Labour’s extra borrowing
National has released an updated costing of Labour’s extra debt. They now have it at $15.6b over four years. Labour says it is $3.6b. This means there is no dispute that Labour will borrow more. It probably also means that the amount would be somewhere between $4b and $16b.
I’ve spent quite a few hours reading both Labour’s and National’s documents. Here’s how I see it:
- Borrowing for NZSF contributions of $6.1b. National is quite correct that this counts as an increase in net debt. If you look at crown accounts and budgets under Labour, the value of the NZSF is not included as part of the net debt calculation. However to be fair to Labour, their point is that this money is not being borrowed for spending, but to allow the NZSF to purchase investments. The wisdom of that is another issue, which I’ll cover in another post. The bottom line is that the borrowing does increase bet debt but it does not increase the operating deficit, which is the more important thing to worry about. Borrowing for investments and capital purchase is still borrowing, but it is not as bad as borrowing for operational spending. It can even be good.
- National’s figures on revenue look far more robust to me. Labour have taken no account of the extra avoidance by having an 11c difference between top personal and trust and corporate rates. They’ve also just invented $600m of revenue from unspecified anti-avoidance measures. Also not taken into account how a general R&D tax credit will see much expenditure reclassified as R&D to gain the credit. Their ETS revenue figures have already been challenged by the Greenhouse Policy Coalition as out by 100% or so.
- Likewise on the expenditure side, there are policies that Labour had not funded, and polices previously announced not yet specified. National has credited back to them their $972 allowance for future policies and specified the costs of those previously announced but not yet costed.
- The dividends claimed as revenue as a hugely complex area. I had to talk to a boffin to get my head around it. First of all you have to understand that until an asset part-sale proceeds at a particular price, it is all theoretical. The price shares float at will determine the ultimate impact on the books. Having said that, in theory the share price should reflect the expected future earnings and the loss of dividends should be around equal to the saved interest on reduced debt. Now what is this you say about PREFU including the reduced debt but not the reduced dividends? Should it not include both? The explanation is that until a decision is made on a specific SOE part-sale in a specific year, you can’t forecast the impact on dividends. So has PREFU included the reduced debt? Sort of. The Govt has made a policy decision that the capital requirements for the next five years will be funded out of the asset part-sales. This is $900m/year or $4.5b total. This is expected to be the minimum the sales *less* foregone dividends will bring in. Remember the target range is $5b to $7b. So Treasury have done the correct thing for their purposes. But in terms of comparing National and Labour I agree it is unfair not to take some account of dividends. However rather than try and guess the impact on dividends (and get it wrong as Labour did) I think the fairer thing is to simply reverse the policy assumption that the capital spending will be funded from SOE part-sales. Over the four years this is $3.6b. Until we know details of SOE part-sales debating their impact on the deficit and hence debt is somewhat pointless. It all depends on the price the shares get.
- With the CBD rail loop, I go with National’s figures. The SH1 expansion they will can is scheduled for well into the future. To fund the CBD rail loop, they will need to borrow.
So putting aside SOE part-sales, overall I make it that Labour will increase net debt by around $12b over four years, of which half is for NZ Super Fund contributions.