Economic and fiscal update

Budget Economic and Fiscal Update 2019

 

An introduction to the Budget Economic and Fiscal Update#

The Treasury is New Zealand's economics and finance ministry. We advise on the direction of New Zealand's economic policy with the aim of achieving a strong and sustainable economy, and raising New Zealand living standards. This includes reporting on the expenditure of government (fiscal) revenue, and assisting to ensure spending is fit for purpose and can improve outcomes for New Zealanders.

Sharing what we do#

As the government's lead economic and financial adviser, we forecast the economic outlook for New Zealand and the Government's fiscal outlook. This Budget Economic and Fiscal Update (Budget Update) is part of a suite of documents we release as required by the Public Finance Act 1989.

This Budget Update primarily outlines what the Treasury observes in our current economic and fiscal climate, what we might see in the future, and what risks we may face over the next four years (our forecast period). This gives an indication of what the economy is most likely to do to inform decision-making.

Other information#

On the Treasury's website is a series of other information that provides users of the Budget Update with further detail. This other information should be read in conjunction with the published document. This includes detailed economic forecast tables, a comparison of the Treasury and Inland Revenue tax forecasts, tax policy changes, additional fiscal indicators and fiscal tables presented under the Government Finance Statistics (GFS) framework and accounting policies.

This other information can be accessed at: https://treasury.govt.nz/publications/efu/budget-economic-and-fiscal-update-2019

Making it New Zealander-centric#

Our advice is not just based on facts and figures. Improving outcomes means we need to understand which outcomes to improve and what is important to New Zealanders. We use the Treasury's Living Standards Framework to recognise the different aspects of New Zealanders' living standards and wellbeing. Our framework builds on 30 years of New Zealand and international evidence on wellbeing and provides a high-level framework on intergenerational wellbeing. Page 2 provides further information on the Living Standards Framework.

Understanding our path#

The Treasury is in a unique position to focus on improving the way our economy can raise New Zealand living standards. Along with delivering first-rate economic and financial advice, we are committed to providing it in a way so New Zealanders understand how we work to achieve our goals. If you would like to know more about who we are and what we do, or want a simpler overview of the Budget Update, please go to our website at https://treasury.govt.nz

Statement of Responsibility#

I make this statement in accordance with section 26W of the Public Finance Act 1989.

On the basis of the economic and fiscal information available to it, the Treasury has used its best professional judgement in preparing, and supplying the Minister of Finance with, this Economic and Fiscal Update. The Update incorporates the fiscal and economic implications of both government decisions and other circumstances as at 8 May 2019 that were communicated to me by the Minister of Finance in accordance with the requirements of the Public Finance Act 1989 and of other economic and fiscal information available to the Treasury as at 8 May 2019. This Update does not incorporate any decisions, circumstances or statements that the Minister of Finance has determined, in accordance with section 26V of the Public Finance Act 1989, should not be incorporated in this Update.

 

Gabriel Makhlouf
Secretary to the Treasury

22 May 2019

To enable the Treasury to prepare this Economic and Fiscal Update I have ensured the Secretary to the Treasury has been advised, in accordance with the requirements of the Public Finance Act 1989, of all government decisions and other circumstances as at 8 May 2019 of which I was aware and that had material economic or fiscal implications.

In accordance with section 26W of the Public Finance Act 1989, I accept responsibility for the integrity of the disclosures contained in the Update, responsibility for the consistency and completeness of the Update information with the requirements of Part 2 (Fiscal responsibility) of the Public Finance Act 1989 and responsibility for the omission from the Update under section 26V of the Public Finance Act 1989 of any decisions, circumstances or statements not incorporated in it.

 

Hon Grant Robertson
Minister of Finance

22 May 2019

The Treasury's Living Standards Framework#

The Living Standards Framework (LSF) has been developed to improve the Treasury's delivery of its core functions of providing economic and fiscal advice. It identifies intergenerational wellbeing as dependent on the growth, distribution and sustainability of human, social, natural and financial/physical capital (the ‘Four Capitals'), recognising the limitations of existing well-established economic and financial measures.

The LSF helps the Treasury to analyse, measure and compare the variety of outcomes from government decisions through a wide and evolving set of indicators (the ‘LSF Dashboard'). It also looks at the risk and resilience of the Four Capitals in the face of change and unexpected shocks.

The LSF has been used in the development of the Government's Wellbeing Budget https://budget.govt.nz. Further information can be found on the Treasury's website, including:

The Treasury's Living Standards Framework

 

 

Executive Summary#

June years 2018
Actual
2019
Estimate
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Economic            
Real production GDP (annual average % change) 3.2 2.4 3.0 2.8 2.4 2.4
Real GDP per capita (annual average % change) 1.1 0.7 1.5 1.5 1.3 1.2
Unemployment rate (June quarter) 4.4 4.1 4.0 4.1 4.2 4.3
CPI inflation (annual % change, June quarter) 1.5 1.8 2.0 2.1 2.0 2.0
Current account balance  (% of GDP) -3.4 -3.4 -3.4 -3.4 -3.3 -3.3
Fiscal (% of GDP)            
Core Crown tax revenue 27.8 28.2 28.2 28.5 28.6 28.8
Core Crown expenses 27.9 29.1 29.4 29.6 29.0 28.8
Total Crown operating balance before gains and losses 1.9 1.2 0.4 0.6 1.3 1.7
Core Crown residual cash 0.5 -0.9 -1.3 -1.3 -0.2 0.3
Net core Crown debt 19.9 20.1 20.4 20.7 19.9 18.7
Net worth attributable to the Crown 44.9 43.4 42.5 42.1 42.8 43.9

Sources: Stats NZ, the Treasury

  • The pace of economic growth eased back to trend over the six months to December 2018, reflecting slowing population growth together with subdued growth in business investment. This contributed to the economy growing at a slightly slower rate of 2.8% in the year to December 2018 than the 3.1% growth recorded in 2017.
  • Recent economic data point to a continuation of current quarterly growth rates, resulting in annual growth of 2.4% in the year to June 2019. Growth in the economy over the initial year of the forecast horizon continues to be supported by migration-led population growth, government spending, accommodative monetary policy and solid (although slower than recent years) growth abroad.
  • Increased government spending and stronger investment see real gross domestic product (GDP) growth reach 3.0% in the year ended June 2020. Growth then eases to 2.4% over the latter part of the forecast period, as the fiscal stimulus from the increased government spending fades, net migration growth eases and interest rates increase.
  • The economy continues to operate near full capacity, with the unemployment rate at low levels, and labour force participation rates at historic high levels. The unemployment rate falls to 4.0% in the year ending June 2020 before rising slightly over the remainder of the forecast period to reach 4.3% in 2023. This continued tightness in the labour market supports an acceleration in wage growth, which in turn provides impetus for household spending.
  • Annual Consumers Price Index (CPI) inflation fell to 1.5% in the March quarter of 2019 as the increases in fuel prices experienced over 2018 unwound. CPI inflation increases to around 2.0% in 2020 and remains broadly stable thereafter.
  • Economic growth for New Zealand's main trading partners was slightly slower than expected over the latter half of 2018. A further slowing in growth to 3.4% over the year ended December 2019, reflects a softening in data outturns, continued uncertainty around trade negotiations, a decline in business confidence, tightening financial conditions, and higher policy uncertainty across many economies. The Treasury assumes trading partner growth is stable at 3.4% over the remainder of the forecast horizon. The outlook for export commodity prices remains positive, with dairy and meat prices supported by continued global demand and tightening global supply.
  • Core Crown tax revenue increases steadily over the forecast period, reaching $105.6 billion in 2022/23, $25.4 billion higher than in 2017/18. This is primarily owing to expected growth in wages and employment, as well as domestic consumption, residential investment and corporate profits. As a percentage of GDP, core Crown tax revenue stays relatively stable across the forecast period.
  • In nominal terms core Crown expenses increase by $25.1 billion over the forecast period. Key drivers of this increase are the 2019 Budget decisions, which were higher than previously forecast and the operating allowance for Budget 2020 is now $3.0 billion (up $0.6 billion) while the operating allowances for Budget 2021 and Budget 2022 are unchanged at $2.4 billion.
  • While the operating balance before gains and losses (OBEGAL) remains in surplus, it decreases from $5.5 billion in 2017/18 to surpluses of $3.5 billion and $1.3 billion in the following two years. The surpluses then increase over the rest of the forecast period to reach $6.1 billion (1.7% of GDP) in 2022/23 as revenue starts to grow at a faster pace than expenditure.
  • For Budget 2019, the multi-year capital allowance provides funding for Budgets 2019 to 2022, and uses $10.4 billion of the $14.8 billion available. This leaves $4.4 billion available for Budgets 2020 to 2022.
  • Capital spending exceeds operating cash flows until the final year of the forecast, resulting in residual cash deficits for the first four years, while 2022/23 sees a residual cash surplus of $1.2 billion. As a result, net core Crown debt is forecast to increase in nominal terms, peaking at $69.9 billion (19.9% of GDP) in 2021/22 before falling to $68.5 billion (18.7% of GDP) in 2022/23.
  • As a result of these additional borrowings, gross debt is forecast to increase by $4.8 billion by 2022/23, to stand at 25.3% of GDP.

Finalisation dates for the Update#

Economic forecasts - 11 April 2019

Tax revenue forecasts - 7 May 2019

Fiscal forecasts - 8 May 2019

Specific fiscal risks - 8 May 2019

Text finalised - 24 May 2019

Economic Outlook#

Overview#

  • The pace of economic expansion lost some momentum over the second half of 2018, largely reflecting slower business investment growth and a continued easing in population growth. More timely indicators of economic activity point to a stabilisation of annual economic growth over the six months to June 2019.
  • Real gross domestic product (GDP) growth is projected to rise from 2.4% in the 2018/19 fiscal year to 3.0% in 2019/20, supported by an increase in government spending, partly reflecting Budget 2019 decisions, and stronger investment. Since the Half Year Update, government spending is a cumulative $7.2 billion higher over the forecast period.
  • Beyond 2019/20, GDP growth gradually eases as the stimulus from higher government spending fades, population growth declines and monetary conditions tighten. GDP growth averages 2.6% per year across the five years to June 2023.
  • The unemployment rate declines to 4.0% in 2019/20, supported by the acceleration in economic growth, before gradually rising to 4.3% by 2022/23. A tight labour market and labour market policies add to wage pressures over the forecast period, supporting household income and spending.
  • Capacity pressures are expected to underpin an increase in Consumers Price Index (CPI) inflation to the middle of the Reserve Bank of New Zealand's (RBNZ) target range (2.0%) by 2019/20. Since finalising the Treasury's economic forecasts, RBNZ's Monetary Policy Committee reduced the Official Cash Rate (OCR) from 1.75% to 1.50%. The OCR cut does not substantially alter the Treasury's economic outlook.
  • Economic growth in New Zealand's top trading partners slowed over the year ended December 2018 and this recent weakness is expected to persist into 2019. The Treasury assumes trading partner growth is stable at 3.4% over the forecast period, at a lower rate than experienced in recent years.
  • Annual real GDP growth over the 2018/19 fiscal year is lower than in the Half Year Update, reflecting a mix of weaker business investment and export growth. Nominal GDP growth, a key factor driving tax revenue, is also weaker.
  • The balance of risks is broadly similar to the Half Year Update. Risks to the economic outlook are discussed in detail in the Risks and Scenarios chapter.
Table 1.1 – Economic forecasts
Year ending June
Annual average % change
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Private consumption 3.6 3.6 2.9 2.9 2.7 2.7
Public consumption 3.0 1.9 4.2 1.8 0.9 1.0
Total consumption 3.5 3.2 3.2 2.6 2.3 2.3
Residential investment 2.6 3.4 5.2 5.4 3.4 2.0
Business investment1 6.8 0.7 3.8 3.6 2.4 2.1
Total investment 5.6 1.4 4.2 4.1 2.7 2.1
Stock change2 -0.1 -0.2 -0.1 0.1 0.0 0.0
Gross national expenditure 4.1 2.7 3.2 3.1 2.4 2.3
Exports 3.6 2.7 3.1 2.8 2.6 2.5
Imports 7.9 2.1 3.9 3.4 2.3 2.2
GDP (expenditure measure) 2.9 2.5 3.1 2.9 2.5 2.4
GDP (production measure) 3.2 2.4 3.0 2.8 2.4 2.4
Real GDP per capita 1.1 0.7 1.5 1.5 1.3 1.2
Nominal GDP (expenditure measure) 5.7 3.8 5.8 5.4 4.9 4.7
GDP deflator 2.7 1.2 2.5 2.4 2.3 2.2
Potential GDP 3.0 2.9 2.8 2.7 2.6 2.6
Output gap (% of potential, June quarter)3 0.7 0.0 0.4 0.3 0.1 -0.1
Employment 3.7 2.3 1.9 1.7 1.4 1.3
Unemployment rate4 4.4 4.1 4.0 4.1 4.2 4.3
Participation rate5 71.0 70.9 71.2 71.3 71.4 71.4
Hourly wages (annual % change)6 3.0 3.3 3.2 3.5 3.5 3.6
CPI inflation (annual % change) 1.5 1.8 2.0 2.1 2.0 2.0
Terms of trade (goods)7 4.7 -1.8 0.2 0.1 0.2 0.1
House prices (annual % change)8 3.6 2.9 3.8 4.2 4.3 4.8
Current account balance (annual)            
  $billions -9.8 -10.1 -10.8 -11.4 -11.7 -12.2
  % of GDP -3.4 -3.4 -3.4 -3.4 -3.3 -3.3
Net International Investment Position (% of GDP) -53.5 -57.5 -57.8 -58.3 -58.9 -59.6
Household saving ratio (% of HHDI)9 -1.4 -0.5 -0.3 -0.6 -0.8 -0.9
Exchange rate (TWI)10 73.8 73.7 73.7 73.8 74.0 74.1
90-day bank bill rate11 2.0 1.8 1.9 2.3 2.5 2.6
10-year bond rate11 2.8 1.9 2.3 2.5 2.7 2.9

Sources: Reserve Bank of New Zealand, Stats NZ, QV Limited, the Treasury

Economic forecasts are presented on a June year basis for consistency with the fiscal forecasts. Longer time series for these variables are provided on page 135.

Notes:

  1. Business investment is the total of all investment types excluding residential building.
  2. Contribution to GDP growth.
  3. Percentage difference between actual real GDP and potential real GDP.
  4. Percent of the labour force, June quarter, seasonally adjusted.
  5. Percent of the working-age population.
  6. Quarterly Employment Survey, average ordinary time hourly earnings.
  7. System of national accounts
  8. Quotable Value House Price Index.
  9. Percent of household disposable income (HHDI), March years.
  10. Trade-weighted index, average for June quarter.
  11. Average for the June quarter.

Key economic forecast judgements and assumptions

These forecasts cover the period through to June 2023, and include the following assumptions:

  • The trade-weighted exchange rate index rises from 73.7 in the June quarter of 2019 to 74.1 in the 2022/23 fiscal year.
  • Net migration declines from 50,000 people in the 2017/18 fiscal year to 25,000 in 2021/22 and is steady thereafter. Owing to the size of experienced revisions of new migration data from Stats NZ, the Treasury has put more weight on earlier data and assumes the declining trend since 2016 will continue. Assumptions regarding net migration are discussed in more detail in this chapter.
  • Working-age population (15 years of age and over) growth averages 1.5% per year over the five years to June 2023, including the contribution of net migration.
  • The labour force participation rate rises from 70.9% in the December quarter of 2018 to 71.4% in the year ending June 2022 and is steady thereafter.
  • Over the five years to June 2023:
    • economy-wide multifactor productivity growth averages 0.5% per year
    • economy-wide labour productivity growth averages 0.9% per year, and
    • potential outputgrowth averages 2.7% per year.
  • The long-run neutral nominal 90-day interest rate is 3.75%.
  • The long-run non-accelerating inflation rate of unemployment (NAIRU) is 4.25%.
  • The price of West Texas Intermediate (WTI) oil is stable at US$60 per barrel across the forecast period.
  • A number of public sector pay equity claims are settled, resulting in higher wages in those occupations. These settlements are assumed to have positive flow-on effects for private sector wages.
  • Economic forecasts were finalised on 11 April 2019.

Current Economic Conditions#

Economic growth has eased back to trend over recent years…

Economic growth has eased from above trend growth of around 4.0% over 2016 to 2.8% in the year ended December 2018 (Figure 1.1), broadly in line with the Treasury's estimate of potential growth. Migration-led population growth supported an expansion in domestic demand from 2014 to 2017. Working-age population growth peaked at 2.7% in 2017 and has been declining since, weighing on the productive capacity of the economy and domestic demand more broadly. Rising house price inflation also supported household consumption over 2016, but house price inflation has since declined, reflecting easing population growth and regulatory changes.

Figure 1.1 – Real GDP growth

Figure 1.1 – Real GDP growth. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Sources: Stats NZ, the Treasury

Text description of Figure 1.1 – Real GDP growth.

Real GDP increased 0.6% in the December 2018 quarter following growth of 0.3% in the September quarter. Business investment growth was a key driver of this slowing, likely reflecting uncertainty regarding the international and domestic outlook, tightening profit margins and some temporary factors. Temporary factors include a wind down in Kaikōura earthquake-related infrastructure repairs. Other temporary factors, such as outages at the Pohokura gas field and low hydro-lake levels, also hampered production more broadly.

More timely indicators including goods exports, building consents and survey measures of sentiment point to a stabilisation of annual economic growth over the six months to June 2019. However, the global growth outlook remains uncertain posing a risk to the domestic economic growth outlook.

…but the labour market remains tight

Despite slowing economic growth, the labour market continued to tighten with the unemployment rate falling to 4.2% in March 2019.[1] Wage growth has begun to pick up and firms are reporting high levels of difficulty finding labour. The relatively low unemployment rate points to strong capacity pressures across the economy as a whole and is around levels that have not been seen since before the global financial crisis. Despite this, CPI inflation remains below the midpoint of RBNZ's target range (2.0%) and the Treasury's measures of potential output suggest that supply and demand in the economy are broadly balanced.

Rising petrol prices and higher non-tradables inflation saw headline annual CPI inflation reach 1.9% over the six months to December 2018. However, quarterly petrol prices fell in March 2019 and CPI inflation fell to 1.5%. Measures of core inflation, which give little weight to irregular price movements such as fuel, have increased modestly over the past year. A more sustained increase in inflation requires a pick-up in economic growth above current rates.

Since the finalisation of these forecasts, RBNZ's Monetary Policy Committee reduced the OCR from 1.75% to 1.50% on 8 May 2019. RBNZ stated that slowing domestic and international economic growth prompted the need for additional monetary stimulus to meet its objectives of maximum sustainable employment and keeping inflation near 2.0%.

This decision was made after the Treasury's economic forecasts were finalised, but before higher government spending was announced as part of Budget 2019. The OCR cut does not substantially change the Treasury's economic outlook. In general, the economic growth outlook for the next three years is similar for both the Treasury and RBNZ, with accommodative monetary and fiscal policies supporting growth.

Global growth eased over the six months to December 2018

Trading partner growth softened over the six months to December 2018, following above average growth in the preceding 18 months. Goods exports and export commodity prices have remained relatively resilient in the context of slowing global growth. Real goods export growth remained buoyant over the six months to December 2018 and dairy production was strong. However, dry weather conditions over the three months to March 2019 constrained dairy production, likely limiting dairy export volume growth over 2019.

Growth in exports of services held up, although the Treasury's business talks highlighted that the tourism sector is experiencing weaker-than-expected forward bookings. Imports fell over the second half of 2018, reflecting, in part, the timing of petroleum and crude oil imports following the shutdown at the Marsden Point oil refinery and delays to motor vehicle imports owing to biosecurity issues. Net exports provided a small positive contribution to economic growth over the same period.

As a small open economy, New Zealand's economic growth is particularly affected by external flows of goods, services and finance, which can change quickly. The outlook for world growth is fragile and has become more uncertain. Trade tensions and a range of country-specific factors have seen global growth slow over 2018, with higher frequency indicators suggesting this weakness has persisted into 2019. The set of forecasts presented in this chapter assume a stable outlook for trading partner growth, albeit at a lower rate than experienced over recent years. Risks to the international outlook remain prevalent and skewed to the downside. The Risks and Scenarios chapter expands on such risks further, including a scenario on how the New Zealand economy may evolve if the outlook for trading partner growth were weaker than anticipated.

Domestic Outlook#

Real GDP growth peaks around 3.0% in 2020 supported by government spending…

Real GDP growth is projected to pick up over the six months to December 2019 and peak around 3.0% in 2020, supported by solid growth in government spending, accommodative monetary conditions and rising investment. Since the Half Year Update, government operating spending is around $7.2 billion higher as a result of Budget 2019 decisions (of which around $0.5 billion is a transfer package) and higher operating allowances at Budget 2020.

The majority of this spending relates to the expansion of new and existing government services. Government spending growth rises to 4.2% in 2019/20 (Figure 1.2), contributing 0.8 percentage points to economic growth in that year. Thereafter, government spending grows at a slower rate, reflecting relatively lower operating allowances. (This is discussed in more detail in the Fiscal Outlook chapter.)

Figure 1.2 – Public consumption

Figure 1.2 – Public consumption. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Sources: Stats NZ, the Treasury

Text description of Figure 1.2 – Public consumption.

Higher government spending adds to capacity pressures across the economy. Stronger domestic demand is expected to promote business investment and contribute to higher wage and price pressures.

As the impulse from higher government spending fades, economic growth gradually eases to 2.4% in the 2022/23 fiscal year. Population growth is also projected to continue to slow further, contributing to slower economic growth. The slowdown in GDP per capita growth is less marked, declining from 1.5% in the 2020/21 fiscal year to 1.2% in 2022/23.

Growth in the nominal economy is supported by the pick-up in real GDP growth, rising terms of trade, higher inflation and government labour market policies. Annual average nominal GDP growth peaks at 5.9% in the year ending September 2020, easing to 4.7% by 2022/23, reflecting slowing real GDP growth. Compared with the Half Year Update, nominal GDP is a cumulative $4.7 billion lower over the forecast period.

…and slowing population growth sees GDP growth ease from 2020

Slowing population growth is a countervailing force for aggregate economic growth over the forecast period. Indeed, growth in the working-age population accounted for around two-thirds of GDP growth over the three years to June 2018. Easing population growth reduces both domestic demand growth and the rate at which the economy can expand without generating rising price inflation (potential growth).

Net migration is the main driver of cyclical changes in population growth for New Zealand and is influenced by a range of relative economic conditions between New Zealand and

the rest of the world. New migration data from Stats NZ show that net migration peaked earlier and at a lower level than reflected in the discontinued intentions measure (64,000 in 2016, compared with 72,000 in 2017), and has been declining since.[2] The new migration data have been subject to large revisions (Figure 1.3). Based on the size of revisions, relative labour market conditions between New Zealand and the rest of the world, and alternative measures of migrant arrivals, the Treasury has put more weight on earlier data and assumed the declining trend since 2016 will continue.

Figure 1.3 – Annual estimated net migration

Figure 1.3 – Annual estimated net migration. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Sources: Stats NZ, the Treasury

Text description of Figure 1.3 – Annual estimated net migration.

Net migration is projected to add 131,000 people to the population over the next four and a half years, around 50% lower than the preceding four and a half years. Relative to the Half Year Update, net migration is assumed to add 11,000 fewer people as a result of the lower starting point. Risks to the migration outlook are present in both directions.

The labour market remains tight, with the unemployment rate declining…

The unemployment rate is forecast to decline to 4.0% by June 2020 (Figure 1.4) as stable employment growth supported by strong domestic demand outstrips growth in the labour force. Beyond 2020, employment growth eases as the stimulus from higher government spending fades and interest rates rise, which sees the unemployment rate gradually rise to 4.3%.

Figure 1.4 – Unemployment and labour force participation rates

Figure 1.4 – Unemployment and labour force participation rates. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Sources: Stats NZ, the Treasury

Text description of Figure 1.4 – Unemployment and labour force participation rates.

The labour force participation rate is projected to rise to 71.4% by early 2021/22 and remain stable thereafter, supported by further increases in participation rates for females and people over the age of 65. Participation rates for these two demographic groups have been steadily increasing over recent years, reflecting longer-term trends and regulatory changes (eg, improved health outcomes, higher life expectancies, technological change and part-time work entitlements).

…and, combined with labour market policies, supports an acceleration in wage growth…

Wage growth is projected to accelerate over the forecast period (Figure 1.5), reflecting the tight labour market and a range of labour market policies. Across the four and a half years to June 2023, a number of pay equity settlements and collective employment agreements are expected to be negotiated. In addition, the minimum wage rises to $20.00 per hour by April 2021, in accordance with government policy. Wage growth averages 3.4% across the forecast period.

Figure 1.5 – Labour income

Figure 1.5 – Labour income. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Sources: Stats NZ, the Treasury

Text description of Figure 1.5 – Labour income.

Growth in inflation-adjusted wages (real wages) is stable at around 1.4% across the forecast period. Real wage growth sits a little above recent averages, as labour productivity recovers supported by solid business investment growth (the outlook for business investment is discussed later in the chapter). Higher real wages support household consumption. However, there is significant uncertainty around the outlook for labour productivity.

Annual growth in the compensation of employees, which captures growth in employment and wages (or total gross labour income), is projected to rise to 5.1% in the 2020/21 fiscal year driven by rising wage growth and stable employment growth. Compensation of employees growth – a key driver of source deductions revenue – gradually eases to 4.8% by 2022/23, reflecting the outlook for employment growth.

…supporting a stable outlook for household spending

The outlook for household spending is broadly stable, reflecting higher wage growth and supportive labour market conditions. However, the rate of consumption growth is lower relative to recent years (Figure 1.6), owing to a continued slowing in population growth and lower house price inflation compared with recent years.

Figure 1.6 – Private consumption growth

Figure 1.6 – Private consumption growth. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Sources: Stats NZ, the Treasury

Text description of Figure 1.6 – Private consumption growth.

These forecasts assume households will continue their relatively cautious behaviour of recent years, with consumption growth slightly above income growth. This sees the aggregate household savings rate sitting a little below zero across the forecast period (Figure 1.7).

Figure 1.7 – Household debt and savings

Figure 1.7 – Household debt and savings. Link to a text description of this chart below the image.

Sources: Stats NZ, the Treasury

Text description of Figure 1.7 – Household debt and savings.

Over recent years, households experienced strong gains in non-financial wealth, which is heavily weighted towards residential housing. Despite a relatively low rate of dissaving, rising non-financial wealth supported consumption growth and growth in debt in excess of household income growth. High debt levels increase the sensitivity of household spending to changes in interest rates and a deterioration in financial circumstances. Household consumption could be weaker than forecast if households lower their expectations of gains in income or wealth. Such an outcome would be consistent with weaker than expected wage growth or slower house price inflation.

House price inflation is projected to remain relatively muted…

House price inflation is projected to be lower over the forecast period compared with recent years, reflecting slowing population growth, an expanding housing supply and regulatory changes (Figure 1.8). House price inflation is assumed to pick up slightly over the year ahead supported by low mortgage rates.

Figure 1.8 - House price inflation and non-financial wealth

Figure 1.8 – House price inflation and non-financial wealth. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Sources: QV Limited, Stats NZ, the Treasury

Text description of Figure 1.8 – House price inflation and non-financial wealth.

There are risks to the outlook for house prices. House prices may grow more slowly if supply expands more rapidly than projected or if demand is less supportive, which could be the case if households choose to save more or pay down debt at a faster rate. On the other hand, demand and house prices could be stronger than assumed if net migration inflows are higher or income growth is stronger.

…and residential investment activity is projected to pick up

Growth in residential investment has been modest over the past two years (Figure 1.9), particularly in the context of strong population growth, with skill shortages and general constraints across the sector holding back activity. These forecasts assume urban development reforms and other policies unlock capacity constraints in the construction sector, supporting residential investment growth.

Figure 1.9 – Residential investment growth

Figure 1.9 – Residential investment growth. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Sources: Stats NZ, the Treasury

Text description of Figure 1.9 – Residential investment growth.

Indicators including building consents suggest rising residential investment growth over the year ending December 2019. House sales have been broadly flat over recent months according to the Real Estate Institute of New Zealand (REINZ), consistent with relatively stable house price inflation.

Residential investment growth is forecast to accelerate to 5.4% in the 2020/21 fiscal year, supported by government residential investment initiatives. Thereafter, growth eases as interest rates rise and population growth continues to slow.

Assumptions on the economic impact of government residential investment initiatives are unchanged since the Half Year Update.

Recent economic developments have weighed on business investment…

A range of forces, including the exchange rate, the terms of trade, financial market conditions, business confidence and profitability, affect business investment. On balance, these forces have deteriorated a little over recent quarters. Uncertainty around both the domestic and international outlook is likely to have been a contributor to lower investment growth over 2018 (Figure 1.10). This slowdown was compounded by the temporary effect of a wind-down in Kaikōura-related road repairs dragging on growth. Growth in Other Construction activity (which includes expenditure on roads and other major civil works) fell from an annual average rate of 18.7% in the year ended June 2018, to 2.4% in the year ended December 2018.

Figure 1.10 - Business investment

Figure 1.10 – Business investment. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Sources: Stats NZ, the Treasury

Text description of Figure 1.10 – Business investment.

…but ongoing capacity pressures and a pick-up in economic growth support an acceleration in business investment growth…

Business investment growth is projected to rise slightly over the six months to June 2019, supported by aviation industry investment, which tends to be quite lumpy. Business investment growth is then projected to accelerate over the 2019/20 fiscal year, as an increase in government spending stimulates economic activity supporting sentiment, the terms of trade remain high, supporting profitability, and businesses respond to the need to expand capacity in the context of a tight labour market and rising wages.

In addition, government spending provides direct support to business investment growth. The Government's net capital expenditure activity (excluding New Zealand Superannuation Fund contributions) is $31.5 billion across the forecast period, the composition of which is discussed in more detail in the Fiscal Outlook chapter.

Business investment growth peaks at around 4.0% over the year ending June 2021, before easing as the stimulatory impact of higher government spending fades, interest rates rise and population growth slows further.

…which underpins productivity growth

Labour productivity growth is assumed to average 0.9% over the forecast period, supported by rising business investment and easing net migration flows. The rate of productivity growth is higher relative to recent history. If productivity growth is weaker than expected and is not offset by stronger labour input growth, then GDP growth may be lower.

A higher rate of productivity growth relative to recent history helps to partly offset the impact of slowing population growth on the productive capacity of the economy. The Treasury's estimate of potential output growth slows from 2.9% in the 2018/19 fiscal year to 2.6% in 2022/23.

CPI inflation gradually stabilises at 2.0%, reflecting emerging capacity pressures

The sharp rise in petrol prices experienced over 2018 unwound over the March 2019 quarter, resulting in annual inflation declining to 1.5%. Measures of core inflation, which give little weight to irregular price movements such as fuel, increased modestly over the past year. Annual CPI inflation is forecast to increase to around 2.0% in the 2019/20 fiscal year and remain around this rate thereafter.

Despite the small rise in measures of core inflation, easing capacity pressures and economic activity suggest that interest rates have been less stimulatory than previously assumed. Consistent with the direction of changes in the Half Year Update, the Treasury has further reduced the extent to which it believes the current level of interest rates is stimulatory. This is reflected in the outlook for interest rates, which are expected to increase later and by less than the Half Year Update over the forecast period (Figure 1.11).

Figure 1.11 – Monetary conditions

Figure 1.11 – Monetary conditions. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Sources: RBNZ, the Treasury

Text description of Figure 1.11 – Monetary conditions.

The trade-weighted exchange rate index is assumed to remain broadly flat around 74.0 across the forecast period. However, there is a high degree of uncertainty around this judgement.

External Outlook#

Global economic growth has eased…

After solid growth over the 2017/18 fiscal year, global economic growth slowed over the six months to December 2018, reflecting trade tensions, tightening financial conditions and a decline in business and consumer sentiment. Recent reports from the Organisation for Economic Cooperation and Development (OECD) and International Monetary Fund (IMF) project this weakness to persist into 2019.

Slowing global growth and trade tensions saw global trade volume growth fall sharply over the six months to December 2018 (Figure 1.12) and more timely indicators of trade, such as survey measures of new export orders, continued to decline across many countries. As trade tensions escalate or financial conditions deteriorate, the risk of significant adverse impacts on the real economy from uncertainty, reduced investment and lower exports increases (the Risks and Scenarios chapter contains further discussion). In the medium term, growth faces structural challenges from population ageing and weaker productivity growth since the global financial crisis.

Figure 1.12 – World trade volume growth

Figure 1.12 – World trade volume growth. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Source: Netherlands Bureau of Economic Policy

Text description of Figure 1.12 – World trade volume growth.

Labour markets remain strong across advanced economies, reflecting past growth, and wage growth is beginning to pick up, supporting household incomes and spending.

Global growth could surprise on the upside if trade tensions are resolved quickly, supporting a recovery in business sentiment. However, the balance of risks to the global outlook remains skewed to the downside. Trade tensions remain prevalent, although the direct impact of tariff measures to date, which is included in forecasts from the IMF and OECD, appears to be modest. Following the finalisation of these forecasts, the US raised tariffs on US$200 billion of Chinese imports from 10% to 25%, increasing the risk to the outlook for global trade.

Over the six months to December 2018, US monetary policy uncertainty and a deterioration in financial market sentiment placed pressure on emerging market currencies and caused considerable volatility in financial markets. Although these pressures unwound over early 2019, there remains the risk that a sharp deterioration in market sentiment could lead to tighter global financial market conditions. Persistently weak global economic developments or the UK withdrawing from the European Union (EU) without a deal could cause such a deterioration in market sentiment.

Recent developments and outlook for main trading partners

Economic growth for New Zealand's top 16 trading partners came in slightly lower than expected over the six months to December 2018 at 3.8% (Figure 1.13), compared with 4.0% forecast in the Half Year Update. A further slowing in growth to 3.4% is expected over the year ending December 2019, reflecting a softening in realised data, continued trade tensions, a decline in business confidence, tightening financial conditions, and higher policy uncertainty across many economies. Thereafter, growth is projected to remain stable at 3.4% across the forecast horizon.

Figure 1.13 – Trading partner growth

Figure 1.12 – World trade volume growth. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Sources: Stats NZ, the Treasury

Text description of Figure 1.13 – Trading partner growth.

Other Asia: Hong Kong, Philippines, Indonesia, India, Malaysia, Singapore, Thailand, South Korea, Taiwan. Other advanced economies: Canada, US, UK, euro area, Japan.

Economic growth in China, New Zealand's largest trading partner, eased to 6.6% in the year ended December 2018, down from 6.8% in 2017, reflecting trade tensions and previous tightening in financial conditions. The Chinese government has responded with measures to support financial markets and fiscal measures, including income tax reductions, to support demand. Until formal trade arrangements with the US are agreed to, there remains considerable uncertainty about the economic outlook.

