Tax cut policy ignites a row

National's tax cuts have sharply defined the positions of the main parties in the election campaign.

Labour says they are unaffordable and favour the rich, the business community has warmly welcomed them, and except for Act the other parties in Parliament are not enthusiastic.

The policy, announced yesterday, means substantial cuts for most workers although low and middle-income families are still likely to be better off under Labour's targeted tax relief plan.

The tax thresholds would be moved significantly over the next 18 months, delivering about $30 a week from April 1 next year to someone earning $50,000 a year and $92 a week to a person earning $100,000 or more.

It will cost $3.9 billion a year by 2008, and National says it can be afforded without cutting core services like health and education.

Finance Minister Michael Cullen disagrees, and says a National-led government would have to borrow heavily to pay for the cuts.

"They are saying we are so rich we can afford to spend billions and billions on tax cuts, but we can't afford to lift our kids out of poverty in this country," he said.

"That is a defining issue for this campaign."

Business New Zealand chief executive Phil O'Reilly said lower taxation offered scope for improved productivity and growth.

"Reducing personal tax rates would provide incentives for individuals and families to get ahead by working hard, knowing that they will keep more of their earnings," he said.

However, he was disappointed that National did not intend immediately lowering the company tax rate.

The United Future Party was dismissive, saying the policy had "significant holes in it" and New Zealand First leader Winston Peters was sceptical about whether it could be afforded.

He said he wouldn't be able to endorse it without knowing that NZ First's own policies -- which include a huge increase in the number of police and lower taxes for exporters -- could be accommodated.

Dr Cullen had another angle of attack.

As well as saying the tax cuts would blow the budget, he said National would not be able to implement them because only Act supported them and National would never get the numbers to pass the legislation through Parliament.

"There is only one other party in Parliament like to vote for tax cuts of this insane size and unfair configuration and that is Act," he said.

"The main result of this package, if anything, will be to squeeze Act further off the political agenda."

Dr Cullen said the size of the tax cuts meant there would be nothing left for National to implement other policies.

"What's left cannot even meet current service needs, let alone the cost of compulsory bulk funding -- $350 million more if no school suffers a cut -- or meeting the pressures on aged care services."

But National finance spokesman John Key said today National's new spending in each of the next three years would not be too far from Labour's.

Labour had planned to spend about $1.9 billion a year on new inititatives, whereas National would spend about $1.5 billion, he said on National Radio.

But Labour's figure did not take into account its promise to scrap interest on student loans which would cost at least $100 million next year, rising to at least $300 million a year by 2008.

National also had not used the extra 1.58 billion cash Treasury was now projecting it would get over the next four years, beyond its May expectations.

Labour had already spent that money in its extended families package.

"It's garbage when Michael Cullen gets up and says we are going to have less money," he said.

"It's totally incorrect."

National would pay for its student loan tax deduction scheme from reducing waste in the tertiary education sector, Mr Key said.

Dr Cullen said today on National Radio that National's policy would also lift child poverty.

National will axe the roll out of the $10 a child family support payment due to kick in 2007 under Labour's Working for Families package.

Beneficiaries are eligible for the $10 a child payment.

Dr Cullen said by taking that money and putting it into tax credits and cuts, children in the poorest families would be worse off.

But Mr Key said being on a benefit was the main reason people were in poverty and National had used the money to create strong incentives for people to move into work where they would be better off.

- NZPA