KEY POINTS:
The Government's accounts have dropped into an operating deficit for the first time in almost 15 years as investments like the New Zealand Superannuation Fund feel the effects of weak global markets, and as tax revenues fall short of forecasts.
The Treasury this morning revealed that the Crown's operating balance for the seven month period to January 31 was a deficit of $394 million -as much as $4.2 billion away from the forecast surplus of $3.8 billion.
It is the first time since June 1993 that an operating deficit has been reported.
Finance Minister Michael Cullen has been quick to respond to the surprise deficit by describing it as a "timely reminder" of the need for governments to maintain "prudent fiscal policy" in small, open economies like New Zealand's.
Dr Cullen said the accounts reflected weakeness in international financial markets and investor concern about the United States economy.
The main reason the accounts have dropped into deficit - and come in so far away from forecast - is that the financial portfolios of the New Zealand Superannuation Fund, Accident Compensation Corporation and Earthquake Commission have been hurt by falling world markets in January.
The super fund's returns on its assets, which include international shares, were $1.5 billion lower than forecast over the seven month period, ACC's were $700 million short and the Earthquake Commission's were $300 million below.
Adding to the turnaround in fortunes was the fact that the Government made a $1 billion dollar higher than forecast loss on the revaluation of the ACC claims liability.
Dr Cullen has previously made it clear that the operating balance does not impact on how much money he actually has to spend, so the deficit itself is unlikely to make him pull back from spending he had planned for election year.
However, Dr Cullen's preferred indicator for how much he has to spend - the OBEGAL, which removes the effects of gains and losses on things like the super fund - has also come in below forecast in the latest January accounts.
The OBEGAL for the seven month period is a surplus of $3.1 billion, $600 million lower than the expected $3.7 billion.
That has happened because tax revenues are $700 million below forecast.
While it remains too early to solidly predict, it appears the upside surprise that the government has enjoyed in previous years in terms of tax revenues could this year turn into a downside surprise - which does impact on what Dr Cullen can spend unless he raises debt levels.
Dr Cullen said the Government's strategy remained to keep gross Crown debt at around 20 per cent of gross domestic product over the medium-term.
He said he hoped the benefit of the Labour-led government's management of the accounts was now "more apparent to all New Zealanders".
