KEY POINTS:
Speculation has been mounting that Michael Cullen in his eighth Budget today will peel off some of the fat wad of a surplus and stuff it into the KiwiSaver piggybank.
He may prefer to tough it out for another year, trying voters' patience but keeping the fiscal war chest intact for the election year Budget.
But if this afternoon's announcements do include more incentives for KiwiSaver, it will make sense for a couple of reasons.
One is that it deals with Cullen's short-term dilemma - he is sitting on a surplus of fiscally unnecessary and politically untenable dimensions, but disbursing it in a way that boosts household spending would spook the Reserve Bank into raising interest rates yet again.
The other, longer-term justification is that one of the reasons monetary policy has struggled to gain traction in the mortgage belt in recent years is that so many people have concluded the best way to accumulate wealth for their retirement is not to save money but to borrow it and buy housing.
Anything that brings a bit more balance into the choice of savings vehicle is desirable.
Cullen delivers this Budget against the background of an economic upswing.
But the recovery is brittle and he is mindful of the need not to put more weight on it than it can bear.
His dilemma is that the Crown accounts will show a build-up of surpluses to politically toxic levels, but exporters need a further boost to domestic demand like a hole in the head.
If you look only within the four corners of the Government's finances, the case for tax cuts - over and above the $1 billion promised to business - is compelling.
Three-quarters of the way through the fiscal year the operating surplus is 14 per cent or nearly $750 million ahead of forecast - and the forecast was a $6 billion surplus for the full year.
The cash surplus - which allows for spending on capital items such as infrastructure and contribution to the Cullen fund and which strips out paper gains or losses from revaluations of ACC and public servants' pension liabilities - has topped $2 billion, when it was expected barely to be in the black for the full year.
Such numbers, Cullen has admitted, are politically unsustainable.
At the same time there have been increasingly stern warnings from Reserve Bank governor Alan Bollard about the inflationary implications of fiscal policy which is flipping from being contractionary in the past few years to significantly stimulatory.
Why that is a problem is starkly illustrated by a graph (left) from the recent International Monetary Fund report on New Zealand.
It breaks down our economic growth into tradeable and non-tradeable sections.
The tradeables are manufacturing, agriculture, forestry, fishing and services exports (mainly tourism); the non-tradeables part is the domestically focused part of the economy, driven lately by the combination of a tight labour market and an irrepressible housing boom.
Despite Bollard raising the official cash rate nearly 3 percentage points since the start of 2004, house price inflation is still running hot, nationally if not in Auckland.
The main effect of tight monetary policy has been to keep the exchange rate painfully high from the standpoint of exporters and firms competing with imports.
This week, Quotable Value reported that house price inflation has returned to double-digit rates, and Statistics New Zealand has reported the strongest quarterly increase in retail sales since the mid-1990s.
But while nontradeables' growth has carried on its merry way, the tradeables have gone sideways if not slightly backwards since 2003.
This split into a two-speed economy - consumers and home-buyers on a debt-propelled spending binge and the industries that earn the country's living battling a howling gale of currency headwinds - is not sustainable. The longer it lasts the more painful the ultimate correction is liable to be.
Cullen is vulnerable to the charge that the already foreshadowed level of increases in Government spending combined with business tax cuts will stoke domestic demand to a degree that has at least contributed to the two recent Reserve Bank interest rate increases.
To add to that stimulus by promising personal tax cuts - even if they are down the track, people tend to spend in anticipation of them - would be to fuel the fire under an already overheated domestic economy.
The risk would be that international investors anticipating further interest rate rises would drive the dollar higher still.
But as the Institute of Economic Research reminded us last week, the combination of annual tax cuts in Australia and bracket creep here only amplifies the underlying income gap between the two countries.
In such an environment, a measure like making employee contributions to KiwiSaver, the workplace superannuation scheme due to come into effect on July 1, more attractive would appeal to the Finance Minister.
It reduces the surplus without fuelling spending.
The Government has already addressed some of the tax disadvantages for superannuation schemes. He has removed the capital gains tax faced by managed funds on their New Zealand and Australian share portfolios.
That has removed the long-standing anomaly that for people in lower tax brackets the money their savings earned while in the hands of a fund manager was taxed at a higher rate than the rest of their income.
And it has moved to make employer contributions to workplaces schemes tax deductible up to 4 per cent of the employee's income, so that a matching payment really is that, $1 for $1 and not 67c.
So one option would be to make employee contributions tax-deductible too.
That would be a radical change, abandoning the internationally peculiar taxed-taxed-exempt model introduced by Sir Roger Douglas in the late 1980s.
Its defenders insist there is no evidence that tax incentives boost savings. But maybe New Zealand constitutes the evidence that the lack of incentives, or compulsion, reduces savings.
Such a move is open to the criticism that it would benefit those on higher incomes most and do little for the battler on the average wage.
National's finance spokesman Bill English has already been running that line.
So Cullen might prefer another mechanism, such as a straight subsidy for employee contributions, perhaps capped.
But with the economy running on one overheating engine, and a current account deficit of more than $14 billion or 9 per cent of GDP, any measure which aims to adjust the split between household spending and household saving in the direction of more savings looks to be worth a try.
