Full text: The Budget Speech

The Finance Minister, the Hon Dr Michael Cullen, in Parliament:

Mr Speaker, this year's Budget has been prepared amidst the most uncertain political and economic situation internationally for a very long time. The long bull market of the 1990s, fed by international political and economic liberalisation and growing integration, seems now a distant memory.

In their place, older and more malign factors have reasserted themselves: war, terrorism, and their associated fear and uncertainty; disease; and economic stagnation in many of the world's most important economies.

Against this international backdrop the primary objective of Budget 2003 is to tell our own national story of certainty and stability. Budget 2003 delivers results in terms of gross debt, net debt, and the operating balance exclusive of revaluations and accounting changes which exceed the targets set in Budget 2002. It also looks forward to key fiscal indicators for the coming three year period which are broadly in line with the most recent December Economic and Fiscal Update. If events unfold over the next year as forecast this will give room for some targeted and significant moves in Budget 2004 and beyond.

Since the presentation of last year's Budget the world has been through a period of turmoil and increasing uncertainty. The world's key economic engine - the United States - has not only slowed down but is sending very mixed signals about the short to medium term outlook. The build up to the conflict in Iraq exacerbated that situation. Equity markets continue to drift downwards or, at best, sideways, punctuated by short, unsustained recoveries.

A growing US current account deficit and a return to deficit financing at the federal level have led to a weakening in the US dollar which has been the main factor driving an appreciation of the New Zealand dollar. This has placed further pressure on our tradeables sector.

In addition to these broader influences, others, including more local factors, are likely to impact on growth during 2003 and into 2004. Drought across much of the country, particularly in areas not normally subject to drought, and late frosts have led to reductions in land based production. Falling milk prices have combined with the rising New Zealand dollar to reduce returns to dairy farmers for the current year well below the very high levels experienced over the previous couple of years. The SARS epidemic appears to be impacting on the growth in tourism. Finally, the very real prospect of a dry winter in combination with the independent redetermination that has reduced the Maui gasfield's reserves may be expected to impact on growth in the short term.

All these factors will moderate the very strong growth New Zealand has experienced over the last year or so. Year to March growth is expected to have been 4.4 per cent, placing New Zealand at the very top of the OECD growth ladder. The weakening factors already referred to are expected to be offset in part by a range of domestic factors.

Net migration inflows remain strong and house prices are rising. Both will support domestic demand. Business and farm balance sheets are in good shape providing an important buffer. Monetary conditions are expected to continue to ease over the year ahead.


On balance, it is anticipated that the domestic factors will create a soft spot in quarterly GDP growth in the middle of this year, dragging growth down to 2.2 per cent for the year to March 2004. Growth is then expected to rebound in the following year to 3.2 per cent as the downside factors unwind and the external sector recovers.
It is expected that easier monetary conditions in conjunction with a recovery in trading partners' growth will help support the rebound in GDP growth from the latter part of 2004 onwards.

This pattern of economic growth, though it is likely to continue to be high by OECD standards over the forecast period, is expected to lead to some weakening of the labour market with unemployment rising to 5.6 per cent by March 2004 and holding at that level before dropping from mid - 2005 onwards. This is also likely to be a very strong performance by international standards.

The strength of the economy over the last year is reflected in the fiscal forecast for the operating balance exclusive of revaluations and accounting changes. That figure, forecast to be $2.29 billion in Budget 2002 and $3.52 billion in the 2002 December Economic and Fiscal Update, is now expected to be $4.04 billion or 3.1 per cent of GDP.

This results in a gross debt forecast for 30 June 2003 of 27.3 per cent of GDP, compared with the forecast of 28.6 per cent in Budget 2002. The corresponding figures for net debt are 14.0 per cent and 16.8 per cent. Thus, for the third year in a row, performance has exceeded expectations.

The final operating balance for the year, including revaluations and accounting changes, is likely to be severely affected by revaluations, including those in the Government Superannuation Fund and Accident Compensation scheme. Revaluations are presently estimated to total $2.68 billion, reducing the final operating balance to $1.36 billion. This does not, of course, affect the cash position.

These revaluations flow in large part from changes to the discount rate arising out of changing interest rates. As such they are the reverse effect of the positive impact on the operating balance of rising interest rates in earlier years and themselves are likely to be at least partly reversed out over time. The ACC revaluation is also substantially affected by recalculations based on, for example, a reassessment of experience of the very long tail of the most serious cases from the 1970s and 1980s.

The forward forecasts for the operating balance have to be compared with this year's OBERAC. For 2003/04 a small drop to $3.8 billion is forecast, rising thereafter to $4.5 billion in 2004/05, $5.3 billion in 2005/06, and $6.2 billion in 2006/07. Gross sovereign issued debt is projected to fall to 23 per cent of GDP in 2006/07.

This is well below the government's stated prudent gross debt upper limit. In this light it is useful to provide some additional focus around the debt target and the fiscal possibilities that exist over the forecast horizon.

The broadly stated target is to keep gross debt below 30 per cent of GDP. However, given prudential management with a margin for risk, the bias is more against increasing debt than lowering it so that there will be a natural tendency for the gross debt percentage to trend downwards over time.

The projected decline does indicate the likelihood of sufficient fiscal headroom in Budget 2004 for some significant initiatives beyond the amount presently allowed. Whether these will in fact proceed will depend on a number of judgements about the economic and fiscal position, including the level and direction of the structural surplus.

Should present indicators prove to be accurate, the Labour Progressive Government will be in a position to make some significant improvements in the level of family assistance to low to middle income families and in the incentives to move off welfare benefits into employment. Work will be proceeding on a range of possibilities over the next year with the final choice of measures in part dependent on the amount of money available. The United Future Party will of course, be consulted about the shape of the proposed changes.

One decision has already been taken in the context of this year's budget. The strength of the government's fiscal position has enabled us to move to full funding of contributions to the New Zealand Superannuation Fund a year earlier than anticipated. The Fund is expected to go to market in the final quarter of 2003 in what seems likely to be a favourable combination of a relatively strong New Zealand dollar and moderate equity prices.

The New Zealand Superannuation Fund is part of the government's capital budget. Another large part of that is occupied by the State-owned enterprises.

This Labour-led Government indicated, on taking office, that it was no longer in a "preparing-for-sale" mode with respect to the SOEs, but a "long term hold" one. Some 18 months ago work began on the implications of that stance for both the Crown and the SOEs.

Because of the size and strategic significance of the SOEs, it is crucial to the success of the economy that they perform well and are able to achieve their full potential to best advance the government's economic objectives.

There is no intention to abandon the basic framework established in the 1986 State Owned Enterprises Act, or to become involved in operational matters or compromise the accountability of SOE boards.

But we do need to adjust to the post-privatisation environment. Specifically, we need to get the balance right between allowing SOEs to grow and diversify, and ensuring that Crown capital is available for the government's other priority areas.

In particular, I will be seeking to incorporate SOE requests for equity for significant investments into the normal budget process, where commercial realities allow, so that the Crown can better integrate its capital management.