Analysis: Government debt has “blown out” says incoming Prime Minister Christopher Luxon. His fiscal plan promises a $3.4b reduction in debt by 2027/28, compared with the Treasury’s existing track.
But according to the International Monetary Fund, New Zealand has some of the lowest government debt in the developed world – so have campaigning politicians had their eye on the wrong ball?
The problem isn’t with central government debt – it’s with local council debt.
Just before the election, international credit rating agency S&P Global revised its long-term rating outlook on Hamilton City Council from stable to negative. “The council is delivering a large capital expenditure program that is resulting in substantial after-capital account deficits and rapidly rising debt,” S&P warned. “Its debt is among the highest in the world for AA-rated local peers.”
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A big part of that expenditure is building wastewater capacity, water treatment plant upgrades, and transport and road projects connecting the new 20,000-person Peacocke residential development to the rest of the city.
Whether the council’s rating is lowered, or the outlook returned to stable, depends in large part on whether it can materially reduce its after-capital account deficits – and the big question there is over Three Waters.
Hamilton’s not the only council warned that its debt rating might hang on the outcome of the water reforms. Western Bay of Plenty was told its outlook could worsen if its liquidity deteriorates. Whangārei’s rating was lowered. Kāpiti Coast and Hutt City were put on negative outlooks, in part because of their large water infrastructure programmes, ahead of the Three Waters reforms.
As S&P pointed out in Hutt City’s rating, that council (like others) had front-loaded its spending on water infrastructure in the expectation it would be reimbursed for any debt incurred, when control of the assets and liability for the debt were moved to one of 10 new regional water corporations.
Back then, S&P noted the pathway for the water reforms was subject to general election outcomes. Now, we know that outcome. A National-led government has been elected, and it’s promised to repeal the Three Waters legislation within its first 100 days.
S&P, which rates central government and 25 councils, is now firing a shot across the bow of the incoming government. It warns that the plans to repeal the Three Waters reforms without financing an alternative could place councils the length of NZ under even greater strain.
“Contrary to popular belief, public debt is not a major constraint on the credit rating,” says S&P director Martin Foo. “In fact, net general government debt in NZ, by our measures, is comparable to Australia’s and well below most other advanced economies.
“The sovereign balance sheet is in decent shape. We would emphasise that local council balance sheets are under more strain. The former Labour Government’s Affordable Water reforms were unpopular, let’s face it. They were politically unpopular. But the reforms could have been an escape valve for some of this high debt.”
Foo says council credit ratings will come under pressure if they are forced to borrow more for water assets. “Now that National has threatened to repeal the laws, the question for us is, ‘what’s next?’”
The forecast costs of getting New Zealand’s drinking water, wastewater and stormwater infrastructure up to first-world standards are eye-watering – about $185 billion over the next 30 years according to Internal Affairs officials. National expects councils (many already at their borrowing limits) to find ways to get together and finance those costs themselves.
Auckland Mayor Wayne Brown has warned that if National’s water policy goes ahead, water bills will either double over the next four years or the city will have to stop fixing the pipes. And Wellington mayor Tory Whanau tells me that leaving the water infrastructure on council balance sheets will have a significant impact on the long-term plans for Wellington and every other council. “The reality is we cannot afford it.”
