Huge surplus opens door to tax breaks

By VERNON SMALL deputy political editor

Tax breaks for low and middle-income earners and a big boost to social spending are on the horizon as the strong economy delivers bumper budget surpluses.

The Treasury yesterday released updated forecasts showing that a surge in tax revenues since the election had added $1.3 billion to the Government's expected surplus.

But a cautious Finance Minister Michael Cullen said he would wait until the 2004 budget before loosening the pursestrings.

"It's important at this stage not to spend in advance surpluses which have yet to occur, and to build in assumptions turning them into realities before we are sure they are going to be realities."

Dr Cullen ruled out lowering the corporate tax rate and also rejected an across-the-board cut to personal tax rates.

But he said higher surpluses left room for a mix of more spending and cuts to revenue in 18 months.

"Obviously this Government's priorities would be moves which assist primarily low to middle-income families."

He and Social Services Minister Steve Maharey were looking at the complex structure of family assistance and hoped to make it simpler without making anyone worse off.

The Government would need a "reasonable amount of fiscal headroom" to deliver on that plan.

Sources said that would probably cost between $300 million and $400 million and would take effect in election year, 2005.

Options could include extending the existing tax credit for working families to include beneficiaries, or changes to the low-income abatement, which gives an effective tax rate of 15 per cent on earnings up to $9500 a year.

Either would be a useful counter to likely Opposition promises to cut the top personal and corporate tax rates.

More than 1.5 million people earn less than $20,000 a year.

Bulging surpluses would also allow more spending on health and education on top of the tax breaks for the lower paid.

The Government's December economic and fiscal update, released yesterday, forecasts a surplus of $3.5 billion for the year to next June, up from the $2.2 billion forecast before the election.

On average over the next three years, annual surpluses would be $750 million higher than forecast.

The extra income would slash gross debt to 25.5 per cent of gross domestic product by 2005 - well below the Government's own target of 30 per cent of GDP.

But rather than blow the windfall, Dr Cullen plans to bank most of it.

Spending for the 2003 budget will be increased by only $200 million on the pre-election forecast.

Borrowing will be cut by $900 million this year and by $2.2 billion next year.

Dr Cullen said the forecasts and the attached Budget Policy Statement showed a benign economic outlook and a strengthening fiscal position.

Growth was forecast to average a little over 3 per cent, wages to rise by about 3.5 per cent and inflation to stay well within the 1 to 3 per cent band.

The balance of payments would weaken but not rise above 5 per cent of GDP.

But National's finance spokesman, Don Brash, said the healthy numbers had been achieved by good luck, not good management, and had peaked.

"Dr Cullen shouldn't kid himself that we're well on the path to the much-vaunted target of 4 per cent sustainable growth."

Export prices were falling, the exchange rate was rising and the Government was intent on slowing immigration, said Dr Brash.

Dr Cullen said the forecasts had included only one alternative scenario, showing weaker growth, because that was the most likely risk.

"It briefly mentions the upside risks but then passes on rapidly ... in case any of my spending colleagues get too excited at the prospect."

The latest National Bank survey had shown that businesses were increasingly gloomy, but that was not surprising given uncertainty in world markets and the risk of war in Iraq.

But businesses' confidence in their own prospects were more stable and positive than the headline figure.

Dr Cullen expected that business concerns about legislation now before Parliament would wane once the law changes were in place.

But he agreed that the strong currency, particularly at more than 90c against the Australian dollar, was "into the uncomfortable territory" for many manufacturing exporters.

He said the rise seemed to be driven by "irrational exuberance", echoing Federal Reserve chairman Alan Greenspan's description of the mid-90s US stock market boom.