Operating Surplus Explained

People often say that because the government is running a surplus there is a lot of cash available for additional spending or large tax cuts. This is not the case.

Basically, the operating surplus does not take account of other government commitments such as new capital spending. Also it includes technical accounting changes that don’t actually change the amount of money that is available to spend.

In "household budget" terms:

• the operating surplus is like a family's income after everyday expenses (which in government terms are the operating expenses).
• But as with many families, the money left over after day to day expenses isn’t actually "spare".

Investing in the Future
Like many households the government is planning for the future:

• It has set up a superannuation fund and makes regular contributions to it.
• Like families that are saving for the future, the government has decided to leave any earnings of the fund in the fund. Clearly this isn’t spare cash available for spending.

Investing in Education
Many families lend money to their children who are at university to help them with the expenses of gaining an education. Similarly, the government has a policy of making advances to fund Student Loans. These advances are recorded in the surplus, but they are not the government’s to spend – they’ve been lent out.

Investing in Infrastructure Development
As a family grows, they may decide to build an extension to their home. In the same way, the Government is committed to capital purchases such as new roads and state houses.

Some say we should borrow for this and it’s true that sometimes a family will extend their mortgage to extend their house. But no family would think it’s a good idea to borrow money when they don’t need to because they know they would have to pay interest.

Investing in Business Development
If the family runs a small business it would be looking to maintain and expand that business. This takes up a portion of the "spare" cash. Similarly, the Government is also committed to maintaining the entities it owns, and does this via investment in State-owned Enterprises (such as Air New Zealand) and Crown Entities (such as district health boards). You can’t actually spend your investment in your business.

Spare cash is committed
Taking all these commitments into account, the household's spare cash - in the same way as the Government's operating surplus - is fully utilised and at times may not be enough. To spend any more or to reduce your income means you need to borrow more. This applies equally to a family and to the government.

From time to time there may be money left over. When this occurs, the government needs to weigh up carefully how it spends this money, just like any household would:

• The government could reduce its revenue, just like one parent in a household could choose to move from full-time work to start working part time or stop working altogether.
• Alternatively, the government might need to invest more in health or education, just like a family might decide to invest more in their kids' education.
• The government also needs to be sure it doesn’t enter into long-term commitments on the basis of one off events. For example one of the parents in a household wouldn’t quit their job if they received a $5,000 bonus. They know this is a one off and it needs to be treated this way.

Like a family that wants to plan ahead for a secure future, the Labour-led government carefully manages the country’s finances so that we can meet the needs of all New Zealanders now and into the future.

Michael Cullen
Minister of Finance
October 2006

Background

The operating surplus of $11.5 billion:

• is what is left over after accounting for total Crown expenses and revenue.
• is not the cash generated by the Crown.

Nor do 'expenses' as defined for accounting purposes capture all of the Crown's spending.

To calculate the cash available, you need to adjust the operating surplus like this:

Operating surplus (ie, revenue minus expenses)
$11.5Bless
net change in non-cash items
(e.g. the change in provisional tax)
- $0.9Bless
revenue not available to the core Crown
(surpluses retained by State-owned Enterprises, Crown Entities, and the Super Fund)
- $1.8Bequals
core Crown cash to be allocated
= $8.8B

Other spending by the Government not included in the term 'expenses'less
Contributions to the Super Fund
- $2.3Bless
Investing in roads, hospitals, schools, etc.
- $1.8Bless
Loans to students and district health boards
- $1.7Bequals
Cash surplus after total spending available to offset debt
= $3B

Over the next four years the government expects to run cash deficits, so a cash surplus won't be available every year.
But because the government's finances have improved so much in recent years, it can borrow to cover these deficits without aggravating its debt position.

An updated picture of the government's finances looking into the future will emerge in December when Treasury publishes its forecasts.

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