It is down to us. That has always been the case but Dr Cullen’s ninth Budget put more onus on us, the private sector, to make the best choices: choices about consumption now or consumption later; choices about how to deal with higher energy and food prices; choices about more or less work. Anthony Byett of fxmatters has more.

Up until now the Labour-led governments have salted away a large proportion of our income for the future. This has been in the form of money contributed to the NZ Super Fund; money by that way that has been increasing in value by 11.3% p.a. or around 8% p.a. above the inflation rate in spite of recent losses. The surplus government revenue has also been used to undertake capital investment into roads, hospitals, prisons; and to build up overseas funds via the Reserve Bank and make loans to students, all of which are expected to be of future benefit to us collectively.

The government will continue to take surplus tax to meet most of the contributions to the NZ Super Fund (and Kiwi Saver) but the other investment activities will now be funded by government borrowing from the private sector (including offshore).

The accounting measure that captures this major change in policy is the operating surplus falling from an average of $6.1 billion in the past five years to a $0.7 billion average in the next four years. More telling, the cash surplus moves from an average of $2.1 billion to deficits around $3.4 billion. The initial impact is an extra $0.9 billion to be borrowed by the government via bond issuance in 2008/09 (the balance coming by running down accumulated government financial assets)

To be sure, some of these changes reflect a markdown in revenue forecasts induced by lower expected GDP growth and only some reflects policy initiatives, including tax cuts, in the Budget. Whatever the cause, the net effect is the same: the private sector will now have to undertake extra saving to fund investment activities of the government.

This extra saving can come about in two ways. We could increase output and consequently savings faster than expected, possibly the result of the lower personal tax rate, and the April 2008 corporate tax cut, encouraging us to work harder or smarter. This appears challenging as the Budget already assumes a productivity boost over 2009 and 2010. We could also save more by either not spending the extra cash provided on 1 October and beyond and/or by actually cutting back on current expenditure, possibly because we realise the government’s potential to assist us in future is now less, or maybe because we anticipate higher investment returns under a lower tax rate regime. Saving more would mark a change from the previous habits of New Zealand households.

The third alternative is that we simply call more on offshore savings; we do not change our ways but instead borrow abroad or sell more New Zealand assets.

These choices are important. They will have a long-term influence on our future well-being.

There is also a more material impact right now. Anticipations of these choices we are about to make are already showing in the money and currency markets. The initial reaction is not optimistic. The implicit expectation is that we will not increase saving sufficiently and hence interest rates and the exchange rates will be higher than would otherwise have been the case. One way this manifests itself is a delay to what might otherwise have been a monetary easing in the September quarter.

Of course, markets have been wrong before. We could meet Dr Cullen’s challenge and work smarter, save harder. Unfortunately tax cuts do come with added responsibilities.