By Bernard Hickey
This week's Budget came and went without too much drama or debate about the central assumption around which everything else revolved.
Finance Minister Bill English's guiding light for years has been the aim of reducing net debt to around 20% of GDP by 2020 from a peak of 25.6% next year. It forced him to cut back his new spending allowance next year from NZ$2.5 billion to NZ$1.5 billion. It also forced him to cut the Government's capital spending allowance this year to NZ$1.4 billion from NZ$1.7 billion as recently as December.
This focus on debt repayment limited the Government's options this year and looks set to do the same for two or three years to come. That means less potential for the sort of infrastructure investment that Auckland in particular and New Zealand in general needs to cope with the biggest migration shock in over 100 years and record high tourism. It also restrains the Government's ability to pursue its social investment strategy of investing heavily upfront to turn around the lives of vulnerable kids before they are locked in to generations of misery.
Instead, this Budget limited itself to doing the absolute necessities of fiscal life, which meant spending money reactively on health and education to cope with population growth, and the utterly necessary business of rebuilding Child, Youth and Family. The Government had virtually nothing to say or do in the Budget about dealing with the core problem at the heart of the economy, the government's finances, the financial system's stability and many of the nation's social woes -- Auckland's housing infrastructure shortage.
The Auckland Council made it perfectly clear last week that it could not pay for the NZ$17 billion of roading, water and other infrastructure needed to build all the extra houses around and inside Auckland that the Government is assuming and demanding be built. Ratepayers don't want to take on the extra debt to pay for it and the central Government's own rules about local government debt issuance are blocking the Council from borrowing the funds it needs to pay for this infrastructure.
Auckland's housing supply outlook, which remains woefully inadequate, is therefore stuck in an endless loop of claim, counter-claim and then nothing being done. The Government blames the Council for not allowing Auckland to build out and up. The Council blames the Government for not funding the infrastructure to build out and up. Meanwhile, the infrastructure is not being built and Aucklanders face rent inflation seven times faster than inflation, house prices nearing 10 times incomes and endless hours in traffic jams on an over-whelmed transport network.
Auckland and the economy needs a circuit breaker of debt-funded infrastructure investment and the only player big enough and financially strong enough to do it is the Government. Ultimately, it also has the most to lose if Auckland's housing crisis spirals further out of control. The Government faces a blow-out in rent subsidies and will have to pay for the longer term social effects of a generation growing up in garages and cars and being shunted through endless schools and foster homes and prisons.
Why won't the Government just borrow the money to break the Auckland log-jam?
The Government's concentration on debt repayment is having real world effects at a time when the real measure of investor concerns about debt, interest rates, are near record lows of about 2.7%. Bill English is worried that somehow international investors will lose faith in us if we have to borrow heavily again to deal with another Global Financial Crisis for earthquake.
There are no indications of that in what our credit ratings agencies say and English himself regularly trumpets New Zealand's falling net foreign debt and how Treasury's repeated warnings about a worsening current account deficit have been just plain wrong.
The Government's own forecasts show net debt will track down to 15% of GDP by 2023 and that solid economic growth and the effects of fiscal drag will keep GDP growing faster than debt. Instead, the Government said this week it will go out of its way to repay NZ$9.2 billion in the three years to 2020.
This seems perverse at a time when fund managers and international investors are screaming out for more Government bonds to invest in, not less.
The Government should stop jumping at debt shadows and just start using that money to show us the infrastructure.
49 Comments
"Why won't the Government just borrow the money to break the Auckland log-jam?"
Answer: Because the govt is prudent financially.
But unfortunately it is not being prudent immigration wise.
So that's it. That's the summary of it.
That's what the voters will have in the back of their minds at the next election.
One good thing and one bad thing.
"Why won't the Government just borrow the money to break the Auckland log-jam?"
A constant fiscal deficit added to a chronic current account deficit would be more than our, so far, benevolent foreign wholesale funding agents would underwrite.
Others have noted our dependence and added us to a list of financially stricken sovereign no-hopers.
The rogues gallery also includes Poland, Indonesia, New Zealand, Turkey, Brazil, Romania, Ukraine, South Africa and Hungary. Read more HT Henry_Tull
Brian Gaynor emphasised the risk New Zealand's external debt posed a while back. Read more
Productive as in "white gold"?
Read through this synopsis with reference to African oil producers and substitute New Zealand whole milk powder producers.
