Housing fix requires Labour to break fiscal straightjacket

1. 'Throw off the fiscal straitjacket'

Almost by accident, economist Shamubeel Eaqub revealed the achilles heel that will bedevil this Labour Government during this term and beyond if it makes it that far, and he did it from the podium at the heart of the Government.

Eaqub was speaking at the release of the housing stocktake commissioned from him and fellow housing experts Alan Johnson and Philippa Howden-Chapman by Housing Minister Phil Twyford.

During the question and answer session in the Beehive Theatrette, the former Goldman Sachs economist volunteered off the cuff that the Government's commitment to reduce net debt to 20 percent of GDP was a fiscal straitjacket that was limiting its ability to truly address the housing crisis and the various problems of child poverty, child health, housing unaffordability and poor education that flowed from that.

He said New Zealand had chronically underbuilt housing for the last 30 years and needed at least 500,000 more affordable houses to meet the gap, as well as a doubling of the state housing stock to 130,000 over the next decade. The current Government has plans to build 100,000 new affordable Kiwibuild homes over the next decade and to add a net 1,000 new state houses year (although Twyford is arguing before cabinet to double that to 2,000 per year).

"I want to see Housing New Zealand ramp up supply like we haven't done in the last 30 years. We have less housing stock today in state housing than we had in 1991, which was the peak. On a per capita level, we're at the lowest level since the 1950s. It is a frickin travesty," Eaqub said.

"There is an endless list of projects that are begging for money, whether it's housing or infrastructure. If we don't invest in this one area where there's an incredibly long waiting list, I don't see how we're going to get on top of the needs of the lowest socio-economic groups in New Zealand," he said.

He said any Government that did not borrow when interest rates were at the lowest level in a century was a "fiscal idiot."

"If you put on your economist's hat you'd say this was the best possible time to borrow money because money was cheap and everybody is wanting to lend you money and there is an endless list of projects that are begging for money, whether it's housing or infrastructure...we need to spend money on building up the capability of New Zealand," he said.

"Debt is the best possible way to do it. The fiscal responsibility rules are a straight jacket that are unnecessary and certainly when it comes to Housing New Zealand specifically, we should be gearing that up a hell of a lot to try to create more housing supply. That is under-geared."

New Zealand's net Crown debt is nudging up to 21.7 percent of GDP this year and Labour promised before the next election to get it down to 20 percent within five years of taking office. However, the OECD average is closer to 70 percent and the United States is proposing more than $1 trillion a year of spending increases and tax cuts that will increase its debt to GDP ratio from just under 80 percent to over 90 percent by 2022.

The Opposition has argued that New Zealand needs much lower Government net debt because households are so indebted and New Zealand is more vulnerable to losing the confidence of international investors because of that high private debt (over 160 percent of GDP) and the frequency of its natural disasters, including earthquakes.

'This is a man-made disaster'

But Eaqub and his fellow stocktakers argued that solving the housing crisis was an opportunity to solve many of New Zealand's social deficits around health, education and child poverty that were costing taxpayers billions of dollars a year in hospital costs, lost productivity and accommodation supplements. As a type of social investment to boost the well being of future generations, a massive housing build funded by borrowing would make economic and social sense.

Eaqub called for more ambition from the Government.

"If I was the minister, (and I'm not), my ambition would be to build 500,000 houses, not 100,000," he said.

"I think we're lacking ambition. If you look at our rate of building since the 1980s. It's been too low and too slow. Cumulatively, I reckon we're 500,000 houses short. Kiwibuild has to be firstly ambitious, but also to build on top of the what the private sector is already building. The private sector is not very good at building much more than 20,000 houses a year. We should be building at a rate of 30,000 a year to get on top of our problems."

Asked how that could be done given the Government's fiscal responsibility rules, he said: "Without being facetious, borrow shed loads of money."

