KEY POINTS:
It now appears to be a case of when rather than if Finance Minister Michael Cullen will deliver personal tax cuts.
Yesterday Dr Cullen said Reserve Bank warnings on spending did not mean he had to sit still forever.
Speaking after the Treasury revealed the Government's operating surplus
was already $800 million ahead of forecast, Dr Cullen said he had heard Reserve Bank Governor Alan Bollard warn last week against excessive loosening of the purse strings.
"No Government could ignore the warnings of the Reserve Bank," he said last night. "But nor would I read the bank's messages as an excuse to sit still. The bank is not saying 'never' to tax cuts, it is saying 'not now'."
Expectation has been rising for months that Dr Cullen will deliver personal tax cuts in next year's Budget and ensure they are in place in 2008, election year.
Such a move could potentially neutralise a key plank of National's election strategy, although the party is known to be hoping voters will question why it took Labour so long to act.
The Treasury's half-year fiscal update next week is expected to paint a picture of a stronger economy than forecasters expected when the May Budget was delivered.
Any increase in the Treasury's forecasts for tax revenue will be closely watched. It is that revenue track that Dr Cullen and Revenue Minister Peter Dunne are eyeing as they prepare to make decisions early next year on company and personal tax adjustments.
Certainly, the Treasury's unveiling yesterday of the Crown accounts for the four months to the end of October highlighted once again the healthy state of the coffers.
The operating balance for the period was $3.08 billion - well ahead of the forecast $2.29 billion.
The difference was largely the result of higher-than-expected income from investments, although tax revenue also came in $300 million ahead of forecast.
Dr Cullen said yesterday that he was facing a "classic conundrum".
"I'm actually getting stronger and stronger warnings from the Reserve Bank, from the OECD and from others that because the economy is running hotter than anticipated, it actually makes it more important not to have excessive fiscal loosening."
But he also appeared to concede that the Government could afford tax cuts.
"It's the old conundrum - because you can afford it means you shouldn't do it, probably."
National's finance spokesman, Bill English, said the surplus figures showed the Government was growing fat while families were on a diet.
He did not expect Dr Cullen to ignore the Reserve Bank's warnings, but he said people wanted a commitment from him to lower taxes unequivocally.
"Middle New Zealand knows he's trying to find reasons for Labour to build up a war chest for an election- year lolly scramble.
"Cullen seems to have no difficulty with substantial increases in spending and its impact on inflation, but he is very squeamish about anything to do with tax."
Mr English said he favoured the Australian model of incremental tax cuts being implemented over time.
"We're looking more to the Australian model, where reducing taxes becomes business as usual for a Government," he said.
"That means smaller reductions over longer periods of time - people know your direction."