The Treasury

Global Navigation

Personal tools

Government
Publication

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

Core Crown

Table 2.11 –Components of core Crown net worth
  Year ended 30 June
  OLD GAAP NEW GAAP
($ billion) 2006 Actual 2007 Forecast 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Total assets 102.3 109.7 105.5 112.2 115.4 118.2 124.3
Total liabilities 62.2 63.8 56.4 58.6 58.2 57.3 59.6
Net worth 40.1 45.9 49.1 53.6 57.2 60.9 64.7

Source: The Treasury

Over the forecast period, core Crown assets are expected to increase from $105.5 billion from 2006/07 to $124.3 billion, largely reflecting the application of the operating balance and additional borrowing to build up assets.

As Figure 2.10 illustrates, the majority of growth occurs within financial assets, which increase by around $14.9 billion, while investments in Crown entities (primarily to fund hospitals and housing capital projects), and physical assets also increase slightly.

Figure 2.10 – Core Crown asset growth
Figure 2.10 – Core Crown asset growth
Source: The Treasury

Within the financial asset portfolio of the core Crown:

  • the NZS Fund is expected to increase by around $12.2 billion from 2006/07 to 2010/11. These funds are being set aside to assist in meeting future fiscal pressures associated with an ageing population
  • advances are forecast to increase by around $2.4 billion, primarily due to student loans, and
  • the financial asset portfolios of the Reserve Bank and New Zealand Debt Management Office stay relatively flat over the forecast period.

By 2010/11 the make-up of the financial asset portfolio is expected to have changed significantly, primarily driven by the increase in the holdings of the NZS Fund.

Figure 2.11 – Core Crown financial assets by portfolio
Figure 2.11 – Core Crown financial assets by portfolio
Source: The Treasury

The level of core Crown liabilities is expected to increase by around $3.2 billion from 2006/07 to 2010/11. The major component of core Crown liabilities is gross sovereign-issued debt, which, as previously mentioned, is forecast to increase nominally but decrease as a percentage of GDP over the forecast period.

State-Owned Enterprises and Crown Entities – Net Surpluses

State-owned enterprises (SOEs) and Crown entities (CEs) are forecast to run total operating surpluses of $10 billion over the forecast period. Around $2.4 billion of the operating surpluses will be returned as dividends, and will be available to fund spending elsewhere in the Crown.

Figure 2.12 – SOE and Crown entities operating balance
Figure 2.12 – SOE and Crown entities operating balance
Source: The Treasury

In 2006/07 SOE/Crown entities net surpluses are forecast to be $0.5 billion, which is lower than what is expected for the rest of the forecast period. The lower 2006/07 result is primarily due to an increase in the ACC unfunded liability of around $2 billion. This increase was mainly a result of changes in economic assumptions and higher rehabilitation costs (eg, more claims).

From 2007/08 onwards, SOE/Crown entities net surpluses are on average $1.8 billion.

SOE/Crown entities net surpluses after payment of dividends total $7.6 billion. This residual is maintained within the entities that have generated the net surpluses. In broad terms, the majority of the accumulated net surpluses are forecast to build up assets.

Financial assets across SOE/CEs are forecast to increase by around $7.1 billion. The majority of the increase is within the Crown Financial Institutions (including ACC and EQC), which are accumulating financial assets for the purpose of meeting future obligations.

Comparison with Half Year Update

Operating balance

Figure 2.13 – Operating balance comparison
Figure 2.13 – Operating balance comparison
Source: The Treasury

Compared to the Half Year Update the operating balance is expected to be similar in 2006/07. However, there are a number of counteracting factors:

  • an increase in tax revenue primarily in corporate tax due to some one-off tax receipts
  • delays in spending (of which some has been transferred into 2007/08), and
  • non-cash write-offs of tax and fines receivables have resulted in a $1.2 billion increase in expenses.

