Financial Statements of the Government of New Zealand for the Year Ended 30 June 2008

Fiscal Summary for the year ended 30 June 2008#

Summary Statement of Financial Performance for the year ended 30 June 2008#

Summary Statement of Cash Flows for the year ended 30 June 2008#

Summary Statement of Financial Position as at 30 June 2008#

These summary financial statements comply with generally accepted accounting practice as it relates to summary financial statements.

The information in these summary statements is drawn from and is consistent with information presented in the full financial statements of the Government for the year ended 30 June 2008, which were the first NZ IFRS full financial statements. These were authorised for issue on 30 September 2008.

The Government is a public benefit entity and the full financial statements of the Government have been prepared in accordance with generally accepted accounting practice as it applies to such entities. The recognition and measurement disclosure changes resulting from the change to NZ IFRS were not significant in the context of this summary information. The full financial statements received an unqualified audit opinion.

These summary financial statements cannot be expected to provide as complete an understanding as provided by the full financial statements, which can be obtained from www.treasury.govt.nz/government/financialstatements/.

Ministerial Statement#

Since 2000, New Zealand has enjoyed the longest uninterrupted period of economic expansion since World War II.

That growth, accompanied by a dramatic rise in employment, big fall in unemployment, strong increases in workers' wages and firms' profits, all assisted Crown revenue growth which in turn assisted the government to dramatically lift public investment in health, education, infrastructure and other public goods.

But just as important, the government has been utilising favourable economic conditions to position the Crown in a strong financial position to better withstand any future external shocks to our economy and society.

Since 1999, the government has driven gross sovereign-issued debt down, from over 35 percent of GDP to be nearer the government's long-term target of 20 percent of GDP, while simultaneously building up the financial assets of the New Zealand Superannuation Fund to part pre-fund future pension liabilities.

In 2006, the New Zealand Government's net financial asset position moved into positive territory for the first time in the nation's history, a position maintained in the 2007/08 financial statements for the year ended 30 June.

These statements are the first prepared under New Zealand International Financial Reporting Standards (NZ IFRS). The statements show an operating profit before gains and losses (OBEGAL) of $5,637 million, $410 million higher than forecast in the 2008 Budget Economic and Fiscal Update. The operating balance was on target at $2,384 million. This result compares with the previous year's operating balance of $8,022 million which included some large actuarial gains on the Government's long term liabilities while this year's result has been impacted by the decline in overseas equity markets.

Core Crown residual cash was $736 million less than in the previous year but $1,149 million higher than forecast. The delay in the $690 million KiwiRail purchase to 1 July drove most of this surplus with operating cash flows $274 million higher than forecast.

Gross sovereign-issued debt (excluding Reserve Bank settlement cash) continued to fall as a percentage of GDP at 17.4 percent in 2008 compared with 18.2 percent last year. This continues to be consistent with the Government's long term debt objective to keep gross sovereign-issued debt broadly stable at 20 percent of GDP over the next ten years.

As at 30 June 2008 the financial statements show that the Crown's net financial asset position inclusive of the assets of the New Zealand Superannuation Fund was equivalent to a positive 7.9 percent of GDP, compared with a positive 5.3 percent of GDP a year earlier.

The New Zealand Superannuation Fund grew by $1,239 million over the year to a net worth of $14,212 million. The Fund was adversely impacted by the downturn in overseas equity markets, making an $881 million operating loss for the year ended 30 June 2008. The Fund's annualised return since inception remains positive at 10.34% (over 3% above the risk free rate of return for the same period).

Hon Dr Michael Cullen
Minister of Finance

30 September 2008

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 generally accepted accounting practice.

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.

John Whitehead
Secretary to the Treasury

30 September 2008

I accept responsibility for the integrity of these financial statements, the information they contain and their compliance with the Public Finance Act 1989.

In my opinion, these financial statements fairly reflect the financial position of the Crown as at 30 June 2008 and its operations for the year ended on that date.

Hon Dr Michael Cullen
Minister of Finance

30 September 2008

Commentary#

Introduction#

This commentary outlines the key trends for each of the fiscal indicators along with a comparison to the forecasts provided in the 2008 Budget Economic and Fiscal Update. It should be read in conjunction with the financial statements on pages 24 to 157.

These are the first set of annual audited financial statements of the Government prepared in accordance with NZ IFRS. Comparative figures have been restated to align with NZ IFRS. Restated data prior to 30 June 2007 has not been subject to audit.

Each section in the commentary follows the components of the Government's fiscal strategy (outlined in the 2008 Fiscal Strategy Report - which is summarised on page 5):

• Revenue (including taxes)
• Expenses
• Surpluses
• Cash Position
• Debt, and
• The New Zealand Superannuation Fund (NZS Fund).

