NZ budget deficit already NZ$700 mln worse than shock pre-Christmas forecast (Update 1)

The affordability of the latest round of tax cuts, initially announced during National's election campaign in October, is under further scrutiny following the release of Government financial figures by Treasury that show a large gap between Government's operating balance and Treasury's pre-Christmas forecast. (Update 1 to include comments from Finance Minister Bill English.) Corporate taxes, GST receipts and withholding tax on interest payments were lower than expected because of the longer and deeper than forecast recession and lower term deposit rates. This will concern Standard and Poor's, which announced it was reviewing New Zealand's AA+ credit rating after seeing the shock pre-Christmas numbers. S&P is worried New Zealand will be running big 'twin deficits', with both the public sector and the private sector borrowing heavily at the same time. The operating balance before gains and losses (OBEGAL) in the financial year to the end of February 2009 was NZ$49 million, down 97% from the pre-election update forecast and NZ$1.2 billion worse than expected in Treasury's pre-Christmas update. However, NZ$494 million of the shortfall was because February's tax due date was moved to March 2 as the last day of February fell on a weekend. This means the budget deficit is already running about NZ$700 million behind where it was forecast to be before Christmas. There are still 3 months left in the financial year. Treasury said this February timing difference would reverse out in March. The OBEGAL was down NZ$551 million from the end of January. Government's operating deficit, including gains and losses from investments in ACC and the NZ Superannuation Fund, slipped further into the red in February, well below the Treasury forecasts that election promises were partly based on. The figures show a large gap between Government's operating deficit of NZ$8.45 billion for the eight months to the end of February, compared with Treasury's pre-election update forecast of a positive balance of NZ$3.2 billion, a gap of NZ$11.6 billion. In the seven months to January, Government's operating deficit was NZ$5.5 billion. Losses were up due to fewer tax receipts than forecast and losses from ACC and the NZ Superannuation fund. "Tax revenue and receipts were approximately NZ$1.8 billion lower than forecast in the Pre"Election Update," Treasury said. "This variance had increased since last month, mainly due to a temporary timing difference that is expected to reverse next month. Once this timing difference reverses, we expect tax revenue and receipts to continue tracking more in line with the forecast in the December Update, as the continued deterioration in the world economic situation flows through to the New Zealand economy." "Losses on non"financial instruments were NZ$5.2 billion. This consisted of the ACC actuarial loss of NZ$2.9 billion and the GSF (Government Super Fund) actuarial loss of NZ$2.4 billion." "The ACC actuarial loss of NZ$2.9 billion compares to NZ$3.1 billion last month and is based on the latest valuation performed in December 2008. The GSF actuarial loss of NZ$2.4 billion compares to NZ$0.9 billion last month and is based on the latest (4"monthly) valuation performed in February 2009." The New Zealand Super Fund had a deficit of NZ$3.57 billion at the end of February, NZ$4.2 billion below the pre-election forecast. Core Crown expenses in the eight months to February were NZ$39.75 billion, up 8.3% from the same period a year ago. Social security and welfare spending was up 6.3% to NZ$12.4 billion while health spending was up 8.8% to NZ$8.1 billion. Spending on core government services were up 13.6% to NZ$2.2 billion. Commenting on the results, Finance Minister Bill English had a stab at the "loose spending policies" of the previous Labour government. He added that National's April 1 tax cuts and brought-forward infrastructure spending would help New Zealanders through the recession. "It's clear that the global recession continues to have an impact on the government's finances. It's also clear that the patently loose spending policies of the previous Labour-led government were unsustainable," English said. "As we prepare for our first Budget on May 28, the new government is performing a delicate balancing act. Our first priority is to ensure that we help New Zealanders get through the worst effects of the recession by preserving entitlements, providing more than NZ$1 billion of tax cuts from April 1 and bringing forward productive infrastructure investment," he said.