Tuesday 17 May 2011

Budget 2011: A Moderately Good Hand

Raising The Stakes - But Not Too High: John Key knows that if he's to keep on winning the electorate must be persuaded to keep on playing. That's why Bill English will not risk the voters betting everything on a change of government.

NEW ZEALAND should count itself fortunate in having a governing political party located in the centre of the political spectrum. In trying economic times the peddlers of extreme solutions are never without an audience. It takes genuine courage to embrace moderation when the political rewards for extremism can be so high.

For nearly three years now, John Key and Bill English have resisted the advice of extremists and kept the New Zealand economy right-side up. Reading the signals ahead of this week’s Budget, it’s clear they’ve no intention of turning it upside-down anytime soon.

As far as possible – without attracting the unwanted attentions of the international credit rating agencies – Bill English will strive to maintain the purchasing power of the voting public. He cannot avoid making some gestures in the direction of reining-in Government expenditure, but such cuts as there are in the Budget will not be felt universally (as happened with the GST increase) or even immediately.

Mr Key’s announcement of a “Zero Budget” in conditions of relatively strong inflation actually signals a 2-3 percent reduction in the real level of Government expenditure.

Government departments and agencies may receive the same appropriation as last year, but in dollars that are worth less. Maintaining the same level of services to the public in these circumstances will be a struggle. Civil servants will find it equally difficult to preserve (let alone increase) their incomes. Indeed, the value of their wages and salaries will almost certainly decline in real terms.

So, its name notwithstanding, there will be quite substantial public spending cuts in Thursday’s “Zero Budget”. It’s just that by being restricted to the public sector, and because they’ll be happening in slow-motion, most of the electorate won’t notice them.

Private sector savers, families with children, and tertiary students will, however, find it difficult not to notice the Government’s plans to cut-back the State’s contribution to Kiwisaver; tighten-up the eligibility for “Working For Families”; and take a more aggressive approach to the recovery of outstanding student loans.

But, even here, Mr Key and Mr English have made moderation their watchword. Very wisely they have ignored the advice of the business community’s more feral elements – which was to squander a huge chunk of the Prime Minister’s personal political popularity by rushing through these austerity measures under Urgency. Instead, Mr Key and his Finance Minister have chosen the impeccably democratic option of post-dating the reform of Kiwisaver, Working For Families and the recovery of student loans until after the General Election.

In effect, the Prime Minister is daring the electorate to abandon his government for an Opposition in varying degrees of disarray. “Back me or sack me!” is his cry – leaving the average voter in the agonising position of the poker player holding a weak hand who must decide whether or not to pony up his last dollar to discover if his opponent is bluffing.

John Key is asking voters to look at the Opposition parties, assign them playing cards according to their worth, and then decide whether or not their hand is stronger than the Government’s.

If they decide the Oppositions’ cards are too low, then they should give the Government what’s on the table. But, if they honestly believe the combination of Phil Goff (King?), Metiria Turei (Queen?), Winston Peters (Joker?) and Hone Harawira (Knave?) constitutes a winning hand, then, by all means, they should push all their chips forward. Lose a little or win a lot: that’s the wager. And it’s only their own, their children’s and their country’s future that’s at stake.

It’s high risk politics for Mr Key and his government, but the genius of the Prime Minister’s proposition lies in how little he has actually put on the table.

If he had followed the advice of the Business Roundtable, or Dr Don Brash, or the right-wing commentariat, Mr Key would have pushed everything into the centre of the table. All of the state assets; interest-free student loans; Working For Families in its entirety; Paula Rebstock’s welfare reforms; the whole kit and caboodle of neoliberal obsessions would have gone into the pot.

Had he done that, then the voters might have been willing to risk everything – even on the poor hand the Opposition parties have dealt them. The wager would have been a terrifying zero-sum choice: win it all or lose it all. Folding wouldn’t have been an option.

But John Key, the successful currency trader; the self-made millionaire; the high-stakes riverboat gambler; has made throwing-in our hand a reasonable option. The Key-English version of moderate-conservative poker may set the table limit low, but by reassuring the punters that they’re not engaged in an all-or-nothing gamble, it keeps them at the table.

And so long as they keep on playing, the Prime Minister knows he can keep on winning.

This essay was originally published in The Press of Tuesday, 17 May 2011.


Anonymous said...

John Key has said that the PM he admired most was Keith Holyoake. The approach he is following shows, I think, that he has studied Keith very carefully. The thing we have to remember is that Keith won four elections, the only person in the last eighty years to do so. (I can't be bothered checking whether there was anyone before that).
Key is also, like Holyoake, widely underrated for his brains. The left, at their peril, greatly underestimate his abilities. I remember seeing a statement by Henry Lang, a Secretary of the Treasury and one of the smartest Civil Servants New Zealand has ever had, saying that Keith was the smartest man in New Zealand. He was however, like Key, enormously underrated by his opponents.
I think you are absolutely correct that Key has put very few major changes, or changes that will really affect the public forward. As long as he keeps to that line, and as long as the Left remain disbelieving that he is actually popular he will continue to get the general support the polls show. I don't think he will stay around long enough to do three full terms but I don't see how he can possibly be beaten this year.

Anonymous said...

Very good post - similar in style to Colin James for bringing together a complex big picture into a usable metaphor and giving the best honest assessment/analysis possible regardless of pesonal political preference.

Mark Wilson said...

Dear Chris -

I feel that the first part of this would be best off the record but it is of course your call. Yes I am the same Mark Wilson that "plagued" Pundit and predictably eventually got shut down. When you read the generally sycophantic input they attract now I am not sure that their blog is the better for it. I note that it was a comment by Claire Browne that the blog was dominated by the left that encouraged me to participate. I also did not initially realize the difference in how fiercly the debate in the business world is conducted and how gently it is conducted elsewhere. My mistake.

