The Kākā by Bernard Hickey

TL;DR: Housing, Infrastructure and RMA Reform minister Minister Chris Bishop gave the new Government’s most important and ambitious speech of its first 100 days yesterday, pledging to flood cities with land for homes and help give councils new revenue to pay for the water and transport infrastructure needed to build on that land.

In the process, Bishop set the most substantial housing affordability goal by any Government in a decade, saying he wanted house-price-to-income multiples to more than halve to between 3-5 times income over the next ten to 20 years. The last National housing minister to set a house-price-to-income multiple goal of four times income was Nick Smith in April 2014, when Auckland’s ratio was seven. The internationally recognised median house price to median household income multiple was 6.6 nationally and 8.1 in Auckland at the end of January this year, down from peaks of 12.6 and 9.3 in September 2021.

In my view, Bishop’s speech to the Wellington Chamber of Commerce was the most encouraging by a housing minister since then-new-Housing Minister Megan Woods dumped Labour’s 100,000 Kiwibuild homes target in September 2019. It includes the potential for the most useful major infrastructure funding reform ever, but remains deeply flawed and unlikely to succeed without:

* changing savings and tax incentives for home owners for both housing and pension saving;

* ensuring the currently routine and massive land bankers’ re-zoning profits are mostly captured to subsidise infrastructure investment;

* confirmation of massive capital grant and revenue help for councils to change their incentives; and

* the reversal of the current opposition of supporters of National-ACT-NZ First to housing infrastructure investment and urban intensification.

Somehow, those land banks will have to actually be built on quickly with affordable apartments to improve overall house-buying and rental affordability. Also, councils and ratepayers will have to believe they benefit from investing in and maintaining the infrastructure, especially for much-more densified housing, public transport, walking and cycling infrastructure near city centres.

Bishop’s grand ambition and strategy has yet to have a fleshed-out with series of actions and agreements on key flash points such as sharing GST, value capture and congestion and water charges. Bishop has said he will present a more detailed set of actions to Cabinet by the end of March. That will be when the rubber in his speech will have to hit the road towards housing affordability.

(Paid subscribers can see more detail from Bishop and my analysis of the speech and his cabinet paper below the paywall fold and in the podcast above. I’ll open it up for public reading, listening and sharing if we get over 100 likes.)

Elsewhere in the news in Aotearoa-NZ’s political economy at 10 am:

* The Public Service Commission published its review of the Accredited Employer Work Visa Scheme (AEWV), finding Immigration NZ rushed through over 100,000 visas quickly to meet employer demand without enough checks, ignoring staff concerns about migrant exploitation, although some checks had since been tightened.

* Immigration Minister Erica Stanford said she had asked for advice about the AEWV scheme “and immigration settings more broadly that I will be considering over the coming weeks.” She later told reporters in Parliament (RNZ Liu Chen) she wanted to strengthen some of the scheme’s settings “and I will be taking it to Cabinet in the next couple of weeks.” She has previous said she wanted to lift the skill levels of those bought in through the scheme, whereby construction workers, cleaners and truck drivers were three of the most used categories. (See more below in Charts of the day)

* Finance Minister Nicola Willis told NZ Herald-$$$’s Jenee Tibshraeny the Government was looking at exempting some trusts from paying the new 39% tax rate. Deloitte partner Robyn Walker said this could involve applying the 39% to higher-income earning trusts, leaving lower-income trusts at the current 33%.

The most ambitious housing speech in a decade

‘Housing Minister’ has become something of a tombstone job in the last decade. It’s where high-fliers with ambition go to have their political careers ground into the dirt of Aotearoa-NZ’s most wicked policy problem, before they are cast aside and either sent back home or to the back-benches.

Chris Bishop is no doubt sure he can be the exception that proves the rule and he has come out all guns blazing in his first substantial speech on housing, which is the most encouraging thing I’ve seen to come out of the Government in its first 100 days.

He gave the most vivid description of the problem I’ve seen from a politician since Phil Twyford was in opposition. Here’s a selection of his key quotes (bolding mine):

Our collective failure to build enough houses has trapped people in poverty, it has increased inequality, it has made us poorer rather than wealthier, and it has shattered the Kiwi dream of a property-owning democracy.

At its heart I believe housing is a moral issue.

How can anyone look at the mother forced to go into labour in a car in Rotorua and think that is kind or moral? How is it moral for thousands of our fellow citizens to live in motels for months at a time, bouncing from grotty unit to unit, often surrounded by squalor, crime and poverty?

This is state neglect on an industrial scale. And it is entirely self-inflicted and unnecessary. What sort of country have we become where this becomes institutionalised and normalised?

The simple truth is that young people today just don’t have the same opportunity to get into the housing market as their parents did, or their grandparents.

Fundamentally it is an issue of intergenerational equity. Young people stare at our broken housing market and think they have no hope of ever owning their own home. And for many, they’re right. They don’t.

Are we surprised that so many are leaving New Zealand? Most of my friends live offshore. The lure of London, New York and Sydney will always be attractive to young Kiwis. 

But our housing market is practically standing at the departure lounge at Auckland Airport and in big neon writing telling them to just get on the plane.

And the housing market is the giant sucking sound at the heart of the New Zealand economy telling them not to bother coming home. Chris Bishop speech to the Wellington Chamber of Commerce yesterday.

He laid out an agenda of ‘five interlocking actions’:

First, our Going for Housing Growth policy will smash urban limits holding our cities back, fix infrastructure funding and financing, and introduce incentives to encourage cities and regions to go for growth.

Second, improvements to the rental market will make it easier to be a landlord, and easier to be a tenant.

Third, building and construction changes will improve competition and lower building costs.

Fourth, better social housing will better look after those who need support.

Fifth, reform of the Resource Management Act. Chris Bishop

Can Bishop side-step and swamp the land-bankers?

Bishop’s main strategy is to flood the housing market with land that can be built on and to ensure councils provide the infrastructure and zoning to ensure that happens.

The missing link in my view is the incentive for developers and investors to quickly build and ‘flood the zone’ with homes aimed at renters and first home buyers, and to avoid the scourges of the last great housing land supply push — Nick Smith’s ill-fated Special Housing Areas (SHAs) — which was land-banking and a lack of infrastructure investment followthrough from councils hitting debt limits.

Smith believed simply fast-tracking the zoning of greenfields and brownfields land would be enough unlock a supply shock that drove down prices and rents, at least after inflation. Instead, land buyers simply captured the massive capital gains from rezoning land and then drip-fed the land out to ensure prices didn’t fall, and almost all of the houses that were built were not affordable. Although much of it was ‘live’ zoned for housing, it often came with a caveat that developers had to front up with massive development contributions to pay for water and roading infrastructure. Either the councils baulked because the contributions were not enough, or the developers chose to sit on their hands with the home a new central Government would front up the capital.

Four years after SHAs were launched in October 2013, just 68 of the 3,157 homes built in 154 SHAs in Auckland were affordable homes for sale to private first-home buyers. RNZ Todd Niall A 2018 Auckland study found “the creation of the SHA generated an average price increase of approximately 5%, and more generally that affordability did not improve, but rather worsened.”

The vast majority of houses built on SHA land were the usual large homes costing over $1 million that were aimed at those nearing retirement. This market is the one the private housebuilding sector is attuned to, given older equity-rich buyers are the only ones able to afford large multi-bedroom-and-garage homes, which developers deem the only ones with high-enough profit margins to justify the risk and pay for escalating development contributions.

The other major complaint with the SHAs was that councils were forced to zone the land for housing, but would not or could not invest in the water and transport infrastructure to support housebuilding, especially on greenfields land where brand new pipes and roads need building and development contributions do not cover the costs.

Zoning for extra housing does work, just not as well as it should

But even with the land-banking and infrastructure shortages, up-zoning to increase housing supply does improve affordability for home-buyers and renters, as was evident during the natural experiments of the post-quake rebuilds in Christchurch, when the central Government subsidised infrastructure, the post 2016 Auckland Unitary Plan partial upzoning (aside from Ponsonby, Remuera, Mt Eden and Parnell) and the post 2019 Lower Hutt upzoning.

Sadly, the argument put foward that upzoning doesn’t work because of land-banking and the reluctance of private developers to drive down prices by flooding their own markets, was picked up by the Independent Hearings Panel for Wellington City Council’s recent changes and used to actually justify downzoning. Interestingly in the speech, Bishop said he would be the final decisionmaker on the now-widely-derided plan.

The idea that zoning and land supply does not affect housing affordability is frankly nuts. The evidence is as plain as day: cities that make it difficult to build more housing have housing affordability problems. Cities that legalise housing find it is more affordable.

I can also announce today that I will be the decision-maker on relevant district plan changes relating to housing where councils and Independent Hearings Panels do not agree – for example, the Wellington IHP process depending on where the Wellington City Council lands on it, or any requests for extensions to timeframes – in my role as the Minister Responsible for RMA Reform. Chris Bishop speech.

Rightly, and in contrast to Nick Smith’s initial approach, Bishop acknowledged the central Government couldn’t simply force councils to zone for housing without helping them with funding for infrastructure.

Zoning more land by itself isn’t enough. The plain fact is that Councils need new tools to fund infrastructure.

Currently, local roads and water infrastructure compete with other Council services for funding. For Councils at or near their debt limit, new infrastructure is necessarily funded from working capital, putting upwards pressure on water charges or rates and forcing Councils to depend on hand-outs from the central government through programmes like the Infrastructure Acceleration Fund set up by the previous government.

Our position is that pricing should play a greater role in infrastructure funding. Growth bottlenecks have emerged precisely where prices do not reflect costs. Infrastructure should earn sufficient lifetime revenue from service charges to recover its whole-of-life costs. Where charges are credibly signalled in advance, they will be reflected in urban land prices by lowering the price a developer is prepared to pay for land. 

Show me the money from value capture, congestion and water charges

Bishop is talking here about congestion charges, water charges and value capture, measures which both central Governments and councils have baulked at so far because voters don’t like ‘user pays’ and donors developers don’t like their untaxed capital gains on land values being ‘captured’ by anyone else — especially a council or the Government.

But at least Bishop is talking about it and ACT’s idea of sharing GST is still in the mix. We’ll see whether Treasury allow it anywhere near a Cabinet meeting for approval.

Too many Councils see housing as a burden, not a benefit. We aim to change that. Abundant housing benefits everyone, but too many councils are either ambivalent about growth or actively hostile to it. I want to shift the dial away from that so that councils and communities share in the benefits of growth.

In the coming months we will be looking at the best mechanism to give effect to our “Build for Growth” policy, where Councils gain a financial windfall from new housing. ACT campaigned strongly on sharing a percentage of the GST of new housing with councils. That will be part of the mix as we ponder how to get the incentives right. Bishop in the speech.

