John Armstrong is the Herald's chief political commentator

John Armstrong: Public oblivious to clever accounting

Quake rebuild money budgeted from asset sales fund

Key and English know that the fine detail of how Budget accounting works is not something which voters get overly fussed by. Photo / NZ Herald
Key and English know that the fine detail of how Budget accounting works is not something which voters get overly fussed by. Photo / NZ Herald

You do not have to burrow too deeply into the annual Government accounts to uncover the untold story of last week's Budget.

It is a story which raises questions about National's exploitation for not altogether noble reasons of the billions of dollars scheduled to flow from its partial privatisation programme into a Government-controlled infrastructure development fund.

It is a story which National - to its credit - has not tried to hide. It is also a story which has largely passed the public by.

The place to start is page 33 of the Budget document updating economic and fiscal forecasts. It is here that the Treasury has produced a table outlining the latest projected costs faced by the Crown for Christchurch's recovery from the 2010 and 2011 earthquakes. That bill has ballooned by a further $2 billion to an estimated total of more than $15 billion. Of some worry is the fact that the previous $13 billion estimate was barely six months old.

The Treasury has also revised its estimate of the overall level of investment, public and private, that will be needed for rebuilding Christchurch from the $30 billion in last December's Budget update to a new figure of $40 billion.

The department is the first to admit that estimating the actual amount of further expenditure required is "inherently difficult and subject to much uncertainty".

That is of no comfort to National which will likely have to find even more cash to finance the recovery plan than Treasury flagged last week.

Some of the cost will be met by operational spending which is largely funded by tax revenue. However, a fair chunk of the bill will be paid by cash set aside for funding capital works - cash which will be derived from the proceeds of National's partial asset sales.

With the sale of shares in Mighty River Power having raised around $1.7 billion, the Government has now placed $2.1 billion into the so-called Future Investment Fund. Close to $90 million of this has been allocated to health sector projects, while schools have so far got around $84 million of their promised $1 billion. Irrigation projects have soaked up a further $80 million.

However, more than $900 million of the $2.1 billion cash stash has been allocated to the rebuilding of Christchurch. That includes $426 million for the redevelopment of Christchurch and Burwood Hospitals.

It may come as something of a surprise that this money is being drawn - some might say raided - from the proceeds of asset sales to fund the replacement of essential infrastructure in Christchurch.

It begs the question of whether National is conveniently dipping into the fund simply to avoid paying the earthquake bill by (horror of horrors) borrowing money or by (even greater horror of horrors) raising taxes or further slicing of Government spending.

Given National's tight rein on operational spending is already having a contractionary impact on the economy, further spending cuts or tax rises are not really an option.

National is only slightly less averse to borrowing, if only because the twin combination of the earthquake-related damage and softening the impact of the global financial crisis on New Zealanders has already forced it to go into the red.

But then National can delve into the Future Investment Fund with relative alacrity because someone in National's senior ranks had the wherewithal to write into the fine print of the policy covering the fund's establishment that possible projects could include "infrastructure recovery from natural disasters".

Whomever inserted that provision deserves National's eternal thanks and everlasting gratitude.

For that was not the impression John Key gave of how the fund would operate when he unveiled it at an October rally in Auckland which kicked off National's 2011 election campaign.

Key portrayed the pot of money as an instrument with which to "modernise" existing assets and thus transform the economy - rather than merely using it to plug gaps in the the existing infrastructure. It was all wrapped together with National's slogan of "Building a Better Future". The first priority would be education, with $1 billion being set aside to accelerate National's school building programme alongside the roll-out of ultra-fast broadband. There was no mention of Christchurch or earthquakes.

Key was instead promoting the fund as an answer to trenchant criticism during preceding months of National's partial privatisation agenda.

National was never going to succeed in stifling that opposition. The intention was to dilute and disperse it by stipulating that all the cash raised from the phased sell-offs of minority shareholdings in a clutch of state-owned enterprises would be devoted to building new schools, hospitals and other such worthy, but capital-hungry, projects

National would thus be able to parry criticism that the sell-offs were purely ideologically driven and instead argue they were motivated by a desire to benefit the common good. National might be selling a portion of the family silver. But at least it was replacing those items with some silver-plated cutlery.

That still left National battling Opposition party charges that its intention to partially privatise the remaining state-owned electricity generators would ultimately result in higher power prices, foreign ownership and forgone revenue from the loss of dividend streams.

However, National ignored this critique, instead asking its political foes how they intended to fund capital spending without further borrowing - something which focus group research had shown to be anathema to votes.

National's opponents might well now ask whether the fund is being used in quite the fashion that Key said it would be. Or whether it has become an exercise in shonky accounting which effectively has the ulterior motive of helping National to achieve its Holy Grail of Budget surplus within the next two years.

A lot is riding on all this - namely credibility in economic management which National intends making the central feature of next year's election campaign.

The fiscally virtuous thing for National to have done would have been to divert money from asset sales straight into debt reduction. If National wanted to continue to spend money on the capital side of the ledger, it should either raise taxes, cut spending or borrow. The Future Investment Fund is helping National to avoid all three unwelcome outcomes.

It is tempting to accuse National of pulling the wool over voters' eyes. But that would not be correct. Key and Bill English have been utterly transparent about what they are doing. They would have few qualms about what they doing. They might well argue they are doing the responsible thing. But then they also know the fine detail of how Budget accounting works is not something which voters get overly fussed by.

- NZ Herald

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John Armstrong is the Herald's chief political commentator

Herald political correspondent John Armstrong has been covering politics at a national level for nearly 30 years. Based in the Press Gallery at Parliament in Wellington, John has worked for the Herald since 1987. John was named Best Columnist at the 2013 Canon Media Awards and was a previous winner of Qantas media awards as best political columnist. Prior to joining the Herald, John worked at Parliament for the New Zealand Press Association. A graduate of Canterbury University's journalism school, John began his career in journalism in 1981 on the Christchurch Star. John has a Masters of Arts degree in political science from Canterbury.

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