Goff And Tamihere Are Both Wrong. (But Bernard Hickey Is Right On The Money!)

Show Me The Money! The alternative to state funding of infrastructure is, of course, to fund it by taking on massive amounts of private debt. On this issue, at least, Auckland mayoral challenger, Tamihere, has some solid points to make. In his own colourful turn of phrase, the incumbent mayor, Phil Goff, and the Auckland Council, have “maxed-out the credit card”. If the City is to preserve its international credit rating of AA, then it simply cannot afford to take on any more debt.

NEITHER PHIL GOFF, nor John Tamihere, are telling Aucklanders the truth about their city, but Bernard Hickey has given it a pretty good shot. In a powerful and deeply insightful article, posted on the Newsroom website, Hickey not only explains why KiwiBuild failed, but why it could never have succeeded. In the process, he lays bare the fundamental failures of political and economic intelligence fuelling New Zealand’s conjoined national and local infrastructure crises. Goff and Tamihere are part of that intellectual failure, and that is why neither politician is giving Aucklanders meaningful answers to their most pressing questions.

Tamihere has proposed selling 49 percent of Watercare to either the Accident Compensation Corporation, or the Superannuation Fund, or both, and using the proceeds (estimated at around $5 billion) to fund Auckland’s urgent infrastructure needs. Goff, who, in his years as a member of the Fourth Labour Government, never once voted against the privatisation of state-owned monopolies, has come out as a staunch defender of the municipally-owned Watercare company. He is warning Aucklanders that Tamihere’s plan would increase the average Aucklander’s water bill by $200-400 per year – falling most heavily on the poorest Auckland families.

What does Hickey say about the funding of local government infrastructure?

“After the mid-1980s, the Government saw the private sector as the provider of housing and saw any infrastructure as a cost that needed to be borne by those building the new houses and local Government, not the wider taxpaying public. Even now, that thinking is infused through Treasury and into the minds of the current Labour leadership, going from Ardern through Finance Minister Grant Robertson to Twyford.”

In other words, the neoliberal principle of “user pays” has been extended well beyond its original target, the hapless individual consumer of government services, to encompass everyone: consumers, businesses, central and local government institutions; everyone. The contrast between the neoliberal approach and the nation-building approach, which, historically, has informed the policies of successive New Zealand governments, could hardly be starker.

As Hickey makes clear:

“[N]neither the National or Labour-led governments of the last 35 years have seen it as their role to pay for [housing’s] underlying infrastructure. Their instincts have been to get others to pay for it, unlike during the golden eras of the 1930s, 40s, 50s, 60s and early 1970s when governments of both colours used the national balance sheet to build and subsidise that infrastructure through the Ministry of Works, State Advances Corp and various Group Building schemes and child benefit capitalisation policies.”

The alternative to state funding of infrastructure is, of course, to fund it by taking on massive amounts of private debt. On this issue, at least, Tamihere has some solid points to make. In his own colourful turn of phrase, Goff and the Auckland Council have “maxed-out the credit card”. If the City is to preserve its international credit rating of AA, then it simply cannot afford to take on any more debt. What’s more, the rest of the country cannot afford for Auckland to take on any more debt.

Hickey tells us why:

“The technical problem is the Auckland Council is almost at its debt-to-revenue limit ratio of 270 percent, which is the level specified by Standard and Poor’s for Auckland to keep its AA credit rating. This is important because taking on more debt would mean Auckland’s credit rating would be downgraded, which would increase the interest costs on existing debt and force up rates. But it would also breach the rules set by the Local Government Funding Agency [LGFA] about Auckland’s credit rating not falling more than one notch below the Government's AA+ rating. That’s important because Auckland’s rating essentially sets the base for all local government borrowing through the LGFA. It means there is enormous political pressure locally and financial pressure from other councils (and the LGFA) for Auckland not to borrow much more. Councils beyond the Bombays and north of Orewa would scream blue murder if their interest bills went up because the Auckland Council decided to solve a funding problem the central Government won’t solve.”

Unable to take on any more debt, Tamihere knows that the only way for Goff to fund infrastructure development in Auckland is by increasing rates, raising user-charges, and/or adding another 5-10 cents to the price of a litre of petrol. Tamihere is far from convinced that Goff (or anyone else) is willing to risk a ratepayers’ revolt by leading Auckland up that particular garden path, hence his plan to access five billion desperately needed dollars for urgent infrastructure development by selling 49 percent of Watercare.

The politics of this is quite clever, because, by the time ACC and/or the Superfund take the necessary steps to secure their standard rate-of-return from Watercare by taking it out of everybody’s water bill – Goff is quite right about that – Tamihere may have earned himself enough public good-will to be re-elected Mayor in 2022. (Assuming, of course, that this partial privatisation policy enables him to beat Goff in October 2019.) Five billion dollars builds a lot of infrastructure, so, who knows, Tamihere’s use of Peter’s central government funds, to pay for Paul’s local government needs, might just work. “The Mayor who rebuilt Auckland without plunging us all into deeper debt!” – has a rather nice political ring to it.

In the long run, however, Tamihere’s gambit can only be a bust. Liquidating and then spending Auckland’s capital assets can only end up dragging the city to the same point Goff has already reached. Namely, facing the politically unpalatable reality of requiring people to give up an increasing proportion of their income to the Council and/or its commercial arms. While the New Zealand political class – and that includes you, Jacinda Ardern, Grant Robertson and James Shaw – remains incapable of thinking outside the neoliberal box, New Zealand’s crumbling infrastructure, not to mention the many large-scale public works projects that will be required to meet the challenges of the future, cannot be addressed.

Goff and Tamihere would be better advised to jointly demand, as the leading mayoral candidates, that the State once again steps up to the plate of nation-building. In a country whose entire population is smaller than that of a medium-sized global city, there never has been, and still isn’t, any other viable alternative to turning the state into New Zealand’s angel investor.

This essay was originally posted on The Daily Blog of Thursday, 4 July 2019.