Budget Economic and Fiscal Update 2020

An introduction to the Budget Economic and Fiscal Update#

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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#

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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.

Making it New Zealander-centric#

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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.

Understanding our path#

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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, please go to our website at https://treasury.govt.nz

Statement of Responsibility#

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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 23 April 2020 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 23 April 2020. 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.

Caralee McLiesh
Secretary to the Treasury

6 May 2020

 

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 23 April 2020 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

7 May 2020

Executive Summary#

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Sources: Stats NZ, the Treasury

• The COVID-19 pandemic is a 'once in a century' public health shock that is causing major disruption to life and economic activity around the world, drastically altering the economic outlook here and abroad. Many countries, including New Zealand, are expecting their largest economic downturns in living memory. The final impact of COVID-19 and related response measures on the New Zealand economy remains highly uncertain.
• This uncertainty presents significant challenges when forecasting the economic, tax and fiscal outlook. Governments around the world, including the New Zealand Government, are responding with a range of health-related and economic support measures. However, the spread of the virus is yet to be fully contained, and it will be some time before an effective vaccine is readily available.
• New Zealand has made progress to contain the spread of the virus, but there are many factors that can affect the economic outlook from here. These include the extent to which it is brought under control here and abroad; the range and effectiveness of response measures; the resiliency of firms; the length and degree of trade disruption, financial disruption and wealth impacts; and the extent to which there are lasting impacts on demand or supply in particular industries.
• Given the high level of uncertainty, we present a number of alternative economic forecast scenarios. In the main economic forecasts, real production GDP is forecast to fall sharply in the June quarter, resulting in an annual contraction of 4.6% over the June 2020 year, with annual real GDP falling a further 1.0% by June 2021. Economic activity is forecast to recover over the remaining three years of the forecast period, with GDP growth peaking at an annual average of 13.1% in the year to March 2022.
• Government support helps cushion the impact on employment. Nevertheless in the main forecast the unemployment rate approaches 10% by September 2020, easing only gradually to around 8% by mid-2021 in the main forecast.
• The economic impact of COVID-19, coupled with the Government's response, has had a significant impact on the Government's fiscal position. All key indicators are significantly weaker than those forecast in the Half Year Update published in December.
• Overall tax revenue is expected to fall in the first two years of the forecast period, primarily owing to the economic slowdown coupled with tax policy changes. The tax revenue forecasts then start to recover as economic activity starts to pick up.
• A sharp rise in core Crown expenses is expected in the current year mainly as a result of the Government's response to COVID-19. The level of core Crown expenses peaks at just under $120 billion in 2021/22, before starting to fall as some of the Government's temporary response measures are expected to cease and the economy continues to recover.
• In the current year and the next two fiscal years, operating deficits (operating balance before gains and losses) average around $28 billion, while net core Crown debt is expected to increase on average by around $35 billion per year. The operating deficits and increases in net core Crown debt start to recover from 2022/23.
• The Government's balance sheet is forecast to absorb most of the fiscal impact of the COVID-19 Government response and economic downturn impacts, with increasing borrowings and reducing net worth. Net core Crown debt is expected to reach 53.6% of GDP by the end of the forecast period.

Economic Outlook#

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Summary#

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• The COVID-19 pandemic is causing major disruption to life and economic activity around the world. The pandemic has drastically altered the economic outlook here and abroad. Governments are responding with a range of health-related and economic support measures. The outlook remains exceptionally uncertain, particularly as the spread of the virus is yet to be contained for any length of time, and it will be some time before an effective vaccine is readily available.
• Given the heightened uncertainty that exists along with the continued evolution of policy, this chapter provides several alternative paths the economy may take. The main economic forecasts assume approximately $35 billion of discretionary COVID-19 fiscal support, alongside significant monetary policy stimulus. An additional economic forecast is also presented in which fiscal support is extended further, in line with the overall magnitude of the COVID-19 Response and Recovery Fund (CRRF).
• Overall, risks are skewed to the downside. Additional scenarios are presented that illustrate the possibility of a slower recovery in New Zealand and abroad, as well as a scenario in which the adverse impacts on the economy from the COVID-19 pandemic are more moderate.
• The economic impact on New Zealand will depend on a number of factors: the extent and pace of the spread of COVID-19 in New Zealand; the extent to which it is brought under control abroad; the range and effectiveness of response measures here and abroad; the resilience of firms; the length and degree of trade disruption, financial disruption and wealth impacts; and any lasting impacts on demand or supply in particular industries.
• New Zealand's four-level COVID-19 alert system has been integral to our public health response. The extent to which economic activity is reduced below normal varies with the alert level. We have assumed that alert level 4 results in activity approximately 40% below normal; level 3, approximately 25% below; level 2, 10-15% below; and alert level 1, 5-10% below.
• The main economic forecasts include the one month at level 4, and assume one month at level 3, followed by the remainder of the year to March 2021 at levels 1 or 2. The decision taken on 20 April to shift to level 3 from late 27 April means the main forecast remains reasonable, but much will depend on the ability of the country to de-escalate further, with downside risk should a return to alert levels 3 or 4 be required during the next year. Should the control of the virus's spread enable either the removal of restrictions or (to a lesser extent) the majority of the ten month period to the end of March 2021 at alert level 1, then there may be some upside to these forecasts. The negotiation of selective border openings could be another upside, enabling earlier tourist flows to and from selected countries.
• Under the main forecast, real GDP contracts by close to one-quarter in the June 2020 quarter, reflecting the time spent in alert levels 3 and 4. Economic activity recovers as restrictions are lifted, so that by the end of 2020 real GDP is around 10% lower than in the Half Year Economic and Fiscal Update 2019 (Half Year Update). Over the 2020 calendar year real GDP is forecast to contract by around 10% relative to 2019, with annual average growth forecast to reach a low of nearly -12% in the year to March 2021.
• By 1 April 2021, all restrictions are assumed to be lifted (including border restrictions). Nevertheless, activity in the June 2021 quarter remains around 7% below that predicted in the Half Year Update. This reflects much lower services exports, as overseas tourism will likely take some time to recover, combined with weak domestic demand, given that lower incomes and increased uncertainty weigh on household consumption and business investment.
• Government support helps cushion the impact on employment, even as hours worked fall sharply in the June 2020 quarter. In the main forecast the unemployment rate approaches 10% by September 2020, easing only gradually to around 8% by mid-2021.
• The spread of COVID-19 has dramatically affected global growth prospects. The International Monetary Fund expects the global economy to contract by 3.0% in the year to December 2020, provided the virus is contained by the end of the June 2020 quarter and containment measures are eased over the second half of 2020.
• Global growth is forecast to rise to 5.8% in the year ending December 2021, supported by very substantial economic policy actions to mitigate the adverse impacts on labour, capital and financial markets. There is extreme uncertainty about both the depth and duration of the downturn and the strength of the recovery. The risks to the global outlook are tilted towards weaker outcomes, especially the potential for a longer and broader impact as the pandemic continues to evolve.
• Commodity prices have fallen in the wake of reduced demand and increased uncertainty, although so far the impact on agricultural commodities has been less pronounced. Lower oil prices combined with softer demand are likely to result in weaker inflation pressures in New Zealand and abroad.
• Nominal GDP is impacted by both lower real activity and softer price pressure, with cumulative nominal GDP over the five years to June 2024 forecast to be over $100 billion lower than in the Half Year Update. The forecast which incorporates the full CRRF has cumulative nominal GDP around $80 billion below the Half Year Update. Lower aggregate income in the economy is a major contributor to the deterioration in the fiscal outlook presented in the Fiscal Outlook chapter.
• The slower recovery scenario illustrates the much higher degree of uncertainty associated with forecasts at present. Nominal GDP in this scenario is a cumulative $90 billion lower than the main forecast. This is around four times the deviation from the main forecast that we typically present. The presentation of confidence bands around the forecasts also helps to illustrate uncertainty. Unlike showing particular alternative paths the economy may take based on specific alternative assumptions, confidence bands illustrate the range of possible/likely outcomes based on statistical methods.

Sources: Stats NZ, the Treasury

Economic Outlook#

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The world's economies are experiencing a COVID-19-related shock…

The COVID-19 pandemic is a ‘once in a century' public health shock with profound impact on economic and financial systems around the world and in New Zealand. As a consequence, the forecasts in this Budget Update show an unprecedented level of change from the Half Year Update. The scale of the contraction, both in New Zealand and abroad, is substantially greater than that experienced during the global financial crisis.

In order to contain the virus, the Government has instigated a range of measures, including the use of emergency powers, COVID-19 alert level restrictions, and a variety of support measures. While necessary, public health measures have had, and continue to have, large negative impacts on the economy. This is compounded by containment actions taken internationally and changes to the behaviour of households, firms and investors in the face of large uncertainties. Both the demand and supply sides of the economy are impacted, through trade, confidence, labour and financial market channels.

…involving large contractions in activity

Level 4 restrictions were in place from late March through most of April. During this period, economic activity was severely curtailed. Although initial estimates of GDP will not be known until September, when June quarter data are released, indicators such as traffic movements and the number of people entering the country provide a sense of the disruption that occurred (Figure 1.1).

Figure 1.1 - Heavy traffic movements and border crossings

Sources: NZ Customs Service, NZ Transport Agency

Text description of Figure 1.1 - Heavy traffic movements and border crossings.

The extent and duration of this shock are highly uncertain

The path the economy takes from here is extremely uncertain. The magnitude and duration of the downturn and the subsequent pace of the recovery depend on many unknown factors, including the course of the virus, how long activity restrictions are in place, how quickly the global economy recovers, how behaviours and production might change, and how successful government policies will be in supporting households and firms. In the context of this uncertainty, government policies continue to evolve.

Given the heightened uncertainty that exists along with the continued evolution of policy, this chapter provides several alternative paths the economy may take. Presented initially are the two outlooks that have largely informed the development of the fiscal forecasts, namely the main (Budget Update 2020) forecast, and the full COVID-19 Response and Recovery Fund (CRRF) forecast. These two forecasts share similar outlooks for the global economy, but the latter forecast includes the full impact of the $50 billion CRRF, while the former forecast reflects an estimate of the likely fiscal policy response made at the time the forecasts were finalised.

In a later section, alternative scenarios are provided to illustrate the impact if the recovery in activity is more gradual in New Zealand and abroad. A slightly faster recovery is also illustrated. The asymmetric nature of current risks is indicated by the larger deviations to the main forecast shown in the slower recovery scenario. Given that the scenarios represent a small subset of possible outcomes, they are also supplemented by the presentation of confidence intervals around the main forecasts based on statistical simulations. The Forecast uncertainty box on page 25 gives more details.

Table 1.2 and the economic assumptions box provide additional detail on the main forecasts, consistent with the requirements of the Public Finance Act 1989.

Sources: Reserve Bank of New Zealand (RBNZ), Stats NZ, the Treasury

Economic forecasts are presented on a June year basis for consistency with the fiscal forecasts.

Notes:

1. Business investment is the total of all investment types, it includes public investment but excludes residential investment.
2. Percent of the labour force, June quarter, seasonally adjusted.
3. Trade weighted index, average for June quarter.
4. Average for the June quarter.

Large declines in activity are expected in the June quarter

The largest decline in activity is expected to occur in the June 2020 quarter, with the main forecast indicating a decline in real GDP of around one-quarter (Figure 1.2). The fall reflects constraints imposed during approximately one month at alert level 4, an assumed further month at alert level 3, and then a shift to alert levels 1 or 2. This follows a smaller fall in GDP in the March quarter, reflecting that the greatest COVID-19 impacts occurred relatively late in that period.

Figure 1.2 - Real GDP

Sources: Stats NZ, the Treasury

Text description of Figure 1.2 - Real GDP.

The impact of restrictions varies by industry, reflecting the degree to which working from home is possible, whether worksites are allowed to remain open, and the level of underlying demand. Industries such as construction were particularly hard hit in alert level 4, but should experience a degree of recovery at alert level 3, as worksites reopen with appropriate safety measures. Industries that are closely linked to tourism, such as accommodation and hospitality have also experienced large drops in activity but will not experience much difference between alert levels 3 and 4, and even at alert levels 1 and 2, reflecting constrained domestic travel activity and the lack of international visitors.

There are also likely to be other distributional impacts. Māori and Pacific peoples tend to be disproportionately impacted during economic downturns and industries that will take longer to recover, such as Retail and Accommodation, are more likely to employ young, female, lower skilled and low income workers.

The absence of a return to alert level 3 or 4 should enable partial recovery

The main forecasts assume a shift to level 2 later in the June quarter. Provided that this is maintained, or further de-escalation occurs, the economy should recover some of the ground lost in the second quarter from the September quarter onwards. It is likely that the fall in June quarter GDP will be the largest on record. The increase in the September quarter is also expected to be sizable, even though the level of activity is only likely to partially recover from the record June quarter fall.

Border restrictions are assumed to remain in place through to the end of the March 2021 quarter, thereby preventing recovery in the international tourism and education sectors. As a result, even with relatively greater domestic tourism, the level of real GDP is forecast to remain approximately 10% below the Half Year Update at the end of 2020 in the main forecast. Over the 2020 calendar year real GDP is forecast to contract by around 10% relative to 2019, with annual average growth forecast to reach a low of nearly -12% in the year to March 2021. The negotiation of selective border openings, such as a ‘trans-Tasman bubble’, is a potential avenue that could enable earlier tourist flows to and from selected countries.

