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Pre-election Economic and Fiscal Update 2017

Operating Balance

The 2016/17 operating performance is expected to be significantly improved…

The strong tax outturn is the key contributor to an expected OBEGAL surplus of $3.7 billion in 2016/17, just over double the $1.8 billion recorded in 2015/16 (Table 2.4).

Table 2.4 - Growth in 2016/17 OBEGAL compared with 2015/16
Year ending 30 June
$billions
2016
Actual
2017
Forecast
Increase
Core Crown 2.2 5.0 2.8
Crown entities (0.3) (1.2) (0.9)
SOE's 0.7 0.6 (0.1)
Eliminations between segments (0.8) (0.7) 0.1
OBEGAL 1.8 3.7 1.9
Percentage of GDP 0.7 1.4  

Source: The Treasury

As discussed earlier, core Crown tax is expected to be $5.2 billion higher in 2016/17 compared with the previous year. However, core Crown expenses are only forecast to increase by $2.9 billion with the largest increases expected to be social assistance spending.

Partially offsetting the core Crown result, Crown entities (CEs) are expected to make an OBEGAL deficit in 2016/17 largely reflecting increased insurance expenses from the new costs associated with the Kaikōura earthquakes. In addition the OBEGAL deficits in ACC have also increased from the previous year. This is driven by several factors including a higher number of claims across all accounts, lower discount rates (used to calculate the present value of claims), and price increases.

Figure 2.9 - Components of OBEGAL by segment
Figure 2.9 - Components of OBEGAL by segment.
Source: The Treasury

…before returning to steady growth over the next four years …

OBEGAL is expected to grow steadily in the remaining years of the forecasts rising to $6.4 billion by 2020/21.

Figure 2.9 shows the composition of OBEGAL from the different segments of the Government.

The core Crown segment is forecast to have an OBEGAL surplus that remains relatively constant in the next two years, albeit less than the current year, before continuing to rise over the remainder of the forecast period, largely reflecting growth in tax revenue outpacing growth in nominal spending.

CEs are expected to be largely neutral with relatively small deficits while State-owned Enterprises' (SOEs) contribution to OBEGAL remains fairly stable with operating surpluses forecast to average $0.7 billion throughout the forecast period.

See pages 97 to 98 for a list of CEs and SOEs.

...while investment returns contribute to the growth in net worth

The total Crown operating balance, inclusive of gains and losses, is forecast to be in surplus across all years of the forecast period with an initial peak in 2016/17 of $11.5 billion.

Gains and losses then return to long-term assumptions and the operating balance follows the OBEGAL trend growing to $10.1 billion in 2020/21 (Figure 2.10).

Figure 2.10 - Components of operating balance
Figure 2.10 - Components of operating balance.
Source: The Treasury

The level of operating balance plays a significant part in increasing the Government's financial assets and contributing to growth in the Crown's net worth.

The NZS Fund had small investment losses in 2015/16 and is now forecasting gains on investments of around $5.5 billion in the current year. Beyond 2016/17, investment gains assume a long-term rate of return.

In addition to investment gains, actuarial gains on the Crown's significant long-term liabilities such as ACC and Government Superannuation Fund (GSF) are forecast to be $1.4 billion in 2016/17 (compared to actuarial losses of $7.1 billion in 2015/16). However, as future actuarial gains or losses resulting from discount rates and CPI changes are not forecast, they do not impact the operating balance beyond 2016/17.

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