The Treasury

Global Navigation

Personal tools

Treasury
Publication

Half Year Economic and Fiscal Update 2014

Comparison to the Pre-election Update

The Pre-election Update was published on 19 August 2014. There have been a number of developments since then that have significantly impacted on the fiscal outlook.

Table 2.10 - Key fiscal indicators compared to the Pre-election Update
Year ending 30 June
$billions
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Core Crown tax revenue  
Half Year Update 65.6 69.2 73.1 76.8
Pre-election Update 66.2 70.2 73.6 77.1
Change (0.6) (1.0) (0.5) (0.3)
Core Crown expenses  
Half Year Update 73.0 75.1 76.9 80.7
Pre-election Update 72.8 75.9 78.6 81.5
Change 0.2 (0.8) (1.7) (0.8)
OBEGAL  
Half Year Update (0.6) 0.6 2.6 3.1
Pre-election Update 0.3 0.8 1.9 3.0
Change (0.9) (0.2) 0.7 0.1
Residual cash  
Half Year Update (4.0) (3.5) (0.1) 0.6
Pre-election Update (4.6) (2.9) (0.4) (0.3)
Change 0.6 (0.6) 0.3 0.9
Net debt  
Half Year Update 63.5 67.0 67.0 66.4
Pre-election Update 64.3 67.0 67.5 67.9
Change (0.8) - (0.5) (1.5)

Source: The Treasury

Economic factors have adversely impacted tax revenue...

Recent price growth has been slower than expected and global dairy prices have fallen by more than anticipated. This is expected to flow through to slower growth in tax revenue directly through lower GST and other persons' tax. In addition, short-term interest rates are likely to remain lower than otherwise, we expect the Reserve Bank will not have to increase the OCR as quickly as previously thought. As a result, RWT on interest earnings will be less than previously forecast.

Figure 2.20 - Movement in core Crown tax revenue since the Pre-election Update
Figure 2.20 - Movement in core Crown tax revenue since the Pre-election Update.
Source:  The Treasury

Compared to the Pre-election Update, tax revenue forecasts have been revised down by $2.4 billion across the 2014/15 to 2017/18 forecast period, with $0.6 billion relating to the 2014/15 year (Table 2.11).

Across the forecast period:

  • GST forecasts have reduced owing to lower forecasts of nominal private consumption and residential investment
  • individuals' tax forecasts have reduced owing to lower forecast aggregate employees' compensation, reflecting slower nominal wage growth, and reduced forecasts of entrepreneurial income and weakness in the dairy sector
  • the lower interest rate track lowered the forecast for interest RWT, and
  • corporate tax forecasts have increased as, despite the weakness in the dairy sector, profits in other sectors of the economy are higher than previously forecast.
Table 2.11 - Reconciliation of the change in core Crown tax revenue
Year ending 30 June
$billions
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
Movement in core Crown tax owing to:  
Source deductions (0.1) (0.2) (0.3) (0.4)
Other persons tax (0.1) (0.2) (0.1) -
Corporate tax 0.1 0.3 0.7 0.8
Residential Withholding Tax (RWT) (0.1) (0.4) (0.5) (0.4)
Goods and Services Tax (GST) (0.4) (0.4) (0.3) (0.3)
Other taxes - (0.1) - -
Total movement in core Crown tax (0.6) (1.0) (0.5) (0.3)
Plus: Pre-election Update's tax base 66.2 70.2 73.6 77.1
Core Crown tax revenue at Half Year Update 65.6 69.2 73.1 76.8
As a % of GDP 26.8% 28.0% 27.9% 28.1%

Source: The Treasury

While the full-year forecasts have been revised down, year-to-date tax revenue to October 2014 was $0.2 billion above the Pre-election Update (Table 2.12). Some tax types are already showing weakness relative to the Pre-election Update (eg, source deductions and interest RWT) and their full-year 2014/15 forecasts have been reduced accordingly.

Other major tax types, ie, GST and net other persons tax, are currently tracking above the Pre-election Update, but their 2014/15 forecasts have been reduced. This has occurred because much of the nominal GDP forecast reduction is expected to unfold over the remainder of the year as consumption and entrepreneurial income components of GDP are expected to weaken.

Corporate tax to October is above forecast and its full-year forecast has been increased to reflect this.

Table 2.12 - Pre-election Update forecast compared to October 2014 actuals and
change in Half Year Update
Year ending 30 June
$billions
2014/15
October
Actuals
Pre-election
October
Forecast
Actual
October
Variance
Forecast
Year-end
Change
Source deductions 8.3 8.4 (0.1) (0.1)
Net other persons' tax 1.4 1.3 0.1 (0.1)
Corporate tax 3.0 2.8 0.2 0.1
Other direct tax (including RWT) 0.7 0.7 - (0.1)
GST 5.5 5.4 0.1 (0.4)
Customs and excise duties 1.4 1.4 - -
Other taxes 0.6 0.6 - -
Total tax 20.9 20.6 0.2 (0.6)

Source: The Treasury

...but also reduce some core Crown expenses...

Benefit expenses are now expected to be lower than previously forecast, with New Zealand Superannuation payments reducing later in the forecast period as there is a lower wage track to which New Zealand Superannuation is indexed.

The lower interest rate track has also reduced debt servicing costs for the Crown since the Pre-election Update.

Operating allowances of $1 billion have been set for the next two Budgets, rising to $2.5 billion for Budget 2017 before dropping back to $1.5 billion for Budget 2018. This compares to the $1.5 billion per year in the Pre-election Update. The re-phasing results in a reduction in spending of $0.5 billion and $1.0 billion over the next two fiscal years, but is then broadly neutral thereafter.

...with a deficit now forecast in 2014/15...

The slower growth in tax revenue is the main driver of an operating deficit now expected in 2014/15. In addition to changes mentioned earlier, ACC insurance expenses from 2015/16 onwards are higher as the weaker interest rate track impacts the present valuing of future claims costs.

The key changes in OBEGAL are outlined in Table 2.13.

Table 2.13 - Changes in OBEGAL since Pre-election Update
Year ending 30 June
$billions
2015
Forecast
2016
Forecast
2017
Forecast
2018
Forecast
OBEGAL - 2014 Pre-election Update 0.3 0.8 1.9 3.0
Changes in forecasts:        
Economic factors        
  Tax revenue (forecast changes) (0.6) (1.0) (0.5) (0.3)
  Benefit expenses (forecast changes) - - 0.1 0.2
  Net finance costs 0.1 0.1 0.2
  ACC forecasts - (0.1) (0.1) (0.1)
Other factors        
  Change in Budget allowances - 0.5 1.0 0.1
  Other changes (0.3) 0.3 0.1 -
Total changes since the Pre-election Update (0.9) (0.2) 0.7 0.1
OBEGAL - 2014 Half Year Update (0.6) 0.6 2.6 3.1

Source: The Treasury

...however, net debt is forecast to be lower than previously expected

Net core Crown debt is expected to be lower by $1.5 billion by 2017/18, compared to the Pre-election Update. This improvement in net core Crown debt is driven by a reduction in the residual cash shortfall across the forecast period (which is forecast to be in surplus in 2017/18, a year earlier than at the Pre-election Update).

The cash impact of the changes to OBEGAL that also impact residual cash is broadly neutral. However, capital spending is expected to be $1.4 billion less than the Pre-election Update, owing in the main to reduced expectations regarding the purchase of physical assets.

Page top