New Zealand's housing crisis has long been a bugbear for policymakers, affecting a wide range of policy areas beyond housing itself.
 
Almost everyone sees a serious problem, but addressing it continues to be hampered by a fundamental misalignment of incentives between central and local government. Put simply, councils often view growth as a cost rather than a benefit.
 
The housing crisis has become intolerable for successive governments, which have changed planning laws and cajoled councils to come to the party. But there is a further measure, contained in the National-ACT coalition agreement, that would align incentives: revenue sharing.
 
The core idea is simple: promise councils a share of extra tax revenue which growth confers on central government through GST, income tax and company tax. That promise would nudge councils to be more supportive of house building. It is something the New Zealand Initiative has promoted since its inception.
 
Two main options are explored in a research note the Initiative has just published. The first would pay councils a portion of estimated GST on the value of new residential builds. Depending on the size of the portion (50% was floated last year by ACT in a Members Bill), it would provide substantial funding to councils.
 
The second would reward councils that issued more residential consents than their historical averages. National’s Build for Growth policy for last year’s election proposed $25,000 per additional consent. This approach would potentially reward councils with more active housing policies.
 
Neither option is perfect, but a hybrid approach might offer the best of both worlds. This could include a base payment tied to the value of building work completed or numbers of consents issued. Additional top-up payments could be made for exceeding historical consent averages. The approach could be extended to non-residential buildings, to encourage wider economic development.
 
As they work on the coalition agreement’s commitment, policymakers need to carefully balance incentives and accountabilities. Importantly, revenue sharing must not substitute for fiscal responsibility and councils must demonstrate a strong commitment to efficient service provision and infrastructure development.
 
A well-designed revenue sharing system would help align council interests with national housing goals, delivering a substantial improvement on the status quo. By encouraging development, it could also stimulate a virtuous cycle of economic growth.
 
We have tried the stick. It is time to give the carrot a chance.
 
Nick Clark’s research note, ‘Revenue share’ for housing, was published on 7 August.