Bank tax provisions are likely to feature strongly tomorrow when the new current account deficit figures are released, but an economist is warning that their significance should not be overplayed.
Westpac is forecasting that the September deficit narrowed to 3.5% of GDP (gross domestic product), the lowest since March 2003.
Westpac chief economist Brendan O'Donovan said that in the June quarter, the Bank of New Zealand reported a $661 million provision for tax on structured finance transactions that were entered between 2000 and 2005, after the High Court ruled in favour of the Inland Revenue Department in July.
That type of item was recognised in the balance of payments at the point when it was recognised in a firm's financial statements - which was not necessarily when the tax was paid - and resulted in a sharp drop in income on foreign equity investment, he said.
The provisions would be an even bigger feature for the September accounts.
Westpac made a $918 million provision after a separate High Court ruling.
The other two major banks had not had their day in court but ASB provisioned for the full $208 million liability and ANZ set aside $240 million in its third-quarter statements.
That gave a total of $1.37 billion - more than double the BNZ tax provision.
"The dollar amounts involved in these tax provisions are large, but their significance to the current account deficit can easily be overstated."
The BNZ tax provision was cited as the reason behind the "surprise" narrowing of the deficit in June.
But it was the equivalent of just 0.36% of GDP.
Most forecasts of the deficit overshot by 1% to 2%.
Similarly, the tax provisions in the third quarter added up to 0.73% of GDP, only a third of the estimated narrowing in the deficit for that quarter, he said.
The remaining two-thirds came from the same factors that had been driving the deficit lower for the past year: weaker import demand; lower interest rates on overseas debt; and lower profits for overseas-owned firms.
The latter two were likely to be a feature for several more quarters, given the long lag before they began to have a downward effect on the deficit.
However, imports were beginning to pick up as demand recovered and firms rebuilt inventories, he said.
The recently-published terms of trade showed that export volumes were up 9% on a year ago, a "stunning result" in the midst of a global recession, he said.
"What's more, Kiwis have been able to do much of their belt-tightening via imports, with volumes down 14% on a year earlier. Net exports were a huge positive of the New Zealand economy during the recession. It's reasonable to expect consumption to pick up the baton during the recovery."
