Budget projections test Cabinet commitment to Rogernomics

Press, 19 December 1988, Page 8

Budget projections test Cabinet commitment to Rogernomics

By

PATTRICK SMELLIE

The Cabinet will meet today for an extended session on economic policy, but without Mr Roger Douglas as Minister of Finance, for the first time since the 1984 election. It will be the first chance for the new Minister of Finance, Mr Caygill, to test his colleagues’ resolve for a continuation of Rogernomics. Scheduled originally for two days last week, the meeting is to examine the early estimates of next year’s Government spending and tax receipts, and the possible size of the deficit in election year. What is certain is that this meeting, and the vote on the Prime Minister, Mr Lange’s, leadership on Wednesday are crucial. The Government will be

doing all it can this week to try to patch the gaping holes in its credibility before the Christmas break. This means there is almost no likelihood of Mr Lange being ousted in the caucus leadership vote, particularly since actions by Mr Douglas at the end of last week appear to have provoked opposition to his campaign. What is also clear is that discussion of the Budget projections will immediately bring into play many of the points of friction which caused Mr Lange and Mr Douglas to fall out.

From Cabinet papers shown to journalists by Mr Douglas last week, it is now known that the Cabinet has already agreed to consider new tax increases for next year.

The easiest of these would be a 2.5 per cent increase in the rate of GST, which would net the Government about $6OO million. But it has also been revealed that the Prime Minister proposed a five cents in the dollar increase in the top rate of personal tax earlier this year.

That kind of pressure may be applied again if the Cabinet cannot find spending cuts of sufficient size to reduce the deficit next year. Mr Caygill made clear over the week-end that, while he supports the thrust of Mr Douglas’s policies, he is much less willing to go after reductions in social welfare spending — seen as the last area largely un-

touched by Mr Douglas. Mr Caygill said there was no scope for major reductions in education or health spending, and last week defended levels of social welfare benefits, which reflected the economic downturn.

To try to reduce the possibility of faulty Treasury calculations of the deficit, the Prime Minister’s Department is understood to be gathering alternative forecasts, mainly from those published by the private sector.

These range from a deficit of $2.8 billion — twice the size of this year’s forecast deficit — to around the same level as this year’s, relative to the size of the whole economy.

Adding pressure to the

discussions will be the call from a large group of academic and sector group economists for lower exchange and interest rates through looser monetary policy.

The financial markets, in particular, will be watching the Cabinet meeting for solid signs of commitment to a fiscal policy which would allow interest rates to start falling again.

For that reason, the Government may well announce the sale of a major asset such as the Bank of New Zealand, Air New Zealand, or PostBank before Christmas, but after the vote confirming Mr Lange’s leadership has been taken.