Tracking the economy

Friday 13th July 2001

Tax revenue climbs ...

Last week saw the release of the Government Financial Statements for the eleven months ended May 31, 2001. These statements contain much information on the fiscal accounts including revenues and expenditures.

The statements show tax revenue is up 8.1%, or $2.5 billion, in the 11 months to May 2001 compared with the same period a year ago. Tax revenue for the 11 months was $34 billion. The Treasury offers various reasons for the increase including:

A higher tax rate for personal incomes over $60,000;
Higher corporate profitability;
Higher GDP that has flowed through and affected various tax types.

Tax revenue does tend to rise and fall in conjunction with economic activity or GDP. Statistics New Zealand recently released GDP figures for the year ended March 2001. During this year nominal GDP grew 5.6%, significantly below the growth in tax revenue over the year to May.

The chart shows the relationship between growth in nominal GDP and total tax revenue. Tax revenue growth is shown as a rolling three-month figure and quarterly GDP growth has been interpolated to provide monthly data for comparison. The chart illustrates that while the growth in tax revenue is volatile it tends to track growth in GDP reasonably closely. However, over recent times, tax revenue growth has exceeded GDP growth.

Explanations for the difference in the growth rates include the increase in the top personal tax rate implemented last year and recent relatively high inflation.

The increase in the top personal tax rate has boosted tax revenue from individuals. The chart below shows the rolling annual tax revenue from individuals has risen $1.7 billion since the higher tax rate was implemented on April 1, 2000.

Not all the higher tax revenue is due to the rate rise. Wage and employment growth has also played a major role in raising tax revenue from individuals. A stalling in employment growth in 2001 and a waning in the effects of the tax rate rise have resulted in a levelling off in tax revenue from individuals. From here, we should see tax revenue from individuals grow more in line with wages and employment.

... as does expenditure

Expenses were up $1.6 billion over the 11 months to May 2001 compared with the same period a year earlier. Expenditure increases have been concentrated in education, health, and "other." The "other" expenditure category includes initiatives introduced in the 2000 Budget Update.

Larger increases in tax revenue than in total expenses and fairly steady non-tax revenue have produced an improvement in the operating balance of $1 billion over the same period last year. The operating balance for the 11 months to May 2001 stands at $2.7 billion.

Despite the healthy surplus, the Treasury forecasts the operating surplus to shrink substantially to $600,000 million for the fiscal year (ending June 2001). There are two main reasons for this:

The year-end revaluation of the ACC and Government Super Fund liabilities will reduce the surplus by around $1.2 billion; and
Expenses are forecast to exceed revenues in June by around $0.9 billion.

However, the Treasury notes the ACC and Super Fund revaluations may be less than expected, due to recent movements in the interest rate used to discount these liabilities.

- Compiled by Doug Steel

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