Financial Statements of the Government of New Zealand for the Year Ended 30 June 2015

Ministerial Statement#

The economy continues to grow, with the 18th consecutive quarter of GDP growth in the three months to 30 June giving growth of 2.4 per cent from the same quarter last year and annual average growth of 3.0 per cent in the year to 30 June 2015.

The Government's programme to build a more productive economy is also delivering dividends in terms of the Crown's finances which have been turned around in recent years.

In the wake of the global financial crisis and the Canterbury earthquakes, the total Crown's annual operating balance excluding gains and losses (OBEGAL) was a deficit of $18.4 billion, equivalent to 9 per cent of national income in a year.

Careful stewardship over day-to-day expenses permitted the Government to significantly reduce the size of the OBEGAL deficits year after year and, in 2014/15, the Crown reports a return to surplus - delivering on the Government's key fiscal priority first set in 2011.

The OBEGAL surplus of $414 million is equal to 0.2 per cent of GDP in the year to 30 June 2015 while the Government's operating balance including gains and losses of $5.8 billion is equal to 2.4 per cent of GDP.

In the year to June 2015, the core Crown's revenue was $72.2 billion, while core expenses were $72.4 billion.

The Government has continued to restrain growth in spending while focusing on getting more effective results from existing spending, particularly for the most vulnerable New Zealanders.

While core Crown expenses grew by $1.2 billion (1.7 per cent), the increase in spending was lower than the pace of growth in the economy, resulting in expenses easing to 30.1 per cent of GDP, compared with over 34 per cent of GDP four years ago.

The approach of the Government to expenditure control is working well for New Zealand and for New Zealanders.

In its Budget 2015 forecasts, the Treasury had forecast a small OBEGAL deficit in 2014/15.

However, the Government's ongoing commitment to solid expenditure control, together with tax revenue being marginally stronger than the Treasury had expected, means the Crown accounts were in surplus.

Returning to surplus in 2014/15 is a significant milestone, but the Government is committed to continued prudent management of the public finances, including effective revenue raising and ongoing attention on operating spending and the underlying drivers of demand for public services, reprioritisation of spending that is not deliver results and rigorous management of our balance sheet.

Our focus must remain on steady and ongoing reductions in public debt over the medium term. That is the most prudent approach to take in a still uncertain global environment.

Hon Bill English
Minister of Finance
30 September 2015

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 andwith 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.

Gabriel Makhlouf
Secretary to the Treasury
30 September 2015

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 2015 and its operations for the year ended on that date.

Hon Bill English
Minister of Finance
30 September 2015

Commentary#

Fiscal Overview#

Fiscal Overview

Introduction#

These financial statements[1] contain the audited results for the financial year ended 30 June 2015. The results are compared against previous years and against two sets of forecastsfor the 2014/15 year:

• Budget 2014 refers to the 2014 Budget Economic and Fiscal Update, and
• Budget 2015 refers to the 2015 Budget Economic and Fiscal Update.

This commentary should be read in conjunction with the financial statements on pages 32 to 138.

These financial statements, including the comparative results, are the first set of annual audited financial statements of the Government prepared in accordance with Public Benefit Entity (PBE) accounting standards (which are based on International Public Sector Accounting Standards). The most recent published financial statements have been prepared in accordance with NZ equivalents to International Financial Reporting Standards as applicable for PBEs. Overall, the impact on transition to the new standards was not significant to the financial results. Note 33 provides further information on the impact on the financial position and performance of this change on the comparative results.

At a Glance#

1 Gross sovereign-issued debt excluding Reserve Bank settlement cash and Reserve Bank bills.

2 Net core Crown debt excluding the NZS Fund and advances.

Headlines:#

• Tax revenue up $5.1 billion from a year earlier and higher than forecast (page 9).
• Core Crown expenses were $1.2 billion higher than the year before, but less than expected (page 11).
• OBEGAL reached surplus for the first time since 2008, an improvement of $3.2 billion from last year (page 15).
• Core Crown net debt increased by $0.7 billion, but fell as a percentage of GDP (to 25.2%) (page 17).
• Net worth attributable to the Crown continued to strengthen (page 19).

A comparison of the year end results to Budget 2015 is included on page 23.

Summary#

Figure 1 - OBEGAL (excluding minority interests)

Source: The Treasury

The Crown has reached surplus...#

The operating balance before gains and losses (OBEGAL) has reached surplus for the first time since 2008. The improved result was due to further growth in nominal GDP (leading to a higher tax take) combined with low expenditure growth.

The OBEGAL surplus was $0.4 billion this year (0.2% of GDP), compared to a deficit of $2.8 billion for the previous year.

... as tax revenue increased...#

Figure 2 - Core Crown revenue and expenses

Source: The Treasury

Real GDP growth in the year to June 2015 was 3.0% higher mainly as a result of robust growth in construction, household consumption and tourism. In current dollar terms (ie, nominal GDP), the value of output increased 2.8% in the June 2015 year.

The increase in nominal GDP, along with higher terminal tax on corporate and other individuals' income, led to core Crown tax revenue being $5.1 billion (8.2%) higher than a year earlier, with all major tax types increasing, to reach $66.6 billion. As a share of the economy, core Crown tax revenue was 27.7% of GDP (compared to 26.3% last year).

...while core Crown expenses remained relatively flat... #

In nominal terms, core Crown expenses increased $1.2 billion (1.7%) to $72.4 billion for the year to 30 June. As a share of the nominal economy, core Crown expenses were equal in value to 30.1% of GDP (30.4% of GDP in 2014); which is in line with the government's short-term intentions.

The largest drivers of growth in nominal core Crown expenditure were New Zealand Superannuation benefits (as a result of indexation and an increase in the number of recipients), along with new spending allocated in Budget 2014, primarily in the areas of health and education.

Figure 3 - Operating balance (excluding minority interests)

Source: The Treasury

...and gains added to the OBEGAL result... #

Adding the Crown's net gains of $5.4 billion to OBEGAL, the operating balance was a surplus of $5.8 billion ($2.8 billion higher than 2014). Strong equity markets for the period ended 30 June 2015 drove the net financial gains (mostly NZSF and ACC), partly offset by actuarial losses in relation to updated long-term liability valuations for ACC insurance and Government Superannuation Fund pensions.

