Memo to Bill English: We need that surplus

"The Government continues to do a good job of controlling its expenditure," Finance Minister Bill English insists. Photo / Mark Mitchell

World’s economy is still a worry, so it’s important for NZ to cut its debt.

With the arrival of May and the Budget a few weeks away, we've been softened for disappointment on the surplus. It was National's proudest election boast last year when it was a mere prediction; now suddenly it's not important.

"An artificial target", says John Key. A "flirtation", says Bill English, who has watched the slender surplus budgeted for this year show itself one month, disappear the next. He blames lower inflation which is bringing less revenue than the Treasury expected.

"The Government continues to do a good job of controlling its expenditure," he insists.

In last month's report, "expenditure for the year was likely to be $4.1 billion lower than forecast in the 2011 Budget when the Government first set the target of returning to surplus in 2014-15".

That target looked ambitious back then when the economy was still flat-lining from a global recession and Christchurch had just suffered its second earthquake.

But by the end of 2012, things were picking up and through 2013, 2014 and right on to the present, the economy has been humming.

It has been in a growth phase now for 2 years. If the Budget was "balanced across the cycle", allowing deficits in recession, it surely should be in surplus by now. A surplus, no matter how marginal, is an economic signal that matters. It says the country is well governed. Simple as that.

It is too easy for National governments to appear prudent. All opposing parties are to its left, and the last thing they will suggest is that it is spending too much, especially when the economy is going well. They prefer to paint English and Key as mean, insensitive fiscal conservatives, a fiction that suits National just fine.

English has assiduously fed that image of the Government in every Budget. Even the early ones in the recession after the global financial crisis, he talked tough about dealing to a projected "decade of deficits".

The previous Government, he said, had left expenditure unsustainably high but he and Key were not about to tackle any of Labour's indulgences - interest-free student loans, working for families, the super gold card. They thought they needed only to keep departments on tight rations and economic growth would take care of the deficits.

The budgets of 2009 and 2010 were some of the reddest New Zealand has seen. The 2010-11 deficit was $18.4 billion even before the earthquakes. At that point, English decided he had to reduce it by $10 billion the following year. He convinced Key they had to sell assets and Key took the unprecedented step of seeking a mandate for asset sales at the 2011 election.

The asset sales put an end to business doubts about Key's economic mettle, and ever since the Government's fiscal performance has enjoyed generous reviews.

Probably too generous. English believes he has found a way to balance budgets without making the kind of cuts to public services that made the previous National Government so unpopular. He was confident the public service could operate far more efficiently if it was given clear, specific service targets. These were set in 2012 and results have been published annually since.

By turning social welfare into an employment agency and concentrating on reducing the state's liabilities from lifelong and intergenerational dependence, English believes he will leave a legacy of social and economic benefit.

Which may be right, but we need to see a surplus sooner than we will. The coming Budget will no doubt show a positive balance but the real cash surplus when debt starts to come down is still a couple of years away. Meanwhile, we hope the world does not suffer another crisis before the debt comes down to the level that enabled us to weather the last one.

The world is a worry. It is awash with too much money printed by central banks in the belief it would reinvigorate their economies after the 2008 crisis. The Herald this week carried an item from the London Telegraph's Jeremy Warner who noted that 30 per cent of all government debt in the euro zone is trading on a negative interest rate. Investors are paying governments for the ability to lend to them.

They are doing so because they see no productive investments, no alternative except stocks and property. The price of houses is soaring almost everywhere because of cheap money.

Warner wrote: "Eventually there will be a massive correction in which creditors will suffer sickening losses. Nobody can tell you when that moment will arrive." The surplus cannot come too soon.