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Cullen Offers Staged Tax Cuts

Cullen Offers Staged Tax Cuts, Slashes Economic Growth Forecasts in Election Budget

By Jonathan Underhill

Finance Minister Michael Cullen


May 22 – New Zealand Finance Minister Michael Cullen promised $10.6 billion of income tax cuts by 2011, with the first reductions coming in time for this year’s general election, according to his ninth and potentially last budget.

The staged tax cuts include lowering the rate for the poorest paid to 12.5% from 15% and increasing the threshold for higher incomes. The rate at which most workers are taxed, 33%, will apply on income up to $80,000 by April 1, 2011, from $60,000 now.

By staggering the tax cuts – only $1.5 billion applies in the first step from Oct. 1 this year – Cullen may be able to boost Labour’s election prospects while avoiding fueling economic growth and inflation that’s kept borrowing costs high. Still, the package will help push the government to a $3.5 billion cash deficit this year, the first shortfall since 1990 and is forecast to herald three more years of red ink.

The $3.5 billion deficit is “at the limits of my comfort zone,” Cullen told the media and analysts at the parliament today. He dubbed his 2008 budget “A Fair Economy. A Strong Future,” and said budgets “don’t win elections but they can lose them.”

Prime Minister Helen Clark’s government, seeking an unprecedented fourth term in office, is suffering one of its worst slumps in popularity since coming to power, according to opinion polls. Rising mortgage rates, soaring energy costs and more-expensive staple foods that have squeezed household budgets and eroded the goodwill generated from Labour’s social programs such as subsidised early childhood education, cheaper medical visits and family benefits.

Limiting Cullen’s ability to unveil a lolly scramble of pre-election handouts is an inflation rate that reached 3.4% in the year ended March 31, outside the central bank’s 1 percent-to-3 percent target range. Soaring costs of fuel – oil reached a record $133 a barrel in New York yesterday – and food are stoking inflation even as the economy’s expansion slows. The Treasury slashed its forecast for economic growth this fiscal year to 1.5% from the 2.1% rate it predicted in December and cut its 2010 estimate to 2.3% from 2.8%. Consumer price inflation is predicted to slow to 3.2 percent this year and the rate may slide to 2.8% the following year, within the central bank’s target range. The Reserve Bank has kept the official cash rate unchanged at a record high 8.25% in each of its past six reviews of monetary policy.

“This is giving the Reserve Bank room to leave interest rates on hold,” said Khoon Goh, economist at ANZ Bank, adding that it may wait until year-end for a cut. Some analysts had predicted a reduction in borrowing costs by July-September.

“In the past, the government has run a prudent fiscal strategy, providing a buffer if the economy is hit by economic shocks,” he said. “Today’s budget leaves the economy more vulnerable.”

The Treasury’s growth forecast lags behind those of the IMF, released last week, for a 2% expansion this year though it matches the pace in a Bloomberg News survey published this week.

In addition to the tax cuts, Cullen proposed spending $325 million in Budget 2008 as part of more than $500 million to roll out high-speed broadband internet.

He allocated $276.4 million to develop New Zealand’s defence capability and $124.4 million on arts and culture. An extra $3 billion would be spent on health, $182 million on teachers and $180 million of the police. Community organisations would get an additional $446.5 million.

The budget also included $690 million in the current year for the purchase of Toll New Zealand’s rail business.


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