Dialogue: No need for 'borrowing' to pay for super scheme

The Government's forecast operating surpluses provide plenty of leeway for its proposed superannuation fund, says the Minister of Finance, MICHAEL CULLEN*.

Claims that because the dollar level of Government debt is rising, the Government is borrowing to pay into the New Zealand Superannuation Fund are wrong and distort through oversimplification.

The Government collects revenue and incurs expenses in financing its operations. Operations must meet various targets: revenue to gross domestic product, spending to GDP and operating balance.

I have always said that the operating balance must, in general, be sufficient to cover contributions into the superannuation fund. If it is not, the Government must explain how it intends to make up for any shortfall.

In this year's Budget, we forecast operating surpluses of $1.4 billion in the 2002 fiscal year, and $2.4 billion, $3.1 billion and $3.7 billion in the years after that. They are fully adequate to - indeed they are 72 per cent above on average - projected transfers into the super fund of $600 million in 2002 and $1.2 billion, $1.8 billion and $2.5 billion in the years following.

Alongside its operations, the Government funds its capital programme. This also needs to meet defined targets. They are gross debt to GDP, net debt to GDP and net worth targets.

The debt financing will jump around. For example, the decision to refinance hospital and Housing Corporation debt through central Government will lower the cost of debt servicing because the Government can negotiate cheaper interest rates. It will show up as an increase in Crown gross debt but not in Crown net debt.

Delays in, say, building new schools or prisons will show up as a fall in net debt in the current year, but this will be offset by a rise next year. Lumpy spending on re-equipping the Defence Force will cause a blip in nominal debt when it takes place in four or five years.

The key is to keep debt in line with declared objectives - in this Government's case, below 20 per cent of GDP. This the Budget does with room to spare.

Now I want to pose the counter-factual. What if there was a blanket constraint applied to Government finances to say that as long as there is a superannuation fund, debt must not increase in dollar terms?

That is what the National Party finance spokesman, Bill English, is saying.

There are three scenarios. One is that there is no fund and, because there is no fund, nominal debt can increase. So if a future government borrows to restore an air-strike capacity and to give every schoolchild a laptop, that would be fine. It would be legitimate to borrow in accountancy-challenged Englishspeak to pay for assets that depreciate in value but not assets that appreciate in value. That would be bizarre.

Scenario two is at the other extreme and says it is not legitimate to increase nominal debt at all. If we did, again in Englishspeak, we would be borrowing to pay for cuts in the corporate tax rate or to pay teachers' wages.

As inflation continues, even at low levels, and as the economy grows, the debt to GDP ratio would gradually decline. That is a legitimate debt target to have. It is just that it is not our debt target.

What Mr English seems to be saying is that we are wrong for not having a debt target that is more ambitious than even the one he had when he left office. The argument is not about borrowing to put into the fund. It is about borrowing at all.

Scenario three is that it is not legitimate to put money into the super fund unless surpluses (and as a technicality it would require cash surpluses at that) are big enough to fund both the transfers and the full net cost of the Government's capital programme. That would be highly contractionary, requiring higher taxes or major cuts to spending programmes to boost already large surpluses.

This, though, is where the English logic leads. If the Opposition wants, as it says it wants, $510 million to reverse the top income tax rate, $375 million to cut company taxes, $2.4 billion to double teacher salaries, $80 million for universities, $260 million for hospitals, and on and on the wish list goes, it must make an equivalent reduction in capital spending or it will be borrowing to pay for these things.

Either that, or it is trying to apply one set of rules for things it likes and another for things it opposes.

Mr English might well think he has a politically populist angle, but it is showing up his hugely simplistic and dangerously distorted grasp of the fundamentals of fiscal management. He is trying to score political points, but is damaging his own credentials and credibility in the process.

* Michael Cullen was speaking at last night's Business Herald Budget seminar.