English dampens Budget hopes

CRAIG SIMCOX/The Dominion Post

HOT OFF THE PRESS: Bill English with an early copy of his Budget from printers in Lower Hutt yesterday.

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Finance Minister Bill English is damping down expectations that there will be something in tomorrow's Budget for everyone, as the first National Budget in a decade rolls off the presses.

"People won't be finding a lot of money in their bank account after this one," he said.

A $330 million insulation scheme is likely to be the centrepiece of the Budget. Up to 900,000 homeowners will be eligible for $1500 insulation grants.

But promised tax cuts seem certain to be axed.

Labour's last Budget delivered the first significant personal tax cuts in more than a decade but it also signalled the end of a long run of Budget surpluses. Labour finance minister Michael Cullen thought he had a $3.1 billion surplus to play with, but recession has turned it into an $8b-plus deficit.

Mr English conceded yesterday that it would be five years or more before any government got its books back into the black again.

He insisted that it would be a "no surprises" Budget. "It is a predictable Budget and the focus is on getting debt under control."

The austerity measures appear to have affected plans for a Treasury party on Friday: communications manager Mike Munro said staff would pay their own way at a Bollywood-themed lunch.

Yesterday Mr English met bosses from ratings agency Standard & Poor's, whose threats of a credit downgrade if debt is not brought under control have sparked fears of a flow-on effect to business and homeowners. A downgrade would raise borrowing costs.

But Mr English batted off suggestions that ratings agencies were dictating the shape of the Budget. He said it was not unusual for ratings agencies to be briefed before a Budget and it had happened last year.

"They have just said to us, as they have to every other government, they want to see a credible management of public debt."

WHY RATINGS MATTER

A credit rating downgrade would lift the interest rate the Government pays to borrow, which flows through to interest rates on mortgages and business borrowing.

A lower rating can also cut the number of investors willing to lend to us, increasing the risk that banks cannot roll over funding.

Treasury has warned that, based on Ireland's experience, a rating downgrade would add $600 million a year to our current interest bill.

Three agencies rate New Zealand's creditworthiness: Standard & Poor's, Moody's and Fitch.

Ratings have two components:

1. Rating strength The agencies have different ways to express this but it ranges from triple-A (the highest quality) down to triple or double-B ("junk") ratings.

2. An indication of how likely that is to change: stable, negative or positive outlook. Each country gets a domestic and, more important, foreign currency rating.

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