In today's email we dig into the Government's signalling around housing, infrastructure and urban water quality.
1. More housing to come
One of the criticisms of the Budget last week was that it didn't have a bigger focus on housing in Auckland. That may reflect the fact the Government pre-announced its Crown Building Programme for up to a net 26,000 new houses, but there was also some expectation of announcements around the $1 billion Housing Infrastructure Fund (HIF) that has been in the works since last year.
Finance Minister Steven Joyce signalled in comments on Friday that further Auckland housing announcements could come within a few weeks and Prime Minister Bill English fleshed that out more at his post-cabinet news conference yesterday.
He said Joyce's comments about an upcoming announcement were referring partly to the HIF.
English said the HIF discussions had been complex and took time, in part because councils did not have well prepared projects. He said this was partly because the discussions also looked at sources of finance. The speculation about these discussions has centred on whether there may be some sort of Crown Fibre Holdings type vehicle created where local Government invested with council or private players.
"There's been intensive negotiation in the early part of this year, around the financing as well as the actual projects. So it's been a very productive discussion about how to expand the sources of finances for councils and central Government, as well as everyone getting a much better understanding of what roads and pipes are actually required to bring forward housing supply," English said.
"That's turning high level plans into construction projects, so I would expect as those negotiations are completed for a billion dollar fund, there'll be announcements about what the projects actually are," he said.
"I wouldn't want to prejudge what will be announced, but the whole discussion about how to finance these things sooner than was expected, dealing with the council debt limits, dealing with the way central Government accounting works has been a big part of the discussion, and for New Zealand, it's pretty challenging, because we don't have a history of doing this outside of the mainstream PPPs."
English said other types of financing mechanisms were becoming publicly acceptable. He indicated they could also be used for new water infrastructure. His comments reflect a growing focus from senior ministers in recent weeks on urban water quality.
"And as you look into the future with the size of infrastructure demands, which will include once our urban areas get around to focusing on water quality, they're going to find their water systems need significant investment, as well as the ongoing housing demand," he said.
"This is a great way to work through the nuts and bolts of how council and central Government can work together to improve financing mechanisms."
However, English downplayed suggestions of an imminent announcement of Crown Fibre Holdings style vehicles.
"Because it's relatively new, I wouldn't raise too many expectations about the next few months, but certainly the indications I've seen are there's an awful lot learned by central and local Government about how different financing types could work," he said.
English agreed some of the new financing vehicles may require legislative change, which he said was not possible before the election.
2. And tax reform?
Another theme of the post-Budget discussion was Steven Joyce's openness in the Budget lockup and in subsequent discussions to the idea of tax reform after the election.
Joyce had been asked about corporate tax reform and the potential for an evening up of the playing field between pensions vehicles and property by reinstating tax breaks for pensions removed in the late 1980s. Andrew Coleman's presentation via Motu in March of a paper pointing out the potential to reduce the relative tax advantages of property has sparked the discussion.
English was much more cautious about both ideas when asked about it at his post-cabinet news conference.
He said cutting the corporate tax rate was not the panacea presented by those who want it, citing the big boost it gives to overseas owners of local companies.
He pushed back at the idea of bringing in tax breaks for savings vehicles.
"The fact is that people make reasonably sensible investments. If you look at the most recent Reserve Bank figures about it. The more we understand about it, the more diversified the savings look," he said.
"So we're always open to improvements. You need a pretty strong case. Rather than just fiddling with it to make it look like you're doing something. That isn't really the threshold from our point of view. You'd need to see some significant economic benefit," he said.
The issue of New Zealanders' reliance (or otherwise) on property is worthy of debate, given the Reserve Bank and IMF worries about the over-reliance of our banking system on property and the relative sizes of our housing market and stock markets. Both have called for the Government to reduce the relative tax advantages of housing.
Our housing market is worth more than four times GDP, while our stock market is worth less than half GDP. In other OECD economies, housing and stock markets are more closely aligned to each other and GDP.
3. The cost of clean water
The other big event in Wellington yesterday was the Freshwater Symposium, where Local Government New Zealand President Lawrence Yule and Environment Minister Nick Smith pushed a new and common line about how the public were unaware about the large cost of improving water quality.
Newsroom's Lynn Grieveson reports on those comments at Newsroom, including Smith's linking of water quality with housing costs.
Here's the key quotes from Smith:
"A big responsibility and debate for Government is around the issue of housing affordability, which is directly connected to the price of a section and the way in which local authorities fund that infrastructure," he said.
"How tough we make the standards flows through into the price of sections and in terms of the price of housing," he said.
