Comment: Before we all get too excited about a big spend up - it is important to remember that the $7.5 billion surplus is already past history, writes Federated Farmers Manager General Policy Nick Clark.

The Government's $7.5 billion operating surplus is ramping up debate on what to do with it and with an election looming it is sure to become a potent political weapon.

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The 2018/19 surplus was the biggest in more than a decade. It was $2 billion more than that for 2017/18 and $4 billion more than forecast in the May 2019 Budget for 2018/19.

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Meanwhile, net core Crown debt decreased as a percent of GDP to 19.2 per cent, below both the previous year's forecast and the Budget 2019 forecast.

Inevitably the news generated much noise on what to do with the apparent largesse.

Those on the left are clamouring for more social spending while those on the right are demanding tax cuts. People on both sides also seem keen for the Government to take advantage of its low debt and the low interest rate environment to borrow more for infrastructure, but the sides differ on what infrastructure should take priority.

And with monetary policy having relatively little room to move, economists are saying that fiscal policy should be deployed to stimulate the steadily slowing economy.

But before we all get too excited about a big spend up, a slashing of taxes, or a borrowing splurge it's important to remember that the $7.5 billion surplus is already past history. What's more relevant is what the current year is looking like and this is not so clear.

Federated Farmers Manager General Policy, Nick Clark. Photo / Supplied
Federated Farmers Manager General Policy, Nick Clark. Photo / Supplied

We have yet to see progress on how 2019/20 is faring, but Budget 2019 made provision for hefty multi-billion spending increases. The upshot was a forecast slashing for this year's operating surplus to just $1.3 billion.

Even such a modest surplus was predicated on strong GDP growth of over 3 per cent.

Three per cent growth was always going to be a stretch and with growth now running at barely 2 per cent (and slowing) a surplus might now be in doubt.

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So assuming the Government wants to maintain its credentials for fiscal responsibility, which Grant Robertson seems keen to do, it might not have as much extra room as expected for further spending increases or tax cuts unless it gets tougher in prioritising its existing spending.

Where it does have room is to borrow more. Governments can borrow to plug operating deficits, and they did in response to the Global Financial Crisis and the Canterbury earthquakes – two severe economic shocks.

But unless another shock hits us a better use of more debt is to invest in infrastructure, especially if it is used on projects that will grow the economy.

There is certainly no shortage of need, whether it be for more and better transport, energy, communications, and water infrastructure. Others want the Government to substantially boost social infrastructure spending, such as for housing, schools and hospitals.

More debt means higher interest costs and that would impact on the operating surplus, but with long-term interest rates so low (10 year government bond rates slipped below 1 per cent this week) it is as good a time as ever to borrow to invest.

When considering the choice between higher spending and tax cuts, this isn't necessarily binary, but the Government is forecasting to hoover up $89 billion this year in tax revenue alone plus several billion in other revenue.

Its operating spending is forecast to top $93 billion this year, up $6 billion on last year, and it is factoring in further multibillion increases in spending over the next few years.

Taxpayers are being squeezed and they need a break.

Furthermore, while we need a fiscal stimulus the Government also has to recognise that poor business confidence and its impact on economic growth is not due to fiscal policy, except perhaps a feeling of over-taxation.

It is mainly due to widespread concerns about the impacts of a wide range of its policies.

For farmers, proposed policies for freshwater management and climate change are top of mind.

So unless the Government gets its broader policy settings right it shouldn't be surprised if businesses remain gloomy and the economy continues to sag.