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Molesworth & Featherston (Weekend) – May 12th 2006

Molesworth & Featherston - Weekend Update edition

Business and Political News
May 12th 2006

Direct Link To This Week's Weekend Update Edition:

Budget 06
Budget growth and spending down

With growth coming in softer than the Government forecast last December, the spending in this year’s budget will be down a little on levels picked in the Budget Policy Statement. It’s possible the economy could register as little as one percent growth this year.

Spending will be below forecast on the student loan policy (Dr Cullen will crow about that). Tertiary education will get a boost. There will be another $750 million of new health spending, though that’s a bit less than last year and a sign health spending is not going to keep growing as fast as it has. NZ Trade & Enterprise grants will be rejigged.

Even with reduced spending a series of four annual cash deficits begin this year. Dr Cullen is exercised about cash deficits but has never really pulled off the argument. (To see why it’s just an accounting contrivance, imagine you finish this year with $1 less in your wallet than you began it, but with a share portfolio worth $1000 more - would you really be worse off? Only your cash position would be worse). The government’s operating surplus will increase very strongly this year because the GSF, ACC and the Super Fund all achieved very strong returns in world investment markets (To see why the cash position DOES matter -- it bears contemplating that the government can’t spend these gains, though they do make us better off).

We expect to see a big increase in spending on transport this year. High oil prices will make it politically easier to keep pushing more toward public transport. We’ve reached a point where the revenue from excise and user charges is close to total road and transport funding, so it would make sense to formalise the relationship now and shut down one perennial whinge.

The Budget of course won’t include tax cuts. Dr Cullen privately thinks his Australian counterpart has gone too far for prudence in his budget. The expansionary Costello Budget will likely push up interest rates and in turn, the Australian dollar can be expected to rise faster relative to ours (it’s already helped by strong mineral returns). More demand and a lower exchange rate in our biggest export market will suit our exporters.


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