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Fiscal Impacts

The earthquakes will have a significant impact on the Government's fiscal position. Operating spending and debt will be higher as a result of providing short-term income support and assistance, paying for reconstruction of infrastructure and repairing government-owned property, land remediation and Earthquake Commission (EQC) payments to households. Each of these areas is discussed in more detail below. The changed outlook for the economy will also affect tax revenue as noted earlier. The tax forecasts included in the Budget Update are based on an economic outlook that includes the impact of the earthquake on economic activity and therefore incomes and expenditure.

The current estimate of the total cost to the Crown is $8.8 billion, with the vast majority of this figure expected to occur within the 2010/11 to 2014/15 period. Around $5.5 billion of this cost impacts on the core Crown sector and $3.3 billion on the State-owned enterprise and Crown entity sector, mainly via the EQC. Only the core Crown element adds to core Crown net debt although total government net worth is reduced by the full amount. The direct impact of these expenses means net debt is about 3% of GDP higher by the end of the forecast period than it would be without the earthquakes.

Table 2.2 outlines the assumed timing of when the major spending hits the operating balance at both the core and total Crown levels. This timing reflects a combination of accounting rules about when events are recognised and our current best estimate of when decisions are likely to be made. To help manage the costs of the earthquakes a Canterbury Earthquake Recovery Fund of $5.5 billion has been set up. Around $2.3 billion of this fund has already been allocated.

Table 2.2 - Impact on operating expenses of earthquake costs (years ended June)
Accrual expenses  $million 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 Total
Local infrastructure 789 59 78 79 79 78 1162
State-owned assets (schools etc) 25 45 15       85
Welfare support and emergency response 457 52 6 6     521
AMI Insurance contingency 427 18 18 18 19   500
Yet to be allocated 1111 1492 234 166 165 71 3239
Total Canterbury Earthquake Recovery Fund 2809 1666 351 269 263 149 5507
EQC 3050           3050
ACC 181           181
Other SOE and CE costs 40           40
Total Crown 6080 1666 351 269 263 149 8778

Residential property

EQC has reinsurance for its costs above $1.5 billion, up to $4 billion for each of the two earthquakes. Given current information, the total cost to EQC of its share of the damage to residential property is forecast to be $3.1 billion. This forecast cost has increased the 2010/11 forecast total Crown operating deficit (by the $1.6 billion) from that in the Half Year Update, but has not impacted on core Crown net debt because EQC's assets and liabilities are not part of the core Crown. The impact on EQC and the National Disaster Fund (NDF) is discussed further in the Investment Statement Supplement.

Local infrastructure

The Government is committed to contributing 60% of the cost of repairing essential local infrastructure (water, storm water, sewerage systems and stop banks). A provision for around $0.8 billion in 2010/11 has been included in these forecasts based on current estimates of the amount of damage to underground systems.

The primary government contribution to repairing local roads comes from the National Land Transport Fund. The New Zealand Transport Agency (NZTA) assesses damage estimates and formulates a special funding assistance rate, which determines the split of central and local government funding for repair of local road infrastructure. The current Christchurch City Council estimate of total damage is $0.7 billion. However, it is too soon to know how much is eligible for funding from the National Land Transport Fund. Preliminary estimates from NZTA indicate that around $0.4 billion will be eligible, thus the forecasts apportion this over a number of years. The National Land Transport Fund contribution to local road costs may be absorbed using the provision for emergency work built into the National Land Transport Programme, or if this is exhausted, the costs will be absorbed by reprioritising projects within the National Land Transport Programme. In the event that the Government decides to assist the region to meet its share of roading costs, the additional costs will be met from the Crown contingency allowance discussed below.

Local roads and essential infrastructure repair costs are dependent on decisions around land remediation. The current local road estimates do not attempt to reflect any land remediation policy outcomes.

State-owned assets

The cost of repairing state highways is not expected to be significant and may be absorbed using the provision for emergency work built into the National Land Transport Programme, or if this is exhausted, the costs will be absorbed by reprioritising projects within the National Land Transport Programme.

