Economic growth forecasts slashed

By VERNON SMALL

Budget surpluses and growth forecasts have taken the predicted hammering in the aftermath of the September 11 terrorist attacks.

But the Government believes New Zealand faces "reasonably benign" economic prospects and a strong fiscal position compared with the rest of world.

Finance Minister Michael Cullen yesterday released the Treasury's December Economic and Fiscal Update and the Budget policy statement containing broad spending plans.

They show Budget forecasts of 3.3 per cent economic growth in the year to March 2003 have been slashed to 1.9 per cent. Growth is picked to rebound to 3.7 per cent the following year.

The Budget surplus for the year to next June tumbles to $985 million from $1.376 billion on Budget night, and from $2.44 billion to $1.8 billion for 2002/03.

Taking out revaluations of assets and liabilities, Dr Cullen said surpluses would rise from $1.2 billion this year to $3.9 billion in 2005/2006.

The main risk to the economic outlook was the rate of recovery in the United States.

Prolonged weakness in the global economy could push growth as low as 1.2 per cent next year, cutting even more off the forecast surplus.

But Dr Cullen said he would not cut costs, lift taxes or aggressively boost spending to help the economy out of the doldrums.

Next year's funding priorities would be health - where a $2.4 billion spending package spread over three years had already been announced - education, and transforming the economy.

The forecasts show $850 million left for new spending next year, of which $400 million has already been committed to health and $40 million to pay for parental leave.

But Dr Cullen said spending on some areas had not been finalised.

He said the Government intended to stay within its self-imposed limit of $6.1 billion for new spending over its three years in office.

The limit was increased last year.

Although the Government would find the limit difficult to meet, he did not intend to increase it twice.

But a small amount might be needed to finance more intelligence gathering, pay for sending troops and aircraft to Afghanistan and cover other costs flowing from the September 11 attacks.

The forecasts included $2 million this year rising to $12 million and then $14 million in subsequent years to fund "responses to terrorism".

The forecasts also include $250 million to implement a land transport and safety strategy.

Government sources said the package, a mix of operating and capital spending, was due for release in February.

Its final shape was still fluid, but one option could see petrol taxes and road user charges raised by $100 million to help finance the package.

That would mean a rise of about 3.5 cents a litre in petrol tax.

Transport Minister Mark Gosche had been negotiating with the Greens over the package, but they have baulked at the amount of spending on new roads, preferring a greater emphasis on rail.

On the capital spending side, Dr Cullen said there was pressure for investment in hospitals, schools, prisons, transport, re-equipping the defence force and recapitalising Air New Zealand.

Together, they would help push borrowing up $1.5 billion to $10.6 billion over the next five years, including $3.9 billion for student loans.

An extra $600 million would be raised this financial year, including "pre-funding" $500 million needed next year - a move aimed at smoothing a big rise in borrowing in 2002/03.

National's associate finance spokesman, David Carter, said the update showed taxpayers' money was being put at risk.

"Dr Cullen has become Dr Debt," he said.

"He has opted for the easy choice of letting debt rise as a percentage of GDP. That is an option I would not have chosen."

Act finance spokesman Rodney Hide said the $7.9 billion being set aside for the Coalition's superannuation scheme over five years was all being borrowed.