Lower tax take leads to shortfall

Two-thirds of the way through the Government's financial year, its tax take was down nearly 10 per cent on the same period last year, while spending was nearly 4 per cent higher.

The Government's financial statements for the eight months ended February, which were released yesterday, showed PAYE down 6 per cent on the same period in the previous fiscal year, while income tax from the self-employed was down 17 per cent.

The corporate tax take was 26 per cent lower.

Among the big-ticket expenditure lines, social security and welfare spending (which includes superannuation) was up 10 per cent, and health and education were both 8 per cent higher than in the first eight months of the previous fiscal year.

The net effect is that by the end of February the Government was running an operating deficit of $4.5 billion, excluding any gains and losses on the value of its financial assets.

The contraction in revenue is greater than was foreshadowed in the last half-year fiscal update, given in December.

Tax revenue was 1.1 per cent lower than forecast then, or 2.1 per cent ($680 million) if the impact of the settlement of a tax dispute with the banks over structured finance transactions is excluded.

The Treasury expects that shortfall to persist to the end of the year.

The key driver was lower than expected business profitability, it said, but it had also overestimated the amount of PAYE from wage and salary earners.

GST, on the other hand, is running 5 per cent above forecast, another trend the Treasury expects will continue through to the end of the year.

Core Crown expenses came in 2.2 per cent or $920 million below forecast, reflecting factors such as lower spending across a number of departments, the timing of Treaty of Waitangi settlements and deferred funding to transport agencies.

Finance Minister Bill English said the large increases in public spending of the previous five years were unsustainable because of the debt burden they impose on taxpayers.

"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 will have a similar focus," 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 would continue for the foreseeable future, English said, as the Government still faced several years of large deficits.