Fran O'Sullivan: Time for Cullen to step on gas

Budget 2002 is the work of a technocrat who desperately needs a shot of fiscal amphetamine.

Michael Cullen's election-year Budget - complete with a $2.6 billion surplus for this year and a forecast 3.1 per cent growth rate - fails at his first self-imposed hurdle: to devise an economic transformation programme that will spur the economy to sustain his target growth rate of 4 per cent.

Cullen's Budget initiatives - superimposed over the domestic and international economic outlook - do not put New Zealand on the path to rejoining the top half of the OECD nations.

There will be Budget surpluses aplenty to sustain the minister's Superannuation Fund and his reputation as a sound fiscal manager.

But policies which would truly transform the economy are thin on the ground.

The Government will need to make a much larger financial commitment to big-bang policies if businesses are to be inspired to lift their game.

In the next five years, a 3 per cent growth rate is as good as it gets, says the Treasury. It projects annual growth will, in fact, decline to just over 2 per cent after that, while our nearest neighbour, Australia, looks set to cement its competitive advantage with forecast growth rates of 4 per cent.

Businessmen who privately stamped their feet at the level of the Treasury and the Prime Minister's department when Helen Clark's growth and innovation framework did not measure up to their expectations have been rewarded, albeit partially.

An Investment Promotion Agency has been unveiled - but its $14.5 million budget is less than one-third of the $50 million recommended by the Boston Consulting Group.

And it is not the greenfield venture that businesses wanted: it is simply an amalgamation of two existing Government agencies.

It will also sit under Industry New Zealand - a relative non-performer established to keep Alliance leader Jim Anderton off Labour's back - instead of being a stand-alone operation.

The McLeod Committee's proposed $1 million tax cap to attract wealthy New Zealanders back to these shores and an 18 per cent tax rate for new foreign direct investment are expressly viewed as inequitable or unworkable by Cullen.

Foreign greenfields investors may not get a look in, but it will not have escaped attention that a preferential tax rate of 19.5 per cent was slipped into Parliament last week through an omnibus tax bill, benefiting Maori authorities and organisations such as the Waitangi Fisheries Commission.

A range of Knowledge Wave initiatives have been unveiled, including:

* A proposal for high-speed linking of rural communities through a major investment in broadband networks.

* $34 million on a "talent" or brain-gain initiative to harness world-class New Zealanders.

* Hot sectors - creative industries, biotech and information and communication technology - picked by the Government as winners get an additional $7.6 million.

* $7.1 million will be spent on a strategic investment programme for high-growth industries.

* A one-stop shop will be set up to front the multiple funding programmes for small business.

* Brand New Zealand gets $1.5 million to shore up cluster formation.

* $6 million is pledged for co-operative research between the public and private sectors.

There is a plethora of policies to create a culture of success and help manufacturing at the regional growth and export-oriented level. But many of these had already been announced.

Businesses yesterday applauded such measures as a step in the right direction - but they will not produce the economic tsunami needed to capture the public imagination.

Businesses' own siren song of lower company tax, flatter personal incomes taxes, lower government spending, privatisation, tighter welfare policies and greater private provision of health and education has been ignored.

Forecast operating balances for 2002-2006 comfortably exceed the requirements for transfers to Cullen's pet project the Superannuation Fund, one of the defining aspects of his three-year reign on the Treasury benches.

Cullen said the operating balance of $2.3 billion for this financial year would be more than adequate to cover the Government's transfer of $600 million to the fund.



He has confronted the need to stimulate more New Zealanders to provide for their own retirements. Upfront tax incentives have been ruled out, but he is proposing to lower the tax cost of employer contributions for low-income earners in employer-based schemes from April 1, 2004.

There is a sniff of lower taxes in the future - but only if future Budget surplus forecasts are exceeded. Cullen instead dished out a lecture to businesses to prove his point that New Zealand's tax rates are low by international comparisons.

Officials are exploring the application of the risk-free return method for overseas equity investment on capital account, seen by the funds industry as a blatant tax grab.





The gross debt forecast for 2002-03 will be 28.6 per cent of GDP, down from the 36.8 per cent when the Government took office.

The Government has been able to achieve its objective of reducing gross debt as a percentage of GDP faster than expected, despite the $885 million recapitalisation of Air New Zealand.

Placing industry training funding on the same footing as the rest of tertiary funding is a crucial shift, as is doubling the number of apprentices, says Business New Zealand.



Major strategic issues - dealing with exploding entitlement growth, the impact of future collapse of private health insurance and infrastructural investment to support immigration - are not dealt with.

Auckland should get a large dollup of the $175 million for transport initiatives, but that is well overdue.

The Government has not gone hog-wild in election year dishing out a raft of pork barrel initiatives to secure marginal seats for Labour MPs. On current political polling it does not have to.

There are the usual Budget book-keeping tricks, but nowhere as blatant as those of some of the minister's predecessors.

Take the second paragraph of Cullen's Budget speech. He proudly notes that a revised $6.125 billion counting limit for new spending for the Government's first term has been adhered to in Budget 2002 with net new spending totalling $6.124 billion - excluding some limited spending on new security measures arising out of the events of last September.

That emergency spending was in fact for $1 million, which would have placed Cullen lineball on his $6.125 billion revised forecast. Still a good result.

A doyen of fiscal purity should have disclosed that.

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