KEY POINTS:
Treasury is now advising that "modest" business tax cuts will be affordable in 2008, Finance Minister Michael Cullen said today.
Dr Cullen told MPs that it was still to early to say how much was affordable and the potential flow on effects to personal tax rates, but the
Government was still looking at making decisions around March next year.
One of the problems for Dr Cullen is that Treasury and IRD have widely different predictions of how much tax the Government will pull in from 2008 onwards, with IRD saying it will be more than Treasury does.
Dr Cullen said those differences were growing smaller.
"The gap between IRD and Treasury has narrowed somewhat in terms of forward forecasts of revenue. Fair to say that Treasury has moved towards IRD than the other way around," Dr Cullen said.
"At this stage looking out to any changes coming into force in April 2008, Treasury would tend to be indicating very informally that the amount of headroom is sufficient for a modest business tax package but no more.
"So again we are still dependent on just how the revenue track pans out over coming months in order to be clear about what options will be available come Budget 2007."
Any significant cuts to personal rates would not only be expensive to the Government, but could also cause inflationary pressure and worsen the current account deficit.
"So the issue is not does the Government have the money for changes on the revenue side, the issue is what is the impact on total macro-economic management and what will be the downsides of that?"
The Government would be releasing a discussion document on international tax issues before Christmas.
Decisions on this would have to be worked in with the review of business tax.
The Government would get "bigger bangs for the bucks" with changes to the international tax regime, but it was important to improve perceptions around the headline corporate tax cut as well.
Dr Cullen said the economy was continuing to grow more strongly than forecast, defying National's prediction of entering potential recession.
The labour market remained strong as did inflationary pressure and the exchange rate.
"The three month accounts for the first three months of this year will be showing us running a cash deficit as forecast but slightly better than forecast."
It was not possible yet to work out what the end of the year position would be, he said.
- NZPA