Fiscal policy aims to cushion the blow…

The Government has announced a range of measures to support people and businesses through the period of disruption caused by COVID-19 as well as supporting the eventual recovery. The main forecasts include approximately $35 billion of fiscal support, including wage subsidies, other forms of business support, and increased expenditure on health and main social assistance benefits. This $35 billion includes the $12.1 billion Economic Response Package announced on 17 March, and a further $23 billion of assumed support from the Government's CRRF fund. This leaves around $27 billion from the Fund for other initiatives, while maintaining overall expenditure broadly in line with the fiscal forecasts presented in the Fiscal Outlook chapter.

The main forecast and alternative full CRRF forecast shown in Figure 1.2 differ in the extent of fiscal support that is assumed. The levels of fiscal support assumed are shown in Figure 1.3, with the full utilisation of the CRRF taking total fiscal support to around $62 billion. The timing and magnitudes, however, reflect modelling assumptions, as actual decisions on the full use of the fund are yet to be taken.

Figure 1.3 - COVID-19 related fiscal support

Source: The Treasury

Text description of Figure 1.3 - COVID-19 related fiscal support.

The additional fiscal support contributes to a faster recovery in economic activity relative to the main forecast, particularly over the years to June 2021 and 2022.

…including limiting the extent to which unemployment rises

Initially the impact of measures such as wage subsidies reduces the extent to which firms are likely to need to shed labour rather than spurring additional activity. This reflects that initially the restrictions associated with alert levels 3 and 4 are key constraints on activity. Hours worked are likely to fall sharply in the June 2020 quarter and to a greater degree than employment and paid hours. This reflects the support of wage subsidies on employment and wage payments. Nevertheless, the unemployment rate is forecast to peak at a little under 10% in both the main forecasts and the full CRRF forecast in the September quarter (Figure 1.4). While fiscal support helps prevent a higher peak, unemployment is still expected to increase from the June quarter, as the level of activity remains below that required to support higher employment levels.

Figure 1.4 - Unemployment

Sources: Stats NZ, the Treasury

Text description of Figure 1.4 - Unemployment.

While decisions have not been made on the specific uses of the CRRF, we assume that a key focus remains on supporting employment and this results in a more-rapid fall in the unemployment rate in the full CRRF forecast relative to the main forecast.

Medium-term recovery will depend on a number of factors including international developments

The main forecasts incorporate further recovery beyond next year. This is predicated on the assumption that COVID-19 no longer poses a significant threat globally (eg, an effective vaccine is available), thereby supporting renewed global growth, which combined with the removal of border restrictions supports renewed international tourism flows. However, the recovery in tourism will not happen instantly and the pace of recovery is a key uncertainty. The main forecasts are for total services exports to still be around 20% below the level in the Half Year Update by June 2023, narrowing to 10% by June 2024. At the end of 2019, exports of travel services (largely tourism) represented a little over half of total real services exports. Free movement of people across borders is also assumed to result in an increase in the contribution of net migration to population growth, with net migration assumed to increase from 4,000 in the year to March 2021, to 35,000 by the end of the forecast period.

Decline in global economic activity not seen in peacetime since the 1930s…

The spread of COVID-19 has dramatically affected the growth prospects of the global economy. The rapid spread of the virus and the necessary containment measures, including lockdowns and social distancing, have adversely affected a broad range of activities. Global labour markets have deteriorated markedly, and the heightened uncertainty has negatively impacted investment plans and their financing. The severity of the containment measures has begun to ease in a number of countries but the possibility remains that some measures, including social distancing, remain in place for a prolonged period.

The International Monetary Fund (IMF) expects global economic activity will decline on a scale not seen since the Great Depression of the 1930s. Global growth is forecast to fall to -3.0% in 2020, assuming that the pandemic and required containment peak in the second quarter for most countries in the world, and recede in the second half of this year. Global growth rebounds to 5.8% in 2021, supported by the substantial economic policy actions governments and central banks have taken to underpin resilience in labour, capital and financial markets. While crucial for a strong recovery, there is considerable uncertainty about what the economic landscape will look like when countries emerge from their containment measures.

…with partial recovery dependent on COVID-19 containment measures subsiding

The outlook for New Zealand's major trading partners is similar to that for the global economy. In China, activity fell very substantially in the March 2020 quarter when virus containment measures were at their peak. Containment measures have eased over recent weeks and indicators of activity suggest the economy will expand in the June 2020 quarter and a further recovery in activity is expected over the second half of the year.

Figure 1.5 - Global growth

Sources: IMF, Haver, the Treasury

Text description of Figure 1.5 - Global growth.

The disruption in China, combined with measures to contain the pandemic, is expected to result in very substantial contractions in other economies in the region over the first half of 2020. The recovery of production and consumption in China and the likely easing in containment measures will help stabilise economic conditions across Asia and underpin a recovery over the second half of the year. Nevertheless, the prospects for tourism, which is very important to a number of economies in the region, has weakened considerably and is likely to continue to have a considerable dampening effect on activity. Weaker global demand more generally will also restrain the pace of recovery in China and across the Asia-Pacific region.

In Australia, output is likely to contract significantly over 2020 and the unemployment rate is likely to rise sharply. The Australian Government's wage subsidy programme will help limit the rise in unemployment to some extent. Provided that public health restrictions are eased in coming weeks, a recovery is expected to begin in the September 2020 quarter and to strengthen from there.

In the United States, state-led public health measures have seen the economy shed millions of jobs and a substantial contraction in economic activity is expected in the first half of 2020. The economy is expected to recover over the second half of the year, as the virus fades. As the recovery strengthens, the economy is likely to experience a period of above-trend growth in 2021 and 2022, supported by federal government spending.

Global commodity prices down sharply…

Global commodity prices have fallen sharply since the start of the year, most notably for oil. Metals prices are also sharply lower. Agricultural prices, while also lower, have been more resilient. The recent sharp decline in oil prices is expected to be deflationary for most economies in the short-run, including New Zealand. For major energy producers and exporters, including the United States and Australia, lower oil prices will reduce planned investment in additional capacity. Prices for Australia's most significant bulk commodity exports have been relatively resilient.

 …however, while down, agricultural prices have been more resilient

Prices for New Zealand's major export commodities have fallen, reflecting weaker international demand. Forestry prices have been especially weak, compounding the effects of an over-supply prior to the pandemic. Dairy auction prices have fallen 11% and meat prices 12% since the end of last year. Further falls in dairy and meat prices are expected in coming months, but prices should recover as the pandemic fades. Forestry exports are also expected to recover over the medium term.

Figure 1.6 - Terms of trade and TWI

Sources: Stats NZ, RBNZ, the Treasury

Text description of Figure 1.6 - Terms of trade and TWI.

The lower New Zealand dollar is providing some offset for commodity exporters. Global movements in currencies have reflected strong demand for US dollars, and the US dollar has appreciated against most currencies. Particularly large moves have been observed in the exchange rates of commodity exporters. During March, the New Zealand dollar had fallen by up to 16% against the US dollar relative to its end of 2019 level, but has subsequently recovered to end April only 9% lower.

Lower oil prices also provide a partial offset for the economy as a whole, although COVID-19 restrictions mean that demand for oil products is constrained and therefore typical demand responses to lower prices are not possible. Prices for oil are likely to rise over the medium term. However, the weak outlook for global inflation is likely to limit the pace of a broader recovery in import prices. Overall, the goods terms of trade are expected to continue to support national income over the medium term.

Global risks are skewed to the downside

The IMF notes that risks to its outlook are skewed to the downside. The risks of a weaker outlook have a number of sources including a longer period of restrictions on activity to contain the pandemic, lingering uncertainty about viral contagion, persistent scarring effects on activity from reduced investment, and long-lasting shifts in consumer spending behaviour. These developments may create lasting changes in supply chains and weakness in aggregate demand. The IMF presents a downside scenario that incorporates more-widespread and long-lived COVID-19 containment measures. In this scenario, GDP growth in 2020 and 2021 is reduced by around three percentage points. The Treasury's weaker world scenario illustrates the implications for New Zealand's recovery.

Recovery in New Zealand is also likely to require ongoing policy support…

In addition to the continued fiscal support outlined above, monetary policy will likely need to remain supportive for some time. The Reserve Bank's Monetary Policy Committee announced in March that it intends to keep the Official Cash Rate at 0.25% for at least 12 months and to implement a Large Scale Asset Purchase programme (LSAP) of New Zealand Government Bonds and Local Government Funding Agency (LGFA) debt. We assume that over the forecast period as a whole such measures are expanded to provide additional monetary policy support. This plays an important role in the recovery of investment and provides support to the housing market and therefore consumption. It also helps keep the exchange rate lower, although the extent to which this is maintained will also be dependent on the relative stance of policy abroad.

This support is likely to be necessary for annual inflation to recover back towards 2% over the medium term. In the near term, the inflation outlook is particularly uncertain as prices for different goods and services are buffeted by a mix of falls in demand, or in some instances driven higher by temporary shortages. On balance, weaker demand is likely to mean inflation falls considerably.

Figure 1.7 - CPI inflation

Sources: Stats NZ, the Treasury

Text description of Figure 1.7 - CPI inflation.

…however, nominal GDP is unlikely to return to levels predicted in the Half Year Update

By June 2024, real GDP is forecast to be around 1% below that forecast in the Half Year Update. A sustained period of weaker price growth, combined with the weaker outlook for real activity, results in forecast nominal GDP being around 2% lower than forecast in the Half Year Update at the end of the forecast period. This is despite revisions to historical data which saw nominal GDP start about 1% above forecast.

Overall, nominal GDP is forecast to be a cumulative $103 billion lower than forecast in the Half Year Update over the five years to June 2024. Again, this is despite revisions to earlier data, with annual GDP at the end of last year around $3 billion higher than in the Half Year Update. Under the full CRRF forecast, the difference is around $80 billion. These large changes in overall income in the economy have a significant impact on tax revenue and the government's fiscal position, as outlined in the Fiscal Outlook chapter.

Figure 1.8 - Nominal GDP

Sources: Stats NZ, the Treasury

Text description of Figure 1.8 - Nominal GDP.

Alternative Scenarios#

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This section presents two additional scenarios to highlight some of the ways in which the economy could evolve differently from the forecasts presented earlier. The Treasury has also previously released scenarios that consider the impact if the time spent at the various alert levels differs[4].

Slower recovery

This alternative scenario assumes the economic shock from COVID-19 is more persistent than in the main forecast, including a more gradual recovery in tourism. The scenario assumes the full CRRF fund is used to support the economy in the initial response phase and then during the recovery phase. Trading partner growth is materially weaker, contracting by nearly 6% over 2020, with further small contractions occurring over 2021 and 2022 (see earlier Figure 1.5).

The weaker economic environment results in slower business investment. This, combined with shifts in demand domestically and from abroad, results in the effective redundancy of some earlier investment. We may expect a rise in business failures and higher unemployment. Together, these factors contribute to slower productivity growth than in the main forecasts and a slower economic recovery overall.

There is uncertainty about extent to which the current COVID-19-related shock is temporary or has longer lasting growth impacts. In this scenario, the impact on growth is more persistent, with potential output around 4% lower than in the main forecast by June 2024.

Both weaker supply and demand create competing forces on prices in the economy. However, overall the impact of weaker demand dominates. This results in persistently lower inflation when combined with lower rates of imported inflation, given the softness in the global economy (Figure 1.14). The depreciation in the New Zealand dollar provides only a partial offset.

Figure 1.14 - Inflation

Sources: Stats NZ, the Treasury

Text description of Figure 1.14 - Inflation.

Figure 1.15 - Nominal GDP

Sources: Stats NZ, the Treasury

Text description of Figure 1.15 - Nominal GDP.

With weaker economic activity, unemployment is persistently higher than in the main forecasts, ending the forecast period close to 7%.

Over the forecast period, nominal GDP is cumulatively more than $90 billion lower compared to the main forecast. This results in lower tax revenue. Core Crown tax revenue is over $19 billion lower than in the main forecast, in total across the five years of the forecast period. While all taxes would likely be lower, the largest impact comes from lower corporate taxes which are cumulatively $8 billion lower. This reflects that operating surplus does not recover to its pre-COVID-19 level until 2024. Increased welfare expenses, mainly due to much higher recipient numbers, add over $3 billion to expenses.

Moderated impact from COVID-19

This second scenario assumes more effective control over the spread of COVID-19 domestically and abroad, with only a limited number of contained second phase infection episodes. As in the case of the main forecast, the scenario assumes around $35 billion in COVID-19-related fiscal support.

Figure 1.16 - Unemployment rate

Sources: Stats NZ, the Treasury

Text description of Figure 1.16 - Unemployment rate.

Tourism starts to recover from late 2020, compared with the second half of 2021 assumed in the main forecast. The earlier recovery in tourism encourages business activity and improves sentiment, prompting an earlier recovery in business investment.

As foreign economic growth starts to recover sooner, demand for New Zealand's exports of goods also recovers at a faster pace, starting from the second half of 2020.

