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Peter Wilson: No Gift's Under The Government's Christmas Tree

Peter Wilson
Peter Wilson

Governments like to send us off to Christmas and summer breaks feeling good about life and the economy, with nothing much to gripe or worry about during the parliamentary recess which lasts through to early February.

That isn't going to happen this year, because it's coming to a close with an impending dose of bad news.

The half-year economic and fiscal update, known as HYEFU, will be released on Tuesday. It's expected to show the company tax take is still well down and unlikely to recover in the short term, with the impact of the recession still biting.

It isn't as bad as it could have been, and a long way better than the doomsday scenarios that existed when the Government took over in November last year, but it isn't going to give Finance Minister Bill English much comfort as he starts thinking about his next budget.

In Parliament, English has been busy trying to make sure everyone knows just how tough it's going to be.

For the last few weeks, question time has started with a government backbencher asking him what challenges the economy faces. This has allowed him to cover various aspects of economic difficulty, the latest being a warning to the public service that its challenge is going to be providing quality services during a time of tight fiscal restraint.

In a similar way, Health Minister Tony Ryall has been issuing reminders, on every available occasion, that health funding isn't going to increase next year at the same rate it did under the previous government or even as much as it did in his government's first budget.

English's May budget is going to be even tighter than his first one. Increased government spending is already set at about $1.1 billion, compared with about $2 billion this year. It will be spread across all the core sectors like health, education and welfare and it isn't going to go very far.

But despite being fiscally hamstrung during all of its first year in office the Government is amazingly popular, riding the polls at above 50 percent compared with 44.9 percent on election night. John Key is preferred prime minister with ratings so far ahead of anyone else that there isn't a contest.

The trick is going to be keeping it that way, and there are hard calls ahead.

A lot was expected from the new government when it took office, particularly from the business sector which was looking forward to substantial reforms.

That hasn't happened, and isn't likely to. When Key and English talk about the immediate future, on issues like changes to the tax system for example, they add the rider that anything they do will have to have broad public support.

Cutting taxes would have broad public support, no doubt about that, but English also says that any changes will be cost neutral -- if he loses revenue in one place, it will be made up in another. He also says that if there any changes, they won't be "big bang" reforms.

This aversion to "big bangs" marked the Government's first year and is very likely to mark the second as well. It was evident in its response to the recession, which was a series of measures to ease the burden on businesses rather than the huge financial initiatives many other governments embarked upon.

Key says the tactics worked, although the relatively robust banking sector was a big factor in New Zealand's escape from serious harm.

The Government's response to the 2025 Taskforce report was further evidence of its refusal to consider radical reform. The recommendations were slapped down by Key and English, who clearly aren't going to consider changes they don't think they can sell to the public.

Another obstacle in the way of a reformist agenda is the string of promises National made during the election campaign, which meant most of the previous government's core policies have to remain largely intact.

Key is doing exactly what he said he would do -- lead a pragmatic, centre-right government which hasn't got a secret agenda of privatisation or anything else. He will have disappointed those who hoped he had.

He kept his word, and succeeded in strengthening the Government's support during a very difficult year.

It might not be enough to keep the business sector on board during the second year if the Government maintains a steady as she goes approach with a few tweaks here and there.

A wealth of political capital has been accumulated during the first year, and the question the Government faces is whether it is prepared to spend any of it so it can get to grips with the step-change English says is needed to set the economy on a new and sustainable course.

That basically means saving more and spending less, and avoiding the boom-bust scenarios, the easy credit and the housing bubbles that kept the economy afloat during Labour's years in office and delivered budget surpluses.

Now the Government's books are horribly in the red and it has to borrow $250 million a week to keep going.

There isn't much room to move and Key isn't going to take any risks with reforms which could fail to have any positive impact or might even be counter-productive. He is more likely to be looking at incremental changes which will keep his political capital largely intact through his second year as prime minister.

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