Budget Economic and Fiscal Update 2010

Other Information#

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Information supporting the Budget Economic and Fiscal Update on this website that should be read in conjunction with the published document:

• Estimates of Revenue Effects of Small Tax Rate and Tax Base Changes
• Technical Note on the Basis of Assumptions Regarding the Effect of the Tax Package on Forecast and Projected Economic Growth by the Treasury (20 May 2010):
  
  Technical Note on the Basis of Assumptions Regarding the Effect of the Tax Package on Forecast and Projected Economic Growth - 20 May 2010

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Statement of Responsibility#

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On the basis of the economic and fiscal information available to it, the Treasury has used its best professional judgement in supplying the Minister of Finance with this Economic and Fiscal Update. The Update incorporates the fiscal and economic implications both of Government decisions and circumstances as at 4 May 2010 that were communicated to me, and of other economic and fiscal information available to the Treasury in accordance with the provisions of the Public Finance Act 1989.

John Whitehead
Secretary to the Treasury

11 May 2010

This Economic and Fiscal Update has been prepared in accordance with the Public Finance Act 1989. I accept overall responsibility for the integrity of the disclosures contained in this Update, and the consistency and completeness of the Update information in accordance with the requirements of the Public Finance Act 1989.

To enable the Treasury to prepare this Update, I have ensured that the Secretary to the Treasury has been advised of all Government decisions and other circumstances as at 4 May 2010 of which I was aware and that had material economic or fiscal implications.

Hon Bill English
Minister of Finance

11 May 2010

Economic and Fiscal Update#

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Overview#

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The New Zealand economy is expected to continue its recovery from recession. After contracting in both the March 2009 and 2010 years, the economy is forecast to grow by around 3% per annum over the next four years. This recovery is expected to flow through to the fiscal position and drive a reduction in operating deficits.

However, the economy has suffered an ongoing loss of output compared to what was expected before the recession and the recovery is expected to be more gradual than previous upturns. With operating deficits remaining over the forecast period, net core Crown debt is expected to rise steadily. Medium-term projections in the Fiscal Strategy Report show the operating balance (before gains and losses) returns to surplus in the June 2016 year.

Uncertainty continues to surround the outlook, particularly the strength of the current recovery and whether imbalances in the economy that built up in the previous expansion will adjust. There are also growing risks associated with recent developments in Europe related to sovereign debt. Some of the key risks to the outlook are explored in alternative scenarios, with stronger or weaker outcomes possible.

Economic Outlook

The economy is expected to experience above-average growth over the next four years as it recovers gradually from recession. The forecast recovery is driven by stimulatory monetary conditions, a stronger global economy, an associated rise in export volumes and prices, and high confidence levels. The economy is also expected to be positively affected by significant tax reform in Budget 2010, including:

• a reduction in personal income tax rates at existing income thresholds to 10.5%, 17.5%, 30% and 33% from 1 October 2010
• a rise in GST from 12.5% to 15% on 1 October 2010, and
• a cut in the tax rate for companies, portfolio investment entities and other savings vehicles from 30% to 28% and base-broadening measures from 1 April 2011.

These changes shift the burden of taxes to sources less harmful for growth. Personal income tax cuts are expected to raise the supply of labour by increasing the economic returns of working. They will also help encourage more saving. For businesses, the tax changes may help reorient investment towards more productive parts of the economy.

The nominal economy is forecast to grow strongly over the next two years as real growth recovers, the terms of trade strengthen and inflation is higher. Consumer price inflation is expected to temporarily spike over the next year as a result of changes in government policy, particularly the rise in GST. The strengthening nominal economy flows through to growing tax revenue, although taxes lag the recovery because of a build-up of corporate losses emanating from the recent recession.

Fiscal Outlook

The fiscal position has weakened significantly in recent years. Crown revenue has fallen owing to a combination of income tax cuts, the recession and a long-lasting impact on the economy from the global financial crisis. Previous spending decisions, which had been in place before the crisis, lifted Crown expenses. The recession added to this increase as a weaker labour market caused the number of Unemployment Benefit recipients to rise. As expenses rose and revenue fell, the Crown operating balance was in deficit in the June 2009 year for the first time in 15 years.

Operating deficits are expected to fall over the next four years owing largely to a recovery in tax revenue. Crown expenses are forecast to rise, boosted by higher benefit payments when GST rises, but trend down as a share of the economy as unemployment falls and the annual operating allowance remains at $1.1 billion (growing at 2% per annum after 2010/11). However, the operating balance is still expected to be in structural (ie, non-cyclical) deficit over the forecast period.

Ongoing operating deficits are expected to see a fall in net worth over the forecast period, as well as a rise in net debt to over 26% of Gross Domestic Product (GDP). Although debt levels would remain lower than most developed nations, New Zealand faces relatively high borrowing costs so the financing costs of any given level of debt are higher. As outlined in the Fiscal Strategy Report, the Government's long-term fiscal objective is for net debt to be brought back to a level no higher than 20% of GDP by the early 2020s.

Notes:

1. Real production GDP, annual average percentage change
2. Consumers Price Index, annual percentage change
3. Percent of labour force, March quarter, seasonally adjusted.
4. Total Crown operating balance before gains and losses
5. Net core Crown debt excluding the New Zealand Superannuation Fund and advances
6. Total Crown net worth

Sources: Statistics New Zealand, the Treasury

Economic Outlook#

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The economy is recovering from recession...

Figure 1.1 - Real production GDP

Source:  Sources: Hall and McDermott (2009), Statistics
New Zealand, the Treasury

The New Zealand economy contracted throughout 2008 and early 2009 (Figure 1.1). The initial triggers of recession in early 2008 were domestic factors, including drought and tight monetary policy to combat growing inflation pressures at the time. This domestic-led recession was deepened by the global financial crisis, which escalated in mid-September 2008.

The impact of the global downturn on New Zealand, while significant, was smaller than for most developed nations. In the OECD, only Australia and Poland had smaller falls in real output from when the crisis began. New Zealand’s performance was supported by a sound financial system, growth in key trading partners China and Australia, strong commodity exports, falling emigration and monetary and fiscal stimulus. These factors also helped pull New Zealand out of recession in the June 2009 quarter. Although the beginning of the recovery in mid-2009 was subdued, it gathered strength in the December quarter with growth of 0.8%.

...but significant imbalances built up before the recession

Significant imbalances built up in the economy during the expansion in the 2000s. These imbalances, although closely related, can be broadly categorised as follows:

• Strong domestic demand, including government expenditure, gradually increased pressure on available resources and resulted in persistently high inflation. Monetary policy tightened during this period, with higher interest rates encouraging the New Zealand dollar to appreciate.
• Domestic demand was partially funded from high rates of borrowing, with household and agriculture debt rising sharply over much of the 2000s driven partly by increasing house and farm prices. However, house and farm prices rose well above fundamental determinants, such as income and farm returns.
• The years leading up to recession featured a divergence of growth between sectors. The tradable sector, which includes primary, manufacturing and tourism industries, did not grow from early 2004 to the peak of the last economic upturn in late 2007. In contrast, non-tradable industries such as construction, retail and government administration grew strongly.
• Relatively strong investment and a fall in national saving, led by households, contributed to a rise in the current account deficit to around 8% of GDP on average from 2004 to 2008, before it fell during the recession. The savings of foreigners were increasingly used to finance these deficits, which raised the net international liability position to over 90% of GDP by early 2009.

These imbalances were facilitated by easier global credit and low risk aversion, and were also apparent in other developed nations. Although New Zealand came through the recent global downturn relatively well, New Zealand's past and projected current account deficits, domestic indebtedness and its net international liability position are large relative to most developed nations, making the economy vulnerable to some types of shocks. With a gradual economic recovery expected to continue, the current account deficit is forecast to widen again from 2.6% of GDP to over 7% of GDP. Such deficits would mean a rise in the net international liability position to 100% of GDP by mid-2014 (Figure 1.2). However, there are a number of factors that support New Zealand's position. These include sound macroeconomic settings (eg, a flexible exchange rate and independent monetary policy), external debt that is largely denominated in local currency or hedged, relatively low public debt and a robust banking system.

Figure 1.2 - Current account balance and net international investment position

Source:  Statistics New Zealand, the Treasury

The recovery from recession is expected to be gradual...

After a fall of 1.4% in the March 2009 year and 0.3% in the March 2010 year, real output is expected to grow at around 3% per annum: 3.2% in the March 2011 year; 3.1% the next year; 2.9% in the March 2013 year; and 3.0% in the March 2014 year. These growth rates are higher than our estimate of potential growth over these four years of around 2.8% per annum.[1] The positive outlook is supported by the lagged impact of an easing in monetary conditions since mid-2008, a stronger global environment and associated higher demand for exports, high confidence levels, the hosting of the Rugby World Cup in late 2011 and the tax package.

The tax package in Budget 2010 has a significant impact on the economic outlook, although the exact impact will depend on the responses of numerous firms and individuals and is therefore uncertain. The tax package and its impacts are outlined on pages 68 to 70. At the economy-wide level, the main impacts are assumed to be:

• The level of real output is expected to be 0.9% higher in the long run. By the June 2014 quarter, the economic forecasts incorporate a level of real outputthat is 0.4% higher than in the absence of the tax package. This impact takes time given the amount of spare capacity in the economy currently. Therefore, in the medium-term projections in the Fiscal Strategy Report, a further impact of 0.5% is expected by June 2017.
• The tax package is also forecast to cause volatility in output growth in the second half of 2010. Real output is expected to grow strongly in the September quarter and fall slightly the next quarter as some consumer spending, particularly on durable goods, is brought forward before the increase in the GST rate on 1 October 2010.
• The tax changes are expected to boost incomes, help encourage more saving and reorient investment towards more productive parts of the economy.

Table 1.2 - Economic forecasts

Notes:

1. Forecasts finalised 16 April 2010
2. Contribution to GDP growth
3. Estimated as the percentage difference between actual real GDP and potential real GDP
4. Household Labour Force Survey, percent of the labour force, March quarter, seasonally adjusted
5. Quarterly Employment Survey, average ordinary-time hourly earnings, annual percentage change
6. Annual percentage change
7. System of National Accounts (SNA) basis, annual average percentage change
8. Average for the March quarter, actual for 2010

A longer time series for these variables is provided on page 160.

Sources: Statistics New Zealand, Reserve Bank of New Zealand, the Treasury

...as the global economy strengthens...

A stronger global economy is an important driver of these forecasts. The global financial crisis in late 2008 led the world economy into its worst and most synchronised recession since World War II. Output in the economies of our top-12 trading partners is estimated to have fallen by 0.9% in the 2009 calendar year, including falls of 2.4% in the United States, 4.9% in the United Kingdom and 5.2% in Japan. However, the recovery in the global economy has taken hold more strongly than previously expected, and all our major trading partners have returned to growth, with emerging economies particularly robust.

The economies of our top-12 trading partners are expected to grow by a relatively strong 3.7% in each of 2010 and 2011, and an average of 3.5% in each of the subsequent three years. Fast-growing emerging economies, particularly China, helped lead the world out of recession, and will remain crucial drivers of the global economy. New Zealand will benefit as fast-growing countries are taking a larger share of our exports over time. There will also be indirect benefits as economic growth in Australia, New Zealand's largest trading partner, is boosted by demand for minerals from emerging markets.

Although the global outlook is stronger than previously expected, there is still an ongoing impact from the financial crisis. Weak recoveries are predicted in Europe, Japan and the United Kingdom, in contrast to high growth in emerging economies. There are also a number of potential threats to the sustainability of the global recovery, which are explored further in the Risks and Scenarios section from page 76. In particular, concerns over sovereign debt in the Euro area, which have reached crisis levels in Greece and threaten to spread further, have worsened significantly since the Budget forecasts were finalised.

...and boosts demand for New Zealand's exports

World spot prices for New Zealand's commodity exports have returned to the peaks of 2008. A stronger world economy, especially emerging economies, has contributed to the rebound in prices, particularly for dairy products. Some of this increase is expected to be temporary, but dairy prices will be underpinned by growing demand for protein in the developing world as incomes rise. Higher export prices relative to import prices are expected to see the merchandise terms of trade strengthen (Figure 1.3).

Figure 1.3 - Merchandise terms of trade (SNA)

Source:  Statistics New Zealand, the Treasury

Growth in export volumes is forecast to rise as trading partner growth strengthens and the Rugby World Cup in late 2011 temporarily lifts services exports. Ongoing strong growth in exports over the rest of the forecast period reflects an assumed gradual depreciation of the New Zealand dollar. Already, a relatively low exchange rate against the Australian dollar has lifted prospects for service exports and non-commodity manufacturing. Changes in tax policy that help to shift resources to the tradable sector are also assumed to boost non-commodity exports slightly.

Inflation spikes temporarily because of a number of policy changes

A gradual tightening of monetary policy is expected over the forecast period, which sees 90-day interest rates rise from below 3% in the first half of 2010 to 4.8% in the September 2011 quarter and 5.8% by mid-2014. The output gap, the difference between actual and potential output, is estimated to close slowly from around -2% of GDP in the March 2010 year to almost zero by mid-2014. Underlying inflation pressures are thus expected to rise but stay relatively subdued.

Figure 1.4 - Consumers Price Index

Source:  Statistics New Zealand, the Treasury

Including policy changes, however, Consumers Price Index (CPI) inflation is forecast to rise to 5.9% in the year to March 2011 (Figure 1.4):

• The rise in tobacco excise taxes is expected to add 0.5% to the CPI between the June 2010 and March 2011 quarters.
• The introduction of the Emissions Trading Scheme (ETS) on 1 July 2010 is assumed to add around 0.4% to the CPI in the year to March 2011. Unlike the other changes, the ETS impact was included in the Half Year Update 2009.
• A rise in ACC levies for motorists on 1 July 2010 is expected to add 0.1% to the CPI in the September 2010 quarter.
• The rise in GST is estimated to add 2.0% to the CPI in the December 2010 quarter.

