Would you give a credit card with a $1.35 billion limit to a bunch of clowns

As you might have read in the Herald online, the Auckland City Council is looking at an overall rates increase of 2.7% this year, (with a 4.5% increase for residential ratepayers).

Firstly, it’s pretty obvious that this is a cynical attempt to try and calm furious Aucklanders after the two rates shocks of 2005 and 2006.

Secondly, they are only able to keep rates down because they now intend to borrow up to $1.35 Billion over the next ten years. There is no cutback in the spending plans for the left wing council, they intend to keep on with many of their social engineering projects and pet projects and similar – but now instead of funding it from rates they’ll borrow. Guess what that means – people will now pay twice for dubious projects – once in actuality, a second time with cumulative interest.

The council shouldn’t be borrowing any large sum of money until they have addressed the large amount of poor quality spending, bloated bureaucracy and expansion into social engineering. There would be scant need for borrowing with the extra cash found in Auckland City doing some belt-tightening.

Auckland City is now also abandoning the previous John Banks led council policy of running budget surpluses, so now some of Auckland’s operational expenses and unforeseen expenditure may also met with borrowing/going into overdraft instead of paying out of surplus.

Here’s the analogy. If you have a house that’s debt free, is it a good idea to take out a mortgage to buy yourself a holiday or an item that doesn’t generate income for you, such as a collection of books or a garden? The answer would be no. You would use equity in your home to buy something that provides an income stream (like another investment property) or a measurable economic benefit to you, such as a car. Borrowing for OPEX or non-economic fixed assets is a fiscally dumb thing to do. A small to moderate level of debt for assets that produce cashflow (like car parks) or deliver a real measurable economic benefit (and not this triple bottom line nonsense) is a smart thing if the council is a tight ship showing fiscal disciple.

But now the left wing Auckland City Council is using debt to fund a very large wish list of items using Auckland’s significant asset base. But much of what they are intending to buy won’t generate cashflow, which ought to be a test used to see whether money should be borrowed against it.

Now, granted, a left wing councillor would see things much differently (ie, who will notice, and anyway, future generations should pay), but arguably, future generations were already paying via depreciation being factored in to the council’s annual plan.

The real issue here is the lack of fiscal discipline. It’s just going to be far too easy from now on for the left wing council to say "Ok, our pet project costs $25 million, just whack it onto the council credit card for some future generation to pay". And pay they will – once upfront, and a second time with cumulative interest. $1.35 billion in ten years will be generating an interest bill of around $90 million per annum (assuming Auckland gets a an excellent rate of around 6.7% for borrowing). That’s some serious interest. And Dr Bollard’s interest rates rise this morning makes that even more expensive.

Basically it boils down to this – would you give a credit card with a $1.35 billion limit to the same clowns who spend up like drunken sailors on shore leave?