Half Year Economic and Fiscal Update 2021

An introduction to the Half Year Economic and Fiscal Update#

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#

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.

Statement of Responsibility#

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

On the basis of the economic and fiscal information available to it, the Treasury has used its best professional judgement in preparing, and supplying the Minister of Finance with, this Economic and Fiscal Update. The Update incorporates the fiscal and economic implications of government decisions and other circumstances as at 25 November 2021 that were communicated to me by the Minister of Finance as required by the Public Finance Act 1989, and of other economic and fiscal information available to the Treasury as at 25 November 2021. This Update does not incorporate any decisions, circumstances or statements that the Minister of Finance has determined, in accordance with section 26V of the Public Finance Act 1989, should not be incorporated in this Update.

 

Caralee McLiesh
Secretary to the Treasury

10 December 2021

 

To enable the Treasury to prepare this Economic and Fiscal Update I have ensured all government decisions and other circumstances as at 25 November 2021 of which I was aware and that had material economic or fiscal implications have been communicated to the Secretary to the Treasury, as required by the Public Finance Act 1989.

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

 

Hon Grant Robertson
Minister of Finance

10 December 2021

Executive Summary#

Note:

1. Operating balance before gains and losses.

Sources: Stats NZ, the Treasury

• After a year and a half of successfully eliminating COVID-19 in the community, the arrival of the Delta variant of the virus has changed New Zealand's course from an elimination to a minimisation and protection strategy. Consequently, while New Zealand has transitioned away from the Alert Level System to the more permissive COVID-19 Protection Framework, COVID-19 developments will continue to be a major influence on economic and fiscal outcomes and represent a major source of uncertainty and risk.
• Strong demand leading up to the Delta outbreak resulted in stronger-than-expected economic activity, tax revenues exceeding forecasts and record-low unemployment. GDP rose by 4.1% over the first half of 2021 and the unemployment rate fell to 3.4% in the September 2021 quarter. Stronger economic activity and the need for less COVID‑19 fiscal support measures have led to a recovery in the Government's fiscal position in the first half of 2021, with actual results outperforming expectations.
• Activity has fallen in the September quarter owing to restrictions, but we expect a rebound in subsequent quarters, supported by pent-up demand, continued strength in building construction, and the more permissive COVID-19 Protection Framework.
• The combination of supply chain disruptions and strong demand has seen capacity pressures intensify, contributing to higher inflation. Consumers Price Index (CPI) inflation is forecast to peak at 5.6% in the March 2022 quarter, significantly higher than the peak expected in the 2021 Budget Economic and Fiscal Update (Budget Update), before trending down. As a result, interest rates are expected to rise faster and to a higher level than forecast in the Budget Update. Higher inflation is a major contributor to higher nominal GDP over the forecast period compared to the Budget Update.
• The labour market outlook has continued to improve since the Budget Update. The unemployment rate is expected to fall to 3.1% in the March 2022 quarter before slowly increasing to 4.1% by the end of the forecast period. This continued tightness in the labour market, together with higher CPI inflation is expected to maintain wage inflation above 4.0% throughout the forecast period.
• The strong growth in tax revenue experienced in the first half of 2021 is expected to continue and, when combined with the above-mentioned changes in economic conditions, core Crown tax revenue is forecast to grow on average by just over $7.0 billion in each year of the forecast period.
• With the emergence of the Delta variant, the growth in core Crown tax revenue expected in the current fiscal year is offset by the Government's fiscal support measures. An operating balance before gains and losses (OBEGAL) deficit of $20.8 billion is expected in the current year, which is $16.2 billion more than the deficit reported in the 2020/21 fiscal year.
• As the majority of the Government's fiscal support measures in response to the Delta variant are temporary in nature, they quickly unwind, resulting in a sharp recovery from the 2022/23 fiscal year. OBEGAL is expected to return to surplus in the 2023/24 fiscal year and reach $8.2 billion by the end of the forecast period.
• In the 2022 Budget Policy Statement, the Government signalled an operating allowance of $6.0 billion per annum for Budget 2022, $4.0 billion per annum for Budget 2023, and $3.0 billion per annum for Budgets 2024 and 2025. While the Budget 2022 operating allowance is higher than normal, this is expected to be a one-off, reflecting a number of significant reform programmes expected to be funded through Budget 2022.
• Higher allowances increase the level of nominal government consumption, but because higher inflation and wage costs flow through to higher costs for the government, the rate of growth in real government consumption is forecast to be lower than at the Budget Update.
• Overall, a core Crown residual cash shortfall of $36.8 billion is expected over the forecast period. Net core Crown debt is forecast to increase by $35.8 billion by 2025/26, primarily to fund the expected cash shortfall over the forecast period. Net core Crown debt is expected to peak at $165.5 billion in 2023/24, $18.7 billion lower than forecast in the Budget Update. As a percentage of GDP, net core Crown debt peaks a year earlier at 40.1% of GDP in 2022/23. This is owing to the stronger starting position from the audited results at 30 June 2021, as well as the stronger residual cash position.
• Net worth attributable to the Crown also improves, growing to $166.4 billion by the 2025/26 fiscal year, owing to the cumulative improvement in the operating balance.
• The Economic Outlook chapter presents alternative upside and downside scenarios. Compared to our main forecast, the upside scenario explores better COVID-19 outcomes both in New Zealand and abroad, resulting in a faster domestic recovery, a stronger terms of trade and an improved fiscal position. In the downside scenario, we explore the possibility of worse COVID-19 outcomes internationally and domestically, resulting in a higher unemployment rate, a slower recovery in domestic activity and higher net debt.
• In addition, the Risks to the Fiscal Forecasts chapter discusses the key risks to the fiscal forecasts, including COVID-19 and climate change.

The economic forecasts do not include the annual national accounts data released on 19 November 2021. See page 11 for further details.

Economic Outlook#

Overview#

• New Zealand's economic performance has been stronger than expected since the publication of the Budget Economic and Fiscal Update 2021 (Budget Update), reflecting that the economy has been more adaptable and resilient to the COVID-19 pandemic than previously thought.
• Robust demand throughout the first half of 2021 has catalysed broad-based growth, with stronger-than-expected economic activity, tax revenues exceeding forecasts, and the unemployment rate dropping to record-low levels.
• We forecast an approximately 6% fall in GDP in the September 2021 quarter owing to the Delta outbreak, although we are expecting activity to return in subsequent quarters supported by pent-up demand, continued strength in building construction, and the more permissive COVID-19 Protection Framework boosting activity at the start of 2022.
• The labour market remains tight, and unemployment is expected to drop to 3.1% in the March 2022 quarter and remain below 4.0% for most of the forecast period. This is expected to lead to wages rising more rapidly.
• Aggregate demand and wage pressures have combined with ongoing supply chain disruptions to push Consumers Price Index (CPI) inflation well outside the Reserve Bank of New Zealand's target range of 1% to 3%.
• Interest rates are now anticipated to rise more rapidly and to a higher level than previously assumed, placing downward pressure on aggregate demand and house price growth and returning inflation to within the target range from late 2023. We anticipate a slight fall in house prices in 2023.
• Higher inflation translates to nominal GDP being a cumulative $78.5 billion higher over the forecast period to June 2025 relative to the Budget Update. This is the major driver of the additional $48.6 billion in core Crown tax revenue over the five years to June 2025. However, higher inflation adds to cost pressures associated with the provision of public services.
• The global economic recovery has lost some momentum owing to the emergence of Delta and ongoing supply chain disruptions, but remains positive with vaccination, policy support, savings drawdown, and the reopening of economic activity all supporting growth.
• The ongoing progression of the Delta and newer variants of COVID-19 continues to represent a key source of uncertainty to our forecasts. As we go to print, the emergence of Omicron is causing growing concern and highlights this risk. Two alternative scenarios looking at the impacts of a more contained spread of COVID-19 and a faster spread are presented to illustrate the level of uncertainty in the forecasts.

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

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

Notes:

1. Business investment is non-residential public and private investment.
2. Contribution to GDP growth.
3. Percentage difference between actual real GDP and potential real GDP.
4. Percent of the labour force, June quarter, seasonally adjusted.
5. Percent of the working-age population, June quarter, seasonally adjusted.
6. Quarterly Employment Survey (QES), average ordinary-time hourly earnings.
7. 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#

Aggregate demand has held up better than expected

Since the beginning of 2021, the economy has performed strongly (Figure 1.1). Strength has been broad-based across most industry groups and sectors with strong domestic spending boosting consumption and record building consents boosting construction. Tourism, however, remains a key area of weakness, reflecting the impact of ongoing border restrictions on international tourism.

Figure 1.1 - Real production GDP

 

Sources: Stats NZ, the Treasury

Strong aggregate demand has been reflected in ongoing labour demand, with unemployment falling throughout 2021 and an environment where firms are finding it increasingly difficult to find labour.

However, the emergence of Delta in Auckland and its spread to other regions saw New Zealand re-enter lockdowns again in August, stalling the momentum that the economy had in the first half of 2021. The spread of Delta internationally, and the ensuing efforts to contain it with lockdowns, has restricted the movement of both goods and people in a number of countries, causing further disruptions to supply chains. Domestically this has seen inflation peak at a 10-year high of 4.9% in the September quarter and unemployment reach a low of 3.4%, the equal lowest on record, matching the result in the December 2007 quarter.

With Auckland remaining at higher alert levels since the lockdown began in August and other regions dipping in and out of higher alert levels, we now forecast an approximately 6% fall in real GDP in the September 2021 quarter. This is followed by a gradual recovery over the December 2021 and March 2022 quarters of 3.7% and 3.8%, respectively. The recovery is underpinned by pent-up demand, higher employment, continued strength in building consents, and the more permissive COVID-19 Protection Framework boosting activity at the start of 2022.

Supply-side constraints have also become prevalent…

In addition to demand pressures, COVID-19 disruptions have also led to supply-side constraints both domestically and internationally (discussed later in this chapter) that have varying degrees of persistence. These include delays associated with shipping and reduced availability of key inputs in areas such as construction of electronic components.

The labour market provides further evidence of capacity constraints. The September quarter Quarterly Survey of Business Opinion (QSBO) reported record-high difficulty finding skilled labour and near-record difficulty finding unskilled labour in the September quarter, and a net 42% of businesses planned to increase their headcount in the next quarter.

With ongoing border restrictions limiting the potential supply of additional labour, employment growth is likely to be more constrained than it has been.

The greater-than-expected strength in activity, together with upwards historical revisions that were incorporated in the June 2021 quarter GDP release, has resulted in growth exceeding what the economy can sustain over the long run. The difference between actual and long-run potential economic activity, a key measure of spare capacity in the economy known as the output gap, has been more positive than previously thought. This lack of capacity is a strong indication of domestic inflationary pressure (Figure 1.2).

Figure 1.2 - Output gap

 

Sources: Stats NZ, the Treasury

 …which, along with strong demand, has seen inflation surge…

With supply-side pressures emerging rapidly since the Budget Update, and inflation jumping to 4.9%, the highest in 10 years, CPI inflation forecasts have been revised upward across the forecast period relative to the Budget Update forecasts (Figure 1.3). Annual CPI inflation is forecast to peak at 5.6% in the March 2022 quarter. Inflation then falls across 2022 and continues to decline towards the Reserve Bank of New Zealand's 2.0% target midpoint over the remainder of the forecast period.

