Govt operating deficit before gains and losses in yr to November 6% worse than PREFU forecast due to lower tax take, Treasury says

A lower than expected tax take in the five months to November means the government's finances are in a worse position than expected in Treasury's pre election forecast, figures show a day after Prime Minister John Key warned of a lower surplus and noted the possibility of delaying the government's return to the black.

The Crown's operating balance before gains and losses (OBEGAL) was a deficit of NZ$4.477 billion at November 30, NZ$252 million, or 6%, worse than forecast in the pre election fiscal update (PREFU), monthly figures released by Treasury show.

This was primarily due to lower than forecast core Crown tax revenue, which at NZ$21.4 billion, came in NZ$498 million, or 2.3%, worse than expected in the PREFU.

Treasury warned of downside risks to tax revenue for the current financial year to June 30. Forecasts in the PREFU expect a NZ$10.8 billion deficit for the year, although today's warning on tax revenue could mean a new set of Treasury projections to be released on February 16 will show a bigger deficit for the year.

Prime Minister John Key yesterday said new Treasury projections showed the government would return to a NZ$300-500 million surplus in the 2014/15 year. This was down from a NZ$1.45 billion surplus expected in the PREFU.

The government may reconsider its surplus track if global events take a big turn for the worse, Key added.

'Won't be easy getting there by 2014/15'

Following the release from Treasury, Finance Minister Bill English said the figures reinforced the need for ongoing spending restraint and responsible fiscal management.

“The Government is committed to reducing its deficits over the next two years and returning to surplus in 2014/15. This won’t be easy, particularly with ongoing debt problems in Europe reducing forecasts for global growth," English said in an emailed statement.

“However, returning to surplus and repaying debt are among the most important things the Government can do to ensure New Zealand can withstand future shocks and build a more competitive economy based on exports and new jobs," English said.

Costs from the latest Canterbury earthquake on 23 December would be included in the Crown accounts when the Earthquake Commission had measured the financial impact.

The Budget Policy Statement, to be issued on 16 February, will confirm the Government remains on track to post a budget surplus in 2014/15, English said.

“Not surprisingly, given the more subdued global economic outlook, that surplus now looks like being smaller than the NZ$1.5 billion forecast in the pre-election update – at somewhere between NZ$300 million and NZ$500 million," he said.

“As the Prime Minister said yesterday, returning to surplus is important to our plan to limit debt and take pressure off interest rates and the exchange rate."

Tax take down

Treasury said the main tax variances were as follows:

• source deductions were NZ$394 million (4.4%) below forecast,
• GST revenue was NZ$309 million (5.1%) below forecast, and
• corporate tax was NZ$210 million (7.1%) above forecast.

The source deductions and GST revenue variances were mainly timing-related and are expected to reverse; however there was a risk that some of the GST variance may not reverse by year's end.

"While corporate tax revenue was above forecast, which appears to be due to higher than expected corporate profitability, lower third-quarter GDP compared to the PREFU forecast suggests that corporate profitability may be lower than forecast by year end. So overall, there is a downside risk to tax revenue for the current year," Treasury said.

The operating balance (inclusive of gains and losses) deficit at NZ$9.92 billion was NZ$2.83 billion (39.9%) higher than forecast due to actuarial losses on the Government Superannuation Fund (NZ$1.04 billion) and ACC liabilities (NZ$898 million), as well as higher than forecast investment losses (NZ$588 million).

"Gross debt at NZ$72.35 billion (35.6% of GDP) was NZ$888 million lower than forecast due to lower than expected levels of collateral deposits (NZ$1.78 billion) at balance date, partly offset by higher than expected issuances of Treasury Bills (NZ$654 million) due to pre-funding by the NZ Debt Management Office to take advantage of favourable market conditions. As these differences from forecast also have a corresponding impact on the Crown’s financial asset holdings, net debt came in close to forecast at $NZ47.63 billion (23.4% of GDP)," Treasury said.

(Updtates with comments from Finance Minister English)