Govt's operating deficit smaller than expected

Bill English has dampened hopes for public-sector pay rises. Photo / Jason Oxenham

The Government's operating deficit was smaller than expected in the first five months of the financial year as a clampdown on expenditure managed to offset a shortfall in the tax-take from last month's forecast.

The operating balance before gains and losses was a deficit of $1.54 billion in the five months ended November 30, smaller than the $1.66 billion forecast in the December half-year economic and fiscal update, and $2.34 billion a year earlier, the Treasury said.

Core Crown expenses were $67 million lower than forecast at $29.94 billion, with underlying costs $20 million below expectations and spread over several departments, and up 2.7 per cent from a year earlier.

That made up for core tax revenue missing forecast by $94 million at $25.49 billion, with income tax, corporate tax and GST all falling short of expectations, though up 6.7 per cent from a year earlier.

Last month the Treasury pushed out the Government's forecast return to operating surplus until 2016, as persistently low interest rates erode revenue from withholding taxes, household spending lagging estimates saps GST, and soft inflation keeps a lid on wages, crimping income taxes.

The Treasury forecast an Obegal deficit of $572 million in the year ending June 30, 2015, turning to a surplus of $565 million the next year.

Finance Minister Bill English last week said public-sector wages would remain in check after the annual pace of inflation fell below the Reserve Bank's target band of between 1 per cent and 3 per cent, capping expectations for future salary hikes.

Slow inflation has spurred the prospect of interest rates remaining lower for longer, which reduces expected returns on government bonds. As a result, the Accident Compensation Corp reported an actuarial loss of $2.02 billion, which was $706 million ahead of forecast.

That weighed on the Crown's operating balance, which includes fair value adjustments in its investment portfolio and actuarial movements, which was a deficit of $1.31 billion in the five-month period, $466 million wider than forecast.

The Crown reported an operating surplus of $2.26 billion a year earlier as it benefited from fair value gains in the investment portfolios of ACC and the New Zealand Superannuation Fund.

ACC's insurance liability was $31.47 billion as at November 30, $832 million more than forecast, while the Earthquake Commission's property damage liability was $333 million more than expected at $3.9 billion.

The Government's net debt was $220 million smaller than expected at $62.64 billion, or 26.5 per cent of gross domestic product, and 5.1 per cent higher than a year earlier. Gross debt was $782 million more than expected at $85.36 billion, or 36.1 per cent of GDP, due to a number of unsettled trades, and was up 2.6 per cent from a year earlier.

The Crown's residual cash deficit was $3.24 billion, $40 million more than forecast, and smaller than the $4.01 billion a year earlier.