In 1870 when it appeared that Maori were dying out, one unadventurous soul observed that the government's best tactic was to "smoothe the pillow of a dying race". Today, the Labour-led government seems to have adopted this as its approach to the country as a whole. We are gradually opting out of the real world. In a burst of nationalistic fervour after coming to office in 1999, Helen Clark said her aim was to lift New Zealand's incomes back into the top half of the OECD over ten years. The disciplines entailed in producing above average economic growth for a sustained period quickly proved too much. Several months ago, instead of climbing the OECD table, we slipped a notch to 22nd. A huge array of statistics tells us we are losing our first world status. We once had the third highest living standards in the world. As David Skilling of the New Zealand Institute said last week, our economy "is gradually detaching itself from developed world income levels". Brian Gaynor says "New Zealand is sleep walking to the poorhouse". The budget was another exercise in smoothing the pillow of a dying economy. Kiwi Saver is better than nothing. But it won't save us. For a time it looked as though the National Party was ready to deliver the latest available economic medicine to the ailing patient, but I suspect it, too, has given up.

The patient's diagnosis is quite clear. Government spending is now $15 billion per annum above the baseline trajectory that had been operating prior to Labour taking office. In 1999 tax revenue was $32 billion. Only 8 years later it's $52 billion, instead of $37 billion. Excessive spending has built a hot house environment with inflationary pressures that flow into every corner of the economy. Wages, prices, house costs, rents, mortgage rates and electricity all feel the relentless push from government overspending. Productivity has slowed to a crawl, while the rise in the standard of living, allowing for inflation, gradually subsides for most people, especially traditional Labour voters. It's a replay of Robert Muldoon. Thanks to excessive state spending and overuse of credit cards we import more and more. The government's spendthrift nature infects individual behaviour right across the country. High domestic interest rates are only one of the sideline results of excessive spending, like diabetes resulting from over-eating. The dollar soars because overseas investors are looking for a quick buck. They won't invest long-term in an economic graveyard.

Overspending governments often choose to regulate, rather than deal with the base cause of the disease. Few doctors admit mistakes. We now have 24,000 more people on the state's payroll than in 1999, steadily reaching double the number running the country eight years ago. Their remuneration races ahead of the private sector, and helps drive Wellington house prices and the inflationary environment many are allegedly there to control. Commissions and regulators spring up as ministers try to bandage the inflationary balloon to stop it exploding. Remember that awful movie of Evelyn Waugh's, "The Loved One"? It centred around the American funeral industry with a vast Mrs Joyboys in bed gorging herself until she burst? Labour is moving relentlessly down that road as ministers inflate spending and meddle in things beyond their expertise, completely confident they know better than the market place. Any wonder that an upwardly mobile one million Kiwis now live overseas, escaping the huge gap that has opened up between wages at home and those elsewhere?

With wiser governance we could be enjoying that $15 billion in our own pockets, choosing what to do with it, including saving some. Both Labour and National governments made the building blocks in the 1980s and 1990s that would encourage economic growth, higher productivity and more choices for New Zealanders. We started catching up with the developed world. But last week's budget gave us more of Michael Cullen's tax and spend snake oil, a prescription that economists have known for 30 years eventually chokes the goose that lays our golden eggs. In Muldoon's day we watched a variety of interest groups prance about after budgets, applauding sectoral favours he'd delivered them. Last week "over the moon" fund managers welcomed Kiwi Saver. They perceive short-term advantage. Local authorities with bloated payrolls and excessive property rates rejoiced in their extra power to tax for infrastructure. Fletcher Building's shares soared as investors sought their spin-off from the extra expenditure. The 1970s are back.

Next year we'll have Michael Cullen's election lolly scramble. Just in time to slip another notch on the OECD's table.