Budget 2008: Cullen delivers tax cuts

Every worker will get a tax cut from October 1 as part of a three-year plan which is the centrepiece of Finance Minister Michael Cullen's ninth Budget.

Dr Cullen told Parliament this afternoon the three-year programme will deliver between $12 and $28 a week more in take home pay from October this year, rising to between $22 and $55 a week on April 2011.

The long foreshadowed cuts will cost $1.5 billion in first year and $10.6 billion in total.

National leader John Key mocked the Government's offering as too little, too late and said Dr Cullen expected people to be grateful after nine years for what amounted to no more than two blocks of cheese.

Dr Cullen has had to cut future budgets' spending allowance and slightly increased debt levels to accommodate tax cuts.

He said those offering more would have to show how they would cut spending or increase government borrowing.

Mr Key was not deterred and immediately promised that New Zealanders would do better under a National tax package.

Dr Cullen's budget clearly indicated a general election in late October or early November.

Dr Cullen told journalists that budgets do not win elections, but his colleagues know the reaction to it will be crucial to Labour's chances of winning a fourth term.

Behind in the polls and facing tough economic times, Dr Cullen's colleagues will be hoping that the tax cuts will at least give them a mild boost.

CUTS OF $12-18 PER WEEK BY OCTOBER 1

Dr Cullen's programme will see a cut in the bottom rate of income tax and changes to the thresholds at which different rates kick in.

Inflation indexing for Working for Families would also be brought forward, along with a forecast second round of indexing, and the income tax system would be made simpler.

Presently, the tax system has four effective rates: 15 per cent up to $9,500, 21 per cent to $38,000, 33 per cent to $60,000 and 39 per cent for anything above that.

By the end of the three year programme, the bottom rate would be 12.5 per cent on the first $20,000, 21 per cent from $20,001 to $42,500, 33 per cent from $42,501 to $80,000 and 39 per cent on income above that.

"At full implementation, this will mean for individuals on a full-time income tax cuts of between $1130 and $2870 a year, or roughly $22 to $55 a week," Dr Cullen said.

The first stage would see the new 12.5 per cent rate apply on income up to $14,000 from October 1, rising to $17,500 on April 1, 2010. The 33 per cent threshold would rise to $40,000 from October 1, and the top threshold to $70,000.

The October 1 cuts would deliver around $12 to $28 a week.

Dr Cullen said the first round of cuts would benefit superannuitants, who pay tax on their superannuation, by $45.88 per fortnight for a married couple and $23.84 for a single.

The indexation of Working for Families to take account of cost of living increases would be brought forward to October 1, rather than April 1 next year, when it was supposed to occur.

Legislation to allow the tax and Working for Families changes would be introduced later today.

A second round of Working for Families indexation would occur on April 1, 2011.

A single income family on $40,000 a year with two young children would be better off by $1603 a year from October and $2967 a year from April 1.

The cost of the tax package was $1.5 billion in 2008/09, rising to $2.3 billion in 2009/10, $3.1 billion in 2010/11 and $3.8 billion in 2011/12.

Indexing working for Families would cost $146 million in 2008/09 rising to $438 million in 2011/12.

Dr Cullen told Parliament the Budget - which could be the difference between Labour winning or losing the election - aimed to build a fair society and strengthen the economy against a backdrop of gathering gloom.

"A very large part of this challenge is generated by international forces which are well outside of our control. The most obvious of these to the average Kiwi family is the continued increases in the prices of fuel and some foodstuffs."

The rapid rise in international oil prices - up from US$20 a barrel at the end of 2001 to more than US$125 recently - had seen petrol prices go from $1.02 a litre to $2 a litre.

"The fact that we have the fifth lowest petrol prices in the OECD is no comfort to the motorist at the petrol pump.

"Some foodstuffs have seen comparable price rises. Wheat, rice, sugar, dairy and other products have seen unprecedented price rises internationally over the last couple of years or so. Global food prices have risen 83 per cent in the last three years."

"Families are looking for some relief from these twin pressures of food and fuel price increases."

For many, price increases had been made worse by higher mortgage rates, worsened by the world-wide credit crunch.

These pressures came after New Zealand had enjoyed higher economic growth since 1999 than many key trading partners, including Australia, the US, the United Kingdom, Japan and the European Union.

Unemployment had been below four per cent for nearly four years and household incomes had risen by a quarter since 2000, allowing for inflation.

But inflationary pressure had led to high interest and exchange rates, the latter disadvantaging exporters.

This year had also seen a serious drought which reduced dairy production.

Dr Cullen said these factors had combined to cause a significant economic slowdown.

Growth to March 2009 was expected to bottom out at 1.5 per cent, then rise to 2.3 per cent in 2010 and 3.2 per cent in 2011.

"Budget 2008 is delivered, then, at a time of considerable challenge and uncertainty. But it is also delivered from a position of strength by a Labour-Progressive government that has managed the public purse responsibly and did not squander resources in times of greater optimism."

The Government's focus was on a fair deal for all New Zealanders and planning for a strong, sustainable future and the Budget had to balance five key areas: responding to families wanting early relief from price pressures; a fair, longer term tax programme; maintaining social services; sensible fiscal management; and an integrated programme to build a stronger, sustainable economy.

TAX CUTS THE BUDGET'S CENTREPIECE

Tax cuts were at the heart of the election year budget, with almost all other spending pre-announced.

Despite this it lifts government spending in areas that range from health and education to conservation and state housing.

There is close attention to social services in the budget, which Dr Cullen has previously promised would not be affected by tax cuts, and spending is up in core areas.

Health spending will increase by $3 billion over the next four years, with $2 billion of that going to district health boards. Elective surgery will be boosted by an injection of $160 million.

There is also dollops of cash for education, research and other areas, all of which has been well  foreshadowed.

- with NZPA

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