Half Year Economic and Fiscal Update 2020

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 (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 and provides a high-level framework on intergenerational wellbeing.

Understanding our path#

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

Statement of Responsibility#

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

On the basis of the economic and fiscal information available to it, the Treasury has used its best professional judgement in preparing, and supplying the Minister of Finance with, this Economic and Fiscal Update. The Update incorporates the fiscal and economic implications both of government decisions and of other circumstances as at 30 November 2020 that were communicated to me by the Minister of Finance in accordance with the requirements of the Public Finance Act 1989 and of other economic and fiscal information available to the Treasury as at 30 November 2020. This Update does not incorporate any decisions, circumstances or statements that the Minister of Finance has determined, in accordance with section 26V of the Public Finance Act 1989, should not be incorporated in this Update.

 

Caralee McLiesh
Secretary to the Treasury

9 December 2020

To enable the Treasury to prepare this Economic and Fiscal Update I have ensured all government decisions and other circumstances as at 30 November 2020 of which I was aware and that had material economic or fiscal implications have been communicated to the Secretary to the Treasury, in accordance with the requirements of the Public Finance Act 1989.

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

 

Hon Grant Robertson
Minister of Finance

9 December 2020

Executive Summary#

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Note:

1. Net core Crown debt, excluding the New Zealand Superannuation Fund and advances (including lending under the Funding for Lending Programme - for more details see page 40).

Sources: Stats NZ, the Treasury

• New Zealand's elimination strategy has resulted in a low prevalence of COVID-19 compared to most other countries and allowed for a relatively swift economic recovery. Although the contraction in June quarter GDP was the sharpest on record, it was less severe than expected, suggesting that the effects of alert level restrictions on economic activity are smaller than previously assumed.
• A range of high-frequency indicators also signal a strong rebound in activity during the September quarter, particularly in household spending, and the rise in unemployment was less than forecast in the Pre-election Update. Indicators of economic activity have continued to surprise on the upside since the economic forecasts in this Half Year Update were finalised, and as such there are material upside risks to the near-term GDP and employment forecasts. Uncertainty about the economic impacts remains high, however, due to both volatility and the potential for sizeable revisions in the data.
• Despite improvements in the outlook, the COVID-19 shock is expected to have lasting economic impacts, and the fiscal position remains challenging. By June 2024, nominal GDP remains a cumulative $67 billion below the 2019 Half Year Update forecast. The Government faces large near-term deficits and rising debt levels, with net core Crown debt forecast to peak at 52.6% of GDP in 2022/23. The rise in debt partly results from the Reserve Bank’s Funding for Lending Programme (FLP), which is explored on page 40. Looking through the fiscal impact of the FLP, net debt peaks one year later at 45.6%.
• Higher levels of activity over the second quarter contributed to a more positive fiscal position than expected in the June 2020 year, with higher tax revenue and lower net debt than forecast in the Budget Update. The near-term outlook has also improved since the Pre-election Update, and the operating balance before gains and losses (OBEGAL) deficit is expected to be around $10 billion lower in the June 2021 year. The improvement is driven by the stronger economic outlook, which increases tax revenue by just over $4 billion a year on average and reduces expected benefit expenses.
• Some of the rebound in household spending could have been driven by savings accumulated during higher alert levels and may not be sustained, and continuing uncertainty will likely constrain business investment in the near term. Seasonal patterns may also have limited the economic impact of the closed border so far, and tourism-related businesses are expected to come under more pressure during the normal peak travel period over summer. As a result, economic growth is forecast to continue at a slower pace over 2021, and then pick up from 2022 as New Zealand's border reopens.
• Recent trial results for several COVID-19 vaccines are promising and present upside risk to the 1 January 2022 international border opening assumed in the Pre-election Update. This assumption currently remains unchanged, however, as the effectiveness and timing of the distribution of these vaccines were still unclear at the time of writing.
• The employment outlook has improved, with a lower forecast peak in unemployment and a faster recovery in labour force participation. The higher starting point for GDP is forecast to result in persistently higher economic output, with cumulative nominal GDP $48 billion above the Pre-election Update forecast by June 2024. The medium-term fiscal outlook is also more positive, with OBEGAL deficits expected to be $6.2 billion lower on average each year compared to the Pre-election Update. The OBEGAL deficit now narrows to $4.2 billion by the end of the forecast period.
• Since the Pre-election Update, a further $4 billion has been assumed to be allocated from the COVID‑19 Response and Recovery Fund, leaving around $10 billion in the fiscal forecasts unallocated. The Government signalled that this will largely be held in reserve in case of a virus outbreak, so there may be upside risk to the fiscal forecasts if one does not occur. The uncertain long-term impact of COVID-19 remains a significant fiscal risk, with respect to both the Government's response and its role in the recovery.
• The Economic Outlook chapter presents two alternative forecast scenarios, one on the upside and one on the downside. The first scenario explores the impact of stronger domestic demand and an earlier easing in border restrictions, leading to a faster economic recovery over 2021 and a lower peak in unemployment. The second involves sporadic COVID-19 outbreaks in New Zealand throughout 2021, resulting in higher unemployment and a slower recovery in New Zealand’s services exports.

Economic Outlook#

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Overview#

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• COVID-19 continues to have a profound effect on the New Zealand and global economies. While progress on vaccines has raised hopes of a quicker return to normal for international travel and social interactions, renewed outbreaks and associated increases in restrictions have increased near-term risks to the global economic outlook. While there is still uncertainty about the pace of the recovery here and abroad, we see increasing evidence of more upside risk, particularly with regard to the domestic economy.
• New Zealand's early elimination strategy has resulted in a much lower prevalence of COVID-19 compared to many other countries, helped by strict border controls and an effective public health response. The restrictions placed on activity in the June quarter to limit the spread of the virus contributed to the sharpest fall in real GDP on record, with a quarterly decline of 12.2%.
• The recovery from the downturn has been swift, despite a return to higher alert levels during August and September. Along with the better-than-expected outturn for June quarter GDP, this suggests that the effects of the alert levels on economic activity are smaller than previously assumed. Accordingly, our assumptions about the extent to which the alert levels constrain activity have been lowered, and we expect real GDP to rebound by a robust 10.5% in the September quarter. High-frequency indicators have consistently surprised on the upside and have continued to do so since our economic forecasts have been finalised, and as such there are material upside risks to our near-term GDP forecasts.
• While the recovery is forecast to continue, it is expected to be constrained by a number of factors. Uncertainty levels remain high, meaning businesses are taking a wait-and-see approach to new investments. This is consistent with a decline seen in business lending compared to the same period last year. Furthermore, there is likely to be a seasonal effect, since the lack of the usual inflow of international tourists will be felt more acutely in the peak summer months. Near-term weakness in trading partner growth could further slow the pace of the recovery. Therefore, a slowdown in economic growth is forecast over the first half of 2021, although the level of economic activity is not expected to decline.
• Treasury's working assumption is that Alert Level 1 restrictions will remain in place until the end of 2021. As in the Pre-election Update, border restrictions are assumed to start easing from 1 July 2021 and to be lifted on 1 January 2022. Recent trial results for several COVID-19 vaccines are promising and present upside risk to these assumptions. However, at the time of writing, the effectiveness and timing of the distribution of these vaccines were still unclear.
• A large ongoing fiscal response is relieving the effects of the pandemic in New Zealand. In the absence of renewed community outbreaks, fiscal support is assumed to have peaked in the 2020 fiscal year, and COVID-19-related fiscal support assumed in the economic forecasts has been lowered by around $8 billion from the Pre‑election Update.
• In line with the stronger domestic recovery, the unemployment rate is forecast to peak at 6.9% by the end of 2021, compared to 7.8% forecast in the Pre‑election Update. In comparison, the unemployment rate peaked at 6.6% during the Global Financial Crisis. While the economy is forecast to continue growing, this growth is expected to fall short of the growth in available jobseekers in the next few quarters, with the labour force participation rate forecast to increase. House price growth has also been surprisingly strong, and together with higher employment levels supports private consumption growth.
• Inflation is expected to ease in the coming quarters owing to relatively weak domestic demand and subdued import price inflation, before increasing gradually towards the mid-point of the Reserve Bank of New Zealand's (Reserve Bank's) inflation target range of 1% to 3%.
• New Zealand's goods exports have been resilient to the current crisis, which together with weakness in imports and stronger than expected services and income balances has improved the outlook for the current account, and also contributed to the stronger-than-expected recovery.
• As risks are more balanced than in the Pre-election Update, we revert to presenting an upside and downside as our additional forecast scenarios. In the upside scenario, we assume a stronger domestic recovery, with more of the current positive momentum being sustained into the beginning of 2021. This could result in higher confidence levels, in turn boosting private consumption and investment growth. In the downside scenario, sporadic outbreaks of COVID-19 in the community result in the reinstatement of higher alert levels, leading to further quarterly declines in real GDP and a higher peak in the unemployment rate despite increased policy support.

Sources: Stats NZ, Reserve Bank, CoreLogic, the Treasury

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

Notes:

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

Economic Outlook#

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The recovery has been quicker than expected…

The New Zealand economy has weathered the COVID-19 shock better than expected. Although the June quarter contraction in production GDP of 12.2% was the largest fall on record by a wide margin, it was smaller than the Pre‑election Update forecast of a 16% contraction (Figure 1.1). The previous biggest fall was 2.4% in the March 1991 quarter.

Figure 1.1 - Real production GDP

Sources: Stats NZ, the Treasury

Text description of Figure 1.1 - Real production GDP.

The return to higher alert levels in August resulted in a small downturn in economic activity, mostly concentrated in Auckland. The New Zealand Activity Index (NZAC) fell by 1.7% in August compared to the same period in 2019 but recovered quickly and was 1.0% higher than year-ago levels in September.[6] Despite this rapid recovery, it is an important reminder that until the COVID-19 pandemic has been eradicated or effective vaccines are available, a return to higher alert levels will remain a key risk, one we consider in an alternative scenario (see pages 24 to 25).

A strong recovery in economic activity levels in the September quarter is expected to have occurred. A number of high-frequency activity indicators are now at or above pre‑pandemic levels, with this trend continuing after our economic forecasts were finalised. For example, in the September quarter, the unemployment rate increased by less than expected and retail sales increased strongly to above year-ago levels (Figure 1.2). Traffic movements and electricity demand also moved above levels seen during the same period last year, while the ANZ business confidence index improved in November to its highest level since late 2017 (although it is still negative). As a result, our baseline forecast sees real GDP rebounding by a robust 10.5% in the September quarter, followed by further growth of 2.2% in the December quarter.

Figure 1.2 - Real retail sales and consumption

Source: Stats NZ

Text description of Figure 1.2 - Real retail sales and consumption.

…but uncertainty remains high

The path the economy takes from here remains uncertain. The pace of the recovery depends on many unknown factors, including the course of the virus, the speed and effectiveness at which vaccines can be rolled out, how quickly the global economy recovers and how behaviours and production might change. In this environment, forecasting errors are much larger than normal. For example, in the 2020 Budget Update, we had forecast real GDP to contract by 23.5% in the June quarter. This was revised to a 16% contraction in the Pre-election Update, while the actual outturn was 12.2%. Data volatility and the potential for sizeable data revisions mean uncertainty about the impacts will likely remain for some time.

