Briefly in the news in Aotearoa’s political economy around housing, poverty and climate on Wednesday, November 26:
* RMA Reform, Housing and Infrastructure Minister Chris Bishop announced plans last night to abolish regional councils to “simplify how we plan our cities and regions and make it far easier to build the future New Zealanders deserve.”
* But in my view, it’s another attempt to try to squeeze out cost savings to pay for new and existing infrastructure for ongoing strong population growth, when the real problem is a self-imposed limit on using the Crown’s balance sheet to do it, while also pursuing strong population growth to juice GDP and house prices.
* Bishop described the reforms as the biggest since 1989, but they’re actually another attempt to make the 1989 reforms work. Those reforms were based around restricting the size of Government and it’s gross debt to 30% of GDP.
* That self-imposed and now-unnecessary restriction may have allowed proper maintenance of infrastructure without population growth in the first decade after 1989, but it hasn’t worked for the last 20 years because population growth driven by migration has been closer to 1.5-2%.
* The United States may unwittingly be about to spark a debate within New Zealand about the unstated-but-very-real bipartisan strategy of using temporary-worker-led migration to pump up economic growth and house prices without having to take on much more public debt to pay for infrastructure.
* 1News’ Logan Church reported last night the Trump Administration has directed the US Embassy in Wellington to collect evidence of “migrant-related crimes and human rights abuses facilitated by people of a migration background,” warning New Zealand “not to accept the globalised migration narrative”.
* In my view, this might spark a much-needed debate on how to match up our true infrastructure and investment ambitions with our population ‘strategy’. I’d prefer a high population growth strategy, but that would also require a larger Government balance sheet and a land tax.
* Elsewhere in the news, the UK, the EU and Pacific nations backed a roadmap away from fossil fuels at COP30, but New Zealand didn’t sign up, Marc Daalder reports for Newsroom-Pro-$ this morning
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More magical thinking to extend the 1989 reforms
1989 was the fulcrum upon which Aotearoa turned, and not necessarily for the better. Even now, we measure any change against that starting point.
It is effectively year zero in our political economy because it’s the year the Public Finance Act 1989 and the Reserve Bank of New Zealand Act 1989 passed into legislation. It was the year more than 850 local authorities were amalgamated into 86 city, district and regional councils under then-Labour Minister of Local Government Michael Bassett, thanks to the Local Government Amendment Act 1989. And it was the year the Resource Management bill was introduced into Parliament by then-Labour Prime Minister and Minister for the Environment Geoffrey Palmer.
These four acts are the foundation of our governmental, economic and budgetary frameworks that have underpinned everything ever since. Along with the Employment Contracts Act 1991, they form the settlement of the 1984-1991 reforms that ended the post-war era of high taxes, high investment, big Government and tight Government control of prices, wages, imports, exports and foreign exchange.
I would describe these four legislative milestones of 1989 as the four horsemen of our political and economic apocalypse. But it wasn’t obvious at the time they would ride together in a way that would leave us with:
* a $100 billion infrastructure deficit and no clear way to fund the extra $100 billion needed to cope with just 0.5% population growth in the next 30 years;
* the most expensive housing to rent or buy in the developed world (still);
* worsening public health;
* an exodus of 200 New Zealanders a day to live and work elsewhere, including in Australia; where,
* real wages rose 30% above New Zealand’s in the wake of the 1989 reforms.
These reforms to deregulate trade, foreign exchange, capital movements, wages and prices at the same time as slashing income taxes and consolidating local government may well have worked, if a key assumption made at the time had turned out to be true.
Four horseman assumed 0.5% population growth
The 1989 reforms were predicated on the idea that New Zealand had stopped growing its population quickly through migration and a falling birth rate meant it had plenty of infrastructure to accommodate growth. At most, politicians and planners expected population growth of 0.5% per annum over the next 40 years and that our population would be 3.9 million by 2021.
