Bernard Hickey: Key's economic challenge

Finance Minister Bill English. Photo / Mark Mitchell

Are we ready for the Government to return to surplus? Prime Minister John Key and Finance Minister Bill English have talked a lot about returning the Budget to surplus by 2014/15, one year earlier than previously forecast.

The tone of their comments in an election year is startling. When most politicians are sweet-talking voters with suggestions of tax cuts or new spending, they are talking tough about being fiscally responsible and trying to avoid adding new debt.

The scale of the task ahead is enormous and it may prove much tougher to do than to forecast.

That's because the size of government support for the economy at present is enormous.

The Government is forecast to run a budget deficit this year of 5.5 per cent.

To put that into context, if the Government was not running that deficit it would have contracted by at least that amount because the economy is basically flat on its back.

Deutsche Bank forecasted that the economy fell into a double-dip recession in the second half of last year. Key and English acknowledged this week that a double dip - defined as two consecutive quarters of GDP contraction - may have happened.

They are more confident about some sort of growth this year and into next, but it's clear from their rhetoric they are much more aware of the risks that growth may be slower than the 3.4 per cent forecast for the current year to March 2012.

The key question for the Government and the economy is: can the private sector take up the slack and grow another prop to replace the Government's prop as it is pulled out over the next four years?

Will private-sector employers take on tens of thousands of new employees? Will businesses invest heavily in new infrastructure, equipment and training? Will this passing of the economic baton from spending, borrowing and government spending to saving, investing and exporting happen smoothly?

English seemed a little nervous about this baton-passing exercise when he spoke to the finance and expenditure committee in Parliament this week.

He pointed out, rightly, that households still have twice as much debt as they did before the housing boom in 2003. The economy can't rely on the so-called non-tradeable sector, which includes the housing industry and retailing, to take up the slack.

The load will fall on the export sector, which shed 55,000 jobs - or 12 per cent of its workforce - from 2003 to 2009.

Exporters will need to bounce back quickly and start employing an awful lot of people. That's because our economy is so skewed still towards the non-tradeable sector, which employs four times the amount of people.

So English is saying that the skinny runner in the outside lane will have to sprint across the track, accelerate to the front and grab a big, big baton for the New Zealand economy from the Government.

Can exporters do it? So far the signs are not great. Manufacturers are struggling with a high currency. Farmers and commodity exporters are doing much better, but they too have a debt problem to fix.

This is obvious in provincial New Zealand, where the benefits of the high Fonterra pay-out are being redirected to debt repayment.

The signs this week are that even the spectators are getting nervous as the runner approaches the bend.

bernard.hickey@interest.co.nz