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

Indicators of the Government’s Fiscal Performance

This section aims to help readers better understand the Government’s fiscal position.

Each indicator in this fact sheet gives valid insights into the government’s historical, current and forecast fiscal position, but no one indicator gives a complete picture. Individual indicators do, however, come into greater or lesser focus as circumstances change.

When, for example, the New Zealand Government’s net worth was low and net and gross debt levels were high, much of the focus of government and public commentary at that time was on eliminating annual operating deficits and on the need to attain, and later to lock in, annual operating surpluses.

However, as net worth has risen, and gross and net debt levels have fallen, the Government in more recent years has increasingly focused on how to maintain debt levels around current levels and, accordingly, has given more focus to the Government’s annual cash balance.

Most of the indicators in this section may be useful regardless of the particular fiscal strategy being followed. In a few cases (such as the formulation of OBEGAL excluding NZS Fund revenue), the indicator is used to throw light on the impact of a particular strategy (in this case the build-up of financial assets in the NZS Fund).

Accounting Equations

Flow indicators (a worked example of how these flows interact is provided in the Fiscal Outlook chapter, see Table 2.2)

  1. Core Crown revenues – core crown expenses + net surplus of SOEs (ie, after dividends) and Crown entities + net gains and losses = Operating balance.
  2. Operating balance – net gains and losses = Operating balance before gains and losses (OBEGAL).
  3. OBEGAL – retained items (eg, net surplus of SOEs/CEs and revenues of the NZS Fund) – non-cash items (eg, depreciation) = Net core Crown cashflow from operations.
  4. Net core Crown cashflow from operations – net investing activities (eg, contributions to NZS Fund, purchases of assets, loans to others) = Residual cash.

Stock indicators

  1. Gross sovereign-issued debt (GSID) = debt issued by the core Crown.
  2. Core Crown net debt = gross sovereign-issued debt – core Crown’s financial assets.
  3. Net worth (NW) = Crown’s total assets – Crown’s total liabilities. (Operating balance (OB) in any year largely drives the change in Net worth.)

Ratio of Core Crown Revenue (excluding NZS Fund revenue) to GDP

Ratio of core Crown revenue (excluding NZS Fund revenue) to GDP = the amount of revenue the core Crown receives as a percentage of GDP. Core Crown revenue mostly consists of tax revenue collected by the Government, but also includes investment income, sales of goods and services, and other receipts. Tax revenue is an accrual measure of taxation (ie, it is a measure of tax due, regardless of whether or not it has actually been paid).

The revenue collected is used to meet the Government’s spending needs. It is important to look at this alongside expenses, operating balance and gross debt indicators for insights into the sustainability of current policy settings.

Ratio of Core Crown Revenue (excluding NZS Fund revenue) to GDP

Core Crown revenue (excluding NZS Fund revenue) to GDP is expected to be broadly stable at around 34% over the forecast period, while core Crown tax to GDP is expected to be remain relatively flat over the forecast period.

Ratio of Core Crown Expenses to GDP

Ratio of core Crown expenses to GDP = the day-to-day spending (on salaries, welfare benefit payments, running hospitals and schools, finance costs and maintaining national defence etc) that do not build physical assets for the Government. This is an accrual measure of expenses and includes items such as depreciation on physical assets.

This shows the day-to-day spending of the core Crown – ie, it excludes spending by SOEs and Crown entities – and highlights the size of Government in the economy and potential scope for crowding out the private sector.

The forecasts of operating expenses assume that the entire forecast operating allowance is allocated to spending.

By reducing gross debt, the Government has also reduced finance costs. However, in the years ahead, finance costs are likely to be fairly flat with gross debt forecast to be broadly stable.

Ratio of Core Crown Expenses to GDP

In the short-term core Crown expenses to GDP rise slightly before the trend stabilises as allocations for future Budgets are broadly consistent with forecast growth in the economy.

Operating Balance

Operating balance = revenues less expenses, plus net gains and losses.

The operating balance shows whether the government sector has generated enough revenues to cover its expenses in any given year.

This measure can be volatile from year to year owing to events outside of the Government’s direct control (such as changes in interest rates and revaluations etc); therefore, it is generally not used as a measure of the Government’s short-term fiscal stewardship.

Operating Balance

The Government has been running operating surpluses since the early 1990s. The operating balance was just over 7% of GDP in 2006 and is expected to remain above 2% of GDP over the forecast period.


OBEGAL = the operating balance before net gains and losses.

OBEGAL excluding NZS Fund revenue = OBEGAL less interest and dividend revenue earned by the NZS Fund.

By excluding net gains and losses the OBEGAL gives a more direct indication of the underlying stewardship of the Government.

The current Government wishes to retain the NZS Fund investment returns in the Fund. Therefore, to ensure the Government is meeting its fiscal objectives, the Government has stated that it will be focusing on the OBEGAL excluding NZS Fund revenue.


