So there was a devastating earthquake in Christchurch this last week that wrecked buildings and the lives of many people. The entire nation feels for the people who went through the quake and are trying to pick up their lives as best they can. Amidst the aftermath John Key announced that the city will be rebuilt. The rebuilding will be billions of dollars and take probably years to fully complete. Each and every time we see pictures on television or read a newspaper report we get glimpses of what effort will be required – roads, water and waste water services, power and telephones, homes and commercial properties all need to be repaired and reconstructed. Yet, the country seems prepared to make that effort.
There are a couple of other seemingly seismic events playing out as well, ones that were getting news attention before last Tuesday but have temporarily been sidelined. These relate to the global price of food and fuel and how the rising prices of both threaten to bring down governments throughout the Middle East. Food prices are rising quickly, some may say spiking. The first effects are being felt by those on the margins of society and globalised markets, the surplus populations of the world. Someone I know today described this phenomena in local terms, a significant proportion (he didn’t define an exact figure) of kiwis are finding they can no longer afford to buy milk.
Fuel prices are threatening to do the same. They were hovering around $90 a barrel, near $2 NZ a litre at the pump, even as the western world staggered through a recession. Events of the past month in the Middle East has rocketed the price over $100 a barrel and the prices at the pump past $2 with more to come probably if the NZ dollar falls in value. The riots and revolutions in the Middle East have a number of elements to them. One is the price the affordability of food. Exactly how certain we can be of the link between food and fuel prices is still not totally clear for me. There have certainly been natural disasters and crop failures around the globe which have pushed prices up, along with financial speculators. There is a plethora of analysis on the net regarding the reasons for the price increases, and links between, food and fuel so I will not attempt to rehearse them in any great depth here. All I will say is that I do think the link is becoming clearer, I am giving more credence to the idea that we are entering into a period of stagnating oil production (a peak oil type event) which is flowing through to food prices.
The Christchurch earthquake and food/fuel prices are not directly linked of course. For me, the link lies in how as a country we deal with them over the next few months and the next few years. So then how do we cope with Christchurch rebuilding whilst also taking cognizance of food and fuel prices. I noted that Fran O’Sullivan made an attempt in the Saturday edition of the NZ Herald.
“The brutal reality is that the February 22 earthquake will exhaust the Government sector’s financial ability to deal with any other major unforeseen incidents. Just 10 weeks ago Finance Minister Bill English said the Government’s accounts were stretched…Key should not hesitate to ask other New Zealanders to play their part towards financing the rebuilding of Christchurch.
Major levy increases will be needed to restore the Earthquake Commission’s fund in case it is called on by other New Zealanders before it can be replenished over time. Key should do the same. This is the opportune time for him to review the extent of his Government’s tax-cuts, which are being funded through borrowing and not healthy surpluses, and the extent of the interest-free student loans and Working for Families tax credits bequeathed by the previous Government…Put frankly, Auckland can no longer be the priority for the national infrastructure spend. It has had lots of Government cash spent there for the Rugby World Cup.”
To paraphrase O’Sullivan, we should all play our part to rebuild Christchurch so Key will need to review things like his tax cuts and other government spending including infrastructure plans. Some of what she says I can agree with however I am interested in joining the dots a little further than O’Sullivan attempts to encompass food and fuel prices. The dots do link back to the spending areas she has identified.
The matter of tax should be obvious to most. The recent round of cuts was not “fiscally neutral” and was not a “tax switch” for a good portion of low income earners. The first reservoir of finance Key needs to dip into to fund the Christchurch rebuild is tax. I myself doubt he has the courage to reverse the cuts of May last year. A rebuilding tax can certainly be levied however. Australia has introduced one for the Queensland flood starting at incomes over $50,000 and increasing again at incomes over $100,000. Key could also introduce a levy on top of company. Beyond that simple task the opportunity may be right to roll out some long sighted tax changes such as a capital gains tax or financial speculation taxes. That will help fund the immediate Christchurch reconstruction efforts but also help lay a solid foundation for future national economic development.
The suggestion that Working for Families should be scraped should also be obvious to most. Obviously a silly idea that is. At a time where wages are low and stagnating, unemployment is high and living costs are increasing the last thing the government needs to do is remove some of the financial props that are helping families get bye. The state of our economy dictates they need to be retained. Future possible events of structural high food and fuel prices, along with unemployment and uncertain economic recovery may very well necessitate Working for Families type programmes on a wider scale. That is, structural problems of high food & fuel prices along with faltering employment and growth will require a much greater effort to distribute resources and wealth on a far more equitable basis throughout our (and even global) political economy.
Finally there is infrastructure. This is where I once again find myself agreeing with O’Sullivan. Key and Steven Joyce need to urgently reconsider the infrastructure plans they have set in place. The major need must lie with Christchurch. There is some low hanging fruit Key is easily able to pluck for this. There is the 1.7 billion dollar Puhoi to Wellsford Holiday Highway for starters. This road has a Benefit-Cost ratio (BCR) of somewhere between 0.4 to 0.8 (the optimistic view Joyce found somewhere). If Joyce wants to improve the road he can do so for around $300 million and bypass Warkworth. The 2 billion dollars Waikato Express Way has a BCR of somewhere between 0.5 and 1.1 (again optimistic figures found somewhere by Joyce). That project can no doubt be scaled back with th3e resulting saving on both projects likely to be, at a guess, $2.5 billion. That’s a decent contribution toward the Christchurch effort. Then there is the Wellington Northern Corridor with a BCR of 0.6 to 0.9 to consider as well.
Should Key and Joyce want to spend money improving our transport infrastructure, and I understand there are arguments for doing so, then the priority must be public transport. In a few years, or maybe even a few months, if oil prices rise back toward $150 a barrel then the focus for affordable public transport will intensify. There are existing bus and rail projects that urgently require government funding to get completed. In 2020, when Christchurch is rebuilt, people are requiring road upgrades on which to drive their electric vehicles then Keys successors can consider it then.
As the reconstruction effort in Christchurch takes place we are all going to be required to help out. Government revenue and government spending, including infrastructure, will have to be carefully considered. New taxes will be required and there are scheduled government ‘think big’ roading projects that can be downscaled or cancelled. Such deliberations also need to take account of a future that requires, I think, income/wealth equality and structural programmes to cope with higher food and fuel prices.