Newsroom Pro's 8 Things: PM dampens budget hopes; The case for borrowing and building; The Greens' tough task for 2020; A new industrial relations approach

The news that matters this morning

The Government is on the pre-Budget campaign trail this morning, talking down expectations of quickly dealing with National's previous underfunding of health and education budgets.

Prime Minister Jacinda Ardern began the campaign at her post-cabinet news conference yesterday. (See our Newsroom Pro article from yesterday)

"I had to dampen down my (expectations) when I saw the state that the last government left core services like health and education," she said.

"I always said from the beginning we thought it would be bad. We didn’t know it would be this bad, and what the public is seeing is just a snapshot."

Expect to see plenty more of these snapshots with ministers revealing the effects of under-funding. The reports of raw sewage running down the walls of leaky buildings at Middlemore hospital will be the first of many.

Ardern followed up this morning RNZ, telling Guyon Espiner that under-investment by the previous National Government was widespread. She also told reporters just before the Labour caucus there would be more detail to come. Education Minister Chris Hipkins said he had discovered $200 million worth of school buildings were not fit for purpose.

National Finance Spokeswoman Amy Adams accused the Government of looking for scapegoats to problems of its own making. Opposition Leader Simon Bridges told reporters in Parliament this morning that is was "pure spin". He said Labour had over-promised to its public sector union backers and would now go hunting for school doors that didn't shut properly to justify its case.

TVNZ's Andrea Vance reported this morning the Chinese businessman bidding for the taxpayer-owned Jericho Station high country sheep station has pulled out of the deal. Wenchen Du and his company Qianlong applied to the Overseas Investment Office (OIO) to buy the Fiordland sheep and beef farm from Landcorp last year for $8.7 million. Southland farmer Ed Pinckney had also bid for the fare, offering $200,000 less than Qianlong.

Overseas, Mark Zuckerberg told Congress overnight Facebook should have done more to stop its members' data from being misused. (Reuters).

Donald Trump's Russia investigation woes deepened overnight as the New York Times reported the FBI had raided the offices of Trump's lawyer, Michael Cohen.

Meanwhile, Trump vowed to make a decision in the next day or two over whether to strike Syria over a suspected chemical weapons attack. (New York Times).

China has approached Vanuatu about building a permanent military base there in a move that would substantially increase the ability of China to project its power into the South Pacific, the Sydney Morning Herald reported this morning. Ardern told reporters she couldn't comment on the specific case, but said the Government kept "a watchful eye on activity in the Pacific", and was opposed to the militarisation of the Pacific generally.

2. The case to borrow and invest

In this comment piece first published on Newsroom Pro this morning I argue Labour should respond to Auckland's man-made infrastructure disaster the same way National responded to Christchurch's natural disaster: by using its strong balance sheet to borrow and build.

John Maynard Keynes, the ultimate Keynesian economist, is reputed to have said: "If the facts change I change my mind, what do you do sir?"

It's clear now the facts have changed for the Labour-led Government, but it has yet to change its mind.

Ardern and Finance Minister Grant Robertson showed how the facts had changed for the Government yesterday in their first attempts to prepare the ground for the Budget on May 17.

"I always said from the beginning we thought it would be bad. We didn’t know it would be this bad, and what the public is seeing is just a snapshot," she said.

Ardern previewed the Government's plan to grab back the news agenda over the next month with various further insights into what it found smoking under the budgetary hood when they arrived. The public has already seen a few wisps of smoke.

News in recent weeks of raw sewage running down the walls of leaky buildings at Middlemore hospital and exhausted midwives quitting in droves across Auckland is just one of the signs. There are many others in Auckland and elsewhere to indicate our largest city has just suffered a population shock that is now generating an infrastructure crisis. It has been worsened by five years of squeezed health, education and public transport budgets that saw district health boards and schools spend money on operations rather than infrastructure.

The National Government decided after the initial splurge of spending in the wake of the Canterbury earthquakes that it needed to get back into surplus quickly and stop borrowing so it implemented a series of 'zero' budgets in 2011 and 2012. It then kept a lid on spending growth throughout the period of very strong population growth from 2013 onwards. Most of that population growth from migration was a surprise, but some of it was a deliberate decision. Most of the population growth hit the upper half of the North Island and an already-stretched Auckland in particular.

