The Dim-Post

August 30, 2011

The situation

Filed under: economics — danylmc @ 2:53 pm

The Herald reports:

The Earthquake Commission’s Natural Disaster $6 billion fund has been cleaned out, and the Government’s finances have taken an additional $1.3 billion hit as its bill for repairing Canterbury earthquake damage more than doubled this morning.

Finance Minister Bill English this morning announced the Earthquake Commission has increased its estimated Canterbury earthquake liability by $4 billion to $7.1 billion.

The excess above the Natural Disaster Fund will be met directly by the Government worsening what was already forecast to be New Zealand’s worst-ever operating deficit of $16.7 billion.

This puts English in a horrible position. Either he (a) raises taxes, which the Prime Minister will oppose bitterly, (b) introduces an austerity budget in 2012 with massive spending cuts, probably tipping the country back into recession, or (c) does nothing and the ratings agencies downgrade our credit rating.

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29 Comments »

  1. or (d) borrows more from intl markets at higher rates?

    Comment by Gregor W — August 30, 2011 @ 3:00 pm

  2. The rating agencies, if they are worth their salt, wouldn’t downgrade based upon a one off event unless it was incredibly significant – more so than a few billion. What they should be more interested in is the long term trend and overall ability to meed debt obligations. Its that, not the earthquake, that has us on negative outlook.

    Comment by DT — August 30, 2011 @ 3:01 pm

  3. (e) puts more state assets on the ‘for sale’ list?

    Comment by Rich (the other one) — August 30, 2011 @ 3:02 pm

  4. f) Announce production of a new reality show that focuses on a city of people surviving despite postapocalyptic conditions. Could be called Canty Shore.

    L

    Comment by Lew — August 30, 2011 @ 3:06 pm

  5. Wasn’t the majority of assets held by the EQC just investment in NZ government debt securities? Wouldn’t that have meant in order to pay out it’s claims, the EQC would not have rolled over these bonds, but cashed them up, meaning the govt would have needed to refinance from somewhere else.

    There’s just something really wierd about a safety net fund investing in the very body it is intended to act as a hedge for.

    Maybe I’m missing something

    Comment by Bed Rater — August 30, 2011 @ 3:10 pm

  6. FFS… Earthquake levy! I mean, buh!

    Comment by Progger — August 30, 2011 @ 3:20 pm

  7. I imagine English wants to introduce an earthquake levy, but Key will rule it out on ideological grounds.

    Comment by danylmc — August 30, 2011 @ 3:23 pm

  8. By the sound of it whatever happens (sans levy) will a) be good for (whoever replaces) Phil Goff but b) really bad for the country overall

    Comment by Hobbes — August 30, 2011 @ 3:25 pm

  9. Depends if Labour can rejuvenate. If Goff and King are replaced with rough facsimiles and Labour keeps the same bunch of ex-Clark cronies hanging on their front bench undermining their leaders at every opportunity then Key will remain wildly popular.

    Comment by danylmc — August 30, 2011 @ 3:28 pm

  10. An Earthquake Building expert said recently at a meeting in Canterbury University, “Use the World Bank. What else is it there for?”

    Comment by xianmacIanmac — August 30, 2011 @ 4:26 pm

  11. Ianmac: I’m fairly sure that any loans frrom the World Bank come with fairly strict lending criteria, which will almost definitely require complete privatisation of any State Owned Entities. That’s just how they roll.

    Comment by Simon Poole — August 30, 2011 @ 4:36 pm

  12. Before we flip into options for paying this budgetary blowout, I think we should focus on what Bed Rater has said – how has this happened, and what were EQC investing in to pay the bills?

    I know damage estimates can vary wildly, but more than double the bill?@#? Orion built temporary overhead power lines within weeks, so they should have had the bills for that after a month or two. And most infrastructure (roads, water, etc) should have been rough estimated for scale of works and cost within a month or so. Which only leaves residential houses, and a $4bn blowout is hard to justify on that alone…

    Anyone else worried about Fletcher Challenge’s pivotal role in the rebuild about now? The focus seems to be on smashing as many marginally damaged buildings down quickly, which leaves a vast amount of rebuilding to be done when we sober up.

    Comment by bob — August 30, 2011 @ 4:37 pm

  13. “Wasn’t the majority of assets held by the EQC just investment in NZ government debt securities? Wouldn’t that have meant in order to pay out it’s claims, the EQC would not have rolled over these bonds, but cashed them up, meaning the govt would have needed to refinance from somewhere else.”

    I’ve wondered this. Do the government have to cough up the value of the bonds (bad), or do EQC just sell their current holdings of bonds to other buyers (probably Chinese… good)?

    Comment by davidp — August 30, 2011 @ 5:30 pm

  14. $4 Billion sounds huge. And it is a big sum of money, but compared to the Government’s motorway building budget it’s not that big. Considering the crap benefit-cost ratios of half of the planned motorways, it would make perfect sense to cancel half of them (the half with the worse BCRs), to free up money for the rebuild of Christchurch.

