Financial Statements of the Government of New Zealand for the Year Ended 30 June 2017

Ministerial Statement#

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The 2016/17 Crown accounts are a direct demonstration of the benefits of a steadily growing New Zealand economy. Sensible fiscal and monetary policies combined with microeconomic settings that encourage business confidence and investment have meant New Zealand continues to achieve solid economic growth, rising employment and rising real wages, against a backdrop of low inflation. This performance is more impressive in the context of a still volatile global outlook.

As a result of our country's economic performance, in 2016/17 the New Zealand Government has achieved its third fiscal surplus in a row.

Core Crown tax revenue was $75.6 billion for the 2016/17 year, up 7.4 percent from the previous year with all major tax types increasing, reflecting the growth in the economy. Increases in the number of people in employment and profitability of businesses are key drivers to this growth in revenue. As a percentage of nominal GDP core Crown tax revenue increased to 28.2 percent, up from 27.8 percent.

Core Crown expenses continued to fall as a percentage of GDP from 29.2 percent in 2015/16 to 28.5 percent in 2016/17. In nominal terms increases in social assistance expenses and the incremental spending announced in Budget 2016 contributed core Crown expenses of $76.3 billion (up $2.4 billion from 2015/16).

Costs associated with the Kaikōura earthquakes added to expenses in 2016/17, with EQC estimating claims will cost nearly $0.6 billion and another $0.2 billion recognised so far on the rail and road transport links. Additional expenditure is expected in 2017/18 as work on the transport infrastructure continues.

With revenue growing at a faster rate than expenses, the operating balance before gains and expenses (OBEGAL) in 2016/17 reached $4.1 billion, an increase of $2.2 billion since 2015/16 and ahead of expectations.

The New Zealand Superannuation Fund recorded investment gains of $5.5 billion reflecting rising global markets which, along with the OBEGAL result, contributed to a total Crown operating balance (including gains and losses) of $12.3 billion (compared to an operating loss of $5.4 billion in 2015/16). Volatility in this measure reflects similar volatility in equity markets as well as some of the Government's long-term liabilities (ACC claims liability and Government Superannuation Fund retirement plan) whose value can move substantially over a year.

Following on from the positive core Crown operating result, the Crown recorded a residual cash surplus, leading to a decline in nominal net core Crown debt for the first time since 2008 to $59.5 billion (22.2 percent of GDP). This is a decline of $2.4 billion from 2015/16.

The Crown's assets increased by $20.9 billion to $313.6 billion at 30 June, while total Crown liabilities were relatively static at $197.1 billion. Net worth attributable to the Crown increased by $21.2 billion to $110.5 billion, reflecting the operating result for the year and an upward valuation of the Crown's property assets of $8.7 billion.

The New Zealand Government will continue to focus on economic growth and fiscal consolidation combined with further investments in public services and public infrastructure in the years ahead.

 

Hon Steven Joyce
Minister of Finance

29 September 2017

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 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

29 September 2017

 

 

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 2017 and its operations for the year ended on that date.

 

Hon Steven Joyce
Minister of Finance

29 September 2017

Commentary on the Financial Statements#

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Fiscal Overview#

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Headlines#

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Core Crown tax revenue was $5.2 billion more than last year and is higher than the Budget 2017 forecast by $1.0 billion (page 10).

Core Crown expenses were $2.4 billion higher than last year, but $1.1 billion less than Budget 2017 forecast (page 12).

The OBEGAL surplus of $4.1 billion, is $2.2 billion higher than last year, reflecting a 7.4% growth in core Crown tax revenue higher than a 3.3% increase in core Crown expenses (page 15).

The total Crown operating balance (excluding minority interests) was $12.3 billion, as a result of the OBEGAL surplus and total Crown net gains of $8.2 billion (page 16).

Net worth attributable to the Crown increased $21.2 billion due to the operating balance, combined with the uplifts on the Crown's property plant and equipment (page 20).

Core Crown net debt decreased in nominal terms by $2.4 billion, while also continuing to decrease as a percentage of GDP (to 22.2%) (page 17).

A residual cash surplus of $2.6 billion, up $3.9 billion from last year's residual cash deficit of $1.3 billion (page 17).

At a Glance#

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1. Gross sovereign-issued debt excluding Reserve Bank settlement cash and Reserve Bank bills.
2. Net core Crown debt excluding the New Zealand Superannuation Fund (NZS Fund) and advances.

A comparison of the year end results to Budget 2017 is included on page 23.

These financial statements[1]contain the audited results for the financial year ended 30 June 2017. The results are compared against previous years and against two sets of forecasts[2] for the 2016/17 year:

• Budget 2016 refers to the 2016 Budget Economic and Fiscal Update, and
• Budget 2017 refers to the 2017 Budget Economic and Fiscal Update.

This commentary should be read in conjunction with the financial statements on pages 27 to 116.

Summary#

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Core Crown tax revenue increased...#

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Core Crown tax revenue of $75.6 billion was up from last year by $5.2 billion (7.4%) with all tax revenue types increasing. Source deduction revenue, corporate tax revenue and goods and services tax were particularly strong making up 84.2% of the year on year change.

Figure 1 - Core Crown revenue and core Crown expenses

Source: The Treasury

... reflecting growth in the economy...#

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As a share of the economy, core Crown tax revenue was 28.2% of GDP, up 0.4% from last year. Nominal GDP grew by 5.9% in the year to June 2017 to $268.1 billion, mainly as a result of 5.7% growth in private consumption and a 12.7% increase in residential investment.

The total population grew by just over 2%, while total wage and salary income grew by more than 5% during the year, with the number of people in employment up by just over 3%, and an increase in average hourly earnings of 1.6%.

Figure 2 - OBEGAL

Source: The Treasury

... being higher than growth in core Crown expenses resulting in an OBEGAL surplus...#

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As a share of the economy, core Crown expenses decreased to 28.5% of GDP (29.2% of GDP in 2016); in nominal terms however, core Crown expenses increased $2.4 billion to $76.3 billion.

The largest drivers of growth in nominal core Crown expenditure were Budget 2016 decisions (which came into effect in 2016/17), and an increase in social assistance expenses. However delays around the business transformation project for Inland Revenue, and negotiations of Treaty settlements, has pushed some expenditure out into future years.

