Last week I received my rates invoice from Christchurch City Council.

To my dismay, I learnt that my rates for the city council and regional council combined have increased by 11%.  But then I discovered it could have been worse.

According to the Taxpayers Union’s 2024 Rates Dashboard, the average rates increase for city and district councils will be 14% and for regional councils, 15%. Both are more than three times the rate of inflation.

And that is only the average. According to the dashboard, four councils will increase more than 20%, with another two a shade under 20%.

Auckland’s 6.8% rates increase seems austere in comparison.

Meanwhile, long-term plans, which have a ten year horizon, forecast spending, rates, and debt to continue ballooning well beyond next year. The outlook is dire.

Those who follow the fortunes and misfortunes of local government know that its funding has been subject to complaint and debate for many years. There have been repeated predictions of rates being on the verge of becoming ‘unsustainable’ and strident calls to reform the system to address concerns about affordability and fairness.

Numerous government reviews and inquiries have been held over the past 25 years. Yet almost nothing has changed, except for ever higher rates bills for residents, businesses and farmers.

Councils face increasing financial pressures from inflation, costs of regulation, growing infrastructure needs, and expanding service demands. Those grappling with these pressures deserve sympathy and support.

But, some let the side down through a lack of focus and poor decisions, leading to wasteful spending on frivolous projects and poor management of their core activities. Wellington is arguably the worst case. Spending on boondoggles like the convention centre is highly questionable when rates are increasing in the double digits. Prioritising them over fixing leaky pipes is downright irresponsible.

Whatever the cause, the councils’ financial challenges and the need to sharpen incentives to encourage housing have driven calls for central government to share revenue with them.  There are two main proposals.

The first is from last year’s Review into the Future for Local Government, which recommended central government “make a greater investment in local government through an annual transfer of revenue equivalent to GST charged on rates”.

The second, from the National-ACT Coalition Agreement, would commit the government to “introduce financial incentives for councils to enable more housing, including considering sharing a portion of GST collected on new residential builds with councils.” 

Both seek to provide payments to councils equivalent to a portion of estimated GST revenue. But they differ in their incentives and incentives matter.

The first proposal, paying the estimated GST on rates, is problematic. While it would substantially boost council funds, there is no guarantee the money would be spent wisely and no incentive to promote housing and other development. Councils would instead be incentivised to keep increasing their spending and rates to maximise the GST payment. Similarly, they would be incentivised to derive more funding from rates than user charges – and to start delivering services where councils have no comparative advantage other than tax.

That brings us back to the second proposal: financial incentives for councils to enable more housing. It has much more promise. Councils have been treating growth as a cost to be mitigated through zoning and consenting rather than as a benefit to be sought. There is broad consensus in favour of changing those incentives and many ways of doing it.

The Government is reforming planning rules to push councils to accelerate housing development. On the funding side, it is reforming water infrastructure and infrastructure funding and financing, making it easier for councils to enable growth. It is developing a framework for city and regional deals to address challenges and opportunities facing councils and groups of councils. Deals will need new funding for councils if they are to succeed.

City and regional deals have potential, at least for those able to participate. However, all councils should be able to share the benefits of growth more directly. In this respect, the Coalition Agreement’s commitment is a move in the right direction.

What might this look like in practice?

The New Zealand Initiative is investigating options, but there are some clues. Before last year’s election, National and ACT proposed two different policy approaches. National proposed to provide councils with $25,000 per residential building consent issued above their 5-year averages. ACT wants to pay councils 50% of the estimated GST on new residential building work completed.

Each proposal has different incentive characteristics and would involve different trade-offs.

National’s plan would create a strong incentive.  However, the payments would be unstable because they depend heavily on fluctuations in the housing market, which councils can’t directly control. ACT’s plan, which would fund all councils, is less strong but still beneficial.

Either policy would be an improvement, but combining the two might get the best of both. Each could also be tailored to cater for city and regional deals.

New funding from central government cannot substitute for greater fiscal responsibility in local government. Councils must focus better on efficient and effective provision of local infrastructure, regulation, and public services.

Without this effort, central government will be reluctant to ‘share’ its revenue. And long-suffering ratepayers will continue to get nasty shocks.