Year end financial statements

Financial Statements of the Government of New Zealand for the Year Ended 30 June 2020

The Office of the Auditor-General advised the Treasury of a referencing error in the audit report, on page 37 of the Financial Statements of the Government. The error has now been corrected. Previously, the key audit matter about the Accident Compensation Corporation’s outstanding claims liability referred to an amount of $62.9 billion on page 75. It has been corrected to refer to an amount of $61.5 billion on page 77.

 

Formats and related files

Ministerial Statement#

The Crown accounts for the year to 30 June (2019/20) reflect the Government's decision to go hard and early to cushion the blow of COVID-19 for business and households while making sure New Zealanders were supported with investments in critical public services like health and education, and investing in infrastructure to future-proof the economy, boost productivity and create jobs.

The 2019/20 accounts also show how New Zealand's economy has been stronger-than-expected during the COVID-19 pandemic, with a lower deficit, higher tax take and lower net debt than forecast by the Treasury at the 2020 Budget.

The world is experiencing a 1-in-100 year economic shock as a result of COVID-19 and New Zealand is well-placed to handle the impacts. Careful management of the Government books meant we went into this global pandemic running Budget surpluses, and with some of the lowest net debt in the world. New Zealand will continue to have a strong balance sheet and low debt compared to other countries, putting us in a strong position to recover and rebuild from COVID-19.

The Crown accounts show the operating balance before gains and losses (OBEGAL) was a deficit of $23.1 billion (7.5% of GDP) in 2019/20. While the deficit was expected due to the impact of COVID-19, it was $5.2 billion better than what the Treasury forecast in Budget 2020, due to a stronger-than-expected economy and careful management of Government spending.

Core Crown tax revenue of $85.1 billion was $2.8 billion higher than forecast in the Budget. This reflects the stronger-than-expected economy as New Zealand got on top of COVID-19 quickly and opened up the economy to give the recovery a head start.

Core Crown expenditure was $5.2 billion lower than forecast at $114.0 billion. An increase in expenditure from the previous year was due to COVID-related expenses, including the Wage Subsidy Scheme, which had paid out $12.1 billion to businesses to protect 1.7 million jobs by 30 June 2020. The COVID Response and Recovery Fund (CRRF) was also created during the 2019/20 year. At 30 June, $26.0 billion had been allocated from the CRRF to support the early COVID response.

The Government will continue to monitor spending carefully to ensure value for money as we recover and rebuild from the impacts of COVID-19.

Net core Crown debt was 27.0% of GDP at 30 June, below the 30% forecast in the May Budget. Net debt across advanced economies around the world heading into COVID-19 was above 80% of GDP, with countries like the UK recently crossing 100%.

During the 2019/20 year, the Government borrowed at record low interest rates for long-term infrastructure investments to future-proof the economy, boost productivity and create jobs. Total Crown infrastructure investment was $9.1 billion during the year, $0.5 billion higher than the previous year, and up $3.0 billion from 2017. Core Crown capital investment was $9.4 billion during the year, including $1.5 billion invested into the Super Fund to help cover future retirement costs. The core Crown residual cash deficit was $23.7 billion, compared to a forecast deficit of $32.0 billion at the Budget. This meant the net debt position was less than forecast.

The COVID-19 pandemic will continue to have an ongoing impact on the global and New Zealand economies for a number of years. The 2019/20 Crown accounts show the Government is in a strong position to continue to use the strength of its balance sheet to support businesses and households through this 1-in-100 year shock, and position the economy to recover and rebuild from COVID-19.

Hon Grant Robertson
Minister of Finance

5 November 2020

Statement of Responsibility#

These financial statements have been prepared by the Treasury in accordance with the provisions of the Public Finance Act 1989. The financial statements comply with New Zealand generally accepted accounting practice and with Public Benefit Entity Accounting Standards (PBE standards) for the public sector.

The Treasury is responsible for establishing and maintaining a system of internal control designed to provide reasonable assurance that the transactions recorded are within statutory authority and properly record the use of all public financial resources by the Crown. To the best of my knowledge, this system of internal control has operated adequately throughout the reporting period.

Caralee McLiesh
Secretary to the Treasury

5 November 2020

I accept responsibility for the integrity of these financial statements and that the information they contain complies with the Public Finance Act 1989. The audit of the financial statements has been delayed due to COVID-19.

In my opinion, these financial statements fairly reflect the financial position of the Crown as at 30 June 2020 and its operations for the year ended on that date.

Hon Grant Robertson
Minister of Finance

5 November 2020

Commentary on the Financial Statements#

Fiscal Overview#

Fiscal Overview

Fiscal Strategy#

The Government's fiscal strategy is expressed through its long-term objectives and short-term intentions for fiscal policy. The Government's fiscal policy is pursued in accordance with the principles of responsible fiscal management set out in the Public Finance Act 1989.

The main purpose of the Government's fiscal indicators is as a communications device, designed with the objective of improving the quality of information available to inform and analyse how the Government is performing against its fiscal strategy. These indicators can be generally accepted accounting practice (GAAP) measures but can also be derived from the GAAP numbers presented in the financial statements.

Further information on the Government's fiscal strategy can be found in The Wellbeing Budget published with the Government's budget on 14 May 2020.

Table 1 - Key fiscal indicators
Year ended 30 June
$ million
Actual
2016
Actual
2017
Actual
2018
Actual
20191
Actual
2020
Forecast
30 June 2020
Budget
20191
Budget
2020
Core Crown tax revenue2 70,445 75,644 80,224 86,468 85,102 89,245 82,330
Core Crown expenses 73,929 76,339 80,576 86,959 108,832 93,344 113,998
Residual cash (1,322) 2,574 1,346 (710) (23,692) (4,191) (32,031)
Gross debt3 86,928 87,141 88,053 84,449 102,257 86,845 99,427
Net core Crown debt4 61,880 59,480 57,495 57,736 83,375 64,695 88,935
Total borrowings 113,956 111,806 115,652 110,248 152,717 118,005 164,799
OBEGAL5 1,831 4,069 5,534 7,429 (23,057) 1,155 (28,293)
Operating balance5 (5,369) 12,317 8,396 389 (30,040) 4,650 (35,491)
Net worth attributable to the Crown 89,366 110,532 129,644 136,949 110,320 131,846 100,093
Total net worth 95,521 116,472 135,637 143,339 115,943 137,680 106,018
% of GDP              
Core Crown tax revenue2 27.3% 27.5% 27.4% 28.5% 27.6% 28.2% 28.0%
Core Crown expenses 28.7% 27.8% 27.5% 28.6% 35.3% 29.5% 38.7%
Residual cash (0.5)% 0.9% 0.5% (0.2)% (7.7)% (1.3)% (10.9)%
Gross debt3 33.7% 31.7% 30.0% 27.8% 33.2% 27.4% 33.8%
Net core Crown debt4 24.0% 21.7% 19.6% 19.0% 27.0% 20.4% 30.2%
Total borrowings 44.2% 40.7% 39.5% 36.3% 49.5% 37.2% 56.0%
OBEGAL5 0.7% 1.5% 1.9% 2.4% (7.5)% 0.4% (9.6)%
Operating balance5 (2.1)% 4.5% 2.9% 0.1% (9.7)% 1.5% (12.1)%
Net worth attributable to the Crown 34.7% 40.2% 44.2% 45.1% 35.8% 41.6% 34.0%
Total net worth 37.1% 42.4% 46.3% 47.2% 37.6% 43.4% 36.0%
  1. The 'Actual 2019' and 'Budget 2019' comparators have been restated for the impact of new accounting standards effective from 1 July 2019. At this point in time, the earlier years in the table have not been restated. Refer to note 28 in the financial statements for more details.
  2. Core Crown tax revenue is higher than total Crown tax revenue owing to taxes paid by entities consolidated within Government.
  3. Gross sovereign-issued debt excluding Reserve Bank of New Zealand (RBNZ) settlement cash and RBNZ bills.
  4. Net core Crown debt excluding the New Zealand Superannuation Fund (NZS Fund) and advances.
  5. Excluding minority interests.

The table below shows the Government's performance against its fiscal strategy with regards to the short-term fiscal intentions.

Table 2 - Progress at 30 June 2020 against the Government's short-term fiscal intentions set at Budget 2020
Fiscal Strategy Report 2020 Fiscal Position 2020[1]

Debt

The intention is to allow the level of net core Crown debt to rise in the short term to fight COVID-19, cushion its impact and position New Zealand for recovery.

Net core Crown debt (excluding NZS Fund and advances) is forecast to be 30.2% of GDP in 2019/20, 49.8% of GDP in 2021/22 and 53.6 per cent of GDP in 2023/24.

Gross sovereign-issued debt (including Reserve Bank settlement cash and Reserve Bank bills) is forecast to be 74.0% of GDP in 2023/24.

This assumes a multi-year capital allowance of $8.4 billion for Budget 2020 and the next three Budgets.

Debt

Net core Crown debt (excluding NZS Fund and advances) at 30 June 2020 was 27.0% of GDP (2019: 19.0%).

Gross sovereign-issued debt (including Reserve Bank settlement cash and Reserve Bank bills) at 30 June 2020 was 40.3% of GDP (2019: 30.0%).

Operating balance

The intention is to run operating deficits in the short term to fight COVID-19, cushion its impact and position New Zealand for recovery. This is enabled by our strong starting position and low net core Crown debt going into this pandemic.

The operating balance (before gains and losses) is forecast to be -9.6% of GDP in 2019/20, improving to -1.3% of GDP in 2023/24.

Operating balance

The operating balance (before gains and losses) for the year ended 30 June 2020 was a deficit of 7.5% of GDP (2019: surplus of 2.4%).

The operating balance for the year ended 30 June 2020 was a deficit of 9.7% of GDP (2019: surplus of 0.1%).

Expenses

The intention is to ensure expenses are consistent with the operating balance objective.

Core Crown expenses are forecast to fall from 38.7% of GDP in 2019/20 to 30.2% of GDP in 2023/24.

Total Crown expenses are forecast to be 38.1% of GDP in 2023/24.

This assumes new operating allowances of $3.3 billion per year in Budget 2020, $2.4 billion per year in Budget 2021, $2.4 billion per year in Budget 2022 and $2.6 billion per year in Budget 2023.

Expenses

Core Crown expenses for the year ended 30 June 2020 were 35.3% of GDP (2019: 28.6%).

Total Crown expenses for the year ended 30 June 2020 were 45.1% of GDP (2019: 36.7%).

Revenues

The intention is to ensure revenue is consistent with the operating balance objective.

Total Crown revenues are forecast to be 36.9% of GDP in 2023/24.

Core Crown revenues are forecast to be 29.4% of GDP in 2023/24.

Core Crown tax revenues are forecast to be 27.3% of GDP in 2023/24.

Revenues

Total Crown revenues for the year ended 30 June 2020 were 37.6% of GDP (2019: 39.2%).

Core Crown revenues for the year ended 30 June 2020 were 29.8% of GDP (2019: 30.8%).

Core Crown tax revenues for the year ended 30 June 2020 were 27.6% of GDP (2019: 28.5%).

Net worth

The intention is to use the Crown's net worth to fight COVID-19, cushion its impact and position New Zealand for recovery. Significant risks will be transferred onto the Crown's balance sheet through the response period.

Total net worth attributable to the Crown is forecast to be 8.9% of GDP in 2023/24.

Total Crown net worth is forecast to be 10.3% of GDP in 2023/24.

Net worth

Total net worth attributable to the Crown as at 30 June 2020 was 35.8% of GDP (2019: 45.1%).

Total Crown net worth as at 30 June 2020 was 37.6% of GDP (2019: 47.2%).

Fiscal Indicators#

OBEGAL (Operating Balance before Gains and Losses)

The OBEGAL deficit of $23.1 billion for 2019/20 represents a fall of $30.5 billion from the surplus recognised last year. This is largely a reflection of the impacts of the COVID-19 pandemic and the Government's response to it.

A slowdown in the economy has contributed to the decrease in core Crown tax revenue of $1.4 billion in the year to 30 June 2020. In addition, the Government's fiscal response has driven a significant increase in core Crown expenses, which have increased by $21.8 billion from the previous year. When this is combined with the decline in net surplus from State-owned Enterprises (SOEs) and Crown entities, there is a resulting OBEGAL deficit. The movements in revenue and expenses are discussed further on pages 15 to 18.

Figure 1 shows the composition of OBEGAL from the different reporting segments of the Government. The most significant change is in the core Crown segment, which reported an OBEGAL deficit of $16.9 billion, a drop of $23.4 billion from the surplus reported last year. This is largely attributable to the rise in core Crown expenses discussed on pages 17 and 18.

