Cullen firm on no room for tax cuts

Michael Cullen is in a club of one in believing there is no room for tax cuts, says National Party finance spokesman John Key.

The Finance Minister yesterday updated Treasury forecasts to show much stronger economic growth and fatter Government revenues than expected in May's Budget.

But Dr Cullen emphasised the tunnel at the end of all this light.

Like other forecasters the Treasury has been confounded by the economy's continued strength. It now expects growth to clock in at a rip-roaring 4.7 per cent by March, compared with 2.8 per cent forecast in May. That should boost tax revenues by $1.7 billion above what it expected on Budget day.

But only an extra $300 million of that windfall is earmarked for additional spending in next year's Budget. A cash surplus of $1.4 billion will be applied to paying down public debt.

In the short term, the Government could afford more spending or tax cuts, Dr Cullen said.

But the economic timing was wrong. More spending, whether by households or the Government, when the economy was already running flat out would not deliver more growth. It would simply force the Reserve Bank into "more strenuous monetary policy" - higher interest rates in other words.

Mr Key said National was conscious of the need to avoid having tax cuts which were immediately countered by higher interest rates.

 

He said the evidence was now irrefutable that there was capacity for tax relief. "The Crown accounts are in incredibly good shape and likely to stay that way for the foreseeable future."

Dr Cullen said the latest forecasts showed the Budget surplus falling as the economy inevitably slowed, so that within four years it would only be enough to cover contributions to the New Zealand Superannuation Fund and keep gross Government debt from growing faster than the economy.

"Having committed to the New Zealand Superannuation Fund [National's] options on tax cuts are now very much more limited than they were," he said.

"If you want tax cuts ... you have to come up with a significant cut in the growth in Government spending and that looks quite difficult in the medium to longer term."

In particular, the decade starting 2010 would see large increases in health spending as a result of the ageing population. Unlike superannuation, it was not possible to prefund future health spending except by maintaining a strong fiscal position.

But Mr Key said some Government spending was of low quality.

 

Dr Cullen indicated that while Budget moves that revved up spending would not be timely, moves to encourage savings were a different story. "We are looking at savings in general, including the deposit on a first home."

Dr Cullen said health would probably account for around 40 per cent of the $2.1 billion in additional spending in next year's Budget.

GROWTH

Treasury estimates for 12 months to March 2005

MAY BUDGET

2.8 %

YESTERDAY

4.7 %