz

 

Unaudited 2013/14 Tax Revenue Outturn

The Financial Statements of Government for the full 2013/14 year have not yet been completed. They are due for release in October 2014.

Preliminary, unaudited data indicate that core Crown tax revenue for the year was approximately $381 million (0.6%) below the Budget Update forecast.

Table 2.6 - Comparison of 2013/14 forecasts of core Crown tax revenue by tax type
Year ended 30 June Budget
Update

$m
Pre-election
Update
   
$m
Variance
$m
Variance
%
GST 16,285 16,104 (181) (1.1)
Corporate tax 9,877 9,743 (134) (1.4)
Source deductions 23,818 23,779 (39) (0.2)
Customs and excise duties 3,967 3,931 (36) (0.9)
Other individuals tax 4,117 4,133 16 0.4
Other taxes 3,833 3,826 (7) (0.2)
Total tax 61,897 61,516 (381) (0.6)

Source: The Treasury

The largest variances from forecast occurred in GST and corporate tax.

The main economic driver of GST is private domestic consumption. The latest Statistics NZ GDP data indicated that nominal private consumption grew by 0.1% in the March 2014 quarter, whereas the Budget Update had forecast an increase of 1.1%. We estimate that this shortfall versus forecast in domestic consumption through the first half of the 2014 calendar year has decreased GST by about $150 million relative to the Budget Update forecast. The remaining $30 million is mainly the result of earthquake-related refunds being higher than was previously assumed.

The lower-than-forecast private consumption in the March quarter has led to a reduction in the level of the private consumption forecast across the forecast period, with a corresponding reduction in the level of the GST forecasts.

The reasons for the corporate tax shortfall are not as clear-cut as for GST. This is because returns for corporate income tax are filed annually and the 2014 returns are not due until next year, whereas the vast majority of GST returns are filed every one or two months. However, based on the currently-available data, it appears that June quarter terminal tax assessments, ie, end-of-year square-ups for the 2013 tax year, were slightly below expectations. Since terminal tax is effectively ‘backward-looking', this is not expected to have implications for future years. The corporate tax forecasts have been increased by around $100 million each year from 2015 onwards, owing to a slight increase in the forecast of the underlying macroeconomic driver.

Core Crown Expenses

Figure 2.4 - Changes in core Crown expenses since the Budget Update
Figure 2.4 - Changes in core Crown expenses since the Budget Update   .
Source:  The Treasury

Core Crown expenses have decreased marginally since the Budget Update...

Core Crown expense forecasts are slightly lower than forecast at the Budget Update across all years with the exception of 2015/16. Expenses by the end of the 2017/18 year are expected to be a cumulative $0.8 billion lower than previously expected (Figure 2.4).

These lower expenses include $0.2 billion of tax impairments that were forecast in 2013/14 at Budget Update that have not eventuated, as well as around $0.4 billion related to phasing changes resulting in expenses now falling outside the current forecast period.

Figure 2.5 - Core Crown expenses
Figure 2.5 - Core Crown expenses   .
Source:  The Treasury

...but continue to grow across the forecast period...

Core Crown expenses are expected to increase in nominal terms by around $11.1 billion by 2017/18 compared with 2012/13, with $10.2 billion of this beyond 2013/14 (Figure 2.5). However, as core Crown expenses are forecast to grow at a slower rate than growth in the nominal economy, they are expected to ease from 33.0% of GDP in 2012/13 to 30.0% of GDP by the end of the forecast period.

Figure 2.6 - Increase in core Crown expenses (compared to 2012/13)
Figure 2.6 - Increase in core Crown expenses (compared to 2012/13)   .
Source:  The Treasury

Nominal growth in core Crown expenses is largely attributable to 2013/14 and future operating allowances, coupled with increasing social assistance spending as shown in Figure 2.6.

In these forecasts, finance costs also increase over the forecast period to reflect increasing gross debt and rising interest rates.

Other increases in expenses include core Crown expenses for the Canterbury rebuild (refer to pages 34 to 35 for details of the profile and phasing of earthquake expenses).

Figure 2.7 - Components of social assistance spending
Figure 2.7 - Components of social assistance spending   .
Source:  The Treasury

Social assistance spending is expected toincrease by $3.7 billion between 2012/13 and 2017/18. Of this, New Zealand Superannuation payments (around half of social assistance costs), grow by $3.4 billion as payments are linked to wage growth and recipient numbers increase (Figure 2.7). Other benefit expenses, largely income-related rent, are also expected to increase marginally over the forecast.

Election Promises vs Government Policy

In the lead up to an election, political parties, including the current Government, make announcements regarding their policies and intentions. It does not automatically follow, however, that all announcements are included in these fiscal forecasts.

The criteria for inclusion in the fiscal forecasts is outlined in the Specific Fiscal Risks chapter with a decision by Cabinet being the key criteria for distinguishing government policy from the policies of individual political parties, and therefore inclusion in the forecasts.

Operating Balance

The Crown is forecast to return to surplus this financial year…

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

The OBEGAL is expected to return to surplus in the current 2014/15 year with a surplus of $297 million forecast. Beyond 2014/15, surpluses are expected to increase by between $0.5 billion and $1.1 billion per year.

Figure 2.8 shows the composition of OBEGAL from the different segments of the total Crown.

The core Crown segment moves from a forecast OBEGAL deficit of $4.0 billion in 2013/14 to a forecast $2.7 billion surplus in 2017/18, largely reflecting growth in tax revenue.

The State-owned Enterprise (SOE) and Crown entity (CE) segments together positively impact the OBEGAL balance by $2.0 billion in 2013/14, easing back to $0.9 billion in the final year of the forecast period largely reflecting ACC levy rate reductions announced in Budget 2013.

These forecast surpluses are expected to assist in strengthening the Crown's balance sheet and contribute to the Crown's ability to repay debt in the future.

...although OBEGAL is lower compared to the Budget Update

These forecasts indicate the annual OBEGAL surpluses are forecast to be smaller in all years relative to the Budget Update. The surplus in 2017/18 is forecast, for example, to be $3.0 billion, half a billion lower than previously forecast (Table 2.7).

Table 2.7 - Changes in OBEGAL since the Budget Update
Year ended 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
OBEGAL - 2014 Budget Update (2.4) 0.4 1.3 2.4 3.5
Changes in forecasts:          
           Tax revenue (0.4) (0.3) (0.4) (0.5) (0.5)
           IRD tax impairments 0.2 - - - -
           Treaty settlement expenses                     0.1 0.2 0.1 0.1 0.1
           EQC forecasts (0.1) 0.1 - - -
           ACC forecasts - - - 0.1 0.1
           Social assistance expenses - - - - (0.1)
           Other changes - (0.1) (0.2) (0.2) (0.1)
Total changes since the Budget Update (0.2) (0.1) (0.5) (0.5) (0.5)
OBEGAL - 2014 Pre-election Update (2.6) 0.3 0.8 1.9 3.0

Source: The Treasury

Material changes to OBEGAL forecasts since the Budget Update include:

  • Tax revenue is weaker across the forecast period than the Budget Update as discussed earlier (refer page 25).
  • IRD's tax impairments were forecast to be higher than eventuated in 2013/14.
  • The Office of Treaty Settlements (OTS) has updated its Treaty settlement expenditure forecasts for the timing of forthcoming Deeds of Settlement. The timing for Deeds is determined by milestones earlier in the settlement process such as claimant groups achieving a mandate for negotiations and agreements being reached on redress packages with the Crown. As settlements get closer to being finalised, the OTS has a greater amount of certainty about when they will occur and impact on Crown expenses.
  • Earthquake Commission (EQC) forecasts in the first two years have changed following an updated valuation of EQC's insurance liabilities at 30 June 2014.
  • ACC's results in the later years of the forecast largely reflect increases in investment income from investments outweighing changes in insurance costs.
  • Social assistance expenses are slightly higher than previous forecasts and are expected to be higher by $0.1 billion in the final 2017/18 year.

 

Figure 2.9 - Components of operating balance
Figure 2.9 - Components of operating balance   .
Source:  The Treasury

...with increases in OBEGAL lifting the operating balance

The total Crown operating balance, inclusive of gains and losses, is forecast to be in surplus across all years of the forecast period. Figure 2.9 shows the growth in the operating balance and its components. The 2013/14 year's forecast surplus of $2.8 billion includes $5.2 billion of gains made by Crown financial institutions (CFIs), largely ACC and NZS Fund. While the 2013/14 year reflects the current strong market growth, lower long-term rates of returns are assumed in future years, resulting in lower growth in these years. These gains result in increased financial assets which lead to increases in the Crown's share of net worth (refer page 38 for discussion).

In addition, updated long-term liability valuations for ACC and the Government Superannuation Fund (GSF) at 30 June 2014 have led to $1.1 billion of actuarial gains in the 2013/14 year (compared to $3.6 billion in 2012/13).

When compared to the Budget Update, the operating surplus is forecast to be lower in all years. In 2017/18 the operating balance is forecast to be a $6.1 billion surplus, $0.6 billion lower than previously forecast.

Cyclically-adjusted Balance and Fiscal Impulse

In addition to OBEGAL and the operating balance (both of which are total Crown indicators), the cyclically-adjusted balance and the fiscal impulse are useful indicators in assessing the relationship between fiscal policy and the economy. These indicators are summarised in Table 2.8.

Table 2.8 - Cyclically-adjusted balance and fiscal impulse indicators
Year ended 30 June
% of GDP
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
OBEGAL (2.1) (1.1) 0.1 0.3 0.7 1.1
Cyclically-adjusted balance (CAB) (1.5) (1.0) (0.2) (0.1) 0.6 1.1
Fiscal impulse (1.6) 0.0 (0.2) (0.4) (1.0) (0.1)

Source: The Treasury

Cyclically-adjusted Balance (CAB)[3]

CAB is an estimate of the fiscal balance (OBEGAL) adjusted for fluctuations of actual GDP around trend GDP. Adjustments are also made for significant one-off expenses in order to provide a picture of the underlying fiscal position and the effects of policy decisions.

Figure 2.10 shows CAB tracking close to OBEGAL in recent years, indicating that the operating deficits between 2009 and 2013 have been largely structural. OBEGAL is expected to reach a surplus of 0.1% of GDP in the year ending June 2015. However, because the economy is assumed to be operating a little above capacity over much of the forecast period, the CAB is expected to reach surplus two years later in the year ending June 2017.

Fiscal impulse

The fiscal impulse is a summary measure of how changes in the fiscal position impacts aggregate demand. The fiscal impulse is calculated on a cyclically-adjusted basis and excludes net interest payments. To better capture the role of capital spending, this indicator uses the change in a cash-based version of the fiscal balance (CAB supplemented by capital expenditure). Figure 2.10 shows fiscal policy is expected to withdraw from aggregate demand over the forecast period.

Figure 2.10 - Operating balance indicators and fiscal impulse
Figure 2.10 - Operating balance indicators and fiscal impulse   .
Source:  The Treasury

 

Notes

  • [3]For more details of both CAB and fiscal impulse, see the Additional Information document on the Treasury website www.treasury.govt.nz

 

Cost to the Crown of the Canterbury Rebuild

As reported previously, the Canterbury earthquakes were unprecedented events. Early estimates of costs were very challenging. Over time, as agreements are reached and decisions are made, the costs of the rebuild become clearer and are re-estimated and published.

Estimates of the cost to the Crown of the Canterbury rebuild have increased significantly since 2011. At the time the 2011 Budget Update was prepared, only months after the February earthquake, the initial estimate of total costs was $8.8 billion (including $3.1 billion of claims costs to EQC). All expenses were assumed to be operating, in the absence of information regarding the Crown's contribution to capital expenditure. In these early estimates the Treasury emphasised the high levels of uncertainty.

Three and a half years after the 2011 Budget Update, these forecasts estimate operating costs have increased to $12.6 billion (including $7.4 billion in relation to EQC) reflecting updated estimates and agreements reached. In addition, capital expenditure of asset rebuilds, such as the new Canterbury hospitals, is estimated to be $3.2 billion. The Treasury is a long way from determining the final costs to the Crown arising out of the Canterbury rebuild because uncertainty remains around the likely final costs to the Crown of a number of items (eg, Christchurch central city anchor projects) have not yet been determined.

The Treasury uses the same approach for forecasting the costs of the Canterbury rebuild that are used in the Financial Statements of the Government, which are subject to audit by the Auditor-General.

Costs associated with water infrastructure are recognised up-front while the costs of road repairs are recognised in the year of repair. This is consistent with the way the Crown treats repairs to local roadways across New Zealand, where there is a spreading of costs to reflect that the first call for funding these future expenses will be from dedicated ring-fenced revenue sources.

Operating expenditure will have an impact on the Crown's OBEGAL while capital expenditure does not. Instead capital expenditure results in growth in the Crown's balance sheet.

The current forecasts reflect the Treasury's best professional judgement of the known costs under current government policy. They do not include future decisions the Government may or may not take regarding the rebuild.

Table 2.9 outlines the latest estimates of the net impact of the earthquakes included in these forecasts and future years. As the rebuild progresses the composition of expenditure shifts more towards capital spending as Crown assets are replaced.

Latest estimates for the total cost to the Crown are $15.8 billion and are expected to extend beyond the forecast period. This compares to an estimate of $15.4 billion to 2018 in the Budget Update. These latest estimates include updates from entities with significant earthquake costs (primarily CERA, EQC and Southern Response). A full update of all entities with earthquake-related expenses will be undertaken in the next Half Year Update. Refer to page ii which discusses the Treasury's process for this forecast update.

Table 2.9 - Net earthquake expenses (operating and capital)
Year ended 30 June
$millions
2011-13
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Outside forecast period Total
Pre-election Update
Total
Budget Update
Local infrastructure 1,364 81 170 113 50 50 - 1,828 1,828
Crown assets1 40 114 586 520 456 280 50 2,046 1,996
Land zoning 912 114 (12) 70 5 1,089 1,034
Christchurch central city rebuild2 115 412 570 169 124 (13) (260) 1,117 1,030
Welfare support 269 19 9 4 3 2 - 306 306
Southern Response support package 458 124 (50) (31) (10) 1 - 492 415
Other costs 508 130 170 136 44 35 - 1,023 997
Core Crown Canterbury earthquake recovery costs 3,666 994 1,443 981 672 355 (210) 7,901 7,606
EQC (net of reinsurance proceeds) 8,026 (257) (245) (79) (2)  (39)  7,404 7,291
Other SOE and CEs (217) 25 247 283 127 41 - 506 506
Total Crown 11,475 762 1,445 1,185 797 357 (210) 15,811 15,403
Operating and capital expenses                  
Operating expenditure (OBEGAL) 11,253 403 316 374 231 82 (47) 12,612 12,132
Capital expenditure 222 359 1,129 811 566 275 (163) 3,199 3,271
Total Crown 11,475 762 1,445 1,185 797 357 (210) 15,811 15,403
Total cash payments3 6,595 1,367 4,872 1,730 587 382 (5) 15,528 15,006

Notes:

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

Source: The Treasury

Forecasts have been updated to take account of the latest information available. Overall, updated forecasts have led to rephasing of both operating and capital net costs with some costs now falling outside the forecast period. Updated valuations of both EQC and Southern Response Earthquake Services Limited's earthquake liabilities at 30 June 2014 have resulted in an increase of $0.2 billion in operating costs being recognised in these forecasts. Additional operating costs in relation to anchor projects (including write-downs and impairments of property) also add $0.1 billion, while re-estimations of insurance recoveries, demolition costs and red zone property management costs result in $0.1 billion of additional net operating costs.

The full cost of EQC's earthquake claims liability is captured in the table above. It outlines the costs of the Canterbury rebuild to the total Crown (which includes all Crown entities, such as EQC, State-owned Enterprises and core Crown departments).

Under the Earthquake Commission Act, if the assets of the EQC are not sufficient to meet its liabilities, the Crown is responsible for funding the deficiency by way of a grant or advance. EQC continues to expect its National Disaster Fund (NDF) will be depleted during the current fiscal year. Whether these claims are funded by the NDF, or directly by the Crown, however, will have no bearing on the overall costs to the total Crown because that funding will represent a transfer within the total Crown reporting group.

The Specific Fiscal Risks chapter discusses the fiscal risks associated with the Canterbury earthquake forecast net expenses. Key risks include the timing of expenditure and escalating costs as well as the independent review of infrastructure costs shared by the Christchurch City Council and the Crown (due to be completed by 1 December 2014).

Net Core Crown Debt

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

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

Net core Crown debt as a share of GDP is expected to peak in 2014/15 at 26.8% (Figure 2.11). By 2017/18 net core Crown debt is expected to have fallen to 25.0% of GDP.

While operating cash flows are expected to return to surplus in 2014/15, net capital spending is expected to exceed operating cash flows resulting in core Crown residual cash[4] deficits across the forecast period. Cash deficits are funded by increases in net core Crown debt4 (either through additional borrowing or a reduction in financial assets).

Over the forecast period, the Crown is expected to generate cash flows from core Crown operations of $8.6 billion and will receive the last of the proceeds from the Meridian share offer ($0.6 billion)[5]. The core Crown is forecast to spend $24.0 billion on capital items such as purchasing of physical assets (eg, school buildings), advances (eg, student loans) and future new capital spending. Overall, this results in a cash shortfall across the forecast of $12.4 billion. As a result of this cash shortfall, net core Crown debt is expected to increase in nominal terms and to peak on an annual basis in 2017/18 at $67.9 billion (one year later than previously forecast), and then fall after residual cash surpluses are achieved.

Figure 2.12 - Core Crown residual cash
Figure 2.12 - Core Crown residual cash   .
Source:  The Treasury

...but is higher than the Budget Update...

Core Crown residual cash is expected to remain in deficit across the forecast period and is higher than the Budget Update largely owing to lower tax receipts than previously forecast (Figure 2.12). As a result, net core Crown debt (in both nominal terms and as a share of GDP) is forecast to be higher in each of the forecast years when compared to the Budget Update.

...with the bond maturities funding residual cash deficits

Figure 2.13 - Gross debt vs net debt
Figure 2.13 - Gross debt vs net debt   .
Source:  The Treasury

There has been no change in the bond programme to 2017/18 from the Budget Update. The bond programme is expected to raise funds of $36.6 billion over the forecast period, while $25.4 billion of existing debt will be repaid, providing net cash proceeds of $11.2 billion (Table 2.10). While there is a greater cash shortfall over the forecast period ($12.4 billion compared to $9.4 billion forecast at the Budget Update), this additional shortfall is expected to be managed through reductions in financial assets.

The movement in gross debt generally reflects the timing of the bond programme and maturities. As a percentage of GDP it is forecast to decrease from 36.6% in 2012/13 to 32.5% in 2017/18 (Figure 2.13) consistent with the decrease in net debt as a share of national income.

Table 2.10 - Net increase in government bonds
Year ended 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
5-year
Total
Face value of government bonds issued (market) 8.0 8.0 7.0 7.0 7.0 37.0
Cash proceeds from government bond issue            
Cash proceeds from issue of market bonds 7.7 8.1 7.0 6.9 6.9 36.6
Repayment of market bonds (2.2) (8.7) (1.8) (11.3) (24.0)
Net proceeds from market bonds 5.5 (0.6) 5.2 6.9 (4.4) 12.6
Repayment of non-market bonds - (1.4) (1.4)
Net repayment of non-market bonds - (1.4) (1.4)
Net cash proceeds from bond issuance 5.5 (2.0) 5.2 6.9 (4.4) 11.2

Source: The Treasury

Notes

  • [4]Net core Crown debt and residual cash indicators are measured on a core Crown basis. Residual cash includes both operating and capital activity. This differs from OBEGAL, which is measured at a total Crown level and includes operating activity only.
  • [5]Although the Government's Share Offer programme has now been completed, owing to the use of instalment receipts for the Meridian Energy share offer some proceeds (approximately $0.6 billion) are expected to be received in the 2014/15 year. Refer to page 40 of the 2014 Budget Update for further detailed information regarding the final proceeds of the programme.

