A Tale of Two Forecasts

BY COLIN ESPINER

OPINION: Bah, humbug.

We might be officially out of the woods, but don't expect any pre-Christmas treats from Finance Minister Bill English, who is still as fiscally retentive as ever.

To keep with the Christmas theme, the Half-Year Economic and Fiscal Update is A Tale of Two Forecasts.

On the plus side, unemployment is going to peak lower, GDP growth will be better, and total debt not as large as Treasury had thought, even six months ago.

On the down side, however, debt is still ballooning out and the interest payments alone are going to cost us $600 million every year. And the economy remains so fragile that even next year it is expect to contract before bouncing back in 2011.

English says he'll leave it up to us to decide whether or not Treasury has been "too Eeyore-ish''. But he's hardly Tigger, or even Christopher Robin.

Next year's Budget is shaping up as an austerity exercise such as the country hasn't seen since the early 1990s, and English has even mentioned the previously unmentionable - a possible spending cap on the entire Crown accounts.

Such a move would be politically dicey, covering as it would benefits, pensions, KiwiSaver, defence, police, and health and education spending.

Treasury has hinted in its report that it thinks the prospects of English managing to stick to a new spending allowance of just $1.1 billion are extremely slim, which means cuts will be needed elsewhere if anything new is ever to be funded.

English confirmed today that health and education spending would have to come from that meagre pot as well.

But while the Finance Minister may not exactly be rolling out the barrel, his other ministers may well be salivating at the prospects of the economy beginning to improve.

For Prime Minister John Key, today's report goes a considerable way to vindicating his "sunny side up'' take on the economy throughout this year.

Basically, for once, the optimists have been proved right.

But then again, all these figures are predicated on the current tax rates staying the same. And given that the average wage earner is expected to hit the top tax rate by 2024, that's clearly not sustainable.  

Possibly the best news is that the so-called $50 billion black hole in the economy caused by the recession is now officially a $23 billion vortex. In other words, in the next three years the Government has some $27 billion more than it expected.

There won't be any shortage of offers to spend that money - many times over.