Cullen promises tax cuts, but not until 2008

PM Helen Clark sits by as Labour Finance Minister Dr Michael Cullen delivers the budget at Parliament. Picture / Fotopress

Tax cuts in 2008 and a new government-backed saving scheme for retirement and mortgages in 2007 are the main features of Finance Minister Michael Cullen's cautious budget, presented to Parliament today.

He will end this financial year, on June 30, with a record operating surplus of $7.4 billion.

But economic growth is forecast to slow, and Dr Cullen's "soft landing" prediction points to a surplus of $6.7 billion at the end of the next financial year and an average $4.8 billion over the following three years.

Spending in future budgets, he said, would be "significantly less" than in 2004 and 2005.

Dr Cullen has responded to pressure for tax cuts by linking the income thresholds to inflation, but changes will not cut in until April 2008.

The thresholds will rise by 6.12 per cent and adjustments will take place every three years after that.

Dr Cullen said gains would range from $35 to $534 less tax each year, depending on income levels.

National leader Don Brash said the Budget was an opportunity lost for New Zealanders.

"The promise to tinker with tax thresholds three years down the track is nothing short of an insult to hardworking Kiwis who have been overtaxed for the past six years," Dr Brash said.

The Government also announced that a new savings scheme, KiwiSaver, will open in April 2007.  It is designed to help people save for retirement and first home mortgages. Employees will be automatically enrolled and will get an upfront $1000 from the Government. They can opt out if they want to.

The standard saving rate will be 4 per cent of income, with an optional 8 per cent. It will be collected through the IRD like income tax.

After people have been KiwiSavers for three years, they will be able to withdraw their savings to buy their first home. They will get a $1000 boost from the Government for each year they have been saving, up to a maximum $5000.

Dr Cullen's budget speech was marked by a cautious approach to future economic trends.

He said the economy would slow over the next two years from its current 4.2 per cent to an annual growth rate of about 2.5 per cent.

"The message of budget 2005 is that large one-off packages will be rare over the foreseeable future unless accompanied by expenditure cuts or efficiency gains," he said.

"I have warned ministers and departments, and the public, to moderate expectations in terms of expenditure increases next year."

Most of the budget spending has already been announced, and again health is swallowing billions as primary care subsidies widen to include more people.

Education and training, research and technology also see significant increases and another 1300 state houses will be built over the next four years.

Dr Cullen is increasing spending on roads beyond the level he has previously announced -- an extra $100 million a year over the next three years bringing the total over the next four years to $8.4 billion.

The much-criticised police budget is being increased to a record $1.03 billion and there will be another 245 sworn and non-sworn staff.

Dr Cullen said that for the first time, police numbers would be above 10,000.

- NZPA