In today's email we dig into the continuing standoff between local and central Government over paying for the infrastructure needed to cope with a growing population, increased tourist numbers and tougher water standards.
1. Funding blockages galore
One of the recurring themes of New Zealand's political economy right now is the almighty standoff between central and local Government over who pays for the infrastructure needed to sustain fast population growth and improved water standards.
The Housing Infrastructure Fund is the Government's immediate response to fast-growth councils being unable to borrow more without cutting their credit ratings and triggering rate increases. The Government is expected to make announcements on these projects in the coming weeks, particularly in Auckland.
The pressure is also on in transport in Auckland, where the Government is expected to release the terms of reference for its longer term plans for congestion charging this week. However, as Prime Minister Bill English cautioned yesterday with less than four months to go before the election, these charges are long term prospects.
The problem is the Auckland Council's funding issues are very much in the short to medium term, as Mayor Phil Goff pointed out in his interview with Lisa Owen on The Nation on Saturday.
He said Auckland's previous transport spending deficit of $4 billion over the next decade has risen to $7 billion because population growth had risen from 16,000 per year to 45,000 per year.
Goff pointed to the Council's key constraint, which is the Standard and Poor's imposed debt-to-revenue limit of 265 percent needed to keep Auckland's AA credit rating. Auckland's ratio is already at 256 percent.
This is the problem for Auckland and other growth councils. Growth doesn't pay for growth in the short term without borrowing, but some are up against their debt limits and ratepayers don't want to pay the much higher rates needed without the borrowing. They're also reluctant to pay extra for the higher rates bills needed to service higher debt if they choose to go ahead with lower credit ratings.
Councils are now regularly calling for a way to share in the tax revenue growth created by economic and population growth because the only revenue tool they have is rates.
Goff called again over the weekend for the Government to pass on a share of GST revenues to councils. In particular, he said the Government should rebate back to Council the GST revenues being charged on council rates, which was $239 million last year for Auckland. He referred to the way the system works in Australia for the Victorian state Government and the city of Melbourne in particular.
"The government – the federal government – puts down to the state government a share of GST. We need something like that for a city the size of Auckland in New Zealand," Goff said.
Finance Minister Steven Joyce yesterday again ruled out any move to share GST with councils.
“No, we won’t be doing that,” Joyce said.
“One of the great principles of NZ taxation is people know their taxes go through parliament and they know what to do if they don’t agree with parliament. And rates go through councils and they know what to do with councils if they don’t like where their rates are going. That’s an important separation and helps with accountability,” he said.
2. A tourism funding blockage
Newsroom's Lynn Grieveson covered Local Government New Zealand's quarterly briefing yesterday and found this issue of how councils pay for the infrastructure for growth, for tourism and water quality dominated the discussion.
LGNZ President Lawrence Yule again called for a share of GST revenue to help pay for tourism infrastructure, arguing the $100 million fund announced in the Budget was not enough and not available to the Councils who needed it.
“There’s been a lot of talk about the tourism fund and $100m has been announced, and while we are grateful for that, we still haven’t captured effectively the issue of why we should not get a share of either the GST or a share of the visitor revenue to help fund this stuff," Yule said.
“At the moment what the government is doing is handing out money from its funds, but it’s not directly linked to the income that is coming in from visitors," he said.
Yule also pointed out that very few councils would be able to apply for the fund because of the fund's criteria around whether councils had reached their debt limits and that regional tourism revenues had to be less than $1 billion.
LGNZ even suggested the creation of a special economic zone in Queenstown to trial a visitor levy.
3. A water funding blockage
The other big area where this funding catch 22 is building is around water quality.
The central Government is effectively setting ever-higher standards for water quality, but it is Councils that must pay for the infrastructure to ensure those standards are met.
Growth councils don't have the revenue sources to fund the extra debt needed, while councils in low-growth areas with contracting populations also face higher standards at a time when their ratings bases are falling.
Unlike in other countries where local Governments can raise sales or income taxes, our councils are limited to rates on land or capital values. The Governmental dividends of economic growth in the form of income and sales taxes go to Wellington, but the costs of the water and transport infrastructure needed to fuel that growth fall largely on councils.
LGNZ highlighted this blockage around water quality in yesterday's briefing.
