Tackling the infrastructure deficit

Key announcements from Budget 2023

• $71 billion of infrastructure investment over the next five years is an increase from the Government’s claimed $45 billion in the past five years. This funding encompasses schools, hospitals, public housing, rail and road networks some of which were detailed in the initial press release with more detail to follow over the next few days.

• $3 billion to build 3,000 new state homes by June 2025. At first pass, this seems largely aimed at maintaining the current velocity of public housing build.

• $6 billion to fund a National Resilience Plan in response to Cyclone Gabrielle and other extreme weather events. The Government notes that the initial focus of investments will likely be on road, rail, and local resilience as well as telecommunications and electricity transmission investment.

• Significant additional funding for Kiwrail.

Pre-Budget insights from Deloitte’s Norm Castles

‘May you live in interesting times' is often quoted as a Chinese proverb but as with most things its origin is as disputed as its meaning. Google says that it could possibly have been a form of curse and Prime Minister Chris Hipkins may well agree. In any case, it’s safe to say the impending government budget is indeed being deployed in interesting times - inflation, transformational change agendas, skills shortages, natural disasters, a new prime minister, and an election, paint a picture of the ever-changing geopolitical context we find ourselves in.

In this challenging environment, it will be interesting to see how the government’s return to ‘bread and butter’ issues plays out in Budget 2023 in regard to infrastructure funding. Can you indeed focus on your bread and butter whilst also tackling the massively complex and challenging infrastructure environment?

With this in mind ahead of the budget announcement, we’re breaking down key areas and considerations we have on our radar for Budget 2023:

• Disaster response funding impact
  The impact of recent the climate related disasters is still being calculated (with estimates upward of $8B) and it is acknowledged by all that supporting affected communities and rebuilding for resilience is critical. What will be interesting is how much disaster response funding will impact funding allocations that would otherwise be aimed at addressing NZ’s massive ‘base’ infrastructure deficit? Given New Zealand’s relatively low debt-GDP ratio of 49%, in contrast to 59% in Australia, 106% in the UK and 122% in the US, there’s a strong argument to be had that we should borrow more and do both. But, with borrowing costs higher than before, borrowing to finance a larger fiscal deficit could be viewed as reckless and inflationary.

• Fixing what we already have
  The New Zealand Infrastructure Commission - Te Waihanga, recently noted that our future welfare and livelihoods depend increasingly on the less glamorous work of improving our existing infrastructure and their Rautaki Hanganga o Aotearoa (New Zealand Infrastructure Strategy) outlines that for every $40 spent on new infrastructure, $60 should be put towards maintenance and renewals of existing assets. Should the government take their advice, a Budget approach of increasing renewal investments as a share of spend could help support the challenging sectoral conditions we are seeing at present, such as house building consent approvals slowing, and by its nature, provide a more broadly distributed (and potentially less inflationary) spend across the New Zealand market.

• National Land Transport Fund
  Even before the recent floods, it was clear that there was insufficient funding to maintain our national roading network, let alone deal with the real and urgent challenges of adapting and responding to climate disasters like Cyclone Gabrielle. While a lasting fix is needed (i.e. congestion and distance based charging), we will be looking to see how the government addresses the immediate multi-billion dollar funding gap having already tipped in around $1.2 billion in December 2022 to offset fuel excise duty (FED) and road user charge (RUC) reductions.

• Funding decarbonisation
  New Zealand’s infrastructure deficit is only going to widen as we shift towards a low carbon economy. A recent Treasury assessment estimated the cost of direct decarbonisation support at between $4 billion and $12 billion per year. This is recognised as a massive and ongoing infrastructure challenge, so while a US-style Inflation Reduction Act is unlikely, it will be interesting to see if budget 2023 increases funding or incentives to accelerate industry-based carbon reduction. Accelerating the transitioning of industry (e.g. coal fired boiler replacement) is one of the easier and quicker ways of moving towards a lower carbon economy and (it can be argued) has sustained benefits to industry, so should be supported by both sides of the house.

• Balancing Auckland’s transport priorities
  Recent announcements around light rail and additional harbour crossings, along with the existing busway program, will feed into the discussion around how much infrastructure funding our biggest city should receive and where this funding should be allocated. In regard to City Rail Link (CRL), the Office of the Auditor-General recently identified that $1.11 billion of wider network improvements is required on Day 1 (when the first paying passengers are expected to use the CRL) to integrate the project into the existing transport network via new trains, level crossing removal and the Wiri to Quay Park upgrade. The same report also has Auckland Transport and KiwiRail signalling that a further $7.5 billion allocation between now and 2036 is required to realise CRL’s full transformative potential which would shift from an initial 27,000 to 54,000 passenger peak capacity.

Whatever the government’s budget approach, it is vital that government works to maintain construction industry pipeline confidence so we can retain the construction industry capacity we will need to help us through the impending recession.