The moderated impact from COVID-19 sees unemployment falling back to around 5% by late 2021. Stronger demand generates slightly more inflation, which reaches 2.0% by the end of the forecast period.

Cumulatively, nominal GDP is forecast to be around $23 billion higher than in the main Budget forecasts, resulting in core Crown tax revenue that is cumulatively $6 billion higher. Nearly half of this ($2.5 billion) additional tax revenue reflects source deductions, as a result of higher labour income. Higher tax revenues and lower welfare expenses (around $1 billion lower) contribute to a lower peak in net core Crown debt than in the main forecast and the slower recovery scenario (Figure 1.17).

Figure 1.17 - Net core Crown debt to GDP[5]

Sources: Stats NZ, the Treasury

Text description of Figure 1.17 - Net core Crown debt to GDP.

Fiscal Outlook#

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Overview#

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• The economic impact of COVID-19, coupled with the Government's response, has had a significant impact on the Government's fiscal position. All key indicators are significantly weaker than those forecast in the Half Year Update published in December.
• In the current year and the next two fiscal years, operating deficits (operating balance before gains and losses) average around $28 billion, while net core Crown debt is expected to increase on average by around $32 billion per year. The operating deficits and increases in net core Crown debt start to fall from 2022/23.
• Tax revenue is expected to fall in the first two years of the forecast period, primarily owing to the economic slowdown coupled with tax policy changes. The tax revenue forecasts then start to recover as economic activity starts to pick up. Overall tax revenue is $49.2 billion lower than the Half Year Update over the forecast period.
• In total across the forecast period, nominal GDP is $103 billion lower than in the Half Year Update. This lower GDP forecast accounts for around $34 billion of the $49.2 billion reduction in forecast core Crown tax revenue across the forecast period.
• A sharp rise in core Crown expenses is expected in the current year mainly as a result of the Government's response to COVID-19. The level of core Crown expenses peaks at just under $120 billion in 2021/22, before starting to fall as some of the Government's temporary response measures are expected to cease and the economy continues to recover.
• The Government has already announced an immediate $12.1 billion economic response package. In addition, $50.0 billion in funding has been set aside to manage the Government's response to and recovery from COVID-19. Some of that funding has already been announced, for example increases to the Wage Subsidy Scheme. Around $39.3 billion of the funding remains unallocated at the time the fiscal forecasts were completed.
• In addition to the Government's fiscal policy response of $62.1 billion, the Reserve Bank is also employing monetary policy measures such as the Large Scale Asset Purchases (LSAP) programme aimed at reducing borrowing costs and injecting more money into the economy.
• The Government's balance sheet is forecast to absorb most of the fiscal impact of the COVID-19 Government response and economic downturn impacts, with increasing borrowings and reducing net worth. Net core Crown debt is expected to reach 53.6% of GDP by the end of the forecast period.
• There is added uncertainty in these forecasts in relation to the size of the economic impact, and the pace of recovery. The Economic Outlook chapter discusses these uncertainties and provides some scenarios to illustrate the range of potential outcomes.

These forecasts are sensitive to a number of judgements and assumptions and should be read in conjunction with the Risks to the Fiscal Forecasts chapter.

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.
4. ‘2019 Actual' numbers have been restated to reflect updated accounting standards. For more details refer to the forecast financial statements note 17 on page 120.

Source: The Treasury

Comparison to the Half Year Update#

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All fiscal indicators are significantly weaker primarily owing to COVID-19

The main impacts since the Half Year Update relate to the economic downturn and the Government's response to and recovery from COVID-19. This has led to weaker nominal GDP, higher unemployment and policy decisions to support New Zealanders. This has resulted in a reduction in tax revenue, additional expenditure relating to social assistance as beneficiary numbers increase and the Government's response to COVID-19 totalling $62.1 billion. All of these factors mean all key indicators are weaker than previously expected.

Core Crown Tax Revenue#

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Tax revenue is forecast to decrease over the next two years primarily as a result of the economic and policy impacts of COVID-19, with a recovery in the latter part of the forecast period...

Core Crown tax revenue (Figure 2.2) is forecast to decrease by $4.2 billion and $2.2 billion in 2019/20 and 2020/21 respectively, before recovering in 2021/22 and then increase over the remainder of the forecast period. As a percentage of GDP, core Crown tax revenue will decrease from 28.5% in 2018/19 to 26.6% in 2021/22; after that it will increase and remain stable at just over 27% for the remainder of the forecast period.

Figure 2.2 - Core Crown tax revenue

Source: The Treasury

Text description of Figure 2.2 - Core Crown tax revenue.

By 2023/24, core Crown tax revenue is expected to reach $102.1 billion, $15.6 billion higher than in 2018/19, although this is $8.4 billion lower than forecast in the Half Year Update (and $49.2 billion lower over the forecast period). Table 2.6 shows the breakdown of the movements across the major tax types.

Source: The Treasury

Source deductions, which are mainly PAYE on wages and salaries, are forecast to grow in 2019/20 and 2020/21. While we are expecting there to be fewer people employed in the labour force, this is offset by wage growth and fiscal drag.[6]

Over the remainder of the forecast period, source deductions tax revenue is forecast to grow by a total of $6.0 billion, almost entirely owing to a recovery in employment and wage growth. The rest of the increase is expected to come from fiscal drag, which contributes $1.4 billion over the forecast period.

GST revenue is forecast to decrease over 2019/20 and 2020/21 mostly owing to lower private consumption, residential investment and significantly lower overseas tourist spending.

GST revenue forecasts recover and increase from 2021/22 onwards as a result of expected increases in private consumption and residential investment.

Corporate tax revenue is forecast to fall over 2019/20 and 2020/21, mainly because:

• the April 2019 change in the method that Inland Revenue uses to calculate income tax revenue caused a one-off boost to revenue in the 2018/19 year
• policy measures in response to COVID-19, such as the loss carry-back mechanism and the permanent reinstatement of depreciation deductions for commercial properties, are expected to reduce corporate tax revenue (see Table 2.7 for details), and
• there will be a decrease in taxable income, much of which is a result of the economic slowdown caused by COVID-19.

In the final three years of the forecast period, corporate tax revenue is forecast to grow, almost entirely owing to a recovery in taxable income, following the expected economic shock.

The taxable income for taxpayers in the ‘other person' category is expected to fall in the next few years although the fall is tempered by the additional revenue expected from the implementation of ring-fencing of residential property losses (previously announced in Budget 2018).

While we expect taxable income for this group to recover by the end of the forecast period, the recovery of tax revenue is slowed by the re-introduction of depreciation deductions for commercial properties. We also expect there to be a lag in the recovery of provisional tax revenue.

…largely reflecting the economic forecasts

Figure 2.3 shows that core Crown tax revenue is forecast to shrink at a faster rate than nominal GDP in 2019/20. This is mainly owing to the one-off increase to income tax revenue in 2018/19, caused by a change in Inland Revenue's calculation method and is not forecast to repeat in 2019/20. In addition, policy decisions will be contributing to the differences in the trend of nominal GDP and tax revenue.

Figure 2.3 - Core Crown tax revenue and nominal GDP growth

Source: The Treasury

Text description of Figure 2.3 - Core Crown tax revenue and nominal GDP growth.

Core Crown Expenses#

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Core Crown expenses are expected to increase significantly in the near term primarily owing to COVID-19…

Core Crown expenses are expected to increase by $26.9 billion in 2019/20, an increase of 31% compared to expenses in 2018/19.

Figure 2.4 - Core Crown expenses

Source: The Treasury

Text description of Figure 2.4 - Core Crown expenses.

Around $14.4 billion of the increase in core Crown expenses in 2019/20 is owing to the Government's decisions to respond to COVID-19 (eg, wage subsidies). In addition, the forecast for core Crown expenses includes $4.9 billion phased from the CRRF that is yet to be allocated. The remaining increase in core Crown expenses will be owing to the decisions from Budget 2019 of around $3.4 billion and increases in benefit expenses owing to increases in recipient numbers and the adjustment to payments from the indexation to wage growth.

The impact of the Government's response to and recovery from COVID-19 will mean core Crown expense will remain at similar levels up to 2022/23. The forecast profile of COVID-19 related expenditure is outlined on page 29. It is expected that most of the Government's policy measures in relation to COVID-19 will be temporary, and therefore there will only be a small structural impact to core Crown expenses by the end of the forecast period.

…looking through the temporary impacts of COVID-19, growth in core Crown expenses is broadly similar to the Half Year Update…

Overall, core Crown expenses are forecast to increase by $26.0 billion by the end of the forecast period, this compares to growth of $22.2 billion in the Half Year Update. Core Crown expenses as a percentage of GDP are expected to peak at 38.7% in 2019/20 before declining to 30.2% by 2023/24.

…with Budget 2020 decisions and allowances for future Budget decisions being a key driver of the growth…

A portion of the nominal increase in expenses is attributable to decisions from Budget 2019 and Budget 2020. Budget 2020 decisions are expected to increase core Crown expenses by an average of $3.2 billion per annum from 2021 onwards, while Budget 2019 is expected to contribute $3.8 billion each year on average to this increase.

Operating allowances for Budget 2021 and Budget 2022 have been set at $2.4 billion with the Budget 2023 allowance being $2.6 billion. Overall, new spending from future Budgets is forecast to increase core Crown expenses by $7.2 billion per annum by 2023/24 (Figure 2.5).

Figure 2.5 - Future Budget allowances available for new spending decisions

Source: The Treasury

Text description of Figure 2.5 - Future Budget allowances available for new spending decisions.

For forecasting purposes, Budget allowances are assumed to be all operating expenditure. However, these allowances can be used for a combination of revenue and operating or capital expenditure 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. Refer to the box on page 40 for more details on how Budget allowances work.

…while benefit costs continue to grow, mainly owing to increasing recipient numbers…

Social assistance spending is forecast to grow by $9.6 billion across the forecast period, mainly owing to growth in recipient numbers, the impact of indexation of most benefits to wage growth and the increase of $25 per week in main benefits from 1 April 2020.

The New Zealand Superannuation benefit is expected to grow by $4.4 billion.New Zealand Superannuation recipient numbers are forecast to increase from an average of around 767,000 in 2018/19 to over 901,000 by the end of the forecast period (an increase of 17.5%). By the end of the forecast period, New Zealand Superannuation equals around half of core Crown social assistance spending and 16.8% of core Crown expenditure.

Figure 2.7 - Social security welfare expense and recipient numbers of main benefits and NZS

Source: The Treasury

Text description of Figure 2.7 - Social security welfare expense and recipient numbers of main benefits and NZS.

The increase of $25 per week in main benefits from 1 April 2020 is expected to increase social assistance spending by $2.4 billion.

Growth in Jobseeker Support and Emergency Benefit and Accommodation Assistance benefits is expected to contribute $1.1 billion and $0.7 billion respectively to the $9.6 billion growth in social assistance costs.

The economic conditions over the forecast period are a significant factor in the expected growth in Jobseeker Support and Emergency Benefit recipients with some flow-on impacts to Accommodation Assistance, and the growth in benefit expenses. The number of Jobseeker Support and Emergency Benefit recipients is expected to initially increase by 158,000 (more than doubles) by 2020/21 compared with 2018/19. However, by 2023/24 there are expected to be around 41,000 (an increase of 30%) more recipients compared with 2018/19. The number of Accommodation Assistance recipients is expected to increase initially by 136,000 by 2020/21 compared with 2018/19. However, by 2023/24 this reduces to 67,000 (an increase of 23%) compared with 2018/19.

…and finance costs increase owing to additional borrowings

Core Crown finance costs are forecast to grow by around $0.8 billion by the end of the forecast period, primarily owing to interest on additional borrowings to fund the forecast residual cash deficits (refer to page 44). This is offset by a lower effective interest rate of borrowings owing both to lower Government bond interest rates and to settlement cash liabilities having a lower interest rate than the repurchased Government bonds they have effectively replaced through the Large Scale Asset Purchases programme (LSAP).

Operating Balance before Gains and Losses and the Operating Balance#

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OBEGAL deficits are forecast across the period although some recovery is expected by 2023/24 …

OBEGAL is forecast to be a $28.3 billion deficit in 2019/20 and remain at a similar level for the two following years before reducing to a $16.5 billion deficit in 2022/23 and a $4.9 billion deficit in the final year of the forecast (Figure 2.8).

Figure 2.8 - Components of OBEGAL by segment

Source: The Treasury

Text description of Figure 2.8 - Components of OBEGAL by segment.

In line with the expected economic impacts of COVID-19 and the Government's response, OBEGAL deficits are expected to be highest over the next three years, before starting to recover in 2022/23.

State-owned enterprises' (SOEs') surpluses reduce from 2018/19. This reflects the expected decline in third-party revenue due to COVID-19 for a number of SOEs, and in particular the aviation and tourism sector revenue.

The Crown entities sector is forecast to run deficits of around $2.8 billion in the current year and then reducing to $1.5 billion by the end of the forecast period. These deficits are mainly driven by ACC and District Health Boards (DHBs), which are both expecting growth in demand leading to rising costs.

