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Statement of Responsibility On the basis of the economic and fiscal information available to it, the Treasury has used its best professional judgement in supplying the Minister of Finance with this Economic and Fiscal Update. The Update incorporates the fiscal and economic implications both of Government decisions and other circumstances as at 3 December 2013 that were communicated to me by the Minister of Finance in accordance with the requirements of the Public Finance Act 1989 and of other economic and fiscal information available to the Treasury as at 3 December 2013. This Update does not incorporate any decisions, circumstances, or statements that the Minister of Finance has determined, in accordance with the Public Finance Act 1989, should not be incorporated in this Update. Gabriel Makhlouf Secretary to the Treasury 9 December 2013 To enable the Treasury to prepare this Economic and Fiscal Update I have ensured the Secretary to the Treasury has been advised, in accordance with the requirements of the Public Finance Act 1989, of all Government decisions and other circumstances as at 3 December 2013 of which I was aware and that had material economic or fiscal implications. I accept responsibility for the integrity of the disclosures contained in the Update and responsibility for the consistency and completeness of the Update information with the requirements of Fiscal Responsibility in the Public Finance Act 1989. Hon Bill English Minister of Finance 9 December 2013 B.6 | 1 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Executive Summary The economic expansion is becoming increasingly embedded, with growth becoming more broad-based although still dominated by domestic demand. Growth in the second half of 2013 appears to have been stronger than expected at Budget time with real gross domestic product (GDP) estimated to be growing at around a 3% annualised pace. Real GDP growth is expected to be 3.6% in the 2015 March year, but eases to around 2% in Figure 1 – Real GDP and private final demand* the last two years of the forecast Annual average % change 10 period. Over the five years to Forecast 8 March 2018, real GDP growth 6 averages 2.6%, a little above the 4 Treasury’s estimate of potential growth over this period. 2 0 A stronger economy sees the -2 underlying fiscal position improve -4 faster than in the Budget Update, 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Years ended 31 March although developments outside the Private final demand Real GDP core Crown see the overall total Sources: Statistics New Zealand, the Treasury Crown operating balance before *Private final demand comprises private consumption, gains and losses (OBEGAL) being residential and market investment spending little changed this year and next. OBEGAL is forecast to move from a deficit of $4.4 billion last year to a small surplus of $0.1 billion in the year ending June 2015, and to $5.6 billion in the year ending June 2018. Government net core Crown debt peaks a year earlier and at a lower level than previously forecast at $64.5 billion in the year ending June 2016. The main influences on the outlook for the economy are broadly similar to those in the Budget Update. The Canterbury rebuild remains a key driver of demand, along with a high terms of trade and strengthening labour market conditions supporting income growth and associated household and firm spending. Credit growth is increasing but overall remains moderate. Higher-than-expected net migration and household wealth inflows are also contributing to near term demand, as are stimulatory monetary policy settings, although all are forecast to diminish in importance over the forecast period. Private spending growth is forecast to accelerate to over 5% in the year ahead. The Half Year Update sees a continuation of low government spending growth. This, together with some recovery in effective tax rates sees fiscal policy exerting a restraining influence on demand and interest rates, notwithstanding planned reductions in Accident Compensation Corporation (ACC) levies in the June 2015 and 2016 years. The global backdrop for these forecasts is for steady, but uneven, economic growth with the possibility of further economic and financial market turbulence. It is likely to be some time yet before the major advanced economies begin to “normalise” monetary and fiscal conditions, contributing to an elevated New Zealand dollar in the meantime. 2 | B.6 EXECUTIVE SUMMARY The exchange rate is assumed to remain high for much of the forecast period, acting as a drag on export and import-competing sectors but spreading the income gains from the high terms of trade to the broader economy. Growth in imports, partly associated with strong investment growth, means net exports make a negative contribution to GDP growth over the first three years of the forecast period. In sum, the economy is expected to be operating at, or above capacity over most of the forecast period, leading to some increase in price pressures and the current account deficit. The unemployment rate is forecast to decline to below 5%, annual Consumers Price Index (CPI) inflation to move back to around the middle of the 1% to 3% target band and the current account deficit to increase to around 6.5% of GDP. Higher inflation will lead to an eventual withdrawal of macroeconomic stimulus. Short-term interest rates are expected to begin increasing next year and to rise gradually thereafter. Fiscal policy restraint and the high exchange rate imply interest rates are lower than otherwise would be the case. The recent application of macro prudential tools also assists monetary policy over the short term. In the absence of these downward forces, the size of the Canterbury rebuild would likely force interest rates to rise earlier and by more. The estimated size of the Christchurch rebuild is unchanged from the Budget Update at $40 billion, although the precise timing of activity remains a key uncertainty. The Government’s fiscal costs are currently assessed to be $14.9 billion. Figure 2 – OBEGAL, core Crown residual cash and core Crown net debt $billions 80 $billions 15 Forecast 10 70 5 60 0 50 -5 40 -10 30 Core Crown operating cash flows -20 also return to surplus in the year -25 ending June 2015, but when 2000 2002 2004 2006 2008 2010 2012 Years ended 30 June combined with net capital Core Crown residual cash OBEGAL spending, core Crown residual cash does not return to surplus Source: The Treasury until the year ending June 2017 (both a year earlier than in the Budget Update). -15 20 10 0 2014 2016 2018 Net debt (RHS) There is a mix of upside and downside risks, including the size and pace of the Canterbury rebuild, the extent of the turnaround in net migration currently underway, the path of the terms of trade, the path and pass-through of the exchange rate and the saving behaviour of households, particularly in light of current house price increases. Global risks, although more even than in recent years, remain skewed to the downside, which if crystallised, would act to accentuate the domestic orientation of forecast growth. We see a risk of a more cyclical path for the economy, with stronger domestic demand driven growth in the short to medium term, necessitating a stronger macro policy response and eventual slowing in growth. The Half Year Update contains two alternative scenarios to illustrate some of the risks to the main forecasts. One scenario maps out a more pronounced domestic demand driven cycle while the other shows the impact of weaker Asian trading partner growth. B.6 | 3 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE In addition to the fiscal impact of changes to economic activity, the Government is exposed to other fiscal risks. For example, the Crown’s financial position is susceptible to market risk with regards to movements in market variables such as interest rates, exchange rates and equity prices. There are also a number of contingent liabilities and fiscal risks outlined in the Specific Fiscal Risk chapter. Table 1 – Summary of the Treasury’s main economic and fiscal forecasts 2013 Actual 2014 Forecast 2015 Forecast 2016 Forecast 2017 Forecast 2018 Forecast Economic growth1 2.7 2.7 3.6 2.7 2.0 2.2 Unemployment rate2 6.2 5.8 5.6 5.4 5.2 4.7 0.9 1.4 2.4 2.4 2.3 2.2 -4.5 -4.2 -5.5 -6.3 -6.5 -6.4 Total Crown OBEGAL5 -2.1 -1.0 0.0 0.7 1.2 2.1 Net debt6 26.2 26.3 26.5 25.8 24.4 22.3 Economic (March years, %) CPI inflation3 Current account balance4 Fiscal (June years, % of GDP) Notes: 1 2 3 4 5 6 Real production GDP, annual average percentage change Percent of labour force, March quarter, seasonally adjusted Annual percentage change % of GDP Total Crown operating balance before gains and losses (OBEGAL) Net core Crown debt excluding the New Zealand Superannuation Fund (NZS Fund) and advances Sources: Statistics New Zealand, the Treasury Finalisation Dates for the Update 4 | B.6 Economic data 11 November Economic forecasts 11 November Tax revenue forecasts 18 November Fiscal forecasts 3 December Specific fiscal risks 3 December Text finalised 11 December 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Economic Outlook Overview The near-term outlook for the New Zealand economy is robust, with an increasingly embedded and broad-based pick-up in activity anticipated following a drought-affected first half of 2013. Real GDP growth is expected to exceed its potential rate over the coming years, peaking at 3.6% in the March 2015 year, before easing to a more moderate rate of around 2.0% towards the end of the forecast period. Growth outlook reflects net influence of supportive and constraining factors The growth outlook continues to reflect Figure 1.1 – Real GDP growth the net impact of a number of large Annual average % change 8 supporting and constraining forces. The Canterbury rebuild remains a key 6 factor on the supportive side, along 4 with a high terms of trade, stimulatory 2 monetary policy settings and rising 0 incomes on the back of a -2 strengthening labour market. Forecast -4 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18 The supportive influences on the Quarterly Budget Update 2013 Half Year Update 2013 domestic economy are set against a backdrop of familiar constraining Sources: Statistics New Zealand, the Treasury factors. These include the forecast reduction in the fiscal deficit, which will continue to lean against demand, an elevated exchange rate that will remain a near-term headwind for growth in the export sector, and a steady, but uneven, outlook for global economic growth. The main influences on the outlook for the economy are broadly similar to those in the Budget Update. However, higher-than-expected net migration inflows over the year to date contribute to stronger near-term demand growth, and add to the supply potential of the economy further out. Domestic demand pressures building in the near term... The Canterbury rebuild is expected to provide significant impetus to demand over the forecast horizon and beyond, chiefly through additional residential and business investment, but also through related consumption spending on consumer durables. The merchandise terms of trade are forecast to remain elevated and close to historic highs across most of the forecast period, supported by rising demand for New Zealand’s commodity exports. This is a key driver of income growth and nominal GDP growth. An additional inflow of approximately 26,000 net migrants compared to the Budget Update will boost the productive capacity of the economy over time, but will add to demand pressures in the near term – particularly in the housing market in Auckland. Households are assumed to be broadly comfortable with the amount of debt reduction undertaken over recent years (as a share of income). That said, households are expected 4 | B.6 FORECAST FINANCIAL STATEMENTS to remain cautious in their spending decisions, with increases in consumption coming from rises in income, rather than from running down assets or increasing debt. ...against a backdrop of familiar offsetting factors Ongoing steps to reduce the fiscal deficit will remain a constraining factor on demand over the coming years, but will free up resources enabling additional activity elsewhere, such as the Canterbury rebuild. The reduction in the deficit will also allow interest rates and the exchange rate to remain lower than they would otherwise be. The elevated New Zealand dollar will constrain activity in exchange rate-sensitive parts of the economy over the coming years, including the non-commodity and service export sectors, but will also support investment and consumption by making imported goods cheaper. The assumed decline in the exchange rate is expected to begin to stimulate activity in the external sector towards the end of the forecast period. The near-term outlook for trading partner growth is slightly weaker than forecast in the Budget Update, primarily owing to slower growth in the Australian economy as mining investment moderates. Although the medium-term outlook for this growth is relatively benign, there are risks arising from the diverging trends in the global economy. Interest rates expected to begin to rise next year With the economy set for a period of above-potential growth, increasing price pressures are expected to see the Reserve Bank begin to increase the Official Cash Rate (OCR) in the first half of 2014. The forecast track for short-term interest rates in the Half Year Update is broadly similar to that in the Budget Update, but is around 30 basis points lower than it would have been in the first half of the forecast period if loan-to-value (LVR) lending restrictions had not been implemented. Having been the subject of a range of revisions since the Budget Update, the annual current account deficit is expected to narrow further in the near term, before widening to 6.4% of GDP in the March 2018 quarter. B.6 | 5 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Table 1.1 – Economic forecasts1 (Annual average % change, March years) 2013 Actual 2014 Forecast 2015 Forecast 2016 Forecast 2017 Forecast 2018 Forecast Private consumption 2.3 3.7 2.8 2.8 1.9 1.6 Public consumption 0.4 0.1 0.4 0.7 0.6 0.7 Total consumption 1.9 2.9 2.3 2.4 1.6 1.4 19.1 16.7 25.5 16.4 3.7 0.6 6.2 11.7 8.1 3.1 0.7 1.0 -12.2 15.2 -3.7 2.4 2.4 2.4 7.1 14.6 12.1 6.2 1.7 1.1 -0.4 0.2 -0.2 -0.1 0.0 0.1 Gross national expenditure 2.3 5.7 4.4 3.3 1.6 1.3 Exports 3.0 -2.2 2.4 1.9 2.9 3.0 Imports 0.7 7.3 5.1 4.3 2.1 0.8 GDP (expenditure measure) 2.9 2.4 3.4 2.5 2.0 2.2 GDP (production measure) 2.7 2.7 3.6 2.7 2.0 2.2 Real GDP per capita 2.0 1.6 2.2 1.6 1.0 1.2 Residential investment Market investment Non-market investment Total investment Stock change 2 Nominal GDP (expenditure measure) 2.4 6.5 4.9 5.2 4.0 3.7 -0.5 3.9 1.5 2.6 2.0 1.5 -0.9 -0.2 0.9 0.5 0.0 0.0 Employment 0.3 2.0 2.6 1.4 1.0 1.3 Unemployment rate4 6.2 5.8 5.6 5.4 5.2 4.7 67.9 68.5 68.9 68.7 68.5 68.5 2.1 2.7 3.1 3.2 3.4 3.4 GDP deflator Output gap (% deviation, March quarter)3 Participation rate Nominal wages CPI inflation 5 6 7 0.9 1.4 2.4 2.4 2.3 2.2 -6.1 10.6 -0.9 1.6 0.3 0.0 $billion -9.5 -9.5 -13.0 -15.7 -16.7 -17.2 % of GDP -4.5 -4.2 -5.5 -6.3 -6.5 -6.4 -71.8 -70.6 -72.8 -75.5 -79.0 -82.6 75.9 77.0 75.3 73.9 70.0 65.3 2.7 2.7 3.6 4.4 4.9 5.2 3.7 4.8 4.9 5.1 5.2 5.2 Terms of trade8 Current account balance Net international investment position % of GDP TWI 9 90-day bank bill rate 10-year bond rate9 Notes: 9 1 Forecasts finalised 11 November 2013. 2 Contribution to GDP growth. 3 Estimated as the percentage difference between actual real GDP and potential real GDP. 4 Percent of the labour force, March quarter, seasonally adjusted. 5 Percent of the working-age population, March quarter, seasonally adjusted. 6 Quarterly Employment Survey, average ordinary-time hourly earnings, annual percentage change. 7 Annual percentage change. 8 System of National Accounts (SNA) and merchandise basis, annual average percentage change. 9 Average for the March quarter. Longer time series for these variables are provided on page 129. 6 | B.6 FORECAST FINANCIAL STATEMENTS Economic Outlook Economy set for period of above-potential growth in the near term... The near-term outlook for the New Zealand economy is robust, with an increasingly embedded and broad-based pick-up in activity anticipated following a drought-affected first half of 2013. The Canterbury rebuild is showing signs of gaining momentum, the labour market is strengthening and monetary conditions remain stimulatory. Strong external demand for New Zealand’s commodity exports, particularly dairy, has underpinned a rebound in the terms of trade to near-record highs and domestic demand has received further support from a marked turnaround in net migration inflows since the start of the year. Overall, real GDP growth is forecast to accelerate above its potential rate in the coming years, peaking at 3.6% in the March 2015 year. This will result in an increase in price pressures and will necessitate withdrawal of monetary policy stimulus in the first half of 2014. There is likely to be some variation in growth and activity at a regional level. ...followed by a moderation in the later years Real GDP growth is expected to moderate to a more sustainable pace later in the forecast period, in line with the Treasury’s estimate that potential growth will average around 2.4% over the forecast period. This reflects the Treasury’s assessment of growth in the labour force and productivity in the longer run.1 The assumed depreciation in the New Zealand dollar is forecast to begin to stimulate activity in the exchange rate-sensitive parts of the economy, such as the services and non-commodity export sectors, towards the end of the forecast period. Outlook reflects net impact of large influencing factors The growth outlook for the New Zealand economy reflects the net influence of a number of large supportive and constraining forces. Many of the supportive factors that are expected to influence domestic activity over the forecast period do so in a similar manner, and to a similar extent, as forecast at the Budget Update. These include the impetus from the Canterbury rebuild, stimulatory monetary policy settings and a strengthening labour market. Overall, however, the net impact of the supportive influences on demand in the near term is slightly stronger than forecast at the Budget Update, including a larger-than-expected turnaround in net migration flows reflecting the recent weaker performance of the Australian economy. We judge the balance of risks to the central forecast to be balanced, but explore alternative economic scenarios in the Risks and Scenarios chapter. Canterbury rebuild remains a key influence across the forecast period... The Canterbury rebuild is expected to provide significant impetus to demand over the forecast horizon and beyond, chiefly through additional residential and business investment, supported by higher private consumption, particularly of consumer durables. 1 See the note, Potential Output in the 2012 Half Year Update, published as part of the 2012 Half Year Economic and Fiscal Update, for background information (available on the Treasury website). B.6 | 7 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Estimating the level of investment activity associated with the Canterbury rebuild is inherently difficult and subject to much uncertainty. The Treasury’s estimate of the total level of investment that relates to the Canterbury rebuild is similar to that in the Budget Update at around $40 billion. Approximately half of this total investment is forecast to have taken place by the end of the forecast period in mid-2018. ...underpinning strong growth in residential investment... After a soft patch in the middle of the year, a surge in building consents in the Canterbury region in the September quarter suggests that residential rebuild activity is about to increase significantly. Annual real residential investment growth is forecast to accelerate to a peak of around 26% in the March 2 2015 year. This peak in growth occurs Figure 1.2 – Real residential investment Number % of real GDP (annual) slightly later and at a lower level than 7 35,000 Forecast forecast in the Budget Update, but the 30,000 6 broad picture is similar in level terms. 25,000 Over two-thirds of the residential 5 rebuild is expected to be completed by 20,000 4 the end of the forecast period in 2018. 15,000 3 10,000 While the Canterbury rebuild is expected to provide a large proportion 2 5,000 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18 of the impetus for the surge in Quarterly Real residential investment Exc. Canterbury rebuild residential investment over the forecast New dwelling consents (RHS, annual total) period, activity in other parts of the Sources: Statistics New Zealand, the Treasury country is also expected to rise significantly, particularly in the Auckland region. The drivers of the underlying growth include a catch-up for past population growth, expected future population increases (including through migration), rising household income, and low, albeit rising, interest rates. Figure 1.2 shows the share of real residential investment with and without the Canterbury rebuild. Including rebuildrelated activity, residential investment is forecast to peak at around 6% of real GDP – in line with the share reached in the early-2000s. Rapidly rising house prices, particularly in the Auckland region, are expected to encourage an increase in new home building, although this will take time. The implementation of LVR lending restrictions by the Reserve Bank makes it less certain how the supply and demand dynamics in the housing market will play out. Higher-thanexpected net migration inflows mean that annual house price inflation is forecast to be stronger in the near term than in the Budget Update. However, the impact from migration is offset to some extent by the LVR lending restrictions, which are expected to impose a modest dampening effect on house price inflation in the near term. Annual house price inflation is forecast to peak at around 10% in the December 2013 quarter, before moderating to 2.4% towards the end of the forecast period. The forecast track for short-term interest rates in the Half Year Update is broadly similar to that in the Budget Update, but is around 30 basis points lower in the first half of the forecast period than it would have been if LVR restrictions had not been implemented (consistent with the Reserve Bank’s estimates). 2 Note that the “Excluding Canterbury rebuild” line is only illustrative and should not be interpreted as an alternative forecast of what would have occurred in the absence of the Canterbury earthquakes. 8 | B.6 FORECAST FINANCIAL STATEMENTS ...as well as market investment The current environment of low interest rates, strong business confidence and an elevated exchange rate (which makes imported capital goods cheaper) is also expected to drive a sharp increase in market investment in the near term. The Canterbury rebuild is expected to contribute to an increase in market investment as well. Later in the forecast period, higher interest rates and a lower exchange rate are expected to see market investment growth moderate. Robust outlook for private consumption... The large increase in residential investment over the forecast period is also expected to provide significant impetus to private consumption in the form of related and additional spending on consumer durables. Private consumption growth is expected to accelerate to 3.7% in the March 2014 year – its fastest pace since the end of 2007 – as consumer confidence remains elevated and real incomes are boosted by the current subdued inflation environment. Figure 1.3 – Private consumption and house prices Annual average % change 8 Annual average % change Forecast 24 18 6 12 4 6 2 0 0 -6 -2 -12 -4 -18 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18 Quarterly Private consumption Real house prices (RHS) Sources: Statistics New Zealand, QV, the Treasury The pace of private consumption growth is expected to slow later in the forecast period as real income and house price growth slow, and interest rates rise (Figure 1.3). B.6 | 9 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Migration and Regional Activity One of the main differences between the Half Year Update and the Budget Update forecasts is the more pronounced turnaround in net permanent and long-term migration flows. After registering a net outflow of migrants throughout 2012, the annual net flow of migrants moved into positive territory in January 2013, and has since climbed to a three-year high of 17,500 in the year ended October 2013. Net migration flows often exhibit large cycles as arrivals and departures move in different directions at the same time. In a reflection of the recent divergence in performance between the New Zealand and Australian economies, fewer migrant departures, mostly to Australia, account for around two-thirds of the turnaround in net migration flows since Figure 1.4 – Net migration the start of 2013. Moreover, just over People (annual total) half of the increase in arrivals since the 50,000 Forecast start of the year was accounted for by 40,000 arrivals from Australia, two-thirds of 30,000 whom were returning New Zealanders. 20,000 All told, the Half Year Update 10,000 0 incorporates an additional net inflow of around 26,000 migrants over the -10,000 forecast period compared with the -20,000 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18 Budget Update, mainly in the next two Quarterly Budget Update 2013 Half Year Update 2013 years (Figure 1.4). Sources: Statistics New Zealand, the Treasury Additional migrants will add to the economy’s supply potential over time... Additional people in New Zealand will flow through to an increase in the labour force, and add to the underlying productive capacity of the economy. An additional inflow of migrants may also help to relieve regional pressures and bottlenecks in the labour market – particularly arising out of the ongoing Canterbury rebuild. ...but will add to demand pressures in the near term However, it will take time for the full supply impetus to be felt and, in the meantime, higher net migration inflows will exacerbate near-term demand pressures. With the economy already operating close to capacity, any additional demand impetus will complicate the task for the Reserve Bank of setting monetary policy in the near term. Moreover, the concentrated nature of the demand associated with higher net migration will also contribute to sustained upward pressure on house prices, particularly in the Auckland region. While aggregate annual house price growth in the Half Year Update is forecast to peak at a slower pace than in the previous housing cycle in the early-to-mid-2000s, the aggregate picture masks significant variation at a regional level. Overall, to the extent that stronger near-term demand pressures elicit a more aggressive tightening of monetary policy, the wider risk is of a more pronounced economic cycle than in the central forecast. The Risks and Scenarios chapter contains an alternative scenario in which the net migration inflow is greater than in the Half Year Update’s main forecast. 10 | B.6 FORECAST FINANCIAL STATEMENTS ...supported by the historically-high terms of trade... The positive outlook for the terms of Figure 1.5 – Merchandise terms of trade (SNA) trade is another strongly supportive and ANZ commodity price index Annual % change factor in the Half Year Update Annual % change 20 40 Forecast forecasts. This will continue to 15 30 underpin incomes and nominal GDP 10 20 over the forecast period. The near5 10 term rebound in the merchandise 0 0 terms of trade reflects sustained high -5 -10 dairy prices as well as support from forestry and meat during the middle of -10 -20 the year. In keeping with commodity -15 -30 Mar-89 Mar-92 Mar-95 Mar-98 Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16 price indicators, the merchandise Quarterly Merchandise terms of trade (SNA) terms of trade are expected to be ANZ Commodity Price Index (RHS, adv. 1q, quarterly average) around 15% higher in the December Sources: Statistics New Zealand, ANZ, the Treasury 2013 quarter than in the same period a year ago (Figure 1.5). Dairy prices are expected to fall back as global supply increases. The timing is uncertain and global supply remains constrained, but the Half Year Update forecasts assume a drop in dairy prices, and a corresponding modest correction in the terms of trade, during the first half of 2014. Overall, though, the terms of trade are expected to remain near record highs over the medium term, at a similar level seen in the Budget Update, supported by structural factors including rising demand for New Zealand’s commodity exports, particularly from China. ...and a strengthening labour market Having shown signs of improvement Figure 1.6 – Unemployment rate and over the past year, the labour market is participation rate expected to strengthen further over the % of working-age population % of labour force 8 70 forecast period, with the unemployment Forecast rate falling gradually and employment 7 69 continuing to increase. The Canterbury 6 68 rebuild will be a large contributor to the 5 67 strengthening in the near term, along 4 66 with rising activity in the Auckland region. (See the Migration and 3 65 Regional Activity box.) Nominal wage 2 64 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18 growth is expected to be solid Quarterly Unemployment rate Participation rate (RHS) throughout the forecast period, with annual growth remaining broadly in the Sources: Statistics New Zealand, the Treasury range of 2.5% to 3.5%. This is consistent with moderate real wage growth of around 1% per year on average over the forecast period. The labour force participation rate is expected to increase over the coming years as stronger employment conditions encourage more workers to enter the labour force. Ongoing welfare reform is expected to strengthen job-search incentives and have an additional positive influence on labour force participation. The participation rate is expected to moderate slightly towards the end of the forecast period reflecting the effect of an ageing population. B.6 | 11 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE However, consumers expected to remain cautious... As outlined in the Budget Update, developments in household net worth, partly driven by house price movements and reduced uncertainty about future growth, underpin our assumption that households are broadly comfortable with the amount of debt reduction undertaken over recent years (as a share of income). That said, households are expected to remain cautious in their spending decisions in the coming years, with increases in consumption coming from rises in income, rather than from running down assets or increasing debt further. All told, household saving as a percentage of household disposable income is expected to remain broadly flat over the forecast period, as it has been for the past few years.3 This represents a shift in behaviour from the mid-2000s and its continuation will be an important factor influencing demand in the economy. ...and there is a backdrop of familiar constraining factors, including fiscal restraint... The supportive influences on the domestic economy are set against a familiar backdrop of factors that will constrain growth, including continued steps to reduce the fiscal deficit, an elevated exchange rate and a steady, but uneven, outlook for global economic growth. Ongoing steps to reduce the fiscal deficit will remain a constraining factor on demand over the coming years. The combined impact of fiscal decisions in the 2013 and previous Budgets will see real government consumption rise only modestly over the forecast period, averaging growth of just 0.5% Figure 1.7 – Real government consumption per year compared to around 4% over Annual average % change % of real GDP (annual) 8 20 much of the 2000s (Figure 1.7). As a Forecast proportion of real GDP, government 6 19 consumption declines over the period 4 18 towards the past decade’s low of 2 17 16.0%. A lower share of government 0 16 spending in the economy will free up resources enabling additional activity -2 15 elsewhere, such as the Canterbury -4 14 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18 rebuild. In doing so it also allows Quarterly interest rates and the exchange rate to Growth Share of GDP (RHS) remain lower than they would Sources: Statistics New Zealand, the Treasury otherwise be. ...an elevated exchange rate... An elevated exchange rate will also continue to present a near-term headwind to growth in parts of the external sector, particularly for non-commodity exporters and import-competing firms. Having weakened during the middle of the year on the back of market expectations of a “tapering” of quantitative easing in the US, the trade-weighted index (TWI) climbed back close to its record highs in the September quarter. The New Zealand dollar has gained particularly strongly against its Australian counterpart, with the cross rate currently near a five-year high. 3 Note that the historical time-series of the net household saving rate was revised higher in the annual National Accounts for the year ended March 2013, which were released after the finalisation of the Half Year Update forecasts. See Revisions in the 2013 Annual National Accounts box for further details. 