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Half Year Economic and Fiscal Update 2012

Operating Surplus

The Crown is forecast to return to surplus in 2014/15...

Figure 2.6 - Operating balance before gains and losses (OBEGAL)
Figure 2.6 - Operating balance before gains and losses (OBEGAL).
Source:  The Treasury

Overall, the Crown is forecasting two years of declining deficits, with the OBEGAL expected to reach a surplus of $66 million in 2014/15. Surpluses are then forecast to continue across the projection period (see page 38) as the Crown starts to strengthen its fiscal position. The Crown begins to rebuild a fiscal buffer against future adverse shocks and cost pressures and contributions to the NZS Fund are expected to resume in 2018/19.

The main driver of the return to surplus is fiscal constraint, with core Crown expenses forecast to grow at half the rate of core Crown tax revenue over the forecast period. In addition, the State-Owned Enterprise (SOE) and Crown Entity (CE) sectors contribute between $1.7 billion and $2.0 billion to the OBEGAL in each year of the forecasts.

The underlying nature of the operating balance can be seen using the cyclically-adjusted balance (CAB), which adjusts for business cycles and significant one-off expenses. As shown in Figure 2.6, the recent operating deficits have been largely structural, primarily reflecting the changed view of the underlying size of the economy following the global financial crisis. The resulting smaller economy reduced the tax base, while, in contrast, expenses continued to grow. As the forecast for expense and revenue flows (described earlier) occur, the CAB is expected to move from deficit to surplus in 2014/15.[3]

Figure 2.7 - Fiscal balance compared to other countries
Figure 2.7 - Fiscal balance compared to other countries.
Sources: IMF, the Treasury

...and the recovery has a similar profile to other countries

New Zealand's return to surplus track is similar to that of other countries, as shown in Figure 2.7. The fiscal balance[4] track shows the impact of the global financial crisis and that most other developed countries are also forecast to recover over the coming years. While New Zealand is forecast to return to surplus in 2014/15, some other countries were more severely affected by the global financial crisis and are forecast to face a period of longer deficits.

Changes in OBEGAL Since Budget 2012

Changes in the economic forecasts since the Budget Update have worsened the fiscal outlook.  However, the reductions in revenue were largely offset by reductions in expenses and tax policy changes that increased expected revenue.  Refer to page 26 for discussion on changes in tax revenue and page29 for discussion on the changes in core Crown expenses.  Overall, the OBEGAL track is broadly in line with the forecasts from the Budget Update.  A summary of the changes is shown in Table 2.7 below.

Table 2.7 - Changes in OBEGAL since Budget 2012
Year ended 30 June
OBEGAL - Budget Update (7.9) (2.0) 0.2 2.1

Changes in forecasts:

Economic forecasts

Tax revenue (1.3) (1.6) (2.1) (2.9)
Benefit expenses 0.3 0.2 0.5 0.6
Net finance costs - 0.2 0.2 0.1
GSF expenses - 0.1 0.1 0.1
Policy changes:
Road user charges and fuel excise duty - 0.2 0.3 0.4
Transport-related expenses - (0.1) (0.1) (0.2)

Timing differences:

Earthquake expenses 0.7 0.3 0.1 0.1
Change in top-down 0.5 0.1 0.1 0.1

Other changes:

Tax forecasting changes 0.2 0.4 0.5 0.2
ACC (0.1) 0.1 0.2 0.3
Other 0.3 0.1 0.1 0.5
Total changes since Budget Update 0.6 (0.0) (0.1) (0.7)
OBEGAL - Half Year Update (7.3) (2.0) 0.1 1.4

Source:  The Treasury

Economic forecasts:

The downward revision in nominal GDP reduced tax revenue forecasts, but the impact of these was partially offset by reductions in forecasts for benefits and finance costs as inflation and interest rates are now forecast to be lower than at the Budget Update

Policy changes:

Increases in road user charges and fuel excise are expected with the increase in revenue used to fund transport-related operating and capital costs.

Timing differences: 

While the earthquake costs are expected to be similar to those forecast at Budget 2012, the profile has changed, with costs now being recognised earlier.  In addition, some costs are now capital in nature, reducing the impact on the OBEGAL.

The 2012/13 top-down adjustment[5] has been increased significantly from the Budget Update reflecting the large department underspends in 2011/12.

Other changes:

Changes to assumptions for tax revenue forecasts were made to incorporate recent evidence which represents a structural change in tax revenue. 

Recent improvements in rehabilitation rates for ACC recipients are now thought to be more structural than initially thought, and have reduced ACC insurance expense across the forecast period.


  • [3]For more details, see the Additional Information on the Treasury website.
  • [4]To enable comparison between countries, New Zealand’s generally accepted accounting practice (GAAP) based figures have been converted to a Government Financial Statistics (GFS) basis, therefore the fiscal balance differs from other indicators in this document.  New Zealand data are for June year estimates of the central government, while the international comparators are for general government (includes local government).  For more details about GFS, see the Additional Information on the Treasury website.
  • [5]The top-down adjustment is a central adjustment to reduce department forecasts for spending, reflecting the fact that departments tend to forecast upper limits of spending rather than best estimates.
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