Dialogue: Defining tension at Budget's heart

By COLIN JAMES

Tomorrow's Budget comes almost exactly at the midpoint in this Government's (first?) term. And, just as last year's, it comes in a bad patch for the Government.

The roll call is lengthening: the community card mistake, declining economic confidence, the secret deal with John Yelash, a poll majority against dumping air combat capability and, in a reprise of May 2000, a standoff over parental leave between Helen Clark and the Alliance's Laila Harre.

This Government is beginning to emulate Jenny Shipley's pattern: a good summer followed by a sagging late autumn. Whether it will go on to emulate Shipley's (and Clark's last year) winter slides will depend partly on tomorrow's signals.

Modern budgets typically do two things. They set, adjust or confirm the policy conditions in which the national economic cake is baked, mostly by private individuals and firms. And budgets divvy up the cake, taking money off individuals and firms and redistributing it to others in services and cash.

This is a high-wire act. Too many concessions to the cake-bakers risk discontent among the less-well-off and their champions at squeezed social services. Too much redistribution risks a smaller cake to redistribute as firms scarper to where making money is easier.

Labour and Alliance politicians - the aberrant 1980s Labour inner cabinet aside - are redistributors by instinct and motivation. But they are now cruelly constrained by the disciplines imposed by international investors.

So the primary focus in tomorrow's Budget, Michael Cullen says, will be on the Government's strategic role in getting a bigger cake baked, enough to get us a top-half OECD economic placing.

Cullen's idea of the strategic role is not 1990s deregulation and business cost-cutting, but developing the 2000 Budget's foray into assistance for small firms, attempts to attract big firms to invest and "economic transformation" to a "knowledge society."

Since this amounts to industrial redistribution, taxing some firms to give to others, it needs a strong rationale.

The Government argues that pinpoint intervention to boost research, technological improvements, business start-ups and firms of the future will generate more, and more rewarding, economic activity than leaving private firms to market-driven devices.

But this Budget, like the last, will commit only small additional funds to the task. Ministers' hearts are really in social redistribution: to give everybody a real chance of good health and a good education; to lay a standard-of-living floor under the least-well-off; and to clean up and conserve the environment for future generations.

This can boost economic activity and wealth. Healthy, educated workers are more productive; a clean environment can attract migrants and tourists.

But it takes years to work. In the short term it works against economic activity and wealth by reducing resources for reinvestment - and, in the case of environmental controls, by blocking development outright.

These two countervailing forces met in Whitianga last week when Sandra Lee blocked a marina development. Leader Jim Anderton's desperate rescue of that project serves only to highlight the fact that the environmentalist cast this Government has maintained in the Resource Management Act and elsewhere in its policy will constrain its top-half economic bid.

Anderton's "wood processing group" of forest industry executives identified the act as one of the three main barriers to development. Anderton ruled it off-limits, although a cabinet committee was last week set up to study compliance costs.

The next test will be the proposals for the Reefton goldmine.

So, midterm, the Government has arrived at its defining tension. It must reconcile the divergent objectives of asserting First World social and environmental status and expanding the economy faster to get us to a First World economic level so we can afford it.

That reconciliation will take many years, high-quality management and luck. There have been flashes of the second but also failures, so no judgment can yet be made on whether the Government will get all the way across its high wire.

Tomorrow's tight Budget, stuck with spending clamps even while bursting through the new spending cap, will not be the decider.

* ColinJames@synapsis.co.nz