Fran O'Sullivan: No room for error in English's rose-tinted effort

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Finance Minister Bill English briefing journalists and analysts on the details of his 2011 Budget. Photo / Mark Mitchell
Finance Minister Bill English briefing journalists and analysts on the details of his 2011 Budget. Photo / Mark Mitchell

Bill English's "Blue Sky Budget" has no room for error if he is to get New Zealand's finances back into the black by 2015.

English has typecast his Budget as "responsible and balanced".

But the Finance Minister's plan to restore Budget surpluses one year ahead of schedule are heavily dependent on rosy economic growth forecasts.

If the forecast growth rate is not achieved, or there are delays to the Christchurch quake rebuild, the Budget surplus forecast will come under serious pressure when projected tax revenues fail to materialise.

Put the rose-tinted revenue forecasts to one side. What this Government finally has done is signal that the big-spending policies of its predecessor are no longer deserving of sacred-cow status.

KiwiSaver, Working for Families and student loans have all been subject to a Budget "nip and tuck" exercise.

English and his Treasury officials have trimmed some fat here. But the policies themselves remain as part of a bipartisan status quo. They now seem unlikely to be tackled in any substantive and coherent fashion unless the NZ economy is hit by more exogenous shocks.

On the transformative front two elements stand out.

First, the plan to spend the thick end of a billion dollars executing the fast broadband rollout. The Government is in the final stages of negotiations with its preferred bidders.

A decision is expected in the next month (most industry observers expect Telecom to dominate). This will further drive initiatives to leverage off a weightless economy.

Second, the plan to partially privatise four state energy companies - Solid Energy, Meridian, Mighty River Power and Genesis Energy - and sell down more of the Government's stake in Air NZ. This will provide up to $7 billion for the Government to use to fund other infrastructure requirements.

But it will require Prime Minister John Key to mount a big sales effort during the election campaign to counter Labour's criticism that National intends to sell the family silver.

The proposal will be attractive to New Zealanders who want to invest in NZ-domiciled and controlled companies and will give a huge fillip to the NZX.

Aside from these two initiatives, the Budget was so bereft of bold new ideas even its author issued a tongue-in-cheek open invitation to those who can drum up transformative policies to talk to him.

English's quip came at the end of a press conference held during the "lockup" for journalists and analysts yesterday.

His self-deprecating manner can be misleading. But the remark did focus attention on the prime weakness of the 2011 Budget - the need for more transformative projects and programmes that will set the economy on to a faster growth trajectory.

This is an area Key should address if National is returned at the next election by splitting the finance role.

English's temperament makes him well suited to the Minister of Finance's job with a focus on balancing the books.

But if Key wants a focus on policies to grow the top line of the NZ economy he should recreate the portfolio of Treasurer.

English argues Government finances are in such dire straits that he had no option but to pursue the Budget surplus objective.

He again emphasised that at heart of the Government's plan lie six main policy drivers: a growth-enhancing tax system; better public services; support for science, innovation and trade; better regulation, including regulations around natural resources; investment in infrastructure; and improved education and skills. Get these basics right and businesses will swing into action and drive growth.

Businesses would have been hoping for more. More programmes to leverage science and innovation, research and development, the China opportunity and so forth.

Essentially English's Budget was geared at two vital constituencies: credit rating agencies who want to see the Budget numbers realised before they restore New Zealand's sovereign credit ratings back to pre-financial crisis and earthquake levels.

The agencies will not downgrade NZ, but the deficit reduction is not hard and fast enough to warrant a ratings increase.

The second group are the voters from whom the Key Government wants to extract a renewed mandate on November 26 to implement Budget changes to Working for Families, KiwiSaver and student loans.

Most business lobbies have pulled their punches. But behind the scenes there is disappointment that the Government is not tackling the demographic time bombs posed by an ageing population.

The major caveat hanging over the Budget is the heroic growth assumption.

Getting "back into the black" will not happen unless Treasury forecasts - which include the growth rate peaking at 4 per cent of GDP in 2013 - are achieved. This is predicated on the huge spending infusion to rebuild Christchurch. What will happen to this scenario if Christchurch's shaky foundations do not settle down again in time to fit the Government's quick-paced rebuilding timetable?. Forecast increases for tax revenue and job increases are also at the rosy end of the spectrum.

If the economy performs as well as the Treasury forecasts in its optimistic projections, New Zealand will be back on the path to prosperity. It is a big ask.

- NZ Herald

Fran O'Sullivan

A columnist for the NZ Herald

Fran O'Sullivan has written a weekly column for the Business Herald since its inception in April 1997. In her early journalistic career she was a political journalist in Wellington and subsequently an investigative journalist who broke many major business stories including the first articles that led to the Winebox Inquiry in both NBR and the Sydney Morning Herald. She has specific expertise in relation to China where she has been a frequent visitor since the late 1990s. She is a former Editor of the National Business Review; has twice been awarded Qantas Journalist of the Year and is a multiple winner of the Westpac Financial Journalism Supreme Award.

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