Budget 09: The pragmatists won - but we all may lose

Budget 2009 is all about moderation. Bill English and John Key wanted to moderate the effects of the worst recession since the 1930s. They wanted to respond with moderation to those calling for deeper cuts. They have been moderate with the fiscal knife.

By choosing to abandon the tax cuts and the NZ Super fund contributions they have chosen the path of least resistance. They have chosen the pain of taking away things that were promised but not yet delivered, rather than taking away things already in our hands. It's the politically sensible thing to do in an MMP political system.

It is also essentially a pragmatic decision and reflects the pragmatism of both Key and English.

By deciding to spend an extra NZ$5.8 billion on education, health, justice, roads and broadband over the next three years the government has decided it is better off borrowing the money and spending it to boost the economy rather than simply having a smaller deficit and much lower debt in the distant future.

But is it the right thing to do?

The implications of Budget 2009 are very unattractive for the longer term, particularly if the global economy remains in recession or worse for the next couple of years, as I think it will.

Tax cuts are now off the agenda for the foreseeable future. Bill English told us in the media lockup he didn't see any realistic prospect of either promising or delivering those tax cuts before the 2011 election. Interest rates may rise because of the extra NZ$50 billion of government borrowing over the next five years.

The decision to stop contributions to the New Zealand Superannuation Fund while at the same time promising to keep pension payments at 66 per cent of the average wage is frankly not credible. If the growth track forecast in this budget eventuates then there simply won't be enough money in the kitty to afford these pensions.

Baby-boomers should be very wary of the implicit promises in this budget. Given the NZ Super Fund has effectively been put to sleep, they cannot be sure there will be enough money there to fund their pensions.

Bill English is hoping (because it's certainly not in Treasury's forecasts) that growth picks up before the baby boomers retire. If it doesn't, then New Zealand should prepare itself for some ugliness.

Taxes would have to rise, or the pension would have to fall, or the retirement age would have to be put back.

In effect, this budget is setting up a battle of the generations. Unless there is an economic miracle and the world starts growing strongly, we and our politicians will have to take some tough decisions.

Do we reduce the living standards of the baby boomers and ensure there are jobs and standards of living for Generations X and Y. Or do we tax the earnings of Generations X and Y more heavily so the baby boomers can retire in comfort.

Bill English and John Key have deferred the decision in the hope that the economy will catch their hail mary pass.

But decisions delayed can often make the final decision more painful.

Pragmatism won through in Budget 2009, but we may all pay in the end if someone doesn't confront our core problem at some stage in the next couple of years.

Our economy has too much government and its taxes are too high and in the wrong place. Until we change that structure to make us more productive, we will forever be stuck facing decisions about robbing Generation X Peter to pay Baby boomer Paul.

- Bernard Hickey, in Wellington

* Click here to go to nzherald.co.nz's comprehensive coverage of Budget 09.