Summary
The economic recovery continues…
The New Zealand economy suffered a sharp fall in the rate of growth in nominal GDP as a result of the global financial crisis (figure 1). Annual nominal GDP growth, however, remained positive as it was supported by the strength of our major trading partners, particularly Australia and China.
- Figure 1 - Nominal and Real GDP growth
- Source: The Treasury
Strong demand from China led to a rapid recovery in New Zealand's commodity prices and terms of trade, boosting nominal GDP in the March and June quarters of 2010.
While the impact of the overseas recovery on the demand for our exports has been strong, the domestic economy is showing cautious growth. The recovery in business investment and labour markets has been muted as profitability has not yet reached previous levels.
Tax revenue reflects this lower profitability and subdued labour markets.
As the gap between revenue and expenses widens…
While core Crown tax revenue declined for the second consecutive year, expenses remained flat year-on-year. This increasing divergence has lead to a continuation of operating deficits (figure 2).
- Figure 2 - Core Crown tax revenue and core Crown expenses
- Source: The Treasury
Core Crown tax revenue fell as both tax cuts and recessionary impacts continued to reduce the Crown's income. Included in the previous year's revenue was $1.4 billion in relation to tax on structured finance transactions not previously recognised. Excluding this one-off revenue the decrease in revenue since last year was $2.5 billion. Figure 7 on page 8 summarises the movements for the year.
In contrast core Crown expenses were flat compared to last year. This follows a large increase in last year's expenses compared to 2008. As with tax revenue, the previous year's expenses included some “exceptional” items (eg, deposit guarantee provisioning and a loss on the purchase of KiwiRail). Excluding these expenses, Core Crown expenses rose by $1.1 billion from last year.
Resulting in an operating deficit…
With revenues falling and expenses remaining static, the operating deficit before gains and losses (OBEGAL) increased $2.4 billion from last year to reach $6.3 billion for the year ended 30 June 2010.
Recovery in investment markets, however, contributed to the Crown making a net gain for the year of $1.8 billion (recovering some of the $6.6 billion loss incurred in the previous year).
Overall, the operating deficit was smaller than last year at $4.5 billion.
- Figure 3 - Components of the operating deficit
- Source: The Treasury
Leading to increased borrowings…
Combining the cash impact of the operating results with capital expenditure and advances, the Crown recorded a residual cash deficit for the year of $9.0 billion. This deficit was funded through an increase in borrowings, primarily through the domestic bond programme (figure 4).
- Figure 4 - Cash proceeds from issue of market domestic bonds
- Source: The Treasury
And a reduction in net worth
Operating deficits have led to a decline in net worth. The Crown's net worth fell $4.5 billion to just under $95.0 billion at 30 June 2010.
