KEY POINTS:
There has been a striking contrast in the response of the two main parties to the disturbing news that after 14 years of budget surpluses the Treasury now calculates the public accounts are set for a decade of deficits.
An announcement such as that, of which governments have
ample warning, would normally be accompanied by some urgent decisions aimed at restoring the fiscal balance somewhat sooner. Instead, Finance Minister Michael Cullen merely congratulated himself again on having saved previous surpluses for a "rainy day" and looked forward to the problems it would cause for National's intended tax cuts.
There was evidently nothing he thought necessary to change, either in his own programme of reluctant tax cuts that started this month or in the Government's spending programmes that might have seemed affordable in better times. If Labour's "rainy day" could last 10 years, as the Treasury forecasts, Dr Cullen and his colleagues seemed strangely relaxed about it.
He even observed that had he known in the May Budget how bad things would become, his tax cuts might not have been as generous. Evidently he can do nothing about those scheduled two and three years ahead. There could be no clearer admission that Labour does not expect the next few years to be its problem.
It cannot complain, therefore, that attention turns much more seriously on the National Party's response. The fiscal crisis is indeed the first real test of the mettle of leader John Key and his team and it is rare that voters get such a measure before an election.
National could have taken the easy option of confirming its previously indicated tax cuts, offering no specific savings in public expenditure and pretending that tax cuts would actually cure the deficit in quick time. Conservative parties are prone to that belief.
Instead, National has faced the need to balance its tax cuts with specified savings, notably the removal of business tax breaks on research and development and employer contributions to KiwiSaver. The wisdom of reducing the incentives to save is questionable but the courage is not. National can expect to incur employers' wrath even though their mandatory contribution will also be reduced. The tax credit was given in compensation for the compulsion Labour sprang on employers late in the day.
National has clearly decided employers and industry are the safer targets politically. In time a National government might also look at free childcare and other universal benefits introduced by this Government. There is no point providing welfare for the well-off as well as the needy if the burden on the budget cripples the economy on which everyone depends.
Budget deficits are, as Dr Cullen likes to say, the result of the interplay of two big variables, total taxation and operational outlays. But the deficit or surplus is also a figure that shines brightly on the scanners of international investors and credit agencies.
A small economy cannot expect foreign funds and dealers to have a detailed knowledge of its economic health at any moment. They will look at numbers such as fiscal deficits and the related public debt level and form their impression of the economy's health and the quality of economic management here.
Budget surpluses came relatively late in our economic reform, after the previous National Government had taken a razor to public spending in 1991-92. The budget went into surplus in 1994 and never looked back, until now. In fact, it regularly exceeded the Treasury's expectations, particularly on revenue generated. We can hope that the revenue has been underestimated in the projected deficits ahead.
But the next government cannot be content to sit and hope for higher growth. National has made a start.
