The Government’s books are running well ahead of where the Treasury thought they would be just weeks ago, with the operating deficit for the eleven months to the end of May coming in $3.0 billion smaller than forecast and net debt tracking lower than expected.
The interim financial statements, published by the Treasury on 2 July, cover the first eleven months of the 2025/26 financial year, which ends on 30 June. They are the last near complete read on the Crown accounts before the full year result, and the first proper look at the books since the Budget on 28 May.
The headline measure the Government watches is the operating balance before gains and losses excluding ACC, known by the shorthand OBEGALx. For the eleven months it was a deficit of $6.8 billion. That is still a deficit, but it is $3.0 billion less red ink than the Treasury pencilled in at the Budget only five weeks earlier.
The reason the Treasury strips out gains, losses and ACC is that those items swing around with financial markets and long run actuarial assumptions, and can flatter or depress the accounts in a single month without telling you much about the underlying position. Once you put the gains back in, the picture looks even better. The full operating balance, including gains and losses, was a surplus of $1.1 billion, against a forecast deficit of $2.5 billion. That is a $3.6 billion swing, and most of it comes from stronger than expected returns on the Crown’s investment portfolios rather than from the day to day business of taxing and spending.
The tax take
The more meaningful driver for the underlying position is tax. Core Crown tax revenue reached $114.9 billion over the eleven months, $0.9 billion more than forecast. The Treasury put most of that down to higher than expected corporate tax and provisional tax paid by other individuals, which is the tax that self employed people and investors pay in instalments through the year. Provisional tax is a rough, close to real time signal of how business and self employed income is tracking, and it is running hot.
That fits what the rest of the economy has been saying in the past fortnight. The BNZ and BusinessNZ Performance of Manufacturing Index jumped to 59.7 in June, its highest reading since July 2021, up from 51.3 in May. A reading above 50 means the sector is expanding, below 50 means it is shrinking. The companion Performance of Services Index came in at 58.6, a fourth straight month of expansion. Read together, BNZ economists said the two surveys point to an economy growing at close to a 4 percent annual pace. When firms sell more and earn more, they pay more company and provisional tax, and that is now showing up in the Crown accounts with the usual lag.
Total core Crown revenue, which takes in more than just tax, was $126.6 billion, $1.7 billion above forecast. Part of that was the Emissions Trading Scheme, where revenue ran $0.5 billion ahead of forecast because carbon unit prices and the volume sold at auction were both higher than the Treasury had assumed.
Spending, meanwhile, came in slightly under budget. Core Crown expenses were $132.4 billion, $0.9 billion below forecast, spread across a range of areas including core government services, transport and education. A lower spend and a higher take both push the deficit down.
Debt and net worth
The debt numbers moved the same way. Net core Crown debt sat at $186.0 billion at the end of May, or 41.3 percent of gross domestic product, which is $2.8 billion less than the Treasury had forecast. Net worth attributable to the Crown was $181.2 billion, or 40.2 percent of GDP, and that was $4.1 billion higher than forecast, helped by the same investment gains that lifted the operating balance. It is worth remembering how far that number has travelled. Net Crown debt was effectively zero when Helen Clark and Michael Cullen left office in 2008.
A word of caution about reading too much into any single month. These are interim, unaudited figures, and the eleven month position can still shift in the final month and again when the audited full year accounts are published later in the year. Investment gains in particular can reverse as quickly as they appear if markets turn. The underlying OBEGALx deficit of $6.8 billion is the number that matters for the Government’s fiscal strategy, and it is still a deficit, even if a smaller one than the Treasury expected.
Even so, the direction is clear. A stronger economy is quietly repairing the books faster than the Treasury dared forecast at the Budget, and it is doing so mainly through revenue rather than through cuts. That is the same recovery that led the Reserve Bank to lift the Official Cash Rate to 2.50 percent on 8 July, its first increase in three years, as it moved to keep a lid on inflation that it expects to peak near 3.9 percent in the June quarter.
The election backdrop
The timing matters. New Zealand goes to the polls later this year, and the state of the books is always contested ground in an election campaign. A deficit that is narrowing faster than forecast, debt tracking below expectations and a surprise operating surplus once gains are counted all give the Government a friendlier fiscal backdrop to campaign on than looked likely even at Budget time. Whether the improvement holds through the final month, and whether voters feel a recovery that is showing up in company tax receipts before it shows up in their wages, are the open questions.
The full interim financial statements are on the Treasury website, and the monthly business surveys are published by BusinessNZ.
What do you make of the books coming in ahead of forecast in an election year? Have your say in the comments below.
This article was written by AI, briefed to report the facts, hopefully without some of the bias people bring to the job 🙂
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