Fiscal joy but no slump relief

By DAVID PLANK Strategist Deutsche Bank

It has been many years since the financial market community spent time worrying about the Budget.

This year's was little different, even if it was the first from a Labour Minister of Finance in 10 years. The publication of a surprisingly large current account deficit a few hours before Dr Cullen began his speech had a much bigger impact on the market than the Budget itself.

Some might say this reflects the reduction in influence the Government has on the economy. As the reaction of the business community to numerous aspects of Government policy makes clear, however, the Government can still play a central role (if only in a negative sense to date).

In large part the lack of attention to the Budget no doubt reflects the fact that the potential for concern over the state of the Government's finances is limited when the Government is running surpluses.

It is also because the Budget itself is no longer the central event in the Government's economic strategy. After all, the key facets of the Government's economic strategy had already been announced and signalled well before the Budget.

Rather, the Budget is the means by which the Government pulls together the financial effects of all its policy measures.

The financial market community was looking for two things from this Budget.

The first was a credible fiscal position. Given the precarious state of the external position, as evident in a current account deficit in excess of 8 per cent of GDP, one of the key things contributing to continued investor confidence in the New Zealand economy is the healthy fiscal position.

The second was whether the Budget could provide the circuit-breaker for the slump in business confidence. As noted in other commentary, it was always going to be difficult for the Budget to deliver on this front.

On the fiscal front, the Budget certainly seems to deliver good news. According to the Treasury's forecasts, the fiscal position will remain in surplus for the next three years, with higher tax rates compared with National's policy contributing more than $800 million each year to this achievement.

A surplus equal to 0.7 per cent of GDP this fiscal year will grow to around 3 per cent of GDP by 2003/04. Spending is forecast to decline as a percentage of GDP.

The Treasury's scenario analysis also suggests the surpluses are relatively robust in the event of a negative economic shock. Reflecting this, the issue of new Government debt in the next fiscal year will be less than the amount that is maturing.

That is, the total amount of Government debt will fall. It seems there is little for the rating agencies and financial markets to worry about on the fiscal side.

Of course, forecasts and scenarios must be treated with a large degree of caution. A recent IMF study (reported in yesterday's Herald) reveals that the failure of forecasters to predict recessions is virtually unblemished.

On this score, it is notable that average annual growth in the Treasury's weak scenario does not fall below 2 per cent. Yet annual average growth was negative as recently as in the year to March 1999.

If the recent downturn in business confidence flows through into activity then the Government's fiscal position could become a real concern. On the other hand, the Treasury's central growth forecasts do not seem excessively optimistic. There could be room for positive surprises.

Perhaps the biggest area of concern is the Government's forecast expenditure track.

After a 4.4 per cent boost to spending for the next fiscal year, spending is forecast to rise by 2.4 per cent in 2001/02 and 3 per cent the following, election, year.

What's more, the amount of extra expenditure in those years still unallocated is even less. If unallocated expenditure is assumed to continue beyond one year, then the Government is leaving itself a total of $550 million to spend on new initiatives in 2001/02 (plus 1.4 per cent) and a further $575 million to spend in 2002/03 (plus 1.5 per cent).

To achieve this track will require an almost unbelievable degree of fiscal self-control.

Between Winston Peters' first Budget in 1997 and Bill Birch's last in 1999, forecast spending for 1999/2000 was broadly unchanged, around $36.5 billion. Of course, to achieve this the Coalition had to split and National had to cut expenditure in the Asian crisis belt-tightening exercise.

In the 1998 Budget, Winston Peters forecast spending in excess of $37 billion for 1999/00, an increase of $500 million over that set aside in his first Budget.

Delivering on the expenditure track without a similar-type split will occupy a great deal of Dr Cullen's time in the next two years. A big stick could come in handy.

Budget 2000 feature

Minister's budget statement

Budget speech