The debt blame game

May 23rd, 2012 at 7:00 am by David Farrar

Stuff reported earlier this week:

Voters blame Labour more than National for the country’s current debt levels, according to a nationwide survey of Fairfax newspaper readers.

With the two main parties pointing the finger at each other, we asked more than 2000 of our readers who they blamed more.

Almost half of those in the survey saw it as effectively ”a plague on both their houses”, with 44 per cent blaming a combination of the Clark and Key governments.

But among those who singled out one or the other, 33 per cent saw Labour as being more at fault, while only 18 per cent blamed National more.

That is despite a huge blow-out in net core Crown debt since National took office, with a rise from $10 billion in 2008 to $50b now and forecasts it will top $70b by 2015.

However, in 2008 Treasury was forecasting a decade of deficits, though not at the level actually seen over the last few years. There was a record $18b deficit last year, which was hit by the cost of the earthquakes, and will be a likely $10b to $12b deficit in the current financial year.

The survey results are not a random sample, so should not be taken as gospel. However they do give me confidence that voters out there are smarter than assumed.

These finding have caused great howls of outrage from the normal Labour types, with graphs showing how debt fell until 2008 and rose afterwards. In their simple binary world, that means Labour was good on debt and National has been bad. They hope and pray the public are so stupid that they overlook the global financial crisis and associated world recession.

As most people will know the 2008 PREFU showed us that under Labour’s fiscal settings, New Zealand was facing a decade of deficits. But it was even worse than that. Just two months later the forecasts were for not a decade of deficits, but a permanent structural deficit that would never go away.

Now National responded to these forecasts by cancelling its planned 2010 and 2011 tax cuts, and a mixture of spending cuts and reductions in the future spending allowance. One can argue that Labour may have taken some action also to stop a structural deficit from being locked in, if they had won in 2008. But the problem for them is they opposed every single spending cut or even restraint that National did. So hence it is no wonder that the public don’t see them as credible.

It was only a few months before the 2011 election that Labour realised how badly they had misjudged the public mood, and stopped calling for massive new spending.

So as I said, the results of that survey are reassuring that many in the public can tell the difference between correlation and causation.

The cumulative effect

January 27th, 2011 at 10:32 am by David Farrar

I briefly tuned into talkback last night while driving and heard some people wondering how a relatively modest reduction in future spending can make an impact on when we return to surplus, and the $300 million a week of borrowing.

Labour increased spending by an average of $2.8b a year for its last five years in office.

National is now saying they are going to have an allowance of just $0.8b a year for future spending growth. That’s a $2b a year difference. Now in the first year it doesn’t make much impact on a $10b deficit.

But the spending growth is cumulative. Over five years spending growth at $0.8b a year will mean spending after four years is $4b higher. At $2.8b a year it would be $14b higher.

So over five years, the projected deficit drops by $10b. And that means you are borrowing $200m less a week.

Of course there are other factors such as the rate of economic growth and hence tax revenue growth, plus there are certain expenditure items that are contractural (benefits) and go up or down depending on how many people receive them.

The impact on debt is more pronounced Because the total amount of spending not undertaken is cumulative. In year 1 it is $2b, year 2 is $4b, then $6b, $8b and $10b. Over five years that reduction in future spending means you have $30b less debt that would otherwise have been the case.

Keeping future spending growth to $800m a year is not at all easy. Out of that you have to fund population growth demand on health and education and public sector wage rises before you even get into discretionary new initiatives.

Key signals less debt while Goff promises more debt

January 26th, 2011 at 11:48 am by David Farrar

Over two days we’ve seen two dramatically different paths outlines for the Government. Yesterday Phil Goff promised more borrowing and more debt. Today John Key announced the opposite – that National would reduce future spending to reduce debt – and also flagged allowing the private sector to invest in four current SOEs (which will also reduce debt).

This is excellent – both the reduced spending cap, and the flagging of an election policy to allow minority shareholdings in some energy companies.

Some extracts from Key’s speech:

Growth over the last decade was built on all the wrong things – debt, consumption, and government spending.

People borrowed heavily to buy houses and farms, property prices soared and New Zealanders felt wealthier as a result. They spent a lot on consumer goods, which led to a bubble of economic activity.

 The Labour Government thought this bubble, and the tax revenue it generated, would go on forever and spent up large on permanent new spending programmes. The Government’s spending increased by more than 50 per cent in just six years.

Labour literally had to keep thinking up new ways to spend money, as their refusal to drop tax rates led to fiscal drag and large surpluses. Rather than have modest spending growth, and lower taxes, they did nothing except huge spending increases.

The internationally-competitive sectors of the economy actually went into recession in 2004, and experienced a 10 per cent drop in output over the next five years.

A five year recession for the competitive sector of the economy.

By the time the National-led Government came into office at the end of 2008 the economy was deep in recession, and inflation was the highest it had been in 18 years.

The Government’s books had been left in a mess, with Treasury projecting no end to budget deficits and government debt spiralling out of control.

This is worth remembering – the official forecasts were for deficits and debt to be so big, that we would never ever return to surplus.

As an incoming government, we moved quickly to steady the ship, help the economy through the recession and set a credible path back to surplus.

 Even so, when we tally up everything the Government is spending this year, we still need to borrow $300 million a week on average to pay the bills.

 In the worst of the recession, running a budget deficit was the right thing to do, as it gave much-needed support to the economy.

 Now, as the economy recovers, borrowing $300 million a week is unaffordable and is holding the economy back.

 It is crowding out our internationally-competitive sectors of the economy, keeping the exchange rate high, and tying up resources that could be better used elsewhere in the economy.

And this borrowing will, of course, have to be repaid in future years, with interest.

Annual interest payments on our debt will, in four years time, cost more than spending on the Police, defence and early childhood education combined.

Which is why we need policies to reduce the growth in debt and lead us back to surplus.

When we are borrowing $300 million a week, have an overvalued exchange rate, and face the prospect of a credit rating downgrade, the Government believes it should be spending less and therefore borrowing less.

I have therefore challenged my Ministers to balance the books more quickly.

Government spending will continue to increase each year in dollar terms, but at a slower pace than the rest of the economy.

As the first step in reducing spending growth, we will run a tighter Budget this year than was indicated in the Budget Policy Statement in December.

Currently we have a new spending allowance of $1.1 billion each year, compared to Labour’s average of $2.8 billion a year over its last five budgets.

Our plan is to reduce that new spending allowance in Budget 2011 even further, to around $800 to $900 million.

Nonetheless, this year’s Budget will continue to prioritise new spending to health and education in particular, and to initiatives that promote economic growth.

 This would be a good time for the PPTA to reconsider the wisdom of ongoing strike action for their 4% pay claim.

Key says that Treasury project this reduction in future spending will see NZ get back into surplus in 2014/15 instead of 2015/16. This of course will only occur if the 2011 – 2014 Government has tight fiscal discipline.

