Fran O'Sullivan: Greece is the word - Time for Govt to act

Bill English must get expenditure under control in his second Budget. Photo /Mark Mitchell

The latest financial crisis which has brought Greece to its knees and threatens the viability of other European nations - possibly even the UK - is a fantastic opportunity for the Key Government to demonstrate leadership on the fiscal front.

Yesterday, Prime Minister John Key stressed next week's Budget would have two strands: Improving the long-term performance of the New Zealand economy and maintaining a tight control on the Government's finances.

Crucially, that meant bringing the Budget back into surplus over the next few years and returning public debt to a prudent and manageable level. Spending had to remain under control.

"At the moment we are borrowing $240 million a week and that cannot continue indefinitely."

Problem is this Government has (so far) tied its own hands by continuing to underwrite promises made by its predecessors.

But if the crisis enveloping Greece (and the rest of the financially troubled and debt ridden "Pigs": Portugal, Ireland and Spain) has taught us anything it is that there is little time to lose in putting our own fiscal house in order.

What we can't afford to do indefinitely is continue to pay the election bribes that the previous Labour Government dolled out in 2005 to persuade voters to put them back in power for a third term.

Specifically, New Zealand can't afford to continue to stump up for interest-free student loans for a bunch of young Kiwis many of whom will pay very little tax here over their careers, or pay Working for Families subsidies to reasonably well-off middle-class people.

Nor can the Government continue to underwrite the cost of middle-class tax avoidance by allowing them to continue to plumb the major difference that opened up between the trust tax rate of 33c in the dollar and the top personal rate of 38c in the dollar - which did not exist before Labour drove up the top personal rate in 1999.

Nor can the Government continue to underwrite national superannuation payments on a universal basis from the age of 65 years on the shallow proviso that the beneficiaries are New Zealand citizens or permanent residents and have lived here a total of 10 years since turning 20, with five of those years having been spent here after reaching 50.

This is a recipe for national bankruptcy.

If Key and Finance Minister Bill English are truly serious about getting on top of New Zealand's massive borrowing for current consumption they would set about axing this giant middle-class boondoggle now. Not wait until major volatility on international markets sends this part of the world into a tailspin and forces a day of reckoning.

Next week, English will unveil his second Budget.

There will be considerable focus on getting the Government expenditure curve under control. But the centre-piece - as far as electors are concerned - will be the tax-go-round that will be sold on the basis of sending signals that Kiwis need to invest and save rather than borrow and spend.

This is a much needed message. But it's not much use the politicians using a megaphone on this score unless the Government gives the lead.

A Maxim Institute-commissioned poll shows that 56 per cent of Kiwis oppose the Government's plan to increase GST to 15c in the dollar and cut personal income taxes (expected to be down to 33c in the dollar over time).

Most want to retain the current suite of Labour-initiated taxpayer-funded perks including Working for Families, interest-free student loans, and the Government-subsidised KiwiSaver. They also want national super retained in its current form.

Maxim is simply stating the obvious when it says the poll results do not mean "we can afford to carry on as we are".

That requires leadership. The same leadership that National demonstrated in the 1990s when it slapped a surtax on national super and cut welfare to get the Government's accounts in order.

The Australian Government last night signalled it would keep a tight-rein on its own spending as it seeks to get back into Budget surplus by 2012-2013.

The Rudd Government may be staring at an electoral abyss, but its decision to slap on a fiscal straitjacket and increase revenue through more resource taxes was relatively creative. It also sent a signal that the dividends from Australia's mineral wealth should be retained to further Australia's future.

Back here the focus will be on trying to get a mind-shift away from property investment.

There has been a considerable groundswell against property investment and all it entails: negative gearing, counting tax losses against other income, depreciation and the rest. But tax avoidance has also been on the trust front where the overall "loss" to Inland Revenue equals that on the property front.

If the Government is serious about getting the top personal tax rate down to the 33c enjoyed by trust "investors" then it needs to make swingeing expenditure cuts to get New Zealand out of debt faster.

A counter argument could be mounted that if the Government does fail to tackle the sacred cows on the spending front, the more prudent course might be to raise the trust rate to match the top 38c personal rate but to apply that rate at a higher income threshold than the current $70,000.

This is not alarmist. Simply, New Zealand's room to move will be sharply circumscribed if the European situation gets worse. The Bank of England's decision to keep interest rates unchanged is signal enough.