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Treasury forecasts the key to tax cuts

NZ NewswireNZ Newswire 26/05/2016

Bill English may have delivered a forgettable budget but the forecasts that determine whether tax cuts can be afforded will be carefully watched says NZ Newswire's political writer Peter Wilson.

By this time next week not many people will be talking about the budget.

That won't worry the government. It was a mid-term budget, a care and maintenance exercise that will keep health, education, welfare and the other services rolling along for the next 12 months.

Ministers had a go at hyping up the $761 million Innovate New Zealand package as a big deal, but with 25 separate initiatives the money is spread over a big area.

It didn't get much traction as the media tended to focus on easy targets such as the tobacco tax hikes - actually a continuation of the 10 per cent a year increases which began in May 2012.

What will be of ongoing interest is the Treasury's fiscal forecasts, because they determine whether National can go into next year's election campaign promising tax cuts if it wins a fourth term.

It's what Treasury calls the "out years" that matter.

The budget that's just been presented has a forecast surplus of less than $1b, which isn't enough and hasn't been considered for tax cuts.

But in 2017/18 the forecast surplus is $2.5b, in 2018/19 it's $5b and in 2019/20 it hits $6.7b.

Prime Minister John Key has said around $3b is the figure he would need for tax cuts, and that fits neatly into those forecasts.

Whether they hold up is another matter. Treasury doesn't always get it right, which Key and Finance Minister Bill English know.

But if those forecasts look like sliding down, the government can influence the situation.

"Next year we'll make decisions about tax cuts," English said on Friday.

"At least we're a developed country with an opportunity to do that, and the only way to keep that opportunity is to be pretty careful with spending."

It's a safe bet that he's going to be "pretty careful with spending" to make sure there's enough fiscal breathing space for tax cuts.

It's going to be a careful balancing exercise.

The government can't be seen to be sacrificing social area spending like health, education and welfare so it can afford tax cuts.

And, as Key has said, they have to be worthwhile or there's not much point in delivering them.

He has suggested cuts that give taxpayers an extra $20 a week in their pockets would be a worthwhile target.

Both Key and English are talking about middle-income taxpayers who are finding themselves moving into higher tax brackets as wages and salaries increase.

Those who earn big salaries - the ones opposition parties call "National's rich mates" - aren't likely to benefit much, if at all.

For the last two years, the government has been courting middle New Zealand and the less well off.

It surprised everyone, not least Labour and the Greens, when it increased benefits in the 2015 budget.

National has been steadily moving into Labour's territory, and it's not going to stop doing that.

It's one of the reasons Labour is having so much trouble lifting its support above 30 per cent in the polls.

Labour leader Andrew Little indicated he was well aware of that when he targeted his pre-budget speech at middle New Zealand.

He's trying to persuade middle income earners that they aren't getting a fair go under National.

So far, he doesn't appear to be succeeding. National's support is steady at around 47 per cent - the same as it's 2014 election result.

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