Operating Balance

Figure 7 - Operating balance

Source:     The Treasury

This year's operating deficit of $10.5 billion is the largest deficit ever recorded by the Crown and compares to an operating surplus of $2.4 billion last year.

The operating balance before gains and losses declined by $9.5 billion compared to the previous year due to decreases in revenue and increases in expenses (as discussed earlier).

Total Crown losses totalled $6.6 billion this year, an increase of $3.3 billion from the previous year. These losses included an ACC actuarial loss of $4.5 billion and NZS Fund investment losses of $3.5 billion. These losses were offset by a gain on the net Kyoto position of $0.8 billion and gains on other financial instruments. These are discussed below in more detail.

Compared to the 2009 Budget, the operating deficit was $1.2 billion larger than forecast.The main contributors were higher than forecast expenses (deposit guarantee scheme, asset impairments) and actuarial loss on ACC, which were partially offset by higher than forecast revenue, investment gains since the 2009 Budget (NZS Fund and ACC) and a lower than expected actuarial loss on GSF (due to an improvement in asset performance and a decrease in the discount rate used to calculate the present value of the obligation).

ACC Actuarial Loss

Each year ACC estimates the present value of expenditure commitments that exist in respect of claims notified and accepted in the current and previous years (but not fully met at balance date), and claims incurred but not notified, or accepted by ACC at balance date. The value of these future commitments is recognised in the statement of financial position as an insurance liability and is independently valued by an actuary each year.

The result of the current year's valuation was an increase in the obligation by $4.5 billion ($2.4 billion higher than forecast). Significant factors in this increase were increases in predicted medical and rehabilitation costs along with a decrease in the discount rate used to calculate the present value of expected payments.

Actuarial valuations on large, long term liabilities such as the ACC claims liability are particularly sensitive to underlying assumptions such as discount rates and inflation rates. A small change in these assumptions could have a significant effect on the value of the liability and the operating balance. A discussion on the sensitivities of these assumptions (and the linkages between these assumptions) is included in the financial statements.

NZS Fund

The NZS Fund recorded an operating deficit of $2.8 billion, including net losses of $3.5 billion, for the year. The investment return for the year was -22.14% (compared to -4.92% last year). The majority of these losses were recorded in the first part of the financial year, while the Fund reported an investment return of 10.89% in the final three months of the year.

Since inception the Fund has returned 3.85% (annualised).

Net Kyoto Position

The Government has committed (under the Kyoto Protocol) to ensuring that New Zealand's average net emissions of greenhouse gases between 2008 and 2012 are reduced to 1990 levels. The net position at any point in time represents the Crown's deficit (or surplus) emissions compared to those 1990 levels. At 30 June 2009, the Crown had surplus units with lower than expected emissions from the agricultural sector and planted forests removing more carbon dioxide per hectare than previously assumed. This surplus compares to a deficit in units last year. When converted at current carbon prices, the move to surplus units this year resulted in a gain of $0.8 billion.

Notes