Budget deficit better than forecast

NZ government budget deficit NZ$4 bln in 10 months to end of April; NZ$664 mln below forecast on higher tax revenues

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NZ government budget deficit NZ$4 bln in 10 months to end of April; NZ$664 mln below forecast on higher tax revenues

4th Jun 13, 10:07am by Bernard Hickey

Treasury has reported the Government's Operating Balance before Gains and Losses (OBEGAL) was in deficit by NZ$4 billion in the 10 months to April 30, which was NZ$664 million lower than forecast becuase of higher than expected corporate tax revenues.

Corporate tax was NZ$532 million above forecast. Treasury said just over half this variance was because of higher corproate profits, partly because of stronger stock markets.

Government spending was close to forecast at NZ$57.8 billion.

The operating balance surplus, after gains and losses was was NZ$2.8 billion, which was NZ$142 million below forecast.

Finance Minister Bill English said a stronger economy was underpinning tax revenues.

“The economy is growing more strongly, new jobs are being created, unemployment is coming down and business and consumer confidence have picked up," English said.

“The Government is supporting these positive trends with a common-sense economic programme focused on giving businesses the confidence to invest, grow and create new jobs. The plan is working and the benefits are starting to show through in the Government’s finances, as we remain on track to surplus in 2014/15.”

English said core Crown tax revenue was $3.1 billion higher than in the corresponding period the previous year, which was mainly due to higher income taxes and a broadening of the tax base.

Net core Crown debt of NZ$60 billion or 28.7% of GDP was NZ$441 million below forecast as at 30 April.

“It’s important that we cap and then start reducing this debt by sticking to sound fiscal and economic management,” English said.

“That will allow us to meet our second fiscal target of reducing net debt to no more than 20 per cent of GDP by 2020.”

(Updates with chart, details, comments from English)

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6 Comments

by Stephen Hulme | 4th Jun 13, 10:32am 1370298767

Phew - I was getting worried that the 2014/15 0$75 million budget surplus forcast was at risk and taxes would have to rise as a consequence.

Corporate tax was NZ$532 million above forecast. Treasury said just over half this variance was because of higher corproate profits, partly because of stronger stock markets.

An explanation of this statement is warranted, since the welfare of the US stock market and hence our own is Federal Reserve Quantitative Easing dependent. Vicarious money printing our way to government surplus nirvana is by default a non-sustainable vicious circle outcome.

One hates to think the Fed taper could derail NZ government economic forecasts.

by Roger Witherspoon | 4th Jun 13, 10:44am 1370299488

Or that risk free lending might actually not be, like, actually risk free. Like Mortgage Backed Securities or Greek Government debt were considered to be.

"An FX swap agreement is a contract in which one party borrows one currency from, and simultaneously lends another to, the second party. Each party uses the repayment obligation to its counterparty as collateral and the amount of repayment is fixed at the FX forward rate as of the start of the contract. Thus, FX swaps can be viewed as FX risk-free collateralised borrowing/lending" ...

How do you wake up a slumbering RBNZ engaged in happy dreams that they know what they are doing?

by Colin Riden | 4th Jun 13, 11:29am 1370302155

And Bill forgot to mention that Crown closing net worth is $259 million below forecast.

It is all very well to be crowing about higher tax reducing operating deficits but that is not very relevant if at the same time you are still losing it against forecast net worth.

by Stephen Hulme | 4th Jun 13, 12:23pm 1370305388

The operating balance surplus was $2.8 billion, $142 million below forecast. In addition to the $664 million lower OBEGAL deficit was a $759 million positive variance from the Crown’s investment portfolios, with the NZS Fund recording net gains of $737 million above forecast. Offsetting this result was an unfavourable variance in relation to ACC’s outstanding claims liability that was $1.5 billion above forecast, mainly due to a lower discount rate at the end of April compared to that used in the forecast. And this at the bottom of document page 2 (6 of 36) PDF reader.

What is going on?- Treasury can raise the discount rate as high as it wishes to make our future liabilities disappear at today's prices. Equally it can raise forecasts of those future costs by inordinate levels and discount by zero to make it seem that we can longer afford to run a public service system - thus apparently necessitating that it be passed to the private sector - what is going on minister? An explanation is called for.

Nevertheless, from where on earth can the Treasury be sourcing it's discount rate factors? Real world analysis says interest rates cannot be rising for some time if we believe the RBNZ and it's forecasts. Are the employed discount rates made public and if not, why not?

by Colin Riden | 4th Jun 13, 12:31pm 1370305908

So Bill is keeping to form and being less than forthright in his statements.

And I note from your reference that almost half the increase in tax revenue is simply due a timing difference:

Core Crown tax revenue was $486 million higher than forecast, with corporate tax $532 million above forecast. Just over half this variance is thought to be the result of higher corporate profitability, partly resulting from continued strength in equity markets. The remainder is a timing difference with some large taxpayers filing returns in April, earlier than expected. Other tax types were broadly in line with forecast.

by Stephen L | 4th Jun 13, 10:12pm 1370340720

In economics as I understand it, simplistically:

The government deficit/ surplus plus the private deficit /surplus = the current account deficit/surplus. Or to turn it around, private increase in debt = current account less the government deficit.

In NZ's case the government deficit is now ~$4 billion, improved from ~$10 billion. But the government is knowingly following policies to Lift the current account deficit from $9 billion to $10 billion and then progressively get worse to $16 billion in 2017.

So they are merely guaranteeing increased private debt and loss of wealth by $7 billion this year, against roughly breakeven last year. Assuming they were in fiscal balance in 2017, that would need private asset sales or increased private debt of $16 billion in that year.

Getting into fiscal balance is fine; but in my view useless to counterproductive if in doing so they load debt on to private citizens. Only the government has the levers to affect the exchange rate to influence the current account.

As it happens I don't believe the world will let us grow private debt by such an extraordinary amount on top of that we already have; nevertheless I hope a government does finally address the current account.