Budget 2023: Corporate tax take $2 billion less than forecast, Crown accounts show

The Government's financial books show the tax take is falling sharply as businesses are hit hard by higher costs and less profits.

Treasury on Wednesday released the Crown accounts for 11 months to May, showing New Zealand recorded a corporate tax deficit of $2 billion less than what was forecast in Budget 2023.

New Zealand recorded a total deficit (operating balance before gains and losses) of $6.5b in the same period, more than $2b than projected in May's Budget but $1b lower than in 2022.

Finance Minister Grant Robertson promised the Government "had already taken steps to respond to the uncertain economic environment by carefully and responsibly managing its spending".

Robertson. Photo credit: Getty Images

Independent economist Cameron Bagrie told AM on Thursday a couple of things were contributing to the lower tax take.

"We know the economy is tracking a lot weaker - we've got those negative GDP statistics," Bagrie told host Ryan Bridge.

"What Treasury's also underestimated has been the brutality of the impact of inflation on business sector profitability and this is not just big businesses, this is your SMEs (small and medium enterprises), this is your farmers."

After years of low inflation, the annual consumer price index skyrocketed from 4.9 percent in the September 2021 quarter before peaking at 7.3 percent in June last year. It's remained sticky ever since but fell to 6.7 percent in March.

Bagrie said while businesses were tracking "OK" in terms of sales, it was the "ruthlessness" of higher costs that was having a major impact.

Cameron Bagrie.
Cameron Bagrie. Photo credit: AM

"If firms are making less money, they pay less tax and what we're seeing coming through is less revenue," he explained.

"I think the real big error here was there seemed to be this expectation that firms were in better shape financially - profitability wise - [and] high levels of profit we saw in the 2021/2022 year were going to be maintained. Now, one of the things we know about history is that profits go really well at the top of the economic cycle but profits tend to get brutally savaged on the downside of the cycle."

When asked what that meant for unemployment, Bagrie said there would likely be "a fair few job losses".

"What we're already starting to see, in regard to the weekly benefit statistics, is that they're moving up around 700 per week - they're now tracking above where they were in 2022 and that points to a subtle turn in the job market at this stage."

Bagrie said, however, the hit to the economy would be "less subtle" by the year's end.

"Those sort of profit turns that we're starting to see on the ground - they're going to be met by [a] response and the response is going to be cost-cutting.

"It also needs to be met by some other things - some positive things - such as investing in technology."

Bagrie said it was hard to say what the unemployment rate - currently at 3.4 percent - could be by Christmas.

"Trying to put a number by year-end - you're whistling Dixie," he explained.

"The real story here is, what needs to take place over the next 18 to 24 months? And this is the unfortunate, economic and social side of getting rid of inflation.

"Getting rid of inflation means you need to beat up the economy, it means profitability needs to be lower and there are going to be job losses."

Watch the full video for more.