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Introduction

The importance of the Crown's balance sheet

The Crown's balance sheet is a record of the assets owned, and the liabilities or obligations owed, by the Government on behalf of current and future New Zealanders. It provides a snapshot of the financial strength and sustainability of the New Zealand Government. The balance sheet should be fit for purpose in terms of its size and composition, and managed in a way that protects long-term value for taxpayers by enhancing returns and constraining the Crown's risk.

Government owns assets to achieve its social and economic policy goals, as well as to manage the liabilities and risks facing the Crown and the wider economy now and into the future.

The Government's balance sheet management will therefore reflect its decisions about:

  • how best to finance, in the most efficient way, the Government's policy priorities such as delivering smarter public services, looking after the conservation estate and providing productive infrastructure
  • how the Government can best support the conditions needed for a thriving economy, and
  • prudent overall management of the Government's financial position, in terms of having appropriate liquidity and flexibility to meet spending commitments and liabilities in a crisis without an untimely fiscal contraction, and to support longer term fiscal sustainability.

The strength of the Crown's balance sheet is vital to the entire economy. It is critical to ensure that the Government's investment in assets does not, however, impose growth-dampening costs on the economy by, for instance, crowding out the private sector, or impose undesirable levels of risk or unnecessary costs on taxpayers.

The strength of the Crown's balance sheet was one factor that has meant that, despite already being in recession, New Zealand has been able to manage its way through the global financial crisis which has had a more significant effect on many other countries around the world. For example:

  • various identified infrastructure projects, spanning the housing, transport, education and energy sectors, were able to be accelerated to stimulate economic activity
  • significant (and ongoing) operating deficits were able to be quickly and efficiently funded through additional Crown debt, instead of having to rapidly cut government spending or increase taxes, and
  • retail and wholesale bank and financial institution guarantees were introduced, and additional liquidity was made available through the Reserve Bank.

These actions provided a cushion for the rest of the economy - the Government was able to partly absorb the shock on its own balance sheet, thereby protecting private incomes. Without this cushion, the shock to private incomes would have been much larger.

More recently, domestic events such as weathertight homes issues, the Canterbury earthquake and the collapse of a number of finance companies have also realised a number of risks to the Crown's finances. The financial impact of these events has been manageable for the Crown because of the overall strength of the balance sheet and also because the Government had to some extent provisioned for these types of risks.

For the balance sheet to continue to provide this flexibility and resilience, particularly when more serious future shocks occur, a more focused approach to the management, monitoring and reporting of the Crown's material assets, liabilities and risks is needed. In particular, more focus is needed on aligning the balance sheet to the Government's overall objectives and integrating reporting on the Crown's balance sheet with overall fiscal reporting and strategy.

This Investment Statement is part of this more focused approach.

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