The short-term spike is assumed to have only a small impact on inflation expectations and therefore a limited impact on monetary policy. This assumption relies on pre-tax wages not responding fully to the rise in prices caused by the higher GST rate, as the net effect of the GST increase and lower personal income taxes is to boost real after-tax wages. Annual inflation averages 2.4% in the rest of the forecast period, within the Reserve Bank's medium-term target range of 1% to 3%.

Consumer spending recovers as confidence strengthens and job growth returns...

Private consumption growth is expected to strengthen over the next year owing to higher incomes from the rising terms of trade, improved consumer confidence and a fall in unemployment. Tax changes are expected to impact positively on household incomes as the higher GST rate, in aggregate, is more than compensated by the reduction in personal income taxes and higher social assistance benefit payments.

Private consumption is not forecast to grow as strongly as in the mid-2000s. Negative influences include: an expected rise in interest rates on a high level of household debt; lower net migration inflows as departures recover with an improvement in global labour markets; weaker growth in house prices; and some rebuilding of balance sheets by households. As a proportion of disposable income, the rate of household dis-saving is expected to be 7.0% by March 2014 compared with 13.7% in the March 2009 year.

...as firms begin to hire and invest...

As the economy strengthens, firms are expected to raise employment. The tax changes also provide a boost to employment of around 10,000 people, as lower personal income taxes encourage higher labour force participation. This boost is assumed to happen gradually to reflect the slow growth in the demand for labour. With employment growth returning, the unemployment rate is forecast to fall steadily towards 4.5% of the labour force by mid-2014 (Figure 1.5). Since the Budget forecasts were finalised, the unemployment rate has already declined from a peak of 7.1% in the December 2009 quarter (revised down from 7.3%) to 6.0% in the March 2010 quarter. This compares with an expected fall to 7.1% in the Budgetforecasts. Although this measure of unemployment has been unusually volatile in recent quarters, the larger-than-expected fall, taken on its own, suggests the domestic recovery could be stronger than forecast.

Figure 1.5 - Unemployment rate

Sources: Statistics New Zealand, the Treasury

Residential investment is expected to rise sharply over the next two years, reflecting a catch-up from very low levels of building relative to population growth. Non-residential investment is also forecast to rebound strongly, given high levels of business confidence. Tax changes are assumed to boost overall investment slightly as the extra 10,000 workers anticipated require more capital to work with. The removal of housing depreciation and other tax changes are expected to shift the composition of investment, from residential to market investment, and lower house prices slightly from what they would have been in the absence of tax changes. However, there is much uncertainty about how large an impact these policy changes will have on investment and the housing market.

...but the level of output in the economy remains below pre-crisis trends

Potential output is still assumed to be lower compared to what was forecast prior to the global financial crisis. Real output is expected to be around 4.5% below the Budget 2008 forecast in the June 2012 quarter, which was the final period forecast at the time. This reflects the direct impact of the crisis, such as an increased cost of capital compared to pre-crisis levels and the resulting impact on business investment. It also reflects a re-evaluation of how sustainable growth had been in the previous expansion. In particular, economy-wide multifactor productivity growth is estimated by the Treasury to have averaged 0.4% per annum over the 2000s, down from 0.8% per annum in the 1990s.

Overall, a growing nominal economy boosts tax revenue

Growth in the nominal economy is forecast to rebound from 1.7% in the March 2010 year to 7.0% in the March 2011 year, before easing back gradually after that. Nominal output growth is expected to be driven by stronger real activity and higher prices, the latter reflecting the higher terms of trade and the stronger inflation profile. The rise in GST contributes to higher nominal output as nominal GDP is GST-inclusive. Nominal output growth is expected to flow through to higher core Crown tax revenue, but with a lag.

Core Crown tax revenue is forecast to fall by about 7% in the June 2010 year owing to:

• subdued business profits in the early stages of the recovery
• the recognition of $1.4 billion of company income tax in 2008/09, which was not repeated in 2009/10
• previous personal and business tax cuts
• a steep decline in interest rates in 2009 reducing interest withholding tax in 2010, and
• a forecasting assumption that previously-incurred tax losses are being used to offset current profits, reducing the corporate tax burden.

Source deductions (mostly PAYE) are expected to fall in the June 2011 year, as the 1 October 2010 personal income tax cuts come into effect. They then rise in line with a recovering labour market, in part driven by higher participation as a result of these tax cuts. GST revenue is forecast to rise as consumer spending rebounds and the GST rate rises to 15%. Corporate tax is expected to increase once business profits recover and the tax-loss cycle has run its course. The cut in the company tax rate from 30% to 28% is not expected to noticeably reduce corporate tax as there are offsetting base-broadening measures. Refer to the box on pages 68 to 70 for the full details of the tax changes.

Source: The Treasury

Inland Revenue also prepared a set of tax forecasts based on the Treasury's macroeconomic forecasts. The two forecasting teams compare forecasts to provide quality assurance for each other. The two sets of Budget 2010 forecasts are broadly similar to each other over the entire forecast period, with the difference in any given year not more than 1% of expected total tax revenue. The Treasury forecasts are lower than Inland Revenue's in the 2010 and 2011 June years but are higher in the 2013 and 2014 June years as the Treasury has incorporated a larger response to the economic recovery in its tax revenue forecasts than Inland Revenue.[2]

Fiscal Outlook#

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Core Crown revenue expected to recover as taxes respond to a stronger economy

Core Crown revenue is expected to increase from $56.4 billion in the June 2010 year (29.8% of GDP) to $72.9 billion in the June 2014 year (30.7% of GDP), primarily led by the increase in tax revenue described above (Figure 1.6). Tax revenue is forecast to rebound as the economy recovers, albeit with a lag because of recent weakness in tax revenue and a build-up of losses.

Figure 1.6 - Core Crown expenses and revenue

Source: The Treasury

Core Crown expenses are expected to grow in absolute terms, but fall as a share of the economy...

Core Crown expenses, which represent the operating spending of the Government excluding State-Owned Enterprises and Crown entities, are forecast to rise from $64.8 billion in the June 2010 year to $77.0 billion in the June 2014 year. This rise is expected to be driven by:

• Benefit payments are forecast to increase from $21.4 billion in the June 2010 year to $24.6 billion in the June 2014 year. The forecast increase in benefit payments over the next four years is owing to: growth in New Zealand Superannuation (NZS) recipient numbers of around 20,000 per annum (Figure 1.7), which on average adds an extra $320 million each year; indexation of social assistance benefit types increases expenses by around $1.7 billion over the next four years; offsetting some of the increase in benefit payments, a decline in Unemployment Benefit and Emergency Benefit recipient numbers from 79,000 to 60,000 as the unemployment rate falls from 7.0% in the June 2010 year to 4.6% in the June 2014 year.
• Finance costs are forecast to increase from $2.4 billion in the June 2010 year to $4.5 billion in the June 2014 year owing to the flow-on impact to debt servicing costs from the forecast increase in debt.
• The operating allowance for new spending allocated in Budget 2010 adds around $1.1 billion to expenses in the June 2011 year, primarily in the health and education sectors.[4] The operating allowance grows at 2% per annum thereafter (eg, $1.12 billion in the June 2012 year) and so adds a further $3.4 billion to expenses by the June 2014 year.

Figure 1.7 - NZS recipient numbers

Source: Ministry of Social Development

Although expenses rise in absolute terms, they decline as a share of the economy over time. This decline partly reflects the recovery in the economy. It also reflects the decision in Budget2009 to reduce annual operating allowances for new spending to $1.1 billion (growing at 2% per annum after 2010/11). Core Crown expenses are forecast to rise from 34.2% of GDP to 34.7% in the June 2011 year and then fall to 32.4% by the June 2014 year.

...operating deficits peak in the June 2011 year owing to one-off factors...

As the trend of expenses exceeding revenue continues, significant operating deficits are expected over the forecast period. The total Crown operating balance (before gains and losses) is expected to be in deficit by $6.9 billion this year (3.7% of GDP). Operating deficits are forecast to peak at $8.6 billion (4.2% of GDP) in the June 2011 year owing to:

• the tax package is broadly fiscally neutral by the end of the forecast period, as outlined on page 70. However, it has a fiscal cost in the June 2011 year (eg, social assistance benefits are compensated for the rise in the GST rate)
• underlying tax revenue is weaker in the early part of the forecast period (as previously mentioned), and
• finance costs and some one-off expenditure, including a number of expenses that have been transferred from the current year into next (such as transport spending and Treaty of Waitangi settlements).

By the June 2014 year, operating deficits are expected to fall to $3.0 billion (1.3% of GDP) as a result of a rise in tax revenue (Figure 1.8). Compared to the Half Year Update, operating deficits are expected to be smaller, reflecting the stronger economic outlook. The reduction in operating deficits has also flowed through to improvements in the residual cash and net debt position.

Figure 1.8 - Total Crown operating balance before gains and losses

Source: The Treasury

The total Crown operating balance including gains and losses is also in deficit across the forecast period. The deficit is forecast to be smaller when gains and losses are included because Crown financial institutions such as the New Zealand Superannuation (NZS) Fund are forecasting, on average, to make gains over the forecast period.

The underlying nature of these deficits can be measured by the cyclically-adjusted, or structural, balance, which gauges how much of the operating balance before gains and losses reflects temporary cyclical factors rather than long-lasting factors. While the cyclically-adjusted deficit is estimated to fall from 4.0% of GDP in the June 2011 year to 1.1% in the June 2014 year, the fact it remains negative means that operating deficits are largely structural.[5]

Notes:

1. Operating balance before gains and losses
2. Net core Crown debt excluding the New Zealand Superannuation Fund and advances
3. Gross sovereign-issued debt excluding Reserve Bank bills and settlement cash

A glossary and longer time series for these variables is provided on page 159.

Source: The Treasury

…and cash deficits are met by increased borrowing and higher net debt

Residual cash deficits are expected to continue through the forecast period. The trend is similar to that for operating deficits, peaking in the June 2011 year at $13.3 billion before reducing to $6.0 billion in the June 2014 year. Overall, the cash deficits total $45.6 billion over the next five years.

The Government is expected to spend close to $21.2 billion on capital over the forecast period. The capital spending comprises around $8.7 billion to purchase physical assets primarily so that departments can maintain their current level of assets to deliver services. The Government is also expected to provide loans and capital injections of around $8.9 billion. Just over half of this funding is to State-Owned Enterprises and Crown entities and is generally used to purchase physical assets in the health, education, housing and transport sectors. The rest of the funding primarily relates to student loans.

In addition, the Government has set aside $3.6 billion for future new capital spending. The allowance for new capital spending is $1.39 billion for Budgets 2011 to 2014, which is a reduction from the Half Year Update owing to a portion transferring to the operating allowance.[6]

Source: The Treasury

Cash deficits represent the amount the Government has to fund, either by raising debt or reducing financial assets. Over the forecast period as a whole, cash deficits are expected to raise net core Crown debt from $17.1 billion(9.3% of GDP) in the June 2009 year to $63.0 billion (26.5% of GDP) in the June 2014 year (Figure 1.9). This represents a large rise in net debt to its highest share of the economy since 1998. As a proportion of GDP, medium-term projections in the Fiscal Strategy Report show that net debt is expected to continue rising to a peak of 27.4% in the June 2015 year as the operating balance returns to surplus the following year. The Government’s long-term fiscal objective is for net debt to be brought back to a level no higher than 20% of GDP by the early 2020s, which will ensure New Zealand is well placed to deal with future shocks as well as the spending pressures associated with an ageing population. In the Fiscal Strategy Report, the net debt target of 20% of GDP is projected to be achieved in the June 2022 year.

Figure 1.9 - Net core Crown debt

Source: The Treasury

The expected cash shortfall is forecast to be met by additional borrowing and the utilisation of financial assets held by the New Zealand Debt Management Office. The majority of the borrowing requirement will be met through bond issuance in the New Zealand domestic market (Table 1.7). Issuance total $52.2 billion over the forecast period (taking the current year into account), a reduction of $1.5 billion from the previous forecast. After meeting debt maturities, net bond issuances total $33.2 billion (including net non-market issuances to the Earthquake Commission).

Source: The Treasury

Net worth declines because of continued operating deficits

Net worth is forecast to fall from $99.5 billion (54.0% of GDP) in the June 2009 year to $82.6 billion (34.8% of GDP) in the June 2014 year. The fall reflects the flow-on impact to assets and liabilities from the operating deficits expected over the forecast period. Although net worth declines, the Government is still expected to increase total assets by around $32 billion over the forecast period. As part of the overall increase in assets, the Government's holding of physical assets is expected to increase by around $13.9 billion. Overall, the Government is expected to buy around $34.2 billion and sell about $0.9 billion of physical assets over the next five years. The value of physical assets is expected to decline owing to depreciation by around $19.9 billion by the June 2014 year. A breakdown of net additions and depreciation by segment is shown in Figures 1.10 and 1.11. Generally, the increase in core Crown and Crown entities' physical assets is funded from either capital injections or operating funding provided from the Crown. The increase in SOEs' physical assets is expected to be driven by utilisation of operating surpluses or by raising debt. In addition, the forecasts set aside around $3.6 billion in funding for future capital investments over the forecast period.

Figure 1.10 - Net additions of physical assets over 5 years

Source:  The Treasury

Figure 1.11 - Depreciation of physical assets over 5 years

Source:  The Treasury

Risks and Scenarios#

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Economic and fiscal forecasts always involve a significant amount of uncertainty. The first part of this section outlines the key risks to the outlook and the second part shows how some of the most significant risks could play out in two plausible alternative scenarios.

Economic Risks

Key risks continue to surround the global economy...

The extreme risks to the outlook have eased significantly since early 2009, when financial markets and the world economy had yet to trough after the global financial crisis. Financial markets have since recovered and the world economy has begun to recover. This recovery could prove to be stronger than incorporated in the main forecasts. A stronger recovery may occur if emerging economies, especially in Asia, maintain supportive monetary policy. Faster progress in restoring financial sector strength and rebuilding firm and household balance sheets, as asset prices recover, would lead to a quicker pace of recovery, assisted by higher credit growth. An earlier return of business and consumer confidence could also provide greater support to investment and consumption.

