Finance Minister Michael Cullen today edged ever closer to confirming tax cuts in 2008 as Treasury reported another strong surplus for the last financial year.

The final Crown accounts recorded a headline operating surplus of $11.5 billion in the 2005/2006 financial year.

This was slightly misleading as $1.8 billion of this was due to a one-off change in the way the tax take was recorded.

The accounts showed that after adjustments for all accounting changes and revaluations, the Government recorded an $8.6 billion surplus with a cash surplus of $3 billion after capital expenditure and investments.

Dr Cullen said the operating balance after revaluations was the best measure and this was running at 5.5 per cent of GDP, which was slightly lower than last year's equivalent of $8.8 billion or 5.9 per cent of GDP.

He said those who had called for tax cuts from this money would have had to borrow to pay for contributions to the New Zealand Superannuation Fund and other investments.

It would result in 20 years of work to reduce debt being "blown" in five years unless it was also proposed to cut spending by the same amount.

Dr Cullen said those who argued last year's surplus could pay for future tax cuts were not being logical as they had to be funded from forgoing future revenue.

Reducing taxes now could see New Zealand's credit rating downgraded and this could bring higher interest rates, he said.

If tax cuts fuelled spending, then the Reserve Bank could also push interest rates still higher.

Despite pouring cold water on the idea of tax cuts now, Dr Cullen was warmer to the idea of tax cuts in 2008, when the next election is due to be held.

Dr Cullen has said for some time the review of business tax under way could have a flow on effect to personal tax rates.

Lowering the corporate tax rate would create a differential between the middle personal tax rate and extend even further the gap between the top tax rate and company tax.

So far the smoke signals from the Beehive have been that ministers are looking at a cut to the company rate and this would mean either cutting the personal rates or lifting the thresholds at which they kick in.

There has been increasing disquiet that more and more people are being caught by the top tax rate of 39 cents as incomes rise and Dr Cullen is also considering inflation indexing tax thresholds from 2008.

The review under way is also looking at other changes to business tax, such as tax breaks for exporters, which will also cost money.

"We are still not clear at this point what headroom is available going forward," Dr Cullen said.

Conflicting predictions

Inland Revenue is forecasting far larger tax takes from 2008 onwards than Treasury and there was no indication yet which was correct.

Dr Cullen said the situation would become clearer following Treasury's December forecasts and when decisions had to be made around March.

Despite the uncertainty about how much money he would have to spend or forego in 2008/2009, the door was firmly ajar for an election year tax cut.

"Tax changes are likely to occur on April 1 2008, the extent of those cannot be predetermined, the phasing of those cannot be predetermined."

He said it was a pointless exercise to speculate about how much tax rates could be cut or how they might be designed.

Dr Cullen did indicate some of the constraints decisions would be made under.

He said if he maintained debt at current levels it would be necessary to run operating surpluses of around 3 per cent of GDP (approximately $5 billion) to ensure debt levels did not increase.

Some more money would also be needed to pay for increases in spending above the $1.9 billion already set aside in future budgets before taxes could be cut.

National's finance spokesman John Key said the $11.5 billion showed that every person in New Zealand had been overtaxed by $2875.

Mr Key said the surplus proved that National's promised tax cuts at the last election were affordable.

Business groups also called for tax cuts to be brought forward, while students wanted a lift in tertiary education spending and a cut in fees.

Wellington Regional Chamber of Commerce said today's announcement strengthened the case for reductions in both personal and company tax rates.

Charles Finny, its CEO, said: "Businesses appreciate the importance of fiscal responsibility. However, the size of the surplus shows that tax cuts are affordable and should be implemented as soon as possible."