As always the main media focus is on the headline numbers for the
fiscal surplus or deficit – where the government still expects to squeak into
the black in the 2014-15 fiscal year with a tiny surplus of $75 million, and is
then planning to run rather a small surplus of 0.3% of GDP in the 2015-16 year
and a rather larger one of 1% of GDP in the 2016-17 year.
While these numbers get the headlines, they don’t really
tell you what you most want to know. That’s because the fiscal surplus or
deficit moves up and down of its own accord, depending on the state of the
economy: in good times, tax revenues increase and payments on the likes of
unemployment deficit go down, none of it due to any policy changes or good or
bad management by the government. It’s purely a cyclical phenomenon.
To see
what the impact of the government’s decisions actually is, you have to strip
out those purely cyclical influences on the economy. How you do it in practice
is more art than science, but various organisations give it a go, including
(obviously enough) the Treasury itself. The ‘cyclically adjusted balance’, or CAB, is the result. As the graph below
shows, the deficit today isn't really as bad as it looks. In the June 2013
year, the headline deficit is 2.9% of GDP, but the impact of the earthquake
accounts for about 0.6% of GDP and the weakish state of the economy accounts
for another 0.5% of GDP. Take those out – in other words, assume it’s a normal
year with no major disasters and the economy in okay shape – and the deficit
would have been only 1.8% of GDP.
That’s reasonably good news: we’re not starting from the
sort of fiscal black hole that many other OECD economies find themselves in,
where the true underlying state of the public finances is dire. A fiscal
deficit of 1.8% of GDP isn't something you’d want to go on running
indefinitely, but it’s not the end of the world, either, as a place to be
starting out from.
The other bit of good news is that the fiscal surpluses that
the government is projecting for future years are actually real – they’re not
just a reflection of the economy getting better. In the graph, you can see that there’s no difference between the headline surplus numbers and the cyclically adjusted ones.
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