When the numbers don't add up

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.