Media release: Incentives key to local government challenges

2 December, 2015

Wellington (2 December 2015): New Zealand urgently needs to find ways to incentivise local authorities to be more open to economic growth if local government is to meet the looming infrastructure and aging population challenges.  

This is according to The Local Formula: Myths, Facts & Challenges, the latest report from public policy think tank The New Zealand Initiative, written by Research Fellow Jason Krupp and Senior Fellow Dr Bryce Wilkinson.  

The authors find that despite questions about the quality of some of local government spending, the sector has largely managed its finances well to date. Council rates have remained relatively stable when measured against the overall economy since the 1940s (see graph below), and median long-term debt was 4% of non-current assets in 2014.  

However, this position is likely to come under pressure in the future, and will impact growing and shrinking councils alike. A recent report by Treasury’s National Infrastructure Unit shows that much of the country’s infrastructure network will need to be replaced over the next 30 years, while at the same time the tax base shrinks due to the aging population.  

“Much of the thinking on this problem has focused on whether local government needs new taxing powers to meet these challenges, but our research finds that it is a political constraint that holds the sector back,” said Dr Oliver Hartwich, Executive Director of the Initiative.  

“Councils find it extremely difficult to convince ratepayers to accept higher rates or debt, even if it produces long-term benefits. Unless central government finds new ways of incentivising local communities to be more open to economic growth, there is little chance of addressing these future challenges, let alone the current ones.”  

The report is part of a series on local government, and will study how other jurisdictions have tackled similar challenges, with the aim of assessing whether these polices can be used in New Zealand.  

“The pervading trend in New Zealand has been to centralise and amalgamate local government into bigger and bigger units, but here we are 170 years later, still struggling to convince New Zealanders to invest in the backbone of economic growth,” said Hartwich.  

“It is time to inject fresh ideas into this stale funding debate. Our following report, which we expect to launch in the first half of 2016, will study those jurisdictions that have already dealt with these political challenges, and whose economies have grown faster than ours as a result.”  

The report found:

  • Council spending and rates had remained largely stable since the 1940s when measured against the overall economy;
  • Total long-term debt was equivalent to 4% of total local government assets in 2014. Auckland had highest long-term debt, equivalent to 14% of total assets, but 50 councils carried debt equivalent to 5% or less of total assets in the same period;
  • Debt servicing costs were low for regional councils, equivalent to 5% of rates income on the high end (Greater Wellington Regional Council), and -35% on the lower bound (Bay of Plenty Regional Council);
  • District council debt servicing costs as a proportion of rates revenue ranged from 19% on the top end (South Taranaki District Council) to -9% (Wairoa District Council) in 2014;
  • and Local government sector faces a $6 billion to $7 billion funding gap between infrastructure depreciation expense and renewals expenditure by 2022, based on 2012 projections.

 localgovt graph



About The New Zealand Initiative  

The New Zealand Initiative is an evidence-based think tank and research institute, which is supported by a membership organisation that counts some of the country’s leading visionaries, business leaders and political thinkers among its ranks.  

Our members are committed to developing policies to make New Zealand a better country for all its citizens. We believe all New Zealanders deserve a world-class education system, affordable housing, a healthy environment, sound public finances and a stable currency.  

The New Zealand Initiative pursues this goal by participating in public life, and making a contribution to public discussions.  

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