Now onto the capital side:

The Investment Statement shows that the government, on behalf of taxpayers, owns $220 billion of assets across a whole range of social, financial and commercial investments – everything from hospitals, roads, prisons, schools and Police stations to the Super Fund, electricity companies and coal mining operations.

We also expect to acquire $33 billion of net new assets over the next five years, including new schools, operating theatres, ultra-fast broadband and major investments in our state highways and other transport infrastructure. That is a considerable spend by any reckoning.

At the margin there are two ways we can acquire new assets – either we can borrow more or we can change the mix of assets we own.

Indeed, and it is stupidity to insist that our current mix of assets is perfect, and in no way can any existing asset be sold or even sold down.

The greatest scope to change the mix of assets lies with the government’s portfolio of commercial assets.

In particular, the sort of mixed-ownership model under which Air New Zealand operates – where the government owns most of the company but there is a minority of outside equity – gives the best of both worlds.

Under this model, the government has a controlling stake in what is a crucial piece of transport infrastructure and guarantees that it will be majority New Zealand owned. But by not owning 100 percent of the airline, the government also has capital free to invest in other assets.

This model could be extended to more of the government’s commercial assets.

As well as freeing up capital, there are three other potential benefits of a mixed ownership model.

The first is that it broadens the pool of investments for New Zealand savers, either directly themselves, or through investment funds such as KiwiSaver.

New, quality listings on the stock exchange would give “mum and dad” investors the option of putting their savings into large and proven companies, rather than relying, as is so often the case, on property investments.

The second is that the company reaps the benefits of sharper commercial disciplines, more transparency and greater external oversight.

Under the mixed ownership model Air New Zealand has been a creative and innovative company and a model corporate citizen. It has also offered some very competitive prices for air travel.

I am convinced that Air New Zealand would not be run as well, nor provide as good a service to customers, if it was owned 100 percent by the government.

And the third potential benefit is the opportunity for the companies involved to obtain more capital to grow further, without depending entirely on a cash-strapped government to support them.

Having some SOEs able to access capital, without the taxpayers having to borrow more will be good for them, and allow them to grow.

And NZ investors would love having some solid companies to be able to invest in – which will help boost savings.

For all these reasons, the Government has asked Treasury for advice on the merits and viability of extending the mixed ownership model to four other state-owned companies – Mighty River Power, Meridian, Genesis and Solid Energy.

In each case, the government would retain majority ownership and control, and the freed-up capital would be used to purchase other public assets, thereby reducing the government’s need to borrow.

The Government has also asked Treasury for advice on the merits and viability of reducing the government’s shareholding in Air New Zealand, again while retaining a majority stake.

Only the companies I have just mentioned will be considered for a mixed ownership model.

For all these reasons, the Government has asked Treasury for advice on the merits and viability of extending the mixed ownership model to four other state-owned companies – Mighty River Power, Meridian, Genesis and Solid Energy.

In each case, the government would retain majority ownership and control, and the freed-up capital would be used to purchase other public assets, thereby reducing the government’s need to borrow.

The Government has also asked Treasury for advice on the merits and viability of reducing the government’s shareholding in Air New Zealand, again while retaining a majority stake.

Only the companies I have just mentioned will be considered for a mixed ownership model.

Yay. We are currently the only country in the OECD that has a policy based on pure ideology of banning any private sector investment in current state assets. This probable policy is a step in the right direction.

It is subject to finalisation and approval from voters at the 2011 election. It will maintain Government control of the five companies, but allow for Kiwi mums and dads to invest in those companies, providing the companies with capital, and the investors with good returns.

Kiwis will have some clear choices for the 2011 election – policies which boost savings, reduce future spending and reduce debt vs policies to tax rich pricks more and borrow more.

$300m a week

December 15th, 2010 at 9:00 am by David Farrar

The Government is now borrowing $300m a week. This level of borrowing is simply not sustainable. The answer is not to tax and spend as Labour has promised (they have indicated they will increase at least the top tax rate) but to restrain or even reduce spending.

The OBEGAL (Operating Balance Excluding Gains and Losses) is forecast to just his surplus in 2015. To achieve that will require massive fiscal discipline – no spending sprees in both the 2011 and the 2014 election years. And even after 2015, massive restraint will be needed to give us a cushion going forward.

By 2015 core expenses are forecast to be 31.7% of GDP, down from 34.9% this year. That is going in the right direction but still too high in my opinion. I’d like to see both National and Labour indicate what their desired level of spending as a % of the overall economy is. These would not be legal straitjackets, but targets they can be measured against.

I think a realistic long-term goal is in the mid 20s – maybe as high as 28% but no higher. If we keep spending down, then the average economic growth will be significantly higher – and that is how we create jobs, grow wages, and close the gap with Australia.

The risk of debt

May 18th, 2010 at 7:00 am by David Farrar

The Herald reports:

The Government could face rising costs of borrowing and increased scrutiny of its debt as a result of the sovereign debt crisis in Europe, a global fund manager has warned.

Gerard Fitzpatrick, a bond portfolio manager for Russell Investments, said Europe’s €750 billion ($1.3 trillion) bailout had stopped the immediate liquidity crisis but there were still concerns about sovereign debt. …

However, he said there was a risk of debt being repriced which could make it more expensive for the Government here to borrow money internationally.

“That will put more pressure on the New Zealand budget.”

Maybe this may cause a bit of hesitation in the economic geniuses in Labour who demand that the Government increase its level of borrowing, so it can put more money into the Cullen Fund.

Editorials 14 May 2010

May 14th, 2010 at 11:34 am by David Farrar

The NZ Herald talks Super City:

Who should lead Auckland? By a surprising margin, residents seem to favour the lesser-known of the two declared candidates for the Super City mayoralty. …

It could be that today’s survey reflects a view from across six of the seven territorial-council areas that a vote for Mr Banks represents a central Auckland takeover of their cities. An anyone-but-Auckland-City mentality would make a tough campaign for the Banks team.

He may be copping the backlash over the Government’s poor handling of the Super City reform, which is unfair as he has voiced concerns over several aspects of that process.

And The Press on rugby:

The inclusion of Argentina in what will be, from 2012, a southern hemisphere four-nations rugby tournament is obviously great news for supporters of the Pumas.

For many years the South American nation has been starved of regular top-flight tests due to the club commitments of its leading players in Europe, notably in France, but that will now change, with a rule change agreed by the International Rugby Board (IRB) this week. Finally, it seems, Argentina will be playing in a high-profile annual test rugby competition.

And the Dom Post on Greece:

As Bill English prepares to deliver his second Budget on Thursday a spectre hovers at his shoulder. The spectre is Greece.

The land of retsina, olives and sun-drenched beaches is about to become the land of wage cuts, job losses and higher prices, thanks to the profligacy of successive Greek governments.

