Bad news will show in Budget, Cullen cautions

By VERNON SMALL

A pessimistic Michael Cullen is warning that the Sars virus and a raft of other bad economic news will see growth forecasts cut in next month's Budget.

The Finance Minister is also flagging a boost to state housing spending if the economy slows too sharply. But for now the Government is maintaining a tight fiscal stance.

"There has clearly been a significant change in external factors which have been negative," Dr Cullen told the Herald yesterday.

"I think there is a conjunction of circumstances of the [high] dollar, some commodity prices - particularly the [lower] dairy payout - the drought on top of the frost, war and Sars."

The Treasury was yet to advise him formally that it would lower its forecasts.

"But certainly the dollar has gone up further than forecast. The drought has been worse than forecast. We have to allow within that for the probability of a very dry year and the impact that's going to have [on power supplies and prices].

"So it would not surprise me to see Treasury revising down its forecasts for the coming year."

Part of the impact was factored into the Treasury's December outlook, which picked growth of 2.5 per cent in the year to next March.

Dr Cullen said it was hard to assess the impact of the Iraq war. But the Sars outbreak was already harming growth.

Some trade trips to Hong Kong had been postponed and tourists from China were cancelling travel. There could be a wider impact on tourism.

But he was not yet prepared to lift Government spending to compensate for the slowing economy.

"The difficulty is that a lot of forms of stimulation are structural, such as changes to family support levels. You can't wind those back by saying, 'Oh gosh, the economy is picking up now, let's take that money back off you'."

The most obvious way to boost the economy would be through extra spending on state housing. But it was too soon to know if a fall in building activity, particularly in Auckland, would be maintained.

"At the moment you would still be pretty brave to say there's a lot of slack running around the building industry."

The Housing NZ Corporation could gear up a much more aggressive construction and refurbishment programme if the Government chose to put money into that.

"There will be some increases in the Budget in those areas but not as much as they would like."

The Government should "hold fire" to avoid causing extra inflation in the building sector while other areas were struggling.

On the positive side for the economy, oil prices had not soared as high as had been feared before the outbreak of war.

Strong migration would help to keep the domestic economy buoyant.

"So I am not anticipating going into recession, but certainly anticipating a fairly marked slowdown, given the point we are coming from, which is a very high base at 4.4 per cent growth."