Fran O'Sullivan: S&P's message - The piper must be paid

Credit rating agency Standard & Poor's is exactly the right sort of bogeyman to scare Kiwis into accepting a tough - but realistic - Budget.

But the jury will be out - until tomorrow night - on just what the rating agency makes of the novel arrangements that Finance Minister Bill English's team has devised to stymie the growth of rapidly escalating public debt.

This week's repeated admonitions by S&P that it would expect the New Zealand Government to start posting Budget operating surpluses over the next three to five years translates to: "Get your affairs in order, Government - or we'll whack you with a ratings downgrade."

In all reality, pushing up the Government's interest payments on its borrowings by some $600 million annually (the amount Treasury Secretary John Whitehead warns could be the upshot of a downgrade) would not normally be such a big deal.

Interest rates have already come off the boil by a considerable amount. Another $600 million would be unlikely to lead to a full-on currency crisis. International investors would not normally refuse to go on funding New Zealand's current account deficit.

But these are not normal times.

The S&P statements represent something of an ultimatum.

But the great value of S&P's exercise is to get across the message that sooner or later the piper has to be paid.

S&P worked up such a head of media steam on Monday that by yesterday English was forced to say that it was in fact "his Budget". It had not been written to pander to the international credit rating agencies.

But, said English, the focus was still on getting debt under control.

There is a element of smoke and mirrors to this.

The ratings boys have already got their copy of the Budget and will either administer a good thrashing (if they don't see enough evidence that English has matched his intent with spending cuts and possibly new revenue streams), or leave the rating where it is.

It is hard to imagine the Government allowing S&P an insider glimpse if it expected the agency was going to later hit it over the head by issuing an immediate downgrade.

These things always have an element of choreography.

English's denials aside, the Government has used S&P as its bogeyman ever since the agency put New Zealand on notice that it could face a downgrade from its AA+ sovereign rating if the Budget did not show evidence that English had posted a "credible, medium-term fiscal plan".

There has been subsequent contact with the agency as English's Treasury team worked through the Budget parameters.

It is a role S&P is increasingly playing worldwide, as Governments - some of them still triple AAA-rated, like Britain - take advantage of the practical utility of having an outsider tell the public the unpalatable fact that their country is living beyond its means. This reduces the potential for political backlash that would otherwise occur if the same message was delivered deadpan by a politician with no chorus line in sight.

Spain, Ireland, Greece and Portugal have already been downgraded.

Now S&P has hung a question-mark over Britain's prized AAA rating by attaching a negative outlook. This ought to curb the desire of the respective party leaders, Prime Minister Gordon Brown (Labour) and David Cameron (Conservatives), to go on a bidding war during the election.

Pity S&P was not on the case earlier in New Zealand.

If it was, it would have been doubtful that National could have quite so easily made the case its tax-cut programme would be revenue neutral because of offsetting cuts to other programmes such as KiwiSaver.

But the rating agencies - like our political parties - had still to break out of denial mode.

New Zealand has been here before.

In 1984, then Labour Finance Minister Sir Roger Douglas used the looming spectre of International Monetary Fund intervention to force an economic revolution and set New Zealand on the path to paying its own way. But in 1984, New Zealand was out on its own as a basket-case with huge debt levels that were pared back by stripping farmers of their agricultural subsidies, taking subsidies off everyday goods such as milk and ultimately selling assets to get the books into better shape.

English faces a different environment.

New Zealand official debt is low by OECD standards.

But - like many others worldwide - we've been on a spending splurge, using the equity in our houses as ATMs to fund a explosion of private debt.

New Zealand has yet to work its way through the deleveraging phase. It will take time - but English must show he is taking the right steps.