Managing revenues and expenses
The Government is removing fiscal stimulus measures as we move beyond COVID-19
The fiscal strategy takes a balanced approach to managing core Crown expenses, which after increasing in 2021/22 as a result of the Government's response to COVID-19 are expected to decline as a share of GDP over the forecast period from 35.4 percent in 2021/22 to 29.8 percent of GDP by 2025/26 (Figure 17). The reduction in core Crown expenses as a percentage of GDP beyond the current year reflects the temporary nature of the COVID 19 fiscal support, with fiscal stimulus measures put in place to cushion the economic shock ending, and spending reducing to a level closer to pre-COVID-19 times.
Figure 17 - Core Crown expenses and core Crown revenue
Source: The Treasury
The Government continues to take a balanced and careful approach to expenses. Future Budget allowances continue to be smaller than during COVID‑19. This will mean a continued focus on high value-for-money investments that support the Government's priority areas while maintaining essential services, like healthcare and education.
The wellbeing approach provides a strong value-for-money framework that is supporting investment decisions by helping the Government target spending to areas it is needed most (see Wellbeing Outlook Chapter).
Wage growth and higher interest rates means increases to core Crown revenue
As a share of the economy core Crown revenue is expected to increase marginally from 31.2 percent of GDP in 2021/22 to reach 32.2 percent of GDP by 2025/26.
In dollar terms, core Crown revenue is expected to increase in each year of the forecast period, reaching $149.2 billion by 2025/26 as nominal GDP grows. The increase in core Crown revenue is largely driven by the stronger outlook for wage growth, economic activity and interest rates driving up core Crown tax revenue.
…with no significant changes to Government's revenue strategy
Under the Public Finance Act 1989, the Government is required to publish its Revenue Strategy in the Fiscal Strategy Report. The remainder of this section meets that requirement. The Revenue Strategy had been updated in Budget 2021 to reflect changes to the top personal income tax rate, which came into effect on 1 April 2021. The strategy remains broadly unchanged for Budget 2022.
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 the operating balance objective of returning the OBEGAL to surplus and maintaining an average surplus in the range of 0 percent to 2 percent of GDP thereafter.
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, and has consulted on proposals to limit opportunities to avoid paying this rate. Work is also underway to fill a data gap on the effective tax rate paid by high wealth individuals.
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 Government is also planning to introduce a Tax Principles Bill to legislate a reporting framework that will require officials to assess the performance of the tax system against a set of high-level principles. Consultation on the principles is planned for the middle of 2022. The Generic Tax Policy Process shall be used to develop and consult on tax policy where practicable.