KEY POINTS:
Finance Minister Michael Cullen warns any personal tax cuts he delivers in next year's Budget will be modest - and likely worth less than $10 a week to most income earners.
In an attempt to keep a lid on expectations, Dr Cullen said yesterday large tax cuts would
not be economically sustainable and would push up interest rates.
Instead, $1 billion in tax cuts is set to be delivered to business, more money may be poured into health and also used to meet wage pressures across the public sector.
"Given that we've got expectations around the business tax cuts and changes that we are committed to as part of our confidence-and-supply agreements, that does mean that at this point I've got to look a bit like the Grinch," Dr Cullen said.
There have been rising expectations that he will deliver personal tax cuts in next May's Budget and have them in place in the 2008 election year.
The Government's Half-Year Economic and Fiscal Update yesterday has done little to dampen that hope with the Treasury revising upward forecasts for economic growth, tax revenue and operating surpluses compared with May projections.
The forecast cash deficits Dr Cullen has previously fretted about have almost halved. The update paints a picture of a resilient economy that has shrugged off predictions of a recession.
But while the improved position has given the Government $1 billion of "extra headroom" for next year's Budget, Dr Cullen said that money would be used on business tax cuts.
He conceded the healthy Government books allowed him to do more.
But he believed people would spend the money from big personal tax cuts, adding to inflationary pressure and putting strain on interest rates and the dollar.
"If we were to give $10 a week across the board to all income tax earners, the fiscal impact of that is well in excess of $1 billion a year, with no further change in terms of thresholds, and no change in terms of the top tax rate," Dr Cullen said.
"You should be anticipating if there are consequential changes for personal taxation (from business tax changes), they will be well inside that figure for most income earners."
The warning is an attempt to avoid a repeat of the famous 2005 "chewing gum" Budget disappointment that nearly led to Labour losing the election. In the days before that Budget, expectations of personal tax cuts were built up - only for the changes to tax thresholds to fall short of hopes.
Dr Cullen was unable to say yesterday if those changes - which included plans to inflation-index tax thresholds, increasing them every three years at a rate of 2 per cent a year - would go ahead in 2008 as planned.
They would have cost $360 million but the actual inflation rate since the changes were announced has been higher than 2 per cent, meaning they would cost considerably more.
National finance spokesman Bill English said his rival had missed an opportunity to give money back to workers.
He said Labour could have started cutting personal tax three years ago but painted itself into a corner by spending too much.
He also questioned whether voters would look fondly on Dr Cullen's decision to give $1 billion in tax cuts to business first. "What do Labour supporters make of that?"