National says tax cuts still affordable

National is standing by its tax-cut policy despite a blunt warning from the Reserve Bank Governor.

In a speech yesterday Alan Bollard said the economy is extremely unbalanced because New Zealanders are spending 12 per cent more than they earn.

He also warned political parties about the fragile state of New Zealand's economy, and urged them not to make coalition promises they cannot deliver.

Dr Bollard indicated interest rates are likely to rise further.

National's finance spokesman John Key said today he agreed all political parties needed to show restraint in their spending plans. But he claimed the policies National advocates would improve the economy and over time would reduce inflation.

Despite the warnings on spending he said there is no reason the country cannot afford tax cuts. He said National's tax policy would be phased in over time and would improve the "supply side" of the economy.

A pledge to cut taxes was a central plank of National's election campaign, while Labour promised tax relief for families.

Labour leader Helen Clark is currently in the process of trying to form a new Government after securing the largest vote of any party in the September 17 election but failing to secure a majority. National is waiting in the wings should she be unable to do so.

Mr Key said tax cuts would encourage more skilled New Zealanders to stay here and work longer, reducing the impact on inflation.

He agreed some of the coalition bribes being bandied about could have frightening consequences for the economy but said in the end it comes down to quality of spending rather than quantity.

However, he said there are signs the coalition process is becoming an almighty lolly-scramble.

Labour's Caretaker Finance Minister Dr Michael Cullen has said he welcomed Dr Bollard's speech and agreed fiscal prudence was required.

- NEWSTALK ZB, HERALD ONLINE STAFF