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Assets and liabilities

  • The government's balance sheet comprised $217 billion in assets and $118 billion in liabilities, as at 30 June 2009.
  • The government's net worth is projected to fall from 56% of GDP in 2009 to 31% in 2013, reflecting the impact of the recession.

While the fiscal outlook is primarily driven by taxation and spending flows, changes in asset and liability values also matter for the Government's fiscal position.

A broader measure of the Government's fiscal position than net debt is net worth, the difference between the assets and liabilities on the balance sheet. The balance sheet is made up of assets, debt and non-debt liabilities such as obligations to people under the accident compensation scheme. The Government's net worth is projected to almost halve as a percent of GDP over the next five years, due to rising debt as the Government absorbs much of the impact of the recession on its balance sheet.

Figure 7.14 - Total Crown net worth
Figure 7.14 - Total Crown net worth.
Sources:  The Treasury

Maintaining a net worth buffer over time enables the government to absorb future shocks. The government holds assets for a variety of reasons, but these need to be managed in a manner consistent with achieving the government's fiscal objectives.

Some assets have largely commercial objectives. State-owned enterprises comprise $45 billion of assets and Crown financial institutions (such as the NZS Fund and Accident Compensation Corporation) hold $34 billion of financial assets such as share market investments. Managing these commercial and financial assets to achieve commercial rates of return will be beneficial to the long-term fiscal position, as well as the performance of the New Zealand economy.

New spending on capital initiatives, just like operating expenditure, will be constrained by long-term fiscal pressures. Planned new capital expenditure allowances are projected to be $1.65 billion until 2015, reflecting the Government's infrastructure investment policy. After that, the capital allocation, under both main scenarios, is projected to reduce to $950 million a year and grow with inflation beyond that. This compares with new capital spending allowances averaging $2.1 billion in the Budgets from 2000 to 2008.

The available amount of new capital spending will impact on the level of capital assets that the Government holds for non-commercial purposes, such as prisons and hospitals. This emphasises the importance of disciplined capital investment decisions and, where appropriate, learning from the private sector to most effectively manage those capital assets. Capital-intensive sectors may require wider institutional reforms to manage to a constrained capital expenditure growth path (for example, criminal justice policies impact on the need for new prisons).

Managing future shocks to the balance sheet

The recent global financial crisis and subsequent global economic recession have had dramatic impacts on the balance sheets of governments across the OECD. It is likely that another sharply negative economic shock will occur at some point over a 40-year horizon, particularly given that many of the global and domestic imbalances that existed prior to the current shock still remain. Providing a buffer against such potential future shocks is one rationale for ensuring that the Government's debt is managed down to prudent levels.

The projections assume that the rate of economic growth reaches and remains at trend over the period from 2016. This implies that macroeconomic shocks are symmetric - upturns and downturns average out. Even if this is the case, the response of policy makers may not be. Increased spending (and lower taxes) in downturns to smooth economic activity may not be matched by spending restraint (and higher taxes) during upturns.

Furthermore, the risks for the New Zealand economy could be weighted to the downside. For example, the New Zealand economy has vulnerabilities stemming from high levels of external debt. If these imbalances do not unwind smoothly, adverse economic scenarios could be envisaged where a sharp and painful current account reversal occurs as foreign investors withdraw their capital.

The Crown's balance sheet is exposed to a wide array of other risks - for example, the market volatility of its financial assets and liabilities, as well as off-balance sheet exposures such as explicit and implicit contingent liabilities. An explicit contingent liability is the government's deposit guarantee scheme which, in the event of failure of financial institutions, could represent a call on the Crown of some portion of the $130 billion facility. Implicit liabilities include risks that governments could be expected to take on the liabilities from other parts of the economy, such as natural disasters.

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