17 July 2002

National’s Accounting Would Make Enron Blush

“The National Party’s accounting would make even Enron executives blush,” Finance Minister Michael Cullen said today.

“It is fortunate National has no prospect of winning government as they would blow holes in the Crown accounts and destroy New Zealand’s hard won reputation for fiscal prudence.

“National is claiming that they can finance their tax and spending promises by scrapping the New Zealand Superannuation Fund. They also maintain that they would reduce government spending to below 30 percent of GDP and reduce gross debt to below 25 percent.

“This is fiscal nonsense. The money simply cannot be made to stretch as far as National is trying to stretch it without resorting to Enron-style fiddles,” Dr Cullen said.

“For example, National seems to be assuming that the indicative allocations of around $500 million provided in the budget for 2003-04 and outyears are fully available for new spending initiatives. In fact they have to cover salary increases for police, teachers, prison officers and the like and such unanticipated expenditures as biosecurity responses to mosquito and moth incursions and the increase in border protection after the foot and mouth outbreak in Europe.

“Our figures show that - even assuming a state sector wage freeze and no unexpected events requiring a fiscal response - National’s policies would outstrip Labour’s Super Fund contributions by at least $1.5 billion in Year Four and that the gap would widen over time.

“National will be hard put to quarrel with our costings because wherever possible, we have used their own cost assessments. Where these were not provided, we have been deliberately conservative in our estimates and where the policy is too vague to be costed in any meaningful way at all, we have left it out.

“National’s reaction to persistent poor polls has been to fight this campaign like a minor party; promising the earth in the secure knowledge that they will never be in a position to deliver. In the process, they have done severe damage to their own credibility and have debased the standard of political debate in this country,” Dr Cullen said.

Ends

***

THE COST OF NATIONAL’S PROMISES

National’s Budget allocations.

National has built its budget around not having to put money into the Superannuation Fund.

Instead, it will:

- Phase in tax cuts.

- Increase spending by $800 million a year cumulative during the next three years.

National’s Budget package was announced on 15 April 2002, and worked off numbers from the December Economic and Fiscal Update. At that time the indicative allocations for new spending were around $500 million cumulative, so the $800 million is only $300 million more than was already factored in to Budget projections.

National seems to be assuming that the full indicative budget allocation would be available for new initiatives but it knows from its experience in government that this is not the case. In fact, the (approx) $500 million fiscal allowance built into 2003/04 and out year projections has to cover all cost increments normally associated with the process of government.

These include state salary increases for police, teachers, prison officers etc. They also include such unanticipated expenditures as extra money to support peacekeeping efforts in East Timor, biosecurity responses to mosquito or moth incursions and extra border protections to increase surveillance after the foot and mouth outbreak in Europe. It would be extremely rash (and dangerous) to assume that the full $800 million is available for new policies.

In other words, National has drafted its budget assuming a state sector wage freeze and no unexpected events requiring a fiscal response from the government.

National’s promises are set out in the table.

Cost of National’s policy commitments ($ million)

Type of promise 2002/03 2003/04 2004/05 2005/06

Tax cut 200 880 1,110 1,290

Extra spending* 800 1,600 2,400

*Gross. Because the fiscal projections used by National included a $500 million, $1,000 million, $1,900 million allowance for extra spending, the net increase in new spending is $300 million, $600 million, $500 million. The projections used in the 2002 Budget have not changed materially from these. Note also that the $400 million three year cumulative health funding through to 2004/05 is included in both projections because it was included in the 2001 DEFU that National worked off. There is no extra money earmarked for health in 2005/06. This means that either the health fund plateaus in that year, or if National intends to continue with another $400 million injection the total left is $2,000 million

Even at this aggregate level, National is radically “overspending” the money it intends to save by not making transfers into the Superannuation Fund.

The table below compares the total cost of tax cut and spending increase with scheduled transfers into the fund.

National’s policy commitments compared with superannuation fund contributions ($ million)

2002/03 2003/04 2004/05 2005/06

National’s policy cost 200 1,680 2,710 3,690

Super fund contribution 1,200 1,800 2,011 2,117

The overspending will widen over time. National has factored in $900 million per annum new spending for fiscal years 2007 - 09 and $1,000 million for 2010-2012.

