Tax take up, spending down for smaller than forecast 9-month deficit

New Zealand recorded a smaller-than-expected budget deficit in the first nine months of the fiscal year, as government spending came in lower than expected, and the tax take was higher, although some of that is seen reversing by year-end.

The operating balance before gains and losses (Obegal) was a deficit of $358 million in the nine months ended March 31, compared to the forecast in the half year economic and fiscal update in December of a $1.2 billion deficit. Core Crown tax revenue of $48.2 billion was 1.8% above forecast, although the Treasury expects about half that variance to reverse by June 30, while core Crown expenses were 0.2% below estimate at $53.7 billion.

Finance Minister Bill English on May 1 warned that achieving a budget surplus next year is becoming more difficult, with the Treasury forecasting tax revenue will be $4.5 billion lower over the next four years than was expected a year ago. In his traditional pre-budget speech, English said the May 21 budget would show how very low inflation would eat into the tax take because the dollar value of all economic activity rises more slowly than when inflation is higher, meaning less total available taxable revenues.

Since then, prices of dairy products have extended their decline, prompting analysts to trim their forecasts for Fonterra Cooperative Group's 2016 payout after the dairy company slashed its payout for the current season to $4.50 a kilogram of milk solids, from a previous forecast of $4.70/kgMS. The continued decline has also stoked speculation the Treasury will pull back its forecasts for economic growth.

"We're getting on top of spending but lower inflation, while good for households and businesses, means the Treasury's budget forecasts will show a small deficit for 2014/15," Mr English said.

The nine-month statements today show gross debt was $88.2 billion, or 37.1% of gross domestic product, which is bigger than the $83.7 billion, or 35.2% of GDP projected in the Half Year Economic and Fiscal Update. Net debt was $63 billion, or 26.5% of GDP, under-shooting the projection of $64.8 billion, or 27.2%.

Much of the higher tax take was driven by corporate tax being $545 million, or 9%, above forecast. Of that, some $300 million was probably related to timing of payments and would reverse out through the June quarter, the Treasury said. Other individuals' tax was $357 million, or 10.4% above forecast, while the excise paid on tobacco resulted in Customs and excise duties being $129 million, or 4% above expectations.

Against that, goods and services tax was $201 million, or 1.6% below forecast, mainly due to weaker than expected growth in consumption and earthquake-related refunds that were about $60 million larger than forecast.

Net losses on non-financial instruments were $4.6 billion higher than forecast, mainly reflecting actuarial losses on liabilities of Accident Compensation Corp and the Government Superannuation Fund. This was partly offset by net gains on financial instruments that were $1.5 billion better than projected.

Total Crown assets were valued at $264.4 billion as at March 31, while liabilities were $184.9 billion.

(BusinessDesk)