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Budget 2006 Home Page Half Year Economic & Fiscal Update 2006

Core Crown – Revenue

Table 2.5 – Core Crown revenue
  Year ended 30 June
Core Crown Revenue 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
($ billion)            
Tax revenue 52.4 52.2 53.9 56.2 59.2 61.9
Investment revenue 4.5 4.5 3.8 4.1 4.4 4.7
Other core Crown revenue 2.2 2.3 2.2 1.3 1.1 1.3
Total core Crown revenue 59.1 59.0 59.9 61.6 64.7 67.9
(% of GDP)            
Tax revenue 33.3 32.1 31.6 31.3 31.3 31.3
Investment revenue 2.9 2.8 2.2 2.3 2.3 2.4
Other core Crown revenue 1.4 1.4 1.3 0.7 0.6 0.6
Total core Crown revenue 37.6 36.3 35.1 34.3 34.3 34.3

Source: The Treasury

Over the forecast period, total core Crown revenue initially declines as a percentage of GDP and remains relatively stable at around 34.3%. Tax revenue (discussed below) is the major source of core Crown revenue and is the main driver of this trend.

Within the other sources of core Crown revenue, investment revenue is forecast to fall from 2.8% of GDP in 2006/07 and to remain relatively stable at around 2.3% of GDP. This reflects a forecast assumption that investment rate of returns will drop to average rate of returns after the high rates experienced in 2005/06. This growth in line with GDP reflects the build-up of financial assets across the Crown.

Other core Crown revenue initially stays stable then declines from 2008/09 onwards. The drop in other revenue from 2008/09 onwards reflects the indicative portion of the 2008 Budget package allocated to revenue initiatives.

Tax revenue

Table 2.6 – Tax revenue % of GDP, compared with the Budget Update
  Year ended 30 June
Tax Revenue 2006 Actual 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast
(% of GDP)            
Tax revenue - Half Year Update 33.3 32.1 31.6 31.3 31.3 31.3
Tax revenue - Budget Update   31.7 30.8 30.1 30.8  

Source: The Treasury

Over the June and September quarters, tax revenue growth has slowed; annual average growth in tax revenue has fallen from around 10% to close to 5%. Although PAYE growth has remained at around 8% during this period, growth in other taxes has declined, most noticeably corporate tax, where growth is now hovering around 0% (after adjusting for the change in provisional tax accounting in June 2006) after being as high as 20% in December 2005.

This slowing in corporate tax was not unexpected. Apart from some one-off factors that are expected to reverse out in the near future, corporate tax for the September 2006 quarter is close to the Budget Update forecast.

Looking ahead, corporate tax is expected to follow the business cycle, albeit with a slightly smoother growth path. This is because tax loss accumulation and utilisation tend to smooth the growth profile of tax relative to the business cycle. Corporate tax growth is forecast to be higher than profit growth through the bottom of the business cycle in 2007 as a higher-than-normal proportion of companies incur losses. Through the upswing in the business cycle, corporate tax is expected to grow more slowly than profit growth as the losses built up in 2007 are offset against profits in 2008 and 2009. Overall, the forecast for corporate tax is similar to the Budget Update forecast.

In contrast, recent PAYE growth has exceeded expectations, largely because wage and employment growth has been higher than forecast in the Budget Update. This has caused an upward shift in the level of compensation of employees through the whole forecast period, which adds about $500 million to the PAYE forecast each year. An increase in Treasury’s estimate of the “fiscal drag” effect, ie, taxpayers facing higher marginal tax rates at higher incomes, has also added about $200 million a year to the PAYE forecasts.

The overall picture across the forecast period is for tax revenue to decline relative to GDP through to 2009 and to flatten out thereafter. This is contrary to what we would expect to see, ie, tax revenue gradually increasing relative to GDP, as the effect of an increasing effective tax rate on personal income owing to the progressive tax scale slightly outweighs the retarding effect of taxes that grow more slowly than GDP, such as excise duties.

The reasons for this unusual profile in the tax-vs-GDP are:

  • overall from 2007 through to 2011, the tax bases of the major tax types, eg, compensation of employees, private consumption are forecast to grow more slowly than GDP, thereby reducing the total effective tax rate on GDP
  • tax threshold adjustments scheduled for April 2008 and April 2011 remove some of the fiscal drag effect from tax on personal income
  • the effective tax rate on corporate income reduces through the upswing of the business cycle as tax losses generated at the bottom of the business cycle are subsequently used to reduce firms’ total income tax liability, and
  • further reductions in import tariff rates cause customs duty to lag GDP growth by a wider margin than has been the case in recent years.

These effects are summarised in the following table.

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