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Sludge Report #151 – The Budget Is Wrong! (Again)

In This Edition: Life Imitates Art - The Budget Is Wrong! (Again) - Digging Yet Deeper – Another Mistake Is Discovered - And Finally A Reconciliation Of The $5.7 billion

NOTE: Authors of this report will be anonymous and wide ranging, and occasionally finely balanced. Indeed you are invited to contribute: The format is as a reporters notebook. It will be published as and when material is available. C.D. Sludge can be contacted at The Sludge Report is available as a free email service..Click HERE - to subscribe...

Sludge Report #151

Life Imitates Art

Many moons ago, at Dr Cullen's first budget Sludge offered the view "Sludge Report #13 - The Budget Is Wrong". At the time a few liberties were possibly taken for literary reasons. Now however we have a genuine budget mistake to report, a real goober. A $1.67 billion doozy which has led to a restatement of the accounts.

Some readers may recall that yesterday at the end of Sludge #150 a wee mystery from the annals of the budget was noted.

The mysterious annal in question was the GAAP tables and the "Forecast Statement of Financial Performance" (Pg 108 of the Fiscal Strategy Report). A picture of which is below. IMAGE: Snapshot from the Forecast Statement of Financial Performance (Note: The columns of figures from left are 2002 Actual, 2003 Previous Actual, and 2003 Estimated Actual)
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If you look closely you will see that Public Servants appear to have been creaming it somewhat (Personnel costs), and that while we had been told that the Government was planning on increasing its expenditure by $1.3 billion, according to the table actual government expenses increased by $5.7 billion (Total Crown expenses) or 12% between 2002 and 2003.

Now even factoring in some generous pay settlements $2.8 billion is an awful lot of nurses, doctors, police people and teachers and you might have thought that if our glorious Labour Government had been so successful in getting voters new jobs they would have been crowing about it.


The Budget Is Wrong! (Again)

Well it seems that part of the reason that this wee factoid wasn't turned into one of the several hundred press releases full of vital information Scoop was sent on email yesterday, is that the number is wrong, $733 million wrong!

First time round the treasury boffin responsible for communicating with Scoop on this point replied as expected.

"The increase is mainly due to reclassifications between personnel and other operating expenses. What happens is in the pervious [sic.] year forecasts departments are uncertain were spending is going to be applied, so is treated as other operating expenses. As the year progresses it becomes clearer how spending is applied and is classified to represent this in the updated forecasts."

Sludge smelt a rat, and quickly replied:

"The $1.3 Billlion in extra expenditure in this category [Personnel expenses] is by far the largest component in the difference between forecast 02-03 and actual 02-03 figures. If it was a reclassification in expenditure there should have been a corresponding decrease in some other classification - and there isn't."

At which point the boffins went back to their spreadsheets and had another look. And then Sludge received another email.

"The Core Crown increase is, as you surmised, incorrect. We have found the coding error in the 2003 Budget forecasts and it is effectively double counting GSF pension expenses of $733m (most of the $808m increase). This means we have understated operating costs by the same amount (we will fix this in the version on the web)." [emphasis added].

"So the answer if the detailed numbers were "correct" is the personnel cost increase is really all due to the Crown Entities." [emphasis added again].

And so in other words the budget is wrong!

But that still doesn't explain all that extra dosh going to public servants. Remember this all started because the table shows a $2.8 billion or 25% hike in personnel costs between 2002 and 2003.

Of that, we now know that $733 million was put in the wrong basket. But that still leaves us with roughly $2.1 billion of fresh filthy lucre for the cardigan wearing walk-short wearers to explain.

By this stage the treasury boffins were being extremely cooperative, in fact eager to explain what was really going on. The boffin of record went on to explain:

"A look at the more detailed forecasts in the segment disclosures (ie core Crown, Crown entities and SOE numbers that sum to total Crown) indicates that core Crown personnel has increased $808m from last years forecast for 2002/03; Crown entities have increased $515m (a large portion of this is due to increased funding to Education which the schools and Tertiaries [sic] would mainly apply to salaries and the health funding being allocated to DHBs and "shifting" from core Crown to DHBs and hence adding to salary costs in that sector), and SOEs have hardly changed."

Which translated into English means: "We looked closer and found that of the $1.3 billion, 800 million belongs to Government Departments and $500 million comes from schools and hospitals, effectively doctors, nurses and teachers."

C.D. Sludge: So have nurses, doctors and teachers have got all the $2.1 billion?

Answer [paraphrased from conversation with boffin]: Sort of. But sort of not. Some of it will have gone to wage settlements too. We'll look into it more deeply for you.

C.D. Sludge: Do you record numbers of doctors, nurses and teachers?

Answer: No.

Aha. Now we know why there was no press release crowing about this massive health and education job creation scheme.


Digging Yet Deeper – Another Mistake Is Discovered

As promised the boffins then looked more deeply and in the process found another mistake. It turned out that the 2002 budget was wrong too.

