Covid has exposed joint underlying crises in our hospital system and our labour market, which were created by a 30-year long set of shibboleths of low public debt and low taxes adopted across the machinery of local and central Government, and accepted by politicians and median voters either tacitly or directly.
Those shibboleths have never been stated as such out loud, but govern every aspect and level of Government and our major public services day in and day out. It effectively means that the size of Government should be no larger in the long run than 30% of GDP, and that is enforced by keeping net public debt no larger than 30% of GDP.
This 30/30 rules governs every aspect of our daily lives and all of public life, but few know about it or have thought it remarkable enough to debate publicly. In many cases, it is just assumed to be such an obvious and good thing that it’s not worth contesting or noting.
The assumption that no central or local Government will build a public service, set a tax or run deficits that mean the size of central Government, or the size of net Government is much more than 30% of GDP in the long run. Effectively, it’s a 30/30 rule because it means the tax to GDP ratio is set at around 30% of GDP and net Government debt is not allowed out go much above 30% for more than a couple of years. This interdependent rule circumscribes what Government can do, how much it can invest and what politicians are ‘allowed’ to propose to voters.
It has meant that over the last 30 years, our Governments (both local and central) have effectively run the most sinking of lids they could on Government-provided services such as healthcare, education, welfare and public transport. It is the strand of Governmental DNA that runs through everything. It is the unspoken force behind directives from public service leaders to the front lines and in their advice to incoming ministers and councillors. Its legal basis is the 1989 Public Finance Act.
There’s are good examples in plain sight every day and the effects are just as evident in the crises engulfing our health system at the moment and in the crisis emerging in the wider labour force. Covid was the shock that has exposed the weak underpinnings the 30/30 mantra has created for our economy and society. We’re discovering that mantra only works when our population is growing fast because of high levels of temporary guest worker migration and an ongoing-and-forever slide in interest rates that powers house prices higher. Now the migration has stopped and interest rates have risen (at least for now), the weakness of our economy’s underpinnings are clear.
Just this morning, health workers and ambulance staff are warning of a ‘catastrophic collapse’ in services because of staff, infrastructure and equipment shortages built up over many years of straining to keep spending on healthcare and worker wages low. Business groups are pleading with increasing desperation for the Government to properly releases the shackles on temporary worker migration.
When the tide goes out, the naked are exposed. Covid was a social and economic undersea earthquake that happened in 2020. The tide going out is in effect the sea drawing back before the tsunami comes back in.
A simple example
Here’s just one example. This morning the Erin Gourley reports for the Dominion Post that prospective Wellington City Council councillors are being told by the Council’s CEO Barbara McKerrow and CFO Sara Hay in a briefing that they’ll have few choices to talk about with voters other than to consider selling Council assets. Here’s the detail, with the between-the-lines messages spelled out below:
The council – which has a big portfolio of commercial assets including ground leases under many commercial buildings, a 34% shareholding in Wellington Airport, and ownership of the KiwiPoint Quarry – may have to sell some off in order to “recycle the proceeds to other council priorities”.
A pre-election report is presented each year to candidates looking to run for election and summarises key issues for the council, including details of the council’s finances and the challenges ahead for the next council term.
Candidates reading this year’s report, released on Tuesday, should be left under no illusion that the tests awaiting them will be real and demanding – building a city capable of housing up to 80,000 more residents, in an evolving climate, with huge and growing infrastructure needs and declining revenue.
Why is this the only option? Because most of the levers councillors could use to change the trajectories of spending on public services are unable to be used because of the 30/30 mantra. Also, the current situation of creaking-to-breaking-point infrastructure and huge future investment needs are the inevitable result of the 30/30 mantra in tandem with a high population growth strategy. The just-as-inevitable moment of truth we now face is because the safety ‘pressure valves’ of low-wage migration and ever-rising housing prices stopping an implosion and/or implosion have been turned off by the Covid shock.