Residual Cash and Domestic Bond Programme

Residual cash = the level of money the Government has available to repay debt or, alternatively, needs to borrow in any given year. Residual cash is alternatively termed “Cash available/(shortfall to be funded)”.

Domestic bond programme = the amount of new government stock expected to be issued over the financial year.

The cash available measure includes capital investment and NZS Fund contributions; therefore, it is the flow contributing to changes in debt. This balance cannot be looked at independently from gross sovereign-issued debt.

The domestic bond programme raises term debt for the Government, the proceeds of which contribute to funding operating and investing activity, and the repayment of maturing debt. The programme tends to be different from the cash available figure in any given year as financing activity, such as the repayment of debt, needs to be considered.

Residual Cash and Domestic Bond Programme

The Government is currently moving from a period of having cash available to repay debt, to a need, in subsequent years, to generate cash through borrowing and reductions in marketable securities.

Crown Gross Debt

Total Crown gross debt = the total borrowings (both sovereign-guaranteed and non-sovereign guaranteed) of the total Crown.

Gross sovereign-issued debt = debt issued by the sovereign (ie, core Crown) and includes Government stock held by the NZS Fund, GSF, ACC or EQC for example.

Total gross debt and GSID are often expressed as a percentage of GDP to put the level of debt into perspective, in terms of a country’s ability to generate growth to repay the debt and/or income to service this debt.

Total gross debt represents the complete picture of whole-of-government obligations to external parties. However, debt issued by SOEs and Crown entities is not explicitly guaranteed by the Crown. The debt that is issued by the sovereign and guaranteed by the sovereign is in GSID. The Government’s long-term debt objective is formulated in terms of GSID.

A high ratio of debt to GDP can have an adverse impact on credit ratings and perceived sustainability of current policy settings. So as a general rule, a relatively low ratio is considered to be prudent. A low ratio of debt to GDP can also provide the Government with more flexibility in their accounts to respond to adverse shocks through increasing debt.

Crown Gross Debt

GSID has been steadily declining since the early 1990s and is expected to remain broadly stable around 20% of GDP in the forecast period.

Core Crown Financial Assets

Core Crown financial assets= the financial assets of the core Crown. These are either cash or shares (equity) or a right to receive a financial instrument, which can be converted to cash. The assets of the NZS Fund are becoming the dominant feature of the Crown’s financial assets. The NZS Fund is the Government’s means of building up assets to partially pre-fund future New Zealand Superannuation expenses. The Government’s contributions to the NZS Fund are calculated over a 40-year rolling horizon to ensure superannuation entitlements over the next 40 years can be met.

Established under the New Zealand Superannuation and Retirement Income Act 2001, the NZS Fund was created to partially provide for the future cost of New Zealand Superannuation, which is expected to almost double in cost due to population ageing.

The Government plans to allocate around $2 billion a year to the NZS Fund over the next 20 years. The NZS Fund’s mandate is to invest money in a way that maximises its returns, without undue risks.

As the cost of providing New Zealand Superannuation increases, future governments will draw on the NZS Fund to help smooth the impact of the cost of New Zealand Superannuation on their finances.

Core Crown Financial Assets

For the year ended June 2006, NZS Fund assets totalled $9.86 billion or around 6% of GDP. The NZS Fund is expected to grow to around $27 billion or 14% of GDP by the end of the forecast period.

Core Crown Net Debt

Core Crown net debt = borrowings (financial liabilities) less cash and bank balances, marketable securities and deposits, and advances (financial assets). Net debt excludes the assets of the NZS Fund and GSF.

By including financial assets, net debt can provide additional information about the sustainability of the Government’s accounts. Many international agencies believe the quantity of off setting financial assets is important when determining the credit-worthiness of a country. That is, if a country has a high ratio of financial assets to GDP, they are better able to justify a high ratio of debt to GDP.

However, as some financial assets are not very liquefiable (or easily converted into cash), it is important to view net debt alongside GSID.

Core Crown Net Debt

After declining steadily since the early 1990s, net debt is projected to consolidate in the years ahead at around 3% of GDP, rising slightly towards the end of the forecast period. If the assets of the NZS Fund are included, the Government’s net debt position is in a net financial asset position.

Net Worth

Net worth = assets less liabilities (also referred to as the Crown balance). The change in net worth in any given forecast year is largely driven by the operating balance.

Total Crown net worth is one indicator of the degree to which current government activities are sustainable. This indicator should be considered alongside the Crown’s debt position, as relatively high debt to GDP ratios may still be considered sustainable if the Crown has relatively high ratios of saleable or commercial assets to GDP.

Building up net worth is also consistent with preparing for population ageing.

Net Worth

Net worth is projected to continue to rise, moving from around 45% in 2006 to around 57% at the end of the forecast period.


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