Economics: Look Out for Local Bodies

When United Future MP Larry Baldock offered “a radical solution” to the growing problem of funding the construction and maintenance of local roads throughout the country, he was mindful that the Government is shifting more and more costs for public goods and services from taxpayers to ratepayers.

Baldock is his party’s transport spokesman and favours changing Government policy so that all revenue from roading-related taxes is used on road-related expenditure, an arrangement he reckons would address both roading needs and concerns with the Local Government Bill.

According to Baldock, the Government road funding agency, Transfund, currently pays local councils around 40 to 45 percent of the costs of local road construction and maintenance, about $322 million in the 2002/03 financial year. If the Government adjusted this percentage by five to 10 percent year over the next five years, he proposed, local councils would have additional income (or at least greater percentage reimbursement from their local road costs) that should enable them to keep rate increases to zero or at least level with inflation.

The merits or otherwise of Baldock’s ideas about the funding of our roads is not the point of this column, however. Your columnist was more interested in noting (a) he is brand-new member of Parliament and (b) he is sitting on the Local Government and Environment Select Committee.

This committee has been considering public submissions on the Local Government Bill, piece of legislation with far-reaching economic and constitutional implications. Essentially, the Bill aims to increase the powers and broaden the ambit of local government without providing effective checks on what those authorities may do. At least, not effective enough to satisfy critics of the legislation, such as the Local Government Forum.

The forum, representing Federated Farmers, the Business Roundtable, the Forest Owners Association, Business New Zealand and the Property Council, had cause to be bothered not only by the Bill’s broad sweep, but also about the select committee’s grasp of the issues. Public submissions on the legislation were considered earlier this year and the committee was still assessing them when Prime Minister Helen Clark called an early election. The membership of the committee which sat down to continue the assessment after the election was significantly different from the membership which heard the submissions.

The committee agreed to request from the forum to be allowed to re-state its case and early in October heard again from both the forum and from Local Government New Zealand, which represents the country’s local authorities and supports the Bill.

What might the authorities do with their new powers?

Tourism Minister Mark Burton gave good hint when he addressed Local Government New Zealand tourism symposium and enthused to his audience about the “long-term community plans” proposed in the Local Government Bill. These would provide “a new opportunity to think about and plan for tourism development” to reflect the wishes of the local community.

In short, local authorities will be enabled to do more in the tourism domain than they can do now.

Who will pay for the extra business and other activities with which local bodies will become involved?

Baldock, obviously informed by his committee work, has the answer. While discussing his road-funding ideas, he said: “In effect, central Government is devolving responsibility to local government without passing on any funding. The citizens will therefore be faced with an increase in rates and no reduction in income tax.”

Local government spending amounts to almost four percent of GDP, and the assets of the sector, net of debt, amount to about $42 billion. According to the Local Government Forum, the broadly comparable net asset value of all companies listed on the New Zealand Stock Exchange is about $27 billion.

Important economic questions are raised, when this proportion of resources is devoted to sector of the economy that is not primarily focused on wealth creation.

There are issues of fairness, too. Farmers are paying about 20 percent of all rates collected by local authorities, but represent just six percent of the rate-paying population, according to Federated Farmers estimates. The Feds reckon the annual rural rates burden on the farming community is $425 million, yet there are only 34,000 farming enterprises, compared to an estimated 600,000 ratepayers in total.

But as Federated Farmers policy analyst Nigel Billings points out, government that knows plenty about taxes and who is paying them is profoundly ignorant about the rates burden and who carries it. There is no central database and the information is hard to winkle out of local authorities.

Without hard data, there can be no proper analysis of the case for expanding local authority functions. Nor can we properly appreciate the implications for the business people and farmers who look most likely to pick up much of the tab.

Bob Edlin is Management magazine’s regular economics writer.

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