The Government set out ‘The Road to Recovery’ in its 2009 Budget. The Budget’s three main objectives were: 

• helping New Zealanders through the recession and supporting jobs
• lifting productivity and raising New Zealand’s international competitiveness 
• taking steps to keep government debt under control.

Budget 2009 had to do more than walk a tight rope; it had to navigate a tangled web of priorities and constraints. Tom Scott observed in a cartoon in the DominionPost on Budget day, that the government had to balance its objectives and public opinion. This balance was more than just between debt and spending. It involved balancing short term and long term objectives, borrowing versus running down assets, and borrowing to invest versus borrowing to spend. At the heart of it was a tension between National’s preference for parsimonious government and the need in difficult times for bold public spending to support jobs, expand infrastructure and orientating New Zealanders on balanced rather than unsustainable consumption.

The path it set veers neither strongly to the left nor to the right. Overall, this budget has attempted to use the government’s role in the economy to create a sense of confidence in the near term and inspire a positive outlook for the future. Near term confidence comes from keeping overall expenditure, benefits and taxes stable. A positive long-term outlook comes from improving the economy’s infrastructure, pursuing a raft of initiatives to lift productivity and selective investment into export-orientated industries.

The Minister noted that, “New Zealand continues to spend more than it earns and finance the difference by excessive borrowing... [with] insufficient growth and investment in those parts of the economy that either export or compete with foreign producers." The Government’s main thrust in supporting jobs is not to provide them directly. Rather it balances the employment goal with its productivity goal, and aims to provide a base for private industry to thrive and for the tradable part of the economy to compete internationally.

To re-balance the economy “in favour of more investment and jobs in internationally competitive industries,” the Budget involves spending $1.45 billion on new capital initiatives. This covers the urban broadband roll-out, improving rail services and building new roads, school buildings, and prisons. It will be complemented by some increase in funding for research, science and technology. This includes, for example, a dollar-for-dollar $190 million Primary Growth Partnership with primary sector industries to boost its growth and innovation. Such support may contribute to assisting the economy to increase its focus on value-added, export-orientated production.

Some of the capital expenditure will also create jobs and absorb some of the people laid off in the downturn. Yet, Treasury forecasts that unemployment will still climb to almost 8 percent unemployment. Despite that level of unemployment and given the scale and range of infrastructure investment planned, it is unclear where all the skilled people required to support this work will come from. The changes in Vote: Education do not suggest the increase in vocational and industry training that might be required.

To address its objective of having a “credible plan to keep on top of debt” the government has reviewed its spending priorities and “has carefully scrutinised existing spending baselines”. Over the past five years, the operating allowance for new budget spending has increased by an average of $2.78 billion per year, despite running budget surpluses. The current budget cuts this to $1.20 billion over the next 5 years to 2013/14, but this will still result in budget deficits. Taking into account capital expenditure as well, Core crown expenditure will increase by $16.4 billion over this five year period, while it increased by $14.9 billion over the preceding five year period. So while there is some re-orientation from operating to capital expenditure, the overall level remains relatively constant.

The Government has committed to “maintaining all [benefit and superannuation] entitlements”. But it is not promising beneficiaries more.
Similarly, the personal income tax cuts planned for 2010 and 2011 have been “deferred”, so working tax payers will not pay any less tax. The Minister of Finance said at the Budget lock-up that it would take “magnificent better economic performance” for the government to consider tax cuts before the next election. But how does the public feels about National breaking a central election promise?

The government has done a good job of presaging that the planned tax cuts would be axed. The Minister presented the decision not to lower taxes as a difficult balance between credibly managing its debt levels and borrowing to fund a tax cut. While this makes sense from a financial point of view, the public debate will include passion and prejudice. The answer is a long two years off.