Cullen attacks big tax cuts, defends budget

Finance Minister Michael Cullen has accused supporters of substantial tax cuts as "Muldoonist" and says such policies would lead to higher debt, inflation and interest rates.

Dr Cullen said a lot of work had been done in the past 20 years to slash government debt and put it on a strong financial footing.

"Yet there are still those amongst us who hanker after the days when governments happily engaged in short-term fiscal stimulus and pretended that there would be no consequences in terms of increasing debt or destabilising government finances in future years," he said in notes for a speech to a KPMG tax seminar in Auckland this morning.

Dr Cullen did not mention National once in his speech, but much of it was clearly aimed at National's tax cut policy.

National is refusing to say when it will release the details of that policy, but says its proposed cuts will be substantial, will start early next year and will result in a tax cut for all working New Zealanders.

In contrast Dr Cullen's May 19 budget promised extremely moderate tax relief and not until 2008.

National's tax cut promise has struck a chord with voters, with National nosing to 38 per cent support, ahead of Labour's 37 per cent in a National Business Review-Phillips Fox poll published today.

Dr Cullen told the seminar the government's accounts showed little headroom existed over the next three years for substantial tax cuts.

"Where any headroom exists that allows changes in taxation precedence must be given to changes that foster productivity growth."

That was why the budget included a suite of business tax cuts aimed at boosting productivity, rather than cuts in the headline corporate tax rate.

The Government had also delayed changes in personal tax thresholds, because inflation was already running high and the economy could not cope with further stimulation.

"In an economy operating at full capacity, cutting tax or raising expenditure beyond what is already planned, or even signalling an intention to do so, will flow immediately into higher mortgage rates for homeowners and higher interest rates for businesses."

Dr Cullen said by 2008-2009 the budget's business tax cuts and changes to the personal tax thresholds would be worth $776 million annually.

That would be offset by about $720 million of net carbon tax revenue, which will start to flow from April 2007.

"For those who threaten to throw a tantrum if they don't get tax cuts by lunchtime, this is clearly too little and too late.

"Those with a wider view can see that it is incremental changes, carefully designed and competently implemented, that make the difference," Dr Cullen said.

"As for my government, we are in this for the long haul, and are not about to jeopardise that steady progress."

Since the budget Dr Cullen has repeatedly attacked National's proposed tax cuts.

Those tax cuts would have to be partnered by equal cuts in government spending to avoid lifting inflation.

The potential size of the tax cuts National was proposing would require cuts in core government spending areas such as education and health, Dr Cullen has said.

- NZPA