The 200506 Budget projected operating revenue at $78.9 million, comprising taxation revenue of $67.6 million and other operating revenue of $11.2 million.
This projection was revised upwards to $79.3 million in the supplementary budget, following an unexpectedly large dividend from Telecom. Taxation receipts so far in 200506 have been considerably higher than expected. In the five months to November 2005, receipts of the four main taxes were $3.1 million above budget. Receipts of value added tax (+$1.2 million), income tax (+$0.9 million) and company tax (+$1.8 million) were all well over budget, while import levies ($0.8 million) were below budget. These very strong tax receipts highlight the strength of the economy in the first few months of this financial year.
Nevertheless, it is too early to assume that all of these gains will be maintained throughout the financial year. This is highlighted by the experience of 200405. In the first five months of 200405, receipts were some $2.0 million over budget. However, between December 2004 and February 2005 receipts were more than $1.3 million below budget. Taxation receipts can fluctuate considerably from month to month, and the gains so far this financial year could be reduced considerably if we were to experience a number of low months. The anecdotal evidence of a slowdown in the economy in the last couple of months also suggests that taxation receipts may be less buoyant in the period ahead.
For this reason, MFEM has adopted a relatively cautious approach and revised taxation receipts for 200506 up by $2.0 million. Revenue projections have also been revised upwards by a further $0.5 million to reflect higher expected interest earnings, in part because of higher interest rates.
Taxation receipts in 200607 and future years will be significantly affected by the decision in November 2005 to remove most import levies with effect from 1 July 2006. This decision reflects a longstanding commitment by Government to remove levies and is consistent with obligations under the Pacific Island Countries Trade Agreement (PICTA).
It is estimated that in the absence of exemptions or increases in other taxes, the effect of the removal will be to reduce taxation receipts by around $6.3 million per year compared to what they would otherwise have been. This comprises $5.6 million in lost import levies and $0.7 million from lower VAT receipts.
It has been suggested that the removal of import levies will increase spending in the economy, thereby offsetting some of the loss in revenue. However, this is unlikely to be the case. Aggregate demand would only increase if government did not reduce its own expenditure. To ensure fiscal responsibility government expenditure would need to be reduced, and this would offset any increase in aggregate demand from higher consumer spending.
Projections suggest that total operating revenue in 200607 may be around $78.7 million, a fall of $0.6 million compared to revenue projections for 200506 at the time when the supplementary budget was framed.
In 200708 most components of operating revenue are projected to increase in line with nominal GDP less 1 percentage point.
This is broadly in line with historical trends.
Complete report: MFEM, Half Year Economic and Fiscal Update