African oil producers typically source “dollars” selling oil, allowing them to participate in global markets via the eurodollar in order import products (including food) that they don’t produce themselves. In the past few years, however, the “windfall” of higher oil prices has led to an increase in supplemental credit-based “dollars” from China as everyone assumed the good times would only last. In exchange for allowing more Chinese imports, the oil producer only obtains another source of international funds. Worse, this alternate source comes in the form of a noose.
In effect, these nations have pledged their oil resources as collateral for those borrowed “dollars.” If the price of oil falls, more production has to be steered toward repayment of past currency lines, which has the doubly devastating effect of reducing the amount of oil available for open sale to further obtain “dollars” (at already reduced prices). It is a direct currency strangulation that if taken too far can lead to total “dollar” exorcise.
The Chinese are repaid in oil for their comparative financial advantage leaving the “host” nation drastically impoverished and facing both grave recession at the same time as monetary strangulation. Read more and more
Protein as in milk doesn't have technology eg solar renewables clean energy, to disrupt it.
In fact China even if at slower rates still has a population bigger than USA predicted to move from rice farmers to protein hungry city dwellers. And no longer 1 baby limit.
Don't bet against dairy in the mid to linger term.
The government isn't financially prudent.
If it was, it never would have cut the top tax rate when it could ill afford to do so.
Did you not notice the graph in the article, which shows the ballooning of government debt under National?
On the one hand, they take credit for NZ weathering the GFC quite well.
On the other, they point to the GFC when you ask them about their debt levels.
And before you say Christchurch, that only contributed about 20bn to the total.
.
They need to introduce a new, higher tax band. One of 35% on incomes over 120k.
And invest in public transport. If they were serious about cutting NZ's greenhouse gas emissions, they would have done this a long time ago.
.
This government is so inept, if it wasn't having dangerous flow on effects on society, it would be laughable.
They govern for their mates, shy away from anything which needs true leadership and are hard pills to swallow (taxation, public transport, reducing emissions - especially from agriculture), and they will leave a sorry legacy.
One which New Zealanders will have to suffer for decades to come.
Spot on, Bernard.
The one thing that makes Auckland work well or badly is transport. Much as we might wish that AKL had more or better public transport the reality is that decades of National government policy to promote cars and trucks has built the Auckland that we have today. So the one thing that this government could have done at any time over the last decade instead of blowing hot air was to significantly expand their motorway network around Auckland.
If you look at the map published by Auckland Council showing the location of the Special Housing Areas, surprise surprise, they hug existing motorways on the whole.
The government also needs to fund the absolutely essential infrastructure of schools and hospitals. The council could get away with not building more libraries and pools but a city goes nowhere without health and education.
Small point of correction. Councils have to have a policy on debt but they get to choose what's in it. If AC are up against their debt limit it is self-imposed and could be changed.
It would be much cheaper to build the missing public transport network than to improve the road network. Adding extra lanes to motorways has very little impact once they get to 3 lanes wide, and there isn't really any land to build more motorways.
One train track can carry as many people per hour as 12 lanes of motorway.
Why on earth this concern about the deficit? Did the 1935 Government worry about a deficit when it started state housing? If we are borrowing our own money, $NZ$, there is no problem. The Reserve Bank can just credit the Government books with the necessary money. Just like the Commercial Banks credit your account when you borrow to buy a house. What I would like to know is what percentage of governments borrowings are in a foreign currency. That is relevant. A fast rail service, not more roads, certainly more houses and fewer migrants are the answers to high house prices. It is a combination of all three not just one. They are all political decisions and are not ones the RBNZ can make decisions about.
None - but 66.5% of coupon bearing government debt is foreign owned (financing the C/A deficit) - a significant fall in the value of the NZD would necessitate a domestic buyer to replace the current creditors - are the citizens currently capable of sustaining that burden along with the private debt overhang (local and foreign) they are saddled with servicing and liquidating at a rising rate? Loading the RBNZ balance sheet with government debt to affect dilution of the nation's nominal NZD worth demands lower currency pair values, thus raising the cost structures of imports to service exports - hence making NZ export products uncompetitive on international trading platforms.
But Stephen it has all been done before. What if the transfer of funds from the RBNZ paid no interest. Nobody would want to buy that Government debt. Not I imagine, even in these negative interest rate days. The loan could be gradually repaid through either the funds from that infrastructure or that infrastructure being owned by the Government which becomes an asset of the Government
The preferred PPP ideology is not consistent with your expectations.
The Transmission Gully project’s net present cost is $850 million. This is the “whole of life” cost, for WGP to build and then operate the road for 25 years. Because the costs are spread over time, they are expressed in today’s terms.
