Capital allocation in practice: the 2009/10 year in review

The Government's annual capital budget is in fact a small proportion of the Crown's total investment in any given year. As noted above, the size, shape and strength of the Crown's balance sheet is impacted over time by a number of factors, not all of which are directly controlled by the Government, such as the decisions of autonomous entities that manage the Crown's assets and liabilities. The Treasury's modelling also shows that the largest risk to the Crown's financial position comes from changes in the economy feeding into tax and spending.

Investment in social assets such as schools and defence equipment over the next few years is expected to be largely funded from debt. Some investment is funded by specific taxes (such as the expenditure on roads). Investment in commercial assets is largely financed by cash generated by each of the SOEs, at the expense of dividends received by the Crown which would offset other spending or reduce debt.

As a result of this variety of funding sources and the devolved public management system in which Crown entities and SOEs operate, the amount of Crown capital allocated or invested in any given year far exceeds the amount of the new capital allowance allocated by the Government directly at Budget time.

Figure 3 shows the various capital cash flows for physical and intangible assets in the 2009/10 financial year.

Figure 3 - Cash flows for 2009/10

Source:  The Treasury

Figure 3 illustrates that:

• Total Crown capital expenditure on property, plant and equipment in 2009/10 was $6.3 billion. The $1.02 billion of the Government's new capital allowance that funded 2009/10 expenditure (a portion of the total $1.45 billion allocated at Budget 2009) was less than a sixth of the total spending for the year.
• SOE capital expenditure on property, plant and equipment ($2.2 billion) was 35% of Crown-wide capital expenditure.
• The majority of levers available to Ministers within the capital allocation process are over the Core Crown (eg, departments) and Crown entities' cash flows. There are more limited controls in place over capital spending by SOEs (although major investment decisions are subject to consultation and approval processes). This approach is consistent with allowing SOEs to operate in a manner similar to a private sector company.
• A substantial portion of the Crown's capital allocation regime is also funded by agency reserves and depreciation funding[1].

More active overall balance sheet management and strategy should consider whether this allocation of capital across entity types is consistent with long-term government objectives.

Decisions to increase Crown assets given the current fiscal context and outlook need to be well considered and prioritised because, as with all government spending, it is current or future taxpayers who bear the cost. It is essential that all Crown capital is both efficiently allocated and well managed regardless of how it is funded or allocated. For example, a 5% improvement in efficiency across the entire balance sheet would fund the Government's planned new capital allowance for more than a decade (thereby reducing the Crown's borrowing).