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Half Year Economic and Fiscal Update 2012

Core Crown Expenses

Core Crown expenses continue to increase over the forecast period but fall as a percentage of GDP...

Figure 2.3 - Core Crown expenses
Figure 2.3 - Core Crown expenses.
Source:  The Treasury

Core Crown expenses are expected to increase in nominal terms by $8.9 billion over the forecast period, from $69.1 billion in 2011/12 to $78.0 billion in 2016/17, as shown in Figure 2.3.

While expenses continue to increase, the growth is expected to be at a slower rate than economic growth. As a result, core Crown expenses fall as a percentage of GDP over the forecast period.

Figure 2.4 - Core Crown expense growth (excluding earthquake costs)
Figure 2.4 - Core Crown expense growth (excluding earthquake costs).
Source:  The Treasury

Figure 2.4 illustrates the slowing expense growth (excluding earthquake costs). Over the 10 years from 2002/03 through to 2011/12 the average annual increase in core Crown expenses was 6.1%, but over the next five years the average increase is forecast to halve to 3.0% per year. The fall in the growth rate is largely owing to fiscal constraint on spending in recent Budgets.

This fiscal constraint is projected to continue over the ten years following the forecast period and helps the Crown rebuild the fiscal buffer and resume contributions to the NZS Fund. See page 38 for details about the projection period.

Figure 2.5 - Future budget allowances
Figure 2.5 - Future budget allowances.
Source:  The Treasury

While the rate of expense growth declines, the nominal increase in core Crown expenses is $8.9 billion from 2011/12 to the end of the forecast period, as detailed in Table 2.4.

New operating initiatives are the largest component of the increase in core Crown expenses. Of the $5.0 billion of allowance increases, $0.6 billion relates to Budget 2012, with the remaining $4.4 billion relating to the next four Budgets, as shown in Figure 2.5.

Table 2.4 - Growth in core Crown expenses
Year ended 30 June $billions
Core Crown expenses 2011/12 69.1
Core Crown expenses 2016/17 78.0
Increase in core Crown expenses 8.9
New spending  
Budget allowances 5.0
Forecast changes  
Social assistance 3.4
Emissions Trading Scheme (0.3)
Finance costs 0.8
Debt impairments 0.7
One-off costs  
Weathertight homes 0.3
Earthquake expenses (1.2)
Other movements 0.2
Total change in expenses 8.9

Source: The Treasury

In addition to new spending, increases in benefit spending provide most of the remainder of expense growth. Social assistance benefits are expected to increase $3.4 billion over the next five years, with $3.1 billion of the increase related to New Zealand Superannuation payments (forecast to rise from $9.6 billion in 2011/12 to $12.7 billion by 2016/17). About two-thirds of the growth in superannuation payments is owing to an increase in recipient numbers, while the remaining third relates to payments rising with wage growth.

Finance costs are expected to increase by $0.8 billion over the next five years, largely reflecting the continued increases in gross debt and interest rates over the forecast period.

Debt impairments are expected to be $0.7 billion higher by 2016/17 than they were in 2011/12. The increase in these impairments is largely owing to the actual expense in 2011/12 being lower than expected, in part owing to one-off reductions to student loan impairments through policy changes to the level of repayments rising from 10% to 12%.

Offsetting these increases, costs of the Emissions Trading Scheme (ETS) are expected to be lower than in 2011/12 as the number of units issued and the costs of those units decrease across the forecast period.

There are some large “one-off” expenses that also contribute to the growth in expenses over the forecast period. The largest of these is a fall in earthquake costs, which are largely expected to be incurred in the first few years of the forecasts and fall to $0.1 billion in 2016/17; $1.2 billion lower than in 2011/12. Slightly offsetting the fall in earthquake costs was a one-off reduction in 2011/12 related to the weathertight homes provision to reflect the reduced take-up rates for the scheme.

...but are forecast to increase at a slower rate than forecast in the Budget Update

While core Crown expenses are forecast to rise over the next five years, they are less than those forecast at the Budget Update. For example, the forecast core Crown expenditure in the 2015/16 year was $77.3 billion in the Budget Update and this is now expected to be $75.6 billion in these forecasts (a $1.7 billion reduction).

The reduction in the expense forecasts is largely related to the weaker economic outlook, particularly in relation to inflation, wage growth and interest rates. In comparison to the Budget Update, with specific reference to the 2015/16 year, the two main reductions in core Crown expenses as a result of changes to the economic forecasts were:

  • Social assistance benefits are $0.6 billion less as lower tracks for inflation and average wage growth flow through to lower benefit payments. The average payment rates for the Accommodation Supplement is the other main source of reductions in benefit expenses, which reflect recent data on rental costs and are now expected to increase at a slower rate than previously expected. Slightly offsetting these reductions, the Half Year Update includes higher recipient numbers in each year of the forecasts other than in 2012/13.
  • The track for interest rates was also revised down in these forecasts, which meant that finance costs are $0.2 billion less than the Budget Update forecasts. The lower track for interest rates also impacts on the Government Superannuation Fund (GSF) expenses as the interest rate unwind of the long-term liability is expected to be lower.

In addition to the impact of economic forecasts, the cost of the ETS is expected to be $0.6 billion lower than was expected at Budget 2012. The reduction in the ETS costs was because the cost of units has decreased markedly since the Budget 2012 forecasts. However, while the expense forecasts are lower, these are largely offset by a reduction in revenue so there is minimal OBEGAL impact.

Overall, the lower expense forecasts compared to the Budget Update help contribute to the Government remaining on track to return to surplus in 2014/15, which is detailed on page 32.

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