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

Ministerial Statement#

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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#

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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#

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Fiscal Overview#

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Fiscal Strategy#

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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.

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.

Fiscal Indicators#

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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

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)

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

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

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).

Financial Statements Summary#

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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.

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

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

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)

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

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.

Revenue#

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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.

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

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.

Source:  The Treasury

Expenses#

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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).

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).

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

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

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#

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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)

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

Source:  The Treasury

Total Crown Balance Sheet#

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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

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.

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.

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

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

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).

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#

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

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.

Source:  The Treasury

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

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#

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Independent Audit Report of the Controller and Auditor-General#

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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#

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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#

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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 #

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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.

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

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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#

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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#

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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#

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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