Unravelling the ‘show methe money’ numbers

Opening the government’s books can make or break a party’s policies, writes Chris Money.

A COUPLE of weeks ago, there was news every political party contesting this election was waiting for with bated breath – previously confidential information that laid bare the results of a carefully managed strategy to manipulate the country’s economy and government finances.

On the scale of salacious releases, the Pre-Election Economic and Fiscal Update (or Pre-EFU) appears to be a very grey Wellington bureaucratic ritual, a ceremonial ‘‘opening of the books’’. But it has some real bite for politicians and voters considering their options.

Prior to the reforms introduced by Ruth Richardson in the early 1990s, the government held all the cards on the state of the books leading up to the election. There was no compulsion to let anyone else know whether the country’s finances were in any kind of shape to fund the promises made in an election campaign.

The Fiscal Responsibility Act introduced the Pre-EFU, and a new world of transparency, where every party would have a fair crack at knowing whether their policies were affordable.

Well, kind of. The incoming Labour Government in 1999 discovered that some departmental budgets had funding timed to run out after the period the forecasts covered, requiring Labour to bolster those budgets in preference to some election promises. Public servants politely refer to these as ‘‘holes in baselines’’. Michael Cullen, the then minister of finance, was more forceful in calling it a ‘‘radioactive pile of bones’’.

So how does the Pre-EFU affect the next few weeks of policy debate? Many political parties will have begun costing their promises and formulating strategies based on the Treasury’s assessment at 2014 Budget in May. But a lot can happen to the numbers in five months.

If a party picks it right, or is conservative in its policy formulation, it can happily go through the election process with a prescription they know won’t be attacked with the ‘‘show me the money’’ call John Key so successfully used against Phil Goff last election. If they bank on the Budget 2014 numbers, and these drop in Pre-EFU, all of a sudden politicians are left with four difficult choices: scale back promises, reprioritise, raise taxes, or say you just don’t believe Treasury.

The good news from the PreEFU is that economic growth continues to be positive and pretty much stable. Bill English has also delivered on his promised surplus and forecasts show a growing surplus. More good news – we’re paying down government debt. The debt story is often underplayed but, in some respects, is the most important fiscal success of the last six years. We retain one of the lowest government debts in the OECD and that this was kept at manageable levels through the GFC, is a credit to both the current government and the preceding government which drove debt down during good economic times.

The Pre-EFU does have a real sting in its tail for all aspiring ministers of finance, with tax take significantly lower than forecast. While we’re still on track to have comfortable surpluses, over $1.5 billion has come out since Budget.

This is the reason why National has discounted tax cuts in the short to medium term and why we have seen Labour saying it may take longer to implement some of its promises.

While the cupboard is a little more bare, the number crunching has allowed more certainty for big-ticket election promises in our countdown to election day. Chris Money is a PwC director and economics expert.