A $30m widening of Auckland Council’s budget shortfall has seen the mayor and political pundits talking about a hypothetical 22.5 percent rates increase – but where did that number come from in the first place?
Spectators of Auckland Council are scratching their heads at the warnings of hypothetical rates rises Mayor Wayne Brown has talked about in response to the widening budget hole.
The shortfall increased last week from $295 million to $325 million, while $50 million of storm-related costs will be added to the council’s debt levels.
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But while council officials have made it clear that a range of levers will need to be employed to cover the gap – asset sales, rates increases, service cuts and more debt – Brown came out last week with a press release discussing a 22.5 percent increase to average rates.
It’s a number that hasn’t been accepted lightly, with questions raised over how Brown’s team arrived at it and whether it’s an attempt to warn ratepayers against resisting the use of other ‘levers’ like service cuts or asset sales.
“The budget proposal that was consulted on called for a mix of spending cuts, rate increases, the sale of non-earning assets like the airport, and the modest use of debt,” Brown said.
“All of these have their place as just relying on rates rises that would be around 22.5 percent, without providing anything extra, is unrealistic in this time of tight financial pressure on ratepayers, and using debt is what got us into this place.”
But where does that 22.5 percent figure even come from?
Documents provided to councillors on May 5 show what the impact of general rates increases would be on Aucklanders, and estimated that every 1 percent of rates increases would add an additional $20.3m or so into council coffers.
By that arithmetic, rates increases of 22.5 percent would earn the council $456.75m – more than a hundred million more than the announced budget gap.
Of course, that 22.5 percent could be taking into account the 3.5 percent of rates increases already locked in by the council’s long-term plan, in which case the hypothetical hole-filling increase would be 19 percent.
At that rate, the council would earn $385.7m. That’s close enough to $375m to either be some hurried back-of-the-envelope calculations or a bit of rounding up.
However, although the budget hole has been sold as having increased to $375m, that overlooks the $50m one-off storm-related cost, which council chief financial officer Peter Gudsell told RNZ would not be added to the ongoing operating shortfall.
"While these costs do not add to the ongoing operating shortfall, they will add to council's debt levels and therefore reduce the debt capacity that can be utilised to manage other costs.”
So the shortfall would more accurately be measured at $325m. It would take a rates increase of 16 percent to bridge the gap in the case that no other levers are pulled.
India Logan-Riley, member of alternative budget authors A Better Budget for Auckland, said it was “another example of Wayne Brown using dodgy numbers to scare people into accepting things – like cuts and asset sales – that are generally very unpopular”.
“The original $295m shortfall was based on inaccurate inflation projections, underestimates of the airport performance, and vague numbers,” they said. “And this latest announcement adds more unreliable maths on budget foundations that were already very shaky.”
Conflation of the borrowed $50m and the $325m the council needs to find makes the financial situation at the council seem all the more dire, which may increase the public appetite for snipping of non-essential services or getting rid of the 18 percent stake in the airport.
But Newsroom understands that when the increase to the shortfall was announced to councillors last week, it was presented as a $325m hole rather than a $375m one.
Since then, the mayor’s communications have seemed intent on bundling the two costs together.
A spokesperson for Brown followed suit in explaining how they reached the 22.5 percent number:
“Essentially, the $375 million deficit in expenditure represents the equivalent of an approximately 19 percent rates increase on an 'unmitigated' basis (i.e., without proposed reductions in the Natural Environment and Water Quality targeted rates) plus the 3.5 percent already built into the Long-Term Plan to give us 22.5 percent.”
But although Brown was using the 22.5 percent as strictly a hypothetical – no world exists where only rates would be used to cover the shortfall – others have picked it up and run with it.
The Auckland Ratepayer’s Alliance slammed the prospect of such a big rates hike the following day.
“Faced with a hike this large, nothing should be off the table. It is no longer enough to go through the budget with a fine tooth comb to pick and choose what pet projects are worth keeping – large-scale cuts are needed for anything that is not a core council function.”
The hypothetical 22.5 percent would likely gain a little more reality in some ratepayers’ minds as they hear from lobby groups treating it as real.
Auckland Council laid out a number of rates scenarios to councillors in a workshop earlier this month, detailing how much revenue a range of rates increases would make.
The proposed scenario of a general rates hike of 7.23 percent would see residential rates rise by 4.53 percent, leading to an average increase of $2.87 more per week for Auckland households.
A more dramatic hike of 13.5 percent general rates would see those same residential rates go up by 9.86 percent, costing households on average $6.25 more per week.
Extrapolating on this data, Brown’s floated 22.5 percent scenario would see the average household spending around $10 more a week on rates.
But as councillor Maurice Williamson told Newshub last week – “We’re never going to do that, I can tell you.”
He then said that number was put out there just to illustrate the “magnitude” of the budget shortfall.
It’s important to note that none of these politicians are seriously suggesting a 22.5 increase is on the way. It’s purely an illustrative tool of the size of Auckland’s financial woes. But even if it’s just a thought experiment with a political purpose – the numbers still need to add up.
