Overall, a growing nominal economy boosts tax revenue
Growth in the nominal economy is forecast to rebound from 1.7% in the March 2010 year to 7.0% in the March 2011 year, before easing back gradually after that. Nominal output growth is expected to be driven by stronger real activity and higher prices, the latter reflecting the higher terms of trade and the stronger inflation profile. The rise in GST contributes to higher nominal output as nominal GDP is GST-inclusive. Nominal output growth is expected to flow through to higher core Crown tax revenue, but with a lag.
Core Crown tax revenue is forecast to fall by about 7% in the June 2010 year owing to:
- subdued business profits in the early stages of the recovery
- the recognition of $1.4 billion of company income tax in 2008/09, which was not repeated in 2009/10
- previous personal and business tax cuts
- a steep decline in interest rates in 2009 reducing interest withholding tax in 2010, and
- a forecasting assumption that previously-incurred tax losses are being used to offset current profits, reducing the corporate tax burden.
Source deductions (mostly PAYE) are expected to fall in the June 2011 year, as the 1 October 2010 personal income tax cuts come into effect. They then rise in line with a recovering labour market, in part driven by higher participation as a result of these tax cuts. GST revenue is forecast to rise as consumer spending rebounds and the GST rate rises to 15%. Corporate tax is expected to increase once business profits recover and the tax-loss cycle has run its course. The cut in the company tax rate from 30% to 28% is not expected to noticeably reduce corporate tax as there are offsetting base-broadening measures. Refer to the box on pages 68 to 70 for the full details of the tax changes.
|
Year ended 30 June $ billions |
2010 Forecast |
2011 Forecast |
2012 Forecast |
2013 Forecast |
2014 Forecast |
|---|---|---|---|---|---|
Core Crown tax revenue |
|||||
| Budget 2009 Forecasts | 51.6 | 51.8 | 54.6 | 58.4 | - |
| Forecast changes | -0.4 | 2.5 | 2.6 | 2.0 | - |
| Half Year Update 2009 Forecasts | 51.2 | 54.3 | 57.2 | 60.4 | 63.8 |
| Forecast changes | -0.5 | 0.4 | 1.4 | 1.9 | 2.4 |
| Policy changes | 0.0 | -0.8 | -0.6 | -0.8 | -0.8 |
| Budget 2010 Forecasts | 50.7 | 53.9 | 58.0 | 61.5 | 65.4 |
Composition of Budget 2010 Forecasts: |
|||||
| Source deductions | 21.9 | 20.2 | 21.0 | 22.6 | 24.4 |
| Corporate tax | 7.3 | 8.9 | 9.5 | 10.0 | 10.4 |
| GST | 11.7 | 14.4 | 15.9 | 16.7 | 17.6 |
| Other taxes | 9.8 | 10.4 | 11.6 | 12.2 | 13.0 |
Source: The Treasury
Inland Revenue also prepared a set of tax forecasts based on the Treasury's macroeconomic forecasts. The two forecasting teams compare forecasts to provide quality assurance for each other. The two sets of Budget 2010 forecasts are broadly similar to each other over the entire forecast period, with the difference in any given year not more than 1% of expected total tax revenue. The Treasury forecasts are lower than Inland Revenue's in the 2010 and 2011 June years but are higher in the 2013 and 2014 June years as the Treasury has incorporated a larger response to the economic recovery in its tax revenue forecasts than Inland Revenue.[2]
Notes
- [2]For a detailed comparison of the Treasury and Inland Revenue forecasts of tax revenue, see Additional Information on the Treasury website.
