19 May 2005

Hon Dr Michael Cullen Minister of Finance

A budget for a more secure future

Budget 2005 delivers large increases in social spending together with significant cuts to business tax and a package to encourage New Zealanders to save, Finance Minister Michael Cullen said today.

Dr Cullen said the budget continued the government’s commitment to maintaining a strong fiscal stance, supporting economic growth and building a fair and inclusive society. The savings and tax packages would encourage businesses and households to save and invest while the indexation of income tax thresholds from 1 April 2008 would give people a secure financial environment in which to plan.

New budget initiatives will cost the government $2 billion in the coming financial year, rising to $2.7 billion in 2008-09. In addition, the budget commits a further $1.3 billion in new capital spending, bringing the total over the forecast period to $4.2 billion.

These are larger than the amounts indicated in the 2005 Budget Policy Statement in December but are consistent with the government’s long-term fiscal goals.

"The government’s fiscal strategy since we took office in 1999 has been to strengthen the public finances in preparation for the ageing of the population. This has entailed accumulating assets through the New Zealand Superannuation Fund and managing debt at prudent levels.

"In last year’s budget, I committed the government to a new – tougher – debt target: steadily to reduce government sovereign issued debt as a proportion of GDP passing through 20 per cent before 2015. The budget forecasts show debt hovering just above this level, indicating that there is still a little work to be done.

"They also show the cash position deteriorating sharply from an expected surplus this year of $2.4 billion to near balance in 2005-06, and then into the red over the following three years with deficits of $1.6 billion, $2.8 billion and $1.4 billion respectively as cash flows are used to fund capital investment."

The OBERAC [Operating Balance Excluding Revaluation and Accounting Changes] over the same period drifts down from 4.9 per cent of GDP this year to 3 per cent in 2008-09.

"It is important to remember that all these forecasts assume much smaller budgets in future," Dr Cullen said. "Current planning is for an operating allowance of $1.9 billion in Budget 2006 rising by 2 per cent – the mid-point in the Reserve Bank’s inflation target range – in Budgets 2007 and 2008.

"The economy has performed strongly over recent years and the fruits of that strong performance will continue to support high employment levels over the forecast period. But the Treasury’s judgement is that growth will drop back from an estimated 4.2 per cent in 2004-05 to 2.3 per cent and 2.5 per cent over the next two years.

"Factors driving the projected slowdown are declining net migration, a cooling housing market, the lagged effects of the higher dollar and recent interest rate increases and an expected deterioration in the terms of trade.

"The forecasts suggest a soft landing with unemployment remaining below 5 per cent. But they also show the current account deficit stuck at over 6 per cent of GDP over the forecast horizon," Dr Cullen said.

"This underscores the need to curb recent rates of growth in government spending. In the last two terms in office, we have introduced a large number of policy changes. It is now time to consolidate on what we have done and to test the effectiveness of the expenditure that is in place."

Dr Cullen said that through its six budgets, the government had taken a long term view rather than succumbing to the temptations of the three year electoral cycle and that this farsightedness had delivered positive dividends for New Zealand.

"We have raised incomes for the retired and for New Zealand families, begun to repair the damaged infrastructure we inherited, substantially increased health and education spending and introduced a range of supports for business.

"As we have done all that, we have also increased the Crown’s net worth. This has risen from 7.9 per cent of GDP in 2000 to 27.8 per cent this year and is projected to increase to 35.4 per cent by 2009.

"That is a record of achievement and competence of which any government would be proud," Dr Cullen said.

ENDS

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