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Budget 2017 Home Page Budget Economic and Fiscal Update 2017

Residual Cash and Net Core Crown Debt[9]

Operating cash flows improve over time...

Net operating cash flows are forecast to be in surplus across the forecast period, rising in a similar trend to the OBEGAL forecast. By 2020/21, net operating cash flows are forecast to be $9.1 billion. Over the forecast period the Government is expected to generate cash flows from core Crown operations of $30.5 billion.

The increasing operating cash flows largely represent growth in tax receipts exceeding the growth in operating payments.

...outpacing capital spending near the end of the forecast period…

While operating cash flows are positive across the forecasts, capital expenditure is forecast to exceed operating cash flows until 2019/20, when core Crown residual cash returns to surplus (Figure 2.16).

Figure 2.16 - Core Crown residual cash
Figure 2.16 - Core Crown residual cash.
Source: The Treasury

Core Crown residual cash is broadly neutral over the forecast period, with cash deficits in the next two years mostly offset by cash surpluses at the end of the forecast period.

… leading to a decline in net core Crown debt...

Net core Crown debt as a share of nominal GDP is forecast to decrease, from 24.4% in 2015/16 (Figure 2.17) to 19.3% by 2020/21.

Figure 2.17 - Net core Crown debt
Source: The Treasury

In dollar terms, net core Crown debt is forecast to increase for the first three years as cash flows from operating activities are not expected to be sufficient to meet capital spending before starting to decline once residual cash returns to surplus. Net debt is forecast to be $62.8 billion in 2020/21.

The Government is aiming to reduce net debt to between 10% and 15% of GDP by 2025, after the current target of 20% of GDP by 2020 has been achieved.

...and gross debt begins to decline after 2016/17

Gross debt is expected to peak at $88.6 billion in 2016/17. Forecast maturities are then expected to exceed new debt being issued. Gross debt is forecast to be $78.9 billion in 2020/21 which is equivalent to 24.3% of nominal GDP (Figure 2.18).

Figure 2.18 - Gross debt
Figure 2.18 - Gross debt.
Source: The Treasury

The bond programme[10] is expected to raise funds of $34.0 billion over the forecast period, while $42.4 billion of existing debt will be repaid, providing net repayments of $8.4 billion (Table 2.10).

The issuance profile is relatively flat in order to reduce year-to-year volatility of bond programmes and ensure consistency of supply over this time.

In future the Government intends to maintain the amount of bonds issued at not less than 20% of GDP over time. The Fiscal Strategy Report (FSR) contains further information on the gross debt objective.

Table 2.10 - Net increase in government bonds
Year ending 30 June
Face value of government bonds issued (market) 8.0 7.0 7.0 7.0 6.0 35.0
Cash proceeds from government bond issue            
Cash proceeds from issue of market bonds 8.0 6.9 6.8 6.5 5.8 34.0
Repayment of market bonds (5.1) (11.6) (6.5) (7.3) (11.1) (41.6)
Net proceeds from market bonds 2.9 (4.7) 0.3 (0.8) (5.3) (7.6)
Repayment of non-market bonds (0.8) - (0.8)
Net repayment of non-market bonds (0.8) - (0.8)
Net cash proceeds from bond issuance 2.1 (4.7) 0.3 (0.8) (5.3) (8.4)

Source: The Treasury

Why net debt increases even when the Government has an operating surplus

OBEGAL surpluses are forecast across the forecast period. However, net core Crown debt is not forecast to reduce in nominal terms until 2019/20 (although as a percentage of GDP net debt does reduce). To explain why net core Crown debt is forecast to rise over the next few years Table 2.11 below illustrates how the Crown's OBEGAL impacts on the Crown's cash requirements and ultimately, net core Crown debt.

Core Crown taxation revenue combined with other core Crown revenue fund core Crown expenses, along with forecast surpluses and deficits of SOEs and CEs, resulting in a total OBEGAL surplus or deficit.

The surpluses and deficits of SOEs, Crown Entities and the NZS Fund are not available for the Government to allocate, and some items do not impact cash (eg, depreciation expense). Once these are removed, the core Crown operating cash flows are used to purchase assets, make advances (eg, student loans) or invest in entities such as NZTA to support their capital programmes.

Where the capital outflow exceeds operating cash flows (residual cash deficit), the Crown must increase debt to fund the shortfall. Where there is a residual cash surplus (ie, capital outflows are less than operating cash flows) the Crown reduces net core Crown debt.

Net core Crown cash flows from operations are forecast to be positive across the forecast period, reaching $9.1 billion by 2020/21. The increase in capital spending over the next few years results in net core Crown debt increasing until operating cash flows exceed capital spending in 2019/20.

Table 2.11 - Reconciliation between OBEGAL and net core Crown debt
Year ending 30 June
Core Crown revenue 76.1 80.8 83.8 87.5 92.5 96.8
Core Crown expenses (73.9) (77.5) (80.5) (83.5) (86.2) (89.2)
Net surpluses/(deficits) of SOEs and CEs (0.4) (1.7) (0.4) 0.1 (0.2) (0.4)
Total Crown OBEGAL 1.8 1.6 2.9 4.1 6.1 7.2
Net retained surpluses of SOEs, CEs and NZS Fund 0.3 2.2 0.4 (0.1) 0.2 0.4
Non-cash items and working capital movements 1.2 1.2 0.9 0.7 1.2 1.5
Net core Crown cash flow from operations 3.3 5.0 4.2 4.7 7.5 9.1
Net purchase of physical assets (2.0) (2.7) (3.2) (2.4) (2.0) (1.6)
Advances and capital injections (2.6) (2.1) (3.2) (2.8) (2.4) (1.9)
Contribution to NZS Fund - (2.2)
Forecast for future new capital spending (0.2) (0.4) (1.3) (1.6) (2.0)
Top-down capital adjustment - 0.1 0.8 0.2 0.2
Net core Crown capital cash flows (4.6) (4.9) (6.0) (6.3) (5.8) (7.7)
Core Crown residual cash (deficit)/surplus (1.3) 0.1 (1.8) (1.6) 1.7 1.4
Opening net core Crown debt 60.6 61.9 62.3 64.1 65.7 64.2
Core Crown residual cash deficit/(surplus) 1.3 (0.1) 1.8 1.6 (1.7) (1.4)
Valuation changes in financial instruments - 0.5 - - 0.2 -
Closing net core Crown debt 61.9 62.3 64.1 65.7 64.2 62.8
As a percentage of GDP 24.4% 23.2% 22.8% 22.1% 20.6% 19.3%

Source: The Treasury


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