Figure 4 - Net worth attributable to the Crown 

Source: The Treasury

...strengthening the Crown's net worth...#

With an operating surplus and revaluation uplifts of the Crown's property, plant and equipment, the Crown's net worth continued to strengthen.

Total assets increased by $21.9 billion, while liabilities increased by $10.3 billion.

The uplift in financial sector assets ($12.8 billion) was largely the result of strong equity markets, while revaluations to Crown assets contributed to the increase in value of property, plant and equipment ($5.3 billion).

The increase in liabilities was due mainly to an increase in borrowings, partly offset by lower earthquake liabilities as claims were settled.

Figure 5 - Net debt

Source: The Treasury

...as cash deficits reduce and net debt flattens#

At $1.8 billion, the residual cash deficit was $2.3 billion less than the year before. Tax receipts grew faster than operating payments, leading to an operating cash surplus of $1.6 billion.

While operating cash flows were positive, they were not sufficient to cover capital spending. The core Crown spent $3.4 billion on capital which included purchasing physical assets, providing capital to Crown Entities and net increases in advances (eg, student loans).

Net debt reached $60.6 billion (25.2% of GDP) at 30 June 2015, compared to $59.9 billion (25.6% of GDP) a year earlier. The rate of growth in net debt has slowed in recent years as cash deficits have become smaller.

Revenue#

Total Crown revenue was $95.0 billion, an increase of $5.8 billion from a year earlier mostly due to higher core Crown tax revenue.

Figure 6 - Core Crown tax revenue

Source: The Treasury

Core Crown Tax Revenue#

Overall, core Crown tax revenue at $66.6 billion was $5.1 billion (8.2%) higher than the year before due to a rise in nominal economic activity, the composition of that activity and increased terminal tax revenue.

Source: The Treasury

Economic activity (ie, real GDP) in the year to June 2015 was 3.0% higher as residential rebuilding in Christchurch reached a peak, resulting in strong growth in the construction industry, and as household consumption and tourism grew rapidly, resulting in fast growth in the retail trade and accommodation industry. In current dollar terms (ie, nominal GDP), the value of output increased 2.8% in the June 2015 year. Total weekly paid hours increased 2.9% from the previous year and average hourly wages were up 2.5%, giving an increase in total weekly gross earnings of 5.5%.

As a share of the economy, core Crown tax revenue was 27.7% of GDP (compared to 26.3% last year). The increase from last year was mainly due to the timing of 2014 tax year corporate and other individuals' income tax across the 2014 and 2015 fiscal years (Table 3). This resulted in terminal tax revenue being significantly higher in 2015 than it was in 2014, adding 0.7% to the tax-to-GDP ratio. At the same time, compensation of employees grew at a faster rate than nominal GDP, providing a boost to source deductions (+0.3% of GDP).

Source: The Treasury

All major tax types contributed to the nominal increase in tax over the year, with three tax types making up most of the increase (Table 4):

• Source deductions: $1.6 billion (6.6%) higher than the previous year owing to higher total labour income. Growth in wages and salaries and in total employment added an estimated $0.8 billion and $0.6 billion respectively to source deductions, compared with the June 2014 year.
• GST: $1.2 billion (7.2%) stronger than 2014 largely owing to growth in domestic consumption.
• Corporate tax: $1.0 billion (10.4%) higher than the year before, mainly owing to growth in taxable profits in the 2014 tax year, which pushed up terminal tax revenue and contributed to an increase in provisional tax estimates for the 2015 tax year.

The above strength in source deductions and GST is expected to continue into the next financial year. However, some of the increase in provisional tax estimates for the 2015 tax year is expected to reverse.

Figure 7 - Other revenue

Source: The Treasury

Other Revenue#

Other revenue includes other fees and levies (eg, ACC levies), revenue from operations of Crown entities (CEs) and State-owned enterprises (SOEs), interest revenue and dividend revenue.

Core Crown other revenue, at $5.6 billion was the same as the previous year, while the SOE and CE sectors (including eliminations) recorded revenue of $22.8 billion, $0.7 billion higher than a year earlier (Table 2).

The increase was mostly attributable to SOE mixed ownership companies[2] which recorded $0.8 billion higher revenue (which was largely offset by higher operating expenses).

Expenses#

Total Crown expenses were $94.3 billion in the latest year, $2.4 billion more than the year earlier. The expenditure increase was across all three segments, with the core Crown recording the largest proportion ($1.2 billion).

Core Crown Expenses#

Despite the nominal expenditure increase of $1.2 billion, core Crown expenses fell as a share of the economy to 30.1% of GDP (Figure 8); which is in line with the government's short-term intentions.

Figure 8 - Core Crown expenses

Source: The Treasury

Table 6 shows the largest contributors to the increase in nominal core Crown expenses over the year, with the following key areas contributing to the increase:

• New Zealand Superannuation benefits increased $0.7 billion, mostly a result of indexation and an increase in recipients of New Zealand Superannuation, from around 640,000 to 665,000.
• Education expenses were $0.6 billion higher than the previous year mainly as a result of allocations in Budget 2014 for schools operations (teacher salaries and operating grants), maintenance of infrastructure in schools, schools' payroll services, increased subsidies for early childhood education centres and new investments in tertiary education. In addition, there was a higher impairment expense on student loans.
• Health expenses were also $0.2 billion higher mainly as a result of allocations in Budget 2014 of approximately $0.4 billion, with funds going to District Health Boards for extra services and to help meet cost pressures and population changes. Partly offsetting this result, was lower expenditure on the ACC related non-earners account.

Source: The Treasury

Other Expenses#

The SOE and CE sectors (including eliminations) also recorded expenses that were $1.2 billion (6.0%) higher than the previous year.

This result was partly attributable to ACC insurance expenses which increased $0.6 billion, mostly reflecting increased entitlement claims volumes. There was also an impact from the discontinuation of residual levies from 1 April 2016.