The continued strength in activity indicators is a material upside risk to our near-term GDP forecasts. Consequently, there is a risk that actual outcomes may prove more volatile with, for example, growth somewhat stronger in the September quarter, followed by a fallback in activity levels in subsequent quarters. It is unlikely that the recovery will be smooth and therefore these alternatives are entirely feasible. Such differences help illustrate the considerable uncertainty that remains, even if the general trends apparent in the forecasts are broadly similar.

In our recent discussions with businesses, many indicated that some of their investment plans have been put on hold until there is more certainty about the likely trend in demand.[7] This is consistent with a decline seen in business lending compared to the same period of 2019. Furthermore, after an initial strong rebound, in November annual growth in retail electronic card spending fell to 1.4% from 8.3% the previous month, suggesting some loss in momentum, although this indicator has not always been a very accurate measure of actual consumer spending. Up to now, the effect of border restrictions on companies that rely on international visitors has been partially offset by increased spending by New Zealanders on domestic holidays during the off-peak season for international tourists. In the summer months, the lack of the usual influx of tourists from abroad will be felt more acutely. Given these concerns, a slowdown in economic growth is forecast over the first half of 2021, although the level of economic activity is not expected to decline.

While the pace of economic growth is forecast to quicken once border restrictions are lifted from 1 January 2022, the level of real GDP continues to be lower than forecast in the 2019 Half Year Update. This reflects the fact that the pandemic is expected to have long-lasting effects on economic output via lower labour supply, productivity, and capital stock levels. We have retained our potential output assumptions (see page 20 of the Pre-election Update). However, a quicker and sustained recovery could limit the ‘scarring’ effects of the pandemic and therefore potential output may improve more quickly than was outlined in the Pre‑election Update.

The quicker recovery pushes inflation slightly higher in the near term…

The stronger domestic recovery results in slightly higher rates of Consumers Price Index (CPI) inflation in the near term compared to the Pre‑election Update forecasts (Figure 1.3). Higher food and shipping costs are also contributing to slightly increased price pressures in the economy. A stronger exchange rate provides an offset. Inflationary pressures are still expected to ease in the coming quarters, in line with weaker domestic demand as the unemployment rate increases and border restrictions remain in place. Annual CPI inflation is forecast to reach a low of 0.7% in the March 2021 quarter. Once domestic demand recovers, CPI inflation is forecast to increase gradually towards the mid-point of the Reserve Bank's target range of 1% to 3%.

Figure 1.3 - Consumers Price Index

Sources: Stats NZ, the Treasury

Text description of Figure 1.3 - Consumers Price Index.

Monetary policy is expected to remain supportive throughout the forecast period, although the mix between traditional and unconventional measures may change. However, by the end of the forecast period, economic activity will have recovered and inflation is forecast to be back near the mid-point of the Reserve Bank's target range, and therefore monetary policy support is expected to be scaled back.

…with nominal GDP much higher than forecast in the Pre-election Update

As a result of the stronger recovery, a higher domestic price level and robust terms of trade, nominal GDP is cumulatively around $48 billion higher than in the Pre-election Update by the June 2024 quarter. This contributes to higher forecasts of tax revenue and an improved fiscal position, as outlined in the Fiscal Outlook chapter.

The unemployment rate is now expected to peak at a lower rate

After falling unexpectedly in the June quarter from 4.2% to 4.0%, the unemployment rate increased to 5.3% in the September quarter. The smaller-than-expected increase in unemployment can partly be ascribed to the significant amount of fiscal support that has been provided, with the Wage Subsidy Scheme in particular successfully maintaining labour market attachment. As such, underemployment and hours worked better reflect the decline in activity in the June quarter. The underutilisation rate provides a broader measure of the degree of slack in the labour market. The June quarter saw the largest recorded increase in the underutilisation rate since the series began in 2004 (to 12.0%), increasing further to 13.2% in the September quarter, though this is still lower than the 2012 peak of 15.6%. There are also disproportionate effects across sectors, with employment in the retail and accommodation sectors falling more sharply than in others. This is discussed in more detail in the box below on page 17.

The unemployment rate is expected to increase further over the coming quarters as fiscal support measures ease and border restrictions remain in place, although by how much remains uncertain. It is possible that the rise in the unemployment rate will be more muted than in our baseline forecasts if more people exit the labour force.

Figure 1.4 - Unemployment rate

Sources: Stats NZ, the Treasury

Text description of Figure 1.4 - Unemployment rate.

Total Jobseeker numbers increased by more than 60,000, to more than 200,000, in the September quarter compared to the same period last year. The unemployment rate is forecast to peak at 6.9% by the end of 2021, much lower than the peak of 7.8% forecast in the Pre-election Update (Figure 1.4). Once border restrictions are eased and economic activity continues to recover, the unemployment rate is forecast to fall gradually, reaching 4.0% by the end of the forecast period.

Employment levels typically increase strongly over the summer months, reflecting increased demand over the holiday period and seasonal demand for labour in the agricultural sector. With the number of international visitors in the country being lower than normal, less of this typical increase is likely to occur. This may well show up as a decline in seasonally adjusted employment, even if actual employment levels do not fall. Nevertheless, due to the improved outlook for the economy and data revisions, employment levels are higher than in the Pre-election Update.

While the economy is forecast to continue growing, this growth is expected to fall short of the growth in available jobseekers in the next few quarters. The participation rate increased to 70.1% in the September quarter following a decline in the June quarter (from 70.7% to 69.9%), and it is expected to continue recovering in the coming quarters (Figure 1.5). In other words, the number of discouraged workers is expected to decline. A degree of ‘scarring’ caused by the COVID-19 pandemic on the labour market is still expected, as skills mismatches result in a period of lower labour productivity. However, there are indications that the degree of ‘scarring’ is less than previously thought.

Figure 1.5 - Labour force participation rate

Sources: Stats NZ, the Treasury

Text description of Figure 1.5 - Labour force participation rate.

Wages also held up better than expected in the September quarter. The higher starting point in the September 2020 quarter leads to persistently higher wage levels over the forecast period. Combined with stronger employment, this boosts household incomes by a cumulative $19.4 billion up to the June 2024 quarter compared to the Pre-election Update, which supports private consumption growth. However, some of the increase in average earnings is due to compositional shifts in the labour market, as the pandemic has disproportionately affected lower-earning jobs. Indeed, COVID-19 has not affected all sectors, demographic groups, and regions equally. Some of these distributional effects of the pandemic on the labour market are explored in the box below.

Assumed COVID-19-related fiscal support is lower

A large ongoing fiscal response is relieving the effects of the pandemic. However, in the absence of a resurgence of the virus, fiscal support is assumed to have peaked in the 2020 fiscal year. COVID-19-related fiscal support assumed in the economic forecasts has been reduced from $58.5 billion in the Pre-election Update to $50.1 billion. Of the $50.1 billion, $17.8 billion has already been allocated in the 2020 fiscal year, leaving $32.3 billion for the remainder of the forecast period. The Government's response to the pandemic continues to adapt as the COVID-19 situation evolves. This means that plans for COVID-19-related expenditure have continued to evolve and will likely continue to do so for some time, and the exact timing and costs of these plans remain uncertain.

The economic forecasts assume less COVID-19-related fiscal spending than is included in the fiscal forecasts (see the box on the impacts of the response to COVID-19 on the economic and fiscal outlook on page 5). This difference reflects the decision to include additional spending made after economic forecasts were finalised. Treasury’s modelling indicates that including these differences in our economic forecasts would result in nominal GDP being only around 0.2% higher over the forecast period.

A strong rebound in consumption…

Private consumption fell sharply but by less than expected in the June quarter, with government support cushioning the impact on household incomes. Subsequently, there has been a notable rebound in the second half of 2020, as reflected in spending indicators such as electronic card transactions and retail trade sales. Some of the initial recovery in private consumption was likely the result of the spending of accumulated savings while the country was under higher alert level restrictions and may therefore not be sustained at the same pace. However, with border restrictions in place, those who had international travel plans will either purchase other goods and services, including domestic tourism, or increase their savings, which could boost private consumption in the coming quarters.

These factors, in addition to a resilient housing market, are expected to contribute to a strong rebound in quarterly real private consumption of 10.7% in the September quarter, from the 12.1% contraction in the June quarter. Consumption in the year to March 2021 is forecast to be 4.6% below the previous year (Figure 1.10). After falling by 14.8% from the 2020 March to June quarters, retail trade sales volumes bounced back by 28% in the September quarter to be 8.2% higher than in the same period last year. This presents upside risk to our September quarter consumption and GDP forecasts. However, retail trade stock levels were 4.7% below year-ago levels in the September quarter, which suggests sales growth might slow in the coming quarters.

Figure 1.10 - Real private consumption

Sources: Stats NZ, the Treasury

Text description of Figure 1.10 - Real private consumption.

The expected increase in unemployment, easing in fiscal support measures and lower net migration are expected to result in a slowdown in private consumption growth in the December 2020 and March 2021 quarters. The seasonal impact of fewer international visitors during the normally busy summer period is a further source of downward pressure on private consumption growth (due to the indirect negative impact on incomes for those working in tourism-related sectors).

…supported by resilient house price growth…

Housing market activity has been surprisingly strong, with the REINZ House Price Index rising 13.5% in September from the same period a year ago. This partly reflects higher demand for housing from New Zealanders returning from abroad. Record-low interest rates and the temporary suspension of the Reserve Bank's loan-to-value-ratio restrictions have also supported house prices. Although a slowdown in house price inflation is still expected, it is now forecast to remain robust throughout the forecast period, whereas in the Pre-election Update we had expected it to reach a low point of -5.4% by the September 2021 quarter. House price inflation is expected to slow from recent highs over the course of 2021 owing to net migration remaining constrained in the short term, an expected increase in supply (supported by annual building consents rising to a 46-year high), and the forecast increase in unemployment dampens demand (though less than expected previously). More details on the fundamental factors driving the outlook for the housing market are provided in the box below.

Figure 1.11 - House prices

Sources: CoreLogic, the Treasury

Text description of Figure 1.11 - House prices.

…and higher net migration when borders are reopened…

Net migration is expected to be substantially lower than normal in the year ahead given the continued border restrictions. While many New Zealand citizens and permanent residents have returned to the country since the start of the pandemic, the departure of temporary visa holders and substantially lower inflows of new temporary workers are expected to more than offset arrivals. As such, annual net migration is forecast to fall from 90,000 in the 12 months ending March 2020 to just 5,000 by the end of June 2021. As border restrictions start to be partially eased from 1 July 2021 onwards, net migration flows rise to 43,000 by the end of the forecast period. Rising net migration increases population growth, stimulates demand and increases the potential size of the labour force.