…leading to operating balance deficits

Net losses of $8.8 billion are expected in 2019/20, largely reflecting losses in the Government's large investment funds (ACC and NZS Fund) along with the impact of the LSAP. The LSAP is discussed in more detail on page 43.

The total Crown operating balance, which includes gains and losses on assets and liabilities, is forecast to be in deficit across all years of the forecast period (Figure 2.9). An operating balance deficit of $37.1 billion is expected in the current year, staying at this level in the following years before reducing to a deficit of $1.0 billion in 2023/24. This trend reflects the OBEGAL trend which flows directly through, with gains and losses having a small impact.

Figure 2.9 - Components of operating balance

Source: The Treasury

Text description of Figure 2.9 - Components of operating balance.

Residual Cash and Net Core Crown Debt[7]#

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Significant cash shortfalls are now expected, reflecting the forecast deficits…

Over the entire forecast period, a cash shortfall of $150.9 billion is expected (Figure 2.10). This cash shortfall is funded largely through additional borrowing.

Figure 2.10 - Core Crown residual cash

Source: The Treasury

Text description of Figure 2.10 - Core Crown residual cash.

A net operating cash deficit of $21.8 billion is expected in 2019/20. The level of operating cash deficit grows in 2020/21 to reach $28.3 billion before reducing over the forecast period. The trend in these deficits broadly follows a similar trend to the OBEGAL forecast with larger deficits in the near term.

…while capital spending adds to the operating deficits…

The Government is forecast to invest a net total of $57.8 billion in capital over the forecast period. Net capital spending includes:

• $14.3 billion on building and acquiring physical assets
• $7.4 billion on advances mainly due to the Reserve Bank's Term Lending Facility of up to $6.0 billion to support the Government's Business Finance Guarantee Scheme to help promote lending to viable businesses and ensure liquidity to the banking system, and
• $18.3 billion on providing capital to Crown entities (eg, to the New Zealand Transport Agency for state highways ($6.8 billion), to DHBs to build or develop hospitals ($3.9 billion) and to KiwiRail to invest in the rail network ($3.2 billion)).

In addition, the forecast capital spending includes $10.3 billion in contributions to the NZS Fund and future new capital spending of $10.3 billion including $7.8 billion in contingencies where funding has been set aside for a specific initiative, but additional report backs are required before funding is confirmed. Future new capital spending represents funding set aside to be allocated in the future.

Table 2.11 shows 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).

Source: The Treasury

…and consequently, net core Crown debt is expected to increase over the forecast period

In nominal terms, net core Crown debt is expected to grow significantly over the forecast period reaching $200.8 billion in 2023/24.This is an increase of $143.1 billion from the position at the end of the 2018/19 fiscal year. The increase is mainly driven by the need to fund the residual cash deficits of around $150.9 billion expected over the next five years (refer to table 2.12 to see how fiscal indicators are impacted).

As a percentage of GDP, net core Crown debt is expected to increase rapidly in the first two years of the forecast period, from 19.0% in 2018/19 to 44.0% in 2020/21 (Figure 2.11). It then gradually rises, before stabilising at 53.6% in 2022/23. Net core Crown debt excludes the NZS Fund assets; if these were included, net debt would be 36.9% of GDP.

Figure 2.11 - Net core Crown debt

Source: The Treasury

Text description of Figure 2.11 - Net core Crown debt.

Table 2.12 sets out how all forecast Government revenue, and operating and capital expenditure impacts the key fiscal indicators.

1. State-owned enterprises (SOEs) and Crown entities (CEs)

Source: The Treasury

Gross debt rises rapidly over the forecast period…

Gross debt is expected to rise in each year of the forecast period, increasing by a total of $134.3 billion over the forecast period (Figure 2.12). The increases to gross debt are highest in the early parts of the forecast period, as a result of the immediate fiscal response to COVID-19.

Figure 2.12 - Gross debt

Source: The Treasury

Text description of Figure 2.12 - Gross debt.

Forecast gross debt as a percentage of GDP rises significantly, before stabilising at just under 60% by the end of the forecast period.

…owing to the core Crown borrowing programme underpinning the fiscal response to COVID-19

The core Crown borrowing programme includes the issuance of both New Zealand Government Bonds (NZGB) and short-term borrowings (eg, Treasury Bills). Consistent with the profile of core Crown residual cash, NZGB issuance is predominantly weighted towards the early part of the forecast period.

Heightened uncertainty remains on the timing, and to a lesser extent the size, of cash requirements, alongside variability in economic activity. To mitigate this uncertainty, the expected increase in borrowings is higher than the forecast change in cash requirements. This leaves a sizeable cash buffer, which allows the Government to be better placed to manage funding and liquidity risks.

In total, the bond programme is expected to raise funds of $204.3 billion over the forecast period. Bond maturities and repurchases will result in repayments of $47.7 billion of existing debt. In addition, short-term borrowing is expected to be $7.0 billion higher at the end of the forecast period, relative to the end of 2018/19 (Table 2.13). Overall, the core Crown borrowing programme will provide net funds of $163.6 billion to help meet residual cash deficits and to ensure cash is available for bond maturities in 2025.

Source: The Treasury

Total Crown Balance Sheet#

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Operating balance deficits drive the decline in the Crown's net worth…

Net worth is the difference between the Crown's total assets (what the government owns) and liabilities (what the government owes). This difference primarily consists of the accumulation of operating surpluses and deficits (referred to as taxpayers' funds) and revaluation uplifts in the physical assets.

Figure 2.13 - Net worth

Source: The Treasury

Text description of Figure 2.13 - Net worth.

In nominal terms, net worth declines by $104.5 billion over the forecasts, a decrease of 73% from the net worth as at 2018/19. As a percentage of GDP, net worth decreases to be 10.3% in 2023/24. The impact of the operating balance deficit, which is largely owing to the COVID-19 economic impact and Government response to date, flows through to the Crown's balance sheet. For a breakdown of net worth refer to Table 2.14.

This shows that taxpayers' funds (which is primarily the accumulation of previous operating balance surpluses and deficits) is now forecast to be in a negative position across the forecast period; the last time this occurred was for the year ended 30 June 1999. A positive taxpayers' funds provides a buffer against adverse events. These forecasts reflect the use of that buffer in response to COVID-19. Taxpayers' funds will need to be rebuilt in the future to cope with future shocks.

Source: The Treasury

The forecasts show a relatively static Property, plant and equipment reserve. The impacts of the economic decline due to COVID-19 on assets valuations will not become clear until year end (30 June) valuations are completed for key non-financial assets (ie, land, buildings).

The Risks to the Fiscal Forecasts chapter includes a section on balance sheet risks and should be read in conjunction with the fiscal forecasts.

The balance sheet shrinks as liabilities increase faster than asset growth …

While liabilities increase by $217.9 billion, assets increase by only $113.4 billion. Total Crown assets grow to reach $478.0 billion in 2023/24. Total Crown liabilities increase to reach $439.5 billion in 2023/24 largely owing to a significant increase in borrowing.

Figure 2.14 - Total Crown net worth

Source: The Treasury

Text description of Figure 2.14 - Total Crown net worth.

…with total borrowing expected to increase by $207.0 billion or 188%

Total liabilities including provisions are forecast to increase by $217.9 billion over the forecast period to $439.5 billion in 2023/24. The increase in total liabilities is largely owing to borrowings increases of $207.1 billion, 188% higher than the level at 2018/19.

Figure 2.15 - Borrowings by segments

Source: The Treasury

Text description of Figure 2.15 - Borrowings by segments.

The increase in borrowing is driven by two main factors:

• Government bonds and short term borrowings have increased by $132.5 billion.
• Kiwibank borrowing (eg, deposits held) increasing by $10.8 billion to fund lending growth through growth in deposits from customers, as discussed on page 51.

The Balance Sheet provides capacity for the government to meet financial, social and commercial objectives

The Government's balance sheet can be usefully categorised[10] by function or purpose as illustrated below.

The balance sheet decreases significantly owing to the impacts of COVID-19…

The largest asset growth over the forecast period is in the social assets portfolio (on average 51% of the total Crown balance sheet). Social assets (eg, schools, defence force, public housing and infrastructure) are expected to increase by $32.7 billion to be $233.1 billion in 2023/24. This increase largely reflects the capital spending discussed earlier (refer to page 45), with one of the most significant investments expected to be in public housing.

Figure 2.16 - Breakdown by functional classification of the balance sheet

Source: The Treasury

Text description of Figure 2.16 - Breakdown by functional classification of the balance sheet.

The commercial asset portfolio (representing on average 17% of the Crown balance sheet) is expected to increase by $11.6 billion over the forecast period to be $79.0 billion in 2023/24. Overall, it remains relatively static as assets increase in line with liabilities (the largest of which relates to Kiwibank loan assets growth, which is offset by growth in the Kiwibank loan liabilities).

The financial segment's net worth is forecast to decrease sharply by $127.4 billion over the forecast period to be $185.0 billion in 2023/24, owing to the increased borrowings required to service the operating deficits and capital expenditure (as discussed above) and investment returns decreasing in the short-term returns (largely reflecting losses in the Government's large investment funds (ACC and NZS Fund)).

Key Economic Assumptions Used in the Forecast Financial Statements#

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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, and
• 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 2.15 below.

Notes:

1. Production measure
2. Expenditure measure

Source: The Treasury, Stats NZ

Risks to the Fiscal Forecasts#

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Overview#

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The Treasury's fiscal forecasts are based on a number of assumptions and key judgements using the best information available and our best professional judgement. As with any kind of forecast, there is a risk that actual events will differ from expectations. This chapter outlines the key risks to the fiscal forecasts.

Risks to the fiscal forecasts can be either positive or negative and can affect revenue and spending or assets and liabilities. The key risks to the fiscal forecasts can be broadly classified into the following categories:

This chapter provides a discussion of the following risks to the fiscal forecasts:

• COVID-19 (all risk types) - there is a significant risk that the fiscal forecasts will be impacted from the continued effects of COVID-19, particularly on the economy and from the Government's response. This section outlines the key risks to the fiscal forecasts resulting from COVID-19.
• Fiscal Sensitivities (risk type 4) - the fiscal forecasts are sensitive to particular economic indicators (eg, nominal GDP). This section outlines how changes in these economic indicators impact key fiscal indicators.
• Balance Sheet Risks (risk types 3 and 4) - the Government's balance sheet is exposed to a number of risks. This section outlines the risks that assets and liabilities will not be able to provide public services, finance or prefund future government expenditure and obligations, or achieve commercial objectives.
• Specific Fiscal Risks (risk types 1 and 2) - the fiscal forecasts will be impacted from future policy decisions and changes in demand for government services. This section covers all government decisions and other circumstances known to the Government that may have a material effect on the fiscal outlook, but are not certain enough in timing or quantum to include in the fiscal forecasts.
• Contingent Liabilities and Assets (risk type 3) - the fiscal forecasts will be impacted if any of the Government's current contingent liabilities or assets crystallise. This section outlines the Government's contingent liabilities and assets as at 31 March 2020.

In previous Economic and Fiscal Updates, information on Fiscal Sensitivities and Balance Sheet Risks has been disclosed separately in a Risks and Scenarios chapter. However, we believe it is more useful in the current environment to include this information in this chapter with the other discussions of risks to the fiscal forecasts.

COVID-19#

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The COVID-19 pandemic is a ‘once in a century' public health shock, which has already had a significant fiscal impact on the Government's finances. The true fiscal impact of COVID-19 is still highly uncertain. This uncertainty presents significant risks to a number of assumptions used in preparing the fiscal forecasts. The key risks to the fiscal forecasts are:

Impact on the economy - the economic disruption from COVID-19 is still in its early stages, so there is a high degree of uncertainty about its impact on jobs and incomes. Forecasts for tax revenue and benefit expenses are particularly sensitive to economic conditions. To illustrate this uncertainty, the Economic Outlook chapter includes scenarios that model the fiscal impact of how the economy might evolve if some of the key judgements around COVID-19 in the main forecasts were to be altered.

The Government's current response - the Government has already implemented a number of policies to respond to COVID-19. The initial response has focused on the health response, increasing resources for the vulnerable and supporting businesses’ access to finance. Policies announced as at 20 April 2020 have been included in the fiscal forecasts based on the best information available; however, given the degree of uncertainty there is a risk that actual costs for these policies may differ, for example in estimating future calls on the Business Finance Guarantee.

The Government's future response and recovery - COVID-19 has impacted a number of sectors in the economy. The Government has a three-phase plan to respond to, and recover from, COVID-19. The phases are: fighting the virus and cushioning the blow, positioning for recovery and resetting and revitalising the economy. The fiscal forecasts do not include any individual Government decisions made after 20 April 2020; however, they do include funding set aside to manage the fiscal costs of the response to, and recovery from, COVID-19.

The COVID-19 Response and Recovery Fund - the Government has established the COVID-19 Response and Recovery Fund (CRRF) as a Budget management tool for managing the fiscal impacts of COVID-19. These forecasts assume that the CRRF will be fully allocated by the end of the forecast period. At the date the fiscal forecasts were completed, $39.3 billion was still available in this budget envelope. To include this budget envelope in the forecasts, the Treasury has had to make judgements about the nature (eg, operating or capital) and timing of the costs. There is a risk that actual costs will differ from those judgements and assumptions used to prepare the fiscal forecasts. There is also a risk that the fiscal costs of the Government’s response and recovery may be more or less than what has been reflected in the fiscal forecasts.

