John Roughan: Budget fails to live up to promise

Finance Minister Bill English remembers the Mother of all Budgets in 1991 and he knows the economy was as flat that year as it is now. Photo / Mark Mitchell

A lingering recession, the public sector nearly as big as the rest of the economy, borrowing to pay more benefits than we need. We've been here before.

It's 20 years now since the "Mother of all Budgets". Time flies. Nobody under 30 today will have a memory of it, few under 40 will realise how radically it defied previous wisdom.

Most who do remember probably recall only that it slashed social welfare, which is half true. It sliced basic benefit rates by up to a quarter and introduced grants for beneficiaries' particular needs.

But its real bravery was much broader. It defied the first rule of Keynesian economics, it cut spending in a recession.

Bill English remembers. He was a new MP in 1991 and he knows the economy was as flat that year as it is now.

It had been that way for three years. Our experience of 1987-91 bears striking comparisons to 2007-11.

Each period began with a bubble bursting. In 1987 it was the sharemarket, in 2007 it was property. The economy began to slump in 1988 as it did in 2008.

Through 1989, 1990 and into 1991 the economy floundered along much as it has been these past three years. But there, sadly, the symmetry ends.

In 1991 the country had a new Government dominated by two dogged women who were determined to get its costs under control once and for all.

"You can't," cried professors of economics, "you can't cut public spending in a recession. It is contrary to everything we learned from the Great Depression."

They did it, and the following year was rugged. But the year after that, 1993, the economy rebounded and this time with real growth, not inflation.

The fiscal squeeze had helped Reserve Bank Governor Don Brash get inflation down to the 0-2 per cent target Labour had given him.

The resulting recovery was so rapid and strong that in 1994 we got something my generation had never seen: a budget surplus. We had been taught to believe the words budget and deficit joined as naturally as earth and quake.

With a surplus the economy never looked back. Bill English remembers. He started his Budget on Thursday with a reminder that growth averaged 3.2 per cent until 2004. It was after that year that things went silly.

Economic growth attracted a new wave of immigration with capital the migrants had to invest here. They discovered to their surprise that property in this country carries no tax on capital gains.

Our house values went so high for so long we started to live like millionaires on credit. Meanwhile, a Labour Government was reaping the tax surpluses. After fattening up state service staffing and salaries, it started turning the well-off into beneficiaries.

I got a doctor's subsidy I don't need, then a retirement savings scheme that killed the scheme I had because it couldn't compete with KiwiSaver's tax credits.

Big families with incomes bigger than mine got the child benefit. Students had interest waived on loans so that Labour could survive the 2005 election. By the time the wealth illusion turned to dust in 2007, the public service had grown by half, comprising 45 per cent of the economy.

Recession the following year sent the Budget into deficit and then the global financial crisis arrived. Late in 2008 a new National Government was looking at deficits for a decade.

John Key does not lack political courage. He took a risk when he ruled Winston Peters out of coalition consideration.

He took another when he embraced the Maori Party, another when he ignored the result of the smacking referendum.

He has put his Government on the line at the coming election with a second term programme to part-privatise state energy companies.

Sir Roger Douglas and Ruth Richardson did not put their reforms to a popular vote until after they had acted. Don Brash, when he led the National Party at the 2005 election, did not exactly spell out the programme outlined in his Act advertisement last Sunday.

Had Thursday's Budget lived up to its promise it would have trumped the Brash ad. But it didn't.

English must have been deeply traumatised by his first term in Parliament. Key, a young investment banker when National nearly lost the 1993 election, has not run the same risk. They are not cutting and not increasing spending. Without doing very much they think 2013 will see a resurgence like 1993 and they can budget for a surplus in 2014.

Maybe things come easy to Key. Maybe the crust under Canterbury will stop cracking soon and the rebuilding of Christchurch can start. Maybe investors will buy Earthquake Bonds instead of Auckland property this time.

I don't know. I know only what happened the last time and it worked.