12 | B.6 FORECAST FINANCIAL STATEMENTS An elevated exchange rate makes New Zealand a more expensive destination for tourists and foreign students, and is expected to constrain growth of services and non-commodity goods exports in the near term. Given that many of New Zealand’s commodity exports are priced in US dollars, an elevated exchange rate also dampens New Zealand dollar export receipts from commodity exports, but spreads income gains to the broader economy. Over the longer term, goods and services export volumes are expected to grow more strongly, driven in large part by an assumed depreciation in the New Zealand dollar. Both goods and services volumes are also expected to rise as global demand picks up, generating additional demand for New Zealand’s goods and services. A weaker New Zealand dollar will boost New Zealand dollar receipts for commodity exports too, but will also increase import prices. As mentioned before, demand for dairy and other commodity exports is likely to continue to benefit from links with fast-growing Asian markets over the long term. ...and steady, but uneven, global growth The near-term outlook for trading partner growth is slightly weaker than forecast in the Budget Update, primarily owing to slower growth in the Australian economy as mining investment moderates, and a weaker outlook for emerging economies including China. The outlook over the rest of the forecast period is broadly similar to that in the Budget Update, with growth of around 3.8% per year. Table 1.2 – Trading partner growth (calendar years) 2013 weights 2012 Actual 2013 Forecast 2014 Forecast 2015 Forecast 2016 Forecast 2017 Forecast 2018 Forecast Australia 27% 3.7 2.5 2.6 3.0 3.0 3.0 3.0 China 17% 7.8 7.6 7.4 7.3 7.1 7.0 7.0 United States 11% 2.8 1.7 2.6 2.5 2.5 2.5 2.5 Japan 9% 2.0 1.9 1.5 1.1 1.0 1.0 1.0 Euro area 8% -0.6 -0.5 0.8 1.2 1.3 1.4 1.5 United Kingdom 4% 0.1 1.3 1.9 1.8 2.0 2.0 2.0 Canada 2% 1.7 1.6 2.2 2.4 2.5 2.5 2.5 23% 3.8 3.8 4.4 4.8 4.9 4.9 4.9 100% 3.6 3.2 3.6 3.8 3.8 3.8 3.9 TPG - Consensus (November 2013) 3.6 3.3 3.7 3.9 4.0 3.9 3.9 TPG - IMF WEO (October 2013) 3.6 3.2 3.7 3.8 3.9 4.0 4.0 TPG - The Treasury (2013 Budget Update) 3.5 3.4 3.8 3.8 3.8 3.9 - Other Asia* Trading Partner Growth (TPG) * South Korea, Taiwan, Hong Kong, Singapore, Malaysia, Indonesia, Thailand, Philippines, India Sources: IMF, Haver Analytics, Consensus Economics, the Treasury The factors behind the weaker near-term trading partner growth – particularly the gradual rebalancing of Australian GDP growth away from investment towards consumption, residential investment and exports – are unlikely to result in significant direct negative implications for New Zealand exporters. Ongoing income growth and increased demand for protein in Asian economies, particularly China, are also expected to underpin strong demand for New Zealand’s commodity exports over the medium term. However, the global economy continues to face significant challenges, and diverging trends pose risks to the relatively benign medium-term outlook for trading partner growth. The major developed economies are showing signs of more sustainable growth – particularly the US, Japan and the UK – while growth in emerging market economies (including some of New Zealand’s trading partners in Asia) is slowing as a result of both structural and cyclical factors. As the developed economies begin to withdraw monetary stimulus, emerging B.6 | 13 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE market economies that have benefited from the loose global monetary conditions may come under pressure as capital inflows are reversed. Meanwhile, a combination of rapid credit growth and inflated property values poses risks to financial stability in China. The risks to the global outlook are explored in more detail in the Risks and Scenarios chapter. Forecast widening in current account deficit reflects composition of growth The current account has been Figure 1.8 – Current account balance subject to a range of historical % of GDP (annual) 4 revisions since the Budget Forecast 2 Update, most recently in the 0 annual set of National Accounts -2 for the year ended March 2013, -4 which were released after the -6 Half Year Update forecasts were -8 finalised. Estimates of the current -10 account deficit from 2000 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18 Quarterly onwards are now on average Current account balance Income and transfers balance Services balance Goods balance 1.1% of GDP narrower than previously recorded. (See Sources: Statistics New Zealand, the Treasury Revisions in the 2013 Annual National Accounts box for further details.) The annual current account deficit is expected to narrow further in the near term on the back of a narrower income deficit and a wider goods surplus than in the Budget Update. The wider goods surplus is mainly attributable to the dairy sector, in which prices have remained higher than expected, and also production has recovered more quickly than expected from last summer’s drought. The annual current account deficit is forecast to widen from 2014 onwards to 6.4% of GDP in the March 2018 quarter. This is expected to be driven by a widening in the income balance as business profits and international interest rates pick up. The goods balance is expected to register a small deficit in 2015, primarily owing to increased goods imports associated with the expected pick-up in investment. The balance is expected to recover in the final years of the forecast period as investment growth slows and the assumed weakening in the exchange rate makes New Zealand’s non-commodity exports more attractive overseas. The services deficit is forecast to widen towards the end of the forecast period as the assumed fall in the exchange rate feeds through into increased services import prices (an example of the so-called “J-curve” effect). However, over time, a weaker exchange rate will make New Zealand a more attractive destination for tourists and also make service imports less attractive. As a result, the services deficit would be expected to narrow outside the forecast period, contributing to a narrower current account deficit. Revisions in the 2013 Annual National Accounts The annual National Accounts for the year ended March 2013 were released after the Half Year Update forecasts were prepared and finalised. The National Accounts provide information on national income, consumption, investment and saving by the different sectors of the economy. Overall, the level of nominal (expenditure) GDP in the March 2013 year was around $600 million higher than previously indicated by the quarterly GDP releases. This 14 | B.6 FORECAST FINANCIAL STATEMENTS mainly reflected upward revisions to investment, with revised estimates for Canterbury making a significant contribution on the residential side. As previously signalled by Statistics New Zealand, the release incorporated a range of historical revisions to the current account as well, stemming mainly from updated estimates of spending by foreign visitors in New Zealand. Exports of services are now 1.2% of GDP higher on average from 2000 onwards than previously estimated. This increase was partly offset by higher goods imports, which were revised up by 0.3% of GDP on average from 2004 onwards on account of a new estimate for goods imports valued under $1,000 – a known area of undercoverage. Accordingly, the current account deficit is now on average 1.1% of GDP narrower than was reported in the 2012 National Accounts (Figure 1.9). The largest positive impacts were in 2002 and 2004, when the current account deficit is now 1.5 percentage points of GDP narrower than was previously estimated. The peak current account deficit reached in 2006 was revised narrower too, to 7.9% of GDP compared to 8.7% of GDP previously. When incorporated into the quarterly data, these changes are likely to lead to a narrower current account deficit than that presented in the Half Year Update. Higher estimates of spending by foreign visitors in New Zealand reduced the amount of activity that was previously attributed to private consumption. This flowed through to a level shift in the household saving rate, which is now between 0.5 and 2.5 percentage points of disposable income higher across history than was previously estimated, and increased national saving too. As shown in Figure 1.10, the narrower current account almost entirely reflects higher national saving across history. The widening current account deficit in the Half Year Update forecasts reflects investment increasing by more than saving over the forecast period, partly as a result of the Canterbury rebuild. However, with a large proportion of the Canterbury rebuild to be paid for by overseas insurance inflows, the investment-saving gap does not flow through fully into new borrowing. Statistics New Zealand currently estimates a total of $18.7 billion of reinsurance claims from all of the Canterbury earthquakes. At the end of the June 2013 quarter, a total of $10.5 billion of these claims had been settled with overseas reinsurers, with these inflows recorded in the financial account of the balance of payments. Figure 1.9 – Revised current account balance % of GDP 0 % of GDP 2.0 Figure 1.10 – Saving and investment % of GDP 26 Forecast 24 -2 1.6 -4 1.2 -6 0.8 -8 0.4 -10 0.0 22 20 18 16 14 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Years ended 31 March %-pt difference (RHS) Previous Revised Sources: Statistics New Zealand, the Treasury 12 10 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Years ended 31 March Gross national saving Gross national saving (revised) Gross national investment Gross national investment (revised) Sources: Statistics New Zealand, the Treasury B.6 | 15 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Inflation expected to pick up as spare capacity is used up... With the economy set for a period of Figure 1.11 – Inflation above-potential growth in the near Annual % change 7 term, non-tradables inflation is forecast 6 Forecast 5 to accelerate to a peak of around 4% 4 in mid-2016, before easing back as 3 real GDP growth moderates towards 2 1 the end of the forecast period. 0 Tradables inflation is expected to -1 -2 move back into positive territory over -3 the coming years and to come under Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18 Quarterly increased upward pressure from the Non-tradables Tradables Headline CPI inflation assumed decline in the exchange rate. Sources: Statistics New Zealand, the Treasury Overall, headline CPI inflation is forecast to peak at 2.6% in late-2015 and to decline gradually thereafter, albeit remaining slightly above the 2.0% mid-point of the target range. Increases in tobacco excises are expected to add 0.2 percentage points to annual inflation in each of the March 2014, 2015 and 2016 quarters. ...leading to a withdrawal of monetary stimulus next year Increasing price pressures are expected to see the Reserve Bank begin to increase the OCR in early 2014. As mentioned earlier, the forecast track for short-term interest rates in the Half Year Update is broadly similar to that in the Budget Update, but is around 30 basis points lower than it would have been if LVR restrictions had not been implemented. Nominal GDP growth expected to remain strong Nominal GDP is particularly important for generating forecasts of tax revenue. The main components of nominal income GDP, namely compensation of employees and business operating surplus, are inputs for generating forecasts of PAYE and corporate tax revenues respectively. Figure 1.12 – Nominal GDP and terms of trade Annual average % change Annual average % change 12 12 Forecast 10 8 10 8 6 4 6 2 4 0 -2 2 0 -4 -6 -8 -2 -10 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18 Underlying growth in the volume Quarterly Nominal GDP Total terms of trade (RHS) of output, alongside strong gains in the terms of trade and a pick-up Sources: Statistics New Zealand, the Treasury in pricing pressures, are expected to support nominal GDP growth in the near term. Nominal GDP is forecast to grow by 6.5% and 4.9% in the March 2014 and 2015 years respectively. Growth in nominal GDP is expected to ease somewhat later in the forecast period, as real GDP growth moderates, the terms of trade level off and pricing pressures are restrained by higher interest rates. 16 | B.6 FORECAST FINANCIAL STATEMENTS Economic Forecast Assumptions Net permanent and long-term migration inflows rose to 17,500 in the year ended October 2013, although only data up to the September month (+15,200) were available when the Half Year Update forecasts were finalised. Net migrant inflows are forecast to rise to 26,300 in the June 2014 year before returning to the long-run assumption of 12,000 per year by the second half of 2016. The non-accelerating inflation rate of unemployment (NAIRU) is assumed to be around 4.5% by 2018. Average hours worked per week are assumed to be around 33 (near their current level). Economy-wide labour productivity growth is assumed to average around 1.1% per year between the years ending March 2014 and March 2018. Investment associated with the rebuild from the Canterbury earthquakes is assumed to be around $40 billion in 2011 prices (rounded to the nearest $5 billion), spread across residential property ($18 billion), commercial ($9 billion), and infrastructure and social assets ($11 billion). Around $18 billion of the total is forecast to be undertaken within the forecast period to June 2018. WTI oil prices are assumed to fall from around US$106 per barrel in the September 2013 quarter to around US$82 in the March 2018 quarter, in line with the latest oil futures prices. Ninety-day interest rates are assumed to increase from the first half of 2014 to 5.2% in the March 2018 quarter. Ten-year interest rates are also assumed to rise gradually from their current levels, reaching 5.2% by the March 2018 quarter. The TWI is assumed to remain around 75 until mid-2015 before falling to around 64 in the June 2018 quarter. Tobacco excise increases add 0.2 percentage points to annual inflation in each of the March quarters 2014, 2015 and 2016. The reductions to ACC levy rates will reduce contributions by households and employers by $387 million in the 2014/15 levy year rising to around $1 billion in the following levy year. B.6 | 17 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Fiscal Outlook Overview The Crown’s fiscal position is broadly unchanged from the Budget Update in the first two years of the forecast but has strengthened in the medium term. With stronger economic growth expected, core Crown tax revenue is forecast to grow more rapidly, while expenses remain relatively stable. The operating deficit narrows in the current year and a surplus of $86 million is forecast in 2014/15. By 2017/18, the surplus is expected to reach $5.6 billion. These surpluses help fund the Government’s capital spending and enable the repayment of debt. Net core Crown debt starts to fall in nominal terms as residual cash returns to surplus in 2016/17, a year earlier than previously expected. The improved cash position, coupled with a lower starting base in 2012/13, means net core Crown debt falls as a share of GDP to stand at 22.3% by 2017/18. The Government Share Offer programme is expected to conclude in the current year with proceeds between $4.6 billion and $5.0 billion now expected to be available for the Future Investment Fund. The Crown’s balance sheet continues to strengthen as operating surpluses are expected to steadily increase. Table 2.1 – Fiscal indicators Year ended 30 June 2013 Actual 2014 Forecast 2015 Forecast 2016 Forecast 2017 Forecast 2018 Forecast (4.4) (5.7) 55.8 68.1 (2.3) (4.1) 60.0 69.2 0.1 (3.5) 63.3 72.2 1.7 (1.2) 64.5 77.0 3.1 1.2 63.4 83.4 5.6 3.1 60.4 92.4 (2.1) (2.7) 26.2 32.0 (1.0) (1.8) 26.3 30.4 0.0 (1.5) 26.5 30.2 0.7 (0.5) 25.8 30.8 1.2 0.5 24.4 32.0 2.1 1.2 22.3 34.2 $billions Total Crown OBEGAL1 Core Crown residual cash Net core Crown debt2 Net worth attributable to the Crown % of GDP Total Crown OBEGAL1 Core Crown residual cash Net core Crown debt2 Net worth attributable to the Crown Notes: 1 2 Operating balance before gains and losses Net core Crown debt excluding the New Zealand Superannuation Fund (NZS Fund) and advances Source: The Treasury Overall, growth in the economy, and continued management of spending levels, is expected to result in the Crown returning to surplus, starting to reduce debt and rebuild the Crown’s net worth. In preparing these fiscal forecasts, key assumptions have been made in relation to the performance of the economy, and managing new spending within Budget allowances. As with all assumptions, there is inherent uncertainty and a change in any one of these could negatively or positively impact the Crown’s forecast surpluses and net debt position. The Risks and Scenarios chapter and the Specific Fiscal Risks chapter outline the key risks to the Crown achieving these forecasts. 18 | B.6 FORECAST FINANCIAL STATEMENTS Core Crown tax revenue increases in each year of the forecasts and by 2017/18 is expected to be $19.2 billion higher compared to 2012/13, reflecting the forecast growth in nominal GDP, as discussed in the Economic Outlook chapter. While core Crown operating expenses are expected to increase by $8.7 billion over the next five years, they fall to just under 30% of GDP by the end of the forecast period. These forecasts shows the Government is expected to achieve its fiscal objective of a return to surplus in 2014/15. While a surplus of $86 million is forecast in 2014/15, beyond 2014/15 surpluses are expected to increase by between $1.5 and $2.5 billion each year. With net debt finishing in a stronger position at 30 June 2013 and a strengthening in the residual cash balance since the Budget Update, the net debt track is lower on average by 2.4% of GDP each year. Net debt falls to 22.3% by 2017/18 in line with the Government’s medium-term target of net debt brought back to a level no higher than 20% of GDP by 2020. In nominal terms, net debt starts decreasing from 2016/17 as cash surpluses are forecast to return for the first time since 2007/08. Table 2.2 – Reconciliation between OBEGAL and net debt Year ending 30 June $billions 2013 Actual 2014 Forecast 2015 Forecast 2016 Forecast 2017 Forecast 2018 Forecast 64.1 68.5 72.3 76.7 80.9 84.9 (70.3) (72.2) (73.2) (75.5) (77.8) (79.0) 1.8 1.4 1.0 0.5 - (0.3) Total Crown OBEGAL (4.4) (2.3) 0.1 1.7 3.1 5.6 Net retained surpluses of SOEs, CEs and NZS Fund (1.2) (1.4) (1.0) (0.4) - 0.2 1.1 1.4 1.5 2.0 2.3 1.0 Net core Crown cash flow from operations (4.5) (2.3) 0.6 3.3 5.4 6.8 Net purchase of physical assets (1.2) (2.2) (1.8) (1.3) (1.4) (1.2) Advances and capital injections (1.7) (1.9) (2.3) (2.4) (1.8) (1.6) - (0.2) (0.6) (0.8) (1.0) (0.9) Core Crown revenue Core Crown expenses Net surpluses/(deficits) of SOEs and CEs Non-cash items and working capital movements Forecast for future new capital spending Proceeds from Government share offers 1.7 2.5 0.6 Core Crown residual cash balance (5.7) (4.1) (3.5) (1.2) - Opening net debt - - 1.2 3.1 50.7 55.8 60.0 63.3 64.5 63.4 Core Crown residual cash deficit/(surplus) 5.7 4.1 3.5 1.2 (1.2) (3.1) Valuation changes in financial instruments (0.6) 0.1 (0.2) - 0.1 0.1 Closing net debt As a percentage of GDP 55.8 60.0 63.3 64.5 63.4 60.4 26.2% 26.3% 26.5% 25.8% 24.4% 22.3% Source: The Treasury Core Crown Tax Revenue Tax revenue grows by around 5.8% per annum on average over the forecast period... Figure 2.1 – Core Crown tax revenue B.6 | 19 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Core Crown tax revenue is forecast to rise in each year of the forecast period, with the 2017/18 forecast being $77.9 billion, which is $19.2 billion higher than in 2012/13. These annual increases also see forecast tax revenue increasing relative to nominal GDP, reaching 28.8% by the end of the forecast period (Figure 2.1). % of GDP $billions 90 45 Forecast 80 40 70 35 60 30 50 25 40 20 30 % growth 15 20 15 10 Forecast 10 5 10 0 0 2004 2006 2008 2010 2012 2014 2016 Year ended 30 June Core Crown tax revenue ($b) % of GDP 2018 5 Most of the 5.8% average annual growth in tax revenue forecasts comes Source: The Treasury 0 from growth in the economy with -5 nominal GDP forecast to grow at 4.9% on average over the forecast period. Tax revenue growth slows a little towards the end of -10 Figure 2.2 – Core Crown tax revenue growth 2004 2006 2008 2010 2012 2014 2016 2018 the forecast period as nominal GDP Year ended 30 June growth slows (refer Figure 2.2). The Tax revenue growth remainder of the forecast tax growth largely relates to increased residential investment, largely owing to the Canterbury rebuild, and the progressive nature of PAYE tax. All tax types are expected to increase across the forecast period, with particular strength in tax from employees (PAYE) and goods and services tax (GST), as shown in Table 2.3. Source: The Treasury Employment earnings growth (forecast at just below the GDP growth rate) combined with the progressive nature of the personal tax scale add $7.3 billion to source deductions over the forecast period with the average PAYE growth rate of 5.8% per annum. The level of residential investment is forecast to grow at an average rate of 16% per annum over the forecast period, largely as a result of rebuilding in Canterbury. This increase in investment is expected to boost GST by $1.7 billion by 2017/18. These forecasts also see an expected rise in 90-day bank bill interest rates from 2.6% on average in 2012/13 to 5.2% by 2017/18, with flow-on increases to tax on interest earned on residents’ savings (RWT). 20 | B.6 FORECAST FINANCIAL STATEMENTS Table 2.3 – Reconciliation of movement in core Crown tax revenue over the forecast period Year ending 30 June $billions 2014 Forecast 2015 Forecast 2016 Forecast 2017 Forecast 2018 Forecast Total Employees' compensation 1.2 1.1 1.1 1.2 1.3 5.9 Entrepreneurial income 0.4 0.2 0.3 0.2 0.2 1.3 Corporate profits 0.8 0.7 0.6 0.2 0.2 2.5 Private consumption 0.9 0.9 0.9 0.8 0.7 4.2 Residential investment 0.4 0.6 0.4 0.2 0.1 1.7 (0.1) 0.1 0.3 0.2 0.2 0.7 0.2 0.3 0.3 0.3 0.3 1.4 - (0.1) 0.4 0.5 0.7 1.5 3.8 3.8 4.3 3.6 3.7 19.2 Plus: previous year's tax base 58.7 62.5 66.3 70.6 74.2 58.7 Core Crown tax revenue 62.5 66.3 70.6 74.2 77.9 77.9 27.4% 27.7% 28.2% 28.5% 28.8% Movement in core Crown tax owing to: Interest rates Fiscal drag1 Timing and other factors Total movement in core Crown tax revenue Note: 1 Fiscal drag is the additional tax revenue generated from source deductions as an individual’s average tax rate increases as their income increases. Source: The Treasury ...and is higher than the Budget Update Compared to the Budget Update, tax revenue forecasts have been revised up by $0.1 billion in 2013/14 rising to $1.4 billion by 2016/17. Figure 2.3 – Movement in core Crown tax revenue since the Budget Update $billions 1.6 1.4 1.2 The bulk of the upwards revision 1.0 0.8 occurs beyond 2014/15 (refer Figure 0.6 2.3), with the largest increases from 0.4 individuals' taxation and GST. A 0.2 stronger labour market, with higher 0.0 -0.2 wages and salaries, is expected to -0.4 increase PAYE relative to the Budget 2014 2015 2016 2017 Year ended 30 June Update, with the change further Individuals Corporate GST Other Total net change boosted by fiscal drag. Net other Source: The Treasury persons’ tax also increases as a result of higher forecast profits for unincorporated businesses. Increased employee compensation and profitability lead to higher consumption, boosting GST growth. Although corporate tax is expected to increase over the forecast period in nominal terms as business profitability improves, annual growth is broadly similar to that forecast at the Budget Update. B.6 | 21 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Core Crown Expenses Growth in core Crown expenses is subdued over the forecast period... Core Crown expenses are forecast to increase in nominal terms by $8.7 billion in total over the forecast period (Figure 2.4). The growth in core Crown expenses is expected to be at a slower rate than economic growth, so as a result they fall from 33.1% in 2012/13 to 29.2% of GDP by 2017/18, in line with the Government’s target of reducing expenses to around 30% of GDP. Nominal growth in core Crown expenses is largely attributable to new spending for future Budgets, social assistance spending and finance costs as shown in Figure 2.5. Figure 2.4 – Core Crown expenses $billions % of GDP 90 45 Forecast 80 40 70 35 60 30 50 25 40 20 30 15 20 10 10 5 0 0 2004 2006 2008 2010 2012 2014 Year ended 30 June Core Crown expenses ($b) 2016 2018 % of GDP Source: The Treasury Figure 2.5 – Increase in core Crown expenses $billions Net $8.7b 12 Net $7.5b 10 The forecast includes new spending to be allocated in future budgets of around $1.0 billion for the next four budgets. Including the impact of spending decisions from Budget 2013, budget allocations are forecast to increase core Crown expenses by $5.1 billion by the end of the forecast period. Net $5.2b 8 Net $2.9b 6 Net $1.9b 4 2 0 -2 2014 2015 2016 2017 2018 Year ended 30 June Budget 2013 decisions Future allowances (operating) Social assistance Earthquake Finance costs Other Source: The Treasury Social assistance spending is expected to increase by $3.7 billion across the forecast period. New Zealand Superannuation payments (the most significant across different social assistance payments) grow by $3.3 billion over the forecast period as payments are indexed to inflation and recipient numbers increase on average by 25,000 over the next five years (Figure 2.6). The rest of the increase in social assistance spending is owing to indexation, with recipient numbers staying relatively stable for other benefit types. Figure 2.6 – Social assistance spending $billions Thousands 800 25 20 700 15 600 10 500 5 400 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Year ended 30 June NZ Superannuation Other benefits NZ Super beneficiaries Source: The Treasury Finance costs increase by $0.7 billion over the forecast period as gross debt continues to increase and interest rates are forecast to rise. 22 | B.6 FORECAST FINANCIAL STATEMENTS Partially offsetting this higher expenditure, the Crown’s earthquake costs reduce over the forecast period as the most significant expenses have already been recognised in previous years (refer to box on page 30 for details of the profile of earthquake expenses). ...but expenses are marginally higher than the Budget Update by the end of the forecast period Initially expenses are slightly lower than forecast at the Budget Update, but by the end of the forecast period expenses are around $0.6 billion higher than previously expected (refer Figure 2.7). Figure 2.7 – Changes in core Crown expenses since Budget 2013 $billions 80 78 76 74 The strength in economic conditions and impacts from 72 welfare reform have reduced unemployment-related benefit 70 2014 2015 2016 2017 recipient numbers and therefore Year ended 30 June Budget Update 2013 Half Year Update 2013 social assistance expenses compared to the Budget Update. Source: The Treasury However, by the end of the forecast period this trend reverses owing to the impact of a higher inflation track and increases in income-related rents. Refer Table 2.4 in the Operating Balance section below for changes to benefit expenses since the Budget Update. Costs associated with the Government Superannuation Fund (GSF) are also forecast to increase above the level forecast in Budget Update. Larger impacts are expected in the last few years of the forecast owing to increases in discount rates causing the interest unwind of the GSF liability to also increase. In addition to these expenses, some increases (eg, Emissions Trading Scheme expenses) also have a corresponding increase in core Crown revenue and therefore are OBEGAL neutral to the Crown. B.6 | 23 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Operating Balance The Crown is forecast to return to surplus in 2014/15… Increases in core Crown tax revenue and slowing expenditure growth reflect an improved outlook across the forecast period with the Crown’s OBEGAL forecast to return to a surplus of $86 million in 2014/15. This stronger outlook is largely driven by economic factors impacting on tax revenue combined with the continuing programme of fiscal constraint. There are risks to achieving a surplus in 2014/15 and later years should these factors not play out as forecast. Refer to the Risks and Scenarios and Specific Fiscal Risks chapters for further discussion of risks that may impact the Crown’s operating balance. OBEGAL is a total Crown measure, of which the core Crown shows the greatest growth over the forecast period. In 2013/14 the core Crown has an OBEGAL deficit of $3.7 billion which turns around to contribute a $5.9 billion surplus to OBEGAL by 2017/18. Figure 2.8 – Components of OBEGAL by sector $billions 8 6 Forecast 4 2 0 -2 -4 -6 Both the State-owned Enterprise (SOE) and Crown entity (CE) sectors’ -8 2013 2014 2015 2016 2017 2018 contribution to OBEGAL in the future Year ended 30 June Core Crown Crown Entity SOE OBEGAL have been significantly changed. Source: The Treasury Together they contribute $2.0 billion to the OBEGAL surplus in 2013/14 falling to $0.4 billion by the end of the forecasts. Figure 2.8 shows the composition of OBEGAL from the different sectors of the Government. The CE sector’s contribution is expected to fall significantly owing to a reduction in ACC levy rates while the SOE sector’s contribution falls owing to the Government’s Share Offer programme. Refer to separate section on pages 36 to 41 for further discussion of this programme. While reductions in ACC levies were included in the Budget Update, reductions are higher in these forecasts. Reductions in ACC levies of $300 million in 2014/15 increasing to $1 billion a year from 2015/16 were announced at the time of the Budget Update. Since that time specific levy rate reductions for the relevant levy years have now been factored into the forecasts and Cabinet has increased the 2014/15 reduction to $387 million. As a result, the reduction in income has increased in 2014/15 and the timing of the OBEGAL impact for the expected second round of reductions has been revised. Refer Table 2.4 for a summary of the key changes to the forecasts from the Budget Update that impact on OBEGAL. 24 | B.6 FORECAST FINANCIAL STATEMENTS Table 2.4 – Changes in OBEGAL since Budget 2013 Year ending 30 June $billions 2014 Forecast 2015 Forecast 2016 Forecast 2017 Forecast (2.0) 0.1 0.8 2.6 Tax revenue 0.1 0.2 0.9 1.4 Benefit expense 0.1 0.2 0.1 (0.1) - (0.1) (0.1) (0.1) NZS Fund and ACC interest (0.1) (0.2) (0.2) (0.2) SOE results (0.1) (0.3) (0.2) (0.1) ACC levy and insurance expense (0.1) - 0.4 (0.3) Other changes (0.2) 0.2 - (0.1) Total changes since Budget Update (0.3) - 0.9 0.5 OBEGAL – Half Year Update (2.3) 0.1 1.7 3.1 OBEGAL – 2013 Budget Update Changes in forecasts: GSF expenses income Source: The Treasury ACC and NZS Fund’s interest income has also decreased since Budget Update largely owing to a reduction in the expected level of interest earning assets held by ACC and NZS Fund since Budget 2013. SOE profits have also declined across the forecast period since Budget Update largely owing to foregone profits from the Government’s share programme (refer to Government Share Offer Programme section on pages 36 to 41). Figure 2.9 – OBEGAL and CAB % of GDP 10 Forecast 5 0 -5 The underlying nature of OBEGAL can be seen using the cyclically adjusted -10 balance (CAB). This measure adjusts 2004 2006 2008 2010 2012 2014 2016 2018 Year ended 30 June for the state of the economic cycle and OBEGAL OBEGAL excluding earthquake CAB significant one-off expenses. Figure Source: The Treasury 2.9 shows CAB tracking close to OBEGAL in recent years, indicating that the operating deficits between 2009 and 2013 have been largely structural. The projected size of the economy reduced following the recession, implying a smaller tax base while, in contrast, expenses continued to grow. In this forecast, tax revenue is forecast to grow more rapidly than expenses (which remain relatively stable), seeing CAB move to surplus in 2015/164 a year later than OBEGAL. ...with OBEGAL surpluses beyond 2014/15 enabling debt to be repaid Surpluses are achieved in 2014/15 and continue to increase over the forecast period to a level that translates to being sufficient to fund the Government’s capital spending and allows for the reduction of debt. 4 For more details, see the Additional Information on the Treasury website www.treasury.govt.nz/budget/forecasts/hyefu2013. B.6 | 25 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Current strength in equity markets lifts the operating balance… When gains and losses are included, Figure 2.10 – Components of operating balance $billions $billions the total Crown operating balance is 15 10 Forecast forecast to be in surplus across the 9 forecast period with steady growth 10 8 7 each year of the forecasts (Figure 5 6 2.10). The current year’s surplus is a 5 result of gains expected to be made by 0 4 Crown financial institutions (CFIs), 3 -5 2 largely ACC and NZS Fund, and 1 reflects strong global equity returns -10 0 (for example, by 30 September 2013 2013 2014 2015 2016 2017 2018 Year ended 30 June NZS Fund had made year-to-date Gains and losses OBEGAL Operating balance gains of $1.0 billion). While the Source: The Treasury current year reflects strong market growth, the forecast gains in future years assume a long-term rate of return, resulting in more subdued growth in these years. These gains play a part in increasing the Government’s financial assets, and the Crown’s net worth (discussed on page 33). ...and valuations of long-term liabilities contribute to an improved result in 2013/14 In addition, updated long-term liability valuations for ACC (at 30 June 2013 and updated for movements in discount rates to 30 September) and GSF (at 30 September) have also led to significant actuarial gains in the 2013/14 year which also contribute to the Crown’s operating balance. Given the size of the balance sheet, market movements can have a significant impact on the operating balance. Refer to page 35 for further discussion of the impact of these valuations on the Crown’s operating balance. Cost to the Crown of Canterbury Earthquakes The Government continues to make significant contributions to the rebuild of Canterbury which is one of its four key priorities. Latest estimates for the total cost to the Crown are at $14.9 billion to the end of the forecast period (slightly lower than the $15.2 billion in the Budget Update). While some costs have reduced, others have increased. An updated estimate of costs to the Crown show that core Crown costs have reduced since the Budget Update primarily owing to a cost sharing agreement entered into with the Christchurch City Council (CCC) and an updated red zone valuation. However, increases in estimates of Crown entity capital investment in Canterbury (primarily investment in state housing stock) partially offset these reductions. In June 2013 the Crown negotiated a cost sharing agreement with CCC to contribute up to $1.8 billion for the repair costs of local infrastructure (mainly water and roads). This agreement has increased certainty around the Crown’s estimate of local infrastructure costs, reducing them from the $2.4 billion estimate at Budget Update to $1.8 billion. Table 2.5 outlines the latest estimates of the net impact of the earthquake included in these forecasts, the operating/capital split and the expected cash profile of earthquake costs. 26 | B.6 FORECAST FINANCIAL STATEMENTS Table 2.5 – Net earthquake expenses (operating and capital) Year ending 30 June $millions Local infrastructure Crown assets1 Land zoning Christchurch central city rebuild2 Welfare support Southern Response support package Other costs Core Crown Canterbury earthquake recovery costs EQC (net of reinsurance proceeds) Other SOE and CEs Total Crown Operating and Capital expenses Operating expenditure (OBEGAL) Capital expenditure Total Crown Total cash payments3 Notes: 1 Crown assets includes capital expenditure on Canterbury hospitals, schools, Tertiary Education Institutions and the justice and emergency services precinct. 2 Central city rebuild costs are net of expected recoveries. 3 Some expenses are non-cash (eg, asset write-offs and impairments) and therefore do not have a cash element to them. Source: The Treasury The Specific Fiscal Risks chapter includes discussion on the risks associated with the Canterbury earthquakes (eg, many of the business cases and project costings for Anchor projects in the central city are yet to be finalised). While the expenses are largely recognised up front and indicate the Crown’s obligation, the cash profile reflects the expected timing of payments to settle these obligations. As with the expenses, risks also remain regarding the timing of these cash payments. Net Debt Net debt peaks as a share of GDP in 2014/15... Figure 2.11 – Net debt B.6 | 27 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE When compared to the Budget Update, net debt levels have reduced to be on average 2.4 percentage points of GDP lower than previously forecast. This reduction in net debt is owing to a stronger starting position at 30 June 2013 and an improved cash flow over the forecast period. $billions % of GDP 35 70 Forecast 60 30 50 25 40 20 30 15 20 10 10 5 0 0 2004 2006 2008 2010 2012 2014 2016 2018 Similar to the operating surplus, core Year ended 30 June 5 Crown operating cash flows also Net debt ($b) % GDP return to surplus in 2014/15. However, Source: The Treasury once capital cash flows are included, residual cash remains in deficit two further years, reaching surplus of $1.2 billion in 2016/17, one year earlier than forecast in the Budget Update. By 2017/18, core Crown residual cash is expected to increase to a cash surplus of $3.1 billion. Deficits are funded by an increase in net debt (through additional borrowing or a reduction in financial assets) while surpluses reduce net debt. In nominal terms, net debt is expected to peak on an annual basis in 2015/16 at $64.5 billion, but once residual cash surpluses are forecast, debt is expected to reduce. Net debt as a share of GDP peaks in 2014/15 at 26.5% (a year earlier than in nominal terms). By 2017/18 net debt is expected to be 22.3% of GDP (Figure 2.11) in line with the Government’s medium-term target of net debt brought back to a level no higher than 20% of GDP by 2020. ...with residual cash deficits mostly funded by issuing government bonds Residual cash surpluses are reached earlier than previously forecast, largely owing to stronger tax receipts and a decline in cash payments. The lower proceeds from the Government Share Offer programme partially offset this increase. Over the forecast period there is a cash shortfall of $4.4 billion. In order to fund this shortfall along with bond maturities, the bond programme is expected to raise funds of $33.6 billion over the forecast period. Over the forecast period, $26.1 billion of existing debt will be repaid, providing net cash proceeds of $7.5 billion (Table 2.6). The excess cash proceeds raised from the bond programme will be invested in financial assets and used to meet future debt maturities. As the Crown’s fiscal position is stronger at the start of the forecast period than was previously forecast, the bond programme to 2016/17 is $4.0 billion lower than forecast in Budget 2013. The higher-than-forecast starting cash position has allowed for a $2.0 billion reduction in the current year’s bond programme as well as the beginning of a buy-back programme to help manage cash flows around the record-large bond maturity in April 2015. A buy-back programme of the April 2015 bond is scheduled to commence in the second half of the 2013/14 fiscal year. Up to $3.0 billion is forecast to be repurchased by 30 June 2014, subject to market conditions. 5 Net debt and residual cash indicators are measured on a core Crown basis. Residual cash includes both operating and capital activity. This differs from OBEGAL, which is measured at a total Crown level and includes operating activity only. 28 | B.6 FORECAST FINANCIAL STATEMENTS Table 2.6 – Net increase in government bonds Year ending 30 June $billions 2014 Forecast 2015 Forecast 2016 Forecast 2017 Forecast 2018 Forecast 5-year Total 8.0 7.0 7.0 6.0 6.0 34.0 8.0 7.1 6.7 5.9 5.9 33.6 (3.1) (7.8) (1.8) - (11.9) (24.6) Net proceeds from market bonds 4.9 (0.7) 4.9 5.9 (6.0) 9.0 Repayment of non-market bonds (0.8) (0.7) - - - (1.5) Net repayment of non-market bonds (0.8) (0.7) - - - (1.5) 4.1 (1.4) 4.9 5.9 (6.0) 7.5 Face value of government bonds issued (market) Cash proceeds from government bond issue Cash proceeds from issue of market bonds Repayment of market bonds Net cash proceeds from bond issuance Source: The Treasury B.6 | 29 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Total Crown Balance Sheet Operating balance surpluses result in increasing net worth... Net worth attributable to the Crown increased in 2012/13 for the first time since the global financial crisis and the Canterbury earthquakes. At its height, net worth attributable to the Crown peaked at $105.1 billion in 2007/08. Figure 2.12 – Net worth attributable to the Crown % of GDP $billions 120 60 Forecast 100 50 80 40 60 Net worth attributable to the Crown is forecast to continue strengthening in 40 nominal terms, largely owing to 20 forecast operating balance surpluses 0 (of which just under half is attributable 2004 2006 2008 2010 2012 2014 2016 2018 Year ended 30 June to gains on the Crown’s investment Net worth attributable to the Crown %GDP portfolio), and grow to $69.2 billion by Source: The Treasury the end of the current year. Net worth is expected to grow another $23.2 billion to stand at $92.4 billion by 2017/18, as shown in Figure 2.12. As a share of GDP this is 34.2%, still well below the peak of 56.6% of GDP in 2007/08. 30 20 10 0 ...with assets increasing $35.5 billion over the forecast period... Assets are forecast to increase by $35.5 billion, with the growth over the forecast period made up of investments in additional assets of $78.4 billion partially offset by reductions (largely depreciation) of $42.9 billion. Figure 2.13 – Total Crown assets $billions 300 Forecast 250 200 150 100 The largest asset growth over the 50 forecast period is in the financial assets portfolio (Figure 2.13). This 0 2013 2014 reflects investment growth in CFIs Financial such as NZS Fund and ACC, with much of this growth recognised as Source: The Treasury gains in the Crown’s operating balance with some growth in the asset base from reinvestment. 