In Australia, New Zealand's second largest trading partner, economic growth slowed over the six months to December 2018. Declining house prices weighed on household spending, while construction activity declined and export growth slowed. GDP growth forecasts remain muted, with continued weakness in residential construction limiting investment and high levels of household debt constraining household spending growth.

In the US, economic growth is expected to ease over the two years to December 2020 as the impact of the fiscal stimulus wanes, but growth remains close to trend. The unemployment rate is low and wage growth has shown signs of picking up. However, inflation has not risen as much as expected and monetary policy has become more accommodative. Financial markets will remain volatile as uncertainty relating to trade tensions continues.

Conditions across South East Asia have generally remained solid, supported by accommodative monetary policies, infrastructure spending and foreign investment inflows. However, many of these economies are reliant on exports and slowing global growth (particularly in China) and trade tensions are likely to see a modest easing in economic growth over the year ending December 2019.

Euro area growth also eased over the six months to December 2018, led by weak manufacturing output, reflecting slowing external demand and temporary factors including the introduction of new vehicle emission standards in Germany. Protests in France and a deterioration of financial conditions in Italy also weighed on euro area growth with their impacts likely to persist in 2019. An additional source of uncertainty weighing on business confidence and investment in the UK is the lack of certainty of its withdrawal from the EU.

…and there are challenges in the medium term

The outlook is for a general slowing of economic growth across New Zealand's major trading partners over the year ending December 2019, after which growth is projected to remain stable at 3.4%, albeit at a lower level than experienced over recent years.

In the US, the unwinding of the stimulus from fiscal policy will become a drag on growth, while in other economies, reduced spare capacity and higher interest rates will slow growth. In addition to this cyclical slowing, an ageing population and weak productivity growth in the past point to weaker medium term growth prospects than experienced in previous expansions.

In China, growth is expected to ease, but a shift to more consumption-led activity should support demand for New Zealand's exports.

Commodity prices remain buoyant amid slowing world growth…

Export prices are projected to remain stable (Figure 1.14). Dairy and meat (around 40% of total goods exports values) prices rebounded over the three months to March 2019, despite an easing in global growth. Dairy auction prices strengthened following the sell-off of EU intervention stocks.

Figure 1.14 – Goods terms of trade

Figure 1.14 – Goods terms of trade. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Sources: Stats NZ, the Treasury

Text description of Figure 1.14 – Goods terms of trade.

Import price inflation is projected to remain relatively muted. Oil prices are assumed to be stable, reflecting solid supply supported by past investment in exploration, technological advancements, and weaker global demand compared with recent years.

Over the medium term, the terms of trade are projected to rise gradually as Chinese demand for food continues to expand amid tighter global supply, particularly in the meat and dairy industries.

…and the outlook for exports is stable…

The outlook for exports growth is broadly stable over the forecast period, reflecting a stable outlook for trading partner growth (Figure 1.15). In the near term, the contribution of dairy production to export growth will be limited as dry weather conditions hampered agricultural production over the three months to March 2019. Meat exports should partly offset this weakness as farmers held onto stock as a result of favourable feed conditions early in the season, likely boosting eventual slaughter weights.

Figure 1.15 – Trade volumes

Figure 1.15 – Trade volumes. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Sources: Stats NZ, the Treasury

Text description of Figure 1.15 – Trade volumes.

Service exports are expected to be supported by a lower exchange rate relative to recent years and continued economic growth in key trading partners. Growth in service exports is projected to be slightly weaker in the year ending December 2019, compared with the year prior. This reflects slowing visitor arrivals growth over the first three months of 2019 and weaker forward bookings in the tourism sector signalled through the Treasury's business talks.

…and growth in imports is projected to rise, reflecting robust domestic demand

Growth in import volumes is projected to increase over the year to December 2020 as domestic demand growth accelerates. Beyond 2020, growth in import volumes slows, reflecting easing domestic demand pressures.

Overall, growth in net exports is projected to be slightly positive for economic growth over the 2018/19 fiscal year, compared with the large negative contribution over the previous two years. Over the two years to June 2021, the domestic demand growth outlook is projected to be slightly stronger than the global growth outlook, relative to their respective trend rates. This sees New Zealand's trade deficit expand and net exports are projected to provide a negative contribution to aggregate economic growth. Beyond 2021/22, domestic demand growth slows and the economic growth contribution of net exports is broadly neutral.

In the external accounts, solid domestic demand outweighs the gradual increase in the terms of trade and the goods and services balance is therefore forecast to move into a slight deficit position over the two years to June 2021. Thereafter, as domestic demand eases, imports growth declines and the goods and services balance return to surplus.

Rising global interest rates towards the end of the forecast period see the income deficit widen (Figure 1.16). The net result is a broadly stable current account deficit and a relatively flat net external liability position.

Figure 1.16 – Current account balance

Figure 1.16 – Current account balance. Link to a text description of this chart below the image.

Sources: Stats NZ, the Treasury

Text description of Figure 1.16 – Current account balance.

Notes#

  1. [1] Since the finalisation of the Treasury's economic forecasts on 11 April, Stats NZ released March 2019 quarter CPI and labour markets data. The data do not fundamentally change the Treasury's view on the economic outlook.
  2. [2] Stats NZ moved to producing migration statistics on an outcomes based approach from January 2019. This replaces the intentions measure. Further information can be found at https://www.stats.govt.nz/about-us/what-we-do/current-projects/migration-data-transformation-project/

Fiscal Outlook#

Overview#

  • The fiscal outlook remains in line with the Government's fiscal strategy.
  • In the near-term, the fiscal outlook is expected to be weaker than the position at 30 June 2018, primarily owing to higher than usual growth in expenses.
  • The annual growth in core Crown expenses in the current year is expected to be 8.3% and then 6.8% in 2019/20. This compares to an annual average growth of 2.9% over the previous five years.
  • In nominal terms core Crown expenses are expected to increase by $25.1 billion over the forecast period. A key driver of this increase is Government decisions. As a percentage of GDP, core Crown expenses gradually increases until 2020/21 before falling to reach 28.8% by 2022/23.
  • Core Crown tax revenue is also expected to increase across the forecast period. By 2022/23, core Crown tax revenue is $25.4 billion higher than in 2017/18. This is largely driven by expected growth in wages and employment, as well as domestic consumption and corporate profits. As a percentage of GDP, core Crown tax revenue stays relatively stable between 28% and 29% across the forecast period.
  • OBEGAL surpluses over the next two years are expected to decline from the 2017/18 actual result with a surplus of $1.3 billion forecast for 2019/20. OBEGAL surpluses after 2019/20 slowly increase and reach $6.1 billion (1.7% of GDP) in 2022/23.
  • While net operating cashflows are in surplus across the forecast period, capital spending is expected to exceed operating cashflows until the last year of the forecast period. As a result, residual cash deficits are expected over the next four years before returning to a surplus in 2022/23. Cumulatively, residual cash deficits of $10.6 billion are expected across the forecast.
  • These residual cash deficits are funded from additional borrowings and utilising financial assets. As a result, net core Crown debt is forecast to increase by $11 billion. Over the forecast period, as a percentage of GDP, net core Crown debt initially increases then starts to fall from 19.9% of GDP in 2021/22 to 18.7% of GDP 2022/23.
  • Gross debt is forecast to increase by $4.8 billion by 2022/23, as a result of additional borrowings. Total borrowings are forecast to increase from $115.7 billion in 2017/18 to $130.6 billion by the end of 2022/23. This growth is owing to additional government bonds across the forecast period and an increase in Crown entities borrowings.
  • The Crown's balance sheet continues to grow, with net worth attributable to the Crown reaching $160.8 billion (43.9% of GDP) in 2022/23. This growth is largely the result of forecasting continued operating surpluses across the forecast period.
  • Overall the fiscal outlook has weakened since the Half Year Update, primarily owing to higher Government spending. Further discussion on the comparisons against the 2018 Half Year Update can be found on page 43.
  • The Forecast Financial Statements and Core Crown Expense tables can be found on pages 123 to 127, and provide more detailed information on the fiscal forecasts.

These forecasts are sensitive to a number of judgements and assumptions and should be read in conjunction with the Risk and Scenarios and Specific Fiscal Risks chapters.

Table 2.1 – Fiscal indicators
Year ending 30 June 2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
$billions            
Core Crown tax revenue 80.2 84.7 89.2 95.1 100.2 105.6
Core Crown expenses 80.6 87.3 93.3 98.9 101.7 105.7
Total Crown OBEGAL1 5.5 3.5 1.3 2.1 4.7 6.1
Total Crown operating balance 8.4 (0.3) 4.7 5.9 9.0 10.9
Core Crown residual cash 1.3 (2.8) (4.2) (4.3) (0.6) 1.2
Net core Crown debt2 57.5 60.3 64.7 69.2 69.9 68.5
Gross debt3 88.1 83.3 86.8 88.4 96.8 92.9
Total borrowings 115.7 112.1 118.1 121.2 131.3 130.6
Net worth attributable to the Crown 129.6 130.0 134.7 140.7 149.8 160.8
% of GDP            
Core Crown tax revenue 27.8 28.2 28.2 28.5 28.6 28.8
Core Crown expenses 27.9 29.1 29.4 29.6 29.0 28.8
Total Crown OBEGAL1 1.9 1.2 0.4 0.6 1.3 1.7
Total Crown operating balance 2.9 (0.1) 1.5 1.8 2.6 3.0
Core Crown residual cash 0.5 (0.9) (1.3) (1.3) (0.2) 0.3
Net core Crown debt2 19.9 20.1 20.4 20.7 19.9 18.7
Gross debt3 30.5 27.8 27.4 26.5 27.6 25.3
Total borrowings 40.0 37.4 37.3 36.3 37.5 35.6
Net worth attributable to the Crown 44.9 43.4 42.5 42.1 42.8 43.9

Notes:

  1. Operating balance before gains and losses.
  2. Net core Crown debt, excluding the New Zealand Superannuation Fund (NZS Fund) and advances.
  3. Excludes Reserve Bank settlement cash and bank bills.

Source: The Treasury

Table 2.2 sets out how the forecast Government revenue, operating and capital expenditure impacts the key fiscal indicators.

Table 2.2 – Fiscal indicators and the financial forecasts
Fiscal Narrative Actual Forecast
30 June
2018
$million
30 June
2019
$million
30 June
2020
$million
30 June
2021
$million
30 June
2022
$million
30 June
2023
$million
Core Crown taxation revenue... 80,224 84,650 89,245 95,089 100,172 105,595
...combined with other core Crown revenue... 6,554 6,949 7,182 7,837 7,951 8,232
...fund core Crown expenses... (80,576) (87,300) (93,262) (98,891) (101,686) (105,733)
...and with SOE and CE results... (668) (834) (1,852) (1,904) (1,754) (1,948)
...result in an operating balance before gains and losses (OBEGAL) 5,534 3,465 1,313 2,131 4,683 6,146
...with gains/losses leading to an operating surplus/(deficit) 8,396 (284) 4,680 5,916 8,972 10,890
...with income in SOEs, CEs and the NZS Fund retained... 139 727 1,920 1,997 1,857 2,063
...and some items do not impact on cash... (6,789) 44 (2,990) (5,633) (7,628) (9,851)
...this leads to an operating residual cash surplus/(deficit)... 7,280 3,952 4,923 4,411 7,884 9,248
...used to make contributions to the NZS Fund... (500) (1,000) (1,460) (2,120) (2,420) (2,553)
...and to use for capital expenditure... (2,515) (3,362) (3,703) (3,373) (2,592) (2,010)
...and to make advances (eg, to students)... (2,919) (3,167) (4,435) (2,751) (2,230) (1,999)
...adjusting for forecast adjustments (top down/new spending)... 792 484 (419) (1,225) (1,521)
...results in a residual cash surplus/(deficit)... 1,346 (2,785) (4,191) (4,252) (583) 1,165
...when combined with opening net core Crown debt... 59,480 57,495 60,299 64,695 69,226 69,861
...and other fair value movements in financial assets and financial liabilities... (639) 19 205 279 52 (241)
...results in a closing net core Crown debt... 57,495 60,299 64,695 69,226 69,861 68,455
...which as a % of GDP is 19.9% 20.1% 20.4% 20.7% 19.9% 18.7%

Source: The Treasury

Key judgements and assumptions

The fiscal forecasts are based on assumptions and judgements developed from the best information available at the time they were prepared. Actual events are likely to differ from these assumptions and judgements, while uncertainty around the forecast assumptions and judgements increases over the forecast period.

The forecasts incorporate government decisions and other circumstances known to the Government and advised to the Treasury (up to 8 May 2019). The criteria for inclusion in these forecasts, along with the key risks, can be found in the Risks and Scenarios and Specific Fiscal Risks chapters.

In addition to the key assumptions underpinning the economic forecasts (refer to page 7), the following key judgements and assumptions supporting the fiscal forecasts were made:

  • Tax forecasts are based on the economic forecast completed on 11 April 2019.
  • The cost of commitments not explicitly included in the fiscal forecasts (or variations to the estimates included in the fiscal forecasts) can be met within the Budget operating and multi-year capital allowance included in the fiscal forecasts.
  • Departments will continue to spend less than the upper limits of approved spending (referred to as appropriations). A top-down adjustment is made to compensate for this. The adjustment will be higher at the start of the forecast period as departments' appropriations (and therefore expenses) tend to be higher in these years, reflecting the flexibility departments have around transferring underspends to later years.
  • Major capital programmes (eg, School Growth Package, Health Capital Package, Rail Packages, Housing Infrastructure Fund, P-8A Poseidon Aircraft and Prison capacity) will proceed as planned.
  • Forecast returns on the large investment portfolios managed by the Accident Compensation Corporation (ACC) and the NZS Fund are based on their expectations of long-term benchmark rates of return for their respective portfolios.
  • Significant valuations (eg, student loan portfolio, ACC claims liability and the Government Superannuation Fund (GSF) retirement liability) are based on underlying assumptions (eg, discount rates, salary increases and inflation) made at the time the valuations were prepared.
  • No revaluations of property, plant and equipment are projected beyond the current year. Only valuations that have already been completed are included in these forecasts.
  • KiwiRail freight assets continue to be valued on a commercial basis (refer to the Specific Fiscal Risks chapter for risks to the valuation methodology).
  • Contributions to the NZS Fund over the forecast period and the estimated contribution to the NZS Fund, if contributions were based on the legislated contribution formula, are set out in Table 2.3. Over the forecast years, all Fund variables (apart from the capital contributions) are based on those provided by the NZS Fund itself. For more information, refer to the Treasury website for the NZS Fund model.
Table 2.3 – NZS Fund contributions
Year ending 30 June
$billions
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Estimated contribution as prescribed by formula1 2.0 2.2 2.4 2.5 2.5
Forecast contribution in Budget Update 1.0 1.5 2.1 2.4 2.6

Note:

  1. Calculations of annual contributions using the NZS Fund model.

Source: The Treasury

  • Between 2018/19 and 2021/22 the Government's own planned capital contributions are applied. Between 2019/20 and 2022/23, small percentages of the capital contributions are transferred to a new fund administered by the Guardians of New Zealand Superannuation which will invest via the New Zealand Venture Investment Fund Limited (NZVIF).

Further information on the underlying economic assumptions used in these fiscal forecasts can be found on page 48.

Core Crown Tax Revenue#

Tax revenue is forecast to grow over the forecast period...

Core Crown tax revenue (Figure 2.1) is forecast to increase in each year of the forecast period in nominal terms, while remaining relatively stable as a percentage of GDP. By 2022/23, core Crown tax revenue is expected to reach $105.6 billion, $25.4 billion higher than in 2017/18.

Figure 2.1 – Core Crown tax revenue

Figure 2.1 – Core Crown tax revenue. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Source: The Treasury

Text description of Figure 2.1 – Core Crown tax revenue.

Table 2.4 shows the breakdown of the increase across the major tax types.

Table 2.4 – Increase in core Crown tax revenue over the forecast period, by major tax type
Year ending 30 June
$billions
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Total
Change
Source deductions 2.0 2.0 2.2 2.2 2.4 10.8
GST 1.2 1.4 1.5 1.4 1.3 6.8
Corporate tax 1.4 (0.3) 0.9 0.7 0.9 3.6
Net other persons tax (0.5) 1.0 0.6 0.2 0.3 1.6
Resident withholding tax (on interest) 0.1 0.1 0.2 0.4 0.4 1.2
Other taxes 0.3 0.3 0.5 0.2 0.1 1.4
Total increase in core Crown tax revenue 4.5 4.5 5.9 5.1 5.4 25.4
Plus previous year 80.2 84.7 89.2 95.1 100.2  
Core Crown tax revenue 84.7 89.2 95.1 100.2 105.6  

Source: The Treasury

Source deductions are forecast to grow by $10.8 billion over the forecast period. Half of this increase is expected to come from forecast wage growth. The rest of the increase comes from expected employment growth that contributes $2.4 billion and fiscal drag which contributes a further $1.9 billion.

GST is forecast to grow by $6.8 billion over the forecast period, with growth from household consumption (supported by income growth and relatively low interest rates) expected to contribute $6.3 billion and residential investment expected to contribute $1.2 billion.

Corporate tax is forecast to grow by $3.6 billion over the forecast period, mainly owing to expected growth in corporate profits.

In April 2019, Inland Revenue moved the administration of income taxes to a new accounting system, enabling the recognition of income tax more consistently during the tax year (the previous system relied on year-end assessments to a large extent, particularly for large taxpayers). This change has resulted in an earlier recognition point for income tax revenue, and is estimated to add around $1.0 billion to net company tax and reduce net other persons tax by around $0.5 billion in the 2018/19 year, with negligible effects in later years. These changes dominate the corporate tax and net other persons tax forecast movements in the 2018/19 year shown in Table 2.4 and Figure 2.1.

…broadly in line with expected economic growth

Figure 2.2 shows that core Crown tax revenue is forecast to grow at a slightly slower rate than nominal GDP in 2019/20, mainly owing to system changes at Inland Revenue discussed above.

Figure 2.2 – Core Crown tax revenue and nominal GDP growth

Figure 2.2 – Core Crown tax revenue and nominal GDP growth. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Source: The Treasury

Text description of Figure 2.2 – Core Crown tax revenue and nominal GDP growth.

Tax revenue is then forecast to grow at a slightly higher rate than GDP, owing to a number of factors:

  • Fiscal drag is forecast to add 0.6% of GDP to tax revenue by 2022/23.
  • CPI-indexation of alcohol and tobacco excise rates adds 0.3% of GDP to forecast tax revenue.
  • Some previously announced policy measures first introduced in the 2018 Budget (eg, ring-fencing of residential property tax losses and GST on low-value goods imports) are expected to increase tax revenue by 0.2% of GDP over the course of the forecast period.

Comparison with Inland Revenue forecasts

Inland Revenue has also prepared a set of tax forecasts, which, like the Treasury's tax forecasts, were based on the Treasury's macroeconomic forecasts. The Treasury's forecasts of core Crown tax revenue are, on average, 0.4% higher than Inland Revenue's forecasts. Most of the forecast differences in tax forecasts arise from differences in the modelling methods used by the respective agencies to forecast some of the larger tax types, particularly source deductions, corporate tax, GST, resident withholding tax (RWT) on interest and road user charges.

This comparison is included in the Additional Information on the Treasury website at: https://treasury.govt.nz/publications/efu/budget-economic-and-fiscal-update-2019

Core Crown Expenses#

Core Crown expenses are expected to increase, particularly over the next three years…

Core Crown expenses are expected to increase across the forecast period by $25.1 billion from $80.6 billion in 2017/18 to $105.7 billion in 2022/23 (Figure 2.3).

Figure 2.3 – Core Crown expenses

Figure 2.3 – Core Crown expenses. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Source: The Treasury

Text description of Figure 2.3 – Core Crown expenses.

Core Crown expenditure increases at a greater rate the next three years (Figure 2.4). Annual growth in core Crown expenses is expected to be 8.3% in the current year and 6.8% and 6.0% in the following two years. This is largely owing to Government spending decisions. The funding set aside for Budget 2020 initiatives also contributes to the growth in expenditure. In addition, subsidies relating to assets (eg, Housing Infrastructure Fund, which are loans with no interest being charged), have resulted in an increase in core Crown expenses over the next two years.

Figure 2.4 – Core Crown expenses annual growth and the level of Budget allowances[3]

Figure 2.4 – Core Crown expenses annual growth and the level of Budget allowances. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Source: The Treasury

Text description of Figure 2.4 – Core Crown expenses annual growth and the level of Budget allowances.

Core Crown expenses as a percentage of GDP, peak at 29.6% in 2020/21 before declining to 28.8% in 2022/23.

…primarily owing to Budget decisions and allowances for future Budgets…

A significant portion of the nominal increase in expenses is attributable to decisions from theGovernment’s 100-Day Plan, Budget 2018 and Budget 2019. Overall, these decisions result in a forecast increase in core Crown expenses of $9.6 billion by 2022/23, with Budget 2019 contributing $3.8 billion each year on average to this increase (refer page 31).

Future operating allowances are set at $3.0 billion for Budget 2020 and $2.4 billion for Budgets 2021 and 2022. Over the forecast period, allowances for future Budgets increase core Crown expenses by $7.8 billion by 2022/23 (Figure 2.5).There is a pre-commitment against Budget 2020, for the PGF totalling $0.6 billion, leaving an average of $2.9 billion of spending yet to be allocated.

Figure 2.5 – Core Crown expenses with allowance break-down

Figure 2.5 – Core Crown expenses with allowance break-down. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Source: The Treasury

Text description of Figure 2.5 – Core Crown expenses with allowance break-down.

For forecasting purposes, Budget allowances are assumed to be all operating expenditure. However, these allowances can be used for a combination of revenue and expenses initiatives when allocated. The fiscal forecasts also assume that any additional costs in relation to Government commitments and future costs pressures will be met from operating allowances.

…the cost of social assistance also steadily increase…

Social assistance spending is forecast to increase by $6.8 billion (excluding policy changes) across the forecast period. Of this, $4.8 billion relates to growth in New Zealand Superannuation expenses reflecting an expected increase in recipient numbers from almost 741,300 in 2017/18 to over 872,900 (17.8% increase), an increase in payment rates and other factors. By the end of the forecast period, New Zealand Superannuation equals around 53% of core Crown social assistance spending and 18% of core Crown expenditure.

The remaining increase is largely owing to indexation of entitlements to wage growth (Figure 2.6).

Figure 2.6 – Growth of New Zealand Superannuation recipients and expenses

Figure 2.6 – Growth of New Zealand Superannuation recipients and expenses. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Source: The Treasury

Text description of Figure 2.6 – Growth of New Zealand Superannuation recipients and expenses .

…however, judgements on the level of spending reduce overall growth in the near term…

The fiscal forecasts are a culmination of individual forecasts provided by departments and other government entities. The actual level of spending by entities is usually below what they forecast and there is a bias towards over-forecasting expenditure.

This is owing to a number of reasons, such as expenditure being delayed or programmes not being implemented. The Treasury therefore estimates the extent to which expenditure is over-forecast and reduces the forecast accordingly. This adjustment is referred to as a ‘top-down' adjustment. The top-down adjustment is larger in the first two years of the forecast period ($0.8 billion in 2018/19 and $1.4 billion in 2019/20), partly owing to the significant growth in expense expected in these years. It then remains static at $0.5 billion for the rest of the forecast period (refer to page 99).

…and so does a decline in finance costs

Core Crown finance costs are forecast to decline by around $0.3 billion by the end of the forecast period, primarily owing to a reduction in the effective interest rate on borrowings. For example, at June 2018 the effective interest rate on Government bonds was 4.1% and by 2022/23 it is forecast to decrease to 2.8%. The reduction is primarily from Government bonds being issued at a lower rate (between 2.3% and 2.7%) than those maturing over the same period (between 3.6% and 5.6%). Even though borrowings are expected to increase resulting in additional finance costs, the lower effective interest rate more than offsets this increase.

2019 Budget new operating spending

The purpose of this box is to explain how the Budget 2019 operating package impacts the fiscal forecasts. Details on individual initiatives can be found in the Summary of Initiatives in The Wellbeing Budget document.

The Budget 2019 net operating package totals $15.2 billion across the forecast period, an annual average increase of $3.8 billion from 2020. The package includes revenue initiatives that increase core Crown revenue by $0.2 billion and spending which increases core Crown expenditure by $15.4 billion (refer Table 2.5).

Table 2.5 – Impact of operating package
Year ending 30 June
$millions
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
5-year
Total
Gross spending 773 3,449 3,615 3,702 3,863 15,402
Savings and revenue initiatives - (10) (44) (80) (108) (242)
Budget 2019 net package 773 3,439 3,571 3,622 3,755 15,160
Impact of new spending            
Increase in core Crown revenue -   10 44 80 108 242
Increase in core Crown expenses 773 3,449 3,615 3,702 3,863 15,402
Reduction in OBEGAL 773 3,439 3,571 3,622 3,755 15,160

Source: The Treasury

Gross spending of the Budget 2019 package ($15.4 billion) is spread across a number of areas as outlined in Table 2.6 below. The core Crown expense tables on page 99 outline the total core Crown expenditure on each of these areas after these increases.

Table 2.6 – Composition of the increase in gross spending[4]
Year ending 30 June
$millions
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
5-year
Total
Health 166 1,037 1,114 1,149 1,200 4,666
Social security and welfare 45 433 609 574 596 2,257
Education (190) 158 306 366 510 1,150
Law and order 172 223 177 181 189 942
Primary services 354 308 109 68 64 903
Core government services 5 199 238 206 212 860
Economic and industrial services 191 278 78 69 71 687
Defence 21 96 132 135 124 508
Heritage, culture and recreation - 140 135 119 99 493
Housing and community development - 106 102 109 116 433
Environmental protection - 21 32 27 27 107
Transport and communications 9 22 14 9 5 59
Unallocated contingencies - 428 569 650 585 2,232
  773 3,449 3,615 3,702 3,863 15,402

Source: The Treasury

The amounts classified as ‘unallocated contingencies’ represent centrally-held contingencies that have yet to be allocated to a particular departmental baseline.

Operating Balance#

OBEGAL is expected to initially decline before climbing…

OBEGAL is forecast to remain in surplus over the forecast period, decreasing from $5.5 billion in 2017/18 to $1.3 billion in 2019/20 before reaching $6.1 billion in 2022/23 (Figure 2.7).

Figure 2.7 – Components of OBEGAL by segment

Figure 2.7 – Components of OBEGAL by segment. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Source: The Treasury

Text descripton of Figure 2.7 – Components of OBEGAL by segment.

The initial decline in OBEGAL surpluses is a result of the growth in core Crown expenses outpacing growth in core Crown tax revenue (as discussed in earlier sections of this chapter). This trend reverses from 2020/21 and as a result, OBEGAL surpluses are expected to start rising.

Crown entities are collectively forecasting OBEGAL deficits that increase from a $0.6 billion deficit in the current year to $1.8 billion in 2022/23. The increase in these deficits is largely driven by ACC and District Health Boards (DHBs), which are both expecting growth in demand and rising costs. State-owned Enterprises' (SOEs) contribution to OBEGAL remains fairly stable with surpluses forecast across the forecast period.

…while investment returns contribute to the growth in the operating balance and net worth

The total Crown operating balance, inclusive of gains and losses, is forecast to be a deficit of $0.3 billion in the current year, before returning to surplus for the remainder of the forecast period, reaching $10.9 billion in 2022/23 (Figure 2.8).

Figure 2.8 – Components of operating balance

Figure 2.8 – Components of operating balance. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Source: The Treasury

Text description of Figure 2.8 – Components of operating balance .

Gains and losses on liabilities are included in the first year of the forecast but are not forecast beyond then (as happens every year). In the current year, the Crown is expected to record large losses on its non-financial liabilities (ACC outstanding claims liability and the GSF retirement plan liability) of $4.7 billion and losses on the Emissions Trading Scheme (ETS) of $0.6 billion. The losses from non-financial liabilities are primarily driven by a reduction in discount rates used to calculate these long-term liabilities. For example, the single effective discount rate for ACC's liability has decreased from 3.51% at 30 June 2018 to 2.97%. As future actuarial gains or losses are not forecast, they do not impact the operating balance beyond 2018/19. The losses relating to the ETS are a result of changes to the carbon price, which has increased to $25.67 per unit in the current year from $21.10 per unit at 30 June 2018.

Partially offsetting these losses are the year-to-date gains made on the Crown's two large investment portfolios, ACC and the NZS Fund. As the global equity markets have been weaker in the first half of 2018/19, the gains recorded are lower than in 2017/18. These forecasts assume investment income returns to a long-term rate, resulting in stable returns being forecast beyond the current year.

The level of the operating balance plays a significant part in increasing the Government's financial assets and is the primary reason for the growth in the Crown's net worth. As a percentage of GDP, net worth attributable to the Crown is forecast to be lower than it was in 2017/18, largely due to the increasing operating expenditure. This is discussed in more detail in the balance sheet section of this chapter.

Summary fiscal indicators

To assess the Government's fiscal position, the Treasury calculates two summary fiscal indicators: the cyclically-adjusted balance (CAB) and the fiscal impulse. Further detail on these indicators can be found in the Additional Information section of the Budget Update, which is available on the Treasury website https://treasury.govt.nz/publications/efu/budget-economic-and-fiscal-update-2018.

Table 2.7 – Operating balance indicators and fiscal impulse
Year ending 30 June
% of GDP
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
OBEGAL 1.9 1.2 0.4 0.6 1.3 1.7
Cyclically-adjusted balance 1.6 1.1 0.3 0.4 1.2 1.7
Fiscal impulse[5] 0.3 1.1 (0.0) (0.2) (0.6) (0.5)

Source: The Treasury

Cyclically-adjusted balance

The CAB is an estimate of OBEGAL adjusted for the cyclical position of the economy. Cyclical factors (eg, higher tax revenue in an upturn or higher unemployment expenses in a downturn) are removed to assess the Government's underlying fiscal performance. Figure 2.9 shows the CAB is in surplus across the entire forecast period. That indicates the surpluses are structural and not due to cyclical economic conditions. From 2018/19 to 2021/22, the economy is forecast to be operating above its potential level (a positive output gap). As a result, the CAB is forecast to be lower than OBEGAL. Thereafter the economy is forecast to be operating at its potential level, such that cyclically-adjusted surpluses are broadly consistent with OBEGAL. Cyclically-adjusted balances are, on average, lower than those forecast at the Half Year Update.

Figure 2.9 – Operating balance indicators and fiscal impulse

Figure 2.9 – Operating balance indicators and fiscal impulse. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Source: The Treasury

Text description of Figure 2.9 – Operating balance indicators and fiscal impulse.

Fiscal impulse

Unlike the CAB which is an operating measure, the fiscal impulse is based on both operating and capital cash flows. For a given year, the fiscal impulse estimates how much discretionary changes (ie, excluding cyclical factors) in the fiscal position add to, or subtract from, aggregate demand in the economy (expressed as a percentage of GDP).[6] The fiscal impulse indicates that changes in fiscal policy are forecast to stimulate aggregate demand in 2018/19, and then to have a broadly neutral impact on aggregate demand in 2019/20. For the remainder of the forecast period, fiscal policy changes are estimated to have a relatively contractionary impact on aggregate demand. This is driven by rising tax receipts and falling expenses (both as a percentage of GDP) from 2021/22.

There are a number of changes compared to the Half Year Update. The 2018/19 impulse is now estimated to be 1.1% of GDP, compared with 2.2% forecast at the Half Year Update. This reflects changes in the expected timing of operating and capital spending. Some operating spending, previously expected to take place in 2018/19, is now expected in 2019/20. Changes in the timing of spending and higher expenditure for Budget 2019 see a broadly neutral impulse forecast for 2019/20, compared to a -0.9% of GDP impulse forecast at the Half Year Update.

Residual Cash and Net Core Crown Debt[7]#

Operating cash flows improve over time…

Over the entire forecast period, a cash deficit of $10.6 billion is expected. This cash shortfall is funded partly through additional borrowing (refer to Figure 2.10).

Figure 2.10 – Core Crown residual cash

Figure 2.10 – Core Crown residual cash. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Source: The Treasury

Text description of Figure 2.10 – Core Crown residual cash.

Net operating cashflows are forecast to be in surplus across the forecast period, broadly following a similar trend to the OBEGAL forecast. Over the forecast period, the Government is expected to generate cash flows from core Crown operating activities of $30.4 billion.

…outpacing capital spending near the end of the forecast period

However, capital spending is forecast to exceed operating cashflows until the last year of the forecast, resulting in residual cash deficits for the first four years. As tax receipts continue to grow and capital spending decreases, a residual cash surplus of $1.2 billion is forecast in 2022/23.

The Government is forecast to spend a net total of $41.1 billion on capital investments over the forecast period. Net capital spending includes $15.1 billion on building and acquiring physical assets, $13.0 billion on providing capital to Crown entities (eg, the New Zealand Transport Agency for state highways ($4.2 billion) and DHBs to build or develop hospitals ($2.6 billion)) and $9.6 billion in contributions to the NZS Fund.

Similar to the adjustment to operating expenses, a top-down adjustment has also been applied to both operating payments and capital spending to account for the possibility that expenditure will be deferred into later years.

Table 2.8 outlines core Crown capital spending that has an impact on net core Crown debt. It excludes capital spending undertaken directly by Crown entities and SOEs funded from their own resources (including third-party financing).

Table 2.8 – Net capital expenditure activity[8]
Year ending 30 June
$billions
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
5-year
Total
Education 0.8 0.8 1.2 1.2 1.0 0.8 5.0
Defence 0.5 0.8 1.3 1.3 0.8 0.5 4.7
Corrections 0.2 0.5 0.2 0.1 0.1 0.1 1.0
Health 0.3 0.2 0.1 - - - 0.3
Police 0.1 0.1 0.1 0.1 0.1 0.1 0.5
Inland Revenue 0.1 0.1 0.2 0.2 - - 0.5
Other 0.5 0.8 0.6 0.5 0.7 0.5 3.1
Net purchase of physical assets 2.5 3.3 3.7 3.4 2.7 2.0 15.1
Student loans - (0.1) (0.1) (0.1) (0.1) - (0.4)
Housing infrastructure fund - 0.1 0.2 0.2 0.2 0.1 0.8
PGF loans - - 0.7 0.2 - - 0.9
Other 0.1 0.1 - 0.3 - (0.1) 0.3
Net advances 0.1 0.1 0.8 0.6 0.1 - 1.6
NZTA 1.6 1.2 1.0 0.3 0.9 0.8 4.2
City Rail Link 0.3 0.1 0.5 0.4 0.4 0.4 1.8
District Health Boards 0.1 0.5 0.6 0.4 0.5 0.6 2.6
Crown Infrastructure Partners 0.1 0.3 0.2 0.2 0.1 - 0.8
KiwiRail 0.4 0.4 0.7 0.6 - - 1.7
Southern Response 0.2 0.2 0.1 - - - 0.3
Ōtākaro - 0.1 0.2 0.1 - - 0.4
Tamaki - 0.1 - 0.1 0.1 - 0.3
Other 0.1 0.2 0.3 0.1 0.1 0.2 0.9
Net investments 2.8 3.1 3.6 2.2 2.1 2.0 13.0
Future new capital spending - 0.5 0.5 1.0 1.5 1.7 5.2
Top-down capital adjustment - (1.3) (1.0) (0.6) (0.3) (0.2) (3.4)
Contribution to NZS Fund 0.5 1.0 1.5 2.1 2.4 2.6 9.6
Net capital spending 5.9 6.7 9.1 8.7 8.5 8.1 41.1

Source: The Treasury

Future new capital spending represents funding set aside in contingencies for projects agreed in Budgets and amounts to be allocated in future Budgets from the multi-year capital allowance. The multi-year capital allowance has been set aside for capital spending in Budget 2019 to Budget 2022. This allowance has been increased by $1.7 billion to $14.8 billion. Of this amount, Budget 2019 has allocated $10.4 billion leaving $4.4 billion remaining to be allocated. For more details, refer to page 41.

