Half Year Economic and Fiscal Update 2018

An introduction to the Half Year Economic and Fiscal Update#

Print this section

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

Sharing what we do#

Print this section

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

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

Making it New Zealander-centric#

Print this section

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

We now provide a living standards perspective in many of the Treasury's core documents, including our Annual Report,He Puna Hao Pātiki: 2018 Investment Statement and He Tirohanga Mokopuna: 2016 Statement on the Long-term Fiscal Position.

Understanding our path#

Print this section

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

Statement of Responsibility#

Print this section

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

On the basis of the economic and fiscal information available to it, the Treasury has used its best professional judgement in preparing, and supplying the Minister of Finance with this Economic and Fiscal Update. The Update incorporates the fiscal and economic implications of both government decisions and other circumstances as at 27 November 2018 that were communicated to me by the Minister of Finance in accordance with the requirements of the Public Finance Act 1989 and of other economic and fiscal information available to the Treasury as at 27 November 2018. This Update does not incorporate any decisions, circumstances or statements that the Minister of Finance has determined, in accordance with section 26V of the Public Finance Act 1989, should not be incorporated in this Update.

Gabriel Makhlouf
Secretary to the Treasury

5 December 2018

 

To enable the Treasury to prepare this Economic and Fiscal Update I have ensured the Secretary to the Treasury has been advised, in accordance with the requirements of the Public Finance Act 1989, of all government decisions and other circumstances as at 27 November 2018 of which I was aware and that had material economic or fiscal implications.

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

Hon Grant Robertson
Minister of Finance

6 December 2018

Executive Summary#

Print this section

Sources: Stats NZ, the Treasury

The New Zealand economy continues to expand steadily, with growth around trend. Supported by government spending, ongoing strength in the labour market, and solid growth abroad, real gross domestic product (GDP) growth is expected to increase to 3.0%, on average, over the next couple of years.

As in the Budget Economic and Fiscal Update (Budget Update), the economy appears to be operating around full capacity following several years of strong growth. The unemployment rate has declined noticeably and wage growth is expected to increase, supported by ongoing labour market tightness and policies for low-paid workers. Rising incomes continue to support consumption, despite household consumption growth easing over the past year.

Looking beyond 2018/19, business and residential investment is forecast to pick up while solid growth in key trading partners supports net exports. However, over the latter half of the forecasts, tightening monetary conditions and easing net immigration contribute to real GDP growth slowing to 2.3% by 2022/23. Inflation is forecast to increase to 2.0% over 2019 owing to the impact of recent fuel price rises. It then remains around this level over the forecast period as wage and other pressures support core inflation.

Nominal GDP in recent quarters has been slightly lower than anticipated in the Budget Update, driven by a lower terms of trade. However, a broadly similar outlook for real GDP combined with higher inflation means that the nominal value of GDP in 2021/22 is now forecast to be slightly higher than in the Budget Update.

Following stronger than expected year-end results for 2017/18, the fiscal position is better than previously forecast and continues to improve across the forecast period. However, this improvement is now expected to be slower than in the Budget Update as higher core Crown tax revenue and new policy measures, such as increases in road user chargers and petrol excise rates, are offset by increased spending on transport and social assistance. As a result, the operating balance before gains and losses (OBEGAL) is forecast to be lower across most forecast years, reaching a surplus of $8.4 billion (2.3% of GDP) in 2022/23. 

As in the Budget Update, capital spending is expected to exceed net operating cash flows over the first three years of the forecast period despite higher tax receipts. This leads to residual cash deficits in these years and an increasing value of net core Crown debt, peaking at $66.9 billion in 2020/21. However, the residual cash balance is then forecast to return to surplus and the value of net core Crown debt declines to $63.5 billion in 2022/23 (17.4% of GDP). Relative to the Budget Update, net core Crown debt is lower across all years of the forecast period due to the stronger 2017/18 starting position.

This outlook is subject to a range of assumptions, risks and uncertainties. For the economic forecasts, the international outlook presents a number of downside risks that, if they materialise, could affect New Zealand’s export growth, terms of trade and exchange rate. These include rising trade tensions, political instability and uncertainty about the impacts of US monetary policy tightening. Meanwhile, on the domestic front, key uncertainties exist around how households will respond to rising interest rates, the impact of business confidence on investment and the extent to which capacity constraints may prove binding. Any changes to the economic outlook would flow through to changes in the fiscal position.

Economic Outlook#

Print this section

Overview#

Print this section

• The economy continues to expand at a pace that is close to trend, supported by population growth, government spending, accommodative monetary policy and solid trading partner growth. Real gross domestic product (GDP) growth is expected to increase to 3.0%, on average, over 2018/19 and 2019/20, as residential investment strengthens and net exports pick up. The unemployment rate has declined noticeably, falling to 3.9% in the September quarter. Higher global fuel prices and a decline in the New Zealand dollar have driven a sharp, but temporary, increase in headline inflation. Core inflation has increased more gradually. As growth picks up, continued labour market tightness, combined with a range of labour market policies, including fair pay agreements, pay equity settlements and minimum wage increases, is expected to underpin a rise in wage growth and contribute to a sustained increase in inflation.
• Beyond 2019/20, the outlook is for GDP growth to ease as monetary conditions tighten and net export growth returns to average. Net migration inflows are projected to subside, which also dampens demand.
• Nominal GDP continues to grow at a solid pace, although growth has eased in recent quarters and is a bit lower than anticipated in the Budget Update. Real GDP growth over the year ahead is slower than in the Budget Update, but is little changed thereafter. Inflation is a bit higher over the entire forecast horizon, reflecting recent outcomes and a later withdrawal of monetary stimulus. Overall, the nominal value of GDP in 2021/22 is $0.8 billion higher than in the Budget Update, at $350.6 billion.
• The global economic outlook remains positive. Output growth remains solid in most key trading partners, although growth has slowed over the year. Increases in trade protection are likely to be contributing to slower growth. Inflation pressures are gradually increasing and some countries are reducing monetary policy stimulus. Trading partner growth is expected to slow further but to remain above trend, leading to higher global inflation.
• The balance of risks has evolved. Domestically, weak business confidence may reduce real activity. However, capacity pressures may lead to higher wage growth and higher inflation, which would be positive for nominal GDP and tax revenue. The global outlook has become more uncertain and global growth could slow more sharply than expected, depressing commodity export prices and nominal GDP growth.

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

Economic forecasts are presented on a June year basis for consistency with the fiscal forecasts. Longer time series for these variables are provided on page 137.

Notes:

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

Economic Conditions and Outlook#

Print this section

The economy is growing broadly in line with trend…

Real GDP increased 1.0% in the June quarter, following growth of 0.5% in the March quarter, keeping growth over the year steady at 2.7%. Growth over the second half of 2018 has been underpinned by continued strength in the labour market, increases in government financial support to households and favourable weather conditions that have boosted primary production. Quarterly GDP growth of 0.7% is expected for both the September and December quarters, which would take growth in the year ended December to 2.8%, broadly in line with the Treasury's estimate of potential growth. These forces continue to drive growth over the first half of 2019, taking annual average growth to 2.9% in the year ending June 2019 (Figure 1.1).

Figure 1.1 - Real GDP growth

Sources: Stats NZ, the Treasury

A key risk to growth over the 2018/19 fiscal year is the extent to which weaker business and consumer sentiment affect spending decisions (Figure 1.2). Business investment has shown signs of weakness over the first half of 2018, although the Treasury's business talks suggested that trends in activity had been broadly stable in recent months. These forecasts assume that weaker business confidence will have a further modest negative effect on business investment. Indicators of consumer spending show growth slowed in the September quarter. However, higher fuel prices, rather than lower consumer confidence, appears to be the main driver of the slowdown.

Figure 1.2 - Business and consumer confidence

Sources: NZIER, Westpac McDermott-Miller

…but there are challenges in the medium-term

The outlook for growth beyond 2018/19 will depend on how businesses respond to increasing wage and capacity pressures and on the saving choices of households. Household debt metrics have deteriorated in recent years as increases in non-financial wealth, which is heavily weighted towards housing, and low interest rates have influenced household decisions to increase consumption and reduce saving.

Consumption growth has slowed over the past year, coinciding with slower house price growth, to be roughly in line with income growth. Nonetheless, estimates of household saving remain negative and household debt levels remain high, particularly among first-home buyers and property investors (Figure 1.3).

Figure 1.3 - Household debt and saving

Sources: Stats NZ, the Treasury

High debt levels increase the sensitivity of household spending to changes in interest rates and financial circumstances. Household consumption could be weaker than forecast if households lower their expectations of gains in income or wealth. Such an outcome would be consistent with a slower pace of house price inflation or more modest wage growth than forecast.

Corporate profit margins have come under increased pressure from rising input costs and further cost increases, particularly wage costs, are expected. Firms have a range of choices about the way they respond. For example, they may increase investment by more than expected in order to boost labour productivity, or firms may seek to economise on labour inputs, which might be reflected in a slower pace of employment growth.

Growth in residential investment is being hampered by capacity constraints. Progress in mitigating these constraints will be an important driver of growth. The Government's operating surplus is forecast to continue rising. The aggregate impact of these investment and saving decisions is reflected in a current account deficit that is projected to be broadly stable, at around 3.6% of GDP, over the forecast period (Figure 1.4).

Figure 1.4 - Saving, investment and the current account balance

Sources: Stats NZ, the Treasury

Domestic Conditions#

Print this section

Household consumption is keeping pace with household income

Strong growth in household consumption resumed in the June quarter with a 1.0% increase. However, growth may have slowed in the September quarter as sharply higher fuel prices weighed on other, more discretionary, spending. Household income growth in the September quarter was supported by the implementation of the Government's Families Package as well as continued strength in the labour market.

There are few indicators of December quarter consumer spending available, although the September quarter rise in fuel prices has been reversed, which will support spending. Overall, real household consumption is forecast to grow 2.8% over the year ended December 2018, down from 4.4% over the year ended December 2017. Meanwhile, real household income growth has increased to be a little above the pace of household consumption growth.

Rising incomes support consumption…

Over the first half of 2019, household consumption growth is expected to pick up a little as real income growth rises, supported by the tight labour market and administrative wage increases for low-paid workers. Further administrative wage increases, including including fair pay agreements, pay equity settlements and minimum wage increases, are assumed to occur across the forecast period, consistent with the Government’s labour market policies. However, the impacts of the Government’s policies are highly uncertain.

Solid growth in real household incomes underpins household consumption growth of around 3.0% per year over 2019/20 and 2020/21 (Figure 1.5). Over the remainder of the forecast period, slowing population growth drives an easing in private consumption growth. Growth in per capita spending also increases over the year ahead and stabilises at 1.4% per year before slowing a little after 2021/22 as higher interest rates drag on disposable income and generate some easing in overall labour market conditions. The household saving rate is projected to move from -2.8% of disposable income towards zero a negative position to one that is slightly positive, although there is uncertainty around this judgement.[1]

Figure 1.5 - Real private consumption expenditure growth

Sources: Stats NZ, the Treasury

 

…as wage growth picks up…

Wage growth picked up over the past year. The Quarterly Employment Survey shows average hourly wages rose 3.2% in the year ending September 2018, up from 1.6% in the previous year. Large contributions to the increase came from the pay equity settlement for care and support workers, mandated minimum wage increases and from settlements of collective employment agreements (CEAs).

Over the 2019/20 year, further public sector CEAs are expected to be settled and minimum wages are assumed to increase further, in line with the Government's commitment to increase the minimum wage to $20.00 per hour by April 2021. A number of public sector pay equity claims and other measures to address the gender pay gap in the public sector are also expected to be negotiated over the forecast period. Settlement of these negotiations may impact on the private sector and reinforce the effects of broader labour market tightness on aggregate hourly wage growth, which is projected to average around 3.5% per year (Figure 1.9).

Figure 1.9 - Labour income growth

Sources: Stats NZ, the Treasury

In the national accounts, annual growth in compensation of employees, which captures growth in employment and wages (or total gross labour income), is expected to be stable at around 5.3% over the period to June 2021, before declining to 4.7% as employment growth slows.

…and employment growth remains solid

The unemployment rate declined noticeably to 3.9% in the September quarter 2018 and average hours worked per person employed rose 0.4% over the year ended September. Average hours worked are high by recent standards, although they remain well below pre-2008 levels, likely reflecting structural changes (eg, increased statutory leave) as well as survey changes. Other indicators of labour market capacity, including underutilisation and survey measures of firms' difficulty hiring labour, corroborate the picture of labour market tightness (Figure 1.10). The Treasury's business talks confirmed ongoing acute labour shortages in construction and IT.

Figure 1.10 - Labour market indicators

Sources: Stats NZ, NZIER

Estimates of spare capacity from statistical models based on past observations of output, inflation and unemployment support the judgement that supply and demand in the economy are broadly in balance or, in technical terms, that the output gap is closed (Figure 1.11).

