Budget blowout makes funding super difficult: English

This week’s Budget will again highlight the plans of Finance Minister Michael Cullen to partially prefund superannuation – and it will also highlight some of our major reservations with it.

The lead up to the Budget has been dominated by Dr Cullen’s admission that he would not be able to keep to his $5.9 billion spending cap.

This is despite many comments over the past 12 months recommitting to the cap and tying his credibility to it. From the 19 December 2000 Budget Policy Statement: "To achieve all our objectives, we will need to maintain spending within the $5.9 billion three-year spending limit that was agreed in Budget 2000."

The breach of the cap has set a dangerous precedent. The Government is saying it’s a small breach – so why didn’t they just find the savings to cover it and keep their fiscal credibility intact?

In fact it is a large proportion of the $1200m they will spend in the next two years. More importantly the Government has demonstrated that as soon as the going gets tough, fiscal discipline and targets will get thrown out the window.

Remember Dr Cullen is expecting political parties to sign up to superannuation prefunding plan that will impose huge fiscal constraints on future Governments.

Dr Cullen’s plan requires future Governments to put aside an average $2 billion a year for the next 25 years. It is designed to guarantee the current level of superannuation for the next 100 years, and at its peak subsidises the pension by a modest 14%.

Dr Cullen has shown in Year One that Labour has trouble controlling its spending. Higher than expected tax revenue will keep him on track this year, but that won’t last 25 years.

The pressure to spend more can only grow from here. Inside the Left there is growing impatience with Government’s inability to do more for people on low or middle incomes. Funding pressures in health and education are intensifying as hospitals take cuts in their budgets and universities threaten to increase student fees.

Current forecasts from the Treasury show structural surpluses are expected to get bigger and bigger every year. But those surpluses are predicated on two things – that the Government will be able to keep to its spending plan, and that economic growth and government revenues will pan out as expected.

We expect the surpluses will come under pressure from both sides – spending pressures mean Dr Cullen will blow his $6.1 billion spending cap next year. At the moment the only person who thinks they’ll stick to the new cap is Dr Cullen.

At the same time, we believe forecast rates of nominal GDP growth are optimistic, meaning revenues aren’t likely to be as robust as currently forecast.

Such pressures will come to a head quite quickly. In the DEFU, the Treasury forecast average nominal GDP growth of 5% per annum, helped along by high nominal growth in 2000, the bulk of which is actually due to inflation. To highlight the sensitivities, if you drop this back to 4%, which is what National averaged in the 1990’s, this would have a cumulative negative effect of $1920 million on the 2004 operating balance.

This would result in a $1700 million surplus in the year Dr Cullen has to find $1800 million to feed his super fund. And that makes no allowance for any further expenditure slippage!

Our concerns are being borne out by at least one private sector commentator who is expecting surpluses of only $1400 million in 2004, leaving a $400 million shortfall if correct.

So the Super Fund is yet to get off the ground and the doubts about its robustness and credibility are already starting to intensify. These doubts are just beginning to surface in the Labour Party and the Council of Trade Unions as they realise it’s not a free lunch. They have to pay a political price – defending health cuts and rising student fees.

The funds being put aside for the Super Fund have alternative uses – debt repayment (in the short term), increased spending, or tax cuts. It’s only now that the pressure is on that those alternatives are being highlighted.

The pressure will be strong in Dr Cullen’s own party and strongest amongst his coalition partners – especially when they go into negotiations around the election year Budget facing an electorate grumpy over failed expectations, a business sector that’s still wondering whether the charm offensive is anything more than spin, and health and education sectors under severe financial strain.