Government and Fiscal Policy

A real surplus or in the margin of error?

Thursday December 20, 2012 Dr Adrian Slack

Treasury lowered its forecast 2014-15 surplus to $66 million (on the Total Crown OBEGAL measure), but is still holding out for a surplus.



In RBNZ’s December Monetary Policy Statement, the RBNZ noted that while the economic recovery would automatically shrink the deficit, “most of the projected improvement is expected to come via tighter discretionary fiscal policy”.


Treasury’s forecast for the next three years has expenditure 1.5 percent to 2.5 percent lower than the track in its June Budget forecast.  So there is an indication of further consolidation in government expenditure.


Treasury has also shaved between 0.5 percent and 1.0 percent off its annual (nominal) GDP growth rate forecasts out to 2015. This will drive revenue growth down.  Relative to the June Budget update, revenue is forecast to be around 2.0 percent to 2.5 percent lower.


It seems, however, that the government’s (surprise) lifesaver that will help rope in Treasury’s forecast surplus is a just announced increase in fuel taxes.  The excise tax component of petrol will increase by 3 cents per litre from July 2013 – an increase of around 5.5 percent on the current rate; road user charges will be increased by a similar amount.  Adding on GST, this is could boost Government revenue by around $30 million to $40 million a year.  This would represent a fair proportion of the $66 million 2014/15 surplus.  But even with this buffer, the forecast surplus would seem to us to be well within the margin of error – that is, it is a surplus by name but how accurate are Treasury’s assumptions?


Looking forward, BERL believes that the return to surplus on the Government accounts is likely to be delayed past 2014/15, even with the previously unsignalled excise tax increase.  BERL forecasts a slower economic recovery than Treasury.  This means that the “automatic” stabiliser will take longer to restore the fiscal accounts to surplus; we foresee a return to surplus by 2015/16.