You have to admire John Key’s audacity. He has presided over a government which has never run a budget surplus and who has accumulated considerable debt. Yet he is hinting that tax cuts are in the pipeline.
In 2007 net Crown debt had been paid off. A small debt was accumulated as Labour adjusted for the Global Financial Crisis. From 2008 New Zealand’s net government debt has increased from less than $6 billion to $37 billion. This is not normally the actions of a sound prudent manager although I accept that circumstances have been unusual.
As part of its re election strategy National is painting itself as a sound economic manager. Ongoing deficits would make people question Key’s and National’s supposed strength in economic management. This is why the projected budget surplus is so important. There has to be light at the end of the tunnel.
But I have this very strong feeling that the surplus is built on foundations of straw. There are a couple of reasons for this. Firstly the finances surrounding the Christchurch rebuild spend are decidedly dodgy. And secondly the decrease in milk prices this year will blow a rather large hole in the tax take.
I commented on the rebuild costs earlier. Immediately post budget various people concluded that some fancy accounting in relation to the rebuild had shaved expenses.
Keith Ng’s analysis suggests that there has been a total reduction in the spend on the Christchurch rebuild of $524 million. At a time when the rebuild is getting under way this is extraordinary. David Parker’s estimate is that the reduction is $567 million and this is from the Crown’s half share of local infrastructure rebuild.
No wonder Gerry Brownlee was so grumpy with the recent Kordamentha report commissioned by Christchurch City which suggested that costs of the rebuild had been underestimated by $500 million dollars. Even before it was released he was trying to undermine it’s validity.
Then this morning Stuff reported that EQC will run out of money early next year. There is a Crown guarantee so that claimants will be covered but it appears that the crown will one way or another have to allocate some money. According to the EQC the fund could be almost $2 billion in debt by June 2016 if no action is taken. The interest cost of borrowing this amount would be in the vicinity of $120 million a year. Added to the difference in opinion on the cost of the rebuild this could cause a significant change to the country’s finances.
There was also this recent story by John Campbell on TV3 (h/t Not a PS Staffer). This year’s Prefu does not include EQC’s up to date figures because the EQC failed to deliver a statement of performance expectations for the coming year. The statement should have been published before the end of June and would have outline EQC’s projected financial position in relation to earthquake claims. Questions concerning the delay need to be answered.
The second bombshell is the continued reduction in the international sale price for milk. On Morning Report this morning it was estimated that the falling price could suck $5 billion out of the economy this year as compared to last year. This would have a significant adverse effect on the tax and GST take. The Prefu expects milk prices to stabilise in 2015, but if the cause of the drop in price is increased production of milk in Europe and elsewhere this expectation may be overly optimistic.
So the risks to the surplus look pretty big and the surplus itself is looking very shaky. To propose a tax cut in these circumstances is reckless in the extreme.
And you have to wonder when National’s announcement is going to be made. It was going to be on September 1 but was deferred understandably because of the Ashburton killing. But National is now talking about releasing the information next week. The information is obviously available now. Why isn’t the information being released now? Is it because National wants as little time as possible for the opposition to be able to dig into the figures?
We are in the extraordinary position where the oppositions’ publicly released policies and costings (both Labour and the Greens) are comprehensive yet the Government is not doing the same. We do not know what they are planning to do next term. We have no ideas what sort of budget they are actually intending to run.
Sound economic managers? More like snake oil salesmen.