Earthquake levy has same risk as increasing debt in terms of credit rating, hence need for control of budget spending, English says

Earthquake levy has same risk as increasing debt in terms of credit rating, hence need for control of budget spending, English says

By Alex Tarrant

Finance Minister Bill English says a temporary levy to pay for the costs from the Christchurch earthquakes would be just as bad as increasing the government’s borrowing programme in terms of raising the risk of a sovereign credit rating downgrade.

The government has chosen to increase its borrowing programme to pay for the immediate costs of the February 22 quake – something it says it could not avoid – and then look to control and cut budget spending in certain areas to get its books back to surplus and start repaying debt after 2014/15.

The Green Party has proposed implementing a temporary levy on those earning over NZ$48,000 in order to raise around NZ$5 billion to pay for the ongoing costs of the quake over the next four or five years.

On top of the expected NZ$5 billion cost, government is also facing revenue reductions of about NZ$5 billion as a result of disrupted economic activity over the next four years.

Green Party co-leader Russel Norman has said Treasury advice was that a ratings downgrade could add 30 to 100 basis points (0.3% to 1%) on to the cost of borrowing if New Zealand’s credit rating was downgraded from AA+ to AA by Standard & Poor’s.

Interest.co.nz was told Treasury Secretary John Whitehead made the comments in a briefing on the Christchurch quake to opposition parties two weeks ago.

In response to questions from Norman at Question Time on Thursday afternoon, English reiterated the position that government did not have any choice about increasing borrowing for the early costs of the February 22 quake.

“The government has had to start borrowing more almost immediately to pay for earthquake costs, such as the NZ$150 million welfare spend that’s going on at the moment just to put cash in people’s pockets,” English said.

“The real issue is how the government intends to deal with that increased debt. If we weren’t borrowing we wouldn’t be able to meet all those immediate demands, but the government will outline in the budget how it does intend to deal with that increased level of debt,” he said.

“In our view, we believe a levy could be just as much a risk for our credit rating as increased borrowing, because it would demonstrate the government wasn’t willing to deal with its own spending quality, on the one hand.

'Levy would hurt growth'

“On the other hand a levy could make it more difficult to pick up, and in the long run that is going to help cut debt and rebuild Christchurch,” English said.

Norman asked whether the real issue in terms of risk of a ratings downgrade was the level of government debt, and if a levy were struck to raise a billion dollars a year, that would have a significant impact on reducing the amount the government needed to borrow, and hence reduce the risk of a credit downgrade?

“Regardless of whether we had the earthquake or not, that is the argument for increasing taxes when the government does owe money,” English replied.

“We have argued that it’s in our long-run best interest to have relatively low taxation rates on income, savings, investment and exports, because that will help the economy grow,” he said.

“There is an argument that you could put those tax rates up right now to reduce debt, but we believe that would be detrimental in the long-run.”

Norman said the proposal was for a short-term, temporary levy and therefore wasn’t about the long-term argument.

English said he still believed government should choose the path it was on.

“With respect to the levy, our calculations indicate that a levy of the size that the member is referring to would probably have to last for about eight to ten years to meet, say, a NZ$6 billion cost. We don’t regard that as short-term, that does look fairly long-term,” English said.

Norman then asked about the Treasury Advice, saying a downgrade would cost somebody who had an ordinary mortgage on a house in the order of 1% increase in interest rates, which would be a much greater increase on costs for that household than a temporary levy.

English said he hadn’t seen particular Treasury advice that specific.

“But there’s no doubt that a credit [rating] downgrade would generally lead to somewhat higher interest rates, and that is a risk that New Zealand faces,” English said.

“Not just because of government debt, in fact the credit rating agencies would say that it’s the large private debt alongside the government debt that gives them some concern about New Zealand,” he said.

The government was very conscious about the risks of a downgrade, and believed it was making the right considered choices to deal with those risks.

“In the long-run, the issue for New Zealand is the amount of debt it owes to foreign lenders. At the moment what’s driving up that debt is a growth in government debt, and most of the advice I’ve seen has indicated the best thing the government can do to deal with that rise in debt is to reduce, where it can, its expenditure in a permanent way, rather than relying on a temporary levy,” English said.

Paying for rebuild in different ways

Norman said the cost cutting initiatives being looked at, such as cuts to Working for Families, would mean a smaller group of New Zealanders would pay for the Christchurch rebuild – those that have benefit cuts - and that a large bulk of New Zealanders would face higher interest payments on mortgages if there were a downgrade.