Figure 1.3 - Consumers Price Index

 

Sources: Stats NZ, the Treasury

Tradables inflation is expected to ease in the near term as elevated world energy prices and price effects of supply-chain disruptions unwind. Higher interest rates, as the Reserve Bank increases the Official Cash Rate (OCR) throughout 2022 to subdue domestic demand, sees non-tradables inflation gradually dampen over rest of the forecast period.

…and a tighter-than-expected labour market…

The labour market continues to be remarkably resilient despite the Delta outbreak and remains characterised by a state of tightness. In the September quarter, unemployment fell to 98,000, or 3.4%, the equal lowest since current records began in 1986 (Figure 1.4).

Figure 1.4 - Unemployment and participation

 

Sources: Stats NZ, the Treasury

Combined with lower underemployment, and the labour force participation rate sitting at a historical high of 71.2%, this has resulted in a marked reduction in what little spare capacity there was in the labour market. This employment growth occurred despite Auckland being in lockdown for around half the reference quarter, suggesting that firms are retaining staff in expectation of future reopening.

Given the tightness in the labour market, the absence of short-term opportunities to increase labour supply, and an anticipated lift in spending and activity as New Zealand shifts to the new COVID-19 Protection Framework, the unemployment rate is forecast to drop to 3.1% in the March 2022 quarter, before gradually rising towards 4.1% at the end of the forecast period. Employment is expected to grow quarter-on-quarter, but at a slower rate than the Budget Update forecasts (reflecting the increased tightness in the most recent data), while the labour force participation rate slowly declines to 70.9% by June 2026.

…leading to increased wage pressures…

This increased tightness in the labour market is expected to fuel additional wage growth and maintain an elevated rate of labour force participation.

Annual ordinary time average hourly wage growth is forecast to reach a peak of 4.6% starting in the December 2023 quarter, before tapering off to annual growth of 4.2% by the end of the forecast period (Figure 1.7).

Figure 1.7 - Wage growth

 

Sources: Stats NZ, the Treasury

These wage pressures are likely to be felt unevenly across the economy, as tourism-exposed industries (accommodation and transport, for example) will not experience wage growth to the same extent as growing sectors such as construction and primary manufacturing industries.

…while government consumption growth is subdued

Annual average growth in real government consumption is forecast to be lower than in the Budget Update forecasts for most of the forecast period. Although the fiscal allowances will support an increase in the dollar-value of government consumption, higher inflation and wage costs will increase the cost of providing government services. The balance of these forces is such that in real terms, government consumption will still grow, but at a slower pace than forecast in the Budget Update. This is reflected in a significantly higher government consumption deflator, the price measure for government services used in the national accounts.

Generalised price pressures mean interest rates are likely to continue to increase sharply…

In response to the strength in demand and inflation exceeding the target band, the Reserve Bank has removed monetary policy stimulus since the Budget Update and we expect this trend to continue over the forecast period.

In July 2021, the Reserve Bank halted the LSAP programme and, having initially delayed raising the OCR owing to the Delta outbreak, increased the OCR by 0.25% in October and again in November to reach 0.75%. The Reserve Bank is expected to continue responding to the stronger-than-expected inflationary pressures by lifting the OCR further during 2022 and 2023.

As a consequence, the 90-day interest rate is forecast to rise to 3.2% by the June 2023 quarter before moderating slightly over the forecast period to the assumed long-run neutral 90-day rate of 3.0% (Figure 1.8).

Figure 1.8 - 90-day interest rates

 

Sources: RBNZ, the Treasury

…which moderates the pace of house price growth…

Annual house price growth is forecast to ease over the year ahead after peaking at approximately 30% in the June 2021 quarter (Figure 1.9). The high rates of house price growth seen recently are expected to support consumption and residential investment activity for some time yet, boosting aggregate demand and adding to inflationary pressures. However, as the housing market cools, these forces are expected to wane.

Figure 1.9 - House prices

 

Sources: CoreLogic, the Treasury

The key reason we expect house price inflation to slow is rising interest rates. The higher OCR will translate to higher mortgage rates, reducing demand for housing. House prices are forecast to fall slightly on an annual basis over 2023 and 2024, shortly after interest rates peak. The box below explores in more detail the role of interest rates in influencing house prices.

Other factors will also be working to address supply and demand imbalances in the housing market. These include changes around tax deductible interest for rental property owners, tightening loan-to-value ratio restrictions and elevated price-to-income ratios reducing affordability and credit availability, and ongoing measures to expand the supply of housing.

…and acts as a drag on investment activity in the medium term…

Record-high building consents issuance over the past year indicates that residential construction activity will stay strong over the year ahead. However, growth in residential investment is expected to slow over time as interest rates rise and the rate of house price inflation diminishes (Figure 1.13).

Figure 1.13 - Real investment

 

Sources: Stats NZ, the Treasury

Business investment is expected to be subdued in the short-term due to the impact of Delta restrictions. Deferred investment post lockdown, ongoing household demand and a progressive re-opening of the borders see a pick-up in business investment in the first half of 2022, before rising interest rates slow the rate of growth over the remainder of the forecast period.

…although household spending remains strong in the short term…

In the short term, household consumption is expected to recover as restrictions on activity ease, with the impact of remaining public health restrictions offset by recent higher house price growth and elevated employment levels and wages (Figure 1.14).

Figure 1.14 - Real private consumption

 

Sources: Stats NZ, the Treasury

In the medium term, higher household incomes and employment levels will support consumption. However, relative to the Budget Update we now expect the cost of living to rise more rapidly. This will erode consumers' purchasing power and is a countervailing constraint on household spending. Rising interest rates and the housing market slowdown will also contribute to slower growth in consumption over 2023 and 2024.

…while goods exports are supported by elevated commodity prices

Despite a slowdown in global growth, demand for New Zealand's goods exports is expected to remain strong. Global supply chain disruption is causing challenges for exporters and is expected to have lingering impacts, with real goods exports now forecast to be 1.1% lower in 2025 compared to the Budget Update.

Commodity export prices have risen to record highs, driven by the strength in global consumer demand as well as stockpiling behaviour from buyers motivated by supply chain concerns. Commodity prices are expected to ease over 2022 as global agricultural supply recovers and demand normalises.

Figure 1.15 - Goods terms of trade

 

Sources: Stats NZ, the Treasury

The rise in export prices boosted the goods terms of trade to a record high in the June 2021 quarter. However, higher import prices driven by supply chain disruption are forecast to result in a drop in the terms of trade in the September quarter. The medium-term outlook for the terms of trade is similar to the Budget Update, with persistently rising import prices contributing to a modest easing across the forecast period. (Figure 1.15).

Rising domestic interest rates see a steady increase in the exchange rate, with the trade-weighted Index (TWI), reaching 78 by 2023, and 79 by the end of the forecast period.

Delta results in services exports recovering later than expected...

The short-lived trans-Tasman travel bubble saw services exports increase 63% in the June quarter. However, the arrival of the Delta variant of COVID-19 brought this partial recovery to an abrupt halt and has pushed out the expected recovery in inbound tourism.

Services exports are forecast to begin to recover from the second half of 2022 in line with the Reconnecting New Zealand plan. The return of international visitors, however, is assumed to be more gradual in the short term (Figure 1.16).

Figure 1.16 - Services exports

 

Sources: Stats NZ, the Treasury

The current account balance is expected to widen in the near term, with stronger imports, a weaker terms of trade, and a weaker income balance (resulting from higher interest rates increasing debt-servicing costs) leading to an annual current account deficit of 5.8% of GDP in the June 2022 quarter. By the end of the forecast period, the recovery in services exports and rising services terms of trade combine to narrow the deficit to 4.0% of GDP.

…and acts as a drag on global growth...

The global economic recovery has lost some momentum owing to the emergence of Delta and ongoing supply chain disruptions, but the growth outlook remains positive, with vaccination, policy support, savings drawdown, and the reopening of economic activity all supporting growth prospects.

Delta has led to a slowing of growth in real GDP in the United States and China, and Australia's GDP contracted 1.9% in the September 2021 quarter but is expected to bounce back relatively quickly in 2022. While growth in the United States is expected to pick up in the December quarter, China faces a number of headwinds including energy shortages, COVID-19 lockdowns, and firms in difficulty in the property market.

…with ongoing supply chain disruptions fuelling global inflationary pressures

Inflation has resurfaced as a key international risk; specifically, there are concerns about stagflation in some economies. Global inflation pressures were already high as a result of the massive monetary and fiscal stimulus that had been provided by central banks and governments. These pressures have risen further, driven by temporary factors such as higher oil prices and once-off pandemic impacts, more persistent factors such as supply chain issues and energy costs, and factors whose persistence is yet to be determined, such as increasing inflation expectations.

Accordingly, inflation has surprised on the upside in a number of regions - reaching 6.2% in October in the United States - which could lead to monetary policy tightening earlier. To date, central banks have generally held back from raising policy rates; however, the Korean and Norwegian central banks have hiked interest rates recently and the Bank of England and United States Federal Reserve have communicated an earlier start to tightening monetary policy settings.

Higher inflation in particular sees materially higher nominal GDP

Higher inflation than forecast in the Budget Update, combined with stronger near-term activity, translates to nominal GDP being $21.4 billion higher by the year to June 2025 and a cumulative $78.5 billion over the forecast period to June 2025 compared to the Budget Update. This is the main driver of the additional $48.6 billion in core Crown tax revenue across the four years to June 2025, leading to an improved fiscal position relative to the Budget Update, as outlined in the Fiscal Outlook chapter.

Risks are broadly balanced, and hinge on COVID-19 developments

The outlook is highly uncertain, with factors such as COVID-19, the duration of supply chain disruptions, or the persistence of house price inflation all adding to uncertainty. We view the risks as roughly balanced. The progression of COVID-19 both domestically and abroad remains the key source of uncertainty for our economic forecasts. The box below explores two indicative scenarios to give a sense of how sensitive the fiscal forecasts are to economic risks.

Fiscal Outlook#

Overview#

• The fiscal outlook is expected to improve over the forecast period, after an initial weakening in the 2021/22 year as the Government responds to the recent Delta outbreak.
• The expected strength in economic activity and the stronger-than-expected base provided from the 30 June 2021 results have led to a significant improvement in tax revenue forecasts, which flows through to improve the key fiscal indicators when compared to the Budget Economic and Fiscal Update 2021 (Budget Update).
• Core Crown tax revenue increases by $36.5 billion over the forecast period, an average of $7.3 billion higher each year. This growth is broadly in line with the economy, with core Crown tax revenue being around 29.0% of GDP over the five-year forecast.
• Core Crown expenses are initially forecast to increase to $128.0 billion in the 2021/22 year, from $107.8 billion at 30 June 2021. This is primarily owing to COVID-19 related expenditure to support the New Zealand economy through the outbreak of the Delta variant. As this expenditure eases, core Crown expenses are lower in the 2022/23 year, then increasing over the remaining years by $4.5 billion on average. This year‑on-year lift is primarily attributable to future Budget allowances available across the forecast period, as well as an increase in benefit expenses and core Crown finance costs.
• The operating balance before gains and losses (OBEGAL) is now expected to return to surplus in the 2023/24 year, in contrast, at the Budget Update deficits were expected in all years of the forecast period.
• Net worth attributable to the Crown is $57.5 billion higher by 2024/25 than was expected at the Budget Update and is forecast to be $166.4 billion in the 2025/26 fiscal year. This is mainly owing to the stronger starting point from the results at 30 June 2021 and the cumulative improvement in the operating balance over the forecast period.
• Overall, core Crown residual cash broadly follows a similar trend to OBEGAL, with an improvement of $18.3 billion compared to the Budget Update. However, the capital cash flows associated with the Reserve Bank's Funding for Lending Programme (FLP) cause the residual cash trend to differ year-to-year compared to the OBEGAL trend. Residual cash is forecast to return to surplus in the 2024/25 year, one year after OBEGAL. Overall, there is a residual cash shortfall of $36.8 billion across the forecast period.
• The forecast for net core Crown debt is expected to increase by $35.8 billion by 2025/26, largely to fund the expected cash shortfall over the forecast period. However, net core Crown debt has improved compared to the Budget Update and is now forecast to peak nominally at $165.5 billion in 2023/24 and at 40.1% of GDP in 2022/23. This is $18.7 billion and 7.9 percentage points lower than the Budget Update and is largely a result of the stronger residual cash position and starting point from the results at 30 June 2021. When excluding the impact of the FLP, net core Crown debt peaks at 35.3% of GDP in 2023/24.