However, significant downside risks remain. In developed economies, these include: sovereign-debt issues emerging in parts of the Euro area, which have reached crisis levels in Greece and could worsen significantly and spread to other countries; private demand may fail to take over once public stimulus and stock rebuilding ends; credit may remain constrained; households and firms may undergo a more drastic deleveraging; and continuing weak housing and labour markets could slow the recovery in consumer spending. The probability of these risks occurring may be low, but any one of them could trigger lower growth in the world economy. At an extreme, the impact from the next shock could be larger than after the global financial crisis because the world economy is less well positioned now than it was beforehand.

...and commodity prices, drought and the impact of tax reform

The world spot price for New Zealand's commodity basket as a whole has risen substantially. Given this increase has been shared across a wider range of products than the previous peak in 2008, it may be less subject to correction. Nevertheless, there are still risks to export commodity prices. Upside risks are mainly around growing demand for commodities in emerging markets. Downside risks include a larger consumer reaction to high prices, if current high prices are only a reflection of temporary factors, or if commodity demand from China is not sustainable.

One of the temporary factors supporting dairy prices is recent drought conditions in New Zealand. Drought will likely lower agricultural production, particularly for dairy, and there is a risk this impact is larger than anticipated in the main forecasts.

The recovery in New Zealand is also subject to risks. Current high confidence levels could be signalling a stronger recovery, while recent weakness in actual consumer spending and in the housing market could portend a more subdued upturn. Once recovery is underway, there are also risks surrounding the rate of potential growth New Zealand can realistically achieve given the weakening of productivity growth over the 2000s. Recent cyclical volatility and policy changes have created additional uncertainty about longer-term trends.

As discussed on page 61, imbalances built up in the economy over the 2000s. An abrupt adjustment is possible if foreign investors react to a higher forecast current account deficit, triggering a sharp fall in the exchange rate, or if households curtail spending more sharply in the face of rising interest rates. House and farm prices are another source of risk. These asset prices remain very high, and the leverage built upon earlier price rises has not been unwound to any significant extent.

The introduction of the tax package also adds a degree of uncertainty not present a year ago, with the potential for significant changes in the behaviour of firms and households. A stronger or weaker than forecast growth response to the tax package could also contribute to the upside and downside scenarios.

Upside Scenario

The upside scenario outlined below incorporates a stronger economic recovery led by a faster domestic upturn. This scenario would be consistent with the tendency of recoveries to be strong and the tendency of forecasters to under-predict their strength.

The domestic economy could recover more strongly than in the main forecasts...

In the upside scenario, the economy rebounds more strongly than in the main forecast, led by higher domestic demand. In line with high levels of confidence in early 2010, consumer spending and both business and residential investment recover faster than in the main forecast. The labour market has already strengthened more quickly than expected in these forecasts. The economy is also assumed to be supported by slightly stronger growth in our trading partners, which would benefit from the same confidence-led recovery as New Zealand in this scenario. Stronger trading partner growth would provide more support for non-commodity export goods and service exports.

Economic growth in this scenario rebounds more quickly than in the main forecasts to 4.5% and 3.2% in the 2011 and 2012 March years respectively. Such growth would be expected to lower the unemployment rate more quickly to 4.8% in the March 2012 quarter, compared to 5.5% in the main forecasts. The larger-than-expected fall in unemployment in the March 2010 quarter provides support to this scenario. A key aspect of the upside scenario is that inflation is also likely to be higher than in the main forecasts as a result of stronger domestic demand. There may also be a greater impact on prices from policy changes than assumed in the main forecasts; for example, if inflation expectations are affected to a greater extent. Annual CPI inflation is 6.5% at March 2011 and 3.5% a year later in this scenario compared to 5.9% and 2.4% respectively in the main forecasts.

The nominal economy is larger in the upside scenario because of stronger real activity and higher inflation. Compared to the main forecasts, nominal GDP over the 2010 to 2014 June years is around $22 billion (2%) higher. The larger nominal economy results in higher tax revenue relative to the main forecast, reflecting higher personal and corporate income taxes owing to higher incomes, more GST results from stronger domestic demand and a larger increase in tax on interest income as interest rates rise by more.

Notes:

1. Percent of labour force, March quarter, seasonally adjusted
2. Average for March quarter, actual for 2010
3. Annual percentage change, March quarter

Sources: Statistics New Zealand, Reserve Bank of New Zealand, the Treasury

…but not by enough to return operating balances to surplus in the forecast horizon

Government expenses are only slightly lower than in the main forecasts. While there are fewer people on the unemployment benefit in this scenario, higher inflation adjustments for benefits and the impact of higher inflation and wage growth on superannuation payments would see overall benefit payments rise. This is offset by lower debt-servicing costs as a result of lower debt levels.

With higher tax revenue, the operating deficit would be slightly smaller than in the main forecast at 3.7% in the June 2011 year and would fall more quickly over the following three years. With smaller deficits in the upside scenario, net core Crown debt would be expected to rise by less than in the main forecasts, rising to a peak of 23.5% in the June 2014 year. However, operating deficits remain over the forecast period in this scenario and net debt continues to rise, despite the stronger economic recovery.

Downside Scenario

The downside scenario centres on risks to the global recovery. It considers a more subdued recovery in the world and domestic economy as a result of lingering impacts from the global financial crisis on, for example, confidence and credit availability.

Notes:

1. Percent of labour force, March quarter, seasonally adjusted
2. Average for March quarter, actual for 2010
3. Annual percentage change, March quarter

Sources: Statistics New Zealand, Reserve Bank of New Zealand, the Treasury

A weaker global economy would impact on New Zealand's trade and earnings...

In the downside scenario, recent signs of a rebound in world growth prove to be premature as renewed weakness takes hold in late 2010. Trading partner growth is assumed to be 2.8% in 2010 and 3.0% in 2011 compared to 3.7% in each year in the main forecasts. The level of GDP in our trading partners is around 2% lower at the end of the forecast period compared to the main forecasts. A number of factors could drive such a downside scenario, including the economic risks discussed above. For example, an escalation and spread of the sovereign-debt crisis in Greece would require significant adjustment by the economies directly affected and knock-on effects for others, or unanticipated shocks could slow growth in emerging Asia. It is important to note that, although significant, this downside scenario as modelled is not on the scale of the global financial crisis.

The main effect of the downside scenario on the New Zealand economy is lower terms of trade. Weaker global demand is assumed to flow through to significantly lower prices for New Zealand’s exports compared to the main forecast. This reduces incomes in the domestic economy and hampers the recovery in New Zealand. A tightening of global credit conditions also contributes to a more subdued upturn by raising the cost of credit and reducing domestic investment. Lower confidence and weaker credit growth lead to a fall in house prices in real terms of more than 7% in the year to March 2011.

The largest impact on the New Zealand economy is felt in the March 2012 year when growth eases again to 2.0%, down from 2.8% in the March 2011 year. Economic growth is slightly higher in the subsequent two years as interest rates are lowered, the exchange rate declines more rapidly and world growth recovers slightly. Nevertheless, the unemployment rate would be expected to remain above 6% for an extra 5 quarters compared with the main forecasts. A combination of weaker terms of trade, weaker real activity and subdued inflation results in lower nominal GDP compared to the main forecast. Under the downside scenario, the level of nominal GDP is predicted to be around $22 billion (2%) lower than in the main forecast over the 2010 to 2014 fiscal years.

…and lower tax revenue while raising operating deficits and net debt

Tax revenue is lower in the downside scenario than in the main forecasts because weaker incomes and domestic demand flow through to income tax and GST revenue. More people would receive benefits in the downside scenario, but the adjustments to benefit rates because of inflation would be lower. The operating deficit under the downside scenario in the June 2011 year is 4.4% of GDP and declines more slowly to 2.3% of GDP by 2014. Larger deficits relative to the main predictions mean borrowing would be higher under the downside scenario and would result in net debt peaking at around 30% of GDP by the June 2014 year. Such a scenario illustrates an outlook similar to that in Budget 2009. Those forecasts, made near the trough of the world economic downturn, foresaw a rise in projected net core Crown debt to around 30% of GDP in the June 2013 year.

Fiscal Sensitivities

The scenarios set out alternative paths for the fiscal position based on plausible economic drivers. In contrast, Table 1.10 provides some “rules of thumb” on the sensitivities of the fiscal position to changes in specific variables without identifying the drivers of change.

Source: The Treasury

Fiscal Forecast Assumptions

The fiscal forecasts are based on assumptions and judgements developed from the best information available on 4 May 2010, when the forecasts were finalised. Actual events are likely to differ from some of these assumptions and judgements. Furthermore, uncertainty around the forecast assumptions and judgements increases over the forecast period. Significant tax reform in Budget 2010 adds additional uncertainty to the economic and fiscal forecasts.

The fiscal forecasts are prepared on the basis of underlying economic forecasts. Such forecasts are critical for determining revenue and expense estimates. For example:

• A nominal GDP forecast is needed in order to forecast tax revenue.
• A forecast of CPI inflation is needed because social assistance benefits are generally indexed to inflation.
• An unemployment forecast is needed to underpin the projected number of Unemployment Benefit recipients.
• Forecasts of interest rates are needed to forecast finance costs, interest income and discount rates.

A summary of the key economic forecasts that are particularly relevant to the fiscal forecasts is provided in the table below (on a June-year-end basis to align with the Government's balance date).

In addition there are also a number of other key assumptions that are critical in the preparation of the fiscal forecasts.

Government decisions

Incorporate government decisions up to 4 May 2010.

Tax package

Estimated second-round macroeconomic effects of the tax package have been incorporated into the tax, benefit and debt servicing forecasts.  There is uncertainty associated with the full impact of the policy changes on the fiscal position, so there is a risk there could be additional impacts not captured in the fiscal forecasts.

Operating allowance

Net $1.1 billion in 2010/11, growing by the rate of 2% per annum for subsequent Budgets.

Capital allowance

$1.39 billion in Budget 2011, 2012, 2013 and 2014 allocated as follows over the forecast period:

Investment rate of returns

Incorporate the actual results to 28 February 2010.  Beyond the June 2010 year, gains on financial instruments are based on long-term benchmark rate of returns for each portfolio.

Finance cost on new bond issuances

Based on 5-year rate from the central economic forecasts and adjusted for differing maturity.

Top-down adjustment

Top-down adjustment to operating and capital as follows:

Borrowing requirements

The forecast cash deficits will be met by reducing financial assets and issuing debt.

Property, plant and equipment

For the purposes of the forecast financial statements, no revaluations of property, plant and equipment are projected beyond the current year.  Valuations as recorded for the 2009 annual financial statements and any additional valuations that have occurred up to 28 February 2010 are included in these forecasts.  A number of revaluation exercises are currently underway and are planned to be completed in time for the 2010 annual financial statements (published in early October).  The results of these valuations are, therefore, not reported in these forecast financial statements.

Student loans

The carrying value of student loans is based on a valuation model adapted to reflect current student loans policy.  As such, the carrying value over the forecast period is sensitive to changes in a number of underlying assumptions, including future income levels, repayment behaviour and macroeconomic factors such as inflation and discount rates used to determine the effective interest rate for new borrowers.  Any change in these assumptions would affect the present fiscal forecast.

Government Superannuation Fund and ACC liabilities

The Government Superannuation Fund and ACC liabilities included in these forecasts have been valued as at 28 February 2010 and 31 December 2009 respectively, with the ACC valuation being adjusted for the 31 March 2010 discount rate.  Both liabilities are valued by projecting future cash payments, and discounting them to present value.  These valuations rely on historical data to predict future trends and use economic assumptions such as inflation and discount rates.  Any change in actual payments or economic assumptions would affect the present fiscal forecast.  For example, if the discount rate decreases, the value of the liabilities would increase.

The Government Superannuation Fund's assets are offset against the gross liability and have been updated to reflect market values at 28 February 2010.  The value of assets over the forecast period reflects long-run rate of return assumptions appropriate to the forecast portfolio mix.

Emissions Trading Scheme (ETS)

The forecasts have been prepared in accordance with current government ETS policies and the effects of these policies over commitment period 1 (CP1) (2008 to 2012). Details of current climate change policies are listed at:

www.mfe.govt.nz/issues/climate/policies-initiatives [Treasury adjusted URL at March 2024 https://www.epa.govt.nz/industry-areas/emissions-trading-scheme/participating-in-the-ets/]

The carbon price assumption is constant at €10.75 with an exchange rate of 0.5298 (a carbon price of NZ$20.29). The forecast assumes a 67% uptake of post-1989 foresters into the ETS over CP1.

Beyond 2012, ETS net revenues have been modelled as neutral (revenues equal expenses), as New Zealand currently has no international commitments beyond this period.  Net revenue (the value of credits received after free allocation of credits to participating industries and after meeting future emissions liabilities) is assumed to be recycled back to the public through fiscally equivalent, unspecified tax reductions or spending increases.

Kyoto position

The Kyoto position included in fiscal forecasts reflects the Government's obligation for CP1, which is for the period 2008 to 2012.  Base case projections beyond 2012 do not incorporate a quantitative estimate of any net emissions position that may eventuate from New Zealand's obligations under future international climate change agreements.

NZS Fund contributions

A $250 million contribution in 2009/10 and no contribution is assumed in the forecast period beyond the 2010 fiscal year.

Fiscal Risks#

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Introduction#

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This chapter describes the fiscal risks to the Government, including specific fiscal risks, and contingent liabilities, and notes charges against the fiscal forecasts.

Legislative Requirements

The Public Finance Act 1989 (PFA) requires an Economic and Fiscal Update to incorporate, to the fullest extent possible consistent with the limits on disclosure requirements set out below, all government decisions and other circumstances that may have a material effect on the fiscal and economic outlook. If the fiscal implications of government decisions and other circumstances can be quantified for particular years with reasonable certainty, these fiscal implications must be included in the forecast financial statements. If the fiscal implications of government decisions and other circumstances cannot be quantified for particular years with reasonable certainty, those government decisions or other circumstances must be disclosed in the statement of specific fiscal risks.

