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Half Year Economic and Fiscal Update 2015

Operating Balance

Operating performance of the Crown strengthens…

OBEGAL is expected to be broadly balanced over the next few years. OBEGAL reached a surplus of $0.4 billion in 2014/15, however a small deficit of $0.4 billion is expected in the current year. This deficit is then forecast to return to a surplus in 2016/17 rising to $4.9 billion by 2019/20.

The forecast deterioration in OBEGAL in the current year is largely owing to the growth in core Crown expenses outpacing growth in core Crown revenue. As mentioned earlier in this chapter, forecast growth in tax revenue is considerably lower than actual growth in 2014/15, while core Crown expenses are expected to increase in the current year compared to last year.

As OBEGAL is the residual of a large revenue and expense base small variations to forecast can therefore have a significant impact on OBEGAL. The higher-than-forecast result in the 2014/15 year and the decrease in the current year's OBEGAL forecast reflects the level of uncertainty around these forecasts. Refer to the Risks and Scenarios chapter for further discussion of some of the risks that could impact on the 2015/16 outturn.

Figure 2.7 shows the composition of OBEGAL from the different segments of the Government. The core Crown segment is forecast to have an OBEGAL deficit of $0.6 billion in 2015/16, before returning to a surplus of $0.2 billion in 2016/17, with OBEGAL surpluses continuing to rise over the remainder of the forecast period, largely reflecting growth in tax revenue outpacing growth in nominal spending.

Figure 2.7 - Components of OBEGAL by segment
Figure 2.7 - Components of OBEGAL by segment   .
Source:  The Treasury

State-owned Enterprises (SOEs) contribution to OBEGAL is fairly stable with operating surpluses forecast throughout the forecast period.

Contrasting this Crown entities' (CEs') contribution to OBEGAL reduces across the forecast period from $0.7 billion in 2014/15 to a break-even position from 2017/18 onwards and is spread across a number of entities, with ACC's results generally having the largest impact. For example, changes to ACC levies result in ACC's contribution to the OBEGAL reducing.

...with investment returns contributing to the operating balance

The total Crown operating balance, inclusive of gains and losses, is forecast to be in surplus across all years of the forecast period with a surplus in 2015/16 of $0.3 billion growing to $7.8 billion in 2019/20 Figure 2.8 shows the continuing growth in the operating balance and its components.

Figure 2.8 - Components of operating balance
Figure 2.8 - Components of operating balance   .
Source:  The Treasury

ACC and NZS Fund hold the largest investment portfolios and market movements in these portfolios can have a significant impact on the operating balance.

In 2015/16 gains on investments are forecast to be substantially lower than in previous years, primarily owing to NZS Fund recording net losses on their investments in the first four months of the current financial year. The forecasts assume investment income returns to a long-term rate of return, resulting in continued growth going forward. The level of investment gains plays a significant part in increasing the Government's financial assets and contributing to growth in the Crown's net worth (discussed on page 45).

In addition to gains on investments, gains and losses on long-term liability valuations for ACC and GSF may also impact on the Crown's operating balance. However, in the 2015/16 year they contribute only a small amount with $0.1 billion of actuarial losses.

Gains and losses are sensitive to balance sheet movements. Refer to the total Crown balance sheet section later in this chapter for further discussion of these sensitivities.

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