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Treasury gets gloomier on finance companies in February

Friday 9th April 2010

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The Treasury’s outlook for finance companies took a turn for the worse in February as it boosted how much the government’s retail deposit guarantee may cost taxpayers.

The Treasury upgraded its provision for the net cost of defaults under the scheme to $849 million in the eight months ended Feb. 28, according to the latest government financial statements. That’s still below the $899 million figure forecast in its half-year outlook, but $78 million more than the estimate in the financial statements for the seven months through January.

That came in a month when South Canterbury Finance, the Timaru-based lender owned by Allan Hubbard, posted a first-half loss after boosting its provisions for impaired loans, and flagged a billion dollar liquidity risk at the expiry of the first tranche of deposit guarantee ends October. Since then, SCF has been downgraded to a BB rating by Standard & Poor’s and put on creditwatch negative, though the government has accepted the company into its extended guarantee.

The government’s core tax revenue came in $361 million below forecast at $32.6 billion, with other individual tax coming in 13% below forecast at $2.6 billion.

“The majority of the variance was due to lower-than-expected provisional tax, suggesting business profitability in the 2010 tax year is weaker than expected in HYEFU (half-year economic and fiscal update),” the department’s commentary said. “Weaker than expected business profitability is supported by the general view of tax practitioners visited during recent business talks as part of the Budget 2010 forecast round. We expect that the other individuals’ tax shortfall will persist through to year end.”

Pay As You Earn tax $456 million under forecasts at $14.38 billion. Corporate tax was $49 million ahead of estimates at $3.89 billion.

The crown operating balance showed a deficit of $1.62 billion, that’s $1.1 billion smaller than forecast. The operating balance before gains and losses, was a deficit of $4.49 billion, some $567 million smaller than expected.

Finance Minister Bill English flagged more cuts to spending, saying “Budget 2010 will have a similar focus on weeding out low quality spending” after he successfully cut $2 billion from the next four years’ expenditure.

“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,” he said in a statement.

Gross debt was $3.15 billion below expectations at $49.38 billion, or 26.6% of GDP, though net debt was only $77 million below estimates at $24.17 billion, or 13% of GDP.

The New Zealand Superannuation Fund and ACC investment portfolios continued to bolster the government’s books, with their accelerating gains still exceeding forecasts by $267 million and $311 million. Their total assets were at $15.35 billion and $14.67 billion respectively.



View this story on Good Returns: S&P expects more finance companies will collapse


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