Subsidies begat subsidies

November 5, 2019

Why is the south subsidising power delivery to the north? Steven Joyce opines:

I hold no brief for Rio Tinto or its aluminium smelter but I am a fan of Southland, and I don’t think Southland is getting a fair deal.

It’s worse than that.  Southland looks like it might be getting lined up for the “Taranaki Treatment” from the government.

Rio Tinto is once again reviewing the future of the smelter, which directly and indirectly, pays the wage packets of about 3,500 people in a region of roughly 100,000. . .

That’s a lot of jobs and there will be more in businesses which service and supply the smelter and it’s staff, but that by itself isn’t a justification for subsidising Rio Tinto. But there’s a but:

But actually they have a legitimate point – or at least, the people of Southland do.  People and businesses in Southland, including the smelter, pay too much to get their electricity delivered to them.  More correctly they subsidise the delivery of electricity to everyone else, and they are sick of doing it.

The lower South Island produces much of New Zealand’s power, and at the lowest cost, but they see no benefit from having the big hydro power stations in their neighbourhood.  Electricity is expensive to shift around so it should make sense to set up your business near a power station, but it’s not because electricity transmission costs are currently averaged across the country.

If you live over the road in Te Anau from New Zealand’s biggest power station, you are not just paying to have your power delivered to you, you are paying to get it delivered to people in Auckland, 1700 kilometres away on a whole other island.

Given the loss of energy and cost of sending power so far that doesn’t stack up environmentally or financially.

And as Auckland grows, it needs more power. Transpower, which runs New Zealand’s electricity grid, has spent several billion dollars over the last decade upgrading their network and keeping the lights on, much of it for the benefit of Aucklanders.

 And Southland people and the smelter have been paying for a lot of that.  

And we’ve all been paying for the subsidy to Rio Tinto because the south is subsidising the north’s power.

The previous government put together a new Electricity Authority to, amongst other things, sort out a fairer price for electricity transmission. It’s taken a while because it’s controversial.

In 2016 the authority put up a fair proposal that would have saved Southlanders a lot of money. The smelter would pay around $20 million a year less than it does now in transmission charges, and other Southland power users would get a commensurate reduction.

That would be better for the company and other southerners than subsidising the smelter.

But people in Auckland and Northland who would pay a bit more kicked up a big public fuss and so did politicians, including New Zealand First.  The Authority went away to check its sums again. It has now come up with another, watered down plan. It still improves things for Southland, but only about half the amount as previously.  And its still a few years away from coming in.

Tanspower should not have bowed to political pressure to change it’s  mind about people paying the trues cost of power just because for once the south would gain and the north would lose.

So it’s not surprising the smelter is getting antsy, or anybody else in the deep south. Southlanders pay higher petrol prices because the population is smaller and there is less competition.  They pay higher electricity prices because they are subsidising getting power delivered to Auckland.

On energy costs they never win. And they risk large industries leaving – industries that should be attracted to their part of the country because of the abundant cheap electricity that is generated there.

Thanks to the mnemonic Love Many Fat Royal People Today I can still    recite the factors affecting the location of industry – Labour, markets, finance, raw materials, power and transport.

The market in the south is smaller, but if you’re exporting that, and transport are not a big consideration. Finance is mobile, the south has plenty of Labour so it’s just subsidised power that makes the north more attractive.

If the south wasn’t subsidising the north’s power at least some   of the businesses which locate in Auckland, would choose somewhere nearer where the power is generated instead?

That would have the added bonus of slowing Auckland’s growth.

Meanwhile the trendies in Auckland and Wellington opine that we’d be better off without the smelter anyway for all sorts of thinly argued environmental reasons. Of course it’s not their lives that would be up-ended if it goes.

All this is grimly familiar to Taranaki people, who have had one of their largest highest-paying industries sacrificed on a Greenpeace-inspired oil and gas ban that is now generally accepted will do absolutely nothing to reduce climate change. Because of the complex interplay between coal, gas and electricity, it may be making things worse. It’s certainly lifting gas and power prices.

And it is not just industry that is at risk in Taranaki and Southland. There was news out this week that the aggressive new water policy the Government wants to impose on food producers will disproportionately affect people and economies in places like Taranaki and Southland. . .

