Cautious Cullen holds back in case it all goes wrong

By AUDREY YOUNG, political reporter

Michael Cullen has delivered a wait-and-see Budget, accompanying modest increases in health and education spending with a heavy note of caution about looming economic storm clouds.

The Finance Minister's worries about the sustainability of the surpluses mean low- and middle-income earners will have to wait until next year for "significant improvements" in family assistance.

Even then, he said, these would come only if the economy did not slump. .

"A clutch of malign influences, including weak world demand, the potential impact of severe acute respiratory syndrome, drought in some regions, possible disruptions to power supply, weak commodity prices and a strong dollar, are already weighing on business confidence and activity,' he said.

Dr Cullen announced $1.6 billion in new spending for the financial year, $880 million of it in education and health.

The new spending was $500 million more than forecast in December, when he outlined preliminary Budget priorities.

But overall core Government spending is budgeted to increase by 1.2 per cent - a slight cut in real terms as inflation is forecast to be 1.6 per cent.

The big winners were health and education, with increases of just over 5 per cent, and research, which gained 12 per cent.

New health spending of $443 million takes the total to $9.6 billion, although most of the health increases have already been announced.

Education's extra $437m takes the total to $8.2 billion - including $430 million on early childhood education, $2 billion for primary schooling, $1.5 billion for secondary and $2.8 billion for tertiary.

The Budget for the first time set maximum fees for tertiary courses, linked to the cost of the course.

These will be adjusted annually for inflation.

A new housing vote of $63 million over four years will give bodies such as local councils suspensory loans to accumulate housing stock.

And 300 new state houses will be built, mainly in Auckland.

The Budget also delivered a $77 million increase in research spending as part of the Government's growth and innovation strategy.

Dr Cullen reinforced the Government's hands-on approach to encouraging economic growth.

"It is this Government's view that the market alone will not provide the level of growth and innovation we need as a nation," he said.

"A small, stringy country 2000km from its nearest substantial neighbour cannot afford the luxury of ideological self-indulgence."

National leader Bill English said setting maximum tertiary fees paved the way for huge fee increases.

And of the $4 billion surplus, he said: "Rather than targeting our long-term growth, this Government is putting its surplus in a war-chest so it can buy votes ahead of the next election."

But Treasury forecasts suggest that the economy is at a turning point and that the surpluses will not last.

The economy has grown at an usually high rate of 4.4 per cent.

That boosted Government revenue and helped Dr Cullen post the $4 billion surplus for this year - $1.8 billion higher than forecast in last year's Budget.

Once paper revaluations are taken into account, the more sobering final operating balance is $1.36 billion.

Growth is forecast to fall to 2.2. per cent in the next year.

Dr Cullen said he wanted to improve assistance to low- and middle-income families and improve incentives to move off welfare benefits into work.

But this would depend on a number of judgments about the economic and fiscal position.

"Our fiscal policy approach remains biased towards caution and incremental change that characterise prudent fiscal management," he said before delivering his fourth Budget.

"Next year's Budget is not going to be some great cornucopia of riches spread thickly far and wide."

Treasury papers yesterday forecast that a delayed world recovery could reduce growth from 2.2 per cent to 1.9 per cent and cut the predicted $3.8 billion surplus by $400 million.

Growth and surpluses are then expected to lift after next year by 3.2 per cent for 2004-2005, 3.1 per cent for 2005-2006 and 2.8 per cent for 2006-2007.

Unemployment, now at 5.1 per cent, is forecast to rise to 5.5 per cent by the end of the next financial year, then to 5.6 per cent in 2004-2005, 5.3 per cent in 2005-2006 and 5.2 per cent 2006-2007.