Figure 1.11 - Unemployment and output gap

Sources: Stats NZ, the Treasury

The outlook is for employment growth to ease from its rapid pace over recent years, but to remain solid, growing at a similar pace to the working-age population. The unemployment rate is projected to remain around 4.0% over the forecast horizon, below the Treasury's estimate of the medium-term sustainable rate, with is reflected as an excess of demand relative to supply (a positive output gap) over the forecast horizon.

House price inflation has eased

Ongoing gains in household net wealth have supported household spending; net wealth increased at an average annual pace of 10.0% in the three years ending March 2017. However, over the past year net wealth grew around 4.0%, below the rate of income growth.

House prices, which are of particular importance for the net wealth positions of a large number of New Zealand households, increased a little over 5.0% over the past year, well below the rate of increase experienced over the past three years (Figure 1.12).

Figure 1.12 - House prices and net migration

Sources: Stats NZ, the Treasury

As discussed in previous Updates, much of the slowdown in house price inflation is concentrated in the Auckland region. Auckland house price inflation was particularly strong over 2015 and 2016 and well in excess of household income growth, reducing affordability. Since then, regulatory and tax changes and lower net immigration seem to have had a larger impact on house prices in Auckland than other regions. Outside Auckland, house price growth has slowed, but continues to exceed income growth.

House price inflation is assumed to ease a little over the year ahead, and to grow at a similar pace to household income thereafter. There are risks around this assumption. House prices may grow more slowly if supply expands more rapidly than projected or if demand is less supportive, which could be the case if households' desired saving rate is higher than assumed. On the other hand, demand and house prices could be stronger than assumed if net migration inflows are higher or income growth is stronger, which could be the case if wage pressures are stronger than expected.

Higher fuel prices are boosting headline inflation

Consumers Price Index (CPI) inflation of 0.9% was recorded in the September quarter, up from 0.4% in the June quarter, and annual inflation increased to 1.9% from 1.5% in June. Higher fuel prices contributed 0.3 percentage points to quarterly inflation and 0.7 percentage points to annual inflation. On an annual basis, measures of core inflation, which give little weight to irregular price movements such as fuel, have crept higher over the past year.

The gradual rise of the core inflation measures is consistent with the emergence of mild capacity pressures over past quarters, as indicated by the positive output gap over 2016 and 2017. However, that gap has subsequently closed, suggesting that interest rates have been less stimulatory than previously assumed. The implication is that interest rates do not need to rise as much as previously assumed in order to slow economic activity. This is reflected in the outlook for interest rates, which increase later and by less than in the Budget Update (Figure 1.13). A modest increase in the exchange rate is assumed to accompany the rise in interest rates, which imparts downward pressure on tradable inflation. However, there is a high degree of uncertainty around these judgements.[2]

Figure 1.13 - Monetary conditions

Sources: Reserve Bank of New Zealand, the Treasury

Annual CPI inflation is forecast to increase to 2.0% in the December 2018 quarter and to remain around 2.0% over the year to June 2019, although the sharp drop in petrol prices in recent weeks, if sustained, may result in weaker outturns. In the year ending June 2020, annual inflation is forecast to average 1.8%, as the impact of higher fuel prices in 2018 drops out of the annual calculation. Thereafter, wage and other cost pressures lift inflation to 2.0%, the mid-point of the RBNZ's 1% to 3% inflation target.

Residential investment is expected to pick up… 

Developments in the housing market also impact on GDP directly through housing investment, which includes house sales, the construction of new dwellings and improvements to existing dwellings.

Growth in residential investment has been modest over the past two years or so, with skill shortages and regulatory barriers constraining activity. Dwelling consents rose sharply over the first half of the year, which is expected to underpin further growth in residential investment over the year ahead. House sales have been broadly flat, on average, over recent months according to the Real Estate Institute of New Zealand (REINZ), consistent with the sideways movement in house prices. House sales are expected to remain around current levels.

Assumptions on the scale and timing of the KiwiBuild programme are unchanged from the Budget Update. There is considerable uncertainty around the timing and impact of the KiwiBuild programme. Overall, residential investment growth is forecast to increase to 6.1% in the year ending June 2020 (Figure 1.14). Thereafter, growth eases as interest rates rise and population growth slows.

Figure 1.14 - Real residential and business investment

Sources: Stats NZ, the Treasury

…and business investment continues to grow steadily

A range of forces, including the exchange rate, export commodity prices, financial market conditions, business confidence, and capacity utilisation affect business investment. On balance, these forces have changed little over the past year or so and business investment growth has been steady (Figure 1.14). However, business investment fell in the June quarter.

Business investment growth is expected to strengthen in the September quarter, driven by investment in the airline industry, which tends to be quite lumpy, but to be quite modest over the remainder of the 2018/19 fiscal year. Construction activity is expected to remain solid in coming years according to the National Construction Pipeline Report 2018[3]. The Government's net investment intentions, across all investment types, including construction, are similar to the Budget Update at $10.5 billion cumulatively over the next four years (refer to Table 2.7 page 33). In addition, the terms of trade are forecast to remain at a relatively high level, which supports business profitability and investment. Overall, the outlook is for business investment to grow steadily, averaging a bit over 4.0%, over the next two years before easing as interest rates rise and population growth slows.

Government spending supports demand over the year ahead

The outlook for the Government's tax and spending plans has been updated to incorporate decisions made since the Budget Update. The Government's Budget operating allowances are unchanged from the Budget Update, although timing delays to expenses in 2017/18 have increased expected expenses in 2018/19, as reported in the Government's 2018 Financial Statements. This is reflected in the large fiscal impulse for 2018/2019 (Figure 1.15).[4] In addition, the forecasts include an estimate of the potential impact of pay equity claim settlements within the forecast period.  Assumptions around timing, scale and impact are subject to a wide band of uncertainty.

Figure 1.15 - Government consumption and fiscal impulse

Sources: Stats NZ, the Treasury

External Conditions#

Print this section

Global outlook remains solid, but risks of weaker growth have increased…

Recent reports by the OECD and IMF project global growth to be stable at a high level over 2018 and 2019. Trade protection has increased, although the direct impacts of tariff measures to date, which are included in forecasts from the IMF and OECD, appear to be modest. However, as trade tensions escalate, so too do the risks of significant adverse impacts on the real economy from uncertainty and reduced investment (the Risks and Scenarios chapter contains further discussion). In the medium term, growth faces structural challenges from population ageing and weak productivity growth.

Growth in New Zealand's major advanced economy trading partners remained above average over the first half of the year, reducing spare capacity. Unemployment rates have fallen to low levels, relative to the historical experience, in a number of economies (Figure 1.16). There are signs that wage growth and inflation are picking up, although less so in the euro area and Japan.

Figure 1.16 - Unemployment rates

Source: Haver Analytics

Expansive fiscal policy is continuing to support strong growth in the US, but in other advanced trading-partner economies growth slowed in the September quarter. Indicators of growth in the current quarter suggest growth has continued at this slower pace. Uncertainty around trade prospects may be a common factor contributing to the slowdown in growth.

Growth in China, New Zealand's largest trading partner, was strong over the first half of the year, but slowed in the third quarter (Figure 1.17). Investor concerns around the impacts of the intensifying trade dispute with the US have contributed to lower equity prices and a depreciation of the yuan. The Chinese authorities have responded with measures to support financial markets and fiscal measures, including income tax reductions, to support demand.

Figure 1.17 - Growth in China and Australia

Source: Haver Analytics

Conditions across Southeast Asia have generally remained solid, supported by accommodating monetary policies, although some central banks have increased policy rates in recent months. Trade tensions appear to be weighing on sentiment in the region and, combined with the prospect of further interest rate rises in the US, pressure on the region's exchange rates and financial markets is expected to continue.

In Australia, New Zealand's second largest trading partner, economic growth has gained momentum on the back of strong household spending (Figure 1.17). Business investment has picked up, supported by public sector infrastructure spending and buoyant confidence. The Australian labour market continues to tighten with employment growing strongly and the unemployment rate falling to 5.0%, although wage growth has yet to show convincing signs of a pick-up and inflation remains a bit below the mid-point of the central bank’s target.

…and there are challenges in the medium-term

The outlook is for a general slowing of economic growth across New Zealand's major trading partners (Figure 1.18). In the US, the stimulus from fiscal policy will wane and eventually become a drag on growth, while in other advanced economies, reduced spare capacity and higher interest rates will slow growth. In addition to this cyclical slowing, ageing populations and weak past productivity growth point to weaker medium-term growth prospects than experienced in previous expansions.

Figure 1.18 - Contributions to trading partner growth

Sources: Haver Analytics, the Treasury

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

In China, the economy continues to deleverage and transition to a more sustainable economic structure. Notably, China's transition will likely continue to increase the share of household consumption in GDP. With most of New Zealand's exports to China ultimately consumed by households, China's trade share is expected to continue to increase, which offsets much of the impact of slower headline growth on the outlook for China and New Zealand's major trading partners overall.

Export outlook strengthens as dairy production increases…

Export volumes grew solidly over the year ended June 2018, increasing 3.6%, despite a decline in dairy exports, which account for a quarter of total goods exports by value (Figure 1.19). Strong growth in meat, forestry, and other food, beverage and tobacco volumes, which includes infant milk formula, more than offset the decline in dairy exports. Services export volumes, which include international visitors, have continued to grow strongly.

Figure 1.19 - Export and import volumes

Sources: Stats NZ, the Treasury

Season-to-date dairy production has been exceptionally high, pointing to increased dairy exports over the year ahead. Growth in other goods categories in 2018/19 is expected to be a little slower, on the whole, than in 2017/18. Services export growth is projected to increase as the lower exchange rate contributes to higher visitor spending. Export volumes are expected to increase 4.4% in the year ending June 2019 and to increase around 2.3% per year thereafter as dairy export growth returns to normal and the recent fall in the exchange rate reverses and weighs on visitor spending.

Goods imports volumes increased 9.2% over 2017/18, driven by strong growth in capital goods imports, including transport equipment, with the latter likely reflecting the strength of in-bound tourism. Services import volumes, which are about a fifth of total imports, have grown solidly over the past year, rising 4.7% in the year ended June 2018, driven by an increase in New Zealand residents travelling overseas. Total import volumes rose 8.0% in the year ended June 2018. Import volume growth is forecast to ease, in line with the outlook for domestic demand (Figure 1.19).

Overall, net exports are expected to be neutral for growth over the year ended June 2019, compared with their large negative contribution over the previous year. Beyond 2019, net exports are expected to make a small negative contribution to growth given the prospects for demand growth in New Zealand relative to our major trading partners.

…and solid export demand helps keep the terms of trade high

New Zealand's goods terms of trade have declined from their peak in the December quarter 2017 and a further softening is expected over the 2018/19 fiscal year (Figure 1.20). Dairy auction prices have weakened, consistent with strong domestic supply, and prices for other export commodities have eased in recent months. The lower New Zealand dollar has cushioned some of the impact of lower international prices on producers.

Figure 1.20 - Terms of trade

Sources: Stats NZ, the Treasury

New Zealand is a net importer of oil and petroleum products and falls in global oil prices over the past month or so will partially offset some of the income effects of lower export prices. Overall, the terms of trade are expected to fall a bit further before stabilising in mid-2019. Over the medium term, the terms of trade are projected to rise gradually as Chinese demand for food remains solid amid tighter supply, particularly in the meat and dairy industries.

In the external accounts, the small negative effect of net export volumes is more than offset by the positive effect of the gradual rise in the terms of trade and the deficit in the goods and services balance is projected to narrow a little. However, higher global interest rates widen the income deficit. The net result is a stable current account deficit. These deficits result in an increase in New Zealand's net external liability position from 54.6% of GDP as at June 2018 to a projected 59.6% as at 30 June 2023.

Nominal GDP#

Print this section

Growth in nominal GDP captures growth in real GDP and changes in prices. The national accounts measure of prices (the GDP deflator) is broader than the CPI. It includes import and export prices as well as prices of investment goods and prices of non-market goods and services, such as those the Government provides.

Growth in nominal GDP has eased over the past year, driven by the decline in the terms of trade. Nominal GDP growth is expected to continue to ease over the year ending June 2019, driven by the weaker terms of trade. Stronger real GDP growth and stabilisation of the terms of trade promote a recovery in nominal GDP growth to 5.6% over 2019/20. Thereafter, nominal GDP growth eases in line with real GDP growth. Over the forecast period, nominal GDP growth averages 4.9% per year.

Compared to the Budget Update, nominal GDP is around $2.8 billion lower over 2019/20, with $1.8 billion of this difference owing to lower GDP over the year ending June 2018, which is the starting point for these forecasts. By the end of the 2021/22 fiscal year, nominal GDP is $0.8 billion higher than previously forecast. Adjusting for the lower starting point, nominal GDP is cumulatively $4.8 billion higher than in the Budget Update over the period to June 2022, owing to stronger nominal growth after 2018/19. This is largely driven by higher compensation of employees, reflecting both higher wages and employment over the forecast period.