2015 2016 Year ended 30 June Commercial 2017 2018 Social Commercial assets increase $9.5 billion over the forecast period, largely owing to continued growth in the Kiwibank mortgage assets (that grow as their deposits from customers grow) and as SOEs increase their investment in physical assets. The social asset portfolio (eg, schools, hospitals and social housing) increases by $10.9 billion by the end of the forecast period as a result of new capital spending (funded by the Future Investment Fund, as detailed in the Government Share Offer Programme section on pages 36 to 41), and as existing assets are replaced. Figure 2.14 – Total Crown borrowings 30 | B.6 FORECAST FINANCIAL STATEMENTS ...while liabilities increase at a slower rate The Crown’s liabilities are expected to increase by $7.2 billion over the forecast period, largely driven by increased borrowing. Borrowings are forecast to increase $12.2 billion to $112.3 billion by 2017/18. $billions 140 Forecast 120 100 80 60 40 20 0 2013 2014 2015 2016 2017 2018 As shown in Figure 2.14, borrowing is Year ended 30 June Financial Commercial Social mostly held in the financial liability portfolio (by the Treasury’s Debt Source: The Treasury Management Office, and the Reserve Bank). Borrowings in this portfolio increase $2.5 billion over the forecast period to meet the Crown’s cash deficits (refer to pages 31 to 32 for discussion of the bond programme). The remainder of borrowing is in the commercial portfolio, and is largely made up of Kiwibank deposits, which grow in line with the bank’s mortgage assets. Partially offsetting the growth in Figure 2.15 – Total Crown liabilities borrowings are reductions in liabilities $billions as a result of settling obligations related 200 Forecast 180 to the Canterbury earthquakes. The 160 Crown’s earthquake-related insurance 140 liabilities held in the financial portfolio 120 100 (EQC and Southern Response) are 80 forecast to decrease $8.4 billion over 60 the five-year forecast period as all 40 claims are expected to be settled by 20 0 2017/18. 2013 2014 2015 2016 2017 2018 Year ended 30 June The Crown’s balance sheet is sensitive to market movements... Financial Commercial Social Source: The Treasury Many of the assets and liabilities on the Crown’s balance sheet are measured at “fair value” in order to disclose current estimates of what the Crown owns and owes. Fair value can be derived in a number of ways, traditionally based on market prices, but where these are not available, values can be best estimates based on certain assumptions. While the measurement at fair value is seen as the most appropriate value of these items, it can be volatile, resulting in fluctuations in the value of the assets and liabilities with changes in the underlying assumptions. Table 2.7 shows an example of some of the key sensitivities to the valuation of the Crown’s major assets and liabilities and the impact these can have on the operating balance. B.6 | 31 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Table 2.7 – Financial instruments sensitivities Financial assets Impact on operating balance1 %change Interest rates $millions +1 (532) -1 Share prices NZD exchange rate 592 +10 1,681 -10 (1,681) +10 (1,029) -10 1,160 1 Using 30 June 2013 sensitivities Source: The Treasury Financial assets are the largest asset group on the Crown’s balance sheet and have increased significantly in recent years. CFIs (eg, NZS Fund and ACC) hold investments to make financial returns, and those asset values are dependent on market prices, interest rates and exchange rates, which can all be volatile. The Crown has a number of significant long-term liabilities which are actuarially valued based on estimated future cash flows, over 50 years into the future. As part of the actuarial valuation, inflation rates are used to help estimate future cash flows while discount rates are used to obtain the value of those future cash flows in today’s dollars (their present value). Changes in these assumptions can have significant impacts on the valuation because the cash flows are so large and over such long periods. Table 2.8 shows the impact that a 1% change in inflation and discount rates would have on the operating balance. Table 2.8 – Long-term liability sensitivities Impact on operating balance1 Discount rate Inflation rate $millions +1 % -1 % +1 % -1 % ACC outstanding claims 3,628 (4,823) (4,966) 3,788 GSF retirement liability 1,587 (1,927) (1,508) 1,831 33 (33) (19) 43 EQC outstanding claims 1 Using 30 June 2013 sensitivities Source: The Treasury ...and judgements and estimates also impact on the balance sheet... Outside of market factors, valuations are subject to a number of judgements and estimates. In general, as time goes on, better information becomes available and initial estimates are updated to reflect current information. Some examples of this include: ACC rehabilitation costs, earthquake-related insurance liabilities and student wage growth. ...while other risks still remain In addition to those items on the balance sheet there are a number of liabilities (and assets) that may arise in the future but are not yet included; either because they are dependent on an uncertain future event occurring (eg, outcome of litigation) or the liability cannot be measured reliably. If these contingent liabilities crystallise, there will be 32 | B.6 FORECAST FINANCIAL STATEMENTS associated costs with a negative impact on the operating balance. Refer to page 75 for a list of the contingent liabilities that the Crown was exposed to at 31 October 2013. Refer also to the Risks and Scenarios chapter for further discussion on balance sheet risks. B.6 | 33 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Government Share Offer Programme At the time of the Budget Update, no transactions in the Government Share Offer programme had been completed. Since that time minority shareholdings in Mighty River Power, Meridian Energy and Air New Zealand have been sold and the Government has indicated that the sale of up to 49% of the shares in Genesis Energy will follow in the first half of calendar 2014. At the time the assumptions for this Half Year Update were finalised, the proceeds from the Crown reducing its shareholding in Air New Zealand were not known. Table 2.9 – Progress to date (core Crown) Gain/(loss) Gross Net on proceeds proceeds1 disposal $millions $millions % sold $millions 1,685 1,638 48.20 167 Meridian Energy 1,883 1,829 Note: 1 Net of direct costs and present value discounting. 48.98 (422) Mighty River Power Source: The Treasury As a result of the progress to date (Table 2.9), two key assumptions underpinning the forecast fiscal impact of the programme have been updated in this current Half Year Update: Total proceeds are now expected to be within an estimated range of $4.6 billion to $5.0 billion, which is based on actual proceeds from the Mighty River Power and Meridian transactions and estimated proceeds from the Genesis Energy and Air New Zealand transactions. The Half Year Update forecasts assume the mid-point of this range of $4.8 billion. The previous $6 billion assumption was a mid-point estimate of a range of potential outcomes across the entire Government Share Offer programme. These outcomes have now narrowed considerably since the Budget Update. This section includes discussion on the changes in the estimate in proceeds over time. Given the Government’s announcement regarding the timing of the Genesis Energy share offer, all proceeds from the programme are now expected to be received by 2014/15. The Budget Update did not forecast the timing of individual share offers, none of which had been completed by that point, and so assumed proceeds were spread evenly across the four years 2012/13 to 2015/16. The fiscal impacts of these changes in assumptions are that, while net debt will decrease sooner than previously forecast, that reduction will be smaller as proceeds have been reestimated. In addition, while the proceeds are received earlier (and so the estimated finance cost savings occur earlier), dividends and profits are also foregone earlier than previously forecast as the Government’s share of the companies is reduced. 34 | B.6 FORECAST FINANCIAL STATEMENTS Table 2.10 – Estimated profile of gross cash proceeds Year ending 30 June $millions 2013 Actual 2014 Forecast 2015 Forecast 1,690 2,490 620 Cash/Debt impact Forecast cash proceeds Source: The Treasury This estimated profile is based on the mid-point of the estimated range of $4.6 billion to $5.0 billion, which was set before the proceeds from the Crown reducing its shareholding in Air New Zealand were known. Table 2.11 – Estimated fiscal impact of the Government Share Offer programme Note $billions Actual to date and forecast Cash/Debt impact Forecast cash proceeds $4.8 billion Forecast foregone dividends 1 $321 million p.a. Estimated finance cost savings 1 $219 million p.a. Reduction in net debt $4.2 billion by 2017/18 Accrual impact Forecast foregone profits 1 $327 million p.a. Estimated finance cost savings 1 $219 million p.a. Net decrease in OBEGAL Loss on disposal recorded in taxpayers' funds 1 $108 million p.a. 2 $383 million Notes: 1 Based on an average of the fiscal forecasts subsequent to the programme being completed. 2 Based on the mid-point estimated cash proceeds, the published gain from the Mighty River Power sale and loss from the Meridian Energy sale, and the published net asset position of Air New Zealand and Genesis Energy at 30 June 2013. Source: The Treasury The final fiscal impact of the Government Share Offer programme remains uncertain and dependent on a number of factors, including market conditions. The figures in Table 2.11 are based on the current profit and dividend forecasts supplied by the companies, and forecast interest rates on government debt. This means the figures are a static estimate, at the current time, of the fiscal impact of the Government Share Offer programme. The figures do not account for uncertainty and risks, and in particular the commercial risks around the estimated profits and dividends from the companies, and risks around future interest rates on government debt. The risks in relation to Mighty River Power and Meridian Energy were explained in the offer documents for these companies. Because of uncertainty and risk, a commercial entity would usually forecast profits that are greater than the Government’s cost of borrowing. Whether forecast profits are actually delivered will depend on actual company performance. B.6 | 35 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Previous Economic and Fiscal Updates have disclosed annual estimated fiscal impacts of the Government Share Offer programme, as well as a five-year total. It is no longer possible to give annual figures, as the progress in the programme to date means that providing the latest annual estimates could allow forecast profits and dividends for individual companies in the programme to be calculated. Individual company forecasts are commercially sensitive, and may be “inside information” in relation to the Securities Markets Act 1988. Forecast profits and dividends are supplied to the Treasury by the companies under a confidentiality deed, under which the Treasury has agreed to preserve the confidentiality of this information, and to comply with the provisions of the Securities Markets Act 1988. Given this, only totals or averages have been disclosed, consistent with section 26V of the Public Finance Act 1989. Future disclosures of the impacts of the Government Share Offer programme will follow the same approach. Future Investment Fund In Budget 2012 the Future Investment Fund (FIF) was established to allocate the estimated proceeds from the Government Share Offer programme, rather than issuing debt. So far, $2.1 billion of this fund has been allocated. A large portion of this allocation is expected to be spent on the Canterbury rebuild as well as investments in schools, hospitals, technology and irrigation. Table 2.12 – Analysis of Future Investment Fund $billions Forecast cash proceeds Total Fund 4.8 Allocated in Budget 2012 (0.5) Allocated in Budget 2013 Commitments against future budgets (1.4) To be allocated (0.2) 2.7 Source: The Treasury With the proceeds from the Government Share Offer programme now expected to be between $4.6 billion and $5.0 billion, the amount remaining to be allocated over the life of the FIF has declined since the Budget Update. However, based on current forecasts, the Government does not need to alter the current FIF spending profile as the current profile still ensures the FIF funds all new capital expenditure through to Budget 2016. 36 | B.6 FORECAST FINANCIAL STATEMENTS Changes to Estimate of Proceeds Original Estimate In the Supplement to the 2010 Investment Statement of the Government of New Zealand in May 20116 the Treasury estimated that the Government Share Offer programme was likely to result in gross sales in the order of $5 billion to $7 billion (Table 2.13). In part, that assessment was based on independent estimates of the commercial values of the companies at that time, along with Air New Zealand’s share price. Table 2.13 – May 2011 estimated gross sales Estimated Low High commercial estimate estimate value Mighty River Power 1.35 1.87 3.70 Meridian Energy 2.29 3.18 6.30 Air New Zealand 0.16 0.29 1.20 Genesis Energy 0.58 0.81 1.60 Solid Energy 0.62 0.86 1.70 Total 5.00 7.00 $billions Source: The Treasury The estimated commercial values are for 100% of the companies. The figures for Mighty River Power, Meridian Energy, Genesis Energy and Solid Energy were based on the most recent independent commercial valuations of these companies by Macquarie Research, First NZ Capital and Forsyth Barr. The figure for Air New Zealand was based on its share price at the time. These valuation reports are available at: www.comu.govt.nz/publications/information-releases/valuation-reports/2010/ Solid Energy is no longer in a position to be part of the Government Share Offer programme in the near future. Excluding Solid Energy from the May 2011 estimate of proceeds gives a revised range of $4.38 billion to $6.14 billion. The Treasury’s estimate of proceeds, $4.6 billion to $5.0 billion, is within this range. Other factors that have affected the estimated proceeds from the programme include: falls in the share prices of comparable New Zealand electricity companies, reflecting a range of influences, and the revised contract between Meridian Energy and New Zealand Aluminium Smelters Limited (NZAS) which, according to Meridian Energy, reduced the value of its net assets by $476 million. 6 www.treasury.govt.nz/budget/2011/supp2010is B.6 | 37 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE 2013 Budget Update The exclusion of Solid Energy from the programme was the only new information available at the time the fiscal forecasts for the Budget Update were finalised. The $6 billion figure used in previous fiscal forecasts was still within the revised range excluding Solid Energy, although it was towards the top of that revised range. At that point the share offer for Mighty River Power had not been completed, and so none of the commercial valuations implicit in the $5 billion to $7 billion range had been tested by the market. At the top end of the price range in the offer document, proceeds from Mighty River Power would have been around $1.9 billion, which was above the top end of the estimated range that was part of the $5 billion to $7 billion range. The Treasury therefore concluded that the Budget Update should retain the $6 billion midpoint estimate of proceeds. Actual proceeds Table 2.14 – Actual proceeds to date May 2011 Low estimate High estimate Actual gross proceeds Mighty River Power 1.35 1.87 1.69 Meridian Energy 2.29 3.18 1.88 Air New Zealand 0.16 0.29 0.36 Total 3.80 5.34 3.93 $billions Source: The Treasury Total gross proceeds for the three transactions completed to date, at $3.93 billion, are towards the bottom of the May 2011 estimate. For the individual transactions: actual proceeds for the Mighty River Power share offer were slightly above the mid-point of the estimated range from May 2011 actual proceeds for Meridian Energy were below the estimated range from May 2011, but proceeds were affected by the falls in the share prices of comparable New Zealand electricity companies, and the revised contract between Meridian Energy and NZAS, and actual proceeds for the Air New Zealand transaction were above the May 2011 estimated range, as a result of the significant increase in Air New Zealand’s share price since then. 38 | B.6 FORECAST FINANCIAL STATEMENTS Accounting for minority interests The treatment of the programme in the fiscal forecasts reflects that the Government retains the majority ownership and control of the companies. There is therefore no “sale of assets” reported in the consolidated financial statements. The revenue and expenses, assets and liabilities of these companies will continue to be fully consolidated by the Crown. The key change to the financial statements is the disclosure of the non-controlling interest (often referred to as the “minority interest”) of the profits and equity in those companies. The loss on disposal is calculated as the difference in the book value of the net assets sold and the cash proceeds. This loss is shown as a transfer within the equity section of the balance sheet as it is considered a transaction between owners. There is therefore no loss shown in the statement of financial performance. Foregone profits represent the portion of profits that would have been recognised by the Government prior to the sale but are now attributable to the minority interests. Forecast foregone profits reduce the Government’s OBEGAL. The actual change in the OBEGAL will depend on the actual profits the company generates, which may be different from what is currently forecast. These profits are different from foregone dividends (although dividends are often a subset of profits), which represent dividend payments by the companies that will now be paid to minority interests. As dividends are a cash receipt, forecast foregone dividends increase the Government’s net debt. Again, the actual change in net debt will depend on actual dividends paid by the companies. Proceeds from the programme decrease net debt. This impact on the Government’s debt has flow-on impacts to finance costs. Overall, the programme is expected to decrease net debt by $4.2 billion by the end of the forecast period. This decrease serves to reduce finance costs for the Government. B.6 | 39 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Fiscal Forecast Assumptions The fiscal forecasts are based on assumptions and judgements developed from the best information available on 3 December 2013, when the forecasts were finalised. Actual events are likely to differ from these assumptions and judgements. Furthermore, uncertainty around the forecast assumptions and judgements increases over the forecast period. The Canterbury earthquakes add further uncertainty to the economic and fiscal forecasts. The fiscal forecasts are prepared on the basis of underlying economic forecasts. Such forecasts are critical for determining revenue and expense estimates. For example: A nominal GDP forecast is needed in order to forecast tax revenue. A forecast of CPI inflation is needed because social assistance benefits are generally indexed to inflation. Forecasts of interest rates are needed to forecast finance costs, interest income and discount rates. A summary of the key economic forecasts that are particularly relevant to the fiscal forecasts is provided in Table 2.15 below (on a June-year-end basis to align with the Government’s balance date). Table 2.15 – Summary of key economic forecasts used in fiscal forecasts 2013 Actual 2014 Forecast 2015 Forecast 2016 Forecast 2017 Forecast 2018 Forecast 2.6 3.0 3.4 2.4 1.9 2.2 212,721 227,793 239,172 250,494 260,334 270,295 CPI (ann avg % chg) 0.8 1.4 2.0 2.5 2.3 2.3 Govt 10-year bonds (ann avg, %) 3.6 4.7 4.9 5.1 5.2 5.2 5-year bonds (ann avg, %) 2.9 4.3 4.6 4.9 5.1 5.2 90-day bill rate (ann avg, %) 2.6 2.7 3.4 4.3 4.8 5.2 Unemployment rate (ann avg, %) 6.6 5.9 5.6 5.4 5.2 4.8 Employment (ann avg % chg) 0.4 2.6 2.2 1.3 1.0 1.4 Year ended 30 June Real GDP1 (ann avg % chg) Nominal Notes: 2 GDP2 1 ($m) Production measure. Expenditure measure. Source: The Treasury 40 | B.6 FORECAST FINANCIAL STATEMENTS In addition, there are a number of other key assumptions that are critical in the preparation of the fiscal forecasts. Government decisions Incorporate government decisions and other circumstances known to the Government up to 3 December 2013. Tax revenue Tax policy changes enacted and announced by the Government will take place as planned and will affect tax revenue and receipts as calculated and agreed between Inland Revenue and the Treasury. Earthquake costs Expenditure (accrual measure) is forecast based on estimates on when key decisions will be taken. The timing of cash payments is based on estimates of when actual spending will take place. Refer to page 30 for further discussion. Operating allowance Net $1.0 billion from Budget 2014 growing at a rate of 2.0% per annum for subsequent Budgets. Provision for new capital spending $1.0 billion in Budget 2014 and $0.9 billion in Budgets 2015 and 2016, then growing at a rate of 2% per annum for subsequent Budgets. For further details, see note 8 of the Forecast Financial Statements. Government share offers Sale programme is forecast to conclude in 2013/14. Finance cost on new bond issuances Based on the 5-year rate from the main economic forecasts and adjusted for differing maturity. Top-down adjustment A top-down adjustment is made to compensate for departments that tend to forecast upper spending limits (appropriations) rather than best estimates. Net sale proceeds of $4.8 billion (based on a mid-point estimate of between $4.6 billion and $5.0 billion). Top-down adjustment to operating and capital are as follows: Year ending 30 June $billions 2014 Forecast 2015 Forecast 2016 Forecast 2017 Forecast 2018 Forecast Operating 1.4 0.5 0.3 0.3 0.3 Capital 0.5 0.1 0.2 0.1 0.1 The adjustment will be higher at the front end of the forecast period as departments’ appropriations (and therefore expenses) tend to be higher in these years, reflecting the flexibility departments have around transferring underspends to later years. Borrowing requirements Forecast cash deficits will be met by reducing financial assets and issuing debt. Property, plant and equipment For the purposes of the forecast financial statements, no revaluations of property, plant and equipment are projected beyond the current year. Valuations as recorded for the 2013 annual financial statements and any additional valuations that have occurred up to 30 September 2013 are included in these forecasts. B.6 | 41 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Student loans The carrying value of student loans is based on a valuation model adapted to reflect current student loans policy. As such, the carrying value over the forecast period is sensitive to changes in a number of underlying assumptions, including future income levels, repayment behaviour and macroeconomic factors such as inflation and discount rates used to determine the effective interest rate for new borrowers. Any change in these assumptions would affect the present fiscal forecast. Investment rate of returns Incorporate the actual results to 30 September 2013. Beyond this time, gains on financial instruments are based on long-term benchmark rates of return for each portfolio. GSF and ACC liabilities The GSF and ACC liabilities included in these forecasts have been valued as at 30 September 2013 and 30 June 2013 respectively. The ACC liability has also been adjusted for the 30 September 2013 discount rate. Both liabilities are valued by projecting future cash payments, and discounting them to present value. These valuations rely on historical data to predict future trends and use economic assumptions such as inflation and discount rates. Any change in actual payments or economic assumptions would affect the present fiscal forecast. For example, if the discount rate decreases, the value of the liabilities would increase. GSF’s assets are offset against the gross liability and have been updated to reflect market values. The value of assets over the forecast period reflects long-run rate of return assumptions appropriate to the forecast portfolio mix. ACC levies The forecast includes a $387 million reduction in ACC levies for the 2014/15 levy year rising to $1.0 billion in the following levy year. NZS Fund contributions No contribution is assumed in the forecast period. Year ending 30 June $billions 2014 Forecast 2015 Forecast 2016 Forecast 2017 Forecast 2018 Forecast Required contribution 2.1 2.2 2.2 2.1 2.0 - - - - - Actual contribution The underlying assumptions in calculating the required contribution in each year are the previous year’s NZS Fund balance and projected series, over the ensuing 40 years of nominal GDP, net (after-tax) New Zealand superannuation expenses and the Government 5-year bond rate. The latter is used in calculating the Fund’s expected long-run after-tax annual return. Over the forecast years all Fund variables, apart from the capital contributions, are provided by the NZS Fund itself. Refer to the Treasury’s website for the NZS Fund model. 42 | B.6 FORECAST FINANCIAL STATEMENTS Risks and Scenarios Overview This chapter outlines the general economic and fiscal risks associated with the major assumptions underpinning the main forecast. Risks associated with the main forecast of the Half Year Update are evenly balanced, with upside risks to the domestic outlook having increased relative to recent Economic and Fiscal Updates, while risks associated with a negative global shock remain. Domestically, risks with potentially the largest impact on the New Zealand economy relate to the speed of the Canterbury rebuild and its interaction with the wider economy, the extent to which demand is boosted by population growth via higher net migration inflows and the degree of caution displayed by consumers. Major advanced economies continue to undergo significant adjustments to reduce government debt, while the effects of monetary easing remain uncertain. Emerging economies are at risk from a rise in global interest rates once the US begins tapering its quantitative easing programme, which could have negative implications for New Zealand’s economy through both financial channels and the terms of trade. Two scenarios are presented that represent just two possible ways the New Zealand economy could deviate from the main forecast. Scenario one is based on a stronger domestically driven, cyclical pick-up in GDP growth, in part driven by higher external net migration. This scenario results in nominal GDP being $20.7 billion higher over the forecast period. In scenario two, a slowing of growth in emerging Asia negatively impacts New Zealand’s terms of trade and lowers nominal GDP by $12.5 billion over the forecast period. If these economic risks or any significant deviations from the main forecast were to eventuate they would impact on the Government’s fiscal performance and position. In addition to risks associated with the economy, the Crown is also subject to expenditure and balance sheet risks. In particular, volatility in market prices such as interest rates can have a significant impact on the Crown’s fiscal position. Introduction The first part of this chapter outlines the key risks to the economic outlook. These risks mainly relate to the key judgements associated with the main forecast. In the second part of the chapter, two scenarios are presented that represent just two possible ways the New Zealand economy could deviate from the main forecast. The chapter then focuses on the established channels between the risks facing the economy and the Crown’s fiscal position. Economic Risks Risks to the forecasts are relatively balanced As in the Budget Update, risks around the main forecasts are fairly evenly balanced, with upside risks to the domestic outlook having increased relative to recent Economic and Fiscal Updates, while risks associated with a negative global shock remain. B.6 | 43 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE There are a large number of ways in which events could turn out different from forecast. The risks with potentially the largest impact on the New Zealand economy relate to the speed of the Canterbury rebuild and its interaction with the wider economy, the extent to which demand is boosted by population growth via higher net migration inflows and consumer behaviour. Global economic developments, including shocks as the world economy undergoes an extended period of transition, could lead to more rapid adjustments for the prices of some of our main commodity exports and therefore affect the path of the terms of trade. All of these factors are likely to have a significant role in influencing the size and dynamics of the current economic cycle. Other key judgements made in the forecasts include the level and flow-through of the exchange rate, the current amount of spare capacity in the economy and monetary policy developments. The earthquake rebuild remains a significant area of uncertainty... There is considerable uncertainty associated with the timing and magnitude of the Canterbury earthquake rebuild. Key determinants of the speed of the rebuild include insurance settlements and the capacity and capability of the construction sector. If the rebuild were to progress more slowly than expected, residential and non-residential construction and employment could all be weaker than in the main forecast. The overall size of the rebuild will also be influenced by the extent to which private firms ultimately decide to reinvest insurance proceeds within the Canterbury region. Another risk to the forecasts is how much the Canterbury rebuild crowds out activity in other parts of the economy. Even with inward migration and the importation of capital goods, New Zealand has limited construction capacity and consequently it is likely that some rebuild activity will crowd out other activity elsewhere. Implicitly this means that activity outside Canterbury at the peak of the building cycle is likely to be a lower share of GDP relative to previous construction upturns. If the pace and level of the Canterbury rebuild is more sluggish, there will be less displacement of activity in the rest of the country and less competition for construction resources, resulting in less upward pressure on prices. ...as does the strength of the current net migration cycle... Despite large upward revisions to the net migration assumption since the Budget Update, there is the possibility that weaker activity in Australia and other developed economies sees even stronger net inflows into New Zealand. The impact on the economy will be influenced by the skills of migrants and the areas where they settle (or remain in the case of New Zealanders who choose not to leave for abroad). For example, appropriately skilled migrant inflows into Canterbury could mitigate some of the risks related to the Canterbury rebuild, albeit adding to accommodation pressures in the near term. However, a large proportion of the population gains from higher net migration will likely place additional pressure on the housing market in other parts of the country, such as Auckland, contributing to stronger domestic demand, which then flows through to the wider economy through multiplier effects. …while households could be less cautious, resulting in greater cyclical volatility If households exercise less spending restraint than is anticipated in the main forecasts, consumption may rise faster than disposable income, with the shortfall being funded by rising debt, resulting in a negative saving rate over the forecast period. While this would be positive for GDP growth in the near term, owing to a boost to private consumption, it 44 | B.6 FORECAST FINANCIAL STATEMENTS may require a sharper adjustment in the medium term as households become more indebted and need to repair their balance sheets. Elevated debt levels also expose household balance sheets to sharp corrections in house prices. The Alternative Scenarios section explores the risk of a more protracted and larger net migration cycle and more willingness on the part of households to spend, all resulting in a more cyclical pick-up across the economy. Global downside risks persist… Global risks continue in the background and remain skewed to the downside as major advanced economies continue to undergo significant adjustments to reduce government debt, and in addition the effects of monetary easing and its subsequent withdrawal remain uncertain. Some emerging Asian economies, which are significant for New Zealand’s trading partner growth, could also experience weaker growth once global monetary stimulus is withdrawn, particularly in the US. ...with elevated debt levels requiring ongoing adjustment European countries remain highly indebted, but the probability that the crisis will worsen significantly has subsided over the past year owing to actions taken by the European Central Bank and some pick-up in euro area growth. Nevertheless, there remains considerable ongoing risk of further flare-ups, which would further dampen growth in the region and trigger financial market turmoil if an event was significant enough. Peripheral countries in the euro area continue to struggle with austerity measures which, compounded by poor competitiveness, create the potential for political instability. The US must also undergo significant adjustment to reduce high government debt. Following on from events in October when the debt ceiling was raised temporarily to prevent a default on interest payments for US Treasury debt, there is a risk that brinkmanship continues to create heightened uncertainty concerning a permanent increase in the debt ceiling. This could lead to significant volatility in global financial markets which rely heavily on US Treasury bills and bonds as collateral. More sustained growth and therefore reduced need for monetary stimulus... Well anchored inflation expectations and existing spare capacity mean Japan, the US and the UK are still undertaking significant quantitative easing programmes to stimulate their economies through the purchase of financial assets. However, the US economy has recently shown signs of more sustainable growth and markets are expecting a tapering of quantitative easing in early 2014, although the US remains vulnerable if the removal of stimulus proves to be premature. Japan has implemented additional fiscal stimulus and structural reforms to kick-start growth. However, whether this will translate into sustainable growth over the medium term remains uncertain, particularly following a prolonged period of economic malaise. …could expose fragilities elsewhere... A rise in global bond rates once the US tapers its quantitative easing programme could leave some emerging economies significantly exposed given their currently high levels of debt. This could be exacerbated by losses in the banking sector in those emerging economies if the rapid growth in credit in recent years was facilitated by easy lending standards. An increase in US bond rates, combined with a weaker economic outlook in B.6 | 45 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE emerging market economies, could also lead to an outflow of foreign capital, putting downward pressure on exchange rates and raising inflation. Of New Zealand’s emerging Asia trading partners, Indonesia and India are the most vulnerable, as neither is currently running a current account surplus. The risk of a severe event similar to the Asian financial crisis in 1997 appears less likely now given that most Asian economies have floating exchange rates, hold larger foreign exchange reserves and have less foreign currency-denominated external debt. …while risks for New Zealand’s key trading partners remain… Of more significance to New Zealand are the risks to the growth outlook for China, which is our second largest trading partner after Australia. The property investment and construction boom in China following the global financial crisis led to a build-up of poorquality debt, especially in the local government sector. The risk of a sharp correction in house prices remains, and could expose a high level of bad debts in the banking sector and may cause credit conditions to tighten even further. China is aiming to rebalance its economy away from export- and investment-led growth towards consumption. Rebalancing could lead to lower growth in the short term, particularly if the transition is disorderly, while faster progress to this goal would benefit New Zealand as it is a major supplier of food products to Chinese households. Weaker growth in China would also negatively impact on activity in emerging Asia, particularly amongst commodity producers, given their reliance on Chinese demand and tightly-linked supply chains. One of the main risks associated with New Zealand’s largest trading partner, Australia, is the transition of growth from investment to domestic demand and exports. It will take some time for the exports associated with this investment to come online, requiring increased residential and non-mining business investment to replace high levels of mining investment and maintain Australia’s recent strength in economic growth. Australia is also exposed to a slowdown in China and emerging market economies which would reduce the demand for hard commodities. …which, if they eventuate, would adversely impact on the New Zealand economy Weaker growth in our trading partners could result in weaker demand for New Zealand’s exports and commodity prices may fall. This would affect domestic incomes, confidence and asset prices as households behave more cautiously owing to higher risk aversion. The result of these developments would be lower private consumption, while more caution on the part of firms would decrease business investment growth and new hiring. The higher level of uncertainty faced by financial market participants could flow through to reduced availability, and a higher cost, of credit for New Zealand. However, in contrast to other developed countries, there is still scope for the Reserve Bank to provide liquidity as needed and lower the base interest rate (or slow increases) to mitigate the impact of higher funding costs on the interest rates faced by households and businesses. Other risks surround key judgements... Economic relationships are complex and developments are subject to inherent uncertainty, particularly the evolution of the exchange rate. There is a risk that the exchange rate remains supported for longer owing to the stronger domestic outlook, prolonged monetary stimulus in advanced economies and ongoing gains in global commodity prices for key New Zealand exports. A higher exchange rate would decrease 46 | B.6 FORECAST FINANCIAL STATEMENTS tradables inflation, as imported goods would become less expensive, and encourage consumption of imported products. On the other hand, exporters and import-competing businesses would become less competitive, hindering manufacturing and services exports and production of import substitutes for the domestic market. Another area of uncertainty is the current amount of spare capacity in the economy (the output gap) and its relationship with inflation. If the output gap is currently more negative, because potential GDP is higher than we have assumed in the main forecast, then there is greater scope for an increase in real GDP with less domestically generated inflation. Alternatively, if the strength of inflationary pressures were to surprise, perhaps owing to a stronger spill-over of rebuild costs from Canterbury into the wider economy, the response of monetary policy may be greater than anticipated. While implemented for macroprudential reasons, the effectiveness of the recent loan-to-value restrictions in moderating house price growth is another area of uncertainty. …including the perennial risks associated with the weather Pasture conditions have improved since last summer and the impact of the drought on real GDP was broadly in line with estimates outlined in the Budget Update. In the near term, the agricultural sector is expected to bounce back strongly from the drought, although this is dependent on the assumption that pasture conditions remain favourable in coming quarters. Feed prices and availability amongst New Zealand’s international competitors will also influence global supply and have a strong bearing on commodity prices and therefore the path of New Zealand’s merchandise terms of trade. Alternative Scenarios The following scenarios show how the economy might evolve if some of the key judgements in the main forecast are altered (Table 3.1). The scenarios are only illustrative in that they are two of a large number of possible examples, and do not represent upper or lower bounds for the forecasts, with more extreme paths possible. They represent what are assessed to be key risks to the Half Year Update forecast and illustrate the impact of relatively small changes in the assumptions on key economic and fiscal variables. Although not the most likely outcome, there is a realistic prospect that these scenarios could occur. Table 3.1 – Summary of key economic and fiscal variables for main forecast and scenarios March years Real GDP (annual average % change) Main forecast Stronger cyclical growth Slower emerging Asia growth Unemployment rate1 Main forecast Stronger cyclical growth Slower emerging Asia growth Nominal GDP (annual average % change) Main forecast Stronger cyclical growth 2013 Actual 2014 Forecast 2015 Forecast 2016 Forecast 2017 Forecast 2018 Forecast 2.7 2.7 2.7 2.7 3.2 2.7 3.6 4.4 3.4 2.7 2.8 2.5 2.0 1.6 1.8 2.2 1.8 2.0 6.2 6.2 5.8 5.7 5.6 5.3 5.4 5.1 5.2 4.9 4.7 4.6 6.2 5.8 5.8 5.7 5.4 5.0 2.4 2.4 6.5 6.9 4.9 6.1 5.2 5.7 4.0 3.9 3.7 3.6 B.6 | 47 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Slower emerging Asia growth Current account balance (% of GDP) Main forecast Stronger cyclical growth Slower emerging Asia growth 90-day bank bill rate2 Main forecast Stronger cyclical growth Slower emerging Asia growth Total Crown OBEGAL (% of GDP)³ Main forecast Stronger cyclical growth Slower emerging Asia growth Core Crown net debt (% of GDP)³ Main forecast Stronger cyclical growth Slower emerging Asia growth Notes: 1 March quarter, seasonally adjusted. 