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Budget 2014 Home Page Budget Economic and Fiscal Update 2014

Core Crown Tax Revenue

Tax revenue grows by 5.8% per annum on average over the forecast period...

Core Crown tax revenue is forecast to rise in each year of the forecast period, although at a lower rate than previously expected. While tax in the current year is weaker than previously forecast, growth of 5.8% per annum across the forecast period is still expected.

By 2017/18 core Crown tax revenue is expected to reach $77.6 billion, $18.9 billion higher than in 2012/13. Forecast tax revenue increases relative to nominal GDP, reaching 28.5% by the end of the forecast period compared to 27.5% in 2012/13 (Figure 2.1).

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

Most of the growth in tax revenue forecasts can be attributed to growth in the nominal economy, with nominal GDP forecast to grow at 5.1% per annum on average over the forecast period. Tax revenue growth increases in 2014/15 before slowing over the remainder of the forecast period as the growth in nominal GDP slows (Figure 2.2).

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

All tax types are expected to increase across the forecast period, with individuals' source deductions (PAYE) and goods and services tax (GST) showing the most significant growth, as shown in Table 2.3.

Table 2.3 - Growth in core Crown tax revenue over the forecast period by tax type
Year ending 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Total
Movement in core Crown tax owing to:    
Source deductions 1.5 1.4 1.4 1.5 1.7 7.5
Other persons tax 0.1 0.4 0.1 0.2 0.1 0.9
Corporate tax 0.4 0.5 0.5 0.3 0.3 2.0
Residential Withholding Tax (RWT) - 0.4 0.6 0.4 0.4 1.8
Goods and Services Tax (GST) 1.1 1.5 1.1 0.8 0.9 5.4
Other taxes 0.1 0.3 0.5 0.3 0.1 1.3
Total movement in core Crown tax 3.2 4.5 4.2 3.5 3.5 18.9
Plus: previous year's tax base 58.7 61.9 66.4 70.6 74.1 58.7
Core Crown tax revenue 61.9 66.4 70.6 74.1 77.6 77.6
As a % of GDP 26.8% 27.6% 28.0% 28.2% 28.5%

Source: The Treasury

Growth in employees' compensation (contributing $6.2 billion to the growth in source deductions and the progressive nature of the personal tax scale (fiscal drag) see source deductions increase by $7.5 billion over the forecast period.

Growth in corporate profits are the main drivers behind corporate tax increasing by $2.0 billion over the forecast period, while growth in private consumption contributes to a $5.4 billion increase in GST.

Increased residential investment continues to contribute to the forecast growth in tax revenue, boosting GST by $1.4 billion by 2017/18 as residential investment is forecast to grow at an average rate of 13.8% per annum. This growth is partly offset by GST refunds to insurers, as a large part of the Canterbury residential rebuild is funded by insurance claims.

The 90-day bank bill interest rate is expected to rise from 2.6% on average in 2012/13 to 5.2% by 2017/18. This rise, together with growth in the interest-bearing deposit base, results in growth in tax on interest earned on residents' savings (RWT) of about $1.8 billion across the forecast period.

Table 2.4 - Composition of growth in core Crown tax revenue over the forecast period
Year ending 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Total
Movement in core Crown tax owing to:    
Employees' compensation 1.4 1.2 1.1 1.2 1.3 6.2
Entrepreneurial income 0.5 0.2 0.1 0.2 0.1 1.1
Corporate profits 0.9 0.5 0.4 0.4 0.2 2.4
Private consumption 0.8 1.1 1.1 0.9 0.7 4.6
Residential investment 0.3 0.6 0.3 0.1 0.1 1.4
Interest rates (0.1) 0.2 0.4 0.1 0.1 0.7
Fiscal drag 0.2 0.2 0.3 0.3 0.4 1.4
Policy changes - 0.1 0.1 0.1 - 0.3
Timing and other factors (0.8) 0.4 0.4 0.2 0.6 0.8
Total movement in core Crown tax 3.2 4.5 4.2 3.5 3.5 18.9
Plus: previous year's tax base 58.7 61.9 66.4 70.6 74.1 58.7
Core Crown tax revenue 61.9 66.4 70.6 74.1 77.6 77.6

Source: The Treasury

Budget 2014 includes policy changes totalling $0.3 billion across the forecast period. The largest positive changes come from an Inland Revenue initiative targeting unfiled tax returns and a reduction in the duty-free tobacco concession ($0.2 billion each), with other minor changes slightly reducing tax. These policy changes are discussed in further detail in the Additional Information document (on the Treasury website).

Although growth in tax revenue is forecast, risks to the forecast tax outturn remain, particularly if the assumptions on the economic outlook do not materialise as expected. The Risks and Scenarios chapter provides further discussion of the risks around tax revenue.

...but is weaker than at the Half Year Update

Overall, tax revenue is $1.1 billion less than the Half Year Update across the forecast period, with $0.6 billion relating to the 2013/14 year.

The downward revision in tax revenue in the current year is partly owing to assumptions made at the Half Year Update not eventuating - in particular, in individuals' tax, GST and excise duties (eg, higher earthquake-related insurance refunds than previously assumed and strength in excise that was previously assumed to be permanent but is timing-related). The reduction in the current year forecasts of $0.6 billion consists of $0.2 billion for individuals' tax, $0.3 billion for GST and $0.1 billion for other taxes (Figure 2.3).

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

While the current year's tax take is lower than previously forecast, this weakness is not expected to flow through to 2014/15, as stronger economic growth in that year is expected to boost tax revenues and offset the current year's weakness. Tax policy changes (as discussed above) since the Half Year Update also contribute to the increase in tax in 2014/15. However, the forecast for nominal GDP growth from 2015/16 onwards is lower than in the Half Year Update, reducing the core Crown tax revenue forecast in those years.

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