Discussion paper from Local Government New Zealand, with the backing of the NZ Initiative, calls for devolution of power including taxing from central to local government

Discussion paper from Local Government New Zealand, with the backing of the NZ Initiative, calls for devolution of power including taxing from central to local government
Should cities like Auckland have greater powers? Local Government New Zealand thinks so and outlines its case for greater devolution in a new discussion paper. Photo by Jenee Tibshraeny.

Local Government New Zealand’s (LGNZ) says the country's centralised approach to government is holding back our economy, diluting democracy, and crowding out community input.

The key message from LGNZ's conference this week is a call for greater devolution.

LGNZ says it wants to see more power shifted from central to local government and it has a plan on how to do it. But whether its grand vision gets any traction in the Beehive is another story.

It follows the release last week of the Productivity Commission's draft report on the funding and financing of local government. The commission says council's couldn’t rely on rates alone to pay for the the rising cost pressures they face due to infrastructure, climate change, tourism and the growing responsibilities placed on them by central government.

LGNZ spells out its case in its latest discussion paper titled: Reinvigorating local democracy: The case for localising power and decision-making to councils and communities.

“LGNZ, with the support of the New Zealand Initiative, is calling for a shift in the way public decisions are made in New Zealand by seeking a commitment to localism. Instead of relying on central government to decide what is good for our communities it is time to empower councils and communities themselves to make such decisions,” LGNZ president Dave Cull says.

“This means strengthening local self-government, putting people back in charge of politics and reinvigorating our democracy. We are seeking an active programme of devolution and decentralisation. We are seeking an active programme of devolution and decentralisation. Localism is underpinned by the principle that power and authority should flow up from citizens and communities, not down from the Government.”

Blueprint or wish list?

The paper outlines what it says is a process for gradually changing from the top down, centralised approach to government, to one based on more local input, where communities play more of a meaningful role in the country’s social, economic and cultural development.

It says when it comes to government New Zealand is one of the most centralised countries in the developed world, despite the fact this isn’t something widely known by the public at large.

“The share of tax expenditure shows just how stark our centralist tendencies are, with 90% of all public expenditure controlled by central government. As a fiscally centralised nation our responses to emerging problems and challenges tends to be “top down” and “one size fits all” in nature.”

LGNZ says the risks to the country of placing so much control in the hands of central government is similar to those created by any monopoly provider. It says this includes a lack of contestability and the risk of policy capture, undifferentiated services, diseconomies of scale and a lack of responsiveness and bureaucracy. It says in addition centralisation can have negative economic and social outcomes.

“Recent data from the OECD (2016) shows that decentralised countries tend on the whole to be wealthier than centralised countries. This is partly explained by the way in which localising decisions through decentralisation strengthens allocative efficiency. This is achieved because decentralisation of public services is more likely to result in a better match between communities’ needs and preferences and the provision of public services, that is, over-provision and under-provision are less likely to occur.

“Reinforcing this trend are two recent research projects from the World Bank, which found that a 10% increase in the level of decentralisation is associated with an average increase in per capita GDP of 3%. In short, decentralised countries tend to be wealthier than centralised ones. They also vote more at the local level.” 

It says devolution, or localism, provides local politicians and their communities with an incentive to take a more proactive approach to economic and social development.

“It gives them a real stake in the running of their communities. Centralisation is prone to paternalistic behaviours (we know what is best for you) that leads citizens to believe that the Government will necessarily “fix things”, which it is not always well positioned to do.

“This is not to say that we don’t need a strong and effective system of central government. Central government has a critical role to play, but successful outcomes increasingly depend on the willingness of governments to stand back and be prepare to support local efforts. Too often government programmes are “helicoptered” into communities with little understanding of the local context.”

It says we can no longer afford to use a paternalistic “central government knows best” model of public decision-making.

Who pays?

But central to any talk of devolution is who is going to pay for it? Something LGNZ makes mention of in its report.

“One of the first challenges any move towards localism needs to get right is funding. If we are serious about enabling communities to develop and take ownership for solutions to local problems and challenges then fiscal discretion is essential. Unfortunately, the current way in which councils are funded fails to adequately incentivise them to grow their tax base in order to invest in the services, amenities and infrastructure that will attract new residents and investment.

