Deficit bigger than expected as Solid Energy indemnity weighs

The New Zealand government's operating deficit was wider than expected in pre-election forecasts as income tax lagged forecast and an indemnity for financially stricken coal miner Solid Energy weighed on the expense line.

The operating balance before gains and losses (Obegal) was a deficit of $1 billion in the four months ended Oct. 30, more than the $740 million forecast by the Treasury in its truncated September pre-election economic and fiscal update, it said in a statement. That's smaller than the 41.74 billion Obegal deficit a year earlier, with the tax take up 7.9 percent at $20.88 billion from the same period in 2013.

The Treasury said the rate of growth in the tax take is unlikely to continue "due to changes in economic conditions, including the flow-through from lower dairy prices and an ongoing low rate of inflation."

Fonterra Cooperative Group [NZX: FCG] today cut its forecast payout to farmers to $4.70 per kilogram of milk solids, a level economist estimate will result in a $6 billion drop for the dairy sector from last season when it enjoyed record prices.

"This emphasises the unusual conditions the New Zealand economy is experiencing," Finance Minister Bill English said in a statement. "We have stable growth, growing employment, and low interest rates, which are helping New Zealanders to get ahead. But at the same time, falling dairy prices and low inflation are impacting on the nominal economy and government revenue."

"This is making it more challenging for the Government to achieve its fiscal targets as quickly as it would like," he said.

Core tax revenue was $97 million below forecast due to lower than expected goods and services tax and personal income source deductions, though that was partly offset by a bigger take from corporate taxpayers and strong provisional assessments in other individuals tax.

Expenses were $118 million higher than forecast at $23.98 billion, due largely to the $103 million indemnity deed for Solid Energy to preserve the miner's balance sheet.

Prime Minister John Key last month said the new budget forecasts could show a small deficit fro the 2015 financial year, which has been a government target to get the books in black. The Treasury will update the forecasts next week at its half-year economic and fiscal update.

Today's financial statements show the residual cash deficit $57 million lower than forecast at $2.25 billion, with tax receipts from the New Zealand Superannuation Fund $308 million above expectations. That's down from $3.26 billion a year earlier.

Net debt was in line with expectations at $61.85 billion, or 27 percent of gross domestic product, while gross debt was $1.57 billion above forecast at $84.69 billion, or 37 percent of GDP.

The Crown's operating balance, which includes unrealised movements in the government's investment portfolio and actuarial valuations, was a deficit of $998 million in the four months ended Oct. 30, compared to an expected surplus of $188 million. That was due to some $2 billion of actuarial losses from Accident Compensation Corp and Government Superannuation Fund stemming from lower interest rates. The Crown reported an operating surplus $1.83 billion a year earlier.

(BusinessDesk)