Prime Minister John Key said that modernising the IRD computer system as part of an efficiency drive in the public service could cost up to $1 billion.
But if it were to be done it would be a long-term investment.
He said that while the Government had not wanted to make great changes in tax policy at the moment, tax policy was being held because the computer systems "can't actually support radical changes from Government."
"You don't want to be in a position where Parliament is held hostage to a lack of technology," he told reporters at Parliament this morning.
Mr Key acknowledged that improving technology would cost a lot of money.
"That will be the case. We are already having those discussions with the ICT Minister and Internal Affairs [Amy Adams] but ultimately departments themselves. There has been discussion that IRD for instance could be up for the better part of $1 billion if it writes a new computer system."
Mr Key will give more details in a speech of planned efficiencies in the public service through greater use of technology, sharing of backroom services and mergers of Government agencies.
He would not predict how many jobs would be lost but said that better service and results was the driving factor.
Asked how you could get better service with fewer people, he cited Air New Zealand check-in kiosks, where check-in was faster with fewer staff.
"It is the same thing for the public service. So much of what we want to do, people want to be able to access technology in that to get better services."
"I think we have got a very good public service but we can't stand in the way of technology, nor should we stand in the way of using the advantages that come from being able to have shared services."
He believed the cost over-runs associated with the INCIS police computer debacle in the late 90s had done a lot of damage.
"Government ministers became very nervous about failures around big projects. That's all well and good but the world has moved on."
Asked about the possible involvement of Google, he said he had talked with the company when he was in California last July.
"They showed us some technology we thought was pretty cool. There is definitely - in terms of their cloud technology - the capacity to use that.
"They are just one of a number of large both multi-national and New Zealand companies that could play a role."
Meanwhile, Labour leader David Shearer held up yesterday's flu scare on a flight from Tokyo as an example of how previous public service cuts had cost the country.
"A couple of years ago, 16 frontline science staff were cut back, these were the people dealing with pandemics.
"Yesterday, we had a plane arrive in New Zealand with the possibility of carrying a pandemic and we had actually weakened our services as a result of those cut backs."
The Government is yet to release details about where jobs are likely to be axed, and Mr Shearer said Mr Key needed to come clean.
"At the moment, people are concerned and worried about where those job cuts are going to be," he said.
"The Government is really about cutting the public service, selling our assets, and that's really a substitute for a plan to grow our economy in the right way."