Monday, May 31, 2004


NZPundit's new "high-brow" group-blog is online, though if David Farrar's "tax and spend" article is any example, the brow is set rather low. David tracks the growth of government revenue since 1990, and points out that, according to the government's own financial projections,

[t]he increase from 1999 to 2008 is forecast to be a staggering $30 billion, of which over $20 billion is taxation alone. If re-elected Labour in 2008 will have state revenue of $72 billion, which is a gigantic 71% increase over nine years.

This is fairly disingenuous, even for a former spindoctor. Why? Because he is working in raw dollars rather than as a percentage of GDP. This allows him to throw big numbers ($30 billion!) around for shock value, but is misleading (to say the least). If you actually look at those financial projections, you get rather a different story, as can be seen from the chart below:

10 year trend information

(Stolen from the Budget 2004 forecast financial statements.)

David is looking at total crown revenue and expenditure, and this does increase over the period 1999-2008. However, note the significant discontinuities in 2003. The government changed its accounting practices then, and now includes all revenue and expenditure of Crown Entities and SOEs in this category (for an idea of what is included, see the appropriate sections of the Crown Reporting Entity). So, in 2003 "total crown revenue" included things like Air New Zealand earning money by selling plane tickets; in 2002 it didn't. That single example is about $3.6 billion a year, by the way, so you can see how this makes a substantial difference.

The truth can be seen in the trends in tax and core crown revenues as a percentage of GDP (and indeed the trends in total crown revenue on either side of that accounting discontinuity) - they're remarkably stable. Tax revenue hovers at just over 30% of GDP, core crown revenue at around 33.8%, and total revenue at either 40% or ~43.5% depending on how you measure it. And that gives us the real story: the $30 billion increase in crown revenue (and $20 billion increase in tax revenue) that David is so incensed about is due primarily to GDP growth. In 1999, GDP was just a smidgen under $100 billion. In 2008 it is projected to be $167 billion. To paraphrase David, that's a gigantic 67% increase over nine years. And since the percentages of government taxation and total revenue are now stable (give or take that accounting discrepancy), they will naturally increase accordingly.