In addition expenses in the mixed ownership companies increased $0.6 billion (which was more than offset by higher revenue).

Operating Balance#

1 Other gains and losses includes the net surplus from associates and joint ventures

Source: the Treasury

Figure 11 - Components of OBEGAL by segment

Source: The Treasury

OBEGAL

The OBEGAL has reached surplus for the first time since 2008. The continued improvement was mainly owing to growth in tax revenue outpacing spending growth.

Figure 11 shows the composition of OBEGAL from the different segments of the Government. For the period ended 30 June 2015, the core Crown was close to break-even (compared to a deficit of $4.1 billion last year), with higher tax revenue (8.2%) outpacing higher expenses (1.7%) compared to last year.

Also posting a favourable result, the SOE segment achieved a surplus of $0.6 billion compared with a surplus of $0.4 billion last year across a number of companies.

While other segments improved, the Crown entity segment's surplus of $0.7 billion was lower than the previous year's $1.5 billion surplus. Within this result, ACC's surplus reduced by $0.9 billion, mainly due to higher entitlement claims volumes which increased 12.4% compared to 2013/14 levels. In addition, levy revenue was lower due to reduced levy rates, partially offset by an increase in liable earnings and number of registered motor vehicles. There was also an impact from the discontinuation of residual levies from 1 April 2016.

Partly offsetting ACC's result, EQC recorded a surplus of $0.7 billion (compared to $0.3 billion last year) mainly because their insurance liability is expected to be lower than previously thought.

Figure 12 - Operating balance

Source: The Treasury

Operating Balance

Adding the Crown's net gains of $5.4 billion to the OBEGAL surplus, the operating balance was a surplus of $5.8 billion ($2.8 billion higher than 2014).

The NZS Fund recorded $3.2 billion of the total Crown net gains, with ACC recording $2.4 billion. NZS Fund's investment portfolio earned returns as global equity markets rose. Overall, the Fund returned 14.64% for the year to June (19.36% last year) and now has financial assets of approximately $31.3 billion ($27.0 billion in 2014).

While financial gains on investments were positive, the 2014/15 year was adversely impacted by actuarial losses of $1.7 billion in relation to updated long-term liability valuations for ACC insurance and Government Superannuation Fund (GSF) pensions. A decrease in discount rates, partially offset by lower inflation rates[3] resulted in actuarial losses of $1.4 billion for ACC and $0.3 billion for GSF.

The operating balance is particularly sensitive to balance sheet movements. Refer to the sensitivities and risks to the balance sheet section on page 22.

Debt#

Net Debt

Figure 14 - Net debt

Source: The Treasury

After increasing over the past six years, net debt has begun to flatten and has fallen as a share of the economy (25.2% of GDP versus 25.6% of GDP a year earlier). Net debt in nominal terms was similar to last year, with an increase of $0.7 billion this June year, as the Crown ran a smaller residual cash deficit to previous years. The residual cash shortfall of $1.8 billion was partly offset by valuation movements from favourable foreign exchange changes and an increase in circulating currency.

The fiscal overview, on pages 4 and 5, summarises the link from the OBEGAL (a total Crown measure of total revenue less total expenses) to net debt (a core Crown measure of debt).

Source:  The Treasury

Residual Cash

The residual cash deficit was $1.8 billion, $2.3 billion less than last year. Table 10 summarises the contributors to the reduction in the residual cash deficit over the year.

Tax receipts were $5.0 billion higher than last year, which was in line with the improvement in core Crown tax revenue as discussed on page 9.

Tax receipts grew faster than operating payments, leading to an operating cash surplus of $1.6 billion. Offsetting the operating cash surplus recorded during the year, capital spending totalled $3.4 billion, resulting in an overall cash deficit. Capital spending included:

• Net purchase of physical assets of $2.0 billion, including $0.7 billion for the Ministry of Education in relation to school property ($0.2 billion was Canterbury related) and $0.5 billion for defence equipment.
• Net increase in advances of $0.6 billion, which included $0.4 billion for student loans.

Figure 15 - Crown share of dividends received from mixed ownership companies

Source: The Treasury

• Net purchase of investments of $1.5 billion, the largest of which was the Crown's investment in state highways of $1.0 billion.
• Last year the Crown received proceeds of $2.3 billion from the Government's share offer programme (compared with this year's proceeds of $0.6 billion, reflecting the Meridian Energy final instalment).

While the Crown has sold a minority share in the mixed ownership companies, it continues to own at least 51% of the companies and therefore continues to receive at least 51% of their dividends (Figure 15). The total amount received by the Crown in dividends from the companies in 2015 was higher than the amount received in 2012 and 2013, when the Crown owned 100% of the three electricity companies and around 73% of Air New Zealand.

Figure 16 - Gross debt

Source: The Treasury

Gross Debt

Gross debt, which reflects the borrowings of the core Crown, was $4.2 billion higher than a year earlier at $86.1 billion (Figure 16). As a percentage of the economy, gross debt remained at a similar level at 35.8% of GDP (35.0% of GDP a year earlier).

The increase in nominal gross debt was predominantly the result of a temporary increase in the issuance of Treasury Bills as well as the Crown's bond and bill repurchasing programme.

Crown's Borrowing Programme

The debt programme (Table 11) during 2014/15 raised cash from the market of $3.6 billion. The Crown continued to issue bonds ($8 billion face value) and also temporarily increased the market Treasury Bill issuance. The proceeds were largely used to provide liquidity for the maturity and earlier repurchases of the April 2015 bond ($8.7 billion).

Overall, once the non-market cash flows (debt issued directly to agencies within the Crown) were included, net cash proceeds from borrowing were $2.6 billion.

Net Worth Attributable to the Crown#

Figure 17 - Net worth attributable to the Crown

Source: The Treasury

Net worth attributable to the Crown was $86.5 billion as at 30 June 2015, an increase of $11.0 billion from a year earlier, continuing the upward trend. As a share of the economy, net worth attributable to the Crown was 35.9% of GDP, which was 3.7% higher than a year earlier.

The main reasons for the improvement in the Crown's net worth were the operating balance surplus and revaluation uplifts of the Crown's property, plant and equipment (details on the next page). The operating balance surplus was driven by gains on financial assets and the OBEGAL surplus (as discussed on pages 15 and 16).

