Dr Cullen’s surplus projections
May 31st, 2006 at 2:59 pm by David FarrarI’ve blogged in the past how the Treasury projections of future surpluses have consistently been much less than the actual surpluses – the actual surplus often being twice as large as the projected surplus.
Now it’s a bit unfair to call this a Treasury problem I’ve decided. Why? Because Dr Cullen in recent years has been sticking huge numbers in as “provisions for future initiatives” and by use of this provision you can make the projected surplus be anything at all you want. With a stroke of the pen a $6 billion projected surplus can be reduced to $4.5 billion by allowing just an extra $500 million a year “provision”.
Let me explain. You are projecting for the next three years after the current one. Now the provisions work like this:
Year 1 $500 million
Year 2 = $500 million from Year 1 + additional $500 million = $1billion
Year 3 = $1 billion from Year 2 + additional $500 million = $1.5 billion
So by adding in an extra $500 million a year provision, you knock $1.5 billion off the Year Three surplus.
Now since 1997 it has been common practice to have this provision. It recognises that every year you may have demands for increased expenditure such as wage increases, or some new initiatives. Known initiatives will generally be included in the vote for that portfolio.
In the late 1990s, the average provision was around $600 million. And Dr Cullen for the first couple of years had sensible provisions of $470 million, $480 million, $550 million and $315 million etc etc.
But then in 2004 the provisions started growing like topsy, just at the same time as the surpluses were growing to a degree people weer calling for tax cuts.
In 2004, the provisions for the next three years was $978m, $926m and $1463m.
In 2005 they were $1249m, $1757m and $1845m.
And finally in 2006 they were $1416m, $1868m, and $1913 million.
Now these are cumulative, so year by year the provision is:
07/08 $1,416m
08/09 $3,284m
09/10 $5,197m
So that is almost $10b of “provisions”. And that number is not worked out by Treasury scientifically. It is not based on known demand. It is a policy decision by the Minister of Finance. He gets to decide what number to put in, and by doing so he can move the projected surpluses up or down by billions of dollars.
So when Dr Cullen refers to future surpluses showing tax cuts are unaffordable, remember that he has almost $10b of unallocated provisions in there, with no rationale for them being at that level.
No tag for this post.
May 31st, 2006 at 3:21 pm
Ahah! I think I’ve figured out how we can fund Transmission Gully!
Vote:May 31st, 2006 at 3:24 pm
First Treasury deliberately under-estimates future surpluses. That Cullen does not merely use this to the desired end (contain spending), but also to defer tax cuts infuriates the right and some of those Treasury officials (tough).
Second, I recall Cullen and Key debating about the allocation of $1.5 billion or $1.9 billion a year for contingencies.
The lower figure was to reduce the borrowing cost of Key’s tax cut preference.
I thought precedent, including Nationals own spending record in the 1990′s, supported Cullen.
Vote:May 31st, 2006 at 3:28 pm
why should we be surprised – labour have lied and misled the sheeple about everything else (Power at any cost for the socialists)
On the positive side – it does mean that Brash and Key will have more money for tax cuts -
Vote:May 31st, 2006 at 3:38 pm
If the money is spent, then it’s only future provisions which can be made available for tax cuts (presuming National is not intent on campaigning on the basis of making subsequent public service sector cutbacks).
Labour themselves has the 2008 choice of dispersing surplus money (apparently available long term) for allocation to annual spending, “generous” provisions or tax cuts.
Labour doing this in an electoral mandate process, is acting democratically.
Vote:May 31st, 2006 at 4:37 pm
Vote Defence …
Has any of that money been spent on ‘contingencies’ or is it all just sitting there waiting to be returned to those who coughed for it in the first place?
Vote:May 31st, 2006 at 4:53 pm
Cullen and Clark are opposed to tax cuts because they want a big fat cushion against future revenues shrinking. They know once taxes are cut they cannot easily be put up again. And their core constituency is always pressuring the Labour Government to spend more and more. If they have to make expenditure cuts then their whole show falls apart. So there will never be tax cuts under the Labour Party and if there are tax cuts they will be grudging with much snarling about the so called rich.
Vote:May 31st, 2006 at 5:21 pm
I have just been listening to newstalk zb – it seems this is the least of Helen’s Problems – something bigger looming is the Potato-field inquiry – he has had the report since 9 May, has failed to respond – is looking at his options including jumping ship. Helen is stuck between a rock and a hard place – if he leaves Labour (as is rumoured) thenno majority without bringing the greens into the mix – and that wil make life very interesting –
i suppose there will be blogs about this – but very interesting developments.
Vote:May 31st, 2006 at 5:25 pm
Isn’t this a bit arse about face?
Do you think the government should NOT make a provision that is around the scope of actual budget spending increases that are likely?
Wouldn’t it be true that if we took that approach, every year the surplus would come in under budget?
It’s a Labour government. It spends money. It provides for it wisely. That is what Labour parties do and it is what the people have voted for three times in a row.
I know you’d prefer to be much less responsible with the public finances, but that’s something you can have your own monopoly on, David. We’d prefer to be prudent (for a purpose, of course).
Vote:May 31st, 2006 at 5:50 pm
Jesus Jordon not even you believe you now.
Vote:May 31st, 2006 at 6:16 pm
The socailists are addicted to power, they realise that if they are going to retain control they will need vast sums of money to buy votes. THERE WILL BE NO TAX CUTS
Vote:May 31st, 2006 at 6:24 pm
Peter McK is right about Philip Field.
Vote:The Independent Financial Review has a story on the front of today’s issue.
Those crafty blighters at Fairfax have no online link to it.
But Potatohead has apparantly “informally canvassed his prospects of jumping to United Future.”
