THE PRESS TUESDAY, JULY 8, 1986. Losing sight of $1 billion

Press, 8 July 1986, Page 20

THE PRESS TUESDAY, JULY 8, 1986. Losing sight of $1 billion

There has been much curiosity about the way the Minister of Finance, Mr Douglas, has discovered that another $1 billion has to be cut out of Government spending to keep the deficit for the forthcoming Budget under $2.5 billion. Mr Douglas said that the required savings had emerged because “new bills keep turning up from the time of the National Government.”

It might have been expected that the officials were constantly doing the numbers. Possibly the cost-cutting exercise in Government departments delayed some calculations. Possibly the introduction of GST later this year complicated the work of the departments in estimating their expenditures. Perhaps the departments, all under severe financial restraints, examined their programmes and assessed whether each part would stay in next year’s plans, and this took them all much more time before they could give the Treasury a figure for their coming expenditure. Even allowing for all this, $1 billion is a huge sum and the figure has appeared with an air of surprise, and an assertion of anger, on Mr Douglas’s part. In his address to a seminar on the financial services industry on Friday, Mr Douglas recalled that “the May statement on Government expenditure reform cut this year’s need spending by over $BOO million.” This, he said, should have allowed the Government deficit to be reduced. It did not, he said. He allowed for “some decrease” in tax revenue and “some increase” in social expenditure as a result of a “cyclical downturn” in the economy; this would produce by itself a “small increase” in the deficit. In May, however, the Government did not know the full extent of the problem.

It is true, as Mr Douglas had said, that debt servicing for the “think big” projects will contribute substantially to the deficit. However, these debt-servicing requirements were known. They might not have been possible to calculate with complete precision, because the exchange rate at the time of the servicing would be relevant to some of the debts. In the instance of New Zealand Steel, the Government took over its debt responsibilities in February this year and they will have to be met in the new fiscal year.

The $1 billion of which Mr Douglas has spoken also includes $l2O million for the debt-servicing requirement for the Meat Board’s stabilisation account. The Government eventually took over all of the board’s stabilisation account debt. Although it had become clear that the Government was going to have to take over that debt, it was slow to take over one part of it. Some of the

$l2O million was the interest to the private sector, incurred during the time when it seemed obvious that the Government would need to move. Some rough estimate of all these debt problems was surely possible before last week.

One of the more serious implications for Government policy towards the State sector in the further reductions required is that much of the emphasis given to financial management has been undermined. The approach to date has been that the heads of departments would be more accountable financially, and would be given considerable flexibility to determine their own priorities. The Government has hitherto not imposed across-the-board cuts.

Now, having examined a number of the departments and produced cuts of about $BOO million, the Government finds itself short and says that another $1 billion has to be found and that there will be across-the-board cuts. It begins to look, on a bigger scale, like the moves taken by the previous Government, which imposed a 3 per cent cut across the board. There are differences. Not every department will be affected in the same way. A commitment has been made not to cut education and welfare votes. Like the National Government, the present Government will increase welfare spending. This Government has earned a reputation for rigid economic management. Discovering a $1 billion shortfall does not sit easily with its reputation and must damage its credibility. The Government has put considerable trust in Mr Douglas and he may need to do some persuading that there is an over-all grasp of the relevant figures. Mr Douglas has worked very closely with the Treasury. He might insist from now on that important figures are added up or estimated progressively as soon as the evidence of a liability is seen.

Mr Douglas can point to the costs and consequences of big investments by the National Government; and he can deplore them. He cannot, with much conviction, say that he has not been aware of them. The “Opening of the Books” took place in 1984, a few weeks after the General Election. They have been open to the Government at least ever since. It has known about State wage costs; it has known what effects GST will produce on its own costs; it has known that the farming industry has been in trouble and that the industry has incurred big debts; it has known the Petrocorp debt and it accepted the petrol refinery expansion cost — a cost that is met from the tax on petrol anyway. The sudden revelation last Friday must be more astonishing to the public than Mr Douglas says it has been to himself.