Despite the increase in net worth, the composition of the balance sheet remains largely similar to previous years. The net worth attributable to minority interests is also similar to last year, as the Government share offer programme was largely completed in the last financial year. Note 35 in the 30 June 2014 financial statements contains more detailed information on the movement in minority interests.

The 2014 Investment Statement examined the composition and the state of the Crown balance sheet using three different sectors (social, financial and commercial). The glossary on page 156 explains the definition of these three sectors. The composition of the balance sheet using those sectors is outlined in Table 13 below.

Total Crown Balance Sheet#

Total Crown assets were $278.7 billion as at 30 June 2015, a $21.9 billion increase over the year. The growth was largely in financial sector assets of $12.8 billion, social assets grew by $5.6 billion and commercial assets grew by $3.5 billion.

Total Crown liabilities were $186.5 billion as at 30 June 2015, an increase of $10.3 billion from the previous year, largely in relation to financial sector liabilities.

Figure 18 - Total Crown balance sheet

Source: The Treasury

Social Balance Sheet#

Social sector net worth at $121.7 billion was $5.5 billion higher than last year, driven largely by an increase in assets.

The Crown's social assets were valued at $138.8 billion at 30 June 2015, a $5.6 billion increase over the year, with the largest uplifts related to the following:

The state housing portfolio increased by $2.2 billion of which $1.6 billion relates to land. Approximately 93% of the land increase related to Auckland stock reflecting the strength of this market.

The value of state highways (including land) increased by $0.7 billion, mainly due to revaluation changes for the movement in land prices.

While social assets increased, social liabilities were similar to last year at $17.1 billion.

Figure 19 - Social balance sheet

Source: The Treasury

Financial Balance Sheet#

Financial sector net worth at -$49.9 billion was $5.1 billion stronger than last year.

The Crown's financial sector assets were valued at $87.4 billion at 30 June 2015, a $12.8 billion increase compared to last year due to:

• Equity market returns, which increased values of investment portfolios held by ACC and the NZS Fund. Refer to page 16 for discussion about the investment gains this year.
• Increases in the Reserve Bank's assets largely as a consequence of an increase in the volume of liabilities of the Bank (assets are largely matched by liabilities) and exchange rate movements.

Figure 20 - Financial balance sheet

Source: The Treasury

Financial sector liabilities were $137.3 billion, an increase of $7.7 billion from the previous year. The main drivers of growth in financial liabilities were the following:

• Liabilities associated with derivatives increased by $4.0 billion. Of this, $1.5 billion related to the Reserve Bank and $1.8 billion related to the NZS Fund. The increase was largely due to change in exchange rates and overall is neutral on the balance sheet as there will be a corresponding increase to financial assets.
• Other financial liabilities increased by $5.2 billion. Of this, Treasury Bills increased by $3.6 billion to provide liquidity for the April 2015 bond maturity. Reserve Bank liabilities increased by $1.3 billion, largely relating to Reserve Bank bills and borrowing instruments and foreign exchange movements on liabilities.
• ACC's insurance liability increased this year by $2.6 billion from $29.9 billion to $32.5 billion. The key drivers of this increase were the discount rate reduction, partly offset by various inflation rates being lower than expected. For further information on ACC's inflation assumptions see Note 23 insurance liabilities.
• Earthquake-related insurance liabilities of EQC and Southern Response were $1.8 billion and $0.2 billion lower respectively as insurance claims were paid out during the year. EQC's claims liability movement also includes an actuarial reduction reflecting the latest available information about the expected cost of claims still to be paid.

Commercial Balance Sheet#

Commercial sector net worth at $20.4 billion increased by $0.9 billion compared to last year.

The Crown's commercial assets were valued at $52.5 billion at 30 June 2015, a $3.5 billion increase over the year. A large component of this increase related to Kiwibank loans ($1.0 billion increase), along with increases due to property, plant and equipment valuation uplifts and additions across the sector.

Commercial liabilities valued at $32.1 billion were $2.6 billion higher than the previous year, primarily due to an increase in deposits held by Kiwibank ($0.9 billion), matched by an increase in its lending.

Figure 21 - Commercial balance sheet

Source: The Treasury

Year End Results Compared to Budget 2015#

Budget 2015 was published on 21 May 2015 and is the most recent set of forecasts. Budget 2015 was restated for the impact from the new PBE standards. As a result, both core Crown sovereign revenue and core Crown expenses have decreased by a corresponding amount, with no OBEGAL impact.

With the exception of gross debt, the 2015 results were favourable compared to Budget 2015, with tax revenue stronger than expected as the economy grew in nominal terms by 0.4% more than expected. In addition, net migration and labour force participation were slightly higher than expected.

Core Crown Tax Revenue#

Source: The Treasury

Core Crown tax revenue was $0.6 billion (0.8%) higher than expected, with the largest differences being:

• Source deductions: $0.2 billion (0.8%) higher than forecast due mainly to higher-than-forecast hours worked per worker in the June 2015 quarter.

• Customs and excise duties: $0.1 billion (3.0%) higher than forecast due mainly to some back-dated fuel excise revenue and associated penalties.
• Other individuals tax: $0.1 billion (2.2%) higher than forecast due mainly to higher-than-expected provisional tax estimates.
• Corporate tax: $0.1 billion (0.8%) higher than forecast mainly owing to above-forecast tax from Portfolio Investment Entities, which was mainly caused by larger-than-anticipated funds under management.

Overall the tax variance to forecast is not significantly larger than recent forecasts (Figure 22) and remains within 1%. Estimated Actuals refers to the latest forecasts published shortly before year end.

Figure 22 -  Core Crown tax revenue variance to Estimated Actuals

Source: The Treasury

Core Crown Expenses#

Core Crown expenses were $0.5 billion (0.7%) lower than expected. As with core Crown tax revenue, the forecast variance is reasonable, particularly given past years (Figure 23).

