Editorial: John Key faces tough call on post-quake Budget

Prime Minister John Key with former All Black captain Richie McCaw during his visit to Kaikoura. Photo / Mark Mitchell
Prime Minister John Key with former All Black captain Richie McCaw during his visit to Kaikoura. Photo / Mark Mitchell

The consensus view of the nation's economists is that New Zealand is well placed to take the rebuild costs from last week's quake in its stride.

When you consider the scale of destruction to infrastructure - and likely costs running into the billions - it is a remarkable position to be in.

In fact, the robust state of affairs is something of a testament to the financial management of John Key and Bill English over the past eight years.

Markets did not fall, credit ratings were not cut, the dollar held its ground and there are not expected to be any major implications for the Reserve Bank's monetary policy.

But the rebuild costs will still put a short-term dent in the government accounts. It is a dent which falls, inconveniently for Key and English, in an election year.

After showing considerable constraint - some would say to the point of being miserly - the signs were there that the Government was ready to loosen the purse strings for the 2017 Budget.

That's not to accuse Key of being overly cynical, it is just being realistic about the nature of politics.

Whether the final shape of the fiscal stimulus was to take the form of tax cuts, a family assistance package or more investment in infrastructure had not been made clear. Key has dropped hints about all three.

He has also indicated a desire to stay focused on debt reduction.

But something will have to give. The Prime Minister needs to be careful not over promise.
It's too early for accurate assessments about the final costs of the quake.

The re-opening of State Highway 1 and the southern rail link look like an unprecedented engineering challenge.

Whatever early estimates are, the final costs will inevitably be higher.

In the interests of having a ball-park figure to work with ASB economists settled on $2.5 billion, or 1 per cent GDP.

That's a manageable figure - particularly if smoothed over several years.

The Crown's debt position is relatively strong - with borrowing of about 25 per cent of GDP. So the Government has the option of borrowing more, or slowing its repayment track to cover the costs.

It may be that the pressure of an electorate hungry for election-year spending makes this inevitable.

But the frequency of major quakes in the past decade should, if nothing else, serve as a reminder of how important it is for New Zealand's Government to maintain a cautious fiscal position.

Over the next few days Key and English face some very difficult decisions. The Government's half-year economic and fiscal update is due on December 8, although it may now be delayed.

That update will include some big calls on quake costs and may set the parameters for spending plans next year.Key and English can be rightly be proud of their track record and will now have an eye on their legacy.

They will have been hoping that their diligence has bought them some freedom to unleash new spending on social policy.

But win or lose in 2017, blowing out the budget would be a disaster for a political team that has built its reputation on fiscal prudence.

It would be foolish to blow that away for the sake of a small tax cut.

- NZ Herald

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