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Half Year Economic and Fiscal Update 2015

Comparison to the Budget Update

The Budget Update was published on 21 May 2015. Since then, there have been a number of developments that have significantly impacted the fiscal outlook. Table 2.8 below summarises the changes in the key fiscal indicators since then.

Table 2.8 - Key fiscal indicators compared to the Budget Update
Year ending 30 June
$billions
2015
Actual
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Core Crown tax revenue    
Half Year Update - 68.4 71.0 75.1 79.9
Budget Update 66.1 68.9 72.5 76.8 80.5
Actual 66.6 - - - -
Change 0.5 (0.5) (1.5) (1.7) (0.6)
Core Crown expenses    
Half Year Update - 74.9 76.8 80.7 83.3
Budget Update 73.1 74.9 77.1 80.8 83.4
Actual 72.4 - - - -
Change 0.7 - 0.3 0.1 0.1
OBEGAL    
Half Year Update - (0.4) 0.4 1.0 3.5
Budget Update (0.7) 0.2 1.5 2.0 3.6
Actual 0.4 - - - -
Change 1.1 (0.6) (1.1) (1.0) (0.1)
Residual cash    
Half Year Update - (5.4) (4.7) (2.8) 0.5
Budget Update (2.7) (4.2) (1.6) (0.2) 1.7
Actual (1.8) - - - -
Change 0.9 (1.2) (3.1) (2.6) (1.2)
Net core Crown debt    
Half Year Update - 65.9 70.7 73.4 72.8
Budget Update 61.7 65.6 67.1 67.2 65.5
Actual 60.6 - - - -
Change 1.1 (0.3) (3.6) (6.2) (7.3)
Net worth attributable to the Crown    
Half Year Update - 86.9 89.6 93.1 99.3
Budget Update 74.8 77.8 82.1 87.0 93.6
Actual 86.5 - - - -
Change 11.7 9.1 7.5 6.1 5.7

Source: The Treasury

 A weaker economic outlook has adversely impacted the fiscal outlook...

Slowing economic growth since the Budget Update has adversely impacted the fiscal outlook, with tax revenue now expected to be lower in each year of the forecast period.

Core Crown tax revenue forecasts have been revised down by a combined $4.3 billion across the forecast period, mainly owing to the cumulative $17 billion reduction in the forecasts (from 2014/15 to 2018/19) for nominal GDP. Forecasts for most of the major tax types have been reduced with the exception of corporate tax which is higher than at the Budget Update (Figure 2.22). Table 2.9 below summarises the movements by tax type since the Budget Update.

Figure 2.22 - Movement in core Crown tax revenue since the Budget Update
Figure 2.22 - Movement in core Crown tax revenue since the Budget Update   .
Source:  The Treasury

Table 2.9 - Reconciliation of the change in core Crown tax revenue

Year ending 30 June
$billions
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
Movement in core Crown tax owing to:        
Source deductions - (0.4) (0.6) (0.5)
Other persons' tax - (0.4) (0.3) (0.1)
Corporate tax - (0.2) 0.2 0.7
RWT (0.2) (0.4) (0.5) (0.3)
GST (0.3) (0.3) (0.6) (0.3)
Other taxes - 0.2 0.1 (0.1)
Total movement in core Crown tax revenue (0.5) (1.5) (1.7) (0.6)
Plus: Budget Update's tax base 68.9 72.5 76.8 80.5
Core Crown tax revenue at Half Year Update 68.4 71.0 75.1 79.9
As a % of GDP 27.9% 27.8% 27.7% 28.1%
Core Crown tax movements consist of:        
Policy initiatives - - - 0.2
Forecast changes (0.5) (1.5) (1.7) (0.8)

Source: The Treasury

As a result of the weaker nominal GDP outlook and lower interest rate track, forecasts for most of the major tax types have been reduced:

  • A lower forecast for compensation of employees (aggregate wages and salaries) has contributed to the source deductions forecasts being reduced by $1.5 billion across the forecast period.
  • The forecasts for entrepreneurial income, mainly on the farming side, are lower than in the Budget Update which has caused a $0.8 billion reduction in the other persons' tax forecast.
  • Interest rate forecasts are lower than in the Budget Update, which was the main contributor to the $1.4 billion reduction in interest RWT forecasts across the forecast period.
  • The Goods and Services Tax (GST) forecast is $1.5 billion lower in total than in the Budget Update owing to weaker forecasts of nominal consumption.