Figure 1 - Components of OBEGAL by segment

Figure 1 - Components of OBEGAL by segment

Source:   The Treasury

The Crown entity segment reported a deficit of $4.1 billion, $2.6 billion more than the previous year's deficit of $1.5 billion. The primary drivers of this increase are higher District Health Board (DHB) health and personnel expenses, increased Accident Compensation Corporation (ACC) insurance expenses and an increase in New Zealand Transport Agency (NZTA) transport operating expenditure. In addition, Earthquake Commission (EQC) reinsurance revenues have reduced as the prior year results included a significant downward revision in reinsurance receivables.

For the year ended 30 June 2020, the SOE segment reported a deficit $0.9 billion, a fall of $4.1 billion from the $3.2 billion surplus last year. The current year deficit is partly owing to lower sales of goods and services due to the disruption caused from the COVID-19 pandemic. The rise in SOE expenditure is driven by the fair value write down of aircraft of $1.1 billion but also owing to the 2018/19 expense being lower due to a one-off impairment reversal in 2018/19 as discussed on page 18.

Despite the increase in the deficit from the previous year, the OBEGAL deficit was $5.2 billion lower than forecast in Budget 2020. The variance against Budget 2020 is primarily owing to favourable variances for core Crown revenue and core Crown expenses which have been partially offset by higher than forecast Crown entity and SOE deficits of $1.3 billion and $0.9 billion, respectively (discussed further on pages 26 and 27).

Operating Balance

Overall, total net losses for the year were $8.7 billion, largely owing to $6.0 billion of losses in relation to the valuation of the long-term liability for ACC outstanding claims, $3.3 billion of losses recognised relating to the Large Scale Asset Purchase (LSAP) programme (refer to pages 20 and 21), and $1.1 billion in relation to the Emissions Trading Scheme (ETS). These movements are discussed further on page 19. The valuation losses were partially offset by $1.9 billion in investment gains mostly from the NZS Fund and ACC investment activities.

Figure 2 - Operating balance (excluding minority interests)

Figure 2 - Operating balance (excluding minority interests)

Source:   The Treasury

When these net losses are combined with the OBEGAL deficit (and including surpluses from associates and joint ventures), the operating balance for 2019/20 was a deficit of $30.0 billion.

Residual Cash

In the year to 30 June 2020, there was a residual cash deficit of $23.7 billion. This was a result of a net operating cash flow deficit of $14.3 billion, combined with a $9.4 billion deficit in net cash flows from core Crown capital spending. This is a $23.0 billion increase in the residual cash deficit from last year.

Figure 3 - Core Crown residual cash

Figure 3 - Core Crown residual cash

Source:  The Treasury

Operating payments were $103.5 billion, an increase of $20.5 billion compared to last year. The increase in operating payments is broadly in line with the increase in core Crown expenses (discussed on pages 17 and 18) and largely reflects the Government's fiscal support measures in response to the COVID-19 pandemic.

Capital spending for 2019/20 totalled $9.4 billion, an increase of $2.7 billion from the previous year. Analysis of capital cash flows by sector excluding NZS Fund shows that 54% of capital spending ($4.3 billion) was within the transport and economic sectors. The total spend in the transport sector was $2.5 billion (32%), largely for the state highway network. The economic sector spent $1.8 billion (22%) which primarily relates to the Small Business Cashflow (Loan) Scheme (SBCS) loans. The education and defence sectors had the third largest spends at 12% each.

The residual cash deficit was $8.3 billion lower than the deficit forecast at Budget 2020, largely as a result of lower than forecast operating payments of $5.7 billion and higher than forecast core Crown tax receipts of $2.3 billion. In addition, capital payments were $0.9 billion lower than forecast.

Net Core Crown Debt

Net core Crown debt has increased by $25.7 billion from $57.7 billion in 2018/19 to $83.4 billion in 2019/20. As a share of the economy, net core Crown debt increased to 27.0% of GDP (compared to 19.0% of GDP a year earlier). The cash shortfall of $23.7 billion is the main driver of the increase, as explained in the residual cash section above.

Figure 4 - Net debt

Figure 4 - Net debt

Source:  The Treasury

In addition to the residual cash deficit, the LSAP programme has adversely impacted net core Crown debt by $3.3 billion through losses reported as a consequence of the repurchase of government bonds (as discussed on pages 20 and 21).

The net core Crown debt balance at 30 June 2020 was $5.5 billion below forecast at Budget 2020, mainly driven by the residual cash deficit being $8.3 billion lower than Budget 2020. However, offsetting this favourable residual cash variance is the impact of the LSAP programme. The significant expansion of the programme has adversely impacted net core Crown debt as described on pages 20 and 21. The programme expanded from $30 billion in March 2020 to $60 billion at 30 June 2020 (in August 2020 the programme increased further, to $100 billion).

Gross Debt

Gross debt, which reflects the borrowings of the core Crown, increased by $17.9 billion, from $84.4 billion in 2018/19 to $102.3 billion this year. As a percentage of the economy, gross debt grew to 33.2% of GDP (27.8% of GDP a year earlier).

Gross debt at $102.3 billion was $2.8 billion higher than forecast at Budget 2020, which is largely owing to issuance of treasury bills being $2.2 billion higher than forecast. Treasury bills are a short-term liquidity tool and issuance of these bills was higher than forecast at Budget 2020 in order to front load funding requirements as part of the Crown’s borrowing programme (refer to box on pages 25).

Fiscal impacts of COVID-19

The COVID-19 pandemic has had a significant impact on the Government's results for the 2019/20 fiscal year, shown through a large operating balance deficit, increasing debt levels and a fall in net worth.

The pandemic contributed to an economic slowdown, with a 12.2% contraction in GDP reported for the June 2020 quarter. In response to the fall in economic activity, both fiscal (Government's response to COVID-19) and monetary policy (Reserve Bank's response) support measures were implemented to cushion the impact on the domestic economy. This has led to a deterioration in the Government's finances in the last quarter of 2019/20, from the relatively strong position at the beginning of the calendar year.

Core Crown tax revenue

Prior to April 2020, monthly core Crown tax revenue was consistently higher than the levels seen in the 2018/19 fiscal year as shown in Figure 5. This reflects the strong and stable economic conditions prevailing prior to the onset of the COVID-19 pandemic. From April 2020, reduced economic activity owing to alert level and border restrictions led to lower core Crown tax revenue being recognised in the quarter to June 2020, compared to the 2018/19 fiscal year.

Figure 5 - Core Crown tax revenue by month

Figure 5 - Core Crown tax revenue by month

Source:  The Treasury

Figure 6 - Core Crown expenses by month

Figure 6 - Core Crown expenses by month

Source:  The Treasury

In addition, measures such as the tax loss carry-back scheme have contributed to the lower tax revenue. Businesses that are expected to make a loss in either the 2019/20 year or the 2020/21 year are able to estimate the loss and use it to offset profits from past years. The impact from using this policy is reported as a reduction in tax revenue.

Core Crown expenses

Core Crown expenses were $108.8 billion, an increase of $21.8 billion from the 2018/19 fiscal year, Figure 6 illustrates that much of the increase in core Crown expenses occurred from March 2020 onwards, with a large portion of this increase attributable to the Government's fiscal support measures in response to the COVID-19 pandemic.

The Government introduced the wage subsidy scheme in March 2020 to support employers adversely affected by the COVID-19 pandemic. The payments under the scheme are reported as transfer payments and subsidies and total $12.1 billion up to 30 June 2020 (refer note 8 in the financial statements).

Other COVID-19 related response measures have also contributed to the increase in expenses in the 2019/20 fiscal year, such as the SBCS and the Business Finance Guarantee Scheme. For more details refer to note 3 in the financial statements.

Fiscal impacts of monetary policy

The LSAP programme, introduced by the Reserve Bank to lower borrowing costs by repurchasing Government bonds on the secondary market, has led to $3.3 billion of losses being recognised in the Statement of Financial Performance. The fiscal implications of the LSAP programme are discussed further in the LSAP box on pages 20 and 21.

The reduced interest costs in the economy also have a pervasive effect on the fiscal indicators, including lower withholding taxes, lower borrowing costs, and large increases in the value of long dated liabilities such as the ACC and Veterans Disability obligations, as the time value of money reduces.

Financial Statements Summary#

The combination of COVID-19's effect on the economy, along with the Government's fiscal response, has had a significant impact on the Government's fiscal performance and position during the 2019/20 fiscal year. This is shown in the Financial Statements of the Government through a deficit in the operating balance, an increase in borrowings and a reduction in net worth, however these results are stronger than was forecast in Budget 2020.

  • Core Crown tax revenue was $1.4 billion lower than last year but was higher than the Budget 2020 forecast by $2.8 billion (page 15).
  • Core Crown expenses were $21.8 billion higher than last year, but $5.2 billion lower than the Budget 2020 forecast (page 17).
  • The operating balance was a deficit of $30.0 billion largely a result of higher core Crown expenses of $21.8 billion along with total Crown net losses of $8.7 billion (page 19).
  • Net worth has decreased by $27.4 billion to $115.9 billion (page 22).

A comparison of the year end results against Budget 2020 is included on pages 26 to 27.

These financial statements[2] contain the audited results for the financial year ended 30 June 2020. The results are compared against the previous year and against forecasts[3] for the 2019/20 year:

  • Budget 2019 refers to the 2019 Budget Economic and Fiscal Update published in May 2019, and
  • Budget 2020 refers to the 2020 Budget Economic and Fiscal Update published in May 2020.

The financial statements of the Government received an unmodified auditor's opinion for the year ended 30 June 2020.

This commentary should be read in conjunction with the financial statements on pages 41 to 166.

Why has the presentation changed?

We have rearranged content to help clarify and tidy the Financial Statements of Government. It is important to note that there is no removal of information, rather information is now structured differently to assist understanding.

Changes include:

  • We have included a separate fiscal strategy and fiscal indicators section in the commentary to the Financial Statements of the Government, to show how the Government is performing against the fiscal strategy.
  • We have removed any fiscal strategy indicators from the financial statements that are not GAAP measures and included these as additional information. In particular, we have not presented OBEGAL, a non-GAAP measure, on the face of the Statement of Financial Performance. While this measure is derived from GAAP numbers, the operating balance is the “bottom line” GAAP performance measure in the Statement of Financial Performance.

A slowdown in the economy has contributed to a decrease in core Crown tax revenue…

The COVID-19 pandemic has caused a slowdown in the economy, with much of its impact showing in the final quarter of the 2019/20 fiscal year. Nominal GDP was $308.3 billion representing an increase of 1.5% from last year, while real GDP fell by 1.5%. Much of the expected contraction occurred in the June 2020 quarter, continuing the downturn in economic activity from the March 2020 quarter.

Figure 7 - Core Crown tax revenue and nominal GDP growth

Figure 7 - Core Crown tax revenue and nominal GDP growth

Source:  The Treasury

The reduction in real activity was contributed to by lower private consumption of 2.4% and residential investment down 12.5%. In addition, lower corporate profits and individuals' income were driven by a reduction in business investment of 10.1%.

The unemployment rate has stayed fairly static year on year, with the wage subsidy scheme providing support to employment through the June quarter.

The above economic conditions have contributed to a decrease in core Crown tax revenue, which is down $1.4 billion from last year to $85.1 billion. The one-off increase to core Crown tax revenue recognised in the 2018/19 year from the implementation of Inland Revenue’s Simplified Tax and Revenue Technology (START) system, has also contributed to the decrease in core Crown tax revenue this year. Despite this system change, prior to the impacts of the COVID-19 pandemic, core Crown tax revenue had been tracking higher than the previous year. At 29 February 2020, core Crown tax revenue was in line with forecast and $4.0 billion higher than at February 2019. This increase over the prior year fell away in the June quarter, largely driven by the economic conditions described above (refer to page 10).

The change in economic conditions has also resulted in a change in the way corporate and other persons tax revenue has been estimated in the 2019/20 year, for more details refer to the Tax Revenue Estimation box on page 16.

... while the Government's fiscal response has driven a significant increase in core Crown expenses...

As a share of the economy, core Crown expenses increased to 35.3% of GDP (28.6% of GDP in 2019); in nominal terms, core Crown expenses increased by $21.8 billion (25.2%) to $108.8 billion.

The largest driver of growth in nominal core Crown expenditure was the Government's fiscal support measures in response to the COVID-19 pandemic.

Figure 8 - Core Crown revenue and core Crown expenses

Figure 8 - Core Crown revenue and core Crown expenses

Source:  The Treasury

Within core Crown expenses, the most significant growth was in social security and welfare spending which increased by $15.3 billion, from $28.7 billion in 2018/19 to $44.0 billion in 2019/20. This increase was largely owing to the wage subsidy scheme that was put in place to support businesses and workers who were financially impacted by the COVID-19 pandemic. Payments from this scheme totalled $12.1 billion in the year to 30 June 2020.

