Darren Gibbs: Ho-hum day for well-warned money markets

Each year, financial markets seem to pay less attention to the Budget.

This reflects the fact that within the broad limits of what constitutes sound fiscal management - and New Zealand's policy now falls well within these limits - domestic fiscal policy settings have very little influence on key financial prices.

Take interest rate markets, for example. New Zealand's short-term rates are anchored by the Reserve Bank's official cash rate. Fiscal policy is only one factor influencing economic performance and thus the bank's policy settings.

Long-term interest rates are are largely driven by rates overseas. Domestic bond supply is relevant only at the margin.

The typical lack of financial market response to the Budget also reflects the transparency of the Budget process.

The key Budget numbers - at least as far as markets are concerned - were indicated well in advance of Budget Day, and the market had clear guidance that it should not expect large differences compared with the figures in the December economic and fiscal update.

So it is not surprising that the Budget has come and gone with little fanfare.

As foreshadowed, the Treasury has reduced its forecast of economic growth for the year to next March to 2.2 per cent.

This reflects a number of negative factors, including a sluggish world economy, the Sars virus, the effect of dry weather on electricity production and manufacturing, and a New Zealand dollar that has risen by about 8 per cent more than the Treasury assumed in December.

The economy is forecast to recover to about 3.2 per cent growth in the year to March 2005.

This gives a reasonable baseline for the Government's fiscal planning, albeit one that is a little more optimistic than Deutsche Bank - we see growth closer to 2 per cent and 2.5 per cent in 2004 and 2005.

We are a little more concerned about the world economy and about the possibility that the New Zealand dollar will appreciate well beyond the Treasury's assumption if the American dollar continues to weaken, as seems likely.

The modest revisions to the growth outlook have translated into little change in the forecast operating surpluses or the forecast borrowing programme.

The Government will issue $3.2 billion of bonds this financial year, slightly down on previous forecasts, reflecting what is likely to be a larger than forecast cash surplus from last year.

This programme is in line with market expectations and, after refinancing the maturing April 2004 bond, implies little change in the amount of debt on issue.

Meanwhile, the Government's net debt position continues to improve, especially once the forecast assets of the soon to be created New Zealand Superannuation Fund are taken into account.

How should the Budget be judged?

At the macro-economic level this was yet another sound Budget.

But while stable public finances undoubtedly make a contribution to the country's wellbeing, having got the macro-economics broadly right, it is important to do the same on the micro-economic side.

Taking into account the aim of raising New Zealand's economic performance, this is where many people may once again be left disappointed.

* Darren Gibbs is senior economist at Deutsche Bank NZ