Half Year Economic and Fiscal Update 2019

An introduction to the Half Year Economic and Fiscal Update#

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

Sharing what we do#

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As the government’s lead economic and financial adviser we forecast the economic outlook for New Zealand and the Government’s fiscal outlook. This 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#

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

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The Treasury is in a unique position to focus on improving the way our economy can raise New Zealand living standards. Along with delivering first-rate economic and financial advice, we are committed to providing it in a way 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#

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

On the basis of the economic and fiscal information available to it, the Treasury has used its best professional judgement in preparing, and supplying the Minister of Finance with, this Economic and Fiscal Update. The Update incorporates the fiscal and economic implications of both government decisions and other circumstances as at 25 November 2019 that were communicated to me by the Minister of Finance in accordance with the requirements of the Public Finance Act 1989 and of other economic and fiscal information available to the Treasury as at 25 November 2019. This Update does not incorporate any decisions, circumstances or statements that the Minister of Finance has determined, in accordance with section 26V of the Public Finance Act 1989, should not be incorporated in this Update.

Caralee McLiesh
Secretary to the Treasury

4 December 2019

 

To enable the Treasury to prepare this Economic and Fiscal Update I have ensured the Secretary to the Treasury has been advised, in accordance with the requirements of the Public Finance Act 1989, of all government decisions and other circumstances as at 25 November 2019 of which I was aware and that had material economic or fiscal implications.

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

Hon Grant Robertson
Minister of Finance

4 December 2019

Executive Summary#

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Sources: Stats NZ, the Treasury

• The New Zealand economy is experiencing a period of slower, but still solid, economic growth, as household spending eases and global uncertainty weighs on business investment. This contributed to the economy growing at a slower rate of 2.4% in the year to June 2019, compared to 3.2% growth recorded in the year to June 2018.
• Recent data suggest growth has continued at this slower pace over the second half of 2019. As a result, the forecast for GDP growth in 2019/20 has been revised down, reflecting the drag from subdued business investment and household consumption as well as lower services exports.
• Growth is forecast to pick up in 2020/21, supported by monetary and fiscal stimulus. The Budget Policy Statement 2020 includes an additional $12.0 billion of government capital investment, which complements other spending measures announced in the Budget Update. Reductions in the Official Cash Rate have largely flowed through to lower mortgage interest rates, and house prices have picked up. Stronger house price growth is expected to support an increase in household consumption growth. Economic growth eases towards the end of the forecast period, as fiscal and monetary support wane and as population growth continues to soften.
• Although growth has slowed, conditions in the labour market remain tight, and this has caused wage and cost pressures to rise. The unemployment rate is projected to be steady at around 4.2%, while wage growth increases to reach 3.7% at the end of the forecast period. Past falls in tradable goods prices have helped keep CPI inflation subdued but inflation is projected to rise gradually to 2.0% in late 2021.
• Global growth has slowed and the outlook has eased. Escalating trade protectionism, and the associated uncertainty, has weakened global trade and dampened investment spending. Despite this, demand for New Zealand's major export commodities has remained firm and prices have increased, although growth in tourism has eased. The lower New Zealand dollar is providing additional support for export incomes.
• Nominal GDP, the main driver of tax revenue, is forecast to increase 5.1% over the year ahead, supported by improved terms of trade. Growth averages 5.0% over the forecast period, slightly lower than expected in the Budget Update. Nominal GDP is lower in each forecast year and, in total, is $5.1 billion lower than in the Budget Update.
• By 2023/24, core Crown tax revenue is forecast to reach $110.5 billion (28.4% of GDP), $24.0 billion higher than 2018/19.
• Core Crown expenditure increases by $22.2 billion, reaching $109.2 billion in 2023/24 (28.1% of GDP). This increase in expenditure largely reflects previous Budget decisions, and future Budget allowances combined with increases in benefit expenses.
• An operating balance before gains and losses deficit of $0.9 billion is forecast in the current year, before returning to a small surplus in 2020/21 which then grows to reach $5.9 billion (1.5% of GDP) in 2023/24.
• Capital expenditure across the forecast period is $49.9 billion. This includes the Government's new capital investment of $12.0 billion, with $8.1 billion included in the forecast and the remaining $3.9 billion forecast to be spent after 2023/24.
• Taking into consideration both the operating and capital activities of the Government, a total cash shortfall of $20.1 billion is forecast. The cash shortfall is mainly funded from additional borrowings.
• Net core Crown debt is forecast to increase by $18.6 billion. As a percentage of GDP, net core Crown debt increases from 19.0% in 2018/19 to 21.5% of GDP in 2021/22 before falling to 19.6% in 2023/24. Gross debt increases by $18.2 billion over the forecast period to be $102.6 billion in 2023/24 (26.4% of GDP).
• Total borrowings are forecast to increase from $110.2 billion in 2018/19 (36.2% of GDP) to $145.3 billion by the end of 2023/24 (37.3% of GDP). This increase is owing to issuing additional government bonds to help fund the cash shortfall, an increase in Kiwibank borrowings (eg, deposits held) and Crown entity borrowings.

Economic Outlook#

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Overview#

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• The New Zealand economy is experiencing a period of slower, but still solid, economic growth as household spending eases and global uncertainty weighs on business investment. Nonetheless, the labour market remains tight, and wage and cost pressures have increased. Past falls in tradable goods prices have helped keep CPI inflation subdued but inflation is projected to rise gradually to 2.0% in late 2021.
• Global growth has also slowed and the outlook has eased. Escalating trade protectionism, and the associated uncertainty, has weakened global trade and dampened investment spending. Despite this, demand for New Zealand's major export commodities has remained firm and prices have increased, although growth in tourism has eased. The lower New Zealand dollar is also supporting export incomes.
• Domestically, fiscal and monetary policy support for growth has increased in the period since the Budget Update. The $12.0 billion of capital investment announced in the Budget Policy Statement 2020 supports economic growth, particularly from 2020/21 onwards. Reductions in the Official Cash Rate have largely flowed through to lower mortgage interest rates, and house prices have picked up. Stronger house price growth is expected to support an increase in household consumption growth.
• The outlook is for growth to increase from 2.2% over 2019/20 to 2.8% over 2020/21 and 2.7% over 2021/22. This period of stronger growth is expected to put upward pressure on wages and prices and lead to a gradual reduction in monetary stimulus from 2022 onwards. Growth eases to 2.4% over 2023/24 as fiscal and monetary support wane and as population growth continues to soften. The unemployment rate remains close to 4.2% over the forecasts.
• Nominal GDP, the main driver of tax revenue, is forecast to increase 5.1% over the year ahead, supported by improved terms of trade. Growth averages 5.0% over the forecast period, slightly lower than in the Budget Update. Nominal GDP is lower in each forecast year and, in total, is $5.1 billion lower than in the Budget Update.
• The global outlook and net immigration remain key sources of uncertainty. Global risks remain tilted towards slower growth and weaker demand for New Zealand's exports. In contrast, the tight labour market suggests net immigration could be stronger than assumed. The Risks and Scenarios chapter explores these risks further.

Sources: Reserve Bank of New Zealand (RBNZ), 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 141.

Notes:

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

Economic Outlook#

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Economic growth has slowed …

The New Zealand economy is experiencing a period of slower, but still solid, growth. GDP growth continued to ease over the first half of the year driven by a slower pace of growth in household consumption and business investment. This slower pace of growth is expected to have continued over the second half of the year.

Growth is forecast to slow to 2.2% in 2019/20, which is weaker than forecast in Budget Update. This slower growth will lead to less intense capacity pressures and slow the pace of wage and price inflation. Since the Budget Update, monetary policy has been loosened and further fiscal policy support has been announced. These measures are expected to promote a pickup in growth to 2.8% in 2020/21 and 2.7% in 2021/22 and to lead to a gradual rise in inflationary pressures (Figure 1.1). To stabilise inflation at 2.0%, monetary policy support for growth is projected to be withdrawn gradually from early 2022 onwards. Slower growth in government consumption and investment spending, and slower population growth, also contributes to easing growth over 2022/23 and 2023/24.

Figure 1.1 - Real GDP growth

Sources: Stats NZ, the Treasury

Text description of Figure 1.1 - Real GDP growth

In these forecasts, net migration inflows are higher over the forecast period than assumed in the Budget Update, reflecting the stability of net inflows in recent data, but still trend down - from 50,000 persons in 2018/19 to 35,000 persons in 2023/24. This upward revision increases the rate of expansion in the productive capacity of the economy; growth in the working-age population averages 1.6%, up from 1.5% in the Budget Update (Figure 1.2). However, the strength of domestic wage and price pressures in recent quarters corroborates other measures of labour market stretch that suggest the labour market is tighter than previously assumed. This is reflected in a lower rate of labour productivity growth over the forecast period. Overall, the rate at which the economy can grow without putting upward pressure on inflation has been lowered to 2.6% from 2.7% in the Budget Update.

Figure 1.2 - Population growth and changes to net migration

Sources: Stats NZ, the Treasury

Text description of Figure 1.2 - Population growth and changes to net migration

…as household spending growth eased…

Household consumption growth slowed markedly over the first half of 2019, growing 0.4% and 0.5% in the March and June quarters respectively. Growth in services consumption was particularly soft, most noticeably in some components of discretionary spending including hotels and restaurants. This continued the trend of slower growth in discretionary spending over the past two years, especially on new motor vehicles (Figure 1.3). Overall, half of the items that make up household consumption spending are growing more slowly than they were a year ago[1]. This trend is consistent with slower growth in house prices, reduced housing turnover, and lower consumer confidence.

Figure 1.3 - Contributions to real household consumption growth

Sources: Stats NZ, the Treasury

Text description of Figure 1.3 - Contributions to real household consumption growth

…reflecting slower house price growth…

Changes in house prices are an important driver of household consumption, reflecting the large share of housing wealth in total household assets and of borrowing for housing in total household liabilities. House price movements can affect consumption through changes to wealth and to collateral for borrowing. Changes in housing turnover can also affect consumption activity through increased spending on household goods such as furniture and fittings.

Annual house price growth slowed to 1.3% over the past year, driven by price falls in the Auckland market. Demand for existing homes has likely been dampened by several factors including changes to the bright line test, tighter regulations on overseas buyers and lower net immigration. Slower growth in house prices may also be influenced by an increase in supply following a period of underbuilding relative to population growth.

In recent months, sales of existing homes have increased, mortgage interest rates have fallen and house prices in Auckland have begun to rise. Stronger retail sales growth, a tentative pickup in car registrations and improved consumer confidence indicate the stronger outlook for house prices is flowing through to household spending.

Nonetheless, household consumption over the second half of 2019 likely remained subdued and growth is forecast to slow to 2.3% in 2019/20 from 3.3% in 2018/19. House prices are forecast to strengthen further, and growth reaches 6.2% in 2021/22, supported by low mortgage interest rates and an ongoing shortfall of housing relative to the population. House price inflation gradually eases over the remainder of the forecast period as interest rates begin to rise and as demand and supply become more balanced (Figure 1.4).

Figure 1.4 - Growth in house prices and real private consumption

Sources: QV, Stats NZ, the Treasury

Text description of Figure 1.4 - Growth in house prices and real private consumption

…but household income growth remains strong

The outlook for house prices and stable, solid growth in household incomes underpin a pickup in consumption growth to 2.6% in 2020/21 and 2.9% in 2021/22 and 2022/23, before easing modestly in 2023/24 (Figure 1.4).

Household disposable income growth remains solid. Increases in government transfers over the past year have provided a significant boost to household income and labour market earnings have continued to grow strongly. The Quarterly Employment Survey reported total gross weekly earnings were 5.3% higher in the year ended September 2019 than in the previous year and in line with the average for the past five years. The Treasury's estimate of compensation of employees, which is based on the Household Labour Force Survey's broader measure of employment, also grew 5.3% over the year ended September, although slower employment growth drove the decline from 5.8% in the previous year. Overall, we estimate household disposable incomes grew 5.7% in the year ended March 2019 and that growth will reach 6.0% in the year ended March 2020 (Figure 1.5).[2]

The combination of strong income growth and weaker consumption spending points to an increase in the household savings rate, which might suggest that households have decreased discretionary spending (or increased precautionary saving) in response to uncertainty about future growth in incomes and wealth (Figure 1.5).

Figure 1.5 - Growth in disposable income and the household saving ratio

Sources: Stats NZ, the Treasury

Text description of Figure 1.5 - Growth in disposable income and the household saving ratio

Growth in disposable income is forecast to remain solid over 2020/21 and beyond, as the expected pickup in wage growth offsets slower growth in employment and government transfers. Household consumption rises a little more quickly than disposable income, reflecting stronger house price growth, and household saving trends down.

The saving behaviour of households and the responsiveness of household spending to higher house prices are uncertain. The past easing in house prices is unusual in the context of strong population growth, low unemployment, solid household income growth and low interest rates. These factors may cause house prices to increase more quickly than forecast and consumption may be stronger than forecast. On the other hand, house prices are high relative to incomes, household debt is at a high level and housing supply is increasing, which could result in more restrained house price inflation and consumption outcomes than forecast.

