Treasury reports OBEGAL surplus of NZ$414 million in year to June 30, 2015; First budget surplus in 7 years; Govt meets political target; Result a turn-around from forecast of deficit in May Budget

Treasury reports OBEGAL surplus of NZ$414 million in year to June 30, 2015; First budget surplus in 7 years; Govt meets political target; Result a turn-around from forecast of deficit in May Budget
Finance Minister Bill English announcing a 2014/15 budget surplus on October 14 at Treasury. Photo by Lynn Grieveson for Hive News.

By Bernard Hickey

The Government has achieved its four-year-old political target of returning the Budget to surplus for the first time since 2009.

But Finance Minister Bill English has warned National will keep the shackles on spending and he was cagey about whether the Budget would stay in surplus given slowing economic growth and very low inflation.

Treasury reported the Government posted an Operating Balance before Extraordinary Gains and Losses (OBEGAL) of a surplus of NZ$414 million or 0.2% of GDP in the year to June 30, 2015.

This was the first budget surplus posted by the Government in the last seven years and meets a political target the Government has focused on since 2011.

It's also a major turnaround in the Government's finances in recent months, given Treasury forecast a deficit for 2014/15 in the May budget of NZ$684 million or 0.3% of GDP.

The full statement is here.

The Government's operating balance inclusive of gains and losses was a surplus of NZ$5.8 billion or 2.4% of GDP.

Core Crown expenses grew by NZ$1.2 billion or 1.7%. The increase in spending was lower than the pace of growth in the economy, resulting in expenses easing to 30.1% of GDP, compared with over 34% four years ago.

"You can see the surplus on this diagram. If you look carefully. And hold your glasses a bit further out from your face," English said in the Budget news conference while pointing to the chart (see picture).

English said the Government would keep spending under tight control, given the challenges of slowing global growth and very low inflation.

"There's a bit more concern actually about whether the world economy's getting into a low growth, deflationary path," English said.

"So that means the government has to take a different approach to reducing debt and maintaining surpluses than we have done in previous cycles," he said.

"So there won't be any sense of the constraints coming off because I think in the past that has been the expectation after a period of constraint. It's important that we continue to focus on improving our expenditure management so that we don't slip into old habits and put that 10 kilos back on again."

The OBEGAL deficit hit a high of NZ$18.4 billion of 9% of GDP in 2010/11 after the Global Financial Crisis and the Canterbury earthquakes.

Asked about whether the Government would reach the surplus for 2015/16 forecast in the May Budget, English was cautious.

"The Budget 2015 one was pretty slim. We've had six months of growth that were softer than expected, that seems to be coming right now. But we've yet to see what impact that will have on the forecast," he said.

Asked again if he would like to stay in surplus, he said: "We've got to adjust a bit to this lower inflation, lower growth, environment that we find ourselves in and that's the process we will go through the next few months."

"We would certainly prefer to have surpluses because it would help us deal with the debt issue, but what we have learnt out of the last few couple of years is that the way to achieve that in the low inflation, low growth, world is to focus very much on the drivers of demand for expenditure, which is why the government is spending a lot of time, and will do  through Budget 2016, on social investment and on balance sheet management, because the surplus will be a result of doing that job well rather than relying on some strong uplift in tax revenue, which now looks unlikely."

Asked if he could promise another surplus, he said: "We are going to go through a process of re-doing the fiscal targets, that's the bet answer I can give you."

Political reaction

Labour Finance Spokesman Grant Robertson described the surplus as "one black drop in a sea of red."

“The Finance Minister has finally found a surplus needle in his haystack of debt," Robertson said, describing it as a rounding error rather than a surplus.

He said the Government had manipulated the books by delaying Canterbury rebuild spending and 'overcharging ACC by NZ$350 million.

“Without such trickery National would be in deficit again and that’s at the peak of the economic cycle when New Zealanders would rightly expect the books to be in the black."

Robertson said the Government was unlikely to sustain surpluses.

