INDEPENDENT NEWS

Fiscal, economic performance good but care needed

Published: Tue 14 Dec 2004 02:19 PM
14 December 2004
Fiscal, economic performance good but care needed
“The Budget Policy Statement and December forecasts confirm the quality of the government’s economic and fiscal management and show scope for some additional expenditure in the next few years but make clear that there is no room for large structural spending increases or tax cuts,” says Finance Minister Michael Cullen.
“The economy has significantly outperformed Treasury’s expectations requiring it to revise up in the December Economic and Fiscal Update its budget night growth forecast for the current year from 2.8 per cent to 4.7 per cent and its surplus forecast from $5.7 billion to $6.5 billion.
“The fiscal flow through from this stronger than expected performance will allow the government to: increase the indicative allocation for new expenditure arising from Budget 2005 from $1.8 billion to $2.1 billion in Year One rising to $2.4 billion in Year Four increase the allocations for Budget 2006 and subsequent budgets from $1.6 billion to $2.1 billion, $2.2 billion and $2.3 billion respectively; reduce the domestic borrowing programme for this year from $2.35 billion to $2.15 billion and partially pre-fund the government’s borrowing requirements over the following two years.
“In other words, we are banking some of the windfall and directing the rest of it into new initiatives,” Dr Cullen said.
Falling terms of trade, declining net migration, slower consumer spending and the effects of higher interest rates and a higher dollar were tipped to pull the growth rate back to around 2.5 per cent in the next two years.
This pattern was mirrored in the fiscal outlook with the OBERAC [Operating Balance Excluding Revaluations and Accounting Policy Changes] forecast to drift back from a high of $6.5 billion in the current year to $6.2 billion in 2005-06; $5.3 billion in 2006-07; $4.9 billion in 2007-08 and $5.4 billion in 2008-09.
“These surpluses will be fully absorbed in contributions to the New Zealand Superannuation Fund and in funding the government’s capital programme.
“As a result, nominal debt will begin to rise slightly after 2006, moving from $32.9 billion to $34.9 billion in 2008-09. The government will, however, meet its long-term debt objectives relative to GDP.
“Gross debt as a proportion of GDP is projected to fall steadily over the forecast period from 25.4 per cent currently to 19.6 per cent while net debt falls to 7.6 per cent by 2007-08 and to zero when offset against the $15.2 billion assets projected for the Superannuation Fund in that year.
“Because the large baby boomer generation is now at the height of its earning power, tax flows relative to spending are reasonably strong in historical terms.
“But three facts need to be borne constantly in mind: cyclical influences currently pushing up tax flows will reduce as growth slows; budget surpluses are projected to come back over the next three to four years to the level needed to fund payments to the Super Fund and to keep gross debt from rising; and the tax to spending ratios will reverse as the baby boomers begin to enter old age.
“That is why there are huge risks in embarking on any large structural spending or tax changes which would have an ongoing cost.
“This is evident in the BPS table modelling long-term fiscal scenarios out to 2015. It shows that an increase in spending of $2.1 billion per budget, which is relatively conservative based on recent trends and given the aging population, would have debt levels flattening at just below the 20 per cent of GDP target.
“Factor in a $1 billion tax cut on top of that and gross debt climbs to over 23 per cent of GDP by 2015,” Dr Cullen said.
ENDS

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