Third term governments always look tired. Policies developed in opposition have been implemented (usually with more difficulty and less effect than expected), ambitions – such as exporting 40 percent of GDP – are nowhere near deliverable (and in truth, never were), unexpected issues prove tiresome and intractable and whenever you try to do something the majority grumbles (of too much or not enough, usually both) and too often there is a minority with a veto. Perhaps worst of all, there is never enough cash to do what you’d really like to do. While every third term government looks to its ‘legacy’, this Key-English budget looks flat.

It has never been obvious that the Key-English administration has had a vision other than being ‘good government’. That has been its political strength for vision involves looking to the challenges ahead. It is easier to deal with the immediate issues and, broadly, that is what the public wants as long as things are going well. Admittedly, the current administration took over as the global economy plunged into its worst postwar crisis and its longest postwar stagnation, which is still not over for many economies. Initially the New Zealand economy stagnated too, but it did not collapse and the economic stagnation from 2007 to 2013 was just tolerable. Since then the economy has been growing along at about 3 percent per annum– back on its long term growth track.

There were two main reasons why New Zealand survived the global downturn. The first was the Cullen Cushion, for the previous Minister of Finance had been squirrelling away surpluses which were raided in 2009 to ease the economy through the downturn. So far English has not been able to reflate the cushion. The government budget is still running a (small) deficit and the level of public debt is considerably higher today than it was in 2008. English implicitly acknowledges Cullen’s achievement by saying that he would like to do the same, but the projections suggest not in the current term.

The other key positive factor in the New Zealand economic performance has been the consequence of the China-NZ Free trade agreement which has opened up opportunities in the growing Chinese market especially for dairy products. Again it was the Clark-Cullen government which did the deal but it was the Key-English government that benefited from it.

This is not to make a political point. The reality is that each government inherits from its predecessor newish policies which it continues. For instance, the Minister for Economic Development was able to get some large infrastructural projects quickly underway because some five years earlier the previous government had seen the need and prepared the groundwork. Similarly the restructuring of Auckland’s governance was underway under Labour (although the first thinkings occurred in the time of the Bolger-Birch National government).

A third reason for the government’s short term success, a negative one which also began evolving under the predecessor government, concerns the heavy offshore borrowing by the private sector. Little of this has gone into increasing the capacity to produce (or export to pay for it) but has been for consumption purposes – either directly or via housing construction.

It is hard to disentangle the Canterbury earthquakes rebuild so let us just focus on the Auckland housing market with its speculative boom. It is only the short-sighted or those who profit from the boom who cannot see the obvious. The Reserve Bank thinks that increasingly rents do not cover landlords’ outlays. The logic is that either the landlords are subsidising their tenants or that they are in it for the capital gains.

Admittedly there is a problem of a housing shortage in Auckland to which the difficult geography and lack of a commuting infrastructure complicate the migration pressures. The speculative boom has added to the shortages because its new housing is at the large end of the market. People don’t really need huge houses to live in but the reality is that there are more capital gains to be made from an over-leveraged large house. Building one large house means there is not the capacity to build two or three smaller houses, thereby contributing to the shortage of affordable houses for ordinary New Zealanders.

However, speculation requires a regular turnover of housing which generates fees to transaction specialists – real estate agents, valuers, conveyers, lawyers, financiers and the like – who largely consume their income rather than save it. Thus a speculative boom financed by offshore borrowing flows through to consumption and everyone feels prosperous as long as the capital inflows and the boom continues.

The issue has been, among the rational anyway, not whether there is a speculative property boom but how to restrain it. Supply-side policies of increasing the stock of housing are too slow, and in any case won’t work during a bubble. The Reserve Bank has found exhortation ineffective and is constrained by its legislation as to what else it can do. At face value, using prudential finance policy instruments such as loan-to-value ratios for macroeconomic purposes is odd but the RBNZ is trying to avoid ramping up interest rates to moderate the Auckland boom. That would kill housing in the rest of the country and productive investment everywhere.

Belatedly therefore the budget announced a capital gains tax to discourage short-term property speculation. (There appeared to be an element of panic; earlier in the year the prime minister had announced there would be no new taxes in the budget.) Will this be enough to quiet the boom? While policy managers dream of a slow deflation, speculative bubbles usually pop spectacularly, erratically and messily.

Thus the three main forces sustaining the economy are all under threat. There is no Cullen Cushion for a buffer, the initial penetration into the Chinese market is now on its saturation path (and there is sufficient turmoil in the world dairy market to threaten prices even if the Chinese economy does not slow down) and the housing bubble may implode. (The fourth, the Christchurch, rebuild will eventually come to an end.)

One does not get a sense that the budget speech is aware of this although no doubt the Minister of Finance has been briefed along similar lines to the contents of this article. There is a hint where the Treasury forecasts say the Chinese and commodity risks are ‘skewed to the downside’. Because the penalties are even higher on the downside than the gains are on the upside, the prudent would think more about the downside; the budget does not.

Any thoughtful review of the economy’s prospects would conclude that the country needs a higher savings rate. More savings would enable a sustainable exchange rate. It would give people greater security in retirement, increase domestic ownership and maintain national integrity. That is one of the reasons for the government running a budget surplus.

Consider the ending of the Kiwi-saver incentive. Cullen ingeniously hid some of his budget surplus by giving it to individuals as a Kiwi-saver deposit. However they could not spend the pseudo-tax cut but were forced to save it for retirement. Whether it additionally increased the private savings rate may be debated, but the effect of abandoning the incentive for opening the account as in this year’s budget and using it to fund the benefit increases to poor families will be to stimulate consumption.

The net effect of the budget is pro-consumption when increasing domestic savings ought to have been a medium term goal. Having said that, the benefit increases are a long-term investment in the economy insofar as they reduce the poor health of children, improve their education and access to training and help reduce social inequality which should also reduce crime and delinquency.

Few of these medium and long-term considerations were prominent in the budget speech. They may be overwhelmed when the downside occurs. That will surely happen one day – but hopefully not too soon!