Overall the OBEGAL surplus of $4.1 billion, increased by $2.2 billion from last year.

… gains in financial markets and liability valuations, resulted in a strong bottom line... #

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The Crown's operating balance is particularly sensitive to changes in some key assumptions used to value financial assets and liabilities.

Actuarial gains in relation to updated long-term liability valuations for ACC and GSF liabilities resulted in a combined actuarial gain of $1.4 billion (compared to an actuarial loss of $7.1 billion last year) (page 53). In addition to these valuation gains, NZS Fund recorded an investment gain of $5.5 billion in the current year (compared to a loss of $76 million last year).

When these results are combined with the OBEGAL surplus, the operating balance (after gains and losses) was an operating surplus of $12.3 billion ($17.7 billion higher than the 2016 operating deficit of $5.4 billion).

... contributing to growth on the balance sheet…#

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Alongside the operating surplus of $12.3 billion, revaluation uplifts of the Crown's property, plant and equipment assets, an increase of $8.5 billion, resulted in net worth attributable to the Crown increasing by $21.2 billion to reach $110.5 billion.

Total assets increased by $20.9 billion to $313.6 billion, while liabilities remained fairly static, at $197.1 billion.

Increases in property, plant and equipment and financial assets such as NZS Fund investments contributed to the growth in assets while the actuarial valuation decreases to liabilities discussed above (ACC, and GSF) offset growth in borrowings.

... and resulting in a cash surplus, reducing net debt.#

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Overall a residual cash surplus of $2.6 billion was achieved, an increase of $3.9 billion from last year's residual cash deficit of $1.3 billion.

The operating cash flow strengthened on last year, increasing by $3.0 billion, to $6.3 billion. This is in line with the OBEGAL result, reflecting increased core Crown tax receipts more than offsetting the growth in core Crown operating payments. Capital spending of $3.7 billion was lower than last year by $0.9 billion, due to delays in projects.

The capital spend consisted of net purchases of physical assets ($2.2 billion) and new capital investment in Crown entities ($1.7 billion), offset by net repayment, of advances ($0.1 billion).

Core Crown net debt decreased nominally by $2.4 billion from last year to be $59.5 billion, largely a result of the residual cash surplus. As a percentage of GDP, net debt has continued to fall, from 24.4% to 22.2%.

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

Year end results compared to Pre-election Update#

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The Pre-election Update was published on 23 August 2017. While the financial statements focus on results compared to Budget 2017 forecasts, this section compares results against the recent Pre-election Update. Overall, the results are better than the Pre-election Update. However a large portion of these variances reflect delays in spending that is now expected to occur at a later date. Therefore, while individual years may differ, the June 2017 results do not indicate a substantial departure from the Pre-election Update.

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.

While core Crown tax revenue was close to the Pre-election Update core Crown expenses were $502 million lower than expected. Final valuations were received after the Pre-election Update and this has reduced impairment expenditure by around $100 million. In addition KiwiSaver tax credits were lower than anticipated and education expenses (which are largely volume driven) were also less than expected.

The lower than forecast expenditure was the largest contributor to the OBEGAL surplus being $363 million higher than in the Pre-election Update at $4,069 million.

Valuation movements subsequent to the Pre-election Update, coupled with the OBEGAL result, meant that the operating balance was $839 million higher than forecast.

In addition to lower operating cash payments, largely off the back of lower expenses, capital payments were almost $600 million lower than expected resulting in the residual cash surplus being $1,077 million higher than the Pre-election Update. A number of capital projects expected in 2016/17 are now expected to occur later, particularly in relation to the investment in school property assets.

Gross debt was $580 million lower than expected, primarily due to collateral of around $500 million in relation to lending securities not required to be reported on a gross basis (reducing both assets and borrowings equally).

The higher residual cash result led to net debt being $1,080 million lower than expected.

Net worth attributable to the Crown was $1,653 million higher than forecast in the Pre-election Update. In addition to the higher operating balance result discussed above, valuations in relation to the Crown's property assets increased net worth by around $700 million.

Revenue#

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Total Crown revenue was $104.2 billion, an increase of $6.1 billion from last year mostly due to increased core Crown tax revenue.

Core Crown Tax Revenue#

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Core Crown tax revenue was $75.6 billion, up $5.2 billion (7.4%) from the year before, with most of that coming from growth in nominal GDP and its components (eg, employees' compensation and domestic consumption).

Most major tax types increased over the year, with three tax types making up most of the increase (table 4):

Source:  The Treasury

Source deductions increased by $1.6 billion (6.0%). This growth is mainly a result of growth in the number of people in employment (up 3.1%), with a lesser contribution from increases to salaries and wage rates (up 1.6%).

Corporate tax revenue increased by $1.4 billion (12.3%), mainly due to profit growth amongst companies both large and small, and across most sectors of the economy (including a substantial contribution from the finance and insurance sectors). This growth was supported by $0.2 billion (74%) growth in Portfolio Investment Entities (PIE) tax.

Goods and Services Tax (GST) was $1.3 billion (7.1%) higher than last year, with most of the growth coming via domestic consumption reflecting more people in employment, and those in employment, earning more. There was a notable contribution from residential investment activity, such as building new houses and adding to and renovating existing houses.

Source:  The Treasury

Total nominal GDP grew by 5.9% in the year to June 2017 while growth in core Crown tax revenue was 7.4%. Therefore as a share of the economy, core Crown tax revenue increased to 28.2% of GDP, compared to 27.8% last year (table 5).

The majority of the increase came from tax on corporate profits that are not captured in the nominal GDP measure, such as the profits of the finance and insurance sectors, and PIE tax mentioned above.

Offsetting some of this growth, some of the major components of nominal GDP that are principal drivers of tax revenue (total employees' compensation and domestic consumption) are estimated to have grown at a slower rate than total GDP, thereby lowering the tax-to-GDP ratio. As a result, the composition of nominal GDP growth was slightly negative for tax revenue.

