Economist warns now is 'not the time for tax cuts', says Government should focus on getting back to surplus

A former Reserve Bank economist says the government's fiscal hole is so large that it is not the time for tax cuts.

The government said it still intends to deliver tax cuts by July, but will not lock them in until they have got them past their coalition partners.

In his state of the nation speech, Deputy Prime Minister Winston Peters agreed with reports the government has a $5.6 billion fiscal hole. Finance Minister Nicola Willis denies the shortfall.

A cornerstone promise in National's election campaign was to deliver tax cuts to the tune of around $14b over four years.

Former Reserve Bank economist Michael Reddell was one of three experts who reviewed National's foreign buyer tax policy prior to the election and raised serious concerns about the party's revenue projections.

That policy ended up being dumped during coalition negotiations.

Reddell told Checkpoint it was the time to wind deficit down, get back to surplus and then the government could think about what tax cuts to put in place.

"They will argue that they will do enough spending cuts that will roughly match what the tax cuts are going to be and let's hope that's so but I think many economists would take the view that we are starting with such a large fiscal deficit bequeathed to them by the Labour government that it's not the time for tax cuts."

Reddell said there was "huge uncertainty" about what would actually happen with the economy and forecasts were just "best guesses".

The government should not have been surprised when it came into power and found the economy in worse shape than thought, he said.

Specific surprises were plausible as it did not know precise information while in opposition but Reddell said National had claimed for years that Labour had weak fiscal discipline and presumably, they expected it.

Reddell said "you certainly can't tell the magnitude of any sort of gap".

"What you've got going on here is some of the things the government wants to do is costing a bit more than thought pre-election, some of the things they wanted to do are going to raise a bit less revenue and then there's the sort of wild card that the minister of finance has been playing up as to the state of the economy and particularly, how that's going to play out over the next two or three years.

"Most economists, I think, would take the view that the economy's perhaps a little bit weaker than it was six months ago."

Prime Minister Christopher Luxon said the tax relief plan wold be unveiled at the Budget.

In his post-Cabinet press conference, Luxon said he did not think the government had been taking a softly-softly approach to the signalling poor economic situation, describing it as "a very volatile and a deteriorating set of circumstance".

He said the agreements and commitments between each of the coalition partners was very clear and they were very comfortable with their plans with each other.

"We will have a fully funded tax relief plan for low-and-middle income New Zealanders."

Asked if he can rule out a new tax as part of the Budget, Luxon said "that is not our intention".

Kiwibank economist Jarrod Kerr said there had been decades of underinvstment infrastructure and that he supported the idea of borrowing more than allowed under current fiscal responsibility rules.

Labour's finance spokesperson Barbara Edmonds said a future Labour government would consider taking on more debt.

Kerr said New Zealand had ample ability to service larger loans and the fiscal responsibility rules should be scrapped.

"Finance is not the excuse for our infrastructure problems. We've under-invested for decades. We have ample ability to increase debt to pay for that and I think we need to go down that path. I think the fiscal responsibility rule of the past are inadequate.

Kerr said not upgrading and maintaining infrastructure will leave the country facing huge problems.