2 March quarter average. 3 June years. 2.4 6.5 4.1 5.0 3.8 3.4 -4.5 -4.5 -4.5 -4.2 -4.2 -4.2 -5.5 -5.8 -6.4 -6.3 -7.2 -7.2 -6.5 -7.5 -7.1 -6.4 -7.2 -7.1 2.7 2.7 2.7 2.7 2.9 2.7 3.6 4.7 3.3 4.4 5.8 3.7 4.9 6.0 4.5 5.2 6.1 5.0 -2.1 -2.1 -2.1 -1.0 -0.8 -1.0 0.0 0.6 -0.2 0.7 1.6 0.3 1.2 2.2 0.7 2.1 3.0 1.5 26.2 26.2 26.2 26.3 25.9 26.4 26.5 25.2 26.9 25.8 23.5 26.6 24.4 21.2 25.7 22.3 18.4 24.3 Sources: Statistics New Zealand, the Treasury, Reserve Bank Scenario One – Stronger Cyclical Growth A more cyclical pick-up in domestic growth… Scenario one is based on a stronger domestically driven, cyclical pick-up in GDP growth, in part driven by higher external net migration which raises domestic demand and spills over to wider confidence amongst firms. In this scenario it is assumed that the peak and duration of the net migration cycle is greater than in the main forecast and reaches 33,000 in the year to September 2014, only 10,000 below the peak in the early 2000s. This results in an addition of 16,000 people to the population over the forecast period (Figure 3.1) and follows from a relatively more attractive New Zealand economy and outlook compared to other developed countries, particularly Australia. Within this, the arrival of international migrants to assist in the Canterbury rebuild is greater, particularly from the UK and Ireland, as well as Asia. An increase in the number of international arrivals adds to demand for housing, particularly in the Auckland and Canterbury regions where job opportunities are more abundant and the pressure on the existing housing stock is already high. Stronger competition for existing homes leads to higher house price inflation relative to the main forecast. As a result, annual house price inflation peaks at about 15% in 2014, compared with around 10% in 2013 in the main forecast. Figure 3.1 – Annual net external migration Figure 3.2 – Private consumption growth 48 | B.6 FORECAST FINANCIAL STATEMENTS 000s Annual average % change 50 7 Forecasts 40 Forecasts 6 5 30 4 20 3 2 10 1 0 0 -1 -10 -2 -20 Mar-01 Dec-02 Sep-04 Jun-06 Mar-08 Dec-09 Sep-11 Jun-13 Mar-15 Dec-16 -3 Mar-01 Dec-02 Sep-04 Jun-06 Mar-08 Dec-09 Sep-11 Jun-13 Mar-15 Dec-16 Quarterly Scenario one Half Year Update 2013 Sources: Statistics New Zealand, the Treasury Quarterly Scenario one Half Year Update 2013 Sources: Statistics New Zealand, the Treasury ...with private consumption and investment growing more strongly... Faster house price growth leads households to resume mortgage equity withdrawal to finance consumption, and the relationship seen between house prices and consumption over the 2000s reasserts itself. Annual real private consumption growth averages 4.5% in this scenario over 2014 and 2015 compared to 3.0% in the main forecast, although growth is slower beyond 2016 (Figure 3.2). Additional demand for the existing housing stock also provides further support for residential investment which is already forecast to reach a similar peak (as a percent of GDP) as in the previous housing boom. The lift in domestic demand spills over to business confidence, resulting in increased market investment and hiring. Employment growth is therefore higher, which contributes to a lower unemployment rate over the forecast period. In the near term, the demand-driven pick-up in actual GDP sees the output gap close earlier, resulting in faster growth in domestically generated inflation. Although the influx of overseas migrants contributes to an increase in potential GDP over the forecast by lifting the working-age population, the output gap is more positive owing to the stronger pick-up in actual GDP. The output gap peaks at 1.9% of potential GDP over the medium term as opposed to 0.9% in the main forecast, but is still much narrower than the cycle in the mid2000s. Higher inflation and inflation expectations in the near term see the Reserve Bank react by tightening monetary policy sooner and more aggressively over the cycle to maintain price stability. The 90-day bank bill rate reaches 6.0% by March 2017, around 100 basis points higher than the main forecast, which could see floating mortgage rates rise to around 8%. Higher interest rates act to temper private consumption and investment growth and, as a result, real GDP growth beyond 2016 is weaker relative to the main forecast. ...but domestic and external imbalances become greater As the higher consumption is partly financed by borrowing against the increased value of housing, rather than higher incomes, the household saving rate is significantly lower than in the main forecast. The household saving rate reaches a low of -3.6% of household disposable income in the March 2017 year compared to the main forecast where it is 0.1% in 2017. This negative saving rate, along with higher interest rates at the end of the forecast period, drives lower consumption growth relative to the main forecast in 2017 and 2018. It is likely that further adjustment to household balance sheets will be required sometime beyond the forecast period, which would continue to constrain future consumption growth. B.6 | 49 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE The annual current account deficit is wider and reaches 7.2% of GDP in March 2018, versus 6.4% in the main forecast. This is because some of the increased consumption and investment is met from imported goods and services. The higher interest rate track also means the exchange rate remains elevated for longer, which encourages more imports and constrains services exports, further contributing to a wider current account deficit. GDP and tax revenue increases... Stronger private consumption and residential investment, along with greater price pressure, result in nominal GDP being a cumulative $20.7 billion higher over the forecast period. The increased activity drives a stronger labour market in the early years of the forecast period, with the unemployment rate falling to 5.1% in March 2016, 0.3 percentage points lower than in the main forecasts. Core Crown tax revenue is a cumulative $8.6 billion higher over the forecast period as a result of the higher nominal GDP. Higher nominal consumption and residential investment boost GST revenue by $2.1 billion over the forecast period. The stronger labour market and increased competition for workers push up wages and salaries, boosting source deductions revenue by a cumulative $1.8 billion. The stronger economic activity allows firms to increase their margins, boosting profitability and increasing corporate tax by $1.9 billion out to June 2018. Higher short-term interest rates, needed to control rising inflation, boost tax on interest by $1.8 billion. Core Crown expenses are slightly Figure 3.3 – Operating balance (before gains lower than in the main forecast owing and losses) to a fall in debt servicing costs and, to % of GDP 6 a lesser extent, a reduction in welfare Forecasts 4 payments. The decrease in welfare 2 payments is driven by a lower number 0 of recipients receiving unemployment-2 related benefits, reflecting the stronger -4 labour market. In this scenario, -6 OBEGAL records a larger surplus of -8 0.6% of GDP in the June 2015 year, -10 2007 2009 2011 2013 2015 2017 the same year surplus is achieved in Years ended 30 June Scenario one Scenario two Half Year Update 2013 the main forecast (Figure 3.3). Net Source: The Treasury core Crown debt as a percentage of GDP peaks at 25.9% in the June 2014 year, compared to 26.5% in the June 2015 year in the main forecast and falls away more quickly, dropping below 20% by June 2018 (Figure 3.6). ...but fiscal policy assumed to be restrained While OBEGAL records a larger surplus in 2015 in this scenario, discretionary fiscal policy is unchanged relative to the main forecast and is restrained compared to the mid-2000s cycle. The subdued growth in government spending in the main forecast maximises the prospect of a subsequent “soft-landing” for the economy as well as minimising external vulnerabilities. If the extra income received by the Government was used to increase spending it would add to the cycle by increasing domestic demand, contributing to price pressures, which could then necessitate tighter monetary policy. This may support the exchange rate remaining higher for longer, which could result in greater imbalances such as an even larger current account deficit. 50 | B.6 FORECAST FINANCIAL STATEMENTS Scenario Two – Slower Growth in Emerging Asia Increases in global interest rates trigger slower growth in emerging Asia… Scenario two is based on a slowing of growth in emerging Asia, which would negatively impact New Zealand’s terms of trade as demand for soft commodities falls. It is assumed that earlier and faster-than-expected tapering of asset purchases in the US leads to a tightening of credit conditions in emerging Asia, excluding China. Tighter credit conditions in the region constrain business investment, while household disposable income falls as servicing costs on outstanding household debt rise, limiting household spending growth. …while domestic imbalances partially unravel in China... Slower growth in China is triggered by relatively disorderly corrections in domestic financial and real estate markets. Specifically, these events could arise from a reduction in infrastructure investment as local government debt mounts to unsustainable levels, a sharp correction in the overheated housing market which results in a tightening of credit conditions and/or large-scale defaults in the informal banking sector. It should be noted that this scenario characterises a disorderly rebalancing event as opposed to a significant financial market failure that would have more severe implications, but is considered to be unlikely. Weaker Chinese demand for commodities produced in the rest of emerging Asia compounds the impact of the initial slowdown in the region. In addition, growth in our largest trading partner, Australia, slows as demand for hard commodities from emerging Asia falls in the face of weaker growth. …resulting in weaker growth in our trading partners... Overall, the shock lowers trading partner growth between 2014 and 2016 relative to the main forecasts (Figure 3.4). The weaker-than-assumed activity in emerging Asia (including China) flows through to New Zealand in the form of lower prices for key commodity exports, particularly dairy, meat and forestry products, resulting in a larger drop in the merchandise terms of trade in the near term (Figure 3.5). As in the main forecast, the assumed global supply response to previously strong demand still occurs in this scenario, adding to the downward pressure on prices for key commodity exports. The terms of trade in this scenario remain at a lower level over the medium term, albeit one that is still high by historical standards, which reduces incomes and results in more cautious household spending over the forecast period. In this scenario, private consumption growth averages around 2.4% annually, compared with 2.6% in the main forecast. Risk aversion is heightened for firms, leading to lower business investment as they are less willing to commit to expenditure in a more uncertain environment. In the main forecast we assume that the labour market continues to improve as increasing employment contributes to a gradual decline in unemployment. In scenario two, a weaker pick-up in domestic activity and more caution on the part of businesses result in subdued employment and the unemployment rate recovers to a lesser extent. The assumption of a weaker labour market sees the unemployment rate fall to 5.0% by March 2018, compared to 4.7% in the main forecast. This results in more spare capacity in the economy and less domestically generated inflation. B.6 | 51 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Figure 3.4 – Trading partner growth Figure 3.5 – Merchandise terms of trade (SNA) Annual average % change Index 6 1,300 Forecasts 5 1,250 4 1,200 3 1,150 2 1,100 1 1,050 0 1,000 -1 2001 2003 2005 2007 2009 2011 2013 2015 2017 950 Mar-06 Forecasts Mar-08 Mar-10 Calendar year Scenario two Half Year Update 2013 Sources: Haver Analytics, the Treasury Mar-12 Mar-14 Mar-16 Mar-18 Quarterly Scenario two Half Year Update 2013 Sources: Statistics New Zealand, the Treasury …causing weaker nominal GDP… Weaker domestic activity, combined with lower terms of trade and CPI inflation, reduces nominal GDP by $12.5 billion over the forecast period compared to the main forecast. The lower terms of trade in this scenario weaken the goods trade balance over the forecast period which, along with the lower nominal GDP, increases the current account deficit as a percentage of GDP relative to the main forecast. The current account balance reaches a deficit of 7.1% of GDP by March 2018, compared to 6.4% in the main forecast. …as well as lower tax revenue and operating balance Core Crown tax revenue is a cumulative $3.9 billion lower over the forecast period in this scenario, largely owing to nominal GDP being $12.5 billion lower over the forecast period. The weaker labour market and less inflationary pressure lower worker incomes, which reduces source deductions revenue by $1.3 billion over the forecast period. The economy’s weaker nominal activity means that business profitability is reduced, resulting in corporate taxes being a cumulative $1.0 billion lower. Resident withholding tax is $0.7 billion lower over the forecast period with interest rates increasing less than in the central forecast as inflation is closer to the mid-point of the target band. Weaker nominal consumption and residential investment reduces GST revenue by a cumulative $0.4 billion over the forecast period. Core Crown expenses are slightly Figure 3.6 – Net core Crown debt higher than in the main forecast, % of GDP 30 driven by an increase in debt servicing Forecasts 25 costs. Welfare payments are broadly similar to the main forecast as the 20 higher number of recipients receiving 15 unemployment-related benefits is 10 largely offset by lower indexation 5 adjustments to payment rates of many benefits and superannuation. This 0 2007 2009 2011 2013 2015 2017 reflects both lower inflation and wage Years ended 30 June Scenario one Scenario two Half Year Update 2013 growth. In this scenario, the return to surplus of OBEGAL is delayed by one Source: The Treasury year until the June 2016 year (Figure 3.3). As a consequence, net core Crown debt as a proportion of GDP is higher at the end of the forecast period (June 2018), falling to 24.3% compared to 22.3% in the main forecast (Figure 3.6). 52 | B.6 FORECAST FINANCIAL STATEMENTS General Fiscal Risks The remainder of this chapter focuses on the links between the risks to the performance of the economy and the Crown’s fiscal position. For more on fiscal risks, see the Specific Fiscal Risks chapter on page 61. Fiscal Sensitivities Table 3.2 provides some rules of thumb on the sensitivities of the fiscal position to small changes in specific variables. For example, if, for some reason, nominal GDP growth is one percentage point faster than we have forecast each year up to June 2018, tax revenue would be expected to be around $4.0 billion (1.5% of GDP) higher than forecast in the June 2018 year as a result. The sensitivities are broadly symmetric and if nominal GDP growth is one percentage point slower each year than we expect, tax revenue would be around $3.9 billion lower than forecast in the June 2018 year. However, these figures can be influenced by the composition of growth as different types of activity have different effective tax rates. A different interest rate path than that forecast would also impact on the fiscal position. A one percentage point lower interest rate would result in interest income on funds managed by the Treasury’s New Zealand Debt Management Office (NZDMO) being $178 million lower in the June 2018 year. This would be more than offset by interest expenses being $384 million lower in the June 2018 year. Table 3.2 – Fiscal sensitivity analysis Year ending 30 June ($millions unless stated) 2014 Forecast 2015 Forecast 2016 Forecast 2017 Forecast 2018 Forecast 620 0.3 1,335 0.6 2,150 0.9 3,035 1.2 4,015 1.5 270 0.1 125 0.1 570 0.2 290 0.1 910 0.4 475 0.2 1,285 0.5 670 0.3 1,725 0.6 875 0.3 Interest income1 (70) (89) (85) (161) (178) (% of GDP) (0.0) (0.0) (0.0) (0.1) (0.1) Interest expenses1 (% of GDP) (4) (0.0) (134) (0.1) (244) (0.1) (341) (0.1) (384) (0.1) Overall operating balance (66) 45 159 180 206 (0.0) 0.0 0.1 0.1 0.1 1% higher nominal GDP growth per annum on Tax revenue (% of GDP) Tax revenue impact of a 1% increase in growth of Wages and salaries (% of GDP) Taxable business profits (% of GDP) Impact of 1% point lower interest rates on (% of GDP) Note: 1 Funds managed by the Treasury’s NZDMO only. Source: The Treasury B.6 | 53 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Revenue Risks One of the major sources of risk to the fiscal position arises from the inherent uncertainty about future tax revenue. The amount of tax revenue that the Government receives in a given year is closely linked to the performance of the economy. Figure 3.7 plots the main tax revenue forecast, along with confidence intervals around those forecasts based on the Treasury’s historical tax forecast errors and the assumption of an even balance of risks around the central forecast.7 The outermost shaded area captures the range +/- $7.8 billion in the June 2018 year within which actual tax outturns fall 80% of the time.8 The tax revenue forecasts from the two scenarios are also shown in Figure 3.7. The 2008/09 global financial crisis showed that exogenous shocks can have severe impacts on government revenue. Further adverse weather conditions or a global downturn would have a negative impact on the Government’s fiscal position. Should any of the uncertainties outlined in the Economic Risks section eventuate differently from the main forecast, government revenue would likely be different from forecast, with scenarios one and two being examples of possible outcomes. Figure 3.7 – Core Crown tax revenue uncertainty $billions 90 85 80 75 70 65 60 55 50 45 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Years ended 30 June 10-90 percentiles 20-80 percentiles 30-70 percentiles 40-60 percentiles Scenario one Scenario two Actual and forecast Source: The Treasury 7 A full summary of the methodology and critical assumptions is included in New Zealand Treasury Working Paper 10/08. Standard deviation assumptions used for 0-, 1-, 2- and 3-year ahead forecasts are 0.9%, 3.2%, 5.3% and 6.6% of the actual result, respectively. 8 Previous Treasury analysis showed that a shock that has a significant and persistent impact on economic growth can result in tax revenues significantly beyond the outermost shaded area. See Fookes, C (2011), “Modelling shocks to New Zealand’s fiscal position”, New Zealand Treasury Working Paper 11/02. 54 | B.6 FORECAST FINANCIAL STATEMENTS Based on average historical forecast errors and an even balance of risks, Figure 3.7 suggests that tax revenue over the forecast period would be stronger than scenario one approximately 30% of the time and weaker than scenario two approximately 40% of the time. There is also uncertainty around government revenue arising from the performance of SOEs and the path of interest rates as outlined in the Fiscal Sensitivities section. Expenditure Risks One-off and unexpected expenditure shocks can have a large impact on the Crown’s operating balance in the year that they occur. Persistent errors in forecasting the cost of various programmes (ie, policies that cost more than the Government allows for) can also have substantial ongoing effects on the fiscal position. There is also considerable uncertainty regarding the effect of the performance of the economy on Crown expenditures. This uncertainty largely relates to the operation of the so-called automatic stabilisers. For example, if the economy performs better (worse) than expected in a given year, official expenditures on social programmes may be lower (higher) than planned. Meanwhile, the destructive seismic events of recent years have underlined the inherent exposure of the Crown’s fiscal position to exogenous shocks. The Government’s fiscal position would be impacted if another catastrophic earthquake were to occur or if the costs associated with the recent events exceed the updated estimates. The ageing population also presents risks to the medium-term fiscal position, particularly to the extent that demographic forecasts may prove to be too low or high. An ageing population requires increased government expenditure, particularly for health and superannuation spending. Balance Sheet Risks In addition to risks around revenue and expenditure, the Crown’s financial position is exposed to risks to its balance sheet. While some are unavoidable, the Crown’s general approach is to identify, avoid or mitigate these risks where practicable. For more information on balance sheet risks, see the Fiscal Outlook chapter on pages 34 to 35. The largest source of balance sheet risk is volatility in asset and liability values owing to movements in market variables such as interest rates, exchange rates and equity prices. This may result in an operating balance impact. Of the Crown’s aggregate financial risk, roughly a third is estimated to be attributed to this “market risk”.9 Three areas of the balance sheet are particularly susceptible: Financial assets held by the CFIs are sensitive to financial-market volatility. CFIs diversify their portfolios across a range of financial assets to manage exposures to specific market risks. The Crown Ownership Monitoring Unit (COMU) estimates a 10% fall (rise) in world share markets would lead to a 4% to 5% fall (rise) in the value of the Crown’s financial portfolio. 9 Irwin, T and Parkyn, O (2009), “Improving the management of the Crown’s exposure to risk”, New Zealand Treasury Working Paper 09/06. B.6 | 55 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Insurance and retirement liabilities and provisions are prone to market volatility through their actuarial valuations, which are sensitive to assumptions about variables such as interest and inflation rates, and risk margins. Physical assets such as land, buildings, state highways and military equipment are susceptible to valuation movements through changes in property market conditions, interest rates and changes in the costs of construction. This will affect the recorded value of physical Crown assets. Business risks, relating to the broader commercial environment, may also affect the Crown’s balance sheet. A number of entities owned by the Crown, including commercial and social entities, have their financial performance and valuations impacted by these external factors. Funding Risks The New Zealand Crown remains in the top-20 rated sovereigns globally, with the top Aaa foreign-currency rating from Moody’s and AA foreign-currency ratings from Standard & Poor’s and Fitch. The outlook is stable across all three agencies. The downside risks identified by the rating agencies are broadly in line with the risks identified earlier in the chapter. In the case of an increase in global risk-aversion and in the absence of a marked improvement in the external position, New Zealand may be more likely to face a degree of funding pressure in the future. All things being equal, any further deterioration in the ratings outlook could serve to raise debt-servicing costs for the Crown. On the other hand, additional downward pressure on borrowing rates is possible if diversification flows, particularly away from Europe, continue in the future. The Crown is also susceptible to “liquidity risk” with respect to its ability to raise cash to meet its obligations. This risk, however, is relatively small given ongoing management of the core Crown’s liquidity position by the Treasury’s DMO, as well as the Government’s commitment to maintaining prudent debt levels. 56 | B.6 FORECAST FINANCIAL STATEMENTS Specific Fiscal Risks The Statement of Specific Fiscal Risks is required by the Public Finance Act 1989 to set out, to the fullest extent possible, all government decisions and other circumstances known to the Government at the date of the finalisation of the fiscal forecasts that may have a material effect on the fiscal and economic outlook, but are not certain enough in timing or amount to include in the fiscal forecasts. Although the process for disclosure of specific fiscal risks involves a number of parties, including government departments, the Treasury and the Minister of Finance, there remains a possibility that not every risk is identified. Disclosure of known risks is also subject to specific requirements and materiality thresholds, which are described after the Statement of Specific Fiscal Risks. Overview Specific fiscal risks can be positive or negative and can affect revenue or spending. The links between external events and spending are indirect because new policies that change spending and revenue usually require a decision by the Government and approval from Parliament. The approach taken in this chapter is to disclose those potential policy decisions and key areas of uncertainty that may have a material effect on the fiscal outlook. The Government generally sets aside allowances of new funding for future Budgets to manage uncertainty and cost pressures. These allowances are included in the fiscal forecasts. Current fiscal management policy is for future policy decisions affecting expenses or capital expenditure to be met through reprioritisation or from within existing provisions included in the fiscal forecasts. Future policy decisions are risks to the fiscal forecasts only to the extent that they cannot be managed from within: existing baselines or Budget allowances for operating expenditure, or the existing Crown balance sheet for capital expenditure, including the Future Investment Fund. Notwithstanding this, known material policy risks are identified as specific fiscal risks, even though the Government has more control in managing such risks through reprioritisation, the existing Crown balance sheet and the Budget allowances. This is done to ensure a prudent approach to the disclosure of risks, improve transparency and not pre-judge future decisions by governments. The specific fiscal risks are categorised into: Potential policy decisions affecting revenue: For example, changes to tax policy or ACC levies could reduce or increase government income. Potential policy decisions affecting expenses (expected to be funded from reprioritisation or Budget allowances): Costs of policy proposals could increase or decrease expenses depending on decisions taken, and they are risks to the fiscal forecasts only to the extent that they cannot be managed within existing baselines or Budget allowances. B.6 | 57 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Potential capital decisions (expected to be funded from the existing Crown balance sheet, including the Future Investment Fund): Capital investment decisions are risks to the fiscal forecasts only to the extent that they cannot be managed within the existing Crown balance sheet, including the Future Investment Fund. Matters dependent on external factors: The Crown’s liability for costs is sometimes dependent on external factors such as the outcome of negotiations or international obligations. A range of generic risks to the fiscal forecasts are not recognised as specific fiscal risks: The most significant economic risks have been identified in Chapter 3. Business risks and volatility in the returns from the Crown’s investments relating to the broader economic and commercial environment. General cost pressures, such as those associated with demographic changes (eg, an ageing population). Potential risks from changes in demand for government services or transfer payments owing to underlying structural factors (such as changes in demand for Jobseeker Support). The costs of future individual natural disasters, and other major events, as they usually occur infrequently and their occurrence, nature and timing cannot be predicted. Once a disaster does occur, a number of choices arise about how to respond and when potential liabilities are recognised (eg, through setting aside an allocation of funding for the disaster). Specific risks are disclosed at this point based on the range of possible responses. The final part of the chapter contains a current list of contingent liabilities and contingent assets. Contingent liabilities are costs that the Crown will have to face if a particular event occurs or are present liabilities that are unable to be measured. Typically, contingent liabilities consist of guarantees and indemnities, legal disputes and claims on uncalled capital. The largest quantified contingent liabilities are to international financial organisations and mostly relate to uncalled capital and promissory notes. Contingent assets are possible assets that have arisen from past events but the value of the asset, or whether it will eventuate, will not be confirmed until a particular event occurs. 58 | B.6 FORECAST FINANCIAL STATEMENTS Statement of Specific Fiscal Risks Summary Table The matters listed below are disclosed as specific fiscal risks because they meet the rules for disclosure outlined after this Statement. Full descriptions of the risks listed below are set out in the next section. Where quantification is possible, this is included in the description of the risk. Specific fiscal risks as at 3 December 2013 Status10 Potential policy decisions affecting revenue ACC – Levies Unchanged ACC – Funding Policy Review Unchanged Revenue – Income-sharing Tax Credits Unchanged Services Funded by Third Parties Unchanged Potential policy decisions affecting expenses (expected to be funded from reprioritisation or Budget allowances) ACC – Work-related Gradual Process Disease and Infection Unchanged Budget Operating Initiatives New Canterbury Earthquake Recovery – Christchurch City Council/Crown Cost Sharing Changed Canterbury Earthquake Recovery – Christchurch Central Recovery Plan Changed Canterbury Earthquake Recovery – Residential Red Zone Changed Communications – Ultra-Fast Broadband Initiative New Defence Force – Mid-point Rebalancing Review Changed Environment – Post-2012 International Climate Change Obligations Changed Government Response to Wai 262 Unchanged Housing – Reform of Social Housing Unchanged Revenue – KiwiSaver Auto-enrolment Unchanged Revenue – Transformation and Technology Renewal Changed Social Development – Vulnerable Children White Paper Unchanged Social Development – Welfare Reform Costs Unchanged Social Development – Welfare Reform Forecast Benefit Savings Unchanged State Sector Employment Agreements Unchanged Potential capital decisions (expected to be funded from the existing Crown balance sheet, including the Future Investment Fund) Departmental Capital Intentions Unchanged Earthquake Strengthening for Crown-owned Buildings Unchanged Finance – Crown Overseas Properties Changed Justice – Christchurch Justice and Emergency Services Precinct Changed Primary Industries – Investment in Water Infrastructure Unchanged Transport – Auckland Transport Projects New Transport – Support for KiwiRail Changed 10 Unchanged – risks that have not materially changed since the previous Economic and Fiscal Update. Changed – risks that have changed substantively from the previous Economic and Fiscal Update. New – risks that have not been disclosed in the previous Economic and Fiscal Update. B.6 | 59 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Specific fiscal risks as at 3 December 2013 Matters dependent on external factors ACC – Non-earners’ Account Canterbury Earthquake Recovery – Residential Red Zone Communications – Potential Impairment in Value of Broadband Investment Defence Force – Potential Rationalisation, Revaluation and Disposal of NZDF Assets Energy – Crown Revenue from Petroleum Royalties Environment – Post 2012 International Climate Change Negotiations Finance – EQC Finance – Goodwill on Acquisition Finance – Government Commitments to International Financial Institutions Finance – Sale of Part of the Crown’s Shareholding in Certain Companies Finance – Southern Response Earthquake Services Support Health – Litigation in the Disability Support and Aged Care Areas Housing – Divestment of Housing Revenue – Cash Held in Tax Pools Treaty Negotiations – Treaty Settlement Forecasts Treaty Negotiations – Relativity Clause Status10 Unchanged Changed Unchanged Unchanged Unchanged Changed Changed Unchanged Unchanged Changed Unchanged Changed Unchanged Unchanged Unchanged Unchanged Potential Policy Decisions Affecting Revenue ACC – Levies (Unchanged) Levy rates for the Work, Earners’ and Motor Vehicle accounts are set by Cabinet following a public consultation process. Claims experience, ACC performance and economic assumptions (particularly discount rates) can impact insurance expenditure, both in the current year and the estimated future liability. If any of these factors differ from what is forecast the revenue collected may be more or less than required to cover the costs of claims, resulting in unplanned savings or costs which could have a corresponding impact on the operating balance. ACC – Funding Policy Review (Unchanged) The Government is undertaking a review of ACC’s funding policy. Adopting a lower funding target band midpoint would result in a reduction in levies and reduce Crown revenue and Crown assets, with a flow-on impact to the operating balance. Revenue – Income-sharing Tax Credits (Unchanged) The Government has introduced legislation to establish an income-sharing tax credit. If passed as introduced, the legislation will allow couples with children under the age of 18 to pool their earnings for income tax purposes if they meet certain criteria. If implemented, the changes could reduce tax revenue by $500 million a year once the scheme is fully operational. The Finance and Expenditure Committee has recommended that the significant fiscal cost of the package be addressed before the Bill proceeds further. Services Funded by Third Parties (Unchanged) A wide range of government services are funded through third party fees and charges. Demand for these services can vary with a direct impact on revenue received. There is a risk the Government may need to provide additional funding if revenue collected is lower than the total costs of providing the services. There is also a risk that changes will be required to the way government services are delivered, which could result in costs to the Crown. 