Local government funding and financing report ho hum

15 July 2019

The Productivity Commission’s Local government funding and financing draft report is modest in scope, finding that the current system is “broadly sound” and recommending relatively small changes around the edges.

The exception is whether to impose a tax on vacant residential land – a late item which came out of the Tax Working Group and which the Commission will present a recommendation on for the next consultation round.

Submissions on the draft report are due by 29 August. The inquiry is to be completed and with the Government by 30 November.


The Commission considers that local government already has a wide range of funding and financing sources to choose from – including general and targeted rates, fees and user charges, development contributions and, in Auckland Council’s case, a fuel tax.

But it has identified four areas where new instruments are required to:

  • ensure enough infrastructure to support rapid urban growth
  • equip councils to adapt and help their communities adapt to climate change
  • cope with the growth of tourism, and
  • handle the accumulation of responsibilities foist on local government by central government.

We look at each of these in turn.

Growth-enabling infrastructure

The key problem is that central government has a near monopoly on funding tools that respond to growth (GST, income tax, etc.) while local government relies principally on rates, which are set according to spending demands – and ratepayers have little incentive to support large-scale new housing, given that the likely effect will be to reduce the value of existing houses.

The resulting bottle neck has produced harmful land and house price inflation with the effect that in the last three years, the net worth of the 55-64 and 65 plus age cohorts rose by 31% and 45% respectively, while that of 15-24 year olds declined by 24%.

The Commission thinks that debt is an effective and appropriate way for councils to spread the burden of capital expenditure for long-lived assets across generations. It recommends more use of Special Purpose Vehicles (SPVs), like the Milldale SPV, as a way of keeping councils within their debt limit and to reflect its view that local government financing should be based on the “benefit principle”.

And to incentivise local authorities to invest in growth, it suggests creating a funding stream from central to local government based on new building work within the authority’s territory. This could be calculated on the value of building consents or on new construction measured by floor area. It will be interesting to see how this idea fares.

The Commission has been wrestling with infrastructure funding issues for a number of years now. It was a major theme in the Housing Affordability (2011), Using land for housing (2014), and Urban planning (2015) inquiries. But recommendations from those reports which might have addressed the matter have been either rejected or ignored, in particular, the proposal that central government should ease the burden on local government by paying rates on Crown-owned properties.

Climate change

Local government is on the front line for climate change and will face significant cost pressures as:

  • owners of large amounts of infrastructure that is directly at risk from sea level rise and other adverse weather events
  • the authorities responsible for planning and development on at-risk land (with the associated legal vulnerabilities), and
  • the branch of government which will have to shepherd communities through the design and implementation of local adaptation strategies, responding to pressure from landowners to invest in flood and coastal defences, and managing retreats from vulnerable locations.

The Commission reports that some councils feel they are in a legal limbo, where either allowing or limiting development on at-risk land may expose them to liability and that these uncertainties require “urgent attention”. It accepts that the National Climate Change Risk Assessment framework and associated National Adaptation Plan, provided for in the Zero Carbon Bill, and due for completion in 2020 will largely solve that problem.

Specific recommendations are:

  • that the role of the NZ Transport Agency be extended to assist councils facing significant threats to the viability of local roads and bridges
  • the creation of a climate-resilience agency and associated fund to help at-risk councils redesign and possibly relocate and rebuild wastewater, storm water and flood protection infrastructure threatened by climate change
  • a new regulatory regime (possibly administered by the Commerce Commission) which could forcibly merge water services in the event of council failure and place them under a Council Controlled Organisation structure, with funding on a fully user-pays basis rather than through rates.


The Commission suggests legislating to enable councils in tourist hot spots to implement an accommodation levy on tourists. Where this will not do the trick (i.e. day trip attractions), the Government should provide some operational funding from the new international visitor levy.

Unfunded mandates

Continuing issues for local government are its poor relationship with central government and the imposition by central government of new responsibilities without any recognition of, or recompense for, the associated fiscal costs.

To strengthen the local government-central government interface, the Commission is proposing a “Partners in Regulation” protocol which would set out an agreed set of behaviours and expectations when developing legislation or regulation. This would help ensure that regulatory regimes are co-designed and jointly implemented.

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