The Budget Forecast indicates that the statistics will show the economy shrank by 0.9 percent in the year to March 2009 and is forecast to contract by 1.7 percent in the year to March 2010. The economy is forecast to start growing again in the year to March 2011 and reach 4 percent in the year to March 2013. Unemployment is predicted, perhaps over-pessimistically, to peak at just below 8 percent in late 2010. Given the government’s plans, Treasury forecasts budget deficits of $7.7 billion in 2009/10 and $9.3 billion in 2010/11 at its worst point. The Forecast suggests that it will be a decade before the government’s operating balance (before gains and losses) is back in the black.

With this bleak picture as its back drop, the Government dubbed Budget 2009 as ‘The Road to Recovery’. This recognised that New Zealand faces difficult times, and that New Zealanders need to be confident that we can push through these to better ones. The economic downturn is primarily driven by the external influence of the global recession. But the previous government, on the whole, left the current government with a good base to work from. It supported a broad social welfare support system and a habit for squirreling away surpluses rather than spending them.

The benefit and tax system provides something called an “automatic stabiliser”. Without having to change any policies, when people’s incomes go down they pay less tax and may receive more support so their income doesn’t fall by as much. And if they lose their job, welfare benefits cushion that loss. This system works without the government having to rush to intervene – the support systems are already in place to help people cope. In this budget, the government has provided confidence by continuing to support this system.

But the Government did not feel that the economy is currently in a position for them to offer further tax cuts. This is a sensible choice regardless of whether the Government honestly believed before the election that it could go ahead with tax cuts given how the global recession has manifested. The question should focus on the conditions today and outlook for the near future. Given the circumstances, the public (or the Government on its behalf) is faced with a choice. It could leave tax rates as they are and letting the government use the revenue as it sees fit to help the economy recover. Or it could cut its future consumption to repay the debt that will be required so it can have a tax cut and more consumption now.

This choice was made in the context of the Government having to borrow substantially anyway. The decision came down on the side of borrowing less.

This raises a second point about the context in which the current Government had to draw up its road map. The previous Government used its government surpluses to pay down sovereign debt. Before ‘net debt’ was redefined on Budget day, in the year to June 2008 the net Core Crown debt went to negative $19 million, that is, the government actually had positive net assets! This prudent financial management meant that the current Government has a firm foundation to take on debt to soften the blows being landed on the country by the global recession.

Many people have asked, what did Cullen do with all that money? The answer is, buy an insurance policy that is being cashed in now. Low Crown debt has enabled the government to strike a balance between supporting the country through the hard short term without crippling it with debt in the long term. The international credit rating agencies’ judgement has been that the government has struck a good balance, giving New Zealand a stable or upgraded credit rating.