Cullen unlikely to play Santa Claus

By NZPA

Monday 16th December 2002

Finance Minister Michael Cullen will resist playing Santa Claus despite the likelihood that a mid-year budget update this week will show a burgeoning surplus, economists say.

The December Economic and Fiscal Update (DEFU) is forecast on Thursday to show the 2002/03 operating surplus swelling to $3.3 billion compared with the budget night figure announced in May of $2.3 billion.

While ministers may be rubbing their hands saying "Ho, ho, ho", Dr Cullen will be saying "No, no, no!".

He and the Government is the beneficiary of a booming economy, with new data on Friday expected to show 4.8 percent growth in the September year -- well above the 3.1 percent Treasury forecast on budget night.

The economic boom has been fuelled by a consumer spend-up rather than an export boom, although exports have held up better than expectations, given falling dairy and commodity prices and the soaring New Zealand dollar.

The Government wins at virtually every turn from higher economic growth -- taxes on companies making higher profits, more people in jobs (around 50,000 in the past year) and rising wages.

However, Dr Cullen is likely to resist increasing base spending even though economists forecast the stronger than forecast growth to continue well into next year.

Deutsche Bank is picking the 2003/04 surplus to be $3.9 billion, up $800 million on previous official forecasts.

Bank of New Zealand head of market economics Stephen Toplis said Dr Cullen has "an aversion to lock the cyclical windfall into spending baselines".

Instead, Dr Cullen is likely to slice Government borrowing and stash the cash in his superannuation fund.

Government borrowing for this year, budgeted at $3.4 billion, and a planned $5.5 billion bond tender programme next year are likely to be reduced, putting further downward pressure on interest rates.

Dr Cullen has already moved to hose down the hopes of his spending ministers.

"Banking fiscal windfalls will be a big test of the political will of this Government," he said in a recent speech.

Dr Cullen said he would have to be confident that growth rates and tax take increases were long-term and stable.

"It is simply too early to move with confidence to a substantially higher spending track, because our experience is that these structural shifts in spending are very difficult to claw back if later evidence suggests that we need to," Dr Cullen said.

While the economies of many countries have struggled to get traction, New Zealand's growth rate looks like being close to top of the OECD for 2002.

Westpac chief economist Adrian Orr expects the momentum to continue in the final quarter of this year and into next year.

"It looks like a pretty positive finish to the year and enough to roll over into easily the first half of next year," he told National Radio.

"The big question mark has been around business investment, that's been the laggard. We have had plenty of domestic spending, plenty of construction activity and the government has been out there shopping as well.

"It's been the business sector which has been nervous but now you are seeing improved confidence, you are seeing plenty of pressure on capacity, low unemployment and rising real wages so there are plenty of reasons for going out to invest now."

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