Michael Cullen: Greater clarity proposed to describe the cash position

Michael Cullen

In the Budget 2005 you may notice some change in the presentation. After a five-year struggle I am about to give up, as lost, the effort to educate the media on one of the basic questions of third-form accounting: What is cash?

There does not seem to be any way to explain the difference between an operating balance (which normally includes a variety of non-cash items, such as depreciation and unrealised increases in the value of assets) and a cash surplus which may be available for new expenditure or, if you like, for tax cuts.

I am not for a moment suggesting any move away from sound accounting principles. The operating balance (specifically the Oberac, or operating balance excluding revaluations and accounting policy changes) is an important indicator.

It describes the starting point for assessing the health of the public purse, and for considering strategic options in terms of investments in capital (in the form of infrastructure, hospitals, prisons and so on) and management of long-term liabilities such as the impact of population ageing and the maintenance of prudent levels of public debt.

The problem is that the operating balance has not served us well as a headline indicator. In political terms it can create the illusion of spending options that do not really exist, and it leaves me, as Finance Minister, defending complex truths against an attack of appealing half-truths. That is never a fruitful debate.

The truth is that if one looks at the cash surpluses we have run, they are relatively modest, and the outlook for them is shaky. In 2003-2004, for example, we achieved a cash surplus of $520 million. The forecast for 2004-2005 is for a cash surplus of $1.4 billion.

However, this cash build-up will be needed to fund capital spending during the next three years, when we are anticipating cash deficits of $705 million in 2006 and about $1.5 billion in 2007 and 2008.

As was noted in December's Budget Policy Statement, forecasts provide scope for some additional spending in the short term beyond that signalled while still meeting the debt objective.

However, prudence dictates that any such spending should not be economically stimulatory and should be fiscally neutral over the longer term.

In layman's terms, that means that the relatively small and uncertain cash surpluses that are forecast are not sufficient to support the kind of tax cuts that those on the right are proposing, or the kind of expenditure increases which (ironically and schizophrenically) those on the right are also proposing.

Once we take account of capital investments, which are essential for future economic growth, and investments in the New Zealand Superannuation Fund, which are essential for future fiscal stability, what we have left is a thin layer of fat. What others are proposing would involve cutting into the muscle and weakening our fiscal wellbeing. Sadly this fact is lost upon many New Zealanders.

The major purpose of a set of accounts is to provide a transparent picture of the Government's financial position for accountability purposes and a sound basis for considering and debating investment decisions. If the structure of our Government accounts is failing to do that because important players in the public discourse have difficulty grasping the true nature of the Government's bottom line, I have no qualms about changing it to make it clearer.

So you can expect to see in Budget 2005 the familiar level of financial transparency under the Public Finance Act, but greater clarity on the cash position, which is the amount actually available as a spendable surplus. Then we can have an informed debate on the evidence about how sustainable that is over time, and whether we can realistically entertain structural changes to revenue or expenditure.

* This is an extract from a speech given by Deputy Prime Minister Dr Cullen in Wellington on February 21.