A slightly higher than expected tax take, and marginally lower than expected core expenses, meant the Government's operating deficit before unrealised investment gains in December was 2.8% smaller than expected, Treasury said today.
The Crown's financial statements for the six months to December 31 show its operating balance before gains and losses (OBEGAL) was a deficit of NZ$5.968 billion - 2.8% smaller than the expected NZ$6.137 billion in Treasury's December Half Year Economic and Fiscal Update.
"The financial statements show that in the first six months of the financial year, core Crown tax revenue was close to forecast at NZ$25.0 billion or 0.7% above forecast," Treasury said in a press release.
"Within this result, source deductions (PAYE) were NZ$271 million or 2.6% higher than forecast and GST revenue was NZ$125 million or 1.9% lower than forecast. With the complexity of forecasting the October tax changes, the recent volatility in labour market data and uncertainty whether subdued consumer spending is reflected in GST outturns, it is too early to predict whether the PAYE and GST variances will persist," it said.
"Core Crown expenses were 0.5% below forecast at NZ$32.9 billion, due to individually small variances across several departments."
The largest variance, in lower than expected core Crown expenses, related to the Ministry for the Environment which issued $61 million fewer NZ units under the Emissions Trading Scheme than forecast, Treasury said.
"This is expected to be a timing issue with no impact on the year end result," it said.
The Crown's operating balance deficit, inclusive of gains and losses, was significantly less than forecast, at just over NZ$1.3 billion, Treasury said.
"This was driven in part by the New Zealand Super Fund which recorded gains in its investment portfolio that were NZ$1.7 billion higher than forecast, while ACC recorded an actuarial gain on their outstanding claims liability of NZ$911 million, NZ$1.8 billion above its forecast actuarial loss.
"The residual cash deficit at NZ$13.2 billion was NZ$555 million higher than forecast mainly due to payments that occurred in late December which had not been anticipated to occur until January. As a result, this residual cash variance is expected to reverse in January," Treasury said.
Although the residual cash deficit was 4.4% higher than forecast, net debt was only 0.4% higher than expected as the increased cash deficit was partially offset by changes in the market value of the underlying financial assets and liabilities, Treasury said.
Net debt 20.7% of GDP
At 31 December, gross debt was NZ$62.1 billion (32.5% of GDP), NZ$1.8 billion higher than forecast across a number of debt instruments.
"This variance did not translate into a corresponding increase in net debt because there were similar increases in financial assets during the period. Net debt stood at NZ$39.5 billion (20.7% of GDP) at the end of December, very close to forecast," Treasury said.
The Government announced at the half year update in December it had increased the borrowing programme for the current year to NZ$13.5 billion from NZ$12.5 billion and forecast a gross increase in borrowing over the next three years by NZ$10.5 billion from its May 2010 forecast.
No provision for those remaining in deposit guarantee
Meanwhile, Treasury did not allocate a provision for any future losses from the six firms (now four after the amalgamation of Marac, Canterbury Building Society, and Southern Cross Building Society) still covered by the government's retail deposit guarantee, which runs until December 31 this year. They are Combined Building Society (the new entity after the amalgamation), Wairarapa Building Society, PGG Wrightson Finance, and Fisher & Paykel Finance. The entities have combined deposits of NZ$1.8 billion, Treasury said.
"The Crown assesses the risk of default by the remaining six entities participating in the extended scheme to be unlikely and therefore as at 31 December 2010 no provision is considered necessary in relation to the amount guaranteed by the Crown under the extended guarantee. While the provision represents a best estimate of the likely loss, a range of outcomes is possible under the scheme in terms of which entities may default and the eventual loss to the Crown following an event of default. This reflects the significant uncertainty as to the value that can be realised from an entity’s assets following an event of default," Treasury said.
Here are comments from Finance Minister Bill English on the accounts:
Government financial statements for the six months ending December 31, show the cash deficit heading towards a record $15.6 billion in the current financial year, Finance Minister Bill English says.
The statements show revenue and spending broadly in line with forecasts in the Half-Year Update.
“However with the cash deficit already sitting at a record $13.2 billion and set to rise to $15.6 billion by June 30 – adding to New Zealand's already large stock of foreign debt - there is no room for complacency," Mr English says.
"This Government has borrowed heavily to support the economy and jobs during the recession and the early stages of recovery, but that kind of borrowing cannot continue indefinitely.
“New Zealand as a whole needs to save more, spend less and reduce its heavy reliance on foreign debt – and the Government is a crucial player in this.
“By playing its part in lifting national savings, this Government will help to keep interest rates low and build faster, ongoing economic growth.
"We are committed to managing the Government’s finances responsibly on behalf of taxpayers and that is why we have outlined plans to reduce the rate of new spending and get back to budget surplus as soon as possible.
"You'll see more policies aimed at tilting the economy towards savings and investment in Budget 2011."
While the accounts were broadly in line with the Half-Year Update, tax revenue was still about $1.3 billion behind Budget 2010 forecasts.
"This result reflects the relatively flat economy in the latter part of 2010 and reinforces the need for sound fiscal management," Mr English says.
(Update adds English comments, charts, comment on deposit guarantee)