Question mark over tax cuts

Only a slashing of government expenditure or an increase in borrowing will enable National to make its planned tax cuts after Treasury yesterday reported that years of financial surpluses will turn into deficits until 2013 at least.

Its forecasts predict lower tax income, a much weaker economic outlook, a higher cost of some existing policies, cash surpluses turning into cash deficits, higher funding costs, higher government spending on benefits and considerable uncertainty in the international financial industry.

National has campaigned hard on its tax cut policy, which Labour's Minister of Finance, Michael Cullen, is now saying is unaffordable.

"Now is not the time for promises of any additional tax bonuses over and above what is already legislated for by Parliament," he said.

National leader John Key and finance spokesman Bill English earlier indicated that the first round of Clark Government tax cuts on October 1 would make up just part of the parcel they were planning to announce before the election.

National was promising further cuts in April 1 next year, 2010 and 2011.

Speculation has been that National will offer about $50 a week in tax relief.

National has said it wants to reduce the number of public servants, but that will not provide an immediate improvement in the tax position with which it can pay for tax cuts.

However, the party has signalled unofficially that it is thinking about changing some parts of KiwiSaver.

Take-up rates for KiwiSaver during its first year of operations far exceeded original assumptions.

The Pre-election Economic and Fiscal Update revisions are based on an assumption that growth in applications will continue and membership will reach 56% of the total labour force by 2012-13.

KiwiSaver costs are expected to reach an extra $280 million a year by 2010.

A National-led government could shave some spending there by changing the way it funds contributions.

Mr English said the figures outlined in the pre-election update were worse than National had expected.

"We are currently digesting them. However, National is not content to run a decade of deficits.

"Slamming the brakes on at this point would make things worse. The way out is to control the growth of government spending and grow the economy. That will require a fresh approach."

National's economic plan, to be detailed this week, would be focused on providing short-term stimulus to the economy in the current uncertain outlook, while strengthening the position for recovery in the longer term, he said.

The Treasury statement showing an operating balance, excluding book-keeping changes, of $5.6 billion this year, turns into a $31 million deficit next year, a $1.7 billion deficit in 2010 and a $2.4 billion deficit in 2011.

A positive cash position of $2 billion this year becomes a nearly $6 billion deficit next year, improving slightly to $5.2 billion in 2010 before blowing out to $6.6 billion in 2011.

Crown finance costs are forecast to rise from $2.5 billion this year to $3.9 billion by 2012-13.

ASB chief economist Nick Tuffley said from Auckland the forecasts were finalised on August 28, well ahead of the recent and dramatic deterioration in global financial markets.

"As a result, if the forecasts were redone now the deficits would be larger.

"On top of the altered economic outlook, the pre-election update does not account for any policies that political parties will announce as the election draws closer, which will put further downward pressure on the fiscal position unless current expenditure is used more wisely."