Colin James: Hard work for next Treasurer

OK, Michael Cullen has had his pleasure. Now the party is ending, what has this Budget set up for himself - or John Key - for the next term?

This next three years is the crunch. After the 1984-92 policy revolution came 10 years of expenditure-side efficiencies and then the export and consumer booms of Labour's lucky past few years.

Time now to sober up. Whoever inherits the fiscal and public spending package embedded in Cullen's sixth Budget will have to get down to the hard work of post-revolutionary improvement.

First, Cullen has been on a spending binge. The rollicking economy has showered him in revenue and he has spent a fair amount on public servants and pet schemes. That continues in this Budget and he is confident they can be financed on a 2.5 per cent-a-year growth economy.

Of course, the Greens to his left and most of his party (also to his left) want a lot more on a lot of pet projects. He warned them off: "Significantly less" would be available for new spending in the next few years. Not least, the Treasury has warned that rapidly rising public service numbers and bright new ideas have created some structural strain.

Moreover, quite apart from new projects, health can't go on expanding too much longer. Pete Hodgson has been doing some work on that, preparatory to taking over the portfolio. Does Labour's statist, centralised approach allow the requisite innovative lateral thinking next term? Does National have MPs of requisite capability and courage?

Second, Cullen has been on a tax binge. During the past five years, he has, in effect, structurally lifted personal rates to a higher platform, which he now proposes to embed by adjusting bracket thresholds only from here on - and at a rate which will fall short of inflation, let alone wages and salaries. (Though, of course, there is for 260,000 low-middle-income households last year's tangle of rebates and concessions).

Cullen set his face against cutting any income tax rates, including the 30c company rate - though all three allies, Jim Anderton, the Greens and United Future, want a cut.

Cullen has tried to get by on simplification, easing the footling FBT rules, accelerating depreciation, changes to investment taxing rules and the like. These are welcome and useful, though the carbon tax will take the gloss off. On both counts, personal and company, tax will be an issue over the next three years. Increasingly, our competition is not high-tax Europe but low-tax Asia - not to mention tax-cutting Australia.

Third, infrastructure investment will remain a core issue. There is a large gap, particularly in roads and energy but also developing in water.

Cullen pays for investment in cash (so helping turn his towering operational surplus into a cash deficit). He is suspicious of private sector involvement. If this gap is not to continue to constrain growth, fast creative thinking will be needed on funding. That means, if you listen to National, Act and United Future, bringing in the private sector.

Fourth, while the next term's finance minister is about that task, he might take research more seriously if this economy is to get smarter and lift productivity growth. Spending has barely kept pace with inflation and this Budget scarcely does better.

Alternatively, fifth, we will need to import the fruits of research. That means reducing the cost of capital and upping the attraction to foreign investors. Cullen took a step yesterday by making R&D tax breaks available to foreign investors. His personal savings scheme may help.

And, in linking savings to the current account deficit, he has flagged the sixth challenge: how to spring the external accounts from debtors' prison. Keeping the Budget in surplus is half of the macroeconomic story, but only half.

And, seventh, attracting capital and upping international competitiveness will spotlight the regulatory framework. Under Cullen, it has rigidified. Competing in Asia demands high flexibility.

Eighth, competitiveness means another look at state-owned enterprises, if not to privatise, at least to tighten commercial discipline.

And, ninth, how about the single economic market with Australia? Cullen got it moving after National could not. It is a major challenge for the next term.

Finally, if you want a tenth issue, try education. Cullen yesterday trumpeted a shift from quantity (the 1990s fixation) to quality. Has he got the mechanisms? Doubtful.

The unalloyed good news is that Cullen's stewardship leaves the accounts in good shape. He may be an enthusiastic taxer but he is a determined surplus budgeter. That is a sound platform for a demanding third-term agenda.