Missing the woods for the trees

The media have been running a series of articles claiming errors in National’s fiscal plan, based on information from Grant Robertson or former Labour staff.

While there was one error, which I will detail, the narrative on this is almost farcical because of the time frames the forecasts cover.

The PREFU and National’s plan deal with forecasts out to 2035 or so – which is a period of 15 years.

Over those 15 years there will be around $2 trillion of government spending and around $1.8 trillion of government revenue.

The actual outcome in 15 years will be tens of billions different to what we are forecasting today. Even Treasury with its dozen of Budget staff often is out by $1 or $2 billion in a forecast for just the following year, let alone 15 years times.

What the competing forecasts are about is competing paths.

Labour’s path (which it doesn’t want to talk about) is 15 years of deficits, and $200 billion+ extra debt and a tax hike.

National’s path is getting back into surplus quicker, having debt peak at far less and a temporary tax cut. How it achieves this is pretty simple. They do two things:

  • Scrap some of the current low quality Labour programmes such as free tertiary fees
  • Increase future spending at a slightly lower rate than Labour

The 2nd bullet point is the key. It is what Bill English managed to do after the GFC. You spend up large for a couple of years to cushion the recession but then you clamp down on future spending increases by reprioritisation and fiscal discipline.

The 15 year plans (and even the three year plans) are not a cast in stone projection. Take for example Labour’s 2017 plan – they ended up spending masses more money than they claimed they would, because the economy had enough growth to cover it.

So arguing about $80 million here or even $4 billion in the context of a time period which has $2 trillion of spending is just silly, to put it mildly.

Now sure if National has made a mistake in their plan, this should be reported. But it’s a mistake which represents 0.2% of total revenue or spending over the 15 years.

So what are the areas of dispute.

Super Fund contributions

National’s fiscal plan was calculated and written primarily after the May Budget. Two days before the plan was released the Government released the PREFU and National over around 36 hours had to comb through the PREFU and look for what had changed since BEFU.

They missed that the rate of contributions to the NZ Super Fund had dropped. The three professional economists employed by NZIER to check the plan also missed this. It’s sort of understandable as Labour have spent years claiming having reduced contributions is evil. But there is a formula used to calculate contributions and this was applied to PREFU (Labour could have chosen to over-ride it but didn’t).

So what is the impact of this error. That National’s projected debt in 2034 would be 36% of GDP instead of 35%, as opposed to over 50% for Labour.

But again remember that debt figure is due to the difference between tax income and spending over 15 years which will be about $2 trillion.

NZ Upgrade Programme

Grant Robertson is claiming National has double counted NZ Upgrade Programme funding for our infrastructure programme.

National and NZIER dispute this. They rolled it into capital allowances but kept the label for consistency from an earlier plan.

Tax on Super Fund contributions

Grant Robertson is claiming National should have accounted for the lower tax revenue on the super fund contributions being suspended.

This is what you call a second order effect and no party even takes these into effect when doing opposition plans. We know this because Grant Robertson himself didn’t do this in 2017 when his plan was to increase contributions to the NZ Super Fund.

Labour desperately don’t want people talking about their fiscal plan, because 15 years of deficits is more n economic death wish than a plan.

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