Government spending cuts key to surplus

Finance Minister Bill English during his presentation at the Treasury's 2014 Half Year Economic and Fiscal Update in Wellington. Photo / Mark Mitchell

National’s tax carrot may still be on the cards for 2017 election year

The Government's widely touted return to surplus is likely to take a further 12 months and is largely reliant on cuts to spending.

In spite of that, Finance Minister Bill English says tax cuts remain on the cards for election year 2017.

Yesterday's Half Year Economic and Fiscal Update saw the Treasury change its forecast of an operating balance before gains and losses (Obegal) surplus of $297 million for the 2014-15 year to a deficit of $572 million.

Acting Treasury Secretary Vicky Robertson said that despite solid growth in the economy, the Crown's finances would take a hit from a lower than previously forecast tax take due to low dairy prices and interest rates.

The Treasury now expects the Obegal to return to a surplus of $565 million in 2015-16. However that surplus is achieved mostly by cutting operating allowances or increases in spending from the $1.5 billion a year set out for Budget 2015 and 2016 to $1 billion. Mr English said the previous $1.5 billion-a-year spending allowance had been set "to make sure we have a bit of a buffer".

The operating allowance would rise to $2.5 billion in the 2017 Budget.

"This will allow us to consider modest tax cuts and/or additional debt repayment in Budget 2017, as economic and fiscal conditions allow", he said. He was also not ready to concede defeat on achieving this year's surplus.

Labour finance spokesman Grant Robertson said the Government had failed its own return-to-surplus test of successfully managing the economy, and Mr English was planning "an election year lolly scramble".

The vanishing surplus

Treasury, which was predicting a $297 million surplus in 2014-15 now expects a deficit of $572 million.
What's happened?
The tax take is expected to be $600 million less than previously expected due to falling dairy prices and lower interest rates.
Is it a worry?
To the extent you believe keeping its promise of returning to surplus this year demonstrated the Government's competence in managing the economy, yes. To the extent that lower interest rates are related to low inflation which means prices are stable and not adding to pressure on household budgets, no.