Defence.

Best estimate is that National’s Defence policies will cost around $700 million a year.

Costing.

This cost is set at the difference between current defence spending and raising spending to 1.5 percent of GDP. The 1.5 percent of GDP benchmark is taken from Bill English’s 12 June speech to the national conference of the RSA in which he describes the current level of “barely 1 percent of GDP” as “inadequate”, and National Party conference resolutions to raise it to around 1.5 percent of GDP (Dominion, 13 June.)

This is not a generous allocation if National is to meet the capital costs and operating expenses associated with its core defence commitments.

- Restore air combat capacity: capital and operating costs of between $2 and $3 billion.

- Acquire and operate a third frigate: capital $700 million, operating unknown but substantial.

- Refurbish army equipment: government has committed to this so there is no money in the current vote to divert to air combat and combat capable navy.

- Fully equip SAS to make it operationally compatible with allied forces: minimum $10 million.

- Review pay of defence force personnel: no firm costing available, depends on levels of increase the review recommends.

Veterans.

Veterans’ policy would cost at least $50 million a year.

This is the estimated cost of the veteran’s “gold card” that would get them priority access to hospital services, housing accommodation and other services.

Extra costs would be incurred depending on what National did with its policies to provide medallic recognition where it has not been forthcoming and to revamp veterans’ pensions.

Transport.

Best estimate of National’s transport policies is $290 million a year.

This estimate has three components:

- Removing the 4c petrol tax levy at a cost of $142 million.

- The debt servicing, capital charge and depreciation costs associated with diverting $2 billion of Superfund contributions to a State Highway expressway between Hamilton and Auckland and improving Auckland’s roading network (statement 8 January 2002). The annual cost of this level of capital spending has been set at a very low 7 percent per annum.

- Extension of the Invercargill Airport runway. National has not costed this, or said where it is being funded from, but an allocation of $8 million has been made.

Tertiary education.

A conservative estimate is that National’s tertiary education policies will cost around $23 million in the current financial year, rising to around $230 million in 2005/06. The cost through to the end of 2005 is $485 million.

Costings

There are three significant spending components to the National Party’s tertiary education policy:

Initiative 2002/03 2003/04 2004/05 2005/06

“You Stay, We Pay” (conservative estimate) 9.5 37.0 73.7 120.2

PTE Policy Reversal 13.3 28.6 32.0 35.0

No real increase in fees 0.0 14.6 44.7 76.8

Total 22.8 80.2 150.4 232.0

All of other elements of the policy are non-specific in terms of spending implications or else have no direct fiscal impact.

National’s costing of “You Stay, We Pay”, its post-study write-off policy, is based upon around 85 percent of 33,355 graduates each year qualifying for 41 percent of their debt being written off over a period of five years. They estimate the policy will cost $120 million over the first 3 years, increasing to $175 million in year 8. There are number of problems with this costing. It does not allow for a likely increase in the uptake of loan entitlement, it is based on a shorter than actual average length of course, and it excludes those qualifying through PTEs. The policy is more likely to cost as much as $194 million more over 2002/3-2005/6. National has committed that 2002 borrowings will be included, so provision will need to be made for write-offs in 2002/03.

National has promised to “not discriminate on whether a tertiary education provider is publicly or privately owned”. This can only be interpreted as a reversal of the 2002 Budget decision to cap PTE funding and introduce a capital differential between PTEs and public institutions. The cost is therefore equivalent to the savings obtained from this budget initiative. Presumably, the policy would be implemented immediately to prevent these provisions from being imposed, so again it would begin costing money in this financial year.

The commitment to “ensure adequate EFTS funding” has been widened to encompass no fee increases in real terms. While National has stated (Sunday Star-Times, July 7 2002) that it was not committed to freezing fees, spokesperson Maurice Williamson told the Press (July 8 2002) that National would hold fees “in real terms” - keep fee rises in line with inflation - by funding institutions more. This would require funding increases costing approximately $30 million in academic 2004, $60 million in academic 2005 and $90 million in academic 2006 (financial year figures differ).