Net core Crown debt peaks as a share of GDP in 2021/22…

Net core Crown debt as a percentage of GDP is expected to increase for the first three years of the forecast period before declining to 18.7% in 2022/23 (Figure 2.11).

Figure 2.11 – Net core Crown debt

Figure 2.11 – Net core Crown debt. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Source: The Treasury

Text description of Figure 2.11 – Net core Crown debt.

However, in nominal terms, net core Crown debt continues to grow, peaking at $69.9 billion in 2021/22, and then declines in the final year of the forecast once residual cash returns to surplus. Net core Crown debt is forecast to be $68.5 billion in 2022/23.

…while gross debt continues to decline as a percentage of GDP

Gross debt remains on a generally declining trend as a percentage of GDP, decreasing from 30.5% in 2017/18 to 25.3% by 2022/23 (Figure 2.12).

Figure 2.12 – Gross debt

Figure 2.12 – Gross debt. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Source: The Treasury

Text description of Figure 2.12 – Gross debt.

In nominal terms, gross debt is expected to increase over the forecast period, in order to partially fund the overall residual cash deficits.

The core Crown borrowing programme is a key influence in the trend in gross debt. As a result on an annual basis gross debt will vary depending on the timing of bond maturities and proceeds from bonds.

By 2022/23, New Zealand Government Bonds (NZGBs) on issue are forecast to decline to 21.6% of GDP, from 25.7% at the end of 2017/18. This is consistent with the Government's stated intention to maintain levels of NZGBs on issue at not less than 20% of GDP over time.

The core Crown borrowing programme covers the cash shortfall and maturities over the forecast period

The core Crown borrowing programme includes forecast proceeds from both Government bonds and short-term borrowing (eg, Treasury Bills). Overall, the programme will provide funds of $5.2 billion (Table 2.9) to help meet residual cash shortfalls.

In total, the bond programme is expected to raise funds of $43.6 billion. Although, bond maturities will result in $37.4 billion of existing debt being repaid. In addition, short-term borrowing is expected to be $1.0 billion lower at the end of the forecast period, relative to the end of 2017/18.

Table 2.9 – Net issuance of Government bonds and short-term borrowing[9]
Year ending 30 June
$billions
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
5-year
Total
Face value of Government bonds issued (market) 8.0 10.0 10.0 8.0 6.0 42.0
Debt programme cash flows            
Cash proceeds from issue of market bonds 8.4 10.4 10.2 8.3 6.3 43.6
Repayment of market bonds (12.0) (6.6) (9.9) - (8.9) (37.4)
Net issue/(repayment) of short-term borrowing (0.7) (0.3) 1.1 - (1.1) (1.0)
Net debt programme cash flows (4.3) 3.5 1.4 8.3 (3.7) 5.2

Source: The Treasury

Total Crown Balance Sheet#

Operating balance surpluses drive the growth in the Crown's net worth…

Figure 2.13 shows that, in nominal terms, net worth attributable to the Crown is expected to grow across the forecast period, reaching $160.8 billion by 2022/23, as a result of operating balance surpluses. The nominal growth in the Crown's net worth over the forecast period is reflected by an increase in total assets of $55.0 billion, partly offset by an increase in total liabilities of $24.0 billion.

Figure 2.13 – Net worth attributable to the Crown

Figure 2.13 – Net worth attributable to the Crown. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Source: The Treasury

Text description of Figure 2.13 – Net worth attributable to the Crown.

As a percentage of GDP, net worth attributable to the Crown stays relatively stable at around 43% across the forecast period as growth in operating surpluses is broadly in line with economic growth. This trend has changed to what was expected at the Half Year Update which showed a gradual increase in the size of the Crown's net worth as a share of the economy, owing to a higher forecast expenditure track (refer page 28).

Spending decisions and tax revenue have traditionally had the largest impact on the Crown's finances. However, as the size and nature of the balance sheet investment evolves, changes in the values of assets and liabilities will continue to have a significant effect on the overall fiscal position.

The Specific Fiscal Risks and Risks and Scenarios chapters include a section on balance sheet risks and should be read in conjunction with the fiscal forecasts.

Table 2.10 – Breakdown of total Crown balance sheet
Year ending 30 June
$billions
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Financial assets 157.5 153.8 159.0 164.9 181.4 189.0
Property, plant and equipment 159.0 164.3 169.6 172.5 174.9 176.6
Other assets 23.4 23.3 24.3 25.5 27.2 29.3
Total assets 339.9 341.4 352.9 362.9 383.5 394.9
Borrowings 115.7 112.1 118.1 121.2 131.3 130.6
Insurance liabilities 45.3 49.8 50.6 52.1 53.7 55.4
Other liabilities 43.3 43.3 43.5 42.9 42.8 42.3
Total liabilities 204.3 205.2 212.2 216.2 227.8 228.3
Total net worth 135.6 136.2 140.7 146.7 155.7 166.6
Net worth attributable to the Crown 129.6 130.0 134.7 140.7 149.8 160.8

Source: The Treasury

…with financial assets increasing by $31.5 billion…

Financial assets are forecast to grow by $31.5 billion over the forecast period to $189.0 billion (around 47.9% of total assets) in 2022/23 (Table 2.10) as a result of:

  • The financial asset portfolio managed by the NZS Fund is expected to grow by around $25 billion. This growth in financial assets is driven by the expected investment returns that accumulate over the forecast period. In addition, the contributions from the Crown to the NZS Fund of around $9.6 billion are expected to be invested in financial assets.
  • The financial asset portfolio managed by ACC is also expected to grow by $4.8 billion largely as a result of expected investment returns.
  • Advances are expected to increase by $7.7 billion by 2022/23, primarily owing to growth in Kiwibank mortgages of $6.3 billion. The remaining increase in advances is from loans forecast to be provided from the Housing Infrastructure Fund and the PGF. For forecast purposes, it is assumed the unallocated portion of capital spending from the PGF will be provided for projects as concessionary loans.
  • Financial assets held by the Treasury reduce to help fund the expected cash shortfall, offsetting the increases above.

…and physical assets increasing by $17.6 billion…

Overall, property, plant and equipment (PPE) is expected to increase by $17.6 billion to $176.6 billion (around 45% of total assets) by 2022/23. There are large increases expected across the PPE asset classes of buildings, state highways, specialised military equipment (SME) and aircraft.

Figure 2.14 – Increase in PPE by asset class

Figure 2.14 – Increase in PPE by asset class. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Source: The Treasury

Text description of Figure 2.14 – Increase in PPE by asset class.

Just over a quarter ($4.3 billion) of the overall increase in PPE comes from capital investments funded from Budget 2019, which includes:

  • investment in infrastructure to help maintain health services provided by DHBs
  • the purchase of four Boeing P-8A Poseidon maritime patrol aircraft, and
  • investment in the rail freight network through the replacement of rolling stock (locomotives and wagons) and implementation of the Future of Rail review.

In addition, decisions from previous Budgets will also be a factor in the increase expected in PPE, as capital projects generally take a number of years to complete. For example, the decision to fund the expansion of Waikeria Prison was made in Budget 2016; but the majority of the fiscal impact from this decision on PPE is reflected across the current forecast period.

Housing New Zealand Corporation is expected to make significant investment in public housing across the forecast period, which is a key factor in the increase in the buildings PPE asset class. This investment is expected to be largely funded from third-party borrowings.

Over the forecast period the value of state highways is expected to grow by $5.5 billion, primarily reflecting roading projects to be funded from the National Land Transport Fund.

…with $3.1 billion set aside for future capital Budget decisions…

Total assets are forecast to increase by $3.1 billion over the forecast period from funding set aside for future capital initiatives. The annual profile included in the forecasts for this investment is outlined in Table 2.12.

How capital decisions from the Budget impact the Government's balance sheet

The Government has set aside $14.8 billion to fund capital investments for Budgets 2019 to 2022. The decisions on capital investments made by the Government in Budget 2019 total $10.4 billion, leaving $4.4 billion of funding to allocate over the next three Budgets.

Even though Budget 2019 has funded capital investments of $10.4 billion, the impact on the Government's balance sheet is estimated to be only $7.9 billion. The reason for this difference is that the balance sheet will only include capital investments expected to occur up to 30 June 2023. Around $2.5 billion of capital investments from Budget 2019 are expected to occur after 30 June 2023.

The capital investments from Budget 2019 will flow through to different parts of the forecast balance sheet depending on the nature of the investment. Table 2.11 provides a breakdown of how asset categories have been impacted by Budget 2019 decisions.

Table 2.11 – Reconciliation between Budget capital decisions and impact on the fiscal forecasts
$billions 2019 2020 2021 2022 2023 5-year
Total
Post
2023
Budget
2019
Total
Investment in PPE 0.3 1.5 1.3 0.3 0.9 4.3 0.7 5.0
Loans 0.2 0.5 0.2 - - 0.9 - 0.9
Equity investments - - 0.5 0.6 0.2 1.3 0.1 1.4
Tagged contingencies - 0.3 0.3 0.4 0.4 1.4 1.7 3.1
Total 0.5 2.3 2.3 1.3 1.5 7.9 2.5 10.4

Source: The Treasury

Of the $4.4 billion of the multi-year capital allowance that remains it is assumed that $3.1 billion of expenditure will occur over the forecast period.

Table 2.12 – Profile of amount remaining in the multi-year capital allowance
$billions 2019 2020 2021 2022 2023 5-year
Total
Post
2023
Total
Annual amount - 0.1 0.6 1.1 1.3 3.1 1.3 4.4

Source: The Treasury

…while liabilities are expected to increase by $24.0 billion over the forecast period

Total liabilities are forecast to increase by $24.0 billion over the forecast period to $228.3 billion in 2022/23. The increase in total liabilities is owing to borrowings being higher by $14.9 billion and insurance liabilities being higher by $10.1 billion.

Figure 2.15 – Borrowings by segments

Figure 2.15 – Borrowings by segments. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Source: The Treasury

Text description of Figure 2.15 – Borrowings by segments.

The increase in borrowings is driven by three main factors:

  • gross debt increasing by $4.8 billion (refer pages 37 to 38) to partly help meet the expected cash shortfall
  • Kiwibank borrowings (eg, deposits held) increasing by $6.3 billion, which offsets the increase in Kiwibank advances discussed on page 40, and
  • borrowings by Crown entities increasing by $5.9 billion to fund capital expansions. This includes a $3.0 billion increase in Housing New Zealand Corporation's third-party borrowing to increase its public housing portfolios. In addition, increased borrowing by Crown Infrastructure Partners Limited ($2.0 billion) and NZTA ($1.1 billion) has also contributed to the total increase in borrowings.

The increase in insurance liabilities of $10.1 billion is largely owing to an increase of $11.8 billion in ACC insurance liabilities. The most recent ACC liability valuation (31 December 2018), updated for discount rates at 28 February 2019, has resulted in an increase to the liability of around $3.7 billion in the current year, primarily owing to a decrease in discount rates. The remaining change in the ACC liability reflects the increase in cost of existing and new claims. Both the EQC and Southern Response insurance liabilities are expected to decline as existing claims are forecast to be largely settled by the end of the forecast period.

Comparison to the Half Year Update#

The Half Year Update was published on 13 December 2018. Since then, there have been a number of changes that have impacted the fiscal outlook. Table 2.13 summarises the changes in the key fiscal indicators since the Half Year Update.

Table 2.13 – Key fiscal indicators compared to the Half Year Update
Year ending 30 June
$billions
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Core Crown tax revenue          
Budget Update 84.7 89.2 95.1 100.2 105.6
Half Year Update 84.3 89.2 95.0 100.4 105.3
Change 0.4 - 0.1 (0.2) 0.3
Core Crown expenses          
Budget Update 87.3 93.3 98.9 101.7 105.7
Half Year Update 88.7 90.9 95.9 98.9 103.2
Change (1.4) 2.4 3.0 2.8 2.5
OBEGAL[10]          
Budget Update 3.5 1.3 2.1 4.7 6.1
Half Year Update 1.7 4.1 5.1 7.6 8.4
Change 1.8 (2.8) (3.0) (2.9) (2.3)
Core Crown residual cash          
Budget Update (2.8) (4.2) (4.2) (0.6) 1.2
Half Year Update (5.0) (2.5) (0.9) 0.9 3.0
Change 2.2 (1.7) (3.3) (1.5) (1.8)
Net core Crown debt          
Budget Update 60.3 64.7 69.2 69.9 68.5
Half Year Update 62.7 65.6 66.9 66.3 63.5
Change (2.4) (0.9) 2.3 3.6 5.0
Total borrowings          
Budget Update 112.1 118.1 121.2 131.3 130.6
Half Year Update 111.4 116.2 116.9 123.3 122.8
Change 0.7 1.9 4.3 8.0 7.8
Net worth attributable to the Crown          
Budget Update 130.0 134.7 140.7 149.8 160.8
Half Year Update 133.5 140.9 149.8 161.6 174.7
Change (3.5) (6.2) (9.1) (11.8) (13.9)

Source: The Treasury

Overall core Crown tax revenue is expected to be marginally higher than the Half Year Update...

Core Crown tax revenue is forecast to be $0.6 billion higher than in the Half Year Update over the forecast period. Forecasts for revenue from GST and other taxes have increased with these increases largely offset by reductions in the forecasts for corporate tax, RWT and revenue from other persons tax. Table 2.14 summarises the movements by tax type since the Half Year Update.

Table 2.14 – Reconciliation of the change in core Crown tax revenue
Year ending 30 June
$billions
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Total
Change
Movement in core Crown tax owing to:            
Good and services tax (GST) 0.4 0.3 0.7 0.8 1.2 3.4
Source deductions - (0.1) - - 0.1 -
Corporate tax (0.1) (0.3) (0.3) (0.5) (0.4) (1.6)
Resident withholding tax (RWT) on interest - - (0.2) (0.4) (0.4) (1.0)
Other persons tax (0.1) (0.1) (0.1) (0.1) (0.1) (0.5)
Other taxes 0.2 0.2 - - (0.1) 0.3
Total movement in core Crown tax revenue 0.4 - 0.1 (0.2) 0.3 0.6
Plus: Half Year Update's tax base 84.3 89.2 95.0 100.4 105.3  
Core Crown tax revenue at Budget Update 84.7 89.2 95.1 100.2 105.6  
As a % of GDP 28.2% 28.2% 28.5% 28.6% 28.8%  

Source: The Treasury

The $3.4 billion increase in GST is mainly owing to increased forecasts of private nominal consumption ($1.7 billion) and more accurate information from agencies ($1.7 billion).

Corporate tax revenue forecasts are $1.6 billion lower in total, mostly driven by the inclusion of $1.3 billion of Research and Development (R&D) tax credits (which was previously recognised as an expense) as a reduction in tax revenue for the first time. As this also reduced core Crown expenses, there is no impact on OBEGAL.

The RWT forecast is $1.0 billion lower owing to a lower forecast interest rate track and the net other persons' tax revenue forecasts are $0.5 billion lower, mostly owing to a weaker outlook for growth in entrepreneurial income.

…while OBEGAL growth slows, as additional spending takes effect…

OBEGAL growth has slowed across the forecast period since the Half Year Update, as new Budget spending takes effect. The major movements in OBEGAL since the Half Year Update are outlined in Table 2.15. Cumulatively, OBEGAL is $9.2 billion lower across the forecast period.

Table 2.15 – Changes in OBEGAL since the Half Year Update
Year ending 30 June
$billions
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
OBEGAL - 2018 Half Year Update 1.7 4.1 5.1 7.6 8.4
Changes in forecasts:          
       Core Crown Tax revenue forecasting changes 0.4 - 0.1 (0.2) 0.3
       Budget 2019 new operating spending (0.1) (1.2) (1.3) (1.3) (1.5)
       Increase to Budget 2020 operating allowance - - (0.6) (0.6) (0.6)
       Social assistance forecasting changes 0.1 (0.1) (0.1) (0.1) (0.1)
       Expenditure phasing changes 0.9 (0.4) (0.4) (0.1) 0.2
ACC and DHB results (0.2) (0.7) (0.6) (0.3) (0.3)
EQC results 0.2 - - - -
Other SOE/CE results - - (0.1) (0.4) (0.3)
       Other changes 0.5 (0.4) - 0.1 -
Total changes since the Half Year Update 1.8 (2.8) (3.0) (2.9) (2.3)
OBEGAL - 2019 Budget Update 3.5 1.3 2.1 4.7 6.1

Source: The Treasury

Core Crown tax revenue has increased as a result of forecasting changes (refer page 44 for a more detailed discussion of this change since the Half Year Update).

Final Budget 2019 decisions are larger than assumed at the Half Year Update by around $5.4 billion, which has increased core Crown expenditure, reducing OBEGAL across the forecast period. (Refer to the box on page 31 for further information on the Budget 2019 new operating spending.)

The Budget operating allowance for Budget 2020 has increased since the Half Year Update from $2.4 billion to $3.0 billion, resulting in a $0.6 billion impact on OBEGAL for each of the last three years of the forecast. However, the allowances for Budgets 2021 and 2022 remain unchanged at $2.4 billion per year.[11]

Social assistance forecasting changes have increased spending by $0.3 billion in total since the Half Year Update. This is primarily driven by higher forecast growth in recipient numbers (largely for Accommodation Assistance and Jobseeker Support benefits) partially offset by a reduction in the forecast for family tax credits reflecting ongoing strength in the labour market.

Expenditure phasing changes have also contributed to the reduction in OBEGAL. The largest changes in timing were in relation to PGF expenditure resulting in expenditure shifting out of the current year and into later years. Reforecasts of expenditure since the Half Year Update have led to expenditure being transferred from 2018/19 into the 2019/20 fiscal year improving OBEGAL in the current year. In addition, some expenditure previously forecast in the later part of the forecast is now not expected until beyond 2022/23.

Crown entity and SOE forecasts have been revised since the Half Year Update with some entities' forecasts improving and others weakening. The most significant changes were in relation to DHBs and ACC. In total, the DHBs are expecting higher deficits than previously. At the same time, ACC is expecting levy revenue to be lower and insurance claim costs higher than previously forecast. Both of these Crown entity changes result in OBEGAL being $2.1 billion lower across the forecast period when compared to the Half Year Update.

In addition, EQC's forecasts have improved in the near term by $0.2 billion as a result of higher reinsurance recoveries expected in the latest actuarial valuations improving OBEGAL since the Half Year Update.

...and net core Crown debt is higher across the forecast period, reflecting new spending decisions...

Core Crown residual cash is forecast to be $6.1 billion lower than the Half Year Update. This results in an increase to net core Crown debt, which is expected to be around $5.0 billion higher than previously forecast across the forecast period (Table 2.16).

Table 2.16 – Changes in net core Crown debt since the Half Year Update
Year ending 30 June
$billions
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Net core Crown debt - 2018 Half Year Update 62.7 65.6 66.9 66.3 63.5
       Budget 2019 new operating spend 0.1 1.3 2.6 3.9 5.4
       Increase to Budget 2020 operating allowance - - 0.6 1.2 1.8
       Budget 2019 new capital spend and MYCA1 - 0.1 - (0.3) (0.1)
       Tax receipt forecasts2 0.1 (0.2) (0.4) (0.7) (1.2)
       Social assistance forecasting changes (0.2) - 0.1 0.2 0.3
       Reforecast of capital spending (0.8) (0.7) (0.6) (0.6) (0.6)
       EQC support payments - (0.2) (0.2) (0.2) (0.2)
Changes in PGF spending profile (0.6) (0.6) - - -
Net finance costs 0.1 0.1 0.1 0.2 0.4
Gains and losses (0.2) (0.2) (0.1) (0.1) (0.2)
       Other changes (0.9) (0.5) 0.2 - (0.6)
Total changes since the Half Year Update (2.4) (0.9) 2.3 3.6 5.0
Net core Crown debt - 2019 Budget Update 60.3 64.7 69.2 69.9 68.5
  1. MYCA refers to the multi-year capital allowance.
  2. Excluding reclassification of R&D tax credits previously included as an operating payment.

Source: The Treasury

Increases in Budget 2019 spending as well as the Budget 2020 operating allowance, have increased net core Crown debt by $7.2 billion.

Tax receipts have increased by $1.2 billion across the forecast period since the Half Year Update, as a result of changes in the timing of cash flows relating to R&D tax credit payments and increases in GST offset by reductions in corporate tax, RWT and other persons' tax receipts.

Social assistance forecasting changes largely mirror the OBEGAL movement with the $0.3 billion increase in payments primarily driven by higher forecast growth in recipient numbers.

Reforecasting of capital spending has resulted in a $0.6 billion overall reduction in net core Crown debt as some of this capital spending previously forecast to occur prior to 2022/23 is now expected to fall outside of the forecast period.

As a result of EQC's expected revenue changes, EQC now no longer require $0.2 billion support from the Crown.

The expected profile of capital spending by departments has resulted in changes to the cash profile in 2018/19 and 2019/20. This impacts net core Crown debt in these two years but not on net core Crown debt overall.

Net finance costs have increased resulting in a $0.4 billion impact on net core Crown debt. This is largely owing to a reduction in interest receipts arising from reductions in interest rates since the Half Year Update.

In addition, movements in gains and losses have also had an impact resulting in a $0.2 billion decrease in net core Crown debt.

...and net worth attributable to the Crown is lower across the forecast period reflecting increased government spending

Net worth attributable to the Crown is now forecast to stand at $160.8 billion (43.9% of GDP) in 2022/23 compared to $174.7 billion (48.0% of GDP) at the Half Year Update. This $13.9 billion reductionis largely driven by the impact of additional Budget spending on the Crown's operating balance across the forecast period.

Key Economic Assumptions Used in the Forecast Financial Statements#

The forecast financial statements 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 to forecast tax revenue.
  • A forecast of CPI inflation is needed because social assistance benefits are generally indexed to inflation.
  • 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 forecast financial statements is provided in Table 2.17 below.

Table 2.17 – Summary of key economic forecasts used in the forecast financial statements
Year ending 30 June 2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Real GDP1 (annual average, % change) 3.2 2.4 3.0 2.8 2.4 2.4
Nominal GDP2 ($millions) 288,812 299,713 316,957 334,009 350,210 366,568
CPI (annual average, % change) 1.5 1.8 1.8 2.1 2.1 2.0
Govt 10-year bonds (annual average, %) 2.9 2.3 2.0 2.4 2.7 2.9
5-year bonds (annual average, %) 2.4 1.8 1.8 2.2 2.5 2.7
90-day bill rate (annual average, %) 1.9 1.9 1.8 2.1 2.5 2.6
Unemployment rate (annual average, %) 4.5 4.2 4.1 4.1 4.2 4.3
Employment (annual average, % change) 3.7 2.3 1.9 1.7 1.4 1.3

Notes:

  1. Production measure.
  2. Expenditure measure.

Sources: The Treasury, Statistics New Zealand

Notes#

  1. [3] This reflects the impact of Budget decisions on core Crown expenses in the coming fiscal year. For example, Budget 2019 decisions will be reflected in the 2020 fiscal year.
  2. [4] The breakdown by functional classification above is based on a framework developed by the OECD so may be different to the classification by portfolio in the Budget documents.
  3. [5] The fiscal impulse measure shown is the core Crown fiscal impulse plus Crown entities excluding Earthquake Commission (EQC) and Southern Response payments and receipts.
  4. [6] To isolate changes in the fiscal position that have a direct impact on aggregate demand pressures, some expenditure is excluded from the fiscal impulse measure. See the Additional Information section of the Budget Update for further detail.
  5. [7] Net core Crown debt and residual cash indicators are measured on a core Crown basis. Residual cash includes both operating and capital activity. This differs from OBEGAL, which is measured at a total Crown level and includes operating activity only.
  6. [8] In addition to the above capital spending, a number of capital projects have been undertaken through Public Private Partnerships (PPPs). Unlike capital spending, where cash payments are made as the asset is being constructed, cash flows in relation to PPPs do not typically commence until the completion of the project.
  7. [9] More information on the bond programme can be found at https://debtmanagement.treasury.govt.nz/investor-resources/media-statements
  8. [10] The OBEGAL balance excludes minority interests - the portion attributable to the investors in mixed ownership companies (Air New Zealand, Genesis, Mercury and Meridian).
  9. [11] Refer to note 6 on page 110 of the forecast financial statements for the profile of future budget allowances.

Risks and Scenarios#

Overview#

  • The risks to the international outlook are skewed to the downside and include continued trade tensions, a more pronounced slowdown in the Chinese economy, and major adjustments in international financial markets. Should these risks materialise, global and domestic growth will deviate from that presented in the main forecast.
  • The risks to the domestic outlook are more balanced and include uncertainty around the impact of business confidence on investment, the extent to which capacity pressures are binding, and uncertainty regarding the outlook of house prices, net migration and productivity growth.
  • Scenario One explores weaker-­than-forecast trading partner growth driven by a combination of the risks listed above. Under this scenario, lower demand for New Zealand exports causes a fall in export prices. Weaker consumption and investment sees slower nominal GDP growth adversely affecting tax revenue and the fiscal position.
  • Scenario Two illustrates the impacts of capacity pressures leading to stronger-than-forecast wage growth. Under this scenario, stronger domestic demand leads to more investment. Higher-than-forecast nominal GDP and tax revenue generate larger fiscal surpluses and lower net debt.
  • The Crown's balance sheet is exposed to a number of risks beyond those associated with the operating balance, including through changes in the value of the Crown’s assets or liabilities, and through the potential impact of the Crown’s fiscal obligations that arise from policy choices.

Risks to the Economic Outlook#

Economic forecasts involve judgements about current and forecast levels of individual variables and the workings of the economy as a whole. This section outlines the risks around some of our judgements that could have a significant impact on the economy if they were to materialise. Risks to the economic outlook have flow-on implications for the Government's fiscal position as tax revenue and public spending vary with the state of the economy.

The Specific Fiscal Risks chapter details potential government decisions, contingent liabilities and contractual obligations that may also have a material impact on the economic or the fiscal outlook.

Weaker trading partner growth could be driven by further trade tensions…

Trade tensions, particularly between the US and China, have escalated since early 2018. Recently, the US has implemented tariffs of 25% on US$250 billion worth of imports from China. Expectations of an agreement between the two nations supported market sentiment over the start of 2019, although, until formal agreements are made, uncertainty will continue to weigh on economic activity. Trade tensions have already weakened manufacturing activity and export growth in some of New Zealand's trading partners in Asia and Europe. Should the US implement further tariffs on Chinese imports, slower growth in China would reduce demand for New Zealand's exports. Further spill-overs are likely for Southeast Asian economies (given their role in global value chains that often include China) which are increasingly important export destinations for New Zealand.

The terms of the UK's withdrawal from the EU are also uncertain. The UK is now scheduled to leave the EU by 31 October. If no withdrawal agreement is reached, economic activity in the UK, and to some extent in the EU, could fall markedly and create uncertainty in many markets connected to the UK.

…while a more pronounced slowdown in China could lower demand for our exports

Growth in China has slowed over the past year, partly driven by regulatory measures implemented by Chinese authorities aimed at reducing shadow banking, as well as trade tensions associated with the US. Although stimulus measures are expected to support growth in the Chinese economy over the second half of 2019, authorities face a challenge between the need to support growth and the management of financial risks.

A slowdown in Chinese activity would significantly lower demand for New Zealand's exports directly, or indirectly through other trading partners such as Australia. In Australia, domestic activity could be weaker than expected, driven by declining house prices impacting household consumption, or weak business sentiment impacting investment.

These factors could lead to major adjustments in international financial markets…

The end of 2018 was a volatile period for equity markets, with many making annual losses. Lower market sentiment was driven by trade tensions, fears of a global slowdown and uncertainty regarding the pace of monetary tightening in the US. However, the turbulent period had limited spill-over implications for the real economy, and many markets have recovered. Nevertheless, a deterioration in market sentiment associated with the uncertainties listed above could lead to lower demand for riskier assets and rapidly tightening credit conditions in an environment of high private and public sector debt in many countries.

Another risk is the limited ability of central banks to stimulate economies in the event of an economic slowdown as interest rates are already low relative to their pre-global financial crisis levels. This may necessitate other measures to stimulate the economy, such as quantitative easing or the use of fiscal policy measures.

…though global growth could pick up

Despite the balance of risks being tilted to the downside, there is also a risk that global growth could accelerate faster than anticipated. Trade tensions may ease if the US and China reach a trade agreement and begin phasing out tariffs. The UK could leave the EU with an agreement in place, allowing firms in both nations to continue trading with certainty and without additional tariffs. Central banks around the world could remain accommodative, keeping borrowing costs at record lows. Monetary and fiscal policy stimulus in China could also be greater than expected and help growth accelerate, improving Chinese incomes and demand for New Zealand's exports.

The outlook for commodity prices and exchange rates is uncertain…

New Zealand is particularly susceptible to changes in global agricultural commodity prices. The risks discussed above may affect commodity prices in either direction. The adjustment in the New Zealand dollar will also play a significant role in determining the profitability of New Zealand export industries. Lower-than-forecast oil prices may support global growth, as oil is a major input cost for many industries.

…and oil prices may be lower than assumed in the main forecast

Oil prices could be lower in the long term as the break-even costs for shale oil producers in the US keep declining owing to technological advancements, pushing supply higher. Oil supply from non-OPEC members in response to price changes is also uncertain.

The effects of business confidence are hard to estimate…

Recent falls in domestic business sentiment can possibly be explained by several factors such as uncertainty about signalled changes in government policies, labour market pressures, global uncertainty and profit margins.[12] A key risk to the outlook over the next few years is weaker sentiment having a more pronounced effect on business investment.

…and measures of capacity pressures are uncertain

Measures of capacity pressure in the domestic economy are uncertain. If potential growth is lower than expected, there will be less spare capacity in the economy, constraining investment and production and resulting in higher inflationary pressures.

Capacity pressures in the labour market could lead to higher-than-forecast wage growth. Wage negotiations that are yet to be resolved also pose a risk to the wage growth forecast. The effects of higher-than-forecast wage growth are explored in Scenario Two. Similarly, capacity pressures may constrain construction activity more than anticipated.

Productivity could be weaker than anticipated…

A factor that could lead to lower potential growth is weaker-than-forecast labour productivity. Labour productivity is the quantity of goods and services produced per hour worked. If firms do not increase capital investment to compensate for lower labour supply growth (for example, owing to declining net migration), labour productivity growth could be weaker than forecast.

…while the risks to house price growth are tilted to the downside

Downside risks to our house price forecast include higher-than-expected supply growth, lower-than-expected net migration and negative sentiment associated with Australian housing market activity flowing through to New Zealand. Weaker-than-forecast house prices would lower consumption and residential investment, ultimately slowing growth. The uncertainty regarding the sensitivity of households to changes in interest rates is also a risk.

Changes in weather conditions affect agricultural output…

Weather conditions hampered agricultural production over the first three months of 2019; however, the mild El Niño should result in benign weather conditions leading into winter. Agricultural conditions and hydroelectric power generation in New Zealand remain sensitive to climate conditions.

…and net migration will depend on developments domestically and internationally

Net migration outflows to Australia tend to increase when Australia's labour market strengthens relative to New Zealand's. The prospect of relatively faster wage growth in New Zealand may lead to less people migrating to Australia than assumed in the main forecast. Equally, tight domestic labour markets may encourage employers to look offshore for workers. In addition, uncertainty around policy changes to residency requirements or visa conditions may deter potential migrants, widening the uncertainty around the outlook for net migration.

Large revisions between the most recent releases of Stats NZ's new official measure of net migration also make the outlook uncertain.

Some policies are yet to be agreed

While we anticipate the effects over the forecast period to be small, the RBNZ proposal to increase capital requirements for locally-incorporated banks will not be known until later in the year.

Alternative Scenarios#

The following scenarios show how the economy might evolve if some of the key judgements in the main forecast were altered. This section aims to show how changes in certain assumptions have flow-on impacts to the economy as a whole. The scenarios illustrate two of the many ways that the economy may deviate from the main forecast.

Scenario One explores weaker-than-forecast trading partner growth driven by a combination of the risks listed above. Under this scenario, lower demand for New Zealand exports causes a fall in export prices. Lower sentiment and domestic demand results in weaker investment and sees GDP growth falling in nominal and real terms, affecting tax revenue and the fiscal position.

Scenario Two illustrates the impacts of capacity pressures leading to stronger-than-forecast wage growth. Under this scenario, stronger domestic demand leads to more investment. Higher-than-forecast nominal GDP and tax revenue generate larger fiscal surpluses and lower net debt. Table 3.1 summarises key economic variables under each scenario compared with the main forecast.

Table 3.1 - Summary of economic and fiscal variables for the main forecast and scenarios
June years 2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Real GDPa          
Main forecast 2.4 3.0 2.8 2.4 2.4
Scenario One: Weaker trading partner growth 2.4 2.8 2.4 2.4 2.4
Scenario Two: Higher wage growth 2.4 3.2 3.1 2.4 2.4
Nominal GDPa          
Main forecast 3.8 5.8 5.4 4.9 4.7
Scenario One: Weaker trading partner growth 3.8 4.8 5.0 4.9 4.7
Scenario Two: Higher wage growth 3.8 6.2 6.1 5.0 4.7
Operating balance before gains and losses
(% of GDP)
         
Main forecast 1.2 0.4 0.6 1.3 1.7
Scenario One: Weaker trading partner growth 1.2 0.3 0.3 1.0 1.2
Scenario Two: Higher wage growth 1.2 0.5 0.9 1.7 2.1
Net core Crown debt (% of GDP)          
Main forecast 20.1 20.4 20.7 19.9 18.7
Scenario One: Weaker trading partner growth 20.1 20.7 21.4 21.0 20.2
Scenario Two: Higher wage growth 20.1 20.2 20.1 18.9 17.3

a annual average % change.

