NZ budget deficit 59% worse than forecast after 4 months; RBNZ losses flagged (Update 1)

The government's deficit before gains and losses on investments was NZ$1.22 billion or 59% worse than forecast in the first four months of the financial year, largely because taxes from company profits were almost 40% lower than forecast. (Update 1 includes Bill English statement.) The operating deficit (which includes gains and losses on investments) at the end of October was slightly better than forecast in the 2009 Budget in May, accounts released by Treasury show. Higher than expected investment returns from the NZ Super Fund and the ACC Fund over the first four months of the government's financial year were almost fully offset by lower than expected tax revenue, investment losses by the Reserve Bank and an actuarial loss on the ACC claims liability, Treasury said. The Crown operating deficit (which includes gains and losses on investments) was NZ$1.267 billion at the end of October, compared to a forecast deficit of NZ$1.316 billion. Tax revenue of NZ$15.4 billion over the four months was 9.4% lower than forecast, while cash receipts of NZ$15.9 billion were 1.5% below forecast.  A large proportion of the "variance" in revenue from forecasts was due to lower than expected business profitability for the 2009 tax year, Treasury said. The operating deficit before gains and losses (OBEGAL) was NZ$3.27 billion, which works out at NZ$182 million a week. This was 59% worse than a forecast NZ$2.05 billion forecast in May.

"Corporate tax revenue was NZ$1,044m (39.7%) lower than forecast. The majority of this variance relates to lower-than"expected net terminal tax and suggests that businesses had overstated their provisional tax liability during the 2008/09 tax year at a time when profitability was declining sharply," Treasury said. "Recent 2008/09 financial year results for publicly"listed companies indicate that weakness in corporate profitability has occurred across a broad range of sectors, and is consistent with the sharp economic contraction that occurred over this period," it said. "Indications suggest that lower 2009 profitability will flow through to lower"than"expected 2010 tax revenue than was forecast at Budget 2009. Excluding a large payment made into tax pools that boosted corporate tax receipts in July, underlying tax receipts were also tracking below forecast," Treasury said. The NZ Super Fund had an operating surplus of NZ$1.25 billion for the four months, which was 268% above its Budget forecast. Meanwhile, the Reserve Bank of New Zealand made net investment losses of NZ$265 million during the four months to October, "primarily relating to foreign exchange rate movements on financial instruments," Treasury said. It did not give further detail. Net government debt was estimated at 11.9% of GDP at the end of October, in line with the Budget forecast. Finance Minister Bill English released this statement on the government's accounts:

The fiscal challenges facing the Government as the economy comes out of recession are again highlighted in the Crown's financial statements for the four months to 31 October, Finance Minister Bill English says. A feature of the latest data is the impact of lower-than-expected business profits on tax revenue - particularly indications that lower company profits in 2009 will flow through to reduced 2010 tax revenue. "This lower tax revenue was the main contributor to the operating balance before gains and losses (OBEGAL) being in deficit by $3.2 billion in the four months to 31 October - $1.2 billion larger than forecast," Mr English says. "It's clear that the impact of the recession will be felt by many businesses and, in turn, on the Government's books for some time. This will influence our decisions around both revenue and spending. "It means there will be little or no new money for government departments and ministries for the foreseeable future - and certainly not at the unsustainable rate of increase provided by the previous government. Mr English says this challenging environment reinforces the real value of the significant economic programme the Government already has in place. "Without this balanced programme, there is no doubt that New Zealand would have emerged from the recession in much worse shape than it has, at the cost of thousands more jobs and even more debt." The Budget Policy Statement and Half-Year Economic and Fiscal Update on 15 December will set out the Government's economic framework and update forecasts for 2010 and beyond. "They will help shape our decisions for Budget 2010, as we focus on getting a better performing economy that supports more jobs and higher incomes."