Amuch-anticipated return to surplus somehow metamorphoses into yet another unwelcome deficit; dairy prices slump ever lower; the New Zealand dollar keeps rising ever higher; the overheated Auckland property market makes the South Sea Bubble of the 1700s look like an exercise in financial probity.

Is this the so-called rock-star economy? Or the rocky road to recession?

It is not raining on John Key and his colleagues. It is pouring.

Still smarting at the mass defection of erstwhile supporters which the party took for granted in the Northland byelection, National is currently exhibiting the self-absorbed demeanour of someone who cannot quite work out what is happening to himself or herself and is not sure what to do about it.


Not that National can do much anyway to halt the rise in the currency or stimulate the international milk market.

In the past week the Prime Minister and his Finance Minister have also appeared to accept they will fail to meet their long-established target date this year for a resumption of Budget surpluses.

As for Auckland house prices, well, the warning from the Reserve Bank on Wednesday of a potential downward, disruptive correction in prices could not have been blunter.

The Reserve Bank's worry is that the trading banks, which have 60 per cent of their lending in residential mortgages, could find themselves in dire straits such that credit dries up with the result that the economy goes into a severe downturn.

Key's response was literally "crisis, what crisis?" But that hellish scenario ought to chill Key and Bill English to the bone.

But the Reserve Bank has not stopped there. It is strongly urging the Government to give "fresh consideration" to ways and means of shutting property speculators attracted by untaxed capital gains out of the Auckland market.

Key's difficulty is that he has long ruled out a capital gains tax. His one consolation is that Labour leader Andrew Little has effectively done likewise.

But Little is not in Government. Key is. The latter's political pragmatism which sees him take the path of least resistance has finally caught him out.


In failing to institute some kind of tax or other disincentive to curb speculative sales, Key now has the unenviable choice of having to take tougher and less popular action to force a correction, but not one which sends prices plummeting through the floor.

The alternative is to leave intervention to the Reserve Bank. The latter argues that its tools would have only a limited impact in cooling such a pressure-cooker market.

The onus is on Key and English to come up with something. While Key is employing the "no crisis" line, it is a safe bet that a lot of midnight oil is being burned to tackle what is now the No1 issue confronting the Government.

For make no mistake, the laws of economics dictate that a correction will happen. House prices must stop rising at some point.

The very real danger is that those who have bought at the market high then panic that values may tumble and put their houses back on the market to cut their losses. The net result will be the opposite of what they intended. There will be a glut of houses on the market as sellers who bought in at lower price levels likewise try to offload their properties while they still retain their value.

Demand will dry up. Would-be buyers will either opt out of the market for fear of it collapsing, leaving them paying off a mortgage far higher than the equity left in their new home.

Or they will wait until prices stop falling in the expectation that they can count on purchasing a house at far less expense than they had expected. Those who stay put in their homes will suffer a drop in wealth.

Hindsight will be in abundance. But National will be alone in getting all the blame.

Suddenly, National is finding the business of governing far more vexed. That is not saying that the Key Administration has reached some kind of tipping point from whence it irreversibly slides to defeat in 2017.

There have been other (brief) periods when National has endured a bumpy ride during its six-plus years of occupying the ministerial suites in the Beehive only to subsequently regain its poise.

But the political atmosphere has markedly changed.

Labour's recovery under Little has shifted the spotlight back where it should be - illuminating the actions of a Government that has an increasing tendency to cut constitutional corners, be loose with the facts and rewrite history where it suits.

Some ministers are handling this scrutiny better than others.

Sticking a microphone in front of Gerry Brownlee these days is to invite a salvo of sarcasm from the Defence Minister to any persistent line of questioning, especially on matters relating to New Zealand's Iraq deployment.

Key on the other hand seems to spend half of every day stuck behind microphones as he seeks to both soothe voters and smooth over the cracks opened up by the likes of Brownlee.

As Prime Minister, it falls on Key to be the principal salesman for the Government's actions. But there is no back up.

Some senior ministers are alert to the need to provide background information to the media explaining why the Government has undertaken some course of action on something.

But the notion that there is some huge spin machine operating out of the Beehive which relentlessly force feeds journalists with National's take on events is a myth.

That did not matter during National's first two terms.

It sure matters now. And never more so when Key is out of the country and cannot mictro-manage every domestic issue.

The third-term blues are also prompting the Prime Minister to dig into his reserves of political capital.

That was the case on Monday as he suddenly downplayed National's surplus target as being an "artificial" one rather than a real one, saying achieving it was like "landing a 747 on a pinhead".

There would be more sympathy for Key's shifting of the goalposts in extra time had he and English not milked in advance what looked like being one of National's major success stories.

The search for the lost surplus has been National's Holy Grail. It has also become a measure of whether National can justifiably lay claim to being a better manager of the economy than Labour.

The final size of what English and Key say will be a deficit will not be known until October.

The public will not be too fussed if that figure is only a few million dollars off surplus. They may even give credit to National for a narrow miss. Even a figure of around $200 million to $300 million may be acceptable.

Key and English will have seen the Treasury's finalised Budget forecasts. Presumably they are not crash hot for this year - the target year.

The last thing National wants is for Budget Day next month to be overshadowed by having failed to make surplus.

Moreover, a large(ish) deficit has other implications - namely the credibility and scale of National's plan to cut taxes ahead of the 2017 election.

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