Impact on the valuation of the balance sheet - a number of assets and liabilities on the Crown balance sheet are valued using market information (eg, share investments and ACC outstanding claim liability). The impact of COVID-19 is likely to cause some ongoing volatility in the market that will affect the future value of assets and liabilities on the Government’s balance sheet.

Contingent liabilities - the effects from COVID-19 may result in costs from some of the Government’s existing contingent liabilities converting into expenses during the forecast period. In particular, there is a risk that there may be calls on some uncalled capital facilities and some Crown guarantees and indemnities may be triggered.

Fiscal Sensitivities#

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Table 3.1 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 2024, tax revenue would be around $5.3 billion higher than forecast in the June 2024 year. The sensitivities are broadly symmetric: if nominal GDP growth is one percentage point lower than expected each year, tax revenue would be around $5.1 billion lower than forecast in the June 2024 year. The figures are indicative and can be influenced by the composition of growth as different types of activity have different effective tax rates.

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 forecasts. 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#

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The Government's balance sheet is absorbing a significant shock because of COVID-19, deploying the resilience built up over several economic cycles of responsible fiscal management. In addition, the COVID-19 response has seen some further risks added to the Government's balance sheet, for instance in relation to guarantees provided to businesses. To explain this, and the impact of future risks, it is useful to apply the function or purpose approach to Balance Sheet risks set out in the Fiscal Outlook chapter:

• Social - assets and liabilities held to provide public services.
• Financial - assets and liabilities that finance or prefund government expenditure and obligations for future expenditure.
• Commercial - assets and liabilities of entities with commercial objectives.

Balance Sheet risks are risks that assets and liabilities will not be able to provide public services, finance or prefund future government expenditure and obligations, or achieve commercial objectives. The resilience of the balance sheet refers to its ability to absorb and adapt to shocks and stresses that might otherwise hinder these objectives being achieved.

Sources of (Social) balance sheet risk to public services

• Physical assets such as land, buildings, state highways and military equipment are susceptible to external natural hazards, and the quality of asset management in delivering services. The government generally relies on asset management, including built in redundancies (eg, in network capacities), and its ability to re-allocate or repurpose assets (eg, in responding to a crisis) rather than risk transfer instruments such as insurance in managing these risks.
• The replacement costs of physical assets are also susceptible to valuation movements through changes in property market conditions, changes in demand and changes in the costs of construction. Valuations are updated as part of the financial reporting cycle, rather than the budgeting cycle. These forecasts therefore do not reflect any impact from COVID-19 in physical asset valuations.
• Social insurance and retirement liabilities (eg, Accident Compensation, Veterans' Disability and the Government Superannuation Fund) are prone to volatility through their actuarial valuations, including changes to expectations of future interest rates and inflation rates. These forecasts reflect a significant crystallisation of this risk as a consequence of the recent reduction of interest rates to unprecedented low levels.
• The Crown faces contingent liabilities, for example, indemnities of activities in the public interest, environmental claims and legal proceedings. The government indemnities associated with the Business Finance Guarantee Scheme to support viable businesses represent a significant increase in balance sheet risk. Contingent liabilities are more fully discussed in pages 84 to 94 at the end of this chapter.

Sources of (Financial) balance sheet risk to finance or prefund future government expenditure and obligations

• The New Zealand Government remains among the highest-rated sovereigns globally, with the top Aaa foreign-currency rating from Moody's (reaffirmed on 3 April 2020) and AA foreign-currency ratings from Standard & Poor's and Fitch. Moody's has reported: “While the global coronavirus outbreak presents unprecedented challenges to New Zealand's economy, the Government has promptly deployed its fiscal capacity to buffer the impact of the shock. Institutional effectiveness mitigates vulnerabilities related to reliance on external financing and elevated household debt.”
• The deployment of the Government's fiscal capacity has meant that the balance sheet is now more highly leveraged than previously. Monetary policy activities including a Large Scale Asset Purchase (LSAP) program, foreign exchange swaps to manage short-term interest rate pressures, and lending to the finance sector by the Reserve Bank have expanded the consolidated balance sheet, increasing interest rate, foreign exchange and credit risk.
• Financial assets held by ACC and the New Zealand Superannuation Fund are sensitive to financial market volatility, such as movements in interest rates, exchange rates and equity prices. This has been especially apparent from movements in recent weeks that are reflected in these forecasts. Crown financial institutions 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 long-term social insurance or retirement liabilities.
• Liquidity risk: the Crown incurs liquidity risk with respect to its ability to raise cash to meet its obligations. Each agency manages its own specific liquidity risk while the Treasury manages the Crown's liquidity requirements. The LSAP programme instituted by the Reserve Bank provides additional assurance that this risk is managed in the current environment.

Sources of (Commercial) balance sheet risk to meet commercial objectives

• A number of commercial entities owned by the Crown have their financial performance and valuations impacted by the commercial environment in which they operate. These forecasts include support packages for Air New Zealand and Airways Corporation where COVID-19 has significantly impacted their commercial environment.

Managing risk into the future

The Crown's exposure to balance sheet risks is unavoidable if it is to pursue its objectives. The general approach that has been taken to identify, measure and treat these risks where practicable, to maintain debt at prudent levels and to hold a healthy level of net worth has enabled the Government to effectively absorb much of the shock of COVID-19.

The build-up and subsequent deployment of that fiscal resilience in response to COVID-19 has underscored the importance of the fiscal responsibility principles in the Public Finance Act 1989.

The forthcoming risk management challenge is to move from absorption to adaptation, as the Government moves from fighting the virus and cushioning the blow, toward kickstarting the economy, resetting the Crown’s balance sheet objectives and rebuilding its capacity to absorb shocks in the future.

Specific Fiscal Risks#

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This statement of specific fiscal risks is required by the Public Finance Act 1989. In addition to the discussion of other types of risks to the economic and fiscal forecasts outlined in this 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 are not certain enough in timing or quantum to include in the fiscal forecasts. This section covers:

• how specific fiscal risks are managed
• criteria for inclusion and exclusion of specific fiscal risks, and
• the statement of specific fiscal risks.

The risks disclosed in this chapter reflect those that are known at the date of the finalisation of the fiscal forecasts, 23 April 2020. 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.

How Specific Fiscal Risks are Managed

A key principle guiding the disclosure of risks is transparency. This means that material risks are disclosed in this section 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 (the future new spending built into the fiscal forecasts). This ensures 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 risks. The risks disclosed in this section therefore may not arise in a way that affects the fiscal forecasts presented in this Economic and Fiscal Update.

1 Reprioritisation

Core Crown expenses for the year ended 30 June 2019 were $87.0 billion, while capital spending for the same period totalled $6.7 billion. This base of expenditure creates significant scope for reprioritisation. 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 2020 and are included in the Treasury's fiscal forecasts (Fiscal Outlook chapter). These may be reviewed at a later date when the fiscal impact of COVID-19 is clearer.

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. The effect of including the allowances in the forecasts is 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 for each Budget. The allowances have been set at a level that allows the Government to achieve its broader fiscal and policy objectives and in accordance with the expectation that any new policy initiatives and cost pressures can be managed within these parameters. A self-imposed limit on expenditure also helps to ensure any new spending is targeted to areas of high priority.

3 Policy choices

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

4 COVID-19 Response and Recovery Fund (CRRF)

For risks that materialise in full or in part owing to the impacts of COVID-19, drawing down on the remaining CRRF balance is an additional option for the Government.

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.

General Risks Not Included as Specific Fiscal Risks

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

• risks from changes to economic assumptions, including as a result of COVID-19, and the most significant of these have been recognised elsewhere in this chapter and Economic and Fiscal Update
• business risks and volatility in the returns from, and valuation of, the Government's investments relating to the broader economic and commercial environment, and
• the costs of future individual natural disasters, individual events resulting from climate change, and other major events (including biosecurity incursions), as their occurrence, nature and timing cannot be predicted. New Zealand will continue to experience natural disasters and for some of these the frequency and/or severity is likely to increase with climate change, for example increased coastal flooding because of sea level rise and extreme weather events. Once such an event does occur, a number of choices arise about how to respond, and when to recognise potential liabilities. Specific risks are disclosed at that point based on the range of possible responses.

Exclusions to Disclosure

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.

Summary Table#

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The matters listed below are disclosed as specific fiscal risks because they meet the criteria 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 and/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 2019.

Statement of Specific Fiscal Risks as at 23 April 2020

Policy Change Risks by Portfolio#

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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. Some of the policy issues identified would require either legislative or regulatory change. These changes could result in a potential aggregated impact greater than $100 million per year.

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 $1.5 billion to $2.0 billion would need to be reported if such an amendment were to be enacted.

Biosecurity

Mycoplasma Bovis Biosecurity Response (Changed)

The Government and the farming sector have agreed to attempt to eradicate the cattle disease Mycoplasma bovis. Funding has been allocated by the Government, and included in the forecasts, for response activities in 2020/21. The need for additional funding over the rest of the forecast period will be considered depending on progress in eradicating the cattle disease. The timing of farming sector contributions may differ from what is in the fiscal forecasts.

Broadcasting, Communications and Digital Media

Delivery of the Government's Public Media Outcomes (Unchanged)

The media sector, including both public and privately owned organisations, is coming under increasing pressure owing to international competition, declining revenue shares and changes to the way people access content. The Government has committed to strengthening New Zealand's public media and has commissioned a detailed business case on the viability of a preferred approach. Significant additional investment may be required to deliver on the Government's public media outcomes.

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

Education

Early Learning Action Plan (Unchanged)

Following public consultation between November 2018 and March 2019 and subsequent Cabinet approval, the Government released He Taonga te Tamaiti - Every Child a Taonga: Early Learning Action Plan 2019-2029 in December 2019. The estimated cost of the Early Learning Action Plan (ELAP) in the forecast period is approximately $1.6 billion. This estimated cost relates to actions that are indicated in the ELAP as likely to begin within the forecast period, such as improving adult-to-child ratios. To the extent that costs cannot be managed within baselines, further funding may be required.

Education Workforce Strategy (Unchanged)

The Ministry of Education is working in partnership with the Education Workforce Strategy Governance Group to develop a comprehensive Education Workforce Strategy (EWS) for the full education workforce. The aim is for Cabinet to consider the draft EWS in June this year. Post-Cabinet consultation and engagement will follow. An implementation plan will be finalised in early to mid-2021. Initial estimates are that unconstrained implementation, delivering on the full intent of the EWS, will cost more than $100 million.

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

The Government has a stated intention to extend its first year fees-free tertiary education and training policy to the first three years of tertiary education fees-free in future parliamentary terms. The behavioural changes from extending the policy, and therefore the impact on future costs, are unquantifiable at this stage.

Reform of Vocational Education (RoVE) (Changed)

While funding has been set aside in a contingency to manage some of the costs of the Reform of Vocational Education (RoVE), and this is included in the fiscal forecasts, further funding will be required to manage the full costs of implementing the reform. In addition, the nature and timing of the reform will influence the scale of funding needed to ensure the viability of at-risk subsidiaries of the New Zealand Institute of Skills and Technology (former Institutes of Technology and Polytechnics).

Response to the Tomorrow's Schools Review (Changed)

The Government's response to the Tomorrow's Schools Review has been publicly released. Continued policy development and relevant service and implementation design have begun. Accordingly, future decisions are required on almost all changes, including decisions on changes in investment. The Government has indicated it will consider these changes and new investments over the next three to four Budgets. This is a policy choice of the Government and the costs will be material but unquantifiable at this point for specific financial years.

Finance

Deposit Insurance Scheme (New)

The Government has announced that by 2023 it plans to introduce a deposit insurance scheme, of $50,000 per depositor per institution, and is consulting on the details. The scheme would have an impact on both expenses and revenue over the forecast period, but is not yet reflected in the fiscal forecasts.

Foreign Affairs

APEC 2021 (New)

The impact of COVID-19 on the cost of New Zealand's hosting of APEC 2021 has yet to be assessed but could pose a fiscal risk to the Crown.

Official Development Assistance (Changed)

Each year, New Zealand's Official Development Assistance (ODA) expenditure is measured as a proportion of Gross National Income (GNI). In Budget 2020, Cabinet agreed to increase ODA by $55.589 million in 2020/21, lifting it to 0.31% of GNI from 0.28% of GNI. If Government wants to maintain the ratio at or around 0.31% beyond June 2021, a different level of funding may be required, depending on the scale of the economic impact of COVID-19.

Health

Health and Disability System Review (New)

The review of the New Zealand Health and Disability System will identify opportunities to improve the performance, structure, and sustainability of the system with a goal of achieving equity of outcomes, and contributing to wellness for all, particularly Māori and Pacific peoples. Until the Government has considered the recommendations and decided which to implement, the costs of implementation will not be known.

Primary Care Services (Changed)

The Government has signalled the intention to further increase funding for Primary Care services beyond the increase provided in Budget 2020 and in response to COVID-19. The associated implementation details and funding arrangements for any further funding are yet to be finalised.