Greece’s predicament is a cautionary tale for governments and peoples everywhere. Keep spending more than you earn and one day the debt collector will come calling.

A lesson lost on Labour it seems as they keep calling for the Government to increase spending and borrowing.

New Zealand, fortunately, is far from Greece’s situation. Public debt is at present about 13 per cent of the size of the economy – a fraction of the 120 per cent Greece is tipped to reach this year – but Government spending is forecast to exceed revenue for the next six years and debt levels are rising.

What some may forget though is that fiscal settings inherited from Labour had spending always remaining greater than revenue, and debt indeed increasing over the long-term to Greece type levels. Without the changes made by National in the 2009 budget, net crown debt was forecast to exceed 60% of GDP within around a decade.

And Labour opposed pretty much every one of those changes that reduced the debt track.

So far John Key’s Government has struck a sensible balance. It has borrowed enough to keep the economy ticking over and to insulate New Zealanders from the worst effects of the global financial crisis but reduced the rate at which debt was forecast to grow when it took office.

It should continue to take a long-term view of New Zealand’s interests. Mr English must continue to keep a tight rein on spending, not just in 2010 but next year – election year – as well.

Spending restraint needs to be maintained until, at the earliest, the OBERAC is back in surplus, and large enough to cover NZSF contributions.

The ODT looks at classroom attacks:

Thus it is in the case of the 13-year-old year 9 Te Puke High School boy who attacked his teacher with a 10cm kitchen knife, stabbing him in the neck and shoulders several times.

A centimetre or two either way, it must be supposed, and the injuries could have been fatal.

The attack has been met with anger at the perpetrator, sympathy for the teacher, incredulity that it could have happened at all, and revelations of just how common classroom assaults are becoming.

In 2008, 238 pupils were stood down for assaulting teachers; 442 teachers needed treatment after assaults at school in 2008 and 2009 at a cost of $413,000. …

The question is, why? Why did the boy have a knife at school? Whatever possessed him to make this apparently unprovoked attack? Was he, is he, prone to violent outbursts or physical aggression? If he had an issue or a grievance, why did he not first attempt to resolve them otherwise? Perhaps he did, and perhaps more of the background to this terrible episode will yet emerge, but it will not diminish either the viciousness of the assault, nor the level of accountability to which the assailant must be held – regardless of his age.

All good questions.

Middle Class Welfare from Labour

July 20th, 2009 at 6:17 am by David Farrar

Phil Goff’s latest plan is to borrow more money from overseas, so that people can get the dole – even if their partner is earning a million dollars a year.

I prefer welfare to be targeted towards those who are in real need. I fully accept that if a family has both parents earning say $100,000, then it is difficult if one of them loses their job. Their spending has to adjust. But at the end of the day they still have a family income of $100,000 and that is not the priority for welfare.

Labour seem genetically incapable of coming up with any economic proposal that does not involve borrowing more money to spend more money. As an example Fitch Ratings recently put NZ on negative outlook and said:

Against this backdrop of external vulnerability, more aggressive restoration of public finances through fiscal prudence will be needed to raise the national savings rate to counter weak private savings.

So Fitch have clearly said the Government needs to spend less, and borrow less or we will have a credit rating downgrade. And what is Labour’s response to this:

“National’s problem is that many of its policy changes so far go in precisely the wrong direction. Cuts to KiwiSaver and the Super Fund deferrals in particular will worsen the crucial savings gap,” David Cunliffe said.

So Fitch warn against excessive public borrowing, and Labour’s response is to advocate borrowing an extra $3 billion a year!!

As I said they seem genetically incapable of coming up with any solution, apart from borrow and spend. No matter what the problem is, their solution is always the same.

The importance of reducing debt

May 25th, 2009 at 9:52 am by David Farrar

Brian Fallow in the Herald looks at why we now have a debt problem:

Over the past five years, government spending has increased by 50 per cent – twice as fast as the economy or tax revenues have grown.

Even in the same budget as which Dr Cullen finally gave tax cuts, he still increased spending by $4.5 billion. He didn’t even leave enough money for his Super Fund contributions – and that was before the flobal recession.

But now tax revenues are falling as the recession lays waste to the tax base. Treasury secretary John Whitehead says it will be some time in 2011 before the level of economic activity is back to where it was in 2007.

So three or more years of no extra income, yet the continual spending increases give us a huge deficit and debt problem.

This would see gross government debt double by 2013, relative to the size of the economy, and in the absence of a policy response climb to over 75 per cent of GDP by 2023. That is where it peaked in 1987; only by 2023 there will be the added pressure of baby-boomer pressure on health and superannuation costs.

This is what the situation would be under Labour. Labour have condemned basically every saving National has made, and just demanded more and more spending.

Whitehead in a speech on May 15 spelled out what that level of debt would mean. It would be $49,000 for every man woman and child in the country: “A family of four would basically have another mortgage of close to $200,000”.

$200,000 debt for a four person family. Not much of a future.

“But as we see it the most effective way the Government can begin to get on top of expenses is by reducing the spending allowances for future Budgets, currently set at $1.75 billion for the 2009 Budget and increasing by 2 per cent a year in each of the next three Budgets.”

Over four years that provision is a cumulative $18 billion in new spending. “We expect the Government to halve those spending allowances,” Purdue said.

Reducing the provision is sensible. In the late 1990s it was only $600 million a year. At $600 million a year then over four years it is only $6 billion as opposed to $18 billion.

NZIER on fiscal stimulus

May 15th, 2009 at 12:46 pm by David Farrar

NZIER have done a very interesting report on the balancing act between jobs and debt.

The fiscal stimulus of almost $10b over four years will result in an extra 10,000 jobs in the short run, but it will reduce future consumption by $160 per person per year. We can spend now, but we have to pay for it eventually.

And that is the key thing to remember – that debt has a cost.

We find that a policy that reduces the cost of employing people could boost employment more at a similar cost to long-run consumption. Better still would be well-targeted spending on infrastructure to deliver longrun productivity improvements. Given New Zealand’s longer term growth challenge, any fiscal efforts to stabilise the economy and avoid a more severe recession should have productivity at the centre of the policy radar screen.

Productivity growth is all important.

we find that the current package is likely to:
• generate an extra 10,000 jobs in the short run
• raise GDP in the short term by 0.6 percentage points
• lead to lower employment after 2012 and a 0.8 percentage point fall in long-run real consumption per annum than without the stimulus.

Again debt has consequences. And just think about how much more debt there would be with Labour – not just $1b+ for their pet tunnel, but they have oppossed every cost saving in the public service.

The cost of a downgrade

May 11th, 2009 at 12:00 pm by David Farrar

Vernon Small in the Dom Post reports on the cost of a credit downgrade:

A credit rating downgrade could hit New Zealand hard, adding $600 million a year to our interest bill, equal to twice the cost of the new Wellington Hospital in Newtown, officials have warned.

