The briefings: The price of Government

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There is a subtle but strong message running through the Briefings to Incoming Ministers released yesterday which comes near to putting a price that the Government is going to have to pay to implement its promises.

Some of these new costs will be surprises.

Many of the briefings report the need for more funding to continue existing programmes.

The Ministry for Primary Industries, for example, says: “MPI is facing a number of cost pressures and will provide you with further briefing on these.”

Other briefings have redacted some key financial data.

Even small agencies, like NZ ON Air, report that after nine years of its budget having been frozen it believes it has had an effective reduction in its budget of 22% and is now having to make tough decisions about which programmes it will fund.

It suggests that funding may be at risk for the weekend political shows, “The Nation” and “Q+A”.

Prime Minister Jacinda Ardern was obviously referring to these sort of pressures when she told her weekly press conference on Monday that the Government was uncovering a range of proposals from the previous Government which have not been funded.

“There’s no doubt that every day an office brings a new surprise that I would have had an expectation that the past Government would have budgeted for particularly when they announced something but didn’t (fund it),” she said.

“We have commitments we have made which we will be factoring into both the next Budget and the Half-yearly Fiscal Update, and as we work through them, we are confident we can still maintain our Budget Responsibility Rules.

Ardern said that the “lens” that was being applied was whether capital projects fitted into Labour’s priorities and she cited roading as one example of that.

“We didn't consider it a priority in line with what we want to achieve as a Government.

“But all Ministers are undertaking an exercise att he moment where they are working through all their ap[priopriations top whether the commitments are line with what we want to achieve as Government.

One of the biggest bills will be to fund the gap in Auckland transport funding which was identified by the previous Government as $5.9 billion.

But such is the pressure on finances that the Ministry of Transport suggests in its briefing to Transport Minister Phil Twyford that land transport revenue might  need to be raised for transport funding “via fuel excise duties and road user charges.”

“ Any changes will require Cabinet agreement and legislative amendment. We can advise you on possible changes to these duties, charges, and Crown funding."

Road funding sits mostly outside the general Budget process with only $540 million of the New Zealand Transport Agency’s current $4.5 billion of funding coming from the Crown. The bulk comes from the the National Land Transport Fund and is road user charges, fuel excise duty and motor vehicle registry fees.

So the Crown’s $540 million is the only saving possible in roading.

But there are big-ticket items that are unfunded --- particularly the $2.2 billion which will be required to replace the Air Force’s ageing P# Orion maritime surveillance aircraft.

The Earthquake Commission may also be in need of a capital injection. Its briefing says: “The  Natural  Disaster  Fund (NDF) is forecast to be fully exhausted by the Canterbury and Kaikoura  earthquake   claims. 

Based on current premium levels it will take about 30 years to rebuild to the level of the current   reinsurance   deductible of $1. 75 billion.

The recently  announced   premium   increases from  1 November   2017 reduce this period to 10 years (assuming no further major events occur in the interim).

Decisions are required on the level of financial risk from future natural disasters that the  Crown is willing to hold while the  NDF rebuilds,  and the best way of managing that risk.

Treasury, in its briefing to Infrastructure Minister, Shane Jones, raises the question of funding and though it acknowledges that the new Government wants to use Infrastructure Bonds to provide funding, it suggests that private funding --- presumably through public, private partnerships – could be important.

Treasury says total Crown assets are forecast to grow by $38.6 billion to $331.3 billion in 2020/21, made up of additional investments in assets, both physical and financial.

“The largest asset growth over the forecast period is in the social assets portfolio (e.g., schools, hospitals and social housing), which makes up just over 50% of the total Crown balance sheet.

“Social assets are expected to increase by $24.7 billion over the forecast period to be $174.1 billion in 2020/21. This increase largely reflects growing capital spending.

It is clear from the briefing paper that Treasury is not convinced that the Infrastructure Bonds plus the capital budget --- which is already under pressure – will be able to fund the full slate of projects proposed.

“While public capital has an important role to play, attracting greater third-party capital underpinned by revenue streams would also help to overcome current disincentives to investment facing current providers.

“Third-party capital refers to either financiers, community groups or iwi.

“This strategy is based on enabling new approaches towards financing and funding projects.

“This also means risks and costs involved are borne by the most appropriate sources, while infrastructure providers are able to get a sufficient return on their investment.”

Public-private partnerships were preferred by the previous Government and were proposed for the new Dunedin Hospital and some schools. By abandoning that approach, there will be significant extra additions to the capital budget.

The new Government always expected they would need to find more for health services and the briefing will not have disabused them.

“The health and disability system faces a range of cost pressures arising from changes in demographics, prices, and patterns of illness, in common with similar high-income countries around the world

“Baseline funding for Vote Health has increased annually since 2000/01. However, successive governments' policy decisions have led to different rates of increase.

“The pressures on Vote Health are expected to continue, however, and the track of DHB total deficits suggests that efficiency gains are becoming increasingly difficult.

“Similarly, ongoing efficiency gains in the $2.4 billion of health services purchased by the Ministry are becoming more difficult, and demand and cost pressures bear on those frontline services too.”

What the Government is confronting is two separate pressures on its spending --- one deferred spending from the austerity imposed by the last Government as a response to the GFC in 2008 and a new force in the form of a rapidly growing, ethnically diverse population.

But no one ever said being in Government was easy.

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