Budget Economic and Fiscal Update 2021

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 government decisions and other circumstances as at 30 April 2021 that were communicated to me by the Minister of Finance as required by the Public Finance Act 1989, and of other economic and fiscal information available to the Treasury as at 30 April 2021. 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

13 May 2021

To enable the Treasury to prepare this Economic and Fiscal Update I have ensured all government decisions and other circumstances as at 30 April 2021 of which I was aware and that had material economic or fiscal implications have been communicated to the Secretary to the Treasury, as required by the Public Finance Act 1989.

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 and wellbeing) 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

13 May 2021

Executive Summary#

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Notes:

1. Operating balance before gains and losses.

Sources: Stats NZ, the Treasury

• New Zealand has been successful in eliminating COVID-19 in the community throughout most of the 2021 fiscal year. This has enabled most of the economy to operate relatively normally. After the sharpest contraction on record in the June 2020 quarter, GDP rebounded by 12.8% over the second half of 2020 and the unemployment rate fell to 4.7% in the March 2021 quarter. Stronger economic activity has led to a recovery in the year-to-date financial results of the Government, with actual results outperforming expectations.
• Nevertheless, the COVID-19 pandemic continues to play a large role in the economic and fiscal outlook, adversely affecting those sectors dependent on international people flows, as well as people at the margins of the labour force. These effects are expected to persist over the forecast period.
• The impact of COVID-19 on economic activity together with the Government's fiscal support measures have led to large OBEGAL deficits in the near-term, that are expected to narrow across the forecast period reaching $2.3 billion by 2024/25. Net core Crown debt is forecast to increase by close to $100 billion by 2024/25, peaking as a share of GDP at 48.0% in 2022/23. When excluding the Funding for Lending Programme net core Crown debt would be expected to reach 41.4% by the end of the forecast period.
• Both the economic and the fiscal outlook have improved compared to the 2020 Half Year Economic and Fiscal Update (Half Year Update). Although risks are more balanced than a year ago, uncertainty about the economic outlook remains high owing to both volatility and the potential for sizeable revisions in the data.
• Nominal GDP is higher over the forecast period than in the Half Year Update, reflecting stronger real activity, higher inflation and an elevated terms of trade. Overall, we now expect the pandemic to have a smaller impact on New Zealand's long-term productive capacity compared to the Half Year Update. Despite some near-term weakness, the economy is expected to strengthen throughout the forecast period, supported by the return of international visitors and higher government spending. Real GDP is forecast to grow by 2.9% in 2021 and average 3.4% over the remainder of the forecast period.
• The employment outlook has also improved substantially compared to the Half Year Update. The unemployment rate is expected to rise slightly in the near term before trending down to 4.2% at the end of the forecast period.
• A stronger starting position for the fiscal forecasts combined with improved economic activity, has led to a reduction in OBEGAL deficits in most years and a lower net core Crown debt track compared to the Half Year Update.
• Core Crown tax revenue is expected to increase by $4.2 billion on average in each year of the forecast when compared to the Half Year Update, but is still lower than expected before the pandemic, owing mainly to lower nominal GDP.
• Overall, the Budget 2021 package allocates operating funding of $15.1 billion over five years. As well as the Budget 2021 package, the Government has provided funding by pre-committing against the Budget 2022 operating allowance and through the COVID‑19 Response and Recovery Fund (CRRF). On average $1.8 billion per year of unallocated Budget 2022 funding remains while $5.1 billion of the CRRF remains unallocated.
• Net worth attributable to the Crown is forecast to decline from $110.3 billion in 2019/20 to $94.0 billion in 2024/25, a $16.3 billion reduction, as total liabilities are expected to grow at a faster rate than total assets through to 2023/24 before reversing. When compared to the Half Year Update, net worth attributable to the Crown is expected to improve by $33.0 billion by 2024/25, largely reflecting operating balance improvements.
• The Economic Outlook chapter presents alternative upside and downside scenarios. Compared to our main forecast, the upside scenario explores a stronger global recovery in which GDP and labour market outcomes are more positive in the near term, and the effect of tax policy changes on house prices is smaller. The second scenario explores the impact of worse COVID-19 outcomes in New Zealand and abroad. As a result, unemployment rises and the impact on the economy becomes more permanent. In addition, the Risks to the Fiscal Forecasts chapter discusses the key risks to the fiscal forecasts presented in the 2021 Budget Economic and Fiscal Update (Budget Update).

Economic Outlook#

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Overview#

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• The New Zealand economy has proved more resilient to the COVID-19 shock than anticipated, with a swift recovery in the second half of 2020 bringing activity close to pre-pandemic levels. Although the economy is below its previous trajectory and risks to the forecasts persist, the strength of the recovery to date has improved the outlook.
• There remains a high degree of divergence between different sectors of the economy, and the absence of international visitors contributed to a 1.0% quarterly decline in December quarter GDP. The closure of the border is expected to be felt again in the March quarter, and a small quarterly decline in GDP is forecast.
• Despite some near-term weakness, the economy is expected to strengthen from the second half of this year as tourist numbers start to recover and government spending supports consumption and investment. In June 2025, real GDP is forecast to be 2.9% above the Half Year Update, with cumulative nominal GDP around $100 billion higher.
• Unemployment is forecast to rise slightly in the near term as the number of people entering the labour force exceeds the number of people entering employment. Increased demand for labour sees unemployment fall below 4.5% by the start of 2023.
• The improved labour market outlook and resilience in economic activity suggest that the long-term effects of the pandemic will not be as severe as previously thought. We now assume a smaller impact on the economy's long-term productive capacity compared to the Half Year Update.
• CPI inflation is forecast to rise in the near term to 2.4% as a result of temporary price pressures, before falling below 2.0% in 2022 as spare capacity in the economy remains. Annual inflation is forecast to rise from 2023, reaching 2.0% in early 2024.
• Government policies are expected to slow the pace of house price growth across the forecast period. This is assumed to have a dampening effect on private consumption and residential investment, though growth in these sectors is forecast to remain robust.
• Demand for New Zealand's goods exports is expected to continue as the world economy recovers, and the terms of trade are supported by rising commodity prices.
• Downside risks continue to threaten the recovery, while near-term economic momentum may also be stronger than expected. Two alternative scenarios are presented to illustrate the level of uncertainty in the forecasts.

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

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

Notes:

1. Business investment is non-residential public and private investment.
2. Contribution to GDP growth.
3. Percentage difference between actual real GDP and potential real GDP.
4. Percent of the labour force, June quarter, seasonally adjusted.
5. Percent of the working-age population, June quarter, seasonally adjusted.
6. Quarterly Employment Survey (QES), average ordinary-time hourly earnings.
7. Forecasts are based on the QES prior to the March 2021 quarter redesign.
8. System of National Accounts.
9. CoreLogic Quarterly House Price Index.
10. Trade-weighted index (TWI), average for the June quarter.
11. Average for the June quarter.

Economic Outlook#

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The New Zealand economy has proved more resilient than anticipated…

Following the 11.0% GDP contraction in the June 2020 quarter, the New Zealand economy showed a high degree of resilience by growing 12.8% over the next two quarters. This took the level of real production GDP in the December 2020 quarter to just 0.9% below the previous year, exceeding the Half Year Update forecast by $1.4 billion (Figure 1.1). GDP was volatile on a quarterly basis, rebounding 13.9% in the September quarter before falling 1.0% in the December quarter.

Figure 1.1 - Real production GDP

 

Sources: Stats NZ, the Treasury

Text description of Figure 1.1 - Real production GDP.

…supported by robust household spending and a buoyant housing market

Beneath the strong headline GDP growth in the second half of 2020, there was a high degree of divergence between different sectors of the economy. Swift recoveries in private consumption and residential investment were underpinned by fiscal and monetary policy support as well as the resilient housing market, offsetting an 8.5% annual fall in business investment. The largest contributor to private consumption growth was durable goods spending, as households made one-off purchases with savings accumulated during higher alert levels, fuelling solid growth in retail trade. In contrast, December quarter activity in arts and recreation services was down 13.1% compared to 2019, and accommodation and food services was down 4.8%, reflecting the ongoing loss of international visitor spending.

Labour market conditions are far better than anticipated…

The surprise drop in December quarter unemployment to 4.9% and subsequent fall to 4.7% in the March 2021 quarter have substantially improved the labour market outlook. The March quarter result was better than the Budget Update forecast of 5.1%, suggesting that the peak in unemployment may be lower than forecast. However, an increase in underutilisation and a fall in hours worked suggest ongoing spare capacity in the labour market, and employment growth in the March quarter was entirely driven by people entering part-time work. The unemployment rate is forecast to rise in the near term as employment growth in tourism-related industries remains relatively weak, before falling to under 4.5% by 2023 (Figure 1.2).

Figure 1.2 - Unemployment rate

 

Sources: Stats NZ, the Treasury

Text description of Figure 1.2 - Unemployment rate.

The forecast rise in the unemployment rate is due to the number of people entering the labour force exceeding the number of people gaining employment, increasing the number of unemployed job seekers. Total employment is no longer forecast to fall, but to be unchanged during the first half of 2021 and steadily recover over the remainder of the forecast period. The lower unemployment rate suggests increased tightness in the labour market, driving stronger wage growth compared to the Half Year Update.

…and resilient demand drives higher inflation…

Inflationary pressures from resilient domestic demand, supply chain disruptions and the rising cost of new homes have supported price growth, with annual Consumers Price Index (CPI) inflation reaching 1.5% in the March 2021 quarter. Inflation is expected to continue rising in 2021, peaking at 2.4% in the September quarter (Figure 1.3). Some of the drivers of rising inflation are likely to be temporary, however, and spare capacity in the economy is expected to remain for some time. CPI inflation is forecast to fall back below 2.0% in 2022, as capacity constraints in construction ease and global supply chains normalise.

Figure 1.3 - Consumers Price Index

 

Sources: Stats NZ, the Treasury

Text description of Figure 1.3 - Consumers Price Index.

Inflation is considerably higher over the forecast period compared with the Half Year Update, as the more resilient labour market supports wage growth and boosts domestic demand. Annual inflation is forecast to rise from 2023, reaching 2.0% in early 2024. Given the relatively subdued inflation outlook and ongoing risks to the economic recovery, monetary policy is expected to remain supportive, with short-term interest rates forecast to be unchanged from the current 0.3% before starting to rise at the end of 2024.

…resulting in substantially higher nominal GDP across the forecast period…

Despite ongoing downside risks to the outlook, the resilience seen in the economy is expected to continue. Real GDP is forecast to be 2.9% higher than the Half Year Update in June 2025, partly owing to large upward revisions to historical data. Some near-term weakness is expected as the loss of the peak tourism season is felt, though growth is forecast to pick up in the second half of 2021 as tourist numbers start to recover and government spending supports consumption and investment. As a result of the stronger economic recovery, elevated terms of trade, a higher domestic price level and upward revisions to historical data, nominal GDP is cumulatively around $100 billion higher than in the Half Year Update by the June 2025 quarter. This drives higher forecasts of tax revenue and an improved fiscal position, as outlined in the Fiscal Outlook chapter.

…and a smaller long-term economic impact from the pandemic

The improved labour market outlook and resilience in economic activity suggest that the permanent economic scarring from the pandemic will not be as severe as previously thought. The long-term effects of the pandemic are explored further in the box below.

The loss of international visitors remains a drag on the economy…

Although the elimination of COVID-19 in the community has allowed most areas of the economy to recover swiftly, tourism-related businesses continue to be affected by the border closure. Services exports - which are usually dominated by tourist spending - fell by 17.3% in the December quarter on a seasonally adjusted basis. This was the result of a 2.1% fall in the non-seasonally adjusted value occurring when there would usually be a large rise as tourist numbers increased. Another large seasonally adjusted fall is forecast in the March quarter, when tourist spending would usually increase further (Figure 1.5).

Figure 1.5 - Real services exports and imports

 

Sources: Stats NZ, the Treasury

Text description of Figure 1.5 - Real services exports and imports.

The impact of seasonality on services exports is adding to the uncertainty around near-term GDP movements, and will continue to do so for as long as visitor flows remain disrupted. A 20% quarterly fall in services exports is forecast in the March 2021 quarter, contributing -0.9 percentage points to real GDP growth, followed by a 25% rise in the June quarter, contributing +0.9 percentage points. These forecasts are largely driven by judgements around seasonal adjustment, so the actual outturns could vary significantly depending on the approach taken by Stats NZ.

These forecasts were finalised prior to the announcement that a safe travel zone between New Zealand and Australia would open on 19 April, so there is upside risk to the services exports forecast for the June quarter. The impact on GDP is expected to be relatively minor, given that services imports will also increase as New Zealand residents travel to Australia, though the inflow of Australian tourists will provide a much-needed boost for tourism businesses in New Zealand. We continue to assume a significant opening of the border on 1 January 2022, when populations in New Zealand and the rest of the developed world are expected to be largely vaccinated against COVID-19. However, it is likely to be longer before unrestricted global travel can resume given the difference in vaccination progress worldwide, so a gradual recovery in services exports is forecast.

