Budget 2010: Who wins in Bill's game

Taxes down, GST up in Finance Minister Bill English's bid to make us work harder and save. Photo / Mark Mitchell

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The Government has delivered income tax cuts for all as part of a plan it says is a "once-in-a-generation opportunity" to change the direction of the economy.

Prime Minister John Key borrowed Labour's slogan and touted it as a Budget for "the many, not the few", saying it would make New Zealand more competitive with Australia.

Finance Minister Bill English said 73 per cent of income earners would have a top tax rate of 17.5 per cent or less.

The tax cuts take effect in October.

The top rate goes from 38c to 33c in the dollar, the 33c rate to 30c, the 21c rate to 17.5 and the 12.5c rate to 10.5c.

At the same time, GST will go up from 12.5 per cent to 15 per cent.

The net result will be about $2.80 extra a week for someone on $20,000 a year, $6.30 a week on $30,000, about $10 a week on $40,000, $13.70 a week on $50,000 and $20 a week on $70,000.

Mr English said households had been changing their habits after the global financial crisis, saving more and reducing their debt.

"This tax change is very timely because it is pushing in a direction that people are already going," he said. "In that sense it is a once-in-a-generation opportunity to change the direction of this economy."

He said the lower taxes would encourage people to work harder and save more.

The Budget's two surprises were the cut in the 21c rate to as low as 17.5c and the cut in company tax from 30c to 28c from next April.

Mr English said that would give New Zealand companies a "head start" on the Australian company tax rate which will progressively drop to 28c, beginning in two years.

"We are keen to get out of the blocks earlier."

He said it would keep more skilled workers from going abroad.

Mr Key said before the Budget that New Zealanders paid more tax than Australians on annual incomes up to $228,000.

After the Budget, New Zealanders will pay less than Australians after $55,000.

Labour says inflation will take money out of people's pockets and leave many worse off.

Inflation is forecast to be 2.2 per cent in the next financial year, jumping to 5.9 per cent, then settling at 2.4 per cent.

As expected, compensation for the GST increase will be paid, giving an increase of 2.02 per cent in benefits, pensions, student allowances, and Working for Families tax credits.

The tax cuts and compensation will cost $17.8 billion over four years but other tax measures to broaden the tax base are forecast to bring in $16.7 billion over the same period.

But Treasury officials say other economic factors would reduce the gap to $415 million.

Property investors will be hit by cuts to the depreciation tax breaks they have enjoyed.

And loopholes allowing property investors to make Working for Families claims will be closed.

Health and education received the lion's share of spending increases.

While Mr English stuck to his self-imposed cap of a $1.1 billion limit for new money, total new operating spending in the 2010-11 financial year will increase by $5.9 billion.

That is because of increases in such items as welfare, Working for Families and superannuation.

And while Mr English has praised officials and chief executives for freeing up another $1.8 billion over four years for spending on other priorities, almost 25 per cent, or $449 million, of the savings came from the early childhood sector.

Of the $449 million, $295 million will be saved by cutting the top two funding rates that are linked to higher qualifications.

The Treasury predicts 174,000 new jobs will be created over four years and that unemployment will fall to 4.6 per cent in that period.

It forecasts surpluses to return in 2016, instead of 2019 as forecast last year in Mr English's first Budget.