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Pre-election Economic and Fiscal Update 2017

Fiscal Forecasts

This section of the chapter focuses on the five-year forecast horizon, up to and including 2020/21.

The preparation of the pre-election fiscal forecasts has involved:

  • reassessing tax revenue (in conjunction with Inland Revenue (IRD) and benefit expense forecasts in light of the revisions to the macroeconomic forecasts
  • updating the operating results and expense forecasts using the 2016/17 pre-audited financial information from departments and significant other government reporting entities
  • considering the impact of additional financial information that has occurred since the finalisation of the Budget Update forecasts on 3 May 2017, and
  • incorporating the fiscal impact of significant Cabinet decisions made since the Budget Update, up to and including 7 August 2017.

This section discusses the following areas: core Crown tax revenue, core Crown expenses, the operating balance, core Crown capital spending, residual cash and net core Crown debt, the total Crown balance sheet and a comparison to the Budget Update.

Key judgements and assumptions

The fiscal forecasts are based on assumptions and judgements developed from the best information available at the time they were prepared. Actual events are likely to differ from these assumptions and judgements, while uncertainty around the forecast assumptions and judgements increases over the forecast period. The criteria for inclusion in these forecasts, along with the key risks, can be found in the Risks and Scenarios and Specific Fiscal Risks chapters.

The forecasts incorporate government decisions and other circumstances known to the Government and advised to the Treasury up to 7 August 2017. In the lead up to an election, political parties, including the current Government, make announcements regarding their policies and intentions. It does not automatically follow, however, that all announcements are included in these fiscal forecasts.

In addition to the key assumptions underpinning the economic forecasts (refer page 7), the following key judgements and assumptions supporting the fiscal forecasts were made:

  • Tax policy changes enacted and announced by the Government will take place as planned and will affect tax revenue and receipts.
  • Judgements have been made around the extent to which the current strength in tax revenue outturns continues throughout the forecast period.
  • Any future new spending or revenue reductions will be limited to the operating and capital allowances set by the Government. For further details of these allowances, see note 9 of the Forecast Financial Statements.
  • Departments will continue to spend less than the upper limits of approved spending (referred to as appropriations). A top-down adjustment is made to compensate for this. The adjustment will be higher at the front end of the forecast period as departments' appropriations (and therefore expenses) tend to be higher in these years, reflecting the flexibility departments have around transferring underspends to later years.
  • The Government has committed $1.0 billion of funding to assist high growth councils facing financial constraints to finance roads and water infrastructure (referred to as the Housing Infrastructure Fund). The fund has been forecast to be allocated based on the timing outlined in initial bids received.
  • The Government and Auckland Council have agreed to each fund 50% of the costs of the City Rail Link. The Government’s share of these costs is estimated to be around $1.7 billion. These fiscal forecasts include an amount allocated as part of the Budget Update and assume the Government's remaining share of costs will be met from existing budget allowances.
  • The Government recently announced it will provide up to $600 million of capital in Crown Infrastructure Partners which will co-invest in water and transport infrastructure to enable housing supply growth. These fiscal forecasts assume the Government’s costs associated with this programme will be met from existing budget allowances.
  • The Government has committed to reinstating State Highway 1 between Picton and Christchurch following the Kaikōura earthquake. These fiscal forecasts include an amount allocated as part of the Budget Update and assume the Government's remaining share of costs will be met from existing budget allowances, existing baselines or the National Land Transport Fund.
  • Forecast returns on the large investment portfolios managed by the Accident Compensation Corporation (ACC) and the NZS Fund are based on their expectations of long-term benchmark rates of return for their respective portfolios.
  • Significant valuations (eg, student loan portfolio, ACC claims liability and the Government Superannuation Fund retirement liability) are based on underlying assumptions (eg, discount rates, salary increases and inflation) made at the time the valuations were prepared.
  • No revaluations of property, plant and equipment are projected beyond the current year. Only valuations that have already been completed are included in these forecasts.
  • KiwiRail freight assets continue to be valued on a commercial basis (refer Specific Fiscal Risks chapter for risks to the valuation methodology).
  • Where possible, 2016/17 results have been based on pre-audited actual results. However, these results have not yet been finalised or audited and are likely to differ from the final published 2016/17 financial statements.
  • Contributions to the NZS Fund are assumed to resume in the 2020/21 financial year. Table 2.2 sets out the estimated contribution to the Fund if contributions were to start earlier (2017/18). For more information, refer to the Treasury website for the NZS Fund model.
Table 2.2 - NZS Fund contributions
Year ending 30 June
$billions
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
Estimated contribution1 2.0 2.0 2.0 2.0
Estimated contribution2 2.7 2.7 2.7 2.8
Forecast contribution - - - 2.2

Notes:

  1. Calculations of estimated contributions if they were to resume in 2017/18 (under the policy to lift the age of eligibility for New Zealand Superannuation (NZS) to 67 years by 2040/41).
  2. Calculations of estimated contributions if they were to resume in 2017/18 (under the current age of eligibility for NZS of 65 years).

Further information on the underlying economic assumptions used in these fiscal forecasts can be found on page 46.

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