This note was written to accompany Stressful Fiscal Sums: Should the Government Spend More and Tax Less? I am grateful for assistance from an economist who for various reasons cannot be named.Stressful Fiscal Sums: Should the Government Spend More and Tax Less?
Keywords: Macroeconomics & Money;
OBERAC (the operating balance of government excluding revaluations and accounting policy changes) can be looked at as to how it is made up. and what happens to the quantum. The following focuses on the what happens to it. My comments in italics.
For the fiscal year just ended June 2003, OBERAC = $5.6 billion.
Some was used for State Owned Enterprises and such like
– $800m was for retained earnings (after dividends) and depreciation of the Government’s trading activities. The sum is included in OBERAC for comprehensiveness. So the government never actually got its hands on this money, but it could if it was desperate (although that would limit the effectiveness of the SOEs).
– $500m was for capital injections into Crown entities and State Owned Enterprises. The Crown received $214m in dividends, so the SOEs and Crown entities were a net cash drain, although they are building up national assets via the new investments, and their retained earnings.
– $200m was advances to District Health Boards and Housing New Zealand, similar to the advances to Crown entities.
Some was used for purchasing physical assets used by the public service such as building schools, defence equipment, computers and cars
– $1000m In the OBERAC is an allowance for the depreciation (loss of value) of physical capital assets of the Crown as they become less effective. The amount for the core agencies comes to about $900 million, so this item balances off that depreciation, and means that the Crown is maintaining the level of its capital assets in its core activities.
Some was advanced to students as loans for their tertiary education
– $700m was the net advance after some students repaid part or all of their loans. Whatever one may think of the student loans policy – for my views see The Index on Education and related topics – it is correct to deduct this amount from OBERAC since the cash given to the students is not available to pay off loans.
Some was a contribution to the New Zealand Superannuation Fund
– $1200m. The government has chosen to put some of its savings into the NZSF, which is to be largely invested in equities. The aim is a nest egg to be used for the growth of the proportion of the elderly in the population, and their higher burden on society in future years. There are two issues here. First, whether the government should make some provision: prudence says ‘yes’. Second, whether the provision should be investment in equities? This latter issue is more contentious (I must write on it some day). If the answer to this second question is ‘no’, as a consequence of the response to the first question, the government needs to lower its debt even further than it currently does (or take some other roughly equivalent measure). Thus those who want to abandon the NZSF would want a greater cash surplus in order to pay off the debt. Unless one wants to deny the economic significance of the demographic change, there are no tax cuts from abandoning the NZFS.
So from the OBERAC $5.6b we deduct various government investments to get to the $1.2b cash surplus. For an economist the $1.2b is more tangible than the $5.6b, which reflect various conventions which, while rigorous, may be disputed in terms of the usefulness of the measure.
OBERAC’s name tells us that there are other elements which could, or could not, be added to the total.
– Excluding changes from accounting policy makes sense.
– Revaluations may be positive or negative. Among them is that when interest rates fall, government guaranteed funds have less revenue from their investments in bonds, and find it more difficult to meet their outlay commitments and so are likely to call further on the government. The practice is to charge the public account when the funds have to be paid. (An example is the Government Superannuation Fund.) I agree charging the shortfall when it has to be paid out is the sensible practice.
– On the other hand the value of some assets change (e.g. the market price of equities held by investment funds), and those changes are not included either.
In some respects (changes in accounting policies aside – and they can be large) a better measure is changes in ‘Net Worth’, which is the value of all the Crown’s assets less all the Crown’s liabilities. Net Worth rose from $18.8b in June 2002 to $23.8b in June 2003, or by $5.0b.
None of these measures are precisely helpful for an economist concerned with the pressure of government economic activities on the economy and hence the right budget deficit/surplus policy. Suppose we start with the $1.2b cash surplus for last year. We would probably want to add the investment activities of the SOEs and others, outside the government account, since they are result in the government using more resources. On the other hand some government spending is overseas – overseas aid, military hardware, foreign debt repayments, NZFS investments in overseas equities, …. – so they dont impact on resource demands within New Zealand. There is a Treasury paper Indicators of Fiscal Impulse for New Zealand by Renee Philip and John Janssen which explores some of these issues.
In summary, while various measures from the government accounts are quoted in public, it is rare for those most vehement in the public debate to understand the complexities in the definitions of the measures, and the audiences are even less informed. There is no doubt that OBERAC is a poor indicator of the state of the government finances for the assessing changes in aggregate spending and taxation. The cash surplus is better, but even so it does not give a comprehensive indication of the government’s aggregate impact on the economy’s resources. Moreover there is no a priori reason for the cash surplus being positive, negative or zero. So the fact that the cash surplus was $1.2b in the June 2003 year does not tell us whether the government had more room to increase spending or reduce taxation.