Fran O'Sullivan: We're in deep, but let's not be a Pig

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Prime Minister John Key yesterday displayed all the characteristics of a man deeply afflicted with political Tourette's syndrome as he tried to convince Parliament how much better off New Zealand was when it comes to exploding Government debt levels compared with Portugal, Ireland, Iceland, Greece and Spain and emerging Pigs like the US and the UK.

The Prime Minister has a point.

Despite the big hole which has now emerged in the Government's finances, New Zealand's escalating public debt, as a proportion of GDP, is nowhere near the catastrophic peaks that bigger debtor nations exhibit.

It is also true that the National-led Administration could not have prepared for the string of misfortunes which have impacted on New Zealand since Bill English's May Budget, especially the Canterbury earthquake with its $1.5 billion impact on the Government's finances in this year.

But all the elaborate dancing on the head of the proverbial pin does not disguise the raw reality that English's billion-dollar bet that his Budget tax-go-round would turbo-charge New Zealand's economic growth has (so far) proved to be a fizzer.

Even before Treasury's "show and predict" exercise - aka the half-yearly economic and fiscal update or hyefu - it was obvious that many Kiwis were using their tax cuts to pay down personal debt rather than helping spur economic activity by consuming, and, that the self-employed and corporates were not contributing as much as expected to tax revenues. Just how much became apparent yesterday with the $1.4 billion drop in forecast tax revenue for this financial year.

The overall upshot is the Government's cash deficit has blown out from $13.3 billion to $15.6 billion this year taking into account the unexpected expenditure and the drop in forecast tax revenue.

English said the Government was prepared to "look through" the deterioration given that it was driven by events that were one-off in nature (like the earthquake), or largely temporary in nature and given that tax revenue is expected to strengthen by the end of 2014-2015.

The Government will increase its borrowing level from $250 million to $350 million a week.

While English and Key want to maintain public confidence their approach smacks a bit too much of an Alice Through the Looking Glass exercise. This was underscored by English's comments to a press conference that the Government had to be in a position where it could "handle another recession and another earthquake and frankly we won't be there until 2020".

It is no time to be sanguine about New Zealand's finances.

We can't predict the timing of the next major earthquake but on past performance we can say that New Zealand is bound to be hit by at least one more recession in the next decade.

The Government's response has been to order another review of expenditure. But it says it will not touch the so-called "broadly neutral" tax cuts even though they are not having the desired economic effects.

The underlying figures in the May Budget showed English's tax-go-round was already $460 million short of sufficient cash to fund the big personal income tax cuts in this financial year. The Budget pointed to a funding shortfall of $1.085 billion to the tax switch over a four-year period, before becoming revenue positive in 2013-2014 with a net positive impact of $175 million expected to be posted to the Government's operating balance in that fiscal year.

But the Government cannot escape the fact that Treasury forecasts on the $1.085 billion cumulative shortfall have now tripled.

The May Budget was a step in the right direction by bumping GST up to 15 per cent, wiping some property tax breaks and cutting personal and company tax rates. This has helped the drive towards a more productively focused economy. They also plan more moves on the savings front. But since then it's been rather Slowsville.

This Government has an opportunity to use the Budget numbers "crisis" well. BusinessNZ's Phil O'Reilly was on the right track with his suggestion that a fresh look at "no-go areas" in the economy would also help boost the economy.

"BusinessNZ and other organisations have stressed the importance of taking action to constrain costs and get more dynamism in the economy, including increasing the entitlement age for superannuation, reducing the cost of KiwiSaver and making changes to interest-free student loans."

Plenty of ordinary Kiwis also have their ideas as shown by the online responses to last week's column on "Ten ways to reduce our snowballing debt".

Here are just a few.

From Kaya of Glenfield: "Too many parasites in NZ, not enough producers. Politicians at local and national level, bureaucrats coming out our ears. This country is suffocating in red tape and being strangled by chair polishers."

Juice from New Zealand reckoned: "What the latest economic crisis has showed me recently is the strong relationship between socialism and business success. If business is not doing well then governments obviously won't have the income from taxes etc to spend."

Rusty Shackleford cut to the chase: "Frankly, the only way to cut the deficit is for Kiwis to stop sticking their hand out come election year. We have to stop being bribed for our vote."

Selwyn Pellett added: "Balance the internal books (fiscal) is required but so is balancing the current account deficit. Importing more than we are exporting has led New Zealand to having one of the highest levels of national debt (government + private) in the world. I am a wealthy baby boomer and ... generation X and Y have every right to demand a huge chunk of my wealth when I die (yes death duty) to [help repay] the national debt that my generation created."

Silence Somegood said: "This country was once the envy of the world and after the World War II owed nothing to no one. Now we are in a situation where we are in debt to other countries just through sheer stupidity by governments whose aim is to make citizens dependent on whoever they elect. Paying tax on tax is another of the shortcomings."

John Key heads off to Hawaii soon for a 10-day break. Let's hope he returns with renewed vigour and determination to give English the political backing that is needed to make the right moves so we don't end up as Pigs NZ.