Dialogue: Time to take foot off the fiscal brake

The Government's vision of lifting the economy is held back by its strategy, argues ULF SCHOEFISH.*

Long gone are the days when Government Budgets contained significant fiscal surprises. These days they are mainly summaries of long-announced policy initiatives put into a proper accounting framework.

That is why Finance Minister Dr Michael Cullen tries to discourage a strong focus on the Budget. Unrealistic expectations can lead only to disappointment.

It would be wrong, however, to play the event down too much. Most importantly, the Budget's comprehensive presentation of policy initiatives and public finances allows the public to judge whether the Government is putting money behind its vision for the economy.

Last year, priority was given to dealing with election promises. A tax increase was required to pay for part of significant extra social policy spending, which made it hard to argue that the Government was making headway in strengthening the competitive position of the New Zealand economy in the international market place.

Small steps in the right direction have followed during the past year, with the Government's change of mind on the deductibility of research and development spending a prime example.

But the economy still lacks truly bold fiscal initiatives, and Dr Cullen's attempt to keep down expectations is a sign that the Government has little to offer on that score.

Usually it is fiscal deficits and the need to curb spending that would put a Minister of Finance in such a position. But the current situation could not be more different. Dr Cullen is presiding over cash flows far exceeding Treasury expectations.

That is being achieved despite a non-spectacular performance of the economy, which shows how healthy the underlying fiscal position is.

Leaving aside pure accounting influences, such as the revaluation of long-term liabilities of the ACC and the Government Superannuation Fund, a surplus of around $1.6 billion (1.4 per cent of GDP) is likely to be recorded for this year.

Projections for future years are also expected to look impressive. Despite relatively modest expectations for GDP growth, forecasts for fiscal surpluses are likely to increase to $2.1 billion (1.8 per cent of GDP) and $3 billion (2.4 per cent of GDP) as growth in expenditure is projected to fall behind the growth rate of the economy.

Those projections are difficult to reconcile with accusations of fiscal blowout mounted against Dr Cullen by the Opposition when he had to announce that he could not keep to his self-imposed cap of $5.9 billion of extra spending during the first term of the Labour/Alliance Government.

However, while not particularly significant from a macroeconomic perspective, the extra spending of $270 million has not helped Dr Cullen's credibility, and raises questions about the potential for more fiscal slippage before next year's election.

But even if the spending cap is raised again, the general trend of rising surpluses over coming years is unlikely to be affected. That implies that the difference between what the Government takes out of the economy and what it returns will continue to rise.

In other words, the Government will hold the economy back rather than push it ahead. Positive effects of other policy measures on economic growth will be offset by an overall approach that keeps the fiscal brakes on.

Dr Cullen is determined to save the rising fiscal surpluses and establish a huge fund to support the payment of state pensions 20 years from now.

But such a savings strategy seems at odds with the fact that the Government is presiding over an economy which is experiencing a strong net migration loss, a continued stream of companies relocating overseas and poor productivity performance.

Reflecting those trends, New Zealand has continued its slide on the international economic scale. What one should reasonably expect from the Budget is evidence that the Government is taking serious steps to address those problems.

Other countries are leading the way in showing how budget surpluses can be put to work more productively.

On Tuesday, Australia's Treasurer will confirm a $A5 billion tax cut, which includes lowering the corporate rate to 30 per cent, three percentage points below New Zealand's rate.

The Americans and Germans are also in the process of lowering taxes, and other countries will follow. In contrast, the New Zealand Government has so far been extremely hesitant to contemplate changes to tax rates.

The improvement in the quality of tertiary education is another key ingredient to lifting the economy's growth potential.

But it appears that the Government is planning to constrain payments to tertiary institutions below sustainable levels for a second year in a row.

Those examples show an inherent contradiction between the Government's well-articulated vision of lifting the economy's performance and the fiscal strategy pursued, which holds it back.

If the Government wants to rise to the occasion on Budget day and deliver a positive message, it should indicate that it is prepared to rethink its medium-term fiscal approach of amassing surpluses.

Otherwise this year's Budget is likely to end up as another missed opportunity.

* Ulf Schoefisch is chief economist of Deutsche Bank New Zealand.


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