Beyond the current year the operating balance is initially higher than the Half Year Update, however this trend reverses from 2009/10 (refer Table 2.12). Key drivers of this trend are:

  • increases to forecast nominal GDP have led to an increase in forecast tax revenue of about $1 billion in 2007/08 and 2008/09. The upward revision to tax forecasts in the last two years is much smaller
  • an increase in SOE/Crown entities surpluses of around $0.2 billion per annum (spread across a numbers of entities)
  • an increase in investment income primarily owing to a higher overall financial asset position
  • a reduction in benefit expenses forecast of approximately $0.1 billion per annum. Most of the reduction occurs in unemployment benefits as a result of expected improvements in labour market conditions, and
  • expenses are forecast to be higher than the Half Year Update, reflecting a higher Budget 2007 package than previously signalled in the 2007 Budget Policy Statement.
Table 2.12 - Operating balance reconciliation (explains changes to the operating balance since Half Year Update)
NEW GAAP
($ million) 2007
Forecast
2008
Forecast
2009
Forecast
2010
Forecast
2011
Forecast
Operating balance 2006 Half Year Update 6,260 6,071 5,197 5,826 5,979
Changes (revenue)
Tax revenue (forecasting) 461 967 766 570 580
Tax revenue (policy) (22) (516) (489) (330)
New revenue allocation 1,000 1,000 1,000
Investment income 263 125 123 113 105
Total revenue changes 724 1,070 1,373 1,194 1,355
Other changes
Welfare Benefit forecast changes 39 141 207 175 127
Other forecasting changes 36 (143) (85) (127) (130)
Expense transfers 367 (211) (56) (70) (119)
Top down expense adjustment 500
Increase in Budget 2007 and 2008 allowance 153 (667) (1,065) (1,547) (1,834)
Long term receivables write-off (1,199)
ACC insurance expenses (1,019) (254) (281) (353) (379)
Other SOE/CE movements 585 490 404 397 400
Transition to IFRS (243)
Other movements 124 (66) (125) (185) (33)
Total other changes (657) (710) (1,001) (1,710) (1,968)
Total changes 67 360 372 (516) (613)
Operating balance 2007 Budget Update 6,327 6,431 5,569 5,310 5,366

Source: The Treasury

Effect of Policy Changes on Tax Forecasts since the Half Year Update

$ million 2006/07
Forecast
2007/08
Forecast
2008/09
Forecast
2009/10
Forecast
2010/11
Forecast
Material policy changes
Reduction in company tax rate (60) (790) (735) (680)
Reduction in tax rate for savings vehicles (5) (50) (60) (65)
International tax review - CFC changes (13) (50) (50)
Inclusion of life insurance in the PIE rules (25) (25) (25) (25)
Charitable donations threshold (15) (25) (25)
SSCWT exemption extension (17) (18) (19) (20)
Indexation of personal income tax thresholds 85 395 425 535
Total (22) (516) (489) (330)

Sources: The Treasury, Inland Revenue

Reduction in company tax rate

With effect from the 2009 income year, the company income tax rate will decrease from 33% to 30%.

Reduction in tax rate for savings vehicles

In line with the reduction in the company income tax rate, the tax rate for widely-held savings vehicles, eg, superannuation funds and unit trusts, will also decrease from 33% to 30% and the maximum Portfolio Investment Entity (PIE) tax rate will be set at 30%.

International tax review – CFC changes

From 1 April 2009, active income of controlled foreign companies will be exempt from New Zealand income tax.

Inclusion of life insurance in the PIE rules

With effect from 1 October 2007, all life insurance savings products will be able to use the fair dividend rate method under the PIE regime. Unit-linked life products are to be allowed to obtain certain benefits of the PIE regime.

Charitable donations threshold

With effect from the 2009 income year, there will be no limit to the level of rebate that may be claimed in respect of charitable donations made by individuals and companies.

SSCWT exemption extension

The specified superannuation contribution withholding tax exemption for KiwiSaver has been extended to other superannuation schemes that have similar lock-in rules to KiwiSaver.

Indexation of personal income tax thresholds

The triennial indexation of personal income tax thresholds announced in the 2005 Budget will now not be proceeding.

Residual cash

Over the forecast period residual cash is similar to the Half Year Update. In the short term the cash position is stronger owing to the increase in tax revenue. The cash position weakens and similar to the Half Year Update moves into a cash deficit as the full impact of the forecast increases in the Budget 2007 operating and capital allowance kick in.

Page top