Week in Politics: Biggest issue now is which party best money manager

No politician worth his or her salt would ever say it. But if ever there was an election to lose, then next month's is starting to fit the bill.

There has been a sense of the unreal about this week's mayhem on Wall Street, the collapse of previously venerable financial institutions, George W. Bush's dire warnings about the American economy and Washington legislators' seeming inability to heed them.

New Zealanders are struggling to come to grips with the enormity of it all - and the likely scale of the repercussions locally.

Because, make no mistake, there will be repercussions.

Politically, the sighting of Four Horsemen of the Economic Apocalypse riding down Wall Street on Monday is having a profound though not immediately visible effect on the election campaign here.

While the economy has been in technical recession, it had been the accepted wisdom that it was resilient enough to bounce back quickly.

Both major parties had been working on the assumption that it would be acceptable to run cash deficits for two or three years before renewed economic growth brought a return to the sunny days of bumper surpluses.

That optimism has evaporated as the bad news has kept coming out of America and the credit crunch starts to bite here.

Voters now have a bad case of the economic jitters.

This coming Monday's release of the Treasury's pre-election fiscal update has taken on even more importance.

Before its release, the election campaign has gone off the boil.

No-one can electioneer on a serious basis until the contents of the update - otherwise known as the "Prefu" - have been digested.

The Prefu - required by law so voters are not hoodwinked about the true state of the nation's accounts - is not going to make for happy reading.

Even less so, given its forecasts were made before the latest bout of money- market turmoil.

At the last election, the document should have come gift-wrapped.

No sooner had Treasury announced that tax revenue was likely to be more than $700 million higher than earlier forecast, than Labour had spent the windfall by extending its Working for Families income-assistance programme to a further 60,000 families.

This time, any kind of wrapping paper would be an extravagance.

The Prefu - to quote Michael Cullen - will reveal a "quite significant" deterioration in the Government's books.

The cash deficits of around $3.4 billion forecast in the May budget for the next three years are going to be considerably larger thanks to the current recession, pushing government debt levels above Dr Cullen's targeted maximum of 20%.

That the numbers aren't pretty is the subject of some perverse glee in Labour's ranks.

Labour believes they put National in an awful quandary.

If National unveils tax cuts which are significantly higher than the ones Labour is phasing in over four years, then the sorry-looking numbers in the Prefu will make National look reckless.

If National has adjusted its tax cuts to accommodate the worsening of the Government accounts, then there will be little difference between its package and Labour's.

National will disappoint on its one crucial point of difference.

Dr Cullen and Helen Clark have been playing up the latter scenario by suggesting National has overpromised on tax and will end up under-delivering.

Dr Cullen has been insisting that when John Key initially flagged an extra $50 a week for someone on the average wage, he meant that was on top of Labour's cuts, which start at $16.54 and rise to $32.12 in April 2011.

That would mean someone on the average wage getting more than $80 a week extra once National's cuts had been fully phased in.

National insists that Mr Key always meant National's cuts would take in those made by Labour, meaning the difference between the two parties is more like $18 than $50.

Miss Clark this week seized on the difference, questioning why anyone would want to change the government to get an extra $18 a week.

If anything, National has likewise been playing down expectations.

It will be more generous than Labour, but seemingly less so than it might have earlier wanted to be.

However, National believes it long ago won the argument over tax cuts. Labour capitulated.

There is little point reviving that argument, as voters have already "banked" the money in their minds and are not going to hand out fresh plaudits.

Voters are now more concerned about the economy and are accordingly judging which of the two major parties is the more reliable economic manager.

The tax debate is no longer about extolling the virtues of tax cuts in isolation.

They now have to be sold as a tool of wider economic management.

That is partly why National has brought forward the release of its tax policy to next Wednesday.

This week's market chaos has given National a much-needed opportunity to shift the election campaign's focus on to the economy and away from Labour's theme of whether National can be trusted.

However, National had little choice but to bring forward the unveiling of its tax cuts.

The party had initially planned to release the policy during the early stages of the four-week formal campaign, which will be launched by Miss Clark and Mr Key at separate rallies next weekend.

However, with the Prefu numbers looking so bad, Mr Key would in the interim have been constantly fending off questions on whether National's tax cuts were still affordable.

It would have left a big gap in his campaign launch speech as well as making him vulnerable in the first one-on-one leaders' debate with Miss Clark the following Tuesday.

Now, Mr Key will be able to stress how the tax cuts fit into National's five-point plan for lifting economic performance.

However, National's credibility still hinges on him and Bill English demonstrating the cuts are affordable.

The word is that it will be obvious from the costings it releases exactly where National is getting the money to fund the difference between its package and Labour's.

It will not be coming from extra borrowing, although Labour will still claim that is the case.

National has been quietly putting it around that it is talking about having different spending priorities than Labour in a couple of areas which have some bearing on economic circumstances.

While there is no hint of what that might be, Labour is speculating that it means significant reductions in KiwiSaver tax credits to employees and employers.

National could argue it is better to divert some of that money into tax cuts to prime a flagging economy rather than having it stashed away.

National is going to make changes to KiwiSaver, but says they will be modest.

With more than 800,000 people now signed up to the scheme, any reduction in entitlements will be extremely risky politically.

National has looked anything but willing to take those kind of risks.

- John Armstrong is The New Zealand Herald political correspondent.