Kiwiblog

Treasury has just published the crown accounts for the year ending 30 June 2009. This is basically the last set of accounts for the Labour Government, even though the new Government will have had some impact through decisions taken before the 2009 budget.

The 2008 budget said there would be a surplus of $3.1 billion. In fact the operating deficit was $10.5 billion.

The OBEGAL (the underlying surplus) was a deficit of $3.9 billion compared to the budget of $1.3 billion.

Treasury released yesterday the crown accounts for the first nine months of this financial year. Here’s the differences between what Labour projected in the PREFU and the reality six months later:

• Tax revenue down $1.9 billion
• OBEGAL down $2.1 billion from $1.9 surplus to $0.2 deficit
• Investment losses total $5.7 billion
• Acturial losses of $3.6 billion
• $0.7 billion gain on Kyoto
• Overall deficit is $7.7 billion – a blow out of $11.1 billion from the projected $3.4 billion surplus in PREFU
• Gross debt now $45 billion or 25.1% of GDP (do you recall Labour saying 22% would be a disaster?)
• Net debt (which I find more useful) is $5.1b or 2.9% of GDP – against forecast of 3.0%

The one off investment and acturial losses are not that major a concern for me, but the $2.1 billion change downwards in OBEGAL is a huge issue.

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.

News that the Reserve Bank of Australia has dropped their official cash rate by a huge 100 basis points gives some inidcation of how weak various economies are.

NZIER released their quarterly survey of business confidence yesterday. On the basis of it they predict the recession will last for at least another two quarters. A net 32% of firms have reported a decline in trading activity and a net 13% expect trading activity to fall further in the next three months.

It is in that context, and the decade of deficits announced by Michael Cullen on Monday, that National have modified their tax package which will be announced later today. This is both necessary and responsible. The public want a tax package that takes account of the last few weeks, let alone the last few months.

The scary thing with the PREFU numbers is they were finalised five weeks or so ago, so do not include the latest shocks from the US. As the Herald says:

Party leader John Key yesterday admitted that the pre-election opening of the books by the Treasury showed a picture that was much worse than he had expected.

“We’d always expected a slowdown, but I don’t think anyone saw deficits for 10 years and such a deterioration in the accounts.”

The economic and fiscal update showed cash deficits forecast to reach $7 billion and budget deficits for the next 10 years. …

No-one at all was expecting it to be that bad.

Also behind the decision is the fact that the forecasts revealed by the Treasury this week do not take into account the tumultuous events of the past month, in which banks have collapsed, the US Government has approved an enormous bail-out deal for Wall Street, and the flow of credit internationally has virtually seized up.

Who knows where it will end. Now this is no reason not to have tax cuts at all – they are important as one factor in lifting economic growth. But some caution around size and timing is essential.

Prime Minister Helen Clark yesterday cast doubts on National’s statement that it had scaled down its tax cut plan.

“I believe they over-promised on their tax package and they are now using the excuse of the books to try and talk down expectations,” she said.

I am tempted to call the PM a moron for that comment, but I know she is not a moron so all I’ll say is she is playing dumb. If she really thinks a decade of deficits is simply an “excuse” then she is in la la land.

But here is what is really interesting. We have seen National says “Yes we will modify our plans in wake of the financial crisis” while Labour says it is not going to change anything. Dr Cullen ruled out any change to tax or spending in the PREFU lockup. At most they might delay some of WInston’s new bureaucrats. Labour are happy to have ten years of deficits and debt rising from under 20% to 30% of GDP.

Labour have had it easy for the last nine years. They have never had to make tough decisions, and now the economy is in reecession they have no idea and no plan as to what to do to prevent a decade of deficits. Their biggest problem for the last decade has been what new schemes to dream up to spend our money on – hey lets put a billion more into Working for Families, no no lets buy some trains for a billion, no no let’s give pensioners free bus trips, no no let’s give public servants a pay rise but only if they join the PSA etc etc.

Because the economy, helped by strong commodity prices, has been so strong they have been able to say no to measures that would boost labour productivity and economic growth. Many of these measures (such as RMA reform) will be unpopular with some lobby groups, so why bother to take the heat, when hey we have enough money without such reforms.

