Housing NZ’s $2.9 billion debt risky – Treasury

The Government allowed Housing New Zealand to borrow billions to build new state houses despite advice from Treasury that such debt would be expensive and risky.

In May, the Government said it would build 6400 state houses over four years.

The funding for this came prinipally from $2.9 billion Housing New Zealand was allowed to borrow independently, instead of through regular government borrowing. Just $234 million of new money was allocated to the Crown agency.

Documents released by Treasury yesterday reveal the agency repeatedly warned the Government against allowing Housing NZ to borrow this way during the leadup to the Budget, suggesting that the money should come out of normal Crown debt.

This money would have likely come with cheaper interest rates but would vastly increase the amount of core Crown debt. That would likely stop the Government achieve its key Budget responsibility rules target of getting core Crown debt below 20 per cent of GDP in five years.

The advice echoed similar words given by Treasury when the National-led Government decided to allow Housing NZ to borrow more than $1b in the last Budget.

In a February briefing, Treasury analysts said borrowing directly through the Crown would save $11m a year. This was based on a plan to borrow $1.75b instead of $2.9b. A later analysis estimated a further $3m to $6m in annual interest costs for every $1b borrowed by Housing NZ.

Treasury analysts said letting independent agencies borrow money of their own accord made sense with properly independent state-owned enterprises like Solid Energy but not bodies like Housing NZ that delivered essential services and would be bailed out by the Government if something went wrong.

‘‘This is because failure to deliver these services will be unacceptable to the public and ministers . . . meaning further public funding will be made available to continue service provision should it become necessary,’’ the analysts wrote.

In essence, overseas credit rating agencies would not see this debt as separate from Crown debt given the agency delivered such a core service, and thus would just factor it into their decisions about New Zealand anyway. Because of this, it risked the credibility of the Government’s Budget responsibility rules as it was essentially a loophole through them.

Treasury analysts did acknowledge that with New Zealand’s sterling credit rating real harm to our international reputation was unlikely.

It’s understood Housing NZ was keen to have the power to sign multi-year contracts and not have to go through rigorous budget processes every year to keep up a strong build programme.

Borrowing directly through the Crown would save $11 million a year. Treasury analysts