Fiscal sensitivities (continued)

Projection assumptions (continued)

Table 1.15 - Summary of fiscal assumptions for forecasts and projections

Forecast period (to 2015)

Projection period (2016-2025)

Government decisions

Operating allowance

Net $1.12 billion in 2011/12 (ie, the original $1.1 billion increased by 2%), growing by the rate of 2% per annum for subsequent Budgets.

Also based on annual increments of a 2011/12 base of $1.12 billion, grown at 2% per annum.

Capital allowance

$1.39 billion from Budget 2011 to 2014, allocated as follows over the forecast period (June year basis):


$billion	2011	2012	2013	2014	2015
Contingency	0.13	0.01	-	-	-
Budget 11	0.16	0.56	-	0.16	0.09
Budget 12	-	0.16	0.54	0.10	0.26
Budget 13	-	-	0.16	0.56	0.10
Budget 14	-	-	-	0.16	0.56
Budget 15	-	-	-	-	0.16
Total	0.29	0.73	0.70	0.98	1.17

Based on a track of $900 million in 2013/14 as the starting point, increasing at 2% p.a. Value in 2015/16 is $936 million.

Emissions Trading Scheme (ETS)

The forecasts have been prepared in accordance with current government ETS policies. Details of current climate change policies are listed at: www.mfe.govt.nz/issues/climate/policies-initiatives
The carbon price assumption is based on estimates of the current carbon price from Price Carbon and is assumed to remain constant at €10.75 with an exchange rate of 0.5409 (a carbon price of NZ$19.87) over the forecast period.
The forecast assumes a 67% uptake of post-1989 foresters into the ETS over Commitment Period One (CP1).
It is assumed the ETS has no fiscal impact on debt or cash flows, as the net cash impact from the ETS and international obligations is highly uncertain.

The ETS has been modelled as having no net fiscal impact in the projection period (expenses equal revenues), as the net impact of the ETS and future international obligations is highly uncertain. Any net revenue (the value of credits received after free allocation of credits to participating industries and after meeting future emission liabilities) is assumed to be recycled back to the public through fiscally equivalent, unspecified tax reductions or spending increases.

Kyoto position

The Kyoto position included in the fiscal forecasts reflects the Government's obligation for CP1, which is for the period 2008 to 2012.

Projections beyond 2015 do not incorporate a quantitative estimate of any net emissions liability that may eventuate from New Zealand's obligation under future international climate change agreements.

NZSF contributions

Contributions calculated via separate NZSF model.
Assumed to recommence at $2.8 billion in 2019 when the projected core Crown operating surplus (before gains and losses) is more than enough to cover the capital contribution.

Investment rate of returns

Incorporate the actual results to 30 September 2010. Beyond 30 September, gains on financial instruments are based on long-term benchmark rates of return for each portfolio.

Finance cost on new bond issuances

Based on five-year rate from the main economic forecasts and adjusted for differing maturity.

Borrowing requirements

The forecast cash deficits will be met by reducing financial assets and issuing debt.

Top-down adjustment


$ billion	2011	2012	2013	2014	2015
Operating	0.85	0.15	-	-	-
Capital	0.35	0.15	-	-	-

This is a downward adjustment to expenditure forecasts to reflect the extent to which departments use appropriations (upper-spending limits) for their expenditure forecasts.

Property, plant and equipment

For the purposes of the forecast financial statements, no revaluations of property, plant and equipment are projected beyond the current year. Valuations as recorded for the 2010 annual financial statements and any additional valuations that have occurred up to 30 September 2010 are included in these forecasts.

Student loans

The value of student loans is based on a valuation model adapted to reflect current student loans policy. As such, the value over the forecast period is sensitive to changes in a number of underlying assumptions, including future income levels, repayment behaviour and macroeconomic factors such as inflation and discount rates used to determine the effective interest rate for new borrowers. Any change in these assumptions would affect the fiscal forecast.

Government Superannuation Fund (GSF) and ACC liabilities

GSF and ACC liabilities included in these forecasts have been valued as at 31 October 2010 and 30 June 2010 respectively, with the ACC valuation being adjusted for the 30 September 2010 discount rate. Both liabilities are valued by projecting future cash payments and discounting them to present value. These valuations rely on historical data to predict future trends and use of economic assumptions such as inflation and discount rates. Any change in actual payments or economic assumptions would affect the present fiscal forecast. For example, if the discount rate decreases, the value of the liabilities would increase. Pages 101 and 102 outline the key economic assumptions used for both valuations. GSF's assets are offset against the gross liability and have been updated to reflect market values at 31 October 2010. The value of assets over the forecast period reflects long-run rate of return assumptions appropriate to the forecast portfolio mix.

Fiscal drag

Projecting source deductions involves employed labour force growth plus nominal average wage growth, supplemented by a fiscal drag elasticity of 1.35.

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