Going further with a house-price-to-income commitment

Bishop then went further in this RNZ Checkpoint interview last night by stating a preference for an eventual affordability target of 3-5 times income within 10-20 years.

Asked if he wanted house prices to fall, he said a crash "tomorrow" would "cause enormous economic and financial instability to people".

"What I want is for house prices to moderate over time, so that in 10 to 20 years' time, we have essentially gone a long way towards solving our housing affordability problem.

"In housing markets that we consider to be affordable, a house price to income ratio of between three and five is considered affordable. That's not the case in most of our major cities right now."

"Over time as you moderate house prices and incomes grow, [three to five] is what we would like to see things get to, but as I say, that is not going to happen immediately and it is not going to even happen in the next two to three or four years. This is something that has to happen in the medium- to long-term.

"And unless we do that, house prices will continue to go up and people will continue to be locked out of the housing market.

"I want house prices to be affordable, and a house price to income ratio of seven, eight, nine, 10, 11, 12, in some cases 13 to one in some parts of New Zealand is not affordable, entrenching inequality and poverty in our cities." Bishop via RNZ Checkpoint

He refused to give an exact timeframe, saying he wouldn’t repeat Labour’s ‘100,000 homes’ mistake, but did gave some indication:

"What I want is for house prices to moderate over time, so that in 10 to 20 years' time, we have essentially gone a long way towards solving our housing affordability problem." Bishop via RNZ Checkpoint

But is cutting the multiple to 3-5 from 6-8 even possible in 20 years?

In short, a combination of very fast income growth and flat-to-falling nominal house prices would make an ‘automatic moderation’ towards a multiple of 3-5 possible. This chart via Interest showing the fall from a November 2021 peak of 12.6 and 9.3 respectively for Auckland and New Zealand to 8.1 and 6.6 now shows it is possible. The 5-10% rise in household incomes in the last couple of years as house prices fell around 20% was enough to do the trick. Flat prices with 5%-plus income growth would drive the multiple there over 20 years

A land tax and pension saving tax breaks are still needed

In my view, the true test of the supply-shock argument comes when the tax incentives for land buying and housebuilding change for home owners, landbankers, housebuilders and councils.

Currently, the lack of a capital gains tax and the lack of tax breaks for saving in pension funds to invest in businesses means home owners and landbankers are incentivised to buy and hold land after leveraging it up with bank loans, comfortable in the knowledge land prices always escalate and are eventually liquid.

In my view, a 0.5% annual tax on occupied residential-zoned land values and a 1.5% tax on unoccupied (both built and unbuilt) residential-zoned land values to pay for infrastructure would change the incentives for land banking and shift the land price inflation expectations permanently lower. Some form of incentive to save in pension funds would completely flip the incentives and encourage investment in housebuilding and other real business IP, training and technology.

In the spirit of The Kākā Project, a ‘full court press’ to change incentives would include:

* land tax on residential land values, and land-bankers in particular;

* pension savings tax break;

* water and public infrastructure paid for with Treasury bonds serviced by land tax, congestion charges, water charges and land uplift value capture revenues;

* the reversion of interest deductibility and ‘bright-line’ house trading income rules to previous rules; and,

* a proper carbon tax and taxes on nitrous oxide and methane emissions to pay for emissions-reducing and water-quality-improving infrastructure.

Charts of the day

Very skilled cleaners and truck drivers

Cartoon of the day

100 days of targets

Timeline cleansing nature pic

Dive right in

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TL;DR: The five things that mattered in Aotearoa’s political economy that we wrote and spoke about via The Kākā and elsewhere for paying subscribers in the last week included:

* The new Government is reviewing migration settings that produced 2.8% population growth last year and is looking at a longer-term strategy of matching population growth to the ‘absorbtive capacity’ of Aotearoa-NZ’s infrastructure. See more in Monday’s email.

* Prime Minister Christopher Luxon adopted the language of Ruth Richardson before her 1991 ‘Mother of All Budgets’ in arguing for benefit sanctions to bolster the Government finances, which he said were in such a mess that there was a risk of losing the confidence of creditors. Luxon said it was time New Zealanders had a ‘grown-up conversation’ about the ‘brutal facts of our reality’ and he would not shy away from taking ‘hard decisions’.  But the evidence shows Aotearoa-NZ’s financial position is nowhere near as troubling as it faced in 1991 and even if it were, the really ‘hard decisions’ would be to follow the advice of the financial grown-ups of the world — the IMF, the OECD and the World Bank — which is to tax capital gains, focus on much faster reductions in climate emissions and to avoid pointless austerity that widens inequality and would scar another generation, See more in Tuesday’s email.

* Ratings agency Standard & Poor’s downgraded the outlooks for the debt issued by 15 councils, immediately increasing borrowing costs and forcing rates increases that will further inflate living costs and keep pressure on the Reserve Bank to keep mortgage rates high. S&P blamed the new Government’s decision to repeal Three Waters and the resulting uncertainty about how councils would pay to repair and expand infrastructure needed to cope with 1.5-2% per year population growth enabled over the last 20 years by both parties running the Beehive.  See more in Wednesday’s email.

* Stats NZ reported the number of children living in material hardship rose by 23,400 to 143,700 (12.% of all kids) in the year to the end of June. The percentage of Maori kids living in poverty was 21.5%, little changed in statistical terms from the previous year. See more in Friday’s email.

* Flying in the face of comments from a ratings agency and a mountain of demand for a new long-term sovereign bond issued yesterday, Finance Minister Nicola Willis again characterised the Government’s finances as too fragile to borrow in its own right to solve Aotearoa-NZ’s infrastructure deficits. But the ‘grown-ups’ in financial markets and in ratings agencies are saying the exact opposite. S&P Global Director of Sovereign and Public Finance Ratings, Anthony Walker, told me in an interview the Crown’s AAA rating was not fragile and the Crown had 30% of GDP ($120 billion) of borrowing capacity before it would be downgraded.

What we talked about on ‘The Hoon’ on Thursday night

In this week’s podcast above of the weekly ‘Hoon’ webinar for paying subscribers at 5pm on Thursday night:

* 5:00 pm - 5:05 pm - Bernard Hickey and Peter Bale opened the show with a discussion about the week’s local news, in particular the retirement of Grant Robertson and the tragic passing of Efeso Collins.

* 5:05 pm - 5:20 pm - Bernard and Peter talked with David Farrier from Webworm with David Farrier about his new Big Worm Farm fund for investigative journalism. Details here

* 5:20 pm to 5:30 pm - Bernard, Peter and The Kākā’s climate correspondent Cathrine Dyer talked about the significance of the loss of FSC certification for log exports by Earnslaw because of slash damage in 2018 (1News) and a study that found global support for climate action being ‘systematically under-estimated’ Carbonbrief.

* 5.25 pm - 5.45 pm - Peter, Bernard, and Robert Patman talked about the latest developments in Ukraine and the Middle East.

* 5.45 pm -6 pm - Peter, and Bernard spoke with CTU Economist Craig Renney about the Government treating its finances like household finances, next week’s rate hike(?) chances and this week’s child poverty stats.

The Hoon’s podcast version above was produced by Simon Josey.

This is a sampler for all free subscribers. Thanks to the support of paying subscribers here, I’m able to spread the work from my public interest journalism here about housing affordability, climate change and poverty reduction around in other public venues. I’d love you to join the community supporting and contributing to this work with your ideas, feedback and comments. We have a couple of special offers on at the moment.

Other places I appeared this week

I talked with S&P Global Government Ratings Director Anthony Walker for When The Facts Change via The Spinoff about downgrades to the ratings outlooks for 15 councils and the political economy of borrowing from the Crown’s balance sheet to fix our infrastructure deficit.

We also produce this 5 in 5 with ANZ daily podcast and Substack for ANZ Institutional in Australia, which you can sign up to via Spotify and Apple and Youtube for free.

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TL;DR: Flying in the face of comments from a ratings agency and a mountain of demand for a new long-term sovereign bond issued yesterday, Finance Minister Nicola Willis has again characterised the Government’s finances as too fragile to borrow in its own right to solve Aotearoa-NZ’s infrastructure deficits.

She also again compared the Government’s budget to a household budget, saying spending cuts needed to be found to ‘balance the books’ and that she was afraid of losing the confidence of financial markets when the ‘rainy day’ came for borrowing.

But the ‘grown-ups’ in financial markets and in ratings agencies are saying the exact opposite. S&P Global Director of Sovereign and Public Finance Ratings, Anthony Walker, told me in an interview yesterday the Crown’s AAA rating was not fragile and the Crown had 30% of GDP ($120 billion) of borrowing capacity before it would be downgraded.

He said the Crown using its balance sheet to borrow from fund managers to fix infrastructure deficits would be the fastest and cheapest way to do it. His comments came after record-high demand for a 30-year bond issued yesterday by the Treasury’s Debt Management Office at just one basis point above secondary market rates. (Paying subscribers can see more below the paywall fold, but I’ll open it up on request from subscribers and with more than 50 likes.)

Govt's Budget 'just like a household,' says Willis

Channelling Margaret Thatcher at a select committee hearing yesterday, Finance Minister Nicola Willis compared the Government’s Budget situation to that a household looking to tighten up its spending when money was short.

Willis again said New Zealand was vulnerable to being shut off from being able to borrow from financial markets in the event of a weather or earthquake event.

She said the Government needed to: “have enough space, so that when the rainy or extremely cycloney day comes, we can borrow from the world,” and that having headroom to borrow was “the best insurance policy for climate change”.

She described herself as being in a similar situation to a family with a tight budget where interest costs were high.

“They go and do value-for-money exercises, they look through the budget. That's exactly the exercise that the Government as a whole has to do.” Nicola Willis speaking to Parliament’s Finance and Expenditure Select Committee yesterday (video).

Willis described the Budget inherited from the Labour Government as in an “unsustainable fiscal situation”.

“We are a small exposed trading economy so we are far more vulnerable to shocks and being able getting access to cash than those really large economies.” Willis

The implication was that the Government, therefore, couldn’t afford to and didn’t want to use its balance sheet to borrow on its own accord to invest in infrastructure. She repeated comments made previously by herself and Infrastructure Minister Chris Bishop that the Government would create a National Infrastructure Agency that arranged city and regional deals, whereby councils would borrow from private investors and arrange Public-Private-Partnerships, rather than the Government borrowing directly through the Crown’s balance sheet.

“We can afford to deliver infrastructure and there's a few things we're going to do that are going to make our dollars go further.

“One that's important is we're going to have a much faster approach to consenting which will reduce the cost of projects.

