The govenment's operating deficit before gains and lossses in the eight months to February was 23% worse than forecast as Treasury booked an estimated net NZ$1.5 billion of costs to EQC due to the February 22 earthquake.
The government's operating balance before gains and losses (OBEGAL) was a deficit of NZ$9.187 billion for the eight months, worse than December's forecast by NZ$1.693 billion, Treasury said today.
Finance Minister Bill English has warned the government's deficit could hit NZ$16 billion in the current year, which ends at June 31, due to costs arising from the quake and a weaker economy in the second half of 2010.
"Due to the earthquake and other factors, this year’s operating deficit before gains and losses could be more than 8%, or more than NZ$16 billion – up from the NZ$11.1 billion forecast in the December update," English said in a speech two weeks ago.
Here is the release from Treasury:
The 22 February earthquake in Christchurch occurred just six days before month-end. As such these financial statements do not include the full costs of the earthquake. However, they do include an estimate of the Earthquake Commission’s (EQC’s) net cost of $1.5 billion which is the main reason for the operating balance before gains and losses deficit exceeding forecast by $1.7 billion. Additional earthquake related costs will be included in coming months when they can be reliably quantified and as subsequent policy decisions regarding earthquake recovery are made.
Core Crown revenue in the eight month period stood at $36.6 billion, 1.7% lower than forecast in part due to lower than expected interest and dividend income. Core Crown tax revenue was very close to forecast overall, with source deductions above forecast while corporate and GST were below forecast. In addition to the impact the Christchurch earthquakes will have on New Zealand’s economic growth and the government’s tax take, global events such as Japan’s earthquake and tsunami and unrest in the Middle East and North Africa pose a negative risk to global economic growth, and hence also pose a negative risk to New Zealand’s economy and tax revenue.
Core Crown expenses in the eight month period stood at $44.3 billion, 0.6% lower than forecast. This was mainly due to underspends of $574 million across a number of departments offset by a $331 million revision in the estimate of recoveries relating to the deposit guarantee scheme which was not forecast.
EQC’s booking of the estimated net costs from the 22 February quake has increased the operating balance deficit by $1.5 billion, however, the operating balance was boosted by unforecast gains of $5.2 billion. Of these gains, $3.2 billion came from equity investments in the NZS Fund and ACC and $2.0 billion were actuarial gains on ACC and GSF liabilities.
Net debt (at $37.6 billion or 19.3% of GDP) was $489 million lower than forecast. With the core Crown residual cash deficit close to forecast at $10.8 billion (1.1 % lower than forecast) most of this variance related to issues of circulating currency which was $276 million higher than forecast.
Gross debt stood at $63.4 billion (32.6% of GDP), which was $14.0 billion higher than the same time last year. As a result of the higher debt position, finance costs for the eight months ended 28 February 2011 were $1.9 billion compared with $1.5 billion in the same period last year.
Here is the reaction from English:
A significant impact from the second Canterbury earthquake and revisions to expected Crown recoveries under the Retail Deposit Guarantee Scheme are reflected in the Government’s accounts for the eight months to February.
“The accounts do not include the full costs of the earthquake,” Finance Minister Bill English says. “But they do include an estimate of the Earthquake Commission’s net cost of $1.5 billion.
“This is the main reason for the operating deficit before gains and losses coming in $1.7 billion higher than forecast at $9.2 billion for the eight months. Additional earthquake-related costs will be included in coming months when they can be quantified and as further decisions are made about the earthquake recovery.”
The latest accounts also include a $331 million increase in the Government’s expected loss from the Retail Deposit Guarantee Scheme, which covered eligible depositors in failed financial institutions.
“Most of this is attributable to a reduction in expected related party loan recoveries from the receivership of South Canterbury Finance,” Mr English says. “The receiver has provided updated information on South Canterbury’s lending business not available previously.
“In addition, the expected effect of the latest Canterbury earthquake has been factored into likely recoveries.
"Overall, we now expect a net loss from the Retail Deposit Guarantee Scheme of around $1.2 billion, compared with earlier estimates of around $900 million."
Mr English says these significant extra one-off costs would add to what was already shaping as a large deficit in the current financial year.
“The deficit forecasts will be updated in the Budget on 19 May. They will reinforce the need for the Government to carefully consider its spending priorities and set a credible path back to budget surplus. Only then can we begin repaying our debt and building a buffer against the next economic shock.
“We will do that while we set about to rebuild Christchurch. As I've previously said, the earthquake will have a significant impact on the Government’s finances and the wider New Zealand economy for years to come.
"It's therefore more important than ever that we stick to our broader economic programme to reduce New Zealand’s vulnerability to foreign lenders, get the Government’s finances in order and build faster growth based on higher national savings and exports.”
On a positive note, the operating balance after gains and losses was $2.5 billion in the eight months to February – about $3.5 billion better than forecast. This reflected strong investment gains by the New Zealand Superannuation Fund and ACC, along with actuarial gains on ACC and Government Superannuation Fund liabilities.
And here is the reaction from Labour Finance spokesman David Cunliffe:
Labour’s Finance spokesperson David Cunliffe says the government accounts released today make it even clearer that National will use the economic impact of the Christchurch earthquakes to justify savage cuts to public spending in this year’s budget.
“With the Earthquake Commission estimating the net cost of the quake at $1.5 billion, National believes it has found its excuse to further its own ideological priorities, and produce a zero budget that dramatically slashes services for low to middle-income Kiwis,” David Cunliffe said.
“All that will do is to drive New Zealand even deeper into recession.
“Labour recognises the financial impact of the quake, but we need a balanced package in response,” David Cunliffe said.
“We need to borrow to smooth the cost over the time it takes to complete the recovery, we need to reprioritise projects such as the holiday highway north of Puhoi, we need to back off some of the tax cuts to wealthy Kiwis who didn’t need them in the first place, and we need a real plan for growing the economy and jobs.
“The Government has had no such plan for the past two-and-a-half years and is no closer to developing one now,” David Cunliffe said.
“Sadly, the New Zealand economy is going nowhere other than backward under this Government. The economy was significantly weaker than expected just two months ago --- before the earthquake. Two-thirds of the expected $15 billion loss of production over the next four years is due to the Government's mismanagement of the economy:
“John Key promised us most Kiwis would be better off under National. What he should have said is that wealthy Kiwis will be better off, because low and middle-income Kiwis are struggling.
“The real irony about National’s mismanagement of the New Zealand economy is that we would be in even worse shape if it wasn’t for the strong financial gains from the Super Fund and ACC, the very institutions that National still apparently believes it is smart to cripple,” David Cunliffe said.
(Updates with Cunliffe comment, English comment, chart, Treasury release)