Budget deficit below forecast again

Bonds

NZ budget deficit lower than expected again as stronger corporate profits and stock markets boost tax returns and abnormal gains

5th Jul 13, 10:22am by Bernard Hickey

Treasury has reported the Government's deficit before gains and losses was NZ$3.3 billion in the 11 months to May, which was NZ$763 million lower than expected and it expects the full year result to also be better than forecast.

"At NZ$502 million above forecast, Core Crown tax revenue continued the trend from recent months, with large positive variances in corporate tax (NZ$496 million) and tax from other persons (NZ$164 million), partially offset by a negative variance in GST (NZ$222 million)," Treasury said.

"Higher- than-expected profitability, in part owing to strength in financial markets, contributed to the positive variances and we expect that the differences in core Crown tax revenue will persist to year-end," it said.

Stronger stock markets and lower long term liability estimates because of changes to discount rates produced abnormal gains of NZ$9.4 billion, which was NZ$2 billion above forecasts. There was also NZ$1.7 billion in gains on the government's investment portfolios, including NZ$1.2 billion from the NZ Super Fund.

The operating balance was in surplus by NZ$6.5 billion, which was NZ$2.7 billion more than expected.

Total proceeds of NZ$1.7 billion from the sale of shares in Mighty River Power were above forecasts of NZ$1.5 billion.

These higher than forecast cash proceeds from the partial sale of Mighty River Power, tax receipts being NZ$322 million above forecasts and spending being NZ$222 million below forecast meant the residual cash deficit was NZ$768 million below forecast.

This meant net debt was NZ$800 million below forecasts at 26.4% of GDP.

Finance Minister Bill English said the government's restraint of spending growth meant the improving revenue outlook was flowing through into lower deficits more quickly.

“This is a positive sign and confirms that the Government remains on track to return to surplus in 2014/15, so we are in a position to have choices about repaying debt and investing more in public services," English said.

"If this improvement continues until the end of the financial year, the OBEGAL deficit will be $2.3 billion smaller than Budget 2012 forecasts," he said.

(Updated with comments from English)

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23 Comments

by Stephen Hulme | 5th Jul 13, 11:17am 1372979829

Hmmmm - it would seem that the budget deficit is hostage to a flick of the pen when it comes to imposing the value of the discount rate (undisclosed) to derive the present value of long term liabilities:

Sustained strength in equity markets, and reductions in the valuation of long‐term liabilities (primarily owing to changes in the discount rate), have resulted in gains of $9.4 billion for the year-to-date, $2.0 billion ahead of forecast. Gains on the Crown’s investment portfolios were $1.7 billion higher than expected, with the NZS Fund contributing $1.2 billion of this difference. In addition, actuarial gains on the ACC outstanding claims liability were $358 million above forecast at $1.0 billion, contrasting to the year‐to‐date losses of $0.8 billion to 30 April. The turn around of the actuarial loss was a result of an increase in the discount rate during May and highlights the volatility associated with the valuations of the long-term liabilities. bottom of page 2 (6-35) PDF reader

Volatility indeed - I had occasion to comment about this aspect of the Crown Accounts last month: Read here

What is going on?- Treasury can raise the discount rate as high as it wishes to make our future liabilities disappear at today's prices.

by iconoclast | 5th Jul 13, 11:28am 1372980490

It is evident to all and any firmament-gazers, the desire (nay, the need) for financial engineering is indeed viral. It is the very soul of society.

by Kate | 5th Jul 13, 11:39am 1372981199

What annoys me is that we don't know whether TSY do this to benefit NZ or to benefit the executive government. Given the undisclosed nature of their "workings" the populus tends to suspect the latter - which just serves to denegrate our respect for democracy.

by Ms de Meanour | 5th Jul 13, 12:22pm 1372983751

A whole bunch of material about the way in which Treasury decides on its discount rates, and subjects its calculations and methodology to external audit, is easily found by Googling "New Zealand Treasury Discount Rates".

http://www.treasury.govt.nz/publications/guidance/reporting/accounting/discountrates

You might well say that it's not very easily understood by the man in the street, but that's not the same thing at all as it being "undisclosed".

by Stephen Hulme | 5th Jul 13, 12:44pm 1372985068

Ms de Meanour - the publication of the raw #s was never in doubt, it is the apllcation of them to a particular set of liabilities and the chosen durations that are of importance when the Crown makes sweeping changes from one month to the next.

by Ms de Meanour | 5th Jul 13, 1:01pm 1372986094

Papers explaining their methodology and assumptions are also published at the same site.

by Kate | 5th Jul 13, 1:36pm 1372988193

Totally missed/skirted the point, MdM!