The PFA requires the Minister of Finance and the Secretary to the Treasury to sign a statement of responsibility for each Economic and Fiscal Update that:

• the Minister of Finance has communicated to the Secretary to the Treasury before the Economic and Fiscal Update is finalised, all policy decisions with material economic or fiscal implications that the Government has made, and all other circumstances with material economic or fiscal implications of which the Minister is aware, and
• the Secretary to the Treasury has incorporated in the Economic and Fiscal Update the fiscal and economic implications of those decisions and other circumstances, using the Treasury’s best professional judgement (on the basis of the economic and fiscal information available to the Treasury on the day before the Economic and Fiscal Update was finalised).

The PFA also requires the statement of specific fiscal risks of the Government to disclose the rules used to determine what is and what is not a specific fiscal risk.

The PFA requires that the fiscal forecasts must be prepared in accordance with generally accepted accounting practice (GAAP).

FRS-42 Prospective Financial Statements provides GAAP guidance for preparing fiscal forecasts. The general principle of the standard is that forecasts should be prepared using the best information that is reasonable and supportable. To ensure the accuracy of the fiscal forecasts the forecast assumptions:

• are based on the best information that is available at the time the forecasts are prepared (eg, latest economic conditions)
• are consistent with the current plans of the Government (eg, include current policies and other policies the Government is considering), and
• have a reasonable and supportable basis (eg, events are probable and measurable).

There will always be an element of judgement surrounding the assumptions that are made in preparing the fiscal forecasts. To provide a more comprehensive picture of the fiscal position FRS-42 also requires disclosure of factors that may lead to a material difference between the forecasts and the actual results. This includes matters such as new policies the Government may be considering and sensitivity around key assumptions (eg, economic conditions).

Criteria and Rules for Disclosure in the Fiscal Forecasts or as Specific Fiscal Risks

All government decisions and other circumstances that may have a material effect on the fiscal and economic outlook are considered against the criteria and rules set out below to determine if they are to be incorporated into the fiscal forecasts, disclosed as specific fiscal risks or, in some circumstances, excluded from disclosure.

Criteria for including matters in the fiscal forecasts

Matters are incorporated into the fiscal forecasts provided they meet all of the following criteria:

• The quantum is more than $10 million in any one year.
• The matter can be quantified for particular years with reasonable certainty.
• A decision has been taken; or a decision has not yet been taken, but it is reasonably probable[7] the matter will be approved, or it is reasonably probable the situation will occur.

Additionally, any other matters may be incorporated into the forecasts if the Secretary to the Treasury considers, using his or her best professional judgement, that the matters may have a material effect on the fiscal and economic outlook and are certain enough to include in the fiscal forecasts.

Rules for the disclosure of specific fiscal risks 

Matters are disclosed as specific fiscal risks if:

• the likely cost is more than $10 million in any one year, and either
• a decision has not yet been taken, but it is reasonably possible[8] (but not probable) that the matter will be approved or the situation will occur, or
• it is reasonably probable that the matter will be approved or the situation will occur, but the matter cannot be quantified for or assigned to particular years with reasonable certainty.

Additionally, any other matters may be disclosed as specific fiscal risks if the Secretary to the Treasury considers, using his or her best professional judgement, that the matters may have a material effect (more than $10 million in any one year) on the fiscal and economic outlook, but are not certain enough to include in the fiscal forecasts.

Exclusions from disclosure

Matters are excluded from disclosure as specific fiscal risks if they fail to meet the materiality criteria (ie, are less than $10 million in every year), or if it is unlikely[9] they will be approved or occur within the forecasting period.

Additionally, the Minister of Finance may determine that an item included in the fiscal forecasts or a specific fiscal risk not be disclosed, if such disclosure would be likely to:

• prejudice the substantial economic interests of New Zealand
• prejudice the security or defence of New Zealand or international relations of the Government
• compromise the Crown in a material way in negotiation, litigation or commercial activity, or
• result in a material loss of value to the Crown.

Furthermore, the Minister of Finance has to determine that there is no reasonable or prudent way the Government can avoid this prejudice, compromise or material loss by making a decision on the fiscal risk before the finalisation of the forecasts, or by disclosing the forecast item or fiscal risk without reference to its fiscal implications.

Information Relating to all Disclosed Risks

Allowances for additional operating and capital spending in future Budgets are incorporated into the fiscal forecasts. From Budget 2011 the operating allowance is set at $1.12 billion per Budget (grown forward at 2% per annum) and the capital allowance is $1.39 billion per Budget from 2011 to 2014.

The risks outlined in this chapter, should they eventuate, would only have an effect on the operating balance and/or net debt to the extent that they were not funded from within the allowances, by reprioritising existing expenditure or through third-party revenue.

Policy options for many risks require further development, and the quantum of the risk is often uncertain. Consequently, the final cost or saving may differ from the amounts disclosed in this chapter.

Charges Against the Fiscal Forecasts#

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The PFA requires that if the fiscal implications of government decisions and other circumstances can be quantified for particular years with reasonable certainty, these fiscal implications must be included in the forecast financial statements. This applies irrespective of whether or not a decision has been taken by the Government to provide additional funding for the matter.

Based on the criteria outlined in pages 86 and 87, none of the risks outlined in this chapter are considered probable enough to be included as charges against the fiscal forecasts.

Specific Fiscal Risks#

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The matters listed below are disclosed as specific fiscal risks as they meet the rules for disclosure outlined on pages 86 and 87 above.

Quantified and unquantified risks are listed separately. Within each list the risks have been categorised as new or changed/unchanged since the last Economic and Fiscal Update.

Risks are unquantified if the amount of the risk is unknown, or if the matter is partially disclosed as an unquantified risk (as full disclosure would be likely to prejudice New Zealand's substantial economic interests, security, defence or international relations; or compromise the Crown in a material way in negotiation, litigation or commercial activity; or result in a material loss of value to the Crown).

Fuller descriptions of the risks listed below are included on pages 94 to 103.

Quantified Risks

If they were to eventuate the risks outlined in these tables would, to the extent that they cannot be funded from future budget allowances, by reprioritising existing expenditure or through third-party revenue, impact the Government's forecast financial position (as indicated in the table below).

A negative fiscal impact means an increase in net debt and possibly a decrease in the operating balance.

Unquantified Risks

If they were to eventuate the risks outlined in these tables would, to the extent that they cannot be funded from future budget allowances, by reprioritising existing expenditure or through third-party revenue, impact the Government's forecast financial position (as indicated in the table below).

A negative fiscal impact means an increase in net debt and possibly a decrease in the operating balance.

Risks Removed Since the 2009 Half Year Economic and Fiscal Update

The following risks have been removed since the 2009 Half Year Economic and Fiscal Update:

Statement of Specific Fiscal Risks#

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ACC - Levies and Non-Earners' Account (new, unquantified risk)

Changes in tax settings and ACC's financial performance affect the Crown's levy income and liability for claims. The lag between half-yearly liability valuation and annual decisions on levies means that future levy rates may differ from current levels, with either a positive or negative impact on revenue.

Broadcasting - Digital Switchover (new, unquantified risk)

The Government is planning to announce a date for digital switchover (DSO) when take-up of digital TV reaches 75% or 2012, whichever is the earlier. Depending on the date chosen for DSO, and the level of any direct support that the Government chooses to provide to assist smooth transition and thereby ensure that maximum potential economic benefit is realised, there may be a negative impact on the operating balance.

Climate Change - ETS and International Climate Change Obligations (unchanged, unquantified risk)

There is uncertainty in the level of fiscal impact associated with the Kyoto obligation over the 2008-2012 first commitment period. The net impact of variables including carbon prices, levels of net emissions, the uptake of post-1989 foresters and allocation levels to emitters are highly uncertain and could change the Government's costs significantly. A review of the Emissions Trading Scheme (ETS) in 2011 may also have fiscal implications. The Government may need to purchase emission units to meet its obligations under the Climate Change Response Act 2002 and the Kyoto protocol, with a corresponding impact on net debt.

After the first commitment period, no rights or obligations are forecast in the Government's accounts for any post-2012 international climate change agreement, given the Government has yet to ratify any such agreement and the high levels of uncertainty around its potential nature and size. Also, the effect of the ETS, which transfers the impact of the world price of carbon through the economy, will mitigate the fiscal impact of such an agreement. Any agreement entered into will need to be recognised at the time, alongside forecast ETS revenues and expenses.

Climate Change - Finance for Developing Countries (new, unquantified risk)

There is an international expectation that developed countries, including New Zealand, contribute finance to developing countries to support adaptation and mitigation. Globally, contributions are likely to be in the order of tens to hundreds of US billions of dollars per year from this year onward. Following the Copenhagen climate change negotiations in 2009, New Zealand associated with the Copenhagen Accord. In the Accord, developing countries committed to contribute finance to developing countries to support mitigation and adaptation, collectively approaching US$30 billion over 2010-2012 and US$100 billion per annum by 2020. New Zealand's contribution as a portion of this finance is currently uncertain.

Communications - Broadband Investment (changed, quantified risk)

The Government has committed to spend $1.5 billion on a new broadband network delivering “ultra fast” broadband services. Of this amount, $290 million has been appropriated through Budget 2009 and $258 million through Budget 2010. The timing and amount of further funding has not yet been determined.

Corrections - Community Probation and Psychological Services (changed, quantified risk)

The 2009-2017 Criminal Justice Forecast predicts a significant increase in the number of sentences and orders served in the community over the forecast period. The Department of Corrections estimates that this would require an additional 497 Probation Officers, Programme Facilitators and Psychologists over the forecast period based on current levels of service delivery. This size of this risk has decreased since the last Economic and Fiscal Update because the Department is able to absorb part of the increase within baselines. The Department now estimates that it will require an additional $30 million operating by 2013/14 and additional capital funding of $24 million.

Corrections - Prison Construction (changed, quantified risk)

The Government is considering options to address forecast growth in the prison population. Under current policy settings, the Department of Corrections faces prison capacity demands over the next 10 years. The Department has developed a plan to respond to this demand by increasing prison capacity and replacing capacity that is at the end of its life. The first stage of this plan (a new prison at Wiri and expansion of Mt Eden Prison) received funding in Budget 2010. If the Government chooses to fund the remainder of this plan, it would cost up to an additional $412 million capital over the next 10 years and $63 million operating per annum by 2018/19. These figures are subject to change depending on the procurement methods chosen by the Government.

Defence Force - Defence Review (unchanged, unquantified risk)

The Government has approved terms of reference for a Defence Review and subsequent Defence White Paper. This process is expected to be completed by 30 September 2010. Included in the Defence Review is an examination of financial management procedures to meet the long-term defence funding requirements. The Defence Review is likely to present a range of options with different funding implications.

Defence Force - Future Operationally Deployed Forces Activity (unchanged, quantified risk)

There are currently over 400 New Zealand Defence Force personnel deployed overseas on peace-keeping and United Nations missions. Maintaining existing deployment levels would result in an increased annual operating balance impact of some $30 million from 2011/12 subject to any decisions to change existing deployments. The forthcoming White Paper on Defence expected to be completed by 30 September 2010 will consider future funding requirements for a range of operational commitments in the context of Government's wider policy priorities and fiscal position.

Defence Force - Sale of Skyhawks and Aermacchi Trainers (unchanged, quantified risk)

New Zealand's application to sell the former Air Combat Force aircraft has been approved by the US Congress and now depends on the successful conclusion of commercial negotiations. Should the sale proceed, at a contract value of US$110 million, the net proceeds from the sale are expected to be around NZ$130 million.

Economic Development - Large Budget Screen Production Fund (changed, unquantified risk)

The Large Budget Screen Production Fund is a fund to assist film production companies. The appropriation is set at $36 million, however the Fund is a demand-driven programme and actual costs are dependent upon the number of productions. In any given year, the number of productions underway can vary and associated costs can vary.

Economic Development - Venture Investment Fund Underwrite (new, quantified risk)

The Government has agreed in principle to provide a four-year $40 million underwrite to the New Zealand Venture Investment Fund (NZVIF) to allow NZVIF to continue to engage with prospective venture capital fund managers. Approval of the underwrite is subject to further advice from officials.

Education - Broadband Investment: Schools (unchanged, quantified risk)

Government has signalled an investment of $150 million into Vote Communications to support the introduction of ultra-fast broadband into schools. The capital cost of upgrading school internal networks for all state and state-integrated schools has been estimated at $235 million. Further work is being undertaken to refine this cost in the coming year.

Education - School Operational Grants (unchanged, unquantified risk)

The Government has historically increased school operating grants in each Budget. Any funding for school operations grants would depend on the circumstances and the ability of the proposal to be funded within existing baselines.

Education - Additional Funding for Defective School Buildings (unchanged, unquantified risk)

As in other areas of the building sector, the school property portfolio has a portion of the building stock built between 1995 and 2005, which is subject to the “leaky buildings” (defective building) issues as a result of poor design, inappropriate materials, poor workmanship and deficient building project oversight.

Education - Additional Funding for School Property (changed, unquantified risk)

The Ministry of Education advises an additional $154 million may be required for new schools over the next three financial years to meet demographic changes. The Ministry also advises that there is a risk of further increases around the annual property portfolio revaluation which will require increased depreciation funding.

Education - Early Childhood Education Participation (unchanged, unquantified risk)

The Government is considering ways in which early childhood education participation of groups that are currently under-represented might be increased. Any costs would depend on the option chosen and the ability of the proposal to be funded within existing baselines. Currently, the Ministry's Performance Improvement Actions expect increased participation amongst under-represented groups. This is to be funded from savings from the Budget 2009 forecast Early Childhood Education expenditure. However, the Ministry has yet to realise the necessary savings. Because the final costs for a package depend on behavioural changes, this risk is unquantifiable at present, and may vary from costs agreed in Budget 2010.

Education, Social Development, Health and Revenue - Medical Training Places (changed, quantified risk)

The Government has considered funding 200 additional medical training places over five years. Sixty additional medical places were funded in Budget 2009, with a further twenty in Budget 2010. Proceeding with the remaining 120 places would require additional funding, although final costs would depend on the option chosen and the ability of the proposal to be funded within existing baselines. The estimated impact would be $12 million operating per annum by the end of 2014/15, and this grows beyond the forecast period.