In a background paper obtained by The Dominion Post, Treasury officials, using Ireland as a benchmark, draw a specific link between the country’s credit rating which agencies say is threatened unless debt is brought under control and social spending.

The paper cautions that, although extra borrowing is economically attractive in the short term, the cost of continued use of debt would rise exponentially.

And that $600 million a year is basically just wasted money. There is no guarantee we will avoid a credit downgrade, but I want the Government to be working hard to do so.

No borrow and hope

April 23rd, 2009 at 7:57 am by David Farrar

Bill English has sent out his strongest signal that the future tax cuts will not be implemented. I’m going to cover the details of this at a later stage – for now want to look at the overall fiscal situation.

The Herald reports:

Mr English said without a change to the present spending track, preliminary Budget forecasts showed recurring operating deficits of more than $10 billion a year indefinitely.

“Most worrying of all, debt would continue climbing, with no sign of levelling off.”

At the predicted 2023 level, Crown gross debt would equate to about $30,000 for every New Zealander and it would force the Government to pay an extra $8 billion a year in interest costs than forecast in the October pre-election update, Mr English said.

This simply can not be allowed to happen. Every dollar extra in interest costs is a dollar less for health, education, Police etc.

Mr English said his Budget would allow for more spending than Labour’s last year.

But the rate of growth of Government spending in recent years could not be sustained, he said in a speech to business executives in Auckland yesterday.

Core Crown expenditure this year was expected to be $63.5 billion – up $21.6 billion or 51 per cent in the past five years.

He contrasted that to estimates that the economy had grown by just 23 per cent in the same time, and tax revenue by 24 per cent.

Cullen massively increased spending on the assumption that the economy would never falter. They intrdouced interest free student loans, KiwiSaver, Working for Families – and now there is not enough money to pay for them.

The responsible thing to do with a growing economy, is to have every year modest incraeses in spending, modest tax cuts and significant surpluses. Peter Costello did this. But for nine years we had massive increases in spending.

Labour leader Phil Goff said last night that Mr English was “softening the public up” to breach the basic promise National made in the election campaign last year – that people would be better off through tax cuts.

He said National had misled the electorate.

Labour would by now have not only cancelled their tax cuts (I will touch on this at a later stage) but would be copying UK Labour and actually hiking taxes in a recession with a new top tax rate of 50%.

Who to blame, and what to do with the economy

December 22nd, 2008 at 9:00 am by David Farrar

The set of economic forecasts inherited from Labour were bad enough reading last week. But then on Friday, I noticed that Finance Minister Bill English said that the economy is already nearly at Treasury’s worst-case scenario.

So how bad is the now likely worst case scenario:

  • Unemployment peaks at 7.5% in mid 2010
  • Economy contracts in year to March 2010 as well as March 2009
  • OBEGAL deficits of $32 billion from 2009 to 2013 – averaging greater than $8 billion a year
  • Gross debt to increase from $35 billion to $82 billion over four years – a $47 billion increase
  • Net debt to increase from $6 billion to $54 billion
  • Gross debt as % of GDP to go from under 20% to 39% in four years, and to 76% by 2023

This is a worse outlook than Labour left National in 1990. And you can’t even compare to the 1999 PREFU which was:

  • Operating Balances growing to almost $2.5 billion
  • net debt falling from 22% to 18%
  • Economic growth of over 3% a year
  • Unemployment to reduce from 7% to 5.7% over two years

Cullen was left with a wonderful set of projections.

So the next few years are going to be a disaster in fiscal terms. So who is at fault? Well of course the main responsibility is the global credit crisis – that goes without saying. But why are our fiscal fortunes so fragile, than a crisis such as this fucks our economy for the next decade or more? Let’s look at some of the possible culprits.

National’s tax cuts

If anyone blames the deficits and debts on National’s tax cuts, then they are incompetent or lying. The tax cuts were 99% funded from changes to KiwiSaver, and other expenditure savings. They have no impact on the deficit or debt.

In fact National’s tax cuts are (in hindsight) an even better idea than when first mooted? Why? Because they contribute towards a total fiscal stimulus package of 5% of GDP – this is one of the largest in the OECD and may help soften the recession.

But even better, the tax cuts are not funded from cutting current spending (which would detract from the stimulus) but by reducing subsidies into KiwiSaver which would lock the money up for decades.

We’ll come back to the issue of KiwiSaver.

Labour’s tax cuts

So how about Labour’s tax cuts? Is all this fiscal doom and gloom because Labour finally gave in and delivered tax cuts? Well it is certainly true that Dr Cullen has indicated he would have not cut taxes to the extent he did, based on PREFU’s numbers. And many people suspect Labour, if re-elected, would have cancelled some or all of their tax cuts.

The cost of Labour’s tax cuts over four years is $10.8 billion. So yes, if Labour did not cut taxes at all in their nine years of office, then the fiscal situation would be slightly better. Of course taxpayers would be worse off, but who cares about them!

But compare that $10.8 billion to OBEGAL deficits of over $30 billion and an increase in debt of almost $50 billion.  If Labour had not delivered tax cuts (and had not spent the money saved – a big if), it would have somewhat improved the fiscal outlook, but left households worse off, and made the recession worse.

Labour’s tax cuts were equivalent to a one off $3.3 reduction in taxation – the only personal tax reduction in nine years, where taxation went from $32 billion to $57 billion.  It is probably the most modest tax reduction program in the western world.

Labour’s Spending

What has really left us with a massive problem, isn’t Labour finally doing a $3.3 billion annual tax cut, but the massive increases in annual expenditure.

Expenditure has increased from $34 billion per year to $57 billion. That is a $23 billion hike – or seven times as great as the belated tax cuts.

Now of course some of this is necessary increases – even Sir Roger advocates you should increase spending in line with inflation and population growth. But off memory that is still $18 billion a year in extra spending.

And this is the problem Labour has left us. They massively increased spending in non-essential areas, on the assumption that we would have record growth and surpluses forever. They didn’t just keep funding and improving existing programmes (schools, hospitals) but they invented new schemes. Now these schemes were arguably good things – but they were funded based on an assumption of growth and surpluses. And together they combine to remove flexibility from future Governments.

Let us look, at just three of them:

The Cullen Fund

The Cullen Fund was based on a premise that as we are going to have surpluses for the next 30 years, then we should save some of those surpluses to meet the future cost of superannuation, so we won’t have to borrow money in the future.

The fatal flaw was always the assumption about surpluses, but as the years went on and they continued unabated, the opposition to the Fund diminished, and even National signed up to it.

But we are now in a very different situation. We have a structural deficit, and face massive borrowing for at least a decade.

So the Cullen Fund is now based on borrowing heaps of money today, so we do not have to borrow heaps of money in 25 years? Anyone else see the fatal flaw? Borrowing money to save money is the sort of stuff that cuased the credit crisis.

