Editorial: Unacceptable approach to big blowout

Prime Minister John Key. Photo / Getty Images.

The Prime Minister finds the blowout of the Government's cash deficit this year to be "the outer limit of what we would regard as acceptable". He was saying something similar in May when he budgeted for a deficit of $13.3 billion this fiscal year. With not quite half the year gone, the Treasury yesterday reported the deficit will be at least $15.6 billion. It is not acceptable.

John Key is testing the confidence of those who know his Government needs to regain a tight grip on state spending. He has shown no stomach for the task of curbing the big social programmes of the previous Government that expanded public spending by 50 per cent in the five years to last year.

But he has been happy to cut personal and company income tax rates, giving back more than he gained from an increase in GST. The tax changes since October 1 have barely had time to contribute to the deteriorating cash position revealed yesterday.

The Treasury blames the blowout mainly on the cost of the Canterbury earthquake and compensation for owners of leaky homes. These are considerable, but the net cost of the quake will be less than the $1.5 billion insurance liability once repairs have generated activity that will contribute to Government revenue. And the bill for leaky homes should have been a budget provision years ago.

There are always excuses if a Government needs to find them. Drought is a common one. The dry spring farmers have had this year will have an effect on production that could provide next year's excuse.

But a Government that was tackling excessive spending would be able to absorb unexpected costs without its debt rising to levels that put the country at risk of a credit downgrade.

The December economic update reflects the continuing fragility of the recovery worldwide in the second half of the year. Sovereign debt crises in the Euro zone and lingering high unemployment in the United States have cast a pall beyond their boundaries. But food prices generally, and the strength of China and Australia have been in New Zealand's favour.

Domestic growth has been weaker than the Budget expected, but that largely reflects a necessary decline in household borrowing for consumption. The Treasury now forecasts a catch-up in business investment next year, boosted by the earthquake recovery.

But it expects the lift to be temporary, before growth falls in 2012 to continue a recovery that is weaker than would usually be expected from a slump such as occurred in 2008. With luck, this may be the lull before national investment responds to a windshift, steering away from property and consumption towards the signals that are coming from international food markets.

The Government needs to help this switch, not hinder it by maintaining higher levels of social spending than the economy can afford. There is no value in an artificial fiscal stimulus that helps maintain the exchange rate at heights that discourage investment in exports.

The Government knows what it should be doing. Income support for the fairly well-off, interest-free student loans, KiwiSaver subsidies, universal superannuation from age 65, are all major public expenses and all could justifiably provide savings.

Mr Key has staked his political future on maintaining some of that waste. In doing so, he has staked the country's economic prospects on them, too. The Budget has descended deeper into the red and is forecast to reach its nadir in the current year. Forecasts are not fact, as the latest revision proves yet again. Until this line on the Government's chart turns for the better, all bets on its fiscal responsibility are off.