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Budget 2016 Home Page Budget Economic and Fiscal Update 2016

Core Crown Tax Revenue

Tax revenue grows over the forecast period...

Core Crown tax revenue is forecast to rise in each year of the forecast period. By 2019/20, core Crown tax revenue is expected to reach $84.4 billion, $17.8 billion higher than for the June 2015 year. Core Crown tax revenue increases, from 27.6% of nominal GDP in 2014/15, to 28.2% of GDP 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 growth in tax revenue is forecast growth in nominal GDP (Figure 2.2). This graph also illustrates the timing lag between GDP growth and its impact on tax revenue. In addition, policy initiatives and other factors also influence tax revenue.

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 nominal GDP growth driving the bulk of the tax revenue growth

The stronger-than-expected tax revenue in the current year has been built in to these forecasts and is largely owing to growth in nominal GDP in the 2015/16 year with forecast nominal GDP growth of 3.5%, up from 2.8% in the 2014/15 fiscal year (Figure 2.2).

Nominal GDP and its components are the principal drivers of tax revenue growth through the forecast period, as shown in Table 2.2. Of the total $17.8 billion forecast increase in tax revenue, $14.4 billion is owing to macroeconomic factors, while $3.4 billion relates to other factors (discussed below).

However, growth in tax revenue owing to macroeconomic factors is not uniform across all years. Growth in tax revenues from corporate profits is forecast to be relatively subdued in 2015/16, owing to an expected decline in profits in the agriculture sector this year. Corporate profits and entrepreneurial income are expected to grow with contributions to corporate tax and other persons tax respectively, forecast to be larger in 2017/18 and 2018/19 than in the other years of the forecast period. Residential investment contribution to GST growth increases initially but then declines in 2019/20 (Table 2.2).

In contrast to these cyclical effects, growth arising from the two largest drivers of tax revenue, namely employees' compensation and nominal private consumption, is forecast to be comparatively steady throughout the forecast period. Employees' compensation is forecast to add $1.0 to $1.3 billion to source deductions (mainly PAYE) in each year of the forecast period and consumption adds $0.7 to $0.9 billion to GST each year.

Table 2.2 - Composition of growth in core Crown tax revenue over the forecast period
Year ending 30 June
$billions
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
5-year
Total

Change in core Crown tax compared with previous year owing to:

   

Macroeconomic factors:

   
Employees' compensation 1.0 1.0 1.0 1.2 1.3 5.5
Private consumption 0.7 0.8 0.9 0.9 0.9 4.2
Corporate profits 0.1 0.3 0.9 0.8 0.5 2.6
Residential investment 0.2 0.3 0.3 0.3 0.1 1.2
Entrepreneurial income 0.1 0.2 0.3 0.2 0.1 0.9

Other factors:

   
Fiscal drag 0.2 0.2 0.2 0.2 0.3 1.1
Indirect tax CPI inflation indexation 0.2 0.1 0.1 0.1 0.1 0.6
Interest rates (0.1) (0.5) (0.1) 0.4 0.7 0.4
Interest-bearing deposit base 0.2 - - - - 0.2
Policy initiatives - - (0.1) 0.3 0.1 0.3
Other factors 0.5 (0.1) 0.2 0.2 - 0.8 
Total movement in core Crown tax revenue 3.1 2.3 3.7 4.6 4.1 17.8
Plus: previous year's tax revenue 66.6 69.7 72.0 75.7 80.3 66.6
Core Crown tax revenue 69.7 72.0 75.7 80.3 84.4 84.4
Percentage of GDP 27.9% 27.8% 27.7% 27.9% 28.2%

Source: The Treasury

The other factors contributing the most to the forecast growth in tax revenue are:

  • fiscal drag (ie, the effect of higher average tax rates applying to higher incomes), adding approximately $1.1 billion to PAYE and the growth of source deductions across the forecast period
  • CPI indexation of excise rates adds $0.6 billion to customs and excise duties by 2019/20
  • although they have a negative effect on tax growth in the early part of the forecast period, interest rates are forecast to rise from 2018, overall increasing the interest RWT forecast by $0.4 billion
  • growth in the interest-bearing deposit base is forecast to add $0.2 billion to RWT in the 2015/16, and
  • various policy initiatives are expected to affect tax revenue from 2017/18 contributing an additional $0.3 billion to tax revenue by 2020. The policy initiatives line includes initiatives announced in both the Half Year Update and the Budget Update. See Additional Information on the Treasury website for details of the Budget Update policy initiatives (www.treasury.govt.nz/budget/forecasts/befu2016).

Inland Revenue has also prepared a set of tax forecasts which, like the Treasury's tax forecasts, were based on the Treasury's macroeconomic forecasts. The two sets of forecasts differ because of the different modelling approaches and assumptions and judgements made by the two agencies. This comparison is included in the Additional Information on the Treasury website.

Tax Expenditure Statement

The Treasury prepares a Tax Expenditure Statement annually in conjunction with the Budget Update. The purpose of this statement is to provide additional transparency around policy-motivated “expenditures” made through the tax system. Tax expenditures impact on the Crown's operating balance by either reducing tax revenue (eg, through an exemption or a preferential tax rate) or by increasing expenditure (eg, Working for Families tax credits). Refer to the Treasury website for a copy of the 2016 Tax Expenditure Statement.

(www.treasury.govt.nz/budget/2016/taxexpenditure).

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