Council ownership

A standard popular argument for public or council ownership over private ownership is that private shareholders are too short-term focused, at the expense of longer-term value. 

It's an eminently debatable proposition. But as always, Demsetz would say 'as compared to what?'. We always need to compare how the alternative works in the real world.

Here's Oliver Lewis over at BusinessDesk:

To mitigate rates rises and fund services, Christchurch City Council will be asking its commercial arm to frontload dividend payments and provide $47 million extra over the next three years.

The move, endorsed by councillors at a meeting on Wednesday, drew a forthright warning from Christchurch City Holdings (CCHL), which controls assets worth more than $5 billion on behalf of the council.

CCHL chair Abby Foote – who has repeatedly spelled out the constrained financial position of the group and the need to start paying down its $2.3b of debt, $440m of which was taken on at the bequest of the council for the earthquake recovery – said the new request placed the CCHL board in an extraordinarily difficult position. 

'Do not add up' 

“We cannot pay down debt, grow dividends to council and invest in the resilience and growth of our critical infrastructure,” Foote said. “These things simply do not add up. We cannot do them all, and that is what we have been saying for the last 12 months.”

...

Explaining the request for extra dividends, interim council CEO Mary Richardson said she and chief financial officer Bede Carran met with CCHL last week.  Staff believed the request for additional dividends, which was supported by councillors at the meeting, was doable to help restrain rates increases and allow the council to deliver on its capital programme.

When we lived in Christchurch, it always seemed as though Council was underinvesting in maintenance and keeping up with depreciation at the Port. 

If a private company is excessively sweating assets to benefit current shareholders, there are a few potential disciplining mechanisms. Shareholders have incentive to watch over management practice; behaviour that reduces long-term value will ultimately hit shareholders. And takeovers always remain a possibility.

A market test applies. If management is taking the piss when arguing for lower dividends, shareholders can check. Management can be replaced. Analysts skilled at figuring this stuff out can buy out existing shareholders and increase value. Nothing in this world is perfect, but there's a correction mechanism here. 

What disciplining mechanisms kick in if managers of a council-owned company say that the council owners are insisting on sweating the assets too hard? If they're right, no alternative owners can come in and replace the current ones. There's no discovery process to find out whether they're right. 

There's some chance that Council is running down the port to help pay for the new stadium. Does that seem like an entirely good idea, or an advertisement for the merits of public ownership?

Yes, it would have been tobacco prohibition

A living-wage campaigner didn't like my column on tobacco prohibition and complained to the Media Council. 

The Council didn't uphold his complaint on substance but did want the Post to have a disclaimer on our columns about the Initiative's membership base.

The Council's ruling is here. 

Here's what I'd told the Post, and the Council, in response to the complaint:

Please feel free to share this both with the media council and with Mr Herz-Edinger.

I viewed and continue to view the VLNC rules as prohibition on smoked tobacco.

In the same way that near-beers with less than 0.5% alcohol were allowed under American alcohol prohibition, near-cigarettes with less than a tiny amount of nicotine would be allowed under the VLNC rules. It is not prohibition of nicotine, which would continue to be available in vape form. But it would have been prohibition of smoked tobacco.

If we compare 0.5% alcohol beer to the average strength of beer, and the VLNC-allowed levels of nicotine in cigarettes to the average strength of a cigarette, it is roughly equivalent to a 0.2% alcohol rule for beer. So I do not think I am exaggerating here. I went through that calculus here:

“The legislation sets limits on nicotine allowed in cigarettes. The US Centres for Disease Control estimates that the average cigarette has just over 19mg of nicotine per gram of tobacco. From April 1, 2025, Very Low Nicotine Content rules will apply. Under those rules, no tobacco product can have more than 0.8 mg of nicotine per gram.

If a standard beer is 5% alcohol, the VLNC rules are roughly equivalent to banning the sale of beer with more than 0.2% alcohol.”

Those wishing to do so can check the math with a calculator. It isn’t complicated. The VLNC rules set a tighter standard for nicotine allowed in cigarettes than American alcohol prohibition set for alcohol allowed in near-beers.

Had American prohibition included a ban on the sale of near-beers to those born prior to 1900, the creeping increase in the proportion of population forbidden against buying near-beers would have been the minor point

I very much hold that prohibition on cigars, pipe tobacco and cigarettes would have begun the instant that the VLNC rules took effect: 1 April 2025. If that is incorrect, then America never had alcohol prohibition. And my article, here disputed, very clearly set out that I referred to prohibition of tobacco, not prohibition of nicotine. Nicotine would not have been prohibited. I was not taking license or exaggerating for effect or generalising. Smoked tobacco would have been under a prohibitionist regime from 1 April 2025 if the rules maintained a 0.8mg/g threshold. The effects would have been different from American alcohol prohibition, because nicotine would still be available in vape from. But it would nevertheless be prohibition of smoked tobacco.

I had thought that I had made this very clear in the disputed column. I wrote,

“Under prohibition, the illicit market would not just be a way of avoiding excise. It would be the only way of getting a real cigarette. It would be remarkable if Australian crime syndicates, or others, did not plan on supplying the New Zealand market from 2025 – had we gone ahead with prohibition

Tobacco prohibition would not have prohibited nicotine – vaping would remain legal. But illicit tobacco does not carry excise. Shifts to the illicit market provide no health benefits while reducing excise revenue. And because illicit tobacco is cheaper than taxed tobacco, smokers who shift to the illicit market would have one fewer reason to flip to vaping.”

I would have written exactly the same thing regardless of who our members are, because I believe it to be true.

It's a bit funny where total membership subscription fees from our two tobacco company members, over the entire lifespan of the organisation, are a tiny fraction of the amount that the Health Research Council gave to Janet Hoek in a single grant for anti-tobacco work and nobody ever seems to consider that a conflict. One-sided skepticism reigns.  

Competition in Consenting

This week's column over in the Stuff papers wonders about getting some competition into building consenting. A snippet:

Getting building consenting authorities out from under joint and several liability would help. And especially where the government is keen on encouraging the use of quality, lower-cost materials certified overseas.

But so too could easing the local monopoly on building consent and code of compliance issuance.

Government has already recognised that building consents and sign-offs are part of the problem. Kāinga Ora, the government’s housing provider, has its own arms-length consenting authority: Consentium. It provides consents for Kāinga Ora developments along with building inspections and code of compliance certificates.

Consentium then provides a small bit of contestability in the market for building inspection certificates. Kāinga Ora developments can ignore idiosyncratic local interpretations of the Building Act and build to a common national standard. It can also decide to try out new and innovative materials to help bring costs down while improving quality.

But only buildings that will be owned and retained by Kāinga Ora can apply for consenting through Consentium. If a private developer is building two adjacent identical houses, one for Kāinga Ora and the other for private sale, Consentium would only provide consenting services for the Kāinga Ora home. One potential reason: Kāinga Ora is not likely to sue Consentium if they discover a problem down the track.

It’s a bit of a shame.

Consentium is hardly perfect. It was reported earlier this month that it took almost two years for Consentium to decide that an above-ground stormwater storage tank didn’t impose a fire risk. But council consenting systems can be even more broken.

If building consenting authorities had to compete for business, outcomes could be different. If private developers had the option to seek consent from Consentium, both Consentium and councils could have reason to improve performance – so long as the liability issue were sorted out.

