Tax cuts off as Govt fights recession

BY COLIN ESPINER

Tax cuts are off the table before the next election, but Finance Minister Bill English's belt-tightening Budget has staved off a credit downgrade. Parliament went into urgency last night to pass the backtrack on tax, which would have put an additional $10 a week in the pockets of average income-earners.

International ratings agency Standard & Poor's last night upgraded New Zealand's credit rating from AA+ negative to stable in the wake of the Budget, saying English's first effort as finance minister had delivered a "sound outlook".

A ratings cut could have added $600m to the country's interest bill, and fear of a downgrade prompted the Government to prune spending and cancel tax cuts to reduce debt.

Budget 2009 defers indefinitely the tax cuts planned for 2010 and 2011, and English said they were unlikely to occur before the next election unless there was a "miraculous" change in the Government's accounts.

Parliament went into urgency last night to pass the backtrack on tax, which would have put an additional $10 a week in the pockets of average income-earners not already claiming other benefits.

The breach of the election pledge will save the Government $900m, on top of a further $2 billion that English has lopped from departmental budgets over the next four years.

National's cost-cutting drive has also resulted in contributions to the New Zealand Superannuation Fund being cut from $2b to just $250m this year, with no more payments scheduled until 2020.

And English is pledging to lower the amount of new spending initiatives in future budgets by $600m each year in a bid to turn around spiralling cash deficits and mounting public debt.

Budget 2009 reveals the Government has managed to flatten previously steepening gross debt forecasts, in what English yesterday told Parliament was "the deepest, most synchronised recession since the 1930s". But the amount the country owes will still continue to rise until 2017, where it will peak at 43 per cent of gross domestic product before starting to fall again.

English has not managed to tame a decade of cash deficits, either, despite describing such forecasts as "unacceptable" last December. Treasury says the Government's deficits will peak at $9.6b in 2012 and the country will not return to surpluses until 2019.

"I have the dubious distinction of being the first finance minister in 60 years to deliver a budget when the world economy is shrinking," English said. "Every worst-case scenario has eventuated."

But National is still planning to spend an extra $2.9b in the next financial year, driven by increases in health, education, infrastructure, and benefit payments as the number of jobless mounts.

Treasury is predicting unemployment, currently 5 per cent, will peak at 8 per cent in September next year a rise from 105,000 to 179,000 jobless.

Treasury also provides a gloomy forecast for growth, predicting the economy will continue to contract throughout next year by 1.7 per cent before returning to slow growth in 2011.

Prime Minister John Key last night celebrated securing the country's credit rating, claiming National had saved the economy from Labour's "credit-card economics" with a sensible and cautious Budget.

But Labour leader Phil Goff said the Budget was "dishonest" and had no plan for jobs growth. "It says one thing, but does another. It is full of rhetoric but empty of substance or vision."

Most business leaders described the Budget as a step in the right direction, but overly cautious. Unions also criticised the lack of a jobs plan.

Health is the big winner in the Budget, with National retaining the extra $750m Labour put aside in last year's accounts. Much of the money will go to district health boards to fund subsidised medicines, including the breast cancer drug Herceptin, and to lower elective-surgery waiting lists.

The Government is also pledging $1b over four years for education, much of it on new school buildings and an increase in operations grants. But some of the money is coming from cuts in other areas, including tertiary and early childhood education.

Some $600m is being "re-prioritised" in education, while the Ministry of Social Development suffers a $428m cut, most of it from administration staff.

Other portfolios to receive budget cuts include Foreign Affairs ($105m), aid ($166m), economic development ($180m), housing ($90m), and conservation ($54m).

More money is being spent on law and order, however, including an additional $900m for 600 more police, 246 more probation officers, and 1000 more prison beds to be achieved through double bunking at five prisons.

Most of the other spending plans were already known, including the $320m home insulation programme and $290m to kick-start the Government's $1.5b broadband-to-the-home plan.

- © Fairfax NZ News