19 May 2011

Budget cuts to get books back in order

10:58 pm on 19 May 2011

The Finance Minister describes it as not a typical election year Budget. Instead, Bill English says it is a responsible Budget and will get the National-led Government's books back into surplus by the 2014-15 fiscal year - a year earlier than forecast.

Radio New Zealand's political editor Brent Edwards analyses the 2011 Budget.

National has put some spark back into this year's election campaign by cutting the workplace savings scheme KiwiSaver, Working for Families and interest-free student loans.


As well, it confirmed on Thursday that it would proceed with plans to partially privatise four state-owned energy companies and sell down its shareholding in Air New Zealand. Those sales and spending cuts are expected to reduce the Government's need to borrow.

Mr English says this year it is borrowing $380 million a week, but that will fall to $100 million a week next year. In 2014-15 the Government will begin repaying debt.

But it might come at a cost to National. While the party is still well ahead in opinion polls, the spending cuts and partial asset sales will put its political popularity at risk.

Whichever way it sells the cuts to KiwiSaver, the 1.7 million people currently in the voluntary savings scheme will be worse off once the cuts come into effect.

And the Labour Party argues many middle-income families will be further penalised by cuts to Working for Families tax credits, although the Government estimates 280,000 low-income families will be better off.

Which party wins that argument is likely to gain some political traction during the rest of the year ahead of the election.

Economic plan under scrutiny

Meanwhile, the Government's economic management will also come under scrutiny. While it's forecasting a quicker-than-expected return to surplus, that's based on predictions of faster growth.

Much of that growth, though, is driven by rebuilding Christchurch. If that construction work is stripped out of the figures, then economic activity looks flat for the next three years.

Nor is there any substantive evidence in the Budget to convince those - including the business sector - who accuse the Government of having no real economic plan or strategy.

This Budget has essentially been about cutting spending to get the books back into order.

And not all the savings are substantive. Some have not been properly identified yet, with government departments being left to make the cuts.

The government sector, including schools and hospitals, face cuts of nearly $1 billion over the next three years. Those cuts are likely to lead to further job losses as the wider State sector finds way to live within its means.

The Treasury predicts, though, that all the cuts in the Budget will keep net debt as a proportion of gross domestic product (GDP) below 30% and that it will fall from 2014/15 as the Government begins repaying its debt.

For the time being, that has convinced international ratings agency Standard & Poor's to retain New Zealand's AA+ rating, but it has not removed the country from its negative outlook.

The agency is still to be convinced that the Government has got the economy back on a sustainable footing - despite the cuts it has made.

Cuts to KiwiSaver, but debt forecast to get worse

Bill English argues the cuts to KiwiSaver will lift national savings. He says there's no sense in the Government having to borrow to subsidise KiwiSaver by more than $1 billion a year.

By halving the tax credit paid to KiwiSaver accounts and by taxing the employer contribution, the Government will save hundreds of millions of dollars a year.

It can then use that to reduce its deficit and debt. At the same time, it is raising the minimum contribution for workers and employers from 2% to 3%.

Mr English says together, that will lift savings.

But this is likely only if people continue to both join and contribute to KiwiSaver. And figures in the Budget make it clear the country's net financial position will continue to get worse after this year.

New Zealand's net debt to the rest of the world falls this year to 78.6% of GDP, mainly the result of reinsurance money flowing into the country after the recent two big earthquakes in Canterbury.

But from next year the debt position is forecast to get worse, despite the initiatives in this Budget to lift national savings. The Treasury says it will climb to 85.3% of GDP in 2015 - hardly a sign that national savings are improving.

Within the Government forecasts there are further problems. Its return to surplus is based on a Treasury forecast of tax revenue which, over five years, is nearly $4 billion higher than the Inland Revenue's forecast.

Focus now on election

As always, when it comes to the Budget figures, much will depend on how robust the forecasts are. For National, though, it simply needs to get to the election unscathed.

So potentially unpopular cuts to KiwiSaver and Working for Families are being rushed through Parliament under urgency - even though the earliest some of the changes come into effect is April next year.

Urgency means National avoids the scrutiny of a parliamentary select committee and denies the public the opportunity to have their say.

But Prime Minister John Key says people can pass judgement on the Budget when they vote on 26 November.