Brian Gaynor: Steady plod dampens Budget's sparkle

Next week's Budget will not be radical because Finance Minister Michael Cullen has set himself fairly rigid fiscal parameters and after 3 1/2 years this Government's economic and social policies are strongly established.

In the December 2002 Budget Policy Statement, Cullen wrote that he wanted to build on the sound economic policy and fiscal foundations established between 1999 and last year.

His primary objective was to raise the sustainable rate of economic growth, invest in infrastructure and prepare for the future through the New Zealand Superannuation Fund.

He has set tight parameters because of his determination to run operating surpluses across the economic cycle sufficient to fund the Crown's NZ Super Fund contributions, meet capital pressures and priorities, and manage debt at prudential levels.

The Crown, with in excess of $40 billion to collect and spend in the June 2004 year, is the country's biggest commercial entity by a wide margin. By comparison, Fonterra has revenue of $14 billion, Telecom $5.5 billion and The Warehouse $2 billion.

The main sources of its revenue have remained relatively steady over the past decade (the high contribution from "other" income in the 1993 year was mainly due to an unrealised gain from a change in the value of state-owned commercial forests).

Total revenue of $41.6 billion for the June 2002 year was made up of individual income tax of $18.1 billion (43.6 per cent), company tax of $5.4 billion (13 per cent), withholding taxes of $1 billion (2.5 per cent), indirect tax, mainly GST, of $13.9 billion (33.3 per cent) and interest, dividends and other operational income of $3.2 billion (7.6 per cent).

The expenditure side of the Government's accounts has changed much more dramatically since 1993. Expenditure on education, health and law and order has risen as a percentage of total expenditure.

Spending on debt servicing has fallen in absolute terms and expenditure on social security, core Government services and defence has declined in relative terms.

Social security and welfare is by far the biggest expenditure item, accounting for $14.6 billion or 36.9 per cent of total spending in the last June year.

National superannuation accounted for $5.5 billion (13.7 per cent of total Government expenditure), domestic purposes benefit $1.5 billion (3.8 per cent), unemployment benefits $1.4 billion (3.5 per cent), Government Superannuation Fund pension expenses $1.2 billion (2.9 per cent) and family support $0.9 billion (2.2 per cent).

Expenditure on health has risen from $4.5 billion to $7.7 billion since 1993, on education from $4.2 billion to $7.1 billion and on law and order from $1.2 billion to $1.8 billion.

Debt servicing costs have dropped from $4 billion to $2.3 billion because of loan repayments and lower interest rates. Defence spending has remained relatively static.

The Treasury has published expenditure forecasts through to the June 2007 year. These show that the ageing population will have a big impact on Government spending.

National superannuation is forecast to rise from $5.5 billion to $6.7 billion between 2002 and 2007 and health expenditure from $7.7 billion to $8.8 billion.

Expenditure on education will remain relatively stable in absolute terms, but fall in relative terms. This is because of a forecast reduction in primary school numbers, while the total number of students in primary, secondary and tertiary institutions will rise only slightly from 940,000 to 962,000 between 2002 and 2007.

By comparison the projected population over 65 will increase from 464,000 to 516,000 over the same period and is expected to reach one million by 2030.

In percentage terms the over 65s will represent 23.1 per cent of the population in 2030 compared with just 11.9 per cent in 2002.

No details have been given on the "other" item in the expenditure forecasts but this is projected to increase to $6.4 billion in the June 2007 year.

The Government's size, its well-entrenched programmes (such as national superannuation, health and education) and changing demographics have restricted its flexibility. The desire to balance the books has also introduced a new discipline to Crown expenditure.

This discipline is welcomed but it has reduced any prospect of a surprise Budget.

The Government has had nine successive surpluses and is on track for another in the current year. It reported a surplus of $2.8 billion for the eight months to February 28, $0.9 billion higher than forecast.

Tax revenue for the first eight months was above budget and expenses below budget.

The greater fiscal discipline is reflected in other statistics. Government expenditure as a percentage of GDP has fallen from 35.8 per cent in 1994 to 32.5 per cent and total Government debt has also declined.

The Budget is now a vehicle for ministers to promote new Government expenditure in their portfolios.

There have already been more than 20 pre-Budget press releases by 11 ministers. These expenditures, which will be provided for in the Budget, include:

* $167 million over four years to provide an extra 774 primary and secondary teaching positions.

* $3.4 million to establish an FM service for National Radio and $2.6 million a year to maintain its services.

* $19 million for a pay increase for uniformed defence personnel.

* $19 million funding to allow all primary heath organisations to charge lower fees for patients under 18.

* $85 million of additional funding to increase the number of workers taking part in workplace learning.

* $78 million over four years to support the National Certificate of Educational Achievement and the administration of other qualifications.

* $28 million for the establishment of a Families Commission.

These initiatives are fairly small in relation to the Crown's total expenditure of more than $40 billion.

Although the slowing economy will reduce tax revenue, the Government's finances are in a fairly healthy position.

Cullen and his predecessors have run large surpluses during the good years and built up reserves for a rainy day.

In December the Treasury was forecasting a surplus of $3.8 million for the next June year and $4.5 billion for the following year.

This gives the Finance Minister room to manoeuvre if the economy slows, tax revenue falls and expenditure rises, particularly that for unemployment benefits.

The Government also has some additional leeway because the Reserve Bank has the ability to stimulate economic activity through its monetary policy. This is because New Zealand interest rates are higher than in most other parts of the world.

Once again, next week's Budget statement will be fairly bland, more notable for its omissions than its content.

This is unfortunate because the business community would be greatly encouraged by signals from the Government that it is serious about economic development.

What about changes to the Resource Management Act, one of the biggest hurdles to business investment, particularly in the electricity industry?

What about tax cuts? What about more investment in infrastructure, particularly roading?

What about greater efforts to encourage direct foreign investment in new greenfield operations?

New Zealand will not improve its economic performance until a greater emphasis is placed on the creation of economic wealth instead of the distribution of our relatively limited wealth.

Next week Cullen has the opportunity to demonstrate that he is serious about business development and wealth creation. But will he take up the challenge?

* Email Brian Gaynor