The Government should seriously consider suspending contributions to the Cullen Fund. We can’t save money we do not have.


KiwiSaver has much the same problem as the Cullen Fund. It is all well and good to help subsidise people’s savings, but not if the taxpayer is having to borrow money to do so.

Because who is going to have to pay back and pay the interest on all that borrowing? Those same savers. So once again we have the stupidity of borrowing money today, to help people save. That is not sustainable.

I like KiwiSaver. If we were going to continue with record surpluses, it would be great to have a scheme which provides massive incentives for people to save. But we don’t. Does anyone think Labour would in 2009 have announced the KiwiSaver subsidies they did in 2007? Of course not.

National has wisely already cut the cost of taxpayer subsidies to KiwiSaver. Arguably they need to go further and also look at whether the employee subsidy is affordable. If we need to borrow to find it, then it isn’t.

You see the employer matching contribution is a 1:1 subsidy already, which is massive. Hell most people are happy to get a 10% return on investment and the employer contribution gets you an instant 100% return. Now the employee subsidy gets you a further 100% return, so those earning up to $52,000 get a 2:1 subsidy or a 200% return on investment.

Unless the fiscal fortune improves, maybe the employee subisdy has to go also. Sure that means only a 100% return instead of a 200% return, but that is a lot better than the standard 10% return and I doubt it would discourage people going into KiwiSaver. Maybe raise the employer contribution rate to a maximum 3% so the total saved isn’t decreased.

Working for Families

This is another major spending commitment that falls into the category of unaffordable with hindsight. Basically whenever Labour had spare cash they hoovered it up into this targeted welfare assistance programme. And now taxpayers are going to have to borrow billions of dollars to fund this programme.

Unlike the other two programmes though, this one can’t be easily reformed. Families have grown used to having the extra cash, and in the midst of a recession, it would be quite wrong to take the money off them.

But what does need to be done, is some medium-term work on a better tax and welfare system that has less tax churn.

How bad is Labour’s legacy

December 18th, 2008 at 12:21 pm by David Farrar

We found out today how bad is Labour’s economic legacy. In 1999 National left Labour with a strongly growing economy, falling unemployment, low interest rates, and low inflation.

Today’s DEFU tells us what Labour has left National. And my God it is bad:

  • Unemployment to hit 6.4% (and maybe 7.2%) within 15 months
  • Gross debt to increase from under 20% to a massive 33.1% (and maybe 38.6%) by 2013
  • OBEGAL deficits of $23 billion over next four years
  • Cash deficits of $48 billion over five years

This is appalling.  Even the “upside” scenario sees a massive increase id debt, deficits and unemployment.

Deficits of up to $6 billion are just unacceptable. If we do not improve from the lgeacy Labour left us, we will be leaving the next generation with a mountain of extra debt.

It gets even worse over the ten year horizon:

  • The costs of all the borrowing basically fuck the economy. We end up with a permament structural deficit with the books Labour have left us.
  • Even after 2019, the crown will be running an permanent OBEGAL deficit of 2% of GDP, or $4 billion a year. Even the “upside” scenario sees an ongoing deficit of 0.7% of GDP. So Labour have left us with an economy that is stuffed, even under the more optimistic scenario. We just can not run a decade of deficits.
  • Gross debt is now projected to hit 57% of GDP in 2023. Do you remember Helen and Michael telling us that hitting 22% of GDP would be reckless. Well they have left us with a debt on track to hit 57% of GDP!!!
  • Even net debt, which had reached zero, is projected to rocket up to 47% of GDP

This is a set of books, every bit as bad as those left behind by Labour in 1990. They are horrible. Bill English has the toughest job in NZ for the next few years.

The task for the National-led Government is to improve on this. DEFU is basically what would happen if you continue with Labour’s policy settings. The tax cuts were fiscally neutral so don’t affect things. Over the next few years we should always refer back to this DEFU as what we would achieve under Labour. National has to deliver smaller deficits and less debt than DEFU is projecting. That is their challenge.

Labour’s financial legacy

November 13th, 2008 at 3:25 pm by David Farrar

At Backbenches last night, Charles Chauvel said that Labour has left National a very good set of accounts with lots of money, and would be making sure they looked after it.

This caused some consternation in the audience and phrases like a decade of deficits emerged.

Anyway Dr Cullen has released the latest forecast from Treasury – as of Friday. So let’s see what National is being left with:

  • Unemployment now to peak at 5.7% instead of 5.1%
  • Nominal GDP to be $15 billion lower for 2009-2013 than in PREFU.
  • The OBEGAL deficit and cash deficit to both worsen by around $1.5 per annum from 2010
  • An extra $5 billion of debt up until 2013, compared to PREFU
  • Real market investment to decline by 13% in 09/10
  • GDP growth for 08/09 estimated t be just 0.4%
  • OBEGAL deficit to hit $5 billion in 2012/13
  • The cash deficit in 2012/13 to hit $9.1 billion

The nominal GDP figure puts it in perspective. The NZ economy will generate $15 billion less over five years.

The focus has to be on increasing economic growth.  Bill English is going to have a very hard time trying to get the Government out of a cycle of debt and deficit.

Will Labour reveal their tax increases policy before the election?

October 22nd, 2008 at 10:00 am by David Farrar

Smart readers will have noted Labour have been very careful not to rule out tax increases after the election. They have said they will not reverse their current tax cuts, but they have left open introducing new taxes, or a new “rich rich prick” tax rate of 45c for those who earn over $100,000.

The Herald reports that Labour have basically already spent their contingency spending money for the next three years. This means that if Labour is re-elected they will either have to go through three years of making no spending promises or they will put up taxes.

Yesterday Dr Cullen said strong leadership was needed to ensure the overseas crisis did not lead to a “depression” in New Zealand.

“Labour is simply not prepared to let that happen,” Dr Cullen said.

“We will bring forward spending on infrastructure to create real jobs and build the potential for future growth … now is not the time to slash spending as our opponents are proposing.”

The hypocrisy of these statements are massive. Up until a few weeks ago Dr Cullen was attacking National’s plans for increased infrastructure spending. Cullen and Clark said it was madness and lunacy. They have done the mother of all u-turns.

But he also gets it wrong about “slashing spending”. Yes National will look to eleiminate some low quality spending – but the major change it is making is reducing the amount of money going into KiwiSaver in the short term. Now Dr Cullen is saying that in a recession you need increased activity to help you out of it – well that is exactly what National are doign by temporarily diverting some money from savings into spending and tax cuts – both of which help minimise a recession.

So by Dr Cullen’s own logic, National’s policies will provide a greater short-term stimulus to the economy. You save more in the good times and you save less and spend more in the tight times – exactly what National is doing. Cullen just can not admit that his 4%/4% KiwiSaver policy is nno longer suitable for today’s economic climate – it was a policy for when we had massive surpluses.