 

Total Crown Balance Sheet

Figure 2.14 - Size of the Crown's balance sheet
Figure 2.14 - Size of the Crown's balance sheet.
Source:  The Treasury

Operating balance surpluses strengthen the balance sheet...

Net worth attributable to the Crown is forecast to grow steadily in nominal terms across the forecast period largely owing to forecast operating balance surpluses. Beyond June 2014, net worth attributable to the Crown is expected to grow by $17.6 billion to stand at $92.0 billion or 33.9% of GDP by 2017/18 (Figure 2.14).

...with assets increasing by $41 billion over the forecast period...

Figure 2.15 - Total Crown assets
Figure 2.15 - Total Crown assets.
Source:  The Treasury

Total assets are forecast to grow by $41.1 billion over the forecast period with the largest asset growth in the financial assets portfolio (Figure 2.15). This growth reflects investments by CFIs, with much of this growth recognised as gains in the Crown's operating balance.

The commercial asset portfolio is expected to increase by $9.6 billion over the forecast period, with growth in Kiwibank's mortgage book comprising $7.2 billion of this increase. (This growth is also reflected in the Crown's liabilities as Kiwibank deposits grow in line with these mortgages.)

Social assets (eg, schools, hospitals and social housing) are expected to increase by $16.8 billion by the end of the forecast period, primarily as a result of new capital investments via the Future Investment Fund.[6]

At the Budget Update, $1.7 billion remained in the fund to be allocated to future capital spending ($3.0 billion had already been allocated). Subsequent to Budget 2014, $0.1 billion has been allocated to regional roading packages. This is a pre-commitment against Budget 2015, leaving $1.6 billion yet to be allocated across Budget 2015 and Budget 2016.

Figure 2.16 - Total Crown liabilities
Figure 2.16 - Total Crown liabilities   .
Source:  The Treasury

...and liabilities begin to fall in 2017/18

The Crown's liabilities are expected to increase by $13.5 billion (Figure 2.16) over much of the forecast period, largely driven by increased borrowing ($16.4 billion over the forecast period) before beginning to fall in 2017/18. Borrowings are forecast to peak at $119.9 billion in 2016/17 before decreasing slightly to stand at $116.4 billion by 2017/18.

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

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

Financial assets have increased significantly in recent years. CFIs (eg, NZS Fund and ACC) hold investments to make financial returns, and those asset values are dependent on market prices, interest rates and exchange rates, which can all be volatile. For example, a 10% change in the NZ dollar exchange rate or share prices can impact the Crown's operating balance by $1 billion to $2 billion.

In addition, the Crown has a number of significant long-term liabilities (eg, ACC claims and GSF retirement liability) that are actuarially valued based on estimated future cash flows 50 years into the future. As part of the actuarial valuation, inflation rates are used to help estimate future cash flows, while discount rates are used to obtain the value of those future cash flows in today's dollars (their present value). Even small changes in these assumptions can have significant impacts on the valuation because the cash flows are so large and over such long periods.

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

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

...while other risks still remain

In addition to those items on the balance sheet there are a number of liabilities (and assets) that may arise in the future but are not yet included in our forecasts, either because they are contingent on an uncertain future event occurring (eg, outcome of litigation) or the liability cannot be measured reliably. If these liabilities crystallise, there will be associated costs with a negative impact (or positive in the case of contingent assets) on the operating balance or net debt. Refer to page 75 for a list of the contingent liabilities that the Crown was exposed to at 31 May 2014. The Risks and Scenarios chapter also includes further discussion on risks to the Crown's balance sheet.

Notes

  • [6]Proceeds from the Government Share Offer programme were set aside to fund future new capital spending through this Fund. Refer to the 2014 Budget Update page 41 for further information on the Future Investment Fund.

 

Fiscal Forecast Assumptions

The fiscal forecasts are based on assumptions and judgements developed from the best information available on 5 August 2014, when the forecasts were finalised. Actual events may differ from these assumptions and judgements. Furthermore, uncertainty around the forecast assumptions and judgements increases over the forecast period. The impact of the Canterbury earthquakes adds further uncertainty to the economic and fiscal forecasts.

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

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

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

 

Table 2.11 - Summary of key economic forecasts used in fiscal forecasts
Year ended 30 June 2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Real GDP1 (ann avg % chg) 2.2 3.6 3.6 2.8 2.1 2.1
Nominal GDP2 ($m) 212,955 231,149 240,199 251,041 261,741 271,173
CPI (ann avg % chg) 0.8 1.5 1.6 2.3 2.4 2.2
Govt 10-year bonds (ann avg, %) 3.6 4.5 4.6 4.8 5.0 5.2
5-year bonds (ann avg, %) 2.9 4.1 4.4 4.8 5.0 5.2
90-day bill rate (ann avg, %) 2.6 2.9 4.1 4.8 5.0 5.3
Unemployment rate (ann avg, %) 6.7 6.0 5.6 5.3 4.9 4.6
Employment (ann avg % chg) 0.4 3.3 2.5 1.5 1.4 1.1

Notes:

  1. Production measure.
  2. Expenditure measure.

Source: The Treasury

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

Key Assumptions
Government decisions The forecasts incorporate government decisions and other circumstances known to the Government and advised to the Treasury up to 5 August 2014.
Tax revenue Tax policy changes enacted and announced by the Government will take place as planned and will affect tax revenue and receipts as calculated and agreed between IRD and the Treasury.
Earthquake costs Expenditure (accrual measure) is forecast based on estimates of when key decisions will be taken.  The timing of cash payments is based on estimates of when actual spending will take place.  Refer to page 35 for further discussion.
Operating allowance Operating allowances are net $1.5 billion from Budget 2015, growing at a rate of 2.0% per year for subsequent Budgets.  For further details, see note 8 of the Forecast Financial Statements.
Provision for new capital spending Capital allowances are $0.8 billion in Budget 2015 and $0.9 billion in Budget 2016.  The Treasury's forecasts then assume capital allowances grow at a rate of 2.0% per year for subsequent Budgets.  For further details, see note 8 of the Forecast Financial Statements.
Finance cost on new bond issuances Based on the 5-year rate from the main economic forecasts and adjusted for differing maturities.
Top-down adjustment

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

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

 
Year ended 30 June
$billions
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Operating 0.9 0.5 0.4 0.4
Capital 0.4 0.1 0.1 0.1

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

Property, plant and equipment For the purposes of the forecast financial statements, no revaluations of property, plant and equipment are projected beyond the current year.  Valuations that have occurred up to 30 June 2014 are included in these forecasts. 
Student loans The carrying value of student loans is based on a valuation model adapted to reflect current student loans policy.  As such, the carrying value over the forecast period is sensitive to changes in a number of underlying assumptions, including future income levels, repayment behaviour and macroeconomic factors such as inflation and discount rates used to determine the effective interest rate for new borrowers.  Any change in these assumptions would affect the present fiscal forecasts.
Investment rate of returns The forecasts incorporate the unaudited actual results to 30 June 2014.  Beyond this time, gains on financial instruments are based on long-term benchmark rates of return for each portfolio.
GSF and ACC liabilities

The GSF and ACC liabilities included in these forecasts have been valued as at 30 June 2014 respectively.  Both liabilities are valued by projecting future cash payments, and discounting them to the present.  These valuations rely on historical data to predict future trends and use economic assumptions such as inflation and discount rates.  Any changes in actual payments or economic assumptions would affect the present fiscal forecast.  For example, if the discount rate decreases, the value of the liabilities would increase.

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

NZS Fund contributions

No contribution is assumed in the forecast period in line with the Government's stated intentions to commence contributions once net core Crown debt has reached 20% of GDP as set out in the Fiscal Strategy Report (FSR).

 
Year ended 30 June
$billions
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Required contribution1 2.3 2.3 2.2 2.1
Actual contribution - - - -

1.  Calculations of annual contributions if they were to resume in 2013/14.

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

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

 

Medium-term Projections

The previous sections of this chapter have concentrated on the five-year forecast horizon, up to and including 2017/18. The focus now switches to the decade beyond the last forecast year, extending to 2027/28, referred to as the medium-term projections. The different names reflect different levels of precision.

Forecasts are based on comprehensive modelling of, and expert opinion on, economic and fiscal conditions. They take into account the relationships and interactions between variables, and make allowance for the impacts of existing policies. Based on the information available, they represent the best attempt to predict future outcomes.

Projections represent potential future paths of variables. They are usually based on historical averages of the levels or growth rates, and depend greatly on both the forecast base from which they arise and the assumptions used to generate them. Projections should not be viewed as accurate predictions, but rather as indicators of potential outcomes under a given set of assumptions. The projections assume an economy that is free of cycles and growing on trend, and contain no unplanned policy responses that might, in actuality, be enacted to address unfavourable trends or encourage positive outcomes.

Projected nominal GDP growth slows...

The two economic variables that most significantly influence the fiscal projections are nominal GDP and the CPI inflation measure. A table in the annex to this section shows the paths of the other main economic projections.

Annual growth of nominal GDP gradually slows over the projections, from a peak of 4.5% in the year ending June 2021 to 4.2% by the year ending June 2028. This is mainly owing to the labour force contribution, where an ageing population slowly reduces overall participation rates.

While projected nominal GDP growth rates are virtually identical to those produced for the 2014 Fiscal Strategy Report (FSR), they arise from an end-of-forecast GDP base which is $1.4 billion (0.5%) lower. This wedge is maintained over the projection decade. Because tax revenue is brought to a stable ratio of nominal GDP in projections, based both on history and current tax parameters, this results in reduced tax, in dollar terms, relative to the 2014 FSR.

Figure 2.17 - Core Crown revenue and expenses
Figure 2.17 - Core Crown revenue and expenses   .
Source:  The Treasury

Figure 2.17 illustrates the paths of core Crown revenue and expenses, as percentages of nominal GDP, in recent history and the Pre-election Update forecasts and projections.

Lower tax revenue is the main reason why the fiscal projections are not quite as strong as those of the 2014 FSR. As depicted in Figure 2.18 the total Crown operating balance before gains/(losses) tracks slightly below the previous projection.

Figure 2.18 - Total Crown operating balance before gains/(losses) or OBEGAL
Figure 2.18 - Total Crown operating balance before gains/(losses) or OBEGAL   .
Source:  The Treasury

The Pre-election Update projection of expenses, in dollar terms, is only slightly higher than the previous projection. The majority of the small difference is owing to higher interest costs, which arise from debt not reducing as quickly.

...with OBEGAL surpluses projected to continue...

Figure 2.19 - Net core Crown debt (excluding NZS Fund and advances) assuming no policy intervention
Figure 2.19 - Net core Crown debt (excluding NZS Fund and advances) assuming no policy intervention   .
Source:  The Treasury

The projection of OBEGAL continues the rising profile exhibited in the forecast years. Surpluses increase, not just in dollar terms but also as percentages of GDP, principally because revenue growth outstrips that of expenses. Allowances for new operating spending grow more slowly than nominal GDP. By contrast, most revenue types, and in particular tax revenue, grow in line with nominal GDP. The track also receives a boost in the initial years of projections as some tax types lift to their long-run stable ratios of nominal GDP.

...resulting in net core Crown debt reaching 20% of GDP in 2020/21

Weaker revenue projections also result in a projection of net core Crown debt to GDP that is marginally higher than in the 2014 FSR, as shown in Figure 2.19. The narrowing of the gap between the two net debt tracks in 2019/20, before moving apart again, reflects the assumed resumption of capital contributions to the NZS Fund shifting out one further year.

The current policy relating to resumption of capital contributions to the NZS Fund is that these will restart once net core Crown debt is no higher than 20% of GDP. This was projected to occur in 2019/20 in the 2014 FSR. However, the reduction in both forecast and projected tax revenue means that net core Crown debt is projected to fall below 20% of GDP one year later. As a result, capital contributions are now projected to also resume one year further out, in 2020/21.

Further long term projections are available in the Treasury's latest Statement on New Zealand's Long-Term Fiscal Position, which was published in July 2013. It outlines how, in common with many advanced economies, New Zealand faces an ageing population structure which will bring with it both challenges and opportunities.

Assumptions for Medium-term Fiscal Projections

The assumptions for the medium-term economic and fiscal projections are outlined in this section. The full assumptions can be found in the 2014 FSR, at http://www.treasury.govt.nz/budget/2014/fsr

Table 2.12 - Summary of economic and demographic assumptions*
  Forecasts Projections
June Year[7] 2014 2015 2016 2017 2018 2019 2020 2021 2022 ….. 2028
Labour force 2.6 2.1 1.2 0.9 0.8 1.1 1.0 1.0 0.9   0.7
Unemployment rate** 6.0 5.6 5.3 4.9 4.6 4.5 4.5 4.5 4.5   4.5
Employment 3.3 2.5 1.5 1.4 1.1 1.2 1.0 1.0 0.9   0.7
Labour productivity growth*** 0.5 1.3 1.6 1.0 1.1 1.4 1.5 1.5 1.5   1.5
Real GDP 3.6 3.6 2.8 2.1 2.1 2.3 2.4 2.5 2.4   2.2
Nominal GDP                 8.5 3.9 4.5 4.3 3.6 4.3 4.4 4.5 4.5   4.2
Average hours paid per week**** 32.8 32.6 32.5 32.4 32.4 32.3 32.2 32.2 32.2   32.2
Average hours worked per week***** 33.4 33.4 33.3 33.2 33.1 33.0 33.0 33.0 33.0   33.0
CPI (annual % change) 1.6 2.1 2.3 2.3 2.1 2.0 2.0 2.0 2.0   2.0
Government 5-year bonds
(average % rate)
4.1 4.4 4.8 5.0 5.2 5.3 5.5 5.5 5.5   5.5
Nominal average hourly wage 2.6 2.8 3.1 3.3 3.4 3.4 3.5 3.5 3.5   3.5

* Annual average % change unless otherwise stated.

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

*** Hours worked measure.

**** Average over public and private sector.

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

Sources: The Treasury, Statistics New Zealand

No economic variables have had their medium-term, stable assumptions changed since the 2014 FSR. As average hours worked per week is assumed to grow at the rate of average hours paid per week, it has stabilised at a slightly higher level, but in the same projected year. This does not affect projected GDP as it depends on the unchanged growth rate, not the level, of average hours worked per week.

Economic projections display the potential paths that some key economic indicators take beyond their forecast bases, while simultaneously providing inputs to projecting many fiscal variables. For example, the modelling of many future benefit expenses uses inflation to annually index payment rates. Nominal GDP acts as the denominator in fiscal indicators to make them more comparable over periods of a decade or more.

The stable projection assumption for annual growth in CPI is 2%, which is the midpoint of the 1% to 3% target in the Reserve Bank's Policy Targets Agreement. With annual growth in CPI at 2.1% by the end of the forecasts, the stable assumption is attained in the first projected year and maintained in all later ones.

Nominal GDP is projected using a growth rate produced by combining those of real GDP and CPI. Projected real GDP growth is itself derived from the growth rates of several economic variables, particularly that of the labour force and annual labour productivity growth.

Table 2.13 - Summary of fiscal projections, as percentages of nominal GDP
  Forecast Projections
Year ended 30 June 2014 2015 2016 2017 2018 2019 2020 2021 2022 ... 2028
Core Crown revenue 29.1 30.1 30.5 30.7 31.0 31.4 31.4 31.3 31.3 ... 31.2
Core Crown expenses 30.8 30.3 30.2 30.0 30.0 29.7 29.2 28.9 28.6 ... 27.0
Total Crown revenue 38.8 39.6 39.7 39.8 40.2 40.5 40.6 40.5 40.5 ... 40.3
Total Crown expenses 39.8 39.3 39.2 39.0 38.9 38.6 38.1 37.8 37.5 ... 36.0
Total Crown OBEGAL1 -1.1 0.1 0.3 0.7 1.1 1.8 2.3 2.5 2.7 ... 4.2
Total Crown operating balance 1.2 1.2 1.4 1.8 2.2 3.0 3.3 3.5 3.8 ... 5.5
Core Crown GSID2 38.3 36.1 36.4 37.5 34.6 32.6 29.8 27.4 24.9 ... 10.0
Core Crown net debt3 25.9 26.8 26.7 25.8 25.0 23.3 20.8 19.0 16.9 ... -0.7
Total Crown net worth 34.5 34.5 34.5 34.9 36.0 37.5 39.2 41.1 43.2 ... 59.5
Net worth attributable to the Crown4 32.2 32.2 32.3 32.8 33.9 35.2 36.9 38.6 40.6 ... 55.9

Notes:

  1. Operating balance before gains/(losses).
  2. Gross sovereign-issued debt.
  3. Excludes financial assets of the NZS Fund and core Crown advances.
  4. Excludes assets and liabilities belonging to minority interests.

Source: The Treasury

Summary of medium-term fiscal assumptions
Tax revenue Linked to growth in nominal GDP. Source deductions (mainly PAYE tax on salary and wages) are grown using employment growth and nominal average hourly wage growth, multiplied by a fiscal drag elasticity of 1.35, at the beginning of the projection period.  Beyond 2019/20 source deductions remain at a long-term stable value of 11.2% of GDP.  The four other major tax categories - Corporate tax, GST, hypothecated Transport taxes and Other taxes ­­- are gradually returned, from their end-of-forecast values, to long-term constant ratios to GDP.  This transitional adjustment is to ensure that tax revenue projections are based on ratios to GDP that 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 4.1% for Corporate tax, 7.6% for GST, 1.3% for hypothecated Transport taxes and 4.5% for Other taxes.  The long-term ratios are based on historical data, taking into account tax rate and policy changes that could affect these.  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 “wage floor”.  The latter refers to the net (after-tax) weekly NZS rate for a couple being constrained in legislation to lie between 65% and 72.5% of net average weekly earnings.  As tax on average weekly earnings increases owing to fiscal drag, the net average weekly earnings do not grow as quickly as the gross earnings in the years where fiscal drag is applied in modelling source deductions.
Other benefits Demographically adjusted and linked to inflation.
Health and education Held constant at the end-of-forecast values, because their growth is assumed to come from a share of the projected Operating Allowance annual increment.
Other expenditure Held constant at the end-of-forecast values, because their growth is assumed to come from a share of the projected Operating Allowance annual increment.
Finance costs A function of debt levels and interest rates.
Operating allowance $1.592 billion in 2018/19, based on 2% growth from a $1.5 billion value in Budget 2015.  Operating Allowances continue to grow at 2% per year from this value in later projected years.
Capital allowance $0.955 billion in 2018/19, based on 2% growth from a $0.9 billion value in Budget 2016.  Capital Allowances continue to grow at 2% per year from this value in later projected years.
NZS Fund Contributions to the Fund suspended until 2019/20.  Contributions begin again in 2020/21, at a level consistent with the New Zealand Superannuation and Retirement Income Act 2001.

Source: The Treasury

Notes

  • [7]Note that the economic forecasts in the Pre-election Update are based on a March year.

