Overview of Specific Fiscal Risks

Specific fiscal risks can be positive or negative and can affect revenue or spending. The links between external events and spending are indirect because new policies that change spending and revenue usually require a decision by the Government and approval from Parliament. The approach taken in this chapter is to disclose those pending policy decisions and key areas of uncertainty that may have a material effect on the fiscal outlook. The specific fiscal risks are categorised into:

• Pending policy decisions affecting revenue: Changes to tax policy or ACC levies could reduce or increase government income.
• Pending policy decisions affecting expenses: Costs of policy proposals could increase or decrease depending on decisions taken and they are risks to the extent that they cannot be managed within baselines or budget allowances.
• Pending capital decisions: Capital investment decisions are risks to the extent that they cannot be managed within balance sheets or budget allowances.
• Matters dependent on external factors: The liability of the Government for costs is sometimes dependent on external factors such as the outcome of negotiations or international obligations.

Some key examples of the risks disclosed in this chapter are outlined below:

• government decisions relating to the recommendations of the Welfare Working Group and the redesign of business processes at Inland Revenue
• specific policies that may have flow-on costs that are not accounted for within allocated funding, such as early childhood education funding, but are not likely enough to include in the forecasts
• explicit guarantees that give assurance to the public and businesses about the Crown's planned response to specific events are recognised as risks; the largest current guarantee relates to the Extended Deposit Guarantees Scheme with a total value of $1.9 billion, and
• generic cross-Government risks such as the renegotiation of collective employment agreements could have material costs and flow-on effects to remuneration in other sectors.

General cost pressures, such as those associated with an ageing population, are not recognised as specific fiscal risks.

A number of new risks have been added since the Half Year Update. Key examples are:

• the amount and timing of cash proceeds from the planned partial sale of State-owned assets are uncertain
• possible policy decisions relating to Canterbury earthquakes, social housing and legal aid may affect expenses
• pending decisions relating to irrigation are likely to require capital investment, and
• negotiations such as those on an international climate change agreement are yet to settle on final costs, which are likely to be material.

The costs of individual natural disasters, and other major events, are not recognised as specific fiscal risks in advance as they usually occur infrequently and their timing cannot be predicted. Once a disaster does occur, a number of choices arise about how to respond. Specific risks are disclosed at this point based on the range of possible responses.

A number of earthquake-related risks have been added to this chapter. In addition to policy choices for the Government, recent events in Canterbury and Japan have placed pressure on private sector insurers. As a result, the cost of insurance premiums, most notably for EQC's reinsurance, could increase over the next five years with potential flow-on effects to the Crown. This is not yet certain enough to be a risk but could be recognised in the future.

The final part of the chapter contains a current list of contingent liabilities, which are likely costs that the Crown will have to face if a particular event occurs. Typically, contingent liabilities consist of guarantees and indemnities, legal disputes and claims on uncalled capital. The largest quantified contingent liabilities are to international financial organisations and mostly relate to uncalled capital and promissory notes.