Labour’s Fiscal Vision Board

At long last, the Labour Party has released its fiscal strategy. Quite naturally, there are many reassurances about everything being fine and debt coming down over time despite increased spending. It's just a shame it doesn't seem to really add up.

Before we get into it, here's what you need to remember: a government only runs a surplus if revenues exceed expenditure. A promise to repay debt therefore rests on those two numbers. If there's no credible demonstration as to how and when what will be collected will be more than what will be spent, there's no real plan to reduce debt.

There will be significant new outgoings in the debit column

First, let's look at current settings. Treasury says core Crown expenditure in 2029/30 will be $168 billion, which will be around 30% of gross domestic product. Revenues will be $174 billion, which means we are projected to have a modest but stable surplus.

Now, what Labour is promising is to allow core Crown expenses to increase to 33 pc of GDP. Treasury says that GDP will be about $554 billion in the 2029/30 fiscal year. So this means spending would be allowed to increase on the order of $15 billion a year by the end of the decade.

There will only be modest new incomings in the credit column

Assuming spending does increase, this means either more borrowing or more taxes. Labour is committed to one big new tax, which is a capital gains tax on investment and commercial property. It hasn't named any others.

On Labour's own assumptions, which in a spirit of charity we will assume play out, this tax will produce $0.965 billion in 2029/30, rising to $1.35 billion in the years after that.

So spending will increase by 2.7% of GDP. Meanwhile, the capital gains tax, that great elixir of life, will provide revenues equal to less than a quarter of a percent of GDP. Which means that a CGT will provide only one dollar in every eleven of the money Labour wants to spend.

Inflation won’t patch the hole

While Labour isn't promising new taxes beyond a CGT, it's worth noting that under our present settings, taxes increase every year automatically. As inflation dilutes the value of money, incomes are pushed automatically into higher and higher tax brackets. Every year, taxes increase by stealth in this way. To be completely fair here, National is counting on this too.

Thanks ACT.

But this effect is already part of the existing forecasts. So unless Labour is promising a lot more inflation, it's hard to see how they can count on stealth increases to bridge the gap in any meaningful way.

Wait, what?

So here's where we are:

• Quite a bit more spending;

• No new or increased taxes to cover the new spending; and

• Debt somehow going down over time.

This is about as reasonable as Agnes Skinner telling the guy at checkout that she wants all her groceries in one bag but she doesn't want that bag to be heavy.

Dreams are not a strategy

Imagine somebody who needs to get in shape to secure his or her long term health. After much deliberation, he or she writes down a plan about how to get there.

The plan is as follows:

• Reduce BMI from 33 to 20.

• Increase daily calories from 1900 to 2300 per day.

• Increase exercise only by adding a brisk five minute walk a day.

Would you really call that a health and fitness strategy? Setting their vision board aside, would you believe that more likely to get fitter and healthier or unhealthier and sicker?

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