BPS and DEFU: Not A Lot Left In The Cupboard
At 2pm today the Government released its Budget Policy Statement – showing spending intentions for the June 2000-2001
budget – and Treasury’s December Economic and Fiscal Update – with three year economic forecasts. Scoop’s Alastair
Thompson attended the lockup.
It is perhaps not that surprising that Finance Minister Michael Cullen has chosen to deliver his second Budget Policy
Statement nice and early like his predecessor Bill Birch.
Today’s low key announcement – in advance of a holiday period – would seem to be aimed to generate as little comment as
So why is Michael Cullen so punctual? Because today’s news – especially to those in Cabinet and the backbenches of the
government– is the sort of pill that takes some swallowing.
In his BPS Michael Cullen’s colleagues are in effect being told not to go away and think up any new things to spend
money on over the holiday period.
Why? Because there is not a lot left in the cupboard of this Minister of Finance.
True to his word at budget time Government fiscal expenditure in the coming financial year – beginning June 2001 – is
not in for much of a boost. The $5.9 billion expenditure plan over the three year term of this government is being stuck
Where this year’s budget included over $1.2 billion in extra spending. Next year ministers are to make do with only $640
million of new initiatives. And then in the following year - election year - the figure is the – even smaller - $615
While this may seem at first glance quite a lot, it isn’t. It is the smallest budget for new initiatives any Finance
Minister has given himself for at least five years.
In recent years the lion’s share of this sort of sum has regularly been spent in the health sector alone. Of the
provision for next year’s budget 25% of the total is likely to be taken up in contingency funding alone – to deal with
emergencies like wars, floods and invasions by insects.
Usually in circumstances like this it then becomes a matter of prioritising the essentialness of various pieces of
spending. And the temptation to further raise petrol, cigarette and other excise taxes will also be strong.
In the words of the Minister this afternoon. “This will be a very tight budget round, and that was a conscious decision
of this government at the outset.”
Asked if this meant he would have to say “No” a lot over the next six months he replied. “I expect to spend a lot of
time over the next three months telling my colleagues to find compensatory areas of savings.”
As a small measure of compensation for this forced period of frugality Michael Cullen, again true to his word in the
2000 Budget, has announced an intention to increase capital expenditure estimates by $800 million over three years to
This, Dr Cullen says in his press statement, will be used to deal with the recently incurred defence force capital
expenditure commitments (hit by the exchange rate fall) and perhaps more interestingly, “to help finance hospital
“Crown finance costs are generally lower than those available in the private sector, it makes sense for public hospitals
to go to the Crown for their borrowing needs.”
As capital expenditure is not measured on the operating balance this one billion dollar change can be achieved without
influencing the precious government surplus or self-imposed $5.9 billion three year fiscal envelope.
As for the surplus, Treasury’s forecasts for the 2001 year show a central forecast figure of $800 million roughly, with
alternative, stronger and negative scenarios delivering $1.2 billion or $500 million respectively.
The markets will be pleased that these figures show the government still in the black but the projections are far from
rosy and reflect the flat domestic economy experienced for most of calendar 2000. Should there be much variance from
these figures on the down side then the required sums needed the following year for planned super pre-funding will be
quickly put into doubt.
As for the Treasury forecasts themselves they remain broadly in line with those of the trading banks and include the
traditional heroic assumptions on increases in the TWI exchange rate measure showing it climbing to 58 by early 2002.
Presently the TWI is trading at around 50.
Across the road from Treasury, in its latest set of forecasts, released last week, the Reserve Bank has now dropped this
assumption and is plotting a more gradual increase in the exchange rate.
On the interest rate front Treasury is anticipating 90-day-bill rates rising to 7% next year and 7.5% the year after
indicating expectation of a Reserve Bank OCR rise. This flies somewhat against market sentiment which is presently
selling three month 90-day-futures at around 6.6% indicating an easing.
In the final analysis the BPS and Treasury Forecasts continue to leave as many questions unanswered as they answer.
Notable among these the question of whether the government will go into deficit for the first time in several years? And
whether it will have enough to start superannuation pre-funding the following year.
At the moment the general economic situation remains as it has for most of this year – too close to call.
Fortunately, a strong hint about what is really up with the NZ economy will be able to be picked up on Thursday with the
release of GDP statistics for the September quarter.
Dr Cullen says Treasury is picking around 0.5% growth for the quarter though he himself is inclined to warn all-comers
that not too much store should be taken for any quarterly result.
Meanwhile hovering above all the analysis of the NZ economic outlook the risk of a US hard landing remains a serious
threat which could yet give the new Labour/Alliance government another economically speaking annus horribilis.