Jacinda Ardern performed a neat act of political jujitsu on Simon Bridges this week, flipping National’s “party of infrastructure” tag on its back with its own road and rail projects to claim the initiative this election year. Bernard Hickey reveals Labour has even more clever infrastructure funding moves up its sleeves that could tie National in knots.
But wait, there’s more…
The front bench of the Labour-led Government were on hand to cheer on Prime Minister Jacinda Ardern’s revelation of $6.8b of infrastructure projects in Auckland this week. They celebrated the way Ardern rebranded National’s 2017 election campaign plans for new road and rail projects as Labour’s vision for “future-proofing” infrastructure and giving the economy a $4 billion to boost to growth at the same time.
It was the ultimate act of political jujitsu, made possible by the power of incumbency and National Leader Simon Bridges’ own attacks on Labour’s record on infrastructure in its first two years. Bridges claimed in December, less than a year out from the election, that National was the “party of infrastructure.” His problem is National is also not the party of Government and he hadn’t counted on Labour using its extra wiggle room on debt and listening to repeated calls from business leaders, the IMF, the OECD and the Reserve Bank for the actual Government to use its balance sheet to borrow and build.
But these same Labour front-benchers had more up their sleeve that could leave National fuming over their own ideas being used against them.
Again.
Finance Minister Grant Robertson and Transport Phil Twyford confirmed to me this week that Labour is considering allowing the New Zealand Transport Agency (NZTA), which was behind this week’s big spending plans, to borrow in its own right outside the Government core debt limits, similar to the way Kāinga Ora has. Newsroom revealed earlier this month the Government had lifted the former Housing NZ Corp’s borrowing limit by $4b to $7b, giving the freedom to borrow more to build an extra 5,000 homes.
The ability for NZTA to borrow in its own right could free up a second term Labour-NZ First-Green Government to invest much more heavily in rail, buses and roads, without breaching its much-touted debt limit. National would also find it difficult to attack, given it gave Housing New Zealand Corp the power and the precedent of borrowing much more off the Crown’s balance sheet under former Prime Minister Bill English in May 2017.
Lower hurdle rate
Robertson and Twyford also told me the Government is looking closely at whether Treasury’s 6.0 percent discount rate for evaluating big projects should be lowered closer to the current borrowing costs of around 1.5 percent, which would make many, many more projects economically viable.
Treasury uses this interest rate as the basis for calculating the current value of future cashflows and the hurdle rate for projects to jump over to be approved. It’s another way of ensuring big projects produce returns in the form of higher economic output through less congestion and faster traveling times that are worth more than their cost of capital. In previous decades, that discount rate was closer to the actual cost of borrowing, so it made sense.
But current Government borrowing rates are closer to one percent than six percent. National would find it difficult to attack the use of a long term cost of capital assumption that is now nearly five percentage points above financial market estimates of the real cost of Government capital.
Robertson also told me Labour would likely stick to its 15-25 percent debt limit for the election campaign and any second term. Using such non-core Crown borrowing vehicles would allow Labour to keep that promise and borrow much more.
Copy cats?
Four of the provincial roading projects were very similar to ones touted by National before the election, but not formally funded by National (although National says now they could have easily found the money)
‘They’re ours now’
Ardern rejected National’s claim that the projects chosen were the same as the extension of National’s Roads of National Significance (RONS) projects promoted before the election. She pointed to dedicated busways and extra cycleways added to the Tauranga Northern Link and Mill Road projects.
Twyford told me the projects that were suspended in late 2017 and early 2018 had been reworked and re-evaluated for ‘mode shift’ to public transport and had different economic impact assessments.
‘You stole our projects’
National Leader Simon Bridges decried the lack of an announcement on Auckland Light Rail (which no one else was expecting) and said Labour had simply lifted National’s proposals from before the election.
“It’s literally all of National’s work. It’s all things the Government cancelled at the start of their time in office, whilst they have done nothing since then other than argue and discuss and faff about on light rail,” Bridges said.
“They’ve given up on their own promises as they swipe ours,” he said.
The effect?
Treasury estimated a 0.4 percent boost ($3.9 billion) boost to GDP over the next four years. NZTA forecast the projects would create up to 1000 jobs in the first year and 7000-9000 jobs in the wider supply chain.
Labour has gazumped National with the former Government’s own ideas. Labour has said the same of National many times when their positions were reversed. This is the luxury of incumbency.
Ardern has also cleverly hit back at the Bridges narrative that National is the party of big roads and Labour is captured by a Green crusade for rail in Auckland. That narrative was always over-simplified on both sides, but it was resonating with those in business and in the provinces who just want someone to get on with it.
My long term view
This $6.8 billion package is nowhere near enough to solve an infrastructure crisis created by 30 years of under-investment and record-high (and unplanned-for) population growth over the last five years. The Government should use the power of a barely-geared balance sheet (19 percent of GDP) and record-low interest rates (1.38 percent yesterday for 10 year Government bonds).
If they were serious…
The Government would use its balance sheet to re-engineer Auckland, Tauranga, Hamilton, Wellington, Queenstown and Christchurch for affordable, warm, dry and productive housing and rapid transit systems that enable carbon zero by 2050.
A proper number would be at least $100 billion of infrastructure, house, road, rail and public transport subsidies over the next decade. That would still leave New Zealand’s net debt well below the 40-60 percent levels of our AA rated peers and lift our overall productivity in a way that would easily pay for it through our broad-base-low-rate tax system.
They’re starting
The widening of the Labour-Green pre-election debt target of 20 percent of GDP to a range of 15-25 percent was a good (if small) start. That allowed the $12 billion ramp up of capital spending announced in mid-December’s HYEFU and confirmed with more detail yesterday. That including yesterday’s details of $6.8 billion on road and rail, around $1b on health and schools, with another $4 billion for announcement in the May budget
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