But now Labour has run out of money. They are content to run ten years of deficits. They are not willing to take any hard decisions about lifting our economic growth, let alone paring back any of their spending schemes.

We’ll hear later today what National’s plan is. I think it will be measured, significant and popular. It will of course be attacked by Labour and the unions. National could announce the second coming, and Labour and the unions will attack it. Hopefully at some stage, somone may ask Labour what their plan is? Their plan is to not change tax rates and not change spending significantly. Their plan is a decade of deficits.

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.

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.

Bill English delivered a well received speech on the economy to the conference. The key focus will be his comments on debt, so I’ll deal with them at the end and cover the other stuff first. First his summary of the economic picture:

On the negative side:

• The economy will continue to struggle.
  
• Inflation is high.
  
• Interest rates are high.
  
• The business outlook is grimmer than it has been since 1988.
  
• There is considerable uncertainty about some parts of the investment market, given the collapse of many finance companies.
  
• Oil prices are much higher than they were a year ago and, despite some short term relief, are likely to remain high.

On the positive side:

• Commodity prices are at an all-time high.
  
• Provincial areas are doing reasonably well, and the further south, the better.
  
• The dollar is dropping, pushing up export incomes.
• The economy is tilting more towards the export sector.

A good round-up.

First, we are going to have tax cuts. New Zealanders have been taxed too high for too long.

Even the Labour party has grudgingly conceded the argument. But it has come awfully late to the party. Australia is in its sixth year of significant personal income tax cuts and has signalled further cuts to come. It’s time we got started.

Tax cuts will put some cash in people’s pockets and that’s good. But the longer-term reason for cutting taxes is to improve the incentives to work, save, and invest – and that’s what National is committed to doing.

This is worth remembering. Tax cuts are great in that people get to keep more of their own money. But having tax cuts leading to higher economic growth is the bigger goal – for that is the way we get better services, and have more money.

Secondly, New Zealanders are not getting value for money – their hard-earned money – from government services. Too much is caught up in a burgeoning Wellington bureaucracy designed to make the government feel big and ministers to feel powerful.

And commercial property prices in Wellington keep going up.

Thirdly, we will cut red tape.

This is easy to say and hard to do. People wonder how we can be in favour of small workplaces, soundly build houses, and yet achieve it with fewer rules.

We will do it in two principled ways.

We will use bureaucracy against the bureaucrats. Let officials and ministers jump the hurdles, fill out the forms and incur the cost of compliance before they can have a new regulation. We will also attack specific costs, like complexity in the tax system, the time and costs of the RMA, and the extensive new rules and bureaucracy under the new Building Act.

Fight fire with fire – I like it.

Fourthly, we will introduce national standards in education.

Almost 10,000 young New Zealanders leave school every year without the basic competence to learn more skills….

We will introduce national standards in literacy and numeracy. This will be a spur to taking the best teaching practise from schools that are succeeding and spread this across the whole system. If every child is assessed and taught appropriately, we can help the thousands who now miss out.

This will take time but again we will not lift economic growth without improving our education outcomes.

Finally, we will lift the quality and quantity of New Zealand’s infrastructure investment, to remove the blockages that are currently holding our economy back.

New Zealand under Labour is virtually the only country in the developed world that refuses to use private sector financing and risk management techniques to help spend taxpayers’ money effectively and make it go further.

Over the next 10 years, central and local government will spend between $60 billion and $70 billion on infrastructure. We can do it badly or we can do it well. Let’s do it well.

That’s a lot of money!

So now let us look at the reports of deficits and borrowing – from NZPA:

But deputy leader and finance spokesman Bill English told delegates National was prepared to borrow more to fund infrastructure.

He said New Zealand had one of the lowest levels of debt of any developed country and “additional borrowing” for infrastructure would boost economic growth.

Any increase in debt for infrastructure would be transparent and voters could trust National to be a “conservative” manager of the economy.

“So that will be extremely clear cut and rather hermetically sealed.”

Mr Key argued that increased borrowing overall — ostensibly to fund infrastructure — could be separated from National’s tax cuts.