Risks and Scenarios

Overview

  • This chapter outlines the main economic and fiscal risks associated with the central forecast. Risks to the economic outlook are evenly balanced over the forecast period as a whole, while being tilted to the downside in the near-term. In addition to risks associated with the economy, the Crown is also exposed to expenditure and balance sheet risks. In particular, volatility in market prices can have a significant impact on the Crown’s fiscal position.
  • Internationally, the risks with potentially the largest impact on the New Zealand economy relate to the level of demand for New Zealand's commodity exports, particularly from China, as well as the timing and magnitude of interest rate increases in the US and the sensitivity of energy prices to geopolitical developments.
  • Domestically, the risks with potentially the largest impact on the New Zealand economy relate to the pace of the Canterbury rebuild and its interaction with the wider economy, the sensitivity of households to higher debt servicing costs, along with net migration’s impact on domestic demand.
  • Two scenarios are presented that represent two possible ways in which the New Zealand economy could deviate from the central forecast. Scenario one is based on weaker short-term domestic demand combined with a larger decline in the terms of trade, which lowers nominal GDP over the forecast period. Scenario two is based on stronger growth in the US, which leads to exchange rate depreciation and a more competitive export sector, increasing nominal GDP over the forecast period.
  • The first part of this chapter outlines the key risks to the economic outlook. The second part of the chapter presents the two alternative scenarios for the economy. The remainder of the chapter focuses on general fiscal risks that can impact the Crown's fiscal position.

Economic Risks

Uncertain global outlook...

Global developments can impact New Zealand through migration, trade, confidence and financial channels. Risks posed to the outlook for key trading partners, and global financial settings in general, are all factors that can lead to rapid changes in the economic outlook for New Zealand.

…as risks to New Zealand's key trading partners remain...

Risks to the growth outlook for China remain, even with June quarter growth strengthening after a weaker March quarter. The property investment and construction boom that stimulated Chinese growth following the global financial crisis was fuelled by rapid credit growth. Concerns around the high level of local government debt, the quality of lending in the shadow banking sector and exposure of financial institutions to housing market vulnerabilities persist. China's growth could slow more quickly than in the central forecasts if financial market disruption resulted in significantly tighter credit conditions; however, their impact is likely to be limited by room for further policy adjustment, sustained urbanisation and solid income growth.

Commodity prices have fallen recently, led by declines in export dairy and forestry prices. While the weaker outturn in the GlobalDiaryTrade auction held in early August poses a downside risk if sustained, commodity prices tend to be volatile and the latest prices may overstate the weakness in demand. There have also been some positive offsets: sheep meat prices have strengthened as demand from China has increased, while meat supply remains constrained in the US. The extent to which these trends continue is uncertain. A continuation of recent dairy auction price falls would pose a downside risk to the main forecast, which the first scenario explores in combination with further weakness in household consumption in New Zealand.

...and the US economy starts to gain momentum...

Recent strong growth in investment, consumption and construction, combined with the lowest market volatility since 2007, give the US economy significant potential to outperform current forecasts. Recent speeches by Federal Reserve Chair Janet Yellen indicate that if future data releases are stronger than expected, normalisation of monetary policy would happen earlier. However, a stronger US economy could further exacerbate the risks to emerging economies if expectations of a faster withdrawal of monetary stimulus were to develop. The impact of an earlier tightening in US monetary policy on the New Zealand economy is explored in more detail as part of the second scenario.

...while geopolitical developments could contribute to price volatility...

Recent geopolitical developments in Ukraine and the Middle East have been watched closely by markets for any possible impacts on energy supplies, with much of the focus on oil. While long-term implications of the recent geopolitical developments remain uncertain, further deterioration that impacts energy supplies may further increase prices. Similarly, improvements that enhance the stability of energy supplies could reduce energy prices. The impact on New Zealand of Russia's recent ban on food imports from selected countries (not including New Zealand) is uncertain at this stage.

Domestic outlook is also uncertain...

Key areas of uncertainty remain, including the speed of the Canterbury rebuild and its wider economic implications, the reaction of households to higher debt servicing costs, and the scale of the current migration cycle and its impact on domestic demand.

...with the timing and extent of the Canterbury rebuild an area of uncertainty…

There is still uncertainty around the overall timing and magnitude of the Canterbury rebuild. Key determinants continue to be the pace of the settlement of remaining insurance claims and the evolution of resource pressures in the construction sector. While the resolution of insurance claims has continued to progress, there are risks that the greater complexity of remaining claims could slow the rate of settlement. The availability and mobility of skilled labour will also impact on the pace of reconstruction if specific skill shortages act as bottlenecks in the construction industry. If the rebuild were to progress more slowly, residential and non-residential investment and employment growth could all be weaker than reflected in the central forecast.

The Canterbury region will account for a greater share of GDP than in previous construction booms and regional resource pressures will act to crowd out activity in other parts of the economy. The extent to which prices and wages rise to facilitate the transfer of resources remains heavily influenced by competing demand pressures elsewhere, especially in Auckland.

...as is the sensitivity of households to increasing interest rates…

Household debt levels have increased recently after falling since the global financial crisis. Households are relatively exposed to interest rate increases as the majority of mortgage rate debt will quickly reflect increases in the OCR. Households are, however, increasingly shifting to fixed rate mortgages which have not increased as much as floating rates so far. If households exercise more restraint, debt levels would be lower than otherwise but consumption growth would be weaker, which scenario one explores in more detail. On the other hand, if households are less sensitive to interest rate increases, consumption growth would be higher than otherwise, and in the absence of stronger income growth this would lead to higher debt than otherwise.

...while the housing market weakens in spite of strong net migration

House price growth and house sales have slowed as loan-to-value restrictions have impacted mortgage lending. Mortgage rates have also begun to rise, with the expectation of future increases as the tightening cycle continues. This weakness in the housing market has been in contrast to the near-record net migration gains, which historically have increased the demand for housing, contributing to both house price inflation and construction activity. While higher net migration flows would pose an upside risk, there could also be a delayed response to the recent increases in net migration, leading to stronger demand for housing and possibly higher private consumption growth. The second scenario incorporates a larger effect from the central forecast's net migration gain.

Other risks around key judgements

Economic relationships are complex and judgements need to be made about key economic variables such as the exchange rate. If, for any reason, key factors such as those outlined above play out differently than assumed in the central forecast and impact on the inflation outlook, then the Reserve Bank's setting of monetary policy would be responsive to those different conditions. Interest rates could rise by more or less and the pace of tightening could be faster or slower depending on the direction of change.

Alternative Scenarios

The following scenarios show how the economy might evolve if some of the key judgements in the central forecast are altered (Table 3.1). The scenarios represent two of a number of ways that the economy could deviate from the central forecast. Scenario one represents the economic impacts of weaker short-term domestic demand combined with a larger decline in the terms of trade. Scenario two represents the economic impacts of stronger growth in the US.

Table 3.1 - Summary of key economic variables for central forecast and scenarios
March years 2014
Actual
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast

Real GDP (annual average % change)

         
Central forecast 3.3 3.8 3.0 2.2 2.1
Scenario one 3.3 3.4 2.9 2.2 2.2
Scenario two 3.3 4.0 3.1 2.2 1.9

Unemployment rate1

         
Central forecast 6.0 5.6 5.2 4.8 4.5
Scenario one 6.0 5.6 5.4 4.9 4.6
Scenario two 6.0 5.5 4.9 4.5 4.4

Nominal GDP (annual average % change)

         
Central forecast 7.0 5.2 4.2 4.4 3.7
Scenario one 7.0 3.8 3.0 5.0 3.7
Scenario two 7.0 5.7 5.0 4.7 3.8

Current account balance (% of GDP)

         
Central forecast -2.8 -4.8 -6.2 -6.4 -6.4
Scenario one -2.8 -5.1 -6.5 -6.1 -6.1
Scenario two -2.8 -4.8 -5.9 -5.9 -6.0

90-day bank bill rate2

         
Central forecast 3.0 4.3 4.9 5.0 5.3
Scenario one 3.0 3.7 3.8 4.1 4.8
Scenario two 3.0 4.6 5.2 5.3 5.5

Notes:

  1. March quarter, seasonally adjusted
  2. March quarter average

Sources: Reserve Bank, Statistics New Zealand, the Treasury

Scenario one - Softer household demand with weaker export prices

Softer than expected household demand...

Figure 3.1 - Real consumption
Figure 3.1 - Real consumption.
Source: The Treasury

In the first scenario, households are more responsive to increasing interest rates than in the central forecasts, and the weakness in private consumption seen in the March quarter of 2014 continues throughout the year, as shown in Figure 3.1. Households that are exposed to elevated debt levels reduce consumption by more than expected in the central forecast to offset increased debt-servicing costs, which reduces private consumption over the remainder of 2014.

...and lower dairy prices lead to a weaker housing market...

In this scenario, export dairy prices continue to fall, weighing on commodity exports. The merchandise terms of trade consequently decline, while the exchange rate depreciates sharply to help buffer the shock from lower dairy prices. The lower terms of trade flow through to slower income growth, which further lowers private consumption once the initial spike owing to increasing interest rates has subsided.

Figure 3.2 - Residential investment
Figure 3.2 - Residential investment.
Source: The Treasury
Figure 3.3 - 90-day interest rate
Figure 3.3 - 90-day interest rate.
Source: The Treasury

The near-term weakness in consumption will dampen housing demand and lead to weaker house price growth. This leads to lower residential investment (Figure 3.2) compared to the central forecast, which is another factor which lowers nominal GDP growth as households and firms react to the income shock.

...and lower interest rates...

Weaker domestic demand helps contain inflation expectations, which results in a slower monetary tightening cycle. Under this scenario, the Reserve Bank does not raise the OCR again until the end of 2015, which keeps the 90-day rate lower than in the central forecast (Figure 3.3). However, as the exchange rate depreciates and New Zealand's goods and services become more competitive, net exports begin to contribute positively to growth and import volumes shrink. Together with the stabilisation of the terms of trade, strong growth near the end of the forecast period requires more aggressive monetary policy tightening. This causes interest rates to increase faster near the end of the forecast period, although to a lower peak than in the central forecast.

…as well as lower tax revenue and operating balance

Weaker domestic activity, combined with the lower terms of trade, reduces nominal GDP by a cumulative $20 billion relative to the central forecasts over the forecast period.

Core Crown tax revenue is a cumulative $7.0 billion lower over the forecast period in this scenario, owing to the weaker nominal GDP. The weaker labour market and lower labour incomes reduce source deductions revenue by $1.4 billion over the forecast period. The economy's weaker nominal activity means that business profitability is reduced, resulting in corporate taxes being a cumulative $1.9 billion lower. Resident withholding tax is $1.3 billion lower over the forecast period with interest rates increasing by less than in the central forecast. Weaker nominal consumption and residential investment reduce GST revenue by a cumulative $1.3 billion over the forecast period.

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

Core Crown expenses are higher than in the central forecast, driven by an increase in debt servicing costs. The softer labour market also results in an increase in the number of recipients of unemployment-related benefits compared to the central forecasts. In this scenario, the return to surplus in OBEGAL is delayed until June 2018 (Figure 3.4). As a consequence, net core Crown debt peaks at 28.4% of GDP in the June 2016 year, compared to 26.8% in the June 2015 year in the central forecast (Figure 3.8). By the end of the forecast period, net core Crown debt is 28.2% of GDP in this scenario compared to 25.0% of GDP in the central forecast.

Since the economic forecasts were finalised in mid-July, dairy prices at the early August GlobalDairyTrade auction were weaker than the central forecast had anticipated. It is important to note that scenario one reflects a combination of other factors in addition to lower dairy prices. Therefore, while the probability of this scenario has increased as a consequence of weaker dairy prices, it remains more likely that the overall economy will evolve in a manner that is more similar to the central forecast.

Scenario two - Stronger US growth with more domestic momentum

The US economy grows faster and, combined with stronger domestic inflation...

Figure 3.5 - Exchange rate (TWI)
Figure 3.5 - Exchange rate (TWI).
Source: The Treasury

In the second scenario both the US economy and domestic price pressures are stronger than expected. As the US economy strengthens, the Federal Reserve reacts by beginning the tightening cycle earlier than currently expected. As interest rates begin to rise in the US, lowering the difference in rates between New Zealand and the US, the exchange rate depreciates (Figure 3.5). In this scenario the TWI falls from 79.0 in the December quarter of 2014 to 77.4 in the December quarter of 2015, while over the forecast period the TWI is on average 1.5% lower than assumed in the central forecast.

Figure 3.6 - Consumers price index
Figure 3.6 - Consumers price index.
Source: The Treasury

While net migration remains the same in this scenario, the pressure from the recent gains in net migration increase domestic demand more than in the central forecast. The increase in domestic demand, combined with exchange rate depreciation, leads to increased inflationary pressures. The Reserve Bank responds by tightening monetary policy more aggressively to contain inflation expectations over the medium term, which brings inflation back towards 2% by the end of the forecast period. Inflation remains higher over the forecast period in this scenario, averaging 2.5% per year compared to 2.1% per year in the central forecast (Figure 3.6).

...leads to exchange rate depreciation and lower current account deficits

As the exchange rate falls, the price of imported goods increases, which makes exporters and import-competing domestic businesses becoming more competitive, boosting manufacturing and service exports and the production of import substitutes. Through this channel the lower exchange rate helps to rebalance the economy, lowering the annual current account deficit in June quarter 2018 from 6.4% of GDP in the central forecast to 6.0% of GDP (Figure 3.7). Furthermore, net exports of goods and services contribute an additional 0.2% to GDP growth in the year to March 2016 compared to the central forecast.

Nominal GDP growth and tax revenue higher

Figure 3.7 - Current account
Figure 3.7 - Current account.
Source: The Treasury

Stronger US growth and the lower exchange rate, combined with greater price pressures, increase nominal GDP by a cumulative $13 billion above the central forecasts over the forecast period. Core Crown tax revenue is a cumulative $3.9 billion higher over the forecast period. Higher nominal consumption and residential investment boost GST revenue by $0.5 billion over the forecast period. The stronger labour market and increased competition for workers push up wages and salaries, boosting source deductions revenue by a cumulative $1.3 billion. The stronger economic activity allows firms to increase their margins, boosting profitability and increasing corporate tax by $1.2 billion. Higher short-term interest rates, needed to control rising inflation, boost tax on interest by $0.4 billion.

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

Core Crown expenses are slightly lower than in the central forecast owing to a fall in debt servicing costs. The stronger labour market also results in a decrease in the number of recipients of unemployment-related benefits compared to the central forecasts. In this scenario, OBEGAL records a larger surplus of 0.3% of GDP ($0.6 billion) in the June 2015 year (Figure 3.4). Net core Crown debt declines to 23.3% of GDP in the June 2018 year compared to 25.0% of GDP in the central forecast (Figure 3.8).

General Fiscal Risks

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

Fiscal Sensitivities

Table 3.2 provides some rules of thumb on the sensitivities of the fiscal position to small changes in specific variables. For example, if nominal GDP growth is one percentage point faster than forecast in each year up to June 2018, tax revenue would be around $3.2 billion higher than forecast in the June 2018 year as a result. The sensitivities are broadly symmetric and if nominal GDP growth is one percentage point slower each year than expected, tax revenue would be around $3.1 billion lower than forecast in the June 2018 year. The figures are indicative and can be influenced by the composition of growth as different types of activity have different effective tax rates.

A different interest rate path from that forecast would also impact on the fiscal position. A one percentage point lower interest rate would result in interest income on funds managed by the Treasury's New Zealand Debt Management Office (NZDMO) being $145 million lower in the June 2018 year. This would be more than offset by interest expenses being $338 million lower in the June 2018 year.

Table 3.2 - Fiscal sensitivity analysis
Years ended 30 June
($millions)
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast

1% higher nominal GDP growth per annum on

       
Tax revenue 675 1,435 2,270 3,190

Tax Revenue impact of a 1% increase in growth of

       
Wages and salaries 285 605 965 1380
Taxable business profits 130 300 480 675

Impact of 1% lower interest rates on

       
Interest income1 (73) (77) (136) (145)
Interest expenses1 (22) (187) (275) (338)
Overall operating balance1 (51) 111 139 194

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

Source: The Treasury

Revenue Risks

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

Figure 3.9 plots the central tax revenue forecast, along with confidence intervals around these forecasts based on the Treasury's historical tax forecast errors and the assumption of an even balance of risks around the central forecast.[8] The outermost shaded area captures the range ± $6.4 billion in the June 2018 year, within which actual tax outturns should be expected to fall 80% of the time.

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

Figure 3.9 - Core Crown tax revenue uncertainty
Figure 3.9 - 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 over-forecasting of expenditure can also have substantial ongoing effects on the fiscal position, along with the uncertainty inherent in forecasting the cost of new policy initiatives.

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

Balance Sheet Risks

In addition to risks around revenue and expenditure, which appear in the balance sheet through their impact on the operating balance, the Crown's financial position is also exposed to asset and liability risks. The largest source of balance sheet risk is volatility in asset and liability values owing to movements in market variables such as interest rates, exchange rates and equity prices.

For additional detail, refer to the 2014 Investment Statement which provides information on the shape and health of the Crown's portfolio of assets and liabilities at the end of the previous financial year.[9] It outlines how the balance sheet has changed in recent years and includes forecasts of its anticipated composition and size through to 30 June 2018.

Funding Risks

The New Zealand Crown remains in the top-20 rated sovereigns globally, with the top Aaa foreign-currency rating from Moody's and AA foreign-currency ratings from Standard & Poor's and Fitch. Ratings outlooks are stable for Standard & Poor's and Moody's, and the rating outlook from Fitch is positive.

In the case of an increase in global risk aversion and in the absence of a marked improvement in the external position, New Zealand may be more likely to face a degree of funding pressure in the future. All else being equal, any improvement in the ratings outlook could serve to lower debt-servicing costs for the Crown.

The Crown is also susceptible to “liquidity risk” with respect to its ability to raise cash to meet its obligations. This risk is relatively small, however, given ongoing management of the core Crown's liquidity position by the Treasury's NZDMO.

Notes

Specific Fiscal Risks

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

Overview

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

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

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

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

The specific fiscal risks are categorised into:

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

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

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

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

Statement of Specific Fiscal Risks

Summary Table

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

Specific fiscal risks as at 5 August 2014 Status [10]

Potential policy decisions affecting revenue

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

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

 
ACC - Work-related Gradual Process Disease and Infection Changed
Budget Operating Initiatives Unchanged
Canterbury Earthquake Recovery - Christchurch Central Recovery Plan - Anchor Projects Changed
Christchurch City/Crown Cost Sharing - Horizontal Infrastructure Unchanged
Communications - Ultra-Fast Broadband Initiative Changed
Defence Force - Operating and Capital Costs Changed
Finance - Concessionary Loans Unchanged
Government Response to Wai 262 Unchanged
Housing/Social Development - Housing Assistance Changed
Internal Affairs - All-of-Government Common Capabilities Sustainable Funding New
Revenue - KiwiSaver One-off Enrolment Unchanged
Revenue - Transformation and Technology Renewal Unchanged
Social Development - Welfare Reform Costs Unchanged
Social Development - Welfare Reform Forecast Benefit Savings Unchanged
State Sector Employment Agreements Unchanged
Vulnerable Children White Paper Unchanged

Potential capital decisions (expected to be funded from the Crown balance sheet, including the FIF/capital allowance)

 
Arts, Culture & Heritage - Review of Military History Museum Arrangements New
Agency Capital Intentions Unchanged
Earthquake Strengthening for Crown-owned Buildings Unchanged
Finance - Crown Overseas Properties Unchanged
Parliamentary Service - Parliamentary Accommodation New
Primary Industries - Investment in Water Infrastructure Unchanged
Transport - Auckland Transport Projects Unchanged
Transport - Regional State Highways New
Transport - Support for KiwiRail Unchanged
Transport - Cycleways New

Matters dependent on external factors

 
ACC - Levies Unchanged
ACC - Non-earners' Account Unchanged
Canterbury Earthquake Recovery - Residential Red Zone Unchanged
Caregiver Employment Conditions Unchanged
Communications - Impairment in Value of Broadband Investment Unchanged
Defence Force - Potential Rationalisation, Revaluation and Disposal of NZDF Assets Unchanged
Energy - Crown Revenue from Petroleum Royalties Unchanged
Finance - EQC Unchanged
Finance - Goodwill on Acquisition Unchanged
Finance - Solid Energy Unchanged
Finance - Southern Response Earthquake Services Support Unchanged
Housing - Divestment of Housing Unchanged
Revenue - Cash Held in Tax Pools Unchanged
Revenue - Student Loans Changed
Treaty Negotiations - Treaty Settlement Forecasts Unchanged
Treaty Negotiations - Relativity Clause Unchanged

 

Notes

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

 

Potential Policy Decisions Affecting Revenue

ACC - Funding Policy Review (Changed)

The Government has been reviewing ACC's funding policy and intends that there be further levy reductions across all accounts but decisions have not yet been taken on the nature and timing of those reductions.  Such reductions would reduce Crown revenue and Crown assets, with a flow-on impact to the operating balance and net worth.

