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Budget 2017 Home Page Budget Economic and Fiscal Update 2017

Core Crown Tax Revenue

Tax revenue grows over the forecast period...

Core Crown tax revenue (Figure 2.1) is forecast to rise in each year of the forecast period in nominal terms while remaining fairly static as a percentage of nominal GDP. By 2020/21, core Crown tax revenue is expected to reach $89.9 billion, $19.5 billion higher than in 2015/16.

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

…mainly owing to nominal GDP growth...

The increase in core Crown tax revenue across the forecast period can be largely attributed to the growth in nominal GDP (Figure 2.2). The introduction of the Family Incomes Package is partly offset by other factors such as fiscal drag.

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

The tax elements of the Family Incomes Package (ie, personal income tax threshold adjustment and the abolition of the Independent Earner Tax Credit (IETC)), is expected to reduce core Crown tax revenue by $6.3 billion over the forecast period. The package takes effect from 1 April 2018, so the first full-year effect of the package will be seen in the 2019 June financial year.

As noted in the Economic Outlook chapter, in addition to the direct tax impact, the package will have some macroeconomic effects, mainly via domestic consumption as households are expected to spend much of the additional disposable income generated by the package.

This increase to spending will have an immediate effect on goods and services tax (GST) revenue, with subsequent effects on company income tax, through increased business profits, and pay-as-you earn (PAYE) income tax, through increased demand for labour. There is also expected to be some additional resident withholding tax (RWT) on interest, as interest rates are expected to be a little higher than they would have been in the absence of the package.

Altogether, these tax “clawback” effects are expected to total $1.5 billion across the forecast period.

Table 2.3 - Tax revenue impacts of the Family Incomes Package
Year ending 30 June
$billions
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
5-year
Total
Gross reduction in tax revenue - 0.5 1.9 1.9 2.0 6.3
Macroeconomic impacts - - (0.4) (0.6) (0.5) (1.5)
Net reduction in tax revenue - 0.5 1.5 1.3 1.5 4.8

Source: The Treasury

Pages 21 to 22 provide a full explanation of the Family Incomes Package and consequential fiscal impacts.

…as nominal GDP continues to grow strongly

Nominal GDP is forecast to grow at an average rate of 5.1% per year over the forecast period. This is expected to cause tax revenue to grow by $19.8 billion over the same period, as shown in Table 2.4.

Table 2.4 - Composition of growth in core Crown tax revenue over the forecast period
Year ending 30 June
$billions
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
2021
Forecast
5-year
Total
Change in core Crown tax compared with previous year owing to:    
Nominal GDP 4.4 3.6 4.2 4.0 3.6 19.8
Composition of GDP (0.4) (0.2) (0.2) (0.4) (0.6) (1.8)
Policy initiatives 0.2 (0.5) (1.0) 0.1 (0.1) (1.3)
Fiscal drag 0.1 0.2 0.3 0.2 0.2 1.0
Interest rates (0.2) (0.1) 0.1 0.4 0.4 0.6
Interest-bearing deposit base - 0.1 - 0.1 0.1 0.3
Other factors 0.1 (0.2) 0.1 0.5 0.4 0.9
Total increase in core Crown tax revenue 4.2 2.9 3.5 4.9 4.0 19.5
Plus: previous year's tax base 70.4 74.6 77.5 81.0 85.9 70.4
Core Crown tax revenue 74.6 77.5 81.0 85.9 89.9 89.9
Percentage of GDP 27.7% 27.5% 27.3% 27.5% 27.7%

Source: The Treasury

Policy initiatives

In addition to the Family Incomes Package discussed above, all other policy initiatives that have a tax effect have been included in these forecasts. Other recenttax policy initiatives included in these forecasts are the Base Erosion/Profit Shifting initiatives and changes around the taxation of Employee Share Plans. A full table of tax policy initiatives since the Half Year Update can be found at http://www.treasury.govt.nz/budget/forecasts/befu2017

Composition of GDP

Although nominal GDP is forecast to grow at more than 5% per year on average, not all components of nominal GDP grow at the same rate. For instance, employees' compensation and domestic consumption respectively are both forecast to grow at a slower rate than nominal GDP. These are the principal economic drivers of two of the largest tax types: PAYE and GST. Collective GDP-compositional effects take $1.8 billion off tax revenue growth over the forecast period.

Fiscal drag

Owing to the progressive nature of the personal tax scale (ie, higher marginal tax rates applying at higher incomes), PAYE tends to grow at a faster rate than the underlying incomes on which PAYE is levied. This effect is colloquially known as fiscal drag and it adds $1.0 billion to tax revenue growth over the forecast period.

Interest-bearing deposit base and interest rates

RWT on interest depends mainly on the stock of interest-bearing deposits and the interest income earned on those deposits. The stock of deposits is expected to grow more or less steadily over the next five years, adding $0.3 billion to RWT over the forecast period. Interest rates are forecast to increase from recent lows, particularly through the latter half of the forecast period, and are forecast to add $0.6 billion to RWT.

Comparison with Inland Revenue forecasts

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 are relatively close to each other but differ slightly because of the different modelling approaches and assumptions and judgements made by the two agencies. This comparison can be found at http://www.treasury.govt.nz/budget/forecasts/befu2017

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). The 2017 Tax Expenditure Statement is available on the Treasury website

http://www.treasury.govt.nz/budget/2017/taxexpenditure

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