Earthquake levy has same risk as increasing debt in terms of credit rating, hence need for control of budget spending, English says

By Alex Tarrant

Finance Minister Bill English says a temporary levy to pay for the costs from the Christchurch earthquakes would be just as bad as increasing the government’s borrowing programme in terms of raising the risk of a sovereign credit rating downgrade.

The government has chosen to increase its borrowing programme to pay for the immediate costs of the February 22 quake – something it says it could not avoid – and then look to control and cut budget spending in certain areas to get its books back to surplus and start repaying debt after 2014/15.

The Green Party has proposed implementing a temporary levy on those earning over NZ$48,000 in order to raise around NZ$5 billion to pay for the ongoing costs of the quake over the next four or five years.

On top of the expected NZ$5 billion cost, government is also facing revenue reductions of about NZ$5 billion as a result of disrupted economic activity over the next four years.

Green Party co-leader Russel Norman has said Treasury advice was that a ratings downgrade could add 30 to 100 basis points (0.3% to 1%) on to the cost of borrowing if New Zealand’s credit rating was downgraded from AA+ to AA by Standard & Poor’s.

Interest.co.nz was told Treasury Secretary John Whitehead made the comments in a briefing on the Christchurch quake to opposition parties two weeks ago.

In response to questions from Norman at Question Time on Thursday afternoon, English reiterated the position that government did not have any choice about increasing borrowing for the early costs of the February 22 quake.

“The government has had to start borrowing more almost immediately to pay for earthquake costs, such as the NZ$150 million welfare spend that’s going on at the moment just to put cash in people’s pockets,” English said.

“The real issue is how the government intends to deal with that increased debt. If we weren’t borrowing we wouldn’t be able to meet all those immediate demands, but the government will outline in the budget how it does intend to deal with that increased level of debt,” he said.

“In our view, we believe a levy could be just as much a risk for our credit rating as increased borrowing, because it would demonstrate the government wasn’t willing to deal with its own spending quality, on the one hand.

'Levy would hurt growth'

“On the other hand a levy could make it more difficult to pick up, and in the long run that is going to help cut debt and rebuild Christchurch,” English said.

Norman asked whether the real issue in terms of risk of a ratings downgrade was the level of government debt, and if a levy were struck to raise a billion dollars a year, that would have a significant impact on reducing the amount the government needed to borrow, and hence reduce the risk of a credit downgrade?

“Regardless of whether we had the earthquake or not, that is the argument for increasing taxes when the government does owe money,” English replied.

“We have argued that it’s in our long-run best interest to have relatively low taxation rates on income, savings, investment and exports, because that will help the economy grow,” he said.

“There is an argument that you could put those tax rates up right now to reduce debt, but we believe that would be detrimental in the long-run.”

Norman said the proposal was for a short-term, temporary levy and therefore wasn’t about the long-term argument.

English said he still believed government should choose the path it was on.

“With respect to the levy, our calculations indicate that a levy of the size that the member is referring to would probably have to last for about eight to ten years to meet, say, a NZ$6 billion cost. We don’t regard that as short-term, that does look fairly long-term,” English said.

Norman then asked about the Treasury Advice, saying a downgrade would cost somebody who had an ordinary mortgage on a house in the order of 1% increase in interest rates, which would be a much greater increase on costs for that household than a temporary levy.

English said he hadn’t seen particular Treasury advice that specific.

“But there’s no doubt that a credit [rating] downgrade would generally lead to somewhat higher interest rates, and that is a risk that New Zealand faces,” English said.

“Not just because of government debt, in fact the credit rating agencies would say that it’s the large private debt alongside the government debt that gives them some concern about New Zealand,” he said.

The government was very conscious about the risks of a downgrade, and believed it was making the right considered choices to deal with those risks.

“In the long-run, the issue for New Zealand is the amount of debt it owes to foreign lenders. At the moment what’s driving up that debt is a growth in government debt, and most of the advice I’ve seen has indicated the best thing the government can do to deal with that rise in debt is to reduce, where it can, its expenditure in a permanent way, rather than relying on a temporary levy,” English said.

Paying for rebuild in different ways

Norman said the cost cutting initiatives being looked at, such as cuts to Working for Families, would mean a smaller group of New Zealanders would pay for the Christchurch rebuild – those that have benefit cuts - and that a large bulk of New Zealanders would face higher interest payments on mortgages if there were a downgrade.

“A short-term levy that was large enough to raise enough money to meet the six or seven billion dollar cost would need to be either applied to a much wider range of income earners than he says, or be applied at a higher rate, if we were going to meet those costs in the short-term,” English replied.

“The method that the government is pursuing will allow us to spread the costs of the Canterbury earthquake over more people over a longer period of time,” he said.

“We believe that we need the tax settings and the spending settings that are going to help lift the performance of the economy. Increasing taxes is probably not going to help that, and continuing with ineffective government spending is not likely to help that.

“So we’ve been trying to get the tax rates moderate and lower, and to focus government spending where it can be effective. If we can achieve both of those things, we can get a growing economy, and deal with the debt that comes from the Christchurch earthquake,” English said.