Managing revenues and expenses
Significantly higher government expenditure will help cushion the impact of COVID-19
Expenses are expected to peak in 2020 at 38.7 per cent of GDP, before reducing to 30.2 per cent of GDP at the end of the forecast period. Core Crown expenses are expected to average 35.5 per cent of GDP over the forecast period (Figure 15).
Figure 15 – Core Crown expenses
Source: The Treasury
The increase in government spending reflects our response to the health and economic impact of COVID-19. The increase in expenditure is driven by a mix of temporary and permanent measures including direct policy responses to COVID-19 (such as the Wage Subsidy Scheme) and higher welfare expenses.
Tax revenue is expected to fall as a result of the weaker economy
Core Crown revenue is expected to decline from 30.8 per cent of GDP in 2018/19 to 28.8 per cent of GDP by 2021/22. This is then expected to pick up from 2022/23 onwards, reaching 29.4 per cent of GDP by 2023/24 (Figure 16).
Figure 16 - Core Crown revenue
Source: The Treasury
The forecast decline in core Crown revenue in dollar terms is driven by the negative impacts of COVID-19 on the economy, with weaker economic activity expected to reduce incomes and profits. This lowers future inflation, which decreases the size of the tax base relative to previous forecasts. The Government's tax policy changes to support businesses affected by COVID-19 are also expected to have a limited impact on tax revenues.
A fair, balanced and progressive tax system will promote the long-term productivity and sustainability of the economy
The primary function of the tax system is to raise revenue to fund government expenditure. It should do this in a way that supports this Government's overall economic and fiscal objectives. Our long-term objectives for the tax system are as follows:
- 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.
- A system that treats all income and assets in a fair, balanced and efficient manner.
The Government remains committed to 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.
At the same time it is important that people and businesses pay their fair share of tax. This includes multinational companies and those in the digital services field. As part of these efforts the Government will continue to participate in multilateral negotiations, convened by the OECD, on the future of the international tax framework.
The Government also aims to continue improving public confidence in the tax system and Inland Revenue. With this in mind the Government will ensure that tax policy development continues to be inclusive, consultative and transparent. We will also continue the modernisation and simplification of New Zealand's tax system through Inland Revenue's Business Transformation programme.
The key priority for tax policy at present is to support the COVID-19 response
The tax system has a key role to play in supporting the Government's COVID-19 response and recovery efforts.
In the short run the tax system must help to cushion the impact of COVID-19 on the economy. It is critical to ensure that the tax and welfare systems work together appropriately to deliver income support to affected businesses and workers. The Government is also taking policy and administrative measures to increase cashflow and reduce compliance pressures on businesses.
Tax policy will help position the economy for recovery by supporting investment and job creation. The Government has already announced business tax changes that will promote investment, reduce compliance costs and support cashflow.
These measures include:
- The reinstatement of depreciation deductions for commercial and industrial buildings.
- An increase in the threshold for provisional tax.
- An increase in the threshold for writing off low-value assets.
- A time-limited discretion for the Commissioner of Inland Revenue to remit use of money interest (interest charged on the amount a taxpayer owes) if a taxpayer is unable to pay on time due to the impacts of COVID-19.