Treasury has released the final set of fiscal accounts before the release of the Budget in about a fortnight. The media release, however, is slightly misleading, as it does not always clearly distinguish when it is referring to Core Crown versus Total Crown figures. So while the government deficit is still bad, the actual figures are perhaps not as bad as one might interpret from a scan of Treasury’s media release.
For the nine months to the end of March 2012, Core Crown revenue was 4 percent below forecast, but expenses were also reined in at 3.3 percent below forecast. As a result the Core Crown OBEGAL deficit was 1 percent ($74 million) worse than forecast at $7.4 billion and the Operating Balance deficit came out $1.2 billion better than forecast.
The “Core Crown” represents the revenues, expenses, assets and liabilities of the Crown, departments, Offices of Parliament, the Reserve Bank, and the NZS Fund. Total Crown captures a wider sphere of activity (and assets), including the core Crown plus State-Owned Enterprises (SOEs) and Crown Entities (CEs).
The table shows the Core Crown accounts – actual and forecast – for the nine months to the end of March 2012, and the forecast for the 2011/12 fiscal year, which runs to June.
Table 1: Government accounts for the nine months to the end of March 2011
For the Total Crown accounts revenue was 2.1 percent ($1.31 billion) below forecast and expenses were 0.8 percent ($518 million) below forecast. The net impact was that the Total Crown OBEGAL deficit was $787 million (14.7 percent) higher than forecast at $6.13 billion.
So by either of Treasury’s main government budget indicators, the deficit on the Core Crown accounts is not tracking as badly as the Total Crown accounts, which have been affected by the costs of the Christchurch earthquake in December 2011, which occurred after Treasury’s forecasting process.
The OBEGAL is an indicator of the government’s underlying stewardship of the Crown’s finances. It excludes gains and losses on the Crown’s assets and liabilities, which are volatile in the short term. The Operating Balance, which includes gains and losses, is a more of an accounting indicator of the Crown’s current financial performance, taking into account underlying activity and also short term fluctuations in asset and liability values.
While we are looking forward to what is to come in Budget 2012, the Core Crown deficit has been tracking broadly in line with forecasts. However, this is only because both revenue and expenditure have been below forecast – rather than everything being on track.
The government promised to return to a budget surplus by the end of fiscal 2014/15. To make this happen, it is likely that the Finance Minister will have to continue to tighten the purse strings, as revenues are unlikely to get back on to the track it assumed when making this promise. So Budget 2012 is likely to see the government’s contribution to the overall economic pie shrink. While this may contribute to the government’s long-term goals, it may have severe short-term consequences that we should not ignore. Although it may be good to reach the long-term economic nirvana, as Keynes put it, “in the long run, we’re all dead”.