…although the outlook for investment is mixed

After dipping slightly earlier in the year due to COVID-19-related disruptions, residential building consents have shown resilience in the months after the restrictions on activity were eased, although some of this may be attributable to catch-up growth. Our engagements with businesses in the construction sector between late October and early November revealed that building activity is supported by strong demand in the near term, but the outlook beyond that is less clear. Relatively subdued growth in residential investment activity is forecast in 2021, as uncertainty remains high, the labour market is expected to deteriorate, border restrictions continue to limit population growth and there are skilled labour shortages.

The outlook for non-residential investment is less favourable. Uncertainty about the strength of the recovery is expected to put a damper on the pace of investment growth. As a result, a period of lower growth in business investment is forecast over the remainder of 2020 and the first half of 2021 (Figure 1.14). Businesses that are directly or indirectly exposed to demand from international visitors are particularly cautious and may face a challenging summer period due to the lack of visitors from abroad. For these businesses, investments aimed at expanding capacity or new market segments will likely be placed on hold until there is more certainty about when border restrictions will be eased. In addition, the easing of fiscal support measures will test the resilience of businesses. On the other hand, monetary conditions remain supportive, with the cost of capital at historically low rates.

Figure 1.14 - Real investment

Sources: Stats NZ, the Treasury

Text description of Figure 1.14 - Real investment.

Alternative scenarios show different paths the economy could take

It is plausible that the domestic economy will recover more quickly in the near term than in our main forecasts, as suggested by a number of high-frequency indicators. On the other hand, a key downside risk to our central forecasts is the assumption that higher alert levels will not be reinstated. This uncertainty is a possible reason why some businesses have put a hold on new investment plans. The upside (stronger domestic recovery) and downside (renewed outbreaks of COVID-19) scenarios are explored in more detail in the box below.

The terms of trade are expected to remain near record-high levels…

The relative resilience of New Zealand's goods exports during the COVID-19 pandemic is partly because a large share of products is in food or related industries, which are less exposed to cyclical swings in global activity levels and continue to be supported by solid demand fundamentals. Nonetheless, supply chain congestion, lower freight capacity, and higher shipping costs have affected both importers and exporters.

More details on the global economic context are provided in the box below on page 28. Due to the unique nature of the current crisis, the effects have not been felt equally across and even within sectors. The horticultural sector has continued its impressive performance, with kiwifruit and apples in particular benefiting from the global health and wellness trend. On the other hand, in the meat sector, products that are more exposed to the restaurant trade have seen greater price declines than those that are mostly sold in retail outlets. Given the uneven nature of the pandemic across different countries, the markets where New Zealand products are sold have also played a significant role in exporters' performance. New Zealand exporters have benefited from the relatively quick recovery in demand for their products to the Chinese market, which is a relatively important market for several of our exports, including dairy, forestry and seafood.

In contrast to previous downturns, there has not been a large fall in our terms of trade. The relative resilience of exports is helping to limit the fall in the terms of trade, and lower import price inflation is providing further support, helped by weak global price pressures and relatively low oil prices. Overall, the goods terms of trade are expected to remain near record-high levels, although there may be a decline in the near term due to global demand weakness, and should remain supportive of incomes over the medium term (Figure 1.19). The TWI has been stronger than expected on the back of increased global risk appetite due to the progress with COVID-19 vaccines. In addition, a stronger-than-expected domestic recovery has increased interest rate expectations. However, this run of optimism is not expected to be sustained, with market sentiment playing a part in pushing up the exchange rate. The TWI is forecast to retrace some of its recent strength at the beginning of 2021 and remain steady until the end of 2022, after which it is forecast to rise gradually as monetary conditions tighten as a result of an improvement in the economy.

Figure 1.19 - Goods terms of trade and TWI

Sources: Stats NZ, RBNZ, the Treasury

Text description of Figure 1.19 - Goods terms of trade and TWI.

…which together with stronger services and income balances has improved the outlook for the current account balance

Goods export values declined by 5.2% in the June quarter, while goods imports fell by a much larger 20.3% (Figure 1.20). As a result, the trade surplus reached a record high of $2.2 billion in the quarter. Imports are forecast to recover gradually over the coming quarters, in line with the recovery in the domestic economy. The pace of the recovery is, however, being hampered by supply chain congestion issues that are resulting in delays. Similarly, goods exports are also forecast to recover, but at a more measured pace, given the lingering effects of the COVID-19 pandemic on global demand, and an expected decline in our terms of trade. Owing to the border restrictions, it is also more challenging for exporters to engage with new customers. As a result, the trade balance is forecast to move back into deficit in early 2021.

Figure 1.20 - Goods exports and imports

Sources: Stats NZ, the Treasury

Text description of Figure 1.20 - Goods exports and imports.

The services balance in the June quarter was higher than expected. This is because more tourists and students remained in the country than we had assumed. Usually we would have seen a notable increase in services exports in the peak summer months, but border restrictions mean this will not happen. The services balance is therefore expected to deteriorate further. The annual services balance is forecast to move into deficit in the December 2020 quarter, peaking at a deficit of 1% of GDP in the December 2021 quarter (Figure 1.21).

Figure 1.21 - Current account balance and its components

Sources: Stats NZ, the Treasury

Text description of Figure 1.21 - Current account balance and its components.

Overall, the current account deficit follows broadly the same profile as in the Pre-election Update, although the size of the deficit is smaller owing to less negative services and primary income balances.

 

Fiscal Outlook#

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Overview#

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• The Government's fiscal outlook continues to be largely influenced by the COVID-19 pandemic, through the impact on economic activity and the Government's fiscal measures to support the economy.
• Since the start of the COVID-19 pandemic, the Government has faced a fiscal outlook of large deficits and increasing levels of debt. However, compared to the Pre-election Update, the fiscal outlook has improved and is largely a result of stronger economic activity than previously forecast, which improves the outlook for tax revenue and the labour market, and this in turn reduces benefit expenses.
• Funding of $10.3 billion remains unallocated from the COVID-19 Response and Recovery Fund (CRRF), which has been included in the fiscal forecasts. The Government has stated an intention to focus spending, from the unallocated portion of the CRRF, on any resurgence of the virus and other essential COVID-19 pandemic related expenditure, so there is an upside risk to the fiscal forecasts if the CRRF is not fully utilised.
• The Government's decision on a new top tax rate of 39% applies to personal income earned over $180,000 and is forecast to increase tax revenue by $2.2 billion across the forecast period. The extra revenue raised is largely offset by the increase in the Budget operating allowances to $2.625 billion for Budget 2021 to Budget 2024.
• The operating results in all years are expected to be better than previously forecast. The forecast operating balance before gains and losses (OBEGAL) deficit in 2020/21 of $21.6 billion is expected to remain at a similar level to 2019/20 before reducing across the forecast period.
• The pace of the reduction in OBEGAL deficits is now expected to be faster than previously expected. In the final year of the forecast, an OBEGAL deficit of $4.2 billion is expected, an average reduction per year of $4.4 billion from the first year of the forecast (compared to $2.8 billion at the Pre-election Update).
• The improvement in OBEGAL flows through to the forecasts for core Crown residual cash and net core Crown debt; however, the impact from the Funding for Lending Programme (FLP) announced by the Reserve Bank of New Zealand (Reserve Bank) also impacts these indicators. The FLP is expected to initially increase core Crown residual cash deficits and net core Crown debt in the first three years of the forecast period, but this then reverses as the loans issued are repaid.
• Overall, residual cash deficits total $101.8 billion across the forecast period, while net core Crown debt increases by $106.6 billion by the end of the forecast period. A residual cash surplus of $3.9 billion is forecast in 2024/25, largely owing to the cash flows on loans under the FLP.
• As a percentage of GDP, net core Crown debt is expected to increase in the first half of the forecast period, peaking at 52.6% in 2022/23, before reducing to be 46.9% in 2024/25.
• Net worth attributable to the Crown is forecast to decline by $50.2 billion by 2023/24 before increasing slightly in the final year of the forecast to reach $61.0 billion, mainly reflecting the trend in the operating balance.

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

Notes:

1. Operating balance before gains and losses.
2. Net core Crown debt, excluding the New Zealand Superannuation Fund and advances (including lending under the FLP, for more details see the box on page 40).
3. Excludes Reserve Bank settlement cash and bank bills.
4. Percentage of GDP: The nominal GDP for the March 2020 year being revised higher by $7.9 billion has had the effect of decreasing net core Crown debt by 0.7% of GDP in the year ended June 2020 and up to 1.3% lower over the forecast period.

Source: The Treasury

Key Trends in the Fiscal Outlook#

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Tax revenue grows broadly in line with the economy…

Core Crown tax revenue is forecast to increase by $20.5 billion across the forecast period, reaching $108.8 billion in 2024/25. As a percentage of GDP, core Crown tax revenue remains relatively stable, declining by 0.4% across the forecast period and reaching 26.9% in 2024/25 (Figure 2.1).

Figure 2.1 - Core Crown tax revenue

Source: The Treasury

Text description of Figure 2.1 - Core Crown tax revenue.

When compared to growth in the economy, core Crown tax revenue is forecast to grow at a faster rate than nominal GDP in both 2020/21 and 2022/23 but comparatively more slowly in 2021/22 (Figure 2.2).

Figure 2.2 - Core Crown tax revenue and nominal GDP growth

Source: The Treasury

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

The slow growth in 2021/22 is mainly owing to:

• a slower growth rate in major components of the total GDP forecast that affect the tax revenue forecasts, such as compensation of employees, taxable profits and overseas tourist spending in New Zealand, and
• policy changes introduced in response to the COVID-19 pandemic, mainly relating to depreciation allowances, asset-expensing thresholds and loss carry-back, as announced earlier this year, which are expected to reduce tax revenue.

In 2022/23, tax revenue growth exceeds nominal GDP growth as total tax policy change effects, such as the new 39% tax rate, are positive when compared to 2021/22, while taxable profits and residential investment are forecast to grow at a faster rate than GDP.

In 2023/24 and 2024/25, core Crown tax revenue is forecast to grow in line with nominal GDP growth.

…while expenses stay elevated in the near term owing to fiscal measures in response to the COVID-19 pandemic…

In 2020/21, core Crown expenses continue to climb from the 2019/20 actual result, reaching $114.2 billion, before stabilising (Figure 2.3). As a percentage of GDP, core Crown expenses are forecast to peak in 2020/21 at 35.3%, before reducing across the remainder of the forecast period and reaching 29.3% in the final year of the forecast.

Figure 2.3 - Core Crown expenses

Source: The Treasury

Text description of Figure 2.3 - Core Crown expenses.

This initial increase in core Crown expenditure largely reflects Government decisions for Budget 2020 (adding around $3.3 billion) and an increase in expected benefit expenses, while CRRF related expenditure remains similar to the previous year.

Breaking down the increase, the health, transport and housing sectors account for most of the expected increase from 2019/20. Funding for the Managed Isolation and Quarantine (MIQ) facilities, operating funding to Crown Infrastructure Partners (for ‘shovel ready' projects) and investment in housing and infrastructure projects to enable urban development are the key areas of growth within these sectors.

More details on the functional classification of core Crown expenses can be found in the Expenses by Functional Classification on page 112 and in the core Crown Expense Tables on page 117.