“A short-term levy that was large enough to raise enough money to meet the six or seven billion dollar cost would need to be either applied to a much wider range of income earners than he says, or be applied at a higher rate, if we were going to meet those costs in the short-term,” English replied.

“The method that the government is pursuing will allow us to spread the costs of the Canterbury earthquake over more people over a longer period of time,” he said.

“We believe that we need the tax settings and the spending settings that are going to help lift the performance of the economy. Increasing taxes is probably not going to help that, and continuing with ineffective government spending is not likely to help that.

“So we’ve been trying to get the tax rates moderate and lower, and to focus government spending where it can be effective. If we can achieve both of those things, we can get a growing economy, and deal with the debt that comes from the Christchurch earthquake,” English said.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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10 Comments

Bill is talking ideological rubbish. A tax temporary or otherwise will always be be better for ones credit rating than raising more debt. Bush1 and Clinton raised taxes - massive surpluses flowed. Cullen raised taxes - surpluses flowed.
And how is it that NZ and the US with lower marginal income tax rates are struggling relative to countries like Australia, Germany, Sweden and Canada whose high marginal tax rates should plunge them into an economic abyss according to Bill.
(Clearly an alternative to raising taxes is cutting expenditure but thats another discussion than Bill's framing of the issue.)
I look forward to the day when economic debate in NZ is fact- based...

Massive surpluses mean only one thing, the Govt is over taxing.

Ideally, the Govt's annual budget should break even.

Incidently, what happened to all that money from Cullen's surpluses? They certainly didn't save any for a rainy day.

Surpluses were not massive...not annual budget but business cycle budget....

He had to give the surpluses out as WFF as a counter-bribe to Brash's tax cut bribe in 2005.  Apart from that labour was happily spending on social engineering programs....while I dont like National, (I think they only look after the top 10% of NZers), Labour are simply wasteful and incompetant....the choice who to vote for just sucks.

:/

regards

 

What is Bill English on?

And we had one of the lowest personal tax rates among the developed OECD countries before the last tax cuts for the wealthy.  So according to Blinglish we should already have had a stunning growth rate.  We gaven't so lower taxes more -- real logical.

Not all high income earners are wealthy/rich.

FYI check out Singapores personal tax rates

English is being held hostage by a number of outside forces. 

  • Credit agencies perpetually dangle the "Sword of Damocles" threat of ratings downgrades.  These agencies represent the interests of global banking - fullstop.  Downgrades create a profit vortex of increased fees for the banks.  When the algorithyms indicate the time is right, a downgrade is inevitable.
  • The Insurance market, including EQC, will dither as long as it takes before writing large cheques to policy holders, forcing the government to be first in with relief.  Increased premiums will add an additional burden to home and business owners throughout the country, earthquake factors notwithstanding.
  • The National Party, having called an election, cannot cut significant social spending programmes or raise taxes before the ballot boxes are sealed.  The Party has already promised homeowners, whose assets are leaking value faster than rain dripping through the roof, a bailout.  This effectively transfers private losses onto the backs of taxpayers. 
  • The price of energy is beginning a new leg up.  The Jasmine Revolution and war in the Middle East will force the price of petrol ever higher.  These increases will filter to the householder immediately at the pumps, and later at the supermarket checkout.  Energy is the life's blood of our economy and its effects will kill consumer spending.

Bill will have to "Bend it like Beckham" to keep kicking these cans into a future of falling revenues, declining assets, and increased debt.

I’m with Norman on this one except for the only 48,000+. Everyone in Christchurch is suffering Rich or poor so we should all help make a slight sacrifice to help out.

I would suggest maybe 1c below 48,000 and 2c over.  It’s fair for the wealthy like me to pay more but I think we should all be prepared to help out in such a situation.

What is Bill English on if he thinks a Levy would hit growth when it would all be being spent on construction etc.

nymbe - no, no just careful it's a "Green Idea" - so it cannot be a good idea and many here can confirm that.

Of course - a levy is the only sensible way to go.

Wealth distribution

 Worldwide wealth must become distributed from the top of the rich back to the middle class at least. This would be a good base of economic recovery.

A levy for people suffering financially from the earthquake in Christchurch could be a good example, how this could be demonstrated – otherwise a core of unrest could be created.

 http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10533729