Cameron should keep an eye on Key

So, the Labour Government, already unpopular as it draws to the end of its third term, blows the Budget surplus to stimulate a recessionary economy. Then it loses the general election. With the international rating agencies breathing down its neck, the incoming centre-right regime begins the unpleasant task of reining in public spending as fast as is politically palatable. Sound familiar?

Already a reality for New Zealanders, the scenario is a pretty good approximation of how the Brits - whether they are happy about it or not - expect their political script to play out over the next year.

Perhaps that's why the New Zealand Budget has been such big news in Britain, knocking Manchester United's European defeat and Britain's Got Talent from front pages.

Okay, let's kill the sarcasm. The only financial story out of New Zealand to make any dent in Britain over the past month is the one about the couple from Rotorua who ran off with millions in overpaid overdraft cash.

But how Prime Minister John Key and Finance Minister Bill English sell their cuddly new-look, new-right political model will be of some interest in Britain, not least to Tory leader David Cameron.

British national debt is already a shocking 754 billion ($1921 billion) or 53 per cent of GDP. The Treasury has warned it could hit 79 per cent by 2013 and Standard & Poor's went further, warning it could top 100 per cent.

In New Zealand, we're worrying about Government debt of 18 per cent of GDP blowing out to 43 per cent.

Cameron has plenty of public concern to work with as he runs his fiscally conservative policy line.

But the young (42) self-confessed Margaret Thatcher fan - who stops short of accepting the label Thatcherite - is aware of just how out of fashion traditional centre-right thinking is.

With about a year until the British general election, he has time to study the success or otherwise of Key's soft-right approach.

The Budget itself isn't likely to get much media coverage in Britain at all - even in the business pages. They are, once again, full to overflowing with stories of corporate distress and economic slowdown.

Yesterday, British regulator the Financial Services Authority (FSA) published its plans for stress testing banks. The FSA - perhaps stung by suggestions the US tests were too soft - is going to use a model so grim that even the normally cautious headline writers at the Times were describing it as a doomsday scenario.

Banks will be tested for survivability if unemployment were to hit 3.7 million, or 12 per cent, house prices fell 50 per cent from peak and the recession lasted until 2012.

That's a worst-case scenario, the FSA is at pains to point out. But it is the worst worst-case scenario that has been seen since the big state bailouts headed off total financial meltdown.

It is tempting to report that Britain's green shoots - being talked up by the local press just three weeks ago - are starting to wilt. While it's a metaphor almost too perfect to ignore, it isn't quite accurate.

Good and bad news don't necessarily cancel each other out. They can run concurrently. Real green shoots will keep growing because nothing in history has ever managed to stop people doing business. And doing business is what drives economies.

But for sustained growth to kick off, the banks have to start lending again. Nobody - least of all the bankers - believes that the banking sector is completely out of the woods yet.

The banks won't relax until they get some certainty about how bad the economy is going to get and how high unemployment will rise.

Unemployment means rising mortgage defaults and increasingly - as the young and mortgage free join the dole queues - rising credit card defaults. Defaults mean more stress on the already cash-constrained balance sheets of banks, less lending, more business failures and higher unemployment.

It's a vicious cycle all right, but it will eventually run its course. At some point all the businesses that are going to fail will have done so. Unemployment will peak and those tiny green shoots will start to grow into jobs. The banks will start lending and real recovery will begin.

How much any one Budget can act as a circuit breaker for the downward cycle is a highly debatable point.

Based on this week's New Zealand Budget it looks like a debate that is still alive within the National Cabinet.

The natural instinct of a conservative government is to concentrate on balancing the books and hope markets respond with confidence to a fiscally prudent approach. But it is also to stand back from the economy and let the downturn run its painful course. To do that now means stepping out from the pack and the prevailing political response to this crisis.

English and Key look to be keeping a foot in each camp. They've made some big calls to keep S&P happy but can still point to a small but stylishly on-trend rise in public spending. If they head further down the traditional centre-right path, will they be fashion leaders or fashion victims?

This time next year, if the British public stays in its current mood, then the Conservative Party's blue-pin-striped leader may well be stepping into power and offering them an international ally on the right. If they decide they want one, that is.

Liam Dann is in Britain on the Newspaper Association's Cardiff Fellowship, with support from the British High Commission and Air New Zealand.