“Is the challenge of this year’s budget tougher than the 1984 budget?”

New Zealand was technically bankrupt in 1984, but in many ways the present crisis is more challenging. It is unfair. National did not cause this crisis but now it is their responsibility to get the budget right.

To understand the issues facing Bill English first we have to remember that New Zealand went into recession before the global meltdown. And we have our own economic issues.

In the OECD only two countries owe more money per person than we do; Iceland which is bankrupt and Spain where unemployment has just hit 17 percent. New Zealand’s external debt is now $167 billion. Politicians used to say “Most of the money is owed by Aussie banks, it is not our worry”. The banks owe most of the debt but just days before the election the Labour government extended a guarantee to cover all bank borrowing. Potentially you owe $41 thousand; that’s what $167 billion divided by 4 million works out at.

As only a third of us pay income tax as a taxpayer you potentially owe around a $120 thousand.

Around $80 billion dollars of the bank borrowings you are guaranteeing is “hot money” that has to be refinanced every 120 days. Our banks have been borrowing short and then lending it long on house mortgages, the recipe for a crash.

One of the major events of the global credit crisis was the failure of the finance house Bear Stearns. When Bear Stearns failed it had $15 billion in cash and was about to announce it had made significant first quarter profits, but Bear Stearns was borrowing $76 billion every night and lenders decided Bear Stearns was not a good credit risk at any interest rate. Could that happen to New Zealand?

It has already happened once. The Labour government gave the banks a guarantee because with out it our banks could not roll over the debt. If Bill English produces a budget with a huge deficit lenders will have another look at New Zealand cedit worthiness and they will not like what they will find.

A deficit is simply spending more than you earn. A billion dollars is hard to conceive so let us personalise it to your share. All the figures today’s dollars. This year the government is spending $18,960 per person. So your share is nearly $19,000.

Just 13 years ago in today’s dollars the government spent just $11,200 per person each year. It took New Zealand governments 156 years to get to $11,200 and just 13 years to increase spending by $7,567 per person per year.

It is the biggest spend-up in history, bigger than World War II!

Spending must be matched by taxes. Labour, by not adjusting tax rates for inflation had more people paying the top tax rate. The world-wide boom meant companies were paying record taxes.

This massive increase in the size of government has distorted the whole economy. Resources have been diverted from exporting. Government spending has lead to a huge rise in our external deficit.

For nearly four years the country has spent every month nearly a billion dollars more than we have earned. The external deficit has added around $40 billion to the debt we owe. This is unsustainable.

The recession has wiped out the only reason we have been regarded as a “good” risk – the government surplus.

Companies only pay income tax on profits and profits are in free fall. Unemployment is up so there are fewer taxpayers, and a rise in unemployment numbers increases welfare costs.

Bill English says he has a fifty billion dollar hole in the forward budgets. How long before lenders start to wonder if the New Zealand government’s bank guarantee is not much better than Iceland’s? Some have said “Who care’s if we lose our triple A rating? When we lost our triple A rating in the eighties the world was awash with credit. Now like with Bear Stearns or Iceland, the lenders of the $80 billion of hot money our banks owe, could decide that they do not want to lend at any interest rate.

So what to do? The good news. Even in a slump people need to eat. Provided the government quickly moves to cut red tape and allows resources to move to the export sectors we can trade our way out of the external deficit.

The good news is also that there is huge waste in government. Why do we have an Electricity Commission?

Also, business does not need welfare. The Department of Economic Development could be abolished and its few necessary tasks reallocated. We are the only country in the world to subsidise horse racing.

The hard news is that government cannot balance the books without cutting spending in welfare, education and health. The good news here is that Labour’s extra spending has made services worse. Despite the huge increase in spending over the last four years in health – productivity dropped 8 percent. Just going back to where we were, a very moderate goal – would save around a billion dollars.

Sir Roger Douglas says “I believe Bill English can cut billons of dollars of wasteful government spending, balance the budget and actually improve the quality of services. There is no law that says government spending must increase. From my time as finance minister till Bill Birch, 12 years ago, government spending in today’s dollars fell $300 per person.”

“What we cannot do is spend our way out. Spending has got us into the mess and more government spending cannot get us out. Sure there is room to reprioritise government spending but the idea that the pain of the adjustment should fall solely on the productive sector, is absurd and unfair.”

Every day we delay just means this recession will be longer. If the budget cuts wasteful government spending we will have made the first steps towards a sustainable recovery and a high growth future.