KEY POINTS:
The Treasury has just offered its most detailed explanation yet of why it it has been regularly underestimating fiscal surpluses - and therefore the scope for tax cuts.
It is interesting insofar as it gives an insight into how many of the factors are likely to be seen as permanent and structural, and how many are in the "now you see it, now you don't" basket which it would be unsafe to base tax cuts upon.
The 2006/07 fiscal year was the eighth in a row in which the Treasury's forecasts of tax revenue a year ahead were too low. The errors reflect a similar pattern of errors in forecasting nominal gross domestic product (real growth plus inflation, a rough proxy for the tax base).
Even with a Budget, forecasting the spending side of the Government's accounts is not an exact science either. The operating balance (roughly equivalent to a company's bottom line) is also thrown around by the financial performance of state-owned enterprises and the Cullen fund and changes in the valuation of liabilities to ACC claimants and retired public servants.
The net effect, however, has been that the Treasury's forecasts of the operating balance one year ahead has been light by an average of $2.2 billion a year over the past three years.
And the cash balances - what is left of the operating surplus after finding capital items like infrastructure, student loans and contributions to the Cullen fund - have been higher than forecast by more than $3 billion a year.
The Treasury and Finance Minister Michael Cullen have known for at least the past two years that "while our revenue forecasts performed well in comparison with other countries, there was a systematic pattern of forecasts lagging the actual results. As a result forecasts exceeded the actuals during a downturn and were below the actuals during a growth phase."
In common with most forecasters it underestimated how long and how strong the current expansion phase would turn out to be. It is the longest in 40 years.
Some of the factors underpinning that sustained growth look more durable than others.
One is household income growth arising from a tight labour market. For the reasons laid out in this column last week, that looks like an enduring feature of the New Zealand economy, given an ageing population and the income gap with Australia.
Another is a greater willingness to borrow than in the past.
Measures like the ratio of household debt to income, and debt servicing costs as a share of income, have been rising relentlessly for more than a decade.
There may be a period of consolidation ahead as the housing market cools but it is unlikely anyone will be holding up New Zealand households as a picture of prudence, providence and thrift any time soon.
Meanwhile, the terms of trade - the relative value of the kinds of thing we export compared with the kinds of thing we import - have been climbing for years and are now the most favourable they have been since March 1974.
Some economists argue this represents a fundamental shift, that with the rise of China, manufactured goods are the new commodities while the foods of affluence are increasingly in demand.
But other items on the Treasury's list of growth-supporting factors look more ephemeral.
Where a few years ago the world was awash with cheap money, allowing relatively cheap fixed mortgage rates here, there is now a credit crunch. Global growth is expected to lose momentum as the US locomotive slows; the only question is by how much.
And net migration inflows have been dwindling. So the Treasury's report sounds a cautionary note.
While the economy's average growth has been higher than previously it is not convinced that its trend or sustainable growth rate has increased.
It points to significant imbalances that have built up in the economy, in particular persistent inflation pressures and a gaping chasm of a current account deficit.
"This suggests that our forecasts of the trend growth rate may not have been fundamentally wrong, although the cyclical factors supporting growth through this period were stronger than we expected."
That sort of comment suggests a vigorous debate is still going on, or should be, about how much of the fiscal "surprises" of recent years is structural beer, available for tax cuts, and how much is cyclical froth which should just be banked.
Cullen insists that no decisions about the size, shape and timing of tax cuts will be made before next year's Budget.
The Reserve Bank, however, has joined together the publicly available dots and come up with an estimate of $1.5 billion worth of tax cuts in 2009.
Governor Alan Bollard warns that they would be inflationary. That is pretty self-evident if the alternative is to use the money to reduce what is left of the Government's debt instead.
Crucially, however, including tax cuts for the first time in the bank's forecasts did not result in a projected interest rate track with another official cash rate increase built into it, though they do have rates staying high for longer than was expected three months ago.
In that sense it might be seen as a green light, an indication - although inevitably a conditional one - that tax cuts of that order will not trigger a jump in interest rates.
While that might be welcome from the standpoint of a Government trailing in the polls, it might consider that the central bank has painted it into a corner by cementing expectations of tax cuts of that order.
Cullen has laid down four conditions for tax cuts, one of which is that they should not exacerbate inflation. From his comments last week it seems he is interpreting that to mean that they not result in smaller surpluses than were previously forecast.
Another of his conditions is that they not increase inequality.
That may be a hint that the Government is thinking about a change to the bottom of the tax scale, something like the Australian practice of exempting the first few thousand dollars of income from tax altogether.
