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Budget 2014 Home Page Budget Economic and Fiscal Update 2014

Total Crown Balance Sheet

Operating balance surpluses result in a stronger balance sheet...

Following on from the 2012/13 increase (the first increase in five years), net worth attributable to the Crown is forecast to grow steadily in nominal terms across the forecast period largely owing to forecast operating balance surpluses. Beyond 2014, net worth attributable to the Crown is expected to grow by $19.4 billion to stand at $89.5 billion by 2017/18. As a share of GDP this is 32.8%, still below the peak of 56.6% of GDP in 2007/08 as shown in Figure 2.14.

Figure 2.14 - Net worth attributable to the Crown
Figure 2.14 - Net worth attributable to the
Source:  The Treasury

...with assets increasing by $38 billion over the forecast period...

Total assets are forecast to grow by $37.6 billion over the forecast period, made up of additional investments in assets (both physical and financial) of $76.2 billion, partially offset by reductions (largely depreciation) of $38.6 billion.

The largest asset growth over the forecast period is in the financial assets portfolio (Figure 2.15). This growth reflects investments in Crown Financial Institutions (CFIs), with much of this growth recognised as gains in the Crown's operating balance.

Figure 2.15 - Total Crown assets
Figure 2.15 - Total Crown assets.
Source:  The Treasury

The commercial asset portfolio is expected to increase by $9.6 billion over the forecast period, with growth in Kiwibank mortgages comprising $8.0 billion of this increase, with the remainder from SOEs increasing their investment in physical assets.

Social assets (eg, schools, hospitals and social housing) are expected to increase by $13.3 billion by the end of the forecast period, primarily as a result of new capital spending. The Future Investment Fund contributes to the funding of these asset purchases, as detailed on page 41.

...and liabilities beginning to fall by the end of the forecast period

The Crown's liabilities are expected to increase by $12.5 billion (Figure 2.16) over the forecast period, largely driven by increased borrowing ($14.6 billion over the forecast period) (Figure 2.17) before beginning to fall in 2017/18. Borrowings are mostly held by the Treasury's Debt Management Office and the Reserve Bank, and are forecast to peak at $118.5 billion in 2016/17 before decreasing slightly to stand at $114.7 billion by 2017/18.

Figure 2.16 - Total Crown liabilities
Figure 2.16 - Total Crown liabilities.
Source:  The Treasury
Figure 2.17 - Total Crown borrowings
Figure 2.17 - Total Crown borrowings.
Source:  The Treasury

Borrowings in the financial portfolio increase by $4.9 billion over the forecast period to meet the Crown's cash deficits (refer to page 36 for discussion of the bond programme). The remainder of borrowing is in the commercial portfolio, of which two-thirds relates to Kiwibank deposits, which continue to grow in line with Kiwibank's mortgages.

Partially offsetting the growth in borrowings are reductions in liabilities as a result of settling the Crown's obligations related to the Canterbury earthquakes (around $9.4 billion at 30 June 2013). These are all expected to be settled by 2017/18.

The Crown's balance sheet remains sensitive to market movements...

Many of the assets and liabilities on the Crown's balance sheet are measured at “fair value” in order to disclose current estimates of what the Crown owns and owes. While the measurement at fair value is seen as the most appropriate value of these items, it can be volatile, resulting in fluctuations in the value of the assets and liabilities reflecting changes in the market and underlying assumptions.

Financial assets are the largest asset group on the Crown's balance sheet and have increased significantly in recent years. CFIs (eg, NZS Fund and ACC) hold investments to make financial returns, and those asset values are dependent on market prices, interest rates and exchange rates, which can all be volatile. For example, a 10% change in the New Zealand dollar exchange rate or share prices can impact the Crown's operating balance by $1 billion to $2 billion.

In addition, the Crown has a number of significant long-term liabilities (eg, ACC claims and GSF retirement liability) which are actuarially valued based on estimated future cash flows 50 years into the future. As part of the actuarial valuation, inflation rates are used to help estimate future cash flows, while discount rates are used to obtain the value of those future cash flows in today's dollars (their present value). Even small changes in these assumptions can have significant impacts on the valuation because the cash flows are so large and over such long periods.

...and judgements and estimates will also impact on the balance sheet...

Outside of market factors, valuations are subject to a number of judgements and estimates. In general, as time goes on, better information becomes available and initial estimates are updated to reflect current information. Some examples of this include: ACC rehabilitation costs, earthquake-related insurance liabilities, and student wage growth.

...while other risks still remain

In addition to those items on the balance sheet there are a number of liabilities (and assets) that may arise in the future but are not yet included in our forecasts, either because they are contingent on an uncertain future event occurring (eg, outcome of litigation) or the liability cannot be measured reliably. If these liabilities crystallise, there will be associated costs with a negative impact (or positive in the case of contingent assets) on the operating balance or net debt. Refer to page 76 for a list of the contingent liabilities that the Crown was exposed to at 31 March 2014. The Risks and Scenarios chapter also includes further discussion on risks to the Crown's balance sheet.

The Treasury recently released its 2014 Investment Statement, which further discusses the Crown's balance sheet. In particular, it provides information on the shape and health of the Crown's portfolio of assets and liabilities, as well as a discussion on balance sheet management, including financial risk management.

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