Remarks at New Zealand Initiative / LGNZ Forum on Special Economic Zones

Speeches
Monday, October 19, 2015

Introduction

Thanks for the invitation. As I said at the launch of “The Case for Economic Growth” back in April, we don’t have enough forums like this, and there aren’t enough organisations in New Zealand like the NZ Initiative.

I’d like to mention three things in my address.

First, my general scepticism about Special Economic Zones (SEZs)

Second, notwithstanding that scepticism, how SEZs might help in the Auckland housing market.

And third, what about Wellington?

 

Scepticism

I have been generally sceptical about SEZs for three reasons.

1. The quasi-constitutional complaint

A unitary state just seems appropriate for New Zealand’s size. We have only 4.5 million people – our population is smaller than more than half the states in the US. New Zealand had six separate provinces, each with their own provincial government and legislature, after 1852. Eventually that number grew to ten! Such a system of government was absurd back then and would be equally ridiculous today. Regional variations in New Zealand, in terms of political, ethnic, religious, or any other often politically significant driver, just don’t exist to the same extent as other countries.

2. History of poor local government decision-making

The second reason I worry about devolving further power down to regions is a generally poor history of local government decision-making, particularly in recent times. Let me cite a few examples:

  • The Kaipara District Council secretly ran up a $58 million debt on a new sewage treatment scheme
  • The Hamilton City Council blew $40 million on holding the V8 supercar race in Hamilton, $22 million of which was funded by debt.
  • Auckland Council lost $1.2 million hosting David Beckham’s LA Galaxy football team in 2009
  • And of course the new Dunedin stadium in some ways tops the lot. It’s cost $250 million and rising ($60 m more than planned) and continues to be a giant millstone around the neck of Dunedin ratepayers.

The 2002 changes to the Local Government Act, giving Councils the power to do essentially whatever they liked, seem to have made things worse.

3. Growth creation v growth redistribution

Third, in many places, SEZs have been promoted as a way of promoting particular regions at the expense of others, through regional tax breaks or tariff concessions or subsidies, etc. These are expensive, often don’t work, arguably lead to inequity, and most importantly don’t actually raise national growth – they just redistribute it.

 

The SEZ Report

All of that said, the SEZ report by the NZ Initiative is a cogent report and I cautiously welcome it for a few reasons.

The first is that while it’s true that culturally and politically New Zealanders in one part of the country are not particularly different from another, we do have genuinely regional economic challenges and opportunities, and I also think it’s true to say that there is a variable degree of enthusiasm from different regions to take advantage of those opportunities.

The second is that I think the report neatly points to the fact that in a lot of cases, the incentives acting on local government and central government are misaligned. Let me explain with reference to a specific example – the Auckland housing market.

It is manifestly in the country’s interest (and thus central government’s interest) to sort out Auckland housing:

  • Absent large Auckland house price inflation, interest rates would be highly likely to be lower for longer
  • Runaway house price inflation encourages further investment in housing as an asset class.
  • Housing has a significant effect on the government books. As Bill English has pointed out recently, the NZ government spends $2 billion each year on accommodation subsidies. 60 per cent of all rentals in New Zealand are subsidised by the Government. The state owns around $21 billion worth of houses.
  • Housing costs are a significant contributor to inequality – and certainly inequity – in New Zealand.

And yet the incentives acting on central government don’t exist to anywhere near the same level on the Auckland council. The fundamental answer to Auckland housing is increased supply of land and housing. Except there are two big factors weighing against this in Auckland

First, economically – it is not really in the Council’s interest to open up new land for development. New land and new housing means new infrastructure; all of which has to be paid for. As the report points out, if the Council builds infrastructure ahead of housing demand arising; they worry about borrowing, debt levels, depreciation, etc. Yet building infrastructure after a development goes ahead is not an option either, as the developers won’t proceed without adequate infrastructure. We end up with a “catch 22” situation.

Second, and more important, there are political constraints. Existing homeowners don’t want to pay higher rates for infrastructure they won’t use. And restricted housing supply is fantastic for people who already own houses – the price keeps rising. And who is it who votes? Not the people who would benefit from freed-up land and new houses.

The Productivity Commission has done an excellent job pointing this out recently.

So what is the answer to all of this? Put simply - to make Auckland Council actually want development. To incentivise them to care about development. Give them a stake in economic growth.

If Auckland Council directly financially benefited from an increase in revenue that flows from increases in population or economic activity, it would be far more likely to facilitate that population increase.

The NZI paper also posits the idea of “Housing Encouragement Grant”, where central government would give a Council a bonus for every new dwelling built in an area. 

Whatever the mechanism used; the key idea is to give Councils an incentive to favour development and economic activity over the status quo.

 

Wellington

The NZI paper deliberately adopts what is arguably a “soft” form of SEZ – where regulatory deviation from the national norm is allowed; and if those changes work as intended, then the council receives a portion of the revenue.

One interesting extension (or analog) to that idea is for central government and local governments to make joint growth-enhancing financial investments in a particular region. If the investment works, then the region receives a “fiscal reward” – a share of the extra tax/revenue paid – arising from the extra economic growth. These “City Deals” are being rolled out across Britain right now, by a Conservative government.

I know Wellington is looking at this concept right now in terms of investments it is interested in making in the expansion of the airport, as well as other things. Wearing my unashamedly pro-Wellington regional hat on, it’s a conversation that I think is well worth having.