Fiscal Outlook#

Print this section

Overview#

Print this section

• The year-end results for 30 June 2018 were stronger than expected and, as a result, this flows into a stronger starting base for the fiscal forecast.
• Overall, the fiscal outlook is expected to improve across the forecast period. However, some of the strong starting point, owing to timing, is expected to unwind by the end of the forecast period (in particular in the 2018/19 fiscal year).
• Core Crown tax revenue increases by $25.1 billion reaching $105.3 billion in 2022/23 (28.9% of gross domestic product (GDP)). This increase in tax revenue reflects the continued growth in economic activity as discussed earlier in the Economic Outlook chapter.
• Core Crown expenditure increases by $22.6 billion reaching $103.2 billion in 2022/23 (28.3% of GDP). This increase in expenditure largely reflects previous Budget decisions, future Budget allowances and increases in benefit expenditure.
• The operating balance before gains and losses (OBEGAL) is expected to decrease in the current year to $1.7 billion followed by steady growth in the remaining years of the forecasts, reaching a surplus of $8.4 billion (2.3% of GDP) in 2022/23.
• While revised tax receipt forecasts result in an improvement to operating cash flows, capital spending is still expected to exceed net operating cash flows over the first three years of the forecast period. As a result, residual cash deficits are forecast for these years, before returning to a residual cash surplus in the last two years of the forecast.
• To fund the forecast residual cash deficits, net core Crown debt is forecast to increase in nominal terms before tracking down in the last two years of the forecast. As a percentage of GDP, net core Crown debt is expected to stay relatively flat over the next four years, before reducing to 17.4% in 2022/23.
• The Crown's balance sheet continues to grow, with net worth attributable to the Crown reaching $174.7 billion (48.0% of GDP) in 2022/23. This growth is largely the result of continued forecast surpluses across the forecast period.
• OBEGAL is expected to be lower than what was forecast in the Budget Update in the near term before exceeding the Budget Update forecast in 2021/22. Core Crown tax revenue is expected to be higher than the Budget Update across all years as are core Crown expenses, with the increase in tax revenue exceeding the increased expenditure in 2021/22.
• Net core Crown debt is lower than the Budget Update across all years of the forecast, initially owing to a lower starting position. Additional tax receipts are expected to reduce net core Crown debt by $3.6 billion. However, these are more than offset by increased operating and capital expenditure across the forecast period.
• Comparisons against the Budget Update can be found on page 40.
• The Forecast Financial Statements and Core Crown Expense tables can be found on pages 125 to 129, and provide more detailed information on the fiscal forecasts.

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

Notes:

1. Operating balance before gains and losses.
2. Net core Crown debt, excluding the New Zealand Superannuation Fund (NZS Fund) and advances.
3. Percentage of GDP: In line with best practice, nominal GDP has been adjusted to incorporate changes to the national accounts data published after the economic forecasts were finalised. These annual national accounts resulted in nominal GDP for the March 2018 year being revised lower by $1.5 billion (0.5%) relative to the latest quarterly GDP release. The smaller denominator has the effect of increasing the fiscal ratios, with an impact on net core Crown debt of 0.1 percentage points of GDP in the year ended June 2018.

Source: The Treasury

Core Crown Tax Revenue#

Print this section

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

Figure 2.1 - Core Crown tax revenue

Source: The Treasury

Core Crown tax revenue is forecast to rise in each year of the forecast period, in both nominal terms and as a percentage of GDP. By 2022/23, core Crown tax revenue is expected to reach $105.3 billion, $25.1 billion higher than in 2017/18.

Recent strength in tax outturns has been included in the current year of this forecast. Table 2.5 shows the largest tax types leading the way in nominal growth (Figure 2.1).

Source: The Treasury

Of the major tax types, source deductions, which is mainly PAYE on wages and salaries, is forecast to grow the most ($10.8 billion) over the forecast period. Growth in PAYE comes from a combination of growth in employment, wage and salary rates and average hours worked. It is expected that just under half of the source deduction revenue growth is forecast to come from growth in wage rates. This is mainly owing to tighter labour market conditions and a range of labour market policies including fair pay agreements, pay equity policy and minimum wage policy. The robust forecast wage growth also means that fiscal drag[6] makes a significant contribution (about 1% each year) to forecast PAYE growth.

Goods and services tax (GST) is forecast to increase by a total of $5.5 billion over the forecast period, mainly owing to forecast growth in private consumption, and to a lesser extent, growth in residential investment. Around 20% of the growth in GST is forecast to come from residential investment.

Corporate tax is forecast to grow by $4.0 billion over the forecast period, almost entirely owing to forecast growth in the economy leading to higher profits.

A forecast gradual rise in deposit interest rates from the 2020/21 year onwards leads to forecast growth of $1.6 billion in resident withholding tax (RWT) on interest over the forecast period.

Net other persons' tax is forecast to grow by $1.7 billion over the forecast period, mainly owing to forecast growth in entrepreneurial income, but with a significant contribution from policy changes (eg, ring-fencing of residential property investment losses).

New policy measures such as increases in road user charges and petrol excise rates have been included in our forecasts. We have also updated policy costings for previously announced policies such as residential property investment loss ring-fencing and GST on low-value imports, as these policy details have been firmed up since the Budget Update. Together with existing policy measures, such as successive 10% increases to tobacco excise rates, these policy measures are expected to add 0.6% to the tax-to-GDP percentage over the forecast period.

Figure 2.2 - Core Crown tax revenue and nominal GDP growth

Source: The Treasury

…in line with a growing economy

Average annual nominal GDP growth over the five years to 2022/23 is forecast to be 4.8%. Over the same period, core Crown tax revenue is forecast to grow at a rate of 5.6% per year on average. This is slightly higher than the growth in nominal GDP, owing to the effects of fiscal drag and policy changes (Figure 2.2).

Comparison with Inland Revenue forecasts

Inland Revenue has also prepared a set of tax forecasts which, like the Treasury's tax forecasts, were based on the Treasury's macroeconomic forecasts. The Treasury's forecasts of core Crown tax revenue are, on average, 0.2% higher than Inland Revenue's forecasts. Most of the forecast differences in tax forecasts arise from differences in the modelling methods used by the respective agencies to forecast some of the larger tax types, particularly corporate tax, GST and road user charges.

This comparison is included in the Additional Information on the Treasury website at https://treasury.govt.nz/publications/efu/half-year-economic-and-fiscal-update-2018

Core Crown Expenses#

Print this section

Core Crown expenses are expected to remain relatively stable compared to the size of the economy…

Core Crown expenses (as a percentage of GDP), while remaining relatively stable, are expected to peak at 29.5% in 2018/19 before declining to 28.3% at the end of the forecast period (Figure 2.3).

Figure 2.3 - Core Crown expenses

Source: The Treasury

Nominally, core Crown expenses are expected to increase by $22.6 billion from $80.6 billion in 2017/18 to $103.2 billion in 2022/23, an increase of around $4.5 billion each year.

The large growth from 2017/18 to 2018/19 is primarily owing to the lower-than-forecast spending in the 2017/18 year, which has now been transferred to 2018/19, as well as some spending being brought forward into the current year.

Over the forecast period, the nominal growth on core Crown expenses is largely attributable to Budget decisions and new spending set aside for future Budgets. In addition, social assistance spending is forecast to increase by $8.2 billion across the forecast period, largely as a result of the forecast increase in recipient numbers of New Zealand superannuation (refer to page 30).

…with nominal growth primarily owing to operating allowances providing for future decision-making…

Operating allowances for Budget 2019 to Budget 2022 have been set by the Government at $2.4 billion. There have been some pre-commitments made against Budget 2019 and Budget 2020 leaving an average of $1.6 billion and $2.2 billion respectively of spending yet to be allocated. Overall, forecast new spending from future Budgets are forecast to increase expenses by $9.6 billion by 2022/23 (refer to Figure 2.4).

Figure 2.4 - Core Crown expenses with allowance break down

Source: The Treasury

For forecasting purposes, Budget allowances are assumed to be all operating expenditure. However, these allowances can be used for a combination of revenue and expense initiatives when allocated. New operating spending will be allocated to departments' baselines when Budget decisions are made.

These forecasts assume that any additional costs in relation to government commitments and future cost pressures (whether they be from increased demand for government services, inflation or additional services) will be met from operating allowances.

…and increases in the cost of New Zealand superannuation also contribute to expenditure growth…

The cost of New Zealand superannuation (NZS) is forecast to increase as recipient numbers increase.

NZS payments account for $4.9 billion of the increase in core Crown expenses over the forecast period. This increase reflects the growth in the number of recipients, the increase in payment rates and other factors. By the end of the forecast period, NZS equals around 55% of core Crown social assistance spending and 18% of core Crown expenditure (compared with 54% and 17% respectively in 2017/18).

Recipient numbers are forecast to increase from almost 741,300 in 2017/18 to over 878,300 by the end of the forecast horizon (an increase of 18.5%). The remaining increase is largely owing to indexation of entitlements to wage growth (Figure 2.5).

Figure 2.5 - Growth of NZS recipients and expenses

Source: The Treasury

…alongside growth in other expenditure…

Transport expenditure is expected to be higher across the forecast period reflecting the approval of the Government's Policy Statement on Land Transport. In addition, expenditure previously forecast in 2017/18 is now expected to be incurred in the current year, as well as increases in expenditure relating to labour market policies including fair pay agreements, pay equity policy and minimum wage policy.

…while judgements continue to be made regarding the level of spending

The fiscal forecasts are a culmination of individual forecasts provided by departments and other government entities (a ‘bottom-up' forecast).

History suggests that the actual level of spending is usually below what entities forecast and that there is a bias towards over-forecasting expenditure.

This is owing to a number of reasons, such as expenditure being delayed or programmes not being implemented. The Treasury therefore estimates the extent to which expenditure is over-forecast and reduces the forecast accordingly. This adjustment is referred to as a ‘top-down' adjustment (Figure 2.6).

Figure 2.6 - Variance in core Crown expenses to original budget¹

Note

1. Original budget refers to the relevant Budget Update first full forecast year (ie, Original budget for 2019 is Budget 2018).

Source: The Treasury

Operating Balance#

Print this section

OBEGAL is expected to decrease initially then grow over the rest of the forecast period…

OBEGAL is expected to decrease in the current year followed by steady growth in the remaining years of the forecasts, as revenue grows at a faster pace than expenditure. OBEGAL reached a surplus of $5.5 billion in 2017/18 but is expected to decrease to a surplus of $1.7 billion in the current year. This surplus is then forecast to rise to $8.4 billion by 2022/23.

The forecast decreases in OBEGAL in the current forecast year largely reflect the higher-than-expected outturn for 2017/18 impacting 2018/19 as the lower-than-forecast expenditure in 2017/18 is now expected to be spent in the current year and the impact of spending decisions made in Budget 2018.

Crown entities (CEs) and State-owned Enterprises' (SOEs) contribution to OBEGAL remains fairly stable. Figure 2.7 shows the composition of OBEGAL from the different segments of the Government.

Figure 2.7 - Components of OBEGAL by segment

Source: The Treasury

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

The total Crown operating balance, inclusive of gains and losses, is forecast to be in surplus across all years of the forecast period, and expected to reach $13.3 billion in 2022/23 (Figure 2.8).

Figure 2.8 - Components of operating balance

Source: The Treasury

The year-to-date gains made on the Crown's large investment portfolios, ACC and the NZS Fund, reflected strong performance in the global equity markets. These forecasts assume investment income returns to a long-term rate, resulting in stable returns going forward.

Partially offsetting these investment gains are expected net losses on non-financial liabilities of $2.8 billion in 2018/19. This is primarily driven by changes to discount rates used to calculate the ACC outstanding claims liability and the GSF long-term liabilities (resulting in losses of $1.9 billion and $0.4 billion respectively) and losses on the Emissions Trading Scheme of $0.5 billion. As future actuarial gains or losses are not forecast, they do not impact the operating balance beyond 2018/19.

The level of operating balance plays a significant part in increasing the Government's financial assets and contributing to growth in the Crown's net worth.

Core Crown Capital Spending#

Print this section

The Government is forecast to spend $41.6 billion cumulatively on net capital spending over the next five years. Net capital spending is expected to increase significantly in 2018/19 and persist at that level across the forecast. This capital spending includes $15.2 billion on building and acquiring physical assets (eg, school buildings), purchasing four Boeing P-8A Poseidon maritime patrol aircraft, $10.5 billion on providing capital to CEs (eg, the New Zealand Transport Agency (NZTA) for state highways and district health boards (DHBs) to build or develop hospitals) and $9.7 billion in contributions to the NZS Fund over the forecast periods.

Similar to operating expenses, a top-down adjustment has been applied to capital spending to account for the possibility that expenses will be pushed out.

Source: The Treasury

Table 2.7 outlines core Crown capital spending that has a net core Crown debt impact. It excludes capital spending undertaken directly by CEs and SOEs funded from their own resources (including third-party financing).