60 | B.6 FORECAST FINANCIAL STATEMENTS Potential Policy Decisions Affecting Expenses (Expected to be Funded from Reprioritisation or Budget Allowances) ACC – Work-related Gradual Process Disease and Infection (Unchanged) Under current legislation, the Government incurs an obligation for Work-related Gradual Process Disease and Infection claims when the claim is made, and an expense is recognised at this point. The liability for commercial accident and sickness insurance contracts would usually be recognised when exposure to conditions that will give rise to a claim occurs. An amendment to legislation would be required to recognise claims at the same time as for commercial contracts. There are currently no plans to make such a change. An initial adjustment to the liability, and an expense of about $650 million would need to be reported if such an amendment were to be made. Budget Operating Initiatives (New) The Government is yet to make decisions on any potential package of new operating initiatives for the upcoming Budget. New operating initiatives represent a risk to the forecasts only to the extent they cannot be managed through reprioritisation or from within the existing Budget allowance for new operating spending in the forecasts. The Government’s stated intention is that all new operating initiatives will be managed through these mechanisms. Canterbury Earthquake Recovery – Christchurch City Council/Crown Cost Sharing (Changed) The Crown is partially funding the recovery of local infrastructure in Canterbury as set out in the cost sharing agreement with the Christchurch City Council. The agreement includes a review clause. The review is to be completed by 1 December 2014. As a result, the Crown’s contribution could differ from that included in the fiscal forecasts. Canterbury Earthquake Recovery – Christchurch Central Recovery Plan (Changed) The Crown is partially funding the construction of Anchor Projects as part of the Christchurch Central Recovery Plan as set out in the cost sharing agreement with the Christchurch City Council. The extent of funding will vary from project to project, depending on final project costs. Business cases for the development of Anchor Projects are in their early stages. Project costing for construction of the Anchor Projects will become increasingly clear during the business case process and the subsequent procurement phase. An estimate of the cost has been included in the fiscal forecasts but the Crown’s eventual contribution may differ. Communications – Ultra-Fast Broadband Initiative (New) The Government has expressed support for Crown Fibre Holdings to enter into discussions with Chorus Limited to help manage potential issues for Chorus in delivering the Ultra Fast Broadband Initiative. Depending on their nature, the outcomes of those discussions could give rise to a fiscal risk. The Government’s expectation is that any options arising from the discussions will remain within the current funding envelope. Defence Force – Mid-point Rebalancing Review (Changed) The New Zealand Defence Force (NZDF) savings and reform programme will be on-going and integrated into normal business practice from 2014/15. The Government is yet to make final decisions on future funding for NZDF. However, funding increases may be approved for NZDF within the forecast period. B.6 | 61 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Government Response to Wai 262 (Unchanged) The Waitangi Tribunal’s report on the Wai 262 claim focuses on the protection of Māori culture and identity, with a particular focus on mātauranga Māori and associated taonga. The Tribunal’s recommendations are directed towards a number of government agencies individually, as groups and across sectors. The Government has yet to respond to the Tribunal’s report and recommendations. Housing – Reform of Social Housing (Unchanged) The Government has decided to change the policy settings for social housing. This includes growing third party providers of social housing, increasing the effectiveness of financial assistance, and Housing New Zealand Corporation focusing on providing social housing to those with the greatest housing need. Some decisions have been announced and included in the fiscal forecasts but other plans for implementation remain under development, and may require reprioritisation or additional funding. Revenue – KiwiSaver Auto-enrolment (Unchanged) The Government has announced its intention to consult on the design of a one-off KiwiSaver auto-enrolment exercise to increase the number of KiwiSaver members. The Government will proceed with a one-off KiwiSaver enrolment exercise only when it is confident that such a step poses no significant risks to returning to, and maintaining, an operating surplus. An auto-enrolment exercise is likely to entail a one-off cost for kickstart payments to new members and ongoing additional costs for the Member Tax Credit. Depending on the timing, design features and take-up rate, these costs could be in the order of $350 million to $550 million over the first four years after auto-enrolment takes place, and are expected to be funded out of the operating allowance. Revenue – Transformation and Technology Renewal (Changed) The Government is exploring options that will fundamentally change the way Inland Revenue manages its processes and data. Any changes could impact tax revenue collections and may have material costs to implement. Inland Revenue has commenced the development of a detailed business cases for Stage 1: Enabling secure digital services. The business cases will inform the Government’s decision-making for the first stage of transformation and may require significant reprioritisation or new funding. Social Development – Vulnerable Children White Paper (Unchanged) The Government has begun to implement proposals to better identify and provide assistance to vulnerable children. Future costs of the proposals are currently being developed with a focus in the first instance on costs for the 2014/15 year. There are likely to be multi-year impacts on Votes Education, Health, Justice and Social Development. To the extent that these cannot be funded from reprioritisation, additional funding from the allowance may be required. Social Development – Welfare Reform Costs (Unchanged) The Government has agreed to a package of changes to the benefit system. The extent of any additional costs of implementing welfare reform, such as implementing the Investment Approach, remain uncertain. 62 | B.6 FORECAST FINANCIAL STATEMENTS Social Development – Welfare Reform Forecast Benefit Savings (Unchanged) A conservative estimate of the likely benefits from Welfare Reform has been included in the fiscal forecasts. The actual impact may differ owing to behavioural factors and the complexity in implementing the reforms, with a corresponding impact on benefit expenditure. State Sector Employment Agreements (Unchanged) A number of large collective agreements are due to be negotiated in the short-to-medium term. As well as direct fiscal implications from any changes to remuneration, the renegotiation of these agreements can have flow-on effects to remuneration in other sectors. The Government has signalled an expectation of restraint given its current fiscal stance and an expectation that agreements will be managed with the current fiscal forecasts. Potential Capital Decisions (Expected to be Funded from the Existing Crown Balance Sheet, Including the Future Investment Fund) Departmental Capital Intentions (Unchanged) The Government requires 16 capital-intensive agencies or sectors to identify their capital spending intentions over the next 10 years based on current policy settings and certain demographic and inflation assumptions. The Government expects that these intentions will be managed back through a range of measures such as prioritisation, changes to asset utilisation, alternative methods of service delivery and changes to policy settings. Departmental capital intentions are risks to the fiscal forecasts only to the extent that they cannot be managed through existing balance sheets, including the Future Investment Fund. Earthquake Strengthening for Crown-owned Buildings (Unchanged) There is a possibility that the Crown will incur costs for earthquake strengthening some of its buildings that may not meet modern building standards. The Government is currently undertaking a stocktake of Crown-owned earthquake-prone buildings. The likelihood, timing and fiscal impact of any earthquake strengthening are uncertain. Finance – Crown Overseas Properties (Changed) The Government holds New Zealand House in London on a long-term lease from the Crown Estate (UK). Depending on the Government’s future intentions for this building, an upgrade may be required. A rough-order cost estimate for this upgrade is $100 million over the period from 2014/15 to 2016/17. Justice – Christchurch Justice and Emergency Services Precinct (Unchanged) The Government has included the development of a Justice and Emergency Services Precinct in the fiscal forecasts, and there is a risk that the spending profile differs from this. Primary Industries – Investment in Water Infrastructure (Unchanged) In addition to $80 million provided in 2013/14, the Government will consider providing up to $320 million in future Budgets to Crown Irrigation Investments Limited as schemes reach the “investment-ready” stage. B.6 | 63 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Transport – Auckland Transport Projects (New) The Government has signalled its intention to accelerate transport projects in the Auckland Council’s Auckland Plan, including a number of state highway projects, Auckland Manukau Eastern Transport Initiatives, the East-West Link and support for the City Rail Link and a second Waitemata Harbour Crossing. The Government is yet to consider the most appropriate timing, phasing of and funding for these initiatives. Transport – Support for KiwiRail (Changed) KiwiRail has signalled its intention to seek additional Crown funding over the next four years as it continues to: work towards its objective of becoming a commercially viable network undertake earthquake strengthening work on some of its buildings, and repair damage to operational facilities in Christchurch following the earthquakes. KiwiRail has also signalled that it may require additional funding following the breakdown of the Aratere ferry. The Government has not considered how it would respond to such a request. Matters Dependent on External Factors ACC – Non-earners’ Account (Unchanged) Funding for the Non-earners’ Account is agreed as part of the annual Budget process. Claims’ experience, ACC’s financial performance and economic assumptions (particularly discount rates) can impact insurance expenditure, both in the current year and the estimated future liability. If any of these factors differ from what is forecast the amount required to cover the costs of non-earners’ claims for that year may be more or less than the agreed level of funding, resulting in unplanned savings or costs to the Crown. Canterbury Earthquake Recovery – Residential Red Zone (Changed) Some recoveries from the EQC and private insurers remain outstanding and there is a risk that final recoveries may be greater or less than forecast. In addition, potential costs associated with the future use of residential red zone are uncertain. The future value may change depending on any future alternate uses of the land. Communications – Potential Impairment in Value of Broadband Investment (Unchanged) The Government has set aside $1.345 billion to progressively capitalise Crown Fibre Holdings so that it can invest with private partners in a new network delivering ‘ultra-fast’ broadband services. Given the contracts entered into, the extent of the recovery of this investment is particularly dependent on the number of connections made to the network. The fiscal forecasts include a provision for this impairment, but the final amount of the impairment may vary from this provision. Defence Force – Potential Rationalisation, Revaluation and Disposal of NZDF Assets (Unchanged) The Government is considering the potential to dispose of a number of NZDF assets, including the Seasprite helicopters and Unimog trucks. Depending on market conditions, the timing of disposal and sale price received could have an impact on the Government’s overall financial 64 | B.6 FORECAST FINANCIAL STATEMENTS position. NZDF is also completing analysis of inventory that is surplus to requirements and is over and above the existing provision for obsolescence. The existing provision is also being reviewed to ensure that all items comprising the provision are still relevant. Energy – Crown Revenue from Petroleum Royalties (Unchanged) The Crown Revenue from Petroleum Royalties is very dependent upon extraction rates, the USD value per barrel and the USD/NZD exchange rate. Movements up or down in either of these variables could result in a significant decrease or increase in the Crown revenue. The overall impact for the Crown could be positive or negative. Environment – Post-2012 International Climate Change Obligations (Changed) The Government has adopted an unconditional target to reduce emissions by 5% by 2020 relative to its 1990 levels. Its conditional commitments are subject to international negotiations and agreements. Currently no rights or obligations are included in the fiscal forecasts for either conditional or unconditional post-2012 obligations. These could have significant fiscal implications that will need to be recognised when the commitments are considered to be binding and the Government has no discretion to avoid the liabilities. Finance – EQC (Changed) The net financial position of EQC, and the size of any requirement for additional Crown funding, remains uncertain. The key driver of this uncertainty is EQC’s outstanding claims liability – the actuarial estimate of EQC’s outstanding claims liability is highly uncertain and sensitive to assumptions; for example, construction demand surge, land damage estimates, legal challenges, reinsurance recoveries and the profile of claims settlement. The magnitude of the net outstanding cost claims is large, so small percentage changes in the liability can have a material impact on the fiscal forecasts. Finance – Goodwill on Acquisition (Unchanged) As at 30 June 2013, the Government had goodwill on acquisition of a number of subentities totalling $655 million. Under New Zealand accounting standards (NZIAS 36), such goodwill items are required to be assessed annually for impairment. If there is any indication that the goodwill may be impaired, the recoverable amount of the cash generating units to which the goodwill is allocated is required to be estimated. If the recoverable amount is less than the carrying amount of those units, the units and the goodwill allocated to them are regarded as impaired and the Government is required to recognise impairment losses in the operating statement. Such assessments will be conducted at the end of the financial year, and the fiscal forecasts currently make no allowance for such impairment losses. Finance – Government Commitments to International Financial Institutions (Unchanged) The forecast level of government commitments to international financial institutions is subject to change, depending on the Government’s response to any changed financial plans on the part of these institutions. The risk government commitments to the International Monetary Fund being called has increased in recent years. Finance – Sale of Part of the Crown’s Shareholding in Certain Companies (Changed) The Government has sold part of the Crown’s shareholding in Air New Zealand, Mighty River Power and Meridian Energy. It is proposing to sell part of the Crown’s shareholding in Genesis Energy. The fiscal forecasts include an estimate of the cash proceeds from B.6 | 65 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE the sale of part of the Crown’s shareholding in these companies, the dividends and profits from these companies that will be paid or are attributable to minority shareholders rather than to the Crown, and the estimated finance cost savings. There is still some uncertainty over the final amount and timing of any cash proceeds, foregone profits, flow-on effects for the Crown and any implementation costs are uncertain, and these may differ from what has been assumed in the fiscal forecasts. Finance – Southern Response Earthquake Services Support (Unchanged) The ultimate cost to the Crown of settling earthquake claims remains subject to significant uncertainty. Out-year forecasts assume that the actual cost to settle claims will align with the actuary’s central estimate of the claims provision. There is a risk that the actual cost could vary from this estimate. Health – Litigation in the Disability Support and Aged Care Areas (Changed) Several cases and funding claims in the disability support and aged care sectors may involve significant costs to the Crown relating to interpretation of the Minimum Wage Act 1983, the Equal Pay Act 1972 and the Government’s policy of paying certain family members through its Funded Care Policy. Changes to the existing policy could require additional funding. Housing – Divestment of Housing (Unchanged) The Government may undertake divestment or redevelopment of some housing property. Property sales are subject to market conditions and therefore there is an inherent level of uncertainty about the return to the Crown associated with any divestment and/or development. Revenue – Cash Held in Tax Pools (Unchanged) Funds held in tax pools are recognised as a Crown asset. There is a risk that funds held in these pools, over and above a taxpayer’s provisional tax liability, may be withdrawn, resulting in a reduction in the Crown’s available cash reserves. Treaty Negotiations – Treaty Settlement Forecasts (Unchanged) The fiscal forecasts include provision for the cost of future Treaty settlements. Given settlements are finalised through negotiations, there is a risk that the timing and amount of the settlements could differ from the profile included in the fiscal forecasts. Treaty Negotiations – Relativity Clause (Unchanged) The Deeds of Settlement negotiated with Waikato-Tainui and Ngāi Tahu include a relativity mechanism. Now that the total redress amount for all historical Treaty settlements exceeds $1 billion in 1994 present-value terms, the mechanism provides that the Crown is liable to make payments to maintain the real value of Ngāi Tahu and Waikato-Tainui’s settlements as a proportion of all Treaty settlements. The agreed relativity proportions are 17% for Waikato-Tainui and approximately 16% for Ngāi Tahu. There is a risk that the timing and amount of the expense for the relativity payments may differ from that included in the fiscal forecasts. There is also uncertainty on how various disputes concerning the interpretation of the mechanism will be resolved. Risks Removed Since the 2013 Budget Update The following risks have been removed since the 2013 Budget Update: 66 | B.6 FORECAST FINANCIAL STATEMENTS Expired risks Reason Health – Payment of Family Caregivers Merged with Litigation in the Disability Support and Aged Care Areas risk Finance – New Zealand Aluminium Smelters Included in fiscal forecasts Finance – Solid Energy No longer material Criteria and Rules for Inclusion in the Fiscal Forecasts or Disclosure as Specific Fiscal Risks The Public Finance Act 1989 requires that the Statement of Specific Fiscal Risks sets out all government decisions, contingent liabilities or contractual obligations known to the Government and subject to specific requirements that may have a material effect on the economic or fiscal outlook.11 The criteria and rules set out below are used to determine if government decisions or other circumstances should be incorporated into the fiscal forecasts, disclosed as specific fiscal risks or, in some circumstances, excluded from disclosure. Criteria for Including Matters in the Fiscal Forecasts Matters are incorporated into the fiscal forecasts provided they meet the following criteria: The matter can be quantified for particular years with reasonable certainty. A decision has been taken, or a decision has not yet been taken but it is reasonably probable12 the matter will be approved, or it is reasonably probable the situation will occur. Additionally, any other matters may be incorporated into the forecasts if the Secretary to the Treasury considers, using their best professional judgement, that the matters may have a material effect on the fiscal and economic outlook and are certain enough to include in the fiscal forecasts. Rules for the Disclosure of Specific Fiscal Risks Matters are disclosed as specific fiscal risks if: the likely impact is more than $100 million over five years, and either a decision has not yet been taken but it is reasonably possible (but not probable) that the matter will be approved or the situation will occur, or 13 it is reasonably probable that the matter will be approved or the situation will occur, but the matter cannot be quantified or assigned to particular years with reasonable certainty. 11 The Statement of Specific Fiscal Risks is a requirement set out in sections 26Q and 26U of the Public Finance Act 1989. 12 For these purposes ‘reasonably probable’ is taken to mean that the matter is more likely than not to be approved within the forecast period (by considering, for example, whether there is a better than 50% chance of the matter occurring or being approved). 13 For these purposes ‘reasonably possible’ is taken to mean that the matter might be approved within the forecast period (by considering, for example, whether there is a 20% to 50% chance of the matter occurring or being approved). B.6 | 67 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Additionally, any other matters may be disclosed as specific fiscal risks if the Secretary to the Treasury considers, using their best professional judgement, that the matters may have a material effect (more than $100 million over five years) on the fiscal and economic outlook but are not certain enough to include in the fiscal forecasts. Exclusions from Disclosure Matters are excluded from disclosure as specific fiscal risks if they fail to meet the materiality criterion (ie, are less than $100 million over five years), or if they are unlikely14 to be approved or occur within the forecasting period. Additionally, the Minister of Finance may determine that a matter be included in the fiscal forecasts or a specific fiscal risk not be disclosed, if such disclosure would be likely to: prejudice the substantial economic interests of New Zealand prejudice the security or defence of New Zealand or international relations of the Government compromise the Crown in a material way in negotiation, litigation or commercial activity, or result in a material loss of value to the Crown. If possible, the Minister of Finance should avoid withholding the matter either by making a decision on it before the forecasts are finalised, or by disclosing it without quantifying the risk. 14 For these purposes ‘unlikely’ is taken to mean that the matter will probably not be approved within the forecast period (by considering, for example, whether there is a less than 20% chance of the matter occurring or being approved). 68 | B.6 FORECAST FINANCIAL STATEMENTS Contingent Liabilities and Contingent Assets Contingent liabilities are possible costs that have arisen from past events, but the amount of the liability, or whether it will eventuate, will not be confirmed until a particular event occurs or present liabilities that are unable to be measured with sufficient reliability to be recorded in the financial statements (unquantifiable liabilities). Typically, contingent liabilities consist of guarantees and indemnities, uncalled capital and legal disputes and claims. The contingent liabilities facing the Crown are a mixture of operating and balance sheet risks, and they can vary greatly in magnitude and likelihood of realisation. In general, if a contingent liability were realised, or the amount becomes sufficiently reliable to record as a liability, it would reduce the operating balance and net worth and increase net debt. In the case of contingencies for uncalled capital, the negative impact would be restricted to net debt because the cost would be offset by the acquisition of capital. Where contingent liabilities have arisen as a consequence of legal action being taken against the Crown, the amount shown is the amount claimed and thus the maximum potential cost. It does not represent either an admission that the claim is valid or an estimation of the amount of any award against the Crown. Contingent assets are possible assets that have arisen from past events but the amount of the asset, or whether it will eventuate, will not be confirmed until a particular event occurs. Only contingent liabilities and contingent assets involving amounts of over $100 million are separately disclosed. Quantifiable contingencies less than $100 million are included in the “other quantifiable” total. Some contingencies of the Crown are not able to be quantified. We have disclosed all unquantifiable contingent liabilities and unquantifiable contingent assets that are not expected to be remote.15 Contingent liabilities have been stated as at 31 October 2013, being the latest set of reported contingent liabilities. 15 Remote is defined as being an item with less than a 10% chance of occurring. B.6 | 69 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Quantifiable Contingent Liabilities and Contingent Assets Guarantees and indemnities Status16 ($ millions) Contingent liabilities Other guarantees and indemnities Unchanged 178 178 Uncalled capital Asian Development Bank Unchanged 2,881 International Monetary Fund – promissory notes Unchanged 1,092 International Bank for Reconstruction and Development Unchanged 995 International Monetary Fund – arrangements to borrow Unchanged 1,013 Other uncalled capital Unchanged 25 6,006 Legal proceedings and disputes Tax disputes Unchanged 607 Other legal proceedings and disputes Unchanged 65 672 Other quantifiable contingent liabilities Unclaimed monies administered by the Department of Inland Revenue Unchanged Transpower New Zealand Limited Unchanged 156 Other quantifiable contingent liabilities Unchanged 184 104 444 Total quantifiable contingent liabilities 7,300 Contingent assets Tax disputes Unchanged 169 Other quantifiable contingent assets Unchanged 84 Total quantifiable contingent assets 253 16 Status of contingent liabilities or assets when compared to the Financial Statements of the Government of New Zealand for the year ended 30 June 2013. 70 | B.6 FORECAST FINANCIAL STATEMENTS Unquantifiable Contingent Liabilities and Contingent Assets Guarantees and indemnities Status Contingent liabilities Air New Zealand Unchanged Contact Energy Limited Unchanged Earthquake Commission (EQC) Unchanged Genesis Power Limited Unchanged Housing New Zealand Corporation Unchanged Justices of the Peace, Community Magistrates and Disputes Tribunal Referees Unchanged Maui Contracts Unchanged Maui Partners Unchanged Meridian Energy Limited New New Zealand Aluminium Smelter and Comalco Unchanged New Zealand Local Authorities Unchanged New Zealand Railways Corporation Unchanged Persons exercising investigating powers Unchanged Synfuels-Waitara Outfall Indemnity Unchanged Westpac New Zealand Limited Unchanged Legal claims and proceedings Accident Compensation Corporation (ACC) litigations Unchanged Air New Zealand litigation Unchanged Television New Zealand Unchanged Treaty of Waitangi claims Unchanged Ministry of Education litigation Unchanged Other unquantifiable contingent liabilities Criminal Proceeds (Recovery) Act 2009 Unchanged Environmental liabilities Unchanged Treaty of Waitangi claims – settlement relativity payments Unchanged B.6 | 71 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Description of Contingent Liabilities Quantifiable contingent liabilities over $100 million Uncalled capital As part of the Crown’s commitment to a multilateral approach to ensure global financial and economic stability, New Zealand, as a member country of these organisations, contributes capital by subscribing to shares in certain institutions. The capital (when called) is typically used to raise additional funding for loans to member countries, or in the case of the quota contributions, to directly finance lending to members. For New Zealand and other donor countries, capital contributions comprise both “paid in” capital and “callable capital or promissory notes.” The Crown’s uncalled capital subscriptions are as follows: Uncalled capital 31 October 2013 $millions 30 June 2013 $millions Asian Development Bank 2,881 2,992 International Monetary Fund – promissory notes 1,092 1,163 995 1,056 1,013 1,052 25 23 International Bank for Reconstruction and Development International Monetary Fund – arrangements to borrow Other Legal proceedings and disputes Tax in dispute – assessed When a taxpayer disagrees with an amended assessment issued following the dispute process, the taxpayer may challenge that decision by filing proceedings with the Taxation Review Authority or the High Court. The contingent liability represents the maximum liability the Inland Revenue has in respect of these cases. $607 million at 31 October 2013 ($641 million at 30 June 2013) Other quantifiable contingent liabilities Unclaimed monies Under the Unclaimed Money Act 1971, entities (eg, financial institutions, insurance companies) hand over money not claimed after six years to Inland Revenue. The funds are repaid to the entitled owner on proof of identification. $104 million at 31 October 2013 ($101 million at 30 June 2013) Transpower New Zealand Limited Transpower has a contingent liability relating to excess capital expenditure on the North Island Grid Upgrade Project (NIGU).The NIGU spend exceeds the amount initially approved in 2006. The methodology for approvals subsequently changed in 2012, which increases the potential size of the excess capital expenditure. If the excess expenditure is not approved by the Commerce Commission it cannot be recovered from customers. NIGU is operational and a submission for the excess expenditure has been made. 72 | B.6 FORECAST FINANCIAL STATEMENTS The excess is $156 million at 31 October 2013 ($156 million at 30 June 2013) Unquantifiable contingent liabilities This part of the Statement provides details of those contingent liabilities of the Crown that are not quantified, excluding those that are considered remote, reported by the following categories: a) Indemnities b) Legal claims and proceedings, and c) Other unquantifiable contingent liabilities. a) Indemnities Indemnities are legally binding promises where the Crown undertakes to accept the risk of loss or damage that another party may suffer or to hold the other party harmless against loss caused by a specific stated event. A number of these indemnities are provided to organisations within the Crown’s control. If these indemnities were to crystallise, the Crown would compensate the individual entity for the loss and there would likely be an adverse impact on core Crown expenses and core Crown net debt. B.6 | 73 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Party indemnified Instrument of indemnification Actions indemnified Air New Zealand Deed of indemnity issued 24 September 2001. Claims arising from acts of war and terrorism that cannot be met from insurance, up to a limit of US$1 billion in respect of any one claim. Contact Energy Limited The Crown and Contact Energy signed a number of documents to settle in full Contact's outstanding land rights and geothermal asset rights at Wairakei. The documents contained two reciprocal indemnities between the Crown and Contact to address the risk of certain losses to the respective parties' assets arising from the negligence or fault of the other party. Earthquake Commission (EQC) Section 16 of the Earthquake Commission Act 1993. Any deficiency in EQC’s assets to cover the Commission’s financial liabilities. In the event of a major natural disaster the Crown may be called upon to meet any financial shortfall incurred by the EQC. EQC expects to have the necessary financing to meet its liabilities as they fall due over the next 12 months, hence a call on its Crown guarantee is not expected for the coming year. In the event that EQC cannot meet its obligations, however, the Crown would need to finance any shortfall and the Crown’s net debt position would increase as a result. This support arrangement is discussed earlier in this chapter as a specific fiscal risk. Genesis Power Limited Housing New Zealand Limited (HNZL) Deed between Genesis Power Limited and the Crown. The agreement sees the Crown compensate Genesis in the event that it has less gas than it requires for the longterm supply of gas to cover Huntly Power station’s minimum needs. Genesis acquisition of Tekapo A & B power stations. Indemnity against any damage to bed of lakes and rivers subject to operating easements. The Crown has provided a warranty in respect of title to the assets transferred to HNZL. The Crown indemnified HNZL against: any breach of the warranty provided, and any third party claims that are a result of acts or omissions prior to 1 November 1992. The Crown also indemnified the directors and officers of HNZL against any liability consequent upon the assets not complying with statutory requirements, provided it is taking steps to rectify any non-compliance. 