Tax forecasts

May 22nd, 2012 at 7:00 am by David Farrar

One of the memes being pushed by Labour and the Greens is that the 2010 package wasn’t revenue neutral. They assert this because revenues are lower than was projected. The problem with their arguments is that revenues often differ from what was projected, and there is no way of knowing how much is because of changing economic projections, how much is impacted by a policy change and even how much is just because the are imprecise.

As an example. Let’s say you forecast to be $12.5b at 12.5% and you increase to $15% and hence forecast will bring in $15b. That extra $2.5b of income is distributed back as income tax cuts. But let’s say once goes to 15%, the revenue only goes to $14b. Now Labour and the Greens are saying that $1b less is due to the policy change, and hence the tax switch was not fiscally neutral. They argue that it is purely because of the rise in that people spent less, and hence less was paid. But the drop in might just be because of lower economic growth, or a drop off in consumer confidence etc.

To give you an idea of how dramatically forecasts change over time, I’ve collated the forecasts from the last nine fiscal updates. They tell quite a story. Let’s start with total tax revenue.

The last two columns are best to focus on, as we get a full history. This is the total tax take projected for last financial year and the current one.

Back in the 2008 budget Dr Cullen projected $62.1b in tax revenue for 2011/12. Then by the PREFU it had dropped to $61.2b. It further dropped to $58.3b in the DEFU, which takes accounts of National’s election tax cuts. However those changes were compensated by expenditure reductions – mainly KiwiSaver.

A huge drop occurred between 2008 DEFU and the 2009 budget, with tax revenues dropping $4.3b! Now bare in mind it was in the 2009 budget National cancelled its planned tax cuts for April 2010 and April 2011, so it would have been an even bigger drop without that. This change was pretty much all due to the global financial crisis and recession.

By year end forecasts got more positive, going up to $56.6b, and then the tax switch in the 2010 budget projected it to go to $57.4b. However then forecasts dropped again, dropping to $56.7b and then $54.7b.

Now Labour and Greens say that the difference between 2010 Budget and the latest forecasts is all due to the tax switch. But as one can see over time the wider economy is a far bigger factor in tax projections. Recall how in 2009 tax revenues forecast dropped $4.3b even though National cancelled tax cuts.

Now let’s look just at GST.

This shows projected GST revenues only. Note how they from 2008 to 2009 they went from $13.5b down to $11.3b. Then they were projected in 2010 to go up to $15.8b with the increase to 15%. Just six months later revised that down to $14.0b, but then this year revised up to $15.0b.  This is still lower than originally forecast in 2010, but again no greater than other variances from year to year.

So when Labour and Greens say the tax switch cost $2b, they are making it up. What they are saying is that there has been $2b less tax revenue than projected. But if the tax switch had never happened it is quite possible the drop in tax revenue would have been the same or even greater.

And for the paranoid out there, this is all my research, taken from going through the last nine fiscal updates. No one suggested it to me, helped me with it, or even knew about it. I did it because I got sick of the uncontested claims about the impact of the tax switch.

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17 Responses to “Tax forecasts”

  1. Pongo (371 comments) says:

    The changes to depreciation on property kick in now which will make quite a bit of difference, for me I claimed 12k back last year and none this year.
    One thing that is really starting to wind me up is Labour and Greens saying a CGT will divert investment in property to productive assets, bollocks first English has removed all tax advantages on property and when you consider the hassle that landlord ing can be and the returns you get the share market is a much better place to be. Also if a cgt is a disincentive to property why is it being applied to productive assets as well. The MSM need to start asking Parker and Norman why the inconsistency. CGT is hideously complicated to implement and if they set it at 15% then for me it will lower my tax rate on property from the current 28% I pay.

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  2. berend (1,705 comments) says:

    But why is John Key still borrowing $240 million a week?

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  3. decanker (184 comments) says:

    “But if the tax switch had never happened it is quite possible the drop in tax revenue would have been the same or even greater.”

    Much of your explanation relies on that, but one could equally say with the same degree of confidence:

    “But if the tax switch had never happened it is quite possible the tax revenue would have been the same or even greater.”

    Just depends on your view of taxation.

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  4. Doug (410 comments) says:

    But why is John Key still borrowing $240 million a week?
    Another Labour lie.

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  5. peterwn (3,243 comments) says:

    It is quite possible to produce figures showing anything you like. The Left recently have tried to show:
    1. Tax changes are not neutral (Labour).
    2. Changing circumstances mean that the ‘Roads of National Importance’ programme (but presumably not Len’s trainsets) can be curtailed (Greens).
    3. Part privatisation of SOE’s does not make economic sense (Greens).

    Funny that the Left has not yet tried to show that taxing ‘rich pricks’ more will help grow the economy. Even the new French president is having trouble in this regard and wants to extend his tax net to the City of London (his 22nd arrondissement?) institutions.

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  6. Wayne91 (143 comments) says:

    Berend – Whatever the figure is thats being borrowed – its to help pay for Labours unadultered election bribes such as WFF, interest free student loans, and the Labour Bloating of the public service system

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  7. graham (2,333 comments) says:

    peterwn:

    Funny that the Left has not yet tried to show that taxing ‘rich pricks’ more will help grow the economy. Even the new French president is having trouble in this regard and wants to extend his tax net to the City of London (his 22nd arrondissement?) institutions.