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

In the current year, the OBEGAL deficit is forecast to remain at a similar level to that recorded in 2019/20. It is then expected to reduce across the forecast period, reaching a deficit of $4.2 billion in the final year of the forecast (Figure 2.4).

Figure 2.4 - Components of OBEGAL by segment

Source: The Treasury

Text description of Figure 2.4 - Components of OBEGAL by segment.

This improvement is mainly a result of the core Crown operating results, reflecting the stronger economy through increased tax revenue and a lowering of core Crown expenses. Outside of the core Crown results, State-owned Enterprise (SOE) and Crown entity results are also expected to strengthen.

The total Crown operating balance, which includes gains and losses on assets and liabilities, is forecast to be in deficit until 2023/24. In 2020/21, net losses total $3.3 billion, largely reflecting the actuarial losses on the ACC outstanding claims (mainly as discount rates have lowered since 30 June 2020), along with the impact of the LSAP programme.

However, net gains are forecast to return from 2021/22, as long-term benchmark rates of return are used. This return to net gains, coupled with the decreasing OBEGAL deficits, results in the total Crown operating balance returning to a forecast surplus of $0.7 billion in 2024/25.

…driving the decline in net worth

As total liabilities grow at a faster rate than total assets, net worth attributable to the Crown is forecast to decline from $110.3 billion in 2019/20 to $61.0 billion in 2024/25, a $49.3 billion reduction. As a percentage of GDP, net worth attributable to the Crown decreases to 15.1% in 2024/25. This is primarily owing to higher levels of debt required to fund the total Crown operating balance deficit, which flows directly into the Crown's balance sheet, through taxpayers' funds.

The residual cash position follows a similar trend to the operating deficits…

Core Crown residual cash largely reflects the core Crown operating results, leading to reducing cash residual deficits across the forecast period (Figure 2.5).

Figure 2.5 - Core Crown residual cash

Source: The Treasury

Text description of Figure 2.5 - Core Crown residual cash.

The FLP is forecast to have a significant impact on core Crown residual cash, initially adverse as it increases the amount of cash advanced by the Government ($28.0 billion by 2022/23), but it will have a positive impact in later years as these advances are forecast to be repaid ($22.2 billion by 2024/25).

As a result, a small residual cash surplus of $3.9 billion is expected in 2024/25.

Table 2.4 shows net capital expenditure that has an impact on net core Crown debt. It excludes capital spending undertaken directly by SOEs and Crown entities funded from their own resources (including third-party financing). The Government is forecast to invest a net total of $56.6 billion in capital over the forecast period.

Source: The Treasury

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

In nominal terms, net core Crown debt is expected to grow significantly over the forecast period, reaching $190.0 billion in 2024/25. This is an increase of $106.6 billion from the position at the end of 2019/20. The increase is mainly driven by the need to fund the net residual cash deficits of $101.8 billion expected over the next five years (Figure 2.6).

Figure 2.6 - Net core Crown debt

Source: The Treasury

Text description of Figure 2.6 - Net core Crown debt.

As a percentage of GDP, net core Crown debt is expected to increase rapidly in the first three years of the forecast period, from 26.4% in 2019/20 to 52.6% in 2022/23, before gradually lowering and reaching 46.9% in 2024/25.

By the end of the forecast, the FLP is expected to add $5.8 billion (1.4% of GDP) to net core Crown debt, as it includes the FLP liabilities but excludes the corresponding assets (as advances are excluded from the definition of net core Crown debt).

Table 2.5 on page 41 shows if the assets from the FLP were included in the calculation of net core Crown debt, it would be expected to peak in 2024/25 at $184.2 billion (compared to $194.2 billion in 2023/24). As a percentage of GDP, net core Crown debt would be forecast to peak at 45.6% in 2023/24 (compared to 52.6% in 2022/23).

Further information on the impact of the FLP on net core Crown debt can be found in the box on page 40.

Comparison to the Pre-election Update#

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The fiscal forecasts are stronger than expected in the Pre-election Update.

While the Government's fiscal outlook continues to be largely influenced by the COVID-19 pandemic, Table 2.6 shows that key fiscal indicators have improved when compared to the Pre‑election Update.

Source: The Treasury

Operating Balance before Gains and Losses#

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Operating deficits are lower than previously expected across all years, reflecting core Crown operating results…

OBEGAL deficits have reduced in all years across the forecast period when compared to the Pre-election Update. The operating deficit for the 2020/21 fiscal year is expected to be lower by $10.1 billion, with an OBEGAL deficit forecast of $21.6 billion.

This improvement is mainly a result of stronger economic activity, increasing the forecast for core Crown tax and lower expected government expenditure, discussed below.

Outside of the core Crown, overall SOE and Crown entity results are expected to be $1.4 billion higher across the forecast; however, ACC results are lower than previously forecast owing to lower discount rates and updated information on claims costs.

…and core Crown tax revenue is forecast to be higher than previously expected...

Core Crown tax revenue is forecast to be $16.8 billion higher over the forecast period when compared to the Pre-election Update, an increase on average of $4.2 billion per year. The increase is mainly a result of the movements in source deductions, goods and services tax (GST) and corporate tax, which are summarised in Table 2.7.

Source: The Treasury

Source deductions are higher over the forecast period, mainly owing to a stronger outlook for employment and wage growth. Additionally, the introduction of a new top personal income tax rate of 39% for income over $180,000 has added around $0.4 billion per year from 2021/22 onwards.

GST forecasts are also up across the forecast period, driven by strength in residential investment and net tourism, as well as stronger actual revenue outturns in the first part of 2020/21. Changes in private consumption, residential investment and other economic variables drive the overall change across the rest of the forecast period.

Corporate tax forecasts are higher, mainly owing to an improved outlook for taxable profits across the forecast.

…while core Crown expenses are lower reflecting the stronger economic outlook…

Core Crown expenses are expected to be $6.6 billion lower across the forecast period as benefit expenses and CRRF-related expenditure are lower than previously forecast, particularly in the near term (Figure 2.9). Additionally, rephased expenditure from the CRRF means $2.2 billion is now expected in 2024/25, a year later than previously forecast.

Figure 2.9 - Core Crown expenses compared to the Pre-election Update

Source: The Treasury

Text description of Figure 2.9 - Core Crown expenses compared to the Pre-election Update.

Overall, benefit expenses are expected to be $0.2 billion lower than previously forecast largely owing to the stronger economic outlook, which has reduced the forecast for Jobseeker Support recipients and payments. Additionally, the COVID‑19 Income Relief Assistance has been forecast down owing to lower than expected up-take.

Partially offsetting the overall decrease, New Zealand Superannuation benefit expenses are expected to grow by $1.7 billion when compared to the Pre-election Update. The increase is owing to stronger wage growth and higher average ordinary time weekly earnings (AOTWE), to which New Zealand Superannuation payment rates are linked. The AOTWE increases are due to Stats NZ's update of the Quarterly Employment survey population to better reflect the economy.

The forecast phasing of the unallocated portion of the CRRF has been updated since the Pre-election Update, resulting in a reduction in CRRF expenses in 2020/21. This decrease is partially offset, as the phasing has been shifted out into subsequent years of the forecast; therefore, CRRF expenses are higher than previously forecast in later years.

Additionally, the top-down adjustment, which reduces overall expenditure, has increased since the Pre‑election Update (see Table 2.8). When compared to the Pre-election Update, the top-down adjustment removes an additional $2.7 billion from core Crown expenses.

Source: The Treasury

Factors considered in the increased top-down adjustment for the Half Year Update include:

• the significant lift in baseline expenditure expected, particularly in 2020/21 and 2021/22, primarily owing to unspent expenditure from 2019/20 transferred, and
• the increased uncertainty on the unallocated portion of the CRRF and when it may be fully spent, particularly given the intention to focus spending on any resurgence of the virus and other essential COVID-19 pandemic related expenditure.

Offsetting the decrease in core Crown expenses, operating allowances for Budget 2021 through to Budget 2024 have increased since the Pre-election Update. These have been set at $2.625 billion per year for each Budget, adding $1.2 billion to core Crown expenses across the forecast (refer to Table 2.9).

Note:

1. Budget operating allowances accumulate across the forecast period, eg, Budget 2021 includes $2.625 billion in each year of the forecast.

Source: The Treasury

When compared to the Pre-election Update, core Crown finance costs are $2.0 billion lower across the forecast, reflecting the decrease in the expected net Government bond issuance and short-term borrowing. Additionally, as interest rates remain lower for longer, the LSAP programme continues to have an ongoing effect as well, because the fixed interest rate payable on the repurchased Government bonds is replaced by the lower floating Official Cash Rate payable on bank settlement account borrowings, which funds the LSAP programme.

Residual Cash and Net Core Crown Debt[16]#

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Residual cash reflects improvements in the operating balance but is impacted by the FLP…

The core Crown operating results discussed above largely flow through to improve the core Crown residual cash position across the forecast period. In total, residual cash deficits of $105.7 billion are now expected to 2023/24, which is a decrease of $5.1 billion when compared to the total residual cash deficits forecast at the Pre‑election Update.

The impact of the FLP sees higher residual cash deficits in 2021/22 and 2022/23 before repayments are forecast from 2023/24. Overall, when compared to the Pre‑election Update, advances are $20.0 billion higher across the forecast period.

Figure 2.10 - Core Crown residual cash compared to the Pre-election Update

Source: The Treasury

Text description of Figure 2.10 - Core Crown residual cash compared to the Pre-election Update.

…while net core Crown debt as a percentage of GDP reduces in all years

Net core Crown debt as a percentage of GDP has reduced in all years when compared to the Pre-election Update. Nominal net core Crown debt is $6.9 billion lower than previously forecast by 2023/24.

For further information on the impact of the FLP on net core Crown debt, refer to page 40.

Total Crown Balance Sheet#

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

Net worth attributable to the Crown is forecast to be $22.4 billion stronger than previously expected by 2023/24. This is mainly as a result of the forecast change in taxpayers' funds of $23.1 billion by 2023/24, owing to the strength in the total Crown operating balance when compared to the Pre-election Update (see Table 2.10).

Source: The Treasury

…while Government bonds reduce as less cash is required

Lower than expected total Crown borrowings are the key driver of the higher net worth attributable to the Crown, when compared to the Pre-election Update. The lower borrowings are through a reduction in forecast net Government bond issuance and short-term borrowing, as the stronger results have led to less cash being required.

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

In total, the bond programme is expected to raise funds of $166.6 billion over the forecast period. Bond maturities will result in repayments of $54.2 billion of existing debt. In addition, short-term borrowing is expected to be $6.8 billion lower at the end of the forecast period, relative to the end of 2019/20 (Table 2.11). Overall, the core Crown borrowing programme will provide net funds of $105.6 billion to cover core Crown residual cash deficits and to ensure cash is available for upcoming bond maturities.

Source: The Treasury

Key Economic Assumptions Used in the Forecast Financial Statements#

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The Forecast Financial Statements are prepared on the basis of underlying economic forecasts. Such forecasts are critical for determining revenue and expense estimates. For example:

• a nominal GDP forecast is needed to forecast tax revenue
• a forecast of 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 2.12.

