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Half Year Economic and Fiscal Update 2016

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 2020/21, core Crown tax revenue is expected to reach $89.9 billion, $19.5 billion higher than in 2015/16.

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

… mainly owing to nominal GDP growth...

The tax-to-GDP ratio remains flat across the forecast at around 28% (Figure 2.1). Tax is forecast to grow a little more strongly than GDP through 2019/20 and 2020/21 owing to the influence of fiscal drag[5] and increasing interest rates on PAYE and interest resident withholding tax (RWT) respectively.

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

... but with some largely offsetting influences below the headline numbers

Although headline tax revenue and nominal GDP growth rates are forecast to be broadly similar to each other over the forecast period, there are other factors at work that affect the growth rates of the component parts of the tax forecasts to varying degrees, both positively and negatively, including:

  • The two largest components of total tax revenue are pay-as-you-earn tax (PAYE) and goods and services tax (GST). The principal economic drivers of these taxes, namely employees' compensation and domestic consumption, are both forecast to grow more slowly than nominal GDP, thereby reducing the growth rate of tax revenue relative to GDP by $2.0 billion across the forecast period.
  • Fiscal drag is forecast to add increasing amounts to PAYE each year, increasing tax revenue by $1.4 billion across the forecast period.
  • Growth in the interest-bearing deposit base (ie, the sum of cash-like investments on which interest is earned that is subject to RWT) is forecast to add $0.4 billion to tax revenue by 2021.
  • Although interest rates have a negative effect on tax growth in the early part of the forecast period, rates are forecast to rise from 2018/19 onwards, overall increasing the interest RWT forecast by $0.4 billion.
  • CPI indexation of excise rates adds $0.2 billion to customs and excise duties by 2021.

Further detail of these effects is shown in Table 2.3.

Table 2.3 - Composition of growth in core Crown tax revenue over the forecast period
Year ending 30 June
Change in core Crown tax compared with previous year owing to:
Nominal GDP 3.6 4.1 3.9 3.4 3.3 18.3
Composition of GDP 0.2 (0.5) (0.5) (0.6) (0.6) (2.0)
Fiscal drag 0.2 0.2 0.3 0.3 0.4 1.4
Interest-bearing deposit base 0.1 - 0.1 0.1 0.1 0.4
Interest rates (0.3) (0.1) - 0.3 0.5 0.4
Indirect tax CPI inflation indexation - - - 0.1 0.1 0.2
Other factors - 0.1 0.2 0.2 0.3 0.8
Total movement in core Crown tax revenue 3.8 3.8 4.0 3.8 4.1 19.5
Plus: previous year's tax base 70.4 74.2 78.0 82.0 85.8 70.4
Core Crown tax revenue 74.2 78.0 82.0 85.8 89.9 89.9
Percentage of GDP 28.0% 28.0% 27.9% 27.9% 28.1%

Source: The Treasury

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 are relatively close to each other but differ slightly 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 at


  • [5] Fiscal drag is the effect of higher marginal tax rates applying to higher incomes.
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