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Pre-Election Economic and Fiscal Update 2008

2 Fiscal Outlook (continued)

Revenue and Expenses

Core Crown Revenue

Core Crown revenue consists mainly of tax revenue. Also included are interest and dividend revenues, and sales of goods and services.

Core Crown revenue excluding the NZS Fund best represents the revenue available to meet the Government's spending needs.

Core Crown revenue excluding the NZS Fund treats the NZS Fund as a third party (ie, its revenue is not included but the tax it pays is).

Core Crown revenue growth falls …

Figure 2.1 - Core Crown revenue excluding the NZS Fund
Figure 2.1 - Core Crown revenue excluding the NZS Fund.
Source:  The Treasury

Core Crown revenue excluding the NZS Fund is forecast to fall from 34.2% of GDP in 2007/08 to 32.7% of GDP by 2012/13, while in a nominal sense over the same period it is forecast to increase by around $10 billion. The trend in core Crown revenue is primarily driven by what happens in tax revenue.

… as the economy slows ...

As mentioned in Chapter 1, the forecasts for nominal GDP have been reduced by just over $8 billion since the Budget Update (on a June year basis), with GDP in 2011/12 (the final forecast year in the Budget Update) being about $2 billion lower than in the Budget Update.

Figure 2.2 - Core Crown tax revenue
Figure 2.2 - Core Crown tax revenue.
Source:  The Treasury

A reduction in the forecasts for domestic consumption as past imbalances start to unwind over all forecast years is a key feature of the macroeconomic forecasts. This reduces the GST forecasts. It also has flow-on effects for business income taxes as reduced spending leads to lower profits, which have also been squeezed by an increase in the forecast wage growth track. The increased wage forecast provides some offset to the forecast reductions in tax revenue via an increase in the source deductions (PAYE) forecast.

Table 2.2 - Changes in core Crown tax revenue forecasts by major tax type
Year ended 30 June
$million
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast

Core Crown tax revenue

Budget Update 56,523 58,228 60,319 62,712
GST (193) (265) (516) (340)
Corporate taxes (183) (432) (305) (471)
Other persons tax (309) (94) (113) (93)
Source deductions 199 63 41 191
Other 21 (85) (158) (106)
Change in core Crown tax revenue (465) (813) (1,051) (819)
Pre-election update 56,058 57,415 59,268 61,893

… and personal tax cuts began to come into affect from 1 October 2008

The introduction of personal tax cuts announced in Budget 2008 means there has been a structural reduction in tax revenue of $1.6 billion in 2008/09 rising to $4.3 billion by 2012/13. The tax cut was included in the fiscal forecasts at the time of Budget 2008.

The tax cuts were the primary driver for the fall in tax revenue as a percentage of GDP over the forecast period.

Inland Revenue Tax Forecasts

In line with established practice, the Inland Revenue Department has also prepared a set of tax forecasts, which, like the Treasury's tax forecast, is based on the Treasury's macroeconomic forecast. Inland Revenue's forecasts are shown here for comparative purposes. The Treasury's forecasts are the Crown's official forecasts.

Table 2.3 - The Treasury and Inland Revenue core Crown tax revenue forecasts
Year ended 30 June
$billion
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Forecast

Source deductions

Treasury 23.1 23.7 24.4 25.5 27.2
Inland Revenue 23.1 23.7 24.3 25.5 27.3
Difference 0.1 (0.1)

Net other persons tax

Treasury 3.5 3.8 3.8 3.9 4.0
Inland Revenue 3.4 3.6 3.7 3.8 3.9
Difference 0.1 0.2 0.1 0.1 0.1

Corporate tax

Treasury 9.5 9.6 10.4 10.9 11.4
Inland Revenue 9.3 10.3 10.9 11.4 11.8
Difference 0.2 (0.7) (0.5) (0.5) (0.4)

Goods and services tax

Treasury 11.7 12.0 12.5 13.2 13.8
Inland Revenue 11.6 12.0 12.4 13.1 13.8
Difference 0.1 - 0.1 0.1 -

Other taxes

Treasury 8.3 8.3 8.2 8.4 8.7
Inland Revenue 8.4 8.2 8.1 8.3 8.5
Difference (0.1) 0.1 0.1 0.1 0.2

Total tax revenue

Treasury 56.1 57.4 59.3 61.9 65.1
Inland Revenue 55.8 57.8 59.4 62.1 65.3
Difference 0.3 (0.4) (0.1) (0.2) (0.2)

Total tax revenue (% of GDP)

         
Treasury 30.4 30.1 29.7 29.4 29.5
Inland Revenue 30.3 30.3 29.7 29.5 29.6
Difference 0.1 (0.2) (0.1) (0.1)

Sources: The Treasury, Inland Revenue

The differences between the two sets of forecasts are much smaller than has been the case in recent forecasting rounds. The only significant difference is in corporate taxes where the two agencies have differing opinions on the degree of tax losses accumulating in the short term and on the effect these will have on income tax during the upswing in the business cycle.

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