Do the sums and read between the lines, and it looks like something has to give in this year's budget. And I think I know what it may be...

So Bill English hasn't dropped enough pounds... or, at least, dollars. Weight loss is the metaphor Bill English has chosen to excuse his failure to meet the government oft-repeated and top priority of reaching surplus by 2015-16. That's right, it's sayonara surplus.

English's explanation run along these lines:

"...imagine if someone said they’re going to lose 10 kilos of weight and they lose 9.9 kilos. That doesn’t mean they’ve failed. It means they can get to 10 kilos, it’s going to take a bit longer, and it’s the same with the surplus."

Which is fiscally fine as far as it goes; the economy isn't at any risk from this failure and the markets seem unperturbed. But politically it's far from fine. If you fail to honour your number one election promise, there will be implications.

But to say English and Key have got National into something of a political pickle is obvious... and there's not much more to be said until we see what shape the political damage takes.

No, what interests me is the economic pickle English now finds himself in after seven straight deficits. Let's take a step back.

A year ago English was loosening the reins a little. He felt he had successfully navigated New Zealand through the global financial crisis, smoothing off the rough edges for the most vulnerable. He deserved and still deserves credit for that. At least in part.

Yet he spoke too soon. He locked in a surplus when the tide was turning on dairy, the dollar and inflation. And he gave himself an increased new spending limit of $1.5 billion, up from the $1billion of his previous budgets. He whipped that extra half billion away last December as the current pulled at him (even though it was designated for his precious tax cuts). Now, as his tax revenues shrink still further  - by a forecast $4.5 billion over the next four years - he's in real trouble.

With just $1 billion in new spending this budget, he has to give around $700m to health and education just to keep up; that's become a given over the years. Now English says he's been able to trim here and tuck some pennies away there, but it's not going to leave him much more than another $300 million for new spending.

So with much less than he thought he had a year ago, what does he do?

Cut spending? He's promised not to do that and promised it again this weekend.

Borrow more? He's promised to reduce that too.

Back away from National's core policy promises? He won't do that either.

So what's a Finance Minister to do? How does he square that circle?

English is insisting that with much less money he won't cut, borrow or break any promises. That looks like a man in denial.

One suggestion he's given is to delay. On The Nation  this weekend he said:

...it does mean that you can’t do everything at once. You’ve got to work into these things; they take a bit of time.

So are you going to have to delay some things, Minister?

Well, look, there’ll be some things which do take a year or two to get there, but there’s other things which you can’t delay. For instance, this year, we’ve got a number of pay rounds in the public service – nurses, police, teachers, lots of other groups. You negotiate those pay rounds. You have to pay the bill and we pay it willingly, because these are people who deserve to be well paid. There’s some things you can delay, but a lot of things you can’t."

Well, he won't delay tax cuts because that's red meat to the base - and a fair few swing voters - in election year, 2017. Although his political management of that will be interesting because there will now be a lot riding on it, yet it will only be worth a block of cheese when it comes. So much in politics is managing expectations and it will be hard not to disappoint.

But the bigger disappointment - at least this year - seems to be around tackling poverty. Straight after the election John Key won praise from all quarters for his determination to take the issue seriously this term. He had listened to the electorate, he said, and he would act.

Along with those tax cuts and debt repayment, it was a big issue our recovering economy was going to now be able to address. But listen to him on The Nation:

Okay. So what about measures to curb poverty, then? Will they have to be delayed? Because the Prime Minister identified them as something of a priority. Is that going to be delayed?

Well, we’ve been working on these issues for a while, particularly focused on communities and families with persistent deprivation and caught in a cycle of dependence. And so you could expect to see us continue with that sort of programme through this Budget...

But can we expect something in the Budget –some measures to counter child poverty? You can still afford that?

Well, as we’ve pointed out, the ability to afford large-scale programmes just isn’t there. We’ve got a track record of addressing these issues at their most fundamental level, and we’ll continue with that.

But then, do you see what I’m getting at, Minister? You have limitations, because you’ve got a certain amount of money; it’s less than what you expected. You’ve still got a shopping list of the things that you want to spend it on. Should we be expecting less, or does something have to give?

Well, you shouldn’t expect too much, of course. And I do know what you’re getting at, because I’ve spent the last three or four months working away with all these issues, and we’ll lay out the detail. But you can expect to see from this government what you have in the past, and that is a pretty considered and incremental approach.

The language is telling; you can expect to see a contination of programmes, but nothing new. In fact, the money for large-scale programmes just isn't there.

