Families firmly on Government agenda

By BRIAN FALLOW economics editor

With its coffers overflowing, the Government has firmed up its commitment to spend more on low to middle income families.

But they will not feel much benefit until the year after next.

Finance Minister Michael Cullen yesterday delivered the December Economic and Fiscal Update - the half-time score of the Government's financial year, in which the Treasury updates its economic forecasts and on the strength of that revises how much it expects to be in the kitty for new spending initiatives in next year's Budget.

Dr Cullen expects to have around $700 million for new spending initiatives in the 2004 Budget.

That is over and above the $1.1 billion spending increase for 2004/05 committed in last May's Budget and about $300 million committed since then, mainly to boost the Ministry of Foreign Affairs and Trade and the Child, Youth and Family service.

It will allow the Government to take the first step in a programme, phased in over several years, to lift the incomes of low to middle-income families.

That was the group that had gained least from the growth of the economy over the past 20 years, Dr Cullen said.

It would also provide better incentives for people going from benefits into employment and make housing more affordable for low-income families and single adults, he said.

No details were forthcoming.

"Some will see a clear effect before the end of 2004 because some parts of the package will come into force at that point.

"Some parts will come into force in 2005, some in 2006 and some in 2007," he said.

The Treasury is forecasting stronger economic growth over the next two years than it was in May. It now sees only a gentle and shallow slowdown in growth, bottoming out between the middle of next year and mid-2005.

This growth outlook, which is towards the optimistic end of the range of economists' forecasts, would deliver fatter operating surpluses than expected in the Budget, averaging $6 billion a year over the next four years, even with the increased spending.

The Government could afford to spend more sooner, Dr Cullen acknowledged, without endangering its long-term Government debt targets. But that would be "daft" because it would fuel the side economy, domestic spending, which is already running hot. It would require the Reserve Bank to raise interest rates more than it already expects to, which in turn could drive the dollar higher, compounding the difficulties of the export sector.

Taxes have for some time been pouring in faster than the Treasury had forecast.

It is now more confident it understands why and that the resulting increase in revenue is likely to persist for some time and is not a fair-weather mirage.

Company tax is now expected to run $900 million ahead of Budget forecasts this year as companies have used up accumulated tax losses.

And PAYE is expected to yield between $500 million and $700 million a year more than forecast.

That reflects a drop in unemployment and more people moving into higher tax brackets as their wages and salaries rise, resulting in an increase in the average tax rate.

National Party leader Don Brash called for tax cuts, saying all income earners deserved their share of the spoils.

The operating surpluses do not reflect money the Government spends on capital items such as infrastructure, student loans or prefunding New Zealand Superannuation. Over the next five years a small cash deficit is expected, after those items are included.

But Government debt measured against the size of the economy will continue to shrink, from 28 per cent now to 20 per cent in five years.