Armstrong on Labour’s spending

October 18th, 2008 at 11:51 am by David Farrar

Thank God some media are focusing on the substance of policies and spending promises, rather than merely the style of symbolism.

John Armstrong does a first class analysis:

Increasingly, the story of the 2008 election is a tale of two election campaigns.

The first campaign has everyone pretending nothing has changed and it is business as usual. The other campaign accepts everything has changed in the wake of the global financial crisis.

Stuck fast in the first campaign are most of Parliament’s minor parties. They are becoming increasingly irrelevant to the main action. They are in denial that the party is over.

They continue to promise to spend money on this or that. But they are not going to be able to extract the requisite cash from the two big parties in post-election talks. There simply is not going to be any money spare.

ACT is probably the only minor party happy about this – they want to cut spending. With a decade of deficits there is not enough money for the major parties spending priorities, let alone the minor parties.

The minor parties have not adjusted to that reality. As a result they are finding themselves ignored.

The minors should concentrate on policies that go beyond spending. I know this will be very hard for the Greens, but money does not grow on trees – not even carbon credit generating trees.

It is a different story for the major parties. National accepts the party’s over. Labour knows the party’s over. But it is hoping some voters haven’t noticed.

In the pretend campaign, Labour continues to spend money it does not really have, this week targeting students, their parents, beneficiaries in part-time work and the elderly.

There is no way Labour can deliver on their promises, unless they hike taxes which in a recession is suicidal. Labour knows a fourth term would be their final term anyway, so they don’t care about broken promises, so long as they get that magical fourth term.

The spending was clearly planned before international financial markets went into free-fall and the Treasury produced far gloomier forecasts of the state of the Government accounts.

Despite Budget surpluses turning into ongoing deficits, Labour continues to roll out new spending, using the fig-leaf of a three-to-four year phase-in period for new policies to try to hide its embarrassment from those questioning how this squares with the party’s claim to be fiscally responsible.

And remember PREFU was done before the latest developments in the credit crisis with global credit drying up.

National is justifiably arguing that Labour is asking voters to write it a blank cheque. Without figures or forecasts, voters are flying blind.

Labour is behind in this election, however. It has to go for broke.

National is being far more cautious because it is the one looking more likely to have to clean up the mess. Its stimulus is principally $1.4 billion-worth of tax cuts which it would bring forward to next April, when it believes the economy will most need it.

National is being transparent about how big its stimulus will be. Labour isn’t. Only a week or two ago Labour accused National of being fiscally reckless with its tax cuts. National can now fire that charge straight back.

Labour is going for broke – but it is the country that will be broke. Ten years of deficits is close to the deficit being structural. Add on an extended recession and Labour’s billions of extra spending and you mey get that structural deficit we had in the 70s and 80s – endless borrowing and debt – wiping out the gains of the last two decades.

Counting up Labour’s borrow and spend

October 18th, 2008 at 11:04 am by David Farrar

The PREFU shows us Labour is leaving us with a decade of deficits. But despite forecasts showing the Government will need to borrow money fpor the next 12 years or so, they have gone on making huge spending promises.

The Herald has counted up the numbers and finds that Labour is planning to spend a net $3.65 billion more. Now this is simply not possible. They will have to increase taxes to do this, or break their promises.

Cullen talks depression not recession

October 15th, 2008 at 11:00 am by David Farrar

Does Dr Cullen know something we don’t?

The Dom Post reports:

Finance spokesman Michael Cullen said: “The Government is not going to allow the economy to slip into a depression because it has some fear of lifting its short-term borrowing position. That is not sensible fiscal economic management.”

The Government is already facing a debt blowout after the Treasury forecast a decade of deficits.

So Dr Cullen is worried about a full scale depression, yet he is handing out free cash to students.

But Dr Cullen said he would borrow more if necessary to fund road, infrastructure, forestry, housing and rail projects, including expanding the electrified network to Auckland’s North Shore and a rail tunnel under Waitemata Harbour.

His plan marks a U-turn from Labour’s scathing attacks on National’s plan to borrow more to spend on infrastructure.

In August, Prime Minister Helen Clark said: “I just think it’s mind-bogglingly stupid. You go out and borrow at a time when the international markets are in crisis.”

National pleding to borrow more when debt was at 20% of GDP was called reckless and stupid, and now Labour says that increased borrowing is the answer with debt projected to hit 30% of GDP.

Which Dr Cullen should we listen to?

Is this the biggest economic flip-flop ever?

The secret mini-Budget

October 15th, 2008 at 8:58 am by David Farrar

The Herald starts to ask the obvious questions about Labour’s planned mini-Bduget for December – how much will it cost?

Labour will not reveal how much more taxpayers money they will spend. Labour won’t reveal how much more debt they will incur. And Labour won’t reveal how much they will increase taxes by to pay for it.

You could understand an Opposition newly elected to Office doing a mini-Budget once it finds out how bad the books are. But Labour is in Government – it has daily updates from Treasury and the Reserve Bank if necessary.

Labour had previously accused National of three things

  1. A secret agenda
  2. Uncosted policies
  3. Increasing debt (Clark said it was “mind-boggling stupid” to do so)

We now know that it is in fact Labour doing all these things. They are refusing to give details of some of their spending plans or tax increases (or rule them out), saying we will tell you after the election.

They are making promises (such as superannuation) that have not been costed (the media are having to do it for them).

They are announcing spending bribes everywhere, despite a projected decade of deficits. EIther debt will skyrocket or they will have to put tax rates up. They are incapable of trimming existing Government spending.

Borrow and Spend

October 13th, 2008 at 3:36 pm by David Farrar

Labour’s books for the Government are forecast to have to borrow $20 billion over the next decade. A decade of deficits is going to push debt from under 20% of GDP to over 30%.

In that context, Labour’s pledge today to introduce universal student allowances within four years is reckless and unaffordable. Every cent of those allowances is going to be borrowed.

In 2005 I would have cheered for abolishing parental means testing. It would have been a far better policy than interest free student loans.

But to go ahead and announce this, after learning about the decade of deficits in reckless, and reinforces that this Government only knows how to spend money, and doesn’t know what to do when it runs out of money to spend – it just keeps spending.

This is not about some noble public policy goal – such as more operations, or not having eight year olds unable to read or write. It is purely an attempt to buy votes through a borrow and spend policy. Once fully implemented it will cost over $200 million a year – every cent of it borrowed.

It is becoming clear what Labour’s secret mini budget in December will be – massive tax increases. It is either that – or borrowing so much it will take a generation to repay.

There are many good things one can do when you have large surpluses. But when the economic is in recession, and you are spending more than you are receiving, you have to make choices. And those choices should be aimed at growing the economy, not just free cash for students.