I recently returned from Vancouver where the Squamish Nation has autonomy over its Sen̓áḵw apartment tower development near Vancouver’s downtown. A New Zealand equivalent could allow iwi to establish themselves as building consenting authority on iwi-held land. In places where councils were underperforming, iwi might take up consenting for their own construction projects. That too would provide greater competitive discipline on building consenting.

Afternoon roundup

A closing of some of the tabs

First, a set from closing a pile of the week's accumulated stories from the Stuff papers. I wonder whether the people who complain about the absence of real journalism bother reading what The Post and Sunday Star Times have been putting out lately. 

• National's 'tax relief' won't be a tax cut "because the only real cut is a spending cut, anything else is just rearranging who pays what and in which generation."
• "If Health New Zealand can't find doctors, his iwi will." Some of the social services already being provided by Ngāti Toa.
• Andrea Vance asks "How did the cost of moving two schools blow out to more than $400m?"
• Promising work on methane vaccines for cows. Including great context from Dave Frame. [And here's Dave Frame and Adrian Macey over at Business Desk on methane]
• A path from John Birch through to anti-fluoride activism in NZ that runs through ZAP - a group I'd not heard of for at least a decade. Just great stuff from Charlie Mitchell here. 
• Poor response rates in the 2023 Census, and speculation that it might be the last census as we know censuses. 
• This one is just beautifully written. Joe Bennett on a walk up a hill.

  There’s a lot to be said for being a cattle beast. You live with friends. Your food is all about you. You own nothing but an ear tag. And castration frees you from the main source of worry and expense. Admittedly you make one bad journey in the end, but you don’t see it coming, and your mates go with you. And you’re spared the horrors of old age.

And the rest of the tabs. Or some of the rest. I'm drowning here but the computer needs to be rebooted.... 

• One hypothesis on why Google Search doesn't work as well as it once did.
• Another climate stress test, another finding of zero systemic risk justifying RBNZ's continued prudential excursions into climate issues. Unless prudential reg now is meant not to guard against systemic risk and instead starts from assuming that bank directors are idiots and that bank shareholders need to be protected against bad decisions.
• NZ's NPS-UD doesn't go hard enough. British Columbia's enabling apartments up to 20 stories near transit stations. 
• A new (to me anyway) metastudy on workforce diversity. Effects are significant and positive, "but insubstantial."
• "If the government believes making it more difficult to recruit offshore is going to get 50,000 people off the dole they are as deluded as all those who came before them who wanted to believe the same thing. I get the politics. I don't get the economics."
• RBNZ now investigating whether we should have a central bank digital currency.
• The Government really ought to push ahead with the Rule of Two for Medsafe Approvals. It would unlock access to RSV vaccines. Come on......
• Taiwan wants NZ to do more in supporting anti-authoritarianism. I wonder whether we ought to be doing more in supporting scholarships for promising students from the Islands to study in NZ.
• After my Insights column on the Christchurch Cathedral cost-benefit assessment, a reader pointed us to the business case for a major Tauranga city redevelopment project. I'd hope that, if central government is putting money into this, it pushed hard on checking whether the increases in tourism are plausible (and net national rather than within-country diversion). And whatever arguments one wants to have about appropriate discount rates for social projects as compared to infrastructure projects, expect infrastructure spending (like museums) to be portrayed as social investment where the lower discount rate allows a higher NPV for purported benefits. Bit of a Lil Lisa's Slurry problem here. 
  
  
  

Still no prudential regulation case around climate change

The Reserve Bank of New Zealand desperately wants to find reasons to have workstreams in climate change. 

It makes little sense. 

They've run another stress test on the banks looking to see if they could find a prudential regulation case. 

They couldn't. 

They found no systemic risk from a harsh scenario, just losses absorbed by shareholders of banks that don't respond adequately. And while that might make the banks less resilient against further shocks, that ought to just mean that the RBNZ's prudential side makes sure that bank capitalisation remains high enough. 

Here's their report on it. 

They conclude:

The Climate Stress Test, and preceding Risk Assessments, have shone a light on the potential effects climate-related risks can have on our large banks’ balance sheets. Climate-related risks, if not managed, could significantly reduce bank dividends, profitability and raise credit risk-weighted assets over the medium to long-term which would lessen the resilience of the system to other shocks.

I come to a different conclusion.

The Reserve Bank's prudential and monetary roles should be split across two separate agencies. A monetary authority with independence in the use of monetary policy to keep inflation within tight bounds. And a prudential side restricted to dealing with actual prudential risk.  

Despair - construction consenting edition

Kainga Ora is the government's house building agency. It's been building a lot of social housing.

Kainga Ora has its own (but independent) consenting authority, Consentium. 

It's a neat idea. Rather than have to deal with building consents across each different territorial authority, Kainga Ora can run building consents, inspections, and Code of Compliance Certificates through Consentium. 

I really really like the idea of making building consenting contestable. 

Councils have local monopolies on this stuff. Having alternative sources of building consents and certificates that follow a national standard rather than whatever bespoke view councils might have introduces some competition. If councils are being weird about approving something, developers could seek consents instead from the alternative agency. 

And an outfit like Consentium signing off on new building methods with innovative materials might help other building consenting authorities have confidence in approving similar things. 

And then I read Brent Melville's piece in BusinessDesk. You really should subscribe to BusinessDesk. It's regularly and reliably very good. 

But despair. 

I'll snip from it here as the piece is now more than a week old and hope that they don't get too mad at me for it. 

In what's been described as a win for common sense, and after an exhaustive 18-month process, the building regulator has determined that water tanks are "unlikely" to be a fire risk. 

The Ministry of Business, Innovation and Employment (MBIE) clarified this week that an external water tank proposed under a consenting application for a Kāinga Ora development in Henderson, West Auckland, didn't represent a fire risk to neighbouring properties.  

The determination, announced on March 28, was sought in July 2022 by the housing agency's dedicated consenting consultancy, Consentium, was in reference to a new, two-storey detached dwelling and whether an above-ground stormwater tank near the property boundary complied with C3.6 and C3.7 of Clause C3 of the Building Act. 

At the time, Consentium, as the authority, held the view the stormwater tank didn't comply with part of the Building Code concerned with limiting the spread of fire between properties.  

The application was accordingly changed to specify a metal tank to replace the 2.95-metre-long plastic tank supplied by Thin Tanks. 

The regulator duly entered into a year-and-a-half of discussions, consultation, independent fire reviews and deliberations.

Go read the whole thing. If we'd written this as a satirical column in our Insights newsletter, it would have seemed too harsh on officials. 

And yet. 

Even more competition in provision of building consents would be a good thing....

Reader mailbag: really long tunnels edition

I'd been wondering about the proposal to dig a really long tunnel to route through traffic away from Wellington's central city. 

It seems the kind of thing that you might decide to do, after running congestion charging for a while and seeing that the project is warranted, rather than deciding on ahead of having that information from revealed preferences and prices. The thing won't be cheap. 

So I was happy to see this in my inbox this afternoon to help me think through it. 