Future new capital spending represents funding set aside in contingencies for projects agreed in Budgets and amounts to be allocated in future Budgets. The Government is moving to a multi-year capital envelope for managing capital investment (refer to the box below) and has set aside funding of $13.1 billion for the next four Budgets. There have already been some decisions that have been funded from the multi-year envelope, leaving $9.0 billion. Of the amount left in the multi-year capital envelope it is expected around $7.0 billion will be invested over the forecast period with the remaining investment expected to occur after 2022/23.

Residual Cash and Net Core Crown Debt[9]#

Print this section

After an initial decline, operating cash flows are expected to improve across the forecast period…

After initially declining, net operating cash flows are expected to rise over the forecast period. Net operating cash flows are forecast to be in surplus across the forecast period, rising in a similar trend to the OBEGAL forecast. Over the forecast period, the Government is expected to generate cash flows from core Crown operating activities of $37.1 billion.

However, capital spending is forecast to exceed operating cash flows in the first three years of the forecast, resulting in a forecast residual cash deficit in these years. As forecast tax receipts continue to grow at a faster pace than operating payments and capital spending, a residual cash surplus is forecast in the final two years of the forecast (Figure 2.11).

Figure 2.11 - Core Crown residual cash

Source: The Treasury

…with net core Crown debt reducing as a percentage of GDP…

Net core Crown debt as a percentage of GDP is expected to decline from 20.0% in 2017/18 to 17.4% at the end of the forecast period (Figure 2.12).

Figure 2.12 - Net core Crown debt

Source: The Treasury

However, in dollar terms, net core Crown debt is forecast to increase for the next three years, before starting to decline once residual cash returns to surplus from 2021/22. Net debt is forecast to be $63.5 billion in 2022/23.

This forecast nominal increase in net core Crown debt in the short-term is expected to be funded through a combination of using existing financial assets of the Crown and additional funds raised through debt.

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

There is no significant change in the nominal level of gross debt (of which the core Crown borrowing programme is the major component) over the forecast period. A slight rise in the nominal value of debt in 2021/22 is the result of steady bond issuance in a year with no forecast bond maturities.

Gross debt as a percentage of GDP is expected to decline across the forecast period. By 2022/23 gross debt is expected to decrease to 23.6% of GDP, from 30.6% at the end of 2017/18 (Figure 2.13).

Figure 2.13 - Gross debt

Source: The Treasury

By 2022/23, New Zealand Government Bonds (NZGBs) on issue, as a percentage of GDP, are forecast to decline to 20.2%, from 25.7% at the end of 2017/18. This forecast level is consistent with the Government's stated commitment to maintain levels of NZGBs on issue at not less than 20% of GDP over time. This is seen as necessary to:

• ensure ongoing government access to debt funding, supporting fiscal resilience in the event of future economic or funding shocks
• reduce volatility of government borrowing programmes through economic cycles, and
• provide wider capital markets benefits, including reliable pricing benchmarks for other issuers.

The core Crown borrowing programme has been designed largely to meet maturities over the forecast period

The core Crown borrowing programme includes forecast issuance for both government bonds and short-term borrowing (eg, Treasury bills). The bond programme is expected to raise funds of $37.4 billion over the forecast period. However, bond maturities will result in $37.3 billion of existing debt being repaid. In addition, short-term borrowing is expected to be $2.1 billion lower at the end of the forecast period. Therefore, the total borrowing programme will provide net repayments of $2.0 billion over the period (Table 2.10).

Source: The Treasury

Total Crown Balance Sheet#

Print this section

Increasing operating balance surpluses result in a stronger balance sheet

Figure 2.14 shows that in nominal terms, net worth attributable to the Crown has recovered from the decline that ended in 2012 and is expected to grow across the forecast period reaching $174.7 billion by 2022/23. As a percentage of GDP, net worth attributable to the Crown is forecast to reach 48.0% by 2022/23, albeit still below the peak of 52.3% in 2008/09.

Figure 2.14 - Net worth attributable to the Crown

Source: The Treasury

…with assets increasing by $57.4 billion while liabilities are expected to grow at a slower rate over the forecast period…

Total assets are forecast to grow by $57.4 billion over the forecast period to $397.3 billion in 2022/23, made up of additional investments in assets, both physical and financial. At the same time, the Crown's liabilities are also forecast to increase slightly by $12.6 billion and are estimated to be $216.9 billion in 2022/23. As a result, net worth is expected to increase across the forecast period (Figure 2.15).

Figure 2.15 - Total Crown assets

Source: The Treasury

The largest asset growth over the forecast period is in the social assets portfolio (just over 50% of the total Crown balance sheet). Social assets (eg, schools, defence force, public housing and infrastructure) are expected to increase by $27.9 billion to be $207.7 billion in 2022/23. This increase largely reflects the capital spending discussed earlier (refer to page 33).

Liabilities in relation to the social segment (eg, tax refunds, GSF and provisions in relation to social assets noted above) remain fairly static. As a result, social net worth is expected to increase (Figure 2.16).

Figure 2.16 - Social balance sheet

Source: The Treasury

The financial asset portfolio (around 30% of the total Crown balance sheet) is expected to increase by $22.0 billion to be $124.0 billion in 2022/23. This increase is primarily reflecting investment growth in the large investment portfolios (NZS Fund and ACC).

On the liability side, the financial segment is forecast to remain fairly static remaining under $150.0 billion.

Overall net worth in the financial sector increased by $20.8 billion across the forecast period, reflecting the increase in financial asset segment (as discussed above) (Figure 2.17).

Figure 2.17 - Financial balance sheet

Source: The Treasury

The commercial asset portfolio (representing nearly 20% of the Crown balance sheet) is expected to increase by $7.5 billion over the forecast period to be $65.6 billion in 2022/23. This growth is primarily owing to the Kiwibank loan book. The commercial liabilities increase by $8.4 billion over the forecast period to be $42.9 billion in 2022/23. This primarily relates an increase in the liabilities of Kiwibank (eg, deposits held and other borrowings). Commercial net worth decreases by $1.0 billion over the forecast period (Figure 2.18).

Figure 2.18 - Commercial balance sheet

Source: The Treasury

…however, the Crown's balance sheet remains sensitive to market movements

Many assets and liabilities on the Crown's balance sheet are measured at fair value to show current estimates of what the Crown owns and owes. This is intended to reflect the value of these items: it can be volatile, resulting in fluctuations in the value of the assets and liabilities reflecting changes in the market and underlying assumptions.

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

Comparison to the Budget Update#

Print this section

The Budget Update was published on 17 May 2018. Since then, there have been a number of changes that have impacted the fiscal outlook. Table 2.11 summarises the changes in the key fiscal indicators since the Budget Update.

Source: The Treasury

Core Crown tax revenue is expected to be higher than the Budget Update...

Core Crown tax revenue is forecast to be $3.1 billion higher than in the Budget Update over the four-year period up to 2021/22. Forecasts for revenue from source deductions and corporate tax have increased while revenue from other persons' tax, and resident withholding tax on interest have all been reduced. Table 2.12 summarises the movements by tax type since the Budget Update.

Most of the change in tax revenue forecasts has come from:

• Source deduction revenue forecasts increased by $2.5 billion in total over the forecast period, mainly owing to a higher track for forecast employment and wage rates, plus the associated increase in forecast fiscal drag.
• Corporate tax revenue forecasts increased by $2.1 billion in total over the forecast period, mainly owing to planned system and administrative changes as part of Inland Revenue's Business Transformation project, that are expected to have a one-off effect on the calculation of tax revenue, adding $1.1 billion in the 2018/19 year.
• Motor vehicle fees and road user charges revenue forecasts increased by $1.1 billion in total over the forecast period, mainly owing to the road user charges rate increases and duties forecast increased by $0.8 billion in total over the forecast period, both mainly owing to the increases from the updated Government Policy Statement on Land Transport.

These increases in tax revenue are offset somewhat by:

• Resident withholding tax revenue forecasts decreased by $1.8 billion over the forecast period, owing to a decrease in forecast deposit rates across the forecast period.
• Net other persons' tax forecasts decreased by $1.5 billion mainly owing to the administrative and system changes mentioned above.

Source: The Treasury

…while OBEGAL grows at a slower pace, as additional spending takes effect…

Overall, OBEGAL is expected to be lower in each year of the forecasts with the exception of 2021/22 where OBEGAL exceeds that forecast at the Budget Update (Table 2.13).

Source: The Treasury

Social assistance spending has increased since the Budget Update with forecasting increases of $1.2 billion from 2019/20 onwards. This is largely owing to increases in Jobseeker Support and Emergency Benefit recipient numbers based on the latest actual data on recipient numbers being higher than expected. In addition, a higher inflation track has resulted in an increase in benefit expenses owing to the indexation of most benefit types. Partially offsetting these increases is a reduction in the Working for Families benefit expense based on recent year-to-date spending being lower, likely reflecting stronger income growth of recipients.

Transport operating spending has increased by $2.5 billion, with significant capital expenditure forecast at the Budget Update shifting to operating spending as well as additional spending owing to the additional tax revenue (road user charges and fuel excise duties) collected from the implementation of the Government's Policy Statement for Transport mentioned above.

Expenses relating to the write-down of loans provided at a subsidised interest rate has resulted in a reduction of $0.5 billion in OBEGAL for the 2018/19 fiscal year, compared to the Budget Update. A large part of this relates to the write-down on loans from Housing Infrastructure Fund, which were previously expected to be recognised in the 2017/18 fiscal year.

Additional spending of around $0.6 billion in now expected in 2018/19, owing to lower than forecast actual spending in 2017/18.

There have been some decisions the Government have made against future Budget allowances which have directly impacted OBEGAL in 2018/19 and 2019/20 due to the spending profile of these initiatives (eg, Provincial Growth Fund and Mycoplasma bovis). Overall the impact on OBEGAL from these decisions is neutral as there will be less funding available to allocate on new initiatives in the remaining fiscal years of the forecast period.

Updated forecasts for State-owned Enterprises and Crown entities show a weaker outlook than previously forecast across the forecast period. This weaker forecast result was across a number of agencies with DHBs and ACC forecasting the most significant changes from the Budget Update ($0.7 billion and $0.4 billion lower respectively).

...and net core Crown debt is lower across the forecast period compared with the Budget Update

Overall, residual cash is forecast to be $0.7 billion weaker than the Budget Update over the period to 2021/22. The changes in core Crown revenue and expenditure mentioned above (excluding the non-cash asset impairments and capital to operating changes) flow through and impact on the changes to residual cash. In addition to these operating receipts and payments, changes to capital spending also impact on residual cash.

Compared to the Budget Update, core Crown tax receipts (largely relating to the additional excise and road user charges) were $3.6 billion higher.

Operating payments are forecast to be higher by $7.2 billion while capital investments are forecast to be $1.2 billion lower than the Budget Update. The operating payments changes largely reflect the changes to the OBEGAL results as discussed earlier while the reduction in capital payments is primarily owing to the switch to operating payments for transport spending discussed earlier. In addition, a larger portion of the houses to be delivered under the KiwiBuild programme during the forecast period are expected to be funded from the sale proceeds of houses rather than contributions from the Crown. This has resulted in an increase in both operating receipts and payments, but a reduction in capital payments. Overall the impact of this change has improved residual cash by around $1 billion, compared to the Budget Update. Combined, this results in residual cash being lower in the near term before improving as core Crown receipts outpace cash payments in the later years of the forecast.

Net core Crown debt is forecast to be $66.3 billion in 2021/22, $0.7 billion lower than forecast at the Budget Update. The improved starting position arising from the 30 June 2018 actual results has contributed to this reduction in the forecast for net core Crown debt. As a percentage of GDP, net debt is forecast to be 19.0% in 2021/22, close to what was forecast at the Budget Update. This small change is largely driven by the expected residual cash results.

Key Economic Assumptions used in the Forecast Financial Statements#

Print this section

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

• A nominal GDP forecast is needed to forecast tax revenue.
• A forecast of CPI inflation is needed because social assistance benefits are generally indexed to inflation.
• Forecasts of interest rates are needed to forecast finance costs, interest income and discount rates.

A summary of the key economic forecasts that are particularly relevant to the forecast financial statements is provided in Table 2.14 below.

Notes:

1. Production measure.
2. Expenditure measure.

Source: The Treasury, Stats NZ

Risks and Scenarios#

Print this section

Overview#

Print this section

• This chapter discusses some of the key risks facing the economy and uses two alternative scenarios to assess the implications of different assumptions and judgements.
• The risks to the international outlook are skewed to the downside and include: rising trade tensions; political uncertainty in different parts of the world; uncertainty about the impacts of tightening US monetary policy; and the uncertainty about global commodity prices. Should these risks materialise, global growth will deviate from that presented in the main forecasts and, with it, export growth, the terms of trade and the exchange rate.
• The risks to the domestic outlook are more balanced and include: the uncertainty around the impact of business confidence on investment; the sensitivity of households to changes in interest rates; the extent to which capacity constraints bind, particularly in the construction sector; house price uncertainty; and the level of net migration inflows.
• Scenario One explores the impacts of further escalation in global trade tensions. Declining trade volumes weigh directly on global growth, lowering the demand for New Zealand exports, while weaker sentiment lowers business investment, consumption, and global commodity prices. The overall impact of the scenario sees GDP growth falling in nominal and real terms, affecting tax revenue and the fiscal position.
• Scenario Two illustrates the impacts of higher household consumption, investment and export prices. Higher household consumption in this scenario is supported by households continuing to spend instead of saving or paying down mortgage debt, lower retail prices and a stronger-than-forecast impact of low interest rates on consumption. Investment is stronger than in our main forecast, which may overstate the negative impact of weaker business confidence. Investment might also be stronger than currently forecast owing to higher export prices. Higher nominal GDP and tax revenue generate larger fiscal surpluses and lower net debt.
• The Crown's balance sheet is exposed to a number of risks beyond those associated with the operating balance. The Crown's financial position is exposed to risk through changes in the value of the Crown's assets or liabilities, and also through the potential impact of the Crown's fiscal obligations that arise from policy choices.