Notes:

1. Operating balance before gains and losses.
2. Net core Crown debt excluding the New Zealand Superannuation Fund and advances.

Source: The Treasury

Comparison to the Budget Update#

The fiscal outlook is stronger than previously expected…

The financial results since the completion of the Budget Update have outperformed expectations, largely on the back of stronger-than-expected economic activity. This means the starting base for the Half Year Update fiscal forecast is stronger, and this strength in the economy is expected to continue, resulting in a significant upward revision in tax revenue forecasts compared to the Budget Update. In the current year, the Government's temporary fiscal support measures in response to the Delta outbreak have more than offset the increase in tax revenue forecast, while an increase in the level of Budget allowances partially offsets the increase in the tax revenue forecast from 2022/23. Overall, most key fiscal indicators have significantly improved since the Budget Update (Table 2.3).

Source: The Treasury

…as economic activity sees tax revenue improve…

Core Crown tax revenue is forecast to be higher by $12.2 billion per year on average and is $48.6 billion higher in total by the 2024/25 year when compared to the Budget Update.

The tax forecast shows strength in most of the major tax types, as summarised below (Table 2.4).

Source: The Treasury

New Zealand's economic performance has been stronger than expected since the Budget Update, reflecting that the economy has been more adaptable and resilient to the COVID‑19 pandemic than previously thought. This increase in real activity, in combination with higher inflation, translates to a large increase in nominal GDP over the forecast period.

Most of the increase to the nominal GDP forecasts compared to the Budget Update fell into operating surplus (broadly, a measure of profits in the economy), which led to increases in the forecasts of corporate tax and other persons tax. Recent tax outturns were above forecast corporate and other persons tax revenue and receipts, indicating that taxable profits for the 2021 tax year were higher than forecast at the Budget Update.

Source deductions are expected to be $1.7 billion higher in the current year, rising to $4.3 billion by 2024/25, mainly owing to a stronger outlook for the labour market. However, most of the upward revision to the total compensation of employees forecast was in wages, rather than employment. As a result, there is a stronger contribution from fiscal drag (the effect on income tax as an individual's tax rate increases as their income increases) when compared to the Budget Update.

GST forecasts are expected to be on average $2.6 billion higher each year compared to the Budget Update, with the biggest drivers being an increase in the forecast for private consumption and residential investment. The expected reopening of the border will also see a small positive contribution from net migration, as non-resident spending in New Zealand is forecast to increase in the later years of the forecast period.

The resident withholding tax forecast is higher mainly as a result of a much stronger deposit interest rate forecast. The increase in other taxes is mostly owing to a higher customs and excise duty revenue forecast, which in turn is driven by indexation (inflation adjusted increases in excise rates).

Policy changes, as outlined in Table 2.5, also contribute to the change in core Crown tax revenue, mainly owing to the denial of interest deduction for residential rental properties.

…and a rising carbon price has increased revenue from the Emissions Trading Scheme…

Overall, the net impact from the Emissions Trading Scheme (ETS) is expected to improve OBEGAL by an additional $3.5 billion over the forecast period compared to the Budget Update. ETS revenue is higher by $5.4 billion, partially offset by higher ETS expenses of $1.9 billion. The overall improvement is mainly owing to an increase in the price of tradeable New Zealand Units (NZUs) from $36.90 per unit at the Budget Update to $64.50 per unit used in the Half Year Economic and Fiscal Update (Half Year Update).

This increase in ETS revenue, in addition to higher tax revenue, accounts for the majority of the increase in core Crown revenue, which is higher across all years of the forecast period compared to the Budget Update by an average of $13.6 billion per year, amounting to $54.5 billion.

…while expenditure has also increased.

Core Crown expenses are expected to be higher than the Budget Update in the current year by $13.3 billion and then on average $6.4 billion higher over the following three years.

The increase of $13.3 billion in the current year is largely temporary in nature, relating to the Government's fiscal support measures in response to the COVID-19 pandemic. A number of decisions have been funded from the CRRF to support the economy during the Delta outbreak. However, this expenditure is not expected to persist in the later years of the forecast period. Further details on decisions charged against the CRRF since the Budget Update can be found in the box on pages 43 and 44.

Figure 2.1 - Core Crown expenses compared to the Budget Update

 

Source: The Treasury

Beyond the current year, core Crown expenses have increased compared to the Budget Update by an average of $6.4 billion each year. This is primarily owing to an increase in Budget operating allowances, the establishment of the CERF and increasing finance costs, partially offset by an increase in the operating top-down adjustment. Refer to Table 2.6.

Source: The Treasury

The Government has signalled its future Budget allowances for Budget 2022 through to Budget 2025 in the Budget Policy Statement 2022 (BPS). The future Budget operating allowances have been increased compared to the Budget Update, resulting in an increase in core Crown expenses of $3.3 billion in 2022/23, rising to an increase of $4.9 billion by 2024/25 (Table 2.7).

Source: The Treasury

The Government has established the Climate Emergency Response Fund and set aside funding of $4.5 billion for it. This funding is assumed to be spent consistently across the forecast period from 2022/23, split evenly between operating and capital expenditure. Compared to the Budget Update, this has increased core Crown expenses by $0.5 billion in each year from 2022/23.

Core Crown finance costs have increased relatively consistently across the forecast period compared to the Budget Update, averaging $1.0 billion each year. This is in contrast to the Government's cash requirements, which have decreased compared to the Budget Update by an average of $4.6 billion per year (page38).

Offsetting the allowances and finance costs is an increase in the operating top-down adjustment. When compared to the Budget Update, the change to the operating top-down adjustment reduces core Crown expenditure by $3.8 billion across the forecast period. The increase compared to the Budget Update is most notable in the initial years of the forecast. This is largely owing to a significant amount of unspent expenses from the 2020/21 year transferring into the 2021/22 year, likely delays to the implementation of projects owing to COVID-19 alert level restrictions and the impact of higher Budget operating allowances.

Benefit expenses have increased compared to the Budget Update by $0.6 billion over the forecast period as a whole. Benefit expenses are expected to be lower in the near term owing to improved economic conditions reducing beneficiary recipient numbers for the Jobseeker benefit. This trend reverses from 2023/24 with benefit expenses higher in the later years of the forecast period largely because of a stronger wage growth track, as most benefits are indexed against forecast wage growth.

Largely owing to the factors above, OBEGAL improves over much of the forecast period.

The OBEGAL deficit is expected to increase in the current year by $2.4 billion compared to the Budget Update, as the increase in core Crown expenses is greater than the increase in core Crown revenue. However, this trend reverses from 2022/23, resulting in an improvement to OBEGAL in the later years of the forecast period by approximately $8.2 billion per year. OBEGAL is now forecast to return to surplus in the 2023/24 year, which was not expected to occur within the forecast period in the Budget Update (which ended in 2024/25).

Core Crown residual cash returns to a surplus in the 2024/25 fiscal year…

In total, the core Crown residual cash position is expected to improve by $18.3 billion compared to the Budget Update. This is primarilyattributable to the same factors that impact OBEGAL, mentioned above.

Figure 2.3 - Core Crown residual cash compared to the Budget Update

 

Source: The Treasury

Tax receipts are forecast to be $48.2 billion higher compared to the Budget Update, and while the trend is usually expected to move in line with revenue, there can be differences in the timing of cash receipts which cause it to vary. This is the case in the 2023/24 and 2024/25 fiscal years as the timing of the 2023/24 Matariki holiday (which falls on 28 June 2024) pushes $4.5 billion of GST receipts from the 2023/24 year into the 2024/25 year.

The operating cash flow movements broadly reflect the increases in core Crown expenses previously discussed. However, there are also capital cash flows which impact the residual cash trend only and cause it to differ from the trend in OBEGAL.

An increase to the multi-year capital allowance of $4.0 billion compared to the Budget Update is signalled in the 2022 BPS, adding $2.2 billion of capital expenditure to the forecasts. The remaining $1.8 billion of the $4.0 billion increase to the multi-year capital allowance is expected to fall outside the forecast period.

The CERF is assumed to be spent evenly between operating and capital expenditure from the 2022/23 year onwards. While the operating expenditure is captured through OBEGAL, there is an additional $2.3 billion which impacts on residual cash from the expected capital expenditure to be funded from the CERF.

In addition, the amount of loans expected to be issued from the Reserve Bank's FLP is now forecast to peak at $22.0 billion by 2022/23, rather than $28.0 billion at the Budget Update. In the near term, this has improved the forecast for core Crown residual cash deficits by $5.3 billion as fewer loans are expected to be advanced; however, this consequently causes a weakening in the later years of the forecast period as fewer repayments are now expected.

…resulting in a significantly lower net core Crown debt track…

Net core Crown debt is expected to reduce by $30.2 billion and be 9.0 percentage points of GDP lower by 2024/25 compared to the Budget Update. This is driven by the overall improvements in residual cash, as well as a stronger starting point from the results to 30 June 2021.

The peak in net core Crown debt in nominal terms is still expected in the 2023/24 forecast year; however, it is expected to be $18.7 billion lower than was forecast at the Budget Update. Net core Crown debt as a percentage of GDP is still forecast to peak one year earlier than nominal net core Crown debt; however, it peaks at 40.1% of GDP rather than 48.0% of GDP as per the Budget Update. Net core Crown debt falls to 30.2% of GDP by the end of the forecast period.

Figure 2.4 - Net core Crown debt compared to the Budget Update

 

Source: The Treasury

Net core Crown debt includes the FLP liabilities but excludes the corresponding assets because they are classed as advances, and advances are excluded from the definition of net core Crown debt.

Net core Crown debt, including FLP advances, is forecast to peak at 35.3% of GDP in 2023/24, an improvement of around six percentage points and a year earlier than expected at the Budget Update.

…and a significantly improved balance sheet.

The total Crown operating balance (including gains and losses) flows through to impact net worth attributable to the Crown. When compared to the Budget Update, the operating balance has improved by $18.5 billion over the forecast period largely owing to changes in core Crown tax revenue and expenses, with the addition of the net gains/(losses) on financial and non-financial instruments.

Source: The Treasury

The improved operating balance, in addition to the stronger net worth starting position from the 30 June 2021 results (the actual result of $151.5 billion was $39.5 billion better than forecast at the Budget Update), has led to net worth attributable to the Crown being $57.5 billion higher than the Budget Update by the end of the forecast period.

Fiscal Outlook for the Half Year Update#

The Half Year Update forecast illustrates the position of the New Zealand economy.

The results reported in the Financial Statements of Government for the year ended 30 June 2021 illustrated the resilience of the New Zealand economy as it rebounded swiftly from the initial impact of the COVID-19 pandemic. While this provided a stronger base for the Half Year Update forecast, it is evident that the 2021/22 year will be heavily impacted by COVID-19 support measures. The outlook after the initial year of the forecast significantly improves across the remaining period from the 2022/23 year.

