Summary

The operating balance before gains and losses (OBEGAL) halved from last year's $18.4 billion deficit to $9.2 billion

There were two key factors to the OBEGAL deficit being lower than last year:

• the economy grew which led to higher tax revenue, and
• earthquake costs and core Crown expenses were less than last year.

Offsetting these improvements, KiwiRail restructured their business, which resulted in reductions in their rail-related asset values, with some of this recognised as an impairment expense.

Figure 1 - OBEGAL

Source:  The Treasury

Excluding the net earthquake expenses of $1.9 billion, the OBEGAL deficit was $7.3 billion this year compared to $9.3 billion last year (table 1).

The New Zealand economy continued to recover this year, helped in part by a boost from the Rugby World Cup in the first half of the financial year. 

The labour market grew moderately over the year, as did private consumption despite ongoing household deleveraging. Business profits rebounded too, and investment spending increased, especially in the second half of the year as the Christchurch rebuild gathered momentum. Export volume growth was strong as a result of good production conditions, but prices fell as the year progressed.

All of these factors played a part in nominal GDP growth of 3.5% from last year.

The growth in the nominal economy, the labour market, and both personal and corporate income levels contributed to increased tax revenue of $3.5 billion (6.8%) from the previous year.

Total Crown expenses were $92.7 billion for the year to 30 June 2012 ($7.2 billion less than last year) but excluding the impact of the Canterbury earthquakes, total expenses were $89.9 billion, $3.6 billion more than last year.

Of the total Crown expenses, $69.1 billion was for core Crown^expenses, a decrease of $1.4 billion (figure 2) from 2011.

Figure 2 - Core Crown revenue and expenses

Source:  The Treasury

Core Crown expenses decreased as estimates of costs for weathertight homes fell, recent budget packages took effect, and earthquake costs reduced.

Outside the core Crown, other expenses increased by $5.0 billion, largely due to the impairment of KiwiRail's assets by $1.4 billion (refer page 9). In addition to KiwiRail, general expenses of SOEs and Crown Entities increased across the board, but were largely offset by similar increases in their revenue.

Lower investment gains and increases in the Crown's long-term liabilities meant that the operating balance deficit increased...

Last year a recovering global equity market saw the NZS Fund record net gains of $3.5 billion on their investments, which contributed to total Crown gains of $5.0 billion. This year, equity markets were more subdued and while asset values were sustained, they were not increased significantly.

Figure 3 - Components of the operating deficit

Source:  The Treasury

In addition, the Crown's long-term liabilities (ACC and GSF) had large actuarial adjustments this year, which resulted in a combined actuarial loss of $6.8 billion (page 26).

Overall, the Crown recorded net losses of $5.7 billion this year. Combining that with the OBEGAL deficit of $9.2 billion, the operating balance was in deficit by $14.9 billion, compared to $13.4 billion last year.

...leading to a cash deficit and an increase in borrowings...

Combining the cash impact of the operating results with capital expenditure, the Crown recorded a residual cash deficit for the year of $10.6 billion (table 2).

The operating cash flows are different to the OBEGAL deficit because the cash flows exclude SOE and CE results as well as non-cash items such as depreciation.

The cash deficit was primarily funded through an increase in borrowings through the Government's debt programme but also through the sale of some financial assets.

...and an overall decline in the Crown's net worth.

Combining the operating deficit with a decline in asset value, the net worth attributable to the Crown fell $21.2 billion from last year to stand at $59.3 billion as at 30 June 2012.

In terms of balance sheet composition (figure 4):

• assets fell by $4.9 billion, largely a result of the write-down of KiwiRail assets, while
• liabilities increased by $16.2 billion as borrowings increased to fund the cash deficits and the long-term obligations for ACC and the GSF increased.

Figure 4 - Net Worth attributable to the Crown

Source:  The Treasury