EQC levies to treble from February next year

Tuesday 11th October 2011 1 Comment

The compulsory Earthquake Commission levy is to treble to 15 cents per $100 of insured value from February next year, as the first step in a 30 year plan to rebuild the National Disaster Fund, which was wiped out by the Canterbury earthquakes.

Finance Minister Bill English announced the change this morning at a media lock-up for release of the Crown accounts to June 30, which showed a massive blow-out in the Budget deficit as a result of costs that the government is bearing because of the quakes.

The increase is estimated to cost the average insured homeowner some $137.80 a year, or $2.65 a week, with the cap on total EQC charges rising from $69 a year to $207 a year.

The move will also immediately reduce the up-front cash shortfall to the government from earthquake costs from $1.2 billion to $490 million.

The cash shortfall had previously been estimated at $500 million, but a High Court decision requiring the EQC to make payments on multiple disasters in one year had increased that sum by an estimated $380 million. An allowance for future non-Canterbury claims had also added $330 million, which had not previously been calculated, said English.

The impact of this immediate change will be visible when the Pre-election Fiscal Update is releasedon Oct. 25, as required by the Fiscal Responsibility Act.

The EQC Natural Disaster Fund cannot fail, even if it has insufficient funds, because it is guaranteed by the government, but the $6 billion collected in the fund was more than wiped out by total claims estimated at $11.7 billion.

While reinsurance payments of $4.2 billion and earnings in the EQC fund reduced the gap between claims and the size of the fund, some $1.1 billion of insurance costs remain unfunded.

English said the new levies were fair because insured homeowners gained the benefit of EQC cover and should not be subsidised by non-home-owning taxpayers. The Green Party has advocated a temporary quake levy to meet the extraordinary costs of the quakes.

They would enable EQC to “rebuild the National Disaster Fund to its pre-earthquake level of $6 billion in about 30 years” and would also allow the EQC to cover its running costs, which have normally been subsidised out of the fund’s earnings.

However, the levy increase is not the last word on future preparation for earthquakes, with English due to take a paper to Cabinet for a complete review of the EQC in coming months, with the exact timing depending on “getting more issues resolved on the ground in Canterbury,” English said.

Meanwhile, the Crown accounts for the year to June 30 confirmed what was already well-known – that the earthquakes punched a hole in the government’s finances, taking the operating deficit before investment gains to $18.4 billion (9.2% of GDP), compared with $6.3 billion (3.3% of GDP) in the year to June 2010.

Offsetting that slump was approximately $5 billion in improved returns from the Crown investments such as the New Zealand Superannuation Fund and Accident Compensation Corporation investment fund, which reflected improvements in global financial markets over the course of the year.

That put the residual cash deficit at $13.3 billion (6.7% of GDP), including capital expenditure by the government, and produced an operating deficit on the usual activities of government of $9.3 billion, which includes quake expenses.

“A combination of higher than forecast revenue and lower than forecast spending has reduced the underlying deficit by about $2.8 billion,” said English in a statement. “However, this is more than overshadowed by the higher earthquake costs.”

Net government debt grew from 14.1% of gross domestic product at June 2010 to 20% of GDP at June 2011, again reflecting the one-off impact of quake-related costs, but still at the lower end of debt levels among OECD nations.

The impact of the earthquakes is written largest in a dramatic impact on the estimated net worth of the government as a whole – that is, the balance of what it owns versus what it owes. Net worth fell from $94.988 billion in 2010 to $80.887 billion, taking it back to pre-2006 levels.

Despite spending constraint in the core public sector, government spending as a proportion of GDP also rose in the June 2011 year, to 35.2% of Gdp, again a five year high-point.

BusinessDesk.co.nz

Comments from our readers

On 11 October 2011 at 3:47 pm Siena said:

Kiaora. We do need to replenish the EQC, and we need more than just mere sufficient 'Reserves'. Reinsurance will be a major factor because New Zealand is dependant upon it, as Jerry Brownlee has stated, New Zealand "will never cover a major disaster on its own." With the frequent aftershocks still occurring in Christchurch, I would say reinsurance in the 'Garden City' would be very difficult if at all - No insurance company would want to touch Christchurch with a barge pole. I read that a team, representing the Insurance Council, negotiated a draft legislation with the EQC and Treasury in the early 1990s, which included the change from indemnity value to replacement value, adoption of a first loss philosophy and the $100,000 cap. The idea behind the $100,000 and its calculation was that everyone should have EQC cover sufficient to re-build a basic home and buy essentials such as beds, refrigerator etc. The $100,000 effectively came from the standard NZ Modal home at that time of approx 1,000 sq ft at $100 a square ft. Homeowners needing more could take out extra private insurance. To me that makes it even more essential that over years this figure should have been raised, whether simply by inflation or a re-calculation. On differential rating my understanding is Government wanted a simple scale with cross-subsidisation eg Wellington pays the same as Whangarei. On land value because the EQC cover is limited to 8 metres from the house plus the driveway should rectification of land in Remuera cost more than in Kaitaia?