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Special Topic: Tax Revenue recent history and outlook

The Financial Statements of the Government of New Zealand (FSG) for the year ending 30 June 2015 were released on 14 October. The 2015 FSG showed an operating balance excluding gains and losses (OBEGAL) surplus of $414 million, vs. the 2015 Budget forecast deficit of $684 million. Tax revenue contributed about half of the OBEGAL's $1 billion positive variance from forecast.

This special topic expands on the tax variance commentary that appeared in the FSG, analyses the tax revenue results for the September 2015 quarter and outlines the likely implications for tax revenue for the remainder of the 2015/16 fiscal year.

Tax revenue for the year to June 2015

For the 12 months ended June 2015, core Crown tax revenue was just 0.8% ($559 million) above the 2015 Budget forecast of $66,077 million, as shown in Table 1. While all of the variances from forecast across the various tax types were relatively small, they were almost all positive, producing the positive result vs. forecast for total tax revenue.

Total wages and salaries in the June quarter were above forecast, mainly as a result of higher-than-forecast average weekly paid hours. This contributed about half of the $200 million PAYE (source deductions) variance from forecast.

Table 1 - Core Crown tax revenue: 2014/15 actual result vs. 2015 Budget forecast

Table 1 – Core Crown tax  revenue: 2014/15 actual result vs. 2015 Budget forecast.

The other half was the result of a $100 million forecasting judgement included in the Budget forecast that has since proven to be unnecessary. [1]

Customs and excise duty[2] is not normally a tax type that features in forecast variance explanations. However, in the June 2015 quarter, two unusual things happened:

  • NZ Customs booked some additional petrol excise revenue, plus associated penalties, relating to prior years; and
  • there was an unusually large amount of tobacco product importation/production through the June quarter, causing a small increase in tobacco excise relative to forecast.

Business income taxes, for individuals (other individuals' tax in Table 1) and companies (corporate tax), were both above forecast, although for different reasons. For individuals, the forecast included an assumption that provisional tax would tail off towards the end of the year in the face of declining profitability and lower incomes for dairy farmers. In fact, provisional tax revenue in the June quarter was up on the previous year, contributing +$75 million to the total tax variance. Net terminal tax revenue, i.e. square-ups of income tax for previous tax years, was also a little above expectations.

For corporate tax, provisional and terminal tax were close to, albeit a little below, forecast. The majority of the positive variance against forecast came through Portfolio Investment Entity (PIE) tax. PIE tax is inherently difficult to forecast for two reasons:

  • Since PIE tax is linked to investment returns, it can be very volatile from one year to the next; and
  • More than 90% of annual PIE tax is returned and paid in the month of April, which means that there is limited current-year information available from PIE taxpayers at the time the Budget forecasts are prepared.

PIE tax in 2015 was boosted by strong growth in KiwiSaver funds under management. While this should raise the trend level of PIE tax in the future, we expect to see continuing variation around the trend owing to the volatility of investment returns.

Finally, resident withholding tax[3] (RWT) also came in above forecast. At the time the Budget forecasts were being compiled, interest RWT was running below forecast and the RWT forecast was lowered accordingly. However, the lower-than-forecast year-to-March outturn turned out to be a timing anomaly and interest RWT finished the year above forecast.

Forecast accuracy

The core Crown total tax revenue variance vs. the 2015 Budget forecasts of 0.8% was slightly below the long-run average forecast variance of 1.1%. It was also similar to the variances of the previous four years, which were all around ±0.6% to 0.7%.

In 2008, when the long-run average forecast error was around 4%, the Treasury adopted a target of achieving variances from forecast of less than ±3% for its one-year-ahead forecasts of core Crown tax revenue. Treasury has achieved this target on six out of the seven annual tax revenue outcomes since then and the long-run (now 20-year) average has dropped to 3.1%. Compared to the 2014 Budget forecast, total core Crown tax revenue for 2014/15 was $194 million (0.3%) higher, well within the ±3% target range.

Further information on the performance of Treasury's economic and tax forecasts can be found at: http://www.treasury.govt.nz/publications/informationreleases/forecastingperformance

2015/16 tax outturns so far

FSG for the three months to September 2015 have been published on the Treasury website. To some extent, tax revenue has continued on from where it left off in June.

Table 2 - Core Crown tax revenue: September 2015 quarter actual result vs. 2015 Budget forecast
Tax type Variance from forecast
  $millions %
Source deductions +107 +1.7
Other individuals' tax +39 +3.5
Corporate tax +72 +3.4
Other direct taxes -31 -5.3
GST -76 -1.7
Customs and Excise duties -30 -2.8
Other indirect taxes +20 +4.2
Total core Crown tax +101 +0.6

Some tax types have continued to run above forecast, particularly:

  • The momentum (relative to forecast) seen in source deductions in the June quarter has continued through to September; and
  • Corporate tax was boosted by a small number of large, unforeseen payments of non-resident withholding tax (NRWT). The NRWT portion of the corporate tax variance is expected to persist through to the end of 2015/16 but is not expected to be repeated in later years.

However, some negative forecast variances have begun to appear in the tax outturn table:

  • Interest rate cuts are starting to affect interest RWT (included in other direct taxes in Table 2);
  • Weakness in nominal domestic consumption through the first half of the 2015 calendar year has contributed to below-forecast GST; and
  • Much of the additional tobacco excise collected in the June quarter has reversed out as refunds in the September quarter.

Looking ahead...

As noted above, when formulating tax forecasts, some judgement is required to assess whether outturn variances are the result of short-lived seasonal fluctuations or have been caused by permanent macroeconomic factors. While tax revenue is currently running close to forecast, it is possible that this might not continue through to the end of 2015/16.

Since the Budget forecast was finalised, GDP has posted two quarters of weak growth, i.e. the March 2015 and June 2015 quarters. This is yet to become fully evident in tax outturns.

The world price for NZ's dairy products has dropped considerably since the Budget. While this is affecting dairy farmers' profits and tax payments most immediately, it has wider implications for both corporate and individuals' income tax, as do other key developments noted in recent Monthly Economic Indicators reports.

The lower level of domestic consumption, caused by the abovementioned weak growth through the first half of 2015, is expected to continue to weigh on GST outturns over the remainder of 2015/16.

Employment growth halted in the September quarter and the unemployment rate rose to 6.0%. This may imply some downside to the Budget's source deductions forecasts over the coming months at least.

Since the Budget, the Reserve Bank has cut the OCR three times, causing deposit interest rates to fall. This is already causing interest RWT to fall short of the forecast. A lower interest rate track through the remainder of 2015/16 would continue to drag on RWT.

All of these things were taken into consideration when preparing the 2015 Half-Year Update forecasts, which are due for release on 15 December.

The October FSG will be published on 8 December.

Notes

  • [1]At the time the Budget forecast was prepared, source deduction revenue was running lower than was implied by the macroeconomic forecast, so a downward adjustment was factored in.
  • [2]Excise duties on the NZ production of, and excise-equivalent duties on the importation of, alcohol, tobacco and petroleum fuel products, plus import tariffs on general goods.
  • [3]Tax withheld on interest and dividend income earned in New Zealand.
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