Highlights of low-key Budget

Finance Minister Michael Cullen says his second Budget, announced today, has two principal objectives: to consolidate the Government's reputation as a prudent economic manager and to advance the Government's policy agenda.

The tightest of the three budgets the coalition will present in its term, Dr Cullen said today's Budget was vigilant on spending.

"Net new spending has been limited to $629 million. This compares with around $1.26 billion in Budget 2000 and with the $815 million we are setting aside now for next year's budget."

"Every initiative had to be justified, and several worthy proposals had to be deferred."

Dr Cullen said he was concerned that the spending allocation for next year's Budget should be realistic. $815 million would be credible, although it would demand continuing discipline from Ministers, he said.

Risks posed by the slowdown in the world economy had been recognised, though Dr Cullen said he shared the Treasury's view that the New Zealand economy was well placed to absorb the shock and continue to grow.

"Although the Treasury has revised down its growth track since the December Economic and Fiscal Update (DEFU), it is still projecting growth of 2.9 per cent on average for the next four months.

"And the general outlook is for a benign mix of circumstances – unemployment remaining low at 5 per cent, inflation under control and the current account deficit dropping steadily to 3.3 per cent of gross domestic product (GDP) by the end of march, 2005," said Dr Cullen.

Today's Budget showed a pattern of rising surpluses through the forecast period to $3.7 billion in the 2004-2005 year, indicating a strong fiscal picture.

The forecast surplus for the current year was $641 million. However, the position as reflected in the Operating Balance Excluding Revaluations and Accounting Changes (OBERAC) - a new way of calculating the Government's operating balance - was significantly stronger.

"It shows a surplus of $1.7 billion. This is higher than the DEFU forecast of $765 million and reflects higher than expected tax revenues and the $140 million from the sale of the (radio) spectrum licences," Dr Cullen said.

However, those factors were overwhelmed by a combined $1.1 billion increase in liabilities for the Accident Compensation Corporation (ACC) and the Government Superannuation Fund.

Dr Cullen said the new OBERAC measure provides a more accurate guide to the quality of the Government's fiscal stewardship because it strips out these revaluation effects which reflect technical assumptions rather than real money, and which are predominantly interest rate-driven so tend to balance out over time.

"A surplus of $1.4 billion is forecast for the coming 2001-2002 year followed in the subsequent three years by surpluses of $2.4 billion, $3 billion and $3.7 billion respectively."

The surpluses were around $650 million lower, on average, than the DEFU forecasts, reflecting a reduction in projected tax revenues due to the slowing world economy and increased spending provisions.

The Government had raised the $5.9 billion fiscal cap to $6.125 billion and had increased the indicative provision for the years 2003-2004 and 2004-2005 from $800 million to $900 million.

"This adjustment is extremely modest in the context of total Government spending. This is reflected in the fact that expenditure relative to GDP is expected to fall steadily over the forecast horizon," he said.

By late 2003-2004 it was projected to drop to below 33 per cent if GDP – the lowest level since 1977.

"Net debt is tipped to remain relatively stable at around 18 per cent of GDP. These are the lowest levels achieved in 20 years and would be even lower if the debt calculations included the assets in the New Zealand Superannuation Fund.

Taking these into account, the comparable figure is a fall to 13.1 per cent," Dr Cullen said.

Highlights and key points:

* The operating surplus is projected to be $641 million.

* Spending is at its lowest level as a proportion of gross domestic product (GDP) since 1977.

* Net debt is forecast to fall to 17.8 per cent of GDP by the end of this electoral term, down from 21.7 per cent when the Government took office.

* $34.35 million package for economic and regional development.

* An extra $467 million over four years for education, featuring boosts for adult literacy programmes, early childhood education and school principals' professional development.

* A commitment of nearly $62 million over four years on implementing the review of sports, fitness and leisure.

* An investment of $20 million in establishing centres of research excellence in tertiary institutions.

* A commitment of $100 million in the coming year to the New Zealand Venture Investment Fund.

* New health spending in the budget of about $1.4 billion over the next four years, including $84.4 million a year for elective surgery.

* An increase of $173 million over four years for Child, Youth and Family Services.

* An extra $166 million for the police over the next four years.

* New spending of $46 million over four years on cultural and economic empowerment for Maori.

* An initial contribution of $600 million to the New Zealand Superannuation Fund.

www.nzherald.co.nz/budget

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