Opinion: English to cut spending and services

Finance Minister Bill English's carving knife is poised - he's getting ready to cut spending and services in the lead up as he prepares for next year's budget.

The first real sign of just how deep those cuts will be will come next week when he opens the books for the December update.

Unemployment is still on the rise - but Treasury is likely to indicate it will hit 7 percent, not 7.5 percent as initially predicted. Treasury now seems to be saying it will not get as high as the May Budget's downside scenario, predicted to be 9.5 percent by 2011.

So some jobs have been saved.

But while the recession may be tentatively over the impact on the Government's accounts will be felt for years into the future.

English has been at pains to point out how expensive Labour's 2005-2008 programme was. And it was.

In 2005-05 Labour spent $28.3 billion on core Government services. That's basically departmental budgets. It excludes spending on benefits and superannuation. By 2009, when National took office, that had blown out to $41 billion - a 45 percent increase in core spending over that period.

But that sort of increase and trend is simply unsustainable given the rapidly reducing revenue base.

PAYE is down because unemployment is up. Corporate tax is down significantly and is showing few signs of any improvement.

Labour's programme was particularly expensive across health and education.

Government Departments hired at will.

Labour gave interest free student loans. KiwiSaver costs hundreds of millions every year.

Extensions to Working for Families welfare system costs hundreds of millions every year.

Michael Cullen spent twice what he had to buying back KiwiRail from Toll.

The purchase suited Labour for political reasons. They campaigned on KiwiSaver, KiwiRail and Kiwibank. But it was not good value for money - taxpayers’ money. Cullen would never have spent his own dosh on such a buy-up.

I note KiwiRail is now valued at half what Cullen paid for it - no wonder the Toll executives were reportedly chanting, 'there's only one Michael Cullen' at their board meeting at the time of the deal.

So now English is starting to prepare his second budget in difficult and trying circumstances.

The recession may be technically over - the housing market is showing signs of life and interest rates are still relatively low but English has problems.

Exporters are struggling under the high dollar so an export led recovery may take some time.

So what are his options?

I really think a coherent economic plan has been missing this year. English relies heavily on a number of clichés to get him through - his favourite - 'we are taking the sharp edges of the recession'.

But he must now offer more than that.

Kiwis will soon want to see what his plan to move us out of recession really is, but I fear it's not coming.

I predict next week we will get more of the English grimace.

More of the same old bad news about Government spending, because in reality he is the unlucky Finance Minister.

The Government's books are in an awful state. English will be billions in deficit still and will be for years to come.

So the Government has introduced a $1.1 billion cap on new spending in next year's budget.

So for the first time in a decade we will see much smaller increases in the health and education budget. The Justice/Corrections area will also cost big bucks next year. So there will be no lollies - many departments will have programmes and more staff chopped. There is very little option if English sticks to the $1.1 billion cap, and he will.

So pay rises for public servants are off the agenda. That means cops and teachers too. English told a select committee this morning that a 1 percent increase in the public service payroll costs $160 million a year. In Labour's last year the increase was 5.3 percent - do the maths - $848 million alone.

Take that out of the $1.1 billion cap for the entire Government spend and you soon see why English is left with such little room to move.

Remember he is also borrowing $250 million a week for the next four years just to keep things ticking over. Future generations will pay for that for decades to come.

So next week we will get some signs that the economy is bouncing back very slowly - but as English puts it, it is still 'patchy'.

But that suits him politically. He can wind back spending, cut programmes and still blame Labour and the recession.

But those excuses will get lame and stale.

Yes, the numbers don't lie but English must still come up with some form of economic plan to move us forward.

He and John Key won't go near the age and eligibility of superannuation because politically they can't. They would be nailed.

But their lack of courage here means a problem goes on hold for another day.

They should, like Australia, signal the age of entitlement will be going up in the years ahead.

It doesn't have to happen right now.

Problem is National's record on superannuation is so poor - it's now a sacred cow.

The books get opened on Tuesday. It will set the scene for Budget 2010.

But don't expect too much.

The biggest surprise in next year's budget would be to see massive changes to the tax system introduced - as called for by the tax working group.

The options being discussed include lowering the top rate, lowering the corporate rate, introducing a land tax, increasing GST.

A gutsy Government would take some of these recommendations and throw some fairness into the tax system.

But I sense English and Key are cautious incrementalists. Change won't be big nor bold.

Will they prove us wrong?