Risks to the Economic Outlook#

Print this section

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

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

Rising trade tensions might hamper global growth

Trade tensions, particularly between the US and China, have escalated since early 2018. Currently, US tariff rates on Chinese products are 25% on US$50 billion worth of imports from China and 10% on an additional US$200 billion. The latter set of tariffs could rise to 25% in early 2019 unless an agreement is reached. China retaliated with tariffs on imports from the US. The rise in protectionism was not limited to restricting imports and has extended to supporting domestic industries affected by the protectionist measures, as in the case of US agricultural sector. On a positive note, trade negotiations between the US, Mexico and Canada have concluded successfully and are currently awaiting legislative approval.

New Zealand is not well integrated into the global value chains that might be disrupted by the recent tariff measures. In addition, direct US-China trade in the goods that New Zealand exports is not large, suggesting limited trade diversion benefits. Therefore, the direct impacts of tariff measures to date on New Zealand exports appear to be limited.

The risk lies in what may follow if trade tensions continue to escalate. IMF estimates suggest that US tariffs of 25% on US$250 billion of Chinese imports could reduce Chinese growth by around 0.7 percentage points over the next 12 months. Spill-overs are especially likely for Southeast Asian economies given their role in global value chains that often include China, which are increasingly important export destinations for New Zealand. The impacts of continued trade tensions on sentiment may have a stronger negative impact on global growth as compared to the direct impacts of restricting the flow of trade.

This chapter explores the possible impacts of further escalation in trade tensions on the domestic economy (refer to Scenario One below).

Political uncertainty increases the ambiguity about the global growth outlook

Political developments in Italy and ongoing negotiations between the UK and the EU on the terms of the UK withdrawal from the European Union result in uncertainty surrounding Europe's economic outlook. In Australia, a federal election is due in May 2019, which may change fiscal policy. Political uncertainty is also extended to the Middle-East with US sanctions on Iran recently coming into effect.

Political uncertainty typically leads to a stronger appetite for safe-haven currencies such as the US dollar. The US dollar has been on an appreciating trend since April 2018 relative to other major currencies, and might continue appreciating if the political uncertainty continues.

Political uncertainty partly explains the recent divergence in the pace of growth among New Zealand's trading partners. Where markets expect rising interest rates in the US, Canada, and the UK next year, interest rates in the euro area and Australia are likely to remain low for a longer period of time. Further divergence in trading partner growth affects New Zealand's exports as some trading partners import more of certain goods. For example, China, where the economic outlook is particularly uncertain, is the most significant importer of New Zealand dairy products, exposing this sector to higher risks.

Tighter US monetary conditions might lead to further appreciation in the US dollar

After a sustained period of low inflation and lower interest rates, the Federal Reserve projections indicate that interest rates may be increased six more times by the end of 2020 to around 3.5%. A faster than necessary tightening of monetary conditions in the US could curb real economic growth and limit the impacts of the ongoing fiscal stimulus.

Higher US interest rates while New Zealand's rates remain on hold puts pressure on the bilateral exchange rate. The US dollar has been appreciating relative to the New Zealand dollar since early October. Rising interest rates in the US while other major economies remain largely on hold is increasing the attractiveness of holding US-dominated bonds, leading to the appreciation of the US dollar. Further appreciation in the US dollar poses more risk to the ability of emerging economies, such as Turkey and Argentina, to service their debt.

Heightened volatility in financial markets will follow developments elsewhere

Globally, financial sector vulnerabilities persist in the wake of the global financial crisis. The key risk to the outlook for global financial markets is the limited ability of central banks in most developed countries to stimulate the economy in the event of an economic slowdown as interest rates are already low relative to their pre- global financial crisis levels. Investor concerns around the impacts of the intensifying trade disputes have contributed to lower and more volatile equity prices internationally. China appears to be affected the most from recent trade tensions, with equity prices falling and the yuan depreciating. To offset the negative impacts of trade tensions, the People's Bank of China has increased liquidity alongside other stimulatory fiscal measures, including income tax reductions. The success of these measures largely depends on how the trade tensions with the US unfold.

The outlook for commodity prices is, as usual, uncertain…

New Zealand is particularly susceptible to changes in global commodity prices as most of its merchandise exports are agricultural. All commodities have their own supply and demand dynamics and are affected by different idiosyncrasies. The risks discussed above might affect commodity prices in either direction. The degree of realignment in the New Zealand dollar will also play a significant role in determining the profitability of New Zealand export industries.

… and oil prices might be lower than assumed in the main forecasts

We see some downside risk to our oil price assumption in the medium to long term as the breakeven costs for shale oil producers in the US keep declining owing to technological advancements, pushing supply higher. Oil supply from non-OPEC members in response to price changes also remains uncertain.

The effects of business confidence are hard to gauge

The impacts of sentiments are hard to gauge. The recent falls in business confidence might be explained by several factors such as uncertainty about signalled changes in government policies, labour market pressures, and profit margins.[11] Entirely ignoring the recent declines in business confidence means that business investment might be slightly higher than assumed in the main forecasts. A key risk to growth over the 2018/19 fiscal year is the extent to which weaker sentiment affects business investment and household spending decisions. Scenario Two explores the potential impacts of a smaller-than-forecast impact of business confidence on investment.

The sensitivity of households to changes in interest rates is uncertain

Household consumption could be higher than forecast if household expectations of future income growth or wealth increases, leading to higher debt. Such an outcome would be consistent with higher house price inflation or more wage growth than forecast. As the sensitivity of households to changes in interest rates is uncertain, the impact of rising debt on household consumption is also uncertain.

Several factors can explain why house price growth might be different from forecasts

Stronger-than-forecast capacity pressures in the construction sector will constrain residential investment, limiting housing supply. Additionally, the RBNZ eased loan-to-value restrictions after our forecasts were finalised, easing households' access to credit and raising housing demand. Offsetting the upside risks above depends on the success of new policies such as restricting foreign buyers and loss ring fencing.

The extent to which capacity constraints bind…

Measures of capacity pressures are uncertain, and sometimes contradictory. While many sectors in the economy report tight capacity pressures, this is particularly true for the construction sector, limiting growth in residential investment. Policies aimed at alleviating the capacity constraints in the sector can affect residential investment, house prices, and productivity. However, their impacts are yet to be known.

… particularly in the labour market

Indicators of labour market capacity, including unemployment, underutilisation, and survey measures of firms' difficulty hiring labour, portray a tight labour market. The Treasury's business talks confirmed ongoing labour shortages in several sectors, such as construction and IT. Unemployment is currently near our estimate of the long-term non-accelerating inflation rate of unemployment (NAIRU).[12] However, estimates of the NAIRU, as in the case of the potential output, are inexact.

In addition to capacity constraints, there are several labour market policies that may see wages grow faster than forecast. The policies include fair pay agreements, minimum wage increases and pay equity.

Changes in weather conditions affect agricultural output and electricity generation

The Southern Oscillation Index suggests a weak El Niño over this summer, although the impact is highly uncertain. Regardless, agricultural growing conditions and hydroelectric power generation in New Zealand remain sensitive to climate conditions.

Net migration will depend on developments domestically and internationally

Net migration outflows to Australia tend to increase when Australia's labour market strengthens relative to New Zealand's. The prospect of faster wage growth in New Zealand may lead less people to depart for Australia than assumed in the main forecasts. Equally, tight domestic labour markets may encourage employers to look offshore for temporary or permanent workers. On the other hand, institutional changes to residency requirements or visa conditions, or uncertainty around prospective changes, may deter some potential migrants, widening the uncertainty around the outlook for net migration.

Alternative Scenarios#

Print this section

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

Scenario One explores the impacts of further escalation in global trade tensions. Declining trade volumes weigh directly on global growth, lowering the demand for New Zealand exports, while weaker sentiment lowers business investment, consumption, and global commodity prices. The New Zealand dollar depreciates as the US dollar is viewed as a safe haven currency and owing to declining commodity prices. The overall impact of the scenario sees GDP growth falling in nominal and real terms, affecting tax revenue and the fiscal position.

Scenario Two illustrates the impacts of higher household consumption, investment, and export prices. Higher household consumption in this scenario is supported by households continuing to spend instead of saving or paying down mortgage debt, lower retail prices, and a stronger-than-forecast impact of low interest rates on consumption. Investment in this scenario is stronger than in our main forecast as the main forecasts may overstate the negative impact of weaker business confidence. Investment might also be stronger than currently forecast owing to higher export prices. Higher nominal GDP and tax revenue generate larger fiscal surpluses and lower net debt. Table 3.1 summarises key economic variables under each scenario compared with the main forecasts.

^a annual average % change.

Source: The Treasury

Scenario One - Global Trade Tensions Escalate Further

This scenario explores the impacts of further escalation in global trade tensions on the domestic economy. The scenario assumes that trade tensions hamper growth domestically and globally through direct and indirect channels.

Demand for New Zealand exports declines…

Rising tariffs on global trade weigh directly on export volumes domestically and globally, resulting in lower global commodity prices. Lower domestic exports slow GDP growth.

…and weaker sentiment lowers business investment and consumption

Most economic variables tend to underperform under uncertainty and heightened tensions. Negative sentiments lower consumption and investment, slowing GDP growth domestically and internationally. Under this scenario, domestic business investment and consumption recover to their pre-escalation levels two years after the escalation in trade tensions (Figure 3.1).

The New Zealand dollar depreciates

Figure 3.1 - Lower business investment

Sources: Stats NZ, the Treasury

The New Zealand dollar depreciates as the US dollar is viewed as a safe- haven currency and as commodity prices decline. The lower New Zealand dollar makes domestic exports more competitive. However, the benefits in the form of higher domestic export volumes are limited owing to capacity constraints. To stimulate the economy, interest rates fall to nearly 1.0% a year after the escalation in tensions, keeping inflation relatively stable around RBNZ's 2.0% mid-point target.

Nominal GDP is cumulatively $23 billion lower relative to the main forecasts

Figure 3.2 - Lower nominal GDP

Sources: Stats NZ, the Treasury

Declining export prices, trading partner growth, domestic consumption and investment more than offset the positive contributions from more stimulatory interest rates, leading to lower GDP (Figure 3.2). Cumulative nominal GDP over the five years to June 2023 is $23 billion lower than in the main forecasts.

Slower growth feeds into lower tax revenue and weakens the Government's fiscal position. Core Crown tax revenue falls $6.5 billion relative to the main forecasts by mid-2023, with source deductions and goods and services tax (GST) $1.2 billion and $0.1 billion lower respectively.

This scenario assumes that the Government's operating and capital allowances are unchanged from those in the main forecast (see Economic Outlook chapter for details). Under these assumptions, the operating balance before gains and losses (OBEGAL) surpluses are smaller in each year, reaching $7.1 billion (2.0% of GDP) in 2023 (Table 3.1). This is $1.3 billion below that in the main forecast. The Government's debt levels are also higher, with the level of net core Crown debt $7.1 billion higher by June 2023, raising debt to GDP to 19.5% compared with 17.4% in the main forecasts (Table 3.1).

Scenario Two - Stronger Domestic Demand and Higher Export Prices

This Scenario investigates the impacts of stronger-than-forecast export commodity prices and more positive business investment and household consumption.

Figure 3.3 - Higher interest rates and TWI

Sources: Reserve Bank of New Zealand, the Treasury

Stronger consumption and investment intensify capacity constraints across the economy, resulting in higher inflation. In response, interest rates rise, curbing the pace of real growth. The New Zealand dollar appreciates as the prices of New Zealand exports increase, resulting in a small decline in the volume of exports (Figure 3.3).

Nominal GDP is cumulatively $14 billion higher relative to the main forecasts…

On balance, stronger consumption, investment, and commodity prices more than offset the impacts of rising interest rates. Relative to the main forecasts, nominal GDP is cumulatively $14 billion higher by mid-2023 while real GDP is almost $6.0 billion higher.

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

Stronger growth feeds into higher tax revenue and strengthens the Government's fiscal position. Core Crown tax revenue is cumulatively $4.9 billion higher relative to the main forecasts by mid-2023, with source deductions and GST $1.3 billion and $0.5 billion higher respectively.

