The earthquake will ask some tough questions of all politicians this year - What will they cut? How much can they borrow? Either way, the government's austerity plans are on hold

Even as the funerals begin, the release of names continues to give flesh and blood to the tragedy and grief keeps clutching at us, the political and economic reality of this earthquake is starting to come to the fore. Like liquefaction.

Prime Minister John Key has just announced $120 million to carry Christchurch through the next six weeks, with workers who can't work getting $400 a week, via their employers, until early April. That's ten times the amount allocated for similar purposes after the first quake. And good on 'em.

The compensation comes after Key said this morning that the cost of the re-build, from "back of the envelope" calculations, would be around $20 billion. Even if you say it quickly, the $5 billion that the government reckons it will need to contribute towards that, on top of the EQC funds, the re-insurers and locals' private insurance, is a huge amount of money. And as these things go, it's probably an under-estimate.

All of which has massive implications. The Prime Minister also said the earthquake would have a "substantial impact" on this year's Budget, in May. For example, can the government stick to its goal of reducing new spending to close to $800 million. Bill English, in his stage of the economy speech less than two weeks ago, said:

We plan to reduce that new spending allowance in Budget 2011 to around $800 million to $900 million. I would like to think this is just a start and that at least some of this restraint could continue into future budgets.

Such thinking has been up-ended by that mighty shake.

You know, it's become a pattern for this government. Every time they try to tilt right and play the austerity card, they get stopped in their tracks. These reluctant Keynesians keep being forced to get the cheque book out.

National MPs were compelled politically to promise spending (and limit cuts, to say student loans, KiwiRail and the like) to win the 2008 election, then introduce a stimulus package to weather the recession (although most of the stimulus came in the form of tax cuts, which aren't the most targeted or reversible instruments, and which they ideologically were desperate to do anyway). Just as the razor blade was starting to be sharpened, the first earthquake forced the promise of more government spending, from wage subsidies to infrastructure builds.

And now this.

When it comes to vast sums like this, political economics becomes very simple. You need more money and it has to come from somewhere - you either have to cut or borrow.

Naturally, a right-wing government will favour the former, because it wants to do that anyway. And this will become one of the big questions in the next few months. What's going to have to be sacrificed to pay for Christchurch?

It's the perfect cover for those who prefer small government anyway, except that sacking more public servants and cutting more night classes aren't going to come close to picking up the tab. So you look to the big ticket items? Will National choose to go farther than intended on welfare cuts? Will defence upgrades be postponed? Will some of the highways of national significance be seen as less significant? Maybe we could skip a prison or two?

What about the budgets for the Rugby World Cup? Whanau Ora? Broadcasting? Youth Affairs? The Families Commission? And on and on...

Those who prefer bigger government will be fearful of opportunism by the government in coming months, but on the other hand will be pleased that the stimulus continues, contrary to the government's political instincts.

Not too pleased though, because the political impact extends to them. Labour, for example, might have to re-think its tax-free zone on the back of this disaster.

But what about the other side of the equation? The borrowing?

Remember this?

"What is clear is that the rapid rise in net foreign liabilities is unsustainable.. Simply servicing the existing debt of almost $170 billion is a strain on the economy. These concerns are front of mind for credit rating agencies..."

Or this?

"We will need to work fairly hard to reduce [our debt levels]... The government's budget is going to tighten up compared to last year."

That was Finance Minister Bill English on February 17 and February 1 respectively. His was a government "committed to reducing foreign borrowing". Now we're going to borrow many millions more.

Just a matter of days ago, such borrowing more was inconceivable and the indication from the ratings agencies - Standard & Poor's put us on a 'negative credit watch' late last year, you'll recall - was that any more borrowing was not only irresponsible, but impossible. We were up to our eyeballs. I remember National making comparisons to Portugal, Ireland and Spain.

(I'd note that for all the spin around that issue, S&P told the Herald this month that, "Generally, we look at the Government in New Zealand as being relatively small and compared to its peers it's quite efficient", and that it doubted that government cuts could achieve any meaningful savings).

Now, more borrowing is essential, and suddenly it's also no big deal. Moody's sees no reason to alter our credit rating, despite anticipating extra offshore borrowing as a result of this second quake. Our debt ratios would remain in line with our Aaa-rated peers, it says.

The government, if not sanguine, now accepts that borrowing more is possible.

Which prompts the question, how come borrowing that would have utterly buggered our economy a week ago, is now perfectly acceptable? How can both be true and responsible?

Either way, the government books have been turned on their heads, and managing them through this disaster now lies at the heart of this election year.


