KEY POINTS:
This is Finance Minister Michael Cullen's week.
That time of the year when our infamous Scrooge unveils yet another astonishing Budget surplus then performs his ritualistic dance on the head of a pin to justify why he needs to keep over-taxing New Zealanders instead of returning the state's
taxation windfall through direct personal tax cuts.
Since the Labour Government came into power in 1999 it has hiked the top personal tax rate to 39 per cent and pocketed 100 per cent of the benefits as taxpayers move up to higher taxation levels on the back of wage rises.
The Government has also pocketed a huge dividend from the corporate sector by holding the company rate at 33 per cent rather than reducing it to 30 per cent to be competitive with Australia.
The upshot is that Labour is now pulling in an extra $20 billion a year in tax payments - nearly 40 per cent more in real terms than when it took power.
That factor, coupled with the news that Cullen will once again post a Budget surplus for 2006-2007 that is more rosy than his initial forecasts, will add fuel to the clamour for immediate tax cuts.
But despite the competitive pressure from Australia where Treasurer Peter Costello has now unveiled four cuts to Australian's personal tax rates - adding yet another incentive to New Zealanders to go to Australia and find work - Cullen is not likely to reduce tax rates here to such an extent.
This time Cullen will defuse the usual ritualistic criticisms by introducing personal tax trade-offs geared towards increasing personal savings.
Cullen is taking a two-pronged approach.
The Budget's tax trade-off will not include normal tax cuts as we understand them: A reduction in personal taxation rates putting more money back into the pockets of workers and investors. At least (not) in the short-term.
What Cullen will do is stipulate that to gain a tax rebate or trade-off in overall personal taxation taxpayers will have to deposit their tax benefit into a KiwiSaver (or similarly approved retirement savings account) and lock it up for future retirement use.
He will promote this as a prudent non-inflationary move designed to increase the overall New Zealand savings pool.
The proposal will play out on several levels.
If the savings pool is increased, more funds will accumulate to be invested into the stock market or used to retain more of our companies in New Zealand ownership.
This is likely to be introduced before the next election.
The business sector will finally get a reduction in the overall corporate rate to 30 cents in the dollar to match the Australian rate and a bevy of changes to spark increased research and development, skills training and export market development.
But the Budget is also about third-term politics.
Labour is well behind National in the opinion polls.
Most voters understand that National will deliver direct tax cuts if it wins next year's election.
Opposition Finance spokesman Bill English, and his boss John Key, are fudging the degree to which a future National government might be able to deliver deep cuts along the lines promised at the 2005 election.
They have put a caveat over this by saying the level of cuts a National government could deliver depends on the state of the New Zealand economy and the overall fiscal situation.
Labour is not similarly bound.
Cullen's Cabinet colleagues have been putting pressure on the Finance Minister to signal outright tax cuts, or, changes to overall taxation thresholds.
The word is that Cullen may signal a post-election reduction in personal taxation by increasing the thresholds at which the various rates kick in.
Not all the details will be released on Thursday.
But if Cullen signals Labour is finally ready to reduce direct personal income taxation it will take the wind out of National's sails.