Revenue - Income-sharing Tax Credits (Unchanged)

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

Services Funded by Third Parties (Unchanged)

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

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

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

Under current legislation, the Government incurs an obligation for Work-related Gradual Process Disease and Infection claims when the claim is made, and an expense is recognised at this point. The liability for commercial accident and sickness insurance contracts would usually be recognised when exposure to conditions that will give rise to a claim occurs. An amendment to legislation would be required to recognise claims at the same time as for commercial contracts. An initial adjustment to the liability and an expense of about $1 billion would need to be reported if such an amendment were to be enacted.

Budget Operating Initiatives (Unchanged)

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

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

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

Christchurch City/Crown Cost Sharing - Horizontal Infrastructure (Unchanged)

The Crown is partially funding the recovery of local infrastructure in Canterbury as set out in the cost-sharing agreement with the Christchurch City Council. The agreement includes a review clause. The review is to be completed by 1 December 2014. Any additional costs or savings to the Crown that may arise from the review will have a corresponding fiscal impact.

Communications - Ultra-Fast Broadband Initiative (Changed)

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

Defence Force - Operating and Capital Costs (Changed)

In 2013, the Government reconsidered New Zealand Defence Force (NZDF) funding, output requirements and capability intentions, through the Defence Mid-Point Rebalancing Review.  The review has resulted in a baseline increase for NZDF in Budget 2014.  There is a likelihood that further operating and capital decisions may be required to achieve Defence White Paper (2010) policy and enable NZDF to manage additional cost pressures over the forecast period.

Finance - Concessionary Loans (Unchanged)

The Crown has provided loans to local government and iwi-based organisations on a concessionary basis to achieve public policy purposes. To reflect the concession, these loans have been written down and have a current carrying value of $382 million. There is, however, a risk that the adjustments made may be insufficient to cover the credit risk involved in these non-commercial loans.

Government Response to Wai 262 (Unchanged)

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

Housing/Social Development - Housing Assistance (Changed)

The Government has changed the policy settings for social housing and is considering a number of aspects of housing assistance. The changes and the matters the Government is considering include growing third party providers of social housing, increasing the effectiveness of financial assistance, and Housing New Zealand Corporation focusing on providing social housing to those with the greatest housing need. Increasing the scale or speed of change may require reprioritisation or additional funding.

Internal Affairs - All-of-Government Common Capabilities Sustainable Funding (New)

A central component of the Department of Internal Affairs' responsibilities as functional lead for All-of-Government ICT and the ICT Strategy and Action Plan is the development and delivery of All-of-Government common capabilities. The Government has agreed that departments and some Crown entities should migrate to common ICT capabilities, including RealMe. Many of these common capabilities have been developed and are being used and some are still in development. To the extent that these costs cannot be met within agencies' baselines, they may require new funding.

Revenue - KiwiSaver One-Off Enrolment (Unchanged)

The Government has announced its intention to consult on the design of a one-off KiwiSaver auto-enrolment exercise to increase the number of KiwiSaver members. The Government will proceed with a one-off KiwiSaver enrolment exercise only when it is confident that such a step poses no significant risks to returning to, and maintaining, an operating surplus and debt repayment is on track. An auto-enrolment exercise is likely to entail a one-off cost for kick-start payments to new members and ongoing additional costs for the Member Tax Credit. Depending on the timing, design features and take-up rate, these costs could be in the order of $100 million to $290 million over the first four years after auto-enrolment takes place, and are expected to be funded out of the operating allowance.

Revenue - Transformation and Technology Renewal (Unchanged)

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

Social Development - Welfare Reform Costs (Unchanged)

The Welfare Reform package of changes to the benefit system was introduced from July 2013, following amendments to the Social Security Act 1964. The current phase is to review programmes with a view to reducing future benefit dependency and long-term liability. Additional funding was appropriated at Budget 2014. The extent of any further costs associated with the ongoing implementation of the Investment Approach is uncertain.

Social Development - Welfare Reform Forecast Benefit Savings (Unchanged)

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

State Sector Employment Agreements (Unchanged)

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

Vulnerable Children White Paper (Unchanged)

The Government has begun to implement proposals to better identify and provide assistance to vulnerable children. While funding for 2014/15 has been included in the fiscal forecasts, future costs of the proposal are still being developed. To the extent that these cannot be funded from reprioritisation, additional funding from the operating allowance may be required.

Potential Capital Decisions (Expected to be Funded from the Crown Balance Sheet, Including the FIF/capital allowance)

Arts, Culture and Heritage - Review of Military History Museum Arrangements (New)

In June 2014, the Government agreed to review the current arrangements around the recording, collecting and exhibiting of New Zealand's military history with a focus on the national level. At this stage it is unclear what the outcome of this business case will be, but this could result in further provision of military history exhibitions. This could require substantial Crown investment.

Agency Capital Intentions (Unchanged)

Future Budgets may well include new capital initiatives other than those identified in other specific fiscal risks. Such initiatives are likely to be primarily from the 16 capital-intensive agencies or sectors that are required to identify their capital spending intentions over the next 10 years based on current policy settings and certain demographic and inflation assumptions. The Government expects that these intentions will be managed back through a range of measures such as prioritisation, changes to asset utilisation, alternative methods of service delivery and changes to policy settings. New capital initiatives and agency capital intentions are risks to the fiscal forecasts only to the extent they cannot be managed through existing balance sheets, including the FIF, and the provision in the fiscal forecasts for forecast new capital spending.

Earthquake Strengthening for Crown-owned Buildings (Unchanged)

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

Finance - Crown Overseas Properties (Unchanged)

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

Parliamentary Service - Parliamentary Accommodation (New)

With the expiry of the lease on Bowen House in December 2018, the Parliamentary Service is identifying and assessing options for future office accommodation which may require capital expenditure with estimates ranging from $40 million to $130 million.

Primary Industries - Investment in Water Infrastructure (Unchanged)

In addition to $80 million provided in Budget 2013 and $40 million provided in Budget 2014, the Government will consider providing up to $280 million in future Budgets to Crown Irrigation Investments Limited as schemes reach the “investment-ready” stage.

Transport - Auckland Transport Projects (Unchanged)

The Government has signalled its intention to accelerate transport projects in the Auckland Council's Auckland Plan, including Auckland Manukau Eastern Transport Initiatives, the East-West Link and support for the City Rail Link and a second Waitemata Harbour Crossing. Decisions on further Crown financial assistance for Auckland Manukau Eastern Transport Initiatives and the East-West Link will be made as part of future Budgets.

Transport - Regional State Highways (New)

A regional state highway acceleration package of $212 million was announced by the Government in June 2014. $115 million of this is subject to the outcome of further investigations. Further funding decisions will be considered as part of Budget 2015.

Transport - Support for KiwiRail (Unchanged)

The Government in Budgets 2010 to 2014 supported KiwiRail Holdings Limited (KiwiRail) with around $1 billion invested in its plan to become a commercially viable network. Further funding is being sought by KiwiRail in support of this objective. A major review of the business has commenced and will be assessed to inform Budget 2015 and any further investment.

Transport - Cycleways (New)

At the date these specific fiscal risks were finalised (5 August), a proposal relating to cycleways was under active consideration by the Government. If such a proposal is approved and is not to be funded entirely from within existing baselines, it may impact on the FIF or the Budget allowances.

Matters Dependent on External Factors

ACC - Levies (Unchanged)

Revenue from the levies set for the Work, Earners' and Motor Vehicle accounts may be more or less than is required to cover the cost of claims, if factors such as claims experience, ACC performance and economic assumptions (particularly discount rates) turn out differently from what has been forecast. Any such variance will have a corresponding impact on the operating balance.

ACC - Non-earners' Account (Unchanged)

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

Canterbury Earthquake Recovery - Residential Red Zone (Unchanged)

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

Caregiver Employment Conditions (Unchanged)

Several cases and funding claims in the disability support and aged care sectors relating to interpretation of the Minimum Wage Act 1983, the Equal Pay Act 1972 and the Government's policy of paying certain family members through its Funded Care Policy may involve significant costs to the Crown. Changes to the existing policy could require additional funding. Successful litigation may have implications for agencies that target assistance based on family circumstances and/or employ workers under similar contracts.

Communications - Impairment in Value of Broadband Investment (Unchanged)

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

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

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

Energy - Crown Revenue from Petroleum Royalties (Unchanged)

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

Finance - EQC (Unchanged)

EQC is forecasting a cash deficiency in the National Disaster Fund (NDF) arising in the 2014/15 financial year. Under Section 16 of the Earthquake Commission Act 1993 the Crown shall provide funding to meet a deficiency in the NDF. Such funding will impact on net debt but not the operating balance or OBEGAL. The financial position of EQC and the amount of any Crown funding carry a high level of uncertainty owing to the nature of EQC's claims liability. An actuarial estimate of the net claims liability and its rate of settlement is included in the forecasts; however, the estimates are sensitive to underlying assumptions such as damage estimates, legal challenges, reinsurance recoveries and the forecast profile of settlements. The Crown's financial position may be adversely impacted if these assumptions are modified over time. Because the net claims liability is large, small percentage changes in the liability can have a material impact on costs and forecasts.

Finance - Goodwill on Acquisition (Unchanged)

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

Finance - Solid Energy (Unchanged)

Since Solid Energy's financial restructure in October 2013 the company's export prices have deteriorated significantly driven mainly by a decrease in US dollar coal price. The company continues to develop and implement a business strategy to adapt to these challenging market conditions and continue operating. Any changes to the restructure arrangements or further deterioration in market conditions or the company’s financial position may adversely impact the Crown.

Finance - Southern Response Earthquake Services Support (Unchanged)

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

Housing - Divestment of Housing (Unchanged)

The forecasts reflect related divestments and redevelopments of some housing property. Property sales are subject to market conditions and therefore there is an inherent level of uncertainty about the return to the Crown associated with forecast divestments and to the proposed funding of the related developments.

Revenue - Cash Held in Tax Pools (Unchanged)

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

Revenue - Student Loans (Changed)

The value of student loans is sensitive to assumptions such as the borrower's future income, and general economic factors such as interest rates, unemployment levels, salary inflation and the CPI. As new lending occurs, an initial write-down to fair value will be made, and an expense will be incurred, reflecting the cost the Crown incurs in making an interest free loan. The forecasts for this initial write-down assume that loans issued after 1 January 2015 with similar repayment characteristics to student loans would attract an effective interest rate of 6.73%. The effective interest rate actually applied for these loans will be updated early in 2015.

Treaty Negotiations - Treaty Settlement Forecasts (Unchanged)

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

Treaty Negotiations - Relativity Clause (Unchanged)

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

Risks Removed Since the 2014 Budget Update

There have been no risks removed since the 2014 Budget Update.

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

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

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

Criteria for Including Matters in the Fiscal Forecasts

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

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

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

Rules for the Disclosure of Specific Fiscal Risks 

Matters are disclosed as specific fiscal risks if:

  • the likely impact is more than $100 million over five years, and either
  • a decision has not yet been taken but it is reasonably possible[13] (but not probable) that the matter will be approved or the situation will occur, or
  • it is reasonably probable that the matter will be approved or the situation will occur, but the matter cannot be quantified or assigned to particular years with reasonable certainty.

Additionally, any other matters may be disclosed as specific fiscal risks if the Secretary to the Treasury considers, using 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.

Exclusions from Disclosure

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

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

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

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

Notes

  • [11]The Statement of Specific Fiscal Risks is a requirement set out in sections 26Q and 26U of the Public Finance Act 1989.
  • [12]For these purposes “reasonably probable” is taken to mean that the matter is more likely than not to be approved within the forecast period (by considering, for example, whether there is a better than 50% chance of the matter occurring or being approved).
  • [13]For these purposes “reasonably possible” is taken to mean that the matter might be approved within the forecast period (by considering, for example, whether there is a 20% to 50% chance of the matter occurring or being approved).
  • [14]For these purposes “unlikely” is taken to mean that the matter will probably not be approved within the forecast period (by considering, for example, whether there is a less than 20% chance of the matter occurring or being approved).

Contingent Liabilities and Contingent Assets

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

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

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

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

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

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

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

Contingent liabilities have been stated as at 31 May 2014, being the latest set of reported contingent liabilities.

Notes

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

 

Quantifiable Contingent Liabilities and Contingent Assets

 

 
 

Status [16]

($millions)

Contingent liabilities

   

Guarantees and indemnities

   
Other guarantees and indemnities Unchanged 190
    190

Uncalled capital

   
Asian Development Bank Unchanged 2,808
International Monetary Fund - promissory notes Unchanged 1,043
International Bank for Reconstruction and Development Unchanged 966
International Monetary Fund - arrangements to borrow Unchanged 988
Other uncalled capital Unchanged 21
    5,826

Legal proceedings and disputes

   
Tax disputes Unchanged 592
Other legal proceedings and disputes Unchanged 50
    642

Other quantifiable contingent liabilities

   
Unclaimed monies Unchanged 112

Transpower New Zealand Limited

Unchanged

150

Other quantifiable contingent liabilities Unchanged 203
    465
Total quantifiable contingent liabilities   7,123

Contingent assets

   
Tax disputes Unchanged 118
Other quantifiable contingent assets Unchanged 53
Total quantifiable contingent assets   171

 

Notes

  • [16]Status of contingent liabilities or assets when compared to the Budget Economic and Fiscal Update published on 15 May 2014.

 

Unquantifiable Contingent Liabilities and Contingent Assets

Contingent liabilities
  Status

Indemnities:

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

Legal claims and proceedings:

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

Other unquantifiable contingent liabilities:

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

Description of Contingent Liabilities

Quantifiable contingent liabilities over $100 million

Uncalled capital

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

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

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

 
Uncalled capital 31 May 2014
$millions
30 June 2013
$millions
Asian Development Bank 2,808 2,992
International Monetary Fund - promissory notes 1,043 1,163
International Bank for Reconstruction and Development 966 1,056
International Monetary Fund - arrangements to borrow 988 1,052

Legal proceedings and disputes

Tax in dispute

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

$592 million at 31 May 2014 ($641 million at 30 June 2013)

Otherquantifiable contingent liabilities

Unclaimed monies

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

$112 million at 31 May 2014 ($101 million at 30 June 2013)

Transpower New Zealand Limited

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

$150 million at 31 May 2014 ($156 million at 30 June 2013)

Unquantifiable contingent liabilities

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

  1. Indemnities
  2. Legal disputes
  3. Other contingent liabilities.

a Indemnities

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

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

 
Party indemnified Instrument of indemnification Actions indemnified
Air New Zealand Deed of indemnity issued 24 September 2001. Claims arising from acts of war and terrorism that cannot be met from insurance, up to a limit of US$1 billion in respect of any one claim.
Contact Energy Limited The Crown and Contact Energy signed a number of documents to settle in full Contact's outstanding land rights and geothermal asset rights at Wairakei.  The documents contained two reciprocal indemnities between the Crown and Contact to address the risk of certain losses to the respective parties' assets arising from the negligence or fault of the other party. 
Earthquake Commission (EQC) Section 16 of the Earthquake Commission Act 1993. As set out in the Earthquake Commission Act 1993, the Crown shall fund any deficiency in EQC's assets to cover its financial liabilities on such terms and conditions that the Minister of Finance determines.  See risk page 70.
Genesis Energy Limited Deed between Genesis Power Limited and the Crown. The agreement sees the Crown compensate Genesis in the event that Genesis has less gas than it requires for the long-term supply of gas to cover Huntly power station's minimum needs.
  Genesis acquisition of Tekapo A & B power stations. Indemnity against any damage to bed of lakes and rivers subject to operating easements. 
Housing New Zealand Corporation (HNZC) The Crown has provided a warranty in respect of title to the assets transferred to Housing New Zealand Limited (HNZL).

The Crown indemnified HNZL against:

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

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

Justices of the Peace, Community Magistrates and Disputes Tribunal Referees

Section 197 of the Summary Proceedings Act 1957.

Section 58 of the Disputes Tribunal Act 1988.

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

Section 9 of the Civil Defence Emergency Management Act 2002.

Civil Defence Emergency Management Plan.

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

The Crown has indemnified Westpac:

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

 

b Legal claims and proceedings

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

Accident Compensation Corporation (ACC) litigation   

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

Air New Zealand litigation

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

Television New Zealand Limited (TVNZ)

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

Treaty of Waitangi claims

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

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

Ministry of Education litigation

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

c  Other unquantifiable contingent liabilities

Criminal Proceeds (Recovery) Act 2009

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

Environmental liabilities

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

Any contaminated sites for which costs can be reliably measured have been included in the Statement of Financial Position as provisions.

Treaty of Waitangi claims - Settlement Relativity Payments - see page 72.

Description of Contingent Assets

Quantifiable contingent assets over $100 million

Tax disputes - non-assessed

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

$118 million at 31 May 2014 ($169 million at 30 June 2013)

Forecast Financial Statements

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

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

The forecasts have been prepared in accordance with the Statement of Responsibility and reflect the judgements and information known at the time they were prepared. They reflect all government decisions and circumstances communicated to 5 August 2014.

The finalisation dates and key assumptions that underpin the preparation of the Forecast Financial Statements are outlined in the Fiscal Outlook chapter (pages 23 to 47).

Statement of Accounting Policies

Significant Accounting Policies

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

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

The specific accounting policies are included within the 2014 Pre-election Economic and Fiscal Update Additional Information document which can be found on the Treasury's website at www.treasury.govt.nz/budget/forecasts/prefu2014

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

The Forecast Financial Statements have been prepared on the basis of the Treasury's best professional judgement. Actual financial results for the periods covered are likely to vary from the information presented in these forecasts. Factors that may lead to a material difference between information in these Forecast Financial Statements and the actual reported results in future years are set out in the Specific Fiscal Riskschapter on pages 61 to 82.

Key forecast assumptions are set out on pages 40 to 42.

