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Managing non-debt liabilities

The Crown has many non-debt liabilities requiring careful management. These may arise due to specified contractual arrangements, such as government employee superannuation schemes through the GSF or insurance obligations such as ACC. In addition, the Crown is also exposed to other contingent liabilities, such as Crown guarantees, as well as a range of commitments driven by existing policy settings, the largest of these is New Zealand superannuation.

These future expenses can be funded when they fall due - pay as you go (PAYGO), or they can be matched with assets by saving now based on estimated future needs - save as you go (SAYGO). The discussion below outlines the pros and cons of the respective approaches.

PAYGO

With fiscal pressures arising from an ageing population, a PAYGO approach would require a combination of significantly higher future taxes, lower spending on other objectives, and increased levels of debt. This approach has immediate benefits through lower current taxes or more spending, but it imposes higher costs on future generations that may not receive the benefits.

SAYGO

SAYGO requires higher taxes today or less spending on other objectives, but would see lower future taxes as savings can then be used to meet the future expenses. This is likely to reduce future fiscal pressures and the risk of core Crown debt rising to imprudent levels. It can also lead to economic benefits from increased saving. A SAYGO approach also has the potential benefit of better aligning the costs of an obligation to those who benefit from them, which is considered to be more inter-generationally equitable.

However, there can be risk implications depending on the design of any SAYGO scheme. In addition SAYGO has limitations, it is better suited to circumstances where liabilities are well defined and cannot be avoided by changes to existing policy settings. Overuse of SAYGO may have the unintended effect of unnecessarily locking-in these settings or encourage general fiscal spending because of the better asset position.

Implementing SAYGO

The Crown can save today by investing in assets to match its liabilities using fiscal surpluses or levies, such as in the case of EQC. Alternatively, funds can be used to lower net core Crown debt.

Saving through the use of funds for specific purposes provides greater transparency, and it is likely to be more widely understood. This contrasts with lower levels of core Crown debt which may be less permanent if the reasons for lower debt are not well understood. This could undermine saving for future obligations.

Funding arrangements for non-debt liabilities

The Crown has a range of funding arrangements that depend on the circumstances of the non-debt liability. Non-debt liabilities that are contractual in nature tend to be funded through SAYGO schemes. Future policy obligations tend to be PAYGO, with the exception of New Zealand superannuation. Contingent and unexpected obligations are managed by fiscal buffers.

ACC liabilities are largely fully-funded contractual obligations, however GSF obligations are far less than 100% funded. The NZSF was established to recognise there is a strong policy commitment for New Zealand superannuation.

The NDF has a mandate to hold assets to meet the costs of future natural disasters. The Crown's other contingent liabilities and unexpected expenses are managed by holding core Crown debt at lower levels so there is a fiscal buffer available when needed. Not all contingent and unexpected events are likely to occur at once, which allows the Crown to cover a range of risks with a smaller fiscal buffer.

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