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Half Year Economic and Fiscal Update 2014

Core Crown Tax Revenue

Core Crown tax revenue is forecast to rise in each year of the forecast period. By 2018/19, core Crown tax revenue is expected to reach $80.0 billion, $18.5 billion higher than in 2013/14. Forecast tax revenue increases as a percentage of nominal GDP, from 26.3% in 2013/14 reaching 27.9% at 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

The main driver for the increase in tax revenue is forecast growth in nominal GDP (Figure 2.2). Other factors can also influence the tax revenue forecast such as the composition of that growth, interest rate track (impacting RWT) and assumptions regarding taxpayer behaviour.

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

Year to date tax outturns to 31 October 2014 are around 8% higher than the same period last year. This growth is largely owing to increases in source deductions, GST and corporate tax. In addition, increases in interest rates have resulted in higher income from RWT. Growth in tax revenue is expected to reduce to around 7% for the full year, as some of the strength in the year-to-date outturn is expected to soften, partly owing to weakness in the dairy sector.

Key assumptions over and above economic drivers include:

  • Payments to dairy farmers are forecast to be spread smoothly through the early years of the forecast period as dairy co-operative payments for particular dairy seasons tend to extend well past the end of the corresponding tax year.
  • Tax loss utilisation is assumed to ease off over 2015 and 2016 and then flatten out through the remainder of the forecast period.
  • Earthquake-related GST refunds for insurers, which peaked in 2011/12, are expected to continue to decrease over the forecast period.

While growth in tax revenue is forecast to track closely to nominal GDP growth for most of the forecast period, growth in tax revenue is expected to outpace nominal GDP growth in 2014/15. There are a number of reasons for this:

  • Income tax payments through the early part of the 2014/15 fiscal year indicate that a higher-than-usual proportion of 2014 tax year revenue will fall into the 2014/15 fiscal year.
  • Some components of nominal GDP (employee compensation, private consumption and residential investment) are growing faster than total nominal GDP.
  • GST refunds relating to insurers are declining.

From 2015/16 tax revenue is forecast to grow in line with nominal GDP.

Table 2.3 provides an analysis of the impact particular components of GDP have on the tax revenue forecasts.

Table 2.3 - Composition of growth in core Crown tax revenue over the forecast period
Year ending 30 June
$billions
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Total
Movement in core Crown tax owing to:    
Employees' compensation 1.1 1.1 1.2 1.2 1.3 5.9
Private consumption 0.8 0.9 0.9 0.7 0.7 4.0
Corporate profits 0.1 0.9 0.7 0.4 0.3 2.4
Fiscal drag 0.2 0.3 0.3 0.3 0.4 1.5
Residential investment 0.4 0.3 0.2 0.1 - 1.0
Inflation indexation 0.2 0.2 0.1 0.1 0.1 0.7
Interest rates 0.1 0.1 0.1 0.2 0.2 0.7
Entrepreneurial income (0.1) 0.1 0.4 0.1 0.1 0.6
Interest bearing deposit base 0.1 0.1 0.1 0.1 0.1 0.5
Other factors 1.2 (0.4) (0.1) 0.4 - 1.2  
Total movement in core Crown tax 4.1 3.6 3.9 3.7 3.2 18.5
Plus: previous year's tax base 61.5 65.6 69.2 73.1 76.8 61.5
Core Crown tax revenue 65.6 69.2 73.1 76.8 80.0 80.0
Percentage of GDP 27.4% 27.3% 27.4% 27.7% 27.9%

Source: The Treasury

Employees' compensation contributes $5.9 billion to source deductions' growth over the forecast period, with the progressive nature of the personal tax scale (fiscal drag) adding a further $1.5 billion.

Growth in private consumption contributes $4.0 billion to the increase in GST over the forecast period, related to net migration growth and gradual wage growth.

Growth in corporate profits contributes $2.4 billion with the main driver being corporate tax increasing over the forecast period, despite the weakness in the dairy sector; profits in other sectors are higher than previously forecast.

Inland Revenue has also prepared a set of tax forecasts based on the Treasury's macroeconomic forecasts (Table 2.4)[3]. Inland Revenue’s forecasts are higher than the Treasury’s forecasts in the first three years of the forecast but lower in 2017/18. Source deductions and corporate taxes are where the largest forecast differences arise, reflecting the different methods used and assumptions made by the two forecasting agencies. For instance, Inland Revenue’s source deductions forecast is higher than the Treasury’s owing to the different assumptions made around how much of the current weakness in PAYE will be carried through to future years. Although these differences are less than half of one percent of total tax revenue, they highlight the uncertainties associated with any forecast.

Table 2.4 - The Treasury's and Inland Revenue's core Crown tax revenue forecasts
Year ending 30 June
$billions
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Source deductions    
The Treasury 25.0 26.3 27.7 29.3 30.9
Inland Revenue 25.1 26.5 28.0 29.5 31.1
Difference (0.1) (0.2) (0.3) (0.2) (0.2)
Net other persons tax    
The Treasury 3.8 3.9 4.2 4.5 4.5
Inland Revenue 4.0 3.8 4.3 4.4 4.5
Difference (0.2) 0.1 (0.1) 0.1 -
Corporate taxes    
The Treasury 11.1 11.8 12.5 12.9 13.3
Inland Revenue 11.2 11.7 12.2 12.6 12.8
Difference (0.1) 0.1 0.3 0.3 0.5
Goods and services tax    
The Treasury 17.4 18.3 19.2 20.2 20.7
Inland Revenue 17.4 18.4 19.3 20.0 20.7
Difference - (0.1) (0.1) 0.2 -
Other taxes    
The Treasury 8.3 8.9 9.5 9.9 10.6
Inland Revenue 8.3 9.0 9.6 10.1 10.9
Difference - (0.1) (0.1) (0.2) (0.3)
Total tax    
The Treasury 65.6 69.2 73.1 76.8 80.0
Inland Revenue 66.0 69.4 73.4 76.6 80.0
Difference (0.4) (0.2) (0.3) 0.2 -
Total tax (% of GDP)    
The Treasury 27.4 27.3 27.4 27.7 27.9
Inland Revenue 27.6 27.4 27.6 27.7 27.9
Difference (0.2) (0.1) (0.2) - -

Sources: The Treasury, Inland Revenue

Notes

  • [3]For more details of the Treasury and Inland Revenue's forecasts, see the Additional Information document on the Treasury website www.treasury.govt.nz
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