Cullen announces $4.04 billion surplus

UPDATE - New Zealand was poised to post a surplus of $4.04 billion for 2002-03, Finance Minister Michael Cullen said in his Budget speech today.

Dr Cullen said this surplus was sufficient to maintain infrastructural investment, meet debt targets and finance contributions to the Superannuation Fund.

The Budget also forecast surpluses of $3.8 billion in 2003-04, $4.5 billion in 2004-05, $5.3 billion in 2005-06 and $6 billion in 2006-07.

"These numbers indicate that there is likely to be scope in next year's budget for some substantial new initiatives, particularly to assist low and middle income families and to smooth the transition from welfare to work," he said.

However, Dr Cullen warned against significant new spending until there was satisfaction that it was sustainable.

"As part of our overall judgements about the economic and fiscal outlook, we need to assess what proportion of the Budget surplus is likely to be structural and what may be due to purely cyclical factors."

He said the operating balance, excluding revaluations and accounting charges, was tracking around $1.8 billion higher this year than forecast in last year's Budget. However, the operating balance was expected to be cut by around $2.6 billion due to large, engative revaluations of the outstanding ACC claims, the Government Superannuation Fund liabilities and the EQC asset portfolio.

"None of these changes affect the Crown's cashflow or debt position and more than half - $1.6 billion - are due to shifts in interest rates which are point-in-time measurements and are likely to reverse out again," Dr Cullen said.

"Although the government has continued to maintain a tight fiscal stance, new spending for the 2003-04 year has had to accommodate some significant demand-driven factors. These include substantial additonal growth in tertiary education numbers, a demographic adjustment for health and some pressing capacity needs in the public sector, particularly in Statistics New Zealand."

The gross debt forecast for 30 June is 27.3 per cent of GDP, compared with the forecast of 28.6 per cent in last year's Budget. The corresponding figures for net debt are 14.0 per cent and 16.8 per cent.

"Thus for the third year in a row, performance has exceeded expections," Dr Cullen said.

Gross sovereign issued debt is projected to fall 23 per cent of GDP in 2006/07.

Dr Cullen said this was well below the government's stated prudent gross debt upper limit.

"In this light it is suefull to provide some additional focus around the debt target and the fiscal possibilities that exist over the forecast horizon."

Dr Cullen said the broadly stated target was to keep gross debt below 30 per cent of GDP. However, given prudential management with a margin of risk, the bias is more against increasing debt than lowering it so that there will be a natural tendency for the gross debt percentage to trend downwards over time.

He said the projected decline does indicate the likelihood of sufficient fiscal headroom in next year's Budget for some significant initiatives beyond the amount presently allowed.

"Whether these will in fact proceed will depend on a number of judgements about the economic and fiscal position, including the level and direction of the structural surplus.

Meanwhile the Treasury said today healthy economic growth has left most New Zealanders better off and the country is in good shape to deal with rougher months ahead.

However, the best times may be past. The fiscal and economic update released with today's budget said domestic spending in the last few months saw economic growth peak at 4.4 per cent in the year to March 2003.

Strong household income growth as more people gained jobs, topped off by low interest rates and strong housing demand, left not only most people feeling better off, but the Government as well.

Treasury said the fair winds that have guided the Labour Government in recent years are about to turn into "headwinds".

What Dr Cullen describes as the "most uncertain political and economic situation internationally for a very long term" does not bode well for everyday New Zealanders.

Slower job growth, less money in farmer's pockets and the shopkeepers of Auckland seeing less Asian tourists and students coming in the door will hurt everyone - but just a bit, Treasury hopes.

The Government's chief economic advisers just aren't too sure how bad it will get.

Their biggest short term worries are the lack of water in the right places and ignorance of how bad the Severe Acute Respiratory Syndrome (Sars) outbreak might be.

They predict it is going to be a very cold economic winter, dragging growth rates down to 2.2 per cent for the March 2004 year. That is worse than predicted in December (2.5 per cent), though Treasury is picking a rebound to 3.2 per cent growth in the following year.

As a result New Zealanders will borrow more and save less to maintain their lifestyles with debt servicing reaching record levels, Treasury said.

People will find it harder to get jobs as nervous businesses stop recruiting as unemployment rises from the current 5.0 per cent -- close to a 14-year low -- to 5.6 per cent by March 2004.

The Government's coffers also take a small hit with the surplus for the coming year reducing slightly to $3.8 billion.

Treasury are predicting a quick rebound after the dark months of winter as long as the world economy picks up.

Summer should see the beginning of better times and if Treasury are right one of the mildest and shallowest economic downturns in recent times.

ANZ Bank chief economist David Drage described the budget as "a strong set of fiscal numbers".

"However, enthusiasm should be tempered by serious downside risks. It will be a difficult period."

The economic fundamentals of the economy were sound and New Zealand was on track for continued growth. "But it wouldn't take very much at all for a dramatic alteration to the surpluses if the economy took a turn for the worse.

"Although Dr Cullen has attempted to present the risks as balanced, they are tilted to the downside," Mr Drage said.

Dr Cullen said that in respect to Sars and the prospect of rain to ease the electricity situation, Treasury would only guess.

"There are considerable uncertainties in the forecasts."

He also said there was "a deal of uncertainty" about the extent to which the projected surpluses were structural.

If things panned out as projected, then new spending of around $400-500 million could be contemplated in next year's budget, he said.

- HERALD STAFF, NZPA