Government Posts $10.5 Billion Operating Deficit in Wake of Recession

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.

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