Our self-styled champion of the provinces might be a bit miffed that provincial people don’t show appropriate levels of political adulation when he shows up with the taxpayers’ cheque book and sprays $10m here and $10m there. The truth is his largesse is poor consolation for the damage other things are doing to the economic prospects of regions like Southland

We shouldn’t subsidise the smelter. Rather we should stop forcing Southlanders to subsidise Aucklanders. 

We should also revert to a more gradual water plan that gives farmers time to adapt, and we should let Southland retain control of SIT. Then we should get out of the way and let the sensible practical Southlanders get on with making a success of their province.

This illustrates how subsidies begat subsidies.

If transmission costs were levied where they fell, Rio Tinto would have cheaper power without subsidies and the rest of the south would also save on their energy bills.

 

 


3/5s of not very much

September 23, 2019

Steven Joyce gives the government some much-needed advice:

It was confirmed this week that New Zealand is now running at little more than half speed.

From growing at rates of 3½ to 4 per cent three years ago our economy at the end of June was only 2.1 per cent larger than it was the previous June.

That’s a problem firstly because our population is growing at about 1.6 per cent a year, so if our economy grows at 2 per cent then the amount of additional wellbeing per person (to coin a phrase) is three fifths of not very much.

Not very much is far less than we need for economic, environmental and cultural wellbeing.

The second problem is that our terms of trade (the prices of our exports versus our imports) are still very strong so we should still be cranking along. It’s a problem if we are slowing down when the world really wants to buy what we are selling. What happens if the world actually falls out of bed?

What happens is recession and maybe even depression.

The government has been quick to blame the world economy for our lower growth rate this week, but our terms of trade put the lie to that.

The third problem is that there is no sign of anything on the horizon that will lead to much of an upturn, and in fact all the signs are that we are going to slow further. Our businesses are in a funk because of what is known as regulatory overhang. In short, they are too fearful to invest because the government is making lots of rule changes that could mean they don’t get much of a return for the risk they take.

It’s not just farmers, other businesses are too scared to invest.

The government for its part seems inclined to shrug its shoulders and say “nothing to see here”. They observe we are still growing (slightly) faster than Australia so what’s the problem? That story is likely to change in the next six months as Australia’s tax cuts come through and their housing market picks up. Anyway weren’t we trying to grow a lot faster than Australia so we could close the income gap with our cousins across the Tasman – what happened to that ambition?

This government has no ambition for growth, only for regulate, tax and spend.

The fourth problem is that lower growth means less to go around. If we were still growing as fast as we were then in real terms our economy would be around $5 billion bigger this year than it is. That means more money for higher pay and more jobs, and of course about 30 per cent of it goes into the government coffers – which would pay for a lot more cancer drugs, teachers or electric vehicle subsidies.

How hard is it to join the dots between higher growth and more for essential services and infrastructure?

So what to do? Well if I could offer some gratuitous advice to the Finance Minister I think he should be working on baking a bigger cake, and I think the recipe is pretty straightforward. Its time to rein in some of his ministerial colleagues who are wreaking havoc with business confidence.

For example he should suggest the Minister of Immigration sort out his portfolio so that horticulturists can find seasonal workers and the international education sector can get up off its knees. He should tell the Minister for the Environment to come up with a more reasonable plan for water quality improvements and methane emissions reductions so farmers step back from the cliff edge, and the Minister of Education to stop stuffing about with the apprenticeship system.

He should encourage the Reserve Bank Governor to be less heroic on bank capital requirements, persuade his colleagues to do a backtrack on gas exploration now it is proven the ban is simply value destroying and does nothing for climate change, overrule the Greens to permit some gold mining, and stop taxing tourists more so the tourism sector starts growing again. He should cancel the return to industry-wide pay bargaining given that NZ First are never going to vote for it anyway, tell the Transport Minister to get on with building at least some of the stalled roading projects, particularly given that light rail is years away, and reverse at least one of the petrol tax increases.

Then he could watch the economy recover and start thinking about how he’s going to allocate the increased government revenues. And New Zealand will be in much better shape if the world economy does get worse. . .

