KEY POINTS:
Finance Minister Michael Cullen believes there is room to cut personal taxes without fuelling the flames of inflation.
Reserve Bank Governor Alan Bollard yesterday delivered a warning to politicians, saying any easing in fiscal policy could lead to further rate hikes.
Although he kept official interest rates on hold, his statement has been interpreted as a warning to both major parties to avoid promising a major spend up or large-scale tax cuts in next year's election campaign.
But Dr Cullen today said it was now looking as if Treasury would revise its forecast of the Government's tax take upwards.
Treasury has repeatedly underestimated government revenue in recent times.
Dr Cullen said that extra money could be used for tax cuts without adding to expected inflationary pressure, as in current forecasts the money was expected to remain in the economy rather than flow into the Government's coffers.
Dr Cullen has said he will address the issue of personal tax cuts in next year's budgets.
However, he has there are four preconditions for tax cuts -- no borrowing, no service cuts, no adding to inflation and no increase in inequalities of income.
Dr Cullen will face huge pressure to cut taxes whatever the situation, given a government surplus of $8.6 billion in the past year and his reluctance to cut personal taxes over the past eight years.
"What the (Reserve) Bank is concerned about particularly moving forward is any stimulus over and above what is projected," he said on Radio New Zealand.
"Treasury is indicating to me they think they are going to revise upwards their future revenue forecast. I think therefore that increase is able to be used for tax reductions without adding to the fiscal stimulus.
"In other words as long as we remain with the bottom line looking roughly like what we are projecting for budget time then we are okay. But if we add to that then we will be in further difficulty."
National's finance spokesman Bill English said huge growth in government spending had created significant inflationary pressure, which Dr Cullen was denying.
He said Dr Cullen's stance appeared to be laying the ground for an "election year lolly scramble" that would further fuel inflation.
National was heeding Dr Bollard's warning, but Mr English would not commit the party to a fiscally neutral spending programme.
Dr Bollard yesterday said fiscal policy was already contributing to inflationary pressure, despite ongoing surpluses in the Government's operating balance.
Bank of New Zealand head of research Stephen Toplis said the probability of further easing in fiscal policy was "around 100 per cent".
" The danger in a close election campaign, accompanied by a very strong fiscal balance sheet and ongoing surpluses, is that all and sundry will try to buy the election.
"If this gets out of hand then the central bank will most surely need to respond."
Westpac chief economist Brendan O'Donovan and research economist Dominick Stephens said the Reserve Bank was right to warn the fiscal authorities, "but prudence rarely wins close elections".
"The Governor ought to brace for a fiscal lolly scramble next year," they said.
The Westpac economists expected the Reserve Bank to hike the Official Cash Rate twice more next year, starting in March.
Dr Bollard also pointed a tight labour market, continued expansion of domestic income growth on the back of strong commodity prices and rising global food prices as inflation risks.
On the other hand, signs of moderation were coming from the housing market, while remaining uncertainty in global financial markets posed a downside risk for key trading partner economies.
- NZPA
