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Budget 2017 Home Page Budget Economic and Fiscal Update 2017

Specific Fiscal Risks by Portfolio

Internal Affairs

Fire Services Levy (Changed)

The Government has announced it will unify the Fire Services into Fire and Emergency New Zealand and signalled that this change will cost approximately $303 million which will be funded through a Crown contribution, a repayable capital loan and levy increases. The increase in levies required to meet the increase expenditure on Fire Services, and to contribute to repaying the repayable capital injection has been approved for the year 2017/18. Any future levy increases beyond 2017/18 will need to be approved by Cabinet and are not yet included in the fiscal forecasts.

Primary Industries

Investment in Water Infrastructure (Unchanged)

To date, a total of $183 million has been appropriated for the Crown-owned company, Crown Irrigation Investments Limited, to manage the Crown's investment in irrigation infrastructure. The Government will consider providing further capital up to $217 million in future budgets as schemes reach the “investment-ready” stage.

Revenue

Cash Held in Tax Pools (Unchanged)

Funds held in tax pools are recognised as a Crown asset. There is a risk that funds held in these pools, over and above a taxpayer's provisional tax liability, may be withdrawn by that taxpayer, resulting in a reduction in the Crown's available cash reserves.

Potential Tax Policy Changes (Unchanged)

Some of the items on the tax policy work programme could each have a significant positive impact on operating revenue: work on Base Erosion and Profit Shifting proposals including interest limitation rules, transfer pricing and permanent establishment avoidance, and the taxation of foreign hybrid instruments and entities. Some of the expected impact has been included in the fiscal forecasts but the impacts of the final policies may differ from the amounts included.

Student Loans (Unchanged)

The value of student loans is sensitive to assumptions such as the borrower's future income and general economic factors such as interest rates, unemployment levels, salary inflation and the CPI. As new lending occurs, an initial write-down to fair value will be made, and an expense will be incurred, reflecting the cost the Crown incurs in making an interest free loan and the risk that borrowers may not repay their loans. However, the assumptions made at the time of lending are volatile and are subject to change.

Transformation and Technology Renewal (Unchanged)

The Business Transformation programme agreed by Cabinet is reflected in forecasts. There are risks that the expected implementation costs, revenue gains and operating cost savings may differ from forecasts. This includes a risk that, during the transition between systems, Inland Revenue discovers historic procedural issues. In addition, the Government is considering possible policy changes affecting the way Inland Revenue manages its processes and data. Any changes to procedures or policy could materially impact the programme's cost, and the additional revenue collected.

Social Housing

Divestment and Development of Housing (Unchanged)

The forecasts include divestments and redevelopments of housing property as part of Housing New Zealand Corporation's (HNZC) asset management strategy. Proceeds from property divestments will be used to help fund investment in redeveloping and growing HNZC's stock. Market conditions impact on the proceeds of sale and the cost of acquisitions and development. Given these uncertainties, there is a risk that there will be variations from the fiscal forecasts.

Social Housing Reform (Unchanged)

The Government is progressing the Social Housing Reform Programme (SHRP). The SHRP aims to improve the housing and associated services provided to those in housing need, to build the social housing market and to fully recognise the costs of social housing. Specific Fiscal Risks associated with the SHRP are as follows:

  • Existing and additional social housing places may require funding above the current Income Related Rent Subsidy (IRRS) appropriation cap.
  • The development of a more diverse and competitive social housing market may adversely affect HNZC's financial position.
  • Proceeds from social housing transfers are likely to differ from book value.

Tamaki Regeneration Project (Unchanged)

Proceeds from housing sales in Tamaki over the next 10 to 15 years may be less than the forecasted loss on houses sold. Over this period 7,500 new houses are planned to be built in Tamaki in place of about 2,500 existing houses.

Transport

Auckland City Rail Link (Unchanged)

The Government has committed to fund 50% of the costs associated with the City Rail Link project, which is estimated to cost $3.4 billion. Based on this estimate, the Government's contribution to this project will be around $1.7 billion, of which the first $436 million has been appropriated. There is a risk that the timing and amount of the government contribution towards the project could be different from what is included in the forecasts.

Auckland Transport Alignment Plan (Unchanged)

The Government and Auckland Council released the final report for the Auckland Transport Alignment Project in August 2016. This report identified a funding gap of $4 billion over the next 30 years. The Government and Auckland Council are considering options to address this funding gap.

Rail Network Valuation Approach (New)

KiwiRail operates both freight and passenger transport services. The valuation approach for the assets used for these different activities is outlined in Budget 2017Additional Information- accounting policies.

The freight business of KiwiRail is predominantly commercially focused and therefore for financial reporting purposes assets relating to the freight business are fair valued on a net realisable value basis.

In order for the freight infrastructure to continue to be valued on this basis, KiwiRail needs to meet certain criteria set out in the Accounting Standards Framework. Consistent with prior years, there is a likelihood of continued Crown support and a risk that KiwiRail no longer meets the criteria for valuing freight infrastructure on a net realisable value basis and may need to change to a depreciated replacement cost basis.

The impact of this change would increase the value of assets by around $4 billion, with an estimated $1 billion to $2 billion impacting OBEGAL reflecting the reversal of previous impairments of freight infrastructure assets recorded through the Statement of Financial Performance.

Southern Transport Corridor Reinstatement (New)

There is risk that the costs of reinstating the South Island Transport Corridor (Picton-Christchurch) will cost more than what is currently included in the fiscal forecasts. In addition, a portion of the costs of the reinstatement currently classified as capital expenditure in the fiscal forecasts may be reclassified as operating expenditure, adversely impacting the operating balance (currently estimated to be up to $700 million, spread across a number of years). The classification between capital and operating expenditure has no impact on net core Crown debt.

Support for KiwiRail (Unchanged)

The Government in Budgets 2010 to 2017 supported KiwiRail Holdings Limited (KiwiRail) with an investment of around $2 billion in the New Zealand freight rail system. Further Crown investment into KiwiRail is likely to be required from 2019/20. A review of KiwiRail's structure and funding arrangements will be undertaken in 2017/18, to inform future funding decisions.

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