He won’t of course and nor will he see that it’s the poor and the struggling middle that will be hurt the hardest by policies which hamper growth.


Regions lose with central control

August 2, 2019

The government is centralising vocational education, merging 16 technology institutes and polytechnics into one:

Former Tertiary Education Minister Steven Joyce warns of the risks in this move:

. .  .Leaving aside the issue of transferring the control of hundreds and hundreds of millions of assets out of regional New Zealand to Wellington, there are huge risks in the proposal. Across the Tasman, New South Wales has just done something similar, merging its 16-odd TAFEs (polytechs) into one NSW-wide TAFE, and it is a cautionary tale. The merged entity lost $30 million in its first year, blowing out to $240m in its second. It’s now in the process of further reform.

Yes, many New Zealand polytechnics are currently struggling, but that’s not unique to this country. When employment is high, vocationally-minded people tend to get into work ahead of going to polytech, and roll numbers drop. It’s been made worse here by the sudden squeeze on international enrolments caused by government immigration policy which is contributing to a perfect storm of red ink.

Interestingly however, well-run polytechnics like SIT in Southland, Otago, and the Eastern Institute of Technology in the North Island, have continued to perform and make surpluses. A few board overhauls and the odd regional merger, plus a bit more tuition funding, would do wonders for the others and retain their local focus – and be much less risky.

The government’s prescription is radical surgery when much less drastic medicine could solve the problems at a much lower cost in both money and jobs:

The Government’s polytechnic and industry announcement today will cost thousands of jobs and may be the death knell for some polytechnics, National’s spokesperson for Tertiary Education Dr Shane Reti says.

“Moving apprentices back to polytechnics and creating one mega polytechnic will cost at least 1300 jobs in industry and probably as much again in polytechnics.

“Employers are telling us they will cease to employ apprentices next year if apprentices go back to polytechnics. This is a big step backwards especially when our construction sector is crying out for apprentices.

“The Government has brutally dismissed the concerns of industry and businesses who raised serious issues with polytechnic training. Industry understands the needs of industry best and who will be the best fit for them, but Mr Hipkins is blatantly ignoring them.

“Now the Minister is turning his axe to polytechnics. Under these reforms well performing polytechnics from the Southern Institute of Technology to Otago Polytechnic will lose the very essence of their successful and innovative local decision making.

“The reforms dissolve polytechnics into hollow and meaningless ‘legacy’ polytechnics. This ideology will destroy tradition, decimate organisational knowledge and the final indignity will be the mega polytechnic spending community gifted cash and assets.

“This is devastating for polytechnics and their staff and students.

“Every aspect of the vocational education sector is under attack. Apprentices are being sent back to polytechnics, polytechnics are being amalgamated into legacy campuses, jobs are being lost, cash and community assets will be ring-fenced and regional autonomy is being stripped away.

“These reforms will be disastrous for regional education and apprenticeships. Mr Hipkins is pushing ahead with ideology over what is best for students and regional New Zealand.

“National will empower the regions to make decisions around what they teach, where they teach and how they teach. We will return polytechnic assets taken by Labour and give them back to communities. We will return apprentices to industry.

“National supports apprentices and regional polytechnics and we will fight for their voice and autonomy in these ideological educational reforms.”

Invercargill mayor Tim Shadbolt said the city will fight to save The Southern Institute of Technology:

Invercargill leaders have vowed to fight a Government decision to centralise the Southern Institute of Technology [SIT] with 15 other polytechnics and training institutes nationwide.

Mayor Tim Shadbolt said he was in “absolute disbelief they could do such a terrible thing to our city” and said legal action would be taken against the decision.

“They have really ripped the heart out of Invercargill with this announcement.”

The proposal also threatens the future of Telford Farm Training Institute:

Clutha-Southland MP Hamish Walker said the announcement was incredibly disappointing and raised uncertainty for Telford’s future.

“Today’s announcement of the Government’s reform of vocational education through the centralisation of polytechs is another blow to rural and regional New Zealand. 

“It is the people in regions who know the needs of their people best, not a long list of public servants in Wellington.”

