Treasury says budget deficit of NZ$1.063 bln in 7 mths to Jan was NZ$637 mln worse than forecast; sees underlying weakness in GST receipts

By Bernard Hickey

The Government's budget deficit outlook has worsened slightly because of weaker than expected GST and corporate tax receipts, but Treasury is hopeful most of the weakness is timing related and Finance Minister Bill English has reiterated his confidence the budget will return to surplus in the next financial year to June 30, 2015.

Treasury has reported the Government's Operating Balance before Gains and Losses (OBEGAL) was a deficit of NZ$1.063 billion in the seven months to the end of January, which was NZ$637 million worse than forecast in the Half Year Economic and Fiscal Update (HYEFU) in December.

Treasury said core tax revenues were NZ$892 million below forecast, but this was partly offset by core spending being NZ$138 million lower than forecast.

It said GST receipts were NZ$354 million lower than forecasts, with a third of that because of earthquake related refunds, which was likely to worsen further. About a third was likely to be due to timing differences, which should reverse out by the end of June, Treasury said.

"The remainder of the variance reflects underlying weakness in the tax type," Treasury said.

Corporate tax receipts were NZ$135 million below forecasts, due largely to some large taxpayers being part of tax pooling schemes. Treasury said it expected this variance to reverse out by June when they filed their final returns.

Income taxes from source were NZ$85 million below forecasts, which Treasury said was likely to continue, albeit to a lesser extent in the second half of the year as the economy strengthened.

A further NZ$155 million of the lower-than-expected tax receipts was due to tobacco excises being lower than forecast, with about NZ$80 million of this lower-than-expected figure likely to be permanent.

The majority (NZ$114 million) of the lower-than-expected Government spending was due to Treaty settlement expenses being NZ$114 million below forecast because of settlement delays.

Finance Minister Bill English said the Government remained on track for a surplus in the 2014/15 financial year, "but this is a challenging goal and we need to remain disciplined."

"The extent to which tax revenue is likely to remain below forecast will become clearer as officials work through forecasts for the Budget. Timing issues appear likely to see some of the current variation narrow by the end of the financial year," English said.

"The lower revenue is at odds with other macro-economic indicators that have been broadly in line with the Half-Year Update forecasts and, if anything, point to even stronger economic growth in the second half of the 2014 fiscal year," he said.

The bottom line Government surplus of NZ$3.4 billion was NZ$690 million better than forecast because continued strength in financial markets generated gains on financial instruments of NZ$2.8 billion, which was NZ$1.4 billion ahead of forecast.

Reaction

Labour Finance Spokesman David Parker said the result raised serious questions about National's management of the economy

“For the November figures Treasury said there were timing issues. They said the same for December. But the third time even Treasury admits it doesn’t know why the books are even more in the red. Once looks like misfortune, twice looks like carelessness. Three times sounds like mismanagement," Parker said.

“Either the much-hyped ‘rock star’ economy has already turned into a one-hit wonder or National isn’t as good at running the books as it claims to be," he said.

“If the economy is recovering the tax take should be increasing and the deficit reducing. The opposite is happening. Serious questions need to be asked of National’s economic credibility."

(Updated with comments from Bill English, detail, reaction from David Parker).