Economist warns Auckland Council against 'slash and burn' approach

8:24 pm on 16 November 2020

Auckland Council should avoid making drastic cutbacks to plug a projected billion-dollar hole in its finances, an economist says.

Economist Cameron Bagrie says now is not the time for a "slash and burn response" from Auckland Council.

Photo: LDR

The council announced on Wednesday last week that the $450 million hit to revenue from Covid-19 that was projected this year could snowball to nearly $1 billion by 2024.

New forecasts showed a decline in annual revenue of $260m in 2021/22, $170m the following year and $110m in 2023/24.

Mayor Phil Goff outlined the new projected hit to the council's revenue on Wednesday. It followed a closed-door workshop last week for councillors to look at the council's proposed 10-year budget due out for public consultation in December.

"Many Aucklanders and Auckland businesses are doing it tough with reduced income. Council is in the same situation of having to do what we need to do with less money than we had planned to have," Goff said.

"In this 10-year Budget, there will similarly be things that we want to do that won't be possible in the current financial environment. We will need to prioritise those things that are the most important to do."

Wellington-based economist Cameron Bagrie said the council should avoid using drastic cutbacks to make up for the projected drop in its revenue, and it was important not to overreact.

Departing chief economist from ANZ bank Cameron Bagrie

Cameron Bagrie Photo: RNZ / Alexander Robertson

"Now is not the time for a slash and burn response. You want to provide stability and if you need to borrow more you can," he said.

Bagrie said organisations like the council, which had the ability to increase their debt in the current environment, should.

It has a credit rating of AA and Aa2 from S&P Global and Moody's respectively and can borrow at record low interest rates.

Bagrie said the council still had structural issues that existed before Covid-19 that would need to be addressed.

"We need to think very seriously about what the best models are for local government in terms of funding, what we expect them to deliver and what assets they should own.

"The current income base of all councils is too narrow compared to what they are expected to deliver."

Rates make up about 40 percent of Auckland Council's revenue. The remaining 60 percent of its income comes from sources such as concerts and visitor attractions, pools and leisure centres, dividends, parking, development contributions and public transport fares.

These traditional sources of revenue for council have dried up as a result of Covid-19. Industries like tourism, which have traditionally helped boost council revenue, are not expected to recover any time soon.

In July, the council agreed to a 3.5 percent rates increase, along with more debt and asset sales to pay for it.

Manukau Ward councillor Efeso Collins said last week that more cuts were likely.

"The challenge before our city is how we manage the financial strain against the need to ensure that we continue to service the needs of the community," he said.

"Our financial situation is such that some of the projects in train will be impacted and during times of financial turbulence, inequity is highlighted."

Collins said Covid-19 had already had a noticeable impact on South Auckland, where a lot of people had lost their jobs and there had been a corresponding increase in the need for food parcels.

Auckland Council has been approached for comment.

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