John Armstrong: Black memories of harsh Budgets past

Spin goes into overdrive as Govt tries to push the positives while dealing with downturn

Key's reassurances are intended to make people feel secure. THE unwelcome ghosts of austere Budgets past loom large and linger ominously in the dank, though slightly lightening economic gloom. The Prime Minister accordingly has set in train the necessary rites of exorcism.

Budget Day is still the best part of three weeks away. Nevertheless, John Key and Bill English are already upping the doses of pre-delivery spin.

This is not surprising. The task of selling the Budget may well have been made easier by the horrendous impact of the local and international economic downturn on the Government's accounts.

Public expectations of the Finance Minister coming up with any lollies or goodies on May 28 are just about zero. It is thus probable that National will seek to surprise and has found the money to deliver some positive offerings of some kind .

At the same time, selling the Budget has also been made a lot more difficult by the dreadful state of those accounts which plunge ever deeper into the red.

With falling tax revenue imposing corset-tight fiscal constraints - the Government's operating deficit for this year has now blown out to $7.7 billion compared with a forecast surplus of $3.4 million before last November's election - English has had to be pretty ruthless.

That is because the Budget must - and will - set out how the Government plans to curb and then reduce the ballooning debt which will flow from the soaring increase in Government borrowing to fund the deficit.

English's forward projections showing debt tracking downwards will have to be credible enough to persuade international credit rating agencies not to downgrade New Zealand's rating.

That is the absolute priority. Any downgrade would raise interest rates, thereby increasing the cost of servicing that debt while simultaneously snuffing out any nascent recovery in economic growth.

Moreover, the agencies will also have to be convinced the Government will stick to the job and not suddenly wilt in election year.

That means applying rigorous discipline to Government spending not just for the coming year, but for years ahead. That means the axe for some policy programmes and the reshaping of others, while accepting additional spending allowances in the Budget each year is no longer the norm.

So far, finding saving in Government programmes is said to have been easier than initially thought. While in office, Labour had oodles of dosh and was not slow in dishing it out. In the short time between winning an election and delivering its first Budget, National has thus found plenty of low hanging fruit to pluck.

The choices will get a lot harder over the next year as the various spending reviews are increasingly forced to dig into the baseline funding of Government departments to find savings.

National has clearly used the recession as a heaven-sent opportunity to radically review Government spending to get what it calls "more value for money".

In doing so, however, it leaves itself dangerously open to accusations the whole exercise is simply cover for an ideologically driven assault on state-provided social services.

Enter Key. Delivering a pre-Budget, scene-setting speech on Thursday, he set out to make one thing very clear. This was not going to be a Doomsday Budget which cuts people's access to essential social services.

Key and his Cabinet colleagues may have seemingly slashed and burned their way through the previous Government's spending programmes like Grim Reapers on speed.

However, they are not going to make the mistake of predecessors in Government. In particular, they are not going to enact some kind of repeat of Ruth Richardson's 1991 "Mother of All Budgets".

Like English's forthcoming missive, that was the first Budget of a new Administration. And it nearly destroyed it. Sitting on the backbenches in that Government, English got first-hand experience of the fate of Finance Ministers who indulge in public displays of "no gain without pain" machismo.

Key was not in Parliament in the 1990s, but his instinctive pragmatism will have told him that this year's Budget is going to be Spartan enough without boasting about it.

Labour is already resurrecting the word "black" from Arnold Nordmeyer's infamous 1958 "Black Budget" as its label for English's first effort.

Key, if not English, is understandably wary. His double act with English has had the latter preaching fiscal restraint while the former talks up economic confidence. Key's speech this week offered glimmers of hope that the international downturn will not hit New Zealand to the degree earlier feared.

If so, Labour will argue, why has the Government taken the axe to the public service with such relish if not out of ideological desire to reduce the role of the state?

So far, National has been able to keep its hands clean by getting departmental chief executives to make savings and announce job cuts. The scale of cutbacks will be exposed in the Budget, making it much more difficult for ministers to hide.

English will respond by saying the state of the Government's books is so dire, National has had to make its own sacrifice by postponing its cherished second and third tranche of tax cuts.

Finding the savings to satisfy the credit rating agencies also means putting payments into the Cullen superannuation fund on hold - something English all but confirmed in Parliament this week, and very deliberately so, to try to reduce the impact on Budget Day.

National knows Labour will exploit public ignorance about how the fund works to suggest halting contributions will necessarily mean reductions in pensions.

Key has already promised to resign if that happens. His speech this week sought to head Labour off at the pass by again stressing the Budget would not be cutting such entitlements.

The same applied to other measures like income assistance through Working for Families and unemployment benefits.

National's strategy is simple. The international financial crisis has made people feel insecure. A UMR poll this week had more than half of the respondents concerned about keeping their job or jobs in their family.

Key's reassurances are intended to make people feel secure that in a time of insecurity basic entitlements are not going to be whipped away from under them.

Key has reinforced that message of reassurance by ringfencing spending on health and education from cutbacks in their overall spending.

Indeed, National intends going a step further by outflanking Labour in its own bailiwick by increasing spending on "public services" in the health and education sectors.

There will inevitably be argument with Labour over whether the numbers actually add up to an increase.

However, Sir Roger Douglas' condemnation of the extra spending in those areas and his assertion that English and Key have not learned from past mistakes in over-funding those portfolios may suggest to the pair they have got things about right politically.

The pair have learned from past mistakes, although not the ones Act's founding father is talking about.