Govt's final accounts for the past year come in $360m better than expected pre-election; National's Steven Joyce warns against spending it all at once; Warns of softer growth potential

Final results for the government’s books in the year to June have come in even better than expected in Treasury’s pre-election update.

There’s an extra $363 million in the operating balance excluding gains and losses (OBEGAL) compared to the latest forecast on 23 August (PREFU). We’re up slightly on the revenue side ($19m), with the result down to Crown expenses being $500m lower than forecast. The OBEGAL came in at a surplus of $4.1bn.

The government’s net debt to GDP ratio at the end of June was 22.2%, compared with the PREFU expectation of a 22.5% reading. Net debt was $59.5bn. Gross debt at $87.1bn represented 32.5% of GDP (vs 32.6% expected at PREFU).

Caretaker Finance Minister Steven Joyce warned about spending all the new dosh at once, saying the higher-than-expected OBEGAL excess might not continue in coming years. He said Treasury had based its commentary on “solid” growth projections, although warned some economic commentators had suggested in the past few days that these might have softened.

Read Joyce’s statement below:

The New Zealand Government has achieved its third fiscal surplus in a row with the Crown accounts for the year ended 30 June 2017 showing an OBEGAL surplus of $4.1 billion, $2.2 billion stronger than last year, Finance Minister Steven Joyce says.

“The 2016/17 Crown accounts are a direct demonstration of the hard work of New Zealanders since the Global Financial Crisis and the benefit of a strong economic plan that is delivering consistent growth,” Mr Joyce says.

Core Crown tax revenue was $75.6 billion for the 2016/17 year, up 7.4 per cent from the previous year with all major tax types increasing.

“The 12.3 per cent growth over last year in company tax, a 7.1 per cent growth in GST, and a 7.4 per cent growth in personal income tax, are a direct consequence of the confidence and growth of Kiwi companies and the growth in jobs.”

Core Crown tax revenue growth of $5.2 billion outpaced core Crown expenditure growth of $2.4 billion.

The final OBEGAL result for the year is $363 million better than predicted by Treasury at the time of the Pre-election Fiscal Update, largely due to core Crown expenditure being $502 million less than forecast.

“This better result should be seen as a one-off. Treasury advises that much of this expenditure reduction reflects timing differences and is likely to reverse out in the years ahead,” Mr Joyce says.

The country’s net debt has reduced in nominal terms by $2.4 billion from last year, to $59.5 billion. Net debt has dropped to 22.2 per cent of GDP.

“This is the first time net debt has reduced in actual dollar terms since the GFC and the Christchurch earthquakes,” Mr Joyce says. “It’s a significant milestone in the country’s economic recovery from those twin shocks.”

Mr Joyce says that the 2016/17 full year result should be interpreted with caution, and not seen as automatically flowing through into higher surpluses than forecast in the years ahead.

“Treasury has based its forecasts on current economic settings and some reasonably solid growth predictions for the years ahead. A number of commentators have noted a softening of growth indicators in recent days.

“The Government’s future surpluses will be needed to meet the cost of the significant investments we have committed to as part of the next four Budgets including the Government’s $32.5 billion infrastructure programme.

“We also need to keep reducing debt over time to prepare for the next rainy day event.”

Read Treasury’s summary below:

Core Crown tax revenue increased…

Core Crown tax revenue of $75.6 billion was up from last year by $5.2 billion (7.4%) with all tax revenue types increasing. Source deduction revenue, corporate tax revenue and goods and services tax were particularly strong making up 84.2% of the year on year change.

… reflecting growth in the economy…

As a share of the economy, core Crown tax revenue was 28.2% of GDP, up 0.4% from last year. Nominal GDP grew by 5.9% in the year to June 2017 to $268.1 billion, mainly as a result of 5.7% growth in private consumption and a 12.7% increase in residential investment.

The total population grew by just over 2%, while total wage and salary income grew by more than 5% during the year, with the number of people in employment up by just over 3%, and an increase in average hourly earnings of 1.6%.

… being higher than growth in core Crown expenses resulting in an OBEGAL surplus…

As a share of the economy, core Crown expenses decreased to 28.5% of GDP (29.2% of GDP in 2016); in nominal terms however, core Crown expenses increased $2.4 billion to $76.3 billion.

The largest drivers of growth in nominal core Crown expenditure were Budget 2016 decisions (which came into effect in 2016/17), and an increase in social assistance expenses. However delays around the business transformation project for Inland Revenue, and negotiations of Treaty settlements, has pushed some expenditure out into future years.

Overall the OBEGAL surplus of $4.1 billion, increased by $2.2 billion from last year.

… gains in financial markets and liability valuations, resulted in a strong bottom line…

The Crown’s operating balance is particularly sensitive to changes in some key assumptions used to value financial assets and liabilities.

Actuarial gains in relation to updated long-term liability valuations for ACC and GSF liabilities resulted in a combined actuarial gain of $1.4 billion (compared to an actuarial loss of $7.1 billion last year) (page 53). In addition to these valuation gains, NZS Fund recorded an investment gain of $5.5 billion in the current year (compared to a loss of $76 million last year).

When these results are combined with the OBEGAL surplus, the operating balance (after gains and losses) was an operating surplus of $12.3 billion ($17.7 billion higher than the 2016 operating deficit of $5.4 billion)

… contributing to growth on the balance sheet…

Alongside the operating surplus of $12.3 billion, revaluation uplifts of the Crown’s property, plant and equipment assets, an increase of $8.5 billion, resulted in net worth attributable to the Crown increasing by $21.2 billion to reach $110.5 billion.

Total assets increased by $20.9 billion to $313.6 billion, while liabilities remained fairly static, at $197.1 billion.

Increases in property, plant and equipment and financial assets such as NZS Fund investments contributed to the growth in assets while the actuarial valuation decreases to liabilities discussed above (ACC, and GSF) offset growth in borrowings.

… and resulting in a cash surplus, reducing net debt.

Overall a residual cash surplus of $2.6 billion was achieved, an increase of $3.9 billion from last year’s residual cash deficit of $1.3 billion.

The operating cash flow strengthened on last year, increasing by $3.0 billion, to $6.3 billion. This is in line with the OBEGAL result, reflecting increased core Crown tax receipts more than offsetting the growth in core Crown operating payments. Capital spending of $3.7 billion was lower than last year by $0.9 billion, due to delays in projects.

The capital spend consisted of net purchases of physical assets ($2.2 billion) and new capital investment in Crown entities ($1.7 billion), offset by net repayment, of advances ($0.1 billion).

Core Crown net debt decreased nominally by $2.4 billion from last year to be $59.5 billion, largely a result of the residual cash surplus. As a percentage of GDP, net debt has continued to fall, from 24.4% to 22.2%.