Personal tax cuts back in PM's sights

Personal tax cuts are back on the agenda of Prime Minister John Key and his enthusiasm for the cuts appear to indicate they could be part of National's 2011 election manifesto.

Speaking to the Otago Daily Times yesterday, Mr Key talked about how a reformed tax system - rewarding people for hard work and risk-taking - could help productivity, along with other measures the Government was considering.

"A lot of work is being undertaken by the tax working group which is due to report by the end of 2010."

The tax group would make recommendations, some of which would not be palatable to the Government but others would have merit, he said.

What was true was that the group was concerned about holes in the tax system, particularly around the $200 billion of rental properties from which the Crown lost $150 million in revenue.

Mr Key did not support a capital gains tax but he did favour putting some boundaries around investment property.

"On the tax front, the Crown aims to be tax neutral. If we end up plugging some holes then we can recycle the money through tax cuts."

Asked if he could see a time when he could confidently talk about the reintroduction of the tax cuts postponed once the recession hit, Mr Key said he could but the ability to deliver them depended on the size of the fiscal deficits in the future.

However, tax cuts could be part of the overall tax mix.

All of the academic research he had seen out of Treasury pointed to lower personal tax rates as being the strongest impetus to economic growth.

Research from the United States also confirmed that.

After celebrating a year in office on Thursday, Mr Key is predicting that the coming year will have a strong economic focus.

"We will have a stronger economy [in 2010] and the flexibility to deliver productivity growth that the economy needs."

The Government had committed $3 billion to the upgrade of Transpower's network, was spending $1 billion a year on state highways and was getting ready to spend $1.5 billion on the fibre to the home project for ultra-fast broadband.

The mix of infrastructure and tax was important in driving economic growth, he said.

The free trade agreements he recently signed were also an important part in the country's economic growth.

By January, 40% of Fonterra's markets would be tariff free.

In Malaysia, the free trade agreement meant that by January, Zespri would have no tariffs in that market where it now paid 15%.

"There are economic gains to be had there."

Science would also take a lot of attention from the Government, Mr Key said.

And it was one area where more money was likely to be spent.

The OECD said yesterday that New Zealand should continue with expansionary monetary and fiscal policy "for the time being".

It saw New Zealand as finally emerging from its five-quarter-long recession, the beneficiary of strong domestic and global policy stimulus.

The recovery could be hampered by the overhang of high private sector indebtedness, contracting credit, the New Zealand dollar's recent strength and rising unemployment.

"Given weak and fragile private demand, it is appropriate that monetary and fiscal policies remain expansionary for the time being.

If the recovery takes hold as projected, stimulus should start to be withdrawn by mid-2010," the OECD said.

Mr Key said his main goal for the coming year was to develop a coherent programme to deliver economic growth.

The Government had already made substantial progress but more needed to be done.

The infrastructure spending was only the first step that needed to be taken.

dene.mackenzie@odt.co.nz