Fiscal uncertainty is the order of the day

By BRIAN FALLOW

This Budget was drawn up against an economic outlook of greater than usual uncertainty, says Finance Minister Michael Cullen.

"The Treasury has had to guess what the impact of Sars will be."

Rain might still avert a power crisis.

The United States dollar might stop falling so the "illusion" of a rising New Zealand dollar might cease. Then again, it might not.

The conclusion Cullen invites us to draw is that this year's economic forecasting is more than usually a high-wire act of balancing risks, and the need for the safety net of wide surpluses is greater than usual.

"It emphasises the importance of not making structural adjustments to either revenue or spending which might be of an order to undermine the long-term fiscal position."

The Treasury's outlook is in line with the mainstream of private sector forecasts.

Growth will slow from 4.4 per cent in the March year just ended to 2.2 per cent in the year ahead.

The data of the past few months show an economy at a turning point, the Treasury says.

Retail sales appear to be slowing, business and consumer confidence worsening. The external trade figures have deteriorated.

"Even building consents and house sales data, while pointing to strength in residential construction for a while yet, look to have peaked," it says.

But after a slowdown in the year ahead, relieving pressure on overstretched resources, a rebound is forecast to 3.2 per cent for the March 2005 year. The unemployment rate picks up from 5 per cent now to 5.6 per cent in a year.

"The main drivers of the rebound are the forecast recovery in trading partner growth and increased competitiveness that help drive a rebound in net exports, and lower interest rates that provide a stimulus to domestic demand."

Underlying the forecasts are assumptions which may prove optimistic or too gloomy. The dollar is forecast to stay around 60 on the trade-weighted index for a year or so then head lower. It is already 61.2.

Trading partners' growth is forecast to pick up from an insipid 2.9 per cent this calendar year to 3.4 per cent next year. But that is based on international consensus forecasts which have tended to be revised down each month.

About 30 per cent of the forecast recovery in trading partner growth is Australia, where growth is expected to pick up as it recovers from drought.

But it also assumes the United States will manage 3.6 per cent growth next year, a more debatable proposition.

On the other hand, the Treasury forecasts a steep fall-off in net immigration from around 40,000 back to an assumed long-run average of 5000 over the next three years.

"We see no sign of that happening yet, in the level of applications," Cullen said.

Reflecting these uncertainties, the Treasury has sketched two alternative scenarios.

Under the delayed global recovery scenario, New Zealand's real GDP growth in the year ahead would be 1.9 per cent, not 2.2 per cent, cutting $400 million off the expected Budget surplus of $3.8 billion.

Alternatively, if domestic demand proves more resilient, driven perhaps by a stronger than expected net inflow of migrants, growth could make 2.6 per cent, adding $300 million to the fiscal bottomline.

Cullen said it was a Budget that reinforced the Government's reputation not only for fiscal prudence but for economic pragmatism.

A "rebalancing" from the idea that, whatever the problem, the market was the solution would continue, as forthcoming announcements about energy would show.

National's finance spokesman, Don Brash, said there was nothing in the Budget to encourage investment and enterprise, deal with major infrastructure problems, tackle welfare dependency or cut the choking growth of bureaucracy.

"Dr Cullen has been quick to congratulate himself on his fiscal prudence. But tough times are looming and the fiscal reins will loosen, especially under pressure from spending-eager ministers."

National's priority was to cut company tax to 30 per cent and to start moving the top personal rate toward the same level. It would also scrap the superannuation fund.

"To invest $2 billion a year in offshore shares and bonds makes no sense when there are severe roading problems."