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Budget 2006 Home Page Half Year Economic & Fiscal Update 2006

Comparison with Budget Update - continued

Table 2.15 – 2006 Half Year Update fiscal indicators
  Year ended 30 June
Fiscal indicators ($ million) 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Revenue            
Total revenue 76,581 74,977 76,688 79,051 82,818 86,489
Core Crown revenue 59,170 59,020 59,917 61,577 64,746 67,895
Tax revenue 51,973 51,708 53,344 55,596 58,512 61,225
Expenses            
Total Crown expenses 65,084 68,790 70,688 73,926 77,064 80,583
Core Crown expenses 49,900 53,963 55,577 58,159 60,554 63,479
Operating balance - Core Crown 9,270 5,057 4,340 3,418 4,192 4,416
Operating balance - Crown entities 1,593 1,013 1,079 1,124 963 950
Operating balance - SOEs 1,799 776 993 1,055 1,091 1,062
Dividend elimination (1,189) (586) (341) (400) (420) (449)
Operating balance 11,473 6,260 6,071 5,197 5,826 5,979
OBERAC 8,648 6,656 6,071 5,197 5,826 5,979
OBERAC (excluding net NZS Fund asset returns) 8,068 5,981 5,231 4,170 4,588 4,511
Cash available/(shortfall to be funded) 2,985 107 (691) (1,821) (978) (294)
Debt indicators            
Gross sovereign-issued debt 35,461 37,867 40,153 39,192 38,615 41,082
Total gross Crown debt 39,427 43,750 46,869 47,290 46,901 49,531
Net core Crown debt 7,745 6,382 5,923 7,187 7,697 7,525
Net core Crown debt with NZS Fund assets (2,116) (6,271) (9,703) (11,792) (14,979) (19,195)
Net worth 71,403 77,718 83,789 88,986 94,812 100,791
Domestic bond programme 2,375 2,456 2,517 2,476 2,472 2,465
Nominal GDP 157,332 162,667 170,633 179,817 188,764 198,068
Fiscal indicators as a % of GDP            
Revenue            
Total Crown revenue 48.7 46.1 44.9 44.0 43.9 43.7
Core Crown revenue 37.6 36.3 35.1 34.2 34.3 34.3
Tax revenue 33.0 31.8 31.3 30.9 31.0 30.9
Expenses            
Total Crown expenses 41.4 42.3 41.4 41.1 40.8 40.7
Core Crown expenses 31.7 33.2 32.6 32.3 32.1 32.0
Operating balance 7.3 3.8 3.6 2.9 3.1 3.0
OBERAC 5.5 4.1 3.6 2.9 3.1 3.0
OBERAC (excluding net NZS Fund asset returns) 5.1 3.7 3.1 2.3 2.4 2.3
Debt indicators            
Gross sovereign-issued debt 22.5 23.3 23.5 21.8 20.5 20.7
Total gross Crown debt 25.1 26.9 27.5 26.3 24.8 25.0
Net core Crown debt 4.9 3.9 3.5 4.0 4.1 3.8
Net core Crown debt with NZS Fund assets (1.3) (3.9) (5.7) (6.6) (7.9) (9.7)
Net worth 45.4 47.8 49.1 49.5 50.2 50.9
New Zealand Superannuation Fund            
Fund asset returns (after tax) 969 743 840 1,027 1,238 1,468
Fund contributions 2,337 2,049 2,133 2,326 2,459 2,576
Fund assets (year end) 9,861 12,653 15,626 18,979 22,676 26,720
% of GDP 6.3 7.8 9.2 10.6 12.0 13.5