The report says councils received most of their funding through rates. And while it is efficient, it’s also inflexible.

“One solution would be to introduce a local tax, as happens in a number of countries whereby citizens pay taxes to their municipality as well as to central or federal government. Alternatively, a share of the GST spent in their districts or cities could be retained or returned to councils. A second solution, which might help “sell” the idea to central government, would be a “tax swap” whereby the Government agrees to share a proportion of its GST income with councils in exchange for a share of each council’s property taxes.”

The paper says this would also serve as an incentive to councils to foster economic growth and development.

While it might not appear to address councils’ immediate funding needs it would provide a strong incentive to promote local economic growth, as their GST receipts would increase respectively. This may need to be accompanied by a rates cap to ensure that taxes stay low, and councils’ incentives are aligned with growing the local economy.

Local levies or taxes

“Some areas face unique pressures that existing funding tools are insufficient to solve and where central government processes are either too slow, or unsupportive, to help adequately. Two examples are Queenstown Lakes District Council, which faces pressures of visitor demand, and Auckland Council, which faces pressures created by fast population growth.

“In both cases reliance on property taxes and limits on the ability to borrow have exacerbated the problems facing the councils and their communities, risking the attractiveness of Queenstown as a holiday destination and economic growth in Auckland due to housing affordability and an infrastructure backlog.”

It says the answer is to allow councils to develop specific funding tools which are able to be targeted to those sectors creating the pressures. It says this could involve local levies or taxes to meet “exceptional” demands, such as the impact of visitors on infrastructure.

“This would need to be supported by a robust regulatory framework to ensure it operates in an efficient and accountable way and also evidence of community support, such as through a local referendum.”

Threat of Government cost shifting

But it says it is important that greater devolution, or localism, isn’t accompanied by greater cost shifting.

“LGNZ is calling for an end to cost shifting and unfunded mandates. These occur when central government requires a council to undertake a new service but fails to provide the funding necessary to carry the service out. They can also occur where councils are required by central government to increase service level standards of existing services, again with no funding to pay the additional costs.”

“Preventing cost shifting and unfunded mandates is also important to our localism agenda as arbitrary interventions by ministers in decision-making by councils will ultimately diminish the willingness of citizens to contribute to, and the willingness of elected members and officials to endorse, a localist approach.”

It cites the Sale and Supply of Alcohol Act 2012 as a prime example.

“In 2012 the Sale and Supply of Alcohol Act was amended to give communities the right to adopt local alcohol policies in order to control harm from the sale and consumption of alcohol. Years later many councils are still trying to adopt their policies despite spending significant resources defending legal challenges.

“This example highlights a common situation where central government gives councils a duty but fails to provide them with the powers or resources to carry the duty out in a way that will meet the expectations of their communities or the intent of the legislation.”

Need to deepen democracy

The paper says part of the reason for its call for localism is the perilous position democracy finds itself in in many western countries in the 21st century.

“Democracy, not just in New Zealand but in much of the world, is under pressure. Fewer people are voting, trust in democratic institutions is declining or low and we are seeing a growth in populist parties, many of which show little sympathy for the democratic process that put them in power. One reason given for this “democratic recession” is a growth in the number of citizens who feel marginalised and excluded from social and political life.”

It says the key to turning it around is more democracy, not less, with citizens having a meaningful say in the way in which their town or city develops.

“Localism is not just about shifting decision-making from central government to local government, it also involves giving citizens themselves the ability to be directly involved in the decision-making process. We want to devolve power to communities through a reform of the local government system, not a devolution of power to local government per se. To make this work we need to move away from the pure “representative” model of democracy currently in use, where councillors are ultimately accountable at the ballot box, to one that is inclusive and engages the community in the decision making process.

“The evidence suggests the quality of decision-making is improved where government actions more closely match the wishes of their citizens. In this way, empowerment can revive civic society and drive improvements.”

It says there are numerous ways to achieve greater community engagement in council decision-making.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Two statements stood out to me particularly
“LGNZ says it wants to see more power shifted from central to local government and it has a plan on how to do it. But whether its grand vision gets any traction in the Beehive is another story.” - Yup, central gov would fight tooth and nail to hold on to as much power as possible.