Finance - Crown Overseas Properties (unchanged, quantified risk)

The Government holds New Zealand House in London on a long-term lease from the Crown Estate (UK). Depending on the Government's future intentions for this building, an upgrade may be required. Preliminary cost estimates for this upgrade total $150 million over the period 2010/11 to 2013/14.

Finance - Crown Retail Deposit Guarantee Scheme (unchanged, unquantified risk)

The Government operates an opt-in Retail Deposit Guarantee Scheme over financial institution deposits. The objective of the scheme is to ensure ongoing retail depositor confidence in New Zealand’s financial system, given the international financial market turbulence. A total of 73 financial institutions have been approved under the scheme. These are listed on the Treasury website. Deposits totalling $133 billion are under guarantee. The Crown also continually updates the likelihood of further default actions triggering the guarantee and assesses the expected loss given default. Based on these assessments, the Crown has provided for $881 million as at 31 March for future payments under this scheme after expected recoveries. The policy decision to extend and amend the Retail Deposit Guarantee Scheme to 31 December 2011 was announced on Tuesday 25 August 2009 and as at 30 April 2009, 4 financial institutions had been approved under the extended guarantee. This reflects the significant uncertainty as to the value that can be realised from an entity’s assets following an event of default. Except as provided on the Treasury website, further information on the Retail Deposit Guarantee Scheme cannot be provided due to commercial sensitivity.

Finance - Electricity Reforms (new, unquantified risk)

In December 2009, the Government announced a series of measures related to improving the operation of the electricity market, including reconfiguring State-Owned Enterprises' assets (virtual and physical asset swaps), a liquid hedge market, and measures to improve security of supply. Some details of these measures are yet to be decided; for example, the timing for the SOE asset reconfiguration. Given this, the impact of the reforms on the individual SOEs cannot currently be estimated. While some aspects of the measures, such as the physical asset swaps between Meridian and Genesis, should be fiscally neutral for the Crown as owner of the SOEs, other aspects may not be, but this cannot currently be quantified. There are also implementation costs associated with the reforms, estimated to be between $6 million and $12 million.

Finance - Government Commitments to International Financial Institutions (unchanged, unquantified risk)

The forecast level of government commitments to international financial institutions is subject to change, depending on the Government's response to any changed financial plans on the part of these institutions.

Finance - New Zealand Post Equity Injection to Fund Expansion (unchanged, unquantified risk)

A decision to fund New Zealand Post's business expansion through equity injection or other form of financial support is currently being sought.

Health - Additional WellChild Visits (unchanged, quantified risk)

The Government is considering providing funding for three additional WellChild visits during the first nine weeks of a baby's life. The initiative has not been funded in Budget 2009 or Budget 2010, and has been deferred for consideration in future Budgets. If approved, the indicative cost of this initiative would be $15 million operating in 2011/12 and outyears.

Health - Caregiver Employment Conditions (changed, unquantified risk)

The Employment Court has made a judgement in favour of two third-party employed caregivers regarding their sleepover employment conditions. Although the third-party employer is appealing the decision, an unsuccessful result would require consideration of the repercussions for the Crown.

Health - District Health Board Deficits (unchanged, unquantified risk)

Several District Health Boards (DHBs) have projected operating deficits in 2010/11. The Government has stated that it does not view projected DHB operating deficits as acceptable, and the Ministry of Health is working with DHBs to develop financial recovery plans. The Government has set aside funding in Vote Health to meet deficit requirements in 2010/11, anticipating that the DHB deficit position will improve in future years.

Health - H1N1 Pandemic (changed, unquantified risk)

In the event of a second wave H1N1 pandemic, there may be fiscal impacts as a result of an increase in demand for Tamiflu and antibiotics, and an increase in the utilisation of medical facilities.

Health - Payment of Family Caregivers (changed, unquantified risk)

The Human Rights Tribunal has declared that the Ministry of Health's policy of not employing family members to provide care to disabled relatives is in breach of S19 of the New Zealand Bill of Rights. An appeal has been lodged in the High Court.

Housing - Hobsonville Urban Development (unchanged, unquantified risk)

The Government has commenced the development of an integrated urban community at Hobsonville within an area known as the Buckley precinct. Funding was provided in Budget 2008 for this precinct, as well as any other costs that will be incurred concurrently in order to enable broader site works and whole of project infrastructure. Additional capital funding may be required for the subsequent precincts in future Budgets. This would increase net debt until 2013 when the development will begin providing a return to the Crown. This risk is unquantified as disclosure could compromise the Government in negotiations with potential private sector partners.

Housing - State Housing Tenancy Management (new, unquantified risk)

The Government is considering changing tenancy management practices for state house tenants, with the aim of increasing the proportion of houses that are occupied by high needs tenants. This is likely to result in higher costs to the Crown for the Income Related Rent subsidy paid to the Housing New Zealand Corporation and the Accommodation Supplement. The changes could also increase public expectations that all high needs applicants are housed, which could lead to pressure to increase the size of the state housing portfolio.

Housing - Weathertight Homes (unchanged, unquantified risk)

The Government is considering options to facilitate assistance to homeowners to repair homes affected by the weathertightness issues that occurred as a result of changes to building regulations and industry practices in the late 1990s and early 2000s.

Immigration - Immigration New Zealand Change Programme (changed, quantified  risk)

The Immigration New Zealand Change Programme proposes an integrated approach to upgrading immigration services. Work is underway and further work is proposed, particularly a significant upgrade of existing ICT systems. Were the ICT component to proceed, estimated Crown capital costs are up to $62 million over four years from 2010/11 to 2013/14. Ongoing costs of the project would be funded from fees.

Immigration - Re-development of Mangere Refugee Centre (unchanged, quantified risk)

The existing refugee facilities at Mangere may need refurbishment. Initial estimated costs of the refurbishment are $5 million operating and $25 million capital.

Justice - Auckland Courthouse Capital Programme (new, quantified risk)

Forecast level of demand for court services under current policy settings indicates there may be a need for additional courthouse capacity in the greater Auckland region. If additional funding is provided, the overall estimated cost will be up to $160 million with $20 million in 2011/12, $25 million in 2012/13 and $115 million in 2013/14. The Minister of Finance has yet to fully consider the quantum of this risk.

Justice - Review of the Legal Aid System (changed, quantified risk)

The Government has already taken a number of steps to improve the administration of the legal aid system. The Government is developing further options for delivering legal aid services in a sustainable and affordable way. Final costs will depend on the further decisions that are expected to be taken in early 2011.

Ministerial Services - Rugby World Cup Visits Programme (new, quantified risk)

It is expected that the costs of the guest of government and state functions programme will be higher than usual during the year of the Rugby World Cup. It is currently estimated that, beyond the annual budget of $4 million, a further $12 million will be spent on showcasing New Zealand to a wide range of overseas visitors coming to New Zealand in connection with the event. These costs include official events, accommodation and hospitality for the guests of government.

Police - Digital Radio Network Phase 2 (changed, quantified risk)

The Government has previously funded the partial implementation of a Digital Radio Network in Wellington, Auckland and Christchurch, to be completed by December 2010. Police are still considering options for the further rollout of a National Digital Radio Network, possibly beginning in the 2011/12 fiscal year. Earlier estimates suggested costs of up to $150 million, comprising $28 million in capital in 2011/12, rising to $38 million in 2013/14; and $7 million of operating in 2011/12, rising to $18 million in 2013/14.

Research, Science and Technology - Research Infrastructure (new, unquantified risk)

The Government is considering a five year Research Infrastructure Strategy for Vote Research, Science and Technology. Current planning indicates this will cost $130 million to $200 million over five years. Any costs that are not able to be funded within baselines will decrease the operating allowance.

Revenue - Cash Held in Tax Pools (unchanged, unquantified risk)

Funds held in tax pools are recognised as an asset to the Crown. There is a risk that funds held in these pools, over and above a customer's provisional tax liability, may be withdrawn, resulting in an unquantified cash loss to the Crown.

Revenue - Charitable Giving (unchanged, unquantified risk)

Officials are investigating possible tax incentives for charitable giving, including gift aid and changes in the tax treatment of cultural gifts.

Revenue - Child Support - Shared Care (unchanged, unquantified risk)

A Government discussion document will be released on shared care in the child support formula, including taking into account the incomes of both parents and the costs of children. Any changes would have administrative costs for Inland Revenue and could have further costs to Government from reduced offsets to benefits.

Revenue - Imputation (unchanged, unquantified risk)

Aspects of the current imputation system are being reviewed. This includes whether companies should be able to stream imputation credits, and the refundability of imputation credits, particularly to charities.

Revenue - International Tax Review (unchanged, unquantified risk)

A number of proposals will be considered, and possibly progressed, as part of Phase II of the international tax review. Since all these proposals involve exempting income in particular circumstances, they may, if progressed, have a negative impact on tax revenue.

Revenue - Redesigning Business Processes at Inland Revenue (unchanged, unquantified risk)

The Government is investigating options to redesign business processes at Inland Revenue, which could include both policy and administrative options to simplify customer interactions in the Pay As You Earn and Personal Tax Summary systems. Any changes could impact tax revenue collections or have material administrative costs to implement.

Revenue - Potential Tax Policy Changes (unchanged, unquantified risk)

The Government is considering changes to various tax policies as indicated in the 18 month tax policy work programme. Measures on the current work programme are expected to be revenue neutral in aggregate. Measures enacted to date, and included in revenue forecasts, have increased tax revenue by around $50 million per annum. The remaining items are expected to be revenue negative up to the same extent. Because it is unclear exactly what additional policy changes, if any, will be made at this stage, these further changes have not been included in revenue forecasts. The work programme will be revised as soon as possible after the Budget.

Revenue - Review Tax Treatment of Fitout of Commercial and Industrial Buildings (new, unquantified risk)

The Government has announced a review of the appropriate tax treatment for “fitouts” of commercial and industrial buildings in light of Inland Revenue's interpretation statement IS10/01 on the treatment of residential building fitout. Depending on the outcome of that review, there could be a fiscal gain or loss over the forecast period.

Revenue - Reviews Stemming from Budget 2010 Tax Changes (new, unquantified risk)

The tax changes announced in Budget 2010 include commencing consultation on the exact nature of policy changes that will be legislated later in 2010 for enactment from 1 April 2011. To the extent that consultation leads to enacted legislation that is different from what is currently expected, the revenue implications of policy changes may be different from what is forecast.

Revenue - Tax Issues Relating to Auckland Governance Reform (unchanged, unquantified risk)

New entities are likely to emerge from the reform of local governance in Auckland. Some of these new entities could have tax liabilities different to the tax liabilities of existing entities, which would impact on the total tax paid by Auckland local government entities beyond the 1 November 2010 transition date. Depending on the shape of entities adopted, the changes could decrease tax revenue.

Reviews of the Delivery of Public Services (unchanged, unquantified risk)

The Government has announced its intention to deliver more public services, more effectively, for fewer resources. The Government may undertake one or a number of value-for-money in-depth reviews over the next 12 months. The Government has also agreed to the implementation of a number of Performance Improvement Actions (PIAs). Reviews and PIAs may identify areas of expenditure that are not efficient, effective or aligned to government policy, or could be delivered differently. Reviews and PIAs may recommend, or result in, changes to service delivery and/or free up resources for reprioritisation within the vote (or within the organisation) or be returned to the centre to meet pressures in other areas. Reviews of government activities that result in improved cost-effectiveness are likely to have a positive impact on the fiscal position.

Risk to Third-Party Revenue (unchanged, unquantified risk)

A wide range of government activities are funded through third-party fees and charges. With a decrease in economic activity, there is a risk that decreases in third-party revenue streams will require changes to service delivery with transitional costs to the Crown. For example, decreases in Customs revenue or in levies on building activity may mean that some activities are temporarily unable to be fully cost-recovered and the Government will need to transition out of an activity or temporarily subsidise that activity.

State Sector Employment Agreements (unchanged, unquantified risk)

A number of large collective agreements are due to be renegotiated in the short to medium term. As well as direct fiscal implications from any changes to remuneration, the renegotiation of these agreements can have flow-on effects to remuneration in other sectors. The Government has signalled an expectation for restraint given the current economic environment and conditions in the private sector.

Transport - Changes to Penalties for Driving Offences (new, unquantified risk)

The Government is considering changes to driving offences, in particular increasing penalties for driving offences causing injury or death. Final costs will depend on options chosen and may increase costs in Votes Courts, Justice, Attorney-General, Police, and Corrections.

Transport - Support for New Zealand Railways Corporation (KiwiRail) Business Strategy (new, quantified risk)

The Government has agreed in principle to support a 10-year strategy for the New Zealand Railways Corporation (NZRC, trading as KiwiRail Group) to achieve a commercially viable rail network. A total of $750 million in capital over the next three years is forecasted as the Crown contribution towards the strategy, but its disbursement will be dependent on the approval of suitable business cases and demonstrable progress towards objectives. Budget 2010 has provided $250 million in capital as the first tranche of Crown funding for this strategy. If this funding results in progress towards the desired service improvements and revenue uplift, and if subsequent business cases can justify further investment, up to $500 million in additional capital may be required over the next two Budgets. Budget 2010 also provides for the refinancing of $170 million of NZRC debt to the Crown. In addition to this, NZRC has $220 million in debt to the Crown maturing over the period 2011/12 to 2014/15, which the Crown may also need to refinance.

Transport - Tauranga Eastern Corridor (unchanged, unquantified risk)

The Crown may be asked to provide a loan to the New Zealand Transport Agency to advance the construction of the Tauranga Eastern Corridor Roading Project. It is intended that the loan will be repaid by toll revenue from the road.

Contingent Liabilities and Contingent Assets#

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Contingent liabilities are costs that the Crown will have to face if a particular event occurs. Typically, contingent liabilities consist of guarantees and indemnities, legal disputes and claims, and uncalled capital. The contingent liabilities facing the Crown are a mixture of operating and balance sheet risks, and they can vary greatly in magnitude and likelihood of realisation.

