Finance Minister Bill English revealed the figure yesterday in a scene-setting speech for his May 20 budget.
Added to $1.1 billion of "new money" in the budget, it will give the Government nearly $3 billion to spread around big-spending areas like health and education.
Mr English said ministers had found that across the public service there were many ways to provide the same services with less money "and in some cases drop off services that aren't effective".
Labour's finance spokesman, David Cunliffe, said National's previous definition of "lower quality services" had a devastating impact on adult community education classes and the quality of life of thousands of New Zealanders.
"On past experience, what he means by lower quality spending is savage cuts to training incentive allowances to help women get off the DPB," Mr Cunliffe said.
"In Mr English's own electorate, thousands of elderly people are having the home support they rely on cut so that rich earners like Mr English can pocket an extra $300 a week."
Mr Cunliffe said the income tax cuts in the budget would be paid for by funding reductions.
"All these services are apparently of lesser priority than Bill English's rich mates."
Mr English didn't give away any budget secrets in his speech to the Wellington Regional Chamber of Commerce, although he later told reporters business tax cuts weren't off the table and the Government was still thinking about it.
He said his second budget would focus on building higher and sustainable economic growth now that New Zealand had come through the recession in fairly good shape.
"We still face some economic headwinds -- the global recovery remains fragile, our high exchange rate against the US dollar and the pound is hampering exporters, and New Zealand households are over-extended," he said.
