John Armstrong: Key aims for middle of road to recovery

Prime Minister John Key. Photo / APN

Bill English's third Budget will be tough, perhaps the toughest in a generation.

But next Thursday's document won't be as tough as people fear. Or as tough as people have been led to believe.

National has indulged in a classic softening-up exercise before Budget day - just as John Key and English did last year by accustoming the electorate to a rise in GST.

By Budget day, that increase was old news. The focus then went on how juicy were the accompanying cuts in income tax.

In the same "bad news then good news" strategy this week, the Prime Minister foreshadowed changes to KiwiSaver, notably an as-yet-unspecified cut in the Government's annual contribution of up to $1040 to individual accounts.

The advance warning was accompanied by confirmation of the expected phasing out of Working for Family income support entitlements for the well-off, and measures to stop people avoiding repaying their student loans.

Unlike previous Budgets, none of those curbs will be rushed through Parliament on Budget day. Instead, the changes will be implemented in a far more pedestrian fashion, a stipulation being that National first secures a mandate at the November election for doing so.

Key is increasingly insisting on such "transparency" regarding his Government's intentions. He sees building public trust in National as one of his essential tasks as leader.

That is one reason why, despite a record Government deficit, next Thursday will not be even a modest reprise of Ruth Richardson's likewise recession-driven "Mother of All Budgets" in 1991.

Key's antipathy to such "slash and burn" exercises reflects his ideological leaning as a centre-right moderate, despite Labour's efforts to paint him in more extreme garb. While it is not obvious, Key also moves with caution. If reforms are to endure, the Government has to carry the public with it.

Just as pertinently, if a government is going to survive under MMP, it has to carry voters with it.

That alone rules out "big bang" Budgets like Richardson's 1991 extravaganza.

Such was the unpopularity of that document's radical shift from universal state provision to user-pays and means testing that support for National plummeted.

But those were the days of first-past-the-post politics. National still squeezed back into power two years later after securing only 35 per cent of the vote.

Under MMP, such an outcome would dump Key from office.

These factors explain why Key will have no truck with any sudden slashing of Government spending from the current level of around 35 per cent of gross domestic product to 29 per cent, as recommended by Don Brash's 2025 Task Force.

An immediate cut of that size would have a huge impact on the provision of public services, especially if the Government kept spending at current levels in the politically sensitive, yet cash-hungry health and education portfolios.

It would destroy National's claim to have protected the vulnerable by "taking the rough edges off the recession".

Even so, National is going to have to bite the fiscal bullet. This may not be the Mother of All Budgets. But Bill English is now the not-so-proud father of the Mother of All Budget Deficits. This year's is a record in nominal terms at $16 billion.

Though the Christchurch earthquake has been a major component, the scale of the deficit is evidence that National did run an expansionary fiscal policy to try to limit the impact of the economic downturn on jobs and services.

But it can no longer afford to do so to that extent.

National's focus-group research is telling the party that public opinion is shifting from wanting protection from the global financial crisis to deep concern that the country is now borrowing $380 million a week to insulate people from the downturn.

Coinciding with that is Brash's political reincarnation as Act leader.

His frequent mention of that borrowing figure taps him straight into public angst about New Zealanders living beyond their means.

And lurking in the background are the dreaded international credit rating agencies, poised to give the thumbs down to any government cutting too much economic slack.

The upshot is that cutting through this morass and setting out a credible path for a return to surpluses became the absolute priority in the writing of this year's Budget.

English and Key this week highlighted the Treasury's forecasts in the 2008 pre-election update of a deficit of $2.4 billion this year, not the actual figure of close to $16 billion.

They did so to illustrate the gap they have to close. But in doing so, they also underlined the fragility of economic forecasts on revenue projections.

The reception the Budget gets may well hinge on outside analysts and economists agreeing that the forecasts are robust and so make a quick return to surplus feasible.

The plus is that the shift in public opinion means there is now much greater public acceptance of the fact that getting the books in order entails sacrifice.

Witness KiwiSaver. Close to $900 million is budgeted for provision of tax credits to a large proportion of the 1.7 million members.

That pot of cash proved irresistible to the Beehive razor gangs. But the probable slicing in half of that $900 million subsidy has prompted little complaint.

Even so, National is bracing itself for a fair bit of squealing next Thursday once the various lobbies have done the numbers in what the the Beehive prefers to call a "tight" rather than a tough document.

National can live with that if the great bulk of mainstream voters see National moderately positioned between the fiscal stringency of Act and what National will relentlessly argue is the profligacy of Labour and the rest of the centre-left.