Lower than forecast tax revenues and higher than forecast investment losses have dragged the budget operating balance NZ$7.7 billion into the red as Finance Minister Bill English puts the finishing touches on the 2009 budget due on May 28. The operating balance was NZ$11.1 billion worse than the Treasury forecast just eight months ago.

The government's operating deficit over the nine months to March was NZ$7.7 billion, Treasury said today, although this was less than the NZ$8.45 billion deficit in the eight months to February.

Government's operating balance before gains and losses (OBEGAL) was a deficit of NZ$0.2 billion by the end of March, mainly due to the lower March tax take, Treasury said. This compared with its forecast for an OBEGAL surplus of NZ$1.91 billion.

Tax revenue in the nine months to March was NZ$0.7 billion less than forecast by Treasury in December, due to "lower than expected profits (both corporate and individual); weakness in private consumption; and stronger deterioration in the labour market."

Tax revenue was also NZ$1.9 billion lower than in the pre-election forecast. The National Government introduced its promised tax cuts for 2009 on April 1, but further cuts planned for 2010 and 2011 have been cast into doubt lately.

Treasury said ACC had a further loss of NZ$0.3 billion in March and that the Earthquake Commission fund lost NZ$0.1 billion. Bucking the trend, the NZ Super Fund gained NZ$0.2 billion over the month. In the nine months to March, the three funds together have lost NZ$5.7 billion.

The Super Fund's return over March was 1.12%. Annualised returns since its inception in 2003 have been 2.09%. Treasury said that this compared to 6.77% for the 'risk-free' rate of return from Treasury Bills. On Monday, interest.co.nz wrote that Bill English had written to the heads of the government's big investment funds asking them to review whether they were taking on too much risk.

ACC also made an actuarial loss of NZ$2.0 billion on non-financial instruments over the month, based on December valuations. This was part of NZ$3.6 billion of actuarial losses overall from non-financial instruments in March, representing losses arising from the difference between estimates and actual experience in the funds' payment forecasts.

Gross debt at the end of March was "significantly higher than forecast" pre-election at NZ$45 billion, or 25.1% of GDP. This was because of higher than forecast issues of Reserve Bank and Treasury Bills, and derivative liabilities, Treasury said. However, Treasury noted that financial assets had also increased, minimising the impact on net debt, which was in a net asset position of NZ$5.4 billion (NZ$4.3 billion lower than forecast).

"Net debt is broadly in line with forecast as positive valuation movements in financial assets and financial liabilities held by the Reserve Bank and NZDMO were partially offset by a higher"than expected residual cash deficit (driven primarily by lower"than"expected tax receipts)," Treasury said.

The NZ Debt Management Office announced this week it would increase its borrowing programme by NZ$1 billion to NZ$5.5 billion in the next 8 weeks.