 …with a dip expected in the March quarter…

Indicators of activity suggest a slowdown over the March 2021 quarter, partly due to increased alert levels in February, with the New Zealand Activity Index showing relatively weak growth and the Household Labour Force Survey measure of hours worked falling 2.3%. These indicators, together with the assumption that seasonally adjusted services exports will fall sharply, are consistent with our forecast of a slight fall in real production GDP. Volatility in economic data was always expected, however, and robust growth in GDP is forecast in the June 2021 quarter, with a steady recovery over the remainder of the forecast period.

…and government policy reduces the pace of house price growth

Annual house price growth continued to accelerate at the end of 2020 and into 2021, prompting the Government to introduce policy measures to address affordability concerns. These policies are expected to reduce house price growth, while increased government spending supports the economic recovery, as explored in the following box.

Household consumption is forecast to remain robust…

Although the slowdown in house price growth is forecast to result in more subdued household spending than otherwise, private consumption is expected to grow steadily over the forecast period (Figure 1.7). The continued resilience in the labour market will raise household incomes, and monetary policy is assumed to remain supportive. Fiscal support and the easing of border restrictions from mid-2021 are also expected to boost incomes and lift spending over the forecast period.

Figure 1.7 - Real private consumption

 

Sources: Stats NZ, the Treasury

Text description of Figure 1.7 - Real private consumption.

…and investment grows steadily after some near-term weakness…

High levels of residential building consents issuance over the past year indicate a large pipeline of work for the near term, though labour shortages and difficulty accessing building materials are expected to limit the amount of work that can be completed. Residential investment growth is forecast to be flat over 2021 as supply constraints restrict growth, before picking up in 2022 as global supply chains normalise and an increase in migration expands the supply of labour (Figure 1.8). The slowdown in house price growth will have a dampening effect owing to the reduction in anticipated returns, though low interest rates are expected to support steady growth over the forecast period.

Figure 1.8 - Real investment

 

Sources: Stats NZ, the Treasury

Text description of Figure 1.8 - Real investment.

Business investment is forecast to remain subdued over the first half of this year, as tourism-related businesses continue to bear the loss of international visitors and deal with uncertainty about future earnings (Figure 1.8). Government investment, steady household demand and the gradual return of overseas visitors drive a strong recovery from the second half of 2021, and business investment is forecast to exceed pre-pandemic levels by the start of 2022.

…though risks to the outlook remain

Downside risks continue to threaten the recovery, including the potential for outbreaks of COVID-19 in the community and uncertainty around the success of vaccination programmes. Volatility in economic data will also continue as statistical agencies face challenges in capturing current economic developments, and it is possible that there will be significant revisions to historical data over coming years. There are also upside risks, with recent tax outturns suggesting continued momentum in the New Zealand economy and some of our trading partners showing signs of a more rapid recovery than expected. These risks are illustrated in the two alternative scenarios explored in the box below.

The terms of trade are supported by rising commodity prices…

Robust demand for New Zealand's goods exports has continued, benefiting from the resilience of retail demand as well as the strong economic recovery in China, as explored further in the box below. Commodity prices experienced a swift rebound over the second half of 2020 and into 2021. World prices for dairy, forestry and horticultural products were up between 13% and 24% in April 2021 compared to pre-pandemic levels, though meat prices remained slightly down owing to weak restaurant demand. The rising exchange rate and higher shipping costs have also softened domestic returns for exporters.

The goods terms of trade are forecast to lift in the near term, while the TWI is assumed to remain relatively flat at around 75 (Figure 1.13). Some of the rise in commodity prices is likely to be temporary, driven by disruptions to global supply, and the terms of trade are forecast to ease from 2022 as world trade flows normalise. Goods exports are expected to grow steadily across the forecast period as the world economy recovers.

Figure 1.13 - Goods terms of trade and TWI

 

Sources: Stats NZ, RBNZ, the Treasury

Text description of Figure 1.13 - Goods terms of trade and TWI.

…though weakness in services exports drags on the current account balance

Goods import values fell sharply in 2020 and have been relatively slow to recover, remaining around 10% down in the December 2020 quarter compared to the previous year. The fall in goods imports and the relative strength in goods exports lifted New Zealand's goods balance into surplus in the December quarter, for the first time since 2014 (Figure 1.14). Import values are forecast to continue increasing in line with household demand and business investment, pulling the annual goods balance back into deficit in the second half of this year. Congestion in both global supply chains and New Zealand ports is disrupting trade and poses a risk to the outlook for both imports and exports, though recent data suggest that overall trade volumes have largely recovered.

The services balance is forecast to fall into deficit in the first quarter of this year as the seasonal impact on services exports peaks, before rising from 2022 as tourist numbers start to recover. The current account balance falls to -3.6% of GDP at the end of this year, then narrows to -3.1% at the end of the forecast period (Figure 1.14).

Figure 1.14 - Current account balance and its components

 

Sources: Stats NZ, the Treasury

Text description of Figure 1.14 - Current account balance and its components.

Fiscal Outlook#

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Overview#

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• The fiscal outlook continues to show signs of recovery, with operating deficits expected to narrow to $2.3 billion by 2024/25, while net core Crown debt as a percentage of GDP starts to fall from 2022/23. However, the COVID-19 pandemic continues to have a large impact on the Fiscal Outlook, with Government support still expected across the forecast period. Net core Crown debt is forecast to increase by close to $100 billion by 2024/25 but is expected to peak at 48.0% of GDP in 2022/23.
• The results to date for the 2020/21 fiscal year show actual outturns that have continued to outperform expectations. This is largely driven by strong economic growth, which has lifted tax revenue in the current year. In addition, a large amount of operating expenditure that was previously expected to be spent in 2020/21 is now expected to be spent later in the forecast period.
• A stronger starting point for the fiscal forecast, means the operating balance before gains and losses (OBEGAL) deficit is forecast to be $15.1 billion (4.5% of GDP) in the current year, which is a reduction of nearly $8 billion compared to the 2019/20 year.
• Investment markets and interest rate returns have also recovered strongly in 2020/21. As a result, overall valuation gains of $17.0 billion are expected in the current year, which more than offsets the forecast OBEGAL deficit, leading to an operating balance surplus and an increase in net worth for the 2020/21 fiscal year.
• In 2020/21, both the residual cash deficit and net core Crown debt are expected to increase when compared to last year. This is largely driven by the Reserve Bank's Funding for Lending Programme (FLP). Excluding the impacts from the FLP, both indicators show a recovery from the 2019/20 actual result.
• The stronger starting position and improved economic outlook means the fiscal outlook continues to improve with most key fiscal indicators stronger than previously expected. However, some of this improvement mentioned above is offset by higher spending and weaker results from Crown entities and State-owned Enterprises (SOE's).
• In the 2021/22 fiscal year, expenditure has been rephased in from the 2020/21 fiscal year and decisions from Budget 2021 have been incorporated. As a result, the OBEGAL deficit is forecast to increase to $18.4 billion in 2021/22 and is also expected to be higher than at the Half Year Update. Over the rest of the forecast period, expected OBEGAL deficits decrease, narrowing to $2.3 billion (0.6% of GDP) by 2024/25, and improve when compared to the Half Year Update.
• The core Crown residual cash deficit is initially forecast to remain high, then is expected to reduce significantly, returning to a surplus of $3.3 billion by 2024/25. Residual cash is forecast to be $8.9 billion lower overall than at the Half Year Update, mainly because of the impact of core Crown drivers on OBEGAL. In addition, residual cash has been impacted by increases in capital allowances and rephasing of the FLP.
• The fiscal impact from the FLP has had a significant influence on the forecast for core Crown residual cash (refer Table 2.7 on page 33). If the fiscal impact from the FLP were stripped out, the trend in core Crown residual cash would be broadly similar to the OBEGAL deficit track.
• Net core Crown debt is forecast to increase to 2023/24 in nominal terms, peaking at $184.2 billion. However, as a percentage of GDP, net core Crown debt is expected to peak a year earlier at 48.0% of GDP in 2022/23.Across the forecast, both nominally and as a percentage of GDP, net core Crown debt has reduced compared to the Half Year Update, driven mainly by the improvement in the core Crown residual cash deficit forecast for the 2020/21 fiscal year, which flows through to net core Crown debt.
• Similar to its impacts on core Crown residual cash, the FLP has a significant impact on net core Crown debt. Excluding the FLP, net core Crown debt is expected to increase to $171.5 billion (41.4% of GDP) in 2024/25. The level of net core Crown debt is lower across the forecast period when the impacts of the FLP are removed (refer page 24).
• By the end of the forecast period, net worth attributable to the Crown is forecast to decline by $16.3 billion. When compared to the Half Year Update, net worth attributable to the Crown is expected to improve by $33.0 billion by 2024/25, reflecting the operating balance improvements as strength in the economy continues.

Source: The Treasury

Fiscal Outlook for the Current Year#

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The financial results of the Government have recovered strongly during the 2020/21 fiscal year…

The Financial Statements of the Government for the nine months ended 31 March 2021 have continued to outperform expectations. This is largely driven by stronger economic activity, which has lifted the growth in the Government's core Crown tax revenue. Growth in employment, wages, private consumption, residential investment and profits has contributed to the stronger year-to-date growth in tax revenue. However, not all of the recent growth in tax revenue can be explained by the reported growth in the underlying economic drivers of tax. This higher starting base for tax revenue has been built into the forecast for the 2020/21 fiscal year. Overall, core Crown tax revenue is expected to grow by $6.4 billion in the 2020/21 fiscal year.

Although core Crown expenditure is close to forecast at 31 March 2021, some of the spending previously expected to occur in the last three months of the 2020/21 fiscal year is now expected to be spent later in the forecast period. In addition, some unused funding for 2020/21 from the CRRF has been reprioritised and returned to the unallocated portion of the CRRF (refer to page 29). This has reduced the growth in core Crown expenses, which are now expected to grow by $1.9 billion in the 2020/21 fiscal year.

With core Crown tax revenue expected to grow at a faster pace than core Crown expenses for the 2020/21 fiscal year, the forecast OBEGAL deficit in 2020/21 of $15.1 billion is lower by $7.9 billion than the 2019/20 actual result.

…and so too have market conditions, resulting in an operating balance surplus…

Investment markets and interest rates have also recovered strongly in 2020/21. As a result, overall valuations gains totalling $17.0 billion are expected in 2020/21. Gains of around $12.8 billion are expected from the financial instrument portfolios largely managed by the NZS Fund and ACC. The increasing yields on Government bonds have influenced an increase in discount rates used to value the Government's long-term liabilities (eg, ACC's outstanding claims liability), resulting in a gain of $9.5 billion expected to be recognised in 2020/21. This gain is partially offset by losses from the LSAP programme and provisions for the Emissions Trading Scheme (ETS).

When gains and losses are added to the OBEGAL deficit, the total operating balance is forecast to be in surplus in the 2020/21 fiscal year, at $1.3 billion. The overall improvement in the 2020/21 year has led to an increase in net worth attributable to the Crown, up $1.7 billion from the previous year's actual results and reaching an expected $112.0 billion.

…however, the improved operating results in the 2020/21 fiscal year do not fully flow through to residual cash and net core Crown debt

A core Crown residual cash deficit of $25.3 billion is forecast in 2020/21, which is $1.6 billion higher than the deficit last year, while net core Crown debt is expected to increase by $30.3 billion, which is $4.7 billion more than the increase during the 2019/20 fiscal year. The Reserve Bank's LSAP and FLP have offset the improvements in OBEGAL mentioned above. Excluding the impacts of these programmes, both the core Crown residual cash deficit and net core Crown debt have improved since the 2019/20 result.

Trends in the Fiscal Outlook Beyond 2020/21#

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Tax revenue growth initially declines, then grows in line with the economy…

Core Crown tax revenue is forecast to increase by $21.7 billion across the forecast period, reaching $113.2 billion in 2024/25. As a percentage of GDP, core Crown tax revenue remains relatively stable at around 27% of GDP (Figure 2.1).

Figure 2.1 - Core Crown tax revenue

 

Source: The Treasury

Text description of Figure 2.1 - Core Crown tax revenue.

Although forecast to remain fairly static across the forecast period, core Crown tax revenue as a percentage of GDP is expected to decrease in the near term, falling to 26.6% of GDP in 2021/22. This drop in 2021/22 is broadly driven by tax policy measures the Government introduced in the previous year in response to supporting the economy through the COVID‑19 pandemic.

