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

Key Trends

Revenue grows in line with the economy …

Figure 2.1 – Core Crown revenue excluding NZS Fund revenue and expenses
Source: The Treasury

Tax revenue as a percentage of GDP remains relatively flat over the forecast period. However there are a number of offsetting factors influencing this trend. In particular:

  • the Business Tax Reform will resulted in a structural reduction in the tax revenue to GDP ratio. The most significant tax type affected is company income tax as a result of lowering the company tax rate from 33% to 30%, and
  • the impact of fiscal drag, whereby income growth over time moves people into higher tax brackets. This is more prominent with the removal of personal income tax threshold indexation.

The 2005/06 core Crown revenue includes the one-off non-cash adjustment of $1.8 billion booked at 30 June 2006 (1.1% of GDP), reflecting the change in accounting treatment for the recognition of provisional tax.

… while Budget initiatives increase expenses …

The Government has made significant policy decisions in recent Budgets. Core Crown expenses are expected to increase by around $1 billion between 2006/07 and 2007/08 as a result of past Budget initiatives such as Working for Families and KiwiSaver. In addition, the 2007 Budget includes new initiatives of $2.5 billion in 2007/08 rising to $3.1 billion by 2010/11. The enhancements to the KiwiSaver initiative is a key feature of Budget 2007 and is the main driver of the rising profile. In the short term this results in a rising trend in core Crown expenses to GDP. By 2008/09 this trend flattens out, as the allocations for future Budgets are broadly consistent with the forecast growth in the economy.

… resulting in declining operating balances …

Figure 2.2 – Operating balance
Source: The Treasury

The operating balance as a percentage of GDP is expected to decline from 7.3% in 2005/06 to 3.8% in 2006/07. The main reasons for the decrease are:

  • the 2005/06 outturn included a number of one-off positive revaluations (eg, investment gains) and accounting changes (eg, provisional tax revenue recognition), and
  • the forecast for 2006/07 includes some one-off expenses such as the write down of tax and fines receivables and an increase in the ACC insurance liability.
Figure 2.3 – Operating balance before gains and losses (OBEGAL) and excluding NZS Fund revenue
Source: The Treasury

Beyond 2006/07 the operating balance continues to decrease, but at a much lesser rate.

The operating balance before gains and losses (OBEGAL) and excluding NZS Fund revenue provides a better picture of the underlying movement in the fiscal position. The balance also declines over the forecast period, falling from 3.4% to 1.7% of GDP

Some components of the operating surpluses expected over the forecast period have been partitioned by the Government and are not available to fund new policy initiatives. This includes:

  • entities retaining their surpluses for the purpose of achieving their long-term objectives (ACC, EQC and NZS Fund), and
  • entities retaining their surpluses to accumulate assets (State-Owned Enterprises (SOEs) and some Crown entities).
Figure 2.4 – Accumulated operating balance breakdown for the period 2006/07 to 2010/11
Source: The Treasury

This leaves around 48% of the accumulated operating balance available to finance the Government’s investing activities, such as contributions to the NZS Fund and its general capital programme.

… and a move from cash surplus to deficit …

This will be invested primarily in NZS Fund contributions of $11.1 billion, purchases of physical assets of $9.6 billion (eg, schools and defence equipment), advances of $4.4 billion (mainly student loans and refinancing existing private sector debt of the health and housing sectors), injections into Crown entities for hospitals and housing of $1.8 billion, and the purchase of foreign exchange reserves of $0.7 billion.

Figure 2.5 – Core Crown cash position on a year-by-year basis
Source: The Treasury

There is a residual financing requirement over the forecast period of around $4 billion.

Table 2.3 – Impact of Crown operating surpluses on the balance sheet from 2006/07 to 2010/11 inclusive
Source: The Treasury

Application of the Operating Balance

The following graph explains how the operating balance translates into cash available and then how it has been applied for the 2007/08 financial year.

Application of the Operating Balance

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