Credibility in Tatters

Cooked Books In Pustule Stew

Well, we always knew this was going to happen: Labour's cooking the fiscal books again.  Challenged to provide costings for its election spending promises, it has eventually delivered--voodoo numbers. (Disclosure: we remain sceptical of the Government's numbers as well as being over egged when it comes to returning the Crown's books to surplus in the declared time frame.  But at least the Government's numbers would have had Treasury and Inland Revenue scrutiny.)

Let's put the finger on Labour's pustules:


Firstly, there is a matter of borrowing more ($4bn--as acknowledged by Labour itself) only to return to fiscal surplus earlier (2016-17).  How does that come about?  A new tax--a capital gains tax--is touted to raise truckloads of new revenue.  By year 10 of the tax, Labour claims that it would be raising $2.27bn per annum.  Yet this tax would be full of exceptions (already announced), carve outs and would apparently not face any avoidance actions.  How reliable is the number?  Pie in the sky.  No serious work has been done on the structure, application, or cost of administering such a complex tax.  Voodoo economics.  Yet--and let's never forget this--the debt increase which it will need to fund will be very, very real.  Nothing voodoo when it comes to the debt. 

Secondly, Labour is also promising tax cuts.  Yup.  So, let's get the legerdemain clearly before our eyes: higher borrowing, and huge tax cuts (both fiscally real), offset by a new wonder tax that will raise billions because Labour says so, and much higher spending.  How big are the tax cuts?  Labour's tax cuts are a new tax threshold, lower GST, and a Research and Development tax credit.  These tax cuts are apparently bigger than all new spending announced to date, to be funded by new borrowing.  So borrowing will have to fund not only new spending, but huge tax cuts as well.  Yah gotta be dreamin', mate.

Thirdly, the economic gurus in Labour (Cunliffe, Parker) apparently made a slight calculation error representing about half a billion dollars.  Labour has made a "big thing" about National's plans to sell up to half of selected State Owned Enterprises.  Labour has argued that this would mean halving the dividend received from these companies.  True enough.  But then it completely overstated the dividend and built this into its fiscal projections.

Here is the problem: the overstatement represents a schoolboy error.  It indicates that Labour has not done any serious work on its "Show me the money" figures. 

According to the NZ Herald,

Labour's figures show it expects to receive ordinary and special dividends from the SOEs of just over $845 million in the next financial year, rising to $1.2 billion four years later. . . . But Labour drew its figures from Treasury numbers released two weeks ago for interest revenue and dividends for state-owned enterprises. Through a spokesman, Finance Minister Bill English said those figures referred to total interest and dividends received by all SOEs including Kiwibank.
A Treasury spokesman said was the case, and the figures used by Labour were "not the same as disposable income available for the Government to spend on its priorities". (Emphasis, ours)

Government owned companies receive interest and dividends from their commercial operations.  Kiwibank, being a bank, gets lots of interest payments.  Some of this gets paid across to the Crown once profits are calculated; the rest is retained by the companies to fund their commercial operations, depreciation, etc.  Labour stupidly used the gross figure, not the actual dividend payments to the  Crown.  That amounts to a $400m per annum error.  Either Cunliffe and Parker are ignorant, or they are deliberately obfuscating. 

Finally, Labour wants to borrow to invest in superannuation funds.  It wants to treat this as fiscally neutral.  You borrow, then invest in a big fund investing in shares and bonds and property, pay interest on the debt, and hope that the earnings from the investment will not only pay the interest cost, but will eventually enable you to pay back the borrowings.  So, this debt should not be counted in government borrowing figures.

As John Key said,

. . . that was the same as saying "if you have a mortgage against your home, that [debt] doesn't count and the day you buy the house, you should book the profits of what you think you might be able to sell the house for some time in the never-never".

Smoke and mirrors.  The kind that rating agencies see through in a nano-second.  How did Cunliffe defend that charge?

Mr Cunliffe said it was "absolutely appropriate" to calculate net Crown debt including the Super Fund assets, "as they always were under the last Government".

Precisely.  We cooked the books back then, so its OK to keep on cooking them today.  

Any voter who trusts these guys as honest brokers deserves all that will come down the pike if and when they are voted back into government.