John Armstrong: Tax-cut signal looks like rod for National's back

Bill English speaks to an audience. Photo / NZME.

Can Bill English continue to keep all of National's fiscal balls in the air? And for how long before he drops one?

More particularly, is National making a rod for its own back by continuing to flag tax cuts in the election-year Budget of 2017?

Yesterday's half-year update of the Government's fiscal books was arguably the biggest setback English has suffered in his six years as Finance Minister.

The Treasury has executed a reverse water-into-wine routine which has all but dashed National's hopes of meeting its target of getting the Government's fiscal books into surplus by the end of this financial year.

As Labour's finance spokesman Grant Robertson noted, the target of surplus by 2014-15 is National's totem pole. It is seen as a measure of National's overall handling of economic matters. English - according to Robertson - had failed the test he had set himself.

In that respect, the good news for National yesterday was that the projected surplus turned into deficit after the election - not before.

Whether the Government is running a surplus or a deficit can result from tiny shifts in some much larger numbers covering tax revenue versus Government spending. That is why English is not conceding defeat and that a surplus this year is still "achievable".

However, English has taken out insurance to preserve next year's forecast by deferring around $1 billion in spending over the next two years. The deferral serves a double purpose of ensuring there is money in 2017 for "modest" tax cuts for low to middle-income earners.

All very convenient. However, the reduction in the new spending allowance may well put pressure on the delivery of public services.

On the revenue side of the equation, the Treasury is very bullish, forecasting economic growth will remain around 3 per cent for the next three years - with a consequent spin-off in terms of increased proceeds in tax.

Yet the Treasury's forecasts also show that further falls in export prices would bite into tax revenue - something already apparent with weaker dairy prices.

National's tax cuts are a long way out and a lot could change in the interim. Whether it is wise to keep flagging them is a moot point. English always adds the rider of "as economic and fiscal conditions allow". But no one hears that proviso amidst the din of rising expectations that National will come under increasing pressure to ultimately satisfy.