Major report reveals $75 billion infrastructure deficit, warns of recession risks
Tuesday, 15 September 2020
Decades of underspending has left New Zealand with a $75 billion infrastructure deficit, and economists are warning we risk deepening the Covid-19 recession if that doesn’t change dramatically.
A new report from the Association of Consulting and Engineering and economist Shamubeel Equab revealed New Zealand has consistently ranked below Australia and other OECD nations in infrastructure spending after a sharp decline in the 1980s which didn’t start to rebound until the early 2000s.
“We have not made up for the deficit accumulated in those two decades, nor are we well-prepared for the significant demand on our infrastructure due to climate change, ongoing population growth, and the economic challenges of the future,” ACE NZ chief executive Paul Evans said.
The $75b deficit we now find ourselves in is equivalent to a quarter of annual GDP.
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That has exacerbated traffic congestion issues in all of New Zealand’s major centres and led to an ageing and outdated wastewater pipe network, with several high profile bursts and spills in recent months.
Cuts to infrastructure spending after the Global Financial Crisis not only deepened the recession in New Zealand, but caused an ongoing loss for both the industry and the wider economy as a whole, a mistake Equab warned we were at risk of repeating.
“Infrastructure investment has one of the highest short-term economic returns within the types of investment that the Government has significant direct control over, behind only education and health,” he said.
“Economic studies on the long-term economic effects of investment in public capital found that a 1 per cent increase in the public capital stock increases economic activity by 0.1 per cent a year on average. That is, the creation of $100 million in public capital increases economic output by $10m a year permanently.”
That number is almost double for local government spending, as it normally revolves around core infrastructure such as roads, airports, and utilities.
Council spending is around a third of public investment in New Zealand, but after several years of growth many councils are finding it increasingly difficult to borrow more, both due to debt constraints and political pressure to keep rates low.
Council rates have increased at an average of 4.7 per cent a year, triple the rate of overall consumer prices, and councillors are wary of voter backlash to any further increases.
New infrastructure spending and particularly maintenance costs are an obvious candidate for councils looking to tighten their belts during tough economic times.
However, the report warns any cuts would be counter-productive, with an enormous effect on jobs in the short and long term.
A downturn in construction after the GFC meant several businesses closed or downsized, with fewer providers and less capacity across the market.
The industry did not return to pre-recession levels for another six years, and cost inflation due to capacity constraints is estimated to have cost the country $2.7b.
The report also urges authorities to choose investment projects with long-term climate change implications. Local government assets alone worth $5.1b are at risk of destruction from a 1-metre sea level rise.
The infrastructure sector employs around 40,000 people in New Zealand, and is more likely to employ Māori and Pacific people, meaning booms and busts in the industry have a disproportionate impact on those communities.