Magazine article New Zealand Management

Sorting the Accounts

Magazine article New Zealand Management

Sorting the Accounts

Article excerpt

A handy set of statistics--the Crown Accounts Analysis--was last published in November 2005. It has been replaced by more sophisticated financial tables which are fed into the national accounts. For the purposes of this column, however, the CAA more usefully helps explain fiscal policy issues that are about to become the stuff of election campaigning. Most important, it breaks down the Government's financial statements to show a current account and capital account. If the difference between those two accounts is obscured, politicians can easily mislead us when they argue the toss about tax cuts, increased investment in economic infrastructure and what-have-you.

The two accounts have already been obscured--perhaps deliberately--as the electioneering heats up. Public debt and the country's overseas debt have similarly been confused. National leader John Key told the National Party conference the party would spend $500 million a year more on infrastructure than planned by Labour, if it becomes the government after the election. It would borrow to do so, and would introduce infrastructure bonds and make greater use of public-private partnerships. National's infrastructure borrowing would lift "New Zealand's debt-to-GDP target" (according to one report of these plans) by two percentage points to 22 percent. Wrong: it would increase the government's debt-to-GDP target, not the country's (which is a whopper).

Finance Minister Michael Cullen insisted Key would borrow for tax cuts if elected, "and he would pass the bill to our children. That's just crazy." Perhaps. But let's give Key the benefit of the doubt and examine his announcement with the benefit of the CAA data.

The Government recorded a surplus of $ 8.099 billion in its current account during the June 2005 financial year, because current income ($51.424 billion) exceeded current expenditure ($43.325 billion).

The capital account showed gross fixed capital formation was $1.062 billion, including major capital expenditure on corrections facilities. Because revenue exceeded both current and capital expenditure, the Crown recorded a rise in "net lending" (and didn't have to borrow). If the Government had spent significantly more on capital developments, "net lending" could have become "net borrowing". The Government might have cut taxes, too, reducing its current account "saving" without necessarily turning it into a deficit.

In other words, a government decision to borrow for capital investment purposes should not be confused with its tax-raising policies. …

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