A fountain made of buckety things. Photo: Matt Boulton via Flickr/Wikipedia. CC BY-SA 2.0
A fountain made of buckety things. Photo: Matt Boulton via Flickr/Wikipedia. CC BY-SA 2.0

BusinessJune 25, 2021

Bernard Hickey: A pyrrhic and partial victory in Wellington

A fountain made of buckety things. Photo: Matt Boulton via Flickr/Wikipedia. CC BY-SA 2.0
A fountain made of buckety things. Photo: Matt Boulton via Flickr/Wikipedia. CC BY-SA 2.0

Last night Wellington City Council voted for a spatial plan that will allow some intensification of housing, but the problems run much deeper, writes Bernard Hickey. 

This story was originally published in Bernard Hickey’s email newsletter The Kākā and is republished with permission.

The apparent partial defeat of nimby councillors in Wellington’s spatial plan debate last night is only a pyrrhic victory. The real problem holding back housing supply is not the zones and lines on maps drawn up under threat of legal action from the Beehive.

The real problem is the Public Finance Act driving the government’s own financial strategy to reduce debt forever and always, rather than reducing long-term climate and housing liabilities that aren’t being measured on New Zealand Inc’s collective balance sheet.

It is strangling climate and housing infrastructure investment and creating the perverse situation where councils and the government are now cutting plans for transport and housing spending because they have to keep interest rates low, which in turn further pushes up house prices and double cab ute sales.

Why the Public Finance Act needs reform or reinterpretation

The debate over Wellington’s housing future initially took a dark turn yesterday afternoon when anti-development councillors stopped the building of high buildings in the CBD. But councillors in favour of much more new housing rallied support late in the meeting to add back into the plan some character housing areas for more intense development.

The end result was a one-all draw of sorts that pro-house-building councillors were happy with, if only to have avoided the last-minute disaster of widespread and much larger carveouts of character areas from the spatial plan.

But the finalisation of the plan doesn’t solve the basic problem that councils refuse to spend enough on infrastructure to support the necessary house building, in part because they don’t want to increase their debt as much as they could, and in part because they aren’t getting enough help from the central government.

The 1989 Public Finance Act’s vague but very real demand that officials keep public debt low is suffocating housing development and did not account for the extremely fast population growth that has happened accidentally on purpose in the last 20 years.

The best example of that in Wellington is that attempts to build much more intense developments on Taranaki St and Willis St at the Basin Reserve end of the CBD were blocked last year because council officials told developers they did not have the water pipe capacity for the hundreds of extra residents the developments would house.

This piece from Rob Mitchell in the Dominion Post from April shows how developers were forced to build townhouses on sites ripe for high-rises because of a lack of infrastructure. Thames Pacific’s The Paddington and The Wellington Company’s Aro Living townhouse developments are being built at the moment  on former car sales yards and car parks. They should have been high rises, but officials advised the infrastructure wasn’t there. The plan’s restrictions were not the real problem.

“Thames Pacific principal Stephen Sutorius admits his homes will accommodate about 300 people on a site that could have taken three times that many. His company considered a high-rise development of the former car sales yard, but he was told the city’s creaking infrastructure couldn’t take the extra load,” Mitchell reported.

Again, the supply was strangled because neither council nor the government wanted to pay. The simplest and most-used approach is to front-load these infrastructure costs into development levies, which then massively pump up the cost and ruin the economics of building houses that regular income earners can afford.

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The debt limits are the problem, not the lines on maps

The spatial plan may in theory allow more housing near train stations and in some of the character areas of Mt Cook, Newtown, Mt Victoria and Thorndon, but the council’s self-imposed debt limits and the suffocating effect of the Public Finance Act on officials’ ambitions through Treasury and the Local Government Funding Agency are even more effective at stopping enough development.

Even this morning, for example, the NZ Herald’s Bernard Orsman reports the $1.4bn Eastern Busway from Panmure to Pakuranga and Botany has been put back two years following a surprise $120m cut to Auckland’s Transport budget. This appears connected to NZTA-Waka Kotahi’s decision in recent weeks to squeeze public transport budgets after blowouts in big roading costs and funding limits driven by the Public Finance Act.

Cutting public transport spending in a climate and housing emergency

It is simply extraordinary that at a time the government has declared a climate emergency and Auckland and Wellington are crying out for affordable and climate friendly housing that both central and local governments are crying poor. This is at a time when the government in Wellington is sitting on $40bn in cash earning 0.25% in its Crown Settlement Account with the Reserve Bank and can borrow for 10-year terms at less than 1.8%. It is also at a time the Auckland Council is sitting on a AA+ credit rating that would not endanger New Zealand’s just-upgraded sovereign rating if Auckland borrowed more and was downgraded.

This is just crazy. The Public Finance Act was designed in the late 1980s and early 1990s when bond vigilantes ruled the world and New Zealand’s debt position was worse than others. We rightly feared being cut off, in part because at that time the government mostly borrowed in foreign currencies with floating interest rates. That meant the New Zealand taxpayer took the interest rate and currency risk if there was a global financial market meltdown or New Zealand was deemed “unbankable”. Any sharp fall in our currency or foreign reserves was punished immediately with a massive and quickly unsustainable rise in interest costs in NZ dollar terms.

Change or reinterpret the legislation

But now our government borrows with fixed interest securities in NZ dollars. The bond buyer takes the interest rate and currency risk. Once the government has sold its 10 or 20 or 30 year bond at a fixed interest rate, its borrowing costs cannot rise. That reduces the risk of international financial markets withdrawing ‘permission’ for us to borrow. It means we can borrow for 10 years at 1.8%, and mostly at the moment from our own Reserve Bank, our own NZ Super Fund, our own ACC fund, our own KiwiSaver Funds and overseas funds desperate for any government bonds they can get their hands on because their own central banks are hoovering up their own bonds.

The Public Finance Act is not fit for purpose any more, or at the very least needs to be massively reinterpreted by the officials and politicians observing it.

The key Section of the Public Finance Act is 26G,  “Principles of responsible fiscal management”. It tells the government that “once prudent levels of total debt have been achieved, [it must] maintain those levels by ensuring that, on average, over a reasonable period of time, total operating expenses do not exceed total operating revenues.”

There is some room for interpretation in that it says the government must monitor net worth and when running fiscal policy “have regard to its likely impact on present and future generations.”

A true measure of net worth would include the future liabilities and the lost opportunity benefits of investing (or not investing) in housing and climate infrastructure that either embeds or removes carbon emissions (and the credits required to keep them) that will need to be bought on international markets in future, along with the hospital, justice system, education and productivity costs of not achieving affordable housing. I see no signs Treasury is calculating this net worth correctly and advising the government of future costs, or lost opportunities of investing in infrastructure, both social and physical.

The government and councils believe they can change things through Unitary Plans and Spatial Plans by an edit of the National Policy Statement for Urban Development. But without a change in the Public Finance Act or its interpretation, any change will be limited.

Follow When the Facts Change, Bernard Hickey’s essential weekly guide to the intersection of economics, politics and business on Apple Podcasts, Spotify or your favourite podcast provider.

Keep going!