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Key Trends

The OBERAC is expected to drop before rebounding towards the end of the forecast horizon…

The OBERAC is forecast to fall from $5.9 billion (3.7% of GDP) in the current year to $3.4 billion (1.9% of GDP) by 2008/09, before rising to $5.1 billion (2.7% of GDP) by 2009/10. However, this is still sufficient to meet the requirements for contributions to the NZS Fund and progress towards the debt objective of 20% of GDP by 2015.

Revenues are forecast to exceed operating expenses…

Over the forecast horizon revenue is expected to be more than sufficient to meet operating expenses (salaries, benefit payments, depreciation costs, etc).

Figure 2.1 – Total Crown revenue, expenses and operating balance
Figure 2.1 - Total Crown revenue, expenses and operating balance.
Source: The Treasury

In recent years core Crown revenue growth has exceeded expense growth, largely consistent with strong economic growth. This trend is expected to reverse over the initial stage of the forecast period. This reflects:

  • the fair value measurement of student loans in 2005/06 and an extension to the Working for Families package from 2006/07
  • the impact of the forecast economic cycle on tax revenue. Tax revenue growth decreases due to an expected slowdown in economic growth in the early part of the forecasts, before rebounding by 2009/10.
Figure 2.2 – Core Crown revenue and expense growth (excluding GSF valuation)
Figure 2.2 – Core Crown revenue and expense growth (excluding GSF valuation).
Source: The Treasury

… but not by enough to finance all investments …

In line with the Government’s fiscal objectives the OBERAC has been applied to fund the Government’s investments. The existing fiscal strategy is to strengthen public finances to prepare for future fiscal costs associated with an ageing population. Over the forecast period total assets are expected to increase by around $29.4 billion.

Figure 2.3 – Core Crown investments on a year-by- year basis
Figure 2.3 - Core Crown investments on a year-by-year basis.
Source: The Treasury

The OBERAC is not fully available to finance the capital programme. This is because some components of the OBERAC are non-cash (ie, depreciation) or retained by entities within the Crown (ie, SOE/Crown entity surpluses and NZS Fund returns) for the purpose of achieving their long-term objectives. Adjusting for these items gives the core Crown operating cash flows. Figure 2.3 shows how these cash flows are applied across the forecast years.

As outlined in Table 2.2 below, the cumulative operating balances are expected to be in surplus by a total of $24 billion over the years from 2005/06 to 2009/10. Adjusting for returns retained by entities within the Crown ($13.4 billion) and non-cash items ($9.9 billion) gives a cash flow from operations which generates around $20.5 billion over the forecast horizon.

Table 2.2 – Impact of Crown operating surpluses on the balance sheet from 2005/06 to 2009/10 inclusive

Core Crown investing activity - balance sheet growth.

Source: The Treasury

This will be invested primarily in NZS Fund contributions of $12.6 billion, purchases of physical assets of $8.7 billion (for example, schools and defence equipment), advances of $4.8 billion (mainly student loans and refinancing existing private sector debt of the health and housing sectors), injections into Crown entities for hospitals and housing of $1.3 billion and the purchase of foreign exchange reserves of $1.2 billion.

There is a residual financing requirement of around $8.1 billion, which will be partially met by reducing the holdings of marketable securities and deposits which have accumulated from 2003/04 and 2004/05, and by raising some debt.

… while gross debt as a percentage of GDP slowly reduces over the forecast period

As a percentage of GDP, gross debt is expected to fall from 23.2% in 2004/05 to 19.3% by 2009/10. In nominal terms, gross debt is forecast to fall to $33 billion by 2006/07 and then rise to $36.2 billion by the end of the forecast horizon.

Figure 2.4 – Gross sovereign-issued debt (% of GDP and $ million)
Figure 2.4 – Gross sovereign-issued debt (% of GDP and $ million).
Source: The Treasury

The initial decrease in debt in nominal terms reflects residual cash from the strong results in 2003/04 and 2004/05. Gross debt is then expected to slowly rise, reflecting the fact that capital spending will be greater than the funding available due to the OBERAC.

The Government’s 2005/06 bond programme has been increased to $2.7 billion, compared with $2.2 billion at the Pre-election Update. There have also been increases to the 2006/07, 2007/08 and 2008/09 domestic bond programmes of around $1 billion in each of those years. The changes are attributable to the lower OBERAC’s outlined earlier flowing through to higher financing requirements over the forecast horizon, which with this Update now includes 2009/10. The Government’s approach is to smooth the size of the bond programme from year to year to provide a steady supply of new bonds to the market, with any over-funding in a year being used to pre-fund part of future years’ borrowing requirements.

Net core Crown debt is expected to rise over the forecast horizon

Net core Crown debt[3] in both nominal terms and as a percentage of GDP is forecast to increase due to the financing requirement outlined above.

Figure 2.5 – Net core Crown debt (% of GDP and $ million) and % of GDP including assets of NZS Fund
Figure 2.5 - Net core Crown debt (% of GDP and $ million and % of GDP including assets of NZS Fund.
Source: The Treasury

Net core Crown debt with the financial assets of the NZS Fund is forecast to be below zero by 2006/07.


  • [3]Net core Crown debt excludes the assets of the NZS Fund and GSF.
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