Source: The Treasury

Scenario One - Weaker Trading Partner Growth

This scenario explores the impacts of weaker-than-forecast trading partner growth on the domestic economy.

Demand for New Zealand exports declines…

Weaker trading partner growth could result from uncertainty related to multiple risks. For example, rising tariffs on global trade would weigh directly on export volumes domestically, while a major financial market adjustment could lower global business sentiment, reducing investment and lowering demand for our exports. Weaker demand for New Zealand's exports lowers export prices, causing the terms of trade to fall.

…and weaker sentiment lowers business investment…

Weaker demand for New Zealand's exports also lowers domestic business sentiment. Lower sentiment and weaker export prices lower business investment across the forecast horizon. Firms also postpone hiring decisions, resulting in slower employment growth, a higher unemployment rate and lower wage growth.

…while consumption falls as households have less disposable income

Weaker wage growth means households have less disposable income, leading to lower consumption across the forecast horizon (Figure 3.1). Lower investment and consumption lead to slower nominal GDP growth.

Figure 3.1 - Lower consumption growth

Figure 3.1 – Lower consumption growth. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Sources: Stats NZ, the Treasury

Text description of Figure 3.1 – Lower consumption growth.

The New Zealand dollar depreciates…

To stimulate the economy, RBNZ lowers the OCR, keeping inflation relatively stable around their 2.0% mid-point target. The New Zealand dollar depreciates in response to lower interest rates.

…and nominal GDP is cumulatively $15 billion lower relative to the main forecast

Declining domestic consumption and investment more than offset the positive contributions from lower interest rates, leading to lower nominal GDP growth (Figure 3.2). Cumulative nominal GDP over the five years to June 2023 is $15 billion lower than in the main forecast.

Figure 3.2 – Lower nominal GDP growth

Figure 3.2 – Lower nominal GDP growth. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Sources: Stats NZ, the Treasury

Text description of Figure 3.2 – Lower nominal GDP growth.

Slower growth feeds into lower tax revenue and weakens the Government's fiscal position. Core Crown tax revenue falls $4.7 billion relative to the main forecast over the five years to June 2023. Forecasts of business income taxes and tax on resident interest income are $1.6 billion and $1.5 billion lower than in the main forecast, respectively.

This scenario assumes that the Government's operating and capital allowances are unchanged from those in the main forecast (see Economic Outlook chapter for details). Under these assumptions, from 2019/20, OBEGAL surpluses are smaller in each year, reaching $4.4 billion (1.2% of GDP) in 2023 (Table 3.1). This is $1.7 billion below that in the main forecast. The Government's debt levels are also higher, with the level of net core Crown debt $4.6 billion higher by June 2023, raising debt to GDP to 20.2%, compared with 18.7% in the main forecast (Table 3.1).

Scenario Two - Higher Wage Growth Leads to Stronger Growth

This scenario investigates capacity pressures in the labour market leading to higher-than-forecast wage growth. Household incomes rise and stronger growth leads to an improved fiscal position.

Consumption and investment rise

Capacity pressures in the labour market lead to higher-than-forecast wage growth. This supports stronger consumption, as households have more disposable income. Stronger domestic demand encourages firms to invest and import goods, but results in intensifying capacity pressures across the economy, leading to higher inflation. In response, RBNZ raises the OCR, curbing the pace of growth. The New Zealand dollar appreciates in response to higher interest rates.

Figure 3.3 - Higher interest rates and TWI

Figure 3.3 – Higher interest rates and TWI. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Sources: RBNZ, the Treasury

Text description of Figure 3.3 – Higher interest rates and TWI.

Nominal GDP is cumulatively $13 billion higher relative to the main forecast…

On balance, stronger consumption and investment more than offset the impacts of rising interest rates and higher imports. Relative to the main forecast, real GDP is almost $4.2 billion higher, while nominal GDP is cumulatively $13 billion higher by mid-2023.

…raising tax revenue and improving the Government's operating balance…

Stronger economic growth feeds into higher tax revenue and strengthens the Government's fiscal position. Core Crown tax revenue is cumulatively $5.3 billion higher relative to the main forecast over the five years to June 2023, with source deductions and GST $3.5 billion and $1.1 billion higher, respectively. This scenario assumes that the Government's operating and capital allowances are unchanged from those in the main forecast. Under these assumptions, OBEGAL surpluses are larger in each year, reaching $7.8 billion (2.1% of GDP) in 2023 (Table 3.1),$1.6 billion above that in the main forecast.

…and lowering debt

Higher tax revenue from stronger growth leads to $4.5 billion lower net core Crown debt by June 2023. The debt-to-GDP ratio falls to 17.3% compared with 18.7% in the main forecast (Table 3.1). The changes in the debt-to-GDP ratio among the different scenarios are shown in Figure 3.4.

Figure 3.4 - Net core Crown debt to GDP

Figure 3.3 – Higher interest rates and TWI. Link to a text description of this chart below the image. Chart data available in BEFU 2019 Charts and Data MS Excel file.

Sources: Stats NZ, the Treasury

Text description of Figure 3.4 – Net core Crown debt to GDP.

Fiscal Sensitivities#

Table 3.2 sets out some rules of thumb on the sensitivities of the fiscal position to small changes in specific variables. For example, if nominal GDP growth is one percentage point higher than forecast in each year up to June 2023, tax revenue would be around $5.5 billion higher than forecast in the June 2023 year. The sensitivities are broadly symmetric and if nominal GDP growth is one percentage point lower than expected each year, tax revenue would be around $5.3 billion lower than forecast in the June 2023 year. The figures are indicative and can be influenced by the composition of growth as different types of activity have different effective tax rates.

A different interest rate path from the forecast would also impact the fiscal position owing to the effect on the portfolios of various government reporting entities, such as the New Zealand Superannuation Fund (NZS Fund), Accident Compensation Corporation (ACC) and the Treasury. For example, at 30 June 2018, a 1.0% increase in New Zealand interest rates would have reduced the total Crown operating balance by around $1,550 million, while a 1.0% decrease would have increased the total Crown operating balance by $1,697 million. The majority of the Government’s borrowings and a large number of financial assets are managed by the Treasury. To illustrate the interest rate sensitivities on the Treasury’s portfolio, Table 3.2 provides the estimated impact of lower interest rates on those assets and liabilities. A one percentage point fall in the interest rate would result in a $102 million reduction in the interest income on funds managed by the Treasury in the June 2023 year.This would be more than offset by $384 million lower interest expenses the June 2023 year. As above, the sensitivities are broadly symmetric.

Table 3.2 - Fiscal sensitivity analysis
Years ended 30 June
($millions)
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Impact on tax revenue of a one percentage point increase in growth of          
Nominal GDP 865 1,820 2,920 4,120 5,455
Wages and salaries 370 790 1,265 1,795 2,395
Taxable business profits 185 415 670 950 1,260
Impact of 1% lower interest rates on          
Interest income1 -35 -68 -61 -57 -102
Interest expenses1 -15 -124 -233 -321 -384
Net impact on operating balance -20 56 172 264 282

Note:

  1. Funds managed by the Treasury.

Source: The Treasury

The forecast financial position is based on a number of judgements and assumptions about the future. To inform these judgements and assumptions we rely on market information. Some additional assumptions include those around foreign exchange rates, share prices, the carbon price and property prices. Where the actual outcome differs from our assumptions, the Crown's actual financial position is likely to differ from the forecast. For example, foreign currency-denominated financial assets and liabilities are converted into New Zealand dollars at the reporting date, the Government's listed share investments are reported on market prices and property owned by the Crown is valued using market information. Changes in these variables can also have flow-on effects for the Crown's operating balance. For example, a strengthening of share prices may result in higher returns from the Government's direct share investments.

Balance Sheet Risks#

The Crown's balance sheet is exposed to a number of risks beyond those associated with OBEGAL. These risks affect the Crown's financial position through changes in the value of its assets or liabilities, along with the potential impact on the Crown's explicit (through policy settings) and implicit (a strong expectation the Crown would respond to an event) obligations.

Main source of balance sheet risk

A large source of balance sheet risk is owing to movements in market variables, which change the value of the Crown's assets and liabilities. As noted earlier, these changes may also impact the Crown's operating balance. Three areas of the balance sheet are particularly susceptible to market risk:

  • Financial assets held by ACC and the NZS Fund are sensitive to financial market volatility, such as movements in interest rates, exchange rates and equity prices. The CFIs set long-term investment strategies based on underlying policy objectives. These strategies aim to look through short-term volatility and take exposures that would offset the impact of insurance or retirement liabilities.
  • Insurance and retirement liabilities are prone to volatility through their actuarial valuations, including changes to expectations of future interest rates and inflation rates.
  • Physical assets such as land, buildings, state highways and military equipment are susceptible to valuation movements through changes in property market conditions, interest rates and changes in the costs of construction.

Other sources of balance sheet risk

  • Business risk: A number of commercial entities owned by the Crown have their financial performance and valuations impacted by the commercial environment they operate in.
  • Funding risk: The New Zealand Government remains amongst the highest-rated sovereigns globally, with the top Aaa foreign-currency rating from Moody's and AA foreign-currency ratings from Standard & Poor's and Fitch. In the case of an increase in global risk aversion in the future, New Zealand may face increased funding pressure. All else equal, a deterioration in the ratings outlook could raise debt-servicing costs and lessen the funding capability for the Crown.
  • Liquidity risk: The Crown incurs liquidity risk with respect to its ability to raise cash to meet its obligations. This risk is managed by each agency to meet their specific liquidity risk requirements and by the Treasury to manage the Crown's liquidity requirements.
  • Contingent liabilities: The Crown faces contingent liabilities; for example, relating to natural disasters and financial system stress. The Specific Fiscal Risks chapter discusses contingent assets and liabilities in greater detail.

Managing risk

While the Crown's exposure to risks is sometimes unavoidable, the Crown's general approach is to identify, measure and treat these risks where practicable. However, some risks cannot be reduced. Maintaining debt at prudent levels and holding a healthy level of net worth helps manage residual risks and increases the Crown's resilience to shocks. A strong balance sheet helps by absorbing the impact from risks so that the wider economy does not need to adjust immediately, at a greater economic cost. A strong balance sheet also provides the Government fiscal space and choices about how it can respond to shocks.

Specific Fiscal Risks#

Overview#

This statement of specific fiscal risks is required by the Public Finance Act 1989. In addition to the discussion of risks to the economic and fiscal forecasts presented in the Risks and Scenarios chapter, it sets out (to the fullest extent possible) all government decisions and other circumstances known to the Government that may have a material effect on the fiscal outlook, but that are not certain enough in timing or amount to include in the fiscal forecasts. This chapter covers:

  • the nature of fiscal risks to the economic and fiscal outlook
  • how risks set out in the chapter are managed
  • criteria for inclusion and exclusion of fiscal risks in this chapter
  • statement of specific fiscal risks, and
  • contingent liabilities and assets.

The risks disclosed in this chapter reflect those that are known at the date of the finalisation of the fiscal forecasts, 8 May 2019. Although the process for disclosure of specific fiscal risks involves a number of entities, including government departments, the Treasury and the Minister of Finance, there remains a possibility that not every significant risk is identified.

Nature of Risks to the Economic and Fiscal Outlook

Risks can be positive or negative, and can affect revenue and spending or assets and liabilities. The table below reflects a wide range of potential risks that may exist to the economic and fiscal forecasts.

Risk types 1 to 3 in the table are in the scope of this chapter, whereas risk types 4 and 5 were covered in the Risks and Scenarios chapter. Further detail on the criteria for disclosing a specific fiscal risk is set out in a section below.

Nature of risk Description
1.   Policy changes Potential decisions likely to be taken by the Government related to both new policy and existing policy settings (eg, changes to eligibility criteria for a benefit).
2.   Cost pressures associated with existing policies and risk of cost variances Changes in demand or pricing that impact the cost of delivering services under existing policy settings (eg, an increase in the number of students enrolling in schools). This category includes variances to costs of policies included in the fiscal forecasts.
3.   Contingent liabilities and assets Potential costs or income to the Crown that depend on whether particular events occur.
4.   Deviation from key assumptions and judgements Any deviations from the key assumptions and judgements used for the economic and fiscal forecasts that have flow-on impacts for the fiscal forecasts.
5.   Other uncertain events Significant events relating to changes in the external environment (eg, natural disasters, international events).

How Risks Outlined in This Chapter are Managed

A key principle guiding the disclosure of risks is transparency. This means that risks are disclosed in this chapter regardless of whether they can be managed through existing funding sources (eg, through prioritisation of funding already available to departments) or the Budget operating and capital allowances (future new spending built into the fiscal forecasts). This is done to ensure a prudent approach to the disclosure of risks, to improve transparency and to avoid prejudging future decisions by governments about what may or may not be funded from allowances.

The Government has a number of options to manage the risks disclosed in this chapter. Therefore, the risks disclosed in this chapter may not arise in a way that affects the fiscal forecasts presented in this Economic and Fiscal Update.

1 Re-prioritisation

Core Crown expenses for the year ended 30 June 2018 were $80.6 billion, while capital spending for the same period totalled $5.9 billion. Agencies are expected to fund pressures and new activities from within the funding already allocated to them. This could include repurposing low-value expenditure or generating efficiency savings.

2 Budget allowances

The following allowances for new expenditure have been confirmed for Budget 2019 and are included in the Treasury's fiscal forecasts (Fiscal Outlook chapter).

$billions Budget
2020
Budget
2021
Budget
2022
Operating allowances (per year) 3.0 2.4 2.4
Multi-year capital envelope (total)            ←   4.4   →                                    

These allowances are included in the fiscal forecasts to reflect future new spending by the Government and better link the forecasts to the Government's fiscal strategy. This means that new spending decisions in future Budgets should not impact the Government's fiscal targets.

The allowances are the main mechanism for the Government to allocate new expenditure each Budget. It does this through providing a self-imposed limit on expenditure that helps to ensure any new spending is targeted to areas of high priority. The allowances have been set at a level that allows the Government to achieve its broader fiscal and policy objectives and under the expectation that any new policy initiatives and cost pressures can be managed within these parameters.

3 Policy choices

For a number of risks, the Government has choices around future funding, including how much is funded and the timing of funding.

Criteria for Inclusion in Either the Fiscal Forecasts or as a Specific Fiscal Risk

Specific criteria based on section 26U of the Public Finance Act 1989 determine what is included in the fiscal forecasts as opposed to what is disclosed as a specific fiscal risk.

Fiscal forecasts Specific fiscal risks

Matters are incorporated into the fiscal forecasts when they meet the following criteria:

  • the matter can be quantified for particular years with reasonable certainty, and
  • a decision has been taken, or a decision has not yet been taken but it is reasonably probable[13] that the matter will be approved, or it is reasonably probable the situation will occur.

Matters are disclosed as specific fiscal risks if the likely impact is more than $100 million over five years and either:

  • a decision has not yet been taken but it is reasonably possible[14] (but not probable) that the matter will be approved or the situation will occur, or
  • it is reasonably probable or possible that the matter will be approved or the situation will occur, but the matter cannot be quantified or assigned to particular years with reasonable certainty.

General Risks Not Included in This Chapter

A range of general risks to the fiscal forecasts exist but are not separately disclosed as specific fiscal risks:

  • Risks from changes to economic assumptions. The most significant economic risks have been identified in the Risks and Scenarios chapter.
  • Business risks and volatility in the returns from, and valuation of, the Government's investments relating to the broader economic and commercial environment.
  • Biosecurity incursions, as their occurrence, nature and timing cannot be predicted. Once an incursion does occur, a number of choices arise about how to respond and when potential liabilities are recognised. Specific risks are disclosed at that point based on the range of possible responses.
  • The costs of future individual natural disasters and other major events (including individual events resulting from climate change), as their occurrence, nature and timing cannot be predicted. Once a disaster does occur, a number of choices arise about how to respond and when potential liabilities are recognised. Specific risks are disclosed at that point based on the range of possible responses.

Exclusions to Disclosure

Additionally, the Minister of Finance may determine, under section 26V of the Public Finance Act 1989, that a matter not be included in the fiscal forecasts or a specific fiscal risk not be disclosed, if such disclosure is 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 Government in a material way in negotiation, litigation or commercial activity, or
  • result in a material loss of value to the Government.

Section 26V requires the Minister of Finance, if possible, to avoid withholding the matter, either by making a decision on it before the forecasts are finalised, or by disclosing it without quantifying the risk.

Contingent Liabilities and Assets

The final part of the chapter contains a current list of contingent liabilities and contingent assets. Contingent liabilities are costs the Crown will have to face if a particular event occurs or are current liabilities that are unable to be measured. Typically, contingent liabilities consist of guarantees and indemnities, legal disputes and claims on uncalled capital. The largest quantified contingent liabilities are to international financial organisations and mostly relate to uncalled capital and promissory notes. Contingent assets are possible assets that have arisen from past events but for which the value of the asset, or whether it will eventuate, will not be confirmed until a particular event occurs.

Summary Table#

The matters listed below are disclosed as specific fiscal risks because they meet the rules for disclosure. Full descriptions are set out in the next section.

The table below is categorised based on the nature of the risk: policy changes, cost pressures and cross-portfolio risks. Within these categories, the risks have been ordered by portfolio and include the title of the risk, its status and whether it has an impact on revenue, expenses or capital expenditure. The status of the risk describes whether the risk reflects a new matter or is changed or unchanged since the Half Year Economic and Fiscal Update 2018.

Statement of Specific Fiscal Risks as at 8 May 2019

Policy changes by portfolio Status[15] Type of risk
ACC    
Impacts of Changes to Accident Compensation
Policy Settings
Unchanged Expenses
Work-related Gradual Process Disease and Infection Unchanged Expenses
Biosecurity    
Mycoplasma Bovis Biosecurity Response Unchanged Expenses and Revenue
Broadcasting, Communications and Digital Media    
Delivery of the Government's Public Media Objectives New Expenses
Customs    
Tobacco Excise Proposed Change New Revenue
Defence    
Defence Funding Requirements to Deliver New Zealand's Defence Strategy Unchanged Expenses and Capital
Disposal of New Zealand Defence Force Assets Unchanged Expenses
Education    
Early Learning Strategic Plan Unchanged Expenses
Extension of the Fees-free Tertiary Education Policy Unchanged Expenses
Reform of Vocational Education (RoVE) New Expenses and Capital
School and Early Childhood Education Funding Review Unchanged Expenses
Response to the Tomorrow's Schools Review New Expenses
Foreign Affairs    
Official Development Assistance Unchanged Expenses
Greater Christchurch Regeneration    
Canterbury Earthquake Recovery Residential Red Zone Unchanged Expenses and Capital
Health    
Dunedin Hospital Changed Expenses and Capital
Primary Care Services Unchanged Expenses
Housing and Urban Development    
KiwiBuild - Fiscal and Delivery Risks Unchanged Expenses and Capital
Internal Affairs    
Archives New Zealand Storage Capacity Changed Expenses and Capital
Police    
Next Generation Critical Communications Programme Unchanged Expenses and Capital
Regional Economic Development    
Provincial Growth Fund Unchanged Expenses and Capital
Research, Science and Innovation    
Research and Development Spending Target Unchanged Expenses
Revenue    
Potential Tax Policy Changes Unchanged Revenue
Taxation of Digital Services New Revenue
Social Development    
Changes to the Welfare System Changed Expenses
Transport    
Support for KiwiRail Changed Capital
Wellington Transport Investment Programme Changed Expenses and Capital
Treaty of Waitangi Negotiations    
Government Response to WAI262 Unchanged Expenses
Cost pressures by portfolio Status[16] Type of risk
ACC    
ACC Levies Unchanged Expenses and Revenue
Legal Claims and Proceedings New Expenses
Non-earners' Account Unchanged Expenses
Climate Change Unchanged Expenses
Emissions Trading Scheme - Fixed Price Option Unchanged Expenses
Customs    
Joint Border Management System Further Development Unchanged Expenses and Capital
Economic Development    
New Zealand Screen Production Grant - International Unchanged Expenses
Education    
Education Operating Cost Pressures Unchanged Expenses
Learning Support Changed Expenses
Finance    
Earthquake Commission Unchanged Expenses
Goodwill on Acquisition Unchanged Expenses
Foreign Affairs    
Antarctica NZ - Redevelopment of Scott Base Changed Expenses and Capital
Greater Christchurch Regeneration    
Christchurch Central Recovery Plan - Anchor Projects Unchanged Expenses and Capital
Southern Response Earthquake Services Support Unchanged Expenses and Capital
Health    
DHB Sustainability New Expenses
Health Capital Pressure Changed Capital
Health Operating Pressure Unchanged Expenses
Housing and Urban Development    
Divestment and Development of Housing New Zealand Corporation Housing Changed Expenses
Emergency Housing Special Needs Grants Unchanged Expenses
Increases to Market Rent Changed Expenses
Tāmaki Regeneration Project Unchanged Expenses
Police    
Firearms Buyback Scheme New Expenses
Research, Science and Innovation    
Research and Development Tax Incentive Unchanged Expenses
Revenue    
Cash Held in Tax Pools Unchanged Revenue
Student Loans - Valuation Unchanged Expenses
Transformation and Technology Renewal Unchanged Expenses
Statistics    
Census Costs Changed Expenses and Capital
Transport    
Auckland City Rail Link Changed Expenses and Capital
Rail Network Valuation Approach Unchanged Expenses
Treaty of Waitangi Negotiations    
Relativity Clause Unchanged Expenses
Treaty Settlement Forecasts Unchanged Expenses
Cross-portfolio specific fiscal risks Status Type of risk
Addressing the Gender Pay Gap in the State Sector Unchanged Expenses
Changes to Institutional Form of Government Agencies Unchanged Expenses
Changes in Accounting Standard for Employee Benefits New Expenses
Increasing the Minimum Wage Unchanged Expenses
Non-government Providers Receiving Funding from the Crown New Expenses
Other Capital Cost Pressures Unchanged Capital
Other Operating Cost Pressures Unchanged Expenses
Outcomes from Other Government Inquiries and Reviews Unchanged Expenses
Pay Equity Claims Following the Care and Support Worker Settlement Unchanged Expenses
Policy Responses to the 15 March Terror Attacks New Expenses
Possible Response to the Referendum on Cannabis Law Reform New Expenses and Revenue
Services Funded by Third Parties Unchanged Expenses
State Sector Employment Agreements Changed Expenses
Unexpected Maintenance for Crown-owned Buildings Unchanged Capital

Policy Change Risks by Portfolio#

The following section outlines risks relating to potential decisions likely to be taken by the Government relating to both new and existing policy settings.

ACC#

Impacts of Changes to Accident Compensation Policy Settings (Unchanged)

The Government has signalled it will review a number of Accident Compensation scheme policy settings. These changes could result in a potential aggregated impact on expenses in excess of $100 million per year. All of the policy issues identified would require either legislative or regulatory change.

Work-related Gradual Process Disease and Infection (Unchanged)

Under current legislation, the Government incurs an obligation for Work-related Gradual Process Disease and Infection claims when the claim is made, and an expense is recognised at this point. The liability for commercial accident and sickness insurance contracts would usually be recognised when exposure to conditions that will give rise to a claim occurs. An amendment to legislation would be required to recognise claims at the same time as for commercial contracts. An initial adjustment to the liability and an expense of about $1.0 billion to $1.5 billion would need to be reported if such an amendment were to be enacted.

Biosecurity

Mycoplasma Bovis Biosecurity Response (Unchanged)

The Government and the farming sector have agreed to attempt to eradicate Mycoplasma bovis. Funding has been allocated by the Government for response activities in 2018/19 and 2019/20, and the need for further government funding and type of response over the rest of the forecast period will be considered depending on progress in eradicating the cattle disease. The rate and timing of industry contributions are not finalised and therefore are not included in the fiscal forecasts.

Broadcasting, Communications and Digital Media

Delivery of the Government's Public Media Objectives (New)

The Government has committed to strengthening New Zealand public media, with work still underway. The media sector, including both public and privately owned organisations, is coming under increasing pressure as platforms for consumption are changing. Significant additional investment may be required to deliver on the Government's public media objectives.

Customs

Tobacco Excise Proposed Change (New)

The Tax Working Group has recommended that consideration is given as to whether this increase should go ahead. The increase has been included in tax forecasts and is expected to raise $295 million over the current forecast period. The Government is considering whether this increase should go ahead. Depending on the decisions made, there may be fiscal impacts.

Defence

Defence Funding Requirements to Deliver New Zealand's Defence Strategy (Unchanged)

The Government is reviewing the Defence capability procurement programme within the context of the existing indicative funding for the Defence White Paper. It is expected that changes to New Zealand Defence Force operating and capital funding will be made over the forecast period in line with any updated capability plan. However, the precise quantum and timing of these changes will be dependent on a range of business cases and Budget initiatives that will be subject to future decisions.

Disposal of New Zealand Defence Force Assets (Unchanged)

The Government is considering the potential to dispose of a number of New Zealand Defence Force (NZDF) assets. Depending on market conditions, the timing of disposal and sale price received could have either a positive or negative impact on the Government's overall financial position.

Education

Early Learning Strategic Plan (Unchanged)

The Ministerial Advisory Group has, with the support of the Ministry of Education, drafted a new 10-year Strategic Plan for Early Learning (the draft Plan) for the Minister of Education. The Government has also indicated it will reinstate higher hourly funding rates for early childhood education (ECE) services with 100% qualified teachers. The draft Plan was consulted on between November 2018 and March 2019, and will be submitted to Cabinet for consideration later in 2019.

Extension of the Fees-free Tertiary Education Policy (Unchanged)

The Government has committed to expand fees-free tertiary education to two years from 2021 and three years from 2024. The Government has indicated that the timeline for the third year may be brought forward, depending on economic conditions. The behavioural changes from extending the policy, and therefore the impact on future costs, are unquantifiable at this early stage but there is an expected general increase in demand for tertiary education beyond the forecast period.

Reform of Vocational Education (RoVE) (New)

In recent years, institutes of technology and polytechnics (ITPs) have experienced significant declines in demand, which has reduced their revenue and affected some providers' sustainability, requiring capital injections. The Government is considering proposals to significantly reform the vocational education sector in light of this. Proposed changes include: structural changes to the existing ITP system by establishing a single New Zealand Institute of Skills and Technology; changes to roles and responsibilities for industry training and skills leadership; and a unified funding system for vocational education. The Government will determine the scope and scale of the reform in mid-2019. While funding has been set aside in a contingency to manage some of the costs, there is a risk that further funding will be required to manage the full costs of implementing the reform. The nature and timing of the proposed reform will influence the scale of funding needed to ensure viability of at-risk ITPs.

School and Early Childhood Education Funding Review (Unchanged)

Decisions about the future direction of the previous government's Review of Education Funding Systems were taken by Cabinet in May 2018. This included expanding previous work on replacing deciles to look more broadly at how wider system settings should address equity. Decile funding will not be replaced in 2020. However, this decision will be revisited at a future date and may have expenditure implications.

Response to the Tomorrow's Schools Review (New)

The Government is reviewing the governance, management and administration of schools - the Tomorrow's Schools Review - and will make decisions on its response in mid-late 2019. Progressing this work, and implementing decisions made as a consequence of it, will likely involve material costs.

Foreign Affairs

Official Development Assistance (Unchanged)

Each year, New Zealand's Official Development Assistance (ODA) expenditure is measured as a proportion of Gross National Income (GNI). The Government sets the overall budget for the New Zealand Aid Programme on a triennial basis. Therefore, there remains a fiscal risk that a decision to provide additional funding will be made prior to the following triennium.

Greater Christchurch Regeneration

Canterbury Earthquake Recovery Residential Red Zone (Unchanged)

The Crown currently owns a significant area of red-zone property in Christchurch. The Government has a number of options for future use of this land. Depending on the decisions made, there may be fiscal impacts.

Health

Dunedin Hospital (Changed)

Funding has been set aside in Budget 2019 for the ongoing redevelopment of Dunedin Hospital. Once a detailed business case is completed the Government will consider redevelopment options.

Primary Care Services (Unchanged)

The Government has signalled the intention to further increase funding for Primary Care services. The implementation details and funding arrangements are yet to be finalised.

Housing and Urban Development

KiwiBuild - Fiscal and Delivery Risks (Unchanged)

Changes in the housing market and economy may have an impact on the costs of delivering 100,000 homes and associated revenue recycling. If house prices fall, Crown underwrites may be called: increasing debt, and the value of the portfolio may fall, impacting the operating balance. To achieve programme goals, there may be a need to change policy parameters or provide support to developers and/or homebuyers. The Crown also faces general commercial risks associated with development and with implementing a large and evolving programme, which pose fiscal and delivery risks.

Internal Affairs

Archives New Zealand Storage Capacity (Changed)

There are capacity and condition issues with the current property portfolio for the storage of New Zealand's documentary heritage. Budget 2019 provides funding to complete the design work and shift activities associated with the proposed upgrade and expansion of the physical infrastructure. Further funding will be sought at Budget 2020 to complete this project.

Police

Next Generation Critical Communications Programme (Unchanged)

The Next Generation Critical Communications programme seeks to replace Emergency Services' (New Zealand Police, Fire and Emergency New Zealand, St John New Zealand and Wellington Free Ambulance) critical communications networks with a modern digital capability. A detailed business case is being developed following Budget 2019. To the extent that the programme cannot be managed within baselines, additional funding will be required.

Regional Economic Development

Provincial Growth Fund (Unchanged)

The Government has committed to a Provincial Growth Fund of $3.0 billion over a three-year period. The capital and operating split and timing of this funding are likely to change, so final amounts may vary from what is included in the fiscal forecasts.

Research, Science and Innovation

Research and Development Spending Target (Unchanged)

The Government has announced a target to increase economy-wide Research and Development (R&D) expenditure to 2% of GDP over the next 10 years. To reach this target, economy-wide R&D expenditure would need to increase by approximately $3.8 billion (from $3.9 billion in 2018 to around $7.7 billion by 2028). To achieve this, the majority of growth will need to come from the private sector with the balance to come from public investment. Depending on private expenditure increases, this would require average annual increases of approximately $150 million in public research and development spending each year over 10 years.

Revenue

Potential Tax Policy Changes (Unchanged)

The tax policy work programme can be viewed on the tax policy website www.taxpolicy.ird.govt.nz. The fiscal implications of many of these policy topics are unquantified at this stage. The Government has initiated a work programme to consider the recommendations from the Welfare Expert Advisory Group (WEAG) and is currently considering a number of Tax Working Group recommendations for inclusion in the tax policy work programme.

Taxation of Digital Services (New)

The Government has stated its intent to release a discussion document on options for taxing the digital economy. The Government's preference is to continue working within the OECD framework to find a multilaterally agreed solution, but a digital services tax is a credible option if the OECD does not make sufficient progress on a multilateral solution this year. The amount of increased revenue would be dependent on the design of the tax.

Social Development

Changes to the Welfare System (Changed)

The Government has committed to overhaul the welfare system. Part of this work involved the establishment of the WEAG, which was tasked with advising on how to improve the welfare system to achieve the Government's vision (ie, deliver adequate income and standard of living, support participation, and promote dignity of clients). WEAG delivered its Report on New Zealand's social security system to the Minister for Social Development in February 2019, with public release on 3 May. The Government has responded to some of the recommendations through initiatives in Budget 2019. It is continuing work on other recommendations.

Transport

Support for KiwiRail (Changed)

Budget 2019 provides KiwiRail with a first instalment funding package for two years to maintain the rail network and initiate major procurement projects around new rolling stock and Interislander ferries. However, further Crown funding is likely to be sought in order to progress these projects beyond 2020/21 as part of the implementation of the Future of Rail programme.

Wellington Transport Investment Programme (Changed)

Development of business cases for individual projects that make up the Let's Get Wellington Moving programme are about to begin. The programme includes rapid transit, public transport, walking and cycling improvements to reduce congestion in the Wellington City area, and is expected to cost $6.4 billion over 20 years, split between local government and the National Land Transport Fund (NLTF) (at a cost of $3.8 billion to the NLTF). The NZTA board is yet to agree funding for the individual projects.

Treaty of Waitangi Negotiations

Government Response to WAI262 (Unchanged)

The Waitangi Tribunal's report on the WAI262 claim focuses on the protection of Māori culture and identity, with a particular focus on mātauranga Māori and associated taonga. The Tribunal's recommendations are directed towards a number of government agencies individually, as groups and across sectors. The Government has yet to respond to the Tribunal's report and recommendations.

Cost Pressure and Cost Variance Risks by Portfolio#

The following section outlines risks of cost pressures and variance risks of items included in the fiscal forecasts (where applicable). The majority of agencies are likely to face cost pressures in the future owing to changes in demand or costs of inputs used in the delivery of existing services or products. The key drivers of future cost pressures are likely to come from population changes, wage increases (both pay negotiations and progression through pay scales) and price inflation of inputs. Cross-portfolio risks for other operating and capital cost pressures are outlined on page 81.

ACC

ACC Levies (Unchanged)

Indicative future levy rates for the Work, Earners' and Motor Vehicle accounts have been included in the forecasts. However, final levy decisions are made by the Government and may differ from the forecast levy path. In addition, revenue from the levies set for these accounts may be more or less than is required to cover the cost of claims. If factors such as claims experience, ACC performance and economic assumptions (particularly discount rates and unemployment rates) turn out differently from what has been forecast, ACC's levy revenue, claims costs and liability may also differ from forecast. Any variance will have a corresponding impact on the operating balance.

Legal Claims and Proceedings (New)

A recent High Court decision regarding the interpretation of section 32(1)(c) of the Accident Compensation Act 2001 found that an injury is only an ordinary consequence of treatment when it is more likely than not to occur. The effect of this is that fewer claims will be excluded as an ordinary consequence of treatment. At this stage, the impact of this decision is yet to be quantified and therefore is not reflected in the fiscal forecasts.

Non-earners' Account (Unchanged)

The amount of funding provided by the Crown (and included in the fiscal forecasts) for the Non-earners' Account may be more or less than is required to cover the cost of claims. If factors such as claims experience, ACC performance and economic assumptions (particularly discount rates) turn out differently from what has been forecast, any such variance will have a corresponding fiscal impact.

Climate Change

Emissions Trading Scheme - Fixed Price Option (Unchanged)

The Emissions Trading Scheme earns revenue and incurs expenses for the Crown, both of which are uncertain, partly owing to the market price of New Zealand Units (NZUs). Both revenue and expenses are valued based on the market price of NZUs which, for the fiscal forecasts, is assumed to be $25. Under the Fixed Price Option (FPO), emitters have an option to meet their obligations by purchasing units directly from the Crown at a fixed price of $25. If the market price of NZUs continues to be higher than the fixed price of $25, it is likely that emitters would use the FPO. As a result, the Crown would recognise a loss from selling units at below market price and receive cash that would reduce net core Crown debt. The overall fiscal impact of these risks is uncertain and depends on future market prices, unit volumes and the extent to which participants elect to use the FPO. At 29 March 2019, the market price of NZUs was $25.67.

