Credibility test must hinge on Budget

Tomorrow's Budget Policy Statement will be more a broad statement of the Government's fiscal objectives and priorities than a rough draft of the Budget.

The revenue projections will reflect a "growth dividend," the economic outlook having brightened since the Treasury's last published forecasts in October.

Revenue will also be boosted by next month's rise in the top income tax rate, but cut by a lower take from Housing New Zealand and TVNZ.

On the spending side, we are told to expect scant detail. The Treasury has not done a bottom-up calculation of expenditure.

Tomorrow's statement, Finance Minister Michael Cullen said last Friday, would focus more on the restrictions under which those programmes would operate rather than projecting their costs.

Another big source of uncertainty is Labour's policy of partly prefunding New Zealand Superannuation. The aim is to build reserves in a super fund, the income from which will help to keep the tax costs of the state pension within tolerable bounds as the population ages.

This is still being negotiated among Labour, the Alliance and the Greens. Dr Cullen said last week he hoped to achieve a broad consensus about the principle of partial prefunding, but opinions differed about how it should be done.

Labour's preference for a dedicated tax may have to yield to a fixed proportion of GDP or some such ratio.

How the prefunding is done, and how fast, are key uncertainties in figuring out the future track for Government debt.

Dr Cullen said on Friday that "our long-term debt objective will recognise that public debt is now low relative to our recent history and to other OECD countries.

"We will set an operating balance that maintains the low debt over the medium term, that is, across the business cycle. This gives us an allowance for funding the costs of the ageing baby-boomers."

To some extent it is a semantic distinction: the traditional rationale for paying off public debt is to reduce servicing costs while the demographic going is good.

Indeed, in purely financial terms it would make sense to do that; the presumably risk-averse custodians of the proposed super fund's reserves would be doing well to get a return, net of their costs, consistently above Government bond yields.

Another uncertainty hanging over the debt track is the Government's contention that some items of capital expenditure were not adequately provided for. Capital expenditure is not reflected in the operating balance, which is akin to a company's profit-and-loss account, so that even if the operating balance is in the black, Government debt can rise.

With all these uncertainties, any critical analysis or credibility testing of the fiscal forecasts will have to wait until the Budget in June.