In general, if a contingent liability were realised it would reduce the operating balance and increase net debt. However, in the case of contingencies for uncalled capital, the negative impact would be restricted to net debt.

Where contingent liabilities have arisen as a consequence of legal action being taken against the Crown, the amount shown is the amount claimed and thus the maximum potential cost. It does not represent either an admission that the claim is valid or an estimation of the amount of any award against the Crown.

Contingent assets are potential assets dependent on a particular event occurring.

Only contingent liabilities and contingent assets involving amounts of over $10 million are separately disclosed. Contingent liabilities and assets below $10 million are included in either the “other quantifiable contingent liabilities” total or the “other quantifiable contingent assets” total.

Contingent liabilities and contingent assets have been stated as at 31 March 2010, being the latest set of contingencies reported.

Quantifiable Contingent Liabilities and Contingent Assets

Unquantifiable Contingent Liabilities

Statement of Contingent Liabilities and Contingent Assets

Quantifiable contingent liabilities

Guarantees and indemnities

Guarantees and indemnities are disclosed in accordance with NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets. In addition, guarantees given under section 65ZD of the Public Finance Act 1989 are disclosed in accordance with section 26Q(3)(b)(i)(B) of the same Act.

Air New Zealand - letters of credit and performance bonds

The letters of credit are primarily given in relation to passenger charges, airport landing charges and indemnities provided to financial institutions on limits provided on staff credit cards. The performance bonds are primarily given in respect to engineering contracts.

$61 million at 31 March 2010 ($32 million at 31 October 2009)

Cook Islands - Asian Development Bank (ADB) loans 

Before 1992, the New Zealand Government guaranteed the Cook Islands' borrowing from the ADB. These guarantees have first call on New Zealand's Official Development Assistance.

$14 million at 31 March 2010 ($15 million at 31 October 2009)

Indemnification of receivers and managers - Terralink Limited

The Crown has issued a Deed of Receivership indemnity to the appointed receivers of Terralink Limited against claims arising from the conduct of the receivership.

$10 million at 31 March 2010 ($10 million at 31 October 2009)

Ministry of Transport - funding guarantee 

The Minister of Finance has issued a guarantee of $10 million to the Transport Accident Investigation Commission. The guarantee allows the Commission to assure payment to suppliers of specialist salvage equipment in the event of the Commission initiating an urgent investigation of any future significant transport accident.

$10 million at 31 March 2010 ($10 million at 31 October 2009)

Legal proceedings and disputes

The amounts under quantifiable contingent liabilities for legal proceedings and disputes are shown exclusive of any interest and costs that may be claimed if these cases were decided against the Crown.

Where contingent liabilities have arisen as a consequence of legal action being taken against the Crown, the amount shown is the amount claimed and thus the maximum potential cost. It does not represent either an admission that the claim is valid or an estimation of the possible amount of any award against the Crown.

Health legal claims

Claims against the Crown in respect of alleged negligence for failing to screen blood for Hepatitis C when screening had first become available, resulting in people allegedly contracting Hepatitis C through contaminated blood and blood products.

$15 million at 31 March 2010 ($15 million at 31 October 2009)

Inland Revenue legal proceedings and disputes - tax

Legal proceedings and disputes tax represents the outstanding debt of those tax assessments raised, against which an objection has been lodged and legal action is proceeding. When a taxpayer disagrees with an assessment issued following the dispute process, the taxpayer may challenge that decision by filing proceedings with the Taxation Review Authority or the High Court.

The reduction in contingent liabilities is owing to the dispute with a number of financial institutions regarding the tax treatment of certain structured finance transactions, which has now been settled.

$267 million at 31 March 2010 ($1,655 million at 31 October 2009)

Kapiti West link road

Court action has been filed against New Zealand Transport Agency to have the land held for the Kapiti West link road released for sale. The maximum liability is $14 million.

$14 million at 31 March 2010 ($25 million at 31 October 2009)

Other quantifiable contingent liabilities

Air New Zealand partnership

The Air New Zealand Group has a partnership agreement with Christchurch Engineering Centre in which it holds 49 % interest. By the nature of the agreement joint and several liability exists between the two parties.

$61 million at 31 March 2010 ($68 million at 31 October 2009)

Crown Health Financing Agency

The agency is subject to potential legal claims plus associated legal fees in respect of the actions of the former Area Health Boards. The agency is defending those claims that have resulted in litigation and will defend any of the others that result in litigation. The agency does not accept liability for the claims.

$26 million at 31 March 2010 ($28 million at 31 October 2009)

Inland Revenue - unclaimed monies

Under the Unclaimed Monies Act 1971, companies (eg, financial institutions, insurance companies) hand over money not claimed after six years to Inland Revenue. The funds are repaid to the entitled owner on proof of identification.

$50 million at 31 March 2010 ($46 million at 31 October 2009)

International finance organisations[12]

The Crown has lodged promissory notes with the International Monetary Fund. Payment of the notes depends upon the operation of the rules of the organisation.

$1,532 million at 31 March 2010 ($1,561 million at 31 October 2009)

Kyoto Protocol units

During the first commitment period the Net Kyoto Position of the Crown estimates that 89.1 million tonnes of carbon credits will be generated by carbon removals via forests. To the extent that these forests are harvested in subsequent commitment periods there will be an associated liability generated that will need to be repaid.

The New Zealand Emissions Trading Scheme transfers a portion of the potential future liability to forest owners. As at 31 March 2010, approximately three million tonnes has been transferred to forest owners in the form of New Zealand units. The Crown's contingent liability is calculated as the remaining credits the Crown is potentially liable for (86.1 million tonnes) multiplied by the carbon price of $20.29 as at 31 March 2010.

$1,747 million at 31 March 2010 ($1,871 million at 31 October 2009)

New Zealand Export Credit Office - export guarantees

The New Zealand Export Credit Office (NZECO) provides a range of guarantee products to assist New Zealand exporters. These NZECO guarantees are recorded by the Crown as contingent liabilities. The amount of future liabilities arising from these guarantees is expected to be minor.

$145 million at 31 March 2010 ($175 million at 31 October 2009)

Reserve Bank - demonetised currency

The Crown has a contingent liability for the face value of the demonetised currency issued which has yet to be repatriated.

$23 million at 31 March 2010 ($23 million at 31 October 2009)

Unquantifiable contingent liabilities

Accounting standard NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires that contingent liabilities be disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Disclosure of remote contingent liabilities is only required if knowledge of the transaction or event is necessary to achieve the objectives of general purpose financial reporting. This part of the statement provides details of those contingent liabilities of the Crown that cannot be quantified (remote contingent liabilities are excluded).

Guarantees and indemnities

Airways Corporation of New Zealand Limited

The Crown has indemnified Airways Corporation of New Zealand Limited as contained in Airways' contract with New Zealand Defence Force for the provision of air traffic control services. The indemnity relates to any claim brought against Airways by third parties arising from military flight operations undertaken by the Royal New Zealand Air Force.

AsureQuality Limited

The Crown has indemnified the directors of AsureQuality Limited in the event that they incur any personal liability for redundancies arising from any agreement by international trading partners that allows post-mortem meat inspection by parties other than the Ministry of Agriculture and Forestry, or its sub contractor.

At Work Insurance Limited

The Crown has indemnified the liquidators of At Work Insurance Limited (Deloitte Touche Tohmatsu) against various employment-related claims.

Bona Vacantia property

P&O NZ Limited sought a declaratory judgement that property disclaimed by a liquidator is bona vacantia. A settlement has been reached, which includes a Crown indemnity in favour of New Zealand Aluminium Smelters and Comalco in relation to aluminium dross disposed of in their landfill, for costs that may be incurred in removing the dross and disposing of it at another site if they are required to do so by an appropriate authority. The Minister of Finance signed the indemnity on 24 November 2003. In February 2004, a similar indemnity was signed in respect of aluminium dross currently stored at another site in Invercargill.

Building Industry Authority

The Building Industry Authority (BIA) is a joint defendant in a number of claims before the courts and the Weathertight Homes Resolution Service relating to the BIA's previous role as regulator of the building industry. The BIA has been disestablished and absorbed into the Department of Building and Housing and, to prevent conflicts of interest, the Treasury was given responsibility for managing weathertight claims against the BIA on behalf of the Crown from 1 July 2005.

Contact Energy Limited

The Crown and Contact Energy signed a number of documents to settle in full Contact Energy's outstanding land rights and geothermal asset rights at Wairakei. Those documents contained two reciprocal indemnities between the Crown and Contact Energy to address the risk of certain losses to the respective parties' assets arising from the negligence or fault of the other party.

Crown Retail Deposit Guarantee Scheme

On 12 October 2008, the Minister of Finance initiated an opt-in Retail Deposit Guarantee Scheme. The objective of this scheme is to ensure ongoing retail depositor confidence in New Zealand’s financial system given the international financial market turbulence.

As at 31 March 2010, 73 financial institutions had joined the scheme and deposits totalling $132.5 billion had been guaranteed. This is the maximum exposure and does not include any offset resulting from the recovery of the remaining assets of the financial institution in the event the guarantee is called upon. The Crown assesses the potential loss to be associated with the entities that hold significant deposits (ie, greater than $5 billion) as being remote.

For other entities within the scheme (ie, entities that hold deposits less than $5 billion) a provision has been made to provide for losses that are considered more likely than not to occur. The Crown continually updates both the likelihood of further default actions triggering the guarantee and the expected loss given default. Based on these assessments, the Crown has provided for a net expected loss given default of $881 million as at 31 March 2010 ($899 million at 31 October 2009) being the cost of future payments under the scheme after expected recoveries.

While the provision represents a best estimate of likely loss, a significant range of outcomes is possible under the scheme in terms of which entities may default and the eventual loss to the Crown following an event of default. This reflects the significant uncertainty as to the value that can be realised from an entity's assets following an event of default. Except as provided on the Treasury website, further information on the Retail Deposit Guarantee Scheme cannot be provided owing to commercial sensitivity.

Earthquake Commission (EQC) 

The Crown is liable to meet any deficiency in the EQC's assets in meeting the Commission's financial liabilities (section 16 of the Earthquake Commission Act 1993). In the event of a major natural disaster the Crown may be called upon to meet any financial shortfall incurred by the Commission.

Electricity Corporation of New Zealand Limited (ECNZ) 

The Deed of Assumption and Release between ECNZ, Contact Energy Limited and the Crown provides that Contact Energy stands in the place of ECNZ for those assets transferred to Contact Energy from ECNZ. As a result of the split of ECNZ, Ministers have transferred the benefits of the Deed to ECNZ's successors - Meridian Energy Limited, Mighty River Power Limited, and Genesis Power Limited.

The liability is open-ended and is of significant commercial value. Directors are unlikely to forego the indemnity without substantial compensation.

As a result of the 1999 split of ECNZ into three new companies the Crown has signed a Deed of Indemnity that has indemnified ECNZ in relation to all ECNZ's pre-split liabilities and any liabilities that arise out of the split itself. This indemnity is provided to ECNZ to ensure that directors can be satisfied as to the ongoing solvency of ECNZ following the split and to enable most of ECNZ's surplus funds to be distributed to the Crown. In addition, the Crown has indemnified ECNZ against any liability that might arise under its debt and swap arrangements as a result of ECNZ entering into the Agreements for Sale and Purchase on 22 December 1998.

In addition, the Crown has guaranteed ECNZ's existing hedge contract obligations, which remain with ECNZ after the split. The principal purpose of the guarantee is to provide sufficient credit support to ECNZ under the hedge contracts so as to avoid providing hedge counterparties reasonable grounds upon which to terminate their hedge contracts as a result of the split. In light of the expected future medium-term spot price of electricity, it is expected that most payment flows under the hedge contracts will be from the hedge counterparties to ECNZ, which will then be passed to the new SOEs. All hedges have now expired, although some are in litigation regarding errors in how payments were made.

Ministry of Fisheries - indemnity provided for delivery of registry services

The Crown has indemnified Commercial Fisheries Services Limited against claims made by third parties arising from Commercial Fisheries Services undertaking registry services under contract to the Chief Executive of the Ministry of Fisheries. This indemnity provided under the Fisheries Act 1983 and 1996, expires on 30 September 2010.

Genesis Power Limited - supply of gas

The Crown has entered into a deed with Genesis Energy to share a specified and limited amount of risk around the sufficiency of Genesis Energy's long-term supply of gas to cover the Huntly e3p's (a 385 MW combined cycle gas turbine power station) minimum needs. The agreement sees the Crown compensate Genesis Energy in the event it has less gas than it needs.

Genesis Power Limited - contractor claims

A subcontractor to the Kupe Alliance has presented several claims relating to the construction of the Kupe project. These claims have been disputed by the Kupe operator. There can be no assurances that such claims will not have an adverse impact on Genesis Energy's business, financial condition or results of operations.

Genesis Power Limited - financial guarantees

The company issued financial guarantees to the alliance contractor and other agents of the Kupe joint venture for the full and faithful performance of its subsidiaries in their capacities as joint venture partners, to the extent of their several liabilities under the development agreement.

The company issued a financial guarantee to Energy Clearing House Limited for the full and faithful performance of its subsidiary Energy Online Limited, to the extent of its liabilities for its retail electricity purchases.

These guarantees may give rise to liabilities in the company if the subsidiaries do not meet their obligations under the terms of the respective arrangements.

Genesis Power Limited - letters of credit and performance bonds

The company, as a participant in the electricity market, issued letters of credit to the Energy Clearing House Limited under the markets' security requirements. These letters of credit are issued as part of normal trading conditions and are to ensure there is no significant credit risk exposure to any one market participant.

The company has also issued letters of credit and performance bonds to certain suppliers and service providers under normal trading conditions. The liabilities covered by these arrangements are already provided for in the statement of financial position, and therefore not expected to create any adverse effects on the financial results presented. These are not material to the financial statements.

