Time right for Govt to be bold and borrow
Low interest rates chance to fix infrastructure deficit while helping stimulate economic growth
Reserve Bank governor Adrian Orr has been severely criticised on numerous issues, including his call for more fiscal or government stimulus if the economy slows.
Most of his critics believe he should stick to monetary issues and shouldn’t be trying to influence Government policy.
However, Orr’s views are consistent with many prominent global economists, including Larry Summers, a Harvard economics professor and former US Treasury Secretary.
Summers recently wrote that monetary policy, particularly lower and lower interest rates, has become less effective in stimulating economic growth.
He wrote in his Financial Times column: “Given the risk of a catastrophic deflationary spiral, central banks are probably right to attempt to ease monetary conditions. But diminishing returns have surely set in with respect to monetary policy and there is risk of doing real damage to the health of the banks and financial intermediaries.”
He continued: “Most importantly governments need to rethink fiscal policy. With real rates near zero or even negative, the cost of debt service is very low and low rates can be locked in for decades. That means that the debt levels that were prudent when rates were at 5 per cent no longer apply in today’s zero interest rate world. Governments that run chronic surpluses are failing to do their part to support the global economy.”
This begs the question: Why doesn’t the NZ Government borrow an additional $10 billion to $20b to update the country’s ageing infrastructure? This could be borrowed at extremely low interest rates and with long-term maturity profiles.
Economists are increasingly arguing that this would be a far more effective way of stimulating economic growth, compared with everreducing interest rates, and would have significant long-term benefits for an economy.
What are the pros and cons of a substantial increase in NZ Government borrowings, albeit at low interest rates, to rebuild the country’s ailing infrastructure?
The Treasury’s 2015 report “The Thirty-Year New Zealand Infrastructure Plan” noted that “Some of our biggest infrastructure networks face renewal pressure over the next 30 years, particularly in the social infrastructure, electricity distribution and three waters sectors. These renewals are simply a result of the fact that many of these assets were built or put under the ground at the same time and therefore need replacing at the same time.”
The report went on to state: “Our schooling estate has an average age of
42 years and over 50 per cent of our social housing stock is over 42 years old. The estimated cost of renewing our [drinking water, waste water and storm water assets] over the next 15 years varies from $30b to $50b, in fact one of the biggest challenges facing the sector is trying to understand what the true costs are and when they will be incurred.”
These latter comments don’t include roads, rail, airports, seaports, telecommunications networks or electricity and gas infrastructure assets.
The list of New Zealand’s infrastructure assets in 2015 included:
● 10,886km of state highways
● 83,703km of local roads
● 4000km rail corridor
● 12,000km of national transmission grid
● 42,312 GWh of electricity produced
● 2532 schools
● 38 public hospitals
● 52 municipal landfills.
The Thirty-Year vision was for New Zealand to have “a modern, integrated and efficient infrastructure system which underpins a prosperous and inclusive society [and] supports international connectedness, increased productivity, movement up the global value chain, and more exports and growth”.
Underinvestment in infrastructure can cause major problems as is being demonstrated by the large-scale electricity blackouts in California at present. The root cause of these blackouts is the state’s fragile and poorly maintained power lines, surrounded by untrimmed trees, that can spark major wildfires such as the one in Paradise, California, that killed 80 people in 2018.
The state’s utility company, Pacific Gas & Electricity Co (PG&E), now
regularly shuts down its electricity grid, particularly in dry and high wind conditions, because the company’s ageing power lines are prone to instigate new wildfires.
Meanwhile, back in New Zealand a new independent infrastructure body, the New Zealand Infrastructure Commission — Te Whihanga, is being established to develop a 30-year infrastructure strategy, in conjunction with central and local government. The commission will be an autonomous Crown entity, with an independent board of between five and seven members with a range of perspectives and private sector expertise.
The Treasury believes that a fresh approach is required because “New Zealand is facing a major infrastructure deficit, which, if not addressed, will impact our economic future and our social and environmental wellbeing.”
The new commission doesn’t appear to have any mandate to recommend how this “major infrastructure deficit” will be financed.
As most of the major projects will be undertaken and financed by government, we need to focus our attention on the Crown’s financial position (see accompanying table).