Community assets would be taken away, decision-making powers would be lost and as a result, Telford would be disadvantaged, he said.

“Telford’s long-term proposal was turned down because of this reform which will now cause further damage to Clutha-Southland and its workforce.”

“This creates further uncertainty for staff and students at Telford who have already been through enough.” . . 

Successful organisations like SIT and Otago Polytech could have been used as a model for other institutions that were floundering.

Instead the successful are being sacrificed because of others’ failures and the regions lose autonomy to central control.


It’s only words

May 31, 2019

Has any government not put money into policies which aim to improve wellbeing?

I can’t think of a single one that hasn’t put considerable amounts into   health, education, welfare, infrastructure . . . any and all of the areas that impact on and contribute to wellbeing.

Just two years ago, then Finance Minister Steven Joyce said:

. . .This budget is about delivering more of the public services, the infrastructure, the resilience, and the incomes that New Zealanders need to get ahead and to provide for their families.

This budget is about the opportunity we have to build on the platform we have all created and deliver greater prosperity for New Zealanders. . .

This Government is focused on helping our most vulnerable people lead more successful lives. . . 

Initiatives included helping people move from benefits to work, improving safety of victims of family violence, investment in social housing, funding for caregiver support and social initiatives aimed at tackling long-term issues for the most vulnerable.

It included measures to help children get a better start in live and there was a significant increase in mental health funding..

Social investment is about tackling our most challenging social issues. The combination of these new initiatives and the Government’s decisions about family incomes will allow us to make serious headway with some of the longer-term challenges faced by the most vulnerable New Zealanders. . . 

He concluded:

This budget is all about “Delivering for New Zealanders”.

It takes four significant steps to bring the benefits of a stronger economy to all New Zealanders. It makes a big investment in public services, it makes a record investment in new infrastructure, it improves the resilience of our country to future shocks, and it strengthens families by lifting their incomes.

It’s important that we remember that the only reason we get to have this conversation is because we have a strong and growing economy built on a strong economic plan.

We must maintain our focus on growing the economy and sticking to the plan.

It is only by doing that, that we can provide for the prosperity of all New Zealanders.

What a contrast between the former government’s careful management and understanding that economic growth is essential to support social initiatives and the current one which is very good at soft words that seek to disguise a slowing economy.

The debate continued and then-PM BIll English spoke:

. . .We are unashamedly addressing the hard core of New Zealand’s longest-run social problems, and in this Budget there are 14 initiatives that do that. I want to pay tribute to public servants who, I know, find it difficult to fit the model. It creates a lot of tension and sometimes a bit of frustration, but we are making some progress because what is the point of having a Government if it cannot deal with the most complex, the most vulnerable, . . 

The previous government called it social investment. Its words were backed up by policies that were working to improve lives and sustainably funded by a growing economy. .

This government calls it wellbeing and so far it’s only words. If it’s going to be more than words and to make a significant and positive difference it will have to do a lot better on delivering, not just on its promises but on economic growth too, than it has to date.

The projected surplus next year is only $1.4 billion. That’s a big number but not in the context of government spending.

Opposition leader Simon Bridges points out:

. . . The Prime Minister boasts in her press release that growth is forecast to average 2.6 per cent over the next four years, under the National Government growth was 4 per cent. This Government simply can’t be trusted with the economy. 

“NZ First has once again shown that it holds the purse strings with today’s announcements of a billion on rail that nobody wants and even more for forestry. That’s on top of Shane Jones’ billion dollar slush fund and the billion dollars already promised for trees. The cost of this coalition is not worth it for New Zealanders with what they’re getting in return, and it certainly isn’t improving anyone’s wellbeing.

“It’s no wonder Grant Robertson has had to drop his self-imposed debt target and increase the spending limit by $17 billion so he can fund the Government’s bad spending decisions. Surpluses are forecast to be billions of dollars lower than they were just a few months ago. . . 

Changing the language doesn’t change the fact that wellbeing can only be built on a strong and growing economic foundation.

 


Micro matters not minor matters

September 11, 2018

BusinessNZ says the Employment Relations Amendment Bill is harmful and oppressive:

None of the provisions that most concern business have been removed by the select committee considering the Bill. . .

