Deficit speculation squashed

Press, 19 February 1986, Page 1

Deficit speculation squashed

By

MARTIN FREETH

in Wellington Speculation of a blowout in the fiscal deficit was squashed yesterday when the Minister of Finance, Mr Douglas, disclosed a favourable $1.7 billion revised estimate. Mr Douglas said Government expenditure was tightly on track and not out of control as suggested by some commentators recently. At a special press conference, he released new estimates showing net Government expenditure for the full year to be 15.7 per cent ahead of 1984-85. That is rather lower than indicated in the progress spending figures released by the Treasury over the last six months which have excited many private sector economists. The new deficit estimate, awaited since Mr

Douglas announced the revision 10 days ago, had been expected to be at least $l.B billion and perhaps higher than $2 billion. It was the second revision of the deficit estimate since the Government’s projection of $1.3 billion in the Budget last June. In November, Mr Douglas revised that to $1.6 billion. The new estimates for the year show a significant reversal in the rising cost of servicing Government debt, apparently achieved through refinancing overseas debts , on more favourable terms. Debt servicing is still estimated to be the second-largest item of Government expenditure at $3.3 billion, and to end the year 30 per cent ahead of 1984-85. How-

ever, Treasury figures have shown debt servicing part-way through the year to have been as high as 50 per cent ahead of the previous year. Mr Douglas said that the final deficit figure would depend on the size of tax flows to the Government in March. He said the Government had stuck with the revenue projections contained in last June’s Budget. The March tax flow is projected to total $2850 million. During February and March 69 per cent of the year’s total company tax and 76 per cent of the terminal and personal provisional tax are forecast to flow to the Government. Those payments are expected to reverse dramatically the high deficits evident in recent months of Treasury expenditure

and revenue figures. The deficit for the 10 months to the end of January is $3.4 billion. Mr Douglas warned that the tax flow could still throw the new deficit estimate. “A variation of plus or minus 5 per cent on $2850 million can throw the deficit up or down $l4O million. Ten per cent could cause variations up or down of $2BO million, and 15 per cent would put us roughly $420 million out either way.” If the March tax flow estimate is 10 per cent higher than the actual flow, the deficit will turn out to be about $2 billion, which is just on 4 per cent of New Zealand’s gross domestic product, something the Government would still regard as a positive result for its

economic strategy to contain inflation. Mr Douglas said the $1.7 billion estimate was the best available to the Government at this stage. He outlined five factors which had changed the year’s revenue and expenditure estimates: • The revenue from the new fringe benefit tax is expected to be down $lOO million on the initial Budget estimate, which was made on inadequate data. • Customs duty is also expected to be down, by $2OO million, as a result of lower than expected imports during the year and the Government’s decision in December to remove duty on some goods. • Post Office running costs are $lOO million ahead of the Budget estimate because.-, of increased staff numbers

and a lower level of productivity than expected. • Debt-servicing costs are now forecast to be $l3l million higher than initially thought, apparently because of the level of interest rates the Government has had to accept in selling stock. • Tax revenue from individuals is expected to be up $155 million as a result of the relatively high wage round. Mr Douglas said the level of public sector pay settlements had been higher than assumed by the Government, but the pressure this had put on expenditure had been offset by other factors. He had called for a review of the system of provisional tax payments which at present causes a huge March inflow to the Government Reaction, page 8