It estimated councils face $100 billion worth of water infrastructure costs in coming years to replace pipes built in the 1960s that are near the end of their lives, and to cope with upgraded water standards.
LGNZ CEO Malcolm Alexander said councils needed more help to deal with the funding gap, as the current model of paying for infrastructure with increased rates or debt was not sustainable.
“Setting standards on the one hand with no idea of who is going to pay or how it is going to be paid, is not coherent policy,” Alexander said.
“At the same you have increased environmental standards, you have increased resilience standards, so the question becomes: how are we going to do this? Under our current funding model, it’s rates and debt. And the question becomes: is that a sustainable position? Our view is it is not.”
Yule summarised the problem this way: “We need a review of local funding to support investment in infrastructure. The growth itself should be able to fund most of these costs, but at the moment the way it is set up it is largely not."
4. Early childhood funding pressures
The intense pressures of very fast population growth in tandem with over five years of Government spending restraint are evident in education and health as well.
Newsroom's National Affairs Editor Shane Cowlishaw reports over at Newsroom Pro on calls from unions and the Early Childhood Education (ECE) sector for more funding to keep up with the growth and to offset various restrictions on spending in recent years.
Shane spoke to Sue Cherrington, associate dean of Victoria University’s School of Education, and found she agreed the ECE sector is under financial stress.
“There’s absolutely no fat in the system and in real terms services are getting less per child than they were previously.”
The focus on lifting participation rates, rather than quality, was a concern as research showed that participation in mediocre early education could be detrimental, she said.
5. On the defensive
But the big diplomatic and political event of the day yesterday was US Secretary of State Rex Tillerson's fleeting visit to a wintry Wellington.
Newsroom's Foreign Affairs and Trade Editor Sam Sachdeva covered the joint news conference with Bill English at Premier House, and a short subsequent news conference with English on his own.
Tillerson defended America's commitment to the region and its actions on climate change but, as Sam points out, it's hard to focus too much on what Tillerson says when Trump regularly undermines his underlings with his tweet storms.
Trump did the same again overnight with comments that are set to infuriate Qatar, where America has its largest military base in the Middle East.
The ejection of Qatar from the Gulf states over the weekend is also set to complicate New Zealand's efforts to sign a trade deal with the Gulf States. English admitted yesterday the turmoil there was likely to delay any deal.
6. Numbers of the day
Down 2.2 percent - The fall in the seasonally adjusted value of building activity in the March quarter, as measured by Statistics New Zealand in its Value of Work Put in Place series. It was the first fall in five years and surprised economists, who had expected another rise. There was a 7.2 percent fall in the volume of non-residential work and a 0.8 percent fall in the volume of residential work. Economists downgraded their March quarter GDP forecasts slightly as a result.
Down 2.9 percent - The fall in wholesale milk powder prices in last night's fortnightly Globaldairytrade auction. It was the first fall since March 7.
2 percentage points - The lead held by the Conservative Party (42) over Labour (40) in a Survation telephone poll of 1103 voters taken for Good Morning Britain on June 2nd and 3rd.
7. Quotes of the day
Rex Tillerson on Donald Trump's tweeting: "The president has his own unique ways of communicating with the American people and the world, and it’s served him pretty well. I don’t intend to advise him on how he ought to communicate - that’s up to him."
Bill English on Trump's tweeting: "I don’t think it’s our position to comment on the way that the elected leader of another country conducts his business - we wouldn't expect him to be raising issues about my Facebook."
London Mayor Sadiq Khan calling for Trump's state visit to Britain to be called off: "I don’t think we should roll out the red carpet to the president of the USA in the circumstances where his policies go against everything we stand for. When you have a special relationship it is no different from when you have got a close mate. You stand with them in times of adversity but you call them out when they are wrong. There are many things about which Donald Trump is wrong."
8. One fun thing
The tweets of the day after Rex Tillerson was reportedly flipped the bird by onlookers as his motorcade drove to Premier House yesterday:
Rachel Stewart: "The only native bird that's not in serious trouble in New Zealand."
Dovil: "I say we go all in and pelt Rex's car with dildos because you know we're going to end up on the Travel Ban list at this point anyway."
Philip Matthews: "Please let Trump tweet about this. Please."