Bumper surplus but Cullen holds back on tax cuts

A massive Government surplus has renewed calls for personal tax cuts, but Finance Minister Michael Cullen will wait until next year to decide.

Dr Cullen said yesterday that despite an operating surplus of $11.47 billion in the 2005-06 fiscal year, caution was still warranted.

He did not feel that politically he had to offer tax cuts, and would decide when he had a clearer picture of how revenue was tracking this fiscal year.

"Speculation around size and shape [of tax cuts] at this point, based on last year's surplus, is simply not a valid economic exercise. Any shift in fiscal stance has to be judged against the surrounding economic circumstances - that is the most important point."

But while Dr Cullen continued to give reasons why tax cuts might not be prudent, it is becoming increasingly likely that Labour will go into the 2008 election with cuts already in place.

A review of business tax which looks set to lower the corporate rate to 30 per cent from 33 is likely to have flow-on effects for personal taxes.

The big question now is how far Labour will go, given that it is already earmarking money for health and that it won't want to appeal simply to voters in the top tax bracket.

The Government surplus unveiled yesterday was boosted by $1.8 billion from an accounting change. But even without that unusual effect, the operating surplus was $9.67 billion - well ahead of the $8.49 billion forecast in May's budget.

Corporate tax was modestly higher than expected, and GST takings were also above forecast due to inflation pressures.

National's finance spokesman, John Key, seized on the surplus as evidence that his party could have afforded the sizeable tax-cut package it took into last year's election.

"It totally vindicates our position - he [Dr Cullen] was the one who said tax cuts were unaffordable and reckless and would demand deep cuts in the public service. None of those things were remotely true."

Mr Key said there was little doubt Labour would offer tax cuts because Prime Minister Helen Clark had been "telling people" it would happen.

He also said that rather than be proud of the surplus, Dr Cullen should apologise for gouging so much money from taxpayers.

But that appears highly unlikely.

Dr Cullen is wary of wider eco-nomic conditions, in particular what tax cuts could do to interest rates and the country's credit rating.

The Reserve Bank is battling persistent inflation and there is some speculation it may have to raise rates again.

"There is no point in me giving somebody a tax cut, if the next week, as a result of the Reserve Bank's actions, it all disappears straight back into Australian-owned banks on their mortgage payments," Dr Cullen said.

The Government is set to make decisions on business and personal tax changes in March and announce them in next May's Budget.

The changes could then be in place on April 1, 2008 - an election year, meaning tax will once again be a major battleground in the campaign.

But Labour is also wary of raising expectations too far, and Helen Clark yesterday echoed Dr Cullen on the risk of tax cuts, saying: "I don't think you want to rush to a whole lot of conclusions off one set of accounts."