Hive News Friday: Budget surpluses surging; Debate rages over Housing NZ finances; Fonterra warns of wet, slow October

Bill English responds to reporters' questions at the release of the Government's Financial Statements on October 13. Copyright Lynn Grieveson / Hive News

The unveiling yesterday of a higher-than-forecast Budget surplus for 2015/16 didn't get the clear air the Government might have hoped for, even though it creates the political and economic landscape for the debate over tax cuts and Government spending on infrastructure, health, education, justice and police ahead of the next election. That was reinforced yesterday by Labour's announcement of a NZ$180 million plan to employ 1,000 extra police.

Instead, debate in and around Parliament was dominated by Labour's release of OIA documents showing the debate within the Government about how to fund the changing role of Housing New Zealand as it gears up its major rebuilding programme and becomes an integral part of the Government's plans for more house building in Auckland with the new Unitary Plan.

Treasury warned the Government that Housing NZ was on track to "exhaust its cash balance" by February 2017 as it ramps up its development activity, requiring more capital in some form from the Government.

The precursor to all this was the July 11 tweet from Steven Joyce that revealed the Government had decided to drop its demands for a dividend. (See more in our July 12 Hive News email.)

'Reports of collapse ridiculous'

Accusations that Housing NZ was "going broke" were thrown around and angrily rejected by the Government.

"Reports that it is "going broke" are simply wrong," Bill English said in Parliament, adding the reports had caused distress among Housing NZ staff.

"As Housing New Zealand ramps up its large-scale building programme, of course it may need more Government support, because you would not expect an organisation that has been building 300 houses a year to have enough cash on its balance sheet to finance the building of 3,000 houses over a few years," he said.

James Shaw then asked how the Government would fund the extra 30,000 houses talked about by Bill English earlier in the week as part of a programme Labour has called "Kiwibuild-lite".

English said Housing New Zealand would complete detailed planning of the next tranche of developments in the coming months, including its 1,000 house Northcote development.

"It will also need to complete over the next few months a detailed financial analysis to show just what funding it needs, given that it can source funding from, for instance, sales of surplus houses to the market," he said.

"When it has done a proper job of that, the Government will then consider applying more taxpayer funds to it. But we are not just going to hand Housing New Zealand hundreds of millions of dollars and hope that it does a good job."

English described comments about Housing NZ as being "near collapse" as "ridiculous."

"There is no reason to believe that Housing New Zealand is under financial strain or going broke, and it is absolutely nowhere near near-collapse," he said.

"Collapse is what happened to Solid Energy, not what happens to Housing New Zealand, which has NZ$20 billion of assets and about NZ$4 billion of debt."

Earlier English had to spend a large chunk of his Budget announcement news conference explaining Housing New Zealand's funding situation.

'Housing NZ in strong expansion mode'

"As Housing New Zealand moves from building 300 new houses a year to building 1,000 or 2,000, it just may, or probably, need more support from Government to do that, okay? Because it is ramping up the building programme. And when it was building 300 or 400 houses it had enough cash on its balance sheet to finance that," he said.

"So it's simply an organisation whose level of activity is growing and they will likely need more support from Government in order to achieve that, alongside the proceeds from transfers that they have been doing."

Challenged again about the Treasury comments on Housing NZ needing cash and whether that meant it was 'going broke', he said:

"No, no, they just said they are going to run out of cash. They've normally had enough cash to build 300 or 400 houses on top of the repair and maintenance programme. But if we are saying to them 'we want you to build 1000 or 2000' then running out of cash doesn't mean they are going broke, it just means when they have built their 400th house they are going to need some Government funding to expand their activities. So Housing New Zealand are heading into a strong expansion mode and, like any business, as it expands it needs cash to finance its activities."

Strains showing at Housing NZ?

Asked if the Government was putting too much strain on Housing NZ, English said the issues around the Tamaki Redevelopment Company showed redevelopments at scale were complex and took time.

"That's a NZ$1.5 billion property company and it's doing all it's own work so it doesn't have to go through the Housing New Zealand bottleneck of decision making. So when you are trying to do as much as we are doing, it's inevitably complex and it also means that an organisation that has been a longstanding state monopoly is going to go through rounds of change and strain as they gear up for what's going to be a 7 to ten year redevelopment cycle," he said.

"And all these projects are complicated because there are tenants in the houses. So we are setting up to redevelop whole communities here. Tamaki is the first, Northcote is another one, there will be dozens of others over the next ten years at scale."

He said Housing NZ was working on those plans for more capital and was making good progress.

"With these kinds of organisations and Government, you don't just give them a big dollop of cash and let them run loose. They have to produce sharply focused plans with real clarity around the financials, and then they get the cash," he said.

Twyford says Housing NZ 'on brink of insolvency'

Phil Twyford continued to point to the Treasury advice about cash being needed by February and to describe Housing NZ as "going broke" and "on the brink of being technically insolvent."

"Read what his officials said," he told reporters when challenged about English's rejection of the 'going broke' description.

"They said unless something changes, Housing New Zealand will not be able to service its debts. That means they would be technically insolvent. Bill English, though his incompetent management, has driven Housing New Zealand into the ground. The organisation that should be leading the Government's response to the housing crisis has basically been left in financial ruin. It's appalling," he said.

