Budget forecast: Mixed blessings

Business can look forward to a Budget of mixed blessings from Michael Cullen today.

There will be some tax relief, on depreciation and fringe benefits, to sugarcoat the pill of a new carbon tax.

There will be new compliance costs, for firms with more than five employees, from a new workplace savings regime though the scheme has been designed to minimise those costs as far as possible.

And for investors, there will be the removal of capital gains tax on managed funds and probably some moves to overhaul the tax treatment of outbound investment.

The Budget will be predicated on forecasts that the economy has already passed the peak of its cycle.

As Cullen said last Friday: "Instead of barrelling along on the open road at the rate of around 4 per cent plus per annum, we have entered a built-up area and are reducing speed, heading to around 2.4 per cent by March 2006."

But the economy has been stronger for longer than the Treasury, or other forecasters, expected. That has had a lagged effect on the Government's revenues, swelling the operating balance and net cashflow.

Westpac economists expect the operating balance for this year to be a $7.1 billion surplus (4.7 per cent of GDP) instead of the $5.6 billion the Treasury forecast last December. They expect the cash balance to be $800 million up on the $1.4 billion surplus forecast five months ago.

Whether that embarrassment of riches will be enough to force a reluctant finance minister into foreshadowing some kind of adjustment of the income tax thresholds, as the speculation has it, remains to be seen.

But Cullen has limited his options for tax cuts by adopting in last year's Budget a new and more stringent debt target.

Fiscal prudence, as he defines it, is now a matter of keeping the ratio of gross government debt to GDP falling and heading towards 20 per cent, instead of 30 per cent previously.

More announcements on capital spending on infrastructure are expected, but there may also be some "reprioritising" of previous announcements to avoid putting undue pressure on a construction sector already running at full stretch.

Details of the depreciation changes have yet to be announced but they are likely to include faster depreciation for shortlived assets such as computers.

But as National's finance spokesman John Key notes, accelerated depreciation does not change the amount of tax paid - just its timing.