Core Crown tax revenue is expected to grow broadly in line with the economy…

Core Crown tax revenue is forecast to increase by $36.5 billion across the forecast period, reaching $134.5 billion in 2025/26 at an average increase of $7.3 billion per year. As a percentage of GDP, core Crown tax revenue rises gradually over the forecast period and reaches 29.5% of GDP in 2025/26 (Figure 2.5).

Figure 2.5 - Core Crown tax revenue

 

Source: The Treasury

When compared to growth in the economy, core Crown tax revenue is forecast to grow at a slower rate than nominal GDP in 2021/22; however, from 2022/23 it then grows at a stronger rate over the remainder of the forecast period (Figure 2.6).

Figure 2.6 - Core Crown tax revenue and nominal GDP growth

 

Source: The Treasury

The core Crown tax revenue results for the year to 30 June 2021 were stronger than expected and have provided a high starting base for the Half Year Update. The large tax-to-GDP increase in 2020/21 was a result of:

• source deductions, other persons tax and corporate tax growing at a faster rate than their underlying drivers (ie, compensation of employees and operating surplus), and
• an increase in the effective GST rate, which is likely linked to households spending more money in New Zealand instead of overseas.

Following on from the 2020/21 year, there is expected to be slower growth in the 2021/22 year, which can be attributed to:

• resident withholding tax on dividends returning to its pre-2021 level, and the reversal of the higher-than-usual effective GST rate in 2021, and
• the impact of policy measures relating to commercial building depreciation and low-value asset expensing that were introduced last year to support businesses through the COVID-19 pandemic.

However, this slower growth was offset by an increase in terminal tax for companies in 2022 to make up for the under-accrual in provisional tax through 2021.

From the 2022/23 year onwards, tax revenue growth is forecast to marginally exceed nominal GDP growth. This is mainly because various components of the GDP forecast that affect tax revenue grow at a faster rate than nominal GDP. The major contributors to the rising tax-to-GDP ratio include fiscal drag, tax policy effects and increasing deposit interest rates.

…and the level of expenditure increases in the 2021/22 year owing to temporary expenditure, which subsides in the 2022/23 year…

Core Crown expenses are expected to increase by $25.8 billion across the forecast period. While this increase is fairly steady at an average of $4.5 billion per year over the last three years of the forecast, the trend in the first two years reflects the Government's support measures in response to the COVID-19 pandemic.

Core Crown expenses are expected to reach $128.0 billion in the current year, an increase of $20.2 billion from the 2020/21 year, before declining to $120.2 billion in the 2022/23 year (Figure 2.7).

Figure 2.7 - Core Crown expenses

 

Source: The Treasury

The higher level of core Crown expenses in the current year includes COVID-19 related spending, particularly from recent decisions in response to the outbreak of the Delta variant since August 2021. For example, $5.3 billion of wage subsidy scheme payments and $3.2 billion in COVID-19 resurgence support payments. These expenses are expected to be largely temporary in nature and subside in the second year of the forecast and beyond.

From the 2022/23 year, core Crown expenses increase by $13.4 billion to reach $133.6 billion in the last year of the forecast period. While core Crown expenses are forecast to increase each year after 2022/23, as a percentage of GDP they decline across the forecast, falling to 29.3% of GDP by 2025/26.

The increase in spending from 2022/23 onwards is partly attributable to an increase of $8.9 billion in benefit expenses, primarily owing to a lift in New Zealand Superannuation. The increase in benefit expenses is driven by increasing wage growth to which the major benefit categories' payments are indexed, as well as a significant increase in the number of New Zealand Superannuation recipients towards the end of the forecast period.

Allowances for new spending in future Budgets also account for $16.0 billion of the growth in expenditure by the end of the forecast. In the Budget Policy Statement 2022, the Government has signalled an operating allowance of $6.0 billion for Budget 2022, $4.0 billion for Budget 2023 and $3.0 billion each for Budgets 2024 and 2025. Decisions averaging $1.3 billion per year have already been pre-committed against the Budget 2022 operating allowances.

Likewise, the CERF is expected to contribute $0.6 billion to the growth in core Crown expenses over the forecast period.

While the Budget 2022 operating allowance is higher than normal, this is expected to be a one-off, reflecting a number of significant reform programmes expected to be funded through Budget 2022. Budget allowances beyond Budget 2022 revert back to levels of investment similar to those announced in recent Budgets.

These allowances can be used for a combination of revenue and expenditure initiatives when allocated; however, for forecasting purposes, Budget allowances are assumed to be expenditure. The fiscal forecasts also assume that any additional costs in relation to Government commitments and future cost pressures will be met from operating allowances, such as those outlined in the Risks to the Fiscal Forecasts (page 53).

Figure 2.8 - Operating allowances

 

Source: The Treasury

Core Crown finance costs are also higher by $1.6 billion by 2025/26, largely driven by an increase in the Government's borrowing programme.

More details on the functional classification of core Crown expenses, including large short-term expenses relating to the COVID-19 pandemic, can be found in the Core Crown Expense Tables on page 139.

… contributing to an increase in the OBEGAL deficit in the current year before it improves, returning to a surplus in 2023/24.

While OBEGAL is initially expected to worsen to a deficit of $20.8 billion in 2021/22, it then returns to surplus in the 2023/24 year, reaching a surplus of $8.2 billion by the last year of the forecast period.

The initial increase in the OBEGAL deficit is owing to the significant increase in core Crown expenses relating to the fiscal support measures in response to COVID-19. This leads to the growth in core Crown expenses outpacing the growth in core Crown revenue. As the majority of COVID-19 spending is expected to be temporary, this trend reverses after 2021/22, leading to an improvement in OBEGAL across the rest of the forecast period.

Figure 2.9 - Components of OBEGAL by segment

 

Source: The Treasury

Crown entity and SOE results have remained relatively static across the forecast period…

Crown entity results fluctuate slightly year-on-year across the period but ultimately only contribute marginally to the OBEGAL improvement. Within this net change, ACC results have weakened owing to higher CPI inflation forecasts and updated information around claims costs, which together increase insurance expenses. This has been partially offset by improved results across several different Crown entities.

The State-owned enterprise segment contributes a further net positive change to OBEGAL across the forecast period of $0.8 billion.

… and the operating balance moves broadly in line with OBEGAL.

The total Crown operating balance largely follows the OBEGAL trend; however, it is also impacted by net gains and losses on financial and non-financial instruments. In the current year, a net loss on non-financial instruments causes the operating balance deficit to exceed the OBEGAL deficit by $3.0 billion, a trend which then reverses as the operating balance surpluses exceed those of OBEGAL by an average of $5.7 billion per year over the remaining forecast period.

In the 2021/22 year, the net loss on non-financial instruments is the result of actuarial losses on ACC outstanding claims of $3.2 billion and net losses on the ETS of $3.0 billion (largely owing to the increase in the market price of NZ units), both of which are not forecast beyond the current year.

Beyond the 2021/22 year, the operating balance improves by $38.5 billion. The operating balance is forecast to be back in surplus in the 2022/23 year and ends the forecast period in a surplus position of $14.7 billion.

A near-term decline in net worth attributable to the Crown is expected, which then improves over the latter half of the forecast period.

Net worth attributable to the Crown improves over the forecast period by $14.9 billion, mainly reflecting the forecast operating balance results.

While this represents a significant improvement, net worth attributable to the Crown initially falls from the 2020/21 position and only returns to that level in the 2024/25 fiscal year. By the end of the forecast period, net worth attributable to the Crown is forecast to be $166.4 billion.

As a percentage of GDP, net worth attributable to the Crown is forecast to decline in the first two years of the forecast period, before increasing from 2023/24 onwards.

Core Crown residual cash deficits increase in the current year, then reduce over the forecast period, returning to surplus in 2024/25…

Core Crown residual cash strengthens across the forecast period and is forecast to return to a surplus of $14.5 billion in 2024/25, one year later than OBEGAL. Across the forecast period, the residual cash deficits total $36.8 billion.

Figure 2.10 - Core Crown residual cash

 

Source: The Treasury

Residual cash is broadly influenced by the same contributors to OBEGAL, reflected by the larger cash deficits expected in the first two years of the forecast, which are primarily in response to the COVID-19 related expenses mentioned above.

The timing difference causing residual cash to return to surplus one year after OBEGAL, has occurred owing to the inclusion of capital cash flows, as well as the Reserve Bank's FLP.

A multi-year capital allowance of $9.8 billion has been signalled in the BPS, in addition to the operating allowances mentioned previously. This will provide additional funding to be spent on capital and will consequently impact the core Crown residual cash position forecast.

Table 2.11 shows net capital expenditure that has an impact on core Crown residual cash and net core Crown debt. It excludes capital spending undertaken directly by SOEs and Crown entities funded from their own resources (including third-party financing). Capital spending is forecast to be greater in the first three years of the forecast period, which is reflected in the residual cash deficits forecast in those years.

Source: The Treasury

In addition to capital spending, advances are being forecast in the near term from the Reserve Bank's FLP, which reach a peak of $22.0 billion of issued loans by 2022/23. However, after 2022/23 these advances begin to be repaid and are expected to be fully repaid by the end of the forecast period. These repayments have a positive impact on residual cash supporting the return to surplus by 2024/25.

…with the residual cash balances flowing through to net core Crown debt…

To fund the residual cash deficits, net core Crown debt is forecast to increase in nominal terms until 2023/24, then reduce as residual cash returns to surplus. As a percentage of GDP, net core Crown debt peaks a year earlier at 40.1% of GDP in 2022/23, before reducing to 30.2% of GDP by the end of the forecast period.

Figure 2.11 shows net core Crown debt as a percentage of GDP as per the existing definition (ie, excluding the FLP assets) and also shows what net core Crown debt would look like across the forecast if the FLP assets were included.

Figure 2.11 - Net core Crown debt

 

Source: The Treasury

When including the FLP assets, net core Crown debt is expected to peak a year later in 2023/24 at 35.3% of GDP. By the end of the forecast period in 2025/26, net core Crown debt, including FLP assets, is expected to be the same as without the FLP assets, at 30.2% of GDP as the FLP advances are expected to be fully repaid.

Source: The Treasury

…and increasing the forecast issuance of Government bonds.

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

In total, the bond programme is expected to raise funds of $83.0 billion over the forecast period. Bond maturities and repurchases will result in repayments of $60.2 billion of existing debt. In addition, short-term borrowing is expected to be $6.0 billion lower at the end of the forecast period, relative to the end of 2020/21 (Table 2.13). Overall, the core Crown borrowing programme will provide net funds of $16.8 billion to cover core Crown residual cash deficits and to ensure cash is available for upcoming bond maturities in the 2026/27 fiscal year.

However, the improvement in the fiscal outlook compared to the Budget Update has led to a lower borrowing requirement. In addition, a gradual reduction in financial asset holdings is forecast, reflecting the need for a lower cash buffer. Combined, these result in a decrease to the core Crown borrowing programme compared to the Budget Update.

Source: The Treasury

Key Economic Assumptions Used in the Forecast Financial Statements#

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

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

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

Notes:

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

Sources: The Treasury, Stats NZ, Reserve Bank of New Zealand

Risks to the Fiscal Forecasts#

Overview#

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

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

COVID-19#

The August 2021 Delta outbreak of COVID-19 in the community has already had a significant fiscal impact on the Government's finances and has demonstrated the high degree of uncertainty from COVID-19. The fiscal forecasts for the 2021/22 year include Wage Subsidy payments of $5.3 billion and Resurgence Support Payments of $3.2 billion.

