Economic and fiscal update

Half Year Economic and Fiscal Update 2006

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HYEFU 2006 was published conjointly with the Budget Policy Statement (BPS) 2007.

Statement of Responsibility#

On the basis of the economic and fiscal information available to it, the Treasury has used its best professional judgement in supplying the Minister of Finance with this Economic and Fiscal Update. The Update incorporates the fiscal and economic implications both of Government decisions and circumstances as at 8 December 2006 that were communicated to me, and of other economic and fiscal information available to the Treasury in accordance with the provisions of the Public Finance Act 1989.

John Whitehead Secretary to the Treasury

8 December 2006

 

This Economic and Fiscal Update has been prepared in accordance with the Public Finance
Act 1989 for the 30 June 2007 forecast year. In 2008 and outyears the fiscal forecasts
depart from the requirements of FRS-29. This standard requires prospective information to
be prepared in accordance with the financial standards that will be effective in these periods,
which will be New Zealand International Financial Reporting Standards (NZ IFRS). As the
impacts of the transition to NZ IFRS have yet to be fully identified and clarified, forecasts for
30 June 2008 and outyears have been prepared under current financial reporting standards.


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


To enable the Treasury to prepare this Update, I have ensured that the Secretary to the
Treasury has been advised of all Government decisions and other circumstances as at
8 December 2006 of which I was aware and that had material economic or fiscal
implications.

Hon Dr Michael Cullen
Minister of Finance
8 December 2006

1 Economic and Tax Outlook#

Summary#

Economic growth has been stronger than expected in the Budget Update

Growth in the first half of 2006 was stronger than forecast in the Budget Update.

  • Stronger than expected economic activity, and higher employment and wage growth, have led to tax revenue exceeding forecasts by around $300 million in the period from July to September 2006.
Figure 1.1 – Growth in real GDP
Figure 1.1 - Growth in real GDP.
Sources: Statistics New Zealand, The Treasury
  • Annual average gross domestic product (GDP) growth is forecast to be 1.8% in March 2007 and 2.3% in March 2008 before further recovering to 3.2% in 2009. The economy is forecast to have passed its weakest period of quarterly growth, which occurred at the end of 2005, and has entered a period of modest growth.
  • The cycle in GDP growth is forecast to be smoother than was anticipated in the Budget Update, where growth of 1% was forecast in March 2007 followed by a rebound to 3.3% in March 2008.
  • Tax revenue is forecast to be around $1 billion higher in March 2007 than forecast in the Budget Update, with this higher revenue expected to flow through the whole forecast period, largely due to increased forecasts of nominal GDP.

Imbalances in the economy are likely to exist for longer than previously forecast

  • The long period of strong growth in the economy has seen the emergence of macroeconomic imbalances – a rise in inflation pressures and a large current account deficit. The corollary of these imbalances has been tighter monetary policy and a high exchange rate that has seen the export and import-competing sectors come under pressure.
  • Imbalances are forecast to continue throughout the 2007 calendar year. At the time of the Budget Update a faster reorientation in growth away from components of domestic demand and towards exports was forecast during late 2006 and early 2007. This reorientation is now forecast to occur during 2008, with the unwinding of the imbalances expected to be slow but orderly.
  • Despite slow growth, inflationary pressures in the non-tradables sector of the economy are expected to remain during 2007. Consumer Price Index (CPI) inflation is forecast to be volatile in the short term, due to the impact of falling oil prices and the appreciation of the exchange rate in the second half of 2006. Inflation is forecast to ease to 1.9% in June 2007, before lifting back to 2.8% in December 2007.
  • Export growth is forecast to be constrained by the appreciation of the exchange rate in the middle of 2006. As a result, the current account deficit is expected to narrow at a slow rate, remaining at 8.8% of GDP in the year to March 2008.

Inflation and the current account deficit are forecast to reduce in an orderly fashion

  • Soft growth in most components of domestic demand during 2007 is expected to be the first element of some reorientation of growth in the economy. This forecast is underpinned by some consolidation in the household sector, with households less willing to take on debt in the face of high debt servicing ratios. With growth expected to be soft and profits continuing to be squeezed, market investment is expected to fall 6.9% in the year to March 2007 and 1.2% in the year to March 2008.
  • Soft domestic demand growth is forecast to lead to an easing in inflationary pressures in the economy, with inflation forecast to be 2% by 2009.
  • Exchange rate depreciation during 2007 is forecast to lead to a recovery in export growth in 2008 providing some further rebalancing of growth in the economy and boosting GDP growth to 3% or more in the remaining years of the forecast period. This recovery in export volumes, together with a rise in the terms of trade, and soft import volume growth due to a weak outlook for domestic demand, are forecast to lead to a gradual narrowing of the current account deficit to 6.3% in the year to March 2010.

There are a number of risks to the outlook

  • The behaviour of households is a key judgement underlying the central forecast. If households remain willing to take on a higher level of debt, domestic demand is likely to remain stronger than forecast and inflationary pressure is likely to be larger than forecast.
  • The imbalances in the economy present a risk to the outlook. In the central forecast, the imbalances are forecast to resolve gradually, in an orderly manner. It is possible that there could be a sharper adjustment in the economy. The Risks and Scenarios chapter considers a scenario where there is an abrupt current account adjustment and consequent sharp fall in growth and the fiscal position.
Table 1.1 – Economic outlook: central forecast 1
(Annual average % change, year to 31 March) 2006 Actual 2007 Estimate 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Private consumption 4.5 1.6 1.6 1.0 1.3 1.5
Public consumption2 5.4 4.7 3.0 3.9 3.4 4.0
Total Consumption 4.7 2.2 1.9 1.7 1.8 2.1
Residential investment -4.7 -5.1 0.0 3.5 2.6 0.3
Central government investment 25.6 6.2 1.6 2.0 2.0 2.0
Other investment 6.7 -6.4 -1.2 4.4 5.8 5.7
Total Investment 5.6 -5.1 -0.7 4.0 4.8 4.3
Stock change3 -0.3 -0.9 0.3 0.1 0.1 0.1
Gross National Expenditure 4.5 -0.5 1.7 2.3 2.6 2.8
Exports -0.1 3.6 1.4 4.1 4.6 4.0
Imports 5.0 -2.6 0.9 2.1 3.2 3.4
GDP (Production Measure) 2.2 1.8 2.3 3.2 3.1 3.0
 - annual % change 2.1 2.0 2.7 3.2 3.1 3.0
Real GDP per capita 1.3 0.8 1.3 2.3 2.2 2.2
Nominal GDP (expenditure basis) 4.7 3.3 4.3 5.6 5.0 4.9
GDP deflator 2.5 1.5 2.0 2.4 1.9 1.9
Employment4 2.7 1.9 -0.2 0.8 1.3 1.5
Unemployment5 3.9 4.0 4.8 4.6 4.4 4.3
Wages6 4.7 4.8 3.9 3.7 3.4 3.4
CPI inflation7 3.3 2.8 2.7 2.0 2.0 2.0
Export prices8 1.0 10.1 4.7 4.5 3.4 2.5
Import prices8 1.8 9.6 4.4 2.8 2.6 2.5
Current account balance            
  - $ million -14920.0 -14975.9 -14741.0 -12027.8 -11665.6 -12261.7
  - % of GDP -9.6 -9.3 -8.8 -6.8 -6.3 -6.3
TWI9 68.3 63.5 60.1 57.3 54.9 54.4
90-day bank bill rate9 7.6 7.5 6.0 6.0 6.1 6.0
10-year bond rate9 5.7 6.1 6.0 6.0 6.0 6.0

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

NOTES:

1 Forecasts finalised on 15 November 2006.

2 The forecast profile for public consumption is influenced by government defence spending.

3 Contribution to GDP growth.

4 Household Labour Force Survey, full-time equivalent employment.

5 Household Labour Force Survey, percentage of the labour force, March quarter, seasonally adjusted.

6 Quarterly Employment Survey, average hourly ordinary time earnings.

7 Annual percentage change.

8 Overseas Trade Index basis, annual average percentage change, March quarter.

9 Average for the March quarter.

Recent Economic Environment#

Annual GDP growth has slowed over the past 18 months

GDP increased 0.8% in the March 2006 quarter and 0.5% in the June quarter, rebounding from two soft quarters in the second half of 2005 which saw the economy record close to zero growth. Looking across this period of volatility in quarterly growth reveals a picture of an economy where growth has slowed compared with the strong growth of the preceding few years. However, our assessment is that the economy is past the weakest period of growth, which occurred at the end of 2005, and is well into a period of modest growth, despite the build-up of a number of imbalances in the economy that cloud the future outlook.

Figure 1.2 – Growth in real GDP
Figure 1.2 – Growth in real GDP.
Source: Statistics New Zealand

Imbalances still exist in the economy, highlighted by a current account deficit of 9.7% of GDP …

A number of recent Budget and Half-Year Updates have highlighted imbalances in the economy. The long period of strong growth in the economy has seen the emergence of macroeconomic imbalances – a rise in inflation pressures and a large current account deficit. The corollary of these imbalances has been tighter monetary policy and a high exchange rate that has seen the export and import-competing sectors come under pressure.

… and headline inflation of over 3%

The CPI increased 1.5% in the June quarter, which took annual CPI inflation to 4.0%. A spike in oil prices to US$78/barrel during the conflict in Lebanon saw petrol prices and international airfares both make large contributions to the quarterly increase in the CPI. Cheaper prices for cars and a smaller than expected increase in international airfares both contributed to a 0.7% increase in the index in the September quarter. The quarterly increase was smaller than forecast in the Budget Update.

Annual inflation was 3.5% in September, higher than the 3.1% rate forecast in the Budget Update. While petrol price increases have contributed to some of this result, non-tradables inflation has also proved to be higher than forecast, with the demand pressures in the economy continuing to push prices up. Annual non-tradables inflation was running at 4% in the September quarter and has now been at or above 4% since December 2003. Some of the largest contributions to non-tradables inflation have come from the housing and household utilities group.

Pressure on resources and the persistence of non-tradables inflation have contributed to the Reserve Bank keeping the Official Cash Rate steady at 7.25%. With this still representing a sizeable wedge between New Zealand and offshore interest rates, New Zealand has remained an attractive destination for international investors, contributing towards a lift in the Trade-Weighted Index (TWI) measure of the New Zealand dollar to around 66, up from 60 in July 2006.

Recent GDP growth has exceeded the forecasts underlying the Budget Update …

At the time of the Budget Update,GDP growth was forecast to slow to 1% in the year to March 2007, with quarterly growth of 0.2% to 0.4% forecast across the 2006 calendar year. This outlook was built around a slowing in domestic demand, while exports were forecast to be weak due to the effects of a poor agricultural season combined with a high exchange rate. Growth was subsequently forecast to rebound in the year to March 2008, owing to the effects on exports of an expected decline in the exchange rate. While services exports have been stronger than forecast, most of the difference on the export side has been in agricultural exports, owing to a surge in dairy exports from inventories, with dairy exports increasing much more than production.

… despite tentative signs of a rebalancing in growth as domestic demand has slowed …

Domestic demand growth has slowed over recent months. The large contributions to growth from the household sector in the form of private consumption and residential investment have eased. This reflects the impact of interest rate increases during 2005 on households and an easing in net migration from its peak of over 40,000 per annum in 2003. In addition, declines in the terms of trade at the end of 2005 and the beginning of 2006 have effectively reduced household disposable income through rising import prices, especially petrol, and some falls in international prices of some New Zealand exports.

Figure 1.3 – Contributions to real GDP growth
Figure 1.3 – Contributions to real GDP growth.
Source: Statistics New Zealand

The corporate sector has also experienced a slowdown, with firms trimming investment. Firms’ margins have been under pressure during the past 12 months, with firms unable to fully pass on to customers rising cost pressures, especially for labour and petrol. Firms have responded by cutting back investment, with the depreciation of the exchange rate early in 2006 raising the cost of imported investment goods and discouraging new investment.

… with net exports the key reason for the divergence from forecast

The easing in domestic demand described above has broadly matched the forecasts in the Budget Update. Private consumption declined 0.4% in the June quarter, with high petrol prices in the quarter acting to constrain spending.

Figure 1.4 – Annualised contributions to half
year growth
Figure 1.4 – Annualised contributions to half.
Source: Statistics New Zealand, The Treasury

Strength in net exports (exports minus imports) has been the source of the upside surprise to forecasts. The decline in the exchange rate early in 2006 appears to have boosted services exports. However, much of the upward surprise has come from dairy exports. The 2005/06 dairy production season started poorly owing to cold conditions in the spring of 2005. Favourable conditions at the end of the season boosted production, with Fonterra announcing a record production season. This helped boost dairy exports, together with what looks to have been a run-down of dairy stocks in the June quarter, with a 20.3% increase in dairy exports volumes in the June quarter greatly exceeding the lift in production.

Weaker domestic demand, together with the decline in the exchange rate making imports more expensive, saw import volumes fall in the March and June quarters after also falling in December 2005. This easing in imports was sharper than the gradual easing forecast in the Budget Update.

GDP is estimated to have increased 0.6% in the September quarter

After declining 0.4% in June, private consumption is estimated to have increased 0.7% in the September quarter. Residential investment is also expected to post a small gain in the September quarter after declining in June, with building consent data pointing to some rebound in activity in the second half of the year. In the external sector, export volumes are estimated to have recorded another rise in the quarter, albeit not as large as the 4.7% increase in June. However, as in the June quarter, some of the dairy exports look to have been met by running down inventories, which will detract from growth in the quarter. Import volumes are estimated to have been relatively flat in the quarter, recording only a small increase. These components are estimated to add-up to GDP growth of 0.6% in the quarter.

The labour market has remained stronger for longer than expected …

Employment growth in the first half of 2006 was stronger than forecast in the Budget Update, growing at or over 1% in each quarter and taking annual employment growth to 3.1% in June 2006. Employment growth has been substantially stronger than economic activity more generally. One result of this is that productivity growth, measured on a total economy basis, has been particularly weak, with little growth since the middle of 2004. The September quarter saw some signs of an easing in the labour market with employment falling 0.4%, suggesting that activity in the labour market is becoming closer to activity in the rest of the economy. The labour force participation rate fell from its record high of 68.7% to 68.3% and the unemployment rate rose to 3.8% from 3.6% in June. The central track incorporates some further easing in the labour market during 2007, with employment forecast to be flat.

… contributing to continued growth in tax revenue

Strong demand for labour boosted annual wage growth to close to 5% in September 2006, with firms continuing to report difficulty finding skilled staff. This growth in wages, together with the growth in employment, has led to growth in labour income of close to 8%, boosting source deductions tax revenue growth to just over 8%.

Figure 1.5 – Difference from forecast by tax
type
Figure 1.5 – Difference from forecast by tax.
Source: Inland Revenue Department, The Treasury

Total tax revenue is around $300 million ahead of forecast, after removing the effect of some one-off effects, with source deductions and corporate taxes contributing most of the increase.

Nominal GDP growth has slowed

Despite rising inflation, the recent decline in real GDP growth, as well as falls in the terms of trade, have seen nominal GDP growth drop from over 8% in 2004 to 4.2% in the year to June 2006, with annual growth estimated to have declined to 3.6% in the September quarter. The level of nominal GDP in the year to June 2006 was around $700 million higher than forecast in the Budget Update.

Assumptions Underlying the Central Forecast

Global economic activity – global economic growth, inflation and interest rate forecasts are taken from the October 2006 Consensus Forecasts and Asia Pacific Consensus Forecasts. The general global outlook is positive as growth becomes more broad-based. Growth in the United States is expected to continue to soften to 2.6% in 2007, before recovering to 3.1% to 3.2% for the rest of the forecast period. Australia is expected to see growth recover to 3.3% in 2007, up from 2.8% in 2006. Japan has emerged from recession but growth is forecast to be modest at around 2% per annum, with similar rates of growth forecast in European GDP. Economic growth for New Zealand’s top 14 trading partners is forecast at 3.5% to 3.6% across the forecast period.

Oil prices – prices for West Texas Intermediate (WTI) in the March and June quarters were higher than forecast in the Budget Update, but falls in September have taken prices back close to forecast. Futures pricing at the time these forecasts were finalised suggests that prices will increase to US$68/barrel in September 2007 before declining to around US$65/barrel by 2011. Prices at the end of the forecast period are projected to be almost identical to those forecast in the Budget Update.

Net migration – net migrant inflows appear to have troughed on an annual basis in October 2005 at 6,000 and have since recovered to around 13,000. Net migration is assumed to stay at current levels during 2007 before declining to around 10,000 per annum by 2009, and then remain at that level for the rest of the forecast period.

Monetary conditions – the New Zealand dollar exchange rate as measured by the TWI is assumed to decline from a December 2006 quarter average of 65.6 to 54.5 by the end of the forecast period. A neutral short-term interest rate of 5.8% is assumed.

Climate – agricultural growing conditions and the level of hydro electricity storage lakes are assumed to be normal over the forecast period.

Economic Outlook#

Modest quarterly GDP growth of 0.4 to 0.6% is forecast through the end of 2006 and much of 2007

Quarterly GDP growth is forecast to cluster around 0.5% per quarter from the December 2006 quarter through the first half of 2007. Annual average growth of 1.8% is forecast for March 2007, with 2.3% growth forecast in the year to March 2008. After growth of 2.2% in 2006, this outlook means that growth would have been below the trend, or potential rate of growth, which we assess as around 3%, for three consecutive years. This growth outlook is forecast to flow into softer labour market conditions and lower growth in tax revenue.

Figure 1.6 – Growth in real GDP
Figure 1.6 – Growth in real GDP.
Sources: Statistics New Zealand, The Treasury

The weak period of growth is underpinned by some consolidation in the household sector, with households judged to be less willing to take on debt in the face of debt servicing ratios reaching record high levels, as well as a weak period of export volume growth owing to the lift in the exchange rate during the middle of 2006. This appreciation of the exchange rate is forecast to push out a recovery in exchange rate-sensitive categories of exports into the 2008 calendar year, based on an assumption of some falls in the exchange rate during 2007.

Imbalances are likely to continue to exist for some time …

The imbalances in the economy are forecast to remain for some time. The central forecast at the time of the Budget Update suggested that the imbalances would start to reverse early in 2007, with exports forecast to rebound quickly on the back of a depreciation of the exchange rate. Since the Budget Update was finalised, the exchange rate has increased back to 66 on a TWI basis. This lift in the exchange rate in the middle of 2006 is now forecast to delay the recovery in exports until the 2008 calendar year. As a result, the reorientation of growth in the economy will be relatively slow.

… with inflation expected to be close to 3% by the end of 2007 and the current account deficit close to 9% of GDP…

A period of forecast volatility in headline inflation, largely owing to the effects of petrol prices, somewhat clouds inflation pressure in the economy. Strong growth in domestic demand, accompanied by pressure on resources, has pushed non-tradables inflation to over 4% since late 2003. These pressures on resources, particularly in the construction sector, are forecast to continue during much of 2007 and non-tradables inflation is not forecast to fall below 4% until December 2007. Headline inflation is forecast to fall initially before rising back to 2.8% in December 2007.

With reorientation of growth in the economy forecast to occur in an orderly, but relatively slow way, the current account deficit is forecast to remain close to 9% of nominal GDP through 2007. Import volume growth is forecast to be weak, increasing 0.9% in the March 2008 year owing to weak domestic demand. Growth in export volumes, however, is also forecast to be muted, increasing 1.4% in the March 2008 year. As a result, while the current account deficit is forecast to become smaller during 2007, it is expected to remain close to 9% of GDP.

… however, two more years of sub-trend growth in the March 2007 and 2008 years is forecast to lead to an alleviation of inflationary pressures …

With domestic demand growth forecast to be weak owing to consolidation in the household sector, as well as further weakness in market investment, inflationary pressures in the economy are forecast to ease. This is expected to result in inflation moving back inside the Reserve Bank’s target range. By 2008, inflation pressures are forecast to decline. Non-tradables inflation is forecast to fall below 3% by September 2008 and headline CPI inflation is forecast to be 2.2% by December 2008.

… with a rebalancing of growth towards the export sector forecast to lift GDP growth to 3% and contribute to some closing of the current account deficit

The exchange rate is assumed to depreciate from its current high level during the course of 2007. This depreciation is forecast to boost forestry exports. It is also forecast to lift services exports, after a lag of around one year, as New Zealand becomes a relatively cheaper destination for foreign tourists. Export volumes are forecast to increase 4.1% in March 2009, while the weakness in domestic demand described above means that import volumes growth will be muted. Both of these influences are expected to push the current account deficit to just under 7% by March 2009.

Inflation

Inflation reached 4% in June 2006. In the short term headline inflation rates are expected to be volatile due to the effect of oil prices and the exchange rate. However, inflationary pressures in the non-tradables sector are forecast to remain strong. The extent of this persistence is a key judgement in the forecasts.

Recent developments

The acceleration in inflation to over 3% since September 2005 has highlighted a number of imbalances in the economy, reflecting the pressure on resources in the domestic demand.

More recent data, as well as the forecast for the December quarter, show some falls in headline inflation. However, this largely represents the impact of falling oil prices and the rise in the exchange rate, with inflation in other components of the CPI, particularly non-tradable goods, expected to remain high.

Table 1.2 – December quarter CPI
Group Quarterly % Change % Point Contribution
Food -0.2 0.0
Alcoholic Beverages and Tobacco 0.5 0.0
Clothing and Footware 0.6 0.0
Housing and Household Utilities 1.4 0.3
Household Contents and Services 0.2 0.0
Health 1.0 0.1
Transport -3.3 -0.6
Communications 0.5 0.0
Recreation and Culture 0.4 0.0
Education 0.5 0.0
Miscellaneous Goods and Services 0.6 0.0
All Groups -0.1 -0.1

Sources: Statistics New Zealand, The Treasury

The 0.7% increase in the CPI in the September quarter was weaker than most market analysts expected at the time. When these forecasts were finalised, petrol alone was forecast to subtract 0.8 percentage points from the CPI in the December quarter, owing to a series of falls in prices. The impact of falling prices will be compounded by changes in the weightings given to goods in the construction of the CPI. Weights are generally updated every three to four years to reflect changing consumer spending patterns and the introduction of new goods. The change has given petrol a larger weighting in the make-up of the CPI. As a result, the fall in petrol prices is expected to have a larger dampening effect on inflation than would have been the case in the past.

Figure 1.7 – CPI inflation
Figure 1.7 - CPI inflation.
Sources: Statistics New Zealand, The Treasury

This is forecast to lead to a 0.1% fall in the CPI in the quarter, taking the annual rate of inflation to 2.7%. The rise in the exchange rate in the middle of 2006 is also contributing to falls in the price of other imported goods as it generally takes two to three quarters for this effect to be passed on to consumers.

A result of these recent developments is that the short-term outlook for annual rates of inflation is volatile. This volatility is apparent in the rate of inflation for tradables (sectors of the economy exposed to significant international competition), which is forecast to fall below zero early in 2007 owing to the combined impact of falling oil prices and appreciation of the exchange rate in 2006. Tradables inflation is forecast to return during 2007 with higher oil prices and the exchange rate assumed to begin to gradually depreciate back to close to historical averages.

However, capacity constraints remain high and inflationary pressures are forecast to still be strong is some sectors of the economy. This is illustrated in the outlook for persistence in non-tradables inflation, which is expected to remain close to 4% throughout 2007. However, weak domestic demand growth is forecast to gradually reduce the pressure on non-tradables inflation, which is forecast to be below 3% by the second half of 2008. The output gap continues to contribute to inflationary pressure throughout 2007. The size of the output gap is in part determined by our assessment of potential growth in the economy.

The combined effect of the outlook for tradables and non-tradables inflation is that CPI inflation falls to 1.9% by June 2007, rises back to 2.8% in December 2007 then slowly declines to around 2%.

The outlook for trading partner growth remains supportive of growth, underpinning a lift in the terms of trade

The outlook for trading partner growth, while not as strong as in the period of high growth in 2004, is likely to underpin solid demand for New Zealand’s exports. In addition, current drought conditions being experienced in Australia may restrict the supply of some agricultural commodities to international markets. Meat prices are forecast to decline a little initially after recent increases, with drought in Australia likely to lead to some early slaughtering of animals increasing supply, and putting downward pressure on prices. Further out we expect prices to increase with herd numbers likely to be smaller until climatic conditions are more favourable. Dairy prices declined during the first half of 2006 but have increased recently. World prices are forecast to continue this upward move, with demand remaining solid and Australian supply likely to ease as the effects of drought conditions take hold on dairy production.

World prices of oil are forecast to lift to US$68/barrel in the short term, based on futures prices at the time the forecasts were finalised. This is likely to contribute to a lift in import prices. However, oil prices are forecast to decline somewhat from 2008. The prices of a number of other categories of imports are forecast to decline, with capital import prices in particular forecast to continue their downward trend in international price terms.

Figure 1.8 – SNA total terms of trade
Figure 1.8 - SNA total terms of trade.
Sources: Statistics New Zealand, The Treasury

These movements in export and import prices are forecast to see the terms of trade recover somewhat from its recent dip, contributing to the recovery in growth forecast in the March 2009 year.

Soft domestic demand growth is forecast during 2007 …

Domestic demand growth fuelled economic growth during much of the past five to six years. Growth in domestic demand has slowed during the past 12 months as the impact of interest rate increases has begun to constrain households. This recent trend is forecast to continue, with growth in private consumption and residential investment forecast to ease on the household side, while market investment is forecast to continue to decline.

… with households forecast to ease their rate of debt accumulation and slow their expansion of consumption spending …

Annual growth in private consumption is expected to continue to ease as households slow the rate at which they take on debt. Interest rate increases during 2005 have seen debt servicing costs increase, and the central forecasts are for interest rates to hold at current levels right through until September 2007. This leads to debt servicing costs reaching record high levels. Households are forecast to respond to this, as well as an expected easing in the labour market and a forecast end to large increases in wealth from house price gains, by slowing the rate of growth in their consumption. As a result, private consumption is forecast to increase 1.6% in March 2007 and 1% in March 2008, well down from the growth rates of 5% or more recorded in the period from 2003 to 2005.

Figure 1.9 – Debt servicing
Figure 1.9 - Debt servicing
Sources: Statistics New Zealand, The Treasury

While household debt levels are expected to continue to increase, the rate of increase is forecast to be substantially slower than has been the case in recent years. This is an important judgement underlying the central forecasts. If households remain eager to take on an increasing amount of debt, then growth in private consumption, and possibly residential investment, will be substantially stronger than forecast. Scenario One in the Risks and Scenarios chapter considers the outlook for the economy if this desire for a lower rate of debt accumulation does not occur.

… and in the housing market

Residential investment has fallen during the period since the end of 2004 as net migration inflows eased and interest rates increased. Building consents fell in line with the easing in residential investment but have recently increased. This increase in building consents is forecast to lead to an increase in residential investment in the September and December quarters of 2006. However, residential investment is forecast to be flat over 2007, with the size of the population suggesting that the housing stock is already sufficiently large, reducing the incentive to build new houses. Weaker activity in the household sector is also likely to flow into the market for existing houses. House prices are forecast to fall 3% in the 2008 March year, removing an important source of wealth gains for households and further discouraging additional consumption spending.

Figure 1.10 – Selected components of domestic
demand
Figure 1.10 - Selected components of domestic.
Sources: Statistics New Zealand, The Treasury

Businesses are forecast to cut back investment during 2007…

Market investment recorded quarterly falls in the first half of 2006 as firms trim their investment in the face of pressure on margins and falls in profits. With growth expected to be soft and profits continuing to be squeezed, market investment is forecast to continue to fall 6.9% in the year to March 2007 and a further 1.2% in the year to March 2008.

… as well as seeking some adjustment in the labour market …

To date, firms have responded to margin pressures by cutting investment. This behaviour is forecast to extend into the labour market as firms seek to limit their labour costs. As a result, employment is expected to be flat, with firms looking for productivity gains from their existing workforce, rather than adding staff. Nevertheless, firms are not forecast to seek significant falls in employment, due to the cycle in activity being relatively muted and firms looking to retain staff due to difficulties finding skilled workers. These developments are forecast to bring employment growth more into line with general economic activity, with the labour market tending to lag behind developments in the rest of the economy. With employment growth slowing, the labour force participation rate is forecast to fall as employment prospects diminish. The unemployment rate is forecast to rise to a peak of 4.8% in March 2008. The forecasts incorporate wage growth continuing at above 4.5% through most of 2007.

Figure 1.11 – Labour market
Figure 1.11 - Labour market
Sources: Statistics New Zealand, The Treasury

The labour market has outperformed forecasts for a sustained period of time and future developments continue to pose a risk to the central forecast, particularly the outlook for private consumption and residential investment growth.

… leading to slower growth in source deductions tax revenue, despite strength in the period to June 2007 …

Wage increases and the expansion of employment during the first half of 2006 have combined to push source deductions tax revenue to a level around $200 million higher than forecast in the Budget Update in the period to September 2006. Source deductions are forecast to increase around 7% in the 2007 June year with the forecast easing in the labour market leading to slower growth in source deductions tax revenue of 4.3% in the year to June 2008. Revenue from source deductions is forecast to be around $700 million higher than the Budget Update in each of 2007 and 2008.

Growth in source deductions is forecast to be stronger than the growth in labour income throughout the forecast period. This reflects the effects of “fiscal drag” with wage increases, whether owing to rising inflation or productivity increases, meaning that workers will move up the income distribution and be subject to higher marginal tax rates. Previous forecasts have allowed for some effect from this on tax revenues. The Treasury has changed its assessment on the impact of fiscal drag in the Half Year Update based on empirical analysis that suggests that the effect of wage growth on tax revenue built into the Budget Update was too small. The result of this change in method is to add around $200 million a year to the forecasts of source deductions.

Figure 1.12 – Source deductions
Figure 1.12 - Source deductions
Sources: Statistics New Zealand, The Treasury

… while declining profits are forecast to put pressure on corporate taxes

Rising costs, including wages, are forecast to constrain profit growth so that, in the year to March 2007, profits are forecast to decline, leading to a forecast fall of just under 13.3% in the corporate tax take. With profits (as measured by the business operating surplus) forecast to decline in 2007, some firms are likely to make losses, and the forecasts of tax revenue see some build-up in tax losses, which limit corporate tax growth to 0.9% in 2007/08 as the losses are utilised. The box entitled “Corporate Taxes” contains a more detailed discussion of the outlook for corporate tax.

However, total tax revenue is forecast to be around $1 billion higher than the level forecast in the Budget Update

Figure 1.13 – Tax as a percentage of nominal
GDP
Figure 1.13 - Tax as a percentage of nominal
Sources: Statistics New Zealand, The Treasury

The lift in tax revenue forecast in 2007 is expected to persist over the forecast period, despite some slowing in the growth in tax revenue as the economy slows. The level of nominal GDP is forecast to be higher than in the Budget Update, with the difference peaking at close to $2 billion during 2007. The ratio of tax to nominal GDP has increased sharply in recent years, but is expected to fall somewhat during the forecast period, largely owing to:

  • compositional changes in GDP during a period of slow growth in labour income
  • personal tax threshold adjustments in April 2008 and April 2011, and
  • the forecast utilisation of tax losses in the corporate sector.

Government spending is forecast to make a solid contribution to growth

Real public consumption is forecast to grow 3% to 4% per annum throughout the forecast period, with increasing prices meaning that nominal growth is forecast to peak at 8% early in 2007 before growth falls to 5% to 7% across the rest of the forecast period. Non-market investment, which increased around 25% the March 2006 year, is forecast to remain at a high level.

The forecast slow growth in domestic demand leads to an easing in inflationary pressures and sees interest rates fall at the end of 2007

As described in the box entitled “Inflation”, weak domestic demand growth is expected to lead to an easing in inflationary pressures, with CPI inflation forecast to be 2% by March 2009. With inflationary pressures easing, 90-day interest rates are forecast to fall in September 2007, with rates expected to decline to 6% by March 2008.

