Core Crown – Revenue

Tax revenue is the major source of Core Crown revenue.

Source:The Treasury

Ignoring such things as cyclical effects and tax policy changes, tax revenue should grow slightly faster than nominal GDP. This is because the influence of fiscal drag, caused by the progressive nature of the personal tax system, outweighs the influence of some of the tax types for which growth is not necessarily linked to any component of GDP, e.g. excise taxes.

Figure 2.6 – Tax revenue forecasts

Source: The Treasury

The small rise in tax revenue to GDP in 2006/07 comes mainly through source deductions. Source deductions is closely linked to the economic aggregate of Compensation of Employees (COE). As COE accounts for an ever-increasing portion of GDP through the forecast period, so too does source deductions, most noticeably in 2006/07. Source deductions growth is more muted later in the forecast period as the threshold adjustments announced as part of Budget 2005 start to take effect from 2007/08.

There is a pronounced business cycle present in the economic forecasts. This will necessarily be reflected in the business-related tax types of corporate tax and other persons tax. In addition, through the trough of the business cycle, we are likely to see above-average tax loss accumulation. The subsequent utilisation of these losses will suppress tax growth in 2007/08 and 2008/09. This is the major cause of the drop in tax relative to GDP in 2007/08. The further drop in 2008/09 can be ascribed to changes in the provisional tax system that will push a major revenue recognition point across the fiscal year boundary into 2009/10. Note that this occurs a year later than in the Budget Update and the Pre-election Update as the implementation of this change has been delayed for one year.

Inland Revenue’s tax forecasts

In line with established practice, the Inland Revenue Department has prepared an independent set of tax forecasts, based in the short term on more detailed analysis of taxpayer information, and in the longer term on the same broad macroeconomic trends that underpin Treasury’s tax forecasts.

Inland Revenue’s total tax forecasts are higher than Treasury’s in all years. The differences in 2006/07 and 2009/10 are small, given the size of total tax revenue. The difference in 2005/06 is a bit larger and is evident mainly in the individuals and resident withholding tax types.

The differences in 2007/08 and 2008/09, at just over $1 billion, are much larger than in the other years and also much larger than the differences seen in previous forecast Updates. In individuals’ taxes, the differences arise mainly in source deductions as a result of the different methods used by the respective forecasting teams to model the effect of fiscal drag. The differences in corporate taxes result from differing views around how company income tax will be affected by the business cycle with the Treasury forecast incorporating a build-up of tax losses over the next few years. In RWT on interest, the two forecasting teams have different views about the effect of interest rates on the size of the deposit base, with Treasury forecasting that the recent rate of growth in deposits will not be sustained over the full forecast period. The Treasury and Inland Revenue use different methods for forecasting GST, with Treasury putting more weight on residential investment than does Inland Revenue. With residential investment forecast to decline in each of the next two March years, Treasury’s GST forecasts are somewhat lower than Inland Revenue’s.

Detailed comparisons of Treasury and Inland Revenue tax forecasts can be found at www.treasury.govt.nz/forecasts/hyefu/2005/.