74 | B.6 FORECAST FINANCIAL STATEMENTS Party indemnified Instrument of indemnification Actions indemnified Justices of the Peace, Community Magistrates and Disputes Tribunal Referees Section 197 of the Summary Proceedings Act 1957. Damages or costs awarded against them as a result of them exceeding their jurisdiction, provided a High Court Judge certifies that they have exceeded their jurisdiction in good faith and ought to be indemnified. Maui Contracts Contracts in respect of which the Crown purchases gas from Maui Mining companies and sells gas downstream to Contact Energy Limited, Vector Gas Limited and Methanex Waitara Valley Limited. The contracts provide for invoices to be reopened in certain circumstances within two years of their issue date as a result of revisions to indices. These revisions may result in the Crown refunding monies or receiving monies from those parties. Maui Partners Confidentiality agreements with the Maui Partners in relation to the provision of gas reserves information. Any losses arising from a breach of the deed. Meridian Energy Limited Initial Public Offering The Minister of Finance signed a number of indemnities in October 2013. The Crown has indemnified Meridian Energy Limited’s directors and a number of external advisors against losses that they may suffer as a result of any claims brought against them in relation to the Meridian Energy Limited partial share sale. New Zealand Aluminium Smelter and Comalco The Minister of Finance signed indemnities in November 2003 and February 2004 in respect of aluminium dross currently stored at another site in Invercargill. The indemnity relates to costs incurred in removing the dross and disposing of it at another site if required to do so by an appropriate authority. New Zealand Local Authorities Section 9 of the Civil Defence Emergency Management Act 2002. The Guide to the National Civil Defence Emergency Management Plan (“the Guide”) states that with the approval of the Minister, the Government will reimburse local authorities, in whole or in part, for certain types of response and recovery costs incurred as a result of a local or national emergency. The Guide is approved and issued by the Director of Civil Defence Emergency Management. Section 58 of the Disputes Tribunal Act 1988. Civil Defence Emergency Management Plan. New Zealand Railways Corporation The Minister of Finance signed the indemnity on 1 September 2004. The directors of New Zealand Railways Corporation against all liabilities in connection with the Corporation taking ownership and/or responsibility for the national rail network and any associated assets and liabilities. Section 10 of the Finance Act 1990. Guarantees all loan and swap obligations of the New Zealand Railways Corporation. B.6 | 75 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Party indemnified Instrument of indemnification Actions indemnified Persons exercising investigating powers Section 63 of the Corporations (Investigation and Management) Act 1989. Indemnifies the Financial Markets Authority (formerly Securities Commission), the Registrar of Companies, every statutory manager of a corporation, every member of an advisory committee appointed under the Act and persons appointed pursuant to sections 17 to 19 of the Act (to exercise powers of inspection and investigation). The indemnity applies to the exercise, or omission to exercise, of any powers under the Act, unless the exercise of the power or the omission is shown to be in bad faith. Synfuels-Waitara Outfall Indemnity 1990 sale of the Synfuels plant and operations to New Zealand Liquid Fuels Investment Limited (NZLFI). The Crown transferred to NZLFI the benefit and obligation of a Deed of Indemnity between the Crown and Borthwick-CWS Limited (and subsequent owners) in respect of the Waitara effluent transfer line which was laid across the Waitara meat processing plant site. The Crown has the benefit of a counter indemnity from NZLFI which has since been transferred to Methanex Motunui Limited. Westpac New Zealand Limited The Domestic Transaction Banking Services Master Agreement with Westpac Banking Corporation (Westpac’s rights and obligations under this agreement were vested in Westpac New Zealand Limited under the Westpac New Zealand Act 2006), dated 30 November 2004. The Crown has indemnified Westpac: Supplier Payments Service – New Zealand Government Master Agreement dated 23 June 2010. The Crown has indemnified Westpac New Zealand Limited against certain costs, damages and losses to third parties resulting from unauthorised, forged or fraudulent payment instructions (excluding costs, damages and losses arising from Westpac’s wilful default, negligence or breach of the agreement or other applicable legal obligation. in relation to letters of credit issued on behalf of the Crown, and for costs and expenses incurred by reason of third party claims against Westpac relating to indirect instructions, direct debits, third party cheques, departmental credit card merchant agreements, use of online banking products and Inland Revenue processing arrangements. Legal claims and proceedings There are numerous legal actions that have been brought against the Crown. However, in the majority of these actions it is considered a remote possibility that the Crown would lose the case, or if the Crown were to lose it would be unlikely to have greater impact than a $20 million impact. Based on these factors, not all legal actions are individually disclosed. The claims that are disclosed individually, while they cannot be quantified, have the potential to exceed $20 million in costs. Accident Compensation Corporation (ACC) litigations 76 | B.6 FORECAST FINANCIAL STATEMENTS There are a number of actions involving ACC in existence, arising from the statutory review and appeal process, and in the main coming from challenges to operational decisions made by ACC. Given the nature of these proceedings and uncertainty as to their outcomes, attempting to quantify the financial effect would be unrealistic, so no estimate has been made. Air New Zealand litigation Air New Zealand is currently named in class actions. Two (one in Australia and the other in the United States) make allegations against more than 30 airlines, of anti competitive conduct in relation to pricing in the air cargo business. A class action in the United States alleges that Air New Zealand together with many other airlines conspired in respect of fares and surcharges on trans-Pacific routes. All class actions are being defended. The allegations made in relation to the air cargo business are also the subject of proceedings by the Australian Competition and Consumer Commission. A defended hearing in the Federal Court concluded in May 2013 and a decision is awaited. In the event that the Court determines that Air New Zealand had breached Australian laws, the company would have potential liability for pecuniary penalties. Television New Zealand (TVNZ) In the normal course of business various legal claims have been made against TVNZ. Given the stage of proceedings and uncertainty as to the outcomes of the claims, no estimate of the financial effect can be made and no provision for any potential liability has been made in the financial statements. Treaty of Waitangi claims Under the Treaty of Waitangi Act 1975, any Māori may lodge claims relating to land or actions counter to the principles of the Treaty with the Waitangi Tribunal. Where the Tribunal finds a claim is well founded, it may recommend to the Crown that action be taken to compensate those affected. The Tribunal can make recommendations that are binding on the Crown with respect to land which has been transferred by the Crown to an SOE or tertiary institution, or is subject to the Crown Forest Assets Act 1989. On occasion, Māori claimants pursue the resolution of particular claims against the Crown through higher courts. There are currently two such actions against the Crown being heard at the Court of Appeal and the Supreme Court. Failure to successfully defend such actions may result in a liability for historical Treaty grievances in excess of that currently anticipated. Ministry of Education litigation Post Primary Teachers Association and several teachers have lodged a claim in the High Court alleging breach of statutory duty in respect of the Novopay system failures. The Ministry is defending this claim. Other unquantifiable contingent liabilities Criminal Proceeds (Recovery) Act 2009 B.6 | 77 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE The Ministry of Justice is responsible for administering the Criminal Proceeds (Recovery) Act 2009. The Act requires the Crown to give an undertaking as to damages or costs in relation to asset restraining orders. In the event that the Crown is found liable, payment may be required. The timing and amount of any possible payments required are not able to be estimated at this time. Environmental liabilities Under common law and various statutes, the Crown may have responsibility to remedy adverse effects on the environment arising from Crown activities. Departments managing significant Crown properties have implemented systems to identify, monitor and assess potential contaminated sites. Any contaminated sites for which costs can be reliably measured have been included in the statement of financial position as provisions. Treaty of Waitangi claims – settlement relativity payments The Deeds of Settlement negotiated with Waikato-Tainui and Ngāi-Tahu include a relativity mechanism. The mechanism provides that, where the total redress amount for all historical Treaty settlements exceeds $1 billion in 1994 present-value terms, the Crown is liable to make payments to maintain the real value of Waikato-Tainui’s and Ngāi Tahu’s settlements as a proportion of all Treaty settlements. The agreed relativity proportions are 17% for Waikato-Tainui and approximately 16% for Ngāi Tahu. The relativity mechanism has now been triggered and in future years additional costs may be incurred in accordance with the relativity mechanism as Treaty settlements are reached. However, the final amount payable to settle this matter cannot be quantified yet owing to uncertainty around when current and future negotiations will be settled and the value of these settlements when reached. There is also uncertainty on how various disputes concerning the interpretation of the mechanism will be resolved. Description of Contingent Assets Quantifiable contingent assets over $100 million Tax disputes – non assessed A contingent asset is recognised when Inland Revenue has advised, or was about to advise, a taxpayer of a proposed adjustment to their tax assessment. The taxpayer has the right to dispute this adjustment and a disputes resolution process can be entered into. The contingent asset is based on the likely outcome of the disputes process based on experience and similar prior cases. $169 million at 31 October 2013 ($169 million at 30 June 2013) 78 | B.6 FORECAST FINANCIAL STATEMENTS Forecast Financial Statements These forecasts have been prepared in accordance with the Public Finance Act 1989. They are based on the accounting policies and assumptions that follow. As with all such assumptions, there is a degree of uncertainty surrounding them. This uncertainty increases as the forecast horizon extends. The Risks and Scenarios and Specific Fiscal Risks chapters discuss the risks to the fiscal forecast in more detail. The forecasts have been prepared in accordance with the Statement of Responsibility and reflect the judgements and information known at the time they were prepared. They reflect all government decisions and circumstances communicated to 3 December 2013. The finalisation dates and key assumptions that underpin the preparation of the Forecast Financial Statements are outlined on pages 42 to 44. B.6 | 79 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Statement of Accounting Policies Significant Accounting Policies These Forecast Financial Statements have been prepared in accordance with the accounting policies that are expected to be used in the comparable audited actual financial statements of the Government. These Forecast Financial Statements comply with generally accepted accounting practice (GAAP) as required by the Public Finance Act 1989 and have been prepared in accordance with Financial Reporting Standard 42: Prospective Financial Statements. All forecasts use the accrual basis of accounting. Forecasts have been prepared for the consolidated financial statements of the government reporting entity, which includes all entities controlled by the Government (as defined by applicable financial reporting standards). The specific accounting policies are included within the 2013 Half Year Economic and Fiscal Update Additional Information document which can be found on the Treasury’s website at www.treasury.govt.nz/budget/forecasts/hyefu2013. Changes in Accounting Policies All policies have been applied on a consistent basis during the forecast period. There have been no changes in accounting policies during the period. Forecast Policies These Forecast Financial Statements have been prepared on the basis of the Treasury’s best professional judgement. Actual financial results for the periods covered are likely to vary from the information presented in these forecasts. Factors that may lead to a material difference between information in these Forecast Financial Statements and the actual reported results in future years are set out in the Specific Fiscal Risks chapter on pages 61 to 83. Key forecast assumptions used are set out on pages 42 to 44. 80 | B.6 FORECAST FINANCIAL STATEMENTS Government Reporting Entity as at 3 December 2013 These Forecast 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: Core Crown Departments Canterbury Earthquake Recovery Authority 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 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 B.6 | 81 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE 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 Genesis Energy Limited Kiwirail Holdings Limited Kordia Group Limited Landcorp Farming Limited Learning Media 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 companies) Mighty River Power Limited Meridian Energy 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 82 | B.6 FORECAST FINANCIAL STATEMENTS 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 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 Board New Zealand Blood Service New Zealand Film Commission New Zealand Fire Service Commission New Zealand Historic Places Trust (Pouhere Taonga) 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 (2,453) 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 B.6 | 83 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE 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 Ngai Tahu Ancillary Claims Trust Pacific Co-operation Foundation Pacific Island Business Development Trust Reserves Boards (21) 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 Fairway Resolution Limited Health Benefits Limited The Network for Learning Limited Research and Education Advanced Network New Zealand Limited Southern Response Earthquake Services Limited Tāmaki Redevelopment Company Limited Subsidiaries of SOEs, Crown entities and other Government entities are consolidated by their parents and not listed separately in this table. 84 | B.6 FORECAST FINANCIAL STATEMENTS Forecast Financial Statements Forecast Statement of Financial Performance for the years ending 30 June 2014 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast $m $m $m $m $m 58,134 5,172 61,773 5,296 61,969 5,276 65,703 5,070 69,938 4,665 7 63,306 16,713 2,939 3,697 67,069 17,080 3,588 3,867 67,245 16,592 3,378 3,767 70,773 17,516 3,679 3,799 74,603 18,149 4,011 3,988 7 1 23,349 24,535 23,737 24,994 26,148 2 86,655 91,604 90,982 95,767 100,751 10 22,708 19,935 4,812 36,163 4,358 3,031 - 23,485 20,172 4,640 37,748 4,516 3,215 461 (600) 23,338 20,246 4,666 38,350 4,418 3,439 220 (1,375) 23,817 20,384 4,841 37,681 4,695 3,657 1,106 (500) 24,566 20,746 4,925 37,941 5,027 4,068 2,104 (300) 2 2 Total expenses (excluding losses) 91,007 93,637 93,302 95,681 99,077 10 Minority interest share of operating balance before gains/losses1 Operating balance before gains/(losses) Net gains/(losses) on financial instruments Net gains/(losses) on non-financial instruments (62) (4,414) 7,270 3,706 (2,033) 1,748 443 (2,320) 2,234 1,486 86 2,206 535 1,674 2,347 499 10,976 2,191 3,720 2,741 2,846 Net surplus from associates and joint ventures 395 200 239 253 254 Minority interest share of net gains/losses 1 (32) - - - - 6,925 358 1,639 3,080 4,774 For Note Revenue Taxation revenue Other sovereign revenue Total revenue levied through the Crown's sovereign power Sales of goods and services Interest revenue and dividends Other revenue Total revenue earned through the Crown's operations 1 1 2 Total revenue (excluding gains) Expenses Transfer payments and subsidies Personnel expenses Depreciation and amortisation Other operating expenses Interest expenses Insurance expenses Forecast new operating spending Top-down expense adjustment 3 4 5 5 6 7 8 8 9 10 Total gains/(losses) Operating balance 11 3 1. Foregone profits from the Government Share Offer programme are not separately disclosed. Refer to pages 36 to 41 for further details. The accompanying notes and accounting policies are an integral part of these Statements. Forecast Statement of Financial Performance (continued) – Functional Expense Analysis for the years ending 30 June 2014 2013 Previous 2014 2015 2016 201 Actual Budget Forecast Forecast Forecast Forecas $m $m $m $m $m B.6 | 85 $m 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Total Crown expenses By functional classification Social security and welfare GSF pension expenses Health Education Core government services Law and order Defence Transport and communications Economic and industrial services Primary services Heritage, culture and recreation Housing and community development Environmental protection Other Finance costs Forecast new operating spending Top-down expense adjustment 26,268 286 13,856 13,366 3,960 3,670 1,766 9,052 8,375 1,579 2,351 989 528 603 4,358 - 27,510 283 14,433 13,180 4,341 3,804 1,893 9,036 8,098 1,892 2,532 1,057 473 728 4,516 461 (600) 27,305 291 14,464 13,369 4,755 3,820 1,852 9,285 8,096 1,838 2,398 1,157 603 806 4,418 220 (1,375) 27,889 377 14,335 13,456 4,126 3,672 1,839 9,737 8,554 1,777 2,358 1,197 514 549 4,695 1,106 (500) 28,784 460 14,318 13,524 4,226 3,741 1,889 9,917 8,843 1,753 2,417 1,213 515 646 5,027 2,104 (300) 30,00 51 14,28 13,62 4,19 3,72 1,79 10,10 9,11 1,75 2,47 1,21 50 76 5,47 3,16 (300 Total Crown expenses excluding losses 91,007 93,637 93,302 95,681 99,077 102,42 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. 2014 2013 Previous 2014 2015 2016 201 Actual Budget Forecast Forecast Forecast Forecas $m $m $m $m $m By functional classification Social security and welfare GSF pension expenses Health Education Core government services Law and order Defence Transport and communications Economic and industrial services Primary services Heritage, culture and recreation Housing and community development Environmental protection Other Finance costs Forecast new operating spending Top-down expense adjustment 22,741 278 14,498 12,504 4,294 3,456 1,804 2,255 1,978 659 804 283 530 603 3,619 - 23,595 274 14,950 12,389 4,637 3,561 1,933 2,162 2,152 818 854 335 496 728 3,622 461 (600) 23,246 282 14,997 12,558 5,067 3,630 1,901 2,285 2,226 816 882 434 602 806 3,604 220 (1,375) 23,729 369 14,924 12,669 4,470 3,471 1,887 2,247 2,155 726 816 324 512 549 3,743 1,106 (500) 24,244 452 14,953 12,785 4,581 3,516 1,938 2,173 2,168 696 803 265 513 646 3,949 2,104 (300) 25,12 50 14,93 12,83 4,55 3,48 1,84 2,24 2,19 67 80 20 50 76 4,28 3,16 (300 Total core Crown expenses excluding losses 70,306 72,367 72,181 73,197 75,486 77,81 $m Core Crown expenses The accompanying notes and accounting policies are an integral part of these Statements. 86 | B.6 FORECAST FINANCIAL STATEMENTS Forecast Statement of Comprehensive Income for the years ending 30 June 2014 2013 Previous 2014 2015 2016 2017 Actual Budget Forecast Forecast Forecast Forecast $m $m $m $m $m $m Operating balance (including minority interest) Other comprehensive income 7,019 358 1,639 3,080 4,774 6,330 Revaluation of physical assets Net change in hedging instruments entered into for cash flow hedges Foreign currency translation differences for foreign operations Valuation gains/(losses) on investments available for sale taken to reserves Other movements Total other comprehensive income 1,367 - (74) - - - 280 (21) 41 (16) 6 9 - 39 (6) 1 - - 36 8 (2) 9 12 13 7 1,690 (38) (12) 46 5 3 (3) 6 24 9 31 Total comprehensive income 8,709 346 1,644 3,077 4,798 6,361 Attributable to: - minority interest - the Crown 153 8,556 346 1,644 3,077 4,798 6,361 Total comprehensive income 8,709 346 1,644 3,077 4,798 6,361 Forecast Statement of Changes in Net Worth for the years ending 30 June 2014 Opening net worth Operating balance (excluding minority interest) Net revaluations Transfers to/(from) reserves (Gains)/losses transferred to the Statement of Financial Performance Other movements Comprehensive income attributable to the Crown Gain/(loss) on Government share offers Increase in minority interest from Government share offers Transactions with minority interest Closing net worth 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast $m $m $m $m $m 59,780 63,270 70,011 74,895 78,009 7,019 1,367 260 358 (59) 1,639 (74) 86 3,080 14 4,774 11 (10) - (1) (2) 1 73 47 (6) (15) 12 8,709 346 1,644 3,077 4,798 167 175 (550) - - 1,371 1,325 3,676 25 - (16) 66 114 12 40 70,011 65,182 74,895 78,009 82,847 The accompanying notes and accounting policies are an integral part of these Statements. Forecast Statement of Cash Flows for the years ending 30 June B.6 | 87 Fo 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE 2014 2013 Previous 2014 2015 2016 20 Actual Budget Forecast Forecast Forecast Foreca $m $m $m $m $m $ Cash was provided from Taxation receipts Other sovereign receipts Sales of goods and services Interest and dividend receipts Other operating receipts 56,413 4,806 16,651 2,694 5,933 60,695 4,747 17,175 3,175 5,443 61,139 4,831 16,476 3,112 6,565 64,923 4,579 17,505 3,456 4,387 68,977 4,153 18,127 3,761 4,062 72,5 4,2 18,6 4,4 3,8 Total cash provided from operations 86,497 91,235 92,123 94,850 99,080 103,7 Transfer payments and subsidies Personnel and operating payments Interest payments Forecast new operating spending Top-down expense adjustment 22,780 58,450 4,369 - 23,877 62,742 4,629 461 (600) 23,787 63,974 4,395 220 (1,375) 23,947 61,513 4,661 1,106 (500) 24,557 60,277 4,739 2,104 (300) 25,4 60,3 5,1 3,1 (30 Total cash disbursed to operations 85,599 91,109 91,001 90,727 91,377 93,8 898 126 1,122 4,123 7,703 9,8 (5,169) 6,342 (581) (1,405) 280 1,547 - (7,234) (5,221) (516) (2,029) 65 1,500 (503) 50 (7,423) (5,284) (563) (2,085) 27 2,490 (206) 450 (6,487) 2,428 (465) (1,877) (19) 620 (567) 175 (6,077) (5,798) (408) (1,602) 47 (816) 175 (5,48 (8,99 (41 (1,46 1,014 (13,888) (12,594) (6,192) (14,479) (17,09 1,912 (13,762) (11,472) (2,069) (6,776) (7,22 234 141 246 148 153 1 5,476 10,245 4,947 (753) 4,924 5,8 (2,926) (519) 170 (751) (605) (634) 2,647 1,698 2,739 2,005 1,0 (20) 2,130 12,514 7,061 1,383 6,477 7,1 Net movement in cash 4,042 (1,248) (4,411) (686) (299) (11 Opening cash balance 10,686 16,492 14,924 10,221 9,535 9,2 Cash flows from operations Cash was disbursed to Net cash flows from operations Cash flows from investing activities Cash was provided from/(disbursed to) Net purchase of physical assets Net purchase of shares and other securities Net purchase of intangible assets Net repayment/(issues) of advances Net acquisition of investments in associates Government share offer programme Forecast new capital spending Top-down capital adjustment Net cash flows from investing activities Net cash flows from operating and investing activities Cash flows from financing activities Cash was provided from/(disbursed to) Issues of circulating currency stock1 Net issue/(repayment) of government Net issue/(repayment) of foreign-currency borrowings Net issue/(repayment) of other New Zealand dollar borrowings Dividends paid to minority interests Net cash flows from financing activities Foreign-exchange gains/(losses) on opening cash Closing cash balance 196 - (292) - - 14,924 15,244 10,221 9,535 9,236 1. Further information on the proceeds and repayments of government stock ("domestic bonds") is available in note 22. 88 | B.6 (95 1 9,1 FORECAST FINANCIAL STATEMENTS The accompanying notes and accounting policies are an integral part of these Statements. Forecast Statement of Cash Flows (continued) for the years ending 30 June 2014 2013 Previous 2014 2015 2016 2017 Actual Budget Forecast Forecast Forecast Forecast $m $m $m $m $m $m 898 126 1,122 4,123 7,703 9,875 7,270 1,748 2,234 2,206 2,347 2,494 3,706 10,976 443 2,191 1,486 3,720 535 2,741 499 2,846 478 2,972 (4,812) (4,640) (4,666) (4,841) (4,925) (5,016) (684) (723) (785) (789) (807) (828) (497) 23 (130) (138) (141) (145) 385 1,106 299 (4,203) 461 2,517 321 (2,041) 484 2,956 387 (1,754) 379 1,686 564 (3,139) 309 (258) 572 (5,250) 267 (1,422) 580 (6,564) (1,302) 257 (94) 32 (2) 363 (1,119) 526 73 (29) 26 605 (1,166) 243 8 (2) 19 (551) (987) 190 40 (36) (38) 186 277 (39) 108 3 (7) (867) 441 (46) (29) 3 (6) (316) Reconciliation between the net cash flows from operations and the operating balance Net cash flows from operations Items included in the operating balance but not in net cash flows from operations Gains/(losses) Net gains/(losses) on financial instruments Net gains/(losses) on non-financial instruments Total gains/(losses) Other non-cash items in operating balance Depreciation and amortisation Write-down on initial recognition of financial assets Impairment on financial assets (excl. receivables) Decrease/(increase) in defined benefit retirement plan liabilities Decrease/(increase) in insurance liabilities Other Total other non-cash Items Movements in working capital Increase/(decrease) in receivables Increase/(decrease) in accrued interest Increase/(decrease) in inventories Increase/(decrease) in prepayments Decrease/(increase) in deferred revenue Decrease/(increase) in payables/provisions Total movements in working capital (746) 82 (1,449) (645) (525) 47 Operating balance 6,925 358 1,639 3,080 4,774 6,330 The accompanying notes and accounting policies are an integral part of these Statements. B.6 | 89 F 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Forecast Statement of Financial Position as at 30 June 2014 2013 Previous 2014 2015 2016 2017 Actual Budget Forecast Forecast Forecast Forecast $m $m $m $m $m $m 12 12 14,924 19,883 15,244 18,070 10,221 18,968 9,535 17,909 9,236 18,191 9,117 18,642 12 44,000 44,713 44,522 40,429 45,246 53,732 12 12 14 17,359 22,613 1,140 2,295 109,833 18,176 25,312 1,321 2,061 112,627 21,289 24,359 1,148 2,268 113,277 23,044 26,268 1,189 2,366 115,464 24,747 28,188 1,296 2,404 117,316 26,511 29,780 1,267 2,385 118,833 15 8 8 9,593 2,776 - 9,642 2,837 505 (330) 9,876 2,878 206 (450) 10,130 2,872 773 (625) 10,331 2,829 1,589 (800) 10,478 2,788 2,539 (925) 244,416 250,178 248,562 249,354 260,573 275,147 4,691 11,160 1,714 100,087 37,712 11,903 7,138 4,897 12,360 1,553 112,201 35,902 11,766 6,317 4,936 11,955 1,695 104,354 33,430 10,880 6,417 5,084 12,103 1,733 104,608 31,140 10,501 6,176 5,237 13,238 1,740 110,532 30,848 10,192 5,939 5,394 13,971 1,746 117,271 31,738 9,925 5,866 174,405 184,996 173,667 171,345 177,726 185,911 70,011 65,182 74,895 78,009 82,847 89,236 10,862 6,230 12,080 15,339 20,388 26,926 57,068 55,831 56,911 56,760 56,491 56,292 141 (64) 174 143 161 183 68,071 61,997 69,165 72,242 77,040 83,401 Note Assets Cash and cash equivalents Receivables Marketable securities, deposits and derivatives in gain Share investments Advances Inventory Other assets Property, plant and equipment investments1 Equity accounted Intangible assets and goodwill Forecast for new capital spending Top-down capital adjustment Total assets Liabilities Issued currency Payables Deferred revenue Borrowings Insurance liabilities Retirement plan liabilities Provisions 17 18 19 20 Total liabilities Total assets less total liabilities Net worth Taxpayers' funds Property, plant and equipment revaluation reserve Other reserves Total net worth attributable to the Crown Net worth attributable to minority interest Total net worth 21 1,940 3,185 5,730 5,767 5,807 5,835 70,011 65,182 74,895 78,009 82,847 89,236 1. Tertiary education institutions constitute most equity accounted investments. The accompanying notes and accounting policies are an integral part of these Statements. Forecast Statement of Borrowings as at 30 June 90 | B.6 FORECAST FINANCIAL STATEMENTS 2014 2013 Previous 2014 2015 2016 2 Actual Budget Forecast Forecast Forecast Forec $m $m $m $m $m 57,377 4,084 199 7,575 3,188 1,454 26,210 68,469 3,541 204 7,183 1,854 1,475 29,475 60,456 3,470 196 7,094 2,187 1,535 29,416 58,726 3,494 196 7,094 1,914 1,680 31,504 63,128 3,361 196 7,094 1,673 1,639 33,441 68, 3, 100,087 112,201 104,354 104,608 110,532 117, 75,684 24,403 84,580 27,621 77,526 26,828 75,818 28,790 79,851 30,681 85, 32, 100,087 112,201 104,354 104,608 110,532 117, 84,873 94,504 87,571 85,691 90,329 96, (587) (1,027) (449) (573) (713) (7 84,286 93,477 87,122 85,118 89,616 95, Less core Crown financial assets3 62,984 65,786 63,660 60,708 66,516 75, Net core Crown debt 21,302 27,691 23,462 24,410 23,100 19, 13,126 14,375 13,785 14,574 15,264 15, 34,428 42,066 37,247 38,984 38,364 35, 21,407 22,699 22,736 24,320 26,184 28, 55,835 64,765 59,983 63,304 64,548 63, 84,286 (7,902) 93,477 (7,391) 87,122 (7,094) 85,118 (7,094) 89,616 (7,094) 95, (7,0 1,600 1,600 1,600 1,600 1,600 1, 77,984 87,686 81,628 79,624 84,122 89, Borrowings Government bonds Treasury bills Government retail stock Settlement deposits with Reserve Bank Derivatives in loss Finance lease liabilities Other borrowings Total borrowings Total sovereign-guaranteed debt Total non-sovereign-guaranteed debt Total borrowings 7, 1, 1, 34, Net debt: Core Crown borrowings1 Add back NZS Fund holdings of sovereign-issued debt and NZS Fund borrowings Gross sovereign-issued debt2 Core Crown advances Net core Crown debt (incl. NZS Fund) 4 Add back NZS Fund holdings of core Crown financial assets and NZS Fund financial assets5 Net core Crown debt (excl. NZS Fund and advances)6 Gross debt: Gross sovereign-issued debt2 Less Reserve Bank settlement cash and bank bills Add back changes to DMO borrowing owing to settlement cash7 Gross sovereign-issued debt excluding Reserve Bank settlement cash and bank bills4 Notes on borrowings Total borrowings can be split into sovereign-guaranteed and non-sovereign-guaranteed debt. This split reflects the fact that borrowings by SOEs and Crown entities are not explicitly guaranteed by the Crown. No debt of SOEs and Crown entities is currently guaranteed by the Crown. 1. Core Crown borrowings in this instance include unsettled purchases of securities (classified as accounts payable in the Statement of Financial Position). 2. Gross sovereign-issued debt (GSID) represents debt issued by the sovereign (the core Crown) and includes any government stock held by the other Crown reporting entities. 3. Core Crown financial assets exclude receivables. B.6 | 91 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE 4. Net core Crown debt represents GSID less financial assets. This can provide information about the sustainability of the Government's accounts, and is used by some international agencies when determining the creditworthiness of a country. 5. Adding back the NZS Fund assets provides the financial liabilities less financial assets of the core Crown, excluding those assets set aside to meet part of the future cost of New Zealand Superannuation. 6. Net core Crown debt (excluding NZS Fund and advances) excludes financial assets which are held for public policy rather than treasury management purposes. 7. The Reserve Bank has used $1.6 billion of settlement cash to purchase reserves that were to have been funded by the NZDMO borrowing. Therefore, the impact of settlement cash on GSID is adjusted by this amount. The accompanying notes and accounting policies are an integral part of these Statements. Statement of Actual Commitments as at 31 October 2013 As at As at 31 Oct 30 June 2013 2013 $m $m 438 716 5,377 760 169 549 717 5,478 790 169 Total capital commitments Operating commitments Non-cancellable accommodation leases Other non-cancellable leases Tertiary education institutions 7,460 7,703 2,694 2,792 2,620 466 2,735 466 Total operating commitments 5,780 5,993 Total commitments Total commitments by segment Core Crown Crown entities State-owned enterprises Inter-segment eliminations 13,240 13,696 3,881 5,283 5,062 (986) 4,226 5,296 5,078 (904) Total commitments 13,240 13,696 Capital commitments Specialist military equipment Land and buildings Other property, plant and equipment Other capital commitments Tertiary education institutions Statement of Actual Contingent Liabilities and Assets as at 31 October 2013 92 | B.6 FORECAST FINANCIAL STATEMENTS As at As at 31 Oct 30 June 2013 2013 $m $m 178 6,006 672 444 225 6,286 707 432 Total quantifiable contingent liabilities Total quantifiable contingent liabilities by segment Core Crown Crown entities State-owned enterprises Inter-segment eliminations 7,300 7,650 6,983 53 264 - 7,350 35 265 - Total quantifiable contingent liabilities Quantifiable contingent assets by segment Core Crown Crown entities State-owned enterprises 7,300 7,650 228 4 21 245 4 21 253 270 Quantifiable contingent liabilities Guarantees and indemnities Uncalled capital Legal proceedings and disputes Other contingent liabilities Total quantifiable contingent assets The accompanying notes and accounting policies are an integral part of these Statements. B.6 | 93 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Notes to the Forecast Financial Statements NOTE 1: Sovereign Revenue (Accrual) 2014 2013 Previous 2014 2015 2016 2017 Actual Budget Forecast Forecast Forecast Forecast $m $m $m $m $m $m Source deductions Other persons Refunds Fringe benefit tax 22,330 5,210 (1,644) 480 23,709 5,083 (1,488) 477 23,825 5,263 (1,465) 480 25,134 5,525 (1,491) 502 26,491 5,798 (1,524) 522 27,950 6,061 (1,527) 544 Total individuals 26,376 27,781 28,103 29,670 31,287 33,028 Corporate tax Gross companies tax Refunds Non-resident withholding tax Foreign-source dividend w/holding payments 8,747 (151) 420 2 9,240 (197) 447 - 9,197 (193) 394 2 9,681 (205) 459 2 10,271 (219) 521 2 10,453 (230) 559 2 Total corporate tax 9,018 9,490 9,400 9,937 10,575 10,784 Resident w/holding tax on interest income Resident w/holding tax on dividend income 1,631 516 1,671 607 1,673 460 1,905 492 2,419 520 2,879 530 Total other direct income tax 2,147 2,278 2,133 2,397 2,939 3,409 37,541 39,549 39,636 42,004 44,801 47,221 Gross goods and services tax Refunds 25,125 (9,920) 27,220 (10,695) 27,298 (10,700) 29,041 (11,357) 30,800 (11,989) 32,847 (13,121) Total goods and services tax 15,205 16,525 16,598 17,684 18,811 19,726 1,066 855 663 281 1,164 931 678 277 1,155 938 655 294 1,250 995 680 298 1,346 1,055 711 305 1,412 1,084 743 318 674 250 659 267 680 246 721 255 764 267 785 278 954 178 214 174 45 34 1,043 172 223 187 62 36 1,107 168 208 183 65 36 1,156 160 208 191 65 36 1,221 151 209 196 65 36 1,272 144 209 200 65 36 5,388 5,699 5,735 6,015 6,326 6,546 Total indirect taxation 20,593 22,224 22,333 23,699 25,137 26,272 Total taxation revenue 58,134 61,773 61,969 65,703 69,938 73,493 3,437 331 242 3,465 338 269 3,444 338 268 3,125 341 271 2,808 351 274 2,724 361 276 Taxation revenue (accrual) Individuals Other direct income tax Total direct income tax Goods and services tax Other indirect taxation Road user charges Petroleum fuels excise – domestic production Alcohol excise – domestic production Tobacco excise – domestic production Petroleum fuels excise – imports1 imports1 Alcohol excise – Tobacco excise – imports1 Other customs duty Gaming duties Motor vehicle fees Approved issuer levy and cheque duty Energy resources levies Total other indirect taxation Other sovereign revenue (accrual) ACC levies Fire Service levies EQC levies 94 | B.6 FORECAST FINANCIAL STATEMENTS Child support Court fines Other miscellaneous items Total other sovereign revenue Total sovereign revenue 590 168 404 729 173 322 608 173 445 664 173 496 527 173 532 565 173 534 5,172 5,296 5,276 5,070 4,665 4,633 63,306 67,069 67,245 70,773 74,603 78,126 2017 1. Customs excise-equivalent duty. NOTE 1 (continued): Sovereign Receipts (Cash) 2014 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast $m $m $m $m $m $m Source deductions Other persons Refunds Fringe benefit tax 22,188 5,194 (2,251) 465 23,584 5,549 (2,222) 476 23,715 5,667 (2,084) 478 25,003 5,764 (2,005) 500 26,354 6,046 (2,067) 520 27,812 6,348 (2,140 542 Total individuals 25,596 27,387 27,776 29,262 30,853 32,562 Corporate tax Gross companies tax Refunds Non-resident withholding tax Foreign-source dividend w/holding payments 8,665 (597) 451 1 9,495 (766) 446 - 9,516 (641) 392 2 10,119 (681) 457 2 10,613 (728) 519 2 10,887 (768 557 2 Total corporate tax 8,520 9,175 9,269 9,897 10,406 10,678 Resident w/holding tax on interest income Resident w/holding tax on dividend income 1,635 516 1,670 607 1,672 460 1,904 492 2,417 520 2,877 530 Total other direct income tax 2,151 2,277 2,132 2,396 2,937 3,407 36,267 38,839 39,177 41,555 44,196 46,647 Gross goods and services tax Refunds 24,539 (9,783) 26,352 (10,195) 26,428 (10,200) 28,210 (10,857) 29,944 (11,489) 31,968 (12,621 Total goods and services tax 14,756 16,157 16,228 17,353 18,455 19,347 Road user charges Petroleum fuels excise – domestic production Alcohol excise – domestic production Tobacco excise – domestic production Customs duty Gaming duties Motor vehicle fees Approved issuer levy and cheque duty Energy resources levies 1,064 865 666 287 2,035 216 179 44 34 1,164 931 678 277 2,141 223 187 62 36 1,155 938 655 294 2,201 206 183 66 36 1,250 995 680 298 2,292 208 191 65 36 1,346 1,055 711 305 2,403 209 196 65 36 1,412 1,084 743 318 2,479 209 200 65 36 Total other indirect taxation 5,390 5,699 5,734 6,015 6,326 6,546 Total indirect taxation 20,146 21,856 21,962 23,368 24,781 25,893 Total taxation receipts 56,413 60,695 61,139 64,923 68,977 72,540 Forecas Taxation receipts (cash) Individuals Other direct income tax Total direct income tax Goods and services tax Other indirect taxation Other sovereign receipts (cash) B.6 | 95 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE ACC levies Fire Service levies EQC levies Child support Court fines Other miscellaneous items 3,524 331 274 230 159 288 3,438 338 267 237 148 319 3,423 338 271 237 148 414 3,151 341 270 248 137 432 2,695 351 273 259 137 438 2,747 361 276 270 137 439 Total other sovereign receipts 4,806 4,747 4,831 4,579 4,153 4,230 61,219 65,442 65,970 69,502 73,130 76,770 2013 Previous 2014 2015 2016 2017 Actual Budget Forecast Forecast Forecast $m $m $m $m $m $m By type Interest revenue Dividends 2,382 557 3,006 582 2,689 689 2,989 690 3,267 744 3,887 789 Total interest revenue and dividends 2,939 3,588 3,378 3,679 4,011 4,676 2,104 1,270 856 (1,291) 2,639 1,242 878 (1,171) 2,501 1,187 873 (1,183) 2,427 1,254 1,018 (1,020) 2,615 1,307 1,172 (1,083) 3,158 1,364 1,305 (1,151 2,939 3,588 3,378 3,679 4,011 4,676 Total sovereign receipts NOTE 2: Interest revenue and dividends 2014 By source Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total interest revenue and dividends Forecas NOTE 3: Transfer payments and subsidies 2014 2013 Previous 2014 2015 2016 2017 Actual Budget Forecast Forecast Forecast Forecast $m $m $m $m $m $m New Zealand Superannuation Jobseeker Support and Emergency Benefit Supported Living Payment Sole Parent Support Domestic Purposes Benefit Invalid's Benefit Sickness Benefit Unemployment Benefit Family tax credit Other working for families tax credits Accommodation Assistance Income related rents Disability assistance Student allowances Other social assistance benefits 10,235 1,738 1,330 782 812 2,018 575 1,177 611 384 596 1,290 10,894 1,773 1,392 1,288 67 53 32 29 2,038 539 1,191 662 380 574 1,316 10,890 1,697 1,416 1,233 63 52 29 29 1,966 547 1,156 670 379 548 1,295 11,506 1,703 1,484 1,272 1,934 522 1,165 712 377 536 1,327 12,155 1,685 1,491 1,296 1,910 512 1,174 768 378 538 1,338 12,816 1,696 1,508 1,328 1,979 507 1,188 823 379 544 1,341 Total social assistance grants 21,548 22,228 21,970 22,538 23,245 24,109 723 748 795 759 774 812 Subsidies KiwiSaver subsidies 96 | B.6 FORECAST FINANCIAL STATEMENTS Other transfer payments Official development assistance Total transfer payments and subsidies 437 509 573 520 547 547 22,708 23,485 23,338 23,817 24,566 25,468 From 15 July 2013 the benefit categories Domestic Purposes Benefit, Invalid's Benefit, Unemployment and Emergency Benefit and Sickness Benefit, as well as Widow's Benefit, were replaced by new