Nats say they could cut tax despite OECD warning

Don Brash

Right-leaning parties say Finance Minister Michael Cullen is manipulating comments in the latest Organisation for Economic Co-operation and Development (OECD) to prop up his approach.

Dr Cullen said yesterday the report brought a "refreshing dose of reality" into the tax debate.

The report said further fiscal stimulus -- by way of tax cuts or further government spending on top of what was already planned -- would put the economy's projected "soft landing" at risk and would need to be offset by higher interest rates.

"The OECD could not be clearer," Dr Cullen said.

He said the warning reinforced the message that tax cuts would mean higher mortgage and interest rate costs.

However, the National Party says it is confident it could reduce costs and accuses Dr Cullen of selectively using the report.

The OECD said economic growth had been running ahead of potential, with labour shortages and inflationary pressures mounting.

"Higher interest rates will damp domestic demand through the coming year, although this will be offset by the income effects of the "working for families" package.

"Increased business investment will help ease capacity constraints and pave the way for higher productivity growth and increasing real wages."

It said demand was continuing to be fuelled by a vigorous expansion in government consumption.

National Party Leader Don Brash said government spending was out of control.

"Michael Cullen is selectively quoting from the OECD report," he told National Radio today.

"What the OECD actually says is the Reserve Bank's task of controlling inflation has been hugely complicated by the huge increase in government spending in 2004-05."

Dr Brash said the OECD report said the Government's actions over the past 18 months were to blame for rising interest rates.

"(It) doesn't owe anything to what the National Party might do in the next 12 months."

Dr Brash said National did not want to cut taxes only to push up mortgage rates.

"I, better than most people in this country, understand that if you increase government spending or reduce taxes aggressively at the wrong time you can have an affect of interest rates...

"If that means we have to phase in tax relief while we get government spending under control again then so be it. We won't be pushing up mortgage rates."

Dr Cullen said yesterday there was "incontrovertible evidence" that National tax cuts would hit interest rates and said the economy had done well under Labour.

"Our fiscal record speaks for itself. We inherited a gross debt to GDP ratio of 33.7 per cent. It now sits at just under 25 per cent and is projected to reduce to just over 20 per cent within the next two years."

He said core crown spending had reduced as a proportion of GDP since 1999.

ACT has also argued that government spending was to blame for problems and said Dr Cullen continued "galloping" spending in his new budget.

However, Dr Cullen said yesterday that in framing this year's budget, the Government was conscious that it did not want to put more stimulus into an economy that was already suffering from capacity constraints and the resulting inflationary pressures.

"We did quite consciously look very carefully at the capital spending programme that was building up in the budget round and push some of it out beyond next year on the basis that that could be particularly stimulatory, especially placing pressure on the construction sector," he said.

The OECD is forecasting gross domestic product growth to slow to 2.9 per cent in 2005 and 2.4 per cent in 2006, from 4.8 per cent in 2004.

- NZPA