Housing

Progressive Home Ownership (Changed)

The Government has announced it is developing a progressive home ownership scheme. Design of the scheme is still underway and, depending on decisions made, there could be an impact on the fiscal forecasts. The risk of the Crown incurring greater fiscal costs than originally intended is increased by less favourable economic circumstances.

Māori Development

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. In April 2019, the Government initiated a whole-of-government approach to addressing issues raised in the WAI262 claim and the Tribunal's subsequent report.

Research, Science and Innovation

Research and Development Spending Target (Changed)

The Government has a target to increase economy-wide research and development (R&D) expenditure to 2% of GDP over 10 years. While the effect of COVID-19 is likely to decrease GDP, it is also likely to decrease private sector R&D expenditure. It is too soon to assess whether the combined effect of these two factors will further increase the cost to the Crown of achieving the 2% of GDP target.

Revenue

Loss Continuity (Unchanged)

The Government has announced it intends to consult on options to relax the current loss continuity tax rules in order to encourage the growth of start-up companies. The consultation process will result in a discussion document which will more widely canvass the various options, with any resulting changes being included in a future tax bill. Any resulting relaxation of the rules could result in a negative impact on revenue.

Potential Tax Policy Changes (Changed)

The Government has initiated a work programme to progress certain tax measures. These can be viewed on the tax policy website www.taxpolicy.ird.govt.nz. Given the effect of the COVID-19 pandemic on the economy, the focus of the work programme will be on supporting businesses and New Zealanders through this crisis and facilitating the recovery. The fiscal implications of these potential policy changes are unquantified at this stage.

Taxation of Digital Services (Unchanged)

The Government is currently considering options for reform of the international tax framework, in light of the challenges posed by digitalisation and globalisation. The Government's preference is to continue working with the Organisation for Economic Co-operation and Development (OECD) to find a multilaterally agreed solution to these challenges, but the Government will seriously consider a digital service tax if the OECD does not make sufficient progress on a multilateral solution. The revenue impact of any change will depend on the design of the preferred option.

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 Welfare Expert Advisory Group (WEAG), which was tasked with advising on improvements to the welfare system to achieve the Government's vision of delivering adequate income and standard of living, supporting participation, and promoting the dignity of clients. The Government has already responded to a number of recommendations, including its recent decision to increase main benefits by $25 a week, and consideration of other recommendations is ongoing.

Transport

Auckland City Rail Link Ownership Issues (New)

The Government has committed to fund 50% of the costs associated with the City Rail Link project, along with Auckland Council, which has also committed to fund 50% of the project. Both the Crown and Auckland Council have treated the investment for the City Rail Link project as capital expenditure. Depending on the final ownership structure of the City Rail Link, the Crown may need to write off some value from the Crown's books. Any write-off is likely to be in the range of +/- 20% of the Crown's investment (ie, there may be a write-up of value), but this depends upon a number of factors including allocation of assets and valuation basis once allocation has been determined. The timeframe for decisions around future ownership has yet to be finalised. The current work plan is for such a decision to be made in late 2020, although the agreement between Sponsors and City Rail Link Limited allows for such a decision to be made as late as 2022. This is a newly published risk, rather than a new risk, as this risk was previously withheld under section 26V of the Public Finance Act.

Light Rail in Auckland (New)

Cabinet will consider the Government's preferred delivery partner for the City Centre to Mangere light rail project. The Government has signalled in the Auckland Transport Alignment Project that $1.8 billion from the National Land Transport Fund (NLTF) will be available to leverage and finance rapid transit projects in Auckland. Depending on the preferred delivery partner and the final project agreement, additional Crown funding may be required to support the City Centre to Mangere project. This is a newly published risk, rather than a new risk, as this risk was previously withheld under section 26V of the Public Finance Act.

Support for KiwiRail (Changed)

Budget 2020 provides an indicative funding allocation of $246.3 million for below rail (network investment), $396.3 million to replace ageing rolling stock, and $400 million to support replacement of the ageing interisland ferry fleet and associated landside infrastructure. However, further Crown funding is likely to be sought to progress these projects as part of the implementation of the Future of Rail programme. In addition, KiwiRail's ability to access NLTF funding is dependent on the Land Transport (Rail) Legislation Bill being passed and coming into force. If the Bill is not passed, further Crown funding would likely be needed to support the establishment of a reliable and resilient rail network.

Upper North Island Supply Chain Strategy (UNISCS) - Working Group Recommendations (Unchanged)

The final report of the UNISCS Working Group has been delivered. The Working Group's preferred scenario is a full move of the Ports of Auckland to Northport. Officials are currently undertaking further work to support future decisions on the Working Group's recommendations. Government investment would likely be required to support any shift in port trade.

Wellington Transport Investment Programme (Changed)

The Government Policy Statement (GPS) 2021 has been developed in a way that ensures that Let's Get Wellington Moving (LGWM), along with the Government's other priorities, can be funded from the NLTF to the expected level. However, the ability to deliver LGWM in full relies on local government providing its own share. Local government's commitment to funding their share of LGWM is yet to be fully confirmed as their Long-term Plan process is ongoing. If the local government share is at risk of not being met, there could be requests for greater funding from central government, putting further pressure on the NLTF.

Urban Development

Infrastructure Funding and Financing to Improve Housing Affordability (Unchanged)

The Infrastructure Funding and Financing Bill is currently being considered by a select committee. The purpose of the Bill is to enable a multi-year levy to be imposed on beneficiaries of infrastructure projects by Order in Council as part of the Infrastructure Levy Model. Under the Model the levy will be collected by a Special Purpose Vehicle to service finance raised to cover the costs of the infrastructure. The fiscal forecasts make no provision for use of the Model. The impact of the Model will depend on the passing of the Bill into law, the final design of the Model, and the nature and extent of projects funded by the Model.

Cost Pressure and Cost Variance Risks by Portfolio#

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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 that required to cover the cost of claims. If factors such as claims experience, ACC performance, and economic assumptions (particularly discount rates and unemployment rates) differ from the forecasts, ACC's levy revenue, claims costs, and liability may also differ from the forecasts. Any variance will have a corresponding impact on the operating balance.

Legal Claims and Proceedings (Unchanged)

A High Court decision regarding the interpretation of section 32(1)(c) of the Accident Compensation Act 2001 found that an injury is an ordinary consequence of treatment when it is more likely than not to occur. As a result of this decision, fewer claims for compensation will be excluded as an ordinary consequence of treatment. At this stage, the impact of the decision has not been quantified and 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 future 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 (ETS) earns revenue and incurs expenses for the Crown, both of which are uncertain, partly owing to the market price of New Zealand Units (NZUs), future decisions about the settings of the scheme to be taken by Cabinet, unit volumes and the extent to which participants elect to use the Fixed Price Option FPO. For the latest fiscal forecasts, both revenue and expenses have been valued at the 31 January 2020 market price of $27.55. Under the (FPO), participants and eligible persons have an option to meet their obligations by purchasing units directly from the Crown at a fixed price. Should the market price of NZUs exceed the fixed price at the time the surrender obligation becomes due, it is likely that participants and eligible persons would use the FPO. As a result, the Crown would recognise an expense from selling units at below market price and receive cash that would reduce net core Crown debt. The Government also released a consultation document in December 2019 on proposed changes to the settings of the ETS (eg, increasing the FPO to $35 for 2020 emissions). The fiscal forecasts include the fiscal impact of these proposed changes; however, final decisions are yet to be taken so there is a risk that these decisions may differ from what has been assumed in the fiscal forecasts.

Economic Development

New Zealand Screen Production Grant - International (Changed)

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. Although potential delays to productions as a result of COVID-19 may offset some of this risk in the near term, there remains a high level of international interest in New Zealand as a place to do screen business over the forecast period. The fiscal forecasts include an estimate of expenditure based on known productions. There nevertheless remains a risk that demand for the Screen Production Grant will exceed what is included in the fiscal forecasts if more large-budget productions choose to locate in New Zealand (in addition to the two existing large-scale productions of Avatar sequels and The Lord of the Rings television series).

Education

Education Operating Cost Pressures (Changed)

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. In addition, the Ministry of Education faces compounding departmental operating expenditure pressures due to increasing demand for and price of education services, and other cost pressures experienced by its work programmes. These pressures, which include difficult to control inflationary pressures, represent risks to the extent that 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.

Learning Support (Changed)

A range of existing learning support services provided and/or funded by the Ministry of Education face volume and price pressures. Changing learning support funding is a policy choice for the government. However, to the extent that these pressures cannot be met within existing baselines, further funding may be required.

School Transport Services (Unchanged)

The cost of Daily Bus Services makes up approximately half of the total budget for School Transport Services. The Ministry of Education will be going to market for the tender of provision of these services, which could impact the contract total. In addition, the combination of a demand increase of 14% in Specialised School Transport Assistance and indexation increases will likely lead to further cost increases. 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, and 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 (Changed)

As at 30 June 2019, the Government had goodwill on acquisition of a number of sub-entities totalling $743 million. Since then, the goodwill on acquisition relating to Air New Zealand has been impaired, as a consequence of COVID-19. Under New Zealand accounting standards (PBE IPSAS 26), the remaining 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 further such impairment losses.

Foreign Affairs

Antarctica New Zealand - Redevelopment of Scott Base (Unchanged)

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 provided $19.7 million to Antarctica New Zealand to undertake further design and market testing to confirm costs ahead of seeking full redevelopment costs. In June 2019, Cabinet agreed in principle to the redevelopment of Scott Base and to a specific design option, subject to approval of the final costs, to be sought in a future Budget.

Greater Christchurch Regeneration

Christchurch Central Recovery Plan - Anchor Projects (Changed)

The Crown has funded, and continues to provide funding for, the construction of Anchor Projects as part of the Christchurch Central Recovery Plan. 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.

Southern Response Earthquake Services Support (Unchanged)

The ultimate cost to the Crown of settling earthquake claims remains subject to 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.

Health

DHB Sustainability (Changed)

In recent years, the District Health Board (DHB) sector has been running operating deficits. As a result, a number of DHBs have required additional equity injections from the Government in order to remain solvent. This trend is expected to continue, with the fiscal forecasts reflecting deficits from DHBs of on average $0.9 billion per year over the forecast period. The fiscal forecasts assume that future expenditure growth will be met from future Budget allowances.

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 and net core Crown debt. In particular, the DHB sector is likely to face significant cost pressures in the future to maintain the delivery of existing services. These cost pressures may increase as a result of the COVID-19 response. DHB expenditure growth is likely to be driven by demographic changes, price inflation of inputs, and wage costs (both pay negotiation and progression through pay scales). The Government does have choices for meeting future cost pressures if they eventuate. However, given current policy settings, constraining or reducing expenditure over the forecast period while maintaining existing services would be very difficult. DHBs will be likely to require additional revenue to manage growing deficits.

Health Capital Pressure (Changed)

These capital pressures mainly relate to DHBs, but also to the Ministry of Health and other parts of the health system. DHBs have submitted updated capital intentions, identifying the indicative need for Crown funding over the next four years. Budget 2020 has provided $750 million for DHBs and Budget 2019 provided $1.7 billion, with a further $300 million being provided through the New Zealand Upgrade Programme. However, the pressures remain significant over the forecast period. These pressures are largely driven by asset condition issues and demographic change (population growth and an ageing population), placing pressure on infrastructure capacity. Information technology capability in the Ministry of Health and other parts of the sector also needs to be addressed because of ageing legacy systems and an inability to leverage new technology. The magnitude of the risk will depend in part on whether the capital expenditure can be incurred as forecast in the fiscal forecasts.

Health Operating Pressure (Changed)

The health sector is likely to face significant operating pressures within its existing baselines to maintain the delivery of existing health services. The main pressure drivers include demographic changes (both growth and an ageing population), wage costs (both pay negotiations and progression through pay scale), price inflation of inputs and increased operating costs from investment in IT.

Housing

Divestment and Development of Kāinga Ora – Homes and Communities’ Housing (Changed)

Kāinga Ora’s financial forecasts include business-as-usual divestments, acquisitions and the redevelopment of land and housing as part of its asset management strategy. Revenue from land and property divestments is used to help finance new public housing stock. The COVID-19 crisis is expected to soften the property market, reducing Kāinga Ora’s revenue from divestments, thereby increasing its borrowing and/or Crown funding requirements. Kāinga Ora also faces commercial and financial risks inherent in large-scale build and urban development programmes, the magnitude of which has increased as a result of the adverse impact of COVID-19 on Kāinga Ora’s pipeline, international supply chains and the financial viability of its build partners.

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, such as income-related rent subsidies and accommodation payments for transitional housing, are linked to market-based rent levels. Should market rents increase above what is assumed for the forecasts, further funding may be required to maintain current levels of support. This risk is less likely to eventuate in the immediate future owing to the effects of COVID-19.

KiwiBuild - Fiscal and Delivery Risks (Unchanged)

Changes in the housing market and economy may have an impact on the costs of delivering homes and associated revenue recycling. If house prices fall, Crown underwrites may be called, thereby 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 settings 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.