Customs

Joint Border Management System Further Development (Unchanged)

Customs and the Ministry for Primary Industries will implement Tranche 2 of the Joint Border Management System (JBMS) through a series of smaller projects that will either enhance or replace elements of the current systems with the aim of realising the full benefits to the Crown and industry of the JBMS programme. Additional funding for these projects may be required.

Economic Development

New Zealand Screen Production Grant - International (Unchanged)

The New Zealand Screen Production Grant is an uncapped, on-demand grant that incentivises international studios to locate production work in New Zealand by offering them a rebate on their qualifying expenditure. There is currently a high level of international interest in New Zealand as a place to do screen business. Based on the current rising trend, there is a risk that demand for the Screen Production Grant will exceed what is included in the fiscal forecasts. It remains unclear what the fiscal impact would be if more large budget productions choose to locate in New Zealand.

Education

Education Operating Cost Pressures (Unchanged)

The education sector faces significant cost pressures from increasing demand in early childhood education (ECE) and schooling, largely as a result of population growth. Demographic change has an impact on expenditure on ECE subsidies, especially for the 20 hours fully subsidised entitlement for three- to five-year-olds; the per-pupil component of schools' operational funding; and schools' full-time teaching equivalent entitlement, which is based on staff-to-student ratios.

Learning Support (Changed)

The Government will release the Disability and Learning Support Action Plan later in 2019 after concluding targeted consultation in October 2018. The Plan proposes a number of new Learning Support initiatives that build on the $336 million operating and $95 million capital allocated through Budget 2019 to establish Learning Support Coordinators and fund Learning Support cost pressures and system improvements. However, there will also be a number of future cost pressures building in the supply of learning support services owing to population growth and increased eligibility due to better reporting of neurodevelopmental and other conditions. To the extent that these pressures cannot be managed within existing baselines, additional funding is likely to be required.

Finance

Earthquake Commission (Unchanged)

The Earthquake Commission's (EQC's) independent actuary undertakes half-yearly valuations of the total earthquake liability to the Crown. This includes settled and yet to settle claims (including those in litigation), an estimation of future claims not yet received, insurer finalisation and any associated reinsurance recoveries. Based on these valuations, a profile of the claims yet to settle is included in the fiscal forecasts. There remain risks that EQC's remaining settlement expenditure relating to the Canterbury and Kaikōura earthquakes will differ from (be higher or lower than) forecast. This is because EQC’s remaining settlement expenditure relating to the Canterbury earthquakes does not incorporate any liability recognition or provision for costs relating to the over-cap portion of any building claims, whether they are on-sold remedial building claims or otherwise. EQC only recognises expected future costs where it is liable for such costs under the Earthquake Commission Act 1993. The risks include litigation, the resolution of liability with insurers and reinsurers, in addition to the level of future remedial claims. It is not possible at this stage to fully quantify the potential financial impact or the timing of these risks owing to the uncertainty associated with them and variation could be material.

Goodwill on Acquisition (Unchanged)

As at 30 June 2018, the Government had goodwill on acquisition of a number of sub-entities totalling $744 million. Under New Zealand accounting standards (PBE IPSAS 26), such goodwill items are required to be assessed annually for impairment. If there is any indication that the goodwill may be impaired, the recoverable amount of the cash-generating units to which the goodwill is allocated is required to be estimated. If the recoverable amount is less than the carrying amount of those units, the units and the goodwill allocated to them are regarded as impaired and the Government is required to recognise impairment losses in the operating statement. Such assessments will be conducted at the end of the financial year. The fiscal forecasts currently make no allowance for such impairment losses.

Foreign Affairs

Antarctica NZ - Redevelopment of Scott Base (Changed)

The infrastructure at Scott Base is approaching the end of its functional life. The indicative cost of redeveloping the Base ranges from $200 million to $290 million over an approximately eight year period. Budget 2019 provides $19.7 million to Antarctica New Zealand to undertake further design and market testing to confirm costs ahead of seeking full redevelopment costs, yet to be determined, against a future Budget.

Greater Christchurch Regeneration

Christchurch Central Recovery Plan - Anchor Projects (Unchanged)

The Crown has funded, and is partially funding, the construction of Anchor Projects as part of the Christchurch Central Recovery Plan. The funding for the construction of Anchor Projects varies across projects, depending on scope, ownership decisions, implementation and project costs, and may to some extent eventually be recovered. Some projects have been completed, while others are under construction or progressing through the decision-making process. Construction costs for projects have, and will continue to, become clearer during the procurement and construction phases, but costs to the Crown may still vary from current estimates. The quantum and timing of Crown contributions may differ from that included in the fiscal forecasts.

Southern Response Earthquake Services Support (Unchanged)

The ultimate cost to the Crown of settling earthquake claims remains subject to significant uncertainty. Forecasts assume that the actual cost to settle claims will align with the actuary's central estimate of the claims provision. There is a risk that the actual cost could vary from this estimate, which is sensitive to its underlying assumptions such as damage estimates, legal challenges, reinsurance recoveries and the forecast profile of claims settlement. Because the net claims liability is large, small percentage changes in the liability can have a material impact on costs and forecasts.

Health

DHB Sustainability (New)

The fiscal forecasts incorporate expected deficits from District Health Boards (DHBs) over the forecast period. This includes an estimated combined deficit of $390 million for 2018/19. Based on past results, there is a significant risk that DHBs' deficits may be higher than what has been included in the fiscal forecasts, which would adversely impact the Government's operating balance. The Government has provided some funding to support DHB deficits. However, if the deficits that are included in the fiscal forecast were to eventuate, additional funding support may be required to ensure the sustainability of the sector.

The Ministry of Health is working on a new performance management programme that seeks to reduce deficits.

Health Capital Pressure (Changed)

DHBs have submitted updated capital intentions, which identify the indicative need for Crown funding over the next four years. Budget 2019 funds two years of capital investment. However, the pressures remain significant over the forecast period. These pressures are largely driven by asset condition issues and demographic growth (population growth and an ageing population) pressures on infrastructure capacity. There is also a need to address information technology capability in the sector.

Health Operating Pressure (Unchanged)

The health sector is likely to face significant operating pressures against existing baselines in order to maintain the delivery of existing health services. The main factors that are likely to drive operating pressures in the future include changes in population (both growth and an ageing population), wage costs (both pay negotiations and progression through pay scales) and price inflation of inputs. This includes pressure on national disability support services like equipment and housing modifications for disabled people choosing to remain in their home (and this includes the over-65 population).

Housing and Urban Development

Divestment and Development of Housing New Zealand Corporation Housing (Changed)

The forecasts include business-as-usual divestments, acquisitions and redevelopments of housing property as part of Housing New Zealand Corporation's (HNZC's) asset management strategy. Proceeds from property divestments will be used to help fund investment in redeveloping and growing HNZC's stock. A softening in the property market would reduce HNZC's revenue from divestments and therefore (all else being equal) increase HNZC's debt and/or Crown funding requirements. HNZC also faces general commercial risks associated with development and with implementing large and evolving programmes, which pose fiscal risk (in terms of increased development costs that would increase HNZC's debt and/or Crown funding requirements) and delivery risk. If development activity utilising HNZC holdings is accelerated by the new Housing and Urban Development Authority, the likelihood of this risk being realised will increase substantially.

Emergency Housing Special Needs Grants (Unchanged)

Emergency Housing Special Needs Grants help individuals and families with the cost of staying in short-term accommodation if they are unable to access a transitional or a public housing place. If demand increases and/or the number of transitional or public housing places does not increase as forecast, this would increase demand for the grants, with associated fiscal costs.

Increases to Market Rent (Changed)

Over $1 billion of payments per annum for housing assistance are linked to market-based rent levels, such as income-related rent subsidies and accommodation payments for Transitional Housing. Should market rents increase above what is assumed for the forecasts, this could create a significant fiscal risk to maintain current levels of support.

Tāmaki Regeneration Project (Unchanged)

There are 7,500 new houses planned to be built in Tāmaki in place of about 2,500 existing houses. Development involves writing off existing public housing assets. If land sale proceeds are less than the value of the write-offs in the year that they occur, there will be a negative impact on the operating balance.

Police

Firearms Buyback Scheme (New)

The Arms (Prohibited Firearms, Magazines, and Parts) Amendment Act 2019 prohibits certain types of semiautomatic firearms, parts and magazines. The Act provides for an amnesty period for the surrender of all newly prohibited items and for regulations to establish a scheme for the purpose of paying compensation in respect of prohibited items. There is significant uncertainty over the quantity of firearms, parts and magazines covered by the prohibitions. Depending on the level of compensation and the volume of items surrendered, additional costs, above what has already been provided in the fiscal forecasts, may be incurred.

Research, Science and Innovation

Research and Development Tax Incentive (Unchanged)

The Government has approved the implementation of a Research and Development (R&D) Tax Incentive. This incentive allows eligible firms to deduct a percentage of their expenditure on R&D against their tax liability to the Crown. There is a risk costs may differ owing to limited data being available for forecasting purposes and because international experience shows that costs of R&D tax credits can be significantly higher than expected.

Revenue

Cash Held in Tax Pools (Unchanged)

Funds held in tax pools are recognised as a Crown asset. There is a risk that funds held in these pools, over and above a taxpayer's provisional tax liability, may be withdrawn by that taxpayer, resulting in a reduction in the Crown's available cash reserves.

Student Loans - Valuation (Unchanged)

The value of student loans is sensitive to assumptions such as the borrower's future income and general economic factors such as interest rates, unemployment levels, salary inflation and the CPI. As new lending occurs, an initial write-down to fair value is made, and an expense is incurred, reflecting the cost the Crown incurs in making an interest-free loan and the risk that borrowers may not repay their loans. However, the assumptions made at the time of lending rely on volatile factors that are subject to change.

Transformation and Technology Renewal (Unchanged)

The Business Transformation programme agreed by the previous Government in 2015 is reflected in forecasts. There are risks that the remaining implementation costs, revenue gains and operating costs savings may differ from forecasts. In addition, changes in government policies could materially affect the programme's costs and benefits.

Statistics

Census Costs (Changed)

Budget 2019 has provided funding to complete Census 2018 and to commence initial work to deliver Census 2023. The remaining funding needed to deliver Census 2023 will be sought once a detailed business case has been developed.

Transport

Auckland City Rail Link (Changed)

The Government has committed to fund 50% of the costs associated with the City Rail Link project, which is estimated to cost $4.5 billion. Based on this estimate, the Government's contribution to the project will be around $2.25 billion. There is a risk that the timing, scope and amount of the government contribution to the project could be different from what is included in the forecasts.

Rail Network Valuation Approach (Unchanged)

KiwiRail operates both freight and passenger transport services. The valuation approach for the assets used for these different activities is outlined in Budget 2019 Additional Information - Accounting Policies. The freight business of KiwiRail is predominantly commercially focused and therefore, for financial reporting purposes, assets relating to the freight business are fair-valued on a net-realisable-value basis. Ministers are currently considering whether the expectations from rail freight and the basis of investments in rail freight infrastructure should more clearly reflect wider public benefits. A probable financial implication of committing to the wider public benefits of rail may imply that the rail network would be reported in the Whole-of-Government Financial Statements on the same basis as the state highway network - as an asset generating public benefit. This would see a $5.1 billion increase in asset value, with an approximately $300 million increase in annual depreciation expense, offset by annual capital expenditure no longer being written off.

Treaty of Waitangi Negotiations

Relativity Clause (Unchanged)

The Deeds of Settlement negotiated with Waikato-Tainui and Ngāi Tahu include a relativity mechanism. Now that the total redress amount for all historical Treaty settlements exceeds $1.0 billion in 1994 present-value terms, the mechanism provides that 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 17.0% for Waikato-Tainui and 16.1% for Ngāi Tahu. There is a risk that the timing and amount of the expense for the relativity payments may differ from that included in the fiscal forecasts. There is also uncertainty on how various disputes concerning the interpretation of the mechanism will be resolved.

Treaty Settlement Forecasts (Unchanged)

The fiscal forecasts include provision for the cost of future Treaty settlements. Given settlements are finalised through negotiations, there is a risk that the timing and amount of the settlements could be different from the profile included in the fiscal forecasts.

Cross-portfolio Specific Fiscal Risks

Addressing the Gender Pay Gap in the State Sector (Unchanged)

The Government has made a commitment to addressing the gender pay gap in the core Public Service. Fulfilling this commitment will involve costs to the Crown.

Changes to Institutional Form of Government Agencies (Unchanged)

The Government has announced a number of policy commitments that involve changes to the machinery of government. These commitments are likely to involve changes to the composition and structure of existing government departments. Where the additional resourcing and other costs of these changes cannot be met through baseline expenditure, further Crown funding may be required.

Changes in Accounting Standard for Employee Benefits (New)

The External Reporting Board has recently introduced the Public Benefit Entities International Public Sector Accounting Standard (PBE IPSAS 39) Employee Benefits, for reporting periods after 1 January 2019. The Government will adopt the new standard for reporting after 1 July 2019. The resulting changes to the standard will impact the presentation of the Government Superannuation Fund results (refer page 114) and potentially the recognition of obligations for veterans’ disability entitlements. At this point, the overall impact of these new requirements is uncertain.

Increasing the Minimum Wage (Unchanged)

Government policy decisions to increase the minimum wage to $20 by April 2021 will mean increased costs to State sector employers to the extent their employees receive a direct increase in wages. Where costs cannot be absorbed within baselines without compromising service delivery, additional support may be sought.

Non-government Providers Receiving Funding from the Crown (New)

The Government is facing ongoing pressure from non-government providers who receive Crown-funding to provide services to fund a greater proportion of their costs, or to fund cost pressures that could affect service delivery. This includes providers in the health, disability, welfare, justice and child protection sectors.

Other Capital Cost Pressures (Unchanged)

Agencies are likely to face capital expenditure pressures related to replacing ageing infrastructure, information and communications technology (ICT) capability that is no longer fit for purpose and other capital requirements driven by demand pressures. These pressures are risks to the fiscal forecasts to the extent they cannot be managed through agencies' existing balance sheets, new capital spending set aside in forecasts from the multi-year capital allowance or other funding mechanisms (eg, Crown Infrastructure Partners). The Government's stated intention is that all pressures are managed through these mechanisms.

Other Operating Cost Pressures (Unchanged)

As in previous years, agencies are likely to face operating expenditure pressures in the future owing to changes in demand and price of services they provide. The majority of spending by agencies is not automatically adjusted for increases driven by demand or price pressures. These pressures are risks to the fiscal forecasts to the extent they cannot be managed through reprioritisation or new spending set aside in the forecasts. The Government's stated intention is that all pressures are managed through these mechanisms.

Outcomes from Other Government Inquiries and Reviews (Unchanged)

A number of inquiries and reviews (not specifically mentioned elsewhere in this chapter) are underway or have recently released findings across government. At this point, it is uncertain what the fiscal impact from the outcomes of these reviews may be.

Pay Equity Claims Following the Care and Support Worker Settlement (Unchanged)

The Government has introduced legislation that proposes to change the Equal Pay Act 1972 to provide a clearer process for raising and resolving pay equity claims through employment relations bargaining. The proposed legislation reflects the recommendations of the tripartite joint working group on pay equity principles.

The forecasts include an estimate of the cost of pay equity claim settlements within the forecast period. However, there is a risk that the cost may differ from that estimated.

Policy Responses to the 15 March Terror Attacks (New)

The Government has made a number of immediate responses to the 15 March terror attacks. Further responses may be needed including policy and legislative amendments. In addition, there are likely to be further costs associated with responding to the Royal Commission of Inquiry into the Christchurch Terror Attack, which are unable to be quantified at this point.

Possible Response to the Referendum on Cannabis Law Reform (New)

The Government has committed to holding a referendum on legalising the use of cannabis at the 2020 general election. The cost of conducting the referendum has been provided in the forecasts. However, there could potentially be associated impacts on the Government's operating balance should the current legal framework change as an outcome of the referendum.

Services Funded by Third Parties (Unchanged)

A wide range of government services are funded through third-party fees and charges. Demand for these services can vary, with a direct effect on revenue received. There is a risk the Government may need to provide additional funding if revenue collected is lower than the total costs of providing the service. There is also a risk that changes will be required to the way government services are delivered, which could result in costs to the Crown.

State Sector Employment Agreements (Unchanged)

All collective agreements in the State sector are due to be renegotiated over the forecast period. As well as direct fiscal implications for the employers of workforces covered by any changes to remuneration, the renegotiation of agreements can have flow-on effects to remuneration in other employers across the sector.

Unexpected Maintenance for Crown-owned Buildings (Unchanged)

There is a possibility that the Crown will incur costs when unexpected maintenance is required for the buildings it owns. Examples include earthquake strengthening some of the buildings that do not meet modern building standards and maintenance for buildings with weather tight issues. The likelihood, timing and fiscal impact of any repairs are uncertain.

Risks Removed Since the Half Year Update#

Portfolio Title Reason for expiry
Broadcasting, Communications and Digital Media Increased Public Broadcasting Funding This risk has been subsumed into the Delivery of the Government's public media objectives.
Children Oranga Tamariki Future Operating Model This risk is no longer material owing to funding provided through Budget 2019.
Education Additional Funding for Schools in Lieu of Parental Donations This risk is no longer material owing to funding provided through Budget 2019.
Education Institutes of Technology and Polytechnics - Support and Reform This risk has been combined with Reform of Vocational Education (RoVE).
Education Teacher Supply This risk was addressed by a number of Budget 2019 initiatives aimed to address teacher workload and conditions.
Foreign Affairs Hosting the Asia Pacific Economic Cooperation Forum 2021 This risk is no longer material owing to funding provided through Budget 2019.
Health Caregiver Employment Conditions This risk is no longer material owing to funding provided through Budget 2019.
Housing and Urban Development Public Housing This risk has been renamed as Increases to Market Rent, now included in the cost pressure risks.
Justice Access to Justice This risk is no longer material owing to funding provided through Budget 2019.
Justice Reducing Family Violence - Increased Investment This risk is no longer material owing to funding provided through Budget 2019.
Social Development Funding Current Demand for the Resolution of Historical Claims This risk is no longer material owing to funding provided through Budget 2019.
Social Development Pass on Child Support Payments to Sole-Parent Beneficiaries This risk has been subsumed into the Changes to the Welfare System risk.
Social Development Removing Compulsory Deductions to Sole Parent Benefits This risk is no longer material owing to funding provided through Budget 2019.

Contingent Liabilities and Contingent Assets#

Contingent liabilities are possible costs that have arisen from past events, but the amount of the liability, or whether it will eventuate, will not be confirmed until a particular event occurs or present liabilities that are unable to be measured with sufficient reliability to be recorded in the fiscal forecasts.

Typically, contingent liabilities consist of guarantees and indemnities, uncalled capital and legal disputes and claims. 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, or the amount becomes sufficiently reliable to record as a liability, it would reduce the operating balance and net worth and increase net core Crown debt. In the case of some contingencies (eg, uncalled capital) the negative impact would be restricted to net core Crown debt because the cost would be offset by the acquisition of an asset.

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 possible assets that have arisen from past events but the amount of the asset, or whether it will eventuate, will not be confirmed until a particular event occurs.

Only contingent liabilities and contingent assets involving amounts of over $100 million are separately disclosed in this chapter. Quantifiable contingencies less than $100 million are aggregated in the ‘other quantifiable' total.

Some contingencies of the Crown are not able to be quantified. We have disclosed unquantifiable contingent liabilities and unquantifiable contingent assets that potentially could have an impact in excess of $20 million and are not expected to be remote.[17]

The contingencies have been stated as at 31 March 2019, being the latest set of published contingencies.

Quantifiable Contingent Liabilities and Contingent Assets

Contingent liabilities
  Status[18] 31 March 2019
($millions)
Uncalled capital    
Asian Development Bank Unchanged 3,169
International Monetary Fund - promissory notes Unchanged 2,164
International Bank for Reconstruction and Development Unchanged 1,632
International Monetary Fund - arrangements to borrow Unchanged 642
Asian Infrastructure Investment Bank Unchanged 544
Other uncalled capital Unchanged 19
    8,170
Guarantees and indemnities    
New Zealand Export Credit guarantees Unchanged 111
Other guarantees and indemnities Unchanged 86
    197
Legal proceedings and disputes    
Legal tax proceedings Unchanged 144
Other legal proceedings and disputes Unchanged 164
    308
Other quantifiable contingent liabilities    
Unclaimed monies Unchanged 175
Christchurch Engine Centre Partnership Agreement Unchanged 123
Terracotta Warriors Exhibition New 136
Other quantifiable contingent liabilities Unchanged 236
    670
Total quantifiable contingent liabilities   9,345
Contingent assets
  Status 31 March 2019
($millions)
Legal proceedings and disputes    
Other contingent assets Unchanged 143
Total quantifiable contingent assets   143

Unquantifiable Contingent Liabilities and Contingent Assets

Contingent liabilities
  Status
Indemnities  
Air New Zealand Unchanged
Contact Energy Limited Unchanged
Earthquake Commission (EQC) Unchanged
Genesis Energy Unchanged
Housing New Zealand Corporation Unchanged
Justices of the Peace, Community Magistrates and Disputes Tribunal Referees Unchanged
Maui Partners Unchanged
New Zealand Aluminium Smelter and Comalco Unchanged
New Zealand Local Authorities Unchanged
New Zealand Railways Corporation Unchanged
Southern Response Earthquake Services Limited (SRES) New
Synfuels-Waitara Outfall Indemnity Unchanged
Westpac New Zealand Limited Unchanged
Legal claims and proceedings  
Accident Compensation Corporation (ACC) litigation Unchanged
Ministry for Primary Industries - Biosecurity Act 1993 compensation Unchanged
Kiwifruit vine PSA-V Unchanged
Treaty of Waitangi claims Unchanged
Other unquantifiable contingent liabilities  
Canterbury Insurance Disputes Unchanged
Criminal Proceeds (Recovery) Act 2009 Unchanged
Environmental liabilities Unchanged
Holidays Act 2003 and other relevant legislation Unchanged
Remediation of Per- and Poly- Fluoroalkyl Substances Contamination Unchanged
Treaty of Waitangi claims - settlement relativity payments Unchanged

The following contingent liabilities have been removed on the basis they are considered to be remote.

Ministry of Business Science and Innovation - Persons exercising investigating powers
The Treasury - Deed between Genesis and the Crown

Description of Contingent Liabilities

Quantifiable contingent liabilities over $100 million
Uncalled capital

As part of the Crown's commitment to a multilateral approach to ensure global financial and economic stability, New Zealand, as a member country of the organisations listed below, contributes capital by subscribing to shares in certain institutions. The capital (when called) is typically used to raise additional funding for loans to member countries, or in the case of the quota contributions to directly finance lending to members. For New Zealand and other donor countries, capital contributions comprise both “paid-in” capital and “callable capital or promissory notes”.

The Crown's uncalled capital subscriptions over $100 million are as follows:

Uncalled capital 31 March 2019
$millions
30 June 2018
$millions
Asian Development Bank 3,169 3,231
International Monetary Fund - promissory notes 2,164 2,255
International Bank for Reconstruction and Development 1,632 1,643
International Monetary Fund - arrangements to borrow 642 634
Asian Infrastructure Investment Bank 544 548

In addition to the uncalled capital detailed above, The Crown has agreed to provide an uncalled capital facility of $230 million to Southern Response Earthquake Service Limited (SRES) to support the Christchurch earthquake recovery process. Of this amount, $117 million has been called, leaving $113 million as a contingent liability. This capital support will increase net core Crown debt when called.

Guarantees and indemnities

Guarantees are legally binding promises made by the Crown to assume responsibility for a debt, or performance of an obligation of another party, should that party default. Guarantees generally relate to the payment of money but may require the performance of services.

Indemnities are legally binding promises where the Crown undertakes to accept the risk of loss or damage that another party may suffer and to hold the other party harmless against loss caused by a specific stated event(s).

New Zealand Export Credit guarantees

The New Zealand Export Credit provides a range of guarantee products to assist New Zealand exporters manage risk and capitalise on trade opportunities around the globe. The obligations to third parties are guaranteed by the Crown and are intended to extend the capacity of facilities in the private sector.

$111 million at 31 March 2019 ($137 million at 30 June 2018)

Legal proceedings and disputes

Legal tax proceedings

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. This contingent liability represents the maximum liability Inland Revenue has in respect of these cases.

$144 million at 31 March 2019 ($146 million at 30 June 2018)

Other quantifiable contingent liabilities

Unclaimed monies

Under the Unclaimed Money Act 1971, entities (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.

$175 million at 31 March 2019 ($161 million at 30 June 2018)

Christchurch Engine Centre Partnership Agreement

The Air New Zealand Group has a partnership agreement with Pratt and Whitney in relation to the Christchurch Engine Centre (CEC), holding a 49% interest. By the nature of the agreement, joint and several liabilities exist between the two parties; the contingent liability represents Air New Zealand's share of CEC's liabilities.

$123 million at 31 March 2019 ($158 million at 30 June 2018)

Guarantees and indemnities

Terracotta Warriors Exhibition

Over the period of 15 December 2018 to 22 April 2019, Te Papa hosted the Terracotta Warriors Guardians of Immortality Exhibition. The Exhibition is indemnified under the government indemnity of Touring Exhibition Scheme from mid-November 2018 to mid-May 2019 to cover the period of transit and display of these artefacts.

$136 million at 31 March 2019 ($0 million at 30 June 2018)

Unquantifiable contingent liabilities

This part of the statement provides details of those contingent liabilities of the Crown which are not quantified, excluding those that are considered remote, reported by indemnities, legal disputes, and other contingent liabilities.

The indemnities and claims that are disclosed individually, while they cannot be quantified, have the potential to exceed $20 million in costs and are not considered to be remote.

Indemnities

A number of these indemnities are provided to organisations within the Crown's control. If these indemnities were to crystallise, the Crown would compensate the individual entity for the loss and there would likely be an adverse impact on core Crown expenses and core Crown net debt.

Party indemnified Instrument of indemnification Actions indemnified
Air New Zealand Deed of indemnity issued 24 September 2001 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.
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 The documents contained two reciprocal indemnities between the Crown and Contact to address the risk of certain losses to the respective parties' assets arising from the negligence or fault of the other party.
Earthquake Commission (EQC) Section 16 of the Earthquake Commission Act 1993 As set out in the Earthquake Commission Act 1993, the Crown shall fund any deficiency in EQC's assets to cover its financial liabilities on such terms and conditions that the Minister of Finance determines.
Genesis Energy Genesis acquisition of Tekapo A & B power stations Indemnity against any damage to the beds of lakes and rivers subject to operating easements.
 

Justices of the Peace, Community Magistrates and Disputes Tribunal Referees

Section 50 of the District Courts Act 2016 and Section 4F of the Justices of the Peace Act 1957 and Section 58 of the Disputes Tribunal Act 1988 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.
Maui Partners Confidentiality agreements with the Maui Partners in relation to the provision of gas reserves information Any losses arising from a breach of the deed.
New Zealand Aluminium Smelter and Comalco The Minister of Finance signed indemnities in November 2003 and February 2004 in respect of aluminium dross currently stored at another site in Invercargill Costs incurred in removing the dross and disposing of it at another site if required to do so by an appropriate authority.
New Zealand Local Authorities Section 39 of the Civil Defence Emergency Management Act 2002 - National Civil Defence Emergency Management Plan The Guide to the National Civil Defence Emergency Management Plan (‘the Guide') states that, with the approval of the Minister, the Government will reimburse local authorities, in whole or in part, for certain types of response and recovery costs incurred as a result of a local or national emergency. The Guide is approved and issued by the Director of Civil Defence Emergency Management.
New Zealand Railways  Corporation Section 10 of the Finance Act 1990 Guarantees all loan and swap obligations of the New Zealand Railways Corporation.
Southern Response Earthquake Services Limited (SRES) Deed of Indemnity SRES continues to work through and settle the claims of AMI residential policyholders that arose from the Canterbury earthquake series. However, it has not proven possible to settle some claims through the normal internal process or with external assistance such as mediation. In light of certain litigation that has arisen, the Minister of Finance provided SRES with a Deed of Indemnity for that litigation on 25 September 2018.
Synfuels-Waitara Outfall Indemnity 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 which was laid across the Waitara meat processing plant site. The Crown has the benefit of a counter indemnity from NZLFI which has since been transferred to Methanex Motunui Limited.
Westpac New Zealand Limited The Domestic Transaction Banking Services Master

The Crown Transactional Banking Services Agreement with Westpac New Zealand Limited dated 24 September 2015. The Crown has indemnified Westpac New Zealand Limited:

  • for all amounts paid by Westpac New Zealand under letters of credit issued on behalf of the Crown, and
  • against certain cost, damages and losses to third parties resulting from:
    • unauthorised, forged or fraudulent payment instructions
    • unauthorised or incorrect direct debit instructions, or
    • cheques mistakenly drawn in favour of a third party rather than drawn in favour of the Crown.
Legal claims and proceedings

There are numerous legal actions that have been brought against the Crown. However, in the majority of these actions it is considered a remote possibility that the Crown would lose the case, or if the Crown were to lose it would be unlikely to have greater than a $20 million impact. Based on these factors, not all legal actions are individually disclosed. The claims that are disclosed individually, while they cannot be quantified, have the potential to exceed $20 million in costs.

Accident Compensation Corporation (ACC) litigation

Litigation involving ACC arises almost exclusively from challenges to operational decisions made by ACC through the statutory review and appeal process. No accrual has been made for contingent liabilities which could arise, as these disputes are issue based and ACC's active management of litigation means that it will be either settling or defending, depending on the merits of the issue in dispute. ACC's Board believes the resolution of outstanding appeals will not have any material effect on the financial statements of ACC and therefore are not material for the Crown.

Ministry for Primary Industries - Biosecurity Act compensation

Under section 162A of the Biosecurity Act 1993 compensation may be payable as a result of the exercise of powers to manage or eradicate organisms. Compensation is payable where there are verifiable losses as a result of the damage or destruction of a person's property or restrictions on the movement of a person's goods. The Ministry has been notified compensation will be sought for incursions including fruit fly, pea weevil, bonamia ostreae, Mycoplasma bovis and myrtle rust. Due to the complexity and uncertainty of the amount of these claims the amounts are unquantified.

Kiwifruit vine disease Psa-V

Approximately 210 growers have filed a claim against the Ministry for Primary Industries alleging it is liable for damages they suffered from the kiwifruit vine disease, Psa-V. The plaintiffs have not quantified their losses, but have publicly claimed it is in the vicinity of $380 million, citing total industry losses of $885 million, the Ministry defended the claim. On 27 June 2018 the High Court found that MPI owed a duty of care to Strathboss and claimants; that it breached its duty of care at the import permit stage, and that the breach caused the Psa-V incursion. An appeal was filed by the Crown on 24 July 2018.

Treaty of Waitangi claims

Under the Treaty of Waitangi Act 1975, any Māori may lodge certain 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 which has been transferred by the Crown to a State-owned Enterprise (SOE) or tertiary institution, or is subject to the Crown Forest Assets Act 1989.

On occasion, Māori claimants pursue the resolution of particular claims against the Crown through higher courts. Failure to successfully defend such actions may result in a liability for historical Treaty grievances in excess of that currently anticipated.

Other unquantifiable contingent liabilities

Canterbury insurance disputes

SRES from time to time receives notification of legal claims and disputes in relation to claim settlements as a commercial outcome of conducting its business. These include a representative proceeding filed against Southern Response on 29 May 2018 proposing to represent policyholders who entered into a settlement agreement with Southern Response prior to 1 October 2014. Southern Response defends all such claims.

Criminal Proceeds (Recovery) Act 2009

The Ministry of Justice is responsible for administering the Criminal Proceeds (Recovery) Act 2009. The Act requires the Crown to give an undertaking as to damages or costs in relation to asset restraining orders. In the event that the Crown is found liable, payment may be required.

Environmental liabilities

Under common law and various statutes, the Crown may have a responsibility to remedy adverse effects on the environment arising from Crown activities. Entities managing significant Crown properties have implemented systems to identify, monitor and assess potential contaminated sites.

In accordance with PBE IPSAS 19: 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. Where costs cannot be reliably measured, they are disclosed as an unquantified contingent liability.

Holidays Act 2003 and other relevant legislation

A number of entities have commenced a review of payroll calculations over the past six years in order to ensure compliance with the Holidays Act 2003 and other relevant legislation. Where possible, a provision has been made in these financial statements for obligations arising from those reviews. Further work continues to be undertaken by a number of entities including the Ministry of Education, DHBs, the Department of Corrections and KiwiRail Holdings Limited. These entities have complexities that are taking longer to resolve. To the extent that an obligation cannot reasonably be quantified at 31 March 2019, there is an unquantified contingency.

Remediation of Per- and Poly- Fluoroalkyl Substances Contamination

Local and central government entities are investigating per- and poly-fluoroalkyl substances (PFAS) contamination from the historic use of specialised firefighting foam at sites on, and in the vicinity of, airports, NZDF bases, fuel storage facilities and other sites. Various government agencies have been undertaking a programme to review, investigate and develop a comprehensive approach to manage the impact of PFAS at sites around New Zealand. Once a response is agreed, it is possible the Crown may incur costs for the response to PFAS contamination. However, these costs cannot be estimated without the agreed response being finalised, so an unquantified contingent liability has been disclosed.

Treaty of Waitangi claims - Settlement Relativity Payments - see page 80

Description of Contingent Assets

There are no material quantifiable or unquantifiable contingent assets at 31 March 2019.

Notes#

  1. [13] For these purposes, 'reasonably probable' is taken to mean that the matter is more likely than not to be approved within the forecast period (by considering, for example, whether there is a better than 50% chance of the matter occurring or being approved).
  2. [14] For these purposes, ‘reasonably possible' is taken to mean that the matter might be approved within the forecast period (by considering, for example, whether there is a 20% to 50% chance of the matter occurring or being approved).
  3. [15] Unchanged - risks where the nature and/or scale of the risk has not changed substantively since the Half Year Update.
  4. [16] Unchanged - risks where the nature and/or scale of the risk has not changed substantively since the Budget Update.
  5. [17] ‘Remote’ is defined as being an item with less than a 10% chance of occurring.
  6. [18] Status of contingent liabilities or assets when compared to the Half Year Fiscal Update published on 13 December 2018.

Forecast Financial Statements#

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 Risks and Scenarios and Specific Fiscal Risks chapters discuss the risks to the fiscal forecast in more detail.

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 8 May 2019.

The finalisation dates and key assumptions that underpin the preparation of the Forecast Financial Statements are outlined in the Fiscal Outlook chapter (pages 21 to 48).

