Ulf Schoefisch: Plenty of money, so why not spend some of it

Dr Cullen sees the actual and projected fiscal surpluses of around $4 billion as a reflection of prudent fiscal management. A less charitable view would be that such figures reflect a questionable fiscal strategy that works to the detriment of the economy.

Taking a net $4 billion every year away from households and businesses puts the brake on private sector activity and economic growth.

Under certain circumstances such a fiscal squeeze may be necessary. For example, Ruth Richardson oversaw a significant fiscal tightening to reduce high levels of public sector debt. However, those problems are long gone and net public debt is very low by international standards.

Why then does the fiscal strategy echo the consolidation mentality of the early 1990s rather than aim at lifting the economy's growth potential?

Now there is no need to reduce public debt further, fiscal policy should ideally be neutral with zero Budget balances on average over the business cycle.

This target has to be adjusted for the Government's annual contributions of around $2 billion to the NZ Superannuation Fund. Since the strategy is to force the nation to collectively save for future pension payments (a questionable policy approach in itself), those payments should come out of fiscal operating surpluses.

However, instead of the suggested target of $2 billion, projected surpluses are nearly twice that amount, sufficient not only to pay the Super contributions but also to fund investment spending (for instance infrastructure projects).

Under a less restrictive policy approach, investment spending would be funded through borrowing. Both the assets and the corresponding debt should go into the Government's balance sheet, with only the annual interest expenses entering the operating accounts. That ensures that present taxpayers pay only for the annual usage of the assets.

Borrowing for infrastructure investment could lead to a renewed modest rise in the ratio of public debt to GDP but this would occur from a very low level of debt and should be of little concern when the value of the corresponding assets is taken into account. After all, quality investment spending will enhance the economy's ability to generate extra tax revenue to pay for the cost of borrowing.

Fiscal policy settings are clearly too tight, but how much room is there for extra initiatives? It is true that the Government coffers have benefited from the cyclical high of the economy over the past year and that there are downside risks to the Treasury's economic projections. However, taking those factors into account, it still leaves structural operating surpluses of at least $3 billion for the next few years.

That suggests that fiscal policy could be eased by at least $1 billion without acting imprudently. Because the economy is suffering from a range of adverse external influences, such a structural policy shift should have been announced for the beginning of the fiscal year on July 1.

Instead, Dr Cullen foreshadowed possible extra spending for the 2004-05 year. It's likely to be far less than the $1 billion available and to be concentrated in the social policy area.

There is plenty of room for changes to encourage growth. In particular, New Zealand is bucking international trends by not lowering tax rates.

Dr Cullen stressed in his Budget speech that the economic outlook was uncertain, but his fiscal strategy implies that the Government is unnecessarily keeping its foot on the growth brake during this difficult period.

* Ulf Schoefisch is chief economist, Deutsche Bank NZ