Brian Fallow: $1.9b price tag no big worry

The Government-forming agreements carry a price tag of up to $1.9 billion a year, enough to concern but not panic the Reserve Bank.

In very round numbers New Zealand First's key wins - an increase to New Zealand superannuation and a further 1000 police - will each cost around $100 million a year.

Labour's extension of the Working for Families package to more families is a further $400 million or so and the student loan scheme (on its costing anyway) $300 million a year. All up around $900 million.

The implications of the business tax and carbon tax reviews are more uncertain, but if the company tax rate were cut from 33c to 30c in the dollar and the carbon tax scrapped, the cost would be about an extra $1 billion a year.

Now, $1.9 billion a year, as it happens, is the amount already set aside for new policy initiatives.

But Finance Minister Michael Cullen has repeatedly warned that much of that is already in effect spoken for, as it has to cover such things as future pay increases for nurses and other forms of normal creep in Government spending.

So there will be additional fiscal stimulus to what was already in the May Budget, which rose from around 1 per cent of GDP this year to nearly 2 per cent in 2008.

But economists say it is too early for them, or Reserve Bank Governor Alan Bollard, to do more than "guesstimate" how much more stimulus. It is not clear, for example, how much tax relief will come from the reviews or when.

The extra police will be phased in over three years. So will a rise in the minimum wage, which will also add to inflationary pressure.

"It will all make the job of the Reserve Bank harder," said Bank of New Zealand chief economist Tony Alexander. "But it is not the main issue."

That, as Bollard stressed last Friday, is the free-spending consumer's high tolerance of debt.

Westpac's chief economist, Brendan O'Donovan, points out that while extra Government spending (compared with the Budget) is coming our way it is partially offset by higher-than-expected tax flows going the other way.

That after all was how Cullen was able to justify, with a reasonably straight face, the $400 million a year top-up to Working for Families announced at the time of the pre-election opening of the books.

More stimulus, in short, but given the "ifs" and "buts" and "not untils" surrounding it, not enough for Bollard to lose any sleep over. But he sounds as if he's sleeping pretty fitfully already.