The state Council on Revenues predicted Wednesday that private-sector economic growth in Hawaii would offset the drain from federal budget cuts due to sequestration, boosting the state’s revenue forecast.

The council projected that state tax collections would grow by 6.7 percent this fiscal year, up from 5.1 percent from the last forecast in January, and a $77 million increase for the state. The council estimated 7.3 percent growth for fiscal year 2014, up from 6.8 percent, for a $108 million increase.

"The overall picture is the hit from sequestration is too small to really affect our projections," said Richard Kahle, chairman of the Council on Revenues.

The Abercrombie administration had asked the council to factor the potential impact of sequestration into the forecast. Kalbert Young, the state’s budget director, said the administration had hoped the council would have been more deliberative.

The state has set aside $25 million in each of the next two fiscal years to respond to federal budget cuts, but the extent of the cuts is still unknown.

"It looks like the council feels that the impact is somewhat muted or maybe will be offset by what they see as strengths in the local economy," Young said.

The upgraded forecast will give state lawmakers drafting the state’s two-year budget more discretion to consider new spending. But House and Senate leaders said Wednesday that they still plan to take a cautious approach.

In addition to the uncertainty over federal budget cuts, lawmakers have to keep in mind the possibility of new collective bargaining agreements between the state and public-sector labor unions.

Lawmakers also want to make a sizable down payment on the massive $16.3 billion unfunded liability in the public worker health fund, which could soak up cash available for new state programs or tax incentives.

The House approved on Wednesday its draft of the budget, which calls for $11.5 billion in spending for fiscal year 2014 and $11.6 billion for fiscal year 2015. The House draft is about $600 million lower than Gov. Neil Abercrombie’s budget request, yet higher than the $11.2 billion approved for this fiscal year.

"The approach that we have taken is a conservative approach, and that has not changed, and that will not change," said state Rep. Sylvia Luke (D, Punchbowl-Pauoa-Nuuanu), chairwoman of the House Finance Committee. "I think this is still the time for us to look at the budget in a responsible way, for us to look at what the core services of government (are), and for us to re-evaluate what we’re here for."

Young said he hopes lawmakers will reconsider Abercrombie’s budget request given the better revenue forecast, although he cautioned that new spending should be tempered.

State Sen. David Ige (D, Pearl Harbor-Pearl City-Aiea), chairman of the Senate Ways and Means Committee, which will prepare a Senate budget draft, said senators want to be careful about increasing the size of government. He called the unfunded liability in the public worker health fund the "16 billion-pound gorilla in the room, and that doesn’t go away."

The House draft of the budget has $100 million in fiscal year 2014 and $105 million in fiscal year 2015 to address the unfunded liability, while a separate Senate bill could put the state on track to eventually put aside about $500 million a year, the amount budget analysts believe is necessary.

But Ige said the upgraded revenue forecast does relieve some pressure on lawmakers and puts tax incentives — such as expanded film production tax credits — into play this session.

"Obviously, if it does create business opportunities, that’s a good thing," he said. "We all believe that diversifying the economy is important."

State tax collections were up 12 percent through the first eight months of the fiscal year, according to the state Department of Taxation, a figure inflated by a lag in processing tax refunds. The department advised the Council on Revenues that the figure is closer to 7.9 percent growth, which influenced the council’s decision to peg growth at 6.7 percent through the fiscal year ending in June.

Some on the council warned that the state has not seen the full impact of the rush by consumers to claim solar tax credits before new restrictions took effect in January. The impact will likely appear in tax filings during the final months of the fiscal year.

But others suspect that the forecast was too low. The council has often trailed the economic cycle, missing the extent of revenue growth during expansion and the depth of the decline during a downturn.

"We’re likely to be under-forecasting, like we did last year," said Christopher Grandy, an associate professor of public administration at the University of Hawaii at Manoa.