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Govt deficit NZ$1.9 bln higher than forecast in 4 mths to Oct on low corporate tax, GST receipts, Treasury says

Govt deficit NZ$1.9 bln higher than forecast in 4 mths to Oct on low corporate tax, GST receipts, Treasury says

Operating Balance includes investment gains and losses.

By Alex Tarrant

Finance Minister Bill English has foreshadowed a New Year review of government spending following news the government ran a NZ$4.4 billion operating deficit before investment gains and loses (OBEGAL) in the four months to October 31. This was NZ$1.9 billion higher than expected, Treasury said this morning.

This means the government has been running a deficit equivalent to NZ$275 million a week for the last four months and faces an election year budget weighed down by deficits and the potential for a sovereign credit rating downgrade.

The higher-than-expected deficit came as tax revenue was NZ$1.1 billion, or 6.3%, lower than forecast in the May 2010 budget.

"In the New Year the Government will consider further decisions around how to increase efficiency in the public sector and how it manages some of its large and growing expenses," English said in a media release on Monday morning.

"This will be assisted by report of the Welfare Working Group, the Government's review of spending on policy and the ongoing response to the report of the Housing Shareholders Advisory Group," English said.

Tax take down

The tax take was hit by lower corporate tax and lower GST receipts than expected, showing a weak economic recovery as households and businesses try to reduce the amount of debt their balance sheets.

"Overall, an underlying weakness remains in private consumption, with households exercising greater than expected spending constraint," Treasury said.

The deficit was partly reversed by a stronger-than-expected performance of the government's investment portfolios, Treasury said.

New Zealand Super Fund gains were NZ$1.1 billion higher than expected during the four months to October,  while net gains made by the ACC fund were NZ$287 million above forecast. Overall, the Crown’s operating balance deficit was NZ$450 million higher than forecast, at NZ$2.2 billion, Treasury said.

Hard times ahead?

The government is facing calls for a tough budget in 2011 as its deficit blows out due to the lower-than-expected tax take. Prime Minister John Key has said the next budget will be focussed on "savings and investment" although there are so far not many indications on what the government will do to get its balance sheet back to surplus. There were suggestions last week that one measure could be to cut government Kiwisaver contributions, while Treasury has also done research on government spending caps.

This comes after Standard and Poor's last month warned the government that New Zealand needed to improve its savings record by placing its AA+ credit rating on negative outlook, suggesting a 30% chance of a downgrade in the next few years.

The government-appointed Savings Working Group is due to report back in the New Year on ways New Zealand can improve its savings performances. It has previously said the earliest gains would be made from Public Sector savings, although has warned that corrective measures were likely to be challenging.

The government last week came under further pressure from former National Party leader Don Brash, who is gaining traction with his calls for government to sell state owned assets and cut expenditure.

Household, business credit weak

Later on Monday Treasury released its November economic indicators paper, saying consumer spending rose before the October 1 GST increase, but then likely fell back once GST was hiked to 15% from 12.5%.

"Household credit growth was flat in October and house prices edged lower, suggesting that household spending remains conservative and that the economy will need to rely on other sources of expenditure to drive growth in the period ahead," Treasury said.

"Businesses remain reluctant to increase their exposure to debt, although there are encouraging signs of a lift in credit growth and rising business confidence points to a more vibrant economy over 2011," it said.

"Commodity exports are benefiting from rapid price growth and have helped push the merchandise trade surplus to its highest level in sixteen years. Maintaining that surplus will be challenging as there is limited capacity to increase agricultural volumes in the short-term and imports are likely to increase as consumption and investment strengthen over the year ahead.

"In addition, a number of risks to export volumes emerged over the month including drought and the kiwifruit vine disease, psa. Concerns about the sustainability of commodity prices also intensified over the month as China acted to curb rising inflation and the stability of the Euro area came under question." Treasury said.

Labour hits out, but with what?

Labour Finance spokesman David Cunliffe said he thought Bill English had got himself in a hole.

