Bollard deflates mortgage, tax hopes

By Brian Fallow

Hopes of big tax cuts and lower mortgage repayments appeared to move further away yesterday.

Reserve Bank Governor Alan Bollard warned that tax cuts would be inflationary and would help keep interest rates high for longer.

But he said they would not necessarily trigger another rise in the official cash rate, which sets housing mortgage rates.

For the first time the bank has incorporated an assumption of tax cuts in its economic forecasts.

It is picking a $1.5 billion cut - or $15 a week for each taxpayer - from 2009.

But Dr Bollard said the figure and timing were not based on any inside knowledge of Government plans.

"In this very tight economy any fiscal loosening does contribute to inflationary pressures," he said.

"We want that to be taken into account by the Government and other political parties and we want it all to be out there for a rational debate during the coming year."

What sort of inflationary effect tax cuts would have would depend on how they were designed, who got them and how much of the money was spent rather than saved.

The Reserve Bank left the official cash rate at 8.25 per cent, and its forecasts say interest rates and the dollar will stay where they are until the second half of 2009.

The bank takes no view on the merits of tax cuts or spending increases.

But it says it is important to recognise that putting extra pressure on demand when the economy has few spare resources means interest rates and the dollar have to be higher than they would otherwise have been.

Dr Bollard said the fight against inflation had been helped by the Government making more money than expected from tax this year.

Finance Minister Michael Cullen has said that one of the tests for tax cuts is that they must not make inflationary pressures worse.

Yesterday, he said that meant "not providing any further stimulus by way of a smaller operating surplus than we forecast at this year's Budget."

It was reasonable for Dr Bollard to assume that any increase in tax revenue over what was forecast would be applied to tax cuts.

"Clearly the notion that surpluses would go ever higher and higher with every Budget is an impossibility," Dr Cullen said.

He would not say whether $1.5 billion was a reasonable assumption for the amount of any tax cuts.

National Party finance spokesman Bill English said the forecasts seemed to suggest no drop in interest rates until 2010 and asked if there was any sign of relief for mortgage payers.

Bank of New Zealand economist Stephen Toplis said: "One could argue that the bank has just given the green light to a tax reduction by suggesting that it will not, of itself, necessitate a rate increase."

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