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Budget 2007 Home Page Budget Economic and Fiscal Update [2007]

2 Fiscal Outlook

Summary of the Budget Update

Economic growth has accelerated again after a period of weak growth in 2005 and 2006. Growth over 2007/08 is expected to be stronger than forecast at the time of the 2006 Half Year Economic and Fiscal Update (Half Year Update).

This rebound in growth has largely been the result of resurgence in domestic demand, with both private consumption and housing and business investment showing renewed strength.

This growth, together with higher terms of trade and persistent domestic price pressures has resulted in higher GDP, flowing directly into higher tax forecasts of around $3.3 billion over the forecast horizon.

Offsetting some of the forecast growth in tax are tax policy initiatives of around $1.4 billion which form part of Budgets 2007 and 2008. In addition, new expense initiatives are above what was signalled in the 2007Budget Policy Statement (BPS) by around $1.2 billion by 2010/11. The main driver of this increase in expenses is the enhancements to the KiwiSaver initiative previously announced in Budget 2005. These factors result in a fiscal outlook for the Budget Update that shows:

  • Slower core Crown revenue growth relative to recent years, with revenue remaining stable at around 34% of GDP over the forecast period, and expenditure rising to around 33% of GDP by 2010/11.
  • After peaking last year at 7.3% of GDP the operating balance returns to just under 4% of GDP in 2006/07 and declines over the rest of the forecast period. The operating balance before gains and losses (OBEGAL) and excluding NZS Fund revenue follows a similar trend.
  • After taking account of the Government’s capital programme, including contributions to the NZS Fund, the core Crown is forecast to record cash deficits from 2007/08.
  • Gross sovereign-issued debt rising in nominal terms, but falling slowly to 21.8% of GDP by the end of the forecast period.
  • Net core Crown debt rising over the forecast period, but at 3.5% of GDP in 2010/11 it is lower than the levels forecast at the Half Year Update.
  • The NZS Fund is forecast to be $27 billion (13.8% of GDP) by the 2010/11.
Table 2.1 Summary fiscal indicators[6]
Year ended 30 June
OLD GAAP NEW GAAP
2006 2007 2007 2008 2009 2010 2011
($million) Actual Forecast Forecast Forecast Forecast Forecast Forecast
Core Crown revenue excluding NZS Fund revenue     57,123 59,304 61,077 63,733 66,906
Core Crown revenue 59,170 59,502 57,006 59,402 61,172 63,825 66,993
Core Crown expenses 49,900 53,775 52,783 56,096 58,819 61,677 64,898
OBEGAL7 excluding NZS Fund revenue   5,654 4,860 3,862 3,438 3,260
OBERAC 8,648 7,380
Operating balance 11,473 6,568 6,327 6,431 5,569 5,310 5,366
Residual cash 2,985 1,720 1,720 (976) (1,687) (1,649) (1,426)
Gross sovereign-issued debt 35,461 37,217 37,935 40,400 40,231 39,894 42,737
Net core Crown debt (incl NZS Fund) (5,138) (7,962) (7,534) (10,784) (13,145) (16,008) (19,287)
% of GDP  
Core Crown revenue excluding NZS Fund revenue     34.6 34.2 34.1 34.1 34.1
Core Crown revenue 37.8 36.1 34.6 34.3 34.1 34.1 34.1
Core Crown expenses 31.9 32.6 32.0 32.4 32.8 33.0 33.1
OBEGAL excluding NZS Fund revenue   3.4 2.8 2.2 1.8 1.7
OBERAC 5.5 4.5
Operating balance 7.3 4.0 3.8 3.7 3.1 2.8 2.7
Residual cash 1.9 1.0 1.0 (0.6) (0.9) (0.9) (0.7)
Gross sovereign-issued debt 22.6 22.6 23.0 23.3 22.5 21.3 21.8
Net core Crown debt (incl NZS Fund) (3.3) (4.8) (4.6) (6.2) (7.3) (8.6) (9.8)

Source: The Treasury

Old GAAP and New GAAP

The forecasts in Budget 2007 have been prepared under a new set of accounting standards – New Zealand equivalents to International Financial Reporting Standards (NZ IFRS). These new standards will be part of Generally Accepted Accounting Practice (GAAP) for financial statements relating to periods commencing after 1 January 2007.

To help navigate the transition from current reporting standards (Old GAAP) to NZ IFRS (New GAAP) this chapter uses:

  • Old GAAP numbers only for actual results to June 2006
  • New GAAP numbers only for forecasts beyond 2007, and
  • Both Old GAAP and New GAAP numbers for forecasts to June 2007.