Ooh I love to dance a little sidestep, now they see me now they don't-

I've come and gone and, Ooh I love to sweep around the wide step,

cut a little swathe and lead the people on.

Dolly was just gorgeous and Charles Durning did a great rendition of the song. I assume you've seen it :-).

by Ms de Meanour | 5th Jul 13, 2:08pm 1372990126

What then was your point? I understood it to be that we did not know why Treasury were using a particular approach to calculating and applying a discount rate, and therefore that we could not be sure that they were acting in the public interest. I showed that they had published an explanation of their methodology and the assumptions behind it. I thought that would be helpful in case you were under the impression that Treasury were concealing the information. You did specifically refer to "the undisclosed nature of their workings" and I showed that the nature of their workings is not undisclosed.

Now of course one can never know what motivates somebody else's actions or decisions. If they are an expert and you are not, it is wellnigh impossible to know whether their decisions on your behalf are truly (intended to be) in your best interest. Perhaps the outcome is indeed favourable to you, but how can you know it couldn't have been even better? Perhaps they explain it all to you at great length, but how can you know they are explaining as best they can and telling you the truth, the whole truth and nothing but the truth? You could ask for a second opinion from another expert, but then how can you have any more confidence in the second expert than you do in the first?

Short then of becoming an expert in everything and never allowing anybody else to do anything for you or on your behalf, it does seem that sooner or later there comes a point when you simply have to trust. What else are you going to do? In this case, what else do you expect Treasury to do?

by Stephen Hulme | 5th Jul 13, 1:43pm 1372988607

Show me the consistent calculation methodology used to create the term and structure of liabilities associated with ACC for instance.

As a comparative exercise maybe you could investigate NZ Superannuaton Fund's declaration that: Returns are measured on a 'time weighted' basis (monthly compounding). and are thus a true and fair representation of an actual IRR equivalent measure of performance or not.

by Ms de Meanour | 5th Jul 13, 1:45pm 1372988755

Is it your contention that calculation methodologies should never be changed?

by Stephen Hulme | 5th Jul 13, 1:51pm 1372989097

Not at all, just representative of reality, in so much the calculated return matches that which can be spent.or owed.

by Ms de Meanour | 5th Jul 13, 2:21pm 1372990907

That's a different point to the one I was taking issue with.

You said

"the budget deficit is hostage to a flick of the pen when it comes to imposing the value of the discount rate (undisclosed) to derive the present value of long term liabilities".

You also said

"Treasury can raise the discount rate as high as it wishes to make our future liabilities disappear at today's prices."

I have shown that with minimal Googling effort one can establish that there is more to it than a flick of a pen, that the value of the discount rate is not undisclosed and that Treasury is not able simply to raise the discount rate as high as it wishes to make future liabilities disappear.

You can contend that the discount rate is wrong, or that there is something wrong with the methodology or the assumptions used in its calculation and/or application. But you cannot say that Treasury just makes it up or that it is untransparent about how it reaches its figures.

by Stephen Hulme | 5th Jul 13, 2:30pm 1372991438

"the budget deficit is hostage to a flick of the pen when it comes to imposing the value of the discount rate (undisclosed) to derive the present value of long term liabilities".

Which term (10 years,15 years etc.) discount rate do they impose? Is it consistent over time or subject to change for reasons undisclosed?

by Stephen Hulme | 5th Jul 13, 2:47pm 1372992429

Treasury is not able simply to raise the discount rate as high as it wishes to make future liabilities disappear.

