Focus goes on govt borrowing

By Felicity Anderson, Nzoom.com Business News Editor

Monday 20th May 2002

Stronger that expected tax revenues are expected to have helped provide around an extra $900 million in the government's coffers.

Economists are predicting when Budget 2002 is delivered by Finance Minister Michael Cullen on May 23, the projected operating surplus for the current year ending June will be revised upward from the forecast of $1 billion in the December Economic and Fiscal Update (Defu).

ASB and ANZ economists forecast it to be more like $1.5 billion, while Westpac anticipates around $1.65 billion.

They are also forecasting the operating surplus to continue to grow over the next few years.

Westpac expects the government to forecast a surplus of $2.3 billion in 2003 and around 3.5 billion in 2004.

Adrian Orr's Westpac team is slightly less optimistic and sees the surplus more like $1.6 billion in 2003 and $1.9 billion the following year, largely because of differences in assumptions about unemployment and GDP (gross domestic product) growth.

ASB sees a surplus of $2.5 billion next year (up from the Defu forecast $1.8 billion), and points out that $0.6 billion and $1.3 billion consecutively of the June and 2003 surplus will be channelled into the NZ superannuation fund.

The question is how much of the extra cash in the coffers attributable to cyclic effects and how much to strict fiscal management.

The economists say government cash disbursements have been lower than projected because of delays in refinancing Housing Corporation debt and capital injections to district health boards.

But no matter the surplus this year, don't expect an added spending splurge.

Cullen has promised to remain his fiscally dry self and keep to the three-year $6.1 billion spending cap he placed on with the first budget back in 2000.

That means he has around $450 million - $500 million left to spend on new initiatives this time round.

Many of those initiatives have already been announced, but there is likely still to be a few headline catchers in health, education and economic transformation that have been signalled as the focus of this Budget.

And surpluses don't mean the government is not going to have to borrow, albeit slightly less than the $5.1 billion forecast in the Defu.

David Drage'steam at the ANZ point to a heavy capital expenditure programme, including contributions to the NZ superannuation fund, meaning the government is likely to announce a sizeable funding requirement for the year beginning July.

The ANZ's picking the Budget will outline a government bond issuance of around $4 billion. ASB is forecasting around $4.5 billion and Westpac around $3.7 billion.

The debt issuance programme will be the key focus for the financial markets.

Westpac says the government's adherence to the fiscal cap has been viewed positively by the markets, with spending pressured remaining relatively contained.

"However, recent comments by the Finance Minister suggest the government will remove the fiscal cap at the end of 2003 in favour of alternative, but as yet unannounced, methods of containing government spending," the bank's economists say.

"Such a move would be looked on unfavourably by the financial markets, raising doubts over the ability of the government to maintain surpluses in the future.

"Even more so if the government's Budget projections continue to forecast a rise in the debt to GDP ratio - an event that would see New Zealand's risk premium on borrowing rise over the medium term."

The economists are predicting the government will forecast real gross domestic product (GDP) growth of around 3% in the year ended March 2003 (up from 1.9% in the Defu) and between 2-3% after that.

A change this year to bring the government's accounts into line with international standards and NZ specific changes is the other thing that will keep the financial community focused during Budget 2002.

Westpac says although the net results for the crown will be materially the same when it comes o operating balance and net worth, the composition and total of items such as revenues, expenses, assets and liabilities will change.

"For example in 2001 revenue as a percentage of GDP will rise from 34.6% under the current presentation to 40.9%. Similarly expenditure will rise from 33.4% to 39.7% respectively."

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