Armstrong on PREFU

October 7th, 2008 at 7:23 am by David Farrar

John Armstrong does a nice summary:

It was only a few short weeks ago that Bill English was saying he wasn’t going to be spooked by a little bit of red ink in the Government’s accounts.

The Treasury’s pre-election fiscal update bleeds so much of the red stuff that the document looks like the aftermath of Dracula running amok in the blood bank.

The numbers in this horror story are truly awful. It is goodbye to operating surpluses for close to a decade. The forecasts for the separate cash deficit figure nearly double to $6-7 billion for the foreseeable future. Growth slumps. Unemployment jumps. These numbers will almost certainly get worse. The Treasury’s forecasts were done before last week’s maelstrom on Wall Street.

What a legacy to leave behind.

The update is a brutal reality check for parties making big election promises. In the short term, Labour has already gobbled up the allocation for new spending in next year’s Budget. There can be no pre-election bidding wars to buy votes. Post-election negotiations are now going to be hellishly difficult.

Yes – universal student allowances just died yesterday.

If a Labour-Green-NZ First Government was elected, I think they would find it almost impossible to govern without increasing taxes. There is less than $500 million available next year for new initiatives. Even a centre-right Government will find it hard to cope with that. I think it is inevitable there would be a range of new taxes introduced – they will carry through with the legislated tax cuts, but seek to increases taxes elsewhere – maybe even do another envy tax on people earning over $100,000.

In such an atmosphere of restraint, National’s unveiling of its tax cuts tomorrow seem about as tactful as someone cracking open the champagne at a funeral just as the coffin is being lowered into the grave.

The tax cuts needs to countered by savings elsewhere. A significant increase in the operating deficit is not a good idea. However tax cuts are still important as part of a package to life economic growth – higher economic growth is the way to avoid a decade of deficits.

Having slammed National for setting a debt-to-GDP target of 22 per cent, Cullen’s position has been undercut by the current debt ratio being forecast to balloon from 17 per cent to 24 per cent of GDP over the next four years.

And to keep increasing after that to over 30% of GDP.

If National’s tax cuts are reckless, so, by Cullen’s previous definitions, are Labour’s.

Cullen admitted as much by saying that had he known in advance what was going to happen he would have been more cautious about cutting taxes. However, he is refusing to withdraw the second and third phases of Labour’s tax package.

That was actually my question to Dr Cullen – would he have made the tax cuts he did, if he had these forecasts six months ago. He replied that he he would have been more prudent as he leaves recklessness to bloggers 🙂

Cullen is right that he can not directly reverse the tax cuts he has just passed into law. But I just can’t see how a Labour-led Government could live within these fiscal parameters. I suspect there would be a range of new taxes introduced.

That gives National carte blanche to go with its more generous package, which it says will be no more expensive than Labour’s because the extra cost will be funded by transparent savings in government spending.

Yes the key is having the whole package fiscally neutral or very close to it.

The bickering over tax has long made up for the lack of argument over wider economic policy. Yesterday changed everything. The election is no longer about tax. It is about which party can best convince the voters its policies will shorten the length and depth of that recession.

This is absolutely where the debate needs to go. There has to be an real focus on increasing economic growth.

PREFU: Ten years of deficits

October 6th, 2008 at 3:41 pm by David Farrar

The PREFU is far worse than anyone could imagine. Thank God St Ruth and National changed the law in 1994 to force the Government to open the books up before an election – otherwise it would be a repeat of the last time a Labour Government left office – a fiscal mess for the incoming Government.

The Secretary of the Treasury, John Whitehead, did a presentation before we got the books. The room was silent as he wound out the bad news. The problem isn’t our financial markets – they are much better structured than in the US. It is the flow on effects of lower GDP growth and increased spending. So we don’t have a crisis, but we do have a very bleak fiscal situation.

The Crown accounts are going into deficit, and will remain in deficit until 2018 – yes – a decade of deficits on the medium term projections. The deficit is forecast to be $31 million this year and up to $3.2 billion in 2012/13 – returning to surplus only in 2017/18. This is the OBEGAL excluding Super Fund Revenue.

Dr Cullen and Helen Clark are going to be very red faced over debt. Do you recall how they attacked National’s plan to borrow 2% more of GDP for infrastructure as an economic calamity and reckless as it would push debt up to 22% of GDP – 2% in excess of Dr Cullen’s ceiling of 20%

Debt is forecast to peak at 30.1%!!! It will be 24.3% by 2012/13 and 30.1% by 2018/19. After wailing about how the world would end if debt went to 22% of GDP, Dr Cullen is leaving NZ with a forecast rise to 30%.

The cash deficit next year is now forecast to be $6 billion and over five years a cash deficit of 31.7 billion.

Incidentally PREFU was done around five weeks ago so doesn’t take account of the very latest in the US such as the bailout. They do not expect this to change PREFU significantly but it does increase the risk of a sharp slowdown.

Treasury are forecasting close to 0% annual GDP growth until June 2009.

Some changes to the annual predictions are

  • KiwiSaver costs up $280m by 2012
  • Tax take down 900m
  • Benefit costs 500m up
  • Early Childhood Education Costs up 200m
  • Debt servicing up 500m

The annual contingency for extra spending is $1.75 b per annum plus 2% inflation. But most of this is already allocated and for the next four years only $500 to $600 million a year is available for genuine new spending.

So what to do? Well the Treasury Secretary says if one can manage an average real GDP growth of 3%, then the long-term debt (2022/23) will reduce by 10%.

This for me is what the election must now be about. The status quo in terms of economic growth is not acceptable – a decade of deficits must not happen. So voters should ask which party will have the best policies and best people to boost economic growth.

I have previously given Dr Cullen pretty high marks for his fiscal management. Those marks were seriously downgraded today as he leaves us with ten years of deficits forecast and a 50% forecast increase in debt as a percentage of GDP.

There will be some focus on National’s response and their tax plans and infrastructure plans. The tax plans will be credible if they are largely fiscally neutral with reductions elsewhere in expenditure. And a lower tax economy will lead to higher economic growth – which is what it is all about.

The infrastructure plans will add 2% of GDP to gross debt – a small amount now compared to the 10% extra on these projections. The rationale is unchanged for them though – if they will add to economic growth by increasing productivity, then that is a good return on investment. Not all infrastructure investments will lead to higher economic growth, so the focus should be on the quality of the investment.

Bill English is about to inherit what may be the toughest job in New Zealand – turning around a projected ten years of deficits and 50% increase in gross debt as a percentage of GDP.

Cullen breaks his own debt target

September 27th, 2008 at 8:41 am by David Farrar

Michael Cullen has admitted that the opening of the books the week after next will reveal he has broken his own gross debt target of 20% of GDP. And this is after all the hysteria about the end of civilisation if this happened under National.

Dr Cullen said there was room for only “very modest” new spending commitments from Labour during the campaign.