For example, let’s say councillors wanted to invest much more heavily in water infrastructure and public transport to solve the housing affordability and water quality crises in Wellington. They are told they can’t use borrowing because debt isn’t allowed to be more than 280% of revenues. Why is that? Council debt limits are effectively governed by the Local Government Funding Agency (LGFA), which is a Treasury-run joint bond issuance agency that carries a Crown guarantee. It means that councils, especially the faster-growing large ones such as Auckland and Wellington, cannot go over that two to three times revenue level because it would cause credit rating downgrades for the councils, and possibly the sovereign rating of the central Government itself.
The constant demand to reverse fiscal creep
That is not allowed because those downgrades would increase borrowing costs and interest rates for everyone, including ratepaying and median-voting home owners, who depend on ever-rising leveraged and tax-free house prices to offset their low wages. Higher debt levels would probably require a higher level of central Government taxation than the current 30% of GDP.
Currently, the ‘fiscal creep’ built into fixed income thresholds for our income tax system are expected to drive revenues to GDP above 30% over the next couple of years, and even more than spending¹ (see chart below). That’s what is driving National’s calls for tax cuts and why there is consensus about there not being a need or desire for wealth or capital gains taxes.
The low-tax mantra at every turn
So why don’t councils just increase their own taxes in the form of rates or new fees? Unlike in Australia, where the states do charge property stamp duties and are granted a share of centrally-collected GST, our councils have few revenue-raising tools other than rates, parking fees, building consent fees, library fees and rubbish fees. Some have water charges.
Any attempts to increase rates or council debt to solve these issues are driven back by voters and/or the central Government because taxes aren’t ‘supposed’ to be more than 30% of GDP and public debt isn’t supposed to be more than 30% of GDP.
Hiding in plain sight
It took me an awful long time to understand the underpinnings of this interlocking system that proscribe the options for politicians and voters. It was actually laid out in public by the Labour and Green parties before the 2017 election when, in an attempt to convince voters, the public service (and themselves) that they were on board with the 30/30 mantra and therefore a ‘safe’ pair of hands, they committed to the ‘Budget Responsibility Rules’ that were designed to get net debt as measured then under 20% of GDP and keep Government spending around 30% of GDP. That spending limit can only be achieved with balanced budgets and debt around the 20-30% of GDP mark.
Hence the Labour-led Government’s go-slow on infrastructure and housing investment in its first two to three years as it bore down on capital spending and operating spending to achieve those targets. It’s why KiwiBuild failed and why it refused to agree to its own Welfare Advisory Group recommendations to increase benefits to the levels needed to significantly reduce child poverty. Its also why there is constant pressure downwards on wage growth in the public service. Without it, the ageing population and the naturally higher expenses to GDP of healthcare mean the spending to GDP ratio would inevitably rise and break the mantra. That is only sustainable with rising house prices so homeowners can offset that low wage growth with tax-free and leveraged capital gains.
The crises now rolling through our health system are an inevitable result of a decades-long starvation of operational and capital spending to keep achieving the 30/30 mantra. The drive for low wage growth in the private sector is also a result, indirectly, of the mantra. Without significant public investment in infrastructure and R&D requiring higher debt and taxes, the private sector cannot get the productivity growth needed to justify higher wages. Again, that is only sustainable with low consumer price inflation imported from overseas and ever-rising house prices.
The tide just went out and the failure of our 30/30 mantra to allow enough investment in health and real-wage-growing public infrastructure is there now for all to see. The opening of the borders for those who have choices to leave and the arrival of the winter flu season with Covid have thrown its failure into stark relief.
49 Comments
The reason Kiwi Build and other infrastructure projects stalled is nothing to do with 30/30 funding, it's simply a case of a government that talks big, but has zero know how on implementation. They were totally out of their depth in trying to build 100,000 homes. Remember these are academics and life long bureaucrats, they wouldn't have build so much as a carport prior to coming into government. Also, no one in NZ wants to pay a dollar more tax when we see the terrible waste occurring. Hundreds of millions of dollars spent with consultants on endless reports with zero outcome. While it's sickening to see our health care system in disarray maybe letting foreign nurses into the country would help and maybe slimming down the huge amount of waste on Wellington officials would be a good first step.