This scenario assumes that the Government's operating and capital allowances are unchanged from those in the main forecast. Under these assumptions, OBEGAL surpluses are larger in each year, reaching $10.0 billion (2.7% of GDP) in 2023 (Table 3.1), $1.6 billion above that in the main forecast.

Figure 3.4 - Net core Crown debt to GDP ratio

Sources: Stats NZ, the Treasury

…and lowering debt

Higher tax revenue from enhanced growth more than offsets the increased cost of servicing public debt, bringing net core Crown debt $5.1 billion lower by June 2023. Debt to GDP ratio falls to 15.9% compared with 17.4% in the main forecasts (Table 3.1). The changes in debt to GDP ratio among the different scenarios are shown in Figure 3.4.

Fiscal Sensitivities#

Print this section

Table 3.2 sets out some rules of thumb on the sensitivities of the fiscal position to small changes in specific variables. For example, if nominal GDP growth is one percentage point higher than forecast in each year up to June 2023, tax revenue would be around $5.5 billion higher than forecast in the June 2023 year as a result. The sensitivities are broadly symmetric and if nominal GDP growth is one percentage point lower than expected each year, tax revenue would be around $5.2 billion lower than forecast in the June 2023 year. The figures are indicative and can be influenced by the composition of growth as different types of activity have different effective tax rates.

A different interest rate path from the forecast would also impact the fiscal position owing to the effect on the portfolios of various government reporting entities, such as the New Zealand Superannuation Fund (NZS Fund), Accident Compensation Corporation (ACC) and the Treasury. For example, at 30 June 2018, a 1.0% increase in New Zealand interest rates would have reduced the total Crown operating balance by around $1,550 million while a 1.0% decrease would have increased the total Crown operating balance by $1,697 million. The majority of the Government's borrowings and a large number of financial assets are managed by the Treasury. To illustrate the interest rate sensitivities on the Treasury's portfolio, Table 3.2 provides the estimated impact of lower interest rates on those assets and liabilities. A one percentage point fall in the interest rate would result in interest income on funds managed by the Treasury being $113 million lower in the June 2023 year. This would be more than offset by interest expenses $344 million lower in the June 2023 year. As above, the sensitivities are broadly symmetric.

Note: 1 Funds managed by the Treasury. Source: The Treasury

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

Balance Sheet Risks#

Print this section

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

Main source of balance sheet risk

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

• Financial assets held by the Crown financial institutions (CFIs) are sensitive to financial-market volatility, such as movements in interest rates, exchange rates and equity prices. CFIs tend to diversify their portfolios across a range of financial assets to manage exposures to specific types of market risks.
• Insurance and retirement liabilities are prone to volatility through their actuarial valuations, including changes to expectations of future interest rates and inflation rates.
• Physical assets such as land, buildings, state highways and military equipment are susceptible to valuation movements through changes in property market conditions, interest rates and changes in the costs of construction.

Other sources of balance sheet risk

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

Managing risk

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

Investing for Wellbeing: The 2018 Investment Statement He Puna Hao Pātiki discusses the importance, principles of and progress towards good balance sheet management, and explores how it can be extended to incorporate the Treasury's Living Standards Framework.

Specific Fiscal Risks#

Print this section

Overview#

Print this section

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

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

The risks disclosed in this chapter reflect those that are known at the date of the finalisation of the fiscal forecasts, 27 November 2018. Although the process for disclosure of specific fiscal risks involves a number of entities, including government departments, the Treasury and the Minister of Finance, there remains a possibility that not every significant risk is identified.

Nature of Risks to the Economic and Fiscal Outlook

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

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

How Risks Outlined in This Chapter are Managed

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

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

1 Re-prioritisation

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

2 Budget allowances

The following allowances for new expenditure have been signalled in the Government's Budget Policy Statement (BPS) and included in the Treasury's fiscal forecasts (Fiscal Outlook chapter).

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

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

3 Policy choices

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

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

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

General Risks Not Included in This Chapter

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

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

Exclusions to Disclosure

Additionally, the Minister of Finance may determine, under section 26V of the Public Finance Act 1989, that a matter not be included in the fiscal forecasts or a specific fiscal risk not be disclosed, if such disclosure is likely to:

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

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

Contingent Liabilities and Assets

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

Summary Table#

Print this section

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

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

Statement of Specific Fiscal Risks as at 27 November 2018

Policy Change Risks by Portfolio#

Print this section

ACC

Impacts of Changes to Accident Compensation Policy Settings (Unchanged)

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

Work-related Gradual Process Disease and Infection (Unchanged)

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

Biosecurity

Mycoplasma Bovis Biosecurity Response (Changed)

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

Broadcasting, Communications and Digital Media

Increased Public Broadcasting Funding (Unchanged)

Ministers are considering transforming Radio New Zealand into a multi-platform provider and considering establishment of a new Media Commission to provide independent advice to Parliament on public media. A Ministerial Advisory Group on public media has been established to assist the Minister with advice on public media funding and the capacity for more effective collaboration between public media agencies. Budget 2018 provided $15 million for Radio New Zealand to further its audio/visual strategy and for New Zealand on Air to provide more diverse local content. Further funding may be required in the future to address the need for long-term sustainability of New Zealand's public media system.

Children

Oranga Tamariki Future Operating Model (Changed)

Changes to the Oranga Tamariki Act 1989 coming into effect no later than 1 July 2019 include, for example, extending the scope of the Ministry to provide more support for young people aged 18 to 25. To the extent that the costs associated with the Ministry's new functions cannot be funded from within baselines, additional funding is likely to be required. There may also be flow on costs to other agencies as a result of the changed model.

Climate Change

Emissions Trading Scheme - Fixed Price Option (New)

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

Customs

Joint Border Management System Further Development (Changed)

Customs and the Ministry for Primary Industries will now implement Tranche 2 of the Joint Border Management Systems (JBMS) through a series of smaller projects that will either enhance or replace elements of the current systems with the aim of realising the full benefits to the Crown and industry of the JBMS programme. Funding for these projects may be required. In addition, changes in project timeframes have moved expected delivery from 2019/20 to 2020/21.

Defence

Defence Funding Requirements to Deliver New Zealand's Defence Policy (Changed)

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

Disposal of New Zealand Defence Force Assets (Changed)

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

Education

Additional Funding for Schools in Lieu of Parental Donations (Unchanged)

The Government has indicated that it will provide additional annual funding of $150 per student to those state and state-integrated schools that do not request donations from parents. The fiscal impact of this policy is uncertain at this point, as it will be driven by the level of uptake by eligible schools.

Early Learning Strategic Plan (Changed)

The Ministerial Advisory Group has, with the support of the Ministry of Education, drafted a new 10-year Strategic Plan for Early Learning (the draft Plan) for the Minister of Education. The draft Plan ties in strongly with the Minister's objectives of raising quality, improving equity and enabling choice in early learning. The Government has also indicated it will reinstate higher hourly funding rates for early childhood education (ECE) services with 100% qualified teachers. The draft Plan will be consulted on between November 2018 and January 2019, and is likely to require additional Crown funding.

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

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

Institutes of Technology and Polytechnics - Support and Reform (New)

In recent years, institutes of technology and polytechnics (ITPs) have experienced significant declines in demand, which has reduced their revenue and affected some providers' sustainability. Governance and management issues have also been identified at a number of ITPs, resulting in Councils being replaced by commissioners. To improve the financial viability of the sector and ensure the delivery of quality vocational education and training, the Government has signalled a commitment to significantly reform the structure and functions of the system. This reform will require additional Crown funding. The timeframe for implementing change will influence the scale of funding needed to ensure the viability of at-risk ITPs in 2019 and 2020.

School and Early Childhood Education Funding Review (Changed)

The Government has expanded work on replacing deciles to look more broadly at how wider system settings should address equity in the school funding system. Decile funding will not be replaced in 2019 or 2020; however, this decision will be revisited at a future date and may have expenditure implications.

Teacher Supply (New)

The Government is currently moving to address a shortage of teachers in the New Zealand school system. There is a risk that further government intervention will be required to ensure adequate numbers of teachers. Some of these interventions will have associated costs.

Foreign Affairs

Hosting the Asia Pacific Economic Cooperation Forum 2021 (Unchanged)

The New Zealand Government has committed to hosting the Asia Pacific Economic Cooperation (APEC) Forum in 2021. This will involve hosting meetings and events throughout the year, culminating in Leaders' Week in Auckland in November. Some funding for the operations and hosting components of APEC was allocated through Budget 2018. However, funding has not yet been allocated for the associated security responsibilities and remaining hosting costs. Funding will also depend on the assessment of threat and risk levels in the lead up to APEC.

Official Development Assistance (Unchanged)

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

Greater Christchurch Regeneration

Canterbury Earthquake Recovery Residential Red Zone (Unchanged)

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

Christchurch Central Recovery Plan - Anchor Projects (Changed)

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

Health

Dunedin Hospital (Unchanged)

The Government has signalled its intention to redevelop Dunedin Hospital. Funding was set aside in Budget 2018 for initial project management, resource consents and design costs for the redevelopment. Once a detailed business case is completed, the Government will consider redevelopment options and their costs and funding options.

Primary Care Services (Changed)

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

Housing and Urban Development

KiwiBuild (Changed)

Changes in the housing market and economy may have an impact on the costs of delivering 100,000 homes and associated revenue recycling. If house prices fall, Crown underwrites may be called, and the value of land and buildings held by the Crown might fall. To achieve programme goals, there may be a need to change policy parameters or provide support to developers and/or homebuyers, especially if house prices increase. The Crown also faces general commercial risks associated with development and with implementing a large and evolving programme.

Public Housing (Unchanged)

The Government has committed to ending homelessness and improving access to public housing. Increases in demand for public housing may result in pressure to increase spending. The cost of providing public housing places can increase owing to increases in market rent and higher quality requirements. If any of these risks eventuate they may have a significant fiscal impact.

Internal Affairs

Archives New Zealand Storage Capacity (Unchanged)

There is insufficient storage capacity in the Wellington region for current and future Archives New Zealand holdings and the Wellington region storage is not fit for purpose. A business case has been prepared to assess the options for the Department of Internal Affairs to continue to meet its statutory and business requirements. The extent of the fiscal risk to the Crown will depend on the costs and funding option that the Government approves.

Justice

Access to Justice (Changed)

The Government has committed to providing safe and effective justice, and increasing access to justice for New Zealanders. This includes a commitment to increase Community Law Centre funding and establish a Criminal Cases Review Commission. The potential cost and timing of these initiatives is uncertain and will be subject to final Cabinet decisions.

Reducing Family Violence - Increased Investment (Unchanged)

Reducing and preventing family violence is a government priority. The Ministry of Justice and the Ministry of Social Development are currently leading the development of a range of potential investment options. While the timeframe and potential costs of this investment are not yet known, and will be subject to a final decision on any reforms in this area, initial estimates are more than $100 million over the forecast period.

Police

Next Generation Critical Communications (New)

The Next Generation Critical Communications programme seeks to replace Emergency Services' (New Zealand Police, Fire and Emergency New Zealand, St John New Zealand and Wellington Free Ambulance) critical communications networks with a modern digital communications capability providing mission critical voice, video, data and messaging. A business case is currently being developed to explore the options available. To the extent that the programme cannot be managed within baselines, there may be costs associated.

Regional Economic Development

Provincial Growth Fund (Changed)

The Government has committed to a Provincial Growth Fund of $3.0 billion over a three-year period. Budget 2018 provided $1.0 billion to the Fund, and another $2.0 billion has been committed from Budget 2019 and Budget 2020 operating allowances, and the multi-year capital envelope. The capital and operating split of this funding is likely to change, so final amounts may vary from what is included in the fiscal forecasts.

Research, Science and Innovation

Research and Development Spending Target (New)

The Government has announced a target to increase economy-wide Research and Development (R&D) expenditure to 2% of GDP over the next 10 years. To reach this target, economy-wide R&D expenditure would need to increase by approximately $4.0 billion (from a projected $3.7 billion in 2018 to around $7.7 billion by 2028). To achieve this the majority of growth will need to come from the private sector with the balance to come from public investment. Depending on private expenditure increases, this would require average annual increases of approximately $150 million in public research and development spending each year over 10 years.

Revenue

Potential Tax Policy Changes (Unchanged)

The tax policy work programme can be viewed on the tax policy website (www.taxpolicy.ird.govt.nz). The fiscal implications of many of the policy topics under review are unquantified at this stage and the outcomes of the Tax Working Group and Welfare Expert Advisory Group are yet to be determined. The Tax Working Group released its interim report in September 2018. The Government has indicated that it will not be making any decisions about the Group's recommendations until it has received the final report, due in February 2019. The Government has also indicated that any resulting significant tax policy changes will not take effect until after the next general election.

Social Development

Changes to the Welfare System (Changed)

The Government has committed to overhaul the welfare system. Part of this work has involved the establishment of the Welfare Expert Advisory Group (WEAG), which has been tasked with advising on how to improve the welfare system to achieve the Government's vision (ie, deliver adequate income and standard of living, support participation, and promote dignity of clients). WEAG's advice is due in February 2019, and the Government is expected to make decisions on its response in March 2019.

