Implications Of The Budget

  • Bill Birch

The Wellington Club

You have asked what the implications of the Budget are.

Clearly, and most importantly, it means continued economic growth - of 3% or better - which means more jobs.

While the world economy is not yet in a benign phase and there are international risks, forecasts of continuing economic pick-up are very credible.

Export markets are settling down from the upheavals of last year, and tourism, in particular is rebounding strongly. For example, March visitor arrivals were up 11% on March 98.

Treasury's Budget forecasts are for export growth to pick up from the end of this year, and to average 4.8% over the forecast period.

And the outlook for the world economy continues to improve. Growth in our top 10 trading partners is now picked to be 2.3%, up from 2.1% in April and 1.4% in November last year.

However at this stage, because of the international situation impacting on commodity prices and because two years of drought has affected our agricultural output, a larger amount of economic growth is from the domestic sector.

The official growth figures for the March quarter are released at the end of next week, with market commentators picking an out-turn of around 0.7%.

As we look forward to this result we can note the National Bank's regional survey released last week showed economic activity up 1.8% in that quarter, that business confidence in February of 68% was the highest level in five years, and that March quarter retail sales were up 3%.

More recent indicators such as job ads, which grew another 0.6% in May and are up 15.5% on last year, and business confidence, which remains at high levels, are positive signs for the current quarter.

And in case you have managed to overlook it, the end of year brings a series of events to New Zealand which are bound to create further economic activity - APEC, the America's Cup, and the Millennium Events.

The second point to make is that this growth will take place against a background of low inflation and low interest rates.

While growth resumed through the last six months of 1998, the December CPI figure showed inflation at its lowest level in 30 years, and interest rates are at similar 30 year lows.

The Reserve Bank has confirmed that inflation pressures are low, and it is projecting interest rates to stay at current levels for the next 2 years.

Low interest rates, and a more competitive dollar will continue to underpin the recovery.

What this means is conditions for business generally should continue to improve.

The Government cannot guarantee success for any industry or enterprise, but I can say you will be trading in an expanding economy, in stable conditions.

The third key point is that to best help maintain that stability, I can assure you that a National-led government will run a surplus next year, and that we will continue to lower public debt.

The Government's April financial statements show the operating balance $350m ahead of Budget forecast, with tax $200m ahead of forecast. The sale of Cobb power station has helped that balance by another $82m.

Those numbers relate to the current fiscal year, which means this year's surplus is likely to be better than anticipated, but they also highlight that a surplus next year, and achieving net public debt of 20% in three years is very achievable.

If you recall the Budget showed net public debt has been more than halved from nearly 52% of GDP in 1991/92 to 22.5% and it is forecast to come down to 20.2% within three years without any business sales.

Surpluses - our fiscal buffer - are what gives the Government headroom to weather international storms without having to increase debt. And running surpluses and repaying debt are what allows us both to increase quality spending, and to cut taxes.

So in summary, the Budget's meaning is simple:

- it shows just how far we've come in the decade of the 90s, and
- · i shows that we can keep New Zealand moving in the right direction -
- to more growth, more jobs, more surpluses, lower debt, and lower taxes.