When compared to growth in the economy, core Crown tax revenue is forecast to grow at a faster rate than nominal GDP in both 2020/21 and 2022/23 but comparatively more slowly in 2021/22 (Figure 2.2). The current year growth is mainly a result of stronger‑than‑anticipated tax outturns, and strong growth in private consumption, residential investment, wage growth and profitability.

Figure 2.2 - Core Crown tax revenue and nominal GDP growth

 

Source: The Treasury

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

The slower growth in 2021/22 is mainly owing to tax policy measures introduced in the previous year, such as the reinstatement of tax deductions for depreciation on commercial and industrial properties and the increase in the threshold for expensing capital purchases.

These policies are expected to have less impact on expected tax revenue growth from 2022/23. In addition, the introduction of the previously announced new top tax rate is expected to have a positive impact on forecast tax revenue growth in 2022/23 when compared to 2021/22.

From 2023/24, core Crown tax revenue is forecast to grow in line with nominal GDP growth. Core Crown tax revenue for the nine months to March 2021 was $4.0 billion above that forecast at the Half Year Update. It is assumed that much of this strength is expected to persist; however, some unwinding has been built into the forecast. As a result, there is both an upside and downside risk if this strength either was to be sustained or was to unwind over the remainder of the year.

…while expenses stay elevated across the forecast owing to increased spending from Government decisions…

Core Crown expenses in the near term continue to reflect increased spending from the COVID-19 pandemic. New Government spending decisions also see the expected nominal core Crown expenses remain at elevated levels, reaching $121.1 billion by 2024/25 (Figure 2.3).

Figure 2.3 - Core Crown expenses

 

Source: The Treasury

Text description of Figure 2.3 - Core Crown expenses.

While core Crown expenses are forecast to increase nominally each year, as a percentage of GDP they decline gradually across the forecast, reaching 29.2% of GDP by 2024/25.

The Government's fiscal support measures in response to the COVID-19 pandemic continue to keep expenses elevated in the near term. Funding for the Managed Isolation and Quarantine (MIQ) facilities ($1.6 billion), vaccine purchasing ($1.5 billion) and targeted support for the aviation and transport industries ($1.2 billion) is expected in the current year and next year of the forecast before ceasing by the end of the forecast. The Housing Acceleration Fund announcement also adds an additional $2.1 billion of operating expenditure across the forecast period, which has been funded from the CRRF.

…with allowances for new spending in future Budgets contributing to growth in expenditure…

The Government has announced an operating allowance of $2.7 billion for Budget 2022. Decisions averaging $0.7 billion per year have already been pre-committed against the Budget 2022 operating allowances. When combined with non-discretionary spending (given current policy settings), this leaves on average $1.8 billion of operating funding to be allocated at Budget 2022. Operating allowances for Budget 2023 and Budget 2024 are also $2.7 billion. Overall, new spending from future Budgets is forecast to increase expenses by $8.1 billion by 2024/25 (Figure 2.4).

Figure 2.4 - Budget operating allowances

 

Source: The Treasury

Text description of Figure 2.4 - Budget operating allowances.

For forecasting purposes, Budget allowances are assumed to be all operating expenditure. However, these allowances can be used for a combination of revenue and expenditure initiatives when allocated. The fiscal forecasts also assume that any additional costs in relation to Government commitments and future cost pressures will be met from operating allowances, such as those outlined in the Risks to the Fiscal Forecasts (page 43).

The Government may change Budget allowances for a range of reasons - for example, if there is increased revenue that provides additional fiscal headroom, it needs to stimulate the economy, there are high-value investments identified through the Budget process, or it needs to respond to unforeseen events, which has been the case in recent years. Any increase that is not offset by revenue increases or expense reductions will directly impact the fiscal forecasts.

…and other economic factors increasing expenditure…

In addition, social assistance spending (excluding policy changes) is forecast to increase by $3.8 billion across the forecast period, driven by increases in overall recipient numbers (in particular, New Zealand Superannuation) and increasing wage growth to which the major benefit categories' payments are indexed. Core Crown finance costs are also higher by $0.9 billion by 2024/25, largely driven by higher forecast interest and inflation rates across the forecast period.

…while the temporary COVID-19 spending stops…

The expected reduction in COVID-19 fiscal support measures by 2024/25 partially offsets the forecast increases in core Crown expenses. From 2021/22, core Crown expenses are forecast to increase by $10.4 billion by the end of the forecast period.

More details on the functional classification of core Crown expenses, including large short‑term expenses relating to the COVID-19 pandemic, can be found in the core Crown Expense Tables on page 127.

…resulting in a large deficit in the near term, which narrows across the forecast period…

Following the movements in core Crown revenue and core Crown expenses, the operating balance before gains and losses (OBEGAL) is forecast to be in deficit across the forecast.

As mentioned earlier, strength in the 2020/21 fiscal year results in an initial decrease in the OBEGAL deficit, before it is expected to increase between 2020/21 and 2021/22 as growth in core Crown expenditure exceeds the growth in core Crown tax revenue. The OBEGAL deficit is then expected to reduce across the remainder of the forecast period, with a $2.3 billion OBEGAL deficit forecast by 2024/25 (Figure 2.5).

Figure 2.5 - Components of OBEGAL by segment

 

Source: The Treasury

Text description of Figure 2.5 - Components of OBEGAL by segment.

The total Crown operating balance, which includes gains and losses on assets and liabilities, reflects the initial strength in the 2020/21 fiscal year, with an operating balance surplus of $1.3 billion expected.

However, smaller net gains are forecast from the 2021/22 fiscal year, as long‑term benchmark rates of return are used. In addition, long-term liabilities are not revalued beyond the 2020/21 fiscal year. As a result, the expected total Crown operating balance more closely reflects the narrowing OBEGAL deficits forecast, with a return to surplus of $3.0 billion expected in the 2024/25 fiscal year.

…driving the decline in net worth

As total liabilities grow at a faster rate than total assets through to 2023/24, net worth attributable to the Crown is forecast to decline from $110.3 billion in 2019/20 to $90.8 billion in 2023/24, a $19.5 billion reduction. The final year of the forecast sees a small increase of $3.2 billion in net worth attributable to the Crown, reaching $94.0 billion. As a percentage of GDP, net worth attributable to the Crown decreases to 22.7% in 2024/25. This mainly reflects higher levels of debt required to fund the overall total Crown operating balance deficit, which flows directly into the Crown's balance sheet through taxpayers' funds.

More information on the Government's net issuance of Government bonds and short-term borrowings is on page 41.

The operating results largely flow into the residual cash position, while capital spending has a significant impact across the forecast period…

Residual cash deficits are forecast until 2023/24 before returning to a forecast cash surplus of $3.3 billion in the 2024/25 year (Figure 2.6). The operating cash deficits to 2023/24 broadly reflect the expected trends in OBEGAL, driven largely by growth in tax forecasts and additional spending decisions made through Budget 2021.

Figure 2.6 - Core Crown residual cash

 

Source: The Treasury

Text description of Figure 2.6 - Core Crown residual cash.

The surplus in 2024/25 is largely attributable to the cash impact of the FLP, as advances are expected to be repaid in the later years of the forecast.

Looking through the impact of the FLP, the cash position of the Government is expected to improve in the near term, but then worsen. Smaller deficits would be expected in the near term, as cash advances to banks are removed, adding back $28.0 billion by the 2022/23 fiscal year. However, removing the corresponding repayment of FLP loans in the later part of the forecast would result in an expected residual cash deficit of $9.2 billion in 2024/25. The Government is forecast to invest a net total of $65.2 billion in capital over the forecast period.

…resulting in a continued rise in nominal net core Crown debt

In nominal terms, net core Crown debt is expected to increase in each year to 2023/24 and peak at $184.2 billion. This increase is mainly driven by the need to fund the residual cash deficits expected. As a percentage of GDP, net core Crown debt is expected to peak a year earlier at 48.0% of GDP in 2022/23 (Figure 2.7).

Figure 2.7 - Net core Crown debt

 

Source: The Treasury

Text description of Figure 2.7 - Net core Crown debt.

As core Crown residual cash returns to an expected surplus in the 2024/25 fiscal year, net core Crown debt in both nominal and GDP terms also reduces, finally reaching $180.8 billion (43.6% of GDP) by 2024/25.

Excluding the FLP, the level of net core Crown debt is lower across the forecast period and is expected to increase to $171.5 billion (41.4% of GDP) in the final year of the forecast.

Table 2.7 shows net capital expenditure that has an impact on core Crown residual cash and net core Crown debt. It excludes capital spending undertaken directly by SOEs and Crown entities funded from their own resources (including third-party financing).

Source: The Treasury

Comparison to the Half Year Update#

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The fiscal forecasts are stronger than expected at the Half Year Update…

While the Government's fiscal outlook continues to be influenced by the COVID-19 pandemic, with operating deficits and high levels of debt still expected, fiscal indicators are generally forecast to improve when compared to the Half Year Update (Table 2.8).

Source: The Treasury

…growing strength in the economy sees tax revenue improve significantly…

Core Crown tax revenue is forecast to be $21.1 billion higher over the forecast period when compared to the Half Year Update, an average increase of $4.2 billion per year (Table 2.9). The forecast change in core Crown tax revenue reflects a stronger starting point for the 2020/21 fiscal year based on current tax outturns and the improvement in the economic forecast since the Half Year Update. The expected increase is mostly reflected in the increases for GST, source deductions, and net other persons tax.

Source: The Treasury

GST forecasts have increased by $9.1 billion across the forecast period. From the 2021/22 fiscal year onwards, changes in the forecast for consumption and residential investment drive the change for GST, which begins to grow more in line with revised nominal GDP levels for the remaining forecast period.

Source deduction revenue is higher over the forecast period by $7.3 billion, mainly owing to a stronger outlook for employment and wage growth compared to the Half Year Update.

The increase in corporate tax of $3.2 billion is mainly caused by an improved outlook for taxable profits across the forecast.

Additionally, the 2021 Budget decision to increase welfare benefits has increased the forecasts for PAYE by around $0.7 billion across the forecast period.

…however this is partially offset by rephased core Crown expenses and Budget decisions exceeding signalled allowances

Overall, core Crown expenses are expected to increase by $10.4 billion when compared to the Half Year Update, as new spending decisions are expected to be higher than those previously forecast and net core Crown finance costs increase as interest and inflation rates rise (Figure 2.10).

Figure 2.10 - Core Crown expenses compared to the Half Year Update

 

Source: The Treasury

Text description of Figure 2.10 - Core Crown expenses compared to the Half Year Update.

The timing of expenditure and savings initiatives from the CRRF is the main reason for the expected drop in core Crown expenses in the 2020/21 fiscal year.

Savings initiatives as part of the Budget 2021 Package have resulted in $0.8 billion in core Crown operating expenditure being returned to the CRRF. This has primarily reduced education and transport forecast expenditure in the 2020/21 fiscal year.

Revisions to the timing for expected government expenditure by entities and contingencies held centrally has seen core Crown expenses reduce in the 2020/21 fiscal year and spread into the remaining years of the forecast period, though primarily the 2021/22 fiscal year.

Budget 2021 new operating spending has increased expenses across the forecast period, primarily from 2021/22 onwards largely reflecting a higher final Budget 2021 Package. This is illustrated in the difference seen between the net Budget 2021 package and what was signalled in the Budget Policy Statement (BPS) (see Table 2.10).

Source: The Treasury

Although the Government's bond programme has decreased overall since the Half Year Update, net core Crown finance costs have increased by $3.3 billion across the forecast period. This is largely owing to an increase in forecast interest rates and inflation rates since the Half Year Update.

Additionally, the top-down adjustment, which reduces overall expenditure, has decreased since the Half Year Update (Table 2.11). When compared to the Half Year Update, the change to the top-down adjustment adds an additional $3.8 billion over the forecast period to core Crown expenses.

Source: The Treasury

When considering the top-down adjustment for the Budget Update, it is assumed it is now more likely that the remaining unallocated portion of the CRRF will be spent across the forecast period and so the operating top-down adjustment has been reduced.

Partially offsetting this, social assistance spending, excluding benefit policy decisions, has decreased since the Half Year Update, with expenditure revised down by $1.2 billion. Decreases in jobseeker support and accommodation assistance are driven by lower forecast growth in recipient numbers, which outweighed the impact of higher wage forecasts. Partially offsetting these decreases were New Zealand Superannuation expenses and the supported living payment, which increased owing to the higher wage forecasts.

When the results of SOEs and CEs are added, this leads to OBEGAL deficits narrowing by the end of the forecast period

Overall SOE and Crown entity results are expected to be weaker across the forecast period. On average, operating results are expected to be $0.6 billion weaker per year than at the Half Year Update. The results of ACC are expected to be on average around $0.3 billion lower per year, primarily owing to lower forecast levies from 2022/23 onwards compared to the Half Year Update, as insurance expenses are expected to remain relatively constant.