Education.

There are many areas where National’s education policy is vague, but even on conservative interpretations of what it means, it is likely to cost $400 million more a year.

- The largest single expense item is a laptop for every school child 10 and over - at a cost of $1 billion every three years. This has been costed conservatively at $300 million per annum.

- National has offered an extra $30 million a year for secondary teachers pay, and a pay premium for good principals. Even assuming only a quarter of principals are deemed to be “good”, and get a $10,000 annual premium, this would cost $6 million a year.

- A number of schools are promised “more”: high decile schools, rural schools, independent schools and alternative schools. Conservative costings suggest this extra resourcing would cost at least an extra $36 million per annum, just over half of which would go to the high decile schools

- An increase in the level of bursary payment is estimated to cost $10 million a year.

- National’s education policy envisages additional supports for management and governance training and the establishment of a Centre of Excellence in School Governance and Management. This would cost a minimum of $5 million a year.

- There are a number of open-ended commitments: resourcing schools with the extra teachers and classrooms to meet parental demand, reviewing decile funding, the isolation index and ORS funding. There is also a policy to expand the social workers in schools programme, to establish an education think tank, and to develop a school’s recovery action plan. Together these could cost tens of millions of dollars but have been costed here at a global $13 million a year.

Children

National’s children’s policy is estimated to cost $100 million a year.

The main cost elements are:

- Many more families to have access to intensive home visitation programmes to assist with parenting: cost $80 million.

- Increased payments to foster carers and kin-carers are difficult to cost, but an amount of $5 million has been allocated as a conservative costing.

- The cost of the education programme on domestic violence will again depend on how elaborate it is, but to be effective any campaign will cost about $5 million and will need to be sustained, so this is an annual cost

- There are a number of vague promises, like helping low and middle income families who do not know how to manage their finances, ensuring CYFS does a better job, helping families where transience is a problem, reviewing guardianship laws and reviewing sentencing provisions for offences against children. These are potentially very expensive initiatives, but given their current vagueness we have estimated the combined cost at only $10 million.

Superannuation.

The real cost of National’s superannuation policy will emerge decades from now. By committing to maintain current New Zealand Superannuation entitlements and deciding to abandon the Superannuation Fund, National has activated a ticking fiscal time bomb.

In the immediate future, National’s superannuation policy will cost $120 million a year by applying a 15c rebate for savings up to $2,600 per person per annum.

Law and order.

There are two aspects to National’s policies here: extra police numbers and changes to sentencing (“life means life”).

Although policy is vague on the latter, the best estimate of the cost of National’s law and order policy is $130 million a year.

- 500 extra police will cost $33 million a year plus an amount for vehicles and property. In addition, National proposes to fund police training in Auckland, which is likely to involve both capital and operating costs in duplicating a top class facility in Porirua. These extra costs have been assumed to be a very modest $7 million.

- The cost of the new sentencing regime will depend on how it is implemented, but the Private Members Truth in Sentencing Bill can be regarded as a template for the new policy. The Law and Order Select Committee estimated the additional operating costs of implementing its provisions as between $90 million and $159 million per annum, depending on how it was applied. Capital costs for extra prisons would be additional. This estimate does not allow for capital costs and applies the lowest estimate made by the Select Committee.

Health.

Promises here are grand but unquantified. National has set a global envelope of an extra $400 million a year to deal with them. (12 July 2002). It is not clear if this is a cumulative amount or a flat line allocation. It is assumed that it is a flat line allocation.

On 22 November, Bill English describes health as “a big black hole we have to fill before we are looking at lower taxes.”

On 10 December, Roger Sowry said that the $4 billion package was not enough, and suggested that they would put money from the super fund into health.

On I July 2002 National promised a rescue package for DHBs, claiming DHB deficits could be as high as $500 million by the end of next year and therefore signalling this level of tolerance for deficit financing.

In addition, National has promised:

- A rural health package covering recruitment of GPs to rural areas and rural nursing scholarships.

- A boost to IVF funding.

