Surplus comes under more pressure as growth tumbles

By Rob Hosking

Friday 14th December 2001

BIG SQUEEZE: Michael Cullen

A halving in forecast economic growth and a worsening of government finances is likely to be revealed in next week's economic update from the Treasury.

The December Economic and Fiscal Update (Defu) and the Budget Policy Statement for the 2002 Budget will be released on Tuesday. The unusual lateness of the Defu release - it is usually made public in the first week of December - has given rise to speculation that the document holds bad economic news.

Finance Michael Cullen has signalled that the Treasury's growth forecasts are being scaled back, as have those of other forecasters such as the Reserve Bank and the Institute of Economic Research. This year's Budget projected growth of 3.3% for the coming year is likely to be halved.

But the government still planned to hold to its $815 million new spending cap for the coming year, he told Parliament this week, and Dr Cullen has said the government will still be in surplus.

Lower growth, and additional spending was likely to have an impact on the bottom-line surplus, Bank of New Zealand head of market economics Stephen Toplis said, but this was unlikely to come through until the next financial year.

"They haven't done too badly in keeping within the fiscal cap so far, but it is going to be difficult to stay within that over the next financial year. But they can't afford to have the surplus fall away too much or it will jeopardise the superannuation scheme."

The devil, though, will be in other areas, particularly government borrowing. As The National Business Review reported three weeks ago, the government's bond tender programme is likely to be increased. Dr Cullen refused in Parliament this week to say whether an increase in government borrowing would be announced next week.

The borrowing is supposed to fund capital spending and as such is separated out from the operating balance. The question for many economists is how much extra spending in areas such as health, which received a well-publicised boost this week, will be operational spending and how much will be classed as capital spending.

"Generally you need to be creating an asset but given the complexity of the government accounts there is some leeway between the two," ANZ Bank chief economist David Drage said. Health was one area particularly susceptible to this, he added.

"At the end of the day what matters is the sum total of money the government needs in order to continue to operate. It doesn't make a lot of difference how its classified, apart from presentationally.

"The government's spending will still require funding and that need will add to the pressure on the bond issuance programme and possibly on other sources of funding."

The various pressure the government is now under are likely to have an impact on the bottom line, WestpacTrust economist Donna Purdue said.

"They're now managing in a much weaker economic framework than they were at the time of this year's Budget. So far the figures we've seen show they're running on track but the weaker world economy and the spending increases they've already announced suggest the operating surplus is going to be lower. And of course they're going into an election year."

There was now an even more urgent needed for ministers to focus on ensuring the government spending was on high-quality areas, she said.

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