A weaker-than-expected labour market and disappointing corporate profits are taking a toll on the Government's tax revenue and raising the risk of a higher deficit than foreshadowed even in last month's Budget Policy Statement.
The Crown accounts for the seven months to January, released yesterday, had source deductions (PAYE) 3 per cent or nearly $400 million lower than forecast in the pre-election economic and fiscal update (Prefu), while GST was 4 per cent or $350 million lower and the corporate tax take 5 per cent or $250 million lower.
Since the Prefu the Treasury has lowered its forecasts for economic growth in the short term, implying a smaller tax base and resulting in a cumulative $5.6 billion shaved off the Government's bottom line over the next five years and a correspondingly higher borrowing requirement, all else being equal.
For the current year the Budget Policy Statement revised down forecast tax revenue from the Prefu's 28.9 per cent of gross domestic product to 28.7 per cent, a drop of around $400 million.
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Seven months through the year the tax revenue shortfall, relative to Prefu, is $950 million.
The Treasury has shifted its story on the PAYE shortfall from a month ago, when it was apparently hoping much of it was a timing issue related to some breakdown in the normal seasonality around pay increases.
It now says that growth in employment and wages is weaker than Prefu expected, "suggesting some downside to the full-year source deductions results". PAYE contributes nearly 40 per cent of the tax revenue.
It expects the undershoot in company tax to persist and widen by year's end. Corporate tax contributes around 15 per cent of total tax revenue.
Most of the GST shortfall is attributed to earthquake-related refunds to insurance companies. GST is around 27 per cent of tax revenue.
Finance Minister Bill English said the Government would not over-react to what were relatively small changes in the tax take. They reinforced the need for the Government to be disciplined and stick to its plan to get back to surplus in 2014/15 so that it could start repaying debt, he said.
But he accepted that the weaker-than-forecast revenue flow indicated economic growth was not picking up as quickly as expected, for two reasons - a delay in the rebuilding of Christchurch because of the aftershocks just before Christmas and the ongoing effect on confidence of the situation in Europe.