Cullen Michael: Appropriation (2003/04 Estimates) Bill — Third Reading Imprest Supply Debate 
Cullen Michael: Appropriation (2003/04 Estimates) Bill — Third Reading Imprest Supply Debate 
[Volume:610;Page:7667] 
Hon Dr MICHAEL CULLEN (Minister of Finance) 
: 
 I move  
That the Appropriation (2003/04 Estimates) Bill be now read a third time and the Imprest Supply (Second for 2003/04) Bill be now read a second time 
. This marks the final stage of the Budget process for 2003-04 in terms of the first round of the Budget—that is the Budget itself—and of course the standard Imprest Supply Bill presented at this stage of the year. At the time when the Budget was presented in the middle to the latter part of May the fiscal position outlook was strong. We were expecting for the year just ended a fiscal surplus on an operating balance excluding revaluations and accounting changes basis of just over $4 billion per year and a final operating balance of roughly $1.4 billion per year. We were also expecting a forecast operating surplus for the year that we are now in of roughly $3.7 billion. We were expecting both gross debt and net debt figures to be falling as a percentage of gross domestic product. 
The economic outlook at the time of the Budget was for a slow-down in the economy with economic growth slowing to round about 2 percent per annum or just over for the 2003-04 March year— 
Dr Wayne Mapp 
: What about next year? 
Hon Dr MICHAEL CULLEN 
: Dr Mapp should never lead me a straight line like that when the next line is a good one: growth should be picking up in 2004-05 but with very significant downside risks. At that stage we were still terribly uncertain about the outcome of the severe acute respiratory syndrome (Sars) epidemic. We were still facing the prospect of a very dry winter and the impact that the electricity shortages were going to have the outlook for the American economy was still extremely uncertain and so on and so forth. 
A number of things have changed since then. The main change is that the downside risks in the economy have abated. The Sars epidemic is now by and large under control and we have seen a rather more limited impact on tourist numbers in New Zealand than was perhaps first feared. The numbers have already started to pick up from the point to which they had dropped by April and May when they bottomed out. 
Secondly in one of those little examples of fate that are a lesson to all of us about the point at which the Government finalised its plans for reserve capacity it started raining which perhaps is God’s commentary upon our political processes in New Zealand and elsewhere. We are now back on track for an average year in terms of lake storage—thanks very largely to the savings made voluntarily by New Zealanders otherwise we would still be below the average lake level. Rain has continued to come at reasonably frequent intervals in the key catchment areas in the South Island and the central North Island and we will now certainly get through winter with no disruption at all but there are still long-term questions surrounding security of supply and the necessity of ensuring a greater margin than the market has left us with by the middle of this year. 
That has not affected the central economic forecast at all. Of course Treasury would not at this stage be updating economic forecasts unless there had been signs of some very dramatic changes which have not occurred. Certainly the advice I have is that there is no reason at this point for those central forecasts to be changed in any case. So we are still expecting the slow-down which obviously we have been seeing over the last few months—that is bottoming out at about the 2 percent or so level—but with the downside risk now very very much less. So it is not the central pattern that has changed; it is the risk that we might have been coming out well below that 2 percent level. 
The key feature that has emerged more clearly although it was already emerging by May is the contrast between the domestic and external sectors. The domestic economy is remaining very strong. In May it looked as though the number of dwelling approvals was starting to fall away in a reasonably significant and classic cyclical pattern. Since then the numbers have tended to flatten out again at a high level. The construction sector and the building sector remain very strong. The domestic economy in general remains very strong but because of the appreciation of the New Zealand dollar or more accurately the depreciation of the United States dollar the tradable sector and exporting sector are under significant pressure at the present time. We are seeing that reflected in the closures of some firms and also in the generally reduced returns in New Zealand dollars to the New Zealand exporting sector. That is reflected in the figures today when in New Zealand dollar terms exports have continued to fall as a reflection of the rising New Zealand dollar. 