Investment in new dwellings is increasing…

Changes in house prices also affect demand for new housing by altering the returns from building a new house. Residential investment and house prices tend to move together, reflecting the influence of common factors such as interest rates and population growth. On the other hand, changes in factors that affect the supply of housing, such as zoning restrictions, will tend to drive residential investment and house prices in opposite directions.

In Auckland, consents for multi-unit dwellings have increased strongly, consistent with less restrictive conditions on the type of dwelling able to be constructed in some areas (Figure 1.6). Equally, the Treasury's business talks and business survey measures continue to highlight the role of labour shortages in restraining the pace of growth in the construction industry. The compositional shift towards higher-density dwellings, which typically take two to three times longer than houses to complete, also adds to uncertainty around the pace of future growth. Overall, the rise in dwelling consents since the start of the year adds to the pipeline of work ahead.

Figure 1.6 - Dwelling consents by type and growth in residential investment

Sources: Stats NZ, the Treasury

Text description of Figure 1.6 - Dwelling consents by type and growth in residential investment

This pipeline is expected to support an increase in residential investment activity of 5.6% in the 2019/20 year. Strong population growth, low interest rates and rising house price growth sustains a further 5.6% increase over the following year. Growth eases in subsequent years, to 3.4% in 2021/22 and 1.1% by the end of the forecast in 2023/24 as increases in interest rates and slowing population growth reduce demand (Figure 1.6).

…supported by low interest rates

The 90-day interest rate, which is driven by domestic monetary policy settings, is assumed to average 1.0% until the end of 2021. This is a bit below the current 90-day rate but broadly consistent with expectations of financial market participants. Interest rates begin rising gradually from early 2022, as faster growth drives a build up in inflationary pressures, and reach 1.5% by the end of the forecasts (Figure 1.7).

Figure 1.7 – 90-day interest rates

Sources: RBNZ, the Treasury

Text description of Figure 1.7 - 90-day interest rates

Compared with the Budget Update, 90-day interest rates are around 1.1 percentage points lower over the forecast period. However, the Treasury has also lowered its assumption of the level of the 90-day interest rate that is consistent with stable inflation (the neutral rate) by 0.75 percentage points to 3.0%, which partially offsets the economic impact of lower interest rates on activity. The lower neutral assumption reflects the influence of global factors including population ageing and slower productivity growth, and the domestic experience of subdued inflation despite interest rates that are low relative to historical experience.

The reset of the government housing investment programme dampens investment over the forecast period but the effects of this change are more than offset by lower interest rates, stronger house price growth and stronger net immigration compared with the Budget Update. Overall, residential investment is slightly higher than previously forecast.

Increased government investment…

Business investment, which includes both the private and public sectors, has been subdued over the past year or so following strong growth in 2017/18. Growth in 2017/18 was boosted by the earthquake-related rebuild in Kaikōura, and by imports of aircraft. The wind down of rebuild activity in Kaikōura, and in Canterbury, and Air New Zealand’s deferral of aircraft capital expenditure arising from lower expected growth in tourism, have driven much of the slowdown in investment over 2018/19.

In addition, our discussions with business have highlighted the role of policy uncertainty stemming from international developments and from domestic policy, including climate change policy, in tempering investment plans. Pressure on profitability from rising labour costs, and from the intense competition the internet facilitates, is also weighing on investment plans.

Surveys of business conditions and investment intentions point to further weakness ahead. Recent positive developments in the US-China trade dispute and in Brexit may contribute to improved sentiment, but many issues remain unresolved and the associated uncertainty will continue to weigh on sentiment and hamper investment. Domestically, climate change and digitalisation are ongoing structural issues, while labour costs are forecast to continue to rise.

Business investment is expected to increase at a moderate pace over 2019/20 and to gather momentum in 2020/21 as public investment spending increases (Figure 1.8). Public investment spending continues to rise in 2021/22 and remains at a higher level thereafter, but contributes less to growth than in the previous years. The box on higher public investment provides details.

Figure 1.8 - Business investment

Sources: Stats NZ, the Treasury

Text description of Figure 1.8 - Business investment

Private business investment also increases, as businesses look to alleviate constraints in the labour market and as overall economic activity picks up.

…is complementing higher public consumption spending

The outlook for public consumption is largely unchanged from the Budget Update. Government spending on goods and services is expected to pick up over the second half of 2019, as the fiscal plans outlined in Budget 2019 are implemented. Real government spending is forecast to increase 3.6% in 2019/20, down from 4.2% in the Budget Update, reflecting recent quarterly outturns. Government consumption spending continues to increase over the forecasts, but the pace of increase in real spending gradually declines to 1.1% in 2023/24.

The labour market remains tight

Slower growth in activity has flowed through to the labour market. Employment growth declined to 1.4% in the year ending September 2019 from 2.8% in the previous year. Slower demand growth has been matched by a decline in labour supply growth. Growth in the working-age population has slowed and the labour force participation rate has eased. The net effect is that the September 2019 quarter unemployment rate of 4.2% is little changed from the beginning of the year.

Employment growth is expected to remain at 1.4% over 2019/20 and, as the economy gathers momentum, to increase to 2.1% in 2020/21 and to gradually taper off thereafter (Figure 1.11).

Figure 1.11 - Employment growth and the labour force participation rate

Sources: Stats NZ, the Treasury

Text description of Figure 1.11 - Employment growth and the labour force particpation rate

On the supply side, the labour force participation rate is projected to increase as the participation rates for females and older age groups continue their upward trends. Net migration inflows continue to add to labour supply, but at a slower pace than over the past three years or so, and growth in the working-age population slows from 1.7% over 2018/19 to 1.4% in 2023/24. The net result is that supply and demand growth remains evenly matched and the unemployment rate is steady at between 4.2% and 4.3% over the forecast horizon (Figure 1.12).

Figure 1.12 - Unemployment and wage growth

Sources: Stats NZ, the Treasury

Text description of Figure 1.12 - Unemployment and wage growth

Survey measures of labour market conditions and the Treasury's business contacts continue to report difficulty in finding labour across all skill levels. This tightness, combined with mandatory minimum wage increases and higher public sector collective wage agreements, has driven annual wage growth of over 4.0% in recent quarters. However, this measure of wage growth is volatile, and quarterly growth slowed from over 1.0% in the three prior quarters to 0.7% in the September quarter, which is more consistent with underlying pressures in other wage measures.

Wage growth is expected to continue at around September's quarterly pace over the year ahead, resulting in annual growth of 3.0%. Thereafter, wage growth picks up gradually and reaches 3.7% by the end of the forecasts (Figure 1.12). Government policy continues to support wage growth through an additional 13% increase in the minimum wage, spread over the next two years, and through a number of pay equity and other collective settlements.

Growth in compensation of employees (COE) has eased over the past year, driven by slower growth in employment. The forecast is for COE growth to slow to 4.4% over 2019/20 as wage growth eases. Stronger employment and wage growth underpin a rise in compensation of employees to 5.1% over 2021/22 and beyond.

Trading partner growth has slowed…

Global growth continues to be influenced the US-China trade dispute, which has deepened in the period since the Budget Update with both countries raising tariff rates and actively considering further tariff and other trade protection measures. The disruption to trade and cross-border supply chains is slowing growth and creating uncertainty. As a result, trading partner growth has slowed further and is expected to remain around its current pace over the next year. To date, the impacts on growth have been largely confined to export-oriented sectors while tight labour markets, especially in advanced economies, have underpinned household income growth and the domestically focused services sectors. However, there are some signs that weakness is spreading to the services sector, and employment growth has slowed.

Central banks have lowered their policy interest rates in response to slower growth, persistent downside risks and ongoing challenges in their efforts to raise inflation. In addition, fiscal policy has become more stimulatory in a number of countries.

Recently, trade tensions have eased as the US and China negotiate a partial trade deal, although the risk of a further escalation remains and a comprehensive trade agreement appears to be some way off. Moreover, the bilateral trade measures introduced by the US and China since the start of 2018 will continue to exert a significant drag on growth in global activity and trade over the next two years, particularly given the additional uncertainty they generate.

In China, the trade-related tensions have added to the existing domestic factors driving slower growth, including earlier measures to curb credit growth. Growth in many other Asian economies has also weakened. Fiscal policy measures to counter slower growth in China included measures to increase household disposable income and boost consumption, which has supported demand for New Zealand export commodities, even as the economy has slowed overall. Disruptions to meat supply have further supported export prices and contributed to New Zealand's terms of trade remaining resilient to the global slowdown.

Growth in Australia remains sluggish as subdued growth in household consumption, a downturn in the housing market, and drought weigh on growth. The labour market has held up and the unemployment rate has remained steady at around 5.2%. Fiscal and monetary policy support for growth has increased over the past six months or so, and growth is expected to gradually return to average over the next two years.

Major trading partner growth is expected to be around 3.1% in the years ending December 2019 and 2020 before increasing a little in 2021 and thereafter as the effects of this year's policy easing become more apparent (Figure 1.13). However, the outlook is contingent on a resolution of the sources of global uncertainty that are weighing on investment. The outlook for 2020 and 2021 is a little below the Budget Update because of the escalation of the US-China trade dispute and the continued deterioration in business sentiment, including increasing signs of a spill-over into services activity.

Figure 1.13 - Trading partner growth

Sources: Haver Analytics, the Treasury

Text description of Figure 1.13 - Trading Partner Growth

The outlook for trading partner growth remains tilted towards further weakness. Outcomes could be weaker still if barriers to trade and investment continue to rise. Substantial uncertainty remains about the nature and timing of the UK's withdrawal from the EU, as well as the future UK-EU trading relationships and those between the UK and other countries.

…but demand for goods exports has held up…

Prices for New Zealand's commodity exports are close to previous highs, with both meat and dairy prices benefiting from constrained global supply. Prices for some goods, most notably forestry, eased over the past year, although forestry prices have increased from their trough in July. The terms of trade are projected to remain around current levels over the forecast period (Figure 1.14).

Figure 1.14 - Terms of trade (goods) and the exchange rate

Sources: RBNZ, the Treasury

Text description of Figure 1.14 - Terms of trade (goods) and the exchange rate

The lower New Zealand dollar, which has fallen 4.0% on a TWI basis since March 2019, is also supporting export incomes. The TWI is assumed to be 70.8 in the December quarter 2019 and to increase gradually from late 2021 onwards as domestic interest rates rise.

…although tourism inflows have slowed

Slower global growth appears to be affecting services exports, and volumes fell 1.1% in 2018/19 (Figure 1.15). Growth in visitor arrivals has eased over the past year, driven by a decline in visitors from China, following a period of strong growth. New Zealand is not alone in experiencing fewer Chinese visitors. Industry sources report a decline of around 10% in the number of Chinese travelling to all overseas destinations for leisure.

Figure 1.15 - Goods and services export volume growth

Sources: Stats NZ, the Treasury

Text description of Figure 1.15 - Goods and services export volume growth

Goods export volumes rose 4.3% over 2018/19, driven by growth in dairy volumes. Some of this growth appears to have been driven by a rundown in inventories and recent data point to slower dairy volume growth over the year ahead.

Growth in goods and services exports is forecast to slow to 0.6% in 2019/20. The lower exchange rate and a gradual recovery in trading partner growth underpin a pickup in goods and services exports growth of 3.0% in 2020/21. Thereafter, exports grow at their trend rate of 2.5% per year.

Imports growth slowed to 1.7% in 2018/19 from 8.0% in the previous year, partly reflecting easing domestic demand growth. Imports growth is expected to remain moderate in 2019/20, consistent with the lower exchange rate and subdued domestic demand. As domestic conditions strengthen, driven by business investment, import volumes increase and net exports continue to drag on growth.

The current account deficit is contained

In the current account, goods imports rise in line with the expansion in public investment, and the goods deficit rises gradually over the forecast period. The lower New Zealand dollar supports inbound tourism spending and, combined with improving trading partner growth, contributes to a trend increase in the services surplus, which keeps the balance on goods and services broadly stable over the forecast period. In contrast, the income deficit is expected to deteriorate a little as global interest rates eventually rise, and the net stock of international liabilities rises, in part owing to increased government debt.

Overall, the current account deficit is forecast to widen to around 3.8% of GDP in 2023/24 from 3.4% in the year ending June 2019. The net international liability position increases from 55.3% of GDP as at 30 June 2019 to 59.3% of GDP as at 30 June 2024.

Headline inflation is expected to rise…

Annual growth in the Consumers Price Index (CPI) remained subdued at 1.5% in the September quarter 2019. Declines in tradable goods prices, including new cars and petrol prices, have helped keep inflation muted in recent quarters, despite upward pressure from the depreciation of the New Zealand dollar.

In contrast, annual non-tradables inflation increased to 3.2% in the September quarter, driven by housing costs, including rents, purchases of new housing and local authority rates. Some of September's quarterly increase appears to be driven by larger than usual increases in some prices, such as road user charges and domestic airfares. These price increases provide a temporary boost to non-tradables inflation until the September quarter 2020, when they drop out of the annual calculation and non-tradables inflation slows to 2.5% (Figure 1.18).

