Colin James: National may be better off losing this election

No party ever wants to lose an election, but if it has to lose one, this might be just the one, judging by the economic forecasts.

Thus, amid the delight at the polls, there is in the National Party a tiny discomfort that, in government, rough economic weather could sink its ship.

If you want a parallel, try 1996, when Winston Peters betrayed the expectations of most of his voters by going with Jim Bolger after bagging him mercilessly in the campaign. Polls are starting to show a similar expectation that Peters will lean to Labour this time.

That poses him and National a management problem post-election, should the numbers point to a Don Brash government that needs Peters alongside.

In 1996 it was in both major parties' interest to flunk the Peters test. Labour flunked - and won office in 1999. National didn't - and sank in the foreseeable economic downturn that followed the unsustainably high mid-1990s growth.(There was also an Asian crisis and two droughts, which didn't help.)

Similar good economic reasons for not rushing to take office hold now:

* GDP growth is slowing. Down the track that means job growth will slow - it may be slowing already.

* The rise in house prices is slowing and so is house building. So householders will not be able to borrow much more on the paper value of their houses. So they will not spend so freely. If they start to worry about their debt, they may spend less.

* Oil prices are high. They might ease as world growth eases, but growth in China and India might push in the other direction, and in any case sub-$1 petrol is now only a memory. Other prices will rise, too, cutting retail sales volume.

* The exchange rate is falling. That means higher inflation just as growth is slowing - the reverse of the boom spiral of the past few years. Higher inflation means interest rates can't fall. Higher inflation will also reduce retail spending volume - no more super-cheap plasma TV screens.

* Australia is slowing and world commodity prices should ease as world growth slows. Exporters will be less profitable, which is bad news for Auckland in 2006.

* Real wages and salaries will go on rising for a bit, which might offset the forces driving a retail spending fall but will eat into already constrained profits. So investment will slow, which will slow productivity growth.

* Falling profits will cut into Government revenue in the 2006-07 year, just when John Key, if he is Treasurer, would be trying to fund at least one and maybe two tranches of election-winning income tax cuts.

The good news for whoever is Treasurer is that Michael Cullen, while he has spent up, has not broken the bank. He has kept a fat fiscal cushion.

That has cost him and Labour poll support in the pre-election phoney war and might yet be the key to Key becoming Treasurer because it has made tax cuts seem feasible.

And it would give Key and Brash elbow room. If they also put the Budget into deficit for a bit - blaming Cullen, of course, but claiming they need to kickstart growth, especially if households stop taking on debt and start saving - they might even keep the tax cuts coming.

But would that be enough to justify Brash's leap into politics? He is clear about his motive: to close the gap between Australian and New Zealand wages and salaries. If he doesn't do that, his time and effort will be wasted.

His mechanisms are simple: tax cuts and deregulation, notably of wages and salaries.

The first boosts take-home incomes. But the second enables firms to keep labour cheaper and substitute labour for investment. That was one of the big transtasman differences in the 1990s when the wage gap widened significantly. Since slowing economic growth will ease the current labour shortage, this scenario would be feasible.

There is a good argument that in time a deregulated labour market delivers more on average to employees than a regulated one. But that is a long-term argument. Initially, employees lose benefits, as after National's 1991 deregulation.

So, come 2008, a Brash government would be unlikely to have narrowed the Tasman incomes gap much, if at all (even though Australia is now deregulating its wages). It would need two or three terms.

And even that scenario would require a pretty free policy hand. What if he needed New Zealand First?

Peters last week told Brash his tax cuts are unaffordable. One reason is that Peters is not a small-Government conservative like Brash. He believes in active Government spending to help the little people - especially old little people - whom he sees himself as representing.

To the extent Peters might constrain Brash's tax cuts, household net incomes would be lower and spending lower and profits lower. Closing the gap with Australia would take even longer.

So why does old-man-in-a-hurry Brash want to win this election? Because he is in a hurry. But has he turned up breathless and eager at the wrong election?