New Zealand May Abandon Income-Tax Cuts as Recession Deepens

By Tracy Withers

April 8 (Bloomberg) -- New Zealand may abandon income-tax cuts planned for next year because it faces a longer-than- expected recession, Prime Minister John Key signaled today.

The Treasury Department this week said the deepening global recession and feedback from companies added to signs the economy won’t expand until 2010. Business confidence has fallen to a 35- year low, according to a report released yesterday.

Key, who won a 2008 election pledging income-tax cuts over the next three years, is relying on the economy to emerge from its worst recession in at least three decades so he can narrow his budget deficit. The government is curbing spending and reviewing tax-cut plans, he said today.

“We recognize there is a difficult economic position in front of us,” Key told parliament. “The government needs to make sure it’s balanced in what it does, and it will take the actions that are necessary to do the best for New Zealanders.”

The government cut income taxes on April 1. No final decisions have been taken on the further reductions promised for 2010 or 2011, Key said. The government is preparing a budget for delivery on May 28.

The Treasury said on April 6 that the economy is weaker than a it outlined in December. That scenario “incorporated no quarterly growth in the year to March 31, 2010,” it said.

New Zealand’s economy began contracting in the first quarter of last year. It shrank 0.9 percent in the fourth quarter, the most in 16 years.

Global Recession

Economists have since lowered their forecasts for global growth and the economies of New Zealand’s trading partners are likely to contract 1.8 percent this year, Treasury said.

“We’re in a very unusual recession, arguably the worst since the 1930s depression, and there is a range of views of exactly when New Zealand will start growing again,” Key said today. “The business community is responding to what they are seeing internationally, which is a very weak position.”

Some forecasters expect the economy may grow in the current quarter, ending June 30, he said. An alternative scenario is that it continues to contract until the first quarter next year.

A net 65 percent of companies surveyed last quarter expect the economy will worsen over the next six months, the most since 1974, the New Zealand Institute of Economic Research said yesterday.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.