Saturday 21 May 2022

An Exercise In Basic Accountancy.

Hoopla And Razzamatazz: Putting the country into debt allows a Minister of Finance to keep the lights on and the ATMs working without raising taxes. That option may become unavoidable at some future time, for some future government, but that is not the present government’s concern – not in the context of a three year electoral cycle. The politician’s motto is simple: “Always put off until tomorrow what is likely to cost you votes today.”

WHY HAS MAKING such a ridiculously big deal out of the whole Budget exercise persisted? The very notion that the government of the day possesses the foresight and skill to successfully diagnose and treat the nation’s economic ills in ways that have not been tried a hundred times before is fanciful. The smart move would be to treat the entire process as an exercise in basic accountancy. Because that’s all it is.

In essence, the budgetary process is about whether or not present state expenditures should persist (with appropriate adjustments for inflation) or be discontinued. Since most state expenditure is committed to activities that cannot be discontinued without throwing society into chaos, practically all of the Minister of Finance’s decisions are made for him. The sick must continue to be treated. The young must continue to be taught. The poor must continue to be housed and fed. The elderly must continue to be supported in their old age. Just attending to these “Musts” consumes practically all of the State’s annual revenue.

Of course a wise Minister of Finance will also keep a weather-eye on the condition of the global economy. Not because he can do anything about it, but because the impact of exogenous economic events – especially negative events – cannot help but affect the condition of the domestic economy. A reduction in the amount of money people spend and/or invest has consequences for the health of the nation’s businesses, the number of its citizens in work, and, most importantly, the quantum of revenue collected by the state.

In a rational society, any shortfall in state revenue would be made up by a corresponding increase in taxation. Unfortunately, democratic states are seldom governed rationally. Governments elected by the people are reluctant to court the wrath of their electors by increasing their taxes, preferring instead to allow the nation’s cultural and physical infrastructure to decay. Or, if the deferral of crucial maintenance fails to produce the savings necessary to keep the “Musts” operational, borrowing to make good the shortfall.

Government borrowing poses all manner of potential problems for the nation, but not immediately. In a democracy, this delay between the act and its consequences is precious. Putting the country into debt allows a Minister of Finance to keep the lights on and the ATMs working without raising taxes. That option may become unavoidable at some future time, for some future government, but that is not the present government’s concern – not in the context of a three year electoral cycle. The politician’s motto is simple: “Always put off until tomorrow what is likely to cost you votes today.”

The problem with days of reckoning is that they always come. It was Rob Muldoon who found himself without a chair to sit on when the music stopped playing in 1984. When the game resumed, David Lange, and his Finance Minister, Roger Douglas, found themselves without fiscal options. Something dramatic had to happen to the way New Zealand was run, or the lights would indeed go out and the ATMs stop working. (In 1984 they very nearly did!)

As we all know, something dramatic did happen – “Rogernomics”.

Prior to Rogernomics, Budgets had been newsworthy largely because they were the occasion for rises in government taxes on petrol, tobacco and alcohol. Less frequently they made news on account of minor adjustments to Income Tax. Roger Douglas put paid to all of that.

After 1984, Budgets became part of the grand theatre of economic reform. Not even the “Musts” escaped the attention of the reformers. The National Party Finance Minister, Ruth Richardson, confronted with another day of fiscal reckoning in 1991, produced what she called “The Mother of All Budgets”. (A reference to Iraq dictator Saddam Hussein’s promised “Mother of All Battles” during the First Gulf War, which should have warned New Zealanders what Richardson had in store!) It was TMOAB that slashed the incomes of beneficiaries by 25 percent – impoverishing thousands. For some Kiwis, Budgets were now events to be feared.

In spite of the best efforts of the political marketing experts, there has not been a Budget to match Ruth Richardson’s TMOAB for more than 30 years. Yes, there have been years in which Bill English (another National Finance Minister) felt obliged to cut back sharply on what he memorably described as the “Nice To Haves”. (Government projects that made life easier, happier, more fulfilling.) But the “Musts” have limped on from one Jerry-built Budget to the next. But, not for much longer. Those dark clouds gathering on the horizon speak gloomily of another day of reckoning that is fast approaching.

It will not be an ordinary day. Crowded into its 24 hours will be climate change, global financial fragility, the weakening and breaking of supply chains, rising geopolitical tensions, rampant inflation, and the ongoing effects of a global pandemic. To keep the lights on and the ATMs working in the face of these challenges, governments all around the world have been forced to borrow and spend like there was no tomorrow. (Which, with the hooves of the Four Horsemen of the Apocalypse thundering across the planet, may not be an unreasonable prediction!)