It is likely that the uncertainty created by the COVID-19 pandemic, in particular the Delta outbreak, will pose a risk to the fiscal forecasts presented in the 2021 Half Year Economic and Fiscal Update (Half Year Update). The statement of specific fiscal risks in this chapter identifies a number of fiscal risks directly and indirectly caused or affected by COVID-19. Despite the disclosure of risks in this chapter, the level of uncertainty means there are risks to the fiscal forecasts that remain too broad in nature to disclose in the statement of specific fiscal risks. These risks concern:

• The impact on the economy - the economic recovery from COVID-19 will depend on many unknown factors (eg, the shift to the COVID-19 Protection Framework, the easing of border restrictions). Forecasts for tax revenue, benefit expenses and finance costs are particularly sensitive to economic conditions. The Economic Outlook chapter, from page 25,includes scenarios that model the fiscal impact of how the economy might evolve if some of the key judgements around COVID-19 in the main forecast were altered.
• The Government's response - the Government has already implemented policies to respond to COVID-19, mostly funded through the $57 billion COVID-19 Response and Recovery Fund (CRRF). Policies announced and communicated up to 25 November 2021 have been included in the fiscal forecasts based on the best information available. There is a risk that actual costs and/or timing of these policies may differ from the judgements and assumptions used to prepare the fiscal forecasts, as well as that a larger fiscal response is needed in response to future outbreaks.
• The Government's role in responding to the current and any future outbreaks - the fiscal forecasts include funding of around $4.3 billion that is left in the CRRF to manage future costs from COVID-19. The inclusion of the unallocated portion of the CRRF in the fiscal forecasts has required some judgement on the nature (eg, operating or capital) and timing of future COVID-19 response initiatives. In addition, there is uncertainty about the level of funding that may be required for future costs of the current outbreak and of any further outbreaks.
• The impact on valuations of assets and liabilities, and contingent liabilities - a number of assets and liabilities on the Crown balance sheet are valued using market information (eg, land and buildings, share investments and ACC's 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 that some Crown guarantees and indemnities may crystallise.

Climate Change#

Climate change poses significant challenges to New Zealand's wellbeing and to the Government's fiscal position and operations. These risks appear in two domains:

• Mitigation (Reducing emissions)
  
  Mitigation represents New Zealand's contribution to the global effort to reduce emissions and prevent warming. This involves reducing emissions domestically as well as supporting overseas emissions reductions.

• Adaptation (Responding to the physical impacts of climate change)
  
  Adaptation is about taking steps within New Zealand to respond to challenges presented by the physical effects of climate change, such as more frequent and severe weather events.

Several mitigation measures are included in the fiscal forecasts…

The Emissions Trading Scheme (ETS) is the Government's key tool to mitigate emissions within New Zealand. The fiscal forecasts include the:

• forecast cash proceeds from New Zealand Unit (NZU) auctions
• revenues from NZU surrenders
• expenses from NZUs issued to foresters and trade-exposed industries, and
• consequent stock of outstanding NZUs, assuming a continuation of current policy settings (refer to Note 14 in the Forecast Financial Statements).

The market price of $64.50 as at 30 September 2021 was used to determine the size of forecast NZU provision.

The forecasts also include $4.5 billion allocated to the Climate Emergency Response Fund over the forecast period. This reflects the public commitment the Government has made to recycle ETS proceeds into climate-related actions. Over the longer term, mitigation costs to achieve international and domestic targets are likely to be significantly higher, but are not yet sufficiently certain for particular years to be included in the fiscal forecasts.

…while others appear as specific fiscal risks.

New Zealand's ‘Nationally Determined Contribution' to global mitigation efforts is to reduce net greenhouse emissions by 50% below gross 2005 levels by 2030. This equates to an emissions budget for the target period (2021 to 2030) of 571Mt. To achieve this, New Zealand will need to pursue sizeable domestic or offshore abatement to mitigate emissions over 2021 to 2030.

The Climate Change Response (Zero Carbon) Amendment Act 2019 also requires the Government to set domestic greenhouse gas emissions budgets. Each emissions budget covers a period of five years (except the first emissions budget which will cover the period 2022 to 2025). Emissions budgets will act as stepping-stones, or interim targets, to reaching our 2050 emissions reduction targets. The Government has consulted on its choices around how it achieves its climate targets and must publish its first emissions reduction plan in May 2022.

Achieving both domestic and international emissions targets will involve significant costs to the Crown, starting in the current fiscal forecast period. There is an overview specific fiscal risk for this and several subsidiary specific fiscal risks.

Several adaptation measures appear in the fiscal forecasts…

Government agencies include expenditure in their forecasts to avoid, control or transfer (eg, through insurance) risks associated with their assets. Government agencies that have response and recovery functions in the event of natural hazard events make some provision for this activity and this is included in the forecasts, but actual costs may vary from this provision.

…and there is an adaptation-focused specific fiscal risk.

In August 2020, the Government released the first National Climate Change Risk Assessment. This highlighted risks from our ecosystems and communities to buildings and the financial system, including risks to governments from economic costs associated with lost productivity, disaster relief expenditure and unfunded contingent liabilities resulting from extreme events and ongoing, gradual changes.

The Government is now developing its response to the risks in the report, through the National Adaptation Plan, which must be consulted on early in 2022 and will be published by August 2022.

While significant adaptation planning is already in development and funded in these forecasts (eg, policy work on Resource Management Act reform), it is likely that the National Adaptation Plan will generate further adaptation activity that is not currently forecast. This activity is published as an adaptation-focused specific fiscal risk.

Fiscal Sensitivities#

Table 3.1 sets out some rules of thumb on the sensitivities of the fiscal position to small changes in specific variables. For example, if nominal GDP growth is one percentage point higher than forecast in each year up to June 2026, tax revenue would be around $6.9 billion higher than forecast in the June 2026 year. The sensitivities are broadly symmetric: if nominal GDP growth is one percentage point lower than expected each year, tax revenue would be around $6.6 billion lower than forecast in the June 2026 year. The figures are indicative and can be influenced by the composition of growth as different types of activity have different effective tax rates.

Note:

1. Interest sensitivities now relate to consolidated external exposures of both the Treasury (Debt Management) and the Reserve Bank of New Zealand. Recent forecasts (including Budget 2021) reported interest sensitivities relating only to funds managed by the Treasury (Debt Management).

Source: The Treasury

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

Balance Sheet Risks#

The size and nature of the Government's balance sheet are important to the financial resilience of New Zealand. They enable the Government to absorb shocks on behalf of New Zealanders, and to adapt to risks and trends. They therefore play a significant role in macro-economic risk management.

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

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

Sources of (Social) balance sheet risk to public services

Physical assets such as land, buildings, state highways and military equipment are susceptible to external natural hazards, the impact of climate change and the quality of asset management in delivering services. In managing these risks, 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. The Government is also developing a National Adaptation Plan in response to climate change risks the Climate Change Commission has identified.

The replacement costs of physical assets are also susceptible to valuation movements through changes in property market conditions, in demand and in the costs of construction. The Half Year Update forecasts incorporate valuations up to 30 September 2021.

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

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

The Crown also faces contingent liabilities, for example, indemnities of activities in the public interest, environmental claims, and legal proceedings.

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

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

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

The Crown incurs liquidity risk with respect to its ability to raise cash to meet its obligations. Each agency manages its own specific liquidity risk while the Treasury manages the Crown's liquidity requirements. The Government's funding strategy operates within a risk management framework approved by the Minister of Finance. This framework specifies policies for managing credit risk, market risk, operational risk, funding risk and liquidity risk that aim to ensure that risk is maintained within the organisational risk appetite while enabling the delivery of core roles and responsibilities.

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

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

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

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

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

Update on current management of balance sheet risk 

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

The build-up and subsequent deployment of fiscal resilience in response to COVID‑19 have underscored the importance of responsible fiscal management, including maintaining Crown debt at prudent levels - acknowledging that what is seen as prudent may change over time.

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

Specific Fiscal Risks#

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

• how specific fiscal risks are managed
• criteria for inclusion and exclusion of specific fiscal risks
• a statement of specific fiscal risks of the Government
• narrative summaries of all specific fiscal risks, and
• a table of risks that have been removed from the statement of specific fiscal risks since the Budget Economic and Fiscal Update (Budget Update).

The risks disclosed in this chapter reflect those that are known at the date of the finalisation of the fiscal forecasts, 25 November 2021. Although the process for disclosure of specific fiscal risks involves several entities, including government departments, the Treasury and the Minister of Finance, it is still possible that not every significant risk is identified.

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

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

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

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

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

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

General Risks Not Included as Specific Fiscal Risks

There is a range of general risks to the fiscal forecasts but these are not separately disclosed as specific fiscal risks, such as:

• 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 in the 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#

New Risks by Portfolio#

Climate Change

Emissions Trading Scheme - Abatement Obligations Arising from Price Ceilings Being Exceeded (Cost Pressure - Expenses)

New Zealand's Emissions Trading Scheme has a price ceiling, called the “Cost Containment Reserve” (CCR), which releases additional New Zealand Units (NZUs) at auction if a certain price threshold is reached. Under the Climate Change Response Act 2002, if releasing these units causes an emissions budget to be exceeded, the Minister of Climate Change must obtain equivalent emissions reductions to ‘back' these NZUs. This obligation also applies to NZUs allocated through industrial allocation, or the stockpile of privately-held units. If this were to occur, there is a fiscal risk associated with the cost of obtaining the emissions reductions required. The overall fiscal impact of this risk is uncertain and depends on the cost of obtaining equivalent emissions-reductions, which could be achieved through domestic or offshore mitigation.

Education

ICT Capabilities to Support Future Education (Policy Change - Expenses and Capital)

The Government has agreed to establish an Education Service Agency, Te Mahau, within a redesigned Ministry of Education Te Tāhuhu o te Mātauranga. This will require changes to foundational ICT infrastructure and systems, and significant investment, which has yet to be quantified, will be needed in systems and capabilities to support business outcomes and future education reforms.

Work Programme to Grow Māori Medium and Kaupapa Māori Education (Policy Change - Expenses and Capital)

In September 2021, Cabinet agreed to the Ministry of Education developing a work programme to grow Māori medium education and Kaupapa Māori education (MME), with a target of 30% of Māori learners participating in MME by 2040 (up from 10% in 2020). Part of the work programme will be estimating the costings to 2040 of growing MME by this amount.

Foreign Affairs

Aid to Support Our Pacific Neighbours: Support for Pacific Fiscal Crises (Policy Change - Expenses)

The Government is committed to strengthening the long-term resilience of Pacific Island countries, while responding to the immediate impacts of COVID-19, and has been providing emergency budget support through grant financing to Pacific Island countries facing fiscal crises due to the continuing impact of COVID-19. This enables Pacific Island countries to lead their own COVID-19 response and recovery without increasing their debt. The need for, and scale of, additional emergency budget support depends in part on the countries' domestic revenues and may exceed what is provided for in the fiscal forecasts.

Time-limited International Climate Financing Funding: Unfunded 2026-29 Commitment Period (Policy Change - Expenses)

New Zealand's international climate finance commitment is increasing to $1.3 billion over the four year period 2022 to 2025. While the timing and quantum of New Zealand's next international climate finance commitment for the period 2026 to 2029 are unknown, continuing the 2022 to 2025 commitment is likely to require more than is provided for in the fiscal forecasts.

