EQC levy to triple as Govt posts $18.4b deficit

VERNON SMALL AND HAMISH RUTHERFORD

A trebling of the EQC levy will put ''a bit more pressure'' on some home owners ''fully stretched'' paying their mortgages, Finance Minister Bill English admits.

The Government today announced that EQC levies would triple from 5c for every $100 of cover to 15c, lifting the annual maximum for homeowners from $69 a year to $207 a year.

The increase, which takes affect in February next year, will add about $2.65 a week to most homeowners' insurance premiums.

''It will put a bit more pressure on, particularly on some home owners who are fully stretched on servicing their mortgages. But we think in the circumstances, in order to shore up the EQC's finances, it's an extra bit that households will be able to handle,'' English said.

Crown accounts for the year to June released today showed a record $18.4 billion deficit in the 2010-2011 year, a deterioration of more than $12b in a year.

The cost of the earthquakes so far, at $13.6b, included $11.6b for EQC.

Strengthening EQC's finances through an increased levy would provide confidence to homeowners that the insurer could meet its obligations now and in the future.

''We think in the circumstances, in order to shore up the EQC's finances, it's an extra bit that households will be able to handle,'' English said.

Labour's finance spokesman David Cunliffe said it was appropriate to hike the EQC levy because the country could not afford to not have cover.

However, it was another addition on to the ''sky-rocketing'' cost of living.

While inflation was rising, median incomes were falling, Cunliffe said.

''There is no doubt that middle New Zealand has borne more of the pressure and there has been relief at the top end where arguably it was neither needed nor was it particularly good stimulus,'' he said.

English said the levy hike was particularly important given the tight fiscal position reinforced by the latest accounts.

The rise would enable EQC to rebuild the disaster fund to its pre-earthquake level of $6b in about 30 years.

It would also reduce EQC's estimated cash shortfall from $1.2b to $490m, cutting the amount the Government would have to provide under its guarantee of EQC's payouts.

The total annual levy would rise from $86m to about $260m.

He said the rise in the EQC levy was not based on a full actuarial assessment of future liabilities, which would be calculated as part of a future review of EQC.

"However, it is clear the current levy is too low and needs to increase now to pay for EQC's operating costs and to begin rebuilding the NDF."

The accounts for the year to June 30, 2011 showed total revenue was almost $82b but spending was just under $100b boosted by the cost of the Christchurch earthquakes.

They added $4.5 billion to total revenues, from insurance and reinsurance, but expenses relating to the quakes were $13.6 billion out of a total increase in expenses of $18.9b.

The net impact of the quakes was $9.1b.

A recovery in investment markets contributed a net gain of $5b bringing the headline $18.4b deficit down to $13.4b.

Tax revenue at $51.5b was close to forecast, but policy changes during the year had cut tax by $2.7b while the increase in GST had added $1.6b.

The cash deficit for the year including capital expenditure was $13.3b, pushing net debt up to $40.1b or 20 per cent of gross domestic product. Gross debt was $18.9b higher at $72.4b.

English said the Government had taken steps to significantly reduce the deficit and intended to return to surplus in 2014/15.

The Crown's net worth was down $14.1b on 2010 and stood at $80.9b or 40.4 per cent of GDP.

Bank of New Zealand economist Doug Steel said if the economy tracks as the bank expects it to, then the Government should still be able to achieve surplus by 2014/15, as it is targeting.

''It's as challenging today as it was yesterday. That's not to say it's not achievable, I think it still is. Obviously a lot depends on how the world economy performs and its impact or otherwise on the performance here at home.''

The risks to achieving surplus by the target date included a drop in commodity prices, a renewed financial crisis which could push up financing costs, and a weaker than expected domestic recovery, which itself would be driven by the Canterbury rebuild, Steel said.

''Obviously [there are] many moving parts there... but if the world economy can hold up and economic growth here can truck along as predicted then that should flow through to the fiscal accounts and budget surplus by then.''

The Council of Trade Unions claims today's announced rise in the EQC levy is effectively a tax to raise funds for the government.

CTU Economist Bill Rosenberg said the EQC had insufficient funds to cover the Canterbury earthquakes, so the Government has to find an estimated $1.2b from borrowing and the increased levy reduces that to $490m.

''There is, in reality, no difference between this expenditure and all the other expenses required by the earthquakes. A much fairer way to raise funds to pay for the earthquake would be a special earthquake tax targeted at those who could most afford it."

Rosenberg said while EQC levies will have to rise, even this tripled levy will still take no less than 30 years to rebuild the EQC's Natural Disaster Fund.

''Substantial rethinking needs to be done on many aspects of the EQC in the light of the earthquakes, but this is a revenue raising exercise with no obvious logic to its size or form.''

Rosenberg said the Operating Balance was thrown out by the $9.1b provided for the earthquakes and would otherwise have been similar to the previous year, according to Treasury.

"However this has been at the expense of already very tight health and education budgets which have been under spent by $300m each.''

Rosenberg also said the cost of the tax changes that took effect in October 2010 was even higher than budgeted. In the 2010 budget, tax cuts were forecast to cost approximately $2.5b during the year when in fact they cost $2.7b.

The Government will unveil the state of its books in a pre-election fiscal update on October 25.

Finance Minister Bill English and Treasury will present the Pre-election Economic and Fiscal Update - Treasury's update on the state of the Government's books and the economy designed to give political parties who are campaigning an up-to-date set of numbers to base their election campaign on.

Labour has said it will wait for the release of the update before announcing  its flagship savings policy.

- © Fairfax NZ News