Bank tax, drop in imports and oil prices bring deficit down to $5.7bn

Photo / The Aucklander

For the first time in 21 years the country spent less than it earned internationally in the September quarter, but economists said one-off and cyclical factors masked an underlying position that remains problematic.

The current account was in surplus by $340 million in the three months to September 30, reducing the annual deficit to $5.7 billion - at 3.1 per cent the lowest when measured against the size of the economy since December 2001. But these results were flattered by the big four banks' reducing their reported profits by the amount of tax in dispute with the Inland Revenue, $1.34 billion in the latest quarter and $660 million in June.

They have lost the first round of litigation in the High Court, but two layers of appeal remain open to them, so the money is not yet in the bank, so to speak, from the IRD's point of view, and in any case these are one-off influences on the national current account.

Excluding the bank tax factor, the September quarter would have recorded a deficit close to $1 billion, as would the June quarter before it. But that is well down from the quarterly deficits of $3 billion to $4 billion which prevailed between 2005 and 2008.

Without the banks' tax affairs, the deficit for the year ended September 30 would have been $7.75 billion or 4.2 per cent of gross domestic product, down from 6 per cent in the year ended June 30. It is still the lowest that ratio has been for six years.

However, it has taken five quarters of recession and peak-to-trough drop in GDP of nearly 3 per cent to bring the current account deficit back below 5 per cent of GDP - a rule-of-thumb measure of sustainability.

Nevertheless it was better than the markets expected and the deficit might yet fall below 3 per cent of GDP, UBS economist Robin Clements said.

However, the bulk of the improvement over the last year could be put down to one-off and cyclical factors: banks' tax affairs, a drop in imports and lower oil prices.

"None of these are sustainable changes, with the one-off factors dropping out in time and a recovery in the domestic economy likely to outweigh improving trading partner growth and commodity prices, to see the current account deficit return to the 5 to 6 per cent range in a year or two," Clements said.

The balance on goods and services, adjusted for seasonal effects, was a surplus of $788 million in the September quarter, the best result since June 2002, as imports felt the effects of a contraction in demand. The investment income balance, plus transfers, was a deficit of $448 million.

ANZ National Bank economist Khoon Goh expected the current account deficit to continue to improve in the short term.

"Higher commodity prices, particularly dairy prices, will no doubt provide support to export receipts. But with domestic demand recovering imports will start to pick up," he said. "Throw in improved profits from foreign-owned firms as the economy picks up and higher debt servicing costs on the back of higher interest rates next year, and it is easy to see the current account deficit worsening again towards the second half of next year."