April 30, 2020•2184 words
Like many local politicians, Porirua City councillors are considering the impact of the looming global recession on the council's finances and how they should react. I knew they would be getting lots of advice — requested and unsolicited — and decided to add my voice to the noise. I sent this last weekend for them to consider.
Economic forecast for recession
New Zealand, like the rest of the world, is heading into what is projected to be the severest recession since the 1930s.
This recession will be different to the two previous ones, which were largely demand-side recessions, where people did not have as much money to buy good and services. There is likely to be a substantive supply side aspect to this recession, i.e. it will affect the ability of producers to supply the goods other businesses need as raw materials.
On 20 March 2020, 4.9% of the population over 15 years old (145,000 people) were on the Job Seeker allowance (it had been steady until then). A mere four weeks later, on 17 April, this had increased to 5.8% (174,600 people), an extra 28,624 people, a 20.4% increase on 20 March. This will get worse as more businesses fail as the recession takes hold and the job subsidy runs out. In its least-impact scenario, Treasury is predicting 13% unemployment and a drop in GDP of 13% during the March 2021 year, with real quarterly GDP 5% lower than forecast in June 2021. GDP doesn’t return to its projected growth path until June 2024, resulting in a 6% drop across the entire period－that’s a $124 billion loss across the economy. Inflation is projected to stay under 2%. (These growth figures are compared to Treasury’s Half Year Economic and Fiscal Update 2019.)
According to Treasury, “The protracted recovery reflects the deep and widespread disruption caused to the economy. Deep falls in international tourism, for example, are assumed to lead to services exports still being around 10% below previously forecast levels at the end of our forecast period [June 2024].”1
To put these figures in the context of other recent recessions, the global financial crisis of 2009 resulted in a 0.1% drop in real GDP growth worldwide, while the IMF is forecasting a 3% drop in real GDP growth worldwide from this recession.
Porirua City Council, like all local authorities, is governed by the Local Government Act 2002, which states that one of the two main purposes of local government is to: “promote the social, economic, environmental, and cultural well-being of communities in the present and for the future.”
Council is still required to spend most of its planned budget, and has extra costs looming in the form of large infrastructure spending that will be a considerable financial burden to the organisation and community. However, there is no simple solution to this problem and councils, like central government, will need a range of smaller interventions to support communities, rate payers, and the local economy.
There will be a strong temptation, and pressure on council, to reduce the financial pressure on property owners across the board by not increasing or by cutting rates, along with planned expenditure.
Council should introduce measures to reduce the rates burden on property owners suffering genuine financial hardship.
Using debt to pay current expenses or services consumed now, rather than building or repairing long-term assets, can be unfair to future generations. However, given the incredibly low interest rates at the moment, council should consider the judicious use of debt funding provided the loans are very short-term and can be paid off by current property owners.
Overseas experience has shown that austerity during recessions leads to worse social and economic outcomes and you should not go down this route. You may have to trim expenditure this year to balance a lower than expected income by pushing work into later years in your Long-Term Plan, but if you delay dealing with too many issues now, you could compound them in later years, adding to the financial burden.
Council’s procurement should be directed towards supporting local businesses to protect the local economy and jobs.
Your decisions must be based on the benefit principle (i.e. defined as, those who benefit from (or cause the need for) a service should pay for its costs), along with a consideration of people’s ability to pay2.
Council should resist the temptation to implement blanket changes that will benefit everyone, regardless of their situation. Any rates relief should be on the grounds of genuine financial hardship. At the moment, PCC’s Rates Remission and Postponement Policy does not allow you to do that－hardship is not one of the criteria or conditions for postponement or remission－so you would have to amend the policy to formalise this to go beyond considering requests on an emergency case-by-case basis. Currently, applications for rates remission or postponement for a rating year must be made to council by the end of June, barely two months away. This puts pressure on you in two ways:
- The time it will take to amend the policy and for ratepayers to collect the relevant information and make an application. Two months might not be enough time to do that, especially if you have to consult with the community.
- Ratepayers’ financial situation could change drastically after the start of the June financial year, leaving them unable to pay their full rates without an extra, unreasonable financial burden that leads to greater hardship. If PCC did not consider applications received after the start of the June year, this would be unreasonable and unfair to people whose financial situation is out of their control during the recession.
You must liberally apply the policy for remitting penalties added to unpaid rates. Anyone who can prove they are in genuine financial hardship should be exempted from any such penalties during the 2020–2021 financial year.
You should review any changes to these policies or mechanisms for the 2021–2022 financial year.
Providing rates relief on hardship grounds will benefit property owners whose incomes have fallen through job losses or business failures, or superannuitants who rely on investments for their retirement incomes. These investments have fallen considerably in value in many cases, as have the (growth) returns from them, and many of them will not be able to supplement their superannuation to any great extent, if at all.
