Editorial: Shrunken tax take clouds NZ's recovery

The rapid ringing of tills in the lead-up to Christmas offered considerable cheer to previously struggling retailers. It also provided an encouraging insight into the mindset of New Zealanders. Their spending suggested a confidence that this country had come through the recession, their jobs were relatively secure, increased wages were possible, and the cost of their mortgages would remain low until mid-2010. Better times beckoned.

That sentiment was underpinned by economic data that surfaced in the weeks before Christmas. The Treasury's half-yearly update painted a rosier picture than the Budget, forecasting, most promisingly, that job losses would be 64,000 fewer than forecast. Further, gross domestic product figures for the September quarter confirmed the economy was continuing to recover, albeit fitfully. The Prime Minister saw "light at the end of the tunnel", and most New Zealanders were happy to agree, and to offer a quiet thanks that the recession had not caused as much upheaval in this country as in many others.

The importance of this, psychologically, should not be understated. The sharpening of domestic demand, thanks to consumer confidence, will play a significant role if growth is to strengthen in the coming year. But the optimism cannot be unbounded. Caveats must be applied in terms of the local and international economies.

It is undoubtedly helpful that two key trading partners, Australia and China, have largely withstood the recession. The recovery in the United States and Britain, where the downturn bit particularly hard, has, however, been weaker than anticipated. The global upswing is, at best, fragile, and predicated to a degree on the state spending that successfully checked the economic decline. There is still the fear of another dip in activity next year as governments, not least that of China, continue to rein in the spending and start to get their public finances back in order.

Locally, the latest economic data revealed some discomforting detail. In the September quarter, the manufacturing statistics were again grim, and business investment in plant and machinery fell 8 per cent, the fifth successive quarterly decline. This does not bode well for a quick fall in unemployment. Nor does the fact that many employers appear to have gone to considerable lengths to retain staff after expending much effort in attracting them to their workforces. Their response to the recession was to cut hours of work or pay rates, rather than make people redundant. That suggests new jobs will be relatively thin on the ground.

More fundamentally, the Government, like its counterparts overseas, must confront the fact that its finances have taken much of the strain of the recession. The tax base has withered, to the extent of a $2.5 billion hole in Government revenue. The brighter outlook notwithstanding, there will be continued heavy borrowing. The Treasury suggests the cost will simply be $10 million less a week than the $250 million a week being borrowed on average to fund the deficit. This entails sizeable debt-servicing expenses. Surpluses are not forecast to return for seven years, at best. Meanwhile, the public debt burden places an anchor-like restriction on the Government.

New Zealanders have every right to feel sunnier. The Government must, however, take serious steps in 2010 to address the structural operating deficit. The recession has underlined structural weaknesses in the tax system. Reform is needed, not least to encourage investment and remove the unduly favourable treatment of property. Tough public spending decisions will also have to be made. Only when such matters are addressed will many of the clouds start to disperse.