New Zealand government gambles with election year budget

May 19, 2011, 5:37 GMT

Wellington - New Zealand's centre-right government gambled Thursday on the accuracy of opinion polls that predict it will easily retain power at the coming general election in producing a budget that hits family incomes and slashes public service spending.

If Prime Minister John Key's conservative National Party wins the November 26 election, up to 110,000 families will get less money in the form of tax credits for their children from next year and workers will have to start saving more for their retirement as the government cuts back its contributions.

Analysts said a middle-income family would be about 20 New Zealand dollars (16 US dollars) a week worse off.

Key, who has put his political future on the line, saying he will resign from parliament if he loses, eschewed the traditional election-year lolly scramble in favour of a tough love budget designed to slash a record government deficit of nearly 17 billion New Zealand dollars and return to surplus by 2014-15.

Finance Minister Bill English upped the ante by ordering government departments to cut nearly 1 billion New Zealand dollars from their spending over three years. He also confirmed a controversial plan to raise up to 7 billion New Zealand dollars by selling minority holdings in four state-owned energy companies and the national airline Air New Zealand.

None of these changes will take effect until next year and Key, exuding confidence on the strength of polls showing him well ahead of the main opposition Labour Party, said he was content to let voters decide whether to give him the mandate to proceed.

English told parliament, 'This is not a typical election year budget. It is a responsible budget appropriate to New Zealand's situation.'

He said the country, suffering the effects of the global financial crisis and two devastating earthquakes in the second largest city, Christchurch, could not afford to continue borrowing an average of 380 million New Zealand dollars a week overseas to meet the government's requirements.

Only the health and education sectors were promised more money in a budget designed to get the books into the black.

The Treasury predicted the economy to grow by 1.8 per cent in the current fiscal year, rising to 4 per cent a year later, though nearly half the latter figure will be due to boosts from rebuilding Christchurch and hosting the Rugby World Cup later this year.

It forecast wages rising by 4 per cent next year and unemployment falling from 6.8 per cent to 5.7 per cent.

Labour leader Phil Goff said the crippling budget deficit was due to the conservative government's personal tax cuts which benefited the top 10 per cent of income earners at the expense of the rest.

'National has today delivered a budget that won't fix our dire economic situation but will hurt hard-working Kiwis struggling to get ahead,' he said.

Independent analyst Bernard Hickey wrote on the New Zealand Herald's website, 'Key has delivered a 'Tweak and Fiddle' budget that will get him re-elected on November 26.

'But it hasn't solved the underlying structural deficit in New Zealand's government and its economy. That will have to be dealt with in 2012 or 2013 when the growth doesn't arrive and both the deficit and the foreign borrowing start rising again.

'By then we will be in the same boat as the Portuguese, the Greeks and the Irish. It's a boat steered by the bond market vigilantes and their agents, the credit ratings agencies and the sovereign wealth funds behind them.'