Tāmaki Regeneration Project (Changed)

The Tāmaki Regeneration Project involves the replacement of 2,500 old public houses with between 7,500 and 10,500 new public, affordable and market houses (around one-third of which will be public houses). Development involves writing off existing public housing assets. If land sale proceeds are less than the value of write-offs in a given year, there will be a negative impact on the operating balance. The likelihood of this occurring has increased, given the expected impact of COVID-19 on land prices.

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 provided funding to complete the design work and initial shift activities associated with the proposed upgrade and expansion of the physical infrastructure. Budget 2020 provides funding for the development and subsequent lease of the new Wellington Archives New Zealand facility and the land purchase and design for a new Regional Shared Repository (RSR). Further funding will be sought in Budget 2022 for the construction of the new RSR to respond to forecast storage growth up to 2030.

Police

Firearms Reform Programme (Unchanged)

The Arms Legislation Bill is currently awaiting its committee of the whole House stage. The Bill provides for the establishment of a firearms registry and for other changes including amendments to the licensing regime, increased regulatory oversight, and the development of new offences and penalties. To the extent that the implementation of the changes 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, as set out in the fiscal forecasts, are likely to change, and final capital and operating expense amounts in any year may vary from those forecast.

Revenue

Cash Held in Tax Pools (Changed)

Funds held in tax pools are recognised as a Crown asset. There is a risk that funds held in these pools may be withdrawn by that taxpayer, resulting in a reduction in the Crown's available cash reserves. The risk is larger in an economic downturn as taxpayers become more likely to withdraw deposits.

Research and Development Tax Incentive (Unchanged)

The Government has implemented a Research and Development (R&D) Tax Incentive, which allows eligible firms to deduct a percentage of their expenditure on R&D against their tax liability to the Crown. Under certain circumstances, eligible firms may receive a cash payment in place of a tax credit. There is a risk that costs may differ from forecasts owing to the limited availability of data for forecasting purposes on future R&D expenditure, including how firms' R&D expenditure will respond to the subsidy. Additionally, international experience shows that costs of R&D tax credits can be significantly higher than expected if firms recategorise other types of expenditure as R&D in order to claim the credit. Costs may also differ from forecasts as the investment environment can change quickly.

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 Consumers Price Index (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 the fiscal 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.

Social Development

Quarterly Employment Survey Redevelopment (Unchanged)

Stats NZ is redeveloping the Quarterly Employment Survey, which will change the way average wages are calculated from the current approach. There are several ways in which the new survey will differ, and the exact impact of this is uncertain. Current estimates indicate redevelopment would be likely to increase costs to the Crown by roughly $135 million per percentage point increase, per annum, from 2021/22 at the earliest.

Transport

Auckland City Rail Link (Unchanged)

The Government has committed to fund 50% of the costs associated with the City Rail Link project, which is estimated to cost $4.4 billion. Based on this estimate, the Government's contribution to the project will be around $2.2 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 fiscal forecasts.

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 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 that 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#

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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.

Budget 2020 Priority Packages (New)

In the Budget Policy Statement 2020, the Government signalled its intention to focus on five wellbeing priority areas in Budget 2020. As a result of COVID-19, however, packages to address these priority areas have not been included in Budget 2020, which now focuses on funding existing cost pressures and responding to COVID-19. It remains the Government's intention to progress parts of these priority packages, but the timing for doing this is yet to be determined.

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.

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, funding may be sought.

New Zealand Upgrade Programme (New)

The New Zealand Upgrade Programme was announced in December 2019. The programme provides funding for significant capital investments. Operating expenses still need to be provided for some projects and there remains a risk regarding the timing of the capital projects that have been reflected in the fiscal forecasts.

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

The Government is facing ongoing pressure from non-government providers of Crown-funded services to fund a greater proportion of their costs, or to fund cost pressures. 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 as a result of changes in demand and price of the 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)

A number of claims have been raised, mainly from workers in the social sectors (including health, education and welfare), in relation to the Equal Pay Act 1972 providing for pay equity (equal pay for work of equal value). The forecasts include an estimate of the expected cost to settle current and future claims; however, there is a risk that the costs may differ depending on the number of further claims that are raised and the outcomes reached from applying the pay equity principles to each particular claim.

Policy Responses to the 15 March Terror Attacks (Unchanged)

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 Attack on Christchurch Mosques on 15 March 2019, which are unable to be quantified at this point.

Possible Responses to the 2020 Referendums on Cannabis Law Reform and End of Life Choice (Unchanged)

The Government has committed to holding referendums on legalising the use of cannabis and on end of life choice at the 2020 general election. The cost of conducting the referendums has been provided for in the forecasts. However, there could be associated impacts on the Government's operating balance should current legal frameworks change as an outcome of the referendums.

Services Funded by Third Parties (Changed)

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 - increased by COVID-19 - that 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 for some of the buildings that do not meet modern building standards and maintenance for buildings with weather-tightness issues. The likelihood, timing and fiscal impact of any repairs are uncertain.

Risks Removed Since the Half Year Update#

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Contingent Liabilities and Contingent Assets#

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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 they are 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 guarantee or indemnity qualifies as a financial guarantee contract, or the amount becomes sufficiently reliable to record as a liability, it would reduce the operating balance and net worth. When a contingent liability crystallises, and is settled, there is an increase in 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 of 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 of more than $20 million and are not expected to be remote.[17]

The contingencies have been stated as at 31 March 2020, being the latest set of published contingencies.

Quantifiable Contingent Liabilities and Contingent Assets

Contingent liabilities

Contingent assets

Unquantifiable Contingent Liabilities and Contingent Assets

Contingent liabilities

The following contingent liabilities have been removed as they are considered to be remote:

Air New Zealand

Kiwifruit vine PSA-V

In addition, 'New Zealand Transport Agency - contractual disputes' are less than $100 million as at 31 March 2020 and have been aggregated into the 'other quantifiable' total legal proceedings and disputes.

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:

Guarantees and indemnities

Guarantees are legally binding promises made by the Crown to assume responsibility for a debt, or the 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).

Business Finance Guarantee Scheme

The Crown has established a Business Finance Guarantee Scheme with a number of banks to support New Zealand businesses facing hardship as a consequence of COVID-19. Under this scheme, the Crown has indemnified approved banks against any shortfall that arises in relation to a supported loan in default by an amount equal to 80% of the shortfall. As these indemnities are financial guarantee contracts the fair value of the contract, and the expense arising has been quantified and incorporated in to the forecasts.

New Zealand Export Credit Office guarantees

The New Zealand Export Credit Office provides a range of guarantee products to assist New Zealand exporters to 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.

$121 million at 31 March 2020 ($109 million at 30 June 2019)

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.

$141 million at 31 March 2020 ($134 million at 30 June 2019)

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.

$184 million at 31 March 2020 ($174 million at 30 June 2019)

Air New Zealand Partnership

The Air New Zealand Group has a partnership agreement with Pratt & 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.

$186 million at 31 March 2020 ($155 million at 30 June 2019)

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 Bonamia ostreae, Mycoplasma bovis and post entry quarantine (PEQ). These claims can be quantified but do not meet the tests for recognising a provision.

$138 million at 31 March 2020 ($138 million at 30 June 2019)

Unquantifiable contingent liabilities

This part of the statement provides details of the 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.

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.

Cover is not available in the Treatment Injury Account for injuries arising as an ‘ordinary consequence' of treatment. The term ‘ordinary consequence' is undefined in legislation and previously had no established legal or clinical meaning. In a case decided on 2 November 2018, the High Court found that ‘ordinary consequence' means a consequence that has more than a 50% chance of occurring (ie, more likely than not). Therefore, any injury from treatment that has a 50% or less chance of occurring is not ‘ordinary' and is covered. While ACC did not rely on any precise percentage in determining whether a consequence was ‘ordinary', in broad terms if all relevant factors put the likelihood of injury at 10% or more, claims would commonly be declined on the grounds of ‘ordinary consequence'. ACC has appealed the High Court's decision, which was expected to be heard by the Court of Appeal in April 2020. ACC considers the High Court's decision is inconsistent with Parliament's intention when the treatment injury provisions were enacted. Only when the Court of Appeal has ruled on this matter will it be possible to make a meaningful assessment of the financial impact of the outcome.

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, myrtle rust, Mycoplasma bovis and the PEQ response. Due to the complexity and uncertainty of the amount of these claims, the amounts are unquantified. To the extent that an obligation can be quantified, provision of $138 million has been made in these accounts as at 31 March 2020.

Treaty of Waitangi claims

Under the Treaty of Waitangi Act 1975, any Māori may lodge with the Waitangi Tribunal certain claims relating to land or actions counter to the principles of the Treaty. 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

Southern Response Earthquake Services Limited (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.

A representative action proceeding was filed against SRES on 29 May 2018. The financial statements make no allowance for the outcome of these proceedings, as the range of possible outcomes cannot be reliably quantified at this time. These claims are being defended because there is a wide range of potential outcomes, and any estimate of a possible obligation resulting from this proceeding would be unreliable.

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 compliance

A number of entities have commenced or completed a review of calculations in recent years to ensure compliance with the Holidays Act 2003. Where possible, a provision has been made in these financial statements for obligations arising from those reviews that have been made in the current year or previous years. To the extent that an obligation cannot reasonably be quantified, there is an unquantified contingency. Further work continues to be undertaken by entities to calculate the potential liability. For some entities, there are complexities and this issue is taking longer to resolve (eg, District Health Boards and schools).

Remediation of per- and poly-fluoroalkyl substances contamination

Local and central government entities are investigating per- and poly-fluoroalkyl substances (PFAS) contamination at sites around New Zealand. PFAS have been used in a wide range of industrial and consumer applications, and some PFAS are recognised persistent organic pollutants. PFAS contamination has been found as a result of discharges from landfills, wastewater treatment plants, and electroplating and textile industries, and from the historical use of specialised firefighting foam at airports, New Zealand Defence Force 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 79

Wakatu

Crown Law is acting for the Attorney-General on behalf of the Crown in right of New Zealand in Proprietors of Wakatu v Attorney-General (CIV‑2010-485-181), in which it is claimed that the Crown breached trust, fiduciary and other equitable obligations relating to land transactions in the top of the South Island in the 1840s. The plaintiff seeks the return of land he says the Crown holds on trust for the successors of the original owners and compensation, or other relief, for alleged breach of trust, fiduciary and other equitable obligations. In February 2017, the Supreme Court held that the Crown owed a fiduciary duty in relation to the land transactions concerned, but remitted matters of breach, defences and remedy to the High Court for a further hearing or hearings. The matter is large and complex and could take up to a further 10 years to resolve.

Description of Contingent Assets

There are no material quantifiable or unquantifiable contingent assets at 31 March 2020.

Forecast Financial Statements#

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

They are based on the accounting policies and assumptions that follow. As with all such assumptions, there is a degree of uncertainty surrounding them. This uncertainty increases as the forecast horizon extends. Both the Economic and Fiscal Outlook chapters include risks to the forecasts while the Risks to the Fiscal Forecast chapter discusses 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 20 April 2020.

The finalisation dates and key assumptions that underpin the preparation of the Forecast Financial Statements are outlined in the Fiscal Outlook chapter (pages 27 to 52).

Statement of Accounting Policies#

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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 Entity Financial Reporting Standard 42: Prospective Financial Statements.

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

The 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. Where accounting standards are to be adopted within the fiscal forecasts period, this has been signalled in the note disclosures where impacts may be significant.

The specific accounting policies are included on the Treasury's website at https://treasury.govt.nz/information-and-services/state-sector-leadership/guidance/financial-reporting-policies-and-guidance/accounting-policies

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 Risks to the Fiscal Forecasts chapter on pages 53 to 94. Key forecast assumptions are set out on pages 31 to 32.

Reporting and Forecast Period

The reporting periods for these Forecast Financial Statements are the years ended 30 June 2020 to 30 June 2024.

The “2020 Previous Budget” figures are the original forecasts to 30 June 2020 as presented in the 2019 Budget Update and the “2019 Actual” figures are the audited results reported in the Financial Statements of the Government (FSG) for the year ended 30 June 2019 except where balances have been restated to reflect the adoption of the following accounting standards from 1 July 2019:

• PBE IPSAS 35: Consolidated Financial Statements, and
• PBE IPSAS 39: Employee Benefits (updated).

A reconciliation between the key indicators published in the 2019 Budget Update and the FSG for the year ended 30 June 2019 and the comparative numbers published in this document as a result of these changes is included in note 17.