“What effectively will be happening is you will be able to see exactly what our tax cut programme costs, exactly what Labour’s cost, exactly what we are delivering, what differences or priorities we’ve chosen over Labour’s.

Now one is going to hear a lot of rhetoric around this, so I am going to try and explain the situation by looking at a normal company’s accounts.

A company has three major financial statements – the income and expenditure, the balance sheet and the cash flow.

The income and expenditure is the measure of profitability and to a degree of sustainability. The difference between the two is your profit/surplus or deficit/loss. Asset purchases, borrowing, investment in infrastructure doesn’t directly show up here. However depreciation on assets does show up as an expense, as does interest on any borrowing. So if you borrow too much, you will face pressure on your surplus, as interest costs go up. In the bad old days before Ruth, interest on borrowing was something like over 20% of all expenditure.

In the 11 months to May 2008, the surplus is $5.3b and the underlying surplus (excluding one offs) is $7.3 billion. These are forecast to reduce massively in the next few years due to a weaker economy which means less tax, plus tax cuts plus increased spending.

Interest expenses are currently $2.8b out of total expenditure of $66.8b – so less than 5% of expenditure. However the Crown also gets revenue from investments it has – and they totalled $3.0 billion. So in fact the Crown made $200 million more from investments than it paid on debt.

You do want to make sure interest expenses do not get too high – but as Bill English said we do not have a debt or interest problem at the moment – we have a productivity problem.

So you do want the income and expenditure to be in surplus, or at worst for any deficits to be temporary – with there being a surplus over the medium term.Companies really want to be profitable every year without fail. A country isn’t quite the same – instead of paying dividends through profits, you pay dividends through tax reductions.

Next we have the balance sheet. These are your assets and liabilities. Many major transactions happen here, and don’t even directly affect the income and expenditure. If you buy a frigate for $1 billion then you simply have an increase in assets of $1 billion and an increase in debt of $1 billion or a decrease of the cash asset.

Now many asset purchases are funded through borrowing. Why would you do this? Well a couple of reasons. The first is if one gets the value from an asset over 30 years, then it is fairer to spread the cost over 30 years.

The second, and more important arguably, is that the value you will get from the asset, is greater than the cost of the interest of borrowing to purchase it, so that the company/country as a whole becomes more profitable.

Let’s take an example of say a polling company. You may want to buy 40 computers with CATI software on them at a cost of $400,000. But you don’t have $400,000 in the bank. So you might borrow $400,000 which will mean an interest cost of $32,000 a year. And if they are expected to last for 10 years depreciation of $40,000 a year so it will add $72,000 to your annual expenditure.

But having that software may mean you can call people 30% faster. So if your annual wages bill was $500,000 it shrinks to $350,000. Hence the $72,000 a year expenditure leads to $150,000 of savings and you profit increases by $78,000.

So what this means is borrowing for infrastructure and assets can be both fair and a good way of increasing profitability,

But it does increase risk. If you lose some customers and revenue drops, then you have fixed costs with interest and depreciation instead of variable costs such as wages, and your chance of going bust is higher.

Hence it is not universally good or bad to borrow for asset purchases. It depends on how much existing debt you have, and what you are going to buy with any borrowing.

Finally we have the cashflow. This is where you track the cash in and out from both your operating account and your capital account (plus some others). Now there are linkages. If you have a small cash surplus in your operating account and a larger cash deficit in your capital account, then you have an overall cash deficit. And as I said before the more cash you borrow the more it adds to expenditure.

But there is a difference between cashflow for operating and capital. It is quite normal for there to be a cashflow deficit in the capital account – an expanding business often is purchasing assets faster. The challenge is whether the borrowing on those assets overwhelms your operating account.

If we look at the Government, Dr Cullen himself is saying he will run a cash deficit – he will (just) have a cash surplus in the operating account but have a cash deficit in the capital account. Bill English is saying he will have a larger cash deficit – but again it seems in the capital account primarily. They have not ruled out a cash deficit in the operating account, but if so it is expected to be minor and temporary.

