Finance Minister Michael Cullen's ninth budget will have a tax cut package that he is confident will offer as much as possible without causing inflation.
NZPA understands that Treasury will predict inflation falling below the Reserve Bank's 3 percent threshold next year even factoring in the tax cuts to be outlined later today.
This is due to the current shock waves hitting the economy with Treasury likely to cut back forecasts of 2.1 percent economic growth in the year to March 2009 back to around or below 1.0 percent.
Unemployment is also likely to remain below 4 percent, signalling the overall robustness of the economy despite the blues being felt due to increasing costs and a stagnant housing market.
Dr Cullen is expected to highlight the budget as a responsible one balancing the demands for tax cuts with the need to bring inflation rates down.
One source said Dr Cullen would strongly argue that his budget would leave no room for National to credibly outbid Labour's tax cuts without cutting services or increasing borrowing.
Dr Cullen has hinted there could be an across the board lift in the thresholds at which people pay more tax.
Speculation around Parliament is that Dr Cullen will also cut the tax rate at the lower end of the scale as the centrepiece of the tax cuts.
This would meet his self-set test of fairness and equity, as it would deliver something to everyone -- even if it is very expensive.
Revenue would fall by around $1 billion for every $10 a week put into taxpayers pockets.
Dr Cullen has already ruled out the creation of a tax free income bracket and cuts to GST.
TV One News reported last night that the budget would boost the pension rate, possibly from the current 66 percent of the average wage to 68 percent.
That would be a sweetener for the politically powerful Grey Power lobby, and would be good for New Zealand First leader Winston Peters who has been promising to lift the income of older people.
One News also said it expected the budget would put up to $1.5 billion into the development of broadband, which would match the National Party's plans.
Dr Cullen indicated yesterday there would be less money to deliver cuts but they were less likely to be inflationary given tougher economic times.
He also ruled out a lump sum dividend payment saying there was "no basis" for speculation about one.
Dr Cullen said again that the budget would result in reduced expenditure in the future and any wider tax cuts will lead to cuts to services.
