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Budget 2013 Home Page Budget Economic and Fiscal Update 2013

Operating Surplus

The Crown is forecast to return to surplus in 2014/15…

With the increase in tax revenue outstripping spending growth, the Crown's OBEGAL is forecast to return to surplus in 2014/15 at $75 million.

The outlook has improved since the Half Year Update particularly in relation to tax revenue, which has enabled the Government to signal reductions in ACC levy rates (refer to the box on the next page). As a result of the levy reductions, OBEGAL grows at a slower rate than forecast in the Half Year Update.

Figure 2.8 - Components of OBEGAL by sector
Figure 2.8 - Components of OBEGAL by sector.
Source: The Treasury

State-owned Enterprise (SOE) and Crown Entity (CE) sectors contribute $2.0 billion to the surplus in 2012/13 falling to $1.1 billion by the end of the forecasts. The fall is mainly owing to the reduction in ACC levy rates and forgone profits from the Government share offers (partially offset by reduced borrowing costs). Figure 2.8 shows the composition of OBEGAL from the different sectors of the Government.

The underlying nature of OBEGAL can be seen using the cyclically adjusted balance (CAB). This measure adjusts for the state of the economy and significant one-off expenses. Figure 2.9 shows that CAB has been close to OBEGAL in recent years, indicating that the recent operating deficits have been largely structural. The projected size of the economy reduced following the recession, implying a smaller tax base while, in contrast, expenses continued to grow. In these forecasts, tax is expected to grow faster than expenses, seeing CAB move to surplus in 2014/15.[6]

Figure 2.9 - OBEGAL and CAB
Figure 2.9 - OBEGAL and CAB.
Source: The Treasury

...while current strength in equity markets lifts the operating balance

When gains and losses are included, the total Crown operating balance is forecast to be in surplus this year, then declines next year before growing each subsequent year of the forecasts (Figure 2.10). The current year's surplus is a result of gains made by Crown financial institutions (CFIs), largely ACC and the NZS Fund, and reflects strong global equity returns (for example, by 31 March 2013 the New Zealand Superannuation Fund had made year-to-date gains of $3.8 billion, a return of 19.9%). While the current year reflects strong market growth, the forecast gains in future years assume a long-term rate of return, resulting in more subdued growth in these years. These gains play a part in increasing the Government's financial assets, and the Crown's net worth (discussed on page 37).

Figure 2.10 - Components of operating balance
Figure 2.10 - Components of operating balance.
Source: The Treasury

ACC Levy Reductions

As part of Budget 2013, the Government has signalled reductions in ACC levy rates of around $300 million in 2014/15 and $1.0 billion from 2015/16 onwards. When combined with the consequential impact on investment revenue and insurance expenses, the fiscal impact on OBEGAL of the levy reductions is expected to be approximately $0.4 billion in 2014/15, $1.5 billion in 2015/16 and $1.1 billion in 2016/17 (refer to Table 2.5).

The impact on specific levy rates has yet to be agreed; therefore, the fiscal forecasts include revenue and expense contingencies to reflect the expected fiscal impact of the reductions.

Investment revenue has been adjusted to reflect any consequential forgone investment returns from ACC's asset portfolio.

Insurance expenses have also increased in the forecasts to reflect the expected flow-on impacts on the valuation of the claims liability. An expense is required in order to rebalance the risk of meeting future claims with reduced revenue.

Table 2.5 - Fiscal impact of reducing ACC levies
Year ending 30 June
Decrease in levy revenue (0.3) (1.0) (1.0)
Forgone investment revenue (0.1)
Increase in insurance expenses 0.1 0.5
Impact on OBEGAL (0.4) (1.5) (1.1)

Source: The Treasury


  • [6]For more details, see the Additional Information on the Treasury website
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