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Half Year Economic and Fiscal Update 2016

Economic and fiscal impacts of the Kaikōura earthquakes

The Kaikōura earthquakes on 14 November and subsequent aftershocks were destructive, resulting in loss of life and turmoil for those involved. They also affect the economy and the Government's fiscal position, although there is uncertainty at this time over the magnitude and timing.

  • While the earthquakes have significantly affected people in North Canterbury, they are expected to have a relatively minor impact on the New Zealand economy.
  • The economic outlook in this Update does not include any adjustment for the earthquakes (which occurred just after the forecasts were finalised).
  • Preliminary estimates suggest that direct fiscal costs of the earthquakes could be around $2 to $3 billion. However, some of this is expected to be funded by insurance proceeds or existing resources.
  • The fiscal forecasts in this Update therefore only include an incremental net cost of $1 billion, which reduces OBEGAL and increases net debt.

Economic impacts

Information is still emerging. While the earthquakes are likely to have a significant effect on the North Canterbury region, they are expected to have a relatively minor impact at a national level. Given the likely magnitude of impacts on the national economy and uncertainty about these effects, the economic forecasts included in this Update do not include any adjustment for the earthquakes which occurred just after the forecasts were finalised.

While the impact of the earthquakes on the Kaikōura region is considerable, it accounts for a much smaller share of national output and employment than the parts of Canterbury that were affected by the 2010 and 2011 earthquakes. The areas most affected by the earthquakes - the Kaikōura and Hurunui districts - make up around 0.4% of all New Zealand households (whereas the areas most impacted by the Canterbury earthquakes accounted for around 10% of all households). The Kaikōura and Hurunui districts account for less than 1.0% of total tourist spending in New Zealand.

The industries most likely to be affected in the region are tourism (retail, hospitality and leisure) and primary production (seafood and dairy). There is expected to be short-term disruption to these industries as key infrastructure was damaged and access to and from the region has been disrupted. The earthquakes also caused damage in Wellington, with some commercial buildings in the city centre and part of the port damaged.

Some effects are expected to be felt further afield as well. The extensive damage to the road and rail network in the north-east of the South Island will affect not only that region but also the transport of people and freight between much of the rest of the South Island and the North Island. The disruption of transport links through the Kaikōura region is expected to add costs to freight and travel to and through the region.

There may also be wider impacts on tourism elsewhere in New Zealand should people cancel or postpone trips, or redirect trips within New Zealand, because of the disruption or the risk of more earthquakes. At this stage, this effect is thought to be relatively small and the overall impact on tourism will be less than the Canterbury earthquakes.

Over time, the negative impacts of the earthquakes on economic activity are expected to be offset by repair and reconstruction activity. To some extent, reconstruction work is likely to be at the expense of other work in the construction sector or it may lead to higher costs (eg, local wages and/or materials).

Any further evidence and quantification of impacts will be incorporated into the 2017 Budget Economic and Fiscal Update.

Fiscal impacts

The earthquakes will result in additional costs to government. Similar to the Canterbury earthquakes, spending is likely to include providing short-term support and recovery assistance, contributing to the reconstruction of infrastructure, repairing government-owned property, as well as meeting the costs of claims to EQC for residential property damage assuming the Crown guarantee is called. The nature of the damage is different from the Canterbury earthquakes, with significant costs expected in relation to the transport network throughout the region (both road and rail). There are also expected to be costs associated with damage sustained in Wellington.

Preliminary estimates, based on available information, suggest that direct fiscal costs of damage caused by the earthquakes could be in the range of $2 to $3 billion. These costs are a mixture of operating expenses (eg, EQC claims costs) and capital expenditure (eg, rebuilding state highways). Timing of these costs is uncertain. This estimate excludes future decisions the Government may make about the nature of the recovery and rebuild.

Table 2 - Initial estimates of government earthquake costs
Estimate range
Transport infrastructure (roads and rail) $1.5 to $2.0 billion
EQC claims costs for damage to residential property $0.5 to $0.7 billion
Non-transport infrastructure costs Up to $0.1 billion
Other costs Up to $0.2 billion
Total  $2.0 to $3.0 billion

Source: The Treasury

While the $2 to $3 billion estimate represents the gross direct costs associated with the earthquakes, there is an expectation, as happened with the Canterbury recovery, that some of these costs will be met from existing resources, insurance proceeds, existing budget allowances or existing funds such as the National Land Transport Fund. Not all costs will result in increased spending by the Government. As a result, these forecasts have assumed that only a portion of the costs ($1 billion) impact OBEGAL in 2016/17 and net debt, on top of existing spending. This additional cost of $1 billion represents the net costs of the earthquakes that are not expected to be funded from other sources.

The tax forecasts included in this Update do not include any adjustment for the Kaikōura earthquakes. The impact on tax revenue will reflect the economic effects of the earthquakes. There are expected to be some short-term falls in GST, PAYE and possibly corporate and other persons' tax from the affected region, but the impact is expected to be relatively small and offset by other activity (displacement, and rebuilding and reconstruction work). This will also be offset somewhat by increased GST refund claims by insurers, as was the case in the aftermath of the Canterbury earthquakes.

Risks and uncertainty

There is a high level of uncertainty surrounding both the economic and fiscal impacts. In terms of impact on the economy, the main factor is the quantum and timing of reconstruction activity. For example, estimates of the quantum and timing of reconstruction activity following the Canterbury earthquakes changed over time - most notably the size of the rebuild was revised up early on and then the timing pushed out in subsequent revisions.

The earthquakes occurred one week before the fiscal forecasts were finalised. There was limited information available regarding expected loss and recovery plans. The limited period of time adds a significant amount of uncertainty to the estimates included in these forecasts. The fiscal forecasts capture initial estimates of costs. Experience with the Canterbury earthquakes suggests that as more information comes to hand and the recovery plan becomes clearer, additional damage may be uncovered and subsequent aftershocks may cause further damage or delay the recovery. Where this occurs, cost estimates may rise over time.

Figure 1 - Estimates of the cumulative fiscal cost of the Canterbury earthquakes
Figure 1 - Estimates of the cumulative fiscal cost 
of the Canterbury earthquakes   .
Source: The Treasury

For example, as Figure 1 shows, following the Canterbury earthquakes the initial estimate in Budget 2011 of the total fiscal cost was $8.8 billion, around half of the current estimate of $17.5 billion. This increase was a mixture of new damage from aftershocks, subsequent government decisions (eg, red zone offers), and re-estimations of initial damage.

Every additional $1 billion of spending by government would increase net debt by just under 0.4% of GDP.

Risks to the current estimates include:

  • potential damage from significant aftershocks
  • capacity to reprioritise spending to fund the recovery
  • the level of government contribution to the rebuild of local infrastructure
  • the extent to which assets are replaced or upgraded, and
  • additional damage discovered as debris is cleared from sites.

Further commentary on risks and uncertainty can be found in the Risks and Scenarios and Specific Fiscal Risks chapters.

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