Twyford was the most insistent about the way the housing crisis was limiting the next generation, although he brushed aside questions about the fiscal responsiblity rules, saying the Government was being ambitious and there were capacity issues elsewhere in construction that limited the Government's ambitions to that 100,000 homes.

"The housing crisis has changed and is changing the fabric of society. It's limiting our choices and affecting the life decisions that we make," he said.

"The health and education costs of homelessness, of transience and sub-standard housing are taking their toll on a generation of young New Zealanders, whose life chances are permanently blighted by the housing crisis."

Cost of transience and over-crowding

Howden-Chapman also emphasised the flow-on effects of poor housing on education and health, pointing out that over 60 percent of Maori children were living in rentals, which were poorly insulated and over-crowded. Over half of these homes had temperatures below 18 degrees, which was cold enough for children to get sick. She said the Ministry of Health had conservatively estimated that hospital admissions caused by poor housing were costing the health system $350 million a year, while accommodation supplements were costing over $2 billion a year.

She said more than 50 percent of children in rentals moved within the first nine months of life.

"This has fundamental major consequences for stability in communities. You start to see the issues of children not being immunised, not being able to go to pre-schools, because you have to be in the area to know to put your name down," she said.

"Headteachers are concerned about the churn going through the schools and it's hard to build up the social inclusion and stability when that occurs."

Eaqub was asked about an inevitable rise in interest rates and inflation if the Government were to borrow to build more heavily and how that would effect the economy.

"It's a question of where the fiscal spending is going. If the fiscal spending is increasing housing supply then you would expect the rental inflation wouldn't be very high. While you'd have higher inflation and higher interest rates, it would hit a particular part of society. It wouldn't hurt the lower half of New Zealanders, particularly renters. They would be harder hit if the housing supply didn't increase," he said.

The stocktake authors are not the only ones calling on the Government to revisit the 20 percent rule.

'When the evidence changes, you change your mind'

CTU President Richard Wagstaff said he would welcome a fresh debate about slowing down the pace of debt reduction, given the Government was now confronting much bigger infrastructure, social and environmental deficits than expected before it came into Government.

"We would welcome a revision in thinking about slowing down the pace of debt reduction," Wagstaff said.

"I suspect that the Government has found these issues are worse than it bargained for when it committed to that target before the election. I'd welcome a much wider discussion about the social and environmental deficits," Wagstaff said.

"I understand that the Minister of Finance and the Prime Minister are very determined that they are true to their word, but when circumstances change, you can change your mind. That gives some permission to rethink things if the environmental and social changes mean taking a little bit of extra time to repay the debt" he said.

"We think the housing crisis is not so much a natural disaster as it is a man made one, and it needs to be addressed."

2. Charter schools battle ugly for Labour

Jacinda Ardern hopes a compromise will resolve a potentially nasty clash with Labour's Maori MPs and iwi leaders over the future of charter schools. Newsroom's Thomas Coughlan reports the two sides remain far apart.

Ardern promised last week at Waitangi to listen to Maori, but her Government's first action after five days of talks with iwi leaders was to abolish schools that iwi say are helping to resolve the state's failure to educate Maori youth.

Iwi leaders and her Government's Maori MPs want to keep the schools open, but a battle is brewing that could damage Labour's relationship with Maori just at a time when it seemed to be improving.

If the Government cannot mesh the schools into the state system in a way that satisfies iwi leaders, Ardern faces an internal revolt from Deputy Leader Kelvin Davis (who threatened before the election to resign if Labour forced the schools to close), along with fellow school supporters Willie Jackson (Maori Caucus co-chair) and Tamaki Makaurau MP Peeni Henare.

Ardern also risks worsening tensions between Labour and iwi that go all the way back to the Foreshore and Seabed clash that led to the creation of the Maori Party.

Two days after Ardern's well-received speech about listening to Maori concerns, Education Minister Chris Hipkins fired the starting-gun on Labour's long-standing policy to abolish charter schools -- a policy called for by teacher unions.

