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Inside Economics: The double tax hitting ratepayers in the pocket

Inside Economics: Fixing Auckland and Other Cities with GST, Another Rate Cut Looms, Plus the Great Concrete Crunch

In the bustling economic landscape of New Zealand, where urban growth clashes with infrastructural limitations, innovative fiscal strategies are emerging as potential game-changers. One such proposal gaining traction is the idea of leveraging Goods and Services Tax (GST) revenues to revitalize major cities like Auckland, Wellington, and Christchurch. This approach stems from the recognition that New Zealand's urban centers are grappling with chronic issues: overcrowded roads, strained public transport, housing shortages, and aging utilities. Economists argue that redirecting a portion of GST collected within these cities back into local infrastructure could create a self-sustaining funding model, breaking the cycle of central government dependency.

At its core, the GST-fix concept involves ring-fencing tax revenues generated from urban consumption and reinvesting them directly into city-specific projects. For Auckland, which contributes a disproportionate share of the nation's GST—estimated at around 40% due to its population density and economic activity—this could mean billions in annual funding. Imagine transforming the city's notorious traffic snarls into efficient light rail networks or upgrading wastewater systems to prevent overflows during heavy rains. Proponents, including urban planners and local councils, highlight how this mirrors successful models in places like Singapore or certain Australian states, where localized tax retention has fueled rapid development. Critics, however, warn of potential inequities: smaller regional areas might feel shortchanged if GST is funneled predominantly to metros, exacerbating the urban-rural divide. Moreover, implementing such a system would require legislative overhaul, possibly involving amendments to the Tax Administration Act, and could face resistance from fiscal conservatives who prefer centralized control over spending.

This proposal doesn't exist in isolation; it's intertwined with broader economic pressures. As New Zealand's economy navigates post-pandemic recovery, inflation, and global uncertainties, another interest rate cut appears imminent. The Reserve Bank of New Zealand (RBNZ) has been signaling a dovish stance, with the Official Cash Rate (OCR) already slashed multiple times in recent years to stimulate borrowing and investment. Recent data paints a picture of softening economic indicators: GDP growth has slowed to around 0.5% in the latest quarter, unemployment is ticking up to 4.5%, and consumer confidence remains subdued amid high living costs. Inflation, while cooling from its peak of over 7%, still hovers above the RBNZ's 1-3% target band, but the bigger concern is the risk of recession if rates stay elevated too long.

Analysts predict the next OCR cut could come as early as the upcoming Monetary Policy Statement, potentially dropping the rate from its current 5.5% to 5.25% or lower. This move aims to ease mortgage pressures for households—many of whom are locked into rates above 6%—and encourage business lending. For the property market, particularly in Auckland where house prices have dipped 15% from their 2021 highs, a rate cut could reignite buyer interest, though it risks inflating bubbles in an already overheated sector. Exporters, facing a strong Kiwi dollar, might also benefit from a weaker currency post-cut, boosting competitiveness in markets like Australia and China. Yet, the RBNZ walks a tightrope: cut too aggressively, and imported inflation from rising fuel and food prices could resurface; hold steady, and economic stagnation might deepen.

Compounding these challenges is what industry insiders are dubbing "the great concrete crunch"—a severe shortage in concrete supply that's hamstringing the construction sector. New Zealand's building boom, driven by population growth and government initiatives like KiwiBuild, has collided with global supply chain disruptions. Key factors include the lingering effects of COVID-19 on international shipping, which has delayed imports of cement clinker (a vital raw material), and domestic production constraints at plants like those operated by Fletcher Building and Golden Bay Cement. Environmental regulations are adding layers of complexity; stricter emissions standards have forced some facilities to scale back operations, while quarry permits for aggregate materials face community opposition over dust and noise pollution.

The crunch is manifesting in project delays and cost overruns. Major infrastructure endeavors, such as the Auckland City Rail Link and various highway expansions, are experiencing setbacks, with concrete prices surging by up to 20% in the past year. Residential developers report waiting times for concrete deliveries extending from days to weeks, pushing back housing completions and exacerbating the affordability crisis. In Christchurch, still rebuilding from the 2011 earthquakes, the shortage is particularly acute, threatening timelines for seismic upgrades and new commercial spaces. Economists estimate this could shave 0.2-0.5% off annual GDP if unresolved, as construction accounts for about 7% of the economy and employs over 250,000 Kiwis.

Solutions are being floated from multiple angles. The government is exploring import incentives, such as tariff reductions on foreign cement, while investing in domestic alternatives like recycled aggregates to promote sustainability. Industry groups like the Concrete NZ Association are advocating for streamlined consenting processes to boost quarry output. There's also talk of technological innovations, including 3D-printed concrete or low-carbon mixes, though these remain nascent. In the interim, builders are turning to substitutes like timber framing, aligning with New Zealand's forestry strengths, but this shift isn't seamless for all projects.

Tying it all together, these economic threads—GST for cities, impending rate cuts, and the concrete shortage—underscore a pivotal moment for New Zealand. Policymakers must balance short-term stimulus with long-term resilience. For Auckland and its urban counterparts, GST redirection could unlock transformative growth, but only if paired with prudent monetary policy to avoid overheating. Meanwhile, resolving the concrete crunch is essential to maintain momentum in housing and infrastructure, preventing a broader slowdown. As global headwinds like geopolitical tensions and climate change intensify, New Zealand's ability to innovate domestically will be key to emerging stronger. Stakeholders from Wellington to the boardrooms of major firms are watching closely, hopeful that these measures will pave the way for a more prosperous, equitable future. (Word count: 928)

Read the Full The New Zealand Herald Article at:
[ https://www.nzherald.co.nz/business/economy/inside-economics-fixing-auckland-and-other-cities-with-gst-another-rate-cut-loomsplus-the-great-concrete-crunch/BCAQZEHOJBADLEFZNAXQ6JL4EY/ ]