Health

Enhanced Immunisation Programmes in 2022 (Cost Pressure or Variance - Expenses)

With the reopening of the borders, viruses such as the flu virus that have been largely absent for the past two years are likely to re-enter New Zealand and may have more significant effects than they have had previously. There is a risk that the funding required for enhanced immunisation programmes will exceed what is provided for in the fiscal forecasts.

COVID-19 Response - Ongoing Costs of Current Response (Cost Pressure or Variance - Expenses)

The fiscal forecasts provide for the public health response to the current significant outbreaks of the COVID-19 Delta variant and for the purchase of COVID-19 therapeutics. If the scale of outbreaks increases, there is a risk that additional funding may be required for the public health response, including the distribution and use of therapeutics in the health system, as well as for additional therapeutic purchases.

Justice

Legal Aid Demand Pressures (Cost Pressure or Variance - Expenses)

Entitlement to legal aid is mandated by legislation and costs are driven by the volume and complexity of cases. The average cost per case has increased as a result of growth in more serious cases. Volumes can be affected, either positively or negatively, by changes to justice sector policy settings and trends in crime. There is a risk that additional funding will be required if volumes are higher or cases more complex than assumed in the forecasts.

Oceans and Fisheries

Aquaculture Settlements (Cost Pressure or Variance - Expenses)

Fisheries New Zealand delivers the Crown's aquaculture settlement obligations under the Māori Commercial Aquaculture Claims Settlement Act 2004. Based on current forecasts of settlements, what is provided for in the fiscal forecasts will be insufficient to fund all expected settlements.

Social Development and Employment

Social Unemployment Insurance (Policy Change - Expenses)

As part of Budget 2021, the Government announced its intention to design a Social Unemployment Insurance scheme jointly with BusinessNZ and the New Zealand Council of Trade Unions. The scheme that is being developed is intended to be funded from levies. Fiscal implications include the levy costs for public sector employees and as funder of start-up costs including the technical infrastructure and potentially the costs of initial claims until sufficient levy revenue is received. There is currently too much uncertainty to estimate the fiscal impact from a Social Unemployment Insurance scheme to include it in the fiscal forecasts.

Transport

Increases in the Fuel Excise Duty and/or Road User Charges (Policy Change - Revenue)

There is a risk that fuel excise duty (FED) and/or road user charges (RUC) will need to be increased in order to manage pressures on the National Land Transport Fund and enable repayment of a $2 billion loan, which is being provided to support delivery of the National Land Transport Plan 2021. If FED and/or RUC were to be increased, it is likely that any increases would take effect no sooner than 1 July 2024.

Maintaining International Air Connectivity (MIAC) Scheme (Policy Change - Expenses)

Current COVID-19 border settings limit the number of international flights that can operate commercially to and from New Zealand. The Maintaining International Air Connectivity (MIAC) scheme is in place to ensure a minimum level of international connectivity is maintained while border restrictions are in place. The fiscal forecasts include funding for the MIAC to 31 March 2022. If sufficient international flights have not resumed by this date, then funding additional to what is provided for in the fiscal forecasts may be required to ensure connectivity is maintained.

Cross-portfolio

Adverse Weather Events (Cost Pressure or Variance - Expenses and Capital)

There is an increasing risk that, in responding to the increased frequency of adverse weather events, the Crown will incur additional costs across a range of portfolios including, but not limited to, Emergency Management (essential infrastructure recovery), Earthquake Commission (Natural Disaster Fund guarantee), Housing (temporary accommodation), and Social Development and Employment (emergency benefits, rural support payments, and grants). The likelihood, timing and fiscal impact are uncertain.

National Adaptation Plan (Policy Change - Expenses)

The first National Climate Change Risk Assessment prepared pursuant to the Climate Change Response (Zero Carbon) Amendment Act 2019 was released in August 2020. It identified 43 priority risks across five value domains (natural environment, human, economy, built environment and governance) and highlighted 10 risks considered to be the most significant. The Government is now working on developing its response to the risks in the report, through the National Adaptation Plan (NAP), which is due by August 2022. The NAP will be an all-of-government plan to guide how New Zealand will adapt to the effects of climate change over the next six years. Depending on the policy decisions taken in its development, implementation of the NAP is likely to impact on the Government's operating balance and net core Crown debt.

Changed Risks by Portfolio#

Children

Enabling Community and Iwi to Help Children (Policy Change - Expenses)

The Government is committed to ensuring that community, iwi, hapū and Māori organisations are able to find appropriate solutions for children in need. This is in line with the statutory National Care Standards and is likely to have fiscal implications in excess of what is in the fiscal forecasts.

Education

Learning Support (Cost Pressure or Variance - Expenses and Capital)

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

Health

Health System Sustainability (Cost Pressure or Variance - Expenses)

There is a significant risk that District Health Boards' (DHBs) deficits for the 2021/22 financial year will be higher than what is in the fiscal forecasts. In addition, the health system is likely to face significant volume and cost pressures to maintain the delivery of existing services, which may increase as a result of the COVID-19 response. The fiscal forecasts also assume that future health expenditure growth will be met from future Budget allowances, but the cost of operating the health system under Health New Zealand, including additional investment in such areas as digital services and primary health care and any efficiency savings in the longer term, has yet to be fully assessed. The Government has signalled an increase in the level of funding available for the Budget 2022 operating allowance to manage the costs of the investment in a reformed health system. As there is a degree of uncertainty on the funding required for a reformed health system, there remains a risk that the overall investments through Budget 2022 will exceed the signalled Budget 2022 operating allowance, which would adversely impact the operating balance and net core Crown debt.

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 and delays arising from the impact of COVID-19 (primarily Alert Levels 3 and 4), including supply chain disruption (delays and extra costs with shipping), obstacles/delays in obtaining and retaining skilled overseas workers, and higher-than-expected construction cost inflation.

Updated Risks by Portfolio#

ACC

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

The fiscal forecasts reflect unchanged ACC levies until at least 1 April or 1 July 2022 and indicative future levy rates for the Work, Earners' and Motor Vehicle accounts. Final levy decisions made by the Government for the next three levy years (but not in time to be reflected in the fiscal forecasts) may differ from the forecast levy path. Actual revenue from the levies set for these accounts may be more or less than that required to cover the cost of claims. Also, if factors such as claims experience, ACC performance, and economic assumptions (particularly discount rates and unemployment rates) differ from the forecasts, ACC's levy revenue, claims costs, and liability may also differ from the forecasts. Any variance will have a corresponding impact on the operating balance.

Broadcasting and Media

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

Both public and privately owned media organisations are under increasing pressure from international competition, declining revenue shares and changes to the way people access content. The Government is committed to strengthening New Zealand's public media and has commissioned a detailed business case on the viability of a preferred approach. Significant additional investment may be required to deliver on the Government's public media outcomes, but the extent of this will not be clear until final decisions are made.

Climate Change

Emissions Trading Scheme - Variations in Revenue and Expenses (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) and the responses of participants (eg, the extent of afforestation and deforestation activity, and the timing of industrial responses such as the closure of Tiwai Point aluminium smelter). As a result of these factors, actual revenue and expenses may vary from the fiscal forecasts, which for both revenue and expenses assume a carbon price value based on the market price at 30 September 2021 of $64.50.

Conservation

Department of Conservation's Compliance with the Water Services Act 2021 (Cost Pressure or Variance - Expenses and Capital)

The Department of Conservation provides drinking, waste and storm water services and infrastructure across its recreational and corporate assets, including more than 2,000 huts, campsites, visitor centres and networked town supplies. The Water Services Act 2021 imposes significant new regulatory requirements on the Department, with upgrades to assets and changes in service provision required to become compliant. The associated extensive fiscal implications are likely to exceed what is provided for in the fiscal forecasts.

COVID-19 Response

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

The changing global situation and uncertainty with respect to COVID-19 remains. Demand for space in Managed Isolation and Quarantine (MIQ) and the health and security arrangements required may change rapidly. Any changes in demand will put pressure on current MIQ supply and appropriated funding. While less MIQ capacity is expected to be required for international travellers over time, MIQ may have an ongoing role in the management of domestic COVID-19 outbreaks. MIQ is currently funded to June 2022, but may need to continue beyond this date in some form.

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. 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.

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

The Regional Strategic Partnership is a $200 million fund to support regional economic development plans and initiatives. One-third of this amount was appropriated for 2021/22 and included in the fiscal forecasts. The exact nature and timing of the remaining two-thirds are not sufficiently certain to be included in the fiscal forecasts but will likely have an impact during the forecast period.

Education

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

There is ongoing uncertainty about the impact of COVID-19 on unemployment, changes in the net migration of New Zealand residents, transitions of school leavers, and the scale of the increased enrolments in tertiary education that may result. Due to the uncertainty around the impact of COVID-19, learner demand could be higher, or lower, than the available number of funded places. During 2021, there has been significant growth in the demand for tertiary education and training (particularly for apprenticeships). There is funding pressure related to apprentices over 2021 to 2023, but ongoing funding pressure from provider-based enrolments over 2022 to 2024 is less certain.

Ka Ora, Ka Ako | Healthy School Lunch Programme (Policy Change - Expenses and Capital)

The Ka Ora, Ka Ako | Healthy School Lunch Programme was established as a prototype to test different models of delivery to students in selected schools. The programme has been expanded in both 2020 and 2021 and the fiscal forecasts provide for funding for the programme until December 2023. If the Government confirms an extension or expansion of the programme, additional ongoing funding will be required.

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

Te Pūkenga - New Zealand Institute of Skills and Technology, established in 2020, is transforming its national network of education providers (the 16 former Institutes of Technology and Polytechnics), including integrating support for work-based training such as apprenticeships. It may seek significant additional Crown funding to complete the transformation, including implementing a Unified Funding System (UFS) for vocational education and training.

Finance

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

The Crown has provided Air New Zealand with a $1.5 billion interest-bearing loan facility, of which $455 million had been drawn at 26 October 2021, to assist it through the difficult trading period that has arisen from COVID-19's impact on air travel volumes. Air New Zealand has also announced that it will raise new debt and equity capital. Subject to Cabinet being satisfied with the terms of the company's proposed capital raise, the Crown would participate in an equity capital raise by purchasing the number of new shares necessary to maintain a majority shareholding. Air New Zealand's intention is that the Crown loan will be repaid from the proceeds of the proposed capital raise. The size and terms of the capital raise and the future debt/equity mix for Air New Zealand are still being determined, and therefore the fiscal impacts on the Government cannot be determined at this time.

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

The fiscal forecasts already include an assumed fiscal impact from the Large Scale Asset Purchases (LSAP) programme and the Funding for Lending Programme, which have been implemented by the Reserve Bank. There is a risk that the fiscal impact of both these programmes may differ from what is assumed in the fiscal forecasts. This may include changes to expenses from the LSAP programme as a result of interest rate risk. Any additional use of Alternative Monetary Policy tools in response to future shocks could impact key fiscal indicators.

Depositor Compensation Scheme (Policy Change - Revenue and Expenses)

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

Health

Health Capital Pressure (Cost Pressure or Variance - Capital)

Capital pressures relating mainly to hospitals, but also to the Ministry of Health and other parts of the health system, remain significant over the forecast period. Asset condition issues, pressures arising from demographic change (population growth and an ageing population), and information technology capability all need to be addressed and will require more resourcing than is in the fiscal forecasts.

