The “show me the money” costings war is a credibility test for both John Key and Phil Goff

Phil Goff says he will “show John the money” today, providing Labour’s costings for its various policies. He says he will borrow about $2.6b more than National over the first three years. Key’s costings put that figure at $11.7b, increasing to $17.2b over one additional year.

Yesterday, commentators were saying that Goff’s reputation was on the line with these forthcoming costings. If they didn’t stack up, he would not be credible. But what about National’s credibility with its costings? Isn't National’s credibility on the line as well? It is making very public estimates about what some policies will cost, too.

Having looked at National’s spreadsheet (available here on its specialist Attack Labour website), I think there are some serious problems with it. Following up on John Pagani’s insightful posts, I found $8b worth of clear errors in National’s spreadsheet. And I’m sure I didn't find everything there is to find. These are errors that have the effect of roughly doubling the impact of Labour’s manifesto on net debt. That isn’t much good for National’s credibility.

Contributions to the NZ Superannuation Fund.

Labour wants to resume contributions. National doesn’t. Labour’s added contributions total $6.1b over four years, an amount National says is new net debt. Except Labour isn't giving the money away or burning it or buying Drachma, it is putting it in a high-quality investment account that the government owns. The money increases a government financial asset, which means it cannot also be new net government debt. If you borrow $10,000 and then put it in the bank, have you increased your net debt by $10,000? Of course not. But National says you have. This is crazy, and a glaringly obvious error.

Running total of errors: $6.1b

GST removed from fresh fruit and vegetables

National says this policy will cost $1.1b over four years, topping at $350m in year four. That level is based on a guesstimate that we will spend $2.7b a year on fresh fruit and vegetables that year. But we won’t. Stats NZ figures show that NZ households only spent $1.7b a year on all fruits and vegetables in 2010, including fresh ones, dried ones, canned ones, and frozen ones. The public figures don't break it down any further, but generously assuming that 50% of that is fresh, then the annual bill from removing GST tops out at only $110m.

Then you have to add in fresh fruit and veg bought by restaurants and turned into other stuff. Last year restaurants in New Zealand had GST exclusive sales of $4b (Stats NZ figures). Food cost in restaurants are usually about 30% of sales. If households are anything to go by, fruit and veg makes up about 20% of food costs. We’re assuming fresh is about half of that. And the GST 15% of that. Which is another $19m a year. So the total cost tops out at $130m a year, not $350m. Applying that correction across the other years gives a four-year cost of $400m, not $1.1b

Running total of errors: $6.8b

Labour’s tax reforms

National’s figures completely exclude Labour’s policy to close tax loopholes. Apparently, closing tax lopholes is completely impossible. Except, of course, when National closes them. Labour says it will gain up to $300m a year from these. Let’s assume they’re dreaming, and they actually only get half of that. $600m over four years.

Running total of errors: $7.4b

Finance costs

$1.1b of the $17b hole National is claiming comes from extra finance costs (i.e. interest) on all the additional borrowed money from Labour’s other debt-incurring projects. Of course, if that new debt is fictional, then so are the finance costs. Given the errors I listed above, that saves a further $525m.

Running total of errors: $7.9b

And these are only the obvious errors I can easily quantify online. There are plenty of other, ahem, opaque guesses in National’s figures. For example, National says that stopping asset sales will increase net government debt by $2.9b over four years. How did they get that number? No idea. It seems to include cash received from the sale and interest saved on the retired debt and lost dividends, all rolled together into one big messy meta-guess.

Similarly, for some reason the impact of the R&D tax credit has been rolled up with the impact of bringing forward agriculture’s entry to the ETS, even though they have nothing to do with each other. That makes assessing the accuracy of each individual number impossible.

Once Goff releases Labour’s costings, there will no doubt be a weekend full of dorky people throwing spreadsheets at each other and bemused reporters who took journalism instead of maths trying to play umpire. The most important thing to remember is that this is a credibility test for both Key and Goff, not for Goff alone.

Comments (18)

by MikeM on November 04, 2011
MikeM

Hi Rob.

"If you borrow $10,000 and then put it in the bank, have you increased your net debt by $10,000? Of course not. But National says you have."

I agree it's silly and overly simplistic to say the money's gone when obviously it's not, but it's really not my area and I still wonder about the difference between interest charged on the loan compared with income gained from investment.

Is it reasonable to expect in the long term that the super fund would earn much more from this money than what it costs the government to borrow?  It never works in my favour if I borrow money and put it in the bank, but I'm also not someone who can be bothered devoting my every waking sliver of attention to a diverse investment portfolio, which I think is what the government would be doing.

by Rob Salmond on November 04, 2011
Rob Salmond

@Mike: Thanks for the comment. Over the long term, most forecasters are indeed saying that the NZ Super Fund will earn a higher percentage in interest than the government pays to borrow money. There are two reasons for this.

First, governments can borrow money much more cheaply than you or I can, because they have many times more assets than they take on in debt. When you or I take  mortgage, for example, it is often worth four or five years worth of our incomes, and it initially accounts for most of our assets as well. For governments, loans are usually a small fraction of the country's annual income, and the loans are miniscule compared to the stuff the government owns. That is how they get great rates (around 4.5% for 10 years of fixed at the moment I think, whereas we would pay almost 8% fo the same thing on a mortgage).