Figure 1.18 - Inflation and its components

Sources: Stats NZ, the Treasury

Text description of Figure 1.18 - Inflation and its components

Inflation is forecast to rise to 2.0% in the March 2020 quarter, as past falls in petrol prices drop out of the annual calculation and as the lower exchange rate adds to price pressure. Subsequently, capacity pressures stabilise and the temporary boost to non-tradables prices subsides, and inflation eases a little. Stronger economic growth in 2020/21 leads to renewed capacity pressures and inflation expectations gradually rise, following the path of gradually higher past inflation. Headline inflation returns to 2.0% in late 2021 and is stable thereafter. Non-tradables inflation gradually rises from 2.5% in the September 2020 quarter to 2.8% in early 2023 and beyond. Tradables inflation is projected to be stable at 1.1% per year, which is below its average over the 2000s, as weak global inflation pressures continue.

…and support nominal GDP growth of around 5.0% per year

Nominal GDP growth is forecast to increase to 5.1% over 2019/20, up from 3.7% over 2018/19, driven by the recovery in the terms of trade from their fall over the second half of 2018. Stronger real activity and higher domestic inflation sustain nominal GDP growth of 5.2% over 2020/21 and 5.3% over 2021/22. Slower real GDP growth over the following two years flows through to lower nominal GDP growth of 4.8% over 2023/24.

Figure 1.19 - Nominal GDP growth

Sources: Stats NZ, the Treasury

Text description of Figure 1.19 - Nominal GDP growth

The level of nominal GDP is expected to be $5.1 billion lower over the four years to 2022/23 compared with the Budget Update, with decreases in household spending and compensation of employees partially offset by increases in business profits.

Fiscal Outlook#

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Overview#

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• The stronger than expected year-end results for 30 June 2019 have resulted in a stronger starting point for this fiscal forecast. However, some of this strength was one-off or timing in nature, so is not expected to continue into the future.
• Since the Budget Update, a number of factors have contributed to a weaker fiscal outlook, including a slower but still solid economic outlook, a stronger wage outlook, lower interest rates and the Government's new capital investment.
• The operating balance before gains and losses (OBEGAL) is forecast to be lower than the Budget Update across all yearsand net core Crown debt is higher by $9.2 billion by 2022/23.
• Most fiscal indicators are forecast to be weaker, primarily owing to the growth in core Crown expenses outpacing core Crown tax revenue as Budget 2019 spending decisions come into effect, economic activity slows and increased capital spending.
• By 2023/24, core Crown tax revenue is forecast to reach $110.5 billion (28.4% of GDP), $24.0 billion higher than 2018/19. This increase in tax revenue reflects the slower but solid economic activity as discussed earlier in the Economic Outlook chapter.
• Core Crown expenditure increases by $22.2 billion, reaching $109.2 billion in 2023/24 (28.1% of GDP). This increase in expenditure largely reflects previous Budget decisions, and future Budget allowances combined with increases in benefit expenses.
• An OBEGAL deficit of $0.9 billion is forecast in the current year, before returning to a small surplus in 2020/21 which then grows to reach $5.9 billion (1.5% of GDP) in 2023/24.
• Capital expenditure across the forecast period is $49.9 billion. This includes the Government's new capital investment of $12 billion, with $8.1 billion included in the forecast and the remaining $3.9 billion forecast to be spent after 2023/24.
• Taking into consideration both the operating and capital activities of the Government, a total cash shortfall of $20.1 billion is forecast. The cash shortfall is mainly funded from additional borrowings.
• Net core Crown debt is forecast to increase by $18.6 billion. As a percentage of GDP, net core Crown debt increases from 19.0% in 2018/19 to 21.5% of GDP in 2021/22 before falling to 19.6% in 2023/24. Gross debt increases by $18.2 billion over the forecast period to be $102.6 billion in 2023/24 (26.4% of GDP).
• Total borrowings are forecast to increase from $110.2 billion in 2018/19 (36.2% of GDP) to $145.3 billion by the end of 2023/24 (37.3% of GDP). This increase is a result of issuing additional government bonds to help fund the cash shortfall, an increase in Kiwibank borrowings (eg, deposits held) and an increase in Crown entity borrowings.
• The Crown's balance sheet continues to grow, with net worth reaching $174.9 billion (44.9% of GDP) in 2023/24. This growth is largely the result of operating surpluses across the forecast period.
• Comparisons against the Budget Update can be found on page 43.
• The Forecast Financial Statements and Core Crown Expense tables can be found on pages 96 to 133, 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 Risks and Scenarios and the 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. Excludes Reserve Bank settlement cash and bank bills.
4. Percentage of GDP: The nominal GDP for the March 2019 year being revised higher by $4.2 billion has had the effect of decreasing net core Crown debt by 0.2 percentage points of GDP in the year ended June 2019.
5. '2019 Actual' numbers have been restated to reflect updated accounting standards. For more details refer to the forecast financial statements note 17 on page 122.

Source: The Treasury

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

Note:

1. State-owned Enterprises (SOEs) and Crown Entities (CEs).

Source: The Treasury

Core Crown Tax Revenue#

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

Core Crown tax revenue (Figure 2.1) is forecast to increase in each year of the forecast period in nominal terms, while remaining relatively stable as a percentage of GDP. By 2023/24, core Crown tax revenue is expected to reach $110.5 billion, $24.0 billion higher than in 2018/19.

Figure 2.1 - Core Crown tax revenue

Source: The Treasury

Text description of Figure 2.1 - Core Crown tax revenue.

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

Note:

1. Inland Revenue has also prepared a set of tax forecasts. 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-2019.

Source: The Treasury

Source deductions, which are mainly PAYE on wages and salaries, are forecast to grow by $11.8 billion over the forecast period. Growth in PAYE comes from a combination of employment, wages and salaries, and average hours worked. In this forecast, just over half of the source deduction revenue growth is forecast to come from growth in wage and salary rates, mainly owing to tighter labour market conditions and a range of labour market policies including fair pay agreements, pay equity settlements, and the minimum wage policy. The rest of the increase comes from expected employment growth, which contributes $2.2 billion and fiscal drag which contributes a further $2.1 billion. Fiscal drag is the additional income tax generated as an individual's average tax rate increases as their income increases.

GST is forecast to increase by a total of $6.5 billion over the forecast period, with growth from household consumption and residential investment expected to contribute about $6.4 and $1.3 billion, respectively. This is partly offset by a $1.2 billion decrease in GST owing to other macroeconomic factors (mainly net tourist expenditure).

Corporate tax and net other persons tax are forecast to grow by $2.8 billion and $1.7 billion respectively over the forecast period. These increases are mainly owing to forecast growth in operating surplus and entrepreneurial income, which is supported by the increased capital investment.

…broadly in line with expected economic growth

Figure 2.2 shows that core Crown tax revenue is forecast to grow more slowly than nominal GDP in 2019/20. This is mainly owing to the one-off increase to income tax revenue in 2018/19, caused by a change in Inland Revenue's calculation method (part of the Business Transformation programme at Inland Revenue) and is not forecast to repeat in 2019/20.

Tax revenue is then forecast to grow at a rate similar to or slightly higher than GDP.

Figure 2.2 - Core Crown tax revenue and nominal GDP growth

Source: The Treasury

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

Core Crown Expenses#

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Core Crown expenses are expected to grow relative to the size of the economy…

Core Crown expenses are expected to grow across the forecast period by $22.2 billion to reach $109.2 billion in 2023/24 (Figure 2.3).

Core Crown expenses as a percentage of GDP, reach 29.4% in 2020/21 before declining to 28.1% in 2023/24.

Figure 2.3 - Core Crown expenses

Source: The Treasury

Text description of Figure 2.3 - Core Crown expenses.

…but in the near-term grow faster than the economy …

In the current year, core Crown expenses are expected to increase by $6.8 billion compared to last year, which is slightly faster than the expected growth in the economy. Spending in areas such as health and education is forecast to be higher by $1.1 billion and $1.0 billion, respectively, compared to 2018/19. These increases are mainly owing to the decisions from the 2019 Budget package announcements, which overall increased spending by $3.8 billion per annum. In addition, spending on social security and welfare is forecast to increase by $2.5 billion, primarily owing due to stronger wage growth and an increase in recipient numbers (mainly New Zealand Superannuation), as discussed below.

…then growth falls owing to lower new spending allowances for future Budgets…

The Government has announced an operating allowance of $3.0 billion for Budget 2020 (around $2.3 billion to $2.5 billion remains after pre-commitments). Operating allowances for Budget 2021 and Budget 2022 are $2.4 billion with the Budget 2023 allowance being $2.6 billion. Overall, new spending from future Budgets is forecast to increase expenses by $9.7 billion by 2023/24 (Figure 2.4).

Figure 2.4 - Core Crown expenses with allowance break-down

Source: The Treasury

Text description of Figure 2.4 - Core Crown expenses with allowance break-down.

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

…while benefit costs continue to grow owing to increasing recipient numbers and wage growth…

Social assistance spending is forecast to grow by $8.5 billion across the forecast period, with New Zealand Superannuation accounting for $5.2 billion of this increase.In addition, Jobseeker Support, Emergency Benefits and Accommodation Assistance are contributing to this growth.

The expected wages growth level has the largest impact on New Zealand Superannuation owing to the large volume of people receiving the payment (Figure 2.5). Recipient numbers are forecast to increase from an average of around 767,000 in 2018/19 to over 901,000 by the end of the forecast period (an increase of 17.5%). By the end of the forecast period, New Zealand Superannuation equals around half of core Crown social assistance spending and 18.1% of core Crown expenditure.

Figure 2.5 - Growth of New Zealand Superannuation recipients and expenses

Source: The Treasury

Text description of Figure 2.5 - Growth of New Zealand Superannuation recipients and expenses.

…however, finance costs decline owing to lower interest rates

Core Crown finance costs are forecast to decline by around $0.9 billion by the end of the forecast period, primarily owing to a reduction in interest on borrowings. For example, at June 2019 the effective interest rate on Government bonds was 3.8% and by 2023/24 it is forecast to decrease to 2.1%. The reduction is primarily from Government bonds being issued at a lower rate than those maturing over the same period. Even though borrowings are expected to increase resulting in additional finance costs, the lower effective interest rate more than offsets this increase.

Operating Balance before Gains and Losses and the Operating Balance#

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An OBEGAL deficit is forecast in the current year before surpluses return…

An operating balance before gains and losses (OBEGAL) deficit is forecast in 2019/20 before returning to a modest surplus in 2021/22 and growing to reach a surplus of $5.9 billion in 2023/24 (Figure 2.6).

Figure 2.6 - Components of OBEGAL by segment

Source: The Treasury

Text description of Figure 2.6 - Components of OBEGAL by segment.

The forecast OBEGAL deficit in the current year reflects the growth in core Crown expenses outpacing growth in core Crown tax revenue. This trend is expected to start reversing from 2020/21 as smaller increases are assumed for new spending allowances, while core Crown tax revenue is expected to grow broadly in line with the economy.

State-owned enterprises' surpluses are expected to remain static over the forecast period. However, the Crown entities sector is forecast to run deficits of around $2.2 billion to $2.5 billion across the forecast period. These deficits are mainly driven by ACC and District Health Boards (DHBs), which are both expecting growth in demand and rising costs.

…while investment returns contribute to the growth in the operating balance

The total Crown operating balance, which includes gains and losses on assets and liabilities, is forecast to be in surplus across all years of the forecast period and expected to reach $10.9 billion in 2023/24 (Figure 2.7).

Figure 2.7 - Components of operating balance

Source: The Treasury

Text description of Figure 2.7 - Components of operating balance.

Gains and losses on non-financial liabilities are included in the first year of the forecast but are not forecast beyond this. In the current year, the Crown is expected to record large losses on its ACC outstanding claims liability of $2.3 billion. This is primarily driven by a reduction in discount rates used to value all future injury costs of existing claims in today's dollars. For more details refer to the box on page 42.

Offsetting these losses are gains expected on the Crown's two large investment portfolios, ACC and the NZS Fund. The gains forecast for 2019/20 is based on year-to-date gains up to the base month used for the forecast and beyond this point the expected long-term benchmark rates of return, which is also for the other years covered in the forecast (2021 to 2024). Gains on financial instruments are expected to increase over the forecast period owing to the growth in the investment portfolios of ACC and the NZS Fund.

Residual Cash and Net Core Crown Debt[3]#

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Operating cash flows improve over time…

Over the entire forecast period, a cash deficit of $20.1 billion is expected. This cash shortfall is funded largely through additional borrowing (Figure 2.8).

Figure 2.8 - Core Crown residual cash

Source: The Treasury

Text description of Figure 2.8 - Core Crown residual cash.

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. Over the forecast period, the Government is expected to generate cash flows of $29.9 billion from core Crown operating activities.

…with cash from the Emissions Trading Scheme contributing to the improvement…

$2.8 billion is forecast owing to an expectation that more Emission Trading Scheme (ETS) participants will take up the Fixed-Price Option (FPO), where they can pay the Government $25 for each unit they are liable to surrender to meet their ETS obligations. These forecasts assume the use of FPO based on the uptake in 2018/19, owing to the market price at the time being above $25. If the market price of each unit is higher than the fixed price of $25 (as seen in 2018/19), it is likely emitters would use the FPO. For more information, see the box on page 36.

