The Treasury has slashed its forecast for economic growth next year, citing the ongoing crisis in Europe.
It said yesterday that its forecast in the October 25 pre-election economic and fiscal update (Prefu) had assumed that European governments would manage the crisis without too much more damage to the real economy.
But financial tensions had escalated, it said, and dragged down growth forecasts for New Zealand's trading partners.
It pointed to the rebuilding of Christchurch - expected to begin in earnest in the second half of next year - a later start to official cash rate rises and a lower exchange rate as offsets to global weakness.
Even so, it now expects New Zealand's economic growth in the year to March 2013 to be closer to 3 per cent than the 3.4 per cent it had forecast in the pre-election update.
Growth was also likely to be lower in subsequent years but still well above the downside scenario it had sketched in the Prefu, which projects tax revenue a cumulative $14.5 billion lower than the central scenario over the four-year forecast period.
But already, one-third of the way through the Government's financial year the operating deficit is bigger, by $1.2 billion or 20 per cent, than the Prefu track projected.
Crown financial statements for the four months to October 31, released yesterday, show tax revenue of $500 million or 2.8 per cent below forecast.
The PAYE take was $421 million or 5.8 per cent lower than expected, but the Treasury said economic data to date indicated underlying wages and salaries were only slightly below Prefu forecast and the shortfall should reverse out over coming months.
The GST take was $232 million or 4.7 per cent below forecast. Offsetting those shortfalls is the company tax take, which was $229 million or 8.6 per cent above forecast.
"Recent public profit announcements indicate that taxable corporate income may be higher than assumed in the Prefu forecasts," the Treasury said. It described the variances between actual and forecast revenue as within normal variability.
"However, heightened economic risks remain, arising out of the current European sovereign debt environment, as highlighted in Prefu, which would affect tax revenue should these risks be realised," it said.
Nearly half the revenue shortfall is offset by lower-than-forecast expenditure - largely reflecting delays in some Treaty settlements and rail projects.
The operating balance, excluding gains and losses, is $3.36 billion in the red, 4 per cent more than forecast, which the Treasury describes as being "on target".
However, the bottom-line operating balance, a deficit of $7.5 billion, is $1.2 billion or 20 per cent higher than forecast largely because of a $1 billion increase in the estimated liabilities of the Government Superannuation Fund, which pays public servants' pensions. They are evidently living longer.
"We are tracking towards the forecast $10.8 billion deficit for the year to 30 June, 2012 - down from over $18 billion last year. This is forecast to more than halve to $4.4 billion next year, before returning to surplus in 2014/15," said Finance Minister Bill English.
* In its pre-election update, Treasury expected growth in the year to March 2013 to be 3.4 per cent.
* It now expects growth to be closer to 3 per cent.