Figure 23 - Core Crown expenses variance to Estimated Actuals

Source: The Treasury

The lower than forecast result was largely due to earthquake work progressing slower than forecast ($169 million), lower treaty settlement expenditure as completion of negotiations continued into 2015/16 ($133 million), lower Ministry of Education expenses across a number of departmental and non-departmental activities ($116 million under forecast) and lower Ministry of Social Development (MSD) debt write-offs and benefit expenses ($40 million).

Delays in earthquake spending and completion of negotiations around treaty settlements may flow in to the next financial year.

OBEGAL#

The OBEGAL surplus was $1.1 billion higher than expected. Both core Crown tax revenue and core Crown expenses were close to forecast (under 1%) but, when combined, had a significant impact on the OBEGAL result (increasing OBEGAL by $1.1 billion).

Operating Balance#

The total Crown operating balance was $6.4 billion higher than expected. In addition to the favourable OBEGAL result ($1.1 billion), ACC and GSF incurred lower than forecast actuarial losses due to higher discount rates ($2.9 billion and $1.7 billion respectively).

Residual Cash#

The residual cash deficit was $0.8 billion lower due in part to higher than forecast tax receipts ($0.3 billion), along with lower than forecast operating and capital payments ($0.3 billion each).

Gross Debt#

Gross debt at $86.1 billion (35.8% of GDP) was $2.2 billion higher than expected (with the core Crown holding more debt instruments than forecast). The increased debt is largely held in financial assets so has no impact on net debt.

Net Debt#

Net debt at $60.6 billion (25.2% of GDP) was $1.0 billion below forecast mainly due to the more favourable residual cash mentioned above.

Net Worth Attributable to the Crown#

The net worth attributable to the Crown was $11.7 billion stronger than expected mainly due to the higher operating balance mentioned above and revaluation uplifts of the Crown's property, plant and equipment (that were not forecast).

Historical Financial Information#

Independent Report of the Auditor-General#

To the Readers of the Financial Statements of the Government of New Zealand for the Year Ended 30 June 2015#

Opinion

I have audited the financial statements of the Government of New Zealand (the Government) for the year ended 30 June 2015 using my staff, resources and my appointed auditors and their staff.

The Government's financial statements on pages 32 to 148 comprise:

• the annual financial statements that include the statement of financial position as at 30 June 2015, 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 the notes to the financial statements that include accounting policies, and other explanatory information;
• a statement of borrowings as at 30 June 2015;
• a statement of unappropriated expenditure for the year ended on that date;
• a statement of expenses or capital expenditure incurred in emergencies for the year ended on that date; and
• a statement of trust money administered by departments and Offices of Parliament as at 30 June 2015.

In my opinion, the Government's financial statements on pages 32 to 148:

• present fairly, in all material respects, the Government's:
  • financial position as at 30 June 2015;
  • financial performance and cash flows for the year ended on that date;
  • borrowings as at 30 June 2015;
  • unappropriated expenditure for the year ended on that date;
  • expenses or capital expenditure incurred in emergencies for the year ended on that date; and
  • trust money administered by departments and Offices of Parliament as at 30 June 2015.
• comply with generally accepted accounting practice in New Zealand.

My audit was completed on 30 September 2015. This is the date at which my opinion is expressed.

The basis of my opinion is explained below. In addition, I outline the responsibilities of the Treasury and the Minister of Finance, and my responsibilities, and I explain my independence.

Basis of opinion

Using my staff, and my appointed auditors and their staff, I have carried out the audit in accordance with the Auditor-General's Auditing Standards, which incorporate the International Standards on Auditing (New Zealand). Those standards require ethical requirements to be complied with. They also require me to plan and carry out the audit to obtain reasonable assurance about whether the Government's financial statements are free from material misstatement.

Material misstatements are differences or omissions of amounts and disclosures that in my judgement are likely to influence readers' overall understanding of the Government's financial statements. If material misstatements had been found that were not corrected, I would have referred to them in my opinion.

An audit involves carrying out procedures to obtain audit evidence about the amounts and disclosures in the Government's financial statements. The procedures selected depend on the judgements of my staff and appointed auditors and their staff. Also, the procedures depend on my judgement, including my assessment of risks of material misstatement of the Government’s financial statements, whether due to fraud or error. In making those risk assessments, I consider internal control relevant to the Treasury’s preparation of the Government’s financial statements 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 Treasury’s internal control.

An audit also involves evaluating:

• the appropriateness of accounting policies used and whether they have been consistently applied;
• the reasonableness of the significant accounting estimates and judgements made;
• the adequacy of the disclosures in the Government's financial statements; and
• the overall presentation of the Government's financial statements.

My staff, and my appointed auditors and their staff, did not examine every transaction. Therefore, I do not guarantee complete accuracy of the Government's financial statements. Also, I did not evaluate the security and controls over electronic publication of the Government's financial statements.

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

Responsibilities of the Treasury and the Minister of Finance

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

• comply with generally accepted accounting practice in New Zealand;
• present fairly, in all material respects, the Government's financial position, financial performance and cash flows; and
• present fairly, in all material respects, the Government's:
  • borrowings;
  • unappropriated expenditure;
  • expenses or capital expenditure incurred in emergencies; and
  • trust money administered by departments and Offices of Parliament.

The Minister of Finance is responsible for forming an opinion that the Government's financial statements present fairly, in all material respects, 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 the Government's financial statements that are free from material misstatement, whether due to fraud or error. The Treasury is also responsible for the publication of the Government's financial statements, whether in printed or electronic form.

Responsibilities of the Auditor

I am responsible for expressing an independent opinion on the Government's financial statements and reporting that opinion to you based on my audit. My responsibility arises from section 15 of the Public Audit Act 2001 and section 30 of the Public Finance Act 1989.

Independence

While carrying out this audit my staff, and my appointed auditors and their staff, followed my independence requirements, which incorporate the independence requirements of the External Reporting Board.

As an Officer of Parliament, I am constitutionally and operationally independent of the Government 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.

Lyn Provost
Controller and Auditor-General
Wellington, New Zealand

Audited Financial Statements#

Statement of Financial Performance for the year ended 30 June 2015#

The accompanying notes (including accounting policies) are an integral part of these statements.

