Walking the tightrope

Taxpayers were teased, as usual, in the weeks leading up to yesterday's Budget by random government statements on some of its spending choices: $20 million over three years to fund a seismic survey programme to encourage oil and gas exploration; $50 million over three years on the national cycleway project; $24 million for planning for additional beds at North Island prisons; $36 million in subsidies over the next three years for the biofuel industry; $103.5 million on maternity services over the next four years; $40 million next year to assist social service agencies; $2.3 million for administrative and collection costs for the new $50 offenders' levy; $10 million for Taser stun-guns; $300 million for a home insulation fund over four years - leaving not much new spending to announce.

The public was in fact being softened up to react less unhappily with all the gloom in the Budget - the reason for the unprecedented warning some weeks ago from the Treasury Secretary that it would be the most critical such document since the Lange Labour government confronted the 1984 economic and currency crisis.

A decade of debt-funded private and public consumption left Bill English with a bleak picture to describe and he did not resile from the task.

The country must balance the economy in the longer term, he said, rather than rely as it has (and must continue to do so) on "foreign lenders to pay our bills".

It is no accident that the keen foreign interest in his Budget has drawn some comment since an influential credit rating agency, Standard & Poor's, has not been shy in making clear its expectation that Mr English would have to produce a plan to achieve operating surpluses over the next three to five years - something the minister has nevertheless been at some pains to warn was quite unlikely.

The role international lenders play in keeping the New Zealand economy afloat is all too often overlooked by the general populace, but the fact is our rapidly escalating public debt is going to cost a great deal of money in interest payments for very many years.

Mr English's focus, he said, was to get debt under control; as every householder knows, the way to do that is to increase earnings, stop spending money and sell assets to raise cash.

Governments have two additional means: they can increase taxes or they can borrow more (usually at higher interest rates).

First up for Mr English was whether to continue with the election promise of a $4 billion, three-year programme of personal tax cuts.

We had been softened up for the suspension of this, for some weeks ago the Prime Minister said they were now unaffordable.

Indeed they are, making nonsense of his Treasurer's confident declaration last year that National's economic package including the tax cuts would be "credible", would take account of the changing international climate, and would not require any additional borrowing.

Well, we trust not many people believed then that cutting taxes would increase government income in a recession, especially when the absolute necessity to reduce the rate of increase in government spending was being touted almost in the same breath.

The decision to suspend contributions to the New Zealand Superannuation Fund, possibly until 2020, might also be added to the Prime Minister's earlier signalling of the "notable" extent of savings found inside government departments.

Furthermore, the proposed restraint on future new state spending, to be limited to $1.1 billion next year and to a rate of 2% in the following years, makes certain there will be little honey in the general pot for the next five years, at least.

But Mr English generously left the rate of superannuation alone, and did not, as was the case in Australia, raise the age of future eligibility for the nation's 40-somethings.

The Clark government planned - had it won the election - to cut new spending in its 2009 Budget to $1.75 billion, of which $750 million would have been for health services.

Mr English has had even less room to manoeuvre and indeed has limited new spending to $1.45 billion, but will still spend that $750 million on health services.

There is money for education, research and development and for 600 more police (half of them in Manukau) by 2011; continuing support for Kiwirail and the ultra-fast broadband.

Keeping jobs or creating new ones as the recession deepens and the rate of unemployment grows remains the priority and is why National has decided to maintain Labour's benefits, including Working for Families, as well as the elements of the Government's February stimulus package for business.

Though an extremely - but justifiably - cheerless document, the new Government's first Budget is characterised by its pragmatic political considerations (with its nod to the support parties) and its emphasis on short-to-medium term stimulation in areas of capital spending where there is some confidence jobs can be retained.

Most people will be happy benefits have been retained, and they certainly should be happy that state spending is to be curbed.

They should also be budgeting just as carefully as Mr English appears to be: with household debt increasing by 51% since 2004, and with $168 billion of net debt currently owed by the country to overseas lenders, the halcyon days of recent memory are decidedly over.

They will not return until national productivity improves, debt is paid down, our export trade improves and we pay our own bills.

Mr English is walking a tightrope, and so are we all.

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