The Nation’s Bank Account - Budget 2012
Another zero budget keeps the hunt for surplus on track
It will be what it once was – a surplus.
Delivering his fourth successive Budget, the Minister of Finance heralded the return to a surplus in 2014/2015 while announcing a forecast deficit of $7.9 billion for 2012 (3.6% of GDP).
Forecasting a deficit of $2 billion in 2013/14, as part of a steep progression out of deficits, also leaves open the possibility that the Government could return to surplus a year early, should economic conditions improve beyond Treasury’s expectations.
This new normal of year on year deficits (funded by debt) crystallises the stark choices that need to be made from the limited resources and options that are available.
History will be the ultimate judge as to whether the decisions of the day prove to be correct, noting that many of the ingredients that make up the net financial outturn are not fully within any Government’s control: exchange rates and commodity prices being two examples.
More immediately, judgment of the 2012 and upcoming Budgets will be made at the 2014 election and will influence the perspectives held at that time on the fiscal and social stewardship of the current Government. Seeking a third term in an MMP environment that currently provides National with a dearth of natural coalition partners will be testing.
With the luxury of the burgeoning surpluses that arose under the tenure of the previous Labour-led Government being a distant memory, the present Government is faced with a different and more difficult set of decisions including the challenge to sell their story to a varied and sometimes sceptical audience.
With this context in mind, it is not surprising that the anticipated date we are expected to return to surplus broadly coincides with an election year. We can expect the Government to remain focused on this goal, as it looks to suitably project itself to the voting public as a prudent keeper of the nation’s finances within a social framework that it believes is appropriate.
Keeping on track will not be easy – tax revenues are consistently coming in at under their forecast numbers – but to date the Government has largely countered this with continued belt tightening on a number of fronts, as shown by the current Budget.
And in terms of that track, what is important to consider is the journey rather than the current destination. With this in mind, the following graph shows that the worst of the deficits are largely forecast to be over, as we head towards a small surplus of $197 million in two years’ time. It also shows how quickly things can spiral out of control.
A sluggish economy and earthquake costs – how the deficit got so large
It is interesting to reflect on just how the economy has suffered over the past four years from the Global Financial Crisis and its aftershocks, and then from a number of domestic upheavals at home.
The graph below is replicated from the Government’s financial statements for the year to 30 June 2011, and shows just how hard the recession hit in 2008, when core crown tax revenue began to fall away.
Core crown tax revenue (including personal income tax, company tax and GST) fell from a high of $56.7 billion when the Government took office in 2008, to just $50.7 billion in 2009, recovering slightly to $51.6 billion in 2011. As noted earlier, the Budget estimates tax revenue to increase significantly, to $58.2 billion in 2012-13, led by increases in the tax take from individuals (under a reduced marginal tax framework) followed by GST.
This illustrates that, rhetoric aside, cost management is not able to mirror revenue volatility on a real time basis and that “slash and burn” isn’t in fact what has occurred as core expenditure increased by just over $6 billion between 2010 and 2011, to just over $70 billion with core Crown expenditure forecast to be $73.7 billion in 2012-13.
The additional costs in 2011 came from a range of sources, but most predominately the Canterbury earthquakes at $1.9 billion.
How the is deficit made up
The Government’s forecast “transaction statement” for 2012/13 anticipates Government spending of $9.5 billion more than the revenue it will receive in the 2012-13 year. This excludes the activities of Crown entities and state-owned enterprises, hence is slightly higher than the forecast deficit of $7.9 billion. After eliminations, Crown entities and State-owned enterprises are forecast to add $1.6 to the operating balance before gains and losses.
In order to rein back the deficit and return to surplus faster than 2015, the Government would need to make further cuts to expenditure, or grow revenue. However as noted above, the Government’s tax take has suffered materially from the global financial crisis and the lingering economic uncertainty that has followed.
Is there a silver bullet? Figuratively there may be in the sense of Treasury forecasting, with the Prime Minister’s recent sentiment being:
“Typically, Treasury have ... overestimated the income on the way down and underestimated it on the way back up. If you are of the view, as I am, that the economy has now bottomed out and is on the way back up, we might do a bit better on the upside.”
If this is the case, then the forecast deficit of $2 billion in 2013/14 may be reduced – and even potentially the Government could return to a small surplus early.
From a political perspective the rebalancing of a number of the tax levers following the Tax Working Group recommendations will be called to question but there is no doubt as to the efficiency of our GST rules and the ability to trap revenue on the upside. The associated equity issues, the ability for revenue to be raised, and the stimulus effects of a reduced corporate and highest marginal tax rate are political footballs that are, in my view, correctly set for the moment.
Where to from here – does the Government have a plan?
Last year the question posed was whether the Government has a plan for the economy.
The immediate plan is simple: to get back into surplus as soon as possible under a tax and expenditure framework that it feels makes sense. The social consequence of getting it wrong is clearly shown on a daily basis by what is happening in Europe. The political consequences are also being evidenced as voters look to either blame incumbents or hitch their wagons on to those that provide fresh promises.
Economic intervention is not part of the current Budget or something that the Government is generally attracted to, with the exception of sponsoring changes in the regulatory environment to facilitate a local funds management industry and continuing with the mixed ownership model.
Fortunately Budget 2012 didn’t contain any significant tax surprise of the nature in 2010, when all building depreciation was wiped to largely address residential property concerns and resulted in considerable collateral damage to the business sector that is unlikely to be reversed in the near term.
Budget 2012 Analysis
- Introduction - between a rock and a hard place
- Budget at a Glance
- The Nation’s Bank Account
- Mixed ownership model
- Public sector developments
- Tax reform tinkering