Dr Cullen's NBR Budget Breakfast Speech
7.55am 16 June 2000
NBR BUDGET BREAKFAST
Dr Michael Cullen NBR Budget Breakfast – 7.55am 16 June 2000
Yesterday I delivered the Labour and Alliance Coalition Government's first Budget. Today is your opportunity to question me on it.
The point was made many times, to me personally and in various forms through the media that there needed to be a great deal in the Budget for business. The problem with this kind of expectation is it set up a hurdle over which this Budget could not possibly leap.
There is good news for the business sector in the Budget but it is not manna from heaven. There simply is not the money available for that. Rather, its more like fiscal finger food – enough to whet and curb an appetite but not to sate a roaring hunger.
The words have been spoken and the numbers published. No doubt you have all heard and read your fill. I do not want to bore you with repetition. Let me just make a few brief summary points to set the scene for the session that is to follow.
The Budget should not have contained many surprises. It was largely in line with the broad parameters set out in the March Budget Policy Statement.
If anything, the projected surpluses are marginally higher than BPS levels and market expectations. They are significantly higher than those foreshadowed in the pre-election fiscal update.
On average, over the next three years, we are projecting surpluses of around $320 million a year higher than those foreshadowed by National.
As far as I can establish, this Budget takes a longer-term view of the emerging financial pressures that future governments will have to face than any previous budget.
Looking out to the ten year financial horizon, there is a substantial degree of freedom for fiscal slippage without before our basic financial ratios – spending as a percent of GDP and debt as a percent of GDP – are breached.
I don’t think that there is any serious commentator who could argue that this Budget is anything but fiscally tight.
That tight fiscal stance is not a virtue in itself, but it is a virtue in current circumstances. In particular, a country with a large balance of payments deficit does need to lift the national savings rate, and the only short-term way a government can do that is to increase its own savings. In addition, tighter fiscal settings take pressure of monetary policy and this should help to moderate the sorts of interest rate increases that otherwise might have been seen as necessary by the Reserve Bank.
The only plausible niggle I have heard in the last hours since the Budget was released was doubt about if the numbers stacked up: if the growth that underpinned the numbers would eventuate.
Time will tell, but I am confident that the forecasts that lie behind the Budget are the best available estimates that we can make. There are some negatives around – recent rises in interest rates and increasing petrol prices - to name two that are outside of the government’s sphere of influence, and reported declines in business confidence, which may to a greater or lesser degree be inside it.
There are positives to offset these. The world economic growth outlook is good. The US economy appears to be heading for a soft landing, which is likely to take pressure off any further lift in international interest rates. Provincial New Zealand is in good heart. Job vacancies are holding up. Finally, there is still that disjuncture in the confidence surveys – individual businesses being more confident about their own prospects than for the health of the economy as a whole.
Add all these together and the story is much as it looks in the Budget economic update. I would add that the most recent NZEI economic forecasts – prepared later than the Budget sign-off date, - have a higher three year growth forecast than the Budget has.
Finally, I want to touch briefly on issues surrounding the spending priorities in this year's budget. As I have said, the $5.9 billion spending cap is still in place. We said we will be fiscally prudent and we will be.
This will require very tight budgeting in the next two years because there is essentially three tiers of expenditure in this year's budget: new initiatives, election pledge spending and restoring base line spending.
The Government's spending profile has altered slightly as we have brought forward some spending into the 1999-2000 and 2000-2001 years.
The Budget provides for new spending this year of $1,230 billion. That is only $30 million higher than provided for in the BPS.
These shifts will be made up for by tightening spending in the next two budgets. Provision for next year's budget is $550 million and $575 million in the following year.
So, while there will be some capacity for new spending initiatives in the next few years, we will have to heavily prioritise them. I do not see this as a problem. I was impressed by the disciplined approach my cabinet colleagues – Labour and Alliance - took to the budget round. And the spending pressures were always going to be strongest in our first year in office, especially after nine years in Opposition.
I have no doubt that my colleagues understand that delivering a reasonably consistent and secure programme within which strong economic growth can occur is just as important as any thing else in terms of the long term effects we want to make on social policy.
But this year's budget had a bigger job to do.
We are determined to keep faith with the electorate by honouring our election promises.
We also had to make good the under-funding by the previous government of core state functions.
These and other jobs have now been done and the money has been factored into budget baselines for future years. We can tick those items off.
I don’t want to put more into this Budget than it deserves to carry. There is more to an economy that the government. There is more to social wellbeing than social welfare. It will take time to rebalance and rebuild.
I do, though, take pride in the Budget. It is a mix of vision and restraint, of the economic and the social. It is a fresh start. It creates a place for all who want to make a constructive contribution to our collective futures.