Cullen flags the possibility of two tax cut rounds in budget

Finance Minister Michael Cullen has flagged the possibility of two rounds of tax cuts being announced in next year's budget.

Dr Cullen said New Zealand's longest run of economic good news in a generation meant Treasury was now factoring $1.5 billion a year in tax cuts taking effect from April 2009.

The figures were contained in today's release of Treasury's economic update and Dr Cullen's budget policy statement.

"This figure is very soft as no decisions have been taken on the timing, size, shape or scope of our personal tax cuts," Dr Cullen said.

The political imperative to have some form of tax cuts prior to a November election could result in some cuts being phased in half way through the 2008 tax year on October 1.

Dr Cullen did not rule this out but said it did cause some administrative problems for Inland Revenue and employers.

While Dr Cullen confirmed he would play the tax cut hand in election year, he kept his cards very close to his chest.

Raising thresholds, cutting rates and a lump sum repayment were design details Dr Cullen refused to rule in or out.

Dr Cullen also raised the prospect of cuts beyond the $1.5 billion assumed by Treasury.

"At this point there is room for a second round... the figures don't get finalised until next March or April, therefore there is little point in speculating about what will happen in mid-May during the budget.

Dr Cullen said Treasury had made big changes to its revenue forecasts and this meant it was now possible to reward workers for creating the economic golden weather.

"It's about the fact that we are returning to people the money that they paid (in taxes)... that we don't need in order to meet our fiscal objectives," Dr Cullen said.

"It is a dividend payment payback for their success in this economy growing. This economy has performed better than nearly all other western economies over recent years and tax cuts are about paying a dividend to New Zealand workers for that."

Treasury upped its forecasts for economic growth and said this would flow through to a larger tax take for the Government which could be converted in tax cuts and another $1.8 billion in additional capital spending in Dr Cullen's election year budget.

Even factoring in the $1.5b tax cuts, Treasury now predicted cumulative cash deficits of just $2.6b over the next four years. This compares to the $5.7b predicted in the May budget when the extra spending and cuts were not included in the forecasts.

This would lead to a modest increase in the Government's borrowing programme, but still well within all debt and fiscal targets.

Dr Cullen said most of the risks to the revenue forecasts and therefore tax cuts were from offshore.

"The big uncertainty is the international situation rather than anything in the New Zealand domestic economy. Will things really unwind in a nasty way in the United State? If so what will there be the contagion effect of that?"

Dr Cullen said the timing or phasing in of tax cuts would partly be determined by factors such as the inflationary outlook.

The Reserve Bank has said it would maintain interests rate at about the same levels for the foreseeable future after it factored in $1.5 billion of tax cuts.

Treasury lifted its predictions for operating surpluses across the board even after factoring in cuts and more capital spending.

The 2007/2008 year headline operating surplus forecast rose from $6.4 billion to $7.4 billion -- though Treasury is factoring tax cuts only from April 2009 -- and in the following years would still hit around $6 billion despite the cuts taking full effect.

The prediction of an overall cash deficit this year of $1 billion has already swung around to a $759 million surplus.