New Zealand's population grew by over 430,000 to 4.9 million in the last five years, mostly from net migration, but also from relatively high birth rates in Auckland and the upper North Island. Auckland's population grew 215,000 over a time when the Government was refusing to help fund the City Rail Link and at a time Health Minister Jonathan Coleman was forcing DHBs to run operational surpluses. They have since revealed they skimped on capital spending to do that.

Auckland's population shock on top of decades of infrastructure under-spending and a budgetary squeeze from Wellington has created a man-made crisis. There is now a shortage of at least 50,000 houses, four light rail lines, dozens of school rooms, hundreds of hospital beds, several mental health wards and at least one major prison. A significant increase in demand for mental health services from the existing population (a phenomenon seen globally) added to the pressure on public services over the last five years. At least $50 billion of infrastructure spending is needed in the next decade, including at least $14 billion in health.
Ardern was asked yesterday if the health system in Auckland was crisis, in the same way the housing market there was declared by Labour to be in crisis. She didn't go quite that far, but made the comment that: "It feels systemic."

'What do you do madam?'

So what should the Government do when it's clear the facts have changed underneath it? As Keynes might ask, what do you do madam?

Essentially, Ardern and Robertson said yesterday would just make do within the current Budget Responsibility Rules they signed up to with the Greens before the election. These rules force the Government to reduce net debt as a percentage of GDP from around 23 percent to under 20 percent of GDP within the next five years by running budget surpluses.

To be fair to the Government, that is two years slower than the debt track the previous Government was on and includes the re-purposing of billions of dollars worth of income tax cuts to bolster the health and education budgets. But it's also clear these rules are stopping the Government from responding properly to the crisis.

Robertson admitted as much when defending the rules.

"The package will be an important step in rebuilding those public services, but one budget cannot make up for nine years of neglect," he said.

He rejected suggestions the Government should further delay its debt repayment track.

"They are rules we clearly set out, we campaigned on them. I believe we can do the things we need to do to begin rebuilding the critical public services New Zealanders need with that framework," he said.

The Government has therefore chosen not to respond by using its balance sheet to borrow to build the hospitals, schools, roads and rail lines needed to cope with 2-3 percent population growth, which is showing no signs of slowing.

Put simply, the 2018 Budget won't property address the systematic under-spending on infrastructure that has led to this man-made crisis in Auckland that is spreading to the likes of Hamilton, Tauranga and Wellington.

The only major city that is not facing this crisis is, ironically, Christchurch. Its house prices have been broadly flat in the last five years because the Government in Wellington pumped tens of billions of dollars into replacing the pipes and roads and other public infrastructure to support the population.

No one batted an eyelid when the National Government responded to a natural disaster that wrecked a city's infrastructure by borrowing tens of billions of dollars to build those pipes and roads and schools and houses and hospitals in Christchurch. It rightly used the Crown's balance sheet.

So why is the Government refusing to use its balance sheet again to respond to this population shock-driven crisis?

The now National Opposition argues that New Zealand needs to have a strong government balance sheet so it could cope with a 'rainy day' of another earthquake or Global Financial Crisis, and because household balance sheets are over-loaded with mortgage debt. Effectively, the Government has had to compensate for the fact households were enabled and forced to load up with debt to buy expensive housing.

A man-made crisis

The trouble is in deciding what that rainy day looks like. Is it a magnitude 7 earthquake in Wellington? Or is it a doubling of congestion time on Auckland's motorways? Is it collapse in key worker recruitment (police, nurses, midwives, teachers) in Auckland because of unaffordable housing and congestion? Is it employers unable to find people to grow their businesses because there are no houses, schools and hospitals to support them?

At what point does a man-made crisis have the same effect as a natural disaster?

Prime Minister Ardern answered one half of the question yesterday when she described finding a systemic crisis that spilling out across all aspects of public services such as health and education.
She didn't provide the second half of the answer, which is to use New Zealand's unusually strong government balance sheet to fix the problem.