…the net surpluses from SOEs and Crown entities have declined…

Outside of the core Crown, SOEs and Crown entities have recorded a $5.0 billion OBEGAL deficit, a change of $6.7 billion from the $1.7 billion surplus they contributed in the previous year.

A number of SOEs and Crown entities were impacted by reductions in revenue and increases in expenditure owing to the impacts of the COVID-19 pandemic. Increases in insurance expenditure also adversely impact OBEGAL for Crown entities such as ACC and the EQC.

…and net losses have negatively impacted the operating balance....

Overall, total net losses for 2019/20 were $8.7 billion. This is largely owing to $6.0 billion of losses in relation to the valuation of the long-term liability for ACC claims outstanding, $3.3 billion of losses recognised relating to the LSAP programme (refer to the box on pages 20 and 21), and $1.1 billion in relation to the Emissions Trading Scheme (ETS). These losses were partially offset by $1.9 billion in investment gains, mainly from the NZS Fund and ACC investment activities.

Figure 9 - Operating balance (excluding minority interests)

Figure 9 - Operating balance (excluding minority interests)

Source:  The Treasury

...resulting in an operating balance deficit…

All of the factors outlined above lead to an operating balance deficit of $30.0 billion for the year ended 30 June 2020.

...and a decline in net worth as the increase in liabilities exceeds the increase in assets.

The fall in net worth has been largely driven by the operating balance deficit of $30.0 billion, partially offset by revaluation uplifts of physical assets of $5.2 billion.

Figure 10 - Net worth

Figure 10 - Net worth

Source:  The Treasury

When these revaluations are combined with the operating balance deficit and minority interest transactions, net worth decreased by $27.4 billion to $115.9 billion.

Total assets grew by $28.7 billion in the 2019/20 year to reach $393.4 billion, while at the same time liabilities increased by $56.2 billion to reach $277.5 billion.

Of the increase in assets, financial assets grew the most increasing by $19.2 billion, while property, plant and equipment increased by $8.9 billion (including revaluation uplifts). Of the increase in liabilities, borrowings increased by $42.5 billion, while ACC's insurance liability increased by $8.3 billion. The increase in borrowings is largely a result of funding the Government's response to the COVID-19 pandemic.

Year end results compared to Pre-election Update

The Pre-election Update was published on 16 September 2020. While the financial statements focus on results compared to Budget 2020 forecasts, this section compares results against the recent Pre-election Update.

The Pre-election Update included the unaudited actuals for the year ended 30 June 2020. The variances in the table below reflect changes which have been made since the Pre-election Update. Overall, the June 2020 results do not indicate a substantial departure from the Pre-election Update.

Table 3 - 2020 results compared to the Pre-election Update
Year ended 30 June
$ million
Actual
2020
Pre-election
Update
2020
Variance to
Pre-election
Update
2020
Core Crown tax revenue 85,102 84,930 172
Core Crown expenses 108,832 108,832
OBEGAL1 (23,057) (23,358) 301
Operating balance1 (30,040) (30,258) 218
Residual cash (23,692) (23,692)
Total borrowings 152,717 152,737 20
Gross debt2 102,257 101,506 (751)
          as a percentage of GDP 33.2% 33.6%  
Net core Crown debt3 83,375 83,374 (1)
          as a percentage of GDP 27.0% 27.6%  
Net worth 115,943 115,729 214
          as a percentage of GDP 37.6% 38.3%  

1 Excluding minority interests. OBEGAL also excludes any losses on large scale asset purchases.
2 Gross sovereign-issued debt excluding Reserve Bank settlement cash and Reserve Bank bills.
3 Net core Crown debt excluding the NZS Fund and advances.

Core Crown tax revenue was higher than the Pre-election Update by $0.2 billion, at $85.1 billion. Final valuations for certain tax types were confirmed after the Pre-election Update and this has resulted subsequent adjustments. The majority of this increase is owing to source deductions on PAYE, which has increased by just under $0.2 billion.

The increase in core Crown tax revenue was the largest contributor to the $0.3 billion favourable variance in OBEGAL compared to the Pre-election Update. While core Crown expenses remain unchanged, late adjustments to reduce impairment expenditure and other operating expenditure totalling $0.1 billion have also contributed to the lower OBEGAL deficit.

The OBEGAL result has been partially offset by adjustments to gains and losses, resulting in the operating balance being $0.2 billion higher than reported in the Pre-election Update. Final valuations for electricity generation assets, the rail network and gains and losses on the sale of property, plant and equipment were the primary drivers of the changes to gains and losses.

There have been no significant changes to residual cash, total borrowings or net core Crown debt since the Pre-election Update.

Net worth was $214 million higher than in the Pre-election Update at $115.9 billion or 37.6% of GDP. This is primarily as a result of the improvement in the operating balance deficit compared to Pre-election Update as discussed above.

Revenue#

Total Crown revenue was $116.0 billion, a decrease of $3.1 billion from last year largely owing to lower core Crown tax revenue and lower revenue from SOE's sales of goods and services.

Table 4 - Breakdown of revenue
Year ended 30 June
$ million
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Actual
2020
Forecast
30 June 2020
Budget
2019
Budget
2020
Core Crown tax revenue 70,445 75,644 80,224 86,468 85,102 89,245 82,330
Core Crown other revenue 5,676 6,138 6,554 7,006 6,821 7,182 7,144
Core Crown revenue 76,121 81,782 86,778 93,474 91,923 96,427 89,474
Crown entities, SOEs and eliminations (other) 21,295 21,640 23,195 25,668 24,080 24,327 24,929
Total Crown revenue 97,416 103,422 109,973 119,142 116,003 120,754 114,403
% of GDP              
Core Crown tax revenue 27.3% 27.5% 27.4% 28.5% 27.6% 28.2% 28.0%
Core Crown other revenue 2.2% 2.2% 2.2% 2.3% 2.2% 2.2% 2.4%
Core Crown revenue 29.5% 29.8% 29.6% 30.8% 29.8% 30.4% 30.4%
Crown entities, SOEs and eliminations (other) 8.3% 7.9% 7.9% 8.5% 7.8% 7.7% 8.5%
Total Crown revenue 37.8% 37.6% 37.5% 39.2% 37.6% 38.1% 38.9%

Core Crown Tax Revenue

Core Crown tax revenue was $85.1 billion, down $1.4 billion (1.6%) from the year before. The decrease in core Crown tax revenue was broadly as a result of the current economic environment, with lower private consumption and decreased residential and business investment contributing to a reduction in real activity. In addition, part of the decrease was owing to the 2018/19 tax revenue being higher due to the implementation of Inland Revenue's START system in the 2018/19 year, which impacted how tax revenue was calculated and resulted in a one-off increase in that year.

Figure 11 - Core Crown tax revenue

Figure 11 - Core Crown tax revenue

Source:  The Treasury

Most major tax types, with the exception of source deductions, have decreased over the year with four tax types making up most of the movement (Table 5):

  • Source deductions increased by $2.1 billion (6.3%). This increase was owing mainly to wage increases but was also aided by the wage subsidy scheme supporting employment through the June 2020 quarter.
  • Goods and Services Tax (GST) was $0.1 billion (0.5%) lower than last year, mostly owing to weaker private consumption, residential investment and overseas tourist spending in New Zealand in the last part of 2019/20.
  • Resident withholding tax (RWT) on interest was $0.1 billion lower owing to a drop in deposit interest rates.
  • Corporate tax revenue decreased by $3.3 billion (20.7%), mainly reflecting the one-off boost in the 2018/19 year discussed above but also reflecting a $0.4 billion reduction owing to the change in estimation of tax revenue for the 2019/20 year, as discussed in the Tax Revenue box on page 16.
  • Other tax types were relatively static compared to 2018/19.
Table 5 - Increase in core Crown tax revenue
Year ended 30 June ($ billion)
2019 core Crown tax revenue 86.5
Source deductions 2.1
GST (0.1)
Resident withholding tax on interest (0.1)
Corporate tax (3.3)
2020 core Crown tax revenue 85.1

Source:  The Treasury

Tax Revenue Estimation

Total Crown tax revenue of $84.5 billion in the Statement of Financial Performance reports what is recognised in the year ended 30 June 2020. While most of this revenue is received in cash in the same financial year, these financial statements include tax receivables of $13.2 billion based on tax estimates and assessments that are not due to be paid at 30 June 2020 and $1.1 billion of past due tax debt. About half of the $13.2 billion relates to estimates and assessments of other persons and corporate tax (ie, around $6.6 billion), with the balance relating to GST and employer taxes, such as PAYE.

Recognising tax revenue for financial reporting requires a degree of estimation. This mainly affects other persons and corporate tax. For GST and PAYE, estimations are relatively straightforward and accurate because taxpayer filing dates are so regular and frequent. For example, the majority of GST is filed on monthly or two-monthly returns and PAYE is based on employment information forms filed by employers after each employee pay date. As these financial statements are prepared in the two months after 30 June 2020, Inland Revenue can look at subsequent filing information in July and August and use this to support estimates made at 30 June 2020.

Impact of the COVID-19 pandemic on income tax revenue estimation

Where taxpayers subject to the provisional tax regime have not yet filed a relevant terminal tax assessment, Inland Revenue previously used a 5 per cent uplift on the previous year's terminal income tax assessment as the basis for estimating the current year's tax revenue for financial reporting. This aligns with the standard uplift method that the majority of taxpayers use where their current year's provisional tax payments are based on 105 per cent of last year's income tax. This method suits a large number of taxpayers who generally expect to make more or roughly the same amount of profit in a coming tax year.

However, given the large and sudden reduction in economic activity with the COVID-19 pandemic, particularly with New Zealand entering the alert level four lockdown on 25 March 2020, the 105 per cent assumption is not appropriate for the estimation of income tax revenue for the financial year ended 30 June 2020. Therefore, Inland Revenue has estimated this year's income tax revenue based on the Treasury's most recent macro-economic forecasts, using the percentage movement in forecasts firms' net operating surplus. Net operating surplus is a measure of business profits and is published by Statistics New Zealand (www.stats.govt.nz).

As a result, the factor applied to prior years' terminal tax is 102.79 per cent for the 2020 income tax year and 97.26 per cent for the 2021 income tax year, rather than the standard factor of 105 per cent. In the 2021 income tax year (with the period from 1 April 2020 to 30 June 2020 included in these financial statements), the “uplift” factor applied means there is a reduction in tax revenue estimates based on prior years' tax assessments.

The change in estimation using the Treasury's forecast of firms' net operating surplus means tax revenue this year is $526 million lower than it would be if the 105 per cent uplift assumption were used, comprised of $356 million gross corporate tax revenue and $170 million other persons income tax revenue. If the firms' net operating surplus assumption changed, the impact on tax revenue would be:

Sensitivity of assumption Change Change in
income tax
2020
$m
Increase in firms' net operating surplus by +1% 148
  +5% 924
  +10% 1,848
Decrease in firms' net operating surplus by -1% 148
  -5% 924
  -10% 1,848

There is considerable uncertainty in the estimate of around $6.6 billion of other persons and corporate tax revenue at 30 June 2020 (7.8% of total tax revenue), largely as a consequence of the reduction in economic activity due to COVID-19. Changing the assumptions used in estimating the taxes firms will pay for the year ended 30 June 2020, and the portion of what they will pay for the year ended 30 June 2021, by applying macro-economic forecasts that explicitly take the impact of COVID-19 into account, is considered the most appropriate way to reflect the current economic circumstances that firms face.

Expenses#

Total Crown expenses were $138.9 billion in the current year, $27.5 billion more than last year. The majority of the increase occurred within the core Crown segment ($21.8 billion), with the remaining increase of $5.7 billion in Crown entities and SOEs (including eliminations).

