Treasury warns government tax revenue may remain below expectations (Update 1)

Government tax revenue was slightly less than expected in the eight months to February, driven by lower than expected business profitability, figures released by Treasury show. (Update 1 includes provision for expected losses under deposit guarantee scheme.) However, the government's operating deficit was less than  Treasury forecast in December, due to lower than expected spending which may be reversed later in the year because of delayed Waitangi Tribunal payouts. Treasury also warned that it expected underlying tax revenue to remain below expectations for the rest of the fiscal year. The New Zealand government's operating balance before gains and losses (OBEGAL) was a deficit of NZ$4.5 billion for the eight months to the end of February, which was better than a forecast deficit of NZ$5.1 billion. Core crown expenses in the eight months to February were NZ$915 million, or 2.2% lower than forecast in December. This was due to the timing of Treaty of Waitangi settlements being later than forecast (NZ$337 million), and deferred funding to Transport agencies (NZ$144 million), Treasury said. Treasury had expected the settlements to have occurred by the end of December 2009, but they are now expected to come later this year. Tax revenues were NZ$361 million, or 1.1%, lower than expected, Treasury said. Excluding structured finance tax transactions (from the banks) which brought in NZ$320 million during the period, underlying tax revenue was NZ$681 million, or 2.1%, lower than expected. These figures suggest the business part of the economy is recovering more slowly than expected with weak profitability, but that consumption is slightly stronger than expected with GST revenues above forecast. Finance Minister Bill English said the pressure remained on the government to keep a lid on spending to reduce the deficits and growth in debt. “The Government has made it clear that the large increases in public spending of the previous five years are unsustainable because of the debt burden they impose on taxpayers," English said. “In the Budget last year, we freed up $2 billion of low quality spending over the next four years to boost frontline services. Budget 2010 (due on May 20) will have a similar focus on weeding out low quality spending," he said. “We are taking a firm but balanced approach – maintaining existing entitlements to social benefits, New Zealand Superannuation and Working for Families, but keeping within the $1.1 billion annual allowance for extra spending we have set ourselves. This will continue for the foreseeable future, as we still face several years of large deficits. We are working hard to get back into surplus and get the Government’s debt under control." Fewer losses expected Treasury's provision for losses under the government's deposit guarantee scheme was NZ$849 at the end of February, NZ$50 million less than expected in December:

As at 28 February 2010, 73 financial institutions had joined the scheme and deposits totalling $133 billion had been guaranteed. This is the maximum exposure and does not include any offset resulting from the recovery of the remaining assets of the financial institution in the event the guarantee is called upon. The Crown assesses the potential loss to be associated with the entities that hold significant deposits (ie, greater than $5 billion) as being remote. It is recognising the revenue received from these institutions over the guarantee period and has made no provision for any loss associated with these entities. For other entities within the scheme (ie entities that hold deposits less than $5 billion) a provision has been made to provide for losses that are considered more likely than not to occur. The Crown continually updates both the likelihood of further default actions triggering the guarantee and the expected loss given default. Based on these assessments, the Crown has provided for a net expected loss given default of $849 million as at 28 February 2010, being the cost of future payments under the scheme after expected recoveries. While the provision represents a best estimate of likely loss, a significant range of outcomes are possible under the scheme in terms of which entities may default and the eventual loss to the Crown following an event of default. This reflects the significant uncertainty as to the value that can be realised from an entity’s assets following an event of default. Except as provided on the Treasury web site, further information on the Retail Deposit Guarantee Scheme cannot be provided due to commercial sensitivity.