Housing New Zealand Corporation (HNZC)

HNZC is liable to the owners (ANZ National Bank Limited, Ichthus Limited and Westpac Banking Corporation) of mortgages sold by HNZC during 1992 to 1999 for credit losses they may incur from specified limited aspects of their ownership of those mortgages with the Crown standing behind this obligation.

The Crown has provided a warranty in respect of title to the assets transferred to Housing New Zealand Limited (HNZL) (HNZL was incorporated into the HNZC Group as a subsidiary in 2001 as part of a legislated consolidation of government housing functions) and has indemnified HNZL against any breach of this warranty. In addition, the Crown has indemnified HNZL against any third-party claims that are a result of acts or omissions prior to 1 November 1992. It has also indemnified the directors and officers of HNZL against any liability consequent upon the assets not complying with statutory requirements, provided it is taking steps to rectify any non-compliance.

Indemnities against acts of war and terrorism

The Crown has indemnified Air New Zealand against claims arising from acts of war and terrorism that cannot be met from insurance, up to a limit of US$1 billion in respect of any one claim.

Justices of the Peace, Community Magistrates and Disputes Tribunal Referees

Section 197 of the Summary Proceedings Act 1957 requires the Crown to indemnify Justices of the Peace and Community Magistrates against damages or costs awarded against them as a result of them exceeding their jurisdiction, provided a High Court Judge certifies that they have exceeded their jurisdiction in good faith and ought to be indemnified.

Section 58 of the Disputes Tribunal Act 1988 confers a similar indemnity on Disputes Tribunal Referees.

Landcorp Farming Limited 

The Protected Land Agreement provides that the Crown will pay Landcorp any accumulated capital costs and accumulated losses or Landcorp will pay the Crown any accumulated profit, attributed to a Protected Land property that is required to be transferred to the Crown or that the Crown releases for sale. The Crown will also be liable to pay Landcorp, at the time of sale or transfer of any property deemed to be Protected Land, the amount of any outstanding equity payments on the initial value of the property.

Maui Partners 

The Crown has entered into confidentiality agreements with the Maui Partners in relation to the provision of gas reserves information. The deed contains an indemnity against any losses arising from a breach of the deed.

National Provident Fund

The National Provident Fund (NPF) has been indemnified for certain potential tax liabilities. Under the NPF Restructuring Act 1990, the Crown guarantees:

• the benefits payable by all NPF schemes (section 60)
• investments and interest thereon deposited with the NPF Board prior to 1 April 1991 (section 61), and
• payment to certain NPF defined contribution schemes where application of the 4% minimum earnings rate causes any deficiency or increased deficiencies in reserves to arise (section 72).

A provision has been made in these financial statements in respect of the actuarially assessed deficit in the DBP Annuitants' Scheme.

New Zealand Railways Corporation (NZRC) 

The Crown has indemnified the directors of NZRC against any liability arising from the surrender of the licence and lease of the Auckland rail corridor.

The Crown has further indemnified the directors of NZRC against all liabilities in connection with the corporation taking ownership and/or responsibility for the national rail network and any associated assets and liabilities on 1 September 2004.

On 5 July 2009 the Crown further indemnified the directors of NZRC, and the directors of its subsidiaries, to the same extent that statutory entities can indemnify their members under the Crown Entities Act 2004. This indemnity was given on the grounds that there is no express power in the New Zealand Railways Corporation Act 1981 for New Zealand Railways Corporation to grant its own indemnities.

Section 10 of the Finance Act 1990 guarantees all loan and swap obligations of the NZRC.

Persons exercising investigating powers 

Section 63 of the Corporations (Investigation and Management) Act 1989 indemnifies the Securities Commission, the Registrar and Deputy Registrar of Companies, members of advising committees within the Act, every statutory manager of a corporation and persons appointed pursuant to sections 17 to 19 of the Act, in the exercise of investigating powers, unless the power has been exercised in bad faith.

Public Trust

Section 52 of the Public Trust Act 2001 provides for the Crown to meet any deficiency in the Public Trust's Common Fund in meeting lawful claims on the Fund. This is a permanent (legislated) liability. On 7 November 2008 the Minister of Finance guaranteed interest payable on estates whose money constitutes the Common Fund.

Reserve Bank of New Zealand

Section 21(2) of the Reserve Bank of New Zealand Act 1989 requires the Crown to pay the Reserve Bank the amount of any exchange losses incurred by the bank as a result of dealing in foreign exchange under sections 17 and 18 of the Act. This is a permanent (legislated) liability.

Synfuels-Waitara outfall indemnity

As part of the 1990 sale of the Synfuels plant and operations to New Zealand Liquid Fuels Investment Limited (NZLFI), the Crown transferred to NZLFI the benefit and obligation of a Deed of Indemnity between the Crown and Borthwick-CWS Limited (and subsequent owners) in respect of the Waitara effluent transfer line that was laid across the Waitara meat processing plant site.

The Crown has the benefit of a counter indemnity from NZLFI that has since been transferred to Methanex Motunui Limited.

Tainui Corporation

Several leases of Tainui land at Huntly and Meremere have been transferred from ECNZ to Genesis Power Limited. The Crown has provided guarantees to Tainui Corporation relating to Genesis Power's obligations under the lease agreements.

Other unquantifiable contingent liabilities

Abuse claims

There is ongoing legal action against the Crown in relation to historical abuse claims. At this stage the number of claimants and outcome of these cases are uncertain.

Accident Compensation Corporation (ACC) litigations

There are legal actions against ACC in existence, arising in the main from challenges to operational decisions made by ACC. In addition, there is an appeal litigation in progress as a consequence of ACC clients appealing a review officer's decision to the District Court. While an estimate of the financial effect of existing legal actions and outstanding appeals cannot be made, ACC believes the resolution of these will not have a materially adverse effect on the financial statements.

Air New Zealand litigation

Air New Zealand has been named in five class actions. One, in Australia, claims travel agents' commission on fuel surcharges and two (one in Australia and the other in the United States) make allegations against more than 30 airlines, of anti-competitive conduct in relation to pricing in the air cargo business. The other two class actions (in the United States and Canada) allege that Air New Zealand together with many other airlines conspired in respect of fares and surcharges on trans-Pacific routes. All class actions are being defended.

The allegations made in relation to the air cargo business are also the subject of investigations by regulators in a number of jurisdictions including New Zealand, the United States and the European Union. A formal Statement of Objections was issued by the European Commission in 2007 to 25 airlines including Air New Zealand. Air New Zealand has responded to this Statement of Objections. On 15 December 2008 the New Zealand Commerce Commission filed proceedings against 13 airlines including Air New Zealand alleging breaches of the Commerce Act 1986. Air New Zealand is defending each of these proceedings.

In the event that a court determined, or it was agreed with a regulator, that Air New Zealand had breached relevant laws, the company would have potential liability for pecuniary penalties and to third-party damages under the laws of the relevant jurisdictions.

Environmental liabilities

Under common law and various statutes, the Crown may have responsibility to remedy adverse effects on the environment arising from Crown activities.

Departments managing significant Crown properties have implemented systems to identify, monitor and assess potential contaminated sites.

In accordance with NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets any contaminated sites for which costs can be reliably measured have been included in the statement of financial position as provisions.

Kordia Group Limited

As part of its contractual obligations with clients, Kordia Group Limited has an undertaking to provide services at a certain level and should this not be achieved, Kordia Group Limited may be liable for contract penalties. It is not possible to quantify what these may be until an event has occurred. The company does not expect any liabilities to occur as a result of these contractual obligations.

The company makes advances to its subsidiary companies. The company's loan facility comprises a syndicated revolving cash advance facility between three banks, committed to a maximum amount of $135 million (31 October 2009: $136 million). The facility is supported by a negative pledge by the Company and its guaranteeing subsidiaries over their assets and undertakings. Under the negative pledge, each guaranteeing subsidiary may be liable for indebtedness incurred by the company and other guaranteeing subsidiaries. The company considers the negative pledge to be an insurance contract. Such contracts and cross guarantees are treated as a contingent liability and only recognised as a liability if a payment is probable.

Maui contracts

Contracts in respect of which the Crown purchases gas from Maui Mining companies and sells gas downstream to Contact Energy Limited, Vector Gas Limited and Methanex Waitara Valley Limited provide for invoices to be re-opened in certain circumstances within two years of their issue date as a result of revisions to indices. These revisions may result in the Crown refunding monies or receiving monies from those parties.

Rugby New Zealand 2011 Limited - joint venture arrangement

The Crown has agreed in joint venture arrangements with the New Zealand Rugby Union (NZRU) to an uncapped underwrite of the costs of hosting the 2011 Rugby World Cup, on a loss sharing basis (Crown 67%, NZRU 33%). A provision for the forecast losses has been made in the Government's financial statements.

The Crown has agreed to reimburse New Zealand income tax that might be incurred by the joint venture entity (Rugby New Zealand 2011 Limited) or the NZRU in relation to the joint venture entity, and has also agreed to reimburse the NZRU for New Zealand withholding tax that might be incurred on certain payments made in relation to the tournament.

The Crown has further agreed to review its level of support to the tournament if the actual tax revenue arising from the tournament exceeds forecasts.

Television New Zealand Limited

The company is subject to a number of legal claims. Given the stage of proceedings and uncertainty as to outcomes of the cases, no estimate of the financial effect can be made and no provision for any potential liability has been made in the financial statements.

Treaty of Waitangi claims

Under the Treaty of Waitangi Act 1975, any Māori may lodge claims relating to land or actions counter to the principles of the Treaty with the Waitangi Tribunal. Where the Tribunal finds a claim is well founded, it may recommend to the Crown that action be taken to compensate those affected. The Tribunal can make recommendations that are binding on the Crown with respect to land that has been transferred by the Crown to an SOE or tertiary institution, or is subject to the Crown Forest Assets Act 1989.

Treaty of Waitangi claims - settlement relativity payments

The Deeds of Settlement negotiated with Waikato-Tainui and Ngāi Tahu include a relativity mechanism. The mechanism provides that, where the total redress amount for all historical Treaty settlements exceeds $1 billion in 1994 present-value terms, the Crown is liable to make payments to maintain the real value of Ngāi Tahu’s and Waikato-Tainui’s settlements as a proportion of all Treaty settlements. The agreed relativity proportions are 17% for Waikato-Tainui and approximately 16% for Ngāi Tahu. The non-quantifiable contingent liability relates to the risk that total settlement redress, including binding recommendations from the Waitangi Tribunal, will trigger these relativity payments.

Westpac Banking Corporation

Under the Domestic Transaction Banking Services Master Agreement with Westpac Banking Corporation, dated 30 November 2004, the Crown has indemnified Westpac:

• in relation to letters of credit issued on behalf of the Crown, and
• for costs and expenses incurred by reason of third-party claims against Westpac relating to indirect instructions, direct debits, third-party cheques, departmental credit card merchant agreements, use of online banking products and IRD processing arrangements.

Other contingencies

Foreshore and seabed

The Foreshore and Seabed Act 2004 (FSA):

• vests the full legal and beneficial ownership of the public foreshore and seabed in the Crown
• provides for the recognition and protection of ongoing customary rights with respect to the public foreshore and seabed
• enables applications to the High Court to investigate if previously held common law rights have been adversely impacted, and if so, providing for those affected either to participate in the administration of a foreshore and seabed reserve or else enter into formal discussions on redress, and
• provides for general rights of public access and recreation in, on, over and across the public foreshore and seabed and general rights of navigation within the foreshore and seabed.

The public foreshore and seabed means the marine area that is bounded on the landward side by the line of mean high water springs; and on the seaward side by the outer limits of the territorial sea, but does not include land subject to a specified freehold interest (refer section 5 of the FSA).

The FSA provides for the Crown to hold the public foreshore and seabed, as its absolute owner, on behalf of the public of New Zealand. Because of the complex nature of the Crown's ownership interest in the public foreshore and seabed and because we are unable to obtain a reliable valuation of the Crown's interest, the public foreshore and seabed has not been recognised as an asset in these financial statements.

Quantifiable contingent assets

Contingent assets are potential assets dependent on a particular event occurring. As at 31 March 2010, the Crown held quantifiable contingent assets totalling $274 million ($1,563 million at 31 October 2009).

The major components being:

Inland Revenue - legal proceedings and disputes

Legal proceedings and disputes are contingent assets in relation to Inland Revenue pending assessments. Contingent assets arise where Inland Revenue has advised a taxpayer of a proposed adjustment to their tax assessment. There has been no amended assessment issued at this point or revenue recognised so these are recorded as legal proceedings and disputes - tax. The taxpayer has the right to dispute this adjustment and a disputes resolution process is entered into. Inland Revenue quantifies a contingent asset based on the likely outcome of the disputes process based on experience and similar prior cases.

The reduction in contingent assets is owing to potential interest receivable on the dispute with a number of financial institutions regarding the tax treatment of certain structured finance transactions, which has now been settled.

$199 million at 31 March 2010 ($1,488 million at 31 October 2009)

Ministry of Education - suspensory loans

Suspensory loans issued by the Minister of Education to integrated schools.

$66 million at 31 March 2010 ($69 million at 31 October 2009)

Forecast Financial Statements#

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These forecasts have been prepared in accordance with the Public Finance Act 1989.

They are based on the accounting policies and assumptions that follow. As with all such assumptions, there is a degree of uncertainty surrounding them. This uncertainty increases as the forecast horizon extends.

The forecasts have been prepared in accordance with the Statement of Responsibility and reflect the judgements and information known at the time they were prepared. They reflect all Government decisions and circumstances communicated to 4 May 2010.

The finalisation dates and key assumptions that underpin the preparation of the Forecast Financial Statements are outlined on pages 81 to 84.

Statement of Accounting Policies#

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Significant Accounting Policies

These Forecast Financial Statements have been prepared in accordance with the accounting policies that are expected to be used in the comparable audited actual Financial Statements of the Government.

These Forecast Financial Statements comply with generally accepted accounting practice (GAAP) as required by the Public Finance Act 1989 and have been prepared in accordance with Financial Reporting Standard 42: Prospective Financial Statements.

All forecasts use the accrual basis of accounting. Forecasts have been prepared for the consolidated financial statements of the Government reporting entity, which includes all entities controlled by the Government (as defined by applicable financial reporting standards).

