By Alex Tarrant
Finance Minister Bill English is sticking to a return to surplus track of 2014/15 after the government recorded a record NZ$18.4 billion operating deficit before gains and losses for the year to June 30, 2011.
Treasury today released the Crown’s financial statements for the year to June, which showed a blow-out in expenses due to the devastating earthquakes which have hit the Canterbury region since September 2010. Of the NZ$18.4 billion deficit, half (NZ$9.1 billion) was attributed to the earthquakes.
“This is an unusually large deficit, but it includes the significant costs of the Canterbury Earthquake Recovery Fund and the updated assessment of Earthquake Commission costs,” English said in a media statement.
“Setting aside the earthquakes, we’ve made good progress compared to estimates five months ago in the Budget. A combination of higher than forecast revenue and lower than forecast spending has reduced the underlying deficit by about NZ$2.8 billion,” English said.
“However this was more than overshadowed by the higher earthquake costs,” he said.
The operating deficit before gains and losses compared to a NZ$16.7 billion shortfall expected in the May 2011 Budget, with the jump due to a recent reassessment of quake damage caused in Christchurch carried out by the Earthquake Commission, which also announced today that levies would be increased threefold in a bid to recapitalise its natural disaster fund back to NZ$6 billion over 30 years.
Total Crown expenses in the year to June rose NZ$18.9 billion from the previous year to NZ$100.0 billion in the June 2011 year. Of the increase, NZ$13.6 billion was attributed to the earthquakes.
“EQC insurance expenses were NZ$11.7 billion higher than last year due to the Canterbury earthquakes and core Crown spending increased by NZ$1.9 billion due to earthquake-related expenditure,” Treasury said.
Total Crown revenue in the year to June was NZ$81.6 billion, up NZ$6.8 billion from the year before. Most of the rise (NZ$4.2 billion) was due to EQC insurance claims on its reinsurers due to the Canterbury earthquakes, Treasury said.
Core Crown tax revenue rose NZ$0.8 billion, or 1.6%, over the year to NZ$51.6 billion. This was the first annual rise in core Crown tax revenue in three years, Treasury said. Growth in tax had been diluted due to policy changes in Budget 2010. These changes had the impact of reducing taxes levied by NZ$2.7 billion, Treasury said.
“Salary and wages have increased during the year although the impact of personal income tax cuts have more than offset any increases in tax coming from source deductions,” Treasury said in the financial statements.
“Business profits (both corporate and individual) have also increased over the year but again the impact of policy changes through tax cuts have seen lower tax takes from corporate and ‘other individuals’ compared with a year earlier,” Treasury said.
“On 1 October 2010, the GST rate increased from 12.5% to 15%. In addition there was a small increase in consumption over the year resulting in an increase in GST revenue,” it said.
Super Fund helps
Meanwhile, a recovery in investment markets over the year saw the Crown make net gains of NZ$5 billion from its Superannuation and ACC investment funds.
Including these gains the government’s operating deficit was NZ$13.4 billion, compared to NZ$9.4 billion expected in Budget 2011.
The Crown’s net debt rose from NZ$26.7 billion to NZ$40.1 billion (20% of GDP) over the year, Treasury said. Gross debt stood at NZ$72.4 billion at June 30, slightly up from NZ$71.6 billion expected in Budget 2011.
The financial statements come ahead of the Pre-Election Fiscal and Economic Update, which will be released on October 25.
They also follow sovereign credit rating downgrades from Fitch Ratings and Standard & Poor’s from AA+ to AA two weeks ago, due mainly to New Zealand’s high external liabilities.
Sticking to surplus track
Speaking to media in Parliament on Tuesday afternoon, English said the government had booked future earthquake costs in the year’s accounts based on advice from government accountants.
“When we know what those future costs are, we have to book them in the budget," he said.
However there was some risk with additional future costs coming through from the earthquakes that could be higher than expected.
“Treasury have a job in the pre-election update of taking a guess at any future fiscal risks, and if they think there are significant risks there, then they’ll be laid out in the pre-election update," English said.
It was not hard to believe there were risks there, “and if they eventuate, we’ll cope with it.”
“Bearing in mind the accounts we’ve published today have demonstrated the capacity of the government to deal with one of the largest natural disasters in a developed country for a long time. We’ve absorbed that in our budget, and we have been able to establish a track to surplus, which we’re going to stick to. We’ve handled a big lump already. If there are a few more small lumps I think we can handle them,” English said.
Defends tax switch
Stripping out earthquake costs the accounts showed the underlying fiscal management was “pretty good”.
“It’s NZ$2.8 billion better than we budgeted back in 2010. We’ve controlled government expenditure better than expected, and tax revenue was a bit higher. So we’re pretty confident we can halve it in the current year,” English said.
The deficit would be halved again the following year before getting back to surplus in 2014/15.
“That’s the result of a longer-term view the government is taking, where we’re focussed on getting permanent and long-term changes in government spending rather than short-term savings. I think in the next two or three years we’ll get a payoff from that,” he said.
English defended the government’s tax switch in the 2010 Budget, after figures showed the switch had lowered the tax take. English said the switch would be revenue neutral over four years.
“The most important thing about the tax switch is the change in incentives. The short-term impact on the government budget, we took that into account. But in the long-term we’re trying to shift the incentives in the economy to favour savings and investment, and returns from working, and to penalise excessive consumption and property speculation," English said.
“We’re only half-way into the first year of the operation of that full tax package. We said the benefits would flow over three to five years, and I’m confident that they will."
Belt-tightening still to come; Public service watch out
There was a lot of belt-tightening still to come, following a zero budget this year, English said. The government has committed to increasing spending by no more than NZ$800 million in next year's budget.
“We’re only just three or four months into that year. There is plenty of belt-tightening to come over the next three or four years. Along with that we want to concentrate on getting better results. So we would expect that a lot of the work we’ve done in the last couple of years around law and order, and around welfare, will start having some fiscal payoff in the next few years,” English said.
The squeeze was coming harder on the public sector, as the number of public sector workers on the frontline increased, but back office staff were cut. English said he expected the numbers would continue to shrink because budgets were getting tight.
“We’ve got many competent professional public servants, and they’re all going through a process of rethinking what they do,” he said.
(Updates with video, comments on tax switch, belt-tightening)