He’s spent it all!

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.

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