Government deficit widens by more than expected, partially thanks to Health NZ and higher ACC claims costs

The Government’s books sank further into the red in the year to June, partly thanks to higher personnel costs at Health New Zealand and soaring Accident Compensation Corporate (ACC) claims costs.

The Government’s operating balance before gains and losses (OBEGAL) deficit deepened by $3.4 billion in 2023/24 compared to the previous year, to $12.9b.

It was also $1.8b worse than the Treasury forecast at the Budget in May.

“These are sobering numbers,” Finance Minister Nicola Willis said.

“We need to tidy them up and we need to impose restraint.”

While the Government’s revenue, including its tax take, rose over the year, the expenses it faced increased by more.

The Treasury put these higher costs down to a number of factors that both the current and former finance ministers influenced.

It said decisions announced by former Finance Minister Grant Robertson in Budget 2023 were expected to add $5.6b of expenses in 2023/24.

Meanwhile, decisions made by Willis in her late 2023 mini-Budget and Budget 2024 were expected to reduce expenses by $1.1b during the year.

Treasury noted Robertson increased spending to keep up with cost pressures, provide cost of living support and deliver wage settlements for teachers and nurses for example.

Willis hasn’t committed to increasing funding for government departments to keep up with cost pressures to deliver existing services.

Treasury also highlighted the $500 million cost associated with Willis cancelling the Inter-Island “iReX” ferry project.

While Willis is yet to unveil what a new ferry project will look like, she was confident this would be cheaper than the “fatally flawed” project she cancelled.

Treasury also put a lot of weight on ACC’s insurance liability rising by 17% over the year.

ACC is currently consulting in making hefty levy hikes to cover its higher claims costs. There have been calls for ACC to improve its claims management processes to keep a lid on these costs.

As for Health New Zealand, Willis pointed to its $800m deficit in 2023/24, and its lack of processes to ensure it sticks to its budgets.

Altogether, the Government’s expenses rose by 11.3% over the year, while its revenue only increased by 9.4%.

Its tax take rose a little more than expected at the Budget in May, as high inflation made for strong wage growth.

Treasury noted the impact of “fiscal drag”, or wage increases putting people in higher tax brackets. This is an issue Willis has gone some way to addressing by adjusting income tax brackets – giving income earners a tax cut.

A downside of inflation, and the Reserve Bank’s decision to use a high Official Cash Rate (OCR) to curb this, is that it saw the economy falter in in 2023/24.

Accordingly, businesses suffered, and the Government’s corporate tax take fell by 5.9% over the year.

Turning to the Government’s debt position, net core Crown debt rose by 13% over the year to $175.5b.

While this was a little below what the Treasury forecast at the May Budget, it still surpassed Willis’ debt target.

She wants net core Crown debt to fall below 40% of Gross Domestic Product (GDP). At the end of June, it sat at 42.5%.

Willis announced she would release her Budget 2025 preview, known as the Budget Policy Statement, alongside Treasury’s Half Year Economic and Fiscal Update on December 17.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.