Use tax cut cash to pay off debts, experts say

The average family will be about $18 a week better off from Friday - but the experts advise not to go and spend it.

David Kneebone, manager of the financial advice website sorted.org.nz, says most families should use the extra cash from the October 1 income tax cuts to pay debts.

And Craigs Investment Partners private wealth research manager Mark Lister says that is exactly what most people will do.

"My personal view on what will happen, for most people who end up with any more, is that it will be more likely applied to debt repayment, which is probably the sensible thing to do," he said.

"While we have started deleveraging a little bit, there is still quite a way to go, and I suspect that most people will still be feeling a little cautious about their job security and the way the economy is going."

The Government is giving with one hand and taking away with the other.

Standard income tax rates are going down by between 2 per cent at low incomes and 5 per cent at top incomes, but GST goes up on Friday from 12.5 per cent to 15 per cent.

At last year's median household income of $64,000, that means income taxes will drop by $37.50 a week but GST will push up household spending by $19.36 a week, giving households a net gain of $18.14 a week. But that money can be put to good use.

"If you have high-interest debts, particularly hire purchase or credit cards, if you can put even $20 or $30 against a payment regularly, that really does make a difference," said Mr Kneebone.

"Putting the extra money against your mortgage, an extra $20 or $30 a fortnight, can wipe years and thousands of dollars off that loan.

"Most banks are pretty relaxed about you increasing your payments. If you're on a fixed-interest loan some can have penalties but it's worth having a conversation with your bank. Many allow 5 per cent extra payments a year without penalties."

Reserve Bank figures show New Zealanders have already started reducing their debts - on average from 159 per cent of net household incomes two years ago to 154 per cent today.

But this is still way above the debt levels of just over 100 per cent of net incomes a decade ago.

"Our household debt levels as a nation are still high," Mr Lister said.

"Hopefully people have learned a few hard lessons over the last two years and will continue to be a little bit more conservative with their money."

Mr Kneebone warned that people should budget for other price increases apart from Friday's GST hike. Cigarette prices went up about $1 a packet when taxes were raised in April. Major power companies raised prices by about 3 per cent, and petrol prices went up 3c a litre when the emissions trading scheme started in July.

ACC levies on employees went up in April from $1.70 to $2 in every $100, offsetting part of this week's tax cuts, and the ACC part of car licensing fees jumped by $30 to $198 in July.

About 11,000 families on incomes above $72,800 have had a cut in childcare subsidies this week, and almost half the country's early childhood centres are expected to raise fees in the next few months because of a cut in the subsidy for qualified teachers.

The Family First lobby group said yesterday that a basket of cheap-branded essential family groceries increased by 0.7 per cent in the past year at a Pak'nSave supermarket and by 6 per cent at a Foodtown store.

"It comes as no surprise that families are struggling financially and that discretionary spending such as family trips, sports and school expenses are being reduced," said the group's director, Bob McCoskrie.

The Reserve Bank forecasts inflation to peak at 4.8 per cent next June.