“He’s got himself in a hole because his solutions so far [for] New Zealand’s structural problems have been to trim around the edges of fiscal spending and undertake very little structural reform,” Cunliffe said.

That had caused confidence and domestic demand to soften, he said.

“That has fed through into an enormous falloff in corporate taxation, low levels of confidence and low levels of business investment and we look to be getting a vicious cycle of [a] spiralling downturn. These numbers are quite serious I think,” Cunliffe said.

“What they’ve got to do is discover a growth strategy, plus deal with some of the structural impediments in the economy,” he said.

“We need to get a sense of confidence back so that businesses can invest and hire people. That will mean lower unemployment cheques paid out by the government, more people in work, and we’ve got to start turning a downward spiral into an upward spiral.”

Wait till next year

However Cunliffe would not indicate any detailed policies from Labour, saying it would be “rolling out a full set of plans between now and the next election”.

“The first thing I’d say is it’s the Minister of Finance and the government that have the armies of bureaucrats at their disposal to come up with some answers,” Cunliffe said.

“They wanted to be in government and they’ve done nothing constructive with it. I don’t think it’s a fair question at one level to ask the opposition to shoulder a burden that the government has been unwilling or unable to manage itself,” he said.

Labour to look at tax policy?

Broadly speaking government needed “a combination of fiscal prudence, and very aggressive and progressive government action to get growth back into the economy,” Cunliffe said, pointing to his speech two weeks ago in which he said Labour was considering more Private Public Partnerships and private involvement in new subsidiaries of State Owned Enterprises.

“That means working with different regions and sectors to exploit growth opportunities, it means monetary reform, it means protecting land assets, and it means, probably some review of tax policy down the track,” he said.

English’s comments that government would look to review spending in the New Year meant another razor gang, Cunliffe said.

“The problem that he [English] has got is that is probably going to weaken household confidence further, as well as making a liar of the government saying ‘you can have everything that you had under Labour under us and a smiley face too’.

“He’s not going to be able to deliver all those expectations,” Cunliffe said.

More to come

Cunliffe said said there were a “whole bunch of things” that had not shown up in the government’s accounts yet.

“We’ve only got NZ$1.5 billion of Canterbury earthquake costs, we haven’t yet taken to book the full costs of the retail deposit guarantee scheme – you’ve got NZ$190 million extra on Equitable Finance announced in the last week,” Cunliffe said.

“A little dicki-bird tells me they [government] are in no hurry to finalise the receivership sale of South Canterbury Finance assets, because they don’t want to take that to book too soon,” he said.

“I’ll bet you a good bottle of wine that is going to be way higher than early estimates.

“I also am advised that the fiscal risks include as yet unquantified additional Treaty settlement costs, and additional unquantified ETS costs, all of which mean this picture could be a lot worse by election time,” CUnliffe said.

“Ironically, offsetting the worst news were strong gains from the New Zealand superannuation fund and ACC’s assets. Ironic because those were precisely the asset funds the government was keen to run down,” he said.

Here is the release from the New Zealand Treasury

The Financial Statements of the Government of New Zealand for the four months ended 31 October 2010 were released by the Treasury today.

The monthly financial statements are compared against monthly forecast tracks based on the 2010 Budget Economic and Fiscal Update published in May 2010.

The October results are consistent with the general picture outlined in the recently published financial statements for the first three months of the fiscal year.

Tax revenue in the four months to 31 October was $1.1 billion (6.3%) lower than forecast.

Corporate tax and goods and services tax (GST) were again the key contributors to the lower-than-forecast tax revenue result.

  • Corporate tax revenue was $784 million (28.0%) lower than forecast mostly due to a slower economic recovery than expected.
  • GST revenue also continues to be below forecast, by $190 million (4.2%), a significantly lower shortfall than recorded in the three months to 30 September.

Overall, an underlying weakness remains in private consumption, with households exercising greater than expected spending constraint.

The net expenses for settling claims for damage arising from the Canterbury earthquake were recorded by The Earthquake Commission (EQC) at an estimated net cost of $1.5 billion. The Government’s commitment to reimburse a proportion of the restoration costs of critical local government infrastructure, and certain other costs remains unquantified as reliable estimates of the amounts concerned have not yet been established.

