By Guy C. Charlton*
Auckland Mayor Wayne Brown’s recent unsuccessful demand to have the central government repay the GST levied on property rates is the latest salvo in the battle over funding for local government in New Zealand.
It points to the topsy-turvy state of local government finance and the inability of central government to address local government financial and public policy concerns.
It’s also the result of poor decision-making by local governments to properly invest or adequately monitor their operating costs.
These problems hurt both ratepayers’ pocketbooks and quality of life. The issues also starve local governments of the funds they need to provide services and invest in important infrastructure.
But it doesn’t have to be this way. Central government can ease the burden on ratepayers while helping local government to balance the books. The question is: will it?
The cost-of-living crisis affects everyone, including councils. We've even got the receipts. It’s unsustainable to keep putting up rates just because costs are going up – that's why we’re pushing for more funding tools from the Govt, so councils don't have to rely on rates. pic.twitter.com/Mgb8aH3HCJ
— Local Government NZ (@lgnz) April 4, 2024
Rates are on the rise
Auckland has proposed, on average, a 13.75% increase in rates. The Wellington Regional Council is proposing a 19.8% increase and Lower Hutt has proposed a 16.9% increase starting July 1. Hamilton is proposing a 25.5% rate hike, while Buller District Council is proposing a 31.8% rates increase.
These increased rates are the result of inflationary pressures that have impacted local government operations. It is estimated the increase in operating costs and infrastructure will require councils to scrap or delay 20% of proposed projects.
Like many local governments across the world, New Zealand’s local governments rely on property taxes to fund a major portion of their operations. However, local taxation has not risen despite increasing responsibilities and public expectations.
In February, S&P Global Ratings reported that local government rates had not increased as a percentage of the economy (around 2%) in the past 100 years. This is compared with central government taxation, which has gone up 200% in the same period.
Councils carrying the weight of national objectives
This lack of growth is particularly alarming given the increased obligations assigned to local governments under the Resource Management Act, Local Government Act 2002 and a host of other legislation.
The lack of alternate sources of funding and tax authority has led to an over-reliance on rates. Rates account for more than half of council funding.
Even with increased central government transfers, the needed investments and increased costs faced by local councils have created an unsustainable situation which has been papered over by local government debt.
As a consequence, local councils’ average debt levels are much higher than similarly rated northern European countries – about 180% of revenue.
At the same time, the central government has a comparatively low debt rate. According to the OECD, the debt in 2023 was 56.6% of GDP. This compares with a 120.8% on average across the OECD. Clearly, there is room for more central government involvement.
These problems are exacerbated by the government’s repeal of the Auckland petrol surcharge and the axing of Labour’s Three Waters reform. This reform would have amalgamated the 67 council-owned authorities managing drinking, waste and stormwater.
Supporters of the reforms argued larger entities would have the financial capacity to address underlying infrastructure deficiencies. Similarly, the Auckland region petrol tax was meant to fund infrastructure improvements and public transport alternatives.
But with the government’s unequivocal rejection of these local financing options, one wonders where sufficient funding to repair and replace ageing infrastructure will be sourced, much less the new infrastructure and services needed to meet the needs of a growing population.
Councils need to have the authority to enact accommodation levies, congestion charging, expanded tax incremental and development districts, tourist levies and sales and excise taxes, such as the recently removed petrol levy in Auckland, as well as increased access to GST funds.
The central government also needs to provide funding in lieu of rates on Crown property or allow local councils to charge rates on Crown land.
This would avoid the often unfair or strained use of targeted rates to raise funds which should be borne more generally by all taxpayers, as well as the odd “tax-on-a-tax” Auckland’s mayor was complaining about.
At the same time, the central government needs to increase transfers to local councils and provide additional funding that can be put toward particular policy objectives, such as the 2018 Provincial Growth Fund.
Poor funding puts communities at risk
The Future of Local Government report noted local government needs to deal with three different kinds of infrastructure: physical infrastructure (for example, roads, water and waste); social infrastructure (libraries and parks); and civic infrastructure (actions and practices that can leverage community engagement).
Funding shortfalls put these objectives at risk.
When New Zealand was first organised as a self-governing colony in 1853, the basic unit of government was considered to be local provinces and cities. Over time, policymakers appreciated the need to centralise policy and finance. This is reflected in the growth of the central government over the past 100 years.
However, centralisation and distance from on-the-ground problems have created the need for a new social compact. While central government finances are in relatively good shape, local governments have struggled.
