A careful budget for uncertain times

“Budget 2003 advances the government’s policy objectives while also providing a fiscal bulwark against an anticipated slowdown in the domestic economy and against huge international political and economic uncertainty,” Finance Minister Michael Cullen said today.

“New Zealand posted one of the fastest growth rates in the OECD last year at 4.4 per cent. But that rate is expected to halve over the next 12 months to 2.2 per cent before rebounding to 3.2 per cent in 2004-05, 3.1 per cent in 2005-06 and 2.8 per cent in 2006-07.

“A clutch of malign influences including weak world demand, the potential impact of Severe Acute Respiratory Syndrome, drought in some regions, possible disruptions to the electricity supply, weaker commodity prices and a stronger dollar are all already weighing on business confidence and activity.

“But we are better placed to weather these headwinds than are many other economies, not least because of the strength of the Crown accounts,” Dr Cullen said.

“Gross debt to GDP is expected to be down to 27.3 per cent at 30 June, this year – the lowest level since we began collecting the data in 1971 – and is projected to continue to drop steadily in GDP terms over the forecast period. And we are poised to post a surplus on the OBERAC [Operating Balance Excluding Revaluations and Accounting Changes] for the current 2002-03 year of more than $4 billion.

“Both results are testaments to the government’s prudent fiscal management over our last three budgets.

“Budget 2003 shows a surplus path sufficient to maintain infrastructural investment, meet our debt targets and finance contributions to the New Zealand Superannuation Fund.

“In fact we have been able to increase the Fund payment for 2003-04 to the full contribution rate – something we had not anticipated being able to do until the following year.

“The budget forecasts surpluses of $3.8 billion in 2003-04; $4.5 billion in 2004-05; $5.3 billion in 2005-06 and $6.2 billion in 2006-07. These numbers indicate that there is likely to be scope in next year’s budget for some substantial new initiatives, particularly to assist low and middle income families and to smooth the transition from welfare to work.

“But before we embark on significant new spending, we need to be satisfied that we can sustain it. As part of our overall judgements about the economic and fiscal outlook, we need to assess what proportion of the budget surplus is likely to be structural and what may be due to purely cyclical factors.”

Dr Cullen said that although the OBERAC, which provided the most accurate measure of the Crown’s fiscal health, was tracking around $1.8 billion higher this year than forecast in Budget 2002, the operating balance was expected to be cut by around $2.6 billion due to large, negative revaluations of the outstanding ACC claims, the Government Superannuation Fund liabilities and the EQC asset portfolio.

“None of these changes affect the Crown’s cashflow or debt position and more than half - $1.6 billion – are due to shifts in interest rates which are point-in-time measurements and are likely to reverse out again. [A 1 per cent drop in interest rates increases the ACC liability by around $500 million and the GSF liability by around $1.7 billion.]

“Although the government has continued to maintain a tight fiscal stance, new spending for the 2003-04 year has had to accommodate some significant demand-driven factors. These include substantial additional growth in tertiary education numbers, a demographic adjustment for Vote:Health and some pressing capacity needs in the public sector, particularly in Statistics New Zealand.

“But the impact of this additional expenditure on the bottom line is almost entirely off-set by stronger projected tax revenues and reduced debt servicing costs. As a consequence, the budget surplus track in the out-years is similar to that contained in the December Economic and Fiscal Update,” Dr Cullen said.

“Budget 2003 is my fourth budget and reinforces the government’s reputation for fiscal prudence and economic pragmatism while offering certainty and stability in a threatening, confused and insecure world environment,” he said.

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