John Key promises 'ongoing restraint'

Keeping government spending under control is crucial to New Zealand's economic recovery, Prime Minister John Key says.

In a pre-Budget speech today on Auckland's North Shore, Key said government spending - which hit 34.5 per cent of gross domestic product in 2008/2009 - is forecast to be down to 30.6 per cent in the coming year before going under 30 per cent and staying there.

"That is hugely important when the economy is on an upswing because - as the Reserve Bank regularly points out - ongoing spending restraint from the Government helps to dampen the interest rate cycle," he said.

"The Reserve Bank has already begun to raise interest rates from the historically low levels they've been at, towards more neutral levels that aren't going to over-stimulate the economy.

"But keeping government spending under control means that, over the course of the cycle, interest rates will be lower than they otherwise would have to be, and for longer."

He said Budget forecasts for the coming financial year will show the Government is going to post a surplus, albeit a small one.

"Once that has been achieved, we can start getting our debt down."

The Budget would show that the Government remained on track to reduce its net debt to below 20 per cent of GDP by 2020.

"At the same time - over successive Budgets - we have set out on a longer-term path to repair the damage to our economy from the excessive borrowing, consumption and government spending of the mid-2000s."

He promised there would be no "lolly scramble" in this year's Budget or during the election campaign and the Government would be sticking to its self-imposed new spending allowance.

Keeping to this limit would allow the Government to return to surplus next year and enable new spending to be focused on health and education.

Key said new operating spending averaged $2.7 billion per year during the last five years of the previous Labour Government, compared to an average of $250 million in the first five years of the current National-led government.

The large spending up until 2008 showed that "indiscriminately spending large amounts of money" didn't solve social problems, he said.

Future budgets would post consistent and larger surpluses, which would allow the Government to begin reducing debt as a proportion of GDP.

"That is what sensible and responsible fiscal policy is all about," Key said.  

"In difficult times, governments run deficits and build up debt, to support the economy and jobs. In good times, they run surpluses and pay down that debt."

Labour leader David Cunliffe said the Government had been "managing down expectations".

"New Zealanders already have low expectations of the National Government because they've been fiddling while the economy's been going backwards," Cunliffe said in Auckland this afternoon.

"He [Key] is offering no vision, no hope and no plan for New Zealand."

National was doing nothing to fix the underlying problems in the economy, Cunliffe said.

"They've got outdated monetary policies, a warped tax system and inadequate savings and they're too gutless to fix it."

Cunliffe repeatedly told reporters that his government would run a "fiscally balanced programme".

He declined to say how much new spending he expected to make, because he did not have a clear idea of the real state of the economy, he said.

"I do not yet know what the fiscal assumptions are, I do not have available to me the underlying numbers that the Treasury has given John Key.

"It would be irresponsible to make up a number [for new spending] just to answer your question."

Asked whether he expected to repay debt at the same rate as National planned to, Cunliffe said he expected to do so "at or about the same rate as National".

Fairfax Media