The current Finance Minister, Grant Robertson, has about as much chance of holding these grim arrivals at the border as King Canute had of keeping the incoming tide at bay. The budget Robertson delivered today, like most budgets, is a holding operation. If he’s lucky, he will get the chance to borrow and spend all over again in 2023, in a final bid to retain control of the Treasury Benches.

If, however, Robertson is unlucky and/or unsuccessful, then he is unlikely to be too distraught. Indeed, he may feel extremely relieved that he does not have to write the 2024 Budget. And if his assumed successor, Nicola Willis, has a lick of sense she will persuade her boss, Christopher Luxon, to hand-off the job of dealing with the Mother of All Days of Reckoning to Act’s David Seymour. After all, he’s the man with the machete.

Rather than search for a Budget title to top Ruth Richardson’s, Seymour should dispense altogether with the hoopla and razzamatazz surrounding the Budget performance. Since the document he hopes to present will be nothing more – nor less – than an exercise in basic accountancy, that’s the description he should use.

That the phrase ‘an exercise in basic accountancy’ will forever after strike fear into the hearts of New Zealanders is, sadly, as unavoidable as death and taxes.


This essay was originally posted on The Daily Blog of Friday, 20 May 2022.

6 comments:

Kat said...


A reasonably well balanced budget given the harms done by the pandemic and current global conditions.

Luxon claims National would be better economic managers, that is very debatable. Recent utterances from the various National finance spokespeople suggest that their ability to do basic maths let alone grasp accountancy fundamentals is flawed. The one thing Luxon and Willis are very good at is political faux rage, a very cynical and calculated foot stamping political faux rage. The continual cry of “Robertson is addicted to spending” over and over accompanied by “govt hasn’t got a plan and the country is going backwards” is nothing short of fake news, at least according to the credit rating agencies and the IMF it is.

The PM’s rebuttal yesterday that Luxon is not a long haul sort of guy, seemingly only short haul and in the regions no haul was a great example of her quick understanding and intelligence.

If you’re looking for an alternative in basic accountancy “Don’t Call No Haul”…………. https://www.youtube.com/watch?v=5AI44gnaLxY
And…bonus track: https://www.youtube.com/watch?v=F8dKVbP1Nzo

Brit Bunkley said...

New Zealand has proportionately one of the lowest debt per GDP in the world. As is true with taxes and more importantly, spending (second to last in the OECD)…and it shows with health, education, poverty, climate action…etc. But one would never know these facts if they listened to NZ media. https://worldpopulationreview.com/countries/countries-by-national-debt

Guerilla Surgeon said...

"The sick must continue to be treated. The young must continue to be taught. The poor must continue to be housed and fed. The elderly must continue to be supported in their old age. Just attending to these “Musts” consumes practically all of the State’s annual revenue."

Weeeeel .....According to some, including some who comment here – the sick, the halt, the lame, the poor, the young, the elderly – should be abandoned by the state and left to fend for themselves, and if they can't afford to keep themselves? I don't know they are remarkably reluctant to express an opinion on what should happen to them. Starvation? The workhouse? Who knows? It's their own fault for being sick or poor or whatever. They should have made better choices. Particularly, of course they should have chosen wealthy parents but that's a little difficult.

Jens Meder said...

Yes, if our earnings from work, investments and trading profits do not cover the cost of our self-imposed "musts", rights and entitlements, then according to the basic rules of accountancy which every intelligent and honest child with a limited amount of pocket money learns early to "live" within its means, and to save for anything more expensive than its regular sum of pocket money
How come that we as a nation don't seem to understand that this basic accountancy rule applies also to economics on the national level, and trying to by-pass it through non-repayable debt can only lead towards widening poverty eventually when money becomes worthless through inflation and we end up as a barter economy having to exchange goods with each other and our services, like initially in a Soviet kholkhose(?) before it became a little more monetary value based capitalistic ?

Guerilla Surgeon said...

"How come that we as a nation don't seem to understand that this basic accountancy rule applies also to economics on the national level,"

Because it doesn't. I guess accountants and economists might disagree on this. But then again I haven't heard any accountants spout nonsensical ideas like that either.

Odysseus said...

If the answer is #27 pw for a couple of months, it must have been a bloody silly question. Oh, and don't mention the income insurance tax that will make most workers even worse off.