Colin James: Welcome to binge election

So now we have the binge election. Just like old times.

Try this scenario. The economy is booming. Agricultural prices are high. The Budget is flush. A Finance Minister says: "I've spent the lot."

2005? No, 1972. Sir Robert Muldoon's chortle of glee at having, he thought, skewered his Labour opposition, mattered not a whit in the election. Norman Kirk won in a landslide. He carried out his big spending promises.

A year later the 1973 oil shock pulled the plug from our warm bath.

We entered the frigid world of chronic fiscal deficits.

So if we are to have an old-times election binge, will we also have an old-times freeze? Is this auction the political equivalent of a Nigerian scam: send us your vote and we will deposit this large sum in your account or on tick at the post office or ...

Two things are at stake here.

1. The Prime Minister and her deputy not only want "an historic third term" (not so historic, really; Labour did four terms in 1935-49). They also badly don't want to be remembered for losing the unlosable election - unlosable because they should be cantering in on the back of a roaring economy.

2. The Leader of the Opposition has given up a good job and fine international connections to grub in politics to save the nation. His mission requires victory now because after another term of Labour-led government the gates to paradise will be that much harder to prise ajar with spending set at even higher levels and Labour's complicated tax rebates and subsidies embedded.

As one of Don Brash's key lieutenants says privately, this election is a unique chance to propose a really big tax cut because the fiscal operating surplus is fortuitously large - fortuitously, because it is on the back of a debt-supercharged domestic economy that has kept defying predictions and pouring cash into the Treasury in embarrassing amounts.

That means a significant proportion of the surplus is cyclical. In simple terms, it is one of those things of which it can be said: What goes up comes down.

That was what underpinned Michael Cullen's butter-wouldn't-melt-in-his-mouth line on Budget day: no room for "significant" tax cuts.

There was $1.9 billion for his new spending (or National's tax cuts) this fiscal year but health and education would take nearly $1 billion just to meet inflation and demographic imperatives, and after that the scope for new spending (tax cuts) would contract as the economy slowed.

That $1.9 billion - now a bit higher, since the pre-election economic and fiscal update showed even bulgier coffers than at Budget time - delivers a "fiscal impulse" of about 1.5 per cent of GDP.

Cullen, who calls himself a Keynesian, justifies that fiscal impulse as offsetting the looming slowdown in growth.

Keynes' early preference was for the state's offset to be in investment, countering the end-cycle fall in private investment and so smoothing the cycle.

Cullen's extra cash on roads fits that bill.

But later Keynesian politicians pumped consumer demand, then left the tap on when things improved.

Cullen used to preach against that later, corrupt Keynesianism: don't build in higher spending/lower taxes at the top of the cycle, he would say, since that will generate bigger fiscal deficits at the bottom of the next cycle. Hence his politically embarrassing ever-rising fiscal surpluses during the long plateau at the top of this cycle.

In the heat of the election Cullen has metamorphosed.

Scrooge in May has done an amazing costume change to become Santa in August.

John Key on the other side is a trader: buy one day and sell the next, as a colleague of his puts it. What matters is to be on the right side of the transaction at the right time.

Right now Key's buying - power.

Beside him is the former Reserve Bank governor who worried a lot about fiscal impulse and offset any tendency to overspend/undertax with higher interest rates.

He swears on that record he will not let his government get into such a fix. And his biography will tell you that when he was a merchant banker he did not do the slinters at the edge of legality that his competitors did.

Corollary: you can trust him to keep Key straight - even though Key is not matching all his tax cuts with spending cuts and thus, by his calculation, would add another 0.5 per cent of GDP to the fiscal impulse. National has, after all, been consistent in its intentions.

But look at the balance of payments current account deficit: bulging on the back of a gravely worsening trade deficit amid record high export prices and sure to bulge larger - to a frightening 10 per cent of GDP in some forecasts.

That spells a real and rising possibility of a hard landing - made all the more possible by Cullen/Key spend/tax-cut re-stimulation of an economy which has long been running above its capacity to supply labour. And the more that is spent or given away now, the less will be available to fight recession.

Perhaps the politicians are bingeing on fine champagne and there will be no headache. But what if it is cheap Australian shiraz and we wake up with a blinder?

Hey, tomorrow is another day. Some guys have got to hold on to power and some other guys have got to get it off them.