With local elections in full swing, there’s a greater focus on the direction that our councils are moving towards and how much is it going to cost. Wrapped up in these discussions is the the fact that right across New Zealand we need to address our infrastructure deficit after decades of neglect. Planning to address this deficit will not be easy, or cheap, but is critical to aiding growth and fixing our housing issues.

Our latest analysis shows that gross debt levels are increasing over the next decade, with a focus on replacement of existing infrastructure rather than investing to accommodate growth. With increasingly thorny issues around housing and productivity remaining, councils will need new funding streams to allow New Zealand to grow and remain prosperous.

Gross debt levels in councils continues to increase as population pressures, tourism growth, and aging infrastructure come together to form a perfect storm.

Comparing total liabilities to operating income is a common way of comparing debt levels among councils and is a similar concept as house-price-to-income ratios. Total local council liabilities (“gross debt”) in New Zealand is expected to rise to 205% of operating income (“income”) on average over the next decade, up from 176% on average over the previous decade. Gross debt ratios across New Zealand councils have been increasing over recent years (see Graph 1) and are expected to remain broadly around their current levels.

Graph 1

Looking at historical and future debt tracks, Christchurch City Council is expected to rise from being the 10th most indebted council over the last decade (2009-18), to the most indebted over the next decade (2019-28). Substantial investment to ensure that Christchurch’s infrastructure assets are back to pre-earthquake levels drives this higher debt profile, with significant spending occurring to upgrade water assets.

Auckland is shuffled into second place over the next decade, down from the most indebted council over the 2009-18 period, while Kapiti Coast District Council remains the third most indebted council. A full list of gross debt ratios can be found at the end of this article.

Of all 77 local council areas examined (including regional, district and city councils, as well as all unitary authorities), 51 are expecting to see an increase in their gross debt levels relative to income, leaving just 26 with a declining debt profile. Yet even this increase in gross debt is conservative, with a larger increase needed in reality to deal with both replacement of assets and coping with current and future growth.

Higher gross debt ratios don’t necessarily show that councils are borrowing too much. Instead, high gross debt ratios can sometimes more accurately highlight a lack of income needed to grow, even as the population has grown.

Increased infrastructure across the country will be used by not just today’s population, but for generations to come. Given the useful life of an asset, funding infrastructure through debt actually allows for intergenerational equity, as the debt repayments allow for the cost of infrastructure to be spread across the various generations that use the asset. It’s often said that councils, like households and others, shouldn’t live outside their means. However, with households highly likely to purchase a home using a mortgage (that is, taking on debt), it’s clear to see that investing for the future is a wise move, as long as the investment is on the right assets.

The need to fund increasing capital investments in infrastructure means that different funding options are important going forward. Recent research from Local Government New Zealand and the New Zealand Initiative have found that local government in New Zealand receives the smallest comparative share of total government funding in the developed world. The small share of funding shows the need for more funding from central government to local government, either as pure cash payments, or as project-based subsidies, to increase council funding.

The recent Productivity Commission report into local government funding also outlined other alternative funding options, including:

Councils face a tough choice in the future, with many competing issues and a small pool of money. Over the next decade, councils are currently expected to replace rundown assets, ahead of projects which would improve service levels or add more capacity to cope with growth.

Of the $91b in capital spending on the four network infrastructure areas (roading, water supply, stormwater, and wastewater) over the next decade, councils across New Zealand are intending to allocate 46% to replacing existing assets (see Graph 2). Around a third (31%) will be spent on improving levels of service, while only 23% will be spent to meet additional demand.

Graph 2

Most council capital spending is currently geared towards keeping the status quo and fixing rundown assets. But this gearing comes at the expense of investment for the future, with increased tourism and population levels.

With at least $129b in infrastructure funding expected to be built over the next decade, and a housing undersupply still existing, a coordinated attempt to integrate infrastructure spending is critical to success in addressing high housing costs. Increasing local council debt ratios, and a focus on replacements before additions, highlight a need for more infrastructure funding to local government. But with household costs increasing, yet again many in the 2019 local elections will be calling for no to low rates rises. In the absence of increased local government income, central government should support local communities by setting aside funding for infrastructure. Failure to do so will continue to exacerbate New Zealand’s infrastructure deficit and see housing issues increase even further.

Note: Due to the 2016 Kaikoura Earthquake, Kaikoura District Council was exempt from producing a Long Term Plan, and so has been excluded from all analysis.

Debt referred to in this article is gross debt, and includes debt held by investment arms and Council Controlled Organisations.