Public sector on notice for budget

The public sector will need to deal with a budget increase which will include only $1.1 billion of new money compared to more than double that in previous years, Finance Minister Bill English says.

Mr English said there was new money earmarked in the May budget for education and health, but most departments needed to be prepared to deal with less money compared to the average $2.5b to $3b of new money dished out over the past few years under the previous government.

"We've given the public service leadership 12 months lead time to think about how they are going to deal with a much smaller increase, and have also signalled to them...they won't be getting new money for probably three to five years in a lot of cases," he told Radio New Zealand this morning.

He said the public service had been given time to adapt to a "different world than they've been in for the last 10 years".

In most cases public services would need to drop activities that were not effective and work out how to move money from the back office to the front line.

In terms of infrastructure spending, improving roading networks, developing fast broadband and upgrading the electricity grid remained the main goals, and would help boost jobs and the economy.

"We don't plan to pull back on that. Where we are focusing is on the back office expenditure, because that's where over the past three or four years expenditure has grown pretty strongly."

Mr English said some advice from economists, Treasury and the Reserve Bank said the Government could pull back even harder on spending to help ensure interest rates rose less and later, but the Government needed to strike a balance.

He said the new tax package to be announced in the budget would be generally fiscally neutral, which would not add to interest rate problems or slow down the growth of the economy. Incentives presented would encourage people to save rather than spend.