…however, core Crown capital spending exceeds cash from operations until the final year

Capital spending is forecast to exceed operating cash flows, resulting in residual cash deficits for the first four years. Capital spending includes $8.1 billion of the Government's new capital investment across the forecast period. As tax receipts continue to exceed operating expenditure and capital spending decreases later in the forecast, a residual cash surplus of $0.9 billion is forecast in 2023/24.

The Government is forecast to invest a net total of $49.9 billion on capital over the forecast period. Net capital spending includes $13.2 billion on building and acquiring physical assets, $11.0 billion on providing capital to Crown entities (eg, to the New Zealand Transport Agency for state highways ($3.7 billion) and to DHBs to build or develop hospitals ($2.5 billion)) and $11.5 billion in contributions to the NZS Fund.

The Government is forecast to spend $5.0 billion from the Government's new capital investment over the forecast period on various projects, with $3.9 billion falling outside the forecast period. The various projects to be funded will be announced before Budget 2020, with an increase of $3.1 billion in the future capital allowance (with $0.9 billion falling outside the forecast period), totalling $8.1 billion over the forecast period. The remaining investment is expected to occur after 2023/24. For a breakdown of this spending refer to the box on pages 13 to 14.

Table 2.6 shows core Crown capital spending that has an impact on net core Crown debt. It excludes capital spending undertaken directly by Crown entities and SOEs funded from their own resources (including third-party financing).

1. The Government’s new capital investment of $12 billion, of which $8.1 billion is included in these fiscal forecasts with $3.9 billion falling outside of the current fiscal forecast period, is included in the $15.4 billion of future new capital spending.

Source: The Treasury

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

Net core Crown debt was lower than forecast in 2018/19 by $2.6 billion; this led to a stronger opening net core Crown debt position.

In nominal terms, net core Crown debt continues to grow, peaking at $77.7 billion in 2022/23. It then declines in the final year of the forecast as residual cash returns to surplus. Net core Crown debt is forecast to be $76.3 billion in 2023/24, an increase of $18.6 billion from the position at the end of the 2018/19 fiscal year.

Net core Crown debt as a percentage of GDP is expected to increase for the first three years of the forecast period before declining to 19.6% in 2023/24 (Figure 2.10).

Figure 2.10 - Net core Crown debt

Source: The Treasury

Text description of Figure 2.10 - Net core Crown debt

The forecast nominal increase in net core Crown debt in the first four years of the forecast period results from the issuance of debt and the use of existing financial assets of the Crown.

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

Gross debt as a percentage of GDP remains on a generally declining trend, decreasing from 27.7% in 2018/19 to 26.4% by 2023/24 (Figure 2.11).

Figure 2.11 - Gross debt

Source: The Treasury

Text description of Figure 2.11 - Gross debt

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

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

By the end of 2023/24, New Zealand Government Bonds (NZGBs) on issue are forecast to decline to 22.7% of GDP, from 23.6% at the end of 2018/19. This is consistent with the Government's stated intention to maintain levels of NZGBs on issue at not less than 20% of GDP over time.

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

The core Crown borrowing programme includes forecast proceeds from both Government Bonds and short-term borrowing (eg, Treasury Bills). Overall, the programme will provide net funds of $18.9 billion to help meet residual cash deficits and partially prefund the upcoming bond maturity in 2024/25.

In total, the bond programme is expected to raise funds of $45.7 billion. Bond maturities and repurchases will result in repayments of $25.5 billion of existing debt. In addition, short-term borrowing is expected to be $1.3 billion lower at the end of the forecast period, relative to the end of 2018/19 (Table 2.7).

Source: The Treasury

Total Crown Balance Sheet#

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

As a percentage of GDP, net worth stays relatively stable at around 44% across the last four year of the forecast period.

However, net worth is expected to decline in the current year. This is largely owing to valuation losses on the Government's long-term liabilities arising from a decrease in discount rates since 30 June 2019. Net worth then grows from 2020/21 onwards, reaching $174.9 billion by 2023/24, as a result of operating balance surpluses.

Figure 2.12 - Net worth

Source: The Treasury

Text description of Figure 2.12 - Net worth.

The growth in net worth over the forecast period is reflected by an increase in total assets of $79.8 billion, partly offset by an increase in total liabilities of $51.1 billion.

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

Source: The Treasury

…with investment returns and Kiwibank mortgages increasing financial assets…

Financial assets are forecast to grow by $51.4 billion over the forecast period to $215.5 billion (around 48.5% of total assets) in 2023/24 (Table 2.8) as a result of:

• the financial asset portfolio managed by the NZS Fund and ACC. This growth in financial assets is driven by the expected investment returns that accumulate over the forecast period. In addition, the contributions of around $11.5 billion from the Crown to the NZS Fund are expected to be invested in financial assets, and
• advances which are expected to increase by $11.7 billion by 2023/24, primarily owing to growth in Kiwibank (Kiwi Group Holdings Limited) lending of $11.1 billion and is supported by the increase in Kiwibank customer deposits discussed on page 41.

…and capital decisions increasing physical assets…

Overall, property, plant and equipment (PPE) is expected to increase by $10.9 billion to $188.5 billion (around 42.4% of total assets) by 2023/24. Large increases are forecast across the PPE asset classes of buildings, state highways, specialised military equipment (SME) and aircraft.

Previous Budget decisions include the additional investment in DHBs’ and schools’ infrastructure, the purchase of P-8A Poseidon maritime patrol aircraft, and investment in the rail freight network.

Kāinga Ora - Homes and Communities is expected to make a significant investment in public housing across the forecast period, which is a key factor in the increase in the buildings PPE asset class (Figure 2.13). This investment is expected to be largely funded from third-party borrowings.

Figure 2.13 - Increase in PPE by asset class

Source: The Treasury

Text description of Figure 2.13 - Increase in PPE by asset class.

Over the forecast period, the value of state highways is expected to grow by $5.3 billion, primarily reflecting roading projects to be funded from the National Land Transport Fund.

…with $15.4 billion set aside for future capital decisions…

The $15.4 billion includes the Government's new capital investment and the Multi Year Capital Allowance. The Government's capital investment is $8.1 billion of this total (with $3.9 billion forecast to occur after 2023/24. For more detail refer to the box on pages 13 to 14.

 …while borrowings and insurance liabilities are also expected to increase

Total liabilities are forecast to increase by $51.1 billion over the forecast period to $269.2 billion in 2023/24. The increase in total liabilities is largely owing to borrowings being higher by $35.1 billion and insurance liabilities being higher by $13.1 billion.

Figure 2.14 - Borrowings by segments

Source: The Treasury

Text description of Figure 2.14 - Borrowings by segments.

The increase in borrowings is driven by three main factors:

• gross debt increasing by $18.2 billion to help meet the expected cash shortfall (refer to pages 37 to 38)
• Kiwibank borrowings (eg, deposits held) increasing by $10.8 billion to fund lending growth through growth in deposits from customers, as discussed on page 40, and
• borrowings by Crown entities increasing by $2.8 billion to fund capital projects by NZTA and Kāinga Ora - Homes and Communities. This increase includes the obligation of Public Private Partnerships undertaken by NZTA.

The increase in insurance liabilities of $13.1 billion over the forecast period is largely owing to an increase of $14.4 billion in ACC insurance liabilities. The most recent ACC liability valuation updated for discount rates at 31 October 2019, has resulted in an increase to the liability of around $2.3 billion in the current year, primarily owing to a decrease in discount rates. The remaining change in the ACC liability reflects the increase in the cost of existing and new claims. The EQC insurance liabilities are forecast to decline from $1.1 billion in 2018/19 to $0.3 billion in 2023/24 as existing claims are forecast to be largely settled by the end of the forecast period.

Comparison to the Budget Update#

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Table 2.9 summarises the changes in the key fiscal indicators since the Budget Update.

Source: The Treasury

Overall core Crown tax revenue is expected to be lower than the Budget Update...

Core Crown tax revenue is forecast to be $3.1 billion lower than in the Budget Update over the forecast period. Forecasts for revenue from resident withholding tax (RWT) and good and services tax (GST) have decreased, with these decreases partially offset by increases in the forecasts for source deductions, corporate tax and net other persons tax. Table 2.10 summarises the movements by tax type since the Budget Update.

Source: The Treasury

The RWT forecast is $2.9 billion lower owing to lower forecast interest rates, while GST revenue forecasts are $2.4 billion lower, driven by a weaker outlook for household consumption and overseas visitor spending.

Source deductions are forecast to be $1.0 billion higher, owing to a higher starting point as a result of stronger tax revenue up to 30 June 2019, stronger wage growth, and associated fiscal drag, offset slightly by weaker employment.

Corporate tax revenue forecasts are $0.3 billion higher in total mostly driven by a higher starting point. This is partly offset by a lower growth forecast for operating surplus and a higher forecast for the Research and Development tax credits.

Net other persons' tax revenue forecasts are $0.6 billion higher mostly owing to a stronger outlook for growth in entrepreneurial income.

…while higher social assistance and other expenses adversely impact OBEGAL…

OBEGAL growth has slowed across the forecast period since the Budget Update. The major movements in OBEGAL since the Budget Update are outlined in Table 2.11. Cumulatively, OBEGAL is $9.1 billion lower across the forecast period.

Social assistance expenses have increased by $2.2 billion in total since the Budget Update. The increase is mainly owing to New Zealand Superannuation payments, Jobseeker Support, Emergency Benefits and the Supported Living Payment. This increase reflects higher recipient numbers and higher wage growth that contributed $1.8 billion and $0.4 billion respectively to the overall increase.

Higher wage growth compared to the Budget Update has also resulted in an increase in most benefit types. The upward revision to the expected wage level has the largest impact on New Zealand Superannuation owing to the large volume of people receiving the payment.

Actual recipient numbers for the Jobseeker Support, Emergency Benefit are tracking above what was expected at the Budget Update. In addition, the softening in economic conditions in the near-term have resulted in an expected lift in Jobseeker Support recipients some flow-on impacts to Support Living Payment. Overall, the increase in recipient numbers from these benefits has increased expenses by around $1.0 billion over the forecast period.

The decision to compensate homeowners for the repair costs of eligible on-sold Canterbury properties has contributed to OBEGAL being $0.3 billion lower when compared to the Budget Update. On-sold properties are properties that have been sold since the earthquakes, with damages that cost more than the EQC cap and where homeowners cannot recover the over-cap amount from their private insurer.

Crown entity forecasts have been revised with DHBs and ACC forecasts weakening. The DHBs' financial performance continues to deteriorate. At the same time, ACC is expecting higher insurance claims costs than previously forecast. The ACC liability and insurance costs are particularly sensitive to interest rates (used to value all outstanding claims in today's dollars). As discount rates have continued to fall since the Budget Update, the lifetime cost of forecast claims is now higher in present value terms than the same claims forecast at the Budget Update (refer to the ACC box on page 42). Both of these Crown entity changes result in OBEGAL being $2.7 billion lower across the forecast period when compared to the Budget forecast.

Updated forecasts for KiwiRail also show a weaker outlook than previously forecast by $0.7 billion. This is owing to higher depreciation expenses as a result of a change in the valuation approach of the rail freight network from a commercial basis to a public benefit basis adopted in the 30 June 2019 year.

Net core Crown debt is higher, mainly reflecting additional capital investment...

Net core Crown debt is higher across the forecast period compared to the Budget Update, with the exception of the 2019/20 year, which is lower. Table 2.12 shows the significant changes.

The results from 30 June 2019 have meant that there is a stronger starting position for net core Crown debt of $2.6 billion. This is the largest contributor to the improvement in the 2019/20 year. This has been partially offset by a higher core Crown residual cash deficit of $13.0 billion compared to the Budget Update, contributing to an overall increase in net core Crown debt by 2022/23.

Core Crown tax receipts, have decreased by $3.5 billion across the forecast since the Budget Update, in line with the lower forecast tax revenue.

Social assistance forecasting changes largely mirror the OBEGAL movement, with the $2.2 billion increase in payments primarily driven by higher forecast growth in recipient numbers and an increase in the indexation of benefits.

Capital spending (including the Government's new capital investment) has increased net core Crown debt by $7.1 billion. For more detail on the Government's new capital investment refer to pages 13 to 14.

ETS receipts have increased by $2.2 billion across the forecast owing to an expectation that more ETS participants will take up the Fixed-Price Option, where they can pay the Government $25 for each unit they are liable to surrender to meet their ETS obligations (refer to the box on page 36).

In addition, net finance costs have increased resulting in a $0.5 billion impact on net core Crown debt and in line with the increase in borrowings.

...and net worth is higher until 2020/21

Net worth is now forecast to stand at $163.8 billion (44.1% of GDP) in 2022/23 compared to $166.6 billion (44.8% of GDP) at the Budget Update. This $2.8 billion reductionis largely driven by the adverse changes in the operating balance.

Key Economic Assumptions Used in the Forecast Financial Statements#

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

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

A summary of the key economic forecasts that are particularly relevant to the forecast financial statements is provided in Table 2.13 below.