Government Reporting Entity as at 5 August 2014

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

Core Crown segment

Departments

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

Offices of Parliament

  • Controller and Auditor-General
  • The Ombudsmen
  • Parliamentary Commissioner for the Environment

Others

  • New Zealand Superannuation Fund
  • Reserve Bank of New Zealand

State-owned enterprises segment

  • Airways Corporation of New Zealand Limited
  • Animal Control Products Limited
  • AsureQuality Limited
  • Electricity Corporation of New Zealand Limited
  • Kiwirail Holdings Limited
  • Kordia Group Limited
  • Landcorp Farming Limited
  • Learning Media Limited (in liquidation)
  • Meteorological Service of New Zealand Limited
  • New Zealand Post Limited
  • New Zealand Railways Corporation
  • Quotable Value Limited
  • Solid Energy New Zealand Limited
  • Transpower New Zealand Limited

Mixed ownership model companies (Public Finance Act schedule 5 companies)

  • Genesis Energy Limited
  • Meridian Energy Limited
  • Mighty River Power Limited

Others

  • Air New Zealand Limited

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

Forecast Financial Statements

Forecast Statement of Financial Performance for the years ending 30 June

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

Revenue

               
Taxation revenue 1 58,134 61,773 61,001 65,538 69,492 72,882 76,324
Other sovereign revenue 1 5,172 5,296 5,441 5,166 4,984 4,748 4,890
Total revenue levied through the Crown's sovereign power   63,306 67,069 66,442 70,704 74,476 77,630 81,214
Sales of goods and services   16,713 17,080 16,568 16,847 17,291 17,790 18,482
Interest revenue and dividends 2 2,939 3,588 3,174 3,717 4,090 4,815 5,257
Other revenue   3,697 3,867 3,388 3,783 3,875 4,022 4,084
Total revenue earned through the Crown's operations   23,349 24,535 23,130 24,347 25,256 26,627 27,823
Total revenue (excluding gains)   86,655 91,604 89,572 95,051 99,732 104,257 109,037

Expenses

               
Transfer payments and subsidies 3 22,708 23,485 23,360 23,889 24,516 25,348 26,406
Personnel expenses 4 19,935 20,172 20,468 20,812 21,131 21,338 21,586
Depreciation and amortisation 5 4,812 4,640 4,728 4,945 4,971 5,113 5,178
Other operating expenses 5 36,163 37,608 35,611 37,171 37,352 37,114 37,450
Interest expenses 6 4,358 4,516 4,387 4,707 5,111 5,642 5,765
Insurance expenses 7 3,031 3,215 3,466 3,567 4,099 4,443 4,713
Forecast new operating spending 8 461 191 1,834 3,340 4,864
Top-down expense adjustment 8 (600) (875) (485) (360) (360)
Total expenses (excluding losses)   91,007 93,497 92,020 94,407 98,529 101,978 105,602
Minority interest share of operating balance before gains/losses1   (62) (140) (147) (347) (385) (428) (471)
Operating balance before gains/(losses)   (4,414) (2,033) (2,595) 297 818 1,851 2,964
Net gains/(losses) on financial instruments 9 7,270 1,748 4,822 2,528 2,674 2,759 2,914
Net gains/(losses) on non-financial instruments 10 3,674 443 328 (97) (109) (73) (74)
Total gains/(losses)   10,944 2,191 5,150 2,431 2,565 2,686 2,840
Net surplus from associates and joint ventures   395 200 271 255 255 256 256
Operating balance 11 6,925 358 2,826 2,983 3,638 4,793 6,060

 

  1. Minority interests include those who recently purchased shares in the Government Share Offer Programme as well as the pre-existing minority interests.

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

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

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

Total Crown expenses

             

By functional classification

             
Social security and welfare 26,268 27,510 27,303 28,216 29,065 30,098 31,348
GSF pension expenses 286 283 295 373 417 423 423
Health 13,856 14,433 14,404 14,741 14,668 14,616 14,598
Education 13,366 13,180 13,070 13,569 13,747 13,806 13,881
Core government services 3,960 4,201 4,091 4,445 4,548 4,451 4,459
Law and order 3,670 3,804 3,735 3,832 3,794 3,770 3,772
Defence 1,766 1,893 1,775 1,881 1,975 1,945 1,927
Transport and communications 9,052 9,036 9,160 9,409 9,486 9,691 10,002
Economic and industrial services 8,375 8,098 7,566 7,763 7,903 8,131 8,585
Primary services 1,579 1,892 1,721 1,782 1,745 1,723 1,565
Heritage, culture and recreation 2,351 2,532 2,363 2,348 2,431 2,470 2,523
Housing and community development 989 1,057 1,088 1,146 1,183 1,170 1,187
Environmental protection 528 473 536 529 532 511 514
Other 603 728 526 350 575 551 549
Finance costs 4,358 4,516 4,387 4,707 5,111 5,642 5,765
Forecast new operating spending 461 191 1,834 3,340 4,864
Top-down expense adjustment (600) (875) (485) (360) (360)
Total Crown expenses excluding losses 91,007 93,497 92,020 94,407 98,529 101,978 105,602

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

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

Core Crown expenses

             

By functional classification

             
Social security and welfare 22,741 23,595 23,250 23,966 24,415 25,201 26,220
GSF pension expenses 278 274 277 359 404 409 409
Health 14,498 14,950 14,911 15,065 15,132 15,191 15,274
Education 12,504 12,389 12,300 12,825 12,946 13,008 13,081
Core government services 4,294 4,637 4,406 4,849 4,909 4,799 4,792
Law and order 3,456 3,561 3,499 3,568 3,529 3,502 3,502
Defence 1,804 1,933 1,824 1,929 2,023 1,993 1,976
Transport and communications 2,255 2,162 2,235 2,220 2,161 2,224 2,293
Economic and industrial services 1,978 2,152 2,068 2,215 2,241 2,246 2,299
Primary services 659 818 675 700 638 605 603
Heritage, culture and recreation 804 854 841 770 778 753 744
Housing and community development 283 335 355 331 284 228 220
Environmental protection 530 496 535 528 530 510 513
Other 603 728 526 350 575 551 549
Finance costs 3,619 3,622 3,589 3,835 4,000 4,383 4,473
Forecast new operating spending 461 191 1,834 3,340 4,864
Top-down expense adjustment (600) (875) (485) (360) (360)
Total core Crown expenses excluding losses 70,306 72,367 71,291 72,826 75,914 78,583 81,452

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

Forecast Statement of Comprehensive Income for the years ending 30 June

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Operating balance (including minority interest) 7,019 498 3,006 3,355 4,043 5,239 6,549

Other comprehensive income

             
Revaluation of physical assets 1,367 4,172
Net change in hedging instruments entered into for cash flow hedges 280 (21) (104) (2) 5 8 2
Foreign currency translation differences for foreign operations 39 (35) 4
Valuation gains/(losses) on investments available for sale taken to reserves 36 8 4 9 11 12 12
Other movements 7 (38) 9 (28) 23 33 38
Total other comprehensive income 1,690 (12) 4,046 (17) 39 53 52
Total comprehensive income 8,709 486 7,052 3,338 4,082 5,292 6,601

Attributable to:

             
 - minority interest 153 140 180 372 405 446 489
 - the Crown 8,556 346 6,872 2,966 3,677 4,846 6,112
Total comprehensive income 8,709 486 7,052 3,338 4,082 5,292 6,601

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
  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Opening net worth 59,780 63,270 70,011 79,773 82,829 86,548 91,449
Operating balance 7,019 498 3,006 3,355 4,043 5,239 6,549
Net revaluations 1,367 4,172
Transfers to/(from) reserves 260 (59) (116) 13 26 41 41
(Gains)/losses transferred to the Statement of Financial Performance (10) (3) 4 2 (1)
Other movements 73 47 (7) (34) 11 12 12
Comprehensive income attributable to the Crown 8,709 486 7,052 3,338 4,082 5,292 6,601
Gain/(loss) on Government share offers 167 175 (542) -  
Increase in minority interest from Government share offers 1,371 1,325 3,300
Transactions with minority interest (16) (74) (48) (282) (363) (391) (396)
Closing net worth 70,011 65,182 79,773 82,829 86,548 91,449 97,654

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

Forecast Statement of Cash Flows for the years ending 30 June

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

Cash flows from operations

             

Cash was provided from

             
Taxation receipts 56,413 60,695 59,871 64,613 68,430 71,868 75,231
Other sovereign receipts 4,806 4,747 4,999 4,637 4,224 4,343 4,439
Sales of goods and services 16,651 17,175 16,030 16,906 17,418 17,906 18,628
Interest and dividend receipts 2,694 3,175 2,989 2,923 3,170 3,696 4,093
Other operating receipts 5,933 5,443 5,741 5,038 3,739 4,077 3,766
Total cash provided from operations 86,497 91,235 89,630 94,117 96,981 101,890 106,157

Cash was disbursed to

             
Transfer payments and subsidies 22,780 23,877 23,607 24,014 24,527 25,311 26,380
Personnel and operating payments 58,450 62,622 59,370 64,130 59,866 59,779 61,492
Interest payments 4,369 4,629 4,322 4,878 4,962 5,402 5,558
Forecast new operating spending 461 191 1,834 3,340 4,864
Top-down expense adjustment (600) (875) (485) (360) (360)
Total cash disbursed to operations 85,599 90,989 87,299 92,338 90,704 93,472 97,934
Net cash flows from operations 898 246 2,331 1,779 6,277 8,418 8,223

Cash flows from investing activities

             

Cash was provided from/(disbursed to)

             
Net purchase of physical assets (5,169) (7,234) (5,629) (8,331) (7,162) (6,414) (5,611)
Net purchase of shares and other securities 6,342 (5,221) (5,064) 4,075 (3,212) (6,751) 4,130
Net purchase of intangible assets (581) (516) (675) (576) (505) (424) (403)
Net repayment/(issues) of advances (1,405) (2,029) (1,532) (1,749) (1,608) (1,497) (1,434)
Net acquisition of investments in associates 280 65 142 (46) (42) 45 46
Government share offer programme1 1,547 1,500 2,216 598
Forecast new capital spending (503) (146) (413) (653) (836)
Top-down capital adjustment 50 370 75 50 50
Net cash flows from investing activities 1,014 (13,888) (10,542) (5,805) (12,867) (15,644) (4,058)
Net cash flows from operating and investing activities 1,912 (13,642) (8,211) (4,026) (6,590) (7,226) 4,165

Cash flows from financing activities

             

Cash was provided from/(disbursed to)

             
Issues of circulating currency 234 141 274 152 157 161 166
Net issue/(repayment) of government stock2 5,476 10,245 5,520 (526) 5,151 6,865 (4,461)
Net issue/(repayment) of foreign-currency borrowings (2,926) (519) 1,450 (1,709) (1,359) (356) (571)
Net issue/(repayment) of other New Zealand dollar borrowings (634) 2,647 (811) 4,634 2,928 1,599 1,946
Dividends paid to minority interests3 (20) (120) (246) (365) (401) (416) (435)
Net cash flows from financing activities 2,130 12,394 6,187 2,186 6,476 7,853 (3,355)
Net movement in cash 4,042 (1,248) (2,024) (1,840) (114) 627 810
Opening cash balance 10,686 16,492 14,924 12,303 10,463 10,349 10,977
Foreign-exchange gains/(losses) on opening cash 196 (597) 1 (1)
Closing cash balance 14,924 15,244 12,303 10,463 10,349 10,977 11,786

 

  1. Represents proceeds from the Government Share Offer net of purchases by ACC and NZSF.
  2. Further information on the proceeds and repayments of government stock ("domestic bonds") is available in note 22.
  3. Minority interests include those who recently purchased shares in the Government Share Offer Programme as well as the pre-existing minority interests.

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

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

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

             
Net cash flows from operations 898 246 2,331 1,779 6,277 8,418 8,223
Items included in the operating balance but not in net cash flows from operations              

Gains/(losses)

             
Net gains/(losses) on financial instruments 7,270 1,748 4,822 2,528 2,674 2,759 2,914
Net gains/(losses) on non-financial instruments 3,674 443 328 (97) (109) (73) (74)
Total gains/(losses) 10,944 2,191 5,150 2,431 2,565 2,686 2,840

Other non-cash items in operating balance

             
Depreciation and amortisation (4,812) (4,640) (4,728) (4,945) (4,971) (5,113) (5,178)
Write-down on initial recognition of financial assets (684) (723) (778) (829) (834) (853) (862)
Impairment on financial assets (excl. receivables) (497) 23 (45) (128) (131) (134) (137)
Decrease/(increase) in defined benefit retirement plan liabilities 385 461 445 389 357 363 374
Decrease/(increase) in insurance liabilities 1,106 2,517 1,040 3,883 (653) (1,312) (1,579)
Other 331 201 125 (92) (129) (172) (211)
Total other non-cash Items (4,171) (2,161) (3,941) (1,722) (6,361) (7,221) (7,593)

Movements in working capital

             
Increase/(decrease) in receivables (1,302) (1,119) (1,251) (576) 192 517 882
Increase/(decrease) in accrued interest 257 526 119 964 771 879 957
Increase/(decrease) in inventories (94) 73 (8) 2 37 7 (50)
Increase/(decrease) in prepayments 32 (29) 35 (60) 2 6 (2)
Decrease/(increase) in deferred revenue (2) 26 (242) 16 17 26 (28)
Decrease/(increase) in payables/provisions 363 605 633 149 138 (525) 831
Total movements in working capital (746) 82 (714) 495 1,157 910 2,590
Operating balance 6,925 358 2,826 2,983 3,638 4,793 6,060

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

Forecast Statement of Financial Position as at 30 June

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

Assets

               
Cash and cash equivalents 12 14,924 15,244 12,303 10,463 10,349 10,977 11,786
Receivables 12 19,883 18,070 17,774 17,017 17,062 17,622 17,951
Marketable securities, deposits and derivatives in gain 12 44,000 44,713 47,933 44,117 47,311 54,793 51,665
Share investments 12 17,359 18,176 20,652 22,182 23,571 25,122 26,786
Advances 12 22,613 25,312 24,772 26,558 28,229 30,049 31,810
Inventory   1,140 1,321 1,132 1,134 1,170 1,177 1,128
Other assets   2,295 2,061 2,608 2,594 2,611 2,586 2,559
Property, plant and equipment 14 109,833 112,627 115,402 119,386 122,585 124,913 126,663
Equity accounted investments1   9,593 9,642 9,804 10,124 10,413 10,570 10,767
Intangible assets and goodwill 15 2,776 2,837 2,930 2,974 3,010 2,940 2,910
Forecast for new capital spending 8 505 146 559 1,212 2,048
Top-down capital adjustment 8 (330) (370) (445) (495) (545)
Total assets   244,416 250,178 255,310 256,325 266,425 281,466 285,528

Liabilities

               
Issued currency   4,691 4,897 4,964 5,116 5,273 5,435 5,601
Payables 17 11,160 12,360 11,624 11,982 11,780 12,601 12,535
Deferred revenue   1,714 1,553 1,956 1,940 1,923 1,897 1,925
Borrowings   100,087 112,201 103,124 105,127 111,521 119,870 116,445
Insurance liabilities 18 37,712 35,902 36,190 32,308 32,960 34,273 35,851
Retirement plan liabilities 19 11,903 11,766 10,882 10,493 10,136 9,773 9,399
Provisions 20 7,138 6,317 6,797 6,530 6,284 6,168 6,118
Total liabilities   174,405 184,996 175,537 173,496 179,877 190,017 187,874
Total assets less total liabilities   70,011 65,182 79,773 82,829 86,548 91,449 97,654

Net worth

               
Taxpayers' funds   10,862 6,230 13,268 16,409 20,320 25,320 31,584
Property, plant and equipment revaluation reserve   57,068 55,831 61,105 60,966 60,716 60,542 60,376
Other reserves   141 (64) 28 (8) 8 28 42
Total net worth attributable to the Crown   68,071 61,997 74,401 77,367 81,044 85,890 92,002
Net worth attributable to minority interest   1,940 3,185 5,372 5,462 5,504 5,559 5,652
Total net worth 21 70,011 65,182 79,773 82,829 86,548 91,449 97,654

 

  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

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

Borrowings

             
Government bonds 57,377 68,469 60,281 58,955 63,652 70,012 65,095
Treasury bills 4,084 3,541 2,959 4,011 3,685 3,682 3,679
Government retail stock 199 204 183 183 183 183 183
Settlement deposits with Reserve Bank 7,575 7,183 6,849 6,849 6,849 6,849 6,849
Derivatives in loss 3,188 1,854 2,228 1,860 1,742 1,707 1,521
Finance lease liabilities 1,454 1,475 1,503 1,908 2,037 2,043 2,081
Other borrowings 26,210 29,475 29,121 31,361 33,373 35,394 37,037
Total borrowings 100,087 112,201 103,124 105,127 111,521 119,870 116,445
Total sovereign-guaranteed debt 75,684 84,580 77,245 76,864 81,128 87,429 82,360
Total non-sovereign-guaranteed debt 24,403 27,621 25,879 28,263 30,393 32,441 34,085
Total borrowings 100,087 112,201 103,124 105,127 111,521 119,870 116,445

Net debt:

             
Core Crown borrowings1 84,873 94,504 89,076 87,385 92,219 99,180 94,807
Add back NZS Fund holdings of sovereign-issued debt and NZS Fund borrowings (587) (1,027) (611) (738) (871) (909) (911)
Gross sovereign-issued debt2 84,286 93,477 88,465 86,647 91,348 98,271 93,896
Less core Crown financial assets3 62,984 65,786 68,263 65,152 69,170 78,094 75,902
Net core Crown debt 21,302 27,691 20,202 21,495 22,178 20,177 17,994
Core Crown advances 13,126 14,375 13,752 15,077 15,586 15,886 16,077
Net core Crown debt (incl. NZS Fund)4 34,428 42,066 33,954 36,572 37,764 36,063 34,071
Add back NZS Fund holdings of core Crown financial assets and NZS Fund financial assets5 21,407 22,699 25,987 27,703 29,277 31,472 33,794
Net core Crown debt (excl. NZS Fund and advances)6 55,835 64,765 59,941 64,275 67,041 67,535 67,865

Gross debt:

             
Gross sovereign-issued debt2 84,286 93,477 88,465 86,647 91,348 98,271 93,896
Less Reserve Bank settlement cash and bank bills (7,902) (7,391) (7,245) (7,245) (7,245) (7,245) (7,245)
Add back changes to DMO borrowing owing to settlement cash7 1,600 1,600 1,600 1,600 1,600 1,600 1,600
Gross sovereign-issued debt excluding Reserve Bank settlement cash and bank bills4 77,984 87,686 82,820 81,002 85,703 92,626 88,251

Notes on borrowings

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

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

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

Statement of Actual Commitments as at 31 May 2014

  As at
31 May
2014
$m
As at
30 June
2013
$m

Capital commitments

   
Specialist military equipment 800 549
Land and buildings 942 717
Other property, plant and equipment 5,110 5,478
Other capital commitments 860 790
Tertiary education institutions 169 169
Total capital commitments 7,881 7,703

Operating commitments

   
Non-cancellable accommodation leases 2,724 2,792
Other non-cancellable leases 2,507 2,735
Tertiary education institutions 466 466
Total operating commitments 5,697 5,993
Total commitments 13,578 13,696

Total commitments by segment

   
Core Crown 4,199 4,226
Crown entities 5,351 5,296
State-owned enterprises 5,178 5,078
Inter-segment eliminations (1,150) (904)
Total commitments 13,578 13,696

Statement of Actual Contingent Liabilities and Assets as at 31 May 2014

  As at
31 May
2014
$m
As at
30 June
2013
$m

Quantifiable contingent liabilities

   
Guarantees and indemnities 190 225
Uncalled capital 5,826 6,286
Legal proceedings and disputes 642 707
Other contingent liabilities 465 432
Total quantifiable contingent liabilities 7,123 7,650