The combined impact of all of these factors was that the deficit in the operating balance before gains and losses was $1.9 billion higher than expected at $4.4 billion.

This result was partly softened by gains made on investment portfolios. The NZS Fund gains were $1.1 billion higher than expected while net gains made by ACC were $287 million above forecast. Overall, the Crown’s operating balance deficit was $450 million higher than forecast, at $2.2 billion.

Lower-than-forecast tax receipts contributed to the residual cash deficit being $798 million higher than forecast at $7.4 billion. This variance flowed into debt indicators, with net debt being $1.0 billion higher than expected at $34.7 billion (18.4% of GDP).

Here is the release from Finance Minister Bill English:

Larger than forecast deficits in the Crown's financial statements reinforces the need for tight fiscal discipline alongside the Government's ongoing efforts to move resources to frontline services, Finance Minister Bill English says.

Lower than forecast tax revenue combined with the fiscal impact of the Canterbury earthquake have contributed to a $4.4 billion operating deficit before gains and losses in the four months to 30 October.

"The $1.1 billion lower-than-forecast tax take is largely the result of lower than expected business profits and lower GST as New Zealanders spend less and save more," Mr English says.

The drop in revenue is partly offset by $440 million lower than forecast government spending.

"While the Government's books have taken a hit from the effects of lower consumption and increased household saving, this trend creates a strong platform for faster growth in the medium and longer term as we rebalance the economy towards savings, productive investment and exports.

"However lower consumption, a weaker global outlook and the fiscal impacts of the Canterbury earthquake will mean slightly lower growth and slightly higher deficits in the short term before improvements show through.

"This reinforces the need for sound financial management and ongoing discipline in Government spending if we are to getback to surplus by 2016. That is why the Government is committed to spending restraint for the foreseeable future.

"In the New Year the Government will consider further decisions around how to increase efficiency in the public sector and how it manages some of its large and growing expenses.

"This will be assisted by report of the Welfare Working Group, the Government's review of spending on policy and the ongoing response to the report of the Housing Shareholders Advisory Group," Mr English says.

(Updates with Monthly economic indicators, comments from Labour's Cunliffe, statement from Bill English, monthly chart, background)

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32 Comments

We had the softening up process leading up to this not news and now we will get the latest spin from wgtn as to why this is not really bad news but in fact comes with a silver whatsit and we can expect recovery to grow into a beautiful thing very soon just as long as we all stay happy and believe the spin..............

Haarrrrrrrhahahah....English is to have a new year review of govt spending.....wonder why!

Whats the solution wolly? At least people have slowed down on the debt binge!

"In the New Year the Government will consider further decisions around how to increase efficiency in the public sector and how it manages some of its large and growing expenses," English said in a media release on Monday morning.

Er, why not now?

Because it's Christmas Alex and Billy Bob don't do scrooge impressions for live audiences....... besides which from their feedback the Cards of the people still got a way to go to max out and then he'll tell you it's good news......

Here's a small budget cut they could look at ....Stop free-schooling future public servants via the Military......if you paid for your Business Masters you'd be right pissed to know what the go is here.

Will the Goverment cut further ?? In a election year ?? Yeah Right !!

When a country cannot repay its debt, it has two choices :

1. default

2. devalue its currency.

What is the answer for New Zealand ?? 

one more Kin....we declare war on .........say .........Australia......we already have numbers on the ground......and when we lose ...they pick up the tab and we become their serfs.........oh wait...er ...I think that's already happening.

Although it will be unpleasant, but the Government has to get its spending under control. So too does local Government. There will have to be spending cuts, and in my view one of the first places to start is Kiwi saver. There is no justification in my view in paying almost every Kiwi saver account matching funds of up to $1040.00 a year on top of the initial $1000 when the account is first opened. This is in effect paying twice for people's retirement. Once when they are under 65, and again when they turn 65.