Notes:

1. Production measure.
2. Expenditure measure.

Sources: The Treasury, Stats NZ

Risks and Scenarios#

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Overview#

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• The risks to the international outlook are skewed to the downside, but less than what was the case at the Budget Update. Some risks identified at the Budget Update have now materialised while others remain key risks to the outlook. Risks to the international outlook include: continued trade tensions; political uncertainty; a more pronounced slowdown in the Chinese economy; and major adjustments in international financial markets. Should these risks materialise, global and domestic growth will be weaker than expected in the main forecasts.
• The risks to the domestic outlook are more balanced and include: uncertainty around the impact of business confidence on investment; the extent to which capacity pressures are binding; and uncertainty regarding the outlook of house prices, net migration and productivity growth.
• Scenario One explores the effects of weaker world demand owing to further disruption to global trade and increased financial market volatility. Under this scenario, slower trading partner growth lowers demand for New Zealand exports and contributes to weaker business sentiment, lowering investment and employment activity. Lower exports and weaker business activity reduce GDP growth and tax revenues, lowering fiscal surpluses and pushing up net debt.
• Scenario Two illustrates a stronger domestic economy driven by higher net migration that lifts demand, leading to business sentiment recovering sooner than expected. Higher business investment activity stimulates the economy to raise growth above the central forecasts. Increased demand in a capacity-constrained economy also produces higher inflationary pressures, raising nominal GDP and tax revenues to generate larger fiscal surpluses and lower net debt.
• The Crown is exposed to risks from its balance sheet, in addition to risks that impact its operating balance. In particular, the Crown’s financial position is exposed to risk through changes in the value of the Crown’s assets or liabilities, and through the potential impact of the Crown’s fiscal obligations that arise from policy choices.

Risks to the Economic Outlook#

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

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

Further trade tensions could weaken trading partner growth…

Trade tensions between the US and China have eased recently with the prospect of a ‘Phase One' trade agreement, but a formal agreement is yet to be reached. Expectations of an agreement between the two nations improved market sentiments in late 2019 but uncertainty around trade since 2018 has already weighed on global activity, particularly in the manufacturing sectors in Southeast Asia and Europe.

Trade tensions are not exclusive to the US and China. Tariffs on European exports to the US in place since October 2019 may reduce European economic activity.

...with a more pronounced downturn in Chinese growth of particular concern…

Chinese growth has slowed over the past year, partly driven by increased regulation to reduce unregulated financial activities, as well as trade tensions with the US. Chinese authorities introduced tax cuts in March and cut bank capital requirements in September 2019 to support their economy. However, further trade tensions or less effective Chinese stimulus packages may hinder growth prospects, reducing Chinese demand for New Zealand exports. The fallout of a slowing Chinese economy would flow through to weaker growth for our other trading partners, reducing demand for our exports further. Spill-overs are likely for Southeast Asian economies given their role in global value chains that often include China, which are increasingly important export destinations for New Zealand.

…and trade tensions could raise financial market volatility

A deterioration in market sentiment associated with the uncertainties listed above could lead to lower demand for risky assets, wider spreads over less risky currencies and rapidly tightening credit conditions.

Another risk is the limited ability of monetary policy to stimulate economies in the event of an economic slowdown in the absence of additional measures such as quantitative easing or fiscal policy, given that current interest rates are below their pre-Global Financial Crisis levels.

Political uncertainties remain…

The terms of the UK withdrawal from the European Union (commonly known as ‘Brexit') are uncertain. The UK is scheduled to leave the European Union (EU) on 31 January 2020. With weak growth in the UK already, leaving the EU without a withdrawal agreement could lead to further deterioration in UK growth. Delays in reaching an agreement lengthens the time required for the UK to recover from prolonged uncertainty.

Political developments elsewhere also make the economic outlook uncertain. Ongoing protests in Hong Kong; upcoming government elections in the UK and US; and Middle Eastern instability may create further uncertainty.

…but the world economy may recover sooner than expected

Despite the balance of risks being tilted to the downside, there is also a risk that global demand could accelerate faster than anticipated. Continued accommodative monetary policy around the world could keep borrowing costs at record lows to support growth. The effect of monetary and fiscal policy stimulus in China could also be greater than expected to help growth accelerate, improving Chinese incomes and demand for New Zealand's exports. Lower than forecast oil prices may support global growth, as oil is a major input for many industries.

Trade tensions may ease if the US and China reach a trade agreement and begin phasing out trade tariffs. The UK could leave the EU with a robust trade deal in place, allowing firms in the UK and the EU to continue trading with certainty and without additional tariffs.

Commodity price movements and the exchange rate are uncertain…

New Zealand is particularly susceptible to changes in global agricultural commodity prices. The risks discussed above may affect commodity prices in either direction. Meat and protein prices could rise more than expected if the outbreak of African swine fever in China is not contained, or fall if Chinese pig stocks recover sooner than expected.

Increased trade tensions could raise demand for New Zealand exports if our products are not subject to increased tariffs in markets such as China. Rising costs of other countries' goods exports mean our products become more competitive on the global market, supporting long-term growth.

The outlook for the exchange rate is dependent on movements in central bank policy rates and other risks to the global economy discussed above. Scenario One explores this risk, combined with further trade disruptions, in more detail.

…while oil prices are subject to political developments and technological change…

Oil prices spiked over 10% before falling back to previous levels following a drone strike on a Saudi Arabian oil field in September 2019. A more sustained reduction in supply could raise oil prices for longer, leading to higher costs for firms and prices for consumers.

In the long term, there is downside risk to our oil price assumption if the breakeven costs for shale oil producers in the US fall owing to technological advancements, increasing supply. How non-OPEC members would respond to price changes is uncertain.

…and the effect of low business confidence on growth is difficult to estimate…

Businesses report global uncertainty, squeezed profit margins and uncertainty around domestic government policy as reasons for the ongoing pessimism seen in business confidence surveys. Environmental regulation changes and uncertainty around future infrastructure projects were items of particular concern raised by businesses at our business talks earlier this year.

A key risk to the economic outlook is the length of time weak business sentiment persists. A quicker recovery in business sentiment would increase growth from stronger hiring and investment intentions. Scenario Two explores this risk in more detail.

…along with capacity pressures in the economy…

The extent to which the capacity pressures indicated in various measures are binding on the economy is unclear. If capacity constraints are more binding than expected, increased government capital spending in a more constrained environment would result in higher inflationary pressures.

More binding labour market capacity pressures and future pay settlements that have not yet materialised would also push wage inflation higher than forecast.

…while the risks to house price growth are balanced

Higher than forecast net migration and weaker than expected residential investment would drive up house prices faster than anticipated. On the other hand, stronger than expected housing supply growth and weaker than forecast net migration would lower house price growth. Stronger house price growth raises consumption and housing supply to increase economic growth, while weaker house price growth reduces it.

Weather conditions affect agricultural output and electricity generation…

Agricultural production may be resilient this season as pastures recovered well over the winter across most of the country. However, a drier summer than expected would hamper agricultural production.

Current hydro lake levels are above average for this time of year. Should electricity production become constrained by drier weather, rising costs could negatively impact households and firms, reducing economic growth.

…and net migration will depend on developments domestically and internationally

Tighter than forecast labour market conditions may encourage employers to increase the number of migrant workers. This widens the uncertainty around the outlook for net migration.

Emigration of New Zealanders to Australia tends to reduce when Australia's labour market deteriorates relative to ours. The prospect of faster than forecast wage growth in New Zealand may lead to fewer departures than assumed in the main forecast.

Some policies are yet to be agreed

The details of the Reserve Bank of New Zealand's (RBNZ) proposal to increase capital requirements for locally incorporated banks will not be known until 5 December 2019, after the forecasts are finalised.

Alternative Scenarios#

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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 to 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 effects of further disruptions to global trade and increased financial market volatility, reducing global and domestic growth. Slowing trading partner growth reduces demand for our exports and lowers the terms of trade. Less demand and increased uncertainty push domestic activity levels down. Weaker business sentiment reduces GDP growth and tax revenues, lowering fiscal surpluses and raising net debt.

Scenario Two illustrates a stronger domestic economy driven by an increase in net migration that raises consumption and business activity. Rising business sentiment increases investment and reduces unemployment. A larger workforce lifts overall income levels to boost aggregate consumption in the economy. Higher population growth in a capacity-constrained economy increases inflationary pressure, which raises nominal GDP and tax revenues to generate larger fiscal surpluses and lower net debt.

1. Annual average % change.

Source: The Treasury

Scenario One - Increased Trade Disruptions

This scenario explores the effects of further escalations in trade tensions reducing demand for our exports. Worsening market sentiment in a slowing world economy lowers demand for our exports and softens domestic economic activity. Slower growth from reduced demand and increased unemployment weakens the fiscal position.

Trade tensions reduce world economic activity…

World trading activity falls from further escalations in international trade disputes and increasing uncertainty, dampening investment and hiring activity. Slowing world consumption reduces demand for New Zealand exports and lowers our commodity prices.

…reducing demand for exports

A weaker total terms of trade (Figure 3.1) lowers profitability in our export sectors, pushing some firms into financial hardship. Domestic credit supply falls as the number of defaults and bad debts rises, reducing consumption and investment. Slower domestic economic activity sees the unemployment rate rise to 4.7% by 2022 (Figure 3.2).

Figure 3.1 - Lower terms of trade

Sources: Stats NZ, the Treasury

Text description of Figure 3.1 - Lower SNA terms of trade.

Figure 3.2 - Higher unemployment

Sources: Stats NZ, the Treasury

Text description of Figure 3.2 - Higher unemployment.

The exchange rate falls…

The New Zealand dollar depreciates against our trading partners' currencies, improving our competitiveness on the global market, but this does not fully offset lower global commodity prices. A weaker dollar also raises consumer prices and business input costs. However, weaker domestic activity curbs inflationary pressures. Annual headline inflation remains below 2.0% over the forecast period, but the RBNZ eases monetary policy to reduce the impact of slowing global growth.

…and cumulative GDP is $14 billion lower relative to the main forecast

Slower global and domestic growth lowers tax revenue and weakens the Government's fiscal position. Core Crown tax revenue is cumulatively $4.4 billion lower than the main forecast over the five years to June 2024. Resident withholding tax falls by $1.3 billion owing to lower interest rates. This scenario assumes that the Government's operating and capital allowances are unchanged from those in the main forecast. Under these assumptions, OBEGAL is weaker in each year, reaching $4.7 billion (1.2% of GDP) in 2024 (Table 3.1), $1.2 billion lower than in the main forecast.

Scenario Two - Increased Migration Raises Business Sentiment

This scenario explores the impacts of higher than forecast net migration, resulting in business sentiment improving sooner than expected. Increased migration raises demand, encouraging businesses to invest in capital or increase employment. Rising employment and consumption boost economic activity and improve the fiscal position.

Increased population growth raises demand…

Net migration is cumulatively 55,000 higher across the forecast period compared with the central forecast. Increased labour supply raises demand for goods and services.

…leading to a faster recovery in business sentiment…

Businesses feel more confident from stronger demand for their products, incentivising them to take advantage of low interest rates and higher labour supply to expand. Annual average real GDP growth increases to 3.2% in 2021 (Figure 3.3).

Figure 3.3 - Higher GDP growth

Sources: Stats NZ, the Treasury

Text description of Figure 3.3 - Higher GDP growth.

...that boosts employment and consumption

Rising employment increases total income, and rising house prices from increased population growth boost consumption (Figure 3.4). The unemployment rate falls to 3.7% in 2022 from 4.2% in the central forecast.

Figure 3.4 - Stronger consumption growth

Sources: Stats NZ, the Treasury

Text description of Figure 3.4 - Stronger consumption growth.

Output and inflationary pressures rise…

Increased demand overstretches the economy, raising output and inflationary pressures. Annual headline inflation remains above 2.0% from 2021, supported by sustained low interest rates.

...to increase cumulative GDP by $17 billion relative to the main forecasts

Stronger economic growth feeds into higher tax revenue and strengthens the Government's fiscal position. Core Crown tax revenue is cumulatively $6.0 billion higher relative to the main forecasts over the five years to June 2024, with $0.7 billion coming from increased wages and consumption. This scenario assumes that the Government's operating and capital allowances are unchanged from those in the main forecast. Under these assumptions, OBEGAL is stronger in each year, reaching $8.4 billion (2.1% of GDP) in 2024 (Table 3.1), $2.5 billion above that in the main forecast. Net core crown debt falls to 17.7% of GDP in 2024.

General Uncertainties in the Economic and Fiscal Outlook#

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This chapter has thus far focused on key assumptions and judgements that may eventuate differently and alter our main forecasts. However, there are myriad other ways the economy could evolve. Fan charts are a way to illustrate the general uncertainties in our forecasts and the sensitivities of these forecasts to changes in the economy.[8]

Figure 3.5 shows a fan chart of nominal GDP. The width of the fan increases further into the forecast period, meaning the further away from the present, the more uncertainty there is around the main forecast. The combined blue and green areas of the fan show where nominal GDP is expected to be 90% of the time. At the end of the forecast period, this is within +/- $19.5 billion per year of the main forecast. The green area of the fan shows where nominal GDP is expected to be 70% of the time. At the end of the forecast period, this is within +/- $10.3 billion per year of the main forecast. In the two scenarios considered in this chapter, nominal GDP forecasts remain within the green area fan (70th percentile).

