Recession, tax disputes close current account deficit

You can’t beat the bottom of a recession to help boost the current account figures.

As expected, this morning’s release of the country’s current account figures shows a marked improvement. The deficit has shrunk to 3.1% for the year – better than the average forecast by market economists of 3.5% of GDP.

A year ago the deficit was 8.4% of GDP. In dollar terms, that is a drop from $15.4 billion a year ago to $5.7 billion.

On a quarterly basis, the figure is in surplus – by $340 million – for the first time since December 1988.

Several things are driving this.

One is the recession – the slump is partly due to a lower demand for imports, which fell in value by $609 million. The other factor is the high exchange rate, which means what is being imported is much cheaper.

Import volumes actually rose slightly, mostly in the intermediate goods area of inputs for businesses.

Export prices fell $665 million, with all except petroleum products recording falls in prices. Dairy produce recorded a 10.4% drop in prices, despite volumes reaching their highest level since September 1990.

The other factors are on the investment income part of the account.

The largest factor – and it is a huge one – is the tax disputes overseas-owned banks are having with Inland Revenue. Four of those banks have lost cases with the taxman (though they are appealing). In the interim, they brought $1.366 billion to account during the quarter to cover those tax transactions.

A further $800 million to cover the tax debt was brought into the accounts in the last quarter.

If those tax transactions are removed, profits earned by foreign-owned companies in New Zealand rose  $230 million between the June and September quarters.

They would also make the overall annual current account figure less favourable – 4.2% of GDP, or $7.8 billion,