BRIAN EASTON:  Gabrielle’s Trumpet challenges fiscal stability

  • Brian Easton writes –

Cyclonic Storms Raise Economic Questions.

Some years back – it was in the time of the Key-English Government so, as usual, this column is not making a party-political point – a friend working in the climate change area wondered to me whether we should be putting more effort into adaptation. Whatever New Zealand does in reducing its global emissions, it would have little impact on global warming. There was going to be some climate change anyway. Perhaps we needed to pay more attention to taking measures which would reduce its effects.

The thinking at that time was on rising sea levels and their impact on buildings and infrastructure close to the shores. (A related issue is tsunamis.) Storms were mentioned but I do not recall anybody discussing adaption policies other than for the threats from the sea. I knew, even then, that cyclones in the central Pacific were more common; I had seen a long-term record for Samoa. I do not recall any suggestions that they might move south with the intensity that Cyclone Gabrielle did – we forgot about Cyclone Bola.

Could we have mitigated Gabrielle? Lurking behind that question is the abolition of Catchment Boards when they were merged into Regional Councils 1989. We were told at the time that their task to restrain the rivers from flooding was largely over. I wonder if the residents of Esk Valley think that today. Dropping a responsibility down in the bureaucratic hierarchy often results in reducing its ability to do its job. Was this yet another example of short term gains to be offset by long term disaster?

The Minister of Finance, Grant Robertson, has suggested that Gabrielle’s economic cost maybe as much as $13 billion but that estimate is very preliminary. The estimate for the 2010/11 Canterbury earthquakes is $40 billion of which only about half was covered by private insurance. In part, that is because the government self-insures, but the other private costs were carried by businesses and households.

It will be interesting to see whether we have learned much from the Canterbury experience. EQC did, but I wonder whether central government has yet learned that its propensity for centralisation does not always work. Many Cantabrians loathed the way they were pushed around or ignored by Wellington. Centralisation is a powerful force in New Zealand politics. While there may be a little difference between Labour and National on this dimension, it was National which was in charge dealing with the aftermath of the Canterbury earthquakes.

Central government would point out that it was funding much of the reconstruction with funds provided by all New Zealand taxpayers and so was responsible for them. However there is a tendency in central government to see itself as much more competent that local government, underestimating local competence and overestimating its own. Additionally, Wellington bureaucrats have a tin ear to local aspirations. We will see whether Labour gets the balance better in 2023 than National did after 2011.

The fiscal issue is significant not only for the costs the government faces from fixing infrastructure and from compensation (where it is liable – often that is a political rather than legal liability). It would be appropriate to fund some of it from its ‘reserves’. In the New Zealand government’s case the reserves are implicit; by keeping its debt low it is able to borrow more prudently. Even so, because of the reconstruction program, aggregate domestic spending is likely to rise more than was expected a couple of months ago.

But the spending surge from the reconstruction following Gabrielle is what the Reserve Bank does not want, as it tries to dampen economic activity in order to restrain price rises. That means the country currently has two top economic priorities which uneasily clash: fiscal and monetary policy are in conflict. The more we rely on monetary policy, the more of the response to the Cyclone Gabrielle rebuild will be borne by households with mortgages.

That is why Adrian Orr, the Governor of the RBNZ, has proposed an increase in income taxes to pay for the reconstruction. It is orthodox economics; the First Labour Government imposed a wartime tax surcharge to help fight the Second World War.

I argued at the time, unsuccessfully, that we should have funded the reconstruction of the Canterbury earthquakes by a surcharge on income tax. The Key-English Government instead chose to fund it by squeezing spending on government services and benefits. That worked in the short run, but the longer-run consequence has been that activities such as education and health (and just about everything else including improving resilience to climate change) are still suffering from the backlog of underspending, while there has been little room to tackle child poverty vigorously.

The continual clamour for more spending on worthy projects is a part of politics. Less evident is the way that past underspending is affecting the spending which is occurring. For instance, part of the failure of the 2018 Population Census, was because the government wanted it on the cheap.

And so we proceed towards the 2023 Budget on 18 May. It is going to be difficult enough, even were it not election year. Gabrielle has added to Grant’s pressures.


    • This article by Dr Brian Easton was originally posted on Pundit (HERE)

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