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Half Year Economic and Fiscal Update 2015

Core Crown Tax Revenue

Tax revenue grows over the forecast period...

Core Crown tax revenue (Figure 2.1) is forecast to rise in each year of the forecast period. By 2019/20, core Crown tax revenue is expected to reach $84.0 billion, $17.4 billion higher than in 2014/15. Forecast core Crown tax revenue increases as a percentage of nominal GDP, from 27.7% in 2014/15 to 28.4% 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). This graph also illustrates the timing lag between GDP growth and its impact on revenue.

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

In addition, other factors such as the composition of GDP growth, fiscal drag (being the additional personal income tax generated as an individual's average tax rate increases as their income increases), movements in interest rates and the interest-bearing deposit base and CPI indexation of excise rates also influence tax revenue.

...with this year's tax outturns currently ahead of expectations...

Core Crown tax revenue for the four months to 31 October shows some tax types above the Budget Update forecast levels. However, some negative forecast variances have begun to appear: lower-than-forecast RWT indicates that reductions in interest rates are starting to impact on tax revenue and lower-than-forecast GST indicating weakness in nominal domestic consumption. The lower interest rates and weaker domestic demand contribute to the overall slower growth rate for 2015/16.

...growth in 2015/16 is expected to slow...

Nominal GDP growth is expected to slow to 1.8% in 2015/16 from 2.8% in the 2014/15 (Figure 2.2) fiscal year. This has affected the growth forecasts of all tax types to varying degrees with growth in every tax type forecast to be lower in 2015/16 than it was in 2014/15 and with some tax types expected to contract. Total growth in core Crown tax revenue for 2015/16 is forecast to be 2.7% compared to the actual growth of 8.4% in 2014/15.

In addition, timing of income tax plays a large part in the growth rates. In 2014/15, a surge in terminal tax and strong growth in provisional tax resulted in positive growth in both individuals' and corporate income tax, contributing to the above-forecast tax revenue results in that year. Although this strength has continued into the first part of 2015/16, income tax timing effects are forecast to be negative for growth in 2015/16 as the positive spill-over into 2014/15 is not expected to repeat in the current year.

...and nominal GDP growth picks up in later years driving tax revenue growth

Nominal GDP and its components are the principal drivers of tax revenue growth through the forecast period, as shown in Table 2.3. The other factors contributing the most to the forecast growth in tax revenue are:

  • fiscal drag (ie, the effect of higher marginal tax rates applying to higher incomes), adding approximately $1.3 billion to PAYE and the growth of source deductions across the forecast period
  • CPI indexation of excise rates adds $0.6 billion to customs and excise duties by 2019/20
  • growth in the interest-bearing deposit base (ie, the sum of cash-like investments on which interest is earned that, in turn, is subject to RWT) is forecast to add $0.6 billion to RWT by 2019/20
  • although they have a negative effect on tax growth in the early part of the forecast period, interest rates are forecast to rise from 2017 onwards, overall increasing the interest RWT forecast by $0.5 billion, and
  • various policy initiatives are expected to add to tax revenue towards the end of the forecast period. See Additional Information on the Treasury website at www.treasury.govt.nz/budget/forecasts/hyefu2015 for details of these policy initiatives.

Inland Revenue has also prepared a set of tax forecasts which, like the Treasury's tax forecasts, were based on the Treasury's macroeconomic forecasts. The two sets of forecasts differ from each other because of the different modelling approaches and assumptions and judgements made by the two agencies. This comparison is included in the Additional Information on the Treasury website.

Table 2.3 - Composition of growth in core Crown tax revenue over the forecast period
Year ending 30 June
$billions
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
2020
Forecast
Total
increase
Change in core Crown tax compared with previous year owing to:    
Macroeconomic factors:    
Employees' compensation 0.8 0.7 1.1 1.4 1.4 5.4
Private consumption 0.7 0.8 0.8 0.8 0.8 3.9
Corporate profits (0.1) 0.3 1.2 0.8 0.4 2.6
Residential investment 0.3 0.3 0.2 0.2 0.1 1.1
Entrepreneurial income (0.1) 0.2 0.3 0.2 0.1 0.7
Other factors:    
Fiscal drag 0.2 0.2 0.2 0.3 0.4 1.3
Indirect tax CPI inflation indexation 0.2 0.1 0.1 0.1 0.1 0.6
Interest-bearing deposit base 0.1 0.1 0.1 0.1 0.2 0.6
Interest rates (0.2) (0.3) 0.1 0.5 0.4 0.5
Half Year Update policy initiatives - - - 0.2 0.1 0.3
Other factors (0.1) 0.2 - 0.2 0.1 0.4 
Total movement in core Crown tax revenue 1.8 2.6 4.1 4.8 4.1 17.4
Plus: previous year's tax base 66.6 68.4 71.0 75.1 79.9 66.6
Core Crown tax revenue 68.4 71.0 75.1 79.9 84.0 84.0
Percentage of GDP 27.9% 27.8% 27.7% 28.1% 28.4%

Source: The Treasury

Tax Expenditure Statement

The Treasury prepares a Tax Expenditure Statement annually in conjunction with the Budget Update. The purpose of this statement is to provide additional transparency around policy-motivated ‘expenditures' made through the tax system. Tax expenditures impact on the Crown's operating balance by either reducing tax revenue (eg, through an exemption or a preferential tax rate) or by increasing expenditure (eg, Working for Families tax credits). Refer to the Treasury website for a copy of the 2015 Tax Expenditure Statement.

http://www.treasury.govt.nz/budget/2015/taxexpenditure

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