Increases in capital spending and alternative monetary policy impact the phasing of expected cash requirements…

In total, residual cash deficits of $92.9 billion are expected over the forecast period, a reduction of $8.9 billion from the Half Year Update.

This is primarily attributable to the 2020/21 fiscal year, where the deficit is expected to be $14.9 billion lower than at the Half Year Update. Over the remaining years of the forecast, the residual cash position is expected to be weaker by an average of $1.5 billion per year from 2021/22 to 2024/25 when compared to the Half Year Update (Figure 2.11).

Figure 2.11 - Core Crown residual cash compared to the Half Year Update

 

Source: The Treasury

Text description of Figure 2.11 - Core Crown residual cash compared to the Half Year Update.

While the operating cash flow movements broadly reflect the OBEGAL changes previously discussed, capital decisions made through Budget 2021 (totalling $3.9 billion) and the Government's decision to increase the multi-year capital envelope also contribute to the expected trend in core Crown residual cash. The net impact of these decisions is $3.4 billion of additional capital spending across the forecast period.

In addition, the Reserve Bank's FLP has been rephased since the Half Year Update. While the peak of the programme at $28.0 billion in 2022/23 remains unchanged, the uptake of the programme and the expected repayment profile are now forecast to be slower to better reflect actual results to date. As a result, when compared to the Half Year Update, the FLP is expected to have an impact of $3.5 billion on core Crown residual cash by 2024/25.

…with the initial strength in the current fiscal year resulting in lower net core Crown debt than previously forecast

Across all five years of the forecast, net core Crown debt has reduced when compared to the Half Year Update. This expected improvement in net core Crown debt has been driven mainly by the improvement of $14.9 billion in the core Crown residual cash deficit forecast for the 2020/21 fiscal year, which flows directly through to net core Crown debt.

However, from the 2021/22 fiscal year, the slightly weaker cash position compared to the Half Year Update begins to narrow the forecast improvement in net core Crown debt, reflecting the impact of the increased capital spend and the FLP.

Overall, nominal net core Crown debt is expected to be $9.2 billion lower by 2024/25 than previously forecast.

Stronger-than-expected operating balances improve the Crown balance sheet…

The total Crown operating balance (including gains and losses) directly flows through to impact net worth attributable to the Crown. When compared to the Half Year Update, the total Crown operating balance is expected to improve in the 2020/21 year, before remaining broadly consistent with what was previously forecast (Table 2.12).

Source: The Treasury

As a result, by the end of the forecast period, net worth attributable to the Crown is forecast to be $94.0 billion, an increase of $33.0 billion from the Half Year Update.

…and forecast issuance of Government bonds reduces as lower funding is required

The improvement in the economic outlook has led to a lower borrowing requirement, reflected through a reduction in the forecast of net Government bond issuance and short‑term borrowing.

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

In total, the bond programme is expected to raise funds of $155.4 billion over the forecast period. Bond maturities will result in repayments of $54.8 billion of existing debt. In addition, short-term borrowing is expected to be $8.8 billion lower at the end of the forecast period, relative to the end of 2019/20 (Table 2.13). Overall, the core Crown borrowing programme will provide net funds of $91.8 billion to cover core Crown residual cash deficits and to ensure cash is available for upcoming bond maturities in the 2025/26 fiscal year.

Source: The Treasury

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 average weekly earnings is needed because social assistance benefits are generally indexed to wage growth, 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 2.14.

Notes:

1. Production measure.
2. Expenditure measure.
3. Ordinary time.

Sources: The Treasury, Stats NZ, RBNZ

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:

COVID-19#

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The COVID-19 pandemic has had a significant impact on the Government's finances, with an operating balance before gains and losses (OBEGAL) deficit of $23.1 billion reported last year, while net core Crown debt increased by close to 8% of GDP.

The continued uncertainty created by the COVID-19 pandemic poses a risk to the fiscal forecasts presented in the Budget Economic and Fiscal Update 2021. The statement of specific fiscal risks in this chapter identifies a number of fiscal risks directly and indirectly affected by COVID-19. Despite the disclosure of risks in this chapter, the level of uncertainty means there are risks to the fiscal forecasts that remain too broad in nature to disclose in the statement of specific fiscal risks. These risks concern:

• The impact on the economy - the economic recovery from COVID-19 will be dependent on many unknown factors. Forecasts for tax revenue, benefit expenses and finance costs are particularly sensitive to economic conditions. The Economic Outlook chapter, from page 15, includes a scenario that models the fiscal impact of how the economy might evolve if some of the key judgements around COVID-19 in the main forecast were to be altered.
• The Government's response - the Government has already implemented policies to respond to COVID-19, mostly funded through the $50 billion COVID-19 Response and Recovery Fund (CRRF). Policies announced and communicated up to 30 April 2021 have been included in the fiscal forecasts based on the best information available. There is a risk that the actual costs and/or timing of these policies may differ from the judgements and assumptions used to prepare the fiscal forecasts.
• The Government's role in recovery and managing any future outbreaks - the fiscal forecasts include funding of around $5.1 billion that is left in the CRRF to manage future costs of recovery and fight any further outbreaks of the virus. The inclusion of the unallocated portion of the CRRF in the fiscal forecasts has required some judgement around the nature (eg, operating or capital) and timing of future COVID-19 response initiatives. In addition, there is uncertainty about the level of funding that may be required for future costs of recovery and fighting any further outbreaks.
• The impact on valuations of assets and liabilities, and contingent liabilities - a number of assets and liabilities on the Crown balance sheet are valued using market information (eg, land and buildings, share investments and ACC outstanding claims 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. In addition, 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 crystallise.

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 2025, tax revenue would be around $5.8 billion higher than forecast in the June 2025 year. The sensitivities are broadly symmetric: if nominal GDP growth is one percentage point lower than expected each year, tax revenue would be around $5.6 billion lower than forecast in the June 2025 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. Interest sensitivities relate only to funds managed by the Treasury. Exclusions therefore include impacts to the Reserve Bank's Large Scale Asset Purchases (LSAP).

Source: The Treasury

The forecast financial position is based on judgements and assumptions about the future. To inform these judgements and assumptions we rely on market information, such as foreign exchange rates, share prices, the carbon price and property prices. For example, foreign-currency-denominated financial assets and liabilities are converted into New Zealand dollars, the Government's listed share investments are reported on market prices, and property owned by the Crown is valued using market information. Where the actual outcome differs from our assumptions, the Crown's actual financial position is likely to differ from the forecasts. In addition, 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 size and nature of the Government's balance sheet is important to the financial resilience of New Zealand. It enables the Government to absorb shocks on behalf of New Zealanders, and to adapt to risks and trends. It therefore plays a significant role in macro-economic risk management.

The operational and financial capability that is reflected in the balance sheet is also itself subject to hazards and risks, which, if they crystallise, may impair the Government's ability to achieve its operating and financial objectives. For assessing these risks, the Government's balance sheet can be usefully categorised by function or purpose as illustrated in Table 3.2.

Balance sheet risks are therefore 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 the achievement of these objectives.

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 reallocate or repurpose assets rather than risk transfer instruments such as insurance in managing these risks. The Government is also developing a National Adaptation Plan in response to climate change risks the Climate Change Commission has identified.

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. The Budget Economic and Fiscal Update forecasts incorporate valuations up to 28 February 2021. Some valuers have identified that only limited market evidence is available in the post-COVID environment for the recent valuations they have provided. They have therefore warned that the timeframes during which these valuations can be relied upon may be shortened.

Social insurance and retirement liabilities (eg, Accident Compensation, Veterans' disability entitlements and the Government Superannuation Fund (GSF)) are prone to volatility through their actuarial valuations. As well as variability in claims experience, the valuations of these obligations are particularly subject to changes in the assessment of the future value of money, driven by changes to expectations of future interest rates and inflation rates.

Social assets also include significant concessionary lending made available to achieve public policy purposes. This lending includes student loans and the Small Business Cashflow Scheme, while the forecasts also provide for Progressive Home Ownership loans. This lending brings counterparty risk, and also exposes the Crown to risks associated with changes in assumptions about the future value of money, affecting how these future repayments are discounted. Expected credit losses from this lending are closely monitored.

The Crown also faces contingent liabilities, for example, indemnities of activities in the public interest (eg, the Business Finance Guarantee Scheme), environmental claims, and legal proceedings.

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

The deployment of the Government's fiscal capacity since COVID-19 has meant that the balance sheet is now more highly leveraged than previously. In addition, monetary policy activities including the Large Scale Asset Purchases (LSAP) programme, the Funding for Lending Programme, foreign-exchange swaps to manage short‑term interest rate pressures, and lending to the finance sector by the Reserve Bank have significantly increased interest-rate risk to the Government.

Financial assets held by the Accident Compensation Corporation (ACC) and the New Zealand Superannuation Fund (NZSF) are sensitive to financial market volatility, such as movements in interest rates, exchange rates and equity prices. 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.

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 Government's funding strategy operates within a risk management framework approved by the Minister of Finance. This framework specifies policies for managing credit risk, market risk, operational risk, funding risk and liquidity risk that aim to ensure that risk is maintained within the organisational risk appetite while enabling the delivery of core roles and responsibilities.

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

Crown entities with commercial objectives are exposed to changes in customer demand for their products and services, the availability and price of business inputs in order to provide these products and services, changes to the competitive landscape brought about by new technologies they and their competitors adopt, new market entrants and externally generated shocks and trends.

Crown entities with commercial objectives are governed by boards that operate at arm's length from Ministers. Commercial balance sheet risks are managed through each board's accountability to Ministers for each entity's overall performance and through use of the levers provided to Ministers as shareholders of companies by the applicable legislation to influence the performance of entities and companies.

When there are opportunities or challenges for businesses that require or otherwise involve the Crown injecting new capital, this is effectively managed for most entities through the conditions set on accessing this capital.

For listed companies in which the Crown has ownership interests, the rules of the NZX apply. For 100% Crown-owned entities, the two most important levers available to Ministers are the appointment of effective boards and the annual business planning and reporting process.

Update on current management of balance sheet risk

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

The build-up and subsequent deployment of fiscal resilience in response to COVID‑19 have underscored the importance of responsible fiscal management, including maintaining Crown debt at prudent levels - acknowledging that what is seen as prudent may change over time. The deployment of fiscal support is reflected in the reduction of Crown net worth attributable to the Crown from $136.9 billion at 30 June 2019 to a forecast $94.0 billion as at 30 June 2025. This change in net worth is currently mitigated by historically low interest rates on debt issued by the Crown.

The current risk management challenge is to shift from absorption to adaptation, as the Government moves from fighting the virus and cushioning its blow towards economic recovery, 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 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
• a statement of specific fiscal risks of the Government
• narrative summaries of all specific fiscal risks, and
• a table of risks that have been removed from the statement of specific fiscal risks since the Half Year Update.

The risks disclosed in this chapter reflect those that are known at the date of the finalisation of the fiscal forecasts, 30 April 2021. 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.

Within each category of risks (new, changed, updated, and unchanged), risks are grouped by portfolio and classified as either policy change or cost pressure or variance risks:

• Policy change risks relate to potential decisions likely to be taken by the Government relating to both new and existing policy settings.
• Cost pressure or variance risks relate to the cost pressures faced by agencies in the future owing to changes in demand or costs of inputs used in the delivery of existing services or products and/or the variance costs of items included in the fiscal forecasts. The key drivers of future cost pressures are likely to come from population changes, wage increases (both pay negotiations and progression through pay scales) and the price inflation of inputs.

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, the Budget operating and capital allowances, policy choices and/or the CRRF). 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.

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

The Budget Update must incorporate, to the fullest extent possible that is consistent with section 26V of the Public Finance Act 1989 (the limitations on the disclosure requirements), all Government decisions and all other circumstances that may have a material effect on the fiscal and economic outlook. Specific criteria based on section 26U of the Public Finance Act 1989 determine what is included in the forecast financial statements as opposed to what is disclosed as a specific fiscal risk.

The forecast financial statements must include all quantified fiscal implications of Government decisions and all other circumstances (excluding those that are not required to be disclosed by section 26V) that may have a material effect on the fiscal and economic outlook and which can be quantified for particular years with reasonable certainty by the day on which the forecast financial statements are finalised. Where the fiscal implications of those Government decisions and other circumstances cannot be quantified for or assigned to particular years with reasonable certainty they are required to be disclosed in the statement of specific fiscal risks.

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, the most significant of which have been recognised elsewhere in this chapter and the Budget 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, various 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 to determine that:

• incorporating the decision and/or circumstance in the Budget Update is likely to result in one of the consequences listed above, and
• there is no reasonable way that the Government can avoid this prejudice, compromise or material loss by:
  • in the case of a circumstance, making a decision before the day the fiscal forecasts are finalised, or
  • in the case of a decision or circumstance, incorporating in the update the fiscal implications of that decision or circumstance, or the nature of that decision or circumstance, but without reference to its fiscal implications.

