Brian Fallow
Between the lines
Electioneering politicians' fiscal promises - whether tax cuts, tax breaks or spending increases - have to be taken with more than a pinch of salt.
Both spending increases and tax cuts depend on forecast economic growth delivering the forecast increases in tax revenues.
The alternative of resorting to
fiscal deficits and borrowing, should revenues fall short, is not available to New Zealand governments.
That option has, in effect, been foreclosed by the hideous state of our external accounts, with chronic current account deficits adding each year to what is now a towering stack of overseas claims (both debt and equity) on the New Zealand economy.
The credit rating agency Moody's Investor Services, in its latest report on New Zealand, cites several factors which mitigate New Zealand's vulnerability to a current account-induced currency crisis: our floating exchange rate, widespread hedging against exchange rate changes, the fact that much of our overseas debt is denominated in New Zealand dollars, and that much of the short-term foreign debt is owed by New Zealand banks to their foreign parents.
But it follows with a warning: "The Government's adherence to fiscal responsibility is crucial to maintaining confidence and sustaining the inflow of foreign investment on which the country relies for its investment needs."
In context, for "fiscal responsibility" we can read "running surpluses and paying down public debt".
Given the external position, no responsible Treasurer would flirt with returning the budgetary bottom line to the red. The risk of a ferocious market reaction, tanking the dollar and driving up interest rates, is too high.
Which brings us back to the need for the economy to deliver the growth and the resulting tax revenue increases to fund fiscal promises, whether of the tax cut or spending increase variety.
The problem is that about the only thing that can reliably be said about the forecasts is that they will be wrong.
A study last year of the Treasury's forecasting record found that it is about as good as the Reserve Bank's and the major private sector outfits, which means that its GDP forecasts are out on average by 1.3 per cent one year ahead and 1.6 per cent two years ahead.
That represents a margin of error of $450 million or $550 million around the forecast budget surpluses - more than a 3c cut in the company tax rate or top personal rate would cost.
The alternative scenarios considered in the Treasury's pre-election economic and fiscal update also illustrate the point. On the scenario of significantly weaker world growth than the central forecast expects, the $800 million fiscal surplus forecast for 2000/01 would be wiped out and the following year's surplus cut from $1.7 billion to $300 million.
But the hustings are just the place for counting chickens before they hatch.