No.
They couldn't do Kiwibuild because the Ministry of Works doesn't exist.
The ministry of works doesn't exist because of the 30/30 rule.
Kainga Ora has built 13,000 houses under this government so far, with many thousands more in the pipeline. Kiwibuild is a matter of scale, not competence.
National budgeted $0 for new state houses at the 2017 and 2020 elections.
If you care about the future of New Zealand, don't vote National.
100 % agree. We need a MOW, it allowed us to develop infrastructure for our country where there is not sufficient competition for a proper functioning private market.
This is exactly what happened with the Christchurch rebuild. John Key and Gerry Brownlee promised Christchurch would have a stadium open by 2017, yet today the CCC are debating to approve this or not. Now due to open in 2026. Great PR at the time and everyone celebrated this... but there was no funding to go along with these promises.
This is of course one example, of a littany of failures in Christchurch. The managed repair programme of earthquake damages houses was a debacle, handed to fletchers to run, which of course did the cheapest job possible leading to a blow out of botched repairs of hundreds of millions of dollars. Plus many other failures with the whole way the government handled this.
Forget Kiwibuild, which by design was a betrayal of the poor and unhoused. A greater problem is the failure of the Government to rapidly build tens of thousands of new state houses for lifetime income-related rent by all who want them. And the root cause of that is that the state housing agency Kainga Ora is required to be self-funding. Here is where a brave government would cast aside debt ratios and Build Build Build.
https://www.nzherald.co.nz/nz/government-faces-60-year-debt-blowout-aft…
Housing Minister Megan Woods has been warned not to grant any future Budget bids to state housing agency Kāinga Ora for a time, after fears of unsustainable debt levels.
A leaked document from the Ministry for Housing and Urban Development shows that spiralling construction costs have led to a debt blowout at Kāinga Ora, with fears the Government will be unable to completely repay the increase in debt over the next 60 years.
The document, dated June 17, says Kāinga Ora is "investigating" cost-cutting measures such as pausing a programme to improve heating in homes or retrofitting old homes with improvements that make them accessible to people with disabilities. Officials said the ideas might result in some "cost savings" but they will not address the root cause of the blowouts.
https://www.nzherald.co.nz/nz/government-faces-60-year-debt-blowout-aft…
Fiscally irresponsible....ya think.!!??
It’s why KiwiBuild failed
KiwiBuild was a vehicle for transferring risk from property developers to the tax payer. It failed because even with this reduction of risk, developers couldn't be incentivised to build houses that nobody except the Government wanted, at a time when there was more money to be made building McMansions for the petite bourgioise.
It would have made more sense for the government to just build houses themselves, but the problem with that is nobody gets rich doing it, and therefore it's not considered to be an option. That would be communism, or something. I agree that a tax-and-spend model is the proper way to deal with this, but it relies on three things:
- higher tax for those most able to afford it
- ability to spend those taxes wisely
- the political will to increase taxes
I'm not hopeful that we're going to see any of those things happen at governmental level. More likely, we will keep putting our trust in the invisible hand of The Market to solve all our problems.
Hickey is still choosing to be blind.
Debt, current stock thereof, is unrepayable (in any meaningful sense). Been that way since 2005, globally. Yet Bernard is advocating MORE!
That all has to be repaid (or what's a dollar worth?). By who? By future generations, that's who. We who spent the parts of it, are going to give them the task of repaying our debt using a more-depleted planet.
Done ignorantly, that's theft. Done knowingly, fraud.
Come on Bernard - truth time buddy; I'm calling you.
Alternatively - since we know the debt cannot be repaid, and we know everything is going to become more scarce and expensive in the future, the prudent course of action is to build all the infrastructure we can right now.
But build the right infrastructure - public transport, energy efficient housing, other energy projects like the NZ Battery Project (will be the largest pumped hydro storage in the world).
Don't build white elephant motorways like National wants to.
If you care about the future of New Zealand don't vote National. They won't build the NZ Battery Project because National don't build infrastructure - as we can see from the wasted decade under Key.
