S&P sounds tax-cut warning

International ratings agency Standard & Poor's would be "concerned" if the Government went ahead with costly business tax cuts and would look closely at New Zealand's credit rating as a result.

However, it says it is waiting for details of the Government's plans.

The comments follow ugly current account and trade deficit figures released this month.

S&P analyst Kyran Curry said the agency saw the current account deficit, now at 9.7 per cent of gross domestic product, as "the most significant factor" weighing on the country's AA+ sovereign credit rating.

"It's high, it's chronic and it's not sustainable but there are mitigating factors that help to provide support to New Zealand's rating, and in particular it's the strong fiscal position that the Government maintains."

In the May Budget, the Treasury forecast an operating surplus of $5.7 billion, or 3.6 per cent of GDP, for the year to next June, to be followed by a $4.3 billon surplus, or 2.6 per cent of GDP, the next year.

However, ANZ economists believe the Government's tax-take forecasts are over-optimistic and rising spending will narrow those surpluses considerably.

Finance Minister Michael Cullen has announced several costly policies, including tax sweeteners for employers' contributions to the KiwiSaver workplace savings regime - estimated to cost $160 million a year - and the latest version of the investment tax regime - estimated to cost of $140 million a year.

Curry said S&P was aware of the KiwiSaver and investment tax policies and still expected the Government "to maintain a very strong fiscal position moving ahead".

"Approaching an election year in any country, Governments usually build up their expenditure profile," he said. "The Government's already pre-emptively anticipated that in commentary, including in its recent Budget papers, so it's not something I'd be particularly surprised about."

However, Cullen has also fuelled expectations of a cut in the company tax rate, perhaps from 33c to 30c in the dollar, which could cost upwards of $500 million.

"If there was going to be a substantial reduction in their bottom-line balance of those sorts of numbers, then that would be ... negative for the rating," said Curry.

"It would be something that we would look at very closely.

"If there is speculation that the Government's fiscal position may weaken, that would be something that we would view with concern but we would have to look at it in more detail once more data came out.

"They've not released anything I've seen that has detailed costings."

Curry said S&P maintained an "open dialogue" with the Government about its finances and rating.

Apart from the Government's strong fiscal position, other factors mitigating against the current account deficit included how well monetary policy and the banking system were run and the transparency and orderliness of Government and its decision-making.

"It's a range of things that get New Zealand into that top club of countries."

S&P maintained its view that the current account deficit would improve as the New Zealand dollar started falling again, thereby stimulating an export recovery and dampening domestic demand.


How we rate

* New Zealand has a AA+ credit rating from Standard & Poor's and an Aaa rating from Moody's Investors Services

* Standard & Poor's warns that New Zealand's monstrous current account deficit continues to weigh on its rating.

* That is largely offset by the Government's strong balance sheet.

* Should the Government's balance sheet deteriorate significantly and its credit rating be downgraded, the Government would pay more interest on borrowed funds. Some commentators believe that would flow into the private sector, which accounts for most of the country's overseas debt.