No budget jackpot available for next year, says Cullen

By BRIAN FALLOW

Finance Minister Dr Michael Cullen is keen to dispel the idea that he will have a "big pot of money" to release in next year's Budget.

Tomorrow's Budget would forecast an operating balance (before revaluations and accounting changes) for this year close to that forecast in last December's economic and fiscal update, $3.8 billion, Cullen told the Business Herald.

But he indicated that he needed a surplus of around $3.3 billion to finance contributions to the New Zealand Superannuation fund and to keep the Government debt ratios looking good.

A $3.8 billion operating surplus next year would be slightly less than the $4 billion expected this year and would equate to about 2.9 per cent of gross domestic product.

"But we need an operating surplus approaching 2.5 per cent of GDP if we are to keep debt-to-GDP ratios constant or very slightly declining and provide for the contributions to the super fund," Cullen said.

"What I am signalling in the Budget is that if the forecasts come out right we have got some headroom, but it is not huge. It could easily be lost in a bit of extra spending here or there.

"It's about 1 per cent of Government spending and it's not hard to spend an extra 1 per cent in a year. So we have got to work hard to keep some spare for ... some sort of targeted boost for low and middle-income families and better incentives for people to move off benefits and into employment."

The amount to be set aside to partially prefund future NZ Super payments increases from $1.2 billion this year to $1.8 billion next year or about 1.4 per cent of GDP.

The prefunding payments are among the capital spending items which are not reflected in the operating balance and which almost always turn a headline "Budget surplus" into a cash deficit that needs to be paid for by borrowing.

Other lumpy items of capital spending include student loans, investment in infrastructure and other physical assets and (occasionally) military hardware such as warships.

By the end of March, three-quarters of the way through the current fiscal year, tax revenues were running ahead of forecast by almost $700 million while on the expenses side transfer payments were about $300 million less than expected.

But despite these stronger-than-expected cashflows, there would be no change to the remaining bond tenders this year. Next year's bond tender programme would be reduced but not significantly.

For some time Cullen has emphasised the debt-to-GDP ratio as the key measure of fiscal rectitude, since the level of Government debt reflects all its spending capital as well as operational.

Its declared objective is to keep the ratio of gross sovereign-issued debt below 30 per cent over the economic cycle. By the end of March it had fallen to 29.1 per cent, from 29.6 per cent last June.

Cullen cited the United States and Britain as examples of how easy it is for projected Budget surpluses to tip back into deficits and deteriorating debt ratios.