National pins election hopes on tax policies

National's income tax plan will be one of the most highly anticipated policies released during this year's election campaign.

Expectations have been building for months - as well as criticism it won't be affordable and would mean cuts to core services such as pensions, health and education.

Only three people know the details - party leader Don Brash, finance spokesman John Key and former leader Bill English - as National's hierarchy fears leaks from its often-porous caucus.

The first part of the plan - tax deductions for pre-school childcare - was unveiled two weeks ago. The next, focusing on tax credits, is due for release on Thursday.
The timing of the main part of the plan - personal tax rates - has been the subject of intense internal debate that has now been settled. Expect to see it a maximum of three days after Prime Minister Helen Clark announces the election date.

The strategy in holding the policy back is to make the election a battleground about tax - which Dr Brash has already said it regards as its most important single policy this election.

Mr Key has given no details of the personal tax cuts but they are expected to offer relief through a combination of threshold movements, rate cuts and minor changes to Labour's Working for Families tax credit and income assistance package. Mr Key said any major changes to Working for Families would only come once National was in power, because of its complexity.

He was confident a review of spending across departments would throw up enough waste and duplication to help fund cuts. The other ways the cuts would be funded are:* A lower oberac surplus (operating balance before revaluations and accounting changes) than Labour's.* Borrowing more to finance some capital items like roads and possibly student loans.

* More disciplined spending.

Mr Key said Dr Cullen had run surpluses larger than at any time in history, currently $7.5 billion.

"We're the only country as I understand it in the world that's paying for its entire operating and capital projects out of cash. Even after we've done all that we had a cash surplus of arguably $2.4 billion.

"I think the extent of over-taxation is quite clear."

While expecting a big Labour attack on tax cuts, he said the public had an innate sense of "fairness and reason".

Polls showed that despite a huge spending increase in areas such as health and education, the public was questioning the value for money it was getting.

National was not looking at "extremist" policies like Act's where the government would play virtually no role, Mr Key said.

"We are not talking about being incredibly austere. We are talking about ensuring that as we get a growth dividend, the policy response isn't to totally spend the lot."

But Act leader Rodney Hide said Mr Key was feeling boxed in after signing up to the NZ Superannuation Fund, which at $2 billion a year gives him little room to move.

Mr Hide said National was all "hot air" on tax - talking big and then retreating as with other policies such as welfare and nuclear ships.

He said the key indicator showing the country was overtaxed was the surplus.

"The Government is spending like drains and they've still got this extra money. I think they should be cutting back spending."

Westpac chief economist Brendan O'Donovan said he believed there was scope for tax cuts - and maintaining current spending plans in areas such as welfare, health and education.

He said he believed it could be done by borrowing instead of using cash for things such as student loans, Government capital investment and reserves being accumulated by the Reserve Bank.

Mr O'Donovan was critical of the Government's spending as much as possible to claim tax cuts were unaffordable.

As an example, he cited the recent $500 million tax windfall - much of which came from banks - which was immediately ploughed into roads to "again ensure there's not the money for tax cuts".

He also said Finance Minister Michael Cullen's claim that tax cuts would result in higher interest rates was "bogus".

One dollar of tax cuts would be far less inflationary than one dollar of increased spending, he argued.

"Tax cuts allow the expansion of the economy's productive capacity by leaving more for private investment, stimulating employment and attracting people to work and stay in New Zealand."

And with the economy slowing, Mr O'Donovan suggested a fiscal shot in the arm from tax cuts might be just what's required.