Figure 3.5 - Nominal GDP fan chart

Sources: Stats NZ, the Treasury

Text description of Figure 3.5 - Nominal GDP fan chart..

The amount of core Crown tax revenue the Government receives in a given year is closely linked to the performance of the economy. For example, increased private consumption raises revenue from the goods and services tax (GST), while higher unemployment could mean less revenue from taxes on wages and salaries.

Figure 3.6 shows the uncertainty surrounding the main core Crown tax revenue forecast. At the end of the forecast period, the shaded blue area captures a range of approximately +/‑ $9.4 billion, within which actual tax outturns are expected to fall 90% of the time. The green area of the fan shows where core Crown tax revenue is expected to be 70% of the time. At the end of the forecast period this is within +/- $4.9 billion per year of the main forecast.

Figure 3.6 - Core Crown tax revenue fan chart

Source: The Treasury

Text description of Figure 3.6 - Tax revenue fan chart.

Fiscal Sensitivities#

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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 2024, tax revenue would be around $5.7 billion higher than forecast in the June 2024 year. The sensitivities are broadly symmetric: if nominal GDP growth is one percentage point lower than expected each year, tax revenue would be around $5.5 billion lower than forecast in the June 2024 year. The figures are indicative and can be influenced by the composition of growth as different types of activity have different effective tax rates.

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 2019, a 1.0% increase in New Zealand interest rates would have reduced the total Crown operating balance by around $476 million, while a 1.0% decrease would have increased the total Crown operating balance by $701 million. The majority of the Government's borrowings and a large number of financial assets are managed by the Treasury. To illustrate the interest rate sensitivities on the Treasury's portfolio, Table 3.2 provides the estimated impact of lower interest rates on those assets and liabilities. A one percentage point fall in the interest rate would result in a $53 million reduction in the interest income on funds managed by the Treasury in the June 2024 year. This would be more than offset by $388 million lower interest expenses in the June 2024 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 for the Crown's operating balance. For example, a strengthening of share prices may result in higher returns from the Government's direct share investments.

Balance Sheet Risks#

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

Main source of balance sheet risk

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

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

Other sources of balance sheet risk

• Business risk: A number of commercial entities owned by the Crown have their financial performance and valuations impacted by the commercial environment they operate in.
• Funding risk: The New Zealand Government remains amongst the highest-rated sovereigns globally, with the top AAA foreign-currency rating from Moody's and AA foreign-currency ratings from Standard & Poor's and Fitch. In the case of an increase in global risk aversion in the future, New Zealand may face increased funding pressure. All else being 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 with fiscal space and choices about how it can respond to shocks.

Specific Fiscal Risks#

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Overview#

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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 quantum 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
• the 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, 25 November 2019. Although the process for disclosure of specific fiscal risks involves a number of entities, including government departments, the Treasury and the Minister of Finance, there remains a possibility that not every significant risk is identified.

Nature of Risks to the Economic and Fiscal Outlook

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

Risk types 1 to 3 in the table are in the scope of this chapter, whereas risk types 4 and 5 are covered in the Risks and Scenarios chapter. Further detail on the criteria for disclosing a specific fiscal risk is set out on page 63.

How Risks Outlined in This Chapter are Managed

A key principle guiding the disclosure of risks is transparency. This means that material 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 (the future new spending built into the fiscal forecasts). This ensures a prudent approach to the disclosure of risks, to improve transparency and to avoid prejudging future decisions by governments about what may or may not be funded from allowances.

The Government has a number of options to manage 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 Reprioritisation

Core Crown expenses for the year ended 30 June 2019 were $87.0 billion, while capital spending for the same period totalled $6.7 billion. This base of expenditure creates significant scope for reprioritisation. Agencies are expected to fund pressures and new activities from within the funding already allocated to them. This could include repurposing low-value expenditure or generating efficiency savings.

2 Budget allowances

The following allowances for new expenditure have been 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. The effect of including the allowances in the forecasts is that new spending decisions in future Budgets should not impact the Government's fiscal targets.

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

3 Policy choices

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

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, including:

• 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, and
• the costs of future individual natural disasters and other major events (including biosecurity incursions, and individual events resulting from climate change), as their occurrence, nature and timing cannot be predicted. If such an event does occur, a number of choices arise about how to respond, and when to recognise potential liabilities. Specific risks are disclosed at that point based on the range of possible responses.

Exclusions to Disclosure

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

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

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

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#

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

The table below is categorised based on the nature of the risk: policy changes, cost pressures and cross-portfolio risks. Within these categories, the risks have been ordered by portfolio and include the title of the risk, its status and whether it has an impact on revenue, expenses or capital expenditure. The status of the risk describes whether the risk reflects a new matter or is changed or unchanged since the Budget Update 2019.

Statement of Specific Fiscal Risks as at 25 November 2019

Policy Change Risks by Portfolio#

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ACC

Impacts of Changes to Accident Compensation Policy Settings (Changed)

The Government has signalled it will review a number of Accident Compensation scheme policy settings. Some of the policy issues identified would require either legislative or regulatory change. These changes could result in a potential aggregated impact greater than $100 million per year, which has increased since the Budget Update 2019.

Work-related Gradual Process Disease and Infection (Changed)

Under current legislation, the Government incurs an obligation for Work-related Gradual Process Disease and Infection claims when the claim is made, and an expense is recognised at this point. The liability for commercial accident and sickness insurance contracts would usually be recognised when exposure to conditions that will give rise to a claim occurs. An amendment to legislation would be required to recognise claims at the same time as for commercial contracts. An initial adjustment to the liability and an expense of about $1.5 billion to $2.0 billion would need to be reported if such an amendment were to be enacted.

Biosecurity

Mycoplasma Bovis Biosecurity Response (Changed)

The Government and the farming sector have agreed to attempt to eradicate the cattle disease Mycoplasma bovis. Funding has been allocated by the Government, and included in the forecasts, for response activities in 2019/20. The need for funding over the rest of the forecast period will be considered depending on progress in eradicating the cattle disease. The timing of farming sector contributions may differ from what is in the fiscal forecasts.

Broadcasting, Communications and Digital Media

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

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

Defence

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

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

Disposal of New Zealand Defence Force Assets (Unchanged)

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

Education

Early Learning Action Plan (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 Government has also indicated it will reinstate higher hourly funding rates for early childhood education services with 100% qualified teachers. The draft Plan was publicly consulted on between November 2018 and March 2019, and will be submitted to Cabinet for consideration later in 2019. To the extent that costs cannot be managed within baselines, further funding may be required.

Education Workforce Strategy (New)

The Ministry of Education is co-designing with the sector an Education Workforce Strategy (the Strategy) which will also indicate the future direction for Rangai Māori education. Once the Strategy has been completed, the Ministry will finalise a detailed plan to implement the Strategy. This plan is targeted for submission to Cabinet in March 2020. Initial indicative estimates suggest unconstrained implementation options may cost more than $100 million over the forecast period.

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

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

Reform of Vocational Education (RoVE) (Unchanged)

While funding has been set aside in a contingency to manage some of the costs of the Reform of Vocational Education (RoVE), and this is included in the forecasts, there is a risk that further funding will be required to manage the full costs of implementing the reform. In addition, the nature and timing of the proposed reform will influence the scale of funding needed to ensure the viability of at-risk Institutes of Technology Polytechnics. Furthermore, following establishment of New Zealand Institute of Skills and Technology (NZIST), it is likely that NZIST will be consolidated on a line-by-line basis for government reporting purposes which would impact a number of key fiscal indicators.

Response to the Tomorrow's Schools Review (Unchanged)

The Government has released its approach to the Tomorrow's Schools Independent Taskforce's final report. The approach for the reform of the governance, management, and administration of the schooling system will involve a reset from a highly devolved, largely disconnected, and autonomous set of institutions, to a much more deliberately networked and supported system that is more responsive to the needs of learners and their families. Implementing these changes will involve material costs that are yet to be determined.

Foreign Affairs

Official Development Assistance (Changed)

Each year, New Zealand's Official Development Assistance (ODA) expenditure is measured as a proportion of Gross National Income (GNI). Currently ODA is 0.28% of GNI. A decision to increase ODA expenditure beyond the 0.28% of GNI would require additional funding. Additionally, the Cook Islands will graduate to developed status on 1 January 2020. This means that any funding provided to the Cook Islands will not count as ODA, which will reduce New Zealand's total ODA expenditure as a percentage of GNI.

Health

Primary Care Services (Unchanged)

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

Housing

Progressive Home Ownership (New)

The Government has announced it is developing a progressive home ownership scheme. Design of the scheme is still underway and, depending on decisions made, there could be an impact on the fiscal forecasts.

Māori Development

Government Response to WAI262 (Unchanged)

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

Police

Next Generation Critical Communications Programme (Unchanged)

The Next Generation Critical Communications programme seeks to replace New Zealand's 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. Funding of $15 million was provided in Budget 2019 to initiate the programme, establish governance arrangements and prepare for procurement. To the extent that the programme cannot be managed within baselines, additional funding will be required.

Research, Science and Innovation

Research and Development Spending Target (Unchanged)

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

Revenue

Loss Continuity (New)

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

Potential Tax Policy Changes (Unchanged)

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

Purchase Price Allocation (New)

At present when a business is sold, the law allows the buyer and seller to adopt different values for the various assets that make up the business (eg, capital assets, goodwill, client lists) for tax purposes. This allows both parties to reduce their tax liability. The Government is consulting on rules to ensure the parties use the same valuations for tax purposes. If progressed, this measure would result in a revenue gain over and above current tax forecasts.

Taxation of Digital Services (Unchanged)

A discussion document on options for taxing the digital economy has been released. The Government's preference is to continue working with the Organisation for Economic Co-operation and Development (OECD) to find a multilaterally agreed solution, but a digital services tax is one credible option if the OECD does not make sufficient progress on a multilateral solution in 2019. The amount of increased revenue would depend on the design of the tax.

Social Development

Changes to the Welfare System (Unchanged)

The Government has committed to overhaul the welfare system. Part of this work involved the establishment of the Welfare Expert Advisory Group (WEAG), which was tasked with advising on improvements to the welfare system to achieve the Government's vision of delivering adequate income and standard of living, supporting participation, and promoting dignity of clients. The WEAG's report was publicly released on 3 May 2019. The Government responded to a number of the recommendations through initiatives in Budget 2019. Consideration of other recommendations is ongoing.

Transport

Support for KiwiRail (Unchanged)

Budget 2019 provided KiwiRail with a funding package for two years to maintain the rail network and initiate major procurement projects around new rolling stock and InterIslander ferries. Further Crown funding is likely to be sought to progress these projects beyond 2020/21 as part of the implementation of the Future of Rail programme.

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

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

Wellington Transport Investment Programme (Unchanged)

Business cases for individual projects that make up the Let's Get Wellington Moving programme are underway. The programme includes rapid transit, public transport, and walking and cycling improvements to reduce congestion in the Wellington City area, and is expected to cost $6.4 billion over 20 years, with costs shared between local government and the National Land Transport Fund (NLTF) (at a cost of $3.8 billion to the NLTF). The New Zealand Transport Agency board is yet to agree funding for the individual projects. There is a risk to the forecasts to the extent that any further Crown funding is required.

Urban Development

Infrastructure Funding and Financing to Improve Housing Affordability (New)

The Infrastructure Funding and Financing Bill 2019 (the Bill) is expected to be introduced into the House of Representatives by the end of 2019. The purpose of the Bill is to enable a multi-year levy to be imposed on beneficiaries of infrastructure projects by Order in Council as part of the Infrastructure Levy Model. Under the Model the levy will be collected by a Special Purpose Vehicle to service finance raised to cover the costs of the infrastructure. The fiscal forecasts make no provision for use of the Model. The impact of the Model will depend on whether the Bill is passed into law, the final design of the Model, and the nature and extent of projects funded by the Model.

Cost Pressure and Cost Variance Risks by Portfolio#

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ACC

ACC Levies (Unchanged)

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

Legal Claims and Proceedings (Unchanged)

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

Non-Earners' Account (Unchanged)

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

Arts, Culture and Heritage

New Zealand Screen Production Grant - Domestic (New)

The New Zealand Screen Production Grant - Domestic is an uncapped, on-demand grant that incentivises local production work. While there is uncertainty over the demand for the grant, current levels of activity are greater than the funding level of approximately $12 million to $15 million per year. If current settings around eligibility for the grant remain unchanged, available funding will need to be increased from 2019/20 onwards.

Climate Change

Emissions Trading Scheme - Fixed Price Option (Changed)

The Emissions Trading Scheme (ETS) earns revenue and incurs expenses for the Crown, both of which are uncertain, partly owing to the market price of New Zealand Units (NZUs). For the latest fiscal forecast, both revenue and expenses have been valued at the 30 September 2019 market price of $24.85. Under the Fixed Price Option (FPO), emitters have an option to meet their obligations by purchasing units directly from the Crown at a fixed price of $25. If the market price of NZUs exceeds the fixed price of $25, it is likely that emitters would use the FPO. As a result, the Crown would recognise a loss from selling units at below market price and receive cash that would reduce net core Crown debt. The forecasts assume approximately half of ETS surrender obligations will be met using the FPO. The overall fiscal impact of these risks is uncertain and depends on future market prices, unit volumes, and the extent to which participants elect to use the FPO.

