Snub on tax not wholly bad news

By Brian Fallow

Once again the business taxpayer has been passed over in the tax-cuts stakes.

The cuts to the lower-income tax rate unveiled by Treasurer Bill English yesterday will cost $400 million a year, he says.

Which means that double that sum is not available for cuts to the company and top personal tax rates, because of the "dollar-for-dollar" pledge that for every dollar in tax reductions an extra dollar will be spent on social services.

A $400 million cut to the lower personal rate, matched by an increase in social spending, would cost about the same as a 3c cut in the company tax and top personal rate would have.

Mr English says National's next priority will be to start lowering the business tax rate and the top personal tax rate.

"We will aim to lower the rate to 30c. How far and how fast we can go will depend on the economy improving faster than the current forecasts."

So far there is not much sign of that.

The Treasury's budget forecasts were for growth of 2.9 per cent in the current March year and 3.5 per cent next year.

Those figures are still very much in line with private-sector forecasters' views. Consensus forecasts in June were for 3.1 and 3.5 per cent respectively.

Indeed, three sets of figures out last week suggest the economic recovery under way for the past year remains somewhat tentative.

Retail sales, adjusted for seasonal effects, were down for the second month in a row. Job advertisements have tapered off, and a record trade deficit shows exporters still struggling.

With imports growing nearly three times as fast as exports the trade deficit reached a record $1.5 billion in the year to May.

There are two positive signs on the export front, however. Forecasts for world growth are being revised upward, in line with better news out of Asia.

And farmers have been enjoying better growing conditions, although the effects of two successive droughts on stock numbers have yet to be shaken off.

Some of the weakness in retail sales in April and May can be explained away - by the timing of Easter and the fact that there were five Sundays in May, which usually means a lower monthly tally.

Likewise the recent declines in business and consumer confidence can be seen as a retreat from euphoria to more realistic, but still positive, levels consistent with a growth rate of 3 per cent of GDP.

The tax cuts, worth $10.50 a week for anyone earning $40,000 a year or more, will provide a modest stimulus to the domestic economy.

That, of course, is good for business.