Hipkins introduced the Education Amendment Bill that would see charter schools and National Standards made a thing of the past. Both were key planks of the previous Government's education policy.

He said that he would like the Government's contracts with the schools "terminated by mutual agreement" although he reserves the right to issue notices of "termination for convenience" that exist under the charter schools' existing contracts by the middle of May 2018, which would take effect at the end of the school year.

"Operators wanting to be involved in education can apply to me to establish another form of school, such as a designated character school. As part of this process, applications would need to meet the relevant requirements," he said.

The Government suggested that schools that wish to remain open may choose to continue as designated character schools, but issued red lines over key distinctions with state schools, meaning the soon-to-be ex-charter schools would no longer receive bulk funding, teach non-standard curricula, and enter into differential teachers' contracts.

The schools themselves are sceptical. They say that even as special character schools they won't retain enough scope to deliver their brand of special, tailored education to their students.

At Monday's post-cabinet press conference, Hipkins said that the schools had been invited to meet with the Ministry of Education next week to discuss transitional arrangements, but he would not meet them personally to ensure due legal process.

The stakes are high for the Government. Labour's Deputy Leader, Kelvin Davis, previously said he would resign if Te Kura Hourua O Whangarei and Te Kapehu Whetu, two charter schools in his Te Tai Tokerau electorate were closed down. Labour MP Willie Jackson, whose Manukau Urban Maori Authority runs charter school Te Kura Maori o Waatea, has also said that Labour would never close the school.

"They support Maori trying to do their own thing. But what they're saying is look, we can't go with a policy that perhaps could lead to widespread privatisation. We can't have big corporations coming in and running schools. That's what Andrew and Chris are saying," he said.

Davis and Jackson along with Peeni Henare have not commented on the changes but will hold a press conference on Tuesday morning to discuss their charter schools.

Red lines miles apart

The problem for the schools and the Government is their respective red lines are miles away from each other, with Labour suggesting the schools must completely adopt the state agenda or be faced with closure.

Alywn Poole, who sits on the board of the Villa Education Trust which runs two charter schools in South and West Auckland, told Newsroom that he is willing to negotiate with the Government, but he would be firm on three points: the school's ownership and governance structure, the block funding system and the school's teachers remaining outside the standard national award.

He said this could all be achieved "at the stroke of a pen" by amending the designated character school legislation.

The Government, however, has its own red lines, which include forcing the schools to dispense with block funding and accepting national wage awards for teachers.

Block funding means that each charter school receives its budget each quarter as a lump sum without the Government stipulating what it should be spent on. Charter schools have the freedom to divert funds from one area to another, depending on need.

A charter school's funding is determined by the Ministry of Education, which calculates what an equivalent state school would receive, plus a supplementary payment to cover the lease and upkeep of the school's buildings and other infrastructure, which the Government does not own, unlike in a traditional state school.

Poole argues that bulk funding allows the school to divert funding away from administration and capital costs and into teaching, something that will be impossible under the designated character schools model.

"If it goes to the current designated character model and they say here's $300,000 for property, well we couldn't spend that because we've decided to minimise our property spend to put more money into other assets. That means we'd put 30 kids in a class instead of 15, which is exactly what's not working for decile one kids," Poole said.

"It gives us the spending choices to provide uniforms, stationary, IT and not ask for donations," he said.

Jack Boyle, President of the PPTA union, disagrees and told Newsroom that the bulk funding model was flawed.

"It allows huge leeway for school managers to take large salaries, management fees and so forth, and that it means that school leaders have to trade off teachers against other school expenses," he said

The Government looks unlikely to budge on this point.

"I'd be surprised that bulk funding is demonstrating some specific educational outcomes for kids," Ardern said on Monday. "It would be surprising that that's the only thing that's making a difference from their perspective".

Boyle agrees that it is difficult to say why (or even whether) charter schools are successful.

"The evaluation that the last Government did show [was] that they were innovative in regards to their governance structures, and that the students and families that they spoke to were generally happy there, and that’s it. It was not a systematic, quantitative analysis of the educational impact, which would have compared how the same students would have achieved in public schools," he said.