Customs

Joint Border Management System Further Development (Unchanged)

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

Economic Development

New Zealand Screen Production Grant - International (Changed)

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

Education

Education Operating Cost Pressures (Unchanged)

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

Learning Support (Changed)

The Government has released the Disability and Learning Support Action Plan (the Plan). The Plan includes a number of new Learning Support initiatives that build on the

$336 million operating and $95 million capital funding allocated through Budget 2019 to establish Learning Support Coordinators and fund Learning Support cost pressures and system improvements. To the extent that these pressures cannot be managed within existing baselines, additional funding is likely to be required.

School Transport Services (New)

The budget for School Transport Services for 2019/20 is $200 million. The cost of Daily Bus Services makes up over half of this allocation, and the Ministry of Education will be going to market for the tender of provision of these services which could impact the contract total. In addition, the combination of a demand increase of 14% in Specialised School Transport Assistance and indexation increases will likely lead to further cost increases. To the extent that these pressures cannot be managed within existing baselines, additional funding is likely to be required.

Energy and Resources

Decommissioning of the Tui Oil Field (New)

The Tui oil field operator, Tamarind, entered voluntary administration on 11 November 2019. It is likely that if Tamarind is liquidated, there will be no funds available to meet its obligations to fully decommission the oil field. The Crown may be required to meet the full costs of decommissioning the Tui field, which are estimated at US$100 million or more. A portion of decommissioning costs could materialise as early as 2020, with the remaining costs of decommissioning the field expected to materialise over the next two to five years.

Finance

Earthquake Commission (Unchanged)

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

Goodwill on Acquisition (Unchanged)

As at 30 June 2019, the Government had goodwill on acquisition of a number of sub-entities totalling $743 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 New Zealand - Redevelopment of Scott Base (Changed)

The infrastructure at Scott Base is approaching the end of its functional life.The indicative cost of redeveloping the Base ranges from $200 million to $290 million over an approximately eight year period. Budget 2019 provided $19.7 million to Antarctica New Zealand to undertake further design and market testing to confirm costs ahead seeking full redevelopment costs. In June 2019, Cabinet agreed in principle to the redevelopment of Scott Base and to a specific design option, subject to approval of the final costs, to be sought in a future Budget.

Greater Christchurch Regeneration

Christchurch Central Recovery Plan - Anchor Projects (Unchanged)

The Crown has funded, and continues to provide funding for, 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, and implementation and project costs, and may to some extent eventually be recovered. Some projects have been completed and some of the completed projects transferred to the Christchurch City Council, 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 the fiscal forecasts.

Southern Response Earthquake Services Support (Unchanged)

The ultimate cost to the Crown of settling earthquake claims remains subject to uncertainty. Forecasts assume that the actual cost to settle claims will align with the actuary's central estimate of the claims provision. There is a risk that the actual cost could vary from this estimate, which is sensitive to its underlying assumptions such as damage estimates, legal challenges, reinsurance recoveries and the forecast profile of claims settlement.

Health

DHB Sustainability (Unchanged)

The fiscal forecasts incorporate expected deficits from District Health Boards (DHBs) over the forecast period. There is a significant risk that DHBs' deficits may be higher than what has been included in the fiscal forecasts, which would adversely impact the Government's operating balance. The Government has provided some funding to support DHB deficits. However, if the deficits that are included in the fiscal forecasts were to eventuate, additional funding support may be required to ensure the sustainability of the sector. The Ministry of Health is working on a new performance management programme that seeks to reduce deficits.

Health Capital Pressure (Unchanged)

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

Health Operating Pressure (Unchanged)

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

Housing

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

The forecasts include business-as-usual divestments, acquisitions and redevelopment of housing property as part of Kāinga Ora's asset management strategy. Proceeds from property divestments will be used to help fund investment in redeveloping and growing Kāinga Ora's stock. A softening in the property market would reduce Kāinga Ora's revenue from divestments and increase Kāinga Ora's debt and/or Crown funding requirements. Kāinga Ora's also faces general commercial risks associated with developing and implementing large and evolving programmes, which pose fiscal risk and delivery risk. If development activity utilising Kāinga Ora's holdings is accelerated, the likelihood of this risk being realised will increase substantially.

Emergency Housing Special Needs Grants (Unchanged)

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

Increases to Market Rent (Unchanged)

Over $1 billion of payments per annum for housing assistance, such as income-related rent subsidies and accommodation payments for transitional housing, are linked to market-based rent levels. Should market rents increase above what is assumed for the forecasts, further funding may be required to maintain current levels of support.

KiwiBuild - Fiscal and Delivery Risks (Changed)

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

Tāmaki Regeneration Project (Unchanged)

The Tāmaki Regeneration Project plans to build 7,500 new houses in Tāmaki in place of about 2,500 houses that were there before the redevelopment began. 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.

Internal Affairs

Archives New Zealand Storage Capacity (Unchanged)

The current property portfolio for the storage of New Zealand's documentary heritage is facing capacity and condition issues. Budget 2019 provided funding to complete the design work and shift activities associated with the proposed upgrade and expansion of the physical infrastructure through the Preserving the Nation's Memory project. Further funding may be sought at Budget 2020 to complete this project.

Police

Firearms Reform Programme (New)

The Arms Legislation Bill was recently introduced to the House. The Bill provides for the establishment of a firearms registry and for other changes including amendments to the licensing regime, increased regulatory oversight, and the development of new offences and penalties. To the extent that the implementation of the changes cannot be managed within baselines, additional funding will be required.

Regional Economic Development

Provincial Growth Fund (Unchanged)

The Government has committed to a Provincial Growth Fund of $3.0 billion over a three-year period. The capital and operating split and timing of this funding, as set out in the fiscal forecasts, is likely to change, and final capital and operating expense amounts in any year may vary from those forecast.

Research, Science and Innovation

Research and Development Tax Incentive (Unchanged)

The Government has implemented a Research and Development (R&D) Tax Incentive. This incentive allows eligible firms to deduct a percentage of their expenditure on R&D against their tax liability to the Crown. There is a risk that costs may differ from forecasts 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 remaining implementation costs, revenue gains and operating costs savings may differ from forecasts. In addition, changes in government policies could materially affect the programme's costs and benefits.

Social Development

Quarterly Employment Survey Redevelopment (New)

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

Statistics

2023 Census Costs (Changed)

The next Census is due to take place in 2023. Stats NZ has indicated that the funding required to deliver the Census will be sought through Budget 2020. This initiative will be supported by a detailed business case in late 2019, followed by an implementation business case for the preferred option in early 2020.

Transport

Auckland City Rail Link (Unchanged)

The Government has committed to fund 50% of the costs associated with the City Rail Link project, which is estimated to cost $4.4 billion. Based on this estimate, the Government's contribution to the project will be around $2.2 billion. There is a risk that the timing, scope and amount of the government contribution to the project could be different from what is included in the forecasts.

Treaty of Waitangi Negotiations

Relativity Clause (Unchanged)

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

Treaty Settlement Forecasts (Unchanged)

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

Veterans

Treatment of Veterans' Disability Entitlements (New)

At present, Veterans' Disability entitlement payments are recognised in the forecasts as they fall due, without recognising a liability for future payments. The External Reporting Board recently introduced a new public sector accounting standard on employee benefits. Owing to the nature of Veterans' Disability entitlement payments, the government will now be obligated to record an upfront liability for payments to veterans deemed to be in relation to their service rendered. The New Zealand Defence Force is engaging an actuary to undertake a valuation to quantify the liability for the year ended 30 June 2020. This change will bring forward the time at which these expenses are recognised.

Cross-portfolio Specific Fiscal Risks#

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

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

Changes to Institutional Form of Government Agencies (Unchanged)

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

Increasing the Minimum Wage (Unchanged)

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

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

The Government is facing ongoing pressure from non-government providers of Crown-funded services to fund a greater proportion of their costs, or to fund cost pressures. This includes providers in the health, disability, welfare, justice, and child protection sectors.

Other Capital Cost Pressures (Unchanged)

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

Other Operating Cost Pressures (Unchanged)

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

Outcomes from Other Government Inquiries and Reviews (Unchanged)

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

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

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

Policy Responses to the 15 March Terror Attacks (Unchanged)

The Government has made a number of immediate responses to the 15 March terror attacks. Further responses may be needed including policy and legislative amendments. In addition, there are likely to be further costs associated with responding to the Royal Commission of Inquiry into the Attack on Christchurch Mosques on 15 March 2019, which are unable to be quantified at this point.

Possible Responses to the 2020 Referendums on Cannabis Law Reform and End of Life Choice (Changed)[14]

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

Services Funded by Third Parties (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 (Changed)

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

Unexpected Maintenance for Crown-owned Buildings (Unchanged)

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

Risks Removed Since the Budget Update#

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Contingent Liabilities and Contingent Assets#

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

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

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

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

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

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

Some contingencies of the Crown are not able to be quantified. We have disclosed unquantifiable contingent liabilities and unquantifiable contingent assets that potentially could have an impact in excess of $20 million and are not expected to be remote.[15]

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

Quantifiable Contingent Liabilities and Contingent Assets

Contingent liabilities

Contingent assets

Unquantifiable Contingent Liabilities and Contingent Assets

Contingent liabilities

Description of Contingent Liabilities

Quantifiable contingent liabilities over $100 million

Uncalled capital

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

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

Guarantees and indemnities

Guarantees are legally binding promises made by the Crown to assume responsibility for a debt, or 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 to manage risk and capitalise on trade opportunities around the globe. The obligations to third parties are guaranteed by the Crown and are intended to extend the capacity of facilities in the private sector.

$115 million at 31 October 2019 ($109 million at 30 June 2019)

Legal proceedings and disputes

New Zealand Transport Agency - contractual disputes

Legal proceedings and disputes represent the amounts claimed by plaintiffs relating to roading and other contract disputes. In February 2019, the Transport Agency received a claim for $352 million from the Wellington Gateway Partnership in relation to the Transmission Gully public-private partnership. The claim relates to the delays in the commencement of work. The amount represents this claim and other contractual disputes.

$385 million at 31 October 2019 ($385 million at 30 June 2019)

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.

$134 million at 31 October 2019 ($134 million at 30 June 2019)

Other quantifiable contingent liabilities

Unclaimed monies

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

$176 million at 31 October 2019 ($174 million at 30 June 2019)

Air New Zealand Partnership

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

$231 million at 31 October 2019 ($155 million at 30 June 2019)

Ministry for Primary Industries - Biosecurity Act compensation

Under section 162A of the Biosecurity Act 1993, compensation may be payable as a result of the exercise of powers to manage or eradicate organisms. Compensation is payable where there are verifiable losses as a result of the damage or destruction of a person's property or restrictions on the movement of a person's goods. The Ministry has been notified compensation will be sought for Bonamia Ostreae, Mycoplasma Bovis and post entry quarantine. These claims can be quantified but do not meet the tests for recognising a provision.

Unquantifiable contingent liabilities

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

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

Indemnities

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

Legal claims and proceedings

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

Accident Compensation Corporation (ACC) litigation

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

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

Ministry for Primary Industries - Biosecurity Act compensation

Under section 162A of the Biosecurity Act 1993, compensation may be payable as a result of the exercise of powers to manage or eradicate organisms. Compensation is payable where there are verifiable losses as a result of the damage or destruction of a person's property, or restrictions on the movement of a person's goods. The Ministry has been notified compensation will be sought for incursions including fruit fly, pea weevil, Bonamia ostreae, myrtle rust, Mycoplasma bovis and the Post Entry Quarantine (PEQ) response. Due to the complexity and uncertainty of the amount of these claims, the amounts are unquantified. To the extent that an obligation can be quantified, provision has been made in these accounts of $138 million as at 30 June 2019.

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 $450 million, citing total industry losses of $885 million. The Ministry defended the claim. On 27 June 2018 the High Court found that the Ministry owed a duty of care to Strathboss and claimants. An appeal was heard in the Court of Appeal in the weeks of 11 and 18 March 2019 and the Court's decision was reserved.

The Ministry is still unable to quantify Strathboss' claim because the extent of any loss will be dealt with at a second trial in the High Court. That trial will not occur, and the claim will not be quantified, unless all appeals are exhausted and the Crown remains liable.

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.

Canterbury insurance disputes

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

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

Wakatu

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

Other unquantifiable contingent liabilities

Criminal Proceeds (Recovery) Act 2009

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

Environmental liabilities

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

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

Holidays Act compliance

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

Remediation of Per- and Poly- Fluoroalkyl Substances Contamination

Local and central government entities are investigating per- and poly-fluoroalkyl substances (PFAS) contamination at sites around New Zealand. PFAS have been used in a wide range of industrial and consumer applications, and some PFAS are recognised persistent organic pollutants. PFAS contamination has been found as a result of discharges from landfills, wastewater treatment plants, electroplating and textile industries, and from the historical use of specialised firefighting foam at airports, New Zealand Defence Force bases, fuel storage facilities and other sites. Various government agencies have been undertaking a programme to review, investigate and develop a comprehensive approach to manage the impact of PFAS at sites around New Zealand. Once a response is agreed, it is possible the Crown may incur costs for the response to PFAS contamination; however, these costs cannot be estimated without the agreed response being finalised, so an unquantified contingent liability has been disclosed.