Table 6 - Breakdown of expenses
Year ended 30 June
$ million
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Actual
2020
Forecast
30 June 2020
Budget
2019
Budget
2020
Social security and welfare 24,081 25,294 25,999 28,740 44,028 30,811 44,373
Health 15,626 16,223 17,159 18,268 19,891 19,198 20,104
Education 13,158 13,281 13,629 14,293 16,322 14,919 15,516
Core government services 4,102 3,957 4,670 5,166 6,083 5,610 6,685
Law and order 3,648 3,882 4,184 4,625 4,911 4,890 5,069
Other core Crown expenses 13,314 13,702 14,935 15,867 17,597 17,916 22,251
Core Crown expenses 73,929 76,339 80,576 86,959 108,832 93,344 113,998
Crown entities, SOEs and eliminations (other) 21,208 22,668 23,438 24,417 30,084 25,880 28,686
Total Crown expenses 95,137 99,007 104,014 111,376 138,916 119,224 142,684
% of GDP              
Social security and welfare 9.3% 9.2% 8.9% 9.5% 14.3% 9.7% 15.1%
Health 6.1% 5.9% 5.9% 6.0% 6.5% 6.1% 6.8%
Education 5.1% 4.8% 4.6% 4.7% 5.3% 4.7% 5.3%
Core government services 1.6% 1.4% 1.6% 1.7% 2.0% 1.8% 2.3%
Law and order 1.4% 1.4% 1.4% 1.5% 1.6% 1.5% 1.7%
Other core Crown expenses 5.2% 5.1% 5.1% 5.2% 5.6% 5.7% 7.6%
Core Crown expenses 28.7% 27.8% 27.5% 28.6% 35.3% 29.5% 38.7%
Crown entities, SOEs and eliminations (other) 8.2% 8.2% 8.0% 8.1% 9.8% 8.2% 9.8%
Total Crown expenses 36.9% 36.0% 35.5% 36.7% 45.1% 37.6% 48.5%

Core Crown Expenses

Core Crown expenses increased by $21.8 billion to $108.8 billion in the year to 30 June 2020. The expenditure, as a share of the economy was higher than the previous year, reaching 35.3% of GDP compared to 28.6% last year (Table 7).

Table 7 - Movement in core Crown expenses
Year ended 30 June ($ billion)
2019 core Crown expenses 87.0
Budget decisions 3.8
Wage subsidy scheme 12.1
New Zealand Superannuation 1.0
Other movements 5.0
2020 core Crown expenses 108.8

Source:  The Treasury

The largest driver of growth in core Crown expenditure was the wage subsidy scheme that was put in place to support businesses and workers who are financially impacted by the COVID-19 pandemic. This made up $12.1 billion of additional operating expenditure in the 2019/20 year.

The Government's Budget 2019 and Budget 2020 decisions also contributed to this growth. On announcement, the combination of these decisions was expected to increase core Crown expenses by $3.8 billion in 2019/20. Decisions impacting health and social security and welfare expenses had the largest financial impact, increasing by around $1.2 billion and $0.4 billion respectively from 2018/19.

New Zealand Superannuation costs were higher than last year by $1.0 billion. This was owing to an increase in recipient numbers from an average of around 767,000 in 2018/19, to 794,900 in 2019/20 and increased payment rates.

The balance of $5.0 billion increase in expenses includes a large number of smaller movements from multiple entities, largely related to expenses incurred as a result of the COVID-19 pandemic. This includes the fair value write down of the Small Business Cashflow (Loan) Scheme of $0.7 billion, an increase in the impairment of sovereign debt receivables of $0.5 billion compared to last year and impairment of goodwill of $0.3 billion. In addition, an increase in education expenses due to implementation of the Government’s commitment to give tertiary education organisations funding certainty in 2020, regardless of any impact on domestic student numbers resulting from the COVID-19 pandemic. The funding provided to Universities and Wānanga is reported as other operating expenses – grants and subsidies (refer note 10 in the financial statements).

Figure 12 - Core Crown expenses

Figure 12 - Core Crown expenses

Source:  The Treasury

Figure 13 shows the composition of core Crown expenses by key areas of Government spending. The three spending areas of social security and welfare, health and education expenses make up 74% of all core Crown spending. The most significant growth was in social assistance spending which increased by $15.3 billion, from $28.7 billion in 2018/19 to $44.0 billion in 2019/20, mainly due to the wage subsidy discussed earlier.

Figure 13 Composition of core Crown expenses

Figure 13 Composition of core Crown expenses

Source:  The Treasury

Other core Crown expenses (16%) includes other areas of spending (eg, transport, economic, defence, and environmental protection and finance costs) and these levels of spending remained largely consistent with spending in the prior year.

Other Expenses

The SOE and Crown entity sectors (including inter-segment eliminations) recorded net expenses of $30.1 billion, an increase of $5.7 billion from last year.

Part of the increase this year is owing to the 2018/19 expense being lower due to a one-off impairment reversal in 2018/19. This related to the reversal of the KiwiRail rail network impairment which reduced expenses in 2018/19 by $2.6 billion. Excluding this $2.6 billion one-off reversal, the expenditure increase this year was $3.1 billion or 11.7% from 2018/19.

The following key areas contributed to most of the $3.1 billion increase:

  • Fair value write down of $1.1 billion in relation to the Air New Zealand aircraft fleet. The valuation of aircraft was based on indicative market values at 30 June 2020 of each aircraft on a stand-alone basis. The COVID-19 pandemic has had a significant impact on these market values, refer to note 17 in the financial statements for further details.
  • DHB expenses were $1.0 billion higher than the previous year as a result of increased cost of health services and additional personnel expenses from estimated liabilities under the Holidays Act 2003. This also includes COVID-19 response related payments for primary health care and additional leave accrued by employees, as fewer staff took leave through the COVID-19 response period.
  • Higher insurance expenses in ACC of $0.9 billion compared to last year, reflecting the expected increase in the ACC outstanding claims liability which is higher than in 2018/19 (excluding actuarial gains and losses).
  • Increased transport expenses for NZTA of $0.6 billion, mainly owing to the impact the COVID-19 pandemic has had on projects eg, project delays and cost pressure on public transport services to which NZTA contributed.

Operating Balance#

Operating Balance

Total Crown net losses of $8.7 billion, which includes net losses on the LSAP programme, net gains on financial instruments and net losses on non-financial instruments, are partially offset by the net surplus from associates and joint ventures of $1.2 billion. When this is combined with total Crown revenue and expenses, there is an operating balance deficit of $30.0 billion. This deficit compares to last year's operating balance surplus of $0.4 billion, a $30.4 billion decline.

Figure 14 - Operating balance (excluding minority interests)

Figure 14 - Operating balance (excluding minority interests)

Source:  The Treasury

Total net losses include $3.3 billion of losses recognised relating to the LSAP programme. The losses arise as repurchased bonds are bought back at the current market bond prices, which is generally higher than when the bonds were originally issued (as discussed on pages 20 and 21).

Gains on financial instruments of $1.9 billion in the year have fallen from the $4.4 billion recognised last year. This mainly reflects a more challenging investment environment in the wake of the COVID-19 pandemic (primarily in NZS Fund and ACC portfolios) and a $0.5 billion write-down in student loans owing to revised assumptions regarding future income levels, repayment behaviour and macroeconomic factors. The current year saw volatility in financial markets combined with unfavourable market movements, resulting in investment gains being $2.5 billion lower than last year.

Losses on non-financial instruments of $7.4 billion (compared to $11.6 billion of losses last year) largely consisted of losses on the ETS and actuarial losses on the ACC long term liability. The ETS loss was as a result of an increase in the carbon price (from $23.15 last year to $32.10 this year) used to value the ETS liability and the ACC loss was mainly owing to decreases in the discount rates used to value all outstanding claims in today's dollars. Liabilities with long durations such as ACC outstanding claims are particularly sensitive to discount rate movements. If discount rates reduce, the liability in today's dollar increases.

Figure 15 illustrates the reduction of the yield curve of forward discount rates used to value the ACC liability over the last four years.

Figure 15 - Discount rates

Figure 15 - Discount rates

Source:  The Treasury

Impact of the Large Scale Asset Purchases (LSAP) Programme

The aim of the LSAP programme is to inject money into the economy to lower borrowing costs to households and businesses and to depreciate the New Zealand dollar. Under this programme, the Reserve Bank of New Zealand (Reserve Bank) has the ability to buy New Zealand Government Bonds (NZGBs) and Local Government Funding Agency (LGFA) Bonds in the secondary market. The Reserve Bank pays for the bond purchases by crediting settlement account balances held at the Reserve Bank by the seller's bank.

The Reserve Bank, like many other central banks, typically implements monetary policy by controlling the short-term policy rate, the Official Cash Rate (OCR), but has turned to 'alternative' monetary policies, such as LSAP, as their ability to lower the OCR has become constrained. In August 2020, the Monetary Policy Committee directed the Reserve Bank to purchase up to $100 billion NZGBs and LGFA Bonds by June 2022, an expansion from the $30 billion programme initially announced in March 2020. The Reserve Bank's participation in the bond market creates extra demand and increases the price of bonds and so reduces their market yields which is then expected to flow through to interest rates in the economy. In addition, it increases the value of liquid assets held by banks, enabling them to lend more money into the economy.

As well as the economic impacts from the LSAP programme there are several fiscal impacts in the Government's financial statements. The Reserve Bank forms part of the Government reporting entity, therefore their assets, liabilities, revenue and expenses, are added together line by line and any transactions and balances within the Government reporting entity (eg, holdings of NZGBs) are eliminated when presented in the consolidated Financial Statements of the Government. In summary, in reporting on a consolidated basis, the LSAP programme switches borrowings from NZGBs to borrowing through bank settlement deposits with the Reserve Bank. This switch also means there is a move from fixed rate borrowings to floating rate borrowings.

The LSAP programme expands the Reserve Bank's balance sheet…

On the Reserve Bank's balance sheet, the LSAP programme will result in an increase in both financial assets (eg, NZGBs) and borrowings (settlement deposits) of broadly equivalent amounts. To acquire the financial assets on the secondary market, the Reserve Bank must pay current bondholders the market price for those bonds. The current market price will generally be higher than the bond prices that bondholders paid when the bonds were first issued by the Government because interest rates have fallen. The LSAP programme is funded by using newly created settlement balances at the sellers' bank, which is reported as borrowings. As at 30 June 2020 the Reserve Bank had purchased $22.0 billion of assets under the programme, comprising $21.0 billion in NZGBs and $1.0 billion in LGFA bonds, while the liability for settlement deposits with the Reserve Bank has increased significantly.

…on consolidation the NZGBs assets purchased by the Reserve Bank are eliminated against the NZGBs borrowings issued by the Crown, resulting in a loss…

In general, when eliminating transactions and balances on consolidation they match up precisely. However, in some cases this may not be possible, which is the situation when eliminating holdings of NZGBs from the LSAP programme. The NZGBs are purchased by the Reserve Bank at a market price and are purchased directly from the market so it is not possible for the NZGBs purchased to be individually matched back to their original issuance. Therefore, for consolidation purposes it is assumed the oldest holdings of the NZGB liabilities are eliminated first against the Reserve Bank's holdings of NZGBs. Eliminating against the earliest issued bonds means the NZGB liabilities will usually have a lower carrying value than the NZGB assets, as the liabilities for NZGBs are reported at historical cost at the time of issuance, modified for interest yields. There is therefore a difference on consolidation between the market value, paid by the Reserve Bank for the NZGB assets, and the historical value of the NZGB liabilities. Broadly speaking, this difference reflects the change in the value of repurchased bonds since they were first issued owing to movements in market interest rates. Eliminating this difference results in a loss that is included in the operating balance reported in the Statement of Financial Performance. For the year ended 30 June 2020 losses of $3.3 billion have been included in the operating balance. If the NZGB liabilities had been regularly updated to fair value, rather than held at historical costs, valuation losses on these liabilities would have been reported regularly, rather than reported as losses from the LSAP programme.

…and an increase in net core Crown debt…

The main effect of the LSAP programme on the Government's balance sheet is a switch in borrowings from external bondholders of NZGBs to borrowing through bank settlement deposits with the Reserve Bank. The switch in borrowings is not entirely neutral, as the level of the increase in settlement deposits with the Reserve Bank is greater than the reduction in NZGB borrowings backed out on consolidation, so there is an initial increase in net core Crown debt. In substance, this reflects that the Government has had to raise more debt to finance the purchasing back of NZGBs.

…however subsequently there is a positive fiscal impact on the operating balance and net core Crown debt …

The different valuation methods for NZGB assets and liabilities also means there will be a difference between the interest revenue earned by the Reserve Bank and interest expenses incurred by the Crown on the repurchased NZGBs. The interest earned by the Reserve Bank will be based on market interest rates while the interest expense will be based on interest rates prevailing when the bonds were originally issued. Interest revenue and expenses on re-purchased NZGBs are reversed on consolidation at each future reporting date until the re-purchased NZGBs mature. This means there will be reduction in finance costs because the interest expense being reversed on consolidation is greater than the interest revenue being reversed. Lower finance costs will mean there is a positive impact on the operating balance. There will also be a positive impact on net core Crown debt because interest payments on re-purchased NZGBs will no longer paid to external bondholders but paid to the Reserve Bank.

…and there is an expected benefit of lower interest cost

There is currently a benefit from lower borrowing rates as the fixed interest rate payable on the bonds is replaced by the lower floating OCR rate (currently 0.25%) payable on bank settlement account borrowings. These reduced borrowing costs have a favourable impact on the operating balance and net core Crown debt, through lower finance costs and interest payments. This benefit comes with a risk however, as finance costs would increase more rapidly if monetary policy is tightened and the OCR rate increases.