In contrast to the above tax types, corporate tax forecasts are, in total, higher than in the Budget Update for a number of reasons:

  • Portfolio Investment Entity (PIE) tax was around 25% higher than forecast in 2014/15 and this is expected to persist into the future, although there will continue to be considerable volatility around the trend in this tax.
  • Although initially lower, the outlook for profits through the latter part of the forecast period is higher than in the Budget Update, providing a boost to corporate tax in 2018/19 and 2019/20.
  • Based on the most recent published financial statements of companies operating in the financial sector, forecasts of income tax from that sector have been revised up.

...with the fiscal outlook now more subdued than previously forecast

Overall, OBEGAL is expected to be lower in each year of the forecast compared to the Budget Update (Table 2.10).

Table 2.10 - Changes in OBEGAL since the Budget Update

Year ending 30 June
$billions
2016
Forecast
2017
Forecast
2018
Forecast
2019
Forecast
OBEGAL - 2015 Budget Update 0.2 1.5 2.0 3.6
Changes in forecasts:        
Economic factors        
       Tax revenue (0.5) (1.5) (1.7) (0.6)
       Social assistance - (0.2) (0.2) -
Other factors        
       GSF pension expenses 0.1 0.1 0.1 0.1
       ACC forecasts 0.2 0.5 1.0 0.7
       Net finance costs 0.1 (0.1) (0.1) (0.2)
       Other changes (0.5) 0.1 (0.1) (0.1)
Total changes since the Budget Update (0.6) (1.1) (1.0) (0.1)
OBEGAL - 2015 Half Year Update (0.4) 0.4 1.0 3.5

Source: The Treasury

An increase in expected social assistance spending in 2016/17 and 2017/18 is a result of a softer labour market outlook, causing an increase in recipient numbers compared to the Budget Update (particularly in Jobseeker Support and Sole Parent Support benefits). Jobseeker Support benefits increase by a total of around $430 million (6.9%) across the forecast period. Annual increases of between $61 million (3.8%) and $147 million (9.6%) compared to the Budget Update are expected with the largest increase in the 2017/18 year. However, this trend is expected to start unwinding by 2018/19 with the increase since the Budget Update forecast to be $77 million (5.1%).

The GSF liability has reduced since the Budget Update mainly owing to higher discount rates. The reduction in the liability results in lower forecast GSF pension expenses as the interest unwind is now less than previously expected.

Updated ACC forecasts have resulted in an increase in OBEGAL in each year of the forecast and are owing to a number of factors:

  • Similar to the GSF liability, higher discount rates have resulted in a reduction in the ACC claims liability and lower insurance expenses across all years than previously forecast.
  • In September, the Government made the decision to stop the residual levy from 1 April 2016. This decision had the effect of bringing forward costs from later forecast years into the 2014/15 year.
  • From 2017/18, ACC levy revenue is expected to be higher than previously forecast owing to assumptions around levy rate reductions being based on ACC's agreed funding policy.

Net finance costs are affected by both favourable and unfavourable factors:

  • Decreases in short-term interest rates have resulted in a reduction in interest income. However, the impact in 2015/16 is somewhat offset by the starting position at 2014/15 being stronger than expected.
  • The lower residual cash forecast has led to an increase in the Government's borrowing requirements resulting in increased debt servicing costs.
  • Lower medium-term interest rates have resulted in a reduction in finance costs and offset some of the unfavourable impacts mentioned above.

Other changes include re-phasing of operating expenses previously forecast to occur in 2014/15 but now expected to occur in 2015/16.

...leading to an increase in net core Crown debt by the end of the forecast period

Residual cash deficits increase by $8.1 billion across the forecast period compared to the Budget Update. The majority of the weaker cash position is a result of reduced tax receipts ($5.6 billion), higher benefit payments ($0.4 billion) and higher net finance costs ($0.8 billion) over the forecast horizon.

On the capital side, net spending is now expected to be $0.7 billion more than previously forecast largely owing to the increase in the Budget 2016 capital allowance of $1.0 billion and also transfers of unspent capital expenditure from the 2014/15 year.

The increase in cash deficits was partially offset by a $1.1 billion lower actual net debt position in 2014/15 than previously forecast. As a result, net core Crown debt is forecast to be $7.3 billion higher by 2018/19 when compared to the Budget Update.

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