Treasury reports budget deficit running NZ$199 million above forecasts as tax revenues lag expectations, but gap narrows; Surplus in 2014/15 still expected

By Bernard Hickey

Weaker than expected GST and income tax receipts continued to drag the Government's budget into defict in the nine months to March, but Treasury is still confident of a surplus for 2014/15 because the economy is now growing even stronger than it forecast in December.

Treasury has reported the Government posted a NZ$1.7 billion operating balance deficit before gains and losses, which was NZ$199 million worse than forecast, largely because tax revenues were 1.8% or NZ$829 million less than expected.

However, the gap between the deficit and expectations has narrowed somewhat from last month and continued spending restraint helped reduce the size of the gap.

Core Crown tax revenue was NZ$44.5 billion in the latest nine month reporting period, up 6.3% from a year ago, but still 1.8% less than forecast in the pre-Christmas Half Yearly Economic and Fiscal Update (HYEFU). This was narrower than the 2.8% variance seen a month earlier.

"Updated tax revenue forecasts will be released as part of the Budget Economic and Fiscal Update on 15 May. Tax revenue outturns in the current fiscal year are not expected to impact on the forecast return to OBEGAL surplus for 2014/15 as the variance-against-forecasts are offset by a stronger outlook for the economy than had been anticipated at HYEFU," Treasury said in its monthly update.

Core Crown expenses were NZ$423 million lower than expected and net insurance expenses fell by NZ$151 million," Treasury said.

GST was NZ$264 million or 2.2% below forecasts with around half the variance because of stronger than expected earthquake‐related insurance refunds. 

"The remainder of the variance reflects some weakness in the macroeconomic drivers of  GST," Treasury said.

Income taxes were NZ$220 million or 1.2% below forecast, which Treasury said was timing related and expected to reverse out by the end of the year.

Other individuals’ tax receipts were NZ$163 million or 4.7% below forecast because "an earlier judgement about the relationship between receipts and revenue in the HYEFU forecast has not eventuated."

Customs and Excise duties were NZ$97 million or 3.1% below forecasts because an earlier increase in estimates was based on an increased that was a one-off rather than permanent increase.

Corporate taxes were NZ$73 million or 1.3% below forecast with most of the provisional tax timing differences from last month (NZ$372 million below forecast) having now reversed out, Treasury said.

Finance Minister Bill English said the 2014 Budget due next Thursday would show the Government remained on track for a small surplus in 2014/15 and increasing surpluses in following years.

"This will give us choices about repaying debt, investing a bit more in priority public services and, eventually, resuming contributions to the New Zealand Superannuation Fund," English said.

"But to meet this challenging target, we must remain focused on responsible fiscal policy and sensible economic policy that supports ongoing economic growth, more jobs and higher incomes," he said.

Political reaction

Labour Finance Spokesman David Parker said the weaker than expected figures showed the benefits of economic growth were not be shared fairly.

“The Household Labour Force Survey released this week shows wages are stagnating and unemployment remains stubbornly high. Bill English is busy claiming workers can expect significant wage increases but if their pay was growing, the Government’s tax take would not be so short of its target," Parker said.

Green co-leader Russel Norman said the Government would need smoke and mirrors to achieve its targeted surplus for 2014/15.

(Updated with more details, political reaction and chart)