Until we see the actual figures from National in October, it is silly to get too worked up about it – after all Cullen is already running something like a $10 billion cash deficit over three years. The issue is not the size of the cash deficit per se – but what impact it will have on net debt (gross debt is far less important than net debt) and what impact it will have on interest. And most of all what is the long-term forecast in terms of the operating surplus.

Dr Cullen’s ninth and probably final budget is a cunning political device but economically risky and most of all incredibly hypocritical.

The entire budget is designed for one and one purpose only – to try and stuff over National and make it impossible for them to offer larger tax cuts without spending cuts.

Imagine the outcry from Dr Cullen and the left if Bill English as Minister of Finance did the following:

1. Run a cash deficit of $13.7 billion over four years to fund $10.6 billion of tax cuts
2. Ran the OBEGAL operating surplus so low that it will not be large enough to fund the Cullen Fund contributions until 2016
3. Reduced the contingency expenditure provision by $2.5 billion over four years (or $250 million a year)

You would have the left shouting from the treetops that Bill English is borrowing to fund tax cuts, that pensioners should start hoarding catfood because National is planning to starve the Cullen Fund of money, and that reducing contingency expenditure is slashing spending on health and education.

I got to ask Dr Cullen a question on how he would answer the challenge that he is borrowing to fund tax cuts, and he answered that he isn’t, that he is borrowing to fund capital investment.

The irony is that I didn’t agree with the premise of my question – I was in fact quoting what Labour have said for the past few years about borrowing and tax cuts, and the further irony is that Dr Cullen’s response was the argument I have made in the past that borrowing is okay if for capital, not operating expenditure.

As I said above, this budget exists for one reason only – to try and stuff over National. The logical inconsistency of saying we can’t afford tax cuts when the surplus is close to $10 billion, and then delivering tax cuts when the surplus has basically shrunk to zero is staggering.

OBEGAL, the operating balance or surplus after one off gains and losses is forecast to be just $1.0b next year, reducing to $200 million in 2011/12. That is well below a prudent level – I have generally maintained the OBEGAL should be enough to meet the Cullen Fund contribution around $2 billion) and around $1 billion on top of that. So this level of surplus is around $2 billion to $3 billion below that. Cullen has gone from hoarding all the money to spending it all.

Core crown expenditure is forecast to expand from $54 billion last year to a whopping $70 billion in 2012.

Core crown revenue was $58.4 billion last year. The tax cuts sees it stay at around $62 billion this year and next year but then increasing to $69 billion in 2012. So Cullen has core corwn expenditure greater than core crown income for the first time since the last Labour Government. This is a potential repeat of 1990 in terms of leaving the next Government with a deficit.

Net core Crown debt is forecast to go from $1.8 billion to $13.2 billion.

Dr Cullen could hardly contain his glee at having spent everything. Basically the fiscal margin for the next five to six years is close to zero. A further downturn and you have have significant problems. He has happily thrown away his previous fiscal discipline.

So this will make it tougher for National. they certainly will be able to deliver tax cuts larger than these ones, but not massively larger unless they get more rigorous with saying no to various spending proposals. There are not a lot of easy options thanks to Dr Cullen’s empyting or the larder. If by some chance Labour do get re-elected Dr Cullen’s successor will be equally as grumpy with him as Bill English might be – don’t expect any Government can deliver any significant new spending initiatives in the next few years.

I don’t think it is entirely a bad thing that National may have to say no to some more of Labour’s spending. Yes there is a political risk in doing so, but it is at times of economic hardship that people expect the Government to manage its spending more carefully – just as households do. And National certainly has some capital in terms of a lead in the polls that it can use up.

Oh I so envy Australia for its luck in having a more moderate less extreme and idelogical Labor Party. Let us look at what Wayne Swan has delivered. Australia’s population is around five times New Zealand so generally divide by five to get an idea of what it would be for a country our size:

• Tax Cuts of $47 billion
• No tax on the 1st $14,000 of income – rising to the 1st $20,000
• A surplus of  $22 billion which is the largest for a decade but get this only around half what Cullen’s level of surplus has been per capita.
• A move to means testing for welfare rather than universal entitlement for the “baby bonus”
• $33 billion (equal to around $6 billion in a NZ sized country) of savings from cutting wasteful or low quality spending
• $4.7 billion on a national broadband network

Lowering taxes, cutting wasteful spending and targeting welfare at those most in need instead of the rich is not some mad right wing agenda. It is normal day to day prudent management by any Government right or left.

