Forecast changes and in-year revisions

As discussed in Fixed Nominal Baselines, agency baselines do not automatically increase for demand and price changes. All new funding to meet the cost of new policies and agency cost pressures that cannot be met from existing baselines is met from the operating allowance. This deliberate mechanism – referred to as fixed nominal baselines – assists the government in controlling public expenditure.

There are, however, a number of deliberate exceptions where appropriations are forecast rather than fixed and the expected increase is built into the profile of the appropriation. These exceptions mostly apply in the case of legislative entitlements where the cost of the programme is outside agency control, such as New Zealand Superannuation or Early Childhood Education subsidies.

Forecast appropriations do not go entirely unscrutinised. In order to provide some control on forecast expenditure, variances against the previous set of forecasts or forecast changes are charged against the operating allowance through a process called in-year revisions.

The net impact of forecast changes captured at the March Baseline Update (MBU) and the October Baseline Update (OBU) in a calendar year is charged against the following Budget's operating allowance. This is done on a calendar year basis in order to minimise the need for late adjustments to Budget decisions – the changes captured in the MBU immediately prior to a Budget are rolled forward as a charge against the next Budget.

How baseline updates impact in-year revisions

As an example, if at MBU 2017 new population projections were released that meant that the forecast cost of New Zealand Superannuation was to increase by $100 million a year, but then at OBU 2017 this was revised down by $20 million a year, the net impact on the Budget 2018 operating allowance would be $80 million a year.

If the net impact of these changes across all areas of spending is above forecast, the government has a smaller remaining amount of the operating allowance to allocate at Budget. Conversely, if the net impact is below forecast the government has a larger amount of the operating allowance to allocate at Budget. In practice, in recent years the net impact of in-year revisions has generally come in negative. However, this favourable movement has been used to improve the fiscal position rather than allow for increased spending. Judgement always needs to be applied with the in-year revisions process given there is uncertainty about their impact each year and there could be large one-off impacts that would be difficult to adjust for. However, there would need to be some adjustment to spending or revenue plans unless there is a change to the government's fiscal strategy.

There are a number of common baseline changes that are picked up through the in-year revisions process and charged against the operating allowance:

• Changes to price or volume of entitlements: revisions to benefits in Votes Social Development, Building and Housing, and Revenue flow through in-year revisions (except for changes to the unemployment benefit as this could make fiscal policy more pro-cyclical). A few examples of included items are New Zealand Superannuation, Early Childhood Education subsidies, KiwiSaver, the HomeStart Grant, Sole Parent Support, and Accommodation Assistance.
• Exchange rate movements: these were previously excluded from allowances but are now managed within. Examples include Foreign Affairs and Trade consular services, and international subscriptions.
• Changes in expected revenue: this does not apply to general tax revenue as this acts as an automatic stabiliser. A wide range of revenue is captured through in-year revisions, including energy royalties, court fees and fines, immigration fees and levies, occupational licensing and capital charge revenue[6].
• Changes in price set by external bodies: this includes changes made under Permanent Legislative Authority. Examples include legal aid, judicial review costs, MP salaries, Judges' salaries, and Coroner's salaries.

Other baseline changes submitted via baseline updates that are excluded from the in-year revisions process include fiscally neutral changes (such expense transfers or fiscally neutral adjustments), non-departmental depreciation, and impairments and revaluations due to fluctuations in assets and liabilities.