For a Government of the Right, this present one is certainly no great shakes at economics. Good government should create certainty – not uncertainty. Uncertainty has real economic effects: and the revisiting of the Waterview Tunnel project is exactly the sort of Government-created uncertainty that we could do without in the present climate.
By announcing a review of the tunnel, Stephen Joyce immediately put the future of over 550 houses at risk. The total value of these houses is over $200 million – the amount of “wealth” that is burning while the Government fiddles the books.
And what a lot of fiddling! How did the original $2 billion price tag become almost $3 billion within the last six months? Having done cost-benefit analysis for major projects myself, I know that costings of this kind are always hairy.
The Government claims that “financing costs” have escalated. Financing costs are the cost of acquiring the cash to pay for the project. They can fluctuate even when the cash costs of the project do not change. For example, if interest rates on your home mortgage increases, then although the original price you paid for the house is still the same, the cost of financing it has gone up.
Governments fund projects in a number of ways: through borrowing, taxing or “printing money”. Each method has an implicit cost associated with it. While these costs can vary over the business cycle, and a project which looked a good idea in a low interest environment can become untenable when interest rates rise, I am at a loss to understand how with the current exceptionally low interest rates, there could be such a large jump in financing costs.
Another argument used by Mr Joyce to pour cold water over this project is the expected increase in Government debt. Indeed, it is the debt-bogey that has seen Bill English (possibly) killing the second round of tax cuts. Let me be clear: I do not think New Zealand has a Government debt problem.
The worst case scenario is as I understand it, a debt to GDP ratio of 45%. This is not a high figure – especially when implementing a fiscal stimulus. Gordon Brown’s rule of thumb for England prior to the financial crisis was 40% and Mr Brown has certainly exceeded this as England rolls out its stimulus package. The Maastricht Treaty, which sets out the rules under which the EU countries operate, require debt to be less than 60% of GDP.
Moreover, recall that one of the mainstays of this Government’s fiscal stimulus strategy is infrastructure spending. The effect of the tunnel on employment is an added benefit that is surely a counter-point to whatever added cost of financing is claimed by the Minister.
While I am sympathetic with the Greens' principle of spending on public transport rather than building new roads, it is misguided in the present context. I agree that if we were planning the Auckland transport system de novo, we would have a much greater component of public transport. We might not have even started the Western Ring Route. However, this is not the case. We have already built 90% of the route. Not to complete it would possibly lead to greater emissions as vehicles are forced to take longer routes and are stuck in traffic jams. The power cable under the Cook Straight might be the most expensive part of the electricity network – but it’s also the most valuable.
While promising to complete the review in April, we are well into May and the residents of Mt Albert are still to see the report (or Mr Joyce come to that). Government is not about the arbitrary use of power nor the mischievous use of economics. It is about responsible, serious and considered decision-making. If the Minister wants to scuttle the tunnel, let him be open about his reasons.
Rhema Vaithianathan has a PhD in economics and teaches Public Economics at the University of Auckland. She also practices as an independent economic consultant.