Opinion: This budget does not compute

By Bernard Hickey The easiest way to avoid a tough decision is to delay it and hope something changes in the meantime so the decision never has to be made. This is what John Key and Bill English did in "Budget 2009: The road to recovery." They bottled it. By choosing to keep growing spending and to keep benefits unchanged they decided to avoid the key fiscal question facing the nation over the next decade or two: we must choose how to pay for the pension and health costs of the generation of baby-boomers who will be retiring from 2020. There's a few options. New Zealand can choose to reduce the pension payments made to the baby boomers. We can extend the retirement age as Australia has done. We can increase taxes now to save for those pensions after 2020. We can increase taxes being paid from 2020 by today's Generations X and Y.

The fiscal framework outlined in the budget lays out in bare terms just how much of a problem this is, mainly because it's clear we cannot rely on fast economic growth to solve the problem. Treasury's own forecasts show the budget will not be in surplus for another decade. Our gross debt is forecast to almost double to 43% of GDP by 2017. The fundamental problem is we are in an extended period of low to no growth. Bill English rightly points out that nominal GDP will be NZ$50 billion less than originally expected in the next three years combined, which means lower tax revenues. The global economy faces a decade of de-leveraging that will strangle growth. New Zealand cannot ignore that and has its own household debt problem to grind its way out of. The government hopes Treasury is wrong and can skip its way through with a stronger growth outlook. It has bet that an extra NZ$7.5 billion of spending on roads, hospitals, schools and broadband will lift the productive capacity of the economy and deliver that growth. This is wishful thinking. The core problem is that New Zealand needs to accept a lower standard of living after nearly a decade of living beyond its means. We borrowed heavily and spent the money on either consuming things (holidays/cars/boats/televisions) or investing unproductively (in residential and holiday property). Now we have to consume less and repay the debt. No politician wants to tell voters they need to consume less and have lower standards of living, particularly when the pain is not shared evenly. But that's what Key and English needed to do. They needed to cut benefits and cut government spending. They needed to administer the pain now because pain delayed is always worse than pain now. Instead they chose to take the easy way out. They cut the things that are easiest to cut. They are the things that don't involve voters, including government spending on administration and the contribution to the NZ Super Fund. They are the things we haven't received yet, which were the tax cuts promised for 2010 and 2011. On top of that, the government promised the baby-boomers their pensions would be 66% of average wages, reversing a move to cut it to 65%. This means the NZ Super Fund is unlikely to receive significant contributions for another decade. The next 10 years were supposed to be crucial for the fund. Without those contributions it cannot hope to fund those pensions for those baby-boomers. The growth track implied in the budget simply does not compute with the promise to pay baby boomers 66% of the average wage when they retire. English acknowledged as much when he said stronger growth was needed to avoid painful measures in later years to ensure those pensioners are funded. He is referring to the likely prospect now of higher taxes for those working when the baby boomers retire. Generations X and Y have every right to be worried by this budget. English and Key have chosen not to administer the pain now. They hope the pain will go away. If it doesn't, they know it will be another generation's problem. Luckily for them, voters vote in the now rather than the future. They can only hope they are not in power in 2020. By then there will be a lot of grumpy voters.