Total quantifiable contingent liabilities by segment

   
Core Crown 6,758 7,350
Crown entities 51 35
State-owned enterprises 314 265
Inter-segment eliminations
Total quantifiable contingent liabilities 7,123 7,650

Quantifiable contingent assets by segment

   
Core Crown 164 245
Crown entities 7 4
State-owned enterprises 21
Total quantifiable contingent assets 171 270

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

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

Notes to the Forecast Financial Statements

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

Taxation revenue (accrual)

             

Individuals

             
Source deductions 22,330 23,709 23,772 25,177 26,564 28,055 29,647
Other persons 5,210 5,083 5,177 5,316 5,566 5,789 5,981
Refunds (1,644) (1,488) (1,532) (1,416) (1,445) (1,500) (1,566)
Fringe benefit tax 480 477 489 507 528 551 575
Total individuals 26,376 27,781 27,906 29,584 31,213 32,895 34,637

Corporate tax

             
Gross companies tax 8,747 9,240 9,073 9,699 9,999 10,286 10,551
Refunds (151) (197) (219) (213) (225) (232) (240)
Non-resident withholding tax 420 447 428 485 533 558 577
Foreign-source dividend w/holding payments 2 8 2 2 2 2
Total corporate tax 9,018 9,490 9,290 9,973 10,309 10,614 10,890

Other direct income tax

             
Resident w/holding tax on interest income 1,631 1,671 1,634 1,909 2,527 2,912 3,270
Resident w/holding tax on dividend income 516 607 446 472 487 505 516
Total other direct income tax 2,147 2,278 2,080 2,381 3,014 3,417 3,786
Total direct income tax 37,541 39,549 39,276 41,938 44,536 46,926 49,313

Goods and services tax

             
Gross goods and services tax 25,125 27,220 27,266 29,008 30,429 31,954 34,148
Refunds (9,920) (10,695) (11,162) (11,314) (11,679) (12,428) (13,717)
Total goods and services tax 15,205 16,525 16,104 17,694 18,750 19,526 20,431

Other indirect taxation

             
Road user charges 1,066 1,164 1,205 1,244 1,326 1,406 1,479
Petroleum fuels excise - domestic production 855 931 855 948 1,083 1,191 1,207
Alcohol excise - domestic production 663 678 656 677 703 734 766
Tobacco excise - domestic production 281 277 269 284 295 293 294
Petroleum fuels excise - imports1 674 659 746 766 725 654 671
Alcohol excise - imports1 250 267 246 255 265 276 288
Tobacco excise - imports1 954 1,043 1,029 1,108 1,186 1,235 1,232
Other customs duty 178 172 130 119 110 122 118
Gaming duties 214 223 211 209 210 210 211
Motor vehicle fees 174 187 187 195 202 208 213
Approved issuer levy and cheque duty 45 62 52 65 65 65 65
Energy resources levies 34 36 35 36 36 36 36
Total other indirect taxation 5,388 5,699 5,621 5,906 6,206 6,430 6,580
Total indirect taxation 20,593 22,224 21,725 23,600 24,956 25,956 27,011
Total taxation revenue 58,134 61,773 61,001 65,538 69,492 72,882 76,324

Other sovereign revenue (accrual)

             
ACC levies 3,437 3,465 3,591 3,172 2,934 2,893 2,969
Fire Service levies 331 338 338 348 350 353 358
EQC levies 242 269 275 282 285 288 291
Child support 590 729 545 683 688 487 543
Court fines 168 173 173 173 173 173 173
Other miscellaneous items 404 322 519 508 554 554 556
Total other sovereign revenue 5,172 5,296 5,441 5,166 4,984 4,748 4,890
Total sovereign revenue 63,306 67,069 66,442 70,704 74,476 77,630 81,214

 

  1. Customs excise-equivalent duty.
NOTE 1 (continued): Sovereign Receipts (Cash)
  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

Taxation receipts (cash)

             

Individuals

             
Source deductions 22,188 23,584 23,627 25,027 26,408 27,899 29,483
Other persons 5,194 5,549 5,466 5,808 6,046 6,318 6,516
Refunds (2,251) (2,222) (2,276) (2,194) (2,240) (2,333) (2,437)
Fringe benefit tax 465 476 482 505 526 549 573
Total individuals 25,596 27,387 27,299 29,146 30,740 32,433 34,135

Corporate tax

             
Gross companies tax 8,665 9,495 9,369 10,054 10,322 10,681 10,928
Refunds (597) (766) (563) (664) (721) (753) (780)
Non-resident withholding tax 451 446 405 484 532 557 576
Foreign-source dividend w/holding payments 1 2 2 2 2
Total corporate tax 8,520 9,175 9,211 9,876 10,135 10,487 10,726

Other direct income tax

             
Resident w/holding tax on interest income 1,635 1,670 1,629 1,907 2,525 2,910 3,268
Resident w/holding tax on dividend income 516 607 449 472 487 505 516
Total other direct income tax 2,151 2,277 2,078 2,379 3,012 3,415 3,784
Total direct income tax 36,267 38,839 38,588 41,401 43,887 46,335 48,645

Goods and services tax

             
Gross goods and services tax 24,539 26,352 26,613 28,145 29,616 31,131 33,273
Refunds (9,783) (10,195) (10,948) (10,839) (11,279) (12,028) (13,267)
Total goods and services tax 14,756 16,157 15,665 17,306 18,337 19,103 20,006

Other indirect taxation

             
Road user charges 1,064 1,164 1,187 1,244 1,326 1,406 1,479
Petroleum fuels excise - domestic production 865 931 861 936 1,087 1,215 1,247
Alcohol excise - domestic production 666 678 651 680 706 744 775
Tobacco excise - domestic production 287 277 268 287 298 303 303
Customs duty 2,035 2,141 2,179 2,254 2,276 2,243 2,251
Gaming duties 216 223 208 209 210 210 211
Motor vehicle fees 179 187 178 195 202 208 213
Approved issuer levy and cheque duty 44 62 51 65 65 65 65
Energy resources levies 34 36 35 36 36 36 36
Total other indirect taxation 5,390 5,699 5,618 5,906 6,206 6,430 6,580
Total indirect taxation 20,146 21,856 21,283 23,212 24,543 25,533 26,586
Total taxation receipts 56,413 60,695 59,871 64,613 68,430 71,868 75,231

Other sovereign receipts (cash)

             
ACC levies 3,524 3,438 3,580 3,171 2,735 2,844 2,919
Fire Service levies 331 338 338 348 350 353 358
EQC levies 274 267 278 282 285 287 290
Child support 230 237 219 247 261 268 281
Court fines 159 148 148 137 137 137 137
Other miscellaneous items 288 319 436 452 456 454 454
Total other sovereign receipts 4,806 4,747 4,999 4,637 4,224 4,343 4,439
Total sovereign receipts 61,219 65,442 64,870 69,250 72,654 76,211 79,670

NOTE 2: Interest revenue and dividends

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

By type

             
Interest revenue 2,382 3,006 2,503 3,149 3,474 4,160 4,566
Dividends 557 582 671 568 616 655 691
Total interest revenue and dividends 2,939 3,588 3,174 3,717 4,090 4,815 5,257

By source

             
Core Crown 2,104 2,639 2,286 2,462 2,683 3,192 3,508
Crown entities 1,270 1,242 1,176 1,370 1,414 1,478 1,556
State-owned enterprises 856 878 897 1,048 1,267 1,481 1,613
Inter-segment eliminations (1,291) (1,171) (1,185) (1,163) (1,274) (1,336) (1,420)
Total interest revenue and dividends 2,939 3,588 3,174 3,717 4,090 4,815 5,257

NOTE 3: Transfer payments and subsidies

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
New Zealand Superannuation 10,235 10,894 10,913 11,610 12,254 12,906 13,644
Jobseeker Support and Emergency Benefit 1,773 1,691 1,689 1,612 1,597 1,638
Supported Living Payment 1,392 1,422 1,510 1,529 1,555 1,589
Sole Parent Support 1,288 1,222 1,217 1,220 1,226 1,235
Domestic Purposes Benefit 1,738 67 63
Invalid's Benefit 1,330 53 52
Sickness Benefit 782 32 29
Unemployment Benefit 812 29 29
Family tax credit 2,018 2,038 1,965 1,915 1,890 1,907 2,036
Other working for families tax credits 575 539 567 534 535 533 528
Accommodation Assistance 1,177 1,191 1,146 1,134 1,130 1,133 1,151
Income related rents 611 662 660 718 775 825 879
Disability assistance 384 380 379 373 374 375 378
Student allowances 596 574 539 531 534 540 546
Other social assistance benefits 1,290 1,316 1,346 1,298 1,315 1,333 1,310
Total social assistance grants 21,548 22,228 22,023 22,529 23,168 23,930 24,934

Subsidies

             
KiwiSaver subsidies 723 748 804 827 806 845 886

Other transfer payments

             
Official development assistance 437 509 533 533 542 573 586
Total transfer payments and subsidies 22,708 23,485 23,360 23,889 24,516 25,348 26,406

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

 

NOTE 4: Personnel expenses

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

By source

             
Core Crown 6,037 6,066 6,227 6,341 6,431 6,437 6,454
Crown entities 10,966 11,198 11,302 11,603 11,815 11,957 12,104
State-owned enterprises 2,949 2,919 2,946 2,878 2,896 2,955 3,039
Inter-segment eliminations (17) (11) (7) (10) (11) (11) (11)
Total personnel expenses 19,935 20,172 20,468 20,812 21,131 21,338 21,586

NOTE 5: Depreciation, amortisation and other operating expenses

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

Other operating expenses by source

             
Core Crown 36,565 37,811 36,721 37,827 38,089 37,842 38,006
Crown entities 17,065 17,458 17,299 17,757 17,921 17,812 17,680
State-owned enterprises 9,689 9,743 8,967 9,417 9,660 9,961 10,421
Inter-segment eliminations (27,156) (27,404) (27,376) (27,830) (28,318) (28,501) (28,657)
Total other operating expenses 36,163 37,608 35,611 37,171 37,352 37,114 37,450

Depreciation and amortisation by source

             
Core Crown 1,378 1,522 1,398 1,617 1,531 1,592 1,605
Crown entities 1,583 1,642 1,656 1,710 1,792 1,821 1,822
State-owned enterprises 1,851 1,476 1,674 1,618 1,648 1,700 1,751
Total depreciation and amortisation 4,812 4,640 4,728 4,945 4,971 5,113 5,178

NOTE 6: Interest expenses

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

By type

             
Interest on financial liabilities 4,312 4,465 4,344 4,664 5,077 5,600 5,726
Interest unwind on provisions 46 51 43 43 34 42 39
Total interest expenses 4,358 4,516 4,387 4,707 5,111 5,642 5,765

By source

             
Core Crown 3,620 3,622 3,589 3,836 4,000 4,383 4,473
Crown entities 235 239 224 237 236 245 250
State-owned enterprises 1,248 1,279 1,167 1,346 1,533 1,708 1,793
Inter-segment eliminations (745) (624) (593) (712) (658) (694) (751)
Total interest expenses 4,358 4,516 4,387 4,707 5,111 5,642 5,765

NOTE 7: Insurance expenses

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

By entity

             
ACC 3,133 3,315 3,481 3,639 3,995 4,234 4,483
EQC (103) (19) (112) (16) 142 218 224
Southern Response (22) (95) 86 (67) (50) (21) (5)
Other (incl. inter-segment eliminations) 23 14 11 11 12 12 11
Total insurance expenses 3,031 3,215 3,466 3,567 4,099 4,443 4,713

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

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

Forecast new operating spending

         
Unallocated contingencies 191 334 310 273
Forecast new spending for Budget 2015 1,500 1,500 1,500
Forecast new spending for Budget 2016 1,530 1,530
Forecast new spending for Budget 2017 1,561
Total forecast new operating spending 191 1,834 3,340 4,864
Operating top-down adjustment (875) (485) (360) (360)

Unallocated contingencies represent expenses included in Budget 2014 and previous Budgets that has yet to be allocated. Forecast new spending indicates the expected spending increases from future Budgets.

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

Forecast new capital spending (annual)

             
Unallocated contingencies 143 13 3 1 160
Forecast new spending for Budget 2015 3 300 250 185 738
Forecast new spending for Budget 2016 100 300 250 250 900
Forecast new spending for Budget 2017 100 300 518 918
Forecast new spending for Budget 2018 100 836 936
Total forecast new capital spending 146 413 653 836 1,604 3,652
Forecast new capital spending (cumulative) 146 559 1,212 2,048    
Capital top-down adjustment (cumulative) (370) (445) (495) (545)    

Unallocated contingencies represent capital spending from Budget 2014 and previous Budgets that has yet to be allocated. Forecast new spending indicates the expected capital spending increases from future Budgets, which will be mostly funded from the Future Investment Fund.

NOTE 9: Gains and losses on financial instruments

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

By source

             
Core Crown 5,081 1,663 4,076 2,450 2,552 2,610 2,715
Crown entities 1,192 252 698 247 293 345 404
State-owned enterprises 354 11 191 51 58 39 39
Inter-segment eliminations 643 (178) (143) (220) (229) (235) (244)
Net gains/(losses) on financial instruments 7,270 1,748 4,822 2,528 2,674 2,759 2,914

NOTE 10: Gains and losses on non-financial instruments

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

By type

             
Actuarial gains/(losses) on GSF liability 1,251 577
Actuarial gains/(losses) on ACC outstanding claims 2,369 498 482
Foreign-exchange gains/(losses) on Kyoto and ETS 103 (324)
Other (17) (55) (374) (72) (89) (55) (56)
Minority interest share of net gains/losses (32) (33) (25) (20) (18) (18)
Net gains/(losses) on non-financial instruments 3,674 443 328 (97) (109) (73) (74)

By source

             
Core Crown 1,298 (2) 131 (3) (36) (1) (1)
Crown entities 2,309 446 434 (69) (53) (54) (55)
State-owned enterprises 68 (1) (209) (45) (40) (28) (28)
Inter-segment eliminations (1) (28) 20 20 10 10
Net gains/(losses) on non-financial instruments 3,674 443 328 (97) (109) (73) (74)

NOTE 11: Operating balance

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

By source

             
Core Crown 371 (2,249) 342 1,912 3,152 4,394 5,512
Crown entities 5,877 2,646 2,747 1,228 664 552 670
State-owned enterprises 614 732 516 550 693 743 804
Inter-segment eliminations 63 (771) (779) (707) (871) (896) (926)
Total operating balance 6,925 358 2,826 2,983 3,638 4,793 6,060

NOTE 12: Financial assets

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Cash and cash equivalents 14,924 15,244 12,303 10,463 10,349 10,977 11,786
Tax receivables 8,184 7,831 8,222 8,701 9,205 9,606 9,992
Trade and other receivables 11,699 10,239 9,552 8,316 7,857 8,016 7,959
Student loans (refer note 13) 8,288 8,989 8,716 9,021 9,335 9,615 9,851
Kiwibank mortgages 13,202 14,544 14,549 15,843 17,223 18,802 20,405
Long-term deposits 3,588 2,089 3,062 2,193 2,093 2,121 2,297
IMF financial assets 2,291 2,404 2,142 2,349 2,366 2,391 2,415
Other advances 1,123 1,779 1,507 1,694 1,671 1,632 1,554
Share investments 17,359 18,176 20,652 22,182 23,571 25,122 26,786
Derivatives in gain 3,775 3,906 4,212 4,008 3,767 3,711 3,671
Other marketable securities 34,346 36,314 38,517 35,567 39,085 46,570 43,282
Total financial assets 118,779 121,515 123,434 120,337 126,522 138,563 139,998

Financial assets by entity

             
NZDMO 17,799 20,153 17,957 13,515 15,777 22,097 17,342
Reserve Bank of New Zealand 19,342 18,228 18,849 19,025 19,495 20,082 19,664
NZS Fund 23,419 23,891 26,987 29,035 30,330 32,523 34,897
Other core Crown 22,339 20,464 22,419 21,774 22,138 22,666 23,651
Intra-segment eliminations (7,788) (6,691) (6,165) (6,126) (6,186) (6,798) (6,757)
Total core Crown segment 75,111 76,045 80,047 77,223 81,554 90,570 88,797
ACC portfolio 28,243 32,161 30,897 32,605 34,252 36,073 38,008
EQC portfolio 5,401 2,597 3,606 105 47 44 45
Other Crown entities 9,075 9,735 8,065 7,577 6,895 7,023 7,338
Intra-segment eliminations (1,422) (3,625) (1,065) (1,418) (1,562) (1,835) (2,024)
Total Crown entities segment 41,297 40,868 41,503 38,869 39,632 41,305 43,367
Total state-owned enterprises segment 20,058 22,141 21,298 23,085 24,741 26,592 28,468
Inter-segment eliminations (17,687) (17,539) (19,414) (18,840) (19,405) (19,904) (20,634)
Total financial assets 118,779 121,515 123,434 120,337 126,522 138,563 139,998

NOTE 13: Student loans

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Nominal value (including accrued interest) 13,562 14,144 14,234 14,842 15,444 16,017 16,559
Opening book value 8,291 8,528 8,288 8,716 9,021 9,335 9,615
Amount borrowed in current year 1,481 1,632 1,512 1,586 1,645 1,701 1,732
Less initial write-down to fair value (536) (537) (630) (659) (661) (684) (696)
Repayments made during the year (1,054) (1,135) (1,032) (1,131) (1,200) (1,286) (1,363)
Interest unwind 590 600 579 598 618 638 652
(Impairment)/reversal of impairment (484) (110) (12) (100) (100) (100) (100)
Other movements 11 11 11 12 11 11
Closing book value 8,288 8,989 8,716 9,021 9,335 9,615 9,851

NOTE 14: Property, plant and equipment

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

By class of asset

             

Net carrying value

             
Land (valuation) 34,453 34,759 37,032 37,268 37,279 37,417 37,474
Buildings (valuation) 25,784 25,312 26,962 28,397 29,299 29,914 30,353
State highways (valuation) 17,930 18,918 19,300 20,423 21,777 23,056 24,314
Electricity generation assets (valuation) 13,555 14,104 13,403 13,167 12,977 12,874 12,663
Electricity distribution network (cost) 3,865 4,273 4,002 4,137 4,259 4,374 4,478
Specialist military equipment (valuation) 3,094 3,330 2,890 3,151 3,324 3,409 3,374
Specified cultural and heritage assets (valuation) 2,617 2,502 2,812 2,814 2,839 2,861 2,871
Aircraft (excluding military) (valuation) 2,296 2,498 2,281 2,911 3,416 3,625 3,749
Rail network (valuation) 1,035 1,012 1,094 1,332 1,361 1,407 1,440
Other plant and equipment (cost) 5,204 5,919 5,626 5,786 6,054 5,976 5,947
Total property, plant and equipment 109,833 112,627 115,402 119,386 122,585 124,913 126,663

By source

             
Core Crown 29,507 30,565 30,470 32,077 33,120 33,816 34,159
Crown entities 51,823 52,207 56,238 58,050 59,911 61,446 62,953
State-owned enterprises 28,503 29,855 28,694 29,259 29,554 29,651 29,551
Inter-segment eliminations    -     -     -     -     -     -     - 
Total property, plant and equipment 109,833 112,627 115,402 119,386 122,585 124,913 126,663

