Budget surplus next year becoming more challenging, English reveals

See also: Budget 2015: $4.5 billion shaved off tax forecasts, says English

Finance Minister Bill English is warning that achieving a budget surplus next year is becoming more difficult, with the Treasury forecasting tax revenue will be $4.5 billion lower over the next four years than was expected a year ago.

In his traditional pre-budget speech to the Wellington Employers' Chamber of Commerce, English said the May 21 budget would show how very low inflation would eat into the tax take because the dollar value of all economic activity rises more slowly than when inflation is higher, meaning less total available taxable revenues.

"The Treasury now expects nominal GDP (gross domestic product, a measure of economic activity) over the next four years through to 2019 to be around 1.5 percent lower than forecast in Budget 2014, mainly because of lower inflation," English said. "That is about $15 billion less and, to put that in context, that is more than half the impact of the global financial crisis.

"These conditions are presenting some real challenges for the government's books because it's the nominal economy that drives PAYE (personal income tax), company tax and GST receipts. Treasury now expects the government will collect $4.5 billion less tax revenue over the next four years than it expected at the last budget."

Low interest rates were also reducing the tax take on bank deposits, despite New Zealand households tending to save more than in the past and pay down debt.

"The lower-than-expected revenue, as well as some quite significant non-cash items in the government accounts, means getting back to Obegal (the government's primary fiscal measure) surplus is more challenging," English said, warning that the projected $570 million deficit for the year June 30 would now be slightly worse. The 2014 budget initially forecast a tiny surplus of $372 million for the year to June and was a key claim in the run-up to last September's general election.

The December economic and fiscal update revised that to a deficit of $570 million, along with a surplus forecast for the next financial year of about that size.

"It's fair to say that both of those forecasts have deteriorated a little since the half-year update," said English today. "We expect the budget to forecast a slightly bigger deficit for 2014/15 and to forecast a slightly smaller surplus for 2015/16."

While the surplus was important, "a small deficit, should it eventuate this year, isn't a risk to the economy," he said. "In fact, the downturn in revenue is due to positive economic conditions - strong growth but low inflation and low interest rates."

For that reason, the government would leave in place its commitment to new spending of up to $1 billion a year in this year's and next year's budgets.

"We will not be pursuing cuts in services or income support in a knee-jerk response to lower tax revenue. We won't change that approach just to turn a small forecast deficit into a small forecast surplus. Other things matter more."

(BusinessDesk)