Quakes take only half of $18b deficit

Finance Minister Bill English. File photo / Mark Mitchell

Only half the $18.4 billion deficit the Government reported yesterday for the 2010/11 year can be laid at the door of the earthquakes.

Underlying Government spending grew faster than tax revenue.

Excluding quake-related costs, Core Crown expenses were up $4.5 billion or 7 per cent on the year before. "Core" excludes state-owned enterprises and Crown entities such as ACC and the Earthquake Commission.

Tax revenue, by contrast, rose just 1.6 per cent. That includes the $2.7 billion cost of Budget 2010's income tax cuts, offset by the $1.6 billion increase in the GST take arising from the higher rate.

Finance Minister Bill English said he still expected the "tax switch" to be revenue-neutral over a period of four or five years, and in any case it was primarily about shifting incentives towards more saving and investing, and less spending and borrowing for property speculation.

Core Crown expenses at $70.5 billion equate to 35.2 per cent of gross domestic product, up from 33.8 per cent the previous year and well above the Government's long-term target of 30 per cent. Most of the increase - $1.9 billion or 1 per cent of GDP - was, however, the result of such earthquake-related costs as financial support for people in the red zone, AMI and social assistance packages.

Quake-related spending was still $1.2 billion less than expected in last May's Budget because of delays in assessing damage. It is likely to increase this year's spending the same amount.

"Delays to some quake-related spending suggest the deficit for the June 2012 year will probably exceed the $9.7 billion projected in the May Budget," Westpac chief economist Dominick Stephens said.

The $18.4 billion operating deficit before gains and losses (Obegal) includes $9.1 billion in quake-related costs. Under the Crown's accrual-based accounting, the costs must be booked as soon as they can be quantified, even if cash payments have yet to be made.

The Treasury warned further quake-related charges can be expected in future years' accounts.

The fiscal bottom line was boosted by $5 billion in net valuation gains, including $3.5 billion from the Cullen Fund and $2 billion from ACC.

The operating balance was $13.4 billion in deficit or 6.7 per cent of GDP.

That is up from a deficit of 2.4 per cent the year before and 5.7 per cent in the recession year before that. But the past three years' deficits follow 14 years of surpluses.

The Government expects the Obegal deficit to halve in the current year and halve again the year after, before returning to surplus in 2014/15.

The Government's cash deficit or borrowing requirement for the June 2011 year was $13.3 billion.

It pushed its net debt to $40 billion or 20 per cent of GDP, from $26.7 billion or 14 per cent the year before. This does not include the assets of the Cullen Fund or advances, such as student loans, that the Government has made.

The Treasury will release the pre-election update of its economic and fiscal forecasts on October 25.