Internal Affairs

National Archival and Library Services Storage Capacity (Policy Change - Expenses and Capital)

There are capacity and condition issues with the current property portfolio for the storage of New Zealand's documentary heritage. Budget 2019 and Budget 2020 provided funding for the development and subsequent lease of the new Wellington Archives New Zealand facility and the land purchase and design for a new Regional Shared Repository (RSR). Funding in excess of what is provided for in the fiscal forecasts will be needed for the construction of the new RSR to respond to forecast storage growth to 2050 for the three institutions (Archives New Zealand, National Library of New Zealand and Ngā Taonga Sound & Vision).

Local Government

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

The Three Waters Review highlighted systemic challenges facing the three waters sector including infrastructure deficiencies, asset management, service delivery, capacity and capability issues, and funding and affordability constraints. The Crown is providing funding to support the establishment of multi-regional water services entities and the transfer of associated assets, liabilities, staff and services from local authorities to those entities. It is possible that more funding than is provided for in the financial forecasts will be required to meet the establishment and transfer costs (including the possibility of costs resulting from litigation). There is also a risk that the Crown has a future financial exposure to the multi-regional water services entities that are to be established if the ownership and governance structures change from those currently agreed by Cabinet.

Māori Development

Waitangi Tribunal Recommendations and Claims (Policy Change - Expenses)

The Waitangi Tribunal has recommended government action in its reports on several claims including Wai 262, which focuses on the protection of Māori culture and identity and the nature of the Māori-Crown relationship in a post-settlement environment. The Government has identified addressing issues related to Wai 262 as a priority in its Māori manifesto. These and other issues raised through Waitangi Tribunal claims that the Government is working to address, such as Wai 2750 (relating to Housing Policy and Services), represent a fiscal risk.

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. There has been significant progress on this work during 2021, with 136 countries and territories agreeing to key design features of the solution in October. As part of this agreement, countries have agreed to a moratorium on imposing any new digital services tax on multinationals until 31 December 2023 in order to give the OECD-led solution a chance to be successfully implemented. However, the Government may consider a digital services tax if the OECD solution falters. The revenue impact of a digital services tax or OECD solution would depend on how it is designed.

Potential Tax Policy Changes (Policy Change - Revenue)

The Government's tax policy work programme (which includes international tax) was released on 20 July 2021 (see https://taxpolicy.ird.govt.nz/news/2021/2021-07-20-tax-policy-work-programme). The measures on the work programme, and their collective fiscal implications, are subject to change.

Transport

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

In addition to the risk of cost increases associated with the City Rail Link project (see separate risk on page 73), there is a risk relating to the value of the Crown's investment reflected in the fiscal forecasts. The value of the Crown's investment will depend on the final ownership structure of the City Rail Link, such as allocation of assets. The timeframe for decisions on future ownership has yet to be finalised. An agreement between Sponsors and City Rail Link Limited allows for a decision to be made as late as 2022, but this timeframe may be altered depending on the outcome of work currently underway.

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

The Auckland Light Rail Establishment Unit has prepared and provided to project sponsors an indicative business case (IBC) clarifying the strategic case for investment and presenting a short-list of options for mode and route. Three options have been shortlisted and there is a 50% likelihood that the costs of these options would be $9 billion for a surface light rail option, $14.6 billion for a tunnelled light rail option and $16.3 billion for a Light Metro option. Cabinet is yet to consider the IBC and determine a preferred mode and route. The costs and benefits of the project are expected to change as more detailed work is undertaken, informed by more detailed business case assessment, stakeholder and market engagement, detailed design, and associated master-planning. At this stage, it is not possible to determine the level of capital or operational funding contribution that may be needed from either the Crown or Auckland local government. A bespoke value capture mechanism will also be investigated. Notwithstanding the need for a mix of funding sources, a significant Crown contribution will be required to fund the project.

Future of Rail Commitments (Policy Change - Expenses and Capital)

The Crown has already provided some funding to implement the outcomes of the Future of Rail review. Further Crown funding may be sought for investment into the rail network, for maintenance and renewal through the Rail Network Investment Programme (RNIP), and replacement of the remaining ageing rolling stock.

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

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

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

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

Veterans

Veterans' Support Entitlements Liability (Cost Pressure or Variance - Expenses)

The fiscal forecasts include a $3.0 billion liability for 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 by up to 20%. As more data are collected over time, this uncertainty will reduce and the estimate of the liability will become more accurate.

Cross-portfolio

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

The Climate Change Response (Zero Carbon) Amendment Act 2019 requires the Government to set and achieve domestic greenhouse gas emissions targets and achieve emissions budgets starting in 2022 to 2025, and to contribute to the global effort under the Paris Agreement to limit global average temperature increases. New Zealand will need to pursue sizeable domestic and offshore abatement to meet its 2021 to 2030 emissions commitments under the Paris Agreement on top of its domestic commitments. 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 Government Programme (Policy Change - Expenses and Capital)

As part of its own contribution to achieving New Zealand's climate change targets, the Government has established the Carbon Neutral Government Programme, supported by the existing State Sector Decarbonisation Fund, with the aim of accelerating emission reductions and making a number of government organisations carbon neutral by 2025. Funding was provided for this in Budget 2021; however, a fiscal risk exists to the extent that government commitments are unable to be met through existing provisions in the fiscal forecasts.

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

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

Other Capital Cost Pressures (Cost Pressure or Variance - Capital)

Agencies are likely to face capital expenditure pressures related to replacing ageing infrastructure and other capital requirements driven by demand pressures. These are likely to be exacerbated by the impact from COVID-19, supply chain disruption and the tight labour market. These pressures are risks to the fiscal forecasts to the extent that they cannot be managed through agencies' existing balance sheets and baselines, new capital spending set aside in forecasts from the multi-year capital allowance, or other funding mechanisms (eg, Crown Infrastructure Partners).

Other Operating Cost Pressures (Cost Pressure or Variance - Operating)

As in previous years, agencies are likely to face operating expenditure pressures in the future as a result of changes in the demand for, and price of, the services they provide or because some of their funding is time limited. The majority of spending by agencies is not automatically adjusted for increases driven by demand or price pressures. These pressures, which are most significant in the education and health sectors, are risks to the fiscal forecasts to the extent that they cannot be managed through reprioritisation or new spending set aside in the forecasts. The Government's stated intention is that all pressures are managed through these mechanisms.

Unchanged Risks by Portfolio#

ACC

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

The Government has signalled it will review a number of Accident Compensation scheme policy settings. Some of the policy issues identified would require either legislative or regulatory change. These changes could result in a significant fiscal impact.

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

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

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

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

Biosecurity

Mycoplasma Bovis Biosecurity Response (Policy Change - Revenue and Expenses)

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

COVID-19 Response

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

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

Defence

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

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

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

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

Education

Early Learning Action Plan (Policy Change - Expenses)

Following public consultation between November 2018 and March 2019 and subsequent Cabinet approval, the Government released He Taonga te Tamaiti - Every Child a Taonga: Early Learning Action Plan 2019-2029 in December 2019. The estimated cost of the Early Learning Action Plan (ELAP) in the forecast period is approximately $1.2 billion. This estimated cost relates to actions that are indicated in the ELAP as likely to begin within the forecast period, such as improving adult-to-child ratios. There is a risk that these costs may not be met within the existing provision in the fiscal forecasts.

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

The education sector is exposed to changing levels of demand in early childhood education (ECE) and schooling, which can result from factors such as population growth and changes in participation levels. Demographic change has an impact on expenditure on ECE subsidies, especially for the 20 hours' fully subsidised entitlement for three- to five-year-olds; the per-pupil component of schools' operational funding; and schools' full-time teaching equivalent entitlement, which is based on staff-to-student ratios. In addition, the Ministry of Education faces compounding departmental operating expenditure pressures as a result of the increasing demand for, and the price of, education services, and other cost pressures experienced by its work programmes. These pressures, which include difficult-to-control inflationary pressures, represent risks to the extent that they cannot be managed through reprioritisation or new funding that does not entirely cover all demand.

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

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

Finance, Earthquake Commission

Earthquake Commission (Cost Pressure or Variance - Expenses)

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

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.

Health

Health and Disability System Reform (Policy Change - Expenses)

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

Mental Health Support for Children (Policy Change - Expenses)

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

Reducing Planned Care Waiting Lists (Policy Change - Expenses)

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

Housing

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

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

Emergency Housing Special Needs Grant (Cost Pressure or Variance - Expenses)

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

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

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

Increases to Market Rent (Cost Pressure or Variance - Expenses)

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

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

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

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

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

Revenue

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

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

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

The Research and Development (R&D) Tax Incentive allows eligible firms to receive a tax credit based on a percentage of their expenditure on R&D. Under certain circumstances, eligible firms may receive a cash payment in place of a tax credit. There is a risk that costs may differ from forecasts owing to the limited availability of data for forecasting purposes on future R&D expenditure, including how firms' R&D expenditure will respond to the subsidy.

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

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

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

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

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

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

Social Development and Employment

Changes to the Welfare System (Policy Change - Expenses)

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

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 $1,000. 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.

Speaker of the House of Representatives

Future Parliamentary Accommodation (Cost Pressure or Variance - Capital)

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

Tourism

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

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

Treaty of Waitangi Negotiations

Relativity Clause (Cost Pressure or Variance - Expenses)

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

Treaty Settlement Forecasts (Cost Pressure or Variance - Expenses)

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

Cross-portfolio

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

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

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

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

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

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

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.

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

A wide range of government services are funded through third-party fees and charges. Demand for these services can vary, with a direct effect on revenue received. If revenue collected is lower than the total costs of providing the service, there is a risk that the Government may need to provide additional funding or that changes will be required to the way government services are delivered, which could result in costs to the Crown. In particular, measures related to COVID-19, such as the border closure have significantly reduced the third-party revenue some agencies receive.

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

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

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

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

Risks Removed Since the Budget Update#

Contingent Liabilities and Contingent Assets#

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

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

In general, if a guarantee or indemnity qualifies as a financial guarantee contract, or the amount becomes sufficiently reliable to record as a liability, it would reduce the operating balance and net worth. When a contingent liability crystallises, and is settled, there is an increase in net core Crown debt. In the case of some contingencies (eg, uncalled capital), the negative impact would be restricted to net core Crown debt because the cost would be offset by the acquisition of an asset.

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

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

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

Some contingencies of the Crown are not able to be quantified. We have disclosed unquantifiable contingent liabilities and unquantifiable contingent assets that potentially could have an impact in excess of $20 million and are not expected to be remote.[14]

The contingencies have been stated as at 31 October 2021, being the latest set of published Financial Statements of the Government.

Statement of Contingent Liabilities and Contingent Assets

Quantifiable Contingent Liabilities

Quantifiable Contingent Assets

Unquantifiable Contingent Liabilities

Description of Quantifiable Contingent Liabilities (over $100 million)

Uncalled Capital

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

The Crown's uncalled capital subscriptions over $100 million are outlined on page 92.

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.

New Zealand Export Credit guarantees

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

Legal proceedings and disputes

Inland Revenue - legal tax proceedings

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

New Zealand Transport Agency

There are claims of $83.9 million relating to a variety of roading and other contract disputes including contractual claims arising from property acquisitions and disposals.

Waka Kotahi is currently working with roading contractors, and public-private partnership operators on COVID-19-related claims resulting from lockdowns and restrictions imposed by the Government since 17 August 2021.

Apart from the above matters, there is continual dialogue between Waka Kotahi and its contractors over technical and commercial matters that may result in material dispute between the parties.

