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The eleven month accounts published today by the Treasury show that its financial situation improved somewhat in May.

The total Crown operating balance improved from a deficit of almost $7.7 billion in April to under $7.2 billion in May, an improvement of more than $0.5 billion for the year.

OBEGAL, the operating balance excluding portfolio gains and losses, improved even more – from a deficit of $1.8 billion to $1.2 billion at the end of May.
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The Government’s budget operating balance for the 10 months to the end of April was a deficit of NZ$7.69 billion, which was NZ$1.137 billion better than forecast in last week’s budget, largely because the New Zealand Super Fund, ACC and the EQC reported investment gains that were NZ$1.1 billion above forecasts.

The OBEGAL (operating balance excluding gains and losses) deficit was NZ$1.824 billion for the period, which was NZ$135 million better than forecast. This was largely because revenues were NZ$16 million better than forecast and spending was NZ$280 million better than forecast.

Here is the full media statement from Treasury Deputy Secretary Peter Bushnell and the link to the full spreadsheet.

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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.

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The affordability of the latest round of tax cuts, initially announced during National’s election campaign in October, is under further scrutiny following the release of Government financial figures by Treasury that show a large gap between Government’s operating balance and Treasury’s pre-Christmas forecast.

(Update 1 to include comments from Finance Minister Bill English.)

Corporate taxes, GST receipts and withholding tax on interest payments were lower than expected because of the longer and deeper than forecast recession and lower term deposit rates.

This will concern Standard and Poor’s, which announced it was reviewing New Zealand’s AA+ credit rating after seeing the shock pre-Christmas numbers. S&P is worried New Zealand will be running big ‘twin deficits’, with both the public sector and the private sector borrowing heavily at the same time.

The operating balance before gains and losses (OBEGAL) in the financial year to the end of February 2009 was NZ$49 million, down 97% from the pre-election update forecast and NZ$1.2 billion worse than expected in Treasury’s pre-Christmas update.

However, NZ$494 million of the shortfall was because February’s tax due date was moved to March 2 as the last day of February fell on a weekend. This means the budget deficit is already running about NZ$700 million behind where it was forecast to be before Christmas. There are still 3 months left in the financial year. Treasury said this February timing difference would reverse out in March.

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The New Zealand government’s operating balance before gains and losses (OBEGAL) for the seven months ended January 31 was NZ$600 million, which was NZ$800 million below the pre-election update and NZ$300 million below December forecasts, Treasury said. Tax revenue and receipts during the period were NZ$500 million lower than the pre-election forecast.

Meanwhile, Treasury also disclosed a NZ$15.4 billion rise in Gross Sovereign Issued Debt to NZ$45.4 billion (25.3% of GDP) from the pre-election forecast. This included fresh Reserve Bank bill issuance to mop up the liquidity from lending to the banks against securitised mortgages.

Extra government borrowing and ‘derivative liabilities’ were also blamed, although Treasury said increased financial assets, including the securitised bank mortgages, meant net debt had improved by NZ$1.4 billion from the pre-election update.

The latest figures put extra pressure on the National government to abandon its planned tax cuts and drop its contribution to the New Zealand Superannuation fund. Labour has recently said it would support the government if it deferred the April tax cuts because of the rapid deterioration of the global economy. Prime Minister John Key has said the cuts will go ahead.

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Crown accounts released by Treasury show core Crown revenue for the six months ended December 31 was NZ$1.185 billion lower than forecast, and that core Crown expenses were NZ$171 million higher than forecast. (Updated to include comparisons with 2007.)

The decline between forecast revenue and actual revenue was mainly attributable to lower than expected tax receipts from corporates and lower GST receipts, Treasury said.

The figures reinforce the scale and speed of the deepening economic recession and the likely fallout on the government’s finances. The government has already started borrowing heavily in anticipation of large deficits over the next decade. These numbers will be closely watched by Standard and Poor’s, which is reviewing New Zealand’s AA+ sovereign credit rating. S&P has warned that New Zealand’s rating could be downgraded if the budget deficit and government borrowing worsen markedly in coming months. 

Corporate tax revenue was NZ$0.5 billion, or 11.9%, below expectations due to lower‐than‐expected final profits generated in previous tax years, Treasury said.

“We expect that the corporate tax shortfall will persist through to the end of the 2008/09 fiscal year and through to the 2009/10 fiscal year, as the effects of the recent worldwide economic downturn flow through to New Zealand firms’ profitability,” Treasury said.

GST revenue was NZ$0.37 billion, or 6.2%, lower than forecast.

The Operating Balance excluding Extraordinary Gains and Losses (OBEGAL) was a surplus of NZ$98 million in the six months of the fiscal year to date, more than NZ$1.1 billion less than the NZ$1.201 billion forecast before the election.

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