“National’s financial management will go down in history as one small surplus – at the peak of the economic cycle – out of nine Budget deficits. At the peak of the cycle the previous Labour Government was able to post a surplus of $7 billion and had unemployment below 4 per cent, compared to nearly 6 per cent now," he said.

“John Key and Bill English might want to pop the champagne corks for finally getting a surplus but in the absence of a plan for regional economic growth, decent work and higher wages it will leave most New Zealanders feeling pretty flat,”

Green Finance Spokeswoman Julie Anne Genter said the surplus had come at the cost of better health and education.

"We think New Zealanders could have got a surplus today and ensured that every hungry child had a school lunch, giving them their best chance of getting a good education," Genter said.

"With better financial management, the Government can achieve a surplus while enhancing government services, making life better for our children, and cleaning up our air and water," she said, pointing to the potential for a carbon tax, less road spending and solar power systems for schools.

(Updated with more detail, reaction, chart)

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Great result. I know the moaning types here will find all the faults/negatives they want, but we are still travelling well vs other countries such as USA/Aust/EU.

Our national income is currently negative and our government is proudly running a surplus. Guess who's taking on the debt to fill the national income gap then?

Wow, what great government policy.

Sigh. Housing debt at 31 Aug 2015 $206,066,000,000 less Housing debt at 31 Aug 2014 of $193,765,000,000 = increase of $12,301,000,000.

http://www.interest.co.nz/charts/credit/housing-credit and click on the Amount $mil tab.

How does this happen - the banks put up the price of houses by lending more. Good for their salaries of course.

My thoughts exactly. Many applaud a fiscal surplus without recognising a deficit has popped up elsewhere. A zero sum game but it's the government's own congregation picking up the tab for extra interest costs.

We have been a debtor nation since 1974, which goes to show no government has a solution

No politically acceptable solution that is.

So are they going to drop GST back to 12.5% now?

10
up

finally, now make sure it keeps happening and start paying down our debt to get us ready for the next rainy day

It's a shame that Christchurch rebuild never happened and the lack of spending is costing us a lot socially but I have to agree. The Government has borrowed a lot of dirt cheap money so the cost of the borrowing is low, that also makes it a good time to make big repayments on the borrowing.

Anyone know whether 'Other movements' ($1.2b) in the increases in core Crown tax revenue include excise tax revenue (Table 4, p 10.)? If not (as the 'Other revenue' explanation below doesn't seem to include them) - where would these be accounted for?

In particular I'm interested in petrol, alcohol and tobacco excise taxes.

Found it myself (year on year increases in excise taxes):

Increase revenue for tobacco excise = $235m
Increase revenue for alcohol excise = $ 18m
Increase revenue for petrol excise = $153m

TOTAL = $406M

Or looked at another way, basically the whole of the value of the surplus - smokers providing more than half of that amount :-).

Thank you for smoking, eh?

The total tax contribution from smokers was $1.507 billion - from drinkers, $910 million.

My friends that smoke are starting to grow their own, many of my friends make wine and beer. Only way to go.

We tried that - it was simple indeed, but if only someone else could roll them into nice tailored parcels for us :-). So we halved our consumption instead, but for the life of me I don't see how this tax incentive has benefited wider society (aside from the fact that we are likely paying more tax, despite the decrease in consumption).

TSY pointed out prior to the last three excise tax increases, that smokers were already (three tax increase ago, that is) paying in excise tax more than the cost of smoking related health costs. So they are definitely more than covering those costs .. yet alcohol related health costs are a very different story, and even more so when you factor in alcohol related incidents where police time is concerned.

Thats the way it goes these days the poorest and least able to defend themselves get to pay more than they can afford, while the rich pay little or often no tax..
https://www.youtube.com/user/RenegadeEconomist

Universal flat dollar amount tax per capita as the sole form of taxation would negate the need for complex tax laws that create "loopholes".

How do you tax per capita?