Comments (18)

by Andrew R on February 28, 2011
Andrew R

Other ways of raising dosh for Christchurch -- increase taxes on all or some for a period, some sort of local infrastructure bond issue, redirecting spending from elsewhere (e.g. the holiday highway) and selling off our other assets.

Increasing taxes is probably off the agenda for treasury and for the government for ideological reasons.  After all it would mean admitting the previous tax cuts for the wealthy weren't affordable.



by peasantpete on February 28, 2011

ctually, the government could consider issuing govt bonds as a means of raising money AND increasing savings.

Borrowing offshore is rather fraught.

The NZX is not much liked, property is in a nosedive, finance companies are now the current F word, banks are offering san fairy ann.

Floating govt backed bonds could be sensible, no foreign exposure for starters.

by Tim Watkin on February 28, 2011
Tim Watkin

National talked about infrastructure bonds a while back... Early in their term, or even in the election campaign. And there was a plan to allow councils to issue bonds or somesuch for local projects, which seemed like one of its better ideas.

I remember asking Key about it one of the first times I met him and he seemed enthusiastic, but I haven't heard it raised since.

Perhaps somone could talk about how they'd work?

by peasantpete on February 28, 2011

Probably upset "market" purists.  Business Round Table would not approve of govt entering financial markets.

Roger Kerr would have sleepless nights entertaining the notion that govts might enter markets.

No way Key/ English would do it.

They would lose party funding.

It is still a perfectly sensible idea.

by Ian MacKay on March 01, 2011
Ian MacKay

I wonder if the strategy will be to increase cuts to Welfare and Public Service and back roomers (Er, they were the unsung heroes who organised the gear for search and rescue, and transport, and food etc weren't they? ) because we are badly hit by events outside our control and yes we (you) all  need to make sacrifices to help our people in Christchurch. Yes. Come on Spinner Key.

by stuart munro on March 01, 2011
stuart munro

Vis-a-vis the Keynesianism - It's Andrew's

Sometimes even politicians just want to do the right thing. Usually once they've exhausted every other possibility.

Perish the thought but, now that the US is in it's second round of quantitative easing, and Key concedes that this is indeed a national emergency (not just a National emergency) might we not print a bit more paper? Just what circumstances are we waiting for, if these do not suffice?

As for making cuts right left and centre - NZ's pretty anorexic already. Yes, there are many administrative time wasters and rent-seeking fee collections. But the govt. will be keeping most of those. There's not a lot to be made by paring systems further back, they might fall over. - to really save  they'd need to be redesigned from the ground up. And the problem here is that NACT isn't very good at envisioning new forms of civil service, because they are fundamentally opposed to it.

So Christchurch will be an interesting test for the govt. It's not the kind of problem that will go away on its own. It will be a miserably long while till the election if they don't get to grips with it quickly.


by Christopher on March 01, 2011

Roger Kerr would have sleepless nights entertaining the notion that govts might enter markets.

Any proposal that gives Mr Kerr sleepless nights is, ipso facto, a good proposal and is sound.

The Government could make a start by ditching their Joyceian hobby horses aka Roads of National Significance, which at least one is significant enough to earn the title Holiday Highway, and others have, despite best efforts to give them a Joyceian massage, a CBR less than 1.

This would free up some capital, and this at a time when the pithy saying 'Look after the pennies and the pounds look after themselves' holds some relevance.

by Tim Watkin on March 01, 2011
Tim Watkin

I'd be interested in hearing more ideas for funding the rebuild in the next few hours... I'm on Jim Mora's Nat. radio panel with David McPhail this afternoon and that's one of the things we'll be talking about.

So tell me more about bonds... printing money... whatever...

by Ewan Morris on March 01, 2011
Ewan Morris

Tim, I'm puzzled by the fact that you've positioned the debate as cuts vs borrowing. Is there a reason why you've left an earthquake levy (ie, a temporary tax increase) out of the equation, other than the fact that John Key doesn't seem keen on it?

by Pete Turangi on March 01, 2011
Pete Turangi

Well, apparently Bill English is now hinting at cutting interest-fre Student Loans, and Working for Families.

That's here:

In reality, the argument is not about how to pay for the reconstruction, but who should pay for it.

I.e. through consumption tax (predominantly paid for by those who spend a larger proportion of their income on 'consumption' - see the recent GST rises), through an income-related tax/levy (via workers - though this could be implemented as a flat-rate presumably), through other cuts (as English has hinted - SLs and WFF have clear targets - students and low-income households - even though WFF has pulled many NZ children out of poverty - as I've read), through delaying projects (i.e. 'Holiday' highways) etc.

Call me cynical, but I suspect we may hear the beating of the same drums - reducing numbers in the (already) stretched public sector (who someone else has already mentioned elsewhere were responsible for the speedy response to the earthquake and the roll-out of support services) and cutting services.