“The other is we're going to have new forms of funding and financing which will see us working with iwi and other private-sector funders.” Willis.

‘Stop mucking around. There’s plenty of borrowing headroom’

However, S&P Global’s Head of Government ratings, Anthony Walker, told me in an interview to air in my When The Facts Change weekly podcast via The Spinoff tomorrow that the nation’s finances were not fragile and there was the equivalent of 30% of GDP ($120 billion) borrowing headroom left before any danger of a credit rating downgrade. He said there was immense investor demand both globally and locally to lend tens of billions to the central Government in vanilla bonds to repair and extend infrastructure such as water and roads. That would be the cheapest and fastest way for Aotearoa-NZ to address its $100 billion infrastructure deficit, which the Infrastructure Commission has indicated could grow over $200 billion in coming years.

Emphasising the actual strength of the nation’s finances and the demand for very long-term Government bonds, Treasury successfully borrowed $4 billion through a new 30-year syndicated bond issue yesterday with a record-high $19 billion worth of bids — a coverage ratio of almost five times. The yield achieved of 5.09% was just one basis point over secondary market price of the closest maturity May 2051 bond.

Here’s BNZ’s Senior Interest Rate Strategist Stuart Ritson commenting on how the success of the bond auction yesterday had actually dragged down bond yields in the secondary markets:

“The 2054 syndication saw strong demand with the orderbook at final guidance exceeding NZ$19 billion. New Zealand Debt Management issued NZ$4 billion which was previously indicated as the volume cap for the transaction. The 2054 was issued at a spread of +1bp to the May-2051 bond which was towards the tighter end of initial price guidance. The strong investor demand will support market sentiment given the heavy funding requirements ahead.” BNZ’s Stuart Ritson.

So what is National-ACT-NZ First doing instead?

Instead of using its balance sheet to spread the cost of infrastructure crucial to solving our housing, climate and poverty issues, the National-ACT-NZ First Government is pushing ahead with a piecemeal approach. It plans to encourages councils to fund the investment in dribs and drabs through a series of ‘city deals’ that cobble together council bond issues with public-private-partnerships, which are smaller and more complicated than the failed Transmission Gully deal engineered in the last days of the previous National Government.

Walker told me bond investors would much prefer the Crown used its own AAA-rated balance sheet to borrow the money, which would also be much cheaper for the Crown. Fund managers prefer more liquid bonds with the strongest guarantor, which will always be the Crown because it has the power to tax incomes and spending. Councils can only tax property.

‘The Crown is not fragile and council borrowing is at its limits’

I asked him if New Zealand’s fiscal position was fragile and what bond investors would prefer: sovereign debt or local and bespoke bonds.

“It's (New Zealand sovereign debt) generally very, very low risk. From our point of view, AA-plus foreign currency, AAA local. We'd like to look at the foreign currency because it's comparable with other countries. It's the second highest. So we have something like 10 AAAs in the world out of 140 sovereigns we rate. So it's the second notch out of 20 on the scale. It's extremely low risk. Bond investors know that. They like the rule of law. As much as we hear, oh, there's a divide between Labour and the National party, in the New Zealand context, yes there is, but in the global context, politically, those two parties are aligned on 90 % of what they're doing.

“You don't have the fragmented systems in Europe or America. Say Europe, you have six parties coming together to form government. The US, they're polar opposites. You don't have that in New Zealand. Investors actually like that. They know they come to New Zealand, they're going to get well disclosed, transparent system, who's going to do the right thing. They don't have to worry about those type of things.

“And from a borrowing perspective if they were to borrow at the sovereign level. Net debt on our scale is around 30% of GDP. For us to lower the debt assessment, it needs to double. If you think about that, an extra 30 % of net debt, that's $120 billion of extra debt they need to do just for us to lower the debt assessment. So there is a fair bit of headroom there from the sovereign's balance sheet.” S&P’s Anthony Walker

I asked him if financial market pricing and yesterday’s bond auction demand also showed confidence.

“If it was an issue, we wouldn't have a AA plus rating. We wouldn't have a stable outlook. I'm not saying go out and borrow 120 billion. I'm just saying that New Zealand sovereign has headroom. It has headroom on its balance sheet to spend money.

“But from a fragile point of view, you don't have investment grade ratings that are fragile. If they're fragile, they're not investment grade. They're 10 or 15 notches below where New Zealand is right now.” Anthony Walker.

I also asked Walker about the cost of plain sovereign borrowing versus a series of bespoke and small local ‘city deal’ or regional deal bond issues linked to PPPs.

“The cheapest way for ratepayers and taxpayers of residents is the sovereign. It has the biggest balance sheet. Water at $10 billion or $15 billion is a big number for councils. For the sovereign, it's quite small. But you're talking about an economy of $400 billion, roughly. If it's (the borrowing) $20 billion, that's 5% (of GDP). New Zealand as sovereign is the biggest borrower, the cheapest borrower in the country. It has the power to do it. Local councils being fragmented, it's harder to get the kind of demand there. And again, local councils will pay a premium.

“At the same rating level as the sovereign, they will not get the same price. It's usually around 80 basis points 1% (100 basis points) higher on very similar terms. So from a New Zealand rate payer or taxpayer advantage, the cheapest way of doing it is the sovereign. It has the mass, it has the size. But again, it comes down to whether they want to do it, whether local government act, and the responsibility split. Those things need to be looked at. And whether that is a quick solution, it may not be.” Walker.

I also asked why local and international fund managers prefer sovereign bonds to local bonds. He points to the creation of the Local Government Funding Agency (LGFA) to try to aggregate supply, but even then, fund managers want sovereign debt.

“Generally investors will like sovereign because it's, yes, low yielding, pays less interest, but it's safe because they know they're gonna get the money back. But they also look at liquidity. Liquidity is extremely important here. So Horowhenua and South Taranaki for example — we can use any regional council, we work on 25 of them — They borrow through the LGFA to get the aggregate demand up.

“So if you've got a council issuing $10 million here and there, an investor is going to say, well, if I buy that bond, I can't sell it. I have to hold it until maturity. There might be one buyer. I'm going to take a premium because I'll never be able to sell this bond for 10 years. LGFA is doing a billion, one and a half billion a year. They're actually getting everyone's money together and issuing it. It means liquidity is much, much better through the LGFA than local council. And investors are willing to buy it because they know if something changes, they change their mandate, they change their rules, they can actually sell it to somebody else and get their money back.

“They don't have to hold it for 5, 7, 10 years until maturity. But liquidity is extremely important. We see that. Look at Europe. We have governments in Europe which are in the triple B -minus, so I can write at the bottom of this grade. Their interest costs are much lower than New Zealand because of the economic situation and the proximity to European investors. They know what Italy is doing. They're in bed when New Zealand's awake and they charge premiums for this other thing. And as I said, New Zealand sovereign name is much bigger. They're much more comfortable holding that.” Walker.

But the biggest problem at the moment is the high-growth councils such as Auckland, Hamilton, Tauranga, Wellington, Christchurch and Queenstown can’t borrow more in their own right, given their lack of access to revenue from GST or income tax, as councils in other parts of the world have. Three Waters was Labour’s attempt to create new off-balance-sheet vehicles that could borrow in their own right with the power to charge for water, which would all water infrastructure investors to get around the current council debt limits. But National’s repeal of Three Waters and its reluctance to fill the gap with Crown capital or shared taxes has blocked off that path.

Walker was talking after publishing reports announcing reviews for downgrades of 15 council ratings because of the funding vacuum that has opened up after the demise of Three Waters. See more in yesterday’s email.

“New Zealand from a central government point of view has very, very strong fiscal outcomes. And that divide (with councils) is actually widening at the moment. New Zealand councils account for 10% of the country's debt. The sovereign accounts for 90%. But when it comes to infrastructure spending, New Zealand councils are predominantly responsible for it. In other countries, we do have revenue sharing arrangements, not just through GST.” Walker.

‘And we don’t accept the idea the Crown won’t guarantee these CCOs’

ACT has proposed the Government share GST with councils, but National has only said it will consider the idea. National is still insisting that any Crown Controlled Organisations (CCO) set up voluntarily would not have a Crown guarantee.

Walker poured cold water on the idea ratings agencies and bond investors would accept and buy CCO or council bonds without guarantees.

“There is a potential that these CCOs do get established. We do have to look at them individually. If Watercare was just put into a Watercare entity was 100 % controlled and owned by Auckland, we'd put it back on (Council) balance sheet. Because if something goes wrong at Watercare, investors can't get the assets under the laws. So what do investors do? The same investor funding Watercare is funding Auckland, and they're funding Wellington.

“And if Auckland doesn't bail out Watercare, well investors are not going to start funding Auckland. They're not going to give them money to start funding the new football stadium or new roads. So there's a contagion risk across the entire sector when that happens. So there's always (political) incentives (to bail out CCOs), particularly water.

“And we've seen it in New South Wales, for example, where they tried to do some of this stuff and it went pear shaped and ministers started losing their jobs. When governments are losing their jobs, they spend money. We've seen that across the world. It's easier to pay somebody else's money than lose your job.” Walker.

Just in case it wasn’t clear, that comment was effectively Standard and Poor’s — a key ‘grown-up’ of the financial world — telling the Government that it and bond investors simply won’t accept the idea of the Government not guaranteeing these entities.

So we’re back at square one.

So where does this leave us all? In essence:

* Three Waters was the solution the ratings agencies and bond investors might have accepted, but that’s now gone;

* Bond investors and ratings agencies would much prefer the Government just got on with it and either borrowed the money directly via the Crown’s balance sheet and paid to build the infrastructure itself, or started sharing tax revenues with councils; and,

* National-ACT-NZ First are unwilling to borrow on the Crown’s balance sheet or share tax revenues with councils or guarantee CCO debt.

That means there remains a painfully large gap and missed opportunity between the fund managers wanting to lend tens of billions of dollars to the Government to fix our infrastructure issues, and the Government, which still wants to avoid extra borrowing by instead using a complicated hodge-podge of bespoke little bond issues it hopes it can get away without guaranteeing.

The end result?

* the water networks don’t get built or repaired, which blocks the rapid expansion of housing supply to cope with population growth and to try to restore affordability for renters and buyers;

* strong population growth from migration of workers on temporary visas continues, which represses wage growth, pumps up rent growth and further inflates demand for now-limited zoned residential land with water networks — a combination that drives up land and rental property values; and,

* more New Zealanders give up on ever being able to start or keep a family in an affordable and secure home they own or rent, and leave to live overseas permanently with the other one million New Zealand-born diaspora — nearly 14% of the population and the third largest in the OECD as a share of our total population. Australia’s diaspora is less than 2% of its population.

