O'Sullivan: Cullen on Budget tightrope

By FRAN O'SULLIVAN

If the Government wants to get New Zealand "back into the top half of the economic first division," it needs to make the May 24 Budget its political centrepiece for 2001.

It must pull together a breathtakingly ambitious agenda that will excite New Zealanders and touch enough hearts and minds to ensure that talented people want to stay and contribute to turning around the economy.

If the Government has been trying to forge the means by which New Zealand becomes a high-value-added, high-skills, high-technology economy, then precious little of its plan has grabbed attention this year.

For weeks now the endless diet of political sleaze that takes the place of informed debate on New Zealand's prospects has dominated the local news agenda. This tit-for-tat game will end when the key players realise that a policy of mutual deterrence will ensure their parties' survival rather than continuing to empty their political dirt bags into the public arena.

The sleaze campaign launched by National and Act has scored a few temporary political scalps, but has not seriously affected the Government's political ratings.

But National and Act have been effective in deflecting the Government's attention from policy formation and ensuring it does not have time to keep its eye fully on the international ball.

Wall St has fallen, the United States is on the brink of economic recession and Japan and Australia are facing serious problems. These three countries comprise about 50 per cent of New Zealand's export market and if their fortunes continue to fall, so too will New Zealand's.

Against this backdrop, Finance Minister Michael Cullen has to perform some difficult feats with his Budget.

In bilateral negotiations with other cabinet ministers to finalise the amounts they will have for departmental votes and specific policies, the Finance Minister has warned the situation will be tight.

The Treasury's February warning that New Zealand's growth prospects could dive if there were a negative backlash to Asian economies as the United States' demand tap narrowed would have proved a useful bargaining chip for the Finance Minister.

But fiscal prudence is not enough to ensure confidence.

In recent speeches, Cullen has stressed that New Zealand has been trying to sustain First World living standards on the back of Third World exports. Moving away from commodity dependence on logs, butter, meat and cheese is a major challenge that New Zealand must address by tackling what Cullen identifies as underlying problems: a low skills base, a low technology base, low savings and lack of a clear Government/business partnership.

The Government's agenda is focused on reducing compliance costs for business, providing support for exporters, attracting quality investment for growth, creating active business development policies, promoting New Zealand's human capital and lifting the country's savings performance.

In a perfect world, Cullen would use the May 24 event to bring together all the Government's major policy themes and spending decisions into one document, and brand it to gain popular support.

But press secretaries are already preparing for the annual pre-Budget policy announcements - "Drip and drop, flip and flop," as it is dubbed.

It is a trite process, designed more to keep 21 ministerial egos inflated - satiated even - by ensuring their names are at the top of policy announcements that affect their portfolios, instead of pulling the lot under the Minister of Finance's name in the umbrella statements of old.

In our alternative scenario, the Finance Minister's second Budget would - to use current buzzwords - lay out the Government's plan for the economic transformation of New Zealand. All the consequential economic and social strategies would be brought together at that point.

While this would undoubtedly benefit the Government from a political salesmanship viewpoint, more importantly it would benefit the public by ensuring the policy choices were presented honestly.

If Government politicians were banned from announcing major spending decisions before the Budget, the taxpayers whose money they are spending could more adequately judge their priorities.

Under such a scenario last year's pre-Budget announcement of a major fillip for the arts sector would have been held off until Budget day and directly measured against the amount devoted to boosting business development.

The Budget document did contain both policies - but pre-announcement ensured the arts fillip was not seen as a tradeoff against other spending increases.

As the Business Roundtable pointed out in January, the Budget policy statement which underpins the Government's intentions for the 2001 Budget had been predicated on projections which did not take into account the weakening in the world economy. The statement forecast growth of 3.7 per cent in the year to March 2002. That has subsequently been scaled down, and if world economic growth prospects decline further in the next few weeks, Treasury may have to lower its forecasts.

We can expect that Cullen will also have trimmed his fiscal sails to ensure he meets his Budget surplus objective. But if he wishes to get growth back to the Budget policy statement levels, Cullen will have to lessen the Government's burden on business. The obvious step is to lower company taxes from 33c in the dollar, or at least indicate when that step might take place.

Indications are that Cullen has come around to accepting the business logic of reducing the corporate rate to at least the 30c due to go into effect in Australia.

Persuading his colleagues of that logic might be more difficult. Too many of the Labour and Alliance coalition still see the primary responsibility of Government to redistribute wealth - not to create it.

More fundamentally, the Government needs to face up to the reality of the brain drain and drop the 39 per cent top rate for personal income tax. Encouraging people to stay rather than go should be a Government priority.

The Fiscal Responsibility Act of 1994 was essentially set up by former Finance Minister Ruth Richardson to ensure the Budget policy formation process would be transparent and open to public scrutiny. At its heart was the belief that governments should never again be sandbagged - as National was in 1990 - by unauthorised and hidden pre-election spendups by their predecessors.

In practice, however, it has led to little increase in the rigour with which either the Opposition or outside players scrutinise policy. Unlike its author's intentions, it has become a process-oriented, rather than results-oriented process.

National's Bill Birch demystified the Budget's importance in the governmental cycle when he took over from Richardson as Treasury supremo. But the time has now come to ensure the Budget - as the Government's plan - again resumes its important place in the political cycle. If not a "mother of all Budgets" - then something close.