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NZ govt shunts out return to surplus to 2016 as tax take misses expectations

Tuesday 16th December 2014

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The New Zealand government has pushed out its targeted return to surplus for a year as falling dairy prices and a low inflation environment has kept a lid on its rising tax take, but is still dangling a possible tax cut in 2017, the next election year and promising to try and achieve the surplus pledge on which it campaigned for election in September.

The Treasury expects the Crown's operating balance before gains and losses to be a deficit of $572 million in the year ending June 30, 2015 before turning to a surplus of $565 million the following year, according to the half year economic and fiscal update. The government's financial adviser had previously been forecasting the books to be back in the black in the current financial year, with a surplus of $297 million tipped for 2015. That operating balance is forecast to rise faster in the following years, reaching a surplus of $4.1 billion by the 2018/19 year.

The downgrade was due to a weaker tax take than previously expected as persistently low interest rates erode revenue from resident withholding tax, household consumption lags estimates, weighing on goods and services taxes, tepid wage growth keeps a lid on personal income tax, and a slump in global dairy prices eats into corporate taxation.

"Falling dairy prices and low inflation are restricting growth in the nominal economy and government revenue," Finance Minister Bill English said in a statement. "Despite the lower than expected revenue forecasts, the government's ongoing commitment to spending restraint means the public finances continue to improve significantly each year.

"The government believes an OBEGAL surplus is achievable this financial year," he said.

Prime Minister John Key last month pre-empted the possibility of a deficit in the 2015 year, pointing to the decline in dairy prices and slowing economy as a handbrake on  tax expectations. Getting the books back in black has been a key government pledge, though economists and financial analysts have been more circumspect, saying the track to surplus is more important rather than achieving it in a certain year.

The Treasury anticipates tax revenue to be $2.4 billion lower than the pre-election fiscal and economic update over the forecast horizon, while still pointing to nominal growth over the next five years. The tax take is forecast to be $71.5 billion in the current financial year, rising to $87 billion by 2019. The compares to a pre-election forecast of $72.2 billion in the current year, rising to $84.2 billion in 2018.

English kept the prospect of a tax cut on the table, saying the increased headroom for budget spending allowances provide $2.5 billion in the 2017 financial year, the government is expected to post an Obegal surplus of $1.9 billion, which "will allow us to consider modest tax cuts and/or additional debt repayment in Budget 2017, as economic and fiscal conditions allow," he said.

The government's budget policy statement also dangled more cuts in Accident Compensation Corp levies with next year's budget expected to show the workplace insurer in "good financial health".

The Treasury expects accrued ACC levy revenue of $3.2 billion in the 2015 year, falling to $3.04 billion by 2019, while ACC expenses are forecast to rise from $3.68 billion in 2015 to $4.89 billion in 2019. The workplace insurer this year said it was effectively self-funding, where its investment and levy income cover its anticipated and actual claims, with its assets projected to rise to $39.8 billion by the end of 2018 from $29.89 billion in 2014, while liabilities are expected to grow to $39.02 billion from $29.95 billion in 2014.

The budget would also contain "some measures' to address material hardship being suffered by families and children.

"As a first step, the government will look hard at the billions of dollars already spent on vulnerable families and children to determine whether this can be better spent."

Government spending is forecast to rise at a slower pace from the pre-election forecast with low interest rate holding down finance costs, and English said he believes the Crown can still post a surplus.

The Treasury projects net debt of $63.5 billion, or 26.5 percent of gross domestic product, in the 2015 financial year, peaking at $67 billion, or 26.5 percent of GDP, in 2017, before falling to $64.5 billion, or 22.5 percent in 2019. The residual cash deficit is forecast to be $4 billion in the 2015 year before turning to surplus in $600 million in 2018, a year earlier than previously forecast, and rising to $1.8 billion the following year.

Downside risks to the forecast include lower commodity prices, interest rates, inflation and wage growth, while stronger net migration provides an upside risk to the expectations.

Separately, the Debt Management Office kept its domestic bond programme intact, while adding $7 billion of gross issuance in the 2018/19 year.


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