benefit categories. These categories are Jobseeker Support and Emergency Benefit, Supported Living Payment and Sole Parent Support. NOTE 4: Personnel expenses 2014 2013 Previous 2014 2015 2016 2017 Actual Budget Forecast Forecast Forecast Forecast $m $m $m $m $m $m By source Core Crown Crown entities State-owned enterprises Inter-segment eliminations 6,037 10,966 2,949 (17) 6,066 11,198 2,919 (11) 6,155 11,190 2,908 (7) 6,102 11,320 2,969 (7) 6,253 11,449 3,051 (7) 6,371 11,585 3,086 (8 Total personnel expenses 19,935 20,172 20,246 20,384 20,746 21,034 NOTE 5: Depreciation, amortisation and other operating expenses 2014 By source Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total depreciation, amortisation and other operating expenses 2013 Previous 2014 2015 2016 2017 Actual Budget Forecast Forecast Forecast Forecast $m $m $m $m $m $m 37,940 18,648 11,540 (27,153) 39,472 19,100 11,219 (27,403) 40,233 19,439 11,086 (27,742) 38,926 19,435 11,937 (27,776) 38,908 19,524 12,411 (27,977) 38,827 19,612 12,826 (28,074 40,975 42,388 43,016 42,522 42,866 43,191 NOTE 6: Interest expenses 2014 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast $m $m $m $m $m $m By type Interest on financial liabilities Interest unwind on provisions 4,312 46 4,465 51 4,371 47 4,653 42 4,983 44 5,425 48 Total interest expenses 4,358 4,516 4,418 4,695 5,027 5,473 By source Core Crown Crown entities 3,620 235 3,622 239 3,604 221 3,743 228 3,949 227 4,280 241 B.6 | 97 2017 Forecas 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE State-owned enterprises Inter-segment eliminations 1,248 (745) 1,279 (624) 1,198 (605) 1,300 (576) 1,415 (564) 1,550 (598 Total interest expenses 4,358 4,516 4,418 4,695 5,027 5,473 NOTE 7: Insurance expenses 2014 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast 2017 $m $m $m $m $m $m By entity ACC EQC Southern Response Other (incl. inter-segment eliminations) 3,133 (103) (22) 23 3,315 (19) (95) 14 3,457 (38) 6 14 3,545 172 (72) 12 3,885 213 (43) 13 4,204 219 (39 11 Total insurance expenses 3,031 3,215 3,439 3,657 4,068 4,395 Forecas NOTE 8: Forecast new spending and top-down expense adjustment 2014 Previous 2014 2015 2016 2017 2018 Budget Forecast Forecast Forecast Forecast Forecast $m $m $m $m $m $m Forecast new operating spending Unallocated contingencies Forecast new spending for Budget 2014 Forecast new spending for Budget 2015 Forecast new spending for Budget 2016 Forecast new spending for Budget 2017 461 - 220 - 146 960 - 125 959 1,020 - 142 965 1,020 1,040 - 58 936 1,020 1,040 1,061 Total forecast new operating spending 461 220 1,106 2,104 3,167 4,115 (600) (1,375) (500) (300) (300) (300) Operating top-down adjustment Unallocated contingencies represent expenses included in Budget 2013 and previous Budgets that have yet to be allocated. Forecast new spending indicates the expected spending increases from future Budgets. The Budget 2014 allowance of $1 billion has been reduced to absorb Vote Education forecast changes which will be managed within Education's Budget 2014 allocation or through reprioritisation. Post- Forecast new capital spending (annual) Unallocated contingencies Forecast new spending for Budget 2014 Forecast new spending for Budget 2015 Forecast new spending for Budget 2016 Forecast new spending for Budget 2017 98 | B.6 2014 2015 2016 2017 2018 2018 Forecast Forecast Forecast Forecast Forecast Forecast $m $m $m $m $m $m 140 66 - 161 306 100 - 166 250 300 100 - 100 200 250 300 100 250 250 300 250 518 FORECAST FINANCIAL STATEMENTS Forecast new spending for Budget 2018 Total forecast new capital spending Forecast new capital spending (cumulative) Capital top-down adjustment (cumulative) - - - - 100 836 206 567 816 950 900 1,604 206 (450) 773 (625) 1,589 (800) 2,539 (925) 3,439 (1,050) Unallocated contingencies represent capital spending from Budget 2013 and previous Budgets that have yet to be allocated. Forecast new spending indicates the expected capital spending increases from future Budgets, which will be mostly funded from the Future Investment Fund. NOTE 9: Gains and losses on financial instruments 2014 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast $m $m $m $m $m By source Core Crown Crown entities State-owned enterprises Inter-segment eliminations 5,081 1,192 354 643 1,663 252 11 (178) 1,982 111 19 122 2,076 315 24 (209) 2,178 367 19 (217) Net gains/(losses) on financial instruments 7,270 1,748 2,234 2,206 2,347 F NOTE 10: Gains and losses on non-financial instruments 2014 By type Actuarial gains/(losses) on GSF liability 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast $m $m $m $m $m 1,251 - 539 - - Other 2,369 86 498 (55) 1,326 (379) 604 (69) 551 (52) Net gains/(losses) on non-financial instruments 3,706 443 1,486 535 499 By source Core Crown Crown entities State-owned enterprises Inter-segment eliminations 1,298 2,309 100 (1) (2) 446 (1) - 266 1,221 (26) 25 (1) 534 (9) 11 (1) 498 (9) 11 Net gains/(losses) on non-financial instruments 3,706 443 1,486 535 499 Actuarial gains/(losses) on ACC outstanding claims B.6 | 99 F 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE NOTE 11: Operating balance 2014 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast $m $m $m $m $m By source Core Crown Crown entities State-owned enterprises Inter-segment eliminations 371 5,877 614 63 (2,249) 2,646 732 (771) (1,356) 2,832 614 (451) 1,255 1,897 614 (686) 3,520 1,344 697 (787) Total operating balance 6,925 358 1,639 3,080 4,774 F NOTE 13: Student loans 2014 Nominal value (including accrued interest) Opening book value Amount borrowed in current year Less initial write-down to fair value Repayments made during the year Interest unwind (Impairment)/reversal of impairment Other movements Closing book value 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast $m $m $m $m $m 13,562 8,291 1,481 (536) (1,054) 590 (484) - 14,144 8,528 1,632 (537) (1,135) 600 (110) 11 14,049 8,288 1,510 (604) (1,176) 564 (110) 12 14,486 8,484 1,562 (622) (1,276) 574 (110) 11 14,929 8,623 1,613 (643) (1,331) 582 (110) 12 8,288 8,989 8,484 8,623 8,746 For 1 ( NOTE 14: Property, plant and equipment 2014 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast $m $m $m $m $m 34,453 25,784 17,930 13,555 3,865 3,094 2,617 2,296 1,035 5,204 34,759 25,312 18,918 14,104 4,273 3,330 2,502 2,498 1,012 5,919 35,085 26,322 19,049 13,673 4,166 3,186 2,563 2,657 1,128 5,448 35,108 27,029 19,778 13,459 4,260 3,412 2,562 3,025 1,193 5,638 35,110 27,556 20,673 13,316 4,364 3,445 2,588 3,261 1,215 5,788 3 2 2 1 109,833 112,627 113,277 115,464 117,316 11 For By class of asset Net carrying value Land (valuation) Buildings (valuation) State highways (valuation) Electricity generation assets (valuation) Electricity distribution network (cost) Specialist military equipment (valuation) Specified cultural and heritage assets (valuation) Aircraft (excluding military) (valuation) Rail network (valuation) Other plant and equipment (cost) Total property, plant and equipment 100 | B.6 FORECAST FINANCIAL STATEMENTS By source Core Crown Crown entities State-owned enterprises Inter-segment eliminations Total property, plant and equipment Land breakdown by usage Housing State highway corridor land Conservation land Rail network Schools Commercial (SOEs) excluding Rail Other Total land 29,507 51,823 28,503 - 30,565 52,207 29,855 - 30,562 53,485 29,230 - 30,991 55,016 29,457 - 31,190 56,617 29,509 - 3 5 2 109,833 112,627 113,277 115,464 117,316 11 9,580 8,003 5,364 3,256 2,887 1,374 3,989 8,750 8,653 5,460 3,418 2,724 1,520 4,234 9,539 8,153 5,389 3,232 2,880 1,414 4,478 9,367 8,303 5,401 3,222 2,875 1,463 4,477 9,106 8,453 5,423 3,212 2,870 1,480 4,566 34,453 34,759 35,085 35,108 35,110 3 NOTE 14 (continued): Property, plant and equipment 2014 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast $m $m $m $m $m 121,717 5,779 (1,471) (2,047) 126,589 7,830 (598) - 122,796 7,925 (496) 12 130,262 7,011 (670) - 136,537 6,921 (815) - Schedule of movements Cost or valuation Opening balance Additions (refer below for further breakdown) Disposals Net revaluations Other1 Total cost or valuation Accumulated depreciation and impairment Opening balance Eliminated on disposal Eliminated on revaluation Impairment losses charged to operating balance Depreciation expense Other1 Total accumulated depreciation and impairment Total property, plant and equipment (1,182) (56) 25 (66) (85) 122,796 133,765 130,262 136,537 142,558 13,133 (659) (3,587) 473 3,697 17,255 (42) 4,011 12,963 (52) 4,030 16,985 (71) 4,168 21,073 (69) 4,260 (94) (86) 44 (9) (22) 12,963 21,138 16,985 21,073 25,242 109,833 112,627 113,277 115,464 117,316 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast $m $m $m $m $m 2,041 1,521 472 2,579 1,338 862 2,609 1,301 688 2,485 718 809 2,462 802 732 1. Other mainly includes transfers to/from other asset categories. 2014 Additions – by functional classification Transport Economic Education B.6 | 101 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Health Defence Other Total additions to property, plant and equipment2 578 201 966 636 548 1,867 746 506 2,075 564 616 1,819 543 424 1,958 5,779 7,830 7,925 7,011 6,921 2. These additions do not include any purchases which may result from the allocation of the forecast for new capital spending (separately disclosed in the Statement of Financial Position). NOTE 15: Intangible assets and goodwill 2014 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast $m $m $m $m $m By type Net Kyoto position Goodwill Other intangible assets 53 655 2,068 3 744 2,090 72 652 2,154 72 652 2,148 72 652 2,105 Total intangible assets and goodwill 2,776 2,837 2,878 2,872 2,829 By source Core Crown Crown entities State-owned enterprises Inter-segment eliminations 1,041 573 1,162 - 1,175 534 1,128 - 1,237 492 1,149 - 1,250 486 1,136 - 1,229 483 1,117 - Total intangible assets and goodwill 2,776 2,837 2,878 2,872 2,829 For Net Kyoto position The New Zealand Government has committed under the Kyoto Protocol to ensuring that New Zealand's average net emissions of greenhouse gases from 2008 to 2012 (the first commitment period of the Kyoto Protocol, or CP1) are reduced to gross 1990 emission levels, or to take responsibility for the difference. New Zealand can meet its commitment through emissions reductions and use of the Kyoto Protocol flexibility mechanisms such as Joint Implementation, the Clean Development Mechanism, and offsetting increased emissions against carbon removed by forests. To assist New Zealand in meeting its Kyoto Protocol commitments, an Emissions Trading Scheme (ETS) was established (refer note 20). These two initiatives should be looked at together when understanding New Zealand’s international climate change obligations. The New Zealand Government has to settle its Kyoto obligation by the completion of the true-up period which is expected to occur in late 2015. The latest Net Position estimate can be found on the Ministry for the Environment's website: www.mfe.govt.nz/issues/climate/greenhouse-gas-emissions/net-position NOTE 16: NZS Fund 2014 Revenue 102 | B.6 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast $m $m $m $m $m 595 777 782 742 783 Fo FORECAST FINANCIAL STATEMENTS Less current tax expense Less other expenses Add gains/(losses) 983 165 4,374 478 148 1,358 554 159 1,776 547 155 1,684 589 170 1,820 Operating balance 3,821 1,509 1,845 1,724 1,844 Opening net worth Operating balance Other movements in reserves 18,703 3,821 25 21,752 1,509 22 22,549 1,845 19 24,413 1,724 25 26,162 1,844 40 Closing net worth 22,549 23,283 24,413 26,162 28,046 Comprising: Financial assets Financial liabilities Net other assets 23,419 (2,055) 1,185 23,891 (1,714) 1,106 24,899 (1,632) 1,146 26,282 (1,308) 1,188 28,010 (1,325) 1,361 Closing net worth 22,549 23,283 24,413 26,162 28,046 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast $m $m $m $m $m 7,616 3,544 8,403 3,957 7,568 4,387 7,038 5,065 7,594 5,644 Total payables 11,160 12,360 11,955 12,103 13,238 By source Core Crown Crown entities State-owned enterprises Inter-segment eliminations 7,873 4,996 4,877 (6,586) 6,860 5,929 5,663 (6,092) 7,990 5,178 5,219 (6,432) 8,108 5,053 5,736 (6,794) 9,128 4,963 6,230 (7,083) Total payables 11,160 12,360 11,955 12,103 13,238 NOTE 17: Payables 2014 By type Accounts payable Taxes repayable Fo NOTE 18: Insurance liabilities 2014 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast $m $m $m $m $m By entity ACC EQC Southern Response Other (incl. inter-segment eliminations) 29,446 6,869 1,744 (347) 31,423 3,743 698 38 29,146 3,152 1,071 61 29,605 941 532 62 30,363 164 256 65 Total insurance liabilities 37,712 35,902 33,430 31,140 30,848 ACC liability Levy reductions The forecast includes a reduction in levy rates for the 2014/15 levy year agreed to by Cabinet on 2nd December 2013. In addition, the forecasts include further levy reductions B.6 | 103 Fo 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE for the 2015/16 levy year in line with what was signalled in Budget 2013. The amounts factored in for the 2015/16 levy year are based on a best estimate of the likely outcome which may differ from ACC's consultation document and the final outcome. Calculation information PwC NZ have prepared an independent actuarial estimate of the ACC outstanding claims liability as at 30 June 2013. This estimate includes the expected future payments relating to accidents that occurred prior to balance date (whether or not the associated claims have been reported to, or accepted by, ACC) and also the expected future administrative expenses of managing these claims. The assumptions underpinning this valuation form the basis of the five-year forecast of the outstanding claims liability. The key economic variables that impact on changes to the valuation are the long-term Labour Cost Index (LCI), average weekly earnings and the discount rate. Discount rates were derived from the yield curve for New Zealand Government bonds. For these forecast statements, the claims liability has been updated for the latest discount rates as at 30 September 2013. The equivalent single effective discount rate, taking into account ACC's projected future cash flow patterns, is 5.19% and allows for a long-term discount rate of 5.50% from 2035. Other key variables in each valuation are the forecast increases in claim costs over and above the economic variables above, and the assumed rate at which long-term claimants will leave the scheme over the period. This assessment is largely based on scheme history. Presentation approach The projected outstanding claims liability, including an adjustment to reflect projected future actuarial releases ($466 million in 2014 and a further $604 million in 2015), is included within total liabilities. ACC has available to it a portfolio of assets that offset the claims liability. The assets (less cross-holdings of NZ Government stock) are included in the asset portion of the Government's Statement of Financial Position. 2014 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast $m $m $m $m $m 30,648 30,767 (1,202) 656 29,446 (300) 29,146 459 29,605 758 30 1 Closing gross liability Less net assets available to ACC Opening net asset value Net change 29,446 31,423 29,146 29,605 30,363 31 23,466 3,727 27,486 2,503 27,193 2,034 29,227 2,021 31,248 1,727 32 1 Closing net asset value Net ACC reserves (net liability) Opening reserves position Net change 27,193 29,989 29,227 31,248 32,975 34 (7,182) (2,253) 2,334 81 1,562 1,643 969 2 4,929 (3,281) 1,847 (2,253) (1,434) 81 1,643 2,612 3 Gross ACC liability Opening gross liability Net change Closing reserves position (net liability) 104 | B.6 Fore FORECAST FINANCIAL STATEMENTS EQC liability Calculation information Melville Jessup Weaver prepared an independent actuarial estimate of the EQC outstanding claims liability at 30 June 2013 by estimating the projected ultimate claims costs then deducting the payments made in relation to those claims on or before that date. Each component of the claims liability was split into separate groups depending upon the Canterbury earthquake event grouping or other “business as usual” claims. These event groups were further split into sub-claim valuation groups being land claims, building claims or contents claims. The assumptions underpinning the 30 June 2013 valuation form the basis of the five-year forecast of the outstanding claims liability. Critical assumptions used in projecting the ultimate costs include apportionment of costs across earthquake events, the profile of claims settlement, claims inflation rate per annum, risk margins and claims handling costs. There is a high level of uncertainty associated with the valuation of the outstanding claims liability, reinsurance recoveries and unexpired risk liability. Some of the key uncertainties are: cost apportionment across events; the potential for construction cost to exceed expectations; land damage estimates; reinsurance recoveries and profile of claims settlement. The actual claims outcome may differ from the one currently forecast. Presentation approach EQC reinsurance recoveries are included in receivables in the Statement of Financial Position. 2014 EQC liability Opening gross liability Net change Closing gross liability Less reinsurance receivable Opening reinsurance receivable Net change 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast $m $m $m $m $m 8,877 7,114 (2,008) (3,371) 6,869 (3,717) 3,152 (2,211) 941 (777) 6,869 3,743 3,152 941 164 4,066 (1,443) 2,616 (1,238) 2,623 (1,710) 913 (621) 292 (245) Fore Closing reinsurance receivable Net EQC liability Opening net position Net change 2,623 1,378 913 292 47 (4,811) 565 (4,498) 2,133 (4,246) 2,007 (2,239) 1,590 (649) 532 ( Closing net position (net liability) (4,246) (2,365) (2,239) (649) (117) ( B.6 | 105 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE NOTE 19: Retirement plan liabilities 2014 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast $m $m $m $m $m Government Superannuation Fund Other funds 11,908 11,767 10,885 10,506 10,197 (5) (1) (5) (5) (5) Total retirement plan liabilities 11,903 11,766 10,880 10,501 10,192 Fore 9 9 The net liability of the Government Superannuation Fund (GSF) was calculated by GSF's actuary as at 30 September 2013. The liability arises from closed schemes for past and present public sector employees as set out in the Government Superannuation Fund Act 1956. A Projected Unit Credit method was used to calculate the liability as at 30 September 2013, based on membership data as at 30 June 2013 with adjustments for cash flows to 30 September 2013. The funding method requires the benefits payable from GSF in respect of past service to be calculated and then discounted back to the valuation date. For these Forecast Financial Statements, the net GSF liability was updated for the latest discount rates derived from the market yield curve for New Zealand Government bonds as at 30 September 2013. Other principal long-term financial assumptions were an inflation rate, as measured by the Consumers Price Index, of 1.9% for the year to 30 September 2014, 2.3% for the two years to 30 September 2016, 2.4% for the two years to 30 September 2018 and increasing to 2.5% for all years after that. In addition an annual salary growth rate, before any promotional effects, of 3% (unchanged from 30 June 2013). The 2013/14 projected decrease in the net GSF liability is $1,023 million, reflecting a decrease in the GSF liability of $924 million and an increase in the GSF net assets of $99 million. The decrease in the GSF liability of $924 million includes an actuarial gain between 1 July 2013 and 30 September 2013, of $512 million owing to movements in the discount rates and changes in demographic assumptions. The remaining $412 million reduction is owing to expected benefits paid to members (reduces the liability) offset by current service cost and interest unwind (increases the liability). The increase in the value of the net assets of GSF of $99 million includes a gain of $27 million reflecting the updated market value of assets at 30 September 2013. The balance of $72 million is the total of the expected investment returns and contributions received, offset by the benefits paid to members. The changes in the projected net GSF liability from 2013/14 onwards reflect the net of the expected current service cost, interest cost, investment returns and contributions. 2014 GSF liability 106 | B.6 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast $m $m $m $m $m Fore FORECAST FINANCIAL STATEMENTS Opening GSF liability Net projected change 16,557 (1,267) 15,504 (395) 15,290 (924) 14,366 (332) 14,034 (266) 13 ( Closing GSF liability Less net assets available to GSF Opening net asset value Investment valuation changes Contribution and other income less pension payments 15,290 15,109 14,366 14,034 13,768 13 3,018 493 (129) 3,276 177 (111) 3,382 210 (111) 3,481 188 (141) 3,528 190 (147) 3 ( Closing net asset value Net GSF liability Opening unfunded liability Net projected change 3,382 3,342 3,481 3,528 3,571 3 13,539 (1,631) 12,228 (461) 11,908 (1,023) 10,885 (379) 10,506 (309) 10 ( Closing unfunded liability 11,908 11,767 10,885 10,506 10,197 9 NOTE 20: Provisions 2014 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast $m $m $m $m $m 3,374 3,233 3,177 3,177 3,182 Provision for ETS credits 179 - 488 510 492 Provision for National Provident Fund guarantee 977 987 987 942 901 Provision for Canterbury Red Zone support package 222 - - - - Provision for infrastructure costs Provision for weathertight services financial assistance package 769 837 391 201 - 123 62 114 92 67 Other provisions 1,494 1,198 1,260 1,254 1,297 1 Total provisions 7,138 6,317 6,417 6,176 5,939 5 By source Core Crown Crown entities State-owned enterprises Inter-segment eliminations 4,492 1,979 1,151 (484) 3,905 1,907 963 (458) 3,963 1,979 972 (497) 3,730 2,012 952 (518) 3,399 2,023 969 (452) 3 2 Total provisions 7,138 6,317 6,417 6,176 5,939 5 Provision for employee entitlements Provision for ETS credits The Emissions Trading Scheme (ETS) was established to assist New Zealand in meeting its international climate change obligations and to reduce New Zealand's net emissions of greenhouse gases to below business-as-usual levels. The ETS creates a limited number of tradable New Zealand Units (NZUs) which the Government can allocate. Emitters can also surrender Kyoto compliant units to meet their obligations. The allocation of NZUs creates a provision if allocated for free; the provision is reduced, and revenue recognised, as NZUs and Kyoto compliant units are surrendered to the Crown by emitters. The Kyoto compliant units collected through the ETS are recognised as revenue and as part of the net Kyoto Protocol position. The prices for NZUs and Kyoto compliant units used to calculate the ETS provision are assumed to remain constant over the forecast period and are based on market prices during September 2013. B.6 | 107 Fore 3 ( 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE The ETS impact on the fiscal forecast is as follows: 2014 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast $m $m $m $m $m Revenue Expenses Gains/(losses) 16 (55) 235 5 (4) - 32 (83) (258) 65 (87) - 94 (76) - Operating balance 196 1 (309) (22) 18 Fore NOTE 21: Net worth 2014 2013 Previous 2014 2015 2016 Actual Budget Forecast Forecast Forecast $m $m $m $m $m Taxpayers' funds Property, plant and equipment revaluation reserve Investment revaluation reserve Cash flow hedge reserve Foreign currency translation reserve Share based payment reserve Net worth attributable to minority interests 10,862 57,068 107 58 (49) 25 1,940 6,230 55,831 84 (142) (6) 3,185 12,080 56,911 105 99 (55) 25 5,730 15,339 56,760 114 83 (54) 5,767 20,388 56,491 126 89 (54) 5,807 26 56 Total net worth Taxpayers' funds 70,011 65,182 74,895 78,009 82,847 89 3,520 6,925 167 250 5,601 358 175 96 10,862 1,639 (550) 129 12,080 3,080 179 15,339 4,774 275 20 6 10,862 6,230 12,080 15,339 20,388 26 56,001 1,335 (268) 55,965 (134) 57,068 (74) (83) 56,911 (151) 56,760 (269) 56 57,068 55,831 56,911 56,760 56,491 56 Opening taxpayers' funds Operating balance excluding minority interest Government share offers in SOEs Transfers from/(to) other reserves Closing taxpayers' funds Fore 5 Property, plant and equipment revaluation reserve Opening revaluation reserve Net revaluations Transfers from/(to) other reserves Closing property, plant and equipment revaluation reserve ( NOTE 22: Core Crown residual cash 2014 Core Crown cash flows from operations Tax receipts Other sovereign receipts Interest, profits and dividends 108 | B.6 2013 Previous 2014 2015 2016 2 Actual Budget Forecast Forecast Forecast Forec $m $m $m $m $m 57,808 651 1,553 62,056 644 1,660 62,314 728 1,604 66,028 746 1,548 70,179 763 1,654 73, 2, FORECAST FINANCIAL STATEMENTS Sale of goods and services and other receipts Transfer payments and subsidies Personnel and operating costs Finance costs Forecast for future new operating spending Top-down expense adjustment 2,385 (22,780) (40,412) (3,729) - 2,641 (23,877) (42,800) (3,680) (461) 600 2,795 (23,787) (43,446) (3,619) (220) 1,375 2,271 (23,948) (41,740) (3,736) (1,106) 500 2,311 (24,557) (41,510) (3,690) (2,104) 300 2, (25,4 (41,3 (3,9 (3,1 Net core Crown operating cash flows (4,524) (3,217) (2,256) 563 3,346 5, Core Crown capital cash flows Net purchase of physical assets Net increase in advances Net purchase of investments Government share offer programme Forecast for future new capital spending Top-down capital adjustment (1,231) (342) (1,308) 1,663 - (2,560) (990) (1,166) 1,500 (503) 50 (2,691) (842) (1,021) 2,490 (206) 450 (1,997) (941) (1,325) 620 (567) 175 (1,522) (841) (1,518) (816) 175 (1,5 (2 (1,5 Net core Crown capital cash flows (1,218) (3,669) (1,820) (4,035) (4,522) (4,1 Residual cash (deficit)/surplus (5,742) (6,886) (4,076) (3,472) (1,176) 1, The residual cash (deficit)/surplus is funded or invested as follows: Debt programme cash flows Market: Issue of government bonds Repayment of government bonds 15,458 (9,982) 10,245 - 8,013 (3,067) 7,052 (7,805) 6,744 (1,820) 5, Net issue/(repayment) of short-term borrowing1 (5,404) 90 (235) 160 - (9 Total market debt cash flows Non-market: Issue of government bonds Repayment of government bonds Net issue/(repayment) of short-term borrowing 72 10,335 4,711 (593) 4,924 (499) 100 (757) (219) (745) (100) (679) (360) (120) Total non-market debt cash flows (399) (976) (845) (1,039) (120) Total debt programme cash flows Other borrowing cash flows Net (repayment)/issue of other New Zealand dollar borrowing Net (repayment)/issue of foreign currency borrowing (327) 9,359 3,866 (1,632) 4,804 4,494 (3,047) 724 (512) (138) 113 1,041 (754) 724 (603) 1,447 212 (25) 287 121 5,699 234 (1,311) (2,826) 141 - (1,446) 246 1,435 4,669 148 - (3,902) 153 - (7,2 Total investing cash flows 4,622 (2,685) 235 4,817 (3,749) (7,0 Residual cash deficit/(surplus) funding or investing 5,742 6,886 4,076 3,472 1,176 (1,2 Total other borrowing cash flows Investing cash flows Other net sale/(purchase) of marketable securities and deposits Issues of circulating currency Decrease/(increase) in cash 1. Short-term borrowing consists of Treasury Bills and may include Euro-Commercial Paper. B.6 | 109 5, 5, 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Forecast Statement of Segments Statement of Financial Performance for the year ended 30 June 2013 Core Crown Crown State-Owned Inter-segment entities Enterprises eliminations 2013 2013 2013 2013 Actual Actual Actual Actual $m $m $m $m Revenue Taxation revenue Other sovereign revenue Revenue from core Crown funding Sales of goods and services Interest revenue and dividends Other revenue 58,651 1,133 1,461 2,104 800 5,295 24,096 1,856 1,270 2,547 268 14,001 856 811 (517) (1,256) (24,364) (605) (1,291) (461) Total revenue (excluding gains) 64,149 35,064 15,936 (28,494) Expenses Social assistance and official development assistance Personnel expenses Other operating expenses Interest expenses Insurance expenses Forecast for future new spending and top-down adjustment 22,709 6,037 37,940 3,620 - 10,966 18,648 236 3,011 2,949 11,540 1,248 15 (1) (17) (27,153) (746) 5 - - - - Total expenses (excluding losses) 70,306 32,861 15,752 (27,912) - 10 (75) 3 (6,157) 6,379 2,213 3,501 109 454 (579) 642 149 - 153 10 155 (104) (62) 62 371 5,877 614 63 Expenses by functional classification Social security and welfare Health Education Transport and communications Other Finance costs Forecast for future new spending and top-down adjustment 22,741 14,498 12,504 2,255 14,688 3,620 4,151 12,236 9,594 2,250 4,394 236 19 6,891 7,594 1,248 (624) (12,878) (8,751) (2,344) (2,569) (746) - - - - Total Crown expenses (excluding losses) 70,306 32,861 15,752 (27,912) 2013 Crown State-Owned Inter-segment Actual entities Enterprises eliminations Operating balance before gains/(losses) attributable to minority interests Operating balance before gains/(losses) Total gains/(losses) Net surplus/(deficit) from associates and joint ventures Attributable to minority interest Operating balance T Statement of Financial Position as at 30 June 2013 Core Crown $m 110 | B.6 T 2013 2013 2013 Actual Actual Actual FORECAST FINANCIAL STATEMENTS Assets Cash and cash equivalents Receivables Other financial assets Property, plant and equipment Equity accounted investments Intangible assets and goodwill Inventory and other assets Forecast for new capital spending and top-down adjustment Total assets $m $m $m 11,047 11,924 52,140 29,507 32,611 1,041 1,605 2,933 8,368 29,996 51,823 8,151 573 560 1,594 2,037 16,427 28,503 187 1,162 1,301 (650) (2,446) (14,591) (31,356) (31) - - - - 139,875 102,404 51,211 (49,074) Liabilities Borrowings Other liabilities 84,870 29,392 5,251 45,261 24,839 7,226 (14,873) (7,561) Total liabilities 114,262 50,512 32,065 (22,434) 25,613 51,892 19,146 (26,640) Taxpayers' funds Reserves Net worth attributable to minority interest 8,274 15,840 1,499 24,213 27,638 41 8,382 10,192 572 (30,007) 3,539 (172) Total net worth 25,613 51,892 19,146 (26,640) Total assets less total liabilities Net worth Statement of Financial Performance for the year ended 30 June 2014 Core Crown Crown State-Owned Inter-segment entities Enterprises eliminations 2014 2014 2014 2014 Forecast Forecast Forecast Forecast $m $m $m $m Revenue Taxation revenue Other sovereign revenue Revenue from core Crown funding Sales of goods and services Interest revenue and dividends Other revenue 62,491 1,156 1,453 2,501 892 5,222 24,632 1,904 1,187 2,667 181 13,826 873 948 (522) (1,102) (24,813) (591) (1,183) (740) Total revenue (excluding gains) 68,493 35,612 15,828 (28,951) Expenses Social assistance and official development assistance Personnel expenses Other operating expenses Interest expenses Insurance expenses Forecast for future new spending and topdown adjustment 23,338 6,155 40,233 3,604 6 11,190 19,439 221 3,428 2,908 11,086 1,198 8 (7) (27,742) (605) (3) (1,155) - - - Total expenses (excluding losses) 72,181 34,278 15,200 (28,357) B.6 | 111 Total Fo 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Operating balance before gains/(losses) Total gains/(losses) Net surplus/(deficit) from associates and joint ventures Operating balance Expenses by functional classification Social security and welfare Health Education Transport and communications Other Finance costs Forecast for future new spending and topdown adjustment Total Crown expenses (excluding losses) (3,688) 2,248 1,334 1,332 628 (7) (594) 147 84 166 (7) (4) (1,356) 2,832 614 (451) 23,246 14,997 12,558 2,285 16,646 3,604 4,638 12,594 9,759 2,379 4,687 221 18 7,024 6,960 1,198 (579) (13,127) (8,966) (2,403) (2,677) (605) (1,155) - - - 72,181 34,278 15,200 (28,357) Crown State-Owned Inter-segment Core Crown entities Enterprises eliminations 2014 2014 2014 2014 Forecast Forecast Forecast Forecast $m $m $m $m 7,012 12,538 56,649 30,562 33,584 1,237 1,716 2,314 5,947 30,606 53,485 8,371 492 525 1,110 2,233 18,216 29,230 205 1,149 1,213 (215) (1,750) (15,301) (32,284) (38) Statement of Financial Position as at 30 June 2014 Assets Cash and cash equivalents Receivables Other financial assets Property, plant and equipment Equity accounted investments Intangible assets and goodwill Inventory and other assets Forecast for new capital spending and top-down adjustment Total Fo 1 (244) - - - 143,054 101,740 53,356 (49,588) 2 Liabilities Borrowings Other liabilities 87,568 28,098 5,499 40,757 26,916 7,398 (15,629) (6,940) 1 Total liabilities 115,666 46,256 34,314 (22,569) 1 Total assets less total liabilities 27,388 55,484 19,042 (27,019) Net worth Taxpayers' funds Reserves Net worth attributable to minority interest 9,977 15,912 1,499 27,844 27,560 80 8,229 10,166 647 (33,970) 3,447 3,504 Total net worth 27,388 55,484 19,042 (27,019) Total assets 112 | B.6 FORECAST FINANCIAL STATEMENTS Statement of Financial Performance for the year ended 30 June 2015 Core Crown Crown State-Owned Inter-segment entities Enterprises eliminations 2015 2015 2015 2015 Forecast Forecast Forecast Forecast $m $m $m $m Revenue Taxation revenue Other sovereign revenue Revenue from core Crown funding Sales of goods and services Interest revenue and dividends Other revenue 66,317 1,262 1,425 2,427 866 4,992 24,751 1,977 1,254 2,537 123 14,693 1,018 973 (614) (1,184) (24,874) (579) (1,020) (577) Total revenue (excluding gains) 72,297 35,511 16,807 (28,848) Expenses Social assistance and official development assistance Personnel expenses Other operating expenses Interest expenses Insurance expenses Forecast for future new spending and topdown adjustment 23,818 6,102 38,926 3,743 2 11,320 19,435 228 3,646 2,969 11,937 1,300 8 (1) (7) (27,776) (576) 1 606 - - - Total expenses (excluding losses) 73,197 34,629 16,214 (28,359) (900) 2,075 882 849 593 15 (489) (198) Operating balance before gains/(losses) Total gains/(losses) Net surplus/(deficit) from associates and joint ventures Operating balance Expenses by functional classification Social security and welfare Health Education Transport and communications Other Finance costs Forecast for future new spending and topdown adjustment Total Crown expenses (excluding losses) 80 166 6 1 1,255 1,897 614 (686) 23,729 14,924 12,669 2,247 15,279 3,743 4,678 12,507 9,899 2,438 4,879 228 18 7,379 7,517 1,300 (518) (13,096) (9,130) (2,327) (2,712) (576) 606 - - - 73,197 34,629 16,214 (28,359) Crown State-Owned Inter-segment Core Crown entities Enterprises eliminations Total Fo Statement of Financial Position as at 30 June 2015 Assets Cash and cash equivalents Receivables 2015 2015 2015 2015 Forecast Forecast Forecast Forecast $m $m $m $m 6,682 12,335 1,871 5,039 1,195 2,306 (213) (1,771) B.6 | 113 Total Fo 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Other financial assets Property, plant and equipment Equity accounted investments Intangible assets and goodwill Inventory and other assets Forecast for new capital spending and top-down adjustment 54,025 30,991 34,874 1,250 1,762 31,197 55,016 8,563 486 534 19,962 29,457 204 1,136 1,294 (15,443) (33,511) (35) 1 148 - - - 142,067 102,706 55,554 (50,973) 2 Liabilities Borrowings Other liabilities 85,690 27,723 5,793 38,375 28,849 7,963 (15,724) (7,324) 1 Total liabilities 113,413 44,168 36,812 (23,048) 1 Total assets less total liabilities 28,654 58,538 18,742 (27,925) Net worth Taxpayers' funds Reserves Net worth attributable to minority interest 11,257 15,898 1,499 31,008 27,413 117 7,946 10,149 647 (34,872) 3,443 3,504 Total net worth 28,654 58,538 18,742 (27,925) Total assets 114 | B.6 FORECAST FINANCIAL STATEMENTS Statement of Financial Performance for the year ended 30 June 2016 Core Crown Crown State-Owned Inter-segment entities Enterprises eliminations 2016 2016 2016 2016 Forecast Forecast Forecast Forecast $m $m $m $m Revenue Taxation revenue Other sovereign revenue Revenue from core Crown funding Sales of goods and services Interest revenue and dividends Other revenue 70,594 1,162 1,418 2,615 959 4,747 24,896 2,048 1,307 2,570 111 15,272 1,172 1,010 (656) (1,244) (25,007) (589) (1,083) (551) Total revenue (excluding gains) 76,748 35,568 17,565 (29,130) Expenses Social assistance and official development assistance Personnel expenses Other operating expenses Interest expenses Insurance expenses Forecast for future new spending and topdown adjustment 24,566 6,253 38,908 3,949 6 11,449 19,524 227 4,057 3,051 12,411 1,415 8 (7) (27,977) (564) (3) 1,804 - - - Total expenses (excluding losses) 75,486 35,257 16,885 (28,551) 1,262 2,177 311 865 680 10 (579) (206) 81 168 7 (2) 3,520 1,344 697 (787) 24,244 14,953 12,785 2,173 15,578 3,949 5,055 12,498 9,951 2,486 5,040 227 18 7,621 7,831 1,415 (515) (13,133) (9,230) (2,363) (2,746) (564) 1,804 - - - 75,486 35,257 16,885 (28,551) Crown State-Owned Inter-segment Core Crown entities Enterprises eliminations Operating balance before gains/(losses) Total gains/(losses) Net surplus/(deficit) from associates and joint ventures Operating balance Expenses by functional classification Social security and welfare Health Education Transport and communications Other Finance costs Forecast for future new spending and topdown adjustment Total Crown expenses (excluding losses) Total Fo 1 Statement of Financial Position as at 30 June 2016 Assets Cash and cash equivalents Receivables 2016 2016 2016 2016 Forecast Forecast Forecast Forecast $m $m $m $m 6,447 12,815 1,743 4,723 1,259 2,387 (213) (1,734) B.6 | 115 Total Fo 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Other financial assets Property, plant and equipment Equity accounted investments Intangible assets and goodwill Inventory and other assets Forecast for new capital spending and top-down adjustment Total assets 60,067 31,190 36,312 1,229 1,890 32,809 56,617 8,747 483 508 21,925 29,509 203 1,117 1,336 (16,620) (34,931) (34) 789 - - - 1 150,739 105,630 57,736 (53,532) 2 Liabilities Borrowings Other liabilities 90,329 28,228 6,363 38,003 30,743 8,510 (16,903) (7,547) 1 Total liabilities 118,557 44,366 39,253 (24,450) 1 Total assets less total liabilities 32,182 61,264 18,483 (29,082) Net worth