Second, the NZ Super Fund generates good returns because it is enormous and can afford to hire its own dedicated investment team to make sure it has a diversified, high-performing portfolio. Which is, again, more than ordinary folk like you or I could hope to do without spending most of our investment nest-egg on people in pinstriped suits.

This is part of the rationale for Labour wanting to invest in the Super Fund. Over the long term, it is more profitable for the government than running no debt and earning no investment income.

by Ben Curran on November 04, 2011
Ben Curran

Isn't that essentially whatpeople buying homes do? Get a mortgage, pay the interest, hope that the house is worth more than what you paid for it in total? Ideally at the government/investment portfolio level there should be less hoping and more planning, but it's still seems like the same general idea.

by Rob Salmond on November 04, 2011
Rob Salmond

@Ben. The mortgage analogy only goes so far, I think. Here are three differences:

1. Folks buying a home with borrowed money also usually get to live in the home, so they get a consumption value from it as well as an investment value. Governments don't get any consumption value from an investment.

2. You are right that the main financial gains for homeowners come from capital gains. There can be some of that in the investment markets, but as you say the risk to "crossing your fingers and sitting on your bum" is much higher in investment markets than when owning a home.

3. As I mentioned above, the cost of getting the money is much lower for governments than it is for people buying a home.

by Kyle Matthews on November 04, 2011
Kyle Matthews

My first reaction is that you're right on all of these, except the finance costs, which need to be given back to national, in part at least.

The government borrows a billion dollars, puts it in the super fund. The government pays $50 million/year interest.

The super fund invests that billion, and returns (say) $70 million in income.

That's all good and a profit of $20 million made. However wouldn't the super fund income stay in the super fund, and not return to the government? The super fund doesn't return it's income on investments to the government funds does it?

So the government would pick up the tax on the income (about $20 million), but have a net financing cost of $30 million/year.

The super fund would be up $50 million/year.

Expand that out to (say) $4 billion/year, $120 million first year, $240 million second, etc - $1.2 billion over four years? Won't that be the hit on the government books, and the super fund gets the benefit in growth in assets?

by MikeM on November 04, 2011
MikeM

Great.  Thanks for the clarification, Rob.

by Frank Macskasy on November 04, 2011
Frank Macskasy

When it comes to fiscal credibility, I tend to put my money on Labour every time. A bit of time spent researching Labour and National's track record in fiscal management yielded some verrrrry interesting results: none good for National.

If I may share the results I found: http://fmacskasy.wordpress.com/2011/11/03/labour-the-economic-record-200...

This is the sort of comparitive, easy-to-follow data that might be more useful in the msm. Especially when it comes to myth-making that Labour is "fiscally incompetant". The data does not bear out that claim.

 

by Plum on November 04, 2011
Plum

Rob, National's spreadsheet says that the costings for the removal of GST on fruit and veg come from Labour's own figures.  They may still be wrong, but it's not unreasonable for National to take Labour's costings for this at face value in this case.  I agree with your other points though. 

by Chris de Lisle on November 04, 2011
Chris de Lisle

@ Frank: A lot of that data looks like it's part of a long-term trend from the 1990 to 2008. And that bad things happened in 2008 can hardly be pinned on the National government.

Perhaps governments have less control over this stuff than they like to make out?

@ Rob: Watching last night's ten o'clock bulletin, they had John Key quoted several times. The first time he said the hole would be 11billion, then he was on 16billion, and finally on 17billion. I take it they've been inflating their estimates for a while and that John Key forgot exactly how much they had inflated them to.

by MikeM on November 04, 2011
MikeM

@Frank, I know you didn't produce those graphs but if the intent is to push them at MSM and similar then I think it's really important to stress that most of the y axes don't start at 0, so can be visually misleading, or even better fix the graphs.  eg. The Long Term Unemployment graph makes 4% LTE around 2009 appear as if it's virtually non-existant.  Many unfamiliar folks will just look at the bars without checking the numbers on the sides.  I had it drilled into me at school not so long ago to avoid ever showing info in this way, and it frustrates me every time I see it, which sadly is quite often.

by GregS on November 04, 2011
GregS

"Over the long term, most forecasters are indeed saying that the NZ Super Fund will earn a higher percentage in interest than the government pays to borrow money."

I don't buy this.  If this really was the case, then why not promise to borrow 1 trillion dollars?

The problem is that the "long term" can be longer than the timeframe of the borrowing.  The real question is: what level of borrowing can the government handle?  And when it is already borrowing large amounts of money, can it take on more?  National is on the conservative side, Labour says we can be more risky. And the general public are looking at the world economy and favouring caution over the uncertain.

by Rob Salmond on November 04, 2011
Rob Salmond

@Kyle: You would be right about those finance costs on the borrowed NZ Super fund money if I was claiming NZ Super Fund earnings on the other side of the ledger. I decided not to do that in order to keep my claims fairly conservative. You’re right to say that the NZ Super Fund earnings are likely more than sovereign borrowing costs (see below), thereby increasing the government’s net financial assets a little each year, so I probably understated National’s error by not including either term.