How can this be politically sustainable? Easy, peasy.

Ratepayers and taxpayers who own residential property or properties know their financial futures depend on growing their capital gains from residential land as fast as possible, which requires as much disposable income as possible for as much leverage as possible. Only relying on savings from actual work or businesses is pointless when competing against families able to leverage their share of the $1 trillion of equity in their own home or homes. Working for a living or building a (non-residential property) business is a mug’s game.

The following are the key conditions for median voters and voting ratepayers to keep growing those tax-free gains as fast as possible:

* infrastructure investment is strangled to limit the supply of land available for housing, which in turn inflates the value of the existing land able to be lived on;

* migration and population growth needs to stay high to keep upward pressure on rents and land prices;

* disposable income after rates and income taxes need to be as high as possible to be able to borrow as much as possible from banks to bid for and buy the most residential land;

* capital gains and land must remain tax free; and,

* mortgage rates must be as low as possible, which means Government debt and council debt should be as low as possible, which works in tandem with the first condition of limited infrastructure investment.

This explains why governments and councils from both sides of politics are so reluctant to use Government debt to borrow to build the infrastructure, or to share tax revenues with councils or tax land or capital gains. Increasing debt increases mortgage rates. Taxing capital gains or land reduces or destroys the ability for fast rises in home equity. Higher income taxes or rates reduces the disposable income able to leveraged into a home or more homes to rent out.

Home owners vote at much, much higher rates than young renters

It only ends when:

* there are more young renters who vote in general and council elections than home owners, and who have given up on getting on the ‘ladder’ because their own parents are renters and can vote for different sets of policies; or,

* home owners choose to allow capital gains and/or land taxes and higher government borrowing that would voluntarily reduce their disposable income and their ability to expand leverage and capital gains after tax.

In my view, that only occurs when business leaders, home owners and politicians realise they’ve become a besieged and lonely minority in their own land who are;

* forced to travel overseas to visit grandchildren;

* forced to stump up ever-larger deposits and guarantees to get their kids into secure and affordable housing near where they live;

* forced to confront escalating health, prison, climate and education costs and overloaded schools, hospitals and roads because of widening inequality and insufficient infrastructure; and,

* cannot keep cutting taxes, pumping up the population or limiting investment anymore because they’re unable to find stable and effective employees living anywhere near them because of shortages of affordable and healthy housing.

The solution for young renters? Migrate to Australia as fast as you can.

My honest advice to renters frustrated with 20 years of tax-cutting governments who ‘buy’ leveraged tax-free gains for median voters and home-owning ratepayers by choosing low-to-no public investment in infrastructure for housing and high population growth rates?

Either marry into a family that already owns a home or homes, or leave to live overseas with the other one million New Zealanders who don’t see a future. Don’t wait. It’s too late.

Realistically, given the current political landscape where neither of the main parties will tax capital gains or borrow with the Crown’s balance sheet to invest in infrastructure or openly talk about limiting population growth through lower migration of temporary workers, change will take too long. The chances of having enough security and wealth to safely have a family have gone for another decade. That is too long for those in their 20s and 30s weighing up what to do.

Leave while you can. Or hook up with someone who has parents with rental properties and be sure they’ll help you buy a home before you commit.

Chart of the day

Starved of capital

The exclamation marks

Cartoons of the day

Mood: a bedtime story

On special now

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TL;DR: Ratings agency Standard & Poor’s has downgraded the outlooks for the debt issued by 15 councils, immediately increasing borrowing costs and forcing rates increases that will further inflate living costs and keep pressure on the Reserve Bank to keep mortgage rates high.

S&P blamed the new Government’s decision to repeal Three Waters and the resulting uncertainty about how councils would pay to repair and expand infrastructure needed to cope with 1.5-2% per year population growth enabled over the last 20 years by both parties running the Beehive. High population growth boosts GST and income tax receipts for central Government, but loads up massive infrastructure costs for councils, who don’t get a share of GST or income tax, unlike in other countries. The population grew 2.8% last year, the fastest rate since 1947.

The new National-ACT-NZ First Government’s decision to cancel Three Waters and freeze new capital grants to councils without any extra revenue support has essentially robbed Peter to pay Paul, leaving ratepayers stuck with double-digit rates increases that are keeping inflation and mortgage rates up. The new Government’s moves to freeze centralised spending has instead pushed the costs and blame out to councils. S&P’s ratings actions have effectively called b******t on the Government’s repeal of Three Waters and the RMA without ready replacements. (Paying subscribers can see more below the paywall fold and in the podcast above. I’ll open it up later if we get over the 50 likes mark.)

Elsewhere in the news in Aotearoa-NZ’s political economy this morning:

* Grant Robertson announced yesterday he would retire next month as a Labour list MP to become vice-chancellor of the University of Otago. Porirua MP Barbara Edmonds, a former tax lawyer, will become Labour’s Finance Spokeswoman.

* Members of the Independent Hearings Panel setting the agenda for Wellington’s housing own more than $7 million worth of property in the city, with five of the six properties not declared in the panel’s published conflicts-of-interest register and within Mt Victoria and Te Aro, where the panel recommended tougher rules limiting densification, BusinessDesk-$$$’s Murray Jones and Dileepa Fonseka report this morning.

* Waka Kotahi-NZTA has advised the Government that delivering the roads and public transport National campaigned on could end up costing more than twice as much as the party said it would, opening up a potential fiscal hole of $24 billion, NZ Herald-$$$’s Jenee Tibshraeny reports this morning.

* There was strong demand from potential buyers of a long-term lease to run the Port of Auckland and leave the land in the hands of Auckland Council, BusinessDesk-$$$’s Oliver Lewis reports this morning.

* Finance Minister Nicola Willis is open to the Wellington Port being part-privatised to pay for new port facilities to keep the Cook Strait ferries operation running, NZ Herald’s Thomas Coughlan reported yesterday.

* ELE Group, the Auckland labour hire firm that collapsed before Christmas and left 1,000 migrant workers stranded without work, income or the ability to work easily for anyone else, owes creditors $12 million, including more than $4 million to migrant workers, 1News’ Corazon Miller reported last night from the first receivers’ report.

* The United States has warned China it will take action if China tries to ease its industrial overcapacity problem by dumping goods on international markets, two American officials told the FT-$$$ yesterday.

S&P calls b******t on new Govt’s water financing vacuum

The new National-ACT-NZ First Government has talked repeatedly in its first 100 days about fiscal discipline and the need for ‘grown-up’ conversations about ‘hard decisions’ on Government spending, arguing it needed to focus on bringing down the cost of living for home owners facing high mortgage costs and rates bills.

But its spending freezes and a rash of repeals under Parliamentary urgency of key planning and financing arrangements for council investment in infrastructure has only opened up a capital spending vacuum that is forcing councils to fill the holes with double-digit rates increases.

Now the real grown-up in the conversation, ratings agency Standard & Poor’s, has criticised the Government’s withdrawal of centralised direction and capital support in a 12-page research note and a three-page summary backing up its announcement yesterday that downgraded the outlook on the credit ratings for debt issued by 15 councils and two council-controlled organisations. The summary note was titled: Credit FAQ: NZ’s Policy Shift To Weaken The Institutional Setting On Local Councils and the full note was titled: NZ councils’ extremely predictable and supportive institutional settings are at risk.

S&P said in the research note:

“Rising infrastructure budgets and responsibilities are putting growing pressure on the New Zealand local government sector'sfinances. The councils' own-sourced revenues and grants from the New Zealand government (Crown) are not rising enough to adequately cover this additional spending. This is widening revenue and expenditure mismatches, as seen with large deficits and rising debt levels compared with similar systems.

“We believe these imbalances will persist for longer than we expected. This is because of rising inflation and infrastructure budgets, and given the new National Party-led coalition government's promise to repeal existing water reform legislation by Feb. 23, 2024. These reforms were aimed at removing water-related operating and infrastructure responsibilities from councils.” S&P research note.

S&P pointed to “widening revenue and expenditure mismatches, with large cash deficits and rising debt levels compared with similar subnational government systems in other countries.”

“Further, policy uncertainty is elevated given the weakening of financial outcomes and a shift in political support for key reforms (particularly related to water services and infrastructure) that were partly designed to alleviate financial pressures on the sector.

“If the trend continues, it could undermine the strong credit quality of the sector.

“The final design of the new National Party-led government's reform will be vital to address the rising revenue and expenditure mismatches across the sector. Reforms will also be important to curtail the upward trajectory of the sector's debt levels as a proportion of operating revenues.

“In addition, uncertainty is elevated given the shift in political support for key sector reforms, including water reform and the Resource Management Act (RMA). The former government's water legislation was developed after many years of reviews and working groups, and the sudden reversal makes it difficult for councils to prepare their upcoming ten-year long-term plans. Policy uncertainty could weigh on our view of the system's predictability compared to other highly rated systems internationally.

“We could revise our assessment of New Zealand's institutional framework to stable if we observed greater policy stability that could narrow the sector's revenue and expenditure mismatches, leading to a sustainable reduction in sectorwide debt. This could occur if proposed local government reforms or upcoming budget planning markedly improves councils' financial positions. “S&P research note.

‘We don’t think you’re serious about addressing the deficit’

S&P was particularly blunt when talking about the new Government’s true appetite to help councils and solve persistent deficits after capital spending (bolding mine):

“The New Zealand central and local government appears to be a unwilling to address the growing imbalance between revenue growth and rising expenditure for the local government sector. Despite local governments having strong revenue and expenditure autonomy, they have much larger deficits and higher debt than we forecast.

“Many councils are reluctant to substantially raise general property rates more than inflation to fund rising expenditure. This is despite rates being set by individual local governments and not being limited by Crown policies. Large rate increases in recent years have been cannibalized by high inflation, and rising interest expenses and infrastructure spending. Because of this, deficits have widened across the sector. We estimate the after-capital account deficit across the sector grew to be 16% of total revenues in 2023, and total debt rose to 184% of operating revenues.

“The New Zealand Productivity Commission estimates that local government property rates are roughly the same proportion of GDP today as they were more than 100 years ago. In contrast, the Crown's taxation has more than tripled over this period. Many councils prefer to accumulate debt to fund most of their infrastructure rather than fund it via cash flows, and they have limited ability to raise revenues outside of property rates.” S&P credit FAQ

‘Delays and uncertainty plague council planning’

S&P pointed in particular to a directive from Local Government Minister Simeon Brown to councils that they must include water activities in all future budgets.