Source: The Treasury

Table 2.16 – 2006 Budget Update fiscal indicators
  Year ended 30 June
Fiscal indicators 2006 2007 2008 2009 2010
($ million) Actual Forecast Forecast Forecast Forecast
Revenue          
Total revenue 76,581 72,611 74,842 77,560 82,716
Core Crown revenue 59,170 56,190 57,781 59,728 64,157
Tax revenue 51,973 50,669 52,109 53,637 57,709
Expenses          
Total expenses 65,084 66,976 70,632 74,132 77,437
Core Crown expenses 49,900 52,254 55,158 57,973 60,527
Operating balance - Core Crown 9,270 3,936 2,623 1,755 3,630
Operating balance - Crown entities 1,593 1,233 1,086 1,084 994
Operating balance - SOEs 1,799 1,111 1,079 1,195 1,258
Dividend elimination (1,189) (512) (445) (473) (470)
Total operating balance 11,473 5,768 4,343 3,561 5,412
OBERAC 8,648 5,768 4,343 3,561 5,412
OBERAC (excluding net NZS Fund asset returns) 8,068 5,093 3,495 2,517 4,147
Cash available/(shortfall to be funded) 2,985 (1,468) (2,110) (2,706) (1,101)
Debt indicators          
Gross sovereign-issued debt 35,461 35,013 37,082 36,973 36,348
Total gross Crown debt 39,427 38,388 41,412 41,367 40,113
Net core Crown debt 7,745 9,209 10,396 12,701 13,511
Net core Crown debt with NZS Fund assets (2,116) (3,530) (5,430) (6,634) (9,740)
Net worth 71,403 64,253 68,596 72,157 77,569
Domestic bond programme 2,375 2,438 2,484 2,472 2,394
Nominal GDP 156,933 160,013 169,104 178,305 187,584
Fiscal indicators as a % of GDP          
Revenue          
Total Crown revenue 48.8 45.4 44.3 43.5 44.1
Core Crown revenue 33.2 35.1 34.2 33.5 34.2
Tax revenue 33.1 31.7 30.8 30.1 30.8
Expenses          
Total Crown expenses 41.5 41.9 41.8 41.6 41.3
Core Crown expenses 31.8 32.7 32.6 32.5 32.3
Operating balance 7.3 3.6 2.6 2.0 2.9
OBERAC 5.5 3.6 2.6 2.0 2.9
OBERAC (excluding net NZS Fund asset returns) 4.9 3.2 2.1 1.4 2.2
Debt indicators          
Gross sovereign-issued debt 22.6 21.9 21.9 20.7 19.4
Total gross Crown debt 25.1 24.0 24.5 23.2 21.4
Net core Crown debt 4.9 5.8 6.1 7.1 7.2
Net core Crown debt with NZS Fund assets (1.3) (2.2) (3.2) (3.7) (5.2)
Net worth 45.5 40.2 40.6 40.5 41.4
New Zealand Superannuation Fund          
Fund asset returns (after tax) 969 675 848 1,044 1,265
Fund contributions 2,337 2,049 2,239 2,465 2,651
Fund assets (year end) 9,861 12,739 15,826 19,335 23,251
% of GDP 6.3 8.0 9.4 10.8 12.4

Source: The Treasury

New Zealand International Financial Reporting Standards (NZ IFRS)

This note outlines the process for adopting New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) for the Government reporting entity.

The Accounting Standards Review Board announced in December 2002 that reporting entities must adopt NZ IFRS for periods beginning after 1 January 2007, with earlier adoption optional. The Minister of Finance announced in 2003 that the Crown will first adopt NZ IFRS for its financial year beginning 1 July 2007.

Treasury is managing the adoption of NZ IFRS for the consolidated Financial Statements of the Government reporting entity. Individual entities included within the consolidated Financial Statements of the Government reporting entity are responsible for ensuring their own NZ IFRS preparedness. Treasury provides guidance to these entities and facilitates implementation on common issues.

The NZ IFRS adoption timetable requires collecting comparative NZ IFRS financial information throughout 2006/07. Forecasts in the 2007 Budget for 2007/08 and beyond will be prepared on an NZ IFRS basis as will interim financial statements prepared in the 2007/08 financial year. The first set of audited financial statements prepared under NZ IFRS will be for the year ending 30 June 2008.

Entities will start providing NZ IFRS information to Treasury from October 2006 onwards. The initial streams of information will relate to the opening balance sheet only. Subsequent information will capture monthly flows and, leading up to the 2007 Budget, forecast information on an NZ IFRS basis.

At this time, it is expected that impacts on reported results will arise from applying the insurance standard (NZ IFRS 4) to the ACC claims liability and recognition and measurement changes arising from the new financial instrument standards. These latter changes include recognising all financial derivatives in the financial statements and greater use of fair values.

Presentation changes are likely to include presenting the GSF liability net of related assets, as is required under NZ IAS 19. The components of financial income and financial expense will also be affected by NZ IFRS requirements, notably reporting of movements in derivatives and differing rules for disclosing foreign exchange gains/losses.

Draft NZ IFRS accounting policies for the Government reporting entity are available at www.treasury.govt.nz/nzifrs/. Noticeable changes to existing policies include those for financial instruments, with all financial instruments being reported initially at fair value, and impairment for goodwill.

