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Analysis: There is no hole in Labour’s fiscal plan

National accuses Labour of a basic calculating error that blows an $11.7 billion hole in its budget. Labour denies the mistake. Bernard Hickey looks at this fiscal version of a 'he said, she said' and finds no hole - just a political argument about cost inflation and spending priorities.

Finance Minister Steven Joyce brandished his spreadsheets and declared in his seventh floor Beehive office that he and a small pack of National party staffers had found a smoking hole in Labour's fiscal plans. Labour hit back almost immediately with claims that Joyce had mistakenly made the wrong assumption about Labour's accounting treatment and was desperately lashing out. So who's right? The short answer is that Labour is mostly right and National is mostly wrong, although there is fault on both sides.

The big picture is there's certainly no fiscal crater for voters to peer into.

The longer answer is there's a more interesting debate here about which types of spending a Government should choose and whether there should be an independent arbiter that costs political parties' policies before elections. This neutral budget 'referee' would give voters a clear steer every three years so they don't have to consult their own spreadsheets or a fiscal accounting partner (cheap at $600/hr) before deciding which party's box to tick.

The final conclusion to be drawn from the budget scuffle: voters need a officially independent adviser to decide these arguments.

The fiscal TMO decides 'No Try'

Debates over fiscal forecasts can appear a lot like a rolling maul that collapses over the line. All the attacking players put their arms in the air to try to convince the ref and the crowd that they've scored. If they're really sure they run back to the halfway line. All the defenders point to the ground and then hold their palms in the air to indicate the ball was held up. There's some pushing and shoving and a television camera operator is accidentally bundled over into the hoardings.

Then the ref will draw the picture of a screen in the air and hand the decision over to the Television Match Official (TMO), who will then spend countless minutes reviewing the footage from various angles and at various speeds before declaring 'Try!' or 'No Try!'

Sadly for Steven Joyce, in this case, it is a 'No Try'. He was clearly held up over the line by Grant Robertson and Jacinda Ardern, who showed there was no "pretty basic error" in their calculations.

But Steven Joyce's dive for the line was entertaining and may yet be played in the match highlights as a sign that he and his fellow prop Bill English can be dangerous when they adopt a fiscally low body position and get their angles right.

So let's start with Steven Joyce's basic claim. He said there was a $11.7 billion 'hole' in Labour's fiscal plan because its operating allowance hadn't taken into account the need for extra spending in years to come because of the naturally inflating effects of inflation on wages for police, nurses, teachers and the usual crop of budget spending lumps that come in every new Budget round. He said Labour had forgotten to cumulate the spending from one year into the next, thus their 'snowball' of spending looked much smaller than it should have been by 2021/22.

"It's a pretty basic error," Joyce said.

He agreed it was possible that Labour was able to sharply control its spending in the early years to keep within the operating allowances, but was unlikely given the usual spending pressures on Government.

"Either they're planning on starving expenditure beyond their party's commitments, or they've made a big mistake," he said.

On the face of it, Joyce's argument seems attractive. It looked like a try in real time.

Labour's 'operating allowance' in its Fiscal Plan is remarkably flat at $913 million, $835 million and $879 million in the 2017/18, 2018/19 and 2020/21 years, before rising to $879 million, 1.472 billion and $3.429 billion in the years to 2021/22. Joyce said big costs like the April pay equity decision, higher police and nurse salaries and the usual effects of health cost inflation would blow those cost lines out in future years. He said Labour had simply forgotten to cumulate the numbers through the years.

Joyce said the numbers should have gone from $913 million to $1.748 billion and then $2.629 billion in the first three years, before really taking off to $4.099 billion and $7.528 billion by 2021/22. That was the biggest part of the hole with total extra spending over four years of $9.4 billion, he said.

Labour had also not included the cost of paid parental leave, had delayed the start of its families package and had double-counted an increase in multi-national taxation revenue, he said, pointing to an extra $2.34 billion in spending over four years. That also included the interest costs from an extra $19.3 billion in debt over four years.

There are a lot of moving arms, legs and torsos in the rolling maul of Joyce's argument. It's worth slowing these various elements down and looking at them from a few angles.

A slow motion replay from multiple angles

Firstly, Labour Leader Jacinda Ardern denied outright that Joyce had uncovered a hole, saying she stood behind Labour's Fiscal Plan 100 percent. She then left it to her locking partner at the bottom of the maul, Grant Robertson, to explain the details of how Joyce was held up over the line.

Robertson told a news conference on the black and white tiles in Parliament that Joyce was wrong with his assumptions about Labour's use of the 'operational allowance' phrase and the lack of cumulation. He said Joyce was also dead wrong with his other claims about Labour's spending plans. There was no prevaricating or pfaffing around or looking at his boots. Robertson was telling the crowd and the ref in no uncertain terms that there was no try and he deserved a penalty that Ardern could use to clear Labour's lines to well outside the 22 metre mark.

