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Budget 2007 Home Page Half Year Economic & Fiscal Update 2007

Key Trends (continued)

… which are met by borrowings …

Figure 2.7 – GSID (excluding Settlement Cash)
Figure 2.7 – GSID (excluding Settlement Cash).
Source:  The Treasury

Gross sovereign issued debt (GSID) (excluding Settlement Cash) is forecast to increase by around $2.3 billion from 2006/07 to 2011/12, primarily to finance the forecast cash shortfall of $2.6 billion. As a percentage of GDP, GSID (excluding Settlement Cash) is expected to fall from 18.5% to 15.6% over the same period.

The Government’s bond programme is forecast to be around $2.5 billion per annum, amounting to $12.5 billion of new borrowings over the forecast period. After meeting the cash shortfall the residual new borrowing replaces maturing debt.

By increasing borrowings to meet the cash shortfall, financial assets (around $6.5 billion) built up over recent years from strong cash outturns are left intact over the forecast period. These financial assets can be used to meet forecast cash shortfalls beyond 2012.

Why Settlement Cash is excluded from gross sovereign-issued debt

Settlement Cash is the amount of money deposited with the Reserve Bank by banks. It is a liquidity mechanism used to settle wholesale obligations between banks and provides the basis for settling most of the retail banking transactions that occur every working day between corporates and individuals.

Settlement Cash is technically a form of borrowing by the Reserve Bank, which is part of the core Crown. Unlike other core Crown borrowing, however, Settlement Cash represents a liability that is matched by a corresponding increase in financial assets.

Since early 2006, Settlement Cash has increased from $20 million to around $8 billion. This increase was a result of a review of the liquidity management arrangements available to banks. Given the increase in Settlement Cash is net debt neutral and the increase in borrowings does not arise out of any change in cash requirements of the Government, it is appropriate that fiscal policy “looks through” this increase.

The 2007 Fiscal Strategy Report (page 52) states that "the Government is effectively targeting a level of Gross Sovereign-Issued Debt (GSID) excluding the increase in debt on the Reserve Bank balance sheet as a result of the change in the liquidity management regime". As the Reserve Bank decided to fund $1.6 billion of the previously announced increase in its reserves from Settlement Cash rather than borrow from the NZ Debt Management Office, the amount to be excluded from GSID should be adjusted by this amount.

For these forecasts, the GSID excluding Reserve Bank Settlement Cash is:

  Year ended 30 June
$billion 2007
GSID (includes Settlement Cash) 36.8 39.6 39.3 38.1 40.9 39.5
Reserve Bank Settlement Cash 7.5 7.9 7.9 7.9 7.9 7.9
Reduced NZ DMO borrowing due to Settlement Cash 1.6 1.6 1.6 1.6 1.6 1.6
GSID excluding Settlement Cash 30.9 33.3 33.0 31.8 34.6 33.2
As a % of GDP 18.5 18.7 17.7 16.3 17.0 15.6

For forecast purposes the amount of Settlement Cash is held constant. In practice, Settlement Cash does fluctuate through time so the actual amount deducted from GSID will vary when actual results are reported.

... while financial assets increase ...

Figure 2.8 – Core Crown asset growth
Figure 2.8 – Core Crown asset growth.
Source:  The Treasury
 Figure 2.9 –  Net debt (% of GDP and $million) including financial assets of NZS Fund
Figure 2.9 – Net debt (% of GDP and $million) including financial assets of NZS Fund.
Source:  The Treasury

Financial assets (including NZS Fund) are forecast to increase by around $20.2 billion over the forecast period.

There are two main drivers of this increase:

  • Investment in the NZS Fund. In line with the fiscal strategy, a portion of the cash generated from the Government’s operations is set aside to make contributions to the NZS Fund. In addition, the NZS Fund financial assets by the reinvestment of its retained grow surpluses.
  • More advances are being made, primarily in the form of student loans. Student loans are not readily convertible into cash.


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