Editorial: English must do more than hope surplus will appear

Minister of Finance Bill English. Photo / Jason Oxenham

Opinion

Governments should never be given credit for a surplus until it is in the bank. Having taken every opportunity to proclaim its return to surplus in this fiscal year, the Government was obliged yesterday to admit a failure. Sinking dairy prices since the beginning of the year have taken their toll on tax revenue and the slender surplus expected in June next year is now more likely to be a deficit of $572 million.

Far from defeated, Finance Minister Bill English hopes to defy the forecast in yesterday's Half Year Economic and Fiscal Update. He predicts that when the final accounts for 2014-15 are produced in October they will indeed be in surplus. He is basing that hope on the continuing strength of the economy, with growth forecast to average 2.8 per cent over the next five years.

That rate of expansion is lower than the 3.9 per cent recorded in 2013-14 thanks to the dairy boom and the Christchurch rebuild. But the rebuilding continues, business confidence remains high, employment and wages are both rising and the population is growing as more New Zealanders return than leave the country. They are returning or staying for an economy that has a better projected growth rate than the United States, the United Kingdom or the euro area over the next few years.

The ability to budget for a return to surplus seven years after the global financial crisis has helped give the economy "rock star" status in recent years. The precise size and timing of the surplus is less important than the trend - it was a few hundred million in a budget of $40 billion - but missing the target will be noted in the markets. New Zealand does not look quite as impressive today.

To maintain business and international confidence the Government may need to do more than hold course and hope a surplus arrives next year. Mr English has trimmed the Government's allowance for additional spending or tax cuts in the next two fiscal years but he has had to leave room in 2017 for the possible tax cuts offered by the Prime Minister at the election this year. Mr English presented these yesterday as an option to be considered against additional debt repayment, "subject to economic and fiscal conditions at the time".

He has not made it clear whether debt repayment or tax cuts would be preferred in either good conditions or a downturn - possibly because he and Mr Key differ on the issue. Debt repayment should have priority when a surplus appears. It is encouraging that the Half Year Update concedes a need to get debt down to 20 per cent of GDP sooner than the Government's target year, 2020. Low government debt is a country's insurance for recession, enabling it to run deficits without too much damage to its international credit.

The good news in the latest projections is that the accounting surplus is expected to become an actual cash surplus in 2017-18, a year earlier than previously forecast. That is the point at which debt ceases to increase and begins to be paid down. Tax cuts that year might be irresistible to a third term Government seeking re-election but they would be an act of fiscal irresponsibility, an admission its time was up.

The Government has brought the country through an international crisis better than most, thanks to the low debt it inherited, a dairy boom and an injection of earthquake insurance that matches the state outlays for Christchurch's repair.

After the last two years of exceptionally strong growth, the good times might survive the slump in dairy prices, but a surplus would help. Mr English should do more than hope to ensure that by this time next year it will be in the bank.