Editorial: Better a levy than debt for rebuilding

Minister of Finance, Bill English. Photo / Getty Images

It is rare that a government anywhere has a good proportion of its citizens offering to pay more tax. Yet the willingness of New Zealanders to pay a special levy for reconstruction in Christchurch seems not to have abated since the February quake. A UMR survey taken for the Green Party has found that 40 per cent of respondents would prefer to meet the cost with a temporary tax rather than big cuts to other public expenses (29 per cent) or more borrowing (22 per cent).

The Government, though, prefers to borrow. Finance Minister Bill English has announced that the expected $10 billion cost to the public accounts will be raised as debt over the next year or two. Borrowing was the proper way to finance the rebuilding, he said, because the cost would be shared with future taxpayers who would enjoy the permanent benefits.

That is the classic rationale for borrowing but it assumes that the current accounts are in good shape. They are not, as Mr English and the Prime Minister were stressing before February 22. In a New Year address, John Key pointed out that our net foreign debt, equivalent to 85 per cent of the output of our economy, was as large as those of Portugal, Ireland, Greece and Spain.

Unlike them, we have an independent currency. If creditors lose confidence and we cannot refinance, we would not be bailed out by currency partners. We could suffer a shock to living standards, jobs and livelihoods much worse in financial terms than the Christchurch earthquakes.

The rating agency Standard & Poor's put New Zealand on notice late last year that it is at risk of a downgrade. Mr Key and Mr English have been citing that notice as reason to tighten public spending this year. Since the February quake, they have warned that no additional spending for other purposes can be afforded in the Budget Mr English will deliver next month. Any new expenses must be met from cuts or efficiencies in present programmes.

The impact of the earthquake began to appear in the public accounts reported yesterday for the eight months to the end of February. Though the period ended just six days after the quake, its $1.5 billion estimated net cost to the Earthquake Commission was the main contributor to a deficit deeper than expected at this point in the fiscal year.

Thanks mainly to gains on investments by the NZ Superannuation Fund and the Accident Compensation Corporation, net public debt at the end of February was a little lower than forecast. Indeed, thanks to drastic economic and fiscal reform in the late 20th century, New Zealand's public debt remains very low, though it is rising again now.

New Zealand's high total debt has been largely private borrowing, which buyers of sovereign bonds used to ignore. They do not ignore it now, according to Mr English. The global financial crisis has left international lenders wary of private borrowing because banking has proven to be ultimately a public liability. The deposit guarantee given to New Zealand's financial sector cost an extra $331 million, mainly attributable to South Canterbury Finance, in the accounts reported yesterday.

In these circumstances, the Government ought to be considering a tax levy for a limited term. The Greens suggest 1.5 per cent on annual income above $48,000 and 3 per cent above $70,000. All middle and higher income earners would feel they were contributing effectively. It is money they might otherwise be saving in the present climate. Put to the rebuilding of Christchurch, a levy could strengthen the faltering recovery of the whole economy over the next year or two.

A responsible government would not turn it down.