Whatever the left can fairly criticise the right for they cannot say that the right is not able to take a hiding better than the left. In business it is not just the quick and the dead but the tough and the very short lived fragile.

I thought today's missive in the Herald from Bryan Gould critizing Keys business ability was hilarious given Gould's total inexperience in the field.

As to your latest blog if permitted I would say the following -

I would argue that the voter in this election has a starker choice - they can have a government that is too cautious but will keep the masses happy or a multiparty government that will be more left than we have ever seen in this country with the consequent financial collapse of our economy.
The slightest sign of loose financial behaviour will see our economy downgraded and disaster follow.
As always the people the left seek to protect will be the ones who get hammered while the wealth creators will either leave or do a John Gault.

Anonymous said...

Sadly it is our climate Key is gambling with.

Anonymous said...

Actuallu, Key used to confess he liked Muldoon the most, but he never mentions his name these days, funny that.

Just more of the same old do nothing stance, as NZ continues to borrow and spend. Bring on Dr Brash, urgently please.

Borrow and spend. Our kids will end up paying the price.

Unknown said...


Economies are complex creatures and while John Key's cautious approach, will ensure his re-election, one can only wonder if a more fiscally responsible policy setting would be better for New Zealanders in the medium term.

Debt is a pernicious thing and we would do well to be weening ourselves off it. Perhaps the budget will demonstrate that this Government is prepared to show some courage at last.

Andy C said...

@ Brendan , i doubt it. There are far too many working/middle class kiwis who are still upto their necks in their kids student debts or dependant on WFF to maintain their choices.
My pre budget guess's are means test for WFF or reduced the caps and wait for it.....surety before you get a student loan.
Think about it for a moment , when you first got a bank account chances are your parents provided surety that the bank would hold them responsible. IMHO I think thats whats coming. There will be some kids who can have no surety but I'm sure that wil be covered. My guess is that they want to nail down the students who never intended to repay their loans. IIRC the ones with dual nationality who do not have any family ties to this country. It has the added impact that you have to get the folks to sign a document which places them in some liability. Generally kids won't do that if they intend to bunk off and parents generally know if their kids are responsible enough to let them sigh up.

Anonymous said...

For historical comparisons to work, one has to know what a previous government actually did. In the case of Holyoake, he was very much a man from the Depression era, when he lost his seat, but was presiding over a buoyant economy. Also remember that the government had to control the balance of payments in that era, and Holyoake was very much against a devaluation, unless absolutely necessary as in 1967. The result was that, to maintain a level of foreign currency reserves, the government began to borrow heavily in the European markets, especially with Eurodollars. Treasury, and Henry Lang in particular, was very much in favour of this approach. The result was ruinous in terms of interest costs, but having caused the problem, Treasury then imposed their own solution in 1984.

So fast forward to 2011. If we are to believe John Whitehead on RNZ this morning, the government is back trying to manage the balance of payments again, because of the burden of private sector debt to overseas finance. Treasury are also issuing new public debt at an alarming rate, more than is actually needed in the short term. The result will be ruinous, as it was in the 1960s, because most of the debt is held offshore. So even if the Key/English moderation is a vote winner, it will obscure the underlying debt mountain. Either they should bite the bullet, and adopt a 1958 style black budget; or change the policy of over-funding the fiscal deficit. Given that interest rates are so low, and foreign banks continue to purchase NZ public debt, there is no obvious incentive to stop issuing public debt.

Anonymous said...

The mainstream of New Zealand politics has become so quiet on economic issues that the narritive of "doing something" about the economy is seen as being synonymous with Roger Douglas style neoliberalism.

As both the current and previous government are and were content to hope New Zealand's economic problems go away, we can conclude New Zealand will either eventually go bankrupt or find a government that will do what the likes of ACT want.

If no credible alternative plan or vision is provided by mainstream politicians, no alternative will be seen to exist.

Anonymous said...

"I've been thinking..." That statment should frighten you, but fear not, I'm not advocating a scorched-earth policy.

What I've been thinking is that this government, because of its predetermined ideology, is (in a nutshell) trying to head off growing private-sector debt by cutting back on public-sector debt, in an effort to shore-up our overall debt.

It needs to reduce the country's overall debt, but putting in new rules to force the private sector to save (rather than to encourage) would be political suicide. And yet, if my thinking is right, what a Holy Grail that could never be achieved because of the relativity between the scale of the two sector debts.

What we should be doing (and I'm not a barber or taxi-driver, so apologies for pretending I know how to run the country) is bringing back levers to encourage exports. That would be a much better way to improve the ratio of debt to GDP, although not so easy as bullying the public sector.

Gavfaemonty said...

Outstanding post, Chris. The post-election nature of the changes is outstanding politics. This has always looked like a three-term government. He's been very careful to give Labour nothing to work with for this election, and the economic cycle will take care of the next.

Wonder if Key will be more careful with post-Key than Clark was with post-Clark?

Alex said...

Very disappointed in this article, Chris. It is totally naive to suggest that this budget is in anyway good for New Zealanders. This story alone highlights the consequences that so many New Zealanders face from a government delivering a budget with its head in the sand. http://www.starcanterbury.co.nz/local/news/hornby-family-cant-afford-to-stay-in-nz/3952689/

Mark said...

Hey Chris

We threw together a visualization of the nz budget in the 36 hours before it was released, it might help you for your reporting to be able to drill down and see where the moneys going.


Hope you find it useful!

jh said...

Have you read this Chris?