The potential areas of impact from adoption of NZ IFRS may change materially as implementation unfolds.

Risks to fiscal forecasts

The fiscal forecasts were finalised on 8 December 2006 in accordance with the forecast accounting policies. There are certain risks around the forecast results. To assist in evaluating such risks, the following chapters should be read in conjunction with the fiscal forecasts:

  • Risks and Scenarios (Chapter 3) – The fiscal forecasts are based on the economic forecasts presented in Chapter 1 and any variation from the economic forecast will affect the fiscal forecasts, in particular tax revenue and benefit expenses. The Risks and Scenarios chapter discusses the effect on the forecasts under different circumstances.
  • Specific Fiscal Risks (Chapter 4) – The fiscal forecasts incorporate Government decisions up to 8 December 2006. The Specific Fiscal Risks chapter covers specific policy decisions that are under active consideration by the Government at the time of the finalisation of the forecasts.

In addition to the specific fiscal risks and the link to the economic forecasts, there are a number of forecasting issues explained below that may arise in future.

Tax forecasting risks

The tax forecasts prepared for this Half Year Update are based on current tax policy and on the macroeconomic central forecast. Sensitivities of tax revenue to changes in economic conditions are presented in the Risks and Scenarios chapter on page 69.

SOEs’ and Crown entities’ forecasts

The forecasts for large SOEs and Crown entities were provided in October 2006 based on their best assessments at that time.

Revaluation of property, plant and equipment

Crown accounting policy is to revalue certain classes of property, plant and equipment on a regular basis. In certain circumstances the valuation will be affected by foreign exchange rates, so any appreciation in the New Zealand dollar (from 30 June 2006) will adversely affect the current physical asset values included in the fiscal forecasts.

Discount rates

The GSF and ACC liabilities included in these forecasts have been valued as at 31 October and 30 September respectively. The liabilities are to be next valued for the 2007 Budget Update. Any change in discount rates will affect the presented fiscal forecast. For example, if the discount rate rises, the value of the liabilities will decrease.

Tertiary Education Institutes’ (TEIs’) accounting treatment

The forecast information presented in the 2006 Half Year Update combined TEIs on an equity accounting basis. This treatment has been under consideration by accounting standard setters. The Financial Reporting Standards Board (FRSB) has recently advised that the question of whether to consolidate autonomous and independent entities will be considered by delivering its deliberations of the International Accounting Standards Board (IASB) project on consolidation. The IASB plans to publish a discussion paper in 2007.

The combination method adopted in these forecasts is to equity account for the TEIs’ net surpluses and net investment (ie, TEI revenues, expenses, assets and liabilities are not included on a line-by-line basis). This is consistent with the treatment adopted in the 2006 Financial Statements of the Government.

The key indicators are unchanged as a result of the combination approach for TEIs (refer page 60 of the 30 June 2006 Financial Statements of the Government).

Value of Rail Infrastructure

The rail infrastructure (ie, the land, rail track and all the equipment needed to operate the rail network) is currently reported in the Financial Statements and Forecasts at a historic cost value. This is mainly represented by the $1 that the Crown paid Tranz Rail Ltd to repurchase the asset plus the amounts that have been spent on replacement since (and forecast to be spent).

This approach is permitted under generally accepted accounting practice, and was the only one possible until robust information on current values could be obtained. However, the information value in such as approach will diminish over time as increasingly substantial capital amounts for additional work are combined with the nominal amount for the purchase from Tranz Rail Ltd.

Usually, the Government values those assets for which a market value is not readily or reliably able to be determined by using a replacement cost approach. This would provide an estimate of the fair value of the land combined with the current gross replacement costs of the other assets (bridges, tunnels, tracks, level crossings etc.) less allowances for physical deterioration and optimisation for obsolescence and relevant surplus capacity. Such an approach has merit in that it provides information as to the likely cost and time period for maintaining (replacing) the asset. This approach is currently used for the state highway network.

ONTRACK has commissioned a valuation using the optimised depreciated replacement cost methodology to be applied from 1 July 2006. This valuation has not yet been assessed by the Treasury nor has it been audited by the Auditor General, and it has not been included in these forecasts.

It should be noted, however, that any valuation on this methodology will produce a significantly larger amount than the current historic valuation. Moreover, such an amount would not be realisable through a sale, nor through any other commercial transaction. Therefore the valuation will impact neither on the Government’s fiscal strategy, nor the main indicators used to assess the fiscal condition.

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