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Thursday, June 10

Tax cuts cause interest rate rise

Finance Minister Bill English's unaffordable tax cuts for high-income New Zealanders made today's rise in the Official Cash Rate inevitable, says Labour Finance spokesperson David Cunliffe.

"By breaking his promise to make the Budget fiscally neutral, and by handing out tax stimulus to upper income earners who did not need it, Bill English has made the Reserve Bank's job harder, and next year's interest rate and inflation outlook worse."

David Cunliffe said the Reserve Bank had warned repeatedly that a loose Budget would put more pressure on monetary policy to cool inflation.
“Although Budget 2010 limits spending on much needed social services like health and education, it hands out $4 billion a year in tax cuts that the country cannot afford.

“About one third of the tax cuts went to the top 5% of income earners. Even with deep cuts to new social spending, this profligate and political tax lolly scramble resulted in a gross additional deficit of $465 million in 2011, $1.085 billion over four years, and, analysis shows, up to $9.2 billion additional borrowing by 2023/24.

"Alan Bollard simply cannot look past the inflationary impact of this tax windfall to the few --- hence the rise in the OCR today," David Cunliffe said.
"And while he may seek to 'look through' the one off impact of raising GST, he cannot ignore the downstream impact of higher GST on wages and inflationary expectations.

"To make matters worse, this tax windfall appears to have had minimal impact on jobs or growth that could make up for its impact on inflation and interest rates," David Cunliffe said.

"Budget documents predict less than 1% extra growth cumulatively over the next seven years, and only about 6% of new employment is related to Budget measures --the rest is purely cyclical.

"Instead, higher real interest rates risk a repeat of hot currency flows that comprised the 'carry trade' of funding from Japan and Europe through the banking system into our local mortgage market. That made export competitiveness, the current account deficit and housing affordability all worse, and we cannot afford to repeat it.

"Bill English promised the biggest structural reform in a generation to rebalance the economy. Instead what New Zealanders got was a Budget of broken promises ---that did not properly address structural issues; that did raise GST; that was not fiscally neutral; and that, as a result, has fuelled another round of the interest rate-exchange rate roller-coaster,” David Cunliffe said.