A leading economist says the "party is over" for the economy as lower-than-expected revenue from corporate taxes has caused the Crown accounts to dip further into the red.
Recent data showed for the first 10 months of the financial year, core Crown tax revenue was at $92.3 billion. That's $1.4 billion below forecast.
The figures from Treasury show corporate taxes were $1.7 billion lower than forecast, but the impact of this was offset slightly by small gains elsewhere in the tax system.
But there was some good news, with core Crown expenses for the year so far $330 million lower than expected, at $103.5 billion.
Independent economist Cameron Bagrie told AM on Tuesday the Government's tax take is starting to undershoot expectations and the misses are starting to get progressively larger.
"What we've seen in the month of April, is that in April alone, they had a miss by $1.5 billion and it's the usual suspects. It's your provisional tax, it's your terminal tax," Bagrie told AM co-host Laura Tupou.
"What it's actually telling us is that economic reality is sinking in there. You raise costs, you hit firms margins, hit firms margins lower profits, lower profits less tax and that's a little bit of ideology getting checked by economic reality."
Bagrie said a reason for that is down to a "slowing economy", but the big variable is inflation.
Annual inflation skyrocketed from 4.9 percent in the September 2021 quarter to a whopping 7.2 percent in December.
It currently sits at 6.7 percent after a slight drop in March. It comes after years of low inflation.
"We often talk about the household impact of inflation, it's ruthless, it's a thief that turns up and steals money out of our pockets. But it's equally ruthless for businesses. If you see anticipated price increases and you can't pass those price increases on, margins take a hit and that goes straight to profits," Bagrie explained.
"Less profits, once again lower tax, less money coming in the door. Eventually, we're going to have a bit of a reality check here for the government, in regard to if your run rate for non-COVID expenditure is 12-13 percent and your tax revenues are up five percent, you've got a bit of a mismatch between what's going out the door versus what's coming in the door."
When asked how the Government got the projection so wrong, Bagrie said it's a combination of things, but added they're dealing with big numbers, so it's not as bad as it looks at first glance.
"You've got to remember you're forecasting some really big numbers. So the government tax takes is about $130 billion, so to see an error of $2.5 billion over the course of two months is not that large in the overall scheme of things, but it's the cumulative impact in regard to what we're now starting to see," he said.
Bagrie said the economy has been in the "party line" but warned the party has come to an end and woke up with a "hangover".
"What's going on at the moment is that the party's over. We've all gone home and woken up with a bit of a hangover and now it's a question of reality starting to sink in and unfortunately, that reality is now starting to sink in for the Government's fiscal forecast as well," Bagrie told AM.
"It's a real simple reality. You need money coming in the door before you can redeploy it into well-being on the other side. What we're now starting to see is a bit of a reality check in regard to that money coming in the door."
Bagrie said the solution to the issue is getting the economy to operate a lot more efficiently and seamlessly.
"In a perfect world, we would be trying to boost the supply line. If we can get the economy operating a lot more efficiently, seamlessly, that's productivity, that's innovation, getting migration settings right, getting the education sector right," he explained.
"The education sector at the moment is our big concern not just for the next two years, but for the next sort of 10 to 20 years... so we need a ruthless obsession with tweaking as many levers as we can. This is supermarket competition, it's building competition.
"It's getting those small dynamics right because over time if we can boost that supply line, that's the economic line that drives well-being and living standards."
Watch the full interview with Cameron Bagrie in the video above.