Robertson said Joyce had incorrectly assumed that Labour had not accounted for the usual cost pressures of wage inflation and an ageing population in health and education. He said Labour had included these cost pressures in its 'Delivering a Modern Education System' and 'Delivering a Modern Health System' lines in its Fiscal Plan. This was 'above the line' spending and meant that the operating allowance 'below the line' did not need to include them. These lines added up to $8.55 billion of the $9.4 billion 'hole', Robertson said.

This was the central part of his appeal to the crowd and the ref. The ball was clearly held up over the line and never got anywhere near the ground, he said. The replays show Robertson is right about the operating balances being correctly calculated. Labour has cumulated the operating allowance figures and has included the usual inflation, just in a different place above the line.

Joyce later told me he accepted what Robertson said about the inflation that was usually in the operating allowance line actually being 'above the line' in the 'Delivering Modern health and education system' lines.

Robertson then went on to say that Joyce was wrong about the family package being delayed. He said an early version of Labour's website mistakenly said the family package would start from April 1 next year, but Labour's fiscal plan itself had used July 1 as its start date and had clearly stated as much.

He said Labour had used IRD's estimate of reaping $7 in extra multinational tax revenues for every extra $1 in IRD enforcement spending. It had not used the Treasury's numbers already included in the PREFU, which meant Joyce was dead wrong about the double counting. He also said Joyce was wrong about the paid parental leave not being included in Labour's fiscal plans because it was included in the Families Package line of the fiscal accounts -- it's just that Joyce was not able to see it. Labour had only not included it with its own separate line because there was not enough room on the page, and had assumed everyone knew this long standing policy was in there.

"That's a very brave and courageous statement," - Joyce

I accept Labour's word on that, given the line was included in the spreadsheets seen by BERL, which reiterated tonight that it stood behind its signing off on the plan.

Robertson went on to say Labour would be asking other departments beyond Health and Education for efficiency gains to help contain their cost growth. He pointed to National's big spending plans for prisons and defence, which could be re-prioritised once Labour is in Government.

This is where National is on slightly stronger ground. Joyce told me he still thought Labour had not included enough in its operating allowance line for inflation in police, justice, science and other non-health and education spending. He did not accept Labour's claim that it would be able to contain the cost growth in these other areas.

"That's a very brave and courageous statement," Joyce said of Labour's aims for efficiency gains elsewhere.

The Finance Minister has more of a point here when he claims it will be difficult to find these gains in the 'other' departments. Joyce knows how hard this is to do for long, particularly with a fast-growing population. National managed to hold its operating allowance down for a couple of years from 2011 onwards, but had to relent once the squeeze started affecting services after the population surged from 2014 onwards.

Part of National's political problems now stem from those 'zero operating allowance' Budgets of 2011 and 2012. Cost pressures built up to the point where services started being cut and stress emerged through 2014 and 2015.

It's time for an official TMO

The one lesson from today's rolling maul of a debate about fiscal issues is that an official 'TMO' is needed for voters to rely on when the mass of players start pushing and shoving on the goal line and the ref and the crowd are staring into some very dark places over the white chalk.

Labour has rightly called for an independent budget office to become the arbiter on whether the Government of the day is meeting its fiscal responsibility targets and whether political party costings offered up to voters in election campaigns are for real and fit within their own parameters.

That's a small price to pay to avoid the sort of 'he said, she said' arguments we saw just 18 days out from an election.

Britain has an independent body like this that works with Parliament to offer its own assessment of the Government's budget forecasts. It's called the Office for Budget Responsibility. That sound a fair enough name to use down here too in our similar Parliamentary system. America has one with its Congressional Budget Office, which played a massive role in exposing how recent Republican healthcare bills would mean tens of millions of Americans would lose their insurance. The bills were ultimately defeated, in large part because of that independent advice. Canada has a Parliamentary Budget Officer.

Joyce and English said New Zealand didn't need such an independent arbiter on fiscal disputes between political parties. New Zealand was not big enough and could not afford another set of analysts to cost political policies, they said. Voters and the media should judge for themselves, they said.

However, I think English and Joyce are wrong on this. An independent budget office would only need two or three staff to do its costings through the electoral cycle, with a few extra parachuted in during election campaigns. The cost would be in the low single digit millions per year, and no more than $10 million over a three year cycle.

That's a small price to pay to avoid the sort of 'he said, she said' arguments we saw just 18 days out from an election.

We can rely on the sort of crowd-sourced TMO that I've just done here. I've gathered together the best 'Go-Pro' views I could find from the stands and my own iPhone, which I used throughout the day from the sidelines. But it's not a real substitute for a TMO that's using all the angles from 20 cameras and a fancy edit suite out the back of the stands in the SkyTV truck.

SkyTV are happy to let the TMO sit in the corner of the truck. New Zealand's political parties should do the same with an independent budget office.

(Updated to make clear the UK OBR does not cost party policies before an election)

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