KEY POINTS:
It is a measure of how much the economic climate has changed that not three months ago a Treasury projection of Budget deficits for a decade was considered simply unthinkable. Not two months ago, with the election campaign in full swing, parties treated the projection as a statistical
curiosity. Now it seems to be real, and acceptable.
Releasing the Treasury's December update Finance Minister Bill English said a return to surpluses was a "dream" that he did not expect to happen in this three-year term or the next. He had high hopes for its reappearance in a third term if National lasts that long. Until then, we face annual increases in public debt and the prospect that within five years the debt level could be back where it was until the early 1990s.
Deficits and the debt they leave for future taxpayers seem a problem of minor proportions compared to the implications of the global recession now in prospect. The Government's first concern has to be to maintain a sufficient level of domestic activity to avoid large-scale unemployment. The Treasury's latest prediction that unemployment will rise from 4.2 per cent to 6.4 per cent or, at worst 7.2 per cent, in 2010 naturally attracted more interest.
But unemployment in this country went much higher than those levels in previous recessions despite protection for industry and employment sumps in the public service. The worst predictions for the next year or two should not obscure the fact that New Zealand enters this global emergency in better shape than it was, and better shape than many others.
Thanks to 25 years of sound public finances, the past 14 with Budgets in surplus, New Zealand's public debt was down to well under 20 per cent of gross national product. The debt had dropped so low that National's John Key, coming from the private sector, believed the public sector should carry more debt to help finance a larger economy.
That prospect is probably the first casualty of returning deficits. National should not think of borrowing more than it will need to make up the shortfalls in revenue while meeting the higher costs of unemployment and other benefits. But the prospect would have been very much worse if surpluses had not been banked during the boom and we were facing recession with the debt still at previous levels.
The legacy left by Ruth Richardson, Sir William Birch and especially Michael Cullen's long custody of the accounts enables Mr English to confirm his pre-election inclinations to increase capital spending by $5.8 billion over the next five years and to raise operating outlays by $1.75 billion.
But he adds that National "wants to get on with the job of raising our long-term growth prospects ... with some urgency". If that means new public spending in technology and infrastructure that will boost productivity, it now needs to be financed largely from savings in other branches of public expenditure, not additional borrowing. Or at least not until the country is through the worst that global recession threatens and the public accounts are heading back into the black.
The Treasury's prediction that official debt will be back to early 1990s levels on the present track of revenue and spending should disturb Mr English. He has been in Parliament long enough to know how hard the road to fiscal health has been. The initial work cost the Bolger Government nearly all its political capital before its first term was through. The years that followed were sour with complaints of underfunded public services, shroud-waving health providers and food banks. It was a thankless struggle and nobody will want to repeat it.
The new Government's eye may be fastened on the economy's immediate needs but it must not lose sight of the surplus that helped sustain better days.
