Funding councils

Dr Eric Crampton
Insights Newsletter
1 April, 2021

Local government is fundamentally broken because of the way councils are financed, how the costs and benefits of urban growth are divvied up, and the incentives thus created.

Councils bear the costs of growth. Obstructive consenting and planning processes mitigate those costs.

Central government then sees councils as stymying the growth that benefits the whole country.

These incentives result in an endless cat-and-mouse game. Central government legislates against the most recent ways that councils have found to restrict growth. Local councils come up with new ones.

But that may finally be set to change.

Bernard Hickey’s newsletter this week suggested a coming review of councils and “sustainable funding streams”. He hints that may be code for building better incentive structures for local governments making growth a benefit rather than a cost.

We hope Hickey is right. It is critically important and timely.

Central government’s review of water infrastructure seems designed to force councils into handing their water pipes to amalgamated water authorities.

It would fundamentally change how many councils run.

For smaller councils, managing a water company means they can staff areas where they might not otherwise have the necessary economies of scope. The pipes also provide an asset that can be leveraged to pay for other things – unfortunately, often to the detriment of the maintenance of the pipes themselves.

If the ‘Three Waters’ review cleanly and strongly separates water infrastructure from council balance sheets, the funding necessary for water infrastructure improvement and growth will be much easier.

But the change could also precipitate a crisis in local government financing and structure. Having a plan in place for better council financing arrangements before the Three Waters review is completed would make a lot of sense.

Better council financing would also support better resource management outcomes.

The government wants to split the Resource Management Act into three parts, and have the legislation completed this term. Getting this complex job done will be a challenge. Parliament has only so many people who can draft legislation, and too many of them keep being pulled into dubious projects.

But changing resource management without changing the incentives that councils face would continue New Zealand’s sad tradition of pouring old wine into new bottles.

Better financing arrangements for councils would fundamentally change incentives and would do more to improve housing affordability than anything in last week’s housing announcements.

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