The cumulative effect

I briefly tuned into talkback last night while driving and heard some people wondering how a relatively modest reduction in future spending can make an impact on when we return to surplus, and the $300 million a week of borrowing.

Labour increased spending by an average of $2.8b a year for its last five years in office.

National is now saying they are going to have an allowance of just $0.8b a year for future spending growth. That’s a $2b a year difference. Now in the first year it doesn’t make much impact on a $10b deficit.

But the spending growth is cumulative. Over five years spending growth at $0.8b a year will mean spending after four years is $4b higher. At $2.8b a year it would be $14b higher.

So over five years, the projected deficit drops by $10b. And that means you are borrowing $200m less a week.

Of course there are other factors such as the rate of economic growth and hence tax revenue growth, plus there are certain expenditure items that are contractural (benefits) and go up or down depending on how many people receive them.

The impact on debt is more pronounced Because the total amount of spending not undertaken is cumulative. In year 1 it is $2b, year 2 is $4b, then $6b, $8b and $10b. Over five years that reduction in future spending means you have $30b less debt that would otherwise have been the case.

Keeping future spending growth to $800m a year is not at all easy. Out of that you have to fund population growth demand on health and education and public sector wage rises before you even get into discretionary new initiatives.