The Wellington Long Tunnel could be a transformative project to take enough traffic out of the city, especially Te Aro, but also the Quays along the waterfront and Oriental Bay, to improve amenity, relieve congestion at bottlenecks at the Terrace and Mt Victoria Tunnels and make it easier to walk and bike, as well as move buses, delivery vehicles (and cars) within central Wellington. Plenty of other cities of broadly have taken traffic out of their downtowns through purpose-built bypasses, such as Bergen, Antwerp, Basel and Tampere. Bergen is paying for some of the cost of its bypass with a toll.

Saving 15 minutes between the airport and the Hutt, Porirua and the rest of the region seems worthwhile, but both the travel time (and fuel) savings, and uplift of amenity would come at considerable cost. In 2021 Let’s Get Wellington Moving estimated the project might cost $3.1b, but we know how reliable such forecasts have been lately.

Yet it poses the obvious question. If Wellington got time-of-use pricing (congestion pricing) introduced during weekday peaks, focused on the CBD (leaving SH1 out of it as a bypass to a cordon), would the change in behaviour it enabled be enough to relieve congestion on SH1, and so determine then if the Long Tunnel idea was still worthwhile?

The answer is probably yes, although high-level modelling of a cordon pricing option by LGWM suggested that travel times southbound on SH1 would worsen, it would appear because the Terrace Tunnel has insufficient capacity in that direction (one-lane) to accommodate the traffic redirected around the CBD off of the Quays. That could be addressed by putting a higher price on that traffic which could justify building more capacity at that bottleneck.

However, it’s one thing to think of how the roads might be run as a rational business, but reality has some complications:

1. The Long Tunnel is about more than traffic. Arguably it can unlock property value uplift by removing a lot of traffic from existing streets, including taking a lane each way off of the waterfront route to enable a second public transport corridor along it, and more development along the waterfront, as well as removing much of the blight of traffic from Te Aro. The value of all of this is unknown, but as the Long Tunnel is as much about amenity as transport, it is important although caution needs to be taken around exaggerating these benefits (as much as applies to those pushing light rail’s benefits).
2. Congestion pricing for Wellington should probably exclude SH1 for public acceptability, at least at first. A downtown cordon is relatively easy to implement, as trains and buses pretty much all converge on it, and most drivers have reasonable alternatives. Having a good bypass helps to encourage traffic to flow more efficiently around the priced area (this has been seen in Stockholm and Oslo), although it would be wrong to wait until the Long Tunnel is built before introducing congestion pricing.
3. Politics around use of the money. Greens want congestion pricing to raise money to pay for public transport boondoggles, it seems likely National wants it to pay for road boondoggles. Arguably, a road boondoggle that at least benefits those paying the congestion charge is a better waste of money than one that doesn't. It would be better to use pricing revenue to offset rates funding of roads, or enable lower off-peak pricing of roads (if RUC was set by location), or just used for the best projects to upgrade roads in the region, but no jurisdictions do this.
4. The politics around building a Wellington bypass. For over thirty years the issue of fixing the route between the motorway and the roads approaching the airport has been highly politicised.  The current road layout generates congestion all-day during weekdays and much during weekends, and is clearly inefficient as it encourages diversions along routes not well suited to through traffic. The Basin Reserve is the biggest part of that problem, and indeed past BCR assessment of proposals to upgrade it indicate that fixing the Basin Reserve is worthwhile. If the Basin Bridge had been approved by the Key Government, then we probably wouldn’t be talking about the Long Tunnel, but the politics around putting a bridge between Mt Victoria Tunnel (including a new one) and the Arras Tunnel (and maybe a new one to take eastbound traffic off of Vivian St) are complex.

The Greens and Mt Victoria Residents who want nothing built. In Wellington, stopping the “motorway extension” was a cause celebre in the 1990s for the Greens (in their formative years) that succeeded largely due to fiscal constraints, and we are where we are as a result. However, there are also allies in friends of the Basin Reserve who love that cricket ground. The Minister for Infrastructure is one of those people.  The below ground conditions at the Basin are not conducive to tunnelling underneath because of the geology including an underground stream, so it’s a bridge there or a deep tunnel somewhere else. The Minister of Infrastructure is likely to not look friendly upon a bridge (although I wonder if putting a artificial hill to the north of the Basin to conceal a bridge might fix that). 

Unfortunately, the politics around "build no new road projects because cars are bad" from most of the Greens, encourages the Nats to go the opposite "quick build a big project so they can't stop it, and when it opens everyone loves it”.  This transport culture war (which Labour tended to not be a part of, as seen by the road building under the Clark Government) generates a reflex response to build more and bigger.

If there were a more rational, bi-partisan approach, then Wellington could get congestion pricing, a bridge at the Basin Reserve, and perhaps more incremental improvements to SH1 built as merits stack up.  Of course, that wouldn’t deliver the “big bang” amenity transformation of a single big tunnel, but it would likely deliver most of the travel time benefits, many of the amenity benefits, with the only question being whether the costs of disruption and construction in building a cut-and-cover tunnel between Vivian Street and the Arras Tunnel start to rival the Long Tunnel.

This is where the focus of NZTA’s investigation should be in the coming months:

1. Model Wellington traffic with congestion pricing to the downtown (and then again on SH1)

2. Estimate the costs and benefits of the Long Tunnel vs. incremental upgrades to the existing alignment, and whether the transport user benefits and amenity/property uplift benefits are worth it.

I still like the structure that was set out in the 1998 Better Transport, Better Roads proposal. 

Clarifying the absurdity

A couple days ago I pointed to NZIER's figures on the case for strengthening the Christchurch cathedral.

I think it's better to view this whole exercise as making clear what we'd need to believe if we wanted to believe that the regulatory apparatus surrounding the cathedral since 2011 is other than massively value destroying.

Recall that the Bishop wanted to demolish the cathedral and build a facility more in tune with current needs. Reinstating would be too expensive, and the final building not suitable for modern purpose.

A bunch of people who figured they knew better than the then-Bishop what to do with the Anglican Church's property decided that they would interfere. The Wizard. The Heritage People. All the stickybeaks who love to block anyone ever doing anything, but who won't stump the cash to give effect to their preferred views on things.

If you are happy to believe this set of things, then The Wizard and his cohort were right all along. If you don't believe these things, then the case for blocking the Bishop from running a bulldozer through the thing over a decade ago destroyed enormous value. 

• Revenue from climbing the tower will be 5-15 times higher than before the earthquake
• Revenue from the gift shop and cafe will be 1-3 times higher than before the earthquake
• A half a million people per year each get $5 to $10 in enjoyment benefits from having a look inside
• Visiting the museum gives each of 114k to 159k people per year $10 to $20 in enjoyment benefits
• There is no practicable way of charging for entry to either of those
• Regular churchgoers get $5-$10 in benefits from attending mass; special services provide $10-$20 in value
• There is also no practicable way of charging for these as the number of visitors would then fall
• Each of the 398k - 467k people in Christchurch get $2 to $20 in benefits from knowing the cathedral has been rebuilt and that they have the option to go and see it sometime. And $1 to $5 for each of the 4.8-5.3 million non-Christchurch New Zealanders
• And that it is also okay to count the value of the option when exercised (visiting) and the value of the option in the same tally of annual benefits. You might instead count only the value of attending in the year of attendance - exercising the option
• There is meaningful and policy-relevant benefit to people working on cathedral restoration over and above the wages they are paid, and they wouldn't otherwise be working on similar stonemasonry at, for example, the Arts Centre
• Each international tourist will spend between 0.1 and 0.5 extra nights in Christchurch because the Cathedral has been restored; at least half of this will be a shift from other NZ destinations, 0-50% of the extra nights will be net increases in total time spent in New Zealand. Oh - and spending by tourists should be judged on gross spend, not on profit from that spend. 

