Pattrick Smellie: Bill's Biggest Budget BugBear

April 17 - Of all the big numbers floating around these days, the one that worries Finance Minister Bill English most is government debt.

Actually, that's not quite true. Government debt is the most worrying of all the available worrying numbers that English can actually do anything about.

And it's clear from two recent statements - responding to regular IMF and OECD reviews of the New Zealand economy - that this will be a key theme for his first Budget on May 28.

This week's report from the OECD makes all too familiar reading. Much as various wishful thinkers would love New Zealand to pay its way in the world without earning it, the OECD points out that the options are narrowing sharply again, especially if its unusually pessimistic view of a 3% economic contraction this year proves true.

As well as getting the books in order, some things need to happen to get the wealth we have to work better for us. Both the Bolger and Clark governments largely dodged this unpleasantness, preferring to reap and then spend on taxpayers' behalf the benefits of a sustained upturn in world wealth that made us think we were pretty clever for a while there.

Global debt crisis notwithstanding, the local outlook is constrained for all the reasons the OECD and IMF would habitually cite - the balance of payments deficit with the rest of the world remains dangerously high at a time when any creditor is looking askance at lending to inveterate spend-thrifts such as ourselves. After all, New Zealand has never in its post-colonial history earned its own way in the world for any length of time. This country's wealth has always been based on our ability to convince foreign savers that we will pay them back eventually. We've clearly got a trusting face: possibly one of our greatest national assets.

As tax revenues plummet and unemployment rises, New Zealand heads into several years of large Budget deficits. These will push net government debt to GDP from below 20% in recent times to more than 50% - way above levels that Roger Douglas and Ruth Richardson struggled to reduce in their roles as Minister of Finance.

That struggle and the world upturn delivered their successors: Winston Peters, Bill Birch, and Michael Cullen, an increasingly comfortable fiscal environment which last year forced Scrooge McCullen to dole out the biggest personal tax cuts since at least the 1987 tax reductions that offset the imposition of GST.

Now it is English's turn and he's been handed a lemon that till last August was a ripely sweetened mandarin. He supports the tax cuts, but things have turned bad so fast that he mightn't be able to keep them going through to the 2011 election, as Cullen promised in last year's Budget, delivered three months before the world went phut.

The international creditors that we've relied on for so long will insist, especially in current world economic circumstances, on seeing a plan for net Crown debt to fall swiftly once the world economy - presumably accompanied by New Zealand - starts recovering.

Without such a plan, we'll get a credit rating downgrade, we will face higher interest rates and perhaps a weaker currency, both of which will make our public and much larger private international debts that much harder to service.

"The private sector’s reliance on the external funding and government financial sector guarantees have increased the importance of a strong public sector balance sheet," English said this week.

“Falling revenue has created a period of projected government deficits and rising Crown debt to levels that are unacceptable to the Government."

On April 3, English said: “As we prepare for our first Budget on May 28, the new government is performing a delicate balancing act. Our first priority is to ensure that we help New Zealanders get through the worst effects of the recession by preserving entitlements, providing more than $1 billion of tax cuts from April 1 and bringing forward productive infrastructure investment.

“Our other priority is to set out a credible plan for economic recovery over the medium term. That means investing to increase New Zealand’s productivity and growth, while at the same time getting the government’s finances in order."

As the Budget approaches, start looking for signs that the public health system is targeted for both financial order and productivity gains.

For the so many extra billions pumped into the public health system in the last decade, you'd think there'd be more results to applaud.

The bottomless pit and high cost of new healthcare demands, driven by a rising tide of voting dodderers and the constantly improving treatability of just about everything, leave the health system still underperforming while soaking up huge national resources.

English was a reforming Health Minister in the Bolger Cabinet and won much admiration from such unlikely, normally Labour strongholds as nurses and other professional carers.

"If Labour did this, it would be called radical communitarianism," English said to me at that time. "But because it's National doing it, it's called 'reform'."

There have been whispers around the health system for weeks now, including the appointment of an advisory board-style body, similar to those being used in resource management and energy policy reviews.

These involve a panel of sector thinkers, advisors and participants in a process that runs parallel to the normal flows of public service advice, albeit that public servants "hold the pen" on any advice to Ministers.

Health Minister Tony Ryall and English go back a long way, and Ryall is a long student of the health sector too.

That, presumably, is why English ended this week's statement on the OECD report with these carefully chosen words: The OECD also sets out some options for meeting future challenges in the health system, including the smarter purchasing and delivery of health care services.

“We note the challenges the OECD has described in the health sector. We’re already implementing some of the ideas and we will consider others,” Mr English said.

Watch this space.

(Businesswire)

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