GOVERNMENT August 2001
beating the loan
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
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."
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
Intergenerational loans don't provide any answer. The
loan burden still escalates and penalises ratepayers - just over a
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'.
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
"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
"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
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