Michael Cullen funds the great bulk of his capital spending out of cash. Don Brash goes for tax cuts and funding capital projects with debt. Or so it seems.
Cullen gets Tina to push his line: There is no other way. Tax cuts will have to be paid for with cuts in social spending, he says, schoolmasterly.
Brash pushes his line with a postcard proclaiming tax cuts for children selling lemonade and promising to borrow for capital projects, then proclaims in interviews that you don’t buy your house with cash so you wouldn’t buy your roads that way either.
The postcard contrives to present the same black-and-white blue-versus-red dichotomy pictured in National’s election billboards last year.
Glance quickly through the postcard and you might easily get the impression a Brash government would return $9 billion of operating surpluses in tax cuts, with 85 per cent of taxpayers paying only 19 per cent top marginal tax and pay for roads, etc, by borrowing.
But is it all so black and white?
Start on Cullen’s side of the argument.
Who overpromised in the election, then overcommitted on deals with Winston Peters afterwards — so that Marian Hobbs threatened to resign her seat because funding for her beloved Karori wildlife sanctuary was cut? One might have thought bringing tuis back to inner Wellington suburbs fitted the “national identity” theme and could be spared the axe.
If Cullen had not traded Scrooge for Santa Claus last year we could have had tuis and tax cuts.
Then note his shift on capital project funding. He will now fund more from debt, including infrastructure bonds, provided the government’s gross debt-to-GDP ratio doesn’t stray too far above 20 per cent.
Cullen’s formula is crudely fiscal but it does implicitly acknowledge there is an economic argument for debt funding based on economic return.
This is Brash’s logic. New roads deliver an economic return by way of a smaller loss of productive lives and work capacity because of accidents, lower transport costs and potentially more investment.
This is recognised in the formula used now to determine which state highways shall be built and in what order. The benefit — lower transport costs, fewer accidents, travel time saved, environmental effects and so on — must at least match the cost on a net present value basis. (The formula, now 1:1, varies government-by-government.)
This is not to be confused with a return on investment in accounting terms. That would require a rigorously measurable return and would logically allow debt funding only up to the point where the measured return equalled the cost of the debt.
One way of measuring that return could be what people will pay to use the new road by way of tolls. That is an element in the public-private partnership (PPP) approach.
On that basis the whole of a road can be paid for by borrowing since the debt is fully funded. Provided, that is, people actually use the road and pay the tolls — Sydney’s PPP east-west route met stiff consumer resistance and has cost the government dearly.
Next point: roads last decades (as do power stations). So Brash has argued it is unfair for today’s taxpayers to pay all the cost of roads their descendants will also use. Tolls bill future as well as present users for as long as the tolls are levied.
But what about other capital projects? How do you measure the economic benefit of schools and hospitals? Society and the economy do benefit from individuals being taught or repaired but that is (unmeasurably) far short of 100 per cent of the cost.
The individual benefit fraction would logically be funded from cash, which would limit the scope for tax cuts. If instead schools and hospitals were wholly or largely funded from borrowing, Brash’s postcard logic would not be lightyears distant from Steve Maharey’s formula, briefly adopted by the Prime Minister pre-Budget, that social spending is “investment”.
The alternative is to concede Cullen’s claim that tax cuts would have to be funded by a cut in services or an (inflationary) increase in the debt-to-GDP ratio. In fact, some National MPs, noting that public companies risk takeover if they let debt-asset ratios fall too far, argue that the government is under-geared. Not only can it handle more debt but it ought to, they argue.
And what about the Cullen fund? If the surpluses went entirely on tax cuts, contributions to the fund would have to come out of borrowing, which would be like borrowing to buy shares, bonds and unit trusts for your retirement. (One option National has so far steered clear of: individualise the Cullen fund, tack it on to KiwiSaver and encourage employers to kick in.)
At this point you need to read the postcard’s fine print. The allusion transmutes into illusion.
Brash says only that “some” of the surpluses would come back in tax cuts, that the 85/19 formula would apply only if National was now in government, that he would borrow “wisely” to “help” pay for roads “and other big projects” (which may or may not include schools and hospitals) and that he would “prioritise spending”.
Those weasel words, classic tools of allusion, deliver Brash not too far from Cullen, now moving towards some debt funding.
The point, as usual in big-party politics, is that the differences are of degree, not orders of magnitude. Always kick the tyres.