Trialling policy reform in regions that are keen to see the benefits could solve rather a few of the country’s policy problems.

New Zealand has one of the world’s more centralised forms of government. Only about nine cents of every dollar of government expenditure is spent at the local level.

Although local councils have reasonable discretion to set local policy within their district plans, any local council wishing to attract more overseas investment will come up against the Overseas Investment Act (OIA).

Changing district plans to allow cities to grow is a tortuous process thanks to the Resource Management Act (RMA). A region wanting to attract more migrants, or whose community groups are willing to provide financial assistance for refugees, are blocked by immigration rules.

Because policy and regulations are set centrally, the government can be reluctant to make changes. One size rarely fits all and both the status quo and policy reform would suffer that problem. But the status quo at least generally draws less shouting.

Worse, the government can never really be sure which policy changes would really be for the better. When the US trialled welfare reform in the 1990s, it relied on policy experiments run in the 50 states within a framework set by a Republican Congress and President Clinton. And it worked. The states learned from each other’s successes, and their failures, and they iterated toward successful reform.

Doing it better

New Zealand, with a population that would place it around the median of American states, is perhaps too small to support a federalist system. And that would be a pretty big change. But that doesn’t mean that we cannot adopt this kind of regional approach to policy reform. In fact, we might be able to do it even better.

The New Zealand Initiative this week launched a new report, In the Zone: Creating a toolbox for regional prosperity. In it, we recommend this kind of regionalised approach to policy reform and a change to local government finances that could make it work. The basic structure would allow local or regional councils to approach central government with an idea for policy reform. For example, if Greater Wellington wanted to attract more foreign direct investment, it could ask the Beehive for a pared down version of the OIA – or for a complete exemption.

Central government would work with the councils to draft the trial legislation containing a sunset clause. They would specify, at the outset, what success would look like, what failure would look like and how both would be measured.

If the trial proved a success, any council wanting to adopt the changed rules could opt to do so. If it didn’t, Wellington could revert to the same rules as everyone else. Either way, a much better understanding of the effects of that rule change would result.

We also propose that local councils receive a share of the benefits that might come from successful policy reform areas. Central government is understandably reluctant to subsidise local councils, or to hypothecate taxes.

But implementing policy reform is not costless for a local council, whether they are involved in the process through the kinds of policy reform areas that we propose or whether they have changes imposed on them by central government.

We suggest that where councils preside over stronger than normal economic growth, and their residents and businesses remit more tax revenue to central government as a result, local government should get a share of that increase.

For example, if the revenues that central government receive from the Auckland area have been growing at about 5% a year, Auckland might get a small share of revenue growth below 5% but a large share of revenue growth above 5%. Taranaki, with lower typical growth rates, would receive a greater share of revenue growth at lower levels of growth than would be the case in Auckland.

We think the combination of a regionalised approach to policy reform, coupled with better financial incentives for local councils, can let a few policy issues come out from the too-hard basket – and in a way that appreciates local diversity.

Opinions on the RMA are mixed and highly polarised. It is hard to tell what effect real reform could have until it is implemented. It is entirely reasonable to expect different regions facing different pressures might need different approaches.

An urbanised variant of the RMA could be trialled in Auckland to see if it improves housing affordability. If it does, other urban centres might want to take it up. If it doesn’t, a costly mistake would be avoided by implementing it only in one place rather than across the whole country.

At our launch event on Monday night, New Zealand First’s Ron Mark was rather supportive of our idea, as was investment banker Rob Cameron.

National’s Chris Bishop levied what I think is the strongest, and most common, critique of our suggested approach. He warned that local government might not be up to the task given its many failures. There have been a few of these – although central government is hardly without blame either. And Labour’s Clare Curran worried about weakening national-level standards.

Potential reform zone

But we are not recommending Parliament immediately devolve everything to local councils and hope they can handle it. We are instead recommending that where local councils, in conversation with their communities, identify a central government policy or regulation that is holding the region back, central government work with them to provide a tailored regional policy trial.

Our report provides a few potential policy reform zones that we think could be good ideas:

• an urbanised RMA variant to try in Auckland;
• an OIA exemption for Wellington and the Hutt;
• a resource-focused version of the RMA for the West Coast Regional Council; and
• immigration reform for rural areas.

Actual proposals, though, would have to come from local communities. And they could come up with ideas none of us in Wellington have ever considered. Imagine if Northland asked to trial a cannabis legalisation regime, running regulation similar to that for alcohol, and sharing in the excise proceeds. A framework is needed that helps local communities find the solutions that work for them, that lets the government see which kinds of policy reforms are really effective and that provides local councils a better share in the proceeds of economic growth.

I hope the government will consider it.