55% of submissions were against the Bill and thousands of emails sent to Parliamentarians by concerned businesses. EMA, Business Central, the Canterbury Employers’ Chamber of Commerce and Otago Southland Employers’ Association ran a high-profile campaign asking the Government to explain the reasoning for the Bill’s harmful provisions.

“Given current low levels of business confidence, especially among small business, it is unfortunate that the Government has neither listened nor explained its justification for the Bill.

Low business confidence is not political pique. It’s based on genuine concern about policy like this which will make it more difficult, and expensive, to run a business.

“Business cannot support this Bill and will be making our position clear as this Bill progresses through Parliament.

“BusinessNZ is also considering pursuing a claim to the International Labour Organisation or International Court of Justice on parts of the Bill which are contrary to international law.

“Business strongly objects to this Bill’s ability to harm employment relations, jobs and commercial value in New Zealand enterprises.”

The EMA is bitterly disappointed no heed was paid to concerns raised:

The EMA, along with its fellow regional associations, actively lobbied and campaigned for four key areas to be modified as it believed these will not deliver to the Government’s stated aims of a high wage and high performing economy, nor help businesses to be more productive. The joint Fix The Bill campaign resulted in at least 2254 emails being sent to Government MPs seeking clarification on how the changes will help their business succeed.

The four aspects of the Bill that were particularly worrying for business were:

– Employers with 20 employees or more will lose the right to include 90-day-trial periods in employment agreements. However, findings from a nationwide survey of employers found that the 90-day trial periods were useful for businesses of all sizes, to give prospective employees a chance.

A trial period is not just good for employers, it’s good for other employees. If a new worker isn’t up to scratch it impacts badly on workmates.

– Businesses will be forced to settle collective agreements, even if they don’t or can’t agree

And even if they can’t afford them.

– Allowing union representatives access to workplaces without permission

Any access, any time is not conducive to productivity.

– Not allowing businesses a choice to opt out of a multi-employer collective agreement (MECA)

This will not only means saddle businesses with agreements they can’t afford, it will stop a business offering staff better pay and conditions.

With more than 50% of New Zealand businesses employing fewer than 100 staff, the EMA is deeply worried the changes in the Bill combined with the raft of other legislation in the pipeline will unduly burden smaller operators.

Furthermore, despite rhetoric from Government that it is listening to business, this is a tangible example that ideology rather than solid public policy driving decisions and does not bode well for business going forward.

Throughout this process the EMA has been puzzled by how any of the proposed changes to the industrial relations framework will take the country forward in terms of the Government’s goal of developing a modern, nimble and high performing economy.

Taking industrial relations back to the 1970s will not take the country forward and it will harm rather than help the economy.

Steven Joyce writes:*

. . .Economic policy is in fact a three-legged stool, fiscal policy, monetary policy, and microeconomic policy. You can’t successfully operate an economy, especially a small one like New Zealand, without all three working together.

Microeconomics is everything that operates at the firm level in the economy – all the regulations and policy settings that impact directly on businesses. These are things like employment law, immigration settings, competition law, resource allocation, innovation settings, tax policy and the government’s investment in infrastructure.

It is microeconomics that drives much of firms’ actual operating conditions. Along with interest rates and exchanges rates, it is access to capital, skilled people, resources, markets, the necessary infrastructure and importantly the consistency of those settings, that tell the owners of businesses that it is a good time to invest and grow their business.

If you start playing with those settings in an arbitrary way while ignoring the economic consequences of those changes, then firms will simply stop investing. They’ll either wait until there is more certainty, or not invest at all. . .

Microeconomic matters, including employment relations legislation, are not minor matters.

They have a huge influence on the business environment and economy.

Any changes which add to the complexities and risk of employing people will have the opposite affect from the government’s stated aim of developing a modern, nimble and high performing economy.

But this legislation shows that this aim comes a very poor second to Labour’s need to pay back unions for their financial and personal support.

The legislation will be good for unions but not the whose interests they purport to represent nor for the businesses which employ them.