NZIER makes some of the problem really rather clear in Table 6. 

The largest portion of the benefits, dwarfing everything else, is non-use value that they deem to be of low reliability. The point estimate of $19.7m is more than half of their total quantified benefits of $32.4m. 

If don't believe that tourists are going to spend a lot of extra time in NZ because of the restored Cathedral, or that each and every Kiwi outside of Christchurch gets $1 to $5 in annual feel-good benefits about the Cathedral's restoration, then the government erred in blocking the Bishop from running the bulldozer through it. 

If the government is going to require the Anglicans to provide a reinstated cathedral, then the government should be the ones to front the cost. If the government believes the numbers in the NZIER report, then it should be happy to do so. 

If none of us believe those numbers, perhaps the Anglicans should be compensated for the stupidity they've been forced to bear here. I do not believe the numbers, but you have to believe numbers like these if you want to believe that this whole thing has been other than a horrible mistake. 

From where we are:

1. Void the heritage encumbrances on the site.
2. Tell the Anglicans how much money central government (and council, and crowdfunding) is willing to put toward different reinstatement options.
3. Let them bulldoze and build as they like if that's what they prefer instead. 

Update: hoisted from the comments on the "Afternoon roundup" post where I'd first linked the NZIER report, from Glenn Boyle:

Re the cathedral, these sorts of exercises are always difficult and hit-or-miss, but there are certainly some features of NZIER's report that caught my eye:

1. I'd love to see the parameter values used in the option valuation.
2. A discount rate of just 5% (essentially the riskfree rate) is interesting, especially given the costs are all incurred in 6 years but the benefits carry on for 40.
3. There is, apparently, no uncertainty about costs!

Net tax

Stuff's Federico Magrin does a whip-round on the updated Treasury estimates of net fiscal impact by income decile. 

An early version of that paper had been presented at a workshop last year January or February, but for whatever reason wasn't able to be released until after the election. Bit of a shame where there were a lot of claims floating around about who was paying how much. 

The work uses 2018/19 tax and income data. Key charts:

Households below the sixth equivalised disposable income decile receive more in transfers than they pay in tax. The sixth decile is a wash. The top four deciles pay net tax, with the bulk of the burden on decile 10 households who each contribute about $75,000 per household more in tax than they receive in transfers and government-provided services. 

The tax and transfer system sharply reduces the Gini inequality measure. If you're hearing someone citing market Ginis in arguments for higher transfers, know that they either do not know what they are talking about, or are hoping that you won't understand what they're doing. Inequality in final income is much lower than inequality in market income.

There wasn't space in Federico's column for everything that I'd sent through in response to his questions, so I'll include the full answers here (nothing wrong or misleading in how he presented anything; just like keeping track of what I've said about things). 

Treasury’s work really helps us understand that tax and transfer have to be viewed together. It would be easy to damn GST or income tax for not being progressive enough, in isolation, for those who support a lot of redistribution. But where other countries rely heavily on a lot of tax exemptions or preferred tax status for particular groups to achieve redistributive outcomes, New Zealand largely does it through transfers and government-funded programmes. Tax and transfer, put together, sharply reduce income inequality as compared to inequality before taxes and transfers. And the work clearly shows that households in the top ten percent of earners bear a very heavy proportion of the cost of our tax and transfer system.

Treasury’s work relies on data from 2018/19. Since then, a new top marginal tax rate of 39% was introduced for earnings above $180,000, which will have increased the amount of net tax paid by top-earning households. However, inflation will have pushed a lot of lower-earning households into higher tax brackets, reducing progressivity at that end of the distribution. Finally, overall government spending on transfers increased substantially. In 2018/19, government was not in massive structural deficit. In 2024, we are. Far fewer households will now be net taxpayers, because far more government spending is being covered by debt that will fall on future taxpayers.

The tax and transfer system is redistributive by design. Households that are outside of the workforce or that are on lower earnings receive direct transfers to increase their income, and government provides a lot of services in-kind that those households would not be able to afford on their own if they had to pay for them. We all have different views on fairness, and mine is no better than anyone else’s. But what I don’t think is fair is commentary around tax that points to differences in before-tax income as reason to increase taxes and redistribution, while forgetting just how much work the tax and transfer system already does to reduce inequality and poverty.

[And, in response to request for clarification:] You will often hear commentators point to the amount of income earned by the top 10%, and use that as justification for higher tax rates. But that ignores the effects of taxes and transfers that are already in place. Treasury’s work provides that better context. People can come to different views on how much redistribution is enough, but they should at least start by understanding the extent of existing redistribution from the current tax and transfer system.

Afternoon roundup

The afternoon's worthies:

• Immigration restrictions on spousal work rights are dangerous.
• 28 months jail for tobacco smuggling
• Pseudoephedrine is legal. Now we just have to wait for pharmacies to stock it.
• Really neat stuff on NZ board directors. 
• When Wisconsin school districts got to decide how to pay their teachers, shifting to flexible pay "raised salaries of high-quality teachers, increased teacher quality (due to the arrival of high-quality teachers from other districts and increased effort), and improved student achievement." HT: John Dickson.
• RBNZ's estimates of the neutral interest rate
• Rocket Lab's increasing success in landing US DoD contracts. 
• Ikea is spending just over $400 million to open its NZ shop.

Afternoon roundup

More bits as I clear through the tabs. 

• Kevin Rudd's view on south Pacific security.
• 20,000 hard refusals on the 2023 census, up from 6000 in 2018.
• Andrew Heaton talks with Zach Weinersmith about space settlements.
• General Practitioners really ought to be allowed to prescribe for ADD/ADHD. 
• TVNZ in financial trouble, but still doesn't offer a subscription-version of its streaming offering for those who can't abide the ads. 
• The demographics of Parliament
• Climate Commission recognising potential for carbon sequestration through reinjection in geothermal wells. Excellent. 
• The Gods of the Copybook Headings always slouch up to explain it once more. They've been explaining it in education system results. Good that we're starting to recognise it. 
• If there's a right to be protected from the effects of climate change...
• Infrastructure Commission doesn't mince words on Auckland light rail. 

Net zero means net negative?

Will look forward to reading the Climate Commission's latest report. This bit, from Jim Rose over at Carbon News, is a bit concerning:

The world is not on track to meet the Paris Agreement’s 1.5 degrees target, the commission says, and New Zealand is likely to continue contributing to global warming after 2050.

That’s because the country’s current target doesn’t require biogenic methane to reach net zero by 2050 and has no requirement for long-lived greenhouse gases to be reduced beyond net zero.

“This means that it is possible to achieve the 2050 target and still have net positive emissions of 700–1,000 KtCH4 – and the associated contribution to global warming – in 2051 and every year after,” the commission says.

The commission says that when New Zealand’s net zero target was set in 2019 it was seen as ambitious but that’s no longer the case.

I had always understood Net Zero 2050 to mean that the unbacked NZU issued before 2050 would represent the sum total of net emissions from the covered sector from now until forever. An NZU might be redeemed after 2050; it's the quantum of unbacked units issued through 2050 that determines the amount of net emissions overall. 

