Brian Fallow: Big spenders battle over the numbers

In the electoral lolly scramble, National is shovelling more sweets off the back of its truck than Labour - about $7 billion more by June 2009.

That money has to come from somewhere, of course: either from those who would have benefited more from Labour's policies or from future taxpayers servicing a higher debt.

As a factual matter, Michael Cullen and John Key disagree about how much the gap between their two fiscal tracks can be funded by less Government spending rather than more borrowing.

And, as a matter of principle, they disagree about how much it matters if public debt is increased.

It's crazy to borrow for tax cuts, says Labour.

It's crazy to pay for long-lived infrastructure out of this year's taxes, says National.

But what do the numbers say?

National will need an extra $8.7 billion over the next three years to fund its tax cuts.

Key expects to be able to find $5.2 billion of that by spending less in operating costs than Cullen would.

The other $3.5 billion has to come either from borrowing or from less capital spending on such things as roads, prisons, school buildings, student loans and the Reserve Bank's war chest for currency market intervention.

Capital items like those, and contributions to the New Zealand Superannuation Fund, which both parties are committed to, come out of the operating surplus, and if that's not enough (and it normally isn't) from borrowing.

Key expects to achieve his lower spending track in three ways.

One is by eliminating waste in existing programmes. The target there is less than 1 per cent of Government spending, or $1.2 billion over the next three years.

He reckons to save another $1 billion by cancelling a couple of Labour initiatives in this year's Budget: the KiwiSaver subsidised workplace saving scheme and plans to automatically adjust tax thresholds for inflation.

The biggest savings, however, are supposed to come from cutting the amount set aside for new spending in future budgets.

Cullen's Budget allows for $1.9 billion in "new operating initiatives" in each of the next three Budgets.

Key thinks he can get by with an extra $1.3 billion in his first Budget and $1.5 billion in the two following.

The cumulative saving over three years would be $3 billion.

But National has a credibility issue when it comes to spending restraint.

Neither Don Brash nor Key has held ministerial office, never mind had the unenviable task of saying no to Cabinet colleagues' programmes.

Second, as Cullen points out, the $1.9 billion allowance for new spending in each future Budget is not exactly going begging.

"These [allocations] are for additional spending on top of departmental baselines. Some of the money will be available for new initiatives but most will be required to meet cost pressures arising from items such as wage increases and demographic changes in health and to cope with unforeseen events such as civil emergencies."

Even former Treasury Secretary Graham Scott, an Act candidate, has warned that spending cuts are easier said than done. "It has to be done with a scalpel not an axe."

But remember, National's spending reductions are relative to Budget-day forecasts. Since then the Treasury has found another $1.6 billion in revenue over this and the next three years, revising its forecast tax take by that amount in the pre-election economic and fiscal update.

National has not adjusted its plans, so it has that extra revenue (assuming it eventuates) to play with.

But Labour immediately committed the increased revenues to extending its family tax credits and boosting early childhood education subsidies.

Allowing for that extra spending, the gap between the cost of National's tax cuts and Labour's family-targeted policy offering is a cumulative $7.2 billion by 2008-2009.

If Labour is right and National would struggle to live within its spending target without cutting the quality of public services, it might have to increase borrowing by more than the $3.5 billion it expects.

The question is, does that matter?

Cullen deserves credit (with Sir William Birch) for reducing government debt relative to the size of the economy and, therefore, the tax base. The present Crown accounts are, by international standards, a shining example of providence in the face of an ageing population.

Gross government debt peaked at 75 per cent of GDP in 1987.

Aided by asset sales, it had been reduced to 36 per cent of GDP by 1999. Under Cullen, it has fallen to 23.5 per cent now.

In the 2004-2005 fiscal year, it cost $2.3 billion to pay interest on that debt, or 5c in every dollar of tax.

Cullen is determined to keep a cast iron lid on debt. His rationale is that as the population ages, future taxpayers will face much higher public health and pension costs. It is unfair, he believes, to also load them up with higher interest bills on Crown debt.

In last year's Budget, he lowered the target for the gross-debt-to-GDP ratio from 30 per cent to 20 per cent. Even with an estimated $4 billion of additional borrowing over the next three years, he expects to be under 20 per cent in a couple of years.

Key's alternative Budget has gross debt 1 percentage point higher by 2008 and 2 points higher by 2009 than Cullen's last Budget did.

For Cullen, that is a slippery slope. Once you start letting that ratio drift up, it will be hard to stop and the fruits of years of fiscal discipline will be frittered away.

But how much fiscal virtue is enough?

If you look at another measure, net public debt - where gross debt is offset by the Crown's financial assets - the level has fallen from 51 per cent of GDP in 1991 to 7.2 per cent now, something last seen in the 1970s, and is forecast to head lower still.

If you include the assets in the Cullen fund, net debt will be zero next fiscal year.

If the Government was a corporate with a balance sheet like that, its shareholders would be clamouring for higher dividends and it would be seen as a ripe, plump takeover target.

And look, they are and it is.