Policy uncertainty has caused reporting delays. The Crown government has announced an extension to the June 30, 2024, statutory deadline for the adoption of upcoming long-term plans. This followed a direction for all councils to include water activities in all future budgets. However, current legislation requires local governments to remove all water-related activities from financial statements starting from the 2026 fiscal year. We expect the Crown to repeal this legislation by Feb. 23, 2024.

Nevertheless, this has caused a period of heightened uncertainty for councils. The ongoing shortage of auditors has affected many organizations' ability to prepare audited financial statements. Consequently, legislation was passed in 2020 extending statutory reporting timeframes by two months for Crown entities, local authorities, and council-controlled organizations with June 30 balance dates.

Ready. Fire. Aim. Downgrade. Then higher borrowing costs. And rates.

S&P was particularly scathing about the Government’s repealing of Three Waters without a replacement.

“There is little information on how Local Water Done Well will operate or the timeline for its implementation. We only know that the Crown expects to pass relevant legislation by mid-2025. Implementation could drag the process on for another couple of years, given the complexity of the issue and the public consultation processes. During this period, fiscal conditions for the local councils could continue to deteriorate, and policy uncertainty may continue. This would increase credit risks.

“Recent announcements on Local Water Done Well signal that councils may have to devise plans to meet the new, stricter, water standards, under the supervision of a new water infrastructure regulator. The councils would also have the option to form regional council-controlled organizations (CCOs) for water delivery. These CCOs would presumably differ from Labour's proposed water services entities. They could be voluntary and more tightly controlled by councils because of the removal of the co-governance requirement with local mana whenua.” S&P note.

S&P also made plain that it would not accept the Government’s view that new voluntary water CCOs could be formed without either council or Government guarantees. It also pointed out that lower ratings would increase council borrowing costs, but would ironically improve the profitability of the Local Government Funding Agency (LGFA), which is the Crown-controlled agency that borrows on behalf of councils.

As we previously highlighted, we would likely view a CCO (with either a high degree of political control or concentrated ownership, alongside a high level of indebtedness) as part of its parent council's tax-supported debt or at least a contingent liability of the council

If the ratings on local councils fall, those councils may pay higher credit margins to the LGFA under current arrangements. This could slightly boost the profitability of the LGFA.

Here come the rate rises, which also hold up mortgage rates

Meanwhile, BusinessDesk-$$$’s Oliver Lewis reported this morning that Auckland Council’s Watercare is set to increase water charges by 25.8% from July 1 because of the Government’s funding and planning freeze linked to the repeals of the RMA and Three Waters. The report cited comments in Long Term Plan documents due to go out to the public for consultation from February 28.

“This shortfall in debt funding makes it necessary to increase prices by significantly more than previously signalled.” Significantly, the LTP consultation document also said: “The council expects that 100% of growth costs will be recovered from developers over the LTP period." The direction for new growth infrastructure to pay for itself has already been met with criticism on social media platform LinkedIn, including from one developer who said they would have to hike house prices by about $6,000 to cover what they said would equate to an extra $4600 charge per home. BusinessDesk-$$$’s Oliver Lewis

Rising rates, fees and charges are a major factor holding up domestic services inflation and core inflation, which Reserve Bank Governor Adrian Orr said last week was still too high. Councils have announced double-digit rates increases in recent weeks, blaming the new Government’s withholding of capital grants and revenue support.

Charts of the day

‘Lazy’ youth working at higher rates than ever

Cartoons of the day

Fragility gaslighting

Dunedin bound

Timeline cleansing nature pic of the day

‘Finger bitin’ good’

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TL;DR: Prime Minister Christopher Luxon has adopted the language of Ruth Richardson before her 1991 ‘Mother of All Budgets’ in arguing for benefit sanctions to bolster the Government finances, which he said were in such a mess that there was a risk of losing the confidence of creditors.

Luxon said it was time New Zealanders had a ‘grown-up conversation’ about the ‘brutal facts of our reality’ and he would not shy away from taking ‘hard decisions’.

But just how perilous is the Government’s financial position? And if it is in such a mess, who should bear the brunt of the ‘hard decisions'?

Actually, the evidence shows Aotearoa-NZ’s financial position is nowhere near as troubling as it faced in 1991 and even if it was, the really ‘hard decisions’ would be to follow the advice of the financial grown-ups of the world. The IMF, the OECD and the World Bank have advised New Zealand to tax capital gains, to focus on much faster reductions in climate emissions and to avoid pointless austerity that widens inequality and would scar another generation, similar to the scars still there from the 1991 ‘Mother of All Budgets.’ (Paying subscribers can see more below the paywall fold and hear more in the podcast above, although they’re also welcome to ask me to open it up for public consumption. I’ll also open it up if there’s more than 50 likes.)

Elsewhere in the news in Aotearoa-NZ’s political economy today:

* ANZ’s economists have published a longer-term forecast with a scenario that would require the Reserve Bank to increase the Official Cash Rate another 150 basis points to 7.0% to control inflation, which would see mortgage rates rise towards 10%;

* Waka Kotahi-NZTA staff bought unbranded high-viz jackets and hard hats for Christopher Luxon and Transport Minister Simeon Brown to wear at the reopening of State Highway 25a late last year, in order to avoid them being shown wearing jackets and hats with the ‘wrong’ branding highlighting the Waka Kotahi part of the agency’s name, which Brown had just ordered be changed, Newshub’s Amelia Wade reported last night.

* Buildhub, an Auckland-based labour hire firm specialising in importing temporary construction and trades workers from Latin America, collapsed on Friday with as many as 200 migrant workers left in limbo, similar to the situation faced by migrant workers on Accredited Employer Work Visas stranded after the collapse of ELE Holdings just before Christmas. Immigration NZ statement Stuff Susan Edmunds RNZ (August)

Why we’re nowhere near as fragile or lazy as Luxon says

Prime Minister Christopher Luxon and Social Development Minister Louise Upston justified threats to cut the benefits of people on the jobseeker benefit last night by arguing the nation’s finances were in a mess and ‘hard decisions’ were necessary.

Upston announced she had written to the CEO of MSD, Debbie Power, ordering a more rigorous application of existing sanctions, and the preparation of a new ‘traffic light’ system for later in the year:

“Our priorities are for a much stronger focus on the obligations of jobseekers to actively look for work and to take all practical steps to prepare themselves for work. If they fail to take work that is available, to attend interviews or to complete their pre-employment tasks, there needs to be consequences. This could encourage people to then meet work obligations and gain the benefits from being in employment.

“I understand that a more comprehensive sanctions package including the traffic light system will take some time and needs to go through a careful policy programme. However, in advance of that substantive piece, it is my expectation that the Ministry apply the obligations and sanctions that already exist.” Upston letter to Power.

Luxon introduced Upston at his post-Cabinet news conference last night with this pre-amble:

“This Government inherited a country in decline, and as you heard in my state of the nation speech yesterday, this will require some hard decisions to repair. But we are also a Government that is prepared to make those hard decisions.” Luxon in post-Cabinet news conference transcript

It followed on from his State of the Nation speech on Sunday, in which he argued:

We need to get the public finances back in order. 

That means a return to the orthodoxy of tight budgets, careful stewardship of public money, and a determined focus to keep or return the books to surplus. 

Strong public finances aren’t enough of course to deliver a strong economy in their own right – but they are a critical pre-requisite.

We can’t build infrastructure if we can’t be trusted to borrow money. Businesses can’t attract investment if there’s no confidence in the value of our currency. 

And should disaster strike, we will need the financial freedom that low debt and healthy surpluses provide to fund the necessary rebuild. 

Now that won’t be popular with everyone – but it is necessary. More spending, more borrowing, and more taxes isn’t a pathway to prosperity, it’s a recipe for more of what we’ve seen from the last few years. Rampant inflation, higher interest rates, and an economy going nowhere fast. 

The state of the nation is fragile. Luxon State of the Nation speech

Challenged in the news conference if he was being serious with his warnings, or was simply managing expectations, Luxon said:

“No, not at all. What I’m just trying to do is—I just think that. I just think that New Zealanders need to have a grown-up conversation and that the Prime Minister should be able to say, really upfront and really straight-up, “Hey, look, these are the challenges that we’ve got. This is the situation we’ve inherited. This is the mess that we’ve got left behind by the previous Government. Let’s face up to the brutal facts of our reality whether we like to hear it or not, and then let’s put a plan together to actually get ourselves to a much better place.” Luxon in the news conference transcript.

So are the Crown’s finances fragile? And what do the grown-ups say?

There are ways to measure how fragile a sovereign nation’s finances are and there is an entire group of well-paid and independent professionals who assess the fiscal ‘fragility’ of Governments on a day-by-day and minute-by-minute basis.

A ‘fragile’ nation on the verge of being locked out of global financial markets would be one where ratings agencies have warned of ratings downgrades, bond yields were rising sharply and the margin between New Zealand and US Treasury bond yields, the base for global interest rates, would be blowing out.

The most obvious signs of fragility or some sort of financial stress would be when New Zealand Government bond yields jump unexpectedly and more than bond yields in countries such as Australia, Britain, Canada, the European Union and the United States, all of which have similarly open and democratic economies with truly floating currencies and free movements of capital. Remember that bond yields rise when bond prices fall.

The best example was from early 1991 when S&P threatened New Zealand with a two-notch downgrade, forcing Richardson to fly to New York to beg not to be downgraded. That was back when New Zealand’s government debt was issued in foreign currencies, high relative to GDP and issued for short terms. She agreed to cut benefits early in 1991. They were announced in the 1991 Budget.

The ‘wisdom of the crowds’ in financial markets is that NZ is just fine

Here’s the chart showing New Zealand 10-year Government bond yields and the margin to US 10-year Treasury yields over the last ten years, including that there was an improvement (ie a smaller margin) of about 150-200 basis points from 2014 through until late 2020 and then relative stability within a range of 20-50 basis points ever since. Some of the improvement reflects a worsening of the US fiscal position under President Donald Trump.

International investors have increased their holdings of New Zealand Government bonds by about $25 billion to almost $60 billion since Covid. Local Kiwisaver and other funds are also big buyers of NZ Government bonds, increasing their holdings by around $20 billion to $35 billion.

Standard and Poor’s reaffirmed New Zealand’s AAA sovereign local currency and AA+ sovereign foreign currency credit rating with a stable outlook at the beginning of September. The Government issues bonds in New Zealand dollars now and for long durations, rather than foreign currency bonds it used to issue for short durations.

“The stable outlook on our long-term sovereign credit ratings on New Zealand reflects our assessment that the country's excellent institutions, wealthy economy, and moderate public indebtedness will balance credit risks associated with a large current account deficit, high levels of external and private-sector debt, and volatile property prices over the next two years.” Standard and Poor’s rating verdict statement.

Moody’s reaffirmed its AAA sovereign foreign currency credit rating with a stable outlook on December 13.

