Cullen indicates $4 billion cash surplus

By IAN LLEWELLYN

Finance Minister Michael Cullen has given his strongest indication yet that the Government's surplus will reach $4 billion.

NZPA reported in early April that tax revenue for the year was so strong that Treasury gloom about the potential for a much smaller surplus had faded.

In a speech to Labour's Auckland regional conference today, Dr Cullen all but confirmed he had his hands on $4 billion in cash, but warned the book figure would look much worse due to revaluations.

"Many are forecasting an operating surplus of $4 billion this current year ending June 30 or about 3 per cent of GDP. That's probably not far from the mark," Dr Cullen said.

However, that surplus figure is known as Oberac - operating balance excluding revaluations and accounting policy changes.

And Mr Cullen said book-keeping changes would greatly reduce the usual headline surplus figure.

"So this year the Oberac of somewhere in the region of $4 billion will have to wear the very substantial impact of three very large items before the fiscal operating balance is calculated."

* Falling interest rates would hit estimates of how much the Government would have to pay for ACC and Government Superannuation Fund liabilities. According to accounting rules all of that hit must be recorded as a charge now. To make it worse ACC future income can't be set off against the future cost;

* ACC will also have a new figure for the future cost of treating long term claimants;

* The Government's investment arms such as ACC will also have to take into account unrealised book losses on the stock market.

"The combination of all the above factors will mean that final operating surplus will be around a third of the Oberac... and yet we will still be in essentially the same strong position overall."

Treasury said in April the Government had recorded a $2.839 billion surplus for the eight months ending February. This was $919 million more than it forecast in December.

In past months Treasury has taken a cautious approach to the main cause of the swelling surplus -- a higher than expected tax take -- saying it would probably even out.

Now Treasury has accepted the good fortune is a reality and the effect will continue to the end of the financial year.

In January, Treasury said the surplus had reached $2.45 billion -- $700 million more than it predicted last December.

Treasury said more workers bringing home larger pay packets and a continuing spending spree by householders and visitors to New Zealand were the main reason for the tax take.

Lower government spending than expected also helped to give the Government's books a healthy shine, with expenses $526 million lower than forecast.

Delayed payment of Family Support expenses of $210 million was the largest item of underspending.

Health spending was also $144 million below expectations.

Treasury said this was mainly due to delays in large projects and the spending would be carried over into the next financial year.

While the Government benefited from the strong local economy, it took a pasting due to the poor performance of international markets.

Total investment income was $523 million, 56 per cent less than forecast. Most of this was due to the performance of the Earthquake Commission and the Government Superannuation Fund.

Net crown debt was $908 million lower than forecast. This was mainly because large amounts of cash in the Government's hands reduced the need for borrowing.

Net debt was estimated to be 14.3 per cent of GDP compared with a forecast of 15 per cent.

Despite the state of the books, Dr Cullen is resisting all calls to spend up in the May 15 budget.

He wants to see if the black ink can weather an economic slowdown as well as relatively prosperous times.

Dr Cullen is under pressure from spending ministers in portfolios such as education, health and welfare to open his purse strings. So far he has resisted.

He has promised minor increases in spending this year. He recently pointed to early childhood education as one winner.

He indicated the Cabinet would look at larger increases to family support payments in the 2004 budget.

Dr Cullen also said today that a new International Monetary Fund (IMF) report on New Zealand's economy shows it's performing well.

The report said New Zealand's economy had performed relatively well in the past three years.

"New Zealand gross domestic product (GDP) growth has been relatively strong in comparison to the United States since 1999, as generally favourable commodity prices and the strength of domestic demand have kept New Zealand economic activity at high levels despite the US slump," the report said.

However, the New Zealand economy would slow in the next year.

Dr Cullen said economic prospects in New Zealand remained favourable.

"It (IMF) commends....and applauds the Government's cautious fiscal approach -- particularly the decision to defer any significant increases in spending until we are clearer about what proportion of the surpluses are structural and how much fiscal headroom we have," he said in a statement.

Dr Cullen rejected calls by IMF for time-limited benefits, income testing pensions and further labour market reform.

- NZPA