Bill English's third Budget has laid foundations. For a couple of short-term goals, in particular. But what's the point if those foundations are being undermined even as they are laid?

In his barn-storming, even cocky, address to the House yesterday, John Key let slip what this budget was really all about - twice. Was it growing the economy? No, that's not the work of conservative governments. Was it saving jobs? Nope, that was last year's message. Was it savings, as he had promised it would be in his address to parliament in February? Not that either, as it turned out, as total national debt will hardly be touched by this strategy.

No, the PM never spoke a truer word when he said, "Phil Goff might not like it, but Stanard and Poor's does". Much of this budget was written to satisfy the credit ratings agencies.

And the second revelation. When Key ended by looking across at Goff, saying, "see you on the campaign trail". Because the other purpose of this budget was to satisfy voters just enough to ensure a second term.

So for me, the S&P headline sums it up. Bill English's third budget utterly political and just as utterly focused on keeping the feathers of the foreign money lenders unruffled. It is a Budget for the short-term.

But the words work on other levels as well. What we saw yesterday was utterly standard fare for a National government - orthodox, conservative and a budgetary child only an accountant could love. Poors? Well, it it did little to address the growing inequality in this country inspired by the tax cuts of recent years. It had next-to-nothing to say about how a government can help a country grow rich.

And while it addressed the poverty in the government's books, with its cuts to achieve surplus, it did nothing to address the red ink in the bank accounts of households all over the country. A potential surplus in these times is nothing to sniff at. But I wrote at the start of the week, government debt is not the problem. Your debt and my debt is. And by the figures in the Budget, our net national debt is still 85% of GDP and rising by 2015.

So much for Key's promise in February that reducing "our dependence on foreign lenders" and building "up the pool of Kiwi-owned savings and investment" would "be the focus of this year's Budget".

On one hand, I can appreciate the standard practicality of some measures. Low interest rates, low taxes, low government debt do make it easier for businesses to grow. Government accounts were always going to be reduced as money went into propping up the economy during a huge recession and paying to re-build our second largest city. No amount of wishful thinking can ignore the cost of Christchurch; as English and Key both said, at 8% of GDP it is proportionately more expensive than Japan's rebuild (5%) and indeed any other disaster that anyone can remember.

So it's reasonable to assume the some savings and "reprioritisations" are needed and admirable that we can pay off debt so quickly (if the forecasts pan out). Increasing individual and business contributions to KiwiSaver, for example? Good, we want to grow that pot. Remember in Australia they're raising contributions from 9% to 12%. Cutting government contributions temporarily makes sense, if the alternative is higher interest rates. So is pushing to get more student loans paid back.

And our low wages remain our biggest handicap, so if wages can increase by 4% a year, then well done to that government.

What must also be applauded is that this government has resisted the temptation to use the cover of bad times to cut further and faster. We all remember the 'mother of all budgets' and the days when jobs, savings and re-investment were sacrificed on the alter of productivity. Yes, this is a cautious government, but better cautious than brutal, and at least the poorest aren't the worst affected this time.

I'm also intrigued by the potential of the widely-ignored Local Government Funding Agency, which will provide a centralised, co-operative body to raise money for local bodies at a cheaper rate than they could achieve individually. A most un-ACT-like ACT policy.

So, some good foundation blocks. The problem is that they're being laid on the muddy bog of National's previous tax cuts, which slashed government revenue at a time it needed it most. As Jim Anderton said yesterday, the government is borrowing $2.5 billion a year to give tax cuts to just the top ten percent of earners.

Having not learnt the importance of government revenue to, y'know, build and run stuff, the government is now set to pour more water into that bog by partially selling the highest-earning state assets. Those 49% sales will leave the government worse off in the long-term for the sake of a short hit of $5-7 billion.

What's more, the decision to end the days of government stimulus means that while our national house might be nothing more than a foundation. Is the private sector ready to start the building without the government stumping up for some of the bricks and mortar? Maybe, but it's a punt.

That's what makes no financial sense to me. Yes, you can ask where on earth the public sector is going to find $1b in savings and what happens if the politicians don't like what the CEOs choose to cut. Yes, you can point out that the assumed figures are perhaps "heroic". Yes, you can argue that the middle folk cop the flak yet again.

But none of that deals with how we grow as a country. It lacks, to use National's word, ambition.

Because if we can't save and invest in this country, if we can't grow exports and wages, if we can't protect government revenue and therefore public services, we can't keep our assets and do something about the growing costs we face in our daily lives, then those foundations will simply sink into the mud.