What about now? Surely the ‘budget surprises’ are spooking investors?

No. The grown-ups in the room are actually reporting strong demand for New Zealand Government bonds in the last week, including a solid response to a new 30-year duration bond announced by Treasury’s Debt Management Office (NZDM) today.

Here’s BNZ’s Senior Markets Strategist Jason Wong commenting last Friday after a successful Government bond auction last week (bolding mine):

The NZDM weekly tender attracted strong demand, helped by NZGBs underperforming swaps heading into the event.  Bid cover ratios were between 3-4 across the three lines of nominal bonds offered, signalling strong demand, a good signal ahead of next week’s likely syndication of new 30-year bonds. By the close, NZ rates had ended up falling by even more than Australian rates, with a chunky 14bps fall in NZGB yields across the curve.

BNZ Senior Market Strategist Jason Wong.

That is not a picture of fragile confidence in the New Zealand Government’s finances. That says investors are more confident, and relatively more confident than in even Australian bonds (on that day at least).

So are sanctions actually a good idea independently?

The news conference exchanges showed that Upston and Luxon had ignored the 2018 conclusions of the Welfare Expert Advisory Group (WEAG) that there was little evidence to show sanctions actually worked to push people into work in any sustainable way that wasn’t also damaging to wellbeing. Here’s the MSD conclusion from 2018 (bolding mine):

“The available empirical literature and complementary contextual studies suggest that policy design and administration needs to carefully balance the benefits and potential negative effects of work-related sanctions. Empirical evidence provides no guidance on sanction severity that could be considered ‘ideal’ in achieving this balance. However studies of regimes less severe than New Zealand’s show they can be effective in encouraging movement from benefits to work.

“Evidence from the US and UK suggests that a very harsh sanctions regime can have important adverse effects that drive people away from, rather than closer to, employment, and might worsen rather than improve the long-term chances of children in the families affected.” MSD advice to WEAG in 2018.

Instead, Upston and Luxon repeatedly referred to broad OECD research from overseas in 2010, which did not consider New Zealand data.

This Beneficiary Advisory Research note from 2021 found:

The financial penalty of a sanction resulted in research participants and/or their dependents going without necessities, for example, food, electricity and medications. Research participants reported using food banks/ community pantries, stealing, and foraging for food because of sanctions, as well as taking out loans and begging.

Over and above the immediate financial pressure of sanctions, participants reported a significant degree of ongoing anxiety related to income precarity.

Many participants reported being sanctioned because of administrative errors or because they lacked a clear understanding of the obligations associated with their benefit.

Our findings contribute to a growing body of research that suggests sanctions encourage ineffectual compliance rather than encourage positive job-seeking behaviour. Beneficiary Advisory Research paper funded by NZ Lottery Grants board.

‘Well…there’s a correlation that looks like causation’

When pressed on why the Government was pressing ahead without a financial imperative or recent local research to show sanctions worked to increase labour force participation, Upston and Luxon pointed to higher numbers on the Jobseeker benefit and the decline of the use of sanctions since 2017.

“The current data that we have around jobseeker numbers and the decline of use of sanctions gives up a pretty good steer.” Louise Upston in the news conference.

So the Government is relying on a bald statement of financial fragility unsupported by bond prices, ratings agencies and bond investor sentiment, and a pure reckon based on a correlation between two numbers and a 14-year old view from overseas, rather than peer-reviewed research from New Zealand data collected by MSD five years ago.

This is not an evidence based policy. Eventually, Upston and Luxon admitted the policy was a directive based on the perception it was unfair for taxpayers to pay money to people who did not work, or look for work. Here’s the exchange:

Media: Why would you prioritise the research of an OECD report that is 14 years old that encompasses a bunch of countries rather than MSD research that is specifically about New Zealand and done in a shorter space of time? Your critics might look at that and say you're cherry-picking data.

Hon Louise Upston: Look, if you want, there's two sets of research that give different messages, but the statistics, that is the strongest empirical evidence.

Media: But how? The MSD ones are talking about New Zealand—

Hon Louise Upston: 70,000 more people on the jobseeker benefit at the same time that we've seen a 58 percent reduction in the use of sanctions. That’s evidence enough for me to be deeply worried about the number of New Zealanders not in work today that we could be supporting to be a life of greater choice and opportunity through work.PM: It’s about principles—that you have an obligation, and we want to make sure— Media: It should be about statistics, not principles.

PM: No, it is about principles. Because, actually, we have an obligation here in New Zealand to make sure that you're holding your end up. Taxpayers are paying your benefits— so they support you at a time when you desperately need it. That's great. That's what we want to make sure is always the case here in New Zealand. We’re just making sure that everyone understands their obligation. The equivalent part of that equation is you've got to hold up your responsibility to deliver on your obligations. So just making sure that we are acting and making sure that we are enforcing the current sanction regime that has been in power, been in law, for a long period of time—that's not unreasonable.

The question then is what is reasonable for a taxpayer to expect for the money they pay to people to keep them out of poverty. And who is a free rider?

How about the $1.1 billion paid last year in New Zealand Superannuation payments to 55,000 people aged over 65 who were also earning over $100,000 per year from their jobs?

Cartoons of the day

Economic burdens

A happy tune?

Timeline cleansing nature pic

Got your fluff on?

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TL;DR: The Government is reviewing migration settings that produced 2.8% population growth last year and is looking at a longer-term strategy of matching population growth to the ‘absorbtive capacity’ of Aotearoa-NZ’s infrastructure.

Our population grew last year at its fastest rate since 1947, when large numbers of troops returning from World War II boosted the figures ahead of near 2% per year growth during the baby-boom years of 1947 to 1967. Governments of both the left and right invested heavily in public infrastructure such as water, roading and power networks from the 1940s to early 1970s, paid for with sharply higher income taxes, land taxes and estate duties. Government investment as a share of GDP ranged from 10-15% over that period and income tax rates were over 50% for many.

Tax rates were cut from the late 1980s onwards on the assumption of low-to-no population growth and less need for new infrastructure. Land taxes, estate duties and taxes on capital gains were dropped. But population growth has actually averaged 1.5-2% per annum for the last 20 years, with infrastructure investment at less than half the rate of the baby-boom years (investment was 5-10% of GDP), despite population growth being only slight less from 2004 to 2024 than over the 1947 to 1967 period.

Too many people to absorb?

Migration review - Immigration Minister Erica Stanford told Jack Tame in a Q+A interview aired yesterday that last year’s record-high net migration of 126,000 was not sustainable, although it was likely to fall as more temporary migrants with expiring three-year work visas began to leave. But she said migration settings were being reviewed and she had asked officials to look into a General Policy Statement on immigration and population that considered the ‘absorbtive capacity’ of infrastructure.

"I can see that net migration is starting to shift - people are starting to leave and we're going to get that equilibrium back. But in the long term, is this sustainable? No, it's not."

“What I want it to do is give us a planning framework, understand what our absorptive capacity is, and make sure that our hospitals, our schools, our infrastructure, are working with immigration so that we have better long-term planning." Erica Stanford via Q+A

No more ‘free rides’ from ‘tough love’ Luxon

Tough love? - PM Christopher Luxon gave a ‘State of the Nation’ speech to National Party members in Auckland yesterday, saying it was time his Government delivered ‘tough love’ to a ‘fragile nation’. He said beneficiaries who didn’t ‘play ball’ with offers for work would find ‘the free ride is over.’ He also said the Government had discovered Kainga Ora planned to sell 10,200 houses to reduce its debt and that transport spending needs were $200 billion above the funds put aside by the previous Government.

“I have to level with you New Zealand and say - the state of the nation is fragile.

“I will not apologise for tough love. 

“We need to get the public finances back in order.

“That means a return to the orthodoxy of tight budgets, careful stewardship of public money, and a determined focus to keep or return the books to surplus.

"Strong public finances aren’t enough of course to deliver a strong economy in their own right – but they are a critical prerequisite.

"We can’t build infrastructure if we can’t be trusted to borrow money. Businesses can’t attract investment if there’s no confidence in the value of our currency.” Christopher Luxon in his ‘State of the Nation’ address.

‘Are we there yet? No.’

High for longer? - Reserve Bank Governor Adrian Orr gave his first speech of the year in Hamilton on Friday, saying core inflation pressures had fallen, but were still 4% and above the bank’s medium term target of getting inflation down to around 2%. Notably, he used charts for core inflation in his speech that showed significant upwards revisions over the past three years.

“While these declines in core inflation are moving us in the right direction, tackling the tail end of these persistent inflation pressures in the domestic economy remains key to achieving 2 percent inflation. Just how persistent these pressures might be depends on how factors, such as capacity pressures and inflation expectations, evolve going forward.” Adrian Orr in a speech to the NZ Association of Economists.

Housing market not back on track yet

Unanswered questions - Independent economist Tony Alexander published the results of his February survey of mortgage brokers on Friday, which showed the housing market not yet to really fire up because of uncertainty about the RBNZ’s Debt to Income (DTI) limits and the future of interest rates. Rental property investors returned as buyers with a flurry in late 2023 as the new Government was elected, but that enthusiasm has waned because of fresh uncertainties.

“Some buyers are awaiting much greater clarity on how the debt to income (DTI) regime will work and where interest rates are headed. New confusion has appeared in this space.” Tony Alexander in commentary on his February survey of mortgage advisors.

‘Will you share a bed with me? I’m clean. Just $195/week’

Stuff’s Nadine Roberts reported yesterday about an ad placed on Facebook Marketplace last week (since retracted) for someone to share a bed with a stranger for $195/week in Queenstown.

It’s unclear if anyone took him up on his offer, and for those of you who think it can’t have been genuine - think again.

One female who thought the ad must have been incorrectly worded, inquired, and was told she would be sharing a bed with a man “who was always busy with his work.”

The man’s Facebook profile says he is a chef.

The woman didn’t take him up on the offer. Stuff’s Nadine Roberts

Centre-right wins tight by-election in Wellington

The centre-right candidate in the weekend by-election for Wellington City Council’s Pukehīnau-Lambton ward, Karl Tiefenbacher, beat Green candidate Geordie Rogers by 164 votes with 564 special votes still to be counted. The by-election is being held because current Green councillor Tamatha Paul won the Wellington Central seat in the General Election.

The result, if confirmed, would narrow the centre-left majority on the Council to just one or two votes, making it more precarious and reliant on the casting vote of Green Mayor Tory Whanau.

