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Media StatementGovernment Posts $10.5 Billion Operating Deficit in Wake of Recession

14 Oct 2009

The Government’s operating balance for the year ended 30 June 2009 was a $10.5 billion deficit, compared with a surplus of $2.4 billion for the previous year.  This deficit was $1.2 billion larger than forecast in the 2009 Budget.

The recession had a significant impact on the Crown’s fiscal position, reducing revenue and increasing expenses compared to the previous year.  Policy decisions also had an impact.  Some of these are highlighted below.

Year ended 30 June

Actual
2008
Budget 2009
Forecast
Actual
2009
$ million
Core Crown tax revenue 56,747 54,053 54,681^
Core Crown expenses 56,997 62,363 64,002
Operating surplus (deficit) before gains and loses 5,637 (2,916) (3,893)
Operating surplus (deficit) 2,384 (9,303) (10,505)
Gross debt 31,390 44,217 43,356
Net debt 10,258 15,482 17,119#
Total Crown net worth 105,514 95,698 99,515*

  • ^  The decline in tax revenue was partially offset by a one-off recognition of $1.4 billion of tax revenue from structured finance transactions. Due to a High Court ruling for one structured finance case, all similar structured finance assessments have been recognised as revenue in the 2009 financial year.
  • #   Lower revenue and higher expenses resulted in a residual cash deficit of $8.6 billion.  This deficit has been funded by an increase in net debt, which was $6.9 billion higher than the previous year at $17.1 billion (9.5% of Gross Domestic Product).
  • *  The operating deficit is the main contributor to a decline in the Crown’s net worth from $105.5 billion last year to $99.5 billion as at 30 June 2009.

The impact of the recession was seen in reduced revenue and increased expenses compared to the previous year, with:

  • A number of the Crown’s investment portfolios suffered significant losses.  In particular, the New Zealand Superannuation Fund reported an operating deficit of $2.8 billion for the year,
  • Declining profits, incomes and interest rates have reduced tax revenue,
  • A provision of $0.8 billion has been made in relation to the Retail Deposit Guarantee Scheme (refer below), and
  • Unemployment benefit expenses increased by $0.1 billion compared to the previous year.

The impact of policy decisions, compared to the previous year, included:

  • Personal and corporate tax cuts, along with the introduction of measures to help small and medium-sized enterprises, reduced tax revenue by approximately $3 billion,
  • Additional spending announced in the 2008 Budget, particularly in the areas of health and education, contributed to an increase in expenses,
  • Annual inflation indexation of welfare benefit payments, along with growth in beneficiary numbers in areas such as New Zealand superannuation, contributed to an increase of $1.4 billion in social security and welfare expenses,
  • The purchase of KiwiRail in July 2008 resulted in a write-down of $0.3 billion, and
  • The Accident Compensation Corporation’s claims liability increased by $5.8 billion.

In relation to the Retail Deposit Guarantee scheme, the Crown continually updates the likelihood of further default actions triggering the scheme and assesses the expected loss in the event of default. Based on these assessments, the Crown has made a provision of $0.8 billion (less than 1% of the exposure) as at 30 June 2009 for future payments under this scheme. While the provision represents a best estimate of likely loss, a significant range of outcomes are possible under the scheme in terms of which entities may default and the eventual loss to the Crown.

Except as detailed in the financial statements and on the Treasury website, further information on the Retail Deposit Guarantee Scheme cannot be provided due to commercial sensitivity.

ENDS

Contact

Angus Barclay | Senior Communications Advisor
Tel: +64 4 917 6146 or (027) 337 1102
Email: angus.barclay@treasury.govt.nz

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