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Budget 2013 Home Page Budget Economic and Fiscal Update 2013

Core Crown Tax Revenue

Tax revenue increases by around 5% per annum on average over the next four years...

Core Crown tax revenue is forecast to increase by $14.5 billion over the next four years, reaching $72.8 billion in 2016/17. These increases outpace the growth in the economy and see tax revenue rise as a share of GDP each year, reaching 28.3% by the end of the forecast period, but still below levels of the last decade (Figure 2.1).

Figure 2.1 - Core Crown tax revenue
Figure 2.1 - Core Crown tax revenue.
Source: The Treasury

The tax revenue forecasts assume the underlying strength recorded this year remains and that this base then continues to grow. The strength in this year's tax take is owing to a faster growing economy and a shift in income distribution. While there has been recent weakness in the labour market, this has been concentrated at the lower end of the income scale and resulted in a higher average tax rate, owing to the progressive nature of PAYE tax. Coupled with this, strong international equity markets and base-broadening measures have boosted other persons tax. Moderate growth in the nominal economy and earnings is expected to continue across the forecast period, and translate into growth in all types of tax revenue.

In total, the growth in tax revenue is expected to be above the forecast rate of nominal GDP growth (as shown in Figure 2.2). All tax types are expected to increase across the forecast period, with particular strength in tax from employees, as shown in Table 2.3.

Figure 2.2 - Core Crown tax revenue growth
Figure 2.2 - Core Crown tax revenue growth.
Source: The Treasury

Labour earnings growth is the key contributor to the growth in tax revenue across the forecast period. Earnings growth and the progressive nature of the personal tax scale contribute to add $5.1 billion to source deductions over the next four years.

The level of residential investment is forecast to double over the forecast period, mainly as a result of rebuilding in Canterbury. The higher investment is expected to add $1.3 billion to GST by 2016/17 (over the next four years) and is the main reason why GST is forecast to grow faster than private consumption.

Corporate tax is expected to rise over the forecast period as business profitability continues to improve as growing domestic activity allows firms to rebuild margins which have been compressed in recent years. In addition, an assumed running down of tax losses that built up over the recession contributes to the forecast growth in corporate tax.

These forecasts also see an expected rise in 90-day interest rates from 2.7% in 2012/13 to 4.7% by 2016/17, with flow on impacts to increased tax on interest earned on residents' savings (RWT).

Budget 2013 announces revenue initiatives, largely in relation to increased funding for the enforcement of tax law in the property sector.[4] This increased enforcement is expected to raise an additional $45 million of tax revenue from 2016/17 onwards.

Table 2.3 - Reconciliation of change in core Crown tax revenue over the forecast period
Year ending 30 June
$billions
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast

Movement in core Crown tax owing to:

Employees' compensation 0.5  1.1  1.0  1.0  1.2 
Entrepreneurial income 0.1  0.2  0.3  0.1  0.1 
Corporate profits 0.3  1.1  0.2  0.4  0.2 
Private consumption 0.5  0.7  0.8  0.8  0.7 
Residential investment 0.3  0.5  0.4  0.3  0.1 
Interest rates (0.1) -    0.2  0.3  0.3 
Fiscal drag 0.2  0.2  0.2  0.2  0.3 
Tax loss offsets -    0.4  -    0.1  -   
Timing and other factors 1.4  (0.1) 0.6  0.4  0.2 
Total movement in core Crown tax revenue 3.2  4.1  3.7  3.6  3.1 
Plus: previous year's tax base 55.1  58.3  62.4  66.1  69.7 
Core Crown tax revenue 58.3  62.4  66.1  69.7  72.8 
   as a % of GDP 27.3% 27.4% 27.8% 28.1% 28.3%

Source: The Treasury

...and is higher than the Half Year Update

The Half Year Update forecast tax revenue of $71.9 billion by 2016/17, while Budget 2013 expects an additional $0.9 billion, taking the total to $72.8 billion in 2016/17. The reason for the increase is largely owing to the strength of the current year's outturn. While the Half Year Update included increases in both other persons tax and PAYE, the actual outturn for these tax types has outstripped those forecasts. The forecasts assume that most of the current strength will remain and the base will grow.

Figure 2.3 - Movement in core Crown tax revenue since the Half Year Update
Figure 2.3 - Movement in core Crown tax revenue since the Half Year Update
Source: The Treasury

The signalled reductions in ACC levies (refer to page 35) also impact the tax take. With lower levies there is an increase in disposable income, which has flow on impacts to the forecasts in the form of increased tax from consumption and interest on savings.

Notes

  • [4]Refer to the Additional Information on Treasury's website for further details on tax policy changes.
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