Timeline cleansing nature pic

Braided waterway on a small scale

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TL;DR: The five things that mattered in Aotearoa’s political economy that we wrote and spoke about via The Kākā and elsewhere for paying subscribers in the last week included:

* Net emigration of New Zealanders overseas hit a record-high 47,000 in the 2023 year, which only partly offset net immigration of 173,000, which was dominated by arrivals from India, the Philippines and China with temporary work visas. Meanwhile, a report on students working found 15,000 were regularly working 20-50 hours a week to help their parents pay their rents. See Friday’s email.

* The Government reverted indexation for main beneficiaries to price inflation from wage inflation under Parliamentary urgency to save money for tax cuts, which it was advised by MSD could drive an extra 13,000 kids into poverty. 

The savings are also $1.36 billion less than National estimated before the election, expanding its fiscal hole created by the rejection of its to $2.96 billion foreign buyers’ tax to a total of $4.33 billion over four years. See Thursday’s email.

* Thousands of beneficiaries are set to be kicked off their benefits in coming months for not trying hard enough to get work after Social Development Minister Louise Upston signalled a new crackdown. That will happen despite Aotearoa-NZ having the third-highest workforce participation rate in the OECD behind Iceland and Sweden, the most income-stressed renters in the developed world, and having record high net migration of workers on temporary work visas. See Monday’s email.

*  IRD data shows nearly 50,000 recipients of New Zealand Superannuation are being paid $1.1 billion per year in benefits while also earning more than $100,000 per year, or a total of over $5 billion in gross income from jobs, investments and private pensions. That $1.1 billion in taxpayer funds being paid to rich people compares with the extra $1 billion in benefits being paid to the extra 79,000 people on the main jobseeker, sole parent and supported living benefits in the last five years, given those benefits are lower per-person than NZ Super and growing at a slower rate again because the main benefit is indexed to prices, rather than faster-growing wages. See Wednesday’s email.

* The National-ACT-NZ First coalition Government unveiled the first versions of its replacement for Labour’s Three Waters laws, but without the capital grants or guarantees that would make it viable for councils to opt in or attractive enough for bond investors to back, especially for Auckland Council’s Watercare.

In essence, the Government doesn’t want to take the blame for new water charges or the risk of having to promise bailouts of any new entities. It also doesn’t want to stump up any of the $180 billion of capital needed in the coming years because it wants to keep Government debt low to keep mortgage rates as low as possible. See Tuesday’s email.

What we talked about on ‘The Hoon’ on Thursday night

In this week’s podcast above of the weekly ‘Hoon’ webinar for paying subscribers at 5pm on Thursday night:

* 5.00 pm - 5.10 pm - Bernard Hickey and Peter Bale opened the show with a discussion about swimming and a lack of discussion about climate change’s role in Cyclone Gabrielle.

* 5.10 pm - 5.25 pm - Bernard, Peter and The Kākā’s climate correspondent Cathrine Dyer talked about the revived Mike Smith vs Fonterra climate damages case and the media’s role in not mentioning climate change when reporting climate catastrophes.

* 5.25 pm - 5.45 pm - Peter, Bernard, and Robert Patman talked about the latest developments in Ukraine and the Middle East.

* 5.45 pm -6 pm - Peter, and Bernard spoke with energy researcher Dr Sea Rotmann about the report on hidden energy hardship she coordinated with community groups, Genesis Energy and Mercury.

The Hoon’s podcast version above was produced by Simon Josey.

This is a sampler for all free subscribers. Thanks to the support of paying subscribers here, I’m able to spread the work from my public interest journalism here about housing affordability, climate change and poverty reduction around in other public venues. I’d love you to join the community supporting and contributing to this work with your ideas, feedback and comments. We have a couple of special offers on at the moment.

Other places I appeared this week

I talked with Retirement Commissioner Jane Wrightson for When The Facts Change via The Spinoff about her office’s report into options for NZ Superannuation reform.

We also produce this 5 in 5 with ANZ daily podcast and Substack for ANZ Institutional in Australia, which you can sign up to via Spotify and Apple and Youtube for free.

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TL;DR: The Government has reverted indexation for main beneficiaries to price inflation from wage inflation under Parliamentary urgency to save money for tax cuts, which it has been advised could drive an extra 13,000 kids into poverty.

The savings are also $1.36 billion less than National estimated before the election, expanding its fiscal hole created by the rejection of its to $2.96 billion foreign buyers’ tax to a total of $4.33 billion over four years.

Also, National wants to encourage foreign investors to buy land here to build homes as landlords, and to invest in big apartments-for-rent projects.

Paying subscribers can see more detail and analysis on these and other news items in Aotearoa-NZ’s political economy below the fold and in the podcast above.

Tax cuts paid for by pushing kids in poverty

The National-ACT-NZ First Government used urgency in Parliament yesterday to revert indexation for main benefits to prices from wages, in a move expected to save less than a third of the money National needed for tax cuts, MSD advised.

MSD advised the indexation change, which won’t apply to those on NZ Superannuation, is likely to put around 7,000 extra children into poverty and up to 13,000, reports Thomas Coughlan via NewstalkZB.

The change will also only generate $670 million in savings over four years, which was less than a third of the $2 billion in savings over four years hoped-for by National in its pre-election tax-cutting plans (page 7).

Social Development Minister Louise Upston argued the shift would encourage people off the benefit.

“Over the longer-term, taxpayers will gain from savings in benefit expenditure, while benefit recipients retain a consistent level of income.

“This change also supports our relentless focus on getting people who can work into work by improving incentives to move off benefits. We know that a job is the best way for New Zealanders to get ahead, and we want to make sure the rates of main benefits reflect this.” Louise Upston in a statement.

So what? The use of urgency to pass this change was ugly. National also now has a $4.33 billion shortage of funding for its tax cuts over the next four years, which Labour will now portray as being paid for by pushing kids into poverty.

Foreign investment in land and funds for build-to-rent?

Draft Cabinet papers leaked to Newshub last night and RNZ this morning show National wants to encourage foreign investors to buy land to become landlords of new homes and to invest in new build-to-rent apartments, setting up a clash with NZ First’s opposition to foreign buyers. The loophole to get it past NZ First’s foreign buyers’ ban is that the buyers would not be able to live in the homes, although Winston Peters has yet to agree to it.

Bishop's preferred option is to allow foreign buyers to invest in any residential land to build new houses or accommodation facilities, even a single additional dwelling, as long as the buyer did not intend to live in them.

"Build to rent could play a part in helping to solve New Zealand's housing crisis. We have committed as part of our First 100 Days plan to make it easier for build to rent housing to be developed in New Zealand by amending the Overseas Investment Act," Bishop said in a statement.

"We're looking at a range of options to meet this commitment. The foreign buyers ban will remain unchanged." RNZ

The leaked papers show the idea has yet to go to Cabinet.

"I'll be making further announcements in due course once Cabinet has considered the options available to deliver more build to rent housing in New Zealand," Bishop said.

So what? Anything that gets more build-to-rent housing built is a good idea and this one might just sneak past the NZ First picket line because it’s similar to the exemption NZ First agreed to for apartment new-builds off the plan in the initial OIA changes by Labour in 2018.

Just briefly elsewhere

The new Government’s plan to allow landlords to deduct interest costs from their tax bills could be retrospective, according to the Inland Revenue Department (IRD), which could lead to refunds to landlords of provisional tax payments from the 2023/24 year. NZ Herald-$$$ Thomas Coughlan

KiwiRail has brought in McKinsey consultants to advise on its future. BusinessDesk-$$$ Oliver Lewis

A fishing boss who donated $30,000 to NZ First candidate Shane Jones is now lobbying Fishing Minister Shane Jones to remove MPI’s cameras from fishing boats, saying the cameras breached crew privacy. Newsroom Jonathan Milne

Auckland Mayor Wayne Brown announced a nine-point plan last night to speed up KiwiRail repairs of Auckland commuter rail services after an emergency meeting with officials in response to widespread outages and delays. RNZ

World Wildlife Fund (WWF), Environmental Defence Society (EDS), Greenpeace, Forest and Bird and Pure Advantage have argued in a submission to the Ministry for Foreign Affairs and Trade that the Government’s rolling back of environmental laws was breaching its free trade deal with the United Kingdom. RNZ Eloise Gibson

Education Minister David Seymour wants to prosecute and fine the parents of kids not attending school enough. NZ Herald-$$$ Claire Trevett

Wellington City Council will decide later today on a series of cuts to services such as pools and libraries to save money. NZ Herald Georgina Campbell

Transport, Auckland, Energy and Local Government Minister Simeon Brown threatened to over-ride Auckland’s opposition to public transport, cycling and walking spending cuts by legislation to force the cuts. RNZ

Calls are growing for Fletcher Building to be broken up and its board cleaned out after a shock profit warning and the exits of its CEO and Chairman. Robert MacCulloch Jenny Ruth

Chart of the day

How CPI indexation hurts

Quote of the day

A fifth leak in 10 weeks

"I walk my greyhound twice a day and she has less leaks than this Government." Labour Housing Spokesman Kieran McAnulty via Newshub

Cartoons of the day

Thelma and Louise

Just a drip

Valentines Day

‘Don’t push me, coz I’m close to the edge…’

Timeline cleansing nature pic

House brand

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TL;DR: Stronger-than-expected US inflation data out overnight is expected to delay the first US Federal Reserve rate cut into the second half of 2024, which in turn would hold mortgage rates here higher for longer, possibly into next year.

Elsewhere, IRD data shows nearly 50,000 beneficiaries of New Zealand Superannuation are being paid $1.1 billion per year in benefits while also earning more than $100,000 per year, or a total of over $5 billion in gross income from jobs, investments and private pensions.

That $1.1 billion in taxpayer funds being paid to rich people compares with the extra $1 billion in benefits being paid to the extra 79,000 people on the main jobseeker, sole parent and supported living benefits in the last five years, given those benefits are lower per person than NZ Super and growing at a slower rate. Paying subscribers can see more detail below and in the podcast above. They are also able to ask me to open this one up to the public in the comments and by liking this article. I’ll open over 50 likes.

Also, insurers report a structural shift higher in flood and storm damage premia because of climate change, which is being described as another way the rising cost of carbon and inaction on emissions reduction is finding its way into the global economy.

In news elsewhere in our political economy:

* Auckland Mayor Wayne Brown announced last night he had ordered Auckland Transport to immediately stop work on projects funded by the Regional Fuel Tax, which the Government announced last week would end on July. The projects suspended include the Eastern Busway, the Great North Road cycleway and various speed bumps. The announcement did not include the words ‘climate’ or ‘safety’.

* Finance Minister Nicola Willis has told a select committee she wants the IRD to raise more revenues from its audit programme, The Post-$$$’s Rob Stock reported this morning.

