Fran O'Sullivan: Here's your message to us, John

John Key won't have any lollies to give away as election bribes. Photo / Natalie Slade

Many New Zealanders will be looking forward to closing the book on 2010. It's been particularly difficult for South Islanders who have been affected by the Canterbury earthquake and the Pike River coal mine disaster.

But it's also been a struggle for many small business owners and good young New Zealanders trying to get a foothold in a tight labour market.

Next week the Prime Minister hosts his traditional National Party Christmas at Premier House.

John Key's guests will include many from Parliament, the Beltway and business.

It's inevitable that some of the party talk will focus on what 2011 will bring.

I have no particular insight into what drives Key's speech-writers but if they are listening to what the Prime Minister says when he is out in the business community, they might be inspired to craft a useful Christmas message so their boss's thoughts reach a broader audience.

To make things palatable, it could acknowledge that many are still hurting after this year's disasters.

But many more of us will be hurting if we don't take off the rose-tinted spectacles.

This first draft is my take on Key's comments to an Auckland dinner this week.

"Listen up Kiwis. I won't be dishing out an election-year lolly scramble in 2011 to get your votes.

"We have no capacity to run bigger deficits. We've got to get on top of our borrowing programme and we've got to do that quickly. If we don't do that, the risk of a downgrade within about two years is significant.

"It's exactly the same for our political opponents. If they want to go into the election offering to spend more money they'd better explain where it's coming from because they've got to raise taxes, cut spending somewhere else or accept a downgrade."

The two paragraphs are a straight steal. But it's a message that needs to be heard much further than the business community.

The remainder of Key's mythical Christmas message is pure amalgam.

"I want you all to keep on digging ourselves out of our international debt hole before it turns into the kind of grave that will sink the New Zealand economy and make life incredibly difficult for all of us.

"Don't believe me? Well, look at what the citizens of Ireland, Greece and now possibly even Spain are experiencing.

"The rating agencies have given us a heads-up - Kiwis don't need to go there.

"We'll do our bit by (finally) taking some tough decisions to make sure we get our own Budget deficit down faster. But the warning signs are there and we all have to pull together ... think about what sacrifices you can make to help the national effort while you are at the beach over Christmas. Bless, John."

In fact it's a rare Prime Minister who would send out anything other than an anodyne Christmas card.

But it is obvious from Key's disclosures that the Cabinet's inner circle is starting to get quite a focus on the prospect that New Zealand could find itself in rather dire straits if we don't take some more remedial action on the debt front.

Ministers were caught short when Standard & Poor's revised New Zealand's AA+ rating to a "negative" outlook two weeks ago.

Key blames the shift in outlook on international factors - the effect of the debt tsunami that has engulfed Portugal, Iceland, Ireland, Greece and Spain and increased the risk weighting for countries with high foreign debt.

That, rather than that the New Zealand Government's own accounts are now under heavier pressure as a result of diminished tax flows, the $1.75 billion payout to depositors and bondholders in South Canterbury Finance and the financial impact of the Canterbury earthquake.

But he concedes that such things reduce the Government's flexibility on the fiscal front.

Key's Christmas message could usefully point out that if Spain falls over, debt costs will increase. His Government needs to be cautious about what is going on and the capacity to fund our external liabilities.

While Government debt as a percentage of GDP is low, New Zealand needs to start focusing on how it can reduce it because no other OECD country has a greater percentage of borrowings from foreigners than New Zealand.

"My Government is focusing hard on increasing New Zealand's savings level so we can fund more of our growth from the domestic markets.

"We'll incentivise savings and remove the opt-out option for KiwiSaver, buy back one of the Australian banks, and build up a war chest by selling minority stakes in a few of our assets and getting the private sector to play a great role in infrastructure development.

"It's all a hell of a pity really because we would be sporting a 6 per cent growth rate if we were still 'dis-saving' at the same levels as two years ago - the tailend of the incredible period where New Zealanders drew $80 billion net additional debt to fuel a consumption and housing bonanza.

"At least we have the Rugby World Cup to look forward to.

"I'm off to Hawaii for Christmas - don't tell anyone, but I might even leaf through Don Brash's report for a few ideas."