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Budget 2010 Home Page 2010 Investment Statement of the Government of New Zealand

Summary of the Crown's overall balance sheet position

Despite the recent weakening of the New Zealand economy, ongoing structural imbalances and the impacts of the global financial crisis, the Government's balance sheet is in better shape than it was 15 years ago. Assets have grown faster than liabilities over this period, Crown debt has fallen as a proportion of GDP and net worth has increased.

This has been driven by using operating surpluses to retire government debt and invest in public assets, SOEs growing their businesses and a significant increase in financial assets. This includes in particular the establishment of NZSF to partially pre-fund anticipated future expenditure.

Key observations from the charts above include:

  • Size: The assets and liabilities held on the Crown's balance sheet have increased in size since 1995 after taking into account the impact of inflation. This has been driven from a range of sources including: policy decisions (NZSF and ACC funding); asset creation (Kiwibank, student loans); asset purchase (KiwiRail, shareholding in Air NZ); valuation adjustments (roads, housing, schools, electricity generation assets etc); and accounting changes.
  • Composition: Assets now exceed liabilities by approximately $100 billion, whereas in 1995 liabilities exceeded assets by $3 billion. The Crown now holds a greater portion of its assets as financial and commercial assets. The higher the proportion of these assets that are marked to market, the more volatility there will be in reported asset balances. Notwithstanding the increased proportion of financial and commercial assets, social assets have almost doubled over that period, with significant increases in the stock of roads, houses, schools and student loans.
  • Strength: The movement to more liquid assets (financial assets and to some extent commercial assets) and the growth in the assets compared to liabilities means that the Crown balance sheet is in a much better position to withstand shocks than it was in 1995. This was, and is, being tested by the impacts of the domestic recession and the global financial crisis which have negatively impacted the balance sheet, and the Crown's financial position is expected to continue to worsen further before it gets better.

The Government's specified target is to maintain net debt closer to 20% of GDP over the long term. Net core Crown debt is forecast in HYEFU 2010 to increase to 28.5% by 30 June 2015 and is not now forecast to fall below 20% until 2022. As already noted, off balance sheet risks, such as further weakening of the economy reducing the Crown's forecast revenues, pose the greatest threat to this position over the medium term.

Another indicator of the strength of the Government's overall financial position is its credit rating with the balance sheet forming a part of the credit rating assessment by international credit rating agencies. These agencies also put weight on the importance of transparency in the Government's finances in determining sovereign credit ratings. Deterioration in the Crown's credit rating would lead to higher borrowing costs. Higher borrowing costs would take up a greater portion of the Crown's tax take at the expense of other services provided, and invariably flow through to higher borrowing costs for New Zealand-domiciled firms.

New Zealand's credit rating is analysed and published by Moody's Investors Service, Standard and Poor's (S&P) and Fitch Ratings.[1] The rating agencies issue short- and long-term ratings for both domestic and foreign-currency debt. The long-term foreign-currency rating is the rating most commonly used for international comparisons. New Zealand's long-term foreign-currency rating has fluctuated between AAA/Aaa (Triple A) and AA-/Aa3 over the past three decades. AAA is the highest rating level while a rating in the AA/Aa range is also seen as a very high level of credit-worthiness.

New Zealand's long-term foreign currency credit rating is currently Aaa with a stable outlook from Moody's and AA+ (negative outlook) with S&P and Fitch. Most recently,S&P revised their outlook for New Zealand’s credit rating from stable to negativeon 22 November, commenting on the need for evidence of the unwinding of the structural imbalances in the economy. The domestic currency rating is Triple A with all three agencies.

International comparisons

Figure 11 - Number of Sovereigns in Prime and High Quality Grades
Figure 11 - Number of Sovereigns in Prime and High Quality Grades.
Sources:  Moody's Investors Service, S&P, Fitch Ratings.

Figure 11 shows sovereign credit ratings for New Zealand and other countries. Those countries with a Triple A credit rating from all three agencies include Canada, France, Germany, Norway, Sweden, Switzerland, UK and USA.

S&P and Fitch highlight New Zealand's high level of external indebtedness as the main reason for the lower rating. In this context, it is important for the Government to maintain a strong balance sheet and a relatively low level of sovereign debt. Other countries with weak private or household savings and high national levels of external liabilities have lower credit ratings. New Zealand remains amongst the top 20 rated sovereigns in the world.

Except in the case of sovereign debt, for which analysis is more readily available, other international comparisons are difficult owing to the relatively poor balance sheet reporting by other countries. Nevertheless, some broad comparisons are possible. These are summarised in the box below.

How does the Crown's balance sheet compare with other countries?

International comparisons of governments' balance sheets are extremely difficult owing to data limitations and different measurement bases: very few governments report GAAP balance sheets; international data sources are limited by the quality of countries' own information; and different levels of government can complicate the analysis. Even so, some broad high-level comparisons are possible.

Overall, the balance sheet is comparatively strong. The overall measure, net worth, is very difficult to compare. The most comparable international measure is gross debt, which is a substantial driver of overall net worth. New Zealand has comparatively lower sovereign debt as a share of GDP than many other countries. A relatively strong government balance sheet is warranted in light of New Zealand's high levels of private net foreign liabilities.

Financial assets are comparatively modest. The CFIs are relatively modest in size compared internationally. Countries such as Norway, China and Singapore have extremely large Sovereign Wealth Funds. New Zealand's Superannuation Fund is slightly larger than Australia's Future Fund as a share of GDP.

Liabilities other than debt are relatively low. The most significant liability (other than debt) for many governments that would be recognised on the GAAP balance sheet is public sector defined benefit pension schemes (that is, schemes that provide a fixed portion of final salary, for example).[2]  Most governments' pension liabilities are not fully reported, but the UK and many US states, for example, still operate such schemes and face substantial future liabilities.  In comparison, New Zealand's defined benefit scheme (ie, the Government Superannuation Fund, GSF) has been closed to new members since 1992 and the unfunded liability is substantially smaller.

The commercial portfolio is comparatively large and tends to be 100% owned.The OECD's public ownership indicator puts New Zealand in roughly the middle of OECD countries. However, two features of New Zealand's public ownership not fully captured by that indicator are that it is large as a proportion of GDP (reflecting the large size of the electricity SOEs in particular), and the companies are predominantly in 100% public ownership rather than a mix of public and private. Since the most recent data, some countries have increased ownership in the financial sector in light of the global financial crisis owing to bail-outs which New Zealand has avoided.

Other assets reflect policy choices about how best to deliver and finance public services. The fact that the largest government assets include roads, schools and prisons is similar to many countries. Policy choices are the main influence on what assets are on balance sheets. For example, the dominance of social housing on the Crown's balance sheet reflects the choice of government to centrally provide social housing to those with high housing needs, whereas some other countries devolve housing provision to local authorities, or have larger not-for-profit sectors.


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