Statement of Accounting Policies#

Significant Accounting Policies

The 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. They comply with generally accepted accounting practice (GAAP) as required by the Public Finance Act 1989 and have been prepared in accordance with Public Benefit EntityFinancial 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 Forecast Financial Statements reflect the accounting standards in place in the year that they are prepared. Adoption of new accounting standards in future financial years are consequently not reflected in these Forecast Financial Statements. Accounting standards to be adopted within the fiscal forecasts period, where impacts may be significant, have been signalled in the note disclosures (in particular note 13 of the Forecast Financial Statements chapter).

We have adopted PBE IFRS 9: Financial Instruments in these financial statements replacing the existing standard PBE IPSAS 29: Financial instruments: Recognition and Measurement and NZ IAS 39: Financial instruments: Recognition and Measurement. The Crown has exercised the option under PBE IFRS 9 to continue to apply the hedge accounting requirements of PBE IPSAS 29.

The main changes under PBE IFRS 9 for non-hedge financial instruments are:

  • New financial asset classification requirements for determining whether an asset is measured at fair value or amortised cost.
  • A new impairment model for financial assets based on expected losses, which may result in the earlier recognition of impairment losses.

The specific accounting policies are included within the 2019 Budget Economic and Fiscal Update Additional Information document which can be found on the Treasury's website at https://treasury.govt.nz/publications/efu/budget-economic-and-fiscal-update-2019

Forecast Policies

The Forecast Financial Statements have been prepared on the basis of the Treasury's best professional judgement. Actual financial results for the periods covered are likely to vary from the information presented in these forecasts. 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 Specific Fiscal Riskschapter on pages 61 to 92. Key forecast assumptions are set out on pages 24 to 25.

Reporting and Forecast Period

The reporting periods for these Forecast Financial Statements are the years ended 30 June 2019 to 30 June 2023. The “2018 Actual” figures reported in the statements are the audited results reported in the Financial Statements of the Government for the year ended 30 June 2018. The “2019 Previous Budget” figures are the original forecasts to 30 June 2019 as presented in the 2018 Budget Update.

Government Reporting Entity as at 8 May 2019#

These forecast financial statements are for the Government Reporting entity as specified in Part 3 of the Public Finance Act 1989. This comprises Ministers of the Crown and the following entities (classified in the three institutional components used for segmental reporting). The following tables lists the entities within each institutional component. (subsidiaries are consolidated by their parents and not listed separately).

Core Crown Segment

Departments
  1. Crown Law Office
  2. Department of Conservation
  3. Department of Corrections
  4. Department of Internal Affairs
  5. Department of the Prime Minister and Cabinet
  6. Education Review Office
  7. Government Communications Security Bureau
  8. Inland Revenue Department
  9. Land Information New Zealand
  10. Ministry for Culture and Heritage
  11. Ministry for Pacific Peoples
  12. Ministry for Primary Industries
  13. Ministry for the Environment
  14. Ministry for Women
  15. Ministry of Business, Innovation, and Employment
  16. Ministry of Defence
  17. Ministry of Education
  18. Ministry of Foreign Affairs and Trade
  19. Ministry of Health
  20. Ministry of Housing and Urban Development
  21. Ministry of Justice (Includes Te Arawhiti – Office for Māori Crown Relations as a departmental agency)
  22. Ministry of Māori Development
  23. Ministry of Social Development
  24. Ministry of Transport
  25. New Zealand Customs Service
  26. New Zealand Defence Force
  27. New Zealand Police
  28. New Zealand Security Intelligence Service
  29. Office of the Clerk of the House of Representatives
  30. Oranga Tamariki, Ministry for Children
  31. Parliamentary Counsel Office
  32. Parliamentary Service
  33. Serious Fraud Office
  34. State Services Commission (Includes Social Investment Agency as a departmental agency)
  35. Statistics New Zealand
  36. Te Kāhui Whakamana Rua Tekau mā Iwa ­- Pike River Recovery Agency
  37. The Treasury
Offices of Parliament
  1. Controller and Auditor-General
  2. Office of the Ombudsman
  3. Parliamentary Commissioner for the Environment
Others
  1. New Zealand Superannuation Fund
  2. Reserve Bank of New Zealand

State-owned enterprises Segment

State-owned enterprises
  1. Airways Corporation of New Zealand Limited
  2. Animal Control Products Limited
  3. AsureQuality Limited
  4. Electricity Corporation of New Zealand Limited
  5. KiwiRail Holdings Limited
  6. Kordia Group Limited
  7. Landcorp Farming Limited
  8. Meteorological Service of New Zealand Limited
  9. New Zealand Post Limited
  10. New Zealand Railways Corporation
  11. Quotable Value Limited
  12. Solid Energy New Zealand Limited (in liquidation)
  13. Transpower New Zealand Limited
Mixed ownership model companies (Public Finance Act Schedule 5)
  1. Genesis Energy Limited
  2. Mercury NZ Limited
  3. Meridian Energy Limited
Other
  1. Air New Zealand Limited
  2. Kiwi Group Holdings Limited (including Kiwibank)

Crown Entities Segment

Crown entities
  1. Accident Compensation Corporation
  2. Accreditation Council
  3. Arts Council of New Zealand Toi Aotearoa
  4. Broadcasting Commission
  5. Broadcasting Standards Authority
  6. Callaghan Innovation
  7. Children's Commissioner
  8. Civil Aviation Authority of New Zealand
  9. Commerce Commission
  10. Crown Irrigation Investments Limited
  11. Crown Research Institutes (7)
  12. District Health Boards (20)
  13. Drug Free Sport New Zealand
  14. Earthquake Commission
  15. Education New Zealand
  16. Electoral Commission
  17. Electricity Authority
  18. Energy Efficiency and Conservation Authority
  19. Environmental Protection Authority
  20. External Reporting Board
  21. Financial Markets Authority
  22. Fire and Emergency New Zealand
  23. Government Superannuation Fund Authority
  24. Guardians of New Zealand Superannuation
  25. Health and Disability Commissioner
  26. Health Promotion Agency
  27. Health Quality and Safety Commission
  28. Health Research Council of New Zealand
  29. Heritage New Zealand Pouhere Taonga
  30. Housing New Zealand Corporation
  31. Human Rights Commission
  32. Independent Police Conduct Authority
  33. Law Commission
  34. Maritime New Zealand
  35. Museum of New Zealand Te Papa Tongarewa Board
  36. New Zealand Antarctic Institute
  37. New Zealand Artificial Limb Service
  38. New Zealand Blood Service
  39. New Zealand Film Commission
  40. New Zealand Lotteries Commission
  41. New Zealand Productivity Commission
  42. New Zealand Qualifications Authority
  43. New Zealand Symphony Orchestra
  44. New Zealand Tourism Board
  45. New Zealand Trade and Enterprise
  46. New Zealand Transport Agency
  47. New Zealand Venture Investment Fund Limited
  48. New Zealand Walking Access Commission
  49. Office of Film and Literature Classification
  50. Pharmaceutical Management Agency
  51. Privacy Commissioner
  52. Public Trust
  53. Radio New Zealand Limited
  54. Real Estate Agents Authority
  55. Retirement Commissioner
  56. School Boards of Trustees (2,418)
  57. Social Workers Registration Board
  58. Sport and Recreation New Zealand
  59. Takeovers Panel
  60. Te Reo Whakapuaki Irirangi (Māori Broadcasting Funding Agency)
  61. Te Taura Whiri i te Reo Māori (Māori Language Commission)
  62. Television New Zealand Limited
  63. Tertiary Education Commission
  64. Transport Accident Investigation Commission
  65. WorkSafe New Zealand
Organisations listed in schedule 4 of the Public Finance Act 1989
  1. Agricultural and Marketing Research and Development Trust
  2. Asia New Zealand Foundation
  3. Fish and Game Councils (12)
  4. Game Animal Council
  5. Māori Trustee
  6. National Pacific Radio Trust
  7. New Zealand Fish and Game Council
  8. New Zealand Game Bird Habitat Trust Board
  9. New Zealand Government Property Corporation
  10. New Zealand Lottery Grants Board
  11. Ngai Tahu Ancillary Claims Trust
  12. Pacific Co-operation Foundation
  13. Pacific Island Business Development Trust
  14. Reserves Boards (21)
  15. Te Ariki Trust
Non-listed companies in which the Crown is the majority or sole shareholder (Public Finance Act Schedule 4A)
  1. Crown Asset Management Limited
  2. Crown Infrastructure Partners Limited (previously Crown Fibre Holdings Limited)
  3. Education Payroll Limited
  4. Ōtākaro Limited
  5. Predator Free 2050 Limited
  6. Research and Education Advanced Network New Zealand Limited
  7. Southern Response Earthquake Services Limited
  8. Tāmaki Redevelopment Company Limited
  9. The Network for Learning Limited
Legal entities created by Treaty of Waitangi settlement Acts (Public Finance Act Schedule 6)
  1. Te Urewera
Others
  1. Teaching Council of Aotearoa New Zealand
  2. Regenerate Christchurch
  3. Christ Church Cathedral Reinstatement Trust

Other entities not fully consolidated into the forecast financial statements of the Government with only the Crown's interest in them being included

Crown entities
  1. Tertiary Education Institutions (27)
Non-listed companies in which the Crown is the majority or sole shareholder (Public Finance Act Schedule 4A)
  1. City Rail Link Limited

Forecast Financial Statements#

Forecast Statement of Financial Performance
for the years ending 30 June

  Note 2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Revenue                
Taxation revenue 1 79,596 83,241 83,957 88,541 94,310 99,343 104,747
Other sovereign revenue 1 5,223 5,633 5,827 6,027 6,233 6,533 6,731
Total Revenue Levied through the Crown's Sovereign Power   84,819 88,874 89,784 94,568 100,543 105,876 111,478
Sales of goods and services   18,228 19,237 19,386 19,117 20,040 20,363 20,541
Interest revenue 2 2,798 2,966 2,694 2,748 2,916 3,014 3,304
Other revenue1   4,128 4,220 4,554 4,397 4,871 4,947 5,068
Total revenue earned through the Crown's operations   25,154 26,423 26,634 26,262 27,827 28,324 28,913
Total revenue (excluding gains)   109,973 115,297 116,418 120,830 128,370 134,200 140,391
Expenses                
Transfer payments and subsidies1 3 25,366 28,394 28,192 29,794 31,226 32,679 34,006
Personnel expenses   23,690 24,369 24,977 25,802 26,451 26,628 26,820
Depreciation   4,275 4,840 4,972 5,218 5,236 5,310 5,396
Other operating expenses 4 41,614 44,976 45,692 49,009 49,206 47,827 48,113
Finance costs 2 4,151 4,045 3,987 3,906 4,136 4,115 4,352
Insurance expenses 5 4,918 4,877 5,274 5,547 5,788 6,051 6,304
Forecast new operating spending 6 760 265 1,266 4,275 6,964 9,318
Top-down expense adjustment 6 (1,145) (800) (1,400) (500) (500) (500)
Total expenses (excluding losses)   104,014 111,116 112,559 119,142 125,818 129,074 133,809
Minority interest share of operating balance before gains/(losses)   (425) (444) (394) (375) (421) (443) (436)
Operating balance before gains/(losses) (excluding minority interests)   5,534 3,737 3,465 1,313 2,131 4,683 6,146
Net gains/(losses) on financial instruments 2 5,331 2,887 1,445 3,215 3,589 4,068 4,508
Net gains/(losses) on non-financial instruments 7 (2,802) (83) (5,340) (71) (63) (61) (61)
Less minority interest share of net gains/(losses)   (87) (17) (76) 3 (1) (1) (1)
Total gains/(losses) (excluding minority interests)   2,442 2,787 (3,971) 3,147 3,525 4,006 4,446
Net surplus/(deficit) from associates and joint ventures   420 249 222 220 260 283 298
Operating balance (excluding minority interests)   8,396 6,773 (284) 4,680 5,916 8,972 10,890
  1. The 2019 Previous Budget comparator for other revenue and transfer payments and subsidies has been restated to eliminate Income Related Rent Subsidy transactions between government reporting entities.

The accompanying notes and accounting policies are an integral part of these Statements.

Forecast Analysis of Expenses by Functional Classification
for the years ending 30 June

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Total Crown expenses              
By functional classification1              
Social security and welfare2 30,195 33,660 33,777 36,183 37,642 39,173 40,660
Health 16,746 17,507 17,850 18,975 18,936 19,040 19,072
Education 14,607 15,509 15,235 15,868 16,260 16,398 16,591
Core government services 4,495 4,755 4,914 5,587 5,054 4,617 4,560
Law and order 4,494 4,816 5,182 5,369 5,366 5,432 5,554
Transport and communications 9,940 10,938 11,205 11,263 12,313 12,030 12,439
Economic and industrial services 8,928 9,150 9,982 10,184 9,860 9,166 9,242
Defence 2,239 2,366 2,410 2,532 2,565 2,530 2,490
Heritage, culture and recreation 2,518 2,603 2,582 2,772 2,757 2,825 2,838
Primary services 2,134 2,090 2,428 2,500 2,312 2,085 2,132
Housing and community development 1,878 2,318 2,132 2,339 3,017 3,146 3,022
Environmental protection 1,227 1,057 1,123 1,279 1,253 1,476 1,445
GSF pension expenses 163 135 173 178 160 165 182
Other 299 552 114 341 412 412 412
Finance costs 4,151 4,045 3,987 3,906 4,136 4,115 4,352
Forecast new operating spending 760 265 1,266 4,275 6,964 9,318
Top-down expense adjustment (1,145) (800) (1,400) (500) (500) (500)
Total Crown expenses excluding losses 104,014 111,116 112,559 119,142 125,818 129,074 133,809

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 SOEs.

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Core Crown expenses              
By functional classification1              
Social security and welfare 25,999 28,949 28,961 30,915 32,360 33,726 34,959
Health 17,159 18,071 18,277 19,198 19,119 19,254 19,283
Education 13,629 14,663 14,312 14,919 15,318 15,447 15,640
Core government services 4,670 5,046 5,326 5,608 5,161 4,917 4,829
Law and order 4,184 4,419 4,757 4,890 4,885 4,927 5,050
Transport and communications 2,559 2,622 3,212 3,103 3,950 3,366 3,443
Economic and industrial services 2,732 3,307 3,028 4,328 3,576 2,901 3,068
Defence 2,251 2,374 2,418 2,541 2,573 2,539 2,498
Heritage, culture and recreation 850 880 913 996 929 920 902
Primary services 807 756 1,088 1,036 862 680 719
Housing and community development 552 878 711 897 1,396 1,464 1,335
Environmental protection 1,238 1,058 1,125 1,281 1,255 1,478 1,448
GSF pension expenses 150 122 159 164 146 150 167
Other 299 552 114 341 412 412 412
Finance costs 3,497 3,408 3,434 3,179 3,174 3,041 3,162
Forecast new operating spending 760 265 1,266 4,275 6,964 9,318
Top-down expense adjustment (1,145) (800) (1,400) (500) (500) (500)
Total core Crown expenses excluding losses 80,576 86,720 87,300 93,262 98,891 101,686 105,733
  1. The classifications of the functions of the Government reflect current approved baselines. Forecast new operating spending is shown as a separate line item in the above analysis and will be allocated to functions of the Government once decisions are made in future Budgets.
  2. The 2019 Previous Budget comparator for social security and welfare expenses has been restated to eliminate Income Related Rent Subsidy transactions between government reporting entities.

The accompanying notes and accounting policies are an integral part of these Statements.

Forecast Statement of Comprehensive Revenue and Expense
for the years ending 30 June

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Operating Balance (including minority interest) 8,908 7,234 186 5,052 6,338 9,416 11,327
Other comprehensive revenue and expense              
Revaluation of physical assets 10,668 (33)
Transfers to/(from) reserves 59 69 240 30 104 117 79
(Gains)/losses transferred to the  statement of financial performance (25) 9 (4) (1)
Other movements 88 (50) (24) 12 10 12 25
Total other comprehensive revenue and expense 10,790 19 192 38 114 129 103
Total comprehensive revenue and expense 19,698 7,253 378 5,090 6,452 9,545 11,430
Attributable to:              
 - minority interest 586 445 651 359 435 459 438
 - the Crown 19,112 6,808 (273) 4,731 6,017 9,086 10,992
Total comprehensive revenue and expense 19,698 7,253 378 5,090 6,452 9,545 11,430

The accompanying notes and accounting policies are an integral part of these Statements.

Forecast Statement of Changes in Net Worth
for the years ending 30 June

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Opening net worth 116,472 123,567 135,637 136,166 140,748 146,681 155,703
Impacts of adoption of NZ PBE IFRS 91 537 628
Adjusted opening net worth 116,472 124,104 136,265 136,166 140,748 146,681 155,703
Operating balance (including minority interest) 8,908 7,234 186 5,052 6,338 9,416 11,327
Net revaluations 10,668 (33)
Transfers to/(from) reserves 59 69 240 30 104 117 79
(Gains)/losses transferred to the Statement of Financial Performance (25) 9 (4) (1)
Other movements 88 (50) (24) 12 10 12 25
Comprehensive income 19,698 7,253 378 5,090 6,452 9,545 11,430
Transactions with minority interest (533) (503) (477) (508) (519) (523) (528)
Closing net worth 135,637 130,854 136,166 140,748 146,681 155,703 166,605
  1. Refer to note 9 for details of the impacts of adoption of NZ PBE IFRS 9: Financial Instruments on these forecast financial statements.

The accompanying notes and accounting policies are an integral part of these Statements.

Forecast Statement of Cash Flows
for the years ending 30 June

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Cash Flows from Operations              
Cash was provided from              
Taxation receipts 78,566 81,963 82,622 87,567 93,141 98,407 103,522
Other sovereign receipts 4,594 4,710 4,860 4,827 5,100 5,421 5,551
Sales of goods and services 18,387 19,260 19,331 19,153 20,111 20,412 20,653
Interest receipts 2,466 2,462 2,462 2,444 2,628 2,716 2,990
Other operating receipts 4,038 4,909 4,271 4,450 4,743 4,718 4,850
Total cash provided from operations 108,051 113,304 113,546 118,441 125,723 131,674 137,566
Cash was disbursed to              
Transfer payments and subsidies 25,382 29,308 28,156 30,056 31,384 32,795 34,129
Personnel and operating payments 67,687 71,438 73,036 76,094 76,860 75,705 76,362
Interest payments 4,098 4,052 4,056 3,844 4,074 3,977 4,328
Forecast new operating spending 760 265 1,266 4,275 6,964 9,318
Top-down expense adjustment (1,145) (800) (1,400) (500) (500) (500)
Total cash disbursed to operations 97,167 104,413 104,713 109,860 116,093 118,941 123,637
Net cash flows from operations 10,884 8,891 8,833 8,581 9,630 12,733 13,929
Cash Flows from Investing Activities              
Cash was provided from/(disbursed to)              
Net (purchase)/sale of physical assets (7,672) (10,191) (9,843) (10,114) (8,620) (8,010) (8,010)
Net (purchase)/sale of shares and other securities (4,792) 6,117 9,593 (1,582) (250) (11,430) (1,570)
Net (purchase)/sale of intangible assets (817) (723) (913) (951) (764) (571) (540)
Net (issue)/repayment of advances (499) (203) (1,729) (1,995) (1,691) (1,217) (1,259)
Net acquisition of investments in associates (378) (420) (35) (502) (379) (365) (370)
Forecast new capital spending (1,267) (458) (466) (969) (1,475) (1,671)
Top-down capital adjustment 600 1,250 950 550 250 150
Net cash flows from investing activities (14,158) (6,087) (2,135) (14,660) (12,123) (22,818) (13,270)
Net cash flows from operating and investing activities (3,274) 2,804 6,698 (6,079) (2,493) (10,085) 659
Cash Flows from Financing Activities              
Cash was provided from/(disbursed to)              
Issues of circulating currency 395 196 233 198 204 210 217
Net issue/(repayment) of government bonds1 215 (3,378) (3,544) 3,760 350 8,255 (2,685)
Net issue/(repayment) of foreign-currency borrowings (670) 458 (2,151) 24 7 3 13
Net issue/(repayment) of other New Zealand dollar borrowings 3,055 (642) 2,249 1,814 2,393 1,898 2,140
Dividends paid to minority interests2 (541) (532) (518) (524) (524) (527) (531)
Net cash flows from financing activities 2,454 (3,898) (3,731) 5,272 2,430 9,839 (846)
Net movement in cash (820) (1,094) 2,967 (807) (63) (246) (187)
Opening cash balance 18,732 18,068 19,340 22,214 21,412 21,348 21,101
Foreign-exchange gains/(losses) on opening cash 1,428 2 (93) 5 (1) (1) 4
Closing cash balance 19,340 16,976 22,214 21,412 21,348 21,101 20,918
  1. Further information on the proceeds and repayments of government bonds is available in note 16.
  2. Excludes transactions with ACC and NZS Fund.

The accompanying notes and accounting policies are an integral part of these Statements.

Forecast Statement of Cash Flows (continued)
for the years ending 30 June

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Reconciliation Between the Net Cash Flows from Operations and the Operating Balance              
Net Cash Flows from Operations 10,884 8,891 8,833 8,581 9,630 12,733 13,929
Items included in the operating balance but not in net cash flows from operations              
Gains/(losses)              
Net gains/(losses) on financial instruments 5,331 2,887 1,445 3,215 3,589 4,068 4,508
Net gains/(losses) on non-financial instruments (2,802) (83) (5,340) (71) (63) (61) (61)
Minority interest share of net gains/(losses) (87) (17) (76) 3 (1) (1) (1)
Total gains/(losses) 2,442 2,787 (3,971) 3,147 3,525 4,006 4,446
Other Non-cash Items in Operating Balance              
Depreciation (4,275) (4,840) (4,972) (5,218) (5,236) (5,310) (5,396)
Amortisation (906) (729) (751) (789) (805) (807) (795)
Cost of concessionary lending (704) (762) (902) (1,072) (808) (764) (797)
Impairment of financial assets (excluding receivables) 105 (16) 158 (21) (24) (26) (27)
Decrease/(increase) in defined benefit retirement plan liabilities 568 592 594 582 604 601 584
Decrease/(increase) in insurance liabilities (628) (623) (824) (842) (1,452) (1,614) (1,733)
Other 529 264 (532) (636) (671) (698) (372)
Total other non-cash Items (5,311) (6,114) (7,229) (7,996) (8,392) (8,618) (8,536)
Movements in Working Capital              
Increase/(decrease) in receivables 1,614 1,270 1,163 758 1,227 1,411 2,094
Increase/(decrease) in accrued interest 265 485 53 218 176 111 248
Increase/(decrease) in inventories 177 (23) 75 334 155 (57) (61)
Increase/(decrease) in prepayments (8) (7) 67 12 3 16 1
Decrease/(increase) in deferred revenue (200) (108) 39 (40) (46) (32) (38)
Decrease/(increase) in payables/provisions (1,467) (408) 686 (334) (362) (598) (1,193)
Total movements in working capital 381 1,209 2,083 948 1,153 851 1,051
Operating balance (excluding minority interests) 8,396 6,773 (284) 4,680 5,916 8,972 10,890

The accompanying notes and accounting policies are an integral part of these Statements.

Forecast Statement of Financial Position
as at 30 June

  Note 2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Assets                
Cash and cash equivalents 8 19,340 16,976 22,214 21,412 21,348 21,101 20,918
Receivables 8 21,385 20,770 21,622 22,046 22,723 23,560 25,024
Marketable securities, deposits and derivatives in gain 8 51,117 42,630 38,533 39,395 38,931 48,988 49,076
Share investments 8 36,256 39,344 39,267 42,584 46,858 51,720 56,859
Advances1 8 29,422 30,479 32,131 33,612 35,044 36,053 37,094
Inventory   1,344 1,036 1,418 1,752 1,907 1,850 1,789
Other assets   2,817 2,637 2,914 2,972 2,968 2,984 3,056
Property, plant and equipment 10 159,018 155,867 164,316 169,639 172,470 174,866 176,597
Equity accounted investments2   15,416 15,384 15,729 16,414 17,006 17,577 18,223
Intangible assets and goodwill   3,817 3,980 4,026 4,376 4,525 4,473 4,390
Forecast for new capital spending 6 1,452 458 924 1,893 3,368 5,039
Top-down capital adjustment   (1,085) (1,250) (2,200) (2,750) (3,000) (3,150)
Total assets   339,932 329,470 341,378 352,926 362,923 383,540 394,915
Liabilities                
Issued currency   6,375 6,636 6,609 6,807 7,011 7,222 7,438
Payables 12 14,422 13,484 13,726 13,892 14,153 14,592 15,232
Deferred revenue   2,424 2,414 2,384 2,428 2,477 2,502 2,539
Borrowings   115,652 112,890 112,057 118,125 121,215 131,309 130,582
Insurance liabilities 5 45,294 44,732 49,794 50,637 52,089 53,703 55,437
Retirement plan liabilities 13 10,991 9,987 11,414 10,832 10,228 9,627 9,043
Provisions 14 9,137 8,473 9,228 9,457 9,069 8,882 8,039
Total liabilities   204,295 198,616 205,212 212,178 216,242 227,837 228,310
Total assets less total liabilities   135,637 130,854 136,166 140,748 146,681 155,703 166,605
Net Worth                
Taxpayers' funds1   34,841 40,830 35,205 39,966 46,032 55,136 66,161
Property, plant and equipment revaluation reserve   94,750 84,089 94,686 94,640 94,562 94,514 94,477
Other reserves   53 75 108 124 153 183 187
Total net worth attributable to the Crown   129,644 124,994 129,999 134,730 140,747 149,833 160,825
Net worth attributable to minority interest   5,993 5,860 6,167 6,018 5,934 5,870 5,780
Total net worth 15 135,637 130,854 136,166 140,748 146,681 155,703 166,605
  1. Refer to page 112 for the impacts of the adoption of NZ PBE IFRS 9: Financial Instruments.
  2. Equity accounted investments include tertiary education institutions and City Rail Link Limited.

The accompanying notes and accounting policies are an integral part of these Statements.

Forecast Statement of Borrowings
as at 30 June

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Borrowings              
Government bonds 62,393 59,505 58,701 62,378 62,647 70,736 67,772
Treasury bills 4,114 1,937 3,312 2,964 4,006 4,005 2,959
Government retail stock 182 183 177 177 177 177 178
Settlement deposits with Reserve Bank 7,603 7,063 6,713 6,713 6,713 6,713 6,713
Derivatives in loss 5,067 2,694 2,784 2,344 2,110 1,970 1,856
Finance lease liabilities 1,318 2,351 2,537 2,539 2,238 2,135 2,478
Other borrowings 34,975 39,157 37,833 41,010 43,324 45,573 48,626
Total borrowings 115,652 112,890 112,057 118,125 121,215 131,309 130,582
Sovereign-guaranteed debt 83,230 77,510 76,759 80,129 81,493 89,756 85,865
Non sovereign-guaranteed debt 32,422 35,380 35,298 37,996 39,722 41,553 44,717
Total borrowings 115,652 112,890 112,057 118,125 121,215 131,309 130,582
Net Debt:              
Core Crown borrowings1 98,295 91,655 91,725 95,319 96,941 105,290 101,424
Add back NZS Fund holdings of sovereign-issued debt and NZS Fund borrowings (2,858) (2,284) (2,679) (2,715) (2,737) (2,756) (2,765)
Gross sovereign-issued debt2 95,437 89,371 89,046 92,604 94,204 102,534 98,659
Less core Crown financial assets3 88,226 79,453 83,889 87,433 90,694 104,848 109,147
Net core Crown debt (incl. NZS Fund)4 7,211 9,918 5,157 5,171 3,510 (2,314) (10,488)
Add back NZS Fund holdings of core Crown financial assets and NZS Fund financial assets5 38,035 42,302 41,943 46,011 51,871 58,417 65,368
Net core Crown debt (excl. NZS Fund) 45,246 52,220 47,100 51,182 55,381 56,103 54,880
Add back core Crown advances 12,249 11,984 13,199 13,513 13,845 13,758 13,575
Net core Crown debt (excl. NZS Fund and advances)6 57,495 64,204 60,299 64,695 69,226 69,861 68,455
Gross Debt:              
Gross sovereign-issued debt2 95,437 89,371 89,046 92,604 94,204 102,534 98,659
Less Reserve Bank settlement cash and Reserve Bank bills (8,984) (9,118) (7,359) (7,359) (7,359) (7,359) (7,359)
Add back changes to government borrowing owing to settlement cash7 1,600 1,600 1,600 1,600 1,600 1,600 1,600
Gross sovereign-issued debt excluding Reserve Bank settlement cash and Reserve Bank bills4 88,053 81,853 83,287 86,845 88,445 96,775 92,900
Notes on borrowings

Total borrowings can be split into sovereign-guaranteed and non-sovereign-guaranteed debt. This split reflects the fact that borrowings by SOEs and Crown entities are not explicitly guaranteed by the Crown. No debt of SOEs and Crown entities is currently guaranteed by the Crown.

  1. Core Crown borrowings in this instance include 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 any government stock held by the other Crown reporting entities.
  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 creditworthiness 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 government borrowing programme. 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
2019
$m
As at
30 June
2018
$m
Capital Commitments    
State highways 4,101 4,410
Specialist military equipment 1,913 377
Land and buildings 4,446 3,016
Other property, plant and equipment 1,725 2,028
Other capital commitments 884 398
Tertiary education institutions 752 752
Total capital commitments 13,821 10,981
Operating Commitments    
Non-cancellable accommodation leases 3,636 3,708
Other non-cancellable leases 2,747 2,879
Tertiary education institutions 649 649
Total operating commitments 7,032 7,236
Total commitments 20,853 18,217
Total Commitments by Segment1    
Core Crown 9,021 5,885
Crown entities 7,985 7,980
State-owned Enterprises 4,022 4,526
Inter-segment eliminations (175) (174)
Total commitments 20,853 18,217

The accompanying notes and accounting policies are an integral part of these Statements.

Statement of Actual Contingent Liabilities and Assets

  As at
31 March
2019
$m
As at
30 June
2018
$m
Quantifiable Contingent Liabilities    
Uncalled capital 8,170 8,330
Guarantees and indemnities 197 224
Legal proceedings and disputes 308 332
Other contingent liabilities 670 514
Total quantifiable contingent liabilities 9,345 9,400
Total Quantifiable Contingent Liabilities by Segment1    
Core Crown 9,227 9,297
Crown entities 57 17
State-owned Enterprises 160 203
Inter-segment eliminations (99) (117)
Total quantifiable contingent liabilities 9,345 9,400
Quantifiable Contingent Assets by Segment    
Core Crown 136 133
Crown entities 7
State-owned Enterprises
Total quantifiable contingent assets 143 133

More information on contingent liabilities (quantified and unquantified) is outlined in the Specific Fiscal Risks chapter.

  1. 30 June 2018 splits by segment have been restated to correctly show inter-segment eliminations.

The accompanying notes and accounting policies are an integral part of these Statements.

Notes to the Forecast Financial Statements#

NOTE 1: Sovereign Revenue (Accrual)

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Taxation Revenue (accrual)              
Individuals              
Source deductions 30,721 32,248 32,683 34,731 36,960 39,199 41,587
Other persons 6,819 6,968 6,782 7,149 7,506 7,918 8,322
Refunds (2,102) (1,764) (2,614) (1,937) (1,688) (1,923) (2,004)
Fringe benefit tax 559 572 558 585 616 646 677
Total individuals 35,997 38,024 37,409 40,528 43,394 45,840 48,582
Corporate Tax              
Gross companies tax 13,022 13,301 14,376 14,074 14,909 15,565 16,377
Refunds (157) (207) (196) (218) (241) (271) (277)
Non-resident withholding tax 627 669 655 648 676 720 751
Foreign-source dividend w/holding payments 3
Total corporate tax 13,495 13,763 14,835 14,504 15,344 16,014 16,851
Other Direct Income Tax              
Resident w/holding tax on interest income 1,531 1,737 1,613 1,675 1,910 2,348 2,703
Resident w/holding tax on dividend income 753 769 743 796 849 892 932
Total other direct income tax 2,284 2,506 2,356 2,471 2,759 3,240 3,635
Total direct income tax 51,776 54,293 54,600 57,503 61,497 65,094 69,068
Goods and Services Tax              
Gross goods and services tax 33,899 35,339 35,721 37,696 39,701 41,535 43,406
Refunds (13,086) (13,370) (13,745) (14,334) (14,809) (15,277) (15,812)
Total goods and services tax 20,813 21,969 21,976 23,362 24,892 26,258 27,594
Other Indirect Taxation              
Road user charges 1,551 1,500 1,655 1,799 1,904 1,972 2,019
Petroleum fuels excise – domestic production 1,057 1,259 1,184 1,332 1,393 1,402 1,411
Alcohol excise – domestic production 699 737 725 748 771 795 819
Tobacco excise – domestic production 400 356 477 430 430 419 418
Petroleum fuels excise – imports1 841 710 792 751 786 790 796
Alcohol excise – imports1 318 316 341 352 363 374 385
Tobacco excise – imports1 1,407 1,385 1,482 1,539 1,545 1,503 1,500
Other customs duty 172 172 177 177 177 177 177
Gaming duties 246 239 227 230 230 228 231
Motor vehicle fees 227 225 236 228 232 237 240
Approved issuer levy and cheque duty 63 50 58 65 65 69 65
Energy resources levies 26 30 27 25 25 25 24
Total other indirect taxation 7,007 6,979 7,381 7,676 7,921 7,991 8,085
Total indirect taxation 27,820 28,948 29,357 31,038 32,813 34,249 35,679
Total taxation revenue 79,596 83,241 83,957 88,541 94,310 99,343 104,747
Other Sovereign Revenue (accrual)              
ACC levies 2,643 2,874 2,851 2,938 3,072 3,326 3,492
Fire and Emergency levies 568 581 573 588 604 616 628
EQC levies 309 384 387 440 489 494 499
Child support and working for families penalties 231 227 225 225 219 215 212
Court fines 118 96 107 104 103 111 103
Other miscellaneous items 1,354 1,471 1,684 1,732 1,746 1,771 1,797
Total other sovereign revenue 5,223 5,633 5,827 6,027 6,233 6,533 6,731
Total sovereign revenue 84,819 88,874 89,784 94,568 100,543 105,876 111,478
  1. Customs excise-equivalent duty.

