Fiscal cap, not cloth cap, firmly in place

Friday 25th May 2001

Government Accounts

By Rob Hosking

Finance Minister Michael Cullen may have doffed his fiscal cap in recent weeks but yesterday's Budget showed the economic head-gear was firmly back in place.

Forewarned by his speech two weeks ago that the much vaunted fiscal cap of $5.9 billion for the current three-year political term had been re-set at $6.125 billion, the only real surprise for Budget watchers yesterday was that the fiscal balance is a little better than Dr Cullen had hinted at.

Net new spending for the coming year adds up to $692 million.

Much of this is on health and education - the two big winners in this year's Budget round.

Most importantly though, this comparative restraint gives the Labour-Alliance government $815 million for new spending to play with for next year's pre-election Budget.

The original provision for next year was $550 million - an allocation which was always unrealistic, Dr Cullen conceded yesterday.

The Budget papers also include tentative provisions for the next parliamentary term. A $900 million per hear increase in spending for the 20003/04 and 20004/05 fiscal years is included in the Budget - roughly equivalent to $5.4 billion over a three-year term, and slightly lower than the extra spending this term of office.

That also includes $850 million capital spending annually for those two years - most of this expected to go on equipment upgrades in defence.

The forecast surplus for the current year was $641 million. However, changes in the way the government explains its operating balance mean the figure likely to be promoted most heavily by ministers, will be significantly higher.

Once re-evaluations of such Crown held funds as the accident compensation scheme and the Government Superannuation Fund are stripped out, there is a surplus of $1.7 billion. This is up on the December Economic and Fiscal Update forecast of $765 million and reflects higher than expected tax revenues and the $140 million from the sale of the spectrum licences.

Most of the increased tax revenue is from company tax, and the Treasury projections for the coming year take into account a likely "reversing out" of that increase.

Corporate tax revenue is higher than the economic growth figures would suggest is likely.

"The estimates for corporate tax take are conservative - we are expecting some reduction in that because the pace of the economy suggests that the tax take is a little on the high side.

"It may be though that the underlying company profits are higher than was thought."

Some of that money is likely to go to one of the Alliance's pet projects, paid parental leave. While the issue did not even rate a mention yesterday, and nor was it mentioned any of the blizzard of press releases covering the Budget, there is an unquantified provision under the "new risks" section of the Budget documentation.

This section in the tables outlines items the government thinks it might have to pay for, or change its allocation for, over the coming year, but which the Treasury is unable to put any firm numbers on.

While the unquantified risks section of the tables is often made up of such items as pending lawsuits, upcoming pay negotiations and one-offs such as revenue from the recent spectrum auction, it also includes upcoming policy initiatives the government is yet unable to work out.

And while there are no numbers on the paid parental leave provision, there is an introduction date: April 1, 2002.

That presages a nice neat election year sweetener for the government's supporters, as well as election bait for the waverers.

There are risks around what are, by New Zealand's historical standards, rosy Budget forecasts.

Dr Cullen spent much of the first part of his Budget speech outlining the risks in the international economic outlook, and the Budget tables show the likely fiscal situation if world economic growth is weaker than the Treasury currently expects.

However, even this more pessimistic scenario shows the government accounts staying in the black.

The Treasury's most pessimistic scenario still has a fiscal surplus remaining at about $700 million in the next financial year, and the slowly increasing above $1 billion after 2003.

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