Treasury reports deficit was NZ$121 mln below forecast; higher tobacco excise, lower spending more than offset lower than expected GST, PAYE

By Bernard Hickey

The Goverment's finances improved slightly in November and moved a little closer to its eventual target of a surplus, thanks in part to higher than expected taxes from cigarettes.

This was despite further signs that lower inflation and lower than expected spending through local 'bricks and mortar' retailers are dragging on GST and PAYE receipts.

Treasury reported the Government's Operating Balance Before Gains and Losses (OBEGAL) deficit of NZ$1.543 billion for the five months to the end of November was NZ$121 million better than forecast in the December Half Year Economic and Financial Update.

Treasury said GST, corporate tax and PAYE receipts were NZ$138 million lower than forecast, but that lower than expected spending of NZ$67 million and extra receipts from other taxes, fees and State Owned Enterprises helped improve the OBEGAL deficit position.

Treasury forecast in December there would be a NZ$572 million deficit for the full year, which conflicted with the Government's long-held plan to return to surplus in the 2014/15 year, but Prime Minister John Key and Finance Minister Bill English have both expressed confidence the budget would eventually be in surplus once the full year's accounts were finalised in October.

The accounts show tobacco excise of NZ$693 million was collected in the five months to November, which was NZ$69 million more than forecast.

GST receipts at NZ$11.381 billion were NZ$201 million below forecasts, while source deductions (PAYE) were NZ$40 million lower than expected at NZ$10.447 billion.

Companies tax was NZ$85 million lower than expected at NZ$2.839 billion, while non-resident withholding tax (which has been weak because of lower than expected interest rates) was in line with expectations at NZ$699 million.

However, the Government continues to do relatively well from the growing economy.

Even though it was slightly below forecast, core crown tax revenue of NZ$25.489 billion was still NZ$1.6 billion or 6.7% higher than for the same period a year ago as the Government took advantage of buoyant consumer spending, rising household incomes and the effects of 'fiscal drag' as taxpayers moved into higher tax brackets.

The biggest growth in Government spending (NZ$316 million) from a year ago was Social Security and Welfare, driven mostly by New Zealand Superannuation payments, which are indexed to average weekly earnings rather than median earnings or the Consumer Price Index. Other beneficiaries' payments are indexed to the CPI.

New Zealand Superannuation Payments of NZ$4.788 billion were made in the five months to November. Treasury forecast in the HYEFU that NZ Super payments would rise 6% to NZ$11.577 billion in the 2014/15 year from NZ$10.913 billion the previous year. NZ Super payments are forecast to rise to NZ$14.3 billion by 2018/19 and are up from NZ$8.29 billion in the 2009/10 year.

Reaction

Finance Minister Bill English said the figures again highlighted the challenges of returning to surplus this year.

"However, the smaller than expected OBEGAL deficit reinforces the Government's belief that the strong underlying economy and responsible fiscal management can deliver a surplus when the final government accounts are published next October," English said.

"Current economic conditions - stable growth, low inflation, growing employment, and low interest rates - are helping New Zealanders to get ahead. But these conditions are also making it more challenging for the Government to achieve its fiscal objectives in a timely manner."

(Updated with English's comments, chart)