Notes:

1. Production measure.
2. Expenditure measure.

Sources: The Treasury, Stats NZ

Risks to the Fiscal Forecasts#

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Overview#

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

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

COVID-19#

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The COVID-19 pandemic is a major public health shock, which has caused a major economic shock that has already had a significant impact on the Government's finances. The statement of specific fiscal risks in this chapter identifies a number of fiscal risks directly and indirectly affected by COVID-19. In addition, specific fiscal risks identified in this statement may be more generally affected by the economic downturn brought about by COVID-19. Even though these specific fiscal risks have been identified, the true fiscal impact of COVID-19 remains uncertain. This is discussed further on pages 5 to 8.

Despite the disclosure of risks in this chapter, the uncertainty of the economic and fiscal outlook means that there are risks to the fiscal forecasts that are too broad in nature to disclose in the statement of specific fiscal risks. These risks concern:

• the impact on the economy – while it has been almost 12 months since the initial onset of the pandemic, the duration of the economic downturn and subsequent pace of the recovery still depend on many unknown factors. Forecasts for tax revenue and benefit expenses are particularly sensitive to economic conditions. The Economic Outlook chapter includes scenarios that model the fiscal impact of how the economy might evolve if some of the key judgements related to COVID-19 in the main forecast were to be altered
• the Government's response – as part of Budget 2020, the Government set aside $50 billion under its fiscal management approach to support the response to, and recovery from, COVID-19, known as the COVID-19 Response and Recovery Fund (CRRF). The Government has already implemented many policies to respond to COVID-19. Policies announced and communicated up to 30 November 2020 have been included in the fiscal forecasts based on the best information available. There is a risk that the actual costs and/or timing of these policies may differ from the judgements and assumptions used to prepare the fiscal forecasts
• the Government's role in recovery – COVID-19 has impacted many sectors of the economy. The Government's response was initially focused on fighting the virus and cushioning the blow and, while still directed towards fighting further outbreaks of the virus, is increasingly focused on recovery from the impacts of COVID-19. CRRF funding set aside to manage the further fiscal costs of the response to, and recovery from, COVID-19 has been included in the fiscal forecasts. To the extent that this relates to spending decisions not yet made, it requires judgement about the nature (eg, operating or capital) and timing of future COVID-19 response initiatives, and
• the impact on valuations of assets and liabilities, and contingent liabilities – a number of assets and liabilities on the Crown balance sheet are valued using market information (eg, land and buildings, share investments and ACC outstanding claims liability). The impact of COVID-19 is likely to cause some ongoing volatility in the market that will affect the future value of assets and liabilities on the Government's balance sheet. In addition, the effects from COVID-19 may result in costs from some of the Government's existing contingent liabilities converting into expenses during the forecast period. In particular, there is a risk that there may be calls on some uncalled capital facilities and some Crown guarantees and indemnities may crystallise.

Fiscal Sensitivities#

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Table 3.1 sets out some ‘rules of thumb' on the sensitivities of the fiscal position to small changes in specific economic 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 $5.6 billion higher than forecast in the June 2025 year. The sensitivities are broadly symmetric: if nominal GDP growth is one percentage point lower than expected each year, tax revenue would be around $5.4 billion lower than forecast in the June 2025 year. The figures are indicative and can be influenced by the composition of growth as different types of activity have different effective tax rates.

Note:

1. Funds managed by the Treasury.

Source: The Treasury

The forecast financial position is based on judgements and assumptions about the future. To inform these judgements and assumptions we rely on market information. Some additional assumptions include those related to foreign-exchange rates, share prices, the carbon price and property prices. For example, foreign-currency-denominated financial assets and liabilities are converted into New Zealand dollars, the Government's listed share investments are reported on market prices, and property owned by the Crown is valued using market information. These values are based on information prevailing at 30 September 2020. Where the actual outcome differs from our assumptions, the Crown’s actual financial position is likely to differ from the forecasts. In addition, changes in these variables can also have flow-on effects for the Crown’s operating balance. For example, a strengthening of share prices may result in higher returns from the Government’s direct share investments.

Balance Sheet Risks#

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The Government's balance sheet is absorbing a significant shock because of COVID-19, deploying the resilience built up over several economic cycles of responsible fiscal management. In addition, the COVID-19 response has seen some further risks added to the Government's balance sheet, for instance in relation to guarantees provided to businesses. The Government’s balance sheet can be usefully categorised by function or purpose as illustrated in Table 3.2.

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

Sources of (Social) balance sheet risk to public services

Physical assets such as land, buildings, state highways and military equipment are susceptible to external natural hazards and the quality of asset management in delivering services. The government generally relies on asset management, including built-in redundancies (eg, in network capacities), and its ability to reallocate or repurpose assets rather than risk transfer instruments such as insurance in managing these risks.

The replacement costs of physical assets are also susceptible to valuation movements through changes in property market conditions, changes in demand and changes in the costs of construction. The Half Year Update forecasts incorporate valuations up to 30 June 2020. Some valuers have identified that, while prices have not been significantly impacted by COVID-19, only limited market evidence is available from the time COVID-19 restrictions were first implemented. They have warned that illiquidity in property markets may be a short-term issue or a longer-term concern.

Social insurance and retirement liabilities (eg, Accident Compensation, Veterans' disability entitlements and the Government Superannuation Fund (GSF)) are prone to volatility through their actuarial valuations, including changes to expectations of future interest rates and inflation rates. These forecasts reflect a significant crystallisation of this risk as a consequence of the reduction of interest rates to unprecedented low levels.

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

The Crown faces contingent liabilities, for example, indemnities of activities in the public interest, environmental claims, and legal proceedings. The government indemnities associated with the Business Finance Guarantee Scheme to support viable businesses represent a significant increase in balance sheet risk.

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

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

Financial assets held by ACC and the NZSF are sensitive to financial market volatility, such as movements in interest rates, exchange rates and equity prices. Crown financial institutions set long-term investment strategies based on underlying policy objectives. These strategies aim to look through short-term volatility and take exposures that would offset the impact of long-term social insurance or retirement liabilities.

The Crown incurs liquidity risk with respect to its ability to raise cash to meet its obligations. Each agency manages its own specific liquidity risk while the Treasury manages the Crown's liquidity requirements. The LSAP programme provides additional assurance that this risk is managed in the current environment.

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

A number of commercial entities owned by the Crown have their financial performance and valuations impacted by the commercial environment in which they operate. These forecasts include support packages for state-controlled commercial businesses where COVID-19 has significantly impacted their commercial environment.

Managing risk into the future

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

The build-up and subsequent deployment of that fiscal resilience in response to COVID‑19 have underscored the importance of the principles of responsible fiscal management in the Public Finance Act 1989. That deployment is reflected in the reduction of net worth from $115.9 billion at 30 June 2020 to a forecast $66.5 billion as at 30 June 2025.

The current risk management challenge is to move from absorption to adaptation, as the Government moves from fighting the virus and cushioning the blow towards economic recovery, resetting the Crown's balance sheet objectives and rebuilding its capacity to absorb shocks in the future.

Specific Fiscal Risks#

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

• how specific fiscal risks are managed
• criteria for inclusion and exclusion of specific fiscal risks
• a statement of specific fiscal risks of the Government[19]
• narrative summaries of specific fiscal risks that are new, changed or have been updated since the Pre-election Update,[20] and
• a table of risks that have been removed from the statement of specific fiscal risks since the Pre-election Update.

The risks disclosed in this chapter reflect those that are known at the date of the finalisation of the fiscal forecasts, 30 November 2020. Although the process for disclosure of specific fiscal risks involves a number of entities, including government departments, the Treasury and the Minister of Finance, there remains a possibility that not every significant risk is identified.

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

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

A key principle guiding the disclosure of risks is transparency. This means that material risks are disclosed in this section regardless of whether they can be managed through existing funding sources (eg, through prioritisation of funding already available to departments, the Budget operating and capital allowances, policy choices and/or through the COVID-19 Response and Recovery Fund). This ensures a prudent approach to the disclosure of risks, to improve transparency and to avoid prejudging future decisions by governments about what may or may not be funded from allowances.

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

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

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

General Risks not Included as Specific Fiscal Risks

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

• risks from changes to economic assumptions, including as a result of COVID-19, the most significant of which have been recognised elsewhere in this chapter and Half Year Update
• business risks and volatility in the returns from, and valuation of, the Government's investments relating to the broader economic and commercial environment, and
• the costs of future individual natural disasters, individual events resulting from climate change, and other major events (including biosecurity incursions), as their occurrence, nature and timing cannot be predicted.

New Zealand will continue to experience natural disasters and for some of these the frequency and/or severity is likely to increase with climate change, for example, increased coastal flooding, because of sea level rise, and extreme weather events. Once such an event does occur, various choices arise about how to respond, and when to recognise potential liabilities. Specific risks are disclosed at that point based on the range of possible responses.

Exclusions to Disclosure

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

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

Section 26V requires the Minister of Finance to determine that:

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

Statement of Specific Fiscal Risks#

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New Risks by Portfolio#

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Economic and Regional Development

Regional Strategic Partnership Fund (Cost Pressure or Variance - Expenses and Capital)

The New Zealand Labour Party's 2020 election manifesto includes a commitment to a $200 million Regional Strategic Partnership Fund to support regional economic development plans and initiatives. The exact nature and timing of this funding are not sufficiently certain to be included in the fiscal forecasts but will likely have an impact during the forecast period.

Finance

Government Commitments to International Financial Institutions (Cost Pressure or Variance - Capital)

New Zealand has recently agreed to double its commitment under the International Monetary Fund (IMF) New Arrangements to Borrow (NAB) from SDR 340 to SDR 680, and to reduce its commitment under the Bilateral Borrowing Agreements from US$1 billion to US$31 million. These changes are likely to come into effect in January 2021, depending on agreement from other participating countries. The IMF has indicated it is likely the NAB will be activated in the next year, based on its current pipeline of requests for finance from members. New Zealand's commitments could be called upon once the NAB are activated.

Health

Boosting PHARMAC Purchasing (Policy Change - Expenses)

The New Zealand Labour Party's 2020 election manifesto includes a commitment to provide PHARMAC with additional funding of $200 million to widen New Zealand's access to the latest medicines. The exact nature and timing of this funding are not sufficiently certain to be included in the fiscal forecasts but will likely have an impact during the forecast period.

Mental Health Support for Children (Policy Change - Expenses)

The Speech from the Throne reaffirmed the Government's commitment to expand the Mana Ake programme throughout the rest of the country over the next five years and ensure that every primary and intermediate age child has access to mental health support. The exact nature and timing of this funding are not sufficiently certain to be included in the fiscal forecasts but will likely have an impact during the forecast period.

Reducing Planned Care Waiting Lists (Policy Change - Expenses)

The New Zealand Labour Party's 2020 election manifesto includes a commitment to provide $200 million of additional funding to reduce waiting lists for planned surgery and diagnostic services so that New Zealanders can access procedures in a timely manner close to where they live. The exact nature and timing of this funding are not sufficiently certain to be included in the fiscal forecasts but will likely have an impact during the forecast period.

