David Farrar: A battered budget

Next Thursday New Zealand will receive a battered budget.

The combination of the global credit crisis, a recession, finance company collapses and two earthquakes in Canterbury have produced arguably the worst fiscal situation since the 1930s for the New Zealand Government.

The Operating Balance before gains and losses (OBEGAL) for the last nine months has a $10 billion deficit on $50 billion of spending. That means the Government is having to borrow $20 for every $100 of spending.

The second earthquake has been especially nasty on the fiscal front. On top of over $5 billion of unbudgeted direct costs, it has also walloped economic growth, reducing the national tax take. Also mix in the thousands who will go from being taxpayers to welfare recipients because their businesses are buried under the rubble, and that just adds to the problems for the Government.

The Government's hope and strategy for the last couple of years was to reduce the cost of the bureaucracy and impose tight discipline on any new spending, but not to cut any significant current spending. This was projected to see a return to surplus in six years, and had pretty minimal political risk.

But the second earthquake has made that impossible. The extra spending, and reduced tax take, meant New Zealand risked not just a credit downgrade, but a possible permanent or structural deficit if action wasn't taken.

So this week we saw the unusual sight of the Prime Minister announcing what would be in the budget, a week before the Minister of Finance delivers it. It was an obvious (and smart) strategy to get the bad news out first.

Changes were signalled on three fronts. The targeting of overseas students who are not making loan repayments has little political downside. Most of the overseas students do not vote. We are yet to see exactly how the Government plans to collect more money from them, but it is difficult to believe the amounts will be huge.

The changes to Working for Families so some richer families do not receive it will probably not affect many families, and many of those families probably think it is bizarre that they are paying the top tax rate and also receiving welfare. They key thing to look out for here is what the Government does to abatement rates, and at what level WFF starts abating.

The real political danger lies with the flagged changes to KiwiSaver. You have 1.7 million voters in KiwiSaver. That is over 50 per cent of the voting population.

KiwiSaver investors will be anxious about what any changes will mean to their savings, and also to their take home pay. They may become the battleground for the election. National will be arguing their changes were necessary to make it sustainable. Labour's challenge will be to not just condemn the changes (a given), but to outline what they would be doing to balance the books.

Labour has toyed publicly with the idea of making KiwiSaver compulsory. Would they be bold enough to actually go into an election proposing compulsory superannuation through KiwiSaver?

Bernard Hickey has outlined the dangers for the Government with their proposed changes, saying:
KiwiSaver had become one of our loved institutions in a short period of time. We believed it would be there in future. We believed it made financial sense for ourselves and the country.

Changing the rules every time the government wants to reduce the budget deficit simply erodes trust, which is the most ephemeral thing. Will the government confiscate the money at a later date? Will it tax it differently? Will it be there in 40 years? With so many changes in less than 6 years there's a tipping point we need to be careful about approaching.

An erosion of trust in KiwiSaver could also see an erosion in popularity of the Government. Bill English's challenge next week will be to persuade people that these changes are the last National will make to KiwiSaver, and that employees retain enough of an incentive to reduce their take-home pay and have some of it go into KiwiSaver.

* A disclosure statement on David Farrar's political views.