Other Revenue#

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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 $6.1 billion increased by $0.5 billion since last year. This increase was mostly attributable to revenue from the New Zealand Emissions Trading Scheme (NZ ETS) (the NZ ETS is explained further on page 14).

The SOE and CE sectors (including inter-segment eliminations) recorded revenue of $22.4 billion, similar to the prior year (table 3).

Expenses#

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Total Crown expenses were $99.8 billion in the current year, $3.9 billion more than last year.

Core Crown Expenses#

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While nominal expenditure increased by $2.4 billion, core Crown expenses fell as a share of the economy to 28.5% of GDP (figure 9) continuing the trend since 2011.

This nominal growth is largely the result of Budget 2016 decisions which came into effect in 2016/17 as well as increased social assistance. Table 7 shows the largest contributors and offsets to the increase in core Crown expenses over the year:

• Social assistance expenses were greater than last year by $1.0 billion. This was mainly due to an increase in New Zealand Superannuation benefits of $0.8 billion. The majority of this relates to growth in the number of NZS recipients. Recipient numbers increased from around 691,000 in 2015/16, to 717,900. The remaining increase is largely owing to increases in the payment rates for NZS (wage/indexation adjustments).
• Environmental protection expenses increased $0.3 billion on last year, largely reflecting growth in the ETS expenses ($0.1 billion) primarily due to an increase in the number of carbon credits issued (refer to page 14 for more detail). As well as an increase in mine rehabilitation costs totalling $0.1 billion.

Source:  The Treasury

Offsetting these increases:

• Treaty settlements were $0.3 billion lower than 2015/16. Due to the ongoing nature of Treaty settlements, some negotiations forecast as reaching key milestones during the year had not occurred.
• Other expenses includes costs associated with Inland Revenue's business transformation which have been transferred to 2017/18 to align with updated delivery schedules ($0.1 billion).

The distribution of core Crown expenditure was relatively stable when compared against the prior year, with over half of expenditure allocated to social security and welfare and health expenses (rising from 53.7% to 54.4%). Although education expenses have decreased as a percentage of total core Crown expenses from 17.8% in 2015/16 to 17.4% in the current year.

Other core Crown expenses are made up of a number of other areas of spending (eg, defence, environmental protection and finance costs) and remained consistent with spending in the prior year.

Other Expenses#

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The SOE and CE sectors (including inter-segment eliminations) also recorded expenses that were $1.5 billion (6.9%) higher than 2015/16. This result was mainly attributable to an increase in SOE expenses, and an increase in insurance expenses for ACC and Southern Response.

The Kaikōura earthquakes on 14 November and subsequent aftershocks were destructive, and have resulted in additional costs to the Government. In addition to the cost of claims to EQC, there was extensive damage to the road and rail network in the North-East of the South Island, impacting on the transport of people and freight along the southern corridor. EQC have estimated the cost of claims to be $0.6 billion while KiwiRail and NZTA have collectively recognised $0.2 billion in relation to infrastructure repair ($70 million of which is capital expenditure). Additional expenses are expected to be incurred in the 2017/18 financial year.

Operating Balance#

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

OBEGAL#

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The OBEGAL surplus of $4.1 billion is an increase of $2.2 billion from last year.

Figure 11 shows the composition of OBEGAL from the different segments of the Government. For the year ended 30 June 2017, the core Crown segment continued its significant upwards trend as a result of the strong tax outturn discussed earlier, outpacing the increase in core Crown expenses.

The SOE segment remained relatively stable, decreasing slightly to a surplus of $0.5 billion, compared with a surplus of $0.7 billion last year.

Partially offsetting the core Crown results, the Crown entity segment reported a deficit of $1.1 billion, $0.8 billion higher than the previous year's deficit of $0.3 billion. This increased deficit partly reflects increased EQC insurance expenses from the Kaikōura earthquakes, while costs from the Canterbury earthquakes remaining relatively stable with reductions in EQC expenses being offset by increased costs in Southern Response. In addition, the OBEGAL deficits in ACC have also increased from the previous year, driven by several factors including a higher number of claims across all accounts, lower average discount rates for the year (used to calculate the of claims in today’s dollars), and price increases.

Operating Balance#

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Net gains totalled $8.2 billion for the year. These gains, in addition to the OBEGAL surplus, resulted in the total Crown's operating balance surplus of $12.3 billion, $17.7 billion higher than last year's deficit of $5.4 billion.

Source: The Treasury

Gains on financial instruments were $6.3 billion ($5.2 billion more than gain of $1.1 billion last year). The NZS Fund recorded an investment gain of $5.5 billion in the current year (compared to a loss of $76 million in the previous year), reflecting strong investment performance, off the back of rising global equity markets.

In addition to the gains on investments, gains from actuarial valuations on the Crown's significant long-term liabilities such as ACC and Government Superannuation Fund (GSF) were $1.4 billion (compared to actuarial losses of $7.1 billion in the prior year).

The gain included an actuarial gain of $4.5 billion due to the discount rate at 30 June 2017 (used to value all outstanding claims in today's dollars) being higher than the discount rates at 30 June 2016. This gain of $4.5 billion was partially offset by higher inflation rates, and for ACC the impact of the cost of pay equity and the in between travel settlement with care providers (a net actuarial loss of $3.4 billion).

As can be seen from the volatility in figure 12, the operating balance is particularly sensitive to balance sheet movements and actuarial valuations. Note 2 (page 43) of the financial statements discusses the key judgements and assumptions underpinning these financial statements.

Debt#

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1. Net debt is defined as core Crown net debt excluding the NZS Fund and advances.
2. Gross debt is defined as gross sovereign-issued debt excluding the Reserve Bank settlement cash and Reserve Bank bills.

Net Debt#

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The residual cash surplus has resulted in, in nominal terms, net debt decreasing. At $59.5 billion, net debt has decreased by $2.4 billion since 2015/16. As a share of the economy, net debt continued to fall (22.2% of GDP versus 24.4% of GDP a year earlier).

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).

Figure 13 - Net core Crown debt

Source: The Treasury

Residual Cash#

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Net operating cash flows of $6.3 billion for the year exceeded net capital spending of $3.7 billion, resulting in a residual cash surplus of $2.6 billion. The surplus compares to a residual cash deficit of $1.3 billion last year. Table 12 summarises the movements from residual cash deficit last year to surplus in the current year.

