ANALYSIS: National alarmed Labour last week after it appeared to use the Government’s own “off-balance sheet” debt trick.
Finance Minister Grant Robertson fired off a press release, outraged at a Politik report that suggested the National Party was “cheating” and “trying to magic the debt away” with their infrastructure bank proposal.
His beef was with the way it appeared to skirt around the way the Government defines debt.
Total Crown debt is spread across ‘core Crown’ services like government departments, offices of Parliament, the NZ Super Fund and the Reserve Bank.
Crown entities (organisations like the New Zealand Transport Agency which operate ‘at arm’s length’ from government) and state-owned enterprises aren’t counted as ‘core crown’.
And when politicians talk about cutting debt, it is generally only the ‘core Crown’ debt they’re referring to.
“How the Treasury deals with it is a conversation we’d have to have with them. Fundamentally from our point of view it’s still Crown debt and we’re obviously concerned with the overall total of Crown debt over time.”
So when National announced that its new infrastructure bank would have its own board, be able to make its own decisions and borrow independently of government control – all the key characteristics of an entity whose debt is not to be counted as “core” – Labour saw red.
With this loophole, National might be able to better live up to its seemingly contradictory promise of spending more without enacting major spending cuts.
The accusations of wonky witchcraft prompted a clarification from National Party finance spokesman Paul Goldsmith, who denied the party ever had the intention to keep infrastructure bank debt off the books.
While he couldn’t guarantee how Treasury would classify the debt, he would include it in the party’s overall debt target in the interests of transparency.
“How the Treasury deals with it is a conversation we’d have to have with them. Fundamentally from our point of view it’s still Crown debt and we’re obviously concerned with the overall total of Crown debt over time,” Goldsmith told Newsroom.
Disappointingly, Goldsmith didn’t grab his wand, swivel around and point an accusing finger right back at Robertson.
The Finance Minister had to do that himself – in his own press release.
A few sentences on from those accusations of financial sorcery lay an admission the Government had played the same game through entities like Kāinga Ora and the New Zealand Transport Agency (NZTA),
“This [off-balance sheet borrowing] has marginally added to New Zealand’s overall debt. However what National is proposing is a massive order of magnitude greater than that,” Robertson said.
Sneaking more debt in off-balance sheet
The debt merry-go-around dates back to the Public Finance Act which distinguished between “core Crown debt” and debts incurred by Crown entities operating independently from government.
However, it’s a distinction that has become increasingly meaningless over time.
Politicians have sought to reassure a debt-averse electorate that they’re not borrowing unsustainable amounts of money by promising to keep debt within a certain percentage of GDP.
Before Covid-19, our government debt levels were some of the lowest in the OECD.
Politicians of both stripes said such low debt levels were necessary in a small country prone to earthquakes and which might need to draw on billions of dollars at any moment.
However, in the next breath those same politicians made promises to load entities like Kāinga Ora and NZTA up with hundreds of millions of dollars – sometimes billions – in debt instead.
And this ‘magic’ debt trick came at an extra cost. In April, Kāinga Ora borrowed $500m worth of bonds maturing in 2025 at 1.29 percent, $500m of 2030 bonds at 2.18 percent and $300m of 2040 inflation-linked bonds at 2.5 percent.
If they had borrowed those same amounts on the Government’s own balance sheet, the interest rates would have been 0.55 percent, 1 percent, and 0.75 percent respectively.
At those rates, the difference in borrowing costs would have added up to $182m over 20 years.
And Kāinga Ora’s revenue stream is basically whatever the government of the day decides to pay it. Ninety percent of the organisation’s revenue comes from the state – mainly in the form of rent or rent subsidies for social housing tenants.
Treasury warned of the pointlessness of it all in 2018 when it produced an aide memoire on Housing New Zealand’s plans to borrow, which noted “decentralised borrowing provides little overall benefit” and that it involved “unnecessary costs”.
“The Budget Responsibility Rules (BRRs) include reducing core Crown net debt to 20 percent of GDP within five years of taking office.
“Crown entity borrowing on a large scale would undermine the usefulness of the core Crown net debt indicator (since Crown entities are outside of the core Crown), and consequently the credibility of the BRRs.”
A distinction ‘less reasonable’ as time goes on
Sense Partners economist Shamubeel Eaqub said the increased level of off-balance sheet borrowing had made the distinction between core and non-core Crown debt increasingly meaningless.
“The more they start to use this off-balance sheet vehicle the less useful net core debt becomes as an indicator.”
Off-balance sheet debt is more expensive than straight government debt because there is a greater risk of default.
Kāinga Ora might be backed by the Government, but the state is not legally liable if the organisation goes broke. The entity is also less likely to pay back all its debts than the Government is.
“In my mind the reason why you’d want to have off-balance sheet borrowing is because it goes with a degree of independence by the organisation that will be doing the borrowing.”
For example, with the organisation’s management – who are accountable to politicians – would likely choose default over an alternative like raising rents on social housing tenants or selling-off state houses.
It’s not a massively increased risk, but still one that attracts a slight premium.
Eaqub said the increased cost made it hard to justify off-balance sheet debt unless doing so would take politics out of certain funding decisions and allow them to be better assessed on their merits by skilled personnel.
“If it’s only to work around the Government borrowing numbers – for the optics – then that wouldn’t be a good reason.
“In my mind the reason why you’d want to have off-balance sheet borrowing is because it goes with a degree of independence by the organisation that will be doing the borrowing.”
Otherwise the distinction was pointless.
After all, if keeping money spare for an earthquake is the reason the country needs to keep its public debt low, how does paying more to borrow off-balance sheet change that?
Infometrics economist Brad Olsen said rating agencies weren’t really fooled by the shifting around of debt in this way either, and took “non-core” liabilities into account anyway.
“The distinction is becoming less reasonable as we continue to go on.
“The question does become: are you better to just borrow on-balance sheet because of how low borrowing costs are?”