* Christchurch City Council is threatening to suspend its special events promotional spending of $2.9 million over three years to save money, just as the new $683 million Te Kaha stadium is due to open from 2026. Newshub’s Kaysha Brownlie reported last night.

Higher for longer

Data out overnight showed US annual inflation was slightly stronger than expected in January at 3.1% vs 3.4% in December, forcing bets on when the US Federal Reserve will start cutting out towards May from March. The consensus forecast was for a 2.9% annual rate. The S&P 500 fell 1.4% from its record highs as the US 10 year Treasury bond yield rose 11 basis points to 4.28%.

So what? Financial markets lowered their expectations of a May cut to 30% from 50% before the data. The Fed Funds Rate is currently in a range of 5.25% to 5.5% and sets the base for global interest rates, including the wholesale ‘swaps rates’ rates that underpin bank fixed mortgage rates here. This is likely to delay the prospects for mortgage rate cuts in Aotearoa-NZ to later in 2024 or even 2025, which will frustrate Government and borrower hopes for early mortgage cost relief.

The new carbon cost: insurance

Global insurers are ramping up their premia for flood and storm insurance globally after 2023 was its worst year for insurable loss events. They’re also pulling out of some markets seen as most vulnerable to climate-change-driven extreme weather events, including the likes of California, Florida and some parts of Europe, Australia and New Zealand. These changes are pushing through an effective climate-change inflation shock and forcing Governments to consider intervening in some markets to subsidise or outright provide flood and storm insurance. Some insurers are now describing these higher premium as a type of higher cost of carbon, along with carbon taxes. Here’s a useful backgrounder in this FT-gift article: The uninsurable world: what climate change is costing homeowners.

So what? Forced insurance and banking retreats are rippling across the globe, often faster than consumers and governments can react and often triggered by extreme events such as Cyclone Gabrielle. Neither the Labour-led or National-led Governments have grappled with whether to provide some state-backing to flood insurance beyond EQC cover for land damage. Building damage is not covered by EQC. These issues should be considered in the Climate Adaptation Act process, which was stalled at the end of last year and has yet to be revived by National-ACT-NZ First. The danger is consumers, land-owners and taxpayers are overtaken by events again, forcing the sort of ad-hoc, reactive and make-it-up-as-we-go-along approach to issues such as buyouts, flood protection infrastructure investment, managed retreat orders and de facto insurance retreat.

$1.1b in benefits paid to 50,000 earning over $100k/year

Just imagine what Mike Hosking would say if he learned 50,000 New Zealanders on incomes of over $100,000 were also being paid around $23,000 a year in publicly-funded benefits designed to keep them out of poverty by ‘hard-working Kiwi taxpayers’. It doesn’t seem fair does it?

But that’s exactly what is happening every year now, and it’s a major contributor to the expected rise in Government spending on NZ Superannuation over the next four years of nearly $6 billion a year by 2026/27 to $26.4 billion. We heard a lot during the election campaign about the ‘blowout’ in total Core Crown spending of nearly $60 billion a year to $140 billion in the six years of the Labour Government. Over a tenth of that increase came from rising NZ Superannuation costs alone. There has not been a chirrup of protest by any party about this ‘blowout’ in Government spending, and especially not by the NZ First, ACT and National parties, who have professed to be against unnecessary and unfair Government spending on people who can afford to look after themselves.

The detail about the nearly 50,000 high-earning people on New Zealand Superannuation who also receive up to $23,000 a year in average payments was in the Retirement Commissioner’s report yesterday into the sustainability of NZ Superannuation, which recommended a move to means-testing would be fairer than delaying the age of eligibility for NZ Super.

Inland Revenue data for the 2017/18 financial year showed that around 30% of the 732,004 superannuitants (218,606 people) had taxable income over $30,000 and around 4% (31,048 people) had taxable income over $100,000 (Inland Revenue, 2020). The percentage of superannuitants earning these amounts has increased since then. In the 2021/22 financial year, 33% of superannuitants (270,564 people) had taxable income over $30,000 and 6% (49,368 people) had taxable income over $100,000 (Inland Revenue, 2024). Retirement Commission report.

The highest profile recipient of NZ Superannuation is Deputy PM Winston Peters, 78, who is now receiving a salary of $334,734 as Deputy PM, on top of his couples rate NZ Super of $22,800 per year. He also declared in his last publicly-available pecuniary of interests register for 2020 that he was a member of the Parliamentary section of the Government Superannuation Fund. MPs in the scheme before 1992 (Peters was elected in 1978) receive a defined benefit linked to their final salary that is also indexed to inflation. It is not known how much Peters is receiving, if anything, but he was in the scheme in 2020 as Deputy PM.

The Government Superannuation Fund’s 2023 annual report notes that there were payments worth $4.6 million in 2023/24 to members still alive in the Parliamentary Scheme, and no active contributors. That would tally with the retirement of Nick Smith and Peters being out of Parliament in 2023. They were the only ones still in Parliament in the 2017-2020 term who were elected before the 1992 cutoff for joining the defined benefit scheme.

If Peters was receiving an annuity from the scheme, as he would be entitled to do having stopped being an MP and Deputy PM from 2020 to 2023, then he would have received an annual salary similar to their final salary, with additions for multiple years of service. It is indexed to inflation. The NZ Superannuation payments are indexed to wages, while main benefits are indexed to inflation.

Cartoon of the day

False economies

Timeline cleansing nature pic

Hiding in plain sight

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TL;DR: The National-ACT-NZ First coalition Government has unveiled the first versions of its replacement for Labour’s Three Waters laws, but without the capital grants or guarantees that would make it viable for councils to opt in or attractive enough for bond investors to back, especially for Auckland Council’s Watercare.

In essence, the Government doesn’t want to take the blame for new water charges or the risk of having to promise bailouts of any new entities. It also doesn’t want to stump up any of the $180 billion of capital needed in the coming years because it wants to keep Government debt low to keep mortgage rates as low as possible.

Elsewhere in the news in our political economy at 9am:

* Wellington Water says it’s set to escalate water restrictions to ‘level three’ restrictions banning all outdoor use of water within two weeks. Newshub

* The Retirement Commissioner released paper this morning saying the age of eligibility for NZ Super should remain at 65, and that means-testing would be a fairer way of making it more affordable in the long run than changing the age.

‘We won’t pay. You can’t pay. So around we go again’

Simeon Brown and Christopher Luxon last night announced a plan to repeal Three Waters legislation by next Friday and replace it with two new pieces of legislation, one of which won’t be ready until the second half of next year, just as councils are heading into fresh elections. The first law would be passed by mid-2024 to ‘streamline’ the creation of the new entities if councils wanted them, with a second one being a long-term replacement regime to be introduced by the end of 2024 and passed by mid-2025.

Brown also announced the members of a Technical Advisory Panel with Terms of Reference focused on them advising the Government on:

* enabling councils to “appropriately cost-recover and access long-term debt to fund inter-generational water infrastructure”; and,

* creating an “appropriate model to provide financial independence for Watercare from Auckland Council in the first instance.”

The lack of new funding and a government guarantee, which Watercare has said is essential to avoid a doubling of water charges, puts the onus on councils to:

* carve off their water assets to merge them with neighbouring councils after debates over ‘fair’ exchanges of pipes and debt;

* install water meters and hike water charges in the teeth of ratepayer opposition; and,

* convince bond investors and ratings agencies to lend to them without a Crown guarantee at low enough interest rates to make the tens of billions of investment viable.

None of those things will be politically, financially and technically cheap, easy or fast for councils to pull off. Most won’t and Auckland Council has already said it is impossible for Watercare to be carved off without a Government guarantee, which PM Christopher Luxon and Local Government Minister Simeon Brown ruled out again late yesterday (See video below from 18:40 to 19:41)

A roleplaying exercise

The Government is effectively saying: ‘It’s not our fault if the pipes fail and we’re not the ones putting up taxes and taking on debt that pumps up your mortgage rates. We cut taxes. It’s the councils putting up rates, imposing water charges and building up debt piles and/or letting the pipes fail.’

In response, the councils will say: ‘The Crown is hanging us out to dry without access to any of the GST or income tax benefits from the population growth the Government unleashes without consulting us or granting capital for, so we’re best to sit tight, passively-aggressively stop new housing supply, and blame the Beehive.’

The end result? The Government and councils point fingers at each other for yet-more-years, the pipes keep failing, the beaches become more polluted and land prices keep escalating as fast as the rents for those not still in motels, tents and stationwagons.

So how is this politically, financially or environmentally sustainable?

Easy, peasy.

Our political economy has become a Kabuki theatre

The overwhelming majority of voters in council elections are ratepayers who own their own homes, and often several more homes, sometimes in other council areas. They literally do vote early and often in council elections, and at far, far higher rates than renters. All the incentives are for them to block rates increases, water meters, water charges and the creation of new entities. That’s because it keeps their disposable incomes up so it can be leveraged into more residential land purchases, while also restricting the supply of land able to supply more homes. That in turn pumps up the untaxed gains in their leveraged equity in residential land, which is the overwhelming way families become financially secure in Aotearoa-NZ.

This same group of homeowners in the leafier suburbs of our big and small cities are the swing voters in general elections. They’re quite happy with escalating tax-free and leveraged capital gains on residential land. They also believe there is no other way to ensure they can leverage their own children into homes. They want income tax cuts, no rates increases and anything that will bring mortgage rates down.

Allowing and encouraging the accidentally-on-purpose investment strikes is a feature, not a bug. The Government and councils can say they’re trying to solve the problems, but they are wicked problems and a lot of shrugging is required.

How could this change? The political, tax and investment incentives would have to change to tax land values, councils would need extra revenue tools and borrowing capacity to pay for new pipes, and the Government of the day would have to use its balance sheet to borrow most of the $180 billion needed in the decades to come.

The safe bet for the last decade at least has been to buy as much residential land as fast as possible, leverage it up as much as possible and hope like heck the tax-free gains are enough to build up deposits and passive income to support your own family into homes.

The only leverage the landless young have at this stage is to somehow convince their parents this is not sustainable, either because it will mean so many mums and dads have to become guarantors and/or gifters of deposits, or those mums and dads will have to watch their grandkids grow up via WhatsApp and the occasional holiday to Australia, assuming the airfares are low enough and the borders are open. Not enough of the landless young renters vote to change the equations at either local council or general election level.

Even in Wellington, where young renters have mobilised and voted at higher rates, the Green/Labour councillors and Mayor are unable to change the settings around water meters, government debt and rates in a way that means they will be re-elected.

Chart of the day

A range of indicators moving fast

Unemployment set to rise

Cartoon of the day

The rats are back in

‘Just wondering what I should do…’

Timeline cleansing pic of the day

Ready for the Last of Us?

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe