Core Crown

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

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.

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

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

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.

Source: The Treasury

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.