"In addition, the 2002 Actual number was also incorrect. It is actually $12,116 (the mistake in 2002 actuals was the coding was not including GSF expenses of $973m in the total personnel costs and including it in operating expenses - again no change to totals just classifications)." [emphasis added]

A new set of GAAP tables has now been prepared which will replace those on the website and the following image shows the relevant part with the new figures. IMAGE: Revealed For The First Time - Budget 2003 II - The Sequel (Note: Treasury informs that the full restated GAAP tables will be published on the Internet next week. This afternoon they are busy celebrating getting the figures wrong the first time round.)

With the modifications to the 2002 figures, what was a $2.8 billion increase in filthy lucre for the cardigan wearers has now become a far more modest (and explainable) $1.2 billion increase, a mere 10% as opposed to the 25% it had been.

In boffin speak this message is conveyed thus:

"So, after these corrections, the total personnel costs for 2002/03 forecast last year were $12,638m and the 2003 BEFU corrected number is $13,245m for 2002/03. This is an increase of $607m. This is due to increases in core Crown personnel costs of $76m (most likely pay increases throughout departments) small change to SOE forecasts of $13m and $515m increase in Crown entities.

"The Crown entity increase reflects some health funding not known to DHBs at the time of last years forecasts that are now known and any impact of pay increases they have negotiated that may have been higher than originally forecast (especially since deficit forecasts have increased since last year for the 2002/03 year) and the rest is mainly in Education as we have paid more than expected for more teachers and higher wage settlements in 2002/03."

This means it is mainly doctors nurses and teachers receiving the extra un-forecasted expenditure, it is just that rather than receiving the $1.3 billion originally recorded, they have received an increase in salary payments of just $515 million.

"The change between 2002 Actuals of $12,116m and 2003 forecast of $13,245m is $1,129m (not $2.8b you correctly worked out on the incorrect numbers - being $2.8b less $732m GSF double count in 2003 forecast less $943m undercount in 2002 Actuals)."

Translated: We made two mistakes totalling $1.67 billion.

"The $1,129m increase from 2001/02 to 2002/03 is made up of $175m in core Crown departments (presumably more staff in some areas, pay increases and/or shifts between personnel costs instead of other operating costs depending on how departments configure how they deliver their outputs)…"

Translated: Of this, the Wellington cardigan brigade got $175 million more.

"…and $549m in Crown entities (new funding in health, education mainly)…"

Translated: Nurses, doctors and teachers got $549 million more.

"….and $405m in SOEs (mostly the full year impact of Air NZ as only 6 months in 2001/02). "

Translated: $405 million of the increase is a something of a mirage and comes from Air New Zealand being consolidated into the National accounts, not from any new jobs being created or pay increases.

"We have no information on actual or projected staff levels or a split between pay increases and/or more staff within the Crown entity variances discussed above."

Translated: We still don't know how many more nurses, doctors and teachers there are.


And Finally A Reconciliation Of The $5.7 billion

By now dear reader, you should be a fair bit more familiar with understanding Treasury Speak. As a result I offer you the following boffin-speak explanation for the 12% increase in "Total Government Expenses" from 2002 to 2003 verbatim.

"The increase of $5.7 billion is due to:

* $1.8b - the change in GSF and ACC liability valuations of $1.8 billion (GSF $981m; ACC $840m)

* $1.1b - SOE expenses increase a total of $1.1 billion - this is mainly due to the fact that 2001/02 only had 6 months of Air NZ results whereas 2002/03 includes their full year expenses (and revenues). Acquisition date was effect 1 January 2002.

* $2.3b - The core Crown spending has increased $2.3 billion (excluding the GSF liability movement). This increase is due to a number of reasons:

* the new spending introduced in the 2002 Budget of around $1.3 billion

* Benefit expenses increasing by around $0.4 billion due to indexation and growth in beneficiary numbers

* Items we outlined yesterday which were $100m extra transport (classification from capital), $200m for extra student loan and other provisioning movements, $81m write off of Tranz Rail purchase

* extra spending in 2002/03 of $300m, mainly on Education demand driven factors (per Executive Summary document).

* $0.4b - The Crown entity group (excluding ACC valuations) increases by around $1.4 billion offset by an increase in elimination of transactions between core Crown and Crown entities of around $1 billion (much of the Crown entity increase is the pass through of core Crown spending to CEs). The net increase of $400m is due to around $300m in expenses, resulting largely from growth in Tertiary roll numbers (increased student levels means more expenses by the sector which they fund from the fees charged) and $80m in increased ACC payments."

If this final paragaph makes little sense to you then you are not alone. Sludge requested a restatement of what exactly " an increase in elimination of transactions between core Crown and Crown entities" means. Eliciting the following explanation

" The Crown entity increase of $1.4b is because the Crown has funded them more than last year. Core Crown expenses go up (as explained), and Crown entity expenses also go up (because the Crown is funding CEs). We don't want to count both increases as it is just the same money, hence the elimination of internal flows also increases.

Another way I could have explained it is (a) core Crown expenses go up - but the spending is largely funding provided to Crown entities (b) therefore Crown entity spending goes up and (c) the internal transaction removal also goes up - so that at a consolidated level the increase in spending is counted only once (no one said explaining consolidations was easy)."

Still confused?

You are not alone.

Anti©opyright Sludge 2003

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