Economics : Sorting the Accounts

A handy set of statistics – the Crown Accounts Analysis – was last published in November 2005. It has been replaced by more sophisticated financial tables which are fed into the national accounts. For the purposes of this column, however, the CAA more usefully helps explain fiscal policy issues that are about to become the stuff of election campaigning. Most important, it breaks down the Government’s financial statements to show current account and capital account. If the difference between those two accounts is obscured, politicians can easily mislead us when they argue the toss about tax cuts, increased investment in economic infrastructure and what-have-you.
The two accounts have already been obscured – perhaps deliberately – as the electioneering heats up. Public debt and the country’s overseas debt have similarly been confused. National leader John Key told the National Party conference the party would spend $500 million year more on infrastructure than planned by Labour, if it becomes the government after the election. It would borrow to do so, and would introduce infrastructure bonds and make greater use of public-private partnerships. National’s infrastructure borrowing would lift “New Zealand’s debt-to-GDP target” (according to one report of these plans) by two percentage points to 22 percent. Wrong: it would increase the government’s debt-to-GDP target, not the country’s (which is whopper).
Finance Minister Michael Cullen insisted Key would borrow for tax cuts if elected, “and he would pass the bill to our children. That’s just crazy.” Perhaps. But let’s give Key the benefit of the doubt and examine his announcement with the benefit of the CAA data.
The Government recorded surplus of $8.099 billion in its current account during the June 2005 financial year, because current income ($51.424 billion) exceeded current expenditure ($43.325 billion).
The capital account showed gross fixed capital formation was $1.062 billion, including major capital expenditure on corrections facilities. Because revenue exceeded both current and capital expenditure, the Crown recorded rise in “net lending” (and didn’t have to borrow). If the Government had spent significantly more on capital developments, “net lending” could have become “net borrowing”. The Government might have cut taxes, too, reducing its current account “saving” without necessarily turning it into deficit.
In other words, government decision to borrow for capital investment purposes should not be confused with its tax-raising policies. Tax revenue is counted on the current account side of the books; capital investment shows up on the capital side. If tax cuts were to be financed from borrowing, the current account would run into deficit. That would be bad budget policy, raising awkward questions about future generations paying for this year’s consumption.
Further criticisms of Key’s intentions tend to be given credence among taxpayers because of the fanaticism with which fiscal policy has aimed to reduce the public debt over the past 20 years. Prime Minister Helen Clark dismissed National’s plans as “horribly Muldoonist” and said borrowing more at time of international market uncertainty is “reckless and gambling with the future”.
National’s Bill English countered this by recalling one of Labour’s first acts as government: it increased the target debt-to-GDP ratio from 25 percent to 30 percent of GDP. Moreover, he brandished raft of Clark’s statements when she was in opposition; she had criticised the Bolger government’s assault on the public debt (when its ratio to GDP was much higher than now) and advocated more borrowing. Example: in June 1994, Clark complained the Bolger government “is putting an undue emphasis on debt repayment at the expense of our failing services and infrastructure in New Zealand”. So it was fine for her to talk about borrowing more when the public debt was above 50 percent of GDP, but it’s not so fine for National to consider small increase in borrowing to relieve some of the pressure on the country’s infrastructure.
Whether borrowing or debt is okay depends on what the borrowed money is used for. Improving our economic infrastructure is no bad thing. Wellington economist Petrus Simons points out that economic infrastructure, once built, can serve its purpose for long time – the Romans built bridges and aqueducts that are still being used 2000 years later. Why should the present generation pay the full cost of facilities offering benefits far into the future? By borrowing, the costs can be paid back over longer period while the improved infrastructure lifts economic performance, increasing the tax-take to help with repayments.
But not all capital investment should be hailed as beneficial. Let’s not forget the folly of the Muldoon government’s ‘Think Big’ energy projects and the enormous public debt built up in their name.

Bob Edlin is leading economic commentator and NZ Management’s regular economics columnist.

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