Wellington, May 25 NZPA - Get a tax cut and lose your home. That
would be a catastrophic trade-off for having an extra $20 dollars or
so in the hand each week, or two blocks of cheese as the National
Party puts it.

But nearly 150,000 households with mortgages face that risk,
according to research published in the Sunday Star-Times.

That is the number of households under serious mortgage stress
because of the increases in interest rates imposed by the Reserve
Bank, and the tax cuts announced in the budget are forecast to delay
and minimise any relief that governor Alan Bollard may have been
contemplating.

Some economists went as far as predicting interest rates might be
increased again to counter inflationary pressure caused by tax cuts.

There is a brighter side to that bleak picture -- Finance
Minister Michael Cullen doesn't think tax cuts will be inflationary.
Neither does National Party leader John Key, who is working on his
own tax cut plan that will be revealed at the beginning of the
election campaign.

Cullen was careful to spell it out in his budget speech last
Thursday. This is what he said: "In the current climate of low
growth, with downside risks coming from international influences,
and an easing labour market, I am reasonably well-satisfied that the
package will not lead to further rises in interest rates."

Grim statistics that have emerged in recent weeks showing retail
spending dropping and unemployment rising are strong indicators that
the Reserve Bank may soon be in a position where it has to cut
interest rates to stop the country sliding into a recession.

But within hours of the budget being delivered, bank economists
were saying the tax cuts were far too costly.

"Dr Cullen has thrown the kitchen sink and pot scrub at winning
an election," said Westpac's Brendan O'Donovan. Others expressed
similar views.

Cullen responded by saying the size of the cuts had been well
signalled in advance and finance markets should have factored in the
possibility of an October start date rather than April next year.

He was right on both counts. The size of the cuts was signalled
in advance, and it was blindingly obvious that the Government was
going to deliver them before the election.

Cullen said the bank economists were misreading the economic
picture, and Prime Minister Helen Clark told a post-budget audience
the faster than expected economic slowdown mean tax cuts in October
wouldn't have any significant impact on interest rates.

And Key, when he was asked whether his party's proposals would
mean higher interest rates, replied: "No. We will ensure our tax
cut programme doesn't drive interest rates higher."

Maybe he was aware of a survey published at the weekend which
showed 72 percent of National Party voters didn't want any more tax
cuts if it meant mortgage rates would rise.

That puts National into a tricky position. If it lays out a
programme with bigger tax cuts, that programme will be considered to
be more inflationary than the Government's.

But Key has started talking about "the structure" of the tax
system, and his party's ability to present "a better design".

On Friday he said this improved structure would "ultimately"
mean bigger tax cuts.

Presumably, he is talking about moving the thresholds to change
the relative benefits of tax cuts depending on how much people earn.

Cullen interprets these confusing signals as meaning National
intends lowering taxes for high income earners at the expense of the
less well paid.

And with the Government's tax cuts costing $10.6 billion over the
next four years, National hasn't got much room to move because there
isn't enough left in the kitty for anything that reduces revenue
even further.

National has promised it won't cut social services like health
and education, which is where big savings would have to come from.

So far, its explanation for how it will afford tax cuts is to put
a cap on the number of bureaucrats and reduce "poor quality"
government spending when it has gone through the budget books line
by line.

The problem with tax cuts, which over the last three or four
years have become an obsession in politics and the media, is that
there's a price to pay.

Those thousands of home owners with high mortgages are going to
pay it, unless economic factors have an impact on the economy to the
point where inflation falls below the Reserve Bank's intervention
benchmark.

If and when that happens, the bank will lower the official cash
rate and mortgages will come down.

To be fair to Cullen, he warned about the double-edged tax cut
sword well before the budget. He used an example of a family with a
$400,000 mortgage, who would gain a far greater benefit from even a
small rate cut than they would from anything the Government could
offer by way of a tax cut.

Unless the politicians are right, and tax cuts don't push up
inflation and provoke interest rate rises, people with mortgages are
going to be on the wrong side of a nasty equation.