Capital spending and other significant balance sheet assumptions

Transport, defence, and law and order have capital spending aspects that are discussed in this section. This section also describes the assumptions behind other drivers of significant balance sheet components across the projection period.

Core Crown property, plant and equipment

This component of the balance sheet covers core Crown physical assets, including prisons, courts, police stations, defence equipment, conservation estate and some educational property. It is grown with inflation and a growth factor (currently set to labour productivity growth). This is a simplifying assumption as, over a 50-year period, the actual path of capital expenditure on property, plant and equipment will be “lumpy” and alternate between different priorities (eg, between defence equipment and courts) through time.

The growth in this component should be viewed in the context of a large proportion of the assets’ value (in particular, the conservation estate and other assets) remaining constant (this part would increase only by revaluations, which are not forecast). This means that, as a percentage of GDP, this part of property, plant and equipment would decrease slightly over time.

In the modelling of property, plant and equipment, the Long-term Fiscal Model does not include depreciation. The model assumes that depreciation will be fully used to replace existing asset bases and the growth in property, plant and equipment represents the growth over and above depreciation.

State-owned enterprises and Crown entities

A large portion of the initial asset value is in areas where future investment by the core Crown is not likely. These include the start-up capital for state-owned enterprises, which is modelled to keep capital expansion such that their borrowing will remain a constant proportion of their net worth. Growth in state-owned enterprises’ net worth comes from their operating balance (growing with GDP).

Growth in the net worth of Crown entities comes from their operating balance, primarily driven by the surpluses of the Earthquake Commission, Accident Compensation Corporation and Transit New Zealand. In addition, net worth is also grown by the increase in core Crown investments. The growth in net worth then generates increased property, plant and equipment in the Crown entity segment.

The transport component is different to the other Crown entity components, as all transport funding is received as operating revenue by Transit New Zealand and the surplus of this entity reflects the level of capital spending undertaken. The Transit surplus is assumed to grow with inflation, whereas the transport expense is growing with GDP (see above). This assumption means that, over time, a higher proportion will be spent on road maintenance rather than on capital spending. Over a 50-year period, the split between operating and capital is likely to fluctuate. However, while this split could affect the final operating balance, it does not affect gross sovereign-issued debt, as the amount spent in total on both operating and capital is the same.

Core Crown investments and advances

The core Crown investments category covers the investment into Crown entities including Tertiary Educational Institutions, Housing Corporation and District Health Boards. The growth factor applied to this category is an average of the increase over the forecast horizon (which is affected by the scenario allocation of the capital allowance within the forecast horizon) and grows with GDP.

The core Crown advances category covers student loans and advances to Housing Corporation and District Health Boards. This category is mainly driven by the student loan track as per the forecasts contained in the 2006 Budget Economic and Fiscal Update. The remaining advances grow with inflation to keep them constant in real terms. This growth represents debt funding of Crown entity capital; the rest is funded through equity via “investments in Crown entities” described above. Both are recorded as assets for the core Crown and hence the mix is not important for projections of gross sovereign debt and the operating balance. The initial level of advances for Housing Corporation and District Health Boards is determined by the allocation of the capital provision through the scenarios allocation.