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Budget 2014 Home Page Budget Economic and Fiscal Update 2014

Operating Balance

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

The operating balance before gains and losses (OBEGAL) is expected to return to surplus in 2014/15 with a surplus of $0.4 billion forecast. Beyond 2014/15 surpluses are expected to increase by between $0.9 billion and $1.1 billion per annum.

Figure 2.9 shows the composition of OBEGAL from the different segments of the Government.

Figure 2.9 - Components of OBEGAL by segment
Figure 2.9 - Components of OBEGAL by segment.
Source:  The Treasury

The core Crown segment moves from a forecast OBEGAL deficit of $3.8 billion in 2013/14 to a forecast $3.2 billion surplus by 2017/18, largely reflecting growth in tax revenue.

The State-owned Enterprise (SOE) and Crown entity (CE) segments together contribute $2.1 billion to the OBEGAL surplus in 2013/14, halving to $1.0 billion by the end of the forecast period largely reflecting reductions in ACC levy rates announced in Budget 2013. The SOE segment's contribution stays relatively static across the forecast.

Surpluses are achieved in 2014/15 and continue to increase over the forecast period to a level that translates to being sufficient to fund the Government's capital spending as well as a reduction of debt. Maintaining a level of fiscal restraint while the economy grows will allow surpluses to be built up. These surpluses are important to enable a buffer to be built in the case of future shocks such as a global financial crisis or another large natural disaster.

...although post-2014/15 OBEGAL is lower compared to previous forecasts

OBEGAL is lower in all years with the exception of 2014/15. While lower than what had previously been forecast, nevertheless by the end of the forecast period an OBEGAL surplus of $3.5 billion is expected (Table 2.7).

Table 2.7 - Changes in OBEGAL since the Half Year Update
Year ending 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
OBEGAL - 2013 Half Year Update (2.3) 0.1 1.7 3.1 5.6
Changes in forecasts:          
                Tax revenue (0.6) 0.1 (0.1) (0.2) (0.3)
                Budget 2014 package 0.1 0.1 - (0.1) (0.2)
                Increase in future budget allowances - - (0.5) (1.0) (1.5)
                Social assistance expenses - (0.1) 0.1 0.2 0.1
                ACC forecasts 0.1 - 0.1 0.2 0.3
                EQC forecasts 0.1 0.2 0.1 - -
                Net finance costs (0.2) - - (0.1) (0.2)
                Other changes 0.4 - (0.1) 0.3 (0.3)
Total changes since the Half Year Update (0.1) 0.3 (0.4) (0.7) (2.1)
OBEGAL - 2014 Budget Update (2.4) 0.4 1.3 2.4 3.5

Source: The Treasury

Major changes include:

  • Tax revenue is slightly weaker than the Half Year Update (refer page 25).
  • The Budget 2014 package has a positive impact in the first two years as spending is rephased to later years. The Government has made a number of decisions in Budget 2014 to manage the fiscal impact of spending on the 2014/15 year.
  • An increase in new operating allowances from Budget 2015 ($1.5 billion increasing by 2% annually per Budget thereafter) reduces OBEGAL in the later years.
  • Social assistance expenses, while higher than previously forecast in 2014/15, are expected to be less than previously forecast largely as a result of the declining number of benefit recipients.
  • The positive ACC result largely reflects updated assumptions on the 2015/16 proposed reductions in the Work Account levy (now less than expected). In addition, a reduction in insurance claim expenses is expected, reflecting lower rates of growth in the cost of claims.
  • Earthquake Commission (EQC) results are more positive owing to lower forecast insurance expenses after an updated valuation of EQC's insurance liabilities at 31 December 2013.
  • Finance costs have increased compared to the Half Year Update largely as a result of rising interest costs and higher nominal net core Crown debt than previously forecast.

Operating Balance Indicators

In addition to OBEGAL and the operating balance (both of which are total Crown indicators), other operating indicators are useful in measuring different aspects of performance.

Cyclically Adjusted Balance (CAB)

The underlying nature of OBEGAL can be seen using CAB. This measure adjusts for the state of the economic cycle and significant one-off expenses. Figure 2.10 shows CAB tracking close to OBEGAL in recent years, indicating that the operating deficits between 2009 and 2013 have been largely structural. The projected size of the economy reduced during the recession, implying a smaller tax base while, in contrast, expenses continued to grow.

Government Financial Statistics (GFS)[3]

The net operating balance uses the framework developed by the International Monetary Fund called Government Financial Statistics and is specifically designed for government reporting. It is therefore a useful measure to compare with other countries. The net operating balance represents revenue and expenses of the core Crown (excluding the Reserve Bank) and CEs, and therefore excludes SOEs. It also excludes a wider range of valuation movements than OBEGAL, such as impairments and write-offs.

Table 2.8 - Operating balance indicators
Year ending 30 June
% of GDP
2013
Actual
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
OBEGAL (2.1) (1.1) 0.2 0.5 0.9 1.3
Operating balance 3.2 1.3 1.3 1.6 2.0 2.5
Cyclically-adjusted balance (CAB) (1.5) (1.0) (0.2) 0.2 0.8 1.2
Net operating balance (GFS) (0.5) 0.2 1.3 1.5 1.8 2.1

Source: The Treasury

Figure 2.10 - Operating balance indicators
Figure 2.10 - Operating balance indicators.
Source:  The Treasury, IMF (GFS 2005-2006 years, GFS data unavailable for 2004)

Notes

  • [3]For more details of both CAB and GFS, see the Additional Information document on the Treasury website www.treasury.govt.nz
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