Wellbeing Budget 2021

Securing
Our Recovery

A stronger economy means increased revenue relative to forecasts last year

Core Crown revenue is expected to stay relatively stable as a share of the economy over the forecast period at an average of 29.1 percent of GDP.

Figure 17 - Core Crown revenue

Source: The Treasury

In dollar terms, core Crown revenue is expected to increase in each year of the forecast period, reaching $121.3 billion by 2024/25 as nominal GDP grows. The increase in core Crown revenue is largely driven by growth in tax revenue, reflecting strong underlying economic activity with a strong labour market and stable business conditions.

The Treasury's revenue forecasts do not incorporate the Government's recently released housing policy announcements. This is because some design features of the housing changes are still under consideration. While it is likely that there will be a revenue uplift from these changes, the size of this is subject to the final design of the policy.

Under the Public Finance Act 1989, the Government is required to publish its Revenue Strategy in the FSR. The remainder of this section meets that requirement. The Revenue Strategy has been updated in Budget 2021 to reflect changes already announced by the Government, including the change to the top income tax rate, which came into effect on 1 April 2021.

Public finances, including government revenue, are important for wellbeing. Public policy supports New Zealanders' wellbeing when the social benefits of government expenditure outweigh the social costs of raising revenue.

Government revenue underpins many of the Government's overarching policy goals by funding the social expenditure needed to meet these challenges. In some cases, revenue policy has a more direct role in contributing to these goals, through stimulating economic activity in some areas and trying to shift socially costly behaviours in others. This includes policies that support the economic recovery, promote housing affordability and mitigate climate change.

Government revenue needs to be sufficient to ensure a sustainable fiscal outlook. The level of revenue will be maintained to be consistent with reducing operating deficits and stabilising net core Crown debt as a percentage of GDP by the mid-2020s and then reducing it as conditions permit (subject to any significant shocks).

A sustainable revenue base is critical for managing fiscal pressures over the long term. These pressures relate to the ageing population, healthcare costs, infrastructure demand and the need for resilience to climate change and other shocks. There is also rising global concern with inequality and many countries, including New Zealand, face the challenge of fostering inclusive growth.

The Government's revenue policy objective is to raise sufficient revenue in a fair and efficient manner. This policy objective will assist in fostering inclusive growth. The Government's fairness objectives for the tax system are:

  • Progressivity: individuals with a higher income, and therefore ability to pay, should pay a greater proportion of their income in tax.
  • Reducing inequality: the tax system should help in limiting excessive wealth inequality over the longer term.
  • Horizontal equity: the principle that people that are in the same position should pay the same amount of tax.

The efficiency objective is to minimise the economic costs of raising revenue, subject to the Government's revenue and fairness objectives.

Continued public trust and confidence in the tax system and its administration is important. This supports voluntary compliance and broader social capital.

The Government has a strong focus on the fairness of the tax system. This means that the income tax system should be progressive and, in combination with transfers, reduce income inequality. The Government has increased the progressivity of the personal income tax system with a new top tax rate.

The tax framework is based on the principles of a broad base-low rates and neutrality. This generally applies, although taxation of capital is not as broad based as income. Income and consumption tax bases are broad in the sense that there are few specific concessions for particular economic activities, goods or services. This enables tax rates to be set lower than otherwise. Neutrality in the tax treatment of different investments promotes economic efficiency and productivity.

In some cases, revenue policy will be used to influence behaviour. This is appropriate only where there is clear evidence of net social benefits, tax policy is the most appropriate instrument and fiscal risks can be managed. As an example, the research and development tax incentives promote business innovation.

People and businesses must pay their fair share of tax, including multinational companies. The international tax framework needs to adapt to shifts in the global economy, including increased cross-border activity and digitalisation. New Zealand is continuing to work with the OECD to find a multilateral solution to the challenges that the digital economy poses for international taxation.

Tax settings will continue to be broadly stable and predictable. This supports efficiency and macroeconomic stability.

The Government expects Inland Revenue to maintain public confidence by administering the tax system in a fair and efficient manner. The tax system has been modernised and simplified through Inland Revenue's Business Transformation programme.

The tax system must remain fit for purpose in a changing world. Ongoing work will focus on implementing Government policy, maintaining the integrity of existing revenue bases and monitoring the sustainability and fairness of the tax system. The Generic Tax Policy Process shall be used to develop and consult on tax policy where practicable.

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