The Crown reported a surplus of $7.5b for the June year compared with a surplus of $5.5b in the year to June
2018. The huge deficits in 2011 and
2012 were mainly due to the
Christchurch earthquakes.
Gross Crown debt is now $84.4b, or 28.1 per cent of GDP, which is only slightly higher than the 27.2 per cent pre-earthquake debt/GDP ratio.
NZ Government debt is extremely low, on a debt/GDP basis, compared with most other countries. It is also low compared with NZ household or individual debt, which currently stands at $225b.
Annual Crown interest costs have risen from $2.8b to $4.1b between
2010 and 2019 but as a percentage of Crown expenditure these costs have risen from 3.4 per cent in 2010 to only
3.6 per cent in the latest year. Consequently, the NZ Government is in a strong position to borrow to fund an infrastructure rebuild at much lower interest rates than its maturing debt. For example, in 2021 the Crown has $11.3b worth of debt maturing, with a 6.0 per cent coupon rate, and in 2023 a further $9.2b matures with a 5.5 per cent coupon rate. In the latest NZ Government bond tender, which had an April 2037 maturity date, the weighted average accepted yield was 1.61 per cent, significantly below the coupon rates of bonds that mature over the next few years.
It is quite conceivable that the Crown could borrow an additional $20b-plus but its total interest costs could fall as more expensive current borrowings are rolled over at significantly lower interest rates.
If the current Government is genuinely determined to reduce the country’s infrastructure deficit, there has never been a better time to fund this through low-interest rate borrowings.
However, there is one major problem: the fragile state of the domestic construction and building sector and its ability to rebuild the country’s infrastructure.
This problem was evident again this week with the SkyCity International Convention Centre fire, a disaster that surely would never have happened if we had higher quality building standard and work practices.
The construction sector isn’t attracting new capital or high-quality employees because profit margins and profitability are far too low, partly because the Crown has been a tough negotiator on contract terms.
Consequently, the construction and infrastructure building sectors are unprofitable, are failing to attract new talent and have incurred substantial write-downs, losses and failures.
Finance is available for a major infrastructure rebuild and a visionary Government should take advantage of this situation. However, there will be huge problems with this rebuild unless the Crown is willing to take a softer approach to contract negotiations which would enable the construction sector to be more profitable and attract highly skilled managers, engineers, tradies and other onsite workers.
Adrian Orr is on the right track as far as fiscal stimulus is concerned but the country needs a far more profitable and robust construction sector if this strategy is to be successful.
Brian Gaynor is a director of Milford ●
Asset Management
The NZ Government is in a strong position to borrow to fund an infrastructure rebuild at much lower interest rates than its maturing debt.
YEA: Paul Goldsmith, National Party finance spokesman
New Zealand has a lot going for it. The world wants our goods and our terms of trade are still at high levels.
And yet growth per person has slumped to near zero and business confidence remains well below the floor.
Why? The international “headwinds” and global uncertainty explain only part of it — and anyway, we can’t do anything about them.
Domestic factors, however, are significant and controllable.
This Government has been irredeemably complacent about the sources of growth and is undermining several of them.
We know all the industries this Government doesn’t like, but few are convinced by ministers’ apparent belief that critical industries can be replaced by slogans and wishful thinking.
It has driven down business confidence by adding costs, creating massive uncertainty and by demonstrating incompetence, most famously with KiwiBuild.
On costs, think of industrial relations, continued regulatory expansion and additional fuel costs.
On policy uncertainty, just think of the impact that 18 months of uncertainty over a capital gains tax had on investment. And there are still countless working groups. The logical thing is for investors to keep their hands in their pockets and wait to see what happens.
If enough people choose not to invest in new businesses, new plant and machinery, new staff, then the economy slows.
Think of the impact of the oil and gas decision — not just directly on Taranaki, but indirectly following the way it was made, without any analysis or consultation. If they can do that to one industry, they can do it to others, the next time the PM needs to make a speech.
Think of the “wellbeing Budget” — does anyone really know what it means? If you want 10 minutes of entertainment watch Deborah Russell, MP, chair of the finance committee, explaining it in Parliament.