Costs associated with repairing other government infrastructure, including schools, housing and health facility assets, are largely covered by insurance and no additional provision for these costs, other than for insurance excesses, has been factored into the forecasts.

Welfare Support and Emergency Response

The Government has provided other assistance for the community and the cost of these initiatives is estimated to be $0.5 billion, most of which occurs in 2010/11. This includes the immediate costs incurred during the state of national emergency and various support initiatives such as the Earthquake Employment Support package.

AMI Insurance

On 7 April the Government agreed to provide a back-up financial support package for AMI Insurance (AMI) to give policyholders certainty and to ensure an orderly rebuild of Christchurch. As a result, the Government has entered into a five-year arrangement to subscribe for $500 million in convertible called, but unpaid, preference shares in AMI.

The full extent of the costs faced by AMI for the Canterbury earthquakes will remain unclear for several months until AMI has completed a detailed assessment of claims. Even then, the actual cost will remain uncertain and dependent on factors such as the basis on which claims are settled, potential building cost inflation and the time taken to rebuild. Therefore, it is uncertain if AMI will require the government injection over the next five years, and if it is required, when it would be needed and how much it would require.

Given the significant uncertainties and the limited information available at this time, the forecasts incorporate a high level of caution and prudence. Therefore, the AMI support package is included in the fiscal forecast as follows:

  • Recognise a payable of $427 million to AMI in 2010/11 (being the value in today's dollars of a $500 million payment in 2014/15).
  • Forecast an expense of $427 million in 2010/11. This expense reflects a very cautious assumption that if funds were injected in 2014/15, the Government's investment would not be recouped on eventual exit.
  • Record an “interest” expense of $73 million over four years (which represents the difference between $427 million in today's dollars and the nominal payment of $500 million in 2014/15).
  • Forecast a payment of $500 million in 2014/15.

Given the high level of uncertainty around these estimates, a fiscal risk has been included in the Fiscal Risks chapter. It is possible some of the Government's investment could actually be recouped on exit, while it is also a possibility that the Government may have to commit to more than a $500 million support package if AMI's shortfall for claims payments, after exhausting its own resources, is greater than $500 million.

Unallocated

As noted in Table 2.2, the fiscal forecasts incorporate unallocated funds of $3.2 billion. The unallocated funds will be used for any additional costs flowing from current obligations or decisions, as well as for policy decisions that have not yet been made, such as temporary housing and any remediation of land damaged in the February earthquake.

Sources of funding in Budget 2011

Budget 2011 provides funding to meet these costs via the creation of the Canterbury Earthquake Recovery Fund of $5.5 billion. This represents the core Crown costs discussed above. Around $0.7 billion of funding has already been either charged against the Budget 2010 contingency or met from existing baselines and thus was built into the Half Year Economic and Fiscal Update (HYEFU) 2010. The remaining $4.8 billion represents a new addition to net debt as of Budget 2011.

Table 2.3 - Sources of funding for earthquake-related costs (years ended June)
Accrual expenses $million 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 Total
Absorbed by reprioritising within entities 84 123 94 79 79 78 537
Budget 2010 contingency 198 1 199
Budget 2011 2527 1542 257 190 184 71 4771
Total Canterbury Earthquake Recovery Fund 2809 1666 351 269 263 149 5507
EQC 3050 3050
ACC 181 181
Other Total Crown 40 40
Total Crown 6080 1666 351 269 263 149 8778

As noted above, the earthquake costs impact mainly on the 2010/11 and 2011/12 fiscal years. The timing of cash disbursements and hence the impact on net debt is somewhat different. The impact on net debt gives a better indication of the potential impact on economic activity, although it is still not precise. Figure 2.2 summarises the assumed cash profile of the above earthquake costs. This cash profile represents our current best estimate of likely timing of the impact on net debt, and has been factored into the macro and fiscal forecasts, including estimates of the fiscal impulse. Although the bulk of the increase in net debt will be in the form of standard New Zealand Government bonds, a proportion of the funding will be raised via the issuance of Canterbury Earthquake Kiwi Bonds.

Figure 2.2 – Expense and cash profile of earthquake costs
Figure 2.2 - Expense and cash profile of earthquake costs.
Source:  The Treasury
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