While the Productivity Commission’s draft report on Local Government Funding and Financing provides some useful recommendations to improve the current system, the report falls short of advancing the level of change need to lift New Zealand’s productivity, says Stephen Selwood Chief Executive of Infrastructure New Zealand
It is pleasing that the Commission has reinforced earlier findings which emphasise the importance of beneficiaries contributing a greater share of local government costs and of the urgent need for three waters services reform.
The Commission has also highlighted an opportunity to reduce reporting requirements for councils which are now so onerous as to be counterproductive and has recommended removing rating differentials, something which will be pleasing for business.
However, the Commission’s preference for leaving the status quo rates-based system in place is difficult to reconcile with New Zealand’s steadily declining productivity.
Just two weeks ago, the OECD showed that New Zealand’s labour productivity has fallen some 15 per cent vis-à-vis Australia and other strong OECD economies over the past 25 years.
There is no clear link between the Commission’s recommendations and a turnaround in New Zealand incomes and living standards, despite the critical role local government plays in supporting growth.
New Zealand needs to go right back to square one and, instead of asking how best to fund local government, ask who’s best placed to deliver services which promote economic, social and environmental outcomes and with what resources.
Currently growth is a problem for many councils. More residents mean more infrastructure costs to councils which they have to pass on to their reluctant constituents while most of the dividend from growth goes to central government in the form of GST, income and corporate taxes.
In other nations like Australia, the US and Europe, states and local government receive a share of general taxes which incentivises them to enable and encourage growth.
Cities in the US compete for millennials, private investment and growth because that’s what enables local government to provide improving services.
PwC found earlier this year that households in Australian cities are now up to $400 per week better off than they were a decade ago thanks to better growth management. Many households in New Zealand’s growth centres have actually become worse off.
One option for the Government could be to set up City Deals like Manchester or Western Sydney. These are designed to incentivise states and councils to work collaboratively to enable growth and when they do will receive a share of the growth dividend from the Government.
This could be an inducement to councils to cooperate and develop credible regional development plans designed to lift New Zealand’s productivity.
The combination of strengthened national leadership, backed by regional development planning and an agreement for a share of GST to regions who get their act together could be transformational for New Zealand.
Tweaking the status quo will help but will not achieve national aspirations for lifting productivity and improving wellbeing.