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Budget 2006 Home Page Half Year Economic & Fiscal Update 2006

Core Crown - Revenue

Table 2.7 – Movement in effective tax rate on GDP from 2007 to 2011
  Tax revenue
(% of GDP)
2007 tax revenue 32.1
Tax base movements, ie, changes in the composition of GDP -0.5
Fiscal drag +0.6
Tax threshold adjustments -0.3
Tax loss offsets -0.2
Tariff rate reductions -0.1
Other (eg, excise duties) -0.3
2011 tax revenue 31.3
Table 2.8 – Treasury and Inland Revenue total tax revenue forecasts
($ million) 2006/07
Forecast
2007/08
Forecast
2008/09
Forecast
2009/10
Forecast
2010/11
Forecast
PAYE          
Treasury 20,566 21,404 22,354 23,668 24,980
Inland Revenue 20,580 21,510 22,475 23,890 25,250
Difference (14)  (106)  (121)  (222)   (270)
Corporate taxes          
Treasury   8,905   8,947   9,550 10,450 10,833
Inland Revenue  9,003  9,619  10,379  10,631  11,042
Difference   (98)  (672)  (829)  (181)  (209)
Goods and services tax          
Treasury   10,709   11,181  11,618  11,899   12,446
Inland Revenue   10,644   11,025   11,542   11,817   12,421
Difference  ;65  156  76  82  25
Other taxes          
Treasury  11,529  11,812   12,074  12,495   12,966
Inland Revenue  11,655  11,886   12,015 12,533   13,034
Difference  (126)  (74)  59  (38)  (68)
Total tax          
Treasury   51,709   53,344   55,596  58,512   61,225
Inland Revenue  51,882  54,040  56,411  58,871   61,747
Difference  (173)  (696)   (815)   (359)   (522)
Total tax (% of GDP)          
Treasury 31.8% 31.3% 30.9% 31.0% 30.9%
Inland Revenue 31.9% 31.7% 31.4% 31.2% 31.2%
Difference -0.1% -0.4% -0.5% -0.2% -0.3%

Sources: Inland Revenue, The Treasury

Inland Revenue’s total tax forecasts are higher than the Treasury’s in all years, although the gap between the two sets of forecasts is not as large as it was in the Budget Update. Most of the differences occur in the corporate and PAYE tax types.

At the time of the Budget Update, growth in PAYE exceeded that which could be easily explained by growth in aggregate wages and salaries, even after allowing for the impact of fiscal drag. Inland Revenue assumed that this unexplained growth would continue into the forecast period. This assumption opened up a wedge between Treasury and Inland Revenue forecasts of PAYE; this wedge grew to more than $1 billion by the end of the forecast period.

Recent labour market data have shown that employment growth through the first half of 2006 was higher than expected in the Budget Update. PAYE in the September quarter was close to Inland Revenue's forecast, but $200 million above Treasury's.

Treasury's labour market forecast is now much higher than in the Budget Update in the near term and is now more readily reconciled against recent PAYE receipts. In response to recent outturns and to the new labour market forecast, Treasury's PAYE forecasts have increased in the order of $800 million per year. Inland Revenue's PAYE forecasts have increased by much smaller amounts in the near term, and have decreased from 2009 onwards. Thus the difference between the two departments' PAYE forecasts is now much smaller than in the Budget Update.

Detailed comparisons of Treasury and Inland Revenue tax forecasts can be found at www.treasury.govt.nz/forecasts/hyefu/2006.

Treasury or Inland Revenue: Which tax forecasts have been the more accurate?

Ever since the early 1990s, both Treasury and Inland Revenue have been producing tax forecasts for each Budget Update and Half-Year/December Update. This is to ensure that no single agency prepares tax forecasts in isolation and that the official tax forecasts are subjected to some sort of quality assurance. We have examined the accuracy of both agencies’ forecasts over the last decade or so.

Table 2.9 - Accuracy of Treasury and Inland Revenue tax revenue forecasts, for June years 1995 to 2006 (root mean errors)
Forecast horizon (years ahead)
  0 1 2 3 4
Treasury 1.4% 4.0% 6.3% 8.2% 13.7%
Inland Revenue 1.4% 4.2% 6.3% 8.3% 14.2%

Root-mean square error is the square-root of the mean of the squares of the forecast errors. It is a measure of the accuracy and variability of the forecast errors.

Table 2.9 shows that, with the possible exception of the four-year-ahead forecasts, the root-mean square errors of both agencies’ forecasts are very similar to each other. This result is not all that surprising. Both agencies use the same macroeconomic forecast as the basis for their tax forecast. At each forecasting round, there is much discussion between the two tax forecasting teams to test assumptions and judgements, and to ensure that both agencies use all available information in their forecasts. This tends to bring the two sets of forecasts closer together, rather than further apart.Large differences (of $1 billion or more) between the two sets of forecasts have been evident only in the last two forecasting rounds and have mainly affected the longer-horizon forecasts. Therefore, it will be several years before these differences start to affect the statistics presented in table 2.6. In short, over the historical period these forecasts have practically been the same. We will not be able to judge the accuracy of the differences now existing between the two agencies for another 2-3 years.

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