Budget may not be all doom and gloom

Finance Minister Bill English faces a real test of character on Thursday when he releases his first budget of the new National-led administration.

Expectations are this will be labelled one of the most important budgets for the New Zealand economy in years - not for what it gives out but for what it takes back.

Faced with a dramatic decline in revenue and a huge expense burden, the budget will be more about good management than providing additional relief to households and businesses.

Commentators contacted by the Otago Daily Times were unanimous that tax cuts and New Zealand Superannuation Fund contributions would be delayed and future operating spending allowances would be reduced.

"For a new government, the first budget is always important as it provides the platform for delivering election promises and changes in policy direction for future years," Westpac chief economist Brendan O'Donovan said.

"But this year, more than ever, the budget stakes are high. Mr English will need to convincingly demonstrate how the Government will rein in spending so as to avoid a credit-rating downgrade and ensure future generations are not saddled with debt."

Achieving that would not be easy.

Government revenue was falling fast as the global downturn hit the domestic economy hard, he said.

Meanwhile, the legacy of the previous Labour-led government's big spending was well-entrenched expense growth, which was rising, Mr O'Donovan said.

It would take time and more than a little fiscal discipline to turn that spending tide around.

WHK Taylors taxation principal Scott Mason said that in the face of the worst recession in decades, if not generations, everybody was preparing for the worst-case scenario.

"Interestingly, in the past few weeks, government officials - including Prime Minister John Key - have gone on record saying the budget will not be the doomsday event that many believe.

"This is an unusual step, as even in relatively good times governments often try to talk down a budget to maximise its political impact on the day."

New Zealand risked losing its AA+ foreign currency rating and AAA local currency long-term rating from Standard & Poor's if the Government increased debt levels too much in the budget, he said.

The estimated cost to New Zealand of such a downgrade was around $600 million a year in extra interest payments to compensate for the increase in perceived risk in lending in New Zealand due to the decrease in credit rating.

"This is something the Government must avoid."

The budget was expected to be a balancing act between many and often competing aims.

The most obvious example would be the tax cuts promised during last year's election campaign and legislated for late last year.

It seemed certain the tax cuts would be postponed for about two years.

Given that tax cuts reached right to the core of three of the governing parties' ideals, such a step would not be taken lightly.

However, most would agree that tax cuts at the moment would be reckless, Mr Mason said.

Deloitte Dunedin partner Steve Thompson said governments around the world had been trying to reduce the effects of the recession through fiscal stimulus plans.