18 May 2011

The Budget - National's blueprint for election

3:59 pm on 18 May 2011

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

In 2008 when the then Labour Finance Minister Michael Cullen delivered his last Budget, he introduced tax cuts worth $10.6 billion over four years.

Dr Cullen said a decade of strong surpluses meant the Government was able to offer a programme of personal income tax cuts without putting the economy at risk. It would mean, though, that the operating balance before investment gains and losses would fall close to zero for a number of years.

Three years later, and the picture is dramatically different as National Finance Minister Bill English delivers his third Budget on Thursday.

If Dr Cullen had his time again, he might not have cut taxes in 2008 after having resisted earlier calls for tax cuts.

In this Budget, Mr English will announce an operating deficit - excluding gains and losses - of close to $17 billion for the financial year to the end of June.

It will be New Zealand's largest deficit ever, roughly the equivalent of 8% of gross domestic product (GDP), the measure of what the country produces each year.

Since National has been in government it has run consecutive deficits and public debt has risen. Net debt as a percentage of GDP had dropped to under zero but is now heading toward 30%.

Bill English says if the Government was not taking the steps it is in this Budget, net debt would reach as high as 34%. But he remains confident initiatives in the Budget will keep net debt as a proportion of GDP below 30%.

The Government, of course, blames Labour for leaving the finances in a mess. Despite years of surpluses, by the time of the 2008 election - just months after the Budget - the Treasury was forecasting years of deficits as a homegrown recession here and the global financial crisis hit the public finances.

In turn, Labour accuses the Government of mismanaging the economy and not doing enough to get it growing again.

Labour Party leader Phil Goff repeatedly points to Prime Minister John Key's ambitious claim in 2009 that by the end of 2010 the country would be coming aggressively out of recession. It never happened.

But John Key says this Budget will outline optimistic forecasts for growth, including predicting wages will rise faster than inflation over the next three years.

And there is cause of optimism. After the shocks of the global financial crisis and two recent earthquakes in Canterbury, prospects are looking better.

An expected, economic upturn after three years of hard times will be helped by a boost from the Rugby World Cup but, more importantly, from the rebuilding of Christchurch.

Billions of dollars of reinsurance money will flow back into the country to pay for the rebuild. The Government will also spend up large, with more than $4 billion of its forecast deficit for this year due to the quake alone.

Strip out that fiscal impact next year and add in the expected cyclical recovery and next year's deficit, without any change to government policy, will be much smaller.

No new spending

Mr English says without spending cuts the operating balance would come back into surplus in 2016-17, but the Government intends getting there much sooner.

So that requires tightly controlling government spending. There will be no new spending in this Budget.

That is not to say there will be no additional spending. More children in classrooms, more patients in hospitals and rising welfare costs will still push up government spending.

The Government, despite cutting, will still spend more next financial year than it did this.

Mr English has also promised that within the Government's overall Budget - and it expects to spend $70 billion this year - there will still be new spending for health and education.

That new spending will come from cuts elsewhere and expect also transfers of money within those portfolios.

KiwiSaver now too expensive

So where else will the Government cut?

The Prime Minister has already announced the KiwiSaver tax incentive will be cut and that smaller cuts will be made to the Working for Families tax credits and interest-free student loans.

He says the greatest savings will come from KiwiSaver which, because of its success, has become too expensive for the Government. As well, individuals and employers will be expected to pay more into KiwiSaver accounts.

John Key says that means the Government will cut its own debt while at the same time promoting more saving by individuals and employers.

It is, however, an about-face on National's pre-election promise and critics warn it could undermine national savings by again shaking people's confidence in retirement savings.

If KiwiSaver can be changed on a political whim - this will be the second time National has tinkered with it - why bother saving?

Mr Key dismisses the criticism and denies he's breaking an election promise, saying the changes will only take effect after the election in November so voters will be able to have their say.

Delicate balancing act

The Government is running a careful balancing act both economically and politically.

If it cuts too far, it risks sending the economy back into recession. Or at the very least, encourage the emergence of a two-speed economy in which the construction industry, particularly involved in the Christchurch rebuild, does well but activity elsewhere remains subdued.

Politically, it has been softening voters up for what to expect in the Budget.

The Government clearly expects talk of tough times and its continued references to the impact of the Canterbury earthquakes will convince voters the strategy National is following is the only prudent way of dealing with the country's economic and financial woes.

As well, cuts announced in the Budget might not be as drastic as some fear, adding weight to Mr Key's line that his government is a moderate one, steering a middle course between the extremes of both the Right and the Left.

Real debate starts for Labour

For the Labour Party - still a dismal second to National in the opinion polls - the Budget marks the start of the real debate. Until now, it has had to respond to winks and nods from the Government about what will be in the Budget.

From Thursday, there should be strong debate about the future of KiwiSaver, Working for Families, interest-free student loans, asset sales and the broad thrust of economic policy.

But Labour will need to spell out clearly what it might do. It criticises proposed spending cuts at the same time as vilifying the Government for being so deeply in debt.

As well, finance spokesperson David Cunliffe says it would not shy away from making the hard decisions on spending cuts. Where would it cut?

And on the revenue side, how much will it raise taxes to help reverse National's two rounds of tax cuts?

The Green Party continues to argue for a temporary tax - it would last about five years - to pay for the rebuilding of Christchurch. But it also wants to introduce a capital gains tax to raise more revenue and take the steam out of the housing market.

As the economy continues to falter, despite some signs of recovery, the Budget will not be the end of the debate on economic management.

This effectively will be National's manifesto for the election on 26 November. Mr Key - by promoting changes to KiwiSaver, Working for Families and interest-free student loans - is putting some of his political capital on the line.

While National is so far ahead in the polls, a negative public response to the Budget is unlikely to be fatal.

But it could at last give Labour a glimmer of hope.