Interest rates must be brought back on to student loans. It's absurd that they are interest free while a student is still studying. A way must also be found to make Kiwi student loan bluggers who default on their loans by skipping overseas pay them back, or at least keep up with their repayments. Official travel papers e.g., passports should be withheld from those who have defaulted on their loans requiring them to come back to New Zealand to front to their responsibilities!

Here is a post Xmas headline the Govt./Market will pray for.....Consumer spending up in December and Retail in recovery.

Here's the reality........Personal debt crisis deepens as consumers throw caution to the wind in guilt driven spending spree.

Ain't nothing like a 5 to 14 year old to make you feel like you have failed them.

I still have difficulty in understanding why the assets of the Super scheme and the ACC seem to result inthese wildly variations.

Surely they should be recognised outside the annual counting.

Then you wouldnt have media outlets screaming headlines when there is a drop in unrealised capital value.

And Cullen went blindly ahead just before the previous downturn aided and abetted by the master analysts. Then the recovery of sorts.

However English cut off any further contributions just as that recovery began.

On a worldwide scale the reliance of public superannuation schemes to bank on appreciation in share values must contribute to the demand which increases price earnings through unjustified prices.

When the baby Boomers start to draw down these funds the potential for drift and loss in share values will become evident.

Sovereign funds are not immune from this contagion and we are late starters

All IMHO or am I wrong?

Hi BB3,

Treasury reports accounts with and without the fund performances.

OBEGAL is without, and we (and Treasury) lead with that because the other overall figure includes unrealised gains and losses of the funds.

Best to focus on OBEGAL because that indicates the nature of the government's underlying finances.

Just about to update with David Cunliffe's comments on the accounts.

Cheers

Alex

None of this was unexpected was it?..... tweak and fiddle never were going to work and now the big bad Mr Market will turn his attention to little old Noddy...deeply in debt....unable to pay the bills without borrowing 275 ooo ooo each week.....egad what will happen when rates rise as they must thanks to the money printing fraud at the Fed and ECB and BoE.

About the only positive is none of our politicians told Clinton the USA might have to use force against China..........bye Kevin.

Alex - it would be interesting to see how much of this is a structural deficit as opposed to a cyclical deficit, using a realistic, non-debt fueled growth rate for NZ going-forward.

I think we will see that the deficits are structural and that NZ is insolvent over the longer-term.

Unfortunately, given our divided electorate and the fact that the Govt's are not telling NZ'ers the truth about of state of affairs, we will ultimately face the "crisis-first" response, as we have seen in Europe.

What will be interesting is how the crisis unfolds. Given that a large % of the population is dependent on the Govt for benefits or employment, and the fact that those with transferrable skills can jump the Tasman, I am guessing we will see a desparate swing to the left and the confiscation of private property of the "rich". This will be countered by the Aussie's who will not want to see their banks take big hits and for instability of their neighbour. Ultimate solution will be for Aussie to step in and to take control of NZ's fiscal situation. We will then become a state of Australia. Like the Germans, they will impose some strict conditions on bailing us out.

Here's the latest Treasury working paper on structural deficits.

http://treasury.govt.nz/publications/research-policy/wp/2010/10-08/twp10...

Page 9 has the chart showing a structural budget deficit of about 4% of GDP.

cheers

Bernard

With  the return of Winston Peters , garnering 6 % support in a recent shonky poll , JK and Wild Bill are unlikely to alienate the electorate with unpalatable but much needed reform . Don't expect Nanny state to pull her horns in , she'll still remove 50 % of the nation's GDP for herself and her pet projects , bail-outs , chosen few .

Is it any wonder that the NZX is dying , when the government siphons off so much of the country's profits for it's own consumption . The guy from JB Were , Bernard Doyle , would be worth  a double-shot interview on this .

Personally GBH I think Winnie  the poo chucker would far better serve the N.Z. Public as a political commentator.........he has had full access to the Library of the spin and could decipher almost any gobbledegook our political brothers may wish to serve up........ a Nicky Hager deep throat if you will........but a better dresser than Columbo.

