Uncertainty around budget

Photo: ODT files
Photo: ODT files
A flat national economy, high interest rates and lingering cost pressures loom as a testing budgeting backdrop for the Dunedin City Council, as it shapes its 10-year plan.

Uncertainty also continues to swirl around its biggest cost centre — Three Waters.

Councillors are due to consider financial assumptions for the 2024-34 draft long-term plan next week, including how to treat inflation and interest rates.

An assumption about borrowing costs three years ago was interest on existing and new debt could be calculated at 2.85% per year for floating debt.

A report about the 2024-34 draft plan for next week’s meeting has the interest figure at 5%.

This has implications for a council that has signalled its capital spend across the 10 years could be about $2 billion.

"There is uncertainty on the floating rate debt, but the expectation is that interest rates will stay relatively stable over the 10-year period," the report said.

About $1b of capital expenditure could be allocated to Three Waters, it has been signalled.

Clouding this a little is the government’s intention to reverse aspects of the previous government’s water reforms — the council assessed the level of uncertainty about that as high.

For the purposes of preparing the draft 10-year plan, it is assumed the council will continue to deliver Three Waters services through the 10 years.

"The impacts of new proposals from the government for Three Waters reform will be assessed as information is made available," the report said.

Uncertainty about inflation was assessed as medium.

The council meeting agenda included an October report by Berl for local government.

Higher-than-normal price increases remained a key risk, although the worst seemed to have passed, Berl said.

It estimated the consumer price index (CPI) would rise at a rate of 2% a year.

Increases in water and environmental price levels would consistently be higher than 2% and roading would often exceed 2% rises as well.

Berl concluded international and domestic economies had lost some steam as effects from interest rate hikes by central banks flowed through various sectors.

"The high inflationary environment has eroded the purchasing power of consumers — be it households or organisations.

"To add to this, high interest rates have deterred investment and consumption by households and businesses alike."

In June last year, annual inflation came in at 6%. This was down from 6.7% recorded in the year to March.

The latest annual inflation rate reported by Statistics New Zealand was 4.7% in the year to December.

"While this is the smallest annual rise in the CPI in over two years, it remains above the Reserve Bank of New Zealand’s target range of 1%-3%," consumer prices senior manager Nicola Growden said.

Berl described a subdued economy and "pencilled in" an annual increase in gross domestic product of 1.2% for the year to June 2024, followed by a 1.1% increase in the year to June 2025.