Dr Cullen’s surplus projections

I’ve blogged in the past how the Treasury projections of future surpluses have consistently been much less than the actual surpluses – the actual surplus often being twice as large as the projected surplus.

Now it’s a bit unfair to call this a Treasury problem I’ve decided. Why? Because Dr Cullen in recent years has been sticking huge numbers in as “provisions for future initiatives” and by use of this provision you can make the projected surplus be anything at all you want. With a stroke of the pen a $6 billion projected surplus can be reduced to $4.5 billion by allowing just an extra $500 million a year “provision”.

Let me explain. You are projecting for the next three years after the current one. Now the provisions work like this:

Year 1 $500 million
Year 2 = $500 million from Year 1 + additional $500 million = $1billion
Year 3 = $1 billion from Year 2 + additional $500 million = $1.5 billion

So by adding in an extra $500 million a year provision, you knock $1.5 billion off the Year Three surplus.

Now since 1997 it has been common practice to have this provision. It recognises that every year you may have demands for increased expenditure such as wage increases, or some new initiatives. Known initiatives will generally be included in the vote for that portfolio.

In the late 1990s, the average provision was around $600 million. And Dr Cullen for the first couple of years had sensible provisions of $470 million, $480 million, $550 million and $315 million etc etc.

But then in 2004 the provisions started growing like topsy, just at the same time as the surpluses were growing to a degree people weer calling for tax cuts.

In 2004, the provisions for the next three years was $978m, $926m and $1463m.

In 2005 they were $1249m, $1757m and $1845m.

And finally in 2006 they were $1416m, $1868m, and $1913 million.

Now these are cumulative, so year by year the provision is:

07/08 $1,416m
08/09 $3,284m
09/10 $5,197m

So that is almost $10b of “provisions”. And that number is not worked out by Treasury scientifically. It is not based on known demand. It is a policy decision by the Minister of Finance. He gets to decide what number to put in, and by doing so he can move the projected surpluses up or down by billions of dollars.

So when Dr Cullen refers to future surpluses showing tax cuts are unaffordable, remember that he has almost $10b of unallocated provisions in there, with no rationale for them being at that level.