Big spend leaves little in the kitty

By VERNON SMALL Deputy political editor

Finance Minister Michael Cullen may be picking an election-year schoolyard brawl, with a tight cap on future spending leaving few lollies to scramble for in two years.

Heavy expenditure in the first year - $1.23 billion, including big-ticket items already announced - has left little room to play within his $5.9 billion overall spending limit.

It will, as Dr Cullen himself acknowledges, "demand great discipline over the next two Budgets."

His determination to present a tight fiscal face to the business and financial markets saw him forecasting bigger surpluses than Treasury foresaw in its March Budget Policy Statement.

Extra spending is limited to $550 million next year and $575 million in election year, which leaves little in the kitty for the bottomless pit of extra health spending, in particular.

On top of that, there is a slim $180 million each year set aside as a contingency fund. The 2000-2001 contingency has already had a good bite taken from it, with $15 million earmarked for the Green Party's plans and $50 million yet to be allocated to "Closing the Gaps" plans.

The big query over the future fiscal track, in what is otherwise a responsible if dull Budget, is how robust it will be in the face of emerging economic pressure and the realpolitik of calls for an election-year spendup.

While Treasury has mapped a credible growth track - based on May 15 forecasts, before the slump in business confidence was officially measured - a 1 per cent lower outcome can slice $300 million off the Crown's income.

Treasury's economic outlook includes strong world growth and a supportive monetary policy, with stimulus provided by a low exchange rate and a strong export sector.

In that regard, the heavy "front-loading" of spending is strongly counter-cyclical.

It spends the most when the economy is at its peak - now - and preserves the smallest injections for when the economy is off its highs.

That is the wrong recipe to support sustainable economic activity and it is the wrong mix to help the Reserve Bank's inflation busting.

Since the Budget forecasts were finalised there has been a sharp drop in the exchange rate (and a partial rebound), a big lift in petrol prices and an alarming sag in business confidence.

Treasury acknowledges the changes, warning: "There is a risk of this low business confidence translating into lower activity levels than in the central forecast," adding to Dr Cullen's potential election-year timebomb.

Treasury's view of a slower economy - its "weaker domestic demand" scenario - sees growth slipping to 2.1 per cent in the coming year (instead of 3.7 per cent in its central scenario) but tracking slightly higher in the following two years.

The impact on the surplus of such a slowdown is severe in the next year - down to $400 million instead of $1 billion.

After that it would push Dr Cullen's plans to fund superannuation to the limit, with a $1.5 billion surplus in 2001-2002 and $2.2 billion in 2002-2003, when he is expecting to put $1.2 billion and $1.8 billion respectively aside for super.

Usually, around $1 billion of the surplus is non-cash items such as the profits of state-owned enterprises or revaluations.

His ace in the hole may be the proposed sale of the high-frequency radio spectrum, which could add $650 million to the surplus.

While he would baulk at spending the windfall, it would be useful as a one-off injection into the superannuation fund.

A centre-left Coalition's fiscal track saved by an asset sale would be an irony indeed.

Budget 2000 feature

Minister's budget statement

Budget speech