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Half Year Economic and Fiscal Update 2016

Operating Balance

The operating performance of the Crown strengthens…

OBEGAL is expected to decrease in the current year followed by steady growth in the remaining years of the forecasts. OBEGAL reached a surplus of $1.8 billion in 2015/16 but is expected to decrease to a surplus of $0.5 billion in the current year. This surplus is then forecast to rise to $8.5 billion by 2020/21.

The forecast deterioration in OBEGAL in the current year largely reflects a strong outcome in 2015/16, owing to impairment reversals for tax receivables and social benefit receivables. In 2016/17, expenditure is forecast to increase with ACC insurance expenses, reflecting recent claims experience and economic growth assumptions, as well as health and education expenditure increases reflecting Budget 2016 decisions. In addition, one-off costs in relation to the Kaikōura earthquakes have been recognised (for more information, refer to Economic and fiscal impacts of the Kaikōura earthquakes on page 6).

Figure 2.8 shows the composition of OBEGAL from the different segments of the Government. The core Crown segment is forecast to have an OBEGAL surplus of $2.2 billion in 2016/17, with OBEGAL surpluses continuing to rise over the reminder of the forecast period, largely reflecting growth in tax revenue outpacing growth in nominal spending.

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

Crown entities' (CEs') OBEGAL is expected to be in deficit throughout the forecast period. The deficit increases from $0.3 billion in 2015/16 to peak at $1.4 billion in 2016/17, before reducing back to $0.8 billion in 2017/18 and then remaining fairly constant, largely reflecting ACC's results, while EQC has additional earthquake costs owing to the Kaikōura earthquakes in the current year. ACC results in particular are sensitive to movements in discount rates affecting the calculation of future claims costs in present day dollars. As such, their OBEGAL forecasts can move significantly between forecasts.

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

...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 2016/17 of $3.8 billion growing to $11.9 billion in 2020/21 (Figure 2.9). This compares to net losses of $7.2 billion recorded in the previous financial year (mainly in relation to actuarial losses).

Figure 2.9 - Components of operating balance
Figure 2.9 - 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.

The NZS Fund incurred losses on investment in 2015/16. For the first four months of 2016/17, gains on investments have been recorded, which has resulted in the NZS Fund forecasting gains on investments for the 2016/17 year.

Beyond 2016/17, investment gains assume a long-term rate of return, resulting in investment gains increasing to $3.1 billion in 2020/21. 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.

The Crown's significant long-term liabilities such as ACC and Government Superannuation Fund (GSF) use discount rates and CPI assumptions in their valuations. However, as future changes to discount rates and CPI are not forecast, they do not impact on gains and losses beyond 2016/17.

While the Crown is forecast to be in surplus across the forecast period, net debt is forecast to continue to increase in the near future. Table 2.4 below illustrates the link between OBEGAL and the movement in net debt. The key differences are that OBEGAL includes non-cash items and the results of SOEs, CEs, and the NZS Fund (that do not impact net debt), while net debt is also impacted by capital cash flows (that are excluded from OBEGAL).

Table 2.4 - Reconciliation between OBEGAL and net core Crown debt
Year ending 30 June
$billions
2016
Actual
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
Core Crown revenue 76.1 80.5 84.2 88.4 92.6 97.1
Core Crown expenses (73.9) (78.3) (80.1) (82.4) (85.2) (87.8)
Net surpluses/(deficits) of SOEs and CEs (0.4) (1.7) (0.8) (0.6) (0.6) (0.8)
Total Crown OBEGAL 1.8 0.5 3.3 5.4 6.8 8.5
Net retained surpluses of SOEs, CEs and NZS Fund 0.3 1.9 0.8 0.7 0.5 0.7
Non-cash items and working capital movements 1.2 2.0 0.1 1.3 0.9 1.4
Net core Crown cash flow from operations 3.3 4.4 4.2 7.4 8.2 10.6
Net purchase of physical assets (2.0) (3.2) (2.4) (1.9) (1.6) (1.7)
Advances and capital injections (2.6) (3.4) (3.1) (2.8) (2.1) (1.6)
Contribution to NZS Fund - - -   -   (3.1)
Forecast for future new capital spending (0.5) (1.0) (1.4) (1.6) (1.7)
Top down capital adjustment - 0.5 0.2 0.1 0.1 0.1
Net core Crown capital cash flows (4.6) (6.6) (6.3) (6.0) (5.2) (8.0)
Core Crown residual cash (deficit)/surplus (1.3) (2.2) (2.1) 1.4 3.0 2.6
Opening net core Crown debt 60.6 61.9 64.4 66.4 65.0 62.1
Core Crown residual cash deficit/(surplus) 1.3 2.2 2.1 (1.4) (3.0) (2.6)
Valuation changes in financial instruments - 0.3 (0.1) - 0.1 0.1
Closing net core Crown debt 61.9 64.4 66.4 65.0 62.1 59.6
As a percentage of GDP 24.6% 24.3% 23.8% 22.2% 20.3% 18.8%

Source: The Treasury

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