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Budget 2006 Home Page Half Year Economic & Fiscal Update 2006

Comparison with Budget Update

OBERAC and operating balance

Over the forecast period the OBERAC is forecast to be higher than the Budget Update.

Figure 2.14 – OBERAC comparison
Figure 2.14 - OBERAC comparison.
Source: The Treasury

The increase in the OBERAC compared with the Budget Update is largely due to:

  • an increase in tax revenue due to forecasting changes of approximately $1 billion per annum. Most of the increase in the compensation of employees forecast has led to an increase in PAYE forecasts of $600 to 800 million each year. Tax revenue has also changed due to policy decisions outlined in table 2.14
  • a reduction in benefit expense forecast of approximately $0.2 billion in 2006/07 and by $0.4 billion thereafter. Most of the reduction occurs in the unemployment benefit and is due to an improved economic and labour market outlook from the Budget Update and enhanced provision of services to job seekers, and
  • an increase in investment income mainly due to the fact the Government is forecast to hold a higher level of financial assets as a result of the Reserve Bank increasing the settlement cash level. There is a corresponding increase in the forecast for finance costs. There is also an increase in investment income due to a change in the methodology used by the NZDMO to calculate interest income on its financial asset portfolio.

The above factors affect each of the forecast years. In addition, in the current year expenses are also influenced by expenses transfers from the 2005/06 financial year and a one-off write-off of student loan debt.

Post 2008 revenue is forecast to reduce by $1 billion each year, reflecting the increase in the 2008 Budget allocation.

Table 2.13 – OBERAC reconciliation (explains changes to the OBERAC since the Budget Update
($ million) 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast
OBERAC 2006 Budget Update 5,768 4,343 3,561 5,412

Changes (revenue)

Tax revenue (forecasting)857 1,129 1,276 833
Tax revenue (policy)182 106 683 (30)
Other sovereign revenue4 11 4 11
New revenue allocation- - (1,000)(1,000)
Investment income1,536 883 873 773
Other revenue15 7 12 1
Changes to SOE/CE results(296)11 (27)(148)

Total revenue changes

2,298 2,147 1,821 440

Changes (core Crown expenses)

Welfare Benefit forecast changes158 356 354 366
Student loans(434)(109)(113)(102)
Future new operating spending104 176 154 305
Other core Crown functional expenses(554)(554)(290)(307)
Finance costs(684)(288)(290)(288)

Total core Crown expenses changes

(1,410) (419) (185) (26)

Total changes

888 1,728 1,636 414
OBERAC 2006 Half Year Update 6,656 6,071 5,197 5,826

Source: The Treasury

Effect of Tax Policy Changes to Tax Forecasts

Table 2.14 – Material changes in tax revenue forecasts owing to changes in tax policy since the Budget Update
($ million) 2007 Forecast 2008 Forecast 2009 Forecast 2010 Forecast
Material policy changes     
KiwiSaver SSCWT exemption(35)(71)(104)
Fair discount rate(30)(30)(30)
Portfolio investment entities36 (1)(1)
Provisional tax accruals182 135 785 105
Total 182 106 683 (30)

Source: The Treasury

KiwiSaver SSCWT exemption

Employer contributions to KiwiSaver will be exempt from specified superannuation contribution withholding tax

Fair discount rate

A '”fair discount rate” method is to be used for the taxation of offshore portfolio share investments.

Portfolio investment entities

The application date of new rules for portfolio investment entities has been deferred from 1 April 2007 to 1 October 2007.

Provisional tax accruals

In June 2006, Inland Revenue changed the way it calculates provisional tax revenue. This change has the largest effect in 2009 when $600 million of provisional tax revenue that was previously lost owing to a shift in payment dates is effectively reinstated by the new calculation method. Note that this is a change in accounting treatment rather than a tax policy change.

Residual cash

Over the forecast period residual cash is forecast to be around $3.6 billion higher than the Budget Update. The main drivers of the forecast increase are broadly similar to what has increased the OBERAC.

Debt indicators

Compared to the Budget Update, GSID is forecast to be higher by the end of the forecast period. This is largely due to the Reserve Bank increasing its settlement cash level by an additional $5.5 billion. This is partially offset by lower forecast issuance of Treasury Bills by NZDMO.

Net core Crown debt is lower by the end of the forecast period compared to the Budget Update. The main reason for this is because of the increase in the cash position.

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