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IMF Message As Budget Draws Near

Fuseworks Media
Fuseworks Media

As Finance Minister Michael Cullen prepares to deliver his ninth budget tomorrow an International Monetary Fund report (IMF) has warned of the need to keep inflationary pressures in check and restrain government spending.

The IMF said those measures were needed to help reduce the harmful effects of the international credit crunch.

The IMF, in its annual assessment of the New Zealand economy, said the Reserve Bank's decision to raise rates last year was ``appropriate'' and helped moderate house price inflation and slow rapidly appreciating house and share prices.

The IMF also backed government plans to gradually reduce a large fiscal surplus, but cautioned that those steps should occur only once inflationary pressures eased.

Dr Cullen said the IMF's warnings were for the Opposition rather than the Government going by National Leader John Key's statements about tax cuts in the past 24 hours.

He said the budget fit ``reasonably'' well within the IMF's expectations.

``But as I said, we've been trying to balance a range of expectations and not taking up the invitation of one or two of you (in the media) to act totally irresponsibly as the sort of mechanism leading towards the election.''

Dr Cullen hinted there could be an across the board lift in the thresholds at which people pay more tax.

Dr Cullen announced in 2005 that from the beginning of the 2008 tax year tax thresholds would have inflation indexing built in.

They were mocked at the time as the ``chewing gum'' tax cuts and last year Dr Cullen axed them and instead made KiwiSaver more attractive.

On Monday Dr Cullen said Parliament would go into urgency to pass budget related legislation: ``I think people want an assurance this time that those cuts are put in place, they know they are going to come.''

Speculation around Parliament is that Dr Cullen will cut the tax rate at the lower end of the scale as the centrepiece of the tax cuts.

This would meet his self-set test of fairness and equity, as it would deliver something to everyone -- even if it is very expensive.

Revenue would fall by around $1 billion for every $10 a week put into taxpayers pockets.

Dr Cullen has already ruled out the creation of a tax free income bracket and cuts to GST.

Yesterday he indicated there would be less money to deliver cuts but they were less likely to be inflationary given tougher economic times.

He also ruled out a lump sum dividend payment saying there was ``no basis'' for speculation about one.

In Parliament both Mr Key and Deputy Leader Bill English attacked the Government over tax cuts.

This morning Mr Key said he expected Dr Cullen's budget to see a lot of money spent.

``He's certainly going to pull a lot of dollars out of the bag, he's always had very big spending budgets, and he's going to have tax cuts this time after nine years of waiting,'' he told TV One's Breakfast programme.

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