Managing revenues and expenses
A prudent approach will be taken to ensure expenditure is phased, controlled and directed to maximise its benefits
Core Crown expenses average 29.2 per cent of GDP over the forecast period (Figure 24). This is consistent with our commitment under the Budget Responsibility Rules to keep expenses within the recent historical average. Expenses are expected to peak in 2020/21 at 29.6 per cent of GDP, before reducing to 28.8 per cent of GDP at the end of the forecast period.
The Government remains committed to delivering surpluses and funding essential public services. By increasing the operating allowance in this Budget to $3.8 billion, and $3.0 billion in Budget 2020, the Government will address, rather than defer, a number of cost and capacity pressures that have been building over time. This approach is expected to alleviate demand on future Budgets.
Figure 24 – Core Crown expenses
Source: The Treasury
The Government will continue to use the fiscal management approach of fixed nominal baselines to control expenditure. Managing within allowances will also require active management of cost pressures. Budget 2019 included a baseline review of MSD’s funding, which allowed for consideration of both its funding levels in total and improvements that may support sustainable service delivery. Further baseline reviews are intended in future.
Social security and welfare expenses in 2017/18 accounted for 29 per cent of total Crown expenses and 16 per cent when excluding New Zealand Superannuation (NZS). Overall, welfare expenses excluding NZS are expected to remain broadly stable as a percentage of GDP over the forecast and projection period.
The Government’s approach to managing expenses will also see existing expenditure reprioritised where it is not aligned with wellbeing objectives. In Budget 2019 more than $1 billion has been reprioritised.
We will ensure a progressive tax system that is fair, balanced and promotes the long-term sustainability and productivity of the economy
Figure 25 – Core Crown revenue
Source: The Treasury
Over the forecast period, core Crown revenue (Figure 25) and core Crown tax revenue average 30.7 and 28.5 per cent of GDP, respectively. Core Crown tax revenue is expected to increase from 28.2 per cent of GDP in 2018/19 to 28.8 per cent of GDP in 2022/23.
The primary function of the tax system is to raise revenue to fund government expenditure. However, it should do this in a way that supports this Government’s overall economic and fiscal goals.
The Government’s objectives for the tax system are:
- A system that is efficient, fair, simple, coherent and collects the tax that is due, on time and in full
- A progressive tax and transfer system for individuals and families
- A system that promotes the long-term sustainability and productivity of the economy
- A system that supports a sustainable revenue base to fund government operating expenditure around its historical level of 30 per cent of GDP
- A system that treats all income and assets in a fair, balanced and efficient manner.
The Government is committed to meeting these objectives. We support a sustainable broad-base low-rate framework for the tax system. This ensures that taxes are fair and efficient, and that they do not impede economic growth. It also helps keep compliance costs low and minimises opportunities for avoidance and evasion. Following the Government’s response to the Tax Working Group, the tax policy work programme will consider a range of options to further improve the tax system.
People and businesses should pay their fair share of tax. This includes multi-national companies and those in the digital services field. New Zealand is currently working at the OECD to find an internationally agreed solution for taxing the digital economy. However, we may need to move ahead with our own work so that we can proceed with our own form of a digital services tax, as an interim measure, until the OECD reaches agreement. The Government will release a discussion document exploring options for taxing the digital economy shortly.
The Government also aims to continue to improve public confidence in the tax system and Inland Revenue. Our objective is for a system that helps people meet their obligations, is fair and inspires confidence. With this in mind the Government will ensure that tax policy development continues to be inclusive, consultative and transparent.
We will continue to invest in the modernisation and simplification of New Zealand’s tax system through Inland Revenue’s Business Transformation programme. Recent changes will enable the end of unnecessary secondary tax and enable Inland Revenue to provide automatic income tax refunds for salary and wage earners. The next stages of Business Transformation will modernise the administration of student loans, KiwiSaver and child support.