Rates are fundamentally a cost of property ownership and many ratepayers want to reduce that, even at the best of times. While there will be people in genuine financial hardship, there will also be opportunists who will use this recession as an opportunity to reduce the cost of owning property. Council should resist these moves and apply any rates relief on the grounds of genuine financial hardship. Council should not provide a windfall benefit to people whose incomes have not been reduced by the recession, and whose ability to pay their rates has not changed.
Rates relief to private landlords will not benefit all low-paid tenants who have lost their jobs, as many landlords will pocket the savings, rather than pass them on by reducing rents, unless it is made a condition of receiving rates relief. Many landlords will be under financial pressure as well, and will be tempted to use this as an opportunity to shore up their own financial positions. There are limits to the accommodation supplement, but landlords should not be able to benefit through the twin subsidies of the accommodation supplement and rates relief.
Interest rates are extremely low and are projected to stay low throughout the coming recession, which means the costs of servicing mortgages is low for many property owners. The size of mortgage payments are largely the result of paying high prices in a booming market, which is a calculated risk investors and buyers have made based on the expectation of a substantial untaxed capital gain. They should be prepared to bear any losses if the market moves in the other direction.
Supporting local businesses and community
Many people, particularly in lower-paying, more insecure industries (retail, tourism and hospitality, in particular) have lost or will lose their jobs. This will increase financial, social and personal/family pressures and increase the need for support in the community. Some of this will come from central government, but local government has a critical role at a local level to support the people who make up their communities.
Council should be using its buying power to support local businesses at this time (as it should anyway). The temptation is to go for the lowest price to be prudent spenders of public money in times of constraint. However, buying local will not only support local business, but will support local people who work for them. If there is an increased cost from this, council could offset it from parts of the economic development budget that it would have spent on activities that are impossible during the pandemic, such as trade tours, international marketing, shows, events, etc.
Supporting the demand side of the local economy by purchasing goods and services locally also gives businesses the confidence to keep going so they can meet the supply side of the economy (goods and services to other businesses), which supports other parts of the local economy. This will help meet the supply-side driven aspect of the downturn that would lead to declines in production and bottlenecks that harm other businesses and consumers. Many small and medium-sized businesses have little in the way of cash reserves that will let them weather several months with low or no income, and will be in a dire situation even before people are able to start spending again. Public sector spending, whether by local or central government, can be a real boost to local businesses. This is not money that is lost to the community as it circulates around local residents and businesses. Research in the UK in 20133 showed that, following the 2009 GFC, the multiplier effect of money spent by councils with locally-owned small and medium-sized businesses (SMEs) was more than 50% greater than that spent with large local or national businesses.
The idea of cutting PCC grants to community groups on the grounds that there was money available from other charitable sources was proposed during the council elections last year. This would disadvantage community groups even in normal times because the money not given out by council was not being replaced from any other source and would have resulted in the same number of groups competing for a smaller pool of money. However, community groups will now have a greater need for support and it is essential to maintain that funding as much as possible, as part of council’s support for the community.
Council should continue with new or proposed infrastructure projects as much as possible. There is currently new funding available for them from central government, which you should explore. There should be an emphasis on using local businesses on these projects, including opportunities for trade training for local workers in conjunction with Whitireia Polytecnic.
During a severe recession, there are likely to be fewer residential developments by commercial developers. However, the demand for new housing will continue and council should boost its support for greater intensification of housing as a solution. To encourage this, you should review the development contributions for infill housing to reduce the barriers to individual property owners wanting to develop their existing land. This would support local construction firms, and any loss in development contributions would be offset by permanent extra rates income.
You can do this at a local level within your own powers, but you must also work with other local authorities and Local Government New Zealand to create new funding mechanisms for local government that tap into central government’s tax revenue. This will include special purpose vehicles and growth zones, which the government had previously indicated it was interested in exploring.
Paying the living wage
This was adopted by council last year and supported by many current councilors. Backtracking on this will be identified as a possible way of saving expenditure. You should continue with your intention to pay this. A substantial proportion of your staff earn below the living wage, and their incomes will be essential in supporting their households, many of which will already be vulnerable to hardship during the recession.
Wider rates reform
Council should consider wider rates reform for the future. A number of sound proposals have been made over many years, which, in normal times, with the inevitable inertia and self-interested opposition, would be hard to adopt. Times have changed and local government has the opportunity to adopt new ways of working and funding its work to adapt to a different future.
New Zealand Treasury. 2020. Treasury report T2020/973: Economic scenarios. Retrieved from https://treasury.govt.nz/publications/tr/treasury-report-t2020-973-economic-scenarios-13-april-2020 16 April 2020. ↩
New Zealand Productivity Commission. 2019. Local government funding and financing. Retrieved from https://www.productivity.govt.nz/inquiries/local-government-funding-and-financing/ 27 April 2020. ↩
Federation of Small Business. (2013). Local Procurement: Making the most of small business, one year on. Retrieved from https://cles.org.uk/wp-content/uploads/2016/10/FSB-procurement-2013.pdf 27 April 2020. ↩