Using revenue from royalties
Decisions about royalties for Crown natural resources are inevitably linked with discussions about how the revenue should be used, whether or not a linkage is appropriate. A discussion of this issue is therefore included here.
Charge design and revenue use can be interlinked. For example in cost recovery for fisheries research, goals include ensuring that taxpayers aren’t subsidising research from which the industry captures all the benefits, and that the government isn’t undertaking unnecessary research activity. For royalties, however, that direct link between funding and expenditure generally does not exist.
Where royalties are earned on a resource which is owned by or managed on behalf of a specific group (such as iwi or hapu) there is an obvious rationale for using the revenue to the benefit of that group. Royalties on an asset owned or managed by the Crown on behalf of all New Zealanders, however, are more of the nature of general Crown revenue, so should generally benefit all New Zealanders.
Linking revenue gathering directly to expenditure decisions can compromise both sets of decisions.
The general principles of fiscal management in New Zealand involve raising such revenue in the most efficient manner, and spending it in the way that maximises national welfare. This generally argues against “tying” revenue raised from a given source to related expenditure.
Such tied (or “earmarked” or “hypothecated”) revenues tend to increase overall administration costs, reduce flexibility on the overall mix of taxes and the redistributive impact of the tax system, and reduce the efficiency of expenditure over time due to lack of scrutiny and reprioritisation.
Also it is difficult to maintain the direct relationship between expenditure and revenue over time, and unlikely that revenue will remain consistent with the appropriate level of expenditure. If revenue from a tied tax exceeds expenditure, then expenditure tends to rise in response. On the other hand if tied revenue falls short of required expenditure, then general revenue tends to be called on as a supplement. Tied taxes also tend to remain in force after the expenditure for which they were intended ceases.
Studies have also shown that providing decision makers with tied revenue to increase funding for a specific activity tends not to achieve its purpose. Instead general revenue that was previously spent on that activity may be diverted to other purposes, effectively reducing or eliminating the intended effect of introducing the tied revenue (Pickernell, 2004).
4. The revenue from a royalty regime should generally be used in the manner that will obtain the greatest benefit for New Zealand or the local authority area in question, whether or not that relates to the activity being charged for [in most cases this will probably mean treating it as general Crown revenue to be allocated through the Budget process].
Tied taxes may be called on where there is political resistance to increased general taxation or specific charges to fund a specific activity, or a lack of trust that an activity will be supported in the longer term.
Responses to such a situation can include arranging for a charge to be imposed from a higher level of government (which reduces local scrutiny of the revenue), or guaranteeing that revenue will only be used for a specific purpose (i.e. it will be tied). Such arrangements raise all the problems identified above for a tied tax but may be seen as the only viable funding option.
Overall, therefore, although tied revenue regimes may be created in order to limit the Crown’s fiscal exposure or guarantee adequate funding for specified activities, these goals may not be achieved over time.
