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Molesworth & Featherston (Weekend) – Oct. 14 2006

Molesworth & Featherston - Weekend Update edition

Business and Political News
October 14th 2006

Direct Link To This Week's Weekend Update Edition:

Gobs of money

An extra billion dollars has turned up in the tank with the release of the latest Crown accounts, taking the OBERAC surplus to $8.6 billion - or 5.5 percent of GDP.

That’s a billion dollars more than Treasury forecast on budget night and it is a billion dollars Michael Cullen can spend that he wasn’t expecting.

The cries for tax cuts will be as long and loud as ever, and the pressure will be on for a stronger signal from Finance Minister Michael Cullen on where and when the cuts will be made. It’s now inevitable some cuts will be announced before the next election.

The full surplus (including accounting changes) is $11.5 billion. Not all that is available to spend, though that didn’t stop National’s Finance spokesperson John Key from claiming the surplus meant “every man, woman and child has been overtaxed to the tune of $2,875 each.” He divided $11.5 million by four million people. That’s a bit naughty - no finance minister could spend the entire accounting surplus; not even the OBERAC is all available to spend. (By the way, Stats estimates the population at 4.15 million, which would reduce his headline figure to $2,771).

So far Dr Cullen has focused on the possibility of announcing business tax cuts next year.

The size is to be determined by whether the IRD’s more optimistic income forecasts are met.

What the voters are looking for - or at least the upper income earners and single folk with no children who have largely missed out so far - is a hint of what the flow on consequences for them will be from a drop to 30 cents from 33 cents in the corporate rate.

One oddity in Dr Cullen’s statement on the subject - he claimed not spending the cash was consistent with letting the “automatic stabilisers work”. The stabilisers mean a higher surplus helps restrain the economy at the peak of the cycle and a lower one helps it recover at the bottom. If not spending now means the automatic stabilisers are working then Dr Cullen believes the economy is now peaking. That’s rubbish.


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