This is unfair and counterproductive.
It does not recognise that New Zealanders move about the country in search of economic opportunity and quality of life. Their tax dollars should provide a basic level of local services and infrastructure.
*Guy C. Charlton, Associate Professor, University of New England.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
42 Comments
The government is going to go deeper into debt, to reduce (for a select cohort) taxes.
Local Government will jettison people and services, to reduce rates.
And so-called serious commentators will continue to use the word 'funding'.
Which is not the problem. Supplying, is the problem. And post-growth is the paradigm- the permanent paradigm - for which neither is prepared.
The government doesn't need to issue debt, it's a self imposed accounting procedure on its own balance sheet and made between the central bank and treasury and makes no difference to its overall liabilities. All government spending is financed by the creation of new NZ Dollar Currency and after which taxation deletes it again.
This conundrum is far more complex than many appreciate.
For example, what would happen if a city could charge whatever it liked so its books always balanced and the city's residents (or 51% of them) got what they wanted?
It could become like the leasehold vs. freehold scenario. You know - you find an extraordinarily cheap property, usually priced way below everything similar, and investigate. You find out that it is in fact leasehold and you'll be paying ground rent - often tens of thousands per year. So you ignore it because you don't have the maths skills to properly work out what's a reasonable price and what risks you face given whatever the terms of the lease are.
Overseas, there are examples where cities dramatically increased local taxes, usually on property, and the increase became akin to leasehold ground rents. Property prices fell as you now had to account for far higher holding costs. The 'asset rich but cash poor' left in droves, freeing up land & dwellings, while employed people with good cashflows came in and frequently businesses set up to draw on this pool. But this didn't always happen. Sometimes the city just slowly died.
It's a very interesting area of economics ...
But back to NZ ... NZ is quite unique in that we don't have 'local' taxes apart from property taxes, i.e. rates. Travel the world and your head will quickly spin when you encounter these 'local' taxes. (Anyone who has traveled the USA will know what I mean.)
It's always struct me as odd that Aucklanders (for example) can't implement their own taxes to encourage (or discourage) behaviors that we collectively think are good (or bad) for us. This creates a diversity of culture between our cities. And you'll be familiar with that diversity traveling to different cities in Oz. Or even between LA and San Fran.
You find out that it is in fact leasehold and you'll be paying ground rent - often tens of thousands per year. So you ignore it because you don't have the maths skills to properly work out what's a reasonable price and what risks you face given whatever the terms of the lease are.
Not to mention the fact that ground leases are often cheap - until the 20 or 30 year lease is up and you're hit by a $50,000 a year lease - and you want to avoid that.
Like I said, "what risks you face given whatever the terms of the lease are."
The terms can be written any way the lessor wants them to be. There is no 'standard' version. Sometimes you'll find all sorts of maths involved to limit increases and/or make them fair. Not every lessor is out to screw you.
Aucklanders and NZers in general have become too entitled to living beyond their means off other people's money. Both through escalating house prices, and through minimising rates by trying to put the cost onto others.
Rates need to go up. As folk are wont to say at auction time: it's never been cheap to live in a global city.
They aren't the same people - ratepayers are on average older, wealthier and work less. Taxpayers tend to be younger, poorer and more productive.
Local government is in a bind because the old and wealthy have chosen to borrow from the future rather than pay higher rates. Central government has only avoided that problem by using bracket creep to milk the young and productive for more every passing year.
Depressingly Labour seem to be at least as eager as Nact to shift even more of the burden onto the young and hardworking - think about who was going to pay for 3 waters.
The current problem we have is a result of a change made by the Clark government to allow councils to go and fund vanity projects. Which they of course did because it increases the chances of being re-elected. Investment in critical infrastructure was boring and so it was not done or delayed or minimised. This is why we have this problem (in a nutshell). That change needs to be repealed and council needs to get back to doing what they are supposed to do. However the pain of recovering will be on the rate payers. Maybe they will elect competent mayors and council as a result in the future.
Interestingly enough, Wayne Brown had to work around the right-leaning councilors and get support elsewhere because the right-leaning (nominally) were only obstructionist and completely uninterested in fixing anything. Which resulted in other right-leaning councilors having a sook.
The problem, as Brown identified correctly, is that the right-leaning councilors were mere NIMBYs and do-nothings unwilling to deal with problems in any other way than can kicking.