Statement of Specific Fiscal Risks#

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New Risks by Portfolio#

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Children

Oranga Tamariki Partnering with Māori to Find Appropriate Solutions for Children in Need (Policy Change - Expenses)

The Government is committed to ensuring that Oranga Tamariki partners with iwi, hapū and Māori organisations to find appropriate solutions for children in need. This is in line with the statutory National Care Standards Oranga Tamariki is required to meet. Any changes to the way Oranga Tamariki partners with Māori will likely have operational and fiscal implications. Initial funding was provided for this in Budget 2021, however more funding will likely be required.

Climate Change

Recycling Emissions Trading Scheme Proceeds (Policy Change - Expenses)

The Government is exploring options for funding and financing the transition to a low-emissions economy, including the use and fiscal treatment of cash proceeds from the Emissions Trading Scheme (ETS). At present the forecast cash proceeds from the ETS are available to help fund the Government's operating and capital spending. Linking ETS cash proceeds to specific initiatives could reduce the cash available to the Government to meet other operating and capital spending as well as increasing operating expenses, therefore resulting in an adverse impact to net core Crown debt and the operating balance.

Finance

Air New Zealand's Proposed Capital Raise (Cost Pressure or Variance - Capital)

The Crown has provided Air NZ with a $1.5 billion interest bearing loan facility, of which $350 million had been drawn at 31 March 2021, to assist it through the difficult trading period that has arisen due to COVID-19's impact on air travel volumes. Air NZ has also announced that it will raise new debt and equity capital by 30 September 2021. Subject to Cabinet being satisfied with the terms of the company's proposed capital raise, the Crown would participate in an equity capital raise by purchasing the number of new shares necessary to maintain a majority shareholding. Air NZ's intention is that the Crown loan will be repaid from the proceeds of the proposed capital raise. The size and terms of the capital raise and the future debt/equity mix for Air NZ are still being determined, and therefore the fiscal impacts on the Government cannot be determined at this time.

Housing

Housing Acceleration Fund (Cost Pressure or Variance - Expenses and Capital)

The Housing Acceleration Fund includes contestable funding for infrastructure projects across New Zealand. There is a risk that the phasing of funding and delivery will be different from what is currently forecast, which would affect Crown fiscal indicators. There is also a risk that while the fiscal forecasts are based on a best estimate of the current split between operating and capital costs, this will be subject to change, as costs are further refined.

Revenue

Tax Treatment of Rental Property (Policy Change - Revenue)

The Government has extended the bright-line test and to remove deductions for interest incurred to earn income from residential property. While the impact of the bright-line test is outside the forecast period, the removal of interest deductions could have positive fiscal impacts within the forecast period. The fiscal impact of this policy has not yet been quantified as this depends on final policy decisions.

Tourism

Proposed Changes to the International Visitor Levy (Policy Change - Revenue)

The Government is reviewing the International Visitor Conservation and Tourism Levy and there are a range of options under consideration which could increase the levy, impacting revenue. Prior to COVID-19 the levy was forecast to collect around $75 million per annum. However, future levels of international tourism are uncertain. It is intended that revenue remain hypothecated, so the impact of any change should be fiscally neutral overall. There is a risk that the expected increase in revenue does not occur.

Transport

Incentivising Uptake of Low Emissions Vehicles (Policy Change - Expenses)

The Government is considering how to incentivise uptake of low-emission vehicles in order to meet its emissions reduction targets. Future policy decisions are likely to have fiscal implications to the fiscal forecasts.

Changed Risks by Portfolio#

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COVID-19 Response

COVID-19 Vaccine Strategy (Cost Pressure or Variance - Expenses)

The Government has provided for ongoing costs of COVID-19 vaccines, and the costs of vaccinating New Zealanders throughout this year. There is a risk that further funding may be required (for example for booster vaccines in the future), or that liability may materialise under any indemnities given by the Minister of Finance in relation to COVID-19 vaccines.

Managed Isolation and Quarantine (Cost Pressure or Variance - Expenses)

The changing global situation and uncertainty with respect to COVID-19 remains. Demand for space in Managed Isolation and Quarantine (MIQ) and the health and security arrangements required may change rapidly. Any changes in demand will put pressure on current MIQ supply and appropriated funding. Updated fiscal forecasts may lead to further funding being required to deliver additional services or MIQ places. MIQ is currently funded to June 2022, but might be required to continue for a further six months beyond this date in some form.

Education

Free and Healthy Lunch Programme (Policy Change - Expenses and Capital)

The Free and Healthy Lunch Programme was a prototype to test different models of delivery to students in selected schools. Funding for the Programme runs until December 2023. If the Government confirms an extension or expansion of the programme, additional ongoing funding will be required.

Finance

Business Finance Guarantee Scheme (Cost Pressure - Expenses)

The Crown has established a Business Finance Guarantee Scheme (BFGS) with a number of banks to support New Zealand businesses facing hardship as a consequence of COVID-19. The currently assessed fair value of these contracts, and the expense arising, has been quantified and incorporated into the forecasts (see page 82 in the Contingent Liabilities section). The scheme is available for loans originated up to 30 June 2021. The fiscal forecasts are based on utilisation of approximately $2-3 billion of the possible $6.25 billion facility. The usage of the scheme may increase before close‑off, increasing the expense arising from revising the fair value of expected losses.

Health

Health and Disability System Reform (Policy Change - Expenses)

The Government has announced its intention to reform the health and disability system. Funding has been provided in Budget 2021 for the establishment of Health New Zealand and a Māori Health Authority. Further decisions are required on the ongoing funding to support reform, including policy and funding changes to support the transformation of Hauora Māori and primary and community services, digital enablement and consumer-centred digital services, and any remaining costs of structural changes and system improvements.

Health Capital Pressure (Cost Pressure or Variance - Capital)

These capital pressures relate to DHBs, the Ministry of Health, and other parts of the health system. DHBs have submitted updated capital intentions, identifying the indicative prioritisation for Crown funding over the next three years. Over $2.7 billion combined in capital funding has been announced for DHBs in previous budgets and 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 at the time forecast in the fiscal forecasts.

Health System Sustainability (Cost Pressure or Variance - Expenses)

District Health Boards (DHBs) are expected to continue running operating deficits over the 2021/22 financial year until their disestablishment in 2022. There is a significant risk that DHBs' deficits over the 2021/22 financial year 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. The fiscal forecasts assume that future expenditure growth will be met from future Budget allowances. The cost of operating the health system under Health New Zealand, including additional investment in such areas as digital services and primary health care and any efficiency savings in the longer term, has yet to be costed. In addition, the health system is likely to face significant volume and cost pressures to maintain the delivery of existing services which may increase as a result of the COVID-19 response. This risk replaces the previous DHB Sustainability risk and incorporates the previous Health Operating Pressure risk and the previous Primary Care Services risk.

Housing

Large-scale Housing and Urban Development Projects (Cost Pressure or Variance - Expenses and Capital)

Kāinga Ora is currently carrying out a number of large-scale infrastructure redevelopment projects, including the Tāmaki Regeneration Project. Some projects will be funded from sale proceeds from land sold for affordable and market housing. There is ongoing risk around cost overrun, given the scale and complexity of the projects. Risks also remain around the sale proceeds of land sold for affordable and market housing not meeting expectations. The funding source for any future cost overruns or reduced proceeds would need to be identified. There is also a risk that while the fiscal forecasts are based on our best estimate of the current split between operating and capital costs, these will be subject to change, as costs are further refined. In addition, if the sale of land to be used for affordable and market housing is lower than its carrying value this may necessitate expense write-offs in the future.

Local Government

Three Waters Infrastructure Investment and Reform Programme (Policy Change - Expenses and Capital)

The Three Waters Review highlighted systemic challenges facing the three waters sector, including infrastructure deficiencies, asset management, service delivery, capacity and capability issues, and funding and affordability constraints. In July 2020, the Government made funds available to territorial authorities to support their planned investment programme and large-scale asset replacements. Budget 2021 provides funding to support the establishment of multi-regional water services entities and the transfer of associated assets, liabilities, staff and services from local authorities to those entities. It is possible that further funding is required in the future to implement, or to incentivise territorial authorities to support and deliver, the reform programme.

Transport

City Centre to Māngere Rapid Transit Project (Policy Change - Expenses and Capital)

The cost of the preferred rapid transit solution for the City Centre to Māngere corridor is uncertain at this stage. An indication of costs will be provided through the business case process undertaken by the Establishment Unit. The Cabinet decision signals an expectation that significant Crown funding will be needed to deliver the preferred solution. It also signals that other funding tools, including value capture will be further considered.

Future of Rail Commitments (Policy Change - Capital)

Further Crown funding may be sought through future Budgets to progress these projects as part of implementing the Future of Rail Review.

New Zealand Upgrade Programme (Cost Pressure or Variance - Expenses and Capital)

The transport component of the New Zealand Upgrade Programme (the Programme) consists of projects delivered by both Waka Kotahi and KiwiRail (delivery agencies) within a fixed funding envelope of $6.8 billion. Waka Kotahi has advised that its component of the Programme is facing a significant increase in forecast costs, primarily due to property price escalations and acquisitions, inflation, and revised standards and assumptions behind cost estimates. A baselining exercise has been undertaken across delivery agencies Waka Kotahi and KiwiRail to better define the scope, costs, outcomes, and schedules for the projects, and identify options for moving the Programme forward.

Cross-portfolio

Further COVID-19 Business Support (Policy Change - Expenses)

Through various policy decisions, the Government has committed to supporting businesses in response to COVID-19. Were the Government to provide additional support including resurgence support payments to businesses at various COVID-19 alert levels, this would represent a fiscal risk. This risk relates to the extent that the timing, extent and/or nature of COVID-19 business support may differ from that included in the fiscal forecasts, and where additional costs cannot be met from existing underspends.

Updated Risks by Portfolio#

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ACC

ACC Levies (Cost Pressure or Variance - Expenses and Revenue)

ACC levies will remain unchanged until at least 2022/23, with indicative future levy rates for the Work, Earners' and Motor Vehicle accounts included in the forecasts. 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.

Climate Change

Emissions Trading Scheme - Fixed Price Option and Auctioning (Cost Pressure or Variance - Revenue and Expenses)

The Emissions Trading Scheme (ETS) earns revenue and incurs expenses for the Crown, both of which are uncertain. The uncertainty is partly owing to the future market price of New Zealand Units (NZUs), how that market price differs from the Fixed Price Option (FPO), and the extent to which participants elect to use the FPO. Participants in the ETS who emit greenhouse gases are required to surrender NZUs to account for those emissions. Participants who do not have sufficient NZUs are able to meet their obligations by purchasing NZUs from other participants or from the Crown at a fixed price of $35. In addition, the Climate Change Response (Emissions Trading Reform) Amendment Act 2020 enables the auctioning of units to begin in 2021. Auctioning NZUs will result in cash being paid to the Crown, reducing net core Crown debt. The extent of this depends on the future price realised for auctioned units, which is inherently uncertain. As a result of both of these factors, actual revenue and expenses may vary from the fiscal forecasts, which for both revenue and expenses assume a carbon price value based on the market price at 31 March 2021 of $36.90.

Defence

Defence Funding Requirements to Deliver New Zealand's Defence Strategy (Policy Change - Expenses and Capital)

In 2018, the Government updated Defence policy settings in the Strategic Defence Policy Statement 2018. These policy settings, and the Defence Capability Plan 2019 subsequently agreed by the Government in 2019, provide an indication of future Defence capital and operating funding requirements. However, the precise quantum and timing of actual Defence spending will depend on the approval of future business cases and Budget decisions.

Economic and Regional Development

New Zealand Screen Production Grant - International (Cost Pressure or Variance - Expenses)

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 the Avatar sequels and The Lord of the Rings television series). In the Pre-election Update, this risk was published under the 'Economic Development' portfolio.

Provincial Growth Fund (Cost Pressure or Variance - Expenses and Capital)

The capital and operating split and timing of this funding, as set out in the fiscal forecasts, are subject to change due to uncertainty about recipients reaching milestones necessary to receive payment. There is also a risk of losses and write-offs being incurred for funding provided in the form of debt or equity.

Regional Strategic Partnership Fund (Policy Change - Expenses and Capital)

The Regional Strategic Partnership is a $200 million fund to support regional economic development plans and initiatives. The exact nature and timing of this funding are not sufficiently certain to be included in the fiscal forecasts but will likely have an impact during the forecast period.