Information on the impact of NZ IFRS adoption on the financial statements is provided on page 90, and on fiscal indicators on page 91.[3]

Table 2.2 - Reconciliation of residual cash
Year ended 30 June 
$million 2007
Forecast
2008
Forecast
2009
Forecast
2010
Forecast
2011
Forecast
Core Crown revenue 57,006 59,402 61,172 63,825 66,993
Less Core Crown expenses 52,783 56,096 58,819 61,677 64,898
Plus Core Crown gains and losses and other items 1,578 1,157 1,314 1,482 1,686
Plus Net surpluses/(deficits) of SOEs and CEs 526 1,968 1,902 1,680 1,585
Equals Operating balance 6,327 6,431 5,569 5,310 5,366
Less Net gains and losses and other items 790 1,473 1,612 1,780 2,019
Equals Operating balance before gains and losses (OBEGAL) 5,537 4,958 3,957 3,530 3,348
Less NZS Fund revenue after-tax[8] -117 98 95 92 87
Equals OBEGAL less NZS Fund revenue 5,654 4,860 3,862 3,438 3,260
Less Net retained surpluses of SOEs and CEs 1,314 1,652 1,604 1,382 1,252
Non-cash items and working capital movements 3,592 (1,830) (1,065) (1,495) (1,764)
Equals Net core Crown cashflow from operations 7,932 5,038 3,323 3,551 3,772
Less Contribution to NZS Fund 2,049 2,103 2,194 2,312 2,458
Equals Net core Crown cashflow from operations after contributions to NZS Fund 5,883 2,935 1,129 1,239 1,314
Less Purchase of physical assets 2,141 1,803 1,201 1,179 1,034
Advances and capital injections 2,022 1,924 1,047 903 802
Capital allowance for future Budgets 184 567 806 903
Equals Residual cash 1,720 (976) (1,687) (1,649) (1,426)

Source: The Treasury

The New Zealand Superannuation Fund

The NZS Fund is an important component of the Government’s fiscal strategy. The NZS Fund’s assets provide the means for the Government to partially pre-fund future New Zealand superannuation expenses and may only be used for New Zealand superannuation.

The NZS Fund’s assets are to be built up through a combination of investment returns earned on the Fund’s portfolio and Government contributions. The Government’s contributions to the NZS Fund are calculated over a 40-year rolling horizon to ensure that superannuation entitlements over the next 40 years can be met.

The Fund’s net assets are forecast to grow over the forecast period to $27 billion, an increase of $17.1 billion. Over $8 billion of this increase is expected to come from the NZS Fund’s investment performance, with the remaining increase from Government contributions.

  Year ended 30 June          
  OLD GAAP NEW GAAP
  2006 Actual 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
($million)              
Opening net worth 6,555 9,861 9,855 12,910 15,977 19,321 22,984
Gross contribution from the Crown 2,337 2,049 2,049 2,103 2,194 2,312 2,458
NZS Fund revenue 1,190 1,505 382 447 519 599 685
NZS Fund gains and losses     1,123 866 1,055 1,259 1,486
Tax (221) (497) (499) (349) (424) (507) (598)
Closing net worth 9,861 12,918 12,910 15,977 19,321 22,984 27,015

Updated Fiscal Indicators

The fiscal indicators have been updated as a consequence of:

  • the increasing size of the NZS Fund and its importance to the Government’s fiscal strategy. A new indicator, “NZS Fund returns” has been added, and
  • the change in accounting standards to New GAAP (page 90 discusses these changes further).
Previous Fiscal Indicator Updated Fiscal Indicator
  NZS Fund returns
Core Crown revenue Core Crown revenue ex NZS Fund revenue
OBERAC Operating balance before gains and losses
OBERAC excluding NZS Fund returns Operating balance before gains and losses ex NZS Fund revenue
Core Crown expenses
Residual cash
Gross sovereign-issued debt
Net core Crown debt
Net core Crown debt (inc NZS Fund)
Core Crown expenses
Residual cash
Gross sovereign-issued debt
Net core Crown debt
Net core Crown debt (inc NZS Fund)

The noticeable change from adopting New GAAP is OBERAC (operating balance excluding revaluations and accounting changes) being superseded by the “Operating balance before gains and losses”. Unlike the OBERAC the OBEGAL is visible on the Statement of Financial Performance.

A less obvious change is in the composition of the indicators. The core Crown revenue (now excluding NZS Fund revenue) and core Crown expenses indicators will no longer include gains or losses, as gains and losses (refer page 91) will be reported in a separate section of the Statement of Financial Performance.

Notes

  • [6]Detailed tables of the key indicators for the Budget Update and Half Year Update are located on pages 105-106. With the adoption of New GAAP there is a series break in the graphs and tables presented in the fiscal chapter. For some indicators there is not a comparable trend series.
  • [7]Operating balance before gains and losses (OBEGAL) less NZS Fund revenue represents the residual of operating revenue and expenses minus the portion of operating revenue earned by the NZS Fund. The indicator does not take into account any gains and losses which are now reported in a separate section of the Statement of Financial Performance (refer page 161).
  • [8]NZS Fund returns are the sum of its revenue (ie, interest and dividends), gains and losses (which comprise the bulk of its returns) and tax expenses. As OBEGAL does not include gains and losses, the remaining returns to deduct from OBEGAL are NZS Fund revenue less taxes.
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