Funding Current Demand for the Resolution of Historical Claims (New)

The Ministry of Social Development is forecasting to spend in 2018/19 on the resolution of historical claims all funding remaining in a multi-year appropriation that was intended to last until June 2021. Further funding will be required to enable assessment of claims to continue beyond this date. The impending Royal Commission of Inquiry is likely to have an impact on awareness of the claims process resulting in an increase in the number of claims received.

Removing Compulsory Deductions to Sole Parent Benefits (Title changed, risk unchanged)

Section 192 (previously section 70A) of the Social Security Act 2018 reduces the amount of benefit payments owed to sole parents who do not disclose the identity of the other parent of their child and/or apply for child support, subject to some exemptions. The Government has indicated a commitment to remove this section from the Act, which will see more sole parents receive the full main benefit. The exact behaviour change associated with the removal of this section, in terms of applications for child support, is unknown. However, it is expected that it will lead to the cost of removing the sanction increasing over time as the amount of child support retained by the Crown each year decreases.

Transport

Auckland City Rail Link (Unchanged)

The Government has committed to fund 50% of the costs associated with the City Rail Link project, which is estimated to cost $3.4 billion. Based on this estimate, the Government's contribution to the project will be around $1.7 billion. There is a risk that the timing, scope and amount of the government contribution to the project could be different from what is included in the forecasts.

Wellington Transport Investment Programme (New)

Development of the Let's Get Wellington Moving programme is currently underway. The programme includes state highway, public transport, walking and cycling improvements to reduce congestion in the Wellington City area and is expected to cost $4.0 billion to $6.0 billion, split between local government and the National Land Transport Fund over 20 years. The scope of the project and appropriate funding sources are still being worked through.

Treaty of Waitangi Negotiations

Government Response to WAI262 (Unchanged)

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

Cost Pressure and Cost Variance Risks by Portfolio#

Print this section

ACC

ACC Levies (Unchanged)

Indicative future levy rates for the Work, Earners' and Motor Vehicle accounts have been included in the forecasts. However, final levy decisions are made by the Government and may differ from the forecast levy path. ACC has recently consulted the public on potential levy rates for 2019/20 and 2020/21, and Cabinet will make a decision on these in December this year. Levy rates will be reviewed again in two years' time.

In addition, revenue from the levies set for these accounts may be more or less than is required to cover the cost of claims. If factors such as claims experience, ACC performance and economic assumptions (particularly discount rates and unemployment rates) turn out differently from what has been forecast, ACC's levy revenue, claims costs and liability may also differ from forecast. Any variance will have a corresponding impact on the operating balance

Non-earners' Account (Unchanged)

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

Economic Development

New Zealand Screen Production Grant (Unchanged)

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

Education

Education Operating Cost Pressures (Unchanged)

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

Learning Support (Unchanged)

The Government is currently consulting on the draft Disability and Learning Support Action Plan which proposes a number of significant new Learning Support initiatives. There are also a number of cost pressures building in the supply of learning support services owing to population growth and increased reporting of neurodevelopmental or other conditions meeting the eligibility criteria for particular programmes. These include English for Speakers of Other Languages (ESOL), Early Intervention and Sensory Learning. To the extent that these pressures cannot be managed within existing baselines, additional funding is likely to be required.

Finance

Earthquake Commission (Unchanged)

The Earthquake Commission's (EQC's) independent actuary undertakes half-yearly valuations of the total earthquake liability to the Crown. This includes settled and yet-to-settle claims (including those in litigation), an estimation of future claims not yet received, insurer finalisation and any associated reinsurance recoveries. Based on these valuations, a profile of the claims yet to settle is included in the fiscal forecasts. There still remains some risk that EQC's remaining settlement expenditure relating to the Canterbury and Kaikoura earthquakes will be different (higher or lower) than forecast.

EQC's remaining settlement expenditure relating to the Canterbury earthquakes does not incorporate any liability recognition or provision for costs relating to the over-cap portion of any building claims, whether they are on-sold remedial building claims or otherwise. EQC only recognises expected future costs where it is liable for such costs under the Earthquake Commission Act 1993.

Goodwill on Acquisition (Unchanged)

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

Foreign Affairs

Antarctica NZ - Redevelopment of Scott Base (Changed)

The infrastructure at Scott Base is approaching the end of its functional life. The cost of redevelopment of Scott Base, including the replacement of wind-farm assets, ranges from $200 million to $290 million over a 10- to 13-year period. The precise cost has yet to be determined on the basis of a detailed business case.

Greater Christchurch Regeneration

Southern Response Earthquake Services Support (Unchanged)

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

Health

Caregiver Employment Conditions (Changed)

Several cases and funding claims, such as in-between travel costs, in the disability support and aged care sectors may involve significant costs to the Crown relating to interpretation of the Minimum Wage Act 1983 and the Equal Pay Act 1972. There is also a risk of costs to the Crown for possible claims under Part B of the Settlement Agreement where a provider can seek recompense if they consider that they have suffered financial disadvantage as a direct result of implementing obligations under the Home and Community Support (Payment for Travel Between Clients) Settlement Act 2016 or as per the agreed provisions under Part B.

Health Capital Pressure (Changed)

District Health Boards (DHBs) have submitted updated capital intentions, which identify the indicative need for Crown funding over the next four years. These pressures are largely driven by asset condition issues (over 19% of hospital assets are rated in poor or very poor condition) and demographic growth (population growth and an ageing population) pressures on infrastructure capacity. In addition, deficit support may be required to support DHBs' working capital requirements.

Health Operating Pressure (Changed)

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

Housing and Urban Development

Business-as-Usual Divestment and Development of Housing New Zealand Corporation Housing (Unchanged)

The forecasts include business-as-usual divestments and redevelopments of housing property as part of Housing New Zealand Corporation's (HNZC's) asset management strategy. Proceeds from property divestments will be used to help fund investment in redeveloping and growing HNZC's stock. Market conditions impact on the proceeds of sale and the cost of acquisitions and development. Given these uncertainties, there is a risk that there will be variations from the fiscal forecasts.

Emergency Housing Special Needs Grants (Unchanged)

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

Tāmaki Regeneration Project (Unchanged)

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

Research, Science and Innovation

Research and Development Tax Incentive (Unchanged)

The Government has approved the implementation of a Research and Development (R&D) Tax Incentive. This incentive will require the Crown to repay eligible firms a percentage of expenditure on R&D. Budget 2018 provided funding averaging $256 million per year, but there is a risk that costs may differ owing to limited data being available for forecasting purposes and because international experience shows that costs of R&D tax credits can be significantly higher than expected.

Revenue

Cash Held in Tax Pools (Unchanged)

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

Student Loans - Valuation (Unchanged)

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

Transformation and Technology Renewal (Unchanged)

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

Statistics

Census Costs (New)

It is a legislative requirement to hold a census every five years, with the next Census due in 2023. Statistics New Zealand has estimated the quantum for the 2023 Census as being around $150 million over the life of the Census.

Further, owing to the lower-than-optimal response rate for Census 2018, there is some financial uncertainty around the costs for completing this Census.

Transport

Rail Network Valuation Approach (Unchanged)

KiwiRail operates both freight and passenger transport services. The valuation approach for the assets used for these different activities is outlined in the Half Year Economic and Fiscal Update 2018 Additional Information - Accounting Policies. The freight business of KiwiRail is predominantly commercially focused and therefore, for financial reporting purposes, assets relating to the freight business are fair-valued on a net-realisable-value basis.

For the freight infrastructure to continue to be valued on this basis, KiwiRail needs to meet certain criteria set out in the Accounting Standards Framework. Consistent with prior years, there is a likelihood of continued Crown support and a risk that KiwiRail no longer meets the criteria for valuing freight infrastructure on a net-realisable-value basis and may need to change to a depreciated replacement cost basis. The impact of this change would increase the measured value of assets by up to $4.3 billion.

Support for KiwiRail (Unchanged)

Budgets 2010 to 2018 supported KiwiRail with investments of around $2.1 billion in the New Zealand freight rail system. Further Crown investment into KiwiRail is likely to be required from 2019/20 to support the rail network and potentially replace the Interislander ferries. A review of KiwiRail's structure and funding arrangements is due in late 2018/19, which will inform future funding decisions.

Treaty of Waitangi Negotiations

Relativity Clause (Unchanged)

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

Treaty Settlement Forecasts (Unchanged)

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

Cross-portfolio Specific Fiscal Risks#

Print this section

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

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

Changes to Institutional Form of Government Agencies (Unchanged)

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

Increasing the Minimum Wage (Unchanged)

Government policy decisions to increase the minimum wage to $20 by April 2021 will mean increased costs to State sector employers to the extent their employees receive a direct increase in wages. These costs may be reflected in Budget bids for increased appropriations where costs cannot be absorbed within baselines without compromising service delivery.

Other Capital Cost Pressures (Unchanged)

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

Other Operating Cost Pressures (Unchanged)

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

Outcomes from Other Government Inquiries and Reviews (Unchanged)

A number of inquiries and reviews are underway across government. At this point it is uncertain what the fiscal impact from the outcomes of these reviews may be.

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

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

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

Services Funded by Third Parties (Unchanged)

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

State Sector Employment Agreements (Unchanged)

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

Unexpected Maintenance for Crown-owned Buildings (Unchanged)

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

Risks Removed Since the Budget Update#

Print this section

Contingent Liabilities and Contingent Assets#

Print this section

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

Typically, contingent liabilities consist of guarantees and indemnities, uncalled capital and legal disputes and claims. The contingent liabilities facing the Crown are a mixture of operating and balance sheet risks, and they can vary greatly in magnitude and likelihood of realisation.

In general, if a contingent liability were realised, or the amount becomes sufficiently reliable to record as a liability, it would reduce the operating balance and net worth and increase net core Crown debt. In the case of some contingencies (eg, uncalled capital) the negative impact would be restricted to net core Crown debt because the cost would be offset by the acquisition of capital.

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

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

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

Some contingencies of the Crown are not able to be quantified. We have disclosed all unquantifiable contingent liabilities and unquantifiable contingent assets that are not expected to be remote.[18]

The contingencies have been stated as at 31 October 2018, being the latest set of published contingencies.

Quantifiable Contingent Liabilities and Contingent Assets

Unquantifiable Contingent Liabilities and Contingent Assets

Description of Contingent Liabilities

Quantifiable contingent liabilities over $100 million

Uncalled capital

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

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

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

Guarantees and indemnities

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

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

New Zealand Export Credit Office guarantees

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

$123 million at 31 October 2018 ($137 million at 30 June 2018)

Legal proceedings and disputes

Legal tax proceedings

When a taxpayer disagrees with an assessment issued following the dispute process, the taxpayer may challenge that decision by filing proceedings with the Taxation Review Authority or the High Court. This contingent liability represents the maximum liability Inland Revenue has in respect of these cases.

$147 million at 31 October 2018 ($146 million at 30 June 2018)

Other quantifiable contingent liabilities

Unclaimed monies

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

$163 million at 31 October 2018 ($161 million at 30 June 2018)

Christchurch Engine Centre Partnership Agreement

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

$264 million at 31 October 2018 ($158 million at 30 June 2018)

Unquantifiable contingent liabilities

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

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

Indemnities

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

Legal claims and proceedings

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

Accident Compensation Corporation (ACC) litigation

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

Ministry for Primary Industries - Biosecurity Act compensation

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

Treaty of Waitangi claims

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

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

Kiwifruit vine disease Psa-V

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

Other unquantifiable contingent liabilities

Canterbury insurance disputes

Southern Response Earthquake Services Limited (SRESL) from time to time receives notification of legal claims and disputes in relation to claim settlements as a commercial outcome of conducting its business.

A representative action proceeding was filed against SRESL on 29 May 2018. The financial statements make no allowance for the outcome of these proceedings, as the range of possible outcomes cannot be reliably quantified at this time. These claims are being defended.

Criminal Proceeds (Recovery) Act 2009

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

Environmental liabilities

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

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

Holidays Act 2003 and other relevant legislation

A number of entities have commenced a review of payroll calculations over the past six years in order to ensure compliance with the Holidays Act 2003 and other relevant legislation. Where possible, a provision has been made in these financial statements for obligations arising from those reviews. Further work continues to be undertaken by a number of entities including the Ministry of Education, District Health Boards, the Department of Corrections and KiwiRail Holdings Limited. These entities have complexities that are taking longer to resolve. To the extent that an obligation cannot reasonably be quantified at 31 October 2018, there is an unquantified contingency.

Remediation of Per- and Poly- Fluoroalkyl Substances Contamination

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

Treaty of Waitangi claims - Settlement Relativity Payments - see page 78

Description of Contingent Assets

There are no material quantifiable or unquantifiable contingent assets at 31 October 2018.

Forecast Financial Statements#

Print this section

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

They are based on the accounting policies and assumptions that follow. As with all such assumptions, there is a degree of uncertainty surrounding them. This uncertainty increases as the forecast horizon extends. The Risks and Scenarios and Specific Fiscal Risks chapters discuss the risks to the fiscal forecast in more detail.

