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 (ie, 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. There 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 (eg, net surplus of SOEs/CEs and net investment returns of the NZS Fund) – non-cash items (eg, 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 The surpluses generated (unless withdrawn from the entities) cannot be used for other purposes so do not aid in funding other government spending.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 (eg, 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.

Residual cash 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.

Ratio of core Crown revenue to GDP

Ratio of core Crown revenue to GDP

The revenue collected is used to meet the Government’s spending needs. It is important to look at this alongside expenses, operating balance and gross debt indicators for insights into the sustainability of current policy settings.

Ratio of core Crown expenses to GDP

Ratio of core Crown expenses to GDP

This shows the day-to-day spending of the core Crown – ie, it excludes spending by SOEs and Crown entities – and highlights the size of government in the economy and potential scope for crowding out the private sector. This also excludes GSF valuation changes.

By reducing gross debt, the Government has also reduced finance costs.

Operating balance

Operating balance

The operating balance shows whether the government sector has generated enough revenues to cover its expenses in any given year.

This measure can be volatile from year to year due to events outside of the Government’s direct control (such as changes in interest rates and revaluations etc); therefore, it is generally not used as a measure of the Government’s short-term fiscal stewardship.

OBERAC

OBERAC

By excluding revaluations and accounting changes, or things that are outside of the Government’s direct control, the OBERAC gives a more direct indication of the underlying stewardship of the Government.

The current Government wishes to retain the NZS Fund investment returns in the Fund. Therefore, to ensure the Government is meeting its fiscal objectives, the Government has stated that it will be focusing on the OBERAC excluding NZS Fund returns.

Residual cash available and domestic bond programme

Residual cash available and domestic bond programme

The residual cash measure includes capital investment and NZS Fund contributions; therefore, it is the flow contributing to the changes in debt (in the current year net core Crown debt).

The domestic bond programme raises term debt for the Government, the proceeds of which contribute to funding operating and investing activity, and the repayment of maturing debt. The programme tends to be different to the cash residual figure in any given year as financing activity, such as the repayment of debt, needs to be considered.

Gross debt

Gross debt

Total gross debt and GSID are often expressed as a percentage of GDP to put the level of debt into perspective, in terms of a country’s ability to generate growth to repay the debt and/or income to service this debt.

Total gross debt represents the complete picture of whole-of-government obligations to external parties. However, debt issued by SOEs and Crown entities is not explicitly guaranteed by the Crown. The debt that is issued by the sovereign and guaranteed by the sovereign is in GSID. The Government’s long-term debt objective is formulated in terms of GSID.

A high ratio of debt to GDP can have an adverse impact on credit ratings and perceived sustainability of current policy settings. So as a general rule, a relatively low ratio is considered to be prudent. A low ratio of debt to GDP can also provide the Government with more flexibility in their accounts to respond to adverse shocks through increasing debt.

Core Crown financial assets

Core Crown financial assets

These are either cash or shares (equity) or a right to receive a financial instrument, which can be converted to cash. The assets of the New Zealand Superannuation (NZS) Fund are becoming the dominant feature of the Crown’s financial assets. The NZS Fund is the Government’s means of building up assets to partially pre-fund future NZS expenses. The Government’s contributions to the NZS Fund are calculated over a 40-year rolling horizon to ensure superannuation entitlements over the next 40 years can be met.

Established under the New Zealand Superannuation and Retirement Income Act 2001, the NZS Fund was created to partially provide for the future cost of NZS, which is expected to almost double in cost due to population ageing.

The Government plans to allocate around $2 billion a year to the NZS Fund over the next 20 years. The NZS Fund’s mandate is to invest money in a way that maximises its returns, without undue risk.

As the cost of providing NZS increases, future governments will draw on the NZS Fund to help smooth the impact of the cost of NZS on their finances.

Core Crown net debt

Core Crown net debt

By including financial assets, net debt can provide additional information about the sustainability of the Government’s accounts. Many international agencies believe the quantity of off-setting financial assets is important when determining the credit-worthiness of a country. That is, if a country has a high ratio of financial assets to GDP, they are better able to justify a high ratio of debt to GDP.

However, as some financial assets are not very liquefiable (or easily converted into cash), it is important to view net debt alongside GSID.

Net worth

Net worth

Total Crown net worth is one indicator of the degree to which current government activities are sustainable. This indicator should be considered alongside the Crown’s debt position, as relatively high debt to GDP ratios may still be considered sustainable if the Crown has relatively high ratios of saleable or commercial assets to GDP.

Building up net worth is also consistent with preparing for population ageing.