You clearly didn't read or understand Bernard's article, because the whole point is that successive governments have created this mess and the tide is now going out, making it clear what is wrong.
This government is investing in infrastructure that the previous 3 governments did not.
Another admirable but flawed attempt at partisan astro-turfing. National greenlit the CRL for a start, the largest public transport project in the history of New Zealand. How's Auckland's rapid transit, light rail and other promised infra we need to help with that 'climate emergency' coming along?
Vote Labour if you want to fit in at a BBQ but don't actually care about things that don't directly affect you.
National greenlit the CRL for a start
After 2 years of refusing to do it because it cost too much. Their hand was finally forced when Phil Goff, ex Labour party minister and supercity mayor, said he was going to do it any way.
The 2012 Auckland Spatial Plan highlighted the CRL as the most important transport investment for Auckland[6] and the project has enjoyed strong public support.[7][8] Due to the significant costs and difficulties associated with a project of this size, its planning and funding have also been the subject of controversy.[9]
In June 2013, the central government announced its support for the project with a construction commencement date of 2020, four years later than Auckland Council's preferred start date of 2016.[10][11] Prime Minister John Key announced in January 2016 that central government funding for the project had been confirmed, allowing Auckland Council to start construction of the main works from 2018, with central funds guaranteed to flow from 2020.
https://en.wikipedia.org/wiki/City_Rail_Link
Vote Labour if you want to fit in at a BBQ but don't actually care about things that don't directly affect you.
I simply said not to vote National. You are the one who are misinterpreting my words as saying "Vote Labour". Yet again. I didn't even say Labour in my comment.
Brush up on your reading comprehension, eh?
Again, I said nothing about Labour, you brought them up after acusing me of astro-turfing, which is a term generally used to imply a fake grass-roots co-ordinated campaign in support of some position.
My only position is: don't vote National.
I'm also not a member of any political party, nor have I been, nor am I paid by one. So your accusations of astro-turfing are purely false.
Your only position is being relentlessly critical of one party, and being willing to play fast and loose with the facts as shown in your post re: National not building infrastructure. Not only is it really boring, but when you're prepared to revert to outright misrepresentation, it's pretty poor. If you're going to sew seeds of distrust (and you should not exactly be short of material when it comes to National) then at least try and keep it somewhat grounded in fact.
You must have been having a kip for 9 years Macawsley.
(1) Reforms to welfare to reward independence and work. Welfare reform demonstrably worked. The number of sole parents on a benefit was the lowest it has been since 1988. Sixty thousand fewer children were growing up in a benefit-dependent household since 2011. The current lifetime liability of the benefit system has reduced by $13.7 billion over the last five years.
(2) Got the country through the global financial crisis – and back into the black, you know Macawsley, back in the black, making surpluses. And this after printing...... NO money and NOT causing rampant inflation.
(3) Built a more productive, diverse and competitive economy. For eg: generated 274000 jobs in 2 years (and had the 3rd highest employment rate in the developed world), had economy growing at 3% per annum, average household income was up 42% from when National took over, and average wages increased by twice the rate of inflation
(4) Dealt with the Canterbury earthquakes
(5) Made significant reductions in child poverty. You know Macawsely, the child poverty that Jacinda and Labour have made WORSE!
(6) Created "The Better Public Services programme and Social Investment", with results for eg: crime down 14% (youth crime is down a third), rheumatic fever reduced 23%, and 94% of 8 month olds are now fully immunised. Again, this was stuff that the Government measured OUTCOMES for, something that Labour decided to take away. And just funnel billions in and hope for the best. I mean, we had Labours Health Minister saying he "didn't understand how they could spend $1bn and not see any change". Idiot much?
(7) A more competitive, affordable, secure and renewable electricity system. Under Labour consumers were told every second year to save power during winter, prices rose 72% in nine years, and security of supply was at serious risk. Under National, renewable electricity was at near record highs, electricity prices actually fell in 2017 in real terms thanks to more competition, and despite dry years there were no forced conservation campaigns.
