Tax cuts mean deferring spending - Cullen

Tax cuts in next year's budget will mean deferring some of the Government's other spending priorities, Finance Minister Michael Cullen says.

Dr Cullen today said stronger than expected tax revenues, if they arrived, could pay for business tax cuts and possible changes to personal tax.

But revenue was only one of the factors the Government had to consider.

Avoiding a blowout in inflation was also important and meant the Government might have to defer other spending to allow room for tax cuts.

"Maintaining a prudent fiscal policy is critical to prevent injecting further stimulus into the economy -- which would only result in increasing these pressures, higher inflation and higher interest rates," Dr Cullen was due to say to a business audience in Auckland.

"This means that we will need to make room for tax reforms within existing fiscal policy."

Dr Cullen said the Government's tight fiscal stance had been a key factor in avoiding further Reserve Bank interest rate hikes and a downgrading of New Zealand's credit rating in the face of a huge balance of payments deficit.

Dr Cullen said work was continuing on the options contained in the Government's business tax review.

"The business tax review is likely to produce an attractive mix of a lower corporate tax rate and tax credits, particularly helping those businesses focused on lifting their performance, expanding and tackling overseas markets," he said.

"I also recognise that changes to company tax have implications for personal taxation and these will be considered at the same time as the changes to business taxation."

Officials were currently looking at the detail of business tax credit schemes to look at how accurately the activities the Government hoped to encourage -- such as exporting and research and development -- could be defined.

"We are working on these definitions to get a better idea of how the tax credits might work, to help inform the decision whether to pursue them."

Business tax changes will be announced in next year's budget and implemented in 2008.

It is expected that any changes to personal tax rates or thresholds will also be included in the Government's 2007 budget.

- NZPA