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Tim Leitch shines a light on subjects of interest

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0% interest

beating the loan burden

Could the Reserve Bank be used to wipe out loan repayments?

How does this sound? Your council is faced with raising a loan to finance an essential infrastructural scheme that's going to cost millions. But instead of the resulting loan and its interest burden triggering a rates hike, your council is able to borrow every cent at zero interest.

Sounds like Cloudcuckooland? Not if you listen to Tim Leitch. At a recent hearing by North Shore City on its long-term financial strategy he submitted that the council could call for loans for essential capital works to be provided by the Reserve Bank at zero interest. He provided authoritative evidence to substantiate his case.

As a chartered loss adjuster within the insurance industry, Mr Leitch is not talking purely from the perspective of a rates-burdened citizen. He had been a North Shore City councillor between 1992-95 where he had sat on three standing committees and a community board.

In pressing for the council to pursue this proposal, Tim Leitch makes the attention-grabbing observation that "this is a valid way of saving the council and ratepayers about $144.1 million over the next 10 years."

The strategy calculates this on the basis of $430.5 million borrowed by 2010-11 at commercial interest rates. "With interest compounding these borrowed funds by a further $144.1 million, this imposes an added cost of $2,044 on each and every ratepayer across that period. What a waste! Debt servicing of these proportions places an intolerable rates burden on the community while draining away finance that could be spent on other capital works. Moreover, upkeep of the infrastructure suffers, which leads to a run down in the quality of community service provided by council."

Intergenerational loans don't provide any answer. The loan burden still escalates and penalises ratepayers - just over a longer period.

Mr Leitch also finds it galling that "such large amounts of our rate dollars are disappearing offshore, given that all but one of our private banks are now foreign owned. Rather, this money should be available to lift demand in our local economies."

At this stage a reader might be forgiven for thinking they are in the company of a Social Crediter. Tim Leitch confirms this but quickly dismisses any suggestions of 'funny money'.

"What I am advocating is  some responsible improvements in financial techniques. It doesn't demand the altering this country's financial structure – just some enlightened use of facilities already available. Existing legislation makes my proposal entirely tenable."

Evidently the New Zealand Constitution Acts of 1852 and 1989, plus the Reserve Bank Acts of 1933 and 1990 allow for the issue of interest-free finance at the direction of Central Government.

Mr Leitch further buttresses his proposition by quoting from the 1956 Royal Commission Report on Money, Banking and Credit Systems (page 371) which states "...there is no technical reason why the Government should not require the Reserve Bank to grant it debt-free advances." However, it does add the rider: "The question is whether it is desirable in the national interest that this should be done".

He points out that history shows that it had indeed been deemed desirable in the past and it was again now. "Go back 65 years to the first Labour Government when Reserve Bank finance was used for a lot of this nation's infrastructure such as roads, ....


NZ LOCAL GOVERNMENT  August 2001  page 29

.... railways, hydro dams and housing. Indeed, finance at 1 per cent interest continued for producer boards building a strong agricultural sector right through to 1983 when Rob’s mob curtailed it so as to gain more revenue for "Think Big" deficits."

Critics might argue, however, that this was in a pre-globalisation, floating exchange rate era. Dr Don Brash, Governor of the Reserve Bank, referred to this when replying in writing to the question: 'Is there a limit to the amount of credit we can issue ourselves without borrowing from overseas sources?’

Dr Brash replied that although there is technically no limit, that answer needs to be qualified. He said it has to take into consideration the risk of creating too much money in relation to available goods and services. It would lead to inflation and, given New Zealand's floating exchange rate, a depreciation in the country's exchange rate. This, in turn, would erode overseas confidence resulting in the withdrawing of existing loans and assets from New Zealand.

Tim Leitch asserts that overseas interests are financing too much of our country’s operation today and this is now having an adverse effect on both our balance of payments and our exchange rates. He is adamant that the setting of borrowing ceilings would best be determined by how best to use domestic resources and productive capacity.

"That means focusing on unused or under-utilised contracting plant and labour - and then allowing them to be utilised constructively for the needed work. That way an affordable zero interest Reserve Bank loan would serve to employ people reducing unemployment levels as well as achieving many other benefits."

"Everyone wins," according to Mr Leitch. "Councils would avoid imposing unpopular rates increases; ratepayers are left with more spending power in their hands to create local demand;

Tim Leitch: "Enabling basic infracstructural projects to be undertakend without incurring grossly inflated, interest - burdened costs."

local business benefits from this increased spending power; contractors and their workforce are constructively utilised; the general community gains from being able to afford and build its essential infrastructure without having to pay for its actual cost two or three times over because of the finance cost interest burden."

If that sounds all too New Deal, Tim Leitch agrees there is nothing really new in his proposals. But he is concerned that the concept hasn’t been seriously taken up before and says this is because of a "general misunderstanding as to how the monetary system actually works." An insight into this can be gained from National Geographic January 1983. It will be a surprise for many. Since quotes from successive Reserve Bank Governors, as well as others like testimony in 1955 of Mr H. W. Whyte, Chairman of the Association of NZ Banks of New Zealand, all show that the concept is feasible, Mr Leitch says that it is about time responsible decision-makers took up it up because of the significant benefit it will provide for local councils and all their people.

"It will take you to follow through on what management gurus are saying we need to do if our country is to win a place in the new economy - think outside ostensible limitations and break down entrenched attitudes. In this case the self-imposed ones relating to credit systems," says Mr Leitch.

He recommends that such loans would best be used for voter-approved essential capital works to "avoid the chance of wastage on grandiose projects. 

There would need to be a prudent exploration of the capacities (financial, material and labour) to avoid undesirable effects, if any. But this is not something Councils need to predetermine or make any assumptions about. You will not be asking ‘for a free lunch’ – you will have to pay the loans back in full."

Are there any precedents for using zero interest loans for local authority capital works? Leitch identifies Guernsey in the Channel Islands as a prime example where he says a similar technique was used to build much of that island's infrastructure.

Furthermore, he says that presently in the United States a similar proposal has been endorsed by some 3,500 tax-funded bodies such as councils and public boards. This has led to a bill being put before the US Congress to allow for implementation of the concept. This can be seen through the Internet at www.loansinterestfree.com.

Here in New Zealand Mr Leitch reports that at least four councils have supported the proposal. But he adds that to make it a reality more of the local government sector will need to "make submissions s to central government.

"This would include the Minister of Local Government, Hon Sandra Lee, the Minister of Finance, Hon Michael Cullen, and the Minister for Economic Development and Minister for Industry and Regional Development, Hon Jim Anderton.

Local government should be requesting from them a policy decision to allow the Reserve Bank of New Zealand to establish a facility for loaning to local bodies funds at zero interest for essential capital works. Ony then will councils avoid their projects being burdened with grossly inflated costs.

"All it will take is for local government to have the determination to obtain this funding source, and for central government to recognise that it's feasible without creating any adverse fiscal impacts."

Insists Tim Leitch: "Here is one way for central government to prove it sincerely wants local government to be able to afford its role as a governance partner."

page 30 NZ LOCAL GOVERNMENT  August 2001  


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