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.

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.

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 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.

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.

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.

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.

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.

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.

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%.

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

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.

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.

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.

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.

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.

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.

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?

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.

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.

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.