Other quantifiable contingent liabilities

Unclaimed monies

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

Ministry for Primary Industries - Biosecurity Act 1993 compensation

Under section 162A of the Biosecurity Act 1993, compensation may be payable as a result of the exercise of powers to manage or eradicate organisms. Compensation is payable where there are verifiable losses as a result of the damage to or destruction of a person's property or restrictions on the movement of a person's goods. The Ministry for Primary Industries has been notified compensation will be sought following biosecurity responses for incursions including Bonamia ostreae, as well as claims for losses incurred following the destruction of bud-stock, known as the post-entry quarantine (PEQ) response. While these claims can be quantified, they do not meet the tests for recognising a provision.

Air New Zealand Partnership

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

Waitangi Tribunal Binding Recommendations (New)

On 29 September 2021, the Waitangi Tribunal issued interim recommendations under section 8A of the Treaty of Waitangi Act 1975 in relation to the transfer of 7,676 hectares of the Mangatū Crown forest licensed land to a trust comprising Te Aitanga a Māhaki, Ngā Uri o Tamanui and Te Whānau a Kai. Should the recommendation become final, compensation will be payable to the recipients under Schedule 1 to the Crown Forest Assets Act 1989. The Tribunal has indicated the value of the compensation is approximately $200 million. The Crown is considering whether to seek judicial review of the Tribunal's interim recommendations, including the Tribunal's approach to assessing compensation. If the Crown decides to seek review, a stay of the interim recommendations will be sought pending the outcome of judicial review.

Description of Unquantifiable Contingent Liabilities

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

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

Indemnities

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

Legal claims and proceedings

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

Accident Compensation Corporation (ACC) litigation

Litigation involving ACC arises mainly from challenges to operational decisions made by ACC through the statutory review and appeal process. No accrual has been made for contingent liabilities, which could arise, as these disputes are issue based and ACC's active management of litigation means that it will be either settling or defending, depending on the merits of the issue in dispute.

Aquaculture Settlements

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

Ministry for Primary Industries - Biosecurity Act compensation

Under section 162A of the Biosecurity Act 1993, compensation may be payable as a result of the exercise of powers to manage or eradicate organisms. Compensation is payable where there are verifiable losses as a result of the damage or destruction of a person's property, or restrictions on the movement of a person's goods. The Ministry for Primary Industries has been notified that compensation will be sought for incursions including Mycoplasma bovis outbreak remains unquantified. This is due to the Ministry for Primary Industries being unable to reliably estimate the period of time losses will be incurred as a result of its actions under the Biosecurity Act 1993.

Treaty of Waitangi claims

Under the Treaty of Waitangi Act 1975, any Māori may lodge certain claims relating to land or actions counter to the principles of the Treaty with the Waitangi Tribunal. Where the Tribunal finds a claim is well founded, it may recommend to the Crown that action be taken to compensate those affected. The Tribunal can make recommendations that are binding on the Government with respect to land that has been transferred by the Government to a State-owned enterprise (SOE), universities, wānanga or Te Pūkenga - New Zealand Institute of Skills and Technology, or is subject to the Crown Forest Assets Act 1989.

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

Proprietors of Wakatū

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

Other unquantifiable contingent liabilities

Accident Compensation Corporation (ACC) sensitive claims

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

Criminal Proceeds (Recovery) Act 2009

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

Environmental liabilities

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

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

Holidays Act compliance

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

Pay Equity Claims - See page 89

Treaty of Waitangi claims - settlement relativity payments - See page 88

Contingent Assets

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

Forecast Financial Statements#

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

They are based on the accounting policies and assumptions that follow. As with all such assumptions, there is a degree of uncertainty surrounding them. This uncertainty increases as the forecast horizon extends. 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 25 November 2021, where these can be reliably measured.

The finalisation dates and key assumptions that underpin the preparation of the Forecast Financial Statements are outlined in the Fiscal Outlook chapter (pages 27 to 52).

Statement of Accounting Policies#

Significant Accounting Policies

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

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

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

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

Forecast Policies

The Forecast Financial Statements have been prepared on the basis of the Treasury's best professional judgement. Actual financial results for the periods covered are likely to vary from the information presented in these forecasts. Factors that may lead to a material difference between information in these Forecast Financial Statements and the actual reported results in future years are set out in the Risks to the Fiscal Forecasts chapter on pages 53 to 101. Key forecast assumptions are set out on pages 29 to 30.

Reporting and Forecast Period

The reporting periods for these Forecast Financial Statements are the years ended 30 June 2022 to 30 June 2026. The “Previous Budget” figures are the original forecasts to 30 June 2022 as presented in the 2021 Budget Update and the “2021 Actual” figures are the audited actual results reported in the Financial Statements of Government (FSG) for the year ended 30 June 2021.

Government Reporting Entity as at 25 November 2021#

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 are not listed separately).

Core Crown Segment

Departments

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

Offices of Parliament

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

Others

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

State-owned Enterprises Segment

State-owned Enterprises

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

Mixed ownership model companies (Public Finance Act Schedule 5)

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

Other

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

Crown Entities Segment

Crown Entities

1. Accident Compensation Corporation
2. Accreditation Council
3. Arts Council of New Zealand Toi Aotearoa
4. Broadcasting Commission
5. Broadcasting Standards Authority
6. Callaghan Innovation
7. Children's Commissioner
8. Civil Aviation Authority of New Zealand
9. Climate Change Commission
10. Commerce Commission
11. Criminal Cases Review Commission
12. Crown Irrigation Investments Limited
13. Crown Research Institutes (7)
14. District Health Boards (20)
15. Drug Free Sport New Zealand
16. Earthquake Commission
17. Education New Zealand
18. Electoral Commission
19. Electricity Authority
20. Energy Efficiency and Conservation Authority
21. Environmental Protection Authority
22. External Reporting Board
23. Financial Markets Authority
24. Fire and Emergency New Zealand
25. Government Superannuation Fund Authority
26. Guardians of New Zealand Superannuation
27. Health and Disability Commissioner
28. Health Promotion Agency
29. Health Quality and Safety Commission
30. Health Research Council of New Zealand
31. Heritage New Zealand Pouhere Taonga
32. Human Rights Commission
33. Independent Police Conduct Authority
34. Kāinga Ora - Homes and Communities
35. Law Commission
36. Maritime New Zealand
37. Mental Health and Wellbeing Commission
38. Museum of New Zealand Te Papa Tongarewa Board
39. New Zealand Antarctic Institute
40. New Zealand Artificial Limb Service
41. New Zealand Blood Service
42. New Zealand Film Commission
43. New Zealand Growth Capital Partners Limited
44. New Zealand Infrastructure Commission/Te Waihanga
45. New Zealand Lotteries Commission
46. New Zealand Productivity Commission
47. New Zealand Qualifications Authority
48. New Zealand Symphony Orchestra
49. New Zealand Tourism Board
50. New Zealand Trade and Enterprise
51. New Zealand Transport Agency
52. New Zealand Walking Access Commission
53. Office of Film and Literature Classification
54. Pharmaceutical Management Agency
55. Privacy Commissioner
56. Public Trust
57. Radio New Zealand Limited
58. Real Estate Agents Authority
59. Retirement Commissioner
60. School Boards of Trustees (2,423)
61. Social Workers Registration Board
62. Sport and Recreation New Zealand
63. Takeovers Panel
64. Taumata Arowai—the Water Services Regulator
65. Te Pūkenga—New Zealand Institute of Skills and Technology
66. Te Reo Whakapuaki Irirangi (Māori Broadcasting Funding Agency)
67. Te Taura Whiri i te Reo Māori (Māori Language Commission)
68. Television New Zealand Limited
69. Tertiary Education Commission
70. Transport Accident Investigation Commission
71. WorkSafe New Zealand

Organisations listed in Schedule 4 of the Public Finance Act 1989

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

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

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

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

1. Te Urewera

Others

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

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

Crown entities

1. Tertiary Education Institutions (11)
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#

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#

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 2021. 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), the rate of inflation 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 2021. The equivalent single effective discount rate, taking into account ACC's projected future cash flow patterns, is 2.87% and allows for a long-term discount rate of 4.30% from 2065.

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

Presentation approach

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

NOTE 6: Forecast New Spending and Top-down Adjustments

Unallocated operating contingencies represent operating expenses included in Budget 2021 and previous Budgets that have yet to be allocated to departments. Forecast new spending indicates the expected spending increases from future Budgets.

The forecast for new operating spending for Budget 2022 is $6.0 billion. Some of this allowance has been pre-committed as at the forecast finalisation date of 25 November 2021, with only the unallocated portion of the allowance included in this note.

As signalled in the 2022 Budget Policy Statement there will be scope for the Government to use future Budget operating allowances to fund multi-year funding decisions. This is likely to mean the amounts allocated by Budget year in the above table may differ. However, the impacts by fiscal year may not be affected.

The Government has signalled a capital allowance of $9.8 billion for Budget 2022 through to Budget 2025. As at 25 November 2021, $9.2 billion of funding is assumed to remain available. Unallocated capital contingencies represent capital spending yet to be allocated to departments. Forecast new capital spending indicates the funding available for capital spending from future Budgets.

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

NOTE 8: Financial Assets (including receivables)

NOTE 9: Student Loans

NOTE 10: Property, Plant and Equipment

1. Using a revaluation methodology unless otherwise stated.
2. Additions do not include any purchases which may result from the allocation of the forecast for new capital spending (separately disclosed in the Statement of Financial Position).

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 2021. The liability arises from closed schemes for past and present public sector employees as set out in the Government Superannuation Fund Act 1956. A Projected Unit Credit method was used to calculate the liability as at 30 June 2022, based on membership data as at 30 June 2021. 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 2021.

Other principal long-term financial assumptions were an inflation rate, as measured by the Consumers Price Index (CPI), of 2.01% p.a. for the year ended 30 June 2022 It stays at this level until 2058 when it decreases to 2.0% p.a. and remains at 2.0% p.a. for all years after that. In addition an annual salary growth rate, before any promotional effects, of 2.5% p.a. (2.5% p.a. at 30 June 2020).

The 2021/22 projected decrease in the net GSF liability is $1,004 million, reflecting a decrease in the GSF liability of $850 million and an increase in the GSF net assets of $154 million.

The overall decrease in the GSF liability of $850 million includes an actuarial gain (which decreases the liability) between 1 July 2021 and 30 June 2022, of $32 million, largely owing to movements in the demographic assumptions ($227 million) which are largely offset by changes in the CPI rates ($207 million). The difference of $818 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 $154 million includes a revaluation gain of $301 million reflecting the updated market value of assets at 30 September 2021. The balance of $147 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 2021/22 onwards reflect the net of the expected current service cost, interest cost, investment returns and contributions.

NOTE 14: Provisions

Provision for NZ ETS credits

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

Emitters can meet their emissions obligations by surrendering NZUs they hold to the Crown. NZUs purchased through Government auctions result in cash receipts for the Crown. NZUs purchased at Government auctions result in an increase to the NZ ETS provision as new units are created, but not immediately surrendered.

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 price at 30 September 2021 ($64.50).

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.

NOTE 16: Changes in Net Worth

Statement of Segments#

Statement of Financial Performance
for the year ended 30 June 2021

Statement of Financial Position
as at 30 June 2021

Forecast Statement of Segments (continued)#

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

Statement of Financial Performance
for the year ended 30 June 2026

Statement of Financial Position
as at 30 June 2026

Fiscal Indicator Analysis#

The purpose of the following fiscal indicator analysis is to provide a link between the Forecast Financial Statements (pages 109 to 131) based on GAAP, and the key fiscal indicators used to measure performance against the fiscal objectives set out in the Fiscal Strategy Report and the Budget Policy Statement.

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)