By Ian Llewellyn of NZPA

Wellington, March 5 NZPA - The patchy state of the economy has been revealed by the latest set of government accounts.

The first seven months of the financial year to January show the Government was better off than forecast because of improved tax revenues and lower costs.

The operating balance excluding gains and loses, which strips out unrealised investment gains or losses, for the seven months to January 31 was a deficit of $3.36 billion, or 20.8 percent better than the forecast made in December's fiscal update for a deficit of $4.24b -- largely because of a higher tax take, including the one-off payments by foreign owned banks, and reduced government expenses.

Corporate tax revenue showed that companies were still facing weaker than expected profitability down around $150 million or 4.3 per cent below forecast.

"The corporate tax shortfall was largely due to lower-then-expected provisional tax and indicates that underlying business profitability in the 2009/2010 tax year is weaker than we expected," Treasury said today.

"Financial statements published by publicly listed companies in the current reporting season largely support current weaker than expected provisional tax out turns."

This was offset by higher than expected private spending pushing up the GST by $285 million or 3.9 percent more than forecast.

Treasury said indicators were pointing to a "significant" increase in sales volumes in the last months of 2009 and "greater than expected consumption is likely to have continued in January".

Increasing unemployment was also hitting the government books, with $553 million spent on the unemployment benefit.

This was slightly less than forecast, but up from $303 million in the comparable period last financial year.

Welfare spending was up across the board due to the indexation of benefits and higher numbers of beneficiaries.

Government spending was up overall by 3.7 percent or $1.3 billion with $1.1 billion of this being on increased super and benefits.

Overall income for the seven months was down $3.4 billion or 10.4 percent as the recession hit the economy and the tax cuts of 2008 and 2009 taking effect.

Finance Minister Bill English still warned of belt tightening in the upcoming budget, despite the Government's books turning up better than expected.

Mr English said the gains were incremental improvements in the context of much bigger fiscal challenges facing the country over the next few years.

The Government would operate within the $1.1b allowance it set out for new spending in last year's budget and most government agencies would receive no new money when the budget was delivered on May 20.

They would need to reprioritise their existing spending to improve their performance, he said.

But the Council of Trade Unions said the figures showed the Government was exaggerating New Zealand's financial problems.

Secretary Peter Conway said the country did face fiscal challenges "but the Government now has to face up to the fact that it has talked up the fiscal problems to a greater extent than was warranted".

New Zealand had the third lowest gross debt in the OECD and the fifth lowest net debt last year.

Also, Treasury had indicated that $240 million gross issuance per week converted to $130 million net, and $110m in repayments when it was averaged over four years from July 2009 to June 2013, Mr Conway said.

"While this still amounts to a significant borrowing programme, the Government should be more transparent about the fact that nearly half of the $240 million figure ministers regularly quote is actually repayment of debt."