Budget 2014: Things are not quite as they seem

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Last updated 14:23 15/05/2014

Budget 2014: What did you think?

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It's restraint Bill, but not as we knew it.

OPINION: The Budget is back in the black, but behind his shopfront $372 million surplus Bill English is loosening the purse strings in preparation for the September election.

The first shot in the unofficial campaign bidding war is the move to increase the new spending projection from $1 billion to $1.5b from next year - a small stash of cash that can be splashed on the hustings.

English said that was the outer limit of what Treasury thought could be afforded before "material pressure on interest rates" started to emerge.

As a political line in the sand it is a clever move to try and box Labour and the Greens in. But it is unlikely a slight "transgression" by a couple of hundred million dollars would make any noticeable different to demand in the economy, inflation and hence the Reserve Bank's reaction.

In fact English has given himself the flexibility to use more next year - or whenever the tax cut tease becomes a reality - by stipulating the $1.5b as an average across the forecast period, rather than a bright line in any one year.

The $400m surplus for the coming year is larger than had been expected, but is also politically prudent given the risk that things could change between now and the election - and in the pre-election update in August.

English and Prime Minister John Key would not risk the surplus, with all its potent political symbolism, evaporating before the campaign started. Under $100m would have seriously risked that. About $400m is a much wider margin for forecasting error.

The upshot of today's spending decisions, the extra allowance for new initiatives and the sagging growth track - which starts with a hiss and a roar at 4 per cent in the coming year but quickly moderates to 3 per cent and then 2 per cent in the following years - is a big drop in future forecast surpluses.

In December Treasury was tipping $10.5b in accumulated surpluses over the forecast period. That has now dropped to $7.6b and the peak of $5.6b in 2018 has dived to $3.5b.

Nominal net debt actually grows from $59.4b to almost $65b even as its proportion of the economy falls from 26 per cent to 24 per cent.

It's debt reduction Bill, but not as most people would see it.

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