Instead, the average growth rate since 1989 was 1.2% and our population is now 1.4 million more than the architects of 1989 expected. Population growth between 2002 and 2006 averaged 1.5%, thanks to fast migration of temporary workers who often ended up with permanent residency. Excluding the Covid travel restriction years, our population grew an average of 1.8% per annum in the 10 years to 2024, again, thanks to fast migration of temporary workers, many of whom got permanent residency if they were here during Covid.
This influx was generated, allowed and shaped by both National-led and Labour-led Governments, including the 2005-08 and 2017-20 terms, when the avowedly anti-migration party New Zealand First was in Government with Labour. Population growth averaged 1.6% in NZ First’s first term with Labour and 1.7% in its second term.
Instead, we accidentally on purpose grew the population 1.5% to 2.0%
This would have been sustainable if the Government had continued to tax, borrow and invest as it had during the 50 years to 1989, but that was not allowed under the combination of the RBNZ Act, the Public Finance Act, the Local Government Amendent Act and the Resource Management Act. Whether by design or coincidence, these four horseman of our apocalyspe worked perfectly to stop the proper maintenance and renewal of existing infrastructure, and the expansion of water, electricity, roading and public transport networks to cope with the extra 1.4 million people.
A gnarly and wicked combined effect
Here’s how it worked:
* the Reserve Bank Act 1989 gave the bank independence and a single inflation target of (eventually) around 2%, which it achieved by applying very high interest rates between 1989 and 2009, and then again from 2022 to 2025;
* those high interest rates made borrowing for infrastructure relatively more expensive than in the decades before 1989 for both the private sector and Government itself, and forced planners to assume very high interest rates in their cost-benefit calculations, which made most large and long-term projects uneconomic;
* the Public Finance Act 1989 specified the reduction of Government debt to ‘prudent’ levels by the Government running balanced budgets over the long run, which effectively precluded using borrowing to pay for infrastructure for population growth;
* Treasury, Labour and National interpreted that “prudent” word to mean the size of Government should always trend back towards or stay under 30% of GDP and gross Government debt should be in or below the 20-30% of GDP range;
* the Local Government Amendment Act 1989 reforms also specified councils couldn’t run operating deficits or build up debt much, which meant they tried to block or stop the funding of new water networks and other infrastructure to enable expansion, along with systematically investing less in capital than they booked in depreciation; and,
* the Resource Management Act gave councils the perfect tool to block development and avoid running deficits or building up debt, because it allowed them to block development on environmental grounds through three separate layers of governance.
A quest for the magical ‘solution’ to unlock the growth restraints
Ever since, and particularly since 2000, politicians, voters, ratepayers, developers, economists and Uncle Tom Cobbly have blamed councils and the RMA for the growth blockages. The ever-present assumption was that growth could be found without the need for more central Government borrowing and investment, if only:
* councils could be stopped ‘wasting money’ on unnecessary bureaucracies and ‘nice-to-haves’ such as convention centres, special event incentives and public transport;
* councils could amalgamate into an ever-smaller number of ever-larger councils to ‘reduce duplication’ and ‘achieve efficiencies;
* councils would encourage and allow the private sector to fund and/or own the buses/water networks/electricity networks/road networks et al through privatisation and/or Public Private Partnerships (PPPs); and,
* the RMA could be tweaked or rewritten to remove the ‘excuses’ for councils either outright rejecting new developments.
The RMA was amended dozens of times (2009, 2013, 2017) before being replaced in 2023, and then replaced again this year. The assumption was always that just a few more tweaks would remove the blockages.
The unchallenged assumptions were that:
* population growth of 0.5% was going to happen;
* or that population growth of 1.5% could happen; or,
* infrastructure maintenance and investment to match population growth was possible with a Government limited to 30% of GDP per year and debt of 20-30% of GDP.
So here we go again…
Chris Bishop’s announcements last night fit perfectly into this pattern of magical thinking to make 1.5% population growth fit into a Government limited to 30% of GDP per year and debt of 20-30% of GDP.
In my view, removing one layer of local Government won’t change the underlying drivers of the RBNZ Act, the Public Finance Act and the amended Resource Management and Local Government Acts.