“Centralisation is prone to paternalistic behaviours (we know what is best for you) that leads citizens to believe that the Government will necessarily “fix things”, which it is not always well positioned to do.” - Citizens think this as central gov campaigns on it ironically to get into power and then hold onto it as per the first comment.

No accountability and all spin in general with our politics.

HEY BOY HEY GIRL SUPERSTAR DJs HERE WE GO!!!!! ..

A lot of the issues raised here break down to incentives. It's no secret that mortgage holders make for good citizens. They are more inclined to be active in civics, the labor force, paying income taxes, paying rates, supporting the local economy, etc. Mortgage Holders Form Long-Term Households.

Unfortunately home ownership in New Zealand is currently at a 50-60 year low. To have decent cities and increase standards of living, creating competition between councils via income-tax is a fascinating idea. In the USA they have such competition between States, that's how California became the 5th biggest economy in the world [bigger than the UK].

If you don't like the tax policies, transport policies, housing policies of one NZ council, people can move to a city more friendly to pensioners, youth, workers, the environment, etc. At the moment we have a situation where central government comes down and strikes with its' policy stick, as it pleases, onto whatever region it pleases.

When a large percentage of income tax is given to councils to spend, I'd posit people become very, very interested in local government and its' quality. If councils over tax, refuse to develop decent housing policies, and/or run down infrastructure .. people will move to cities with better governance, aka better money management.

The incentive for councils then becomes retaining their citizens/stake-holders (tax payers) .. and I'm sure many housing issues will be solved in the process.

Do I think every council in NZ should be setting tax policy, NO! But their is room for a few. Imagine paying 0% tax on the first $15,000 you earn. Imagine being a high-income-earner and paying no more than 25%. Imagine cities luring overseas companies with tax breaks .. this is great stuff!

I'm not trying to channel the ghost of Adam Smith, but it definitely needs trying out .. tax redistribution, not channeling Mr Smith.

Some of this is just plain scary! In all my years, rates have grown every year at more than the rate of inflation with councils virtually invulnerable to any call to account over that. And now they want more power?!! LGNZ need to reconsider and include some form of accountability structure, where they become more accountable to their rate payer base.

I think that's a point they make, Murray... Councils only have one core revenue stream; rates. Diversifying this would lower the dependence on rates increases. It also eliminates the incentive for councils to continuously pump land values in order to push through rating increases.

The whole article is a champion of accountability through revenue diversification - increase the range of behavior offsetting tools, and councils are forced to compete for citizens. i.e. the elasticity of demand increases, lowering the effective power of the councils. The accountability lies in the fact that citizens become more mobile.

Yes, they would get a more diversified income stream. But then they would also be responsible/accountable for providing a whole lot more services. In my experience I doubt this would be handled well.

Council decision making is poor, foresight is non-existent, and wastage/bloat is rife.

My apologies, I also just described the Government. I guess it doesn't matter who does what.

Haha.
Yes. I definitely agree.

But I think competition would target this, also, right?
People are are going to migrate due to two things, generally; amenity and real wage arbitrage. Councils who can eliminate the inefficiencies are going to be able to either lower taxes (increase real wage) or increase amenities.

Ultimately any level of civil service is inefficient because it is a job for life. In my opinion any policy that aims to address this is a step in the right direction.

I am not so sure you want competition in councils. It leads to a race to the bottom, and the eventual outcome being a survivor/loser scenario.

In business the loser usually goes bust and shuts down. What would the losing council(s) do?

Potentially. Yes.
But it's probably better than the current alternative where councils make losers of the citizens.

Yes i get the argument, but i don't buy it. they want to develop other income streams from the same pool of people. Can you honestly see the Government giving up some of it's tax, to give to the councils? I don't, so this will just be more costs on people who already struggle to afford what they have to pay. In the regions, where i live, my rates have been significantly higher than the main cities for years, and at one point about 5 years ago when i did a bit of research, we were at the top of the range, but our services are not better, but a little less than the big cities. And unlike Auckland and Wellington it is difficult to get central Government help on virtually everything. And then don't get started on the calibre of elected councils - superb at avoiding decisions, but getting meaningful things done, just rubbish! Good for the Art Gallery though!