    I hadn’t heard that one. But there you go – if imposing a humongous tax on ‘rich pricks’ causes them to up and leave the contry, what’s Hollande’s answer? Chase them down to wherever they move and continue taxing them.

    Yeah, good luck with that one.

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  8. peterwn (3,243 comments) says:

    graham – he wants EU countries to impose a ‘financial transaction tax’ to help support France and EU cotcase spending. He also wants to tap into Germany. The main revenue source would be City of London institutions. As far as I can see he got elected on rash promises that he cannot keep during his 7 years in office. Many years ago, New York State or City wanted to impose a tax on Wall Street activities. It was dropped when the NYSE said it would simply re-locate to another state. Presumably same could happen in London.

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  9. Michael Mckee (1,091 comments) says:

    As one of the 168,000 households you highlighted in a previous post DPF, I am very happy National is in government than Labour as I suspect things would be so much worse than they are now.
    Still, I’d like to see the back of WFF and proper tax cuts instituted.

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  10. JC (949 comments) says:

    Berend,

    John Key put that $240 million thing to bed in the video (shown in Kiwiblog) last week in his interview with Leighton Smith. In it he said the amount is about $100 million. If interest rates are favourable more is borrowed and then carried over to produce an average of $100m/week.

    DPF.. well done! Now please do one on that disgraceful claim on “profits being taken out of the country by foreigners”.

    JC

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  11. YesWeDid (1,048 comments) says:

    ‘One of the memes being pushed by Labour and the Greens is that the 2010 tax package wasn’t revenue neutral. They assert this because tax revenues are lower than was projected’

    What total rubbish – the 2010 tax package wasn’t ‘neutral’ even using National’s figures at the time, it was only neutral after 4 or 5 years and given the uncertainty in making projections claiming it was tax neutral was at best ‘hopeful’.

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  12. plum (38 comments) says:

    DPF – you said ‘tax revenues often differ from what was projected, and there is no way of knowing how much is because of changing economic projections, how much is impacted by a policy change and even how much is just because the forecasts are imprecise.’ If there is no way of knowing what the impact is from a policy change such as the tax switch, doesn’t that mean that the prediction that the change would be ‘neutral’ was just as much a guess as anything else?

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  13. Luc Hansen (4,573 comments) says:

    given the uncertainty in making projections claiming it was tax neutral was at best ‘hopeful’.

    More like just a cynical lie.

    And funny how National’s borrowing figures suddenly changed after the election. Before the election, it was the Big Scare of the gross borrowing figure of 240m per week. Those who pay just a little attention to this stuff understand that the government was sprung on this pretty quickly, but now the need for the Big Scare is over, temporarily, it’s happy to revert to the net borrowing figure. Funny that.

    Whichever way these figures are spun, it looks like tax revenues are down about 7.5b since 2008 budget, while GST revenues have risen by only 1.5b. Not maintaining the tax base in the face of the GFC storm was simply irresponsible. It would have been far better to impose the GST increase, while compensating those on lower incomes, and this would have ensured the burden of keeping us solvent would fall on those who can most afford it.

    Instead, this government is slowly turning the screws on the great unwashed while pumping up the bank balances of their tribal mates.

    And the so-called revenue neutral tax switch was regressive, meaning that the rewards went disproportionately to the wealthier amongst us. This group does not spend the same proportion of their income on consumption goods, therefore economic growth was adversely affected (not the only influence, but this is the one under discussion) as a result, which implies less tax revenue…and so on as we spiral into a double dip recession (a la Ruth Richardson’s Mother of all Budgets, a disaster for the economy).

    Some economists propose that a $1 expenditure cut by government leads to between $1-1.50 decrease in GDP. A large proportion of the tax cuts was the same as a spending cut in its effect on GDP, in the sense that it was withdrawn from the money-go-round that keeps everything chugging along.

    Finally, it is well recognised, and backed up by empirical evidence, that tax cuts are a poor stimulus, and tax cuts to the upper income earners is the poorest of all. Much better to build/upgrade/replace houses and schools with Kiwi labour and materials.

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  14. Cunningham (843 comments) says:

    Luc Hansen ‘Some economists propose that a $1 expenditure cut by government leads to between $1-1.50 decrease in GDP’. Shit Luc that’s fucking brilliant. So using that logic we should borrow like hell to raise our GPD and grow? Shit if it’s that easy we should be borrowing trillions of dollars so we can get double digit growth. Shearer was also using this same brilliant logic by saying a zero budget = zero growth. Man those Labour/Green supporters are clever. They should just change their slogan to ‘borrow and grow’ and watch their support levels shoot up.

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  15. Luc Hansen (4,573 comments) says:

    That’s an interesting response, Cunningham, to kidnap a statement about the multiplier effect of spending cuts and justify as a rant against borrow and hope even while the current government, which apparently has your support, is borrowing at not only record levels, but stratospherically record levels.

    Oh well.

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  16. Manolo (13,580 comments) says:

    But why is John Key still borrowing $240 million a week?

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  17. Mike Readman (363 comments) says:

    Notice something common in these forecasts? FU. That’s what the government’s saying as they continue to spends tens of billions of dollars every year.

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