The financial statements of the Government of New Zealand refer to both core Crown and total Crown results. Core Crown includes Ministers, Departments, Offices of Parliament, the NZS Fund and the Reserve Bank of New Zealand but excludes state-owned enterprises (SOEs) and Crown entities (CEs). Total Crown includes the core Crown, SOEs and CEs.

Summary#

The key results were:

• both the operating balance and OBEGAL for the year were in line with the 2008 Budget forecasts (after taking into account a reclassification of the ACC actuarial loss)
• residual cash was $1,149 million higher than forecast for the year although this was essentially timing in nature (eg, the $690 million purchase of KiwiRail expected on 30 June took place on 1 July)
• debt was also lower than forecast at year end, primarily driven by the higher than expected residual cash surplus and, as such, is also considered to be timing in nature, and
• the NZS Fund recorded an operating deficit of $881 million for the year ended 30 June 2008 as a result of the downturn in equity markets (particularly the United States). The Fund's net worth at 30 June 2008 was $14,212 million.

Commentary (continued)#

Fiscal Strategy#

The Government's fiscal strategy (outlined in more detail in the 2008 Fiscal Strategy Report) is to strengthen its fiscal position so that it is well placed to respond to future challenges such as those associated with population ageing. The strategy is summarised in Figure 1.

The Government is implementing this strategy primarily by building up financial assets in the New Zealand Superannuation Fund (NZS Fund) and maintaining gross sovereign-issued debt at around 20% of GDP. In order to keep debt at around 20% of GDP, the Government has said it intends to run its cash flow position so that borrowing tracks in line with GDP over time. In practice, this means running operating surpluses, on average, that are sufficient to cover the contributions to the NZS Fund and some capital spending needs.

The Financial Statements of the Government provide a record of the Government's financial performance over financial year ended 30 June 2008 and its financial position as at 30 June 2008. They provide a comparison with the fiscal forecasts in the 2008 Budget Economic and Fiscal Update. They also provide the public with a snapshot of the progress the Government has made in implementing its fiscal strategy as set out in the Fiscal Strategy Report.

Figure 1 - Fiscal strategy at a glance

Fiscal Indicators for the Year Ended to 30 June 2008#

1. GDP for the year ended 30 June 2008 is the forecast GDP published in the 2008 Pre-election Economic and Fiscal Update (Source: Treasury).

Fiscal Strategy Perspective on the Financial Results to June#

The following table shows how the fiscal strategy is represented in the financial results.

Revenue#

Revenue consists mainly of tax revenue. Other revenue includes interest, dividends, and sales of goods and services.

Core crown revenue excluding the NZS Fund represents the revenue available to meet the Government's spending needs and treats the NZS Fund as a third party (ie, its revenue is not included but the tax it pays is).

Core Crown revenue excluding the NZS Fund was $143 million (0.2%) lower than forecast at $61,671 million. While interest revenue was $219 million (8.5%) lower than forecast due to changes in interest rates and investment levels, this was partially offset by core Crown tax revenue being $74 million (0.1%) higher than forecast. While core Crown tax revenue was largely on target, there were two compensating variances within this result.

• source deduction revenue was $613 million (2.7%) higher than forecast largely due to higher than forecast wage growth, offset by
• GST revenue was $662 million (5.6%) lower than forecast due in the main to weaker-than-expected domestic consumption. In addition the forecast assumed the gap would close between GST revenue and receipts but this did not eventuate.

Figure 2 - Core Crown revenue excluding the NZS Fund

Source: The Treasury

Figure 3 - Core Crown tax revenue

Source: The Treasury

Compared to last year, core Crown revenue excluding the NZS Fund increased by $3,189 million (5.5%). This increase was mainly in source deductions tax revenue, caused by high wage and employment growth.

Core Crown tax revenue has increased as a percentage of GDP since 1999 as a result of the progressive nature of the personal tax scale (coupled with the introduction of the 39% personal income tax rate), growth in taxable corporate profits ahead of GDP growth, and increases in interest rates which have led to increases in withholding taxes on interest-bearing deposits.

Expenses#

Figure 4 - Core Crown expenses

Source: The Treasury

Figure 5 - Core Crown expenses by sector

Source: The Treasury

Core Crown expenses represent the day-to-day operating spending of the Government (ie, it does not include purchases of physical assets or capital spending).

