Treasury books `sea of red ink'

National appears set to slash government spending to pay for its tax cuts and other campaign promises after the Treasury unveiled a grim economic forecast.

Yesterday's pre-election economic and fiscal update (Prefu) took financial analysts by surprise, with the Government's books a sea of red ink on nearly every economic measure.

Among the sobering numbers in the update, years of cash surpluses have been transformed into big deficits, hitting $5.9 billion this year and forecast to peak at $7.3b by 2012.

While just months ago the Treasury was predicting surpluses from next year, it is now not expecting the country's accounts to recover from deficit until 2017.

Finance Minister Michael Cullen urged New Zealanders to keep their nerve, saying the country would "pull through" in better shape than its trading partners.

He said the Treasury and the Reserve Bank had been considering the implications of implementing a government guarantee of bank savings, as the United States and Ireland had done.

The economic bad news has already claimed its first likely expenditure cut, with Cullen announcing Labour planned to scrap the $600 million promised by suspended foreign minister Winston Peters to expand the Ministry of Foreign Affairs and Trade.

The woeful economic news puts pressure on the National Party to deliver a credible alternative economic programme when it unveils its tax-cut package in Auckland tomorrow.

National's tax cuts are expected to add $6b to the $10b Labour has pledged to spend, but the Treasury says there is as little as $496m in total available for new spending in the next financial year.

National announced yesterday a plan to scrap parole for repeat offenders a policy that would cost $360m.

That means National will have to find almost all the money through cuts to existing spending programmes.

The party has called a press conference for this afternoon, when it is expected some of the cuts will be outlined, before the tax announcement.

National finance spokesman Bill English yesterday hinted he might take the razor to the Crown accounts, saying the Prefu figures were "a bit worse than we expected" and that the party was still digesting them. He said National was not content to run a decade of deficits.

"The way out is to control the growth of government spending and grow the economy. That will require a fresh approach," he said.

 

English said National's economic plan would focus on providing "short-term stimulus" to the economy code for tax cuts while strengthening the Crown's position for economic recovery in the longer term.

National's plans to borrow $5b to pay for infrastructure development are also under scrutiny, with the Treasury saying the country's debt is already set to rise to 24.3 per cent of gross domestic product.

National had planned to run a debt track 2% higher and will now have to go to 26% if it is to continue with its plans.

The big deficits are being driven by lower than expected tax revenues, which are expected to fall by $900m a year for the next four years.

The Treasury expects benefit costs to rise as more people become unemployed, adding $500m a year to the welfare bill.

Debt servicing has added $500m to the Crown's costs, while the Treasury forecast the rising costs of Labour's KiwiSaver and 20-hours-free early-childhood education would add $480m.

The news could get worse, with the Treasury warning it prepared its forecasts in late August before the latest turmoil on world markets.

Treasury secretary John Whitehead said the "unprecedented" Wall Street meltdown could exacerbate the slowdown in the New Zealand economy and, if that happened, the housing market could plummet, with price falls of up to 25%.

Cullen said there was no need for a "slash and burn" response.

He said Labour's tax cuts were safe, but there was no room for National to cut taxes further, he said. "Now is not the time for risky or rash promises, or additional tax bonuses over and above what has already been announced."

English said the state of the books was an indictment on Cullen's economic management.

"It's a day of reckoning for a government that has focused on spending, and ignored the need for investment in future growth," he said.

 

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