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Annex 1: Operating provision principles

Determining whether something impacts on the provisions can sometimes be a complex exercise. Currently underway is a review to bring together the experience over the last five years with the aim of improving (and simplifying) the decision making processes, as well as addressing some of the anomalies that can occur at the margins of the framework.

Following is an extract of guidance material available to Treasury analysts, and reflects (in greater detail) what has been published in various Economic and Fiscal Updates since December 1996.

Operating Balance

Principle – All changes in the operating balance resulting from a discrete government decision to introduce a new initiative or change the cost of existing initiatives impact against the $5.9 billion limit, whether they be changes in revenue, expenses or surpluses of SOEs and Crown entities.

Principle – The calculation of impacts is based on the net impact to the operating balance – where this can be calculated. For example, for benefit increases, the impact is net of the income tax component.

Principle – Excluded from the framework are all costs associated with forecasting changes, the recognition of existing contingent liabilities, and costs arising from natural disasters and civil emergencies.

Principle – Impacts are calculated based on the GST inclusive total, to align the framework to the appropriations framework.

What this means in practice is:

  • Gains or losses on sale of assets do not impact, even though they affect the Crown’s operating balance. They do not impact, as they are a direct function of the carrying value in the financial statements, which could vary substantially depending upon factors such as accounting policies, revaluation policies and timing of cyclical revaluations. Accordingly, the gain or loss may be considered subjective (and potentially manipulable).
  • Any action taken to sell assets below market value by the Government will impact against the $5.9 billion fiscal provisions, as this would be a discrete Government decision. The amount that would impact is the difference between market value and the sale price.
  • On the other hand, if a board of an SOE/CE made the decision to sell assets below market value with no government involvement, as opposed to being a government directive, then this would not impact. The government has no discretion in this instance.
  • Devaluations only impact on the Crown operating balance where the impact of the devaluation exceeds the balance in the Crown’s revaluation reserve for that particular class of asset. Revaluations which impact on the operating balance do not count for two reasons:
    • The rationale for not counting gains/losses on sale of fixed assets is that it simply reflects the latest valuation of the assets. The same should apply for any revaluation reserve deficit taken to the operating balance.
    • Where the devaluation results from a specific government decision (e.g. to introduce competition and lower prices), then the change in asset value effectively represents the discounted value of future profits foregone, which will already have impacted on the fiscal provisions.

Policy and Forecasting Changes

Principle – Forecasting changes do not impact on the fiscal provisions. However, there are boundary issues around what is a forecasting change and what is a policy change. For the purposes of counting, a forecasting change is a change where existing policy is such that there will be an automatic change in funding in response to volume change (and government agreement to this change is simply an administrative or rubber stamping exercise).

Principle – Fiscal impacts of implementing existing policy do not impact. However, decisions to change the cost of existing initiatives do impact.

Forecasting Changes

  • How do you distinguish a forecasting change from a policy decision? The basic criteria for a forecasting change is that there is an existing policy or formula that determines that additional expenditure, and Cabinet approval is just an administrative or rubber-stamping exercise. A forecasting change includes the possibility that the baseline will be reduced if volumes go down.
  • Changes to welfare benefit expenses resulting from changes to CPI (which affects CPI indexation) and volume changes (not attributable to a new Government initiative) do not impact. A Government decision to change the benefit rates, on the other hand, does impact.
  • In relation to settlement of Treaty claims, the settlement itself does not impact on the fiscal provisions. Where there is an interest component (because this component is discretionary) it will impact on the fiscal provisions. However, an increase in interest payments due to a delay in signing the deed (which is not a result of a government decision) would not impact on the provisions.

Policy (versus Forecasting) Change

  • Prison musters: an example of the distinction between a policy decision and a forecast change is a decision to increase funding for prison musters. This impacts on the fiscal provisions, as there is no existing policy that states that there will be an increase/decrease in funding if prison muster levels change, i.e. it is not a forecasting change. There is no set formula in place that gets adjusted regularly to account for volume changes.
  • A significant number of government policy decisions that will impact are made in response to changes in demand.

Existing Policy Changes

  • For example, an increase in quotas for New Zealand at the IMF: this would not impact as it is not a new policy decision, rather compliance with existing policy (i.e. membership of the IMF and associated quota contributions).
  • There is sometimes a fine line between implementing current policy and introducing new policy. These situations will need to be assessed on a case-by-case basis in consultation with the Budget Team.

Existing Contingent Liabilities

Principle – The recognition of existing contingent liabilities does not impact on the fiscal provisions.

Examples:

  • Settlement of existing litigation does not count and, similarly, additional litigation costs associated with defending an existing liability do not impact.
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