Editorial: Cullen must stick to fiscal prudence

Considering the morose contents and implications of the Treasury's latest economic and fiscal update, Michael Cullen was remarkably upbeat. Budget surpluses and growth forecasts had taken a hammering but the Finance Minister seemed unabashed. New Zealand, he said, faced "reasonably benign" economic prospects and enjoyed a strong fiscal position compared with the rest of the world.

So it may be, for now. But so hugely uncertain is the world economic outlook that the Treasury update must be a cue for fiscal caution, not a signal for the indulgent carelessness of a vote-buying spending spree.

New Zealand has, indeed, emerged in better shape from the aftermath of the September 11 terrorist attacks than most other countries. Historically high prices for agricultural exports, allied with favourable growing conditions, have sheltered it from much of the global economic turmoil.

But commodity prices have now begun to decline as overseas growth rates slow.

The Treasury has recognised as much, reducing its forecast for economic growth for the March 2003 year to 1.9 per cent. That is sharply down from the May Budget's 3.3 per cent forecast. The Treasury has also upgraded its March 2004 growth forecast from 3 per cent to 3.7 per cent. But rebounding strongly to meet that prediction will depend on the American economy gathering momentum relatively quickly.

Therein lies the necessity for fiscal prudence. Popular wisdom suggests the US will crawl out of recession next year and that there will be no dramatic recovery but a gradual strengthening. Yet questions abound. How soon can badly shaken American consumer optimism be expected to mend? And what if the Bush Administration chooses to pursue its war against terrorism beyond Afghanistan, at the expense of world oil prices?

And what if the dot.com meltdown signifies that the US is suffering a boom and bust-style recession and will take much longer than expected to recover? The International Monetary Fund, while forecasting that American economic growth will be only 0.7 per cent next year, concedes there is "a significant possibility of a worse outcome".

Effectively, that outlook, the synchronicity of the world slowdown and a bumpy year domestically, with a significantly lower tax take, leave the Government with no buffer. The Budget surplus for the year to next June has tumbled to $985 million from $1.38 billion on Budget night, and from $2.44 billion to $1.8 billion for the 2003 year.

Already, almost half the $850 million the Government has put aside for new spending in next year's Budget has been promised to health. And $40 million will go on parental leave. What is left over seems mostly destined for education. If Dr Cullen acts as a responsible Finance Minister must, other sectors hoping for a financial lift will be mostly disappointed.

The minister says the self-imposed cap of $850 million in spending in next year's Budget will be "there or thereabouts". He must not waver, whatever the exigencies of election-year politics. "Thereabouts" must not take on the characteristics of a sizeable walkabout.

Already, Dr Cullen has breached one self-imposed limit, that of new spending over the Government's three years in office. That was greeted with relative equanimity because of its modest proportions. It would not, however, pay to make this a habit.

So far, the Government has maintained a creditable record for fiscal responsibility. Thus, there has also been a low-key response to the borrowing of $1.8 billion more over the next three years than was planned in the Budget, a reflection of the Air New Zealand bailout and lower surpluses. Dr Cullen indicates that tight control will be maintained.

That must be the case. He must not be lulled by New Zealand's relative good fortune. Nor must he read too much into the upswing in business confidence. Most investment will continue to await clear signs of a global recovery. And should export income drop significantly, it will quickly subdue the domestic economy.

There will be no occasion for pre-election gifts underpinned by a one-way bet on the world's economic course. The Government's room to manoeuvre has almost evaporated. In times of uncertainty, fiscal prudence must rule.