Land breakdown by usage

             
Housing 9,580 8,750 11,382 11,210 10,949 10,743 10,530
State highway corridor land 8,003 8,653 8,853 9,003 9,153 9,303 9,453
Conservation land 5,364 5,460 5,418 5,385 5,407 5,417 5,417
Rail network 3,256 3,418 3,252 3,232 3,212 3,202 3,192
Schools 2,887 2,724 2,880 2,875 2,870 2,865 2,860
Commercial (SOEs) excluding Rail 1,374 1,520 1,382 1,382 1,400 1,515 1,560
Other 3,989 4,234 3,865 4,181 4,288 4,372 4,462
Total land 34,453 34,759 37,032 37,268 37,279 37,417 37,474
  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

Schedule of movements

             

Cost or valuation

             
Opening balance 121,717 126,589 122,796 130,531 138,661 146,092 152,521
Additions (refer below for further breakdown) 5,779 7,830 6,020 9,032 8,502 7,275 6,936
Disposals (1,471) (598) (969) (865) (1,061) (858) (763)
Net revaluations (2,047)    -  2,973    -     -     -     - 
Other1 (1,182) (56) (289) (37) (10) 12 (24)
Total cost or valuation 122,796 133,765 130,531 138,661 146,092 152,521 158,670

Accumulated depreciation and impairment

             
Opening balance 13,133 17,255 12,963 15,129 19,275 23,507 27,608
Eliminated on disposal (659) (42) (292) (52) (52) (286) (50)
Eliminated on revaluation (3,587)    -  (1,373)    -     -     -     - 
Impairment losses charged to operating balance 473    -  (202)    -     -     -     - 
Depreciation expense 3,697 4,011 4,051 4,203 4,287 4,391 4,486
Other1 (94) (86) (18) (5) (3) (4) (37)
Total accumulated depreciation and impairment 12,963 21,138 15,129 19,275 23,507 27,608 32,007
Total property, plant and equipment 109,833 112,627 115,402 119,386 122,585 124,913 126,663

 

  1. Other mainly includes transfers to/from other asset categories.
  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m

Additions - by functional classification

             
Transport 2,041 2,579 2,253 3,411 3,285 2,651 2,747
Economic 1,521 1,338 1,139 615 686 802 755
Education 472 862 757 895 959 880 720
Health 578 636 572 803 783 576 800
Defence 201 548 413 654 598 541 439
Other 966 1,867 886 2,654 2,191 1,825 1,475
Total additions to property, plant and equipment2 5,779 7,830 6,020 9,032 8,502 7,275 6,936

 

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

NOTE 15: Intangible assets and goodwill

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

By type

             
Net Kyoto position 53 3 27 33 33 33 33
Goodwill 655 744 650 650 650 650 650
Other intangible assets 2,068 2,090 2,253 2,291 2,327 2,257 2,227
Total intangible assets and goodwill 2,776 2,837 2,930 2,974 3,010 2,940 2,910

By source

             
Core Crown 1,041 1,175 1,182 1,228 1,242 1,243 1,252
Crown entities 573 534 538 581 597 530 493
State-owned enterprises 1,162 1,128 1,209 1,165 1,171 1,166 1,166
Inter-segment eliminations    -     -  1    -     -  1 (1)
Total intangible assets and goodwill 2,776 2,837 2,930 2,974 3,010 2,940 2,910

Net Kyoto position

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

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

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

NOTE 16: NZS Fund

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Revenue 595 777 768 701 769 846 928
Less current tax expense 983 478 1,095 601 652 705 761
Less other expenses 165 148 168 164 184 208 234
Add gains/(losses) 4,374 1,358 3,768 1,980 2,130 2,288 2,458
Operating balance 3,821 1,509 3,273 1,915 2,062 2,221 2,391
Opening net worth 18,703 21,752 22,549 25,819 27,755 29,846 32,102
Operating balance 3,821 1,509 3,273 1,916 2,063 2,221 2,391
Other movements in reserves 25 22 (3) 20 28 35 45
Closing net worth 22,549 23,283 25,819 27,755 29,846 32,102 34,538

Comprising:

             
Financial assets 23,419 23,891 26,987 29,035 30,330 32,523 34,897
Financial liabilities (2,055) (1,714) (2,322) (2,482) (1,790) (1,845) (1,906)
Net other assets 1,185 1,106 1,154 1,202 1,306 1,424 1,547
Closing net worth 22,549 23,283 25,819 27,755 29,846 32,102 34,538

NOTE 17: Payables

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

By type

             
Accounts payable 7,616 8,403 8,026 7,770 6,978 7,240 6,691
Taxes repayable 3,544 3,957 3,598 4,212 4,802 5,361 5,844
Total payables 11,160 12,360 11,624 11,982 11,780 12,601 12,535

By source

             
Core Crown 7,873 6,860 7,739 8,576 8,577 9,384 9,161
Crown entities 4,996 5,929 5,298 4,882 4,591 4,493 4,549
State-owned enterprises 4,877 5,663 4,898 4,911 4,999 5,091 5,178
Inter-segment eliminations (6,586) (6,092) (6,311) (6,387) (6,387) (6,367) (6,353)
Total payables 11,160 12,360 11,624 11,982 11,780 12,601 12,535

NOTE 18: Insurance liabilities

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

By entity

             
ACC 29,446 31,423 29,948 31,138 32,474 33,998 35,603
EQC 6,869 3,743 4,743 384 189 178 178
Southern Response 1,744 698 1,437 722 232 29
Other (incl. inter-segment eliminations) (347) 38 62 64 65 68 70
Total insurance liabilities 37,712 35,902 36,190 32,308 32,960 34,273 35,851

ACC liability

Calculation information

PwC NZ has prepared an independent actuarial estimate of the ACC outstanding claims liability as at 30 June 2014. This estimate includes the expected future payments relating to accidents that occurred prior to balance date (whether or not the associated claims have been reported to, or accepted by, ACC) and also the expected future administrative expenses of managing these claims. The assumptions underpinning this valuation form the basis of the five-year forecast of the outstanding claims liability.

The key economic variables that impact on changes to the valuation are the long-term Labour Cost Index (LCI), average weekly earnings and the discount rate. Discount rates were derived from the yield curve for New Zealand Government bonds. For these forecast statements, the claims liability has been updated for the latest discount rates as at 30 June 2014. The equivalent single effective discount rate, taking into account ACC's projected future cash flow patterns, is 5.01% and allows for a long-term discount rate of 5.5% from 2035.

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

Presentation approach

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

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

Gross ACC liability

             
Opening gross liability 30,648 30,767 29,446 29,948 31,138 32,474 33,998
Net change (1,202) 656 502 1,190 1,336 1,524 1,605
Closing gross liability 29,446 31,423 29,948 31,138 32,474 33,998 35,603

Less net assets available to ACC

             
Opening net asset value 23,466 27,486 27,193 29,840 31,759 33,429 35,208
Net change 3,727 2,503 2,647 1,919 1,670 1,779 1,920
Closing net asset value 27,193 29,989 29,840 31,759 33,429 35,208 37,128

Net ACC reserves (net liability)

             
Opening reserves position (7,182) (3,281) (2,253) (108) 621 955 1,210
Net change 4,929 1,847 2,145 729 334 255 315
Closing reserves position (net liability)/net asset (2,253) (1,434) (108) 621 955 1,210 1,525

EQC liability

Calculation information

Melville Jessup Weaver prepared an independent actuarial estimate of the EQC outstanding claims liability at 30 June 2014 by estimating the projected ultimate claims costs then deducting the payments made in relation to those claims on or before that date. Each component of the claims liability was split into separate groups depending upon the Canterbury earthquake event grouping or other “business as usual” claims. These event groups were further split into sub-claim valuation groups being land claims, building claims or contents claims. The assumptions underpinning the 30 June 2014 valuation form the basis of the five-year forecast of the outstanding claims liability.

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

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

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

Presentation approach

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

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

EQC liability

             
Opening gross liability 8,877 7,114 6,869 4,743 384 189 178
Net change (2,008) (3,371) (2,126) (4,359) (195) (11)
Closing gross liability 6,869 3,743 4,743 384 189 178 178

Less reinsurance receivable

             
Opening reinsurance receivable 4,066 2,616 2,623 1,226 50 3
Net change (1,443) (1,238) (1,397) (1,176) (47) (3)
Closing reinsurance receivable 2,623 1,378 1,226 50 3

Net EQC liability

             
Opening net position (4,811) (4,498) (4,246) (3,517) (334) (186) (178)
Net change 565 2,133 729 3,183 148 8
Closing net position (net liability) (4,246) (2,365) (3,517) (334) (186) (178) (178)

NOTE 19: Retirement plan liabilities

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Government Superannuation Fund 11,908 11,767 10,886 10,494 10,137 9,773 9,399
Other funds (5) (1) (4) (1) (1)
Total retirement plan liabilities 11,903 11,766 10,882 10,493 10,136 9,773 9,399

The net liability of the Government Superannuation Fund (GSF) was calculated by GSF's actuary as at 30 June 2014. The liability arises from closed schemes for past and present public sector employees as set out in the Government Superannuation Fund Act 1956. A Projected Unit Credit method was used to calculate the liability as at 30 June 2014, based on membership data as at 30 June 2014.

The funding method requires the benefits payable from GSF in respect of past service to be calculated and then discounted back to the valuation date.

For these Forecast Financial Statements, the net GSF liability was updated for the latest discount rates derived from the market yield curve for New Zealand Government bonds as at 30 June 2014.

Other principal long-term financial assumptions were an inflation rate, as measured by the Consumers Price Index (CPI), of 2.1% p.a for the years to 30 June 2023, increasing yearly to reach 2.5% p.a. in 2033 where it remains for all years after that. In addition an annual salary growth rate, before any promotional effects, of 3% p.a. (unchanged from 30 June 2013).

The 2013/14 projected decrease in the net GSF liability is $1,022 million, reflecting a decrease in the GSF liability of $730 million and an increase in the GSF net assets of $292 million.

The decrease in the GSF liability of $730 million includes an actuarial gain between 1 July 2013 and 30 June 2014, of $366 million, owing to movements in the discount rates ($57 million) and changes in CPI ($377 million). The remaining $364 million reduction is owing to lower than expected benefits paid to members (reduces the liability), offset by current service cost and interest unwind (increases the liability).

The increase in the value of the net assets of GSF of $292 million includes a gain of $212 million reflecting the updated market value of assets at 30 June 2014. The balance of $79 million is the total of the expected investment returns and contributions received, offset by the benefits paid to members.

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

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

GSF liability

             
Opening GSF liability 16,557 15,504 15,290 14,560 14,243 13,957 13,662
Net projected change (1,267) (395) (730) (317) (286) (295) (306)
Closing GSF liability 15,290 15,109 14,560 14,243 13,957 13,662 13,356

Less net assets available to GSF

             
Opening net asset value 3,018 3,276 3,382 3,674 3,749 3,820 3,889
Investment valuation changes 493 177 395 216 220 224 228
Contribution and other income less pension payments (129) (111) (103) (141) (149) (155) (160)
Closing net asset value 3,382 3,342 3,674 3,749 3,820 3,889 3,957

Net GSF liability

             
Opening unfunded liability 13,539 12,228 11,908 10,886 10,494 10,137 9,773
Net projected change (1,631) (461) (1,022) (392) (357) (364) (374)
Closing unfunded liability 11,908 11,767 10,886 10,494 10,137 9,773 9,399

NOTE 20: Provisions

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Provision for employee entitlements 3,374 3,233 3,301 3,293 3,300 3,315 3,322
Provision for ETS credits 179 510 525 498 474 448
Provision for National Provident Fund guarantee 977 987 885 850 809 762 719
Provision for Canterbury Red Zone support package 222
Provision for infrastructure costs 769 837 394 204
Provision for weathertight services financial assistance package 123 62 94 75 45 15
Other provisions 1,494 1,198 1,613 1,583 1,632 1,602 1629
Total provisions 7,138 6,317 6,797 6,530 6,284 6,168 6,118

By source

             
Core Crown 4,492 3,905 4,154 3,892 3,441 3,157 3,094
Crown entities 1,979 1,907 1,988 2,014 2,029 2,034 2,008
State-owned enterprises 1,151 963 1,114 1,120 1,141 1,137 1,171
Inter-segment eliminations (484) (458) (459) (496) (327) (160) (155)
Total provisions 7,138 6,317 6,797 6,530 6,284 6,168 6,118

Provision for ETS credits

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

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

The prices for NZUs and Kyoto compliant units used to calculate the ETS provision are assumed to remain constant over the forecast period and are based on market prices during June 2014.

The ETS impact on the fiscal forecast is as follows:

  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Revenue 40 5 23 56 99 97 100
Expenses (55) (4) (48) (69) (72) (73) (74)
Kyoto compliant units surrender expense (24)    -  (12) (2)    -     -     - 
Gains/(losses) 235    -  (291)    -     -     -     - 
Operating balance 196 1 (328) (15) 27 24 26

NOTE 21: Net worth

 
  2013
Actual
$m
2014
Previous
Budget
$m
2014
Forecast
$m
2015
Forecast
$m
2016
Forecast
$m
2017
Forecast
$m
2018
Forecast
$m
Taxpayers' funds 10,862 6,230 13,268 16,409 20,320 25,320 31,584
Property, plant and equipment revaluation reserve 57,068 55,831 61,105 60,966 60,716 60,542 60,376
Investment revaluation reserve 107 84 111 120 131 143 155
Cash flow hedge reserve 58 (142) (46) (48) (43) (35) (33)
Foreign currency translation reserve (49) (6) (84) (80) (80) (80) (80)
Share based payment reserve 25 47
Net worth attributable to minority interests 1,940 3,185 5,372 5,462 5,504 5,559 5,652
Total net worth 70,011 65,182 79,773 82,829 86,548 91,449 97,654

Taxpayers' funds

             
Opening taxpayers' funds 3,520 5,601 10,862 13,268 16,409 20,320 25,320
Operating balance excluding minority interest 6,925 358 2,826 2,983 3,638 4,793 6,060
Government share offers in SOEs 167 175 (542)
Transfers from/(to) other reserves 250 96 122 158 273 207 204
Closing taxpayers' funds 10,862 6,230 13,268 16,409 20,320 25,320 31,584

Property, plant and equipment revaluation reserve

             
Opening revaluation reserve 56,001 55,965 57,068 61,105 60,966 60,716 60,542
Net revaluations 1,335 4,172
Transfers from/(to) other reserves (268) (134) (135) (139) (250) (174) (166)
Closing property, plant and equipment revaluation reserve 57,068 55,831 61,105 60,966 60,716 60,542 60,376

NOTE 22: Core Crown residual cash

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

Core Crown cash flows from operations

             
Tax receipts 57,808 62,056 61,321 65,972 69,698 73,265 76,730
Other sovereign receipts 651 644 732 766 783 791 803
Interest, profits and dividends 1,553 1,660 1,548 1,663 1,776 2,145 2,343
Sale of goods and services and other receipts 2,385 2,641 2,445 2,447 2,115 2,441 2,121
Transfer payments and subsidies (22,780) (23,877) (23,607) (24,014) (24,527) (25,310) (26,380)
Personnel and operating costs (40,412) (42,800) (41,861) (42,476) (42,433) (41,986) (43,045)
Finance costs (3,729) (3,680) (3,590) (3,888) (3,772) (4,088) (4,136)
Forecast for future new operating spending (461) (191) (1,834) (3,340) (4,864)
Top-down expense adjustment 600 875 485 360 360
Net core Crown operating cash flows (4,524) (3,217) (3,012) 1,154 2,291 4,278 3,932

Core Crown capital cash flows

             
Net purchase of physical assets (1,231) (2,560) (1,906) (2,893) (2,497) (2,237) (1,851)
Net increase in advances (342) (990) (715) (1,568) (627) (424) (303)
Net purchase of investments (1,308) (1,166) (873) (2,141) (1,685) (1,450) (1,314)
Government share offer programme 1,663 1,500 2,315 628
Forecast for future new capital spending (503) (146) (413) (653) (836)
Top-down capital adjustment 50 370 75 50 50
Net core Crown capital cash flows (1,218) (3,669) (1,179) (5,750) (5,147) (4,714) (4,254)
Residual cash (deficit)/surplus (5,742) (6,886) (4,191) (4,596) (2,856) (436) (322)

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

             

Debt programme cash flows

             
Market:              
    Issue of government bonds 15,458 10,245 7,716 8,135 6,964 6,865 6,851
    Repayment of government bonds (9,982) (2,196) (8,661) (1,812) (11,312)
    Net issue/(repayment) of short-term borrowing1 (5,404) 90 (935) 1,180 (200)
Total market debt cash flows 72 10,335 4,585 654 4,952 6,865 (4,461)
Non-market:              
    Issue of government bonds
    Repayment of government bonds (499) (757) (1,433)
    Net issue/(repayment) of short-term borrowing 100 (219) (500) (80)
Total non-market debt cash flows (399) (976) (1,933) (80)
Total debt programme cash flows (327) 9,359 4,585 (1,279) 4,872 6,865 (4,461)

Other borrowing cash flows

             
Net (repayment)/issue of other New Zealand dollar borrowing 4,494 724 (660) 1,373 720 43 708
Net (repayment)/issue of foreign currency borrowing (3,047) (512) 1,083 (1,174) (573) (14) (569)
Total other borrowing cash flows 1,447 212 423 199 147 29 139

Investing cash flows

             
Net sale/(purchase) of marketable securities and deposits 5,699 (2,826) (2,045) 4,622 (2,342) (6,671) 4,436
Issues of circulating currency 234 141 274 152 157 161 166
Decrease/(increase) in cash (1,311) 954 902 22 52 42
Total investing cash flows 4,622 (2,685) (817) 5,676 (2,163) (6,458) 4,644
Residual cash deficit/(surplus) funding or investing 5,742 6,886 4,191 4,596 2,856 436 322

 

  1. Short-term borrowing consists of Treasury Bills and may include Euro-Commercial Paper.

Forecast Statement of Segments

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

Revenue

         
Taxation revenue 58,651 (517) 58,134
Other sovereign revenue 1,133 5,295 (1,256) 5,172
Revenue from core Crown funding 24,096 268 (24,364)
Sales of goods and services 1,461 1,856 14,002 (606) 16,713
Interest revenue and dividends 2,104 1,270 856 (1,291) 2,939
Other revenue 800 2,547 810 (460) 3,697
Total revenue (excluding gains) 64,149 35,064 15,936 (28,494) 86,655

Expenses

         
Social assistance and official development assistance 22,709 (1) 22,708
Personnel expenses 6,037 10,966 2,949 (17) 19,935
Other operating expenses 37,943 18,648 11,540 (27,156) 40,975
Interest expenses 3,620 235 1,248 (745) 4,358
Insurance expenses 1 3,011 15 4 3,031
Forecast for future new spending and top-down adjustment
Total expenses (excluding losses) 70,310 32,860 15,752 (27,915) 91,007
Minority interest share of operating balance before gains/losses 10 (75) 3 (62)
Operating balance before gains/(losses) (6,161) 2,214 109 (576) (4,414)
Total gains/(losses) 6,379 3,501 422 642 10,944
Net surplus/(deficit) from associates and joint ventures 153 162 83 (3) 395
Operating balance 371 5,877 614 63 6,925