Figure 16 - Illustration of the initial fiscal impacts of the LSAPs programme

Figure 16 - Illustration of the initial fiscal impacts of the LSAPs programme

Source: The Treasury

Total Crown Balance Sheet#

Net Worth

Net worth is the difference between the Crown's total assets (what the government owns) and liabilities (what the government owes). This difference primarily consists of the accumulation of past operating surpluses and deficits (referred to as taxpayers' funds) and revaluation uplifts of physical assets.

Figure 17 - Net worth

Figure 17 - Net worth

Source:  The Treasury

Net worth was $115.9 billion at 30 June 2020, a decrease of $27.4 billion from a year earlier.

Although taxpayers' funds were positive in 2019/20 they have been significantly depleted since 2018/19 reducing from $34.0 billion to $3.2 billion mainly as a result of the operating deficit of $30.0 billion. While revaluation uplifts of physical assets increased by $5.2 billion, this was partially offset by revaluations of liabilities, in particular long-term retirement plans (eg, the Government Superannuation Fund) and veterans' disability entitlements resulted in $1.6 billion of losses, which are presented directly in reserves (not in the operating balance). When these revaluations are combined with the operating balance deficit of $30.0 billion and minority interest transactions, net worth decreased by $27.4 billion to be $115.9 billion.

As a share of the economy, net worth fell 9.6% from 47.2% of GDP in 2018/19 to 37.6% of GDP in the current year.

Table 8 - Net worth
Year ended 30 June
$ million
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Actual
2020
Forecast
30 June 2020
Budget
2019
Budget
2020
Net worth attributable to the Crown 89,366 110,532 129,644 136,949 110,320 131,846 100,093
Net worth attributable to minority interests 6,155 5,940 5,993 6,390 5,623 5,834 5,925
Total net worth 95,521 116,472 135,637 143,339 115,943 137,680 106,018
Net worth as a % of GDP 37.1% 42.4% 46.3% 47.2% 37.6% 43.4% 36.0%

Total Crown Balance Sheet

Total Crown assets were $393.4 billion at 30 June 2020, a $28.7 billion increase from last year largely driven by an increase in financial assets held. Total Crown liabilities have increased further, by $56.2 billion from the previous year to reach a total of $277.5 billion, the increase primarily owing to increased borrowings.

The combination of the movements above has resulted in an overall reduction to total net worth of $27.4 billion in the year to 30 June 2020.

Table 9 - Composition of the total Crown balance sheet
Year ended 30 June
$ million
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Actual
2020
Forecast
30 June 2020
Budget
2019
Budget
2020
Financial assets 138,255 147,050 157,520 164,121 183,315 160,238 179,718
Property, plant and equipment 134,499 144,550 159,018 177,625 186,502 169,151 185,382
Other assets 19,925 22,009 23,394 22,906 23,583 22,644 21,555
Total assets 292,679 313,609 339,932 364,652 393,400 352,033 386,655
Borrowings 113,956 111,806 115,652 110,248 152,717 118,005 164,799
Insurance liabilities 42,126 42,786 45,294 58,216 66,690 50,610 60,533
Other liabilities 41,076 42,545 43,349 52,849 58,050 45,738 55,305
Total liabilities 197,158 197,137 204,295 221,313 277,457 214,353 280,637
Total net worth 95,521 116,472 135,637 143,339 115,943 137,680 106,018
Minority interests (6,155) (5,940) (5,993) (6,390) (5,623) (5,834) (5,925)
Net worth attributable to the Crown 89,366 110,532 129,644 136,949 110,320 131,846 100,093

Financial Assets

Financial assets at $183.3 billion were $19.2 billion higher than last year.

The following key areas contributed to the increase:

  • Marketable securities held by the Reserve Bank increased by $9.1 billion compared to the previous year. This is primarily as a consequence of Reserve Bank balance sheet management and open market operations in response to the COVID-19 pandemic, in order to provide a sizable liquid buffer to manage funding and liquidity risks.
  • The financial asset portfolios managed by ACC and NZS Fund grew reflecting investment performance, as discussed earlier. The primary purpose of these assets is to help pay for ACC claims and fund future New Zealand superannuation costs.
  • Long term deposits increased by $1.1 billion, primarily as a result of Kāinga Ora's debt issuance in the year which has raised financial assets for the Crown.
  • Increase of $2.6 billion in derivatives in gain held primarily by NZS Fund, Treasury, Meridian and Transpower. This is mainly due to favourable market movements, in particular favourable exchange rate movements, in the year to 30 June 2020.
  • Growth in Kiwi Group Holdings loans and advances of $1.8 billion.
  • Fair value of the small business cashflow loans, which were initiated in response to the COVID-19 pandemic, of $0.7 billion.

Property, Plant and Equipment

The $8.9 billion increase in property, plant and equipment (PPE) was as a result of movements across a number of classes such as housing, state highways, aircraft, the rail network and electricity generation assets. The increase is mainly from additions and revaluation changes.

Figure 18 - Movements in PPE by asset classes

Figure 18 - Movements in PPE by asset classes

Source:  The Treasury

As seen in Figure 18, the largest movements in PPE related to the following:

  • The housing portfolio managed by Kāinga Ora (previously managed by Housing New Zealand Corporation) increased by $2.3 billion across land and buildings of which $1.2 billion is owing to revaluation uplifts at 30 June 2020 and the remainder relates to increases in the number of houses.
  • School property has increased in value by $1.1 billion compared to the previous year. Of this, $0.4 billion relates to revaluation of the property at 30 June 2020 and the remaining increase is predominantly owing to additions.
  • The value of state highways (including public-private partnerships) increased by $2.2 billion, mainly reflecting the continued valuation improvements, the development of new state highway assets and improvements to the existing state highway network. The value of corridor land has increased by $1.0 billion which is mainly owing to revaluation of the land at 30 June 2020.
  • The $1.2 billion decrease in the carrying value of aircraft (excluding specialised military), is largely owing to $1.1 billion impairment recognised in respect of Air New Zealand aircraft fleet. The COVID-19 pandemic has had an impact on the indicative market values of the aircraft and is a factor is this reduction in value at 30 June 2020. The impairment loss is charged as an expense in the statement of financial performance.
  • The rail network increased by $0.5 billion mainly owing to additions from progress in capital rail projects.

Borrowings

Total borrowings represents the borrowings undertaken by the core Crown, Crown entities and SOEs. Borrowings at $152.7 billion was $42.5 billion more than last year.

Figure 19 - Increase in borrowings by types

Figure 19 - Increase in borrowings by types

Source:  The Treasury

The overall increase is driven by a combination of factors as seen in Figure 19:

  • Settlement deposits with the Reserve Bank increased by $16.1 billion, mainly owing to the LSAP programme. The repurchase of Government bonds by the Reserve Bank has the impact of reducing Government bonds (as the bonds are eliminated on consolidation for the Financial Statements of the Government) and increasing bank settlement deposits, as discussed on pages 20 and 21.
  • Treasury bills increased by $7.8 billion owing to changes in the Crown's borrowing programme (discussed on page 25). The short term liquidity tool has been used to help fund the residual cash deficit described on page 9.
  • Government bonds have increased by $7.5 billion compared to the previous year. As discussed in the Crown's borrowing programme box on page 25, $32.0 billion of Government bonds were issued in the year offset by $5.3 billion of Government bond repayments. This has been further offset by the Reserve Bank large scale asset purchases which reduces the level Government bonds, as discussed above.
  • Other borrowings have increased by $6.3 billion. This includes borrowings by Crown entities to fund capital projects (eg, NZTA and Kāinga Ora), increased issuance of European-Commercial Paper (ECP) through the Crown’s borrowing programme and increased collateral received on the financial asset portfolio managed by NZS Fund and ACC. In addition, there was a further increase from small movements across various entities.
  • Kiwi Group Holdings borrowings (eg, customer deposit held) increased by $2.4 billion, which offsets the increase in Kiwi Group Holdings advances (eg, mortgages) discussed on page 23.
  • Derivatives in loss increased by $1.6 billion as a result of market movements, particularly relating to unfavourable interest rate movements (mentioned in the gross debt narrative above).

The Crown's borrowing programme

The total outstanding borrowings (denominated in Government Bonds, Treasury Bills and Euro-Commercial Paper) held by the Treasury as at 30 June 2020 was $33.4 billion higher than at 30 June 2019, with the cash proceeds totalling $35.0 billion (Table 10). The proceeds from issuance during the year funded the core Crown cash deficit and the April 2020 bond maturity.

Table 10 - Cash proceeds from debt programme
Year ended 30 June
$ million
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Actual
2020
Forecast
30 June 2020
Budget
2019
Budget
2020
Issue of government bonds 8,079 7,847 7,043 8,372 31,951 10,387 27,752
Repayment of government bonds (1,779) (6,080) (6,828) (11,908) (5,380) (6,627) (5,380)
Net issue/(repayment) of short-term borrowing1 (3,513) 160 100 (730) 8,415 (345) 6,540
Total market debt cash flows 2,787 1,927 315 (4,266) 34,986 3,415 28,912
Issue of government bonds - - - - - - -
Repayment of government bonds (139) (830) - - - - -
Net issue/(repayment) of short-term borrowing (100) - - - - - -
Total non-market debt cash flows (239) (830) - - - - -
Total debt programme cash flows 2,548 1,097 315 (4,266) 34,986 3,415 28,912
  1. Short-term borrowings consists of Treasury Bills and may include Euro-Commercial Paper

Insurance and Retirement Liabilities

ACC's insurance liability increased this year by $8.3 billion from $56.6 billion to $64.9 billion. Government Superannuation Fund (GSF) liabilities also increased by $0.8 billion from $13.2 billion to $14.0 billion. The increases were largely owing to actuarial valuation changes, which are influenced by changes in economic assumptions, such as discount rates and inflation.

Actuarial valuations involve using present value calculations where projected cash payments (such as the future cost of all existing ACC claims, and GSF pension payments) are adjusted where necessary for inflation, and then discounted to today's dollars. These liabilities with long durations are particularly sensitive to discount rate movements and inflation assumptions.

ACC's liability increased by $7.3 billion and GSF liability increased by $1.6 billion due to a reduction in the discount rate in the year to 30 June 2020. If discount rates reduce, the liability in today's dollars increases.

Offsetting these losses, ACC's liability decreased by $1.6 billion and GSF liability decreased by $0.5 billion owing to a reduction in the inflation assumption in the year to 30 June 2020.

Year End Results Compared to Budget 2020#

The Budget Economic and Fiscal Update 2020 (Budget 2020) was published on 14 May 2020.

Table 11 - Comparison to Budget 2020
Year ended 30 June
$ million
Actual
2020
Budget
2020
Variance to
Budget 20201
$m
Variance to
Budget 2020
%
Core Crown tax revenue 85,102 82,330 2,772 3.4
Core Crown expenses 108,832 113,998 5,166 4.5
Operating balance (excluding minority interests) (30,040) (35,491) 5,451 15.4
Total Borrowings 152,717 164,799 12,082 7.3
Net worth 115,943 106,018 9,925 9.4
  1. Favourable variances against budget have a positive sign and unfavourable variances against budget have a negative sign.

Core Crown Tax Revenue

Core Crown tax revenue was $2.8 billion (3.4%) higher than expected in Budget 2020, with the largest differences being as follows:

  • GST, corporate tax revenue and other persons tax were $1.7 billion (8.3%), $0.3 billion (2.8%) and $0.2 billion (4.2%) above forecast, respectively. This is mainly as a result of economic activity performing better than expected in the June 2020 quarter.
  • Source deduction revenue, which is primarily made up of PAYE on wages and salaries, was $0.4 billion (1.0%) above forecast. Labour market data released in early August shows that employment rates and wage growth were both better than forecast through the June 2020 quarter, contributing to the favourable forecast variance. This improvement has been assisted by the COVID-19 pandemic response measures such as the wage subsidy scheme.
Table 12 - Core Crown tax revenue compared to Budget 2020
Year ended 30 June ($ billion)
Budget 2020 core Crown tax revenue 82.3
GST 1.7
Source deductions 0.4
Corporate tax 0.3
Other persons tax 0.2
Other movements 0.2
Actual 2020 core Crown tax revenue 85.1

Source:  The Treasury

Figure 20 - Core Crown tax revenue variance to Estimated Actuals

Figure 20 - Core Crown tax revenue variance to Estimated Actuals

Source:  The Treasury

Core Crown Expenses

Core Crown expenses were $5.2 billion (4.5%) lower than forecast. Excluding the top-down adjustment of $1.1 billion, core Crown expenses were $6.2 billion (5.5%) lower than expected.

The lower than forecast result was largely owing to expenditure now expected to be spent in the 2020/21 fiscal year, originally forecast in the 2019/20 year in Budget 2020. This can be mostly attributed to the change in the expected timing of costs funded from the COVID-19 Response and Recovery Fund (CRRF). The most significant variances were in the health, education, and transport sectors, primarily due to a mixture of delays in spending and lower demand for services due to the impacts of the COVID-19 pandemic.