Export growth is forecast to be constrained by the exchange rate …

The exchange rate appreciation during the middle of 2006 is forecast to delay any recovery in services exports, with the higher level of the exchange rate effectively making New Zealand a more expensive destination for tourists. The exchange rate is also forecast to dampen forestry exports as well as manufactured export volumes, although the impact of the exchange rate on the latter is relatively small. In addition, with a strong contribution to dairy exports from running down inventories in the June and September quarters of 2006, the quarterly level of dairy exports is forecast to decline in December 2006 and March 2007, based on a judgement that this stock rundown will not continue. As a result, the level of dairy exports is forecast to come back into line with production. These developments are expected to see export volumes increase only 1.4% in the March 2008 year.

Figure 1.14 – TWI exchange rate
Figure 1.14 - TWI exchange rate
Sources: Statistics New Zealand, The Treasury

… and the current account is forecast to be 8.8% of GDP in March 2008 …

Weakness in export volumes, together with a large deficit on investment income, means that the current account deficit is likely to remain large, despite weak import volume growth owing to softness in domestic demand. The investment income deficit has emerged from the combination of high profits of foreign-owned firms in New Zealand and high interest costs associated with servicing the debt that has been accumulated by running a current account deficit in excess of 6% of GDP since the end of 2004. By March 2008 the current account deficit is forecast to slowly narrow to 8.8%, compared with 9.7% in June 2006.

… before closing further, as exchange rate depreciation in 2007 boosts exports in 2008 …

The exchange rate is assumed to decline from high levels back closer to its historic average level. This decline will make New Zealand a cheaper destination for foreign tourists and is forecast to boost services exports with a lag of around one year, such that the falls in the exchange rate in 2007 do not begin to boost exports until 2008. With export volumes rising and the terms of trade at a high level, the rate at which the current account deficit narrows is forecast to accelerate, and the deficit is forecast to reach 6.8% of GDP in 2009 and 6.3% in 2010.

Figure 1.15 – Current account
Figure 1.15 - Current account
Sources: Statistics New Zealand, The Treasury

… contributing to a lift in GDP growth to 3.2%

A recovery in exports, together with some recovery in domestic demand, due to a lift in residential investment on the back of interest rate declines and a rise in market investment, are expected to contribute to a recovery in GDP growth to 3.2% in the year to March 2009. Nominal GDP growth is forecast to peak at 5.6% in 2009, with real GDP growth of 3% and an increase in the terms of trade boosting nominal GDP.

Productivity gains are forecast to drive growth on the supply-side of the economy …

We expect labour productivity growth to rebound from its recent low rate of growth. Table 1.3 provides a supply-side breakdown of growth. Rising labour utilisation has made strong contributions to growth over recent years as labour force participation has increased and the unemployment rate has fallen. At the same time productivity growth has made little contribution to growth. Productivity growth has increased a little more recently, with a 1.3% contribution to growth expected in the year to March 2007 as the cycle in the labour market moves more into line with the cycle in the rest of the economy.

Table 1.3 – Supply-side contributions to GDP growth
March Years GDP per Capita GDP Growth Labour
Productivity
Growth
Labour Input
Growth
2004 2.1 3.8 1.6 2.2
2005 2.5 3.7 0.3 3.4
2006 1.3 2.2 0.1 2.2
2007 0.8 1.8 1.3 0.6
2008 1.3 2.3 2.6 -0.3
2009 2.3 3.2 2.5 0.6
2010 2.2 3.1 1.7 1.4
2011 2.2 3.0 1.4 1.6

Productivity growth is expected to be higher over the forecast period than in the recent past, reflecting a return from a period of strong market investment growth up to March 2006 and increases in the capital-to-labour ratio. This lift in productivity is an important judgement in the forecasts. It leads to an increase in GDP growth, and an increase in potential GDP. If productivity growth is lower than forecast, and potential lower, then this could lead to a larger than expected output gap, and consequently more pressure on inflation.

… and firms are expected to lift investment as profits rise …

Rising profits, increasing productivity and falling interest rates all contribute to a rise in market investment growth from the March 2009 year. The Budget Policy Statement signals that the Government has increased the 2008 Budget Allowance by $1 billion, using the additional fiscal headroom to counterbalance the cost of the business tax package. While the details of any changes are still under development and will be made in the lead-up to Budget 2007, the central forecast builds in the impact of lower business taxes, which are assumed to have the effect of making a larger number of potential investment projects profitable for firms, leading to an increase in market investment from 2009 onwards.

… and the labour market recovers

As growth in the economy lifts, employment is also forecast to rise, increasing 1.3% and 1.5% in 2010 and 2011 respectively. After declining during the period of weak growth, labour force participation is forecast to rise while the unemployment rate falls back to 4.3%, our assessment of the long-run structural rate of unemployment.

Corporate Taxes

Corporate taxes have been a significant source of upside surprises in recent years. The future pattern of corporate taxes poses a risk to the fiscal outlook. This box discusses the drivers of the corporate tax forecasts.

The strong economic performance of recent years has contributed to strong growth in corporate profits. Profit growth has been relatively broad-based across most of the economy for the past several years. However, more recently the pattern of profit growth has altered, with the continued strength in the financial sector masking softer performance in other sectors. The growth in tax receipts from other sectors is lower than in the past, indicative of falling profits in other sectors of the economy, with many businesses facing rising costs and falling margins. Meanwhile, a strong housing market and high returns in financial markets have boosted profits in the finance sector. It is likely the strong performance of the financial sector is masking softer performance in other sectors.

With profits forecast to decline in 2007, the forecasts incorporate some build-up in tax losses. This mirrors the 1998 and 2002 tax years, the last two occasions when net taxable profits declined. This build-up in losses is based on a judgement that a period of falling growth in profits will be associated with some firms recording losses. Falling margins are likely to affect firms in some sectors, with exporters particularly at risk as their revenues are directly affected by movements in the exchange rate.

The accumulation of tax losses affects the growth in tax in subsequent years as firms utilise these losses. As a result, once profit growth increases in the year to March 2008, and the number of firms recording losses falls, growth in corporate tax revenue is suppressed by firms utilising the previous build-up in losses to effectively reduce their taxable income. This is forecast to result in a fall in corporate taxes of 13.3% in the 2006/07 year, a small increase of 0.9% in the 2007/08 year then a rebound to growth to 7.0% in the 2008/09 year, with profit growth forecast to rebound strongly.

Figure 1.16 – Growth of corporate tax
Figure 1.16 - Growth of corporate tax
Sources: Statistics New Zealand, The Treasury

The build-up of losses is an important judgement in the forecasts. If a larger number of firms record losses, then tax revenue will grow more slowly as these losses are utilised. A smaller accumulation of losses would be associated with faster growth in tax revenue from 2008/09. By the time forecasts are finalised for the 2007 Budget Update there will be more information available that will provide an indicator of the extent to which losses are building up.

The outlook for corporate taxes is a significant driver of the differences between the revenue forecasts underlying the Half Year Update and the tax revenue forecasts prepared by the Inland Revenue Department (IRD). The IRD forecasts do not include the forecast accumulation of tax losses, with corporate taxes expected to grow from 2008 concurrent with the expected lift in profit growth. As a result, IRD’s forecasts of corporate taxes are higher than the forecasts in the Half Year Update.

Fiscal Forecasts – Finalisation Dates and Key Assumptions#

Finalisation Dates
Economic outlook (refer Chapter 1) 15 November
Tax revenue forecasts 21 November
Fiscal forecasts 8 December
Government decisions and circumstances 8 December
Actual asset revaluations 30 September
Foreign exchange rates 30 September
Specific fiscal risks (refer Chapter 4) 8 December
Contingent liabilities and commitments (refer Chapter 4) 31 October

Key Assumptions

The fiscal forecasts have been prepared in accordance with the Public Finance Act 1989. They are based on the Crown’s accounting policies and assumptions (refer page 108 of the GAAP tables). As with all assumptions, there is a degree of uncertainty surrounding them. This uncertainty increases as the forecast horizon extends. A summary of the key economic assumptions that are particularly relevant to the fiscal forecasts is provided below (on a June-year-end basis to align with the Crown’s balance date of 30 June):

June years 2006/07 2007/08 2008/09 2009/10 2010/11
  BEFU HYEFU HYEFU HYEFU HYEFU HYEFU
Real GDP (P) (ann avg % chg) 1.5 2.0 2.6 3.2 3.1 3.0
Nominal GDP (E) ($m) 160,013 162,667 170,633 179,817 188,764 198,068
CPI (annual % change) 3.3 1.9 2.7 1.9 2.0 2.0
Govt 10-year bonds (qty avg %) 5.9 6.0 6.0 6.0 6.0 6.0
90-day bill rate (qty avg %) 6.8 7.5 5.9 6.0 6.1 6.0
Unemployment rate ((HLFS) basis ann avg %) 3.8 4.0 4.7 4.6 4.5 4.3
Full-time equivalent employment (ann avg % change) 1.8 0.9 0 0.9 1.4 1.5
Current account (% of GDP) -8.4 -9.3 -8.3 -6.5 -6.2 -6.3

Source: The Treasury

New Zealand Superannuation (NZS) Fund

The contribution to the NZS Fund for the year ending 30 June 2007 is $2.049 billion. The contribution to the NZS Fund is calculated over a 40-year rolling horizon to ensure that superannuation entitlements over the next 40 years can be met if the contribution rate were to be held constant at that level. The Government is making the required minimum annual contribution for 2006/07 as calculated by the formula set out in the NZS Act.

$ billion (June year end) 2005 2006 2007 2008 2009 2010 2011
Required contribution 2.107 2.337 2.049 2.133 2.326 2.459 2.576
Actual/Budgeted contribution 2.107 2.337 2.049 2.133 2.326 2.459 2.576

Source: The Treasury

The underlying assumptions in calculating the contributions for 2007 are the nominal GDP series to 2047, the NZS expense series to 2047 and the expected long-term, net after-tax annual return of the NZS Fund (6.1%) (6.1% Budget Update). The forecast rate of return is based on the Treasury’s assumptions for the rate of return on financial portfolios of Crown financial institutions. The Treasury website contains further information on the NZS Fund, as well as a copy of the NZS Fund model.

2 Fiscal Outlook#

Summary of the Half Year Update#

The Government’s fiscal position is strong.

The Financial Statements of the Government for the year ended 30 June 2006 recorded residual cash of $3 billion ($1.2 billion ahead of the Budget Update forecast), gross sovereign-issued debt (GSID) standing at 22.5% of GDP at year end, and, with the addition of the $9.9 billion NZS Fund, the Government was in a net financial asset position of $2.1 billion.

GDP growth, as expected, has been easing, but not by as much as we thought at the time of the Budget Update. Economic growth is now expected to bottom out at a somewhat higher rate, and overall, the economic forecasts described in Chapter 1 paint a less cyclical picture for the economy.

Forecast tax revenue has increased as a result of this updated view of the economy and judgements about the impact of fiscal drag and the build-up of tax losses. These tax forecasts, together with updated expenditure forecasts and the indicative allocations for future Budgets described in the Budget Policy Statement released today, result in higher forecast operating surpluses across the forecast period than at the Budget Update.

These operating surpluses flow through to a stronger fiscal position throughout the forecast period than at Budget Update. The forecasts show ongoing progress in implementing the Government’s fiscal strategy and its objective of strengthening the fiscal position in advance of future pressures arising from population ageing and increased demand for health care.

The fiscal forecasts also imply a somewhat firmer fiscal stance over the period 2005/06 to 2007/08 than predicted at the time of the Budget Update.

More specifically, the forecasts show:

  • Core Crown revenues peaking in 2006/07 at 36.3% of GDP and then settling at 34.3%, with tax to GDP broadly stable throughout the forecast period at around 31%.
  • A similar pattern for core Crown expenses, peaking in 2006/07 at 33.2% of GDP and then falling to around 32%.
  • An operating balance and OBERAC of around $6.0 billion across the forecast period. This is expected to be sufficient to meet the Government’s annual contribution to the NZS Fund and some, but not all, capital spending.
  • Cash deficits increasing to $1.8 billion in 2008/09 and then falling to $0.3 billion in 2010/11. This represents an increase in the cash position over the forecast period in comparison to the Budget Update of about $3.6 billion.
  • GSID falling from 23.3% of GDP in 2006/07 to 20.7% of GDP by the end of the forecast horizon. In the early years of the forecast the debt track is higher but in later years is broadly consistent with the Budget Update and consistent with the Government’s long-term debt objective to have gross debt broadly stable at around 20% of GDP over the next 10 years.
  • The NZS Fund increasing to $26.7 billion (13.5% of GDP) by 2010/11, with net core Crown debt including NZS Fund assets forecast to be in a positive financial position of $19.2 billion (9.7% of GDP).
Table 2.1 – Summary fiscal indicators[1]
  Year ended 30 June
($ million) 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Core Crown revenue[2] 59,170 59,020 59,917 61,577 64,746 67,895
% of GDP 37.6 36.3 35.1 34.2 34.3 34.3
Core Crown expenses 49,900 53,963 55,577 58,159 60,554 63,479
% of GDP 31.7 33.2 32.6 32.3 32.1 32.0
Operating balance 11,473 6,260 6,071 5,197 5,826 5,979
% of GDP 7.3 3.8 3.6 2.9 3.1 3.0
OBERAC 8,648 6,656 6,071 5,197 5,826 5,979
% of GDP 5.5 4.1 3.6 2.9 3.1 3.0
OBERAC excluding NZS Fund returns 8,068 5,981 5,231 4,170 4,588 4,511
% of GDP 5.1 3.7 3.1 2.3 2.4 2.3
Residual cash 2,985 107 (691) (1,821) (978) (294)
% of GDP 1.9 0.1 (0.4) (1.0) (0.5) (0.1)
Gross sovereign-issued debt 35,461 37,867 40,153 39,192 38,615 41,082
% of GDP 22.5 23.3 23.5 21.8 20.5 20.7
Net core Crown debt 7,745 6,382 5,923 7,187 7,697 7,525
% of GDP 4.9 3.9 3.5 4.0 4.1 3.8
Net core Crown debt (incl NZS Fund) (2,116) (6,271) (9,703) (11,792) (14,979) (19,195)
% of GDP (1.3) (3.9) (5.7) (6.6) (7.9) (9.7)

Source: The Treasury

Notes

  • [1]Detailed tables of the key indicators for the Half Year Economic and Fiscal Update (HYEFU) and Budget and Economic and Fiscal Update (BEFU) are located on pages 54 and 55. The fiscal fact sheet on pages 59 to 62 provides a guide to the key fiscal indicators used to measure the Government’s performance.
  • [2]The 2005/06 core Crown revenue includes the one-off non-cash adjustment of $1.8 billion (1.2% of GDP), reflecting the change in accounting treatment for the recognition of provisional tax.

Table 2.2 – Reconciliation to core Crown residual cash
    Year ended 30 June
  $ million 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
  Core Crown revenue 59,170 59,020 59,917 61,577 64,746 67,895
Less Core Crown expenses 49,900 53,963 55,577 58,159 60,554 63,479
Plus Net surpluses/(deficits) of SOEs and CEs 2,203 1,203 1,731 1,779 1,634 1,563

Equals

operating balance 11,473 6,260 6,071 5,197 5,826 5,979
Less OBERAC adjustments            
  Revaluation changes 1,471 (396)
  Accounting changes 1,354

Equals

OBERAC 8,648 6,656 6,071 5,197 5,826 5,979
Less Net return on the NZS Fund (excl revaluation changes) 580 675 840 1,027 1,238 1,468
Equals OBERAC less NZS Fund retained earnings 8,068 5,981 5,231 4,170 4,588 4,511
Less Net retained surpluses of SOEs and CEs 1,179 1,203 1,731 1,779 1,634 1,563
  Non-cash items and working capital movements (1,970) 1,829 1,313 473 1,095 1,297

Equals

  8,859 6,607 4,813 2,864 4,049 4,245
Less              
  Contribution to NZS Fund 2,337 2,131 2,687 2,790 3,173 3,146
  Purchase of physical assets 1,826 2,237 1,233 966 1,025 690
  Advances and capital injections 1,711 2,132 1,584 929 829 703

Equals

residual cash 2,985 107 (691) (1,821) (978) (294)
  Domestic bond programme 2,375 2,456 2,517 2,476 2,472 2,465
Indicators for fiscal objectives (% of GDP)            
  Core Crown revenue 37.6 36.3 35.1 34.2 34.3 34.3
  Core Crown expenses 31.7 33.2 32.6 32.3 32.1 32.0
  OBERAC 5.5 4.1 3.6 2.9 3.1 3.0
  Gross sovereign-issued debt 22.5 23.3 23.5 21.8 20.5 20.7
  Net core Crown  debt 4.9 3.9 3.5 4.0 4.1 3.8
  Net core Crown debt with NZS Fund assets (1.3) (3.9) (5.7) (6.6) (7.9) (9.7)
  Net worth 45.4 47.8 49.1 49.5 50.2 50.9
  New Zealand Superannuation Fund            
  Fund asset returns (after tax) 969 743 840 1,027 1,238 1,468
  Fund assets 9,861 12,653 15,626 18,979 22,676 26,720
  % of GDP 6.3 7.8 9.2 10.6 12.0 13.5

Top-down adjustment to cash payment forecasts

The core Crown cash payments for 2006/07 incorporate a top-down adjustment of $800 million to take into account the usual timing delays of departmental spending. The adjustment is made in the above table and is spread over operating ($500 million) and capital ($300 million) payments.

The level of the adjustment has been based on the analysis of previous over-forecasting by departments and a review of the actual outturn to 31 October 2006.

The OBERAC is expected to be lower than recent outturns …

Significant spending initiatives in the 2004, 2005 and 2006 Budget packages are expected to translate into OBERAC surpluses over the forecast period that are lower than those recorded in recent outturns. However, while the economy is expected to enter a period of slower growth, the forecast slowdown is now not as pronounced at the time of the Budget Update.

Figure 2.1 – OBERAC on a year-by-year basis
Figure 2.1 - OBERAC on a year-by-year basis.
Source: The Treasury

The OBERAC is now forecast to be $6.7 billion (4.1% of GDP) in the current year, declining to $6 billion (3% of GDP) by 2010/11, slightly higher in each year compared to the Budget Update primarily as a result of:

  • higher than expected nominal GDP flowing into tax revenue, and
  • the labour market being stronger than previously expected resulting in a reduction in benefit payments.

Post 2008, the increase in the OBERAC generated by the above factors is forecast to be offset by increasing the Budget 2008 allocation by $1 billion in addition to the $2 billion already allocated. This has been included in Figure 2.1.

… so, too, the cash available from operating …

Figure 2.2 – Accumulated operating balance
breakdown for the period 2006/07 to 2010/11
Figure 2.2 – Accumulated operating balance.
Source: The Treasury

Some components of the operating surpluses expected over the forecast period have been committed by the Government. This includes:

  • entities retaining their surpluses for the purpose of achieving their long-term objectives (ACC, EQC, NZS Fund and EQC), and
  • entities retaining their surpluses to accumulate assets (SOEs and some Crown entities).

This leaves around 54% (or around on average $4 billion per annum) of the accumulated operating balance available to finance the Government’s investing activities, such as contributions to the NZS Fund and its general capital programme.

… As a result there is a cash shortfall, albeit lower than previously forecast

There is a residual financing requirement over the period 2006/07 through 2010/11 of around $3.8 billion.

Figure 2.3 – Core Crown cash position on a year-by-year basis
Figure 2.3 - Core Crown cash position on a year-by-year basis
Source: The Treasury

The cash shortfall results because the Government’s capital programme exceeds the cash available.

The cash flow from operations generates around $22.6 billion over the forecast period. This will be invested primarily in NZS Fund contributions of $11.5 billion, purchases of physical assets of $8.5 billion (for example, schools and defence equipment), advances of $4.3 billion (mainly student loans and refinancing existing private sector debt of the health and housing sectors), injections into Crown entities for hospitals and housing of $1.2 billion and the purchase of foreign exchange reserves of $0.7 billion.

The forecast accumulated cash shortfall of $3.8 billion has reduced since the Budget Update by around $3.6 billion.

Table 2.3 – Impact of Crown operating surpluses on the balance sheet from 2006/07 to 20010/11 inclusive
Table 2.3 - Impact of Crown operating surpluses on the balance sheet from 2006/07 to 2010/11 inclusive.

The Government is forecast to receive cash of around $14.9 billion ($12.4 billion from the bond programme) from borrowings. This is forecast to be used to meet the cash shortfall, repay debt which is maturing over the period ($8.8 billion) and purchase financial assets.

Gradually declining gross debt …

Figure 2.4 – Gross sovereign-issued debt (% of
GDP and $million)
<eFigure 2.4 - Gross sovereign-issued debt (% of GDP and $million.
Source: The Treasury

GSID is forecast to increase by around $5.6 billion over the forecast period but to fall as a percentage of GDP from 22.5% to 20.7% by 2010/11. The nominal increase in GSID comprises a number of factors:

  • borrowing to meet the cash shortfall expected over the forecast period and to refinance maturing bonds
  • an increase in settlement cash levels held by the Reserve Bank from $2 billion to $7.5 billion (that is sustained at this level over the forecast period), and
  • a reduction in the holding of Treasury Bills from $4.9 billion (as at 30 June 2006) to $2.7 billion by 2010/11.

… combined with a build-up of financial assets …

Although there has been a strengthening in the forecast cash position compared with the Budget Update, the forecast Government’s bond programme remains relatively unchanged at around $2.5 billion per annum over the forecast period (see Table 2.2). This continues NZDMO’s recent practice of smoothing bond issuance from year to year.

Keeping the bond programme unchanged results in an increase in the forecast financial assets held by the Government relative to the Budget Update.

 … leads to a further rise in the net asset position of the Government

Figure 2.5 – Net debt (% of GDP and $million) and % of GDP including assets of NZS Fund
Figure 2.5 – Net debt (% of GDP and $million) and % of GDP including assets of NZS Fund.
Source: The Treasury

In contrast to GSID, net core Crown debt is forecast to remain relatively flat over the forecast period at around $7 billion or 4% of GDP.

Over the forecast period, core Crown financial assets are forecast to increase by around $20.1 billion. The largest part of the increase occurs in the assets held by the NZS Fund. The Fund is expected to increase from $9.9 billion by $16.8 billion to be $26.7 billion by 2010/11.

Net core Crown debt including the assets of the NZS Fund is forecast to be in a net financial asset position of $19.2 billion by 2010/11, or 9.7% of GDP.

Settlement Cash Level

The Reserve Bank of New Zealand has raised the settlement cash level to approximately $7.5 billion at 31 October 2006 from $2 billion at 30 June 2006, as a result of its Liquidity Management Review. The change in the settlement cash level reflected the Reserve Bank’s concerns over liquidity pressures in the New Zealand banking system.

With commercial banks now holding significant quantities of settlement cash, their demand for Treasury Bills issued by the New Zealand Debt management Office (NZDMO) has reduced. The holdings of Treasury Bills are forecast to reduce by $2.2 billion by 2010/11.

What is settlement cash?

Settlement cash is the amount of cash the Reserve Bank leaves in the banking system each day. The Reserve Bank aims to leave a relatively constant level of cash in the banking system, although this can be subject to change from time to time. Settlement cash can be used by banks to meet their payment obligations. Hence, settlement cash is a liquidity mechanism used to settle wholesale obligations between the banks and provides the basis for settling most of the retail banking transactions that occur every working day between corporates and individuals.

What is the impact on the fiscal forecasts?

The settlement cash activity of the Reserve Bank is financed from commercial banks and not by Government funding, so doesn’t impact on the Government’s residual cash position. It does impact on GSID and the components of the operating balance (as outlined in the table below), however the impact on the overall net worth and operating balance is neutral.

The following table outlines the impact of the above transactions on the fiscal forecasts at 2010/11 relative to 30 June 2006

  Impact on GSID Impact on the Operating Balance
Increase in settlement cash + $5.5 billion + $0.7 billion (revenue)
+ $0.7 billion (expenses)
Reduction in Treasury Bills - $2.2 billion - $0.2 billion (revenue)
- $0.2 billion (expenses)
Total + $3.3 billion Nil

Revenue and Expenses#

Table 2.4 – Revenue and expenses comparison with Budget Update
  Year ended 30 June
(% of GDP) 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Total revenue            
Half Year Update 48.7 46.1 44.9 44.0 43.9 43.7
Budget Update   45.4 44.3 43.5 44.1  
Total expenses            
Half Year Update 41.4 42.3 41.4 41.1 40.8 40.7
Budget Update   41.9 41.8 41.6 41.3  
Core Crown revenue            
Half Year Update 37.6 36.3 35.1 34.2 34.3 34.3
Budget Update   35.1 34.2 33.5 34.2  
Core Crown expenses            
Half Year Update 31.7 33.2 32.6 32.3 32.1 32.0
Budget Update   32.7 32.6 32.5 32.3  
SOE revenue            
Half Year Update 8.1 7.3 7.2 7.2 7.1 6.9
Budget Update   7.5 7.4 7.4 7.3  
SOE expenses            
Half Year Update 6.9 6.8 6.6 6.6 6.5 6.4
Budget Update   6.8 6.8 6.7 6.6  
Crown entities' revenue            
Half Year Update 16.1 16.0 15.7 15.2 14.5 14.0
Budget Update   16.0 15.5 14.9 13.9  
Crown entities' expenses            
Half Year Update 15.1 15.4 15.1 14.6 14.1 13.5
Budget Update   15.3 14.9 14.4 13.9  

Source: The Treasury

Over the forecast period, total revenue to GDP is expected to fall as are total expenses to GDP.

The trend in total revenue and expenses over the forecast horizon will largely be driven by activity in the core Crown segment of reported government activity. The following section discusses the core Crown activity in more detail. The SOE and Crown entities’ activity is covered in a separate section in the chapter (refer page 50).

Core Crown – Revenue#

Table 2.5 – Core Crown revenue
  Year ended 30 June
Core Crown Revenue 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
($ billion)            
Tax revenue 52.4 52.2 53.9 56.2 59.2 61.9
Investment revenue 4.5 4.5 3.8 4.1 4.4 4.7
Other core Crown revenue 2.2 2.3 2.2 1.3 1.1 1.3
Total core Crown revenue 59.1 59.0 59.9 61.6 64.7 67.9
(% of GDP)            
Tax revenue 33.3 32.1 31.6 31.3 31.3 31.3
Investment revenue 2.9 2.8 2.2 2.3 2.3 2.4
Other core Crown revenue 1.4 1.4 1.3 0.7 0.6 0.6
Total core Crown revenue 37.6 36.3 35.1 34.3 34.3 34.3

Source: The Treasury

Over the forecast period, total core Crown revenue initially declines as a percentage of GDP and remains relatively stable at around 34.3%. Tax revenue (discussed below) is the major source of core Crown revenue and is the main driver of this trend.

Within the other sources of core Crown revenue, investment revenue is forecast to fall from 2.8% of GDP in 2006/07 and to remain relatively stable at around 2.3% of GDP. This reflects a forecast assumption that investment rate of returns will drop to average rate of returns after the high rates experienced in 2005/06. This growth in line with GDP reflects the build-up of financial assets across the Crown.

Other core Crown revenue initially stays stable then declines from 2008/09 onwards. The drop in other revenue from 2008/09 onwards reflects the indicative portion of the 2008 Budget package allocated to revenue initiatives.

Tax revenue

Table 2.6 – Tax revenue % of GDP, compared with the Budget Update
  Year ended 30 June
Tax Revenue 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
(% of GDP)            
Tax revenue - Half Year Update 33.3 32.1 31.6 31.3 31.3 31.3
Tax revenue - Budget Update   31.7 30.8 30.1 30.8  

Source: The Treasury

Over the June and September quarters, tax revenue growth has slowed; annual average growth in tax revenue has fallen from around 10% to close to 5%. Although PAYE growth has remained at around 8% during this period, growth in other taxes has declined, most noticeably corporate tax, where growth is now hovering around 0% (after adjusting for the change in provisional tax accounting in June 2006) after being as high as 20% in December 2005.

This slowing in corporate tax was not unexpected. Apart from some one-off factors that are expected to reverse out in the near future, corporate tax for the September 2006 quarter is close to the Budget Update forecast.

Looking ahead, corporate tax is expected to follow the business cycle, albeit with a slightly smoother growth path. This is because tax loss accumulation and utilisation tend to smooth the growth profile of tax relative to the business cycle. Corporate tax growth is forecast to be higher than profit growth through the bottom of the business cycle in 2007 as a higher-than-normal proportion of companies incur losses. Through the upswing in the business cycle, corporate tax is expected to grow more slowly than profit growth as the losses built up in 2007 are offset against profits in 2008 and 2009. Overall, the forecast for corporate tax is similar to the Budget Update forecast.

In contrast, recent PAYE growth has exceeded expectations, largely because wage and employment growth has been higher than forecast in the Budget Update. This has caused an upward shift in the level of compensation of employees through the whole forecast period, which adds about $500 million to the PAYE forecast each year. An increase in Treasury’s estimate of the “fiscal drag” effect, ie, taxpayers facing higher marginal tax rates at higher incomes, has also added about $200 million a year to the PAYE forecasts.

The overall picture across the forecast period is for tax revenue to decline relative to GDP through to 2009 and to flatten out thereafter. This is contrary to what we would expect to see, ie, tax revenue gradually increasing relative to GDP, as the effect of an increasing effective tax rate on personal income owing to the progressive tax scale slightly outweighs the retarding effect of taxes that grow more slowly than GDP, such as excise duties.

The reasons for this unusual profile in the tax-vs-GDP are:

  • overall from 2007 through to 2011, the tax bases of the major tax types, eg, compensation of employees, private consumption are forecast to grow more slowly than GDP, thereby reducing the total effective tax rate on GDP
  • tax threshold adjustments scheduled for April 2008 and April 2011 remove some of the fiscal drag effect from tax on personal income
  • the effective tax rate on corporate income reduces through the upswing of the business cycle as tax losses generated at the bottom of the business cycle are subsequently used to reduce firms’ total income tax liability, and
  • further reductions in import tariff rates cause customs duty to lag GDP growth by a wider margin than has been the case in recent years.

These effects are summarised in the following table.

Table 2.7 – Movement in effective tax rate on GDP from 2007 to 2011
  Tax revenue
(% of GDP)
2007 tax revenue 32.1
Tax base movements, ie, changes in the composition of GDP -0.5
Fiscal drag +0.6
Tax threshold adjustments -0.3
Tax loss offsets -0.2
Tariff rate reductions -0.1
Other (eg, excise duties) -0.3
2011 tax revenue 31.3
Table 2.8 – Treasury and Inland Revenue total tax revenue forecasts
($ million) 2006/07
Forecast
2007/08
Forecast
2008/09
Forecast
2009/10
Forecast
2010/11
Forecast
PAYE          
Treasury 20,566 21,404 22,354 23,668 24,980
Inland Revenue 20,580 21,510 22,475 23,890 25,250
Difference (14)  (106)  (121)  (222)   (270)
Corporate taxes          
Treasury   8,905   8,947   9,550 10,450 10,833
Inland Revenue  9,003  9,619  10,379  10,631  11,042
Difference   (98)  (672)  (829)  (181)  (209)
Goods and services tax          
Treasury   10,709   11,181  11,618  11,899   12,446
Inland Revenue   10,644   11,025   11,542   11,817   12,421
Difference  ;65  156  76  82  25
Other taxes          
Treasury  11,529  11,812   12,074  12,495   12,966
Inland Revenue  11,655  11,886   12,015 12,533   13,034
Difference  (126)  (74)  59  (38)  (68)
Total tax          
Treasury   51,709   53,344   55,596  58,512   61,225
Inland Revenue  51,882  54,040  56,411  58,871   61,747
Difference  (173)  (696)   (815)   (359)   (522)
Total tax (% of GDP)          
Treasury 31.8% 31.3% 30.9% 31.0% 30.9%
Inland Revenue 31.9% 31.7% 31.4% 31.2% 31.2%
Difference -0.1% -0.4% -0.5% -0.2% -0.3%

Sources: Inland Revenue, The Treasury

Inland Revenue’s total tax forecasts are higher than the Treasury’s in all years, although the gap between the two sets of forecasts is not as large as it was in the Budget Update. Most of the differences occur in the corporate and PAYE tax types.

