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Half Year Economic and Fiscal Update 2012

Core Crown Tax Revenue

Tax revenue continues to recover and increase as a percentage of GDP...

Figure 2.1 - Core Crown tax revenue
Figure 2.1 - Core Crown tax revenue.
Source:  The Treasury

Core Crown tax revenue is forecast to increase by $14.5 billion over the next four years and grow at a faster rate than the economy, reaching $71.9 billion (27.7% of GDP) in 2016/17 as shown in Figure 2.1.

Most of the increase in tax revenue is owing to growth in the economy, with nominal GDP forecast to grow by 24.5% (over the next five years), in part because of the rebuild of Canterbury. The increase in tax revenue over the forecast period mainly comes through four tax types:

  • Earnings growth means that wages increase and, because of the progressive nature of the personal tax scale (ie, higher marginal tax rates at higher incomes), average personal income tax rates increase, adding about 0.4% of GDP to source deductions through pay as you earn tax (PAYE).
Figure 2.2 - Core Crown tax revenue by type
Figure 2.2 - Core Crown tax revenue by type.
Source:  The Treasury
  • Increasing interest rates add about 0.2% of GDP to resident withholding tax (RWT) as the key 90-day rate is forecast to rise from 2.6% to 4.7%.
  • An increase in the assumed effective tax rate on total entrepreneurial income, owing to a number of influences flowing on from changes made in Budget 2010 (including base-broadening depreciation measures and the effect of increased enforcement activity by the Inland Revenue [IRD]), adds about 0.2% of GDP to other persons tax.
  • In addition to the impact of economic growth, the Half Year Update includes policy changes to fuel excise and road user charges, providing $1.1 billion of additional revenue (including 2016/17).

...but the tax forecasts have weakened since the last Budget Update

Weaker economic forecasts have reduced tax revenue since the Budget Update by $7.9 billion for the four years to 2015/16, as shown in Table 2.3 below.

Table 2.3 - Movement in core Crown tax revenue forecasts since the Budget Update
Affected tax type Economic driver 2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Total impact
Source deductions Employees' compensation - (0.3) (0.6) (0.9) (1.8)
Other persons tax Entrepreneurial income (0.1) (0.2) (0.2) (0.4) (0.9)
Company tax Operating surplus (0.6) (0.4) (0.5) (0.6) (2.1)
Goods and services tax Consumption and residential investment (0.3) (0.4) (0.4) (0.6) (1.7)
RWT Interest rates (0.2) (0.2) (0.2) (0.2) (0.8)
All other taxes Other (0.1) (0.1) (0.2) (0.2) (0.6)
Total macroeconomic effect   (1.3) (1.6) (2.1) (2.9) (7.9)
Tax forecasting changes   0.2 0.4 0.5 0.2 1.3
Tax policy changes   - 0.2 0.3 0.4 0.9
Total changes in tax revenue since Budget 2012   (1.1) (1.0) (1.3) (2.3) (5.7)

Source: The Treasury

The tax forecasting changes, which were not directly related to changes in the macroeconomic forecast, were positive in each year. These changes were mainly caused by increases in:

  • the effective tax rate on other persons tax owing to changes made in Budget 2010, as discussed earlier, which has become apparent through recent tax outturns, and
  • the assumed level of tax on investment income as a result of the increasing popularity of savings schemes such as KiwiSaver.

The tax policy changes to road user charges and fuel excise duty are new decisions since Budget.

Treasury and IRD forecasts

In line with established practice, IRD has also prepared a set of tax forecasts which, like the Treasury's tax forecasts, is based on the Treasury's macroeconomic forecasts. In this Half Year Update, the two sets of tax forecasts are close to each other, with the largest difference in any one year being just over $300 million (around 0.5% of core Crown tax revenue). A full comparison of the Treasury and IRD forecasts can be found in the Additional Information on the Treasury website, at www.treasury.govt.nz/budget/forecasts/hyefu2012.

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