Finance Minister Michael Cullen became somewhat cantankerous while preaching fiscal conservatism in the politically testy aftermath of the 2006 Budget. After six years of strong economic growth, the Government’s books looked strong and hefty surpluses were encouraging clamour for tax cuts. Dr Cullen was resisting rising tide of criticism, determined to hold on to the worthy fiscal gains made under his management, and he railed at the National Party “for returning to its misguided election promise of borrowing to fund tax cuts”. Those tax cuts, he insisted, could be afforded only by borrowing and cutting services. In other words, there would be fewer teachers, fewer nurses, fewer police and rising interest bill for future generations.
Cullen took comfort from Colmar Brunton poll showing 75 percent of people preferred spending on health, tax relief for working families, roads, superannuation and interest-free student loans to tax cuts. “And that’s precisely what this Government is delivering,” he declaimed.
Taxpayers, meanwhile, were coughing up $90,000 or so for National’s postcard campaign (although this is trifling sum when stacked against the total tax take of $50 billion budgeted to be collected in 2006/07). The mail-out was highlighting the party’s pledge to deliver tax cuts through “wise borrowing” and by prioritising spending (another way of saying money no longer would be spent on programmes which consume money now). Cullen characterised the postcard promises as “the temptation to splurge”.
National’s John Key riposted by contending the Minister was under pressure, reflected in his accusing the media of dumbing down their coverage of the tax cuts issue, and blaming everybody else for “his failed Budget”.
Key could draw on poll to claim the high ground, too, One News poll which showed majority of those surveyed wanted tax cuts. He also could complain that some government spending was of dubious value. Whether there is enough “dubious” stuff to compensate for the tax cuts is in the realm of political debate.
Key also raised the matter of surplus measurements. He recalled the introduction of “the OBERAC” into the Government’s reporting systems, and how Cullen had regarded this as better measure of the health of the Government’s books than the operating surplus. Cullen subsequently had put it aside in favour of smaller number – the cash surplus – “when the OBERAC got so large it looked like tax cuts were affordable”.
Confused? The Budget Fiscal and Economic Update, thankfully, includes some handy explanations.
The operating balance is the balance of government revenue less expenses plus the net surpluses from State Owned Enterprises and Crown entities (which exclude dividends paid to the Crown). It shows whether the government sector has generated enough revenues to cover expenses in any given year. But it can be volatile, from year to year, because of events outside the Government’s direct control (changes in interest rates and revaluations, for example).
The Government has been running operating surpluses since the early 1990s. These are expected to peak at 5.4 percent of GDP this year, then to decline, but not to lower than two percent of GDP, over the forecast period through to 2009/10.
The OBERAC is the operating balance adjusted for revaluation movements and accounting policy changes. Therefore it is said to give more direct measure of the underlying stewardship of the Government. It excludes one-off gains or losses from asset sales, investment revaluations, and the impact of interest rate changes on unfunded liabilities (such as the Government Superannuation Fund).
Cullen’s 2001 Budget speech referred to the OBERAC as “the fiscal equivalent of the underlying rate of inflation”.
The Government wants to retain the NZS Fund investment returns in the fund. To ensure fiscal objectives are met, therefore, it has said it will be focusing on the OBERAC excluding NZS Fund returns, number which peaked at surplus equivalent to around 5.6 percent of GDP in 2005. That is now headed downwards.
The Treasury has set out key trends in the Economic and Fiscal Update. The OBERAC is forecast to decline in the short term. So, too, is the cash available for investing.
While operating surpluses are expected to continue through to 2009/10, they can’t be fully used by the Government to help finance its capital programme.
Result: cash shortfall (of around $7.4 billion over the next four years) to be met by borrowing. Not good time for fiscal relaxation.
If the Nats would cut taxes, they must spell out how the accounts under their stewardship would balance and what spending – or capital investment – would be cut after revenue inflows are reduced. We have seen Dr Cullen’s books. Let the Nats show us theirs.
Bob Edlin is regular contributor to Management.