NOTE 1 (continued):  Sovereign Receipts (Cash)

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Taxation Receipts (cash)              
Individuals              
Source deductions 30,477 32,079 32,501 34,537 36,754 38,981 41,352
Other persons 7,206 7,257 7,217 7,092 7,472 7,914 8,343
Refunds (2,532) (2,577) (2,535) (2,308) (2,226) (2,345) (2,454)
Fringe benefit tax 542 572 558 585 616 646 677
Total individuals 35,693 37,331 37,741 39,906 42,616 45,196 47,918
Corporate Tax              
Gross companies tax 12,979 13,509 13,604 14,440 15,400 16,237 17,015
Refunds (549) (638) (672) (623) (785) (909) (1,145)
Non-resident withholding tax 591 669 639 648 676 720 751
Foreign-source dividend w/holding payments
Total corporate tax 13,021 13,540 13,571 14,465 15,291 16,048 16,621
Other Direct Income Tax              
Resident w/holding tax on interest income 1,576 1,737 1,613 1,675 1,910 2,348 2,703
Resident w/holding tax on dividend income 731 769 743 796 849 892 932
Total other direct income tax 2,307 2,506 2,356 2,471 2,759 3,240 3,635
Total direct income tax 51,021 53,377 53,668 56,842 60,666 64,484 68,174
Goods and Services Tax              
Gross goods and services tax 33,145 34,844 35,208 37,212 39,208 41,047 42,916
Refunds (12,633) (13,210) (13,585) (14,174) (14,649) (15,117) (15,652)
Total goods and services tax 20,512 21,634 21,623 23,038 24,559 25,930 27,264
Other Indirect Taxation              
Road user charges 1,550 1,500 1,655 1,799 1,904 1,972 2,019
Petroleum fuels excise – domestic production 1,075 1,259 1,184 1,332 1,393 1,402 1,411
Alcohol excise – domestic production 694 737 725 748 771 795 819
Tobacco excise – domestic production 411 356 477 430 430 419 418
Customs duty 2,764 2,556 2,772 2,830 2,866 2,846 2,857
Gaming duties 232 239 227 230 230 228 231
Motor vehicle fees 227 225 236 228 232 237 240
Approved issuer levy and cheque duty 54 50 28 65 65 69 65
Energy resources levies 26 30 27 25 25 25 24
Total other indirect taxation 7,033 6,952 7,331 7,687 7,916 7,993 8,084
Total indirect taxation 27,545 28,586 28,954 30,725 32,475 33,923 35,348
Total taxation receipts 78,566 81,963 82,622 87,567 93,141 98,407 103,522
Other Sovereign Receipts (cash)              
ACC levies 2,844 2,731 2,873 2,823 3,035 3,331 3,458
Fire and Emergency levies 527 581 570 585 600 613 626
EQC levies 337 386 387 417 488 493 498
Child support and working for families penalties 203 209 216 217 211 207 204
Court fines 127 119 107 118 95 103 95
Other miscellaneous items 556 684 707 667 671 674 670
Total other sovereign receipts 4,594 4,710 4,860 4,827 5,100 5,421 5,551
Total sovereign receipts 83,160 86,673 87,482 92,394 98,241 103,828 109,073

NOTE 2:  Investment Revenue/(Expenditure)

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Interest revenue 2,798 2,966 2,694 2,748 2,916 3,014 3,304
Interest Expenses              
Interest on financial liabilities 4,112 4,009 3,963 3,884 4,105 4,075 4,291
Interest unwind on provisions 39 36 24 22 31 40 61
Total interest expenses 4,151 4,045 3,987 3,906 4,136 4,115 4,352
Net interest revenue/(expense) (1,353) (1,079) (1,293) (1,158) (1,220) (1,101) (1,048)
Dividend revenue 877 951 990 1,040 1,110 1,198 1,296
Gains and losses on financial instruments 5,331 2,887 1,445 3,215 3,589 4,068 4,508
Total investment revenue/(expenditure) 4,855 2,759 1,142 3,097 3,479 4,165 4,756

NOTE 3:  Transfer Payments and Subsidies

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
New Zealand superannuation 13,699 14,539 14,562 15,488 16,384 17,409 18,468
Family tax credit 1,639 2,628 2,271 2,195 2,166 2,175 2,130
Jobseeker support and emergency benefit 1,697 1,712 1,854 1,976 2,002 2,030 2,067
Supported living payment 1,541 1,555 1,556 1,589 1,621 1,652 1,676
Accommodation assistance 1,204 1,508 1,641 1,810 1,865 1,904 1,942
Sole parent support 1,117 1,084 1,116 1,175 1,234 1,272 1,311
Income related rent subsidy1 19 110 27 84 135 189 195
KiwiSaver subsidies 897 966 892 915 957 995 1,032
Other working for families tax credits 556 560 543 536 534 535 526
Official development assistance 643 693 697 740 783 822 860
Student allowances 511 581 583 585 594 613 632
Winter energy payment 443 441 458 467 474 482
Best start 80 52 231 373 451 474
Disability assistance 379 379 386 391 387 385 386
Hardship assistance 355 268 299 346 369 390 409
Orphan's/unsupported child's benefit 165 218 225 247 266 286 305
Other social assistance benefits 944 1,070 1,047 1,028 1,089 1,097 1,111
Total transfer payments and subsidies 25,366 28,394 28,192 29,794 31,226 32,679 34,006

NOTE 4:  Other Operating Expenses

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Grants and subsidies 5,436 6,137 6,130 7,545 6,944 6,715 6,872
Rental and leasing costs 1,363 1,378 1,467 1,429 1,426 1,440 1,435
Amortisation and impairment of intangible assets 906 729 751 789 805 807 795
Impairment of financial assets 590 800 692 798 800 801 803
Cost of concessionary lending 704 762 902 1,072 808 764 797
Lottery prize payments 686 710 651 726 751 787 794
Inventory expenses2 1,568 1,664 1,593 1,824 2,321 2,413 2,327
Other operating expenses2 30,361 32,796 33,506 34,826 35,351 34,100 34,290
Total other operating expenses 41,614 44,976 45,692 49,009 49,206 47,827 48,113
  1. The 2019 Previous Budget comparator for the income related rent subsidy has been restated to eliminate the transactions between government reporting entities.
  2. Clinical supplies has now been reclassified from other operating expenses to inventory expenses resulting in a restatement of the 2019 Previous Budget comparator for these two lines.

NOTE 5:  Insurance

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Insurance expense by entity              
ACC 4,363 4,837 5,012 5,478 5,553 5,775 6,017
EQC 514 76 207 95 218 258 269
Southern Response (28) (46) (19) (42)
Other (incl. inter-segment eliminations) 69 10 74 16 17 18 18
Total insurance expenses 4,918 4,877 5,274 5,547 5,788 6,051 6,304
Insurance liability by entity              
ACC 43,314 44,285 48,441 50,083 51,724 53,359 55,089
EQC 1,453 411 986 481 292 272 274
Southern Response 401 186
Other (incl. inter-segment eliminations) 126 36 181 73 73 72 74
Total insurance liabilities 45,294 44,732 49,794 50,637 52,089 53,703 55,437
ACC liability
Calculation information

Taylor Fry has prepared an independent actuarial estimate of the ACC outstanding claims liability as at 31 December 2018. 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 assumptions underpinning this valuation form the basis of the five-year forecast of the outstanding claims liability.

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 yield curve for New Zealand Government bonds. For these forecast statements, the claims liability has been updated for the latest discount rates as at 28 February 2019. The equivalent single effective discount rate, taking into account ACC's projected future cash flow patterns, is 2.97% and allows for a long-term discount rate of 4.75% from 2065.

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

ACC has available to it a portfolio of assets that offset the claims liability. The assets below (less cross-holdings of NZ Government stock) are included as assets in the Statement of Financial Position.

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Gross ACC Liability              
Opening gross liability 40,288 42,725 43,314 48,441 50,083 51,724 53,359
Net change 3,026 1,560 5,127 1,642 1,641 1,635 1,730
Closing gross liability 43,314 44,285 48,441 50,083 51,724 53,359 55,089
Less Net Assets Available to ACC              
Opening net asset value 39,071 41,053 41,958 43,998 44,648 45,375 46,126
Net change 2,887 1,174 2,040 650 727 751 739
Closing net asset value 41,958 42,227 43,998 44,648 45,375 46,126 46,865
Net ACC Reserves (Net Liability)              
Opening reserves position (1,217) (1,672) (1,356) (4,443) (5,435) (6,349) (7,233)
Net change (139) (386) (3,087) (992) (914) (884) (991)
Closing reserves position (net liability)/net asset (1,356) (2,058) (4,443) (5,435) (6,349) (7,233) (8,224)

NOTE 6:  Forecast New Spending and Top-down Expense Adjustment

  2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Forecast New Operating Spending          
Unallocated contingencies 265 1,266 1,540 1,667 1,621
Forecast new spending for Budget 2020 2,735 2,897 2,897
Forecast new spending for Budget 2021 2,400 2,400
Forecast new spending for Budget 2022 2,400
Total forecast new operating spending 265 1,266 4,275 6,964 9,318
Operating top-down adjustment (800) (1,400) (500) (500) (500)

Unallocated contingencies represent expenses included in Budget 2019 and previous Budgets that have yet to be allocated to departments. Forecast new spending indicates the expected spending increases from future Budgets.

The forecast for new operating spending for Budget 2020 is $3.0 billion. Some of this allowance has been pre-committed as at the forecast finalisation date of 8 May 2019, with only the unallocated portion of the allowance included in this note.

  2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Post-2023
Forecast
$m
Total
Forecast
$m
Forecast New Capital Spending (annual)              
Unallocated contingencies 458 393 385 379 356 1,274 3,245
Forecast new spending for Budgets 2020 - 2022 73 584 1,096 1,315 1,315 4,383
Total forecast new capital spending 458 466 969 1,475 1,671 2,589 7,628
Forecast new capital spending (cumulative) 458 924 1,893 3,368 5,039    
Capital top-down adjustment (cumulative) (1,250) (2,200) (2,750) (3,000) (3,150)    

Unallocated contingencies represent capital spending from Budget 2019 and previous Budgets that has yet to be allocated to departments. Forecast new spending indicates the expected capital spending increases from future Budgets.

The forecast for new capital spending for Budget 2019 to Budget 2022 is $14.8 billion. As at the forecast finalisation date of 8 May 2019, $10.4 billion of funding has been allocated, leaving $4.4 billion of funding for future capital initiatives over the next three Budgets.

NOTE 7:  Net Gains and Losses on Non-Financial Instruments

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Actuarial gains/(losses) on ACC outstanding claims (1,881) (3,676)
Actuarial gains/(losses) on GSF liability (553) (1,017)
Gains/(losses) on the Emissions Trading Scheme (462) (558)
Other 94 (83) (89) (71) (63) (61) (61)
Net gains/(losses) on non-financial instruments (2,802) (83) (5,340) (71) (63) (61) (61)

NOTE 8:  Financial Assets (including receivables)

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Cash and cash equivalents 19,340 16,976 22,214 21,412 21,348 21,101 20,918
Tax receivables 11,559 11,148 12,181 12,536 13,052 13,341 13,894
Trade and other receivables 9,826 9,622 9,441 9,510 9,671 10,219 11,130
Student loans (refer note 9) 9,301 9,754 10,085 9,884 9,667 9,445 9,224
Kiwibank mortgages 18,284 19,502 19,946 21,099 22,262 23,362 24,562
Long-term deposits 5,379 4,184 3,496 3,419 3,322 3,154 3,134
IMF financial assets 2,053 1,891 2,334 2,334 2,334 2,334 2,334
Other advances 1,837 1,223 2,100 2,629 3,115 3,246 3,308
Share investments 36,256 39,344 39,267 42,584 46,858 51,720 56,859
Derivatives in gain 3,153 2,922 3,882 3,062 3,102 3,041 2,973
Other marketable securities 40,532 33,633 28,821 30,580 30,173 40,459 40,635
Total financial assets (including receivables) 157,520 150,199 153,767 159,049 164,904 181,422 188,971
Financial Assets by Entity              
The Treasury 23,998 11,682 16,608 15,729 12,101 19,361 16,579
Reserve Bank of New Zealand 22,040 21,858 19,096 19,370 19,553 19,773 20,024
NZS Fund 40,700 43,953 43,984 47,789 53,078 59,017 65,484
Other core Crown 26,738 25,740 28,490 28,846 29,293 29,342 29,016
Intra-segment eliminations (9,222) (9,033) (8,312) (8,054) (6,914) (6,318) (5,488)
Total core Crown segment 104,254 94,200 99,866 103,680 107,111 121,175 125,615
ACC portfolio 42,679 43,480 44,661 45,169 45,902 46,666 47,432
EQC portfolio 484 176 498 244 252 393 552
Other Crown entities 11,195 9,474 9,811 9,862 10,034 10,572 11,929
Intra-segment eliminations (3,056) (2,238) (2,393) (2,361) (2,058) (2,011) (2,049)
Total Crown entities segment 51,302 50,892 52,577 52,914 54,130 55,620 57,864
Total state-owned enterprises segment 25,287 26,405 26,935 28,102 29,454 30,746 31,886
Inter-segment eliminations (23,323) (21,298) (25,611) (25,647) (25,791) (26,119) (26,394)
Total financial assets (including receivables) 157,520 150,199 153,767 159,049 164,904 181,422 188,971

NOTE 9:  Student Loans

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Nominal value (including accrued interest) 15,869 15,745 15,869 15,842 15,797 15,758 15,731
Opening book value 9,197 9,317 9,301 10,085 9,884 9,667 9,445
Impacts of adoption of NZ PBE IFRS 91 537 628
Adjusted opening book value 9,197 9,854 9,929 10,085 9,884 9,667 9,445
Net new lending (excluding fees) 1,300 1,366 1,373 1,382 1,411 1,441 1,474
New lending - establishment fee 36 9 46 43 41 40 39
Less initial write-down to fair value (594) (610) (572) (576) (592) (612) (635)
Repayments made during the year (1,348) (1,449) (1,447) (1,465) (1,480) (1,496) (1,517)
Interest unwind 604 584 396 415 403 405 418
Gains/(losses) on student loans 192
Impairment 106 168
Closing book value 9,301 9,754 10,085 9,884 9,667 9,445 9,224

NOTE 10:  Property, Plant and Equipment

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Net Carrying Value2              
By class of asset              
Land 52,693 51,208 53,067 53,408 53,866 54,246 54,312
Buildings 37,179 36,805 39,343 40,992 41,883 42,527 43,374
State highways 31,702 28,137 33,507 35,190 35,615 36,502 37,210
Electricity generation assets 15,878 15,601 15,589 15,410 15,158 14,874 14,616
Electricity distribution network (cost) 4,097 3,936 4,027 4,065 4,105 4,189 4,270
Aircraft (excluding military) 4,686 5,069 5,269 5,550 5,660 5,975 6,763
Specialist military equipment 3,184 3,316 3,426 4,171 4,891 5,111 5,083
Specified cultural and heritage assets 3,138 3,128 3,151 3,167 3,178 3,190 3,203
Rail network 1,188 1,260 1,455 2,131 2,538 2,652 2,733
Other plant and equipment (cost) 5,273 7,407 5,482 5,555 5,576 5,600 5,033
Total property, plant and equipment 159,018 155,867 164,316 169,639 172,470 174,866 176,597
Land breakdown by usage              
Housing 18,301 18,367 18,554 18,759 18,939 19,110 19,271
State highway corridor land 12,351 10,842 12,316 12,256 12,206 12,166 12,126
Conservation land 6,063 5,712 6,239 6,242 6,244 6,245 6,247
Rail network 3,522 3,468 3,497 3,482 3,479 3,477 3,475
Schools 5,709 5,766 5,781 5,896 5,988 6,087 6,184
Commercial (SOEs) excluding Rail 1,252 1,332 1,282 1,316 1,349 1,388 1,427
Other 5,495 5,721 5,398 5,457 5,661 5,773 5,582
Total land 52,693 51,208 53,067 53,408 53,866 54,246 54,312
  1. From 1 July 2018, the valuation of the Student Loans Scheme moved from an amortised cost approach to a fair value approach owing to PBE IFRS 9 being adopted in the 2018/19 financial year. The new valuation approach resulted in a one-off increase of $628 million to the value of the student loan asset. The 2019 Previous Budget comparator has been restated to include the amount previously estimated to be the one-off impact.
  2. Using a revaluation methodology unless otherwise stated.

NOTE 10:  Property, Plant and Equipment (continued)

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Schedule of Movements              
Cost or Valuation              
Opening balance 160,631 169,614 175,652 185,829 196,250 204,225 211,814
Additions1 8,912 11,333 10,935 11,205 9,795 8,467 8,811
Disposals (1,864) (581) (687) (848) (1,732) (868) (1,446)
Net revaluations 7,972    -  (32)    -     -     -     - 
Other2 1 5 (39) 64 (88) (10) (43)
Total cost or valuation 175,652 180,371 185,829 196,250 204,225 211,814 219,136
Accumulated Depreciation and Impairment              
Opening balance 16,081 19,791 16,634 21,513 26,611 31,755 36,948
Eliminated on disposal (1,490) (125) (71) (116) (85) (118) 197
Eliminated on revaluation (2,255)    -     -     -     -     -     - 
Impairment losses charged to operating balance 103    -     -     -     -     -     - 
Depreciation expense 4,275 4,840 4,972 5,218 5,236 5,310 5,396
Other2 (80) (2) (22) (4) (7) 1 (2)
Total accumulated depreciation and impairment 16,634 24,504 21,513 26,611 31,755 36,948 42,539
Total property, plant and equipment 159,018 155,867 164,316 169,639 172,470 174,866 176,597

NOTE 11:  NZ Superannuation Fund

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Revenue 935 937 999 1,047 1,133 1,248 1,396
Less current tax expense 241 807 675 877 975 1,094 1,230
Less other expenses 341 205 308 232 269 269 285
Add gains/(losses) 3,564 2,641 1,677 2,854 3,204 3,578 4,003
Operating balance 3,917 2,566 1,693 2,792 3,093 3,463 3,884
Opening net worth 34,466 38,865 39,053 41,811 46,093 51,345 57,276
Gross contribution from the Crown 500 1,000 1,000 1,460 2,120 2,420 2,553
Operating balance 3,917 2,566 1,693 2,792 3,093 3,463 3,884
Other movements in reserves 170 27 65 30 39 48 56
Closing net worth 39,053 42,458 41,811 46,093 51,345 57,276 63,769
Comprising:              
Financial assets 40,700 43,953 43,984 47,789 53,078 59,017 65,484
Financial liabilities (3,871) (3,465) (4,425) (4,159) (4,321) (4,437) (4,525)
Net other assets 2,224 1,970 2,252 2,463 2,588 2,696 2,810
Closing net worth 39,053 42,458 41,811 46,093 51,345 57,276 63,769

NOTE 12:  Payables

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Accounts payable 9,221 9,147 8,485 8,627 8,867 9,289 9,914
Taxes repayable 5,201 4,337 5,241 5,265 5,286 5,303 5,318
Total payables 14,422 13,484 13,726 13,892 14,153 14,592 15,232
  1. Additions do not include any purchases which may result from the allocation of the forecast for new capital spending (separately disclosed in the Statement of Financial Position).
  2. Other mainly includes transfers to/from other asset categories.

NOTE 13:  Retirement Plan Liabilities

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Government Superannuation Fund1 10,988 9,985 11,411 10,829 10,225 9,624 9,040
Other funds 3 2 3 3 3 3 3
Total retirement plan liabilities 10,991 9,987 11,414 10,832 10,228 9,627 9,043

The net liability of the Government Superannuation Fund (GSF) was calculated by GSF's actuary as at 31 January 2019. 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 was used to calculate the liability as at 31 January 2019, based on membership data as at 30 June 2018 with adjustments for cash flows to 31 January 2019. 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.

For these Forecast Financial Statements, the net GSF liability was updated for the latest discount rates derived from the market yield curve for New Zealand Government bonds as at 31 January 2019.

Other principal long-term financial assumptions were an inflation rate, as measured by the Consumers Price Index (CPI), of 1.52% for the 19 years to 30 June 2037, then increasing gradually each year to 2.0% in the year ended 30 June 2065 and remaining at 2.0% p.a. for all years after that. In addition an annual salary growth rate, before any promotional effects, of 2.5% (2.5% at 30 June 2018).

The 2018/19 projected increase in the net GSF liability is $423 million, reflecting a increase in the GSF liability of $252 million and an decrease in the GSF net assets of $171 million.

The overall increase in the GSF liability of $252 million includes an actuarial loss (which increases the liability) between 1 July 2018 and partly 31 January 2019, of $822 million, owing to movements in the discount and changes to some of the demographic assumptions, offset by movements in the CPI rates. The difference of $570 million is owing to the current service cost and interest unwind (increases the liability) which is more than offset by benefits to members (reducing the liability).

The decrease in the value of the net assets of GSF of $171 million includes a loss of $194 million reflecting the updated market value of assets at 31 January 2019. The balance of $23 million is the total of the expected investment returns and contributions received/receivable, offset by the benefits paid/payable to members.

The changes in the projected net GSF liability from 2018/19 onwards reflect the net of the expected current service cost, interest cost, investment returns and contributions.

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
GSF Liability              
Opening GSF liability 15,272 15,190 15,558 15,810 15,220 14,606 13,992
Net projected change 286 (574) 252 (590) (614) (614) (600)
Closing GSF liability 15,558 14,616 15,810 15,220 14,606 13,992 13,392
Less Net Assets Available to GSF              
Opening net asset value 4,268 4,613 4,570 4,399 4,391 4,381 4,368
Investment valuation changes 466 225 29 214 214 213 213
Contribution and other income less pension payments (164) (207) (200) (222) (224) (226) (229)
Closing net asset value 4,570 4,631 4,399 4,391 4,381 4,368 4,352
Net GSF Liability              
Opening unfunded liability 11,004 10,577 10,988 11,411 10,829 10,225 9,624
Net projected change (16) (592) 423 (582) (604) (601) (584)
Closing unfunded liability 10,988 9,985 11,411 10,829 10,225 9,624 9,040
  1. The amended accounting standard PBE IPSAS 39: Employee Benefits will be effective for periods beginning after 1 January 2019 meaning it is applicable for forecast years beginning 2019/20 onwards. The value of the net GSF liability would not change with this amendment, but there would be changes to the presentation of GSF annual movements in the Statement of Financial Performance. Some annual movements, such as the return on scheme assets above the risk-free interest rate, currently in OBEGAL and gains and losses, would move to 'other comprehensive revenue and expenses'. We estimate OBEGAL will be reduced by around $150 million in each forecast year, offset by a positive impact in 'other comprehensive revenue'.

This amended accounting standard may also lead to the Crown recognising a liability for veteran's support entitlement payments, if they qualify for that entitlement now. If this were the case, the future payments for those veterans would be valued in today's dollars (using actuarial assumptions and present value calculations) and recognised as a liability, rather than the current treatment, which is expensing the entitlements over time. We have not estimated the possible impact of this change.

NOTE 14:  Provisions

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Provision for employee entitlements 3,677 3,510 3,679 3,623 3,642 3,664 3,638
Provision for ETS credits 2,541 2,357 2,671 2,182 1,680 1,367 990
Provision for National Provident Fund guarantee 835 751 782 725 669 617 567
Other provisions 2,084 1,855 2,096 2,927 3,078 3,234 2,844
Total provisions 9,137 8,473 9,228 9,457 9,069 8,882 8,039
Provision for ETS credits

The Emissions Trading Scheme (ETS) was established to assist New Zealand in meeting its international climate change obligations and to reduce New Zealand's net emissions of greenhouse gases to below business-as-usual levels. The ETS creates a limited number of tradable New Zealand Units (NZUs) which the Government can allocate.

The allocation of NZUs creates a provision if allocated for free; the provision is reduced, and revenue recognised, as NZUs are surrendered to the Crown by emitters.

The prices for NZUs used to calculate the ETS provision are assumed to remain constant over the forecast period and are based on market prices during the last week of March 2019.

The ETS impact on the fiscal forecast is as follows:

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Revenue 669 784 965 1,055 1,064 1,086 1,115
Expenses (720) (521) (537) (566) (562) (773) (738)
Gains/(losses) (462)    -  (558)    -     -     -     - 
Operating balance (513) 263 (130) 489 502 313 377

NOTE 15: Changes in Net Worth

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Taxpayers' funds 34,841 40,830 35,205 39,966 46,032 55,136 66,161
Property, plant and equipment revaluation reserve 94,750 84,089 94,686 94,640 94,562 94,514 94,477
Investment revaluation reserve 70 99 86 86 86 86 86
Intangible asset reserve 1 2 1 1 1 1 1
Cash flow hedge reserve (57) 24 35 51 80 110 114
Foreign currency translation reserve 39 (50) (14) (14) (14) (14) (14)
Net worth attributable to minority interests 5,993 5,860 6,167 6,018 5,934 5,870 5,780
Total net worth 135,637 130,854 136,166 140,748 146,681 155,703 166,605
Taxpayers' funds              
Opening taxpayers' funds 26,456 33,477 34,841 35,205 39,966 46,032 55,136
Impacts of adoption of NZ PBE IFRS 91 537 628
Operating balance excluding minority interests 8,396 6,773 (284) 4,680 5,916 8,972 10,890
Government share offers in SOEs
Transfers from/(to) other reserves 12 71 26 71 126 108 108
Other movements (23) (28) (6) 10 24 24 27
Closing taxpayers' funds 34,841 40,830 35,205 39,966 46,032 55,136 66,161
Property, Plant and Equipment Revaluation Reserve              
Opening revaluation reserve 84,164 84,097 94,750 94,686 94,640 94,562 94,514
Net revaluations 10,668 (33)
Transfers from/(to) other reserves (12) (8) (31) (46) (78) (48) (37)
Net revaluations attributable to minority interests (70)
Closing property, plant and equipment revaluation reserve 94,750 84,089 94,686 94,640 94,562 94,514 94,477
  1. NZ PBE IFRS 9 was adopted in the 2018/19 financial year. The adoption has resulted in a one-off increase of $628 million to the value of the student loan asset impacting on taxpayers' funds - refer note 9 for further details of this one-off adjustment. The 2019 Previous Budget comparator has been restated to include the amount previously estimated to be the one-off impact.

NOTE 16:  Core Crown Residual Cash

  2018
Actual
$m
2019
Previous
Budget
$m
2019
Forecast
$m
2020
Forecast
$m
2021
Forecast
$m
2022
Forecast
$m
2023
Forecast
$m
Core Crown Cash Flows from Operations              
Tax receipts 80,079 83,525 83,238 89,427 94,865 100,283 105,574
Other sovereign receipts 900 952 982 941 915 923 906
Interest receipts 650 692 691 600 604 631 787
Sale of goods and services and other receipts 3,127 3,324 3,236 3,390 3,939 3,893 3,830
Transfer payments and subsidies (26,253) (29,308) (29,097) (31,065) (32,449) (33,915) (35,250)
Personnel and operating costs (47,740) (51,171) (52,146) (55,367) (56,580) (54,553) (54,625)
Interest payments (3,483) (3,442) (3,487) (3,137) (3,108) (2,914) (3,156)
Forecast for future new operating spending (760) (265) (1,266) (4,275) (6,964) (9,318)
Top-down expense adjustment 1,145 800 1,400 500 500 500
Net core Crown operating cash flows 7,280 4,957 3,952 4,923 4,411 7,884 9,248
Core Crown Capital Cash Flows              
Net purchase of physical assets (2,515) (3,229) (3,362) (3,703) (3,373) (2,592) (2,010)
Net increase in advances (92) (54) (94) (799) (561) (101) (13)
Net purchase of investments (2,827) (3,882) (3,073) (3,636) (2,190) (2,129) (1,986)
Contribution to NZS Fund (500) (1,000) (1,000) (1,460) (2,120) (2,420) (2,553)
Forecast for future new capital spending (1,267) (458) (466) (969) (1,475) (1,671)
Top-down capital adjustment 600 1,250 950 550 250 150
Net core Crown capital cash flows (5,934) (8,832) (6,737) (9,114) (8,663) (8,467) (8,083)
Residual cash (deficit)/surplus 1,346 (3,875) (2,785) (4,191) (4,252) (583) 1,165
The residual cash (deficit)/surplus is funded or invested as follows:              
Debt Programme Cash Flows              
Market:              
    Issue of government bonds 7,043 7,862 8,430 10,387 10,239 8,255 6,260
    Repayment of government bonds (6,828) (11,240) (11,974) (6,627) (9,889) (8,945)
    Net issue/(repayment) of short-term borrowing1 100 (2,000) (705) (345) 1,050 (1,050)
Total market debt cash flows 315 (5,378) (4,249) 3,415 1,400 8,255 (3,735)
Non-market:              
    Issue of government bonds
    Repayment of government bonds
    Net issue/(repayment) of short-term borrowing
Total non-market debt cash flows
Total debt programme cash flows 315 (5,378) (4,249) 3,415 1,400 8,255 (3,735)
Other Borrowing Cash Flows              
Net (repayment)/issue of other New Zealand dollar borrowing 2,190 (451) 643 (24) (30) (33) (34)
Net (repayment)/issue of foreign currency borrowing (865) 425 (2,235) 6 (5) (8) 2
Total other borrowing cash flows 1,325 (26) (1,592) (18) (35) (41) (32)
Investing Cash Flows              
Net sale/(purchase) of marketable securities and deposits (3,042) 9,082 10,178 591 2,676 (7,850) 2,374
Issues of circulating currency 396 196 233 198 204 210 217
Decrease/(increase) in cash (340) 1 (1,785) 5 7 9 11
Total investing cash flows (2,986) 9,279 8,626 794 2,887 (7,631) 2,602
Residual cash deficit/(surplus) funding/(investing) (1,346) 3,875 2,785 4,191 4,252 583 (1,165)
  1. Short-term borrowing consists of Treasury Bills and may include Euro-Commercial Paper.

Statement of Segments#

Statement of Financial Performance
for the year ended 30 June 2018

  Core Crown
2018
Actual
$m
Crown entities
2018
Actual
$m
State-owned
Enterprises
2018
Actual
$m
Inter-segment
eliminations
2018
Actual
$m
Total Crown
2018
Actual
$m
Revenue          
Taxation revenue 80,224 (628) 79,596
Other sovereign revenue 1,638 4,966 (1,381) 5,223
Revenue from core Crown funding 29,017 139 (29,156)
Sales of goods and services 1,598 2,269 14,911 (550) 18,228
Interest revenue 1,175 1,032 964 (373) 2,798
Other revenue 2,143 3,176 858 (2,049) 4,128
Total revenue (excluding gains) 86,778 40,460 16,872 (34,137) 109,973
Expenses          
Social assistance and official development assistance 26,237 (871) 25,366
Personnel expenses 7,249 13,546 2,935 (40) 23,690
Other operating expenses 43,535 22,729 11,725 (32,100) 45,889
Interest expenses 3,497 95 1,058 (499) 4,151
Insurance expenses 58 4,855 6 (1) 4,918
Total expenses (excluding losses) 80,576 41,225 15,724 (33,511) 104,014
Minority interest share of operating balance before gains/(losses) (2) (448) 25 (425)
Operating balance before gains/(losses) 6,200 (765) 700 (601) 5,534
Total gains/(losses) 2,806 342 132 (838) 2,442
Net surplus/(deficit) from associates and joint ventures 437 (51) 29 5 420
Operating balance 9,443 (474) 861 (1,434) 8,396
Expenses by functional classification          
Social security and welfare 25,999 5,628 (1,432) 30,195
Health 17,159 14,820 (15,233) 16,746
Education 13,629 11,089 (10,111) 14,607
Transport and communications 2,559 2,903 7,284 (2,806) 9,940
Other 17,733 6,690 7,382 (3,430) 28,375
Finance costs 3,497 95 1,058 (499) 4,151
Total expenses (excluding losses) 80,576 41,225 15,724 (33,511) 104,014

Statement of Financial Position
as at 30 June 2018

  Core Crown
2018
Actual
$m
Crown entities
2018
Actual
$m
State-owned
Enterprises
2018
Actual
$m
Inter-segment
eliminations
2018
Actual
$m
Total Crown
2018
Actual
$m
Assets          
Cash and cash equivalents 16,111 2,791 921 (483) 19,340
Receivables 16,088 5,796 1,887 (2,386) 21,385
Other financial assets 72,056 42,715 22,479 (20,455) 116,795
Property, plant and equipment 41,279 84,300 33,438 1 159,018
Equity accounted investments 45,838 12,698 250 (43,370) 15,416
Intangible assets and goodwill 1,593 664 1,580 (20) 3,817
Inventory and other assets 2,063 995 1,149 (46) 4,161
Total assets 195,028 149,959 61,704 (66,759) 339,932
Liabilities          
Borrowings 97,749 5,517 30,628 (18,242) 115,652
Other liabilities 34,758 53,974 8,517 (8,606) 88,643
Total liabilities 132,507 59,491 39,145 (26,848) 204,295
Total assets less total liabilities 62,521 90,468 22,559 (39,911) 135,637
Net worth          
Taxpayers' funds 37,460 37,310 4,756 (44,685) 34,841
Reserves 24,988 53,158 11,537 5,120 94,803
Net worth attributable to minority interest 73 6,266 (346) 5,993
Total net worth 62,521 90,468 22,559 (39,911) 135,637

Forecast Statement of Segments#

Statement of Financial Performance
for the year ended 30 June 2019

  Core Crown
2019
Forecast
$m
Crown entities
2019
Forecast
$m
State-owned
Enterprises
2019
Forecast
$m
Inter-segment
eliminations
2019
Forecast
$m
Total Crown
2019
Forecast
$m
Revenue          
Taxation revenue 84,650 (693) 83,957
Other sovereign revenue 1,963 5,399 (1,535) 5,827
Revenue from core Crown funding 30,940 191 (31,131)
Sales of goods and services 1,638 2,251 16,092 (595) 19,386
Interest revenue 1,098 1,054 987 (445) 2,694
Other revenue 2,250 3,591 867 (2,154) 4,554
Total revenue (excluding gains) 91,599 43,235 18,137 (36,553) 116,418
Expenses          
Social assistance and official development assistance 29,128 (936) 28,192
Personnel expenses 7,662 14,321 3,033 (39) 24,977
Other operating expenses 47,546 24,277 13,123 (34,282) 50,664
Interest expenses 3,434 78 1,041 (566) 3,987
Insurance expenses 65 5,204 5 5,274
Forecast for future new spending 265 265
Top-down adjustment (800) (800)
Total expenses (excluding losses) 87,300 43,880 17,202 (35,823) 112,559
Minority interest share of operating balance before gains/(losses) (414) 20 (394)
Operating balance before gains/(losses) 4,299 (645) 521 (710) 3,465
Total gains/(losses) 404 (2,385) 149 (2,139) (3,971)
Net surplus/(deficit) from associates and joint ventures 158 66 (5) 3 222
Operating balance 4,861 (2,964) 665 (2,846) (284)
Expenses by functional classification          
Social security and welfare 28,961 6,339 (1,523) 33,777
Health 18,277 15,726 (16,153) 17,850
Education 14,312 11,523 (10,600) 15,235
Transport and communications 3,212 3,559 7,826 (3,392) 11,205
Other 19,639 6,655 8,335 (3,589) 31,040
Finance costs 3,434 78 1,041 (566) 3,987
Forecast for future new spending 265 265
Top-down adjustment (800) (800)
Total expenses (excluding losses) 87,300 43,880 17,202 (35,823) 112,559

