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Budget 2007 Home Page Half Year Economic & Fiscal Update 2007

Revenue and Expenses

This section discusses the trends in the three main OBEGAL components: core Crown revenue, core Crown expenses and SOEs’/CEs’ OBEGAL. The trend in total Crown is primarily driven by the core Crown segment activity so is the focus of this section.

Table 2.4 – Revenue and expenses comparison with Budget Update
  Year ended 30 June
% of GDP 2007 Actual 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast 2012 Forecast
Total revenue            
Half Year Update 44.6 44.7 43.5 43.4 43.7 43.6
Budget Update   44.4 44.4 44.5 44.3  
Total expenses            
Half Year Update 41.4 41.0 41.2 41.3 41.8 41.8
Budget Update   41.5 42.2 42.6 42.5  
Core Crown revenue            
Half Year Update 34.9 35.0 34.0 33.8 34.2 34.3
Budget Update   34.3 34.1 34.1 34.1  
Core Crown expenses            
Half Year Update 32.4 32.1 32.4 32.4 32.8 33.0
Budget Update   32.4 32.8 33.0 33.1  
SOE revenue            
Half Year Update 7.1 7.1 7.1 7.2 7.1 7.1
Budget Update   7.5 7.6 7.5 7.2  
SOE expenses            
Half Year Update 6.6 6.7 6.6 6.7 6.6 6.5
Budget Update   6.9 6.9 6.9 6.7  
Crown entities' revenue            
Half Year Update 15.7 15.4 14.7 14.2 13.8 13.3
Budget Update   15.9 15.6 15.2 14.6  
Crown entities' expenses            
Half Year Update 15.4 15.1 14.5 14.1 13.7 13.2
Budget Update   15.5 15.3 14.9 14.4  

Source: The Treasury

Total revenue to GDP is forecast to fall over the forecast period from 44.7% in 2007/08 to 43.6% by 2011/12. Total expenses to GDP are forecast to increase from 41% to 41.8% over the same period.

The trend in total revenue and expenses over the forecast horizon is largely driven by activity in the core Crown segment of reported Government activity. The following section discusses the core Crown activity in more detail.

Core Crown – Revenue

Table 2.5 – Core Crown revenue
  Year ended 30 June
  2007 Actual 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast 2012 Forecast
$ billion            
Tax revenue and revenue reduction contingency 53.4 57.2 57.7 59.6 62.5 65.5
Investment revenue 2.6 3.0 3.5 3.5 3.7 4.0
Other core Crown revenue 2.2 2.2 2.3 2.7 3.3 3.2
Total core Crown revenue 58.2 62.4 63.5 65.8 69.5 72.7
% of GDP            
Tax revenue and revenue reduction contingency 32.0 32.1 30.9 30.6 30.8 30.8
Investment revenue 1.6 1.7 1.9 1.8 1.8 1.9
Other core Crown revenue 1.3 1.2 1.2 1.4 1.6 1.5
Total core Crown revenue 34.9 35.0 34.0 33.8 34.2 34.3

Source: The Treasury

Tax Revenue and Revenue Reduction Contingency

There are a number of factors that are influencing the trend in tax revenue over the forecast period. In summary the main drivers are:

  • growth in the economy
  • tax initiatives
  • the revenue reduction contingency, and
  • accounting disclosure changes.

Economic growth

Tax revenue is expected to grow by around 7% to the end of this year, which is broadly consistent with forecast growth in nominal GDP for the same period. In nominal terms, tax revenue is forecast to grow by about $4 billion. The three largest components of this growth are:

  • source deductions ($1.5 billion), coming from growth in underlying salaries and wages of about 6%
  • corporate taxes ($0.8 billion), owing to forecast growth in profits, and
  • other persons tax ($0.6 billion), with much of this a result of the 50% increase in the 2008 dairy payout.

From 2009 onwards, the composition of forecast growth changes slightly. In particular tax types:

  • Source deductions are still the main driver of tax growth. With aggregate salaries and wages forecast to grow at around 5% per annum, source deductions continue to grow by about $1.5 billion each year, with fiscal drag contributing $250 million to $300 million of this.
  • Corporate tax continues to grow, but only by about $300 million each year, excluding the effects of the Business Tax Reform announced in the Budget Update.
  • Other persons tax growth also slows, adding about $200 million each year.
  • GST makes a more prominent contribution in these later years, adding $300 million to $600 million each year.

Tax revenue forecasts have also incorporated some second round effects from the revenue reduction contingency. They assume that such a revenue reduction would increase disposable income and also spur some additional employment and wage growth. This would generate some extra PAYE and GST, as well as providing a small boost to some of the other income taxes. This additional revenue from second round effects is estimated to be as much as $500 million by 2011/12.

Tax revenue initiatives

The Business Tax Reform has a significant effect in 2008/09 and beyond, reducing tax revenue by nearly $1 billion each year. Without the business tax package, core Crown tax revenue would have a much flatter profile, hovering around 32% of GDP.

Revenue reduction contingency

The fiscal forecasts include a revenue reduction contingency of $1.5 billion effective from 1 April 2009 and rising to $1.7 billion by the end of the forecast period. As signalled in the 2008 Budget Policy Statement (BPS), the contingency reflects possible reduction to personal income tax.

Accounting disclosure changes

There has been a change in the disclosure of bad debt write-offs of tax receivables. Tax write-offs are now shown as an expense rather than netted off against revenue. The change in the write-off treatment has resulted in a $450 million per annum increase in revenue and a corresponding increase in expenses. The main tax types affected are other persons, corporate tax and GST.

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