Bill English's smoke and mirrors: when good is bad

The Finance Minister will paint a grim tomorrow of high debt and cumbersome taxes to justify his agenda. The truth is something other, but hey, this year's Budget is taking us right down the rabbit hole

In recent weeks, Phil Goff has been trying to argue that the National government deserves no credit for the upturn in the economy and growing employment; we're simply benefiting from a rebounding global economy. Of course that's the reverse of his argument during the recession, when National was solely to blame for the spike in unemployment and the world an innocent bystander. But, hey, that's politics, and tomorrow it's Bill English's turn to twist grey facts into his own version of black and white.

Come Budget time, we’re likely to be exposed to the remarkable sight of a finance minister playing down economic growth and budding prosperity in order to justify the scythe he’ll be taking to public spending. As much as National would love to trumpet its fiscal prudence in troubled times, its longer political game is to shrink the state, and that means pretending things are worse than they are for a little while longer. Ideally, English can delay taking any credit for economic success until next year; election year.

Down the rabbit hole and into the beltway, the politics of this Budget week is that both major parties will be swearing that up is down and good is bad. Politically, both would rather that the economy wasn't looking quite as robust as it is.

Of course, it's hardly nirvana and a glance at Europe and even China suggests we shouldn't pause to wipe the sweat from our brows just yet. Yet as you listen to Bill English's second Budget, keep reminding yourself that New Zealand is in a much better economic position than most its trading partners.

The latest monthly economic review from the Parliamentary Library points out that in May unemployment fell nicely and our unemployment rate is now 10th lowest in the OECD. Annual inflation remains at roughly two percent. The housing market is happily subdued. Fonterra has announced a great increase in the price of milksolids. The OCR remains near historic lows. Our GDP has grown in three consecutive quarters.

"The economy continues to recover, although (to date) both consumers and businesses have been cautious in their spending and investment decisions, paying off debt instead," the Parliamentary Library writes.

Sounds pretty solid, eh? Yet English will fret and frown over his Budget in order to convince us that he needs to be tough on cutting "low quality" spending.

I imagine he will hold up the spectre of Greece and the Euro-Zone's woes as he makes the case for his $1.8 billion cuts and his recession-based decision to limit new spending to $1.1 billion, so that we can pay off government debt more quickly.

Now don't get me wrong, everyone likes to pay off their debt. But the facts are that New Zealand's public debt is in great shape compared to many other countries, which have borrowed heavily to stimulate and re-configure their economies through the recession.

Our government debt as a percentage of GDP is 27 percent. According to the CIA, Britain's is 68%, Germany's 77%, Canada's 72%, India's 60%, America's 53%, Malaysia's 48%, South Africa's 36%, and even the ever-impressive Norway's is 60%.

As the IMF reported recently, the risk of global government debt "cannot be ignored". But it's talking about much, much bigger numbers than we face. It frets that debt in developed economies will expand to about 110 percent of gross domestic product by 2015, from 73 percent in 2007. That's a long way from 27 percent.

The other bit of smoke to be used with mirrors tomorrow is around taxes. English will tell us how over-taxed we are, which sadly for him is an argument somewhat undermined by an OECD report last week showing that we get to keep more of our money – or have it re-distributed back to us – than almost any other OECD country.

A "tax wedge" is the difference between the total labour costs to the employer (mostly wages and salaries) and net take-home pay. Because we lack compulsory savings schemes, state taxes, and the like, only Mexicans get to keep more in their pockets than we do.

Our tax system isn't perfect – we're oddly radical in the way we don't tax capital gains, for example, and there are loopholes in that area that the government is now hinting it may close. But it looks as if English will be asking a lot of our tax system in this Budget; probably too much. Which brings us to the final bit of smoke and mirrors that we can expect.

Perhaps the biggest fact-twist of the day will be that this Budget represents a "step change" in the New Zealand economy, when all it does is expose National's obsession with cutting taxes and lack of fresh ideas.

Y'know what? A tax switch and some reconstituted science funding a "step change" doth not make. Cutting taxes won't suddenly make people invest. Moving tax off income and into goods and services is not enough to create a savings culture. Much more is needed, and this was supposed to be the Budget that got things done.

Hopefully something has been kept up a sleeve somewhere. Because unless there's a lot more than expected in this package – more of the things I wrote about here – then come tomorrow afternoon I'll be asking myself, 'what happened to the government's ambition for New Zealand'?

Or in other words, 'is that it?'