The net core Crown operating cash flow was $6.3 billion, an increase of $3.0 billion from last year with the increase in tax receipts larger than the increase in operating payments. Tax receipts were $5.0 billion higher than last year,in line with the increase in core Crown tax revenue as discussed on page 7. Operating payments increased in line with core Crown expenses, resulted in an increase in cash outflows of $2.4 billion.

Source:  The Treasury

Overall, capital payments were $0.9 billion less than last year. Net purchase of physical assets increased by $0.2 billion, however this was offset by a net repayment of advances of $0.6 billion, and a decrease in purchase of investments of $0.5 billion.

Figure 14 - Net core Crown capital cash flows

Source: The Treasury

Capital spending for 2016/17 totalled $3.7 billion and included:

• Net purchase of physical assets of $2.2 billion, including $0.7 billion by the Ministry of Education in relation to school property, $0.4 billion for defence equipment and $0.2 billion by the Ministry of Health (mostly related to Canterbury rebuild projects).
• Net investments of $1.7 billion, the largest of which was the Crown's investment in state highways of $1.0 billion, with $0.3 billion paid to Southern Response following a call on the Crown Support Deed.
• Net advances was an inflow of $0.1 billion, including repayment of loan proceeds of $0.5 billion, being partially offset by an increase of $0.2 billion for student loans.

Figure 15 - Profile of net core Crown capital cash flows

Source: The Treasury

Around 60% of capital spending ($2.3 billion) has been on the transport and education sectors (figure 15). The total spend in the transport sector was $1.3 billion (35.6%), with a majority of this being spent on progressing the Roads of National Significance, which included completing the Waterview Tunnel, Kāpiti expressway and Auckland region projects. $0.9 billion (24.8%) was spent on Education sector, purchasing physical assets (as discussed above), investing in schools and upgrading existing property to maintain the quality of the property portfolio of the State School sector.

Gross Debt#

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Gross debt, which reflects the borrowings of the core Crown, increased nominally by $0.2 billion compared to last year at $87.1 billion (figure 16). However, as a percentage of the economy, gross debt dropped 1.8% to 32.5% of GDP (34.3% of GDP a year earlier).

Figure 16 - Gross debt

Source: The Treasury

Overall, the Crown's borrowing programme added $1.1 billion to gross debt (table 13). Partially offsetting the increase was a reduction in other liabilities, including derivative liabilities.

During the current year the debt programme raised cash from the market of $1.9 billion. The Crown continued to issue bonds ($8.0 billion face value) while Treasury Bills outstanding were broadly unchanged. The proceeds from bond issuance were largely used to fund repurchases of the December 2017 bond maturity. Repurchasing these securities prior to maturity assists in smoothing the Crown's cash profile, reduces refinancing risk, and minimises any residual market impacts associated with the maturity of this bond.

1. Short-term borrowings consists of Treasury Bills and may include Euro-Commercial Paper.

Net Worth Attributable to the Crown#

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Net worth attributable to the Crown primarily consists of the accumulation of past operating surpluses and deficits (referred to as taxpayers' funds) and revaluation uplifts in the value of the Crown's property assets (the PPE revaluation reserve).

Figure 17 - Net worth attributable to the Crown

Source: The Treasury

Along with the Crown's operating balance surplus, revaluation uplifts of the Crown's property, plant and equipment (details on the next page) resulted in an increase in the Crown's net worth.

Net worth attributable to the Crown was $110.5 billion as at 30 June 2017, an increase of $21.2 billion from a year earlier. As a share of the economy, net worth attributable to the Crown grew 5.9% from 35.3% of GDP in 2015/16 to 41.2% of GDP in the current year.

Figure 18 shows that, while the nominal level of net worth attributable to the Crown has recovered from the decline which began in 2008, the composition of net worth has changed. The main driver of the relatively steady growth in the PPE revaluation reserve over the last few years has been the increases in land and building prices. Although the PPE revaluation reserve grew by 11.3%, as a percentage of net worth attributable to the Crown it has decreased from 84.6% to 76.1% in 2016/17.

Figure 18 - Composition of net worth attributable to the Crown

Source: The Treasury

Taxpayers' funds however, which is directly affected by the operating balance surplus, increased sharply against the prior year, growing by $12.5 billion. As a percentage of net worth attributable to the Crown it has increased to 23.9% in the current year.

Net worth attributable to minority interests largely represents the share of net assets attributable to the investors in the mixed ownership companies (Air New Zealand, Genesis Energy, Mercury NZ and Meridian Energy). The decrease in 2016/17 is the result of dividend payments being larger than the current years' operating profit.

Total Crown Balance Sheet#

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Total Crown assets were $313.6 billion as at 30 June 2017, a $20.9 billion increase since last year. This growth was largely in social sector assets ($13.2 billion), while financial assets grew by $6.3 billion and commercial assets by $1.4 billion.

Total Crown liabilities were $197.1 billion, decreasing by $21 million from the previous year.

Figure 19 - Total Crown balance sheet

Source: The Treasury

Social Balance Sheet#

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Social sector net worth at $142.6 billion was $12.4 billion higher than last year, driven largely by an increase in social assets.

Figure 20 - Social balance sheet

Source: The Treasury

The Crown's social assets were valued at $162.6 billion, a $13.2 billion increase since last year, and made up 51.9% of the Crown's total assets. The largest uplifts related to the following:

• The social housing portfolio increased by $2.6 billion of which $2.2 billion relates to land. The land increase mostly related to Auckland stock reflecting the strength of this market.
• The value of state highways (including land) increased by $2.6 billion, mainly reflecting the development of new and improvements to existing state highway assets.

Social liabilities were $20.1 billion, a $0.9 billion increase compared to 2015/16. This increase was largely due to increased accounts payable and borrowings, offset by a reduction in provisions.

Financial Balance Sheet#

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The Crown's bond programme and therefore holds the majority of the Crown's debt (while the assets funded by the debt are largely in the social sector). Financial sector net worth changed by $7.4 billion, from -$56.4 billion last year to -$49.0 billion in the current year.