Education

Change in Demand for Tertiary Education and Training (Cost Pressure or Variance - Expenses)

There is ongoing uncertainty about the impact of COVID-19 on unemployment, changes in the net migration of New Zealand residents, transitions of school leavers, and the scale of the increased enrolments in tertiary education that may result. More people aged 18-24 years, and more people unable to find work who enter study instead to upskill or retrain, can lead to more enrolments in tertiary education. In Budget 2020, the COVID-19 Response and Recovery Fund provided an additional $334 million over 2021 to 2023 to meet increased learner demand. Due to the uncertainty around the impact of COVID-19, learner demand could be higher, or lower, than the available number of funded places for learners. At the start of March 2021, there are indications of increases in demand for tertiary education and training (particularly for apprenticeships). There is funding pressure related to apprentices over 2021-2023, but funding pressure from provider-based enrolments in 2021 will be assessed after tertiary enrolments to April 2021 are reported and analysed.

Education Operating Cost Pressures (Cost Pressure or Variance - Expenses)

The education sector is exposed to changing levels of demand in early childhood education (ECE) and schooling, which can result from factors such as population growth and changes in participation levels. 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 as a result of the increasing demand for, and the 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 funding that does not entirely cover all demand.

Education Workforce Strategy (Policy Change - Expenses)

The Ministry of Education is working in partnership with the Education Workforce Strategy Governance Group (EWSG), MoE internal stakeholders and the Accord with NZEI Te Riu Roa and the Post Primary Teachers' Association to develop a comprehensive Education Workforce Strategy (EWS) for the education workforce. The aim is for the strategy to go out for public consultation in the first half of this year, with an action plan finalised later in the year.

Learning Support (Cost Pressure or Variance - Expenses)

The Government's Learning Support Action Plan 2019-2025 (the Action Plan) notes the need to provide better support for disabled children and young people, and those with additional learning needs. Some Action Plan priorities may need further funding, such as strengthening support for neurodiverse learners and those who require alternatives to mainstream schooling, and support to attend regularly, and/or are at risk of disengaging from education. In addition, some existing learning support services provided and/or funded by the Ministry of Education face volume and price pressures. There is a risk that these pressures cannot be met within existing baselines and further funding may be required.

Replacing Deciles with the Equity Index (Policy Change - Expenses)

The Government has committed to replacing deciles with the Equity Index as part of its manifesto commitments and fiscal plan. The index provides a more refined measure to understand whether there are socio-economic factors present in the lives of learners that can impact educational outcomes. This will inform how the schooling system can be resourced to provide all learners with an equitable chance of success. Additional funding for schools and implementation will be required in the future to transition to the new system.

Response to the Tomorrow's Schools Review (Policy Change - Expenses)

The Government's response to the Tomorrow's Schools Review commits to reform of the schools system. Continued policy development and relevant service and implementation design have begun, with a focus on enhancing frontline services and support for learners/ākonga, whānau and education providers. Accordingly, future decisions are still required, including decisions on changes in investment. The Government 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. The impact of COVID-19 will lead to continued development work over the long term, with a short-term focus on supporting schools and front-line services.

Finance

Alternative Monetary Policy Tools (Cost Pressure or Variance ­- Expenses)

The fiscal forecasts already include an assumed fiscal impact from the Large Scale Asset Purchase programme and the Funding for Lending Programme that have been announced by the Reserve Bank. There is a risk that the fiscal impact of both of these programmes may differ from what is assumed in the fiscal forecasts, and this may include the size of the programmes as well as any gains or losses due to factors such as interest rate risk and credit risk. Any additional Alternative Monetary Policy tools that the Reserve Bank may deploy could potentially impact key fiscal indicators.

Deposit Insurance Scheme (Policy Change - Revenue and Expenses)

Cabinet has agreed to implement a deposit insurance scheme (DIS) with a target timeframe of 2023. The DIS will have a coverage limit of $100,000 per eligible depositor, per licensed deposit taker. The DIS will be administered by the Reserve Bank of New Zealand and will be fully funded over time by levies on licensed deposit takers. The funding framework for the DIS will be determined through a funding strategy and levy regulations set by the Minister of Finance. The funding strategy and levies are expected to be determined prior to implementation of the DIS. The DIS will impact on the Reserve Bank's revenue and expenses. An estimate of the levy revenue is included in the fiscal forecasts. However, as further policy work is required to develop the funding strategy and levies, there is significant uncertainty around the estimates. Because the full scope and accounting treatment of the insurance liability are also yet to be determined, expenses relating to the insurance liability have not been included in the fiscal forecasts. They may need to be included in future fiscal forecasts once the accounting treatment and full scope of deposit takers and depositors eligible for deposit insurance are confirmed.

Finance, Earthquake Commission

Earthquake Commission (Cost Pressure or Variance - Expenses)

The Earthquake Commission's (EQC's) independent actuary undertakes half-yearly valuations of the total EQC 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 and any associated reinsurance recoveries. Based on these valuations, a profile of the yet-to-settle claims is included in the fiscal forecasts. There are risks that EQC's remaining settlement expenditure relating to the Canterbury 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 recognises expected future costs only where it is liable for such costs under the Earthquake Commission Act 1993. The risks include litigation and 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 variance from what is in the fiscal forecasts could be material.

Foreign Affairs

Official Development Assistance (Policy Change - Expenses)

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 0.30% of GNI from 0.28% of GNI. If the Government wants to maintain the ratio at or around 0.30% beyond June 2021, a different level of funding may be required, depending on the scale of the economic impact of COVID-19.

Health

Mental Health Support for Children (Policy Change - Expenses)

The Speech from the Throne reaffirmed the Government's commitment to expand the Mana Ake programme throughout the rest of the country over the next five years and ensure that every primary and intermediate age child has access to mental health support. Budget 2021 provided funding to continue the existing Mana Ake programme in 2021/22 in Canterbury and Kaikōura and to enable the co-design of mental wellbeing supports in primary and intermediate schools in five new areas, including Northland, Counties Manukau, Lakes, Bay of Plenty and the West Coast. The exact nature and timing of the rest of the costs of the nationwide rollout are not sufficiently certain to be included in the fiscal forecasts, but will likely have an impact during the forecast period.

Reducing Planned Care Waiting Lists (Policy Change - Expenses)

The New Zealand Labour Party's 2020 election manifesto includes a commitment to provide $200 million of additional funding to reduce waiting lists for planned surgery and diagnostic services so that New Zealanders can access procedures in a timely manner close to where they live.

Māori Development

Waitangi Tribunal Recommendations and Claims (Policy Change - Expenses)

The Waitangi Tribunal has recommended government action in its reports on a number of claims including WAI262, which focuses on the protection of Māori culture and identity and the nature of the Māori-Crown relationship in a post-settlement environment. In April 2019, the Coalition Government initiated a whole-of-government approach to addressing issues raised in the WAI262 claim and the Tribunal's report on that claim. This commitment was confirmed in the current Government's Māori manifesto. These and other issues raised through Waitangi Tribunal claims that the Government is working to address, such as WAI2698 (relating to Te Wānanga o Raukawa), represent a fiscal risk to the extent that additional funding may be required to address the issues raised. In the Pre‑election Update, this risk was published as 'Government Response to WAI262'.

Revenue

International Tax (Policy Change - Revenue)

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 may consider a digital services tax if the OECD does not make sufficient progress on a multilateral solution. The revenue impact of a digital services tax or OECD solution would depend on how it is designed.

Potential Tax Policy Changes (Policy Change - Revenue)

The Government is in the process of refreshing the tax policy work programme. The measures on the work programme, and their collective fiscal implications, are subject to change.

Research and Development Tax Incentive (Cost Pressure or Variance - Expenses)

The Research and Development (R&D) Tax Incentive allows eligible firms to receive a tax credit based on a percentage of their expenditure on R&D. 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.

Small Business Cashflow Scheme (Cost Pressure or Variance - Expenses and Capital)

The Small Business Cashflow Scheme was introduced to support small-to-medium businesses affected by COVID-19. There is a risk that the total value of the lending may differ, either positively or negatively, from what is currently forecast, as the lending under the scheme is dependent on demand until the application closing date of 31 December 2023. As new lending occurs, an initial write-down to fair value is made based on assumptions about when and how much borrowers will repay in the future. The fair value write-down reflects the cost the Crown incurs in making a loan at below-market terms. The fair value of the loan portfolio may change over time and will depend on borrower repayments and defaults over the life of the scheme, which are based on volatile factors that are subject to change.

Student Loans - Valuation (Cost Pressure or Variance - Expenses)

The value of student loans is sensitive to assumptions such as the borrower's future income and general economic factors such as risk-free interest rates, risk premiums, 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.

Social Development and Employment

Changes to the Welfare System (Policy Change - Expenses)

The Government's vision for the welfare system is to ensure that people have an adequate income and standard of living, are treated with respect and can live with dignity, and are able to participate meaningfully in their communities. Cabinet has agreed to a multi-year policy work programme to deliver on this vision. Any changes agreed to in future will likely have legislative, operational, ICT and fiscal implications. Cabinet will be provided with detailed information on the scale of change, implications and associated costs as part of future decisions.

Implications for New Zealand Superannuation from Quarterly Employment Survey Redevelopment (Cost Pressure or Variance - Expenses)

Stats NZ is redeveloping the Quarterly Employment Survey and will implement the new design from the March 2021 quarter. Current estimates indicate the redevelopment is expected to increase the average wage used in calculating New Zealand Superannuation and the Veteran's Pension by 1% to 2%. Although the fiscal forecasts include an estimate of the impact from April 2022, there is still some residual uncertainty, which means the final figures published by Stats NZ could be higher or lower.

Speaker of the House of Representatives

Future Parliamentary Accommodation (Cost Pressure or Variance - Capital)

The Parliamentary Service is considering options for the future provision of accommodation for Parliament. This includes exploring the remediation of the earthquake-prone Executive Wing Annex, a new Secure Deliveries building and the construction of a Members' Building. Further work is still required to finalise the design, enter the consenting process and refine costings.

Transport

Auckland City Rail Link Ownership Issues (Policy Change - Expenses)

The Government has committed to fund 50% of the current budgeted costs for City Rail Link Limited (CRLL) to deliver the City Rail Link project (CRL). This is a co-funding arrangement with Auckland Council, which has also committed to fund 50% of the project. Both the Crown and Auckland Council currently treat the funding as capital expenditure, and each have a 50% equity holding in CRLL. Depending on the final decisions on ownership of the CRL assets, it is possible that the Crown's equity holding may need to be written down. The Crown's final net asset position will also depend on how the assets are split between the Crown and Auckland Council and the valuation of these assets. It is likely that the value of the Crown's final assets will differ from a 50% equity investment in CRLL. Current estimates suggest this difference will not be large, however this will only become clear closer to construction completion. Decisions on final ownership will likely be made when sufficient information is available to accurately allocate the assets to the appropriate transport network operators.

Wellington Transport Investment Programme (Policy Change - Expenses and Capital)

The Government Policy Statement on land transport 2021 was developed with the expectation that Let's Get Wellington Moving (LGWM), along with the Government's other priorities, could be funded from the National Land Transport Fund (NLTF), based on available information at the time. LGWM Board partners have indicated that the LGWM indicative package in the GPS 2021 is expected to cost significantly more than previously estimated, increasing the risk that it may not be delivered in full. The ability to deliver LGWM in full also relies on local government providing its own share. Due to competing funding priorities of local councils, it is possible that central government is asked to contribute funding to LGWM.

Cross-portfolio

Pay Equity Claims (Cost Pressure or Variance - Expenses)

A number of claims have been raised in relation to the Equal Pay Act 1972 providing for pay equity (equal pay for work of equal value) and further claims may be raised following commencement of the Equal Pay Amendment Act 2020 in November 2020. 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, and any subsequent funding decisions.

Progressively Extending Living Wage Guarantees to Contractors in the Public Sector (Policy Change - Expenses)

The Speech from the Throne reaffirmed the Government's commitment to progressively extend Living Wage guarantees to contractors in the public sector. Implementing this policy will involve costs to the Crown that may not all be able to be met from baselines.

Services Funded by Third Parties (Cost Pressure or Variance - Expenses)

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. If revenue collected is lower than the total costs of providing the service, there is a risk that the Government may need to provide additional funding or that changes will be required to the way government services are delivered, which could result in costs to the Crown. In particular, measures related to COVID-19, such as the border closure have significantly reduced the third-party revenue some agencies receive.

State Sector Employment Agreements (Cost Pressure or Variance - Expenses)

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 for remuneration for other employers across the sector.

Unchanged Risks by Portfolio#

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ACC

Impacts of Changes to Accident Compensation Policy Settings (Policy Change - Expenses)

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 significant fiscal impact.

Non-Earners' Account (Cost Pressure or Variance - Expenses)

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.

