Houston we have a surplus
The Government’s financial statements released today showed our first surplus since the Global Financial Crisis struck – $414 million.
This is psychologically important. Economically there’s not a big difference between a $400 million surplus and deficit when you have revenue of $95 billion. But it continues a trend of fiscal discipline which has paid off.
Also Andrew Little claimed somewhat hysterically that a failure to achieve surplus would be the biggest political betrayal or deception of his lifetime. So does this mean it is the biggest kept promise of his lifetime?
Note that this is the OBEGAL surplus. It excludes stuff such as Reserve Bank dividends and financial market revaluations. If you include that there is a surplus of $5.7 billion. But the OBEGAL is the important one.
None of our major comparative countries such as Australia, Canada, the Euro zone, UK and the US are back in surplus. In fact they all have significant deficits and are only projected to reach surplus around 2020.
Just four years ago the deficit was almost $20 billion. But the story actually goes back to 2008. Labour had ramped up spending by so much, that when the GFC hit, the forecast wasn’t just for a decade of deficits, but as the chart from the 2008 DEFU shows, a permanent structural deficit. That means never getting back to surplus, and just borrowing endlessly. The forecast was that even as far out as 2023, we would have a deficit of around 2% of GDP (around $5 billion) but possibly as high as 4% of GDP.
So how has the deficit been eliminated? Well core crown expenses have increased by only $2.2 billion since 2011, while revenue has increased by $15.1 billion thanks to a growing economy. This is what Governments need to do – have expenditure grow slower than the economy.
Core crown expenses were forecast in 2008 DEFU to be 35% of GDP and they have ended up being 30% of GDP. That is a huge amount of fiscal restraint – in nominal terms that is spending $12.5 billion a year lower than forecast.
And this includes spending $12.9 billion (net of reinsurance) on Canterbury earthquake recovery
This is due to some policy changes (Kiwisaver subsidies) and some general fiscal restraint with much lower allowances for new initiatives, and a big focus in the public sector on reprioritising spending rather than getting new funding.
Does anyone seriously think Labour would have got spending down to 30% of GDP? They opposed pretty much every policy change and every piece of fiscal restraint. In their last three years of office Labour increased core crown expenses by $17.5 billion.
The 2008 DEFU forecast gross debt reaching 57% of GDP (in 2023) and net debt 47%. Instead it looks like it will peak at around 36% gross and 25% net. That is around $55 billion less debt.
But this is not the end of fiscal restraint, but only the beginning of the end.
The weaker economy means a surplus for this current year is not guaranteed. There is no room for a big spend up. Core crown expenditure should grow no faster than the economy so that it reduces as a percentage of GDP. I think 25% would be a good target – that would allow significant tax relief (and people get taxed more as inflation pushes them up the tax brackets).
So it is good to see a surplus as the outcome of fiscal discipline. But we need the discipline to continue. I will reveal later this week an estimate of how much extra spending would have been incurred if the Government did everything opposition MPs and lobby groups had demanded in terms of extra spending.
The other focus for the Government needs to be further economic reforms, to boost the economy. Keeping a lid of spending is necessary, but not sufficient by itself.