Yes I know the old dog knows his way around the traps but you can't spend your life waiting for someone to throw you a bone while your yap never stops with the Nationalist rhetoric..... while many of his policy agendas remain a romantic notion if you like dressing up SS style and goose finger pointing the culprits for what ails us....it remains that... a romantic notion....in our glorious multi-cultural society.........mwah..beg pardon..mwah

No I fear he should have spent more time tutoring Ron Marks the way of  The Bollocks to ensure a future for the party ......instead I suspect he sees that  the party's over when he says its over............now that's hardly visionary is it.

No GBH..... vote for me and I'll guarantee you ...nothing....save to say lining my pockets as fast and often as I can and getting my dick banged in one of the Beehives back doors once a week........................It's what they do to sort out the men from the boys round these parts.

Do you think it is all part of a cunning plan to get the IMF in to impose neo liberal capitalism on us all so that those big International Companies can come in and rape and pillage at their will?

YES

NO

Very plausible...

"Overall, an underlying weakness remains in private consumption, with households exercising greater than expected spending constraint," Treasury said.

Is this any surprise? The median pre tax income is $529/week, basic food and clothing, car rego, power are all up significantly, the house is worth less than the mortgage but it's all news to these guys that folk aren't out spending like drunken sailors. We have a deliberate policy of wage supression through immigration and a minimum unemployment target of 5%, the think tank reckons we need to remove the minimum wage so we can have higher wages. Do any of these people live in the real world?

Slightly off topic , but splendid to see that 3 of the Aussies have got centuries in the cricket test match against England : Bollinger 121 , Siddle 100 , Doherty 120 ! .......... And all three tons in the one innings .

Excellent to see the lads doing so well .

[ update : Typical English behaviour , to declare 650/5 , before a fourth Aussie , Harris (84) , could bring up his century . Spoil-sports ! ]

Doherty brought his up at a quick rate too! Only his second test but his average is right up there.

@ Patricia

No, its not the IMF, it's common sense: you can only spend as much as you earn. I don;t know why people can't crasp this simple concept. As long as people bury their heads in the sand and blame "neo-liberal capitalism" and vote for more government spending, we will march to bankrupting.

History is riddled by sovereign debt crisis, way before the IMF was even around. In the past governments went bankrupt because they spent to much on wars and palaces. Now they spend to much on bribing voters with other people's money!!

@ Kiwidave - agree with your comments around low wages. I also agree that immigration to fill low-skilled workers does not make sense. However, you also need to remove the subsidies for high birth rates, mainly in lower-social economic groups in NZ, as this creates an over-supply of workers and is financially, socially and environmentally unsustainable. We should be providing subsidies to limit birth rates. 

No GG, neo liberalism is a political concept wrapped up in economic jargon.    Yes we do need to cut our spending but it is on private consumption.  I just do so wish that people would stop labelling Government spending as the bogey man when it is private consumption and an economic policy which encourages it that needs to change

Have updated with comments from Labour Party Finance spokesman David Cunliffe.

Cheers

Alex

@ Patricia

The issue is TOTAL FOREIGN DEBT. Agree with you that private debt is the main issue. However, as the article notes, the private sector is deleveraging. However, the Govt is leveraging at a much faster rate. If you read the notes by S&P you will see that they have not downgraded NZ yet on the basis that Government debt is relatively low. With the Govt borrowing at such a high rate, they will soon lose confidence and those who lend us will take flight. It is all about confidence. We should be doing everything in our power to maintain the confidence. Noboby will thank the Govt when we get downgraded and mortgages shoot up to 15%+!!!

Updated with some comments from Treasury's economic indicators on weak household, business credit

Bernard - Thanks for the Treasury Paper on structural deficits. Useful.

Company tax receipts down on forecast - GST receipts down on forecast.

Perhaps the proletariat are taking a leaf from the capitalists and learning how to trade off the balance sheet?

:-)

 

 

 

 

 

Days to the General Election: 20
See Party Policies here. Party Lists here.