Treaty of Waitangi Negotiations - See page 82

Description of Contingent Assets

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

Forecast Financial Statements#

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

They are based on the accounting policies and assumptions that follow. As with all such assumptions, there is a degree of uncertainty surrounding them. This uncertainty increases as the forecast horizon extends. 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 25 November 2019.

The finalisation dates and key assumptions that underpin the preparation of the Forecast Financial Statements are outlined in the Fiscal Outlook chapter (pages 23 to 48).

Statement of Accounting Policies#

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Significant Accounting Policies

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

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

The Forecast Financial Statements reflect the accounting standards in place in the year that they are prepared. Adoption of new accounting standards in future financial years are consequently not reflected in these Forecast Financial Statements. Where accounting standards are to be adopted within the fiscal forecasts period, this has been signalled in the note disclosures where impacts may be significant.

The specific accounting policies are included within the 2019 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-2019

Forecast Policies

The Forecast Financial Statements have been prepared on the basis of the Treasury's best professional judgement. Actual financial results for the periods covered are likely to vary from the information presented in these forecasts. Factors that may lead to a material difference between information in these Forecast Financial Statements and the actual reported results in future years are set out in the Specific Fiscal Riskschapter on pages 61 to 96. Key forecast assumptions are set out on pages 26 to 27.

Reporting and Forecast Period

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

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

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

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

Government Reporting Entity as at 25 November 2019#

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

Core Crown Segment

Departments

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

Offices of Parliament

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

Others

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

State-owned enterprises Segment

State-owned enterprises

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

Mixed ownership model companies (Public Finance Act Schedule 5) 

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

Other

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

Crown Entities Segment

Crown entities

1. Accident Compensation Corporation
2. Accreditation Council
3. Arts Council of New Zealand Toi Aotearoa
4. Broadcasting Commission
5. Broadcasting Standards Authority
6. Callaghan Innovation
7. Children's Commissioner
8. Civil Aviation Authority of New Zealand
9. Climate Change Commission
10. Commerce Commission
11. Crown Irrigation Investments Limited
12. Crown Research Institutes (7)
13. District Health Boards (20)
14. Drug Free Sport New Zealand
15. Earthquake Commission
16. Education New Zealand
17. Electoral Commission
18. Electricity Authority
19. Energy Efficiency and Conservation Authority
20. Environmental Protection Authority
21. External Reporting Board
22. Financial Markets Authority
23. Fire and Emergency New Zealand
24. Government Superannuation Fund Authority
25. Guardians of New Zealand Superannuation
26. Health and Disability Commissioner
27. Health Promotion Agency
28. Health Quality and Safety Commission
29. Health Research Council of New Zealand
30. Heritage New Zealand Pouhere Taonga
31. Human Rights Commission
32. Independent Police Conduct Authority
33. Kāinga Ora - Homes and Communities
34. Law Commission
35. Maritime New Zealand
36. Museum of New Zealand Te Papa Tongarewa Board
37. New Zealand Antarctic Institute
38. New Zealand Artificial Limb Service
39. New Zealand Blood Service
40. New Zealand Film Commission
41. New Zealand Infrastructure Commission/Te Waihanga
42. New Zealand Lotteries Commission
43. New Zealand Productivity Commission
44. New Zealand Qualifications Authority
45. New Zealand Symphony Orchestra
46. New Zealand Tourism Board
47. New Zealand Trade and Enterprise
48. New Zealand Transport Agency
49. New Zealand Venture Investment Fund Limited
50. New Zealand Walking Access Commission
51. Office of Film and Literature Classification
52. Pharmaceutical Management Agency
53. Privacy Commissioner
54. Public Trust
55. Radio New Zealand Limited
56. Real Estate Agents Authority
57. Retirement Commissioner
58. School Boards of Trustees (2,419)
59. Social Workers Registration Board
60. Sport and Recreation New Zealand
61. Takeovers Panel
62. Te Reo Whakapuaki Irirangi (Māori Broadcasting Funding Agency)
63. Te Taura Whiri i te Reo Māori (Māori Language Commission)
64. Television New Zealand Limited
65. Tertiary Education Commission
66. Transport Accident Investigation Commission
67. WorkSafe New Zealand

Organisations listed in schedule 4 of the Public Finance Act 1989

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

Non-listed companies in which the Crown is 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. Provincial Growth Fund Limited
7. Research and Education Advanced Network New Zealand Limited
8. Southern Response Earthquake Services Limited
9. Tāmaki Redevelopment Company Limited
10. The Network for Learning Limited

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

1. Te Urewera

Others

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

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

Crown entities

1. Tertiary Education Institutions (27)

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

1. City Rail Link Limited

Forecast Financial Statements#

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Forecast Statement of Financial Performance
for the years ending 30 June

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

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

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

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

1. The '2019 Actual' and '2020 Previous Budget' numbers were restated to reflect the adoption of new accounting standards from 1 July 2019. Refer to note 17 for details of the impact of these changes.
2. The classifications of the functions of the Government reflect current approved baselines. Forecast new operating spending is shown as a separate line item in the above analysis and will be allocated to functions of the Government once decisions are made in future Budgets.

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

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

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

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

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

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

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

Forecast Statement of Cash Flows
for the years ending 30 June

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

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

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

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

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

Forecast Statement of Financial Position
as at 30 June

1. The '2019 Actual' and '2020 Previous Budget' numbers were restated to reflect the adoption of new accounting standards from 1 July 2019. Refer to note 17 for details of the impact of these changes.
2. Equity accounted investments include tertiary education institutions and City Rail Link Limited.

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

Forecast Statement of Borrowings
as at 30 June

Notes on borrowings

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

1. The '2019 Actual' and '2020 Previous Budget' numbers were restated to reflect the adoption of new accounting standards from 1 July 2019. Refer to note 17 for details of the impact of these changes.
2. Core Crown borrowings in this instance include unsettled purchases of securities (classified as accounts payable in the Statement of Financial Position).
3. Gross sovereign-issued debt (GSID) represents debt issued by the sovereign (the core Crown) and includes any government stock held by the other Crown reporting entities.
4. Core Crown financial assets exclude receivables.
5. Net core Crown debt represents GSID less financial assets. This can provide information about the sustainability of the Government's accounts, and is used by some international agencies when determining the creditworthiness of a country.
6. Adding back the NZS Fund assets provides the financial liabilities less financial assets of the core Crown, excluding those assets set aside to meet part of the future cost of New Zealand Superannuation.
7. Net core Crown debt (excluding NZS Fund and advances) excludes financial assets which are held for public policy rather than treasury management purposes.
8. The Reserve Bank has used $1.6 billion of settlement cash to purchase reserves that were to have been funded by the government borrowing programme. Therefore, the impact of settlement cash on GSID is adjusted by this amount.

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

Statement of Actual Commitments

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

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

Statement of Actual Contingent Liabilities and Assets

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

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

Notes to the Forecast Financial Statements#

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NOTE 1: Sovereign Revenue (Accrual)

1. Customs excise-equivalent duty.

NOTE 1 (continued):  Sovereign Receipts (Cash)

NOTE 2:  Investment Revenue/(Expenditure)

NOTE 3:  Transfer Payments and Subsidies

NOTE 4:  Other Operating Expenses

NOTE 5:  Insurance

ACC liability

Calculation information

Taylor Fry has prepared an independent actuarial estimate of the ACC outstanding claims liability as at 30 June 2019. This estimate includes the expected future payments relating to accidents that occurred prior to balance date (whether or not the associated claims have been reported to, or accepted by, ACC) and also the expected future administrative expenses of managing these claims. The estimate also includes a risk margin to provide for a higher degree of certainty that the liability for outstanding claims, at balance date, will be adequate to cover possible adverse developments. The assumptions underpinning this valuation form the basis of the five-year forecast of the outstanding claims liability.

The key economic variables that impact on changes to the valuation are the long-term Labour Cost Index (LCI), Average Weekly Earnings (AWE) and the discount rate. Discount rates were derived from the yield curve for New Zealand Government bonds. For these forecast statements, the claims liability has been updated for the latest discount rates as at 31 October 2019. The equivalent single effective discount rate, taking into account ACC's projected future cash flow patterns, is 2.23% and allows for a long-term discount rate of 4.30% from 2082.

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

Presentation approach

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

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

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

The forecast for new operating spending for Budget 2020 is $3.0 billion. Some of this allowance has been pre-committed as at the forecast finalisation date of 25 November 2019, with only the unallocated portion of the allowance included in this note.

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

Unallocated contingencies includes the capital investment package of $8.0 billion. As new projects are announced funding will be allocated to these projects from this amount.

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

NOTE 8:  Financial Assets (including receivables)

NOTE 9:  Student Loans

NOTE 10:  Property, Plant and Equipment

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

NOTE 10:  Property, Plant and Equipment (continued)

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

NOTE 11:  NZ Superannuation Fund

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

NOTE 12:  Payables

NOTE 13:  Retirement Plan Liabilities

The net liability of the Government Superannuation Fund (GSF) was calculated by GSF's actuary as at 30 September 2019. The liability arises from closed schemes for past and present public sector employees as set out in the Government Superannuation Fund Act 1956. A Projected Unit Credit method was used to calculate the liability as at 30 September 2019, based on membership data as at 30 June 2019 with adjustments for cash flows to 30 September 2019. The funding method requires the benefits payable from GSF in respect of past service to be calculated and then discounted back to the valuation date.

For these Forecast Financial Statements, the net GSF liability was updated for the latest discount rates derived from the market yield curve for New Zealand Government bonds as at 30 September 2019.

Other principal long-term financial assumptions were an inflation rate, as measured by the Consumers Price Index (CPI), of 1.62% p.a. for the 18 years to 30 June 2037, then gradually increasing each year to reach 2.0% p.a. in the year ended 30 June 2082 and remaining at 2.0% p.a. for all years after that. In addition an annual salary growth rate, before any promotional effects, of 2.5% p.a. (2.5% p.a. at 30 June 2019).

The 2019/20 projected increase in the net GSF liability is $136 million, reflecting an increase in the GSF liability of $260 million and an increase in the GSF net assets of $124 million.

The overall increase in the GSF liability of $260 million includes an actuarial loss (which increases the liability) between 1 July 2019 and 30 September 2019, of $893 million, largely owing to movements in the discount rates and partly offset by changes in the CPI rates. The difference of $633 million is owing to the current service cost and interest unwind (increases the liability) which is more than offset by benefits paid to members (reducing the liability).

The increase in the value of the net assets of GSF of $124 million includes a revaluation gain of $282 million reflecting the updated market value of assets at 30 September 2019. The balance of $158 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 2019/20 onwards reflect the net of the expected current service cost, interest cost, investment returns and contributions.

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

NOTE 14:  Provisions

Provision for ETS credits

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

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

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

The ETS impact on the fiscal forecast is as follows:

NOTE 15: Changes in Net Worth

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

NOTE 16:  Core Crown Residual Cash

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

NOTE 17:  Impact of Adoption of New Accounting Standards

PBE IPSAS 35: Consolidated Financial Statements

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

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

PBE IPSAS 39: Employee Benefits

The Crown adopted PBE IPSAS 39: Employee Benefits from 1 July 2019 (updating the existing standard PBE IPSAS 25: Employee Benefits). The new standard impacts the way the Government Superannuation Fund (GSF) defined benefit pension scheme is presented in the financial statements, with actuarial gains/losses now being presented in the Statement of Comprehensive Revenue and Expenses (and accumulated in a new revaluation reserve) rather than presented as a gain or loss in the Statement of Financial Performance. The new standard also means the investment return on the scheme's assets above the risk-free rate of return is now classified as actuarial gains and losses (affecting OBEGAL).

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

In addition to the GSF presentation changes, improved clarity in PBE IPSAS 39 over the scope of employee benefits may mean earlier recognition of expenses related to some responsibilities of the Crown, such as veterans' benefits. Work on quantifying any impact in the financial statements is underway. A specific fiscal risk has been included in the Specific Fiscal Risks chapter regarding this potential impact.

A reconciliation between the key indicators published in the 2019 Budget Update and the Financial Statements of Government (FSG) for the year ended 30 June 2019 and the revised comparative numbers published in this document as a result of these two accounting standard changes is included below.

Statement of Segments#

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Statement of Financial Performance
for the year ended 30 June 2019

Statement of Financial Position
as at 30 June 2019

Forecast Statement of Segments#

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Statement of Financial Performance
for the year ended 30 June 2020

Statement of Financial Position
as at 30 June 2020

Statement of Financial Performance
for the year ended 30 June 2021

Statement of Financial Position
as at 30 June 2021

Statement of Financial Performance
for the year ended 30 June 2022

Statement of Financial Position
as at 30 June 2022

Statement of Financial Performance
for the year ended 30 June 2023

Statement of Financial Position
as at 30 June 2023