Cautious Cullen says he will keep the lid on

By JOHN ARMSTRONG political editor

Michael Cullen is promising to maintain a Scrooge-like restraint in his next two Budgets.

He is refusing to relax self-imposed controls on Government spending before the next election, even though the Treasury has confirmed the economy is picking up.

But the Finance Minister says he will dish out more cash on new policies in subsequent years, should the Labour-Alliance Coalition be re-elected.

Dr Cullen yesterday released the Treasury's latest economic forecasts, along with his Budget policy statement, giving a barebones outline of his priorities for next year's Budget.

The forecasts show the economy growing 2.2 per cent in the year to next March.

This is, as expected, lower than June's Budget night projection, which did not reckon on the winter slump in business confidence.

With the economy now on the rebound, Treasury says, strong export prices will push growth to a peak at 3.7 per cent by the following March.

It will then slip back to 2.6 per cent as global growth slows.

The policy statement confirms Dr Cullen's intention to keep within his $5.9 billion "fiscal cap" on new spending during the present three-year electoral cycle despite the prospect of rising surpluses.

Much of this extra spending was "front-loaded" into this year's Budget - meaning Dr Cullen had already committed around $4.2 billion on core Coalition policies.

That left him only $550 million and $575 million to allocate for new projects in his next two Budgets.

By making savings elsewhere, he has tweaked those amounts up to $640 million and $615 million.

But limits on discretionary spending are still tight, prompting scepticism among economists that Dr Cullen will stay within them, especially during election year.

Dr Cullen will have little cash to scratch political itches and soothe caucus colleagues suffering pre-election nerves.

Instead, he is saying that higher surpluses after the next election will give him room to spend up to $1.2 billion extra each year.

Yesterday's policy statement says money will be scarce for policy areas not deemed immediate priorities.

Next year's priorities are listed as education and training, health services and Child, Youth and Family Services.

The Government also wants to reinforce improved relations with business by promising more money for research and development, and export assistance.

Its caution reflects worries about an uncertain international economy, despite rising confidence domestically and forecasts of bigger-than-expected surpluses down the track.

Dr Cullen is still betting that any stalling of the American economy will turn out to be a "soft landing" which is unlikely to disturb his officials' conservative forecasts.

Labour remains determined to appear "fiscally prudent" - and yesterday's documents were deliberately unspectacular for that reason.

The Treasury expects inflation to peak around 3.8 per cent next year.

As a result, it expects the Reserve Bank to raise interest rates next year by three-quarters of a percentage point to 7.25 per cent. Unemployment is picked to stay around 6 per cent.

The other feature of yesterday's forecasts is a jump in extra capital spending from $2.4 billion to $3.2 billion over three years to pay for imported defence equipment, now much more expensive because of the weak New Zealand dollar.