Editorial: Recession will define Key's first Budget

A Government's first Budget is a defining moment. No matter what has been said or done during an election campaign and the six months since, the Budget is the moment the Government must set out all its principles and priorities and back them with cash.

It is not, of course, an opportunity to spend without regard for the condition of the economy and its prospects. The Budget Bill English will deliver today has been described as one of the most difficult in our lifetime because it must respond to a recession triggered by the worst world financial crisis since the Great Depression.

The response of many Governments has been to follow the Keynesian prescription that supposedly would have averted the Depression. They have flooded their frozen banks with new money and put state budgets deeply into deficit in the hope that more public spending will make up for the drop in private sector activity.

The panic has been such that almost no thought has been given to the debt these economies will carry for years when the crisis has passed and they are trying to recover. The debt will either burden their budgets with interest payments or disappear in a period of inflation that would penalise private savings and poison the economy.

New Zealand's recession has not yet been serious enough to warrant a Budget that spent as though there was no tomorrow. Banks here have not needed bail-outs and, while they may be over-cautious in business lending at the moment, big employers are not yet shedding labour and business confidence shows signs of picking up. Serious unemployment is predicted to rise from the present 5 per cent to 7.5 per cent or more but it remains a prediction, not a fact.

The Budget must make allowances for predictions. More will be allocated for welfare benefits. Indeed, a $40 million boost for contracted agencies this year was announced last week. Meanwhile, tax revenue from profits and earnings was running at last report about $500 million below the level predicted in the pre-election economic and fiscal update, the document that warned we are looking at a decade of Budget deficits.

This week, a delegation from the international credit rating agency Standard and Poor's has been in Wellington with a warning of its own for the Government. The deficit needed to be cleared within three to five years, its analyst said, if the country was not to risk another credit downgrade.

The Prime Minister was quick to disappoint them. Five years was "a bit of an ask", he said. He believed it would take longer to return to a surplus and he was relaxed at the prospect of the country remaining on negative credit watch. He has said enough to suggest the Budget will feature a range of savings in the public services but these are unlikely to reduce the deficit. They will probably be matched, or exceeded, by additional spending on public works and infrastructure.

These projects should be critically examined to see whether they are genuine investments in the economy or job-creation schemes. A $500 million package announced in February featured school refurbishments, roading improvements and state house renovations. The Budget is likely to add his $50 million bike track to the list, and he sounds enthusiastic about a housing insulation deal done with the Green Party.

These may not be the daring investments John Key envisaged when he took his party's leadership and hoped to move the economy up a gear. But that was before the world economy went into financial shock. His Government's first Budget needs to spend enough to maintain activity and jobs without losing credible control of a rising public debt. The best it can do is hedge its bets.