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Budget 2015 Home Page Budget Economic and Fiscal Update 2015

Core Crown Tax Revenue

Tax revenue grows over the forecast period...

Core Crown tax revenue (Table 2.3) is forecast to rise in each year of the forecast period. By 2018/19, core Crown tax revenue is expected to reach $80.5 billion, $19.0 billion higher than in 2013/14. Forecast tax revenue increases as a percentage of nominal GDP, from 26.3% in 2013/14 to 28.2% at the end of the forecast period (Figure 2.1).

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

The main driver for the increase in tax revenue is forecast growth in nominal GDP (Figure 2.2). Factors that influence tax revenue are the composition of GDP growth, fiscal drag (being the additional personal income tax generated as an individual's average tax rate increases as their income increases), the interest rate forecast (affecting Resident Withholding Tax (RWT)), Consumers Price Index (CPI) indexation of excise rates and assumptions regarding such things as the timing of tax revenue recognition and the accumulation, and subsequent utilisation, of tax losses.

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

...with 2014/15 particularly strong...

Year-to-date core Crown tax outturns to March 2015 are around 8.0% up on last year, mainly owing to growth in:

  • source deductions, caused in roughly equal parts by growth in employment and wages, and with a contribution from fiscal drag too
  • corporate tax, in which unusually large terminal tax from the 2014 tax year is boosting the growth rate, and
  • goods and services tax (GST), where strong growth in residential investment, partly owing to the Canterbury rebuild, is complementing growth in nominal private consumption.

The year-on-year growth in core Crown tax revenue in 2014/15 is expected to reduce to around 7.5% by June, as some of the strength in year-to-date results is expected to soften, mainly owing to seasonal variation in PAYE and the timing of corporate tax. However, some upside risk to the 2014/15 tax revenue outturn remains, particularly as the June quarter is typically the largest quarter for tax revenue each year. Individually, small variations in tax returns that are due in the June quarter (eg, annual income tax returns from most large corporate and Portfolio Investment Entities (PIE) annual tax returns), can accumulate to large variances from forecast, presenting risks to the 2014/15 tax revenue outturn, both positive and negative.

The expected 7.5% growth in tax revenue in 2014/15 is higher than the 2.4% forecast for growth in nominal GDP. The main reasons for this difference are:

  • the components of nominal GDP that drive the underlying taxable bases for tax revenue are growing faster than total nominal GDP, for example, total employees' compensation is forecast to grow by 5.2%, nominal private consumption is forecast to grow by 4.5% and nominal residential investment is forecast to grow by 18.2%
  • tax revenue in the 2014/15 fiscal year has been boosted by higher-than-usual terminal tax, mainly from the 2014 tax year, and
  • excise rate increases and fiscal drag have also added to tax revenue growth.

...while nominal GDP growth drives tax revenue growth in future years

Through 2015/16 and 2016/17, total tax revenue is forecast to grow in line with nominal GDP, although there is considerable variation across the tax types:

  • source deductions and GST are forecast to grow faster than nominal GDP owing to fiscal drag and to continued strong residential investment growth, but
  • corporate tax and other persons tax are forecast to grow more slowly than nominal GDP (in fact, other persons tax is forecast to decline in 2015/16) owing to relatively weak growth in the underlying income drivers (operating surplus and entrepreneurial income) and an assumption that terminal tax will return to a more “normal” level in 2015/16.

Through 2017/18 and 2018/19, tax revenue growth is forecast to outstrip nominal GDP growth owing to (in approximate decreasing order of significance):

  • fiscal drag adding to the growth rate of source deductions
  • increasing deposit interest rates providing a boost to interest RWT
  • CPI indexation of excise rates, and
  • an assumed tailing-off of earthquake-related GST refunds.

Table 2.3 shows a complete breakdown of the drivers of growth in forecast tax revenue.

Table 2.3 - Composition of growth in core Crown tax revenue over the forecast period
Year ending 30 June
$billions
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Total

Movement in core Crown tax owing to:

   
Employees' compensation 1.3 1.0 1.1 1.2 1.3 5.9
Private consumption 0.9 0.8 0.9 0.9 0.9 4.4
Corporate profits 0.1 0.3 0.6 0.6 0.4 2.0
Fiscal drag 0.2 0.2 0.3 0.3 0.3 1.3
Residential investment 0.3 0.4 0.2 0.3 - 1.2
Indirect tax CPI inflation indexation 0.1 0.1 0.1 0.1 0.1 0.5
Entrepreneurial income (0.1) - 0.5 0.2 0.1 0.7
Interest rates 0.1 - - 0.1 0.3 0.5
Interest bearing deposit base 0.1 0.1 0.1 0.1 0.1 0.5
Budget 2015 policy initiatives - 0.1 0.1 0.1 - 0.3
Other factors 1.6 (0.2) (0.3) 0.4 0.2 1.7
Total movement in core Crown tax revenue 4.6 2.8 3.6 4.3 3.7 19.0
Plus: previous year's tax base 61.5 66.1 68.9 72.5 76.8 61.5
Core Crown tax revenue 66.1 68.9 72.5 76.8 80.5 80.5
Percentage of GDP 27.6% 27.6% 27.6% 27.9% 28.2%

Note: “Other factors” in 2014/15 includes additional 2013/14 terminal tax recognised in 2014/15.

Source: The Treasury

Tax policy changes made by the Government have been included in these forecasts, with the largest effect being the provision of additional audit funding to Inland Revenue (IRD), which is expected to raise an additional $65 million of tax revenue in 2015/16 rising to $257 million in 2018/19.

Table 2.4 - Significant tax policy changes
Year ending 30 June
$millions
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Total
5 years

Tax policy changes:

     
Inland Revenue audit funding - 2015 Budget bid - 65 144 144 144 497
Inland Revenue audit funding - extension of 2012 Budget bid - - - 113 113 226
Child hardship package (PAYE effect) - 7 26 26 26 85
Total - 72 170 283 283 808

Inland Revenue has also prepared a set of tax forecasts based on the Treasury's macroeconomic forecasts. Inland Revenue’s forecasts are close to Treasury’s forecasts, with all the differences in the forecasts of total core Crown tax in any one year being less than $250 million (0.1% of GDP). This comparison is included in the Additional Information on the Treasury website http://www.treasury.govt.nz/budget/forecasts/befu2015

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