By Bernard Hickey
Treasury has just offered a glimmer of relief for the Government as it grapples with the challenge of low inflation and a slumping dairy price in its efforts to reach a budget surplus in the current financial year.
Treasury has reported its Budget Operating Balance before Gains and Losses (OBEGAL) was slightly better than forecast in its August Pre-Election Fiscal Update (PREFU) because of stronger than expected income and corporate tax receipts.
Treasury released its financial statements for the three months to September, which showed a deficit of NZ$725 million for the three months, which was NZ$79 million worse than the last full forecast issued in the May Budget.
But Treasury said the result was slightly better than the forecast in its PREFU issued in August, which was for a full year surplus of NZ$297 million in 2014/15.
"When compared against the PREFU, core Crown tax revenue was NZ$287 million higher than forecast," Treasury said.
"As the lower domestic consumption affecting GST was already factored into the PREFU tax forecasts, the positive variance reflected the strength within the corporate and other individuals taxes," it said.
"As a result, the OBEGAL deficit was slightly smaller at 30 September than was expected in PREFU."
Total core Government revenue of NZ$15.547 billion was NZ$1.2 billion or 8.3% higher than the same period a year ago as economic and wages growth allied with unchanged tax thresholds boosted income and corporate tax receipts.
"For the latest three month period the result was NZ$73 million more than forecast with both other individuals and corporate tax being more than expected ($79 million and $135 million respectively)," Treasury said.
"Offsetting these positive variances, GST was less than forecast by $175 million, reflecting lower than forecast domestic consumption growth," it said.
Government expenses in the first three months of the year were NZ$123 million or 0.7% higher than forecast, largely because of the Government's signing of a NZ$103 million deed of indemnity to bail out Solid Energy.
Surplus target on track?
The figures are expected to reassure the Government somewhat after signs in recent weeks that very low nominal inflation and the prospects for a near 50% fall in the dairy payout could endanger the Government's target of achieving an OBEGAL surplus in 2014/15 that would rise slightly in 2015/16.
Previous Treasury reports this year have consistently shown weaker than forecast GST receipts and some softness in corporate receipts, albeit with tight control on spending.
Treasury is expected to release its Half Yearly Economic and Fiscal Update (HYEFU) on December 16.
English says Budget surplus still challenging
Finance Minister Bill English said the fiscal position remained challenging.
"The accounts illustrate what I've been saying recently," English said
"The economy is growing solidly and this is supporting more jobs, allowing wages to rise faster than inflation and keeping interest rates lower for longer. But we have an unusual situation with the nominal economy - which is what drives revenue to the Government - increasing more slowly. This is partly because falling dairy prices are impacting on nominal growth," he said.
"While it's good for New Zealand families to have low interest rates, low inflation and less debt-driven consumption, it makes the Government's fiscal position more challenging. These accounts reflect only the first three months of the financial year, so uncertainty remains regarding the outlook for tax revenue for the rest of the financial year."
(Updated with chart below, English's comments)
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1 Comments
Is Bill English being misled by those around him?
As I see it the government is doing its best to achieve more with the money it spends. It is also doing what it can to identify and remove bottlenecks and general stupidity in central and local government. These are excellent things to get on with. This fits with the idea that continuous social reform is much better than periodic revolution.
I am not, however, convinced by the desire for a balanced budget as a worthy goal. It depends on whether you issue your own currency or not. For us citizens it is generally a good idea. For those countries who foolishly use a currency they do not issue (yes, I mean the Euro countries other than Germany) then its a very good idea (or else you become a de facto colony as we have seen). The reason is debts. Modern money is issued by the state and banks are licensed to create new lending (subject to a few not exactly onerous conditions). Much of the time banks lend freely to anyone with a job and we borrow more and more in order to outbid the other fellow for the bigger house we can now afford. Whilst banks are increasing lending at a good clip it may make sense for the government to run a surplus in order to dampen the excitement a bit.
The danger arises when the banks stop increasing lending in a mad orgy of bank salary generation. This is where Michael Cullen stuffed up. He didn't see it coming. He probably listened to the rubbish advice from the IMF who also didn't see it coming rather than the dire warnings from the Bank of International Settlements who did. Anyway, there comes a time when bank lending stops increasing exponentially and the wheels fall off. Happens every five or ten years like clockwork. Is that starting to happen now?
It seems to me we need a fiscal mechanism that is variable, like the Reserve Bank has an interest rate that is variable. So we can temporarily tighten the screws by putting up taxes, and temporarily relax taxes when trouble hits. We don't seem to have this. We have a silly tax system that aims at a steady state that never exists. Darwin emphasised that it is the adaptable that survive. We need a flexible tax system so the government of the day can just say " times are hard, we'll have a tax holiday for 12 months" without causing chaos. Deficits need not be a danger if we can develop the right institutional arrangements to manage them. We do not have these at the moment, and so Bill English may be erring too much on the side of caution. Not by aiming for a balanced budget as such, but by elevating it to the status of a good cause.
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