The reality is that New Zealand cannot do much to affect the level of the United States dollar. However effective monetary policy may be in New Zealand it has absolutely no impact in Washington at all. A United States dollar fall is a product of the US current account deficit and the ongoing US federal deficits. The present United States Government which is following policies very similar to those advocated by the National Party has seen a turnaround in the operating surplus since it took office of $1.2 trillion New Zealand dollars a year—moving from a substantial surplus to a substantial deficit. It also believed in this strange theory that if taxes are cut the economy will grow fast and become self-funding. What used to be called the Laffer curve is now more commonly known as the “laughable curve” amongst most sensible economists and results in exactly the same product that President Reagan produced by following exactly the same policies of very substantial deficits that are forecast to continue into the long-distance future. It is likely to place continued downwards pressure on the US dollar. Equally it is clear that the US economy is probably starting to recover but the numbers continue to be somewhat contradictory almost from day to day and certainly from week to week. 
The likely fiscal out-turn for the year just finished will not be very far different from the Budget forecast. I do not have the final numbers yet—only a preliminary estimate. The figure for the operating balance excluding revaluations and accounting charges is likely to be somewhat higher than the $4 billion forecast on Budget night; it will probably be more in the region of $4.5 billion. But the final operating balance is likely to be about the $1.4 billion mark. It could be somewhat lower because further reductions in interest rates have led to significant further revaluations on the Government Superannuation Fund and the Accident Compensation Corporation which are offset by gains on the equity markets in bodies such as the Government Superannuation Fund. So in general terms the final operating balance will be the same order of size as that forecast at Budget-time. 
The problem that the Government faces in this respect is explained to people by saying that a surplus of $4 billion - plus in the operating balance excluding revaluations and accounting charges is not a cash surplus at all. It does not reflect cash in the pocket which can be spent on other items of Government spending. Out of that come the contributions to the New Zealand Superannuation Fund and a great deal of Government capital spending in a whole range of areas. So if we look at it in terms of the Government’s cash surplus it is modest but by no means large for the 2002-03 year. 
Moreover Government revenue continues to run well ahead of Government receipts. What that means to people who do not understand accruals accounting is that what we think we ought to be getting in is running well ahead of what we are actually getting in in terms of cash which means there is some reason for caution. [ 
Interruption 
] No receipts—actual cash—are lower than revenue. So that means we need some degree of caution about what will actually happen to actual receipts as we move on through over the next year. As I have said many times in the House over the last 6 months or so because receipts ran ahead of forecasts for much of the last 2 years there is a desirability of being somewhat cautious. What may happen is that the economy will slow down and there is a possibility that Government receipts will run under forecast during that period. It is a bit late if the money has been spent already. 
Finally it is worth noting that the Government has a strong record in a range of areas. In health for example the district health board deficits will come in under plan and the number of people in primary health organisations is running at some six times the level forecast when the programme was first set up. We are seeing a strong fiscal position and an economy that is going through a small downturn by international standards. If we manage a 2 percent growth rate in the current year that will be much better than that of the great majority of our trading partners who are looking at rates of between 0 and 1 percent or so growth in the great majority of cases. Only Australia is likely to outstrip us to any significant margin at all in the current year and its forecasts have kept coming back in fact over recent times. 
Against this we have policies that simply give the tired old message of: “Cut taxes for the rich flog off the State enterprises cut pensions cut health spending and hope that somehow or other this will result in a golden age for the New Zealand economy.” Well the last time we tried all of that I think it is fair to say that it rogered the New Zealand economy to a fairly substantial extent and many people are still taking a long time to recover from the pain that that inflicted. We do not need to go through another cycle of self-inflicted pain for no real purpose. The task now in front of us is to decide how to build upon the success so far particularly in the area of skills in the areas of investment in the areas of infrastructure and in a number of related areas that the Government is addressing at great speed with great intelligence and great vigour. Opposite us we see a party that is lacking in vigour almost entirely. Indeed it is a party in which its key strategist Mr Murray McCully now describes a member of another party as “the most effective Opposition parliamentarian” and another member of another party as “the most effective member of the Opposition”. With friends like that who needs enemies?