4.5 Forecasting Policies
This section sets out requirements in policies with regard to forecasting.
Departments' forecasts are a crucial part of the annual Budget and fiscal management cycle. Consolidated forecasts are used to:
- feed into the government's decisions around their fiscal strategy;
- assist Ministers' decision making about the affordability of the Budget package at the whole of Crown level; and
- determine the amount and timing of the Government's borrowing programme.
Given the importance of fiscal forecasts in the decision-making process, departments' forecast processes must be robust to produce supportable and credible forecasts. This covers both accrual and cash forecasts. Departments' own management review and quality assurances of the forecasts are a vital part of the process and Chief Executives are required to sign-off on the forecasts in the form of a statement of representation.
4.5.1 General forecasting policies
Forecasts (both departmental and non-departmental) are to be prepared on a midpoint estimates basis using best professional judgment, reflecting information and circumstances at the date the forecasts are provided. Appropriate quality analysis of the forecast is required before submitting to Treasury. When updating forecast information (both the five-year forecasts and monthly forecast tracks), departments should use their best estimates of the actual spending patterns. Treasury recommends that monthly forecast tracks are prepared at the same time as preparing the five-year fiscal forecasts where possible.
Forecasts for all periods and outyears should be realistic and credible. Multi-year appropriation expenditure (for example) should be realistically spread across their duration, not “front-loaded”. Capital expenditure (in particular) can be subject to slippage and forecasts should allow sufficient time for approval, consent and tendering processes to be completed. The timing of a transaction can be different under accrual and cash accounting practices and this timing difference should be reflected in the separate accrual and cash flow forecast schedules.
For departments, forecasts should be based on expected results rather than appropriation limits. Typically, expenditure forecasts should be less than approved appropriation levels (which are maximum levels).
Entities should confirm material forecast inter-entity balances (i.e. over $10m) with the counter-party, and if the transactions are to occur over a period, then this confirmation should include the phasing of the expenditure. Both sides to a material inter-entity transaction must have the same basis for their forecasts. For further guidance on eliminating inter-entity transactions and balances refer to Treasury's elimination framework available on the Treasury website at: http://www.treasury.govt.nz/publications/guidance/reporting/accounting
In general, forecasts of assets and liabilities should use the valuations as recorded in the Financial Statements of the Government for the prior year and any additional valuations that have occurred up to the forecast reference date. As a consequence, no further realised or unrealised gains or losses are forecast for the entire forecast period. An exception to this general policy is that expected physical growth changes in agricultural assets and long term rates of return in large investment funds (as set out in section 4.5.2 below) should be forecast.
Refer also section 6.2.3 for the Treasury's expectations on entities providing financial information to the Treasury.
Treasury provides departments with feedback on their forecasting performance at the end of each financial year.
4.5.2 Forecasting policies for financial assets and liabilities
Forecast sales and purchases of bonds and other liquid instruments are assumed to be issued at par value, with no discounts or premiums forecasted. Generally, financial assets and financial liabilities held at the forecast reference date are assumed to be held until they mature.
Forecasts of instruments that have non-market elements (e.g. low or no interest rates with long maturities such as student loans or social benefit receivables) should include the forecast write-down to fair value on initial recognition and the revenue from the effective interest unwind.
Interest income and interest expense are recognised using the effective interest rate method (which in most instances will equal the coupon rate for future instruments).
Forecasts use the exchange rates, interest rate curves and electricity pricing curves prevailing at the forecast reference date. As a consequence, no additional realised or unrealised foreign exchange gains or losses are forecast for the entire forecast period.
Gains and losses reflect long run rate of return assumptions appropriate to the forecast portfolio mix, after adjusting for interest income and interest expense (recognised separately using the effective interest rate method).
4.5.3 Forecasting policies for derivatives
Only the value of derivatives as at the forecast reference date may be realised - no additional realised or unrealised derivative gains or losses are recognised over the forecast period. Forward margins on forward foreign exchange contracts existing at the start of the forecast period are amortised over the period of the contract on a straight line basis.
Forecasts for derivatives should only include those that exist at the forecast reference date, and then only to their maturity. That is, by the end of the forecast period only those derivatives existing at the forecast reference date with a maturity beyond the end of the period should be recognised in the financial statements.
Future derivative activity should not be included in forecasts. This is because fair value forecasts of future derivatives are zero due to forecast exchange rates being fixed at the rate at the forecast reference date, as are interest rate curves and other assumptions (e.g. electricity pricing curves) affecting the value of derivatives.
4.5.4 Forecasting policies for property plant and equipment
Forecasts of the value of property, plant and equipment (including state highways and rail infrastructure), must use the valuations as recorded in the Financial Statements of the Government for the prior year and any additional valuations that have occurred up to the forecast reference date. As a consequence, no further realised or unrealised gains or losses are forecast for the entire forecast period.
The cost of forecast leasehold improvements is capitalised and amortised over the forecast unexpired period of the lease or the estimated useful life of the improvements, whichever is shorter.
Entities should review forecasts for the purchase of physical assets to ensure they show a realistic profile across all forecast years (analysis of prior year forecasts shows forecasts for purchases of such are typically below actual results).
4.5.5 Forecasting departmental net assets
Section 22(3) of the Act states that net asset holdings in a department must not exceed the most recent projected balance of net assets for that department at the end of the financial year.
The Details of Projected Movements in Departmental Net Assets (the “net assets table”) is included for each department in the Estimates of Appropriations. When a Budget forecast is prepared this net assets table is populated automatically from the department's forecast Statement of Financial Position. This table consists of the opening balance of net assets, plus/minus capital injections and withdrawals, plus surplus to be retained or deficit incurred plus other movements.
Some departments forecast a deficit rather than a surplus. A deficit will generally result in reducing the department's projected net asset position. However, if a department's deficit is lower than forecast (i.e. it forecast a deficit of $100, but actually ended up with a deficit of only $70) then it will end the year with a higher than projected net asset balance resulting in a breach of the Act. This may then also impact on the following year's net asset balance. If a department has projected a deficit then they should contact the Treasury for further guidance on how to make an adjustment to maintain the level of net assets and prevent a breach of the Act.
4.5.6 Other forecasting policies
Forecast operating lease revenues and expenses are recognised in a systematic manner over the forecast term of the lease.
