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Operating Balance

Table 7 - Total Crown operating balance (excluding minority interests)
Year ended
30 June
$ million
Actual 2010 Actual 2011 Actual 2012 Actual 2013 Actual 2014 Forecast
30 June 2014
Budget 13 Budget 14
Total Crown OBEGAL (6,315) (18,396) (9,240) (4,414) (2,933) (2,033) (2,447)
Gains and losses:              
ACC actuarial gain/(loss) 410 996 (2,942) 2,369 479 498 1,082
GSF actuarial gain/(loss) (1,231) (574) (3,896) 1,251 577 713
ETS/Kyoto net position (15) 47 350 103 (324) (184)
Investment portfolios:              
     NZS Fund 1,750 3,518 (204) 4,374 3,735 1,358 2,872
     ACC 745 961 944 1,796 730 203 343
     Earthquake Commission 37 109 (53) 1
Other gains/(losses)* 110 (21) 144 1,445 544 332 594
Total Crown gains/(losses) 1,806 5,036 (5,657) 11,339 5,741 2,391 5,420
Total Crown operating balance (4,509) (13,360) (14,897) 6,925 2,808 358 2,973
% of GDP              
Total Crown OBEGAL (3.3)% (9.2)% (4.4)% (2.1)% (1.3)% (0.9)% (1.1)%
Total Crown gains/(losses) 0.9% 2.5% (2.7)% 5.3% 2.5% 1.0% 2.3%
Total Crown Operating balance (2.3)% (6.7)% (7.1)% 3.3% 1.2% 0.2% 1.3%

* Other gains and losses includes the net surplus from associates and joint ventures and operating balances from minority interests

OBEGAL

The OBEGAL deficit narrowed significantly in the latest June year (Table 7). The improved result was mainly owing to higher tax revenue at the total Crown level (as discussed earlier). However, when compared to Budget 2014, the OBEGAL deficit was $0.5 billion bigger than expected largely owing to lower tax revenue than forecast.

Figure 11 - Components of OBEGAL by segment
Figure 11 - Components of OBEGAL by segment   .
Source:  The Treasury

Operating Balance

Adding the Crown's net gains of $5.7 billion to the OBEGAL deficit, the operating balance was a surplus of $2.8 billion ($4.1 billion lower than 2013).

While the Crown recorded net gains in the current year it was less than the previous year, when discount rates increased and equity markets were stronger, resulting in gains of $11.3 billion in that year. These large movements highlight the volatile nature of the operating balance (Figure 12).

Figure 12 - Operating balance
Figure 12 - Operating balance   .
Source:  The Treasury

The NZS Fund recorded $3.7 billion of the total Crown net gains. Their investment portfolio earned strong returns as global equity markets rose. Overall, the Fund returned 19.36% for the year to June (25.83% last year) and now has pre-tax assets of approximately $26.5 billion ($23 billion in 2013).

Changes in the inflation rate and experience adjustments resulted in actuarial gains on the long-term liabilities for ACC insurance and Government Superannuation Fund (GSF) pensions. A decrease in assumed inflation rates resulted in gains of $1.2 billion ($0.8 billion for ACC and $0.4 billion for GSF).

Compared to Budget 2014, the total Crown operating balance was close to forecast.

Canterbury Earthquake Recovery

Table 8 - Net costs to the Crown of the Canterbury Earthquakes to 30 June 2014

Year ending
30 June
$ million
Total to date Actual
to 2013
Actual
2014
Forecast
2014
Difference
to forecast
Local Infrastructure 1,516 1,407 109 101 8
Land zoning 1,000 903 97 (22) 119
Southern Response support package 582 458 124 67 57
Christchurch central city rebuild 588 115 473 456 17
Other earthquake costs 1,040 783 257 361 (104)
Canterbury earthquake recovery costs 4,726 3,666 1,060 963 97
EQC (net of reinsurance proceeds) 7,784 8,026 (242) (412) 170
Other Crown Entities (129) (217) 88 25 63
Total Crown net earthquake costs 12,381 11,475 906 576 330
Operating expenses 11,579 11,253 326 (64) 390
Capital expenditure 802 222 580 640 (60)
Total Crown net earthquake costs 12,381 11,475 906 576 330

This June year the net cost (including both operating and capital spending) of the Canterbury earthquakes was $0.9 billion, $0.4 billion higher than in the June 2013 year, and $0.3 billion higher than expected in Budget 14 (Table 8).  These results bring the total net costs to date to $12.4 billion.  It is important to note that this does not represent the total fiscal impact to the Crown of the earthquakes as some costs are yet to be incurred.

Operating expenses

The most significant operating expenses this year were incurred by:

  • Canterbury Earthquake Recovery Authority (CERA) with $0.2 billion in relation to the central city rebuild, $0.1 billion in relation to land zoning costs (largely  in relation to the red zone), and $0.1 billion for departmental and other costs. 
  • New Zealand Transport Agency with $0.1 billion for repair costs of local roads.
  • Southern Response costs increased around $0.1 billion to June 2014. 

Offsetting these costs were net recoveries of $0.2 billion for EQC and $0.1 billion due to insurance recoveries by agencies.

Capital expenses

Now the work in Christchurch has moved into the rebuild stage, capital costs have started to increase.  In total, just under $0.6 billion of capital expenditure was incurred this year:

  • $0.3 billion related to the Crown acquiring land for use in the Anchor Projects as part of the central city rebuild.
  • $0.1 billion for refurbishment costs in relation to tertiary education institutes and $0.2 billion of costs for Canterbury hospitals, the state housing stock, schools and the new justice and emergency services precinct.

Compared to Budget 2014

The $0.9 billion of costs incurred this year were $0.3 billion higher than forecast in Budget 2014 largely due to the following:

  • Updated actuarial valuations resulted in higher than forecast support package costs for Southern Response and lower than forecast net recoveries for EQC, totalling approximately $0.2 billion.
  • Land zoning costs were $0.1 billion higher than forecast largely due to lower than expected recoveries during the year.  Insurance recoveries with respect to red zone properties were lower than expected and anticipated funding from Christchurch City Council (CCC) for red zoning was also lower due to the level of uncertainty around the timing and amount of land recoveries.

Risk to cost estimates 

Risks remain that the Canterbury earthquake costs will be higher than estimated.  Key risks include the timing of expenditure and escalating costs as well as the independent review of infrastructure costs shared by the CCC and the Crown (due to be completed by 1 December 2014).  Note 30 in the financial statements includes more detail about the costs this year and provides detailed information about the judgements and uncertainties involved in the cost estimations.

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