Parties battle over tax and interest rates

As the tax wars rage on between National and Labour, Finance Minister Michael Cullen has admitted he made a mistake by not giving a clearer steer about the Budget's limited tax concessions.

He then fired the opening salvos of one of Labour's election themes, borrowed from the Australian election campaign: the fear of returning to high mortgage interest rates.

Twice yesterday, Dr Cullen linked high mortgage interest rates to National leader Don Brash's tenure as Reserve Bank Governor in the Government's fight-back over its post-Budget slump in the polls.

Dr Brash strongly rebutted the accusations last night and hinted that National may frustrate the Government further by delaying its tax policy until Prime Minister Helen Clark names the election date.

Dr Cullen's admission of an error is the closest the Government has come to taking responsibility for the Budget being badly received - especially over its 67c-a-week tax break for low-income earners, which will not take effect for three years.

It has previously blamed the print media and Dr Cullen continues to blame the news services.

"I think the one mistake I made was that, given the mistake in the media, who convinced themselves there was some vast tax policy, I probably should have said there was nothing more than a very minor adjustment to thresholds," he said.

"Beyond that I still think it was a very good Budget."

An internal review is understood to have concluded that because threshold indexation was such a major policy shift for the Government, it was decided to keep it secret until Budget day.

Dr Cullen's Budget show-pieces, the workplace savings scheme and tax breaks for business, were buried by the thresholds issue and, post-Budget, Labour has slipped in the polls. The latest National Business Review-Phillips Fox poll puts it one point behind National.

Dr Cullen and Helen Clark yesterday tried to put a positive spin on the drop in support, saying it would shake their supporters out of any sense of complacency.

Helen Clark noted that the Government was headed for a net debt of zero next year, which had never before been achieved.

"If you govern for the short-term you might throw all the money away, but you know the headache and the hangover would be coming at you the day after the election."

National has said it would be able to afford tax cuts because it would finance some capital spending through borrowing rather than from the operating balance.

Asked last night when National's tax policy would be released, Dr Brash said: "I think the real question is when is the Government going to call the election. That clearly has got some bearing on when we announce our tax policy."

Straight after the Budget it had appeared as though a July election was on the cards and there was reason to get the policy out quickly.

"If the Government looks now at August or September then clearly the need for us to get our tax policy out immediately is somewhat diminished."

In Parliament yesterday, Dr Cullen hit out at Dr Brash, saying that although mortgage interest rates had remained below 10 per cent since Labour took office in 1999, they were above 10 per cent for 51 of the 108 months under a National Government, which coincided with Dr Brash's tenure at the Reserve Bank.

"When that man was in charge of monetary policy, he was known as the most hawkish Reserve Bank Governor in the entire developed world," Dr Cullen said.

Dr Brash said the facts did not support the claim.

When he became Reserve Bank Governor in September 1988 the floating mortgage rate was 15.5 per cent, and when he left it was 7.5 per cent. In contrast, over the past 18 months interest rates had gone up seven times, Dr Brash said.

An Organisation for Economic Co-operation and Development report said the reason for that was a strong rise in Government spending.

"I think it's not too immodest to say I have a better understanding of the relationship between interest rates and Government fiscal policy than most other people in the country, and I'm very committed to not pushing up inflation or pushing up interest rates."

He also cited a report Dr Cullen commissioned by Swedish Professor Lars Svensson about monetary policy under Dr Brash, which was largely favourable.