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Budget 2007 Home Page Half Year Economic & Fiscal Update 2007

Other Revenue

Other core Crown revenue is forecast to increase slightly as a GDP over the forecast period. This is primarily due to the introduction of an ETS. The ETS will create tradable units (the NZ Unit) and will generate revenue when surrendered to the Government by emitters. Further information on the ETS can be found on page 44.

Inland Revenue’s tax forecasts

In line with established practice, Inland Revenue has also prepared a set of tax forecasts, which, like the Treasury’s tax forecast, is based on the Treasury’s macroeconomic forecast. Inland Revenue’s forecasts are shown here for comparative purposes. The Treasury’s forecasts remain the Crown’s official forecasts.

Table 2.6 – The Treasury and Inland Revenue core Crown tax revenue forecasts (excluding the revenue reduction contingency
$billion 2007/08
Source deductions          
Treasury        22.6        24.0        25.4        27.1        28.7
Inland Revenue        22.7        24.1        25.4        26.9        28.5
Difference         (0.1)         (0.1) -          0.2          0.2
Net other persons tax          
Treasury          3.9          4.2          4.3          4.5          4.7
Inland Revenue          3.8          3.8          4.0          4.2          4.4
Difference          0.1          0.4          0.3          0.3          0.3
Corporate taxes          
Treasury        10.8          9.3        10.2        10.4        10.9
Inland Revenue        11.0          9.7        10.2        10.4        10.7
Difference         (0.2)         (0.4) - -          0.2
Goods and services tax          
Treasury        11.8        12.1        12.5        13.1        13.5
Inland Revenue        11.7        12.3        12.7        13.3        13.8
Difference          0.1         (0.2)         (0.2)         (0.2)         (0.3)
Other taxes          
Treasury          8.1          8.5          8.7          9.0          9.4
Inland Revenue          7.9          8.3          8.6          8.9          9.1
Difference          0.2          0.2          0.1          0.1          0.3
Total tax          
Treasury        57.2        58.1        61.1        64.1        67.2
Inland Revenue        57.1        58.2        60.9        63.7        66.5
Difference          0.1         (0.1)          0.2          0.4          0.7
Total tax (% of GDP)          
Treasury        32.1        31.1        31.4        31.6        31.6
Inland Revenue        32.0        31.1        31.3        31.4        31.3
Difference          0.1 -          0.1          0.2          0.3

Source: Inland Revenue, The Treasury

The main differences between the Treasury’s and Inland Revenue’s forecasts occur in:

  • net other persons tax, where the two agencies have differing views on the amount of tax that will be payable on the additional dairy income
  • corporate taxes, where Treasury’s forecast is initially lower than Inland Revenue’s, but is higher by 2012, owing to Treasury forecasting a higher average growth rate than Inland Revenue, and
  • GST, where Inland Revenue’s implicit GST rate on nominal private consumption is higher than the Treasury’s from 2009 onwards.

Core Crown – Expenses

Table 2.7 – Expenses indicators
  Year ended 30 June
Expenses $billion            
Core Crown 54.0 57.1 60.5 63.1 66.6 70.0
Total Crown 69.1 73.0 77.0 80.4 84.7 88.8
% of GDP            
Core Crown 32.4 32.1 32.4 32.4 32.8 33.0
Total Crown 41.4 41.0 41.2 41.3 41.8 41.8

Source: The Treasury

Expense growth

Figure 2.11 – Core expenses ($ and % of GDP)
Figure 2.11 – Core expenses ($ and % of GDP).
Source:  The Treasury

Core Crown expenses are forecast to increase by around 1% of GDP between 2007/08 and 2011/12. In nominal terms, expenses are forecast to increase by $12.9 billion over the same period.

Budget initiatives

Figure 2.12 – Net amounts for new operating initiatives
Figure 2.12 – Net amounts for new operating initiatives.
Source:  The Treasury

The forecast growth in expenses largely arises from expense initiatives introduced in recent Budgets. A number of policy decisions made in previous Budgets have rising spending profiles to allow sufficient time for full implementation. The enhancement to the KiwiSaver initiative announced in Budget 2007 is one of the main drivers of this rising profile (around $0.8 billion in 2007/08 rising to around $1.4 billion by 2011/12).

The fiscal forecasts also include indicative amounts for new operating initiatives for future Budgets. The allowances for each of the next four Budgets have been set at around $2 billion, so are broadly consistent with the forecast growth in the economy. New operating spending initiatives add around $8 billion to the expense base by the end of the forecast horizon.

Emissions Trading Scheme

As part of the new ETS the Government has agreed to allocate NZ Units to emitters free of charge. This has resulted in an increase to expenses of $0.6 billion in 2008/09 and $0.5 billion in subsequent forecast years. Further information on the ETS can be found on page 44.

Benefit expenses

Social security and welfare expenses are forecast to broadly grow in line with the forecast growth in the economy. In nominal terms they are forecast to increase from $17.9 billion in 2007/08 to $20.4 billion in 2011/12. Around $1.7 billion of this reflects cost of living adjustments for New Zealand Superannuation payments and welfare benefits, which reflect inflationary pressures. Most benefits are adjusted each April by the CPI movement over the previous calendar year.

Partly offsetting nominal growth in benefit expense forecasts are second round effects from the assumed revenue reduction contingency. They assume tax paid on benefits will be lower, resulting in reduced gross payment of benefits for the Government.

Top-down adjustment to spending

Forecasts are initially compiled from returns provided by individual entities. The need for a top-down adjustment to core Crown expense and capital expenditure forecasts arises from the extent to which departments use appropriations, which are an authority for the maximum that a department may spend, rather than a mid-point estimate for these forecasts. As appropriations apply to the core Crown only, no adjustment is required to SOE or Crown Entity forecasts.

The size of the adjustment reflects analysis of key departments, trend analysis of expense variances across all departments and a review of results to September 2007. This analysis includes identifying where appropriations have been used as proxy for forecasts, where appropriations and hence forecasts reflect contingencies that may have low probability of being realised in any one year, and past trends of variances between results and forecasts.

In this update the outyear forecasts also have a top-down adjustment in order that aggregate department forecasts better reflect mid-point estimates, rather than appropriation levels, for Government policies. The top-down adjustment is applied to both cash and accrual forecasts and is explicitly identified in the financial statements. The adjustment is:

  Year ended 30 June
$millions 2008
Operating expenditure 750 275 250 200 150
Capital expenditure 250 100 100 100 100
Total 1,000 375 350 300 250

The adjustment for the 2007/08 financial year is higher than the outyears because it reflects the extent to which some expenses will be transferred from 2007/08 to subsequent outyears in Budget 2008. While we expect transfers to be made in the years beyond 2007/08, the amounts transferred into each of those years will be largely offset by the transfers out at the end of those same years.

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