Why we should give our councils a $3b bailout
Central government should bail out local councils or risk another decade of underinvestment in infrastructure and housing, or years of punishing rates rises that are likely to get passed on to already squeezed renters.
The Government then needs to get to work on a long-term fix that gives councils a financial incentive to develop land for housing.
When it comes to responding to unexpected crises, central government has all the tools it needs to blunt the economic fallout.
Local government has no such luck. Auckland Council, which has cleverly broadened its sources of revenue away from rates, initially faced a forecast revenue hit of $450 million, in part thanks to Covid-19 taking out the city’s events business.
The council has been forced to cut about $120m from operating expenses, sell millions of dollars worth of assets, while keeping to its scheduled rates increase. Meanwhile in Wellington, councillors are taking the temperature on a 23 per cent rates rise.
It’s not so much Covid-19, but the costs of fixing the library, water infrastructure, and Let’s Get Wellington Moving, a project to unclog the city’s transport network, that have pushed it over the edge.
Central government doesn’t live in the fiscal straitjacket imposed on councils. Its debt target of letting net debt rise to more than 25 per cent of GDP was swiftly thrown out the window when the Covid19 crisis struck. Borrowing is currently forecast to top out at twice as much.
A proposal to give central government a set-instone debt target was rightly taken out of the Fiscal Responsibility Act when it was heading through Parliament in the 1990s. The economic settings can change – debt should change with them, as it has done this year.
Councils, however, must reach agreements with their residents over their long-term finances. Most are also bound by debt covenants with the Local Government Funding Agency (LGFA), the central government body that actually does their borrowing. Covenants ration borrowing by setting limits in relation to a council’s income.
Central government needs to do two things: first, it should negotiate bailouts for the unforeseen costs of Covid-19. Councils should always look for efficiencies, but it makes no sense to take an axe to decent services, and lump costs on struggling households, when the economy is in crisis.
A bailout wouldn’t cost the world. With local government spending coming in at about 4 per cent of GDP ($12 billion), even a bailout of a quarter of councils’ total spending would be less than the amount the Government has saved in the past three months thanks to the economy rebounding better than expected.
Having put out the fire, central government then needs to look at the long-term financial viability of our councils. Local government, particularly in Wellington, has rightly been getting it in the neck for its terrible record on providing infrastructure.
But not enough attention has been paid to the poor funding councils receive, and the obvious lack of any incentive for them to develop land. In fact, there’s often a powerful disincentive for development: it takes a long time for the rates earned from new development to be worth the cost of providing those developments with infrastructure.
Central government expects councils to be on the front lines of the housing crisis, consenting the way to prosperity. Can it be any surprise that some councils comport themselves like a school PTA when the funding tools the government gives them are the fiscal equivalent of a bake sale?
Can it be any surprise that some councils comport themselves like a school PTA when the funding tools the government gives them are the fiscal equivalent of a bake sale?
We don’t fund our local councils fairly. OECD statistics from 2016 show councils accounted for 11 per cent of total government spending in New Zealand, less than half the OECD average for unitary countries (non-federal ones like us), which is 28.7 per cent. In fact, of OECD nations, only Turkey and Greece have a lower proportion of local government spending than New Zealand.
Councils have rightly complained about central government piling them with unfunded mandates, forcing new rules on them without giving them the funding for enforcement.
New funding tools, such as the ability to levy targeted rates on new developments, are both patchy and unfair: why should new home buyers pay for infrastructure when this sort of thing has historically been a compact between the generations?
The answer could be something like allowing councils to keep a portion of GST raised within their boundaries. With net total GST worth about
$20b next year, giving even a fifth would make an enormous difference to local government, whose spending makes up about 4 per cent of the economy
($13b).
Central government needs to give councils the tools they need to do the job properly – and councils and mayors, particularly in Invercargill, Tauranga, and Wellington, need to prove themselves worthy of the trust government and citizens place in them.