If the Commission is shifting to a view that Net Zero implies undoing the emissions that have obtained from an indeterminate start point through to 2050, that's of course a much bigger job, and one that Parliament certainly didn't authorise.  

A clean ETS is certainly capable of driving beyond net zero. The government or others just need to buy credits through the system and retire the credits, unused. And if tech follows some potential paths, doing so may well be cost-effective in undoing some accumulated emissions. But probably a good idea to wait and see what the cost paths wind up looking like before committing on that one. 

Afternoon roundup

The afternoon's worthies, as I close the tabs from one of the many open browsers....

• Joel MacManus tracks down the management-book origins of Prime Minister Luxon's favourite terms, from 'chunk it down' and 'big rocks' to 'gates of implementation' - which seems original to the PM. 
• Portuguese rules create black markets in port. Now I'm wondering whether NZ accession to the crazy European naming rules mean our port producers will have to come up with a new name for it.
• Rules that make it hard for landlords to remove problem tenants lead them to discriminate against potential tenants perceived as being more likely to cause problems. Latest iteration: COVID-19 eviction moratorium rules in the US. NBER working paper; Reason piece by Ilya Somin. 
• There've been a lot of stories around on loss of trust in media. Uri Berliner's from NPR is simply superb. I'd say it's must-read. Henry Cooke also good on the NZ angle. 
• The InfraComm report on council debt limits is very good. Just finished recording a podcast with author Graham Campbell on it, along with Peter Nunns and our shop's Nick Clarke; should be up on the Initiative's website in due course. I should have remembered to congratulate them for their advice on Auckland light rail. 
• $250 USD up front, never have cavities again. Checking into options to get it muled into New Zealand...
• I always used to tell my Econ 224 studies to be sceptical about assessments that rely heavily on existence value and option value. NZIER's case for rebuilding the Christchurch Cathedral hinges on existence value and option value of $8.9-$30.6 million per year, and an assumption that tourists will stay longer in New Zealand specifically to see the Christchurch Cathedral, and will spend up to $20.8 million per year during that extended stay. I'm .... sceptical. I used to present the students with a case for a 50-meter gold statue of me in Cathedral Square...
• Firms investing in R&D see employee departures to found start-ups when the new opportunity discovered as part of the research is too far from the company's main line. 

In a structural deficit, the only real tax cut is a spending cut

This week's column in the Stuff papers. A snippet:

Tabarrok warned that America had two political parties – “the Tax and Spenders and the No-Tax and Spenders” – and neither was fiscally conservative. In the two decades after Tabarrok’s warning, the federal government never achieved a balanced budget. America’s federal deficit ranged from 1.1% of GDP to over 14% of GDP and gross federal debt doubled, rising from 60% of GDP to 120% of GDP.

New Zealand’s Public Finance Act aims to avoid those kinds of outcomes.

The fiscal architecture is neutral about whether core government spending should be about 27% of GDP, as it was in 2018, or over 33% of GDP, which it is forecast to be in 2024.

The six-percentage point difference in core Crown expenditure, as a proportion of GDP, might not sound like much. But in a $405 billion economy, it amounts to almost $25b in increased core government spending per year across a population of just over 5 million people. Or over $18,000 for a family of four.

Some of that substantial increase in spending has been funded by a higher tax take. Core Crown tax revenue increased from just over 27% of GDP in 2018 to over 29% in 2024. The rest, after accounting for other bits of government spending and revenue, is funded by what is now a substantial structural deficit.

Taking on debt during the depths of lockdown to deal with the crisis was one thing. Now, that crisis has long since passed – but the structural deficit remains. The One Big Task for the coming budget is providing a credible path out.

It is not just a test for the current government. It is also a test of the Public Finance Act.

I'm all for tax cuts. Start by balancing the structural budget. That's the most important tax cut to make. Then see whether there are opportunities to go further. There should be. The government takes in a lot more in tax than it did in 2018, and is spending a lot more than was projected in the 2019 Wellbeing Budget. 

I'd filed the column a few days before having a chat with RNZ's Morning Report on proposed staff reductions in government agencies. I was a bit frustrated about that RNZ rarely informs listeners about whether cutbacks in an agency simply undo the last couple years of hiring, whether they revert staffing levels to levels comparable to pre-Covid, whether they go back to where things were when National left office, or whether they go further than that. If an agency has stayed fairly constant over time, and there haven't been substantial productivity improvements or other shifts, a 40% cut would mean they can't keep doing stuff they've been doing for a long time. But if one has tripled in size recently, and then cuts back by 40%, well, there are options around what things no longer get done.

Checking the last five years' data is really easy at the Public Service Commission's website. Click the link, scroll down to the table, click the tab to open the 'Five Year Trend' view. Done. 

I don't know why Radio New Zealand doesn't check. They were really outraged about proposed 40% staffing reductions at the Ministry for Pacific Peoples. That Ministry had 40 staff in Q2 2018 and 136 by Q2 2023. They reduced a bit at the end of 2023 to 121 staff. If a 40% reduction comes off that figure, they'd still be left with more staff than they had in Q2 2020.

Update: Kate MacNamara does some checking. 

Things I'd have hoped we could all agree on

This week's Budget Policy Statement was disappointing. 

There are a few things I'd have thought we could all have agreed on. They seem pretty basic.

1. If the Reserve Bank is still using monetary policy to push against inflation, fiscal stimulus is a pretty bad idea;
2. While fiscal stimulus through tax reduction seems more effective than fiscal stimulus through spending increases, it is a mistake to run fiscal stimulus when the Reserve Bank is pushing the other way. Sure, things are slowing down, but leave that to monetary policy.
3. Core Crown Expenditure for 2024 is forecast to be more than five percentage points of GDP higher than it was in 2019. Total Crown is higher too; that includes interest on the debt we took on to deal with Covid (and all the other stuff Robertson spent the Covid money on). Fiscal consolidation requires getting spending down. Tax reductions should not precede the spending reductions that make room for them. Otherwise all you're doing is increasing future taxes.
4. If you think that fiscal consolidation through reductions in government spending and transfers has bad macroeconomic consequences, remember that the Reserve Bank has the next move. Sharp reductions in government expenditure would make it easier for the Bank to ease monetary policy, which would encourage other activity to pick up any slack. If you worry that monetary policy has a lag, that's easily solved. The earlier you signal that spending will be coming down to pre-Covid levels, as % GDP, the more RBNZ can do to work it into their models. 

I agree that they can't solve it all in a single budget. Ben Thomas points to the core of the problem:

Trading in stories of government incompetence and spending overruns, opposition MPs can easily believe 6.5% of all state expenditure consists of lavish intra-departmental powhiri and expensive dinners for senior management. Government waste, like representations of toxic waste in popular culture, would be obvious: lying on the ground, oozing and glowing, in storage barrels with hazard markings ready to be taken away.

Instead, much of it is hidden. It might be a team of 10 senior people doing routine work that could be performed by half a dozen juniors. It could be a programme that was once highly valuable but has achieved its purpose, but runs on with full funding. This is waste, but it doesn’t show up in the lines of any accounts. It needs to be identified by people who are familiar with the work of that agency and the public service.