Figure 21 - Financial balance sheet

Source: The Treasury

The value of financial assets and financial liabilities are particularly sensitive to changes in market prices. Note 2, on pages 43 to 47, sets out some of the sensitivities of the key assumptions regarding these assets and liabilities.

The Crown's financial sector assets were valued at $94.2 billion, a $6.3 billion increase compared to last year. As mentioned earlier, the NZS Fund recorded net gains with assets growing by $6.8 billion, which directly impacts the financial balance sheet.

Financial sector liabilities were $143.2 billion, $1.2 billion lower than the previous year, mainly as the result of decreases in the value of ACC and GSF liabilities.

Commercial Balance Sheet#

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Commercial sector net worth at $22.9 billion increased by $1.1 billion compared to last year.

The Crown's commercial assets were valued at $56.7 billion, a $1.4 billion increase over the year. A large component of this increase related to Kiwibank loans ($1.1 billion increase), along with increases due to property, plant and equipment valuation uplifts and additions across the sector.

Figure 22 - Commercial balance sheet

Source: The Treasury

Commercial liabilities at $33.9 billion were broadly in line with last year's position.

Year End Results Compared to Budget 2017#

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The Budget Economic and Fiscal Update 2017 (Budget 2017) was published on 25 May 2017.

Reference to estimated actuals refers to the most recent Budget and Economic Fiscal Update for any given year.

Core Crown Tax Revenue#

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Source:  The Treasury

Core Crown tax revenue was $1.0 billion (1.4%) higher than expected, with the largest differences being:

• Corporate tax: $0.6 billion (4.5%) above forecast. $0.1 billion of the variance was from higher-than-expected PIE tax revenue. The remainder of the variance was spread across companies both large and small, from both the 2016 (terminal tax) and 2017 (provisional tax) income years, with most sectors of the economy represented, including a significant contribution from companies operating in the finance and insurance sector.
• Source deductions: $0.2 billion (0.7%) above forecast. At the time the Budget forecast was compiled, the forecasts were based on actual outturn to March which was tracking below labour market data. However, over the past three months, source deduction revenue has moved steadily ahead of the Budget 2017 forecast, to come back into line with the labour market data.

Figure 23 - Core Crown tax revenue variance to Estimated Actuals

Source: The Treasury

Core Crown Expenses#

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Core Crown expenses were $1.1 billion (1.5%) lower than expected.

The lower than forecast result was largely due to lower than forecast impairment of tax receivables and although significant progress was made during the 2016/17 year in Treaty Settlement negotiations, several deeds negotiated during this period were not initialled until July - September 2017, falling outside the actual results.

Figure 24 - Core Crown expenses variance to Estimated Actuals

Source: The Treasury

OBEGAL#

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The OBEGAL surplus was $2.4 billion higher than Budget 2017 forecast. The majority of the variance against Budget 2017 is reflected in the favourable variances in core Crown revenue and core Crown expenses discussed earlier.

The variance in the operating balance against Budget 2017 is primarily explained by the OBEGAL movement for the same forecast period.

Residual Cash and Net Debt#

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The residual cash surplus was $2.5 billion higher than Budget 2017 with operating cash flows $1.3 billion higher than expected and capital payments $1.2 billion lower than forecast.

Operating cash flows were favourable to forecast with operating payments making up $0.6 billion of this and tax receipts increasing by $0.3 billion.

Capital payments were $1.2 billion lower than Budget 2017, driven by less than forecast purchase of physical assets and investments, due to delays in projects (eg, investment in school property assets).

Net debt at $59.5 billion (22.2% of GDP) was $2.8 billion below forecast mainly driven by the residual cash surplus.

Gross Debt#

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Gross debt at $87.1 billion (32.5% of GDP) was $1.5 billion lower than forecast with the repurchase of Government bonds being higher than forecast.

Net Worth Attributable to the Crown#

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The net worth attributable to the Crown was $10.5 billion stronger than Budget 2017 forecast mainly due to an upwards revaluation of property, plant and equipment of $7.5 billion and a favourable operating balance of $2.9 billion against Budget 2017.

Historical Financial Information#

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Audited Financial Statements of the Government of New Zealand#

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Statement of Financial Performance for the year ended 30 June 2017#

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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 2017#

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Below is an analysis of core Crown expenses by functional classification. Core Crown expenses include expenses incurred by Ministers, Departments, Office of Parliament, the NZS Fund and the Reserve Bank, but not Crown entities and State-owned Enterprises. Details of unappropriated expenditure can be found on pages 117 to 121.

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 2017#

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Statement of Comprehensive Revenue and Expense
for the year ended 30 June 2017

2017 Forecast			Actual
Budget 2016 $m	Budget 2017 $m		30 June 2017 $m	30 June 2016 $m
3,579	9,893	Operating balance (including minority interests)	12,636	(4,933)
		Other comprehensive revenue and expense
-	1,156	Revaluation of physical assets	7,888	8,585
-	-	Share of associates revaluation of physical assets	1,035	280
40	139	Transfers to/(from) reserves	47	(136)
6	(11)	(Gains)/losses transferred to the statement of financial performance	62	(56)
(2)	(25)	Other movements	39	(51)
44	1,259	Total other comprehensive revenue and expense	9,071	8,622
3,623	11,152	Total comprehensive revenue and expense	21,707	3,689
		Attributable to:
529	474	- minority interests	541	777
3,094	10,678	- the Crown	21,166	2,912
3,623	11,152	Total comprehensive revenue and expense	21,707	3,689

Statement of Changes in Net Worth
for the year ended 30 June 2017#

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

Statement of Cash Flows
for the year ended 30 June 2017#

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

Statement of Financial Position
as at 30 June 2017#

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

Statement of Segments#

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Notes to the Financial Statements

Note 1: Basis of Reporting#

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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 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).

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 29 September 2017.

Reporting period

The reporting period for these financial statements is the year ended 30 June 2017.

Where necessary, the financial information for State-owned Enterprises 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.

The accounting policies included in these financial statements are the significant accounting policies for the Financial Statements of the Government and appear in grey shaded boxes. A full list of Crown accounting policies can be found at http://www.treasury.govt.nz/publications/guidance/reporting/accounting.