At the time of the Budget Update, growth in PAYE exceeded that which could be easily explained by growth in aggregate wages and salaries, even after allowing for the impact of fiscal drag. Inland Revenue assumed that this unexplained growth would continue into the forecast period. This assumption opened up a wedge between Treasury and Inland Revenue forecasts of PAYE; this wedge grew to more than $1 billion by the end of the forecast period.

Recent labour market data have shown that employment growth through the first half of 2006 was higher than expected in the Budget Update. PAYE in the September quarter was close to Inland Revenue's forecast, but $200 million above Treasury's.

Treasury's labour market forecast is now much higher than in the Budget Update in the near term and is now more readily reconciled against recent PAYE receipts. In response to recent outturns and to the new labour market forecast, Treasury's PAYE forecasts have increased in the order of $800 million per year. Inland Revenue's PAYE forecasts have increased by much smaller amounts in the near term, and have decreased from 2009 onwards. Thus the difference between the two departments' PAYE forecasts is now much smaller than in the Budget Update.

Detailed comparisons of Treasury and Inland Revenue tax forecasts can be found at www.treasury.govt.nz/forecasts/hyefu/2006.

Treasury or Inland Revenue: Which tax forecasts have been the more accurate?

Ever since the early 1990s, both Treasury and Inland Revenue have been producing tax forecasts for each Budget Update and Half-Year/December Update. This is to ensure that no single agency prepares tax forecasts in isolation and that the official tax forecasts are subjected to some sort of quality assurance. We have examined the accuracy of both agencies’ forecasts over the last decade or so.

Table 2.9 - Accuracy of Treasury and Inland Revenue tax revenue forecasts, for June years 1995 to 2006 (root mean errors)
Forecast horizon (years ahead)
  0 1 2 3 4
Treasury 1.4% 4.0% 6.3% 8.2% 13.7%
Inland Revenue 1.4% 4.2% 6.3% 8.3% 14.2%

Root-mean square error is the square-root of the mean of the squares of the forecast errors. It is a measure of the accuracy and variability of the forecast errors.

Table 2.9 shows that, with the possible exception of the four-year-ahead forecasts, the root-mean square errors of both agencies’ forecasts are very similar to each other. This result is not all that surprising. Both agencies use the same macroeconomic forecast as the basis for their tax forecast. At each forecasting round, there is much discussion between the two tax forecasting teams to test assumptions and judgements, and to ensure that both agencies use all available information in their forecasts. This tends to bring the two sets of forecasts closer together, rather than further apart.Large differences (of $1 billion or more) between the two sets of forecasts have been evident only in the last two forecasting rounds and have mainly affected the longer-horizon forecasts. Therefore, it will be several years before these differences start to affect the statistics presented in table 2.6. In short, over the historical period these forecasts have practically been the same. We will not be able to judge the accuracy of the differences now existing between the two agencies for another 2-3 years.

Core Crown – Expenses#

Table 2.10 – Expenses indicators
Expenses 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
($ billion)            
Core Crown 49.9 54.0 55.6 58.2 60.6 63.5
Core Crown (excluding GSF valuation) 49.6 53.7 55.6 58.2 60.6 63.5
(% of GDP)            
Core Crown 31.7 33.2 32.6 32.3 32.1 32.0
Core Crown (excluding GSF valuation) 31.5 33.0 32.6 32.3 32.1 32.0

Source: The Treasury

Over the past two years core Crown expenses to GDP have increased, primarily due to the impact of the significant increase in spending made in the 2004 and 2005 Budget packages. The Working for Families package was a key part of this.

Figure 2.6 – Core expenses excluding GSF valuations ($ and % of GDP)
Figure 2.6 - Core expenses excluding GSF valuations ($ and % of GDP.
Source: The Treasury

This continues in 2006/07, with core Crown expenses (excluding Government Super Fund (GSF) valuations) forecast to increase $4.1 billion, or 31.5% of GDP in 2005/06 to 33.0% of GDP. This growth in expenses is primarily due to:

  • the impact of the 2006 Budget package ($2.4 billion)
  • an increase in finance costs resulting from the impact of changes in the Reserve Bank settlement cash levels ($0.5 billion, refer page 39). This is entirely offset by higher investment income as the increase in Reserve Bank borrowings has been used to increase financial assets
  • additional fair value write-downs of student loans ($0.4 billion), and
  • the indexation of benefits ($0.1 billion).

Beyond 2006/07, core Crown expenses (excluding the GSF valuation) are expected to stay relatively flat over the forecast period at around 32% of GDP. This is essentially owing to smaller new operating spending forecast in comparison to the last three Budgets. In nominal terms, expenses are forecast to increase by around $9.8 billion. The major drivers of this increase are indexation of benefits (around $1.6 billion) and the allowances for new operating initiatives for future Budgets ($8.0 billion; see Figure 2.8 below).

Figure 2.7 – Core Crown functional expenses as a percentage of total expenses (excluding valuations)
Figure 2.7 – Core Crown functional expenses as a percentage of total expenses (excluding valuations).
Source: The Treasury

Forecast New Operating Initiatives

The fiscal forecasts include indicative amounts for new operating initiatives.

Figure 2.8 – Net allowance for new operating initiatives (GST exclusive)
Figure 2.8 - Net allowance for new operating initiatives (GST exclusive).
Source: The Treasury

Budget allowances represent a level of Government funding that will be allocated to spending and revenue initiatives over the Budgets covered in the fiscal forecasts. The Government has not taken any decisions on where this funding will be allocated except for where pre-commitments against future Budgets have been made.

The operating allowance included in the fiscal forecast for Budget 2007 is $1.9 billion. The BPS has signalled a Budget 2007 package of $1.9 billion plus the three-month costs of the business tax package that fall in 2007/08.

The Budget 2008 allowance is forecast to be $3 billion. The economic and fiscal forecasts have been prepared on the basis that the allowance covers both revenue and expense initiatives. It does not imply any final decisions on the size and composition of the business tax package. The Budget 2008 allocation is $1 billion higher than indicated in the 2006 Fiscal Strategy Report.

Allowances for the 2009 and 2010 Budgets remain at around $2 billion. It is assumed all of the forecast new operating initiatives in these Budgets are allocated to spending.

Net Worth

Net worth is forecast to increase from $71.4 billion in 2005/06 to $100.8 billion by 2010/11. The growth in net worth reflects the Government’s strategy to run operating surpluses to strengthen its fiscal position. This strategy is evident across the whole of the Crown. The following section focuses on the net worth of the core Crown segments for reported government activity. The SOE and Crown entities’ activity is covered in a separate section on page 50.

Table 2.11 –Net worth
  Year ended 30 June
Net worth ($ billion) 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Total Crown net worth 71.4 77.7 83.8 89.0 94.8 100.8
Core Crown net worth 40.1 45.1 49.5 52.9 57.1 61.5
SOE net worth 13.1 13.5 14.2 14.9 15.6 16.3
Crown entities' net worth 41.8 43.3 44.7 46.0 47.1 48.1

Source: The Treasury

Core Crown#

Table 2.12 –Components of core Crown net worth
  Year ended 30 June
($ billion) 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Total assets 102.3 109.7 116.3 118.4 121.5 127.9
Total liabilities 62.2 64.5 66.8 65.5 64.4 66.4
Net worth 40.1 45.1 49.5 52.9 57.1 61.5

Source: The Treasury

Over the forecast period, core Crown assets are expected to increase from $102.3 billion to $127.9 billion, largely due to the planned strategy of running operating surpluses (refer Table 2.3) and additional borrowing to build up assets.

As Figure 2.9 illustrates, the majority of growth occurs within financial assets, which increase by around $20.8 billion, while investments in Crown entities (primarily to fund hospital and housing capital projects) and physical assets also increase slightly.

Figure 2.9 – Core Crown asset growth
Figure 2.9 - Core Crown asset growth.
Source: The Treasury

Within the financial asset portfolio of the core Crown:

  • the NZS Fund is expected to increase by around $16.8 billion over the forecast period. These funds are being set aside to assist in meeting pressures on future NZS payments associated with an ageing population
  • advances are forecast to increase by around $3.5 billion, primarily due to student loans, and
  • the financial asset portfolios of the Reserve Bank, New Zealand Debt Management Office and GSF holdings are expected to slightly increase over the forecast period.

By 2010/11 the make-up of the financial asset portfolio is expected to have changed significantly, primarily driven by the increase in the holdings of the NZS Fund.

Figure 2.10 – Core Crown financial assets by portfolio
Figure 2.10 - Core Crown financial assets by portfolio.
Source: The Treasury

Investments in Crown entities are forecast to increase by around $0.8 billion to allow for maintenance to and increase in the asset base, especially within the health and housing sectors.

Physical assets are expected to increase slightly over the forecast horizon, illustrating the maintenance and expansion of the core Crown’s physical asset base. Figure 2.11 provides a breakdown of the physical assets held by the core Crown, by major asset classes.

Figure 2.11 – Core Crown physical assets by asset class (including capital provisions)
Figure 2.11 - Core Crown physical assets by asset class (including capital provisions).
Source: The Treasury

The level of liabilities is expected to increase over the forecast period from $62.2 billion in 2005/06 to $66.4 billion by 2010/11. The major component of core Crown liabilities is gross debt, which as previously mentioned, is forecast to increase but decrease as a percentage of GDP over the forecast period.

State-Owned Enterprises and Crown Entities#

SOEs and Crown entities (CEs) are forecast to run total operating surpluses of $10.1 billion over the forecast period. Around $2.2 billion of the operating surpluses is forecast to be returned as dividends and is available to fund spending elsewhere in the Crown.

Figure 2.12 – SOE and CE operating balance
Figure 2.12 - SOE and CE operating balance.
Source: The Treasury

The SOE/CE net surpluses are not expected to be at the same level as the 2005/06 outturn, as the actual outturn included some large investment gains, resulting from strong global equity markets and one-off gains on sale of physical assets.

In 2006/07 SOE/CE net surpluses are forecast to be $1.2 billion, which is lower than what is expected over the rest of the forecast horizon. The lower 2006/07 result relative to future years is primarily due to:

  • higher expenses due to an increase in the ACC unfunded liability of around $0.2 billion, and
  • the impact of foreign exchange losses of around $0.2 billion (foreign exchange losses are not forecast beyond the current year).

From 2007/08 onwards, SOE/CE net surpluses are forecast to remain relatively flat at around $1.7 billion per annum.

The SOE/CE net surpluses (after payment of dividends) total $7.9 billion over the forecast period. This residual is maintained within the entities that have generated the net surpluses. In broad terms the majority of the accumulated net surpluses are forecast to be applied to build up assets.

Figure 2.13 – SOE and CE assets
Figure 2.13 - SOE and CE assets.
Source: The Treasury

Financial assets are forecast to increase by around $9.5 billion. The majority of the increase is within the Crown Financial Institutes, which are accumulating financial assets for the purpose of meeting future obligations.

Physical assets are forecast to increase by around $11.5 billion. The majority of the increase is over the SOE segment and Transit NZ, which are investing in physical assets to maintain and expand their current asset base.

The expansion in assets mentioned above that is not funded by net surpluses are forecast to be met by entities raising debt and capital contributions provided by the Government.

Comparison with Budget Update#

OBERAC and operating balance

Over the forecast period the OBERAC is forecast to be higher than the Budget Update.

Figure 2.14 – OBERAC comparison
Figure 2.14 - OBERAC comparison.
Source: The Treasury

The increase in the OBERAC compared with the Budget Update is largely due to:

  • an increase in tax revenue due to forecasting changes of approximately $1 billion per annum. Most of the increase in the compensation of employees forecast has led to an increase in PAYE forecasts of $600 to 800 million each year. Tax revenue has also changed due to policy decisions outlined in table 2.14
  • a reduction in benefit expense forecast of approximately $0.2 billion in 2006/07 and by $0.4 billion thereafter. Most of the reduction occurs in the unemployment benefit and is due to an improved economic and labour market outlook from the Budget Update and enhanced provision of services to job seekers, and
  • an increase in investment income mainly due to the fact the Government is forecast to hold a higher level of financial assets as a result of the Reserve Bank increasing the settlement cash level. There is a corresponding increase in the forecast for finance costs. There is also an increase in investment income due to a change in the methodology used by the NZDMO to calculate interest income on its financial asset portfolio.

The above factors affect each of the forecast years. In addition, in the current year expenses are also influenced by expenses transfers from the 2005/06 financial year and a one-off write-off of student loan debt.

Post 2008 revenue is forecast to reduce by $1 billion each year, reflecting the increase in the 2008 Budget allocation.

Table 2.13 – OBERAC reconciliation (explains changes to the OBERAC since the Budget Update
($ million) 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast
OBERAC 2006 Budget Update 5,768 4,343 3,561 5,412

Changes (revenue)

       
Tax revenue (forecasting) 857 1,129 1,276 833
Tax revenue (policy) 182 106 683 (30)
Other sovereign revenue 4 11 4 11
New revenue allocation - - (1,000) (1,000)
Investment income 1,536 883 873 773
Other revenue 15 7 12 1
Changes to SOE/CE results (296) 11 (27) (148)

Total revenue changes

2,298 2,147 1,821 440

Changes (core Crown expenses)

       
Welfare Benefit forecast changes 158 356 354 366
Student loans (434) (109) (113) (102)
Future new operating spending 104 176 154 305
Other core Crown functional expenses (554) (554) (290) (307)
Finance costs (684) (288) (290) (288)

Total core Crown expenses changes

(1,410) (419) (185) (26)

Total changes

888 1,728 1,636 414
OBERAC 2006 Half Year Update 6,656 6,071 5,197 5,826

Source: The Treasury

Effect of Tax Policy Changes to Tax Forecasts

Table 2.14 – Material changes in tax revenue forecasts owing to changes in tax policy since the Budget Update
($ million) 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast
Material policy changes        
KiwiSaver SSCWT exemption (35) (71) (104)
Fair discount rate (30) (30) (30)
Portfolio investment entities 36 (1) (1)
Provisional tax accruals 182 135 785 105
Total 182 106 683 (30)

Source: The Treasury

KiwiSaver SSCWT exemption

Employer contributions to KiwiSaver will be exempt from specified superannuation contribution withholding tax

Fair discount rate

A '”fair discount rate” method is to be used for the taxation of offshore portfolio share investments.

Portfolio investment entities

The application date of new rules for portfolio investment entities has been deferred from 1 April 2007 to 1 October 2007.

Provisional tax accruals

In June 2006, Inland Revenue changed the way it calculates provisional tax revenue. This change has the largest effect in 2009 when $600 million of provisional tax revenue that was previously lost owing to a shift in payment dates is effectively reinstated by the new calculation method. Note that this is a change in accounting treatment rather than a tax policy change.

Residual cash

Over the forecast period residual cash is forecast to be around $3.6 billion higher than the Budget Update. The main drivers of the forecast increase are broadly similar to what has increased the OBERAC.

Debt indicators

Compared to the Budget Update, GSID is forecast to be higher by the end of the forecast period. This is largely due to the Reserve Bank increasing its settlement cash level by an additional $5.5 billion. This is partially offset by lower forecast issuance of Treasury Bills by NZDMO.

Net core Crown debt is lower by the end of the forecast period compared to the Budget Update. The main reason for this is because of the increase in the cash position.

Table 2.15 – 2006 Half Year Update fiscal indicators
  Year ended 30 June
Fiscal indicators ($ million) 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Revenue            
Total revenue 76,581 74,977 76,688 79,051 82,818 86,489
Core Crown revenue 59,170 59,020 59,917 61,577 64,746 67,895
Tax revenue 51,973 51,708 53,344 55,596 58,512 61,225
Expenses            
Total Crown expenses 65,084 68,790 70,688 73,926 77,064 80,583
Core Crown expenses 49,900 53,963 55,577 58,159 60,554 63,479
Operating balance - Core Crown 9,270 5,057 4,340 3,418 4,192 4,416
Operating balance - Crown entities 1,593 1,013 1,079 1,124 963 950
Operating balance - SOEs 1,799 776 993 1,055 1,091 1,062
Dividend elimination (1,189) (586) (341) (400) (420) (449)
Operating balance 11,473 6,260 6,071 5,197 5,826 5,979
OBERAC 8,648 6,656 6,071 5,197 5,826 5,979
OBERAC (excluding net NZS Fund asset returns) 8,068 5,981 5,231 4,170 4,588 4,511
Cash available/(shortfall to be funded) 2,985 107 (691) (1,821) (978) (294)
Debt indicators            
Gross sovereign-issued debt 35,461 37,867 40,153 39,192 38,615 41,082
Total gross Crown debt 39,427 43,750 46,869 47,290 46,901 49,531
Net core Crown debt 7,745 6,382 5,923 7,187 7,697 7,525
Net core Crown debt with NZS Fund assets (2,116) (6,271) (9,703) (11,792) (14,979) (19,195)
Net worth 71,403 77,718 83,789 88,986 94,812 100,791
Domestic bond programme 2,375 2,456 2,517 2,476 2,472 2,465
Nominal GDP 157,332 162,667 170,633 179,817 188,764 198,068
Fiscal indicators as a % of GDP            
Revenue            
Total Crown revenue 48.7 46.1 44.9 44.0 43.9 43.7
Core Crown revenue 37.6 36.3 35.1 34.2 34.3 34.3
Tax revenue 33.0 31.8 31.3 30.9 31.0 30.9
Expenses            
Total Crown expenses 41.4 42.3 41.4 41.1 40.8 40.7
Core Crown expenses 31.7 33.2 32.6 32.3 32.1 32.0
Operating balance 7.3 3.8 3.6 2.9 3.1 3.0
OBERAC 5.5 4.1 3.6 2.9 3.1 3.0
OBERAC (excluding net NZS Fund asset returns) 5.1 3.7 3.1 2.3 2.4 2.3
Debt indicators            
Gross sovereign-issued debt 22.5 23.3 23.5 21.8 20.5 20.7
Total gross Crown debt 25.1 26.9 27.5 26.3 24.8 25.0
Net core Crown debt 4.9 3.9 3.5 4.0 4.1 3.8
Net core Crown debt with NZS Fund assets (1.3) (3.9) (5.7) (6.6) (7.9) (9.7)
Net worth 45.4 47.8 49.1 49.5 50.2 50.9
New Zealand Superannuation Fund            
Fund asset returns (after tax) 969 743 840 1,027 1,238 1,468
Fund contributions 2,337 2,049 2,133 2,326 2,459 2,576
Fund assets (year end) 9,861 12,653 15,626 18,979 22,676 26,720
% of GDP 6.3 7.8 9.2 10.6 12.0 13.5

Source: The Treasury

Table 2.16 – 2006 Budget Update fiscal indicators
  Year ended 30 June
Fiscal indicators 2006 2007 2008 2009 2010
($ million) Actual Forecast Forecast Forecast Forecast
Revenue          
Total revenue 76,581 72,611 74,842 77,560 82,716
Core Crown revenue 59,170 56,190 57,781 59,728 64,157
Tax revenue 51,973 50,669 52,109 53,637 57,709
Expenses          
Total expenses 65,084 66,976 70,632 74,132 77,437
Core Crown expenses 49,900 52,254 55,158 57,973 60,527
Operating balance - Core Crown 9,270 3,936 2,623 1,755 3,630
Operating balance - Crown entities 1,593 1,233 1,086 1,084 994
Operating balance - SOEs 1,799 1,111 1,079 1,195 1,258
Dividend elimination (1,189) (512) (445) (473) (470)
Total operating balance 11,473 5,768 4,343 3,561 5,412
OBERAC 8,648 5,768 4,343 3,561 5,412
OBERAC (excluding net NZS Fund asset returns) 8,068 5,093 3,495 2,517 4,147
Cash available/(shortfall to be funded) 2,985 (1,468) (2,110) (2,706) (1,101)
Debt indicators          
Gross sovereign-issued debt 35,461 35,013 37,082 36,973 36,348
Total gross Crown debt 39,427 38,388 41,412 41,367 40,113
Net core Crown debt 7,745 9,209 10,396 12,701 13,511
Net core Crown debt with NZS Fund assets (2,116) (3,530) (5,430) (6,634) (9,740)
Net worth 71,403 64,253 68,596 72,157 77,569
Domestic bond programme 2,375 2,438 2,484 2,472 2,394
Nominal GDP 156,933 160,013 169,104 178,305 187,584
Fiscal indicators as a % of GDP          
Revenue          
Total Crown revenue 48.8 45.4 44.3 43.5 44.1
Core Crown revenue 33.2 35.1 34.2 33.5 34.2
Tax revenue 33.1 31.7 30.8 30.1 30.8
Expenses          
Total Crown expenses 41.5 41.9 41.8 41.6 41.3
Core Crown expenses 31.8 32.7 32.6 32.5 32.3
Operating balance 7.3 3.6 2.6 2.0 2.9
OBERAC 5.5 3.6 2.6 2.0 2.9
OBERAC (excluding net NZS Fund asset returns) 4.9 3.2 2.1 1.4 2.2
Debt indicators          
Gross sovereign-issued debt 22.6 21.9 21.9 20.7 19.4
Total gross Crown debt 25.1 24.0 24.5 23.2 21.4
Net core Crown debt 4.9 5.8 6.1 7.1 7.2
Net core Crown debt with NZS Fund assets (1.3) (2.2) (3.2) (3.7) (5.2)
Net worth 45.5 40.2 40.6 40.5 41.4
New Zealand Superannuation Fund          
Fund asset returns (after tax) 969 675 848 1,044 1,265
Fund contributions 2,337 2,049 2,239 2,465 2,651
Fund assets (year end) 9,861 12,739 15,826 19,335 23,251
% of GDP 6.3 8.0 9.4 10.8 12.4

Source: The Treasury

New Zealand International Financial Reporting Standards (NZ IFRS)

This note outlines the process for adopting New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) for the Government reporting entity.

The Accounting Standards Review Board announced in December 2002 that reporting entities must adopt NZ IFRS for periods beginning after 1 January 2007, with earlier adoption optional. The Minister of Finance announced in 2003 that the Crown will first adopt NZ IFRS for its financial year beginning 1 July 2007.

Treasury is managing the adoption of NZ IFRS for the consolidated Financial Statements of the Government reporting entity. Individual entities included within the consolidated Financial Statements of the Government reporting entity are responsible for ensuring their own NZ IFRS preparedness. Treasury provides guidance to these entities and facilitates implementation on common issues.

The NZ IFRS adoption timetable requires collecting comparative NZ IFRS financial information throughout 2006/07. Forecasts in the 2007 Budget for 2007/08 and beyond will be prepared on an NZ IFRS basis as will interim financial statements prepared in the 2007/08 financial year. The first set of audited financial statements prepared under NZ IFRS will be for the year ending 30 June 2008.

Entities will start providing NZ IFRS information to Treasury from October 2006 onwards. The initial streams of information will relate to the opening balance sheet only. Subsequent information will capture monthly flows and, leading up to the 2007 Budget, forecast information on an NZ IFRS basis.

At this time, it is expected that impacts on reported results will arise from applying the insurance standard (NZ IFRS 4) to the ACC claims liability and recognition and measurement changes arising from the new financial instrument standards. These latter changes include recognising all financial derivatives in the financial statements and greater use of fair values.

Presentation changes are likely to include presenting the GSF liability net of related assets, as is required under NZ IAS 19. The components of financial income and financial expense will also be affected by NZ IFRS requirements, notably reporting of movements in derivatives and differing rules for disclosing foreign exchange gains/losses.

Draft NZ IFRS accounting policies for the Government reporting entity are available at www.treasury.govt.nz/nzifrs/. Noticeable changes to existing policies include those for financial instruments, with all financial instruments being reported initially at fair value, and impairment for goodwill.

The potential areas of impact from adoption of NZ IFRS may change materially as implementation unfolds.

Risks to fiscal forecasts

The fiscal forecasts were finalised on 8 December 2006 in accordance with the forecast accounting policies. There are certain risks around the forecast results. To assist in evaluating such risks, the following chapters should be read in conjunction with the fiscal forecasts:

  • Risks and Scenarios (Chapter 3) – The fiscal forecasts are based on the economic forecasts presented in Chapter 1 and any variation from the economic forecast will affect the fiscal forecasts, in particular tax revenue and benefit expenses. The Risks and Scenarios chapter discusses the effect on the forecasts under different circumstances.
  • Specific Fiscal Risks (Chapter 4) – The fiscal forecasts incorporate Government decisions up to 8 December 2006. The Specific Fiscal Risks chapter covers specific policy decisions that are under active consideration by the Government at the time of the finalisation of the forecasts.

In addition to the specific fiscal risks and the link to the economic forecasts, there are a number of forecasting issues explained below that may arise in future.

Tax forecasting risks

The tax forecasts prepared for this Half Year Update are based on current tax policy and on the macroeconomic central forecast. Sensitivities of tax revenue to changes in economic conditions are presented in the Risks and Scenarios chapter on page 69.

SOEs’ and Crown entities’ forecasts

The forecasts for large SOEs and Crown entities were provided in October 2006 based on their best assessments at that time.

Revaluation of property, plant and equipment

Crown accounting policy is to revalue certain classes of property, plant and equipment on a regular basis. In certain circumstances the valuation will be affected by foreign exchange rates, so any appreciation in the New Zealand dollar (from 30 June 2006) will adversely affect the current physical asset values included in the fiscal forecasts.

Discount rates

The GSF and ACC liabilities included in these forecasts have been valued as at 31 October and 30 September respectively. The liabilities are to be next valued for the 2007 Budget Update. Any change in discount rates will affect the presented fiscal forecast. For example, if the discount rate rises, the value of the liabilities will decrease.

Tertiary Education Institutes’ (TEIs’) accounting treatment

The forecast information presented in the 2006 Half Year Update combined TEIs on an equity accounting basis. This treatment has been under consideration by accounting standard setters. The Financial Reporting Standards Board (FRSB) has recently advised that the question of whether to consolidate autonomous and independent entities will be considered by delivering its deliberations of the International Accounting Standards Board (IASB) project on consolidation. The IASB plans to publish a discussion paper in 2007.

The combination method adopted in these forecasts is to equity account for the TEIs’ net surpluses and net investment (ie, TEI revenues, expenses, assets and liabilities are not included on a line-by-line basis). This is consistent with the treatment adopted in the 2006 Financial Statements of the Government.

The key indicators are unchanged as a result of the combination approach for TEIs (refer page 60 of the 30 June 2006 Financial Statements of the Government).

Value of Rail Infrastructure

The rail infrastructure (ie, the land, rail track and all the equipment needed to operate the rail network) is currently reported in the Financial Statements and Forecasts at a historic cost value. This is mainly represented by the $1 that the Crown paid Tranz Rail Ltd to repurchase the asset plus the amounts that have been spent on replacement since (and forecast to be spent).

This approach is permitted under generally accepted accounting practice, and was the only one possible until robust information on current values could be obtained. However, the information value in such as approach will diminish over time as increasingly substantial capital amounts for additional work are combined with the nominal amount for the purchase from Tranz Rail Ltd.

Usually, the Government values those assets for which a market value is not readily or reliably able to be determined by using a replacement cost approach. This would provide an estimate of the fair value of the land combined with the current gross replacement costs of the other assets (bridges, tunnels, tracks, level crossings etc.) less allowances for physical deterioration and optimisation for obsolescence and relevant surplus capacity. Such an approach has merit in that it provides information as to the likely cost and time period for maintaining (replacing) the asset. This approach is currently used for the state highway network.

ONTRACK has commissioned a valuation using the optimised depreciated replacement cost methodology to be applied from 1 July 2006. This valuation has not yet been assessed by the Treasury nor has it been audited by the Auditor General, and it has not been included in these forecasts.

It should be noted, however, that any valuation on this methodology will produce a significantly larger amount than the current historic valuation. Moreover, such an amount would not be realisable through a sale, nor through any other commercial transaction. Therefore the valuation will impact neither on the Government’s fiscal strategy, nor the main indicators used to assess the fiscal condition.

Indicators of the Government’s Fiscal Performance#

This section aims to help readers better understand the Government’s fiscal position.

Each indicator in this fact sheet gives valid insights into the Government’s historical, current and forecast fiscal position, but no one indicator gives a complete picture. Individual indicators do, however, come into greater or lesser focus as circumstances change.

When, for example, the New Zealand Government’s net worth was low and net and gross debt levels were high, much of the focus of Government and public commentary at that time was on eliminating annual operating deficits and on the need to attain, and later to lock in, annual operating surpluses.

However, as net worth has risen, and gross and net debt levels have fallen, the Government in more recent years has increasingly focused on how to maintain debt levels around current levels and, accordingly, has given more focus to the Government’s annual cash balance.

Most of the indicators in this section may be useful regardless of the particular fiscal strategy being followed. In a few cases (such as the formulation of OBERAC excluding NZS Fund returns), the indicator is used to throw light on the impact of a particular strategy (in this case the build-up of financial assets in the NZS Fund).

Accounting Equations

Flow indicators
  • Core Crown revenues – core crown expenses + net surplus of SOEs (ie, after dividends) and Crown entities = Operating balance.
  • Operating balance – revaluation movements – accounting changes = OBERAC.
  • OBERAC – retained items (eg, net surplus of SOEs/CEs and net investment returns of the NZS Fund) – non-cash items (eg, depreciation) = Core Crown cash flow from operations.
  • Core Crown cash flow from operations – net investing activities (eg, contributions to NZS Fund, purchases of assets, loans to others) = Cash available/shortfall.
Stock indicators
  • Gross sovereign-issued debt (GSID) = debt issued by the core Crown.
  • Core Crown net debt =GSID – core Crown’s financial assets. (Cash available/shortfall in any year largely drive the change in net core Crown debt.)
  • Net worth (NW) = Crown’s total assets – Crown’s total liabilities. (Operating balance (OB) in any year largely drives the change in net worth.)

Ratio of core Crown revenue to GDP

Ratio of core Crown revenue to GDP.
Core Crown revenue to GDP is expected to be broadly
stable at around 34% over the forecast period, while
core Crown tax to GDP is expected to be broadly
stable at slightly above 31% of GDP.
Ratio of core Crown expenses to GDP
Ratio of core Crown expenses to GDP.
Core Crown expenses to GDP are
expected to remain broadly
stable at around 32% of GDP
over the forecast period.

Operating balance
Operating balance.
The Government has been running
operating surpluses since the early
1990s.  These are expected to
reach a peak of 7.3% of GDP in 2006
and are expected to remain above
3% of GDP over the forecast period.
OBERAC
OBERAC.
The OBERAC excluding NZS Fund
returns is expected to come down
from its recent peak of a surplus
equivalent to around 5.1% of GDP in 2006,
toward 2% of GDP in 2008 and beyond.

Cash available/(shortfall to be funded) and domestic bond programme
Cash available/(shortfall to be funded) and domestic bond programme.
The Government is currently moving
from a period of having cash available
to repay debt, to a need, in subsequent years,
to generate cash through borrowing and
reductions in marketable securities.
Crown gross debt
Crown gross debt.
GSID has been steadily declining
since the early 1990s and is expected
to remain broadly stable around
20% of GDP in the forecast period.

Core Crown financial assets
Core Crown financial assets.
As at 30 June 2007, the NZS Fund’s
assets are forecast to total $12.7 billion
or around 7.8% of GDP.  The NZS Fund
is expected to grow to around $26.7 billion
or 13.5% of GDP by the end of the forecast period.
Core Crown net debt
Core Crown net debt.
After declining steadily since the
early 1990s, net debt is projected to
consolidate in the years ahead
at around 4% of GDP. If the assets
of the NZS Fund are included, the
Government’s net debt position moved
into a net financial asset position
during 2005/06.