Core Crown expenses were $367 million (0.6%) lower than forecast at $56,997 million. The main variances were:

• social security and welfare expenses were $194 million (1.1%) lower than forecast mainly relating to lower than forecast family assistance expenditure
• education expenses were $495 million (4.9%) lower than forecast as the impairment of student loans was $491 million lower than expected
• core government expenses were $149 million (4.6%) higher then forecast. Impairment of tax receivables was $265 million higher than expected reflecting an increase in the underlying overdue debt. This variance was partially offset by underspends across a number of departments (none of which was individually significant), and
• other core Crown expenses were $219 million (1.5%) higher than forecast due in the main to treaty settlements being earlier than forecast.

In comparison to the previous year, Core Crown expenses were $2,993 million (5.5%) higher. Significant expenditure increases were:

• annual indexation of welfare benefits
• expense initiatives introduced in the 2007 Budget (including the introduction of KiwiSaver), and
• higher demand-driven education expenses.

This increase was partially offset by a decrease in sovereign receivable impairment expenses resulting from a large one-off tax receivable impairment in the year ended 30 June 2007.

Core Crown expenses have increased as a percentage of GDP by 1.6% since 2003 (30.1% in 2003 to 31.7% in 2008) with the introduction of major Government policies such as Working for Families and KiwiSaver.

Surpluses#

OBEGAL#

OBEGAL is the operating balance before gains and losses for the total Crown. By excluding gains and losses the OBEGAL gives a more direct indication of the underlying stewardship of the Government.

Figure 6 - OBEGAL

Source: The Treasury

OBEGAL was $410 million (7.8%) higher than forecast for the year ended 30 June 2008 primarily as a result of a forecasting error included in the Budget. A portion of ACC's actuarial loss was forecast as an insurance expense. This error does not impact on the operating balance as it was a reclassification between expenses and losses.

Within this result, the electricity generating SOEs reported large, equal, and opposite variances in both revenue and expenses of approximately $1,400 million. These variances resulted from higher than expected electricity spot prices.

The OBEGAL (excluding the NZS Fund retained revenue) is a measure of the operating balance that recognises that the NZS Fund has been set up to meet future spending pressures and as a result the returns it earns are not available to the Crown to meet current spending requirements. OBEGAL (excluding the NZS Fund retained revenue) was $5,586 million for the year; $367 million lower than forecast.

Operating Balance#

Figure 7 - Operating balance

Source: The Treasury

The operating balance shows whether the government sector has generated enough revenues (including gains) to cover its expenses (including losses) in any given year.

The operating balance for the total Crown was $175 million (6.8%) lower than forecast at $2,384 million.

Losses of $3,253 million resulted in a decline in the operating balance for the year ended 30 June 2008 and were $585 million (21.9%) more than forecast. These losses compare to gains of $2,162 million for the previous year. The difference is a reflection of the recent decline in overseas equity markets and increases in the ACC claims and GSF liabilities.

The total Crown operating balance is not drawn upon to fund core Crown operations, as current policy is for the NZS Fund, SOEs and CEs to retain a portion of their surpluses for the purpose of achieving their long-term objectives. For the year ended 30 June 2008 SOEs and CEs recorded an overall deficit of $803 million. This deficit includes an operating deficit of $2,408 million in ACC due to equity market and ACC claims liability losses mentioned above. When ACC is excluded the SOE and CE surpluses totalled $1,605 million (refer pages 164 to 166 for a breakdown by individual entity).

During the year $575 million was returned to the Crown as dividends.

Cash Position#

Core Crown residual cash represents the core Crown cash surplus (or deficit) after operating and investing cash requirements (including contributions to the NZS Fund) are met. It represents the money available to the Government to invest, repay debt or, alternatively, the money the Government needs to fund in any given year.

Figure 8 - Residual cash

Source: The Treasury

Residual cash was $1,149 million higher than forecast for the year ended 30 June 2008 at $2,057 million. Increases in the cash surplus were mainly due to:

• the delay in the $690 million KiwiRail purchase from 30 June to 1 July
• KiwiSaver payments being $210 million lower than forecast with regards to kick-start payments and employer tax credits, and
• department cash requirements being $545 million less than expected.

These surpluses were partially offset by tax receipts which were $417 million (0.7%) lower than forecast. In particular, the following tax types were lower than forecast:

• corporate tax receipts were $419 million (4.0%) lower than forecast due in the main to lower-than-expected provisional tax receipts through May and June from large corporate entities
• GST receipts were $148 million (1.3%) lower than forecast reflecting the effects of recent economic activity, and
• net other individuals tax receipts were $130 million (3.3%) lower than forecast due to lower than expected provisional tax payments from the agricultural sector.

In contrast, stronger than expected wage growth contributed to source deduction tax receipts being $124 million (0.5%) higher than forecast.

Over recent years residual cash surpluses have reflected strong economic growth coupled with some departmental underspending.

