Public debt is back in the spotlight with Opposition accusations of a ‘toilet tax’. Thomas Coughlan finds something’s off within the debate over off balance sheet borrowing.
Monday was the first day of the Parliamentary recess. For the press gallery, it’s not unlike returning to school after a gruelling block of exams. A weight is lifted. People have more time for lunch and swapping stories about unsavory things directed at them on Twitter over the weekend.
Not so for those journalists (like yours truly) who like to follow the Government’s finances, and who scrambled into action yesterday as the Opposition launched a broadside at the Government, slating the Labour-led coalition for borrowing the equivalent of a Christchurch rebuild on top of existing borrowing over the next four years.
Opposition Urban Development spokeswoman Judith Collins fired the opening salvo over the weekend. Documents obtained under the Official Information Act show that a $1billion Auckland sewerage pipe ominously dubbed ‘the central interceptor’ may be financed using a Special Purpose Vehicle (SPV).
The problem for the Opposition as they gear up to attack is that they were in favour of this sort of borrowing off balance sheet when in Government, despite the fact that the borrowing is actually more expensive for taxpayers without any real reduction in the risk to Government finances.
To the uninitiated, an SPV sounds more like something one would catch in a sewerage pipe, rather than something used to finance one.
We’ve covered them a fair bit on Newsroom as they’ve become a popular way for governments to finance infrastructure.
Essentially, an SPV is an entity created by the Government for the purpose of raising finance for an infrastructure project. Usually the Government or an entity controlled by the Government then pays the SPV to use that particular piece of infrastructure.
The pipe in question could be paid for by a charge collected by the council over 25 to 40 years.
SPV supporters, which number former National Minister of Everything, Steven Joyce, and Labour’s Phil Twyford, say they’re a powerful conduit for private sector investment in infrastructure.
Detractors argue that it’s simply an expensive way for the Government to borrow money it could easily place on its core balance sheet by borrowing using plain vanilla Government bonds. An SPV allows the Government to borrow for infrastructure, whilst also meeting its debt target. But because SPVs can’t access the same borrowing conditions as central Government, each dollar borrowed costs slightly more.
It’s essentially a premium the Government is willing to pay to keep its balance sheet looking as good as it does —not that it looks bad. New Zealand’s net core Crown debt is amongst the lowest in the OECD, at just 20.1 percent of GDP (0.1 percent away from the 20 percent target for 2021/22).
This is happening all across Government. In May, Housing New Zealand issued $1 billion of bonds in its own name and planned to borrow up to $1.9 billion more, rather than borrowing the money on the core Crown balance sheet.
Debt a political football, again.
It’s debt like this that Simon Bridges was targeting when he said on Monday that the Government was borrowing an extra $6 billion “hidden off the balance sheet in Crown entity borrowing”.
The borrowing isn’t exactly hidden, although the Government’s Budget Economic and Fiscal Update (BEFU) doesn’t make is abundantly clear how this figure was calculated.
National Party sources say it was taken by using PREFU’s estimate that Crown entity debt will be 2.2 percent of GDP by 2022, up from 0.5 percent that the previous Government intended to borrow through crown entitles. 1.7 percent of GDP in 2022 will be $6 billion on current projections.
The Crown entities will fork out $60 million more on that $6 billion than they would have if the Government issued the bonds itself.
The Government will defend most of this borrowing by noting that both raising capital through SPVs and Housing New Zealand was undertaken by the previous Government. In fact, there’s a rather unhelpful photograph of Steven Joyce standing in a large sewerage pipe at Watercare in Mangere illustrating just such a story on Newsroom.
The National Party confirmed to Newsroom that it is not opposed to SPVs on their own, but it is opposed to extra taxes.
And there’s truth to this. Assuming that SPVs and Housing New Zealand pay a one percent premium on core Crown borrowing costs, the Crown entities will fork out $60 million more on that $6 billion than they would have if the Government issued the bonds itself.
And there are two things that could be called a tax here: the borrowing premium, and the levy charged by the SPV to pay that premium back.
Where does the buck stop?
SPVs’ most ardent supporters will say the arrangements take risk off the Government’s balance sheet the same way as a PPP. If the sewage pipe goes over budget or fails, it’s someone else’s problem.
But officials who understand SPVs concede that the buck ultimately stops with the Government, which will eventually have to fork out. It’s difficult to see many other buyers interested in purchasing a $1 billion pipe deep beneath Auckland — especially when they discover what Aucklanders plan to fill it with.
The other, more convincing, argument is that SPVs provide a more targeted way of financing projects. If the SPV charges Watercare for using its infrastructure, the cost will largely be carried by those who make use of the pipe, although allowing the council to borrow on its own balance sheet would achieve the same effect, presumably at lower cost.