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Half Year Economic and Fiscal Update 2013

Operating Balance

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

Increases in core Crown tax revenue and slowing expenditure growth reflect an improved outlook across the forecast period with the Crown's OBEGAL forecast to return to a surplus of $86 million in 2014/15. This stronger outlook is largely driven by economic factors impacting on tax revenue combined with the continuing programme of fiscal constraint. There are risks to achieving a surplus in 2014/15 and later years should these factors not play out as forecast. Refer to the Risks and Scenarios and Specific Fiscal Risks chapters for further discussion of risks that may impact the Crown's operating balance.

OBEGAL is a total Crown measure, of which the core Crown shows the greatest growth over the forecast period. In 2013/14 the core Crown has an OBEGAL deficit of $3.7 billion which turns around to contribute a $5.9 billion surplus to OBEGAL by 2017/18.

Both the State-owned Enterprise (SOE) and Crown entity (CE) sectors' contribution to OBEGAL in the future have been significantly changed. Together they contribute $2.0 billion to the OBEGAL surplus in 2013/14 falling to $0.4 billion by the end of the forecasts.

Figure 2.8 shows the composition of OBEGAL from the different sectors of the Government. The CE sector's contribution is expected to fall significantly owing to a reduction in ACC levy rates while the SOE sector's contribution falls owing to the Government's Share Offer programme. Refer to separate section on pages 36 to 41 for further discussion of this programme.

Figure 2.8 - Components of OBEGAL by sector
Figure 2.8 - Components of OBEGAL by sector   .
Source:  The Treasury

While reductions in ACC levies were included in the Budget Update, reductions are higher in these forecasts. Reductions in ACC levies of $300 million in 2014/15 increasing to $1 billion a year from 2015/16 were announced at the time of the Budget Update. Since that time specific levy rate reductions for the relevant levy years have now been factored into the forecasts and Cabinet has increased the 2014/15 reduction to $387 million. As a result, the reduction in income has increased in 2014/15 and the timing of the OBEGAL impact for the expected second round of reductions has been revised.

Refer Table 2.4 for a summary of the key changes to the forecasts from the Budget Update that impact on OBEGAL.

Table 2.4 - Changes in OBEGAL since Budget 2013
Year ending 30 June
OBEGAL - 2013 Budget Update (2.0) 0.1 0.8 2.6
Changes in forecasts:    
                Tax revenue 0.1 0.2 0.9 1.4
                Benefit expense 0.1 0.2 0.1 (0.1)
                GSF expenses - (0.1) (0.1) (0.1)
                NZS Fund and ACC interest income (0.1) (0.2) (0.2) (0.2)
                SOE results (0.1) (0.3) (0.2) (0.1)
                ACC levy and insurance expense (0.1) - 0.4 (0.3)
                Other changes (0.2) 0.2 - (0.1)
Total changes since Budget Update (0.3) - 0.9 0.5
OBEGAL - Half Year Update (2.3) 0.1 1.7 3.1

Source: The Treasury

ACC and NZS Fund's interest income has also decreased since Budget Update largely owing to a reduction in the expected level of interest earning assets held by ACC and NZS Fund since Budget 2013.

SOE profits have also declined across the forecast period since Budget Update largely owing to foregone profits from the Government's share programme (refer to Government Share Offer Programme section on pages 36 to 41).

The underlying nature of OBEGAL can be seen using the cyclically adjusted balance (CAB). This measure adjusts for the state of the economic cycle and significant one-off expenses. Figure 2.9 shows CAB tracking close to OBEGAL in recent years, indicating that the operating deficits between 2009 and 2013 have been largely structural. The projected size of the economy reduced following the recession, implying a smaller tax base while, in contrast, expenses continued to grow. In this forecast, tax revenue is forecast to grow more rapidly than expenses (which remain relatively stable), seeing CAB move to surplus in 2015/16[4] a year later than OBEGAL.

Figure 2.9 - OBEGAL and CAB
Figure 2.9 - OBEGAL and CAB   .
Source:  The Treasury

...with OBEGAL surpluses beyond 2014/15 enabling debt to be repaid

Surpluses are achieved in 2014/15 and continue to increase over the forecast period to a level that translates to being sufficient to fund the Government's capital spending and allows for the reduction of debt.