Analysis of Expenses by Functional Classification for the year ended 30 June 2015#

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

The accompanying notes (including accounting policies) are an integral part of these statements.

Statement of Comprehensive Revenue and Expense for the year ended 30 June 2015#

The accompanying notes (including accounting policies) are an integral part of these statements.

Statement of Changes in Net Worth for the year ended 30 June 2015#

The accompanying notes (including accounting policies) are an integral part of these statements.

Statement of Cash Flows for the year ended 30 June 2015#

The accompanying notes (including accounting policies) are an integral part of these statements.

The accompanying notes (including accounting policies) are an integral part of these statements.

The accompanying notes (including accounting policies) are an integral part of these statements.

Statement of Financial Position as at 30 June 2015#

The accompanying notes (including accounting policies) are an integral part of these statements.

Statement of Segments#

Statement of Segments

	Current Year Actual vs Estimated Actuals (Budget 2015)
	Core Crown		Crown entities		State-owned enterprises		Inter-segment eliminations		Total Crown
	Actual 2015 $m	Forecast Budget 2015 $m	Actual 2015 $m	Forecast Budget 2015 $m	Actual 2015 $m	Forecast Budget 2015 $m	Actual 2015 $m	Forecast Budget 2015 $m	Actual 2015 $m	Forecast Budget 2015 $m
Revenue
Taxation revenue	66,636	66,077	-	-	-	-	(581)	(615)	66,055	65,462
Other sovereign revenue	993	974	5,062	5,071	-	-	(1,102)	(1,116)	4,953	4,929
Revenue from core Crown funding	-	-	25,535	25,378	139	142	(25,674)	(25,520)	-	-
Sales of goods and services	1,393	1,429	1,854	1,787	14,171	13,928	(552)	(519)	16,866	16,625
Interest revenue and dividends	2,452	2,449	1,429	1,459	1,043	1,070	(1,400)	(1,383)	3,524	3,595
Other revenue	739	723	2,414	2,413	822	894	(360)	(436)	3,615	3,594
Total Revenue (excluding gains)	72,213	71,652	36,294	36,108	16,175	16,034	(29,669)	(29,589)	95,013	94,205
Expenses
Transfer payments and subsidies	23,723	23,846	-	-	-	-	-	-	23,723	23,846
Personnel expenses	6,552	6,540	11,660	11,749	2,935	2,909	(23)	(16)	21,124	21,182
Other operating expenses	38,305	39,043	23,750	23,647	10,994	10,989	(28,187)	(28,276)	44,862	45,403
Interest expenses	3,783	3,977	221	221	1,280	1,333	(721)	(842)	4,563	4,689
Forecast new operating spending and top down adjustment	-	(548)	-	-	-	-	-	-	-	(548)
Total Expenses (excluding losses)	72,363	72,858	35,631	35,617	15,209	15,231	(28,931)	(29,134)	94,272	94,572
Minority interest share of operating balance before gains/losses	-	-	21	19	(384)	(362)	36	26	(327)	(317)
Operating Balance before gains and losses (excluding minority interests)	(150)	(1,206)	684	510	582	441	(702)	(429)	414	(684)
Gains/(losses) and other items	4,029	2,122	2,765	(902)	1,073	49	(1,619)	(1,219)	5,357	50
Operating Balance	3,879	916	2,786	(392)	689	490	(1,583)	(1,648)	5,771	(634)
Assets
Financial assets	88,754	83,538	45,257	42,563	22,588	23,156	(20,812)	(20,609)	135,787	128,648
Property, plant and equipment	32,289	31,956	61,416	58,773	30,852	28,703	1	-	124,558	119,432
Investments in associates, CEs and SOEs	34,883	34,085	9,790	9,331	565	164	(33,320)	(32,838)	11,918	10,742
Other assets	2,787	2,701	1,281	1,150	2,404	2,394	(32)	(26)	6,440	6,219
Forecast adjustments	-	(375)	-	-	-	-	-	-	-	(375)
Total Assets	158,713	151,905	117,744	111,817	56,409	54,417	(54,163)	(53,473)	278,703	264,666
Liabilities
Borrowings	95,549	91,161	5,640	5,484	28,437	28,278	(17,046)	(17,025)	112,580	107,898
Other liabilities	29,762	30,882	44,766	46,070	7,572	7,294	(8,213)	(7,462)	73,887	76,784
Total Liabilities	125,311	122,043	50,406	51,554	36,009	35,572	(25,259)	(24,487)	186,467	184,682
Net Worth	33,402	29,862	67,338	60,263	20,400	18,845	(28,904)	(28,986)	92,236	79,984
Cost of Acquisition of Physical Assets (Cash)	1,999	2,427	2,882	3,247	2,085	1,956	(14)	(11)	6,952	7,619

Notes to the Financial Statements#

Note 1: Basis of Reporting#

Statement of compliance

These financial statements have been prepared in accordance with the Public Finance Act 1989 and with New Zealand Generally Accepted Accounting Practice (NZ GAAP) as defined in the Financial Reporting Act 2013.

These financial statements, including the comparatives, have been prepared in accordance with Public Sector PBE Accounting Standards (PBE Standards) - Tier 1. These standards are based on International Public Sector Accounting Standards (IPSAS). Previously published financial statements have been prepared in accordance with NZ equivalents to International Financial Reporting Standards as appropriate for public benefit entities (NZ IFRS (PBE)). The impact of moving from NZ IFRS (PBE) to PBE Standards was not significant. This is due to a strong degree of convergence between the two suites of standards.

For the purposes of these financial statements, the Government reporting entity has been designated as a public benefit entity (PBE). Public benefit entities (PBEs) are reporting entities whose primary objective is to provide goods or services for community or social benefit and where any equity has been provided with a view to supporting that primary objective rather than for a financial return to equity holders.

The use of public resources by the Government is primarily governed by the Public Finance Act 1989, the State Sector Act 1988, the Crown Entities Act 2004 and the State-Owned Enterprises Act 1986.

These financial statements were authorised for issue by the Minister of Finance on 30 September 2015.

Reporting period

The reporting period for these Financial Statements is the year ended 30 June 2015.

