I got a phone call from the National Party earlier today, and I must say, I'm rather flattered. I guess I must be doing something right, or I'm doing everything *spectacularly* wrong!
By convention, the Opposition gets to borrow a boffin from Treasury during the election to help them with their scheming. Given the small circle of people who were in the loop about the tax cut plans, this boffin, Simon, would have been intimately involved with those plans. Given his speciality and the particulars of this election, he is the busiest and most valuable person in their research unit. So I was rather surprised, flattered, and bloody worried that he spent the better part of an hour trying to straighten me out about my last post (the Calculator one, not the $12.8b one).
His biggest issue with it was that I was wrong about National funding its tax cuts out of the debt increase. I have to say, he's technically right, but the "technically right" part is not particularly convincing. Here's why (an explanation arrived at after much pen-pointing and diagram-construction):
Currently, the Labour government is running a big operating surplus (i.e. Its income is higher than its expenses). It has a lot of money left over after meeting all its operating costs, and its spending that money on contributions to the Super Fund, making capital purchases (buying big stuff, like ships and hospitals) and repaying debt.
What a National government would do is give some tax cuts, which means it would run a smaller operating surplus, which means it will have less money left over after meeting all its operating costs. It still has enough left over to put money into the Super Fund.
Note that, at this point, the tax cuts have been funded, but no borrowing has occurred.
*Then*, because they still need to buy assets, they borrow money to fund those capital purchases. Hey presto - they are borrowing, but they are not borrowing to fund tax cuts.
It's not as duplicitous as it sounds. From National's point of view, capital purchases should never have been paid out of cash in the first place - they'd say it's Cullen who's doing the dodgy accounting by paying for capital purchases out of the cash surplus and making it seem like there's not much money. Capital purchases should be paid for by borrowing, and then that debt should be repaid over the lifetime of the asset, because the benefits of the asset are enjoyed over that time (thus it's a way of spending money that's "better", from an accounting point of view). So if you start off with the assertion that capital purchases should be funded from borrowing - just because it's better accounting - then it really is true that the surplus is higher than it needs to be (i.e. You can afford a tax cut).
They also consider this method to be fairer, since the people who benefit from the asset will be paying for it. For example, if current taxpayers pay for the assets out of cash now, then they could be in another country or dead without having fully enjoyed the benefits of said assets (sucks to be them). That's grossly simplified, but the fundamental idea is that people should only pay as much as they're using, as they're using it.
The advantages of Cullen's way of doing things is considerably simpler - it's cheaper, because borrowing always comes with a cost.
Bottom-line, Simon the Boffin is right, the money that National borrows does not directly go towards tax cuts - however, the tax cuts wouldn't be possible without the borrowing, either! So:
* If you like National, you can say that they are justifiably borrowing money for capital purchases, which reveals that the true surplus really has room for tax cuts.
* If you dislike National, you can say that their tax cuts means they can no longer afford to make the necessary capital purchases out of cash, which forces them to borrow, so their increased borrowing is an indirect effect of their tax cuts.
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So, in all seriousness, the whole tax cut argument - and by extension, this *election* - can be reduced to an accounting debate.
Scary, eh?
But within the accounting debate, there's also an underlying philosophical conflict (the "Political Philosophy-Public Accounting Nexus"): the Left's believes that the state is more than just the sum of current taxpayers - that taxpayers keep the state going, and the state provide for the people, but the relationship isn't necessarily dollar-for-dollar, as the Right's state-as-a-service-provider model would have it.
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Simon the Boffin also makes a few minor points:
* The debt increase *is* $3.2b, not $3.5b, because the $3.5b figure doesn't take into account the savings from not funding the Reserve Bank for some kind of monetary policy thing, and extra spending on roads. (Okay...)
* $3.2b increase in debt is not actually very big, when you put it into context. (It's still 1.8% of GDP, or a 9% increase in debt over what's forecasted. But uh... I guess different people have different definitions of big. Wait... the double-entendre is working *against* me here, isn't it?)
He also made a point which I couldn't figure out whether it was major or minor. He kept saying that I didn't understand baseline spending (He was right. I didn't have a clue what he was on about!). I'm sure he'll correct me if I'm wrong, but I think he was saying that National's $3b lowering of new budget spending isn't quite what it sounds like.
I left the numbers at the office, so I'll have to settle for some hypothetical numbers, but the idea was that if it was a $700m decrease in 2006/07, $1b decrease in 2007/08, and $1.3b in 2008/09, then the 2007/08 cut is really only a $300m cut, because $700m of it was already cut the year before. So the savings from that cut continues to be counted, but it's not as if *another* $700m cut takes place. So really, the new budget spending has only been cut by $1.3b over three years, but it's the saving from the cut that adds up to $3b.
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Alright. I think that's plenty more than enough geeking for a day. I'm going to go and... er... transcribe an interview I had with an economist now. DOH!