National's first round of tax cuts will be reflected in pay packets from tomorrow, but Prime Minister John Key has given his strongest warning yet that cuts in the next two years may have to be shelved.

National campaigned on a three-year programme of tax cuts, but a sharp fall in revenue and rising debt levels have caused the Government to rethink its plans beyond this year.

"It would be my preference that they would go ahead, but we need to ensure that they are affordable in light of the economic conditions that we might face in 2010-2011," Mr Key said yesterday.

"I have to acknowledge we live in difficult times ... At this point it's my expectation they will go ahead."

Planned cuts in 2010 would lower the top rate on earnings above $70,000 from 38 cents to 37 cents and push the threshold for the 33 cent rate up from $48,000 to $50,000.

The 2011 cuts would lower the rate on income between $14,000 and $50,000 from 21 cents to 20 cents in the dollar.

However, Finance Minister Bill English has pledged to bring ballooning Government debt over the next three years back to prudent levels, to avert a credit rating downgrade. That could see contributions to the superannuation fund wound back and the postponement of the tax cut programme.

However, tomorrow's cuts will go ahead, fattening the wallets of about 1.5 million earners.

They are skewed toward the better paid, so those earning less than $40,000 a year, who are already receiving state assistance, will get nothing.

A $10 a week earner rebate will be offered to those who are not getting a benefit, superannuation or Working for Families. But that is all clawed back at an income of $48,000.

Mr Key said many would receive about $20 extra from this week. "I think that's going to provide some stimulation into the economy and that's important. It's coming at an important time."

- © Fairfax NZ News

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