Fiscal holy guacamole, Finance Minister! Just how bad are the Crown accounts?
You’ll notice I’ve gone with an innocent 1960s Batman pun to start my column about the nation’s so-called “fiscal hole”.
I wanted to lift the tone of the discussion after the puerile schoolyard sniggering that we had in Parliament last week.
It is true that “fiscal hole” can sound a bit rude in the wrong context.
But it’s sad it needed a bit of misconstrued banter between Nicola Willis and Grant Robertson to get the Government’s deteriorating finances into the public eye.
For the record, Willis - responding to speculation from New Zealand First leader Winston Peters - tried to ask the Minister of Finance about the size of an alleged fiscal hole.
Unfortunately what she actually said was: “How big is his hole?”
That prompted howls of laughter in the House and a cute response from Robertson about the limits of the public interest.
Ok, all good fun. But what Peters actually alleged was pretty serious.
He claimed the accounts have nose-dived to the tune of $20 billion.
Less than a day later, though, international rating agency Moodys rode to Robertson’s rescue with a new report about New Zealand’s debt position. It concluded everything was fine.
Who’s right? How bad is the Government’s financial position? That’s the legitimate question Willis wanted answered.
I suspect that somewhere between the catastrophising political rhetoric and the cool nonchalance of the Moodys report lies the truth.
We won’t know for sure until we see the pre-election economic and fiscal update (Prefu), which is due from Treasury on September 12.
What we do know is that, as of Treasury’s interim financial statements for the 11 months to May, the fiscal position (released on July 5) the fiscal position has deteriorated by $2.1b when compared with forecasts published in the May Budget.
That’s essentially because the economy has slowed faster than Treasury expected, meaning the Government has taken less tax revenue.
But to suggest that things have blown out to the tune of $20b in the ensuing month seems a bit of a stretch.
In fact, it would probably require some sort of conspiracy involving the Finance Minister and Treasury concealing the truth from the public.
That would be an extremely serious allegation.
So has Peters uncovered the biggest fiscal cover-up since the Greek debt crisis?
Or he has just over-egged some back-of-the-envelope calculations whipped up by an economist with a very gloomy outlook for the next few years?
I never like to rule anything out but the latter seems more likely.
If you take a view that the economy will continue to deteriorate more dramatically than Treasury assumed right across the three-year projections they produced for the Budget, then I think you might find your way to a $20b hole.
But what I think doesn’t really matter.
What matters is how a story like this lands with the global financial markets that define the economic reality.
And of course, it didn’t land at all.
There was no financial market blowback after the allegations last week. In fact, there was very little pick-up of the story outside of the political beltway.
It only hit the mainstream news when the clip of the shadow finance minister enquiring as to the size of the finance minister’s hole went viral.
Ironically, the hyperbole of the accusation has had the unfortunate effect of confusing the issue and relegating it from the public spotlight.
That’s a shame, because this is a very real issue and it could create some problems if it continues to deteriorate.
At this point in the economic cycle, the Government is stuck in a bit of a fiscal Catch-22.
We need the economy to slow sharply and quickly to quash inflation so we can all start moving forward again.
But the faster it slows, the bigger the deficit the Government will have and the more cautious all the parties will need to be with their spending promises.
As Moodys point out, the country is well-placed to ride out the cycle as long as it doesn’t cop another major external shock.
We just need to be brutally realistic about how much debt we are in so we can manage economic expectations accordingly.
The story that Peters touted to add credence to his deficit blow-out allegations was that Robertson had called in the heads of all the major government agencies, to give them the hard word about spending.
That what’s we should expect from a prudent finance minister at this point in the economic cycle.
If things continue to slide then there is no way around a further tightening of the fiscal belt.
I’m not advocating austerity measures but it makes sense to get ahead of the curve on cost savings. That’s the best way to avoid the more radical cutbacks in the future.
The tougher fiscal environment is something of a double-edged sword for National if they win in October.
It could tie their hands with regard to any big spending plans or tax cuts they want to deliver.
On the other, it never hurts to start your tenure by revealing the terrible state of the books when you took them over.
Liam Dann is Business Editor at Large for the New Zealand Herald. He is a senior writer and columnist as well as presenting and producing videos and podcasts. He joined the Herald in 2003.