Between the lines: Cullen gets by with luck and judgment

By BRIAN FALLOW

As much by good luck as good judgment, the Government was able yesterday to deliver a set of economic and fiscal forecasts that Finance Minister Michael Cullen could fairly claim are relatively benign.

The Treasury is picking economic growth of nearly 2 per cent in the year ahead, a slowdown from this year but well clear of the recession in which much of the rest of the world is mired.

Its forecasts, only slightly more optimistic than those of most private-sector forecasters, received support yesterday from the National Bank's business confidence survey. It shows sentiment rebounding to levels before the September 11 attacks, not particularly buoyant but not despondent either.

The Government has been lucky that New Zealand went into this period of global slowdown with the export sector buffered by good growing conditions, a competitive exchange rate and special factors that kept key commodity prices high. That has delayed and mitigated the impacts of the weakest world economy for nearly 20 years.

By contrast the Asian crisis hit when the economy was drought-stricken and still feeling the effects of a tightening of monetary policy.

But the Government can also claim some good judgment.

For one thing the more liberal riding instructions Dr Cullen negotiated with Reserve Bank Governor Don Brash after the last election may have contributed to the easing in monetary policy this year which has helped to bolster confidence and will boost domestic demand next year.

Secondly - and this is another contrast with the Asian crisis - the Government has not been panicked into tightening the fiscal reins to protect the Budget surplus.

It is letting the automatic fiscal stabilisers work, accepting that revenue will fall (though it hasn't yet) and spending rise as the economy slows.

The slowdown, Dr Cullen says, is not large enough to suggest the Government should adopt an aggressively counter-cyclical approach, boosting spending or cutting taxes as the Americans have to stimulate the economy.

Such "cyclical" measures tend to end up being structural, he says, because it is hard to take back tax cuts or spending increases later.

Nevertheless, the Government is bringing forward to the coming fiscal year more than $400 million of capital spending which had not been scheduled until a couple of years later.

Government debt is expected to rise by more than $10 billion over the next five years. Even so, net debt is forecast to remain below the target 20 per cent of GDP over that period, an internationally creditable ratio.

Nevertheless, the Government's room to manoeuvre on the capital side of the Budget is shrinking.

And doubts remain about the quality of the assets being acquired in this expansion of the Crown's balance sheet.