Listener: 13 December, 2003.
Keywords: Macroeconomics & Money;
The history of the modern Treasury –– described in Malcolm McKinnon’s landmark Treasury –– is one of fiscal stress, extreme fiscal stress or intolerable fiscal stress. You might think from the government accounts that is not currently true, for the Treasury reported a “surplus” of $5.6 billion for the year ending June 2003 and promises another comparable one this year. (This surplus’s exact name is “operating balance excluding revaluations and accounting changes” or OBERAC.) For a detailed description of the OBERAC.
I am not saying that the numbers are funny money, as with the Enron accounts. Indeed, there is considerable integrity and rigour in the way that the government’s accounts are compiled. But it is a complicated measure that should be approached with caution. Some of the surplus is used for financing state-owned enterprises, health boards, Housing NZ, lending to students and buying physical assets. A more useful measure is that there was a cash surplus of only $1.2 billion, which was used to pay off government debt.
But should there be any surplus? A common view is that the $1.2b should be spent on priorities such as health, education, children, tax cuts …… There is even the view that the government should be running a deficit, borrowing to spend more on those priorities. The view partly derives from earlier times when the government borrowed each year, but in those days it was running a number of businesses that have since been privatised with enormous investment requirements (notably Telecom), while today SOEs borrow on their own behalf. Allow for these, and past governments were probably also running cash surpluses on today’s basis.
The published justification for the cash surplus is that the government wants to reduce its debt, a prudent strategy if it does not damage the economy, and one that will give considerable room for manoeuvre, if there is a world economic or financial crash. (The US Government has hardly any left since its recent tax cuts and booming budget deficits.)
What about the (“Cullen”) New Zealand Superannuation Fund largely invested in equities, for the day when the elderly become a greater burden on the economy? We can argue whether equity investment is the best way to provide for the future, but most economists think the prudent alternative is to run a bigger cash surplus and pay off government debt faster. That means the fund can’t be used for more spending and lower taxes.
So we are back to just how big the cash surplus should be. As well as the Fiscal Responsibility Act’s monetarist case for mechanically paying off government debt, there is also a Keynesian one. Although Keynesianism is associated with budget deficits, the real message is that the government spending and taxing activities can be used to influence the macroeconomy. Think of the spending and tax cuts as the petrol your accelerator pedal injects into your car. Keynesians argue that if the car is running too slowly, then inject more petrol. But they also argue that if the car is going too fast, ease off the petrol. Given the current healthy state of the economy, I’d have thought the current injection was about right.
What happens if one tries to run the car too fast? It may exceed the speed limit, in which case the Reserve Bank will issue a penalising speeding ticket of higher interest rates that switches off the injection from private investment, and so compromise economic growth. Or, more subtly, the other great injector for growth in the economy, the tradable sector, switches off. High total injections raise the exchange rate. (Look at the US exchange rate since the US increased its government deficit to unsustainable levels.) That makes it harder to export and easier to import. Again, long-run growth will be compromised. Running cash surplus enables sustainable growth though the tradeable sector.
The good news is that although the government is likely to aim for something close to that $1.2 billion cash surplus, with the strong tax inflows and tight spending controls, it may have an extra $1.5 to $2 billion to spend or reduce taxes in the next budget. Some of that is already committed (as for the health sector), but the government has more room for manoeuvre, and there may be a boomlet in public spending and even (small) tax cuts. The danger is that it could over-react and lose fiscal control. Soon the tradeable sector would be in difficulties, as interest rates and the exchange rate went up.
So, yes, although there is a threat, the fiscal stress is lower than it has been. From the Treasury building at 1 The Terrace, one hears the shout “LET’S KEEP IT THAT WAY”.