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Key says Budget 2014 will not be pre-election 'lolly scramble'; new spending allowance will stay at NZ$1 bln; focus on using surpluses after 2014/15 to repay debt

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Key says Budget 2014 will not be pre-election 'lolly scramble'; new spending allowance will stay at NZ$1 bln; focus on using surpluses after 2014/15 to repay debt

By Bernard Hickey

Prime Minister John Key has pledged not to deliver a pre-election "lolly scramble" in the May 15 Budget, saying the Government plans to stick with its previous commitment for new discretionary spending of NZ$1 billion and use surpluses after 2014/15 to repay debt and reduce the upward pressure on interest rates.

Key confirmed that the operating balance in Budget 2014 for the 2014/15 year would be a surplus "albeit a small one."

"Once that has been achieved, we can start getting our debt down," Key said in a midday speech to the North Harbour Club at the North Harbour Stadium, adding the budget would show the Government was on track to get net debt below 20% of GDP by 2020.

"The worst times are now behind us and the risks of another global crisis have lessened considerably. So the Government's focus has moved from managing our way through a recession, with persistent budget deficits, to managing a growing economy," he said.

"Initially, growth in the economy has been driven by low interest rates, high prices for our exports, a catch-up in housing supply and the rebuilding of Christchurch. But this momentum has now turned into a much broader recovery where consumer and business confidence has lifted, employment is rising and wages on average are increasing faster than the cost of living," he said.

"Our focus is on sustaining economic growth over the medium term, so the economy doesn't just burn brightly for a couple of years and then run out of oxygen."

Key said the Budget would forecast continued employment growth and further falls in the unemployment rate. Wages would be forecast to rise faster than inflation and economic growth would continue.

"So we are setting out to manage the growing economy with a five- to 10-year view in mind," he said, adding the Government wanted to use the reasonable growth to "deepen investment, upgrade skills, intensify and diversify our export base and become more competitive."

He said he wasnted to focus on two aspects.

"The first is about maintaining our fiscal discipline so we don't put upward pressure on interest rates and the exchange rate over the next few years. And the second is about international connectedness and exports," he said.

The goverment had averaged new operating spending of NZ$250 million a year in its first five budgets, less than a 10th of the new spending under the Labour Government of 1999 to 2008.

"In 2008/09, government spending came to 34.5 per cent of GDP. In the coming year it's forecast to be 30.6 per cent before going under 30 per cent and staying there. That is hugely important when the economy is on an upswing because - as the Reserve Bank regularly points out - on-going spending restraint from the Government helps to dampen the interest rate cycle," Key said.

"The Reserve Bank has already begun to raise interest rates from the historically low levels they've been at, towards more neutral levels that aren't going to over-stimulate the economy. But keeping government spending under control means that, over the course of the cycle, interest rates will be lower than they otherwise would have to be, and for longer," he said.

"In turn, that helps to keep the exchange rate lower than it would be, which is important for the overall competitiveness of the economy."

"So there is not going to be a lolly scramble in this year's Budget. And we also won't be doing that in the election campaign later this year. In this year's Budget we will be sticking to our new spending allowance of $1 billion," he said.

"In future budgets, we will be posting consistent and larger surpluses. Those surpluses will allow us to begin reducing debt as a proportion of GDP. In difficult times, governments run deficits and built up debt, to support the economy and jobs. In good times, they run surpluses and pay down that debt."

Key said there may also be an opportunity in the future for a very modest increase in the new spending allowance, "as long as that doesn't put pressure on interest rates in any material way."

Export moves

Key then pointed to the Government's revamp of NZTE in recent years and he announced an increase in its presence in CHina, South America and the Middle East.

"Budget 2014 will contain new funding of $69 million operating over the next four years to enable these changes to happen, with $14 million funded from reprioritisation. As a result of this new funding, NZTE will add seven new positions in greater China. This is on top of the 60 NZTE staff already working there," Key said.

Earlier this month Key announced after a meeting with China's President Xi Jingping that MFAT would establish seven new positions and also employ a Public Affairs manager and advisor in Beijing. He said then the Ministry of Primary Industries would add nine new jobs in China.

NZTE would also boost its presence in South America with three new positions, one each in Brazil, Chile and Colombia. There would also be two new positions in the Middle East - in Riyadh and Abu Dhabi.

Key also announced the appointment of a dedicated ASEAN ambassador.

He said the new Budget funding would allow NZTE to work with more companies than the 500 it already deals with.

"In the last year or so, NZTE has found that its resources have been stretched by demand from an increasing number of firms seeking to break into or expand international markets. Therefore, the Budget funding increase will enable NZTE to intensively focus on more companies - 700 in all," he said.

The new funding would also provide more money for NZTE's high impact programmes in sectors such as health, wine, agribusiness, ICT, food and beverage, marine and aviation.

(Updated with more detail on extra NZTE spending)

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4 Comments

Reduce the debt.  Excellent.

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Reduce they debit that they spent years racking up, yea Excellent something...............not sure it's excellent fiscal management!

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Seems sensible to me. Use debt to get the country through tough times (recession), and then pay it back in times of prosperity. Seems like pretty prudent financial management to me.

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With a GFC and earthquake of the size of both, it would have been inappropriate for it not to have gone up in the past 5yrs downlow, and now they're planning to reduce it - its that strange ?  or is it that we've finally got a Govt that will not dish out the lolly just before an election even stranger ?  What would you prefer ?

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