Comparatives

When presentation or classification of items in the financial statements are amended or accounting policies are changed voluntarily, comparative figures have been restated to ensure consistency with the current period unless it is impracticable to do so.

Comparatives referred to as Budget 2016 were forecasts published in the 2016 Budget Economic and Fiscal Update, while Budget 2017 were forecasts published in the 2017 Budget Economic and Fiscal Update. These forecasts include budget adjustments for new unallocated spending during the year (both operating and capital) and top-down adjustments which reduce the bias for forecast expenditure by departments to reflect maximum spending limits instead of mid-point estimates.

Segment analysis

The Government reporting entity is not required to provide segment reporting as it is a public benefit entity. Nevertheless, information is presented for material institutional components and major economic activities within or undertaken by the Government reporting entity. The three major institutional components of the Crown are:

• Core Crown: This group, which includes Ministers, government departments, Offices of Parliament, the Reserve Bank of New Zealand and the New Zealand Superannuation Fund most closely represents the budget sector and provides information that is useful for fiscal analysis purposes. Investments in Crown entities and SOEs are reported at historic cost with no impairment. This ensures losses in those entities are reflected in the appropriate segment.
• Crown entities: This group includes entities governed by the Crown Entities Act 2004. These entities have separate legal form and specified governance frameworks (including the degree to which each Crown entity is required to give effect to, or be independent of, government policy).
• State-owned Enterprises: This group includes entities governed by the State-owned Enterprises Act 1986, and (for the purposes of these statements) also includes Air New Zealand, Mercury NZ Limited, Meridian Energy and Genesis Energy. This group represents entities that undertake commercial activity.

Functional analysis is also provided of a number of financial statements items. This functional analysis is drawn from the Classification of the Functions of Government as developed by the Organisation for Economic Co-operation and Development (OECD).

Accounting Standards issued and not yet effective and not early adopted

Standards and amendments to standards, issued but not yet effective that have not been early adopted, and that are relevant to these Financial Statements are:

Financial Instruments

PBE IFRS 9, Financial Instruments issued in January 2017 (replacing the existing guidance in NZ IAS 39 Financial Instruments: Recognition and Measurement) is effective for annual periods beginning on or after 1 January 2021, but the Crown will adopt this standard early in the 2018/19 Financial Statements of the Government.

The changes in the standard include new financial asset classification requirements for determining whether an asset is measured at fair value or amortised cost, a new impairment model for financial assets based on expected losses, and revised hedge accounting requirements to better reflect the management of risk. The impact of these new requirements has not yet been assessed, but they are expected to have an impact on at least two areas - the carrying value of student loans and the overall level of impairment allowances in relation to KiwiBank loans.

When the new classification rules are adopted, student loans are likely to be valued at fair value, rather than at their current measurement basis of amortised cost. The resulting valuation change will likely result in a one-off increase of $615 million to the value of the student loan asset based on the valuation at 30 June 2017 (Refer to note 15).

As the impact on the impairment allowances depends on the credit environment at the date of adoption, it is not practical to quantify the impact on Kiwibank impairment allowances.

Consolidated Financial Statements

PBE IPSAS 35 Consolidated Financial Statements issued in December 2016 (replacing IPSAS 6 Consolidated and Separate Financial Statements) is effective for annual periods beginning on or after 1 January 2019, with earlier application permitted, but the Crown does not intend to adopt it before the 2019/20 Financial Statements of the Government.

The new standard still requires that a controlling entity consolidates its controlled entities, but the definition of control has changed and the standard now provides considerably more guidance on assessing control. Although the impact of the updated standard has not been assessed, it is possible the new definition may result in some change to previous assessments of control of some entities.

Employee Benefits

PBE IPSAS 39 Employee Benefits issued in January 2017 (updating the existing standard PBE IPSAS 25 Employee Benefits) is effective for annual periods beginning on or after 1 January 2019, with earlier application permitted, but the Crown has not yet decided whether to early adopt it in the 2018/19 Financial Statements of the Government.

The new standard will have an impact on the way the Government Superannuation Fund defined benefit pension scheme is presented in the financial statements with actuarial gains/losses being presented in the Statement of Other Comprehensive Revenue and Expenses rather than as a gain or loss in the Statement of Financial Performance.

Government Reporting Entity as at 30 June 2017#

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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#

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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
• Regenerate Christchurch
• Education Council of Aotearoa New Zealand
• Organisations listed in Schedule 4 and 4A (Non-listed companies in which the Crown is majority or sole shareholder) of the Public Finance Act 1989
• Organisations listed in Schedule 5 (Mixed ownership model companies) of the Public Finance Act 1989
• Legal entities listed in Schedule 6 (Legal entities created by Treaty of Waitangi Settlement Acts) 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 (listed in Schedule 4A of the Public Finance Act 1989), Regenerate Christchurch, City Rail Link 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 17 to the financial statements for the period ended 30 June 2017. This treatment recognises these entities' net assets, including asset revaluation movements, surpluses and deficits.

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 Segment

Departments

• Crown Law Office
• Department of Conservation
• Department of Corrections
• Department of Internal Affairs
• Department of the Prime Minister and Cabinet
• Education Review Office
• Government Communications Security Bureau
• Inland Revenue Department
• Land Information New Zealand
• Ministry for Culture and Heritage
• Ministry for Pacific Peoples
• Ministry for Primary Industries
• Ministry for the Environment
• Ministry for Vulnerable Children, Oranga Tamariki
• Ministry for Women
• 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 Social Development
• Ministry of Transport
• 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
• Office of the Ombudsman
• Parliamentary Commissioner for the Environment

Others

• New Zealand Superannuation Fund
• Reserve Bank of New Zealand

State-owned Enterprises Segment

State-owned Enterprises

• Airways Corporation of New Zealand Limited
• Animal Control Products Limited
• AsureQuality Limited
• Electricity Corporation of New Zealand Limited
• KiwiRail Holdings Limited
• Kiwi Group Holdings Limited (including Kiwibank)
• Kordia Group Limited
• Landcorp Farming Limited
• 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) 

• Genesis Energy Limited
• Mercury NZ Limited
• Meridian Energy Limited

Other

• Air New Zealand Limited

Crown entities Segment

Crown entities

• Accident Compensation Corporation
• Accreditation Council
• 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 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 (2,407)
• Social Workers Registration Board
• Sport and Recreation New Zealand
• 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
• 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 (22)
• Te Ariki Trust

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

• Crown Asset Management Limited
• Crown Fibre Holdings Limited
• Education Payroll Limited
• Fairway Resolution Limited
• Health Benefits Limited (ceased operating)
• Ōtākaro Limited
• Predator Free 2050 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

Others

• Education Council of Aotearoa New Zealand
• Regenerate Christchurch

Other entities

Crown entities

• Tertiary Education Institutions (28)

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

• City Rail Link Limited

These entities are not fully consolidated into the financial statements of the government with only the Crown's interest in them being included.

