By Brian Fallow
WELLINGTON - The Reserve Bank has cast doubt on the affordability of substantial tax cuts over the next two or three years.
Its latest economic forecasts project budget deficits for the 1999/2000 and 2000/2001 years, of $400 million and $100 million respectively. For the following year the bank projects a surplus of $600 million or 0.5 per cent of nominal GDP.
Reserve Bank governor Don Brash would not be drawn yesterday on what would constitute an appropriate buffer before tax cuts should be contemplated. "On the basis of our [forecast] track there doesn't seem to be scope for large tax cuts," he said.
On the early rebound scenario sketched in the December Economic and Fiscal update, which Treasurer Bill Birch has said is closer to what is eventuating than the Treasury's central scenario then, the budget surplus was projected to be $2.4 billion in 2001/02 - four times the Reserve Bank's forecast.
The bank's fiscal forecast could differ from the treasury's for three reasons:
* The bank assumes the spending and tax policies announced in the DEFU. The Treasury will have more up-trade information on that.
* The Treasury may take a rosier view of the economic growth outlook than the bank.
* The Treasury may assume a higher inflation rate than the bank, which is relevant because it is nominal, not real GDP, which drives the tax revenue outlook.
Doubts on tax cuts
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