Scope for tax cuts even in downturn - economists

Far from being boxed into a corner over tax cuts, the opportunities for National to offer more than Labour has in its Budget remain limitless, say economists.

But with an economy predicted to deteriorate further, and soon, they ask whether National will have to do much more than point to the impacts of that slowdown.

"The next six months will be tough," said BNZ head of research Stephen Toplis. "There will be mortgagee sales, businesses will fold and people will get laid off."

The tax issue at the last election was clear-cut - National had offered significant tax cuts, and Labour hadn't. "But after Thursday's Budget, tax cuts have become a debate at the margins."

Toplis said there were plenty of options for National to add a couple of billion dollars more to the deficit in order to offer taxpayers $10 or $20 more a week than Labour had.

"Economists can argue whether that is a good thing or not, but the question for the politicians is whether such action will generate the kind of bang they are listening for."

While Treasury believed the worst of the downturn had passed, "from where we stand you'd be hard-pressed to say things are going to get better in the next six months. In fact, the opposite".

Finance Minister Dr Michael Cullen was correct to say public finances were now being run so close to an operating deficit that he had used up all fiscal latitude for further tax cuts.

Equally, National could argue that with an economy in downturn, and with monetary policy options limited, it made sense to run counter-cyclical fiscal options.

And so there was justification to run cash deficits even larger than already anticipated in the Budget. "In line with that argument, and taking a medium-term view, you could say larger tax cuts were good for the economy and long-term growth."

Deutsche Bank chief economist Darren Gibbs said a future National government could accelerate - as well as improve - tax thresholds and tax relief ahead of the April 2010 date set in the Budget.

"Just as Labour has a May 2008 Budget tax package kicking in in October, so could a National government in a May 2009 Budget bring forward the next round of tax relief to October next year," he said.

It was unlikely there would be cuts in front-line spending (fewer doctors, teachers and so on) to pay for that.

But he said National could pay for more capital spending through public- private partnerships where private money, not public, built infrastructure such as roads that would be tolled.

National has already said it believed it could save $500m on the bureaucratic spend, though Gibbs said it was hard to cut the size of government quickly.

The Budget predicts cash deficits running at around $3.5 billion over the next few years, with debt at just under 20% of GDP. Cullen has said that was about the limit of his comfort zones.

Gibbs said a National government could be happy to push both the deficit and debt levels lower by borrowing for capital spending.

"Their problem is those numbers could go lower anyway if the economy weakens more than expected."

THANKS FOR NOTHING

The government's changes to the tax thresholds have made good headlines for Finance Minister Michael Cullen, but taxpayers shouldn't be overcome by his apparent generosity.

The 39% tax rate for incomes over $60,000 was introduced by Cullen in April 2000, when he calculated it would affect only 5% of the workforce. The threshold has remained the same since then, gradually dragging in more taxpayers as incomes rose with inflation. About 12% are now in the net.

On Thursday, Cullen finally announced changes to the thresholds, with the 39% bracket rising to $70,000 in October, $75,000 in 2010 and $80,000 in 2011.

Sounds good, but if the tax brackets had been adjusted for inflation since 2000, the top threshold this year would already be $74,327. Projecting inflation at 3% in coming years brings the threshold to $78,853 in 2010 and $81,219 in 2011.

This means Cullen's "tax cuts" are effectively only returning many taxpayers to the situation they were in when Labour first came to power.

The effects on the $38,000 bracket are more marked, with the new 2011 threshold of $42,000 still well below what it should be. If adjusted for inflation the 2008 threshold should already be $47,073 and by 2011 it should be $50,000.

- © Fairfax NZ News