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Previewing the Prefu

Written By: - Date published: 12:49 pm, October 5th, 2008 - 9 comments
Categories: economy, election 2008, public services, tax - Tags:

Tomorrow the government’s books will be opened up. It is not expected to be a pretty picture. Oil prices and the credit crunch have forced the economy into recession. The debt to GDP ratio will be higher than was modelled in the Budget for three reasons (at this point, I just want to remind our excitable righties that fiscal modelling is not carried out by Micheal Cullen but by Treasury officials):

1) GDP is lower than expected: the Budget expected the GDP to be $180 billion in the year to June. In fact, it was $179 billion. It may have shrunk by another billion since, whereas the model had it growing by a billion. Even a constant level of debt increases as a % of GDP when GDP shrinks.

2) Tax revenue will be lower than expected: a recession hits corporate tax revenue hard. Employment, while not down, has not grown as modelled, so income tax revenue will also be lower than expected. Lower than expected consumer spending means lower GST revenue. All of which means that even if government spending was at expected levels, more money would need to be borrowed to make up the difference.

3) Spending will be higher than expected: So far, the number of people on the unemployment benefit has not increased so benefit payments have stayed low. However, other government spending has been higher than expected – high oil prices have driven higher than expected inflation, increasing government costs. Add to that the sign-up rate for Kiwisaver has been much higher than modelled. Treasury thought there would be 270,000 members by July 1, today there are over 800,000 – each costs the Government $1000 on sign-up and around $40 a week more. That adds up to around a billion more spent than expected this year. More expenditure means more borrowing.

Add in losses from the Government’s financial assets (the Cullen Fund, the ACC Fund etc) and we are looking at net government debt worsening by several % of GDP more than expected. So, tough times. What should we do? Well, we shouldn’t cut government spending, that would just deepen the recession. Measured increases in government spending (as Australia is undertaking) can prime the economy’s pumps, getting us out of recession quicker. We certainly should not increase debt any more than necessary, especially while international credit markets are in such turmoil; if there was ever a time for borrowing for tax cuts, now is not it.

How the parties react to all this will be an important test of their readiness to govern. Will they react prudentially or will they carry on as if nothing has happened and attempt to win the election at any cost?

9 comments on “Previewing the Prefu”

  1. sean 1

    As long as you guys and Cullen apologise for abusing Key when he said debt would increase by 2% under a National government, then theres nothing to get upset about.

    Its your chance to show either how “big” you are by admitting you were wrong or how hypocritical you are by spinning it and coming up with more apologies.

    The ball is in your court.

  2. randal 2

    sean…everyone is bigger than John Keys. He is a mental midget obsessively focussed on taking other peoples money away from them and it is he who should be apologising to all good new zealanders for trying to havea go at them.

  3. Concerned of Tawa 3

    Labour will hope the empty chest will make the public wary of National’s tax cuts.
    But no…
    I suspect the many voters will be wondering where the last 9 years of global boom have gone and what apart from an expensive wrecked train set have they got to show for it. Not the top half of the OECD (well apart from teen pregnancy and number of uni grads living overseas) that is for sure.

    Sigh.

  4. Concerned of Tawa
    “I suspect the many voters will be wondering where the last 9 years of global boom have gone and what apart from an expensive wrecked train set have they got to show for it”

    Probably not the ones who have taken personal responsibility for their well being.

  5. Labour will stick their head in the sand and pretend nothing is wrong.

  6. Draco T Bastard 6

    sean:

    As long as you guys and Cullen apologise for abusing Key when he said debt would increase by 2% under a National government, then theres nothing to get upset about.

    Why would I do that considering that he’s still promising reckless tax cuts and spending? IE, still proving that he (and the rest of National) is stupid

  7. Quoth the Raven 7

    sean – Read this sentence from the post: “We certainly should not increase debt any more than necessary, especially while international credit markets are in such turmoil; if there was ever a time for borrowing for tax cuts, now is not it.”

  8. r0b 8

    I suspect the many voters will be wondering where the last 9 years of global boom have gone and what apart from an expensive wrecked train set have they got to show for it.

    Let me see if I can help you out there CoT. What we have to show for it is unemployment down to 30 year lows, crime down, numbers on benefits down, the most sustained period of economic growth since WW2, Working for Families, superannuation increases, minimum wage raised every year, four weeks leave, 20 hours free early childhood education, fair rents, interest free loans for students, poverty / childhood poverty rates down, suicide rates down, cheaper doctors vists, modern apprenticeships, and employment law which stopped the widening wage gap with Australia. An independent and sane foreign policy. Planning for the long term future via Cullen Fund and KiwiSaver. Strengthening the economy by paying off massive amounts of 70’s and 80’s debt (so reducing previously crippling annual interest charges), a booming rural economy, and with state owned assets (Air NZ, KiwiBank, KiwiRail, breaking up the Telecom monopoly, back to ACC). And not least we have a strong economy well placed to survive the current international financial crisis.

    There you go CoT, glad I could help.

  9. Strings 9

    >
    >>Add in losses from the Government’s financial assets (the Cullen Fund, the ACC Fund etc) and we are looking at net government debt worsening by several % of GDP
    >

    Strange this one is. THERE ARE NO ‘REAL’ LOSSES, just bits of paper. However, in a land of open accounting I suppose it’s reasonable that such paper write-downs be taken as losses. Does this also mean that Treasury will be advised to substantially increase the “capital tax” they impose on State Enterprises from the half year point? This will clearly show that the cost of Government has increased under the new government, and that all bets are off – except of course for Treasury, who will be able to grow like Topsy to enable much more analysis of how bad things are to be undertaken.

    Hang on though! The Treasury forecast analyses of just a few months ago were so wrong that we are now facing a much worse situation that the last budget was predicated on! Hmmm, seems like a cost saving exercise would be to fire all the economists and economic analysts in Treasury for incompetence, that could be worth a point or two off the tax rate:-)

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