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

… which is met by borrowings …

The Government’s intended bond programme has been set at around $2.5 billion per annum, amounting to $12.5 billion of new borrowings over the forecast period. $8.6 billion of the new borrowing replaces maturing debt. The balance of new debt issued of $3.9 billion is used to meet the cash shortfall.

Figure 2.6 – Gross sovereign-issued debt
Source: The Treasury

In addition to the cash shortfall, gross debt is affected by:

  • the Reserve Bank increasing settlement cash levels in 2006/07, this has had a net impact on borrowings of $3.2 billion (as noted in the Half Year Update), and
  • the impact of the transition to New GAAP, this has increased gross debt by $0.7 billion.

Gross debt increases by around $7.3 billion from 2005/06 to 2010/11. As a percentage of GDP, gross debt is expected to fall from 22.6% in 2005/06 to 21.8% by 2010/11. Excluding the impact of the increase in settlement cash levels, over the same period GSID falls to 18.8% by 2010/11.

… while financial assets increase …

Figure 2.7 – Net debt (% of GDP and $million) and % of GDP including assets of NZS Fund
Source: The Treasury

With borrowings meeting the cash shortfall, financial assets grow by the full extent of the build-up in assets resulting from:

  • contributions made to the NZS Fund and the returns earned by the Fund, and
  • advance activity, such as student loans.

… resulting in an increasing net financial assets (including NZS Fund) track

Including the NZS Fund the Crown is in a net financial asset position. Net financial assets are expected to continue to increase over the forecast period. Excluding the NZS Fund assets, net core Crown debt decreases in nominal terms by around $0.9 billion over the forecast period. This trend is contrary to what happens to gross debt reflecting the fact that some of the borrowings required to meet the cash shortfall are used to invest in financial assets (eg, student loans), so do not impact on net debt.

New Zealand International Financial Reporting Standards (NZ IFRS)

The fiscal forecasts in Budget 2007 are prepared on an NZ IFRS basis.

From 1 July 2007 the financial statements of the Government must be prepared in accordance with NZ IFRS. Hence, forecasts in Budget 2007 are prepared on an NZ IFRS basis to provide comparability with reporting actual results.

While there are relatively minor changes to the bottom line ….

Although the current New Zealand reporting standards (Old GAAP) are relatively well aligned with NZ IFRS (New GAAP), there have been some impacts on the bottom line as a result of adopting New GAAP. Using the forecast year-end position for 2006/07, changing to new GAAP results in the following impacts on fiscal indicators:

  Old GAAP Change New GAAP
Net worth $88.5b Up Arrow: 1.2b. $89.7b
Operating balance $6.6b Up Arrow: 0.3b. $6.3b
Residual cash $1.7b No change $1.7b

These fiscal indicators have changed by less than 1% of GDP (refer to page 105 for fiscal indicator changes).

… but there are changes to some values …

The two main contributors to the change in net worth of $1.2 billion are:

1. The net liability of the Government Superannuation Fund (GSF) is reduced by $3.2 billion. Under New GAAP the pension liability is reported on the basis that the Government meets its obligation on a pay-as-needed basis. Under Old GAAP the liability is reported based on the amount to be invested today to fully fund future pensions. The difference between the two is the treatment of investment taxes.

Note that, from a presentational point of view the assets of the GSF are now netted off against the liability.

The pension obligations to GSF members are underwritten by the Government and there are no implications for GSF members’ payments as a result of this reporting change.

2. The ACC liability has increased by $1.9 billion owing to adding an additional risk premium and liability adequacy test under New GAAP. The actuarially calculated liability under Old GAAP represents a mid-point estimate – that is, equal chance of actual payouts being greater than or less than the estimate. To that extent, it represents the most likely outcome. Introducing an additional risk premium and liability adequacy test under new GAAP does not change the relative risk of ACC’s activities; rather, it simply changes how this risk is reported. There are no implications for ACC levies as a result of this change in reporting.

… and to the presentation of financial information …

Under New GAAP there is:

  • more detail (eg, derivatives are shown separately on the face of the Statement of Financial Position)
  • reclassifications (eg, GSF assets are netted against the GSF liability), and
  • format changes, notably to the face of the Statement of Financial Performance.

The key change to the Statement of Financial Performance is reporting gains/losses in a separate section from revenue and expenses. This section will typically, but not exclusively, capture changes from market movements or actuarial assumptions such as gains on share portfolios and actuarial changes in the GSF liability. Separately reporting gains and losses will:

  • help users identify their effect on reported results and forecasts
  • reduce the “noise” from changes in fair value of items (eg, share investments can provide income (gains) in one month and expenses (losses) the next), and
  • better align accounting practice with other reporting frameworks, such as Government Financial Statistics.

A more detailed list of changes is provided in Chapter 7 NZ IFRS Transition on page 191.

… resulting in continued high-quality reporting

The Accounting Standards Review Board, by deciding that all reporting entities in New Zealand must comply with New GAAP after 1 January 2007, believed that by adopting global financial reporting standards it will improve:

  • the comparability of financial reporting for New Zealand’s corporate sector, thereby enhancing domestic capital market transparency and accountability, and
  • the quality of financial reporting (New GAAP is more comprehensive, more widely accepted and robustly tested).

The New Zealand Government has been required to comply with generally accepted accounting practice (GAAP) since the Public Finance of 1989, and therefore must now adopt New GAAP. Common financial reporting across all sectors in New Zealand provides consistency and transparency to users of financial reports.

As the Government progresses towards full implementation of New GAAP and the audit of June 2008 Financial Statements, the potential areas of impact from adoption of New GAAP will include any change in accounting standards during that time. However, based on the current work programme of the international standard setters, such changes are expected to be minimal on the reported results at June 2008.

Further details on the adoption and expected impact of New GAAP on the Financial Statements of Government, including New GAAP accounting policies for the Government reporting entity, are available at

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