Figure 21 - Core Crown expenses variance to Estimated Actuals

Figure 21 - Core Crown expenses variance to Estimated Actuals

Source:  The Treasury

Crown entity and SOE results

Crown entity and SOE operating deficits were higher than forecast by $2.3 billion and $0.4 billion, respectively. A number of SOEs and Crown entities were impacted by reductions in revenue and increases in expenditure owing to the impacts of the COVID-19 pandemic, the full extent of these impacts were not able to be forecast at Budget 2020 (eg, New Zealand Transport Agency). Increases in insurance expenditure also adversely impacted Crown entities results for ACC and EQC.

Operating Balance

The total Crown operating balance deficit of $30.0 billion was $5.5 billion lower than the deficit forecast in Budget 2020. This has been largely driven by favourable variances in core Crown revenue and core Crown expenses discussed above, as well as net surplus from associates and joint ventures $1.1 billion higher than forecast. Increased net surplus from associates and joint ventures relates to Universities and Wānanga whose net surplus has increased compared to Budget 2020 due to earlier recognition of funding (for further details refer to note 18 in the financial statements).

The favourable variances have been supported by slightly lower than forecast losses on financial and non-financial instruments. The gain recognised on financial instruments is $6.4 billion higher than the forecasted loss, however, this has been almost entirely offset by higher than forecast actuarial losses on the ACC claims liability and higher than forecast losses on the LSAP programme. The actuarial losses were owing to revised discount rate and inflation rate assumptions, whilst the LSAP losses were driven by the expansion of the programme since Budget 2020 (as detailed on pages 20 and 21).

Total Borrowings

Total borrowings at 30 June 2020 were $152.7 billion, which is $12.1 billion lower than the Budget 2020 forecast. This variance is primarily resulting from lower than expected bank settlement deposits with the Reserve Bank of $12.7 billion. Despite the expansion of the LSAP programme resulting in increased settlement deposit balances, this has been offset by higher than forecast issuance of government debt, resulting in lower bank settlement deposits than were forecast. In addition, the level of bank settlement deposits is impacted by Reserve Bank's open market operations, including decisions to allow FX swaps to mature which were previously forecast to be reinvested.

Net Worth

Net worth was $9.9 billion higher than the Budget 2020 forecast, mainly owing to an upwards revaluation of physical assets of $5.2 billion. Revaluations usually occur at 30 June and are not forecast.The largest revaluations were to the land and buildings. When the asset revaluations are combined with the changes in the operating balance this flows through to improve the net worth position. The overall gains and losses which are included in the operating balance are broadly in line with what was expected in Budget 2020.

Historical Financial Information#

Historical Financial Information $ million
Year ended 30 June
$ million
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Actual
2020
Actual
Statement of financial performance                    
Core Crown tax revenue 51,557 55,081 58,651 61,563 66,636 70,445 75,644 80,224 86,468 85,102
Core Crown other revenue 5,642 5,347 5,154 5,530 5,577 5,676 6,138 6,554 7,006 6,821
Core Crown revenue 57,199 60,428 63,805 67,093 72,213 76,121 81,782 86,778 93,474 91,923
Crown entities, SOE revenue and eliminations 23,448 22,321 21,873 21,443 21,592 21,295 21,640 23,195 25,668 24,080
Total Crown revenue 80,647 82,749 85,678 88,536 93,805 97,416 103,422 109,973 119,142 116,003
Social security and welfare 21,724 21,956 22,459 23,026 23,523 24,081 25,294 25,999 28,740 44,028
Health 13,753 14,160 14,498 14,898 15,058 15,626 16,223 17,159 18,268 19,891
Education 11,650 11,654 12,504 12,300 12,879 13,158 13,281 13,629 14,293 16,322
Core government services 5,563 5,428 4,294 4,502 4,134 4,102 3,957 4,670 5,166 6,083
Law and order 3,312 3,338 3,394 3,463 3,515 3,648 3,882 4,184 4,625 4,911
Other core Crown expenses 14,097 12,403 12,813 12,985 13,254 13,314 13,702 14,935 15,867 17,597
Core Crown expenses 70,099 68,939 69,962 71,174 72,363 73,929 76,339 80,576 86,959 108,832
Crown entities, SOE expenses and eliminations 28,944 23,050 20,068 20,005 20,701 21,208 22,668 23,438 24,417 30,084
Total Crown expenses 99,043 91,989 90,030 91,179 93,064 95,137 99,007 104,014 111,376 138,916
OBEGAL (excluding minority interests) (18,396) (9,240) (4,414) (2,802) 414 1,831 4,069 5,534 7,429 (23,057)
Gains/(losses) 5,036 (5,657) 11,339 5,741 5,357 (7,200) 8,248 2,862 (7,040) (6,983)
Operating balance (excluding minority interests) (13,360) (14,897) 6,925 2,939 5,771 (5,369) 12,317 8,396 389 (30,040)
Statement of financial position                    
Property, plant and equipment 114,854 108,584 109,833 116,306 124,558 134,499 144,550 159,018 177,625 186,502
Financial assets 115,362 116,178 118,779 123,918 135,787 138,255 147,050 157,520 164,121 183,315
Other assets 14,999 15,556 15,804 16,600 18,869 19,925 22,009 23,394 22,906 23,583
Total assets 245,215 240,318 244,416 256,824 279,214 292,679 313,609 339,932 364,652 393,400
Borrowings 90,245 100,534 100,087 103,419 112,580 113,956 111,806 115,652 110,248 152,717
Other liabilities 74,083 80,004 74,318 72,708 74,398 83,202 85,331 88,643 111,065 124,740
Total liabilities 164,328 180,538 174,405 176,127 186,978 197,158 197,137 204,295 221,313 277,457
Net worth 80,887 59,780 70,011 80,697 92,236 95,521 116,472 135,637 143,339 115,943
Minority interests 308 432 1,940 5,211 5,782 6,155 5,940 5,993 6,390 5,623
Net worth attributable to the Crown 80,579 59,348 68,071 75,486 86,454 89,366 110,532 129,644 136,949 110,320
Cash position                    
Core Crown residual cash (13,343) (10,644) (5,742) (4,109) (1,827) (1,322) 2,574 1,346 (710) (23,692)
Debt Indicators                    
Net debt 40,128 50,671 55,835 59,931 60,631 61,880 59,480 57,495 57,736 83,375
Gross debt 72,420 79,635 77,984 81,956 86,125 86,928 87,141 88,053 84,449 102,257
Historical Financial Information as % of GDP
Year ended 30 June
as % of GDP
2011
Actual
2012
Actual
2013
Actual
2014
Actual
2015
Actual
2016
Actual
2017
Actual
2018
Actual
2019
Actual
2020
Actual
Nominal GDP (revised) 205,876 215,189 218,826 236,802 245,010 257,814 274,699 293,105 303,605 308,276
Statement of financial performance                    
Core Crown tax revenue 25.0% 25.6% 26.8% 26.0% 27.2% 27.3% 27.5% 27.4% 28.5% 27.6%
Core Crown other revenue 2.8% 2.5% 2.4% 2.3% 2.3% 2.2% 2.3% 2.2% 2.3% 2.2%
Core Crown revenue 27.8% 28.1% 29.2% 28.3% 29.5% 29.5% 29.8% 29.6% 30.8% 29.8%
Crown entities, SOE and elimination revenue 11.4% 10.4% 10.0% 9.1% 8.8% 8.3% 7.8% 7.9% 8.4% 7.8%
Total Crown revenue 39.2% 38.5% 39.2% 37.4% 38.3% 37.8% 37.6% 37.5% 39.2% 37.6%
Social security and welfare 10.6% 10.2% 10.3% 9.7% 9.6% 9.3% 9.2% 8.9% 9.5% 14.3%
Health 6.7% 6.6% 6.6% 6.3% 6.1% 6.1% 5.9% 5.9% 6.0% 6.5%
Education 5.7% 5.4% 5.7% 5.2% 5.3% 5.1% 4.8% 4.6% 4.7% 5.3%
Core government services 2.7% 2.5% 2.0% 1.9% 1.7% 1.6% 1.4% 1.6% 1.7% 2.0%
Law and order 1.6% 1.6% 1.6% 1.5% 1.4% 1.4% 1.4% 1.4% 1.5% 1.6%
Other core Crown expenses 6.7% 5.7% 5.8% 5.5% 5.4% 5.2% 5.1% 5.1% 5.2% 5.6%
Core Crown expenses 34.0% 32.0% 32.0% 30.1% 29.5% 28.7% 27.8% 27.5% 28.6% 35.3%
Crown entities, SOE and elimination expenses 14.1% 10.7% 9.1% 8.4% 8.5% 8.2% 8.2% 8.0% 8.1% 9.8%
Total Crown expenses 48.1% 42.7% 41.1% 38.5% 38.0% 36.9% 36.0% 35.5% 36.7% 45.1%
OBEGAL (excluding minority interests) (8.9%) (4.3%) (2.0%) (1.2%) 0.2% 0.7% 1.5% 1.9% 2.4% (7.5%)
Gains/(losses) 2.4% (2.6%) 5.2% 2.4% 2.2% (2.8%) 3.0% 1.0% (2.3%) (2.2%)
Operating balance (excluding minority interests) (6.5%) (6.9%) 3.2% 1.2% 2.4% (2.1%) 4.5% 2.9% 0.1% (9.7%)
Statement of financial position                    
Property, plant and equipment 55.8% 50.5% 50.2% 49.1% 50.8% 52.2% 52.6% 54.3% 58.5% 60.5%
Financial assets and sovereign receivables 56.0% 54.0% 54.3% 52.3% 55.4% 53.6% 53.5% 53.7% 54.1% 59.5%
Other assets 7.3% 7.2% 7.2% 7.1% 7.8% 7.7% 8.1% 8.0% 7.5% 7.6%
Total assets 119.1% 111.7% 111.7% 108.5% 114.0% 113.5% 114.2% 116.0% 120.1% 127.6%
Borrowings 43.8% 46.7% 45.7% 43.7% 45.9% 44.2% 40.7% 39.5% 36.3% 49.5%
Other liabilities 36.0% 37.2% 34.0% 30.7% 30.4% 32.3% 31.1% 30.2% 36.6% 40.5%
Total liabilities 79.8% 83.9% 79.7% 74.4% 76.3% 76.5% 71.8% 69.7% 72.9% 90.0%
Net worth 39.3% 27.8% 32.0% 34.1% 37.7% 37.0% 42.4% 46.3% 47.2% 37.6%
Minority interests 0.2% 0.2% 0.9% 2.2% 2.4% 2.3% 2.2% 2.1% 2.1% 1.8%
Net worth attributable to the Crown 39.1% 27.6% 31.1% 31.9% 35.3% 34.7% 40.2% 44.2% 45.1% 35.8%
Cash position                    
Core Crown residual cash (6.5%) (4.9%) (2.6%) (1.7%) (0.7%) (0.5%) 0.9% 0.5% (0.2%) (7.7%)
Debt Indicators                    
Net debt 19.5% 23.5% 25.5% 25.3% 24.7% 24.0% 21.7% 19.6% 19.0% 27.0%
Gross debt 35.2% 37.0% 35.6% 34.6% 35.2% 33.7% 31.7% 30.0% 27.8% 33.2%
Notes
  1. [1] GDP for the year ended 30 June 2020 was $308,276 million (2019: $303,605 million revised).
  2. [2] The financial statements of the Government of New Zealand refer to both core Crown and total Crown results. Core Crown is comprised of Ministers of the Crown, Departments, Offices of Parliament, the NZS Fund and the Reserve Bank. Total Crown is comprised of the core Crown, State-owned Enterprises (including mixed ownership model companies) and Crown entities.
  3. [3] Comparisons against the Pre-election Economic and Fiscal Update (Pre-election Update) are available on page 14.

Independent Audit Report of the Controller and Auditor-General#

TO THE READERS OF THE FINANCIAL STATEMENTS OF THE GOVERNMENT OF NEW ZEALAND FOR THE YEAR ENDED 30 JUNE 2020

I have audited the financial statements of the Government of New Zealand (the financial statements of the Government) for the year ended 30 June 2020 using my staff and resources and appointed auditors and their staff. The financial statements of the Government on pages 41 to 166 comprise:

  • the annual financial statements that include the statement of financial position as at 30 June 2020, the statement of financial performance, analysis of expenses by functional classification, statement of comprehensive revenue and expense, statement of changes in net worth, and statement of cash flows for the year ended on that date, a statement of segments, and notes to the financial statements that include accounting policies, statement of borrowings as at 30 June 2020, and other explanatory information;
  • a statement of unappropriated expenditure for the year ended 30 June 2020;
  • a statement of expenses or capital expenditure incurred in emergencies for the year ended 30 June 2020; and
  • a statement of trust money administered by departments for the year ended 30 June 2020.

