Economy doing better but tax take well down

Donna Purdue. Photo / Mark Mitchell

A brighter outlook for the economy, but not immediately for Government revenues, is expected in the half-year economic and fiscal update tomorrow.

Finance Minister Bill English told Parliament's finance and expenditure select committee last week the economy might be in better shape than had been expected in April (when the Budget forecasts were prepared) but that did not automatically flow through to the Government's books.

"The company tax take is significantly under forecast," he said.

By the end of October, a third of the way through the current fiscal year, corporate tax revenue was $1 billion or 40 per cent below forecast and 50 per cent below the same period last year.

Companies most exposed to the finance and property sectors have been hardest hit, the Treasury says.

At the same time, falling employment and tax cuts mean that PAYE revenues are lower than a year ago, a trend the Treasury expects to continue for the rest of the fiscal year.

Overall, it expects the effects of tax cuts and lower profits to outweigh growth in wages and consumption, resulting in a fall in total tax revenue over the full year, despite a recovery in economic activity.

The recovery has come sooner and is looking stronger than the Treasury forecast in the May Budget.

Then it expected gross domestic product to shrink 1.7 per cent in the year to next March before growing at a modest 1.8 per cent and 2.9 per cent over the two following years.

But the Reserve Bank in its forecasts last week now sees the economy shrinking just 0.3 per cent in the current March year and expanding by 3.6 and 3.9 per cent in the next two years.

Westpac economist Donna Purdue said forecasts for growth in New Zealand's major trading partners had been consistently revised higher and global credit markets had freed up.

"Back home, business and consumer confidence have soared, net [inward] migration has doubled, house prices have risen rapidly and commodity prices have recovered - dairy especially," she said. "And while the unemployment rate has risen to its highest level in nine years, the rise hasn't been as great as feared."

But Westpac expects the Government to keep a tight rein on spending despite the improving economy.

English last month noted that baseline spending (which excludes entitlement programmes like superannuation and welfare payments) had grown 45 per cent in the past five years, three times faster than the economy.

"We believe these large recent spending increases provide ample room for reprioritisation. This will be a feature of Budget 2010 as the Government delivers its priorities within the $1.1 billion cap it has set out for new operating expenditure," English said.

He told the select committee last week that the average base salary in the public sector had risen 5.3 per cent in the year to June.

"Every 1 per cent costs $160 million," he said. "There are strong cost pressures in law and order. Health and education have had a culture where automatic increases in wages and operating expenses are assumed. So we need to get on top of these increases through productivity gains."

Westpac expects the forecast operating deficit (excluding gains and losses in the valuation of the Crown's assets and liabilities) for the year to next June to be $7.9 billion, only marginally above the Budget forecast of $7.7 billion.

For the two following years it expects the deficits to fall to around $7 billion then $4 billion, a marked improvement on the Budget forecasts of $9.3 billion and $8.4 billion.