By Bernard Hickey
The Government's budget deficit was larger than expected in the first half of the financial year, due partly to soft GST and corporate tax receipts. However, the underlying deficit continues to improve from the previous year, falling 44% as tax revenues rose 7.4% and costs grew just 1.6%.
Finance Minister Bill English said the result was still reasonably close to forecasts given the large revenue and spending bases. He said the Government remained on track to be in surplus in the 2014/15 year. The Reserve Bank is relying on this effective tightening of fiscal policy to withdraw 2% of Gross National Expenditure over the next 3 years, helping to dampen somewhat the need for tighter monetary policy and higher interest rates.
Treasury reported the Government's Operating Balance Before Gains and Losses (OBEGAL) in the six months to December 31 was NZ$1.8 billion, which was NZ$380 million more than expected because of lower core tax revenue across most types.
"At this stage, it is difficult to determine how much of the lower than forecast tax is temporary versus permanent but we expect this to become clearer over the next few months," Treasury said.
The operating balance after gains on investments was a surplus of NZ$3.2 billion, which was NZ$1.6 billion higher than forecasts because of continued strength in global stock markets.
Net debt was NZ$392 million higher than forecast at NZ$62.3 billion or 28.8% of GDP. This was primarily due to a higher than forecast residual cash deficit driven by lower than expected core Crown tax receipts and higher than expected operating payments," Treasury said.
Core crown tax revenue was NZ$602 million below forecasts at NZ$29.18 billion, while core expenses were NZ$83 million less than expected at NZ$24.692 billion.
GST receipts were NZ$175 million (2.3%) below forecast, with around NZ$80 million relating to earthquake related refunds. Treasury said it was difficult to know if the variance was temporary or permanent, given there was no GST due date in December. "We expect this to become clearer over the next few months," it said.
Corporate tax receipts were NZ$140 million or 3.5% below forecast, which is less than last month.below forecast. "However, other negative factors (relative to forecast) within corporate tax remain, suggesting some downside risk to the full‐year corporate tax result," Treasury said.
Treasury said that underlying expenses were NZ$394 million lower than forecast, although the largest factor was NZ$110 million in treaty settlements that had been delayed while negotiations were finalised. Defence spending was NZ$87 million below forecast because of reduced services up until December, although this was expected to reverse in the second as Defence Force operational activities increases.
Political reaction
"Given the large size of both the revenue and spending bases, overall we are still tracking reasonably close to forecast for the first six months of the financial year," Finance Minister Bill English said.
"And we remain on track to surplus in 2014/15. As we've said many times, this will require ongoing discipline and responsible fiscal and economic management," he said.
"New Zealand certainly doesn't need irresponsible and expensive spending promises - which we're already seeing from other political parties - more than a year before we've even posted a surplus."
(Updated with more details/reaction)
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