Well. No you don't..
The rate increase is offset by diversity in revenue streams. It's not about adding cost, it's about lowering it. The diversity in revenue streams allows the respective council to incentivise localised behaviours - people cluster based on these incentives.
You complain about the level (cost) of public services - these only increase with scale. The diversity of the revenue stream allows councils to incentivise productivity growth which addresses this.

Again. The calibre of civil servant is a direct result of the fact that they are not accountable. Increasing the potential elasticity of demand across TLAs means that less of the burden of this inefficiency is placed on the citizen.

Nice words Nymad, but I still don't buy it. the costs won't come down for the majority. Young, more mobile people might move, but many won't be able to. It appears there is an assumption that people can be made to be more mobile, but that also requires them to surrender security and stability which will have a negative impact on families and saving. Clustering will drive up costs. You admit that increased scale drives up costs, so there will be penalties for clustering.

No, Murray.
Labor is exceptionally mobile in New Zealand - there is little to suggest that we have ever had substantial lock in effects from home ownership. The lock in effect comes from industry - New Zealand is industrially dominated by three cities; Auckland, Wellington, and Christchurch. Diversifying the way in which regions can incentivise industry is the key to addressing this.

I said increased scale drives down costs (Typically parenthesis indicate the inverse proposition). Clustering/intensification will only drive down costs and stimulate productivity growth.

Although the concept seems to work in some other countries - USA, Switzerland, etc., NZ's population and population density is too small. Even with the best of intentions I feel that the risks of the proposals tend towards a larger public service, more bureaucracy, and higher total costs.

Agree, both countries you mentioned were also essentially founded on that principle. So it is ingrained into their day to day mentality. This is further backed up by the fact that their entire legislative and Judicial systems embrace that separation.

Is NZ ready to have "States" I would say absolutely not.

Was there any evidence of this effect in Auckland when we had all the separate councils before we converted to the Supercity?

Well, obviously they were limited by competition in amenity, rates, and planning provision.
But...
Services were different across the councils.
Rating structures were different.
Land use restrictions were different.
Development contributions were different.

but was there any evidence of companies and residents moving/choosing to establish themselves in a particular area as a result?

This is a sound approach. I wish NZ does it. Unfortunately populist media and politicians find it easy to undermine local politics. This makes the politics of bottom up decision making hard to implement.

The core problem with the call for 'greater devolution' and 'local democracy' hinges around the notion that Councils, and more particularly Councillors, actually control things. The sad fact is that Council Staff are the real movers and shakers. They are doctrinaire, unaccountable, un-elected, un-fireable, prone to the fad-du-jour. They can arrange decisions, delay projects, cause cost, pursue their own agendas, and generally have their wicked way with scads of compulsorily acquired OPM, and have it all rubber-stamped by the set of elected buffoons around that distant Council table.

Whatever one can deem this, Democracy and Accountability it ain't.....

I completely understand they want to diversify their income base but this 'idea' from Local Government is naïve at best.

I'd be much more sympathetic if they put forward and argument where the councils received the GST collected in their area. Then the more activity there is in a particular area the more the council receives. They are incentivised to attract business, people and visitors to their area to increase GST take.

Absolutely no.
For a country of 5 million we already have 3 layers of government - its absurd.
We hardly have enough quality management & politicians for central government
It should be the other way around. Force local government to:
a) To amalgamate into unitary authorities
b) Undertake business case and impact assessments on all their spending
c) Spend on essentials first & then nice to haves

No way should tax take be devolved to councils. While some may be competent, most are not and even less competent than Wellington. Having worked in several the power will go to their heads and any drop in national tax will be more than offset by an increase in local tax. And NZers aren't that mobile overall - certain demographics are, but those with children at school, pensioners etc, definitely aren't, and would be hostage to their local council.

To give an example of how arrogant these petty local officials can get, i remember going to a presentation on the next year's budget which included sharp rates increases, and being told that detractors 'just didn't get the bigger picture' - this is when pensioners were literally crying at the front desk as they couldn't cope with their rates bills, while some officials spent freely and frivolously with no accountability. Giving local councils ability to tax on top of rates is like giving an alcoholic the keys to the liquor cabinet.