Net worth
Net worth.
Net worth is projected to continue
to rise at a rapid rate, moving from around
5% in 2000 to over 45.4% in 2006 and moving
towards 50.9% by the end of the forecast period.

Annex 1 – The Treasury’s Fiscal Forecasting Performance#

This Annex discusses the historical accuracy of fiscal forecasts produced in the Budget economic and fiscal updates. One means of assessing the Treasury’s forecasting performance is to compare it with the track record of Treasuries and Finance Ministries in other countries. We have been able to draw on benchmarking studies carried out by the International Monetary Fund and HM Treasury in the United Kingdom. Forecasts will always have a range of uncertainty around them, and the merit of comparing forecasting performance across countries is that it draws comparison with the actual levels of achievement seen in practice.

Nevertheless, it is important to look directly at the properties of the New Zealand forecasts. In the past, we have published reviews of the accuracy of the Treasury’s forecasts (to be found at: www.treasury.govt.nz/forecasts/performance). This annex extends those reviews. The current pattern of forecast errors makes effective forward-planning and Budget decision-making more difficult for the Government. We need to improve the quality of the forecasts.

Finally, the annex reports briefly on work that we have undertaken in the Treasury and that work currently underway to improve the performance of the forecasts.

International perspectives

Two recent studies are available to “benchmark” the Treasury’s forecasting performance against like-for-like forecasters such as other government agencies.

In February 2005, the International Monetary Fund (IMF) produced a report Canada – Selected Issues as part of its 2005 Article IV Consultation with Canada. That report compared the forecasting performance of government agencies in 11 different countries over the period 1995 to 2003. It found the following:

  • The performance of the New Zealand Treasury’s tax revenue forecasts ranked first for one-year-ahead forecasts (in terms of the size of average and average absolute forecast errors)[3] and third for two-year-ahead forecasts.
  • For forecasts of the fiscal balance, the New Zealand Treasury’s forecasts ranked third for both one-year-ahead and two-year-ahead forecasts.

In its December 2005 end of year fiscal report, HM Treasury compared the performance of forecasts of the net borrowing requirement in 15 member states of the European Union (EU) over the period 1997 to 2004. It found that:

  • Average forecast errors ranged from -3% to +2% of GDP, with the New Zealand Treasury’s result being 1.2% of GDP, ie, towards the top end of the EU range.
  • Average absolute forecast errors ranged from 0.26% to more than 3% of GDP, with the New Zealand Treasury’s result being 1.5% of GDP, ie, near the middle of the EU range.

Overall, these studies show that the Treasury’s forecasting performance compares well with that of similar agencies around the world.

Notes

  • [3]Throughout this annex, forecast error is defined as the actual outcome less the forecast of that outcome.

Historical perspectives

The second basis for assessing forecast performance is to look at the pattern of results in New Zealand alone, and not focusing on the performance relative to other countries. In recent years, reports on the performance of the Treasury’s forecasts have been published[4]. Other analyses reported in this annex have examined a much longer time period compared with the assessments in those reports. In particular, there was an analysis of forecast errors for the fiscal balance and tax receipts starting from the early 1970s.

Fiscal balance

The current headline measure of the fiscal balance is the Crown’s operating balance. However, this concept of operating balance has existed in the Crown accounts only since GAAP reporting was adopted in 1994. Forecasts of the Crown’s net cash balance, ie, the cash available to repay debt or required to be financed, have been examined in order to look at performance over the past 35 years.

Figure 1 – Net cash balance forecast errors, one-year-ahead forecasts of Budget years 1972 to 2006
 
Figure 1 – Net cash balance forecast errors, one-year-ahead forecasts of Budget years 1972 to 2006.
Source: The Treasury

Over the whole period, the average forecast error of the net cash balance is 0.8% of GDP, indicating that the forecasts may be too low, on average. After applying a test to this average error statistic, there was insufficient evidence to conclude that forecasts of the net cash balance were on average too high or too low, or in other words, the errors tended to cancel out on average.

Nevertheless, some distinct patterns are evident in Figure 1 when sub-periods of time are considered:

  • From 1972 to 1986, which covers a period when the New Zealand economy was more strictly regulated than today, the forecast errors appear to be random and are much smaller than in the rest of the series.
  • From 1987 to 1991, the forecast errors were mostly positive and relatively large. This was a period when the New Zealand economy was undergoing structural transformation and was accompanied by a period of historically high CPI inflation.
  • From 1992 to 2006, the forecast errors mirror economic growth, with forecast errors being positive (ie, forecasts were too low) during periods of high economic growth and generally negative (ie, forecasts were too high) during periods of low economic growth. In particular, there were five positive forecast errors in a row from 1993 through to 1997, and a further six in a row from 2001 to 2006. The 1993 to 2006 period was ‘split’ by shocks such as the Asian financial crisis, droughts and the September 2001 terrorist attacks.

These patterns make for a more salutary assessment of forecast performance than comes from looking at the average error over the full time period.

Tax receipts

The net cash balance essentially equals total receipts less total expenditure. The largest part of total receipts is tax receipts. The Treasury has examined the long-run trend in tax receipts forecast errors to determine if errors in the forecasting of tax receipts are contributing to errors in forecasting the cash balance.

Figure 2 – Tax receipts forecast errors, one-year-ahead forecasts of Budget years 1972 to 2006
Figure 2– Tax receipts forecast errors, one-year-ahead forecasts of Budget years 1972 to 2006.
Source: The Treasury

Similar to the net cash balance chart, Figure 2 shows more-or-less random errors through the early part of the time period, and errors following the economic cycle from the 1990s onwards. Again, there was insufficient evidence to conclude that the tax receipts forecasts were persistently too high or too low, although there were seven positive errors in a row from 2000 to 2006.

From Figures 1 and 2, it appears plausible that the cash balance forecast errors might be influenced by the tax receipts forecast errors, but strong evidence for correlation between tax receipts forecast errors and net cash balance forecast errors could not be found.

The analysis failed to come up with conclusive evidence of statistical bias in the net cash balance and tax receipts forecasts. Nevertheless, the one-year-ahead forecasts of both of these aggregates have been too low for the last six-or-seven years in a row. This causes significant difficulties for the Government in its budget planning and management. The Treasury has taken, and will continue to take, steps to remedy this problem.

Ongoing work

The programme of work initially focused on revenue forecasting and has also begun to deal with expense forecasting.

Revenue forecasts

In October 2005, the Treasury commissioned a review of its tax forecasting function (“Examination of the New Zealand Treasury’s tax forecasting methods and processes”, Schoefisch U. D.). This report found that “there are no obvious grounds to suggest that the tax forecasts are not being prepared with diligence and best professional judgement based on the input of all information available at the time”. Nevertheless, Schoefisch recommended 12 actions for the Treasury to undertake to improve the performance of its tax forecasts.

Some of these recommendations were process improvements, which the Treasury has subsequently implemented. Other recommendations identified areas where further Treasury research could be most beneficial.

One such recommendation was to investigate the source of the tax forecast errors. Differences between actual tax outcomes and forecasts will arise principally from three sources:

  • forecast errors in the macroeconomic inputs into the tax forecasting models
  • forecast errors that arise from the tax forecasting models themselves, and
  • other more-or-less random errors.

Recent research found that macroeconomic forecast errors have made the largest contribution to under-estimation in the tax forecasts, and tax modelling forecast errors have contributed most to the variability of the overall tax forecasting errors over the past decade. This was the case for all of the major tax types. In short, the Treasury underestimated the strength and durability of the current economic cycle as well as some of its drivers, particularly the sustained growth in employment.

The Treasury is doing several things that should help to address these findings:

  • A set of alternative tax forecasting models is being developed which will replace the existing tax models if they prove to be more accurate (when tested on past data).
  • After steadily increasing the amount of interaction and integration between the macroeconomic and tax forecasting teams over the past two years, the two teams will be formally merged into a single forecasting unit early in the New Year.

A full report on the decomposition of the tax forecasting errors will be released early in 2007.

The Treasury is also now using its general equilibrium model of the New Zealand economy (New Zealand Treasury Model (NZTM)) as its primary macroeconomic forecasting tool. This will allow for better and more consistent evaluation of historical forecast errors that should inform forecasting.

Expense forecasts

On the expense side, current year forecasts of expenses have been consistently too high for the past several years, implying systematic under-spending. Although the Treasury compiles expense forecasts, individual expense items are not forecast directly; rather, they are aggregated from the expense forecasts prepared by each Government department. The Treasury is investigating whether it is appropriate to make a top-down adjustment to total expense forecasts, similar to that currently done for total cash expenditure forecasts.

Conclusion

Based solely on international comparisons, the New Zealand Treasury’s fiscal forecasts compare well with those of comparable agencies. Nevertheless, there is a marked pattern, at least in recent years, of the forecasts lagging reality. As a consequence, revenue forecasts are too low when the economy is growing strongly and too high in a down-turn.

This pattern causes difficulties for Government forward planning and Budget decision-making, and is a priority for the Treasury to correct, if that is possible. Work completed or underway in the Treasury has identified overall system weaknesses, along with sources of error in the revenue forecasts. Revised processes for macroeconomic forecasting should reduce some of the sources of error in the revenue forecasts. Other work is underway to further improve the forecasting methods.

Notes

  • [4]www.treasury.govt.nz/forecasts/performance

3 Risks and Scenarios#

Summary#

  • The central forecast presented in the Economic and Tax Outlook chapter shows an economy experiencing relatively weak growth over 2007 and 2008 before recovering in the year to March 2009. Relatively weak domestic demand growth contributes to the unwinding of imbalances, such as inflationary pressures and a large current account deficit, in a fairly orderly and timely manner. However, the exact path taken by the economy is dependent on how a number of different factors evolve.
Figure 3.1 – Real GDP
Figure 3.1 - Real GDP.
Source: The Treasury
  • Some of the major risks discussed below are key judgements in the forecasts and include households’ ability and willingness to accumulate debt, the path taken by the exchange rate, the reaction of businesses to tighter trading conditions and the extent to which productivity growth rebounds. These factors will influence the extent to which inflationary pressures and a high current account deficit unwind.
  • Although we believe the central forecast presented in the Economic and Tax Outlook chapter to be the most likely outcome, two scenarios that illustrate alternative paths are presented. These scenarios are just two of a number of possible outcomes and therefore do not fully illustrate the range of possible outcomes.
  • The first scenario illustrates the impact of household expenditure and investment not slowing to the same degree as in the central forecast. In this scenario there is an increase in household indebtedness relative to the central forecasts. Stronger domestic demand generates higher real and nominal gross domestic product (GDP) but limits the extent to which inflation pressures abate and the current account deficit reduces. The second scenario reflects an environment in which there is less demand for New Zealand dollar assets leading to a faster fall in the exchange rate. The uncertainty implied by this, together with higher interest rates, reduces households’ appetite for further accumulation of debt and consequently results in lower household spending.

Introduction#

The central forecast presented in the Economic and Tax Outlook chapter incorporates a number of key judgements about how various forces affecting the economy will evolve. These judgements reflect the balancing of both upside and downside risks potentially facing the economy to arrive at our best assessment of the way the economy is likely to develop. Some of these judgements are related to the cyclical drivers of activity and some relate to the structural characteristics of the economy. If actual events differ from these judgements then the path taken by the economy is likely to deviate from the central forecast.

The first part of this chapter, Economic Risks, outlines some of the risks around the economic outlook. There are both upside and downside risks – some domestically and some internationally oriented. The second part of this chapter, Economic Scenarios, presents in more detail two scenarios that could occur if a different set of events were to occur. The third part of this chapter, Fiscal Scenarios, considers the implications of the two economic scenarios on the fiscal position.

Economic Risks#

There is uncertainty around the exact manner and timing of an unwinding of imbalances currently present in the economy

A period of strong economic growth in recent years has seen the emergence of macroeconomic imbalances – a rise in inflation pressures and a large current account deficit. Strong domestic demand growth has contributed to high levels of import demand, while exporters have struggled owing to the exchange rate remaining at a high level. This has led to an increase in the current account deficit to 9.7% of GDP.

Figure 3.2 – CPI inflation
Figure 3.2 - CPI inflation.
Source: The Treasury

The central forecast track sees these imbalances unwind in a fairly orderly and timely manner, helped by a sustained period of below average growth and a reorientation of the drivers of growth. However, there is a risk that imbalances may persist for longer. This is particularly so if domestic demand was to exhibit stronger growth than is incorporated in the central forecast. Higher domestic demand, particularly if concentrated in areas such as construction, may intensify capacity constraints and lead to further inflationary pressure. In addition, higher demand is likely to be partly met from imports and hence limit the magnitude of any reduction in the current account deficit.

The behaviour of households is a key factor influencing domestic demand. Implicit in the central forecast is the judgement that the continued accumulation of debt by households will act as a constraint on future private consumption growth. The ratio of debt to household income is at a record high level and, despite a forecast slowing in consumption growth, this ratio is expected to continue to increase over the forecast period. A key uncertainty in the economic outlook is around households’ willingness to continue to expand debt further and the impact of higher debt servicing costs. Should the debt constraint not impinge as strongly on the spending decisions of households then there is the potential for upside risk to household spending on consumption items and residential investment. Alternatively, a more substantial attempt by households at debt consolidation would pose downside risk. A scenario in which higher domestic demand contributes to more intense inflationary pressures, as consumers continue to be willing to accumulate debt at a rate faster than incorporated in the central track, is examined later in this chapter.

Exchange rate developments are important but notoriously difficult to predict

The expected depreciation of the exchange rate in the central forecast track is predicted to play an important role in the reorientation of the economy’s growth profile by reducing demand for imported goods and services while assisting the competitiveness of our exports. There is a risk that the recent strength in the exchange rate may persist for longer than is incorporated in the central track. A higher exchange rate would act to constrain export growth while making imports relatively cheaper. The net effect would be that the current account deficit could remain more persistent over the shorter term. Such a situation could arise if inflationary pressures were to remain elevated for some time with these pressures being regarded as sufficient to require tighter monetary policy, either through an increase in interest rates or for rates to remain at existing levels for longer. Under such circumstances, if financial market participants continued to focus on relative yield and providing that investor sentiment around the prospects for the New Zealand economy was not unduly dented, then the exchange rate may display a higher profile relative to the central forecast.

Figure 3.3 – Current account
Figure 3.3 - Current account.
Source: The Treasury

Countries running sustained high current account deficits are exposed to the risk of a sharp change in investor sentiment. Such an event, often called a “sudden stop”, could lead to an abrupt current account adjustment as access to offshore capital is reduced and the costs associated with obtaining such capital incorporate a much higher risk premium. Household consumption and residential investment behaviour would be particularly affected given their reliance on debt to finance much of the recent growth in such expenditure.

Research presented at the Macroeconomic Policy Forum in June concluded that the probability of New Zealand facing an abrupt current account reversal of 3% of GDP has increased to around 20%, while the probability of a larger 5% abrupt reversal has increased with the rising current account deficit to around 5%.5 Such results were considered by the author as suggesting that current external balances should not be a cause for great concern. The Government’s strong fiscal position has been considered an important offsetting factor in maintaining the country’s current credit rating. Combined with a strong banking system and a floating exchange rate, this means that concerns around the current account need to be kept in perspective.

While we regard the probability of a “sudden stop” scenario occurring as being low, a second scenario examines the impact of a reduction in demand for New Zealand dollar assets leading to a more rapid exchange rate depreciation and increased uncertainty for New Zealand households.

Productivity developments are an important driver of growth

An unobserved but important consideration in any set of economic forecasts is the rate of potential growth possible in an economy. Potential growth refers to the underlying growth potential of an economy, with growth at such levels consistent with keeping inflationary pressures and capacity issues in check. An important component determining an economy’s potential growth rate is productivity growth. Implicit in the central forecast’s return to higher levels of growth is an improvement in the recent weak levels of aggregate labour productivity growth. In the absence of such an improvement, growth may fall short of the central forecast. Alternatively, if potential growth has lifted then a recovery to higher levels of growth may be possible while at the same time keeping inflationary pressures in check.

The rate of population growth is another factor influencing both an economy’s rate of potential growth as well as consumption and housing demand. Net migration flows have an important influence on New Zealand’s population growth. Net migration flows are assumed to add around 14,000 people to New Zealand’s population during the year to March 2007, with the contribution expected to decline to around 10,000 a year by the end of the forecast period. However, migration flows are volatile and a significant positive deviation from this assumption would pose upside risk to economic growth. Conversely, if an increase in departures from New Zealand was to significantly lower the contribution of net migration to population growth, then domestic demand and economic growth would likely be lower than incorporated in the central forecast track.

A different response by firms to an expected period of weak growth would pose risks for the employment and investment outlook

With near-term growth expected to be relatively modest, the reactions of firms to falling profits in an environment where costs, including labour, continue to increase will be important. There are some indications that recent tight labour market conditions may have resulted in firms deciding to hoard labour in anticipation of better economic conditions in the future. However, the extent that firms continue to hoard labour is uncertain, with a greater degree of labour shedding certainly possible. This would contribute to increasing unemployment and have negative consequences for household incomes and spending behaviour. Recent improvements in business confidence suggest that the risks around firm behaviour are not all negative. Improved business sentiment poses the risk that firms may continue to keep employment at recent high levels. Improved confidence may also provide upside risk to investment spending.

Economic Risks#

External developments remain important and are a potential source of risk

As a small open economy, developments in overseas markets can have important implications for New Zealand. The performance of overseas economies affects the demand for our exports and also influences the prices we receive for these exports as well as the price paid for imports. Such price movements can have important income implications for key sectors of the economy, such as agriculture. Stronger world growth would pose upside risk to the central forecast in terms of the level of demand for New Zealand’s exports and the price received for these products.

In addition to the world outlook for growth, other international events can cause fluctuations in prices for important commodities such as oil. Recent geo-political tensions in the middle-East were one factor in oil prices reaching US$77/barrel in July and August this year. Oil price developments have played an important role in the increase in petrol prices and therefore inflation. The decline of oil and petrol prices, particularly in the month of September, will play an important role in the inflation profile over the next few quarters. A sharp upswing in oil prices would put the recent easing in headline inflation at risk, while continued falls may see headline inflation pressures easing more rapidly than expected.

Other, largely non-economic, events could have large economic effects if they were to occur

Climatic conditions are an important influence on agriculture-related production in New Zealand. Extreme conditions, particularly drought, can therefore have significant negative impacts on production levels. According to the National Institute of Water and Atmospheric Research (NIWA), a moderate El Niño event is occurring in the tropical Pacific which will influence New Zealand’s climate through to the end of the 2006/07 summer. Temperatures are expected to be average or below average in all regions while rainfall is expected to be normal or below normal in all regions, except the west of the South Island where above normal rainfall is expected. Such conditions would suggest that large-scale drought conditions are unlikely.

The occurrence of an influenza pandemic associated with the spread of a highly pathogenic strain of avian influenza would have important implications for the world economy. Even if such an outbreak were not to reach New Zealand shores, it would likely have considerable impact on international travel, tourism and trade in services.

With agricultural exports representing a large component of New Zealand’s exports, the outbreak of serious agricultural diseases, including foot and mouth disease and BSE, on these shores would have major economic implications. However, outbreaks of such diseases in other countries can provide opportunities for competing countries such as New Zealand, with good animal health reputations, to gain market share in foreign markets. In addition, lower production in affected countries limits supply on world markets, contributing to upward pressure on world prices. For example, the occurrence of BSE in North America during 2003 has been positive for New Zealand beef exports into Asia and also a factor in keeping beef prices relatively high.

Concern around climate change has led to a focus on the distance travelled by goods imported into Europe. While “food mile” taxes look unlikely, the imposition of such taxes in the future, or a shift in overseas consumer sentiment against New Zealand products, could have a significant adverse impact on our export levels.

Economic Scenarios#

The following scenarios present two possible growth paths for the economy when some of the key judgements underlying the central forecast are altered. In the first scenario, labelled “Stronger domestic demand”, stronger consumption and residential investment growth raises real GDP growth in the near term but also increases inflationary pressures and prevents a timelier current account adjustment. The second scenario is labelled “Lower demand for New Zealand dollar assets”. Lower demand for New Zealand dollar assets leads to a depreciation of the exchange rate while at the same time increased uncertainty and higher near-term interest rates make households more nervous about high levels of debt. The scenarios are two of a large number of possible examples, and do not represent upper or lower bounds for the central forecast, with more extreme paths possible.

Table 3.1 – Alternative scenarios: summary
  2006 2007 2008 2009 2010 2011
  Actual Forecast Forecast Forecast Forecast Forecast
Production GDP (annual average % change, year ending 31 March)            
Central forecast 2.2 1.8 2.3 3.2 3.1 3.0
Stronger domestic demand 2.2 2.0 3.3 3.4 2.6 2.8
Lower demand for NZ dollar assets 2.2 1.8 1.3 3.1 4.3 2.9
Nominal Expenditure GDP (annual average % change, year ending 31 March)            
Central forecast 4.7 3.3 4.3 5.6 5.0 4.9
Stronger domestic demand 4.7 3.6 5.8 6.2 5.1 5.0
Lower demand for NZ dollar assets 4.7 3.3 2.5 5.6 5.7 4.5
OBERAC ($ billion, year ending June)            
Central forecast 8.6 6.7 6.1 5.2 5.8 6.0
Stronger domestic demand 8.6 7.0 7.2 6.4 6.9 6.9
Lower demand for NZ dollar assets 8.6 6.7 4.9 4.5 5.5 5.5

Sources: Statistics New Zealand, The Treasury

Stronger domestic demand

In the central forecast, households are expected to limit their consumption and housing expenditure in order to slow their accumulation of debt. This translates to a relatively weak growth profile for both private consumption and residential investment. The first scenario presented below looks at the situation where households continue to accumulate debt at a faster rate than in the central forecast. Under this scenario private consumption growth reaccelerates during next year and residential investment also rebounds.

Table 3.2 – Stronger domestic demand scenario
(Annual average % change, 2006 2007 2008 2009 2010 2011
year ending 31 March) Actual Forecast Forecast Forecast Forecast Forecast
Private consumption 4.5 1.8 3.2 2.2 1.2 1.3
Residential investment -4.7 -4.9 6.3 4.8 -1.3 -1.9
Market investment 6.7 -6.2 2.6 5.2 3.6 4.3
Gross national expenditure 4.5 -0.3 3.6 3.2 2.0 2.3
Exports of goods and services -0.1 3.6 1.3 3.7 4.1 3.9
Imports of goods and services 5.0 -2.5 3.9 3.8 2.3 2.5
GDP (production measure) 2.2 2.0 3.3 3.4 2.6 2.8
Employment growth 2.6 1.7 0.4 1.7 1.4 1.2
Unemployment rate1 3.9 4.0 4.3 4.1 4.1 4.2
90-day bank bill rate2 7.6 7.6 7.7 7.3 7.0 7.0
TWI2 68.3 66.0 63.7 59.3 56.3 53.6
CPI3 3.3 2.9 2.9 3.0 2.7 2.4
Current account balance (% GDP) -9.6 -9.3 -8.9 -8.7 -8.2 -7.9
Nominal GDP (expenditure measure) 4.7 3.6 5.8 6.2 5.1 5.0

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

NOTES:
1 Percentage of labour force, March quarter, seasonally adjusted.

2 Average for March quarter.

3 Annual percentage change, March quarter.

With households acting in a less debt-constrained manner, private consumption growth is slightly stronger than in the central forecast in the 2007 March year before accelerating to 3.2% in the March 2008 year, 1.5% stronger than in the central forecast. The momentum in private consumption expenditure continues into the 2009 March year when consumption growth is 1.2% higher than the central forecast. After two years in which residential investment contracts by just under 5% per annum, a willingness by households to continue to accumulate debt for investment in housing sees residential investment grow by 6.3% in the March 2008 year, noticeably faster than the 0% growth predicted in the central forecast.

Figure 3.4 – Real gross national expenditure
Figure 3.3 - Real gross national expenditure.
Source: The Treasury

With signs of renewed demand from households, firms undertake a higher level of investment than in the central forecast with market investment growing by 2.6% in the March 2008 year, rather than the 1.2% contraction present in the central forecast. Employment growth is also stronger than under the central forecast, with the unemployment rate remaining just over 4% throughout most of the forecast period, compared to a March year peak of 4.8% in the central forecast. Greater job certainty reinforces households’ comfort with accumulating higher debt levels.

With stronger domestic demand and a tighter labour market, inflationary pressures are more intense than under the central forecast. This results in the need for tighter monetary policy relative to the central forecasts. In this scenario, 90-day bank bills are modestly higher in March 2007 at 7.6% rather than the 7.5% reported in the central forecast. However, under this scenario a loosening in monetary policy is not feasible during the 2008 March year, with 90-day rates edging up to 7.7% in March 2008, much higher than the 6% forecast in the central track. Even with such a response, inflation remains higher than the central forecast, with annual Consumer Price Index (CPI) inflation remaining at 3% in March 2009, 1% higher than the 2% annual inflation predicted in the central forecast.

Higher interest rates relative to the central forecast act to limit investment demand, with both residential and market investment growth weaker than the central forecast in the final two years of the forecast period.

With higher financial inflows to meet households’ continued desire to borrow, as well as higher interest rates, the exchange rate remains above the central track’s level out until the final year of the forecast. The higher exchange rate has a slight dampening effect on export volume growth, which is lower than the central forecast, most noticeably in the 2009 and 2010 March years when export growth is around 0.4% lower. With stronger domestic demand, the demand for imports also increases. This is particularly so in the March 2008 and 2009 years. Stronger import demand, as well as lower export receipts due to the higher exchange rate, sees a smaller reduction in the current account deficit than is expected in the central forecast. Under this scenario, the current account deficit remains at 8.7% of GDP in March 2009, before ending the forecast period at around 8%. A continuation of current account deficits at such a level is unsustainable, suggesting that further adjustment will be necessary in the future.

Higher real activity out until the March 2009 year, combined with higher inflationary pressures, results in nominal GDP growth being above the central forecast over the entire forecast period. The level of nominal GDP is around $4.7 billion higher than in the central forecast in the March 2011 year.

Economic Scenarios#

Lower demand for New Zealand dollar assets

The second scenario illustrates a situation in which there is less demand for New Zealand dollar assets. This results in the exchange rate depreciating more rapidly than in the central forecast and also causes uncertainty for households that become less comfortable with accumulating debt.

Table 3.3 – Lower demand for New Zealand dollar assets
(Annual average % change, 2006 2007 2008 2009 2010 2011
year ending 31 March) Actual Forecast Forecast Forecast Forecast Forecast
Private consumption 4.5 1.6 0.3 -0.3 2.6 2.4
Residential investment -4.7 -5.5 -9.3 -1.1 15.0 5.3
Market investment 6.7 -6.2 -5.8 1.5 12.3 7.0
Gross national expenditure 4.5 -0.5 -0.4 0.9 4.9 3.7
Exports of goods and services -0.1 3.6 1.4 4.7 5.4 3.7
Imports of goods and services 5.0 -2.6 -2.4 -1.1 7.8 6.4
GDP (production measure) 2.2 1.8 1.3 3.1 4.3 2.9
Employment growth 2.6 1.7 -0.3 0.1 1.5 1.9
Unemployment rate1 3.9 4.0 5.2 5.3 4.7 4.5
90-day bank bill rate2 7.6 7.6 7.2 4.7 5.5 5.5
TWI2 68.3 63.0 53.0 55.6 57.4 57.1
CPI3 3.3 2.8 2.8 0.8 1.0 1.7
Current account balance (% GDP) -9.6 -9.3 -9.6 -4.0 -3.5 -4.9

Nominal GDP

(expenditure measure)

4.7 3.3 2.5 5.6 5.7 4.5

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

NOTES:

1 Percentage of labour force, March quarter, seasonally adjusted.

2 Average for March quarter.

3 Annual percentage change, March quarter.

Under this scenario, lower demand for New Zealand dollar assets contributes to the Trade Weighted Index (TWI) falling to 53.0 by the March quarter of 2008, nearly 12% lower than the central forecast. Higher import prices due to the lower exchange rate contribute to inflationary pressures which see 90-day bank bill rates 120 basis points higher than the central forecast in the March quarter of 2008.

Faced with higher interest rates and an environment of financial market uncertainty, households limit their spending growth and pull back from making big housing investment decisions. This sees private consumption growth around 1.4% lower than the central forecast in both the 2008 and 2009 March years. This results in private consumption increasing 0.3% in the March 2008 year followed by a 0.3% contraction in 2009. Residential investment growth is significantly slower than the central track with residential investment contracting 9.3% in the March 2008 year and 1.1% in the March 2009 year, meaning that residential investment has fallen in four consecutive years.

With less demand for their products in the domestic market and higher imported investment good prices, firms are also more reluctant to invest. This results in market investment growth being 4.6% lower than the central forecast in the March 2008 year and 2.9% lower in 2009. Firms also cut back on employment growth which contributes to the unemployment rate increasing to 5.3% by March 2009.

Higher import prices coupled with weak domestic demand growth contribute to a fall in import volumes which decline 2.4% in the 2008 March year and 1.1% in 2009. The lower exchange rate also flows through to the competitiveness of our exports. Export volumes display a lagged response to the lower exchange rate with relatively strong growth of 4.7% in the March 2009 year followed by 5.4% growth in the March 2010 year.

Figure 3.5 – TWI exchange rate
Source: The Treasury

With domestic demand contracting in the March 2008 year and real GDP growth 1% lower than the central track, inflationary pressures are quickly brought under control, with CPI inflation falling below the central forecast in the final three forecast years. To stimulate the economy, monetary policy is able to loosen considerably with 90-day rates falling below 5% by March 2009. This stimulates a recovery in consumption growth in the March 2010 year as well as a recovery in both residential and market investment.

Renewed confidence in the domestic economy and a much diminished current account deficit, following weak import volumes over the 2008 and 2009 March years and improved export volumes and export receipts on the back of the lower exchange rate, promote a renewed focus on New Zealand by international investors. By March 2010 current account adjustment has been substantial with the current account deficit diminishing to less than 4% of GDP. With renewed demand for the New Zealand dollar from foreign investors, the exchange rate appreciates to around 57 on the TWI during 2010 and 2011.

The overall impact of the recovery is that real GDP growth exceeds 4% in 2010 before returning to more trend levels in 2011. However, the initial weakness upfront in this scenario results in the level of nominal GDP being around $3 billion per annum lower than the central forecast in the majority of the forecast years, or an aggregate impact over the four March years to 2011 of $11 billion.

Fiscal Scenarios#

The fiscal position is strongly influenced by the economy. The major economic determinants, and how they impact on the fiscal position, are listed below. While each effect is expressed in terms of an increase in the determinant, the opposite impact applies for a decrease.

  • Nominal GDP – higher GDP levels are reflected in higher tax revenue, which increases the operating balance and lowers the Government’s net debt.
  • Interest rates – higher interest rates lead to increased debt financing costs. While interest-based revenue also increases, the negative effect of higher finance costs on the operating balance dominates, meaning net debt increases.
  • The level of unemployment – higher levels of unemployment translate to an increase in spending, because the number of unemployment beneficiaries rises. This decreases the operating balance and raises net debt levels.
  • CPI inflation – as most benefits are indexed to CPI movements, higher inflation results in increased benefit costs. This reduces the operating balance and increases net debt.
Table 3.4 – Alternative scenarios: impact on OBERAC and debt
Year ending 30 June 2006 2007 2008 2009 2010 2011
  Actual Forecast Forecast Forecast Forecast Forecast
OBERAC ($ billion)            
Central forecast 8.6 6.7 6.1 5.2 5.8 6.0
Stronger domestic demand 8.6 7.0 7.2 6.4 6.9 6.9
Lower demand for NZ dollar assets 8.6 6.7 4.9 4.5 5.5 5.5
Gross sovereign-issued debt
($ billion)1
           
Central forecast 35.5 37.9 40.2 39.2 38.6 41.1
Stronger domestic demand 35.5 37.5 38.7 36.5 34.9 36.4
Lower demand for NZ dollar assets 35.5 37.9 41.4 41.1 40.8 43.7
OBERAC (% GDP)            
Central forecast 5.5 4.1 3.6 2.9 3.1 3.0
Stronger domestic demand 5.5 4.3 4.1 3.5 3.6 3.4
Lower demand for NZ dollar assets 5.5 4.1 2.9 2.5 3.0 2.8
Gross sovereign-issued debt
(% GDP)1
           
Central forecast 22.5 23.3 23.5 21.8 20.5 20.7
Stronger domestic demand 22.5 22.9 22.2 19.8 18.0 18.0
Lower demand for NZ dollar assets 22.5 23.3 24.7 23.2 21.9 22.5
Net debt (% GDP)            
Central forecast 4.9 3.9 3.5 4.0 4.1 3.8
Stronger domestic demand 4.9 3.7 2.6 2.4 2.0 1.4
Lower demand for NZ dollar assets 4.9 3.9 4.3 5.1 5.3 5.2

Sources: Statistics New Zealand, The Treasury

NOTE: 1 This chapter assumes that changes in the operating balance translate into changes in gross sovereign-issued debt.

