By Alex Tarrant
The outlook for Europe has deteriorated since Treasury released its pre-election fiscal update (PREFU) on October 25, but the government is still committed to returning its books to surplus in the 2014/15 year, Finance Minister Bill English says.
English made the comments after figures released Monday morning showed the government's operating deficit excluding any gains or losses from investment funds such as the Super and ACC funds (OBEGAL), was 4.1%, or NZ$131 million, worse in the four months to October 31 than Treasury forecast in the PREFU less than six weeks ago.
In its remarks this morning, Treasury noted heightened risks from Europe, as highlighted in the PREFU, remained, and that this could affect forecast tax revenue.
In the PREFU released just over a month ago, Treasury said it assumed European governments would manage the region’s debt crisis and stabilise financial markets.
“The greatest uncertainty is associated with the euro area sovereign debt crisis, which we expect to be resolved only gradually, with risks around key developments,” Treasury said in the PREFU.
“The outcome of meetings of European leaders scheduled to occur between the finalisation of this text and its publication, and in the period closely following publication, could change the outlook for the euro area and the global economy,” Treasury said.
Treasury finalised its ‘specific fiscal risks’ in the PREFU, and the document’s text, on October 18, a week before the PREFU was released on October 25. Treasury’s economic forecasts and economic data were finalised on September 26. Tax revenue forecasts were finalised on September 30, and fiscal forecasts were finalised on October 18.
Treasury gave a downside scenario in the PREFU where nominal GDP was NZ$35 billion lower over five years, with a one-in-five chance of it being worse than this. Despite the skew to the downside, Prime Minister John Key on October 26 was still eyeing a "maybe slightly earlier" surplus than the NZ$1.45 billion forecast in 2014/15.
English this morning noted the outlook for Europe had "deteriorated since the Pre-Election Economic and Fiscal Update".
Deficit worse than expected
Figures releases by Treasury on Monday morning showed the OBEGAL for the four months of the new financial year came in at a deficit of NZ$3.360 billion, just above the NZ$3.229 billion forecast. Treasury is expecting a deficit of NZ$10.809 billion for the current year to June 30, 2012, down from an NZ$18.4 billion deficit in the year to June 2011.
"The OBEGAL deficit was higher than forecast mainly as a result of the lower than expected core Crown revenue (NZ$616m), partially offset by lower than expected core Crown expenses (NZ$267m), Treasury said in the monthly accounts.
Core Crown tax revenue was NZ$503 million (2.8%) lower than forecast. Treasury said the main tax variances were as follows:
- source deductions (mostly PAYE) were NZ$421m (5.8%) below forecast,
- GST revenue was NZ$232m (4.7%) below forecast, and
- corporate tax was NZ$229m (8.6%) above forecast.
"The source deductions and GST revenue variances were mainly timing‐related and are expected to narrow in coming months," Treasury said.
"Corporate tax revenue was above forecast with recent public profit announcements indicating that taxable corporate income for the 2011/12 year may provide an upside risk to the annual tax forecasts. Overall tax forecasts were within normal variability and are still on track for the full year forecast, based on experience to date," it said.
"However, heightened economic risks remain arising out of the current European sovereign debt environment as highlighted in PREFU, which would affect tax revenue should these risks be realised."
Super Fund hit
Treasury said that while the OBEGAL was near target, the October results included an actuarial loss on the Government Superannuation Fund (GSF) liability that was NZ$1,046 million higher than forecast. This loss arose from an increase in the assumption regarding future mortality improvements in the most recent valuation of the GSF liability completed after PREFU., Treasury said.
As a result, the operating balance deficit at NZ$7,453m was NZ$1,226m or 19.7% higher than forecast.
Net debt at NZ$45,810m (22.9% of GDP) was slightly lower than forecast and gross debt at NZ$74,969m (37.4% of GDP) was 3.5% lower than forecast.
"While the total government stock on issue was as anticipated, a larger portion of this debt was held by government entities," Treasury said.
'We'll get there'
Finance Minister Billl English this morning said ongoing spending discipline and higher than expected corporate tax revenue had helped keep the Government's finances on track at a time of heightened global uncertainty.
Balancing the books and returning to surplus was one of the most important things the Government could do to build a stronger and more competitive economy.
"The Government is keeping a tight lid on spending and that will need to continue into the foreseeable future so we can return to surplus as quickly as possible in a highly uncertain global environment," English said.
"We are tracking towards the forecast NZ$10.8 billion deficit for the year to 30 June, 2012 – down from over NZ$18 billion last year. This is forecast to more than halve to NZ$4.4 billion next year, before returning to surplus in 2014/15," he said.
"While the outlook for Europe has deteriorated since the Pre-Election Economic and Fiscal Update, the local economy is continuing to grow, with higher than forecast corporate tax revenue. But getting back to surplus won't be easy. In many ways, restraint in the public sector has only just started.
"The Government is committed to meeting this challenge. We've taken steps to control spending and get on top of debt, while putting in place policies that build a more competitive economy and more real jobs. We will continue with that plan over the next three years," English said.
(Updates with comments from English)