The New Zealand government's operating deficit was wider than anticipated at the half-year mark as some financial instruments didn't deliver the expected revenue, though income tax showed signs of rising with an improving labour market.

The operating balance before gains and losses (obegal) was a deficit of $889 million in the six months ended December 31, more than the $797 million shortfall forecast in the December half-year economic and fiscal update, though smaller than the $990 million deficit reported a year earlier, according to the government's financial statements.

Core tax revenue rose 3.3 percent to $32.46 billion, and was largely in line with forecasts, though core Crown revenue, was $171 million below expectations at $35.19 billion. That was due to some financial derivatives being replaced at maturity when they had been expected to mature into interest-bearing deposits, providing the Crown with interest income.

The Treasury said source deductions were 1.1 percent ahead of forecast, and government data showed labour income growth was tracking ahead of expectations.


"This suggests that some of this favourable variance may be permanent, and presents upside risk to the full-year result for this tax type," the Treasury said.

Income tax, which makes up the bulk of tax revenue, was 1.1 percent ahead of forecast at $13.21 billion. Corporate tax was 5.9 percent below forecast with provisional taxes running behind expectations, which officials said could be timing related and may reverse later in the financial year.

The Treasury predicts the Crown's obegal will slip back into deficit in the 2016 financial year before returning to smaller surpluses further out as tepid inflation and a lack of wage growth keeps taxes flatter than expected. Finance Minister Bill English has relaxed his focus on avoiding red ink, saying he won't distinguish between small surpluses or deficits in the immediate future.

The Crown's residual cash deficit was $913 million ahead of forecast at $7 billion, with $931 million of unanticipated spending on personal and operating costs in the half. Treasury said a large proportion of that was due to timing of payments over the Christmas period, and should reverse out in January.

The blow-out in the cash deficit meant the Crown's net debt was $1.1 billion more than expected at $66.93 billion, or 27.5 percent of gross domestic product. Gross debt was $615 million less than forecast at $85.75 billion, or 35.2 percent of GDP.

The operating balance, which includes movements in the Crown's investment portfolios, was a bigger deficit than forecast at $1.98 billion, due to higher than expected actuarial losses on the Accident Compensation Corp's forward liability. The ACC liability was valued at $32.23 billion as at Dec. 31, $562 million more than forecast, and ahead of the $31.28 billion a year earlier.

The Crown's net worth at $84.32 billion was $866 million less than expected due to the bigger operating deficit.