"In this discussion around freshwater we need to be open and honest with our communities as to those cost implications. So, when it comes to the standard of water we want, if you go out to a public consultation without any mention of cost, you will get a big push for it to be purer and purer – but then when you come to implement that policy you will hit a brick wall because the cost implications for ratepayers are unmanageable."
Smith's comments married up with English's around the impending costs of new water infrastructure. The linking of water costs with housing affordability was Smith's alone, however.
4. Grandparenting of pollution rights?
Another hot topic at the Symposium was around how to manage allocation of water rights and consents as regional councils try to improve water quality, particularly around nutrient leaching into water tables.
The thorniest topic is around how existing holders of consents and water rights would have their rights pared back -- the so-called 'grandparenting' of those rights.
Smith touched on it in his speech and in comments to reporters afterwards. He emphasised that allocating the nutrient loads was likely to be a more challenging issue than allocating water flows and suggested a technique that could hurt the biggest and most recent dairy conversions that made 'land grabs' to get in to Regional Councils before limits were imposed.
One of the dangers of grandparenting down from existing high nutrient leaching levels is they effectively reward those who bought land and pumped up production before the water quality regimes were brought in.
"I think people are increasingly recognising, as the caps on nutrients in catchments are being set, that the far more challenging issue is going to be how you allocate those nutrient rights within a catchment than what it is the allocation of water," he said.
"There is a lot of debate going on in communities about the grandparenting of nutrient rights. My view is that if you are going to grandparent, you need to link it not to the levels of pollution that are happening now, but link it more properly to what the levels of nutrients would be if people were adopting good management practice."
That would suggest grandparenting some polluters down at more aggressive rates if they had developed very intensive farming techniques.
Smith later told reporters there was an increasing realisation that there were limits to the amount of nutrients that can be released into catchments, "and the regional councils are struggling with the question of how to impose those limits."
"Some degree of grandparenting is appropriate given that people have invested in good faith under the rules of the day in substantive farm businesses and other activities," he said.
"We would prefer though is to grandparent according to best management practice and be cautious of rewarding those that have very high levels of nutrient discharge because they haven't been farming as well as they could.
"In terms of policy direction we want to signal to regional councils that we prefer a grandparenting model that is not based on absolute but is based on what a good and well managed farm would diffuse into it."
That could be problematic for the most intensely farmed and recently converted dairy farms in areas with very freer draining soils such as South Canterbury and central Otago.
5. Focusing on the split
Bill English was quick yesterday to focus on the split in the way the Greens and Labour voted on the Budget on Thursday night, signalling it will be a tactic in the weeks to come and reinforcing the political box the Opposition has been painted into.
"The Opposition parties can't organise themselves in Opposition. You wonder how they're going to organise themselves in government," English said of the split.
"When in Opposition, all you have to do is oppose what the Government does. Looks pretty easy, but they can't manage that," he said.
English wouldn't be drawn on whether National could work with the Greens after the election.
"You'd have to ask them about that. It's certainly a message that the Greens Labour relationship is a good deal more fragile than people thought it was, or that they were portraying, particularly when it became clear that they hadn't really told the Labour Party that they were going to take the radical step of voting for a National-led Budget," he said.
"That's pretty telling."
Elsewhere on the Budget, English defended the Accommodation Supplement increases and downplayed the potential for rent increases, pointing to MSD research that said rent increases were unlikely.
He compared the supplement increases to the potential for other suppliers of goods to families getting pay increases.
"Just because we put up Working For Families, doesn't mean the supermarket is going to put up the price of Weetbix, even though it knows its shoppers have more cash," he said.
6. People on the move
Anyone experiencing Wellington's weather in the last couple of days will be a little jealous of Bill English, who announced yesterday he would leave on Wednesday for a three day visit to Samoa for its 55th Independence day celebrations. He will also attend the Blues vs Reds Super Rugby match and be awarded a chiefly title.
Elsewhere, Justice Minister Amy Adams announced that former Secretary of Justice Belinda Clark had been appointed a Law Commissioner to replace the outgoing Wayne Mapp.
7. Coming up...
Parliament resumes today for the second week of its three week Budget session. The Parliamentary caucuses meet later today. We'll be covering comments from both parties in tomorrow's email.
We'll also cover the Reserve Bank's Financial Stability Report on Newsroom Pro on Wednesday morning after its release at 9 am.
8. One fun thing
Bill English yesterday confirmed that NATO had asked New Zealand to send an extra two troops to Afghanistan to beef up our current 10 troops by 20 percent.
Our Foreign Affairs and Trade Editor Sam Sachdeva has more on the request and English's comments here at Newsroom Pro.
At the post-cabinet press conference, English was asked all sorts of details about what types of troops they would be. All two of them.