Opinion#

In my opinion, the financial statements of the Government on pages 41 to 166:

  • present fairly, in all material respects, the Government's:
    • financial position as at 30 June 2020;
    • financial performance and cash flows for the year ended on that date;
    • borrowings as at 30 June 2020;
    • unappropriated expenditure for the year ended 30 June 2020;
    • expenses or capital expenditure incurred in emergencies for the year ended 30 June 2020; and
    • trust money administered by departments for the year ended 30 June 2020; and
  • comply with generally accepted accounting practice in New Zealand, in accordance with Public Benefit Entity Accounting Standards.

My audit was completed on 5 November 2020 and this is the date on which my opinion is expressed. That date exceeds the requirement under section 30(2) (b) of the Public Finance Act 1989 for me to provide an audit report on the financial statements of the Government within 30 days after receiving them. This is due to challenges resulting from the Covid-19 pandemic.

The basis for my opinion is explained below, and I outline the key audit matters addressed in my audit. I outline the responsibilities of the Treasury and the Minister of Finance and my responsibilities for the financial statements of the Government. I also comment on other information and explain my independence.

Basis for my opinion#

I carried out my audit in accordance with The Auditor-General's Auditing Standards, which incorporate the Professional and Ethical Standards and the International Standards on Auditing (New Zealand) issued by the New Zealand Auditing and Assurance Standards Board. My responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements of the Government section of this report.

I have fulfilled my responsibilities in accordance with The Auditor-General's Auditing Standards.

I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion.

Key audit matters #

Key audit matters are those matters that, in my professional judgement, were of most significance in my audit of the financial statements of the Government for the current year. In making this determination, I considered those matters that are complex, have a high degree of uncertainty, or are important to the public because of their size or nature.

Key audit matters were addressed in the context of my audit of the financial statements of the Government as a whole, and in forming my opinion thereon, and I do not provide a separate opinion on these matters.

During the period, the Covid-19 pandemic significantly affected the Government. The effects have been disclosed in note 3 on page 62 to the financial statements of the Government. I refer to those disclosures where they are relevant to the key audit matters.

The key audit matters for my audit are described below.

Recognising other persons and corporate tax revenue How we addressed this matter

As disclosed in note 4 on page 65, the Government recognised other persons' tax revenue of $7.1 billion and corporate tax revenue of $12.1 billion.

Tax revenue for the year from other persons and corporates was estimated because the final income tax owed for a year is known only when a tax return is filed. Filing could happen more than a year after the tax year.

The estimation process relies on macro-economic forecasts about how the economy will perform. It also relies on assumptions about how these macro-economic forecasts relate to taxable profits.

As a result of the Covid-19 pandemic, there is increased uncertainty about how the New Zealand economy will perform. Therefore, judgements were made about the performance of the economy and they were used to estimate tax revenue.

Estimating tax revenue is inherently uncertain and judgement is used to estimate:

  • the amount of tax to be collected from provisional taxpayers who have not yet filed their final tax return;
  • the amount of tax revenue where payments have been received but no provisional or final tax return has been filed; and
  • the performance of the New Zealand and global economy.

We reviewed the systems, processes, and controls for receiving and reviewing provisional and final tax returns, tax assessments, and tax revenue. This included understanding Inland Revenue's information technology system used to manage tax.

We assessed the controls for significant reconciliation processes.

We tested the underlying data used in the tax revenue estimation models to confirm that it was relevant and used appropriately. We reviewed the main assumptions and judgements used to estimate tax revenue from other persons and corporates.

We considered the most important variables in the models used to estimate tax revenue and assessed their reasonableness, given the economic impact of the Covid-19 pandemic.

We used independent economic experts to assess the main assumptions about the future (such as economic growth), which could cause a material adjustment to tax revenue from other persons and corporates. We tested how sensitive the estimates were to changes in the main assumptions.

The independent experts also considered alternative macro-economic indicators that could reliably estimate tax revenue from other persons and corporates. We satisfied ourselves that the macro-economic indicator used was reasonable.

I am satisfied that other persons and corporate tax revenue for the year ended 30 June 2020 are reasonable and that the disclosures are appropriate.

Recognising a loss on the large-scale asset purchase programme How we addressed this matter

In response to the Covid-19 pandemic, the Reserve Bank of New Zealand (Reserve Bank) implemented a large-scale asset purchase programme.

This is the first time the Reserve Bank has embarked on such a programme. The programme is currently expected to operate until June 2022, purchase up to a $100.0 billion of bonds, and result in losses.

As outlined in note 3 on page 63, the Reserve Bank has purchased $21.0 billion in New Zealand Government Bonds (Government Bonds) and $964 million in Local Government Funding Agency Bonds under this programme up to 30 June 2020.

The purchase of the Government Bonds by the Reserve Bank effectively removed the bonds from the financial statements of the Government. The result is a loss of $3.3 billion, which is the difference between the price paid by the Reserve Bank and the value of the bonds in the financial records of the Government at the date of purchase.

Because so many Government Bonds were acquired, a model was prepared to calculate the appropriate difference between the price paid to re-purchase the bonds and the value of the bonds in the financial records of the Government at the date of each transaction. A “first in first out” method was applied, which assumes that the bonds purchased first were the bonds issued earliest.

We considered the appropriateness of the model and use of the “first in first out” method.

On a sample basis, we:

  • agreed the bond information in the model to the Treasury and Reserve Bank systems;
  • tested the accuracy of key calculations in the model; and
  • assessed whether the “first in first out” method was correctly applied.

We examined how the model calculated the required consolidation adjustments.

We confirmed that the entries were adjusting the correct line items in the financial statements.

We also assessed the appropriateness of the presentation and disclosures.

I am satisfied that the loss on the large-scale asset purchase programme for the year ended 30 June 2020 is reasonable and that the disclosures are appropriate.

Valuing property, plant, and equipment How we addressed this matter

As outlined in note 17 on page 91, the Government owns physical assets of $186.5 billion at 30 June 2020.

Considerable judgement is needed to determine the value of some of these assets because there are inherent uncertainties in valuing them.

Valuers have considered the economic impact of the Covid-19 pandemic on significant estimates and judgements. These include economic indicators for interest rates and inflation, cash flow forecasts, any changes in levels of service, and replacement costs.

The assets identified below needed significant judgement to determine their value.

 
Land and buildings  

As outlined on page 95, land and buildings were valued at $102.9 billion at 30 June 2020.

Calculating the fair value of land and buildings requires a range of valuation methods and assumptions.

The economic impact of the Covid-19 pandemic had a significant effect on the assumptions made when assessing the value of land and buildings. A number of valuers have identified that although land and property prices have not changed significantly, there has been limited market information available since the Covid-19 pandemic lockdown period. It is difficult to predict what the short- and long-term effect on values will be.

We examined how land and buildings are valued, the significant estimates and assumptions used, and how reasonable they are. We confirmed the competence, capabilities, and objectivity of the valuers, challenged the main assumptions, and assessed the valuation procedures.

We considered whether there were any limitations placed on the valuers.

We considered how valuers took the economic impact of the Covid-19 pandemic into account and the effect of any estimation uncertainties on the final valuations.

We also checked that the revaluation movements and reversals of previous impairments were correctly accounted for.

I am satisfied that the value of land and buildings at 30 June 2020 is reasonable and that the disclosures are appropriate.

Valuing property, plant, and equipment How we addressed this matter
State highways  

As outlined on page 97, the state highways (excluding land) were valued at $39.4 billion at 30 June 2020 by an independent valuer.

The value of the state highways cannot be measured precisely. Significant estimates and assumptions are made, including assumptions about quantities and rates used to construct the state highways, the remaining useful life of the assets, and the unit costs to apply. Changes to the underlying estimates and assumptions can cause a material movement in the valuation of the state highways.

Work done over the last three years has improved the quality of the data used in the valuations, but uncertainties with the valuation remain.

We examined how the state highways are valued, the significant estimates and assumptions used, and their reasonableness. We confirmed the competence, capabilities, and objectivity of the valuer, challenged the valuer’s main assumptions, and assessed the valuation procedures (including the information extracted from databases). We considered whether there were any limitations placed on the valuer and whether centrally calculated rates applied to the valuation were appropriate.

We confirmed that key controls were operating over the systems and processes used to record costs and other asset information about the state highways.

We also considered how the valuer took the economic impact of the Covid-19 pandemic into account and the effect of any estimation uncertainties on the final valuations.

I am satisfied that the value of the state highways at 30 June 2020 is reasonable and that the disclosures are appropriate.

Electricity generation assets  

As outlined on page 99, the electricity generation assets were valued at $17.1 billion at 30 June 2020.

Valuing electricity generation assets is complicated and relies on significant assumptions about the future prices of electricity, generation costs, and how much electricity will be generated. Each of these assumptions affects the others.

These assumptions are sensitive to small changes that can have a significant effect on the value of the electricity generation assets.

The planned wind-down of the New Zealand Aluminium Smelter at Tiwai Point (announced on 9 July 2020, and disclosed in note 30 on page 152) could change the assumptions and therefore the value of the electricity generation assets. How the planned wind-down affects the value of the electricity generation assets has not been taken into account in the valuation because the announcement was made after the end of the financial year.

We examined how electricity generation assets are valued. We confirmed the competence, capabilities, and objectivity of the valuers, tested their procedures for carrying out the valuations (including the information they used), and challenged their main assumptions and judgements.

We tested the sensitivity of the main assumptions to confirm that they were reasonable. We compared the forecast prices of electricity to the expected longer-term wholesale prices and market data, where it was available.

We considered how valuers took the economic impact of the Covid-19 pandemic into account in the valuations and the effect of any estimation uncertainties on the value of electricity generation assets.

We also considered the timing of the announcement of the planned wind-down of the New Zealand Aluminium Smelter at Tiwai Point. We agreed that the value of the electricity generating assets should not be adjusted as a result of the announcement, given that it was after the date of the financial statements.

I am satisfied that the value of electricity generation assets at 30 June 2020 is reasonable and that the disclosures are appropriate.

Valuing financial assets where market data is not available How we addressed this matter

As outlined in note 27 on page 139, the Government had financial assets that are valued using significant non-observable inputs (that is, where market data is not available) of $18.6 billion at 30 June 2020.

These financial assets include loans, investments and deposits, including student loans and the small business cashflow (loan) scheme, which we comment on separately below.

When there is no quoted market price for a financial asset, the value of the asset is estimated using an appropriate technique, such as a valuation model. These models are usually complex, using inputs from market data when available. Otherwise inputs are derived from non-market data, which requires greater judgement.

We reviewed the valuation techniques, controls, and inputs used to determine the value of financial assets where market data is not available.

Taking into account the nature of the financial assets being valued, the valuation techniques adopted, and the uncertainties in determining values, we:

  • tested the internal controls over data entered into financial systems for these assets;
  • assessed the controls and valuation approaches applied where a fund manager carries out the valuation;
  • compared the fair value of financial assets to independent information and investigated any significant variances; and
  • assessed the appropriateness of the inputs used in the valuation where market data is not available.
Valuing financial assets where market data is not available How we addressed this matter
Student loans  

As outlined in note 16 on page 87, at 30 June 2020, the Government had student loans of $10.4 billion.

Student loans are measured using actuarial and predictive models, which reflect current student loan policy and macro-economic assumptions.

The value is sensitive to changes in several assumptions, including future income levels, repayment behaviour, inflation, and discount rates.

There is added uncertainty now about how the Covid-19 pandemic might affect student loan repayments and the limited availability of repayment data during the economic downturn. Adjustments have been made to the valuation to reflect assumptions about employment, overseas compliance, and the associated economic recovery period.

Page 88 further outlines the uncertainties resulting from the economic impact of the Covid-19 pandemic on the valuation. This includes sensitivity analysis disclosures about those significant assumptions.

For student loans we:

  • tested a sample of student loan applications during the year to ensure they were correctly paid out;
  • tested the internal controls over student loans entered into financial systems and actuarial models used by the valuer;
  • checked that the underlying information used in the valuation was correctly extracted from the system;
  • used an independent expert to review the main assumptions in the student loans model, including a review of the cash flow forecasts used to determine the fair value of loans, and adjustments for employment and overseas non-compliance due to the Covid-19 pandemic;
  • assessed the controls and valuation approaches applied by the valuer; and
  • performed a retrospective review of the actual receipts of student loans in previous years against prior year cash flow forecasts to consider whether there was any estimation bias.
Small Business Cashflow (Loan) Scheme  

As outlined in note 16 on page 87, at 30 June 2020, the Government had provided loans to small businesses valued at $737 million.