* Hat tip: Kiwiblog


In fiscal hole and still digging

August 10, 2018

Economist Cameron Bagrie has found a hole in the fiscal bucket:

Steven Joyce is going to be proved right. There is a fiscal hole and a softening economy is making it wider.

I don’t like the term fiscal hole. Good policy should dominate over strict debt targets and economic cycles come and go which are often beyond government control.

But the Labour-led Government’s fiscal hole is looking deeper by the day – and bigger than the $11.7 billion of additional borrowing that Joyce identified. . .

Growth is weaker, the Government is already borrowing creatively to the tune of $6.4 billion via Crown entities (keeping it out of core government net debt metrics) and spending demands are headed one way.

That combination will pressure its fiscal position.  . .

The lack of money left in the kitty post the 2018-Budget raised issues of credibility, but the fiscal parameters were technically achievable.

It wasn’t going to be easy, but it was possible, so the Government was given the benefit of the doubt.

Giving them the benefit of the doubt was a mistake given their record, policies and the knowledge that coalition partners would add to costs.

But the picture is changing and the Government’s ambitions are looking more and more like pipe dreams.

So, what has changed?

Budget spending and investment demands needed funding, whilst at the same time sticking to the narrative of hitting debt objectives and being fiscally responsible.

The result was crown entities borrowing an additional $6.4 billion between 2017 and 2022.

That is an accounting fudge to get it out of the core Government debt figures.

Just because we can’t see it doesn’t mean it’s not there.

Public sector pay and spending demands are only heading one way.

Few bemoan the need to pay teachers and nurses more but that money needs to come from somewhere.

The realities of a coalition Government meant more needed to be spent. Spending allocations in the 2019 and subsequent Budgets were increased by $525 million to $2.4b per year.

That looked fine against a backdrop of solid projections for growth. But it was a risky strategy with the economy late cycle as opposed to early cycle.

The government can’t be held responsible for external problems but they can be blamed for not taking a more prudent approach given clouds gathering on the economic horizon.

They can also be blamed for wasting money on fripperies like fee-free tertiary education and good looking horses without leaving enough for necessities like improved pay and conditions for nurses and teachers.

They’ve dug the hole and there is nothing in their performance that could give any confidence in their ability to get out of it especially as they are still digging.


Pressure proves Steven Joyce right

July 25, 2018

Labour is under pressure to increase its self-imposed debt limit to address wage claims and social spending requests.

That pressure proves former Finance Minister Steven Joyce was right when he said Labour’s pre-election budget had several billion dollar holes in it.

Those holes were where the money for pay increases for health professionals, teachers, police and other public servants should have been.

The pay offer to nurses sounds generous, but as they keep saying they don’t just want more pay, they want better conditions.

. . . Some nurses have talked about being rostered on for three days a week, but working on average 80-86 hours a fortnight.

Being called back in on days off is a regular occurrence, and rosters often have blank spaces left while managers look for nurses to fill the gaps.

The most recent pay offer brought forward $38 million of new funding to provide immediate relief for staffing and workload issues, but was seemingly viewed as being too little, too late.

The strike vote shows the depths of anger in the rank-and-file – if it was underestimated beforehand, it cannot be now.

Striking nurses have two demands – to be paid more, and to be valued. . . 

Teachers who are poised to strike too are also wanting not just more pay but better support.

. . .They are negotiating on teacher and principal pay, but also on workload and things like special education needs co-ordinators.

“There’s a real depth of feeling out there. The whole issue around workload is very, very significant and that’s come through very, very strongly.” . .

While the public isn’t enamoured of strikes, nurses and teachers do have widespread sympathy and have valid questions about why there’s no more money for them.

Labour set its debt target to show that it could be fiscally responsible but the government it leads has already failed at that.

Billions have been wasted on fripperies leaving holes where funds for better pay and conditions for nurses and teachers should be.

And every time they say there’s no more money, they’ll be asked: how can there be enough for fee-free tertiary education and the regional slush fund but not enough for health and education professionals?

Just like Labour of old and previous governments it’s led, this one is making a fuss about how much they spend with little or no attention to how well they’re spending.

It’s quantity over quality, what they spend not what it achieves, and with every mis-spent cent they’re proving the former Finance Minister right.

 


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