Work-related Gradual Process Disease and Infection (Policy Change - Expenses)

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 (Policy Change - Revenue and Expenses)

The Government and the farming sector have agreed to attempt to eradicate the cattle disease Mycoplasma bovis. Crown funding has been appropriated and included in the forecasts for response activities in 2021/22 only. The timing of farming sector contributions may differ from what is in the fiscal forecasts. The need for Crown funding to be appropriated for 2022/23 and subsequent years will be considered depending on progress in eradicating the disease.

Broadcasting and Media

Delivery of the Government's Public Media Outcomes (Policy Change - Expenses and Capital)

The media sector, including both public and privately owned organisations, is under increasing pressure from 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. Once business case outcomes are agreed, significant additional investment may be required to deliver on the Government's public media outcomes.

Conservation

Department of Conservation Compliance with Drinking Water Supply Infrastructure Requirements (Cost Pressure or Variance - Expenses and Capital)

Three waters reforms will introduce new requirements for providers of drinking water and limit the definition of 'self-supplier' to individual domestic self-suppliers. The Department of Conservation manages drinking water supply infrastructure assets at over 2,000 sites including campsites, huts, visitor centres and town supplies, many of which are exempt from drinking water standards under the current definition of 'self-supplier'. The new requirement that all drinking water suppliers must provide safe drinking water and comply with drinking water standards on a consistent basis, and the proposed change to the definition of 'self-supplier' resulting from the Water Services Bill, may have significant fiscal implications for the Department of Conservation.

Defence

Disposal of New Zealand Defence Force Assets (Policy Change - Revenue and Expenses)

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 a negative impact on the Government's overall financial position.

Education

Early Learning Action Plan (Policy Change - Expenses)

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 $1.2 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.

Reform of Vocational Education (RoVE) (Policy Change - Expenses and Capital)

Te Pūkenga - New Zealand Institute of Skills and Technology may seek significant additional Crown funding in the future for the transformation and management of its national network of education providers (the 16 former Institutes of Technology and Polytechnics), including integrating support for work-based training such as apprenticeships. Design of, and implementation planning for, the vocational education Unified Funding System (UFS) is continuing. The UFS is a core component of RoVE and is crucial to incentivising and delivering the changes in behaviour and delivery models that are necessary to achieve the Government's objectives for RoVE. The Speech from the Throne reaffirmed the Government's commitment to complete the RoVE.

Finance, Earthquake Commission

Southern Response Earthquake Services Support (Cost Pressure or Variance - Expenses and Capital)

The ultimate cost to the Crown of settling earthquake claims is subject to uncertainty. Forecasts currently 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 be higher than this estimate, which is sensitive to its underlying assumptions such as damage estimates, recent and future court decisions, claims emerging in the future and the forecast profile of claims settlement.

Housing

Divestment and Development of Kāinga Ora - Homes and Communities' Housing (Cost Pressure or Variance - Expenses)

The Crown's fiscal forecasts include business-as-usual divestments, acquisitions and the redevelopment of land and housing as part of Kāinga Ora's asset management strategy. The Crown 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 (Cost Pressure or Variance - Expenses)

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 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 (Cost Pressure or Variance - Expenses)

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.

KiwiBuild - Fiscal and Delivery Risks (Cost Pressure or Variance - Revenue, Expenses and Capital)

Changes in the housing market and economy may have an impact on the costs of delivering homes and associated revenue recycling. If the prices of underwritten houses 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.

Internal Affairs

Archives New Zealand Storage Capacity (Policy Change - Expenses and Capital)

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 provided 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 to 2030.

Research, Science and Innovation

Research and Development Spending Target (Policy Change - Expenses)

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

Cash Held in Tax Pools (Cost Pressure or Variance - Revenue)

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 the depositor, resulting in a reduction in the Crown's available cash reserves.

Transformation and Technology Renewal (Cost Pressure or Variance - Expenses)

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 and Employment

Increasing Special Needs Grant Limits for Emergency Dental Treatment (Policy Change - Expenses)

The New Zealand Labour Party's 2020 election manifesto includes a commitment to increase the maximum grant limit for Special Needs Grants for emergency dental treatments from $300 to $1000. The exact nature and timing of this funding are not sufficiently certain to be included in the fiscal forecasts but will likely have an impact during the forecast period.

Transport

Auckland City Rail Link (Cost Pressure or Variance - Expenses and Capital)

The Government has committed to funding 50% of the costs associated with the City Rail Link project, which is estimated to cost $4.4 billion. Based on this estimate, the Crown contribution to the project will be around $2.2 billion. There is a risk that the timing, scope and amount of the Crown contribution to the project could be different from what is included in the fiscal forecasts, in particular because of additional costs arising from the COVID-19 lockdowns, as well as the costs associated with the delays in obtaining key skilled workers from outside New Zealand's border.

Treaty of Waitangi Negotiations

Relativity Clause (Cost Pressure or Variance - Expenses)

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 (Cost Pressure or Variance - Expenses)

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.

Veterans

Veterans' Disability Entitlements (Cost Pressure or Variance - Expenses)

The fiscal forecasts include a $3.5 billion liability in respect of veterans' entitlements, including the additional qualifying operational service announced since July 2020. The amount of the liability is an estimate based on the limited data currently available to value it. There is a risk that the amount of the liability may be under- or over-stated. As more data are collected over time, this uncertainty will reduce and the estimate of the liability will become more accurate.

Cross-portfolio

Achieving New Zealand's International and Domestic Climate Change Targets (Policy Change - Expenses and Capital)

The Climate Change Response (Zero Carbon) Amendment Act 2019 requires the Government to set and achieve domestic greenhouse gas emissions targets and achieve emissions budgets starting in 2022 to 2025, and to contribute to the global effort under the Paris Agreement to limit global average temperature increases. New Zealand will need to pursue sizeable domestic or offshore abatement to meet its 2021 to 2030 emissions budget commitments under the Paris Agreement. Emissions Trading Scheme settings will affect government revenue and expenses, while complementary decarbonisation initiatives could result in substantial fiscal costs. The Government has choices around how it achieves these climate targets. It is likely that fulfilling its commitments will involve significant costs to the Crown, starting within the current fiscal forecast period.

Carbon Neutral Public Service (Policy Change - Expenses and Capital)

The Government has agreed to establish the Carbon Neutral Government Programme, with the aim of making the public sector carbon neutral by 2025. This programme is supported by the existing State Sector Decarbonisation Fund and possible mechanisms to achieve carbon neutrality include phasing out coal-fired boilers, transitioning the government vehicle fleet to electric vehicles, and ensuring government-occupied buildings are more energy efficient. Funding was provided for this in Budget 2021, however a fiscal risk exists to the extent that government commitments are unable to be met through existing provisions for funding.

Information and Communications Technology Operating and Capital Pressures (Cost Pressure or Variance - Expenses and Capital)

A number of agencies are facing increasing operating and capital pressures related to ageing information and communications technology (ICT) assets and capability that are no longer fit for purpose. In addition, COVID-19 has highlighted the need for some agencies, particularly in the Education sector, to expand existing digital services, in line with increased demand and changed circumstances. This risk is aligned with the need for agencies to transition to cloud based solutions in line with the Government's Cloud-First policy. These pressures are fiscal risks to the extent that they cannot be managed through agencies' existing balance sheets and/or other funding mechanisms as outlined in this chapter.

Non-government Providers Receiving Funding from the Crown (Cost Pressure or Variance - Expenses)

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 (Cost Pressure or Variance - Capital)

Agencies are likely to face capital expenditure pressures related to replacing ageing infrastructure and other capital requirements driven by demand pressures. These pressures are risks to the fiscal forecasts to the extent that they cannot be managed through agencies' existing balance sheets and baselines, 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 (Cost Pressure or Variance - Expenses)

As in previous years, agencies are likely to face operating expenditure pressures in the future as a result of changes in the demand for and price of the services they provide or because some of their funding is time limited. The majority of spending by agencies is not automatically adjusted for increases driven by demand or price pressures. These pressures and those arising from time-limited funding are risks to the fiscal forecasts 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.

Outcomes from Other Government Inquiries and Reviews (Policy Change - Expenses)

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

Unexpected Maintenance for Crown-owned Buildings (Cost Pressure or Variance - Capital)

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 in excess of $20 million and are not expected to be remote.[16]

The contingencies have been stated as at 31 March 2021, being the latest set of published contingencies.

Statement of Contingent Liabilities and Contingent Assets

Quantifiable contingent liabilities

Quantifiable contingent assets

Unquantifiable contingent liabilities

The following contingent liabilities have been removed:

• Kiwifruit vine PSA-V - removed as a settlement has now been reached.
• Canterbury insurance disputes - Southern Response Earthquake Services - removed as an estimate has now been reflected in the Forecast Financial Statements.
• New Zealand Transport Agency Limited (NZTA) - Deed of indemnity - removed as this is now deemed to be remote.

Description of 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 outlined on page 80.

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 or to help businesses recover from the impact of COVID-19. Under this scheme, the Crown has indemnified approved banks for an amount equal to 80% of the shortfall that arises in relation to a supported loan in default. As these indemnities are financial guarantee contracts, the fair value of the contract, and the expense arising, has been quantified using an accepted methodology, and incorporated into the forecasts. The Crown's maximum exposure under the indemnity was originally capped at $5 billion. However, the maximum exposure, if called upon, is 80% of the aggregate lending written under the scheme, which is currently forecast to reach around $2-3 billion.

New Zealand Export Credit guarantees

The Treasury's New Zealand Export Credit 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.

Legal proceedings and disputes

Inland Revenue - 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.

New Zealand Transport Agency

Legal proceedings and disputes represent the amounts claimed by plaintiffs relating to roading and other contract disputes. In addition, there is regular dialogue between the New Zealand Transport Agency and its contractors over technical and commercial matters that may result in disputes between the parties.

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.

Ministry for Primary Industries - Biosecurity Act 1993 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 of Primary Industries has been notified compensation will be sought following its responses for incursions including Bonamia ostraea, kauri dieback, Mycoplasma bovis and other minor incursions, as well as claims for losses incurred following the destruction of bud-stock, known as the Post Entry Quarantine (PEQ) response. Infectious Bursal Disease Virus (IBDV) claims have also been received. While these claims can be quantified, they do not meet the tests for recognising a provision.

Description of 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 proceedings and disputes

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, although they cannot be quantified, have the potential to exceed $20 million in costs.

Accident Compensation Corporation (ACC) litigation

Litigation involving ACC arises mainly 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.

Aquaculture Settlements

Under the Māori Commercial Aquaculture Claims Settlement Act 2004 the Crown is obligated to provide regional Iwi with 20% of future aquaculture growth. This settlement is ongoing and includes prospective settlement. As aquaculture in New Zealand grows, settlement obligations arise. Iwi may choose to accept settlement as cash, or as marine rights, or as a combination following the negotiation process. The amounts and timing of settlements are therefore uncertain, as they are dependent on sector growth, as well as the preferred nature of settlement. This results in challenges with regards to reliably estimating the Crown's potential obligations. The contingency is therefore unquantified.

Ministry for Primary Industries - Biosecurity Act 1993 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 $130 million has been made in these accounts as at 31 March 2021.

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), universities, Wānanga or New Zealand Institute of Skills and Technology, 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.

Wakatū

Crown Law is acting for the Attorney-General on behalf of the Crown in right of New Zealand in Proprietors of Wakatū 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.

Other unquantifiable contingent liabilities

Accident Compensation Corporation sensitive claims

ACC provides victims of sexual violence and abuse who suffer mental injury support (sensitive claims) in the form of counselling services, weekly compensation and other entitlements. Due to the nature of these injuries, many years may pass before the individual starts receiving treatment. Based on section 36 of the Accident Compensation Act 2001, the date of mental injury is generally recorded as the date the person first receives treatment for that injury. Once a client starts receiving treatment, a liability is recorded in ACC's Outstanding Claims Liability (OCL). With the information ACC holds for these claims, a reliable estimate of the mental injuries incurred but not yet reported as sensitive claims is unable to be made and therefore no liability is recorded in the OCL for these unreported claims.

Criminal Proceeds (Recovery) Act 2009

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

Environmental liabilities

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

In accordance with PBE IPSAS 19: Provisions, Contingent Liabilities and Contingent Assets, any contaminated sites for which costs can be reliably measured have been included in the statement of financial position as provisions. Where costs cannot be reliably measured, they are disclosed as an unquantified contingent liability.

Holidays Act 2003 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).

Treaty of Waitangi claims - settlement relativity payments - See page 74

Description of Contingent Assets

There are no material quantifiable or unquantifiable contingent assets as at 31 March 2021.

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. There are risks to the fiscal forecasts which are discussed further in the Risks to the Fiscal Forecasts chapter.

These 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 30 April 2021, where these can be reliably measured (eg, these forecasts do not include the recent health reform announcements).