@Frank: Thanks for pointing me to those charts. It would be great if some of our esteemed colleagues in the fourth estate would have a look at them.

@Plum: I just looked at Labour’s shiny new spreadsheet, and you are right. Hard to blame the Nats for that, I agree, although I can't figure out how Labour got those numbers. But if those two parties agree it costs $350m, then as one guy with an internet connection I will defer to their collective wisdom. Thanks for pointing this one out.

@GregS: You are conflating two different questions: (1) Does the NZ Super Fund earn more than it costs government to borrow; and (2) If so, should we invest a bazillion dollars in it? The answer to the first question is Yes. Just look at past performance – over 6% per annum so far on average since 2003, including the period of the worst downturn since the 1930s is pretty good. Long term government debt is cheaper than that, and will become relatively cheaper still once the world returns to normal growth patterns. The answer to (2) is, of course No, partly because we do not need to invest a bazillion to achieve our goals, and partly because if we tried to borrow a bazillion dollars than our gross debt/GDP ratio would go up and so would the interest rate we pay on the loan, progressively wiping out the advantage.

by Frank Macskasy on November 04, 2011
Frank Macskasy

Chris,

"@ Frank: A lot of that data looks like it's part of a long-term trend from the 1990 to 2008. And that bad things happened in 2008 can hardly be pinned on the National government."

I would accept that, Chris, except for three things:

1. It's not the fault of the National government when "bad things happen" - and yet National supporters think nothing about blaming the increasing number of unemployed  for being welfare recipients.  In effect, it's the beneficiaries responsibility that they are victims of a global recession - but not the Government's.

2. If we take one case of "bad things happening", I'd tend to agree. But the data is quite clear; the "bad things" tend to happen more when National is in power. (Eg; three credit downgrades? One would be bad luck. Two would be raising eyebrows. Three?! Now that's a trend.)

3. Ok, the unemployment is not directly National's fault. Though they tend to support the laissez-faire economics that have plunged the planet into a global recession.  But let's assume that it's not National's fault - I can live with that.

The question then becomes: what are they doing about it? What did the Jobs Forum in February 2009 produce? The cycleway? That resulted in 200+ jobs instead of the 4000 anticipated. (Shades of Muldoon's 'Think Big' projects creating 110,000+ new jobs.)

Perhaps if National had invested in job creation instead of squandering resources on two pointless tax-cuts, we might have averted unemployment reaching 6.5%. (It was about 3.4% in 2007)

 

And we wouldn't be in this situation now: http://fmacskasy.wordpress.com/2011/10/12/how-can-this-possibly-be/

Personally, I can forgive the Nats for their stuff-ups - but not ignoring the need for job-creation programmes. They had the power to do something. They just chose not to.

by Frank Macskasy on November 04, 2011
Frank Macskasy

MikeM: "@Frank, I know you didn't produce those graphs but if the intent is to push them at MSM and similar then I think it's really important to stress that most of the y axes don't start at 0,"

Just vrecently, John Pagani had a graph on his stuff.co.nz blog - and was pilloried by Nat/ACT supporters because his graphs DID start at zero.

(I could find the link if you like?)

If you can find me more "accurate" info (and god knows the prison one was diabiolical to find) - I'd be a very happy chappy.

Considering the data is from Trading Economics (http://www.tradingeconomics.com/about-te.aspx ), I'm fairly happy at the neutrality of the information.

But I'm happyif you can provide me with better?

 

 

 

 

by Frank Macskasy on November 04, 2011
Frank Macskasy

@Rob,

 

Thank you!

by Ian MacKay on November 04, 2011
Ian MacKay

I do not "know" economics so really appreciate your effort Rob and those of the comments from others. Of course Duncan, and Guyon, and John Armstrong and even John Key would treat the revision with respect.

by MikeM on November 04, 2011
MikeM

Hi @Frank. Nope, I can't provide better info or graphs. I also can't comment about Pagani's blog because I don't follow it closely. I'm just being nitpicky about the sort of info that gets circulated generally.  Sorry if I came across as critical of yourself and I'm not trying to dispute your other points based on the data.

Really though graphs are meant to make information simpler and clearer to understand, and I guess my frustration is that the Trading Economies graphs seem to make it more confusing, at least for anyone who's not already familiar with how they're drawn or who doesn't have the time or inclination to look closely, because whenever the axis doesn't start at 0 it exaggerates the changes disproportionately.  Chuck 'em on a billlboard or in front of much of the journalism-majoring media, and they could be more misleading than just presenting a line of numbers on a page.

by Frank Macskasy on November 04, 2011
Frank Macskasy

Cheers, MikeM. i think I need to set up an online business, creating better, more visually-appealing graphs. It's surprising that there's actually not as much on the 'net as I would've thought there was. (Even the Prison Population graphs aren't as clear as I'd like them to be - I was tossing up whether to use them or not.)

I'm still trying to find graphed information on surpluses/deficits from various governments... it'll be another long night ahead, I think. (Thank gods for my new coffee percolator!)

 

 

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