Treasury reports budget deficit was NZ$260 mln worse than forecast; warns of low dairy payout and inflation impact

By Bernard Hickey

Finance Minister Bill English has warned again that the Government's target of reaching surplus in the current 2014/15 was being challenged after fresh Treasury figures showed weaker than forecast revenues in the first four months of the year.

Treasury reported the Government's Operating Balance before gains and losses in the four months to October was NZ$1 billion, which was NZ$260 million more than Treasury's May Budget forecast because of lower than expected revenues and higher spending.

These latest Crown Accounts will put more pressure on the Government's long forecast return to surplus in the current 2014/15 year.

Finance Minister Bill English has been saying since late September the surplus forecast faced challenges and Prime Minister John Key has acknowledged that next Tuesday's Half Yearly Fiscal and Economic Update (HYEFU) may show a deficit forecast, although he was confident of an eventual surplus once the figures were finalised in late 2015.

However, Treasury reported revenues were 8% ahead of the same period a year ago and were running ahead of Treasury's August 16 Pre-Election Fiscal Update (PREFU), it said.

But it noted this was unlikely to continue because of the slump in dairy payouts and lower than expected inflation.

Core Crown tax revenue was NZ$97 million (0.5%) lower than the May Budget forecast with both GST and PAYE income tax deductions being lower than expected (NZ$200 million and NZ$75 million respectively), "which is expected to be a permanent difference."

Treasury said other individuals and corporate tax receipts were more than expected (NZ$70 million and NZ$129 million respectively).

Core Crown expenses were NZ$118 million or 0.5% higher than forecast at NZ$24.0 billion, due largely to the Government's agreement to a NZ$103 million deed of indemnity to Solid Energy to keep it solvent.

'Challenging conditions'

"This emphasises the unusual conditions the New Zealand economy is experiencing," English said.

"We have stable growth, growing employment, and low interest rates, which are helping New Zealanders to get ahead. But at the same time, falling dairy prices and low inflation are impacting on the nominal economy and government revenue," he said.

"This is making it more challenging for the Government to achieve its fiscal targets as quickly as it would like."

Labour Finance Spokesman Grant Robertson said the Government's surplus target was under threat.

“It is two blows in one morning for the Government’s economic credibility after Fonterra’s dairy payout was slashed, leaving a $6 billion hole in the economy," Robertson said.

“The Government has promised a ‘meaningful’ surplus in 2014/15 and campaigned on it for two elections in a row. This election the Government said the surplus would be almost $300 million. If Bill English is unable to provide that he will have broken John Key’s primary election promise," he said.

“The bitter truth is the tax take is down on forecast because wages are not growing as fast as promised. That makes a mockery of John Key’s claim to be ‘working for New Zealanders’."

(Updated with comments from Bill English and Grant Robertson.)