Comments (14)

by onsos on May 20, 2011

I think you are entirely mistaken when you describe Bill English's third attempt as "a budgetary child only an accountant could love." Its return to surplus--the only stated goal of this effort--is predicated on Treasury figures which appear to be delusional, and on cuts that haven't yet been allocated.

He has ignored what the majority of accountants and economists (including in the Reserve Bank and IRD) have predicted, and has no apparent plan. He, and his colleagues, should be embarrassed.

by stuart munro on May 20, 2011
stuart munro

They are very confident for a government that has just delivered the worst result in 80 years. But there seems to be no more plan now than when they were elected.

It was the kind of budget you could only get from an unreflective and partisan government. The poor shall have better governance, it says, when they rise up and take it.

by Ian MacKay on May 20, 2011
Ian MacKay

"And while it addressed the poverty in the government's books, with its cuts to achieve surplus, it did nothing to address the red ink in the bank accounts of households all over the country."

Surely there must be some summaries on just where the bulk of this debt rests. I keep asking but there is silence. Is it really the spendthrift Mum and Dads or is it in the hands of business and dairying? Since it is used so often by all and sundry to explain our indebted-ness somebody must know who?

by Ian MacKay on May 20, 2011
Ian MacKay

My other question is: Is there any point at which there are definitive figures between now and the Election whereby a voter can say, "The plan won't work. The figures for the recovery are clearly no better than the promises of the last Budget?"

Or will there be a vague illdefined sort of, "Its OK the good times are on the way."

Maybe thats the real cunning of the promises. We will not be sure that the promises are mythical till next year. Too late mate!

by Andrew R on May 21, 2011
Andrew R

@ Ian

At the end of last year debt was like this (from Reserve Bank figures):

Household $183 billion  94% of nominal GDP

Business $72 billion 37% of nominal GDP

Agriculture $48 billion 25% of nominal GDP

Government $56 billion  29% of nominal GDP

by Ian MacKay on May 21, 2011
Ian MacKay

Thanks Andrew. Is the @183 bilion of household debt just mortgage debt or does it include credit cards or hp etc? I ask because I owe nothing and wonder how many people that I know could possibly owe enough to make a difference. Is the bulk of household debt in the names of just a few or is it spread over many ordinary folk?

by animalspirit on May 21, 2011

Household = banks = mostly Australian banks = borrowing for housing just as in the financial crisis elsewhere (Good recent article by Brian Fallow?) in NZ Herald Business) = speculation

Interesting figures on multiple house ownership by MPs in today's Weekend Herald.


by Cushla McKinney on May 21, 2011
Cushla McKinney

I wonder where the projections about wage growth come from.  If employers are forced to put more into their employees Kiwisaver and these contributions are also now taxed at the employees marginal tax rate, they are going to be VERY reluctant to raise wages and likely to count the contributions as part of the overall renumeration package.  I would be extremely surprised indeed to see a 4% increase in people's take home pay.

by Andrew R on May 21, 2011
Andrew R

The 4% income growth is an average. I understand that ceos and theirmates have volunteered to do the heavy liftng with this and ensure their pay increases are sufficient to get to the 4% average.

by Andrew R on May 21, 2011
Andrew R

@ Ian

December 2010 Reserve bank figures on household debt:

housing $171 billion

consumer $12 billion

by Andrew R on May 21, 2011
Andrew R

@ Ian

Also interesting is annual change sector for years ending March 2010, June 2010, September 2010 and December 2010

The per cent changes for each are:

Agriculture: 5.4%, 2.6%, 1.7%, 1.5%

Business: -8.5%, -7.8%, -7.6%, -2.0%

Housing: 3.4%, 2.9%, 2.5%, 1.8%

Consumer: -4.0%, -2.0%, -0.8%, -0.7%

Household Total: 2.9%, 2.6%, 2.3%, 1.6%

by Ian MacKay on May 21, 2011
Ian MacKay

Thanks Andrew. Will save figures for reference.

by animalspirit on May 21, 2011

Apart from the numbers the interesting thing is that it was the Ratings Agencies who effectively caused the finance crisis by giving high ratings to the mix of subprime mortgages comprising the CDOs that are still causing so much trouble because banks etc don't know where they are and what's actually in them - it is this uncertainty that drives the S & P suspicion of the Australian banks that have supplied the funds that have driven the housing bubble here, and probably much of the commercial property and farm investment which is now causing anxiety with negative equity, inability to finance transactions (eg SCF)  which middle NZ is now expected to pay for.  Much of NZ's wealth is tied up in Trusts and we are apparently about to enter the lists of Transparency International with this secrecy regarded as just another form of tax haven - which status the PM is keen to develop.  

by animalspirit on May 27, 2011

And now the Oz banks have been downgraded.  So much for the budget!

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