Drop in tax take predicted

Government’s announcement of a better than forecast tax take in the first half of the financial year must be viewed with some caution due to a prediction of a drop in the tax take in the latter half of the year.
The “Half Year Economic and Fiscal Update for 2009/2010” issued in December 2009 and giving the position as at the end of November 2009, attempts to paint an encouraging outlook for the economy but is tempered by guarded comments regarding one off events and the expectation of a drop in taxation to levels closer to that forecast.
What the public has to remember is that the forecast figures originally set by the Budget earlier in 2009, were revised downwards by a later Supplementary Budget. This was due to the world recession the potential impact of which our government appeared to find hard to firstly acknowledge and then comprehend and handle.
When the crunch came our government had no option but to revise its forecasts downwards. That was sensible in the circumstances but now the world is beginning to recover, when will the forecast figures be re-adjusted? Maintaining the lowered figures enables government to announce greater achievements against forecast. But who will it be fooling?
The table above details Year to Date (YTD) taxation receipts as at the end of November 2009. The figures therefore indicate taxation for the first 5 months of the financial year. A good indication of economic activity in the Cook Islands is the amount of tax received by government, especially Value Added Tax (VAT). VAT revenue provides a good indication of activity in the economy. As the economy picks up, people spend more on goods and services, with each purchase attracting VAT revenue. The more VAT collected therefore, the more activity occurring in the economy. Total YTD Taxation receipts are well above estimates as of the end of November 2009. At that stage total tax receipts were up $3.0 million or 8.5%. This is mainly due to increased economic activity brought about through:
• The Pacific Mini Games;
• Larger than expected increase in tourism numbers, and
• The adverse effect of the global financial crisis being less than first predicted.
YTD receipts are also up $4.5 million or 13.6% on this time in 2008/2009. YTD VAT receipts are $1.1 million or 7.5% above estimates for this time of the year. VAT is also up $1.4 million or 9.2% on the same period last financial year. While the Pacific Mini Games had a slight impact on VAT receipts this year, the World Youth Netball Championships did not. The month of August (the month when we hosted the Netball) was the only month so far this year where VAT receipts were down on budget estimates.
YTD Income Tax receipts are $0.3 million or 3.7% above budget estimates at the end of November. While receipts are favourable against budget estimates they are down $0.1 million or -1.2% on the same period in 2008/2009. This was to be expected due to the downturn brought about by the global economic crisis. Some employees are experiencing reduced hours of employment, ultimately affecting income tax receipts. While there has been a steady increase in tourism over the period, many visitors now
prefer small and private accommodation instead of large resorts. This has affected employment hours at the major resorts on Rarotonga. YTD Import Levies are $0.6 million or 12.6% above budget estimates at this time. Levies are also up $1.0 million or 24.7% on the same period in the last financial year. The re-introduction of the second cargo vessel and the introduction of a third vessel have had a positive impact on import levies. Compliance work by the Revenue Management Division has also benefited Government’s receipts over the period. YTD Company Tax receipts are $0.6 million or 15.6% above estimates so far this year. Company Tax is also up $0.7 million or 20.2% on the same period in 2008/2009. Compliance work by the Revenue Management Office has had a positive effect on the receipts as had increased economic activity. Part of the increase can also be attributed to penalties imposed on some companies for late payment of tax. YTD Departure Tax is $0.4 million or 14.6% above estimates as at the end of November. Receipts are also up $1.5 million or 119.1% on this time last year. The increase over 2008/2009 was expected as there has been an increase in Departure Tax for adults passengers. The removal of Departure Tax for children under the age of 12 has not had a negative impact on receipts. While the increase over last year can be partly attributed to the increase in the tax, there has also been an increase in tourism numbers contributing to the increase over budget estimates. This is only the first five months of the financial year and a clearer picture will become evident during the latter half of the financial year. While these figures paint a positive picture for the Cook Islands economy, it is hard to quantify the impact of the many one-off events held this year. As these events have now finished, we may see a reduction in taxation receipts in the second half of the year. To this end, it is expected that total taxation receipts for the full 2009/2010 financial year will come in on target or slightly above estimates. At this stage it is projected that government revenue will be approximately $1.0 million above budget estimates by the end of the financial year. “

 

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