Dawn Chorus: Finally, the rainy day option appears

Councillor Lotu Fili proposes alternative to Brown’s share sale to balance Auckland Council’s Budget, including borrowing $60 million more to offset cyclone hits in proper use of rainy day funds

Brown has accused his fellow councillors of being ‘financially illiterate.’ His own literacy needs improving. Photo: Lynn Grieveson/Getty Images

TL;DR: Finally, the Auckland City Council is fumbling its way towards understanding how to use its own balance sheet properly, as a buffer for its ‘rainy day,’ rather than as a ‘sinking lid’ that ‘starves the beast’ and is permanently ‘saving for the rainy day’.

Just before its contested Budget debate adjourned last night, Councillor Lotu Fili proposed the Council lean on its strong balance sheet with a AA credit rating to soften the blow of Covid and this year’s Cyclone by borrowing more, rather than selling the family silver and cutting social services to the bone, as proposed by Mayor Wayne Brown and his Ruth-Richardson-era lieutenant, Councillor Maurice Williamson.

News elsewhere in the political economy this morning:

• Michael Wood faces a nervous wait to see whether an official inquiry announced yesterday gives enough political air cover for Chris Hipkins to bring Wood back as Transport Minister;

• Tiwai Point has agreed¹ with Meridian to wind back aluminium production during ‘dry years’ by using its smelter as a type of electricity battery that reduces the need to burn gas and coal when hydro lakes run low in winter;

• Treasury reported yesterday the Government’s books were a touch weaker than expected in May because slower economic growth is squeezing tax revenue growth; and,

• AIG last night joined massive US general insurers All State, State Farm and Farmers in pulling and reducing insurance coverage for home and car owners in states such as California and Florida that are increasingly vulnerable to extreme climate events such as droughts and wildfires. WSJ-$$$

Usually, I put in a paywall for paying subscribers at this point in the email newsletter and lock off the podcast above from free subscribers. But I want to experiment until the end of June with publishing everything to everyone immediately to see what happens with subscription rates, revenues and email opening rates. I want to thank paying subscribers in advance, who are still the only ones able to comment and get access to our very active chat section and webinars. Join our community by subscribing in full to support my journalism in the public interest about housing (un)affordability, climate change (in)action and poverty (not enough) reduction.

A quick explainer on Governments saving for rainy days

One of the good reasons to have low public debt is to provide a ‘rainy day fund’ for when the state or a council has an ‘act of god’ shock that requires the Government to keep spending to cushion the blow to a local economy. Having low debt allows it to borrow easily and cheaply during a crisis to be much bigger and more robust than households, with the very aim of helping out those same households.

Happily over the last 20 years, central Governments under both National (GFC and Christchurch Earthquakes) and Labour (Covid and Cyclones Hale and Gabrielle) have used borrowing in just such a ‘buffering’ way, going into deficit and borrowing to soften the blow for the economy of natural and unexpected shocks. This contrasted with the early 1990s here (Ruth Richardson’s Mother of all Budgets) and in some other countries during the GFC (David Cameron’s austerity budgets) when leaders went straight for the razor blade to cut spending when under pressure.

The early 1990s were different times. Back then, New Zealand’s Government was relatively heavily indebted at over 60% of GDP with mostly foreign currency debt with floating rates and short terms that amplified the pain of economic shocks. Richardson also faced credit ratings downgrades and hostile bond markets. The Crown was also unable to easily borrow for long terms with fixed interest rates in New Zealand dollars. The New Zealand dollar’s float was also in its infancy at that time and was very volatile, making it more difficult for the Government to borrow in stressful times.

Things are different now. Our central Government and our local Government can easily borrow in New Zealand dollars for fixed and longer terms, and often from local pension and KiwiSaver funds. Gross public debt is half the levels it was in 1991 as a percentage of GDP, but more importantly net debt is a third of those levels. There was no NZ Super Fund or KiwiSaver funds when Ruth Richardson felt ‘There is No Alternative’ (TINA). Auckland Council also didn’t have easy, cheap and very welcomed access to big local bond investors.

Now there are definitely established local currency bond markets with investors eager to snap up bonds from the Crown and the Council.

Therefore, it’s a pity the current leadership of Auckland Council seem not to have kept up with both how our financial markets have changed, and how our Governments’ debt situations are much healthier. Sadly, Wayne Brown, 76, and his chief lieutenant, Maurice Williamson, 72, seem stuck in the Richardson era of perma-fear about bond vigilantes and foreign exchange shocks potentially bankrupting New Zealand at any moment.

Brown has accused his fellow councillors of being ‘financially illiterate.’ His own literacy needs improving. He has banged on about Auckland Council’s debt situation throughout the last year, painting councillors into a corner where ‘the only alternative’ was deep cuts to social services and selling off a major stake in one of the country’s most lucrative monopolies.

Finally, Councillors have challenged the early-1990s thinking of Brown and his fellow small Government ideologues. Yesterday a majority voted against Brown’s plan to sell all of the Council’s 18% stake in Auckland International Airport to raise $2 billion in cash to repay debt. His suggestion was that Auckland was desperate and had no choice. That’s simply not true for a council that has:

• An AA credit rating that is not under review and was given a healthy tick in November last year in a report from Standard & Poor’s;

• $72.7 billion of assets and just $11.4 billion of debt;

• A debt to revenue ratio of 260% that is forecast to fall to 220% by 2031; and,

• run Budget surpluses totaling over $3.5 billion in the last two financial years.

2023 is the rainy day you were saving for

Brown was forced to propose a compromise yesterday and propose only a partial sale of an 8% stake instead.

Councillor Lotu Fuli tabled an alternative proposal just before the meeting adjourned, which would see the share sale put on hold until next year’s 10-year budget, with rates’ increases held at 6.8% and debt increased by $160 million, rather than the $100 million mentioned in Brown’s proposal.

Bernard Orsman reported for the NZ Herald this morning that Council CFO Peter Gudsell said increasing debt was not prudent as it ‘reduces headroom to deal with future shocks.’

That is the point indeed. Covid and the cyclones this yesterday certainly count as ‘rainy days’ upon which to use ‘headroom’.

Dynamic septuagenarians just can’t help themselves

Sadly, buried in one proposal, was a plan to permanently lower Auckland Council’s debt ceiling after using sale proceeds to reduce debt.

A classic ‘starve-the-beast’ tactic used by the likes of Ruth Richardson and others in the early 1990s, and clearly ideological. It’s not how actual bond investors and ratings agencies assess bond quality.

Coming up…

I’ll be keeping an eye on the Auckland Council Budget deliberations, which restart at 10 am with consideration of Councillor Lotu Fili’s proposal to increase debt by $160 million, rather than Wayne Brown’s plan for a $100 million debt increase and the sale of $2 billion of Auckland Airport shares.

Also: Lynn and I are going to take a leave day after this goes out so we’ve decided not to do the Ask Me Anything and the Hoon later today. More detail on that later.

Ka kite ano

Bernard

1. This deal was first flagged in April, but was approved by the Electricity Authority yesterday.