Revenue Risks
One of the major sources of risk to the fiscal position arises from the inherent uncertainty about future tax revenue. The amount of tax revenue that the Government accrues in a given year is closely linked to the performance of the economy.
Figure 3.5 plots our main tax revenue forecast, along with confidence intervals around those forecasts based on the Treasury's historical tax forecast errors.[11] The outermost shaded area captures the range (+/- $5 billion in the June 2015 year) within which actual tax forecasts would typically fall for 80% of the time.[12] The tax revenue forecasts from the upside and downside scenarios are also plotted; tax revenue in the June 2015 year is $1.7 billion higher and $2.5 billion lower than in the main forecasts in the upside and downside scenarios, respectively.
- Figure 3.5 - Core Crown tax revenue uncertainty
- Source: The Treasury
Based on average historical forecast errors and an even balance of risks, Figure 3.5 shows that tax revenue over the forecast period would come in weaker than shown in the downside scenario approximately one-quarter of the time, and conversely come in stronger approximately three-quarters of the time. For the upside scenario, tax revenue over the forecast period would come in stronger than shown in the upside scenario approximately one-third of the time, and come in weaker approximately two-thirds of the time.
However, as discussed previously, the forecast risks are not evenly balanced - they are skewed to the downside. Accordingly, the probability of tax revenue undershooting the downside scenario is likely to be higher than one-quarter, and the probability of tax revenue overshooting the upside scenario is likely to be lower than one-third.
Notes
- [11]A full summary of the methodology and critical assumptions is included in New Zealand Treasury Working Paper 10/08. Standard deviation assumptions used for 0-, 1-, 2- and 3-year ahead forecasts are 0.9%, 3.2%, 5.3% and 6.6% of the actual, respectively.
- [12]Recent Treasury analysis shows that a shock that has a significant and persistent impact on economic growth can result in tax revenues coming in significantly below the outermost shaded area. See Fookes, C (2011), “Modelling shocks to New Zealand's fiscal position,” New Zealand Treasury Working Paper 11/02.
