Prior Year Comparison (continued)
The 2006 operating balance was higher than the 2005 operating balance by $5.2 billion. This was mainly due to:
- Tax revenue being higher than last year by $5.3 billion, with the main factors driving the increase being:
- The change in the revenue recognition of provisional tax has increased tax revenue by $1.8 billion
- Wage and employment growth led to an increase in source deductions of $1.6 billion, and
- Corporate profit growth, particularly in the Finance and Insurance sector and the Electricity, Gas and Water Supply sector, was largely responsible for an increase of $1.2 billion in corporate tax revenue.
- Other revenue being higher than last year by $1.8 billion. This was primarily due to increases in investment income, in particular the returns on NZS Fund and GSF assets.
Core Crown expenses were $3.7 billion higher than forecast. Significant movements within the core Crown functional expense classification were:
- Social security and welfare expenses increasing by $0.9 billion due to the annual indexation of welfare benefits and the first full year impact of the Working for Families Package
- Education expenses increasing by $2 billion, due to the initial write down of recording Student Loans at fair value ($1.4 billion) to better reflect the loan balance under the Government’s new interest free policy. The rest of the increase has resulted from roll growth and new policy initiatives
- Health expenses increasing by $0.7 billion, primarily due to increase funding to maintain and increase existing services levels and the impact of demographic changes
The net SOE/CE surpluses were $1.8 billion higher than last year. The key features of the increase were:
- The ACC unfunded liability expense was lower than last year by around $0.7 billion
- Investment returns in the Crown entity segment are up from last year by around $0.7 billion (namely ACC and EQC), due to stronger global equity markets
- Air New Zealand recording a gain of around $0.3 billion from its revaluation of aircraft assets compared to a loss of around $0.1 billion last year
Gross sovereign-issued debt was $0.4 billion higher than last year. The main impacts on debt during the year have been:
- An increase of around $2 billion due to the Reserve Bank raising the Settlement Cash Level, reflecting the Reserve Bank’s concern over liquidity pressures in the New Zealand money market; partially offset by
- A reduction in debt due to repayments made during the year, largely funded from the build-up of financial assets from recent outturns.
Net core Crown debt was $3 billion lower than last year due to the flow on impact of the residual cash available from the current year cash flows.
Net worth increased by $21.4 billion due to the revaluation of property, plant and equipment of $9.9 billion and the impact of the operating balance of $11.5 billion.
Indicators of the Government’s Fiscal Performance
This section aims to help readers better understand the Government’s fiscal performance.
Each indicator gives valid insights into the government’s historical, current and forecast fiscal performance, but no one indicator gives a complete picture. Individual indicators do, however, come into greater or lesser focus as circumstances change.
When, for example, the New Zealand Government’s net worth was low and net and gross debt levels were high, much of the focus of government and public commentary at that time was on eliminating annual operating deficits and on the need to attain, and later to lock in, annual operating surpluses.
However, as net worth has risen, and gross and net debt levels have fallen, the Government in more recent years has increasingly focused on how to maintain debt levels around current levels and, accordingly, has given more focus to the Government’s annual cash balance.
Most of the indicators in this section may be useful regardless of the particular fiscal strategy being followed. In a few cases (such as the formulation of OBERAC excluding NZS Fund returns), the indicator is used to throw light on the impact of a particular fiscal strategy (in this case the build-up of financial assets in the NZS Fund).
Flow indicators
- Core Crown revenues – core crown expenses + net surplus of SOEs (i.e., after dividends) and Crown entities = Operating balance.
- Core Crown revenues are mainly taxes. Core Crown expenses represent most of the Government’s spending, but not all of it. They are the day-to-day spending (salaries, benefit payments, etc) that does not create Government assets. They also include the amount for new initiatives in forecast years.
- Operating balance – revaluation movements – accounting changes = OBERAC.
- The OBERAC is the residual from revenues and expenses less removal of valuation movements. The OBERAC and operating balance are the same in forecast years.
- OBERAC – retained items (e.g. net surplus of SOEs/CEs and net investment returns of the NZS Fund) – non-cash items (e.g. depreciation) = Core Crown net cash flow from operations.
- Retained items such as the net surplus of SOEs/Crown entities and the net investment returns of the NZS Fund are retained by these entities. The surpluses generated (unless withdrawn from the entities) cannot be used for other purposes so do not aid in funding other government spending.
- Depreciation expense is also removed as it is non-cash (it is captured in the actual purchase of assets below). Additionally, actual working capital movements such as payment of creditor impacts on the level of net cash flows from operations.
- Core Crown net cash flow from operations – net investing activities (e.g., contributions to NZS Fund, purchases of assets, loans to others) = Residual cash.
- Cash flows from core Crown operations (excluding the NZS Fund) are the cash equivalent of the operating surplus. They are available to assist funding the capital spending.
- Net investment activities include: Contributions to the NZS Fund – the Government’s annual contribution to the NZS Fund to build up assets to contribute to future NZS payments; Purchase of assets – departments buy assets including computer equipment, new buildings (eg, prisons) and defence equipment; Loans to others (advances) – these are mainly student loans (the Government is committed to help students access tertiary education by funding student loans) and refinancing private sector debt of DHBs and HNZC; Net capital injections – investments in Crown entities such as DHBs and Reserve Bank reserves.
- Cash available/(shortfall) is the amount that needs to be funded if there is a shortfall. Funding is provided by selling surplus financial assets (because of surplus cash from prior years) or borrowing more.
Stock indicators
- Gross sovereign-issued debt (GSID) = debt issued by the core Crown. (Residual cash available over time is the main factor affecting borrowing requirements and hence gross sovereign-issued debt.)
- Core Crown net debt = gross sovereign-issued debt – core Crown’s financial assets.
- Net worth (NW) = Crown’s total assets – Crown’s total liabilities. (Operating balance (OB) in any year largely drives the change in Net Worth.)