    Comment by Kahikatea — August 30, 2011 @ 5:33 pm

  15. @ Kahikatea

    Sounds reasonable. But only spend the money on the buildings that have good CBR – so no convention centre, cathedral, library, town hall, rugby stadium, swimming complex, athletics stadium…

    Comment by insider — August 30, 2011 @ 5:48 pm

  16. TBH, Danyl, I would have a lot more sympathy for Bill English if his party had not made tax cuts the cornerstone of their policy on which they contested the last election (and the one before it). Remember those Ansell billboards?

    Comment by Carol — August 30, 2011 @ 6:37 pm

  17. Would have been helpful if Cullen and Clark hadn’t spent the whole of the nest egg during the start of the GFC laughing all the way about it.

    Comment by abel the amish — August 30, 2011 @ 6:47 pm

  18. Or if National hadn’t put through billions of tax cuts during a recession

    Comment by max — August 30, 2011 @ 7:58 pm

  19. And thank god National culled Public Sector spending in WGN to give back those taxes to the rest of New Zealand.

    Oh, & if Cullen and Clark hadn’t misreported ACC and Pension liabilities they wouldn’t have had the massive ‘surplus’ that they spent up leading into the 08 election.

    Comment by abel the amish — August 30, 2011 @ 8:04 pm

  20. Abel — face facts — government debt went down (a bit) under Labour and has doubled under your beloved National mismanagement.

    Comment by Andrew R — August 30, 2011 @ 8:15 pm

  21. Agree with DT that our Ratings Overlords won’t downgrade over $4 billion. At 4.5% that’s $180 million a year in interest costs, or about 0.36% of revenue. If we want to pay off the principal over 20 years, it’s of the order of 0.6% of revenue. Not quite trivial but less important than, say, a 0.6% increase in structural unemployment.

    Also note that the Americans managed to pull off the neat trick of turning a downgrade into lower debt servicing costs. Don’t think that will work for us, though.

    Comment by bradluen — August 30, 2011 @ 8:36 pm

  22. Did you know that unlike Helen Clark, Michael Cullen still lives in New Zealand? Since Bill English took over his job Michael hasn’t once criticised the current Finance Minister over his handling of the economy. Michael Cullen is super fine with an $18 Billion blow out in Government expenditure in just one financial year.

    Ain’t it grand when you buy off the opposition with other peoples money? So cheap as well.

    Comment by OECD rank 22 kiwi — August 30, 2011 @ 9:32 pm

  23. You partisan political guys give me a headache

    Are you going to go on like this until the election??

    A.

    Comment by Antoine — August 30, 2011 @ 10:43 pm

  24. the solution is screamingly obvious — raise taxes on higher income earners. of course this will not happen and there will be an austerity budget that will hit the most vulnerable and disadvantaged the hardest. and so it goes.

    Comment by pulling your Lenin — August 31, 2011 @ 12:19 am

  25. “I imagine English wants to introduce an earthquake levy, but Key will rule it out on ideological grounds.”

    Ideological grounds Bill doesn’t share, do you suppose? This strikes me as pretty unlikely; surely National Party economic dogma was already familiar to English.

    Comment by Tui — August 31, 2011 @ 8:37 am

  26. Michael Cullen still lives in New Zealand? Since Bill English took over his job Michael hasn’t once criticised the current Finance Minister over his handling of the economy.

    Perhaps his withdrawal from entering political debates has something to do with the fact that he RETIRED FROM POLITICS IN 2008… no…?

    Comment by Sam — August 31, 2011 @ 9:05 am

  27. @Sam

    No. It has to do with the fact that National bought him off with a nice cushy job at New Zealand Post. It’s also in their power to take it away from him if he “doesn’t play ball”.

    MIchael Cullen was so busy being Finance Minister he forget to provide for his own retirement. No housing investment portfolio for him unlike Helen Clark. Luckily Michael’s good friend John Key helped him out. John Key is so popular right now.

    Comment by OECD rank 22 kiwi — August 31, 2011 @ 9:40 am

  28. I have to say it: this is good for Phil Goff. Or it would be if he had a pair.

    We know what the government is going to do: nothing until after the election, then more austerity and asset sales, because they’re ideologically opposed to tax increases. Labour is in a perfect position to present an alternative, make it an election issue, and see which people prefer: higher taxes or worse schools and hospitals.

    But of course that would require virtu – the trait Goff is singularly lacking in. But if he doesn’t do it, then the Greens will.

    Comment by Idiot/Savant — August 31, 2011 @ 2:18 pm

  29. Yeah, National are destroying the economy, our national debt is at an all-time high. Now they want to raise taxes (personal income taxes and rates of course, nothing ever to be said from National about raising company taxes which instantly went from 33% to 30% at the top rate as soon as they got in), using the Christchurch Earthquakes as their main excuse, their second excuse being the Global Financial Crisis.

    Surely they could cut personal income taxes and still have enough money rolling in from the increase in personal expenditure. This would give businesses a boost as well, which is much needed in their ‘beloved’ Christchurch.

    Comment by Gryte — September 3, 2011 @ 3:05 pm


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