Unlike everyone else at the Budget lock-up today, I was genuinely impressed by the Budget. I was practically in awe.
It was a boring Budget, to be sure. They actually had a deep dark secret this time, but lost it. (I suggested that we all act surprised by the unbundling announcement - you know, just to be polite.) Instead, the spin machines gave us three packages with fancy-pants names:
Economic Transformation - raising productivity, building a skilled workforce, raising research capability and investing in our infrastructure.
Families - Young and Old - building stronger families which are healthier, better educated and feel safer in their communities.
National Identity - building a unique national identity through New Zealanders' connections with arts, culture, sporting success and our presence on the international stage through defence and development assistance."
They include (over five years):
* Throwing another $3 billion at Health & Stuff (including $76m for the "Healthy Eating Healthy Action Implementation Plan", aka "Eat Your Goddamn Greens and Get Off the Bloody Couch")
* Paying for election bribe #1 with $1.9 billion for the extension to Working for Families
* Paying for election bribe #2 with $1 billion for student loans
* Spending $1.3 billion on road construction/appeasing Aucklanders/making the Greens cry
* Oh, and there was something about Telecom and wires or something
Okay, the Budget was boring, and even the food sucked compared to last year (though a nostalgic John Campbell was pleased to find that, yes, sausage rolls were indeed on offer).
But it was this very boringness that was impressive. Despite taking widespread criticism from the media, despite nearly losing the election, despite supposed hints from Helen to shuffle along, Cullen did exactly what he did for the last Budget. He is resolutely the same unflinching fiscally conservative Keynesian that he's been since he started. That takes balls.
One reporter said that perhaps I'm giving Cullen too much credit - after all, this is only the beginning of the electoral cycle, so there's little pressure or incentive to splurge. It's true that I shouldn't read too much into this Budget, but I think that when the whole life-cycle of this Government is taken into account, Cullen's master plan begins to emerge.
The big and well-trodden question at the moment is why the Government isn't spending the "Supersize Surplus" (note to National: I don't think "Supersize Me Surplus" makes any sense, and you lose the alliteration) of $8.5 billion. But this figure is the adjusted operating surplus (the Operating Balance Excluding Revaluations and Accounting Changes, or OBERAC). Cullen says that the cash surplus (at $1.8 billion) - *not* the OBERAC (of $8.5 billion) - is the real indication of what the Government can spend.
For an in-depth analysis of the OBERAC, Brian Easton has an excellent column here.
It bears consideration, though, that in the 2000, 2001, 2002, 2003, 2004 Budgets, the OBERAC was the *only* surplus that Cullen talked about. In fact, he said that it "may be regarded as the measure of the underlying surplus". Yet, in 2005, the cash surplus became the "real surplus". I called him up on this last year, and this was his response:
Yes, because unfortunately the media - and obviously political opponents, for purely tactical reasons - couldn't get it through their heads that the operating surplus wasn't the amount you could spend. I mean, I just couldn't explain to them: out of the operating surplus came the money that went into the superannuation fund, came large amounts of money from capital investment of other sorts that went off departmental balance sheets, came the retained profits in the SOEs and Crown Research institutes and Crown entities and all the rest of it, and they kept talking of it as though it *was* the cash surplus.
It's still correct, in my view, to say that the OBERAC reflects the *underlying* fiscal position, but that's not [the figure] that tells you what you've got free to spend, over and above what you're spending now."
That's to say, while the OBERAC is an indication of a Government's fiscal performance, a Government that's doing well is not necessarily one that can afford to splurge, *but*, it's still a Government that's doing well.
So if the Government is "doing well", but not having any cash, then where's the money going? It's building up assets, putting money from Crown entities back into investment, saving for the Super Fund, and even making capital investment out of the operating surplus. Cullen calls this an "unusual position" for the Government to be in, while National calls this cooking the books, because capital investment should be paid out of debt (the rationale is here).
Bottom-line: There is money in the system, but it's going into savings and assets, so it's not available for spending - but it could, in theory and in practice - be, if you take it out of the system or borrow in its place.
So what's all this asset hoarding leading up to? In this Budget, Cullen lays the rhetorical groundwork for his moment of glory:
Cash deficits are forecast of $1.5 billion for 2006/07, $2.1 billion for 2007/08, $2.7 billion for 2008/09, and $1.1 billion for 2009/10, in all some $7.4 billion over the period. Operating surpluses are also expected to fall to an average of $4.8 billion or 2.8 per cent of GDP. This, however, includes returns from the New Zealand Superannuation Fund. Excluding these, the forecast operating surplus averages $3.8 billion or 2.2 per cent of GDP.
This Government does not intend to react to this situation by slashing government expenditure, thus making the slowdown worse. The fiscal prudence adopted over the previous six years, in other words allowing the automatic stabilisers to work on the upside, means they can now be allowed to work on the downside. This contrasts with the position in 1999 when the previous Government reacted to a downturn by such moves as cutting the level of New Zealand Superannuation."
As the economy slows down and the Government's cash surplus turns into a deficit, the Government will be in the perfect position to let loose with the purse strings. The economy will be in a crawling along, begging for some fiscal stimulus; the Government books will be healthily in the black, which will make it conscionable for Cullen to spend beyond the Government's means.
Cullen will be the smug squirrel with the stockpile of acorns when the inevitable winter comes. He can, should and will pump the money that he's hoarding now back into the economy. And if that just happens to be before the 2008 election... well, cie la vie.
Cullen's legacy will still be the Super Fund, but that's for the history books. Between now and then, seeing Keynesian economics work like it does in the the textbooks will be his reward. He'll love every minute of it, and I'm sure that he won't be shy about letting us know.