Some astute analysis by Paula Oliver in the Herald:

Dr Cullen is arguing his tax cuts will meet four carefully worded tests he has thrown into the media – they won’t require borrowing, they won’t exacerbate inflationary pressures, they won’t lead to greater inequality and they won’t require cuts to public services.

But the fact is that when taxes are cut by any amount, however big or small, that amount automatically becomes money that could have been used for something else.

I am bemused as Dr Cullen tries to almost con the country that he has invented a special sort of tax cut which is magically immune from affecting borrowing, inflation or spending priorities.

Paula Oliver correctly notes it is all about priorities and opportunity cost.

Now I am a supporter of a balanced approach to spending and tax. As the economy grows, and the tax take grows, I advocate you put some of it into extra spending and some of it into tax relief. Labour for eight years has been almost 100% into extra spending and 0% into reducing personal tax. ACT seem to be currently advocating 0% into extra spending and 100% into reducing tax. I’ve left the savings side of things out of it for now for simplicity sake – just focusing on spending and tax relief shows the contrast.
Now getting back to Paula’s article, both Labour’s and National’s tax cuts will not require borrowing, in that NZ has a surplus which is more than large enough to cover a reduction in tax. But if one had no tax cuts at all, then the surplus would be larger and debt would fall.  So Dr Cullen trying to pretend his tax cuts are somehow immune from being part of a trade off is silly.

Now again I support a balanced approach. When debt was like it was in 1990, the priority was getting it down. Hell we were near bankrupt and facing massive deficits. But debt today is incredibly low, and almost non existent in terms of net debt. So as long as the structural operating surplus (OBEGAL) remains positive (I personally advocate a 1% of GDP surplus, after provision for Super Fund contribution), it doesn’t matter if gross debt flucutates up and down a bit over the years to reflect capital investment etc.

It was fascinating to observe Dr Cullen on the news last night. He seemed jubilant and happy. Could almost not restrain his glee.

And what was he celebrating? A drop in the Government’s surplus of $4.2 billion from a $3.8 billion surplus to a $0.4 billion deficit. The $4.2 billion drop being made up of decline in the value of financial assets by $2.5 billion, an addition $1 billion liability for ACC claimants and a $700 million drop in tax revenue.

Now while this isn’t end of the world stuff (as the underlying OBEGAL surplus is only down by $600 million) it isn’t what you would expect a Finance Minister to celebrate.  So why was he?  Because Dr Cullen thinks economic bad news is political good news, as a smaller surplus makes it harder for National to promise larger tax cuts.

When you combine his glee over a $4.2 billion surplus with the economic vandalism caused by a xenophobic last minute change to the overseas investment rules, one has to wonder has the 20% deficit in the polls pushed Dr Cullen into a scorched earth policy? Where any amount of damage and destruction to the economy is justified, if it might help close the poll gap?

It’s too early to tell, but when a Finance Minister gleefully celebrates the government’s net worth dropping by $4.2 billion,  it’s a fair question to ask.

Despite the headlines, the latest set of crown accounts are not as bad as some are saying.

This is because the important figure is the one called OBEGAL, formerly OBERAC.  This is the measure of the underlying structural surplus. Dr Cullen uses to refer to this one all the time until it got embarrassingly large and he then tried to revert to 1970s accounting standards by focusing on merely the cash surplus.

The OBEGAL to Jan 2008 was $3.1 billion against a forecast of $3.7 billion.  Now that’s somewhat disturbing as normally actual comes in way above forecast, but some of the difference may just be timing issues.

The full year OBEGAL forecast was $6.6 billion.   We’ll find out in May what that has been revised to – could possibly drop to the $5 to $6 billion range.  This is still definitely high enough to afford tax cuts but ironically quite a bit less than previous years when Cullen said they were not affordable.