Current strength in equity markets lifts the operating balance…

When gains and losses are included, the total Crown operating balance is forecast to be in surplus across the forecast period with steady growth each year of the forecasts (Figure 2.10). The current year's surplus is a result of gains expected to be made by Crown financial institutions (CFIs), largely ACC and NZS Fund, and reflects strong global equity returns (for example, by 30 September 2013 NZS Fund had made year-to-date gains of $1.0 billion). While the current year reflects strong market growth, the forecast gains in future years assume a long-term rate of return, resulting in more subdued growth in these years. These gains play a part in increasing the Government's financial assets, and the Crown's net worth (discussed on page 33).

Figure 2.10 - Components of operating balance
Figure 2.10 - Components of operating balance   .
Source:  The Treasury

...and valuations of long-term liabilities contribute to an improved result in 2013/14

In addition, updated long-term liability valuations for ACC (at 30 June 2013 and updated for movements in discount rates to 30 September) and GSF (at 30 September) have also led to significant actuarial gains in the 2013/14 year which also contribute to the Crown's operating balance.

Given the size of the balance sheet, market movements can have a significant impact on the operating balance. Refer to page 35 for further discussion of the impact of these valuations on the Crown's operating balance.

Cost to the Crown of Canterbury Earthquakes

The Government continues to make significant contributions to the rebuild of Canterbury which is one of its four key priorities. Latest estimates for the total cost to the Crown are at $14.9 billion to the end of the forecast period (slightly lower than the $15.2 billion in the Budget Update). While some costs have reduced, others have increased.

An updated estimate of costs to the Crown show that core Crown costs have reduced since the Budget Update primarily owing to a cost sharing agreement entered into with the Christchurch City Council (CCC) and an updated red zone valuation. However, increases in estimates of Crown entity capital investment in Canterbury (primarily investment in state housing stock) partially offset these reductions.

In June 2013 the Crown negotiated a cost sharing agreement with CCC to contribute up to $1.8 billion for the repair costs of local infrastructure (mainly water and roads). This agreement has increased certainty around the Crown's estimate of local infrastructure costs, reducing them from the $2.4 billion estimate at Budget Update to $1.8 billion.

Table 2.5 outlines the latest estimates of the net impact of the earthquake included in these forecasts, the operating/capital split and the expected cash profile of earthquake costs.

Table 2.5 - Net earthquake expenses (operating and capital)
Year ending 30 June
Local infrastructure 1,364 111 110 110 83 50 1,828 2,395
Crown assets1 40 258 461 353 272 92 1,475 1,579
Land zoning 912 122 1,034 1,218
Christchurch central city rebuild2 115 763 135 81 63 (249) 909 901
Welfare support 269 19 4 292 305
Southern Response support package 458 16 (59) (27) (29) 360 301
Other costs 508 272 71 61 32 32 975 868
Core Crown Canterbury
earthquake recovery costs
3,666 1,563 722 577 422 (75) 6,874 7,567
EQC (net of reinsurance proceeds) 8,026 (337) (47) (114) 7,528 7,532
Other SOE and CEs (217) 160 161 242 123 38 507 66
Total Crown 11,475 1,385 836 705 545 (37) 14,908 15,165
Operating and Capital expenses                
Operating expenditure (OBEGAL) 11,253 413 182 45 135 65 12,093 12,852
Capital expenditure 222 972 654 660 410 (102) 2,816 2,313
Total Crown 11,475 1,385 836 705 545 (37) 14,908 15,165
Total cash payments3 6,595 3,012 2,800 1,594 733 (40) 14,693 15,165


  1. Crown assets includes capital expenditure on Canterbury hospitals, schools, Tertiary Education Institutions and the justice and emergency services precinct.
  2. Central city rebuild costs are net of expected recoveries.
  3. Some expenses are non-cash (eg, asset write-offs and impairments) and therefore do not have a cash element to them.

Source: The Treasury

The Specific Fiscal Risks chapter includes discussion on the risks associated with the Canterbury earthquakes (eg, many of the business cases and project costings for Anchor projects in the central city are yet to be finalised).

While the expenses are largely recognised up front and indicate the Crown's obligation, the cash profile reflects the expected timing of payments to settle these obligations. As with the expenses, risks also remain regarding the timing of these cash payments.


  • [4]For more details, see the Additional Information on the Treasury website
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