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Crown's tax take improves in Feb, but still 2.3% below forecast for first 8 months of financial year
The government's core tax take in the eight months to February was 2.3% below what it had forecast in October, although this was an improvement on the 2.9% gap seen in January.
The figures come after Prime Minister John Key and Finance Minister Bill English said this week the government was likely to run a 'zero budget' again this year, which would see them strip away a previously-expected NZ$800 million increase in the government's operating allowance for the next year.
A softer-than-expected tax take for the current year was one of the reasons for cutting the planned increase in the operating allowance, as labour market conditions remained worse than expected, GST refunds were higher than forecast, and the corporate tax take was down due to weaker profitability.
Rising costs stemming from the Christchurch earthquakes, and a weakening prospects among New Zealand's major trading partners were also reasons for the need for a zero budget, Key said on Monday.
The latest set of government accounts, showing revenue and expenses through the current financial year, showed the government's operating balance before gains and losses (OBEGAL) was a deficit of NZ$5.5 billion in the eight months to February. That was NZ$395 million, or 7.7% larger than what Treasury had expected in its October pre-election update.
Core Crown expenditure was NZ$1.4 billion below forecast during the eight months, offset by core Crown revenue which was NZ$1.2 billion below forecast.
"In addition, since the PREFU there has been an increase in EQC’s expenses, net of reinsurance, of NZ$500 million following a revision of its estimated liability in relation to the Canterbury earthquakes. Most of the increase (NZ$450 million) related to the 23 December 2011 earthquake ‐ NZ$290 million of this was first booked in the 31 January Financial Statements published last month," Treasury said in the accounts.
The lower‐than‐expected core Crown revenue was primarily due to core Crown tax revenue (NZ$35.4 billion) which was NZ$825 million, or 2.3%, lower‐than‐forecast, an improvement from the NZ$946 million variance last month. However, the three main tax‐types continued to be below forecast. The specific drivers were:
- Source deductions ‐ NZ$200 million below forecast as the labour market and employment and wage growth have been weaker than expected.
- GST ‐ NZ$369 million below forecast because earthquake‐related insurance refunds continued to be above forecast. However, the GST base (excluding these refunds) was close to forecast.
- Corporate tax ‐ NZ$193 million below forecast as business profitability was weaker than expected.
"February’s year‐to‐date tax revenue result is consistent with expectations that full‐year tax revenue will be below PREFU forecasts, as indicated in the Budget Policy Statement released on 16 February 2012," Treasury said.
Core Crown expenses of NZ$45.2 billion were 3.0% below forecast. The lower than forecast expenditure was either offset by similar reductions in revenue, or a result of delays in expenditure, Treasury said.
"While the OBEGAL deficit was NZ$395 million higher than forecast, the operating balance deficit at NZ$8.8 billion was NZ$1.3 billion (16.5%) higher than forecast," Treasury said.
"In addition to the OBEGAL result, higher than forecast actuarial losses on the Government Super Fund (NZ$1 billion) and ACC liabilities (NZ$329 million) contributed to the variance. The actuarial losses were partially offset by losses on investment portfolios across the Crown being NZ$629 million lower than forecast due to a rebound in global equities in February," it said.
The residual cash deficit and net debt were largely in line with forecast. Net debt at the end of the eight months was NZ$49 billion (24% of GDP).
Finance Minister Bill English said in a media release that an updated valuation of estimated Canterbury earthquake costs – including NZ$450 million relating to the quake on 23 December 2011 – was reflected in the Government’s accounts for the eight months to February.
"Combined with core Crown expenses remaining significantly below forecast, and core Crown tax revenue continuing to track below forecast, the extra earthquake costs left a NZ$5.5 billion operating deficit before gains and losses in the eight months," English said.
“This is about NZ$395 million higher than the NZ$5.1 billion deficit forecast in the Pre-Election Update last year. These extra cost estimates from the earthquakes are outside our control, but it reinforces the need to remain focused on things we can influence, such as government spending," he said.
“So we will have to remain disciplined to meet the challenging goal of getting back to surplus by 2014/15, when we can start repaying debt.”
English said the main reasons for the difference in the OBEGAL deficit reported for the eight months to February and the Pre Election Update forecast were costs of the 23 December earthquake and an updated actuarial valuation of the Earthquake Commission’s insurance claims liability.
"The estimated cost of the earthquakes has increased by about NZ$500 million, net of reinsurance. Of this, about NZ$450 million related to the 23 December earthquake (around NZ$300 million was estimated in the Budget Policy Statement and the January financial statements), and the remainder reflected an actuarial update," he said.
“These earthquake cost estimates will continue to be updated as more information becomes available. But I’m encouraged that we’ve kept core Crown expenses NZ$1.4 billion below forecast at NZ$45.2 billion for the eight months to February. As we move towards the Budget in May, this discipline around spending will remain our strong focus.”