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The Treasury has pencilled in personal tax cuts of $1.5 billion from April 2009 in its latest forecasts, and Finance Minister Michael Cullen hinted there might be more later.
Dr Cullen stressed that the $1.5 billion was the Treasury's number, not his. It was a working assumption only and no decisions would be made about the size, timing and shape of tax cuts until April next year.
He had, however, discussed with officials what would be a "not silly" number for them to use.
If spread equally among just over 2 million taxpayers, $1.5 billion would be worth about $15 a week
In the half-year economic and fiscal update released yesterday the Treasury has revised up its forecasts for tax revenue, by $2.5 billion for the current year and around $2 billion a year for the next three years.
That reflects both stronger economic growth and more inflation than it expected when the May Budget was written.
It expects wages to rise faster, and dairy farmers' incomes much faster, than it did six months ago but the flipside is a higher dollar and interest rates remaining at current high levels until late 2009.
Dr Cullen said there were always uncertainties about the economic outlook, in particular at the moment about how nasty the credit crunch arising from the US sub-prime mortgage crisis would get and the extent of any contagion from that to the rest of the world economy.
But he said that on current projections it seemed almost certain there would be room for at least one more round of tax cuts, beyond that in next year's Budget, over the next four years. Otherwise Government debt would fall well below what prudence required.
The Reserve Bank this month factored tax cuts of $1.5 billion into its forecasts - insisting it had no inside knowledge of the Government's intentions.
Tax cuts would be inflationary, Governor Alan Bollard said, and would contribute to keeping interest rates at their current high level until well into 2009. But including the tax cuts did not put another interest rate hike into the bank's projections.
Dr Cullen has laid down as one of the conditions for tax cuts that they should not make inflationary pressures worse. He is now taking that to mean that they would not result in Budget surpluses smaller than the Treasury was forecasting back in May.
Bank of New Zealand head of research Stephen Toplis said the Government had cleverly given itself a lot of wriggle room.
"With plenty of headroom in its fiscal forecasts it should be able to deliver the basic $1.5 billion tax cut even in the event of a much softer than anticipated economic environment," he said. "In contrast, if its forecasts prove accurate it will have lots of dough available for more fiscal giveaways in the run-up to next year's election."
National's finance spokesman Bill English said the higher tax take was being driven more by higher inflation than by higher economic growth. For the year to March 2009 the Treasury has revised its growth forecast up from 1.6 to 2.1 per cent, but its inflation forecasts from 1.9 to 3.3 per cent.
A figure like $1.5 billion for tax cuts was too little, too late, Mr English said.
After a decade of lost opportunity the Government was finally succumbing to the pressure of election year .
"They are on the run on tax and they are going to have to try and make it look like they are committed to something more than an election-year bribe. But I think they have got a credibility problem."
