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Fiscal and economic outlook strong - Cullen

Hon Dr Michael Cullen
Treasurer
Minister of Finance

15 June 2000


Fiscal and economic outlook strong - Cullen

"Budget 2000 does not attempt to do everything at once. But it does clearly signpost the direction in which the Labour-Alliance coalition wants to take the country," Finance Minister Michael Cullen said today.

"The task we have set ourselves is to restore faith in the political process and to rebuild New Zealand's tattered social and economic infrastructure. The budget gives us a strong basis from which to build.

"The economic outlook is positive. It has been a good growing season for agriculture. Looking forward, strong world demand, rising commodity prices and a favourable exchange rate will see growth averaging about 3 per cent a year over the next three years.

"These effects will provide a strong stimulus for the export sector. Exports are projected to grow by about 15 percent over the next two years.

"This will take pressure off the current account deficit which is expected to shrink to around 5 percent of GDP by 2002-2003. It will also broaden the base of the economic recovery and put it on a stronger foundation.

"Unemployment is forecast to drop to just above 5 percent in the 2001-2002 financial year and to remain below 6 percent throughout the forecast period.

"The fiscal position is also robust. The Budget points to a pattern of substantial and rising surpluses.

"The surplus for the current 1999-2000 year is forecast at $763 million. The figures for the next four years are $1.01 billion, $2.09 billion, $2.73 billion and $3.22 billion respectively.

"That money will not be spent. We have promised that we will be a fiscally conservative Government and we will hold to that promise. The $5.9 billion cap we have imposed on new spending will stand.

"Although the surplus forecasts in the Budget are consistently higher than the track outlined in the March Budget Policy Statement, the Government's spending profile has been loaded slightly more toward the front end," Dr Cullen said.

"The big change is in the present [1999-2000] year. The BPS anticipated $150 million in new spending but this has been exceeded by $270 million, producing a total of $420 million.

"The West Coast settlement at $135 million [GST inclusive] accounted for almost half the shift. Other big ticket items were $82 million for the arts package and $16 million for high performance sports. All these expenses come on to the Government's accounts this year.

"New spending in the coming 2000-2001 financial year, at $1,230 million, is only $30 million above the provision made in the BPS.

"These shifts will be made up for by smaller spending provisions in the out-years. Obviously strong discipline will be required in those years but I do not anticipate a problem," Dr Cullen said.

"Spending pressures are always strongest in a Government's first year in office, especially after nine years in Opposition. And the most urgent of our spending priorities have now been met.

"Also I was impressed with the disciplined and collegial approach my cabinet colleagues brought to the budget round.

"Net Government debt is projected to fall to 16.5 percent of GDP over the next four years," Dr Cullen said.

"The Government will also be building up assets through the proposed New Zealand Superannuation Fund to partially pre-fund the costs of supporting the large baby boomer generation in retirement.

"We have yet to finalise the details of our policy approach to pre-funding but the Treasury has done a lot of technical work on the subject, some of which is discussed in the budget documentation.

"The harsh fact is that we cannot afford to delay much longer. Unless we begin to make some forward provision soon, future governments and future generations will be confronted with three equally unpalatable choices: large tax hikes, savage cuts in the level of the pension or tough age, work, income or asset tests to limit eligibility.

"All three options would be damaging to the social and economic fabric of the nation," Dr Cullen said.

Change in operating balance

$ million 1999/2000 2000/01 2001/02 2002/03 2003/04
BPS operating balance 400 1,000 1,900 2,200 2,600
Budget operating balance 763 1,012 2,091 2,733 3,222
Change 363 12 191 533 622

Change in fiscal provisions

$ million 1999/2000 2000/01 2001/02 2002/03 2003/04
Indicative provisions BPS 150 1,200 1,850 2,650 5,850
Fiscal provisions Budget 420 1,230 1,790 2,425 5,865
Change 270 30 (60) (225) 15

ENDS


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