Parliamentary Service

Future Parliamentary Accommodation (Policy Change - Capital)

The Parliamentary Service is considering options for the future provision of accommodation for Parliament. This includes exploring the remediation of the earthquake-prone Executive Wing Annex, a new Secure Deliveries building and the construction of a Members' Building. Construction and demolition costs are estimated to exceed $100 million; however, further work is still required to finalise the design, enter the consenting process and refine costings.

Racing

TAB NZ (Cost Pressure or Variance - Revenue, Expenses and Capital)

Under provisions of the Racing Industry Act 2020 that came into force on 1 August 2020, the governing body of TAB NZ is appointed by the Minister for Racing and the racing codes retain significant rights to distributions of TAB NZ surpluses and betting profits. As a result of the first of these factors, TAB NZ may now be deemed to be controlled by the Crown and therefore become part of the government reporting entity. Until the accounting treatment is resolved, forecasts relating to TAB NZ have not been included in the fiscal forecasts, but may need to be included in future fiscal forecasts once the accounting treatment is confirmed.

Social Development and Employment

Increasing Benefit Abatement Thresholds Further (Policy Change - Expenses)

The Government has committed to increasing abatement thresholds for everyone on a benefit to $160 per week and the second threshold for the Sole Parent Support/Supported Living Payment to $250 per week. In the Speech from the Throne, the Government also committed to indexing abatement thresholds to minimum wage increases.

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

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

Reinstating the Training Incentive Allowance (Policy Change - Expenses)

The Speech from the Throne reaffirmed the Government's commitment to reinstate the Training Incentive Allowance for Levels 4 to 7 of the New Zealand Qualifications Framework. The exact nature and timing of this funding are not sufficiently certain to be included in the fiscal forecasts but will likely have an impact during the forecast period.

Cross-portfolio

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

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

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

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

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

The Speech from the Throne reaffirmed the Government's commitment to progressively extend Living Wage guarantees to contractors in the public sector. Implementing this policy will involve costs to the Crown that are not currently provided for in the fiscal forecasts.

Changed Risks by Portfolio#

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COVID-19 Response

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

The Government has set aside funding for the purchase of COVID-19 vaccines and the cost of vaccinating the population to prevent further outbreaks. In addition to what is included in the fiscal forecasts, there is a risk that further funding may be required. There is also a risk that liability may materialise under any indemnities given by the Minister of Finance in relation to COVID-19 vaccines. In the Pre-election Update, this risk was published under the ‘Health' portfolio.

Finance

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

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

Māori Development

Waitangi Tribunal Recommendations and Claims (Policy Change - Expenses)

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

Social Development and Employment

Quarterly Employment Survey Redevelopment (Cost Pressure or Variance - Expenses)

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

Veterans

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

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

Updated Risks by Portfolio#

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Broadcasting and Media

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

The media sector, including both public and privately owned organisations, is under increasing pressure from international competition, declining revenue shares and changes to the way people access content. The Government has committed to strengthening New Zealand's public media and has commissioned a detailed business case on the viability of a preferred approach. Once business case outcomes are agreed, significant additional investment may be required to deliver on the Government's public media outcomes. In the Pre-election Update, this risk was published under the ‘Broadcasting, Communications and Digital Media' portfolio.

Climate Change

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

The Emissions Trading Scheme (ETS) earns revenue and incurs expenses for the Crown, both of which are uncertain. The uncertainty is partly owing to the future market price of New Zealand Units (NZUs), how that market price differs from the Fixed Price Option (FPO), and the extent to which participants elect to use the FPO. Participants in the ETS who emit greenhouse gases are required to surrender NZUs to account for those emissions. Participants who do not have sufficient NZUs are able to meet their obligations by purchasing NZUs from other participants or from the Crown at a fixed price of $35. In addition, the Climate Change Response (Emissions Trading Reform) Amendment Act 2020 enables the auctioning of units to begin in 2021. Auctioning NZUs will result in cash being paid to the Crown, also reducing net core Crown debt. The extent of this depends on the future price realised for auctioned units, which is inherently uncertain. As a result of both these factors, actual revenue and expenses may vary from the fiscal forecasts, which for both revenue and expenses assume a carbon price value based on the market price at 30 September 2020 of $35.

Corrections

Waikeria Mental Health and Addiction Service Operating Funding (Cost Pressure or Variance - Expenses and Capital)

The Waikeria Prison Development, including a 500-bed High Security Facility and a 100‑bed Mental Health and Addiction Service, is currently under construction. The operational costs of running these facilities were not sought at the time Cabinet approved the projects. These operational costs, including the intensive model of care required by the Government as part of the Mental Health and Addiction Service, may require further Crown funding as there is a risk that these costs cannot be met within existing baselines. In the Pre-election Update, this risk was published as ‘Waikeria Mental Health Unit Operating Funding'.

COVID-19 Response

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

Given the changing global situation and uncertainty with respect to COVID-19, demand for Managed Isolation and Quarantine (MIQ), and the number of places, length of time, and type of accommodation, health and security arrangements required, may change rapidly. Any changes in demand will put pressure on current MIQ supply and appropriated funding reflected in the fiscal forecasts, and may lead to further funding being required to deliver additional services or MIQ places. Current expectations are that facilities may be required until the end of 2021, though there may be a need to seek funding additional to that already included in the forecasts. In the Pre-election Update, this risk was published under the ‘Housing' portfolio.

Economic and Regional Development

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

The New Zealand Screen Production Grant is an uncapped, on-demand grant that incentivises international studios to locate production work in New Zealand by offering them a rebate on their qualifying expenditure. Although potential delays to productions as a result of COVID-19 may offset some of this risk in the near term, there remains a high level of international interest in New Zealand as a place to do screen business over the forecast period. The fiscal forecasts include an estimate of expenditure based on known productions. There nevertheless remains a risk that demand for the Screen Production Grant will exceed what is included in the fiscal forecasts if more large-budget productions choose to locate in New Zealand (in addition to the two existing large-scale productions of the Avatar sequels and The Lord of the Rings television series). In the Pre-election Update, this risk was published under the ‘Economic Development' portfolio.

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

The Provincial Growth Fund is a $3.0 billion fund, established by the Coalition Government, which makes payments to counterparties under contract. The capital and operating split and timing of this funding, as set out in the fiscal forecasts, are likely to change, and final capital and operating expense amounts in any year may vary from those forecast. In the Pre-election Update, this risk was published under the ‘Regional Economic Development' portfolio.

Education

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

There is significant uncertainty about the impact of COVID-19 on unemployment, school leavers and the migration of New Zealand residents, and the scale of the increased enrolments in tertiary education and demand for student support (loans and allowances) that will result. More people aged 18 to 24 years, and more people unable to find work who enter study instead to upskill or retrain, can lead to more enrolments in tertiary education. In Budget 2020, the COVID-19 Response and Recovery Fund provided an additional $334 million over 2021 to 2023 to meet increased learner demand. Because of the uncertainty around the impact of COVID-19, however, learner demand could be higher or lower than the available number of funded places for learners. Updated forecasts and initial enrolments in 2021 will provide an indication of any potential additional financial costs.

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

The education sector is exposed to cost pressures from changing levels of demand in early childhood education (ECE) and schooling, which can result from factors such as population growth and changes in participation levels. Demographic change has an impact on expenditure on ECE subsidies, especially for the 20 hours' fully subsidised entitlement for three- to five-year-olds; the per-pupil component of schools' operational funding; and schools' full-time teaching equivalent entitlement, which is based on staff-to-student ratios. COVID-19 and the resulting economic and social conditions serve to increase the uncertainty about levels of demand for educational services in the coming years. In addition, the Ministry of Education faces compounding departmental operating expenditure pressures as a result of the increasing demand for, and the price of, education services, and other cost pressures experienced by its work programmes. These pressures, which include difficult-to-control inflationary pressures, represent risks to the extent that they cannot be managed through reprioritisation or new spending set aside in the forecasts. The Government's stated intention is that all pressures are managed through these mechanisms.

Education Workforce Strategy (Policy Change - Expenses)

The Ministry of Education is working in partnership with the Education Workforce Strategy Group (EWSG) and the Accord with NZEI Te Riu Roa and the Post Primary Teachers' Association to develop a comprehensive Education Workforce Strategy (EWS) for the full education workforce. The aim is for Cabinet to consider the draft EWS (and accompanying Strategic Action Plan) prior to post-Cabinet consultation and engagement with the New Zealand public and education workforce. An implementation plan is likely to be finalised in late 2021. Delivering on the full intent of the EWS will involve a significant fiscal cost.

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

The Free and Healthy Lunch Programme was a prototype to test different models of delivery to students in selected schools. The Government has committed to expanding this programme to cover 200,000 students in 2021 and will roll this programme into outyears. The programme was expanded in 2020 to provide lunches to the 25% most disadvantaged students in the country as part of the Government's COVID-19 response. The programme funding (both the prototype and expansion) currently ends in December 2021. If the Government confirms an extension or expansion of the programme, additional ongoing funding beyond that currently provided for will be required.

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

Te Pūkenga - New Zealand Institute of Skills and Technology may seek significant additional Crown funding in the future for the transformation and management of its national network of education providers (the 16 former Institutes of Technology and Polytechnics), including integrating support for work-based training such as apprenticeships. Design of, and implementation planning for, the vocational education Unified Funding System (UFS) is continuing. The Coalition Government stated an intention to implement the UFS from 1 January 2023, but this and any additional investment is subject to Cabinet decisions. The Speech from the Throne reaffirmed the Government's commitment to complete the reform of the vocational education system.

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

The Coalition Government made an in-principle decision to replace school deciles with the Equity Index. This commitment is also made in the New Zealand Labour Party's 2020 election manifesto. The Index provides a more refined measure to understand whether there are socio-economic factors present in the lives of children that can impact educational outcomes. This will inform how the education system can be resourced to provide all children with an equitable chance of success. Additional funding for schools and implementation will be required in the future to transition to the new system.

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

The Coalition Government's response to the Tomorrow's Schools Review has been publicly released and the New Zealand Labour Party's 2020 election manifesto commits to reform of the Tomorrow's Schools system. Continued policy development and relevant service and implementation design have begun, with a focus on enhancing frontline services and support for learners/ākonga, whānau and education providers. Accordingly, future decisions are still required, including decisions on changes in investment. The Coalition Government indicated it will consider these changes and new investments over the next three to four Budgets. This is a policy choice of the Government and the costs will be material but unquantifiable at this point for specific financial years. The impact of COVID-19 will lead to continued development work over the long term, with a short-term focus on supporting schools and front-line services.

Finance

Business Finance Guarantee Scheme (Policy Change - Expenses)

The Crown has established a Business Finance Guarantee Scheme (BFGS) with a number of banks to support New Zealand businesses facing hardship as a consequence of COVID-19. The currently assessed fair value of these contracts, and the expense arising, has been quantified and incorporated into the forecasts. Possible changes to the BFGS currently under consideration may increase the take-up of the scheme and may impact on credit losses that will be incurred. This is a variance risk to the extent that the actual take-up of the scheme and subsequent credit losses incurred may differ from what is included in the fiscal forecasts.

