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Pre-election Economic & Fiscal Update 2011

Specific Fiscal Risks

The most significant economic risks have been identified in Chapter 3. The Statement of Specific Fiscal Risks is a requirement of the Public Finance Act 1989 and sets out all pending government decisions and other circumstances known to the Government at the finalisation of the fiscal forecasts that may have a material effect on the fiscal and economic outlook, but are not certain enough in timing or amount to include in the fiscal forecasts. It is not possible to identify every possible risk and disclosure is also subject to legal requirements and materiality thresholds, which are described after the Statement of Specific Fiscal Risks.

Overview of Specific Fiscal Risks

Specific fiscal risks can be positive or negative and can affect revenue or spending. The links between external events and spending are indirect because new policies that change spending and revenue usually require a decision by the Government and approval from Parliament. The approach taken in this chapter is to disclose those pending policy decisions and key areas of uncertainty that may have a material effect on the fiscal outlook. The specific fiscal risks are categorised into:

  • Pending policy decisions affecting revenue: Changes to tax policy or ACC levies could reduce or increase government income.
  • Pending policy decisions affecting expenses: Costs of policy proposals could increase or decrease expenses depending on decisions taken, and they are risks to the extent that they cannot be managed within baselines or budget allowances.
  • Pending capital decisions: Capital investment decisions are risks to the extent that they cannot be managed within balance sheets or budget allowances.
  • Matters dependent on external factors: The liability of the Government for costs is sometimes dependent on external factors such as the outcome of negotiations or international obligations.

Some key examples of the risks disclosed in this chapter are outlined below:

  • government decisions relating to the recommendations of the Welfare Working Group and the redesign of business processes at Inland Revenue
  • specific policies that may have flow-on costs that are not accounted for within allocated funding, such as early childhood education funding, but are not likely enough to include in the forecasts
  • explicit guarantees that give assurance to the public and businesses about the Crown’s planned response to specific events are recognised as risks; the largest current guarantee relates to the Extended Deposit Guarantees Scheme with a total value of $1.3 billion, and
  • generic cross-government risks such as the renegotiation of collective employment agreements that could have material costs and flow-on effects to remuneration in other sectors.

General cost pressures, such as those associated with an ageing population, are not recognised as specific fiscal risks.

The new risks that have been added since the Budget Update include:

  • how the Government will respond to the Waitangi Tribunal report on the Wai 262 claim
  • a change in the legal interpretation of when work-related gradual process disease and infection claims should be recognised may have an impact on the fiscal position, and
  • the response to the Rena cargo ship grounding on Astrolabe reef.

The costs of individual natural disasters, and other major events, are not recognised as specific fiscal risks in advance as they usually occur infrequently and their timing cannot be predicted. Once a disaster does occur, a number of choices arise about how to respond and when potential liabilities are recognised. Specific risks are disclosed at this point based on the range of possible responses.

In Budget 2011 the Government established the Canterbury Earthquake Recovery Fund (CERF). The CERF is $5.5 billion and this is an estimate of the core Crown's costs of earthquake recovery. There are a large number of earthquake-related risks that, if they occur, may exhaust the capacity of the CERF. These risks include government commitments where the final cost is not yet known and policy options where decisions have not yet been taken. The risks have been aggregated and are not quantified because it is unclear which risks will be realised and what the scale of these risks would be.

In addition to the obligations and policy choices for the Government, the disasters in Canterbury and elsewhere have placed pressure on private sector insurers. As a result, the cost of insurance premiums is likely to increase over the next five years with potential flow-on effects to the Crown. The potential Earthquake Commission impact has now been recognised as a separate risk.

The final part of the chapter contains a current list of contingent liabilities, which are likely costs that the Crown will have to face if a particular event occurs. Typically, contingent liabilities consist of guarantees and indemnities, legal disputes and claims on uncalled capital. The largest quantified contingent liabilities are to international financial organisations and mostly relate to uncalled capital and promissory notes.

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