Economic growth picked to slow despite big Budget spend-up

3.00pm - By SIMON LOUISSON

Treasury forecast economic growth to slow in 2004/5 and 2005/6 despite a massive injection of new spending announced in today's Budget.

Growth is expected to slow from 3.3 per cent in the March 2004 year to 2.8 per cent in 2005 and 2.5 per cent the following year. It is then seen recovering to 3.4 per cent in 2007.

Finance Minister Michael Cullen in a no-surprises Budget positioning the Government for next year's election, announced new spending initiatives of $2.4 billion in the June 2005 year, rising to $3.8 billion by 2007/08.

Despite the spending spree, Dr Cullen still plans to run huge budget surpluses by historical and international standards, albeit lower than in the previous forecasts in December.

The so-called Oberac (operating balance excluding revaluations and accounting changes) surplus is forecast to be $5.7 billion in 2004/05, falling to $5.0 billion the following year. It is then forecast to rise to $5.1 billion 2006/7 and $5.4 billion the following year.

While the operating surplus remains a healthy 3.9 per cent of Gross Domestic Product in 2005, easing to 3.3 per cent the following year, the cash position is less secure.

Instead of running a cash surplus of $135 million as in 2003/4,there will be a deficit of $808 million. The cash position is dented by a $2.1 billion payment into Dr Cullen's superannuation scheme, which will swell in size to $6.3 billion by June 30, 2005.

Treasury is forecasting inflation pressure will increase as a result of the strong domestic economy in recent years with the Consumer Price Index hitting 2.6 per cent in the year to March 2005.

The department predicts the Reserve Bank will increase the Official Cash Rate once more in mid-year to add to last month's hike to quell inflation.

Export volume and income growth is forecast to be lower than forecast in December and lower exporter spending will slow the domestic economy along with lower immigration and higher oil prices.

To fund the cash deficit, and the Government announced it would borrow $2.35 billion in its 2004/5 debt programme. Dr Cullen said the Government's long-term objective was to manage total debt at "prudent levels".

Government debt would rise by an extra $1.9 billion over four years to boost the Reserve Bank's capacity to intervene in the foreign exchange market.

Total Crown debt is picked to fall less rapidly than in recent years, but will still fall from 25.9 per cent of GDP in 2004 to 22.6 per cent in 2008.

Part of the new spending package announced included $500 million over four years for economic development initiatives.

- NZPA