For the convenience of subscribers, here's my weekend column about how the PM doesn’t trust the Treasury’s forecasts for the very long term and the very short term, but thinks we should rely on the medium term one that says we can afford tax cuts, extra social spending, the quake rebuilds and debt repayment.
So which Treasury forecasts should we rely on Prime Minister?
Next week Treasury is expected to unveil a bountiful set of Budget surplus forecasts for the next four years that allows us to have it all – tax cuts, extra social spending, two major quake rebuilds and debt repayment. Very strong overall GDP growth is likely to power tax revenues much higher than even the Treasury thought just seven months ago, giving the Government big surpluses for equally big election promises next year.
We know this because this week Prime Minister John Key gave us the nod and the wink about what will be in the Half Yearly Economic and Fiscal Update (HYEFU) on Thursday. He was responding to an opinion poll that showed 79% of voters would prefer the Government spend the growing surpluses on extra social spending or debt repayment, rather than on tax cuts.
Speaking after Cabinet was briefed on the HYEFU, Key said the framing of the question was all wrong because it assumed the surpluses weren’t big enough for voters to have it all.
"When you see the HYEFU numbers, what you'll see is the budget surpluses start hockey-sticking up and they start getting quite big," he said.
Pressed again on whether the Government could 'do it all,' he said: "I think when you see the numbers next week, that's what you'll think as well."
He didn’t quite use the word “bigly”, but there were a few Trump-like assurances along the lines of 'believe me, when you see the size of my surpluses you won’t be asking these questions.'
Referring to Treasury’s forecasts and its 26 years of adherence to the Public Finance Act to give an honest account of the fiscal outlook is a perfectly rational thing for a Prime Minister to do. Treasury’s record as a forecaster is among the best in the world and the Act was a pioneer in being designed to stop politicians cooking or hiding the true state of the Government’s books before elections – as happened several times in the 1980s.
But Key’s reliance on those forecasts for some big talking certainly jarred just two days after he rubbished the Treasury’s forecasts in its Long Term Fiscal Outlook delivered last week. Under the same Public Finance Act, the Treasury has to forecast at least once every four years what the Government’s books will look like by 2060 if it continues on with its current settings.
Treasury pointed out for the third time in the current National Government that an ageing population allied to the current settings for New Zealand Superannuation would blow out the Crown’s net debt to over 200% of GDP by 2060 from 25% now. Treasury again suggested the Government extend the age of eligibility for New Zealand Superannuation to 67 and move to a less generous form of indexation than the current one linked to the average wage. The trouble is Key has promised to resign if either one of those two changes are made.
So his response this time was to say those particular long term Treasury forecasts were not reliable, and his proof was that the short term ones were not reliable either.
"The cool thing is Treasury can’t get their predictions right in 44 days, let alone 44 years. They constantly get it wrong," Key said.
He was referring to Treasury’s forecasts before the Budgets in May 2015 and May 2016, which were for small deficits when the Government had targeted surpluses. Eventually, the final numbers registered small surpluses, but not before causing some embarrassment for the Government.
Key had not forgotten when he was asked if he was betting his legacy on Treasury getting its long term forecasts wrong.
"I’m telling you it’s a load of nonsense, because they can’t get predictions in 44 days right, let alone in 44 years."
It is extraordinary for the Prime Minister to call the Treasury’s short and long term forecasts a “load of nonsense” and yet rely on the medium term ones to promise all manner of riches to voters on the eve of an election.
Treasury’s forecasts are worthy of respect. Key may well be right that the Government can afford it all for the next few years, but if that was the case it should also address those longer term challenges evident in the Treasury’s long term forecasts.
One way to credible address the issue is to use the good times now to prepare for the longer term challenges. Michael Cullen resisted Key’s calls from 2005 to 2008 for big tax cuts and instead set up the New Zealand Superannuation Fund and KiwiSaver. That was a sensible way to address those long term challenges, although Dr Cullen also fell short by not dealing with the elephant in the room of those unsustainable New Zealand Superannuation settings.
If there is enough in the surpluses to ‘have it all’, that ‘all’ should include resuming contributions to the New Zealand Superannuation Fund, which Key said in 2009 the Government could not afford. He should also allow a proper bi-partisan debate about those pension settings around the age of eligibility and indexation.
That would be the exact opposite of a “load of nonsense.”