"The thing that really disturbs me is that in the same week that we have seen the Deputy Prime Minister musing about building 30,000 houses, we find out that Housing NZ doesn't have the capital it would need to build those houses. My concern is that the 30,000 houses Bill English is talking about would basically be a massive sell off of publicly owned land and housing to stave off bankruptcy for Housing New Zealand."

Twyford said the documents showed the officials were "virtually at war" with English over the Government's draft statement of performance expectations for Housing NZ, which had been unconfirmed in draft form for five months

"It's very clear from these documents that Steven Joyce's now notorious tweet that Housing New Zealand wouldn't be required to pay a dividend was not some act of compassion by the Government -- the cupboard was bare, basically," he said.

"The balance sheet of Housing New Zealand has been plundered by this Government, and I think in the middle of a housing crisis when you have got Kiwis living in garages and campgrounds, to leave the organisation that should be leading the Government's response to the housing crisis, to leave it without the resources to do it's job, I think that's appalling."

Plenty of money in the pre-election kitty

Earlier in the day, English presented a NZ$1.8 billion OBEGAL surplus, which was up from NZ$414 million the previous year and up from a forecast of NZ$176 million in Budget 2015.

The result was also more than double the forecast from May 2016 Budget of NZ$668 million as nominal GDP grew by 4.2% in the year to NZ$251.8 billion, helping to power higher-than-expected income tax and solid GST revenues.

English said the result gave the Government choices about repaying debt, cutting taxes and investing in infrastructure.

Core Crown tax revenue was NZ$1.6 billion higher than forecast in Budget 2015, while spending at NZ$73.9 billion was below the Budget forecast of NZ$74.5 billion.

“If there is any further fiscal headroom, we may have the opportunity to reduce debt faster and as we’ve always said, if economic and fiscal conditions allow, we will begin to reduce income taxes," he said in his statement.

Not repaying debt yet

However, the Government still ran a residual cash deficit of NZ$1.3 billion for the 2015/16 year, albeit down from NZ$1.8 billion the previous year.

It was lower than the May Budget 2016 forecast for a cash deficit of NZ$2.1 billion, which meant net debt rose to NZ$61.9 billion from NZ$60.6 billion (but was less than the NZ$62.3 billion forecast just five months ago.)

Treasury emphasised the growth in the total economy for the better than expected Budget surplus in OBEGAL (Operating Balance Excluding Gains and Losses) terms.

"The robust GDP growth was reflected in private consumption growth of 3.5%, plus strong contributions to economic growth from residential construction and inbound tourist spending, up by 16% and 17% respectively," it said.

"The total population grew by 2%, boosted by a net influx of nearly 70,000 migrants in the year to June," it said.

Core Crown tax revenues of NZ$70.5 billion for the year to June 30 were up from NZ$66.6 billion the previous year and above the NZ$69.7 billion forecast in May.

Core Crown revenues rose to 30.2% from 29.9% the previous year and was slightly above the May forecast for 30.1% as stronger growth lifted the effects of 'fiscal drag', whereby incomes rise into tax brackets with higher tax rates.

Total wages and salaries rose 5.0% for the year.

In other financial and economic news...

REINZ reported house sales volumes fell 2.5% in seasonally adjusted terms in September from August, while prices rose 3.3% nationally in the month in seasonally adjusted terms. The results were driven largely by a slowdown in activity in Auckland and the upper North Island as the the Reserve Bank's third round of LVR controls rolled through the most over-heated parts of the market, while activity in the rest of the country remained relatively strong.

All this house price growth, population expansion and total economic expansion is boosting consumer confidence. ANZ's Roy Morgan survey of consumer confidence found another improvement in early October to its highest level since mid 2015. However, people are more confident about the broader economic situation than their own personal situations. A net 30% expect to be better off financially in 12 months’ time, down a point from September.

Statistics NZ reported another fall in food prices, this time driven by lower chicken prices and seasonally lower prices for tomatoes, capsicum, lettuce, and cucumber. Food prices fell 0.9% in September, influenced by seasonally lower prices for vegetables and cheaper chicken prices. Chicken prices fell 0.9% for the month, and 11% over the year to September 2016. Prices have fallen on an annual basis for the last 16 months to reach their lowest level since October 2007.

Fonterra has dramatically cut its planned volumes of dairy products for sale on Globaldairytrade because of a very wet early Spring, particularly in the Waikato. It announced it had cut its forecast offer volumes by 11,136 tonnes over the next 12 months, with 9,086 tonnes of that reduction over November and December.

"These decreases have been made in response to significant reductions in daily milk volumes across the central and upper North Island in October, particularly the key dairying region of
Waikato where early October daily milk volumes have been down around 10% vs. the same time in the 2015/16 season," it said.

"The reduced daily milk volumes are being driven by materially wetter than normal spring weather across most parts of the country, and have resulted in the need to remove Wholemilk powder, Cheddar, and Butter from the production plan."

Quote of the day:

Bill English pointing to the NZ$1.8 billion surplus on a chart:

"I think last year some people commented it was hard to see the surplus on the graph. I am hoping that this one is big enough that even the older members of the media contingent like (Fairfax correspondent) Vernon (Small) can see the surplus."

Have a great day and look out below for some great weekend reads.

cheers

Bernard

14 October 2016