The forecasts have been prepared in accordance with the Statement of Responsibility and reflect the judgements and information known at the time they were prepared. They reflect all government decisions and circumstances communicated to 27 November 2018.

The finalisation dates and key assumptions that underpin the preparation of the Forecast Financial Statements are outlined in the Fiscal Outlook chapter (pages 21 to 44).

Statement of Accounting Policies#

Print this section

Significant Accounting Policies

The Forecast Financial Statements have been prepared in accordance with the accounting policies that are expected to be used in the comparable audited actual Financial Statements of the Government. They comply with generally accepted accounting practice (GAAP) as required by the Public Finance Act 1989 and have been prepared in accordance with Public Benefit EntityFinancial Reporting Standard 42: Prospective Financial Statements.

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

The Forecast Financial Statements reflect the accounting standards in place in the year that they are prepared. Adoption of new accounting standards in future financial years are consequently not reflected in these Financial Statements.

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

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

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

The specific accounting policies are included within the 2018 Half Year Economic and Fiscal Update Additional Information document which can be found on the Treasury's website at https://treasury.govt.nz/publications/efu/half-year-economic-and-fiscal-update-2018

Forecast Policies

The Forecast Financial Statements have been prepared on the basis of the Treasury's best professional judgement. Actual financial results for the periods covered are likely to vary from the information presented in these forecasts. Factors that may lead to a material difference between information in these Forecast Financial Statements and the actual reported results in future years are set out in the Specific Fiscal Riskschapter on pages 57 to 91. Key forecast assumptions are set out on pages 25 to 26.

Reporting and Forecast Period

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

Government Reporting Entity as at 27 November 2018#

Print this section

These Forecast Financial Statements are for the government reporting entity as specified in Part 3 of the Public Finance Act 1989. This comprises Ministers of the Crown and the following entities (classified in the three institutional components used for segmental reporting):

Core Crown Segment

Departments

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

Offices of Parliament

1. Controller and Auditor-General
2. Office of the Ombudsman
3. Parliamentary Commissioner for the Environment

Others

1. New Zealand Superannuation Fund
2. Reserve Bank of New Zealand

State-owned enterprises Segment

State-owned enterprises

1. Airways Corporation of New Zealand Limited
2. Animal Control Products Limited
3. AsureQuality Limited
4. Electricity Corporation of New Zealand Limited
5. KiwiRail Holdings Limited
6. Kordia Group Limited
7. Landcorp Farming Limited
8. Meteorological Service of New Zealand Limited
9. New Zealand Post Limited
10. New Zealand Railways Corporation
11. Quotable Value Limited
12. Solid Energy New Zealand Limited (in liquidation)
13. Transpower New Zealand Limited

Mixed ownership model companies (Public Finance Act Schedule 5) 

1. Genesis Energy Limited
2. Mercury NZ Limited
3. Meridian Energy Limited

Other

1. Air New Zealand Limited
2. Kiwi Group Holdings Limited (including Kiwibank)

Crown Entities Segment

Crown entities

1. Accident Compensation Corporation
2. Accreditation Council
3. Arts Council of New Zealand Toi Aotearoa
4. Broadcasting Commission
5. Broadcasting Standards Authority
6. Callaghan Innovation
7. Children's Commissioner
8. Civil Aviation Authority of New Zealand
9. Commerce Commission
10. Crown Irrigation Investments Limited
11. Crown Research Institutes (7)
12. District Health Boards (20)
13. Drug Free Sport New Zealand
14. Earthquake Commission
15. Education New Zealand
16. Electoral Commission
17. Electricity Authority
18. Energy Efficiency and Conservation Authority
19. Environmental Protection Authority
20. External Reporting Board
21. Families Commission
22. Financial Markets Authority
23. Fire and Emergency New Zealand
24. Government Superannuation Fund Authority
25. Guardians of New Zealand Superannuation
26. Health and Disability Commissioner
27. Health Promotion Agency
28. Health Quality and Safety Commission
29. Health Research Council of New Zealand
30. Heritage New Zealand Pouhere Taonga
31. Housing New Zealand Corporation
32. Human Rights Commission
33. Independent Police Conduct Authority
34. Law Commission
35. Maritime New Zealand
36. Museum of New Zealand Te Papa Tongarewa Board
37. New Zealand Antarctic Institute
38. New Zealand Artificial Limb Service
39. New Zealand Blood Service
40. New Zealand Film Commission
41. New Zealand Lotteries Commission
42. New Zealand Productivity Commission
43. New Zealand Qualifications Authority
44. New Zealand Symphony Orchestra
45. New Zealand Tourism Board
46. New Zealand Trade and Enterprise
47. New Zealand Transport Agency
48. New Zealand Venture Investment Fund Limited
49. New Zealand Walking Access Commission
50. Office of Film and Literature Classification
51. Pharmaceutical Management Agency
52. Privacy Commissioner
53. Public Trust
54. Radio New Zealand Limited
55. Real Estate Agents Authority
56. Retirement Commissioner
57. School Boards of Trustees (2,405)
58. Social Workers Registration Board
59. Sport and Recreation New Zealand
60. Takeovers Panel
61. Te Reo Whakapuaki Irirangi (Māori Broadcasting Funding Agency)
62. Te Taura Whiri i te Reo Māori (Māori Language Commission)
63. Television New Zealand Limited
64. Tertiary Education Commission
65. Transport Accident Investigation Commission
66. WorkSafe New Zealand

Organisations listed in schedule 4 of the Public Finance Act 1989

1. Agricultural and Marketing Research and Development Trust
2. Asia New Zealand Foundation
3. Fish and Game Councils (12)
4. Game Animal Council
5. Māori Trustee
6. National Pacific Radio Trust
7. New Zealand Fish and Game Council
8. New Zealand Game Bird Habitat Trust Board
9. New Zealand Government Property Corporation
10. New Zealand Lottery Grants Board
11. Ngāi Tahu Ancillary Claims Trust
12. Pacific Co-operation Foundation
13. Pacific Island Business Development Trust
14. Reserves Boards (21)
15. Te Ariki Trust

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

1. Crown Asset Management Limited
2. Crown Infrastructure Partners Limited (previously Crown Fibre Holdings Limited)
3. Education Payroll Limited
4. Ōtākaro Limited
5. Predator Free 2050 Limited
6. Research and Education Advanced Network New Zealand Limited
7. Southern Response Earthquake Services Limited
8. Tāmaki Redevelopment Company Limited
9. The Network for Learning Limited

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

1. Te Urewera

Others

1. Teaching Council of Aotearoa New Zealand
2. Regenerate Christchurch
3. Christ Church Cathedral Reinstatement Trust

Other entities

Crown entities

1. Tertiary Education Institutions (27)*

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

1. City Rail Link Limited*

*These entities are not fully consolidated into the forecast financial statements of the government with only the Crown's interest in them being included.

Subsidiaries of SOEs, Crown entities and other government entities are consolidated by their parents and not listed separately in this table.

Forecast Financial Statements#

Print this section

1. The 2019 Previous Budget comparator for other revenue and transfer payments and subsidies has been restated to eliminate Income Related Rent Subsidy transactions between government reporting entities.

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

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

1. The classifications of the functions of the Government reflect current approved baselines. Forecast new operating spending is shown as a separate line item in the above analysis and will be allocated to functions of the Government once decisions are made in future Budgets.
2. The 2019 Previous Budget comparator for social security and welfare expenses has been restated to eliminate Income Related Rent Subsidy transactions between government reporting entities.

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

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

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

 

1. Further information on the proceeds and repayments of government bonds is available in note 16.
2. Excludes transactions with ACC and NZS Fund.

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

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

1. Refer to page 94 for the impacts of the adoption of NZ PBE IFRS 9: Financial Instruments.
2. Equity accounted investments include tertiary education institutions and City Rail Link Limited.

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

Notes on borrowings

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

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

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

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

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

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

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

Notes to the Forecast Financial Statements#

Print this section

1. Customs excise-equivalent duty.

 

1. The 2019 Previous Budget comparator for the income related rent subsidy has been restated to eliminate the transactions between government reporting entities.
2. Clinical supplies has now been reclassified from other operating expenses to inventory expenses resulting in a restatement of the 2019 Previous Budget comparator for these two lines.

ACC liability

Calculation information

PwC NZ has prepared an independent actuarial estimate of the ACC outstanding claims liability as at 30 June 2018. This estimate includes the expected future payments relating to accidents that occurred prior to balance date (whether or not the associated claims have been reported to, or accepted by, ACC) and also the expected future administrative expenses of managing these claims.

The assumptions underpinning this valuation form the basis of the five-year forecast of the outstanding claims liability.

The key economic variables that impact on changes to the valuation are the long-term Labour Cost Index (LCI), average weekly earnings and the discount rate. Discount rates were derived from the yield curve for New Zealand Government bonds. For these forecast statements, the claims liability has been updated for the latest discount rates as at 30 September 2018. The equivalent single effective discount rate, taking into account ACC's projected future cash flow patterns, is 3.26% and allows for a long-term discount rate of 4.75% from 2063.

Other key variables in each valuation are the forecast increases in claim costs over and above the economic variables above, and the assumed rate at which long-term claimants will leave the scheme over the period. This assessment is largely based on scheme history.

Presentation approach

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

Unallocated contingencies represent expenses included in Budget 2018 and previous Budgets that have yet to be allocated to departments. Forecast new spending indicates the expected spending increases from future Budgets.

The forecast for new operating spending for Budget 2019 is $2.4 billion. Some of this allowance has been pre-committed as at the forecast finalisation date of 27 November 2018, with only the unallocated portion of the allowance included in this note.

Unallocated contingencies represent capital spending from Budget 2018 and previous Budgets that has yet to be allocated to departments. Forecast new spending indicates the expected capital spending increases from future Budgets.

The forecast for new capital spending for Budget 2019 to 2022 is $13.1 billion. Some of the allowance has been pre-committed as at the forecast finalisation date of 27 November 2018, with only the unallocated portion of the allowance included in this note.

1. From 1 July 2018, the valuation of the Student Loans Scheme moved from an amortised cost approach to a fair value approach owing to PBE IFRS 9 being adopted in the 2018/19 financial year. The new valuation approach resulted in a one-off increase of $628 million to the value of the student loan asset. The 2019 Previous Budget comparator has been restated to include the amount previously estimated to be the one-off impact.
2. Using a revaluation methodology unless otherwise stated.

1. Additions do not include any purchases which may result from the allocation of the forecast for new capital spending (separately disclosed in the Statement of Financial Position).
2. Other mainly includes transfers to/from other asset categories.

The net liability of the Government Superannuation Fund (GSF) was calculated by GSF's actuary as at 30 September 2018. The liability arises from closed schemes for past and present public sector employees as set out in the Government Superannuation Fund Act 1956. A Projected Unit Credit method was used to calculate the liability as at 30 September 2018, based on membership data as at 30 June 2018 with adjustments for cash flows to 30 September 2018. The funding method requires the benefits payable from GSF in respect of past service to be calculated and then discounted back to the valuation date.

For these Forecast Financial Statements, the net GSF liability was updated for the latest discount rates derived from the market yield curve for New Zealand Government bonds as at 30 September 2018.

Other principal long-term financial assumptions were an inflation rate, as measured by the Consumers Price Index (CPI), of 1.67% for the 19 years to 30 June 2037, then increasing gradually each year to 2.0% in the year ended 30 June 2063 and remaining at 2.0% p.a. for all years after that. In addition an annual salary growth rate, before any promotional effects, of 2.5% (2.5% at 30 June 2018).

The 2018/19 projected decrease in the net GSF liability is $217 million, reflecting a decrease in the GSF liability of $76 million and an increase in the GSF net assets of $141 million.

The overall decrease in the GSF liability of $76 million includes an actuarial loss (which increases the liability) between 1 July 2018 and 30 September 2018, of $510 million, owing to movements in the discount and CPI rates and changes to some of the demographic assumptions. The remaining $586 million reduction is owing to the current service cost and interest unwind (increases the liability) which is more than offset by benefits to members (reducing the liability).

The increase in the value of the net assets of GSF of $141 million includes a gain of $120 million reflecting the updated market value of assets at 30 September 2018. The balance of $21 million is the total of the expected investment returns and contributions received/receivable, offset by the benefits paid/payable to members.

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

Provision for ETS credits

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

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

The prices for NZUs used to calculate the ETS provision are assumed to remain constant over the forecast period and are based on market prices during the last week of September 2018.

The ETS impact on the fiscal forecast is as follows:

1. NZ PBE IFRS 9 was adopted in the 2018/19 financial year. The adoption has resulted in a one-off increase of $628 million to the value of the student loan asset impacting on taxpayers' funds - refer note 9 for further details of this one-off adjustment. The 2019 Previous Budget comparator has been restated to include the amount previously estimated to be the one-off impact.

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

Statement of Segments#

Print this section

Forecast Statement of Segments#

Print this section