Awards season

Another aspect of charter schools with a shaky future is their ability to negotiate non-standard contracts with teachers and pay them at a different rate to teachers in the state sector.

Poole says that the schools overseen by his trust pay teachers five percent on average above what they would receive in the state sector, attracting the best staff.

Paul Gaulter, National Secretary of NZEI union, disagrees - saying that he's seen no evidence that differentiated contracts have allowed charter schools to negotiate more competitive contracts.

"The thing that most worries New Zealand about charter schools is that for the first time it allows unqualified and unregistered teachers into New Zealand's compulsory education sector," he said.

Poole, however, disputes this saying that his staff are all registered and qualified and that all schools in New Zealand employ unregistered teachers to fill gaps in demand under the recently-expanded limited authority to teach provisions.

"Contractually, we would set up a minimum amount of registered and qualified teachers and the only reason that anything was in there differently for partnership and charter schools, some were more industry focused," he said.
Poole was hopeful the Government would allow his school to keep its curriculum and governance structure, which was its point of difference.

"The reason to retain our ownership and governance structure allows us to maintain our difference and our model is different. We have a split day and a project based curriculum which means our kids have core subjects but they also have other subjects they do and we only have 15 kids in a class," he said

Hamish Crooks, Trustee of the Pacific Peoples Advancement Trust, which operates the Pacific Advance Secondary School, a Pasifika-focused charter school in Auckland agrees that the key to charter schools' success is their flexibility to meet a wide range of student needs.

"There's a lot of flexibility around how to meet the needs of the children. We have all registered teachers, we follow the school curriculum, but what it does give us is the ability to look at children's specific needs, kids who aren't engaging in high schools", he said.

"State education has failed Maori for 170 years"

The Government will be concerned that it doesn't blow its post-Waitangi honeymoon with Maori as it integrates several Maori-medium schools into the state system. However, there is already severe scepticism and trepidation voiced by Maori education groups about what a return to the state system might looks like.

Toby Curtis, a member of the Iwi Chairs Forum and cultural adviser on the Partnership Schools/Kura Hourua Authorisation Board, which gave authorisation for charter schools to establish, is doubtful.

"We have a wonderful state system that seems to be wonderful at failing Maori children," Curtis told Newsroom.

"Seventy percent of the Māori children in those charter schools would have ended up on the scrapheap and would have ended up being problems for our society and ended up an incarceration statistic."

He said charter schools energised the community, getting them involved and engaging parents to participate in their child's education.
He told Newsroom about a powhiri at the Te Aratika Academy in Hastings.

"These were young boys who could have gone to prison as they got older… but I saw them and they were like a young tribe when we went to that school. They were operating at an adult level when doing their powhiri. I had to respond to them as if I was talking to kaumatua," he said.

Curtis said the he would be supportive of integration with the state system if it recognised that the schools needed a different "diet" to that of failed systems of the past, but he was sceptical.

"They won't budge, because after 170 years they're still failing Maori kids and the country is doing nothing about it."

Raewyn Tipene is the chief executive of the He Puna Marama Trust, which operates Te Kura Hourua o Whangarei Terenga Paraoa and Te Kapehu Whetu in Kelvin Davis' electorate of Te Tai Tokerau. She agreed on the state system's failure.

"The previous mainstream model has largely failed Maori kids. We've got no desire to return to that model. We have two kura that have really successful outcomes for the kids who do attend our kura," she said.

She said that the Trust was keen to look at options with the Ministry, which will meet the trust on the February 23.

Curtis himself believed that the only hope now was to change the state system to allow greater agency for kaupapa Maori education.

"We've got to change the state system and the only way that can be changed is that the Government and Pakeha society has to listen," Curtis said.

The Prime Minister, who made much of listening to the concerns of Maori during her five day stay at Waitangi, said Maori schooling would find a place within the state system.