Speaking of which - has anyone heard from the Libertarianz on the latest earthquake?  I remember their response to the recovery spending from the September earthquake being quite distasteful.

by stuart munro on March 01, 2011
stuart munro

We could sell a few BMWs...

by Ian MacKay on March 01, 2011
Ian MacKay

Pete. Right on cue " Bill English is now hinting at cutting interest-free Student Loans, and Working for Families."

They always wanted to cut thus and now an excuse presents itself. How cynical is that! (No Right Turn also comments on this.)

by william blake on March 01, 2011
william blake

Can someone fill me in on the shortfall please. There is the public Eartquake insurance and there is private home and business insurance, how much does this cover? 10%, 50%, 75% of the damage; from the discussion not 100%.

So the remainder has to be made up from, charitable donations and fund raising, funds from Canterbury Council (rates) and  government funds (taxes).

How the rates and taxes are gathered will be down to the policies of the ruling party / council. So we have a conservative Government so they are going to tax the wider poulation to pay for the disaster (cutting services is just a raise in taxes as far as I am concerned). I don't see this as cynical, it's what a right wing party does. (ask a pig a question and he will grunt).

I don't know much about CDC but it will be difficult to hike rates without loosing more of the poulation (is this what you mean by economic liquefaction, Tim?).

When the Government threw up the partial asset sales, Iwi corporates were interested in purchasing. I wonder if Ngai Tahu would be interested in redeveloping some of Christchurch?

by Andrew R on March 01, 2011
Andrew R

If Key's back of the envelope figures are used as a guide $20 billion to reconstruct, about $15 billion covered by insurance ...


On the other hand Treasury's envelope must be smaller as it could only fit  $10-15 billion on the back of its envelope as the reconstruction cost.



by peasantpete on March 01, 2011

To fund the rebuild of Christchurch is going to require huge amounts of money.

The current government is committed to not spending money.

The current government is between a rock and a hard place.

We are told that we are already borrowing too much money.

I, earlier , suggested that the govt borrowed internally, rather than internationally.

Phiosophically English, Kerr, Key, Treasury would have a problem with this.

It involves government "interference" in the "market".

Actually I have always thought that governments are elected to govern.

I do not recollect any of us being asked to vote for various economists, or their ideologies.

To borrow internally would require careful management of governmental income streams.  The bonds do have to be repaid, plus interest.

Shock! Horror! This could upset banks and finance companies.

Who precisely got us into the current economic mess?

Surely not banks and finance companies!

The budget review required because of Christchurch is going to allow the govt to "slash and burn" very happily and smugly.

For NZ to borrow offshore in the current economic climate is madness, but it is ideologically correct according to "free market" economists.

It makes sense for the govt to borrow money from citizens and repay them than borrow money from offshore sources.

OK maybe not enough could be raised internally.

So what?

Go overseas for the shortfall, not the lot.

Actually is there anyone left in NZ with enough cash left to invest in anything?

by stuart munro on March 02, 2011
stuart munro

With the economy basically dogfood down south after the quake, slashing and burning, however much it might appeal to this government ideologically, might not be the smartest thing they ever contemplated.

It's a curious thing, but most citizens want to live in a country with a robust and thriving economy, not some kind of ghost town like the Nats were building in the nineties.

But sure, governments can ignore the preferences of their people indefinitely. Just ask Gaddafi.

by on March 04, 2011

The economic impact of the earthquake is going to be huge - if for no other reason than lost GST and income tax. So it's clear that the combined impact of fixing the damage and making up for the lost tax will be well beyond that initial figure of three to five billion that John Key  mentioned  a few days back.

But John Key and Bill English are now using the quake as a way of justifying their 'bad medicine' policies, like the partial selling of state assets. This is playing politics, not true leadership.

Surely this is the time we need to borrow, just like you may in an emergency, extend the mortage on your house. The money spent on fixing Christchurch - most of it from insurance  - will also inject cash into the economy.  If the rating agencies are not concerned, then we are probably OK - but NZ is really lucky (for a change) that commodity prices are so high.  Long may the Chinese keep drinking our milk!

by Damian on March 10, 2011

I am surprised so many people missed the statement from John Key shortly after the earthquake something along the lines of... 'NZ government debt if very low compared to most other western nations in the world so we shouldn't worry about borrowing to cover the costs'. This has not been repeated, instead they have gone back to the 'must cut' mantra. I believe it was a bit of a slip up with key admitting what many had been saying publicly and privately but which most of the public don't seem to realise. We are in a very good position from a public debt perspective, not so good private though.

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