Taxman reaps $1billion windfall

By BRIAN FALLOW and ELLEN READ

A torrent of tax dollars from stronger-than-expected economic growth has allowed the Government to cut $3.1 billion from its borrowing programme over the next 18 months.

In the December Economic and Fiscal Update released yesterday, the Treasury has upwardly revised its expected tax take for the year to next June by nearly $1 billion compared with pre-election forecasts.

That mainly reflects its expectation that the economy will grow 4 per cent in this June year, nearly a full percentage point more than it was expecting six months ago.

But tax revenue is growing even faster than the economy, and the Treasury is not sure why.

In the year to date, corporate tax flows have run about 20 per cent ahead of last year, an improvement the Treasury does not think can be entirely explained by profit growth or the running-down of tax losses.

The increase has been broadly based across sectors, it says, and applies to small and large businesses.

Part of the explanation may be that companies are being risk averse in estimating provisional tax, in which case the increase will unwind by the end of the year.

But the Treasury is still expecting about $400 million or 10 per cent more company tax this year thanit was six months ago.

Buoyant residential construction is helping to boost goods and services tax receipts and the forecast for GST revenue is up by $330 million.

With another $1 billion of tax revenue now built into next year's forecasts as well as this year's, Finance Minister Michael Cullen yesterday announced the bond tender programme for this June year would be cut by $900 million to $2.5 billion, and next year's programme by $2.2 billion to $3.4 billion.

Economists had expected the Government to slice about $1.5 billion from the borrowing requirement in the next 18 months and were a little surprised by the extent of the cut.

Deutsche Bank chief economist Ulf Schoefisch said the Treasury's growth and revenue forecasts for 2003-04 might be a bit optimistic.

"However, a renewed upward revision to around $4 billion [for 2003-04 bond issuance] would probably not be of great concern to the markets, judging by the modest response to today's tender cut announcement."

The Treasury thinks the economic growth cycle is at its peak right now, with annual growth of 4.1 per cent forecast for this calendar year.

Over the next 18 months, the effects of heavier going on the export front will overcome the momentum the domestic economy has built up.

The terms of trade have already deteriorated sharply in the past year and some further decline is expected, albeit to levels not far below their long-run trend.

The Treasury is not forecasting any further appreciation in the exchange rate, which it thinks is about at its long-term equilibrium level on a trade-weighted basis.

The world economy is expected to continue improving, but the recovery profile is later and more tentative than six months ago.

The impact of slow trading partner growth, falling export prices and declining export revenues is expected to be increasingly felt next year, pulling GDP growth down to 2.5 per cent by mid-2004 before it recovers to around 3 per cent.

Net migration inflows are expected to fall markedly from the second half of next year, returning to their long-run average of 5000 a year (from about 37,000 now) by 2005.

The labour market is expected to remain strong enough to keep wage growth between 3.2 and 3.8 per cent a year over the next five years, and the unemployment rate increases slightly to 5.5 per cent by 2004 before easing back to 5.2 per cent further out.

Inflation pressures are forecast to ease, bringing CPI inflation back to 2.3 per cent by March next year.