OK so if someone had 20 Hectares but where not allowed to develop it due to council unitary plan, then why not rate it like a 110sq m site in the city....... after all neither are allowed to develop hard to see how council can cause you to unlock it if they will not let you develop it, no matter its size or "value".
Perhaps every city site of 800 sq m should be rated as if its already 3 townhouses......
and in rural regions ask the farmers if they think they get value for the $90k rates bill
to many councils are fiscally incompetent (incontinent) and the CEO's and management team lead them along by their noses to the next trough.
It has been made worse over the last few years from central Govt bribing some with cash and promising to take over their 3 waters projects that they were still neglecting
all compounded by having way to many councils, councillors and mana whenua hanger-ons at the table
Agree the fiscal incompetence (probably globally) of local government is staggering. Allowing them to borrow more or charge more rates without more controls n their activities wouldn't help.
We need less immigration (less new infrastructure costs), water assets to be managed by someone capable (local govt has too many other priorities), and somehow we need better controls on what local govt is allowed to spend on and to control how much they spend on similar projects (e.g. benchmark national costs for pedestrian crossings or road resurfacing)... then we can compare those costs with overseas and see if we can improve further
I agree with much if what the new govt is doing... with targets. It would be good if local govt could do some of the same and announce targets for themselves (lol)
My perception is the quality of town councillors leaves much to be desired. Few with any economic sense. Feel good factors and spending on vanity projects such as addtional new sports facilities or massive upgrades on existing. Ugrading existing ones to appease a particular sport. No international matches here if you don't do this. Doubt if that's the only consideration in requiring international matches to be played in a particular city.
Oh yes now after x-years of this the 3-waters suddenly gets attention. We have to raise rates to pay for this when it should have been a process over the years.
Not sure how the appointed commissioners in Tauranga have faired but at least one is an ex-politician, Anne Tolley, Commission Chair, Anne Tolley has had a wide experience in local and national politics over the last 30 years. Bill Wasley has more than 40 years’ experience in resource management and senior management positions in local government and the private sector. Seems fit for purpose. Stephen Selwood is a professional director and an expert in infrastructure vision, strategy and policy. When I see infrastructure vision I see $$signs, not withstanding his other attributes.
We are at the Limits to Growth. That includes the Limits to Productivity, and the increase in Entropy.
Forever, from here on until they collapse, LAs will cost more per year, than íncomes will rise. Has to be that way, and exponential too.
Don't blame the people - and Tolley would know less than lost o that front.
Some big increases coming up...
https://www.nzherald.co.nz/waikato-news/news/hamilton-city-council-to-p…
Use parking fees to replace the funds lost by Simple Simeon's repeal of the regional fuel tax.
I would suggest Pakuranga would be a great place to start implementing user pay parking fees to cover the maintenance costs of roads. Why should non parking ratepayers cover the costs of maintaining parking for parkers?
This hidden subsidy is huge.
Sounds a good idea.. but I would suspect more people rely on parking than not (public transport sucks so people have to drive). So not an vote winner.
The transport challenge in nz is to sort public transport - so people have a choice not to use cars... but right now we are reducing budget for already poor public transport system.. so it will become less usable and more people will revert to cars. Lol.
We saw this problem coming.. where public transport will worsen and cost of driving will grow with lots of conflict about who pays for what and the added climate issue.. so we moved to a smaller house where we can walk 90% of the time or take public transport locally (coz it's fairly central). Have a 4x4 on standby for nationwide travel so to not worry about potholes lol.
Everything humans do to fix transportation challenges backfires. Ask Elon musk and Wayne brown.
Stop taxing existing ratepayers and tax payers to fund housing and other infrastructure development in far flung places. If people want to build or live in south Pukekohe, or commute from North Waikato to Auckland CBD fund the additional infrastructure costs by tagging those properties with the costs and or make the developers pay. Want to drive on the motorway or in congested parts of the city during rush hour - pay a congestion charge. Want to transport freight on public roads? Pay RUCs that reflect the true damage caused and cost of maintaining the roads based on vehicle weight. If it costs considerably more to bring water and power to a remote location make the charges reflect that cost & don't hide it by adopting a uniform charge for all your customers.
"Oh but if you do that, it won't be economic to build ticky tacky in the middle of no-where". 100% - Its not economic to build ticky tacky in the middle of no-where - especially not if the land and dwelling cost is artificially inflated because the true costs are being subsidised by other ratepayers and taxpayers.
"Oh but we need cheap subsidised housing for the migrant labour sorely needed for the economy" - OK, let the employers who "need" migrant labour pay for that.
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