Cover Story
The buck stops here
by Ruth Laugesen
With its first Budget, the National Government faces its biggest test yet. But can John Key and Bill English get it together to lead us out of the economic doom and gloom?
Bill English is absentmindedly rolling and unrolling a $20 note, back and forth, back and forth, as we talk in his Beehive office. By the end of the interview the once crisp, flat note is a tight little tube like a cigarette.
So what’s the $20 for? English looks at the green cylinder in his hand and grins.
“This is the last $20 from the Budget round. There’s 20 bucks left. And $15 million worth of bids [from ministers]. I kept it in my pocket so they couldn’t get it,” says English, and roars with laughter.
He pauses. He puts his hand in his trouser pocket.
“Actually that’s not true, I’ve also got another $10,” he says, pulling out another tightly rolled note.
English isn’t known for clowning. Ever since National has taken office, English has been playing dour, straight guy to more ebullient and sunny Prime Minister John Key. The relationship has under-currents of tension. At times, English acts as if he’s competing for authority with Key – the Prime Minister floats ideas in public, the Finance Minister shoots them down.
This week the odd political couple have their first major political test: delivering one of the most important Budgets in 25 years. After months of fluffing around with Band-Aids such as cycle tracks and nine-day fortnights, the Government must explain how it plans to steer the country through the shockwaves of the global financial crisis.
The Budget will marry Bill English’s sober economic home truths with John Key’s aspirational reach-for-the-skies claims that this recession could be a springboard for New Zealand to leap ahead of some of its rivals.
Although Key is keen to emphasise his caring, centrist credentials by promising to protect the social safety net, the Budget will reveal how far National is prepared to go in hacking back other government programmes.
The refrain from Bill English is the country’s books are in a mess, and spending needs to be reined in to avoid debt spiralling out of control.
And the numbers are nasty – by March, the deficit was running at $7.7 billion, $11 billion more than forecast as recently as October. The recession has punched a giant hole in government revenue, with the tax take down $2 billion in just nine months. And Labour’s legacy was a forecast for core Crown spending to rise 20% by 2013, from $63 billion to $76 billion.
First up, English says he has no further fiscal stimulus package up his sleeve to kick-start the economy. The Aussies may have just announced a spendup in their latest Budget, but we won’t be doing it here.
“The fiscal stimulus, as much as we can afford it, is in place. If you think about it, there’s been two rounds of tax cuts, there’s a significant infrastructure investment programme, and then there’s been a big drop in interest rates.
“The effect of that will roll on through the next couple of years, so it’ll help, but that’s all in place.”
The argument National has been running – and one Labour says it doesn’t buy – is that government debt is projected to be too high for a major financial stimulus package. Instead, gradually bringing debt down is the main focus of the Budget. Crown debt, which was a very healthy 17% of GDP at the time of the election, is forecast to rise with great speed to 45% of GDP in just four years’ time.
The debt story has two dimensions. By international standards New Zealand’s government debt is still low. But the economy as a whole is among the most indebted in the developed world. New Zealand has an exceptionally high current account deficit (at 8.9% of GDP) and net foreign indebtedness (93% of GDP). The housing boom fuelled that foreign indebtedness explosion.
Labour’s low government debt kept lender concerns at bay. But now, with government debt rising, New Zealand has caught the eye of international agencies, which are threatening to downgrade the country’s credit rating.
Ganesh Nana, chief economist for consultancy firm Berl, thinks the Government should tell the credit raters to get lost. “We want a Budget for New Zealand, not a Budget for the credit-rating agencies,” says Nana, pointing out these are the same agencies that gave AAA ratings to toxic housing securities.
“I would have thought their credibility is a little threadbare at the moment. I don’t see why we should follow their calls.”
Nana thinks Key, with his financial market nous, should be able to convince rating agencies the Government still has room to move. He says it’s crucial to lift the country’s dismal productivity by investing more heavily in infrastructure and skills training, as the Australian Government has done in its Budget.
The Government view, however, is that Crown debt needs to come down promptly as a buffer against any more unexpected international shocks. But bizarrely, in its recent announcement of a tax taskforce, the Government also said its target for the top personal tax rate has shifted from 33c to 30c – this is likely to mean less revenue in the future, adding to the widening deficit. English says the tax-rate change is a result of the coalition deal with United Future and Act.
The grim news from English is that the financial mess New Zealand is in will take many, many years to resolve. He talks of 10-15 years of adjustment ahead.
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