Liability Valuation Changes Will Reduce Final Surplus

"The Crown Statements for the eight months to the end of February show the Government is easily meeting all of its fiscal targets and is running a structural surplus," Finance Minister Michael Cullen said today.

"The operating balance is currently running more than $1 billion over the DEFU forecast. More than half of this improvement [$620 million] is due to stronger than expected tax revenues.

"Treasury expects the tax take to continue above DEFU forecasts throughout the year.

"However its advice is that the liabilities of the Government Superannuation Fund and the Accident Compensation Corporation are likely to be revised up sharply this year, partly because of the drop in interest rates.

"The extent of the increase is not yet known. We don't have a projection yet for the GSF. But ACC's current estimate is for a negative revaluation of $875 million compared to the DEFU. This is in contrast to the 1999-2000 year when the ACC valuation came through as a positive, pushing up the end of year surplus by $519 million.

"Around half this year's anticipated revision is due to interest rate movements. For example, a 1 percent decrease in interest rates increases ACC's liability by around $400 million," Dr Cullen said.

ACC had also on actuarial advice revised up its estimated claim liability for the long-term seriously injured by around $400 million. This followed an increase last year of $200 million and annual increases in payments since 1993 of 25 percent.

The rising costs reflected court rulings and decisions by successive governments to expand the entitlements available to those requiring attendant, residential and on-going care.

"The final valuations for both the ACC and the GSF will not be calculated until 30 June, the last day of the financial year, and will be influenced by where interest rates are sitting at that time.

"These interest rate generated shifts tend to even out over time. That is why I have asked Treasury to develop new fiscal indicators to analyse out the one-offs from the underlying operating balance. Work on this exercise is well-advanced and will be presented in the May 24 budget.

"Notwithstanding the ACC liability revaluation, Treasury still expects a surplus for this year," Dr Cullen said.

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