Finance, Earthquake Commission

Earthquake Commission (Cost Pressure or Variance - Expenses)

The Earthquake Commission's (EQC's) independent actuary undertakes half-yearly valuations of the total EQC earthquake liability to the Crown. This includes settled and yet-to-settle claims (including those in litigation), an estimation of future claims not yet received, insurer finalisation and any associated reinsurance recoveries. Based on these valuations, a profile of the yet-to-settle claims is included in the fiscal forecasts. There are risks that EQC's remaining settlement expenditure relating to the Canterbury 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 recognises expected future costs only 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 variance from what is in the fiscal forecasts could be material.

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

The ultimate cost to the Crown of settling earthquake claims is subject to uncertainty. Forecasts currently assume that the actual cost to settle claims will align with the actuary's central estimate of the claims provision. There is a risk that the actual cost could be higher than this estimate, which is sensitive to its underlying assumptions such as damage estimates, recent and future court decisions, claims emerging in the future and the forecast profile of claims settlement. In the Pre-election Update, this risk was published under the ‘Greater Christchurch Regeneration' portfolio.

Foreign Affairs

Official Development Assistance (Policy Change - Expenses)

Each year, New Zealand's Official Development Assistance (ODA) expenditure is measured as a proportion of Gross National Income (GNI). In Budget 2020, Cabinet agreed to increase ODA by $55.589 million in 2020/21, lifting it to 0.32% of GNI from 0.28% of GNI. If the Government wants to maintain the ratio at or around 0.32% beyond June 2021, a different level of funding may be required, depending on the scale of the economic impact of COVID-19.

Health

DHB Sustainability (Cost Pressure or Variance - Expenses)

In recent years, the District Health Board (DHB) sector has been running operating deficits. As a result, a number of DHBs have required additional equity injections from the Government to remain solvent. This trend is expected to continue, with the fiscal forecasts reflecting deficits from DHBs of, on average, $600 million per year over the forecast period. The fiscal forecasts assume that future expenditure growth will be met from future Budget allowances.

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

Health and Disability System Review (Policy Change - Expenses)

The review of the New Zealand Health and Disability System has identified opportunities to improve the performance, structure and sustainability of the system, with a goal of achieving equity of outcomes, and contributing to wellness for all, particularly Māori and Pacific peoples. Until the Government has considered the recommendations and decided which to implement, the costs of implementation will not be known. The New Zealand Labour Party 2020 election manifesto commits to implementing recommendations of this review, including the establishment of a Māori Health Authority, Public Health Agency and Aged Care Commissioner. As detailed decisions are still to be taken, the full costs of these changes are not yet reflected in the fiscal forecasts.

Housing

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

The Crown's fiscal forecasts include business-as-usual divestments, acquisitions and the redevelopment of land and housing as part of Kāinga Ora's asset management strategy. The Crown also faces commercial and financial risks inherent in large-scale build and urban development programmes, the magnitude of which has increased as a result of the adverse impact of COVID-19 on Kāinga Ora's pipeline, international supply chains and the financial viability of its build partners.

Tāmaki Regeneration Project (Cost Pressure or Variance - Expenses)

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

Revenue

International Tax (Policy Change - Revenue)

The Government is currently considering options for reform of the international tax framework, in light of the challenges posed by digitalisation and globalisation. The Government's preference is to continue working with the Organisation for Economic Co‑operation and Development (OECD) to find a multilaterally agreed solution to these challenges, but the Government may consider a digital services tax if the OECD does not make sufficient progress on a multilateral solution. The revenue impact of a digital services tax or OECD solution would depend on how it is designed. In the Pre-election Update this risk was published as ‘Taxation of Digital Services'.

Potential Tax Policy Changes (Policy Change - Revenue)

The work programme to progress certain tax measures can be viewed on the tax policy website, www.taxpolicy.ird.govt.nz. The measures on the work programme, and their collective fiscal implications, are subject to change.

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

The Research and Development (R&D) Tax Incentive allows eligible firms to receive a tax credit based on a percentage of their expenditure on R&D. Under certain circumstances, eligible firms may receive a cash payment in place of a tax credit. There is a risk that costs may differ from forecasts owing to the limited availability of data for forecasting purposes on future R&D expenditure, including how firms' R&D expenditure will respond to the subsidy. Additionally, international experience shows that costs of R&D tax credits can be significantly higher than expected if firms recategorise other types of expenditure as R&D in order to claim the credit. At the same time, the costs may be lower than forecast if businesses do not claim the subsidy (eg, because of a lack of information about the subsidy). Costs may also differ from forecasts as the investment environment can change quickly.

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

The Small Business Cashflow Scheme was introduced to support small-to-medium businesses affected by COVID-19. There is a variance risk that the value of the lending may differ, either positively or negatively, from what is currently forecast as the lending under the scheme is dependent on demand until the application closing date of 31 December. As new lending occurs, an initial write-down to fair value is made. This reflects the cost the Crown incurs in making a loan at below-market terms and the risk that borrowers will not repay their loans. The fair value of the scheme will depend on the amount of loans and the assumptions around borrower repayments and defaults over the life of the scheme, which are based on volatile factors that are subject to change. These assumptions reflect the changes to the scheme the Government announced on 9 November 2020 but would need to be revised for any future changes made to the scheme.

Social Development and Employment

Changes to the Welfare System (Policy Change - Expenses)

The Government has agreed that its vision for the welfare system is to ensure that people have an adequate income and standard of living, are treated with respect and can live with dignity, and are able to participate meaningfully in their communities. Cabinet has agreed to a multi-year policy work programme to deliver on this vision. Any changes agreed to in future will likely have legislative, operational, ICT and fiscal implications. This risk relates to the fiscal implications of those changes associated with this work programme other than the ‘Increasing Abatement Thresholds Further' risk, the ‘Increasing Special Needs Grant Limits for Emergency Dental Treatment' risk and the ‘Reinstating the Training Incentive Allowance' risk listed in the New Risks by Portfolio section of this statement.

Transport

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

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

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

The Coalition Government decided to terminate the parallel process for the City Centre to Māngere Rapid Transit (Auckland Light Rail) project, with further decisions yet to be taken. The Government is still committed to addressing congestion on the city centre to Māngere corridor and, depending on future decisions, Crown funding may be required to support any rapid transit project. In the Pre-election Update, this risk was published as ‘Light Rail in Auckland'.

Future of Rail Commitments (Policy Change - Capital)

Further Crown funding may be sought through future Budgets to progress projects as part of implementing the Future of Rail Review, in order to build and maintain a resilient and reliable rail network. In the Pre-election Update, this risk was published as ‘Support for KiwiRail'.

Cross-portfolio

Increasing the Minimum Wage (Policy Change - Expenses)

Government policy decisions to increase the minimum wage to $20 by April 2021 would mean increased costs to State sector employers to the extent that their employees receive a direct increase in wages. Where costs cannot be absorbed within baselines without compromising service delivery, funding may be sought. The Speech from the Throne reaffirmed the Government's commitment to increase the minimum wage.

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

The New Zealand Upgrade Programme was announced in December 2019. The programme provides funding for significant capital investments. Operating expenses still need to be provided for some projects and there remains a risk regarding the timing of the capital projects that have been reflected in the fiscal forecasts as well as a risk of cost increases as a result of construction price inflation and project scope changes.

Pay Equity Claims (Cost Pressure or Variance - Expenses)

A number of claims have been raised in relation to the Equal Pay Act 1972 providing for pay equity (equal pay for work of equal value) and further claims may be raised following commencement of the Equal Pay Amendment Act 2020 in November 2020. The forecasts include an estimate of the expected cost to settle current and future claims; however, there is a risk that the costs may differ depending on the number of further claims that are raised, and the outcomes reached from applying the pay equity principles to each particular claim, and any subsequent funding decisions. In the Pre-election Update, this risk was published as ‘Pay Equity Claims Following the Care and Support Worker Settlement’.

Policy Responses to the 15 March 2019 Terror Attacks (Policy Change - Expenses)

The Government has made several responses to the 15 March 2019 terror attacks. Further policy responses and legislative amendments may be needed and there are likely to be additional costs associated with responding to the Royal Commission of Inquiry into the Terrorist Attack on Christchurch Mosques on 15 March 2019. The Royal Commission presented its report to the Governor-General on 26 November 2020, and the costs of the Government's initial decisions on the report's recommendations were unable to be quantified before the fiscal forecasts were finalised.

Risks Removed Since the Pre-election Update#

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Contingent Liabilities and Contingent Assets#

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

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

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

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.

Types of contingent liabilities

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'.

Guarantees and indemnities

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

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

Legal claims and proceedings

There are numerous legal actions that have been brought against the Crown. The amounts under quantifiable contingent liabilities for legal proceedings and disputes are shown exclusive of any interest and costs that may be claimed if these cases have an adverse outcome. The amount shown is the maximum potential cost; it does not represent either an admission that the claim is valid or an estimation of the possible amount of any award against the Crown.

Other contingent liabilities

This includes contingent liabilities where the nature of the contingency does not fall under any of the categories described above.

Unquantifiable contingent liabilities

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

Statement of Contingent Liabilities and Contingent Assets

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

Some contingencies of the Crown are not able to be quantified. We have disclosed unquantifiable contingent liabilities and unquantifiable contingent assets that potentially could have an impact in excess of $20 million and are not expected to be remote.[23]

The contingencies have been stated as at 31 October 2020, being the latest set of published Financial Statements of the Government (FSG).

Where a contingency is new or the status has changed from that published in the Financial Statements of the Government for the year ended 30 June 2020,[24] we have included a description of the nature of that contingency. This is a change from the disclosure shown in previous Economic and Fiscal Updates, which included descriptions for all separately disclosed contingencies.

As at 31 October 2020, there has been no change to the status of the contingencies disclosed since the 30 June 2020 FSG.

Statement of Contingent Liabilities and Contingent Assets

Quantifiable contingent liabilities

Quantifiable contingent assets

Contingent liabilities

Forecast Financial Statements#

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

They are based on the accounting policies and assumptions that follow. As with all such assumptions, there is a degree of uncertainty surrounding them. This uncertainty increases as the forecast horizon extends. There are risks to the fiscal forecasts which are discussed further in the Risks to the Fiscal Forecasts chapter.

These forecasts have been prepared in accordance with the Statement of Responsibility and reflect the judgements and information known at the time they were prepared. They reflect all government decisions and circumstances communicated to 30 November 2020.

The finalisation dates and key assumptions that underpin the preparation of the Forecast Financial Statements are outlined in the Fiscal Outlook chapter (pages 31 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 Entity Financial Reporting Standard 42: Prospective Financial Statements.

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

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

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

Forecast Policies

The Forecast Financial Statements have been prepared on the basis of the Treasury's best professional judgement. Actual financial results for the periods covered are likely to vary from the information presented in these forecasts. Factors that may lead to a material difference between information in these Forecast Financial Statements and the actual reported results in future years are set out in the Risks to the Fiscal Forecasts chapter on pages 49 to 80. Key forecast assumptions are set out on pages 33 to 34.

