David Skilling: Cullen fails to meet economic challenge

In the March media release announcing the Budget date, Michael Cullen made two comments. First, that "Budget 2006 will underline the Government's commitment to transforming the economy". Second, he reiterated that "restraint would be the watchword".

It is not clear that these two statements can be reconciled. So it was perhaps not surprising that Cullen's prediction was only half right.

Outside expected growth in health and education spending, reasonable fiscal restraint was exercised in new initiatives and tax cuts.

But if the Budget was intended to underline the Government's commitment to economic transformation, we are in trouble.

Transformation is a substantial process of change rather than a series of incremental improvements. And it is transformation that is required given the major economic challenges facing New Zealand. There is a pressing need to respond to these challenges with aggression and urgency. Unfortunately the Budget does not move us far in this direction.

Budgets provide a clear measure of how serious the Government is about achieving various goals. It is the opportunity to convert policy statements into tangible actions. Unfortunately, on yesterday's indications, the economic transformation agenda ranks well behind other priorities.

There are initiatives that are likely to have a positive effect on economic growth prospects, such as significantly increased infrastructure investments, increased spending on skills and industry training, increased spending on science and research, and export market development grants.

These initiatives are directionally sound but are unlikely to generate a substantial improvement in our economic prospects. The missing ingredient is materiality. Economic transformation is necessarily more than the handful of sensible but modest initiatives that were included in the Budget.

The local loop unbundling decision inadvertently pre-released is a bold rather than a modest move. And it is encouraging to see the Government being prepared to take risks to pursue initiatives designed to strengthen the economy.

The overall sense from the Budget is that the talk of transforming the economy has not been matched by real action. Ultimately, a government cannot pursue an economic transformation agenda without making substantial investments and commitments. It will not happen spontaneously or on the cheap.

There was much focus in the Budget on the good management of the long-term fiscal position, but rather less focus on improving long-term economic prospects. And, ultimately, what really matters is the underlying strength of the economy.

This is not a call for reckless fiscal policy. The Government does not have unlimited resources. But ultimately this is about trade-offs and being able to prioritise. Spending money on interest-free student loans, for example, means less available for policies to help the economy.

In sum, the Budget has not communicated real seriousness of purpose around economic growth. The positive initiatives announced are insufficient to move the economy to a significantly higher growth path.

* Dr David Skilling is the chief executive of the New Zealand Institute, a policy think tank comprising business, community and education leaders. The institute's reports are available at the link below.