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Tax take continues to fall short, pushing government finances to higher deficit

The New Zealand government's operating deficit was wider than expected in the first seven months of the 2014 financial year, with a smaller tax take than forecast and lower than anticipated tobacco excise duty.

The Crown's operating balance before gains and losses (obegal) was a deficit of $1.06 billion in the seven months ended Jan. 31, more than twice the size of the $426 million deficit predicted three months ago, in the Dec. 17 half-year economic and fiscal update.

However, the obegal is still tracking below the deficit of $2.51 billion recorded at the same time last year. Core tax revenue was 2.4 percent, or $876 million, below forecast at $34.98 billion.

"At this stage, it is difficult to determine how much of the lower than forecast tax is temporary versus permanent, but we expect this to become clearer over the next few months," the Treasury's acting chief government accountant Fergus Welsh said in a statement. "Timing issues are likely to see some of the current variance narrow by year end."

Finance Minister Bill English acknowledged the growing concern over the lower than expected tax take, which was occurring "despite stronger economic growth."

"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," said English.

The reduced tax-take was across the board with personal tax accrued 1.4 percent below forecast at $16.46 billion, corporate tax 4.9 percent short of expectations at $4.29 billion, other income tax such as resident withholding tax 1.2 percent below forecast at $1.13 billion, and goods and services tax accrued 3.7 percent below expectations at $9.2 billion.

Treasury officials said some of the lower tax receipts were due to a mismatch in timing between GST refunds and receipts relating to exports and the Canterbury rebuild, and tax revenue from some large corporate taxpayerss not yet visible to the Inland Revenue Department.

Tobacco excise was 11 percent below forecast at $987 million, adding to pressure on the Crown revenue, and the Treasury now expects about $80 million of that reduction to be permanent. The government hiked tobacco excise in the 2012 Budget, which was forecast to raise $1.4 billion over a four-year period, but was raised in part to reduce tobacco use and therefore should fall over time as smokers quit.

The government expects to post an obegal deficit of $2.3 billion in the current financial year ending June 30 before returning a surplus of $86 million the following year. Treasury officials are picking accelerating tax revenue growth as an expanding labour market provides more income tax, and as rising wages get caught in the fiscal drag of people entering a higher tax bracket.

Finance Minister Bill English said the government is still on track to meet its surplus in the 2015 financial year, but the tax take uncertainty underlined the importance of controlling government spending, even as the economy recovers.

The Crown's operating expenses were 0.3 percent, or $138 million, lower than forecast at $40.13 billion in the seven-month period, due to delays in finalising Treaty of Waitangi negotiations.

The core residual cash deficit was $4.11 billion, 27 percent below forecast, due to the lower than expected tax take and earlier personnel and operating payments across a number of government departments.

The Crown's net debt was a bigger than expected $59.9 billion, or 27.7 percent of gross domestic product, while gross debt was below forecast at $83.33 billion, or 38.6 percent of GDP.

The operating balance, which includes movements in the Crown's investment portfolios and actuarial adjustments, was a surplus of $3.37 billion, $629 million ahead of the December forecast, due to unrealised investment gains from the likes of the New Zealand Superannuation Fund. That compares with a surplus of $4.17 billion a year earlier.

(BusinessDesk)

Comments and questions
12

"Tobacco excise was 11 percent below forecast at $987 million"!!

WOW! Just think how much better off the Government books would be if cannabis leaf was on the same regulatory footing (education, taxation and laws) as Tobacco leaf and alcohol?

Then we would have the Cannabis leaf trade funding schools and hospitals instead of funding criminals and bleeding our police of time and resources.

Radical eh!

I don't think Governments should be in the business of legalizing drugs just for the purpose of increasing tax revenue.......

Nor should they be in the business of deciding which drugs people can take and not be criminals (alcohol, tobacco, paracetamol) and which they will become criminals through taking (cannabis, opiates etc).

That is their job, to Govern and the public get to protest work up support for their views and if need be vote at an election.

Great result for NZ Inc, less tax from smokers is almost certain to mean less smokers, and that will result in less drain on resources keeping them alive after cancer, emphysema, and many other bronchial conditions. Yes we do look after alcohol related illness, but several beers and/or wines a day are not going to cause the same damage as smokers and their exhaust fumes. Drinkers pass their waste out in a non polluting way (99.9% of the time)

Hi Chris,

Abolition leaves a vacuum that the crooks quickly and eagerly fill. Government is doing well with reducing the use of tobacco. It could do the same with cannabis leaf? Cut the crooks out as it is they, the crooks, who are pushing it, it is in their interests to do so.
Also you say, "less drain on resources keeping (people)" alive"!! I don't think Tony Ryall would agree with that. In fact if you use the figures the anti smoking brigade throw around, a good argument could be made for a, "free baccy for all over 60 policy"!! Only kidding :) Cheers

Smokers are not a drain on resources. Cigarettes are extremely highly taxed for that reason (apparently). Alcohol is extremely dangerous, in fact the most dangerous drug there is.....

Just think of how many billions the Government could have collected if Key had introduced a capital gains tax in Auckland 3 year's ago.

But of course, self interest comes into this as most politicians have made huge tax free capital gains on their rental houses in this time!!

Capital gains tax is highly overrated as a source of revenue. None would have been payable in the last three years unless and until rental houses, whether owned by politicians or others, were sold. That would have been only a small proportion of the total private rental housing stock. On the other hand the removal of depreciation allowances on the total private rental housing stock by the National government reaped close to a billion dollars more income tax, and will do so year after year without any private rental housing being sold.

Capital gains tax would be less painful than National's disallowing investors to claim depreciation. That was severe.

duh, how many rental property owners sold their rentals and moved on. None would be a pretty close estimate, and that is the sum total of the CGT that would be available. zip, nada, zero. The politics of envy, you need to take this up with someone who lives in an average street in an average suburb, perhaps David Cunliffe would be a good start.

With lower than forecasted tax income from personal and corporate tax contrary to the forecast by macro economic indicators, why is the reserve bank pegged to increase the OCR on Thursday to 2.75%?

Sounds counter productive to me.

Great news! .. people and businesses are keeping more of their earnings to do with as only they know best ...

No coincidence that the economy is starting to recover also.

It's not rocket science.