Govt tax take in nine months to March NZ$1.6 bln lower than pre-election forecast, but Treasury sees boost over next quarter

By Alex Tarrant

The government is defending its 2010 tax switch after Treasury figures released this morning showed the tax take in the nine months to March was NZ$1.57 billion, or 3.8%, worse than expected in October's pre-election update (PREFU).

The Opposition Labour and Green Parties attacked the government's handling of the economy following the figures. Green Party co-leader Russel Norman said the tax switch had crashed the revenue side of the government's books, while Labour's economic spokesman David Parker called for policies to focus more on growth.

Prime Minister John Key said New Zealanders were choosing to save more of their disposable income rather than spend it on goods and services with a higher rate of GST on them. Finance Minister Bill English said people had been more cautious with their spending than expected.

That behavioural switch was now being incorporated into Treasury's forecasts, English said.

Rising costs, delays

Higher-than-expected earthquake costs, with the government having to pay out GST refunds on insurance payments, timing issues with corporate tax payments, a sluggish labour market recovery, and lower-than-expected spending all contributed to the 3.8% deterioration in the tax take from forecast.

That was out from a negative variance of 2.3% in the eight months to February.

But Treasury expects the 3.8% gap will decrease over the last three months of the financial year, to close by NZ$700 million by the end of June. That means the tax take should be about NZ$900 million worse at June 30 than expected in the October 2011 PREFU forecasts.

Treasury said all but NZ$100 million of lower-than-expected government revenue - including tax and other revenue - was mitigated by lower government spending over the nine months to June.

Despite this, the Crown's operating deficit before investment gains and losses (OBEGAL) was NZ$800 million, or 14.7%, worse than forecast in PREFU. This was primarily due to a net increase in expected earthquake costs to the Crown of NZ$500 million over the year so far.

Zero Budget, falling forecasts

Finance Minister Bill English is set to deliver another zero Budget on May 24 due to the weaker than expected tax take, rising earthquake costs and a weak global economy. He had been set to increase spending by NZ$800 million at the Budget.

The government has been warning since January this year that its books were in a worse position than forecast in the October pre-election economic and fiscal update. In January, Prime Minister Key said PREFU's expected NZ$1.45 billion 2014/15 surplus had fallen to the NZ$300-500 million range.

He said if the deteriorating situation in Europe led to a sharp contraction in demand in the New Zealand economy, the government would consider revising its policy to hit surplus that year.

In February, Treasury's Budget Policy Statement confirmed an expected surplus of NZ$370 million in 2014/15. In those same forecasts, Treasury said the government's expected operating deficit before gains and losses in this current year would be NZ$12.1 billion rather than the NZ$10.8 billion deficit forecast in PREFU).

And by late April that surplus had turned into a NZ$640 million deficit forecast for 2014/15. Finance Minister Bill English said it would be an achievement if the government got "near surplus" in 2014/15.

Despite the now-expected deficit in 2014/15, English and Key have said Budget 2012 forecasts would show a return to surplus in 2014/15 as it squeezed spending further and broadened the tax base.

Revenue down

"Core Crown tax revenue was NZ$1.57 billion (3.8%) lower than forecast at PREFU with the gap in revenue having widened significantly in the month of March," Treasury said in the Crown's accounts for the nine months to the end of March.

Treasury said its assessment was this gap would narrow by approximately NZ$700 million before the end of the financial year because: 

1) While the economy was generally weaker than expected to 31 March, stronger performance by some corporate taxpayers has also been observed during the reporting period. Consequently, a boost to tax revenue is expected to make up approximately NZ$400 million of lost ground in the final quarter of the financial year; and

2) The year-to-date March results include about NZ$300 million of timing differences (NZ$200 million in GST and NZ$100 million in corporate tax) that are mostly expected to reverse before 30 June.

The three main revenue tax-types continued to be below forecast. The specific drivers were: 

• Corporate tax was NZ$659 million below forecast in the period and the Treasury anticipates a significant portion of this variance should clear by year end. 
• GST was NZ$569 million below forecast mainly due to earthquake-related insurance refunds being above forecast, although the Treasury anticipates a temporary component of approximately NZ$200 million of this will reverse before the end of the fiscal year. 
• Source deductions were NZ$236 million below forecast as the labour market and employment and wage growth have been weaker than forecast in the October 2011 PREFU. 

Total Core Crown revenue over the nine months to March, which incorporates tax and other revenue, was NZ$1.83 billion, or 4%, worse than forecast, Treasury said.

Offsetting the tax revenue result, core Crown expenditure was NZ$1.75 billion (3.3%) lower than forecast.

"As reported last month, much of this difference was linked to associated revenue variances, or was primarily the result of delays in expenditure," Treasury said.

"The operating balance before gains and losses (OBEGAL) deficit for the nine months to 31 March was NZ$800 million higher than forecast at NZ$6.13 billion. With lower-than-forecast core Crown expenditure offsetting all but NZ$100 million of the shortfall in core Crown revenue, the remainder of the deficit variance was primarily due to an increase in estimated earthquake costs, net of reinsurance, of approximately NZ$500 million, much of which related to the 23 December 2011 earthquake," Treasury said.

"The  residual cash deficit and net debt positions were respectively NZ$410 million and NZ$544 million lower than expected last October. With expenditure and revenue having had a similar impact on the Crown’s cash position, the variances were largely attributable to delays in capital spending," Treasury said.

At 31 March, net debt stood at NZ$50.06 billion (24.5% of GDP) and gross debt stood at NZ$75.93 billion (37.1% of GDP).

Difficult year

Finance Minister Bill English said English said it had been a difficult year, with the blow-out in expected earthquake costs from the December 23, 2011 earthquake.