"We need to make sure that we work more closely with those that have a proposal for a school that might be a special character school to ease the path to meet the needs of their local community," she said.

"All we are asking is that when they do that, they operate under the same rules that state sector schools do."

3. Cracking down on rogue boards over CEO pay

Newsroom's Sam Sachdeva reports the fallout from last year's stoush between Bill English and the NZ Super Fund board over Adrian Orr's pay rise has finally turned into a legislative change.

Sam can claim some of the credit, given he broke the original story about English's unhappiness with the board, which defied the State Services Commission and the minister. The changes are aimed mostly at ACC and the NZ Super Fund.

A proposal to place tighter controls on the pay of crown entity chief executives will provide “more teeth” to keep any increases in line with the wider public sector, Prime Minister Jacinda Ardern says.

The Government has introduced legislation to give the State Services Commissioner greater say over any pay increases for chief executives at crown entities.

At present, some Crown entities must only consult with or “have regard to” the Commissioner’s advice before approving a pay rise - a situation which has led to controversy in the past, such as a 36 percent increase for Super Fund boss Adrian Orr in 2015/16 against the recommendations of both the SSC and then-Finance Minister Bill English.

The new legislation will require statutory Crown entities to receive the written consent of the Commissioner for the terms and conditions of a chief executive’s employment.

It will also introduce a fixed term of no more than five years for chief executives, while also allowing the Commissioner to apply a code of conduct to an entity’s board and board members. See Sam's full story first published here on Newsroom Pro.

4. Briefly in our political economy...

Summer spending - Statistics New Zealand reported consumers spent heavily in January, increasing core retail sales 1.4 percent, more than double the growth in December and taking annualised growth to the strongest level in seven years.

Still benign - ANZ reported its inflation gauge for January rose 0.8 percent from December and was up 3.1 percent from a year ago, which was the highest monthly rise in three years. "Indirect taxes on tobacco and cigarettes accounted for three quarters of the rise. Removing these from the Gauge leaves a still-benign inflationary impulse of just a 0.2% monthly increase," ANZ Chief Economist Sharon Zollner said.

Not quite right - Broadcasting, Communications, Digital Media and Government Digital Services Minister Clare Curran announced yesterday she had decided to widen the search for a Chief Technology Officer after an initial look at 60 candidates failed to find the right person. No timeframe was given for the wider search or an appointment.

Cam is back - Former ANZ Chief Economist Cameron Bagrie announced this morning he had set up his own consultancy, Bagrie Economics, to provide customised research.

5. Briefly in the global political economy...

Hey big spender - US President Donald Trump sent a plan to Congress to spend $4.4 trillion over the next year, along with a $1.4 trillion infrastructure spending plan.

Too toxic - Unilever, the world's second largest marketer, has threatened to pull its advertising spending from Facebook and Google if they create division in society and fail to protect children from toxic content.

6. Coming up...

Labour Māori MPs Kelvin Davis, Willie Jackson and Peeni Henare are holding a media stand-up to talk about the charter school model at midday.

Fletcher Building is expected to announce on Wednesday morning big new writedowns from its building and interiors division and some sort of arrangement with its banks over a breach of banking covenants.

RBNZ inflation expectations data is due on Wednesday at 3pm. Most expect it them to remain around 2.0 percent.

The Real Estate Institute is expected to publish house price and sales data for January on Thursday.

Closely watched US CPI inflation figures are due early on Thursday New Zealand time.

The BNZ-Business New Zealand PMI measure is due on Friday morning.

7. One fun thing...

The Newsroom team sometimes goes for a beer after work at the Backbenchers pub immediately across from Parliament. It has a range of papier mache puppets of politicians on the walls, but I noticed last week that most were of ex-politicians after the clean out we saw last year.

Jacinda Ardern is due to attend the unveiling of her puppet this week. She said yesterday she hadn't seen it, but was curious to see what they had done with her prominent smile.

8. This morning's political links

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