KEY POINTS:
Nobody should underestimate the seriousness or the momentousness of Treasury's Pre-election Economic and Fiscal Update. After 14 years of surpluses, the country now faces nine years of deficits. The ink is the brightest of crimson, with a deficit of $5.9 billion this year projected to rise to a peak of $7.3 billion by 2012. This, however, is not a time to accept such a gloomy forecast, and to allow it to run its doleful course. Nor is it a time to imagine that tax cuts and modest belt-tightening will be enough to spark the sort of economic turnaround that will render the Treasury's predictions redundant. More radical steps, some of them unpopular, will have to be taken.
The first step should, in fact, be the abandonment of the reductions in personal tax planned by both Labour and National. Given that the Treasury's analysis pre-dated the Wall St financial crisis and the economic situation has already worsened, it is patently apparent the country cannot afford them. The Finance Minister virtually conceded as much when he said he would have taken "a more cautious approach" with Labour's package if he had known the new set of circumstances.
National leader John Key dipped his hat in the same direction yesterday when he said his party's programme of cuts would be scaled back, if only slightly. It would, he said, be irresponsible to proceed on the scale originally envisaged. That is stating the obvious, given the package was expected to add $6 billion to the $10 billion Labour has pledged to spend. Unfortunately, neither party, for purely political reasons, is prepared to take the ultimate step in responsibility, a deed that should have become mandatory once they sighted Treasury figures suggesting as little as $496 million is available for new spending in the next financial year, and only $614 million in each of the following three years.
Mr Key has conceded at least that borrowing to fund a tax-cut programme is not an option. This would merely make the situation worse. The fiscal update says the country's debt is already set to rise to 24.3 per cent of gross domestic product, a situation well outside the Finance Minister's prudent 20 per cent target. Tax cuts must, therefore, be funded by reductions elsewhere in government spending. That means bold measures will be required. The Government has already indicated it will pluck one low-hanging fruit, $600 million of spending on the Ministry of Foreign Affairs and Trade over the next five years. Much more will be needed.
National has signalled it has two areas in mind. These may be the 20-hours free early-childhood education and the KiwiSaver scheme. Over the next five years, their costs are forecast to rise, respectively, by $800 million and $650 million. The generosity of the Government's early-childhood package makes it a logical target. Trimming the KiwiSaver incentives is much more problematic. Its cost owes much to the higher-than-expected uptake. That is welcome, given the scheme aims to replace households' current high-debt profile with a savings culture. The incentives that have underpinned KiwiSaver's popularity should not be hostage to the vagaries of the economy.
There are, in fact, more profitable areas to cut spending if a confident and clear-sighted approach is taken. Take the $300 million annual cost of the Government's cynical abolition of interest on student loans, a significant plank in its 2005 election campaign. Removing that unnecessary offering would be unpopular. So would other cuts in the health, education and social welfare fields. But the incoming government must live with that. Standing idly by is not an option. Serious savings must be found.
