Risk management
Provisions and contingencies are managed across the State sector, with financial oversight from the Treasury and regular disclosure through monthly and annual financial statements. There are strict processes around entities developing new exposures. For example, the Public Finance Act 1989 states that government departments may only give guarantees and indemnities as specified in regulations and if it is in the public interest to do so.
Departments and Crown entities manage employee entitlements and smaller ordinary provisions on their own balance sheets. The Minister of Finance and the Treasury tend to administer items which relate to the Crown as a whole rather than a particular department or Crown entity, such as the Retail Deposit Guarantee Scheme, obligations relating to the international financial organisations and the New Zealand Export Credit Office.
Contingent obligations to international financial organisations are judged to be justified by the membership benefits for New Zealand. Contingent capital may be called if an injection of funds is needed by these institutions (for example, to support balance of payments of other countries). This would create an asset for the Crown, mitigating the risk of loss to the Crown.
A range of upside and downside risks can affect the overall fiscal position, and consequently the Government's balance sheet if they eventuate. Balance sheet risks are discussed in Section 4 and in the information on fiscal risk in the HYEFU2010.
What's not on the balance sheet?
The GAAP balance sheet represents the Crown's assets and debt and other obligations which are binding, according to accounting recognition criteria. Contingent assets and liabilities must be disclosed separately on the balance sheet. However, a more comprehensive view of the Crown's financial position would require consideration of all the Crown's resources and social obligations - some of which may not meet accounting recognition criteria. Most importantly, this includes the power to tax and the implicit obligation to provide public services and transfers. The main means of providing this information is through the Government's Fiscal Strategy Report, half-yearly Economic and Fiscal Updates and the Treasury's Long-term Fiscal Statement.
An example of an obligation of future expenditure that is recorded on the GAAP balance sheet is the ACC liability, which is for accidental injuries that have already occurred. Much other future social expenditure, including New Zealand Superannuation and welfare benefits, is not on the GAAP balance sheet because these are policy commitments only and not contractually binding on the Crown.
New Zealand Superannuation
New Zealand Superannuation is a universal entitlement to a retirement income for New Zealand residents 65 years of age and older. Future liability can be anticipated using population projections and an assumption of constant policy settings.
Challenges and Choices: New Zealand's Long-term Fiscal Statement (The Treasury, 2009) shows that the number of New Zealand Superannuation recipients is expected to rise from 522,000 in 2009 to 1.3 million in 2050. Based on the projections of GDP at the time, this would nearly double the cost of New Zealand Superannuation as a share of national income over the next 40 years from 4.3% of GDP to 8% in 2050. All other things being equal, this type of expenditure pressure will translate into declining balance sheet equity if left unmanaged. Regardless of whether GAAP recognition criteria are met, this type of foreseeable pressure should influence management of the balance sheet into the medium and longer term.
Welfare benefits
One way to look at working-age welfare benefits is to consider them in a similar way to ACC's balance sheet liability: the estimated future obligation to those currently on a benefit, discounted to today's dollars. The Welfare Working Group recently calculated the average lifetime cost of those currently on a benefit, and then multiplied the results by total current recipients to provide an estimated total future liability. And the results are interesting: the present value cost of existing beneficiaries totals $45 billion - significantly more than ACC's gross liability of $27 billion.
| Benefit type | Average lifetime cost per person ($) |
Total cost ($billion) |
|---|---|---|
| Invalid's benefit | 192,000 | 16.7 |
| Sickness benefit | 140,000 | 8.1 |
| Unemployment benefit | 65,000 | 3.6 |
| Domestic Purposes benefit | 161,000 | 17.1 |
| Total | 45.5 |
(Ministry of Social Development [2010]. “Future Liability: Estimating time on benefit and the associated cost”, Centre for Social Research and Evaluation, Ministry of Social Development, Wellington, New Zealand, p.6)
Putting commitments in terms of their present value can help to inform policy making. The New Zealand Government first produced GAAP financial statements in the early 1990s. Among other things, this showed that there was a large unfunded liability associated with the defined-benefit pension scheme for public-sector employees. This disclosure enabled the government of the day to recognise there was a problem and make changes - the scheme was closed to new members. Today, many other governments around the world are grappling with the looming cost of equivalent defined-benefit schemes.