Reporting and Forecast Period

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

Government Reporting Entity as at 30 November 2020#

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

Core Crown Segment

Departments

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

Offices of Parliament

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

Others

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

State-owned Enterprises Segment

State-owned Enterprises

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

Mixed ownership model companies (Public Finance Act Schedule 5) 

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

Other

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

Crown Entities Segment

Crown Entities

1. Accident Compensation Corporation
2. Accreditation Council
3. Arts Council of New Zealand Toi Aotearoa
4. Broadcasting Commission
5. Broadcasting Standards Authority
6. Callaghan Innovation
7. Children's Commissioner
8. Civil Aviation Authority of New Zealand
9. Climate Change Commission
10. Commerce Commission
11. Criminal Cases Review Commission
12. Crown Irrigation Investments Limited
13. Crown Research Institutes (7)
14. District Health Boards (20)
15. Drug Free Sport New Zealand
16. Earthquake Commission
17. Education New Zealand
18. Electoral Commission
19. Electricity Authority
20. Energy Efficiency and Conservation Authority
21. Environmental Protection Authority
22. External Reporting Board
23. Financial Markets Authority
24. Fire and Emergency New Zealand
25. Government Superannuation Fund Authority
26. Guardians of New Zealand Superannuation
27. Health and Disability Commissioner
28. Health Promotion Agency
29. Health Quality and Safety Commission
30. Health Research Council of New Zealand
31. Heritage New Zealand Pouhere Taonga
32. Human Rights Commission
33. Independent Police Conduct Authority
34. Kāinga Ora - Homes and Communities
35. Law Commission
36. Maritime New Zealand
37. Museum of New Zealand Te Papa Tongarewa Board
38. New Zealand Antarctic Institute
39. New Zealand Artificial Limb Service
40. New Zealand Blood Service
41. New Zealand Film Commission
42. New Zealand Growth Capital Partners Limited (previously New Zealand Venture Investment Fund)
43. New Zealand Infrastructure Commission/Te Waihanga
44. New Zealand Lotteries Commission
45. New Zealand Productivity Commission
46. New Zealand Qualifications Authority
47. New Zealand Symphony Orchestra
48. New Zealand Tourism Board
49. New Zealand Trade and Enterprise
50. New Zealand Transport Agency
51. New Zealand Walking Access Commission
52. Office of Film and Literature Classification
53. Pharmaceutical Management Agency
54. Privacy Commissioner
55. Public Trust
56. Radio New Zealand Limited
57. Real Estate Agents Authority
58. Retirement Commissioner
59. School Boards of Trustees (2,420)
60. Social Workers Registration Board
61. Sport and Recreation New Zealand
62. Takeovers Panel
63. Te Pūkenga New Zealand Institute of Skills and Technology
64. Te Reo Whakapuaki Irirangi (Māori Broadcasting Funding Agency)
65. Te Taura Whiri i te Reo Māori (Māori Language Commission)
66. Television New Zealand Limited
67. Tertiary Education Commission
68. Transport Accident Investigation Commission
69. WorkSafe New Zealand

Organisations listed in schedule 4 of the Public Finance Act 1989

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

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

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

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

1. Te Urewera

Others

1. Christ Church Cathedral Reinstatement Trust
2. Venture Capital Fund

Other entities not fully consolidated into the Forecast Financial Statements of the Government with only the Crown’s interest in them being included.

Crown entities

1. Tertiary Education Institutions (11)
2. (8 Universities and 3 Wānanga)

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

1. City Rail Link Limited

Forecast Financial Statements#

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Forecast Statement of Financial Performance
for the years ending 30 June

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

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

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

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

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

Forecast Statement of Cash Flows
for the years ending 30 June

1. Further information on the proceeds and repayments of government bonds is available in the core Crown residual cash summary included in the attached Fiscal Indicator Analysis section.
2. Excludes transactions with ACC and NZS Fund.

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

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

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

Forecast Statement of Financial Position
as at 30 June

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

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

Statement of Actual Commitments
as at 31 October

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

Statement of Actual Contingent Liabilities and Assets
as at 31 October

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

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

Notes to the Forecast Financial Statements#

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NOTE 1: Sovereign Revenue (Accrual)

1. Customs excise-equivalent duty.

NOTE 1 (continued):  Sovereign Receipts (Cash)

NOTE 2:  Investment Revenue/(Expenditure)

NOTE 3:  Transfer Payments and Subsidies

NOTE 4:  Other Operating Expenses

NOTE 5:  Insurance

ACC liability

Calculation information

Taylor Fry has prepared an independent actuarial estimate of the ACC outstanding claims liability as at 30 June 2020. This estimate includes the expected future payments relating to accidents that occurred prior to balance date (whether or not the associated claims have been reported to, or accepted by, ACC) and also the expected future administrative expenses of managing these claims. The estimate also includes a risk margin to provide for a higher degree of certainty that the liability for outstanding claims, at balance date, will be adequate to cover possible adverse developments. The assumptions underpinning this valuation form the basis of the five-year forecast of the outstanding claims liability.

The key economic variables that impact on changes to the valuation are the long-term Labour Cost Index (LCI), Average Weekly Earnings (AWE) and the discount rate. Discount rates were derived from the yield curve for New Zealand Government bonds. For these forecast statements, the claims liability has been updated for the latest discount rates as at 30 September 2020. The equivalent single effective discount rate, taking into account ACC's projected future cash flow patterns, is 1.73% and allows for a long-term discount rate of 4.30% from 2083.

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

Presentation approach

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

NOTE 6:  Forecast New Spending and Top-down Adjustments

Unallocated operating contingencies represent operating expenses included in Budget 2020 and previous Budgets that have yet to be allocated to departments. Forecast new spending indicates the expected spending increases from future Budgets.

The forecast for new operating spending for Budget 2021 is $2,625 million. Some of this allowance has been pre-committed as at the forecast finalisation date of 30 November 2020, with only the unallocated portion of the allowance included in this note.

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

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

NOTE 8:  Financial Assets (including receivables)

NOTE 9:  Student Loans

NOTE 10:  Property, Plant and Equipment

1. Using a revaluation methodology unless otherwise stated.
2. Additions do not include any purchases which may result from the allocation of the forecast for new capital spending (separately disclosed in the Statement of Financial Position).
3. The other movements in 2020 mainly relates to the establishment of New Zealand Institute of Skills and Technology and constitutes land, buildings and other plant and equipment.

NOTE 11:  NZ Superannuation Fund

NOTE 12:  Payables

NOTE 13:  Retirement Plan Liabilities

The net liability of the Government Superannuation Fund (GSF) was calculated by GSF's actuary as at 30 September 2020. The liability arises from closed schemes for past and present public sector employees as set out in the Government Superannuation Fund Act 1956. A Projected Unit Credit method was used to calculate the liability as at 30 September 2020, based on membership data as at 30 June 2020. The funding method requires the benefits payable from GSF in respect of past service to be calculated and then discounted back to the valuation date. For these Forecast Financial Statements, the net GSF liability was updated for the latest discount rates derived from the market yield curve for New Zealand Government bonds as at 30 September 2020.

Other principal long-term financial assumptions were an inflation rate, as measured by the Consumers Price Index (CPI), of 1.01% p.a. for the year ended 30 June 2021, increasing to 1.27% p.a. in 2022, 1.55% p.a. in 2023, and to 1.61% p.a. in the year ended 30 June 2024. CPI then increases gradually from 1.72% p.a. in the year ended 30 June 2025 to 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 2020).

The 2020/21 projected increase in the net GSF liability is $60 million, reflecting a increase in the GSF liability of $181 million and an increase in the GSF net assets of $121 million.

The overall increase in the GSF liability of $181 million includes an actuarial loss (which increases the liability) between 1 July 2020 and 30 June 2021, of $1,003 million, largely owing to movements in the discount rates ($665 million) and changes in the CPI rates ($338 million). The difference of $822 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 $121 million includes a revaluation gain of $311 million reflecting the updated market value of assets at 30 September 2020. The balance of $190 million is owing to the total of the expected investment returns and expected investment gains/losses and contributions received/receivable, which is more than offset by expenses and the benefits paid/payable to members.

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

NOTE 14:  Provisions

Provision for NZ ETS credits

The New Zealand Emissions Trading Scheme (NZ ETS) was established to assist New Zealand in meeting its domestic and international climate change targets. The scheme puts a price on greenhouse gas (GHG) emissions to create a financial incentive for businesses to reduce their emissions, and landowners to plant forests to absorb carbon. The NZ ETS creates tradable New Zealand Units (NZUs) which the Government can allocate for free to certain business to recognise that the additional costs imposed by the NZ ETS could have on their international competitiveness. The Government also allocates NZUs to participants for GHG emissions removals. The allocation of NZUs creates a provision if allocated for free; the provision is reduced, and revenue recognised, as NZUs are surrendered to the Crown by emitters. From 2020/21 the Government will begin to sell a limited volume of NZUs directly to the market via auction which will result in cash receipts.

The prices for NZUs used to calculate the NZ ETS provision are assumed to remain constant over the forecast period and are based on market prices during the last week of September 2020.

The movement in the NZ ETS provision is as follows:

NOTE 15:  Borrowings

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

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

NOTE 16: Changes in Net Worth

Statement of Segments#

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Statement of Financial Performance
for the year ended 30 June 2020

Statement of Financial Position
as at 30 June 2020

Forecast Statement of Segments#

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Statement of Financial Performance
for the year ended 30 June 2021

Statement of Financial Position
as at 30 June 2021

Statement of Financial Performance
for the year ended 30 June 2022

Statement of Financial Position
as at 30 June 2022

Statement of Financial Performance
for the year ended 30 June 2023

Statement of Financial Position
as at 30 June 2023

Statement of Financial Performance
for the year ended 30 June 2024

Statement of Financial Position
as at 30 June 2024

Statement of Financial Performance
for the year ended 30 June 2025

Statement of Financial Position
as at 30 June 2025

Fiscal Indicator Analysis#

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The purpose of the following fiscal indicator analysis is to provide a link between the Forecast Financial Statements (pages 87 to 109) based on GAAP, and the key fiscal indicators used to measure performance against the fiscal objectives set out in the Fiscal Strategy Report.

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

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

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

Expenses by Functional Classification

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

Core Crown Residual Cash

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

Debt Indicators

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

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

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

Reconciliation between the Financial Statements and the Key Fiscal Indicators

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

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

Expenses by Functional Classification
for the years ending 30 June

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

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

Core Crown Residual Cash
for the years ending 30 June

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

Debt Indicators
as at 30 June

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

Notes on borrowings

1. Gross sovereign-issued debt (GSID) represents debt issued by the sovereign (the core Crown) and includes any government stock held by the other Crown reporting entities.
2. Core Crown borrowings in this instance include unsettled purchases of securities (classified as accounts payable in the Statement of Financial Position).
3. Core Crown financial assets exclude receivables, except for unsettled sales of securities.
4. The Reserve Bank has used $1.6 billion of settlement cash to purchase reserves that were to have been funded by the government borrowing programme. Therefore, the impact of settlement cash on GSID is adjusted by this amount.

Reconciliation between the Financial Statements and the Key Fiscal Indicators

Note:

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