Budget surplus soars as NZ sinks into red

By BRIAN FALLOW economics editor

The Government is awash with unexpected cash, even as New Zealand sinks deeper into the red in its dealings with the rest of the world.

The Treasury yesterday reported a Budget surplus (the operating balance before revaluations and accounting changes) of $5.6 billion for the year ended June, equivalent to 4.4 per cent of GDP and $1.5 billion more than it forecast on Budget day.

Contributing to the positive surprise on the fiscal front were better-than-expected company profits which boosted the corporate tax take by more than $235 million.

PAYE was nearly $194 million above forecast, reflecting strong employment and wage growth.

ACC received $165 million more in levies than forecast while its investment portfolio and the Earthquake Commission's gained an extra $345 million from the rally in world sharemarkets in the June quarter.

Meanwhile, education, health and welfare spending were lower than forecast by $136 million, $85 million and $47 million respectively.

The cash surplus available to repay debt was $1.2 billion compared with a $400 million deficit last year.

ANZ chief economist David Drage said Finance Minister Michael Cullen, who is overseas, might have some explaining to do to his Cabinet colleagues upon his return about how much of the surplus is cyclical (and should be banked) and how much is structural (and could be spent).

Associate Finance Minister Trevor Mallard said: "We are having work done to try and work out whether our tax forecasting model is working properly or not. We can't tell yet if it is cyclical or structural."

But it did mean that the Government would have "a bit more room" to do something for low and middle-income families in next year's budget, he said.

There is a downside, however. The same buoyancy in the domestic economy which has delivered a fatter-than-expected fiscal surplus is reflected in an avid appetite for imports and a swift worsening of New Zealand's external deficit.

Statistics New Zealand yesterday reported a current account deficit of $5.9 billion for the year ended June, or 4.6 per cent of GDP - the worst that ratio has been since December 2000.

A year earlier the deficit was $3.2 billion or 2.6 per cent of GDP.

Westpac chief economist Brendan O'Donovan said the burgeoning deficit reflected the two-speed nature of the economy, with a supercharged domestic sector and a struggling export sector.

The balance on goods (exports minus imports) has swung from an annual surplus of $2.7 billion this time last year to a deficit of $270 million, the worst for three years.

The balance on services, such as tourism and education, continued to improve annually, as did migrants' transfers.

But on a quarterly basis, the inflow of cash associated with net immigration, a significant impetus to the housing market, is waning. At $188 million it was the lowest quarterly inflow for more than two years.

The annual investment income deficit was $7.1 billion, steady on three months ago but $600 million worse than a year ago.

At 4.6 per cent of GDP, the latest current account deficit is in line with New Zealand's long-term average.

But the cumulative effect of decades of such deficits is that New Zealand owes the rest of the world $98 billion, or 76 per cent of GDP. That is a very high ratio by international standards. Australia is about 60 per cent and the United States around 25 per cent.

Drage said the rising current account deficit, against the background of New Zealand's large net debtor position, could increasingly act as a restraining influence on further rises of the New Zealand dollar and might add to the risk premium in longer-term interest rates.

But much depended on how the deficit was funded, he said. If the capital inflows went into debt instruments or were intermediated through the banks, the associated foreign exchange risk was generally hedged, resulting in no net demand for New Zealand dollars.

Equity investors, on the other hand, were taking a view on the country as well as the company and tended to be unhedged. The recovery in net equity inflows had been a factor underpinning the New Zealand dollar lately Drage said.

Most forecasters expect the current account deficit to widen further, to between 5 and 6 per cent, before it gets better.

However, there were tentative indications of an improving export outlook in merchandise trade data for August, also released yesterday.

Exports were 2.4 per cent down on a year ago, but that is the smallest annual decline since April last year and has to be seen in the context of a 16 per cent appreciation of the exchange rate over the past year on a trade-weighted basis.

Imports, meanwhile, were 11.6 per cent down on August last year.

And tourist arrivals in August were 2 per cent up on a year ago, the first month since April that numbers were up on the same month last year.