Boardroom
Analysis: Debt anchor dragging Labour into PPPs

The new Government's self-imposed debt target is limiting its ability to borrow to fix growing infrastructure deficits. Bernard Hickey reports it will be forced into fancy and expensive financing tools such as PPPs and infrastructure bonds.

Grant Robertson has 'squared the circle' of fitting the coalition Government's big new spending plans into its self-imposed surplus and debt restrictions, but it means he will have to embrace "innovative financing mechanisms" such as Public Private Partnerships (PPPs) and off balance sheet bond issuance to fix the infrastructure deficits the Government has found.

The Finance Minister today unveiled how the new Labour-New Zealand First Government's 100 day plan and its coalition agreements would affect the Budget outlook.

The Half Yearly Fiscal and Economic Update and the new Government's first Budget Policy Statement showed that it can fit its big health, education, transport and welfare spending plans within Budget responsibility rules to reduce debt to 20 percent of GDP and keep running surpluses over the economic cycle.

As it promised in the election, it is using money saved from National's cancelled tax cuts to pay for catch-up increases in health and education spending, and for a boost in the families package.

But the fit is tight, leaving little room for new pay equity deals or much wage inflation catch-ups from nurses, teachers and police officers. The capital allowances detailed in the plan also leave little room for much new spending on expensive rail or housing infrastructure, hence the need for borrow from private investors or get them to pay for the infrastructure as it is built.

The new Government is forecasting surpluses will grow to $6.5 billion by 2021, which is actually slightly above the $6.4 billion forecast before the election under the previous Government. The surplus is forecast to rise to $8.5 billion by the end of 2021/22.

Net debt is also forecast to fall under 20 percent of GDP by 2021/22. Both of those forecasts are in line with the new Government’s Budget responsibility rules to keep running surpluses over the cycle and reduce net debt to 20 percent within five years of taking office.

However, the Half Yearly Economic and Fiscal Update (HYEFU) shows the new Government has little room to deal with infrastructure deficits or unexpected lumps of new spending.

The HYEFU showed the Government had just $6.6 billion of headroom for extra operating spending over the next four years, once spending already agreed in coalition deals was included.

The capital allowances are also meagre, with just $8.9 billion of headroom over the next four years after accounting for the $1b per year Provincial Growth Fund.Elsewhere, the HYEFU revealed Treasury had slightly reduced its growth forecast for the next year, but increased it in the years beyond. It also increased its interest rate track by 25 basis points by the fourth year and reduced its unemployment rate to four percent.

'We'll need private help'

This tightness is the reason why Finance Minister Grant Robertson, in the lockup for the HYEFU, talked up the prospects of bringing in private capital to help with urban infrastructure.

Asked if the $8.9 billion of capital headroom was enough, he said: "It is the amount that we've got and we'll make it work."

"When it comes to the development of the housing and transport infrastructure, particularly in the Auckland area, we're aware that we need to be working with others to make that happen, and that will be an important part of managing the overall infrastructure and capital needs that we've got," he said.

Asked why the Government didn't just increase its net debt to GDP above the 20 percent level, he said: "It's a balance. We've said we'll take longer to pay down debt than the track that the previous Government had. But we've always got to make sure we leave ourselves a buffer for the classic rainy day and the possibility that as a small country we are more susceptible to external shocks."

"It's a balance. We think that we've struck that balance well and we'll continue to look at innovative financing mechanisms, where we consider them to be appropriate."

Earlier, Robertson said the Government had identified a number of capital pressures that had built up over a significant number of years and it was looking at ways to fund urban infrastructure in Auckland, which would include rail, roading and housing infrastructure.

"We have made it clear we are looking at a variety of funding instruments there -- infrastructure bonds, partnership with the private sector to develop the transport and housing infrastructure that is required to allow us to make that growth sustainable," he said.

"We are looking at some innovative financing mechanisms in those areas."

The Government has said it would look at law changes to allow urban development authorities and others to issue infrastructure bonds funded through targeted rates to develop water and roading infrastructure for new suburbs. It has also not ruled out PPPs on transport projects, although it has stopped or blocked such arrangements for hospitals, schools and prisons.

Other key economic and financial details from the HYEFU

Treasury slightly increased its growth forecast for the full five year period, seeing average GDP growth of 2.9 percent per year. It increased its nominal GDP forecast by $1.5 billion over the forecast period. It saw growth being slightly slower than forecast in the Pre Election Update for the second half of 2018 because of temporarily weaker business confidence and a slower housing market.

But it saw growth picking up in 2019 and 2020 as Kiwibuild and faster growth in household incomes kick in. Treasury forecast faster growth in wages than it saw before the election, but it also increased its forecast for interest rates by 25 basis points by the end of forecast period.