This leaves ministers hostage to fortune or, more acutely, to the public service bosses. That’s bad news too, because after six years of pushing on an open door for funding increases, a door which led to a room full of money, and lack of clear direction from inexperienced Labour ministers, it is not clear the public service has the capability, let alone the will, to deliver surgical savings at the micro level or bold changes at the programme level.

Ministers can identify programme-level cuts: that is, drawing a red line through an initiative or service. But, as evidenced by the political optics disaster of disability carer allowance restrictions, ministers are not in the weeds of the detail of most operational matters.

But National has set Core Crown spend of 30% of GDP as a target to which to aspire. That's more than a full percentage point of GDP higher than Ardern's Wellbeing Budget had projected, and more than two percentage points of GDP higher than when Labour took office. 

And they're still signaling that debt is going to fund tax reductions. If they can't achieve the necessary spending reductions more quickly, they really ought to be phasing in tax reductions more slowly. 

The alcohol levy review - an ongoing OIA saga

I keep a bit of a watching brief on the old BERL social cost of alcohol figure. It turns up in weird places. 

As aide memoire, BERL produced the number as commissioned work in the late 2000s that was meant to follow the method set by Collins & Lapsley in Australia. 

The Collins and Lapsley method has a few problems. But BERL compounded those problems with choices that seemed designed to generate a larger number for the tallied social costs. 

For example, Collins & Lapsley had aetiological tables that tried to attribute the fraction of different disorders that might be attributed to alcohol use. Their tables had a few disorders where the aetiological fraction was negative because drinking reduces the incidence of that disorder. BERL decided that, because they were only looking at harmful drinking, it was ok to just set all those cells in the table to zero rather than maintain a number showing benefits (and consequent reductions in net harm). 

Matt Burgess and I went through the BERL report, seeing what the number would look like if more standard method were followed. For example, BERL counted as social cost to the country every dollar spent on alcohol, including every dollar spent on excise, by those drinking more than about 2 pints of beer a day. Drinkers' spending on beer is a social cost only in the sense that private costs are part of social costs. And since benefits enjoyed by drinkers would need to be netted for any sensible net cost figure, the whole thing was a bit suspect. 

BERL responded to the critique by updating the figure to no longer count as a social cost drinkers' spending on alcohol excise, but let the rest stand. 

Brad Taylor joined Matt and me for an update to the review in 2011, when we went through the underlying Collins & Lapsley work. We adjusted upward the revised BERL figure, but the majority of the BERL-tallied costs were either double-counting or costs far better considered private than external and social. 

BERL provided an updated figure in 2018, but it turned out just to be the old figure multiplied by GDP growth over the period. Which could be fine if the initial number were sound (it wasn't) or if alcohol social costs scaled with GDP (they don't necessarily, and especially where alcohol consumption was declining over the relevant period). 

And the whole thing is a bit silly where the measured social cost really doesn't matter. The policy question is always whether any intervention, whether excise or otherwise, provides net benefits. Interventions can fail to do so despite very high measured social cost; they can also provide benefits even if social costs are low. The only reason for generating large social cost numbers is to motivate "something must be done" responses. 

Anyway. 

The number turned up again in last year's "Independent Review of the Alcohol Levy Stage 1: Rapid Review". The work for the Public Health Agency was undertaken by NZIER and Allen + Clarke. 

The work included this section:

90. The cost of alcohol-related harm to New Zealand society is significant. This section provides a summary of existing estimates of the cost of alcohol-related harm in Aotearoa New Zealand. 

91. The most recent study to quantify the social cost of alcohol in Aotearoa New Zealand was conducted by BERL in 2009. Commissioned by ACC and the Ministry of Heath, the report aimed to quantify the social cost of alcohol and drug related harm looking at the personal, economic, and social impacts. While the estimate of the social cost of alcohol-related harm in Aotearoa New Zealand published by BERL in 2009 and updated in 2018, or rather the methods used to generate it, have been criticised by some commentators, it has been widely cited in the alcohol-harm research and policy space in New Zealand over the last 14 years (BERL, 2009; Nana, 2018). The Law Commission’s 2010 report on the review of the regulatory framework for the sale and supply of liquor also cited the BERL 2009 report. 

92. In 2018, the updated estimate of the social cost of alcohol, based on the BERL methodology, was calculated to be $7.85 billion per year (Nana, 2018). This estimate included costs resulting from justice, health, ACC, social services, unemployment, and lost productivity. Intangible costs such as years of life lost from premature death, lost quality of life, child abuse, sexual abuse, and impacts on victims of alcohol-caused crime are also relevant to assessing the overall impact of alcohol-related harm on society. The 2018 update did not include intangible costs. A recent Australian Study found that in Australia $48.6 billion AUD of intangible costs could be attributable to alcohol (National Drug Research Institute, Curtin University, 2021). 

This section seemed particularly poorly undertaken. Citing the 2018 figure seemed particularly odd where the thing was just the old number multiplied by cumulative GDP growth. 

It's also incorrect to say that the 2018 update didn't include intangible costs. Intangible costs of lost life and lost quality of life were included in the 2009 figure, and the 2018 figure just inflated the old number by GDP growth.  

Paragraph 91 alludes to that 'some commentators' have criticised it, but said nothing about the nature of those critiques or who made them. Were the concerns trivial or notable?

Meanwhile, the bibliography included these two relevant references that weren't included in Para 91:

Crampton, E. (2018). The alcohol cost ‘zombie’ has returned. 

Crampton, E., & Burgess, M. (2009). The Price of Everything, The Value of Nothing: A (Truly) External Review Of BERL’s Study Of Harmful Alcohol and Drug Use (Working Paper No. 10/2009).

The 2009 piece was my original critique of the BERL figure with Matt; I'd have preferred the updated critique from 2011. The 2018 column had my initial guess that the updated BERL figure was just an inflation and population growth adjustment; my 2019 column had Ganesh Nana's confirmation that the new figure was the old figure inflated by cumulative GDP growth. So I'd have pointed to the 2019 column instead. 

But the authors clearly knew about my critiques. That they were in the bibliography suggested that there might have been more fulsome discussion of those critiques in earlier drafts. 

On 6 September 2023, I sent an OIA request to the Ministry of Health asking for all early and working drafts produced by NZIER [Paragraph 14 of the report said that NZIER undertook the analysis of existing data and evidence]; for correspondence between and notes from conversations between MoH, HPA, Allen + Clarke and NZIER regarding NZIER's analysis; and, for any peer review of the report. 

On 15 September, MoH replied saying that the correspondence would be extensive and that I needed to refine the request if I wanted to get anywhere. 

I replied immediately asking them to prioritise delivery of early and working drafts, and any peer review. I also suggested prioritising correspondence and relevant notes from meetings between and among MoH, HPA, and Allen + Clarke regarding the NZIER report. 

On 6 October, I reminded MoH that the refinement of my request only asked that they prioritise two parts of the request, and should not have triggered a clock reset; the requested information was due.

On 17 October, I had a reply from the Public Health Agency's Ross Bell. He noted that they'd considered the refinement as having triggered a time extension. But more substantively, they refused early and working drafts, as well as peer reviews, under 9(2)(g)(i) to protect free and frank expression of opinions. 

I proceeded immediately with the Ombudsman. 