Dunne denies knowing of any talks, but the article notes Field’s independence from Liarbour policies and the fact that he still holds much sway among the Samoan community and Dear Leader cannot afford to lose their support.
May 31st, 2006 at 6:50 pm
Field if he is doing this is trying to put maximum pressure on Clark to give him protection. She must be regretting setting up that inquiry. Field could possibly win the seat without the Labour ticket, so it is a fascinating game being played out. Of course we have the party hopping bill which seems to have gone off the agenda. So there is a problem there as well. Things are not a rosey as the Labour Government would have us believe. And the budget did nothing at all except for a number of spending initiatives binding the loyalty of the minor support parties.
Vote:May 31st, 2006 at 6:52 pm
Ha! Any more in the surplus and it’ll all go on hip hop tours and Helen’s speeding fines!
No thank you!!!
Vote:May 31st, 2006 at 7:06 pm
Dear Leader must have a most lovely dilemma.
Wonder what her views are now?
I could not find the latest NewstalkZB story online but this is what they reported three days before the election.
Apparantly, Potatohead was only guilty of being helpful!!!
PM supports Taito Philip Field
13/09/2005 17:16:10
The Prime Minister says the only thing of which Taito Philip Field is guilty is being helpful.
The Labour MP and State Minister has become involved in the efforts of a Thai man seeking residency. The man is waiting in Samoa for his application to be processed after he was denied refugee status.
Sunan Siriwan has been given a job by Taito Phillip Field to tile a house in Samoa.
Mr Field has written in support of the man to Associate Immigration Minister Damien O’Connor.
Helen Clark says Mr Field was making representation on someone’s behalf as MPs often do. She says if they cannot do that, they might as well shut the electorate office doors.
Vote:May 31st, 2006 at 8:15 pm
If he resigned and did not stand, Labour would win the seat and have Green cover meantime.
If he resigned and stood for Labour, Labour would win the seat.
This is only politically interesting, if he resigned and stayed in parliament or resigned and contested the seat against Labour.
Vote:May 31st, 2006 at 9:26 pm
Of course SPC, he might not be in a position to run again. I still expect the spin machine to head into high gear, and failing that, the police can probably be lent on again. I am sure it is not in the “public interest” to prosecute. Honour among thieves and all that you know…
Vote:June 1st, 2006 at 7:58 am
Getting back to the ‘provisions’.
Keeping a whole chunk of money under the mattress in case something bad happens is what financially challenged people do. It is not prudence, it is ignorance.
People who have good financial nous invest this money in money-making activities so that there is cashflow when times are tight. In terms of a country this would mean investing in the economy, making sure business can carry on when times get tougher.
Note that this is not the socialist’s idea of ‘investing’. Their idea is to have spend up on nice things to have today that won’t produce any return tomorrow.
If tougher times do come, the socialist’s will raid the money under the mattress and that money will be spent (you can only spend it once). Afte that, the econonomy will shrink and the tax take with it.
If tougher times don’t eventuate then a whole bunch of money has been stockpiled for nothing. This is wasteful as it’s not being properly utilised.
Either way it doesn’t work. The right idea is to have a higher sustainable and more reliable income (i.e. tax take), not to hoard money to pull out when times are tough.
Vote:June 1st, 2006 at 8:09 am
There will be tax cuts, just not the sort of eeconomically irresponsible slash, borrow and hope stuff trumpeted by Key and Brash. Cullen is easy to understand if you recognise he is a Keynesian. He will cut taxes not when the consumption sector is overheated and at the top end of an inflationary property speculation spiral, as that ideological stuffed shirt John Key would do, but when the pump needs priming at the bottom of the cycle next year. He will be able to cut taxes despite falling revenue because he has wisely hoarded a chest of cash for just such a rainy day.
Its good, pragmatic, common sense economics – not the voodoo chanting of the magical incantation “tax cuts now” that passes for economics from the right.
These days its the right that is economically reckless and irresponsible and the centre-left which is demonstrating wise, medium to long term economic stewardship. As Russell Brown postulates, the new looney Bolsheviks ranting on the street corner are from the right.
Vote:June 1st, 2006 at 8:23 am
Translation of TomS’ post:
“Cullen will cut taxes in time for the next election to thwart National’s most effective campaign policy.”
Vote:June 1st, 2006 at 9:10 am
So whos the looney with no knowledge of finance?
the former history teacher or the millionaire who got rich in finance, and innternational currency trading?
john key can and does run rings around cullen in terms of knowledge.
but labour can buy more votes with tax for the childless.
Vote:June 1st, 2006 at 9:30 am
Actually John Key is a wide boy of the international money markets, he may be an expert in the inflationary job of making money through currency speculation in an imaginary world detached from the place 99.99% of us actually live in, but is he someone who actually understands an economy? I don’t think so. Its easier to teach a wise, humanist history professor the fundamentals of how an integrated economy works than it is to teach a rational closed system expert like John Key the fundamentals of human nature.
Vote:June 1st, 2006 at 10:23 am
Ah yes Toms – but Michael Cullen is the history teacher who has yet to manage to build up any assets high enough to warrant declaration on the MP’s register. And yet you trust him to tell you the path to economic wealth?
He only knows one way – suck off the welfare / state teat.
Vote:June 1st, 2006 at 10:30 pm
Personal wealth isn’t a necessary reflection of skill/propriety to govern. It may be helpful, but it’s not necessary. Cullen wasn’t in the same situation as Key viz money markets/Merril Lynch so it’s a bit tenuous to compare their current wealth with respect to their supposed skill as Treasurers.
Vote:June 2nd, 2006 at 10:54 am
Its been said before and it is still true. Tax cuts lead to a higher tax take.
Vote: