ECONOMICS Cullenary Skills

ACT leader Rodney Hide, spluttering his outrage at the Government’s financial reporting in mid-March, claimed Finance Minister Michael Cullen was trying to hide Labour’s unprecedented operating surpluses in an attempt to silence mounting calls for tax cuts.
He also accused Dr Cullen of cooking the books, and he compared the change in presentation of the Crown accounts to what the previous Labour Government did to fudge its deficit in the 1990 Budget.
“ACT will fight this sham all the way to the May 19 budget,” Hide vowed. “Whatever the smoke and mirrors, the reality is we have huge surplus that belongs to hard-working New Zealanders, not Dr Cullen. It’s time Labour boosted working Kiwis’ incomes and not deny them through deception.”
One thing was for sure: the Government was running whopping operating surpluses – if you did not take stuff like capital expenditure into account – and the clamour for tax cuts was growing. Hide was reasoning that Cullen did not wish to offer across-the-board tax cuts, and therefore had devised cunning plan so the surplus no longer existed.
He foresaw Cullen proclaiming in the May budget that he had no money. “In this year’s budget, Dr Cullen will showcase new measure of government sector cash flow, designed to get us thinking that the accounts are so squeezed there’s no room for even the tiniest tax cut,” he said.
But the numbers Cullen supposedly has cooked or hidden have been available for public tasting for the past decade or so. generous serving of tables in the government’s financial statements has been much the same since the passage of the 1989 Public Finance Act. The Treasury produces detailed monthly set of accounts, except for the first two months of each financial year, and for fiscal junkies there’s feast of figures.
True, few years passed after the passage of the legislation while Treasury bookkeepers changed their systems to incorporate the new statutory requirements into the public accounts. But the only difference since then is that Cullen recently has been paying more attention to bits of the accounts previously overlooked by politicians and commentators and there has been re-ordering of the tables.
Among the consequences of the 1989 legislation, Treasury revamped the public accounting system to introduce the concept of an operating balance and accrual accounting. The books thus recorded changes to the debt resulting from exchange rate movements and losses and gains on asset sales.
At the same time, for those who cared to dip deeper into the data, the accounts were presented on cash basis. No one has taken much notice of these figures until comparatively recently.
The reason is that we tend to follow the leader when discussing fiscal policy and progress reports as recorded in the public accounts. Ministers of finance for years focused on the operating balance, when they commented on the figures, and news media and commentators would diligently focus on the operating balance, too, even though the accrual items could result in huge fluctuations from year to year.
Scant attention was paid to the cash account, the Government’s investments and its borrowing requirement.
A comparatively recent change in accounting procedures saw the Government introduce line-by-line consolidation. The incomes and expenditures of the state-owned enterprises were brought straight into the accounting system, along with so-called “core government” figures. The operating balance was altered by this innovation – it now includes the expenditure and income directly from the SOEs. This means the latest balance can’t be compared directly with balances before the change.
A top priority for Cullen is reducing the Government’s debt (although it’s much smaller as percentage of GDP than the government debt in other OECD countries). Therefore he must know the borrowing requirement, cash account item, and he has been drawing attention to this account whenever he comments on the financial statements.
He also urges more attention be paid to the capital expenditures, or we will get distorted view of the state of the Government’s finances. He is right. To assess the impact of the Government’s finances on the economy, capital spending must be taken into account – without it, the roads won’t be maintained properly, schools and hospitals won’t be built, there will be electricity shortages and so on. Moreover, the capital account is where superannuation fund flows (around $2 billion year) are recorded.
The fiscal performance of an entity as big as the Government of New Zealand can’t be savoured by tasting just one of many dishes in the financial statements. The minister isn’t pretending we should do that. He knows there’s an array of measures and all of them should be tasted if we are to fully digest his Cullenary skills.

Bob Edlin is regular contributor to Management.

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