The stronger domestic demand scenario is characterised by higher nominal GDP, higher interest rates and inflation and lower unemployment relative to the central forecast.

Figure 3.6 – OBERAC
Source: The Treasury

Higher nominal GDP and lower unemployment result in an increase in tax revenue and a decrease in benefit payments. Higher inflation results in an increase in indexed benefit payments and higher interest rates result in an increase in interest expenses net of interest income. The overall impact of this scenario is an increase in the operating balance over the forecast period.

By the end of the forecast period the OBERAC is around 0.4% of GDP higher than in the central forecast and gross sovereign-issued debt (GSID) is 2.7 percentage points of GDP lower than the central forecast.

Figure 3.7 – Gross sovereign-issued debt
Source: The Treasury

The lower demand for New Zealand dollar assets scenario is characterised by a lower exchange rate out until 2009. Compared to the central forecast, nominal GDP is lower, unemployment is higher and interest rates and inflation are lower.

Lower nominal GDP leads to lower tax revenue and higher unemployment leads to higher expenses. However, lower interest rates and inflation result in lower expenses compared to the central forecast. The overall impact is a lower operating balance from 2007/08. The OBERAC as a percentage of GDP is 0.2% lower than the central forecast at the end of the forecast period. The cumulative impact of the lower operating balance results in GSID being 1.8 percentage points of GDP higher than the base case by the end of the forecast period.

Fiscal Sensitivities#

The scenarios above indicate the sensitivity of fiscal aggregates to changes in economic conditions. Table 3.5 provides some “rules of thumb” on the sensitivities of the fiscal position to changes in specific variables.

Table 3.5 – Fiscal sensitivity analysis
($ million) Year ending 30 June 2007 2008 2009 2010 2011
  Forecast Forecast Forecast Forecast Forecast
1% Lower nominal GDP growth per annum          
 Revenue (507) (1,026) (1,559) (2,174) (2,892)
 Addition to financing costs 15 61 139 251 401
Impact on the operating balance (522) (1,087) (1,698) (2,425) (3,293)
Revenue impact of a 1% decrease in the growth rates of:          
 Wages and salaries (205) (430) (670) (935) (1,225)
 Taxable business profits (110) (250) (385) (520) (725)
One percentage point lower interest rates          
 Interest income (65) (59) (63) (55) (59)
 Expenses (79) (135) (156) (190) (223)
Impact on the operating balance 14 76 93 135 164

The forecasts of capital contributions to the New Zealand Superannuation (NZS) Fund are sensitive to the rate of return assumed on the Fund’s assets:

Table 3.6 – NZS Fund contributions sensitivity analysis
Variable Marginal Change
(%age points)
Effect on Net Return After Tax
(%age points)
Effect on Capital Contribution ($ billion)
2007/08 2008/09 2009/10 2010/11
Expected gross rate of return -1% -0.71% +0.200 +0.217 +0.234 +0.251

4 Specific Fiscal Risks#

Introduction#

This chapter describes the specific fiscal risks to the Crown, including contingent liabilities. The Public Finance Act 1989 (PFA) requires disclosure of all Government decisions and other circumstances that may put pressure on the forecast spending amounts, and/or have a material effect on the fiscal and economic outlook.

Criteria for Disclosure of Specific Fiscal Risks

To ensure a practicable and consistent disclosure approach, fiscal risks are disclosed based on the following criteria, consistent with the principles of the PFA:

  • Reasonable certainty criterion – risks have not been included in the fiscal forecasts because they reflect Government decisions or legislative commitments with uncertain fiscal consequences or timing.
  • Materiality criterion – risks have an impact on the fiscal forecasts (operating balance, net worth or gross debt) of $10 million or more in any one forecast year.
  • Active consideration criterion – risks are being actively considered by the Minister of Finance and responsible Ministers (eg, are the subject of written reports) or are decisions that have been deferred until a later date.

Exclusions from Disclosure

The PFA requires that all specific fiscal risks be disclosed, except where it is determined by the Minister of Finance that disclosing a risk 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 Crown in a material way in negotiation, litigation or commercial activity, or
  • result in a material loss of value to the Crown.

Specific fiscal risks do not include:

  • normal forecasting risks, such as uncertainty around welfare benefits, State Owned Enterprise/Crown entity surpluses, the impact of regular revaluations of physical assets, finance costs or fluctuations in external markets
  • possible changes to the interpretation of accounting policies, such as the changes to revenue recognition rules and recognition of liabilities, or
  • discussion documents containing proposals that the Minister of Finance and responsible Ministers will not actively consider until the consultation process has been completed.

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

Contingent liabilities are also included according to materiality. Contingent liabilities below $10 million are included in the “other quantifiable contingent liabilities” total. Comparatives have been adjusted where appropriate to align with the disclosure of new “material” contingent liabilities. The total amount of prior years’ contingent liabilities remains unchanged.

Information Relating to All Disclosed Risks

  • The risks disclosed may not eventuate into Government policy and the final cost or saving may differ from the amount disclosed if the policy is developed.
  • All risks, should they eventuate, would impact on the Government’s forecast operating and/or capital spending amounts. There are new spending amounts already incorporated into the forecasts to accommodate policy initiatives on which decisions have yet to be made. Most risks outlined in this chapter, if they eventuate, would be covered by these amounts and therefore have no impact on the overall level of the forecasts. The risks have been disclosed to indicate the pressure the risks place upon the forecast spending amounts.
  • If the total of all risks considered exceeds the forecast new operating spending amounts in the forecasts, this would impact on the operating balance.
  • There are a number of other pressures on the fiscal position that have not been included as risks. These pressures comprise proposals largely generated within individual departments and not yet considered by the Minister of Finance and responsible Ministers. Such items are expected to be managed within forecast spending amounts noted above.

Charges against Future Budgets#

As part of its Budget strategy, the Government has put in place some longer-term funding paths for particular sectors. This aids long-term planning and demonstrates the Government’s commitment to specific policies.

Charges against future Budgets do not meet the definition of a “risk” under the PFA, as these items are incorporated in the fiscal forecasts. This section is provided to increase transparency about the provisions for future Budgets.

Defence Funding Package

The Defence Funding Package (DFP) is designed to provide the New Zealand Defence Force (NZDF) with the funding required to address issues identified by the Defence Capability and Resourcing Review, including capability, and maintaining equipment and reserves. Budget 2006 included $73 million per annum as the second tranche of the 10-year plan. The following table shows the additional tranches as charged against future Budgets.

Budget to be
Charged ($million)
07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15
Budget 2007 58.0 58.0 58.0 58.0 58.0 58.0 58.0 58.0
Budget 2008   69.1 69.1 69.1 69.1 69.1 69.1 69.1
Budget 2009     85.7 85.7 85.7 85.7 85.7 85.7
Budget 2010       108.1 108.1 108.1 108.1 108.1
Budget 2011         66.9 66.9 66.9 66.9
Budget 2012           14.2 14.2 14.2
Budget 2013             58.6 54.2
Budget 2014               0

Health – Additional Elective Services

The Government has agreed that the indicative Health allocation of $750 million for Budget 2007 may be pre-committed by $59.5 million per annum for additional elective services.

Budget to be Charged ($million) 2007/08 2008/09 2009/10 2010/11 and Outyears
Budget 2007 59.5 59.5 59.5 59.5

Official Development Assistance

The Government has provided funding for an Official Development Assistance to Gross National Income ratio (ODA:GNI ratio) of 0.27% for the fiscal years 2005/06 and 2006/07 and is committed to increasing this to 0.28% in 2007/08. Budget 2006 included funding of $19 million per annum to reach the 0.27% ratio. The 0.28% ratio in 2007/08 is expected to cost $30 million, and will be charged against Budget 2007.

Budget to be Charged ($million) 2007/08 2008/09 2009/10 2010/11 and Outyears
Budget 2007 30 30 30 30

Removal of Carbon Charge

The Government has decided not to proceed with a broad-based carbon tax. As compensatory measures are still being developed, the cost of the removal of the carbon tax has been agreed as a pre-commitment against Budget 2007.

Budget to be Charged ($million) 2007/08 2008/09 2009/10 2010/11 and Outyears
Budget 2007 347 344 349 349

Specified Superannuation Contribution Withholding Tax (SSCWT) Exemption for KiwiSaver

The Government has agreed that employer contributions to KiwiSaver would be exempt from income tax (ie, Specified Superannuation Contributions Withholding Tax) up to a cap of the lesser of the employee’s contribution or 4% of the employee’s salary or wages. The cost of this exemption will be met from Budget 2007.

Budget to be Charged ($million) 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 and Outyears
Budget 2007 35 71 104 133 162 203

Tertiary Student Component Funding Rate Changes (the rolling funding triennium and fee and course cost maxima)

The Government had a policy of increasing Student Component funding rates for tertiary education by the rate of forecast Consumer Price Index (CPI) inflation on a rolling triennium. Funding was appropriated for future years at the rate of the CPI forecast plus 1%, and in the Budget preceding the relevant academic year funding rates are confirmed using a more up-to-date CPI forecast. This particular policy has been discontinued, and there is no further charge against any Budget beyond 2007.

Budget to be Charged ($million) 2007/08 2008/09 2009/10 2010/11 and Outyears
Budget 2007 28.5 57.0 57.0 57.0

Transport Capital Decisions

The Government has made several long-term capital commitments relating to Transport. This table notes the implications for the capital allowances beyond the forecast period.

Transport Project

($million)

2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Auckland 100.0 100.0 100.0 - - -
Wellington 20.0 20.0 20.0 20.0 - -
Western Corridor 125.0 200.0 195.0 10.0 5.0 -
Bay of Plenty 25.0 15.0 10.0 10.0 - -
Waikato 22.0 22.0 22.0 22.0 22.0 22.0

Time-limited Funding#

Time-limited funding does not meet the definition of a “risk” under the PFA, but is further information that is prepared to increase transparency about initiatives with funding profiles that cease or decrease during the forecast period.

The following table outlines those areas where initiatives have time-limited funding that decreases or ceases at some point and may potentially be extended, using a $5 million materiality threshold. Time-limited funding often relates to pilot programmes, and in some cases Multi Year Appropriations (MYAs) if they are likely to require further funding in the future.


Vote
Description of Initiative Operating Impact ($million)
Community and Voluntary Sector Digital Strategy – Community Partnerships Fund 17 from 2005/06 to 2008/09 (MYA)
Communications Digital Strategy – High-speed Connectivity for Growth 20 from 2005/06 to 2008/09 (MYA)
Economic, Industry and Regional Development Regional Partnerships and Facilitation for Sustainable Economic Growth 57 from 2004/05 to 2006/07 (MYA)
Energy Acquisition of Petroleum Exploration Data 21 from 2004 to 2007 (MYA)
Energy Electricity Efficiency Programme 8 in 2005/06 and 10 in 2006/07
Housing Rural Housing Programme 9 in each of 2005/06 and 2006/07, 7 in 2007/08
Internal Affairs Significant Community-based Projects Fund 40 from 2005/06 to 2008/09 (MYA)
Lands Land Tenure Reform 40 from 2005/06 to 2007/08 (MYA)
Police Regional Assistance Mission Solomon Islands and Solomon Island executive support 7 in each of 2005/06 and  2006/07
Sport & Recreation Children’s and Young People’s Lifestyles 8 in 2006/07, 10 in 2007/08, 6 in each of 2008/09 and 2009/10
Tourism Tourism Demand Subsidy Scheme 7 in 2006/07

The following table shows the impact on the operating balance if funding were to be appropriated to maintain funding levels for these initiatives (ie, extend the initiatives beyond their current scheduled completion dates). These amounts would need to be managed within the forecast operating spending.

Operating Impact ($million) 2006/07 2007/08 2008/09 2009/10 2010/11 and Outyears
Funding to extend initiatives - 50 77 88 94

Quantified Risks#

The risks outlined in these tables would, if they eventuated, impact on the Government’s forecast new operating and/or capital spending amounts.

The Minister of Finance has yet to fully consider the quantum of these risks.

Quantified Risks as at
8 December 2006
Operating Balance Gross Debt Value of Risk
($million)
Funding Received in or since Budget 2006
($million)
New Risks        
Education – Early Childhood Education Ratio Changes Decrease - 90 per annum -
Social Development – New Zealand Superannuation – Rate Adjustment Decrease - 23 in 2006/07, 90 in 2007/08, 68 in 2008/09 and 28 in 2009/10 only -
Changed Risks        
Culture and Heritage – Broadcasting Initiatives Decrease - 27 per annum 6 per annum
Education – School Property Decrease Increase 180 capital in each of next 4 years, and operating of 10 per annum from 2007/08 158 capital and 27 operating from 2006/07 to 2010/11
Education (Tertiary) – Centres of Research Excellence Decrease Increase 20 capital in 2007/08 and 10 per annum operating -
Health – Indicative Funding for Budgets 2007 and 2008 Decrease - 691 in 2007/08 and 1,441 per annum from 2008/09 -
Justice – New Supreme Court – Cost Escalation Decrease Increase Up to 45 capital and 4 per annum operating -
New Zealand Defence Force – Defence – Capital Injections - Increase 257 capital from 2007/08 to 2010/11 297 capital in 2006/07
Police – Increases to Police Staff Decrease Increase Operating of 63 in 2007/08, 105 in 2008/09, 116 in 2009/10 and 117 per annum from 2010/11 and capital of 122 from 2007/08 to 2010/11 32 per annum operating and 49 capital from 2006/07 to 2010/11
Unchanged Risks        
Economic Development – Venture Investment Fund - Increase 40 capital in 2009/10 and 2010/11 60 capital from 2006/07 to 2008/09
Education (Tertiary) – Vocational Training Decrease - 8 in 2007/08, 23 in 2008/09 and 30 per annum from 2009/10 16 from 2006/07 to 2010/11
Finance – National Rail Network – Obligations of Rail Agreement - Increase 60-70 per annum capital from 2007/08 50 capital in 2006/07
Finance – National Rail Network – Reconfiguration of Land - Increase 30 capital in 2007/08, unclear thereafter 53 capital in 2006/07
New Zealand Defence Force – Sale of Skyhawks and Aermacchi Trainers - Decrease 120 capital -
Research, Science and Technology – Multi-year Funding Profile Decrease - 30 in 2007/08, 60 in 2008/09 and 90 per annum from 2009/10 25 per annum operating and 5 capital in 2006/07

Unquantified Risks#

The risks outlined in these tables would, if they eventuated, impact on the Government’s forecast new operating and/or capital spending amounts.

Unquantified Risks as at
8 December 2006
Operating Balance Gross Debt Funding Received
in or since Budget 2006
($million)
New Risks      
Economic Development – Increasing Stadium Capacity for the Rugby World Cup - Increase -
Economic Development – Radio Spectrum Rights Increase - -
Revenue – Extending the Specified Superannuation Contribution Decrease - -
Revenue – International Financial Reporting Standards Unclear - -
Revenue – Life Insurance Unclear - -
Revenue – Tax Incentives for Giving to Charities and Other Non-Profit Organisations Unclear - -
Transport – Extending the State Highway Construction and Revenue Guarantee - Increase -
Changed Risks      
Corrections – Capital Projects Decrease Increase 121 operating
Education (Tertiary) – Tertiary Education Expenditure Review Unclear Unclear -
Education (Tertiary) – Tertiary Education Institutions – Capital Injections - Increase -
Education (Tertiary) – Wananga Capital Injections - Increase -
Environment – Climate Change Policies Unclear - 16 in 2006/07
Health – District Health Board Deficits Decrease Increase -
Revenue – Business Tax Review Unclear - -
Social Development – Working New Zealand – Work Focused Support Decrease - -
State Services Commission – State Sector Retirement Savings Scheme Decrease - -
Unchanged Risks      
Conservation – Lease of Taupo Property Rights from Tuwharetoa Decrease - -
Education – Schools ICT Network Infrastructure Upgrade Decrease Increase 4 capital
Education – Year One Class Sizes Decrease Increase -
Education (Tertiary) – Partnerships for Excellence - Increase -
Education (Tertiary) – Tertiary Student Support Changes Decrease Unclear Operating expenditure of 1 in 2006/07, 2 in 2007/08, 3 in 2008/09 and 4 per annum from 2009/10; capital savings of 13 in 2006/07, 22 in 2007/08 and 25 in 2008/09 and 2009/10
Finance – Crown Overseas Properties - Increase -
Finance – National Rail Access Agreement Amendments Unclear Unclear -
Finance – SOE Long-term Hold Reviews - Decrease -
Fisheries – Civilian Maritime Aerial Surveillance Decrease Increase -
Fisheries – Māori Interest in Marine Farming Decrease - -
Housing – State Housing Project at Hobsonville - Increase -
Immigration – New Immigration Service Delivery Strategy Unclear - -
Justice – Strengthening the National Court Infrastructure Decrease Increase -
National Library – National Library Building Extension - Increase -
Revenue – Family Assistance Indexation and Review of Rates Decrease - -
Revenue – Rebuild of the Student Loan IT System Decrease Increase -
Revenue – Taxation of Partnerships Review Unclear - -
Social Development – Child, Youth and Family Services – Reviewing Levels of Funding and Service Delivery Unclear Unclear -
Social Development / Housing – Accommodation Supplement Review Decrease Increase -
Social Development – New Zealand Superannuation – International Mobility Issues Unclear - -

Risks Removed Since the 2006 Budget Update#

The following risks have been removed since the 2006 Budget Economic and Fiscal Update.

Expired Risks Reason Funding Received
($million)
Conservation – Foreshore and Seabed Compensation No longer meets criteria for disclosure -
Corrections – Collective Employment Contract Negotiations In forecasts -
Education – Expansion of NZ Diploma in Specialist Subjects In forecasts 11 in 2006/07 and 10 in 2007/08 only
Energy – Oil Security – Meeting International Energy Agency Obligations In forecasts -
Justice Sector Agencies – Potential Flow-on Impact of Extra Police In forecasts 96 from 2006/07 to 20010/11
Labour – Department of Labour Strategic Baseline Review Expired        -
New Zealand Defence Force – Environmental Clean-up of Devonport Seabed Contamination No longer meets criteria for disclosure -
Police – Wage Negotiations In forecasts 40 in 2006/07, 83 in 2007/08, 90 in 2008/09 and 91 per annum thereafter
Reserve Bank of New Zealand – Liquidity Management Policy In forecasts -
Revenue – Fringe Benefit Tax Review Expired -
Revenue – Tax and Depreciation Now part of Business Tax Package -
State Services Commission – All-of-Government Authentication In forecasts 11 in 2006/07, 7 in 2007/08 and 4 in each of 2008/09 and 2009/10

Statement of Fiscal Risks#

Conservation – Lease of Taupo Property Rights from Tuwharetoa (unchanged, unquantified risk)

On 18 May 2005, the Government agreed to enter into negotiations with Tuwharetoa Māori Trust Board following legal clarification of property rights relating to Lake Taupo. The Crown is considering leasing certain property rights from the Tuwharetoa Māori Trust Board in order to resolve current disputes. Negotiations are ongoing and the outcome is not yet known.

This risk is unquantified as disclosure could compromise the Crown in negotiations.

Corrections – Capital Projects (changed, unquantified risk)

In Budget 2006, $121 million operating funding was approved for Corrections capital projects. The Department of Corrections has estimated that further capital and operating funding may be required over the forecast period for Mt Eden Prison. The actual amounts depend on the specification and timing of the individual projects and the contracted prices.

Capital injections would increase gross debt while operating funding would decrease the operating balance.

This risk is unquantified as disclosure could compromise the Crown in negotiations.

Culture and Heritage – Broadcasting Initiatives (unchanged, quantified risk)

On 3 February 2005, the Government released a Public Broadcasting Programme of Action. The Programme contains a set of priorities to guide public broadcasting policy over the next six years, and a series of proposals to give effect to these priorities. The Programme as a whole (if fully implemented) would have total ongoing operating costs rising to around $44 million in 2009/10. Broadcasting initiatives of $11 million and $6 million per annum were included in Budgets 2005 and 2006, respectively. The Government is considering proposals for the remaining $27 million per annum. Individual elements of the Programme of Action may be considered in future Budgets over the next five years. These would decrease the operating balance.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry for Culture and Heritage

Economic Development – Increasing Stadium Capacity for the Rugby World Cup (new, unquantified risk)

Eden Park in Auckland requires redevelopment in order to increase stadium capacity ahead of the Rugby World Cup in 2011. The Eden Park Trust Board estimates its latest proposal to cost around $380 million. The Government is considering meeting a portion of the redevelopment costs, which would increase debt.

Economic Development – Radio Spectrum Rights (new, unquantified risk)

The Government has agreed a process for setting prices for offering renewal of property rights to radio spectrum. Any revenue from sale of rights would increase the operating balance. Offers for rights of renewal to existing owners of spectrum rights are being set five years in advance of rights expiring from 2010 onwards. Owners of spectrum rights will have a choice about whether to renew them after 2010, so expected revenue from sale of renewal rights is not reflected in current forecasts of revenue.

Economic Development – Venture Investment Fund (unchanged, quantified risk)

In Budget 2006, the Government agreed to additional investment commitments in the Venture Investment Fund of $60 million from 2006/07 to 2008/09. The Government is also considering further commitments of $40 million over two years (2009/10 and 2010/11) in Budget 2009 depending on the results of the scheduled evaluation of the Venture Investment Fund which is due for completion by 31 March 2009. This would increase gross debt.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Economic Development

Education – Early Childhood Education Ratio Changes (new, quantified risk)

As part of the Early Childhood Education strategic plan, the Government is considering changes to adult:child ratios for licensed, teacher-led services. Current funding is insufficient for full implementation, so further funding of up to $90 million per annum will be considered as part of the budget process. Any increased funding would reduce the operating balance.

Education – School Property (changed, quantified risk)

Budget 2006 provided capital of $138 million in 2006/07 for school accommodation. A further $20 million in capital was provided for additional school furniture and equipment in 2005/06 to allow for a change in accounting treatment. The operating impact associated with the capital expenditure and property policies was $8.6 million in 2006/07 and the total operating impact was $27 million from 2006/07 to 2009/10 to meet associated depreciation and other costs.

Additional capital injections for school accommodation will be required in future years to meet roll growth and could cost up to $180 million in each of the next four years with a corresponding increase in debt. In addition to capital injections, consequential operating costs of $10 million per annum are likely to be incurred, which would decrease the operating balance.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Education

Education – Schools ICT Network Infrastructure Upgrade (unchanged, unquantified risk)

Budget 2006 provided $4 million in capital and $0.6 million in associated operating funding for a partial roll-out of the Schools ICT Network Infrastructure Upgrade, as part of the School Property Business Case 2006/07. The roll-out is intended to assist schools to meet the costs of upgrading their computer networks to meet the new IT infrastructure standards. The Government will consider further roll-out as part of Budget 2007. This would decrease the operating balance and increase debt.

This risk is unquantified as disclosure could compromise the Crown in negotiations.

Education – Year One Class Sizes (unchanged, unquantified risk)

The Government is considering reducing year one class sizes to ensure there are no more than 15 pupils in a class. This will require funding to employ approximately 1,500 additional primary teachers and provide additional school property. This initiative would decrease the operating balance and increase debt, but the precise costs have yet to be quantified as the phasing of the policy is still being determined.

Education (Tertiary) – Centres of Research Excellence (changed, quantified risk)

The Government is considering providing additional capital funding of up to $20 million and operating funding of $10 million per annum to establish up to two new Centres of Research Excellence and provide further funding to existing centres. This would decrease the operating balance and increase debt.

Education (Tertiary) – Partnerships for Excellence (unchanged, unquantified risk)

The Government has established an arrangement called “Partnerships for Excellence” whereby the Crown matches private sector investment in the tertiary sector. Further funding is being considered in 2006/07. The future approach to capital funding for tertiary education institutions, including Partnerships for Excellence, may be considered as part of the funding system review. Any capital injections would increase gross debt.

Education (Tertiary) – Tertiary Education Expenditure Review (changed, unquantified risk)

The Government has initiated a review on the quality, relevance, sustainability and predictability of tertiary education spending. A number of decisions relating to certificate and diploma tertiary education provision were taken in July 2005. In February 2006 the Government decided to place an overall constraint on tertiary education expenditure, and in July 2006 it decided on the overall shape of a new planning and funding framework. Work is also underway to review the quality assurance and monitoring system. Decisions around the details of the new funding framework and the baseline for tertiary education will not be taken until March 2007. At this stage the impact on the operating balance and debt is unclear.

Education (Tertiary) – Tertiary Education Institutions – Capital Injections (changed, unquantified risk)

The Government may consider making loans or capital injections to tertiary education institutions where ongoing educational provision or financial viability are at risk; or where a strategic investment to support the development of their infrastructure is warranted. This would increase gross debt, but the precise impact is unclear as it would depend on progress made by institutions in managing their pressures, and decisions taken by Government.

Education (Tertiary) – Tertiary Student Support Changes (unchanged, unquantified risk)

During the parliamentary term, the Government will consider increasing eligibility for student allowances. The impact of these changes is likely to reduce the operating balance and debt, but the quantum is unclear as it would depend upon the options chosen.

Education (Tertiary) – Vocational Training (unchanged, quantified risk)

The Government is considering a number of policies regarding the expansion of vocational training. One of these is to have 250,000 people participating in industry training. Budget 2006 included $15.6 million over four years to fund an additional 5,000 industry training places in 2007, bringing the total number of people participating in industry training to 195,000. The cost of funding the additional 55,000 places required to meet the target would reduce the operating balance by approximately $7.5 million in 2007/08, $22.5 million in 2008/09 and $30 million per annum thereafter.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Tertiary Education Commission

Education (Tertiary) – Wananga Capital Injections (changed, unquantified risk)

The Government is currently negotiating with Te Wananga O Raukawa over settlement of its Waitangi Tribunal claim. The Waitangi Tribunal has recommended that the Wananga be compensated for capital expenditure it has incurred on facilities to date, and be provided with funding to bring its facilities up to a standard comparable with other tertiary institutions, and meet additional capital requirements. Negotiations are also taking place with Te Whare Wananga o Awanuiarangi in relation to an outstanding item from an original settlement.

This risk is unquantified as disclosure could compromise the Crown in negotiations with the Wananga, but any capital injections would increase gross debt.

Environment – Climate Change Policies (changed, unquantified risk)

Work on climate change policies is currently underway. The impact on the operating balance and debt is unclear, as it will depend on the outcomes of the various work streams underway.

The forecasts make provision for New Zealand’s liability under the Kyoto Protocol, currently estimated at 41.2 million tonnes of carbon dioxide equivalent. The Government has not, at this point, taken a decision on whether to finance part of this liability through purchase of Kyoto-compliant emission units on the international market. However, should a purchasing policy be pursued, the commensurate funding required would increase gross debt while having a neutral effect on net worth.

Finance – Crown Overseas Properties (unchanged, unquantified risk)

The Government is considering options relating to the continued use of certain Crown overseas properties.

The risk is unquantified as disclosure could compromise any negotiations the Crown may enter, but any additional operating funding would decrease the operating balance, and/or any additional capital funding would increase debt.

Finance – National Rail Access Agreement Amendments (unchanged, unquantified risk)

The Government is considering options for amending the National Rail Access Agreement between Toll and ONTRACK. Any impact on the operating balance or debt would depend on the option chosen.

This risk is unquantified as disclosure could compromise the Crown in negotiations.

Finance – National Rail Network – Obligations of Rail Agreement (unchanged, quantified risk)

The Government has committed $200 million between 2004/05 and 2007/08 to upgrade and renew the national rail network. A further $50 million in 2006/07 was agreed in the 2006 Budget. Additional expenditure of around $60 to $70 million per annum may be required from 2007/08 for renewals, with additional funding on top of this for upgrades, but the exact amount will depend on decisions yet to be made. Under the National Rail Access Agreement, additional funding of this nature would generally be recovered through track access fees. Any additional funding would increase debt.

The Minister of Finance has yet to fully consider the quantum of this risk.

Finance – National Rail Network – Reconfiguration of Land (unchanged, quantified risk)

The Agreement for Sale and Purchase of Rail Network and Associated Assets between the Crown and Toll provides for Toll to reconfigure their operations to enable the release of land they occupy to the Crown (ONTRACK) for other uses. ONTRACK requires funding from the Crown for the reconfiguration costs and the settlement of the land value with Toll. Funding of $53 million to ONTRACK for land release in 2006/07 was agreed in the 2006 Budget. Further funding of around $30 million may be required in 2007/08, with unquantified amounts in years beyond that. The exact amounts of funding will depend on decisions yet to be made, but any additional funding would increase debt.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: The Treasury

Finance – SOE Long-term Hold Reviews (unchanged, unquantified risk)

To implement its long-term hold ownership policy, the Government is conducting reviews of each SOE. These reviews are examining the strategic direction for each SOE and therefore the appropriate capital structure to support the individual SOE’s strategy. One possible outcome of current reviews is that some capital could be returned to the Crown. This may be in the form of a special dividend, which would decrease gross debt.

Fisheries – Civilian Maritime Aerial Surveillance (unchanged, unquantified risk)

The Government is considering options to provide increased maritime aerial surveillance for civilian agencies in the short to medium range. Options include delivery of a range of different surveillance capabilities by either military or commercial providers. The amount of funding required would depend on the option chosen, if any. Any capital injections required would increase gross debt, while operating funding would decrease the operating balance.

The risk is unquantified as the amount or timing of any funding is unclear.

Fisheries – Māori Interest in Marine Farming (unchanged, unquantified risk)

The Māori Commercial Aquaculture Claims Settlement Act 2004 addresses Māori claims in commercial marine farming space from 21 September 1992 to 31 December 2004 (pre-commencement space) by providing Iwi with 20% equivalent space. This obligation is to be met through three possible options: the provision of additional new space; Crown purchase of existing farms from 2008; or provision of the financial equivalent of space from 2013.

Under the Act, any Māori claim relating to new aquaculture space after 31 December 2004 will be met by the provision of 20% of the new space.

To the extent that financial compensation or Crown purchase of existing farms is necessary to address Māori interests in pre-commencement space (as opposed to using new space), this would decrease the operating balance. This risk is unquantified as the amount or timing of any funding is unclear. In addition, disclosure could compromise the Crown in negotiations with either commercial marine farm owners or Iwi.

Health – District Health Board Deficits (changed, unquantified risk)

Draft District Annual Plans from Auckland and Whanganui District Health Boards (DHBs) indicate projected operating deficits in 2006/07. Tairawhiti DHB is also projected to have a deficit in 2006/07. The Government does not view DHB deficits as acceptable and cost-containment strategies are in place.

Any deficits would potentially decrease the operating balance and/or increase debt. Specific potential pressures for DHBs include wage bargaining and financing costs of capital projects.

This risk has changed since the 2006 Budget Economic and Fiscal Update to take into account the new projections of DHB deficits.