Show me the grounds that precludes Treasury from raising the discount rate as published in your referenced link towards the 15%+ levels that 10 year NZ government stock traded at in ~1982. It's only a small step to 20% etc. Who would or could deny a return to prior extremes when Treasury sticks pretty much with the opposing extremes we are experiencing now?

by Ms de Meanour | 5th Jul 13, 3:20pm 1372994409

"Sunlight is the best disinfectant; electric light the most efficient policeman".

They publish their workings, assumptions and evidence for all to see and in the knowledge that they will be examined by the banks, rating agencies and others with the ability to make decisions which will affect New Zealand's economic wellbeing for good or ill. What else would you have them do?

by Stephen Hulme | 5th Jul 13, 3:49pm 1372996146

What else would you have them do?

Supply the pertinent facts so those amongst us possessing the skills can undertake analytical investigations of said claims.

We surely cannot be wholly confident the Treasury officials in charge of overseeing Solid Energy were exercising the competence their salaries demanded.

by Ms de Meanour | 5th Jul 13, 4:44pm 1372999480

I'm deducing then that when you examined the published paper "Methodology for Risk-free Discount Rates and CPI Assumptions for Accounting Valuation Purposes - June 2013 Review of Long-term Assumptions", you did not find the pertinent facts that you wanted in it; and further, that Treasury, in possession of those facts, subject to the Official Information Act and in the knowledge that concealment would reflect badly on them and could be publicised, nevertheless refused to supply those facts when you requested them. Right?

As to whether we can ever be confident that anybody is doing the best they can under the circumstances, please see my thoughts in response to Kate above.

by Stephen Hulme | 5th Jul 13, 5:51pm 1373003477

Yes, right

In addition, actuarial gains on the ACC outstanding claims liability were $358 million above forecast at $1.0 billion, contrasting to the year‐to‐date losses of $0.8 billion to 30 April. The turn around of the actuarial loss was a result of an increase in the discount rate during May and highlights the volatility associated with the valuations of the long-term liabilities. bottom of page 2 (6-35) PDF reader

Which rate for what term was applied to generate the turnaround and how do they compare for the 10 months ending April 2013? - is that too hard for you to comprehend?. When have you ever accepted a bond price quote without knowing the yield, coupon and tenor? I have been refused OIA requests for data on the grounds that commercial sensitivity prevents it's release.

by Stephen Hulme | 5th Jul 13, 11:46am 1372981609

Paradoxes engulf us at every level. Read more

The need for financial subterfuge is more than likely inextricably linked with the revelation expressed thus: Snowden's whistleblowing, like that of Manning and Julian Assange and WikiLeaks, threatens to break the silence Pinter described. In revealing a vast Orwellian police state apparatus servicing history's greatest war-making machine, they illuminate the true extremism of the 21st century.

by Wolly | 5th Jul 13, 12:42pm 1372984932

"..... offset by a negative variance in GST (NZ$222 million)"....say again!

by Waripori | 5th Jul 13, 1:04pm 1372986265

This story is about the cash position isnt it? OBEGAL does not take into account changes in value of assets or liabilities brought about by changes in discount rates or markets. Probably nice to know that the value of the Superfund in particular has gone up because that might come in handy one day but it has nothing to do with Government revenue or expenditure which is what the piece is about and it has to be a good news story.

Expenditure is below budget which might be something to do with lower transfer payments. Revenue is above forecast which seems to have everything to do with better corporate profits. All signs of an improving economy. Not many countries can point to a set of books like this.

The GST shortfall is a bit surprising but maybe we are spending less. More likely we are just buying more from offshore directly and avoiding GST. This trend is creating a shrinkage in the tax base and it will have to be addressed.

by Stephen Hulme | 5th Jul 13, 1:49pm 1372988951

The GST shortfall is a bit surprising but maybe we are spending less. More likely we are just buying more from offshore directly and avoiding GST

Isn't that an awful lot of items coming in at under NZD 400.00? - since: If the total you owe us in duty and GST charges is less than NZ$60 then no money will be collected.

by Waripori | 5th Jul 13, 2:02pm 1372989753

I think it will be well North of a Billion dollars and growing all the time. That would be 130 million in GST foregone at least.