Dr Cullen's calm offensive

By JOHN ARMSTRONG and VERNON SMALL

Michael Cullen's giant state pension fund may be ready to come off the drawing-board despite hardly featuring in yesterday's Budget.

After producing the first centre-left Budget in a decade, Labour and the Alliance may soon resolve the stalemate over how the $50 billion-plus super scheme will be funded to meet the retirement incomes of baby-boomers. A working paper is ready to go before ministers.

The potential breakthrough follows the Coalition's agreement to make a cautious start in the Budget on "repairing the social fabric," with Finance Ministers insisting that work be done within strict spending limits.

Much of the Budget spending had been revealed in advance, with the fresher elements including more money for elective surgery, extra cash pumped into strained mental health services, plus a freeze on student fees next year.

Hailing his Budget as a "new start for a new century," Dr Cullen labelled himself the "Iron Chancellor" and promised he would stick to an overall cap on new spending of $5.9 billion in his first term in office.

Displaying his fiscal prudence to a suspicious business community and avoiding the "tax and spend" tag his opponents will try to pin on him, he is forecasting a surplus of just over $1 billion in the next 12 months, rising to a healthy $2.7 billion in election year.

Economic growth is picked to average 3 per cent over the next three years, but Treasury's forecasts were finalised before the recent slump in business confidence, the sharp fall in the dollar and rises in petrol prices.

Treasury warns this could cause inflation to hit 3 per cent by the end of the year and see growth lower than its main forecast.

That spectre comes on top of yesterday's dreadful current account deficit of $8.54 billion, $500 million worse than Treasury's own forecasts and much higher than economists had expected.

At 8.2 per cent of gross domestic product, it was the worst outcome since June 1986 and sliced nearly half a US cent off the value of the kiwi dollar.

Treasury is expecting a quick improvement in the current account, forecasting it will be in deficit by 5.8 per cent of GDP by next March.

The bad news did not overshadow the Budget, whose flagship initiatives are help for Maori and Pacific Islanders to "close the gap" on the rest of the population, along with initial steps towards boosting new industries, especially in the provinces.

As expected, Dr Cullen has gone some way towards fulfilling election pledge-card promises to cut surgery waiting times.

Prime Minister Helen Clark has also satisfied a long-held political wish by injecting $257 million into mental health over four years.

The Coalition may also gain political brownie-points by dangling a carrot of $30.5 million more funding in front of universities and polytechnics in return for a freeze on student fees next year.

The Budget included some working assumptions on the pension fund, saying it would need annual injections of $2 billion after initial input of $3.6 billion spread over the three years from 2001.

It assumed that the annual deposits into the fund would fall to zero by 2025 when it would begin paying out.

Sources said Dr Cullen's paper would be in line with the Budget blueprint and would recommend that 6 per cent of GDP - about $6 billion - be earmarked for pension payments each year. About $4 billion of that would cover the current cost of pensions with the remainder retained to cover part of future costs. The Alliance wants to divert cash into the fund only when there are surpluses, but sources said a compromise might see the 6 per cent provision waived if the Budget was under pressure.

Budget 2000 feature

Minister's budget statement

Budget speech