KEY POINTS:
Finance Minister Michael Cullen has signalled Labour will dangle tax cuts in front of the voters next year.
Cullen - clearly spooked by Labour's sliding poll ratings - has finally been forced to concede he will outline personal tax cuts in next year's Budget.
This is a political
decision - not an economic one.
Anyone who believes otherwise should take a look at the Treasury advice which has consistently argued personal tax cuts should be introduced to spur economic growth and dynamism.
Labour probably hoped it could keep the lid on its proposed 2008 election lolly scramble until Cullen unveils his ninth Budget. He had said he would not be commenting on the contents of tomorrow's Budget ahead of time.
But Labour's haemorrhaging support in two consecutive political opinion polls this week will have sent shivers up the back of long-serving Cabinet ministers - particularly Prime Minister Helen Clark - that National will take power if Cullen continues to cold-shoulder the clear desire by most of the electorate to hold on to to their hard-earned cash through tax cuts instead of fuelling persistent Budget surpluses.
He has not written tax cuts into the script for tomorrow's eighth Budget as some of his colleagues had wanted.
Cullen simply says the 2008 Budget will indicate "when tax cuts would be sensible in terms of economic management, what shape they would take and what his priorities would be".
But the fact that he has finally been forced out of his corner to concede (however reluctantly) that a Labour Government will offer personal tax cuts (sometime) will be enough to keep his restive colleagues on side for now.
They know that even if Cullen does not outline an outright tax cuts bonanza in next year's Budget, Labour can still tantalise voters by suggesting significant cuts will be in the wind if they return the party to office for a fourth term.
Those who believe the Finance Minister will not break from his script should look again at the 2005 election scramble.
Cullen was not initially on song for Labour's interest-free student loans but came round once the electoral auction began.
Much of tomorrow's focus will be on KiwiSaver, the $1 billion business tax package and mechanisms to tackle climate change.
Cullen suggests the cover of the Budget - often seen as a symbol of its contents - is "a deep and long-lasting shade of a sort of ruby red".
He hasn't said so outright.
But around the business community there is concern that might portend Labour intends to crack down on housing inflation issues. This could involve a capital gains tax on investment property (or clarifying the existing rules on this area), wiping tax deductability on investment properties or some other interventionist mechanism.
If so, any policy change might be implemented in stages so that taxpayers and investment home owners - which include a large number of people - have time to adjust their affairs.
The Centre for Independent Studies (CIS) in a report released yesterday - Taming New Zealand's Tax Monster - points out a person on the average wage is now paying an extra $2400 a year in income tax than he or she was in 2000.
This is an extraordinary amount for average wage earners to lose to the Government; a pointer to why 58 per cent of those in TV3's poll said Cullen should be sacked if he did not deliver tax cuts tomorrow and 66 per cent wanted the top 39 per cent tax rate lowered.
Cullen put up his usual counter by saying the TV3 poll hadn't asked the right question, which would be to ask people if they wanted a substantial tax cut that pushed up mortgage rates or led to cuts to health and education spending.
But people are probably sick of hearing this rote response from the Finance Minister.
Most know Labour has been on a significant spending binge since it came to power in 1999. But the windfalls from the growing economy are going only one way: directly into the Government's pockets, not to our increasingly cash-strapped populace.
The CIS will no doubt be labelled a "right-wing" think tank for having the temerity to expose Cullen's tax heist.
But it does suggest some useful policies to tackle Government spending like introducing sunset clauses on spending programmes and simply requiring governments to return any excess tax (which is the basis of Budget surpluses - or revenue that comes in above forecast projections) directly to taxpayers.
This rather novel suggestion may not impose the long-term disciplines that come from embedded tax rate changes.
But it would provide some insurance against an economic downturn in that, if the economy slipped, the tax impact would not be so drastic.
And it would effectively put taxpayers in a similar position to shareholders in companies that build up excess capital.
It's not directly analogous but returning excess tax through tax rebates geared to overall income levels would be worth exploring.
This would lead to considerable lumpiness in earning streams as any return of excess tax would probably be an annual one-off event.
It surely is just the sort of option that a risk-averse finance minister such as Cullen might just consider.
But people will have to wait until next year to see his reaction.