Third, this Government has demonstrated incompetence in critical areas, starting with KiwiBuild, but also in the administration of immigration — which has ground to a halt — and the lazy manner of its spending, exemplified by Shane Jones’ slush fund and the free fees policy. But perhaps most importantly, it’s been incompetent with transport infrastructure.
It is an unforgivable mistake to walk into Government and on day one cancel or delay a dozen major roading projects — all over New Zealand — several of which were ready to go, and replace them with projects that were not ready and won’t be for some time yet.
That is seeing a massive hole open up in our infrastructure pipeline as the old National projects expire. It was entirely predictable.
So these things all weigh heavily on business confidence.
Less confidence means less investment, which flows through to fewer opportunities for Kiwis to get ahead.
So it seems to us, the challenge is to restore confidence and revive our economy, by letting business, large and small, get on with it and by being disciplined and effective in government.
National recently released its Economic Discussion Document which outlines our thinking in three areas: responsible economic management delivering world-class services; a suite of policies for a more productive and competitive economy that lifts household incomes; and third, an equal focus on reducing costs for households and business.
We have committed to lighting a regulations bonfire — we will repeal 100 regulations in our first six months in Government and we will eliminate two old regulations for every new one we introduce, we’re considering whether there’s merit in targeted tax relief for small businesses — like in Australia — we will index tax thresholds to inflation, we will establish a small business payments guarantee and we will ensure government departments pay contractors on time.
New Zealand should still be being doing well. We’ve got a lot going for us, so if we can get the settings right there’s no reason why we can’t succeed.
NAY: Grant Robertson, Finance Minister
The Herald’s Building Confidence series contains some refreshing analysis of how New Zealand businesses are performing.
Closing skills gaps, smarter immigration settings, more affordable housing for workers and greater support for innovation are all areas we’re investing in. Sorting out long-term challenges like productivity and skills shortages won’t happen overnight, but we’re getting on with it.
At the same time, the record infrastructure investments that we’ve committed to in transport, hospitals and schools will help underpin demand and boost productivity.
It’s worth pausing to take stock of the underlying strength of the New Zealand economy. Growth of 2.4 per cent continues to be higher than the long-run average and is stronger than nearly all the countries we compare ourselves to.
Unemployment is at a decade low of 3.9 per cent, wages are rising and the Government is running a surplus.
All are signs of an economy in good shape.
This was reinforced by the Herald’s recent Mood of the Boardroom report which showed more than four-fifths of business leaders expect revenue growth over the next year, 75 per cent expect profits to grow or stay steady and 70 per cent expect to lift or hold staff levels.
The top seven concerns raised by business leaders were all international. For context, all 17 international concerns ranked higher than the oil and gas decision, which was 34th of 38 global and domestic issues canvassed by the Herald.
The Building Confidence series puts paid to the negative narrative that all businesses are gloomy. Given our underlying strengths, one of the biggest risks to the New Zealand economy is that we talk ourselves into a downturn.
I acknowledge that the Government’s work to tackle some of the big, long-term issues New Zealand faces can sometimes cause conflict with parts of the business community.
But the alternative of not taking action would force future governments into faster, quicker and more disruptive change. That’s why we’ve been seeking consensus across Parliament, industry and the public on some of the big pieces of legislation, particularly in the environmental space.
We’re getting on with the job of putting in place the framework and policies that will help us meet our international commitments over the next 30 years. We’re doing that now to give businesses the certainty and time to make a managed transition to a more sustainable economy.
That long-term outlook is central to the economic strategy we announced in September.
The strategy identifies eight key shifts that will support the economy over the next 30 years.
We announced further investment in one of the shifts this week — ensuring that people are skilled, adaptable and have access to lifelong learning.
Skills shortages are by far and away the most pressing issue raised with me by businesses.
On Monday, Prime Minister Jacinda Ardern and Education Minister Chris Hipkins announced an extra 4000 places for the Trades Academy and Gateway schemes to get our young people into trades. This builds on other moves like subsidising the costs of 2000 new apprentices through Mana-in-Mahi.
The boost for Gateway was the first since Labour and New Zealand First were last in Government. That speaks volumes about the situation we inherited this time around as skills shortages grew worse over the last nine years. It is just one of the areas where we are having to make up for years of underinvestment.