(8) A big lift in the number of young Kiwis achieving educational success. When National came to office in 2008, one in two Māori and Pasifika kids left school without NCEA Level 2 – a passport for the future and the recognised minimum standard for other tertiary options. In 2016, nearly 75% of Māori students, and nearly 80% of Pasifika students, achieved the NCEA Level 2 qualification.
(9) Treaty of Waitangi Settlements. 59 Deeds of Settlement signed in nine years, meaning the majority of historical Treaty settlements across New Zealand were resolved.
(10) A turnaround in net migration. Net migration between New Zealand and Australia for the year to June 2017 was 560, in NZ's favour. Under Labour, 10,000 were LEAVING every year.
There's a few achievements Macawsley (and thanks to Google, and Stuff, it was bloody easy). Game, set and match I guess.
The majority of our domestic created inflation is caused by rampant money creation by the banks, I suppose you don't worry about the price of houses and rents though and why do we want the government running surpluses?. A government surplus must equal a private sector deficit, they run down private savings and increase household debt and poverty.
Tread, "banks" do not create money. Money is "created" when the Reserve Bank of New Zealand prints more money. And the RBNZ does that at the behest of the Government. So, the "rampant" inflation you speak of has been caused by the current Government. And FYI, if the private sector make "deficits" they go out of business. Just like NZ will go out of business if our Government constantly makes deficits. Deficits have to be funded by someone. And almost always, if you borrow from someone, they want their money back at some time in the future.
You are right that government ‘debt’ won’t ever be repaid. But that doesn’t matter. Debt is an accounting construct. Hydropower matters, healthy homes, schools and a population that isn’t at each other’s throats matters. But the debt? That’s a side issue and economics is simply a construct to help build a society we want. If the public finance act is preventing that from happening then it is past its use-by date.
In no way should this be seen as advocating low tax or limitless spending - both need managing to keep inflation under control and the population motivated to work, because the real constraint is people and the environment. If it takes more debt to manage real resource constraints then so be it.
Which planet has Bernard just flown in from! How simple, councils just need to increase charges. I doubt any reluctance stems from the 30/30 rule set in stone. I think it is more to do with Council & staff realizing they have maxed out the credit card, that they can't do even the obvious things like filling pot holes but even more to do with the likely reaction of normally calm citizens who increasingly realise council s main priority is their own comfort...Auckland with ever more bureaucrats less able to answer a phone; more than 2 thousand of them on salaries north of $100k.
But hey, Bernard can't see any reason for spending constraint? Maybe he will volunteer to face the crowd baying for blood.
And what about rates being a person tax (poll tax but everyone hates that word). Then all residents would start to appreciate the Council wastefulness on unimportant stuff and appreciate the important stuff ( to me water transport rubbish management street lighting and cleaning animal control noise control etc)
More nurses and doctors are good, but this frontline vs back office narrative isnt as simple. It is in fact quite lazy.
But under the past government they slashed the back office staff, all this did was transfer the admin work to the front line staff, making Nurses and Doctors spend more time doing admin work, rather than focusing on the paitents.
To have a good frontline team, you need a good supporting team to ensure that those who are focused on paitents can actually get on and do their jobs.
Arent the UK and USA debt to GDP both over 100%, and they dont have much to show for it.. and now dont they need to raise taxes to pay the interest on debt that will never be repaid?
We need to get people and governments away from the borrow from the future to spend now mentality and focus on how to spend what we do have more wisely now - lifting productivity and making sure we have a real ROI on spend - this is the real issue.
The GDP measure might be fine but maybe it would be better if it was a GDP per capita limit. Currently, the government is incentivised to grow GDP through low-productivity (below median wage) mass immigration which leads to infrastructure deficits because of the sheer number of migrants required to get the GDP up.
Under a GDP per capita limit the government would have incentives to increase productivity because it would give them more money to spend.