This is $25m less than what the contract would be expected to cost through conventional procurement, and hence meets The Treasury’s value for money test for PPPs.
The cash payments will be around $125 million per year, starting only when the project is finished and open for use, and lasting for 25 years. This stream of cash payments brought back to today’s dollars is $850 million and is the “net present cost”. Read more
If the current global trend of interest rates crashing to ZIRP/NIRP afflicts this PPP project the cost will revert to NZD 3.125 billion in today's dollars?
Furthermore, how much of that cost will be transferred offshore to the Australian based managing contractor Leighton Contractors Pty Ltd?
Given that future interest rates may not be relied upon to earn returns over time, wouldn't it be reasonable to expect contractors to raise the up front cost to obtain the same as is expected by Treasury - $3.125 billion total future payments discounted over 30 years to NPV 0.850 billion today.
Real Estate companies still expecting strong Chinese demand for Auckland houses.
http://www.nzherald.co.nz/opinion/news/article.cfm?c_id=466&objectid=11…
Yet across the water it shows the demand weakening.
http://www.bloomberg.com/news/articles/2016-05-27/chinese-interest-in-a…
Never Mind The Quality, Feel the Width
We are led to believe that huge volume of migrants is good for the NZ economy - increases GDP
You are not supposed to notice that GDP per capita is going down
https://en.wikipedia.org/wiki/Never_Mind_the_Quality,_Feel_the_Width
http://www.urbandictionary.com/define.php?term=never%20mind%20the%20qua…
Former Morgan Stanley Chief Asia Economist: "Don't Listen To The Ruling Elite, The World Economy Is In Real Trouble"
.......all signs point to a prolonged period of global stagnation and instability.
http://www.zerohedge.com/news/2016-05-28/dont-listen-ruling-elite-world…
Unfortunately many voters actually believe the unsubstantiated BS that the PM and his mates rely on to stay in government. Where is the proof that immigration improves the economy? Who pays for infrastructure? Why are there no sensible facts on house purchases by foreigners? Why does this government insist there is no real issue with tax evasion and avoidance? Would be interested to see Paul 'I'm a legend in my own mind' Henry take some of these question up with JK and follow through without breaking out his pom poms (bet he looks good in a skirt though... erk sorry, bad mental image folks). Off for my Sunday afternoon zeds...
'doomsday' is definitely coming, though the exact timing is indeterminable; it will probably occur some time between 2020 and 2030, but could possibly occur before 2020.
A short summary of major factors as of mid-2016.:
1. a series of record high atmospheric CO2 results, and CO2 rising at the fastest rate ever = even faster overheating.
2, a series of record global temperatures and temperatures rising at the fastest rate ever = Abrupt Climate Change.
3. lowest ever Arctic ice cover and possibly an ice-free Arctic this September = a completely new climate regime in the Northern Hemisphere (which will destabilise the Southern Hemisphere ). Accelerating sea level rise.
4.. mass die-off of coral (at the base of the food ocean chain) = collapse of many fisheries.
5. oil and gas sector in deep trouble in most of the world = bankrupt nations and potential collapse of the energy system.
6. riots throughout Europe as the populace responds angrily to austerity and falling living standards = revolution?
7. global financial system held together via historically abnormal interest rates = severe financial instability and eventual collapse.
8. the US, Russia and China preparing for war; war = it all comes to an end somewhat faster.
A possible timeline is here:
Wouldn't it be much cheaper to encourage companies to move to the regions? Auckland already has the second highest population ratio of a city per country, in the world, after Dublin, Ireland. It's geography and spread means there are already transport bottlenecks that are very difficult (and expensive) to solve. Spreading the city wider is only going to make this worse, plus it will mean building on some of the best vegetable growing land in the world.
Many of the towns around NZ have houses and infrastructure already there and have had reducing populations which means they are under utilised. Regional development grants are surely one of the solutions for Auckland.
Canterbury is quietly doing that. Building 500 houses a month. Which is half or more of what Auckland does yet it is only a third the size. This growth seems to be the sustainable post earhquake build rate and it is achieved with limited resources. In particular transport is severely lacking compared to Wellington and Auckland. If the country put some real infrastructure resources into the region we would get a lot of bang for our buck. This might take some of the pressure off Auckland.
It's the ridiculous cost of sections holding back building in Auckland. Two examples below, right at the urban limit far far away from the city, surrounded by farmland...
http://www.trademe.co.nz/property/residential/sections-for-sale/auction…
http://www.trademe.co.nz/property/residential/sections-for-sale/auction…
The prices are comical. Kite flying for dumb oriental money?