The residual cash of $2,057 million has resulted in an increase in core Crown financial assets as discussed on page 15.

Capital Investment#

Core Crown purchases of physical assets ($1,433 million) and advances and capital injections ($1,698 million) represent the capital investment of the core Crown (refer Table 6).

Advances and capital injections are often used by CEs and SOEs to purchase physical assets (such as roading and rail assets). Therefore, to obtain a complete picture of the Government's capital investment it is necessary to “look through” core Crown advances and capital injections and consider total Crown physical asset purchases.

Figures 9 to 11, therefore, show the purchase of physical assets (referred to as “PPE”) of the total Crown, offset by asset disposals.

Figure 9 - Total Crown net purchases of PPE ($ million)

Source: The Treasury

Figure 10 - Total Crown net purchases of PPE by sector ($m and % of total) for year ended 30 June 2008

Source: The Treasury

Figure 11 - Total Crown net purchases of PPE by asset type ($m and % of total) for year ended 30 June 2008

Source: The Treasury

Total Crown net PPE purchases for the current financial year included:

• $986 million on state highway roading
• $571 million on electricity generation assets
• $509 million on education facilities such as schools
• $446 million by district health boards
• $320 million on specialist military equipment, and
• $234 million on rail assets (excluding KiwiRail).

The $690 million purchase of KiwiRail occurred on 1 July and is therefore not included in this capital investment analysis.

Debt#

Gross Sovereign-issued Debt (GSID)#

GSID (excluding settlement cash) represents the debt issued by the sovereign (ie, core Crown) and includes Government stock held by the NZS Fund, ACC and EQC but excludes money deposited with the Reserve Bank by banks (settlement cash).

GSID (excluding settlement cash) was lower than forecast by $373 million (1.2%) at $31,390 million (17.4% of GDP). This result reflected lower than forecast levels of domestic bonds issuance (refer table 9) partially offset by higher than forecast derivative liabilities.

Figure 12 - GSID (excluding settlement cash)

Source: The Treasury

One of the key components of GSID is the domestic bond programme. Table 9 sets out the historical net issuances and repayments.

Net Core Crown Debt#

Figure 13 - Net core Crown debt

Source: The Treasury

Figure 14 - Core Crown financial assets (excluding NZS Fund)

Source: The Treasury

Net core Crown debt equates to core Crown borrowings (gross sovereign-issued debt) less core Crown financial assets (excluding the financial assets of the NZS Fund).

By deducting financial assets (excluding the NZS Fund), net debt can provide additional information about the sustainability of the Government's accounts. However, it is important to view net debt alongside GSID (excluding settlement cash) as some financial assets are not very easily converted to cash (eg, student loans) in the short term.

Net core Crown debt was lower than forecast by $1,865 million (101%) which resulted in a net asset position of $19 million at 30 June 2008. This position is a result of the higher than forecast residual cash surplus in addition to net valuation gains on financial assets and financial liabilities.

Net core Crown debt has decreased by $4,128 million since 30 June 2007. Table 10 provides a breakdown of core Crown net debt by portfolio.

The majority of the decrease in net core Crown debt was in the financial instruments administered by the New Zealand Debt Management Office (NZDMO) ($2,776 million).

NZDMO financial assets have increased by $3,594 million which has been primarily financed by:

• the current year's residual cash surplus of $2,057 million, and
• additional borrowings as NZDMO has continued its recent practice of maintaining a smooth bond issuance program year to year.

NZDMO borrowings have increased by around $818 million. As mentioned above the majority of the additional borrowings have been invested in financial assets, so are net debt neutral.

NZS Fund#

The NZS Fund (“the Fund”) is an important component of the Government's fiscal strategy. The Fund's assets provide the means for the Government to partially pre-fund future fiscal pressures, particularly those pressures arising from an ageing population.

The Government's contributions to the Fund are calculated over a 40 year rolling horizon to ensure that superannuation entitlements over the next 40 years can be met.

The Fund made an operating loss of $881 million for the year ended 30 June 2008. This compares to an operating profit of $1,094 million in the previous year and a forecast loss of $615 million for the current year. This loss results from the downturn in equity markets (particularly the United States). The Fund's full year return was -4.92% bringing its annualised return since inception to 10.34%. This return compares to the risk-free rate of return for the same period of 6.73%.

The Fund's net worth at 30 June 2008 was $14,212 million, an increase of $1,239 million since 30 June 2007. $2,104 million of this increase is from Government contributions which were offset by the Fund's investment performance.

Figure 15 - NZS Fund net worth

Source: The Treasury

Historical Financial Information#

Historical Financial Information (continued)#