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Pre-election Economic and Fiscal Update 2014

Operating Balance

The Crown is forecast to return to surplus this financial year…

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

The OBEGAL is expected to return to surplus in the current 2014/15 year with a surplus of $297 million forecast. Beyond 2014/15, surpluses are expected to increase by between $0.5 billion and $1.1 billion per year.

Figure 2.8 shows the composition of OBEGAL from the different segments of the total Crown.

The core Crown segment moves from a forecast OBEGAL deficit of $4.0 billion in 2013/14 to a forecast $2.7 billion surplus in 2017/18, largely reflecting growth in tax revenue.

The State-owned Enterprise (SOE) and Crown entity (CE) segments together positively impact the OBEGAL balance by $2.0 billion in 2013/14, easing back to $0.9 billion in the final year of the forecast period largely reflecting ACC levy rate reductions announced in Budget 2013.

These forecast surpluses are expected to assist in strengthening the Crown's balance sheet and contribute to the Crown's ability to repay debt in the future.

...although OBEGAL is lower compared to the Budget Update

These forecasts indicate the annual OBEGAL surpluses are forecast to be smaller in all years relative to the Budget Update. The surplus in 2017/18 is forecast, for example, to be $3.0 billion, half a billion lower than previously forecast (Table 2.7).

Table 2.7 - Changes in OBEGAL since the Budget Update
Year ended 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
OBEGAL - 2014 Budget Update (2.4) 0.4 1.3 2.4 3.5
Changes in forecasts:          
           Tax revenue (0.4) (0.3) (0.4) (0.5) (0.5)
           IRD tax impairments 0.2 - - - -
           Treaty settlement expenses                     0.1 0.2 0.1 0.1 0.1
           EQC forecasts (0.1) 0.1 - - -
           ACC forecasts - - - 0.1 0.1
           Social assistance expenses - - - - (0.1)
           Other changes - (0.1) (0.2) (0.2) (0.1)
Total changes since the Budget Update (0.2) (0.1) (0.5) (0.5) (0.5)
OBEGAL - 2014 Pre-election Update (2.6) 0.3 0.8 1.9 3.0

Source: The Treasury

Material changes to OBEGAL forecasts since the Budget Update include:

  • Tax revenue is weaker across the forecast period than the Budget Update as discussed earlier (refer page 25).
  • IRD's tax impairments were forecast to be higher than eventuated in 2013/14.
  • The Office of Treaty Settlements (OTS) has updated its Treaty settlement expenditure forecasts for the timing of forthcoming Deeds of Settlement. The timing for Deeds is determined by milestones earlier in the settlement process such as claimant groups achieving a mandate for negotiations and agreements being reached on redress packages with the Crown. As settlements get closer to being finalised, the OTS has a greater amount of certainty about when they will occur and impact on Crown expenses.
  • Earthquake Commission (EQC) forecasts in the first two years have changed following an updated valuation of EQC's insurance liabilities at 30 June 2014.
  • ACC's results in the later years of the forecast largely reflect increases in investment income from investments outweighing changes in insurance costs.
  • Social assistance expenses are slightly higher than previous forecasts and are expected to be higher by $0.1 billion in the final 2017/18 year.
Figure 2.9 - Components of operating balance
Figure 2.9 - Components of operating balance   .
Source:  The Treasury

...with increases in OBEGAL lifting 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. Figure 2.9 shows the growth in the operating balance and its components. The 2013/14 year's forecast surplus of $2.8 billion includes $5.2 billion of gains made by Crown financial institutions (CFIs), largely ACC and NZS Fund. While the 2013/14 year reflects the current strong market growth, lower long-term rates of returns are assumed in future years, resulting in lower growth in these years. These gains result in increased financial assets which lead to increases in the Crown's share of net worth (refer page 38 for discussion).

In addition, updated long-term liability valuations for ACC and the Government Superannuation Fund (GSF) at 30 June 2014 have led to $1.1 billion of actuarial gains in the 2013/14 year (compared to $3.6 billion in 2012/13).

When compared to the Budget Update, the operating surplus is forecast to be lower in all years. In 2017/18 the operating balance is forecast to be a $6.1 billion surplus, $0.6 billion lower than previously forecast.

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