Taxpayers' funds Reserves Net worth attributable to minority interest 14,777 15,906 1,499 33,961 27,147 156 7,681 10,155 647 (36,031) 3,444 3,505 Total net worth 32,182 61,264 18,483 (29,082) Crown State-Owned Inter-segment Core Crown entities Enterprises eliminations 2017 2017 2017 2017 Forecast Forecast Forecast Forecast $m $m $m $m Revenue Taxation revenue Other sovereign revenue Revenue from core Crown funding Sales of goods and services Interest revenue and dividends Other revenue 74,200 1,201 1,407 3,158 947 4,683 24,978 2,131 1,364 2,544 110 15,753 1,305 1,045 (707) (1,251) (25,088) (598) (1,151) (499) Forecast revenue reduction contingency Total revenue (excluding gains) 80,913 35,700 18,213 (29,294) Expenses Social assistance and official development assistance Personnel expenses Other operating expenses Interest expenses Insurance expenses Forecast for future new spending and topdown adjustment 25,468 6,371 38,827 4,280 5 11,585 19,612 241 4,384 3,086 12,826 1,550 8 (8) (28,074) (598) (2) 2,867 - - - Total expenses (excluding losses) 77,818 35,822 17,470 (28,682) Statement of Financial Performance for the year ended 30 June 2017 Forgone profits from Government share offers Operating balance before gains/(losses) - - - - 3,095 (122) 743 (612) Total gains/(losses) 2,276 897 15 (216) Net surplus/(deficit) from associates and joint ventures Operating balance Expenses by functional classification 79 5,450 171 946 8 766 (4) (832) 116 | B.6 Total Fo 1 1 FORECAST FINANCIAL STATEMENTS Social security and welfare Health Education Transport and communications Other Finance costs Forecast for future new spending and topdown adjustment Total Crown expenses (excluding losses) 25,123 14,930 12,835 2,247 15,536 4,280 5,405 12,478 10,015 2,549 5,134 241 18 7,765 8,137 1,550 (519) (13,119) (9,246) (2,459) (2,741) (598) 2,867 - - - 77,818 35,822 17,470 (28,682) Crown State-Owned Inter-segment Core Crown entities Enterprises eliminations 1 Statement of Financial Position as at 30 June 2017 Assets Cash and cash equivalents Receivables Other financial assets Property, plant and equipment Equity accounted investments Intangible assets and goodwill Inventory and other assets Forecast for new capital spending and top-down adjustment Total assets 2017 2017 2017 2017 Forecast Forecast Forecast Forecast $m $m $m $m 6,329 13,174 69,280 31,188 37,688 1,213 1,729 4,578 34,504 57,985 8,918 461 1,271 2,475 23,507 29,660 201 1,114 (212) (1,585) (17,268) (36,329) - 1,850 496 1,342 (36) 1,614 162,336 108,671 59,570 (55,430) 96,209 28,480 124,689 37,647 6,337 38,805 45,142 63,529 32,272 9,035 41,307 18,263 (17,547) (7,680) (25,227) (30,203) 20,227 15,921 1,499 37,647 36,397 26,947 185 63,529 7,456 10,160 647 18,263 (37,154) 3,447 3,504 (30,203) Crown State-Owned Inter-segment Core Crown entities Enterprises eliminations 2018 2018 2018 2018 Forecast Forecast Forecast Forecast $m $m $m $m 77,869 1,256 - 4,782 24,995 110 (743) (1,259) (25,105) Total Fo 1 1 2 Liabilities Borrowings Other liabilities Total liabilities Total assets less total liabilities Net worth Taxpayers' funds Reserves Net worth attributable to minority interest Total net worth 1 1 Statement of Financial Performance for the year ended 30 June 2018 Revenue Taxation revenue Other sovereign revenue Revenue from core Crown funding B.6 | 117 Total Fo 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Sales of goods and services Interest revenue and dividends Other revenue 1,411 3,527 802 2,214 1,446 2,425 16,248 1,465 1,085 (603) (1,246) (352) Total revenue (excluding gains) 84,865 35,862 18,908 (29,308) Expenses Social assistance and official development assistance Personnel expenses Other operating expenses Interest expenses Insurance expenses Forecast for future new spending and topdown adjustment 26,395 6,472 37,967 4,350 5 11,723 19,491 250 4,764 3,163 13,288 1,676 9 1 (8) (27,999) (655) (3) 3,815 - - - Total expenses (excluding losses) 79,004 36,228 18,136 (28,664) 5,861 2,389 (366) 877 772 36 (644) (228) Operating balance before gains/(losses) Total gains/(losses) Net surplus/(deficit) from associates and joint ventures Operating balance Expenses by functional classification Social security and welfare Health Education Transport and communications Other Finance costs Forecast for future new spending and topdown adjustment Total Crown expenses (excluding losses) 75 171 8 (1) 8,325 682 816 (873) 26,034 14,860 12,882 2,250 14,813 4,350 5,781 12,475 10,072 2,529 5,121 250 18 8,040 8,402 1,676 (529) (13,113) (9,262) (2,481) (2,624) (655) 3,815 - - - 79,004 36,228 18,136 (28,664) Crown State-Owned Inter-segment Core Crown entities Enterprises eliminations 2018 2018 2018 2018 Forecast Forecast Forecast Forecast $m $m $m $m 6,155 13,521 68,848 30,960 39,012 1,209 1,837 1,827 4,586 36,220 59,250 9,090 439 497 1,525 2,563 25,103 29,689 203 1,113 1,341 (211) (1,580) (17,962) (37,674) (35) 1 1 1 Statement of Financial Position as at 30 June 2018 Assets Cash and cash equivalents Receivables Other financial assets Property, plant and equipment Equity accounted investments Intangible assets and goodwill Inventory and other assets Forecast for new capital spending and top-down adjustment Total Fo 1 1 2,389 - - - 163,931 111,909 61,537 (57,462) 2 Liabilities Borrowings Other liabilities 90,396 27,547 6,342 40,112 33,780 9,710 (18,236) (7,971) 1 Total liabilities 117,943 46,454 43,490 (26,207) 1 Total assets 118 | B.6 FORECAST FINANCIAL STATEMENTS Total assets less total liabilities Net worth Taxpayers' funds Reserves Net worth attributable to minority interest Total net worth 45,988 65,455 18,047 (31,255) 28,552 15,937 1,499 38,497 7,238 (38,207) 26,750 208 10,162 647 3,448 3,504 45,988 65,455 18,047 (31,255) B.6 | 119 Core Crown Expense Tables ($millions) 2009 Actual 2010 Actual 2011 Actual 2012 Actual 2013 Actual F Social security and welfare GSF pension expenses Health Education Core government services Law and order Defence Transport and communications Economic and industrial services Primary services Heritage, culture and recreation Housing and community development Environmental protection Other Finance costs Forecast for future new spending Top-down expense adjustment Core Crown expenses 19,382 655 12,368 11,455 5,293 3,089 1,757 2,663 2,960 534 586 297 416 118 2,429 .. .. 64,002 21,185 328 13,128 11,724 2,974 3,191 1,814 2,345 2,806 507 630 339 651 80 2,311 .. .. 64,013 22,005 305 13,753 11,650 5,563 3,382 1,809 2,281 2,542 706 741 943 1,225 479 3,066 .. .. 70,450 22,028 192 14,160 11,654 5,428 3,403 1,736 2,232 2,073 648 863 (46) 769 425 3,511 .. .. 69,076 22,741 278 14,498 12,504 4,294 3,456 1,804 2,255 1,978 659 804 283 530 603 3,619 .. .. 70,306 Source: The Treasury Table 6.1 – Social security and welfare expenses ($millions) 2009 Actual 2010 Actual 2011 Actual 2012 Actual 2013 Actual F Welfare benefits (see below) Social rehabilitation and compensation Departmental expenses Child support impairment 17,366 336 1,092 205 18,961 331 1,130 371 19,781 119 1,127 281 20,375 81 1,122 72 20,789 107 1,168 282 383 392 697 378 395 19,382 21,185 22,005 22,028 22,741 Other non-departmental expenses1 Social security and welfare expenses 1. Other non-departmental expenses and other expenses include costs associated with the Canterbury earthquakes. Source: The Treasury B.6 | 120 C O R E C R OW N E X P E N S E T A B L E S Table 6.2 – Welfare benefit expenses ($millions) New Zealand Superannuation Jobseeker Support and Emergency Benefit1 Supported living payment1 Sole parent support1 Domestic Purposes Benefit1 Invalid's Benefit1 Sickness Benefit1 Unemployment Benefit1 Family Tax Credit Other working for families tax credits Accommodation Assistance Income-Related Rents Disability Assistance Benefits paid in Australia Paid Parental Leave Childcare Assistance War Disablement Pensions Veteran's Pension Other benefits Benefit expenses 2009 Actual 2010 Actual 2011 Actual 2012 Actual 7,744 8,290 8,830 9,584 10,235 .. .. .. 1,530 1,260 613 586 2,062 619 989 512 390 50 143 159 125 176 408 17,366 .. .. .. 1,693 1,303 710 930 2,168 628 1,154 522 411 45 154 178 137 179 459 18,961 .. .. .. 1,757 1,306 743 943 2,139 616 1,197 553 409 40 154 188 135 178 593 19,781 .. .. .. 1,811 1,325 775 883 2,071 599 1,195 580 401 37 158 188 128 177 463 20,375 .. .. .. 1,738 1,330 782 812 2,018 575 1,177 611 384 22 165 186 0 171 583 20,789 B.6 | 121 2013 Actual F 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Source: The Treasury Beneficiary numbers (Thousands) New Zealand Superannuation Jobseeker Support and Emergency Benefit1 Supported living payment1 Sole parent support1 Domestic Purposes Benefit1 Invalid's Benefit1 Sickness Benefit1 Unemployment Benefit1 Accommodation Supplement 2009 Actual 2010 Actual 2011 Actual 2012 Actual 2013 Actual F 522 540 561 585 612 .. .. .. 101 86 50 48 267 .. .. .. 110 88 58 78 312 .. .. .. 114 88 60 80 320 .. .. .. 114 87 60 73 311 .. .. .. 109 87 60 67 305 Source: Ministry of Social Development 1. From 15 July 2013 the benefit categories Domestic Purposes Benefit, Invalid's Benefit, Unemployment and Emergency Benefit and Sickness Benefit, as well as Widow's Benefit, were replaced by new benefit categories. These categories are Jobseeker Support and Emergency Benefit, Supported Living Payment and Sole Parent Support. Table 6.3 – Health expenses ($millions) 2009 Actual 2010 Actual 2011 Actual 2012 Actual 2013 Actual F Departmental outputs Health services purchasing (see below) Other non-departmental outputs Health payments to ACC Other expenses Health expenses 206 11,354 98 667 43 12,368 211 12,077 106 691 43 13,128 199 12,530 120 849 55 13,753 186 13,018 119 744 93 14,160 171 13,348 234 715 30 14,498 Source: The Treasury Table 6.4 – Health services purchasing ($millions) 2009 Actual 2010 Actual 2011 Actual 2012 Actual Payments to District Health Boards National disability support services Public health services purchasing Health services purchasing 10,038 889 427 11,354 10,670 930 477 12,077 11,133 971 426 12,530 11,542 1,029 447 13,018 Source: The Treasury 122 | B.6 A 11 1 13 C O R E C R OW N E X P E N S E T A B L E S Table 6.5 – Education expenses ($millions) Early childhood education Primary and secondary schools (see below) Tertiary funding (see below) Departmental expenses Other education expenses Education expenses 2009 Actual 2010 Actual 2011 Actual 2012 Actual 2013 Actual F 1,030 1,184 1,340 1,355 1,436 4,936 4,564 888 37 11,455 5,157 4,465 898 20 11,724 5,354 3,991 923 42 11,650 5,443 3,795 988 73 11,654 5,590 4,370 1,039 69 12,504 2009 Actual 2010 Actual 2011 Actual 2012 Actual 2013 Actual F 142,135 152,862 159,619 165,126 Source: The Treasury Places Early childhood education1 174,471 1. Full-time equivalent based on 1,000 funded child hours per calendar year. Source: Ministry of Education Table 6.6 – Primary and secondary education expenses 2009 Actual 2010 Actual 2011 Actual 2012 Actual 2013 Actual F ($millions) Primary Secondary School transport Special needs support Professional development Schooling improvement 2,484 1,898 152 290 101 11 2,622 1,972 160 297 95 11 2,731 2,051 163 310 90 9 2,771 2,085 172 323 85 7 2,845 2,148 175 332 84 6 Primary and secondary education expenses 4,936 5,157 5,354 5,443 5,590 2009 Actual 2010 Actual 2011 Actual 2012 Actual 474,630 473,431 280,062 281,095 474,149 281,999 474,821 279,554 Source: The Treasury Number of places Primary1 Secondary1 provided1 B.6 | 123 2013 Actual F 477,659 278,193 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE 1. These are snapshots based as at 1 July for primary year levels (years 1 to 8) and 1 March for secondary year levels (years 9 to 13). These numbers include special school rolls but exclude health camps, hospital schools and home schooling. Source: Ministry of Education Table 6.7 – Tertiary education expenses ($millions) Tuition Other tertiary funding Student allowances Student loans Tertiary education expenses 2009 Actual 2010 Actual 2011 Actual 2012 Actual 2,287 522 444 1,311 4,564 2,398 489 570 1,008 4,465 2,354 429 620 588 3,991 2,306 430 644 415 3,795 2013 Actual F 2,322 432 596 1,020 4,370 Source: The Treasury Places Actual delivered and estimated funded places1 2009 Actual 2010 Actual 2011 Actual 2012 Actual 20 Actu 246,041 250,440 240,529 246,942 243,6 1. Tertiary places are the number of equivalent full time (EFT) students in: student achievement component; adult and community education; and youth guarantee programmes. Note that historical place numbers have been revised so may differ from previous published EFU numbers. Place numbers are based on calendar years rather than fiscal years. Source: Ministry of Education Core Crown Expense Tables (continued) Table 6.8 – Core government service expenses ($millions) Official development assistance Indemnity and guarantee expenses Departmental expenses 2009 Actual 2010 Actual 2011 Actual 2012 Actual 2013 Actual F 458 992 1,668 435 7 1,324 495 319 1,492 510 59 1,518 437 27 1,576 Non-departmental expenses1 Tax receivable write-down and impairments Science expenses 117 236 471 524 330 1,654 179 590 191 1,010 174 1,003 116 925 115 Other expenses1 Core government service expenses 225 5,293 191 2,974 1,602 5,563 1,698 5,428 884 4,294 124 | B.6 C O R E C R OW N E X P E N S E T A B L E S 1. Non-departmental expenses and other expenses include costs associated with the Canterbury earthquakes. Source: The Treasury Table 6.9 – Law and order expenses ($millions) 2009 Actual 2010 Actual 2011 Actual 2012 Actual Police 1,326 1,349 1,393 1,394 Ministry of Justice 379 372 397 440 Department of Corrections 829 903 956 988 1 NZ Customs Service 12 13 120 126 Other departments 80 102 237 103 Department expenses 2,626 2,739 3,103 3,051 Non-departmental outputs 380 399 261 315 Other expenses 83 53 18 37 Law and order expenses 3,089 3,191 3,382 3,403 1. Prior to 2010/11 the majority of NZ Customs Service expenses were classified as core government services. 2013 Actual F 1,408 466 972 140 98 3,084 317 55 3,456 Source: The Treasury Table 6.10 – Defence expenses ($millions) NZDF core expenses Other expenses Defence expenses 2009 Actual 2010 Actual 2011 Actual 2012 Actual 2013 Actual F 1,697 60 1,757 1,747 67 1,814 1,736 73 1,809 1,678 58 1,736 2009 Actual 2010 Actual 2011 Actual 2012 Actual 1,562 83 170 320 507 21 1,778 63 58 .. 418 28 1,696 65 105 .. 386 29 1,744 60 62 .. 305 61 1,819 40 213 .. 153 30 2,663 2,345 2,281 2,232 2,255 1,747 57 1,804 Source: The Treasury Table 6.11 – Transport and communication expenses ($millions) New Zealand Transport Agency Departmental outputs Other non-departmental expenses Asset impairments Rail funding Other expenses Transport and communication expenses B.6 | 125 2013 Actual F 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Source: The Treasury Table 6.12 – Economic and industrial services expenses ($millions) Departmental outputs Employment initiatives (see below) Non-departmental outputs Reserve electricity generation KiwiSaver (includes housing deposit subsidy) Research and development tax credits Other expenses Economic and industrial services expenses 2009 Actual 2010 Actual 2011 Actual 2012 Actual 2013 Actual 389 185 809 20 382 220 894 23 420 214 689 9 346 206 614 5 350 192 618 .. 1,281 154 122 1,024 .. 263 1,045 .. 165 698 .. 204 740 .. 78 2,960 2,806 2,542 2,073 1,978 Source: The Treasury Table 6.13 – Employment initiatives ($millions) Training incentive allowance Subsidised work Employment support for the disabled Other employment assistance schemes Employment initiatives 2009 Actual 2010 Actual 2011 Actual 2012 Actual 30 63 88 4 185 19 109 88 4 220 11 112 87 4 214 8 106 88 4 206 2009 Actual 2010 Actual 2011 Actual 2012 Actual 364 82 .. 88 534 352 123 .. 32 507 354 142 167 43 706 348 134 102 64 648 2013 Actual F 7 93 89 3 192 Source: The Treasury Table 6.14 – Primary service expenses ($millions) Departmental expenses Non-departmental outputs Biological research1 Other expenses Primary service expenses 1. Biological research was previously classified as an economic and industrial services expense. Source: The Treasury 126 | B.6 2013 Actual F 347 137 105 70 659 C O R E C R OW N E X P E N S E T A B L E S Table 6.15 – Heritage, culture and recreation expenses ($millions) Departmental outputs Non-departmental outputs Other expenses Heritage, culture and recreation expenses 2009 Actual 2010 Actual 2011 Actual 2012 Actual 2013 Actual 120 422 44 115 405 110 133 455 153 172 444 247 270 442 92 586 630 741 863 804 Source: The Treasury Table 6.16 – Housing and community development expenses ($millions) 2009 Actual 2010 Actual 2011 Actual 2012 Actual .. 29 148 112 .. 30 140 122 567 31 136 105 (407) 22 98 113 (60) 5 89 117 .. 8 33 14 67 37 84 44 76 56 297 339 943 (46) 283 Financial assistance package1 Housing subsidies Departmental outputs Other non-departmental expenses Warm up New Zealand Other expenses Housing and community development expenses 2013 Actual F 1. Financial assistance package for 2012 actual and 2013 actual includes the impact of a revised estimate of the weathertight homes financial assistance package provision. Source: The Treasury Table 6.17 – Environmental protection expenses ($millions) Emissions Trading Scheme Departmental outputs Non-departmental outputs Other expenses Environmental protection expenses 2009 Actual 2010 Actual 2011 Actual 2012 Actual 17 306 47 46 416 80 300 231 40 651 838 301 26 60 1,225 334 342 46 47 769 Source: The Treasury B.6 | 127 2013 Actual F 55 335 88 52 530 2013 HALF YEAR ECONOMIC AND FISCAL UPDATE Glossary of Terms Accruals basis of accounting Contingent liabilities An accounting basis where revenue is recognised when earned and expenses when the obligations they relate to are incurred. This contrasts to cash accounting, where income is recognised when the cash is received and expenses when cash to settle an obligation is paid out. Costs that the Crown will have to face if a particular uncertain event occurs, or present liabilities that are unable to be measured with sufficient reliability to be recorded in the financial statements (unquantified contingent liabilities). Contingent liabilities typically comprise guarantees and indemnities, legal disputes and claims, and uncalled capital. Appropriations Appropriations are legal authorities granted by Parliament to the Crown or an Office of Parliament to use public resources. Most appropriations are set out in Appropriation Acts. Baselines The level of funding approved for any given area of spending (eg, Vote Education). All amounts within baselines are included in the forecasts. Commercial portfolio Consists of the portfolio of companies held with purely commercial objectives. Core Crown A reporting segment consisting of the Crown, departments, Offices of Parliament, the NZS Fund and RBNZ. For a list of all entities included in this segment, refer to the Government Reporting Entity (pages 87 to 89). Core Crown expenses The day-to-day spending (eg, public servants’ salaries, welfare benefit payments, finance costs and maintaining national defence etc) that does not build physical assets for the core Crown. This is an accrual measure of expenses and includes items such as depreciation on physical assets. Core Crown revenue Consumers Price Index (CPI) Statistics New Zealand’s official index to measure the rate of change in prices of goods and services purchased by households. Consists primarily of tax revenue collected by the Government but also includes investment income, sales of goods and services and other revenue of the core Crown. Contingent assets Corporate tax Income that the Crown will realise if a particular uncertain event occurs, or a present asset is unable to be measured with sufficient reliability to be recorded in the financial statements (unquantified contingent assets). Contingent assets typically comprise loans with specific events that trigger repayment and IRD pending assessments (where there is a proposed adjustment to a tax assessment). The sum of net company tax, non-resident withholding tax (NRWT) and foreign-source dividend withholding payments (FDWP). 128 | B.6 Current account (Balance of Payments) The current account records the value of New Zealand’s transactions with the rest of GLOSSARY OF TERMS the world in goods, services, income and transfers. The current account balance is the sum of all current account credits less all current account debits. When the sum of debits is greater than the sum of credits there is a current account deficit. The current account balance is commonly expressed as a percentage of nominal GDP. Cyclically-adjusted balance (CAB) or structural balance An estimate of the fiscal balance (eg, operating balance before gains and losses) adjusted for fluctuations of actual GDP around trend GDP. CAB provides a picture of the underlying fiscal position and the effects of policy decisions. Because it is based on a number of assumptions and is sensitive to new information, the estimate is subject to some uncertainty. payable) or a right to exchange a financial asset or liability on unfavourable terms (derivatives in loss). Financial portfolio Consists of the assets and liabilities held by the Crown to finance or pre-fund government expenditure. Fiscal drag The additional tax revenue generated from source deductions as an individual’s average tax rate increases as their income increases. Fiscal impulse Changes to the structure of the population such as the age, gender or ethnic make up. A summary measure of how changes in the fiscal position affect aggregate demand. To isolate discretionary changes, fiscal impulse is calculated on a cyclically-adjusted basis and excludes net interest payments. To better capture the role of capital spending, the indicator is derived from cash flow information. Domestic bond programme Fiscal intentions (short-term) The amount and timing of government bonds expected to be issued or redeemed. Indications of the Government’s intentions for operating expenses, operating revenues and the impact of its intentions on the operating balance, debt and net worth over (at least) the next three years. These intentions are required under the Public Finance Act 1989 (PFA). Demographic changes Excise duties A tax levied on the domestic production of alcohol, tobacco and light petroleum products (CNG, LPG and petrol). Fiscal objectives (long-term) Any asset that is cash, an equity instrument of another entity (shares), a contractual right to receive cash or shares (taxes receivable and ACC levies) or a right to exchange a financial asset or liability on favourable terms (derivatives in gain). The Government’s long-term goals for operating expenses, operating revenue, the operating balance, debt and net worth, as required by the PFA. The objectives must be consistent with the defined principles of responsible fiscal management as outlined in the PFA and must cover a period of (at least) 10 years. Financial liabilities Forecast new capital spending Any liability that is a contractual obligation to pay cash (government stock, accounts An amount provided in the forecasts to represent the balance sheet impact of capital Financial assets B.6 | 129 2013 HALF YEAR ECONOMIC AN D FISCAL UPDATE initiatives expected to be introduced over the forecast period. Gross debt (or Gross sovereign-issued debt [GSID]) Forecast new operating spending Represents debt issued by the sovereign (the core Crown) and includes government stock held by the NZS Fund, ACC and EQC. An amount included in the forecasts to provide for the operating balance impact of policy initiatives, changes to demographics and other forecasting changes expected to occur over the forecast period. Gains and losses Gains and losses typically arise from the revaluation of assets and liabilities, such as investments in financial assets and long-term liabilities for ACC and GSF. These valuation changes are reported directly as a movement in net worth (eg, asset revaluation reserves) or indirectly through the statement of financial performance. Gross domestic product (GDP) A measure of the value of all goods and services produced in New Zealand. Changes in GDP measure growth or contraction in economic activity or output. GDP can be measured as the actual dollar value of goods and services at today’s prices (nominal GDP), or excluding the effects of price changes over time (real GDP). Gross domestic product (expenditure) The sum of total expenditure on final goods and services in the economy. GDP deflator An index of changes in the general price level in the economy. It is calculated as the ratio of nominal GDP to real GDP. Generally accepted accounting practice (GAAP) Gross national expenditure (GNE) A measure of total expenditure on final goods and services by New Zealand residents. Insurance liabilities GAAP refers to the rules and assumptions used to prepare and present financial statements. GAAP is an independent and objective set of rules that govern the recognition and measurement of financial elements, such as assets, liabilities, revenues and expenses. The gross obligation for the future cost of claims incurred prior to balance date represented in today’s dollars (present value). The net liability is the gross liability less the asset reserves held to meet those claims. Government Finance Statistics (GFS) The amounts of transactions between different segments (core Crown, Crown entities and SOEs) that are eliminated to determine total Crown results. A statistical framework for government reporting developed by IMF to aid comparability of results between countries. This differs from the GAAP framework that is used for reporting by the Government in New Zealand. 130 | B.6 Inter-segment eliminations Labour force participation rate Measures the percentage of the working-age population in work or actively looking for and available for work. GLOSSARY OF TERMS Labour productivity Measures output per unit of labour input (where labour inputs might be measured as hours worked or the number of people employed). Line-by-line consolidation A term used to refer to the general approach to the presentation of the Crown financial statements. It means that the individual line items for revenues, expenses, assets and liabilities in the financial statements of Government include all departments, Offices of Parliament, RBNZ, SOEs, Crown entities and other entities controlled by the Government. Marketable securities Assets held with financial institutions. These assets are held for both cash flow and investment purposes. Examples are bonds, commercial papers and debentures. Monetary conditions Aggregate monetary conditions measure the degree to which short-term interest rates and the exchange rate either support or restrict economic growth. Monetary policy The policies that RBNZ uses to regulate the supply of money in New Zealand. RBNZ implements its monetary policy decisions by adjusting its Official Cash Rate (OCR) in an effort to maintain stability in the rate of CPI inflation within a defined target range. Tightening monetary policy means raising the OCR in order to moderate aggregate demand pressures and reduce inflationary pressures. Easing monetary policy has the reverse effect. National saving National disposable income less private and public consumption spending. Income excludes gains and losses on capital. Gross saving includes depreciation. Net core Crown cash flow from operations The cash impact of operating results. It is represented by the operating balance (before gains and losses) less retained items (eg, net surplus of SOEs, Crown entities and NZS Fund net revenue) less non-cash items (eg, depreciation). Net core Crown debt Net core Crown debt provides information about the sustainability of the Government’s accounts, and is used by some international rating agencies when determining the creditworthiness of a country. It represents gross debt less core Crown financial assets (excluding advances and financial assets held by the NZS Fund). Advances and financial assets held by the NZS Fund are excluded as these assets are less liquid and/or they are made for public policy reasons rather than for the purposes associated with government financing. Net international investment position (NIIP) Measures the net value of New Zealand’s international assets and liabilities at a point in time. Net worth Total assets less total liabilities. The change in net worth in any given forecast year is largely driven by the operating balance and property, plant and equipment revaluations. Net worth attributable to the Crown Represents the Crown’s share of total assets and liabilities and excludes minority interests’ share of those assets and liabilities. B.6 | 131 2013 HALF YEAR ECONOMIC AN D FISCAL UPDATE New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) negotiation and management of contracts and administration of benefits. The reporting and measurement framework under which these forecast financial statements are prepared. These standards are approved by the External Reporting Board in New Zealand, based on requirements of the international financial reporting standards issued by the International Accounting Standards Board, adjusted where appropriate for entities that are not profit oriented. The amount of output (eg, GDP) per unit of input. Operating balance Represents OBEGAL (refer below) plus gains and losses. The operating balance includes gains and losses not reported directly as a movement against net worth. The impact of gains and losses on the operating balance can be subject to short-term market volatility and revaluations of long-term liabilities. Operating balance before gains and losses (OBEGAL) Represents total Crown revenue less total Crown expenses. OBEGAL can provide a more useful measure of underlying stewardship than the operating balance as short-term market fluctuations are not included in the calculation. Output gap The difference between actual and potential GDP. Potential GDP is the level of output an economy can sustain without acceleration of inflation. Outputs Outputs are the goods and services commissioned by Ministers from public, nongovernmental and private sector producers. Outputs may include the supply of policy advice, enforcement of regulations (such as speed limits in transport), provision of a range of services (in health, education, etc), 132 | B.6 Productivity Projections Projections relate to the period beyond the five-year forecast period and are based on long-run economic and fiscal assumptions. For example, the projections assume no economic cycle and constant long-run interest, inflation and unemployment rates. Residual cash The level of money the Government has available to repay debt or, alternatively, needs to borrow in any given year. Residual cash is alternatively termed “Cash available/(shortfall to be funded)”. Residual cash is equal to net core Crown cash flow from operations excluding NZS Fund activity less core Crown capital payments (eg, purchase of assets, loans to others). Settlement cash This is the amount of money deposited with RBNZ by registered banks. It is a liquidity mechanism used to settle wholesale obligations between registered banks and provides the basis for settling most of the retail banking transactions that occur every working day between businesses and individuals. Social portfolio Consists of the assets and liabilities held primarily to provide public services or to protect assets for future generations. Specific fiscal risks All government decisions or other circumstances known to the Government GLOSSARY OF TERMS which may have a material impact on the fiscal and economic outlook, but are not included in the fiscal forecasts. They are not included in the main forecasts because their fiscal impact cannot be reasonably quantified, the likelihood of realisation is uncertain and/or the timing is uncertain. into sovereign-guaranteed debt and nonsovereign-guaranteed debt. Non-sovereignguaranteed debt represents the debt obligations of SOEs and Crown entities that are not explicitly guaranteed by the Crown. System of National Accounts (SNA) Includes the core Crown (defined above) plus Crown entities and SOEs as defined by the Government Reporting Entity on pages 87 to 89. SNA is a comprehensive, consistent and flexible set of macroeconomic accounts which meets the needs of government and private sector analysts, policy-makers and decision-takers. Total Crown Tradable/non-tradable output The accrual, rather than the cash (“tax receipts”) measure of taxation. It is a measure of tax due at a given point in time, regardless of whether or not it has actually been paid. There is no official definition of the tradable sector. In this document the tradable sector is defined as the part of the economy particularly exposed to foreign competition. It includes primary, manufacturing and tourism industries. Non-tradable output is estimated as a residual of total real GDP. Terms of trade Trade-weighted index (TWI) The terms of trade measure the volume of imports that can be funded by a fixed volume of exports, and are calculated as the ratio of the total export price index to the total import price index. New Zealand’s headline terms of trade series is derived from export and import price indices from Statistics New Zealand’s quarterly Overseas Trade Index release. The Treasury forecasts the terms of trade on an SNA-basis, using implicit export and import price indices derived from quarterly national accounts data. A measure of movements in the New Zealand dollar against the currencies of our major trading partners. The currencies comprise the US dollar, the Australian dollar, the Japanese yen, the euro and the UK pound. Tax revenue Top-down adjustment An adjustment to expenditure forecasts to reflect the extent to which departments use appropriations (upper spending limits) when preparing their forecasts. As appropriations apply to the core Crown only, no adjustment is required to SOE or Crown entity forecasts. Total borrowings Represents the Government’s total debt obligations to external parties and can be split Votes When Parliament considers legislation relating to appropriations, the appropriations are grouped within “Votes”. Generally, a Vote groups similar or related appropriations together (eg, Vote Health includes all healthrelated appropriations administered by the Ministry of Health). Year ended Graphs and tables within this document use different expressions of the timeframe. While some tables may refer to the end of the tax year (31 March), others will refer to the end of the Government’s financial year (30 June). For example, unless otherwise stated references to 2013/14 or 2014 will mean the end of the financial year. B.6 | 133 2013 BUDGET ECONOMIC AND FISCAL UPDATE 134 | B.3 Time Series of Fiscal and Economic Indicators Fiscal Indicators 2003 2004 2005 2006 2007 20 Actual Actual Actual Actual Actual Ac June Years $ millions Revenue and Expenses Core Crown revenue 43,440 46,219 51,045 55,735 58,211 61 Core Crown expenses 39,897 41,882 44,895 49,320 54,003 56 Total Crown OBEGAL 4,366 5,573 7,075 7,091 5,860 5 Total Crown operating balance Cash Position 1,621 7,309 5,931 9,542 8,023 2 Core Crown residual cash 1,217 520 3,104 2,985 2,877 2 Gross debt1 36,617 36,017 35,478 33,903 30,647 31 Gross debt incl RB settlement cash and bank bills 36,617 36,017 35,478 35,867 36,805 37 Net core Crown debt (incl NZS Fund)2 22,647 19,902 13,324 6,302 1,620 (2 Net core Crown debt2 24,531 23,858 19,879 16,163 13,380 10 28,012 39,595 54,240 83,971 96,827 105 27,918 135,710 39,456 146,348 54,025 155,361 83,678 163,224 96,531 173,214 105 185 Core Crown revenue 32.0 31.6 32.9 34.1 33.6 Core Crown expenses 29.4 28.6 28.9 30.2 31.2 Total Crown OBEGAL 3.2 3.8 4.6 4.3 3.4 Total Crown operating balance Cash Position 1.2 5.0 3.8 5.8 4.6 Core Crown residual cash 0.9 0.4 2.0 1.8 1.7 Gross debt1 27.0 24.6 22.8 20.8 17.7 Gross debt incl RB settlement cash and bank bills 27.0 24.6 22.8 22.0 21.2 Net core Crown debt (incl NZS Fund)2 16.7 18.1 13.6 16.3 8.6 12.8 3.9 9.9 0.9 7.7 Total Crown net worth 20.6 27.1 34.9 51.4 55.9 Total net worth attributable to the Crown 20.6 27.0 34.8 51.3 55.7 Surpluses Debt Net Worth Total Crown net worth Total net worth attributable to the Crown Nominal GDP % GDP Revenue and Expenses Surpluses Debt Net core Crown debt2 Net Worth 1 Excludes Reserve Bank settlement cash and bank bills 2 Excludes advances GLOSSARY OF TERMS Economic Indicators March Years 2003 2004 2005 2006 2007 2008 Annual average % change Actual Actual Actual Actual Actual Actual Private consumption 4.9 6.5 4.7 4.7 2.8 3.5 Public consumption TOTAL CONSUMPTION 0.7 4.0 5.1 6.2 4.6 4.7 4.7 4.7 3.4 2.9 4.9 3.8 Residential investment 23.6 14.7 2.3 -5.0 -2.1 1.8 Non-market investment Market investment TOTAL INVESTMENT 10.7 2.8 7.9 15.5 12.4 13.2 10.8 11.6 8.3 5.7 11.0 6.5 1.8 -2.9 -2.8 -8.0 10.6 7.1 Stock change (contribution to growth) -0.1 0.3 0.3 -0.5 -1.1 1.2 GROSS NATIONAL EXPENDITURE 4.6 7.8 5.7 4.7 0.3 5.6 Exports 8.0 0.9 4.8 -0.1 3.3 3.5 Imports 6.9 12.8 12.2 4.4 -1.3 10.6 EXPENDITURE ON GDP 5.0 4.1 3.6 3.4 1.6 3.5 GDP (production measure) 4.8 4.4 3.6 3.5 2.9 2.9 - annual % change Real GDP per capita Nominal GDP (expenditure basis) 4.4 3.3 5.2 5.4 2.5 6.9 2.3 2.0 7.0 3.5 2.2 5.5 3.5 1.7 5.0 1.2 1.8 8.3 GDP deflator Output gap (% deviation, March year average) Employment Unemployment (% March quarter s.a.) 0.2 0.4 2.8 5.0 2.6 1.0 3.0 4.3 3.3 1.2 3.6 3.9 2.0 1.6 2.8 4.0 3.4 1.9 2.2 3.9 4.6 2.8 1.7 3.8 Wages (average ordinary-time hourly, ann % change) CPI inflation (ann % change) Merchandise terms of trade (SNA basis) Current account balance - $billion 2.3 2.5 -5.6 -4.0 3.5 1.5 4.4 -6.0 3.6 2.8 3.4 -9.3 5.3 3.3 -1.9 -13.8 4.6 2.5 -1.2 -13.2 4.7 3.4 8.4 -14.2 Current account balance - % of GDP TWI (March quarter) 90-day bank bill rate (March quarter) 10-year bond rate (March quarter) -3.0 60.6 5.8 6.0 -4.2 66.9 5.5 5.9 -6.0 69.6 6.9 6.0 -8.5 68.3 7.6 5.7 -7.8 68.8 7.8 5.9 -7.7 71.9 8.8 6.4 Data for 2014 and subsequently are forecasts. Data for 2013 and prior years are those that were available on 11 November when the forecasts were finalised. B.3 | 5