“But otherwise, spending’s reasonably well controlled, and revenue is somewhere near where we expect. This is part of the longer time it’s taking for the economy to pick up, and for the government’s books to get back in order," he told media in Parliament Buildings on Tuesday morning.

On reaching a surplus in the 2014/15 year, English said the month to month accounts did not make much difference to that track.

“The important thing for getting back to surplus is to have fundamentally a more competitive economy. It’s important to keep that in mind. Containing government spending matters, and we’re focussed very much on the effectiveness of the spending. But in the long-run, we need a more productive, competitive economy," English said.

That meant changes the government was making to legislation and regulations like Building Act and Resource Management Act, and increasing oil and gas exploration, were all important.

“It’s been just as challenging for government as it’s been for businesses and households. It would be easier, certainly, if the economy was picking up faster, or the global economy was in better shape. But it isn’t," English said.

The government had shown itself to be “pretty resilient” to the sluggish recovery.

“What’s actually happened is tax revenue’s been a bit lower, and there’s been some extra costs from the earthquakes. But essentially spending has been under control for a couple of years. I think that’s a tribute to the efforts made in the public service," English said.

“I’m confident that they’re getting the right attitudes, the right kind of determination, that will help us get to surplus in 2014/15,” he said.

GST revenues were largely down due GST refunds made by the government on insurance payouts.

“So it indicates substantial insurance payouts are being made. That’s sitting in bank accounts – the government’s had to pay the GST refunds. When that money is spent on rebuilding, then we’ll get the GST back. But that’s just going to take some time,” English said.

People were being cautious with their spending, and spending growth was a lot less than three or four years ago.

“But the forecasts have incorporated that now. The whole system has adjusted to higher savings rates, because people are saving more; more careful spending; lower inflation. All of those things make tax revenue lower than it used to be," he said.

'Tax switch was neutral'

Prime Minister John Key defended the government's 2010 tax switch, telling media people were choosing to save more of their disposable income rather than spending it on goods and services with higher GST on them.

"If you look at what’s driving that lower tax revenue, the advice from the IRD and Treasury is that it’s some timing issues. So it’s broadly GST revenue down, as New Zealanders have been more conservative in their spending as they get their books back in order. I think they’re following the same pathway that the government is," Key told media in Parliament Buildings.

Lower company tax receipts were thought to be timing issues.

“We are interestingly enough seeing a bit of a pick up in tax revenue in a few other areas, so that’s quite good,” Key said.

Advice from Treasury was the government was still on track for the 2010 tax switch to be fiscally neutral.

When the government made the changes, which included cutting personal and company tax rates, raising GST, and removing depreciation allowances, it forecast a negative revenue effect in the first three years would turn positive in the 2013/14 year.

Over those four years the switch would mean revenue would be NZ$415 million lower than if the changes had not been made, but then would be positive in the years following that – hence government saying the switch would be ‘broadly’ fiscally neutral’. See: Another day in Parliament, another couple of politicians using selective numbers to support their arguments on tax figures.

Key said there were different things happening in the economy at the moment than were expected.

“So ultimately part of what we did, actually, in terms of the GST/personal tax switch was, try and advocate for people to have better choices: More disposable income to make a choice about whether they consume or save," he said.

“At the moment, they’re taking the very sensible option of saving.”

'Rubbish'

Labour Party finance spokesman David Parker said the government had failed to help the economy grow.

“It’s ‘nek minnit’ economic management. Every time the government updates its forecasts it promises jam tomorrow. Nek minnit, it produces the actual results, and they look worse. It’s the performance, not the forecasting that’s the problem,” Parker said. 

“National has wasted money on MFAT consultancy, commissions for asset sales and a motorway to Puhoi. None of those projects will lead to improvements to wages or the economy. The books will limp back to surplus in two years, but the economy won’t grow and deliver better incomes because selling assets, selling farmland and selling legislation is not a growth strategy," he said.

“To grow our economy we need to keep our assets, invest in innovation and the world’s best educational achievement, adopt export and job--friendly exchange and interest rate settings, pro-growth tax reform, and wealth-building savings policy."

While Labour's 2011 election policies are all up for review, leader David Shearer has indicated the party will keep its capital gains tax policy, the policy to raise the Super age to 67 between 2020 and 2032, and Labour's monetary policy policy.

He has indicated the party is likely to drop its GST off fresh fruit and vegetables policy and its call for the first NZ$5,000 of income to be tax-free. Labour would follow National and not resume contributions to the Super Fund until the government could afford to do so, Shearer said last week.

See all the policies Labour contested the 2011 election on here.

Green Party co-leader Russel Norman said the government's 2010 tax package had driven the books further into the red.

“The National Government has crashed the revenue side of the Budget, and it’s largely a result of their poor fiscal management. National’s 2010 tax cut package has come with a high fiscal price tag, throwing the Government’s books into the red. This revenue crisis is of their own making," Norman said.

“The National Government is failing the basic economic task of fiscal prudence, ensuring there is enough revenue to cover Government expenditure,” he said.

Tax revenues had been hit heavily due to the Government's tax policy changes, weak economic activity, and on-going earthquake-related costs.

“The Government's signature economic policy – its 2010 tax switch – has done nothing to boost economic activity; it's simply left a NZ$1.1 billion hole in their books. The tax shift isn't delivering the kind of resilient economy they'd promised. The evidence for this is sharply declining tax revenues from businesses, GST, and workers,” Norman said.

“The Green Party has set out a clear alternative plan to get the Government's books back into surplus through a mix of reprioritised spending and new revenue streams, like an earthquake levy. John Key's dismissal of a temporary earthquake levy has left him with few options when it comes to funding the rising and still uncertain cost of the Canterbury rebuild," he said.

“We can manage the government's books in a fiscally responsible way without having to sell valuable assets or raise debt.”