Fiscal accounts swing to $10.5b deficit

Wednesday 14th October 2009

New Zealand’s government accounts swung to an operating deficit of $10.5 billion last year as recession and tax cuts eroded revenue, fiscal spending rose and investments made losses.

The operating position turned from a year-earlier surplus of $2.4 billion and was worse than the $9.3 billion deficit the estimated by the Treasury, according to the financial statements, released in Wellington today.

Finance Minister Bill English says the government will embark on a $40 billion borrowing spree over the next four years, with government debt expected to double by 2013. He’s forecasting cash deficits of $10 billion to $12 billion in each of the next four years. Annual interest costs are forecast to exceed $5.4 billion by 2013.

“This underlines the need for us to get our books in order as soon as possible, because budget surpluses give us choices. Deficits do not,” English said.

New Zealand’s economy managed to expand 0.1% in the second quarter, ending five quarters of contraction which eroded tax revenue, drove up the dole queue and prompted the government to suspend pension contributions and tax cuts in the May budget.

English’s budget gave some comfort to Standard & Poor’s, which raised the outlook on the nation’s AA+ credit rating to ‘stable’ from ‘negative’.

Still, the government posted the first budget deficit in nine years and its accounts showed net debt grew to $43.36 billion, or 24% of gross domestic product in the year to June 30, from $31.39 billion 12 months earlier.

Revenue included $1.4 billion expected to be recovered from the nation’s four biggest banks as a result of Inland Revenue’s challenge to the tax treatment of their structured finance deals.

Tax revenue fell by more than $2 billion to $54.7 billion, as companies paid less tax. The government also has to fund the deposit guarantee plan to the tune of $816 million and losses on investments were more than $2.3 billion.

The fiscal numbers “are part and parcel of the severity of the recession,” said Khoon Goh, senior markets economist at ANZ National. “Spending was much higher but there were quite a few one-off charges that the government put through,” he said.

The New Zealand dollar initially fell after the Treasury released the accounts, reflecting comments by Finance Minister English that he was concerned about the currency’s strength.

The kiwi subsequently climbed to as high as 73.95 US cents from 73.72 cents before the statement. Still, this mainly reflected further weakness in the US dollar.

The Dollar Index, which measures the greenback against a basket of six currencies, fell to 75.64, a 14-month low as optimism about the global economy stoked demand for higher yielding, or riskier investments.

Businesswire.co.nz

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