The specific accounting policies are reproduced in full on Treasury's website at http://www.treasury.govt.nz/publications/guidance/reporting/accounting.

Changes in Accounting Policies

All policies have been applied on a consistent basis during the forecast period. There have been no changes in accounting policies during the period.

Forecast Policies

These Forecast Financial Statements have been prepared on the basis of Treasury's best professional judgment.

Actual financial results for the periods covered are likely to vary from the information presented. Factors that may lead to a material difference between information in these forecast financial statements and the actual reported results in future years are set out in the chapter on Fiscal Risks on pages 85 to 118.

Key forecast assumptions used are set out on pages 81 to 84.

Government Reporting Entity as at 4 May 2010#

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These forecast financial statements are for the Government reporting entity as specified in Part III of the Public Finance Act 1989. This comprises Ministers of the Crown and the following entities:

Departments

Agriculture and Forestry
Archives New Zealand
Building and Housing
Conservation
Corrections
Crown Law Office
Culture and Heritage
Defence
Economic Development
Education
Education Review Office
Environment
Fisheries
Foreign Affairs and Trade
Government Communications Security Bureau
Health
Inland Revenue
Internal Affairs
Justice
Labour
Land Information New Zealand
Māori Development
National Library of New Zealand
New Zealand Customs Service
New Zealand Defence Force
New Zealand Food Safety Authority
New Zealand Police
New Zealand Security Intelligence Service
Office of the Clerk
Pacific Island Affairs
Parliamentary Counsel Office
Parliamentary Service
Prime Minister and Cabinet
Research, Science and Technology
Serious Fraud Office
Social Development
State Services Commission
Statistics
Transport
Treasury
Women's Affairs

State-owned enterprises

Airways Corporation of New Zealand Limited
Animal Control Products Limited
AsureQuality Limited
Electricity Corporation of New Zealand Limited
Genesis Power Limited
Kordia Group Limited
Landcorp Farming Limited
Learning Media Limited
Meridian Energy Limited
Meteorological Service of New Zealand Limited
Mighty River Power Limited
New Zealand Post Limited
New Zealand Railways Corporation*
Quotable Value Limited
Solid Energy New Zealand Limited
Terralink Limited (in liquidation)
Timberlands West Coast Limited
Transpower New Zealand Limited

Air New Zealand Limited (included for disclosure purposes as if it were an SOE)

*Includes KiwiRail Holdings

Others

New Zealand Superannuation Fund
Reserve Bank of New Zealand

Offices of Parliament

Office of the Controller and Auditor-General
Office of the Ombudsmen
Parliamentary Commissioner for the Environment

Organisations named or described in Schedule 4 of the Public Finance Act 1989

Agriculture and Marketing Research and Development Trust
Asia New Zealand Foundation
Auckland Transition Agency
Crown Fibre Holdings Limited
Fish and game councils (12)
Leadership Development Centre Trust
National Pacific Radio Trust
New Zealand Fish and Game Council
New Zealand Game Bird Habitat Trust Board
New Zealand Government Property Corporation
New Zealand Lottery Grants Board
Ngāi Tahu Ancillary Claims Trust
Pacific Co-operation Foundation
Pacific Island Business Development Trust
Research and Education Advanced Network New Zealand Limited
Reserves boards (24)
Road Safety Trust
Sentencing Council
The Māori Trustee

Crown entities

Accident Compensation Corporation
Accounting Standards Review Board
Alcohol Advisory Council of New Zealand
Arts Council of New Zealand Toi Aotearoa
Broadcasting Commission
Broadcasting Standards Authority
Career Services
Charities Commission
Children's Commissioner
Civil Aviation Authority of New Zealand
Commerce Commission
Crown Health Financing Agency
Crown research institutes (8)
District health boards (20)
Drug Free Sport New Zealand
Earthquake Commission
Electoral Commission
Electricity Commission
Energy Efficiency and Conservation Authority
Environmental Risk Management Authority
Families Commission
Foundation for Research, Science and Technology
Government Superannuation Fund Authority
Guardians of New Zealand Superannuation
Health and Disability Commissioner
Health Research Council of New Zealand
Health Sponsorship Council
Housing New Zealand Corporation
Human Rights Commission
Independent Police Conduct Authority
Law Commission
Legal Services Agency
Maritime New Zealand
Mental Health Commission
Museum of New Zealand Te Papa Tongarewa Board
New Zealand Antarctic Institute
New Zealand Artificial Limb Board
New Zealand Blood Service
New Zealand Film Commission
New Zealand Fire Service Commission
New Zealand Historic Places Trust (Pouhere Taonga)
New Zealand Lotteries Commission
New Zealand Qualifications Authority
New Zealand Symphony Orchestra
New Zealand Teachers Council
New Zealand Tourism Board
New Zealand Trade and Enterprise
New Zealand Transport Agency
New Zealand Venture Investment Fund Limited
New Zealand Walking Access Commission
Office of Film and Literature Classification
Pharmaceutical Management Agency
Privacy Commissioner
Public Trust
Radio New Zealand Limited
Real Estate Agents Authority
Retirement Commissioner
School boards of trustees (2,451)
Securities Commission
Social Workers Registration Board
Sport and Recreation New Zealand
Standards Council
Takeovers Panel
Te Reo Whakapuaki Irirangi (Te Māngai Pāho)
Te Taura Whiri i te Reo Māori (Māori Language Commission)
Television New Zealand Limited
Tertiary Education Commission
Tertiary education institutions (31)
Testing Laboratory Registration Council
Transport Accident Investigation Commission

Crown entity subsidiaries are consolidated by their parents and not listed separately in this table

Forecast Statement of Financial Performance for the years ending 30 June

The accompanying Notes and Accounting policies are an integral part of these Statements.

Forecast Statement of Financial Performance - Functional Expense Analysis for the years ending 30 June

Below is an analysis of core Crown expenses by functional classification. Core Crown expenses include expenses incurred by Ministers, Departments, Offices of Parliament, the NZS Fund and the Reserve Bank, but not Crown entities and State-owned enterprises.

The accompanying Notes and Accounting policies are an integral part of these Statements.

Forecast Statement of Cash Flows for the years ending 30 June

1. Net issues of Government stock is after elimination of holdings by entities such as NZS Fund, ACC and EQC. Further information on the proceeds and repayments of Government stock ("domestic bonds") is available in note 22.

The accompanying Notes and Accounting policies are an integral part of these Statements.

The accompanying Notes and Accounting policies are an integral part of these Statements.

Forecast Statement of Comprehensive Income for the years ending 30 June

The accompanying Notes and Accounting policies are an integral part of these Statements.

Forecast Statement of Financial Position as at 30 June

1. Tertiary education institutions constitute most equity accounted investments.

The accompanying Notes and Accounting policies are an integral part of these Statements.

Forecast Statement of Borrowings as at 30 June

Notes on Borrowings

Total Borrowings can be split into sovereign-guaranteed and non-sovereign-guaranteed debt. This split reflects the fact that borrowings by State-owned enterprises and Crown entities are not explicitly guaranteed by the Crown. Sovereign-guaranteed debt excludes Kiwibank deposits guaranteed under the retail deposit guarantee scheme. No other debt of State-owned enterprises and Crown entities is currently guaranteed by the Crown.

1. Core Crown borrowings in this instance includes unsettled purchases of securities (classified as accounts payable in the statement of financial position).
2. Gross sovereign-issued debt (GSID) represents debt issued by the sovereign (the core Crown) and includes Government stock held by the New Zealand Superannuation Fund (NZS Fund), ACC and EQC.
3. Core Crown financial assets exclude receivables.
4. Net core Crown debt represents GSID less financial assets. This can provide information about the sustainability of the Government's accounts, and is used by some international agencies when determining the credit-worthiness of a country.
5. Adding back the NZS Fund assets provides the financial liabilities less financial assets of the core Crown, excluding those assets set aside to meet part of the future cost of New Zealand superannuation.
6. Net core Crown debt (excluding NZS Fund and advances) excludes financial assets which are held for public policy rather than treasury management purposes.
7. The Reserve Bank has used $1.6 billion of settlement cash to purchase reserves that were to have been funded by the NZ Debt Management Office borrowing. Therefore, the impact of settlement cash on GSID is adjusted by this amount.

The accompanying Notes and Accounting policies are an integral part of these Statements.

Statement of Actual Commitments as at 31 March 2010

Statement of Actual Contingent Liabilities and Assets as at 31 March 2010

The accompanying Notes and Accounting policies are an integral part of these Statements.

More information on contingent liabilities (quantified and unquantified) is outlined on pages 104 to 118 of the Fiscal Risks chapter.

Notes to the Forecast Financial Statements#

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1. Customs excise-equivalent duty.

Forecast new spending up to Budget 2011 represents expenses included in Budget 2010 that has yet to be allocated. Included in these amounts is a portion of spending transferred from the Budget 2011, 2012 and 2013 capital allowance to be used to help contribute to fix leaky homes.

Forecast for future new spending indicates the expected spending increases from the operating allowances planned for future budgets.

1. The New Zealand Government has committed under the Kyoto Protocol to ensuring that New Zealand's average net emissions of greenhouse gases over 2008-2012 (the first commitment period of the Kyoto Protocol or CP1) is reduced to 1990 levels or to take responsibility for the difference. New Zealand can meet its commitment through emissions reductions and use of the Kyoto Protocol flexibility mechanisms such as Joint Implementation, the Clean Development Mechanism, and offsetting increased emissions against carbon removed by forests. The position will crystallise when the first Kyoto commitment period is settled up post-2012. These financial statements report on the New Zealand Government's obligations for the first commitment period, but not for future commitment periods which are currently being negotiated.

A full copy of the Net Position Report 2010 can be found on the Ministry for the Environment's website: www.mfe.govt.nz

ACC liability

Calculation information

PricewaterhouseCoopers Actuarial Pty Ltd have prepared an independent actuarial estimate of the ACC outstanding claims liability as at 31 December 2009. This estimate includes the expected future payments relating to accidents that occurred prior to balance date (whether or not the associated claims have been reported to, or accepted by, ACC) and also the expected future administrative expenses of managing these claims. The estimate has been updated as at 31 March 2010 to reflect the expected impact of the Accident Compensation Amendment Act 2010 on those expected future payments.

The key economic variables that impact on changes to the valuation are the long-term Labour Cost Index (LCI), average weekly earnings and the discount rate. Discount rates were derived from the market yield curve at 31 March 2010 and then blended to the long-term discount rate of 6% (30 June 2009 long-term discount rate 6%). Other key variables in each valuation are the forecast increases in claim costs over and above the economic variables above, and the assumed rate at which long-term claimants will leave the scheme over the period. This assessment is largely based on scheme history.

Presentation approach

The projected outstanding claims liability is included within total liabilities. ACC has available to it a portfolio of assets that partially offset the claims liability. The assets (less cross holdings of NZ Government stock) are included in the asset portion of the Crown's overall statement of financial position.

The net liability of the Government Superannuation Fund (GSF) liabilities has been calculated by the Government Actuary as~at 28 February 2010. The liability arises from closed schemes for past and present public sector employees as set out in the Government Superannuation Fund Act 1956. A Projected Unit Credit method is used to calculate the liability as at 28 February 2010, based on membership data as at that date. The funding method requires the benefits payable from GSF in respect of past service to be calculated and then discounted back to the valuation date.

The net GSF liability at this valuation was calculated using discount rates derived from the market yield curve as at the balance date and then blended to the long-term discount rate of 6.00% (long-term rate unchanged from 30 June 2009). Other principal long-term financial assumptions were an inflation rate, as measured by the increase in the Consumer Price Index, of 2.25% to 2020, reducing to 2.00% over the five years to 2025 (unchanged from 30 June 2009) and an annual salary growth rate, before any promotional effects, of 3.00% (unchanged from 30 June 2009).

The 2009/10 projected movement in the net GSF liability is $166 million, reflecting an increase in the GSF liability of $412 million offset by an increase in the GSF assets of $246 million.

The increase in the GSF liability of $412 million includes an actuarial loss, between 1 July 2009 and 28 February 2010, of $626 million of which $401 million resulted from changes in the short to medium discount rate assumptions and $225 million was due to experience adjustments. The projected change of $401 million is offset by changes in the current service cost, interest cost and benefits paid to members, to give an overall net projected change of $412 million.

The increase in the value of the net assets of GSF of $246 million includes an actuarial gain, from 1 July 2009 to 28 February 2010, of $217 million. The balance of $29 million is the total of the expected investment returns and contributions received, offset by the benefits paid to members.

The changes in the projected net GSF liability from 2010/11 onwards reflect the net of the expected current service cost, interest cost, investment returns and contributions.

Provision for ETS credits

The Emissions Trading Scheme (ETS) was established to encourage reduction in greenhouse gas emissions. The ETS creates a limited number of tradable units (the NZ Unit) which the Government can allocate freely or sell to entities. The allocation of NZ Units creates a provision (and an expense if allocated for free). The provision is reduced, and revenue recognised, as NZ Units are surrendered to the Crown by emitters. Emitters can also use international Kyoto units to settle their emission obligation, which will occur where emissions exceed the number of allocated NZ units.

Details of current climate change policies are listed at: www.mfe.govt.nz/issues/climate/policies-initiatives [Treasury adjusted URL at March 2024 https://www.epa.govt.nz/industry-areas/emissions-trading-scheme/participating-in-the-ets/]

Forecast Statement of Segments#

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Statement of Financial Position as at 30 June 2009

Statement of Financial Performance for the year ended 30 June 2010

Statement of Financial Position as at 30 June 2010

Statement of Financial Performance for the year ended 30 June 2011

Statement of Financial Position as at 30 June 2011

Statement of Financial Performance for the year ended 30 June 2012

Statement of Financial Position as at 30 June 2012

Statement of Financial Performance for the year ended 30 June 2013

Statement of Financial Position as at 30 June 2013

Statement of Financial Performance for the year ended 30 June 2014

Statement of Financial Position as at 30 June 2014