Brian Fallow

The Economics Editor of the NZ Herald

Quake costs blow deficit out to $6.1b

Bill English. Photo / Ross Setford
Bill English. Photo / Ross Setford

Three-quarters of the way through the Government's financial year its tax revenue is $1.6 billion or 3.8 per cent lower that the Treasury's pre-election forecasts.

Overall revenue in the nine months to March 31 was $1.8 billion below forecast, but so was core Crown expenditure.

Although those two forecast errors offset each other, the operating balance before gain and losses was a deficit of $6.1 billion - $800 million wider than forecast. That was primarily due to an increase in estimated earthquake costs, net of reinsurance, of about $500 million relating mainly to the December 23 earthquake, the Treasury said.

Finance Minister Bill English has already acknowledged a $1 billion deterioration in the fiscal bottom line since February's Budget Policy Statement, which is why the Government has scrapped the $800 million allowance previously pencilled in for new spending and is planning a "zero Budget" on May 24.

The Treasury acknowledges the economy was generally weaker over the three quarters to March 31 than it expected. But it expects $700 million of the $1.6 billion tax shortfall to be clawed back by the end of the financial year.

The company tax take was 11 per cent or $700 million lower than forecast but the Treasury detects a stronger reported performance by some corporates more recently and expects a boost to tax revenue that will make up about $400 million of lost ground when they file their taxes in the June quarter.

GST was nearly $600 million below forecast, mainly due to higher-than-expected earthquake-related insurance refunds, of which the Treasury expects around $200 million to reverse before the end of the year.

Most of the shortfall on the expenditure side is timing-related, while the rest reflects factors, such as a lower-than-expected carbon price and a review of child support penalties, which affect both revenue and expenditure.

Compared with the same period of the previous financial year, tax revenue was 4.9 per cent or $1.8 billion higher, while core Crown spending was up $600 million or 1.3 per cent.

Of the 14 line items the monthly accounts break core spending into, nine were lower than in the previous comparable period.

But the five which increased were the big-ticket items: superannuation and welfare (up 2.5 per cent), health (up 3.4 per cent), education (up 2 per cent), core government services (up 7.4 per cent) and finance costs (up 22 per cent to $2.7 billion despite historically low bond yields).

English said that returning to surplus by 2014/15 required some challenging decisions.

"But we're keeping up entitlements to welfare and superannuation and we'll be investing more in health, education and law and order."

Greens co-leader Russel Norman said the Government faced a revenue crisis of its own making.

"The Government's signature economic policy, its 2010 tax switch, has done nothing to boost economic activity. It has simply left a $1.1 billion hole in its books."

- NZ Herald

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