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Weak tax take in New Zealand contributes to fiscal deficit

Friday 7th May 2010

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Weak personal and corporate tax takes are swelling the government's fiscal deficit, despite one-off gains from big tax avoidance settlements and under-spending in a range of areas, according to Treasury figures for the nine months to March 31.  

The operating deficit on a near-cash basis for the period was $5.27 billion, or 9% below the forecast $5.79 billion operating deficit forecast in the half year fiscal and economic update in December.

However, that improvement reflected $400 million of one-off tax payments from the foreign-owned banks relating to structured finance transactions which were ruled to be tax avoidance, while government spending was 1.7% lower than forecast at $46.99 billion.

Most of the under-spending related to Treaty of Waitangi settlement payments not occurring as quickly as anticipated, an error in education spend forecasting of around $50 million, and a large number of smaller under-spends in other areas, some of which will still occur before the end of the government's financial year, on June 30.

Shorn of the banks' payments, the corporate tax take was $930 million, or 2.4% below forecast, while the tax take from provisional taxpayers at $309 million were 12.8% below forecast and source deductions were down 3.2% on forecast, reflecting tough commercial and labour market conditions.

The only bright spot was the GST take, which was $314 million, or 3.7%, higher than forecast, and this was expected to be sustained through to the end of the financial year, the Treasury said.

Finance Minister Bill English said the weak corporate tax take demonstrated how fragile the government's finances remain.

"Just two weeks out from the Budget, it underscores the brittle fiscal position faced by the government how finely balanced the situation is.

"The slightly better economic outlook will take time to feed in the government's books. It certainly won't bring any dramatic changes to the Budget's fiscal forecasts, compared to the half-year update in December."

While there might slightly styronger revenue from areas and slightly lower welfare spending, there was nothing in today's figures to east the outllok for "several more years of Budget deficits," English said.

When unrealised gains and losses are factored in, the operating deficit was 60.2% lower than forecast, at $1.33 billion, mainly due to gains on the value of New Zealand Superannuation Fund, Accident Compensation Corporation, and Earthquake Commission investment portfoliols.  Lower than anticipated payouts on ACC claims had also created a $173 million actuarial gain where a small loss had been forecast.

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