The Opposition would argue in response that the world's bond vigilantes, who hold more than half of New Zealand Government bonds, would punish us with a spike in interest rates that would push households and the economy over the edge.

But that narrative is worth challenging.

So far this year, the New Zealand Government has borrowed $1.15 billion through the issue of bonds ranging from seven years to 20 years at a weighted average 2.74 percent. Global and local investors bid over $3 billion in these bond issues. It is now actually cheaper for the New Zealand Government to borrow than the US Government.

Ageing investors globally are crying out for bonds issued by healthy governments with healthy economies. They would have no problem whatsoever in gobbling up tens of billions worth of New Zealand Government bonds if it was clear the money was going to be invested in the concrete and steel to make a young and fast-growing economy grow even faster.

Households and bank balance sheets are also in much healthier shape than many think. The interest costs of mortgages represent just eight percent of disposable income now, which is well down on the 14 percent seen in 2008. New Zealand's banks are much better capitalised and loan to value ratios have also been pushed sharply lower by the Reserve Bank's interventions over the last five years.

Moody's just gave New Zealand's AAA credit rating a giant tick and New Zealand's 35 percent gross debt to GDP ratio pales in comparison with the OECD average of over 80 percent. We have plenty of headroom to deal with a man-made crisis. There is nothing special about the 20 percent threshold the Government has focused on. It is obscenely low by OECD standards.

Politicians are often fond of comparing the Government's finances to a household's finances. The previous Government did just that when arguing for its 'zero' budgets in 2011 and 2012 and for its plan announced last year to reduce net debt to 10 to15 percent of GDP. It said the Government had to balance its books, just like any household, and save for a rainy day.

So let's use that analogy.

Just imagine the Government is a young family with two annual incomes totaling $260,000 and a debt to income ratio of 23 percent (ie household debt of 60,000). The family desperately needs a bigger car and a bigger house for the extra three kids that have just arrived. They need the car and house to ensure the kids grow up healthy and safe and are properly educated.

So they go to their friendly banker for a loan to build a new house and buy a second-hand people mover. The bank would not bat an eyelid at lending them three or four times their income to build that family home and buy that car. That's a debt to income ratio of over 400 percent. And the Government is worried about 20 percent? New Zealand could deal with this infrastructure crisis by increasing its net debt to 40 percent.

New Zealand is in exactly the same position as the wealthy family. It is a young and fast growing country with an opportunity to build the houses and schools and hospitals and public transport to grow up even healthier and more productive.

So why is it holding itself back?

The Government currently does not have much air cover to soften its Budget rules. The CTU has called for them to be dropped and both Marama Davidson and Julie Anne Genter have said the Green Party should not sign up to them again.

Back in 2014 and 2015 when Steven Joyce was resisting funding the Government's share of the City Rail Link, Auckland businesses became increasingly agitated at the Government's approach. They eventually lobbied for the Government to stump up the $1.5 billion needed to green light the project. Those businesses could see they would struggle to find workers for their offices and factories if Auckland's congestion crisis was not solved. They also saw opportunities to build commercial offices and apartment hubs around the stations.

All over Auckland and in many other parts of the country, businesses are crying out for staff who can afford to live and travel to their workplaces. They want those rail lines and hospitals and schools built so they can make their businesses grow faster and increase wages.

That affordable housing, transport, health and education is a crucial component in making an economy productive and healthy. New Zealand's business community should step up and demand what any banker in that situation would suggest: borrow the money to invest in a more productive future.

3. Business confidence improves a bit

Newsroom's Thomas Coughlan reported this morning businesses continued to be pessimistic about the wider New Zealand economy, according to NZIER’s latest Quarterly Survey of Business Opinion. But businesses reported that their own activity was faring well, emphasising a perceptions gap that has opened up since the election of the Labour-New Zealand First Government.

A net nine percent of businesses expect economic conditions to deteriorate in the coming months according to NZIER’s latest Quarterly Survey of Business Opinion. This is slightly lower than the figure of 11 percent reported in the last quarter, but still a long way off the mainly positive sentiment that businesses had expressed since 2012.