A bit like the old British "poll tax" but designed to replace Income tax, council rates & GST. So if everybody over 18 pays $15,000 per year flat rate tax for the privilege of living in NZ then the shear simplicity of the rule would help avoid loopholes that the "rich" use to legally "avoid" paying tax. the government's tax revenue would be about 60,000,000,000 assuming 4 million over 18 year olds.

It's regressive:-
And 2 million of those 4 million would require compensation via the welfare system - just another go-round

It is fair. Why do those who generate more value for the economy / country get penalized for it?

Problem is we have far too much misallocated capital - that is, (contrary to your belief/premise) it is not generating the ROI to be of any actual economic benefit.

More value? - who? where are these people?

Look at GDP per capita and National Income per capita - seems the country is going backward - data disagrees with you - but that's a whole other matter

More intrusion and control by big-brother

That elderly 84 year old lady living in an old 1920's villa in Grange Rd in Mt Eden on 3000 sqm land paying $14,000 annually in council rates would love it - she'd be better off

You'd need to make the head-tax $25k per person, and up goes the paper-work, and more involvement and control by big-brother

I'm all for simplicity - which is why I like the Gareth Morgan suggestion - everyone over 18 gets a UBI and all unproductive (i.e., poorly allocated) capital is taxed - no tax loopholes, no complex asset management or tax minimisation schemes needed, no welfare programmes or their administration required.

the definition of productive will raise complications. Is tourism productive? Are hotels productive? If hotels are productive but rental housing is not then rental housing will simply begin to be operated as hotels...

The welfare side is already comparatively straight forward compared to the taxation side. Blanket taxation rules on arbitrary criteria have the potential to create many new and unique asset holding structures with the primary winners being tax lawyers and accountants.

Sorry, these sorts of avoidance/manipulation-type schemes simply wouldn't make any difference at all. Productivity (i.e., use of capital) would be based on the return provided on the capital invested - that calculation isn't the difficulty but asset valuations/methodology would need to be looked at, and some kind of national standard/methodology set.

"welfare side is already comparatively straight forward compared to the taxation side"

....You reckon? Find me the income rules for benefits...come back in a month.

everything there is to know about the rules governing welfare would fit in a pile on my desk. Just the case law governing tax would fill a room.

Aaargh, not The Poll Tax again. It's, er, not been, like, popular, you know. People don't like it. It is the opposite of a land tax.
https://en.wikipedia.org/wiki/Poll_Tax_Riots

There's a wealth of research suggesting that people with mental illness specifically schizophrenia have a much higher incidence of smoking than the general population. One theory is that the nicotine counteracts some of the negative effects of the antipsychotic medication. Its not all black and white as a recent meta analysis study suggests nicotine could be a causal factor in mental illness.

http://www.thelancet.com/journals/lanpsy/article/PIIS2215-0366(15)00152-2/abstract

Theories aside, talk to anyone who's dealt with schizophrenic patients and they'll tell you that those afflicted with the illness smoke copious amounts of tobacco. These people will prioritise tobacco over all else, and are completely unable to defend themselves against the rising cost of tobacco. You have to wonder about the negative social and economic effects of ripping 250 million dollars from some of the poorest and most vulnerable members of society. Perhaps take a trip to old Papatoetoe where there's a mental health facility, and watch the people begging for cigarettes and picking up butts from the gutter.

Keep on task Bill. Please get that OBEGAL surplus up to about 10 Billion and keep it there for a decade or two.
And while we are on a roll, lets get into a trade surplus. There's thirty years there of digging ourselves into a hole that needs remedy.

The maths is that a $10 billion government surplus, plus say a 5 billion current account deficit, would mean private New Zealanders would have to have borrowed or sold assets to the value of $15 billion. If the current account was to magically turn around to a surplus (and it's not obvious how our present fiscal and monetary policies would achieve that) then the first 10 billion of such a surplus would go to the government according to your wishes.
Y = C + I + G + NX
Where:
Y is GDP
C is consumption
I is investment
G is government spending
NX is net exports or exports minus imports (X – M)

Be careful what you wish for.