NEWS ON POLICY AND POLITICS
19 May, 2006

Watching Brief is a regular publication from Russell McVeagh on developments in public law and policy of interest to New Zealand business.

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In this special edition of Watching Brief we outline the main thrust of Budget 2006 and Budget announcements of major interest. (Full details can be found here.)

Michael Cullen delivered his seventh budget in the context of a larger-than-expected surplus, although Government figures project this to be the last surplus for the next few years. Cullen continued to emphasise that, due to the economic outlook and fiscal impulse, tax cuts in the current environment would require cuts in expenditure. He fended off comparisons with Australia, which announced a new round of cuts earlier in the month, claiming "we don't have an inferiority complex." This didn't stop National Party Leader Don Brash dubbing it the "Bondi Budget" because that's where he thinks many New Zealanders will end up as a result of it.

However, Treasury forecasts expect a slow-down to bottom out in the year to March 2007 and the economy to recover to March 2008. Also noteworthy is that Treasury revenue projections, which are the official Government figures, are markedly more pessimistic than those produced by the IRD ($1.4 billion different by 2007/08), mainly due to different predictions of corporate revenue take.

The Beehive bases Budget 2006 on three key themes:

The Government's emphasis this year is very much on improving New Zealand's infrastructure and thus transport funding is the cornerstone of Budget 2006. Announcements state the Government is committed to investing in transport infrastructure and that it recognises the growth benefits of moving towards building a world-class land transport system.

According to Cullen, his announcement of an extra $1.3 billion in funding over the next five years, taking the total spending on transport to $13.4 billion in that period, ushers in the biggest road-building programme New Zealand has ever seen.

Cullen emphasised that this new five year investment plan (different to the traditional single year allocations) provides certainty, both for the public and for the transport industry. This is in response to the recent Transit draft 10 year programme report announcing a significant shortfall in funding (recent figures total $862 million over the next five years), leading to major roading projects being postponed with lengthy delays. In his speech to the House, Cullen said this situation is unacceptable to the Government and that was why he was introducing this "certain five year programme".

After covering the planned $862 million shortfall the remaining $425 million of the total $1.3 billion is allocated to accelerate major projects including:

The $1.3 billion is to come from, firstly, the recent sale of Meridian's Australian Southern Hydro assets for $800 million, which is expected to cover most of the Transit shortfall. Secondly, Cullen announced that "the Government believes it is necessary to secure some cushion both to bring forward other key projects and to ensure the programme is not subject to any further uncertainties." As a result, the Government will be prepared to issue up to $1 billion in infrastructure bonds. Of that, $425 million makes up the balance of the $1.3 billion, thus leaving room for up to an additional $535 million investment if necessary.

When questioned on the roading strategy at Thursday morning's media and analysts' briefing, Cullen also specified recent increasing costs (specifically oil price hikes) as the driving force behind the Government's significant spending in this area.

Delivering an efficient land transport network for Auckland in particular is a stated key priority for the Government as Auckland accounts for one third of New Zealand's GDP.

A further announcement on significant roading plans for the Waikato region, including additional funding, will be announced today.

In addition to this major land transport funding, the Budget is also boosting rail infrastructure in the form of funding assistance for ONTRACK to upgrade the Auckland rail network ($600 million); complete renewal work on the national rail network ($46 million); purchase Wellington Railway Station ($20 million - although this is fiscally neutral since the station will be purchased from the Crown) and assist ONTRACK in meeting its obligations under the Agreement for Sale and Purchase of the Rail Network and Associated Assets.

In a press statement the Minister of Transport Annette King confirms:

[t]his is a significant departure from the past when funding was only guaranteed in one year blocks. Regions need to have confidence their issues are going to be addressed quickly. This major funding package shows that the Government is determined to achieve this.

Accompanying the funding package are new revised funding and planning processes which are being developed by the transport agencies to assist in reducing volatility in the industry. The Minister of Transport also confirmed that the advisory group established earlier this year to investigate ways of moderating cost increases in the roading sector is continuing its work.

A separate announcement will be made in the near future on key deliverables Transit expects to achieve with this boost in funding.

Cullen announced a significant and wide ranging review of regulatory frameworks focusing on issues in current regulatory frameworks that may be constraining business development and economic transformation. Areas for review include:

• implementation of regulation and interaction between regulatory frameworks;
• compliance and regulatory issues facing different sectors; and
• strengthening Government processes for designing regulation.

The review has been signalled for some time and may end up incorporating the review of Part 4 of the Commerce Act, which does not appear to have made much progress since it got underway. Details of the review are to be announced by the Commerce Minister on Monday.

Details of the telecommunications infrastructure plan have been well canvassed, having been leaked prior to Budget day. The plan is part of the Government's economic transformation theme, which aims to progress New Zealand towards an innovative knowledge-based economy.

The announcements include:

• unbundling the local loop;
• provision for naked DSL;
• removing the upstream limit on bitstream unbundling;
• increasing the powers of the Commerce Commission; and
• a commitment to proceed at least as far as accounting separation for Telecom (although it is expected that the Select Committee looking at the proposed legislation will also consider the merits of proceeding further on such matters as other forms of structural separation).

Cullen declared in his speech:

Many will argue these changes are overdue. Certainly, successive Governments have been very patient with Telecom. But national interest must prevail. We cannot afford to be a barely middle range performer in telecommunications as a result of allowing the incumbent to continue to play a long defensive game.

Energy received some attention in Budget 2006, with the Government focusing primarily on renewables. $11.7 million over four years has been allocated to energy research. This funding aims to contribute to New Zealand more effectively responding to pressures on energy supplies and security and will focus on:

• improving understanding of indigenous energy resources and opportunities, with a focus on renewable energy resources;
• developing new energy technologies and allowing New Zealand to adopt new overseas technology; and
• improving energy efficiency in homes and businesses.

In addition, $6 million over four years has been added to the geotechnical data acquisition programme across prospective petroleum basins to encourage more petroleum exploration by oil companies. Associate Energy Minister Hon Harry Duynhoven expects the extra funding to enable more geotechnical data to be acquired and more survey work to be carried out.

Cullen emphasised the use of biofuels as the way forward for energy production in New Zealand, and drew a link between the Government's energy and climate change policies.

Defence spending largely continues implementation of the current 10 year spending plan. However, the Government confirmed its commitment to upgrading the ageing Iroquois and Sioux fleets by providing for a part payment on the purchase of new helicopters.

The Office of Treaty Settlements' negotiating capacity is expected to be increased by 25% with additional funding of $5.2 million over four years. This aims to help the Government meet its target of having all historical Treaty claims lodged by 2008 and settled by 2020.

Most health spending is a result of previous commitments by the Government. A $76 million campaign against obesity will focus on initiatives with schools, primary health care, social agencies and food industry bodies but details of the plans are not to be announced until later in the year. There is also a boost for child health and a significant spending increase for both home based and residential care for older New Zealanders.

The Commerce Commission's litigation fund will increase by $7.8 million to $10.8 million over the next two years, while the Securities Commission's litigation fund will rise by $5.8 million to $8.1 million over the next four years.

Cullen has stood by 1 April 2008 as the date for implementing any changes arising out of the Peter Dunne-led review of business taxation, but when questioned he was doubtful the target date of 1 June 2006 for release of the initial discussion document is realistic.

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