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Half Year Economic and Fiscal Update 2016

Specific Fiscal Risks by Portfolio

ACC

ACC Levies (Unchanged)

Indicative future levy rates for the Work, Earners and Motor Vehicle accounts have been included in the forecasts. However, final levy decisions are made by the Government, and may differ from the forecast levy path. In addition, revenue from the levies set for these accounts may be more or less than is required to cover the cost of claims. If factors such as claims experience, ACC performance, economic assumptions (particularly discount rates and unemployment rates) turn out differently from what has been forecast, ACC's levy revenue, claims costs and liability may also differ from forecast. Any variance will have a corresponding impact on the operating balance.

Non-earners Account (Unchanged)

The amount of funding provided by the Crown (and included in the fiscal forecasts) for the Non-earners' Account may be more or less than is required to cover the cost of claims. If factors such as claims experience, ACC performance and economic assumptions (particularly discount rates) turn out differently from what has been forecast, any such variance will have a corresponding fiscal impact.

Work-related Gradual Process Disease and Infection (Unchanged)

Under current legislation, the Government incurs an obligation for Work-related Gradual Process Disease and Infection claims when the claim is made, and an expense is recognised at this point. The liability for commercial accident and sickness insurance contracts would usually be recognised when exposure to conditions that will give rise to a claim occurs. An amendment to legislation would be required to recognise claims at the same time as for commercial contracts. An initial adjustment to the liability and an expense of about $1.0 billion to $1.5 billion would need to be reported if such an amendment were to be enacted.

Building and Housing/Social Housing

Divestment and Development of Housing (Changed)

The forecasts include divestments and redevelopments of housing property as part of Housing New Zealand Corporation's (HNZC) asset management strategy. Proceeds from property divestments will be used to help fund investment in redeveloping and growing HNZC's stock. Market conditions impact on the proceeds of sale and the cost of acquisitions and development. Given these uncertainties, there is a risk that there will be variations from the fiscal forecasts. In addition, the Government has requested that HNZC investigate further opportunities for increasing large scale redevelopment of its Auckland portfolio with further business cases due in mid-2017. Due to the scale of the redevelopments, there is also a risk that the Crown will be requested to invest additional capital into HNZC impacting on net debt.

Housing Infrastructure Fund (New)

In June 2016, Cabinet agreed to establish a $1 billion Housing Infrastructure Fund (HIF) to which high-growth, financially constrained councils can apply to help finance roading and water infrastructure needed to unlock residential development. As final proposals are not expected to be received until late March 2017, and as decisions are still yet to be made about the water infrastructure governance and loan arrangements, there is a high level of uncertainty in the areas noted below, which may have additional fiscal impacts that need to be managed:

  • The split between capital and operating spending, which will impact fiscal indicators. Currently the fund has been reflected as capital expenditure in the forecasts.
  • Whether or not market interest rates will be applied to the loans.
  • Whether or not the full amount of the fund will be repaid to the Crown.
  • For the amount that is repaid, when the repayment will occur.

Social Housing Reform (Unchanged)

The Government is progressing the Social Housing Reform Programme (SHRP). The SHRP aims to improve the housing and associated services provided to those in housing need, to build the social housing market and to fully recognise the costs of social housing. Specific Fiscal Risks associated with the SHRP are as follows:

  • Existing and additional social housing places may require funding above the current Income Related Rent Subsidy (IRRS) appropriation cap.
  • The development of a more diverse and competitive social housing market may adversely affect HNZC's financial position.
  • Proceeds from social housing transfers are likely to differ from book value.

Tamaki Regeneration Project (Unchanged)

Proceeds from housing sales in Tamaki over the next 10 to 15 years may be less than the book value of the houses sold. Over this period 7,500 new houses are planned to be built in Tamaki in place of about 2,500 existing houses.

Corrections

Additional Capacity to Address Prison Population (New)

The fiscal forecasts include provision for the Government's agreed investment to create additional prison capacity to accommodate prison population growth over the next 10 years. It is likely that the Department of Corrections will require additional funding relating to the direct costs of accommodating prison population increases, as they arise, which would impact on the operating balance. The total quantum of the cost could be between $100 and $140 million over the next four years. There is also a risk that growth in the prison population is different from what is included in the forecasts and additional funding is required.

Defence

Operating and Capital Costs (Changed)

In 2016, the Government reconsidered New Zealand Defence Force (NZDF) capability and funding requirements through the Defence White Paper 2016. It is expected that changes to NZDF operating and capital funding will be made over the forecast period to achieve the Defence White Paper settings. However the precise quantum and timing of these changes will be dependent on a range of business cases that will be considered by Cabinet in the future.

Disposal of NZDF Assets (Unchanged)

The Government is considering the potential to dispose of a number of NZDF assets. Depending on market conditions, the timing of disposal and sale price received could have an impact on the Government's overall financial position. NZDF is also completing an analysis of inventory that is surplus to requirements and is over and above the existing provision for obsolescence. The existing provision is also being reviewed to ensure that all items comprising the provision are still relevant.

Education

School and ECE Funding Review (New)

The Minister of Education is currently engaging the sector on a review of education funding, across schooling and ECE. There is potential for fiscal costs but this depends on policy decisions that are yet to be made. Any funding changes would not be implemented until 2020.

Finance

Crown Overseas Properties (Unchanged)

The Government holds New Zealand House in London on a long-term lease from the Crown Estate (UK). Depending on the outcome of ongoing discussions with the Crown Estate an upgrade to the building may be required. Should a decision be taken to refurbish the property, a rough-order cost estimate for this upgrade is $100 million over the forecast period.

Goodwill on Acquisition (Unchanged)

As at 30 June 2016, the Government had goodwill on acquisition of a number of sub-entities totalling $602 million. Under New Zealand accounting standards (PBE IPSAS 26), such goodwill items are required to be assessed annually for impairment. If there is any indication that the goodwill may be impaired, the recoverable amount of the cash generating units to which the goodwill is allocated is required to be estimated. If the recoverable amount is less than the carrying amount of those units, the units and the goodwill allocated to them are regarded as impaired and the Government is required to recognise impairment losses in the operating statement. Such assessments will be conducted at the end of the financial year, and the fiscal forecasts currently make no allowance for such impairment losses.

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