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Budget 2016 Home Page Fiscal Strategy Report - Budget 2016

Fiscal Forecasts and Projections

For Budget 2016, fiscal forecasts have been prepared for the period 2015/16 to 2019/20 (Table 3). Longer-term projections have been prepared out to 2029/30 (Annex Table A1.4).

Table 3 - Summary of the Treasury's fiscal forecasts in the Budget Update
Year ended 30 June  2015


Total Crown OBEGAL1 0.4 0.7 0.7 2.5 5.0 6.7
Core Crown residual cash -1.8 -2.1 -4.2 -2.1 2.0 3.9
Net core Crown debt2 60.6 62.3 66.3 68.3 66.3 62.3
Net worth attributable to the Crown 86.5 83.5 86.6 91.6 99.3 108.9

% of GDP

Total Crown OBEGAL1 0.2 0.3 0.3 0.9 1.7 2.2
Core Crown residual cash -0.8 -0.8 -1.6 -0.8 0.7 1.3
Net core Crown debt2 25.1 24.9 25.6 25.0 23.1 20.8
Net worth attributable to the Crown 35.8 33.4 33.4 33.5 34.5 36.4
  1. Operating balance before gains and losses.
  2. Net core Crown debt excluding the NZS Fund and advances.

Source: The Treasury

Figure 6 - Core Crown revenue and expenses
Figure 6 - Core Crown revenue and expenses.
Source: The Treasury
Figure 7 - Core Crown expenses
Figure 7 - Core Crown expenses.
Source: The Treasury
Note: Future increases in spending on health and education, for example, will be allocated from the forecast for new operating allowances.

The forecasts show an increase in core Crown revenue as a share of GDP (Figure 6). This increase is greater than forecast in the Half Year Update, largely as a result of a stronger pace of growth in the second half of 2015. Similarly, core Crown tax revenue rises over the forecast period, but is assumed to remain relatively constant as a share of GDP over the projection period.

Core Crown expenses are forecast to rise in dollar terms (Figure 7), but fall as a share of GDP (Figure 6).

Core Crown expenses have fallen from 33.6 per cent of GDP in 2008/09 to an estimated 29.7 per cent in 2015/16, reflecting the Government's expenditure control, and are expected to continue to decline as a share of GDP over the forecast and projection period, consistent with the Government's short-term intentions and long-term objectives.

These revenue and expense tracks lead to growing operating surpluses. Small OBEGAL surpluses are forecast for this year and next, before rising strongly from 2017/18 (Figure 8).

Figure 8 - Total Crown operating balance (before gains losses)
Figure 8 - Total Crown operating balance (before gains losses).
Source: The Treasury
Figure 9 - Core Crown residual cash
Figure 8 - Core Crown residual cash.
Source: The Treasury

The residual cash balance is forecast to be in surplus in 2018/19, which will allow the Government to begin reducing net debt in dollar terms. Residual cash declines in the first year of the projection period as contributions to the NZS Fund resume (see below), but continues to rise thereafter (Figure 9).

Net debt peaks at 25.6 per cent of GDP next year, then gradually declines to 19.3 per cent of GDP in 2020/21, in line with the Government's short-term debt intention (Figure 10). Contributions to the NZS Fund are expected to resume in 2020/21, two years earlier than forecast in the Half Year Update (Annex 1). In 10 years' time, net debt is forecast to be 7.9 per cent of GDP, consistent with the long-term debt objective.

Crown net worth is expected to continue to increase in line with the improving fiscal outlook and the forecast reduction in net debt (Figure 11).

Figure 10 - Core Crown net debt
Figure 10 - Core Crown net debt.
Source: The Treasury
Figure 11 - Net worth attributable to the Crown
Figure 11 - Net worth attributable to the Crown.
Source: The Treasury

The Treasury's Long-term Fiscal Statement shows projections over a much longer time period. Reducing net debt to within a range of 0 per cent to 20 per cent of GDP, resuming NZS Fund contributions as planned, and delivering further improvements in public-sector performance will have a significant effect on long-term projections of the Government's fiscal position and reduce the burden on future generations.

The changing nature of the Crown’s balance sheet

If the Crown's balance sheet is strong, governments can meet financing requirements over time without needing significant changes to existing tax and spending policies even in the face of significant shocks. This is the essence of fiscal sustainability. Net worth is a measure of balance sheet strength that can be used to help assess fiscal sustainability.

How has the Crown's balance sheet changed over time?

Figure 12 - The changing composition of the Crown's assets
Figure 12 - The changing composition of the Crown's assets.
Source: The Treasury

Since the first publication of a Crown balance sheet in 1993, the nature and size of what the Crown owns and owes has changed considerably. As recently as the year 2000 for example, 59 per cent of Crown assets consisted of the traditional plant, property and equipment (PPE) used to deliver core public services such as education and health, while around 25 per cent were financial assets (Figure 12). In contrast, in the year ended June 2015 around 50 per cent of the balance sheet was made up of financial assets while PPE was 45 per cent.

What are the implications?

Spending decisions and tax revenue have traditionally had the greatest impact on Crown finances. However, as the balance sheet evolves, changes in the values of assets and liabilities will continue to have a greater effect on the overall fiscal position than in the past.

For example, as Table 4 illustrates, given the Crown's current shareholdings as at 30 June 2015, a 10 per cent increase in share prices, all else equal, would have increased the operating balance and net worth by approximately $2.5 billion. In contrast, in 2007 a similar increase in share prices would have increased the operating balance by just $1.3 billion. Additionally, if permanent, a 10 per cent increase in share prices now would have the equivalent effect to reducing net core Crown debt by around 1 per cent of GDP. This highlights the growing importance of managing the Crown's balance sheet, including its overall risk exposures.

Table 4 - Sensitivity analysis
Year ending 30 June
Impact on the operating balance

Financial assets and liabilities

2007 2015
Impact of a 1% fall in interest rates 444 539
Impact of a 10% decline in the NZD exchange rate 364 1,043
Impact of a 10% increase in share prices 1,334 2,522

Significant long term liabilities

Impact of 1% decline in the risk-free discount rate[1] -3,085 -7,062
Impact of a 1% decline in the inflation rate[2] 1,813 4,106
  1. Based on the impact on the ACC claims liability and Government Superannuation Fund (GSF) retirement liability.
  2. Based on the impact on the ACC claims liability.

Note: The impacts on net worth are broadly similar to the operating balance impacts.

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