A budget (not) about the nice-to-haves

Is the economy in a bad way or coming right? It depends which John Key you are listening to. At last Monday’s post-cabinet press conference two Keys were on offer.

Flagging a slimmer KiwiSaver, Key talked up “very poor economic conditions”. (Code for: “we have no alternative to doing some hurt.”) A little later, talking up his record, he cited jobs added, low interest rates and a lower crime rate. At other times he enumerates rising real after-tax wages and a 19 per cent lift in payouts to national superannuitants. (Code for: “it will all come right if you stick with us.”)

This encapsulates the politics of Thursday’s election-year budget: to trade simultaneously on toughness and hope.

The target for fiscal 2011-12 is net zero new spending: new spending has to be offset by cuts. The sinking lid is pressing down on public service chiefs’ skulls.

The good news for National’s election campaign is that most cuts won’t really bite voters until after the election and some, like the KiwiSaver cuts, won’t bite at all pre-election. Moreover, National knows its “very poor economic conditions” line will resonate with households’ own first-hand experience of price, income and debt pressure, especially those in middle New Zealand where the National-Labour battle is mostly fought. If households are having to give up “nice-to-haves” (to use Bill English’s phrase), the government might logically do the same.

Moreover, those households know there has been a costly earthquake, on which English can credibly blame part of his budget stringency. The budget is in effect sharing around some of the quake pain.

English and Key are also sensitive to foreign lenders’ and rating agencies’ warnings of higher interest rates if there is not a credible path back to budget balance. In the Key/English book higher interest rates hamper the productive side of the economy and thus slow the huge shift from consumers to producers needed for sustainable prosperity.

A big question on the rating agencies’ checklist for Thursday is how quickly English will get back to a comfortable surplus and whether he can still credibly project that for 2015-16. That in part will turn on what the “new spending” track is from 2012-13. The signals from Key and English are that it will be lower, perhaps a lot lower, than the $1.1 billion plus 2 per cent that was set in the 2010 budget. Just funding interest on the increased borrowing to cover earthquake costs points to that.

Even under the $1.1 billion plus 2 per cent formula departments were set to get less in real terms each year. That was in part designed to force chief executives to find savings and “reprioritise” (code for: drop the “nice-to-haves”).

At some point chief executives, no matter how inventive, will run short of ideas and options. That point is likely to be reached next parliamentary term. English’s “more with less” will then become “less with less”. At that point the issue moves from management to politics. Some chief executives mutter now that they do not have clear directions from ministers of what they think are the “nice-to-haves”.

Meantime, Key and English are cutting some of what English thought before the 2008 election were “nice-to-haves” but which National did not dare propose to the electorate. Two examples touted for paring in Thursday’s budget are interest-free student loans and Working for Families for the better-off.

Don’t waste a good crisis, you might say. To which you might add that at a time of high export prices the budget (ex-earthquake) should be in surplus, not deficit. The deficit is in large part a hangover from the pre-2007 nationwide borrow-and-spend party.

But for National to be fully credible to voters there must be a future upside to offset today’s downside: a promissory note for the indigent now doing penance.

National has just such a promise: the underlying fundamentals are pointing back towards prosperity — but only, it says, if the state occupies less of the economy and leaves more room for producers, particularly exporters (the government doesn’t export) to invest and grow jobs. That is the short-term pain/long-term gain line.

Stick with us and it will come right, National will say at the election, paralleling households’ sensing of better prospects once their balance sheets are back in order. Switch to Labour, National will say, and there will be short-term gain/long-term pain.

Labour will, in speeches this week, at its congress at the weekend and in the election campaign, propose a four-point 10-year development, savings and investment, inequality-reducing and fiscal prudence strategy. It will say Key and English are imposing more pain on the less-well-off than needed and do not have a plan.

Back in February Key was talking of an innovation and savings budget, that is, one geared to higher incomes long-term. Both have faded from the rhetoric since February. “Very poor economic conditions” rule in the moment, it seems. But there is always hope.