Cuts everywhere but on taxes

BY TRACY WATKINS

National will have to win two more elections before it has any money to spend as it shares the pain with 70,000 workers set to join the dole queue, by warning of tough times ahead.

Admitting that the "best of times" had become "the worst of times", Finance Minister Bill English delivered a bleak Budget yesterday, reining in spending, scrapping the next two rounds of tax cuts and putting pension funding on ice in a bid to bring debt under control.

But after a golden 15-year run of surpluses, Mr English posted a whopping $9.3 billion deficit and it will be 2016, two elections from now, before he posts his first surplus, unless there is a dramatic turnaround in economic fortunes.

But the Treasury's forecasts are pessimistic; they are tipping a further 70,000 workers to join the dole queue between now and next year more than 1000 a week a return to early 1990 levels.

There is a financial cost as well as a human one; the rising unemployment bill will cost an extra $2.5 billion in the next four years.

The recovery is not picked to begin till the end of the year, but the Treasury warns that there is great uncertainty about how bad things will get.

The Government will borrow $34 billion over the next four years to help cushion the blow, forcing debt back up to levels not seen since the 1990s.

But Mr English has averted an even bigger borrowing blowout by shaving $2 billion from Government spending and warning the public service that more belt-tightening lies ahead by making little provision for future spending increases.

There was a sigh of relief when it had the immediate effect of staving off a threatened credit downgrade that would have pushed up the cost of Government borrowing by hundreds of millions of dollars a year, flowing through to the cost of borrowing by households.

But National's flagship election promise on tax cuts had to be sacrificed Parliament was rushed into urgency last night to repeal legislation passed just months ago paving the way for tax cuts in 2010 and 2011.

Plans to fund the cost of baby-boomer pensions are also on ice, with the Government cancelling any automatic top-ups to the so-called Cullen super fund till 2020, saving itself $30 million a week.

Mr English made it clear that there was unlikely to be any money in the kitty to restore it in the foreseeable future.

No-one had predicted how savagely the international recession would bite, and it had "laid bare" the weakness of our economy, he said.

But while National painted it as a "balanced" Budget aimed at putting the country on the road to recovery, Labour attacked it as forcing fresh uncertainty on baby-boomers over pensions, and ACT labelled it the "borrow and hope" Budget, accusing National of reneging on its tax-cut promises.

THE GOOD, THE BAD AND UGLY OF THE THE BUDGET

THE GOOD

In a Budget with few big initiatives, $323 million for home insulation and heating sticks out like a frost-bitten toe. About 180,000 households will get grants up to $1800, with Community Service Card holders in line for up to $3000.

Health gets an extra $3b over the next four years, including cash to train more doctors and nurses and subsidise medicines.

Creaky school rooms will get a make-over with a $523m fund to build and modernise schools, part of $1b more over four years for education.

The cops should find it easier to catch bad guys: $182m for 600 extra police by 2011.

Pensioners can rest easy for now  the Government locks in existing entitlements of two-thirds of the average wage at age 65.

THE BAD

Tax cuts promised for next year and 2011 get axed, with no date for their likely reinstatement.

A rise in the independent earner rebate from $10 to $15 also scrapped.

The Superannuation Fund takes a hit, with automatic government contributions suspended till 2020 to help rein in debt.

The cupboard is almost bare  a tight lid on future spending increases across the board from next year.

Savings to free up cash for new priorities spell more job losses in the public sector.

THE UGLY

The good times are over, with the first operating deficit in more than a decade  $9.3b in the year to June 30  and surpluses not expected again till 2016.

Deficits mean more debt. The Government will borrow an extra $34b over the next four years.

Gross debt  the difference between what we owe and what we own  will peak at 43per cent  of gdp in 2017.

The economy will shrink a further 1.7 per cent next year.

Around 70,000 more people set to join the dole queue as unemployment peaks at 8 per cent next year.

- © Fairfax NZ News