I suspect Dr Cullen’s idea of very modest may not be what anyone else calls modest!

UK Conservatives warn against borrowing

August 21st, 2008 at 9:58 am by David Farrar

I was interested to read in the Telegraph that the Conservative Shadow Chancellor, George Osborne is attacking Gordon Brown for his reckless plans to increase Government borrowing.

What fascinated me most was the level of debt:

Under the rules, the Treasury is only supposed to borrow a maximum of 40 per cent of the country’s gross domestic product.

So the UK debate is about whether exceeding 40% of GDP is prudent, while in NZ Helen and Michael preach the end of the world if it is 22% instead of 20%.

Of course Helen is also on the record as having advocated more borrowing when debt was 57% of GDP, so her position on this issue is so flexible, she could get a gold in gymnastics at the Olympics.!

Blog Bits

August 8th, 2008 at 2:47 pm by David Farrar

Four interesting blog pieces – all from “professional” journalists also. First off is Nick Stride, editor of The Independent:

Deputy Prime Minister Michael Cullen was on even shakier ground when he tried to paint National leader John Key’s debt raising and infrastructure investment strategy as a ruinous policy designed to hide borrowing to fund tax cuts.

If memory serves, it wasn’t so long ago Labour was attacking National for the speed with which it was pushing national debt levels down to 30% of GDP.

Now it’s on the attack over plans to lift that ratio from 20% to 22% a rise so insignificant it will barely register at the sovereign rating agencies.

The fact is, New Zealand ranks high among OECD countries in terms of its debt-to-GDP, and in the bottom half in terms of its infrastructure. It therefore makes perfect sense to allow the two to come a little closer together, to everybody’s benefit.

It’s true, as Vernon Small points out in his column on page 24, there’s no free lunch; the extra debt envisioned by National will have to be serviced, reducing the amount government can spend elsewhere.

But it’s not a zero-sum business in which a dollar spent on infrastructure is a dollar that must be taken from health or education. According to research conducted in 2004 by Macquarie Research Economics, every 1% rise in infrastructure spending can be expected to lift GDP 0.5%.

This is what the debate should be about – whether the return on the capital and the interest on borrowing is a good investment – will it lead to higher economic growth. Instead we have had a near Taliban like mentality – that any extra borrowing is madness and Muldoonism.

The Dom Post’s Vernon Small also blogs on this issue:

Yes, National’s plan to increase gross debt to 22% of GDP is conservative. But maintaining it two percentage points above Labour’s target does bend the party-political continuum.

Since when did centre-right parties run a looser fiscal regime than centre-left ones?

It is somewhat ironic. My non serious answer is since Labour started believing in tax cuts. My serious answer is that centre right parties see a difference between borrowing and expenditure on social spending, and borrowing for expenditure on capital works.

No, National cannot credibly say it is raising $750 million in borrowing only for infrastructure and not for tax cuts. Residual borrowing is the net impact of a complete revenue raising and spending programme, though there are good accountability reasons why politicians should explain how new programmes affect the mix.

Finance Minister Michael Cullen is also happy to let debt rise over the next few years, driven by a tax-cut programme. So it is a relativist, not absolutist, debate. They may as well argue they are borrowing to cover the impact on government revenue of the current recession.

Yes if National is borrowing for tax cuts, so are Labour. As I did a long winded post on last weekend, you have a current account and a capital account, and the cashflow funds both those things.

He isn’t a blogger but Keith Rankin writes in support of infrastructure spending:

Helen Clark and Michael Cullen are describing National’s proposal to borrow in order to fund infrastructure projects “incredible”, meaning foolhardy and irresponsible. (“Key unveils plan to borrow, PM dubs it ‘hilarious”‘ – NZ Herald August 4, 2008.) All Clark and Cullen are doing is showing how out of touch they are with economic reality.

Financial crises happen when lending slows down significantly in financial markets. The problem usually is a lack of credible borrowers. This is precisely the time that borrowers such as governments funding infrastructure need to step up to the plate.

Governments need to spend more and borrow more precisely when the private sector is spending less and borrowing less. This was the most important lesson of the Great Depression in the 1930s.

Ben Thomas writes on the so called secret agenda:

All of which is a roundabout way of saying the scandal that did erupt – the audio files of English and the Smiths, Lockwood and Nick – was outrageously overplayed by the media and National’s parliamentary opponents.

The story was as follows: an unknown person, who claimed later to be unaffiliated with any political party, attended the Friday night social event posing as a National Party member and engaged the three senior MPs in conversation around left-wing touchstones: state ownership of Kiwibank, nuclear power and Working for Families.

The conversations were recorded and played on the broadcaster as evidence suggesting that National had a “secret agenda.”

Fine. Except the recordings disclosed no such thing. They were evidence of absolutely nothing except a slightly looser verbal style than MPs would present in a formal media interview or Parliament. This is a story about language.

The Smith & Smith conversations especially were hyped up massively. They were quite unexceptional.

At it’s most basic, there is syntactic precision: there was little effort made in the media to differentiate a secret recording of a conversation (as in this case) from a recording of a secret conversation (which may have yielded something much more interesting).

A useful point.

English conceded he would eventually prefer to sell off Kiwibank “but not now.”

In fact absolutely nothing in English’s comments was inconsistent with National’s declared policy. Lockwood Smith was accused of revealing the hidden agenda when he said “Once we have gained the confidence of the people, we’ve got more chance of doing more things.”

He even said, “We may be able to do some things we believe we need to do, perhaps go through a discussion document process – you wouldn’t be able to do them straight off.”

In other words, National may have a secret plan to, er, consult with the community and gauge public opinion before implementing new policy.

Yes, how a public policy consultation process is proof of a secret agenda, I do now know.

The reality is the secret agenda meme is all about trying to associate a negative brand with a party. I will touch more on this next week, but is is the equivalent of the “Have you stopped beating your wife” question.

There is a very relevant example of a major political party in government pursuing a deeply unpopular policy in the face of public opposition, and refusing to abandon it despite repeatedly being told it is not what voters want. It is the Labour government’s push for state funding for political parties.

Labour has never campaigned in an election on this policy but it is a fond wish of the prime minister and her party.

It’s also a policy that is widely detested by the public, and has been soundly rejected every time its prospect has been floated either through official comments or strategic leaks.

Labour’s secret agenda for state funding – indeed. They don’t have the guts to make it a manifesto promise, because they know it is as popular as anthrax.

Finally back to Vernon Small again, who asks where the dividing line is between bloggers and journalists, with the catalyst being my accreditation as media at the National Party conference. It is an interesting issue (especially to me), but somewhat academic. This is the fourth or fifth National conference I have attended as media. I’ve also been in budget lockups as media, attended tax conferences, spoken on media panels at media conferences, and get invited to cover conferences and seminars on a very regular basis.

I’ve commented over on Vernon’s blog on a couple of issues he raises.