Expenses by functional classification

         
Social security and welfare 22,741 4,151 (624) 26,268
Health 14,498 12,236 (12,878) 13,856
Education 12,504 9,594 19 (8,751) 13,366
Transport and communications 2,255 2,250 6,891 (2,344) 9,052
Other 14,692 4,394 7,594 (2,573) 24,107
Finance costs 3,620 235 1,248 (745) 4,358
Forecast for future new spending and top-down adjustment
Total Crown expenses (excluding losses) 70,310 32,860 15,752 (27,915) 91,007
Statement of Financial Positionas at 30 June 2013
  Core Crown
2013
Actual
$m
Crown entities
2013
Actual
$m
State-Owned
Enterprises
2013
Actual
$m
Inter-segment
eliminations
2013
Actual
$m
Total Crown
2013
Actual
$m

Assets

         
Cash and cash equivalents 11,047 2,933 1,594 (650) 14,924
Receivables 11,924 8,369 2,037 (2,447) 19,883
Other financial assets 52,140 29,995 16,427 (14,590) 83,972
Property, plant and equipment 29,507 51,823 28,503 109,833
Equity accounted investments 32,611 8,151 187 (31,356) 9,593
Intangible assets and goodwill 1,041 573 1,162 2,776
Inventory and other assets 1,605 560 1,301 (31) 3,435
Forecast for new capital spending and top-down adjustment
Total assets 139,875 102,404 51,211 (49,074) 244,416

Liabilities

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

Net worth

         
Taxpayers' funds 8,274 24,213 8,382 (30,007) 10,862
Reserves 15,840 27,638 10,192 3,539 57,209
Net worth attributable to minority interest 1,499 41 572 (172) 1,940
Total net worth 25,613 51,892 19,146 (26,640) 70,011

 

Statement of Financial Performance for the year ended 30 June 2014
  Core Crown
2014
Forecast
$m
Crown entities
2014
Forecast
$m
State-Owned
Enterprises
2014
Forecast
$m
Inter-segment
eliminations
2014
Forecast
$m
Total Crown
2014
Forecast
$m

Revenue

         
Taxation revenue 61,516 (515) 61,001
Other sovereign revenue 1,166 5,379 (1,104) 5,441
Revenue from core Crown funding 24,812 207 (25,019)
Sales of goods and services 1,533 1,904 13,604 (473) 16,568
Interest revenue and dividends 2,286 1,176 897 (1,185) 3,174
Other revenue 828 2,107 778 (325) 3,388
Total revenue (excluding gains) 67,329 35,378 15,486 (28,621) 89,572

Expenses

         
Social assistance and official development assistance 23,360 23,360
Personnel expenses 6,227 11,302 2,946 (7) 20,468
Other operating expenses 38,119 18,955 10,641 (27,376) 40,339
Interest expenses 3,589 224 1,167 (593) 4,387
Insurance expenses (4) 3,459 8 3 3,466
Forecast for future new spending and top-down adjustment
Total expenses (excluding losses) 71,291 33,940 14,762 (27,973) 92,020
Minority interest share of operating balance before gains/losses 16 (163) (147)
Operating balance before gains/(losses) (3,962) 1,454 561 (648) (2,595)
Total gains/(losses) 4,207 1,132 (50) (139) 5,150
Net surplus/(deficit) from associates and joint ventures 97 161 5 8 271
Operating balance 342 2,747 516 (779) 2,826

Expenses by functional classification

         
Social security and welfare 23,250 4,591 (538) 27,303
Health 14,911 12,693 (13,200) 14,404
Education 12,300 9,592 9 (8,831) 13,070
Transport and communications 2,235 2,371 6,862 (2,308) 9,160
Other 15,006 4,469 6,724 (2,503) 23,696
Finance costs 3,589 224 1,167 (593) 4,387
Forecast for future new spending and top-down adjustment
Total Crown expenses (excluding losses) 71,291 33,940 14,762 (27,973) 92,020
Statement of Financial Positionas 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 8,226 3,228 1,506 (657) 12,303
Receivables 11,785 6,364 1,706 (2,081) 17,774
Other financial assets 60,036 31,911 18,086 (16,676) 93,357
Property, plant and equipment 30,470 56,238 28,694 115,402
Equity accounted investments 32,528 8,479 200 (31,403) 9,804
Intangible assets and goodwill 1,182 538 1,209 1 2,930
Inventory and other assets 1,950 598 1,230 (38) 3,740
Forecast for new capital spending and top-down adjustment
Total assets 146,177 107,356 52,631 (50,854) 255,310

Liabilities

         
Borrowings 89,072 5,134 26,218 (17,300) 103,124
Other liabilities 28,333 43,650 7,218 (6,788) 72,413
Total liabilities 117,405 48,784 33,436 (24,088) 175,537
Total assets less total liabilities 28,772 58,572 19,195 (26,766) 79,773

Net worth

         
Taxpayers' funds 12,075 27,687 3,467 (29,961) 13,268
Reserves 16,697 30,819 10,134 3,483 61,133
Net worth attributable to minority interest 66 5,594 (288) 5,372
Total net worth 28,772 58,572 19,195 (26,766) 79,773

 

Statement of Financial Performance for the year ended 30 June 2015
  Core Crown
2015
Forecast
$m
Crown entities
2015
Forecast
$m
State-Owned
Enterprises
2015
Forecast
$m
Inter-segment
eliminations
2015
Forecast
$m
Total Crown
2015
Forecast
$m

Revenue

         
Taxation revenue 66,157 (619) 65,538
Other sovereign revenue 1,293 4,911 (1,038) 5,166
Revenue from core Crown funding 25,016 123 (25,139)
Sales of goods and services 1,439 1,969 14,011 (572) 16,847
Interest revenue and dividends 2,462 1,370 1,048 (1,163) 3,717
Other revenue 862 2,465 986 (530) 3,783
Total revenue (excluding gains) 72,213 35,731 16,168 (29,061) 95,051

Expenses

         
Social assistance and official development assistance 23,889 23,889
Personnel expenses 6,341 11,603 2,878 (10) 20,812
Other operating expenses 39,444 19,467 11,035 (27,830) 42,116
Interest expenses 3,836 237 1,346 (712) 4,707
Insurance expenses 1 3,558 8 3,567
Forecast for future new spending and top-down adjustment (684) (684)
Total expenses (excluding losses) 72,827 34,865 15,267 (28,552) 94,407
Minority interest share of operating balance before gains/losses 17 (364) (347)
Operating balance before gains/(losses) (614) 883 537 (509) 297
Total gains/(losses) 2,447 178 6 (200) 2,431
Net surplus/(deficit) from associates and joint ventures 79 167 7 2 255
Operating balance 1,912 1,228 550 (707) 2,983

Expenses by functional classification

         
Social security and welfare 23,966 4,777 (527) 28,216
Health 15,065 12,781 (13,105) 14,741
Education 12,825 9,903 9 (9,168) 13,569
Transport and communications 2,220 2,443 7,060 (2,314) 9,409
Other 15,599 4,724 6,852 (2,726) 24,449
Finance costs 3,836 237 1,346 (712) 4,707
Forecast for future new spending and top-down adjustment (684) (684)
Total Crown expenses (excluding losses) 72,827 34,865 15,267 (28,552) 94,407
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 7,541 2,068 1,448 (594) 10,463
Receivables 12,069 5,405 1,794 (2,251) 17,017
Other financial assets 57,613 31,396 19,843 (15,995) 92,857
Property, plant and equipment 32,077 58,050 29,259 119,386
Equity accounted investments 34,646 8,771 232 (33,525) 10,124
Intangible assets and goodwill 1,228 581 1,165 2,974
Inventory and other assets 1,732 644 1,387 (35) 3,728
Forecast for new capital spending and top-down adjustment (224) (224)
Total assets 146,682 106,915 55,128 (52,400) 256,325

Liabilities

         
Borrowings 87,382 5,899 28,503 (16,657) 105,127
Other liabilities 28,607 39,377 7,286 (6,901) 68,369
Total liabilities 115,989 45,276 35,789 (23,558) 173,496
Total assets less total liabilities 30,693 61,639 19,339 (28,842) 82,829

Net worth

         
Taxpayers' funds 14,024 30,887 3,536 (32,038) 16,409
Reserves 16,669 30,671 10,134 3,484 60,958
Net worth attributable to minority interest 81 5,669 (288) 5,462
Total net worth 30,693 61,639 19,339 (28,842) 82,829

 

Statement of Financial Performance for the year ended 30 June 2016
  Core Crown
2016
Forecast
$m
Crown entities
2016
Forecast
$m
State-Owned
Enterprises
2016
Forecast
$m
Inter-segment
eliminations
2016
Forecast
$m
Total Crown
2016
Forecast
$m

Revenue

         
Taxation revenue 70,174 (682) 69,492
Other sovereign revenue 1,344 4,798 (1,158) 4,984
Revenue from core Crown funding 25,256 111 (25,367)
Sales of goods and services 1,406 2,036 14,404 (555) 17,291
Interest revenue and dividends 2,683 1,414 1,267 (1,274) 4,090
Other revenue 867 2,594 1,030 (616) 3,875
Total revenue (excluding gains) 76,474 36,098 16,812 (29,652) 99,732

Expenses

         
Social assistance and official development assistance 24,516 24,516
Personnel expenses 6,431 11,815 2,896 (11) 21,131
Other operating expenses 39,620 19,713 11,308 (28,318) 42,323
Interest expenses 4,000 236 1,533 (658) 5,111
Insurance expenses (2) 4,090 8 3 4,099
Forecast for future new spending and top-down adjustment 1,349 1,349
Total expenses (excluding losses) 75,914 35,854 15,745 (28,984) 98,529
Minority interest share of operating balance before gains/losses 14 (399) (385)
Operating balance before gains/(losses) 560 258 668 (668) 818
Total gains/(losses) 2,516 240 18 (209) 2,565
Net surplus/(deficit) from associates and joint ventures 76 166 7 6 255
Operating balance 3,152 664 693 (871) 3,638

Expenses by functional classification

         
Social security and welfare 24,415 5,189 (539) 29,065
Health 15,132 12,798 (13,262) 14,668
Education 12,946 10,072 9 (9,280) 13,747
Transport and communications 2,161 2,520 7,201 (2,396) 9,486
Other 15,911 5,039 7,002 (2,849) 25,103
Finance costs 4,000 236 1,533 (658) 5,111
Forecast for future new spending and top-down adjustment 1,349 1,349
Total Crown expenses (excluding losses) 75,914 35,854 15,745 (28,984) 98,529
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 7,474 2,011 1,400 (536) 10,349
Receivables 12,384 4,842 1,945 (2,109) 17,062
Other financial assets 61,696 32,779 21,396 (16,760) 99,111
Property, plant and equipment 33,120 59,911 29,554 122,585
Equity accounted investments 36,145 8,964 219 (34,915) 10,413
Intangible assets and goodwill 1,242 597 1,171 3,010
Inventory and other assets 1,797 608 1,411 (35) 3,781
Forecast for new capital spending and top-down adjustment 114 114
Total assets 153,972 109,712 57,096 (54,355) 266,425

Liabilities

         
Borrowings 92,216 6,350 30,328 (17,373) 111,521
Other liabilities 27,892 39,753 7,442 (6,731) 68,356
Total liabilities 120,108 46,103 37,770 (24,104) 179,877
Total assets less total liabilities 33,864 63,609 19,326 (30,251) 86,548

Net worth

         
Taxpayers' funds 17,165 33,106 3,497 (33,448) 20,320
Reserves 16,699 30,403 10,137 3,485 60,724
Net worth attributable to minority interest 100 5,692 (288) 5,504
Total net worth 33,864 63,609 19,326 (30,251) 86,548

 

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

Revenue

         
Taxation revenue 73,616 (734) 72,882
Other sovereign revenue 1,143 4,868 (1,263) 4,748
Revenue from core Crown funding 25,342 110 (25,452)
Sales of goods and services 1,403 2,117 14,830 (560) 17,790
Interest revenue and dividends 3,192 1,478 1,481 (1,336) 4,815
Other revenue 933 2,550 1,070 (531) 4,022
Total revenue (excluding gains) 80,287 36,355 17,491 (29,876) 104,257

Expenses

         
Social assistance and official development assistance 25,348 25,348
Personnel expenses 6,437 11,957 2,955 (11) 21,338
Other operating expenses 39,434 19,633 11,661 (28,501) 42,227
Interest expenses 4,383 245 1,708 (694) 5,642
Insurance expenses 1 4,433 8 1 4,443
Forecast for future new spending and top-down adjustment 2,980 2,980
Total expenses (excluding losses) 78,583 36,268 16,332 (29,205) 101,978
Minority interest share of operating balance before gains/losses 6 (434) (428)
Operating balance before gains/(losses) 1,704 93 725 (671) 1,851
Total gains/(losses) 2,609 291 11 (225) 2,686
Net surplus/(deficit) from associates and joint ventures 81 168 7 256
Operating balance 4,394 552 743 (896) 4,793

Expenses by functional classification

         
Social security and welfare 25,201 5,448 (551) 30,098
Health 15,191 12,774 (13,349) 14,616
Education 13,008 10,082 9 (9,293) 13,806
Transport and communications 2,224 2,525 7,430 (2,488) 9,691
Other 15,596 5,194 7,185 (2,830) 25,145
Finance costs 4,383 245 1,708 (694) 5,642
Forecast for future new spending and top-down adjustment 2,980 2,980
Total Crown expenses (excluding losses) 78,583 36,268 16,332 (29,205) 101,978
Statement of Financial Position as at 30 June 2017
  Core Crown
2017
Forecast
$m
Crown entities
2017
Forecast
$m
State-Owned
Enterprises
2017
Forecast
$m
Inter-segment
eliminations
2017
Forecast
$m
Total Crown
2017
Forecast
$m

Assets

         
Cash and cash equivalents 7,961 1,957 1,520 (461) 10,977
Receivables 12,476 4,739 2,028 (1,621) 17,622
Other financial assets 70,133 34,609 23,044 (17,822) 109,964
Property, plant and equipment 33,816 61,446 29,651 124,913
Equity accounted investments 37,494 9,134 198 (36,256) 10,570
Intangible assets and goodwill 1,243 530 1,166 1 2,940
Inventory and other assets 1,771 613 1,414 (35) 3,763
Forecast for new capital spending and top-down adjustment 717 717
Total assets 165,611 113,028 59,021 (56,194) 281,466

Liabilities

         
Borrowings 99,179 6,637 32,085 (18,031) 119,870
Other liabilities 28,147 40,973 7,571 (6,544) 70,147
Total liabilities 127,326 47,610 39,656 (24,575) 190,017
Total assets less total liabilities 38,285 65,418 19,365 (31,619) 91,449

Net worth

         
Taxpayers' funds 21,548 35,099 3,490 (34,817) 25,320
Reserves 16,737 30,205 10,142 3,486 60,570
Net worth attributable to minority interest 114 5,733 (288) 5,559
Total net worth 38,285 65,418 19,365 (31,619) 91,449

 

Statement of Financial Performance for the year ended 30 June 2018
  Core Crown
2018
Forecast
$m
Crown entities
2018
Forecast
$m
State-Owned
Enterprises
2018
Forecast
$m
Inter-segment
eliminations
2018
Forecast
$m
Total Crown
2018
Forecast
$m

Revenue

         
Taxation revenue 77,111 (787) 76,324
Other sovereign revenue 1,201 5,049 (1,360) 4,890
Revenue from core Crown funding 25,500 110 (25,610)
Sales of goods and services 1,430 2,197 15,425 (570) 18,482
Interest revenue and dividends 3,508 1,556 1,613 (1,420) 5,257
Other revenue 918 2,412 1,118 (364) 4,084
Total revenue (excluding gains) 84,168 36,714 18,266 (30,111) 109,037

Expenses

         
Social assistance and official development assistance 26,406 26,406
Personnel expenses 6,454 12,104 3,039 (11) 21,586
Other operating expenses 39,611 19,502 12,172 (28,657) 42,628
Interest expenses 4,473 250 1,793 (751) 5,765
Insurance expenses 4 4,703 9 (3) 4,713
Forecast for future new spending and top-down adjustment 4,504 4,504
Total expenses (excluding losses) 81,452 36,559 17,013 (29,422) 105,602
Minority interest share of operating balance before gains/losses (3) (468) (471)
Operating balance before gains/(losses) 2,716 152 785 (689) 2,964
Total gains/(losses) 2,714 349 11 (234) 2,840
Net surplus/(deficit) from associates and joint ventures 82 169 8 (3) 256
Operating balance 5,512 670 804 (926) 6,060

Expenses by functional classification

         
Social security and welfare 26,220 5,691 (563) 31,348
Health 15,274 12,825 (13,501) 14,598
Education 13,081 10,103 9 (9,312) 13,881
Transport and communications 2,293 2,551 7,746 (2,588) 10,002
Other 15,607 5,139 7,465 (2,707) 25,504
Finance costs 4,473 250 1,793 (751) 5,765
Forecast for future new spending and top-down adjustment 4,504 4,504
Total Crown expenses (excluding losses) 81,452 36,559 17,013 (29,422) 105,602
Statement of Financial Position as at 30 June 2018
  Core Crown
2018
Forecast
$m
Crown entities
2018
Forecast
$m
State-Owned
Enterprises
2018
Forecast
$m
Inter-segment
eliminations
2018
Forecast
$m
Total Crown
2018
Forecast
$m

Assets

         
Cash and cash equivalents 8,500 1,936 1,811 (461) 11,786
Receivables 12,894 4,724 1,944 (1,611) 17,951
Other financial assets 67,403 36,707 24,713 (18,562) 110,261
Property, plant and equipment 34,159 62,953 29,551 126,663
Equity accounted investments 38,813 9,303 216 (37,565) 10,767
Intangible assets and goodwill 1,252 493 1,166 (1) 2,910
Inventory and other assets 1,730 614 1,378 (35) 3,687
Forecast for new capital spending and top-down adjustment 1,503 1,503
Total assets 166,254 116,730 60,779 (58,235) 285,528

Liabilities

         
Borrowings 94,805 6,826 33,573 (18,759) 116,445
Other liabilities 27,617 42,582 7,755 (6,525) 71,429
Total liabilities 122,422 49,408 41,328 (25,284) 187,874
Total assets less total liabilities 43,832 67,322 19,451 (32,951) 97,654

Net worth

         
Taxpayers' funds 27,048 37,162 3,522 (36,148) 31,584
Reserves 16,784 30,008 10,141 3,485 60,418
Net worth attributable to minority interest 152 5,788 (288) 5,652
Total net worth 43,832 67,322 19,451 (32,951) 97,654

Core Crown Expense Tables

Core Crown Expense Tables
($millions) 2009
Actual
2010
Actual
2011
Actual
2012
Actual
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Social security and welfare 19,382 21,185 22,005 22,028 22,741 23,250 23,966 24,415 25,201 26,220
GSF pension expenses 655 328 305 192 278 277 359 404 409 409
Health 12,368 13,128 13,753 14,160 14,498 14,911 15,065 15,132 15,191 15,274
Education 11,455 11,724 11,650 11,654 12,504 12,300 12,825 12,946 13,008 13,081
Core government services 5,293 2,974 5,563 5,428 4,294 4,406 4,849 4,909 4,799 4,792
Law and order 3,089 3,191 3,382 3,403 3,456 3,499 3,568 3,529 3,502 3,502
Defence 1,757 1,814 1,809 1,736 1,804 1,824 1,929 2,023 1,993 1,976
Transport and communications 2,663 2,345 2,281 2,232 2,255 2,235 2,220 2,161 2,224 2,293
Economic and industrial services 2,960 2,806 2,542 2,073 1,978 2,068 2,215 2,241 2,246 2,299
Primary services 534 507 706 648 659 675 700 638 605 603
Heritage, culture and recreation 586 630 741 863 804 841