1. The things that mattered this week

Fonterra's Chairman John Wilson stepped down for health reasons, potentially re-opening a debate about Fonterra's future structure. Various community leaders and economists called on the Government to relax its debt limits to invest in infrastructure, but Winston Peters and Grant Robertson say they aren't planning any relaxation until after the 2020 election.

Fonterra's Wilson goes

Fonterra announced this morning that Chairman John Wilson had stood down from his role with immediate effect to recover from significant surgery that would require on-going treatment.

Wilson will also retire from the board at Fonterra's annual meeting in November and be replaced by dairy farm owner John Monaghan, who has been on the board since 2008. Monaghan would now lead the process of appointing a new Chief Executive to replace outgoing current CEO Theo Spierings , Fonterra said.

“As many of you will know from experience, governance roles are incredibly rewarding, but equally demanding on the individual and their families," Wilson was quoted as saying.

“Continuing as Chairman when I cannot put my full energy and attention into the role is not appropriate," he said, declining any further statements.

This is potentially big news for Fonterra's direction. Wilson had been under pressure to go after Spierings resigned in the wake of big losses on Fonterra's Beingmate investment. Wilson and Spierings were seen as a close double act and their exits could have created space for a debate about whether to break up Fonterra into a wholesale processing arm and a consumer brands and added value operation.

The debate has become increasingly political because the Labour-New Zealand First coalition Government (supported by the Greens) is currently reviewing the Dairy Industry Restructuring Act. This legislation created Fonterra and forces Fonterra to collect milk from anyone who offers to sell it to them, and is forced to supply milk to competitors. But its market share has dropped below the threshold in the South Island that would let Fonterra off the hook.

Is Monaghan any different?

There has been talk that a new chairman with a new strategy, potentially involving a breakup and a focus on milk processing rather than brand creation, could be elected at the General Meeting.

However, the appointment of Monaghan, a director for 10 years and presumably committed to the current dual processing and brand-building strategy, may short circuit that debate and leave the status quo in place. It will largely depend on his views about the need for change, which are not widely known beyond the Fonterra community, and on who the new CEO is.

Rod Oram has been writing in detail about Fonterra's performance, strategy and leadership for the last 18 months for Newsroom. Here's his latest from early June on the debate about a potential breakup and whether Wilson should go. Rod will write his analysis of the latest news for Newsroom later today.

A debate is brewing

The debate about whether the Government should relax its self-imposed 20 percent net debt target heated up this week.

A range of social and business leaders from across the spectrum called on the Government to use its balance sheet to respond to the population shock of the last five years and invest in physical and social infrastructure. They now include Auckland Action Against Poverty, the CTU, the Salvation Army, BERL, ANZ, Shamubeel Eaqub, Cameron Bagrie and Westpac.

Acting Prime Minister Winston Peters also gave the clearest indication yet that the coalition Government would argue before the 2020 election that it should relax its Budget Responsibility Rules, but not before then.

Finance Minister Grant Robertson and Prime Minister Jacinda Ardern have held firm on not relaxing before then, saying it may be something raised before the next election in 2020. The Greens have said they want it relaxed, but New Zealand First has been silent until now. I asked Robertson again on Tuesday about the issue and he was again insistent the population shock should not be compared to the GFC or the Christchurch earthquake. He repeated the view that the balance sheet should be retained for the 'rainy day'.

The rainy day is now

The problem though for many in the business and local government and social welfare communities is that the 'rainy day' is now upon us because the 10 percent jump in our population in the last five years -- most of which was north of Hamilton -- was not planned or built for. Hospitals, schools, houses, roads, railways. prisons and hotels are straining at the seams, with all sorts of social and economic problems bubbling up through the cracks.

Businesses are crying out for workers who can afford to live and commute to work, and for public infrastructure to continue their growth and to generate new productivity. Meanwhile social workers, doctors and nurses are screaming out for help and the facilities to deal with growing waiting lists and the various problems arising from over-crowding, high housing costs and child poverty.

Peters was asked about the debt limit at Monday's post cabinet news conference, and he too indicated it was an issue for the next term.

The risk for the Government is that the window of opportunity for low cost borrowing may have closed by 2020 or 2021. New Zealand can issue 10 year bonds at 2.77 percent currently, which is well below the current 10 year US Treasury cost of 2.98 percent.

The urgency of the infrastructure crisis was made clear in reports this week that Auckland's City Rail Link is now projected to reach its 36,000 passenger per hour capacity by 2035, just 10 years after it opens and and 10 earlier than originally expected.

Bank and council balance sheets tapped out

The problems are exacerbated by a shortage of bank funding for housing and commercial developments because regulators on both sides of the Tasman are forcing the big four banks to tighten up their lending quality and reduce leverage. The first victims of the lending crackdown were developers.

The other problem is that local Government balance sheets are at their limits to retain their existing credit ratings and not increase their interest costs. The main problem is Auckland, which effectively sets the benchmark for all local government borrowing costs, is at its limits to keep its AA credit rating. It cannot use its balance sheet to borrow more without increasing interest costs for its own and other ratepayers, which local government voters would not accept.

So bank and local government balance sheets cannot be used. That leaves the central Government with a net debt to GDP ratio of 20.1 percent.

Newsroom's Thomas Coughlan spoke to the rating agencies this week who said net debt could increase from 20 percent to 30 percent without it affecting New Zealand's credit rating. That implies the Government could easily borrow an extra $35 billion over the next three years without reducing its rating.

A window of opportunity

The Government can currently borrow cheaply, but those low borrowing costs may not last beyond the 2020 election because central banks are ending the money printing programmes that have driven long-term interest rates lower globally since 2009. The European Central Bank and Bank of Japan are still creating money out of thin air to buy their own Governments' bonds. That money is then recycled into other country's bond markets, including New Zealand.

The Government could essentially choose to borrow that freshly printed money now at very cheap rates to build the infrastructure needed to cope with the population shock of the last five years, but the Government is sticking to its pre-election pledge to reach National's debt limit of 20 percent of GDP, albeit taking a couple of years longer than National.

'Air cover' required

For now, National is opposing any such move and would leap on any change as a broken promise. The Government would needs 'air cover' from business leaders making similar calls for any change to happen at the moment. Then Prime Minister John Key secured that 'air cover' from Auckland business leaders in January 2016 to over-rule opposition from Steven Joyce and Gerry Brownlee to the go-ahead for the City Rail Link.

Robertson and Ardern need even bigger air cover now from the same Auckland business community, in my view.