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Budget 2007 Home Page Half Year Economic & Fiscal Update 2007

Key Trends (continued)

Revenue reduction contingency

Figure 2.2 – Profile of revenue reduction contingency
Figure 2.2 – Profile of revenue reduction contingency.
Source:  The Treasury

The fiscal forecasts include a revenue reduction contingency for changes to personal tax. The forecasts assume that the contingency of $1.5 billion is effective from 1 April 2009 – the exact shape and timing of any revenue reductions have yet to be determined. The contingency has a rising profile to reflect income growth. The contingency is disclosed separately in the forecast financial statements (refer page 115).

The fiscal forecasts also incorporate likely flow-on effects from reducing personal income tax. Increased economic activity resulting from increases in disposable income is expected to generate extra PAYE and GST tax revenue. In addition tax paid on benefits will be lower meaning there will be a reduction in gross benefit payments.

These impacts are built into the tax and benefit forecasts incorporated in the fiscal forecasts.

… and core Crown expenses grow faster …

Core Crown expenses are forecast to increase by around 1% of GDP between 2007/08 and 2011/12.

Figure 2.3 – Core Crown expenses as a % of GDP
Figure 2.3 – Core Crown expenses as a % of GDP.  
Source: The Treasury

The forecast growth in expenses largely arises from expense initiatives introduced in recent Budgets. A number of policy decisions made in previous Budgets have rising spending profiles to allow sufficient time for full implementation. The enhancement to the KiwiSaver initiative announced in Budget 2007 is one of the main drivers of this rising profile, at around $0.8 billion in 2007/08 rising to around $1.4 billion by 2011/12, which has been revised since the Budget Update based on forecast uptake.

In addition, the recently introduced Emissions Trading Scheme results in an increase in the expense base.

… as a result the OBEGAL declines …

Figure 2.4 – Operating balance before gains and losses (OBEGAL)
Figure 2.4 – Operating balance before gains and losses (OBEGAL).
Source:  The Treasury

The OBEGAL is forecast to be $6.6 billion (3.7% of GDP) in 2007/08. As the impact of the tax initiatives and recent spending decisions takes effect, the OBEGAL declines over the rest of the forecast period to $3.9 billion (1.8% of GDP) in 2011/12.

Figure 2.5 – Accumulated OBEGAL breakdown for the period 2007/08 to 2011/12
Figure 2.5 – Accumulated OBEGAL breakdown for the period 2007/08 to 2011/12.
Source:  The Treasury

Not all components of the OBEGAL expected over the forecast period are drawn upon by the Government to help fund its operations. For example, entities retain their surpluses for the purpose of achieving their long-term objectives, such as ACC building up financial assets to help meet its outstanding claims liability and SOEs investing in their capital base.

This leaves around two-thirds of the accumulated OBEGAL available to finance the Government’s investment activities, such as contributions to the NZS Fund and its general capital programme.

…and cash surpluses become deficits …

Figure 2.6 – Core Crown residual cash on a year-by-year basis
Figure 2.6 – Core Crown residual cash on a year-by-year basis.
Source:  The Treasury

The portion of the OBEGAL that is available to the Government translates into about $24.1 billion of cash over the forecast period.

This is sufficient to meet the Government’s required contributions to the NZS Fund of $11.4 billion. With the purchase of physical assets of $9.7 billion (for example, schools and defence equipment), advances of $4.4 billion (mainly student loans and refinancing debt of the health and housing sectors), injections into Crown entities for hospitals and housing of $1.1 billion, there is a residual financing requirement over the forecast period of around $2.6 billion.

Table 2.3 – Impact of Crown operating surpluses on the Statement of Financial Position from 2007/08 to 2011/12 inclusive
Table 2.3	– Impact of Crown operating surpluses on the Statement of Financial Position from 2007/08 to 2011/12 inclusive.
Source: The Treasury
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