Govt has no choice but to increase debt this year; No new taxes expected to pay for quakes, Bill English says

By Alex Tarrant

Government has no choice but to increase debt more than previously thought this financial year following the latest Christchurch earthquake, Finance Minister Bill English says.

English spoke to interest.co.nz after Treasury released its first official forecasts for how much the two Christchurch earthquakes on September 4 and February 22 would cost. Its initial estimate yesterday sat at about NZ$15 billion to be shared by government and private insurers.

The two quakes could knock up to NZ$5 billion off the government’s tax take over the next five years, Treasury said.

The two quakes overlapped a slower economy and increasing oil prices, although New Zealand was receiving very high commodity income, English said, referring to a number of factors affecting the economy.

“What it boils down to from the government’s point of view – putting aside the rebuild issues, just on the government’s finances – is there’s not much choice about an uplift in debt in the short-term, and by the short-term I mean this financial year,” English said.

“We’ve got a [December] half year update out there, and it’s got an operating balance before gains and losses (OBEGAL) of about NZ$11 billion,” he said.

“There’s a lot of pressure on that number, it’s going to get bigger.”

Some of the pressures were accounting pressures, meaning government may have to bring to book some future costs from years to come in the May Budget this year.

“While the government’s cash dispersments in relation to the earthquake are likely to be spread over the period of two or three years, the recognition of them is likely to occur earlier than that, as in a lot of them in this financial year,” English said.

“That’s driven by the audit office, not by us.”

“For instance, the second round of EQC excess has to come off,” English said, refering to the EQC's initial payout of NZ$1.5 billion for the second quake, on top of it's NZ$1.5 billion excess for the September quake.

'Big council bill'

“Then there’ll be an issue over the certainty with which we know the government’s share of the council infrastructure bill. That’s potentially quite a big bill. Government has this sharing formula between the council and it about roads, water and sewerage. It’s anyone’s guess what that is, but it could be NZ$1 billion, NZ$1.5 billion – something like that,” he said.

“If you know that, then they’ll probably make us book all of that.”

The Christchurch City Council was severely constrained in terms of how much it could spend on infrastructure.

“There’s still discussion going on about the intricacies of their insurance coverage,” English said.

“They’ve got different sorts of coverage for different assets that are triggered in different circumstances. It’s just that they’re all triggering at once this time,” he said.

Then there were items like the cost of schools affected by the quake that government could be made to book.

“That’s probably the government’s single biggest infrastructure bill for its own infrastructure. If you’ve got 18 schools that are sufficiently damaged and they can’t be reopened – it’s at least 18 – then it’s quite possible that you might have to book the write-down or the rebuild cost,” English said.

“The point there is, whatever you do in the short term, it wouldn’t matter if you put a levy on from [say] July 1 this year, you can’t offset those costs – that increase in debt,” he said.

“The point is simply there is no way in offsetting that increase in deficit in this financial year. The issue isn’t so much ‘can you limit the increase in debt,’ the issue is, ‘what measures can you take in the budget and the two or three years beyond to claw back that increase in the overdraft’.”

'Increase in EQC levies'

It was not the government’s preference to increase its revenue stream to help pay for the quake, although one revenue increase that’ll almost certainly happen would be an increase in EQC levies, English said.

That would be for future disasters and help replenish the EQC fund.

“But beyond that we’re reluctant. It’s not our preference to put on higher taxes or some earthquake levy. If only because the economy is flat and you want to be careful about reversing the signals that are focussed on better incentives, stronger economic growth and investment, savings and exports,” English said.

Asked then that we should not be expecting other ways of raising revenue in the May budget such as capital gains tax or anything around RFRM, English replied, “I wouldn’t be expecting any”.

Government would prefer to look at its spending track over the next four years and see if it could shuffle that around.

“If you look at total government spend over the next four or five years, you’re talking about NZ$300 to NZ$350 billion,” English said.

“If you think of the cost of government, the change in our deficit line is looking like NZ$5 billion less revenue, and NZ$5 billion earthquake costs,” he said.

Asked whether that could mean and extra NZ$10 billion in borrowing, English said “it could possibly”.

“Certainly it means an increase in borrowing this year. Then it’s a matter of what we can do over subsequent years around the mixed ownership model, and looking at our priorities,” he said.

Pressure on debt track after this year; No more SOE sales earmarked

Government was not looking at putting more assets up for sale via a mixed ownership model above those already earmarked.

“One of the things we focus on is the total gross borrowing requirement, and the way to think about it is, under the mixed ownership stuff, we were looking at making progress on reducing that gross borrowing requirement. Now our focus would be on whether we can hold the line or not, over a three or four year period,” English said.

“We can’t hold the [forecast debt] line [in December’s half year update] in year one – this year – but we may be able to get back in line over three or four years,” he said.

“If you think of what we’re trying to aim to do, it’s consistent with the argument we had before that we were at the boundaries of our vulnerability on gross borrowing requirement – net foreign liabilities. That’s everybody, with the private sector and the government, and the government being the component that was rising quite rapidly."

The idea at the start of the year had been whether government spending and debt could be pulled back and tightened up to make government less vulnerable.

“It would now be a challenge to hold the line on it after this year. This year we don’t have much choice. It [the choice] is, we’re going to take on more debt, and that will be added to the stock, and this puts a bit more pressure on to the choices about holding the line in the future,” English said.

Steeper track to surplus

Over the next few months in the build up to the May Budget, Government would work on whether it could still get back to surplus by 2015/16.

“Let’s say you were, then by June 30 we would be starting from a bigger deficit than we expected so the track back would have to be steeper,” English said.

“We’re not rigid about it, but getting back to surplus is pretty important to us, putting a lid on growing external liabilities. We’re keen to get back to surplus around that time,” he said.

(Updates with comments on mixed ownership model, pressure on debt track, surplus comments)