Audrey Young: Managing debt will be Govt's focus this week

Michael Cullen was jovial as he delivered the 2008 Budget. Bill English will deliver the 2009 version against a backdrop of economic gloom. Photos / Mark Mitchell

The 2009 Budget will be one of contrasts.

Promises will be broken, but not to break them would seem like a broken promise as well.

That the centrepiece of National's election campaign for two elections - personal tax cuts - could be ditched with a large measure of anticipated forgiveness shows what a difference a year has made to the economic conditions.

It took former Labour Finance Minister Michael Cullen until November 2007 to agree to a programme of substantial personal tax cuts - $10.6 billion over four years.

By then he had not only been convinced they were a political necessity but had been assured by the Treasury that his surpluses were "structural", or permanent, all other things being equal.

Only a year later, it was evident that the structural surpluses had turned into structural deficits.

Spending was fixed, with the new National Government adopting most of Labour's big-ticket policies, but a slowing economy meant revenue would not keep pace.

The Treasury revised its forecasts for the new Government in December.

With the intervening global financial crisis leading to worldwide recession, they made for grim reading for new Finance Minister Bill English.

The uncertainty was such that the Treasury supplied three forecasts: the upside, the main one and the downside.

The downside was considered the most realistic.

In Mr English's big pre-Budget speech last month, he said the Government's books were undoubtedly in worse shape now than the Treasury predicted in the December downside forecasts, with ongoing Budget deficits and an unexpected doubling in Crown gross debt over the next three years.

He said then that "a significant focus of the Budget will be a credible plan for managing the Government's debt".

* GROWTH

Last Budget

At the time of last year's Budget, GDP growth for the year to March 31, 2007, had been 2.3 per cent. It was estimated to be 2.4 per cent for the 2008 year. But with the country in recession, partly the result of prolonged drought, forecasts were 1.6 per cent for this year, climbing to 2.9 per cent for next year, 3.2 per cent for 2011 and then dipping to 2.8 per cent for 2012. The average growth rate of the economy over Labour's previous eight years had been 3.56 per cent.

December update

When the Treasury revised its forecasts in December, the global financial turmoil had led to a more anaemic outlook. Actual 2008 GDP growth (to March 31) has been 2.2 per cent; the forecast for this year was a minuscule 0.1 per cent, 1.6 next year, 3.5 per cent in 2011, 4.1 per cent in 2012 and 3.6 per cent in 2013.

Latest stats

The Treasury's next forecasts will be revealed in Thursday's books but the Reserve Bank in March predicted the economy this year would shrink by 0.8 per cent followed by growth in the next three years in the order of 0.2 per cent. 4.8 per cent, then 3.9 per cent.

* DEBT

Last Budget

At the time of last year's Budget, Crown debt in the previous year (to June 30) had fallen steadily to 18.2 per cent of GDP ($30.6 billion) - from 35.6 per cent in 1999 when Labour took office. Labour's long-term target had been to get debt under 20 per cent of GDP. The forecasts a year ago to 2012 saw the debt ratio dropping even lower to 16 or 17 per cent. National's view was that 20 per cent was too low and it said it was comfortable with 22 per cent, that it would spend some of its surplus on personal tax cuts and have more borrowing for capital expenditure.

December update

By December, the debt forecasts had ballooned and the political scrap over the difference between 20 per cent and 22 per cent of GPD, which had seemed like quibbling at the time, now seemed laughable.

The problem the National Government had was that it had committed to many of Labour's big spending programmes, but a slowing economy meant revenue would not keep pace with the spending increases.

With no change in policy to affect spending or income, the gap would have to be financed by huge borrowing.

The books in December showed the 2009 debt at $34.7 billion (19.2 per cent of GDP), reaching $60.4 billion in 2012 and billowing out to $71.6 billion by 2013, representing 33.1 per cent of GDP.

Latest stats

The Treasury's latest monthly financial statements - March - show debt has already reached $45.04 billion, or 25.1 per cent of GDP.

* UNEMPLOYMENT

Last Budget

This time last year, it looked as if New Zealand was recording its fourth successive year with unemployment under 4 per cent (March quarter), at 3.5 per cent. That was confirmed a little later but it came in at 3.7 per cent.

The steady cut in unemployment was a big success story for Labour, which had started its term with around 7 per cent. But already a deterioration was being forecast last May because of the recession: 3.7 per cent this year, 4.4 per cent next year, 4.5 per cent in 2011 and 4 per cent in 2012.

December update

By December the global crisis had forced a grim revision of the Treasury's forecasts, with 4.7 per cent unemployment predicted for this year, 6.4 per cent for next year, 6.2 per cent for 2011, 5.4 per cent for 2012 and 4.6 per cent for 2013.

Latest stats

The latest household labour force survey figures show unemployment at 115,000 (5 per cent), and a 10,000 increase on the December quarter.

The Treasury's financial statements for the nine months to March show spending on the unemployment benefit running at $39 million ahead of forecasts at $405 million.

The Reserve Bank forecast in March that unemployment would be 6.8 per cent next year, 6 per cent in 2011, and 5.2 in 2012.