The Kākā by Bernard Hickey
The Kākā by Bernard Hickey
The holes in National’s water reform pipes

The holes in National’s water reform pipes

National's plans to replace Three Waters with opt-in off-balance-sheet entities for councils' water assets is dead in the water without a Government guarantee, which Luxon & Brown have again ruled out
Young renters just have to watch on as pipes keep failing and the Government and councils point fingers at each other, because all the incentives are for ratepayers to block rates increases, water meters, water charges and the creation of new entities. File Photo: Lynn Grieveson

TL;DR: The National-ACT-NZ First coalition Government has unveiled the first versions of its replacement for Labour’s Three Waters laws, but without the capital grants or guarantees that would make it viable for councils to opt in or attractive enough for bond investors to back, especially for Auckland Council’s Watercare.

In essence, the Government doesn’t want to take the blame for new water charges or the risk of having to promise bailouts of any new entities. It also doesn’t want to stump up any of the $180 billion of capital needed in the coming years because it wants to keep Government debt low to keep mortgage rates as low as possible.

Elsewhere in the news in our political economy at 9am:

  • Wellington Water says it’s set to escalate water restrictions to ‘level three’ restrictions banning all outdoor use of water within two weeks. Newshub

  • The Retirement Commissioner released paper this morning saying the age of eligibility for NZ Super should remain at 65, and that means-testing would be a fairer way of making it more affordable in the long run than changing the age.

‘We won’t pay. You can’t pay. So around we go again’

Simeon Brown and Christopher Luxon last night announced a plan to repeal Three Waters legislation by next Friday and replace it with two new pieces of legislation, one of which won’t be ready until the second half of next year, just as councils are heading into fresh elections. The first law would be passed by mid-2024 to ‘streamline’ the creation of the new entities if councils wanted them, with a second one being a long-term replacement regime to be introduced by the end of 2024 and passed by mid-2025.

Brown also announced the members of a Technical Advisory Panel with Terms of Reference focused on them advising the Government on:

  • enabling councils to “appropriately cost-recover and access long-term debt to fund inter-generational water infrastructure”; and,

  • creating an “appropriate model to provide financial independence for Watercare from Auckland Council in the first instance.”

The lack of new funding and a government guarantee, which Watercare has said is essential to avoid a doubling of water charges, puts the onus on councils to:

  • carve off their water assets to merge them with neighbouring councils after debates over ‘fair’ exchanges of pipes and debt;

  • install water meters and hike water charges in the teeth of ratepayer opposition; and,

  • convince bond investors and ratings agencies to lend to them without a Crown guarantee at low enough interest rates to make the tens of billions of investment viable.

None of those things will be politically, financially and technically cheap, easy or fast for councils to pull off. Most won’t and Auckland Council has already said it is impossible for Watercare to be carved off without a Government guarantee, which PM Christopher Luxon and Local Government Minister Simeon Brown ruled out again late yesterday (See video below from 18:40 to 19:41)

A roleplaying exercise

The Government is effectively saying: ‘It’s not our fault if the pipes fail and we’re not the ones putting up taxes and taking on debt that pumps up your mortgage rates. We cut taxes. It’s the councils putting up rates, imposing water charges and building up debt piles and/or letting the pipes fail.’

In response, the councils will say: ‘The Crown is hanging us out to dry without access to any of the GST or income tax benefits from the population growth the Government unleashes without consulting us or granting capital for, so we’re best to sit tight, passively-aggressively stop new housing supply, and blame the Beehive.’

The end result? The Government and councils point fingers at each other for yet-more-years, the pipes keep failing, the beaches become more polluted and land prices keep escalating as fast as the rents for those not still in motels, tents and stationwagons.

So how is this politically, financially or environmentally sustainable?

Easy, peasy.

Our political economy has become a Kabuki theatre

The overwhelming majority of voters in council elections are ratepayers who own their own homes, and often several more homes, sometimes in other council areas. They literally do vote early and often in council elections, and at far, far higher rates than renters. All the incentives are for them to block rates increases, water meters, water charges and the creation of new entities. That’s because it keeps their disposable incomes up so it can be leveraged into more residential land purchases, while also restricting the supply of land able to supply more homes. That in turn pumps up the untaxed gains in their leveraged equity in residential land, which is the overwhelming way families become financially secure in Aotearoa-NZ.

This same group of homeowners in the leafier suburbs of our big and small cities are the swing voters in general elections. They’re quite happy with escalating tax-free and leveraged capital gains on residential land. They also believe there is no other way to ensure they can leverage their own children into homes. They want income tax cuts, no rates increases and anything that will bring mortgage rates down.

Allowing and encouraging the accidentally-on-purpose investment strikes is a feature, not a bug. The Government and councils can say they’re trying to solve the problems, but they are wicked problems and a lot of shrugging is required.

How could this change? The political, tax and investment incentives would have to change to tax land values, councils would need extra revenue tools and borrowing capacity to pay for new pipes, and the Government of the day would have to use its balance sheet to borrow most of the $180 billion needed in the decades to come.

The safe bet for the last decade at least has been to buy as much residential land as fast as possible, leverage it up as much as possible and hope like heck the tax-free gains are enough to build up deposits and passive income to support your own family into homes.

The only leverage the landless young have at this stage is to somehow convince their parents this is not sustainable, either because it will mean so many mums and dads have to become guarantors and/or gifters of deposits, or those mums and dads will have to watch their grandkids grow up via WhatsApp and the occasional holiday to Australia, assuming the airfares are low enough and the borders are open. Not enough of the landless young renters vote to change the equations at either local council or general election level.

Even in Wellington, where young renters have mobilised and voted at higher rates, the Green/Labour councillors and Mayor are unable to change the settings around water meters, government debt and rates in a way that means they will be re-elected.

Chart of the day

A range of indicators moving fast

University of Reading climate scientist Ed Hawkins via X: “Detailed graphic showing observed changes for different aspects of our climate. The context of the past 2000 years is included where data is available. In each case, recent changes are rapid & unusual compared to before human influence on the climate.”

Unemployment set to rise

Job ads on SEEK rose slightly in January, but remain well below their early 2022 peaks. Chart by Antipodean Macro

Cartoon of the day

The rats are back in

Daron Parton via NZ Herald-$$$ and X

‘Just wondering what I should do…’

Morten Morland via The Times-$$$ and X.

Timeline cleansing pic of the day

Ready for the Last of Us?

Attention-grabbing mould in Remutaka forest. Picture by E.E. Grieveson for The Kaka.

Ka kite ano


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