How a Budget surplus became a deficit

On 10 May Cabinet received some rather startling news. Deficits were popping out of the wood work.
The Minister for Finance had the rather difficult task of informing his colleagues that there had been a revision to taxation forecasts and the inclusion of non-discretionary expenditure items since the Supplementary Budget.
The outcome of all this was there was now an operating budget deficit of $1.7 million and a non operating balance deficit of $300,000.
So how did government come to be in this position given the Supplementary Budget painted a rosy picture of an operating budget surplus of $400,000 and a non operating budget surplus of $1.8 million.
The explanation comes courtesy of the Budget Secretariat. They informed the Cabinet that there were various non discretionary items to be added to the expenditure estimates. These items were required under policy and legislative provisions.
Adjustments also had to be made to correct outer year baseline estimates. This is due to job sizing requirements, long service bonuses, depreciation and outer year estimates for the provision of social obligation costs by the State Owned Businesses.
Adjustments had to also be made to remove forward estimates for future budget allowances given that the Budget Policy Statement estimates had significant allowances in for 2011-2012 (adjusted by plus $745,000) and 2012-2013 (reduced by $500,000).
However it appears what really set the alarm bells going was a revision of the returns expected from the tourism growth strategy. This review, in a nutshell resulted in a revision downwards in expected tourist numbers for this and outer years.
Following these adjustments, the budget balances for 2011-2012 showed an operating budget deficit of $1.7 million as a result of a minus $1.4 million shift in operating revenues and a plus $700,000 shift in operating expenditures.
The non operating balance showed a $300,000 deficit as a result of a minus $2.2 million downward shift in the operating balance, a minus $7,000 reduction in the reserve trust fund from lower operating revenues and a plus $50,000 increase in financing depreciation.
What is not clear is whether the need for the above adjustments was overlooked or only became apparent at a later date. It is important for the public to know this if the public is to have any confidence in MFEM’s capacity to produce reliable estimates.
That aside, the question raised now is how the plug the gaps?
The Budget Support Group is considering two options. It is hoped that the group will come back to government with recommendation that will balance the budget.
The Budget Secretariat was tasked with the job of reconfirming all other Crown receipts and non discretionary expenditure by Wednesday 18 May.
The two options being considered by the Budget Support Group were;
(1) Reducing operating expenditures by $1.7 million by reducing departmental budget allocations (outputs and payments on behalf of the crown), reviewing department depreciation, $300,000 under spent to date and considering the legality of back payments of job sizing adjustments.
(2) Consider funding one off investment proposals and existing programmes through;
(a) the Chinese grant of $12 million (buy machinery and assets), local labour component to be used and paid for by government.
(b) Asia Development Bank tranche II economic recovery support programme loan, $9 million.
© NZAID $3 million for economic sector, untagged, various uses suggested.
While Cabinet got the news on the deficit on Monday 10 May, Heads of Ministries (HOMs) got the news at a meeting on Tuesday 11 May. The Herald understands the news was not well received by HOMs.

Herald Issue 554 09 March
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