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Modest Adjustment To Fiscal Cap In Budget

"The 2001 Budget will include a modest adjustment to the $5.9 billion spending cap to allow for necessary and unanticipated expenses to maintain national and regional security," Finance Minister Michael Cullen announced today.

Dr Cullen, speaking to the Wellington Regional Chamber of Commerce, promised a fiscally conservative budget. It would have the lowest spending to GDP ratio of any budget since the late 1970s and the lowest level of net government debt to GDP since the 1980s.

"The $5.9 billion reflected a broad assessment of the cost of intended Government policies with an allowance for cost pressures arising from existing government programmes, and the experience of previous governments in managing overall spending.

"Since then, a number of additional pressures have emerged. The largest of these - the nearly $570 million we have had to stump up to repair holes in the budget baselines - we have decided to absorb within the $5.9 billion cap.

"We have done this even though it has soaked up nearly a tenth of the initial sum," he said.

But the Government was not going to absorb within the $5.9 billion the extension of New Zealand's presence in East Timor, additional costs from Bougainville, the defence pay increase and the need to compensate the defence budget for the lower dollar and for the closure of the Hobsonville Airbase.

"The fiscal impact of these defence capability items was $202 million. On top of that, we have had to strengthen the country's biosecurity by plugging holes in the Bovine TB programme and by upgrading measures to protect against foot and mouth disease.

"This takes the total to about $270 million. I will be adjusting the $5.9 billion to allow for this because the Government puts a higher priority on the need to maintain the security of the region and the border than on the maintenance of a somewhat arbitrary financial allocation.

"This adjustment will not have any material effect on the surplus track projected in the DEFU."

Dr Cullen said there had been a lot less pressure on the $3.2 billion capital budget the Government had set itself this term with the result that he was now able to shave it back to $3 billion.

The 24 May Budget would also mark the birth of OBERAC, a new fiscal indicator designed to improve the presentation of budget information and to give the public a stronger basis from which to judge the Government's financial stewardship.

"OBERAC is an acronym for the Operating Balance Excluding Revaluations and Accounting Changes. Essentially it strips out one-off factors, such as the ACC and GSF revaluations, to provide a more meaningful guide to the Government's fiscal management.

"As I signalled last month, shifts in the ACC and Government Superannuation Fund liabilities are likely to be strongly negative compared with the DEFU. The movement is driven largely by the drop in interest rates.

"The extent of the final revision will not be calculated until June 30 but is likely to be in the order of around $1.1 billion - around one quarter from the GSF, the rest from ACC.

"These interest rate driven valuation changes do not involve hard cash, are based on theoretical assumptions and tend to reverse out over time but the noise created by them can distract from the real picture.

"The OBERAC measure will enable the public and the financial markets to judge the Government's fiscal performance without this substantial background noise while maintaining a firm commitment to the GAAP [Generally Accepted Accounting Practice] rules.

"Notwithstanding the ACC and GSF impact, the Treasury still expects an overall operating balance surplus for the year," Dr Cullen said.


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