Treasury hammers borrowing dodge
Phil Twyford went against the advice of Treasury to increase off-balance sheet borrowing, which could eventually cost the taxpayer $36 million each year in extra interest costs, Thomas Coughlan reports.
Documents released by Treasury show Housing Minister Phil Twyford was strongly cautioned against allowing Housing New Zealand to increase its borrowing limit to enable it to build an additional 1600 homes a year.
Treasury advised it would be more prudent and cost effective for the Government to borrow through its own Debt Management Office (DMO), but Twyford ignored the advice and allowed HNZ to increase its borrowing limit to $2.9 billion in the May Budget.
He was told Housing New Zealand was unable to borrow as cheaply as the Government could through DMO. Treasury cautioned the cost difference between the two forms of borrowing was likely to be $3 to $6 million per annum for each billion dollars borrowed.
A second paper noted Housing New Zealand would be paying an additional $11 million per year in interest. By 2022, Housing New Zealand will have $4.79 billion in debt, roughly 15 percent of its total assets.
Government incurs greater costs for cosmetic reasons
The Pre-Budget Economic and Fiscal Update or PBEFU shows off-balance sheet borrowing increasing from 0.5 percent of GDP now to 2.2 percent in 2022 – equating to roughly $6 billion, depending on the size of New Zealand’s economy.
Off-balance sheet debt does not count against the Government’s core debt, allowing it to borrow more money without breaking its Budget responsibility rules.
That means by 2022, Crown entities could be paying as much as $36 million in interest for entirely cosmetic reasons.
The paper cautions that an “undue focus on core Crown net debt could encourage borrowing by entities outside the core Crown”.
Market participants warn Treasury
There are other costs too – Treasury noted that DMO was due to launch a new bond before the end of the fiscal year (June 30, 2019) and were HNZ to issue a bond at the same time, HNZ and DMO would “effectively end up competing for money in the capital markets, increasing costs for both parties”.
As it happened, New Zealand’s borrowing costs have remained near record lows, largely due to international pressures.
And Treasury wasn’t the only body raising the alarm. It said other market participants – presumably funds that purchased New Zealand Treasury Bonds – were also sceptical.
“[M]arket participants have raised questions about HNZ borrowing in their own name rather than through DMO which is the traditional mechanism”.
Treasury noted this could risk “undermining the reputation of New Zealand as a borrower and increasing borrowing costs across Government”.
“The credibility of the Budget Responsibility Rules would be undermined”
The paper also included the strongest rebuke of the Budget responsibility rules by Treasury.
It warned that if the Government increased off-balance borrowing, it risked undermining its credibility in the international capital markets, pushing up borrowing costs not just for HNZ, but for the Government in general.
Twyford was warned that “material borrowing” outside core Crown debt that circumvented the Government’s debt target would undermine the “credibility” of the budget responsibility rules.
“There is a risk that credit rating agencies and commentators see substantial borrowing by Crown entities as an attempt to circumvent the net core Crown debt target,” the paper said.
“The result would be to degrade the net core Crown debt target and New Zealand’s fiscal reputation. The flow on effects could be to reduced access to capital markets and higher borrowing costs for the Crown overall”.
But it noted that the relatively small level of borrowing by HNZ made this unlikely.
National leader Simon Bridges told Newsroom that the “off-balance sheet borrowing had its issues, but whether it was on or off-balance sheet, Government borrowing is just piling on the interest Kiwis have to pay”.
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