Here comes our “T” Party!

Yes, that’s “T” for Treasury – not Tea, as in the United States. But Treasury secretary John Whitehead’s step into New Zealand post-budget political cauldron could have a similar effect.

In his unprecedented post-budget interview on Q+A at the weekend, the Treasury secretary turned up the heat on incumbent politicians in government and opposition. Here are a few excerpts to give you the flavor of John Whitehead’s view on what New Zealand should be doing.

On lower personal taxes:

“I don’t think tax reform is finished in country. I think there will be more, but a step at a time.”

On the GST increase:

“I think something of the order of the move that we’ve made is quite a substantial one for a first step...”

On lowering or removing overseas investment screening:

Yes, for all but the most sensitive items… and then the definition you would argue about is what’s sensitive… There’s a process going on at the moment, revising the Overseas Investment Act.”

On the government reduction in pre-funding for superannuation:

Treasury’s advice is get your debt down first, and get back to surplus, and that was part of the original act that was passed on the superannuation scheme. Once we’ve done that, our advice is get back into pre-funding.”

On New Zealand’s debt burden:

“Our external debt rates are higher than Greece’s, they’re higher than Spain’s, [in] the order of Portugal’s, or a little bit less then Portugal’s … The matter of concern is at a time when markets are fragile and people are looking for safe havens, they’re looking around and saying ‘well, which countries have low levels of debt’ – and New Zealand is not one of those... ”

Whitehead makes no secret of the fact that Treasury has urged the government to “go faster in getting its debts in order” – or of its view that tax reforms need to embrace capital gains, a step that has been resisted by both National and Labour in the past, or that we cannot afford New Zealand Superannuation at 65 “plus all the other things we’re doing”.

He candidly reveals that Treasury has been “thinking” about “some of the arguments people advance against privatisation” – even though the National-led government has put a hold on State asset sales in its first term and has not asked Treasury for any specific reports on the issue.

Treasury has also been working on proposals to reduce or remove screening on overseas investment as part of the current review of the Overseas Investment Act – at a time when the temperature is rising across the political spectrum over foreign investment as the Crafar farms go on the block.

In short, the “T” party is challenging the National-led coalition to go further and faster on tax reduction, deficit reduction, asset sales, and foreign investment. Whitehead also says New Zealand needs a range of options to improve savings and thinks “compulsory superannuation should be part of the debate.”

Increasing government spending and debt is not the “T” party’s path to sustainable economic recovery – and that is what National is doing over the current budget planning horizon. Treasury forecasts show government budget decisions are likely to see core crown spending increase from $65 billion now to $77 billion by 2014, while government revenue trails spending up from $56 billion to $73 billion Government net debt will rise from 14.1% of GDP to 26.5% - that is from $14.1billion to $26.5 billion. That is if all goes according to plan.

Treasury’s caution was supported last week, by the latest Economic Outlook report from the Paris-based Organisation for Economic Cooperation and Development. The OECD says:

“Instability in sovereign [government] debt markets poses another serious risk … Bolder measures must be taken to ensure fiscal discipline … With a huge debt burden weighing on many OECD countries and the strengthening recovery, the emergency fiscal measures provided by governments to tackle the crisis must be removed by 2011… ”

Of course, the OECD can get it wrong. Remember what is said in its pre-crash Economic Outlook forecast in 2007.

“Our central forecast remains indeed quite benign: a soft landing in the United States, a strong and sustained recovery in Europe, a solid trajectory in Japan and buoyant activity in China and India.”

Whatever happens, the “T” team’s favoured course is even more opposed to Labour’s alternative policy signals: given the Opposition’s attacks on the top personal tax reductions, the comprehensive GST increase, its resistance to more lenient foreign investment rules and state asset sales, and its advocacy of increased government borrowing to sustain the recovery.

However, the sequence of events over last weekend makes it clear that Treasury was going to be embroiled in political debate with Labour over the 2010 budget, whether Whitehead had spoken up or shut down.

The day before Whitehead appeared on Q+A, Labour’s Finance spokesperson David Cunliffe told TV3’s The Nation, that Labour had obtained independent economic analysis to show that the government heading into a $9 billion deficit hole that has not been revealed in the Budget documents.

It remains to be seen whether Labour’s independent analysis withstands expert scrutiny. If it’s accurate, it means Labour will have an even bigger problem living with Treasury’s “T” party line than National. If not, it’s another win for the “T” party.

To the bottom line: in 35 years of tracking New Zealand politics, I have never seen a public servant leap so joyfully into the political cauldron as John Whitehead did last weekend. It’s a shame that he will be leaving his top Treasury post next year before the debate has been resolved by the voters. Long live the “T” party. At least I know what it stands for.