Because the small business cashflow scheme is new, there is no data available to determine the likely rates of repayment or default, and limited data to determine discount rates used in the valuation model.

It is also difficult to predict how the Covid-19 pandemic will affect the ability of businesses to repay the loans.

The external valuer has stated in their valuation report that the uncertain and volatile nature of future debt repayments means that there is significant uncertainty in estimating the fair value of the loans.

For the small business cashflow scheme, we considered the appropriateness of the main assumptions used in the valuation and reviewed how estimation uncertainties due to the Covid-19 pandemic were reflected in the valuation process.

We used an independent economic expert to assess whether:

  • the approach to estimating the default rate was appropriate; and
  • the estimated default loss rate was reasonable, based on current economic forecasts and other available data.

I am satisfied that the value of financial assets where market data is not available at 30 June 2020, including student loans and the small business cashflow scheme, is reasonable and that the disclosures are appropriate.

Valuing insurance liabilities, superannuation liabilities, and veterans' disability entitlements liabilities How we addressed this matter

The Government has significant insurance liabilities from Accident Compensation Corporation claims, public servants' superannuation liabilities and veterans' disability entitlements liabilities at 30 June 2020.

Working out the value of these liabilities is complicated. Actuaries estimate the amount, based on assumptions about the future (including the economic impact of the Covid-19 pandemic). There are uncertainties inherent in the valuations of each of these liabilities.

 
Valuing insurance liabilities, superannuation liabilities, and veterans' disability entitlements liabilities How we addressed this matter
Accident Compensation Corporation's outstanding claims liability  

As outlined in note 12 on page 77, the outstanding claims liability of the Accident Compensation Corporation (ACC) has been valued at $61.5 billion at 30 June 2020, by an independent actuary.

Assumptions used to determine the value of the outstanding claims liability include:

  • the discount rate used to get a present value of expected claims payments;
  • the risk margin for the inherent uncertainty in the estimate of the present value of expected claims payments;
  • the effects of inflation and innovation on future medical costs; and
  • how long it will take people to recover (length of rehabilitation) from injuries.

The sensitivity of each assumption is outlined on page 81. Assumptions are closely linked and cannot be viewed in isolation. Changes in assumptions can have a large effect on the value of the outstanding claims liability (and the gain or loss that is recognised).

We examined how ACC's outstanding claims liability is valued by assessing the reasonableness of the approach. We also reviewed ACC's main assumptions about each significant type of claim to see whether these were appropriate, including the impact of the Covid-19 pandemic on these assumptions and estimation uncertainties.

We tested the systems and controls and, in particular, tested the process for recording claims in detail.

We tested the main assumptions by considering past claims. We assessed the reasonableness of forecasts that differed from past experience by looking at the evidence supporting the forecasts.

We used an independent actuary to review the scope, approach, and reasonableness of the estimated liability.

We tested the reconciliations of the underlying claims data with ACC's systems, examined the sensitivity analysis for movements in the main assumptions, and reviewed the related financial statement disclosures.

I am satisfied that ACC's outstanding claims liability at 30 June 2020 is reasonable and that the disclosures are appropriate.

Government Superannuation Fund's unfunded liability  

As outlined in note 21 on page 110, the Government's unfunded liability for public servants' superannuation entitlements for past and current members of the Government Superannuation Fund (the Fund) has been valued at $14.0 billion at 30 June 2020, by an independent actuary.

The value of the unfunded liability is sensitive to the value of the Fund's assets, expected rates of salary increases for members of the Fund, and estimated inflation and discount rates. The Fund's assets, which are mainly shares and bonds, are traded in markets. Changes in the prices of these shares and bonds affect the amount of the unfunded liability.

The sensitivity of critical assumptions and judgements is described on page 112. The assumptions are closely linked and cannot be viewed in isolation, and changes in assumptions can have a significant effect on the value of the unfunded liability.

We examined how the Government's unfunded liability for public servants' superannuation entitlements is valued. We confirmed the competence, capabilities, and objectivity of the actuary, and tested their procedures. We engaged our own actuary to review the main assumptions, judgements, and procedures used to value the unfunded liability.

We tested the main controls that ensure that membership data used in the actuary's valuation is complete and accurate.

We assessed the appropriateness of the main assumptions used to estimate the value of the unfunded liability, including the expected rates of salary increases, against external benchmarks.

We tested the design, implementation, and operating effectiveness of key controls for investments. We obtained an understanding of the valuation techniques and inputs used by the respective fund managers to value the investments. The value of the funds were reconciled to the latest valuation reports. Any movements between the last valuation date and the year-end data were checked against supporting documentation. We also considered the estimated return on assets owned by the Fund.

I am satisfied that the Government's unfunded liability for public servants' superannuation entitlements at 30 June 2020 is reasonable and that the disclosures are appropriate.

Valuing insurance liabilities, superannuation liabilities, and veterans' disability entitlements liabilities How we addressed this matter
Veterans' disability entitlements liability  

As outlined in note 22 on page 114, the Government recognised a veterans' disability entitlements liability of $3.5 billion at 30 June 2020, because it had to use a new accounting standard during the year (PBE IPSAS 39 Employee Benefits).

Working out the value of the veterans' disability entitlements liability is subject to uncertainty, because of possible deficiencies in the underlying data used to make the estimate, the extent to which veterans will take up their full entitlement, the discount rate, the inflation rate, and changes in mortality rates.

The sensitivity of assumptions is outlined on page 117. The assumptions are closely linked and cannot be viewed in isolation, and changes in assumptions can have a large effect on the value of the veterans' disability entitlements liability, as well as the actuarial gain or loss recognised.

We examined how the Government's veterans' disability entitlements liability is valued. We reviewed the method used to calculate the liability and confirmed the competence, capabilities, and objectivity of the actuary. We also tested the valuation procedures.

We used an independent actuary to review the main assumptions, judgements, and procedures used to value the liability. We tested key controls over the completeness and accuracy of veterans’ data used in the actuary’s valuation.

We also reviewed the accounting entries to recognise the change in accounting policy, including the restatement of the 2019 comparative figures.

I am satisfied that the Government's veterans' disability entitlements liability at 30 June 2020 is reasonable and that the disclosures are appropriate.

Entitlements under the Holidays Act 2003 How we addressed this matter

As outlined in note 22 on page 115, the provision for employee entitlements includes a provision to comply with the Holidays Act 2003. Further work is still needed to finalise the amounts owed to each individual, resulting in uncertainty in the value of the provision.

A number of entities have started or completed a review of current and historical payroll calculations to ensure that they have complied with the legislation. Where possible, provision has been made in the financial statements of the Government for obligations arising from these reviews, where settlement has not been made.

For certain entities, particularly district health boards and schools, complexities mean it is taking longer to calculate the amounts owed to each individual. District health boards and schools employ many people and the amounts needed to settle these obligations remain uncertain. The Covid-19 pandemic also resulted in some entities not being able to resolve all historical compliance issues before 30 June 2020.

As outlined on page 115, the provision for district health boards could be between $1.0 billion and $1.1 billion. This is based on selecting a small sample of former and current employees, applying a number of assumptions, and calculating a provision by extrapolating the result over the known population.

As outlined in note 26 on page 132, if an obligation cannot be reasonably measured at 30 June 2020, there is an unquantified contingent liability. This is the situation for all schools.

For the entities most significantly affected, we considered the progress made in resolving the payroll calculation issues. For those entities that had a provision, we assessed the approach used to calculate the provision.

We also:

  • reviewed the processes followed for calculating a provision and tested a sample of transactions;
  • considered the completeness of the data used for calculating a provision;
  • assessed the competence, capabilities, and objectivity of independent experts who were involved in the calculations; and
  • challenged the main assumptions and judgements made in calculating the provision, including the consideration of the Covid-19 pandemic on the valuation.

For those entities that did not have a provision, we made sure that they could not reasonably quantify an amount. We also reviewed the disclosures made.

I am satisfied that the provision for entitlements under the Holidays Act 2003 at 30 June 2020 is reasonable, and that where a liability cannot be reliably measured, the contingent liability disclosures are appropriate.

Responsibilities of the Treasury and the Minister of Finance for the financial statements of the Government#

The Treasury is responsible for preparing financial statements of the Government that:

  • comply with generally accepted accounting practice in New Zealand, in accordance with Public Benefit Entity Accounting Standards;
  • present fairly the Government's financial position, financial performance, and cash flows; and
  • present fairly the Government's:
    • borrowings;
    • unappropriated expenditure;
    • expenses or capital expenditure incurred in emergencies; and
    • trust money administered by departments.

The Minister of Finance is responsible for forming an opinion that the financial statements of the Government present fairly the financial position and financial performance of the Government.

The responsibilities of the Treasury and the Minister of Finance arise from the Public Finance Act 1989.

The Treasury is also responsible for such internal control as it determines is necessary to enable the preparation of financial statements of the Government that are free from material misstatement, whether due to fraud or error. The Treasury is also responsible for the publication of the financial statements of the Government, whether in printed or electronic form.

In carrying out their respective responsibilities for the financial statements of the Government, the Treasury and the Minister of Finance are responsible for assessing the Government's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting.

Auditor's responsibilities for the audit of the financial statements of the Government#

My objectives are to obtain reasonable assurance about whether the financial statements of the Government as a whole are free from material misstatement, whether due to fraud or error, and to issue an audit report that includes my opinion.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with The Auditor-General's Auditing Standards will always detect a material misstatement. Misstatements are differences or omissions of amounts or disclosures, and can arise from fraud or error. Misstatements are considered material if, individually or in aggregate, they could reasonably be expected to influence the decisions readers make based on the financial statements of the Government.

For the budget information reported in the financial statements of the Government, my procedures were limited to checking that the amounts agree to the Government’s relevant published budgets.

I did not evaluate the security and controls over the publication, whether in printed or electronic form, of the financial statements of the Government.

As part of an audit in accordance with The Auditor-General's Auditing Standards, I exercise professional judgement and maintain professional scepticism throughout the audit. Also:

  • I identify and assess the risks of material misstatement of the financial statements of the Government, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, because fraud can involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
  • I obtain an understanding of internal controls relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal controls used by the Treasury to prepare the financial statements of the Government.
  • I evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Treasury.
  • I conclude on the appropriateness of using the going concern basis of accounting that has been used by the Treasury to prepare the financial statements of the Government, up to the date of my auditor's report, based on the audit evidence I have obtained.
  • I evaluate the overall presentation, structure, and content of the financial statements of the Government, including the disclosures, and whether the financial statements of the Government represent the underlying transactions and events in a manner that achieves fair presentation.

As part of my audit, I obtain information from my staff and appointed auditors of the organisations that are consolidated into the financial statements of the Government, including information about:

  • elimination of transactions between the organisations that are consolidated into the financial statements of the Government;
  • application by those organisations of appropriate accounting policies and Treasury instructions to prepare the financial statements of the Government; and
  • the risks of material misstatement of the financial statements of those organisations that may affect the financial statements of the Government.

I communicate with the Treasury, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal controls that I identify during my audit.

From the matters communicated with the Treasury, I determine those matters that were of most significance in my audit of the financial statements of the Government for the current year and are therefore the key audit matters described in this report.

I am responsible for expressing an independent opinion on the financial statements of the Government and reporting that opinion to you based on my audit. My responsibility arises from the Public Audit Act 2001.

Other information#

The Treasury is responsible for the other information. The other information comprises the information included on pages 1 to 29 and pages 167 to 177.

My opinion on the financial statements of the Government does not cover the other information and I do not express any form of audit opinion or assurance conclusion on that information.

In connection with my audit of the financial statements of the Government, my responsibility is to read the other information. In doing so, I consider whether the other information is materially inconsistent with the financial statements of the Government, or my knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on my work, I conclude that there is a material misstatement of this other information, I am required to report that fact. I have nothing to report in this regard.

Independence#

While carrying out this audit, my staff and appointed auditors and their staff complied with the Auditor-General's independence requirements, which incorporate the independence requirements of Professional and Ethical Standard 1: International Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board.

My staff and I, and my appointed auditors and their staff, may deal with certain public entities on normal terms in the ordinary course of trading activities of these entities. This has not impaired my staff, my appointed auditors and their staff’s independence, or me in exercising my functions and powers under the Public Audit Act 2001 as the auditor of public entities.

As an Officer of Parliament, I am constitutionally and operationally independent of the Government. I was, before starting my term as Auditor-General on 2 July 2018, the Deputy Director-General for the Ministry for Primary Industries. The Deputy Auditor-General has dealt with all matters relating to the Ministry for Primary Industries. Other than this matter, and in exercising my functions and powers under the Public Audit Act 2001 as the auditor of public entities, I have no relationship with or interests in the Government.

John Ryan
Controller and Auditor-General

Wellington, New Zealand