On 16 November, the Ombudsman's Office commenced investigation. 

On 13 December, the Ombudsman's Office advised that the Ministry was prepared to reconsider its decision with respect to final drafts and asked whether that would be sufficient. I wouldn't know until I'd seen any released documents - if the released drafts let me see what had happened in the relevant section, that would be fine. If they didn't, I'd need to see more. I'd have to wait. 

On 2 February, a Senior Investigator at the Office of the Ombudsman noted that the Ministry had advised it would be providing a partial release, and asked whether I wished that they review the withholding of the earlier drafts; I noted that I couldn't know until I'd seen what they would release.

On 4 March, the Office reported that they were still chasing the Ministry about the later drafts. 

On 11 March, the Ombudsman advised that he had sent a letter to the Ministry recommending that the documents be released immediately and apologise for the delay.

At close of business on 14 March, the Ministry of Health released the later drafts. Ross Bell, Group Manager, Public Health Strategy & Engagement at the Public Health Agency, apologised for the delay and any related inconvenience.  

While those drafts did include some annotations from "KT" and Te Whatu Ora, they did not provide much light on what had happened with the section on alcohol social cost. The earliest draft was substantially similar to the final. 

So I still cannot really tell what happened. 

The bibliography references to the critiques suggest that, at minimum, those references were included as a citation in an earlier draft of Para 92. It's possible that an earlier version included more substantive discussion of those critiques, but it's hard to say.

I've asked the Ombudsman to form a determination around those earlier drafts' discussions of the costs of alcohol-related harm.

I suspected that the first draft from NZIER included substantive discussion of the relevant arguments. NZIER aren't idiots; they know this stuff. It's in the bibliography, so it was there at some point. 

If there had been more substantive discussion, was it excised at request of Allen + Clarke, or at request of the Public Health Agency?

In either case, the effect is a document sent to the Minister, advising on the alcohol health levy, that provides a fairly one-sided view on alcohol social costs. 

I yesterday received an additional bit from the Ministry, which might speak to the Public Health Agency's views on things:

Kia ora Eric,

Further to the below email sent to you containing the reconsidered documents of your OIA (ref. H2023031477), the Ministry has identified a paragraph pertaining to yourself in one of the early draft documents. While the Ministry is maintaining its position on withholding the early draft documents under 9(2)(g)(i) of the Act, the following excerpt is being released to you under section 16(1)(e) of the Act: 

So it seems that early drafts did include substantive discussion of my critique of the BERL figure, and that someone caused it to be erased.

I'd also note that I was discussant at the NZAE meetings on the BERL paper in 2009. It was standing room only, because my critique of the BERL paper had already been released. The Ministry could consider asking any economist in the room whether my critique was just a me-thing, or whether the profession broadly shared my concerns.

I did that work as an academic in the Department of Economics at Canterbury, five years before I joined the Initiative, and two years before doing any industry-funded work. The funded 2011 work [funded by NABIC] discovered an error in the earlier unfunded work that had us revise upward the earlier estimate of alcohol social cost. 

I note that Ross Bell, now relevant Group Manager at the Public Health Agency, was Executive Director of the Drug Foundation when the BERL figure was originally being critiqued. 

Here is the issue of the Drug Foundation's "Matters of Substance" newsletter that included discussion of the controversy around BERL's number. It would be surprising if Bell were not aware of the difficulties with BERL's figure. He had the masthead editorial on the issue of their newsletter in which my critique of the BERL figure was discussed. 

I'll look forward to seeing whether I can get any further with this via the Ombudsman. 

In the meantime, it looks pretty obvious that the Public Health Agency was very happy to put a biased document up to the Minister as advice - whether they requested that outcome directly, or had Allen + Clarke do it.

A provisional health warning on advice from the Public Health Agency may be in order. At least until we can figure out what the heck is going on over there. 

And a reminder that government-commissioned reports face censorship regimes. If the Ministry doesn't like what it says, well, the offending bit gets disappeared. As an offending bit here seems to have been disappeared. 

Public service cuts and context

Richard Harmon's Politik newsletter provides a bit of the context that ought to have been showing up in other media reports on potential reductions in public service staffing.

Media has been reporting on staffing cuts on the order of about 7%. Is that a big number or a small number relative to growth in the overall public service?

The public service in 2023 had headcount 38% larger than it had in 2017, when National was last in office, and 19% larger than in 2019, before Covid. 

There has not been 20% population growth since 2019. 

Budget 2024 needs to provide a credible path out of deficits, ideally focused on getting Core Crown expenditure, as a fraction of GDP, back to where it was in 2019 - at least as an interim goal. That would only take things back to where Ardern had had it in the 2019 Wellbeing Budget. 

The 2019 Wellbeing Budget was not austere. It was set to increase Core Crown expenditure's fraction of GDP by about a percentage point as medium-term steady state, from just under 28% of GDP to just under 29% of GDP. 

The 2023 Half-Year Fiscal Update had forecast 2024 Core Crown expenditure at 33.4% of GDP, and a forecast path down to 31.4% by 2028. 

Shaving that back down to 29% more quickly isn't austerity, or at least not the swear word version of it. It's just retrenching after a giant shock. 

And it sure would be great if news outlets appalled at 7% cuts to Ministry rosters could remind folks that that would still generally be a substantial increase on pre-Covid staffing.

Barriers to Banking

I like the new Commerce Commission draft market study into retail banking. Instead of spending a pile of time trying to estimate whether the note on the sidewalk is a $20 or a $50, it looks at what's blocking anybody from picking up any notes that might happen to be there.

And it finds a whole pile of regulatory barriers preventing smaller banks from expanding and new banks from entering. 

The Reserve Bank lets large banks run leaner capitalisation, disadvantaging smaller ones. The large banks had access to the Reserve Bank's Funding for Lending Program; small ones didn't. The overall regulatory burden is huge, but a huge regulatory burden disproportionately hurts small players who can't spread the cost across a larger depositor base. Constantly changing CCCFA rules particularly hurt smaller players. AML rules increase switching costs and help entrench those with already-large depositor bases. 

My column over at Newsroom this week ($ today, ungates tomorrow) goes through some of it. 

A snippet:

None of this should be a surprise. The Reserve Bank’s prudential framework has not considered the effects of its rules on competition. Neither has it been required to give regard to competition. 

The draft report also points to a promising change. The Deposit Takers Act, which introduces deposit insurance, requires the Reserve Bank to take account of “the need to maintain competition within the deposit-taking sector” as one of several objectives. It’s a start. The draft report urges it to go further, recognising that existing levels of competition are not ideal. It warns that the depositor compensation scheme that will back deposit insurance could too easily set levies that have anti-competitive effects.

The Commerce Commission really should be commended for this report. Its draft report on supermarkets spent enormous time and effort trying to estimate supermarkets’ cost of capital and profitability. However, it seemed not to have occurred to the commission, in its draft report on retail grocery, that high profits should encourage new entrants wanting a slice of high profits. The final report turned to those barriers to entry.

This time, its draft report spent less time agonising over precisely how profitable the banks may be and more time on the barriers that may stop existing or new rivals from competing those profits away while benefiting consumers.

The sharper focus meant the commission could come to practical recommendations around regulatory barriers that the Government could ease to reduce large incumbents’ advantages over others.