Health – Indicative Funding for Budgets 2007 and 2008 (changed, quantified risk)

The Government is considering indicative operating allocations of $750 million per annum for Vote Health for each of Budgets 2007 and 2008. These amounts indicate the likely level of increased funding to be provided to Vote Health in future Budgets and to assist the Minister of Health to plan spending priorities over the period. The final allocations will depend on economic and fiscal conditions at the time of each Budget. Finalising the amounts and details of how these allocations will be spent will be subject to normal Budget processes.

The Government has agreed that the indicative allocation for Budget 2007 is pre-committed to $59.5 million per annum for 2007/08 onwards. This was shown in the Charges against Future Budgets section of this chapter. The operating balance could be adjusted to the totals as follows:

Budget to be Charged

($million)

2007/08 2008/09 2009/10 2010/11 and Outyears
Budget 2007 690.5 690.5 690.5 690.5
Budget 2008 - 750.0 750.0 750.0

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: The Treasury

Housing – State Housing Project at Hobsonville (unchanged, unquantified risk)

In Budget 2005, Housing New Zealand Corporation (HNZC) received funding of $54 million to acquire, under the Housing Act 1955, New Zealand Defence Force (NZDF) land at Hobsonville deemed surplus to defence requirements but suitable for state housing purposes. The Government is considering development options for this land, and the purchase of adjoining NZDF land. These may lead to the Crown giving additional capital to HNZC, which would increase gross debt.

Immigration – New Immigration Service Delivery Strategy (unchanged, unquantified risk)

The Government is in the process of developing options for a new immigration service delivery strategy that would allow better management of the risk surrounding immigration decision-making. Options are still being developed, and are likely to be considered in early 2007. Any additional funding would reduce the operating balance and increase debt.

Justice – New Supreme Court – Cost Escalation (changed, quantified risk)

In order to meet revised functional requirements, the Government is considering altering the 2003 design for accommodating the new Supreme Court, which is likely to increase construction costs. The original scheme was approved by Cabinet at a cost of $19 million capital and $4 million per annum operating. The additional capital cost may be up to $45 million with associated operating costs of $20 million over the forecast period, depending on the design option selected. Additional capital injections would increase gross debt and additional operating funding would decrease the operating balance.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Justice

Justice – Strengthening the National Court Infrastructure (unchanged, unquantified risk)

The Government is considering options to ensure that Christchurch’s court facilities are able to adequately deliver court and associated justice services to the region. This risk is unquantified as disclosure could compromise any commercial property negotiations the Crown may enter into. Any additional operating funding would decrease the operating balance and any additional capital would increase debt.

National Library – National Library Building Extension (unchanged, unquantified risk)

The Government is considering funding an extension to the National Library Building, subject to a fully developed and costed proposal.

This risk is unquantified as disclosure could compromise the Crown in negotiations, but any additional funding would increase debt.

New Zealand Defence Force – Defence – Capital Injections (changed, quantified risk)

Implementing the Government’s decisions on the future structure of the NZDF will involve a series of capital acquisitions across all three armed services and for HQNZDF to achieve the required capability upgrades. The Government has agreed to a capital injection of up to $1.244 billion over 2001/02 to 2010/11.

Of the $1.244 billion, $987 million has been agreed with the remaining $257 million likely to be required within the forecast period. The actual expenditure profile will depend on the specification and timing of the individual projects, the contracted prices, and the prevailing exchange rate at the time of purchase.

Any further capital injections would increase gross debt.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: New Zealand Defence Force

New Zealand Defence Force – Sale of Skyhawks and Aermacchi Trainers (unchanged, quantified risk)

As a result of the Government’s decisions on the future structure of the NZDF, NZDF has signed an agreement with Tactical Air Services Inc for the sale of the Skyhawks and Aermacchi trainers for US$110 million. A formal contract has yet to be signed, but proceeds from the sale would decrease debt and increase the operating balance.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: New Zealand Defence Force

Police – Increases to Police Staff (changed, quantified risk)

The Government has committed to funding an additional 1,000 front-line Police and 250 non-sworn Police staff over Budgets 2006 to 2008. The Government will consider further increases in future Budgets with a view to achieving police officer ratios comparable with those of Australia by 2010. Budget 2006 included $32 million per annum operating and $49 million capital over the forecast period to provide for the first tranche of additional police (including non-sworn staff and some associated infrastructure costs).

The Government intends to roll out the second tranche in Budget 2007, and the third and final tranche in 2008. The indicative operating costs are $63 million in 2007/08, $105 million in 2008/09, $116 million in 2009/10 and $117 million per annum from 2010/11. Indicative capital costs are $26 million in 2007/08, $36 million in 2008/09, $53 million in 2009/10 and $7 million in 2010/11. A small portion of the operating costs will be funded through the National Land Transport Fund.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: New Zealand Police

Research, Science and Technology – Multi-year Funding Profile (unchanged, quantified risk)

As part of Budget 2006, the Government signalled its broad intention to move towards a medium-term focus for investment in research, science and technology by indicating increases in the order of $30 million per annum in Budgets 2007, 2008 and 2009, subject to the context of each Budget and the Government’s overall fiscal strategy. These increases would decrease the operating balance.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Research, Science and Technology

Revenue – Business Tax Package (changed, unquantified risk)

The Government is conducting a review of the current business taxation regimes with a view to ensuring the system works to give better incentives for productivity improvements and improved competitiveness with Australia. The review will result in business tax reductions that will be announced as part of Budget 2007 and will come into force from April 2008.

The review of business taxation may also have implications for personal taxation, which will be considered in the context of the business tax reforms.

As announced in the Business Tax Review discussion document, the Government is also reviewing the international tax regime, in particular the Controlled Foreign Company rules, with a view to improving productivity and international competitiveness.

Treasury forecasts currently include an indicative allowance of $1 billion for tax reforms, however the exact amount may be greater or smaller depending on fiscal out-turns and the nature of final proposals for changes in business, personal and international taxation.

Revenue – Extending the Specified Superannuation Contribution (new, unquantified risk)

In mid-2006, the Government announced that employer contributions to KiwiSaver accounts will be exempt from Specified Superannuation Contributions Withholding Tax (SSCWT) up to a cap of the lesser of the employee’s contribution to the scheme or 4% of the employee's salary or wages (see Charges against Future Budgets section of this chapter). The Government is now considering extending the SSCWT exemption to other employer superannuation schemes that meet certain criteria (similar to KiwiSaver schemes). Options are still being developed, but any further exemptions would reduce the operating balance.

Revenue – Family Assistance Indexation and Review of Rates (unchanged, unquantified risk)

The Working for Families package included a commitment to index Family Assistance payment rates and abatement thresholds, once inflation beyond 1 April 2007 cumulatively exceeds 5%. Legislation also requires a review of the amounts of the In-Work Payment and Parental Tax Credits to be undertaken no later than June 2008. This policy cannot be costed with sufficient accuracy until the reviews are completed, but the indexation changes would reduce the operating balance.

Revenue – International Financial Reporting Standards (new, unquantified risk)

The Government is considering the tax policy issues that could arise from the adoption of International Financial Reporting Standards (IFRS). There are two areas where IFRS could have a significant impact, firstly, the Income Tax Act’s general timing of income rules are underpinned by Generally Accepted Accounting Practices (GAAP). Secondly, the financial arrangements rules could be considerably revised to allow for more alignment of taxation and accounting. The impact on the operating balance is unclear at this stage and would depend on the proposals that are finally developed and approved.

Revenue – Life Insurance (new, unquantified risk)

The Government is considering reform of the tax rules in respect of life insurance including ensuring consistency of the taxation of life insurers’ savings products with similar products of other savings vehicles. The impact on the operating balance is unclear at this stage and would depend on the proposals that are finally developed and approved.

Revenue – Rebuild of the Student Loan IT System (unchanged, unquantified risk)

To facilitate the implementation of zero-interest on student loans, the Government is considering options for rebuilding the student loans IT system. The rebuild would allow zero-interest to be assessed, increase the integrity of the system, produce information to inform policy decisions and allow flexibility for policy changes. This risk is unquantified as disclosure could compromise the Crown in negotiations.

Revenue – Taxation of Partnerships Review (unchanged, unquantified risk)

The Government is considering reform to the taxation of partnerships, including replacing the current “special partnerships” tax rules with more modern and internationally comparable “limited partnerships” tax rules. Any new rules are likely to take effect on 1 April 2008. The impact on the operating balance is unclear and would depend on the proposals that are finally developed and approved.

Revenue – Tax Incentives for Giving to Charities and Other Non-Profit Organisations (new, unquantified risk)

The Government’s Confidence and Supply Agreement with United Future includes a new tax rebate regime for charities as one of its policy priorities. A discussion document was released to progress this issue. It includes an outline of options for encouraging New Zealanders to give more of their money, skills and time, and to reinforce the concept of giving to charities and other non-profit organisations. The impact on the operating balance is unclear and would depend on the proposals that are finally developed and approved.

Social Development – Child, Youth and Family Services – Reviewing Levels of Funding and Service Delivery (unchanged, unquantified risk)

The Government is reviewing Child, Youth and Family Services’ funding requirements in order to identify options for sustainable levels of funding and service delivery in the medium term. Options may be submitted for consideration in future Budgets. This risk is unquantified as it is unclear what change in funding would be required. Any change in funding to reflect a new baseline and/or meet necessary capital injections would impact on the operating balance and/or gross debt.

Social Development / Housing – Accommodation Supplement Review (unchanged, unquantified risk)

The Government is reviewing the Accommodation Supplement to assess how well it is performing as an income support and housing assistance policy. If the review identifies a need to adjust the Accommodation Supplement, the Government will consider policy options in future Budgets. While the amounts are unclear and would depend on the policy options chosen, any additional operating funding would decrease the operating balance.

Social Development – New Zealand Superannuation – International Mobility Issues (unchanged, unquantified risk)

The Government is considering the results of a review of arrangements for the payment of New Zealand Superannuation (NZS) to New Zealanders residing overseas and the treatment of overseas pensions paid to recipients of New Zealand pensions and welfare benefits. The impact on the operating balance is unclear, as proposals are still being developed. Any additional funding would decrease the operating balance.

Social Development – New Zealand Superannuation – Rate Adjustment (new, quantified risk)

The Government has ensured that the net married couple rate of NZS applying for the tax year from 1 April 2006 is above 66% of the net average ordinary time weekly wage (known as the 66% wage floor). It will review each year the level to be set for the following tax year. Under the 2006 Half Year Economic and Fiscal Update (HYEFU) forecasts, CPI-indexation of NZS rates is not predicted to be enough to maintain the 66% wage floor. While the impact on the operating balance will depend on the actual CPI and wage statistics that occur, HYEFU forecasts estimate the cost of maintaining the 66% wage floor on 1 April 2007 would reduce the operating balance by approximately $23 million in 2006/07, $90 million in 2007/08, $68 million in 2008/09 and $28 million in 2009/10. This increase has no costs in fiscal years beyond 2009/10.

The Minister of Finance has yet to fully consider the quantum of this risk.

Source: Ministry of Social Development

Social Development – Working New Zealand: Work-focused Support (changed, unquantified risk)

Working New Zealand: Work-focused Support is a package of policy and operational changes aimed at simplifying the benefit system and enhancing the opportunities for beneficiaries to participate in the labour market. The first stage, already underway, focuses on getting services and support in place to help people move into work and stay employed. The Government is considering further options and costs to simplify the benefit system. The next stages will be submitted for consideration in future Budgets. The remaining proposals are still being developed, but any additional funding would decrease the operating balance.

State Services Commission – State Sector Retirement Savings Scheme (changed, unquantified risk)

The Government is considering options for extending the employer subsidy for members of the State Sector Retirement Savings Scheme beyond 3% (3% is the level of employer subsidy from 2006/07) and extending the scheme to the wider state sector. The impact of the KiwiSaver scheme on the State Sector Retirement Savings Scheme is also being evaluated. All of these proposals would decrease the operating balance, but the quantum would vary depending on the options chosen.

Transport – Extending the State Highway Construction and Revenue Guarantee (new, unquantified risk)

The Government has agreed to extend the revenue guarantee for the National Land Transport Programme and the State Highway Plan guarantee from five years to six. The Crown is still considering how and when to add a sixth year to the current five-year State Highway Plan guarantee and National Land Transport Programme revenue guarantee.

Contingent Liabilities#

Contingent liabilities are costs the Crown will have to face if a particular event occurs. Typically, contingent liabilities consist of guarantees and indemnities, legal disputes and claims, and uncalled capital. The contingent liabilities facing the Crown are a mixture of operating and balance sheet risks, and they can vary greatly in magnitude and likelihood of realisation. In general, if a contingent liability were realised it would reduce the operating balance and net worth, and increase Crown debt. However, in the case of contingencies for uncalled capital, the negative impact would be restricted to Crown debt.

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

Only contingent liabilities involving amounts over $10 million are separately disclosed. Contingent liabilities below $10 million are included in the “other quantifiable contingent liabilities” total. Comparatives have been adjusted where appropriate to align with the disclosure of new “material” contingent liabilities. The total amount of prior years’ contingent liabilities remains unchanged.

Contingent liabilities have been stated as at 31 October 2006, being the latest set of published contingent liabilities.

Details of each of the following contingent liabilities can be accessed from the Treasury website at http://www.treasury.govt.nz/forecasts/hyefu/2006.

Quantifiable Contingent Liabilities

Guarantees and indemnities Status [6] ($million)
Cook Islands – Asian Development Bank loans Changed 16
Indemnification of receivers and managers – Terralink Limited Unchanged 10
Indemnification of touring exhibitions Unchanged 250
Ministry of Justice – Treaty settlement, tax liabilities Changed 105
Ministry of Transport – funding guarantee Unchanged 10
Post Office Bank – guaranteed deposits Unchanged 11
Guarantees and indemnities of SOEs and Crown entities Unchanged 19
Other guarantees and indemnities Unchanged 1
    422
Uncalled capital    
Asian Development Bank Changed 1,116
European Bank for Reconstruction and Development Changed 14
International Bank for Reconstruction and Development Changed 1,235
    2,365
Legal proceedings and disputes    
Health – legal claims Unchanged 90
Tax in dispute Changed 827
Other legal claims against SOEs and Crown entities Changed 3
Other legal claims Changed 93
    1,013
Other quantifiable contingent liabilities    
International finance organisations Changed 1,860
Reserve Bank – demonetised currency Unchanged 23
Social Development – claim for judicial review Changed 71
Transpower New Zealand Limited Changed 98
Other quantifiable contingent liabilities of SOEs and Crown entities Changed 37
Other quantifiable contingent liabilities Changed 22
    2,111
Total quantifiable contingent liabilities   5,911

Unquantifiable Contingent Liabilities

Guarantees and indemnities Status
Asure New Zealand Limited Unchanged
At Work Insurance Limited Unchanged
Auckland Rail lease Unchanged
Bona Vacantia property Unchanged
Building Industry Authority Unchanged
Crown Research Institutes (CRIs) Unchanged
District Court Judges, Justices of the Peace, Coroners and
Disputes Tribunal
Unchanged
District Health Boards – director indemnity – (DHBs) Unchanged
Earthquake Commission (EQC) Unchanged
Electricity Corporation of New Zealand Limited (ECNZ) Unchanged
Ministry of Fisheries – indemnity provided for delivery of registry services Unchanged
Genesis Power Ltd (Genesis Energy) Unchanged
Geothermal carbon tax indemnity Unchanged
Housing New Zealand Corporation (HNZC) Unchanged
Indemnities against acts of war and terrorism Unchanged
Maui Partners Unchanged
National Provident Fund Unchanged
New Zealand Railways Corporation Unchanged
Persons exercising investigating powers Unchanged
Ports of Auckland Unchanged
Public Trust Unchanged
Purchasers of Crown operations Unchanged
Reserve Bank of New Zealand (the Reserve Bank) Unchanged
State Insurance and Rural Bank – tax liabilities Unchanged
Synfuels-Waitara outfall indemnity Unchanged
Tainui Corporation Unchanged
Toll NZ Ltd – purchase of rail network assets Unchanged
Works Civil Construction Unchanged
Works Consultancy Services Unchanged
Other unquantifiable contingent liabilities  
Abuse claims Unchanged
Accident Compensation Corporation (ACC) litigations Unchanged
Environmental liabilities Unchanged
Foreshore and seabed Unchanged
Sale of Crown assets Unchanged
Treaty of Waitangi claims Unchanged
Treaty of Waitangi claims – settlement relativity payments Unchanged
Other contingencies  
Foreshore and seabed Unchanged

5 Generally Accepted Accounting Practice (GAAP) Series Tables#

Forecast Financial Statements#

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

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

The forecasts have been prepared in accordance with the Statement of Responsibility and reflect the judgements and information known at the time they were prepared. They reflect all Government decisions and circumstances communicated to 8 December 2006.

Finalisation dates and key assumptions that underpin the preparation of the GAAP tables are outlined at the start of the Fiscal Outlook chapter on page 32.

10 year trend information
Summary indicators 2002 Actual 2003 Actual 2004 Actual 2005 Actual 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
(% of GDP)                    
Revenue                    
Core Crown 31.7 33.0 33.0 34.5 37.6 36.3 35.1 34.2 34.3 34.3
Tax revenue 28.8 30.1 29.9 30.9 33.0 31.8 31.3 30.9 31.0 30.9
Total Crown 39.7 43.1 42.5 44.5 48.7 46.1 44.9 44.0 43.9 43.7
Expenses                    
Core Crown 30.2 31.5 29.2 30.7 31.7 33.2 32.6 32.3 32.1 32.0
Total Crown 37.9 41.7 37.3 40.4 41.4 42.3 41.4 41.1 40.8 40.7
Operating balance 1.9 1.5 5.2 4.1 7.3 3.8 3.6 2.9 3.1 3.0
OBERAC 2.2 4.2 4.7 5.9 5.5 4.1 3.6 2.9 3.1 3.0
OBERAC (excl NZSF returns) 2.2 4.2 4.5 5.6 5.1 3.7 3.1 2.3 2.4 2.3
Net worth 15.0 18.0 24.9 33.1 45.4 47.8 49.1 49.5 50.2 50.9
Gross sovereign-issued debt 28.8 27.3 25.0 23.2 22.5 23.3 23.5 21.8 20.5 20.7
Net core Crown debt 15.3 13.3 10.7 7.1 4.9 3.9 3.5 4.0 4.1 3.8
NZS Fund balance 0.5 1.4 2.8 4.3 6.3 7.8 9.2 10.6 12.0 13.5

Statement of Accounting Policies and Forecast Assumptions#

General Accounting Policies and Forecast Assumptions

General accounting policies

Accounting policy

These Forecast Financial Statements comply with generally accepted accounting practice. With the adoption of NZ IFRS from 1 July 2007, actual results from this date will be prepared in accordance with NZ IFRS. FRS-29 (Prospective Financial Statements) requires prospective information to be prepared in accordance with the financial standards that will be effective in these periods, which will be NZ IFRS for periods beginning 1 July 2007. However, as the impact of the transition to NZ IFRS has not been fully identified and clarified, the forecast financial statements in the 2006 Half Year Update have been prepared under current financial reporting standards.

The measurement base applied is historical cost adjusted for revaluations of property, plant and equipment (where appropriate), commercial forests and marketable securities & deposits and equity investments held for trading purposes.

Revaluations are made to reflect the forecastservice potential or economic benefit obtained through control of the assets. The accrual basis of accounting has been used.

Forecast assumptions

For forecast purposes, no revaluations of property, plant and equipment are projected beyond the current year.

Specific Accounting Policies and Forecast Assumptions

Forecast periods

The reporting periods covered by these forecast financial statements are the years ending 30 June 2007, 30 June 2008, 30 June 2009, 30 June 2010 and 30 June 2011.

Certain state-owned enterprises and Crown entities have different reporting periods from the Crown.

The forecasts for 30 June 2007 have generally been prepared using actual data to 30 September or 31 October 2006 (in some instances). Transactions for the remainder of the year are forecast in accordance with the Crown’s accounting policies and forecast assumptions.

Changes in accounting policies

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

Changes in forecast assumptions

Changes to the forecast assumptions used for the forecasts published in the 2006 Half Year Economic and Fiscal Update are outlined on page 32.

Detailed accounting policies and forecast assumptions

The specific accounting and forecasting policies are reproduced in full on Treasury’s website at http://www.treasury.govt.nz/forecasts/hyefu/2006/.

Government Reporting Entity as at 8 December 2006#

These forecast financial statements are for the Government reporting entity as specified in section 26Q(4) of the Public Finance Act 1989. This comprises Ministers of the Crown and the following entities:

Departments

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

State-owned enterprises

  • AgriQuality Limited
  • Animal Control Products Limited
  • Airways Corporation of
    New Zealand Limited
  • Asure New Zealand Limited
  • Electricity Corporation of
    New Zealand Limited
  • Genesis Power Limited
  • Landcorp Farming Limited
  • Learning Media Limited
  • Meridian Energy Limited
  • Meteorological Service of
    New Zealand Limited
  • Mighty River Power Limited
  • New Zealand Post Limited
  • New Zealand Railways Corporation
  • Quotable Value Limited
  • Solid Energy New Zealand Limited
  • Terralink Limited (in liquidation)
  • Timberlands West Coast Limited
  • Transmission Holdings Limited
  • Transpower New Zealand Limited
  • Air New Zealand Limited (included for disclosure purposes as if it were a SOE)

Others

  • Government Superannuation Fund
  • New Zealand Superannuation Fund
  • Reserve Bank of New Zealand

Offices of Parliament

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

Crown entities

  • Accident Compensation Corporation
  • Accounting Standards Review Board
  • Alcohol Advisory Council of New Zealand
  • Arts Council of New Zealand Toi Aotearoa
  • Broadcasting Commission
  • Broadcasting Standards Authority
  • Career Services
  • Charities Commission
  • Children’s Commissioner
  • Civil Aviation Authority of New Zealand Pacific Islands Business Development Trust
  • Commerce Commission
  • Crown Health Financing Agency
  • Crown research institutes (9)
  • District health boards (21)
  • Earthquake Commission
  • Electoral Commission
  • Electricity Commission
  • Energy Efficiency and Conservation Authority
  • Environmental Risk Management Authority
  • Families Commission
  • Foundation for Research, Science and Technology
  • Government Superannuation Fund Authority
  • Guardians of New Zealand Superannuation
  • Health and Disability Commissioner
  • Health Research Council of New Zealand
  • Health Sponsorship Council
  • Housing New Zealand Corporation
  • Human Rights Commission
  • Land Transport New Zealand
  • Law Commission
  • Legal Services Agency
  • Maritime New Zealand
  • Mental Health Commission
  • Museum of New Zealand Te Papa Tongarewa Board
  • New Zealand Antarctic Institute
  • New Zealand Artificial Limb Board
  • New Zealand Blood Service
  • New Zealand Film Commission
  • New Zealand Fire Service Commission
  • New Zealand Historic Places Trust (Pouhere Taonga)
  • New Zealand Lotteries Commission
  • New Zealand Qualifications Authority
  • New Zealand Sports Drug Agency
  • New Zealand Symphony Orchestra
  • New Zealand Teachers Council
  • New Zealand Tourism Board
  • New Zealand Trade and Enterprise
  • New Zealand Venture Investment Fund Limited
  • Office of Film and Literature Classification
  • Pharmaceutical Management Agency
  • Police Complaints Authority
  • Privacy Commissioner
  • Public Trust
  • Radio New Zealand Limited
  • Retirement Commissioner
  • School boards of trustees (2,468)
  • Securities Commission
  • Social Workers Registration Board
  • Sport and Recreation New Zealand
  • Standards Council
  • Takeovers Panel
  • Te Reo Whakapuaki Irirangi (Te Mangai Paho)
  • Te Taura Whiri i te Reo Māori (Māori Language Commission)
  • Television New Zealand Limited
  • Tertiary Education Commission
  • Tertiary education institutions (33)
  • Testing Laboratory Registration Council
  • Transit New Zealand
  • Transport Accident Investigation Commission

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

  • Agriculture and Marketing Research and Development Trust
  • Asia New Zealand Foundation
  • Fish and game councils (12)
  • Leadership Development Centre Trust
  • New Zealand Fish and Game Council
  • New Zealand Game Bird Habitat Trust Board
  • New Zealand Government Property Corporation
  • New Zealand Lottery Grants Board
  • Ngai Tahu Ancillary Claims Trust
  • Pacific Co-operation Foundation
  • Research and Education Advanced Network New Zealand Limited
  • Reserves boards (24)
  • Road Safety Trust

Forecast Statement of Financial Performance

Forecast Statement of Financial Performance for the years ending 30 June

($ million) Note 2006 Actual Previous Budget 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Revenue                
Taxation revenue 1 51,973 50,669 51,708 53,344 55,596 58,512 61,225
Levies, fees, fines and penalties 1 3,411 3,179 3,294 3,341 3,408 3,483 3,555
Forecast revenue allocation 1 ..  ..  ..  ..  (1,000) (1,000) (1,000)
Total Revenue Levied through the Crown's Sovereign Power 1 55,384 53,848 55,002 56,685 58,004 60,995 63,780
Sales of goods and services 2 13,337 12,715 12,566 12,868 13,402 13,967 14,415
Investment income 3 5,828 3,687 5,115 4,803 5,255 5,480 5,911
Other revenue 4 2,032 2,361 2,294 2,332 2,390 2,376 2,383
Total Revenue Earned through the Crown's Operations   21,197 18,763 19,975 20,003 21,047 21,823 22,709
Total Crown Revenue   76,581 72,611 74,977 76,688 79,051 82,818 86,489
Expenses                
By input type                
Subsidies and transfer payments 5 16,850 18,189 18,031 19,046 19,709 20,680 21,478
Personnel expenses 6 15,116 15,136 15,537 15,828 16,087 16,152 16,286
Operating expenses 7 29,277 29,820 30,403 30,565 30,967 31,418 31,999
New operating spending up to Budget 2007 8 ..  320 216 5 106 8 8
Forecast new operating spending 8 ..  ..  ..  1,381 3,213 5,093 7,013
Finance costs   2,652 2,854 2,978 3,078 3,114 3,048 3,171
Net foreign-exchange (gains)/losses   (411) ..  498 ..  ..  ..  .. 
Movement in total GSF liability 15 279 (17) 299 45 (16) (97) (153)
Movement in total ACC liability 16 1,321 674 828 740 746 762 781
Total Crown expenses   65,084 66,976 68,790 70,688 73,926 77,064 80,583
Revenues less Expenses   11,497 5,635 6,187 6,000 5,125 5,754 5,906
Net surplus of TEIs   54 133 73 71 72 72 73
Operating balance (including minority interest)   11,551 5,768 6,260 6,071 5,197 5,826 5,979
Minority interest   (78) ..  ..  ..  ..  ..  .. 
Operating Balance   11,473 5,768 6,260 6,071 5,197 5,826 5,979

The revenues and expenses are GST exclusive.

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

Below is an analysis of total Crown expenses and core Crown expenses by functional classification. This information reconciles to segmental information within the Statement of Segments.

Forecast Statement of Financial Performance for the years ending 30 June

($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Total Crown expenses by functional classification            
Social security and welfare 18,969 19,706 20,028 20,891 21,623 22,405 23,223
GSF pension expenses 1,671 1,051 1,422 1,145 1,121 1,062 1,027
Health 9,262 10,305 10,111 10,056 10,147 10,122 10,129
Education 10,430 9,892 10,166 10,115 10,150 10,271 10,381
Core government services 2,046 2,031 2,103 2,042 2,064 2,037 2,367
Law and order 2,420 2,604 2,702 2,830 2,852 2,856 2,847
Defence 1,339 1,405 1,461 1,554 1,613 1,701 1,788
Transport and communications 5,986 6,853 6,617 6,798 6,978 7,229 7,187
Economic and industrial services 6,334 5,896 6,007 6,238 6,366 6,585 6,738
Primary services 1,219 1,198 1,277 1,258 1,270 1,272 1,272
Heritage, culture and recreation 2,361 1,900 2,155 2,288 2,293 2,342 2,397
Housing and community development 758 851 938 930 937 954 956
Other 48 110 111 79 79 79 79
Finance costs 2,652 2,854 2,978 3,078 3,114 3,048 3,171
Net foreign-exchange (gains)/losses (411) ..   498 ..  ..  ..  .. 
New operating spending up to Budget 2007 ..  320 216 5 106 8 8
Forecast new operating spending ..  ..  ..  1,381 3,213 5,093 7,013
Total Crown Expenses 65,084 66,976 68,790 70,688 73,926 77,064 80,583
Core Crown expenses by functional classification          
Social security and welfare 15,598 16,956 16,970 17,758 18,345 18,975 19,636
GSF pension expenses 1,671 1,051 1,422 1,145 1,121 1,062 1,027
Health 9,547 10,732 10,673 10,675 10,786 10,832 10,826
Education 9,914 9,068 9,640 9,508 9,571 9,662 9,750
Core government services 2,169 2,301 2,323 2,277 2,259 2,239 2,411
Law and order 2,235 2,393 2,488 2,612 2,622 2,617 2,613
Defence 1,383 1,457 1,519 1,603 1,663 1,750 1,837
Transport and communications 1,818 2,524 2,481 2,558 2,715 2,689 2,596
Economic and industrial services 1,592 1,721 1,716 1,908 1,802 1,763 1,759
Primary services 467 441 490 452 444 439 433
Heritage, culture and recreation 1,194 812 834 879 799 802 808
Housing and community development 202 278 305 280 261 258 260
Other 49 110 112 79 80 80 80
Finance costs 2,356 2,090 2,498 2,457 2,372 2,285 2,422
Net foreign-exchange (gains)/losses (295) ..  276 ..  ..  ..  .. 
New operating spending up to Budget 2007 ..  320 216 5 106 8 8
Forecast new operating spending ..  ..  ..  1,381 3,213 5,093 7,013
Total Core Crown Expenses 49,900 52,254 53,963 55,577 58,159 60,554 63,479

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

Forecast Statement of Cash Flows

Forecast Statement of Cash Flows for the year ending 30 June

($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Cash Flows from Operations              
Cash was Provided from              
Total tax receipts (refer Note 1) 49,706 50,738 51,510 53,276 54,880 58,476 61,207
Total other sovereign receipts (refer Note 1) 3,246 3,047 3,137 3,197 3,247 3,304 3,337
Forecast revenue allocation (refer Note 1) ..  ..  ..  ..  (1,000) (1,000) (1,000)
Interest 1,622 1,422 2,018 2,147 2,377 2,284 2,337
Dividends 117 90 124 131 141 149 156
Sales of goods and services 13,457 13,089 13,352 14,112 14,669 15,344 15,713
Other operating receipts 1,919 2,393 2,075 2,065 2,091 2,018 2,128
Total Cash Provided from Operations 70,067 70,779 72,216 74,928 76,405 80,575 83,878
               
Cash was Disbursed to              
Subsidies and transfer payments 16,944 18,665 18,517 19,586 20,281 21,040 21,848
Personnel and operating payments 38,964 41,670 41,757 42,851 43,424 44,167 44,686
Finance costs 2,047 2,441 2,399 2,570 2,749 2,718 2,762
Forecast new operating spending ..  320 216 1,386 3,319 5,101 7,021
Total Cash Disbursed to Operations 57,955 63,096 62,889 66,393 69,773 73,026 76,317
Net Cash Flows from Operations 12,112 7,683 9,327 8,535 6,632 7,549 7,561
               
Cash Flows from Investing Activities              
Cash was Provided from              
Sale of physical assets 1,865 ..  316 ..  ..  ..  .. 
Total Cash Provided 1,865 ..  316 ..  ..  ..  .. 
               