At least the westgate sections get free shade from the high voltage transmission lines.
For over half a million you would expect the advert to get the spelling right:
Sort After Community Lifestyle Could Be Yours>
It appears to be hard work making a profit on these new developments. I know someone who won a ballot for a small place in Hobsonville and the developers told her that they were making a loss on her house. It certainly looks like she got a good buy after checking those section prices.
The sharpest tools in the shed tend not to become real estate agents or maybe its been put through Google translate from the hougarden listing.
$2245 sq/m for bare land at that distance from the city is nuts. If land supply is relaxed (like it sounds is about to happen) it will plummet.
Would be interesting to know how the government can encourage it? Are we talking some kind of subsidy for non-Auckland businesses?
There already is a massive price difference between Auckland and the regions in terms of land/rent cost; shouldn't that be enough to encourage companies / individuals to move if possible?
Can you pay for NZ Citizenship as well as buy any property you like with laundered money?
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11639504
gov don't want to borrow more, nor print or borrow more currency,
council cannot borrow more, nor rise taxes,
people don't want pay, nor move out of the city,
locals don't want foreigners, nor losing jobs,
big boys also has social issues, is anyone happy? maybe some of the 1%.
paradox everywhere, who's fault is it?
An excellent article Bernard, reflecting my own main concerns with Bill English's very conservative 90s orthodox approach to fiscal and monetary financing.
Some questions arise:
When will it ever be a good time to finance infrastructure in a way that is more than just tinkering?
If current circumstances where government financing is at 2.5% (and that's discounting the helicopter options that the Chinese, Japanese and Trump may well bring into the new orthodox) do not allow us to get on and build decent transport and other infrastructure, then when will be a good time? The answer is never, such that the country becomes doomed to 3rd world facilities when there is absolutely no need for that.
I note that the private sector can never make a case for such investments (where they can with say housing) without guaranteed payments from central or local government in any case. Transmission Gulley where the government is paying an Aussie company 15% per annum to finance the project is just one example of frankly comically insane financing missing an opportunity to invest properly.
I accept that we are not the only country with this issue. The USA very clearly has dilapidated infrastructure, even though by most measures it is the wealthiest country in the world, and they have had the perfect opportunity during and post a recession to do something about it. Whether it is Obama or their Republican congress stuck in a tragic paradigm is unclear. Trump, for his many faults, may actually address the issue.
The Aussies and the UK talk an orthodox game, but in practice are getting on and investing decent amounts, and are frankly correctly not too worried about deficits when financing costs are so low. Japan, although derided often by many here, has the best transport infrastructure in the world. And their electricity issues will get sorted. And they still print trillions more to buy up the world's assets.
Auckland somehow apparently has determined that it needs $17 billion over the next few years, but legally it cannot borrow that amount. I suspect you could easily enough add another $10 billion wish list very quickly, but working with the 17 at 2.5% p.a.is $425 million per annum. That is a very digestible amount, especially where it is spent on proper capital things. The government is throwing crumbs at the problem.
Some whiz in NZ Transport thinks a new harbour crossing just may be needed by 2030. At peak time it takes an hour and a half to get from the central city to south of Albany now.
Bill English seems a decent enough bloke, and has a job that I would not want, but he is so stuck in an ultra conservative mindset, that he either needs to be shocked out of it, or we need to get someone else in the role.
Supply - Bah Humbug. Too much immigration is stuffing up countries everywhere
http://www.telegraph.co.uk/news/2016/05/28/the-wealthy-leaders-of-remai…
"British families see in their daily lives the impact that the loss of control over our borders has placed on the services that they rely on. Schools, hospitals, public transport and housing are all struggling to cope with the growing demands placed upon them by immigration."
"If you have private wealth or if you work for Goldman Sachs you’ll be fine. But when public services are under pressure, it is those people who do not have the luxury of being able to afford the alternatives who are most vulnerable. Getting your child a place in your local school becomes more and more difficult; there is more competition for jobs; wages are held down."
Sound familiar anyone?
National started off by selling our power generation infrastructure. Now there selling our low population. Only one political party opposes them with only 10% of the vote, NZ First.
Labor is dropping the ball on this issue of unrestrained immigration.
Auckland district council needs $17 billion to build basic infrastructure to allow subdivision of land for the shortfall in housing. That doesn't include a hospital or harbor bridge or any large projects that result from raising NZs population by 200,000 in just 3 years. Wake up NZ, this is a disaster that is unfolding on our watch.
$17 billion is peanuts compared to the overall cost of building infrastructure for 200,000 people.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.