KEY POINTS:
The Reserve Bank's gloomy economic forecasts have given National more confidence it can offer bigger tax cuts in this year's election campaign without putting unwelcome pressure on inflation - but Labour doesn't agree.
Reserve Bank Governor Alan Bollard said yesterday he was likely to cut interest rates by the end of the year, and his updated forecasts painted a far less rosy picture of the economy than was seen in the Budget two weeks ago.
The central bank's prediction of a marked slowdown in growth and a rise in unemployment to 6 per cent in 2011 underscores the key role that interest rates and an economic downturn are likely to play in the election campaign.
National's finance spokesman Bill English said yesterday the outlook was tough for households, and the Reserve Bank's projections were "quite a bit worse" than the Treasury had forecast. But Mr English was optimistic the economy was resilient, and when asked what impact the Reserve Bank's predictions would have on National's plan for tax cuts, he indicated the party could make its cuts without worrying the inflation watchdog.
However, National will still have to be careful about how it funds the tax cuts, and Mr English conceded as much when he noted there could be higher costs for the Government from rising unemployment if the Reserve Bank's scenario played out.
National has already indicated it wants to offer voters bigger tax cuts than those Finance Minister Michael Cullen unveiled in the Budget.
Dr Cullen emphasised before his tax cut announcement that he wanted to make sure they did not add to inflationary pressure, and Labour is happy that Dr Bollard is now signalling a rate cut potentially as early as September despite the tax cuts.
It views yesterday's Reserve Bank statements as evidence Dr Cullen got the tax cut package right.
Even though the economic outlook is souring, Labour does not believe National can offer bigger tax cuts without more pressure on inflation.
Some within Labour are also sceptical unemployment will rise as much as the Reserve Bank is predicting.
The Reserve Bank could offer Labour a boost of sorts if it does cut interest rates in September, ahead of the election. A rate cut in September would be followed by Labour's tax cuts hitting voters' pockets on October 1.
An interest rate cut later this year is likely despite inflation being projected to go way outside the Reserve Bank's target band, and reach 4.7 per cent in the September quarter.
A significant amount of that inflation is being driven by international factors such as high oil and food prices, and the Reserve Bank is trying to look through those factors when it weighs what to do with interest rates.
Asked if National was concerned it might inherit a weak economy, Mr English said it did look like being in government would be a challenge.
"But we're up to it," he said.
* NOT SO ROSY
A Reserve Bank summary of economic predictions paints a bleaker picture than numbers forecast by Finance Minister Michael Cullen during Budget week, last month.
Where Dr Cullen predicted inflation to drop from 3.4 per cent this year, to 3.2 per cent in 2009, the Reserve Bank predicts it to climb to 4.4 per cent next year.
Gross Domestic Product was tipped by Dr Cullen to climb 2.4 per cent this year and 1.6 per cent in 2009, while Reserve Bank officials believe GDP will drop to 0.9 per cent next year, from 3.1 per cent this year.
Unemployment, by Reserve Bank estimates, will climb from 3.6 per cent this year, to 4.6 in 2009. A more optimistic Dr Cullen tipped it to rise from 3.5 per cent to 3.7 per cent in the same period.
