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Budget 2010 Home Page Budget Economic and Fiscal Update 2010

Statement of Specific Fiscal Risks

ACC - Levies and Non-Earners' Account (new, unquantified risk)

Changes in tax settings and ACC's financial performance affect the Crown's levy income and liability for claims. The lag between half-yearly liability valuation and annual decisions on levies means that future levy rates may differ from current levels, with either a positive or negative impact on revenue.

Broadcasting - Digital Switchover (new, unquantified risk)

The Government is planning to announce a date for digital switchover (DSO) when take-up of digital TV reaches 75% or 2012, whichever is the earlier. Depending on the date chosen for DSO, and the level of any direct support that the Government chooses to provide to assist smooth transition and thereby ensure that maximum potential economic benefit is realised, there may be a negative impact on the operating balance.

Climate Change - ETS and International Climate Change Obligations (unchanged, unquantified risk)

There is uncertainty in the level of fiscal impact associated with the Kyoto obligation over the 2008-2012 first commitment period. The net impact of variables including carbon prices, levels of net emissions, the uptake of post-1989 foresters and allocation levels to emitters are highly uncertain and could change the Government's costs significantly. A review of the Emissions Trading Scheme (ETS) in 2011 may also have fiscal implications. The Government may need to purchase emission units to meet its obligations under the Climate Change Response Act 2002 and the Kyoto protocol, with a corresponding impact on net debt.

After the first commitment period, no rights or obligations are forecast in the Government's accounts for any post-2012 international climate change agreement, given the Government has yet to ratify any such agreement and the high levels of uncertainty around its potential nature and size. Also, the effect of the ETS, which transfers the impact of the world price of carbon through the economy, will mitigate the fiscal impact of such an agreement. Any agreement entered into will need to be recognised at the time, alongside forecast ETS revenues and expenses.

Climate Change - Finance for Developing Countries (new, unquantified risk)

There is an international expectation that developed countries, including New Zealand, contribute finance to developing countries to support adaptation and mitigation. Globally, contributions are likely to be in the order of tens to hundreds of US billions of dollars per year from this year onward. Following the Copenhagen climate change negotiations in 2009, New Zealand associated with the Copenhagen Accord. In the Accord, developing countries committed to contribute finance to developing countries to support mitigation and adaptation, collectively approaching US$30 billion over 2010-2012 and US$100 billion per annum by 2020. New Zealand's contribution as a portion of this finance is currently uncertain.

Communications - Broadband Investment (changed, quantified risk)

The Government has committed to spend $1.5 billion on a new broadband network delivering “ultra fast” broadband services. Of this amount, $290 million has been appropriated through Budget 2009 and $258 million through Budget 2010. The timing and amount of further funding has not yet been determined.

Corrections - Community Probation and Psychological Services (changed, quantified risk)

The 2009-2017 Criminal Justice Forecast predicts a significant increase in the number of sentences and orders served in the community over the forecast period. The Department of Corrections estimates that this would require an additional 497 Probation Officers, Programme Facilitators and Psychologists over the forecast period based on current levels of service delivery. This size of this risk has decreased since the last Economic and Fiscal Update because the Department is able to absorb part of the increase within baselines. The Department now estimates that it will require an additional $30 million operating by 2013/14 and additional capital funding of $24 million.

Corrections - Prison Construction (changed, quantified risk)

The Government is considering options to address forecast growth in the prison population. Under current policy settings, the Department of Corrections faces prison capacity demands over the next 10 years. The Department has developed a plan to respond to this demand by increasing prison capacity and replacing capacity that is at the end of its life. The first stage of this plan (a new prison at Wiri and expansion of Mt Eden Prison) received funding in Budget 2010. If the Government chooses to fund the remainder of this plan, it would cost up to an additional $412 million capital over the next 10 years and $63 million operating per annum by 2018/19. These figures are subject to change depending on the procurement methods chosen by the Government.

Defence Force - Defence Review (unchanged, unquantified risk)

The Government has approved terms of reference for a Defence Review and subsequent Defence White Paper. This process is expected to be completed by 30 September 2010. Included in the Defence Review is an examination of financial management procedures to meet the long-term defence funding requirements. The Defence Review is likely to present a range of options with different funding implications.

Defence Force - Future Operationally Deployed Forces Activity (unchanged, quantified risk)

There are currently over 400 New Zealand Defence Force personnel deployed overseas on peace-keeping and United Nations missions. Maintaining existing deployment levels would result in an increased annual operating balance impact of some $30 million from 2011/12 subject to any decisions to change existing deployments. The forthcoming White Paper on Defence expected to be completed by 30 September 2010 will consider future funding requirements for a range of operational commitments in the context of Government's wider policy priorities and fiscal position.

Defence Force - Sale of Skyhawks and Aermacchi Trainers (unchanged, quantified risk)

New Zealand's application to sell the former Air Combat Force aircraft has been approved by the US Congress and now depends on the successful conclusion of commercial negotiations. Should the sale proceed, at a contract value of US$110 million, the net proceeds from the sale are expected to be around NZ$130 million.

Economic Development - Large Budget Screen Production Fund (changed, unquantified risk)

The Large Budget Screen Production Fund is a fund to assist film production companies. The appropriation is set at $36 million, however the Fund is a demand-driven programme and actual costs are dependent upon the number of productions. In any given year, the number of productions underway can vary and associated costs can vary.

Economic Development - Venture Investment Fund Underwrite (new, quantified risk)

The Government has agreed in principle to provide a four-year $40 million underwrite to the New Zealand Venture Investment Fund (NZVIF) to allow NZVIF to continue to engage with prospective venture capital fund managers. Approval of the underwrite is subject to further advice from officials.

Education - Broadband Investment: Schools (unchanged, quantified risk)

Government has signalled an investment of $150 million into Vote Communications to support the introduction of ultra-fast broadband into schools. The capital cost of upgrading school internal networks for all state and state-integrated schools has been estimated at $235 million. Further work is being undertaken to refine this cost in the coming year.

Education - School Operational Grants (unchanged, unquantified risk)

The Government has historically increased school operating grants in each Budget. Any funding for school operations grants would depend on the circumstances and the ability of the proposal to be funded within existing baselines.

Education - Additional Funding for Defective School Buildings (unchanged, unquantified risk)

As in other areas of the building sector, the school property portfolio has a portion of the building stock built between 1995 and 2005, which is subject to the “leaky buildings” (defective building) issues as a result of poor design, inappropriate materials, poor workmanship and deficient building project oversight.

Education - Additional Funding for School Property (changed, unquantified risk)

The Ministry of Education advises an additional $154 million may be required for new schools over the next three financial years to meet demographic changes. The Ministry also advises that there is a risk of further increases around the annual property portfolio revaluation which will require increased depreciation funding.

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