Fran O'Sullivan: Budget needs to spell it out

Bill English says every worst case scenario has become a reality. Photo / Kenny Rodger.

Finance Minister Bill English is under no illusion that the issue that will grab the most public attention in his May 28 Budget is the "focus on the Government's books".

That said - and English's tone is quite rueful on this score - the Budget will be a two-pronged affair.

Not only will the Finance Minister devote much of the commentary in his debut Budget to stating exactly how he will knock the books into shape, but he will also (and this is arguably just as important) put some focus on how the Government plans to get New Zealand ready for the economic recovery phase.

English urgently needs to put the Government's books centre-stage and spell out exactly how he plans to reduce New Zealand's forecast debt profile so that the country does not become a casualty when international ratings agencies deliver their verdict on New Zealand's continuing ability to pay its debt.

In an "unforgiving world" it is simply not an option to let New Zealand's gross Crown debt to GDP ratio blow out from last year's rate of about 20 per cent of GDP to basically double within a five-year period to around 45 per cent of GDP by 2013.

Since English spoke to chief executives at a SkyCity function last week, most commentators have read his address as signalling the Government will axe the April 1, 2010 and April 1, 2011 tax cuts.

Neither English nor Prime Minister John Key are saying outright that the next two rounds will be either cancelled or postponed. Simply that there will have to be trade-offs.

The furthest Key would go on Monday was to say the Budget will start deflating the Government's burgeoning debt "over time".

"The initial advice we received from Treasury had an upward-sloping debt curve that would have been unacceptable to the Government.

"New Zealand would have become indebted to a level that we believed was unacceptable and on that basis we have made a number of decisions across a number of areas," Key said.

Those decisions would result in the debt graph heading down over time.

However, Key continues to make the point that the Government views tax cuts as a "very important instrument for economic growth".

New Zealanders are already pocketing the biggest chunk from National's three-stage tax cuts programme which went into effect on April 1.

But - according to opinion polls - they may not be providing much fiscal stimulus to the economy as higher paid New Zealanders opt to use them to pay down debt or increase savings.

If National is to amend the tax cuts programme, it might make better sense to reduce the quantum on offer at the next two rounds and redirect the fiscal boost more towards those who are more likely to use them to fund consumption.

English must feel he's drawn the short straw.

The former Treasury official entered Parliament in 1990 just as National took power after six years of Labour Government.

Then - like now - National was confronted with a huge fiscal blowout. Not only were the Government's books not all they were purported to be.

But the country also had to pay a heavy price as tax revenues dropped and unemployment increased after the bubble burst from under the massive 1980s debt-fuelled binge which propelled the unrealistic ambitions of far too many of New Zealand's major companies.

Ruth Richardson's "mother of all Budgets" slashed Government spending in an endeavour to balance the books. But by then the country was in deep recession.

As a back-bench National MP back then, English will be acutely aware of how his party nearly lost the 1993 election through failing to get the political story right to back the fiscal changes.

While he ultimately became Finance Minister - then Treasurer - National was in the last term of its nine years in Government.

He did not really get to preside over the fiscal good times that buoyed the Crown accounts to the point where Michael Cullen - who followed him in late 1999 - could delight in posting ever bigger Budget surpluses.

Now he has to cope with the aftershocks from the international financial crisis and its punishing effects on the Government's accounts as tax revenues plummet. English has options.

Inevitably, he will pluck some low hanging fruit, particularly if it has been attached to the Government's spending tree by Cullen who bows out of national politics today. English takes the view that Cullen left a lot of fiscal loose ends behind him.

It seems eminently sensible that he will not waste National's precious political capital in propping up programmes that do not meet its own objectives.

That said, English will not take a swingeing axe to high-spending Labour Government programmes like Working for Families, KiwiSaver and Student Loans programmes.

Basic welfare entitlements will be maintained during these recessionary times to underpin people's sense of security. But English has not ruled out specific changes within some as yet unnamed programmes.

Both English and Key are wary of breaking their election promises. But there is plenty of room within the big-spending programmes - right across Government - to get the pruning knife out.

Where the Government is being adroit is in getting state sector chief executives to do much of the pruning themselves.

By pushing a "value for money" philosophy - amidst strong hints that he wants the Government's taxation line more directly related to the expenditure line in future - English puts himself in the position to effectively manage out an overall reduction in Government spending.

Push this far enough (over time) and the ability to throw tax cuts into the mix to spur economic growth will return.

What English is not going to do in this year's Budget is increase GST or introduce property taxes as the OECD has suggested.

The Treasury and IRD are examining the efficiency of New Zealand's current tax-raising structure. But that is not a short-term issue.

Last week, English made the point that the Budget was being readied against a backdrop of global and domestic economic conditions and trade-offs would be needed.

"Just about every unlikely event has occurred and every worst case scenario has become reality," he said then. Let's hope swine flu doesn't join the list of unlikelies.