Businesses continue to feel confidence in their own activity and outlook. A net 15 percent of firms reported a lift in demand in their own businesses in the March 2018 quarter and 16 percent expect increased demand over the next quarter. That is up from a net 10 percent who experienced positive trading conditions for themselves in the December quarter, but down slightly from the net 16 expecting better conditions in the next quarter.

This is slightly less pessimistic than the ANZ survey of business confidence which found 20 percent of businesses were pessimistic about the year ahead. Both surveys reported pessimism was easing slightly and was around the long-term average.

See Thomas' full report from this morning on Newsroom Pro here.

4. A new approach to industrial relations?

Newsroom's National Affairs editor Shane Cowlishaw reported yesterday the Government wants less “combat and conflict” in industrial relations and is funding an innovative approach being championed by some of New Zealand’s biggest companies.

Small businesses wanting to adopt a collaborative approach to workplace relations could have Government resources made available to do so.

Unions are hoping for a resurgence under the new Labour-led Beehive, who have signalled they will strengthen collective bargaining and introduce sector-wide pay agreements as part of a shake-up of employment law.

But Workplace Relations Minister Iain Lees-Galloway has indicated another tranche of work underway is a better signal of the future.Speaking at the Employment Law Matters Annual Forum in Wellington, Lees-Galloway said he wanted to see a new partnership approach adopted, one that brings employees into the decision-making process adopted.

Called High Performance High Engagement, it centres around an idea that people closest to the problem, including workers and unions, are best placed to gather together to brainstorm solutions. The process has been adopted by Air New Zealand and KiwiRail, with Lees-Galloway telling the conference he recently visited the latter to see it in action.

See Shane's full report published first on Newsroom Pro.

5. How to survive the one term curse

Newsroom's Thomas Coughlan talked to Jeanette Fitzsimons and Sue Bradford yesterday about the task ahead for new Green Co-Leader Marama Davidson.

They said she would have to have to compromise and rebuild the party ahead of the 2020 election to ensure it survived.

The key thing to know is that no minor party has polled above five percent after a term in Government. Without a safe electorate seat, the Greens will have to fight tooth and nail to become the first exception to this rule if they want to re-enter Parliament in 2020.

See Thomas' full analysis of the tough task ahead here on Newsroom Pro, where it was first published yesterday.

6. Briefly in the political economy...

No rollback - Opposition Leader Simon Bridges told Duncan Garner on Newshub's AM show a National Government would not reverse any fuel excise increases brought in by the current Labour-led Government.

Too red for Simon - Bridges also said a National coalition with the Greens was less likely with Marama Davidson as co-leader. "I want to work with the Green Party on genuine environment and conservation issues, but not on a picketing and anti-business agenda," Bridges told TVNZ. "They've made the choice for themselves, which definitely represents a leftist agenda rather than a very strong environment one."

Carted off? - Bridges confirmed one more National list MP was likely to exit soon, but would not say who. Former speaker David Carter is expected to go next. Chris Finlayson has denied an imminent departure.

Early exit - The Government's Canterbury Rebuild agency, Otakaro, announced late on Monday afternoon that CEO Albert Brantley had advised the board he would step down around June after just over two years in the job. The former CEO of Genesis said he planned to "to focus on other national and overseas activities." Greater Christchurch Regeneration Megan Woods said: "Losing someone of Mr Brantley’s calibre and experience is a loss and he leaves behind a great legacy in our city - one that he should be proud of."

Poached steel - Gretta Stephens, the general manager and chief executive of New Zealand Aluminum Smelters (which owns the Bluff smelter), has resigned to become the New Zealand head of BlueScope Steel's New Zealand and Pacific operations. She will be based at BlueScope's Glenbrook plant south of Auckland.

Bagged - My Food Bag founders Cecilia and James Robinson have stepped down as joint CEOs in the wake of the sale of the firm to private equity firm Waterman Capital last year. A new CEO will be appointed soon. Waterman hope to IPO the firm, which was valued at $120 million last year.

7. One fun thing...

This twit-pic combo from Tres Dessert made me laugh out loud. I've watched a lot of Frasier over the years.

"NILES THIS IS THE WORST IDEA YOU'VE EVER HAD"

8. This morning's political links

These are available in the morning subscriber email