A budget is about the state of the government's books. It should also be the place where the government draws together its overall economic strategy.

The government has claimed the mantle of prudent fiscal management based on balancing the books with the aid of strong economic growth.

But it has been less prudent in controlling the level of government spending and its quality.

In 2000, it decided to raise central government spending from the level of 30% of GDP, as targeted by the previous government, to 35%. This plan to appropriate a further twentieth of national income to the public sector is perhaps its single most important economic decision.

Big government, and the taxation associated with it, harms growth. No competent economist denies this. Finance minister Michael Cullen sometimes agrees. He told a recent Grey Power audience that significant increases in taxes would slow the economy.

No OECD country has achieved the government's goal of lifting the annual economic growth rate to 4% per capita on a sustained basis with total government spending (central plus local) at New Zealand 's level.

Moreover, much of the government's spending is wasteful. The OECD said last year that 95% of it is not properly evaluated.

Lowering the government spending share of the economy does not mean 'slashing' public services. Ireland has reduced its spending ratio from over 50% of GDP to around 30%, and the faster economic growth rate that it helped engender has allowed big increases in health and education spending.

The budget may include tax measures affecting company superannuation schemes and small and medium-sized enterprises. These are helpful but minor. The government has continued to reject the far more important McLeod review's recommendations for a lower and flatter tax scale.

Analysis of the budget should focus on the big picture. Supporting business development does not consist of throwing money at a yacht race or a few more business incubators.

This is trivial pursuit. Lower spending and taxation are better for business at large.

Even if such handouts made sense, they could not possibly make a perceptible difference to the growth rate of a $120 billion economy.

A government committed to growth must focus on serious growth-raising measures. The previous government's partial deregulation of ACC was estimated to produce cost savings of around $300 million. Analysis suggests there would be around $1 billion of annual benefits from fixing Auckland 's transport problems. These are the sort of things that matter for growth.

Business leaders have been saying that escalating government regulation and the failure to address infrastructure crises in electricity and roading are choking off investment and growth.

Evidence for this view is mounting. In the 10 years to 2002 the economy averaged 3.6 percent annual growth. The budget will show that the outlook for the next decade is weaker.

For more information, contact:

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz

David Young
Communications Manager
Ph: 04 499 0790
Email: dyoung@nzbr.org.nz

Web: www.nzbr.org.nz