National's fiscal lockdown a risk

16:00, Apr 04 2014

No can be an easy answer to give when everyone agrees it is the only one available.

Bill English has created a reputation as an immovable object come Budget season, with little or no "new" money to distribute, with only cuts from some areas creating space for health and education.

It has made the Southlander something of a man of our times, especially in 2011, when he was able to joke about presiding over an $18 billion fiscal deficit, the largest in history ("well at least you've achieved something in your life," John Key apparently told him) with little fear of the repercussions.

Between earthquakes, worldwide economic malaise and policies he inherited, none of the blame appeared to be falling at the feet of English, and the electorate voted for another dose of the same restrained medicine.

At the same time, interest rates sat at record lows, and even though they were low across the Western world, somehow National deserved credit.

This year the economic outlook is markedly different but, based on this week's pre-Budget speech by Key, the song will remain largely the same - there will be no marked increase in spending.


The books English will release on May 15, for the year to June 2015, are expected to predict the Crown will post a surplus so small that it is of only symbolic significance - although the symbolism of a surplus should not be sniffed at after six years in the red.

Thereafter the gains quickly become material. Going on what Treasury said in its last major update in December, the following three years will see a combined surplus of $10 billion.

There is an element of guesswork in any forecasting, but after years of English promising that restraint now will lead to greater "options" later, there would appear to be a broader range of options today than three years ago. But National has spent much of this week presenting this as a mirage.

Six weeks out from the Budget, Key played a card likely to frame the debate for the coming election - a Treasury warning (which we are yet to see) that any kind of Budget lolly scramble, now or in the future, will help make the Government "part of the problem" by driving up interest rates.

To drive home the point, Key offered voters a question to keep in mind.

"If a political party tells you they are going to spend a lot of money, ask them how much it is going to cost your mortgage."

Already it appears that interest rates could rise a full percentage point by the end of the year, yet Key is making a naked attempt to convince voters it would be even worse under Labour and the Greens.

If that proves successful, the Left will be painted into a corner where every spending initiative from now until September 20 will be seen as irresponsible.

Treasury also warned that there was a need to get the national debt - expected to peak at $65b - under control.

While many voters will see this as a concern, it is likely to be so large as to be incomprehensible, especially compared with their monthly household expenses. Hence the focus on interest rates.

Yet the situation smacks of Key asking a question designed to give him exactly the answer he wants.

With the Government spending roughly $1.4b a week keeping various branches of the state operating, the prime minister is telling us that spending only a few million more (or even returning that much in tax cuts) will be the tipping point between restraint and Government-induced inflation, ripping cash from the hands of our hardworking families.

Labour, for its part, appears to be buying into the same argument, promising to repay debt with similar haste to National, and hinting that while it will seek to gather more revenue by way of tax, it would be less than 1 per cent more.

Since Key's speech, Labour finance spokesman David Parker has attempted to portray National as the tax-and-spend government, citing the surge in spending and debt since Key took office.

Parker's figures are mischievous on several fronts, blaming National for the final Budget of the last Labour government. To suggest that the entire debt pile is National's fault is, by implication, blaming it for the cost of the Christchurch rebuild. And it is not as if Labour is likely to propose a major programme of spending cuts if it wins the election.

Still, Parker's questions are not without merit.

Government spending is up substantially under National however the figures are sliced, because as much as National claimed measures such as working for families and interest-free student loans were middle-class welfare, they have done nothing to roll them back.

The idea that it will be the next dollar of spending which will make the difference to interest rates could be a savvy way of turning a negative into a positive.

If the strategy fails, it could prove damaging. After six years of restraint, while now being told the economy is the envy of nations, National is offering nothing new.

By effectively telling us that it would be cavalier for the finance minister to do anything other than say no to new spending, National might find itself in trouble if voters choose to believe Labour can offer something different.

Fairfax Media