The New Zealand economy continues to recover from the domestic recession in 2008 and the Global Financial Crisis that followed. The Government's programme to build a more competitive and productive economy remains on track, with real GDP growing by 2.6 per cent for the year ended 30 June 2012 – its highest growth since late 2007.
In this improving economic environment, the operating deficit before gains and losses halved to $9.2 billion in 2011/12, compared with $18.4 billion the previous year. This reflected an increase in tax revenue, as the economy recovered, and lower core Crown expenses, due to a number of factors including costs associated with the Emissions Trading Scheme and the weathertight homes assistance package, and lower Canterbury earthquake recovery costs in the latest year.
The financial impact of the Canterbury earthquakes continues to significantly affect the New Zealand economy and the Government's finances. Total Crown expenses relating to the earthquakes totalled $1.9 billion this year (net of reinsurance) as the cost of insurance claims and red zone property purchases increased, along with the inclusion of an initial estimate of some of the costs associated with replacing water infrastructure in the Canterbury region. These expenses are in addition to the $9.1 billion recorded last year. The Government remains committed to supporting the recovery of the Canterbury region, which is why we've set aside $5.5 billion for the Canterbury Earthquake Recovery Fund.
The OBEGAL deficit in 2011/12 included a $1.4 billion expense in relation to the rail-related assets of KiwiRail. These assets were devalued by $6.3 billion this year, reflecting the Government's decision to move the company towards a more commercially focused operation. With the one-off KiwiRail expense excluded, the deficit would have been $7.8 billion, which is $0.6 billion less than forecast in the Budget in May.
Core Crown tax revenue has risen to $55.1 billion or 26.9 per cent of GDP, compared with $51.6 billion or 26.1 per cent of GDP last year, and was slightly higher than we expected. Core Crown expenses fell to $69.1 billion or 33.8 per cent of GDP, compared with $70.5 billion or 35.6 per cent of GDP last year. Finance costs increased in line with debt, reaching $3.5 billion or 1.7 per cent of GDP this year.
The Government's two large long term liabilities, ACC and the Government Superannuation Fund (GSF), have increased significantly this year, resulting in a loss of $6.8 billion being reported. Because these liabilities are paid out over more than 50 years, the present-day value of these future payments is sensitive to interest rate changes. When interest rates fall, as they have in the past year, the present-day value of these liabilities increases. Conversely, if interest rates rise, the present day-value of these liabilities is expected to decrease.
In addition to the losses on ACC and GSF, significant gains recorded last year by the Government's investment funds (New Zealand Superannuation Fund and ACC) were not repeated this year, as growth in international markets was more subdued.
The operating balance deficit (after taking these gains and losses into account) was $14.9 billion, compared with $13.4 billion last year.
The Government's residual cash deficit improved markedly to $10.6 billion, down from the $13.3 billion deficit last year. Core Crown net debt was less than predicted at $50.7 billion or 24.8 per cent of GDP, compared with $40.1 billion or 20.3 per cent of GDP last year.
Ongoing cash deficits and rising long-term liabilities such as ACC and superannuation have continued to erode the Crown's net worth over the past four years. The Crown's net worth stood at $59.3 billion on 30 June 2012, compared with $80.6 billion a year before. The Crown's balance sheet, as measured by total assets, shrank two per cent to $240.3 billion compared with $245.2 billion a year before.
Hon Bill English
Minister of Finance
28 September 2012