John Armstrong: Ignore the black cloud, look at the silver lining

Finance Minister Bill English. Photo / Mark Mitchell

Bill English's fourth Budget is a triumph of optimism over realism. It provides further self-justification for National's quest for a Budget surplus within three years - something which has almost become a crusade of religious proportions.

But it is only a paper victory. The figures are essentially meaningless. The Treasury's economic modelling has produced a timely Budget Day surplus forecast of $200 million in the target year of 2014-15.

That keeps the dream alive and helps mute National's opponents, who say the Government should have a plan for economic growth, rather than being surplus-obsessed.

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But because it is a Treasury forecast, it holds good only until the next Treasury forecast. The $200 million could evaporate in an instant. It probably already has.

But National will do whatever it takes to reach the target or get close to it. Be that cigarettes at $20 a packet, or blocking school students with a part-time job stacking shelves at the supermarket from claiming a tax refund.

There may have been other reasons for those Budget moves. But they all add up to one thing - much-needed extra revenue.

What the surplus target does do is keep National on the fiscal straight and narrow. Yesterday's Budget is solid and responsible - no argument.

Some might say too responsible. To reach the Holy Grail of Budget surplus, English has had to rein in Government spending to such an extent that it risks shrinking the economy just when it was poised to grow.

The Budget does nothing to close the wage gap with Australia. It offers little which might produce the economic "step-change" which John Key once talked about so much.

It produces few winners and even fewer losers. The Budget's job is to further insulate New Zealanders from serious economic fall-out from Europe.

At some point, there will have to be pain. English's emphasis on curtailing spending for some years to come is bound to mean cuts in Government services.

But for now, National's response to the financial house of cards in Europe is to wrap voters in as much cotton wool as possible. The Budget is accordingly about as tasty.

Bill English may yet pull off the surplus miracle, if tax income recovers sufficiently. But the target still looks more of a mirage.

The Treasury does its best. But its forecasts have been all over the paddock. Three months ago, this year's deficit was going to be as much as $12 billion. It is now projected at closer to $8 billion.

What was expected to be a $600 million deficit for the 2014-15 target year is now forecast to be a $200 million surplus.

It needs to be said that the Treasury's growth forecasts - on which the revenue projections are based - are now on the same planet as everyone else compared to last year's fairytale predictions.

But it is still forecasting growth of more than 3 per cent by early 2014. Growth has not been that high for four years and is now at a meagre 1.1 per cent.

The growth rate is crucial. A single percentage point under the required rate and a $200 million surplus can be a $2 billion deficit before you can say "Standard & Poor's".

On such flimsy foundations is the central political component of the Budget built.