Budget 2002 - Fiscal Strategy: Abolition of fiscal cap should give room for flexible spend

By Rob Hosking

Friday 24th May 2002

The fiscal cap has gone.

Hints earlier this week that the government would abolish this prudent item of economic headgear were borne out yesterday. The fiscal strategy report accompanying the Budget states that after the election the government will instead "revise the provisions framework to ensure the focus will be on the operating and debt tracks and their consistency with the fiscal objectives."

There will no longer be a set figure decided at the start of each parliamentary term - a practice which began with the passage of the Fiscal Responsibility Act.

The abolition will give future governments a lot more room to manoeuvre in terms of their spending.

However, the government believes setting targets for government debt provides enough fiscal discipline.

"Over time the spending cap becomes an artificial measure in that it ignores the key measures," Finance Minister Cullen said. "Those key measures are gross debt, net debt and net worth."

The government is committed to holding gross debt below 30% - it is projecting gross debt to be 28.6% of GDP for the coming year.

The government pointed out that it inherited gross debt of nearly 37% of GDP when it entered office - but that points to the danger of having targets as a percentage of GDP. Economic growth, which GDP measures, was well down in that financial year, largely due to the Asian crisis. The current government has been much more fortunate.

Dr Cullen also pointed out that the fiscal cap gaves a government room to shift spending on to capital spending - an area not included in the headline operating balance figure.

Some economists suspect Dr Cullen of doing this himself. The surplus announced yesterday is a rosy $2.3 billion - well up on Treasury forecasts.

The Labour-Alliance government set a fiscal cap of $5.9 billion for this parliamentary term - a figure that was increased to $6.1 billion last year, in a move critics described as a "blowout" and which Dr Cullen characterised as "more of a slight exhalation."

The government has kept within that $6.1 billion limit this time. However, capital spending is not included in that extra spending and there has been a dramatic rise in that part of the government's spending programme over the term in office - just over $4.2 billion.

Just over $1.5 billion of that was included in yesterday's Budget.

The government has also scaled back its projected bond-tender programme for the year - down by $250 billion to $3.75 billion.

However, the government brought forward its tender programme in December last year, announcing an unexpectedly large bond tender programme as part of its December economic and fiscal update.

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