Could Auckland Have a Greek Crisis?

Submitted to ‘New Zealand Herald’ but mot published.

Keywords: Governance; Macroeconomics & Money;

Could New Zealand have a financial crisis like the current Greek one? Anything is possible but the central government has a formidable series of institutional arrangements to reduce the probability of it happening together with prudently committed ministers of finance. History reminds us of the dangers. In 1939 we were saved from a Greek-type austerity bailout by the oncoming war. In the 1980s the government spent almost  three months of GDP – say $50b (spread over the decade) – unscrambling the financial mess the Muldoon Government had got us into.

The local government story is patchier. Most famously, in 1870 the bankrupt  Southland Province reunited with the Otago Province.  (It had invested too much on transport – railways in those days.) Could that happen again?

Could it happen to the Auckland Council? I have some faith in the quality of its politicians and institutions, but its draft plan for 2012-2022 gives one pause for thought. It talks about a net borrowing of at least $8.4b over the next ten years, with a quarter of Aucklanders’ rates being used to service the resulting interest at the end of the decade. That is getting to Greek proportions.

The Greek problem is their unwillingness to pay taxes; the Auckland problem is that the borrowing will be mainly invested in infrastructure – like roads – and other facilities which do not pay the investor a return, so the council will be asset rich, revenue poor. (Additionally some of the borrowing is to cover consumption spending, justified by the melding together of the disparate legacy councils.)

As a councillor I would be reluctant to adopt such an ambitious plan that depended so heavily on borrowing (It also requires a more generous central government than I think we have). I would only agree to the investment plan if there was a better funding strategy.

I do not see a lot of merit in raising local body rates faster, although that will happen – dramatically – if Auckland has a Greek-type crisis. Instead I would want the plan to go past a discussion of levies on the transport system, into a commitment to them, with the caveat that if motorists do not pay more for their road use, the Council will not commit itself to all the planned developments. Where I would have a revenue discussion is seeking other sources of funding. The one I like is a low-level retail sales tax across the region,  but a working party would look at other imaginative solutions.

Unless Auckland can break out of the narrow funding constraints imposed on its draft plan it is going to miss out on the infrastructure and facilities it deserves. If it borrows to provide them, the certainty is high debt servicing and the possibility is of a Greek-type crisis for Auckland.

Dr Brian Easton prepared an independent report on the financial implications of the Auckland Council Draft Plan for Land Solutions Ltd.