Statement of Financial Position
as at 30 June 2019

  Core Crown
2019
Forecast
$m
Crown entities
2019
Forecast
$m
State-owned
Enterprises
2019
Forecast
$m
Inter-segment
eliminations
2019
Forecast
$m
Total Crown
2019
Forecast
$m
Assets          
Cash and cash equivalents 19,802 2,016 776 (380) 22,214
Receivables 15,977 5,493 2,204 (2,052) 21,622
Other financial assets 64,087 45,068 23,955 (23,179) 109,931
Property, plant and equipment 42,677 87,878 33,762 (1) 164,316
Equity accounted investments 48,728 12,858 322 (46,179) 15,729
Intangible assets and goodwill 1,828 634 1,583 (19) 4,026
Other assets 2,165 1,062 1,144 (39) 4,332
Forecast for new capital spending 458 458
Capital top-down adjustment (1,250) (1,250)
Total assets 194,472 155,009 63,746 (71,849) 341,378
Liabilities          
Borrowings 91,722 6,838 32,418 (18,921) 112,057
Other liabilities 34,684 58,214 8,423 (8,166) 93,155
Total liabilities 126,406 65,052 40,841 (27,087) 205,212
Total assets less total liabilities 68,066 89,957 22,905 (44,762) 136,166
Net worth          
Taxpayers' funds 42,918 36,873 4,963 (49,549) 35,205
Reserves 24,964 53,084 11,639 5,107 94,794
Net worth attributable to minority interest 184 6,303 (320) 6,167
Total net worth 68,066 89,957 22,905 (44,762) 136,166

Statement of Financial Performance
for the year ended 30 June 2020

  Core Crown
2020
Forecast
$m
Crown entities
2020
Forecast
$m
State-owned
Enterprises
2020
Forecast
$m
Inter-segment
eliminations
2020
Forecast
$m
Total Crown
2020
Forecast
$m
Revenue          
Taxation revenue 89,245 (704) 88,541
Other sovereign revenue 2,000 5,560 (1,533) 6,027
Revenue from core Crown funding 31,979 143 (32,122)
Sales of goods and services 1,836 2,357 15,590 (666) 19,117
Interest revenue 1,060 1,003 1,130 (445) 2,748
Other revenue 2,286 3,496 885 (2,270) 4,397
Total revenue (excluding gains) 96,427 44,395 17,748 (37,740) 120,830
Expenses          
Social assistance and official development assistance 30,804 (1,010) 29,794
Personnel expenses 8,028 14,700 3,115 (41) 25,802
Other operating expenses 51,379 25,698 12,480 (35,330) 54,227
Interest expenses 3,179 97 1,163 (533) 3,906
Insurance expenses 6 5,535 6 5,547
Forecast for future new spending 1,266 1,266
Top-down adjustment (1,400) (1,400)
Total expenses (excluding losses) 93,262 46,030 16,764 (36,914) 119,142
Minority interest share of operating balance before gains/(losses) (395) 20 (375)
Operating balance before gains/(losses) 3,165 (1,635) 589 (806) 1,313
Total gains/(losses) 2,935 302 21 (111) 3,147
Net surplus/(deficit) from associates and joint ventures 140 74 3 3 220
Operating balance 6,240 (1,259) 613 (914) 4,680
Expenses by functional classification          
Social security and welfare 30,915 6,894 (1,626) 36,183
Health 19,198 16,554 (16,777) 18,975
Education 14,919 11,878 (10,929) 15,868
Transport and communications 3,103 3,496 7,931 (3,267) 11,263
Other 22,082 7,111 7,670 (3,782) 33,081
Finance costs 3,179 97 1,163 (533) 3,906
Forecast for future new spending 1,266 1,266
Top-down adjustment (1,400) (1,400)
Total expenses (excluding losses) 93,262 46,030 16,764 (36,914) 119,142

Statement of Financial Position
for the year ended 30 June 2020

  Core Crown
2020
Forecast
$m
Crown entities
2020
Forecast
$m
State-owned
Enterprises
2020
Forecast
$m
Inter-segment
eliminations
2020
Forecast
$m
Total Crown
2020
Forecast
$m
Assets          
Cash and cash equivalents 19,082 1,845 847 (362) 21,412
Receivables 16,246 5,423 2,254 (1,877) 22,046
Other financial assets 68,352 45,646 25,001 (23,408) 115,591
Property, plant and equipment 43,960 91,465 34,215 (1) 169,639
Equity accounted investments 52,783 13,054 315 (49,738) 16,414
Intangible assets and goodwill 1,996 708 1,692 (20) 4,376
Other assets 2,559 1,069 1,133 (37) 4,724
Forecast for new capital spending 924 924
Capital top-down adjustment (2,200) (2,200)
Total assets 203,702 159,210 65,457 (75,443) 352,926
Liabilities          
Borrowings 95,316 8,236 33,686 (19,113) 118,125
Other liabilities 34,041 59,376 8,565 (7,929) 94,053
Total liabilities 129,357 67,612 42,251 (27,042) 212,178
Total assets less total liabilities 74,345 91,598 23,206 (48,401) 140,748
Net worth          
Taxpayers' funds 49,158 38,586 5,415 (53,193) 39,966
Reserves 25,003 53,012 11,645 5,104 94,764
Net worth attributable to minority interest 184 6,146 (312) 6,018
Total net worth 74,345 91,598 23,206 (48,401) 140,748

Statement of Financial Performance
for the year ended 30 June 2021

  Core Crown
2021
Forecast
$m
Crown entities
2021
Forecast
$m
State-owned
Enterprises
2021
Forecast
$m
Inter-segment
eliminations
2021
Forecast
$m
Total Crown
2021
Forecast
$m
Revenue          
Taxation revenue 95,089 (779) 94,310
Other sovereign revenue 2,007 5,763 (1,537) 6,233
Revenue from core Crown funding 32,950 108 (33,058)
Sales of goods and services 2,339 2,356 15,963 (618) 20,040
Interest revenue 1,060 991 1,307 (442) 2,916
Other revenue 2,431 3,857 940 (2,357) 4,871
Total revenue (excluding gains) 102,926 45,917 18,318 (38,791) 128,370
Expenses          
Social assistance and official development assistance 32,292 (1,066) 31,226
Personnel expenses 8,139 15,123 3,232 (43) 26,451
Other operating expenses 51,505 26,501 12,686 (36,250) 54,442
Interest expenses 3,174 222 1,269 (529) 4,136
Insurance expenses 6 5,775 7 5,788
Forecast for future new spending 4,275 4,275
Top-down adjustment (500) (500)
Total expenses (excluding losses) 98,891 47,621 17,194 (37,888) 125,818
Minority interest share of operating balance before gains/(losses) (442) 21 (421)
Operating balance before gains/(losses) 4,035 (1,704) 682 (882) 2,131
Total gains/(losses) 3,289 332 21 (117) 3,525
Net surplus/(deficit) from associates and joint ventures 137 116 3 4 260
Operating balance 7,461 (1,256) 706 (995) 5,916
Expenses by functional classification          
Social security and welfare 32,360 6,982 (1,700) 37,642
Health 19,119 16,545 (16,728) 18,936
Education 15,318 12,146 (11,204) 16,260
Transport and communications 3,950 4,306 8,221 (4,164) 12,313
Other 24,369 7,420 7,704 (6,737) 32,756
Finance costs 222 1,269 2,645 4,136
Forecast for future new spending 4,275 4,275
Top-down adjustment (500) (500)
Total expenses (excluding losses) 98,891 47,621 17,194 (37,888) 125,818

Statement of Financial Position
as at 30 June 2021

  Core Crown
2021
Forecast
$m
Crown entities
2021
Forecast
$m
State-owned
Enterprises
2021
Forecast
$m
Inter-segment
eliminations
2021
Forecast
$m
Total Crown
2021
Forecast
$m
Assets          
Cash and cash equivalents 18,829 2,011 872 (364) 21,348
Receivables 16,419 5,853 2,302 (1,851) 22,723
Other financial assets 71,863 46,266 26,280 (23,576) 120,833
Property, plant and equipment 45,574 92,646 34,249 1 172,470
Equity accounted investments 54,974 13,217 322 (51,507) 17,006
Intangible assets and goodwill 2,139 707 1,700 (21) 4,525
Other assets 2,720 1,046 1,146 (37) 4,875
Forecast for new capital spending 1,893 1,893
Capital top-down adjustment (2,750) (2,750)
Total assets 211,661 161,746 66,871 (77,355) 362,923
Liabilities          
Borrowings 96,938 8,941 34,593 (19,257) 121,215
Other liabilities 32,905 61,196 8,686 (7,760) 95,027
Total liabilities 129,843 70,137 43,279 (27,017) 216,242
Total assets less total liabilities 81,818 91,609 23,592 (50,338) 146,681
Net worth          
Taxpayers' funds 56,580 38,723 5,876 (55,147) 46,032
Reserves 25,054 52,886 11,660 5,115 94,715
Net worth attributable to minority interest 184 6,056 (306) 5,934
Total net worth 81,818 91,609 23,592 (50,338) 146,681

Statement of Financial Performance
for the year ended 30 June 2022

  Core Crown
2022
Forecast
$m
Crown entities
2022
Forecast
$m
State-owned
Enterprises
2022
Forecast
$m
Inter-segment
eliminations
2022
Forecast
$m
Total Crown
2022
Forecast
$m
Revenue          
Taxation revenue 100,172 (829) 99,343
Other sovereign revenue 2,036 6,035 (1,538) 6,533
Revenue from core Crown funding 32,371 105 (32,476)
Sales of goods and services 2,291 2,415 16,255 (598) 20,363
Interest revenue 1,089 988 1,379 (442) 3,014
Other revenue 2,535 3,862 973 (2,423) 4,947
Total revenue (excluding gains) 108,123 45,671 18,712 (38,306) 134,200
Expenses          
Social assistance and official development assistance 33,798 (1,119) 32,679
Personnel expenses 8,047 15,289 3,334 (42) 26,628
Other operating expenses 50,330 25,714 12,819 (35,726) 53,137
Interest expenses 3,041 300 1,307 (533) 4,115
Insurance expenses 6 6,037 8 6,051
Forecast for future new spending 6,964 6,964
Top-down adjustment (500) (500)
Total expenses (excluding losses) 101,686 47,340 17,468 (37,420) 129,074
Minority interest share of operating balance before gains/(losses) (466) 23 (443)
Operating balance before gains/(losses) 6,437 (1,669) 778 (863) 4,683
Total gains/(losses) 3,761 351 21 (127) 4,006
Net surplus/(deficit) from associates and joint ventures 143 137 5 (2) 283
Operating balance 10,341 (1,181) 804 (992) 8,972
Expenses by functional classification          
Social security and welfare 33,726 7,216 (1,769) 39,173
Health 19,254 16,508 (16,722) 19,040
Education 15,447 12,137 (11,186) 16,398
Transport and communications 3,366 3,801 8,490 (3,627) 12,030
Other 23,429 7,378 7,671 (6,624) 31,854
Finance costs 300 1,307 2,508 4,115
Forecast for future new spending 6,964 6,964
Top-down adjustment (500) (500)
Total expenses (excluding losses) 101,686 47,340 17,468 (37,420) 129,074

Statement of Financial Position
as at 30 June 2022

  Core Crown
2022
Forecast
$m
Crown entities
2022
Forecast
$m
State-owned
Enterprises
2022
Forecast
$m
Inter-segment
eliminations
2022
Forecast
$m
Total Crown
2022
Forecast
$m
Assets          
Cash and cash equivalents 18,568 2,014 876 (357) 21,101
Receivables 16,329 6,720 2,357 (1,846) 23,560
Other financial assets 86,278 46,886 27,513 (23,916) 136,761
Property, plant and equipment 46,473 94,216 34,176 1 174,866
Equity accounted investments 57,094 13,366 328 (53,211) 17,577
Intangible assets and goodwill 2,097 695 1,700 (19) 4,473
Other assets 2,653 1,039 1,181 (39) 4,834
Forecast for new capital spending 3,368 3,368
Capital top-down adjustment (3,000) (3,000)
Total assets 229,860 164,936 68,131 (79,387) 383,540
Liabilities          
Borrowings 105,286 9,804 35,776 (19,557) 131,309
Other liabilities 32,355 63,034 8,782 (7,643) 96,528
Total liabilities 137,641 72,838 44,558 (27,200) 227,837
Total assets less total liabilities 92,219 92,098 23,573 (52,187) 155,703
Net worth          
Taxpayers' funds 66,921 39,324 5,910 (57,019) 55,136
Reserves 25,114 52,774 11,677 5,132 94,697
Net worth attributable to minority interest 184 5,986 (300) 5,870
Total net worth 92,219 92,098 23,573 (52,187) 155,703

Statement of Financial Performance
for the year ended 30 June 2023

  Core Crown
2023
Forecast
$m
Crown entities
2023
Forecast
$m
State-owned
Enterprises
2023
Forecast
$m
Inter-segment
eliminations
2023
Forecast
$m
Total Crown
2023
Forecast
$m
Revenue          
Taxation revenue 105,595 (848) 104,747
Other sovereign revenue 2,049 6,219 (1,537) 6,731
Revenue from core Crown funding 32,470 106 (32,576)
Sales of goods and services 2,238 2,423 16,485 (605) 20,541
Interest revenue 1,307 990 1,451 (444) 3,304
Other revenue 2,638 3,853 1,009 (2,432) 5,068
Total revenue (excluding gains) 113,827 45,955 19,051 (38,442) 140,391
Expenses          
Social assistance and official development assistance 35,128 (1,122) 34,006
Personnel expenses 8,080 15,341 3,439 (40) 26,820
Other operating expenses 50,539 25,778 13,013 (35,821) 53,509
Interest expenses 3,162 369 1,359 (538) 4,352
Insurance expenses 6 6,291 8 (1) 6,304
Forecast for future new spending 9,318 9,318
Top-down adjustment (500) (500)
Total expenses (excluding losses) 105,733 47,779 17,819 (37,522) 133,809
Minority interest share of operating balance before gains/(losses) (458) 22 (436)
Operating balance before gains/(losses) 8,094 (1,824) 774 (898) 6,146
Total gains/(losses) 4,188 386 6 (134) 4,446
Net surplus/(deficit) from associates and joint ventures 141 151 5 1 298
Operating balance 12,423 (1,287) 785 (1,031) 10,890
Expenses by functional classification          
Social security and welfare 34,959 7,492 (1,791) 40,660
Health 19,283 16,509 (16,720) 19,072
Education 15,640 12,202 (11,251) 16,591
Transport and communications 3,443 3,888 8,817 (3,709) 12,439
Other 23,590 7,319 7,643 (6,675) 31,877
Finance costs 369 1,359 2,624 4,352
Forecast for future new spending 9,318 9,318
Top-down adjustment (500) (500)
Total expenses (excluding losses) 105,733 47,779 17,819 (37,522) 133,809

Statement of Financial Position
as at 30 June 2023

  Core Crown
2023
Forecast
$m
Crown entities
2023
Forecast
$m
State-owned
Enterprises
2023
Forecast
$m
Inter-segment
eliminations
2023
Forecast
$m
Total Crown
2023
Forecast
$m
Assets          
Cash and cash equivalents 18,283 2,081 909 (355) 20,918
Receivables 16,469 7,950 2,442 (1,837) 25,024
Other financial assets 90,863 47,833 28,535 (24,202) 143,029
Property, plant and equipment 46,723 95,362 34,513 (1) 176,597
Equity accounted investments 59,091 13,518 400 (54,786) 18,223
Intangible assets and goodwill 2,051 655 1,704 (20) 4,390
Other assets 2,655 1,045 1,183 (38) 4,845
Forecast for new capital spending 5,039 5,039
Capital top-down adjustment (3,150) (3,150)
Total assets 238,024 168,444 69,686 (81,239) 394,915
Liabilities          
Borrowings 101,419 11,371 37,603 (19,811) 130,582
Other liabilities 31,892 64,680 8,635 (7,479) 97,728
Total liabilities 133,311 76,051 46,238 (27,290) 228,310
Total assets less total liabilities 104,713 92,393 23,448 (53,949) 166,605
Net worth          
Taxpayers' funds 79,343 39,728 5,878 (58,788) 66,161
Reserves 25,186 52,665 11,680 5,133 94,664
Net worth attributable to minority interest 184 5,890 (294) 5,780
Total net worth 104,713 92,393 23,448 (53,949) 166,605

Core Crown Expense Tables#

($millions) 2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Social security and welfare 23,026 23,523 24,081 25,294 25,999 28,961 30,915 32,360 33,726 34,959
Health 14,898 15,058 15,626 16,223 17,159 18,277 19,198 19,119 19,254 19,283
Education 12,300 12,879 13,158 13,281 13,629 14,312 14,919 15,318 15,447 15,640
Core government services 4,502 4,134 4,102 3,957 4,670 5,326 5,608 5,161 4,917 4,829
Law and order 3,463 3,515 3,648 3,882 4,184 4,757 4,890 4,885 4,927 5,050
Transport and communications 2,237 2,291 2,178 2,176 2,559 3,212 3,103 3,950 3,366 3,443
Economic and industrial services 2,058 2,228 2,107 2,544 2,732 3,028 4,328 3,576 2,901 3,068
Defence 1,811 1,961 2,026 2,146 2,251 2,418 2,541 2,573 2,539 2,498
Heritage, culture and recreation 842 778 787 850 850 913 996 929 920 902
Primary services 676 667 749 644 807 1,088 1,036 862 680 719
Housing and community development 347 320 558 539 552 711 897 1,396 1,464 1,335
Environmental protection 533 723 587 871 1,238 1,125 1,281 1,255 1,478 1,448
GSF pension expenses 282 358 271 217 150 159 164 146 150 167
Other 579 145 461 181 299 114 341 412 412 412
Finance costs 3,620 3,783 3,590 3,534 3,497 3,434 3,179 3,174 3,041 3,162
Forecast new operating spending  ..   ..   ..   ..   ..  265 1,266 4,275 6,964 9,318
Top-down expense adjustment  ..   ..   ..   ..   ..  ( 800) ( 1,400) ( 500) ( 500) (500)
Core Crown expenses 71,174 72,363 73,929 76,339 80,576 87,300 93,262 98,891 101,686 105,733

The classifications of the functions of the Government reflect current approved baselines. Forecast new operating spending is shown as a separate line item in the above analysis and will be allocated to functions of the Government once decisions are made in future Budgets.

Source: The Treasury

Table 6.1 - Social security and welfare expenses
($millions) 2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Welfare benefits (see below) 21,187 21,680 22,441 23,339 24,005 26,745 28,364 29,752 31,164 32,398
Social rehabilitation and compensation 173 142 151 220 241 249 260 279 279 279
Departmental expenses 1,204 1,319 1,339 1,417 1,593 1,776 2,087 2,133 2,080 2,086
Other non-departmental expenses 462 382 150 318 160 191 204 196 203 196
Social security and welfare expenses 23,026 23,523 24,081 25,294 25,999 28,961 30,915 32,360 33,726 34,959

Source: The Treasury

Table 6.2 - Welfare benefit expenses
($millions) 2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
New Zealand Superannuation 10,913 11,591 12,267 13,043 13,699 14,562 15,488 16,384 17,409 18,468
Jobseeker Support and Emergency Benefit 1,691 1,684 1,671 1,697 1,697 1,854 1,976 2,002 2,030 2,067
Supported living payment 1,422 1,515 1,523 1,533 1,541 1,556 1,589 1,621 1,652 1,676
Sole parent support 1,222 1,186 1,153 1,159 1,117 1,116 1,175 1,234 1,272 1,311
Family Tax Credit 1,965 1,854 1,793 1,723 1,639 2,271 2,195 2,166 2,175 2,130
Other working for families tax credits 567 549 559 596 556 543 536 534 535 526
Accommodation Assistance 1,146 1,129 1,164 1,127 1,204 1,641 1,810 1,865 1,904 1,942
Income-Related Rents 660 703 755 815 890 965 1,093 1,200 1,308 1,316
Disability Assistance 379 377 377 377 379 386 391 387 385 386
Winter energy ..  ..  ..  ..  ..  441 458 467 474 482
Best start ..  ..  ..  ..  ..  52 231 373 451 474
Orphan's/Unsupported Child's Benefit1 122 132 143 152 165 225 247 266 286 305
Hardship Assistance1 271 277 290 353 355 299 346 369 390 409
Paid Parental Leave 165 180 217 274 288 370 400 470 490 510
Childcare Assistance 186 183 182 199 196 181 168 169 172 175
Veterans Support Entitlement 119 115 107 98 93 90 84 79 74 70
Veteran's Pension 165 178 186 175 163 153 145 136 127 119
Other benefits1 194 27 54 18 23 40 32 30 30 32
Benefit expenses 21,187 21,680 22,441 23,339 24,005 26,745 28,364 29,752 31,164 32,398

Source: The Treasury

Beneficiary numbers1
(Thousands)
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
New Zealand Superannuation 640 665 691 717 754 767 794 821 846 873
Jobseeker Support and Emergency Benefit 138 133 130 131 130 138 145 143 140 139
Supported living payment 96 98 98 97 95 95 95 94 94 92
Sole parent support 78 72 67 64 59 59 61 61 61 61
Accommodation Supplement 297 292 292 290 287 295 307 311 312 313
  1. Actual numbers have been reclassified so may differ from previous published Economic and Fiscal Update numbers.

Source: Ministry of Social Development

Table 6.3 - Health expenses
($millions) 2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Departmental outputs 183 190 188 192 200 212 221 207 209 211
Health services purchasing (see below) 13,648 13,937 14,361 14,855 15,449 16,327 17,209 17,158 17,150 17,149
Other non-departmental outputs 330 312 356 365 816 929 902 881 1,009 1,003
Health payments to ACC 694 587 694 697 682 783 819 836 848 883
Other expenses 43 32 27 114 12 26 47 37 38 37
Health expenses 14,898 15,058 15,626 16,223 17,159 18,277 19,198 19,119 19,254 19,283

Source: The Treasury

Table 6.4 - Health services purchasing
($millions) 2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Payments to District Health Boards 12,165 12,414 12,822 13,281 13,829 14,582 15,424 15,366 15,363 15,364
National disability support services 1,087 1,126 1,167 1,188 1,256 1,352 1,345 1,371 1,365 1,365
Public health services purchasing 396 397 372 386 364 393 440 421 422 420
Health services purchasing 13,648 13,937 14,361 14,855 15,449 16,327 17,209 17,158 17,150 17,149

Source: The Treasury

Table 6.5 - Education expenses
($millions) 2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Early childhood education 1,545 1,644 1,735 1,805 1,844 1,921 2,037 2,150 2,248 2,345
Primary and secondary schools (see below) 5,550 5,773 6,044 6,116 6,334 6,655 6,796 7,009 6,963 7,017
Tertiary funding (see below) 4,027 4,272 4,235 4,051 4,112 4,235 4,589 4,683 4,756 4,790
Departmental expenses 1,107 1,129 1,112 1,190 1,281 1,429 1,407 1,405 1,420 1,425
Other education expenses 71 61 32 119 58 72 90 71 60 63
Education expenses 12,300 12,879 13,158 13,281 13,629 14,312 14,919 15,318 15,447 15,640

Source: The Treasury

Number of places provided1 2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Early childhood education 185,331 195,818 205,094 211,480 217,010 224,785 236,019 247,182 258,292 269,162
  1. Full-time equivalent based on 1,000 funded child hours per calendar year. Note that historical place numbers have been revised so may differ from previous published Economic and Fiscal Update numbers.

Source: The Ministry of Education

Table 6.6 - Primary and secondary schools
($millions) 2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Primary 2,812 2,920 3,033 3,091 3,216 3,348 3,405 3,510 3,464 3,474
Secondary 2,146 2,229 2,329 2,336 2,407 2,527 2,590 2,684 2,685 2,736
School transport 177 186 185 186 195 206 200 200 200 200
Special needs support 322 336 396 410 429 457 481 501 505 512
Professional development 87 98 96 88 82 109 99 94 89 89
Schooling improvement 6 4 5 5 5 8 21 20 20 6
Primary and secondary education expenses 5,550 5,773 6,044 6,116 6,334 6,655 6,796 7,009 6,963 7,017

Source: The Treasury

Table 6.6 - Primary and secondary schools
Number of places provided1 2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Primary 480,908 488,649 499,876 509,634 518,333 524,666 527,105 525,387 522,451 519,433
Secondary 275,541 275,172 274,073 275,841 274,975 277,219 282,705 290,624 297,097 304,400
  1. Full-time equivalents based on snapshots as at 1 July for primary year levels (years 1 to 8) and 1 March for secondary year levels (years 9 to 13). These numbers exclude special school rolls, health camps, hospital schools and home schooling (prior published tables included special school rolls). These estimates include a new entrant adjustment to make provision for the number of new entrants likely to be enrolled between 1 March and 10 October. Actual numbers have been restated to include this adjustment so may differ from previous published Economic and Fiscal Update numbers.

Source: The Ministry of Education

Table 6.7 - Tertiary funding
($millions) 2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Tuition 2,383 2,406 2,463 2,466 2,552 2,623 2,843 2,911 2,945 2,951
Other tertiary funding 463 484 487 520 561 625 585 586 586 572
Student allowances 539 511 486 465 511 583 585 594 613 632
Student loans 642 871 799 600 488 404 576 592 612 635
Tertiary education expenses 4,027 4,272 4,235 4,051 4,112 4,235 4,589 4,683 4,756 4,790

Source: The Treasury

Table 6.7 - Tertiary funding
Number of places provided1 2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Actual delivered and estimated funded places 239,086 233,132 231,413 223,645 220,717 224,300 224,900 228,000 228,400 228,600
  1. Tertiary places are the number of equivalent full time students (EFTS) in: student achievement component; adult and community education; and youth guarantee programmes. Note that historical place numbers have been revised so may differ from previous published Economic and Fiscal Update numbers. Place numbers are based on calendar years rather than fiscal years.

Source: Tertiary Education Commission

Table 6.8 - Core government services expenses
($millions) 2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Official development assistance 533 513 534 520 643 697 740 783 822 860
Indemnity and guarantee expenses 29 38 30 22 18 19 15 16 17 17
Departmental expenses 1,635 1,740 1,845 1,835 2,119 2,211 2,384 2,441 2,188 2,072
Non-departmental expenses 689 481 379 511 683 998 620 767 750 735
Tax receivable write-down and impairments 1,069 873 680 493 616 750 680 680 680 680
Science expenses 118 121 118 91 94 102 114 113 114 117
Other expenses 429 368 516 485 497 549 1,055 361 346 348
Core government service expenses 4,502 4,134 4,102 3,957 4,670 5,326 5,608 5,161 4,917 4,829

Source: The Treasury

Table 6.9 - Law and order expenses
($millions) 2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Police 1,416 1,456 1,498 1,539 1,629 1,766 1,883 1,942 1,957 2,000
Ministry of Justice 433 451 468 479 502 554 573 575 576 576
Department of Corrections 1,001 1,024 1,068 1,145 1,301 1,449 1,521 1,500 1,505 1,584
NZ Customs Service 150 161 153 171 174 192 203 210 214 218
Other departments 86 100 83 121 132 145 170 147 157 155
Departmental expenses 3,086 3,192 3,270 3,455 3,738 4,106 4,350 4,374 4,409 4,533
Non-departmental outputs 327 320 359 397 445 492 523 498 505 505
Other expenses 50 3 19 30 1 159 17 13 13 12
Law and order expenses 3,463 3,515 3,648 3,882 4,184 4,757 4,890 4,885 4,927 5,050

Source: The Treasury

Table 6.10 - Transport and communication expenses
($millions) 2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
New Zealand Transport Agency 1,880 1,992 1,982 1,888 2,280 2,840 2,782 3,666 3,185 3,265
Departmental outputs 45 43 45 52 55 65 70 64 63 62
Other non-departmental expenses 227 114 106 168 177 210 114 90 81 78
Rail funding 56 93 3 3 3 3 3 3 3 3
Other expenses 29 49 42 65 44 94 134 127 34 35
Transport and communication expenses 2,237 2,291 2,178 2,176 2,559 3,212 3,103 3,950 3,366 3,443

Source: The Treasury

Table 6.11 - Economic and industrial services expenses
($millions) 2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Departmental outputs 372 391 389 465 447 483 464 451 454 453
Non-departmental outputs1 660 742 798 1,085 1,155 1,312 2,505 1,881 1,192 1,317
KiwiSaver (includes HomeStart grant) 828 888 763 743 897 957 1,021 1,063 1,101 1,138
Other expenses2 198 207 157 251 233 276 338 181 154 160
Economic and industrial services expenses 2,058 2,228 2,107 2,544 2,732 3,028 4,328 3,576 2,901 3,068
  1. From 2017 onwards, spending on new investment and research fund initiatives is included in non-departmental outputs, this has been reclassified from core government services.
  2. Other expenses includes employment initiatives (previously disclosed separately).

Source: The Treasury

Table 6.12 - Defence expenses
($millions) 2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
NZDF core expenses 1,768 1,879 1,986 2,084 2,172 2,316 2,426 2,445 2,416 2,375
Other expenses 43 82 40 62 79 102 115 128 123 123
Defence expenses 1,811 1,961 2,026 2,146 2,251 2,418 2,541 2,573 2,539 2,498

Source: The Treasury

Table 6.13 - Heritage, culture and recreation expenses
($millions) 2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Departmental outputs 286 280 274 282 302 316 333 318 313 278
Non-departmental outputs 471 468 477 512 503 521 574 580 578 595
Other expenses 85 30 36 56 45 76 89 31 29 29
Heritage, culture and recreation expenses 842 778 787 850 850 913 996 929 920 902

Source: The Treasury

Table 6.14 - Primary services expenses
($millions) 2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Departmental expenses 365 384 424 458 549 714 691 586 567 563
Non-departmental outputs 135 114 100 92 188 120 123 114 64 64
Biological research1 92 91 95 ..  ..  ..  ..  ..  ..  .. 
Other expenses 84 78 130 94 70 254 222 162 49 92
Primary services expenses 676 667 749 644 807 1,088 1,036 862 680 719
  1. From 2017 onwards, biological research has been reclassified from primary services to non-departmental expenses within core government services.

Source: The Treasury

Table 6.15 - Housing and community development expenses
($millions) 2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Housing subsidies 5 5 5 5 5 4 4 4 4 4
Community Services1 ..  ..  189 189 179 186 223 236 237 239
Departmental outputs 100 113 171 187 150 197 200 162 157 158
Other non-departmental expenses 138 117 114 127 193 256 423 969 1,024 895
Warm up New Zealand 49 37 22 ..  ..  ..  ..  ..  ..  .. 
Other expenses 55 48 57 31 25 68 47 25 42 39
Housing and community development expenses 347 320 558 539 552 711 897 1,396 1,464 1,335
  1. From 2016 onwards, community services have been reclassified from non-departmental expenses in social security and welfare expenses and other expenses in economic and industrial services expenses.

Source: The Treasury

Table 6.16 - Environmental protection expenses
($millions) 2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Forecast
2020
Forecast
2021
Forecast
2022
Forecast
2023
Forecast
Emissions Trading Scheme 46 133 163 295 720 537 566 562 773 738
Departmental outputs 362 360 383 404 412 465 550 557 564 564
Non-departmental outputs 48 41 1 64 72 88 80 51 55 62
Other expenses 77 189 40 108 34 35 85 85 86 84
Environmental protection expenses 533 723 587 871 1,238 1,125 1,281 1,255 1,478 1,448

Source: The Treasury

Glossary of Terms#

Accruals basis of accounting#

An accounting basis where revenue is recognised when earned and expenses when the obligations they relate to are incurred. This contrasts to cash accounting, where income is recognised when the cash is received and expenses when cash to settle an obligation is paid out.

Appropriations#

Appropriations are legal authorities granted by Parliament to the Crown or an Office of Parliament to use public resources. Most appropriations are set out in Appropriation Acts.

Baselines#

The level of funding approved for any given area of spending (eg, Vote Education).

Commercial portfolio#

Consists of assets and liabilities held by companies with commercial objectives, predominantly State-owned Enterprises.

Consumers Price Index (CPI)#

Statistics New Zealand's official index to measure the rate of change in prices of goods and services purchased by households. Core or underlying inflation measures exclude or give little weight to extreme or irregular price movements.

Contingent assets#

Revenue that the Crown will realise if a particular uncertain event occurs, or a present asset is unable to be measured with sufficient reliability to be recorded in the financial statements (unquantified contingent assets). Contingent assets typically comprise loans with specific events that trigger repayment and IRD pending assessments (where there is a proposed adjustment to a tax assessment).

Contingent liabilities#

Costs that the Crown will have to face if a particular uncertain event occurs, or present liabilities that are unable to be measured with sufficient reliability to be recorded in the financial statements (unquantified contingent liabilities). Contingent liabilities typically comprise guarantees and indemnities, legal disputes and claims, and uncalled capital.

Core Crown#

A reporting segment consisting of the Crown, departments, Offices of Parliament, the NZS Fund and the Reserve Bank. For a list of all entities included in this segment, refer to the Government Reporting Entity (pages 95 to 97).

Core Crown expenses#

The day-to-day spending (eg, public servants' salaries, welfare benefit payments, finance costs and maintaining national defence etc) that does not build or purchase physical assets by the core Crown. This is an accrual measure of expenses and includes non-cash items such as depreciation on physical assets.

Core Crown revenue#

Consists primarily of tax revenue collected by the Government but also includes investment income, sales of goods and services and other revenue of the core Crown.

Corporate tax#

The sum of net company tax, non-resident withholding tax (NRWT) and foreign-source dividend withholding payments (FDWP).

Current account (Balance of Payments)#

The current account records the value of New Zealand's transactions with the rest of the world in goods, services, income and transfers. The current account balance is the sum of all current account credits less all current account debits. When the sum of debits is greater than the sum of credits there is a current account deficit. The current account balance is commonly expressed as a percentage of nominal GDP.

Cyclically-adjusted balance (CAB) or structural balance#

An estimate of the fiscal balance (operating balance before gains and losses) adjusted for fluctuations of actual GDP around trend GDP. The CAB provides a picture of the underlying fiscal position and the effects of policy decisions.

Demographic changes#

Changes to the structure of the population such as the age, gender or ethnic composition.

Domestic bond programme#

The amount and timing of government bonds expected to be issued or redeemed.

Excise duties#

A tax levied on the domestic production of alcohol, tobacco and light petroleum products (CNG, LPG and petrol).

Financial assets#

Any asset that is cash, an equity instrument of another entity (shares), a contractual right to receive cash or shares (taxes receivable and ACC levies) or a right to exchange a financial asset or liability on favourable terms (derivatives in gain).

Financial liabilities#

Any liability that is a contractual obligation to pay cash (government stock, accounts payable) or a right to exchange a financial asset or liabilit