- A large number of projects of unspecified cost, such as health promotion programmes, measures to address diabetes, cancer, obesity and cardiovascular disease, more acute and medium-term rehabilitation inpatient beds, youth suicide prevention programmes, a “children at risk” strategy, improved salary and support structures for rural GPs, improved water quality, a healthy housing programme and many others.

Biosecurity, environment and conservation.

National’s environment policies are vague, but it is estimated that they would cost at least $90 million a year.

The main cost elements are:

- A Sustainability and Eco-Restoration Fund. Said to be $500 million, funded by selling Landcorp farms. This is not “free” money because the government loses the assets and the dividends from the farms that are sold. The annual cost of this lost asset is estimated at 10 percent of the asset value: $50 million.

- Assistance with irrigation schemes that offer net environmental benefits. Assuming $700 per hectare cost, and 30,000 hectares converted annually this costs $21 million.

- More mainland habitat islands. Assume one a year, at a cost of $7 million each.

- Policy work on freshwater ecosystems, landfill standards, waste strategy, pest control, $3 million p.a. Widening EECA’s education and advisory role, $2 million.

- Nine new marine reserves in the next Parliamentary term Three a year at $2 million each, $6 million

Industry and regional development

National has promised “a lot of money in the Budget for industry and regional development”. It is difficult to put a precise figure on how much is “a lot”. Economic, industry and regional development currently receives $112 million a year. Each ten percent boost costs $11 million a year but because National has been so vague no precise cost allocation has been made.

Treaty of Waitangi settlements.

National has promised to speed up Treaty of Waitangi settlements. This will have cost implications in the forthcoming term. It will increase the total cost of settlements if more is offered to secure settlements.

At present, there is (five year) multi year appropriation for Treaty settlements, and the amount of the appropriation “rolls out” in line with actual experiences with settlements. $400 million is appropriated for the five years (fiscal) 2002/03 to 2006/07.

This costing assumes that any accelerated settlement process will add $100 million a year in the immediate future.

Summary.

National’s economic programme is based on an assumption that the money going into the New Zealand Superannuation Fund can be used for tax cuts and extra government spending.

National seems to forget that the transfers to the fund are transfers out of operating surpluses. If taxes are cut and spending increased, the operating surplus track will be radically lower. But even then, the amounts it intends to commit to tax and spending plans are larger than the amounts of fund transfers by some 74 percent.

There are therefore three possibilities:

- Radically smaller operating surpluses with the threat of a return to deficits if the economy weakens.

- A halt to, or paring back of, vital capital works in the areas of schools, hospitals, roads and the like.

- Increased debt.

Even that is just the start of the story. With conservative assumptions and no costing of large elements of National’s list of promises, it is easy to see how National would use up more than the full $2,400 million a year envisaged by the time of the end of the Parliamentary term.

It would go on ($million a year)

Health 400

Education 400

Tertiary education 230

Transport 290

Defence 700

Children’s policies 100

Law and Order 130

Superannuation 120

Conservation 90

Veterans 50.

Treaty 100

Total 2440

If the intention is to continue with a rising health funding path, the $400 million annual increase that ends in 2005 will need to be added in to this list of 2006 expenses.

This would require no other extra spending during the term. It implies a three-year wage freeze for police, teachers, the defence forces and other public servants. It assumes no unforeseen events like peacekeeping duties or response to biosecurity threats.

Worse, it leaves out the myriad of uncostable promises to do things like put “a lot more money in the budget for industry and regional development”, increase funding for aged care residential services, and dozens of other big ticket items.

Postscript.

The spending track envisaged in Budget 2002, had government spending declining very slightly as a percentage of GDP over the next three years. National’s policy “flatlines” that spending to GDP ratio at around 33 percent of GDP.

Yet despite that, its policies aim to:

- Reduce the top rate of personal income tax from 32 to 25 cents within ten years.

- Reduce government spending to below 30 percent of GDP.

- Reduce gross debt to below 25 percent of GDP.

National cannot increase spending, cut taxes, and cut both spending and debt as a percent of GDP.

Whichever way the numbers are cut, they simply don’t add up.

National’s accounting would even make Enron and WorldCom executives blush.

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