Where necessary, the financial information for SOEs and Crown entities that have a balance date other than 30 June has been adjusted for any transactions or events that have occurred since their most recent balance date and that are significant for the Financial Statements of the Government. Such entities are primarily in the education sector.

Basis of preparation

These financial statements have been prepared on the basis of historic cost modified by the revaluation of certain assets and liabilities, and prepared on an accrual basis, unless otherwise specified (for example, the Statement of Cash Flows).

The financial statements are presented in New Zealand dollars rounded to the nearest million, unless separately identified.

Judgements and estimations

The preparation of these financial statements requires judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, revenue and expenses. For example, the present value of large cash flows that are predicted to occur a long time into the future, as with the settlement of ACC outstanding claim obligations and Government superannuation retirement benefits, depends critically on judgements regarding future cash flows, including inflation assumptions and the risk-free discount rate used to calculate present values.

The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Where these judgements significantly affect the amounts recognised in the financial statements they are described in the following notes.

For significant accounting policies refer to note 35.

Note 2: Government Reporting Entity as at 30 June 2015#

Reporting entity#

The Government reporting entity as defined in section 2(1) of the Public Finance Act 1989 means:

• the Sovereign in right of New Zealand, and
• the legislative, executive, and judicial branches of the Government of New Zealand.

The description “Consolidated Financial Statements of the Government reporting entity” and the description “Financial Statements of the Government” have the same meaning and can be used interchangeably.

Basis of combination#

These financial statements combine the following entities using the acquisition method of combination:

Core Crown entities

• Ministers of the Crown
• Government departments
• Offices of Parliament
• the Reserve Bank of New Zealand
• New Zealand Superannuation Fund

Other entities

• State-owned Enterprises
• Crown entities (excluding tertiary education institutions)
• Air New Zealand Limited
• Organisations listed in Schedule 4 and 4A of the Public Finance Act 1989
• Organisations listed in Schedule 5 of the Public Finance Act 1989
• Legal entities listed in Schedule 6 of the Public Finance Act 1989

The Crown has a full residual interest in all the above entities with the exception of Air New Zealand Limited, Tāmaki Redevelopment Company Limited and the entities listed in Schedule 5 of the Public Finance Act 1989 (Mixed Ownership Model Companies).

Corresponding assets, liabilities, revenue and expenses, are added together line by line. Transactions and balances between these sub-entities are eliminated on combination. Where necessary, adjustments are made to the financial statements of controlled entities to bring the accounting policies into line with those used by the Government reporting entity.

Tertiary education institutions are equity-accounted for the reasons explained in note 20 to the financial statements. This treatment recognises these entities' net assets, including asset revaluation movements, surpluses and deficits.

The basis of combination for a joint venture depends on the form of the joint venture.

These financial statements are for the Government Reporting entity as specified in Part 3 of the Public Finance Act 1989. This comprises Ministers of the Crown and the following entities (classified in the three institutional components used for segmental reporting):

Core Crown

Departments

• Crown Law Office
• Department of Conservation
• Department of Corrections
• Department of Internal Affairs
• Department of the Prime Minister and Cabinet (Includes Canterbury Earthquake Recovery Authority as a departmental agency)
• Education Review Office
• Government Communications Security Bureau
• Inland Revenue Department
• Land Information New Zealand
• Ministry for Culture and Heritage
• Ministry for Primary Industries
• Ministry for the Environment
• Ministry of Business, Innovation and Employment
• Ministry of Defence
• Ministry of Education
• Ministry of Foreign Affairs and Trade
• Ministry of Health
• Ministry of Justice
• Ministry of Māori Development
• Ministry of Pacific Island Affairs
• Ministry of Social Development
• Ministry of Transport
• Ministry of Women's Affairs
• New Zealand Customs Service
• New Zealand Defence Force
• New Zealand Police
• New Zealand Security Intelligence Service
• Office of the Clerk of the House of Representatives
• Parliamentary Counsel Office
• Parliamentary Service
• Serious Fraud Office
• State Services Commission
• Statistics New Zealand
• The Treasury

Offices of Parliament

• Controller and Auditor-General
• The Ombudsmen
• Parliamentary Commissioner for the Environment

Others

• New Zealand Superannuation Fund
• Reserve Bank of New Zealand

State-owned enterprises

• Airways Corporation of New Zealand Limited
• Animal Control Products Limited
• AsureQuality Limited
• Electricity Corporation of New Zealand Limited
• Kiwirail Holdings Limited
• Kordia Group Limited
• Landcorp Farming Limited
• Learning Media Limited (in liquidation)
• Meteorological Service of New Zealand Limited
• New Zealand Post Limited
• New Zealand Railways Corporation
• Quotable Value Limited
• Solid Energy New Zealand Limited
• Transpower New Zealand Limited

Mixed ownership model companies (Public Finance Act schedule 5 companies) 

