Michael Cullen: Surplus needs to address our three biggest priorities

Yankees legend Yogi Berra once advised 'you better cut the pizza in four pieces because I'm not hungry enough to eat six'. Photo / 123rf

Opinion

COMMENT

Listening to and watching the current debate over what to do with last year's surplus inevitably reminds of that famous saying from New York Yankees baseball star Yogi Berra: "It's like déjà vu all over again."

A Labour Finance Minister announces a larger-than-expected fiscal surplus. Excited media commentators start talking about him sitting on a mountain of cash and begin speculating about tax cuts.

A leader of the National Party launches into well-worn lines about "hardworking New Zealanders" deserving a tax cut (implying that there are some non-hardworking ones who don't).

Meanwhile, the facts of what the nature of the surplus is and what it means for future fiscal options is lost in a welter of ignorance and self-interest. Nor is much attention paid to what are the most significant challenges facing New Zealand.

Let's begin with understanding what the fiscal surplus is and is not. Most importantly, it is not a pile of cash locked away in Grant Roberson's beehive desk waiting to be spent.

The surplus – the operating balance exclusive of gains and losses (OBEGAL) to give it its full title – is an accounting concept based on the difference between revenue recognised and expenditure incurred in the year under discussion. Capital investments are not included in the expenditure and revenue is not the same as the actual cash collected in that year.

But the calculation does include some important elements which bear no relationship to any cash the government may or may not have to spend. In the 2018-19 fiscal year, the most significant of these was an upward revaluation of $2.6 billion in the Government's rail assets due to reversing the National Government's 2012 decision to designate Kiwirail as a profit-making entity. Instead it has reverted to being effectively a public-good entity.

Thus, more than a third of the surplus disappears immediately into the mists of accounting treatments and in no way consists of available cash to spend.

There are more such examples in this, as in any other, OBEGAL. None of this is financial trickery. It is the result of the Government's financial reporting being based on generally agreed accounting practice as required by the Public Finance Act.

Moreover, provision for capital investments is not part of the OBEGAL. These totalled $6.7b in 2018-19. So, while debt fell as a proportion of GDP, in cash terms it actually rose by around $200 million.

This means Robertson's cash drawer is actually empty. What he does have is a strong fiscal position. How strong that position will continue to be is a much more open question than most public debate about tax cuts and/or spending increases wants to recognise.

Finance Minister Grant Robertson has a surplus not been seen since at least 2008, just before New Zealand felt the full effect of the global financial crisis. Photo / Mark Mitchell

Major spending increases have already been committed to by the Government and these are ongoing (think of the public-sector wage increases for the likes of teachers, doctors, nurses and care workers).

The economy is also facing strong international head winds (not least from Cyclone Trump) which may affect the trend in future surpluses.

Treasury has a fairly consistent record of underestimating the growth in the OBEGAL on the economic upswing and, equally, underestimating the growth in the deficit on the downswing.

Some caution is therefore appropriate. We need to recognise that Yogi Berra may have been right when he said: "the future ain't what it used to be".

Fiscal conservatism over an extended period paid off for New Zealand – and Australia – during the Global Financial Crisis. Low initial debt levels enabled both countries to allow debt levels to rise and so weather that storm with minimal damage. Compare that with many European countries whose earlier fiscal profligacy led them into savage fiscal austerity programmes from which some are yet to recover properly.

We also need to recognise the current very low interest rate environment means that buried not at all deeply within the recent release of the fiscal out turn for 2018-19 are some very substantial consequential increases in future government liabilities, some $14.1b increase in that regard in ACC and GSF.

This is not to say that the current government does not have some additional fiscal headroom over and above what it is already committed to, but that headroom is far less than the OBEGAL headline figure would suggest. Not all capital investment needs to be paid for out of current income, for example.

The real question is what should be the priorities. What is probably affordable by way of tax cuts amounts to very little in the pocket for most taxpayers (though more for what I suspect Simon Bridges really means by "hard-working New Zealanders"). And while that may help a little in boosting economic growth in the short term, the evidence from our own past suggest that effect is very small. And, significantly, nobody's prepared to argue for reversing those tax cuts when the economy starts overheating.

There many possible priorities. Surely the three most important facing New Zealand are addressing climate change, poverty and poor infrastructure (of many sorts).

Sir Michael Cullen. File photo / Doug Sherring

Dealing with these will require increases in spending. The last, infrastructure, opens up the possibility of a long-term large investment plan which needs to be consistent with and reinforce our climate-change goals.

And if Reserve Bank Governor Adrian Orr recognises that conventional monetary policy instruments no longer have the capacity to stimulate the economy, then a partnership with government to help fund such a programme would be all the more welcome.

One thing is certain: If Steven Joyce is still digging in that imaginary $11.7b fiscal hole he needs to come up and smell the roses.

• Sir Michael John Cullen is a former Deputy Prime Minister and Minister of Finance.