Cash was Disbursed to              
Purchase of physical assets 5,909 6,713 6,874 5,701 5,281 5,184 5,008
Net increase in advances 1,637 1,808 2,437 2,153 1,754 1,706 1,725
Net purchase/(sale) of marketable securities, deposits and other equity investments 5,859 (527) 6,080 4,328 22 812 4,430
Forecast new capital spending ..  256 82 554 464 714 570
Total Cash Disbursed 13,405 8,250 15,473 12,736 7,521 8,416 11,733
               
Net Cash Flows from Investing Activities (11,540) (8,250) (15,157) (12,736) (7,521) (8,416) (11,733)
Net Cash Flows from Operating and Investing Activities 572 (567) (5,830) (4,201) (889) (867) (4,172)
               
Cash Flows from Financing Activities              
Cash was Provided from              
Issue of circulating currency 165 ..  69 34 35 35 35
Net (repayment)/issue of Government stock1 151 (656) (301) 2,517 (474) (630) 2,465
Total Cash Provided 316 (656) (232) 2,551 (439) (595) 2,500
               
Cash was Disbursed to              
Net (issue)/repayment of foreign-currency borrowing 2,300 (412) (1,219) (175) 302 116 (142)
Net repayment/(issue) of other New Zealand-dollar borrowing (1,856) (394) (4,383) (1,663) (1,845) (1,862) (1,762)
Total Cash Disbursed 444 (806) (5,602) (1,838) (1,543) (1,746) (1,904)
Net Cash Flows from Financing Activities (128) 150 5,370 4,389 1,104 1,151 4,404
               
Net Movement in Cash 444 (417) (460) 188 215 284 232
Opening Cash Balance 3,710 3,319 4,168 3,699 3,887 4,102 4,386
Foreign-exchange (losses)/gains on opening cash 14 ..  (9) ..  ..  ..  .. 
Closing Cash Balance 4,168 2,902 3,699 3,887 4,102 4,386 4,618

1 Net issues of Government stock include movements within government stock holdings of entities such as NZS Fund, GSF, ACC and EQC. The Bonds Reconciliation at the end of these forecasts outlines NZDMO issues of Government stock.

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

Forecast Statement of Cash Flows for the year ending 30 June

($ million) 2006 Actual 2007Previous Budget 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Reconciliation Between the Forecast Net Cash Flows from Operations and the Operating Balance            
Net Cash Flows from Operations 12,112 7,683 9,327 8,535 6,632 7,549 7,561
Items included in the operating balance but not in net cash flows from operations            
Valuation Changes              
(Increase)/decrease in pension liabilities (279) 17 (299) (45) 16 97 153
(Increase)/decrease in ACC liability (1,321) (674) (828) (740) (746) (762) (781)
Decrease/(increase) in NPF guarantee (54) ..  ..  ..  ..  ..  .. 
Unrealised net foreign-exchange (losses)/gains 502 (4) (281) ..  ..  ..  .. 
Non-cash movements in investments 1,242 548 525 482 484 483 511
Unrealised losses arising from changes in the value of commercial forests 15 ..  ..  ..  ..  ..  .. 
Total Valuation Changes 105 (113) (883) (303) (246) (182) (117)
               
Physical Asset Movements              
Depreciation (2,708) (2,918) (3,012) (3,198) (3,334) (3,429) (3,571)
Gain/(loss) on sale of Southern Hydro ..  ..  ..  ..  ..  ..  .. 
(Loss)/gain on sale of assets 811 ..  ..  ..  ..  ..  .. 
Total Physical Asset Movements (1,897) (2,918) (3,012) (3,198) (3,334) (3,429) (3,571)
               
Other Non-cash Items              
Student Loans (1,671) (167) (823) (525) (553) (578) (603)
Amortisation of goodwill (75) (89) (88) (87) (88) (88) (88)
Accrued income from NZS Fund ..  675 743 840 1,027 1,238 1,468
Other 945 133 73 71 72 72 73
Total Other Non-cash Items (801) 552 (95) 299 458 644 850
               
Movements in Working Capital              
Increase/(decrease) in taxes receivable 3,225 22 153 119 775 100 (22)
Increase/(decrease) in other receivables 366 307 (251) (14) 120 88 115
Increase/(decrease) in inventories (39) 161 171 62 69 32 22
Decrease/(increase) in payables (1,598) 74 850 571 723 1,024 1,141
Total Movements in Working Capital 1,954 564 923 738 1,687 1,244 1,256
Operating Balance 11,473 5,768 6,260 6,071 5,197 5,826 5,979

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

Forecast Statement of Movement in Equity

Forecast Statement of Movement in Equity for the year ending 30 June

($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Opening Net Worth 49,983 58,485 71,403 77,718 83,789 88,986 94,812
Operating balance for the year 11,473 5,768 6,260 6,071 5,197 5,826 5,979
Minority interest in operating balance 78 ..  ..  ..  ..  ..  .. 
Increase in minority interest ..  ..  ..  ..  ..  ..  .. 
Net revaluations 9,869 ..  55 ..  ..  ..   .. 
Total Recognised Revenues and Expenses 21,420 5,768 6,315 6,071 5,197 5,826 5,979
Closing Net Worth 71,403 64,253 77,718 83,789 88,986 94,812 100,791

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

Forecast Statement of Financial Position

Forecast Statement of Financial Position as at 30 June

($ million) Note 2006 Actual 2007Previous Budget 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Assets                
Cash and bank balances 9 4,168 2,902 3,699 3,887 4,102 4,386 4,618
Marketable securities, deposits & equity investments 9 43,520 43,232 49,287 54,454 55,683 58,157 64,662
Advances 10 8,758 10,021 10,489 12,302 14,027 14,550 15,047
Receivables 11 14,474 10,534 14,376 14,481 15,376 15,564 15,657
Inventories   907 1,182 1,078 1,140 1,209 1,241 1,263
Other investments 12 323 286 397 430 459 482 488
Property, plant and equipment 13 79,441 73,863 82,922 85,634 87,741 89,577 91,141
TEI investment   5,475 5,301 5,595 5,679 5,743 5,802 5,861
Commercial forests   575 232 565 566 566 567 567
Intangible assets (including goodwill)   630 398 568 489 407 346 283
Forecast new capital spending   ..  256 82 636 1,100 1,814 2,384
Total Assets   158,271 148,207 169,058 179,698 186,413 192,486 201,971
                 
Liabilities                
Payables and provisions 14 16,133 13,559 15,086 15,717 16,049 15,985 16,198
Currency issued   3,362 3,408 3,431 3,465 3,500 3,535 3,570
Borrowings - sovereign guaranteed   29,879 28,560 31,767 33,404 31,768 30,519 32,276
Borrowings - non-sovereign guaranteed   9,548 9,828 11,983 13,465 15,522 16,382 17,255
Provision for GSF pension liability 15 15,231 15,344 15,530 15,575 15,559 15,462 15,309
Provision for ACC outstanding claims liability 16 12,715 13,255 13,543 14,283 15,029 15,791 16,572
Total Liabilities   86,868 83,954 91,340 95,909 97,427 97,674 101,180
Total Assets less Total Liabilities   71,403 64,253 77,718 83,789 88,986 94,812 100,791
                 
Net Worth                
Taxpayer funds   33,477 36,049 39,973 46,044 51,241 57,067 63,046
Revaluation reserve 17 37,633 27,989 37,452 37,452 37,452 37,452 37,452
Minority Interest   293 215 293 293 293 293 293
Net Worth   71,403 64,253 77,718 83,789 88,986 94,812 100,791

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

Below is an analysis of the NZS Fund and Gross and Net Debt information. The notes to the accounts provide breakdown of other key items.

Forecast Statement of Financial Position as at 30 June

($ million) 2006 Actual 2007Previous Budget 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
New Zealand Superannuation Fund            
Within MSDs & equity investments is the NZS Fund (except for cross holdings of investments with other parts of the Crown, for example the NZS Fund will hold NZ Government Stock).  The following information includes all investments and income, including cross-holdings of NZ Government Stock and accrued interest on such stock. 
Opening balance 6,555 10,015 9,861 12,653 15,626 18,979 22,676
Gross contribution 2,337 2,049 2,049 2,133 2,326 2,459 2,576
Income after tax 969 675 743 840 1,027 1,238 1,468
NZS Fund balance 9,861 12,739 12,653 15,626 18,979 22,676 26,720
               
Gross and Net Debt Information            
Definitions of debt:
Total Crown gross debt is the total borrowings (both sovereign-guaranteed and non-sovereign guaranteed) of the total Crown.   This equates to the amount in the total Crown balance sheet and represents the complete picture of whole-of-Crown debt obligations to external parties.
The balance sheet splits total Crown debt into sovereign-guaranteed and non-sovereign-guaranteed debt.  This split reflects the fact that debt held by SOEs and Crown entities is not explicitly guaranteed by the Crown.  Any such debt that may be guaranteed is included in the sovereign-guaranteed total.   No debt of SOEs and Crown entities is currently guaranteed by the Crown.
Gross sovereign-issued debt is debt issued by the sovereign (i.e., core Crown) and includes Government stock held by the NZS Fund, GSF, ACC or EQC for example.  In other words, the gross sovereign-issued debt does not eliminate any internal cross-holdings.  The Government's debt objective uses this measure of debt. 
Total Crown (refer to the Forecast Statement of Segments)              
Total Crown gross debt 39,427 38,388 43,750 46,869 47,290 46,901 49,531
               
Core Crown sovereign guaranteed borrowings 34,477 33,356 36,480 38,464 37,165 36,216 38,276
excl cross holdings of NZS Fund and GSF (984) (1,657) (1,387) (1,689) (2,027) (2,399) (2,806)
Gross sovereign-issued debt 35,461 32,663 37,867 40,153 39,192 38,615 41,082
               
Core Crown              
Gross sovereign issued debt 35,461 35,013 37,867 40,153 39,192 38,615 41,082
Financial assets (40,599) (41,028) (46,347) (51,848) (52,714) (55,018) (61,353)
  (5,138) (6,015) (8,480) (11,695) (13,522) (16,403) (20,271)
               
NZS Fund and GSF financial assets 12,883 15,224 14,862 17,618 20,709 24,100 27,796
Net Core Crown Debt 7,745 9,209 6,382 5,923 7,187 7,697 7,525

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

Forecast Statement of Borrowings

Forecast Statement of Borrowings for the years ending 30 June

($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
Sovereign Guaranteed Debt              
New Zealand-Dollar Debt              
Government stock 17,002 15,982 16,253 18,169 17,061 15,825 17,651
Treasury bills 4,860 5,259 2,585 2,791 2,601 2,608 2,617
Loans and foreign-exchange contracts (11,247) (10,131) 8,213 7,671 7,542 7,542 7,542
Retail stock and other 532 482 463 430 395 390 375
Total New Zealand-Dollar Debt 11,147 11,592 27,514 29,061 27,599 26,365 28,185
               
Foreign-Currency Debt              
United States dollars 14,430 9,309 1,673 1,873 1,873 1,873 1,810
Japanese yen 404 508 (334) (334) (334) (335) (335)
European and other currencies 3,898 7,151 2,914 2,804 2,630 2,616 2,616
Total Foreign-Currency Debt 18,732 16,968 4,253 4,343 4,169 4,154 4,091
Total Sovereign Guaranteed Debt 29,879 28,560 31,767 33,404 31,768 30,519 32,276
               
Non-Sovereign Guaranteed Debt              
New Zealand 7,198 7,827 9,551 10,922 13,109 14,067 14,726
United States dollars 1,794 1,988 2,180 2,121 1,926 1,739 1,862
Japanese yen 279 ..  ..  ..  ..  ..  .. 
European and other currencies 277 13 252 422 487 576 667
Total Non-Sovereign Guaranteed Debt 9,548 9,828 11,983 13,465 15,522 16,382 17,255
Total Borrowings (Gross Debt) 39,427 38,388 43,750 46,869 47,290 46,901 49,531
               
Less              
               
Financial Assets (including restricted assets)              
Marketable Securities, Deposits and Equity Investments              
New Zealand dollars 8,003 5,213 14,738 16,512 14,276 12,860 15,247
United States dollars 11,080 11,608 11,529 11,923 12,130 12,347 12,510
Japanese yen 615 1,173 584 734 900 1,084 1,287
European and other currencies 7,970 7,255 5,014 5,196 5,350 5,696 6,091
Reserve Position at IMF 458 275 388 380 373 365 356
NZ equity investments 2,721 3,643 3,690 4,214 4,791 5,383 6,005
Foreign equity investments 12,673 14,065 13,344 15,495 17,863 20,422 23,166
Total 43,520 43,232 49,287 54,454 55,683 58,157 64,662
               
Advances and Cash              
Student loans 5,569 5,868 5,839 6,374 6,896 7,412 7,891
Other advances 3,189 4,153 4,650 5,928 7,131 7,138 7,156
Cash 4,168 2,902 3,699 3,887 4,102 4,386 4,618
Total 12,926 12,923 14,188 16,189 18,129 18,936 19,665
               
Total Financial Assets 56,446 56,155 63,475 70,643 73,812 77,093 84,327
               
Borrowings less Financial Assets (17,019) (17,767) (19,725) (23,774) (26,522) (30,192) (34,796)
               
Net New Zealand-dollar debt (5,569) (3,562) 3,297 1,633 1,757 1,147 (496)
Net foreign-currency debt (11,450) (14,205) (23,022) (25,407) (28,279) (31,339) (34,300)
Borrowings less Financial Assets (17,019) (17,767) (19,725) (23,774) (26,522) (30,192) (34,796)

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

Statement of Actual Commitments

Statement of Actual Commitments as at 31 October
($ million) As at 31 October 2006 As at 30 June 2006
Capital Commitments    
Specialist military equipment 1,154 535
Land and buildings 804 945
Other property, plant and equipment 2,551 2,530
Other capital commitments 828 818
Investments 124 124
Total Capital Commitments 5,461 4,952
     
Operating Commitments    
Non-cancellable accommodation leases 1,942 1,940
Other non-cancellable leases 2,499 2,466
Non-cancellable contracts for the supply of goods and services 1,786 1,908
Other operating commitments 7,127 6,462
TEIs 303 303
Total Operating Commitments 13,657 13,079
Total Commitments 19,118 18,031
     
Total Commitments by Institutional Segment    
Core Crown 5,973 4,824
Crown entities 9,560 9,627
State-owned enterprises 3,585 3,580
Total Commitments  19,118 18,031

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

Statement of Actual Contingent Liabilities

Statement of Actual Contingent Liabilities as at 31 October
($ million) As at 31 October 2006 As at 30 June 2006
Guarantees and indemnities 423 405
Uncalled capital 2,365 2,592
Legal proceedings and disputes 1,012 1,032
Other quantifiable contingent liabilities 2,111 2,073
Total Quantifiable Contingent Liabilities 5,911 6,102
     
Total Quantifiable Contingent Liabilities by Institutional Segment    
Core Crown 5,755 5,921
Crown Entities 38 63
State-owned enterprises 118 118
Total Quantifiable Contingent Liabilities 5,911 6,102
     
Quantifiable Contingent Assets    
Core Crown - Education and Transport 106 106
Total Quantifiable Contingent Assets 106 106

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

A detailed Statement of Contingent Liabilities and Assets (quantified and unquantified) is outlined on pages 104 to 106 of the Specific Fiscal Risk chapter.

The Statement of Fiscal Risks (quantified and unquantified) is outlined on pages 92 to 103 of the Specific Fiscal Risk chapter.

Forecast Statement of Segments#

Statement of Financial Performance (institutional form) for the year ended 30 June 2006
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) 2006 $m 2006 $m 2006 $m 2006 $m 2006 $m
Revenue          
Taxation revenue 52,444 (471) 51,973
Other sovereign levied income 663 2,811 (63) 3,411
Forecast revenue allocation
Sales of goods and services 884 1,865 11,206 (618) 13,337
Investment income 4,496 1,962 1,008 (1,638) 5,828
Other revenues 683 18,677 537 (17,865) 2,032
Total revenue 59,170 25,315 12,751 (20,655) 76,581
           
Expenses by input type          
Subsidies and transfer payments 15,243 1,708 (101) 16,850
Personnel expenses 5,656 7,591 1,876 (7) 15,116
Operating expenses 26,661 12,967 8,558 (18,909) 29,277
Finance costs 2,356 302 443 (449) 2,652
FX losses/(gains) (295) (113) (3) (411)
GSF and ACC liability revaluation movements 279 1,321 1,600
Total expenses 49,900 23,776 10,874 (19,466) 65,084
           
Expenses by functional classification          
Social security and welfare 15,598 3,740 (369) 18,969
Health 9,547 8,227 (8,512) 9,262
Education 9,914 6,539 22 (6,045) 10,430
Other functional classifications 12,780 5,081 10,412 (4,091) 24,182
Forecast new operating spending
Finance costs and FX losses/(gains) 2,061 189 440 (449) 2,241
Total expenses 49,900 23,776 10,874 (19,466) 65,084
TEI's and Minority Interest 54 (78) (24)
           
Operating balance 9,270 1,593 1,799 (1,189) 11,473
Statement of Financial Position (institutional form) as at 30 June 2006
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) 2006 $m 2006 $m 2006 $m 2006 $m 2006 $m
Assets          
Financial assets 40,599 17,554 5,368 (7,075) 56,446
Physical assets 25,223 37,987 16,231 79,441
Investment in SOEs and CEs (including TEIs) 24,169 5,475 (24,169) 5,475
Other assets 12,293 2,433 2,421 (238) 16,909
Total assets 102,284 63,449 24,020 (31,482) 158,271
Liabilities          
Borrowings 34,477 4,124 7,901 (7,075) 39,427
Other liabilities 27,730 17,503 3,004 (796) 47,441
Total liabilities 62,207 21,627 10,905 (7,871) 86,868
Net worth 40,077 41,822 13,115 (23,611) 71,403
           
Taxpayer funds 28,929 21,086 7,073 (23,611) 33,477
Revaluation reserves 11,148 20,736 5,749 37,633
Minority Interest 293 293
Net worth 40,077 41,822 13,115 (23,611) 71,403
           
Analysis of financial assets and borrowings          
Advances and cash 8,797 2,308 4,148 (2,327) 12,926
MSDs and equity investments 31,802 15,246 1,220 (4,748) 43,520
Total financial assets 40,599 17,554 5,368 (7,075) 56,446
Borrowings - Sovereign guaranteed 34,477 (4,598) 29,879
Borrowings - Non-sovereign guaranteed 4,124 7,901 (2,477) 9,548
Total borrowings 34,477 4,124 7,901 (7,075) 39,427
Borrowings less financial assets (6,122) (13,430) 2,533 (17,019)
Net Crown debt 7,745 Net Crown debt and gross sovereign-issued debt differ from the analysis above due to elimination of cross-holdings of Govt stock and adding back the NZS Fund and GSF assets.
Gross sovereign-issued debt 35,461
Forecast Statement of Financial Performance (institutional form) for the year ended 30 June 2007
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) 2007 $m 2007 $m 2007 $m 2007 $m 2007 $m
Revenue          
Taxation revenue 52,241 (533) 51,708
Other sovereign levied income 677 2,657 (40) 3,294
Forecast revenue allocation
Sales of goods and services 847 1,870 10,523 (674) 12,566
Investment income 4,524 1,179 467 (1,055) 5,115
Other revenues 731 20,256 864 (19,557) 2,294
Total revenue 59,020 25,962 11,854 (21,859) 74,977
           
Expenses by input type          
Subsidies and transfer payments 16,290 1,842 (101) 18,031
Personnel expenses 5,702 7,887 1,954 (6) 15,537
Operating expenses 28,898 14,139 8,277 (20,695) 30,619
Finance costs 2,498 327 624 (471) 2,978
FX losses/(gains) 276 (1) 223 498
GSF and ACC liability revaluation movements 299 828 1,127
Total expenses 53,963 25,022 11,078 (21,273) 68,790
           
Expenses by functional classification          
Social security and welfare 16,970 3,460 (402) 20,028
Health 10,673 8,534 (9,096) 10,111
Education 9,640 7,032 23 (6,529) 10,166
Other functional classifications 13,690 5,670 10,208 (4,775) 24,793
Forecast new operating spending 216 216
Finance costs and FX losses/(gains) 2,774 326 847 (471) 3,476
Total expenses 53,963 25,022 11,078 (21,273) 68,790
Net surplus TEIs 73 73
Operating balance 5,057 1,013 776 (586) 6,260
Forecast Statement of Financial Position (institutional form) as at 30 June 2007
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) 2007 $m 2007 $m 2007 $m 2007 $m 2007 $m
Assets          
Financial assets 46,347 18,088 6,770 (7,730) 63,475
Physical assets 26,231 39,124 17,567 82,922
Investment in SOEs and CEs (including TEIs) 24,674 5,595 (24,674) 5,595
Other assets 12,418 2,475 2,713 (540) 17,066
Total assets 109,670 65,282 27,050 (32,944) 169,058
Liabilities          
Borrowings 36,480 4,488 10,515 (7,730) 43,750
Other liabilities 28,060 17,522 3,079 (1,074) 47,590
Total liabilities 64,540 22,010 13,594 (8,804) 91,340
Net worth 45,130 43,272 13,456 (24,140) 77,718
           
Taxpayer funds 34,139 22,564 7,410 (24,140) 39,973
Revaluation reserves 10,991 20,708 5,753 37,452
Minority Interest 293 293
Net worth 45,130 43,272 13,456 (24,140) 77,718
           
Analysis of financial assets and borrowings          
Advances and cash 9,312 2,379 5,376 (2,879) 14,188
MSDs and equity investments 37,035 15,709 1,394 (4,851) 49,287
Total financial assets 46,347 18,088 6,770 (7,730) 63,475
Borrowings - Sovereign guaranteed 36,480 (4,710) 31,767
Borrowings - Non-sovereign guaranteed 4,488 10,515 (3,020) 11,983
Total borrowings 36,480 4,488 10,515 (7,730) 43,750
Borrowings less financial assets (9,867) (13,600) 3,745 (19,725)
Net Crown debt 6,382 Net Crown debt and gross sovereign-issued debt differ from the analysis above due to elimination of cross-holdings of Govt stock and adding back the NZS Fund and GSF assets.
Gross sovereign-issued debt 37,867
Forecast Statement of Financial Performance (institutional form) for the year ended 30 June 2008
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) 2008 $m 2008 $m 2008 $m 2008 $m 2008 $m
Revenue          
Taxation revenue 53,921 (577) 53,344
Other sovereign levied income 707 2,675 (41) 3,341
Forecast revenue allocation
Sales of goods and services 803 1,917 10,800 (652) 12,868
Investment income 3,795 1,275 584 (851) 4,803
Other revenues 691 20,854 871 (20,084) 2,332
Total revenue 59,917 26,721 12,255 (22,205) 76,688
           
Expenses by input type          
Subsidies and transfer payments 17,179 1,970 (103) 19,046
Personnel expenses 5,694 8,116 2,024 (6) 15,828
Operating expenses 30,202 14,553 8,441 (21,245) 31,951
Finance costs 2,457 334 797 (510) 3,078
FX losses/(gains)
GSF and ACC liability revaluation movements 45 740 785
Total expenses 55,577 25,713 11,262 (21,864) 70,688
           
Expenses by functional classification          
Social security and welfare 17,758 3,554 (421) 20,891
Health 10,675 8,820 (9,439) 10,056
Education 9,508 7,172 23 (6,588) 10,115
Other functional classifications 13,793 5,833 10,442 (4,906) 25,162
Forecast new operating spending 1,386 1,386
Finance costs and FX losses/(gains) 2,457 334 797 (510) 3,078
Total expenses 55,577 25,713 11,262 (21,864) 70,688
Net surplus TEIs 71 71
Operating balance 4,340 1,079 993 (341) 6,071
Forecast Statement of Financial Position (institutional form) as at 30 June 2008
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) 2008 $m 2008 $m 2008 $m 2008 $m 2008 $m
Assets          
Financial assets 51,848 19,455 7,743 (8,403) 70,643
Physical assets 26,371 40,121 19,142 85,634
Investment in SOEs and CEs (including TEIs) 24,957 5,679 (24,957) 5,679
Other assets 13,102 2,467 2,720 (547) 17,742
Total assets 116,278 67,722 29,605 (33,907) 179,698
Liabilities          
Borrowings 38,464 4,758 12,055 (8,403) 46,869
Other liabilities 28,345 18,306 3,328 (944) 49,040
Total liabilities 66,809 23,064 15,383 (9,347) 95,909
Net worth 49,469 44,658 14,222 (24,560) 83,789
           
Taxpayer Funds 38,478 23,950 8,176 (24,560) 46,044
Revaluation reserves 10,991 20,708 5,753 37,452
Minority Interest 293 293
Net worth 49,469 44,658 14,222 (24,560) 83,789
           
Analysis of financial assets and borrowings          
Advances and cash 10,166 2,543 6,673 (3,193) 16,189
MSDs and equity investments 41,682 16,912 1,070 (5,210) 54,454
Total financial assets 51,848 19,455 7,743 (8,403) 70,643
Borrowings - Sovereign guaranteed 38,464 (5,055) 33,404
Borrowings - Non-sovereign guaranteed 4,758 12,055 (3,348) 13,465
Total borrowings 38,464 4,758 12,055 (8,403) 46,869
Borrowings less financial assets (13,384) (14,697) 4,312 (23,774)
Net Crown debt 5,923 Net Crown debt and gross sovereign-issued debt differ from the analysis above due to elimination of cross-holdings of Govt stock and adding back the NZS Fund and GSF assets.
Gross sovereign-issued debt 40,153
Forecast Statement of Financial Performance (institutional form) for the year ended 30 June 2009
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) 2009 $m 2009 $m 2009 $m 2009 $m 2009 $m
Revenue          
Taxation revenue 56,233 (637) 55,596
Other sovereign levied income 726 2,722 (40) 3,408
Forecast revenue allocation (1,000) (1,000)
Sales of goods and services 811 1,973 11,278 (660) 13,402
Investment income 4,126 1,315 752 (938) 5,255
Other revenues 681 21,266 875 (20,432) 2,390
Total revenue 61,577 27,276 12,905 (22,707) 79,051
           
Expenses by input type          
Subsidies and transfer payments 17,728 2,088 (107) 19,709
Personnel expenses 5,793 8,217 2,083 (6) 16,087
Operating expenses 32,282 14,827 8,835 (21,658) 34,286
Finance costs 2,372 346 932 (536) 3,114
FX losses/(gains)
GSF and ACC liability revaluation movements (16) 746 730
Total expenses 58,159 26,224 11,850 (22,307) 73,926
           
Expenses by functional classification          
Social security and welfare 18,345 3,720 (442) 21,623
Health 10,786 9,116 (9,755) 10,147
Education 9,571 7,132 23 (6,576) 10,150
Other functional classifications 13,766 5,910 10,895 (4,998) 25,573
Forecast new operating spending 3,319 3,319
Finance costs and FX losses/(gains) 2,372 346 932 (536) 3,114
Total expenses 58,159 26,224 11,850 (22,307) 73,926
Net surplus TEIs 72 72
Operating balance 3,418 1,124 1,055 (400) 5,197
Forecast Statement of Financial Position (institutional form) as at 30 June 2009
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) 2009 $m 2009 $m 2009 $m 2009 $m 2009 $m
Assets          
Financial assets 52,714 20,705 9,189 (8,796) 73,812
Physical assets 26,168 41,042 20,530 87,741
Investment in SOEs and CEs (including TEIs) 25,146 5,743 (25,146) 5,743
Other assets 14,372 2,433 2,860 (547) 19,117
Total assets 118,400 69,923 32,579 (34,489) 186,413
Liabilities          
Borrowings 37,165 4,987 13,939 (8,796) 47,290
Other liabilities 28,346 18,951 3,726 (891) 50,137
Total liabilities 65,511 23,938 17,665 (9,687) 97,427
Net worth 52,889 45,985 14,914 (24,802) 88,986
           
Taxpayer Funds 41,898 25,277 8,868 (24,802) 51,241
Revaluation reserves 10,991 20,708 5,753 37,452
Minority Interest 293 293
Net worth 52,889 45,985 14,914 (24,802) 88,986
           
Analysis of financial assets and borrowings          
Advances and cash 10,780 2,635 7,952 (3,238) 18,129
MSDs and equity investments 41,934 18,070 1,237 (5,558) 55,683
Total financial assets 52,714 20,705 9,189 (8,796) 73,812
Borrowings - Sovereign guaranteed 37,165 (5,392) 31,768
Borrowings - Non-sovereign guaranteed 4,987 13,939 (3,404) 15,522
Total borrowings 37,165 4,987 13,939 (8,796) 47,290
Borrowings less financial assets (15,549) (15,718) 4,750 (26,522)
Net Crown debt 7,187 Net Crown debt and gross sovereign-issued debt differ from the analysis above due to elimination of cross-holdings of Govt stock and adding back the NZS Fund and GSF assets.
Gross sovereign-issued debt 39,192
Forecast Statement of Financial Performance (institutional form)for the year ended 30 June 2010
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) 2010 $m 2010 $m 2010 $m 2010 $m 2010 $m
Revenue          
Taxation revenue 59,169 (657) 58,512
Other sovereign levied income 737 2,787 (41) 3,483
Forecast revenue allocation (1,000) (1,000)
Sales of goods and services 822 2,025 11,784 (664) 13,967
Investment income 4,350 1,350 760 (980) 5,480
Other revenues 668 21,271 880 (20,443) 2,376
Total revenue 64,746 27,433 13,424 (22,785) 82,818
           
Expenses by input type          
Subsidies and transfer payments 18,583 2,208 (111) 20,680
Personnel expenses 5,816 8,232 2,110 (6) 16,152
Operating expenses 33,967 14,989 9,252 (21,689) 36,519
Finance costs 2,285 351 971 (559) 3,048
FX losses/(gains)
GSF and ACC liability revaluation movements (97) 762 665
Total expenses 60,554 26,542 12,333 (22,365) 77,064
           
Expenses by functional classification          
Social security and welfare 18,975 3,890 (460) 22,405
Health 10,832 9,077 (9,787) 10,122
Education 9,662 7,190 23 (6,604) 10,271
Other functional classifications 13,699 6,034 11,339 (4,955) 26,117
Forecast new operating spending 5,101 5,101
Finance costs and FX losses/(gains) 2,285 351 971 (559) 3,048
Total expenses 60,554 26,542 12,333 (22,365) 77,064
Net surplus TEIs 72 72
Operating balance 4,192 963 1,091 (420) 5,826
Forecast Statement of Financial Position (institutional form) as at 30 June 2010
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) 2010 $m 2010 $m 2010 $m 2010 $m 2010 $m
Assets          
Financial assets 55,018 21,908 9,309 (9,142) 77,093
Physical assets 26,049 41,756 21,772 89,577
Investment in SOEs and CEs (including TEIs) 25,280 5,802 (25,280) 5,802
Other assets 15,182 2,449 2,932 (549) 20,014
Total assets 121,529 71,915 34,013 (34,971) 192,486
Liabilities          
Borrowings 36,216 5,315 14,517 (9,142) 46,901
Other liabilities 28,229 19,496 3,886 (843) 50,773
Total liabilities 64,445 24,811 18,403 (9,985) 97,674
Net worth 57,084 47,104 15,610 (24,986) 94,812
           
Taxpayer Funds 46,093 26,396 9,564 (24,986) 57,067
Revaluation reserves 10,991 20,708 5,753 37,452
Minority Interest 293 293
Net worth 57,084 47,104 15,610 (24,986) 94,812
           
Analysis of financial assets and borrowings          
Advances and cash 11,424 2,722 8,064 (3,274) 18,936
MSDs and equity investments 43,594 19,186 1,245 (5,868) 58,157
Total financial assets 55,018 21,908 9,309 (9,142) 77,093
Borrowings - Sovereign guaranteed 36,216 (5,692) 30,519
Borrowings - Non-sovereign guaranteed 5,315 14,517 (3,450) 16,382
Total borrowings 36,216 5,315 14,517 (9,142) 46,901
Borrowings less financial assets (18,802) (16,593) 5,208 (30,192)
Net Crown debt 7,697 Net Crown debt and gross sovereign-issued debt differ from the analysis above due to elimination of cross-holdings of Govt stock and adding back the NZS Fund and GSF assets.
Gross sovereign-issued debt 38,615
Forecast Statement of Financial Performance (institutional form)for the year ended 30 June 2011
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) 2011 $m 2011 $m 2011 $m 2011 $m 2011 $m
Revenue          
Taxation revenue 61,948 (723) 61,225
Other sovereign levied income 748 2,847 (40) 3,555
Forecast revenue allocation (1,000) (1,000)
Sales of goods and services 817 2,065 12,197 (664) 14,415
Investment income 4,747 1,422 770 (1,028) 5,911
Other revenues 635 21,345 756 (20,353) 2,383
Total revenue 67,895 27,679 13,723 (22,808) 86,489
           