The finalisation dates and key assumptions that underpin the preparation of the Forecast Financial Statements are outlined in the Fiscal Outlook chapter (pages 21 to 42).

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://www.treasury.govt.nz/information-and-services/state-sector-leadership/guidance/reporting-financial/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 43 to 89. Key forecast assumptions are set out on pages 23 to 24.

Reporting and Forecast Period

The reporting periods for these Forecast Financial Statements are the years ended 30 June 2021 to 30 June 2025. The "Previous Budget" figures are the original forecasts to 30 June 2021 as presented in the 2020 Budget Update and the "2020 Actual" figures are the audited actual results reported in the Financial Statements of Government (FSG) for the year ended 30 June 2020.

Government Reporting Entity as at 30 April 2021#

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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 a 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 (services Strategic Planning Reform Board as an interdepartmental executive board)
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 a departmental agency)
20. Ministry of Housing and Urban Development
21. Ministry of Justice - (includes Te Arawhiti - Office for Māori Crown Relations as a departmental agency)
22. Ministry of Māori Development - Te Puni Kōkiri
23. Ministry of Social Development
24. Ministry of Transport
25. New Zealand Customs Service (services Border Executive Board as an interdepartmental executive board)
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. Public Service Commission (includes Social Wellbeing Agency as a departmental agency)
34. Serious Fraud Office
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. Criminal Cases Review Commission
12. Crown Irrigation Investments Limited
13. Crown Research Institutes (7)
14. District Health Boards (20)
15. Drug Free Sport New Zealand
16. Earthquake Commission
17. Education New Zealand
18. Electoral Commission
19. Electricity Authority
20. Energy Efficiency and Conservation Authority
21. Environmental Protection Authority
22. External Reporting Board
23. Financial Markets Authority
24. Fire and Emergency New Zealand
25. Government Superannuation Fund Authority
26. Guardians of New Zealand Superannuation
27. Health and Disability Commissioner
28. Health Promotion Agency
29. Health Quality and Safety Commission
30. Health Research Council of New Zealand
31. Heritage New Zealand Pouhere Taonga
32. Human Rights Commission
33. Independent Police Conduct Authority
34. Kāinga Ora - Homes and Communities
35. Law Commission
36. Maritime New Zealand
37. Mental Health and Wellbeing Commission
38. Museum of New Zealand Te Papa Tongarewa Board
39. New Zealand Antarctic Institute
40. New Zealand Artificial Limb Service
41. New Zealand Blood Service
42. New Zealand Film Commission
43. New Zealand Growth Capital Partners Limited (previously New Zealand Venture Investment Fund Limited)
44. New Zealand Infrastructure Commission/Te Waihanga
45. New Zealand Lotteries Commission
46. New Zealand Productivity Commission
47. New Zealand Qualifications Authority
48. New Zealand Symphony Orchestra
49. New Zealand Tourism Board
50. New Zealand Trade and Enterprise
51. New Zealand Transport Agency
52. New Zealand Walking Access Commission
53. Office of Film and Literature Classification
54. Pharmaceutical Management Agency
55. Privacy Commissioner
56. Public Trust
57. Radio New Zealand Limited
58. Real Estate Agents Authority
59. Retirement Commissioner
60. School Boards of Trustees (2,424)
61. Social Workers Registration Board
62. Sport and Recreation New Zealand
63. Takeovers Panel
64. Taumata Arowai—the Water Services Regulator
65. Te Pūkenga—New Zealand Institute of Skills and Technology
66. Te Reo Whakapuaki Irirangi (Māori Broadcasting Funding Agency)
67. Te Taura Whiri i te Reo Māori (Māori Language Commission)
68. Television New Zealand Limited
69. Tertiary Education Commission
70. Transport Accident Investigation Commission
71. 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

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. Crown Regional Holdings Limited (formerly Provincial Growth Fund Limited)
4. Education Payroll Limited
5. New Zealand Green Investment Finance Limited
6. Ngāpuhi Investment Fund Limited
7. Ōtākaro Limited
8. Predator Free 2050 Limited
9. Research and Education Advanced Network New Zealand Limited
10. Southern Response Earthquake Services Limited
11. Tāmaki Redevelopment Company Limited
12. The Network for Learning Limited

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

1. Te Urewera

Others

1. Christ Church Cathedral Reinstatement Trust
2. 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)
   (8 Universities and 3 Wānanga)

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

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

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

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 '2021 Previous Budget' numbers have been restated to show repurchases of Government bonds by the Reserve Bank within net issue/(repayment) of government bonds. These amounts were previously disclosed as investing cashflows within net (purchase)/sale of shares and other securities.
2. Further information on the proceeds and repayments of government bonds is available in the core Crown residual cash summary included in the attached Fiscal Indicator Analysis section.
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

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

Forecast Statement of Financial Position
as at 30 June

1. Equity accounted investments include Universities, Wānanga and City Rail Link Limited.

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

Statement of Actual Commitments
as at 31 March

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

Statement of Actual Contingent Liabilities and Assets
as at 31 March

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

Taylor Fry has prepared an independent actuarial estimate of the ACC outstanding claims liability as at 31 December 2020. 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 28 February 2021. The equivalent single effective discount rate, taking into account ACC's projected future cash flow patterns, is 3.13% and allows for a long-term discount rate of 4.30% from 2051.

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 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 Adjustments

Unallocated operating contingencies represent operating expenses included in Budget 2021 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 2022 is $2,700 million. Some of this allowance has been pre-committed as at the forecast finalisation date of 30 April 2021, with only the unallocated portion of the allowance included in this note.

The Government has signalled a capital allowance of $12.0 billion for Budget 2021 through to Budget 2024. As at 30 April 2021, $7.6 billion of funding is assumed to remain available. Unallocated capital contingencies represent capital spending from departments. Forecast new spending indicates the funding available for capital spending 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. 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).
3. The other movements in 2020 mainly relates to the establishment of Te Pūkenga New Zealand Institute of Skills and Technology and constitutes land, buildings and other plant and equipment.

NOTE 11:  NZ Superannuation Fund

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 2021. 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 2021, based on membership data as at 30 June 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 2021.

Other principal long-term financial assumptions were an inflation rate, as measured by the Consumers Price Index (CPI), of 1.54% p.a. for the year ended 30 June 2021, increasing to 1.64% p.a. in 2022, 1.85% p.a. in 2023, and to 1.96% p.a. in the year ended 30 June 2024. CPI then increases to 1.99% p.a. in the year ended 30 June 2025 and stays at this level until 2051 when it increases to 2.0% p.a. and remains 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 2020).

The 2020/21 projected decrease in the net GSF liability is $1,259 million, reflecting a decrease in the GSF liability of $910 million and an increase in the GSF net assets of $349 million.

The overall decrease in the GSF liability of $910 million includes an actuarial loss (which increases the liability) between 1 July 2020 and 30 June 2021, of $96 million, largely owing to movements in the discount rates ($1,065 million) which are largely offset by changes in the CPI rates ($968 million). The difference of $814 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 $349 million includes a revaluation gain of $538 million reflecting the updated market value of assets at 31 January 2021. The balance of $189 million is owing to the total of the expected investment returns and expected investment gains/losses and contributions received/receivable, which is more than offset by expenses and the benefits paid/payable to members.

The changes in the projected net GSF liability from 2020/21 onwards reflect the net of the expected current service cost, interest cost, investment returns and contributions.

NOTE 14:  Provisions

Provision for NZ ETS credits

The New Zealand Emissions Trading Scheme (NZ ETS) was established to assist New Zealand in meeting its domestic and international climate change targets. The scheme puts a price on greenhouse gas (GHG) emissions to create a financial incentive for businesses to reduce their emissions, and landowners to plant forests to absorb carbon. The NZ ETS creates tradable New Zealand Units (NZUs) which the Government can allocate for free to certain business to recognise the impact that the additional costs imposed by the NZ ETS could have on their international competitiveness. The Government also allocates NZUs to participants for GHG emissions removals. 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. From 2020/21 the Government will begin to sell a limited volume of NZUs directly to the market via auction. The NZ ETS provision represents the tradeable NZUs outstanding that will be accepted as emitters honour the emissions obligations under the NZ ETS.

Emitters can meet their emissions obligations by either surrendering NZUs they hold, or by purchasing units from the Government directly at a fixed price of $35 per unit (known as the fixed price option, or FPO) before immediately surrendering them. NZUs purchased through Government auctions or FPO result in cash receipts for the Crown. NZUs purchased at Government auctions result in an increase to the NZ ETS provision as new units are created, but not immediately surrendered.

At 31 March 2021, the market price of NZUs ($36.90 per unit) is higher than the FPO. Therefore, for obligations that are due to be met in the 2020/21 fiscal year, it is assumed that the majority will be met through use of the FPO (as opposed to surrendering NZUs they already hold and reducing the NZ ETS provision). After 2020/21, the FPO will no longer be available for use for emitting activities that are carried out from the start of 2021, and so emissions obligations will have to be satisfied through surrendering units. Decisions on the cap on emissions are due to be made towards the end of 2021 and the outcome of these decisions may have a significant impact on these fiscal forecasts.

The prices for NZUs used to calculate the NZ ETS provision are assumed to remain constant over the forecast period and are based on market prices during the last week of March 2021.

The movement in the NZ ETS provision is as follows:

NOTE 15:  Borrowings

This note constitutes a Statement of Borrowings as required by the Public Finance Act 1989.

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.

NOTE 16: Changes in Net Worth

Statement of Segments#

Print this section

Statement of Financial Performance
for the year ended 30 June 2020

Statement of Financial Position
as at 30 June 2020

Forecast Statement of Segments (continued)#

Print this section

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

Statement of Financial Position
as at 30 June 2024

Statement of Financial Performance
for the year ended 30 June 2025

Statement of Financial Position
as at 30 June 2025

Fiscal Indicator Analysis#

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The purpose of the following fiscal indicator analysis is to provide a link between the Forecast Financial Statements (pages 97 to 119) based on GAAP, and the key fiscal indicators used to measure performance against the fiscal objectives set out in the Fiscal Strategy Report.

The fiscal indicator analysis comprises five statements. These statements and their key purposes are described below:

Reconciliation between the Operating Balance and the Operating Balance before Gains and Losses

OBEGAL represents core Crown revenue less core Crown expenses plus surpluses from State-owned Enterprises and Crown Entities but does not include certain gains or losses from Government reporting entities. OBEGAL can provide a more useful measure of underlying stewardship than the operating balance as short-term market fluctuations are not included in the calculation.

Expenses by Functional Classification

This analysis is based on the Classification of Functions of Government as produced by the Organisation for Economic Co-operation and Development (OECD) and permits trends in government expenditure on particular functions to be examined over time.

Core Crown Residual Cash

The core Crown residual cash statement measures the core Crown cash surplus (or deficit), after operating and investing cash requirements are met, that is available for the Government to invest, repay debt, or, in the case of a deficit, fund in any given year.

Debt Indicators

The debt statement presents the calculation of both gross debt and net core Crown debt indicators.

Gross debt is defined as gross-sovereign issued debt and represents debt issued by the sovereign (core Crown) and includes Government stock held by the NZS Fund, Accident Compensation Corporation, and the Earthquake Commission. Gross debt excludes Reserve Bank settlement cash and Reserve Bank bills.

Net core Crown debt represents gross sovereign-issued debt less core Crown financial assets (excluding advances and financial assets held by the NZS Fund). Advances and financial assets held by the NZS Fund are excluded as these assets are less liquid and/or they are made for public policy reasons rather than for the purposes associated with government financing.

Reconciliation between the Financial Statements and the Key Fiscal Indicators

This statement shows how key lines in the financial statements flow through to the key fiscal indicators used to measure performance against the government's fiscal objectives.

Reconciliation Between the Operating Balance and the Operating Balance before Gains and Losses
for the years ending 30 June

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.

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

Core Crown Residual Cash
for the years ending 30 June

1. Short-term borrowing consists of Treasury Bills and may include Euro-Commercial Paper.
2. The repayments of short-term borrowings relates to the forecast cash repayments of a Treasury bill which was issued in 2020/21 in a non-cash transaction.
3. The '2020 Actual' and '2021 Previous Forecast' numbers have been restated to show repurchases of Government bonds by the Reserve Bank within net (repayment)/issue of other New Zealand dollar borrowing. These amounts were previously disclosed as investing cashflows within other net sale/(purchase) of marketable securities and deposits.

Debt Indicators
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

1. 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.
2. Core Crown borrowings in this instance include unsettled purchases of securities (classified as accounts payable in the Statement of Financial Position).
3. Core Crown financial assets exclude receivables, except for unsettled sales of securities.
4. 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.

Reconciliation between the Financial Statements and the Key Fiscal Indicators

Note:

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