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Half Year Economic and Fiscal Update 2015

Fiscal Outlook

Overview

  • The Crown's fiscal position has improved over the past few years with an OBEGAL surplus being recorded in the 2014/15 fiscal year for the first time since 2007/08 (up from a deficit of $18.4 billion in 2010/11) and compared to a forecast deficit at the Budget Update.
  • The current year's results to 31 October continue to be ahead of previous forecast levels. However, we are expecting some of the recent economic events to result in a slowdown in revenue growth in the second half of the fiscal year.
  • OBEGAL is now expected to be broadly in balance over the next few years with a small deficit forecast for 2015/16 and modest surpluses from 2016/17. OBEGAL then begins to significantly improve, growing to reach $4.9 billion over the forecast horizon.
  • The steadily improving fiscal outlook reflects a growing nominal economy which is forecast to drive growth in tax revenue at a rate higher than the expected growth in expenses.
  • Core Crown expenditure as a percentage of GDP is expected to be 30.6% in 2015/16, falling across the forecast period to be 29.1% in 2019/20.
  • Future operating allowances remain at $1.0 billion for Budget 2016, $2.5 billion in Budget 2017 and $1.5 billion in Budgets 2018 and 2019.
  • Capital spending by the core Crown is estimated to be $24.7 billion over the forecast period. Capital allowances for new initiatives in Budget 2016 have been increased by $1.0 billion (supplementing the Future Investment Fund allocation of $0.7 billion) before falling to $0.9 billion in Budget 2017 and then growing at a rate of 2.0% per year for subsequent budgets.
  • Net core Crown debt is expected to peak at 27.7% of GDP in 2016/17, before dropping to 24.0% of GDP by 2019/20 reflecting increasing cash flows.
  • Net worth attributable to the Crown is expected to increase over the forecast period, reaching $107.2 billion by 2019/20 similar to the level before the global financial crisis. This growth is the result of forecast surpluses from 2016/17 onwards as growth in assets exceeds liability growth.
  • Within the balance sheet, total assets are forecast to grow by $35.3 billion to stand at $314.0 billion by 2019/20. Of this, social assets have the largest growth increasing $16.7 billion to stand at $155.9 billion by 2019/20. Liabilities fall in nominal terms initially as earthquake obligations are settled and then increase again slightly as borrowings are increased. Total liabilities are expected to stand at $200.7 billion at the end of 2019/20, with borrowings making up $125.6 billion of that balance.
  • Overall tax revenue forecasts have been revised down since the Budget Update primarily owing to the weaker nominal GDP outlook and lower interest rates. However, improved ACC forecasts (lower insurance expenses, coupled with higher levy revenue from 2017/18) offset the lower revenue somewhat. Core Crown expenses remain relatively close to the previous forecasts. As a result, OBEGAL is expected to be lower across the forecast horizon. The revised tax forecasts also impact on residual cash with higher cash deficits leading to net core Crown debt being higher than previously expected. Refer to page 50 for more detailed discussion on the comparison to the Budget Update.
  • These forecasts are sensitive to a number of assumptions and should be read in conjunction with the Risks and Scenarios and Specific Fiscal Risks chapters.
Table 2.1 - Fiscal indicators
Year ending 30 June 2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast

$billions

Total Crown OBEGAL1 0.4 (0.4) 0.4 1.0 3.5 4.9
Core Crown residual cash (1.8) (5.4) (4.7) (2.8) 0.5 1.9
Net core Crown debt2 60.6 65.9 70.7 73.4 72.8 71.1
Net worth attributable to the Crown 86.5 86.9 89.6 93.1 99.3 107.2

% of GDP

Total Crown OBEGAL1 0.2 (0.2) 0.1 0.4 1.2 1.7
Core Crown residual cash (0.8) (2.2) (1.8) (1.0) 0.2 0.7
Net core Crown debt2 25.2 26.9 27.7 27.1 25.6 24.0
Net worth attributable to the Crown 35.9 35.5 35.2 34.3 34.9 36.2

Notes:

  1. Operating balance before gains and losses.
  2. Net core Crown debt excluding the NZS Fund and advances.

Source: The Treasury

Table 2.2 - Reconciliation between OBEGAL and net core Crown debt
Year ending 30 June
$billions
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Core Crown revenue 72.2 74.3 77.0 81.4 86.5 90.8
Core Crown expenses (72.4) (74.9) (76.8) (80.7) (83.3) (86.2)
Net surpluses/(deficits) of SOEs and CEs 0.6 0.2 0.2 0.3 0.3 0.3
Total Crown OBEGAL 0.4 (0.4) 0.4 1.0 3.5 4.9
Net retained surpluses of SOEs, CEs and NZS Fund (1.1) (0.6) (0.2) (0.3) (0.4) (0.3)
Non-cash items and working capital movements 2.3 1.1 1.2 1.1 1.7 1.6
Net core Crown cash flow from operations 1.6  0.1 1.4  1.8  4.8  6.2 
Net purchase of physical assets (2.0) (2.5) (2.7) (1.9) (1.7) (1.7)
Advances and capital injections (2.0) (2.5) (2.6) (2.0) (1.9) (1.7)
Forecast for future new capital spending (0.5) (0.8) (0.7) (0.7) (0.9)
Proceeds from government share offers 0.6 - -   -   -  
Net core Crown capital cash flows (3.4) (5.5) (6.1) (4.6) (4.3) (4.3)
Core Crown residual cash (deficit)/surplus (1.8) (5.4) (4.7) (2.8) 0.5 1.9
Opening net core Crown debt 59.9 60.6 65.9 70.7 73.4 72.8
Core Crown residual cash deficit/(surplus) 1.8 5.4 4.7 2.8 (0.5) (1.9)
Valuation changes in financial instruments (1.1) (0.1) 0.1 (0.1) (0.1) 0.2
Closing net core Crown debt 60.6 65.9 70.7 73.4 72.8 71.1
As a percentage of GDP 25.2% 26.9% 27.7% 27.1% 25.6% 24.0%

Source: The Treasury

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