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

Note 2: Key Assumptions and Judgements#

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These financial statements reflect the Government's financial position (service potential and financial capacity) as at 30 June 2017, and the financial results of operations and cash flows for the year ended on that date. Underpinning these financial statements are a number of judgements, estimations and assumptions. These include assumptions and judgements about the future, in particular, the service benefits and future cash flows in relation to existing assets and liabilities.

Key assumptions#

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The assumptions in these financial statements are based on the best information available at the time of their preparation. Given the inherent uncertainty of predicting the future, actual events are likely to differ from these assumptions, which may have a material impact on the results reported in these financial statements. Some of the key assumptions are discussed below.

Assumption

Foreign exchange rates

That foreign currency denominated financial assets and liabilities will be able to be translated to New Zealand dollars at the exchange rate prevailing at the reporting date. 

Share prices

That listed share investments, which consist of approximately 95% of the Government's total share investments, can be realised at quoted market prices at balance date.

Interest rates

That current market yield curves provide an appropriate basis for determining the value of the majority of marketable securities and borrowings.

Carbon price

That the carbon price, determined by the Ministry for the Environment based on the quoted NZU spot price at the end of the reporting date as published by OM Financial Limited on their CommTrade Carbon website, reflects the value of units that will be surrendered to the Crown.

Property prices

That current property prices, determined using market evidence, provide the most relevant basis on which to value land and buildings owned by the Crown.

Depreciation rates

That the economic useful life of assets (used to determine depreciation rates) will equate to the estimates determined using a combination of engineering and historical evidence.

Asset Purpose

That assets will continue to be held for their intended purpose. Assets that are held for for-profit purposes are subject to a commercially recoverable amount test (the higher of the income that can be generated from the asset, or the proceeds from its sale).  Assets that are held for public benefit purposes are generally valued at optimised depreciated replacement cost. Optimisation means that surplus assets are identified.  If not surplus, it can be assumed the asset will be replaced, and therefore the asset value is not reduced below its optimised depreciated replacement cost.  If surplus, the asset will be valued at its net selling price.

With respect to the asset purpose assumption, the valuation of the Rail Freight Network is particularly uncertain at present. Treated as a for-profit asset since 2012, this asset has a carrying value of $96 million (2016: $101 million). The Crown is currently conducting a review to consider KiwiRail's operating structure, capital requirements and funding mechanisms within the context of rail's purpose within New Zealand's broader transport mix. This review may change the assumptions underlying the future valuations of KiwiRail's Rail Freight Network.

A number of outcomes are possible from the review, including the possibility of some assets being determined as surplus to requirements, which could result in a portion of the freight assets being revalued using the optimised depreciated replacement cost methodology that was used prior to 2012. The potential impact of this revaluation could increase the asset value up to $4.4 billion and result in the reversal of some or all of the $1.4 billion impairment expense previously recognised. For further information, see note 16.

A number of long-term assets and liabilities are valued by estimating future cash flows which are then discounted to present value. Some of the cash flows, in particular those relating to long-term liabilities (egg, ACC and GSF obligations) use assumptions to predict cash flows up as far as 80 years into the future. Therefore, changes in a number of economic variables can have a significant impact of the Government’s financial position and performance. The most significant of these are:

Sensitivity of key assumptions

The tables below outline the sensitivity of the key assumptions discussed above on the significant valuations included in these financial statements.

The value of financial assets and financial liabilities are particularly sensitive to changes in market prices and account for a significant portion of the financial position. At 30 June 2017 financial assets totalled $133.3 billion (2016: $125.8 billion) while financial liabilities totalled $128.4 billion (2016: $127.2 billion).

In relation to assumptions concerning property prices, land and buildings account for 58% (2016: 57%) of total property, plant and equipment and 68% (2016: 65%) of the asset revaluation reserve. A significant decline in property prices would not impact the operating balance but would reduce net worth.

Long term liabilities such as the ACC claims liability ($40.3 billion) and the GSF retirement plan ($11.0 billion) are particularly sensitive to the assumptions associated with estimating discounted cash flows. The table below outlines the sensitivity of those liabilities to key assumptions:

 

Areas of significant estimation#

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These financial statements include estimated amounts that have a number of uncertainties (discussed below).

Other uncertainties#

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In addition to those items on the statement of financial position there are a number of liabilities or assets that may arise in the future but are not recognised. This is because they are dependent on uncertain future events occurring or the liability / asset cannot be measured reliably. If these contingencies crystallise, there will be an associated impact on the operating balance and net worth of the Crown. These contingencies are reported in note 25 of these financial statements.

Risk management#

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The Crown's financial position at balance date is exposed to risks through possible changes in the key assumptions and judgements described above that could materially impact on the value of the Crown's assets and liabilities.

The Crown's current risk management framework generally involves holding individual government reporting entities responsible for managing the risks that they individually face, subject to legislation and central guidance such as the Public Finance Act and Treasury Instructions. Government-wide resilience is supported through relatively low debt levels and a strong financial position.

With respect to its financial portfolios, the Government's financial instrument holdings expose it primarily to the financial risks of changes in interest rates, foreign exchange rates, risk of default and liquidity risk. These risks are managed at portfolio level consistent with the policy purpose of the portfolio and risk management objectives. Detailed information on the exposure to market risk and policies for managing this risk are available in the separate financial statements prepared by the entities who manage each portfolio.

