Cullen chided for Budget breach

By VERNON SMALL deputy political editor

Three weeks before his second Budget, Finance Minister Michael Cullen has suddenly backtracked on his long-standing promise to stay within strict spending limits.

But the reversal does not signal a new splurge of social spending. It has been forced on the Government by unexpected costs, mostly in defence.

Dr Cullen said he had not publicly dumped the Coalition's three-year $5.9 billion limit sooner because he wanted to moderate colleagues' spending demands during pre-Budget talks.

That comment drew stinging criticism from National finance spokesman Bill English, who said it would damage Dr Cullen's credibility with the public and within the Government.

The unexpected increase helps to explain the Government's reluctance to bow to public pressure for a further $14 million to extend health subsidies to 48,000 low-income workers.

Dr Cullen told a Wellington business audience yesterday that he had added a further $270 million to the Coalition's spending limit.

Extra defence costs and the price of plugging holes in biosecurity protection were blamed for abandoning the self-imposed limit, which was set in March last year.

Extra cash for the East Timor and Bougainville deployments, a pay rise for military personnel, compensation for the impact of a low dollar on the defence budget and the cost of closing the Hobsonville Airbase added up to an extra $202 million.

The rest of the extra spending was needed to upgrade protection against foot-and-mouth disease and meet the cost of continuing the fight against possums through the bovine TB programme.

Dr Cullen said the spending boost showed the Government put a higher priority on regional and border security than maintaining "a somewhat arbitrary financial allocation."

He had reaffirmed his commitment to the $5.9 billion cap in December.

But he stressed it was desirable not to increase the spending limit then "because that could have signalled ... an upping of the base ante in terms of negotiations with other ministers."

"That's the nature of a Budget round.

"I thought it was unwise to signal a loosening in advance of negotiations."

But Mr English said the change blew the spending cap and Dr Cullen's credibility.

"The idea he knew about this six months ago and didn't tell his colleagues will damage his internal and external credibility," Mr English said.

He said it was also likely to be against the law because it breached requirements in the Fiscal Responsibility Act.

Government backbenchers would ask why they were bearing the political fallout from refusing to spend $14 million on 48,000 low-income families when the budget had already been blown, Mr English said.

His biggest concern was that extra pressure for health spending had not yet been dealt with.

"I think he has over-reached in trying to out-do National on fiscal management and has fallen flat on his face."

Dr Cullen said fixing problems inherited from the previous Government had cost an extra $570 million. That had been absorbed into the $5.9 billion limit, deferring other planned initiatives.

But the defence and biosecurity costs forced him to make the new provision.

Most would come in next year's Budget, with a smaller increase in the $600 million of new spending planned for the coming financial year.

He described the increase as a minuscule quarter of a per cent of total spending.

"By any budgeting standards, that is super tight."

Wellington Chamber of Commerce president Barrie Saunders said although it would be preferable to abide by the $5.9 billion limit, Dr Cullen had shown sound fiscal management and the increase "was no reason for a nervous breakdown."

Dr Cullen also announced a $200 million cut in the provision for capital spending from $3.2 billion to $3 billion.

He said a weaker world growth outlook meant that the immediate economic outlook was slightly weaker than forecast in December.

But further ahead, the outlook was still strong enough to see growth averaging 3 per cent a year.

That rate of growth would be "satisfactory, but not satisfying."

Dr Cullen flagged an operating surplus in the upcoming Budget, although ACC liabilities and movements in the unfunded liability for the Government Superannuation Fund would cost $1.1 billion.

Variations in these two factors had played havoc with reported balances in recent years, and Treasury would be developing a new indicator - the operating balance excluding re-valuations and accounting changes, or Oberac - to give the public a more accurate fix on the Government's financial management.

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