John Armstrong: A fairytale of high hopes on a frayed thread

Prime Minister John Key and Finance Minister Bill English. Photo / Mark Mitchell

Abracadabra. Hey, presto. Whatever your wish, a supposedly cash-challenged Bill English can deliver (unless you are a civil servant in Wellington, in which case forget it).

Rebuild Christchurch? No problem. Higher wages? You'll get them. More jobs? Plenty coming. Less borrowing? You bet. No more deficits? Sooner than you think.

Spare us the pixie dust. Few would quibble about the desirability of meeting all of those objectives. But the Budget's narrative all seems just a little too much like a fairytale to be true.

Far more so when you discover it all hangs by a very frayed thread - that the Treasury has got it right in forecasting the economy is poised to go into recovery mode and growth will reach 4 per cent within two years.

At that point you get that sinking feeling. There would be grounds for optimism had the Treasury not been forced to frequently revise its over-optimistic growth forecasts downwards since the economy went into a prolonged downturn in 2008.

The Budget's credibility begins to get even more stretched once you read the fine print, which suggests the Treasury itself is not entirely convinced that economic growth will be such to bring in sufficient tax revenue to meet those objectives.

It stretches more once you discover that the Inland Revenue Department's forecasts of tax revenue are somewhat lower than the Treasury's.

And yet more when you realise that the Treasury's forecasting record shows it under- or overestimating revenue by up to $3 billion either way.

And more again when you factor in the unexpected. And there has been plenty of that in the past 12 months.

The Prime Minister and his colleagues say their soundings, plus anecdotal evidence, indicate an upturn is happening.

Economists are in agreement that a few shards of light are now penetrating the gloom. But they were duped by similar mirages of recovery at the time of last year's Budget.

The political stakes are now much higher. With the cost of living now rearing its head and only six months until the election, National needs concrete evidence of an economy on the rebound to convince hard-pressed households that the forecast wage rises of above 4 per cent are in the pipeline.

If the current slump continues or even worsens - and the Budget could well have a contractionary effect - then National will have its work cut out convincing people that things will suddenly get better on the other side of polling day.

The reliance on the Treasury forecasts has been intensified by the Prime Minister's reluctance to upset too many people through too much cost-cutting.

Thus the cuts in the Government top-up of KiwiSaver accounts and the introduction of a higher rate of employee-employer contributions do not kick in for between 18 months and two years.

Similar political sensitivities are evident in the equally lengthy phasing-in of reductions in Working for Families entitlements, which will leave some families in swing-voter middle-income brackets out of pocket.

Where Key and English have thrown caution to the wind is in mounting a slash-and-burn exercise across the public service.

The Budget's requirement that state agencies find close to $1 billion in savings over the next three years could mean cuts in the core administration budget across government departments of up to 18 per cent unless some services and programmes are axed - something that would run counter to National's promise to boost frontline services, not chop them.

The northerly blowing through Wellington was not the only chill wind gripping the capital last night.