KEY POINTS:
It is hard to avoid a "yeah, right" reaction to the Budget's projections for two key measures of fiscal prudence.
They have the Government maintaining a sort of sweet spot over the next four years, running small operating surpluses while its gross debt remains steady around 17 per
cent of gross domestic product.
It would not take much of an economic shock to turn surpluses of less than 1 per cent of GDP into deficits and send the debt ratio climbing.
The Budget itself sketches one such scenario, where the international environment turns uglier, the surpluses become deficits and debt rises to 22 per cent of GDP by 2012.
Rather than believe that sweet spot of tiny surpluses and steady debt-to-GDP can be maintained for years it is more realistic to assume that if the fiscal position is not improving it will be deteriorating.
Clearly, with economic growth at a standstill the kind of fiscal stimulus the Budget dispenses is appropriate and timely.
The danger is, though, that a temporary fillip to the demand side of the economy turns into an enduring deterioration in the fiscal position.
We have not seen fiscal deficits for many years, and neither have the rating agencies.
Given the parlous state of the country's external accounts, an extended period of deficits and rising debt could possibly put the country's credit rating at risk, raising the spectre of sequentially higher interest costs across the economy for years.
When this issue was raised with Finance Minister Michael Cullen on TV One's Agenda programme on Sunday he was sanguine: "I'm not deeply concerned about that."
He was able to point to a statement from Standard and Poor's put out immediately after the Budget, which reaffirmed its ratings.
"For the time being this Budget has maintained the Government's strong fiscal position," it said.
"While a significant weakening of fiscal policy would lead to a rating downgrade, this is unlikely under the current Government or under whichever government is formed after the election later this year."
But it also sounded a warning note.
"It is critical for New Zealand to maintain fiscal restraint given the uncertain global financial conditions and the imbalances in its own economy. The large current account deficit leaves New Zealand vulnerable to foreign investors losing confidence in its ability to meet its obligations and this could lead to a sharp reversal in capital flows."
It has been a consistent theme of ratings agencies' reports on New Zealand for years now that, to put it more bluntly than they do, we can only get away with being up to our chins in debt to the rest of the world, as a nation and as a people, because the Government's accounts are by contrast a shining example of providence and restraint.
The International Monetary Fund, in its report on New Zealand released earlier this month, also reflects on what the impact would be if the large capital inflows of recent years - the flipside of large current account deficits - were disrupted.
The legacy of decades of current account deficits, and particularly of the surge between 2004 and 2007 when they averaged almost 8 per cent of GDP, has been to push the country's net foreign liabilities to nearly 90 per cent of GDP.
That is very high for a developed country and servicing that debt takes a substantial bite out of our national income - a month's worth every year.
The majority of the increase in foreign liabilities over that period has been an increase in banks' debt to non-residents, which now makes up nearly 40 per cent of their funding.
This coincided, of course, with a boom in the housing market.
The inflow of capital has not, in short, represented some surge in foreign direct investment expanding the country's productive base. By and large it has funded house price inflation at socially destructive levels.
The IMF has studied 109 episodes of strong capital inflows (its tactful term for current account blowouts) among developed countries and what happened when the inflows slowed.
The implications are sobering.
New Zealand's latest episode was unusually large and long-lasting. Deficits of 8 per cent of GDP are 3 to 4 percentage points larger than the norm for this country.
In other countries a correction of that size has meant GDP growth 2 percentage points weaker over the following two years, and domestic demand 4 percentage points weaker.
In short the IMF seems to be warning us to expect two years' worth of what we are going through now - treading water, and frigid water at that. If the adjustment is smooth.
In the context of global financial market turmoil and heightened levels of risk aversion, it might not be.
"Future disruptions could take the form of a global credit squeeze, as seen recently, or could be a more specific loss of investor confidence in New Zealand," it said.
But the IMF goes on to assure us that "a complete loss of access to foreign funding, however, is unlikely given the good credit rating of New Zealand banks".
That credit rating is backed by New Zealand's strong fiscal position, sound monetary policy framework, and flexible exchange rate and labour market, it says.
But that was written before the Budget and before any further fiscal loosening the National Party might devise in order to trump it.
And we have to trust that the finance and expenditure select committee's review of the monetary policy framework does not undermine that support of our credit rating.
The two main ways an orderly adjustment to a more sustainable level of current account deficits is likely to occur are both bad for households.
The rapid cooling of the housing market already under way throws the "wealth effect" into reverse.
Just as homeowners were happy to borrow and spend on the strength of the rising equity in their properties when prices were rising, turbocharging consumption and imports, falling prices should have the opposite effect, increasing saving.
At the same time a fall in the exchange rate from the over-valued levels exporters have endured for some years, if sustained, should trim the trade and current account deficits.
But it will also push up the local price of internationally traded goods - more pain at the petrol pump and the supermarket checkout.
