Report on Council Debt Positive

Report on Council Debt Positive

Thursday, September 27, 2012

Local Government New Zealand  says a report by independent economic research firm, the New Zealand Institute of Economic Research (NZIER), shows local government debt is well managed in the vast majority of cases.

Is Local Government Fiscally Responsible? puts local government debt into perspective, by outlining how New Zealand councils spend well below internationally-benchmarked maximums in servicing their loans.

“Capital expenditure, debt and interest cover are all at prudent levels,” the report states.

“This report says that overall, councils have been very fiscally responsible,” says LGNZ President, Lawrence Yule.

“Good, responsible debt enables councils to build and maintain the infrastructure their communities want and need such as roads, pavements, parks and swimming pools.”

Councils also have to provide infrastructure effectively mandated by central government when it requires, for example, water treatment plants meeting the latest technical standards. 

“This infrastructure can’t all be paid for out of rates income and the money doesn’t just appear out of thin air,” Mr Yule says.

“The sector acknowledges that the debt issue in Kaipara is an exception to the overall picture, but there the issue seems to be primarily attributable to the increase in costs of the Mangawhai waste water scheme.

“However, early warning signs combined with more effective assistance packages in the event councils get into trouble, is central to solving these problems more effectively.  LGNZ is doing some vital work in this area that will help.”

Commenting on the report, NZIER principal economist, Shamubeel Eaqub, said:  “When looking at borrowing, what matters is how much debt you have relative to assets and the ability to repay the debt.  These are the key metrics.” 

“Rates and spending have risen.  But the increases are modest relative to property values or GDP.  Also, at an aggregate level, investment and borrowing cannot be said to be irresponsibly high,” Mr Eaqub said. 

A common indicator of a borrower’s capacity to service debt is the debt servicing cost ratio.  This figure is interest paid on debt as a proportion of the income derived from the infrastructure that the loan covers.

Is Local Government Fiscally Responsible? reports the debt servicing cost ratio at 6.4 per cent last year for New Zealand councils and the international benchmark is around 10 per cent. 

The Government has referred to supposed widespread financial mismanagement by councils as a reason for its Better Local Government reforms. 

A copy of the LGNZ-commissioned report is available here.

ENDS

For more information please contact LGNZ communications advisor, Malcolm Aitken, on (04) 924 1217 or 029 924 1205.