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The economic consequences of Cyclone Gabrielle

23 Feb 2023

| Author: Reweti Kohere

Cyclone Gabrielle will significantly widen New Zealand’s burgeoning infrastructure gap, with early cost-estimates of $13 billion adding to the current shortfall of hundreds of billions of dollars. With roads buckled, bridges washed away, power lines broken and some cell towers still out-of-action, repairing cyclone-ravaged infrastructure in as many as seven regions in the North Island will be a priority of any rebuild.

While the Treasury is getting a clearer picture of the economic cost of Gabrielle’s devastation, Finance Minister Grant Robertson has likened it to the $13b expense of the Canterbury earthquakes 12 years ago.

“[Gabrielle is] going to be the biggest weather-related event this century and it will have a multi-billion-dollar price tag,” Robertson said in a recent interview with TVNZ’s Q&A. But even before the cyclone hit, a deficit in public infrastructure stretched nationwide across several crucial sectors of the economy.

Meeting the gap over the next 30 years would cost $210b, according to research commissioned by the New Zealand Infrastructure Commission – a figure the Treasury cited in its investment statement last year. “We need around $104b more public capital to meet the current shortfall,” Sense Partners’ report said. “If we keep investing at the current rate, we will not keep up with renewals and future demand. We will be short by another $106b in 30 years’ time (in today’s prices).”

Not enough

New Zealand’s infrastructure deficit arose from a slump in investment in the 1980s and 1990s, the report said. While investment recovered in the early 2000s, it hasn’t been enough to meet the country’s needs.

The total bill, factoring in the necessity of renewing and upgrading investments now and in the future, could exceed $1 trillion if New Zealand simply spent more to close the gap. However, “we cannot build our way out of the infrastructure challenge,” the report stated, adding the cost of reversing the historical and future deficits would require almost doubling current spending of 5.5% of GDP – an amount equal to $31b a year.

The fiscal burden created would be unpalatable to both levels of government and would require a bigger workforce to plan, deliver and maintain the additional infrastructure, the report said. The government is looking at adjusting visa settings to increase labour supply for the rebuild, an acknowledgement of the challenge of a persistently tight labour market.

Besides increasing spend, New Zealand needed to make better use of infrastructure, better project selection, broaden funding options and streamline delivery.

Some of the total cost of the cyclone would be absorbed by insurance and the existing budgets of government agencies, Robertson told Q&A. Ensuring shelter, food, water, power and communications were the government’s immediate priorities in allocating disaster relief funds, while transport networks would take longer to repair.

Budget talk

The government has announced $300m of initial cyclone relief funds, most of which will fund Waka Kotahi’s efforts to repair damaged roads, with the remainder supporting hard-hit businesses.

Prime Minister Chris Hipkins said the package was an interim measure and signalled a “rolling maul” of support would follow “as we get a better picture of the scale, cost and needs in the wake of this disaster”. The government also extended the national state of emergency for another seven days.

The government has $4.5b in new operating spend and $12b in multi-year capital expenditure to play with in this year’s Budget, plus $40b it can spend before reaching its new debt ceiling of 30% of GDP, a fiscal rule Robertson introduced in the 2022 Budget.

Asked if he would tighten spending to rein in inflation, the minister said a balance must be struck. “We’ll be careful – we’re not going to blow things apart here fiscally. But we’ve got to respond to the needs in front of us.”

Economic growth would take a hit though. “If you include Auckland, 58% of New Zealand’s GDP has been affected by a weather event in the last month,” Robertson said, adding the recovery phase of the response would stimulate productivity.

‘Now is the moment to reset’

The economic cost of Gabrielle will hit insurers’ books too. Last week, the Insurance Council of New Zealand (ICNZ) estimated insurers were dealing with more than 40,000 claims arising from extreme weather events in the past month. Already, insured losses so far this year surpass all those incurred from natural disasters in 2022.

During the Environment Select Committee’s recent hearing on the Natural and Built Environment Bill, ICNZ advised that insured losses from extreme weather events in the last month would exceed the comparable losses for all of 2022 – a record year at $336 million. In response to the influx of claims, the government expanded a service used after the Christchurch earthquakes to help people navigate the claims process.

The NZ Claims Resolution Service will provide expert support to homeowners to avoid disputes, resolve issues and ensure their claims are settled as quickly as possible. ICNZ welcomed the nationwide expansion, with chief executive Tim Grafton describing the service as “invaluable” in offering “truly independent, free advice” and helping people through the process.

But the country mustn’t lose the opportunity to build back better. “Repairing and rebuilding property and infrastructure in high-risk areas to the same specifications as the past will only lead to a repeat of the dreadful consequences we have all seen,” Grafton said. “Now is the moment to reset and ask questions about whether to rebuild in some locations and if we do, how to rebuild better to better protect ourselves.”

Robertson said difficult conversations loomed as to how the country adapted to a hotter world. “Two words New Zealanders are going to get used to hearing over the next few years [are] ‘managed retreat’.” ■

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