So it looks like John Key may be lining up for a very embarrassing backdown on poverty. Will voters feel let down? Did they think of that as a core promise? Or will they shurg it off?

Perhaps Key's teflon will only be pierced when interest rates start to rise and when the economic growth spurred by Christchurch and immigration starts to fade.

But there's a sense that this budget, which was meant to be a heroic return to surplus and another step on the road to recovery, could yet become a political pothole for National.

 

Comments (11)

by Ian MacKay on May 02, 2015
Ian MacKay

Sorting poverty can take a year or two and the claim can be made that we are working on a plan. Just might take a bit longer. Like the new Highway bridge out of Blenheim promised as a promise (bribe) in the last election. That might take a year or five since the Government has many other bridges promised and a lower surplus. So not the Government's fault that they cannot afford promises made. That's OK then.

by Katharine Moody on May 02, 2015
Katharine Moody

Wasn't it mainly wage inflation and the resulting 'bracket creep' that saw Michael Cullen get so many successive surpluses?

How can any government reverse a deficit without planning for an increase in income?

Check out what the Aussies are doing;

http://news.domain.com.au/domain/real-estate-news/tony-abbott-and-joe-ho...

http://www.theage.com.au/victoria/state-budget-labors-new-tax-will-slug-...

So many missed opportunities with this government.

 

by Alan Johnstone on May 03, 2015
Alan Johnstone

"How can any government reverse a deficit without planning for an increase in income?"

Well, they could spend less. I'd have thought that was fairly obvious.


by Katharine Moody on May 03, 2015
Katharine Moody

Well, they could spend less. I'd have thought that was fairly obvious.

Indeed but of course this government has always taken the opposite stance - that is, they've purposefully borrowed more for new spending (the targeted $1 billion dollar additional operating expenditure per annum) - with a hope that if revenue exceeded forecasts they would pay down more debt;

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1125...

According to that, "Paying the interest on our debt [in the 2014/15] year will cost $3.6 billion - more than we will spend on the police and early childhood education combined," English said.

Not sure what that interest on our debt number will be this year.

by Tim Watkin on May 03, 2015
Tim Watkin

From Barry on the previous (accidentally duplicated) post:

In 2008 they promised a decade of deficits.  They are nearly there.

The problem with missing this year's surplus is the creative accounting used to try to get there has made next year even harder.  They deferred a lot of expenditure and sold off half the power companies.  Now they have to account for it.  They are also cutting ACC levies.

It is unreasonable to blame inflation for lower than expected income, because inflation also means lower than expected outgoings.  The lower than expected income is because they were banking on record milk prices continuing.

So now we have a government that criticized Labour's economic management being responsible for breaking records in economic irresponsibility.  Longest continuous deficit, greatest increase in debt etc. At the same time they are burning environmental capital at a record rate (but this doesn’t get recorded in their books so it doesn't count).

At the same time they have cut the public service to the point that services are declining rapidly.  They margins for saving is getting slimmer all the time and, as you say, it is programmes to help the most needy that will suffer.

I think tax cuts in 2017 will be seen as an irresponsible bribe.

by Tim Watkin on May 03, 2015
Tim Watkin

Katharine, thanks for that link.

Debt repayment was the other main promise alongside tax cuts and poverty... It was usually couched in terms of "when conditions permit", which was meant to be about now. Yet conditions have deteriorated. But it's interesting to see this quote:

"If tax revenue comes in well ahead of forecast, the Government's main priority will be additional debt repayment until the 20 per cent debt target is met," Mr English said.

There have been a few main priorities listed by National, and I think while English understands the politics and of course would like to give tax cuts, there's some difference of opinion between him and Key on this one.

by Tim Watkin on May 03, 2015
Tim Watkin

Alan, we've had zero budgets for years now. In real terms he has cut. Do you really think there's a lot of fat around? It seems in a number of core institutions a lot of patch-up money is being spent and we're saving pennies now that will cost us pounds later.

by Flat Eric on May 04, 2015
Flat Eric

Katherine you missed this link

http://www.bbc.com/news/world-australia-32579226

 

by Alan Johnstone on May 04, 2015
Alan Johnstone

Public spending as a percentage of gdp is still way north of 40%. We've got a long way to go, there's tons of pork to be cut.

Problem is the wrong things are being cut, middle class and corporate welfare is being left uncut

 

by Brendon Mills on May 05, 2015
Brendon Mills

So what services/programmes should be cut Alan?

by william blake on May 05, 2015
william blake

I'll but in and say that the 3% of GDP, spent on debt servicingshould be cut. 

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