Councils are still being forced by their balanced budget mandates, along with a soon-to-be introduced rates cap, to avoid investing in infrastructure for growth, while the economics and politics of privatisation and PPPs mean fast and large infrastructure funding from off the Government’s balance sheet is impossible.
How it could be done differently
There are a few solutions that might work, including:
* limiting population growth to 0.5% per annum by restricting issuance of temporary and permanent work and residency visas, including for students and tourists;
* replacing the Public Finance Act with one focused on ensuring investment to cater for 1.5% population growth on average;
* replacing the Reserve Bank Act to focus on encouraging investment in businesses and infrastructure to create jobs, real wage growth and gross national disposable income growth per capital; and,
* introducing the tax on land and/or wealth tax that was designed to complete the full suite of reforms in 1989 to match up with the RBNZ, PFA, RMA and LGA Acts.
Then-Labour Finance Minister David Caygill proposed a Capital Gains Tax in December 1989 to complete the suite of reforms that included nearly-flat income taxes, a Goods and Services Tax (GST) and the removal of tax incentives for pension savings.
Accidentally on purpose, the failure to introduce the CGT, in combination with:
* the PFA/LGA/RMA restrictions on infrastructure investment for new housing;
* an unstated-but-real-and-bipartisan policy of using population growth to juice total GDP;
* an unforseen loosening of lending restrictions for mortgages by banks freed up by the Banking (Prudential Supervision) Act 1989; and,
* a once-in-100-years fall in mortgage rates from an average of 15.5% in 1989 to as low as 3% in early 2021; led to:
* house price to income ratios rising from around two to around 10; and,
* rental affordability worsening to the worst in the OECD.
A land levy would pay for NZ-as-climate-haven to grow to 19.1m
In my view, a 0.5% per annum levy on the value of all residential-zoned land, with multiples for homes and land not occupied at all, or not by the owner (ie 1.0% for rentals & holiday homes and 1.5% for un-built-on land-banked land, would fix that 1989-sized hole in our economic framework. It would also fund the necessary infrastructure and operational spending at local and central Government level to cope with 1.5% to 2.0% population growth for the next 50-80 years, by allowing us to build enough water networks for the warm, healthy homes needed to make housing affordable.
By the way, if we continue with the 1.5%-2.0% population growth rate we’ve had over most of the last 20 years, New Zealand’s population would be 19.1 million by 2100. By then, with no change in global emissions policies, the planet could warm by as much as 4.4 degrees above pre-industrial levels.
In my view, we are likely to be have to become, or choose to become a climate haven because Aotearoa-New Zealand is the only country in the world that is far enough away from another country to not be reachable in a rubber dinghy or small boat.
The Daily Chart Pack:
The RBNZ sees growth of 0.6% & 0.4% in Q3 & Q4…
…which is seen slow enough to encourage a 25 bps OCR cut today
My Pick n’ Mix of links elsewhere
Paying subscribers can find the full Picks ‘n Mixes online only here:
* Marc Daalder for Newsroom Pro-$: Govt backtracks on commitment to fossil fuel phase-out ‘Australia, the UK, the EU and Pacific nations backed a roadmap away from fossil fuels at COP30, but NZ didn’t sign up.’
* Column by Joel MacManus for The Spinoff: New Zealand has a boomer problem. ‘We have too many boomers and not enough young workers to fund their retirements. National thinks its new KiwiSaver policy could be the answer. ‘
* Deep-dive by Isaac Davison for Stuff: Duty lawyer drought in wine country: Why this town is relying on help from afar. ‘Lawyers are driving more than four hours and even flying between islands to fill vacancies at the short-staffed Blenheim District Court.’
* Deep-dive by Chelsea Daniels & Matt Nippert for NZ Herald: How a Pacific flag ended up at the centre of a global oil-smuggling row
* Deep-dive via WSJ-$ (gift link): Robots and AI Are Already Remaking the Chinese Economy
Cartoon: Corolla on its own
Timeline-cleansing nature pic: Nosey parker.
Ka kite ano
Bernard
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