Treasury says tax take in current 2011/12 year 'well below forecast'; Sticks with expectation of 0.5% growth in March qtr

By Alex Tarrant

The government's tax take in the current year is "well below forecast" due to lower-than-expected prices across the economy, Treasury says in its latest set of Monthly Economic Indicators.

In its latest release covering economic developments in New Zealand and our major trading partners during March 2012, Treasury also said it was sticking to its GDP growth forecast for the March quarter, but only as activity picked up from a much weaker-than-expected December 2011 quarter.

It said while the theme of global growth stabilisation continued in March, there were increasing concerns of a 'hard landing' in China, and noted the Australian economy was performing weaker than expected.

Treasury's comments come after Prime Minister John Key yesterday said there was a possibility Budget 2012 would include no additional operating allowance for the government, meaning another 'zero budget' could be on the cards following just that in Budget 2011. As recently as February 13, Key had said the government was committed to increasing its operating allowance by NZ$800 million in Budget 2012.

GDP growth of 0.5%

In its March indicators, Treasury said it would stick with its expected real, production-based, GDP growth forecast of 0.5% in the March quarter, but only after growth in the December quarter came in below half of what it expected.

Treasury had expected real GDP growth of 0.7% in the December quarter (the market and the Reserve bank expected 0.6%), while figures released by Statistics New Zealand showed growth of only 0.3%.

"However, it should be seen in the context of a difficult global situation. In the December 2011 quarter GDP fell 0.3% in the euro area and in the UK, fell 0.2% in Japan and rose only 0.1% across the OECD area as a whole. Both Australia and Canada were soft with 0.4% growth," Treasury said.

"Turning to the March quarter, the Budget Policy Statement (BPS) forecast 0.5% real growth in the March 2012 quarter as activity slowed in the wake of the RWC. This forecast still looks reasonable, although after December’s result the explanation changes to one of a pick-up in activity," Treasury said.

"For example, primary food manufacturing can be expected to increase - there was some support for this in this February’s 15% rise in meat export volumes. There have also been supportive signs of growth in the BusinessNZ-BNZ Performance of Manufacturing and Service Indexes," it said.

Tax take well down

Treasury said expenditure on GDP in current prices fell 0.5% in the December quarter, its first fall since mid-2009. It said contributors to this fall included lower consumer goods prices, in line with the fall in the CPI, and a rise in import prices as the exchange rate fell.

"As a consequence the level of GDP in current prices was NZ$1.5 billion below the forecast in the Pre-election Update. This is consistent with tax being well below forecast so far this fiscal year," Treasury said in its March Monthly Economic Indicators.

The most recent set of government accounts, released on March 6, showed core government tax revenue in the seven months to January 31 was 3% below what Treasury forecast in its Pre-election Fiscal Update in October 2011. In comments in March, Treasury warned that revenue collected in the 2011/12 could be lower than it had forecast in its February 2012 Budget Policy Statement.

The government's accounts for the eight months to February are due 10am Wednesday morning.

'Larger fall in terms of trade likely'

Meanwhile, Treasury said the latest national accounts measure of the terms of trade fell 2.5%, the first decline since mid-2009.

"Our BPS forecasts include a sharp fall in the terms of trade in 2012 but with additional weakness in dairy prices now appearing, a larger fall is likely. The additional weakness in dairy prices seems to be driven largely by increased supply in the major producer markets," Treasury said.

"It is not just New Zealand that is experiencing favourable conditions for dairy production; the US, Australia and Europe are as well," it said.