The Government's exposure to market risk reflects the combination of these portfolio management practices. These practices include use of Value-at-Risk (VaR) limits and stop-loss limits to manage risk. While the Treasury and the Reserve Bank's activities collectively manage the core Crown's exposure to foreign exchange, there is no other centralised management of market or other risk.

There has been no significant change to the manner in which the Government reporting entities that manage the Government's portfolios, manage and measure risks from the previous year.

Derivative financial instruments are often used across the portfolios to manage exposure to interest rate, and foreign currency risk. Refer to pages 108 to 111 for further derivative information.

Note 3: Sovereign Revenue#

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1. Includes customs excise-equivalent duty.

More detailed unaudited information on tax revenue and receipts can be found at www.treasury.govt.nz/government/revenue/taxoutturn

The Government provides many services and benefits that do not give rise to revenue. Further, payment of tax does not of itself entitle a taxpayer to an equivalent value of services or benefits, since there is no relationship between paying tax and receiving Crown services and transfers. Such revenue is received through the exercise of the sovereign power of the Crown in Parliament.

Note 4: Sales of Goods and Services#

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Note 5: Investment Income/(Expense)#

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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 (refer note 15).

Note 6: Other Revenue#

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Note 7: Transfer Payments and Subsidies#

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Note 8: Personnel Expenses#

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Key management personnel compensation was $10 million (2016: $10 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 Ministers remuneration and other benefits are set out by the Remuneration Authority under the Members of Parliament (Remuneration and Services) Act 2013. 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.govt.nz).

Note 9: Other Operating Expenses#

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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#

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Fees paid to the Controller and Auditor-General for the audit of the financial statements of the Government and its reporting entities (including audit service providers) were $42.1 million (2016: $40.8 million). These fees include $0.2 million (2016: $0.2 million) for the audit of these financial statements. Audit Fees for assurance and related services paid to the Controller and Auditor-General were $0.3 million (2016: $0.4 million). As the Controller and Auditor-General is part of the Government reporting entity, these fees are eliminated on consolidation.

Note 10: Gains and Losses on Non-Financial Instruments#

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Note 11: Insurance#

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EQC insurance expenses include $550 million in relation to the Kaikōura earthquakes.

Further information on these liabilities may also be found in the annual reports of each of these entities and on their respective websites. The objectives, policies and procedures for managing these risks are set out in the governing statutes and policy documents of each entity.

All assets held by the three insurance entities are considered available to back present and future claims obligations. There are no deferred acquisition costs (eg, marketing costs) in respect of insurance obligations at the reporting date. In addition each of these entities is backed by a guarantee from the Crown.

The outstanding claims liability is the present value of the central estimate of expected payments for claims incurred plus a risk margin. The unearned premium liability represents premiums received to provide insurance cover after 30 June 2017. The unearned premium liability deficiency is the extent that the unearned premium liability is insufficient to cover expected future claims (ie, payments for future accidents within the period covered by the premiums received).

The remainder of this note provides detailed analysis of the ACC insurance expense and liability. ACC's insurance obligations arise primarily from the accident compensation scheme provision of no fault personal injury cover for all New Zealand citizens, residents and temporary visitors to New Zealand.

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

Analysis of ACC insurance liability#

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An independent actuarial estimate by PricewaterhouseCoopers, consulting actuaries, has been made of the future expenditure relating to accidents that occurred prior to balance date, whether or not the claims have been reported to or accepted by ACC. The PricewaterhouseCoopers actuarial report is signed by Mr Paul Rhodes, Fellow of the Institute and Faculty of Actuaries (UK), and Mr Michael Playford, Fellow of the Institute of Actuaries of Australia. Mr Paul Rhodes and Mr Michael Playford are also Fellows of the New Zealand Society of Actuaries. The actuaries are satisfied with the nature, sufficiency and accuracy of the data used to determine the outstanding claims liability.

Claims development historical analysis#

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The following table shows the development of ACC's undiscounted claims cost estimates for the seven most recent accident years.

 

Key Assumptions#

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The key assumptions and the methodology applied in the valuation of the outstanding ACC claims obligation are as follows:

(i)   Risk-free discount rates

The projected cash flows were discounted using a series of forward discount rates at the balance date derived from the yield curve for New Zealand government bonds. The equivalent single effective discount rate taking into account ACC's projected future cash flow patterns is a short term discount rate of 3.80% (2016: 3.22%) and a long term discount rate of 4.75% beyond 39 years (2016: 4.75% beyond 39 years).

(ii)   Risk margin

The outstanding claims liability includes a risk margin that relates to the inherent uncertainty in the central estimate of the present value of expected future payments. The overall risk margin is intended to achieve a 75% probability of sufficiency in meeting the actual amount of liability to which it relates.

(iii)   Inflation and indexation

ACC claims and costs are subject to inflation. Some costs are assumed to increase faster than the general rate of inflation (referred to as superimposed inflation) due to factors such as innovation in medical treatment.

(iv)   Rehabilitation rate

Assumptions for rehabilitation rate were set with reference to past observed experience with allowance for expectations of the future that is believed to be reasonable under the circumstances.

(v)   Liability adequacy test

An unearned premium liability deficiency is recognised when the amount of the present value of expected future claim cash outflows, plus a risk margin, exceeds the unearned premium liability.

Sensitivity Analysis#

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The present value of the ACC claims obligation is sensitive to underlying assumptions such as the discount rate, inflation rates and expected medical costs. These assumptions are closely linked. For example, a change to the discount rate may have implications on the inflation rate used. Therefore, when calculating the present value of claims it is unlikely that an assumption will change in isolation.

If the assumptions described above were to change in isolation, this would impact the measurement of the ACC claims obligation as per the table below:

Undiscounted outstanding claims liability

The reported outstanding claims liability (before risk margin) of $33,405 million (2016: $32,457 million) represents the net present value of estimated cash flows associated with this obligation. The following table represents the timing of future undiscounted cash flows for claims to 30 June 2017. These estimated cash flows include the effects of assumed future inflation.