As PDk has indicated Bernard is choosing to be wilfully blind on this topic. While using Wellington City as an example he admits that ordinary people are saddle with low incomes and need to find ways to supplement that to survive (..."would increase borrowing costs and interest rates for everyone, including ratepaying and median-voting home owners, who depend on ever-rising leveraged and tax-free house prices to offset their low wages.") but in the same paragraph he advocates increases in tax es (..."Higher debt levels would probably require a higher level of central Government taxation than the current 30% of GDP." and "o why don’t councils just increase their own taxes in the form of rates or new fees?")
But then he confuses the issue stating that the public push back taxes because of the "30/30 rule". No recognition that earlier in his argument that if the public have to find ways to supplement their low wage incomes then they just might not be able to afford increased taxes and fees?
To be fair, I've never heard of the "30/30 rule" so I suggest Bernard is building on something that is not there. Instead I have always considered that it is better to keep debt down, and that politicians are not always to be trusted when it come to spending public money wisely.
Singapore runs a 130% gov debt to gdp ratio and look how advanced they are. They spend on infrastructure assets that deliver value.
Look at what NZ should have spent money on:
1. Shifting POA to another coast to free up billions of property that currently acts as the world most expensive car park. Trucks out of CBD thanks.
2. Second harbour crossing - preferably a tunnel (winds getting worse so bridges are bad????)
3. Build at least three new hospitals to match the quality of Australian hospitals - ours are third world (go to Melbourne if you dont believe me)
4. 4 lane preferably 6 line highway to Whangarei - 6 lane at least to Warkworth.
5. Properly upgrade rail to new port
6. Hub and spoke rail network for CBD and associated suburbs - including link to airport. Similar to Melbourne make inner CBD free.
Most of this spending should have been done in the 80s.
Going back and retro-fitting rail across Auckland isn't going to happen. Re-claiming road-space for street-level light rail is the cheapest and most effective way to do this but people are obsessed with building a new heavy rail network, even if tunneling one across Auckland will cost tens of billions of dollars.
you are talking about Auckland. have you read the latest keep Wellington moving plans? with the traffic already jammed from the eastern suburbs, they plan to add two cycle lanes and 1 extra bus lanes to solve it.
if you think about it, the current Mt Victoria tunnel was built in 1931 so that today we have two car lanes. and now we are building roads to accommodate a 1890 road users when we about to enter 2030s.
I hope it's just me being silly, otherwise this country is run by lunatics.
Clearly more information is needed. I would start with: Why is Wellington City Council already at their debt limit if they have not been building required infrastructure, and why are they already at their operational budget if they haven't kept up with required infrastructure maintenance?
I would want to really understand what the existing budget is being and has been spent on before concluding that the council just needs more operational budget plus more debt.
I think I follow what you are saying but I get lost at “That is only sustainable with rising house prices so homeowners can offset that low wage growth with tax-free and leveraged capital gains”. What is the connection between “spending to GDP ratio” and that sentence?
If the government is concerned about its debt levels then the obvious solution is to instruct the treasury to stop issuing it. That would destroy the charade of the government being financed by the private sector though. Borrowing is purely an interest rate mechanism which the government via the treasury and RB regulates by adjusting the levels of reserves in the banking system and which have initially been created by the governments spending.
There are alternatives to this procedure such as paying a support rate of interest on reserves or even giving every kiwi a savings account at the RB.
https://clintballinger.com/2018/11/13/decouple-spending-from-bond-sales/
There is no need to issue public debt. http://bilbo.economicoutlook.net/blog/?p=31715
Bernard always makes sense, evidence based.
What we have is a National Party full of one liners, and no policy. Their last period in power, was drift politics with a run down of Health and education, and clipping away at sound policy.
Labour has got it right with their approach and identification, but has attempted too much at once.
Like the USA and China, chose who you want next yr, Labour or National.
My score is Labour 5/10 National 3/10 and Act, perhaps the cheesy grin allows 1
Perhaps if we wish to maintain a 30/30 restriction on government spending, we should choose a suitable "reserve ratio" and impose it on the private banking system: one that restricts the latter's creation of money to 30%, or some suitable percentage, of GDP. This would probably give the government more elbow room to spend on infrastructure.
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