KEY POINTS:
National has conceded that Labour's move to commit billions of dollars to spending promises in election year could affect its options for tax cuts.
National's deputy leader, Bill English, yesterday said public expectations around tax cuts were high, and his party had to be careful about what "time bombs" Labour might be leaving in the Government's accounts.
Labour has already this year announced various spending commitments totalling $4 billion, and Finance Minister Michael Cullen has suggested National will find very little money to spend when it looks at the Government's updated books in tomorrow's Budget.
Mr English said National was committed to tax cuts, but when asked about Labour's spending he appeared to admit there might be some pressure coming on National's plans.
"If they go down the track of further reckless promises like the purchase of Toll, that might squeeze it up a bit," Mr English said. "But we're pretty committed to tax cuts."
National is convinced Labour is trying to make life difficult for it by tying up large chunks of money in future years and leaving little room to manoeuvre for bigger tax cuts.
Labour could then argue National would have to either raise debt or cut spending more dramatically than it has indicated in order to implement its bigger tax cuts or other new spending promises.
Complicating the picture further is the economic downturn, which is reducing Government revenues.
The political battle around tax cuts has been firmly back in the spotlight over the past fortnight as Dr Cullen prepares to deliver some in his ninth Budget.
He has ruled out several options - such as creating a tax-free threshold, paying a one-off 'social dividend', and tinkering with GST - which leaves only a few ways he could design cuts to meet his preference for equality.
It is possible Dr Cullen will choose to cut the bottom income tax rate and adjust the higher thresholds, because moving in that way would ensure the benefits are spread across income earners.
Lower- and middle-income rates and thresholds are where Dr Cullen's tax cuts are likely to be targeted.
But in a speech to be given to GreyPower in Auckland today, Labour's key support partner, New Zealand First, is understood to be likely to suggest Dr Cullen has got it wrong.
Leader Winston Peters favours a tax-free threshold for the first $5200 of income earned - something Dr Cullen has ruled out - and he is likely to tell GreyPower that he would have introduced that measure if he had been presenting the Budget.
Mr Peters is of the view that a tax-free threshold would be a tax cut everyone would benefit from, including married couples on New Zealand Superannuation, who would receive an extra $21 a week.
NZ First would also begin an incremental reduction in the level of GST on all products, Mr Peters is understood to be likely to say, beginning with a first-year drop of half a per cent.
The drop would then continue over the next two years until GST was down at 10 per cent.
Both National leader John Key and Mr English yesterday said they thought the tax-cut programme their party offered in 2005 was still credible in today's economic environment.
