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Pre-election Economic & Fiscal Update 2011

Short-term Outlook

Core Crown revenue increases while expenses decline as a percentage of GDP over the forecast period

Core Crown revenue is forecast to increase over the forecast period, reaching 30.8% by the end of the forecast period compared to 28.7% in the 2011 financial year just past.

Figure 2.1 - Core Crown revenue and expenses
Figure 2.1 - Core Crown revenue and expenses.
Source: The Treasury

Tax revenue makes up roughly 90% of total core Crown revenue. Other sources of income include interest income, revenue from the Emissions Trading Scheme and levies such as Child Support revenue.

The expected increase in core Crown revenue as a percentage of GDP is therefore predominantly in relation to core Crown tax revenue which is forecast to increase from 26.2% of GDP in the year ending June 2012 to 27.8% by the end of the forecast period.

Tax revenue is expected to grow at an average of 6.5% per year between the years ending June 2012 and June 2016. This increase is underpinned by growth in the nominal economy of around 5.0% per year. The main drivers of tax revenue growth are:

  • higher levels of employment and rising wages result in tax from source deductions growing at around 7% per year
  • the higher GST rate is applied to the full year to June 2012, boosting GST by 10% in that year. Growth in GST remains above 7% in the years ending June 2013 and 2014, as growth in the economy exceeds its long-run average, and
  • after several years of declining revenue, corporate tax revenue bounces back in the year ending June 2012. Growth in the year ending June 2013 slows, reflecting the impact of the first full year of a lower corporate tax rate and the impact of large tax losses built up through the 2008/09 recession being unwound. Revenue growth slows, however, over the June 2015 and 2016 years as the pace of economic growth slows.

Compared to the Budget Update, the Treasury's macroeconomic forecasts for the Pre-election Update have softer growth in nominal GDP in the year ending June 2013 with growth returning, albeit from a lower base, in subsequent years (Figure 2.2).

Figure 2.2 - GDP in current prices (expenditure measure)
Figure 2.2 - GDP in current prices (expenditure measure).
Sources: Statistics New Zealand, The Treasury

The weaker nominal economic growth rate in 2013 reflects slower growth in employee compensation and in consumption and flows through to lower estimates of growth in PAYE and GST tax revenue. Although growth in these tax drivers increases in subsequent years, the growth rates are not significantly higher than in the Budget Update and the lower tax revenue in the year ending June 2013 is not recovered within the forecast period.

The profit measures of operating surplus (for corporate) and entrepreneurial income (for other businesses) have also been revised down for the year ending June 2013, with peaks in activity now occurring a year later in the year ending June 2014. However, both measures have been strengthened in the current year ending June 2012.

Overall, compared to the Budget Update, core Crown tax forecasts have increased for the year ending June 2012 by $0.3 billion, but forecasts have been revised downwards in all subsequent years (Table 2.2).

Table 2.2 - Core Crown tax revenue
Year ending 30 June
$billion
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Pre-election Update 55.5 59.2 63.6 67.6 71.5
Budget Update 55.2 59.9 64.4 68.5
Increase/(decrease) 0.3 (0.7) (0.8) (0.9)

Source: The Treasury

In line with established practice, Inland Revenue has also prepared a tax revenue forecast, which, like the Treasury's tax forecast, is based on the Treasury's macroeconomic forecasts. The two sets of forecasts differ from each other because of the different modelling approaches used by the agencies, and the various judgements and assumptions made by the forecasting teams in producing their forecasts. The Inland Revenue forecasts are in the Treasury and Inland Revenue Tax Forecasts section of the Additional Information chapter of Pre-election Update2011 published online only at http://www.treasury.govt.nz/budget/forecasts/prefu2011.

Core Crown expenses are forecast to decline as a percentage of GDP compared to the previous Budget Update, even including costs associated with the Canterbury earthquakes.

Earthquake costs to the Crown were $1.2 billion below forecast in the June 2011 financial year. However, these costs are now expected to be recognised in the current forecast period. Total earthquake costs (excluding EQC insurance costs) are estimated to remain largely within the forecast amounts included in the Budget Update (refer page 15).

Excluding these one-off earthquake costs, core Crown expenses are forecast to decline as a percentage of GDP across the forecast period from 34.2% in the year ending June 2011 to 30.3% by June 2016. This decrease reflects the reduction in new spending over this period that was announced in the Budget Update.

By June 2016, core Crown revenue is expected to exceed core Crown expenses by $1.2 billion.

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