As the coalition agreement between National and Act requires the commission’s future market studies to maintain this focus, the draft report into banking is also a promising sign for studies yet to come.

Rather than try to guess whether there are $20 or $50 notes on the sidewalk, it is far better to check whether policy and regulation have made it impossible for anyone to pick them up.

Afternoon roundup

The afternoon's worthies:

• How universities killed the academic. Great piece. 
• NZ Drug Foundation's report on drug use in 2022/23. One fun bit if you check back against the NZ Health Survey data: more people aged 15-24 (7.7%) use cannabis at least weekly than smoke tobacco (5.8%) at least monthly.
• Making Kiwisaver compulsory will be great for the default providers who get to clip tickets on fees I suppose. Not so hot for those with US tax entanglements. 
• Mayor Whanau presides over a council that blew hundreds of millions of dollars on town hall, library, convention centre, and is turning itself into a bank to provide cut-rate loans to a multinational movie theatre company, and blames stingy ratepayers for the pipes falling apart.
• Probably not good that Russia's still occupying that Ukrainian nuclear plant.
• Really neat paper on the adoption of property tax codes across Canadian First Nations, along with institutional detail on the First Nations Tax Commission and the First Nations Fiscal Management Act. 

Even Lowerer Hutt

One annoying thing about writing a Saturday column for the Stuff papers is never knowing whether a piece will show up in print.

I'd thought this one was a banger. 

I'll be talking about related issues tomorrow night as part of a panel for A City for People. 

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— A City for People (@CityforPeopleNZ) March 4, 2024

Anyway - the column.

Even Lower Hutt 

Transport historian Dr André Brett has suggested that Wellington be renamed Lowerer Hutt, perhaps to help avoid confusion within the region.   

Economists Matthew Maltman and Ryan Greenaway-McGrevy have been looking at Lower Hutt’s housing boom. Their paper, released this week by the Economic Policy Centre at Auckland University, suggests Brett was onto something.  

Wellington City could use a bit more Huttite thinking. And especially while Wellington’s response to the Independent Hearings Panel’s report on the district plan is still in play.  

While Wellington City mulled over whether it should be legal to turn rotting wooden tents into townhouses and apartments, Lower Hutt started building.  

From late 2016, Lower Hutt started a sequence of plan changes. They reduced parking requirements and introduced new zones allowing taller mixed-use developments and medium density housing. They allowed greater density within general residential zoning. And they quickly implemented policy changes set as part of Labour’s urban growth agenda – like medium density rules and upzoning requirements near public transport. 

The paper tests whether those changes to zoning had any effect on building.  

It might sound like testing whether water flows downhill.  

The New Zealand Association of Economists surveyed its members this month. 96% of economists agreed or strongly agreed that district plan land use restrictions reduce housing supply. 94% agreed or strongly agreed those restrictions reduce affordability. And 98% agreed or strongly agreed that easing district plan restrictions will tend to increase housing supply and affordability. 

But Wellington’s Independent Hearings Panel instead seemed convinced by one expert’s odd argument that zoning to allow more building, even in an obvious housing shortage, may not lead to more building.  

And perhaps the Commissioners saw no reason to believe that evidence from faraway places like Auckland could also apply in Wellington.  

So the Lower Hutt evidence is important. At least for those who need very specific local proof that water also flows downhill in the Wellington region.  

On notification of the plan changes, and especially after the changes started taking effect, Lower Hutt started issuing a lot more consents for townhouses and rowhouses. In the new zones enabling medium density and mixed use, there was the same jump in consents for townhouses and rowhouses – and also apartments.  

But perhaps that was just coincidence and Lower Hutt was only following the same trend as other councils.  

The authors used a variety of ways of checking that the zoning changes made the difference. For example, after the plan change, Lower Hutt shifted from being a moderate fraction of overall consents in the Wellington region to overtaking Wellington City.  

The economists also built a synthetic Lower Hutt and compared what happened there with the actual city. This method basically sets a complicated average of patterns in other cities that tracks how Lower Hutt’s consenting rates behaved before the change. Following that ‘synthetic’ Lower Hutt after the zoning change gives a comparison.  

Lower Hutt consented approximately 3260 more units than expected – a tripling the number of housing starts over the six-year period. More houses. More apartments. A few more retirement village units. And an awful lot more townhouses and rowhouses.  

It also affected building in Wellington City. Because it became relatively easier to build in Lower Hutt, some development shifted to the Hutt. Overall, about a quarter of the new consents in Lower Hutt were consents that might have happened in other places otherwise.  

This also matters for theories that a region may only have so much ‘absorptive capacity’ – another dubious argument relied on by Wellington’s hearings panel.  

The vast majority of new consenting in Lower Hutt, about three quarters of it, was new building. It did not just displace building that would otherwise have happened elsewhere. Lower Hutt’s reforms, all on their own, provided a 12 to 17% increase in housing starts for the whole metropolitan area.  

Lower Hutt then helps to keep rents in Wellington lower than they might otherwise be, by providing some of the housing that Wellington City would otherwise block. Every renter in Wellington owes a bit of thanks to Lower Hutt council.  

If Wellington Council cannot see fit to propose a district plan more enabling than the economically illiterate plan proposed by the Independent Hearings Panel, the combined Upper and Lower Hutt populations could well wind up exceeding Wellington’s. 

If that happens, I think we should look back at the good Dr Brett’s suggestion. The Hutts’ ascendancy ought to be properly recognised.  

Wellington would become Lowerer Hutt, as Dr Brett suggested – or perhaps my preferred ‘Even Lower Hutt’. All of it would be part of the Greater Hutt Regional Council. Somes Island would of course become Hutt Island.  

And the ‘special character’ that drove Wellington’s residents, and tax base, out to the Hutts could stand as warning to other cities to at least try to be less stupid than the country’s capital. 

Meanwhile, The Spinoff's suggesting abandoning Wellington for the Hutts and young professionals are abandoning Wellington for points farther afield like Christchurch. 

Buchanan said Christchurch felt more vibrant and there were plenty of young families who’d moved from the likes of Wellington and Auckland.

“Talking to my peers, former colleagues, family, and being out and about around the city, Wellington has a brain drain.

“Whether it be young teachers, firefighters or psychologists, people are unhappy or moving.”

Christchurch offered about 1000 housing options to choose from, Buchanan said, thanks to an increased supply of medium density homes in suburbs close to the city.

In Wellington, he was left with just 190. Most were in places like Wainuiomata, a Lower Hutt suburb with notoriously poor links to the city centre for commuters. A friend had recently paid $1.1 million for a small section and an old three-bedroom house in Upper Hutt.

...

According to a December 2023 Infometrics report, the average house price in Wellington City is $1,023,966 – roughly $100,000 more than the national average.

By contrast, CoreLogic measured the average house price in Christchurch as $757,881.

Wellington has long fought new-build developments, especially in the older inner city suburbs.

These “character areas” where Victorian villas still cling to the hills were described in a recent opinion piece in The Post by Eric Crampton as “wooden tents”, while by contrast he praised Lower Hutt’s initiative at constructing new-builds.

Buchanan attested to this, arguing the new builds in Christchurch only added to the character of the area.

I also had a podcast chat with Danyl McLauchlan on related issues - though we ranged a bit more broadly.

The New Zealand Initiative · What's going on with Wellington?