John Key has indicated the Govt is open to reform which trades personal income tax cuts for some form of tax on investment property.

A new PM defied the odds as the Govt struggled to deal with the worst recession in decades, and Labour played catch up politics.

Prime Minister John Key says there is "light at the end of the tunnel", after half-yearly accounts painted a better picture than the Budget.

The economy's prospects look a lot brighter in the Treasury's latest forecasts than they did when it was preparing the Budget in April.

Treasury now believes unemployment will peak at 7 per cent, less than what it predicted when the recession first hit, John Key told Parliament today.

Many risks still threaten the sustainability of economic growth, Treasury said today.

The investment portfolios of ACC and the New Zealand Superannuation Fund continued to prop up the government's books as corporate and personal tax revenues dwindled, says Treasury.

The tax system has deteriorated beyond the point where tinkering and tweaking are enough, was the message this week.

No one is underestimating the political difficulties in making substantial change, writes Fran O'Sullivan.

Tax reform and a much tougher approach to Govt spending will be necessary if NZ is to narrow the income gap with Australia, Treasury says.

Treasury released a paper yesterday arguing that cuts to Government spending would take pressure off interest rates and the dollar.

Treasury has painted a bleak picture of an under-performing New Zealand economy and outlined some tough choices for the Government.