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Half Year Economic and Fiscal Update 2013

Core Crown Tax Revenue

Tax revenue grows by around 5.8% per annum on average over the forecast period...

Core Crown tax revenue is forecast to rise in each year of the forecast period, with the 2017/18 forecast being $77.9 billion, which is $19.2 billion higher than in 2012/13. These annual increases also see forecast tax revenue increasing relative to nominal GDP, reaching 28.8% by the end of the forecast period (Figure 2.1).

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

Most of the 5.8% average annual growth in tax revenue forecasts comes from growth in the economy with nominal GDP forecast to grow at 4.9% on average over the forecast period. Tax revenue growth slows a little towards the end of the forecast period as nominal GDP growth slows (refer Figure 2.2). The remainder of the forecast tax growth largely relates to increased residential investment, largely owing to the Canterbury rebuild, and the progressive nature of PAYE tax.

Figure 2.2 - Core Crown tax revenue growth
Figure 2.2 - Core Crown tax revenue growth   .
Source:  The Treasury

All tax types are expected to increase across the forecast period, with particular strength in tax from employees (PAYE) and goods and services tax (GST), as shown in Table 2.3.

Employment earnings growth (forecast at just below the GDP growth rate) combined with the progressive nature of the personal tax scale add $7.3 billion to source deductions over the forecast period with the average PAYE growth rate of 5.8% per annum.

The level of residential investment is forecast to grow at an average rate of 16% per annum over the forecast period, largely as a result of rebuilding in Canterbury. This increase in investment is expected to boost GST by $1.7 billion by 2017/18.

These forecasts also see an expected rise in 90-day bank bill interest rates from 2.6% on average in 2012/13 to 5.2% by 2017/18, with flow-on increases to tax on interest earned on residents' savings (RWT).

Table 2.3 - Reconciliation of movement in core Crown tax revenue over the forecast period
Year ending 30 June
$billions
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Total
Movement in core Crown tax owing to:    
Employees' compensation 1.2 1.1 1.1 1.2 1.3 5.9
Entrepreneurial income 0.4 0.2 0.3 0.2 0.2 1.3
Corporate profits 0.8 0.7 0.6 0.2 0.2 2.5
Private consumption 0.9 0.9 0.9 0.8 0.7 4.2
Residential investment 0.4 0.6 0.4 0.2 0.1 1.7
Interest rates (0.1) 0.1 0.3 0.2 0.2 0.7
Fiscal drag1 0.2 0.3 0.3 0.3 0.3 1.4
Timing and other factors - (0.1) 0.4 0.5 0.7 1.5
Total movement in core Crown tax revenue 3.8 3.8 4.3 3.6 3.7 19.2
Plus: previous year's tax base 58.7 62.5 66.3 70.6 74.2 58.7
Core Crown tax revenue 62.5 66.3 70.6 74.2 77.9 77.9
27.4% 27.7% 28.2% 28.5% 28.8%

Note: 1 Fiscal drag is the additional tax revenue generated from source deductions as an individual’s average tax rate increases as their income increases.

Source: The Treasury

...and is higher than the Budget Update

Compared to the Budget Update, tax revenue forecasts have been revised up by $0.1 billion in 2013/14 rising to $1.4 billion by 2016/17.

The bulk of the upwards revision occurs beyond 2014/15 (refer Figure 2.3), with the largest increases from individuals' taxation and GST. A stronger labour market, with higher wages and salaries, is expected to increase PAYE relative to the Budget Update, with the change further boosted by fiscal drag. Net other persons’ tax also increases as a result of higher forecast profits for unincorporated businesses. Increased employee compensation and profitability lead to higher consumption, boosting GST growth.

Although corporate tax is expected to increase over the forecast period in nominal terms as business profitability improves, annual growth is broadly similar to that forecast at the Budget Update.

Figure 2.3 - Movement in core Crown tax revenue since the Budget Update
Figure 2.3 - Movement in core Crown tax revenue since the <em>Budget Update .
Source:  The Treasury
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