Danger as black ink runs dry (+video)

CRAIG SIMCOX/The Dominion Post

DR NO: Michael Cullen and Paul Swain, the outgoing MP for Rimutaka, arrive to speak to Upper Hutt Chamber of Commerce after the Treasury briefing. Dr Cullen said the bad economic news meant it was no time for `risky and reckless promises' or additional tax cuts.

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The country is facing a decade of deficits and the kitty is almost empty for election bribes, the Treasury's books show.
View video: Economic outlook in the red

Poor economic growth will increase unemployment to more than 5 per cent and, in a worst scenario, house prices could fall as much as 25 per cent from their peak.

Of the $1.75 billion earmarked for new spending next year, $1.25 billion is already committed in areas such as health, education salaries and funding for KiwiRail.

There is just $496 million left to spend in next year's Budget and only $614 million in each of the next three years.

But the two main parties promised only modest belt-tightening in response, both looking for savings out of the $600 million funding planned for the Foreign Affairs Ministry.

Finance Minister Michael Cullen said he would not "slash and burn" and National leader John Key said it was not the time "to be slamming on the brakes".

The briefing yesterday, designed to ensure political parties are fully informed before the election, showed a sea of red ink compared with the May Budget.

Treasury secretary John Whitehead warned there could be worse to come, as official forecasts were prepared well before the latest turmoil on United States financial markets and concerns over the banking system.

"The situation is developing by the day and, by any measure, is very serious."

Growth is seen falling to just 0.1 per cent for the year to next March, before recovering to 3.3 per cent by 2010. That would increase unemployment from 3.7 per cent now to 5.1 per cent by 2010 - equivalent to about 38,000 jobs.

After overseeing a decade of surpluses, Dr Cullen goes to the election with deficits (excluding earnings from the superannuation fund) forecast to rise from $31 million this year to $1.7 billion next year and hit $3 billion by 2012.

The balance sheets will stay in the red till 2017-18. That compares with a surplus of $5.6 billion in the year to last June.

The cash deficit - the amount the Government spends more than it earns - blows out from a $2 billion surplus last year to a $6 billion deficit next year, and reaches $7.3 billion by 2013.

Tax revenue for the next three years will be lower on average by about $900 million, and benefit costs would rise $500 million. Debt-servicing costs also rise $500 million a year. The strong uptake of KiwiSaver and 20 hours' free early childhood education cost an extra $280 million and $200 million a year respectively.

Gross government debt would blow out from 17.4 per cent of gross domestic product to more than 24 per cent by 2013 and 30 per cent by 2018. Dr Cullen has set a target ratio of 20 per cent debt to gdp on average.

The rising levels of debt set a challenge to National, which would borrow two percentage points more than Labour to fund infrastructure, but would not borrow to fund its more generous tax package, due to be unveiled tomorrow.

At the release of the update, Dr Cullen said the scale of international turmoil was unprecedented. "What we thought we knew even five months ago has been overtaken by events."

He said his conservative fiscal management had prepared the country well for the bad times.

"That rainy day has now arrived."

In a swipe at National, he said it was no time for "risky and reckless promises or additional tax cuts". If it kept its nerve New Zealand would emerge from the crisis in better shape than many countries.

National's finance spokesman Bill English said his party was not content to run a decade of deficits. The figures were an indictment of Dr Cullen's mismanagement.

National would focus on providing short-term stimulus to the economy, while strengthening it for a longer-term recovery.

WHAT WENT WRONG?

Spending and residential investment have fallen faster than expected.

Households and businesses have faced steeply rising costs for electricity, interest rates, fuel and food, and businesses are feeling the downstream effects.

The housing market has weakened more quickly than expected and will remain depressed during the next year.

International financial turmoil has deepened, leading to tighter borrowing conditions, falling business and consumer confidence, falling asset values and fewer buyers for exports.

Lower household spending means a lower tax revenue and a fall in business profits.

WHAT NEXT

Both Labour and National are now promising to rethink some spending. The first casualty in Labour's belt-tightening looks likely to be the $600 million secured by NZ First leader Winston Peters on foreign affairs spending.

National says it will "rein in the bureaucracy and rein in waste" but has not said how much spending will be cut. 

- © Fairfax NZ News

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Fred   #1   05:26 pm Jan 28 2009

Clark and Cullen's legacy after nine years in power will be sticking NZ with deficits for the next ten years. Hardly, something that Clueless Cullen should take pride in. He crows about how his policies have prepared NZ for the crisis. He does not mention that those policies (over-taxing, unbridled spending...) forced the average Kiwi to borrow excessively just to stay afloat. International events over the last seven years resulted in unprecedented growth in the NZ economy. The NZ economy grew in spite of Labour not because of it. Labour took credit for the prosperity so now it should take the blame for the fall. Unfortunately, neither Clark or Cullen have a clue about where to go from here. Bring on John Key who has the real world experience to lead us through the coming months and years.

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