Budget 2010: Solid, Sensible – but Sustainable?

The worst thing about Budget 2010 is that was so predictable. What’s not so predictable is its sustainability

Bill English promised his second budget would be solid and sensible. The only real surprises were that he (slightly) under-promised and (slightly) over-delivered on personal tax reductions and managed to steal a march on the Australians with a company tax reduction that would have been unavoidable sooner or later.

The rest of the major changes had either been spelled out in detail or, at least, signalled in advance: the GST increase covered by tax reductions; the closing of the loopholes that let asset-rich New Zealanders minimise their income to the point where they claimed assistance from the seriously flawed Working for Families scheme while they waited for their untaxed capital gains; the boost for business-related science and technology; and the capping of runaway costs in early childhood and tertiary education.

The response has been equally predictable. From the right, the call is for bolder “step change”; from the centre, it’s a step in the right direction; and from the left, the idea of Telecom’s chief executive walking home with an extra $2,600 a week, compared to the average wage-earner’s gain of 35 cents a week is a red rag to the roaring bulls.

Phil Goff’s post-Budget speech in the House could have been taken as read. He’d rehearsed much of its content many times before. He must have seen Christmas coming when John Key started softening up the electorate for the reduction in top personal tax rates earlier this month. That “don’t envy the rich – we need them” line would have resurrected memories of Ruth Richardson cheerily talking up the “mother of all budgets” as she went in to sock it to the beneficiaries. Here was another chance to wheel out his new campaign line: Labour's commitment will be more money in the pockets of the many, not the few. And away he went.

Key was ready for him with a speech that cemented Goff to the same Cabinet table with Roger Douglas when he delivered personal tax relief for the rich, with David Caygill when he suddenly introduced an uncompensated increase in GST in 1989, and with Michael Cullen when he sat and watched while the asset-rich started digging their bolt-holes to minimise their tax liability and began mining the WFF welfare scheme that was set up to substitute for low and middle income personal tax reductions.

Unfortunately for Phil, he now lives with an “axe the tax” slogan on GST that he is not confident enough to convert into a policy commitment, and he is not able to explain exactly where the money will come from to create the “smart, high skills, high wage” economy he wants so he can put “more money in the pockets of the many” after he reinstates the top income bracket tax rate that Key is reducing.

Unfortunately for the rest of us, the Key Government may also run into similar problems.

The Treasury Budget Economic and Fiscal Update predicts government policy changes will drive a spike in inflation over the next year. In June, the tobacco tax will bump it up by 0.5%. In July, the Emissions Trading Scheme will jump it by another 0.4%. In July, ACC levies on motorists will lump it with another 0.1%. And in October, the GST hike will pump it by another 2%.

Inflation is expected to rise close to 6 percent for the year ending March 2011. Where inflation goes, interest rates and exchange rates will surely follow under New Zealand’s prevailing monetary policy. There is enough pain waiting around the corner to wipe away the feel-good effect of the latest Budget before the election in 2011.

The other negative political factor that will emerge over time is the impact of the budget cutting and switching within government agencies to eliminate all that “low quality spending” Bill English keeps talking about.

Since this is the first time that the chief executives in the state services have been encouraged to suggest their own budget cuts we must expect that there have been a few slips of the knife during the operation.

Reading through the individual vote estimates in the Budget never reveals the full story. We will only hear about the injuries when the wounded start screaming. However, governments can suffer death from a thousand small cuts, just like anyone else – and there will be screaming to come.

The big unknown is whether the wider world economy has stabilised to the point where New Zealand can feel assured that we are not going to be engulfed by another financial tsunami sweeping out of Europe, the United States, or Asia. The Greek economic crisis, extended across the continent, is far from solved. The latest news from the job and politics fronts in the United States is far from encouraging. And there is growing nervousness about the property bubble emerging in China – the major market that has underpinned the recovery in our export trade.

There is one certainty in all this: global competition for funds – between governments, banks, corporates and private borrowers – is going to intensify.

The sound and sensible thing to do is to plan for a more subdued and somewhat erratic recovery. So maybe a sound and sensible budget is best just now.