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It was clear from the very start of the political year that the 2011 Budget would see significant cuts in spending, with a goal to reduce new spending to just $800 million a year.
John Key labelled the huge amounts the country is currently borrowing as “unaffordable”, outlining that this debt is “holding the economy back”. The February 22 earthquake has changed all of this.
Despite warnings from the International Monetary Fund (IMF) that the government’s Budget deficit is likely to hit nine per cent of GDP, or $18 billion in the current 2010-11 year, the earthquake’s hit on the country will now see borrowing increased rather than reduced.
In addition to this, the spending cuts are likely to be huge. Essentially, the Government is looking at a zero Budget. There will be $600 to $800 million freed up for health and education, but this will only be financed through cuts elsewhere. As such, comparisons have been made to Ruth Richardson’s 1991 ‘Mother of All Budgets’, although as John Armstrong points out, insofar as there are unlikely to be “radical and sweeping policy changes”, Bill English’s third Budget is unlikely to resemble Richardson’s in reality.
Key has assured that there “will not be a savage attack on one particular thing” with regard to cuts, so in order to free up the kind of capital the government needs, there is likely to be a significant cutback in services across the board.
It’s almost a given that Working For Families payments for high-earners will be axed, with $250 million in saving likely, depending at what rate the cuts kick in. KiwiSaver is the other big one—the unforeseen success of the programme is costing the Government $1.02 billion annually in subsidies, and will be analysed thoroughly.
Tariana Turia’s Whanau Ora programme, underfunded from its inception, is unlikely to see any increased allocation of funding, and could potentially see reductions, continuing to render it completely ineffectual. The ACT Party will be similarly disappointed, with talk that funding for the 2025 taskforce is also likely to be sacrificed.
Obviously, of most interest to students will be how the Government is planning to pull money from the Student Loan scheme. There has been speculation that National might use the opportunity to cut the Labour government’s interest-free deal, although Key’s comments indicate that it is more likely the programme will see further restrictions on application for loans, following those introduced in the 2010 Budget.
Among all of this, there seems to be a general acceptance that an austere budget is necessary. Two earthquakes have created some exceptional circumstances. However, the Government’s approach remains political, and it’s interesting to note that taxation is conveniently lacking from the agenda.
Firstly, Key has ruled out a levy like the one introduced by his Australian counterpart Julia Gillard, following the disastrous Queensland floods. Despite general public positivity towards the proposal, Key claims that such a levy is likely to adversely affect economic recovery across the rest of New Zealand.
It’s more likely however, that the levy is simply not politically viable, as it risks undermining the Government’s introduction of income tax cuts last year. There won’t be another re-jig of income tax, and Key has also ruled out introducing a capital gains tax, or land tax, both of which have been recommended by Tax Working Group who engineered last year’s tax switch, as well as the IMF in their recent report.
Pundit’s Rob Salmond therefore makes a sound argument outlining that “we are seeing National jump ideologically to the right. It looks like John Key is losing influence over hard-line ministers who want to cut government spending regardless of circumstance, and is listening less and less to his more fiscally moderate colleagues, such as Simon Power.”
National has a lot of political capital behind them at the moment, and it seems plausible that the Government can pull off an ideologically driven attack on spending in an election year. It’s still a big punt though, and the ball is now in Labour’s court to produce a more appealing, but still credible proposal.