Cullen hints at income tax cut - but not yet

Michael Cullen

Finance Minister Michael Cullen countered Budget criticism with stronger hints yesterday that he will consider cutting personal tax alongside business tax changes if big revenue forecasts by Inland Revenue prove right.

Dr Cullen has already foreshadowed changes to business tax in April 2008 - the same time that adjustments kick in for personal tax thresholds, announced in last year's "chewing gum Budget".

He and Revenue Minister Peter Dunne will issue a paper in a few months on possible business options.

A cut in the 33c company tax rate to match Australia's 30c rate has been widely expected.

But yesterday at his post-Budget speech in Wellington, Dr Cullen hinted that changes to the company tax could not be made without considering its impact in other areas - personal tax is 33 per cent on income over $38,000, and 39 per cent on income over $60,000.

He raised questions about whether it was "sustainable or even desirable" to have a company tax structure different from the rate applied to savings.

Then he went on to talk about personal rates.

"Does it lead to implications in terms of personal rates? If so, how far can we move?" he said in an unscripted part of his speech.

His comments go further than those in a post-Budget interview on Radio New Zealand in which he would not rule out personal tax cuts, and than his comments on TV3 on Thursday when he said: "We haven't got tax cuts yet, but we may in a year or two's time, depending on forecasts of revenue."

It wasn't clear then whether he was talking about business tax cuts or the adjustments to the thresholds or something else altogether.

Australian Treasurer Peter Costello waded into New Zealand's tax debate, saying average wage earners in this country would "pay a lot less tax in Australia" and welcoming more skilled Kiwis over the ditch. "If they can play rugby union they will be doubly welcome," he told ABC Radio.

National dragged Australia back into the tax debate in its post-Budget billboard launch yesterday: "Labour now accepts there's a place for tax cuts. It's called Australia," one says. "290,000 Kiwis just got a tax cut. In Australia," says another.

Dr Cullen is sensitive about being portrayed as having a natural or ideological resistance to tax cuts, and maintains he is guided only by economic conditions.

He argues there has been little room for tax cuts once payments to the New Zealand superannuation fund and capital funding for roads and hospitals are taken off the operating balance.

National's view is that such long-term capital spending - that is to benefit many generations - should be funded by borrowing, and that with an accumulated forecast operating surplus of $14 billion over the next three years, tax cuts are affordable.

But even Dr Cullen's books on Thursday indicate that he might be awash in cash by 2008.

Inland Revenue's forecasts for revenue, especially corporate revenue, are significantly higher than Treasury's and by 2008 he could have $1.5 billion more to play with if IRD is correct.

In the past both agencies' forecasts have been similar, though both have been notoriously shy of reality.

National leader Don Brash said yesterday that Dr Cullen had no intention of reducing either the company tax rate or personal tax rates.

"The Budget surplus will never be huge enough for him to even consider letting hard-working New Zealanders keep a little more of the money they earn."

He said Australia's Labor leader, Kim Beazley, had endorsed Mr Costello's $45 billion tax-cut package as "modest and overdue".

- additional reporting Paula Oliver and Wayne Thompson