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5 October 2007 New Thinking Needed on Local Government by Roger Kerr The 2007 local government elections are now just over a week away. Early indications are that the turnout may again be low. This may reflect not so much apathy as a feeling of disenfranchisement on the part of voters – a lack of ability to have a real say over what councils do. Popular frustration with high rate increases gave rise to the establishment by the government last year of the Local Government Rates Inquiry which submitted a 277-page report in August. There is much to commend in the report. There are strong references to the profligacy of much council spending. It puts the blame for excessive spending largely on councils themselves rather than on central government off-loading functions to local government. The report correctly notes that many councils are over-providing for depreciation, a point made by the Local Government Forum in its recent report Democracy and Performance: A Manifesto for Local Government (available at www.nzbr.org.nz ) and by the Auditor-General. Likewise it dismisses claims that income tax and GST rules favour businesses and recommends that general business rate differentials be abolished. These are politically driven and have no economic rationale. The Inquiry found that many councils are getting poor returns on their commercial investments. This means capital is being misallocated and national economic growth stunted. It suggested councils could exit port businesses while retaining control over the development of waterfronts. Other recommendations are also soundly based: that councils should apply user charges for water and wastewater services; that property rates are the best overall tax base for local government; that many Crown exemptions for rates should be removed; that toll options for roads should be advanced; that development contributions and services such as water supply should not be used to cross-subsidise other activities; that rates should not be exempt from GST; and that there should be greater transparency around the allocation of rates to different council activities and to investment returns on council assets. Some of these recommendations should be well received. A recent Herald DigiPoll found that two thirds of respondents favoured more use of user charges. Overall, however, as Local Government chairman Don Nicolson has observed, “one is left with a feeling of discomfort that the Inquiry … is an attempt to defer the community‘s antagonism with local government but not resolve it – a good but hasty tune-up of a rather badly designed engine.” In part this is because the government put the cart before the horse in focusing the inquiry on funding issues rather than on the proper role of councils and how much they spend. The Inquiry appears in denial in asserting that the 2002 Local Government Act has not encouraged an expansionary role for councils. Councils are not generally undertaking new activities but in the five years ended June 2007, council spending increased by an average of 8.6% compared with just 3.1% in the previous 5 years. The report showed no awareness of well-established economic principles that suggest councils should be involved with ‘public good' activities (not private goods that can be commercially supplied and charged for) and that central government rather than local government should handle income redistribution. It was also disappointing that the report did not recognise the key role of sound institutions and incentives that is emphasised in modern writing on public policy. It did not engage with submissions by a number of parties to examine a better financial framework for local government, even though it acknowledged this was within its terms of reference. Such a framework could include, for example, a legislative requirement that council spending could not increase faster than the rate of inflation plus population growth unless ratepayers agree otherwise in a referendum. (The Hutt City Council, incidentally, has adopted a similar rule.) The Inquiry's response that it did not favour a cap on rates was superficial, the more so because it stated that rates in real terms need to be held at current levels or reduced. Any belief that councils might behave differently without different incentives represents a triumph of hope over experience. Legislation could also include a requirement that councils be restricted to a core of defined activities and that any move to go beyond them (for example, to build a stadium) should be subject to specific voter approval. Moves in this direction would help restore democracy to local government and make councils more accountable to the communities they serve. The government is yet to respond to the recommendations of the Rates Inquiry. It is to be hoped that it will pick up its more useful recommendations. But its proposals for increased transfers from central government, at a high cost to the taxpayer, are no answer. Serious improvements to democracy and performance in local government will have to await new thinking and a new local government act.
Roger Kerr is the executive director of the New Zealand Business Roundtable. |