John Armstrong: English must master tricky balancing act

It has to be assumed today's Budget has done the job it was designed to do even before Bill English reveals its contents this afternoon. Otherwise, Budget Day will be a public-relations disaster for National.

John Key and Bill English seem to have difficulty singing in harmony on the Budget's objectives, but they are still singing from the same song-sheet.

The Budget has been sold to the electorate on the basis of the Cabinet doing the responsible thing for the country by displaying and promising to continue displaying the required fiscal discipline to persuade ratings agencies like Standard & Poor's not to downgrade New Zealand's international credit rating.

Having put all its eggs in that basket - to the point where Labour is claiming the rating agencies have effectively written the Budget - the Government would be somewhat red-faced if New Zealand gets a downgrade.

It has to be assumed the Finance Minister has done enough to avert a downgrade - and we should hear from Standard & Poor's, which has been briefed on the Budget, on that score later today. Otherwise, the traditional Budget night drinks in the Finance Minister's office will be a sorry affair.

The verdict on the Budget is not solely in the credit rating agencies' hands, however. Economists and financial analysts will pore over the Budget's forecasts and make their own judgment as to whether the numbers stack up.

One set of figures will be central to determining the verdict on the document's credibility - the projections for economic growth.

On those figures hang Treasury's estimates of future tax revenue, projections for the size of Budget deficits in the short-term, the prospect for a return to surplus in the longer-term, and the consequential impact on Government borrowing and debt.

Economic forecasting is tricky at the best of times - and these times are even more uncertain.

If Treasury is too bullish about recovery in the short-term, then English risks being panned for being over-optimistic - the fate of recent Budgets produced by Britain's Chancellor of the Exchequer Alistair Darling and Australian Treasurer Wayne Swan.

The tone of a pre-Budget speech by the head of Treasury, John Whitehead, suggests the Budget forecasts here will err on the cautious side despite signs the New Zealand economy has proved somewhat resilient to the international economic downturn - a downturn which might (fingers crossed) have hit the bottom of the economic cycle.

The last forecasts released by the Treasury in December included a downside scenario, which English later confirmed the economy was tracking along, which does not see the economy growing until later next year.

If the Treasury is too pessimistic, then attention will focus on English having to take a bigger slasher to Government spending than envisaged to try to pare back the deficit.

That draws him closer to the political line between being seen to cut wasteful Government spending and being seen to be slicing into essential Government services - a line the Prime Minister has indicated he is not going to cross.

However, yesterday's warning from Transport Minister Steven Joyce that this will be a "tough" Budget sounds rather ominous.

The public has no expectations of getting anything from this Budget. The cancellation of the next two tranches of Nationals' tax cuts is a non-issue despite Labour trying to make it one. The public mood is one of realism. But the expectation of voters is that they will not lose out either.

A Budget that is seen to be using the pretext of satisfying the credit rating agencies as cover for a contraction of the state may get a rather different reception than the Government is hoping for.