• Genesis Energy Limited
• Meridian Energy Limited
• Mighty River Power Limited

Others

• Air New Zealand Limited

Crown entities

• Accident Compensation Corporation
• Arts Council of New Zealand Toi Aotearoa
• Broadcasting Commission
• Broadcasting Standards Authority
• Callaghan Innovation
• Careers New Zealand
• Children's Commissioner
• Civil Aviation Authority of New Zealand
• Commerce Commission
• Crown Irrigation Investments Limited
• Crown Research Institutes (7)
• District Health Boards (20)
• Drug Free Sport New Zealand
• Earthquake Commission
• Education New Zealand
• Electoral Commission
• Electricity Authority
• Energy Efficiency and Conservation Authority
• Environmental Protection Authority
• External Reporting Board
• Families Commission
• Financial Markets Authority
• Government Superannuation Fund Authority
• Guardians of New Zealand Superannuation
• Health and Disability Commissioner
• Health Promotion Agency
• Health Quality and Safety Commission
• Health Research Council of New Zealand
• Heritage New Zealand Pouhere Taonga
• Housing New Zealand Corporation
• Human Rights Commission
• Independent Police Conduct Authority
• Law Commission
• Maritime New Zealand
• Museum of New Zealand Te Papa Tongarewa Board
• New Zealand Antarctic Institute
• New Zealand Artificial Limb Service
• New Zealand Blood Service
• New Zealand Film Commission
• New Zealand Fire Service Commission
• New Zealand Lotteries Commission
• New Zealand Productivity Commission
• New Zealand Qualifications Authority
• New Zealand Symphony Orchestra
• New Zealand Teachers Council
• New Zealand Tourism Board
• New Zealand Trade and Enterprise
• New Zealand Transport Agency
• New Zealand Venture Investment Fund Limited
• New Zealand Walking Access Commission
• Office of Film and Literature Classification
• Pharmaceutical Management Agency
• Privacy Commissioner
• Public Trust
• Radio New Zealand Limited
• Real Estate Agents Authority
• Retirement Commissioner
• School Boards of Trustees (2,416)
• Social Workers Registration Board
• Sport and Recreation New Zealand
• Standards Council
• Takeovers Panel
• Te Reo Whakapuaki Irirangi (Māori Broadcasting Funding Agency)
• Te Taura Whiri i te Reo Māori (Māori Language Commission)
• Television New Zealand Limited
• Tertiary Education Commission
• Tertiary Education Institutions (29)
• Testing Laboratory Registration Council
• Transport Accident Investigation Commission
• WorkSafe New Zealand

Organisations listed in schedule 4 of the Public Finance Act 1989

• Agricultural and Marketing Research and Development Trust
• Asia New Zealand Foundation
• Fish and Game Councils (12)
• Game Animal Council
• Leadership Development Centre Trust
• Māori Trustee
• National Pacific Radio Trust
• New Zealand Fish and Game Council
• New Zealand Game Bird Habitat Trust Board
• New Zealand Government Property Corporation
• New Zealand Lottery Grants Board
• Ngāi Tahu Ancillary Claims Trust
• Pacific Co-operation Foundation
• Pacific Island Business Development Trust
• Reserves Boards (20)
• Sentencing Council
• Te Ariki Trust

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

• Crown Asset Management Limited
• Crown Fibre Holdings Limited
• Education Payroll Limited
• Fairway Resolution Limited
• Health Benefits Limited
• Research and Education Advanced Network New Zealand Limited
• Southern Response Earthquake Services Limited
• Tāmaki Redevelopment Company Limited
• The Network for Learning Limited

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

• Te Urewera

Subsidiaries of SOEs, Crown entities and other government entities are consolidated by their parents and not listed separately in this table.

Note 3: Sovereign Revenue (Accrual)#

1 Customs excise-equivalent duty.

Note 4: Sales of Goods and Services#

Note 5: Interest Revenue and Dividends#

Student loans are advanced on an interest-free basis, therefore they are discounted to reflect their fair value.

The interest unwind reflects the increase in value as the period to repayment reduces.

Note 6: Other Revenue#

The negative revenue result above represents a re-estimation of the revenue EQC is expected to receive from reinsurance.

Note 7: Transfer Payments and Subsidies#

Note 8: Personnel Expenses#

Key management personnel compensation was $10 million (2014: $9 million). This reflects salaries, benefits and allowances. Key management personnel are the 28 Ministers of the Crown who are members of the Executive Council (including the Prime Minister).

The Remuneration Authority sets remuneration levels for members of the Executive Council. The Authority takes into account other benefits available to members of the Executive as set out in the Executive Travel, Accommodation, Attendance, and Communication Services Determination (No 2) 2009 (the "Determination"). The Determination was determined by the Minister Responsible for Ministerial Services. Members of Parliament, including Members of the Executive, have access to other non-cash entitlements as determined by the Speaker of the House of Representatives. Details of these entitlements (eg, travel discounts) can be found on the New Zealand Parliament website (www.parliament.nz).

Note 9: Depreciation and Amortisation#

Note 10: Other Operating Expenses#

Operating expenses relate to those expenses incurred in the course of undertaking the functions and activities of entities included in the financial statements of the Government, excluding those expenses separately identified in the statement of financial performance and other notes.

Audit fees paid to the Controller and Auditor-General#

Fees paid to the Controller and Auditor-General for the financial statements of the Government and its reporting entities were $40 million (2014: $39 million). Fees for assurance and related services paid to the Controller and Auditor-General were $1 million (2014: $1 million). As the Controller and Auditor-General is part of the Government reporting entity these fees are eliminated on consolidation.

Note 11: Interest Expenses#

Note 12: Insurance Expenses#

At 30 June 2015 the total amount paid or payable for damage incurred in relation to Canterbury earthquakes was reassessed and is now expected to be lower than previously expected. This reduction is recognised as a credit in the claims expense. Note 32 contains further discussion on total costs of the earthquakes to the Crown.

The remainder of note 12 provides additional information on the insurance expenses for ACC.

An analysis of the insurance liabilities is provided in note 23. Given the uncertainty over the cost of outstanding insurance claims, it is likely that the final cost will be different from the original liability established.

Net claims incurred in the table below refers to the adjustment in the liability arising from claims incurred in the current financial year and reassessment of claims incurred in previous years. This reassessment results from new information on these claims (including new claims relating to incidents incurred in previous years) and changes in assumptions.

The underwriting surplus/(deficit) below represents the net effect on the statement of financial performance from claims incurred and premiums levied during the year. It includes actuarial gains/(losses).

Note 13: Gains and Losses on Financial Instruments#

Note 14: Gains and Losses on Non-Financial Instruments#

The GSF and ACC liabilities are valued by an independent actuary (refer notes 23 and 24). Actuarial gains/(losses) represent differences between actual results and what the actuary had assumed when previously calculating the liability and the effect of changes in actuarial assumptions (experience adjustments).

Note 15: Receivables#

In determining the recoverability of a tax or other sovereign receivables, the Government uses information about the extent to which the tax or levy payer is contesting the assessment and experience of the outcomes of such disputes, from lateness of payment, and other information obtained from credit collection actions taken. Due to the size of the tax base, the concentration of credit risk is limited and this is not a risk that is actively managed.

The Government does not hold any collateral or any other credit enhancements over receivables which are past due.