Surplus a straitjacket for Govt credibility

It's just five weeks until Bill English gets a sharp haircut, picks a blue-ish tie and stands to deliver his sixth Budget.

At its political heart, as it has been for several years now, will be the prediction of a surplus for the 2014-15 year.

But this time around it is not a forecast on the never-never, but a real and present plan. By election day we will be almost three months into the financial year and will have a reasonable steer on its likely success.

It is worth bearing in mind that whether the government succeeds or fails by a few hundred million dollars in a $70 billion Budget is neither here nor there for the rating agencies, interest rates or the wider economy.

But it has become a self-forged linchpin - if not a straitjacket - of the Government's credibility.  

So important has it become that crown agencies have been told a return to surplus is a priority and they are aware they need to advise of any risk to financial performance and any changes particularly if they are below forecast.

In light of that it's easy to imagine ministers' anguish this week when the latest Treasury update showed the deficit to February 28 was tracking $884m worse than forecast as recently as the December half year economic and fiscal update (HYEFU).

Worse there seemed to be a ''missing billion'' from the forecast tax revenues, despite the economy trucking along as well or better than expected before Christmas.

Of course it cannot be assumed that deterioration on forecast will flow through to next year's surplus. After all, a surge of revenue from the improved economic climate could create a bow-wave of revenue that should boost next year's tax take.

Treasury will of course provide a new set of forecasts in the May Budget and is expecting revenue for 2014-15 to be broadly similar to the HYEFU numbers.

''As a result tax revenue developments are not likely to impact on the forecast surplus for 2014-15,'' Treasury murmured reassuringly.

Where it does increase uncertainty is around the political saleability of a surplus forecast in May.

If the variance from forecast can be $884m between mid-December and February how much more could it skid off the road and into the weeds between May and the September 20 election?

To be fair to Treasury some of the variance is explicable, and perhaps only half is expected to persist - so the final numbers may only be out (as in worse) by about $400m-$500m.

It is also early days and there are still four months to run in the financial year.

The GST shortfall in the missing $1b was $350m, with about a third of that due to persist because it reflects some underlying weakness in this tax type - maybe the result of online shoppers buying overseas.

Company tax was down $372m on forecast though that is seen as a timing issue that is expected to reverse later in the year - though Labour finance spokesman David Parker is not convinced, pointing to possible slippage from big internationals such as Google vacuuming up revenues but paying little tax here. There is also a fear Australian corporates may be repatriating profits because tax paid there can be used to benefit shareholders.

If Parker is right a larger proportion of the shortfall will be permanent, rather than simply ''a timing issue'' with ramifications for 2014-15 as well as 2013-14.

With a surplus expected at this stage of just under $100m in 2014-15 there is very little room to move at all.

Just how fragile that buffer is can be seen by one area of Treasury's ''variance'' this week.

According to its update tobacco excise has come in a full $103m lower than forecast at $1.029b against an expected $1.132b.

Now Treasury's explanation was that the tobacco excise was revised up in the HYEFU '''in response to stronger outturns, however it is apparent that the strength was timing-related rather than permanent''.

That suggests, on the face of it, that it had not factored in the well-known tobacco industry practice of stocking up their warehouses towards the end of the year.

This allows them to get a windfall gain when they increase their prices in the New Year to meet the new excise level - but pay the lower excise applying when the goods were landed. The cost is borne by the smoking public and by the Government's revenue, although there is nothing illegal about it.

It would be a major concern if Treasury did not get that fact - or that it was not aware of the dwindling amount of tobacco going up in smoke.

Either way, there's $100m of the missing billion right there, and possibly $150m by year's end - and it presumably flows through to 2014-15 and beyond..

That's about the size of the current surplus forecast for the 2014-15 year.

We knew it was paper thin, but who guessed it was a roll-your-own.

Fairfax Media