Expenses by input type          
Subsidies and transfer payments 19,253 2,335 (110) 21,478
Personnel expenses 5,893 8,250 2,149 (6) 16,286
Operating expenses 36,064 15,081 9,539 (21,664) 39,020
Finance costs 2,422 355 973 (579) 3,171
FX losses/(gains)
GSF and ACC liability revaluation movements (153) 781 628
Total expenses 63,479 26,802 12,661 (22,359) 80,583
           
Expenses by functional classification          
Social security and welfare 19,636 4,068 (481) 23,223
Health 10,826 9,089 (9,786) 10,129
Education 9,750 7,195 23 (6,587) 10,381
Other functional classifications 13,824 6,095 11,665 (4,926) 26,658
Forecast new operating spending 7,021 7,021
Finance costs and FX losses/(gains) 2,422 355 973 (579) 3,171
Total expenses 63,479 26,802 12,661 (22,359) 80,583
Net surplus TEIs 73 73
Operating balance 4,416 950 1,062 (449) 5,979
Forecast Statement of Financial Position (institutional form) as at 30 June 2011
  Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total Crown
($ million) 2011 $m 2011 $m 2011 $m 2011 $m 2011 $m
Assets          
Financial assets 61,353 23,029 9,471 (9,526) 84,327
Physical assets 25,476 42,537 23,128 91,141
Investment in SOEs and CEs (including TEIs) 25,296 5,861 (25,296) 5,861
Other assets 15,761 2,486 2,943 (548) 20,642
Total assets 127,886 73,913 35,542 (35,370) 201,971
Liabilities          
Borrowings 38,276 5,580 15,206 (9,526) 49,531
Other liabilities 28,110 20,243 4,077 (786) 51,649
Total liabilities 66,386 25,823 19,283 (10,312) 101,180
Net worth 61,500 48,090 16,259 (25,058) 100,791
           
Taxpayer Funds 50,509 27,382 10,213 (25,058) 63,046
Revaluation reserves 10,991 20,708 5,753 37,452
Minority Interest -   293 293
Net worth 61,500 48,090 16,259 (25,058) 100,791
           
Analysis of financial assets and borrowings          
Advances and cash 11,978 2,816 8,220 (3,349) 19,665
MSDs and equity investments 49,375 20,213 1,251 (6,177) 64,662
Total financial assets 61,353 23,029 9,471 (9,526) 84,327
Borrowings - Sovereign guaranteed 38,276 (5,995) 32,276
Borrowings - Non-sovereign guaranteed 5,580 15,206 (3,531) 17,255
Total borrowings 38,276 5,580 15,206 (9,526) 49,531
Borrowings less financial assets (23,077) (17,449) 5,735 (34,796)
Net Crown debt 7,525 Net Crown debt and gross sovereign-issued debt differ from the analysis above due to elimination of cross-holdings of Govt stock and adding back the NZS Fund and GSF assets.
Gross sovereign-issued debt 41,082

Notes to the Forecast Financial Statements#

  2006 Actual 2007 Previous Budget 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
NOTE 1:  Revenue Collected Through the Crown's Sovereign Power        
Income Tax Revenue (accrual)              
Individuals              
Source deductions 19,936 20,534 21,231 22,140 23,121 24,480 25,838
Other persons 4,940 4,393 4,477 4,506 4,681 4,984 5,229
Refunds (953) (962) (1,039) (1,047) (1,045) (1,049) (1,072)
Fringe benefit tax 450 425 443 465 486 513 534
Total Individuals 24,373 24,390 25,112 26,064 27,243 28,928 30,529
               
Corporate Tax              
Gross companies tax 9,413 7,966 7,799 7,904 8,449 9,287 9,609
Refunds (270) (205) (240) (245) (260) (260) (260)
Non-resident withholding tax 1,096 874 1,178 1,115 1,183 1,240 1,296
Foreign-source dividend withholding payments 160 220 168 173 178 183 188
Total Corporate Tax 10,399 8,855 8,905 8,947 9,550 10,450 10,833
               
Other Income Tax              
Resident withholding tax on interest income 1,879 2,079 2,115 2,189 2,142 2,090 2,141
Resident withholding tax on dividend income 74 56 81 86 88 90 92
Estate and gift duties 3 2 2 2 2 2 2
Total Other Income Tax 1,956 2,137 2,198 2,277 2,232 2,182 2,235
Total Income Tax 36,728 35,382 36,215 37,288 39,025 41,560 43,597
               
Goods and Services Tax              
Gross goods and services tax 18,241 18,542 18,830 19,563 20,457 21,184 22,151
Refunds (7,664) (8,028) (8,121) (8,382) (8,839) (9,285) (9,705)
Total Goods and Services Tax 10,577 10,514 10,709 11,181 11,618 11,899 12,446
               
Other Taxation              
Petroleum fuels excise 852 914 893 906 920 930 940
Tobacco excise2 834 145 246 150 152 154 155
Customs duty 1,083 1,773 1,724 1,842 1,819 1,830 1,868
Road user charges 731 793 772 819 877 932 988
Alcohol excise 516 537 544 565 586 604 622
Gaming duties 275 256 230 219 218 218 216
Motor vehicle fees 221 223 224 229 238 245 250
Energy resources levies 73 58 69 66 64 61 64
Approved issuer levy (AIL) and cheque duty 83 74 82 79 79 79 79
Total Other Indirect Taxation 4,668 4,773 4,784 4,875 4,953 5,053 5,182
Total Indirect Taxation 15,245 15,287 15,493 16,056 16,571 16,952 17,628
Total Tax Revenue Collected 51,973 50,669 51,708 53,344 55,596 58,512 61,225
               
Other Sovereign Revenues (accrual)              
ACC levies 2,326 2,189 2,171 2,186 2,230 2,292 2,349
Fire Service levies 254 253 255 256 257 258 259
EQC levies 82 83 84 86 87 89 91
Other levies 749 654 784 813 834 844 856
Total Other Sovereign Revenues 3,411 3,179 3,294 3,341 3,408 3,483 3,555
Forecast revenue allocation ..  ..  ..  ..  (1,000) (1,000) (1,000)
Total Sovereign Revenue 55,384 53,848 55,002 56,685 58,004 60,995 63,780

2 From 2006/07 a larger portion of tobacco products will be supplied by imports. This will increase customs duty at the expense of tobacco excise duty.

  2006 2007 Previous 2007 2008 2009 2010 2011
($ million) Actual Budget Forecast Forecast Forecast Forecast Forecast
NOTE 1:  Receipts Collected Through the Crown's Sovereign Power          
Income Tax Receipts (cash)              
Individuals              
Source deductions 19,897 20,534 21,231 22,140 23,121 24,480 25,838
Other persons 4,883 5,189 5,189 5,324 5,421 5,823 6,053
Refunds (1,503) (1,780) (1,776) (1,920) (1,927) (1,930) (1,940)
Fringe benefit tax 450 421 450 460 482 503 527
Total Individuals 23,727 24,364 25,094 26,004 27,097 28,876 30,478
               
Corporate Tax              
Gross companies tax 8,512 8,602 8,431 8,524 8,501 9,943 10,285
Refunds (833) (746) (1,000) (877) (887) (904) (907)
Non-resident withholding tax 1,093 874 1,128 1,115 1,183 1,240 1,296
Foreign-source dividend withholding payments 157 220 169 173 178 183 188
Total Corporate Tax 8,929 8,950 8,728 8,935 8,975 10,462 10,862
               
Other Income Tax              
Resident withholding tax on interest income 1,862 2,078 2,111 2,190 2,143 2,091 2,142
Resident withholding tax on dividend income 74 56 81 86 88 90 92
Estate and gift duties 2 2 2 2 2 2 2
Total Other Income Tax 1,938 2,136 2,194 2,278 2,233 2,183 2,236
Total Income Tax 34,594 35,450 36,016 37,217 38,305 41,521 43,576
               
Goods and Services Tax              
Gross goods and services tax 17,705 18,183 18,275 19,202 20,096 20,823 21,790
Refunds (7,216) (7,669) (7,568) (8,019) (8,476) (8,922) (9,342)
Total Goods and Services Tax 10,489 10,514 10,707 11,183 11,620 11,901 12,448
               
Other Taxation              
Petroleum fuels excise 847 914 893 906 920 930 940
Tobacco excise 842 145 246 150 152 154 155
Customs duty 1,074 1,773 1,724 1,842 1,819 1,830 1,868
Road user charges 721 793 772 819 877 932 988
Alcohol excise 514 537 544 565 586 604 622
Gaming duties 273 257 231 220 219 219 217
Motor vehicle fees 199 223 224 229 238 245 250
Energy resources levies 73 58 71 66 64 61 64
Approved issuer levy (AIL) and cheque duty 80 74 82 79 80 79 79
Total Other Indirect Taxation 4,623 4,774 4,787 4,876 4,955 5,054 5,183
Total Indirect Taxation 15,112 15,288 15,494 16,059 16,575 16,955 17,631
Total Tax Receipts Collected 49,706 50,738 51,510 53,276 54,880 58,476 61,207
               
Other Sovereign Receipts (cash)              
ACC levies 2,256 2,105 2,159 2,186 2,220 2,273 2,302
Fire Service levies 254 253 255 256 257 258 259
EQC levies 83 83 84 86 88 90 91
Other levies 653 606 639 669 682 683 685
Total Other Sovereign Receipts 3,246 3,047 3,137 3,197 3,247 3,304 3,337
Forecast revenue allocation ..  ..  ..  ..  (1,000) (1,000) (1,000)
Total Sovereign Receipts 52,952 53,785 54,647 56,473 57,127 60,780 63,544
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
NOTE 2:  Sale of Goods and Services          
The Statement of Segments shows the sale of goods and services as a total for each area of the Crown Estate (ie, total sales for core Crown, Crown entities and SOEs).  The total for Crown entities includes such items as lottery sales, housing rental, CRI sales and so on.  The total sales of SOEs represents the majority of their income from electricity generation and distribution services, postal services, advertising, air travel sales and so on.
NOTE 3:  Investment Income          
NZS Fund investment income 1,139 856 963 1,067 1,307 1,576 1,870
Interest income 2,145 1,873 2,633 2,618 2,859 2,779 2,843
Gains/(losses) on marketable securities deposits 1,436 599 849 585 509 501 532
Dividends 117 71 123 133 143 151 158
Gain on sale of Southern Hydro 630 ..  ..  ..  ..  ..  .. 
Student loans 344 269 493 389 425 462 497
Other investment income 17 19 54 11 12 11 11
Total Investment Income 5,828 3,687 5,115 4,803 5,255 5,480 5,911
               
NOTE 4:  Other Revenue              
Unrealised (losses)/gains arising from changes              
in the value of commercial forests 15 ..  ..  ..  ..  ..  .. 
GSF contributions 104 75 76 65 56 47 38
Petroleum royalties 61 55 60 60 59 56 32
Cost recovery income from Fisheries 29 30 30 30 30 30 30
Other 1,823 2,201 2,128 2,177 2,245 2,243 2,283
Total Other Revenue 2,032 2,361 2,294 2,332 2,390 2,376 2,383
               
NOTE 5:  Subsidies and Transfer Payments          
Social assistance grants              
New Zealand Superannuation 6,414 6,782 6,767 7,127 7,486 7,922 8,405
ACC payments 1,708 1,845 1,842 1,970 2,088 2,208 2,335
Unemployment Benefit 712 783 655 649 638 628 628
Domestic Purposes Benefit 1,493 1,504 1,472 1,486 1,493 1,511 1,536
Family Support 1,285 1,725 1,748 2,027 2,040 2,032 2,025
Student allowances 354 364 380 389 395 399 403
Other social assistance grants 4,393 4,922 4,904 5,105 5,275 5,445 5,611
Subsidies 127 140 135 127 127 127 127
Other transfer payments              
Official development assistance 330 88 88 126 126 367 367
Other 34 36 40 40 41 41 41
Total Subsidies and Transfer Payments 16,850 18,189 18,031 19,046 19,709 20,680 21,478
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
NOTE 6: Personnel Expenses          
The Statement of Institutional Segments shows the personnel expenses as a total for each area of the total Crown (ie, total personnel expenses for core Crown, Crown entities and SOEs).
GSF pension costs (excluding liability movement) 1,392 1,068 1,123 1,100 1,137 1,159 1,180
Other pension expenses 206 131 137 137 137 138 138
Other personnel expenses 13,518 13,937 14,277 14,591 14,813 14,855 14,968
Total Personnel Expenses 15,116 15,136 15,537 15,828 16,087 16,152 16,286
               
NOTE 7: Operating Expenses            
Operating expenses relate to those expenses incurred in the course of undertaking the functions and activities of every entity included in the Crown financial statements, excluding those separately identified in the Statement of Financial Performance and other notes.   Items disclosed separately are those required by accounting standards (and are expanded on further in the annual Crown financial statements).   These include depreciation, rental costs and goodwill amortised.Other operating costs is the large residual.  Most of it represents the payment made for services provided by third parties (roading maintenance for example) or for raw materials (fuel, medicines or inventory for example).  It also includes other day-to-day operating costs.
Depreciation expense (by class of asset):          
Buildings 880 900 913 962 1,006 1,014 1,018
Electricity distribution network 109 118 95 102 111 119 127
Electricity generation assets 198 216 242 269 319 372 381
Specialist military equipment (SME) 187 216 251 286 310 335 445
State highways 252 236 235 243 251 260 269
Aircraft (ex SME) 102 246 246 225 185 168 179
Other plant and equipment 905 913 967 1,045 1,084 1,093 1,085
Other assets 75 73 63 66 68 68 67
Total depreciation costs 2,708 2,918 3,012 3,198 3,334 3,429 3,571
Other operating items:              
Rental and leasing costs 820 787 820 845 876 909 939
Change in provision for doubtful debts 429 254 253 192 189 186 301
Write off of bad debts 81 61 400 74 74 74 74
Goodwill amortised 75 89 88 87 88 88 88
Grants paid 1,578 1,162 1,902 1,965 2,045 2,105 2,100
Lottery prize payments 398 371 397 412 429 446 464
Loss/(gain) on sale of assets 93 ..  ..  ..  ..  ..  .. 
Write down of existing student loans to fair value 1,415 ..  ..  ..  ..  ..  .. 
Write down of new loans to fair value 328 381 489 517 543 568 592
Other operating expenses 21,352 23,797 23,042 23,275 23,389 23,613 23,870
Total operating expenses 29,277 29,820 30,403 30,565 30,967 31,418 31,999
               
NOTE 8: Forecast New Operating Spending          
New operating spending up to Budget 2007 ..  320 216 5 106 8 8
Forecast new operating spending ..  ..  ..  1,381 3,213 5,093 7,013
Total Forecast for Future New Spending ..  320 216 1,386 3,319 5,101 7,021
The forecast new operating spending represents an amount that indicates in broad terms the potential spending increases that could be introduced in each future budget round. The forecasts include $1.94 billion for Budget 2007, $1.98 billion for Budget 2008, $2.02 billion for Budget 2009 and $2.06 for Budget 2010.  The remaining amounts are lower as some spending has already been allocated (e.g. as part of Health sector funding packages, the Defence funding package, Official Development Assistance and some Education funding), leaving indicative totals of around $1.4 billion for Budget 2007, $1.9 billion for Budgets 2008, 2009 and 2010.
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
NOTE 9:  Cash and Marketable Securities, Deposits & Equity Investments    
By category:              
Total Cash 4,168 2,902 3,699 3,887 4,102 4,386 4,618
               
Marketable securities and deposits 27,668 25,249 31,865 34,365 32,656 31,987 35,134
Equity investments (e.g. shares) 15,394 17,708 17,034 19,709 22,654 25,805 29,172
Reserve position at the International Monetary Fund 458 275 388 380 373 365 356
Total MSDs and Equity Investments 43,520 43,232 49,287 54,454 55,683 58,157 64,662
Total Cash and MSDs & Equity Investments 47,688 46,134 52,986 58,341 59,785 62,543 69,280
               
By portfolio management:              
Reserve Bank and DMO managed funds 19,284 16,693 22,183 24,074 21,235 19,504 21,589
New Zealand Superannuation Fund 8,555 11,765 11,073 13,754 16,773 20,100 23,740
Government Superannuation Fund 3,959 3,449 3,779 3,854 3,926 3,990 4,046
ACC portfolio 7,882 7,940 8,345 9,034 9,668 10,236 10,699
EQC portfolio 1,943 2,390 1,951 2,142 2,348 2,571 2,813
Other holdings 1,897 995 1,956 1,596 1,733 1,756 1,775
Total MSDs and Equity Investments 43,520 43,232 49,287 54,454 55,683 58,157 64,662
The asset values above are net of any cross-holdings.  For example the asset portfolios of the NZS Fund, GSF, EQC and ACC currently all hold amounts of NZ Government Stock.  For financial reporting purposes these amounts are eliminated within the consolidated financial statements.  The total portfolios are shown below, along with commentary on the restricted nature of some of the assets (for example the GSF assets are only available for the payment of GSF benefits – because of the restricted nature of these assets they are excluded from the definition of net debt).
Nature of financial assets – some are restricted in their purpose
Within the financial assets above, several portfolios are restricted in their nature in that they are only available to meet very specified purposes and are not available (by statute or other reasons) for general use by the Crown.  It is for this reason that such assets are excluded from the definition of net debt – one of the Crown’s key fiscal policy indicators.
New Zealand Superannuation Fund
The assets of the NZS Fund is the Government’s means of building up assets to partially pre-fund future NZS expenses and may only be used for NZ Superannuation.  The Government’s contributions to the NZS Fund are calculated over a 40-year rolling horizon to ensure Superannuation entitlements over the next 40 years can be met.
Government Superannuation Fund
The GSF Authority administers the financial assets of the GSF totalling around $4.2 billion (30 June 2006).  These assets result from contributions by employees built up through time and can only be applied to the ongoing payment of GSF benefits (as provided by the GSF Act).  Also refer Note 15 Outstanding Liability associated with GSF benefits.
EQC – Natural Disaster Fund (NDF)
The EQC is New Zealand's primary provider of seismic disaster insurance to residential property owners.  EQC administers the NDF, comprising capital and reserves. EQC draws on the NDF money to pay out claims for damage caused by natural disasters.
ACC portfolio
The ACC manages the ACC scheme.  At present there is a substantial outstanding claims liability associated with past claims in excess of $12.7 billion (30 June 2006) and it is expected to increase.  To manage the payment of these claims in the future, ACC is building up a matching portfolio of assets.  The target is to have the residual claims fully funded by 2014.  Also refer Note 16 Outstanding Claims Liability.
Individual portfolio information (including cross holdings of NZ Government Stock)    
NZS Fund 9,726 13,038 12,303 15,282 18,636 22,333 26,377
GSF financial assets 4,166 3,833 3,936 4,015 4,090 4,156 4,215
ACC portfolio 9,080 9,443 9,249 10,016 10,722 11,355 11,870
EQC portfolio 5,232 5,638 5,591 5,992 6,420 6,879 7,372
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
NOTE 10:  Advances            
Student loans (see analysis below) 5,569 5,868 5,839 6,375 6,896 7,412 7,891
Kiwibank deposits 2,609 3,425 3,967 5,126 6,274 6,274 6,274
Residential care loans 71 75 67 63 59 55 51
Māori development rural lending 80 63 68 75 81 87 93
Other 429 590 548 663 717 722 738
Total Advances 8,758 10,021 10,489 12,302 14,027 14,550 15,047
               
Analysis of Student Loans              

Stock

             
Nominal loan balance 8,370 8,784 8,988 9,678 10,345 10,997 11,602
Adjustment to fair value (2,801) (2,916) (3,149) (3,303) (3,449) (3,585) (3,711)
Total Student Loan Balance 5,569 5,868 5,839 6,375 6,896 7,412 7,891
               

Movements

             
Opening balance 6,465 5,472 5,569 5,839 6,375 6,896 7,412
Initial fair value write down (1,415) ..  ..  ..  ..  ..  .. 
Amount borrowed in current year 1,046 1,157 1,169 1,293 1,360 1,430 1,480
Fair value write down on new borrowings (328) (381) (489) (517) (543) (568) (592)
Repayments made during the year (550) (634) (560) (612) (702) (788) (885)
Other impairment (13) (15) (343) (17) (19) (20) (21)
Interest unwind 358 87 484 80 416 452 487
Other movements 6 182 9 9 9 10 10
Closing Student Loan Balance 5,569 5,868 5,839 6,375 6,896 7,412 7,891
               
NOTE 11:  Receivables              
Taxes receivable 8,720 5,607 8,873 8,992 9,767 9,867 9,845
Accounts receivable 5,259 4,706 5,272 5,270 5,401 5,494 5,608
Receivable from the sale and purchase of Maui gas 74 32 24 16 4 ..  .. 
Prepayments 421 189 207 203 204 203 204
Total Receivables 14,474 10,534 14,376 14,481 15,376 15,564 15,657
               
NOTE 12:  Other Investments              
International Bank for Reconstruction and Development 86 76 86 86 86 86 86
Asian Development Bank 92 81 92 92 92 92 92
Other 145 129 219 252 281 304 310
Total Other Investments 323 286 397 430 459 482 488
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
NOTE 13:  Property, Plant and Equipment          

By Type

             
Gross Carrying Value              
Land (valuation) 13,803 11,801 14,140 14,327 14,644 14,878 15,057
Properties intended for sale (valuation) 467 454 467 473 470 468 466
Buildings (valuation) 21,859 22,487 23,206 23,968 25,154 25,610 26,272
Electricity distribution network (valuation) 2,311 2,668 2,487 2,758 3,174 3,808 4,527
Electricity generation assets (valuation) 8,536 8,428 9,531 10,700 11,768 12,543 13,119
Aircraft (ex SME) (valuation) 2,068 2,566 2,486 2,734 2,990 3,232 3,807
State highways (valuation) 17,948 16,757 19,304 20,226 21,188 22,164 23,253
Specialist military equipment (valuation) 3,422 4,013 4,266 4,642 4,861 5,273 5,347
Other plant and equipment (cost) 9,692 10,211 10,588 11,738 12,795 13,612 14,298
Other assets (valuation) 7,965 7,250 7,888 8,149 7,893 7,959 8,090
Total Gross Carrying Value 88,071 86,635 94,363 99,715 104,937 109,547 114,236
               
Accumulated Depreciation              
Buildings 1,307 2,883 2,447 3,107 4,057 4,686 5,504
Electricity distribution network 299 421 385 472 563 656 753
Electricity generation assets 111 525 349 611 925 1,291 1,666
Aircraft (ex SME) ..  444 235 478 729 989 1,258
State highways ..  689 712 955 1,206 1,466 1,734
Specialist military equipment 344 1,017 601 886 1,196 1,531 1,976
Other plant and equipment 6,008 6,420 6,285 7,102 7,993 8,711 9,453
Other assets 561 373 427 470 527 640 751
Total Accumulated Depreciation 8,630 12,772 11,441 14,081 17,196 19,970 23,095
               
Net Carrying Value              
Land (valuation) 13,803 11,801 14,140 14,327 14,644 14,878 15,057
Properties intended for sale (valuation) 467 454 467 473 470 468 466
Buildings (valuation) 20,552 19,604 20,759 20,861 21,097 20,924 20,768
Electricity distribution network (valuation) 2,012 2,247 2,102 2,286 2,611 3,152 3,774
Electricity generation assets (valuation) 8,425 7,903 9,182 10,089 10,843 11,252 11,453
Aircraft (ex SME) (valuation) 2,068 2,122 2,251 2,256 2,261 2,243 2,549
State highways (valuation) 17,948 16,068 18,592 19,271 19,982 20,698 21,519
Specialist military equipment (valuation) 3,078 2,996 3,665 3,756 3,665 3,742 3,371
Other plant and equipment (cost) 3,684 3,791 4,303 4,636 4,802 4,901 4,845
Other assets (valuation) 7,404 6,877 7,461 7,679 7,366 7,319 7,339
Total Net Carrying Value 79,441 73,863 82,922 85,634 87,741 89,577 91,141
               

By Holding

             
Freehold assets 77,858 72,839 81,737 84,464 86,586 88,436 90,014
Leasehold assets 1,583 1,024 1,185 1,170 1,155 1,141 1,127
Net carrying value 79,441 73,863 82,922 85,634 87,741 89,577 91,141
               
NOTE 14:  Payables and Provisions          
Accounts payable and accruals 8,899 7,380 8,164 8,779 9,053 8,978 9,170
Taxes repayable 3,570 2,742 3,537 3,537 3,537 3,537 3,537
Provisions 477 514 355 371 421 432 453
Provision for Kyoto Protocol 656 582 609 609 609 609 609
National Provident Fund guarantee 998 944 998 998 998 998 998
Provisions for employee entitlements 1,533 1,397 1,423 1,423 1,431 1,431 1,431
Total Payables and Provisions 16,133 13,559 15,086 15,717 16,049 15,985 16,198

NOTE 15: GSF Liability

The Government Superannuation Fund past service liability (the GSF liability) has been calculated by the Government Actuary as at 31 October 2006 (the valuation date) for inclusion within the 2006 Half Year Update. The GSF liability arises from closed schemes for past and present public sector employees (set out in the GSF Act 1956). A projected Aggregate Funding method, based on 31 October 2006 membership data, was used for the valuation. This method requires the benefits payable from the GSF in respect of past service to be calculated and then discounted back to the valuation date.

The GSF liability included in the 2006 Half Year Update was calculated using discount rates derived from the market yield curve as at 31 October 2006. This resulted in a long-term after-tax discount rate of 3.7% (3.8% as at 30 June 2006). The principal long-term financial assumptions used in the calculation were an inflation rate of 2.25% and an annual salary increases rate, before any promotional effects, of 3.0%.

The 2006/07 movement in the net unfunded liability is $131 million (reflecting an increase in the GSF liability of $299 million and an increase in the net assets of $168 million). The change in underlying economic assumptions accounted for $142 million of the increase (mainly due to the decrease in the discount rate). The changes from 2007/08 onwards reflect the expected net movement in investment income, contributions and benefit payments only.

Presentation approach
The projected GSF liability is included within total liabilities of the Crown. The Government Superannuation Fund has a portfolio of assets that partially offset the GSF liability. The assets (less cross holdings of NZ Government stock) are included in the asset portion of the Crown's overall balance sheet. The component parts are shown in the reconciliation below.

($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
GSF liability and asset information              
GSF liability              
Opening GSF liability 14,952 15,361 15,231 15,530 15,575 15,559 15,462
Net projected change 279 (17) 299 45 (16) (97) (153)
Closing GSF liability 15,231 15,344 15,530 15,575 15,559 15,462 15,309
               
Less net assets available to the GSF scheme              
Opening net asset value 3,521 3,768 3,793 3,961 4,039 4,110 4,176
Investment valuation changes 368 186 294 196 199 203 204
Contribution and other income less membership payments (96) (97) (126) (118) (128) (137) (144)
Closing net asset value 3,793 3,857 3,961 4,039 4,110 4,176 4,236
               
Net unfunded liability of the GSF schemes              
Opening unfunded liability 11,431 11,593 11,438 11,569 11,536 11,449 11,286
Net projected change 7 (106) 131 (33) (87) (163) (213)
Net unfunded liability 11,438 11,487 11,569 11,536 11,449 11,286 11,073

NOTE 16: ACC Claims Liability

Calculation information PricewaterhouseCoopers Actuarial Pty Ltd have prepared the independent actuarial estimate of the ACC outstanding claims liability as at 30 June 2006. 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 administrative expenses of managing these claims.

The key economic variables that impact on changes to the valuation are the long-term Labour Cost Index (LCI), average weekly earnings and the discount rate of 5.75% (5.83% at 30 June 2006). Other key variables in each valuation is the assumed rate at which long-term claimants will leave the scheme over the period. This assessment is largely based on scheme history.

The forecasts are based on currently approved levy rates. ACC claims expenditure is forecast to increase at a greater rate than levy revenue at those levy rates. As a consequence, ACC's net reserves position is forecast to deteriorate from 2008 to 2011. Levy rates are reviewed annually to ensure that new claims are fully funded and that the required components within the claims liability relating to older claims are fully-funded by 2014.

Explanation of change

The total change in the gross ACC liability compared to the expected movement for 2006/07 from the 30 June 2006 estimate is an increase of $109 million. The main driver of the change has been the decrease in the discount rate since the 30 June 2006 valuation.

Presentation approach

The projected gross liability is included within total liabilities. The ACC has available to it a portfolio of assets that partially offset the gross liability. The assets (less cross holdings of NZ Government stock) are included in the asset portion of the Crowns' overall balance sheet.

($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
ACC liability and asset information          
Gross ACC liability              
Opening gross liability 11,384 12,581 12,715 13,543 14,283 15,029 15,791
Net projected change 1,321 674 828 740 746 762 781
Transfer from other insurer 10 ..  ..  ..  ..  ..  .. 
Closing gross liability 12,715 13,255 13,543 14,283 15,029 15,791 16,572
               
Less net assets available to ACC              
Opening net asset value 7,217 8,813 8,880 9,681 10,427 11,122 11,750
Net projected change 1,663 802 801 746 695 628 553
Closing net asset values 8,880 9,615 9,681 10,427 11,122 11,750 12,303
               
Net ACC reserves (net liability)              
Opening reserves position (4,167) (3,768) (3,835) (3,862) (3,856) (3,907) (4,041)
Net projected change 332 128 (27) 6 (51) (134) (228)
Closing reserves position (net liability) (3,835) (3,640) (3,862) (3,856) (3,907) (4,041) (4,269)
               
NOTE 17:  Revaluation reserves          
Asset Revaluation Reserves              
Opening Balance 27,988 27,989 37,633 37,452 37,452 37,452 37,452
Net revaluations              
Land and buildings 2,386 ..  55 ..  ..  ..  .. 
State highways 2,559 ..  ..  ..  ..  ..  .. 
Electricity generation assets 1,419 ..  ..  ..  ..  ..  .. 
Other assets 3,505 ..  ..  ..  ..  ..  .. 
Total Net Revaluations 9,869 ..  55 ..  ..  ..  .. 
Transfer to taxpayer funds (224) ..  (236) ..  ..  ..  .. 
Closing Balance 37,633 27,989 37,452 37,452 37,452 37,452 37,452
($ million) 2006 Actual 2007 Previous Budget 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
 
 
NOTE 18: Core Crown              
Reconciliation of Core Crown Forecast Net Cash Flows from Operations with Forecast Net Cash Proceeds from Domestic Bonds (flows of the NZS Fund and GSF are excluded)
Core Crown Cash Flows from Operations              
Total tax receipts 50,507 51,499 52,412 54,187 55,923 59,622 62,497
Total other sovereign receipts 539 503 468 515 528 529 530
Forecast revenue allocation .. .. .. .. (1,000) (1,000) (1,000)
Interest, profits and dividends 1,893 1,035 1,916 1,710 1,832 1,749 1,817
Sale of goods & services and other receipts 1,449 1,387 1,465 1,372 1,382 1,389 1,361
Subsidies and transfer payments (15,357) (16,820) (16,676) (17,616) (18,193) (18,833) (19,513)
Personnel and operating expenses (28,167) (30,815) (30,616) (31,849) (32,128) (32,195) (32,252)
Finance costs (2,005) (1,781) (2,146) (2,120) (2,161) (2,111) (2,174)
Forecast new operating spending .. (320) (216) (1,386) (3,319) (5,101) (7,021)
Net Cash Flows from Core Crown Operations 8,859 4,688 6,607 4,813