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Cullen blames Cullen for small tax cuts

Bill English MP
National Party Finance Spokesman

16 May 2008

Michael Cullen blames Michael Cullen for small tax cuts

National’s Finance spokesman Bill English says Michael Cullen’s latest justification for smaller tax cuts - the effect on interest rates - makes it clear that he is doubly responsible for Labour’s lack of tax relief, and the size of whatever cuts he serves up next week.

“Michael Cullen’s past decisions on government spending are responsible for interest rates staying higher for longer. All of a sudden, the Finance Minister is crying crocodile tears for borrowers, and using high interest rates as his reason for the size of his tax package. If he’s looking for a villain, Dr Cullen should look in the mirror.

“The real truth is laid out in Cabinet papers. What we know is that Dr Cullen made a deliberate decision sometime between November 2006 and April 2007 that he and Labour would sacrifice higher interest rates so Ministers could spend more taxpayer money.”

Cabinet papers from November 2006 say an increased Government spend ‘risks an interest rate response from the Reserve Bank, the exchange rate staying higher for longer and a more pronounced economic slow-down. Given this, we must stay as close as we can to our Budget 2007 allowances’.

“By April 2007, Labour’s planned budget expenditure was in total some $4 billion bigger than the agreed spending limits laid out in those November 2006 papers.

“And Dr Cullen’s prediction in those papers has come to pass. Interest rates have remained higher for longer than they needed to be, and he has tried to blame everyone but himself. And now he has the gall to tell Kiwis that can’t have much of a tax cut because of high interest rates.

“The reality is that New Zealanders know Dr Cullen does not want to cut taxes. The only personal tax cuts that Labour has offered in the past eight years were cancelled - to pay for record Government spending.

“Dr Cullen has made it clear that the only reason he is offering tax cuts at all is because it is election year. Next year, all bets would be off.

“Labour has made its priorities crystal clear. Labour would prefer to give the Australian shareholders of Toll a quarter of a billion dollar bonus, and would rather spend half a billion dollars on Foreign Affairs bureaucrats than give hardworking New Zealanders a tax cut.

“When push comes to shove, Labour simply can’t be trusted on tax or interest rates.”

ENDS

Extracts from November 2006 Cabinet Paper

To do so risks an interest rate response from the Reserve Bank, the exchange rate staying higher for longer and a more pronounced economic slow-down. Given this, we must stay as close as we can to our Budget 2007 allowances.

Any further significant fiscal expansion by the government over the short-term risks pushing these reductions out or even exacerbating the imbalances. It would also increase the prospect of tighter monetary policy. Higher interest rates would place additional upwards pressure on the exchange rate, which in turn would place more pressure on the export and import-competing sectors and work against the increase in export growth we want to see.

Because of this, we need to stay as close as we can to our existing funding allowances for Budget 2007 of $1.9 billion per annum for operating and $858 million for capital.

we must strive to keep all other spending within the allowance to avoid placing further pressure on interest rates.

I recommend that Cabinet:

1. note that the macroeconomic environment, in particular high inflation and a large current account deficit, mean we need to constrain any new spending in the short-term or risk interest rate increases, a higher exchange rate and a more prolonged economic slowdown;

3. agree to increase the operating allowance for Budget 2008 by $1 billion per annum, with this extra funding to be dedicated to the business tax package;

13. note that the costs referred to in recommendation 12 above will be in excess of
the $1.9 billion allowance for Budget 2007, so we must strive to keep all other spending within the allowance to avoid placing further pressure on interest rates;

Extract from April 2007 Paper:
we do not adjust tax thresholds in the medium term thereby retaining fiscal drag and potentially allowing tax to GDP ratios to rise slightly. Accordingly, this paper seeks Cabinet’s agreement to rescind our previous decision to adjust income tax thresholds on a three-yearly basis. Within the projection period (i.e. from 2011/12 onwards) we will adjust the tax thresholds for inflation, but some portion of fiscal drag might need to be retained to finance our decisions.

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