Spend any time working in local government and you will soon stumble across the long-running funding fight between New Zealand’s two tiers of government.

In the white trunks is central government, frustrated by the inability to make progress on projects of national significance due to what it perceives to be local self-interest, particularly when it comes to infrastructure.

Bruised by Auckland’s long-running housing crisis and black eyed from jabs like the Basin Reserve flyover, central government’s response has been to try to box councils into shape by amalgamating them into bigger units, and legislatively narrowing their activities to a corner.

Head across the ring, and black-trunked local government officials are likely to point to the Beehive as the real problem. In their view, central government is quick to pass legislation that affects councils, such as national drinking water standards and the umpteenth amendment to the Local Government Act, but deftly dodges any attempt to provide funding.

The sector’s response has been to explore new ways of funding the activities of local authorities, such as giving councils additional tax raising powers.

While this billing may sound exciting, it is like watching a dull bout between a heavyweight and a featherweight. Local government will continue to dodge attempts to force amalgamation as a means of delivering efficient decision-making, and central government will blithely ignore appeals for more funding.

To illustrate the point, let us look at Queenstown. This is the second least affordable place in New Zealand to buy a home. According to calculations by interest.co.nz, it takes the equivalent of 8.3 times the median Queenstown salary to buy a house in the region at the median price. Only Auckland is more expensive with a median multiple of 8.75.

Of course, this reflects demand, which is high given the desirability of the location and over which Queenstown-Lakes District Council (QLDC) has little control. But QLDC has control over land supply for housing and that has been constrained for a number of years.

As a result, house prices stay high, preventing all but longstanding permanent residents or the relatively wealthy from owning a home.

QLDC, meanwhile, is said to be investigating the feasibility of a bed tax. This is to pay for the infrastructure investment the council says is needed to support the region’s thriving tourism economy, estimated at just under two million visitors a year.

The rationale is that since tourists don’t pay rates, the town’s 30,000 permanent inhabitants bear an unfair share of this burden.

Yet central government is unlikely to be convinced by this argument. Queenstown already has a flexible taxing mechanism, with 96% of the council’s total rates revenue collected through targeted rates.

Furthermore, there is little to indicate QLDC is experiencing financial stress in its 2015-25 10-year plan. The council has little long-term debt, equivalent to just 6% of non-current assets. Debt servicing costs, equivalent to 11% of rates income, are also well below that of other growth councils such as Auckland, Hamilton, Selwyn and Tauranga.

Targeted rates scheme

And although Queenstown’s rates are the second highest in the country on a per capita basis ($1830), this does not reflect the actual amount residents pay due to the targeted rates scheme. Furthermore, QLDC’s 10-year plan states that capital expenditure related to growth, principally related to subdivision and development activity, will be entirely funded out of financial and developer contributions.

Belabouring the boxing metaphor again, it seems the central government heavyweight cannot land a blow, while the featherweight’s flurry of punches are hardly felt.

This situation is indicative of the adversarial relationship between central and local government. One that is unlikely to be resolved until the discussion stops being framed as a fight between two tiers of government and is expanded to include voters in the discussion.

This is the conclusion the New Zealand Initiative’s most recent report, The Local Formula: Myths, Facts & Challenges, written by myself and Bryce Wilkinson.

Our research shows that much of the local government sector, like QLDC, is in sound financial shape. But while the books are in order, it is difficult for councils to leverage this position of financial health to invest sufficiently in growth-enhancing initiatives.

This is because ratepayers, and voters more broadly, perceive there to be little benefit to them from these investments. Quite the opposite, in fact, in the form of higher rates.

Aware that raising rates is political poison, councils instead seem to opt for a strategy that presents the least cost and political risk; namely do as little as possible even if it has poor outcomes for the economy.

Limited land released

This was evident in the Productivity Commission’s recent work, which showed that many councils limit the release of land for development to lower their infrastructure cost exposure, even though this approach raises the cost of housing for buyers.

If the standoff between central and local government is to be resolved, it needs to include voters in the discussion. After all, these are the people who foot the bill at the end of the day.

On this measure both central and local government do a poor job. Local Government New Zealand’s recent survey of public perception showed the sector was ranked 29 out of 100. The Rules Reduction Taskforce rightly pointed out that many of the problems at a local level stem from central government legislation, yet there appears to be a lack of enthusiasm in the Beehive to remedy the situation.

This needs to change. Unless new ways are found to encourage local communities to be more open to growth, the efforts to lift the country’s economic performance and tackle long-standing problems will be frustrated.

From the Initiative’s perspective, it starts with the willingness to try different approaches to age old problems. Our recent Special Economic Zones report sketched out a structure to deliver reforms in a low-risk manner.

But this requires an attitudinal shift. One that reframes the debate from adversarial to inclusive. From “local-versus-central” to “what is the shared goal of the public, as well as local and central government, and are the incentives needed to get there?”

Until that happens, expect the slugfest to continue for some time.