John Armstrong: Potholes already in path to bright future

John Armstrong

Bill English's Budget may have paved the first few kilometres on what he has called the "road to recovery". In doing so, however, the Finance Minister has already dug a fairly sizeable political pothole in the freshly laid tarmac for himself to fall into.

The credit English deserves for averting a costly downgrade of New Zealand's international credit rating has to be tempered by the big clanger in the Budget - the suspension of Government contributions into the Superannuation Fund for the next decade and possibly longer.

To be more exact, the political clanger is English's revealing of the likelihood that contributions are unlikely to resume until the Budget's operating surplus is "sufficient", something that is not expected to be the case before 2020.

He could have instead declared that contributions were being put on hold for two or three years, after which the decision would be revisited.

That would have been in line with the hints dropped by him and the Prime Minister before the Budget and which the public had been softened up to expect.

It might not have been completely honest, but it would have saved National some grief.

For the subtext of this Budget is the battle for the middle-ground vote, in particular those on middle incomes who deserted Labour and flocked to National in their thousands at last year's election.

National's pitch to these so-called "soft" voters who are only weakly aligned to the governing party is one of competence in economic management.

English has demonstrated that competence in being emphatic about stopping Government debt ballooning out of control from too much Government borrowing to cover Budget deficits which get too large and persist for too long.

Even so, the Budget contains extra spending on health and education which is designed to soothe middle-class angst.

He has also managed to make himself look relatively generous given the circumstances by making a little go a long way by sprinkling small amounts of money over a large number of portfolios while being coy about how much of this is actually new money rather than cash already in the system which has been "reprioritised".

Of particular note is the scheme to insulate more than 60,000 houses built before 2000, with homeowners able to qualify for grants of up to $1800 regardless of income.

The Government justifies this subsidy to the well-off on the basis that it is the houses that need insulating regardless of who owns them and that take-up under existing schemes has been low.

Nevertheless, the new scheme is clever politics. Not only does it hugely help relations with the Greens, it hands a gift to those who have not enjoyed such a handout since the time Sir Robert Muldoon was in charge of the country's finances in the 1980s.

The only danger is that the scheme is heavily oversubscribed and those who really cannot afford to insulate their homes miss out.

The scheme has yet to be officially launched, but Cabinet ministers are already worried that might well turn out to be the case.

Labour's response to the Budget is even more hip-pocket-related.

It has been quick in capitalising on the contributions "holiday" which will freeze the Cullen fund, portraying it as a slap in the face for generations younger than the baby-boomers.

Under National's revised scheme, withdrawals from the fund will not start until 2030 - three years later than first planned. Payments from the fund will also be smaller.

The Government insists the shortfall will still be able to be met from normal Government spending without affecting current entitlements in terms of eligibility and the formula for payments. It says the extra cost has already been incorporated into fiscal projections.

Only the wildly optimistic will swallow that line. The fund's managers say the number of retired people relative to the working-age population will inevitably lead to a significant rise in the cost of providing New Zealand superannuation.

The net cost will rise from 3.5 per cent of gross domestic product to 5.6 per cent by 2030 and 6.6 per cent by 2050.

As a smoothing mechanism for a "pay-as-you-go" system, the fund reduces the tax burden on future taxpayers.

The impact of Thursday's Budget is to cut the burden of superannuation for baby boomers. Those aged between 56 and 64 will have retired before contributions resume to the Cullen fund. The burden will consequently fall more heavily on those 55 and under.

They will be grumpy - and Labour will reinforce the message - that they will be paying twice, first for themselves and second for those retired or about to retire.

Labour argues that estimates of a $20 billion shortfall in the fund resulting from the Budget decision are well astray once earnings and interest on contributions are taken into account and the fund will be light to the tune of some $40 billion.

Labour has also put much effort in the past couple of days into slamming National for promising tax cuts during the election and legislating them into law under parliamentary urgency before last Christmas when it already knew the cuts were unaffordable.

National's defence is that most people would agree the cuts are now not affordable and are accepting of their deferral which was thus hardly a surprise anyway.

Labour's strategy, however, is to turn the deferral into an issue of trust - that those crucial middle-income voters were promised "Labour's policies plus tax cuts" by National and now they have a cost-cutting National regime and no further tax cuts than those that came into effect at the beginning of April.

It all adds up to a bigger personal savings burden, one accentuated by National's earlier savaging of KiwiSaver.

National's response is to question what Labour would have done about Government debt and whether that party was prepared to borrow more, thus jeopardising New Zealand's credit ratings while having to service an even larger debt while facing higher interest charges.

The Treasury estimated a downgrade would push up the cost of borrowing by 1.5 per cent - thus adding $50 more a week to mortgage payments for a household with a $150,000 mortgage. Moreover, an interest rate rise would have substantially undermined already fragile business and consumer confidence.

Labour's finance spokesman, David Cunliffe, refuses to detail what level of debt is acceptable to his party, saying this is not the right time. He says that at this early stage of the electoral cycle, it is Labour's job to focus on what the Government is doing wrong and highlight that.

National would regard that position as extremely convenient for Cunliffe and Labour.

It does leave Labour exposed to the "what would you do question".

However, it is an ill Budget that does not blow some good the Opposition's way. This one does - probably more than Labour could have hoped for.