Government Reporting Entity as at 23 April 2020#

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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 list 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 - (includes National Emergency Management Agency as departmental agency)
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 - (includes Cancer Control Agency as departmental agency)
20. Ministry of Housing and Urban Development
21. Ministry of Justice - (includes Te Arawhiti – Office for Māori Crown Relations as 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. 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. Climate Change Commission
10. Commerce Commission
11. Crown Irrigation Investments Limited
12. Crown Research Institutes (7)
13. District Health Boards (20)
14. Drug Free Sport New Zealand
15. Earthquake Commission
16. Education New Zealand
17. Electoral Commission
18. Electricity Authority
19. Energy Efficiency and Conservation Authority
20. Environmental Protection Authority
21. External Reporting Board
22. Financial Markets Authority
23. Fire and Emergency New Zealand
24. Government Superannuation Fund Authority
25. Guardians of New Zealand Superannuation
26. Health and Disability Commissioner
27. Health Promotion Agency
28. Health Quality and Safety Commission
29. Health Research Council of New Zealand
30. Heritage New Zealand Pouhere Taonga
31. Human Rights Commission
32. Independent Police Conduct Authority
33. Kāinga Ora - Homes and Communities
34. Law Commission
35. Maritime New Zealand
36. Museum of New Zealand Te Papa Tongarewa Board
37. New Zealand Antarctic Institute
38. New Zealand Artificial Limb Service
39. New Zealand Blood Service
40. New Zealand Film Commission
41. New Zealand Infrastructure Commission/Te Waihanga
42. New Zealand Lotteries Commission
43. New Zealand Productivity Commission
44. New Zealand Qualifications Authority
45. New Zealand Symphony Orchestra
46. New Zealand Tourism Board
47. New Zealand Trade and Enterprise
48. New Zealand Transport Agency
49. New Zealand Venture Investment Fund Limited
50. New Zealand Walking Access Commission
51. Office of Film and Literature Classification
52. Pharmaceutical Management Agency
53. Privacy Commissioner
54. Public Trust
55. Radio New Zealand Limited
56. Real Estate Agents Authority
57. Retirement Commissioner
58. School Boards of Trustees (2,421)
59. Social Workers Registration Board
60. Sport and Recreation New Zealand
61. Takeovers Panel
62. Te Reo Whakapuaki Irirangi (Māori Broadcasting Funding Agency)
63. Te Taura Whiri i te Reo Māori (Māori Language Commission)
64. Television New Zealand Limited
65. Tertiary Education Commission
66. Transport Accident Investigation Commission
67. 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. Ngāi Tahu Ancillary Claims Trust
12. Pacific Co-operation Foundation
13. Pacific Island Business Development Trust
14. Reserves Boards (21)
15. Te Ariki Trust

Legal entities created by Treaty of Waitangi settlement Acts (Public Finance Act Schedule 6)

1. Te Urewera

Non-listed companies in which the Crown is majority or sole shareholder (Public Finance Act Schedule 4A)

1. Crown Asset Management Limited
2. Crown Infrastructure Partners Limited
3. Education Payroll Limited
4. Ōtākaro Limited
5. New Zealand Green Investment Finance Limited
6. Predator Free 2050 Limited
7. Provincial Growth Fund Limited
8. Research and Education Advanced Network New Zealand Limited
9. Southern Response Earthquake Services Limited
10. Tāmaki Redevelopment Company Limited
11. The Network for Learning Limited

Others

1. Regenerate Christchurch
2. Christ Church Cathedral Reinstatement Trust
3. New Zealand Institute of Skills and Technology
4. Venture Capital Fund

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 (11)

Non-listed companies in which the Crown is majority or sole shareholder (Public Finance Act Schedule 4A)

1. City Rail Link Limited

Forecast Financial Statements#

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Forecast Statement of Financial Performance
for the years ending 30 June

1. The '2019 Actual' and '2020 Previous Budget' numbers were restated to reflect the adoption of new accounting standards from 1 July 2019. Refer to note 17 for details of the impact of these changes.

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

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.

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

1. The '2019 Actual' and '2020 Previous Budget' numbers were restated to reflect the adoption of new accounting standards from 1 July 2019. Refer to note 17 for details of the impact of these changes.
2. 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.

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

1. The '2019 Actual' and '2020 Previous Budget' numbers were restated to reflect the adoption of new accounting standards from 1 July 2019. Refer to note 17 for details of the impact of these changes.

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

1. The '2019 Actual' and '2020 Previous Budget' numbers were restated to reflect the adoption of new accounting standards from 1 July 2019. Refer to note 17 for details of the impact of these changes.

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

Forecast Statement of Cash Flows
for the years ending 30 June

1. The '2019 Actual' and '2020 Previous Budget' numbers were restated to reflect the adoption of new accounting standards from 1 July 2019. Refer to note 17 for details of the impact of these changes.
2. Further information on the proceeds and repayments of government bonds is available in note 16.
3. 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

1. The '2019 Actual' and '2020 Previous Budget' numbers were restated to reflect the adoption of new accounting standards from 1 July 2019. Refer to note 17 for details of the impact of these changes.

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

Forecast Statement of Financial Position
as at 30 June

1. The '2019 Actual' and '2020 Previous Budget' numbers were restated to reflect the adoption of new accounting standards from 1 July 2019. Refer to note 17 for details of the impact of these changes.
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

Monetary liabilities facilitate payments to be effected in New Zealand dollars, thereby ensuring the smooth functioning of the economy.

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. The '2019 Actual' and '2020 Previous Budget' numbers were restated to reflect the adoption of new accounting standards from 1 July 2019. Refer to note 17 for details of the impact of these changes.
2. Core Crown borrowings in this instance include unsettled purchases of securities (classified as accounts payable in the Statement of Financial Position).
3. 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.
4. Core Crown financial assets exclude receivables.
5. 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.
6. 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.
7. Net core Crown debt (excluding NZS Fund and advances) excludes financial assets which are held for public policy rather than treasury management purposes.
8. 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

1. The 30 June 2019 commitments were restated to reflect the adoption of the new accounting standard PBE IPSAS 35: Consolidated Financial Statements. The impact of this is to increase total commitments by $39 million. Refer note 17 for further details of this new standard.

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

Statement of Actual Contingent Liabilities and Assets

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

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

Notes to the Forecast Financial Statements#

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NOTE 1: Sovereign Revenue (Accrual)

1. Customs excise-equivalent duty.

NOTE 1 (continued): Sovereign Receipts (Cash)

NOTE 2: Investment Revenue/(Expenditure)

NOTE 3: Transfer Payments and Subsidies

NOTE 4: Other Operating Expenses

NOTE 5: Insurance

ACC liability

Calculation information

ACC in conjunction with Taylor Fry prepared the estimate of the outstanding claims liability as at 31 December 2019. Taylor Fry prepare an annual independent actuarial estimate of the ACC outstanding claims liability as at 30 June. This estimate includes the expected future payments relating to accidents that occurred prior to balance date (whether or not the associated claims have been reported to, or accepted by, ACC) and also the expected future administrative expenses of managing these claims. The estimate also includes a risk margin to provide for a higher degree of certainty that the liability for outstanding claims, at balance date, will be adequate to cover possible adverse developments. 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 (AWE) 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 31 March 2020. The equivalent single effective discount rate, taking into account ACC's projected future cash flow patterns, is 2.34% and allows for a long-term discount rate of 4.30% from 2070.

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.

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

Unallocated contingencies represent expenses included in Budget 2020 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 2021 is $2.4 billion. Some of this allowance has been pre-committed as at the forecast finalisation date of 23 April 2020, with only the unallocated portion of the allowance included in this note.

Unallocated contingencies represent capital spending from Budget 2020 and previous Budgets that has yet to be allocated to departments. Forecast new spending indicates the expected capital spending increases from future Budgets.

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

NOTE 8: Financial Assets (including receivables)

NOTE 9: Student Loans

NOTE 10: Property, Plant and Equipment

1. Using a revaluation methodology unless otherwise stated.
2. The rail freight network was valued on a commercial basis for the previous budget and is now valued on a public benefit basis.

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 11: NZ Superannuation Fund

Under the new accounting standard, PBE IPSAS 35 (effective from 1 July 2019), any controlling interests the New Zealand Superannuation Fund has invested in are reported on a fair value basis and shown as a single line item 'Investments in controlled enterprises' in the statement of financial position (rather than on the previous line-by-line basis). Consequently, there have been material reclassifications between the NZ Superannuation Fund's different asset and liability classes, but with a smaller net impact on the overall value of the Fund. Refer to Note 17 for further details.

NOTE 12: Payables

NOTE 13: Retirement Plan Liabilities

The net liability of the Government Superannuation Fund (GSF) was calculated by GSF's actuary as at 31 January 2020. 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 2020, based on membership data as at 30 June 2019 with adjustments for cash flows to 31 January 2020. 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 2020.

Other principal long-term financial assumptions were an inflation rate, as measured by the Consumers Price Index (CPI), of 1.70% p.a. for the 19 years to 30 June 2038, then gradually increasing each year to reach 2.0% p.a. in the year ended 30 June 2077 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% p.a. (2.5% p.a. at 30 June 2019).

The 2019/20 projected decrease in the net GSF liability is $207 million, reflecting a decrease in the GSF liability of $97 million and an increase in the GSF net assets of $110 million.

The overall decrease in the GSF liability of $97 million includes an actuarial loss (which increases the liability) between 1 July 2019 and 31 January 2020, of $524 million, largely owing to movements in the discount rates and partly offset by changes in the CPI rates. The difference of $621 million is owing to the current service cost and interest unwind (increases the liability) which is more than offset by benefits paid to members (reducing the liability).

The increase in the value of the net assets of GSF of $110 million includes a revaluation gain of $267 million reflecting the updated market value of assets at 31 January 2020. The balance of $157 million is owing to the total of the expected investment returns and expected investment gains/losses and contributions received/receivable, offset by expenses and the benefits paid/payable to members.

The changes in the projected net GSF liability from 2019/20 onwards reflect the net of the expected current service cost, interest cost, investment returns and contributions.

The amended accounting standard PBE IPSAS 39: Employee Benefits is effective for these forecasts across all years. The value of the net GSF liability has not changed with this change in accounting standard but there have been changes to the presentation of the annual movements in the net liability in the Statement of Financial Performance. Refer to note 17 for further details of the impact of this change on the comparative numbers published in these forecast financial statements.

NOTE 14:  Provisions

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 January 2020.

The movement in the ETS provision is as follows:

NOTE 15: Changes in Net Worth

1. The adoption of two new accounting standards from 1 July 2019 has resulted in changes to net worth and some of the reserve balances. In addition, a new 'defined benefit plan revaluation reserve' is being presented as part of net worth. Refer to note 17 for details of these changes.

NOTE 16:  Core Crown Residual Cash

1. Short-term borrowing consists of Treasury Bills and may include Euro-Commercial Paper.

NOTE 17:  Impact of Adoption of New Accounting Standards

PBE IPSAS 35: Consolidated Financial Statements

From 1 July 2019, the New Zealand Superannuation Fund is consolidated as an investment entity in accordance with PBE IPSAS 35: Consolidated Financial Statements. Consequently, any controlling interests the New Zealand Superannuation Fund has invested in are reported on a fair value basis and shown as a single line ‘Investments in controlled enterprises' in the Statement of Financial Position, rather than consolidated on the previous line-by-line basis.

In addition to reclassification impact, the measurement of a single investment on a fair value basis may differ from the sum of individual assets and liabilities of that same controlled interest.

PBE IPSAS 39: Employee Benefits

The Crown adopted PBE IPSAS 39: Employee Benefits from 1 July 2019 (updating the existing standard PBE IPSAS 25: Employee Benefits). The new standard has two impacts on the forecast financial statements. It:

• requires a liability to be reported for the obligation to pay Veteran Disability entitlements, and
• changes aspects of the presentation of the defined benefit scheme - previously mainly the Government Superannuation Fund (GSF).

Veterans Disability Entitlements

The Veterans Support Act 2014 provides for a number of entitlements for eligible veterans (and their spouses, partners, and dependants) who suffer service-related injuries or illnesses. Previously these obligations had been classified as social benefits, and were recognised as payments became due. PBE IPSAS 39: Employee Benefits clarifies that as these obligations arise due to illness or injury from qualifying operational service, a liability should be recognised from that date (reflecting the lifetime entitlement amounts, discounted to today's dollars). The accounting policy for Veterans Disability entitlements is therefore changing in these forecasts to be the same as for other employee defined benefits with the new liability recognised from 1 July 2018.

Presentation impacts

PBE IPSAS 39 also impacts the way all defined benefits, including the GSF defined benefit pension scheme is presented in the financial statements, with actuarial gains/losses now being presented in the Statement of Comprehensive Revenue and Expenses (and accumulated in a new revaluation reserve) rather than presented as a gain or loss in the Statement of Financial Performance. The new standard also means the investment return on the scheme's assets above the risk-free rate of return is now classified as actuarial gains and losses (meaning this amount previously included in OBEGAL is now included in reserves).

The new standard does not affect the way the GSF defined benefit liability is calculated overall, and therefore it does not affect the Crown's total Net Worth. From 1 July 2018, cumulative GSF actuarial gains and losses will accumulate in the new revaluation reserve 'Defined Benefit Plan revaluation reserve', rather than in Taxpayers' Funds.

Statement of Segments#

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Statement of Financial Performance
for the year ended 30 June 2019

Statement of Financial Position
as at 30 June 2019

Forecast Statement of Segments#

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Statement of Financial Performance
for the year ended 30 June 2020

Statement of Financial Position
as at 30 June 2020

Statement of Financial Performance
for the year ended 30 June 2021

Statement of Financial Position
as at 30 June 2021

Statement of Financial Performance
for the year ended 30 June 2022

Statement of Financial Position
as at 30 June 2022

Statement of Financial Performance
for the year ended 30 June 2023

Statement of Financial Position
as at 30 June 2023

Statement of Financial Performance
for the year ended 30 June 2024